Source: http://openjurist.org/623/f2d/645
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623 F2d 645 Milgo Electronic Corporation v. United Business Communications Inc | OpenJurist
623 F. 2d 645 - Milgo Electronic Corporation v. United Business Communications Inc	Home623 f2d 645 milgo electronic corporation v. united business communications inc
623 F2d 645 Milgo Electronic Corporation v. United Business Communications Inc 623 F.2d 645
206 U.S.P.Q. 481
MILGO ELECTRONIC CORPORATION, a Florida Corporation,Plaintiff-Appellee,v.UNITED BUSINESS COMMUNICATIONS, INC., a Kansas Corporation,Defendant- Appellant.
No. 78-1624.
Stanley R. Jones, Tustin, Cal. (Harold L. Jackson, Tustin, Cal., with him on the brief), of Jackson, Jones & Price, Tustin, Cal. (J. Donald Lysaught of Weeks, Thomas, Lysaught, Bingham & Mustain, Overland Park, Kan., with him on the brief), for plaintiff-appellee.
William H. Curtis, Kansas City, Mo. (Michael C. Manning, Kansas City, Mo., with him on the brief), of Morrison, Hecker, Curtis, Kuder & Parrish, Kansas City, Mo., Carter H. Kokjer of Lowe, Kokjer, Kircher, Wharton & Bowman, Kansas City, Mo. (John F. Dodd, Shawnee Mission, Kan., and Robert D. Benham of McAnany, Van Cleave & Phillips, Kansas City, Kan., with them on the brief), for defendant-appellant.
United Business Communications, Inc. (UBC) appeals from an adverse judgment in a patent infringement action initiated by Milgo Electronics Corporation (Milgo). Bifurcated trials to the Court on the issues of liability and damages were held in September 1975 and December 1977, respectively, after which the Court found, inter alia, that: Each of the Milgo patents in question were valid; certain claims of each patent were infringed by the manufacture, use and sale of the accused modems; Rixon II was a mere instrumentality, alter ego, or agency of UBC; the infringement was flagrant and willful; and Milgo was entitled to a total judgment, including taxable costs, of $2,340,726.23.
Concurrent with its judgment upholding the validity of the Milgo patents and awarding damages, the Court rendered detailed findings of fact and conclusions of law encompassing in excess of one hundred pages of the record on appeal. We will therefore limit our development of the factual background to those issues we deem dispositive on appeal, i. e., the validity of the patents in question, the existence of an agency relationship between UBC and Rixon II; and the damages awarded.
Milgo is a Florida corporation engaged in the manufacture and sale of data communication equipment, including "modems", which are used to implement communication of binary data over telephone lines. It is not possible to transmit digital information by applying it directly to the telephone lines; accordingly, modems were developed for converting digital information from its original form to a form in which it can be carried on telephone lines. Simply stated, a modem is a telephone made specifically for a computer or an information terminal to communicate with another computer or terminal over an ordinary telephone line. Modems convert output signals from a computer or terminal into electric signals suitable for transmission through a telephone line; and convert the received signal back into an information signal receivable and understood by a computer or terminal. This process of signal conversion is called mod ulation (sending) and dem odulation (receiving) and the word modem is a contraction of mod ulator-dem odulator.
Computers operate on a number system in which all numbers are represented by an array of "1's" and "0's", known as the binary numbering system. In systems for the transmission of data, the speed of transmission is usually defined in "bits" ("1" or "0") per second or "bps".
Telephone lines designed for voice communication have a bandwidth of approximately 300 to 3000 Hertz (Hz).1 Such lines are classified as either "switched or dial up lines" or "leased lines". Switched or dial up lines utilize multiple pairs of lines and diverse electronic equipment which are switched together in a random, first available basis to form a complete circuit each time a telephone call is placed. Leased lines, on the other hand, are not switched randomly with every call and such lines can therefore be specially treated or conditioned to make them more readily adaptable for data transmission. Leased lines are graded as Types 4, 4-A, 4-B, and 4-C and the cost of such lines increase in that order. Switched or dial up lines are more difficult to utilize for data transmission than leased lines, and the less expensive leased lines, e. g. Types 4 and 4-A are more difficult to utilize than the very expensive, highly conditioned Type 4-C leased lines.
By the early 1960's high speed computers had surpassed the ability of the available modems to transmit data over ordinary switched telephone lines. Typical available modems used a two or four level modulation technique to represent data on the carrier. Proponents of the two level modulation technique felt it was preferable over the four level because the error rate was believed to be directly related to the number of levels. It was also believed that if the bandwidth of the signal was narrowed, the data rate had to be reduced accordingly. The four level modulation technique, on the other hand, required a wide energy spectrum, from 600 to 3000 Hz, which was considered "necessary to permit the recovery of a clock signal and provide a high signal to noise ratio". As such, the four level modulation technique incorporating a wide energy spectrum required the utilization of expensive, highly conditioned leased lines.
In the late 1950's and early 1960's, after its own research and development group could not produce an adequate modem for the new computers, Western Union began looking for a modem which would allow its customers to connect their high speed computers to its newly constructed broadband exchange (BEX) which operated much like its switched telephone network.
Western Union specifically sought a modem which would operate satisfactorily at 2400 bps using less than a 1000 Hz bandwidth, since it had concluded that such a modem would work within its BEX network. Western Union's own personnel, however, were skeptical that such a modem could be developed, inasmuch as it was generally believed that the utilization of a narrow band, such as 1000 Hz, would decrease the signal to noise ratio and that the error rate would be substantially increased.
In early 1965 Sang Whang, and several other Milgo employees, took part of Milgo's missile tracking system that handled data as a stand-alone modem and met with Western Union's personnel. Western Union, however, believed Milgo's modem was entirely inadequate, and it reiterated what it considered to be a workable modem for its BEX network.
Upon his return to Milgo, Whang proceeded to develop a modem capable of functioning within the prescribed limitation of Western Union's BEX network. In so doing, Whang developed a modem which, for 2400 bps operation, utilized eight level modulation within a narrow bandwidth centered at 1700 Hz. Whang's prototype modem created considerable interest at Western Union:
Q. What was the substance of that phone call? A. Well, the phone call was to Mr. Boughtwood and he came out of his office laughing, as I recall. He had gotten a phone call from Sang Whang, I believe, of Milgo, and Sang had informed him that unfortunately they could not build a modem that used a thousand cycles of bandwidth and he was very sorry about that, Mr. Whang was, but however would we be amenable to coming and looking at one that used eight hundred cycles of bandwidth, and it tickled us considerably but that was the first contact through any of this. I think it took us about twenty minutes to get our airline tickets.
Q. I take it you were interested in seeing an eight hundred cycle bandwidth modem?
A. We were not believers at that moment.
Q. You didn't believe they had done that?
Q. Did Sang Whang do it?
Q. Would you set forth those key features that it highlighted? A. Okay. By far the most unique feature to us at that point in time was the narrow bandwidth that it required to operate. The second one was the compression technique used to get that narrow band. It was essentially the eight-phase modulation, because this was the first time that we had ever seen or heard of anybody making a practical version of an eight-phase modem. Four phases was considered the state of the art at that point in time.
Q. What do you mean by state of the art? A. The state of the art is pushing the art. It's the latest version, it's the latest technology, the latest technique, and we had gone through a development phase spearheaded by the Bell System to get to the four-phase modem and they had developed that and refined it and that was considered the state of the art in 1965 and this was a breakthrough, both in the narrow band and in the fact that they were using eight phases.
Q. And you figured the Milgo modem was a breakthrough at that point? A. To us it certainly represented a breakthrough at that point in time, yes. It satisfied a real need that we had, satisfied all our requirements.
(R. Appdx., Vol. I at pp. 282-284).
Whang subsequently was issued a patent for his modem, U.S. Patent No. 3,524,023 (Whang '023). The Whang '023 patent disclosed and claimed a high speed data modem system intended to operate over ordinary unconditioned switched telephone lines which would function in ordinary lines without a variable equalizer. The patent asserted that the elimination of the equalizer was achieved by limiting the bandwidth of the data transmission channel to substantially less than the 300-3000 Hz bandwidth available in the line; that a composite band limiting filter restricted the band in the modem to a width of less than 1000 Hz for a 2400 bps data rate, and that the band is centered on a frequency of around 1700 Hz with a low side of 1200 Hz and a high side of 2200 Hz. The patent asserts that the band binding of the signal to the narrow band of less than 1000 Hz resulted from Whang's discovery that within this bandwidth, the transmission characteristics of all ordinary telephone lines in a switched network will "look" substantially alike and behave the same.
Whang's '023 patent, which was assigned to Milgo, was expanded upon and improved by U.S. Patent No. 3,590,381 (Ragsdale '381) and U.S. Patent No. 3,643,023 (Payne '023) which improved the detection techniques by relating data representing phase angles in a squared intermediate frequency at center sampling times to digital counts in high speed binary counter. These patents are follow-on patents to the Whang '023 resulting from work done by other Milgo employees. With these patents, the analog detection circuits of the first Milgo Modem 4400/24 were replaced by digital detectors, thereby overcoming the repeatability problems associated with analog detectors.
Milgo's patented modems were successfully marketed from the outset. Western Union successfully utilized the Milgo 2400 bps on its BEX, and the Milgo 4800 modem Model 4400/48, derived by applying the principles of a 2400 bps modem to a 4800 bps modem, was considered an "immediate commercial success", when introduced in early 1968.
During mid 1968 Rixon2, a modem manufacturer, marketing the PM24 modem which required conditioned lines and the Sebit 24 modem which was a two level amplitude modulated vestigial sideband device, arranged to test one of Milgo's Model 4400/48 modems at one of Milgo's customer's locations. This test was made on a weekend without Milgo's consent. After determining that the Milgo modem functioned efficiently, Rixon obtained a Milgo modem and embarked on a copying process, which extended over a two year period. Howard R. Andrews, a Rixon employee, deposed:
Q. Did you receive instructions from Gatfield to copy point to point the various circuit cards in the Milgo modem? A. Not precisely. At the time I was assigned to the program, the modem had been in the plant for approximately a week at least, I say at least, because it could have been sitting there for a month I suppose. But people had actively been working on it for a week according to what they told me. They had a team of technicians, not engineer actually doing the point by point analysis.
They would take the printed circuit cards, a very large piece of paper, put it up on the wall of this room, drawing the connections, label the I.C. packs with certain numbers and trace out the tracks on the board. So the actual point to point wiring was traced out by technicians. The task I was assigned to after I had been reassigned by Mr. Hollis to Mr. Gatfield was the job of interpreting these schematics and putting them into a form that is really understandable.
In other words, a schematic like this. If it were jumbled around in the fashion that it would be taken off a P.C. board, it would be incomprehensible. It requires a certain regularity of layout of the components and the connections for you to understand what it means.
That was the task I and a couple of other engineers were given. One engineer who worked for me, Mr. Ditman, came over with me from the engineering group as part of this task force.
The two of us together did I would say 95 percent of the interpretation and the redrawing of the schematics made by the technicians.
Q. You mentioned that you wrote a report along with the schematics. A. It was not formal. It was handwritten. It was not typed because this whole program was handled with great secrecy. Only certain people were allowed to know what went on. You had to carefully identify yourself to people in the locked room before you would be admitted. We were all sworn never to tell anybody where this model, what it was, where it came from and how Rixon acquired it, although I did find that out and things of this nature.
So because of this veil of secrecy, secretaries were not certainly supposed to be typing up reports. Everything was handwritten. The schematics I mentioned were drawn by the engineers, not by the draftsmen who normally do that job.
(R. Addendum to Appdx., Vol. IV at pp. 6a and 10a).
After successfully copying Milgo's modem, Rixon began marketing commercially acceptable 2400 bps and 4800 bps modems during the latter part of 1970. Prior thereto, Milgo was the only source of commercially acceptable 4800 bps modems and it was considered the sole source of 2400 bps modems capable of operating on unconditioned switched telephone lines; furthermore, prior thereto Milgo had also built strong business relationships with large accounts, including Burroughs Corporation and Honeywell Information Systems, which it lost to Rixon. This resulted after Rixon was able to force prices down and underbid Milgo.
Milgo filed the instant suit on July 19, 1971, alleging infringement of its Whang '023 patent. Thereafter, on September 25, 1972, Milgo amended its complaint to allege the infringement of its Ragsdale '381 and Payne '023 patents. United Telecommunications, Inc. (United) and UBC, its wholly-owned subsidiary, were named as defendants. In their answers, United and UBC denied the validity of each patent and both denied infringement.
In upholding the Milgo patents the District Court found, inter alia : The Milgo patents were, in all respects, valid and subsisting in law as to the claims in question; the inventions defined in the claims in question would not have been obvious to one of ordinary skill in the art at the time the invention thereof was made; each of the inventions, as to the claims in question are novel and useful and meet the requirements of 35 U.S.C.A. §§ 101 and 102; evidence of copying is properly admissible on the issues of obviousness and infringement; the unobvious requirement of 35 U.S.C.A. § 103 is fulfilled by an inventor who makes a new and useful improvement where those skilled in the art have failed after repeated efforts to do so; the Milgo patents as to the claims in question have been infringed by Rixon II by its manufacture and sale of the accused data sets, and by UBC by the sale of the accused data sets infringing the Whang '023 patent until January 1, 1972; and after January 1, 1972, UBC actively induced the infringement of the Milgo patents by and through Rixon II. The court also determined that United was not liable for the infringement of any of the three patents.
On appeal UBC contends: (1) the Whang '023 patent is invalid; (2) copying is a non-issue; (3) UBC did not infringe any of Milgo's patents; and (4) the Payne '023 and Ragsdale '381 patents are invalid.
UBC contends the Whang '023 patent is invalid as obvious under 35 U.S.C.A. § 103 and invalid as "described in a printed publication * * * or in public use or on sale * * * more than one year prior to the date of the application for patent" under 35 U.S.C.A. § 102(b) and Muncie Gear Works, Inc. v. Outboard Marine & Mfg. Co., 315 U.S. 759, 62 S.Ct. 865, 86 L.Ed. 1171 (1942).
35 U.S.C.A. § 103 provides in part:
A patent may not be obtained though the invention is not identically disclosed or described * * * if the differences between the subject matter sought to be patented and the prior art are such that the subject matter as a whole would have been obvious at the time the invention was made to a person having ordinary skill in the art to which said subject matter pertains. * * *
UBC contends, citing to Graham v. John Deere Co., 383 U.S. 1, 86 S.Ct. 684, 15 L.Ed.2d 545 (1966) that obviousness is to be considered in light of the prior art, the differences between the prior art and subject matter claims, the level of ordinary skill in the pertinent art, along with "(s)econdary considerations such as commercial success, long felt but unresolved needs and the prior failure of others may be utilized as indicia of obviousness." UBC contends that the "alleged invention of the Whang '023 patent is nothing more than an aggregation of ideas which were known to the art, and the result of which was completely predictable."
The ultimate determination of patent validity is, of course, one of law. Moore v. Shultz, 491 F.2d 294 (10th Cir. 1974); Hinde v. Hot Sulphur Springs, Colorado, 482 F.2d 829 (10th Cir. 1973). Patentability depends on numerous factors we identified in A. E. Staley Manufacturing Company v. Harvest Brand, Inc., 452 F.2d 735 (10th Cir. 1971), cert. denied, 406 U.S. 974, 92 S.Ct. 2415, 32 L.Ed.2d 674 (1972):
The question of invention and thus, patentability, is one of fact involving consideration of novelty, utility, commercial success, satisfaction of long-felt want, unsuccessful efforts of others, public acquiescence in validity, imitation, experiments, and independent production by others. 69 C.J.S. Patents § 70 (1951).
452 F.2d at p. 739.
A regularly issued patent is presumed valid, and when the patent office has considered prior art in accepting or rejecting an allegation of anticipation, the presumption is strengthened. Scaramucci v. Dresser Industries, Inc., 427 F.2d 1309 (10th Cir. 1970). The presumption of validity may be rebutted by the showing of obviousness. Halliburton Company v. Dow Chemical Company, 514 F.2d 377 (10th Cir. 1975). When the teachings in the prior art must be ignored to reach a desired result, they become less pertinent to the determination of obviousness. CMI Corporation v. Metropolitan Enterprises, Inc., 534 F.2d 874 (10th Cir. 1976).
An invention that is obvious is an unpatentable invention. Plastic Container Corporation v. Continental Plastics of Oklahoma, Inc., 607 F.2d 885 (10th Cir. 1979). Obviousness turns not on whether a device has, essentially, been produced, but on whether, though not yet produced, it would have nevertheless been conceivable to a worker of ordinary skill in that field. True Temper Corporation v. CF&I Steel Corporation, 601 F.2d 495 (10th Cir. 1979). In each instance, the prior art must be carefully scrutinized. Deere & Company v. Hesston Corporation, 593 F.2d 956 (10th Cir. 1979). In order for a prior art to anticipate a process, it must disclose identical or equivalent steps to accomplish the same result. CMI Corporation v. Metropolitan Enterprises, Inc., supra.
Obviousness must be determined by considering the scope and content of the prior art, the differences between the prior art and claims at issue, and the level of ordinary skill in the pertinent art. Tanks, Inc. v. Reiter Industries, Inc., 545 F.2d 1276 (10th Cir. 1976) citing to Graham v. John Deere Co., supra. Obviousness requires factual determinations which are entitled to the usual respect accorded determinations of fact, and, as such, an appellate court is bound by the trial court's findings on obviousness unless they are determined to be clearly erroneous. Rutter v. Williams, 541 F.2d 878 (10th Cir. 1976); CMI Corporation v. Metropolitan Enterprises, Inc., supra. We are not a trial court and a case such as the one at bar cannot be tried de novo on appeal.