The United States District Court for the Northern District of Indiana denied Grain Processing Corporation lost profits for American Maize-Products’ infringement of U.S. Patent No. 3,849,194 (the ’194 patent).
Grain Processing Corp. v. American Maize-Products Co.,
The district court found that American Maize proved that a noninfringing substitute was available, though not on the market or for sale, during the period of infringement. The court found further that this substitute was acceptable to all purchasers of the infringing product and concluded that American Maize rebutted the inference of “but for” causation for Grain Processing’s alleged lost sales. Upholding the district court’s findings and conclusions, this court affirms.
I.
This appeal culminates the lengthy and complex history of this case, spanning more than eighteen years and eight prior judicial opinions, three by this court. The patent featured in this infringement suit involves maltodextrins, a versatile family of food additives made from starch. Commercial food manufacturers purchase hundreds of millions of pounds of maltodext-rins annually from producers such as Grain Processing and American Maize.
Maltodextrins serve well as food additives because they are bland in taste and clear in solution. They do not affect the natural taste or color of other ingredients in food products. Maltodextrins also improve the structure or behavior of food products. For instance, they inhibit crystal growth, add body, improve binding and viscosity, and preserve food properties in low temperatures. Consequently, food manufacturers use maltodextrins in a wide variety of products such as frostings, syrups, drinks, cereals, and frozen foods.
Maltodextrins belong to a category of chemical products known as “starch hydro- *1344 lysates.” Producers make starch hydroly-sates by putting starch through hydrolysis, a chemical reaction with water. Hydrolysis breaks down the starch and converts some of it to dextrose. 1 With adjustments, this process yields more dextrose. For instance, additional enzymes, time extensions, and increases in temperature or pH enhance the reaction. After hydrolysis, the producer typically refines, spray-dries, and packages the starch hydrolysate for sale in powder form.
Maltodextrins are starch hydrolysates that have a “dextrose equivalence” of less than 20. Dextrose equivalence (D.E.) is a percentage measurement of the “reducing sugars content” of the starch hydrolysate. D.E. reflects the degree to which the hydrolysis process broke down the starch and converted it into dextrose. Converting more starch into dextrose increases the D.E. of the resulting starch hydroly-sate. Hence, pure starch has a D.E. of zero, pure dextrose a D.E. of 100. The D.E. value indicates functional properties of a maltodextrin. A 15 D.E. maltodext-rin, for example, is slightly sweeter and more soluble than a 5 D.E. maltodextrin. On the other hand, the 5 D.E. maltodext-rin has more prevalent binding, bodying, and crystal inhibiting properties.
Grain Processing is the assignee of the ’194 patent, “Low D.E. Starch Conversion Products,” which claims maltodextrins with particular attributes, and processes for producing them. The claimed invention represents improvements in the “heavily explored” field of starch hydroly-sates.
See Grain Processing Corp. v. American Maize-Products Co.,
No. 81-0237, slip op. at 1 (N.D.Ind. March 16, 1987)
(Grain Processing I), rev’d,
12. A waxy starch hydrolysate having
a dextrose equivalent value betiveen about 5 and about 25;
a descHptive ratio greater than about 2, said descriptive ratio being the quotient obtained by dividing the sum of the percentage of saccharides, dry basis, having a degree of polymerization of 1 to 6, by the dextrose equivalent value;
a monosaccharide content in the range of from about 0.1 percent by weight, to about 2.4 percent by weight, dry basis;
a dissaccharide content in the range of from about 1.3 percent to about '9.7 percent, by weight, dry basis; and
being further characterized as capable of producing an aqueous solution of exceptional clarity and substantially complete lack of opaqueness when said hy-drolysate is added to water.
(Emphasis added.)
Grain Processing has manufactured and sold a line of maltodextrins under the “Maltrin” brand name since 1969. The Maltrin line includes “Maltrin M100,” a 10 D.E. maltodextrin. None of the Maltrin products, including M100, fall within claim 12 because they are all made from a non-waxy starch. See Grain Processing I, No. 81-0237, slip op. at 65 (construing claim 12 to require a waxy starch, as recited in the preamble).
American Maize began selling malto-dextrins in 1974. It made and sold several types of maltodextrins, including “Lo-Dex 10,” a 10 D.E. waxy starch maltodextrin. American Maize sold Lo-Dex 10 (called Fro-Dex 10 before 1982) during the entire time Grain Processing owned the T94 patent rights, from 1979 until the patent expired in 1991. During this time, however, *1345 American Maize used four different processes for producing Lo-Dex 10. The changes in American Maize’s production processes, and the slight chemical differences in the Lo-Dex 10 from each process, are central to the lost profits issue in this appeal.
American Maize used a first process (Process I) from June 1974 to July 1982. In Process I, American Maize used a single enzyme (an alpha amylase) to facilitate starch hydrolysis. American Maize controlled the reaction to produce a starch hydrolysate with the desired properties, including D.E. value.
Grain Processing sued American Maize for infringement on May 12, 1981, based on American Maize’s Lo-Dex 10 sales as well as sales of two other maltodextrins - Lo-Dex 5 and ARD 2370. Grain Processing asserted all fourteen claims of the ’194 patent, including product and process claims. The district court bifurcated the infringement and damages issues for trial.
In August 1982, while the suit was pending, American Maize reduced the amount of alpha amylase enzyme in its process to lower its production costs. To achieve the same end result with less enzyme, American Maize continued the reaction longer. American Maize used this process (Process II) exclusively to produce Lo-Dex 10 from August 1982 to February 1988. Grain Processing asserted in its lawsuit that Process II Lo-Dex 10 also infringed the ’194 patent.
American Maize contended that Lo-Dex 10 (by both Processes I and II) did not infringe claim 12 of the ’194 patent because it did not have a “descriptive ratio greater than about 2,” as required by the claim. 2 Descriptive ratio (D.R.) is a function of the D.E. measurement. According to the formula in claim 12, D.R. is inversely proportional to D.E. Because different scientific tests yield slightly different D.E. measurements, the resulting D.R. values derived therefrom also vary slightly.
When Grain Processing accused American Maize of infringement, Grain Processing used the “Schoorl test” for measuring the D.E. of Lo-Dex 10. American Maize, on the other hand, used the “Lane-Eynon test,” which it believed was the “industry standard,” to measure D.E. The Schoorl test tends to yield a lower D.E. and therefore a higher D.R. than Lane-Eynon. Under the Lane-Eynon test, American Maize’s measurements revealed that Lo-Dex 10 did not infringe claim 12, because all of its Lo-Dex 10 samples had a D.R. of less than 1.9. Grain Processing’s Schoorl tests on the same samples, however, yielded a D.R. of greater than 2.
Following a bench trial, the district court held that Lo-Dex 10 did not infringe any of the claims because it did not meet the “exceptional clarity” limitation. This court reversed, holding that Lo-Dex 10 met the “exceptional clarity” limitation and therefore infringed claim 12 and its dependent claims 13-14.
Grain Processing II,
In response to the injunction, American Maize developed yet another process for producing Lo-Dex 10. In this new process (Process III), American Maize used more alpha amylase, adjusted the temperature and pH, and reduced the reaction time. American Maize used Process III exclusively to produce Lo-Dex 10 from March 1988 to April 1991.
*1346 American Maize believed Process III would yield a more uniform, noninfringing output of Lo-Dex 10. See Grain Processing VI, 893 F.Supp. at 1391. In fact, American Maize was “determined to avoid shipping a single bag of Lo-Dex 10 with a D.R. exceeding 1.9.” See id. Process III worked as American Maize intended. American Maize’s measurements - using the Lane-Eynon test - showed that Process III Lo-Dex 10 samples all had descriptive ratios of less than 1.9 and therefore did not infringe. See id. Moreover, American Maize’s customers did not discern any difference between Process III Lo-Dex 10 and Lo-Dex 10 from Processes I or II. See id.
In 1990, Grain Processing tested commercial samples of American Maize’s Process III Lo-Dex 10. Grain Processing again used the Schoorl test to measure D.E. Grain Processing’s measurements showed that American Maize’s Process III output had a D.R. value of greater than 1.9 and therefore infringed. Grain Processing filed a contempt motion in the district court.
The district court initially held American Maize in contempt for continuing to sell an infringing product.
Grain Processing Corp. v. American Maize-Products Co.,
No. 81-0237 (N.D.Ind. May 15, 1990)
(Grain Processing III), modified,
No. 81-0237, (N.D.Ind. July 16, 1990)
(Grain Processing IV), rev’d,
American Maize then adopted a fourth process (Process IV) for producing Lo-Dex 10. In Process IV, American Maize added a second enzyme, glucoamylase, to the reaction. Glucoamylase breaks down starch to a shorter average saccharide length. This shorter saccharide length yields a smaller D.R. without affecting D.E.
From the time American Maize began experimenting with the glucoamylase-al-pha amylase combination, or the “dual enzyme method,” it took only two weeks to perfect the reaction and begin mass producing Lo-Dex 10 using Process IV.
See Grain Processing VI,
The parties agree that Process IV yielded only noninfringing Lo-Dex 10 and that consumers discerned no difference between Process IV Lo-Dex 10 and Lo-Dex 10 made by Processes I-III, American Maize used Process IV exclusively to pro *1347 duce Lo-Dex 10 from April 1991 until the ’194 patent expired in November 1991, and then switched back to the cheaper Process III.
The district court commenced the damages portion of the trial on July 10, 1995. Grain Processing claimed lost profits in the form of lost sales of Maltrin M100, price erosion, and American Maize’s accelerated market entry after the patent expired. Grain Processing further claimed that, for any of American Maize’s infringing sales not covered by a lost profits award, Grain Processing should receive a 28% royalty. After a three day bench trial, the district court denied lost profits and determined that a 3% reasonable royalty was adequate to compensate Grain Processing.
Grain Processing VI,
The trial court determined that Grain Processing could not establish causation for lost profits, because American Maize “could have produced” a noninfringing substitute 10 D.E. maltodextrin using Process IV.
Grain Processing VI,
The district court also found that American Maize’s production cost difference between infringing and noninfringing Lo-Dex 10 effectively capped the reasonable royalty award. American Maize showed that it cost only 2.3% more to make nonin-fringing Process IV products than it did to make infringing Process I — III products.
See Grain Processing VI,
Grain Processing appealed the district court’s denial of lost profits, alleging that American Maize cannot escape liability for lost profits on the basis of “a noninfringing substitute that did not exist during, and was not developed until after, the period of infringement.”
Grain Processing VII,
On remand, the district court again denied Grain Processing lost profits. The district court found that Process IV was “available” throughout the period of infringement.
Grain Processing VIII,
The district court concluded that “the profit lost from infringement is the cost and market price difference attributable to using glucoamylase.”
Grain Processing VIII,
The district court also went on to explain its denial of lost profits “from a different angle.”
Grain Processing VIII,
*1349 Grain Processing appeals the district court’s decision.
II.
The district court must exercise sound discretion to determine the amount of damages, based upon its underlying factual findings and legal conclusions.
See State Indus.,
Upon proof of infringement, Title 35, Section 284 provides that “the court shall award [the patent owner] damages adequate to compensate for the infringement but in no event less than a reasonable royalty for the use made of the invention by the infringer.” 35 U.S.C. § 284 (1998). The phrase “damages adequate to compensate” means “full compensation for ‘any damages’ [the patent owner] suffered as a result of the infringement.”
General Motors Corp. v. Devex Corp.,
To recover lost profits, the patent owner must show “causation in fact,” establishing that “but for” the infringement, he would have made additional profits.
See King Instruments Corp. v. Perego,
At trial, American Maize proved that Grain Processing’s lost sales assertions were unreasonable. The district court adopted Grain Processing’s initial premise that, because Grain Processing and American Maize competed head-to-head as the only significant suppliers of 10 D.E. maltodextrins, consumers logically would purchase Maltrin 100 if Lo-Dex 10 were not available.
See Lam, Inc. v. Johns-Manville Corp.,
American Maize concedes that it did not make or sell Lo-Dex 10 from Process IV until 1991, after the period of infringement. However, an alleged substitute not “on the market” or “for sale” during the infringement can figure prominently in determining whether a patentee would have made additional profits “but for” the infringement. As this court stated in
Grain Processing VII,
“to be an acceptable non-infringing substitute, the product or process must have been available
or
on the market at the time of infringement.”
Grain Processing VII,
*1350
In
Aro Manufacturing,
the Supreme Court stated that the statutory measure of “damages” is “the difference between [the patent owner’s] pecuniary condition after the infringement, and what his condition would have been if the infringement had not occurred.”
Aro Mfg. Co. v. Convertible Top Replacement Co.,
Reconstructing the market, by definition a hypothetical enterprise, requires the patentee to project economic results that did not occur. To prevent the hypothetical from lapsing into pure speculation, this court requires sound economic proof of the nature of the market and likely outcomes with infringement factored out of the economic picture.
See Oiness v. Walgreen Co.,
By the same token, a fair and accurate reconstruction of the “but for” market also must take into account, where relevant, alternative actions the infringer foreseeably would have undertaken had he
*1351
not infringed. Without the infringing product, a rational would-be infringer is likely to offer an acceptable noninfringing alternative, if available, to compete with the patent owner rather than leave the market altogether. The competitor in the “but for” marketplace is hardly likely to surrender its complete market share when faced with a patent, if it can compete in some other lawful manner. Moreover, only by comparing the patented invention to its next-best available alternative(s) - regardless of whether the alternative(s) were actually produced and sold during the infringement - can the court discern the market value of the patent owner’s exclusive right, and therefore his expected profit or reward, had the infringer’s activities not prevented him from taking full economic advantage of this right.
Cf. Westinghouse Elec. & Mfg. Co. v. Wagner Elec. & Mfg. Co.,
Accordingly, this court in
Slimfold Manufacturing Co. v. Kinkead Industries, Inc.
held that an available technology not on the market during the infringement can constitute a noninfringing alternative.
Several opinions of this court have noted that “market sales” provide significant evidence of availability as a substitute.
See, e.g., Minco Inc. v. Combustion Eng’g, Inc.,
Nor does
Zygo
support Grain Processing’s position equating availability with offers for sale. In
Zygo,
this court reviewed for clear error the district court’s factual finding that the infringer’s “SIRIS” interferometer was not an acceptable nonin-fringing substitute.
Zygo,
Grain Processing asserts that permitting the infringer to show substitute availability without market sales, thereby avoiding lost profits, undercompensates for infringement. Section 284, however, sets the floor for “damages adequate to compensate for the infringement” as “a reasonable royalty.” 35 U.S.C. § 284. Thus, the statute specifically envisions a reasonable royalty as a form of adequate compensation. While “damages adequate to compensate” means “full compensation,”
General Motors,
III.
This court next turns to the district court’s findings that Process IV was in fact “available” to American Maize for producing Lo-Dex 10 no later than October, 1979, and that consumers would consider Process IV Lo-Dex 10 an acceptable substitute. This court reviews these factual findings for clear error.
See Gargoyles,
The critical time period for determining availability of an alternative is the period of infringement for which the patent owner claims damages,
i.e.,
the “accounting period.”
See State Indus.,
In this case, the district court did not base its finding that Process IV was available no later than October 1979 on speculation or possibilities, but rather on several specific, concrete factual findings, none of which Grain Processing challenges on ap
*1354
peal. The district court found that American Maize could readily obtain all of the materials needed for Process IV, including the glucoamylase enzyme, before 1979. The court also found that the effects of the enzymes in starch hydrolysis were well known in the field at that time.
Grain Processing VI,
The trial court also explained that “the sole reason [American Maize did not use Process IV prior to 1991] was economic: glucoamylase is more expensive than the alpha amylase enzyme American Maize had been using,” and American Maize reasonably believed it had a noninfringing product.
Grain Processing VIII,
Moreover, the district court’s unchallenged finding that there is no “economically significant demand for a product having all of the [claimed] attributes” supports its conclusion of availability.
Grain Processing VIII,
This court therefore does not detect, and the parties do not suggest, clear error in the district court’s factual findings on the availability of Process IV. These factual findings support the district court’s conclusion that Process IV was available to American Maize for making noninfringing Lo-Dex 10, no later than October 1991. American Maize had the necessary chemical materials, the equipment, the know-how and experience, and the economic incentive to produce Lo-Dex 10 by Process IV throughout the entire accounting period. Accordingly, this court holds that the district court did not clearly err in finding that Process IV Lo-Dex 10 was an avail *1355 able alternative throughout the accounting period.
Whether and to what extent American Maize’s alleged alternative prevents Grain Processing from showing lost sales of Maltrin 100 depends not only on whether and when the alternative was available, but also on whether and to what extent it was acceptable as a substitute in the relevant market.
See King Instruments,
In this case, the parties vigorously dispute the precise scope of the relevant market.
See Grain Processing VIII,
Market evidence in the record supports the district court’s uncontroverted findings and conclusions on acceptability. First, for example, American Maize’s high profit margin on Lo-Dex 10 and the consumers’ sensitivity to price changes support the conclusion that American Maize would not have raised the price of Process IV Lo-Dex 10 to offset the cost of glucoamylase. Further, American Maize’s sales records showed no significant changes when it introduced Process IV Lo-Dex 10 at the same price as previous versions, indicating that consumers considered its important properties to be effectively identical to previous versions. Witness testimony supported this market data. Thus, this court discerns no clear error in the district court’s finding that Process IV Lo-Dex 10 was an acceptable substitute in the marketplace.
It follows from the district court’s findings on availability and acceptability that Grain Processing’s theory of “but for” causation fails. As the district court correctly noted, “[a]n [American Maize] using the dual-enzyme method between 1979 and 1991 ... would have sold the same product, for the same price, as the actual [American Maize] did ... ” and consequently would have retained its Lo-Dex 10 sales.
Grain Processing VI,
*1356 IV.
In summary, this court requires reliable economic proof of the market that establishes an accurate context to project the likely results “but for” the infringement.
See, e.g., Oiness,
This court concludes that the district court did not err in considering an alternative not on the market during the period of infringement, nor did it clearly err in determining that the alternative was available, acceptable, and precluded any lost profits. Accordingly, the district court did not abuse its discretion in denying lost profits. This court affirms the district court’s decision.
COSTS
Each party shall bear its own costs.
AFFIRMED.
Notes
. More specifically, a starch molecule is a complex carbohydrate, i.e., it is a chain of carbohydrate molecules, (C6 H10 05) n, where n is the number of molecules in the chain. Hydrolysis breaks the bonds between some of the C6 H10 05 molecules and converts them to dextrose, C6 H12 Og.
. The district court later interpreted the "about 2” limitation to require a minimum D.R. of 1.9, a finding the parlies do not challenge.
. Grain Processing was not entitled to damages before this date because neither Grain Processing nor its predecessor in interest had marked the Mor-Rex products with the patent number pursuant to 35 U.S.C. § 287(a) (1994).
See Grain Processing VI,
. The district court's 3% royalty rate yielded damages of approximately $2.4 million; Grain Processing sought lost profits of $35 million, which with applicable interest presently implies an award approaching $100 million.
. The district court appears to have conducted a thorough royalty analysis, challenged by neither party on appeal. The court candidly stated that the 3% rate is its “best estimate,” an honest observation that would apply to most reasonable royalty analyses, given the difficulty of determining a hypothetical agreement between parties which did not actually agree on anything at all. The determination is perhaps more difficult when the patentee is not selling the patented product, as is the case here.
See In re Mahurkar,