Induction Innovations, Inc. et al v. Pacholok
Filing
243
MEMORANDUM Opinion and Order. Signed by the Honorable Manish S. Shah on 12/31/2015: Multiple issues of fact preclude a determination that Induction has calculated properly its royalty obligations to Pacholok. Accordingly, it cannot be resolved as a matter of law that Induction owes Pacholok no royalty payments under Section 3(e) of the Stock Purchase agreement. Plaintiffs' motion for summary judgment, 170 , is therefore denied. [For further detail see attached order.] Notices mailed by Judicial Staff. (psm, )
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
INDUCTION INNOVATIONS, INC., and
SARGE HOLDINGS COMPANY, LLC,
Plaintiffs,
No. 13 CV 5102
v.
Judge Manish S. Shah
DAVID PACHOLOK,
Defendant.
MEMORANDUM OPINION AND ORDER
David Pacholok co-founded Induction Innovations, an Illinois corporation
that manufactures and sells induction-heating products, with Thomas Gough.
Pacholok and Gough are also the named inventors of two U.S. patents that concern
induction-heating devices used for automotive repair. After several years at
Induction, Pacholok agreed to resign his position as corporate officer and sell his
stock in the company in exchange for a royalty on the sale of certain products. But
Induction owed Pacholok a royalty only if relevant sales exceeded $1 million in a
calendar year.
In 2013, Induction (and the assignee of Gough’s ownership in the two
patents, Sarge Holdings) sued Pacholok seeking, among other things, a declaratory
judgment that no money is owed Pacholok under the royalty agreement. Induction
filed a motion for summary judgment. For the reasons discussed below, Induction’s
motion is denied.
I.
Legal Standard
Summary judgment must be granted where there is no genuine issue of
material fact and the movant is entitled to judgment as a matter of law. Fed. R. Civ.
P. 56(a). A genuine issue of material fact exists “if the evidence is such that a
reasonable jury could return a verdict for the nonmoving party.” Kvapil v. Chippewa
Cnty, Wis., 752 F.3d 708, 712 (7th Cir. 2014) (quoting Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 248 (1986)) (internal quotation marks omitted). In reviewing a
summary-judgment motion, a court construes all facts, and draws all reasonable
inferences from those facts, in favor of the non-moving party. United States v. P.H.
Glatfelter Co., 768 F.3d 662, 668 (7th Cir. 2014) (quoting Laskin v. Siegel, 728 F.3d
731, 734 (7th Cir. 2013)).
II.
Facts
Thomas Gough and David Pacholok are the named inventors of United States
patents 6,563,096 and 6,670,590, which in general claim an induction-heating
apparatus and a method for using induction heating in automotive repair. See [240]
at 3 ¶ 9; [173-5].1 In 2000, Gough and Pacholok co-founded Induction Innovations,
Citations to the record are designated by the document number as reflected on the district
court’s docket, enclosed in brackets; referenced page numbers are from the CM/ECF header
placed at the top of filings. The facts related in this opinion are taken largely from the
parties’ Local Rule 56.1 Statements of Undisputed Material Fact (and answers or exhibits
thereto). Defendant’s motion for leave to file a corrected version of his Rule 56.1 statement
and memorandum in opposition to summary judgment, [238], is granted in part. The court
will consider the corrected version of defendant’s submissions (now docketed at [240]) in
place of his original filings; but the arguments in plaintiffs’ reply will not be stricken. Some
of the documents referenced in this opinion were filed under seal. To the extent the opinion
discusses any content previously filed under seal, the party that originally filed that
document must file on the court’s docket a public version of the same. The public version
1
2
Inc., an Illinois corporation that makes and sells induction heaters for the
automotive aftermarket. See [240] at 2 ¶ 1; id. at 3 ¶¶ 8, 10. Initially, Gough and
Pacholok each owned fifty percent of the company’s stock, with Gough acting as
Induction’s president and Pacholok serving as a corporate officer and director. See
id. at 2 ¶ 3; id. at 3 ¶ 7. Pacholok later resigned his position with the company and
relinquished his stock as part of a Stock Purchase Agreement. See id. at 2 ¶ 3; id. at
3 ¶ 11. Section 3 of the agreement provides:
In and for the consideration of Pacholok returning his stock in the
Corporation, the Corporation does hereby agree to pay to him the
following amounts and other considerations: . . .
(e)
Royalty on goods sold by the Corporation with the license to
utilize one or more of the Patents (so long as same are valid) based on
annual (calendar year) gross sales, less returns, commencing January
1, 2007, and without regard to future products and accessories, on the
following schedule:
$0 to $1,000,000.00
$1,000,001.00 to $1,100,000.00
$1,100.001.00 to $1,200,000.00
$1,200,001.00 to $1,300,000.00
$1,300,001.00 to $1,400,000.00
$1,400,001.00 and thereafter,
0%
1%
2%
3%
4%
5%
[173-4] at 2–3. The agreement states that “the Corporation” means Induction
Innovations, Inc., and defines “Patents” as “intellectual property consisting of
United States Patents, numbers 6563096 and 6670590 and patent pending for
issuance known as number US 11/260,351.” Id. at 2. (According to Induction, U.S.
patent application 11/260,351 was later abandoned. See [235] at 11 n. 4.)
should leave visible any content addressed below. See City of Greenville, Ill. v. Syngenta
Crop Prot., LLC, 764 F.3d 695, 697 (7th Cir. 2014).
3
In 2013, Induction filed a declaratory-judgment action against Pacholok,
alleging that no royalties were owed under the agreement because in no calendar
year since January 1, 2007 has Induction sold more than a million dollars of goods
encompassed by Section 3(e). See Second Amended Complaint, [139] ¶¶ 56–57.
Induction now moves for summary judgment on its no-royalties claim. [170].2
III.
Analysis
The parties agree that Illinois law applies to this dispute. Contract
interpretation is a question of law. Hanover Ins. Co. v. Northern Building Co., 751
F.3d 788, 791 (7th Cir. 2014) (citation omitted). In Illinois, as elsewhere, the
principal objective in construing a contract is “to give effect to the intent of the
parties.” Peoples Gas Light and Coke Co. v. Beazer East, Inc., 802 F.3d 876, 881 (7th
Cir. 2015) (quoting Gallagher v. Lenart, 226 Ill.2d 208, 232 (2007)). The best
indication of the parties’ intent is the language of the contract itself. Id. (citing
Gallagher, 226 Ill.2d at 233). If the language of the contract is reasonably
susceptible to more than one meaning, it is ambiguous and the court may look to
extrinsic evidence—i.e., evidence outside the four corners of the contract—to
According to Induction’s second amended complaint, Gough at some point assigned his
ownership rights in the ’096 and ’590 patents to a company called Sarge Holdings, LLC. See
[139] ¶ 43; see also [240] at 3 ¶ 5 (stating that Sarge is the registered assignee of
Induction’s intellectual property). Sarge, in turn, licensed to Induction its rights to use and
enforce the patents. See [240] at 3 ¶ 6; see also [173-3] at 2 (“Exclusive License Agreement”
between Sarge Holdings and Induction Innovations, dated July 15, 2013). Sarge is also a
plaintiff in the present suit, and has moved for summary judgment jointly with Induction.
But Sarge is not a party to the contract at issue in the declaratory-judgment claim, and
Pacholok offers no argument that Sarge owes royalties to him under the contract. Sarge is
therefore irrelevant. For ease of reference, plaintiffs are referred to collectively as
“Induction.”
2
4
determine the parties’ intent. Gallagher, 226 Ill.2d at 233 (citing Farm Credit Bank
of St. Louis v. Whitlock, 144 Ill.2d 440, 447 (1991); Quake Constr., Inc. v. Am.
Airlines, Inc., 141 Ill.2d 281, 288 (1990)); see also Davis v. G.N. Mortg. Corp., 396
F.3d 869, 878 (7th Cir. 2005).
A.
Construction of the Stock Purchase Agreement
Section 3(e) of the agreement states that Induction agrees to pay Pacholok a
“[r]oyalty on goods sold by the Corporation with the license to utilize one or more of
the Patents.” [173-4] at 3. Although the phrasing is somewhat clumsy, the meaning
of this clause is clear. “Patents” is explicitly defined in the contract to mean the ’096
and ’590 patents (and a pending US patent application not at issue here). “[W]ith
the license to utilize one or more of the Patents” is a modifier, and it is modifying
one of two things: (1) “goods sold” (such that only “goods sold . . . with the license to
utilize . . . the Patents” count toward the royalty base); or (2) “the Corporation”
(such that only goods sold by “the Corporation with the license to utilize . . . the
Patents,” as opposed to some other corporation, are relevant). The second
interpretation is not a plausible one. Like the word “Patents,” “Corporation” is also
explicitly defined in the agreement: here, it means Induction Innovations. See id. at
2. So there is no need to clarify which “corporation” is the operative one in Section
3(e), and “with the license to utilize . . . the Patents” must therefore refer to “goods
sold.” See Peoples Gas, 802 F.3d at 881–82 (“[C]ourts should not interpret a contract
in a manner that would nullify or render provisions meaningless . . . .” (quoting
Thompson v. Gordon, 241 Ill.2d 428, 442 (2011))) (internal quotation marks
5
omitted); Nautilus Ins. Co. v. Bd. of Dirs. of Regal Lofts Condo. Ass’n, 764 F.3d 726,
735 (7th Cir. 2014) (similar) (also applying Illinois law).
The parties agree that “goods sold . . . with the license to utilize one or more
of the Patents” concerns the sale of goods covered by the ’096 or ’590 patent—that
is, goods embodying one or more of the patented inventions. See [171] at 8–9; [240]
at 26. This is a sensible reading, and the most reasonable one in context. To “utilize”
means “to make use of,” to “turn to practical use or account.” See Merriam-Webster
Online Dictionary, http://www.merriam-webster.com/dictionary/utilize (last visited
December 30, 2015). Thus, a “license to utilize” the patents is a license to practice
the patented inventions. The “license” is not explicitly defined. The Stock Purchase
Agreement mentions no other license to practice the patents at issue (for example, a
license that exists separately from the agreement3 and limits the rights granted to
certain modes of practicing the inventions), and this leads to two conclusions. First,
the license described in Section 3(e) is broad—it encompasses the full spectrum of
rights otherwise afforded only to the patentee. Second, the license is effected
through that same section of the agreement—in other words, in exchange for
royalty payments, Pacholok agrees under Section 3(e) not only to return his stock,
but also to grant Induction an unlimited license to practice the ’096 and ’590
As discussed above at note 2, Induction at some point obtained a license to practice the
patents from Sarge Holdings (which acquired ownership rights by assignment from Thomas
Gough, Pacholok’s co-patentee). But the license from Sarge was not executed until 2013. See
[173-3] at 2. The agreement with Pacholok was signed in 2006. See [173-4] at 5.
3
6
patents. To the extent such practice results in a sale (by Induction, and covered by
other provisions of the contract), that sale must be counted toward the royalty base.
The contract also provides that royalties on “goods sold by the Corporation”
must be calculated “without regard to future products and accessories.” [173-4] at 3.
Induction argues that the “without regard to” clause is a carve-out that excludes
from the royalty base all sales of “future products and accessories.” See [171] at 8.
Pacholok agrees that the phrase “without regard to” may signal an exclusion, but
argues that the term may instead mean that “future products and accessories”
should be included in the royalty base. See [240] at 23. Pacholok does not explain
how he arrives at this alternative interpretation, but presumably he means that
“without regard to” could in this case mean “no matter whether” or “whether or
not”—such that the agreement provides for a royalty on the sale of patented goods
whether or not they are “future products and accessories.” This construction
effectively reads “without regard to . . . ” out of the contract, and it is not,
consequently, a reasonable interpretation. See Land of Lincoln Goodwill Indus., Inc.
v. PNC Fin. Servs. Grp., Inc., 762 F.3d 673, 679 (7th Cir. 2014) (explaining that,
whenever possible, the court should “avoid a construction that would render a
provision [of the contract] superfluous” (citing Kim v. Carter’s, Inc., 598 F.3d 362,
364 (7th Cir. 2010); Matthews v. Chicago Transit Auth., 9 N.E.3d 1163, 1188 (Ill.
App. Ct. 2014))). For this clause to have meaning, “without regard to” must be read
as “not including.” Thus, sales of patented goods count toward the royalty base
7
unless they are sales of “future products and accessories.” Future products and
accessories, in turn, must comprise a subset of patented goods.
But is it one subset or two? In other words, does “future” describe “products
and accessories” together, such that a single subset of patented goods (“future”
goods) is excluded from the royalty base? Or does “future” modify only “products,” in
which case two different subsets of patented goods—“future products” and,
separately, “accessories”—are excepted? The latter interpretation would be
plausible if the parties had agreed to calculate royalties owed “without regard to
future products or accessories.” In that case, “accessories” could reasonably refer to
a second category of excluded sales, distinct from “future products.” But the parties
wrote instead that royalties would be calculated “without regard to future products
and accessories,” indicating that “products” and “accessories” are a single group of
patented goods, distinguishable from the larger set of patented goods by the fact
that they are “future” patented goods. The plain and ordinary meaning of Section
3(e) shows that the parties intended sales of “future” patented goods to be excluded
from the royalty base.
Pacholok argues that the Stock Purchase Agreement is still ambiguous and
so cannot be construed as a matter of law because the meaning of “future” remains
unclear. See [240] at 23–24. There is no ambiguity here. “Future” generally means
existing or occurring at a later time. See Merriam-Webster Online Dictionary,
http://www.merriam-webster.com/dictionary/future
(last
visited
December
30,
2015). Nothing in the contract suggests that the parties intended to employ this
8
term in an exceptional way. Thus, “future products and accessories” plainly refers to
products and accessories not yet in existence as of a certain date.
Induction argues that the cutoff date is the effective date of the contract
(August 31, 2006). See [171] at 8–9. Pacholok agrees that the effective date is one
possible demarcation between present and “future” goods, but argues that the date
of signature (December 11, 2006), or the date when royalties would begin to accrue
under the agreement (January 1, 2007), are also possibilities. See [240] at 24; [1734] at 3, 5. The effective date of the contract establishes the proper dividing line. The
word “future,” as just explained, refers to something not presently in existence. The
present, in turn, is ostensibly the time at which the contract is signed, because it is
at this point that the signatories make known their agreed intentions. But where,
as here, the agreement also includes an effective date, it is as though the parties
put pen to paper on that date. An effective date operates to shift the “present”
forward or backward—in this case backward, from December 11, 2006 to August 31,
2006. Section 3(e) of the Stock Purchase Agreement therefore excludes from the
royalty base any sales of patented goods that did not exist before August 31, 2006.
Section 3(e) also limits the royalty base to sales occurring on or after January
1, 2007, see [173-4] at 3 (stating that Induction owes Pacholok a royalty “based on
annual . . . gross sales, less returns, commencing January 1, 2007”), and requires
that the base exceed $1 million in a calendar year for royalties to accrue, see id.
(setting forth a graduated schedule, with a 0 % royalty owed on annual sales of $0
9
to $1,000,000, and 1% owed on annual sales of $1,000,001 to $1,100,000, etc.). There
is no dispute about the meaning of these terms.
In sum, Section 3(e) of the Stock Purchase Agreement requires Induction to
pay Pacholok a royalty on the sale of goods if: (1) the goods embody one or more of
the inventions claimed in the ’096 or ’590 patent; (2) the goods were sold by
Induction (“the Corporation”); (3) the goods sold existed before August 31, 2006;
(4) the sale took place on or after January 1, 2007; and (5) such sales exceeded
$1 million in the calendar year. This meaning is clear from the face of the contract,
and extrinsic evidence is not needed to interpret it. Because the agreement is
unambiguous, I also do not address Pacholok’s argument that ambiguities should be
resolved in his favor under the anti-drafter rule. See [240] at 27–28.4 (The implied
covenant of good faith and fair dealing, however, may have a role to play. This issue
is discussed below.)
B.
Application to Certain Categories of Sales
The parties disagree about whether certain categories of product sales count
toward the royalty base under Section 3(e).
1.
Modified Products
First, Induction argues that modified versions of goods that otherwise
predate the effective date of the contract, such as the Mini-Ductor, should be
The so-called anti-drafter rule provides that ambiguities in a written contract should be
construed against the drafter of the agreement. It is a rule “of last resort”: it “comes into
play only when neither . . . extrinsic evidence nor other methods of construction can resolve
the ambiguity.” Baker v. America’s Mortg. Servicing, Inc., 58 F.3d 321, 327 (7th Cir. 1995);
see also Alberto-Culver Co. v. Aon Corp., 351 Ill.App.3d 123, 132 (1st Dist. 2004).
4
10
excluded from the royalty base because the modified products were first sold after
August 31, 2006, and thus are “future” products. See [178] at 9–10; [240] at 6 ¶ 26.
Pacholok argues that the modified goods are functionally equivalent to their
originals, and thus, in accordance with the implied covenant of good faith and fair
dealing, must be counted toward the royalty base. See [240] at 6 ¶ 25; id. at 19–20,
28–29.
The covenant of good faith and fair dealing is implied in every contract, and
is most often used as a rule of construction. See Martindell v. Lake Shore Nat’l
Bank, 15 Ill.2d 272, 286 (1958); see also Cromeens, Holloman, Sibert, Inc. v. AB
Volvo, 349 F.3d 376, 395 (7th Cir. 2003). The covenant also applies when one party
“has complete control over the occurrence of a condition precedent” in the contract,
in which case the covenant operates to “prevent that party from behaving
arbitrarily, capriciously, or in a manner inconsistent with the reasonable
expectations of the parties.” Trovare Capital Grp., LLC v. Simkins Indus., Inc., 794
F.3d 772, 778 (7th Cir. 2015) (quoting Midwest Builder Distrib., Inc. v. Lord
& Essex, Inc., 383 Ill.App.3d 645, 891 N.E.2d 1, 26 (2007)) (internal quotation
marks omitted); see also E.B. Harper & Co., Inc. v. Nortek, Inc., 104 F.3d 913, 919
(7th Cir. 1997) (explaining that the implied covenant requires parties to use
reasonable efforts to bring about any condition precedent within their control)
(citing Case v. Forloine, 266 Ill.App.3d 120, 639 N.E.2d 576, 581 (1993)).
For the sale of a patented good to be included in the royalty base under
Section 3(e), the good must be a present product—that is, a non-“future” product.
11
Non-future status is thus a condition precedent to Induction’s contractual
performance. It is also a condition entirely within Induction’s control, as it is within
Induction’s discretion, not Pacholok’s, to determine whether and when existing
product lines should be revised or discontinued. Induction, consequently, must
exercise that discretion in good faith; it may not intentionally modify goods so as to
avoid paying royalties to Pacholok. Cf. Trovare, 794 F.3d at 779 (observing that the
implied covenant of good faith is violated where the party in control of a condition
precedent purposely causes its nonoccurrence).
The parties agree that Induction modified certain of its products after August
31, 2006. But Pacholok points to no evidence suggesting that these changes were
undertaken in bad faith. Nor is it of any help to Pacholok that many of the revised
goods are, in his estimation, functionally equivalent to their predecessors. Even
assuming that a modified good performs the same function as its pre-August 31,
2006 version, the new version is nonetheless a “future” product if it was first
manufactured as such after the cutoff date. See Goldberg v. 401 N. Wabash Venture
LLC, 755 F.3d 456, 462 (7th Cir. 2014) (“Parties to a contract . . . are entitled to
enforce [its] terms . . . to the letter and an implied covenant of good faith cannot
overrule or modify the [contract’s] express terms . . . .” (quoting N. Trust Co. v. VIII
S. Mich. Assocs., 276 Ill.App.3d 355, 657 N.E.2d 1095, 1104 (1995))). Induction was
correct to exclude the sales of such products from its royalty calculations.5
Induction also refers to the implied covenant of good faith and fair dealing, arguing that
the covenant (along with the contract’s “cooperation” clause, which states that the parties
“shall cooperate and do all acts as may be reasonably required . . . with regard to the
5
12
It was not, however, appropriate for Induction to exclude from its calculations
all sales of the Mini-Ductor product between November 2006 and spring 2010.
According to Induction, the pre-August 31, 2006 Mini-Ductor was changed later
that year, when: (1) it was first sold with a carrying case; and (2) its original 90-day
warranty was replaced with a one-year warranty. But as far as can be gleaned from
the facts presented at summary judgment, there was no change in the Mini-Ductor
itself until several years later when, among other things, its heat-dissipating
terminal was modified. Induction does not explain, and nor is it clear, how a mere
change in warranty would render a product a “future” product under Section 3(e) of
the Stock Purchase Agreement. And an induction heater is not a different heater
simply because it arrives in a carrying case rather than a cardboard box. As
Induction’s representative stated at his deposition, a carrying case is something you
put a heating product in. See July 22, 2015 Deposition of Paul Astrowski, [219-2] at
115, Tr. at 114:1–:3. Adding a case does not change the heater itself. From a
manufacturing perspective, Mini-Ductor units sold between November 2006 and
fulfillment of . . . the transaction described herein,” [173-4] at 4) obligates Pacholok to
abstain from licensing the patents at issue to parties other than Induction. See [171] at 15;
[235] at 13. Since Pacholok did license the patents to another party (one of Induction’s
competitors), Induction says that Pacholok breached his fiduciary duties to Induction. See
[235] at 13–14. Pacholok’s alleged fiduciary breach does not alter Induction’s royalty
obligations. The Stock Purchase Agreement makes no reference to Pacholok’s ability to
license his patent rights to third parties, and likewise makes no attempt to render
Pacholok’s lack of such dealings a condition precedent to the operation of the contract.
Whether Pacholok licensed the patents to someone other than Induction, or breached his
fiduciary duties to Induction in doing so, is irrelevant to the present inquiry.
13
spring 2010 appear to be exactly the same as units sold before August 31, 2006.
These sales should have been counted toward the royalty.6
Pacholok claims that several products in the “Pro-Max” line were also sold in
2006, and so should have been included in the royalty base, too. The evidence
suggests that these units were not sold until November 2006—some five months
after the effective date of the contract. See Induction Innovations, Inc. and Sarge
Holdings Company, LLC’s Third Supplemental Response to Defendant’s First Set of
Interrogatories, [219-2] at 181–82. If the units were first manufactured after the
effective date, then they were not in existence as of that date and so were properly
excluded from the royalty base. However, the date of existence is difficult to discern
from the record. (The parties refer only to the date of first sale.) It is at least
conceivable that some of these goods were made (and thus practiced the patents) a
few months before their first sale. Drawing all reasonable inferences in Pacholok’s
favor, there remains an issue of fact as to whether Induction correctly excluded all
Pro-Max sales from the royalty base.7
There appears to be some confusion about when the Mini-Ductor’s warranty was actually
extended, and when the product itself was physically changed. In its initial Local Rule 56.1
submission, Induction stated that the Mini-Ductor’s warranty was extended in December
2006 and its heat-dissipating terminal changed in August 2009. See [219] at 4–5 ¶¶ 26–27.
But in its later response to Pacholok’s Rule 56.1 statement, Induction claimed that the
warranty was extended in November 2006 and the heat-dissipating terminal changed in
late March or early April 2010. See [236] at 17 ¶ 40. I assume (in Pacholok’s favor) that the
latter dates are the correct ones, as they likely represent a larger set of sales that should
have been included in Induction’s calculations.
6
Pacholok also contends that sales of some of the Pro-Max (and Mini-Ductor) products
should be counted toward the royalty base because Pacholok designed those products before
he left Induction. See [240] at 25. Even assuming that Pacholok was responsible for these
designs—an assertion that Induction disputes—a product design is merely an idea for a
7
14
2.
Stand-Alone Accessories
Sales of what Induction refers to as stand-alone accessories—that is,
accessories or attachments sold without induction heaters—were properly excluded
from the royalty calculations. Induction argues that it was correct to exclude these
sales because stand-alone accessories do not embody all of the claim limitations at
issue, and so are not patented goods in the first instance. See [171] at 10–11. This is
not entirely correct. Selling a component of a patented invention is not an act of
direct infringement, but selling or offering to sell such a component (within the
United States) may nonetheless constitute indirect infringement if: (1) the
component is a material part of the invention; (2) the seller knows that the
component is especially made or adapted for use in infringing the patent; and
(3) the component is not a “staple article or commodity of commerce suitable for
substantial noninfringing use.” 35 U.S.C. § 271(c); see also In re Bill of Lading
Transmission and Processing Sys. Patent Litig., 681 F.3d 1323, 1337 (Fed. Cir.
2012) (discussing the requirements for contributory infringement) (citations
omitted).8 If, in selling certain accessories, Induction would be liable for
future product, not the product itself. The operative question under the Stock Purchase
Agreement is whether a product existed as of August 31, 2006. The date of design does not
define the date of existence.
It is also an act of infringement to supply from the United States a component of a
patented invention (that is especially made or adapted for use in the invention, and not a
staple article or commodity suitable for substantial noninfringing use), while intending that
the component be combined outside of the United States “in a manner that would infringe
the patent if such combination occurred within the United States.” 35 U.S.C. § 271(f)(2).
8
15
contributory infringement, those accessories would be considered patented goods
and their sales relevant to determining royalties owed under Section 3(e).
Induction argues that contributory infringement does not apply in this case
because the accessories here have noninfringing uses—specifically, non-automotive
uses. See [235] at 12. (The patents require the application of heat to an automotive
vehicle, or for use in automotive repair, see [173-5] at 11, 22, so non-automotive
applications would fall outside the scope of the patent claims.) It is Pacholok’s
burden to show that there are no noninfringing uses or, if there are noninfringing
uses, that they are not substantial. See Medtronic, Inc. v. Mirowski Family
Ventures, LLC, 134 S.Ct. 843, 849 (2014) (holding that it is for the patentee to show
infringement, even in declaratory-judgment actions where the plaintiff seeks a
declaration that its products are not covered by the patent and so no royalties are
owed); Toshiba Corp. v. Imation Corp., 681 F.3d 1358, 1363 (Fed. Cir. 2012)
(explaining in a contributory-infringement case that it is the patentee’s burden to
prove a lack of substantial noninfringing uses). A substantial use is one that is not
unusual, far-fetched, illusory, impractical, occasional, aberrant, or experimental.
Toshiba, 681 F.3d at 1362 (quoting Vita-Mix Corp. v. Basic Holding, Inc., 581 F.3d
1317, 1327 (Fed. Cir. 2009)).
Pacholok has presented no evidence suggesting that the non-automotive
applications for Induction’s stand-alone accessories are unusual, occasional, or in
any other way insubstantial. Accordingly, Induction would not have needed a
16
license to sell these accessories, and Induction properly excluded sales of these
accessories from the royalty base.
3.
Induction Heaters Sold for Non-Automotive Uses
Induction did not exclude from its royalty calculations sales of induction
heaters sold for non-automotive uses (because the sales data are difficult to parse in
this way), but argues that such sales are in principle excludable because, as just
noted, the patents cover only automotive applications. Thus, says Induction, these
sales are not sales of patented goods. See [171] at 9 n. 3; id. at 11 n. 7. Pacholok
relies on Intel Corp. v. U.S. International Trade Commission, 946 F.2d 821 (Fed.
Cir. 1991), for the proposition that a manufacturer directly infringes a patent by
selling a product that is merely capable of being used for an infringing application.
See [240] at 26–27 (citing Intel, 946 F.2d at 832). Alternatively, Pacholok argues
that infringement may occur where there is merely an offer to sell a good for a
patented use. See id. at 27.
Pacholok’s reliance on Intel is misplaced. That case addressed a patent
claiming a “programmable selection means for selecting [an] alternate addressing
mode.” 946 F.2d at 831 (emphasis added). Thus, to be infringing, the accused device
in Intel needed only to be capable of operating in the mode described. See id. at 832.
The claim language here is distinguishable. The ’590 patent claims a “heater
apparatus used in automotive repair,” [173-5] at 11 (claims 1 and 13); and the ’096
patent claims a method for “heating of an area of a body of an automotive vehicle”
(claims 1 and 7), or for “heating of a mechanical structure of an automotive vehicle”
17
(claim 4), see id. at 22. These patent claims clearly require an actual automotive
application, not the mere capacity for such use. Cf. Fantasy Sports Props., Inc. v.
Sportsline.com, Inc., 287 F.3d 1108, 1117–18 (Fed. Cir. 2002) (emphasizing the
“programmable” claim language in Intel, and observing that “Intel . . . does not
stand for the proposition . . . that infringement may be based upon a finding that an
accused product is merely capable of being modified in a manner that infringes the
claims of a patent.”)
Pacholok’s argument about offers for sale is more persuasive, however. It is
true that Induction does not infringe the ’096 or ’590 patent by selling its induction
heaters for non-automotive uses; however, Induction does infringe the patents by
offering to sell for automotive uses a heater ultimately purchased for other
applications. See 35 U.S.C. § 271(a) (“[W]hoever without authority makes, uses,
offers to sell, or sells any patented invention, within the United States . . . , infringes
the patent.”) (emphasis added). For an offer for sale to constitute patent
infringement, the offer “must meet the traditional contract law definition of that
term”—in other words, it must communicate a willingness to enter into a bargain,
such that another person would be justified in believing that his assent to the
bargain will result in a binding contract. Superior Indus., LLC v. Thor Global
Enters. Ltd., 700 F.3d 1287, 1294 (Fed. Cir. 2012) (citing Rotec Indus., Inc. v.
Mitsubishi Corp., 215 F.3d 1246, 1255 (Fed. Cir. 2000); MEMC Elec. Materials, Inc.
v. Mitsubishi Materials Silicon Corp., 420 F.3d 1369, 1376 (Fed. Cir. 2005)). A true
offer includes price terms. See id.
18
We know that Induction advertised its heating products, and that nearly all
of this advertising focused on the automotive-repair market. See [236] at 5 ¶ 14;
August 19, 2015 Deposition of Thomas Gough, [219-3] at 91, Tr. at 267:11–:18. We
do not know if the advertisements also included price terms, but it is reasonable to
assume that at least some of them did. Advertising commonly includes pricing, and
there is no reason to suppose that all of Induction’s advertisements strayed from
this approach. There is an issue of fact as to whether Induction may properly
exclude all of its “non-automotive” sales from the royalty base.
4.
Foreign Sales
Induction argues that foreign sales—i.e., sales of Induction products
overseas—should be excluded from the royalty base because: (1) it is not Induction
who makes those sales, but a separate company; and (2) foreign sales are not
“covered” by the ’096 or ’590 patent in any event. In arguing that U.S. patents can
never reach foreign sales, Induction casts too wide a net.
Induction is correct that its “foreign exploitation of a patented invention”
does not constitute infringement of a U.S. patent. Power Integrations, Inc. v.
Fairchild Semiconductor Int’l, Inc., 711 F.3d 1348, 1371 (Fed. Cir. 2013) (citation
omitted); see also id. (“It is axiomatic that U.S. patent law does not operate
extraterritorially to prohibit infringement abroad.” (citing Deepsouth Packing Co. v.
Laitram Corp., 406 U.S. 518, 531 (1972), superseded by statute as recognized in
Microsoft Corp. v. AT & T Corp., 550 U.S. 437, 444–45 (2007))); Microsoft, 550 U.S.
at 454–56 (discussing the presumption against extraterritoriality). But U.S. patent
19
law does protect against the domestic manufacture of patented inventions. See
35 U.S.C. § 154(a)(1) (“Every patent shall . . . grant to the patentee . . . the right to
exclude others from making, using, offering for sale, or selling the invention
throughout the United States . . . .”) (emphasis added). A manufacturer that makes
patented products in the U.S. is liable for infringement, see id. § 271(a), and if the
manufacturer then sells those goods overseas, it may owe to the patentee profits
from foreign sales, see WesternGeco L.L.C. v. ION Geophysical Corp., 791 F.3d 1340,
1352 (Fed. Cir. 2015). Induction owes to Pacholok a royalty based on the sale of
goods that practice the ’096 or ’590 patent. If Induction makes such goods
domestically but then sells them to foreign buyers, these are still sales of patented
goods and must be included in the royalty base.
There is evidence reasonably suggesting that Induction makes its products in
the United States. See Astrowski Deposition, [219-2] at 99–100, Tr. at 98:2–99:8
(stating that Induction performs the final assembly of the MD-800 and Pro-Max CE
products in Elgin, Illinois); Gough Deposition, [219-3] at 47–48, Tr. at 223:4–224:13
(stating that Induction does the final assembly of the MD-700, Glass Blaster,
Inductor Max, Pro-Max, and MiniDuctor units); see also Deepsouth, 406 U.S. at
527–28 (explaining that a patented product is “made,” within the meaning of
35 U.S.C. § 271, where it is assembled as an operable whole). But, says Induction,
what it does not do is sell any of its products overseas: foreign sales are carried out
by another company, Induction International, Inc. See [235] at 11; [240] at 5 ¶ 19.
So, the argument goes, foreign sales must be excluded from the royalty base because
20
they are not sales made by “the Corporation”—i.e., Induction Innovations. See [235]
at 11.
Pacholok argues that “the Corporation” necessarily includes Induction
International, not just Induction Innovations (referred to simply as “Induction”),
because the former is the latter’s subsidiary, and the Stock Purchase Agreement is
binding upon Induction’s affiliates. See [240] at 25. There is some dispute about
whether International is actually Induction’s subsidiary, but the question is
irrelevant. The contract says nothing about its enforceability against the parties’
affiliates; it states only that, in addition to the parties, the agreement “shall be
binding upon . . . their respective successors, heirs, and assigns.” [173-4] at 4
¶ 10(b). Pacholok makes no argument, and there is no evidence suggesting, that
Induction International is a successor, heir, or assign of Induction Innovations.
But this does not end the matter as to foreign sales because, as Pacholok
correctly observes, Induction may be deemed responsible for sales made by
International if, in making those sales, International acted as Induction’s agent.
See, e.g., Buckner v. Atl. Plant Maint., Inc., 182 Ill.2d 12, 24 (1998) (“[T]he acts of an
agent are considered in law to be the acts of the principal . . . .”) (citation omitted);
McRaith v. BDO Seidman, LLP, 391 Ill.App.3d 565, 589 (1st Dist. 2009)
(“Generally, the knowledge and conduct of agents are imputed to their principals.”)
(citation omitted). An agency relationship usually exists where “one person (a
‘principal’) manifests assent to another person (an ‘agent’) that the agent shall act
on the principal’s behalf and subject to the principal’s control, and the agent
21
manifests assent or otherwise consents so to act.” Clarendon Nat’l Ins. Co. v.
Medina, 645 F.3d 928, 935 (7th Cir. 2011) (quoting Restatement (Third) of Agency
§ 1.01 (2006)) (applying Illinois law); see also Zahl v. Krupa, 365 Ill.App.3d 653, 660
(2d Dist. 2006) (explaining that agency is a fiduciary relationship in which “the
principal has the right to control the agent’s conduct and the agent has the power to
act on the principal’s behalf”) (citation omitted). The existence or scope of an agency
relationship is typically a question of fact. See Clarendon, 645 F.3d at 935 (citation
omitted).
Here, there is evidence that International was acting on Induction’s behalf
when it sold Induction’s products to foreign buyers abroad. See Gough Deposition,
[219-3] at 49, Tr. at 225:13–:16 (Question: “Induction International, Inc. sells
Induction Innovation, Inc.’s products overseas for Induction Innovations, Inc.,
correct?” Answer: “Yeah, correct.”). This evidence is enough to permit the inference
that Induction authorized International to make foreign sales for Induction’s
benefit. There is thus a question of fact about whether these sales may be imputed
to Induction (and, therefore, counted toward the royalty base).
22
IV.
Conclusion
Multiple issues of fact preclude a determination that Induction has calculated
properly its royalty obligations to Pacholok. Accordingly, it cannot be resolved as a
matter of law that Induction owes Pacholok no royalty payments under Section 3(e)
of the Stock Purchase agreement. Plaintiffs’ motion for summary judgment, [170], is
therefore denied.
ENTER:
___________________________
Manish S. Shah
United States District Judge
Date: 12/31/15
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