Appeal from the District Court of the United States for the Northern District of Illinois, Eastern Division; John P. Barnes, Judge.
Before SPARKS and MAJOR, Circuit Judges, and LINDLEY, District Judge.
Defendant appeals from a judgment upon on accounting allowing plaintiff damages for infringement previously adjudged in this court in Peerless Equipment Co. v. W. H. Miner, Inc., 7 Cir., 93 F.2d 98, 105. Defendant contends that plaintiff did not establilsh a basis for recovery of damages; that the District Court failed to charge defendant's profits from sales of infringing devices with the proper proportion of its general selling and administrative expenses; that the court improperly charged defendant with profits upon all gears sold by it in 1936 and 1937; that the court should have charged defendant only with profits due to the presence of Johnson's element in its devices, and, finally, that none of defendant's devices comes within those previously held to infringe.
The matter of accounting was referred to a master in chancery who made a comprehensive report disposing of all controverted issues, which, upon objection, the court modified in certain respects.
We shall discuss only such of the complicated facts involved as are relevant and essential to an understanding of the issues and our disposition thereof.
Defendant seeks a reconsideration of our earlier determination that it has infringed. It insists earnestly that under the proof now in the record, the former adjudication can not stand.
Upon the former appeal, our decision of validity and infringement turned largely upon the convexity disclosed both in plaintiff's patent and in the shoes embraced in defendant's devices then before us. We found that Johnson's precise construction, including the prescribed degree of convexity, produced a desirable result not previously achieved and, under all the evidence, amounted to invention over the prior art. Narrow though the difference between O'Connor and Johnson may have appeared to be, both the District Court and this court concluded that the specific convexity prescribed brought success to Johnson where O'Connor failed and that Johnson's concept in this respect was nevel and useful and not disclosed by any prior art. We believed that his conception of a slightly convex shoe friction surface, as disclosed in the patent in suit, was the thing that produced the desired successful result in friction draft gears. This convexity, we said, was "essential to the desired results of both parties," and was present in defendant's combination.
We are not persuaded by anything now presented that we should recede from this position. The question of desirability and essentiality of convexity was adjudicated and the evidence now submitted by defendant in its own behalf is persuasive of the propriety of this conclusion. Defendant's tests, made subsequent to the prior adjudication, disclosed that its non-infringement gear was of substantially less capacity than its infringing gears.The evidence taken as a whole points to the soundness of our original conclusion that the convexity prescribed by the patent and utilized by defendant was essential to the desired results.
Defendant insists that the District Court erred in approving the allowance of profits upon all sales of all gears by defendant prior to July 19, 1937, and offered evidence tending to show that not all devices manufactured prior to that date infringed. But the evidence disclosed further that defendant made no attempt to segregate upon its books the respective number of sales of infringing devices and non-infringing devices or the profits arising from the sale of those which infringed or those which did not infringe. Rather, it commingled and mixed in one conglomerate all its sales and all profits from its sales of all gears. Defendant, and it alone, was in position to maintain a record segregating infringing and non-infringing devices and the profits or loss resulting from the sale of each. This it did not do prior to July, 1937. Plaintiff was wholly unable to produce evidence in this respect, for the reason that all gears sold, after use for a short time by railroad purchasers, lost the element infringed, namely: the essential convexity of plaintiff's invention. Indeed, this change in use was essentially incident to the desired results of the patentee. Consequently, plaintiff could not, by examining the devices sold by defendant and in use on railroad gears, ascertrain to any degree of certainty the extent of sales of infringing devices.True, this court determined only that the devices produced at the trial infringed. Upon reference to the master the extent or quantum of such infringement was for him and in making such determination it was incumbent upon him to ascertain, if possible, what part of the profit realized by defendant arose from sale of infringing devices and how much, if any, from non-infringing gears. Plaintiff was unable to supply the evidence, that having been within the power of defendant alone, and defendant, having failed to furnish any reasonable or proper basis for division or segregation and having commingled the profits of all devices sold, must account as trustee for all the profits resulting. We deem the correct principle to be that when the defendant commingled profits which it had made as an infringer with those it had made otherwise and there is no standard or criterion by means of which the master can separate them, the infriner must subject itself to the recovery of the whole. It is, in law, a trustee and profits having been shown to have reached its hands, if it fails to segregate and protect the trust fund, it must turn over all. It follows that the master and the District Court were correct in holding defendant liable for all profits realized by it during the infringing period ending July 19, 1937.
Defendant seeks to rebut this trust liability by evidence that only a part of the devices then on hand infringed and argues that the same relative proportion of non-infringing devices must have been manufactured previously as the same processes were followed. Unfortunately, however, even though this were true, the commingling of profits and the failure to keep records or supply evidence that would disclose what proportion of profits arose from the infringing devices and what proportion, if any, from non-infringing gears, create an unavoidable liability.
Following the decree of the District Court adjudging defendant guilty of infringement and pending appeal to this court, on July 19, 1937, defendant began inspection of all shoes manufactured. Testing was in charge of one Hauskins, who was experienced in his profession.He testified that from the time he began his inspection until December 2, 1937, he examined every shoe and rejected any and all having a convexity of five-thousandths of an inch or more, using gauges which he produced before the master and demonstrating before that official the manner in which his work was done. On December 2, he was succeeded by another experienced inspector, Hansen, who checked several thousand shoes then in stock, a greater portion of which it is apparent from the record, Hauskins had previously tested. He, too, demonstrated his method before the master and testified that all shoes with a convexity of five-thousandths of an inch or more were rejected. The master, seeing and hearing the witnesses, observing their methods, found that defendant, after July 19, 1937 rejected all gears with shoes having a convexity in excess of five-thousandths of an inch and shipped no such gears. He believed Hauskins was corroborated by the inspection made by Hansen.
The court upon review of the master's report found that Hauskins' testimony was not satisfactory because, (1), of careless methods in keeping records; (2), he testified that he did more work than was humanly possible, and (3), the gauges used were not adapted to dependable determination of the existence or non-existence of infringing convexity. The court found further that Hansen in no way corroborated Hauskins; that his inspection, too, was inefficient for the purposes intended and that defendant had continued to infringe after July 19, until December 31, 1937, and entered a decree for all profits from all gears sold during that period.
Obviously whether defendant infringed after the entry of the decree which we affirmed on appeal was not before us. On that review there was and could have been no adjudication as to that. It was the obligation of the master to determine whether the acts of defendant subsequent to the entry of the decree amounted to infringement. Irrespective of the fact that the same process of manufacture may have been followed and the same dies used as previously and the presumption that the adjudicated infringement continued, it does not follow that the evidence supports a finding of continued infringement. There was no evidence of sale or use of any infringing shoe after the entry of the decree.It is clear from the record that not all shoes produced by defendant prior to the entry of the decree infringed and we have held the defendant liable because of its commingling a trust estate arising from infringement with other funds received from non-infringing devices, making it impossible to ascertain how much of the sales profit was trust fudns. But it does not follow that defendant is in the same situation subsequent to July 19, 1937, for upon that date defendant began inspection and after that, according to the testimony of Hansen and Hauskins, no infringing shoe was sold or shipped by defendant. The master saw the method of inspection demonstrted. He saw used the gauges employed; he observed the inspectors upon the witness stand and had the best opportunity of any of us to judge of their credibility under all the facts and circumstances appearing before him. His finding based upon and supported by credible evidence should not be disturbed. It may be that Hauskins' records were not perfect. It may be that his note book on its face indicated more work than could reasonably have been done on certain days, but he testified that his memoranda indicated periods rather than days. We do not believe that the District Court was justified in its ...