The Federal Circuit Post Lucent

The Federal Circuit’s September 2009 decision in Lucent v. Gateway¹ seemed to indicate that the Federal Circuit was concerned about large and unpredictable damage awards and appeared to suggest a practical and realistic approach to damages in patent cases.² Three subsequent Federal Circuit patent damage-related decisions, one of which addresses false marking, have provided additional information to consider.

i4i LP v. Microsoft Corp., 589 F.3d 1246 (Fed. Cir. 2009)

In December 2009, the Federal Circuit upheld a $200 million jury award against Microsoft for infringing i4i’s document-formatting patent. The district court enhanced the jury’s verdict by $90 million based on a finding of willfulness and pre- and post-trial interest. The $290 million award is the largest patent infringement judgment ever to be affirmed on appeal.

Reviewing Microsoft’s Daubert challenge to the testimony of i4i’s damage expert, the Federal Circuit discussed the damage expert’s methodology in determining a royalty rate. i4i’s expert had opined that a $98 royalty rate was appropriate even though certain Word products sold for as little as $97. To calculate the royalty rate, i4i’s expert used another product (XMetaL Author) that had a list price of $499 as a benchmark, multiplied that price by Microsoft’s profit margin, and then applied the 25% rule to the resulting number to come up with the baseline rate. The expert then adjusted the baseline rate using the Georgia-Pacific factors. Because a survey indicated that 2% of Word products sold were used in an infringing manner, the expert used 2% of Word products sales as a royalty base.

Given the Lucent decision, one might have expected the i4i Court to consider whether the evidence showed that the patented feature was the basis for demand for the infringing product and thus whether the entire market value rule should apply. The Court did not address the entire market value rule or whether the XMetaL product was an appropriate benchmark in light of the differences between the patented feature and the XMetaL product. And, while the royalty base was 2% of the Word product sales, the Court did not comment on whether it was appropriate to use a 25% profit split when many technologies contributed to the value of Microsoft’s Word products.

After determining that Microsoft’s Daubert challenges failed and that “vigorous cross-examination”³ was the appropriate method to attack the expert’s opinions, the Court decided the case on a procedural point. Because Microsoft failed to file a pre-verdict motion for judgment as a matter of law on damages before the case was submitted to the jury, the Court declined to review the award for excessiveness. Using the “highly deferential standard,” the Court concluded it could only review the damage award upon “a clear showing of excessiveness.” To be excessive, “the award must exceed the maximum amount calculable from the evidence.” Because the jury’s award was supported by the testimony of i4i’s damage and survey experts, the Court affirmed the award. The Court did note that “had Microsoft filed a pre-verdict JMOL, it is true that the outcome might have been different.” ⁴

The Forest Group Inc. v. Bon Tool Co., 590 F.3d 1295 (Fed. Cir. 2009)

In December 2009, the Federal Circuit held that the false marking statute (35 U.S.C. sec. 292) imposes a penalty of up to $500 for each product that is marked with an incorrect patent number for the purpose of deceiving the public.⁵ The patent at issue claimed an improved spring-loaded parallelogram stilt used in construction. The district court found that Forest knew that its product was not covered by the patent after receiving a second summary judgment determination concerning the patent.

The Court reviewed policy considerations in support of its per article interpretation of sec. 292, opining that acts of false marking deter innovation and stifle competition in the marketplace. The Court concluded that these injuries occur each time an article is falsely marked. The Court reasoned that if a single $500 were imposed for each decision to falsely mark, the statute would be rendered “completely ineffective.”⁶

The Forest Group Court recognized the possibility that interpreting the fine contemplated by sec. 292 to apply on a per article basis could create a surge of “marking trolls” who bring litigation purely for personal gain.⁷ Nevertheless, the Court concluded that by permitting members of the public to sue, Congress encouraged individuals to help control false marking.

As the Court noted, the false marking statute allows a range of penalties, providing district courts the discretion to strike a balance between encouraging enforcement and imposing disproportionately large penalties. However, the Forest Group decision provided no guidance to district courts as to how to determine an appropriate penalty. On remand, the district court reduced the total fine for each product falsely marked from $500 to $180 (the highest sale price of the product at issue) for total damages of $6,840.

Since the Forest Group decision, at least 139 false marking cases have been filed in district courts.⁸ The Senate Judiciary Committee’s current version of the Patent Reform Act contains a provision that would require plaintiffs to show that they suffered a competitive injury and the measure would be applied to both future and pending cases.

ResQNet.Com, Inc. v. Lansa, Inc, 594 F.3d 860 (Fed. Cir. 2010)

On February 5, 2010, the Federal Circuit vacated the damage award against Lansa and remanded the case. The district court had awarded $506,305 in damages based on a 12.5% royalty rate applied to Lansa’s revenues from infringing sales. The technology at issue related to screen recognition and terminal emulation processes that download information from a remote mainframe computer onto a personal computer.

ResQNet’s damage expert determined that the “starting point” for a hypothetical negotiation was royalties received by the patentee from seven existing licenses. These seven licenses included five “re-bundled” licenses which apparently included software products and source code as well as services such as training, marketing, etc.

The Court found that the five re-bundled ResQNet licenses had no relation to the claimed invention. Given that the other two “straight” licenses, which arose out of litigation over the patents in suit, addressed the patented technology, the Court characterized these settlement agreements as “the most reliable license in this record.” It also stated, however, that: "litigation itself can skew the results of the hypothetical negotiation."

The ResQNet Court termed ResQNet’s damage analysis “troubling.” First, the re-bundling licenses had extremely high rates compared with the license on the claimed technology and, second, the reasons given by the expert for considering the re-bundling licenses at all were unconvincing. The Federal Circuit stated that the first Georgia-Pacific factor “must consider licenses that are commensurate with what the defendant has appropriated. If not, a prevailing plaintiff would be free to inflate the reasonable royalty analysis with conveniently selected licenses without an economic or other link to the technology in question.”

The Court ultimately concluded that the district court erred by considering ResQNet’s re-bundling licenses to significantly adjust upward the reasonable royalty without any factual findings that accounted for the technological and economic differences between those licenses and the patent at issue.

While the Court seemed to open the door to the possible use of licenses resulting from litigation settlements, it also reiterated caveats reflecting an acknowledgement that litigation induced license agreements should be used with caution.

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¹580 F.3d 1301 (Fed. Cir. 2009).

²See The BERO Group Nov. 2009 Newsletter.

³589 F.3d at 1271.

⁴589 F.3d at 1272.

⁵35 U.S.C. sec. 292 provides that half of the fine goes to the party that sues for false marking and the other half of the fine goes to the federal government.

⁶590 F.3d at 1303.

⁷Id.

⁸IPLaw360.com “Bon Tool Wins Judgment in False Patent Marking Suit.”