Failure to Provide Detailed Expert Analysis of Hypothetical Royalty Negotiations Causes Reversal of Damages Award Against Microsoft

Case: Lucent v. Gateway, Dell and Microsoft, Fed Cir. No. 08-1485 (9/11/09)

The One Sentence Summary: Lump sum reasonable royalty damages award was not supported by evidence where plaintiff's expert analysis had flaws including not using comparable licenses, and not addressing the small contribution that the patented date picker function made to the success of Microsoft's Outlook program.


What They Were Fighting About: Microsoft appealed a patent infringement damages award for $357,693,056.18. The patent was for graphically picking data to be filled into a form (a diagram from the patent is shown above). The jury found infringement by Microsoft products and awarded lump sum damages. Microsoft also appealed the district court's denial of motions for JMOL re anticipation and obviousness.

Federal Circuit Holdings:

• The jury's rejection of Microsoft's obviousness arguments was justified by expert evidence that claim limitations were not present in the prior art article relied upon by Microsoft.
  
• Microsoft challenged the indirect infringement finding. Direct infringement requires one person to perform all steps of claim.
  
• Circumstantial evidence was sufficient for jury to conclude that some users of accused Microsoft products used date picker functionality according to instructions issued by Microsoft.
  
• The date-picker component of Outlook could be a basis for a contributory infringement finding under 35 U.S.C. § 271(c) because the component had no substantial non-infringing use. The non-infringing uses of Outlook's other components did not prevent contributory infringement.
  
• Denial of JMOL on inducing infringement was appropriate where there was expert testimony supporting the conclusion that Microsoft encouraged users to use the infringing date-picker technology.
  
• Patent damages do not punish infringement, but make the patentee whole.
  
• Plaintiff must prove damages through either lost profits or reasonable royalty.
  
• Reasonable royalty award is based on a hypothetical negotiation of royalty.
  
• Approximation and uncertainty is part of reasonable royalty analysis.
  
• Microsoft's failure to object to admission of licenses in evidence waived its objections.
  
• Lump sum award was "problematic for several reasons. First, no evidence of record establishes the parties' expectations about how often the patented method would be used by consumers. Second, the jury heard little factual testimony explaining how a license agreement structured as a running royalty agreement is probative of a lump-sum payment to which the parties would have agreed. Third, the license agreements for other groups of patents, invoked by Lucent, were created from events far different from a license negotiation to avoid infringement of the one patent here, the Day patent."
  
• Jury should not have been encouraged to speculate about future use of patent.
  Other license agreements relied upon by plaintiff were "radically different" or their connection to the hypothetical negotiations here could not be ascertained.
  
• Broad license to Dell of all IBM computer related patents was not probative of hypothetical negotiations for a license of a single patent.
  
• Plaintiff failed in its burden of showing that licenses in evidence were comparable to the hypothetical negotiation regarding this technology.
  
• Jury was given no basis to compare running royalty agreements to a lump sum royalty which it awarded.
  
• A license for a component of a graphics board did not support the jury's award without testimony of how the licensed component related to the entire board (whether it was a small fraction) and how the license price related to the overall price of the board.
  
• The value of a cross-license in another license relied upon by plaintiff's expert was not explained to the jury.
  
• Under Georgia Pacific factor 2 for comparable licenses, the jury did not have a basis to award a lump sum of roughly three to four times the average amount of the licenses in evidence.
  
• The infringing date-picker feature was a small portion of Outlook, and a hypothetical negotiation would not have had the parties value the technology highly enough to justify the jury award. 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. These two factors, at least as applied to the facts of this case, both aim to elucidate how the parties would have valued the patented feature during the hypothetical negotiation. The evidence can support only a finding that the infringing feature contained in Microsoft Outlook is but a tiny feature of one part of a much larger software program.
  
• Post-infringement evidence such as the usage of a feature can be considered in determining the reasonable royalty a hypothetical negotiation would have yielded.
  
• Royalties are not necessarily strictly tied to usage because companies sometimes have incentives to license without measuring usage or when expected usage is infrequent. However, usage is relevant, and the jury had no evidence to determine how frequently the infringing form-filling features were used.
  
• The lump-sum jury award did not rest on substantial evidence and was against the clear weight of evidence. Microsoft and Lucent would not have agreed to a royalty rate of 8% of revenue from sales of Outlook for use of the infringing form-filling feature.
  
• Jury award could not be supported based on the entire market value rule where there was no evidence that the patented feature was the basis of consumer demand for Outlook, the infringing product.
  
• The opinion of plaintiff's expert of the entire market value rule was flawed. The expert improperly used a rate of 8% of the software price after his initial opinion of 1% of the computer price was rejected in a motion in limine.
  
• The base used in a running royalty calculation can be the entire market value provided the rate is set at a low enough rate as supported by the evidence.
  
• Summary judgment against plaintiff's means plus function claims was appropriate where plaintiff did not present evidence of how the accused product reached the results.