## Facts

- State Industries owned U.S. Patent No. 4,447,377, claiming a method for insulating water-heater tanks with polyurethane foam using a plastic “envelope” to contain foam and keep foam out of protected areas.
- Mor-Flo Industries and its subsidiary used a foaming process employing a cylindrical plastic sleeve pulled over the tank, with fiberglass around the combustion chamber, and the sleeve taped in place.
- In the liability phase, the district court found the ’377 patent valid and infringed (literally and under the doctrine of equivalents), and that determination was previously affirmed.
- In the damages phase, the district court awarded State lost profits on approximately 40% of Mor-Flo’s infringing sales (tied to State’s proven market share and capacity) and a 3% reasonable royalty on the remaining 60%.
- The district court found infringement was not willful and denied enhanced damages and attorney’s fees.
- Mor-Flo appealed the lost-profits and royalty awards; State cross-appealed the non-willfulness finding and the royalty rate.

## Issues

1. Whether the district court permissibly used a market-share allocation to award lost profits on only a portion of infringing sales.
2. Whether the 3% reasonable royalty on the remaining infringing sales was supported by the evidence and not clearly erroneous.
3. Whether the district court’s non-willfulness finding could stand given potentially conflicting findings about Mor-Flo’s knowledge, copying, and reliance on counsel.

## Decision

- Affirmed the award of lost profits on approximately 40% of Mor-Flo’s infringing sales based on State’s proven market share and capacity.
- Affirmed the 3% reasonable royalty on the remaining approximately 60% of infringing sales.
- Vacated the judgment of non-willfulness and remanded for reconsideration because the trial court’s willfulness-related findings were internally inconsistent.

## Legal Principles

- Lost profits in patent cases require proof of a reasonable probability that, but for infringement, the patentee would have made the sales; where the record supports only partial capture, a market-share allocation may be used.
- A court may combine remedies by awarding lost profits for the portion of sales the patentee likely would have made and a reasonable royalty for the remaining infringing sales.
- Reasonable royalty determinations are fact-intensive and are reviewed for clear error; a rate will be upheld when supported by record evidence and within the trial court’s discretion.
- Willfulness findings must be consistent with the underlying factual determinations; a finding suggesting the infringer “should have known” or patterned its conduct after the patentee may conflict with a non-willfulness conclusion based on good-faith reliance on counsel, warranting reconsideration.

## Conclusion

The Federal Circuit upheld a damages award that used market share to limit lost profits and applied a reasonable royalty to remaining infringing sales, but required reconsideration of willfulness where the trial court’s findings about knowledge and copying could not be reconciled with its non-willfulness determination.


State Indus., Inc. v. Mor-Flo Indus., Inc., 883 F.2d 1573 (Fed. Cir. 1989)