Mitutoyo Corp. v. Central Purchasing, LLC

United States Court of Appeals for the Federal Circuit

2006-1312, -1343

MITUTOYO CORPORATION, MITUTOYO AMERICA CORP.,
and HEXAGON METROLOGY NORDIC AB,

Plaintiffs-Cross Appellants,

v.

CENTRAL PURCHASING, LLC,

Defendant-Appellant.

Darle M. Short, Oliff & Berridge, PLC, of Alexandria, Virginia, argued for plaintiffs-
cross appellants. With him on the brief was James A. Oliff. Of counsel were Vu Q. Bui
and Kirk M. Hudson.

Marc S. Friedman, Sills Cummis Epstein & Gross P.C., of New York, New York,
argued for defendant-appellant. Of counsel was Mark J. Rosenberg.

Appealed from: United States District Court for the Northern District of Illinois

Judge Samuel Der-Yeghiayan
 UNITED STATES COURT OF APPEALS FOR THE FEDERAL CIRCUIT

2006-1312, -1343

MITUTOYO CORPORATION, MITUTOYO AMERICA CORP.,
and HEXAGON METROLOGY NORDIC AB,

Plaintiffs-Cross Appellants,

v.

CENTRAL PURCHASING, LLC,

Defendant-Appellant.

________________________

DECIDED: September 5, 2007
_________________________

Before MAYER, RADER and MOORE, Circuit Judges.

MAYER, Circuit Judge.

Central Purchasing, LLC (“Central”), appeals the judgment of the United States

District Court for the Northern District of Illinois, granting summary judgment of

infringement of U.S. Patent No. 4,743,902 (“’902 patent”) in favor of Mitutoyo

Corporation and Hexagon Metrology Nordic AB (collectively “Mitutoyo”), and awarding

damages using a 29.2% royalty rate and including sales of the alleged infringing goods

by both Central and Harbor Freight Tools USA, Inc. (“HFTUSA”), in the royalty base.

Mitutoyo Corp. v. Central Purchasing, LLC, No. 03-CV-990, 2006 U.S. Dist. LEXIS 9301

(N.D. Ill., Mar. 6, 2006) (“Damages Order”); Mitutoyo Corp. v. Central Purchasing, LLC,

No. 03-CV-990, 2005 U.S. Dist. LEXIS 8280 (N.D. Ill., Mar. 6, 2006) (“Liability Order”).
Mitutoyo and Mitutoyo America Corporation (“MAC”) cross-appeal the trial court’s

judgment, dismissing their willful infringement claim, dismissing MAC as a party, and

denying lost profit damages. Mitutoyo Corp. v. Central Purchasing, LLC, No. 03-CV-

990 (N.D. Ill., Apr. 21, 2006) (“Willful Infringement Order”); Damages Order; Liability

Order. Because the trial court erred by dismissing Mitutoyo’s willful infringement claim

and including HFTUSA’s sales in the royalty base, but rendered a proper judgment in all

other respects, we affirm-in-part, reverse-in-part, and remand.

Background

Mitutoyo owns the ’902 patent, which recites a device for electronically

measuring the movement of one object in relation to another, e.g., the movement of a

caliper’s slide relative to its scale. On February 10, 2003, Mitutoyu and MAC filed suit

against Central for patent infringement and breach of contract. They alleged that

Central’s sale of digital calipers manufactured by Guanglu Measuring Instrument

Company, Ltd, infringed the ’902 patent, both literally and willfully, and breached their

1994 settlement agreement—which resolved a 1992 patent infringement dispute, also

involving the ’902 patent, and provided that Central would refrain from any future

importation or sale of infringing products. Central counterclaimed for invalidity,

unenforceability, and non-infringement. In 1995, however, Central had brought a

declaratory judgment action against Mitutoyo, alleging that the ’902 patent was invalid

and unenforceable; and it lost. Accordingly, under principles of res judicata, the trial

court granted summary judgment on validity and enforceability in favor of Mitutoyo;

Central does not challenge this ruling.

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 With respect to infringement, the parties’ dispute turned only on whether the

accused devices meet the “phase position identification” limitation of claim 1 of the ’902

patent. ∗ The parties stipulated to the following construction of “phase position”: “The

amount by which the received signal is displaced or shifted in time relative to a supply

electrode signal. This is commonly referred to as ‘phase angle’ in the art.” Based on

∗
Claim 1 provides:

A measuring device for capacitative determination of the relative position
of two relatively movable parts with respect to one another comprising

a slide provided with a number of groups of supply electrodes
distributed along the direction of relative movement, each of the groups
having n number of supply electrodes, n being an integer greater than 2;

signal generator means having n number of signal outputs, each of the
supply electrodes in each group being connected to a respective one of
said signal outputs whereby all supply electrodes are supply [sic] with
voltages according to a cyclic pattern,

the slide also being provided with at least one receiving electrode;

a signal processing unit connected to at least one receiving electrode;

a scale being provided with a single electronic pattern comprising
internally galvanically isolated scale electrodes, each scale electrode
comprising two mutually galvanically connected parts, one being a
detecting part and being located close to the area of the scale over
which the supply electrodes of the slide can be moved, the other of the
two parts being a transferring part and being located close to the area
over which the at least [sic] receiving electrode of the slide can be
moved,

whereby the position of the slide along the scale determines the signal
from the at least one receiving electrode which is derived from at least
two adjacent supply electrode signals and the position of the slide with
respect to the scale can be determined by the identification in the signal
processing unit of the phase position of said signal from the receiving
electrode.

’902 patent, col. 11, l. 3 − col. 12, l. 8 (emphasis added).

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this claim construction and Central’s admissions, the trial court found that Central

literally infringed, because its devices determined “phase angle” in accordance with

claim 1. Liability Order, 2005 U.S. Dist. LEXIS 8280, at *18-19. When calculating the

phase angle, however, Central’s calipers do not directly compare the received signal to

the supply signal, but rather compare the received signal to a reference signal, which is

generated from the same clock as the supply signal. Therefore, the trial court

necessarily concluded, although without explicitly so stating, that Central infringes under

the stipulated claim construction, because the “phase position identification” limitation is

met regardless of whether the phase angle is ascertained via a direct or an indirect

comparison of the received signal to the supply signal.

In light of the infringement finding, the trial court also found Central liable for

breach of contract. Id. at *21. To the extent that it is liable for infringement, Central

does not dispute breach of contract liability. However, the trial court found that Mitutoyo

had insufficiently pled, and failed to properly prosecute, its claim for willful infringement.

Accordingly, but without citing any authority as a basis for its action, it dismissed the

willfulness claim and denied a jury trial on the issue. Willful Infringement Order.

Next, the trial court found that MAC was not a proper party to the action, because

it concluded that it lacked standing. Although MAC is the exclusive distributor of

Mitutoyo products in the United States, Mitutoyo admitted that it allowed other parties,

namely General Tool Corp., to sell products covered by the ’902 patent in the United

States. The trial court, therefore, concluded that MAC did not possess the exclusive

right to sell in the United States under the ’902 patent, as required to maintain licensee

2006-1312, -1343 4
standing under Ortho Pharmaceutical Corp. v. Genetics Institute, Inc., 52 F.3d 1026,

1032 (Fed. Cir. 1995). Damages Order, 2006 U.S. Dist. LEXIS 9301, at *10-11.

With respect to damages, the trial court found that Mitutoyo was not entitled to a

lost profit award, either for infringement or breach of contract, because it failed to

establish any market overlap between its goods and Central’s. Whereas Mitutoyo’s

calipers retailed from $40.00 to $397.00 and have advanced functionality, Central’s

calipers sold from $19.12 to $48.98 and have more basic features. Given these facts

and Mitutoyo’s failure to introduce any direct evidence of market overlap, the trial court

accepted Central’s argument that its calipers were directed exclusively at “do-it-

yourselfers” who, in the absence of its products, would have either purchased another

low-end caliper or not purchased one at all. Id. at *12-16. The trial court did, however,

award Mitutoyo damages based on a reasonable royalty. It determined that 29.2% was

an appropriate rate based on its conclusion that Mitutoyo would not have accepted less

than its profit margin of 29.2% and Central’s anticipated profit margin was 70%. But,

without offering any explanation for its decision, it used both Central’s and HFTUSA’s

sales of the accused calipers in calculating the royalty base. Id. at *20. While the two

companies have a strong business relationship, they are independent corporate entities,

with different owners, and Mitutoyo introduced no evidence that Central would have

otherwise agreed to pay royalties based on HFTUSA’s sales.

Central appeals as to infringement and the royalty; Mitutoyo and MAC cross-

appeal as to willful infringement, MAC’s standing, and lost profits. We have jurisdiction

under 28 U.S.C. § 1295(a)(1).

2006-1312, -1343 5
 Discussion

Beginning with infringement, we address each of the parties’ challenges in turn.

A. Infringement

We review the trial court’s grant of summary judgment of infringement de novo.

OddzOn Prods., Inc. v. Just Toys, 122 F.3d 1396, 1401 (Fed. Cir. 1997). Summary

judgment is appropriate when there is no genuine issue as to any material fact and the

moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c); AquaTex

Indus., Inc. v. Techniche Solutions, 419 F.3d 1374, 1379 (Fed. Cir. 2005). Thus,

summary judgment may be granted when no “reasonable jury could return a verdict for

the nonmoving party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).

Because Central admits that its products meet all other limitations of claim 1, the only

question is whether the trial court properly applied the parties’ stipulated claim

construction for the “phase position identification” limitation to the undisputed facts of

this case. We conclude that it did.

Central argues that it does not literally infringe because the signal recorded by

the receiving electrode in its devices is a sinusoidal wave, whereas the signal generated

by the supply electrode is a square wave. Because these waves cannot be directly

compared to determine the phase angle between them, it argues that its accused

devices do not satisfy the “phase position identification” limitation. This argument,

however, is without merit, and is based on an impermissibly narrow understanding of

what claim 1 and the stipulated claim construction embody.

Neither the stipulated claim construction nor the language of claim 1 require

calculation of the phase angle by direct comparison of the supply signal and the

2006-1312, -1343 6
received signal. Instead, they merely require the phase angle to be calculated based on

some comparison of those two signals, even an indirect one. Therefore, a reference

signal, generated by the same signal clock as the supply signal, and which has not

undergone any phase shifting, provides an appropriate basis from which to calculate

phase angle based on a comparison between that reference signal and the received

signal. Moreover, this understanding of the “phase position identification” limitation is

consistent with the specification, which expressly provides for determination of the

phase angle via an indirect comparison of the supply signal and the received signal

using a reference signal. ’902 patent, col. 5, ll. 22-66; see also Phillips v. AWH Corp.,

415 F.3d 1303, 1315 (Fed. Cir. 2005) (en banc) (The “specification ‘is always highly

relevant to the claim construction analysis. Usually, it is dispositive; it is the single best

guide to the meaning of a disputed term.’” (quoting Vitronics Corp. v. Conceptronic, Inc.,

90 F.3d 1576, 1582 (Fed. Cir. 1996))).

By Central’s own admission, its accused devices determine the phase angle by

using a reference signal generated by the same clock as the supply signal, which does

not undergo any phase shifting, and comparing the reference signal to the received

signal. Liability Order, 2005 U.S. Dist. LEXIS 8280, at *18-19. Accordingly, the trial

court’s infringement finding was correct.

B. Willful Infringement

We construe the trial court’s dismissal of Mitutoyo’s willful infringement claim as a

dismissal for failure to state a claim under Rule 12(b)(6) of the Federal Rules of Civil

Procedure and, alternatively, as a dismissal for failure to prosecute under Rule 41(b).

Both grounds for dismissal are procedural issues, not pertaining to patent law, that we

2006-1312, -1343 7
review under regional circuit law. Bowling v. Hasbro, Inc., 403 F.3d 1373, 1375 (Fed.

Cir. 2005); Polymer Indus. Prods. Co. v. Bridgestone/Firestone, Inc., 347 F.3d 935, 937

(Fed. Cir. 2003). Under Seventh Circuit law, dismissal for failure to state a claim is

reviewed de novo. Eades v. Thompson, 823 F.2d 1055, 1060 (7th Cir. 1987).

Dismissal of a claim for failure to prosecute is reviewed for abuse of discretion.

Lockhart v. Sullivan, 925 F.2d 214, 217 (7th Cir. 1991). In such cases, the Seventh

Circuit “will not set aside a trial court’s discretionary order unless it is clear that no

reasonable person could concur in the trial court’s assessment of the issue under

consideration.” Daniels v. Brennan, 887 F.2d 783, 785 (7th Cir. 1989) (citations

omitted). In making this determination, it considers the procedural history of the case

and its status at the time of dismissal. Lowe v. City of E. Chi., 897 F.2d 272, 274 (7th

Cir. 1990).

In its complaint, under its patent infringement count, Mitutoyo alleged:

10. The acts of infringement by Central Purchasing have occurred with
full knowledge of U.S. Patent No. 4,743,902 and have been willful and
deliberate, making this case exceptional within the meaning of the United
States patent laws.

It further provided details about the declaratory judgment suit filed by Central in 1995,

which sought to invalidate and render unenforceable the ’902 patent, thereby

establishing that Central had knowledge of the ’902 patent prior to 2002. This is plainly

more than sufficient to meet the requirements of Rule 8(a)(2) for pleading a willful

infringement claim and avoid dismissal under Rule 12(b)(6). Christensen v. County of

Boone, 483 F.3d 454, 458 (7th Cir. 2007) (providing that Rule 8(a)(2) requires only the

“bare minimum [of] facts necessary to put the defendant on notice of the claim so that

he can file an answer” (citations omitted)); see also Ferguson Beauregard/Logic

2006-1312, -1343 8
Controls, Division of Dover Res., Inc. v. Mega Sys., LLC, 350 F.3d 1327, 1343 (Fed.

Cir. 2003) (“Willfulness does not equate to fraud, and thus, the pleading requirement for

willful infringement does not rise to the stringent standard required by Rule 9(b).”).

Therefore, to the extent that the trial court relied on Rule 12(b)(6) as the basis for its

dismissal, it was in error.

The trial court also abused its discretion by dismissing the willfulness claim for

failure to prosecute under Rule 41(b). Indeed, nothing in Mitutoyo’s litigation conduct

evidenced an intent not to pursue its willful infringement claim. The trial court relied

heavily on the fact that Mitutoyo did not move for summary judgment of willful

infringement. However, because summary judgment is only appropriate where there

are no genuine issues of material fact, Fed. R. Civ. Pro. 56(c), its failure to so move

likely indicates its sense that issues of material fact exist, not an intent to abandon its

willfulness claim. See Flynn v. Sandahl, 58 F.3d 283, 288 (7th Cir. 1995) (“[W]e know

of no cases, nor has Sandahl directed us to any, stating that a plaintiff must raise every

legal issue in his motion for summary judgment.”). Moreover, throughout the entire

course of the litigation, including the parties’ Joint Pretrial Order filed on April 14, 2005,

Mitutoyo appraised the court of its willful infringement claim and its request for a trial on

the issue. We therefore reverse the trial court’s dismissal, reinstate the willful

infringement claim, and remand in order for the trial court to conduct a trial on it.

C. MAC’s Standing

MAC’s standing is a question of law that we review de novo. Consol. Edison Co.

v. Richardson, 233 F.3d 1376, 1379 (Fed. Cir. 2000). Mitutoyo and MAC contend that

MAC has standing because it is the exclusive distributor of Mitutoyo products in the

2006-1312, -1343 9
United States. This argument, however, misunderstands the relevant inquiry. In order

for a licensee to have co-plaintiff standing, it must hold at least some of the proprietary

rights under the patent. Ortho Pharm. Corp. v. Genetics Inst., 52 F.3d 1026, 1031 (Fed.

Cir. 1995). Consequently, the pertinent question is whether MAC has the exclusive

right to sell products made according to the ’902 patent in the United States; the

exclusive right to sell only Mitutoyo’s products made according to the ’902 patent,

however, is not a sufficient basis for standing. Because Mitutoyo represented to the trial

court that General Tool Corp. imports products covered by the ’902 patent and has the

right to sell them in the United States, Damages Order, 2006 U.S. Dist. LEXIS 9301, at

*10-11, MAC does not possess the requisite exclusive right to sell.

D. Damages

Whether a party may receive lost profits is a question of law that we review de

novo. Poly-Am., L.P. v. GSE Lining Tech., Inc., 383 F.3d 1303, 1311 (Fed. Cir. 2004).

We hold that the trial court correctly determined that Mitutoyo failed to meet its burden

of establishing any market overlap, so as to entitle it to a jury trial on lost profit

damages. See BIC Leisure Prods. v. Windsurfing Int’l, 1 F.3d 1214, 1218 (Fed. Cir.

1993) (“To recover lost profits as opposed to royalties, a patent owner must prove a

causal relation between the infringement and its loss of profits. The patent owner must

show that ‘but for’ the infringement, it would have made the infringer’s sales.”). As

discussed above, Mitutoyo’s calipers are a more complex product than that marketed by

Central, and very little price overlap exists. This alone may have been insufficient to

support the trial court’s conclusion that Mitutoyo’s and Central’s products compete for

entirely different market segments. However, Mitutoyo also did not put any direct

2006-1312, -1343 10
evidence into the record to suggest overlap among the consumers buying the

companies’ respective goods. And Central demonstrated that the demand for its

products was highly elastic, with $21 being its customers’ preferred price point—

meaning that Mitutoyo’s products are sold almost entirely outside the price range in

which Central customers are likely to buy. Taken together, there was no basis from

which a jury could have found lost profit damages.

With respect to the royalties, we review the trial court’s determinations for

erroneous conclusions of law, clearly erroneous factual findings, and clear errors of

judgment amounting to an abuse of discretion. Rite-Hite Corp. v. Kelley Co., 56 F.3d

1538, 1543 (Fed. Cir. 1995). In determining the royalty rate, the trial court applied the

correct law. Indeed, it was calculated based on a hypothetical negotiation between a

willing patentee and a willing licensee at the time the infringement began. Rite-Hite

Corp., 56 F.3d at 1554. Moreover, it was determined based on the entirety of evidence

in the record. Smithkline Diagnostics, Inc. v. Helena Labs. Corp., 926 F.2d 1161, 1168

(Fed. Cir. 1991).

Central’s challenge amounts to little more than an argument that the trial court

should have placed more emphasis on the facts favoring a lower royalty rate, and fails

to establish any clear error or abuse of discretion. It admits that its anticipated profit

margin was 70% and that Mitutoyo’s profit margin was 29.2%. While the trial court

could have looked to other figures in determining what Central would have been willing

to pay and what Mitutoyo would have required for a license, its use of these figures was

not clearly erroneous. Moreover, the 29.2% figure is reasonable given the contentious

history between these two parties. See Applied Med. Res. Corp. v. U.S. Surgical Corp.,

2006-1312, -1343 11
435 F.3d 1356, 1366 (Fed. Cir. 2006). On these facts, it is unlikely that Mitutoyo would

have been interested in less than a 29.2% rate, and the trial court’s decision to use that

rate was certainly not an abuse of discretion.

With respect to the royalty base, however, the trial court committed clear error by

including HFTUSA’s sales, rather than Central’s sales to HFTUSA. To begin, it

provided no explanation as to why Central would have agreed to pay a royalty based on

those sales. And contrary to Mitutoyo’s contention, the business relationship between

HFTUSA and Central, without more, does not provide a sufficient justification for

including HFTUSA’s sales in the base. In Allen Archery, Inc. v. Browning Manufacturing

Co., 898 F.2d 787 (Fed. Cir. 1990), a parent-subsidiary relationship existed between the

infringing companies, and this made the price of the infringing goods sold between them

an inappropriate basis for calculating the royalty. Instead, the trial court used the price

at which goods were sold to consumers. Id. at 790. Here, there is no corporate

relationship between Central and HFTUSA, and there are no courses of dealing or other

evidence to suggest that Central would have agreed to pay royalties based on both its

sales and HFTUSA’s sales. Accordingly, Allen Archery cannot be used to sustain the

trial court’s action. We therefore reverse the trial court’s damages award insofar as it

includes HFTUSA’s sales in the royalty base, and remand for a proper accounting of the

base.

Conclusion

Accordingly, the judgment of the United States District Court for the Northern

District of Illinois is affirmed-in-part and reversed-in-part, and the case is remanded for

further proceedings in accordance with this opinion.

AFFIRMED-IN-PART; REVERSED-IN-PART; and REMANDED

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