Paymaster Technologies, Inc. v. United States

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United States Court of Appeals for the Federal Circuit

05-5025,-5029

PAYMASTER TECHNOLOGIES, INC.

Plaintiff-Cross Appellant,

v.

UNITED STATES,

Defendant-Appellant.

Jonathan J. Krit, Emrich & Dithmar LLC, of Chicago, Illinois, argued for plaintiff-
cross appellant. On the brief were Paul L. Brown; and Ronald R. Snider, Snider &
Associates, of Washington, DC.

John Fargo, Director, Commercial Litigation Branch, Civil Division, United States
Department of Justice, of Washington, DC, argued for defendant-appellant. With him
on the brief was Peter D. Keisler, Assistant Attorney General. Of counsel on the brief
was Robert G. Hilton, Attorney.

Appealed from: United States Court of Federal Claims

Judge Christine O.C. Miller
 NOTE: Pursuant to Fed. Cir. R. 47.6, this disposition
is not citable as precedent. It is a public record.

United States Court of Appeals for the Federal Circuit

05-5025, -5029

PAYMASTER TECHNOLOGIES, INC.,

Plaintiff-Cross Appellant,

v.

UNITED STATES,

Defendant-Appellant.

_________________________

DECIDED: May 4, 2006
_________________________

Before MICHEL, Chief Judge, FRIEDMAN, Senior Circuit Judge, and DYK, Circuit
Judge.

Opinion for the court filed by Chief Judge MICHEL. Concurring opinion filed by Senior
Circuit Judge FRIEDMAN. Dissenting-in-part opinion filed by Circuit Judge DYK.

MICHEL, Chief Judge.

The United States appeals the final judgment of liability for its use of a patented

invention and of damages by the United States Court of Federal Claims in this case

under 28 U.S.C. § 1498. Paymaster Techs., Inc. v. United States, 61 Fed. Cl. 593

(2004) (“Paymaster II”). Critical to the trial court’s finding use of the invention of United

States Patent No. 5,292,283 (“the ’283 patent”) by two types of money order forms by

the United States Postal Service (“USPS”) was its construction of the claim limitations

“form set” and “ink permeates through the sheet from said printed front surface to said
back surface to provide the indicia in mirror image form on said back surface,” found in

all three asserted claims. The government challenges the trial court’s interpretation of

these two claim phrases, but agrees that if the constructions stand, so do the rulings of

use of the patented invention. The United States also appeals the damage award,

alleging that too large a royalty base was used, as no reduction was made for a

percentage, allegedly 10%, of one of the form sets that due to production variations

does not meet all claim limitations. Paymaster Technologies, Inc. (“Paymaster”) cross

appeals the damage award and requests remand to re-determine and increase the

royalty rate, particularly if the royalty base is reduced.

As to use of the patented invention, encompassing both types of money orders,

because we agree with the trial court’s claim constructions, we affirm. We vacate and

remand the damages judgment as to the royalty base for findings consistent with our

opinion. We affirm the damages judgment as to the royalty rate of 3.5%. Finally, we

commend the trial judge for her painstaking, lucid, and lengthy opinion.

I.

The technology at issue in this case relates to form sets for use with an

imprinting apparatus for imprinting money orders.1 Often, form sets of several

interlayered sheets are used for money orders, including one upper, negotiable sheet

on which an amount to be paid is entered, one intermediate, voucher sheet for the

issuer, and a lower, customer receipt sheet. Layered between these sheets are

“transfer medium” sheets impregnated with ink. The ink from these transfer medium

1
The patent at issue, United States Patent No. 5,292,283 (issued March 8,
1994), covers the form sets. Another patent, United States Patent No. 4,995,315
(issued February 26, 1991), covers the imprinting apparatus.

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sheets permeates onto the intermediate, voucher and lower, customer receipt sheets to

transfer the amount entered on the upper, negotiable sheet onto the intermediate and

lower sheets when the form set is impacted by the imprinting apparatus. The dollar

amount and payee entered on the upper sheet are thus also visible on the front surface

of the intermediate and lower sheets. The amount is also visible on the back surface of

the upper, negotiable sheet – because the ink penetrates to the back of the sheet. This

visibility provides both optical character recognition for automatic processing by

computer and resistance to subsequent alteration and tampering.

At issue are claims 1, 5, and 10. Paymaster accuses the government of using

two different types of money order form sets covered by the ’283 patent: (1) a five-ply

money order form set (consisting of the three specific sheets described above with

interlayered ink-infused transfer medium sheets); and (2) a single-ply money order form

set that is both imprinted and processed electronically. The first type of form set was

found to be covered by claims 1 and 5, while the single-ply form set was found to be

covered by claim 10.

The Court of Federal Claims conducted a one-day Markman hearing in

September 2002 and issued its claim construction in November 2002. Following denial

of various summary judgment motions, in May 2004 the court held a seven-day trial on

liability and damages. Based on its claim constructions, the trial court found that both

the USPS five-ply money orders and the single-ply money orders were covered by the

’283 patent and, consequently, that the government owed Paymaster compensation for

use of both variations of the invention of the ’283 patent. Claims 1 and 5 were found to

cover the five-ply form set and claim 10, the single-ply form set. Relying on expert

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testimony as to the Georgia-Pacific factors, Georgia-Pacific Corp. v. United States

Plywood Corp., 318 F. Supp. 116 (S.D.N.Y. 1970), the trial court established a royalty

rate of 3.5% on a royalty base of $55,923,969.47.2

The government appeals the findings of use of the patented invention based on

both types of money order form sets and challenges the claim constructions on which

such findings rest. It also requests vacatur of the damages award and, if infringement is

upheld, a remand for reduction of the royalty base. Both sides seek remand as to the

damage amount and both seem to agree the trial court erred in not reducing the base.

Paymaster cross appeals the royalty rate aspect of the damages judgment, alleging

clearly erroneous analysis of one of the Georgia-Pacific factors. Because we agree with

the claim constructions, we affirm the rulings of use of the patented invention as to both

types of money orders. However, we vacate and remand the damage award as to the

royalty base for re-determination consistent with Part C of our opinion. Finally, we

affirm the trial court’s damage award as to the royalty rate, rejecting Paymaster’s cross

appeal. This Court has jurisdiction under 28 U.S.C. § 1295(a)(3).

II.

A.

The first critical issue is the correct construction of the term “form set.” According

to the trial court’s construction, “form set” includes “single-ply” form sets, Paymaster

Techs., Inc. v. United States, 54 Fed. Cl. 579, 590 (2002) (“Paymaster I”). The

2
The royalty base was calculated as the combined total purchase of both
types of money order form sets by the USPS. From May 12, 1994, through February
29, 2004, the USPS purchased 1,521,149,560 five-ply money order forms for a total
price of $27,787,193.44. For the same period, the USPS purchased 785,328,262
single-ply money order forms for a total price of $28,136,776.03.

05-5025,-5029 4
government argues that “form set” must be interpreted to exclude “single-ply” form sets

because, it says, the claim language itself recites and the specification discloses more

than one “sheet” in every form set described. Paymaster responds that, while claims 1

and 5 recite a form set including three specific “sheets,” the plain language of claim 10

allows a form set that includes only one such specific “sheet.” Furthermore, it asserts,

the written description discloses a form set having only one specific “sheet.” We agree

with the trial court.

We start with the claim language. Independent claim 10 recites in relevant part:

[a] form set . . . comprising . . . at least one negotiable instrument sheet
....

’283 patent, col. 18, ll. 5-12. In contrast, claim 1 recites in relevant part:

[a] form set . . . comprising . . . an upper negotiable instrument sheet. . ., a
lower customer receipt sheet, an intermediate voucher sheet. . ., a first
transfer medium positioned between said upper negotiable instrument
sheet and said intermediate voucher sheet, and a second transfer medium
positioned between said lower customer receipt sheet and said
intermediate voucher sheet . . . .

Id. at col. 16, ll. 25-37. Claim 5 uses the exact same relevant language. Id. at col. 16, l.

60 – col. 17, l. 5.

According to its plain language, claim 10 reads on a form set that includes a

negotiable instrument sheet. Under conventional construction of “comprising,” a form

set as recited in claim 10 may include only one negotiable instrument sheet, so long as

it includes another form. See Vehicular Tech. Corp. v. Titan Wheel Int’l, Inc., 212 F.3d

1377, 1383 (Fed. Cir. 2000).

Claims 1 and 5 add the limitation that their form sets must include two specific

additional sheets, a lower, customer receipt sheet and an intermediate, voucher sheet.

05-5025,-5029 5
But this limitation cannot mean that the form set of claim 10 must have these same two

specific additional sheets. It merely recites that the form set of these two claims will

also include these two other specified sheets.

The issue, then, is whether a form set with “at least one negotiable instrument

sheet” may be “single-ply.” We hold that a form set as recited by all three claims and

disclosed in the specification may be single-ply. A “form set” is simply a set of forms,

i.e., more than one form. For example, a negotiable instrument sheet may constitute

one form, a customer receipt sheet may constitute another form, and a voucher sheet

may constitute another form. Together, these forms constitute a form set. Yet each

form in a form set does not have to occupy a separate layer, or ply. Rather, multiple

forms in a form set may be in a single ply, as perforated, detachable forms. But there

must be at least two different forms to constitute a form set.

Every relevant part of the specification accords with this meaning of the term

“form set.” Indeed, the key to understanding the correct construction of the term “form

set” is to apprehend that the summary of the invention describes two different types of

form sets: (1) a set of forms with at least one negotiable instrument sheet, and (2) a set

of forms with specifically an upper negotiable instrument sheet, a lower customer

receipt sheet, an intermediate voucher sheet, and transfer medium sheets positioned

between.

The first two paragraphs of the Summary of the Invention describe a form set as

recited in claims 1 and 5, a form set with five specific sheets – including the “upper”

negotiable sheet, the “lower” customer receipt sheet, the “intermediate” voucher sheet,

and the two transfer medium sheets “positioned between” these sheets. ’283 patent,

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col. 2, ll. 10-44. Because the five specific sheets are disclosed as “upper,” “lower,” and

“intermediate,” and because the transfer medium sheets are “positioned between” the

forms or sheets, id. at col. 16, ll. 40, 43, col. 17, ll. 8, 11, this type of form set has to be

multi-ply. This type of form set is the type later disclosed as the preferred embodiment.

Id. at col. 4, ll. 15-17.

The third paragraph of the summary of the invention, however, describes a form

set as recited in claim 10 – a form set only specifying a negotiable instrument sheet. Id.

at col. 2, ll. 52-53. This “negotiable instrument sheet” is not described as an “upper”

negotiable instrument sheet. No transfer medium sheets are “positioned between” the

negotiable instrument sheet and any other sheet. The additional form in this second

type of form set may be part of a single ply. This reading of all three paragraphs of the

summary of the invention – and the two different types of form sets that they describe,

multi-ply and single-ply – is the key to understanding the meaning of “form set.”

It is true that also disclosed in the summary of the invention are form sets with

the specific three sheets as described above and their interlayered transfer medium

sheets. Id. at col. 2, ll. 12-17. A “multicopy form set” comprised of a “plurality of sheets”

is further disclosed in detail in the written description, id. at col. 7, ll. 17-18, but only

under the heading “Description of a Preferred Embodiment.” It is axiomatic that claims

are only rarely, if ever, construed as limited to the preferred embodiment. See, e.g.,

Johnson Worldwide Assoc., Inc. v. Zebco Corp., 175 F.3d 985, 992 (Fed. Cir. 1999).

B.

The government also challenges the trial court’s construction of the claim

limitation “ink permeates through the sheet from said printed front surface to said back

05-5025,-5029 7
surface to provide the indicia in mirror image form on said back surface” that requires

ink “on or at the back surface,”3 appearing in all three asserted claims. The government

asserts that the limitation requires permeation of the ink through the back surface of the

top sheet. Paymaster replies that the limitation requires only penetration of the ink to

the back surface such that the ink resides on the back surface of the sheet – not

through the back sheet. We agree with the trial court’s construction that ink must reside

on or at the back surface of the sheet – but does not have to permeate through the back

surface of the sheet.

The claim language itself of the limitation “ink permeates through the sheet from

said printed front surface to said back surface to provide the indicia in mirror image form

on said back surface” supports the trial court’s interpretation. While it is true that the

claim limitation contains the term “through,” this word cannot carry the government’s

argument. For example, claim 10 states that the ink permeates “through the sheet” –

not “through the back of the sheet.” Claim 10 further explains how far the permeation

goes – “from said . . . front surface to said back surface.” Thus, the ink travels to the

back surface of the sheet – not through the back surface of the sheet. Thus, the claim

language provides no support for the government’s argument. Indeed, it refutes the

argument.

3
In so construing this claim limitation during a hearing on summary
judgment (of invalidity under the on-sale bar and of co-ownership), the trial court noted
that, prior to claim construction, it had “met with the parties and received a list of those
phrases and aspects of claims that were in dispute, and this was not one of them.”
During the summary judgment hearing, then, the court construed the limitation. “There
is no question[ ] in my mind . . . that that claim . . . requires the ink to be on or at the
back surface.” While an argument could have been made that the government waived
any disagreement with the court’s construction, it was not made. Moreover, liability
turns on the correctness of the construction. Hence, we will review it.

05-5025,-5029 8
 The specification further bolsters the correctness of the trial court’s construction.

In the Description of a Preferred Embodiment, the written description discloses that the

ink “permeat[es] from the upper to lower surface of the top sheet.” ‘283 patent, col. 5, ll.

19-20. Later, the written description explains what “through the sheet” means and how

far the ink must travel – “the ink permeates through the top sheet from its front surface

to its back surface.” Id. at col. 7, ll. 49-51 (emphasis added). In yet another instance, it

teaches that the ink “permeate[s] through the paper sheet . . . from the front to the

back.” Id. at col. 7, ll. 56-57 (emphasis added). Thus, in each instance, the

specification explains how far the ink permeates – through the sheet, but only to the

back of the sheet – not through the back of the sheet. Nor does the prosecution history

require a different construction.

The extrinsic evidence of dictionary definitions supplied by Paymaster

strengthens this distinction between “to” and “through” as well. “To” means: “in a

direction toward,” “reaching as far as,” “to the degree or extent of,” “towards a specific

state,” “in contact with,” and “in front of.” Webster’s II New College Dictionary (2d ed.

1999) (emphasis added). These definitions indicate that “to” means something that has

not penetrated through another thing, but rather something that travels “toward

something” and “contacts” it to be “in front of” it. The government does not supply

contrary definitions of “to” and does not offer any definitions of “through.”

Moreover, the government’s argument is impractical, for if the ink came out the

back side of the sheet, it would smear the surface below. Therefore, it is difficult to

understand how the government can expect us to accept its argument which lacks

support in the claims, the written description, dictionaries, and practicality.

05-5025,-5029 9
 C.

We vacate the damages award as to the royalty base and therefore we remand

this issue. On remand, the trial court should re-determine whether the percentage of

five-part money orders that did not infringe – approximately 10% – due to imperfect

production of the accused forms should have been included in the damages calculation,

and what that percentage of non-infringing five-part money orders is. There was

testimony about samples of 10 and 50 forms (out of 1.5 billion purchased) indicating

insufficient penetration of ink approximately 10 to 12% of the time. The court should

assess whether such samples are statistically significant. If not, it may admit additional

evidence. It may not, however, ignore forms not meeting claim limitations. As both

parties agree, the trial court’s interpretation of Bell Communications Research, Inc. v.

Vitalink Communications Corp., 55 F.3d 615 (Fed. Cir. 1995) was incorrect.

D.

While the amount of damages is a question of fact reviewed under the clear error

standard, the methodology used is reviewed for abuse of discretion. See, e.g., Home

Sav. of Am., FSB v. United States, 399 F.3d 1341, 1346-47 (Fed. Cir. 2005). The

“general type of damages to be awarded” is reviewed for clear error. Id. We see

neither clear error nor abuse of discretion in the trial court’s determination of a 3.5%

royalty rate based on its detailed and careful analysis of the Georgia-Pacific factors.

Paymaster’s expert posited a royalty rate of 5% to 6%. The government’s expert

suggested a rate of 1.5%. After carefully analyzing all fifteen of the Georgia-Pacific

factors and weighing the analysis offered by each expert, the trial court determined that

a rate of 3.5% was appropriate. While the court found the government’s expert’s

05-5025,-5029 10
analysis more thorough and accurate on the whole, it found his analysis lacking in part.

Consequently, the court started with the government’s rate of 1.5%, but increased it to

3.5% to account for the omissions in the government’s analysis.

Paymaster contends that the trial court’s analysis of Georgia-Pacific factor eight,

the commercial success and profitability of the accused products, was flawed because

the court weighed the conflicting evidence and found that it balanced out to render this

factor “neutral.” Paymaster II, 61 Fed. Cl. at 612. Paymaster’s expert asserted that the

money orders were both popular and highly profitable for the USPS. The government’s

expert disagreed, asserting that by definition the USPS does not make any profit. Both

offered plausible testimony. We see no clear error or abuse of discretion with the trial

court’s weighing of the evidence and analysis of this factor. What no one can dispute is

that offering the money order service was popular enough that in a ten-year period the

USPS had to purchase 1.5 billion forms. We hold that this equates to commercial

success. Thus, the court could have sustainably found that factor eight was proven by

Paymaster. However, that it did not fails to rise to the level of clear error. The court

clearly understood all the facts. That it termed factor eight “neutral” did not, in any

event, prejudice Paymaster and was at most harmless error.

III.

We agree with the trial court that the term “form set” as used in all asserted claims of
the ‘283 patent includes a form set of a single ply. Like the trial court, we hold that the
limitation “ink permeates through the sheet from said printed front surface to said back
surface to provide the indicia in mirror image form on said back surface” requires only
that the ink appear at the back of the form sheet, not that it permeate all the way
through the back surface of the top sheet. In light of these claim constructions, we
affirm as to liability. We vacate the damages award, however, and remand the issue as
to the correct royalty base for a finding consistent with our opinion and, if appropriate, a
reduction of the royalty base by an appropriate percentage of one product that both
parties agree does not always meet a limitation of either of the two claims found to

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cover this product. Finally, on the cross appeal by Paymaster, we affirm the trial court’s
damages judgment as to the royalty rate. Accordingly, we affirm in part, vacate in part,
and re

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 United States Court of Appeals for the Federal Circuit

05-5025, -5029

PAYMASTER TECHNOLOGIES, INC.,

Plaintiff-Cross Appellant,

v.

UNITED STATES,

Defendant -Appellant.

FRIEDMAN, Senior Circuit Judge, concurring.

Although I agree with and join the court’s opinion, I write separately to suggest a

slightly different approach to determining the meaning of claim 10.

The three independent claims at issue in this case – 1, 5, and 10 – have a

common format. Each of them specifies “A form set . . . comprising,” followed by a

description of the items included in the particular form set. Claims 1 and 5 identically

state, after “comprising,” “an upper negotiable instrument sheet,” a “lower customer

receipt sheet” and “an intermediate voucher sheet,” together with “a first” and “a

second” “transfer medium.” Claim 10, in contrast, after “comprising,” states “at least

one negotiable instrument sheet,” which is described in considerable detail.

On its face, this language appears to state that the form set described in claims 1

and 5 requires 3 sheets (one of which is a “negotiable instrument sheet”), whereas the

form set in claim 10 requires only “at least one negotiable instrument sheet.”
 The government argues, however, that the concept of a “form set” necessarily

requires at least two sheets, since a “set” means more than one. The court’s majority

opinion correctly rejects this interpretation of “form set.”

The government achieves its construction of claim 10 by in effect incorporating

into that claim the limitation in claims 1 and 5 that the “form set” they cover must include

3 sheets. In other words, the government interprets “at least one negotiable instrument

sheet” in claim 10 to mean “at least three” sheets, one of which is a “negotiable

instrument sheet.” This bit of legal legerdemain appears contrary to the well-

established principle of claim construction that explicit limitations in one claim will not be

read into another claim that does not include them. Indeed, if claim 10 as written

includes the 3 sheet limitation of claims 1 and 5, there would seem to have been no

reason for the patentee to have included the “at least one negotiable instrument sheet”

limitation in claim 10, since that limitation already was provided by the “an upper

negotiable instrument sheet” language of claims 1 and 5.

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 NOTE: Pursuant to Fed. Cir. R. 47.6, this disposition
is not citable as precedent. It is a public record.

United States Court of Appeals for the Federal Circuit

05-5025, -5029

PAYMASTER TECHNOLOGIES, INC.,

Plaintiff-Cross Appellant,

v.

UNITED STATES,

Defendant-Appellant.

DYK, Circuit Judge, dissenting in part.

Although I join the court’s opinion insofar as it affirms the Court of Federal

Claims’ construction of the ink permeation limitation and vacates and remands the

damages ruling, I do not agree with the majority’s construction of the term “form set.” I

respectfully dissent.

In pertinent part, claim 10 of the ’283 patent covers “[a] form set for use with an

apparatus having an imprinting mechanism . . . said form set comprising: at least one

negotiable instrument sheet . . . .” ’283 patent, col. 18, ll. 5-13. The majority concludes

that “form set” in claim 10 is a “set of forms, i.e., more than one form” with at least one

negotiable instrument sheet. Maj. Op. at 6, 8. The majority further concludes that while

a “form set” is a set of forms, the form set itself may be “single-ply,” meaning that a

single sheet containing multiple, perforated forms could make up a “form set.” Maj. Op.
at 6. While I agree that a “form set” is a set of forms, I do not agree that a “form set”

can be a singly-ply sheet.

Our cases recognize that the specification is the single best guide in construing

patent terms, and that language in the specification describing the “present invention”

should limit the claims to the invention described. For example, in SciMed Life

Systems, Inc. v. Advanced Cardiovascular Systems, Inc. 242 F.3d 1337 (Fed. Cir.

2001), the court held that “[t]he characterization of [a particular arrangement] as part of

the ‘present invention’ is strong evidence that the claims should not be read to

encompass the opposite structure.” Id. at 1343; see Liebel Flarsheim Co. v. Medrad,

Inc., 358 F.3d 898, 908 (Fed. Cir. 2004). Similarly, in Watts v. XL Systems, Inc., 232

F.3d 877 (Fed. Cir. 2000), the court construed a patent claim limitation stating that two

pipes had to be “sealingly connected.” Id. at 879. The court determined that the

claimed connection was limited to connections with “misaligned taper angles” because

the specification stated that “[t]he present invention utilizes [the varying taper angle]

feature.” Id. at 883 (brackets in original). The court therefore found that the

specification “limit[ed] the invention to embodiments with misaligned taper angles.” Id.

Significantly, these cases are cited with approval in Phillips v. AWH Corp., 415 F.3d

1303 (Fed. Cir. 2005) (en banc).

Here, the specification makes clear that a “form set” includes more than one

sheet. The first paragraph of the Summary of the Invention states that “[t]he present

invention provides a form set for use with an imprinting apparatus for imprinting indicia

with dye-based ink on negotiable instruments. The form set includes an upper

negotiable instrument sheet . . . a lower customer receipt sheet, and an intermediate

05-5025, -5029
2
voucher sheet . . . .” ’283 Patent, col. 2, ll. 12-17 (emphasis added). Contrary to the

majority, nothing in paragraph 3 of the Summary of the Invention supports a single

sheet construction or undermines the significance of the first paragraph.1 Paragraph 3

simply describes a ribbon-based mechanism for imprinting the form set described in the

first paragraph. Thus in my view, the “present invention” language in the specification

limits the term “form set” in claim 10 to a group of multi-ply sheets.

1
Paragraph 3 of the Summary of the Invention states:

Further, in accordance with the present invention, there is provided a form set for
use with an apparatus having an imprinting mechanism including a ribbon
bearing dye-based ink for imprinting negotiable instruments with characters
indicative of the dollar and cents amount for which the negotiable instrument is
drawn. . . . The form set comprises at least one negotiable instrument sheet
comprised of an absorbing type paper sheet material for absorbing the dye-
based ink, whereby when the form set is impacted by the imprinting mechanism
of the apparatus, the dye-based ink permeates through the sheet from the
printed front surface to the back surface to provide the indicia in mirror image
form on the back.

’283 Patent, col. 2, ll. 45-59.
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3