The Court of Appeals for the Federal Circuit's September 2009 decision in Lucent Technologies, Inc. v. Gateway, Inc., 580 F.3d 1301 (Fed. Cir. 2009), suggests that many of the goals urged by supporters of patent reform legislation may be achieved by applying existing law. In particular, the decision suggests that existing law may provide judges with the means to control jury awards without new legislation.

Proposals to change the rules governing patent damage awards, especially awards based on a “reasonable royalty,” have been at the center of the current patent reform debate. In Lucent, the Federal Circuit used existing law to vacate a $357-million damage award against Microsoft and remanded the case for a new trial on damages. The decision may bolster the position of patent reform opponents who argue that current law is sufficient to address some of the perceived problems with patent litigation.

Background

In 1986, three computer engineers at AT&T filed a patent application that eventually issued as the Day Patent. The Day Patent's claims are generally directed to a method of entering data into fields on a computer screen without using a keyboard. In 2002, Lucent, the patent's assignee, sued a series of personal computer manufacturers, alleging that the sales and use of several different programs infringed several patents, including the Day Patent. Because Microsoft sold several of the accused programs, it intervened to defend the suit.

At trial, a jury awarded Lucent more than $357 million, excluding prejudgment interest, in damages for infringement of the Day Patent. The Federal Circuit vacated that award on appeal after conducting a detailed analysis of the evidence relevant to the jury's award.

A Careful Review of the Evidence The Court's review of the damage award is instructive and suggests that the Federal Circuit — and, by extension, district courts — will carefully consider the actual evidence presented to support a jury's damage award. In this case, the parties had both followed the hypothetical negotiation approach to determining a reasonable royalty and used the framework provided by the Georgia Pacific factors to guide their analysis .

Other Licenses in Evidence Not Comparable. The parties disagreed about the form of the royalty that would have resulted from the hypothetical negotiation. In particular, the parties disagreed about whether the royalty should consist of a single upfront payment or a running royalty on all sales, including future sales. Microsoft contended that the negotiation would have resulted in a one-time, $6.5-million payment, while Lucent argued for an eight-percent royalty on the sales price of each copy of the software.

Because the verdict form indicated that the jury had awarded a lump-sum damage award with no provision for a running royalty on future sales, the Court determined that much of Lucent's evidence did not provide support for the jury's verdict. For example, only four of the eight license agreements offered as evidence by Lucent were lump-sum agreements. The licenses that were not lump-sum agreements could be disregarded.

As for the remaining licenses offered by Lucent, the Court distinguished and diminished their evidentiary value. The Court stated that so little information had been presented about the scope and nature of three of the licenses that it was impossible to determine whether they were comparable to the hypothetical agreement in the present suit. The final license was so different in scope from the agreement that would have resulted from the hypothetical negotiation that “a reasonable juror could only conclude that [it was] directed to a vastly different situation than the hypothetical licensing scenario of the present case.”

Because none of the licenses was comparable to the jury's award, the license agreements could not provide support for the jury's verdict. As the Court concluded:

Lucent had the burden to prove that the licenses were sufficiently comparable to support the lump-sum damages award. 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.

The Claimed Invention Is a Small Part of a Larger Product. The Court also found that the size of the damage award was inconsistent with the patented feature's small contribution to the product as a whole. The Court noted that the infringing feature was only one of “hundreds, if not thousands or even more” features in the accused software and that much of the profits from and demand for the accused software are the result of these other features.

Similarly, the Court noted that Lucent failed to present any evidence showing how often the infringing feature was used. Lucent, therefore, could not argue that frequent use of the claimed invention supported the size of the damage award.

The Royalty Base and the Entire Market Value Rule. The Court rejected Microsoft's argument that the jury improperly based its royalty calculation on the sales price of the accused software rather than the value of the specific infringing feature. As the Court noted, the literal application of the entire market value rule would be legally erroneous because there was no evidence showing that the infringing feature was the basis of consumer demand for the accused software.

The Court, however, did note that “the base used in a running royalty calculation can always be the value of the entire commercial embodiment, as long as the magnitude of the rate is within an acceptable range (as determined by the evidence).” As the Court noted, parties routinely enter into licenses that use the sales price of the commercial product as a royalty base. “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.” The Court, however, provided little guidance on how to determine whether a particular multiplier is appropriate.

Implications for Patent Reform Legislation The Federal Circuit's careful review of the damage award in Lucent demonstrates that courts can be deeply involved in the analysis of damages award and are aware of the patent reform debate on Capitol Hill. A key sticking point in the legislative debate continues to be the calculation of damages — particularly the entire market value rule and apportionment of damages. Each side of the debate will likely argue that the Lucent decision proves that Congress should adopt its position.

Judicial decisions can have a significant impact on the debate in Congress. In previous legislative sessions, patent reform advocates contended that it was crucial to change the statutes governing injunctions. That issue receded, however, after the U.S. Supreme Court addressed the standards for issuing injunctions in eBay, Inc. v. MercExchange, LLC, 126 S. Ct. 1837 (2006).

At the beginning of the current Congress, key senators and representatives introduced nearly identical provisions to address damages issues. Both bills focused upon reasonable royalties and defined entire market value, marketplace licensing, and apportionment of damages. Opponents of these provisions argued that Georgia Pacific already provided sufficient authority for judges to properly guide juries for determining damages. They argued that the proposed damages provisions would inappropriately limit the judge's flexibility to consider all the relevant factors in a damages calculation.

Staff members for the House and the Senate Judiciary Committees are continuing to meet and determine how to fashion a compromise bill that will be well received by both bodies and the patent community. During the next several months, we will see how Congress attempts to resolve these contentious issues, and Lucent may be as much of a game-changer as was e-Bay.