REACTIVE METALS AND ALLOYS CORPORATION, Appellant, v. ESM, INCORPORATED, Appellee.
Appeal No. 84-1122.
United States Court of Appeals, Federal Circuit.
Aug. 9, 1985.
769 F.2d 1578
REMANDED WITH INSTRUCTIONS TO VACATE.
E.J. Welsh (argued), Parmelee, Miller, Welsh & Kratz, P.C., Pittsburgh, for appellee. With him on brief was William G. Kratz, Jr.
Before SMITH, Circuit Judge, NICHOLS, Senior Circuit Judge, and NIES, Circuit Judge.
NIES, Circuit Judge.
Reactive Metals and Alloys Corp., plaintiff in a patent infringement suit, appeals from a judgment of the United States District Court for the Western District of Pennsylvania, awarding attorney fees to the defendant, ESM, Inc., under
I.
Background
On December 18, 1980, appellant Reactive commenced a suit against ESM for infringement of its U.S. Patent No. 4,142,887 (‘887). The date of filing of the application for the ‘887 patent, February 21, 1978, is significant to this decision. The inventor named in the patent is Leon Luyckx who was Vice President of Marketing and Sales for Reactive until November 1, 1979. ESM counterclaimed for determinations of invalidity and non-infringement. At the time of the filing of the suit at the end of 1980, Luyckx had been working for ESM as a consultant for approximately a year and has remained in its employ throughout the litigation.
The invention of ‘887 relates to compositions and methods for desulfurizing molten steel. At the time Luyckx developed the patented product, Reactive was selling a line of desulfurizing products under the trademark DEOXSULF. Various products in the line were distinguished by a number. The new products, that is, the products within the claims of the ‘887 patent, were designated DEOXSULF 3, 3A, 15, 30 and 35. Other mixtures sold under the DEOX-
Upon preparation of the application, Luyckx signed what was then the standard inventor‘s declaration which stated that the invention had not been in public use or on sale in the United States more than one year prior to its filing date.1 The central issue in the case, which developed during discovery, was whether the products had been “on sale” within the meaning of
After the close of discovery and the submission of pre-trial statements by the parties, trial was set to begin on November 15, 1982. On November 12, 1982, at ESM‘s request, the court held a conference with the parties to consider newly discovered evidence which counsel for ESM had obtained the week before from Luyckx. The evidence consisted of two 1976 advertisements for DEOXSULF 3 in a trade journal. The court postponed the trial and reopened discovery to permit Reactive to depose Luyckx. At the deposition on November 17, 1982, Luyckx produced a folder of documents which he had taken with him when he left the employ of Reactive and in which he had found the advertisements. Following the Luyckx deposition, which substantiated that the advertisements had appeared prior to the critical date, Reactive undertook to terminate the litigation, working out a settlement with ESM which resolved all issues except ESM‘s claim for costs and attorney fees. The parties presented to the court the following findings of fact and order of dismissal which were accepted and entered by the court on December 20, 1982:
FINDINGS OF FACT AND ORDER OF DISMISSAL
1. An offer for sale of Deoxsulf 3 appears in the September 1976 and November 1976 issues of “I & SM” magazine.
2. Deoxsulf 3 is at least within the scope of the Claims 1, 2 and 6 of United States Patent No. 4,142,887.
3. The November 1976 advertisement describes the method of Claim 8 of United States Patent No. 4,142,887.
IT IS HEREBY ORDERED THAT:
1. The above-captioned action, including all claims and counterclaims asserted are hereby dismissed with prejudice subject only to the additional terms of this ORDER.
2. Claims 1 thru 8 of United States Patent 4,142,887 are invalid under
3. Either party may file a petition for reasonable costs and attorney fees within ten (10) days.
In accordance with the above Order, ESM filed a petition for costs and attorney fees asserting that (1) Reactive made “false and misleading answers during discovery concerning whether or not the patented subject matter was ‘on sale‘“; and (2) Reactive “knew or should have known of the ‘on sale’ bar.” In connection with this request, ESM‘s counsel sought to obtain Reactive‘s sales records relating to the shipments of Deoxsulf 3, 3A, 30 and 35 prior to February 21, 1977. After considering objections by Reactive, the court issued a Memorandum Opinion and Order on August 15, 1983, stating that the evidence then of record, including Luyckx‘s documented testimony, did not support a prima facie case of fraud on the Patent Office during prosecution. However, the court believed it appropriate in view of the established invalidity of the patent, to allow discovery to determine whether the patentee could not reasonably have believed in the validity of the patent so as to justify the prosecution of the case. The court opined that proof of sales might establish the “exceptional circumstances” required by
Through additional discovery seeking “all documents used in preparing the attached chart entitled ‘Deoxsulf Shipments,’ previously provided by plaintiff on August 12, 1981,” ESM obtained the invoices evidencing the sales to third party steel companies together with memoranda discussing testing of the product at various steel mills. Defendant then filed a Supplemental Memorandum in support of its petition for costs and attorney‘s fees submitting therewith documents which ESM obtained during the most recent discovery period, the most significant of which to the court were the invoices.
On March 22, 1984, the district court issued an Opinion and Order granting ESM an award of attorney fees and costs, stating therein: “As noted above, this court previously held that (as of December 20, 1982) the evidence did not establish that this case was exceptional so as to permit the award of attorneys’ fees.” However, the court held that the invoices showed that the subject transactions were “of the ‘extent, character and duration’ which would have barred the issuance of Patent ‘887 had this been revealed to the Patent Office.” Thus, the activities, per the court, constituted barring “sales” not experimental “trials.” The court further held that Reactive failed to respond truthfully in stating, in answer to ESM‘s interrogatory, that there was no record of any use of DEOXSULF 3 since there were sales records for that product. That answer also estopped Reactive from claiming that the sales were for experimental use only. Finally, the court found support for its position on the invoices from the advertisements which did not indicate the “trial” status of DEOXSULF 3.
In view of the above, the district court concluded:
This Court finds that Reactive‘s failure to respond truthfully to Interrogatory No. 1.01(1)(i) propounded by ESM was an act of bad faith and considers this to be the type of misconduct contemplated by
35 U.S.C. § 285 and the Palmer Court. The sales records later produced unquestionably contradicted the sworn statement made by Reactive‘s president. This conduct makes this an “exceptional” caseand warrants the award of reasonable attorneys fees.5
On appeal, Reactive argues that it was error for the court to reopen discovery following settlement and that the court violated Reactive‘s constitutional right to a trial by jury. Further, it argues that the record, even supplemented with the invoices, does not support the award of attorney fees under
ESM counters these arguments, and asserts, in essence, that the invoices produced during the last discovery provide the necessary support in the record for a finding of “bad faith.”
II.
Issue
The issues in this appeal are the propriety of the awards of attorney fees and costs to ESM.
Our jurisdiction over the appeal is found in
III.
Standard of Review of Award of Attorney Fees Under 35 U.S.C. § 285
The patent statute in
The court in exceptional cases may award reasonable attorney fees to the prevailing party.
The proposition is frequently stated that “an award of attorney fees is within the discretion of the trial judge,” Orthopedic Equipment Co. v. All Orthopedic Appliances, 707 F.2d 1376, 1384, 217 USPQ 1281, 1287 (Fed.Cir.1983). The proposition does not mean, however, that, on appeal, the only standard of review to be applied is “abuse of discretion.” As the statutory language indicates, the necessary predicate for the exercise of discretion by the trial court is a finding that the case is “exceptional” because of, inter alia, inequitable conduct during prosecution of the patent or misconduct during litigation. Bayer Aktiengesellschaft v. Duphar International Research B.V., 738 F.2d 1237, 1242, 222 USPQ 649, 652 (Fed.Cir.1984). A finding of such “exceptional” circumstances does not, however, mandate an award of attorney fees. It is at this point that the trial court exercises its discretion in making, or not making, an award. For example, even though inequitable conduct before the PTO is found, fees may be refused to the prevailing party. Rohm & Haas Co. v. Crystal Chemical Co., 736 F.2d 688, 229 USPQ 97 (Fed.Cir.1984).
At the trial level, a prevailing party who seeks an award of attorney fees has the burden of proof of facts which establish the exceptional character of the case. The quantum of proof required to prove bad faith conduct is clear and convincing evidence. See, e.g., Hycor Corp. v. Schlueter Co., 740 F.2d 1529, 1538, 222 USPQ 553, 560 (Fed.Cir.1984). In order to provide a basis for meaningful review, it is incumbent on the trial court not only to make the ultimate finding that the case is exceptional, but also to articulate the more particular factual findings from which the finding of “exceptional circumstances” follows. Hughes v. Novi American, Inc., 724 F.2d 122, 124, 220 USPQ 707 (Fed.Cir.1984); Stevenson v. Sears, Roebuck & Co., 713 F.2d 705, 712-13, 218 USPQ 969, 975 (Fed.Cir.1983); Stickle v. Heublein, Inc., 716 F.2d 1550, 1564-1565, 219 USPQ 377, 388 (Fed.Cir.1983).
On appeal, this court must review the factual underpinnings of the award under the clearly erroneous standard of
IV.
The Merits
Since a
The district court stated that while patent invalidity alone would not justify fees under
Attorneys have to make judgments on many matters before filing a patent application. To avoid a charge of inequitable conduct, they do not have to raise and explain to the PTO all problems they have considered. Rather, assuming the non-disclosed invoices do create a time bar, the fact of nondisclosure (as opposed to the bar itself) would have no effect on the litigation unless there were also proof of actual wrongful intent or gross negligence in the nondisclosure. Simple negligence is not enough. Hycor Corp., 740 F.2d at 1540, 222 USPQ at 562. On the other hand, as to any matters not disclosed, they do run a risk beyond proving their own
Proof of deliberate scheming is not needed; gross negligence is sufficient. Gross negligence is present when the actor, judged as a reasonable person in his position, should have known of the materiality of a withheld reference. On the other hand, simple negligence, oversight, or an erroneous judgment made in good faith, is insufficient. [Citations omitted.]
In the case at hand, there is no evidence of actual wrongful intent or gross negligence by the patentee or Reactive. Indeed, the only evidence of negligence during prosecution is the testimony of the inventor Luyckx who was aware of the advertisements and sales prior to the critical date and who signed the oath for the application with a misunderstanding and disregard of its significance. However, the district court had considered that evidence in its August 15, 1983 order and specifically found it insufficient to establish wrongful intent (i.e., fraud or gross negligence). We cannot see any basis in the record for attributing greater misconduct before the PTO to Reactive than to the inventor.
In any event, the specific ground stated for finding this case to be “exceptional” under
Mixes I, II, III were each offered for sale on or about the date of their first sale. Deoxsulf 3 and 3A were never offered for sale.
The district court held that the invoices contradicted Jackman‘s sworn statement and the above “false” answer constituted the type of conduct which made the case “exceptional.” We cannot agree.
The above question and answer “(i)” is at best ambiguous in the context of the suit. It was, at that time, Reactive‘s position that there were no “offers for sale” in the
The mixes were first used on a trial basis on these dates.
Mix I between March 11 and June 9, 1977 Mix II between March 11 and April 5, 1977 Mix III between August 24 and September 16, 1977 Deoxsulf 3 no record of any trial use Deoxsulf 3A March 8, 1976 Mixes I, II and III were the only mixes used on a commercial basis. Those uses occurred after their date of the first sale listed above.
The above answer with respect to DEOXSULF 3 was clearly wrong in view of the invoice records. However, that answer loses its importance, inasmuch as, in the regular course of discovery, that answer was corrected approximately two weeks later. On August 12, 1981, Reactive‘s counsel, in accordance with discussions with ESM‘s counsel concerning ESM‘s request for production of documents, sent a complete listing of “Deoxsulf shipment records on which we have substituted letters for customer names and blanked out cost information.” Thus, ESM had in its possession the following information, well in advance of the reopened discovery:
Deoxsulf Shipments
| Date | Company and Destination | Product Type | Amount-lbs. | Cost | Use |
| 3/08/76 | A | 3A | 6,000 | Trial | |
| 3/26/76 | A | 3 | 26,000 | Trial | |
| 3/26/76 | B | 3 | 2,000 | Trial | |
| 5/25/76 | B | 3 | 2,000 | Trial | |
| 9/24/76 | C | 3 | 5,600 | Trial | |
| 10/08/76 | C | 3A | 5,600 | Trial | |
| 10/15/76 | D | 3 | 5,600 | Trial | |
| 10/20/76 | C | 3A | 16,800 | Trial | |
| 10/20/76 | C | 3 | 2,800 | Trial | |
| 10/28/76 | E | 30 | 1,100 | Trial | |
| 11/09/76 | E | 30 | 1,100 | Trial | |
| 11/10/76 | C | 35 | 2,800 | Trial | |
| 11/18/76 | F | 30 | 10,800 | Trial | |
| 1/14/77 | C | 35 | 5,600 | Trial | |
| 1/24/77 | D | 35 | 12,000 | Trial | |
| 1/28/77 | G | 30 | 1,600 | Trial |
The attorney further explained that Deoxsulf 3 and 3A were the predecessors of Deoxsulf 30 and 35, respectively, and that the numbers 3 and 3A had been used for the same product.
ESM does not dispute that ESM‘s attorney agreed to the above chart in lieu of the actual invoices after Reactive objected to producing the originals because they contained customer names and costs. The invoices ultimately produced do no more than confirm the accuracy of the chart previously submitted. As the record shows, the chart was a detailed listing, transaction by transaction, of the individual invoices with full information except for names which, however, were known to ESM to be of “customers” who paid for the shipments. Accordingly, the invoices produced two years later were not the first disclosure of transactions, i.e., “sales,” involving DEOXSULF 3 nor, in any sense, were they “newly discovered” evidence which destroyed the basis for Reactive‘s case. Despite these “sales,” Reactive was prepared to litigate its claim of infringement on the theory that these “sales” during the critical period were for testing or experimental purposes. Contrary to the district court‘s finding, the invoices themselves do not establish the “character” of the transactions, that is, that the invention was “on sale” within the meaning of
Considering the record as a whole, the district court‘s finding that the invoices establish the deliberate (or grossly negligent) falsity of Reactive‘s interrogatory answer is clearly erroneous. The chart provided a prompt and accurate correction. ESM‘s assertion of reliance “for a time” on the sworn answers can mean no more than for a period of two weeks—early in the case. Its argument that that “type of conduct ... can often mislead a party” has the virtue of honesty since ESM does not contend it was actually misled. The evidence to establish (or infer) bad faith in Jackman‘s interrogatory answer falls far short of the “clear and convincing” standard. Accordingly, the case cannot be found “exceptional” under
V.
Costs
Reactive also appeals the award of costs to ESM claiming that such an award is without precedent where the parties have agreed to settlement of litigation. However, the dismissal order to which the parties stipulated specifically left open the question of costs. The district court based its cost award on
VI.
Conclusion
The decision of the district court awarding attorney fees to ESM is reversed. The award of costs is affirmed.
Each party shall bear its own costs of this appeal.
REVERSED-IN-PART, AFFIRMED-IN-PART.
EDWARD S. SMITH, Circuit Judge, dissenting.
I respectfully dissent. I do not agree with the majority‘s conclusion that the trial judge‘s finding of exceptional circumstances to award attorney fees is clearly erroneous. Because I believe the award of attorney fees to ESM should be affirmed, I have also considered whether the trial judge abused her discretion by reopening discovery, and conclude that there was no abuse of discretion.
I. Exceptional Circumstances
The majority states that a district judge must make a finding of exceptional circumstances upon which to exercise her discretion to award attorney fees, and that such an award must be reversed if the finding of exceptional circumstances is clearly erroneous. Furthermore, the majority requires that a party‘s actions that establish exceptional circumstances must be supported by proof of wrongful intent or gross negligence by that party.1 I agree completely with this statement of the law. I disagree that the trial judge made any clear error in finding exceptional circumstances in this case.
I believe that the facts of this case do not show any clear error in the trial court‘s finding that Reactive answered at least one interrogatory falsely and with wrongful in- tent. I accept the majority‘s statement of facts as accurate and complete with one exception: the majority does not mention one of Reactive‘s internal memoranda that shows that Deoxsulf 3 and 3A were sold at market prices before the critical date. This memorandum shows clearly that some of Reactive‘s shipments before the critical date were sales of Deoxsulf 3 and 3A. At the very least, the trial judge‘s finding that Deoxsulf 3 was offered for sale before the critical date cannot be said to be clearly erroneous.
Reactive‘s president, Joseph R. Jackman, answered interrogatory No. 1.0.(1)(i) that Deoxsulf 3 and 3A were “never offered for sale.” The majority interprets this answer to be Reactive‘s denial of offering Deoxsulf 3 and 3A for sale before the critical date, in light of the answer to interrogatory 1.0.(1)(iv). The answer to interrogatory 1.0.(1)(iv) gives dates that trial use of the patented products occurred, but states that there was “no record of trial use” for Deoxsulf 3. The majority believes that Reactive‘s production of a shipment summary corrected this erroneous statement 2 weeks later, and that the alleged sales were in fact trials, as the summary stated. That shipment summary, however, only shows information that would lead ESM to believe trials had been conducted. In no way does it suggest that Reactive sold Deoxsulf 3 and 3A for consideration and at market prices before the critical date, as the invoices show. Furthermore, the shipment summary is very misleading in an extremely subtle manner. The summary shows a “cost” item for each shipment, with “blanked out cost information.” In a trial or experimental setting, the cost of raw materials or cost of experimentation is very valuable business data and is entitled to confidentiality during litigation. Reactive‘s invocation of such a right to maintain trade secrets, however, shielded unprotected information that ESM sought—the truth that Reactive had shipped the patented product for a market-based consideration before the critical date. No one looking at
The majority states that the applicant‘s duty to disclose activities material to an on-sale bar to the PTO is not so broad as to include all use activities which occurred prior to the application date. I agree. However,
II. Reopening of Discovery
In order to affirm, it is necessary to decide whether the trial judge exercised her discretion properly in reopening discovery. I conclude that she did not abuse her discretion.
Reactive dismissed its complaint voluntarily because the 1976 ads acted as an on-sale bar to validity of the ‘887 patent under
The question is peculiarly one within the discretion of the Nisi Prius judge who in this case was more familiar than we are with the claims and with the likelihood of defendants’ establishing bad faith. * *
Reactive relies on the legal standard announced by the Gore decision.7 In the event of dismissal before trial, the trial court in Gore required the defendant to satisfy a 2-pronged test to establish an exceptional case under
The trial court here based its decision to reopen discovery on the section 102(b) bar raised by the 1976 advertisements. The section 102(b) bar rendered the patent invalid, and the advertisements, with nothing more, facially suggested Reactive‘s bad faith. The trial judge clearly reserved the issue of attorney fees in the order dismissing the rest of the action, as the majority shows. I believe that the advertisements and the arguably inconsistent shipment summary and interrogatories provide a basis for the trial judge to infer Reactive‘s bad faith, which facts would warrant the reopening of discovery. While the issue is a close one, I think the trial judge was justified in allowing ESM to develop the facts showing Reactive‘s sales. I would affirm.
EDWARD S. SMITH
CIRCUIT JUDGE