On December 22, 2009, the Federal Circuit affirmed a $200 million patent damages case against Microsoft, delivering an early Christmas present to i4i Limited Partnership. i4i Ltd. P'ship v. Microsoft Corp., No. 2009-1504 (Fed. Cir. Dec. 22, 2009). In this closely watched, expedited appeal, Microsoft argued that the district court and jury had erred on several levels when Microsoft Word was found to infringe i4i's patented method claims. The Federal Circuit (Judge Prost, writing for Judges Schall and Moore) essentially affirmed across the board, the sole exception being the permanent injunction's effective date. The court ruled that the injunction cannot take effect until January 11, 2010, rather than in October 2009, as first ordered by the district court.

The i4i decision, should it withstand further review, is certain to shape several areas of patent law and reinvigorate the patent reform movement:

  • First, advocates of patent damages reform will likely cite as evidence of needed reform the court's affirmance of a $200 million award against Microsoft based on a patent claiming a component of a larger software program.
  • Second, litigants should take notice of the Federal Circuit's emphasis of Microsoft's decision not to move for judgment as a matter of law (JMOL) on two issues, obviousness and damages. In the court's view, the lack of JMOL motions limited the court's review of these issues.
  • Third, the Federal Circuit was hesitant to second-guess the district court's judgment concerning Daubert challenges to i4i's experts and their testimony and evidence.
  • Fourth, the opinion may provide ammunition to certain patentees seeking permanent injunctions against infringers.
  • Fifth, the court held that testimony by prior art inventors does not need to be otherwise corroborated to rebut testimony of an anticipatory prior use.

The Invention, the Products at Issue, and the District Court Judgment

The patent at issue, U.S. Patent No. 5,787,449 (the '449 patent), covers a method of editing documents containing markup languages such as XML. Markup languages such as XML instruct a computer on how to process and display text. Markup languages are used ubiquitously in internet web pages. According to the court, the improvement claimed by the '449 patent "stems from storing a document's content and metacodes separately." Slip op. at 3. Storing the metacodes separately from the document's content was an improvement, according to the '449 patent, because it "allowed users to work solely on a document's content or its structure." Id. at 4.

The accused infringing products are certain versions of Microsoft Word containing a custom XML editor. Microsoft Word is arguably the most successful word-processing software program. Since 2003, certain versions of Word have contained XML-editing capabilities. Id. at 4.

After trial before Judge Leonard Davis in the Eastern District of Texas, the jury found the asserted claims of the '449 patent valid and infringed. The jury also found that Microsoft's infringement was willful. The general jury verdict form did not distinguish between direct, contributory, and induced infringement. Id. at 20. The jury awarded damages of $200 million, and Judge Davis enhanced the damages by $40 million under 35 U.S.C. § 284.

Highlights of the Federal Circuit's Analysis

The i4i opinion addresses each of the multiple issues Microsoft appealed. Some of the issues, such as the claim construction, will likely have little significance outside the context of this case. For the present Alert, we focus on what appear to be the most watched or important issues.

Affirmance of $200 Million Damages

Perhaps the most closely watched issue is the award of $200 million in damages for infringement of i4i's patent. At trial, i4i's damages expert, Dr. Wagner, testified that the appropriate royalty rate, under a hypothetical negotiation, for each infringing version of Word would have been $98. Id. at 28. Wagner based his calculation as follows:

[H]e first chose an appropriate "benchmark" in order to value Microsoft's use of the claimed invention at the time of the hypothetical negotiation. Wagner chose a product called XMetaL as his benchmark, which had a retail price of $499. To calculate the licensing fee, Wagner multiplied the price of XMetaL ($499) by Microsoft's profit margin (76.6%), based on his assumption that any licensing fee would be a fraction of the profits. Wagner then applied the 25-percent rule to this number, which assumes the inventor will keep 25% of the profits from any infringing sales. This resulted in a baseline royalty rate of $96.

Id. at 29. With the baseline royalty calculated, Wagner adjusted the rate up $2 to $98 based on his consideration of the Georgia-Pacific factors. Id. at 30-31. As additional evidence, i4i introduced a survey estimating the amount of infringing use by small and large businesses. Id. at 33.

At trial Microsoft objected to the admission of both Dr. Wagner's testimony and the survey under Daubert. Microsoft also vigorously disputed the royalty rate. As partial evidence, Microsoft cited Word's retail price of about $97 to $299.

The Federal Circuit was not convinced by Microsoft's Daubert challenge. The Federal Circuit observed that "Microsoft's disagreements are with Wagner's conclusions, not his methodology" and that "Daubert and Rule 702 are safeguards against unreliable or irrelevant opinions, not guarantees of correctness." Id. at 31. The court also observed that "[t]he testimony of Wecker, the expert who helped design the survey, sufficed to show that the survey was compiled in accordance with acceptable survey methods." Id. at 36.

The Federal Circuit affirmed the damages ruling also because Microsoft had not moved for judgment as a matter of law on the issue prior to verdict. The court observed that "[h]ad Microsoft filed a pre-verdict JMOL, it is true that the outcome might have been different." Id. at 37. During oral argument, Judge Moore emphasized the posture of the case and the standard of review when a party does not move for JMOL. For this reason, the court distinguished the present case from Lucent Technologies, Inc. v. Gateway, Inc., 580 F.3d 1301 (Fed. Cir. 2009), in which the court reversed the trial court's denial of Microsoft's motion for JMOL and vacated a $358 million damages award against Microsoft.

The court adopted a similar approach to Microsoft's challenge of the obviousness ruling. The Federal Circuit noted that "Microsoft has waived its right to challenged the factual findings underlying the jury's implicit obviousness verdict because it did not file a pre-verdict JMOL on obviousness." Id. at 14.

Thus, a party may wish to rely on more than just a Daubert motion when challenging a damages award.

Permanent Injunction

After the jury trial, the district court granted a permanent injunction that was to become effective within 60 days of the district court's August 11, 2009, order. On September 3, 2009, without substantive analysis of the merits, the Federal Circuit granted Microsoft's motion for a stay of the injunction. On appeal, Microsoft argued the injunction was an abuse of discretion under eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006).

Except for the injunction's effective date, the Federal Circuit affirmed. In doing so, the court considered the four factors of eBay. First, the district court did not abuse its discretion in considering "strong circumstantial evidence that Microsoft's infringement rendered i4i's product obsolete for much of the custom XML market, causing i4i to lose market share and change its business strategy to survive." Id. at 44. Thus, a finding of irreparable harm was proper.

Likewise, there was no abuse of discretion in concluding that "monetary damages would be inadequate" for i4i. Id. at 44. The court noted that, "[i]n this case, a small company was practicing its patent, only to suffer a loss of market share, brand recognition, and customer goodwill as the result of the defendant's infringing acts." Id. In the court's view, "[s]uch losses may frequently defy attempts at valuation, particularly when the infringing acts significantly change the relevant market, as occurred here." Id.

As for the balance of hardships, the court saw this factor favoring i4i. When it considered "the parties' sizes, products, and revenue sources," the court found it "clear that the patented technology is central to i4i's business." Id. at 45.

The Federal Circuit also agreed that the public interest favored an injunction. The court characterized that the scope of the injunction as "narrow" in that "[i]t applies only to users who purchase or license Word after the date the injunction takes place." Id. at 42. In the court's view, "[b]y carving out users who purchased or licensed infringing Word products before the injunction's effective date, the injunction's tailoring minimizes disruptions to the market and the public." Id. at 46.

The only modification the Federal Circuit made to the injunction was the effective date. The court observed that "[t]he only evidence about how long it would take Microsoft to comply with the injunction was the Tostevin declaration, which gave an estimate of 'at least' five months." Id. at 47. There was no contrary evidence. Thus, the Federal Circuit held that the injunction's effective date is now January 11, 2010.

Burden of Proving Anticipation Based on Prior Sale

At trial, Microsoft argued that an earlier software program, S4, developed by i4i's corporate predecessor, anticipated the claimed method of the '449 patent. According to Microsoft and its witnesses, the S4 program "allowed the user to add and edit SGML tags in electronic documents." Id. at 16. The S4 source code was not in evidence, however, because it had been destroyed in the course of business long before the present litigation began. Id. Determining whether S4 anticipated thus "turned largely on the credibility of S4's creators, Vulpe and Owens, who are also the named inventors on the '449 patent." Id. at 16-17. Both testified that "the key innovation-the metacode map-was not even conceived until after the critical date," and "[b]oth were extensively cross-examined." Id. at 17. Microsoft offered contrary testimony by its expert and a former i4i employee.

Based on the testimony, Microsoft moved for JMOL that the patent was anticipated, but the district court denied the motion. On appeal, Microsoft argued that JMOL was proper because Microsoft had "established a prima facie case of anticipation, which i4i could not rebut by relying on the inventors' testimony alone, absent corroboration." Id.

In affirming the denial of JMOL, the Federal Circuit explained when corroboration of a witness's testimony is necessary. The court did not agree "that i4i was required to come forward with corroboration to 'rebut' Microsoft's prima facie case of anticipation." Id. In distinguishing this case from other corroboration cases, the court stated that "this is not a case where witness testimony was being used to overcome prior art by establishing an earlier date of invention." Id. at 18. The panel further clarified why it was unconvinced by Microsoft's corroboration argument:

Though we require corroboration of "any witness whose testimony alone is asserted to invalidate a patent," Finnigan Corp. v. Int'l Trade Comm'n, 180 F.3d 1354, 1369-70 (Fed. Cir. 1999) (emphasis added), here the inventor testimony was offered by i4i in response to Microsoft's attack on the validity of the '449 patent. It was not offered to meet Microsoft's burden of proving invalidity by clear and convincing evidence.

Id.