Recently, the Federal Circuit affirmed a $290 million verdict against Microsoft Corporation in its long running patent infringement battle with i4i Limited Partnership and Infrastructures for Information Inc. (collectively, "i4i"). i4i Ltd. v. Microsoft Corp., 598 F.3d 831 (Fed. Cir. 2010), cert. granted, 131 S.Ct. 647 (Nov. 29, 2010) (No. 10-290). More recently, the Supreme Court granted Microsoft's petition for a writ of certiorari and will take up the question of what is the burden of proof for proving invalidity.
i4i brought a patent infringement suit against Microsoft, alleging that certain versions of Microsoft Word ("Word"), Microsoft's word-processing software, that contained a custom tool for editing the "markup language" XML infringed U.S. Patent No. 5,787,449 ("the '449 patent"). The '449 patent relates to an improved method for editing documents containing markup languages such as XML. In particular, the improvement stems from storing a document's content separately from the markups, also called "metacodes." This separation is achieved by storing the metacode in a "metacode map," which describes the metacodes and their location within the document.
After a seven-day trial, the jury returned a verdict in favor of i4i and awarded $200 million in damages. It further found Microsoft liable for willful infringement. The district court denied Microsoft's post-trial motions. After adding $40 million in enhanced damages, as well as prejudgment interest and post-verdict damages, the district court entered judgment in the amount of $290 million and issued a permanent injunction. Microsoft appealed the jury verdict and injunction on numerous grounds.
Jury Verdict Affirmed
The Federal Circuit, in an opinion by Judge Prost, joined by Judges Schall and Moore, affirmed the judgment with only a minor modification to the injunction.
First, the Federal Circuit addressed Microsoft's claim construction arguments. Microsoft argued that the claim term "distinct" had two requirements: (1) storing the document content in a separate file from the metacode map, not just separate portions of memory; and (2) ability to independently edit the document content and the metacode map without accessing each other. The Federal Circuit disagreed. "Because the claims themselves do not use the word 'file' and the specification discloses embodiments where the storage format is not a file," the Federal Circuit concluded "that 'distinct' does not require storage in separate files." Id. at 843. "In light of the specification's permissive language, the prosecution history, and the claim language," the Federal Circuit concluded "that 'independent manipulation' is a benefit of separate storage, but not itself a limitation." Id. at 844.
Second, the Federal Circuit considered Microsoft's invalidity arguments. The Federal Circuit quickly dismissed Microsoft's obviousness challenge largely on procedural grounds. Microsoft had filed a preverdict motion for judgment as a matter of law ("JMOL") that addressed anticipation based on a single reference, but not obviousness. This was "insufficient to preserve [Microsoft's] right to post-verdict JMOL on a different theory (obviousness), or on different prior art (Rita, DeRose, Kugimiya)." Id. at 845. As such, Microsoft had waived its right to challenge the factual findings underlying the jury's implicit nonobviousness verdict, and the Federal Circuit affirmed the legal conclusion of nonobviousness. Id.
The Federal Circuit next turned to Microsoft's anticipation argument-the subject upon which the Supreme Court has granted review. Microsoft had argued that the '449 patent was invalid for violating the "on sale" bar. To prove invalidity by the on-sale bar, Federal Circuit precedent requires a challenger to show by clear and convincing evidence that the claimed invention was "on sale in this country, more than one year prior to the date of the application for patent in the United States." Id. at 846 (quoting 35 U.S.C. § 102(b)) (internal quotation omitted).
Prior to filing for the '449 patent, i4i's corporate predecessor had developed a software program called "S4" and sold it to Semiconductor Equipment and Materials International ("SEMI") in California who put it to use by February 1993. It was undisputed that S4 was sold in the United States prior to June 2, 1993, the critical date for the purposes of the on-sale bar. The only question was whether the version of S4 sold had actually embodied the invention of the '449 patent. Because the source code for S4 had been destroyed years before this litigation began, the question turned largely on the credibility of S4's creators, who were also the named inventors of the '449 patent.
At trial, Microsoft's expert testified that S4 embodied the invention, relying on the S4 user manual. i4i attacked the opinion of Microsoft's expert because it was rendered without reviewing S4's source code. The inventors of the '449 patent also testified that the version of S4 sold to SEMI could not practice the '449 patent because the key innovation of a metacode map had not yet been conceived. Microsoft impeached their testimony with a letter written to investors and a funding application submitted to the Canadian government in which the inventors had indicated that S4 had embodied the '449 patent. But i4i's attorney emphasized to the jury that Microsoft could not prove by clear and convincing evidence that S4 embodied the '449 patent without the source code. In the end, the jury found that the patent was not invalid.
On appeal, Microsoft argued that i4i was required to corroborate the inventors' testimony. Though corroboration is required when a patentee seeks to antedate a prior art reference, the Federal Circuit held that "corroboration was not required in this instance, where the [inventor] testimony was offered in response to a claim of anticipation and pertained to whether the prior art practiced the claimed invention." 598 F.3d at 847. The Federal Circuit then determined that there was sufficient evidence to support the jury's findings. Relying on the clear and convincing evidence standard, the Federal Circuit explained:
In evaluating the evidence, the jury was free to disbelieve Microsoft's expert, who relied on the S4 user manual, and credit i4i's expert, who opined that it was impossible to know whether the claim limitation was met without looking at S4's source code. Although the absence of the source code is not Microsoft's fault, the burden was still on Microsoft to show by clear and convincing evidence that S4 embodied all of the claim limitations. The jury's finding of validity was supported by the testimony of the inventors (Vulpe and Owens), as well as their faxes to an attorney regarding the patent application.
Id. at 848.
Microsoft also challenged the jury instruction on its burden of proving anticipation, arguing in particular that the clear and convincing evidence standard should not apply when the art was not before the PTO. As discussed later, this would form the basis of Microsoft's petition for a writ of certiorari. Microsoft's argument primarily relied on KSR International Co. v. Teleflex Inc., 550 U.S. 398, 426 (2007), where the Supreme Court stated in dicta:
We need not reach the question whether the failure to disclose Asano during the prosecution of Engelgau voids the presumption of validity given to issued patents, for claim 4 is obvious despite the presumption. We nevertheless think it appropriate to note that the rationale underlying the presumption-that the PTO, in its expertise, has approved the claim-seems much diminished here.
The Federal disagreed. "This court's decisions in Lucent Technologies, Inc. v. Gateway, Inc., 580 F.3d 1301, 1311-16 (Fed. Cir. 2009), and Technology Licensing Corp. v. Videotek, Inc., 545 F.3d 1316, 1327 (Fed. Cir. 2008), make clear that the Supreme Court's decision in KSR . . . did not change the burden of proving invalidity by clear and convincing evidence. Thus, based on our precedent, we cannot discern any error in the jury instructions." Id. at 848.
Third, Microsoft challenged the jury's findings of infringement on a number of grounds, starting with contributory infringement. The jury was instructed that contributory infringement requires the sale of "a material component for use in practicing the patented claim-or patented method"; whereas, 35 U.S.C. § 271(c) uses the words "a material or apparatus," not component. Id. at 848-49. "Although the district court's instructions differed from the statute," the Federal Circuit held "this is not a case where the difference mattered." Id. at 849. Microsoft also argued that the jury was erroneously instructed to focus on the custom XML editor, rather than all of Word, when deciding whether any noninfringing uses were "substantial." Id. The Federal Circuit determined that the jury instruction here was appropriate because "a particular tool within a larger software package may be the relevant 'material or apparatus' when the tool is a separate and distinct feature." Id. at 849.
Turning to whether there was sufficient evidence to support the general verdict of infringement, the Federal Circuit concluded that there was. At trial, i4i's expert testified that all the limitations of the method claim were met when Microsoft Word was used to open, edit, or save XML documents. The Federal Circuit found that a joint stipulation between the parties and Microsoft's interrogatory response "unequivocally" stated that Word was used that way. Id. at 850. Thus, a reasonable jury could find that at least one person performed the claimed method; the required showing of direct infringement had been made to support contributory and induced infringement.
In addition, Microsoft argued that there was no contributory infringement because it did not have the required knowledge of the patent and there was substantial noninfringing use. To the contrary, the Federal Circuit noted:
The evidence showed that the Word development team heard a presentation by i4i about software practicing the '449 patent, asked how the software worked, and received marketing materials on the software. Internal Microsoft emails showed that other Microsoft employees received a marketing email from i4i containing the patent number, were "familiar" with i4i's products, and believed the Word's custom XML editor would render that product "obsolete." Based on this evidence, the jury could have reasonably concluded that Microsoft knew about the '449 patent and knew use of its custom XML editor would infringe.
Id. at 851. In addition, the jury heard "ample testimony that the noninfringing, binary file format [use] was not a practical or worthwhile use for the XML community, for which the custom XML editor was designed and marketed." Id. Thus, Microsoft's purported noninfringing use was not substantial.
Although contributory infringement by itself was sufficient to support the general verdict, for completeness, the Federal Circuit went on to address inducement. To prove inducement, the patentee must show direct infringement, and that the alleged infringer knowingly induced infringement and possessed the specific intent to encourage another's infringement. Here, the jury saw and heard about Microsoft's online training and user support that provided detailed instructions on using Word's custom XML editor, which the Federal Circuit noted showed that Microsoft intended Word to be used in an infringing manner. As discussed above, Microsoft had knowledge of the '449 patent. Further, one Microsoft employee stated with regard to i4i's product: "[W]e saw this tool some time ago and met its creators. Word  will make it obsolete. It looks great for XP though." Id. at 852 (alterations in original). As such, the Federal Circuit concluded that there was sufficient evidence for a finding of inducement.
Fourth, the Federal circuited addressed damages. i4i's expert on damages opined that $200 million would be a reasonable damages award based on a hypothetical negotiation between i4i and Microsoft at the time infringement began. To arrive at that figure, i4i's damages expert calculated a royalty rate of $98 per copy of Word, then multiplied it by 2.1 million, the number of copies of Word used in an infringing manner. The $98 per copy rate was determined based on a benchmark product called XMetaL, which retailed for $499. The benchmark rate was then multiplied by Microsoft's profit margin of 76.6%, and the "25-percent rule" applied to the profits. This provided a baseline royalty rate of $96, which was adjusted to $98 based on the factors set out in Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970).
The 2.1 million number was based on a survey that i4i's expert sent to 988 randomly selected U.S. companies. He received 46 responses and determined that 19 of those companies used Word in an infringing manner. The expert then assumed that all the companies not responding did not use Word in an infringing manner. He then multiplied the total number of copies of Word sold to businesses between 2003 and 2008 by 1.9% (i.e., 19 divided by 988) to arrive at 1.8 million, which was increased to 2.1 million to account for sales in the period between the end of the survey and trial.
Microsoft challenged the admissibility of the testimony on damages under Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993), and Rule 702 of the Federal Rules of Evidence. The Federal Circuit disagreed and explained: "[i4i's damages expert's] testimony about the acceptance of the hypothetical negotiation model among damage experts and economists, combined with his methodical explication of how he applied the model to the relevant facts, satisfied Rule 702 and Daubert." Id. at 854. "Microsoft's quarrel with the facts [i4i's damages expert] used go to the weight, not admissibility, of his opinion." Id.
[Note: In a later appeal involving Microsoft in a different case, another panel of the Federal Circuit ruled that one of the techniques used by i4i's damages expert, the "25 percent rule of thumb," is a fundamentally flawed tool for determining a baseline royalty in a hypothetical negotiation, and that evidence relying on the 25 percent rule is inadmissible under Daubert. Uniloc USA, Inc. v. Microsoft Corp., Nos. 2010-1035, -1055 (Fed. Cir. Jan. 4, 2011).]
Microsoft also challenged the admission of the survey as prejudicial under Rule 403 of the Federal Rules of Evidence. "[S]ince the survey was used to estimate the amount of infringing use, a key number in i4i's damage calculation," the Federal Circuit reasoned that "evidence about its methodology and findings could certainly help the jury evaluate the expert testimony." Id. at 856.
Microsoft also challenged the reasonableness of the damages award. But, Microsoft had failed to file for preverdict JMOL on damages. Had Microsoft filed a preverdict JMOL, the Federal Circuit acknowledged that the outcome may have been different. Instead, the Federal Circuit could only review the damages verdict under the "highly deferential" standard applied to denials of new trials. Id. This required "a clear showing of excessiveness," and the reward had to exceed the "maximum amount calculable from the evidence." Id. (emphasis in original). "Given the intensely factual nature of a damages determination and our deferential standard of review," the Federal Circuit chose not to "second-guess or substitute our judgment for the jury's" and affirmed. Id. at 858.
Microsoft also appealed the district court's decision to enhance damages under 35 U.S.C. § 284. Enhanced damages requires a finding of willful infringement. That question was submitted to the jury, who found that Microsoft's infringement was willful, which the Federal Circuit concluded was supported by sufficient evidence. Based on the jury's finding of willfulness, the district court analyzed the factors set out in Read Corp. v. Portec, Inc., 970 F.2d 816, 826-27 (Fed. Cir. 1992), which set forth the standard for deciding whether to and by how much to enhance damages. On one hand, the district court found several of the Read factors favored no enhancement: that there was no deliberate copying by Microsoft and that i4i had delayed in bringing suit. On the other hand, the district court found that several factors favored enhancement: "Microsoft had started using the infringing products more than five years ago (in 2002), failed to conduct an infringement analysis after being notified of the '449 patent again in 2003, and implemented the infringing custom XML editor with the purpose of rendering i4i's products obsolete." Id. at 858. The Federal Circuit noted that Microsoft's litigation misconduct of repeatedly making improper statements to the jury also justified enhancement. Given that the district court was statutorily authorized to increase the award to $600 million, the Federal Circuit concluded that the award of only $40 million was not an abuse of discretion.
Finally, the Federal Circuit turned to the permanent injunction. The district court permanently enjoined Microsoft from selling Word with XML editing capabilities or providing support to anyone to use Word to open custom XML files. As the Federal Circuit pointed out, however, the scope of this injunction was narrow. It applies only to users who purchase or license Word after the injunction takes effect. Users who purchase or license Word before the injunction's effective date may continue using Word's custom XML edition and receiving technical support.
The Federal Circuit concluded that i4i had met the four-part test of eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 391 (2006), which requires irreparable injury, inadequate remedies at law, balancing of hardships, and consideration of public interest. In particular, the court concluded that i4i was irreparably harmed by Microsoft's infringement, which rendered i4i's product obsolete, causing it to lose market share and requiring it to change its business strategy to survive. Remedies at law were inadequate to compensate i4i because i4i had not previously licensed the patent; it had lost market share, brand recognition, and goodwill; and monetary damages would be difficult to quantify. The balance of hardships favored i4i given the patented feature was the core of i4i's business while "merely one of thousands of features within Word, used by only a small fraction of Microsoft's customers." Id. at 863 (internal quotations omitted). The Federal Circuit further found it was appropriate to ignore Microsoft's sunk costs and commercial success of the infringing product when balancing hardships. Lastly, the public interest was not disserved as the injunction was narrowly tailored to minimize disruption to the public.
Microsoft's one and only successful argument on appeal was convincing the court to modify the effective date of the injunction. The district court had ordered the injunction to go into effect sixty days after its order of August 11, 2009. But, the only evidence on record was that it would take Microsoft five months to implement any injunction. As such, the Federal Circuit modified the injunction to go into effect on January 10, 2010.
Microsoft requested panel rehearing and rehearing en banc. The panel granted rehearing for the limited purpose of adding a separate discussion of willfulness, which did not change the result in any way. The petition for rehearing en banc was denied. Microsoft then petitioned the Supreme Court for a writ of certiorari.
Petition for a Writ of Certiorari
On November 29, 2010, the Supreme Court granted Microsoft's petition. See Jaspal S. Hare, Supreme Court To Review The 27 Year Old Clear and Convincing Evidence Requirement for Invalidity, in this issue of IP Insight. The question presented is:
The Patent Act provides that "[a] patent shall be presumed valid" and that "[t]he burden of establishing invalidity of a patent or any claim thereof shall rest on the party asserting such invalidity." 35 U.S.C. § 282. The Federal Circuit held below that Microsoft was required to prove its defense of invalidity under 35 U.S.C. § l02(b) by "clear and convincing evidence," even though the prior art on which the invalidity defense rests was not considered by the Patent and Trademark Office prior to the issuance of the asserted patent. The question presented is:
Whether the court of appeals erred in holding that Microsoft's invalidity defense must be proved by clear and convincing evidence.
Petition for Writ of Certiorari at i, Microsoft Corp. v. i4i Ltd., 562 U.S. ___ (Nov. 29, 2010) (No. 10-290). A decision is likely by June 2011.