March 2010
Managing Intellectual Property, Chinese edition
Authored by Erik R. Puknys
On December 22, 2009, the United States Court of Appeals for the Federal Circuit affirmed an award of $290 million to a small Canadian company called Infrastructures for Information Inc. (i4i). The award, which resulted from a jury trial in a Texas federal court, compensated i4i for Microsoft’s willful infringement of i4i’s patent. Additionally, by order of the appellate court, Microsoft was enjoined from selling any Word or Office product incorporating i4i’s patented invention after January 11, 2010.
This modern day David vs. Goliath story began with i4i’s pursuit of a better way to edit computer-processed documents that contained markup language such as XML. Such markup language, among other things, allows a user to format a document. For example, by using XML, a user can turn a document’s content into section headings and cause other content to be displayed differently, such as in italic. Prior to i4i’s invention, a problem for users was that they had to interact with both the content and the markup language at the same time. i4i’s invention, for which it obtained a United States patent in 1998, separated the document’s content from the markup language, allowing each to be custom edited separately.
After the issuance of i4i’s patent, the Canadian company focused its activities on the patented invention and, in March 1999, it released a product that allowed users to employ Microsoft Word as an editor for XML documents. At the time, Microsoft Word did not have the ability to perform custom-XML editing, and Microsoft had no idea how to create that functionality. Indeed, when defense and security agencies for the United States federal government asked Microsoft to provide custom-XML functionality, Microsoft turned to i4i for the solution.
Lacking the ability to perform custom-XML editing with Word, Microsoft invited i4i to meet with its governmental sales force in April 2001. At that meeting, i4i demonstrated its product, explained how it worked, and distributed sales kits identifying its patent. When it came time to show the U.S. government that Word could be used to perform custom-XML editing in the summer of 2001, Microsoft brought i4i to the presentation, praised i4i’s product, and demonstrated i4i’s product. Later, Microsoft acknowledged that the only way it could have succeeded with the U.S. government was with i4i’s product. At that time, Microsoft referred to i4i as a “Microsoft Partner.”
At the same time, though, Microsoft was working behind i4i’s back to make i4i’s product obsolete. Later, before Word 2003 was released, Microsoft cut off all contact with i4i, and all of i4i’s efforts to reestablish the relationship were met with no response from Microsoft.
After Microsoft incorporated i4i’s invention into Word, Microsoft sold over 100 million copies of Word 2003 and Word 2007. Further, Microsoft touted XML as a core technology, stating that support for custom XML constituted 90% of the value to using XML and that custom XML was the most important effort Microsoft ever did on XML in Office. As Microsoft had predicted, including custom-XML functionality in Word rendered i4i’s products obsolete in 80% of the market, leaving i4i only a niche market for the custom-XML needs of the pharmaceutical industry.
After Microsoft released Word 2003—the first Word version with custom-XML functionality—i4i investigated possible patent infringement. After determining that Microsoft infringed its patent, i4i sought the funding it needed to bring a lawsuit for patent infringement. Once i4i obtained the financial assistance of Northwater Intellectual Property Fund L.P., i4i sued Microsoft for patent infringement in March 2007.
At trial, i4i sought compensation from Microsoft only for actual use of the functionality provided by i4i’s invention and only for such use by business customers (not use by students or individuals). In all, i4i sought less than 2% of Microsoft’s total profits from the infringing Word products.
For its defense, Microsoft argued that it did not infringe i4i’s patent, that the patent was invalid, and that if damages were awarded they should be less than $130,000. The jury found that Microsoft’s Word products infringed i4i’s patent, that the i4i patent was not invalid, and that the amount of money to compensate i4i for the damage done by Microsoft’s infringement was $200 million. Because the jury also found that Microsoft had known of i4i’s patent and had nonetheless infringed it, the Judge increased damages by $40 million. Adding in “post-verdict damages” and interest (from May 21 to August 11, 2009), the award amounted to $290 million. The Court also entered an injunction that prohibited Microsoft from selling products that contained the infringing custom XML functionality.
i4i’s success story teaches many lessons. First, even a tiny foreign company can prevail against a giant U.S. corporation in a jury trial in the U.S. courts. Second, juries react very negatively when they think one company has taken unfair advantage of another, especially when the companies had previously enjoyed a successful relationship. Third, the importance of protecting a company’s intellectual property cannot be overestimated, and even a single patent can adequately protect core technology so long as that patent is drafted and prosecuted with skill. Fourth, according to press releases Microsoft issued after the appeals court’s decision, Microsoft expects to see little disruption in its business even after removing the infringing technology from Word. Many observers have wondered how much trouble and expense Microsoft would have avoided if it had made this change earlier and settled the case. Often, the best time to settle a lawsuit is at the beginning, especially in a case like this one, where the parties’ core products complement each other and there are significant opportunities for mutually agreeable business arrangements. Finally, in litigation, it is best not to take unreasonable positions. For example, the jury clearly did not think that Microsoft’s estimate of $130,000 in damages was reasonable. Having lost credibility on this issue, it is very likely that the jury was not inclined to believe Microsoft’s other arguments either.
Copyright © Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the author and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm's clients.
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