author: GILMORE, District Judge.

text:
    ROLLS-ROYCE LIMITED, 65 Buckingham Gate, London, SWIE 6AT, England, Plaintiff, and Renishaw plc, Gloucester Street, Wottonunder-Edge Gloucestershire, GL 12 7DN, England, Plaintiff, v. GTE VALERON CORPORATION, 750 Stephenson Highway, Troy, Michigan 48007, Defendant.
    No. 83-CV-1497-DT.
    United States District Court, E.D. Michigan, S.D.
    Dec. 4, 1985.

      Parkhurst & Oliff by James A. Oliff, William P. Berridge, Alexandria, Va., Dickinson, Wright, Moon, Van Dusen & Freeman by James A. Samborn, Detroit, Mich., for plaintiff.
    Harness, Dickey & Pierce by Don K. Harness, G. Gregory Schivley, Brimingham, Mich., for defendant.
   OPINION

GILMORE, District Judge.

Throughout trial of this case, several patents and prior art references have been discussed and referred to in abbreviated form. This opinion will also refer to the pertinent patents and references in abbreviated form. The following is a list of the full titles of the patents and references relevant here, together with their abbreviations.

The patents in suit are:
U.S. Patent No. 4,153,998 to McMurtry Known as the ’998 Patent
U.S. Patent No. 4,397,093 to McMurtry Known as the '093 Patent
U.S. Patent No. 4,451,988 to McMurtry Known as the ’988 Patent
U.S. Patent No. 4,473,955 to McMurtry Known as the '955 Patent
The Defendant’s Patent, used at trial to describe the Defendant’s Accused Device, is:
U.S. Patent No. Known as Cusack ’987 4,451,987 to Cusack
The Prior Art references are:
Automatologie, Wolfgang Schmid, 1952 Known as Automatologie and as Schmid ’52
Fuhlergesteuerte Mashinen, Schmid & Oik 1939 Known as Maschinen and as Schmid ’39
German Patentschrift No. 732,165 to Mueller Known as Mueller and as Mueller '165
U.S. Patent No. 3,541,924 to Gambin Known as Gambin and as Gambin ’924
German Auslegeschrift 24 40 692 to Kochsiek Known as Kochsiek
U.S. Patent No. 3,566,479 to Pascoe, et al. Known as Pascoe
U.S. Patent No. 2,655,630 to Kelk Known as Kelk
The other McMurtry patents are:
U.S. Patent No. Known as ’613 1,447,613 to McMurtry
U.S. Patent No. Known as ’925 4,288,925 to McMurtry
U.S. Patent Application Known as '831 398831

I

This action is a patent action in which plaintiff seeks injunction and damages for infringement of specified claims of four of plaintiffs patents. The claims involved are claim 15 of the ’998 Patent; Claims 1 & 3 of the ’093 Patent; claim 1, 3, 5, 7, & 8 of the ’988 Patent; and claim 2 of the ’955 Patent. The latter three patents will be known hereafter as the ’093 Chain Patents.

All of the patents are issued in the name of inventor David McMurtry, and are jointly owned by plaintiffs. The basic issues before the Court are patent infringement and validity.

The patents in suit are directed to devices known as touch-trigger probe heads. These heads are used for detailed measurements of parts and machine tool quality control.

A touch-trigger probe head having a stylus extending from it is placed on the end of a movable arm, and means are provided for monitoring the location of the stylus. The probe head is moved towards a selected surface (such as a hole or projection) of an object, until contact is made between the stylus and the surface. A signal is then triggered and, from the known location of the probe head, the location of the surface is determined. The probe head is then moved away from the object, moved to a second target surface, and the procedure is repeated until all desireable measurements have been completed. It is essential that the measurements be exceedingly accurate, and those in plaintiff’s devices and the infringing device are accurate to within 5 millionth of an inch.

The accused product — or the infringing device — is a touch trigger probe manufactured by defendant GTE Valeron, the Cu-sack '987 patent.

The '998 Patent and the ’093 Chain Patents were granted upon inventions made by McMurtry. Realizing the importance of his patents and inventions, McMurtry left Rolls-Royce to form his own company, now known as plaintiff Renishaw, to capitalize on his inventions. The inventions of the asserted patent claims of McMurtry comprise Omni-directional touch-trigger probe heads that revolutionized the machine tool and coordinate measuring machine industry. With the claimed devices, operations that previously consumed large amounts of operator time and required very complex and fragile instrumentation can now be performed quickly and automatically with little danger of breakage or errors. The probe heads are relatively easy and inexpensive to manufacture, do not require high precision in their construction, and are difficult to damage.

Plaintiff has had great commercial success with the patents, and Renishaw has developed into a multimillion dollar industry from a basement operation, using a phone booth as the only telephone.

Claim 15 of the ’998 Patent defines a touch-trigger probe head having a rest position positively defined by axial kinematic constraints, combined with a directly acting transverse constraint and very precise triggering means based on the seats between the relatively stationary housing and the movable stylus holding member. The probe head provides three-dimensional operation, and is very accurate in a single measurement, and produces highly repeatable results over a large number of measurements.

The claims of the ’093 Chain Patents are improvements on the ’998 Patent. The probe heads there show improved performance derived from the natural ability of a flat plate to rest securely on a kinematically defined axial rest position, and on the ability of a substantially planar resilient member to locate the plate at the same repeatable lateral position. This mechanical positioning may be used in either a 5-way or 6-way probe head construction.

It is the claim of the plaintiff that defendant has appropriated all of the elements of the asserted claims in both groups of patents in its line of probe head products.

Defendant denies infringement, arguing primarily that the claims at issue are limited in scope and that the defendant’s accused device does not practice the true scope of the asserted claims. The burden to prove infringement is on the plaintiff. Proof of infringement must be by a preponderance of the evidence. Envirotech Corp. v. Al George, Inc., 730 F.2d 753 (Fed.Cir. 1984).

Defendant also denies the validity of the patents, arguing that both ’998 and the ’093 Chain are obvious over prior art, and that the ’093 Chain is invalid for violations of 35 U.S.C. § 112, and for double patenting.

35 U.S.C. § 282 provides:

A patent shall be presumed valid. Each claim of a patent (whether in independent or dependent form) shall be presumed valid independently of the validity of other claims; dependent claims shall be presumed valid even though dependent upon an invalid claim. The burden of establishing invalidity of a patent or any claim thereof shall rest on the party asserting it.

Thus, there is a statutory presumption of validity of the patents in suit. The burden of proof of invalidity is on defendant. Proof of invalidity must be made by clear and convincing evidence. Jones v. Hardy, 727 F.2d 1524 (Fed.Cir.1984).

Defendant has also raised the defense that the patents are unenforceable because plaintiffs engaged in inequitable conduct before the Patent Office. The burden to prove this defense by clear and convincing evidence is on the defendant. J.P. Stevens & Co., Inc. v. Lex Tex Ltd., Inc., 747 F.2d 1553 (Fed.Cir.1984).

Finally, defendant has counterclaimed for unfair competition. The burden of proof on this counterclaim is on the defendant.

II

First, the Court will consider Claim 15 of the ’998 Patent.

Valeron defends against the allegation of infringement by claiming that Claim 15 is limited to convergent surfaces. Since the Valeron probe does not employ convergent surfaces, Valeron argues, it has not infringed Claim 15 of the ’998 Patent.

However, Claim 15 is a broad claim not limited to convergent surfaces embodimerits. This is shown by the following evidence:

1) Claim 15 is readable on Fig. 1-3 (convergent surfaces) and on Fig. 4-8 of the ’998 Patent.

2) Claim 15 is a parent claim to Claim 16, which reads on Fig. 4-7, which is not a convergent surfaces claim.

3) The file history (Exhibit 83) shows that Claim 43 of the ’925 Patent application, which was the predecessor claim to Claim 15, was explicitly brought to the examiner’s attention as being directed to Fig. 4-8, the non-convergent surfaces embodiments.

4) Defendant’s expert witness Barker testified that Claim 15 is not limited to Fig. 1-3.

5) Defendant’s expert witness Barker testified that Claim 15 is not literally limited to convergent surfaces.

6) Additionally, defendant admitted that Claim 15 was not limited to convergent surfaces in its Answer to Interrogatory 224(e).

Thus, the Court finds that Claim 15 is not limited to convergent surfaces, but rather is a broad claim for a repeatable three-dimensional touch-trigger probe head covering both convergent surfaces and equivalent structures.

Valeron defends by arguing that if Claim 15 is not limited to convergent surfaces, then it is invalid because it is obvious over prior art. In particular, Valeron alleges that Claim 15 is obvious over the following:

1) “Automatologie” (Schmid ’52)

2) “Maschinen” (Schmid & Oik) (Schmid 39)

3) Mueller 165

Plaintiff responds that those 3 pieces of prior art are not relevant to Claim 15, and that they are no more relevant than Gambin ’924, which was considered by the Examiner.

Under 35 U.S.C. § 103, a patent is invalid if the differences between the subject matter sought to be patented and the prior art are such that the subject matter as a whole would have been obvious at the time the invention was made to a person having ordinary skill in the art.

The Court must examine:
1) the scope and content of the prior art;
2) the claims at issue, and
3) the level of ordinary skill in the prior art.

Secondary considerations such as commercial success, long-felt but unsolved needs, and commercial acquiescence can also be relevant. See Graham v. John Deere Co., 383 U.S. 1, 86 S.Ct. 684, 15 L.Ed.2d 545 (1966).

It is important to emphasize, however, that one cannot rely on hindsight in determining whether the invention was obvious. Multifastener Corp. v. MacLean-Fogg Co., 572 F.Supp. 418 (E.D.Mich.1983).

The German prior art argued by defendants did not make Claim 15 of the ’998 Patent obvious for the following reasons:

The Court will first consider Automatologie & Maschinen (Schmid 52 & 39).

1) They are tracing devices designed primarily for milling rather than probes designed primarily for coordinate measuring. Although they “sense engagement” with the model to be traced, this is not equivalent to sensing and measuring in space the position of a work piece.

2) They are devices of which great accuracy was not expected or required. Exhibit 151, Translation of Automatologie, Schmid 52.

3) Defendant’s expert Professor Fisher testified that they could be accurate to a thousandth, or to a fraction of that, but that the accuracy needed for a coordinate measuring machine was 50 millionths.

4) They taught that switching at the seats was undesirable (due to a problem with sparking). This is directly contrary to the ’998 Patent, which in part achieves its great accuracy by switching at the seats. Thus, the reference pointed in an opposite direction than that taken by the patent in suit.

5) They do not clearly teach 3 points of mechanical contact to achieve a positively defined rest position. Plaintiff’s expert Professor Duffie testified that the reference discloses 6 contact elements, that is, in order for the circuit to begin and end on the housing, he testified that at each of 3 locations on the housing there must be 2 contact elements. These pairs are bridged by contacts on the movable member.

Plaintiff’s expert Sears testified that another possible reading of the reference required 4 contact elements for the circuit to begin and end on the housing.

Defendant’s expert Professor Fisher admitted that Professor Duffie’s interpretation was reasonable, although he believed there were 3 contacts because the text refers to 3 contacts. He finally admitted that nothing in the reference taught the idea of turning pairs of contacts into convergent surfaces.

Thus, the references are, at best, ambiguous as to the number of contacts. They do not teach 3 points of mechanical contact to achieve a rest position.

6) They do not teach transverse constraint of the stylus because there is a gap between the movable member and the housing. While narrowing the gap could obviously improve accuracy, eliminating it would prevent the reference from functioning at all.

Defendant relies heavily on Fig. 8 of the ’998 Patent, which shows an embodiment relying in part on the wall of the housing for transverse constraint. However, the testimony of plaintiff’s experts Duffie and Sears is that in Fig. 8 there is no gap, but rather a friction fit between the housing and the curved periphery of the movable member that allows the movable member to move.

In fact, defendant’s expert Professor Fisher admitted that the circle diagram on Fig. 51 of Automatologie (Schmid ’52) indicated the movements of the stylus tip before contact is broken, and therefore did not suggest a precise location of the stylus except within a certain tolerance variation. At his deposition, Professor Fisher testified this fact kept the reference from being a good measuring device.

Thus, it is clear that the Automatologie and Maschinen references (Schmid ’52 and Schmid ’39) do not teach switching at the seats, a positively defined rest position achieved by 3-point contact, nor transverse constraint of the stylus. Claim 15 of the ’998 Patent is not obvious in view of them.

Nor is claim 15 of ’998 obvious in view of Mueller ’165 because that reference is a tracer with a different and inaccurate switching means, i.e., a mercury switch requiring adjustment of the screws to compensate for the expansion of the mercury. Defendant’s expert, Professor Fisher, admitted that a mercury switch is not a “fluidic” switch as described in the ’998 Patent.

In addition, the commercial success of the ’998 Patent supports the finding of non-obviousness. Renishaw, which started operation with a public telephone, in a few years of existence has developed to the point where today it employs hundreds of people manufacturing and distributing touch-trigger probes around the world. It has sold many millions of dollars worth of the patented inventions, and is the world’s largest producer of touch-trigger probe heads, supplying most of the machine tool and coordinate measuring machine industries. Plaintiff’s touch-trigger probe heads have had extraordinary commercial success. It is clear that commercial success is a secondary consideration in determining whether the invention was obvious. See Simmons Fastener Corp. v. Illinois Tool Works, Ind., 739 F.2d 1573 (Fed.Cir.1984).

Further, evidence from Mr. Wright & Mr. Deis indicated that the McMurtry probe fulfilled long-felt but unfulfilled needs in the industry. Finally, industry acquiescence was shown in that DEA obtained a license under the patent, and in that one of defendant’s Japanese customers required indemnification from defendant under plaintiff’s corresponding Japanese patent.

Thus, the secondary considerations point to non-obviousness.

Therefore, it is clear that the ’998 Patent is valid.

Ill

The Court now turns to the question of infringement. As the court pointed out in Multifastener Corp. v. MacLean-Fogg Co., supra:

There are two methods of determining whether a patent has been infringed. First, a device can “literally” infringe the patent. To determine whether there is literal infringement, the words of the claim in the patents must be compared with the accused devices. Second, if the two products are “equivalent”, there is infringement. If the accused device performs substantially the same function in substantially the same way to obtain the same result as the patented device, they are equivalent. Armco, Inc. v. Republic Steel Corp., 707 F.2d 886 (6th Cir.1983); Acme Highway Products Corp. v. D.S. Brown Co., 473 F.2d 849 (6th Cir.1973), cert. denied 414 U.S. 824, 94 S.Ct. 125, 38 L.Ed.2d 57 (1973); Graver Tank & Mfg. Co. v. Linde Air Products Co., 339 U.S. 605, 70 S.Ct. 854, 94 L.Ed. 1097 (1950).

Id. at 432.

In this case, both plaintiff’s experts and defendant’s experts have testified that the words of Claim 15 can be literally read on Valeron’s accused device.

Professor Duffie testified that Claim 15 of the ’998 Patent is readable on Fig. 6 & 7 of the Cusack patent used here to exactly describe Valeron’s probe, and defendant’s expert Barker testified that Claim 15 reads literally on Valeron’s probe.

Thus, defendant has literally infringed Claim 15 of the ’998 Patent.

IV

The Court now turns to the ’093 Chain Patents.

Defendant argues that the scope of the ’093 Chain is limited to 6-way probes, and that, therefore, its 5-way probe does not infringe on the ’093 Chain Patents.

However, it is clear that a claim for a 6-way probe inherently includes the capability of a 5-way probe. In addition, Fig. 6 of the ’093 claim discloses a 5-way probe since the ball stylus tip shown cannot be used in a 6-way operation. Further, defendant did not attempt to distinguish the Cusack Patent from the McMurtry Patents on this basis.

The status of Valeron’s probe as a 4-way probe does not put it beyond the scope of the claims of the ’093 Chain.

Valeron further argues that Claims 1 and 3 of the ’093 Patent; Claims 1, 3, 5, 7, and 8 of the ’988 Patent; and Claim 2 of the ’955 Patent, otherwise known as the ’093 Chain, were obvious in view of the following prior art: Kelk Patent, Pascoe Patent, and '613 U.K. to McMurtry.

Essentially, defendant argues it would have been obvious to substitute a planar centering member for the spring-loaded ball in U.K. Patent ’613 in view of the diagrams shown in Kelk & Pascoe.

Plaintiff denies obviousness, and argues that claims of the ’093 Chain were no more obvious over the Kelk & Pascoe prior art than over Kochsiek Patent examined by the examiner.

The claims of the ’093 Chain are not obvious over the prior art for the following reasons:

1) The Kochsiek, Kelk, and Pascoe prior art are proportional probes with transducers that do not rely upon a mechanical rest position for accuracy.

2) The diaphrams shown in Kochsiek, Pascoe & Kelk do not suggest that they can be used to help move a stylus from a rest position or help return it to a rest position.

3) It is evident that the substitution of a planar spring for the spring-loaded ball shown in U.K. ’613 Patent (which corresponds to Fig. 7 of the ’998 Patent) was not obvious in that defendant itself, in prosecuting the Cusack Patent, cited the ’998 Patent as teaching a rest position and cited references teaching planar springs, and yet argued in its patent prosecution that it was not obvious to put these things together. That is to say, defendant’s own patent, ’987 to Cusack, reinforces the non-obviousness of the ’093 Chain.

Valeron also argues the ’093 Chain is invalid under 35 U.S.C. § 112 because ’093 Claim 1 can only be read onto its embodiment in Fig. 6 if the movable member is assumed to consist of several parts, i.e. 112, 123, 122, 114, and spring 117.

However, defendant’s expert Barker agreed with plaintiff’s experts that it is possible in a patent claim for the word “member” to refer to a group or composite of parts. Defendant has offered no credible reason why such a reading of “movable member” here to include a composite of parts is not reasonable.

Neither is there any basis for defendant’s contention that the term “mean sheet plane” renders Claim 1 of the ’093 Chain incomprehensible.

Therefore, Section 112 does not render the ’093 Chain invalid.

V

Defendant has asserted that the claims in suit of the ’093 Chain are invalid for double patenting over Claim 18 of the ’925 Patent to McMurtry. This allegation is one of obviousness-type double patenting. Obviousness-type double patenting is a judicially created doctrine, the purpose of which is to prevent the extension of the term of a patent by prohibiting the issuance of claims in a second patent that are not patentably distinct from the claims of the first patent.

Both plaintiff and defendant have cited the same legal standard for the valuation of the double patenting defense. In re Longi, 759 F.2d 887 (Fed.Cir.1985), cited by defendants, stated:

The public should ... be able to act on the assumption that upon the expiration of the patent it will be free to use not only the invention claimed in the patent but also modifications or variants which would have been obvious to those of ordinary skill in the art ... (emphasis added) (quoting In re Zickendraht, 319 F.2d 225, 232 (C.C.P.A.1963).)

Id. at 892-93.

Similarly, Carman Industries, Inc. v. Wahl, 724 F.2d 932 (Fed.Cir.1983) cited by plaintiff says:

... [T]he test is whether the subject matter of the claims of the patent sought to be invalidated would have been obvious from the subject matter of the claims of the other patent, and vice versa.

Id. at 940.

Thus, the test of this defense is whether the claims of the ’093 Chain are obvious from the subject matter of Claim 18 of the ’925 Patent, and whether Claim 18 of the ’925 Patent is obvious from the subject matter of the ’093 Chain.

Despite careful review of the record, this Court has been unable to find any evidence leading to the conclusion that the ’093 Chain and Claim 18 of the ’925 Patent are obvious relative to each other. In fact, defendant has presented no evidence at all regarding the content of Claim 18 of the ’925 Patent. Defendant has not compared Claim 18 of the ’925 Patent with the claims in suit of the ’093 Chain, and there is no evidence on the record from which this Court can conclude that either the ’093 Chain was obvious, given the ’925 Patent, or that the ’925 Patent would have been obvious given the ’093 Chain.

Defendant hinges its double patenting defense on the allegation that, after the expiration of the ’925 Patent, the public will still be unable to produce a 6-way probe with a planar spring (as described in Claim 18 of the '925 Patent) because such a probe will infringe the claims of the ’093 Chain. However, this state of affairs does not necessarily constitute any unlawful extension of a monopoly. As the Court of Customs and Patent Appeals said in Application of Heinle, 342 F.2d 1001 (C.C.P.A. 1965):

The issuance of a patent is no guarantee or even a representation that everything disclosed in it is immediately free of patent or other restraints legally created under the law. Should there be such other patents still in force when a patent expires, the monopoly of the expiring patent is not “extended”; that monopoly ends and any other patents which may affect the rights of the public to use something the expiring patent discloses stand on their own legal foundations. The expiration of a patent right is not a guarantee of a right to use. The right to make, use or vend any given thing may be, and often is, subservient to several patents expiring at different times.

Id. at 1005.

Thus, the defense of double patenting must fail.

VI

Turning to the infringement issue, it is clear that Claims 1 & 3 of the ’093 Patent; Claims 1, 3, 5, 7, 8 of the ’988 Patent, and Claim 2 of the ’955 Patent read literally on Valeron’s probe, and it should be noted that defendant’s expert Barker admitted that the claims of the ’093 Chain read literally on Valeron’s probe.

Therefore, the accused device infringes the ’093 Chain Patents.

VII

Defendant next claims invalidity of the ’998 Patent because of anticipation of Claim 15 by prior publications. Anticipation under 35 U.S.C. § 102 requires the disclosure in a single prior art reference of each element of the claim under consideration. Multifastener Corp. v. MacLean-Fogg Co., Supra. The Court has already held that the prior art references do not render Claim 15 obvious. For the same reasons, they do not disclose each element . of Claim 15, and cannot constitute anticipation under Section 102.

Defendant also claims anticipation by the device made and sold by Lamerson.

35 U.S.C. § 102 provides in pertinent part:

A person shall be entitled to a patent unless:
a) the invention was known or used by others in this country, or patented or described in a printed publication in this or a foreign country before the invention thereof by the applicant for patent, or
b) the invention was patented or described in a printed publication in this or a foreign country or in public use or on sale in this country more than one year prior to the date of application for patent in the United States, or
g) before the applicant’s invention thereof the invention was made in this country by another who had not abandoned, suppressed, or concealed it. In determining priority of invention there shall be considered not only the respective dates of conception and reduction to practice the invention, but also the reasonable diligence of one who was first to conceive and last to reduce to practice, from a time prior to conception by the other.

The first United Kingdom patent application was made on September 21, 1972, and the grandfather application to the ’998 Patent was the ’831 Patent, filed September 19, 1973. Therefore, the crucial dates for anticipation under any of the paragraphs of Section 102 set forth above is either September 19, 1972 or September 21, 1972.

For a prior patent or other publication to be an anticipation it must bear within its four corners adequate directions for the practice of the patent invalidated. See Dewey and Almy Chemical Co. v. Mimex Co., 124 F.2d 986 (2d Cir.1942). To anticipate a patent, a device must be identical to the patent in question, and must have been reduced to practice in this case before September 19 or September 21, 1972. The burden of proof of establishing anticipation rests upon the defendant. The defendant concedes that its burden is that of proving anticipation by clear and convincing evidence.

In Lockheed Aircraft Corp. v. United States, 553 F.2d 69, 213 Ct.Cl. 395 (1977), the Court of Claims said:

Just as an inventor ... faces a heavy burden in proving his conception and diligence, it is generally recognized that prior invention, use or knowledge, imposes on the party asserting it the requirement of clear and satisfactory proof beyond a reasonable doubt, (citations omitted.)
Indeed, the oral testimony of witnesses, speaking only from memory in regard to past transaction has, in the absence of contemporaneous documentary or physical evidence, consistently been found to be of little probative value, (citations omitted) Such uncorroborated testimony is insufficient to show anticipation, within the meaning of 35 U.S.C. 102, of an issued patent.

Id. at 75.

The first question is whether the Lamer-son device totally anticipates the Claim 15 of the ’998 Patent. It is argued that, because a coil spring is not used in the Lamerson device as depicted in defendant’s Exhibits 459 A & B, it does not. It is clear, however, from the testimony that a coil spring could be used in the Lamerson device as depicted in Exhibits 459 A & B, and it is generally conceded that, were one used, it would anticipate the Claim 15 of the ’998 Patent.

However, a substantial question exists as to whether the Lamerson device claimed to have been made and sold in the early 1970’s actually had the internal construction depicted in Exhibits 459 A & B. Mr. Lamerson and Mr. Alaska testified that the device was so constructed. Mr. Gaynor, a former employee of Lamerson from May 1972 to June 1974, testified that he never saw a probe or probe drawing at Lamerson with a construction similar to that shown in Exhibits 459 A & B. Mr. Deis testified that, in his position at Bendix, he had the opportunity to see the Lamerson probe, shown to him by Mr. Alaska, and that the probe did not have the construction shown in Exhibits 459 A & B, nor did it have any form of convergent surfaces construction. There is no contemporaneous documentation of the internal construction of the Lamerson probe. Given this state of the evidence, defendant has not carried its burden to provide clear and convincing evidence that the construction of the Lamer-son probe anticipated McMurtry’s invention.

The evidence as to whether the Lamer-son device was reduced to practice before September 19 or September 21, 1972 is equally ambiguous, to say the least.

Mr. Lamerson’s testimony on the factual issues of when it was reduced to practice is clearly insufficient to show by clear and convincing evidence that any relevant devices were actually made or actually reduced to practice prior to these dates.

In addition, Mr. Lamerson testified that the device for the Ford Design Center was never delivered. As far as the device for Ford Livonia, the requested quote from Ford Livonia, signed by Mr. Lamerson on May 8, 1972, casts serious doubt on the proposition that the probe for Ford Livonia was reduced to practice in any relevant statutory period. This request (Exhibit 163) recites a best delivery date of October 15,1972 for the design and building of the probe at issue.

Mr. Lamerson’s testimony is that he made a quote to Ford Motor Company at Livonia on September 8, 1971, and that he made a quote to the Ford Design Center on September 1, 1971, but his testimony of this alone is clearly insufficient to establish by clear and convincing evidence that the invention was reduced to practice. There were no drawings of the exact device, and the law requires that there be some contemporaneous documentary or physical evidence to establish the reduction to practice within the required time period.

Therefore, it is clear that the patent is not invalid because of anticipation.

VIII

Defendant next contends that plaintiffs inequitable conduct renders all of the patents in suit unenforceable. Defendants claim that plaintiffs were aware of Automotology for more than a year before they cited it to the Patent and Trademark Office, and that, when they cited it, they failed to follow the procedures of the Manual of Patent Examining Procedure to make sure the examiner considered Automotology. They claim that, other than Lamerson’s omni probe, the Automotology and Maschinen references are the most material prior art to the asserted claim in the ’998 Patent. They also cite the long delay and improper citation of Automotology. They claim all of this is a clear indication of wrongful intent and inequitable conduct that should deny plaintiffs a patent. They claim that subjective good faith of a patent applicant or his attorney is not a defense to a charge of inequitable conduct, citing Argus Chemical v. Fiber Glass-Evercoat, 759 F.2d 10 (Fed.Cir.1985). They claim that, because of all of this, the patent should not be held valid because of inequitable conduct.

To find inequitable conduct premised upon alleged non-disclosure or misrepresentation of information to the Patent and Trademark Office requires at least clear and convincing proof of a threshold degree of materiality and intent. See J.P. Stevens & Co., Inc. v. Lex Tex Ltd., 747 F.2d 1553 (Fed.Cir.1984).

It is clear that even a material misrepresentation or omission is not sufficient to satisfy the intent element required to establish inequitable conduct. See Hycor Corp. v. Schlueter Co., 740 F.2d 1529 (Fed.Cir.1984). To establish inequitable conduct, there must be more than simple negligence, but some intent to mislead the Patent Office. See Reactive Metals & Alloys Corp. v. ESM, Inc., 769 F.2d 1578 (Fed.Cir.1985).

Here, the fact is that plaintiffs disclosed Schmid ’52 to the Patent and Trademark Office, and such an act is clearly not one of a party intentionally trying to conceal an obscure German publication from scrutiny. It is the act of a party making a good-faith effort to comply with its duties under the law.

Further, under Patent Office Rule 56, the duty on the patent applicant is to cite material prior art to the Patent Office. Patent Office Rule 56 says that information is material if there is a substantial likelihood that a reasonable examiner would consider it important in deciding whether to allow the application to issue as a patent. There is no duty to transmit to the patent office information that is not material to the examination of the application. Both Schmid ’52 and Schmid ’39 were merely cumulative prior art. They both disclose substantially the same device and share the same shortcomings with respect to Claim 15. They have the same relative lack of materiality with respect to the claimed invention. There was no need that both be cited, and the citation of Schmid ’52 is clearly more than sufficient to satisfy plaintiffs’ duty of disclosure. Furthermore, Schmid '52 and Schmid ’39 are, at best, cumulative to Gambin, which was considered by the patent examiner during the prosecution of Claim 15 of the ’998 Patent.

It is clear to the Court that, not only was plaintiff not fraudulent or grossly negligent, but it made every effort to comply with the duty of disclosure to the Patent and Trademark Offices. There is no clear basis for declaring the patents invalid because of inequitable conduct by the plaintiff.

IX

Defendant has filed a counterclaim against plaintiffs for unfair competition because plaintiffs started, and have continued, this litigation when they knew or should have known, according to the defendant, that at least Claim 15 of the ’998 Patent was invalid and/or not infringed by defendant. They say, in addition, that this conduct, coupled with Renishaw’s efforts to hire two key employees of defendant in the probe, constitutes unfair competition by plaintiffs entitling defendant to an accounting of any damages it has sustained. Defendant also claims that Renishaw’s entire course of conduct in attempting to eliminate Valeron as its sole competitor in the United States amounts to actionable unfair competition.

The Court finds no basis whatever for such contentions, and the claims are without basis in fact or law.

The alleged bad-faith assertion of patents has already been dealt with. The patents the Court has already held are valid and enforceable. The Court has already discussed the Schmid Patents, and finds no basis there for inequitable conduct. With reference to the alleged attempts to hire away defendant’s employees, it is clear that no employment offer was ever made or accepted. Even if one had been made, and one accepts as totally true James Robinson’s testimony, there still is no basis for claiming such unfair competition as to render the patents invalid. There is no basis whatever for defendant’s counterclaim, and no basis for claiming unfair competition because of it.

The counterclaim will be dismissed.

X

The next question the Court must consider is whether treble damages should be awarded, and whether attorney fees should be awarded to plaintiff. 35 U.S.C. § 284 provides that the Court may increase damages up to three times the amount found and assessed, and 35 U.S.C. § 285 provides:

The court in exceptional cases may award reasonable attorney fees to the prevailing party.

The Court will consider first the question of treble damages. The right to enhance damages is one that is directed to the sound discretion of the Court. Generally where the infringement was not willful and wanton, or knowingly and deliberately done, courts will not enhance damages.

A review of the cases shows that enhanced damages have not been allowed where a defense of invalidity was presented at trial with such force that the court decided infringement and validity only after careful study, or where there was an arguable basis for invalidity, and the court decided validity after careful consideration.

The Court finds that the record here does not support a determination that the defendants acted willfully and wantonly, or that they deliberately and intentionally infringed without investigating the validity and scope of the patent infringed. The defendant’s evidence shows that they did not intentionally copy plaintiff’s patent, but that they tried to design around it, and although their device clearly infringes plaintiff’s patents, the record here would not sustain a finding that such infringement was willful, wanton, deliberate and knowing. Therefore, damages will not be enhanced in this case.

The next question is whether attorney fees should be awarded under 35 U.S.C. § 285. It has generally been held that exceptional circumstances under Section 285 incorporate concepts of fraud, malice, and bad faith. The party seeking attorney fees has a significant burden of proving facts establishing the exceptional character of the case by clear and convincing evidence. This clear and convincing evidence must go to either inequitable conduct during the prosecution of the patent or misconduct during litigation. It is only when such proof has been made that the district court may exercise its discretion to make an award of fees. See Reactive Metals and Alloys Corp. v. ESM, Inc., 769 F.2d 1578 (Fed.Cir.1985.)

In Deyerle v. Wright Manufacturing Co., 496 F.2d 45 (6th Cir.1974) the Court said this:

Section 285 of Title 35 permits an award of attorneys’ fees in patent cases when the circumstances are exceptional. In Hoge Warren Zimmermann Co. v. Nourse & Co., 293 F.2d 779, 784 (6th Cir.1961), we noted that “exceptional circumstances have been interpreted as incorporating concepts of fraud, malice, bad faith and other similar concepts.” In Uniflow Manufacturing v. King-Seeley Thermos Co., 428 F.2d 335, 341 (6th Cir.), cert denied 400 U.S. 943, 91 S.Ct. 245, 27 L.Ed.2d 248 (1970), we indicated that an award of attorney fees will be upheld if the trial court specifically finds conduct that is unfair, in bad faith, inequitable or unconscionable____

Id. at 54-55.

See also Stewart-Warner Corp. v. City of Pontiac, Mich., 717 F.2d 269 (6th Cir. 1983), at page 279.

Here, the Court cannot find that the actions of defense counsel added up to bad faith, fraud, malice, or other similar concepts. The proofs in this matter just do not establish that defense counsel acted in such a way. Therefore it is clear that attorney fees may not be awarded.

For the reasons stated, a judgment may. be presented finding the ’098 Patent to be valid, and finding the ’093 Chain Patents to be valid. The judgment may also find that the Valeron defendant’s probe infringes Claim 15 of the ’998 Patent, Claims 1 and 3 of the ’093 Patent, Claims 1, 3, 5, 7, and 8 of the ’988 Patent, and Claim 2 of the ’955 Patent.

The judgment shall also contain an injunction against further infringement, and a reference to this Court’s Magistrate to sit as a Special Master for an accounting of sums owed for infringement by defendant. Plaintiff shall present such a judgment.

This opinion shall constitute findings of fact and conclusions of law required by FRCP 52(a).

      . Both plaintiff's expert Professor Duffie and defendant’s expert Professor Fisher have testified there is no important difference between these two references. There is considerable testimony that they are the same device portrayed in slightly different figures. Therefore, they can be discussed together.


source: Caselaw Access Project

author: MORAN, District Judge.

license: Public Domain

text:
    Louis MARTINO, et al., Plaintiffs, v. McDONALD’S SYSTEM, INC., et al., Defendants. Michael MARTINO, et al., Plaintiffs, v. McDONALD’S CORPORATION, a Delaware corporation, Defendant.
    Nos. 75 C 3455, 77 C 98.
    United States District Court, N.D. Illinois, E.D.
    Dec. 6, 1985.

      George F. Galland, Jr., Judson H. Miner, Charles Barnhill, Jr., Davis, Miner & Barn-hill, Chicago, 111., for plaintiffs.
    Louis C. Keller, Jr., Gary Senner, Earl Pollock, Sonnenschein, Carlin, Nath & Rosenthal, Chicago, 111., for defendants.
   MEMORANDUM AND ORDER

MORAN, District Judge.

These cases were originally filed to challenge, as a per se illegal tie-in contrary to Section 1 of the Sherman Act, 15 U.S.C. § 1, McDonald’s contractual requirement that franchisees must buy and use Coca-Cola as its only sugar-sweetened cola beverage. The standard franchise agreement restricts franchisee purchases to “approved menu items” and only Coca-Cola has been designated as an approved sugar-sweetened cola.

Mindful of developing case law, plaintiffs later amended their complaint to allege that the practice was, alternatively, an unreasonable restraint of trade. See Fortner Enterprises, Inc. v. United States Steel Corp. (Fortner I), 394 U.S. 495, 499-501, 89 S.Ct. 1252, 1256-1257, 22 L.Ed.2d 495 (1969). That led to a motion in limine for a ruling that the plaintiffs’ complaint, on its face and on the undisputed facts, is legally insufficient in charging a per se illegal tying arrangement. A ruling on that motion would have affected, at most, the way the case would be tried; continual skirmishing over whether the case was properly a class action at all was still in progress; and, after a ruling that it was, the first action had to be brought procedurally parallel to the second. The motion in limine was, therefore, held in abeyance. The two actions are now parallel, the parties are now prepared to finish what discovery remains to be done, and the matter is set for trial. Defendant has moved for summary judgment.

The complaint alleges, simply, that McDonald’s explicitly requires its franchisees to purchase Coca-Cola and no other sugar-sweetened cola, that the imposition of the requirement constitutes both a per se unlawful tying arrangement and an unreasonable restraint of trade, and that the requirement has caused franchisees to pay a higher price for cola syrup than they otherwise would have had to pay. The motion in limine, as originally filed, rested upon the undisputed facts that defendant does not sell Coca-Cola to its franchisees, nor does it receive any rebate or commission on Coca-Cola’s sales to franchisees. Due to the nature of Coca-Cola’s distribution system, franchisees buy Coca-Cola syrup from a number of sources, with some variation of price depending on the source. Franchisees can shop around. That was a material fact bearing upon the “fact of injury” issue, which was paramount in the dispute over class certification.

Plaintiffs responded by urging that McDonald’s did have an economic interest in the requirement. McDonald’s, throughout the relevant period, has developed advertising formats through advertising agencies. Franchisees are committed to the expenditure of a stated percentage of their gross for advertising. Almost all have, over the years, discharged some or all of that obligation by contributions to OPNAD (the operators’ national advertising fund), which was separate from McDonald’s. OPNAD then pays for the media expense of national television, radio and print advertising and promotions. Franchisees can, and do, also satisfy that obligation by cooperative advertising in regional markets, using national formats. They may also satisfy that obligation by individual advertising, subject to verification that it occurred. Until the end of 1972 (the relevant time period begins in October 1971 for the first action; the plaintiffs contend, and defendant disputes, that it began at the same time for the second action), Coca-Cola paid advertising allowances to the OPNAD fund. Since the beginning of 1973 Coca-Cola has paid that allowance directly to the franchisees, which then use it to defray OPNAD contributions or for cooperative regional advertising or individual advertising programs. The allowance was and is for the purpose of promoting Coca-Cola in conjunction with other McDonald’s products, although the nature of the Coca-Cola exposure is not specified. Plaintiffs appear to argue that OPNAD is McDonald’s-controlled, that until 1973 the allowance was in practical effect to McDonald’s, and that since then the encouragement of advertising participation through OPNAD and regional programs has resulted in a change in form but not substance since the allowance “still goes into McDonald’s Coke-related advertising.” The amount of that allowance influences, or may influence, McDonald’s ongoing review of whether or not to stick with its Coca-Cola requirement. Thus, insist plaintiffs, the Coca-Cola requirement leads to allowances which are funneled into advertising controlled by McDonald’s and thus primarily benefiting defendant, giving McDonald’s a financial interest in Coca-Cola syrup sales to franchisees.

Plaintiffs’ response to the motion in limine did not deal with their “rule of reason” concept, since the motion was restricted. Defendant now urges, in light of Carl Sandburg Village Condominium Association No. 1 v. First Condominium Development Co., 758 F.2d 203 (7th Cir.1985), that its lack of economic interest in Coca-Cola syrup sales disposes of plaintiffs’ rule-of-reason theory as well, and it moves for summary judgment. Plaintiffs dispute Carl Sandburg’s impact upon their tie-in theory and contend that it has nothing to do with their rule-of-reason argument. According to plaintiffs, the Coca-Cola syrup requirement is a vertical restraint wholly apart from tie-in law. It restricts the ability of a franchisee or a syrup seller other than Coca-Cola, or both, to compete and therefore is, without regard to any economic interest by McDonald's, an unreasonable restraint of trade absent a yet to be litigated competitive justification.

In Carl Sandburg, the district court dismissed a complaint which alleged that a condominium developer’s sale of condominium units subject to two-year management contracts with an unaffiliated company was an unlawful tie-in and (somewhat more equivocally) was an unreasonable restraint of trade. The court held that the sellers of the tying product, condominiums, were not alleged to have a sufficient economic interest in the management services contract, the tied product. 586 F.Supp. 155, 158 (N.D.Ill.1983 and 1984). Plaintiffs, conceding that they were not claiming any direct financial interest by the developers by way of commissions or rebates, contended that it was enough that the developers were receiving an economic benefit from the failure of the management services defendants to disclose defects to potential buyers and that they, the plaintiffs, could have purchased better and less expensive management services elsewhere. The district court, 586 F.Supp. 155 at 159, concluded after considerable discussion of the case law, which need not be repeated here, that such an identifiable economic benefit was insufficient to claim illegal tying. Plaintiffs then asked for review under the rule of reason. The district court concluded that the conduct alleged was not within the concern of the Sherman Act. Id. at 161— 162. The Court of Appeals affirmed, holding that some economic benefit amounting to a commission or rebate is required for a tying claim. 758 F.2d at 208. It went on to state that a rule-of-reason claim in a tying context likewise requires a substantial danger that the tying seller will acquire market power in the tied product market. When the seller of the tying product has no financial interest in the tied product and the tied product is independently priced there is no danger to competition and no actionable conduct. 758 F.2d at 210-211.

If Carl Sandburg means what it says, then plaintiffs cannot prevail in these actions. A review of the legal context from which Carl Sandburg arises persuades this court that it does mean what it says in the circumstances presented here, and that, accordingly, defendants are entitled to summary judgment.

We turn first to tying arrangements as per se violations. As many have noted, the designation of conduct as a per se violation is a judicial conclusion that the conduct is so pernicious that no extended analysis of its anticompetitive effects in a particular market is necessary. “[Tjhere are certain agreements or practices which because of their pernicious effect on competition and lack of any redeeming virtue are conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use.” Northern Pacific Ry. Co. v. United States, 356 U.S. 1, 5, 78 S.Ct. 514, 518, 2 L.Ed.2d 545 (1958). It is a useful judicial shortcut so long as it generally although not invariably accords with economic reality. See Arizona v. Maricopa County Medical Society, 457 U.S. 332, 350-351, 102 S.Ct. 2466, 2476, 73 L.Ed.2d 48 (1982). The classic per se violation remains price-fixing among competitors. Since at least 1947 tying arrangements have also been illegal per se. International Salt Co., Inc. v. United States, 332 U.S. 392, 68 S.Ct. 12, 92 L.Ed. 20 (1947). The classic condemned tying arrangement was and remains the monopolist requiring purchase from it of an unwanted or excessively-priced product as a requirement for purchasing the desired product controlled by the seller. While the anti-competitive impact of tying arrangements in vertical distribution systems has been vigorously questioned, e.g., Easterbrook, Vertical Arrangements and the Rule of Reason, 51 Antitrust L.J. 135 (1984), there can be little dispute that tying arrangements resulting in the extension of market power over another product as evidenced by price discrimination is a per se violation.

In its simplest form, it is a per se violation for one with sufficient economic power with respect to a tying product to appreciably restrain free competition in the market for a tied product by conditioning the sale of the tying product upon the purchaser’s agreement to purchase the tied product. Northern Pacific Ry. Co. v. United States, supra, 356 U.S. at pp. 5, 6, 78 S.Ct. at 518. Presumably, then, if there is a tie resulting from the exercise of market power which appreciably restrains competition in the tied product, causing injury, then the per se rule, it could be argued, imposes liability. Kentucky Fried Chicken Corp. v. Diversified Packaging Corp., 549 F.2d 368, 375 (5th Cir.1977).

The judicial shortcut has never, however, been that abrupt. The rule is not an end in itself but a means to an end, an expeditious way of proscribing anticompetitive conduct. Legal writers are fond of pointing out that it is permissible to require a shoe purchaser to purchase both a right and left shoe. That can be characterized as not involving a tie because the shoes are one product, a concept extended into the franchise cases, e.g., Krehl v. Baskin-Robbins Ice Cream Co., 664 F.2d 1348 (9th Cir.1982); Principe v. McDonald’s Corp., 631 F.2d 303 (4th Cir.1980), cert. denied, 451 U.S. 970, 101 S.Ct. 2047, 68 L.Ed.2d 349 (1981). That extension would appear, however, to be limited by the emphasis in Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2, 104 S.Ct. 1551, 80 L.Ed.2d 2 (1984), to separate product markets, despite some question whether franchise systems, for sec. 1 purposes, should be treated as a single product. See Will v. Comprehensive Accounting Corp., 776 F.2d 665, 670 n. 1, (7th Cir.1985). There are, after all, distinctive markets for McDonald’s brand products or McDonald’s franchises and for Coca-Cola or sugar-sweetened cola beverages generally.

What the courts have condemned “... is the wielding of monopolistic leverage; a seller exploits his dominant position in one market to expand his empire into the next.” Times-Picayune Publishing Co. v. United States, 345 U.S. 594, 611, 73 S.Ct. 872, 882, 97 L.Ed. 1277 (1953). There has been, however, a recognition, perhaps an increasing recognition, that vertical restraints upon intrabrand competition may promote inter-brand competition. Monsanto Company v. Spray-Rite Service Corp., 465 U.S. 752, 104 S.Ct. 1464, 79 L.Ed.2d 775 (1984). The competitive benefits of franchise distribution systems have been often noted, e.g., Ungar v. Dunkin’ Donuts of America, Inc., 531 F.2d 1211, 1222-1223 (3d Cir.), cert. denied, 429 U.S. 823, 97 S.Ct. 74, 50 L.Ed.2d 84 (1976). The “single product” concept has been a means of ameliorating the rigors of the per se rule. The rule has been qualified by a business justification or quality control exception, Carpa v. Ward Foods, Inc., 536 F.2d 39 (5th Cir.1976), so long as the control method adopted was the least restrictive means of accomplishing the purpose. Other concepts have arisen for the same purpose. See generally, ABA Antitrust Section, Monograph No. 8, Vertical Restrictions upon Buyers Limiting Purchases of Goods from Others (1982). And, increasingly, the per se rule has yielded to a redefinition of market power and more searching market analysis. Plaintiffs insist that the law has remained unchanged. Perhaps that is so when we look only to verbal formulations. In that sense, all continue to worship at the same altar. The beliefs of the worshipers have, however, perceptively changed.

The first action here was filed back before United States Steel Corp. v. Fortner Enterprises, Inc. (Fortner II), 429 U.S. 610, 97 S.Ct. 861, 51 L.Ed.2d 80 (1977), and the second action was filed shortly thereafter. Fortner II, picking up upon a footnote in Fortner I, 394 U.S. at 505 n. 2, 89 S.Ct. at 1259 n. 2, emphasized the necessity for market power in the tying product sufficient to raise prices in the tied product or, alternatively, force acceptance of an unwanted tied product, 429 U.S. at 617-622, 97 S.Ct. at 866-868. Shortly thereafter, in Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36, 54-55, 97 S.Ct. 2549, 2559-2560, 53 L.Ed.2d 568 (1977), the Court recognized that vertical restraints may have redeeming virtues, including prevention of “free rider” effects which reduce distribution alternatives (a consideration germane to McDonald’s advertising campaign structure but not, in view of the positions of the parties, discussed by them in this case). Jefferson Parish, 466 U.S. at 16, 104 S.Ct. at 1560, refused to abandon the per se doctrine in tying cases, but it further emphasized the necessity for market power and for extensive economic analysis. Four justices would have jettisoned a per se approach altogether. 104 S.Ct. at 1570 (O’Connor, J., concurring in judgment). The necessity for extensive economic analysis, because of possible pro-competitive justification and to determine actual market power, has since been echoed in National Collegiate Athletic Association v. Board of Regents of the University of Oklahoma, 468 U.S. 85, 104 S.Ct. 2948, 2962 n. 26, 82 L.Ed.2d 70 (1984), and in Northwest Wholesale Stationers, Inc. v. Pacific Stationery & Printing Co., 472 U.S.-, 105 S.Ct. 2613, 2621, 86 L.Ed.2d 202 (1985). Monsanto v. Spray Rite, 465 U.S. at 766, 104 S.Ct. at 1472 (1984) recognized, at least implicitly, that dealers in a vertical distribution system do not have an unfettered right to make independent decisions.

Even if there has been no change in the analytic approach, as plaintiffs insist, there has been a change in emphasis, particularly in this circuit. Photovest Corp. v. Fotomat Corp., 606 F.2d 704 (7th Cir.1979), cert. denied, 445 U.S. 917, 100 S.Ct. 1278, 63 L.Ed.2d 601 (1980), assumed that a trademark carried with it a presumption of market power, as it gave some power over some buyers (Fortner I). It is a far cry from Will, 669, where tying is termed “not cooperation among competitors, the focus of § 1, it is aggressive conduct akin to monopolization under § 2 of the Sherman Act.” Will implies (at 672) that market power, at least in the absence of direct proof of price discrimination, requires a market share in the tying product of more than 30 per cent so as to command an ability to control price in the. tied product. The opinion leans toward the benchmarks for determining whether or not a monopoly in one relevant product market is the basis for attempted monopolization in another, although it stops short of so deciding.

Other cases have looked to market power in the tying product market, e.g., Yentsch v. Texaco, Inc., 630 F.2d 46 (2d Cir.1980); Domed Stadium Hotel, Inc. v. Holiday Inns, Inc., 732 F.2d 480 (5th Cir.1984); Spartan Grain & Mill Co. v. Ayers, 735 F.2d 1284 (11th Cir.1984), cert. denied, - U.S. -, 105 S.Ct. 785, 83 L.Ed.2d 779 (1985). If we look solely to general market power, that emphasis may well doom franchise trademark cases, and almost certainly fast food franchise cases. Jack Walters & Sons Corp. v. Morton Building, Inc., 737 F.2d 698, 705 (7th Cir.), cert. denied, - U.S. -, 105 S.Ct. 432, 83 L.Ed.2d 359 (1984). McDonald’s was a pioneer, but one need only step outside this courthouse to observe perhaps half a dozen fast food franchises within a block. Driving along a strip commercial area is a continuous exposure to a cacophony of presumed gastronomical delights. Indeed, plaintiffs do not allege that kind of market power and this court is unaware of any intention to assert or seek to prove that here.

We are talking about a market in which there is competition for new franchisees. Obviously there is almost invariably disparate economic power between a franchiser and an already existing single franchisee, although the cooperative efforts of franchisees may more evenly balance that economic power; and the self interest of the franchiser which, after all, must seek more franchises and keep existing franchisees relatively satisfied, may mute the exercise of power. That disparity has led to both state and federal legislation to curb franchise abuses, and the introduction of some restraints upon pain of termination may well violate the antitrust laws. Here, however, we are dealing with requirements which always, or at least for many years, have been part of the franchise agreements.

Market share may indicate market power. That power also can arise from a legal advantage, such as a patent or a physical advantage, such as land, which results in an economic advantage which is not and cannot be shared by competitors. Spartan Grain & Mill Co. v. Ayers, supra. Perhaps, as well, market power may be evidenced by actual price discrimination in less than the relevant market (Spartan Grain indicates it cannot) and, if so, Siegel v. Chicken Delight, Inc., 448 F.2d 43 (9th Cir.1971), cert. denied, 405 U.S. 955, 92 S.Ct. 1172, 31 L.Ed.2d 232 (1972), lives on. Enhanced price, which was present there, could be explained as a means of charging franchise fees. It can also indicate leverage. Given the various alternatives for obtaining franchise revenue which do not affect the price of supplies, it may well be that courts will conclusively presume that trademarks confer sufficient market power upon proof of price discrimination or that, at least, the price discrimination is itself sufficient to prove sufficient market power conferred by a trademark. The real concern is, after all, market power which results in a monopoly return upon the tying products by means of leveraged price discrimination in the tied product. Moore v. Jas H. Matthews & Co., 550 F.2d 1207 (9th Cir.1977). Litigating that ambiguity may make little sense when the franchiser has alternate and unambiguous means for obtaining its revenues.

Where does that leave us? The per se doctrine may have some real vitality when there is proof of one aspect of leverage, invasion of a second market, and also proof of a direct economic interest in the tied product even absent a showing of actual market power. Without that economic interest in the second product, however, the vertical restraint is not a tying arrangement for the purposes of that judicial shorthand, the per se rule.

That sufficient economic interest cannot be established here. Here the economic benefit to McDonald’s is general. Coca-Cola paid allowances directly to OP-NAD until 1973, but those funds had to be used for advertising presumably of benefit both to franchiser and franchisee. Plaintiffs’ suggestion that some franchisees may not have benefited from national advertising as much as others is beside the point (as well as conflicting with class action concepts), as all franchisees, wherever situated, benefit from the conditioning of a mobile population to the virtues of McDonald’s. A family from New York may well stop at a McDonald’s at Ottumwa, Iowa, because of its media exposure in New York. In any event, there is no evidence tending, in any substantial way, to show that McDonald’s had itself access to the allowance, even prior to 1973, or that it was used, through some affiliated entity, for purposes for which McDonald’s had responsibilities to the franchisees and which it satisfied through diverted allowances. See Miller Motors, Inc. v. Ford Motor Company, 252 F.2d 441 (4th Cir. 1958), relied upon by the Court of Appeals in Carl Sandburg, 758 F.2d at 208. Accordingly, plaintiffs cannot establish a per se violation.

Plaintiffs urge that even if the restraint is not a tying arrangement subject to attack as a per se violation it is a vertical restraint which a trier of fact must judge by the rule of reason despite the absence of any economic interest in the sale of Coca-Cola syrup. True enough, it is a vertical restraint. True enough, failure to establish a per se violation does not necessarily foreclose an attack upon conduct as being an unreasonable restraint of trade in a relevant market. Carl Sandburg, 758 F.2d at 210. The conduct under attack here is, however, still akin to a tying arrangement even if it is not subject to the per se rule. The same analysis which takes it outside the per se rule also causes it to pass muster under the rule of reason. As Carl Sandburg discusses, the danger is that the tying seller will acquire market power in the tied product market. Absent a financial interest, the tying seller will not be using its market power in the tying product market to invade a second market and the tied goods will be (as they are here) independently priced by separate financial entities. Perhaps there can be instances in which tying arrangements escape per se analysis but run afoul the rule of reason, although that has been questioned. Posner, The Rule of Reason and the Economic Approach: Reflections on the Sylvania Decision, 45 U. of Chgo.L.R. 1 (1977). Certainly, though, there is a disinclination to conclude that conduct may possibly be an unreasonable restraint after an extended analysis has determined that it is so divorced from antitrust concerns that it should not be subject to the per se rule. That disinclination finds vivid expression in Carl Sandburg and it is controlling here.

The reason for that is also well illustrated here. In the absence of an economic interest in the sale of Coca-Cola syrup, McDonald’s interest is in a standard menu with, additionally perhaps, an interest in linkage to a product well perceived by consumers. If that vertical restraint is suspect, requiring a trial to determine economic justification, then every specification is suspect, whether it be the size or fat content of hamburgers or in what oil they should be cooked. Virtually every franchisee probably has some menu change which he believes would be more to the liking of local tastes. But McDonald’s rests upon a distribution system emphasizing uniformity. Franchisees depend, obviously, upon the certainty that each will provide the same menu and the same services. Hamburgers of uniform size and uniform fat content may not appeal to the epicure but they may well appeal to the parents of hungry children in the back seat. Designating menu selections and specifications, without more, does not implicate the antitrust laws.

A rule-of-reason analysis requires a consideration of adverse economic effects upon competition in the relevant product market. Perhaps, as plaintiffs’ claim, unrestricted competition between Pepsi-Cola and Coca-Cola for the trade of McDonald’s franchisees might have some favorable impact on the price of those colas to them. But the issue is impact upon competition in the sugar-sweetened cola syrup market. If McDonald’s so dominated the cola market through its purchases that the restraints substantially affected competition in the rest of the market then the Court of Appeals would have to rethink its somewhat sweeping generalizations in Carl Sandburg. But that is not the fact. Plaintiffs urge that McDonald’s uses close to 18 per cent of Coca-Cola’s domestic syrup, obviously a not inconsiderable volume. Just as obviously, McDonald’s use of Coca-Cola syrup is far less than 18 per cent of the volume of sugar-sweetened cola syrup sold in the United States. Plaintiffs have consistently conceded the vigorous competition between Pepsi-Cola and Coca-Cola in the sugar-sweetened cola syrup market. It is that competition which is the basis for their claim that their access to both syrups could favorably affect the price to them. In the absence of any economic interest and in the absence of any showing that the restraint lessens competition in the overall market, Carl Sandburg, supplemented by Will, does mean what it says.

      . "Plaintiffs" is and will be used in a general sense. The plaintiffs in the first action are former franchisees; plaintiffs in the second action are, or at least until more recently, were current franchisees. The plaintiffs in the first action did not amend their complaint to allege an unreasonable restraint of trade until long after the plaintiffs in the second action, but the cases are parallel now. The court, for simplicity of discussion, will treat the actions as if all plaintiffs had filed a single complaint which had a single procedural history.

      . Whether or not plaintiffs could prove fact of injury on a class basis sufficiently to justify a class action was considered by Judge Marshall in Martino v. McDonald's System, Inc., 81 F.R.D. 81 (N.D.Ill.1979), and subsequently reconsidered by this court, slip, op., 10/19/84. As the latter opinion indicates, a third judge has also dealt with the issue, and a fourth judge briefly had responsibility for the cases. That responsibility was, however, so brief that, mercifully, she was not called upon yet again to review what was and remains a troublesome question. See generally, Hovenkamp, Tying Arrangements and Class Actions, 36 Vand.L.Rev. 213 (1983). That the litigation could be maintainable as a class action presupposes that the challenged requirement is impermissibly pernicious. No judge has as yet considered the legality of the requirement itself, the closest being Judge Marshall’s presumption that proof of market dominance would be classwide because of a sufficiently unique trademark. 81 F.R.D. at 90. That presumption has to yield to subsequent controlling law, as later here discussed.

      . Indeed, plaintiffs do not contend that every franchisee has a statutory right to serve whatever he believes will foster his individual economic interests. The thrust of their argument has always been that franchisees should have a right to market Pepsi-Cola as well as Coca-Cola. It is interesting that almost all current franchisees have opted out. Perhaps they did so because they were convinced that they could not beat city hall, or at least did not want to try. It may be, however, that many believe the present system best serves their economic interests and that they do not want a proliferation of menu items. If so, that raises a question as to whether, as courts have generally assumed, written requirements in a franchise agreement are conclusively coercive for sec. 1 purposes.


author: PLUNKETT, District Judge.

text:
    AMERICAN DENTAL ASSOCIATION, Plaintiff, v. The HARTFORD STEAM BOILER INSPECTION AND INSURANCE CO., Defendant.
    No. 85 C 1788.
    United States District Court, N.D. Illinois, E.D.
    Dec. 6, 1985.
    Peter M. Sfikas, Peterson, Ross, Schloerb & Seidel, Chicago, 111., for plaintiff.
    Steven D. Marcus, Clausen, Miller, Gorman & Witous, Chicago, 111., for defendant.
   MEMORANDUM OPINION AND ORDER

PLUNKETT, District Judge.

Plaintiff, American Dental Association (“ADA”) brings this action against The Hartford Steam Boiler Inspection and Insurance Company (“Hartford”), alleging that although ADA sustained a loss while it was covered by an insurance policy written by Hartford, Hartford has refused to pay the sum owing as a result of ADA’s loss. In Count I, ADA alleges that it sustained a loss of $2,000,000, but that so far Hartford has paid only $16,036.75, leaving a balance of $1,983,963.25 due to ADA. In Count II, ADA claims that as a direct result of Hartford’s wrongful conduct, ADA has suffered the loss of the use of the principal sum owed by Hartford as well as the use of the interest on that principal sum. In Count III, ADA contends that Hartford’s refusal to pay the amount of the loss is vexatious and without reasonable cause, seeking attorney’s fees in bringing this action pursuant to § 155 of the Illinois Insurance Code, Ill.Rev.Stat. ch. 73, § 767 (Supp.1985) (“§ 155”), plus costs of this action. In Count IV, ADA alleges that Hartford’s refusal to pay constitutes a breach of its duty of good faith and fair dealing, and seeks $250,000 in compensatory damages. Finally, in Count V, ADA requests punitive damages in the amount of $10,000,000.

Presently before the court is Hartford’s motion to dismiss Counts IV and V of the second amended complaint (the “complaint”), pursuant to Fed.R.Civ.P. Rule 12(b)(6). We have jurisdiction under 28 U.S.C. § 1332. For the reasons set forth below, Hartford’s motion is granted in part and denied in part.

The facts as alleged reveal that on November 2, 1982, Hartford executed and delivered to ADA an insurance policy whereby Hartford agreed to insure ADA from January 1, 1983 until January 1, 1986, against loss of property directly damaged by an accident. On or about September 9, 1983, while the policy was in full force, ADA suffered extensive damage to the electrical system at its association headquarters, resulting in damages of $2,000,-000. ADA alleges that these damages resulted from an accident covered by Hartford’s insurance policy. ADA further alleges that it has requested that Hartford make payment, but Hartford has refused, except for the approximately $16,000 partial payment described above. ADA then brought this action.

Discussion

Hartford moves to dismiss Count IV on the ground that the common law tort of breach of the duty of good faith and fair dealing is preempted by § 155 of the Code and therefore, Counts IV and V fail to state a claim upon which relief can be granted.

Section 155, entitled “Attorney fees,” provides, in relevant part:

In any action by or against a company wherein there is in issue the liability of a company on a policy or policies of insurance or the amount of the loss payable thereunder, or for an unreasonable delay in settling a claim, and it appears to the court that such action or delay is vexatious and unreasonable, the court may allow as part of the taxable costs in the action reasonable attorney fees, other costs, plus an amount not to exceed any one of the following amounts:
(a) 25% of the amount which the court or jury finds such party is entitled to recover against the company, exclusive of all costs;
(b) $5,000;
(c) the excess of the amount which the court or jury finds such party is entitled to recover, exclusive of costs, over the amount, if any, which the company offered to pay in settlement of the claim prior to the action.

It is Hartford’s position that § 155-preempts both compensatory and punitive damages for any breach of the tort of good faith and fair dealing. ADA, however, takes the position that § 155 does not preempt any cause of action for the breach of the duty of good faith and fair dealing.

The parties’ difference of opinion on this issue is quite understandable. The Illinois Supreme Court has not addressed the question, and the appellate courts are in strong disagreement over the effect of § 155. The Fifth Appellate District has held that a cause of action exists for insureds against insurers who breach their duty of good faith and fair dealing. Ledingham v. Blue Cross Plan for Hospital Care, 29 Ill.App.3d 339, 330 N.E.2d 540 (5th Dist.1975), rev’d on other grounds, 64 Ill.2d 338, 1 Ill.Dec. 75, 356 N.E.2d 75 (1976). The court in Ledingham, however, drew this conclusion without making any reference to § 155 and it is therefore unclear whether the court considered the statutory provision in its analysis. Furthermore, the Fifth District seems to have reversed itself, at least as to the awarding of punitive damages. See Fisher v. Fidelity and Deposit Co., 125 Ill.App.3d 632, 80 Ill.Dec. 880, 466 N.E.2d 332 (5th Dist.1984). The First Appellate District has held that § 155 preempts all tort remedies. See, e.g., Trautman v. Knights of Columbus, 121 Ill.App.3d 911, 77 Ill.Dec. 294, 460 N.E.2d 350 (1st Dist.1984); Kinney v. St. Paul Mercury Insurance Co., 120 Ill.App.3d 294, 75 Ill.Dec. 911, 458 N.E.2d 79 (1st Dist.1983); Tobolt v. Allstate Insurance Co., 75 Ill.App.3d 57, 30 Ill.Dec. 824, 393 N.E.2d 1171 (1st Dist.1979). The Third District considers punitive damages to have been preempted but it has not specifically addressed the issue of compensatory damages. See Debolt v. Mutual of Omaha, 56 Ill.App.3d 111, 13 Ill.Dec. 656, 371 N.E.2d 373 (3d Dist.1978). The Second District has held that the statute preempts an award of punitive damages but not compensatory damages. See Hoffman v. Allstate Insurance Co., 85 Ill.App.3d 631, 40 Ill.Dec. 925, 407 N.E.2d 156 (2d Dist.1980).

The issue has also been considered by several district judges here in the Northern District of Illinois, and these judges are also split on the issue. Judge Aspen has held that § 155 precludes any recovery based in tort. See Strader v. Union Hall, Inc., 486 F.Supp. 159 (N.D.Ill.1980). Judge Shadur is in agreement, as he considers himself bound by the decisions of the First Appellate District. See Abbott Laboratories v. Granite State Insurance Co., 573 F.Supp. 193 (N.D.Ill.1983); Commercial Discount Corp. v. King, 552 F.Supp. 841 (N.D.Ill.1982). Judge Marshall, on the other hand, has held that § 155 does not preclude a claim for either punitive or compensatory damages based on a tort claim. See Roberts v. Western-Southern Life Insurance Co., 568 F.Supp. 536 (N.D.Ill.1983); Kelly v. Stratton, 552 F.Supp. 641 (N.D.Ill.1982). Judges Hart and Moran have reexamined their rulings on the effect of § 155. Both originally held that § 155 preempts any common law tort recovery against an insurer. See Gibe v. General American Life Insurance Co., No. 84 C 1280 (N.D.Ill. May 24, 1984) (Hart, J.); Henke v. Travelers Insurance Co., No. 80 C 5068 (N.D.Ill. Oct. 21, 1981) (Moran, J.). However, both judges now take the position that § 155 preempts a claim for punitive damages, but does not preempt any action for compensatory damages. See UNR Industries, Inc. v. Continental Insurance Co., 607 F.Supp. 855, 863-868 (N.D.Ill.1984) (Hart, J.); Barr Co. v. Safeco Insurance Co., 583 F.Supp. 248, 255-256 (N.D.Ill.1984). The district judges disagree not only as to the construction of § 155, but also as to how a federal judge should arrive at his or her conclusions. We now dive into this quagmire of indecision and add our thoughts on these issues.

I. The Erie Question

As an initial matter, the court must decide what its obligations are under Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). The parties are in agreement that Erie requires this court to predict what the Illinois Supreme Court would decide and to hold accordingly. This approach is favored by many of the judges in the Northern District of Illinois, particularly Judge Marshall. See Roberts v. Western-Southern Life Insurance Co., 568 F.Supp. 536 (N.D. Ill.1983); Kelly v. Stratton, 552 F.Supp. 641, 643 (N.D.Ill.1982). See also Strader v. Union Hall, Inc., 486 F.Supp. 159, 161 (N.D.Ill.1980) (Aspen, J.); Barr Co. v. Safeco Insurance Co., 583 F.Supp. 248, 252-255 (N.D.Ill.1984) (Moran, J.); UNR Industries, Inc. v. Continental Insurance Co., 607 F.Supp. 855, 863 (N.D.Ill.1984) (Hart, J.).

The rationale is that Erie requires a federal court sitting in diversity to apply the law of the state, whether embodied in a decision by the state’s highest court or in a state statute. Accordingly, when the state’s highest court has not addressed an issue, and the appellate courts are in conflict over the interpretation of a state statute, the federal court should predict how the Illinois Supreme Court would rule. Judge Shadur, however, takes the position that when the intermediate appellate court decisions are in conflict and no state supreme court authority exists, our obligation in the federal courts is to decide issues of substantive law in the same way that a state trial judge sitting in the same location would decide those issues. Thus, Judge Shadur has considered himself bound by the decisions of the First District of the Illinois Appellate Court. See, e.g., Abbott Laboratories v. Granite State Insurance Co., 573 F.Supp. at 196-200 (N.D.Ill.1983); Commercial Discount Corp. v. King, 552 F.Supp. 841, 847-852 (N.D.Ill.1982).

We have considered the careful analyses of both Judge Marshall and Judge Shadur. We conclude that our obligation under Erie is to predict the Illinois Supreme Court’s resolution of the issue. First, the predictive approach of resolving undecided questions of state law has been adopted by the Seventh Circuit. See, e.g., White v. United States, 680 F.2d 1156, 1161 (7th Cir.1982); Gates Rubber Co. v. USM Corp., 508 F.2d 603, 607 (7th Cir. 1975). This method has been accepted by other circuits as well. See, e.g., McKenna v. Ortho Pharmaceutical Corp., 622 F.2d 657, 661 (3d Cir.), cert. denied, 449 U.S. 976, 101 S.Ct. 387, 66 L.Ed.2d 237 (1980); Warren Brothers Co. v. Cardi Corp., 471 F.2d 1304, 1307-1308 (1st Cir.1973).

In addition, we share Judge Marshall’s concern that the Eastern Division of the Northern District of Illinois is comprised of several counties which lie in districts other than the First District of the Illinois Appellate Court and therefore Judge Shadur’s approach might require a federal court to apply a rule that would not be used if the plaintiff filed in state court. Kelly, 552 F.Supp. at 644. As Judge Moran noted in Barr Co. v. Safeco Insurance Co., 583 F.Supp. 248, 252 (N.D.Ill.1984), Erie implies that federal courts sitting in diversity are to apply a single body of law that can be considered the law of the entire state. In that opinion, Judge Moran articulated numerous reasons for his preference of the predictive approach, reasons we adopt fully and see no need to repeat here, except to reiterate Judge Moran’s point that:

f all federal courts under Erie were thrust into the role of state trial courts they would be bound by the law of the appellate divisions even when, as here, the law is disputed in other districts and even if an independent determination of state law would lead to a contrary result. No attempt would be made to ascertain the law of the state, as would occur in the state appellate courts and supreme court. Thus the course of litigation would differ in federal as opposed to state courts and litigants would be able to take advantage of that difference in choosing where to bring or whether to remove the case.

Id. at 253-254.

Thus, we conclude that we must try to reach the correct result by predicting how the Illinois Supreme Court would rule if faced with this issue. The appellate court decisions provide us with important data for ascertaining the relevant Illinois law, and we must, of course, give them due consideration; however, we may disregard those decisions if we are convinced that the Illinois Supreme Court would decide otherwise. See West v. American Telephone & Telegraph Co., 311 U.S. 223, 237, 61 S.Ct. 179, 183, 85 L.Ed. 139 (1940); Kelly v. Stratton, 552 F.Supp. at 645. This approach seems particularly appropriate where, as here, the disagreement among the districts is substantial. Having chosen our method of decision, we now turn to the merits.

II. Section 155

A. Punitive damages

A review of the case law indicates that although the courts are in conflict over the issue of compensatory damages, they are virtually all in agreement that § 155 preempts a recovery of punitive damages. See, e.g., Hoffman v. Allstate Insurance Co., 85 Ill.App.3d 631, 40 Ill.Dec. 925, 928, 407 N.E.2d 156, 159 (2d Dist. 1980); Tobolt v. Allstate Insurance Co., 75 Ill.App.3d 57, 30 Ill.Dec. 824, 831-833, 393 N.E.2d 1171, 1178-1180 (1st Dist.1979); Debolt v. Mutual of Omaha, 56 Ill.App.3d 111, 13 Ill.Dec. 656, 659-661, 371 N.E.2d 373, 376-378 (3d Dist.1978). The only Illinois appellate court arguably holding to the contrary is Ledingham v. Blue Cross Plan for Hospital Care, 29 Ill.App.3d 339, 330 N.E.2d 540 (5th Dist.1975), rev’d on other grounds, 64 Ill.2d 338, 1 Ill.Dec. 75, 356 N.E.2d 75 (1976). The court in Ledingham acknowledged the general rule that punitive damages may not be recovered in an action for breach of contract, but then went on to hold that if an insurer breaches the duty of good faith and fair dealing, the insured has a separate cause of action that sounds in tort. Accordingly, an action for punitive damages can lie.

The Ledingham decision made no mention of § 155, and is therefore of little help as we cannot discern whether the court considered that section at all. The precedential value of the opinion is even further diluted by the fact that a subsequent decision of the Fifth District held that “[i]n adopting paragraph 767, the legislature preempted the field for recovery of punitive damages for refusal to pay, barring the common law action for such remedies.” Fisher v. Fidelity and Deposit Co., 125 Ill.App.3d 632, 80 Ill.Dec. 880, 887, 466 N.E.2d 332, 339 (5th Dist.1984).

In light of the strong consensus in the Illinois appellate courts on the issue of punitive damages, we predict that the Illinois Supreme Court would find that such damages are preempted by § 155. In addition, our own examination of the statute leads us to the same result. Before 1977, § 155 provided for recovery of attorney’s fees and other costs of bringing an action against an insurer which had acted vexatiously and unreasonably in refusing to settle the claim. In 1977, the statute was amended to permit recovery of an amount in addition to attorney’s fees and costs. Thus, the 1977 amendment made even more explicit that the statute is basically punitive in nature. This court again agrees with Judge Moran’s analysis in Barr Co. v. Safeco Insurance Co., 583 F.Supp. 248, 255 (N.D.Ill.1984), and also with Judge Hart’s finding that the legislature’s linking of an award under the statute to the insurer’s misconduct suggests that at least one purpose of the section was to punish misbehaving insurance companies. UNR Industries, Inc. v. Continental Insurance Co., 607 F.Supp. 855, 865 (N.D.Ill.1984). The statute is now punitive on its face, and it has always been punitive in nature. Accordingly, we decline to follow Judge Marshall’s holdings that punitive damages are not preempted by the statute, and we hold, in accordance with several other judges in the Northern District of Illinois, that ADA’s claim for punitive damages is preempted by § 155. See, e.g., Thiel v. Prudential Insurance Co., No. 85 C 1645 (N.D.Ill. Dec. 3, 1985) (Decker, J.); UNR Industries, Inc. v. Continental Insurance Co., 607 F.Supp. 855, 866 (N.D.Ill.1984) (Hart, J.); Barr Co. v. Safeco Insurance Co., 583 F.Supp. 248, 256 (N.D.Ill.1984) (Moran, J.); Abbott Laboratories v. Granite State Insurance Co., 573 F.Supp. 193, 195 (N.D.Ill.1983) (Shadur, J.). But see, e.g., Kelly v. Stratton, 552 F.Supp. 641, 646-649 (N.D.Ill.1982) (Marshall, J.). Therefore, Hartford’s motion to dismiss Count V of the complaint is granted. ^ ____

B. Compensatory damages

Although the appellate courts are in basic agreement on the question of punitive damages, the issue of whether compensatory damages are recoverable is more hotly disputed. We conclude that the language of § 155 does not operate to preempt awards of compensatory damages. The statute provides for recovery of attorney’s fees, other costs, and an additional amount. That amount is some proportion of the amount a plaintiff would be entitled to recover under the contract, not to exceed $5,000. The amount recoverable is in no way reflective of the damages actually incurred by an insured because of an insurer’s unreasonable failure to make payments owed. See Barr, 583 F.Supp. at 255.

Judge Hart, after an extensive analysis of the legislative history and case law, concluded that no legislative intent existed to address the problem of compensating plaintiffs for damages sustained because of an insurer’s vexatious and unreasonable failure to pay. Judge Hart stated:

The substance of the statute ... belies any intent to preempt compensatory damages, since the provisions of § 155 are fully explainable in terms of a punitive purpose, and some of its provisions are only explainable in terms of that purpose____ [Section] 155 applies only when the insurer’s conduct was vexatious and unreasonable. That limitation makes perfect sense if the award is intended to punish the defendant, but little sense if the award is intended to compensate the plaintiff since the need for compensation is wholly independent of the vexatiousness of the insurer’s conduct.

UNR Industries, Inc. v. Continental Insurance Co., 607 F.Supp. 855, 866 (N.D.Ill.1984) (emphasis in original).

Judge Hart further found that the 1977 amendments did not provide any new indications of an intent to address the issue of compensation:

As with the original version, the legislative history contains no suggestion of such intent. Nor do the amendments themselves show such an intent. The amendment removing the limit on the amount of attorneys’ fees recoverable may make more suits against insurers economically feasible but does nothing to compensate the plaintiff for the damages giving rise to the suit. Similarly, the award of a sum not to exceed $5,000, being governed by the same standards as the attorneys’ fees award of the original section, is no more related to compensation than the original statute was.

Id, at 866-867.

We agree with Judge Hart’s analysis, and therefore view the Second District’s position, permitting a claim for compensatory damages, but finding preemption as to punitive damages, as the correct interpretation of § 155. See Hoffman v. Allstate Insurance Co., 85 Ill.App.3d 631, 40 Ill. Dec. 925, 407 N.E.2d 156 (2d Dist.1980). Because we predict that the Illinois Supreme Court would permit compensatory damages to be awarded, Hartford’s motion to dismiss Count IV of the complaint is denied.

Conclusion

For all the foregoing reasons, Hartford’s motion to dismiss Count IV of the complaint is denied. The motion to dismiss Count V is granted.

       On May 23, 1985, ADA filed its first amended complaint. Thereafter, Hartford filed its motion to dismiss Counts IV and V of the first amended complaint. ADA then filed its memorandum in opposition to the motion to dismiss and simultaneously filed a motion for leave to file a second amended complaint, which was limited to revision of Count V. Hartford renewed its motion to dismiss in lieu of an answer to the second amended complaint, and filed a reply memorandum in support of its motion to dismiss, now directed at the second amended complaint.