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)

Patent Reform In Action: Judge Rader Provides Damage Apportionment Clinic In District Court Case

Cornell University v. Hewlett-Packard, 01-CV-1974 (N.D.N.Y., March 30, 2009)

Sitting by designation, Judge Rader considered HP's motion for JMOL seeking to reduce a royalty base to include only the earnings attributed to the infringing technology.

The jury found that HP infringed U.S. Patent No. 4,807,115 titled “Instruction Issuing Mechanism For Processors With Multiple Functional Units", and awarded Cornell over $184M. The jury arrived at this award by applying a 0.8% royalty rate to a $23,005,506,034 royalty base, which included earnings from the sale of many components of HP’s products that were allegedly not covered at all by the claimed invention.

Without getting too technical, the patent claims are directed to technology that issues multiple and out-of-order computer processor instructions in a single machine clock cycle. This technique employs a dispatch stack and precedence count memory. By achieving multiple and out-of-order processing, the invention enhances the throughput of processors with multiple functional units.

As a practical matter, the patent covers a component of the instruction reorder buffer (IRB), which itself a part of a computer processor. In an HP server, these processors are a part of CPU modules that, when combined with a temperature controlling thermal solution, external cache memory, and a power converter, make up what HP calls “CPU bricks.” A set of CPU bricks is then incorporated into a cell board, and that cell board is finally inserted into a server, where it functions as the server’s processing engine.

Cornell originally sought damages on the revenue from Hewlett-Packard’s entire server
and workstation systems. The court repeatedly warned Cornell that it would "scrutinize the damages proof . . . and expected Cornell to present well-documented economic evidence closely tied to the scope of the claimed invention." Nevertheless, Cornell went forward to argue that it deserved royalties on a base of the more than $23 billion in sales HP would have made if it had sold all of the alleged infringing processors as CPU bricks.

While Cornell convinced the jury, Judge Rader said "no dice" on the royalty base and granted the JMOL:

The actual math is not at issue, as both parties agree on $23 billion as the appropriate royalty base based on CPU brick sales. The important point is not the way that Cornell derived this royalty base, but that it exceeded again this court’s direction and proceeded to attempt to show economic entitlement to damages based on technology beyond the scope of the claimed invention. The entire market value rule indeed permits damages on technology beyond the scope of the claimed invention, but only upon proof that damages on the unpatented components or technology is necessary to fully compensate for infringement of the patented invention. Thus, this court faults Cornell for using the CPU brick as the royalty base without credible and economic proof that damages on the unpatented portions of this technology was necessary to compensate for the infringement. Moreover, this court finds fault in the origins of this royalty base figure. The $23 billion amount does not come from adding up invoice amounts, nor from actual CPU brick sales to Hewlett-Packard’s customers. Those customers by and large purchased complete server and workstation systems, not CPU bricks. Rather, the $23 billion base simply reveals the revenues Hewlett-Packard would have obtained if it had sold each of the infringing processors in conjunction with a CPU brick.

Notably, Cornell chose this hypothetical royalty base in favor of another alternative more clearly relevant to the value of the patented invention—the revenue Hewlett-Packard would have earned had it sold each infringing processor as just that, a processor, without any additional noninfringing components. Instead of linking its base amount to the processors (of which the infringing IRB is an important component), Cornell simply stepped one rung down the Hewlett- Packard revenue ladder from servers and workstations to the next most expensive processor incorporating product without offering any evidence to show a connection between consumer demand for that product and the patented invention. Accordingly, Hewlett-Packard now requests that this court enforce its ruling at trial that Cornell is ineligible to collect damages under the entire market value rule and reduce the royalty base to account only for the value of the processors incorporating the patented technology. Based on a thorough review of the record, this court grants Hewlett-Packard’s motion.

As a result, the damages were reduced from $184M to $53,494,282.

Read/download the opinion here (link)