Justia Federal District Court Opinions

Luke G. Williams appeals from the orders and final judgments of the United States District Court for the Eastern District of Washington concluding that Unisplay S.A.'s U.S. Patent 4,163,332 (the '332 patent) is not invalid; that Williams infringed claims 9, 10, and 13 of the '332 patent; and that Williams is liable for damages, increased damages, and attorney fees. Unisplay S.A. v. American Elec. Sign Co., No. CS-92-214-JLQ (E.D.Wash. Sept. 7, 1993) (order granting summary judgment that the '332 patent is not invalid); Unisplay S.A. v. American Elec. Sign Co., No. CS-92-214-JLQ (E.D.Wash. April 6, 1994) (order granting summary judgment that laches does not preclude a finding of infringement); Unisplay S.A. v. American Elec. Sign Co., No. CS-92-214-JLQ (E.D.Wash. Nov. 7, 1994) (decision denying motion for judgment as a matter of law or for a new trial on the issue of damages and awarding Unisplay enhanced damages, attorney fees, and prejudgment interest). We affirm the decision of the court in its entirety except for its determination that Williams is not entitled to a new trial on damages. Because the award of actual damages is excessive and unsupported by relevant evidence, we vacate the award and remand for a new trial unless Unisplay consents to remit a portion of the judgment as calculated by the district court on remand.

BACKGROUND

Unisplay develops and licenses technology related to the manufacture and sale of electronic signs. Dr. Paddy Salam is the majority owner of Unisplay. Salam developed a sign (the Solar Glo sign) in which flaps, arranged in a matrix, open and close to display messages. When a flap is opened, a window is exposed and light is emitted from behind the window ("backlit") and reflected from the underside of the flap. When a flap is closed, no light is transmitted or reflected. By combining reflective flaps with the backlit technology, Salam's invention provides good visibility of display messages both in daylight, by reflecting light, and after dark, by transmitting light. Salam applied for a patent, which issued as the '332 patent on August 7, 1979.

Luke G. Williams has been involved in the electronic sign business since the mid-1970's, when he was part owner and manager of American Sign & Indicator Company (AS & I). In 1983, Williams sold his interest in AS & I to Brae Corporation. As part of the sales agreement, Williams signed a five-year covenant not to compete with AS & I or Brae. Despite this covenant, Salam and Williams negotiated an agreement in 1986 in which Unisplay agreed to pay Williams 10% of all proceeds from any license agreement involving the Solar Glo sign technology1 that Unisplay entered into with Williams' assistance. Williams did not obtain any such licenses.

During this time and until August 1988, Williams himself attempted to enter into an exclusive license with Unisplay for the Solar Glo sign technology. All of the negotiations between Williams and Unisplay contemplated royalty rates between 3% and 7.5%, with an up-front licensing fee of about $200,000. Williams' final offer on August 12, 1988 proposed an exclusive license with an up-front payment of $200,000; minimum quarterly payments; and a royalty rate of 5% on the first $20 million in sales, 4% on the next $20 million in sales, and 3% on all subsequent sales. On August 22, 1988, Unisplay countered with a requirement for an up-front payment of $200,000 and a royalty of 5% on the first $20 million of sales, but higher minimum quarterly payments, a royalty of 4.5% on the second $20 million of sales, and a royalty of 4% on all subsequent sales. Williams and Unisplay never reached agreement.

Even during these negotiations, however, Williams showed signs of developing his own signs. On April 5, 1988, five days after the expiration of his non-compete agreement with Brae, Williams incorporated American Electric Sign Co., Inc. (AESCO) and began developing signs that competed with Unisplay's Solar Glo sign. From 1989 to 1992, AESCO's annual sales grew to almost $3 million.

In February 1991, Unisplay's attorney sent AESCO a letter expressing concern that Williams might be infringing the '332 patent and once again offering a license. AESCO did not respond. Ten months later, Unisplay sent a similar letter. Again, AESCO did not respond. Additional discussion followed, but the parties could not reach agreement. Unisplay then filed suit in the United States District Court for the Eastern District of Washington, asserting claims for patent infringement, trademark infringement, unfair competition, misappropriation of trade secrets, breach of contract, and breach of confidential relationship. Williams and AESCO asserted the defenses of laches and estoppel, referring to the delay in Unisplay's filing suit, and counterclaimed for a declaratory judgment of patent invalidity and noninfringement.

On May 26, 1993, the district court granted summary judgment to Williams and AESCO on all of the non-patent issues. Unisplay S.A. v. American Elec. Sign Co., No. CS-92-214-JLQ (E.D.Wash. May 26, 1993). In response to a second summary judgment motion, the court granted summary judgment in favor of Unisplay that claims 9, 10, and 13 of the '332 patent were not invalid. Unisplay S.A. v. American Elec. Sign Co., No. CS-92-214-JLQ (E.D.Wash. Sept. 7, 1993). In its latter decision, the court held that a sign made by Guenther Selig in 1975 did not constitute anticipatory prior art to the '332 patent because Selig's sign did not use external reflective lighting.2 Id., slip op. at 26. Moreover, the court held that the invention of the asserted claims was not obvious in view of the combination of Selig's sign and U.S. Patent 1,191,023 issued to Naylor (the '023 patent). Id., slip op. at 31-32.³ In response to a third motion for summary judgment, the court held that Unisplay's delay in bringing suit was not unreasonable and therefore granted summary judgment in favor of Unisplay on Williams' and AESCO's defense of laches. Unisplay S.A. v. American Elec. Sign Co., No. CS-92-214-JLQ, slip op. at 14 (E.D.Wash. April 6, 1994).

The court then held a bifurcated trial in which the issues of infringement and damages were tried separately to the same jury. The jury returned a verdict finding that AESCO and Williams infringed claims 9, 10, and 13 of the '332 patent.

Before the trial on damages, Unisplay informed the court that it would not seek lost profits as the measure of damages. Instead, Unisplay argued that it was entitled to a reasonable royalty based on projected sales for its Solar Glo sign, not AESCO's actual sales. In support, Unisplay sought to introduce evidence of 1986 and 1987 sales projections that Williams obtained while he was associated with Unisplay.⁴ These projections greatly exceeded AESCO's actual sales of $11.5 million. Unisplay argued that it was entitled to a reasonable royalty on projected sales rather than actual sales because AESCO had "poisoned the market" for the Solar Glo sign. Under its theory, Unisplay argued that AESCO's sales of its alleged infringing sign would have met the projections for the Solar Glo sign had AESCO not sold defective signs. Therefore, Unisplay asserts that it should not have to bear the burden of AESCO's shortcomings by having its recovery of damages limited to a reasonable royalty on AESCO's actual sales.

Williams and AESCO filed a motion in limine to exclude these sales projections. The court granted the motion, specifically rejecting Unisplay's "poison the market" theory. Thus, the court required Unisplay to prove damages based on a reasonable royalty on actual sales.

During the trial on damages, Unisplay called its damage expert, Gary Burns, to testify. Despite the court's ruling on the "poison the market" theory, Burns testified, over objection, that Unisplay's damages should be calculated based on a royalty on projected sales of "five percent for the first 20 million in sales, four percent for the next 20 million, and for all sales over $40 million, at three percent." Based on the projected sales data and these royalty rates, Burns opined that Unisplay was entitled to $9.5 million in damages.

AESCO and Williams called their own expert, Gordon Budke, who testified that a reasonable royalty would be 1% of actual sales. Although negotiations between Unisplay and AESCO had focused upon royalty rates between 3% and 7.5%, Budke reasoned that 1% was appropriate for the three claims of the '332 patent because the prior negotiations were for the entire Solar Glo sign technology, which involved more than just the claims of the '332 patent. On cross examination of Budke, Unisplay introduced an exhibit, Exhibit 144, which applied various royalty rates, minimum quarterly payments, and an up-front licensing fee to AESCO's actual sales of $11.5 million. The exhibit allegedly showed calculations of reasonable royalty damages based on Unisplay's final written offer to AESCO and Williams on August 29, 1988. Each calculation assumed an up-front licensing fee of $200,000 and minimum quarterly payments. The results of the calculations shown in Exhibit 144 are summarized below:

Total       Licensing  Royalty  Royalty     Total
Sales       Fee        Rate     Payable     Payable
(millions)
$11.5       $200,000   5%       $998,125    $1,198,125
$11.5       $200,000   6.5%     $1,089,817  $1,289,817
$11.5       $200,000   7.5%     $1,186,712  $1,386,712
$11.5       $200,000   10%      $1,428,950  $1,628,950