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Substantial Evidence Supported the Jury’s Verdict of Infringement, Validity, and a $115 Million Damages Award

November 16, 2007

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Last Month at the Federal Circuit - December 2007

Judges: Lourie, Linn (author), Bucklo (District Judge sitting by designation)

[Appealed from: E.D. Tex., Judge Davis]

In z4 Technologies, Inc. v. Microsoft Corp., No. 06-1638 (Fed. Cir. Nov. 16, 2007), the Federal Circuit affirmed the district court’s denial of Microsoft Corporation’s (“Microsoft”) motion for JMOL following a jury trial in which the jury found that Microsoft infringed z4 Technologies, Inc.’s (“z4”) U.S. Patent Nos. 6,044,471 (“the ’471 patent”) and 6,785,825 (“the ’825 patent”), and had failed to prove these patents invalid. The Federal Circuit also affirmed the district court’s denial of Microsoft’s motion for a new trial.

The ’471 and ’825 patents relate to the prevention of software piracy. They describe a multistep user authorization scheme, whereby an initial password or authorization code grants the user a “grace period” for a fixed number of uses or a period of time. Users must then submit registration information to a representative of the software developer to receive a second password or authorization code, which enables use of the product beyond the grace period. Users are able to choose between a manual registration mode and an automatic or electronic registration mode. Upon receipt of the registration information, the software representative compares the submitted information to previously stored registration information to determine whether the user is authorized.

z4 sued Microsoft, alleging that the “Product Activation” feature in Microsoft’s “Office” group of software applications and “Windows” operating system infringed the ’471 and ’825 patents. Microsoft countered that it did not infringe and that z4’s patents were invalid and unenforceable. After the district court construed several disputed claim terms, a jury returned a verdict of willful infringement against Microsoft and awarded damages of $115 million. Microsoft filed various

The district court denied these motions and awarded an additional $25 million in enhanced damages and attorneys’ fees to z4. Microsoft appealed.

On appeal, Microsoft argued that the district court erred as a matter of law by denying JMOL of noninfringement based on certain claim limitations— the “user” limitation, the “password” and “authorization code” limitations, and the “automatic” and “electronic” limitations—allegedly lacking in its accused products. With respect to the “user” limitation, the district court construed the term “user” to mean “a person, a person using a computer, a computer, or computers.” Slip op. at 9. Microsoft argued that the proper construction of “user” was “a person or a person using a computer” and that under this construction, its products did not infringe because its products did not recognize “unauthorized users,” but rather unauthorized computers. Id. Agreeing with Microsoft’s construction, the Federal Circuit observed that the claims and the specification referred to “user” and “computer” as distinct entities. It noted that because a construction that would equate a “user” with a “computer or computers” conflicted with both the plain language of the claims and the teachings of the specification, the district court’s inclusion of “computer or computers” in its claim construction could not be sustained. Nonetheless, the Federal Circuit found that substantial evidence supported the jury verdict even under its modified construction of “user” because a reasonable juror could find that Microsoft infringed the asserted claims even under its modified construction.

As for the “password” and “authorization code” limitations, Microsoft and z4 agreed that these terms were used interchangeably in z4’s patents, but Microsoft argued that substantial evidence did not support the jury’s finding of infringement with respect to these limitations. The Federal Circuit disagreed. The Court noted that not only was the jury presented with evidence that Microsoft directly instructed its users to input a specific Product Key provided with each copy of the software and that the Product Key was required as part of product installation, but one of Microsoft’s own witnesses admitted that unless users enabled the grace period using this specific Product Key, they would have been unable to complete the Product Activation process (i.e., to enable the software beyond the grace period). Accordingly, the Court concluded that substantial evidence supported a finding that in the ordinary course of activating a copy of the accused software, a user is required to enter an authorization code—the Product Key—associated with that copy of the software. The Court added that even if the potential use of unassociated Product Keys to enable software grace periods may be framed as a noninfringing mode of operation, its conclusion would be the same. It noted that “infringement is not avoided merely because a non-infringing mode of operation is possible.” Id. at 14.

With respect to the “automatic” and “electronic” limitations, claims 44 and 131 of the ’471 patent recite “requiring the user to selectively choose either manual or electronic registration,” while claim 32 of the ’825 patent recites “instructions for automatically contacting an authorized representative . . . to communicate registration information and obtaining authorization for continued operation.” Id. at 15 (alteration in original). Despite the difference in the claim language, the parties agreed that these terms could be analyzed together. The district court construed “automatically” to mean “instructions (i.e. a computer code) that enable a user’s computer to contact an authorized representative of the software.” Id. Microsoft argued that once users chose the electronic or automatic registration mode (as contrasted with the manual mode), the initiation of the registration communication must commence without any user interaction. The Federal Circuit disagreed.

The Court noted that the claims were silent as to the initiation of the registration process and that although the specification disclosed that automatic registration was performed “without user intervention,” the claims required at least a minimal level of user interaction to select this registration mode. The Court added that nothing in the claims or the specification precluded user interaction in the selection or initialization of the automatic registration. Accordingly, the Federal Circuit affirmed the district court’s construction of this term.

In addition, the Court noted that Microsoft made no effort to argue noninfringement under the district court’s construction and that even under Microsoft’s construction, a reasonable juror could find infringement. Accordingly, it affirmed the district court’s judgment of infringement as well.

Microsoft also argued that the district court erred as a matter of law by denying Microsoft’s motion for JMOL of invalidity under 35 U.S.C. § 102(g). Specifically, in the district court, Microsoft argued that the Licensing Verification Program (“LVP”) feature, which it implemented in its 1998 Brazilian Publisher (“BP 98”) software product, anticipated the asserted claims of z4’s patents under § 102(g)(2). The district court did not agree and found that a reasonable jury could have concluded that BP 98 did not work for its intended purpose (i.e., to stop piracy) in light of the evidence presented at trial. The Federal Circuit noted that § 102(g)(2) provides that a patent is invalid if “before such person’s invention thereof, the invention was made in this country by another inventor . . . .” Id. at 17 (alteration in original). The Court observed that it has interpreted § 102(g) to provide that “priority of invention goes to the first party to reduce an invention to practice unless the other party can show that it was the first to conceive the invention and that it exercised reasonable diligence inlater reducing that invention to practice.” Id. (citation omitted).

The Court explained that Microsoft bore the burden of demonstrating by clear and convincing evidence that BP 98 constituted an actual reduction to practice of the invention claimed in z4’s patents. It noted that in order to establish an actual reduction to practice, the inventor must provide that (1) he constructed an embodiment or performed a process that met all the limitations, and (2) he determined that the invention would work for its intended purpose. The Court noted further that testing is required to demonstrate reduction to practice in some instances because without such testing, there could not be sufficient certainty that the invention will work for its intended purpose. The Court observed that because the necessity and sufficiency of such testing are factual issues, substantial evidence in the record supporting a finding that Microsoft’s LVP software did not work for its intended purpose will suffice to support the jury’s verdict that z4’s patents were not invalid for anticipation.

Applying these principles, the Federal Circuit agreed with Microsoft that the district court incorrectly defined the “intended purpose” of the invention as “to stop piracy.” The Court noted z4’s patents did not disclose a method or apparatus to completely eliminate software piracy, and the claim language indicated that the purpose of the invention is merelythe reduction, rather than the elimination, of such piracy. The Court, however, agreed with z4 that the record contained substantial evidence for a reasonable jury to conclude that the antipiracy feature of BP 98 did not work even to reduce piracy. Accordingly, the Court affirmed the district court’s denial of Microsoft’s motion for JMOL of invalidity by anticipation.

In addition, Microsoft requested a remand for a new trial based on allegedly erroneous jury instructions. The Federal Circuit rejected each of these arguments. The Court observed that under the law of the Fifth Circuit, two requirements must be met before a new trial will be granted based on an erroneous jury instruction. First, the challenger must demonstrate that the charge as a whole creates substantial and ineradicable doubt whether the jury has been properly guided in its deliberations. Second, even if the jury instructions were erroneous, noted the Court, it will not reverse if it determines, based upon the entire record, that the challenged instruction could not have affected the outcome of the case.

Specifically, Microsoft challenged the district court’s instruction that “[a]n inventor’s testimony of conception must be corroborated in a single document.” Id. at 21. The Federal Circuit noted that the district court conceded that this instruction was improper, but nonetheless held that it did not constitute harmful error because Microsoft never presented, much less relied, on the testimony of an individual inventor for its § 102(g) defense and that this instruction was simply not relevant. Because the Federal Circuit agreed with the district court that this instruction was not relevant, it did not address the merits of Microsoft’s argument. The Court noted further that this instruction could not have affected the outcome of the case in light of the substantial evidence supporting the conclusion that Microsoft’s BP 98 was not a reduction to practice of the asserted claims.

Microsoft also challenged the district court’s instruction that Microsoft had the burden of proving invalidity by clear and convincing evidence. Microsoft argued that the district court abused its discretion by refusing to further instruct the jury that Microsoft’s burden is more easily carried when the references on which the assertion was based were not directly considered by the examiner during prosecution. The Federal Circuit did not agree, noting that despite Microsoft’s reliance on cases indicating that a party may more easily meet the clear and convincing evidence burden when the references at issue were not before the examiner, Microsoft cited no authority compelling courts to provide such an instruction. The Court agreed with the district court that such an instruction might lead the jury to believe that the burden of proof is less than clear and convincing evidence when prior art was not considered by the PTO. Accordingly, it held that the district court did not abuse its discretion in refusing to provide the requested instruction.

In addition, Microsoft requested a remand in light of the Supreme Court’s decision in KSR International Co. v. Teleflex Inc., 127 S. Ct. 1727 (2007), based on the district court’s instruction to the jury that “to find an asserted claim obvious, you must find that there was some teaching, suggestion or incentive to combine the items in the prior art into the particular claimed combination.” Slip op. at 23. The Federal Circuit rejected this argument as well. Because Microsoft failed to identify specific evidence or arguments establishing a prima facie case of obviousness, the Federal Circuit found no abuse of discretion by the district court.

Finally, Microsoft requested a remand for a new trial on damages in light of Microsoft Corp. v. AT&T Corp., 127 S. Ct. 1746 (2007) (addressing infringement under 35 U.S.C. § 271(f) with respect to software components), because the jury made its damages determination based on worldwide sales of the accused products. The Federal Circuit rejected this request, finding no properly defined § 271(f) issue in the record. The Court noted that z4’s complaint alleged infringement using only language from § 271(a) and that the jury instructions similarly only paralleled the language of § 271(a). Accordingly, because Microsoft failed to explain what § 271(f) issues it defined below, let alone preserved, the Federal Circuit denied Microsoft’s request for a new trial on damages.