On December 22, 2009, the U.S. Court of Appeals for the Federal Circuit issued its decision in a closely watched case. The court affirmed a $240-million damage award against Microsoft Corporation and an injunction prohibiting sales of the current version of the company’s Word software. The decision, i4i Ltd. Partnership v. Microsoft Corp., No. 2009-1504 (Fed. Cir. Dec. 22, 2009), demonstrates that procedural decisions at trial can have significant consequences on appeal. The opinion also provides some important guidance regarding the court’s thinking on patent damages issues and injunctive relief.

Background

The patent at issue claims an improved method for editing documents containing a computer mark-up language known as custom XML. i4i is the patent’s assignee and sells software products that use the claimed invention, including an “add-on” program for use with Microsoft Word. In 2003, Microsoft introduced a new version of Microsoft Word that had XML editing capabilities. Subsequent versions of Microsoft Word have continued to include this feature.

i4i sued Microsoft for patent infringement in 2007, and the case was tried to a jury. Before it was submitted to the jury, Microsoft moved for judgment as a matter of law on the issues of infringement, willfulness, and some aspects of validity, but failed to do so on the issue of damages. The district court denied those motions, and the jury rendered a verdict against Microsoft, finding that the company had willfully infringed the patent and awarding $200 million to i4i as a reasonable royalty for the infringement. In addition, the district court awarded i4i $40 million in enhanced damages and issued an injunction ordering Microsoft to cease sales of Microsoft Word containing the infringing XML editing capability within 60 days.

The Importance of Procedural Choices at Trial

The Federal Circuit’s opinion suggests that procedural choices at trial contributed to the outcome on appeal. In particular, the decision highlights the importance of the proper use of motions for judgment as a matter of law (JMOL). The Federal Circuit’s conclusions on both the invalidity and damages issues rest heavily on what it portrayed as Microsoft’s inconsistent use of those motions.

With regard to invalidity, Microsoft filed a pre-verdict motion for JMOL, contending that the on-sale bar, 35 U.S.C. § 102(b), invalidated the claims at issue. Microsoft did not, however, file a pre-verdict JMOL motion regarding obviousness or other prior art. In addition, the jury’s verdict form did not require it to make separate findings for each piece of prior art. Instead, it asked only the general question of whether Microsoft had proved that the claims were invalid. The Federal Circuit found that

Microsoft’s failure to move for pre-verdict JMOL on obviousness resulted in it waiving the right to challenge any factual findings regarding obviousness. Microsoft’s failure to file a pre-verdict JMOL motion also doomed its challenge to the jury’s damage award. On appeal, Microsoft urged the Federal Circuit to follow its recent decision in Lucent Technologies, Inc. v. Gateway, Inc., 580 F.3d 1301 (Fed. Cir. 2009), in which the court had closely scrutinized, and rejected, the evidentiary basis for a jury’s award of reasonable royalty damages. But the Federal Circuit refused to undertake that sort of review in this case because Microsoft had failed to move for judgment as a matter of law on damages before the case was submitted to the jury. As a result, the Federal Circuit reasoned that it could only reverse the damage award if there was no evidence to support the jury’s verdict. Because the jury awarded damages in the amount identified by i4i’s expert, the verdict was supported by sufficient evidence, and the Federal Circuit affirmed.

The Federal Circuit’s Approach to Patent Damages

Some observers viewed the Federal Circuit’s recent decision in Lucent as signaling a conscious strategy by the court to rein in patent damage awards. The i4i decision may cause some to temper those assessments, as it shows the court still gives deference to qualified damages experts using established damages methodologies, no matter how extreme their ultimate conclusion may be.

Microsoft argued that i4i’s expert should have been disqualified under the standard set out in Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 570, 589-90 (1993). Daubert requires that the methods used by expert witnesses be reliable and that the evidence they rely upon be sufficiently related to the case.

Here, i4i’s expert opined that a reasonable royalty for use of the inventions was $98 per copy of Word used in an infringing manner. Microsoft challenged the reliability of this calculation, arguing that it resulted in a royalty that was unreasonably high and must, therefore, be the product of an unreliable method. As evidence of the unreasonableness of the $98 figure, Microsoft demonstrated that it had sold copies of the complete Word program for as little as $97 per copy and that the total damage award greatly exceeded license fees it had paid for other patents.

The Federal Circuit rejected Microsoft’s argument, noting that the expert used the hypothetical negotiation method and the Georgia Pacific factors, both of which have been consistently endorsed by the Federal Circuit. The court explained that “vigorous crossexamination, presentation of contrary evidence, and careful instruction on the burden of proof are the traditional and appropriate means of attacking shaky but admissible evidence.”

The Federal Circuit was similarly deferential to the district court’s decision to award $40 million in enhanced damages for willful infringement and litigation misconduct. Microsoft did not challenge the jury’s verdict that it had willfully infringed the ’449 patent. It merely challenged the district court’s exercise of discretion in awarding the enhanced damages. In deciding whether, and how much, to enhance damages, the district court had analyzed the factors set out in Read Corp. v. Portec, Inc., 970 F.2d 816, 826-27 (Fed. Cir. 1992). The Federal Circuit did note that it would have been improper to enhance damages based solely on litigation misconduct. In this case, however, the litigation misconduct—improper statements by Microsoft’s counsel to the jury, in defiance of the district court’s repeated instructions—was a supplemental factor and not the sole basis for the enhancement.

The Injunction Against Sales of Microsoft Word

Perhaps the most talked-about aspect of this case has been the district court’s order enjoining Microsoft from selling infringing versions of its Word software program. Given the enormous number of Microsoft Word users, a broad prohibition on all use of infringing versions of the software could have wreaked havoc on business and government. As a result, the case highlights the “public interest” factor of the permanent injunction test—a factor that is often an afterthought in briefs and court decisions.

Here, the Federal Circuit placed particular emphasis on the narrow scope of the injunction, explaining that it only applies to users who purchase or license Microsoft Word after the effective date of the injunction. “By excluding users who purchased or licensed infringing Word products before the injunction’s effective date, the injunction greatly minimizes adverse effects on the public.”

Conclusion

The Federal Court’s opinion in i4i is lengthy and covers a wide range of important issues. Commentators will continue to analyze it in more detail in the weeks to come. Given the size of the damage award and the potential impact of the injunction on Microsoft’s business, it seems likely that Microsoft will petition for en banc review of the decision.