Letting stand a $160 million judgment against Microsoft, the U.S. Court of Appeals for the Federal Circuit recently affirmed a jury verdict finding that Microsoft willfully infringed Z4 Technologies’ patents relating to methods for preventing computer software piracy. Z4 Technologies, Inc. v. Microsoft Corp., Case No. 06-1638 (Fed. Cir., Nov. 16, 2007) (Linn, J.).

Z4’s two patents describe and claim a method whereby software may be deactivated upon failure of a user to submit proper registration information to a representative within a specified grace period after first use. Z4 alleged that the “Product Activation” feature of Microsoft Windows and Microsoft Office infringed these patents. After a jury found Microsoft willfully infringed the patents and awarded damages, the Court awarded Z4 attorneys’ fees. Microsoft filed a motion for a judgment notwithstanding the verdict (JNOV) and for a new trial. After both motions were denied, Microsoft appealed.

The Federal Circuit, after upholding the jury verdict, finding a “legally sufficient evidentiary basis” for it, turned to the denial of Microsoft’s motion for a new trial based on allegedly erroneous jury instructions. Microsoft argued that the district court erred by not instructing the jury that the burden of proving invalidity “is more easily carried when the references on which the assertion is based were not directly considered by the [PTO] examiner during prosecution.

Rejecting this argument, the Court agreed that a party “may” more easily carry its burden of proving invalidity when a prior art reference was not before the Patent and Trademark Office (PTO) but noted that a jury instruction to that effect is not mandatory. In addition, the Court cautioned that such an instruction might improperly “lead the jury to believe that the burden of proof is less than clear and convincing when prior art was not considered by the PTO.” Therefore, the Court held that the district court did not abuse its discretion by refusing to accept Microsoft’s proposed jury instruction.

The Federal Circuit also rebuffed Microsoft’s argument that the district court’s obviousness instruction was contrary to the Supreme Court’s decision in KSR, insofar as the jury was instructed that a finding of obviousness required “a teaching, suggestion or incentive to combine” the prior art in the manner claimed, finding the error to be “harmless.” In so doing, the Court observed that the “only direct evidence of obviousness introduced by Microsoft was the conclusionary testimony of its expert.”

Finally, Microsoft requested a remand for a new trial on damages in light of the Supreme Court’s decision in Microsoft v. AT&T. Microsoft argued that the jury erroneously based its damages calculation based on worldwide sales—a damages theory rejected by the Supreme Court in the context of 35 U.S.C. § 271(f) and copies of software made from “golden master” disks. The Federal Circuit denied Microsoft’s request for a remand on damages because “the jury did not and could not have relied on § 271(f) in determining its damages award.” Neither the complaint nor the jury instructions referenced § 271(f). According to the Court, the jury was instructed only as to infringement under § 271(a), and “we must assume that the jury properly confined its analysis and ultimate finding of liability to the instructions given under § 271(a).”

Practice Note: Based on the language in this opinion, a possible open question is whether it would constitute prejudicial error were a district court to instruct a jury that the burden of showing invalidity “may” be easier to carry based on prior art not considered by the PTO.