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Federal Circuit Vacates $358 Million Jury Award in Microsoft Infringement Case

08-1485
September 11, 2009

Decision icon Decision

Last Month at the Federal Circuit - October 2009

Judges: Michel (author), Newman, Lourie

[Appealed from: S.D. Cal., Judge Huff]

In Lucent Technologies, Inc. v. Gateway, Inc., Nos. 08-1485, -1487, -1495 (Fed. Cir. Sept. 11, 2009), the Federal Circuit affirmed the district court’s denial of Microsoft Corporation’s (“Microsoft”) JMOL motion for noninfringement, reversed the district court’s denial of Microsoft’s JMOL motion regarding damages, vacated the damages award, and remanded for a new trial on damages.

Lucent Technologies, Inc. (“Lucent”) owns U.S. Patent No. 4,763,356 (“the ’356 patent”), directed to a method of entering information into fields on a computer screen without using a keyboard. In 2002, Lucent asserted the ’356 patent against Microsoft and others in three separate infringement suits, which were later consolidated. Microsoft challenged Lucent’s infringement contentions, contending among other defenses that the ’356 patent was invalid as anticipated and obvious, and, even if valid, Microsoft’s sales of its products did not infringe the ’356 patent. The jury found Microsoft liable as to its Microsoft Money, Microsoft Outlook, and Windows Mobile products. The verdict, without distinguishing among the three products or between inducement and contributory infringement, awarded a single lump sum of $357,693,056.18 to Lucent.

The parties filed numerous post-trial motions, including Microsoft’s renewed motions seeking JMOL that the ’356 patent is anticipated and obvious, and seeking to overturn the jury’s damages award. The district court found substantial evidence in the record to support the jury’s findings and denied Microsoft’s motions. Microsoft appealed the denial and Lucent cross-appealed the district court’s SJ of noninfringement of certain claims of the ’356 patent.

On appeal, the Court first considered the district court’s denial of Microsoft’s JMOL motion on obviousness. Applying the district court’s claim construction, which was not appealed, the Court considered whether claim 19 of the ‘356 patent would have been obvious over a 1984 magazine article describing the use of computer touch screens. The parties and their experts disagreed about whether the article described three of the limitations of claim 19 and whether a fourth limitation would have been obvious from the article. Specifically, the parties differed about whether the article disclosed the limitations of (1) “inserting in said one field information that is derived as a result of said user operating said displayed tool,” which the district court construed to mean “inserting in a particular field information that is derived as a result of the user operating the displayed tool”; (2) a “tool adapted to allow said user to compose said information,” which the district court construed to mean “a graphical keyboard tool or a graphical number keypad tool, which allows the user to compose information by pointing to the display keys of that tool”; (3) “concurrently displaying a predefined tool associated with said one of said fields,” which the district court construed to mean “displaying at the same time, as by a window overlaying the form”; and (4) the step of “indicating a particular one of said information fields into which information is to be inserted,” which Microsoft’s expert conceded the article does not teach.

The Federal Circuit concluded that it was reasonable for the jury to have concluded that the prior art article describes a computer system that does not disclose or use these four limitations required by claim 19. Accordingly, the Court concluded that the district court did not err in denying Microsoft’s motion for JMOL concerning the validity of claim 19 of the ‘356 patent.

Similarly, the Federal Circuit concluded that the district court did not err in denying Microsoft’s motion for JMOL that claim 21 of the ‘356 patent would have been obvious in view of the prior art article. Claim 21 requires that “the step of displaying said pattern includes the step of displaying one or more of said information fields as a bit-mapped-graphics field,” which the Court concluded would not have been obvious from the article, either standing alone or when combined with other prior art references.

Turning to indirect infringement, the Court considered Microsoft’s arguments that (1) Lucent did not prove direct infringement, a necessary predicate for proving indirect infringement; (2) Lucent did not prove contributory infringement because the products have substantial noninfringing uses; and (3) Lucent cannot prove inducement because the products are merely capable of inducing and Microsoft was not shown
to have the requisite intent to induce.

With regard to direct infringement, the Court agreed that Lucent’s direct evidence of direct infringement was limited, but found circumstantial evidence adequate to permit a jury to find that at least one person, other than Lucent’s expert, had performed the claimed method. The Court concluded that Lucent’s circumstantial evidence of infringement was “something less than the weight of the evidence,” yet was just “more than a mere scintilla,” thus satisfying the requirements for a finding of direct infringement. Slip op. at 23 (quoting Consolo v. Fed. Maritime Comm’n, 383 U.S. 607, 620 (1996); Consol. Edison Co. v.NLRB, 305 U.S. 197, 229 (1938)). The Court also disagreed with Microsoft’s argument that the evidence required a jury to conclude that Microsoft Outlook does not contain a “composition tool.”

Regarding contributory infringement, the issue at bar was reduced to whether the “material or apparatus” required by the patent is the entire software package or just the particular tool (e.g., the calendar date-picker) that performs the claimed method. The date-picker tool is suitable only for an infringing use, while the software package as a whole is capable of substantial noninfringing use. The Federal Circuit concluded that “[i]nclusion of the date-picker feature within a larger program does not change the date-picker’s ability to infringe,” and that a jury could reasonably conclude that Microsoft intended users to use the tool, and that the only intended use of the tool infringed the ’356 patent. Id. at 27. The Federal Circuit also rejected Microsoft’s argument that, under the Supreme Court’s holding in Microsoft Corp. v. AT&T Corp., 550 U.S. 437 (2007), 35 U.S.C. § 271(c) does not apply because “[Microsoft’s] products are not a ‘material or apparatus’ as the statute requires for contributory infringement of patent methods.” Slip op. at 27. The Court observed that the Supreme Court in Microsoft did not address the meaning of “material or apparatus” in § 271(c).

With regard to inducing infringement, while the Court agreed with Microsoft that the evidence of Microsoft’s intent to induce infringement was not strong, the Court was not persuaded that the jury was unreasonable in finding Microsoft possessed the requisite intent to induce at least one user of its products to infringe the claimed methods. For these reasons, the Court affirmed the district court’s denial of Microsoft’s motion for JMOL that Microsoft did not induce infringement of the ’356 patent.

Turning next to damages, the Court fi rst observed that the total dollar value of the sales of accused software products was $8 billion. Microsoft challenged the jury’s award of a lump-sum royalty payment of $357,693,056.18 on the grounds that (1) the jury should not have applied the entire market value rule to the value of Microsoft’s three software products; and (2) for method claims, Dynacore Holdings Corp. v. U.S. Philips Corp., 363 F.3d 1263 (Fed. Cir. 2004), requires that damages be limited to the proven number of instances of actual infringing use. Although the Court rejected both arguments as presented by Microsoft, the Court agreed that substantial evidence did not support the jury’s damages award. Further, to the extent the jury relied on an entire market value calculation to arrive at the lump-sum damages amount, the Court concluded that the award is not supported by substantial evidence and is against the clear weight of the evidence.

In so concluding, the Court first determined whether substantial evidence supported a lump-sum, paid-in-full royalty of approximately $358 million for Microsoft’s indirect infringement of the ’356 patent. To do this, the Court determined whether substantial evidence supported the jury’s implicit finding that Microsoft would have agreed to, at the time of the hypothetical negotiation, a lump-sum, paid-in-full royalty of that amount. Focusing its analysis on Microsoft Outlook and the relevant Georgia-Pacific factors, the Court concluded it did not. Specifically, the Court concluded that the second Georgia-Pacific factor, the rates paid by the licensee for the use of other patents comparable to the patent-in-suit, weighed strongly against the jury’s award because there was little evidentiary basis for awarding roughly three to four times the average amount in the lump-sum agreements in evidence.

The Court also found that Georgia-Pacific factors 10 (the nature of the patented invention, the character of the commercial embodiment of it as owned and produced by the licensor, and the benefits to those who have used the invention) and 13 (the portion of realizable profit that should be credited to the invention as distinguished from nonpatented elements, the manufacturing process, business risks, or significant features or improvements added by the infringer) weigh against the damages award because “most of the realizable profit must be credited to non-patented elements,” as the date-picker feature does not constitute a substantial portion of the value of Outlook. Slip op. at 49. Moreover, the Court found that Georgia-Pacific factor 11 (the extent to which the infringer has made use of the invention; any evidence probative of the value of that use) weighs against the jury’s award because the record was “conspicuously devoid of any data about how often consumers use the patented date-picker invention.” Id. at 52.

After reviewing these and other Georgia-Pacific factors, the Court was left with the “unmistakable conclusion that the jury’s damages award is not supported by substantial evidence, but is based mainly on speculation or guesswork.” Id. at 54.

The Federal Circuit next considered Microsoft’s argument that the damages award must be reversed because the jury erroneously applied the entire market value rule. The Court concluded that, assuming the jury did apply the entire market value rule, its application amounted to legal error for two reasons. First, Lucent did not prove that the patented method of the ’356 patent was the basis, or even a substantial basis, of the consumer demand for the Outlook product. Second, the Court found that the methodology used by Lucent’s damages expert did not comport with the purpose of damages law or the entire market value rule primarily because he “tried to reach the damages number he would have obtained had he used the price of the entire computer as a royalty base.” Id. at 60.

For these reasons, the Court vacated the jury’s damages award and remanded for a new trial on damages. With regard to Lucent’s cross-appeal, the Federal Circuit affirmed the district court’s SJ of noninfringement of certain apparatus claims of the ’356 patent containing means-plus-function elements not found in claims 19 and 21 because Lucent did not identify algorithms or analyze source code used in the accused programs.

In sum, the Federal Circuit affirmed the district court’s denial of Microsoft’s JMOL motion for noninfringement, reversed the district court’s denial of Microsoft’s JMOL motion regarding damages, vacated the damages award, and remanded for a new trial on damages.

Summary authored by Daniel G. Chung, student associate at Finnegan.