Sunday, September 13, 2009

Microsoft gets new trial on damages in Alcatel case on Day patent

Discussing the recent CAFC decision in Alcatel v. Microsoft, Kurt Mackie of located the CAFC in Southern California:

The U.S. Court of Appeals for the Federal Circuit in Southern California denied Microsoft's appeal of the infringement charge, but ordered a new trial to reassess the damages portion of the judgment.

The summary of the decision by the CAFC, which is located in Washington, DC, is as follows:

Microsoft Corporation appeals the denial of post-trial motions concerning a jury
verdict that U.S. Patent No. 4,763,356 (the “Day patent”) was not invalid and that
Microsoft indirectly infringed the Day patent. Microsoft also appeals the
$357,693,056.18 jury award to Lucent Technologies, Inc. for Microsoft’s infringement of
the Day patent. Because the validity and infringement decisions were not contrary to
law and supported by substantial evidence, we affirm. Because the damages
calculation lacked sufficient evidentiary support, we vacate and remand that portion of
the case to the district court for further proceedings.

Mackie also wrote: The case involved a so-called "Day patent" (U.S. Patent No. 4,763,356) that Microsoft was found to have violated in three applications: Money, Outlook and Windows Mobile. In assessing the damages, the appeals court examined only how Microsoft Outlook may have infringed.

Among the amici, one had Edward R. Reines, Weil, Gotshal & Manges LLP, of Redwood Shores, California, for
amici curiae Apple Inc., et al. and James W. Dabney, Fried, Frank, Harris, Shriver & Jacobson LLP, of New York, New
York, for amici curiae Bank of America Corporation.

The opinion begins:

In the 1970s, niche groups of hobbyists, including two teenagers in a Los Altos
garage, built personal computers from scratch. In the early to mid-1980s, personal
computing gained popularity although still in its infancy. In 1982, a fifteen-year-old high
school student created the first public computer virus, spreading it among personal
computers via floppy disks, most likely the 5¼-inch version, as the 3½-inch disk wasn’t
introduced until a few years later. (...) In December 1986, three computer engineers at AT&T filed a patent application,
which eventually issued as the Day patent. The patent is generally directed to a method
of entering information into fields on a computer screen without using a keyboard. A
user fills in the displayed fields by choosing concurrently displayed, predefined tools
adapted to facilitate the inputting of the information in a particular field, wherein the
predefined tools include an on-screen graphical keyboard, a menu, and a calculator.

Concerning the background law on damages, the CAFC wrote:

We review for an abuse of discretion a district court’s decision concerning the
methodology for calculating damages. Unisplay, S.A. v. Am. Elec. Sign Co., 69 F.3d
512, 517 n.8 (Fed. Cir. 1995); see also State Indus., Inc. v. Mor-Flo Indus., Inc.,
883 F.2d 1573, 1576-77 (Fed. Cir. 1989) (noting that the precise methodology used in
“assessing and computing damages is committed to the sound discretion of the district
court”). We review the jury’s determination of the amount of damages, an issue of fact,
for substantial evidence. SmithKline Diagnostics, Inc. v. Helena Labs. Corp., 926 F.2d
1161, 1164 n.2 (Fed. Cir. 1991). “A jury’s decision with respect to an award of damages
‘must be upheld unless the amount is grossly excessive or monstrous, clearly not
supported by the evidence, or based only on speculation or guesswork.’” State
Contracting & Eng’g Corp. v. Condotte Am., Inc., 346 F.3d 1057, 1072 (Fed. Cir. 2003)
(quoting Brooktree Corp. v. Advanced Micro Devices, Inc., 977 F.2d 1555, 1580
(Fed. Cir. 1992)).

The invalidity argument of Microsoft, which failed at the CAFC, was not complex:

Microsoft’s position was that claim 19 would have been obvious over a 1984
magazine article, Michael Tyler, Touch Screens: Big Deal or No Deal?, Datamation,
Jan. 1984, at 146 (“the Datamation article” or “Datamation”).

The CAFC discusses the testimony of experts in the trial. For example,

Based on the claim construction
presented, the jury reasonably could have concluded that the Datamation article does
not disclose a graphical tool that overlayed the form. Microsoft’s expert conceded that
the Datamation article doesn’t describe a tool that overlays a form.

Microsoft attorneys did not fare well in the infringement part of the case. For example,
of their citing a 2009 CAFC case, the CAFC wrote:

Microsoft also misreads our holding in Ball Aerosol & Specialty Container, Inc. v.
Limited Brands, Inc., 555 F.3d 984 (Fed. Cir. 2009). There, we reversed the district
court’s grant of summary judgment of infringement of a patent claiming a candle tin with
a removable cover that also acts as a base for the candle holder. The issue in Ball
Aerosol was one of claim construction rather than whether circumstantial evidence
proved infringement. The patentee argued that “an apparatus patent claim with
functional elements is infringed if the accused product is reasonably capable of being
used without substantial modification in the manner recited in the claim.” Id. at 994.
The patentee conceded that there was “no proof that the Travel Candle was ever placed
in the infringing configuration.” Id. at 995.

MGM v. Grokster comes up:

Because Microsoft included the date-picker tool in Outlook, the jury could
reasonably conclude, based on the evidence presented, that Microsoft intended computer users to use the tool—
perhaps not frequently—and the only intended use of the tool infringed the Day patent.
See Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd., 545 U.S. 913, 932 (2005)
(explaining that the contributory infringement doctrine “was devised to identify instances
in which it may be presumed from distribution of an article in commerce that the
distributor intended the article to be used to infringe another’s patent, and so may justly
be held liable for that infringement”).

The Microsoft attorneys did not fare much better with their legal arguments on damages, BUT
they did well enough to get a remand:

Microsoft challenges the jury’s damages award on several bases. First,
Microsoft argues that the jury should not have applied the entire market value rule to the
value of its three software products. Microsoft’s second argument for reversing the
damages award is that, 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. Microsoft states that, “[u]nder Dynacore,
Lucent had to tie its damages claim to demonstrated instances of direct infringement.”
For the reasons stated below, we reject both arguments as presented by Microsoft. We
agree, nevertheless, with Microsoft’s argument that substantial evidence does not
support the jury’s verdict of a lump-sum royalty payment of $357,693,056.18.

The CAFC framed the issue:

Faced with the jury’s selection, our task is to determine whether substantial evidence
supports a lump-sum, paid-in-full royalty of approximately $358 million for Microsoft’s
indirect infringement of the Day patent. To do this, we must decide whether substantial
evidence supports 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 about
$358 million.

[One notes that, at trial, Lucent asked for damages not on a lump-sum basis, but
rather on a running royalty rate.]

The topic of gatekeeper arose:

At times, Microsoft’s briefs seem to suggest that the district
court judge “abdicated” her role as a gatekeeper. The responsibility for objecting to
evidence, however, remains firmly with the parties. Here, the record reveals that, at
trial, Microsoft objected neither to the introduction of any of the licenses discussed
below nor to the testimony of Lucent’s expert as it related to those licenses.

The testimony of experts on damages was criticized by the CAFC. For example,

The jury heard similarly superficial testimony about the license agreement
between Microsoft and Hewlett-Packard. Lucent’s expert merely observed that, under
the cross-license, Hewlett-Packard received “a royalty-free worldwide fully paid up
license under the Microsoft patents” and Microsoft “agreed in return for a license under
Helwett Packard’s patents to pay Hewlett Packard the sum of . . . $80,000,000.” (...)

The law does not require an expert to convey all his knowledge to the jury about each
license agreement in evidence, but a lump-sum damages award cannot stand solely on evidence which
amounts to little more than a recitation of royalty numbers, one of which is arguably in
the ballpark of the jury’s award, particularly when it is doubtful that the technology of
those license agreements is in any way similar to the technology being litigated here. (...)

Lucent’s expert never explained to
the jury whether the patented technology is essential to the licensed product being sold,
or whether the patented invention is only a small component or feature of the licensed
product (as is the case here).

The CAFC spent much time in discussing the second Georgia-Pacific factor:

The second Georgia-Pacific factor is “[t]he rates paid by the licensee for the use
of other patents comparable to the patent in suit.” 318 F. Supp. at 1120.

and concluded:

For the reasons stated, Factor 2 weighs strongly
against the jury’s award.

At a later point in the decision, the CAFC considered two other Georgia-Pacific

Factor 10 is “[t]he 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.” Georgia-Pacific, 318 F. Supp. at 1120. Factor
13 is “[t]he portion of the realizable profit that should be credited to the invention as
distinguished from non-patented elements, the manufacturing process, business risks,
or significant features or improvements added by the infringer.” Id.

The CAFC wrote:

In short, Outlook is
an enormously complex software program comprising hundreds, if not thousands or
even more, features. We find it inconceivable to conclude, based on the present record,
that the use of one small feature, the date-picker, constitutes a substantial portion of the
value of Outlook.
The parties presented little evidence relating to Factor 13. Nonetheless, the only
reasonable conclusion is that most of the realizable profit must be credited to
non-patented elements, such as “the manufacturing process, business risks, or
significant features or improvements added by [Microsoft].” As explained by Microsoft’s
expert Mr. Kennedy, Outlook consists of millions of lines of code, only a tiny fraction of
which encodes the date-picker feature. Although the weighing of Factor 13 cannot be
reduced to a mere counting of lines of code, the glaring imbalance between infringing
and non-infringing features must impact the analysis of how much profit can properly be
attributed to the use of the date-picker compared to non-patented elements and other
features of Outlook.

The CAFC concluded: For these reasons, Factors 10 and 13
of Georgia-Pacific provide little support for the jury’s lump-sum damages award of

Next, the CAFC considered Georgia-Pacific factor 11: Factor 11 is
“[t]he extent to which the infringer has made use of the invention;
and any evidence probative of the value of that use.” Georgia-Pacific, 318 F. Supp.
at 1120.

The bottom line on damages from the CAFC: Having examined the relevant Georgia-Pacific factors, we are 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. When the evidence is
viewed in toto, the jury’s award of a lump-sum payment of about $358 million does not
rest on substantial evidence and is likewise against the clear weight of the evidence.

But note that the CAFC also said:

We need not identify any particular Georgia-
Pacific factor as being dispositive. Rather, the flexible analysis of all applicable
Georgia-Pacific factors provides a useful and legally-required framework for assessing
the damages award in this case. Furthermore, we do not conclude that the
aforementioned license agreements (or other evidence) cannot, as a matter of law,
support the damages award in this case. (...)

A complicated case this was, and the damages evidence of record was
neither very powerful, nor presented very well by either party.

Of the entire market rule:

In one sense, our law on the entire market value rule is quite clear. For the entire
market value rule to apply, the patentee must prove that “the patent-related feature is
the ‘basis for customer demand.’” Rite-Hite, 56 F.3d at 1549 (quoting State Indus.,
883 F.2d at 1580); see also Bose Corp v. JBL, Inc., 274 F.3d 1354, 1361 (Fed. Cir.
2001); TWM Mfg., 789 F.2d at 901 (“The entire market value rule allows for the recovery
of damages based on the value of an entire apparatus containing several features,
when the feature patented constitutes the basis for customer demand.”).

The CAFC alluded to the McCormick reaper case:

Shortly before the Civil War, in Seymour v. McCormick,
57 U.S. (16 How.) 480, 491 (1853), a case involving one of Cyrus McCormick’s famous
reaping machine inventions, the Court warned that it would be “a very grave error to
instruct a jury ‘that as to the measure of damages the same rule is to govern, whether
the patent covers an entire machine or an improvement on a machine.’”

[See previous IPBiz posts on the involvement of Lincoln and Stanton in this case.]

The Kearns intermittent wiper case was cited:

Thus, even when the patented invention is a small component of a much
larger commercial product, awarding a reasonable royalty based on either sale price or
number of units sold can be economically justified. See, e.g., Kearns, 32 F.2d at 1544
(awarding a reasonable royalty of 90 cents per vehicle that had the infringing
intermittent windshield wipers, when the average car price was approximately $4000 to

A not-yet-published, in press, law review of Mark Lemley was cited, UNFAVORABLY:

Some commentators suggest that the entire market value rule should have little
role in reasonable royalty law. See, e.g., Mark A. Lemley, Distinguishing Lost Profits
From Reasonable Royalties, 51 Wm. & Mary L. Rev. (forthcoming 2009) (manuscript
at 2) (...) But such general propositions ignore the realities of patent licensing and
the flexibility needed in transferring intellectual property rights. The evidence of record
in the present dispute illustrates the importance the entire market value may have in
reasonable royalty cases.

Scott Fulton described the case in the following manner:

Instead, in what clearly appears to be an effort to establish (or re-establish) legal precedent for patent reform in the absence of new legislation to achieve the same goals, the judges found fault with the jury award. Specifically, no one really knows how the jury arrived at an award of $357,693,056.18.


Specifically, the law states that estimating damages in terms of royalties for all units sold where the infringing feature was included, can only take place in instances where customers purchased those units specifically because it had that feature. Imagine customers all over the world saying, "I want to buy that new Dell I've been reading about that has that cool new software where you can click on a date from a calendar!"
It's called the entire market value rule; and the case law the judges cite for it reads as follows: "The entire market value rule allows for the recovery of damages based on the value of an entire apparatus containing several features, when the feature patented constitutes the basis for customer demand."


If the Appeals Court's resurrection of a 1970 formula for obtaining the base value for the hypothetical royalty formula (an estimate of the value that the infringed work contributed to the whole product, rather than the sales of the product itself) can be upheld by the Supreme Court -- which may very well happen -- then appeals panels everywhere in the country may cite this case as precedent for overturning colossal jury verdicts. What's more, the prospect of similar verdicts in the future in software-related cases may have just dwindled to something "exceedingly small."

IPBiz notes that the CAFC has been using the Georgia-Pacific factors for a long time, and the Microsoft decision hardly qualifies as a "resurrection." Of the "entire market rule," recall the decision said: "The evidence of record
in the present dispute illustrates the importance the entire market value may have in reasonable royalty cases." Of Scott's reference to "appeals panels everywhere in the country," one notes that patent appeals are ONLY heard by the CAFC, which, as noted above, is located in Washington, DC.

In passing, Radio Steel [the wheelbarrow case] was cited:

Radio Steel & Mfg. Co. v. MTD
Prods., Inc., 788 F.2d 1554, 1557 (Fed. Cir. 1986) (“The determination of a reasonable
royalty, however, is based not on the infringer’s profit, but on the royalty to which a
willing licensor and a willing licensee would have agreed at the time the infringement

Also: But an explanation urging jurors to rely on speculation,
without more, is often insufficient. See Novosteel SA v. United States, 284 F.3d 1261,
1276 (Fed. Cir. 2002) (Dyk, J., dissenting) (“It is well established that speculation does
not constitute ‘substantial evidence.’”).

Also: These claims are apparatus
claims containing means-plus-function elements not found in claims 19 and 21. As
Lucent concedes, it did not provide any analysis of the source code of the accused
programs. Lucent further did not identify the algorithms used in the accused products.
Lucent’s evidence, as Judge Brewster noted, did “nothing more than demonstrate that
the accused products reach the same result; the evidence [did] not demonstrate
circumstantially or otherwise anything about the steps used by the accused products to
arrive at the result.” Under our precedent, Judge Brewster’s grant of summary
judgment was not erroneous. See Aristocrat Techs. Austl. Pty Ltd. v. Int’l Game Tech.,
521 F.3d 1328, 1349 (Fed. Cir.), cert. denied, 129 S. Ct. 754 (2008).

**See also

Alcatel-Lucent receives unfavorable re-exam result


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