The appeal in Lucent Technologies, Inc. v. Gateway, Inc. from the Southern District of California was considered in many quarters as the potentially seminal case on how to calculate damages based on a reasonable royalty using the Georgia-Pacific factors, especially the “entire market value” rule (aka factor 13). That Microsoft and others were currently on the hook to Lucent Technologies (the patentee) for approximately $357 million in damages based on the jury award definitely raised some “eyebrows” about this case. In fact, with all the “hub-bub” about altering the “entire market value” rule in the damages provision of the Patent Law Reform Act of 2009 (S. 515 and H.R. 1260), the Federal Circuit’s handling of the damages award issue in Lucent Technologies case was being watched very carefully.
In a panel comprising Chief Judge Michel, as well as Judges Newman and Lourie, the Federal Circuit overturned this “mega” jury award to Lucent Technologies based on a “lump sum” royalty payment as not being supported by “substantial evidence.” Chief Judge Michel’s opinion specifically observed that “to the extent the jury relied on an entire market value calculation to arrive at the lump-sum damages amount, that award is not supported by substantial evidence and is against the clear weight of the evidence.” But for those hoping for the “entire market value” rule to be substantially restricted by the Federal Circuit, Chief Judge Michel gave them very little solace: “There is nothing inherently wrong with using the market value of the entire product, especially when there is no established market value for the infringing component or feature, so long as the multiplier accounts for the proportion of the base represented by the infringing component or feature.”
The invention in the Day patent involved in Lucent Technologies was directed to entering information into computer screen fields without use of a keyboard, for example, by writing on a touch screen using a stylus. Three of Microsoft’s software products were alleged to infringe the Day patent. One of these was Microsoft’s highly popular Outlook, and specifically the “date-picker” tool which enabled the user to select a series of numbers, corresponding to the day, month, and year, using graphical controls similar to the number pad tool illustrated in the Day patent.
You can sense that Lucent Technologies was in trouble during Chief Judge Michel’s infringement discussion. In fact, Microsoft was found liable by the jury only on the basis of “inducing infringement” under 35 U.S.C. § 271(b) and “contributory infringement” under 35 U.S.C. § 271(c). In other words, only customers who used the “date-picker” tool of Outlook were direct infringers of the Day patent.
Chief Judge Michel also agreed with Microsoft that “there was little, if any, direct evidence of infringement.” Besides Lucent Technologies expert, there was perhaps direct evidence of as few as one other person (his wife) that had used the “date-picker” tool of Outlook. Rather, Chief Judge Michel permitted the jury finding of direct infringement to scrape by based on “circumstantial evidence” that more than these two people had used the “date-picker” tool of Outlook. Even with barely sufficient proof of direct infringement of the Day patent, the “inducing infringement,” as well as “contributory infringement” findings of the jury passed muster.
The remaining 30 pages of Chief Judge Michel’s opinion addressed the damages award issue. You can sense as this portion of the opinion unfolds the mounting skepticism of the Federal Circuit panel that the approximately $357 million jury award based on a reasonable royalty derived from a “lump-sum” payment was supported by “substantial evidence.” Ironically, Lucent Technologies pushed for an award based on a running royalty theory, while Microsoft argued for a lump-sum royalty payment, albeit at a much lower value of $6.5 million. In fact, Chief Judge Michel’s opinion observed that, “[c]ompared to a running royalty analysis, a lump-sum analysis involves different considerations.”
Endeavoring to snatch its $357 million jury award based on a lump-sum theory from the jaws of defeat, Lucent Technologies tried to defend that result based on several of the Georgia-Pacific factors. Using factor 2 (other license agreements), Lucent Technologies offered eight varied license agreements into evidence to support the “lump-sum” award result. But only half of these licenses purported to be “lump-sum” agreements. Chief Judge Michel’s opinion found this evidence insufficient essentially for two reasons: (1) some of these agreements were “radically different from the hypothetical agreement under consideration for the Day patent”; and (2) for the other agreements, Chief Judge Michel was “unable to ascertain from the evidence presented” what the subject matter of these other agreements was. On factor 2, Chief Judge Michel’s opinion concluded by saying that this factor “weigh[ed] strongly again the jury’s award.”
Regarding factor 10 (nature and character of the invention) and factor 13 (the “entire market value” rule), Lucent Technologies argument was burdened by the following fact: “[t]he evidence can support only a finding that the infringing feature [i.e., “date-picker” tool] contained in Microsoft Outlook is but a tiny feature of one part of a much larger software program.” As Chief Judge Michel’s opinion observed based on the testimony of Microsoft’s expert, “Outlook consists of millions of line of code, only a tiny fraction of which encodes the date-picker feature.” Even more fatal to Lucent Technologies argument under factor 10 and especially factor 13 was the following observation by Chief Judge Michel’s opinion: “Here, numerous features other than the date-picker appear to account for the overwhelming majority of the consumer demand and therefore significant profit.”
Factor 11 (extent of use made by infringer of patented invention) also didn’t help Lucent Technologies. Chief Judge Michel’s opinion observed that “[o]nly when the date-picker is used to fill out a form does infringement occur.” But “the evidence of record is conspicuously devoid of any data about how often consumers use the patented date-picker invention.” With no “evidence to describe[e] how many Microsoft Outlook users had ever performed the patented method or how many times,” the fate of Lucent Technologies’ approximately $357 million was sealed: “Having examined the relevant Georgia-Pacific factors, we are left with the unmistakable conclusion that the jury’s damages award is not supported by substantial evidence, but is based mainly on speculation and conjecture.”
Once the dust settles from Chief Judge Michel’s lengthy discussion of the damages award issue, there are several observations that can be made. First, the “entire market value” rule (Georgia-Pacific factor 13) is still very much alive and well. Second, when you try to justify a “mega” jury award to the Federal Circuit based on the Georgia-Pacific factors (including factor 13), putting in “more than sufficient evidence” at trial for each of the factors asserted would be wise, or your “mega” award may go “up in smoke,” as happened to Lucent Technologies. Put differently, you don’t want hear from the Federal Circuit that your “mega” jury award “is not supported by substantial evidence, but is based mainly on speculation and conjecture.” Third, to be successful in asserting factor 13, you should show that the allegedly infringing feature is: (a) more than “a tiny fraction” of the device or product on which the royalty award is to be based; and especially (b) the reason why customers bought the product or device. Finally, it remains to be seen whether Lucent Technologies quiets or inflames the debate on the damages provision currently in the Patent Law Reform Act of 2009.