Panduit Corp. v. Stahlin Bros. Fibre Works, Inc.
197 U.S.P.Q. (BNA) 726, 575 F.2d 1152, 1978 U.S. App. LEXIS 11500 (1978)
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Rule of Law:
When calculating a reasonable royalty for patent infringement under 35 U.S.C. § 284, the analysis must be based on a hypothetical negotiation between a willing licensor and licensee at the time infringement began, not on the infringer's actual profits or market conditions that exist after infringement has occurred.
Facts:
- In 1955, Panduit Corp. (Panduit) began manufacturing and selling a unique wiring duct invented by its president.
- Stahlin Bros. Fibre Works, Inc. (Stahlin) began manufacturing and selling infringing copies of the duct in 1957.
- On March 6, 1962, a patent for the duct design (the Walch patent) was issued to General Electric, which had established inventorship priority over Panduit's president.
- Panduit acquired the Walch patent from General Electric and maintained a firm policy of not licensing it to any competitors in order to maintain exclusivity.
- Stahlin continued to sell its infringing ducts after the patent was issued and acquired by Panduit.
- On January 1, 1963, Stahlin implemented a 30% price cut on its infringing products.
- After being legally ordered to stop selling its initial infringing ducts, Stahlin began producing and selling a new, slightly modified but still infringing duct called the 'Tear Drop'.
Procedural Posture:
- In 1964, Panduit sued Stahlin for patent infringement in the U.S. District Court for the Western District of Michigan.
- The district court (trial court) found the patent valid and infringed, issued an injunction against Stahlin, and ordered an accounting for damages.
- The U.S. Court of Appeals for the Sixth Circuit (intermediate appellate court) affirmed the district court's judgment.
- The district court later held Stahlin in contempt for violating the injunction by selling a new infringing product.
- The Sixth Circuit affirmed the contempt holding.
- The district court appointed a special master to determine damages, who recommended a 2.5% reasonable royalty, totaling $44,709.60.
- The district court adopted the master's report and awarded damages accordingly.
- Panduit, the plaintiff, appealed the district court's damage award to the U.S. Court of Appeals for the Sixth Circuit.
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Issue:
Was the special master's determination of a 2.5% reasonable royalty, based on the infringer's actual profits and the purported availability of non-infringing substitutes, an error in calculating damages adequate to compensate for the infringement under 35 U.S.C. § 284?
Opinions:
Majority - Markey, Chief Judge
Yes. The special master's determination of a 2.5% reasonable royalty was clearly erroneous because it relied on flawed assumptions and failed to adequately compensate the patent holder for the infringement. The court first affirmed the denial of Panduit's lost profits claim, not because Panduit failed to show a lack of substitutes, but because its accounting evidence was insufficient to prove the amount of profit it would have made. However, the court found clear error in the reasonable royalty calculation. The master wrongly concluded that acceptable non-infringing substitutes existed; Stahlin's own persistent infringement and its difficulty in developing a non-infringing alternative demonstrated the patent's unique value. The court held that the royalty calculation must be based on a hypothetical negotiation occurring at the moment infringement began (March 1962), not on subsequent events like price cuts or the infringer's actual profit margins. To do otherwise would create a 'heads-I-win, tails-you-lose' situation for infringers, allowing them to impose a compulsory license on a patent owner at a minimal cost. The case was reversed and remanded for a new damage calculation based on factors including the patent's unique market value, Panduit's policy of not licensing, and the profit Panduit would have required to willingly give up its market exclusivity.
Analysis:
This landmark case established what is now known as the 'Panduit test,' the definitive four-factor framework for proving entitlement to lost profits in patent infringement litigation. Its analysis of reasonable royalties fundamentally shifted the focus from a simple calculation based on industry norms to a more complex, fact-intensive inquiry into the value of the patentee's lost exclusivity. The decision underscored that a 'reasonable royalty' is a legal remedy meant to compensate an unwilling licensor, not merely to replicate a voluntary business transaction, thereby strengthening the patent holder's position in damage negotiations and litigation.
