On August 11, 2009, the United States District Court Judge in the Eastern District of Texas issued a final order in the matter of i4i v. Microsoft. In addition to losing approximately $200 million, Judge Leonard Davis also entered a permanent injunction that was to become effective 60 days from the judgment date, ordering Microsoft to cease selling the ubiquitous word processing program Word. On August 21, 2009, the United States Court of Appeals for the Federal Circuit issued an Order granting Microsoft an expedited appeal of its patent infringement loss to i4i Limited Partnership. The Federal Circuit granted the stay of the permanent injunction on September 3, 2009, pending hearing of the appeal. Oral arguments were also granted in expedited fashion, and were held on September 23, 2009. Earlier today, the Federal Circuit issued its decision giving i4i an early Christmas present and delivered a big fat lump of coal to Microsoft. The Federal Circuit has upheld Judge Davis’ decision with one small exception. The Federal Circuit found the 60 day period in which the injunction was to become effective too short, instead preferring to give Microsoft 5 months to comply with the permanent injunction, which means that the permanent injunction will go into effect on January 11, 2010. Microsoft’s legal options are limited. They can and likely will seek an expedited rehearing en banc, and they can appeal to the Supreme Court. Neither appeals will be as a matter of right, so look for Microsoft to announce a “deal” with i4i in the days leading up to January 11, 2010.
The permanent injunction in question issued after the conclusion of a patent infringement lawsuit brought by i4i Limited Partnership, a litigation where Microsoft was found to infringe U.S. Patent No. 5,787,449, which is titled Method and system for manipulating the architecture and the content of a document separately from each other. Shortly after the verdict was announced, Michel Vulpe, founder of i4i and inventor of the patent, said: “We are very pleased with the verdict. The jury heard extensive testimony and evidence and concluded that Microsoft had indeed infringed our patent. We feel vindicated with this result.” Not surprisingly, Microsoft disagreed and a spokesman for Microsoft said: “We are disappointed by the court’s ruling. We believe the evidence clearly demonstrated that we do not infringe and that the i4i patent is invalid.” As it turns out i4i and Judge Davis were correct, and Microsoft’s belief that the evidence clearly told a different story was nothing more than a fairy tale, at least insofar as the Federal Circuit was concerned.
One particularly interesting aspect of the Federal Circuit decision was the fact that by not filing a JMOL relative to obviousness the Federal Circuit determined that Microsoft did not preserve the ability to question the jury’s implicit factual findings. On this point the Federal Circuit explained:
Microsoft has waived its right to challenge the factual findings underlying the jury’s implicit obviousness verdict because it did not file a pre-verdict JMOL on obviousness for the Rita, DeRose and Kugimiya references. As we explained in Duro-Last, a party must file a pre-verdict JMOL motion on all theories, and with respect to all prior art references, that it wishes to challenge with a post-verdict JMOL. Microsoft’s pre-verdict JMOL on anticipation, based on S4, was insufficient to preserve its right to post-verdict JMOL on a different theory (obviousness), or on different prior art (Rita, DeRose, Kugimiya).
Accordingly, we do not consider whether the evidence presented at trial was legally sufficient to support the jury’s verdict. Our review is limited to determining whether the district court’s legal conclusion of nonobviousness was correct, based on the presumed factual findings. In conducting this review, we must presume the jury resolved underlying factual disputes in i4i’s favor because the jury made no explicit factual findings. This presumption applies to disputes about (1) the scope and content of the prior art; (2) differences between the prior art and asserted claims; (3) the existence of motivation to modify prior art references; and (4) the level of ordinary skill in the pertinent art.
Of course, the outcome of the obviousness challenge was all but determined once Microsoft couldn’t challenge the facts.
Another interesting aspect of the decision related to damages. To come up with the $200 million figure, Wagner calculated a royalty rate ($98), then multiplied that rate by the number of Word products actually used in an infringing manner (2.1 million). Microsoft argued that this rate was exorbitant given the price of certain Word products, which could be as little as $97, but Microsoft’s challenge related to disagreements with Wagner’s conclusions, not his methodology.
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. Wagner explained that he chose XMetaL because it was the product Microsoft bought and used before developing its own custom XML editor, it was the cheapest of the custom XML editors available on the market at the time, and it was one of three principal competitors Microsoft identified in the custom XML market.
Of course, Microsoft would not have preferred to use XMetal as a benchmark because at $499 lead to a royalty that was higher than was charged by Microsoft for the entire Word package. So I guess in essence Microsoft argued that a much lower number should be used because they stole a high end technology and implanted it into a product that was much cheaper than competing products offering the same or similar functionality. I guess Microsoft’s choice to integrate high end technology and charge low end prices was supposed to mean Microsoft should not pay a royalty based on the technology, but rather based on a much lower price point implemented to undercut the competition. Luckily, the district court saw through this argument, the jury saw through the argument and the Federal Circuit saw nothing wrong with testimony and its reliability. The CAFC explained:
Microsoft is correct that i4i’s expert could have used other data in his calculations. The existence of other facts, however, does not mean that the facts used failed to meet the minimum standards of relevance or reliability. See Fed. R. Evid. 702 advisory committee’s note. Under Rule 702, the question is whether the expert relied on facts sufficiently related to the disputed issue. Here, that issue was a reasonable royalty for the ’449 patent. We conclude that Wagner based his calculations on facts meeting these minimum standards of relevance and reliability.
With respect to enhanced damages, it was almost laughable that Microsoft would bring up the issue. As the Federal Circuit explained, the district court was statutorily authorized to increase the award to $600 million, but chose to awarded only $40 million in enhanced damages. With an appropriate and detailed explanation of the enhanced damages award the Federal Circuit simply could not conclude that the district court abused its discretion in weighing the evidence or applying the relevant factors.
The only issue in which the Federal Circuit overruled the district court was with respect to the timing of the effective date of the permanent injunction. The injunction was to take effect 60 days after August 11, 2009. The Federal Circuit stay effectively made that impossible, and specifically set the effective date of the permanent injunction as January 11, 2010.. The Federal Circuit explained that the only evidence on the record was that it would take Microsoft 5 months to create a software product without the infringing technology. Apparently (and reasonably) it was inappropriate to order Microsoft to do something they simply could not do, so the Federal Circuit modified the effective date of the injunction. Presumably i4i will receive royalty payments for the infringing sales between the date of the verdict and January 10, 2010.
It is worth also noting that Microsoft explained after the final order and injunction were issued that they could remove the infringing functionality from Word. Early news reports confidently stated that Microsoft would have absolutely no difficulties accomplishing this task. As I pointed out at the time, these were ridiculous on their face as evidenced by Microsoft scrambling at break-neck speed to secure an expedited hearing in extraordinary fashion. Now it becomes clear that Microsoft knew that was impossible, and testimony at trial from Microsoft said it would take 5 months.
The idea that Microsoft could simply remove the infringing aspects of Word within 60 days was fanciful at best, and fraudulent at worst. Computer software has become increasingly complex, and any user of Microsoft products knows that many Microsoft products simply are not compatible with other software. Compatibility is an enormous problem even when you have years to develop software, so the thought that Microsoft could quickly and easily remove infringing aspects within 60 days and not experience potentially crippling and unforeseen compatibility and functionality problems was naive. On top of that, I wonder whether Microsoft’s statements were intended to downplay their legal problems. Such downplaying of legal problems can create real uncertainty for investors and the market. It will be interesting to see what effect this has on Microsoft moving forward. Investors and the company had better hope they have actually been working on a non-infringing Word since the August 11, 2009 final decision, otherwise Word will be unavailable or released in compromised fashion in just 20 days.