UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
December 31, 1975
TRIO PROCESS CORPORATION AND FRANKLIN SMELTING & REFINING CO., A PARTNERSHIP
L. GOLDSTEIN'S SONS, INC. AND METAL BANK, INC. TRIO PROCESS CORPORATION, APPELLANT IN 75-1556 TRIO PROCESS CORPORATION AND FRANKLIN SMELTING & REFINING CO., A PARTNERSHIP V. L. GOLDSTEIN'S SONS, INC. AND METAL BANK, INC., APPELLANTS IN 75-1557
ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA - No. 38,166
Before: VAN DUSEN, ADAMS and ROSENN, Circuit Judges.
Opinion OF THE COURT
ADAMS, Circuit Judge.
In May 1972, this Court determined that United States Patent No. 3,076,421, owned by Trio Process Corporation (Trio), is a valid patent, that it had been willfully infringed by L. Goldstein's Sons, Incorporated (Goldstein),*fn1 and that the case should be remanded to the district court for a determination of damages.*fn2 The question now before us is whether the district court on the remand erred in assessing the damages.
The patented process which undergirds this appeal is a technique for salvaging copper from scrap wire by the use of a special furnace in which the heat removes the insulation from the wire.*fn3
Although a patent was not issued until 1963, the owner, Trio, had instituted a program of licensing almost immediately after completion of the development of the method in the late 1950's. In fact, licensure was the only use Trio made of the patent; it never utilized the process itself.
Goldstein, in 1960, purchased the first two licenses sold by Trio. The purchase price of $20,000 covered both the license itself and the furnace needed to use the process. $13,000 was allocated for the license and $7,000 for the furnace. Sales were subsequently made by Trio to four other buyers between 1962 and 1969 at the $20,000 rate.*fn4 One company bought the package in 1967, with a modified but more expensive furnace, for $25,000. Another purchased the package later in the same year for $19,500. After a decision by Trio to raise the price of the package, two more were sold in 1972 for $25,000. No licenses have been granted since this Court's decision holding that the patent is valid.*fn5
Despite this Court's 1972 determination that the patented method had been willfully infringed by Goldstein, the infringement continued through 1973. In January of that year, Trio sought, and was granted, an injunction against Goldstein's continuing use of the technique. Following the ensuing violation of the strictures of the injunction, the district court entered an order holding Goldstein in contempt. This Court affirmed that order in March 1974.*fn6
While the contempt motion was being adjudicated, proceedings were taking place before a master in order to determine damages due Trio for Goldstein's infringement of the patent.*fn7 The district court appointed the master in January 1973 and his report was filed, after the taking of extensive testimony, in June 1974. The master approached the damage issue by comparing Goldstein's costs of operating the patented process with the costs of a similar, unpatented process. He found that use of the Trio process led to savings in labor costs alone of $52,791 per furnace year, and that other, smaller, savings resulted from use of the patented method as well. In order to reach a "reasonable royalty" for use of the patent by the infringer,*fn8 the master halved the labor-cost savings, and concluded that $26,390 was a reasonable royalty for each furnace year. Multiplying this figure by the number of furnace years of infringement and making slight modifications, the master found damages of $1,564,804. He recommended trebling this amount, as allowed by 35 U.S.C. § 284 (1970). After trebling and the addition of interest, the total damage figure proposed by the master was $5,062.954.
The district court viewed the damage computation not with regard to the money saved by the defendant as a result of its infringement, as the master had, but in terms of what Trio had lost. It looked first to the initial sum of $2,600 per furnace year - the amount actually charged by Trio for licenses in the 1960-1970 era. The district court then increased the $2,600 figure on the assumption that the open infringement had reduced the market price of the license, and proceeded to set damages at $7,800 per furnace year for the years prior to the decision by this Court on validity, and at $15,000 per furnace year for the period following. The employment of these two figures resulted in total primary damages of $653,839. The trial judge also reduced the master's treble multiplier to a double multiplier, and denied attorneys' fees. With interest, the total damages entered by the district court were $1,726,525.*fn9
Both parties have appealed the award of damages. Trio contends that the master's determination was correct and should not have been disturbed by the district court. It argues that the reduction was contrary to economic fact and that the district court should have based its calculations upon the reasonable royalty set by the master. Trio further asserts that the damage multiplier should not have been reduced from three to two by the trial judge, since Goldstein allegedly exhibited a substantial degree of bad faith in its infringement of the patent and there are, Trio declares, no mitigating circumstances sufficient to justify the reduction of the multiplier.
Goldstein maintains that the license fee actually charged by Trio during the 1960's - $2,600 per year for a five-year period, or $13,000 - is the proper basis for measuring damages, and that there is no reason to depart from this established rate. It further claims that there was no evidentiary basis whatever for the district court's decision to increase the established rate to $7,800 and $15,000 per furnace year in order to assess damages. Goldstein's final challenge to the damage award concerns the multiplier. Since Goldstein allegedly followed the advice of counsel in using the Trio method, it argues that it was improper for the court to multiply the primary damages at all.*fn10
Trio sold licenses during the 1960's for a price equal to $2,600 for each year of the furnace's five-year life expectancy. In assessing damages, the district court simply multiplied this figure by factors of approximately three and six to determine the rate of a reasonable royalty for the periods preceding and following this Court's May 1972 decision on validity.*fn11
We cannot disagree with the first step in the district court's damage calculation, namely, using as a base the license fee actually charged by the patent holder. Since the Supreme Court's decision in Aro Manufacturing Co. v. Convertible Top Replacement Co., 377 U.S. 476 (1964), the determination of damages for infringement of a patent has focused upon the losses suffered by the patent holder rather than upon the profits illegally made by the infringer. "Thus, to determine the damages that may be recovered from [the infringer] here, we must ask how much [the patent holder] suffered by [the] infringement - how much it would have made if [the infringer] had not infringed." Id. at 507. Because Trio is not itself engaged in the metal reclaiming business, the trial court correctly held that the only damages Trio had suffered were the royalties it would have received if Goldstein's use of the process had been made under a licensure agreement.
Moreover, the district judge properly ascertained that the license rate established by Trio in the 1960's may have been artifically depressed by Goldstein's ongoing infringement, and that for this reason the reasonable royalty should be set at a level above the license rate. As one court has accurately observed, "[it] is a fact of economic life that an open infringement tends to reduce a patentee's fees from its subsequent licensees who must meet the infringer's competition, and such infringement deters potential licensees from taking a license."*fn12
The trial judge was also correct in recognizing that the amount of a reasonable royalty for the Trio process increased after the decision by this Court ascertaining the patent's validity. A royalty is expected to be greater once the patent's validity is finally determined.*fn13
While the district court was thus correct in ruling that the level of a reasonable royalty, in these circumstances, is higher than the level of existing license fees, we cannot discern any basis in the record here for the choice of any particular royalty. The district court merely, as he put it, "considered the depressing effect that defendant's infringement may have had on the royalties" and "considered the many factors suggested by the Georgia-Pacific case,"*fn14 and then fixed the royalty rate. No evidence was presented regarding the extent to which an increase was called for. In the absence of such evidence, however, the district court could not have made a proper calculation. For this reason, we must remand.*fn15
The rule - that the extent of the deviation from existing license fees must be determined solely on the basis of evidence submitted to the district court and upon an evaluation of the factors that could affect the royalty rate,*fn16 not upon mere conjecture - is derived from a line of several Supreme Court cases. These cases instruct the federal courts to allow damages in a patent action only to the extent indicated by appropriate evidence.
As long ago as 1860, the Supreme Court ruled in Mayor of New York v. Ransom*fn17 that "[where] a plaintiff is allowed to recover only 'actual damages,' he is bound to furnish evidence by which the jury may assess them.... Actual damages must be calculated, not imagined, and an arithmetical calculation cannot be made without certain data on which to make it."*fn18 This doctrine has been developed over the years in several cases. Rude v. Westcott*fn19 and Boesch v. Graff*fn20 followed the original Ransom holding precisely. In an early twentieth century decision on the question, the Court reiterated the rule that "'in order to get at a fair measure of damages, or even an approximation of it, general evidence must necessarily be resorted to.'"*fn21 And the holding in Sinclair Refining Co. v. Jenkins Petroleum Process Co., 289 U.S. 689 (1933), that a bill of discovery may be made available to enable the plaintiff in a patent case to prove his damages, was necessarily built upon the foundation that such proof is a prerequisite to recovery.*fn22
It was thus improper for the district court to fix the royalty without consideration of evidence presented for that purpose and without articulation of reasons for setting the royalty rate at the particular level chosen. The cause thus must be remanded for reconsideration.*fn23
Following the guidance given by 35 U.S.C. § 284 that "the court may increase damages up to three times the amount found or assessed," the district court doubled the damages it had calculated. The factor by which damages are multiplied is within the sound discretion of the district court.*fn24 Since we are remanding for a redetermination of damages, the questions whether and to what extent to multiply the reassessed damages may also be reconsidered in light of the evidence elicited when the case is returned to the district court and any other relevant material in the record.
That portion of the district court's judgment dealing with damages will accordingly be vacated, and the cause will be remanded for further proceedings consistent with this opinion.