colors," and "the colors of the markers in the kits were irrelevant to the kits' marketability." (Id. at 37-38). However, Pentech's own refusal to "simply remove" the markers of one of the primary colors indicates that the patented product's available spectrum of markers is an advantageous feature. When Pentech finally decided to sell a non-infringing product, they did not "simply remove" all markers having yellow dye. Instead, they stopped selling the erasable marker kits. Clearly, the proven success of the markers, and Pentech's own actions, demonstrate that the patented product was very valuable.
The twelfth factor (the customary royalty in the particular business) is neutral. There was no evidence submitted by either party as to the customary licenses granted for patents on similar or analogous products.
The thirteenth factor (the portion of the profit attributed to the invention) favors a high royalty. The patent covered the entire product as sold by Pentech--that is, the patent was for a kit of markers having the same characteristics as that sold by Pentech. The infringing item was not merely a part of a larger product, but comprised the entire product. Thus, there is no non-patented aspect of the product to which some of Pentech's profit may be attributed. Therefore, the entire profit generated by the product may be attributed to the patent.
The fourteenth factor, the opinion testimony of qualified experts, favors a high royalty. I discount the opinion testimony and affidavit of Pentech's expert, Mr. Pearlman, because I find that he lacked credibility. His conclusions are based on untenable assumptions and are often preposterous. For example, Mr. Pearlman asserts that the patented product had little value. The first flaw in this conclusion is that Mr. Pearlman is looking at the current value of the patented product, rather than the value at the time the hypothetical negotiation would have occurred. Moreover, the evidence cited above clearly belies his conclusion. Pearlman also asserts that "Pentech and Paradise were not competitors at all, much less 'direct competitors.'" (Id. at 13). However, Paradise lost sales and had to lower its prices because of competition from Pentech. (Hockroth Tr. 96-97; 117; 119-20). In fact, Kenneth Ware, a stationery buyer and Pentech's expert witness, testified at trial that he had purchased ERASABLES from Pentech but rejected Paradise's sales efforts primarily because of the price. (Tr. 326-27). Also, a space-planning chart from a Woolworth department store shows the Pentech and Paradise markers on the same display. (Tr. 88-89). Mr. Pearlman's lack of candor is also apparent in his insistent effort to convince me that the patent never should have issued. It is a clear matter of patent law that when determining a reasonable royalty, the patent is presumed valid. On the issue of willfulness, Mr. Pearlman asserts that I should find that Pentech was not a willful infringer because "Mr. Kane's opinions [letters] were on their face thorough and well reasoned." (Pearlman Affid. P 87). Mr. Pearlman overlooked the fact, however, that Pentech continued to sell the known infringing product during the "running change." As for the issue of lost profits, Mr. Pearlman wrongly assumed that there were "a number of substitutes for the patented product during the relevant period." (Pearlman Affid. P 70). Pentech failed to prove that any of the alleged substitutes were non-infringing or that they contained the characteristics that made the patented invention profitable.
In contrast to Pearlman's opinions, Paradise's expert on the issue of a reasonable royalty, George H. Gerstman, Esq. is credible. He proposes that the best evidence of a reasonable royalty is the amount Paradise agreed to pay All-Mark. Accordingly, Mr. Gerstman proposes a royalty of one-half of Pentech's profits.
The fifteenth factor--the amount that a prudent licensee would have been willing to pay and yet be able to make a reasonable profit and the amount that would have been acceptable by a prudent patentee who was willing to grant a license--also favors a royalty of half of Pentech's net profits. According to Paradise, Pentech's profit margin on its sales was 48 percent. (Lubow Decl. P 7). Pentech argues that its profit margin was only 38.4%. (Affidavit of Sheldon M. Whitman P 9). At trial, however, I enforced Judge Leval's discovery order and excluded the affidavit of Pentech's expert witness as to the amount of damages, Sheldon M. Whitman, to the extent it relied on his audit work papers.
Accordingly, I must accept Paradise's calculation of Pentech's profit margin. At a royalty rate of one-half of Pentech's profits, Pentech would retain a profit of 24%. Thus, I find that the reasonable royalty is one-half of Pentech's profits on sales of infringing markers.
To calculate Pentech's royalty amount, I need only multiply Pentech's profit margin by its net sales and then divide by two. Paradise alleges that Pentech's sales of ERASABLES totaled $ 4,300,000 during the period of infringement. Pentech admits that Paradise's calculation of its total sales was correct except that Paradise should have reduced the amount by the number of non-infringing sales made during July 1987. (Affid. of Whitman at P 8). According to Pentech, Paradise should have pro-rated the July 1987 sales to account for the fact that sales prior to July 21, 1987, were not infringing. Paradise argues that Pentech's sales could have occurred at any point during the month of July, but Pentech failed to produce documentation showing the actual sales dates. I hold that Pentech must suffer the result of the inaccuracy caused by its lack of documentation. See Sensonics, Inc. v. Aerosonic Corp., 81 F.3d 1566, 1572-73 (Fed. Cir. 1996) ("if evidentiary imprecision is due to inadequacy of the infringer's records, uncertainty is resolved against the wrongdoer."). Accordingly, Paradise's total infringing sales were $ 4,300,000.
Pentech also asserts that the figure used by Paradise was gross sales and not net sales. Pentech proposes a reduction for sales returns and allowances. This reduction, however, is based on the affidavit of Mr. Whitman, which I had to exclude from evidence due to Pentech's willful failure to supply documentation to Paradise. Accordingly, I must accept Paradise's calculation of net sales as $ 4,300,000.
The profit earned by Pentech, therefore, was 48% of $ 4,300,000 or $ 2,064,000. A royalty of fifty percent of net profits, therefore, is $ 1,032,000. Since this amount exceed Paradise's proven lost profits, Paradise is entitled to recover the reasonable royalty of $ 1,032,000.
An award of prejudgment interest is required to compensate Paradise "for the use of its money between the date of injury and the date of judgment." Oiness v. Walgreen Co., 88 F.3d 1025, 1996 U.S. App. LEXIS 16031, 1996 WL 366582 at *8 (Fed. Cir. 1996) (affirming an interest rate of eight percent); King Instruments Corp. v. Perego, 65 F.3d 941, 953 (Fed. Cir.) (affirming a rate of eleven percent), reh'g denied, 72 F.3d 855 (1995), cert. denied 134 L. Ed. 2d 778, 116 S. Ct. 1675 (1996); Sensonics, 81 F.3d at 1574 ("prejudgment interest is the rule, not the exception.").
Pentech seeks a rate equal to the prime rate plus three percent, compounded annually. The interest rates over the relevant years would thus range from 9.00% to 13.88%. (Exh. BBX-4). I find that rate equal to the prime rate plus 1.00%, compounded annually, is appropriate to compensate Paradise for Pentech's use of its money. The prejudgment interest is to be calculated on the basis of the damages, in this case the reasonable royalty amount of $ 1,032,000.
Paradise has requested enhanced damages under Section 284. The Court of Appeals for the Federal Circuit has identified several factors which should be considered by a court when deciding whether to award enhanced damages: (1) whether the infringer deliberately copied the ideas or design of another; (2) whether the infringer formed a good-faith and soundly-based belief that either the patent was invalid or the product was not infringing; (3) the infringer's behavior as a party to the litigation; (4) the infringer's size and financial condition; (5) the closeness of the case; (6) the duration of the infringer's misconduct; (7) remedial action by the infringer; (8) the infringer's motivation for harm; and (9) whether the infringer attempted to conceal its misconduct. Read Corp. v. Portec, Inc., 970 F.2d 816, 826-27 (Fed. Cir. 1992).
A finding of willful infringement supports, but does not compel enhanced damages. Id. at 826; Brooktree Corp. v. Advanced Micro Devices, Inc., 977 F.2d 1555, 1581 (Fed. Cir. 1993) (en banc) (affirming denial of enhanced damages); see also National Presto Indus. v. West Bend Co., 76 F.3d 1185, 1193-94 (stating that award should "reflect the interest of justice in adjusting the damages appropriate to the culpability of the acts of infringement"). Nonetheless, the circumstances are so egregious that enhanced damages are warranted.
The court in Read explained a potential infringer's duty as follows:
One who has actual notice of another's patent rights has an affirmative duty to respect those rights. . . . That affirmative duty normally entails obtaining advice of legal counsel . . . . Those cases where willful infringement is found despite the presence of an opinion of counsel generally involve situations where opinion of counsel was either ignored or found to be incompetent.