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Stromberg Motor Devices Co. v. Detroit Trust Co.

September 17, 1930

STROMBERG MOTOR DEVICES CO.
v.
DETROIT TRUST CO.



Appeal from the District Court of the United States for the Eastern Division of the Northern District of Illinois.

Author: Alschuler

Before ALSCHULER, EVANS, and PAGE, Circuit Judges.

ALSCHULER, Circuit Judge.

There is here involved the accounting under a decree in this cause entered in pursuance of the direction of this court in an appeal involving the question of validity and infringement of the patents which were sued upon. 254 F. 68.

Certain questions involved in the accounting have been before us on appeal. 270 F. 421.

In the interest of brevity we refer to those cases for statement of the facts, so far as here pertinent and in those opinions appearing.

After a protracted hearing on the accounting, wherein appellant sought recovery of the profits from the infringement of the Ahara patent, the master submitted a preliminary report, in which he recommended the entry of a decree for appellant in the sum of $400,822.07. Upon consideration of objections to the report the master amended it somewhat, recommending in his report as filed in the court a decree for $353,196.49 in favor of appellant.

Upon exceptions to the report the court concluded and found that certain items in it could not stand, confirming it as to others. Among the exceptions sustained were those as to the apportionment of profits which the master undertook to make as between the infringed Ahara patent and the Baverey patent, to which two patents the master had attributed the entire profits. The court held that while the record justified the conclusion that segregation of the profits as between the Ahara patent and the other elements of the infringing carburetor was not impossible, "the master's award cannot stand, because of failure to determine the issue of segregation upon the evidence before him." And the court concluded, "I have reached the conclusion that the case should be remitted to the master in view of the necessity of vacating the award because of failure to determine the issue of segregation."

In his report upon such re-reference the master said: "The master assumed that on the re-reference further evidence on the question of segregation should be introduced. No such evidence was introduced and the record stands in that respect exactly as when the case was heard before the court."

The report then states that since elements other than the Ahara patent entered into the unitary carburetor structure, and the profits attributable to the various elements were segregable, the burden of making the segregation was on appellant, under the authority of Dowagiac v. Minnesota, 235 U.S. 641, 35 S. Ct. 221, 59 L. Ed. 398, and Westinghouse v. Wagner, 225 U.S. 604, 32 S. Ct. 691, 56 L. Ed. 1222, 41 L.R.A. (N.S.) 653; that appellant did not sustain this burden, nor undertake to do so; that there was no proof of reasonable royalty; and a recommendation was made that appellant recover nominal damages only.

The court overruled exceptions to this report, approved it, and entered a decree for appellant for $1, adjudging costs against appellant. From this decree the appeal is prosecuted.

Apart from the question arising on apportionment of profits, it is insisted for appellant that large items of profits were erroneously excluded by the master and the court, and that other large items, allowed as deductions from the profits, were erroneously allowed by the master and the court.

If the decree is correct on the subject of apportionment of profits, no other question need be considered. This will therefore have our first attention.

Apportionment.

Reference to our opinion in 254 F. 68 would indicate the quite complicated and involved relation of the Baverey patent to the infringing Zenith structure. The conclusion there reached was that both the Ahara and Baverey devices inhered in the Zenith carburetor. Upon the accounting and in the briefs and arguments much was presented and streuously urged to impugn that conclusion; but upon careful re-examination of all that has been so adduced and urged, we see no reason to depart from our prior conclusion, so far as it may affect the accounting.

There is no controversy about the general rules which govern such situations. Where recovery is sought of the profits of a patent infringement, if it appears that other elements beside the patented feature entered into the article, and contributed to the profits, these will be apportioned in accordance with the contribution of each, unless it is made to appear that apportionment is impossible, in which case, under the doctrine of confusion of property, the infringer must account for the entire profit. But if it appears that apportionment can be made among the various contributing elements, then the burden of making the apportionment is upon him who seeks recovery of profits to show what part of the profits is attributable to his patent; and, failing to make such segregation, he may recover not more than nominal damages.

The statement of these principles is simple enough, but their application frequently involves much of difficulty and embarrassment. At just what point the evidence may indicate possibility of segregation, without at the same time giving indication of some approximately fair basis of apportionment, may not in many instances be easily conceivable. It is common experience that supporters of the plaintiff's side of such a controversy consciously or unconsciously strive to exalt and swell the profits attributable to the infringed patent, and to depress the influence thereon of the other constituent elements; while those interested in minimizing the recoverable profits will correspondingly minimize the comparative influence of the infringed patent in the structure. In this respect the record here is quite typical. Through oral evidence, charts, experiments, etc., each side would shrink, quite to the vanishing point, the importance in the structure, and therefore in its contribution to the profits, of the element or elements whereon the opposite party relies, and correspondingly exalt the contribution of its own side.

Without entering upon a critical analysis of the voluminous record thereon, we are prepared to accept the master's original conclusion to the effect that the profits on the infringing Zenith carbureters are, in practical sense, the result of the contributions of both Ahara and Baverey. By this it is not meant that some other elements did not enter into its structure, but that the distinguishing profit-making features, which gave it instant and wide recognition, were substantially all in the Ahara and Baverey contributions.

If witnesses in such case testify to percentages or dollars of contribution, and do not disagree, there might be no difficulty on that score. If they disagree, the difficulty of determination increases as the divergence between them widens. If, on one side, the experts had testified that Ahara contributed to profits say but 5 per cent. and other elements 95, this might be well and good until on the other side it was testified that Ahara contributed 95 per cent. and the other elements but 5.

In such situation the trier of the fact, be it master, jury, or judge, must decide as best may be under the conflicting evidence, and this was what the District Court said the master should here have done, but failed to do (or did erroneously). While reams upon reams of evidence were given as to the comparative contributions of Ahara and Baverey to the profits of the infringing carburetor, we do not find that any witness indulged in definite estimates of dollars or percentages of contribution. But without giving figures they expressed their several views of the contribution of Ahara and Baverey by employing adjectives, such as "little," "much," "slightly," "very," etc., all of which were more or less useful in assisting the inquirer to arrive at some fair conclusion of the contribution of these elements, and were perhaps not less helpful than would have been extreme figures submitted by the opposite sides of the controversy.

Involved in the proposition of segregation is a question of a deduction from profits of payments to the amount of $523,221.91, which, during the infringing period, was made by the Zenith Company to the parent company in France, as royalties for use of the Baverey patent, which the French company controlled. The propriety of the allowance will be hereinafter considered, but the subject is here referred to for its bearing on the issue of segregation of profits.

In his preliminary report the master, treating of the segregation of profits, said: "The right of an accounting defendant to have profits segregated in cases where all of the profits are not due to the patent infringed is not questioned as a general rule, but in this case, where all of the profits are due to the Ahara and Baverey patents and royalties that equal or exceed the value that Baverey gave to the infringing structure have been allowed, defendant is not entitled to a segregation of profits."

By this the master evidently meant that since the royalties paid for the Baverey patent contributed at least that amount to the profits, the defendant was not entitled to have any further segregation of the profits. The master made this clear in passing on the objections to the report when he said:

"The statement in the findings of law on page 37 'Defendant is not entitled to a segregation of profits' should not have been made as it appears from what was said in the findings of fact and law in the draft report that segregation had in fact been made. The conclusion was first reached that all of the profits were due to the Ahara and Baverey patents, that these patent dominated the structure and produced the sales. The controversy on the question of segregation was therefore between Ahara and Baverey. What was not due to Baverey was due to Ahara and what was not due to Ahara was due to Baverey. The evidence is conflicting and any conclusion reached as to the relative merits of the two patents involved must rest largely in opinion and depend upon the weight to be given to the respective witnesses who testified on both sides of the case and such a conclusion might or might not approximately express the truth of the situation. After considering all of the evidence in the case the conclusion was reached that the profits due to Baverey did not exceed the royalties paid, but that such royalties were a fair and reasonable value for the use of Baverey. The evidence establishes that the royalty arrangement was made in good faith, and whether too much or too little was paid for the use of Baverey is immaterial as in either case the defendant would be entitled to credit for the amount actually paid.

"It follows that segregation has been made by fixing the value of Baverey at the amount of royalties paid and giving to Ahara the remainder of the profits.

"It is not the master's intention to recommend for adoption in all cases a rule that the value of a patent may be measured by the royalty paid to the owner. Such a rule has been condemned by the courts in cases then before them, but the courts have not held that to measure profits by royalties paid could not in any case be proper, and in the master's opinion in the facts and circumstances of this case the method adopted is the best method to be used and gives fair and reasonable results."

In the preliminary report the net profits, including the royalties, but not excluding federal income and profits taxes, were fixed at $1,203,279.18. But in the report as filed there was deducted an item of profits on miscellaneous parts of $76,287.90, and $397.29 of small items, leaving a net profit of $1,126,593.99, out of which the master recommended, as representing the contribution of the Baverey patent, the amount of the royalties which had been paid, $523,221.91, and recommended that the remainder of the profits be considered the contribution of the infringed Ahara patent. This is the plain import of the last above quotation from the master's filed report.

The report of the master upon the re-reference does not necessarily indicate a change in his conclusions reached before, that a fair apportionment of an assumed profit of $1,126,593.99 would be $523,221.91 to the Baverey patent and the remainder to the Ahara patent. But construing the court's statement that "the master's award cannot stand because of failure to determine the issue of segregation upon the evidence before him" to be a requirement that further evidence thereon must be submitted, the master recommended nominal damages for failure to submit further evidence thereon.

Where a patent infringing unitary structure possesses elements other than the patent, contributing to profits on sales of the structure, in most cases it would scarcely be expected that different persons considering the same facts would reach the same concrete result in making apportionment of profits among the various contributing elements. In most instances this would be because exact figures or proportions are not possible of ascertainment, any more than in many other relations, particularly in tort actions (which in their essence patent infringement actions are). This does not mean that segregation and apportionment are impossible. The master and the court both definitely found it here possible, and in this we agree.

From our careful examination of the record and the contentions of the parties, and the briefs and arguments, and independently of the master's conclusions, we would estimate that the infringing patent and the Baverey patent contributed not far from equally toward the profits. But recognizing as we do the master's long and varied experience in such matters, and the advantage he had in seeing and hearing the witnesses, who were quite numerous, we are better satisfied to adopt the ratio which his figures, as reported, would indicate. Assuming therefore, as the master found, that to a total net profit of $1,126,593.99 the Baverey patent contributed $523,221.91 and Ahara the remainder, this would indicate the proportion of the Ahara contribution to be 55.558 per cent. This percentage we therefore adopt as the share of the ultimate divisible profits to which appellant is entitled.

Having determined upon a basis of apportionment of the profits, we will consider such of appellant's propositions as bear substantially ...


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