On September 11, 2009, the Federal Circuit issued its Opinion in Lucent Technologies v. Gateway, Inc., Case No. 2008-1485, vacating the Southern District of California’s grant of a $511 million dollar damages award in favor of Lucent. Notably, the damages award was based on the total value of Microsoft Outlook®, despite the fact that the asserted patent covered only a small feature of Outlook (the “date picker” function in the calendar module of Outlook used to schedule appointments).

In short, the Federal Circuit almost wholly rejected Lucent’s damages analysis and factual evidence to support the jury’s damages verdict. Lucent had proffered the standard Georgia Pacific calculation for a reasonable royalty rate combined with the use of the “entire market value” rule to set the damages base. Nevertheless, the Federal Circuit declined several amici’s invitations to completely eliminate the entire market value rule for a reasonable royalty calculation.

Georgia Pacific Factors

The Federal Circuit evaluated several of the Georgia Pacific factors used in a reasonable royalty hypothetical negotiation evaluation. Regarding Georgia Pacific factor 2 (other comparable licenses), the Federal Circuit rejected both parties’ allegedly comparable licenses as insufficiently linked to the calculation for the patent at issue. Specifically, the Federal Circuit rejected Lucent’s proffer of eight allegedly comparable licenses for two reasons:

First, some of the license agreements are radically different from the hypothetical agreement under consideration for the Day patent. Second, with the other agreements, we are simply unable to ascertain from the evidence presented the subject matter of the agreements, and we therefore cannot understand how the jury could have adequately evaluated the probative value of those agreements.

Slip Op. at 39. In other words, Lucent had a fundamental failure of proof establishing that its proffered licenses were, in fact, “comparable” as required under Georgia Pacific. Microsoft’s proffered licenses were similarly rejected.

Under Georgia Pacific factors 10 and 13 (contributions of patented invention), the Federal Circuit noted that the relatively small contribution of the patented feature to the larger product weighed against a larger royalty rate. Such a small relative contribution should lead to a smaller royalty rate.

Under Georgia Pacific factor 11, the Federal Circuit noted that Lucent had failed to establish the frequency with which users of Outlook had used the patented feature. “No evidence describes how many Microsoft Outlook users had ever performed the patented method or how many times. Lucent had the burden to prove that the extent to which the infringing method has been used supports the lump-sum damages award.” Slip. Op. at 53.

The Federal Circuit appeared to wholly reject cursory, unsupported Georgia Pacific testimony which relies almost solely on experts making guesses or estimates about the various factors unsupported by any factual testimony.

Entire Market Value Rule

The Federal Circuit also rejected Lucent’s usage of the entire market value rule to set the damages base for a reasonable royalty calculation. The accused infringing feature was a small aspect of a very large program (Microsoft Outlook), but Lucent sought damages based upon the overall revenue associated with Outlook.

The Federal Circuit found at least two legal errors with the entire market value analysis permitted by the District Court. First:

The first flaw with any application of the entire market value rule in the present case is the lack of evidence demonstrating the patented method of the Day patent as the basis—or even a substantial basis—of the consumer demand for Outlook.

Slip. Op. at 58. In doing so, the Federal Circuit reiterated that the proper test for the entire market value rule is as follows:

[O]ur law on the entire market value rule is quite clear. For the entire market value rule to apply, the patentee must prove that “the patent-related feature is the ‘basis for customer demand.’

Slip Op. at 57.

The “second flaw” in the damages testimony presented by Lucent’s expert was his citation to an inappropriately high royalty rate that was inconsistent with other comparable licensing rates. Lucent’s expert proposed an 8% royalty rate which “contrasted starkly to the rates he proposed for the other patents in suit, which were in the 1% range.” Slip Op. at 60. Lucent’s damages expert had inappropriately increased the royalty rate in an effort to capture the entire value of the computer on which the accused infringing products ran.

In sum, the Federal Circuit fairly unequivocally rejected Lucent’s damages expert testimony and factual evidence as insufficient. The Federal Circuit remanded to the district court for a new damages trial.

Background Of The Case

On June 6, 2002, Lucent filed suit against Gateway, alleging infringement of seven separate patents. Microsoft subsequently intervened in the case, while Dell and a trust for which Lucent is the primary beneficiary were added as parties. Lucent and its trust proceeded to assert four additional patents against Microsoft.

In particular, Lucent asserted two claims disclosing “method[s] for entering information into fields on computer-based forms by using pre-defined onscreen tools” against Microsoft. See Microsoft Brief, No. 2008-1485, 2008 WL 5229024, at 9 (Fed. Cir. Nov. 21, 2008). According to Lucent, Microsoft indirectly infringed the asserted claims by selling Microsoft Money, Microsoft Outlook and Windows Mobile to its customers.

On April 4, 2008, a jury concluded that Microsoft infringed both claims of the patent, and assessed damages in the amount of $357,693,056.18. The court subsequently applied prejudgment interest, raising the damages amount to $511,626,520.18. Microsoft later moved for judgment as a matter of law, remittitur and a new trial, asserting that the damages total violated the entire market value rule.

The Southern District of California denied Microsoft’s motions, instead finding that the jury’s verdict was supported by substantial evidence. The court noted that Lucent had introduced evidence such as marketing material, product documentation and expert testimony indicating “that the accused features were important to the success of Microsoft’s products and were promoted by Microsoft.” See Lucent Tech., Inc. v. Gateway, Inc., 580 F. Supp. 2d 1016, 1043 (S.D. Cal. 2008). Additionally, the court noted that Lucent had submitted evidence indicating that lump-sum royalties in the $290 million range were not completely unheard of in the computer industry. See id. Microsoft subsequently appealed the damages award to the Federal Circuit.