Westinghouse Electric Manufacturing Company v. Wagner Electric & Manufacturing Company/Opinion of the Court

The statute makes the decision of the circuit court of appeals final in patent cases, and the plaintiff's petition for the writ of certiorari herein was not granted for the

[Argument of Counsel from pages 611-614 intentionally omitted] purpose of re-examining the court's ruling that defendant's type M transformer was not an infringement of claim 4 of the Westinghouse patent. The writ was issued in view of the holding that, though the master found that the defendant had made a profit of $132,000 from the sale of infringing transformers, the plaintiff could yet only recover $1, because it failed to separate the profits made by its patent from those made by the defendant's addition.

1. The question as to who has the burden of proof in cases like this is one of great practical importance, and constantly arises in patent cases. There has been much controversy on the subject and a conflict in the decisions. The authorities cited in the briefs of the two litigants, and others bearing on the subject, have been examined, but we shall not undertake to separately review them, for they disagree not so much as to the rule as to its application. It will be sufficient for the present purposes to say that--

(a) Where the infringer has sold or used a patented article, the plaintiff is entitled to recover all of the profits.

(b) Where a patent, though using old elements, gives the entire value to the combination, the plaintiff is entitled to recover all the profits. Hurlbut v. Schillinger, 130 U.S. 472, 32 L. ed. 1016, 9 Sup. Ct. Rep. 584.

(c) Where profits are made by the use of an article patented as an entirety, the infringer is liable for all the profits 'unless he can show-and the burden is on him to show-that a portion of them is the result of some other thing used by him.' Elizabeth v. American Nicholson Pav. Co. 97 U.S. 127, 24 L. ed. 1002.

(d) But there are many cases in which the plaintiff's patent is only a part of the machine and creates only a part of the profits. His invention may have been used in combination with valuable improvements made, or other patents appropriated by the infringer, and each may have jointly, but unequally, contributed to the profits. In such case, if plaintiff's patent only created a part of the profits, he is only entitled to recover that part of the net gains. He must therefore 'give evidence tending to separate or apportion the defendant's profits and the patentee's damages between the patented feature and the unpatented features, and such evidence must be reliable and tangible, and not conjectural or speculative; or he must show, by equally reliable and satisfactory evidence, that the profits and damages are to be calculated on the whole machine, for the reason that the entire value of the whole machine, as a marketable article, is properly and legally attributable to the patented feature.' Garretson v. Clark. 111 U.S. 121, 28 L. ed. 371, 4 Sup. Ct. Rep. 291.

The real controversy arises in applying this principle to those cases where it is impossible to separate the single profit into its component parts.

2. In considering the question presented by the record here, it is to be borne in mind that Congress has legislated (Rev. Stat. § 4921, U.S.C.omp. Stat. 1901, p. 3395) with a view of affording the patentee ample redress against the infringer. It not only makes the latter liable for damages,-sometimes three-fold damages, but for all profits derived from the use or sale of plaintiff's invention. The rule as to the burden of proof has, however, been so applied that this statutory right has been often nullified by those infringers who had ingenuity enough to smother the patent with improvements belonging to themselves or to third persons. In such cases the greater the wrong, the greater the immunity; the greater the number of improvements, the greater the difficulty of separating the profits. And if that difficulty could only be converted into an impossibility, the defendant retained all of the gains, because the injured patentee could not separate what the guilty infringer had made impossible of separation.

Manifestly such consequences demonstrate that either the rule or its application is wrong. The rule is sound, for it but announces the general proposition that the plaintiff must prove its case and carry the burden imposed by law upon every person seeking to recover money or property from another. But the principle must not be pressed so far as to override others equally important in the administration lof justice. It may serve to illustrate the rule and its limitations, if, at the risk of stating the obvious, we apply it to the various steps of this case.

The plaintiff proved its patent, and that it had been infringed by the defendant in the manufacture of several thousand transformers, which sold for $955,000. The patent was itself evidence of the utility of claim 4, and the defendant was estopped from denying that it was of value. Lehnbeuter v. Holthaus, 105 U.S. 94, 26 L. ed. 939. But no matter how great its presumptive or actual value, it did not follow that the defendant had made a profit by the sale of the infringing transformers. And so, having sued for profits, the Westinghouse Company was under the burden of showing they had been made. This it did to the satisfaction of the master, who found that the defendant had netted $132,000 from their sale.

The defendant then had the right either to disprove the plaintiff's case, or to offer evidence in mitigation, or both. Accordingly it submitted evidence tending to show that the spaces added by the defendants were noninfringing and valuable improvements which had contributed to the making of the profits. In reply the Westinghouse Company insisted that claim 4 was an entirety, convering a circulatory system in and around a transformer placed in an oilfilled receptacle; that it embraced the 'intervening spaces in the coil' because at least a part of the coil was in the core; that if these spaces were held not to be infringements, they had in fact, as employed by the defendant, added nothing to the profits, but, on the contrary, had crippled the coil and lessened the electrical efficiency of the transformer. 129 Fed. 607. For that reason the plaintiff contended that it had shown that all the gains were 'legally attributable to the patented feature.' Garretson v. Clark, 111 U.S. 121, 28 L. ed. 371, 4 Sup. Ct. Rep. 291; Elizabeth v. American Nicholson Pav. Co. 97 U.S. 127 (6), 24 L. ed. 1002; Crosby Steam Gage & Valve Co. v. Consolidated Safety Valve Co. 141 U.S. 454, 35 L. ed. 815, 12 Sup. Ct. Rep. 49; Keystone Mfg. Co. v. Adams, 151 U.S. 144, 145, 38 L. ed. 104, 105, 14 Sup. Ct. Rep. 295. This view was sustained by the master. But if it be assumed, as was found to be the fact by the court, that the spaces were noninfringing and valuable improvements, it may then have prima facie appeared that these changes had contributed to the profits. If so, the burden of apportionment was then logically on the plaintiff, since it was only entitled to recover such part of the commingled profits as was attributable to the use of its invention.

3. Lindley, L. J., said in Siddell v. Vickers, 9 Rep. Pat. Cas. 162, that there 'was no form of account more difficult to work out that an account of profits.' But that is no reason why the plaintiff should be denied its rights. The problem here, though different, was in many respects analogous to that presented in those cases in which it is necessary to separate the interstate from the intrastate earnings made by a railroad where the same track, rolling stock, depots, and labor are employed at the same time in making gross receipts. These commingled expenses must be apportioned between the two classes of earnings in order to determine whether the intrastate rate is confiscatory. The courts, 'while recognizing the impossibility of reaching a conclusion that is mathematically exact,' have, in addition to all the other evidence bearing on the question, received 'the testimony of experts as to the relative costs of doing a local and through business.' Chicago, M. & St. P. R. Co. v. Tompkins, 176 U.S. 178, 44 L. ed. 422, 20 Sup. Ct. Rep. 336. The converse is true. What is permissible in an effort to separate costs may also be done in a patent case where it is necessary to separate profits. Root v. Lake Shore & M. S. R. Co. 105 U.S. 198, 26 L. ed. 978. See also Providence Rubber Co. v. Goodyear, 9 Wall. 802, 19 L. ed. 570. In effect, this was attempted in the present case. Witnesses who had been in the employment of the defendant, and who had kept the books, purchased the material, superintended the construction, and fixed the price of the transformers, were not able to show that profits had been made, and consequently were not able to show what part of the profits was attributable to the patent and what to the additions, if found to be noninfringing and valuable improvements.

4. Having, by books and other data, proved to the satisfaction of the master the existence of profits, the plaintiff had carried the burden imposed by law, and established every element necessary to entitle it to a decree, except one. As to that, the act of the defendant had made it not merely difficult but impossible to carry the burden of apportionment. But plaintiff offered evidence tending to establish a legal equivalent. It had proved the existence of a fact which, whether treated as a rule of evidence or as a matter of substantive law, would entitle it to a decree for all the profits. The method was different from that mentioned in the second branch of the rule in the Garretson Case, 111 U.S. 121, 28 L. ed. 371, 4 Sup. Ct. Rep. 291, but the plaintiff had now presented proof to demonstrate its right to the whole of the fund because of the fact that the defendant had inextricably commingled and confused the parts composing it. This result would not be in conflict with the principle which, in the first instance, imposed the burden of proof on the plaintiff, but merely gave legal effect to a new fact which, as a matter of law, entitled the patentee to a particular judgment. It presented a case where the court was called on to determine the liability of a trustee ex maleficio, who had confused his own gains with those which belonged to the plaintiff. One party or the other must suffer. The inseparable profit must be given to the patentee or infringer. The loss had to fall on the innocent or the guilty. In such an alternative the law places the loss on the wrongdoer.

5. It is said, however, that the rule does not apply to patent cases. Why it should be limited does not appear. It is admitted that an injunction may be granted against selling infringing devices, even though the result will be to prevent the defendant from using valuable appliances confused with the patented device. And Lord Eldon treated this conceded right to enjoin as an application of the rule relating to the confusion of goods. He therefore restrained the publication of a book, a large portion of which was original, because copyright matter was incorporated therein, saying in Mawman v. Tegg, 2 Russ. Ch. 390:

'As to the hard consequences which would follow from granting an injunction when a very large proportion of the work is unquestionably original, I can only say that if the parts which have been copied cannot be separated from those which are original, without destroying the use and value of the original matter, he who has made an improper use of that which did not belong to him must suffer the consequence of so doing.'

This case was cited and approved in Callaghan v. Myers, 128 U.S. 658, 32 L. ed. 559, 9 Sup. Ct. Rep. 177, where the infringer, who had blended his own with copyright matter, in a volume which sold for a profit, was made to 'abide the consequences on the same principle that he who has wrongfully produced a confusion of goods must alone suffer.' In one of these cases the original matter was less, and in the other more, than that unlawfully appropriated. In both, as in patent cases, the infringer was a 'trustee for the plaintiff in respect of profits.' Root v. Lake Shore & M. S. R. Co. 105 U.S. 214, 26 L. ed. 984. And the liability is not lessened because the confusion is due to a wrongful appropriation by a trustee de son tort, instead of carelessness of a trustee lawfully appointed. Nor is it limited to those cases where the patented device is shown to have preponderated in the creation of the profits. The owner of a small part of the fund is as much entitled to the protection of the law as the owner of a larger share. The rule, however, is not intended to penalize the infringer, nor to give the patentee profits to which he is clearly not entitled. So that where, by general evidence, expert testimony, or otherwise, it is shown that his patent is of relatively small value, it will often be possible to prove that, at the utmost, it could not have contributed to more than a given amounts of the profits. Lupton v. White, 15 Ves. Jr. 432-440, 10 Revised Rep. 94, 2 Mor. Min. Rep. 430. In such cases, except possibly against one who had concealed or destroyed evidence or been guilty of gross wrong, the plaintiff's recovery cannot exceed the amount thus proved, even though it be impossible otherwise more precisely to apportion the profits.

6. But when a case of confusion does appear,-when it is impossible to make a mathematical or approximate apportionment, then, from the very necessity of the case, one party or the other must secure the entire fund. It must be kept by the infringer or it must be awarded by law to the patentee. On established principles of equity, and on the plainest principles of justice, the guilty trustee cannot take advantage of his own wrong. The fact that he may lose something of his own is a misfortune which he has brought upon himself; and if, as argued, the fund may have been made by the use of other patents also, for which he may be liable in another case, it is again a misfortune which he has brought upon himself and an instance of a double wrong causing double liability. He cannot appeal to a court of conscience to cast the loss upon an innocent patentee and by judicial decree repeal the provision of Rev. Stat. § 4921, U.S.C.omp. Stat. 1901, p. 3395, which declares that, in case of infringement, the complainant shall be entitled to recover the 'profits to be accounted for by the defendant.'

This conclusion is said to be in conflict with the Garretson and other decisions, which, it is claimed, justify the conclusion that the defendant is entitled to retain all of the profits, even where the patentee is unable to make an apportionment. Warren v. Keep, 155 U.S. 265, 39 L. ed. 144, 15 Sup. Ct. Rep. 83. An analysis of the facts of those cases will show that they do not sustain so extreme a doctrine. For they deal with instances where the plaintiff apparently relied on the theory that the burden was on the defendant, and for that, or other reasons, made no attempt whatever to separate the profits. None of the cases cited discuss the rights of the patentee who has exhausted all available means of apportionment, who has resorted to the books and employees of the defendant, and by them, or expert testimony, proved that it was impossible to make a separation of the profits. This distinction between difficulty and impossibility is involved in the ruling by the circuit court of appeals of the sixth circuit in Brennan & Co. v. Dowagiac Mfg. Co. 89 C. C. A. 396, 162 Fed. 476, where the Garretson Case was distinguished, and the court said:

'In the present case the infringer's conduct has been such as to preclude the belief that it had derived no advantage from the use of the plaintiff's invention. . . . In these circumstances, upon whom is the burden of loss to fall? We think the law answers this question by declaring that it shall rest upon the wrongdoer, who has so confused his own with that of another that neither can be distinguished. It is a bitter response for the court to say to the innocent party, 'You have failed to make the necessary proof to enable us to decide how much of these profits are your own;' for the party knows, and the court must see, that such a requirement is impossible to be complied with. The proper remedy to be applied in such cases is that stated by Chancellor Kent in Hart v. Ten Eyck, 2 Johns. Ch. 62, 108 where he said: 'The rule of law and equity is strict and severe on such occasion. . . . All the inconveniences of the confusion is thrown upon the party who produces it, and it is for him to distinguish his own property or lose it."

It may be argued that, in its last analysis, that is but another way of saying that the burden of proof is on the defendant. And no doubt such, in the end, will be the practical result in many cases. But such burden is not imposed by law; nor is it so shifted until after the plaintiff has proved the existence of profits attributable to his invention, and demonstrated that they are impossible of accurate or approximate apportionment. If then the burden of separation is cast on the defendant, it is one which justly should be borne by him, as he wrought the confusion.

7. This conclusion would apparently result in a decree in favor of the appellant. But such an order, under the peculiar facts of this case, would operate to deprive the defendant of the right to a ruling on the exceptions filed to the report. The master held that the entire commercial value of the transformer was due to the invention covered by claim 4, and that therefore all the profits belonged to the Westinghouse Company. The court, on the other hand, found that the defendant's additions were not infringements, and had contributed to the profits, and that because of the failure to make a separation the plaintiff was entitled only to nominal damages. For this reason it did not specifically pass on defendant's exceptions. Other questions of law and fact involved in the accounting were not considered. Neither the court nor the master discussed the question of apportionment, and the record does not afford satisfactory data for entering a final decree. This no doubt arises from the fact that both parties relied so entirely upon their theory that the burden was on the other, that facts were not proved which might otherwise have been established. The decree is therefore reversed and the case remanded, with power to hear and determine motions to amend the pleadings, and with directions that the case be recommitted to a master for a new hearing on all the questions involved in the original reference, and, on evidence already submitted and such additional testimony as may be offered, for further proceedings not inconsistent with this opinion.

Reversed.