Fed. Cir. Chops Back $358M Lucent Verdict; Gives Clinic on "Patent Damages Apportionment"

Lucent Technologies, Inc. v. Gateway, Inc., No. 08-1485 (Sept. 11, 2009)

Microsoft appealed the lower court's findings and jury verdict of $358M against Microsoft Corp. for use of its “pop-up calendar” in Microsoft Outlook. With regard to validity, the court affirmed the lower court's finding that the patent-at-issue was not obvious. Regarding infringement, the Fed. Cir. also found Microsoft liable for indirect infringement, but noted that "Lucent's direct evidence of infringment was limited . . . [n]evertheless, [the] circumstantial evidence was just adequate to permit a jury to find that at least one other person within the United States during the relevant time period . . . had performed the claimed method."

The remainder of the 64-page opinion addressed the issue of damages, where the court provided its most detailed analysis of the Georgia-Pacific factors in recent memory. Specifically, the court looked at the most common approach for determining damages - the "hypothetical negotiation" approach to determine the proper royalty upon which the parties would have agreed had they successfully negotiated an agreement just before the infringement began

Prior to its analysis, the court noted the following with regard to the district court's "gatekeeping" role for damages:

Microsoft does not argue on appeal that any of the evidence relevant to the damages award was improperly before the jury. 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. In this instance, the district court judge had no independent mandate to exclude any of that evidence.

One of the first issues regarding damages was the fact that the jury issued a lump-sum royalty that amounted to approximately 8% of the sale price of Outlook. This was problematic to the Fed. Cir. for a number of 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 . . . Lucent submitted no evidence upon which a jury could reasonably conclude that Microsoft and Lucent would have estimated, at the time of the negotiation, that the patented date-picker feature would have been so frequently used or valued as to command a lump-sum payment that amounts to approximately 8% of the sale price of Outlook.

Additionally, the court found that expert testimony "urging jurors to rely on speculation", without any more was "insufficient":

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 . . . In the present case, the jury had almost no testimony with which to recalculate in a meaningful way the value of any of the running royalty agreements to arrive at the lump-sum damages award.

Also, regarding the apportionment of damages (Georgia-Pacific factors 10 & 13), the court determined that the pop-up calendar feature was a "tiny feature" that did not warrant royalties based on the entire Outlook product:

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. Microsoft’s expert explained that Outlook’s e-mail component is "the part of Outlook that’s most commonly used by our customers." . . . 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. . . . . For these reasons, Factors 10 and 13 of Georgia-Pacific provide little support for the jury’s lump-sum damages award of $357,693,056.18.

Finally, in the entire market value (EMV) analysis, the court addressed criticisms in Congress and by high technology companies about the court's use of the EMV rule, which “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 court agreed with Microsoft that the jury improperly applied the EMV rule in this case, by using the entire revenues of Microsoft Outlook as the royalty base.

Also, the court defended the use of EMV despite criticism from various academic and industry circles:

Some commentators suggest that the entire market value rule should have little role in reasonable royalty law. . . . 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. The license agreements admitted into evidence (without objection from Microsoft, we note) highlight how sophisticated parties routinely enter into license agreements that base the value of the patented inventions as a percentage of the commercial products’ sales price. There is nothing inherently wrong with using the market value of the entire product, especially when there is no established market value for the infringing component or feature, so long as the multiplier accounts for the proportion of the base represented by the infringing component or feature.

Nevertheless, in light of the lack of substantial evidence supporting the original damages verdict, the Fed. Cir. remanded the case for further proceedings.

Download a copy of the opinion here (link)