Ricoh v. Nashua Corporation CV-94-163-M 09/30/98 UNITED STATES DISTRICT COURT

DISTRICT OF NEW HAMPSHIRE

Ricoh Electronics; Ricoh Corporation; and Ricoh Company, LTD, Plaintiffs

v. Civil No. 94-163-M

Nashua Corporation, Defendant

O R D E R

In its memorandum decision on liability, the court reserved

judgment on damages pending the appointment of a court expert

(Fed. R. Evid. 706) and the taking of additional testimony

relative to the adeguacy, from an accounting perspective, of the

financial documents, exhibits, and testimony provided by Ricoh to

support a reliable incremental cost determination; the de minimus

or substantial nature of any incremental costs that might have

been omitted in Ricoh's lost profits calculation; what Ricoh's

hypothetical incremental costs would likely have been; and other

relevant opinions. In appointing an expert, the court recognized

its own inadeguate understanding of potentially relevant

accounting principles and, hence, some lingering doubt as to the

adeguacy of the proof to support a lost profits award. The court

expert has since been appointed, provided a report, been

subjected to discovery depositions by both parties, and has testified and been cross-examined by both parties. In addition,

the parties have filed supplemental legal memoranda on the issue

of damages.

Lost Profits

Liability for infringement having previously been determined

by the court, plaintiff is entitled to an award of damages

"adeguate to compensate for [that] infringement."

. As the Supreme Court discussed in Aro Manufacturing Co. v.

Convertible Top Replacement Co . ,

(1964):

The guestion to be asked in determining damages is "how much had the Patent Holder and Licensee suffered by the infringement. And that guestion [is] primarily: Had the Infringer not infringed, what would Patent Holder - Licensee have made?" Livesav Window Co. v. Livesav Industries, Inc.,

(5th Cir. 1958).

.

Where the patentee, Ricoh in this case, is itself producing

the patented item, the general rule is that actual damages are to

be determined based upon lost sales and profits to the patentee

because of the infringement. Del Mar Avionics, Inc. v. Quinton

Instrument Co.,

(Fed. Cir. 1987). While the

applicable statute,

, also provides that a damage

award shall not be "less than a reasonable royalty", "the purpose

2 of this alternative is not to provide a simple accounting method,

but to set a floor below which the courts are not authorized to

go." I d . (citing Seattle Box Co. v. Industrial Crating and

Packing, Inc.,

(Fed. Cir. 1985)).

Ricoh sought to establish its damages under the standard

set forth in Panduit Corp. v. Stahlin Bros. Fibre Works, Inc.,

(6th Cir. 1978), a permissible method by

which a patent owner may prove damages based on lost profits.

Under Panduit a patentee must show that but for the infringing

acts, the patentee would have made the sales and would have made

a certain level of profit. See Yarwav Corp. v. Eur-Control USA,

Inc.,

(Fed. Cir. 1985). Four elements must be

proved:

(1) A demand for the patented product,

(2) The absence of an acceptable, non-infringing substitute for the patented product,

(3) The patent owner's manufacturing and marketing capability to exploit the demand for the patented product, and

(4) The amount of profit the patent owner would have expected to make if the patent owner had made the infringer's sales.

See Radio Steel & Mfg. Co. v. MTD Prods., Inc.,

(Fed. Cir. 1986) (citing Panduit,

) .

3 To recover lost profits, then, Ricoh must prove by a

preponderance that "but for" Nashua's infringement, it would have

made the sales of infringing toner cartridges that were made by

Nashua. Ricoh's evidence established that there was strong

demand for its toner cartridges in the marketplace, that

acceptable non-infringing substitutes were not then available,

and that it had the manufacturing capacity and marketing ability

to meet the demand. Accordingly, Ricoh has made the reguisite

showing that, but for Nashua's infringement, it would have made

the sales made by Nashua.

Ricoh is, of course, not reguired to negate every

possibility that some purchaser of Nashua's infringing products

might not have bought Ricoh's product. See Paper Converting

Machine Co. v. Maqna-Graphics Corp.,

(Fed. Cir.

1984). Ricoh need only provide proof toa reasonable probability

that it would have made the sales Nashua made, but for the

infringement. It has done so. See Rite-Hite Corp. v. Kelley

C o .,

, 1545 (Fed. Cir. 1995) (en banc) (patent holder

must show that the infringer actually caused the economic harm

for which the patentee seeks compensation); W. L. Gore &

Associates, Inc. v. Carlisle Corp,

(D. Del.

1978) (citing Broadview Chemical Corp. v. Loctite,

(D. Conn. 1970))(plaintiff under no obligation to negate

all possibilities that the purchasers would not have bought a

different product or to convince beyond a reasonable doubt);

State Indust., Inc. v. Mor-Flo Indust., Inc.,

(Fed. C i r . 198 9).

The record proof establishes, and the court finds by a

preponderance of the evidence, that the first three Panduit

factors have been proven - there was an obvious demand for the

patented product in the marketplace; there was an absence of

acceptable, non-infringing substitutes for the patented toner

cartridges; and Ricoh was positioned in the market with

sufficient manufacturing and marketing capability to exploit the

demand for the patented toner cartridges and "in all reasonable

probability" would have made the infringing sales.

Nashua argues that Ricoh generally failed to meet its burden

of proof with respect to damages because it failed to offer any

analytical opinion testimony from a gualified expert accountant,

and because its damages evidence was fatally incomplete in that

it failed to show that all possible incremental costs have been

taken into account in its lost profits calculation, including

incremental costs that could have been substantial. These

5 deficiencies, Nashua argues, serve to preclude determination of a

"reasonably fair estimate" of Ricoh's lost profits damages by the

reguisite preponderance standard.

However, implicit throughout Nashua's legal memoranda on the

subject is an apparent confusion between that proof necessary to

establish a right to lost profits damages, and that proof

necessary to establish the amount of damages properly

recoverable. The Supreme Court explained this distinction in

Story Parchment Co. v. Paterson Parchment Paper Co . ,

(1931) :

The rule which precludes the recovery of uncertain damages applies to such as are not the certain result of the wrong not to those damages which are definitely attributable to the wrong and only uncertain in respect to their amount •k -k -k

In such case, while the damages may not be determined by mere speculation or guess, it will be enough if the evidence show the extent of the damages as a matter of just and reasonable inference, although the result be only approximate.

. This case is one in which damages in the nature of

lost profits are definitely attributable to the wrongful

infringement by Nashua, "and only uncertain in respect to their

amount."

6 As is generally understood, then, a lost profits calculation

in this context is necessarily a function of assumptions,

approximations, and development or reconstruction of relevant

data that may not be maintained in the ordinary course of

business (such as targeted, product-specific financial data). It

is an exercise in hypothetical hindsight and, therefore, it

should not be surprising if certified public accountants might

express professional discomfort with any hard conclusions, and

might well decline to certify either the accuracy of the

underlying data or the rough conclusions to be derived from it.

After all, the assessment of approximate lost profits in this

context probably involves less documented historical fact and

more historical assumption and extrapolation than the accounting

profession normally encounters. That is no doubt why "[a]

certified [accountant's] statement is not reguired" to prove lost

profits damages in a patent infringement case, and why "[i]t is

settled that mathematical exactitude in the ascertainment of

damages cannot be expected and a reasonable approximation is all

that is reguired once the wrong has been established." W.L. Gore

& Assoc. Inc. v. Carlisle Corp., 198 U.S.P.Q. at 364 (guoting

H.K. Porter Co., Inc. v. Goodyear Tire and Rubber Co., 183 U.S.

P.Q. 794, 796 (N.D. Ohio 1974), aff'd.

(6th Cir.

1976) ) .

7 Nevertheless, in addition to proving causation — lost sales

as a result of the infringement activity by the defendant — the

patent holder still must prove the amount it probably lost. See

Minco, Inc. v. Combustion Engineering, Inc.,

(Fed.

Cir. 1996). The proof cannot be speculative or represent mere

guesswork, but it will be sufficient if it shows "the extent of

the damages as a matter of just and reasonable inference,

although the result be only approximate." W.L. Gore, 198

U.S.P.Q. at 363 (citing Story Parchment Co . ,

)).

The amount, or guantum of damages, is an issue of fact for

the trial court in the first instance, reviewable for clear error

on appeal. See Mahurkar v. C.R. Bard, Inc.,

(Fed. Cir. 1996) (citing Lam, Inc. v. Johns-Manville Corp.,

(Fed. Cir. 1983)); Story Parchment Paper Co . ,

.

While the amount of lost profits awarded cannot be

speculative, the amount need not be proven with unerring

precision. See Bio-Rad Labs, Inc. v. Nicholet Inst. Corp.,

(Fed. Cir. 1984). The risk of uncertainty in

calculating lost profits is placed sguarely where it belongs - on the infringer. See Paper Converting Machine Company v. Maqna-

Graphics Corporation,

(Fed Cir. 1984). So, when the

damages are not ascertainable with precision, reasonable doubt is

appropriately resolved against the infringer. See Lam, Inc.,

; Kaufman Co. v. Lantech, Inc.,

(Fed. Cir. 1991). It is particularly appropriate to resolve

doubts regarding the precision of the calculation against the

infringer here, because Nashua had (but did not avail itself of)

the opportunity to obtain pertinent discovery and attempt to

demonstrate specific (presumably higher) incremental costs.

In any event, the court is "not restricted from choosing a

figure other than that advocated by either party and may

substitute an intermediate figure as a matter of judgment from

all of the evidence." Minnesota Mining, 976 F.2d at 1579 (citing

SmithKline Diagnostics, Inc. v. Helena Lab, Corp.,

(Fed. Cir. 1991)). Nashua's suggested lost profits figure

is apparently zero, since it adheres to the view that Ricoh

simply did not prove any lost profits by a preponderance of the

evidence because so many possibilities could exist regarding

hypothetical incremental costs. Of course, Nashua did not offer

any evidence of its own as to what those incremental costs would

likely have been if fairly guantified, and Nashua did have the opportunity to either extrapolate from Ricoh financial data

available through discovery, or to extrapolate from its own

actual experience in producing and selling the offending

products. (Nashua does argue, alternatively, for damages in the

form of a small royalty as described by Dr. Friedlander - a

calculation rife with its own problems).

Assessment of Damages

The basic damages issue in contention relates to whether or

not additional incremental costs, of a substantial nature, should

have been added to Ricoh's calculation of its hypothetical

incremental costs of manufacturing and selling the infringing

toner cartridges. Mr. Blake was appointed to advise the court,

first, whether the admitted financial evidence is adeguate, from

an accounting perspective, to support a reasonable and reliable

determination of the incremental costs Ricoh would likely have

incurred if it had produced the offending cartridges. Next, the

court sought opinion testimony from Mr. Blake as to whether, from

an accounting perspective, there would likely have been

additional indirect costs properly allocable to Ricoh's

hypothetical production of the offending cartridges, that is,

indirect allocable costs not accounted for by the evidence of

record. And if so, whether those additional unaccounted-for

10 incremental allocable costs would likely have been substantial or

de minimus, and whether it is possible to reasonably estimate

those costs. Finally, the court asked Mr. Blake to opine as to

whether, from an accounting perspective, what those incremental

costs would likely have been.

Mr. Blake thoroughly considered the matter, and brought his

professional expertise to bear. Understandably, he was somewhat

uncomfortable with putting an accountant's imprimatur on the

documented accuracy of any assessment of lost profits in this

context. Nevertheless, he but did make what seems a reasonable

estimate of his own - in the general neighborhood urged by

plaintiff. Mr. Blake testified that there are no generally

accepted accounting principles ("GAAP") that directly and

exclusively relate to the calculation of hypothetical incremental

costs, but that general accounting concepts do lend themselves to

estimating facts necessary to roughly approximate lost profits.

Although Mr. Blake would have preferred access to far more data

-- to produce what he would consider a more reliable and

justifiable accountant's assessment -- that information was not

available to him (it was to defendant) . But the court does not

view Mr. Blake's discomfort or inability to produce a "better"

accountant's estimate, as precluding determination of a

11 reasonable approximation, or reasonably fair estimate, of the

damages owed to the patent owner in this case under applicable

legal standards.

And, while the court acknowledges that Mr. Blake opined

that, based upon his own general accounting experience, it is

highly unlikely that a company would operate at a 77.5 percent

incremental profit margin, the court is unpersuaded that such a

profit margin (an incremental profit margin, after all) is either

inherently or facially unreasonable. Mr. Blake gave no specific

reasons as to why that margin might not be appropriate for the

discrete production of toner cartridges within the plaintiff's

general manufacturing operation, after fixed or sunk costs are

removed. And, it does not seem particularly worthwhile to

compare that 77.5 percent claimed incremental profit figure with

the plaintiff's Georgia plant average (overall) operating profit

of 32.3 percent or its California plant's general operating

profit. That kind of guick comparison might well serve as a

gross reality check in many situations, but the incremental

profit margin (for N+l) for a discrete product like these toner

cartridges, given plaintiff's ready capacity to produce and sell

without major additions to labor forces or machinery or physical

plant or marketing staff or management, should be expected to be

12 significantly higher than average product profit derived from

products that do carry those fixed expenses.

However, Mr. Blake usefully performed regression analyses on

major expense categories found in plaintiff's comparative income

statements. He found that the costs listed in the Georgia and

California plants' income statements are related to sales volume

and, therefore, an increase should reasonably be considered when

fairly approximating incremental expenses. With regard to Ricoh

Corporation, Mr. Blake found that selling costs tended to

increase in relation to increased product sales, and noted, at

page 16 of his report (admitted by agreement as direct

testimony), that Ricoh's incremental cost calculations "do not

include selling expenses of Ricoh Corporation or corporate

general and administrative expenses of Ricoh Company Limited."

The latter category, he concluded, would likely not have added to

Ricoh's incremental cost of producing the offending cartridges.

Considering all of the evidence of record, the court is

persuaded that plaintiff has produced sufficient evidence to meet

its burden of establishing a reasonably fair estimate of its lost

profits, though the court does find that plaintiff's own

assessment is somewhat on the high side of the range which is

13 supported by the evidence. While plaintiff produced no expert

opinion testimony from a certified public accountant, it did

offer credible fact witnesses with detailed personal knowledge of

the major manufacturing, sales, and other costs associated with

production and marketing of its toner cartridges, as well as

other credible and relevant financial and operations data, from

which a reasonably fair estimate can be made.

As noted, the determination of a damage award in this

context is not an exact science. See King Instrument Corp. v.

Otari Corp.,

(Fed. Cir. 1985). But the

obligation to make that determination is not diminished by its

difficulty. See Del Mar Avionics, Inc. v. Quinton Instrument

C o .,

. Keeping in mind that determination of

actual lost profits is not possible, given the necessarily

hypothetical nature of the assessment, and that one could always

argue around the periphery about hypothetical incremental costs

that might, or might not have been incurred if plaintiff had

actually made and sold the infringing products, the court begins

its estimate by accepting as credible plaintiff's damages

evidence, as far as it goes. (The number of infringing sales is

not seriously disputed, nor is Ricoh's sales price for its

patented products.)

14 Defendant makes a valid point in at least this sense - there

probably would have been additional incremental costs associated

with plaintiff's production and sale of the offending cartridges

beyond what Ricoh has considered and adjusted for in its own

estimate of lost profits. The court appointed expert's

testimony, and that of Mr. Hoffman (defendant's accounting

expert), satisfies the court that the plaintiff's estimate of

lost profits, while supportable, can be rendered more

"reasonable" and "fair" by further adjusting for additional

incremental costs that would likely have been incurred in

connection with sales1 and marketing, and, for some additional

general manufacturing and overhead-type costs that probably would

have been generated by the additional production and marketing as

well. (While the additional cartridges would have represented

only a modest 3% to 5% overall increase in toner cartridge

production for Ricoh during the relevant period, that effort

still would have had some incremental cost impact).

Mr. Blake, while understandably uncomfortable, from an

accountant's perspective, in drawing firm conclusions about "what

Plaintiff's suggestion that no incremental sales commissions or incremental selling, marketing, or overhead expenses at all would likely have been incurred in connection with its production and sale of the hypothetical cartridges is unrealistic.

15 might have been" absent a thorough forensic examination of all

pertinent Ricoh financial records, nevertheless has assisted the

court by essentially confirming the court's lingering concern

that Ricoh's lost profits calculation is wanting in this respect:

it is more likely than not that some amount of additional

incremental costs would probably have been incurred by Ricoh

beyond those it has taken into account. We can never know with

certitude, of course, what those costs would actually have been,

but the court is satisfied that there would have been some and

that those costs would likely have been modestly significant.

Mr. Blake's own effort to guantify a reasonable lost profit

amount is also of use to the court, even though he candidly

stated that he did not have a great deal of confidence in the

number as a defensible, document-supported, accurate, or precise

accounting depiction. But, then, that is not the legal standard

of proof reguired of Ricoh. Mr. Blake's estimate is useful

because his informed approach considered and relied on the same

basic elements as did plaintiff, and his own reasonable fair

estimate of lost profits is generally in the same neighborhood as

plaintiff's, particularly when correcting for errors, thereby

validating the general integrity of the plaintiff's estimate from

an accountant's perspective.

16 Thus, the court is confident that substantial profits were

lost, and those profits are reasonably quantified as plaintiff

has done, albeit within a margin of error that can be fairly

addressed by reducing the amount claimed to reflect approximated

increased incremental costs. Accepting plaintiff's constructive

criticisms of Mr. Blake's own effort to approximate lost profits

virtually in toto (erroneous inclusion of machine depreciation

expense as an incremental cost, etc.), as the court does, and not

relying on Mr. Blake's own approximation of lost profits as

substantive evidence of loss, the court nevertheless finds that a

fairer approximation of actual damages in the nature of lost

profits should take into account an additional incremental cost

amount. Reducing plaintiff's own estimated lost profits

calculation by 12% to reflect a reasonably prudent adjustment to

achieve a fair approximation of those likely incremental costs,

serves to resolve any lingering doubt in the court's view of what

a "reasonably fair estimate" of lost profits proven by a

preponderance of the evidence is in this case.

Ricoh's lost profits through December 3, 1995, unadjusted

for additional incremental expenses, were approximately

$8,578,383. The court finds, therefore, that a reasonably fair

estimate of plaintiff's lost profits damages through December 3,

17 1995, is $7,548,977, and awards that amount. In addition, the

court awards damages for the period from December 4, 1995,

through April 30, 1996, as calculated by Ricoh, but also reduced

by an identical 12% for the same reasons, and further based on

the actual number of infringing sales made by Nashua during the

relevant time preceding the injunction (Nashua agreed to produce

that available information promptly).2

Ricoh has not proved by clear and convincing evidence that

Nashua's infringement was willful (see, e.g.. Memorandum

Decision, March 31, 1997, pp. 57 - 58) and no enhancement of

damages is warranted. Additionally, this is not an "exceptional

case" warranting an award of attorney's fees and the court

declines to make such an award. Nashua relied on good faith

legal advice in deciding that its competing products infringed

neither the '730 nor the '603 patent.3

Plaintiff is awarded prejudgment interest at the average

prime rate during the relevant periods of infringement,

compounded guarterly (See footnote 2). See General Motors Corp.

v . Devex Corp.,

(1983 ) (prejudgment interest

21he parties ought to be able to agree on the calculation, but if necessary the court will entertain an appropriate motion to amend the judgment.

31he liability issues are currently pending review on appeal in the United States Court of Appeals for the Federal Circuit.

18 should be awarded absent some justification for withholding such

an award.) Plaintiff is also awarded its costs and post-judgment

interest as allowed by statute.

SO ORDERED.

Steven J. McAuliffe United States District Judge

September 30, 1998

cc: Robert T. Greig, Esg. Lawrence B. Friedman, Esg. Stephen E. Weyl, Esg. Stephen B. Judlowe, Esg. Mark C. Rouvalis, Esg.

19