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Gotham Silk Hosiery Co. v. Artcraft Silk Hosiery Mills Inc.

December 20, 1944; As Amended January 18, 1945.


Appeal from the District Court of the United States for the District of Delaware; Phillip Forman, Judge.

Author: Biggs

Before BIGGS, JONES, and WOODBURY, Circuit Judges.

BIGGS, Circuit Judge.

This is an appeal from a judgment denying a recovery of profits to a patentee from an infringer. See 48 F.Supp. 131. The patent was held to be valid and infringed by the District Court of Delaware as reported in its opinion, 1 F.Supp. 643, affirmed, 3 Cir., 72 F.2d 47, certiorari denied 293 U.S. 595, 55 S. Ct. 109, 79 L. Ed. 688. On November 21, 1934, the case was referred to a Special Master for an accounting.*fn1 The plaintiff waived damages and sought to recover the profits which it alleged the defendant has received by reason of the infringement. On December 15, 1938, the Master filed his first report. He found that the defendant had received advantages from the use of the patent. He held, using the defendant's price lists and circulars as evidence, that the defendant itself had regarded the infringing hosiery as having a market value of $1 more per dozen pairs than the defendant's equivalent non-infringing stockings. He held that this $1 difference represented a fair measure of the profit received by the defendant from the infringement, subject however to a deduction of 5% estimated by the Master as the additional cost necessarily expended by the defendant in manufacturing the infringing feature of the hose.

The Master decided that the defendant had sold 202,106 dozen pairs of stockings during the accounting period. He thereupon awarded to the plaintiff the sum of $192,000 with certain costs. Exceptions to the report were filed and argument was heard on the exceptions. The court filed an opinion holding that the Master had attempted to determine profit without ascertaining the cost of manufacture to the defendant and its receipts from sales. Since profit ordinarily is deemed to consist of the difference between costs and receipts from sales, the court, citing Providence Rubber Co. v. Goodyear, 9 Wall. 788, 19 L. Ed. 566, remanded the case to the Master for the determination of the profit according to the formula prescribed. See 33 F.Supp. 344.

After the remand to the Master, the parties introduced no further evidence. On September 19, 1941, the Master submitted a second or revised report, finding that the defendant's profits amounted to $202,106. He recommended that this sum be recovered by the plaintiff from the defendant and recommended also an allowance of $12,979 to the plaintiff to cover its necessary fee and expenses. After exceptions had been filed to the report, argument again was had before the District Court. The court held that the plaintiff had failed to sustain the burden of proof placed upon it and allowed only nominal damages. See D.C., 48 F.Supp. 131, at page 140.

Since we have reached the conclusion that the District Court was in error in its application of the law, it is necessary, the nature of the case being as it is, to embark upon an extensive statement of the facts, only a part of which can be deemed to be in dispute.The controversy between the parties lies primarily in questions of law relating to the burden of proof to be sustained by the plaintiff and the defendant under the extraordinary circumstances presented by the instant case. Rule 52(a) of the Rules of Civil Procedure, 28 U.S.C.A. following section 723c, provides that findings of fact made by the District Court (in this case embodied in the court's opinion) shall not be set aside unless clearly erroneous. Where findings of fact made by the District Court in the case at bar are set aside, we do so because in our opinion they are clearly erroneous or because the District Judge has not applied the correct rule of law thereto.*fn2

The patent held to be infringed by the defendant is Tilles No. 1,824,636, for a stocking with an adjustable welt or top consisting of three spaced rows of picots or hemlocks which enable the wearer neatly to turn down the stocking to the proper length and attach the garters to the folded top without danger of runs. The stocking, therefore, is adjustable to three different lengths. The plaintiff calls its stockings embodying the feature of the patent "Gotham Adjustables." The defendant designates its infringing stockings as "Trilength." We will so refer to them. The monopoly of the patent covers only the feature of the welt. The period of infringement was from September 22, 1931, through October, 1934.

On December 6, 1934, an order was entered by the Master requiring the defendant to file an account in respect to the following matters:

"(1) The number of dozen pairs of such stockings manufactured by defendant from September 2, 1931, to the date of the account.

"(2) The number of dozen pairs of such stockings sold by defendant during each calendar month from September 22, 1931, to the date of account.

"(3) The price received for each such dozen pairs of stockings.

"(4) The cost of making or acquiring the said stockings so made or sold, indicating the various items in detail which contribute to the cost of manufacture and/or acquisition and/or sale.

"(5) The total profits, gains, savings, and advantages derived or made by defendant through the making and/or purchase and/or sale of such stockings.

"(6) The number of such stockings on hand on the date of the report.

"(7) Each item in detail claimed by defendant as deductible costs in arriving at its stated profits."

The defendant's answer was as follows:

"(1) See attached sheet.

"(2) See attached sheet.

"(3) See attached sheet.

"(4) No cost figures are available.

"(5) None. (No separate records kept on these styles).

"(6) None.

"(7) No detail records kept on these styles."

The attached sheet referred to in answers 1, 2, and 3 sets out tabulations of the total pairs of infringing hose produced by months, the total dozens of pairs, the numbers of pairs shipped by quality, the total dozens of pairs shipped and the range of selling prices by style and quality. The total dozens produced during the entire infringing period are listed as 27,652 1/2. The total is net with the exception of 81-11/12 dozen pairs worn, found to be defective, returned and credited.

The source from which these tabulations were derived is defendant's exhibit 16, known as the "Tri-Length Book." It is a columnar book from which the first and last few pages are missing. This book purports to be a complete record of all Tri-Length stockings produced in the defendant's plant and in two other plants manufacturing stockings for the defendant and sold by defendant during the accounting period. The stockings purport to be classified according to style number and quality; i.e. first, irregulars, and so forth. The price range of each style rather than the exact prices at which definite numbers of stockings were sold is given.The book was kept on a net basis, that is to say, each day returns were deducted from sales.

The genuineness, authenticity and accuracy of the book has been challenged. It was not kept in the regular course of business by the defendant's bookkeepers and clerks. Instead it was kept by a Miss Kleinschrodt, secretary to the defendant's president, Jack Kugelman. Kugelman was in complete charge of the defendant's business. He owned at least four-fifths of its stock. Only Kugelman and Miss Kleinschrodt knew of the existence of the Tri-Length book. Kugelman testified that during the pendency of the suit he decided to keep a record of the Tri-Length hose; that he then instructed Miss Kleinschrodt as to the method to be employed in keeping the Tri-Length book and that it was maintained under his immediate supervision.*fn3 Kugelman subsequently testified that he was unfamiliar with the books of defendant's business and paid no attention to such details.*fn4 Miss Kleinschrodt testified that entries in the Tri-Length book were first made by her in the latter part of October, 1931. It is the contention of the plaintiff that certain style numbers were used to designate Tri-Length hose and only Tri-Length hose. The defendant insists, however, that the style numbers were used to designate certain types of hose irrespective of whether or not they had the Tri-Length top. The defendant declares that the only correct records as to whether or not its hose were Tri-Length were contained in pencilled notations on payroll sheets and shipping vouchers. All these records were destroyed. Kugelman admits that the defendant's records (with certain exceptions hereinafter referred to) from which information pertinent to the issues of the number of Tri-Length hose sold and the cost of manufacturing and selling them could have been derived were destroyed deliberately after the commencement of the suit.

The appearance of the Tri-Length book is astonishingly uniform, the ink and writing being unvaried from month to month.*fn5 The record was kept in pairs of stockings rather than in dozens, the usual unit in the hosiery business. It is conceded that the vouchers and slips from which the information for the Tri-Length book was drawn were kept in dozens.Moreover, the supersedeas order entered by the District Court on December 8, 1932, expressly provided for the filing of the defendant's report in terms of pairs of stockings. The entries in the Tri-Length book purport to cover a period commencing on September 22, 1931, and there was testimony that the entries were commenced in October of that year. There is other corroborating evidence as to the specious nature of the book. Both the District Court and the Master found the entries in the book to be unworthy of belief and this conclusion is fully supported by the evidence.

Important issues of fact are presented in the instant accounting. The first is the number of pairs of hose embodying the infringing feature sold by the defendant, the prices at which it sold such hosiery, and the portion of the price therefor fairly to be attributed to the infringing feature. A second issue is the amount of the defendant's costs in manufacturing and selling such hose. The defendant, as we have stated, destroyed most of the primary evidence. The defendant had records which would have disclosed the number of hose with the infringing feature sold by it and the prices obtained therefor. It also possessed records which would have disclosed facts from which its costs of manufacturing and selling the hose with the infringing feature could have been found. Bearing these facts in mind the primary question of law before us is the degree of proof required from the plaintiff under the circumstances. As Lord Mansfield declared in Blatch v. Archer (Cowp. 63-65), "All evidence is to be weighed according to the proof which it was in the power of one side to have produced and in the power of the other side to have contradicted."*fn6

In apportionment cases situations have arisen analogous to that of the case at bar either because of the deliberate concealment of evidence by an infringer or because of an infringer's failure to keep proper records. Such a tort-feasor usually seeks refuge in Garretson v. Clark, 111 U.S. 120, 4 S. Ct. 291, 28 L. Ed. 371,*fn7 which required the plaintiff to prove with exactness the precise amount of damages due to defendant's admitted infringement or to forego all recovery. The rule was temporary. Compare the prior decisions in Providence Rubber Co. v. Goodyear, 1869, 9 Wall. 788, 19 L. Ed. 566, and Seymour v. McCormick, 1853, 16 How. 480, 14 L. Ed. 1024. Decisions subsequent to Garretson v. Clark mitigated the severity of the principle enunciated in that case and applied to the infringer in respect to proof of apportionment the general principles of equity ordinarily used to measure a recovery against a trustee de son tort. It is especially appropriate to do this in the instant case where the defendant is a wilful wrongdoer. In the leading case of Westinghouse Electric & Mfg. Co. v. Wagner Electric & Mfg. Co., 225 U.S. 604, 620-622, 32 S. Ct. 691, 697, 56 L. Ed. 1222, 41 L.R.A., N.S., 653, the Supreme Court, dealing with the burden of proof to be imposed upon the parties on a question of the apportionment of profits between an infringing feature and the device as a whole, held that the burden first rests on the plaintiff to prove that profits resulted to the defendant from its sale of the infringing feature and that the plaintiff must exhaust all means available to it for the ascertainment of profits resulting from the infringing feature. But, citing with approval Brennan & Co. v. Dowagiac Mfg. Co., 6 Cir., 162 F. 476, the Supreme Court went on to say: "'In the present case the infringer's conduct has been such as to preclude the belief that it had derived no advantage from the use of the plaintiff's invention. * * * In these circumstances, upon whom is the burden of loss to fall? We think the law answers this question by declaring that it shall rest upon the wrongdoer, who has so confused his own with that of another that neither can be distinguished.'" The Supreme Court then proceeded to shift the burden of proof as to apportionment to the defendant.*fn8 We think that the principle of proof enunciated in the Westinghouse case is applicable to the questions of proof presented in the instant case.*fn9,*fn10 We find support for this view in many of the decisions.

In Armstrong v. Belding Bros. & Co., D.C., 280 F. 895, affirmed 2 Cir., 297 F. 728, certiorari denied 265 U.S. 585, 44 S. Ct. 459, 68 L. Ed. 1192, a patent infringement action, the defendant bluntly stated that its books and records had been lost. The court held that under the circumstances, the plaintiff's evidence as to the defendant's costs should be accepted and that the defendant was in no position to object to the findings of the Master based upon such evidence. See also Yesbera v. Hardesty Mfg. Co., 6 Cir., 166 F. 120.

In United States Frumentum Co. v. Lauhoff, 6 Cir., 216 F. 610, 615, there was a wilful infringement of a patent. The plaintiff was unable to show the exact amount of damages which it had sustained. The court found, however, that defendant's sales were so large that there could be no doubt that there had been substantial damage to the plaintiff. "Under such circumstances," declared the court, "to have plaintiff recover nothing, because the difficulty of absolutely definite proof is insuperable, is a result so unfortunate that, if avoidable, it should not be permitted." See the cases cited in Judge Denison's opinion in which proofs of approximate damages were held to be sufficient. A similar ruling was enunciated by this court in respect to the recovery of profits or damages in Baseball Display v. Star Ballplayer Co., 3 Cir., 35 F.2d 1, a case of willful infringement.*fn11 In the case of Producers & Refiners Corporation v. Lehmann, 8 Cir., 18 F.2d 492, the defendant made a sworn statement that it had kept no separate accounting of its production of infringing oils. Recovery was given on all oils, infringing as well as non-infringing.

It should also be pointed out that for many years courts have permitted the use of expert testimony to ascertain the amount of damages where documentary evidence is lacking. See Sauntry v. United States and United Stats Frumentum Co. v. Lauhoff, supra. This practice has been incorporated in the patent law by the Act of Feb. 18, ...

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