Vaughan responds that it was not error for the magistrate judge to omit a ruling on this issue
because the report concluded the 22 accused systems were not subject to the injunction nor were they
colorable imitations of the 47 enjoined systems. In addition, Vaughan cites evidence of record that
it gave notice of the permanent injunction to all required persons, but not to end-users who had no
contractual privity with Vaughan. Tr. 9/18 at 105-06; DX 3,4; Resp. to Objs. at 9, fn. 2.

Vaughan misreads the magistrate judge’s conclusion about the inapplicability of the
injunction. The report and recommendation did not conclude the injunction was inapplicable to
Vaughan’s 22 accused systems. Rather, the report found Liquid Dynamics failed to present clear and
convincing evidence that the 22 accused systems were mere imitations of the 47 infringing systems,
and that there was a substantial open issue whether Vaughan’s 22 accused systems infringe Liquid
Dynamics’ patent.

2, Factual dispute between the experts

Liquid Dynamics challenges the report’s conclusion that “there is a substantial open question
whether the accused systems contain an element of the patent, the element of substantial helical flow,
and that question should not be determined in a contempt proceeding.” Report and Recommendation
(*R& R”) at 39. According to Liquid Dynamics, this conclusion was erroneous because it was just
based upon a disagreement between the parties’ experts about the proper construction of the patent
element “substantial helical flow,” and that Vaughan’s expert applied a legal standard incompatible
with the Federal Circuit’s construction of that term. Liquid Dynamics’ arguments are unsupported
by the record.

The magistrate judge found there was a factual issue whether the accused systems had a

substantial helical flow as defined in the patent and construed by the Federal Circuit in the summary


determine whether the new product raises substantial open issues of infringement, that rendering a
contempt proceeding inappropriate. Pl]. Objs. at 7, quoting Stryker Corp. v. Davol, Inc., 234 F.3d
1252, 1260 (Fed. Cir. 2000). The magistrate applied the correct legal standard.

4, Vertical Vector Plot Evidence

Liquid Dynamics argues that the report and recommendation incorrectly “discards” PX 54,
which contained vertical velocity vector plots relating to flow patterns prepared by its expert, Dr.
Lueptow, for each accused system using Vaughan’s electronic data. “Discard” is aremarkable term
to apply to the careful analysis and weighing of evidence. The magistrate judge found that PX 54
and“... testimony based on it cannot form a reliable basis for any conclusions about the flow
patterns in the accused tanks . . . because Dr. Lueptow effectively disclaimed that exhibit.” R & R
at 38. Liquid Dynamics contends this evidence was critical to establish substantial helical flow,
citing LD II, 449 F.3d at 1222.

An examination of the report and recommendation shows this objection is baseless. The
magistrate judge was guided by the Federal Circuit’s holding that Dr. Lueptow’s interpretation of
similar evidence at trial was subject to different interpretations. Jd. The magistrate judge found
Exhibit 54 unreliable because Dr. Lueptow testified that the settings used to create that exhibit were
“substantially different from any . . . physically realistic velocity in the tank.” Tr. 8/1 at 448.
Because of his own doubts about the reliability of the PX 54 simulations, Dr. Lueptow created new
simulations. Id, at 438-442. Contrary to Liquid Dynamics’ argument that PX 54 was “discarded,”
the magistrate judge considered all evidence related to vector plots in detail. Her determination of

PX 54's unreliability is amply supported by the record.


I. The Objections

It is undisputed that Vaughan’s 22 accused systems are not exact duplicates or clones of the
47 adjudicated infringing systems. P]. Objs. at 5. Rather, Liquid Dynamics contends the structural
differences between the accused and adjudicated systems are minor, and that the accused systems
have the “substantial helical flow” claimed in its patent. The record reflects, however, that Liquid
Dynamics failed to establish these essential propositions by clear and convincing evidence.

1. Notice of the permanent injunction

The permanent injunction ordered Vaughan to notify its officers, agents, servants, employees
and attorneys, as well as “parties in active concert or participation with them in the manufacture,
marketing, sales and use of [the enjoined] mixing systems.” Objs., Ex. 2. The systems enjoined
included mixing systems that employ the design, placement and orientation of nozzle assemblies
“... used by the 47 mixing systems found to infringe Claims 1 and 8 of [Liquid Dynamics’] U. S.
Patent No. 5,458,414, as well as colorable imitations of the infringing systems.” Jd.

Preliminarily, Liquid Dynamics contends the magistrate judge erred by not addressing the
argument that Vaughan violated the permanent injunction because it failed to provide notice to its
customers and consulting engineers for the 22 presently accused systems. It is undisputed that the
accused systems were in production before the injunction issued. Liquid Dynamics asserts that
customers and consulting engineers, who plan and oversee Vaughan’s projects, acted in concert with
‘Vaughan in the manufacture and use of the 22 presently accused systems. See, e.g., Black & Decker,
Inc. v. Robert Bosch Tool, No. 04 C 7955, 2006 U.S. Dist. LEXIS 94554 at *8 (N.D. Ill. Dec. 27,
2006) (St. Eve, J.) (rejecting argument customers are not “in active concert or participation” with

defendant).


judgment appeal. This finding was based on evidence of significant differences between Vaughan’s
adjudicated infringing systems and the accused systems because of structural and design differences,
flow simulation evidence, torque values and Reynolds numbers. See, e.g., R & R at 26-28, 35-39;
Tr. 9/18 at 72-73, 136-137, 139-140, 180; Tr. 7/31 at 275-281, 290; Tr. 9/19 at 214, 272,274, 292-
293, 305-308, 360-361; PX 48, 123; DX 87, 88, 90, 164. The accused systems do not employ the
nozzle design, placement and orientation used in the adjudicated systems; and Liquid Dynamics’
own experts conceded that these changes could potentially change the flow pattern, although they
were of the opinion “the differences were not great enough to make a significant change.” R & R
at 35. While Mr. Gillete testified the accused systems were functionally the same as the adjudicated
systems, his opinion was based on experience, not by objective scientific tests or data. Id. at 36.
Vaughan’s expert countered that the generally higher torque and Reynolds numbers in the accused
systems showed a significant difference with the adjudicated system.

The magistrate judge acknowledged that Liquid Dynamics’ expert Dr. Lueptow testified that
structural differences between the two systems would not result in different flow patterns; but she
concluded his testimony did not meet the clear and convincing standard, given the equivocal nature
of some of his testimony and Vaughan’s conflicting evidence. Jd. at 36-37; Tr. 9/18 at 72, 73. Dr.
Lueptow’s opinion that vertical vector plots supported his opinion about a substantial helical flow
is a matter of disputed interpretation properly resolved by the trier of fact. R & R at 37, citing the
Federal Circuit’s post-trial opinion in this case, 449 F.3d at 1222, The magistrate judge correctly
did not resolve these factual conflicts, but rather concluded the conflicting evidence raised

substantial factual issues about an element of the patent that should not be determined in a summary


5. Modeling of flow patterns

Liquid Dynamics complains the report and recommendation incorrectly rejected PX 13,
which represented flow patterns from simulations of representative tanks in issue at trial. The same
evidence was admitted at trial and considered by the Federal Circuit as evidence supporting the
jury’s verdict. LD I, 449 F.3d at 1218. Liquid Dynamics ignores the fact that PX 13 was admitted
into evidence at the hearing, and the magistrate judge analyzed this evidence in the context of PX
123. She found that the accused systems’ flow patterns are substantially different from the models
used by Dr. Lueptow. R & R at 39; PX 123 (appended to the report and recommendation); see also
R & Rat 28, discussing PX 13. It is significant that Dr. Lueptow did not testify the flow patterns
of the accused and adjudicated systems were the same or even similar. R & R at 39, fn 18.

The magistrate judge not only admitted PX 13 into evidence, but the report and
recommendation considered all Liquid Dynamics’ flow pattern evidence. The conclusion that this
evidence was not clear and convincing is supported by the record.

CONCLUSION

Liquid Dynamics’ objections to the report and recommendation lack merit. There was a
failure to establish by clear and convincing evidence that Vaughan’s accused mixing systems are a
colorable imitation of the adjudicated systems subject to this court’s permanent injunction. There
is at least one substantial open issue of infringement established by the evidence before the

magistrate judge. Accordingly, a contempt proceeding is inappropriate.

ENTER:

Suzann@B. Conlon
October 20, 2008 United States District Judge


IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION
LIQUID DYNAMICS CORPORATION, )
Plaintiff, )
) Civil Action No.: 01 C 6934
v. )
) Suzanne B. Conlon, Judge
VAUGHAN COMPANY, INC., )
Defendant. )}
)
)

MEMORANDUM OPINION AND ORDER
BACKGROUND

Liquid Dynamics Corporation and Vaughan Company, Inc. are competitors in the production
of slurry tanks used to mix organic waste products, The parties have engaged in a seven year war
of attrition over Liquid Dynamics’ patent on the structure of slurry tanks for mixing waste water and
manure to ensure uniform suspension of heavy solid particles. Liquid Dynamics claimed Vaughan’s
components for mixing tanks infringed its patent; Vaughan counterclaimed patent invalidity and
inequitable conduct. This court granted summary judgment of non-infringement in Vaughan’s favor
and dismissed its counterclaims as moot. Liquid Dynamics Corp. v. Vaughan Company, No. 01 C
6934, 2002 U.S. Dist. LEXIS 14102, 2002 WL 1769979 (N.D.II. July 31, 2002). That decision was
reversed. Liquid Dynamics Corp. v. Vaughan Co., Inc. (“LD I’), 355 F.3d 1361, 1371 (Fed. Cir.
2004).

On remand, a jury found this patent valid and willfully infringed, returning a $1,183,722
verdict against Vaughan. This court then held a bench trial on Vaughan’s allegation of inequitable

conduct; Liquid Dynamics prevailed. This court trebled the jury’s verdict and awarded attorney’s


contempt proceeding. Liquid Dynamics simply did not satisfy its burden to show by clear and
convincing evidence that the accused systems violated the permanent injunction.

Liquid Dynamics fails to cite any basis in the record for its conclusory assertion that the
testimony of Vaughan’s expert should have been excluded because his opinions were based on an
incorrect claim construction of the patent. Dr. Graf did not opine about the construction of patent
claims, but rather that the data did not support a conclusion the accused systems had a substantial
helical flow. See, e.g., R & R at 32-35. It was not an abuse of discretion to allow Dr. Graf to testify.
The fact that he was also of the opinion that the adjudicated systems did not generate helical flow,
while contrary to the jury verdict, was not engaging in claim construction, Dr. Graf interpreted data.
His earlier opinion may inform the weight given his testimony, not its admissibility.

3. The “Colorable Differences” Legal Standard

Liquid Dynamics argues that the magistrate judge erroneously relied upon differences
between the accused and the adjudicated systems. This argument ignores the focus of the report and
recommendation: whether Liquid Dynamics offered clear and convincing evidence that Vaughan’s
accused mixing systems violated the permanent injunction. According to Liquid Dynamics, it was
undisputed that “.. . the accused systems were not exact duplicates or ‘clones’ of the 47 adjudicated

»

system.” Pl. Objs. at 5. Rather, it was Liquid Dynamics’ theory that the structural differences
between the accused and the adjudicated systems were minor and within the scope of the patent
claims, specifically the claimed “substantial helical flow.” Jd. Liquid Dynamics framed these issues,
but failed to satisfy its heavy burden of persuasion. As Liquid Dynamics recognizes in its objections,

under Federal Circuit precedent, the court“... must compare the infringing product and the newly-

accused product to determine if there are more than ‘colorable’ differences between the two” to


fees of $1,501,239. Of import here, the court entered a permanent injunction against Vaughan
restraining its use of the 47 mixing systems adjudicated at trial, as well as any colorable imitation.
The jury’s verdict and this court’s rulings were affirmed. Liquid Dynamics Corp. v. Vaughan
Co.(“LD II”), 449 F.3d 1209 (Fed. Cir. 2006). But this case did not end there.

Liquid Dynamics brought a second case alleging Vaughan’s continued infringement of the
same patent. Liquid Dynamics Corp v. Vaughan Co., Inc., No. 06 C 5611 (N.D. Ill.) (Kennelly, J.).
Subsequently, Liquid Dynamics filed a contempt motion seeking compensatory damages and
attorneys’ fees for violation of the permanent injunction based on the same allegations asserted in
the pending patent infringement case. The contempt motion was referred to a magistrate judge for
areport and recommendation. Liquid Dynamics objects to the recommendation that its motion for
a contempt proceeding be denied.

DISCUSSION

I. The Magistrate Judge’s Report and Recommendation

Given the protracted and contentious history of this litigation, the magistrate judge was
confronted with a formidable task. The record reflects extraordinary care and thoughtfulness.
Extensive briefing occurred before and after a five-day evidentiary hearing. The challenged 47-page
report and recommendation fully addresses the protracted and complex history of the case, the
evidentiary issues raised by the contempt motion, and the applicable legal standard.

The magistrate judge found Liquid Dynamics failed to satisfy its burden to show by clear and
convincing evidence that 22 Vaughan systems (not addressed at trial) violate the permanent
injunction. Specifically, the report concluded Liquid Dynamics failed to establish that the Vaughan

systems now in issue are colorable imitations of the adjudicated infringing systems, which were the

iN)


subject ofthe permanent injunction. Accordingly, the magistrate judge found a contempt proceeding

was inappropriate. The magisirate judge declined Vaughan’s invitation to conclude that its 22

presently accused systems are non-infringing.

I. Legal Standard

Objections to a magistrate judge’s report and recommendation are reviewed de novo. 28

U.S.C. § 636(6)(1)(C); Fed. R. Civ. P. 72(b). A federal court may enforce an injunction by use of
: its contempt power, 18 U.S.C § 401(3). The contempt power should be exercised with restraint and
only under compelling circumstances. To establish that contempt proceedings are appropriate,
Liquid Dynamics bears the heavy burden of proving by clear and convincing evidence that Vaughan
violated the permanent injunction. KSM Fastening Sys., Inc, v. H. A. Jones Co., Inc.,776 F.2d 1522,
1524 (Fed. Cir. 1985).

The core issue here is whether Liquid Dynamics’ accusation regarding Vaughan’s redesigned
mixing tanks should be resolved by a summary contempt proceeding or in the pending patent
infringement case. This motion and the pending infringement case are based on identical allegations.
The magistrate judge applied the correct legal standard. A contempt rule to show cause should not
issue if there are substantial open issues of infringement raised by Vaughan’s 22 presently accused
mixing systems. Additive Controls & Measurement Sys., Inc. v. Flowdata, Inc., 154F.3d 1345, 1349
(Fed. Cir. 1998). Open issues of infringement exist if there is more than a colorable difference
between Vaughan’s presently accused 22 systems and the 47 infringing systems that were in issue

at trial. Abbott Labs v. Torpharm, Inc., 503 F.3d 1372, 1380 (Fed. Cir. 2007).