CAFC Puts Coal in Microsoft’s Stocking by Affirming $240 Million Damage Award and Permanent Injunction

By Eric Guttag
December 22, 2009

Microsoft has lived a charmed life in the “mega award” world of patent infringement litigation.  For example, Microsoft recently dodged a $357 million jury award bullet in Lucent Technologies, Inc. v. Gateway, Inc. But it now looks like Microsoft’s luck finally ran out.  In i4i Limited Partnership v. Microsoft Corp., Microsoft was tagged with:  (1) a jury award of $200 million in damages; (2) a district court award of an additional $40 million in enhanced damages for willful infringement; and (3) a permanent injunction against “selling, offering to sell, importing, or using copies of Word with the infringing custom XML editor” in the future.  All that Microsoft “won” on appeal was a very minor victory in changing the effective date of the injunction by three months to January 11, 2009.

The David taking on Goliath Microsoft this time was the software developer, i4i.  One of the products developed by i4i was an “add-on” software for Microsoft Word which expanded Word’s capability to work with documents containing custom XML.  i4i also obtained U.S. Patent No. 5,787,449 (the ‘449 patent) which claimed an improved method for editing documents containing markup languages like XML by storing a document’s content and metacodes separately.  (Metacodes refer to tags and information about a document’s structure.)

Since 2003, versions of Microsoft Word had XML editing capabilities.  In 2007, i4i sued Microsoft for infringement of the ‘449 patent.  The jury found Microsoft willfully infringed all of the asserted claims of the ‘449 patent, and that the ‘449 patent was not invalid.  On top of the $200 million jury award, the district court granted i4i a permanent injunction and $40 million more in enhanced damages.

Not surprisingly, Microsoft challenged the jury findings on damages and validity, as well as the district court’s construction of the claim term “distinct,” and the grant of the permanent injunction (including the effective date of the injunction), and the enhanced damages.  The Federal Circuit first dealt with the construction of the term “distinct” used to describe how the metacode map and the mapped content were stored.  Microsoft argued that the term “distinct” added two requirements:  (1) storing the metacode map and mapped content in separate files, not just separate portions of the computer’s memory; and (2) the ability to edit the document’s content and its metacode map “independently and without access” to each other.  The district court rejected each of these requirements suggested by Microsoft.

The Federal Circuit agreed with the district court’s construction of the term “distinct.”  As observed by the Federal Circuit, the term “file” suggested by Microsoft appeared nowhere in the ‘445 patent.  Instead, both “storage means” used in the claims, as well as “structures” used in the specification were broader terms than “file” and suggested no particular format.  While “independent manipulation” of the metacode map and mapped content was a “closer question” because several embodiments in the ‘449 patent allowed the user to manipulate on the metacode map or mapped content, the Federal Circuit’s review of the claim language, the specification, and prosecution history suggested the claims were “not limited to these particular embodiments.”

Microsoft’s validity challenge to the ‘449 patent had two prongs.  The first was for obviousness over one U.S. patent, in view of either a SGML editor know as Rita or a second U.S. patent.  The Federal Circuit ruled that Microsoft waived its right to challenge the factual findings underlying the jury’s obviousness verdict.  Accordingly, the Federal Circuit limited its review to the district court’s legal conclusion of nonobviousness based on the jury’s factual findings.  The Federal Circuit then concluded that the jury must have believed that there were differences between these references and the asserted claims, and that there was no motivation to combine these references.  Put differently, Microsoft “[had] not established that the asserted claims would have been obvious.”

The second and more serious challenge was an “on sale” bar based on an S4 software program developed for a client called SEMI by i4i’s predecessor that was delivered to SEMI more than a year prior to the filing date of the ‘449 patent.  S4 allowed the user to add and edit SGML tags in electronic documents and to divide the document into “entities” for storage purposes.  Both the founder of i4i and the developer of the S4 program testified that S4 didn’t create a “metacode map.”  Unfortunately for Microsoft, the source code for S4 was also destroyed after the project with SEMI was completed and many years before the suit was filed.  That made the issue of S4 as an “on sale” bar to the ‘449 patent a “swearing contest,” which Microsoft ultimately lost.

Microsoft was no more successful in overturning the jury’s infringement verdict.  Microsoft first argued that there were two alleged errors in the jury instructions regarding contributory infringement.  But the Federal Circuit found those alleged errors to be, at most, “immaterial.”  Microsoft next challenged the sufficiency of the evidence to support the jury’s infringement verdict.  But the Federal Circuit concluded there was sufficient evidence to support either a theory of contributory infringement or induced infringement.  Regarding contributory infringement, the Federal Circuit ruled that, based on the evidence at trial, “the jury could have reasonably concluded that the custom XML editor had no substantial, noninfringing uses and that Microsoft knew that the use of the custom XML editor would infringe [the ‘449] patent.”  While viewing the theory of “induced infringement” as no longer necessary because Microsoft had committed contributory infringement, the Federal Circuit also concluded that, also based on the evidence at trial, a reasonable jury could have concluded that Microsoft had the “affirmative intent to cause direct infringement.”

The Federal Circuit also concluded that the district court didn’t abuse its discretion in not granting Microsoft a new trial on the $200 million damage award.  There was a long discussion in the Federal Circuit’s opinion on the correctness of the royalty rate ($98 per copy of Word used in an infringing manner) determined by i4i’s expert based on using the Georgia-Pacific factors.  In the end, the Federal Circuit concluded that the i4i expert’s opinion on the royalty rate was “based on sufficient fact or data.”  Even the Federal Circuit’s recent ruling in Lucent Technologies couldn’t save Microsoft from the $200 million jury damage aware being determined to be “reasonable.”

Microsoft’s feeble effort to appeal the $40 million enhanced damage award went completely for naught.  And the Federal Circuit had little difficulty in holding that the district court didn’t abuse its discretion in granting i4i a permanent injunction, even under the standard set forth by the Supreme Court in eBay.  That i4i was not simply a Non-Practicing Entity (NPE), but instead a direct competitor certainly didn’t help Microsoft on the “irreparable injury,” “inadequate remedies,” or “balance of hardships” factors.  On the “public interest” factor, the district court had wisely tailored the injunction to cover future sales of Word, not sales of Word that had already occurred.  Only on the effective date of the injunction did the Federal Circuit quibble with the district court.

Microsoft’s essentially unsuccessful appeal can be likened to the Dickens’ A Christmas Carol.  No matter whether it was Christmas Past (claim construction and validity), Christmas Present (infringement and damages) or Christmas Future (permanent injunction), Microsoft wound up being Ebenezer Scrooge.  But unlike Scrooge who saw the light and found the true Spirit of Christmas, Microsoft was handed a huge lump of coal for its corporate stocking by the Federal Circuit.  Needless to say, it won’t be a Merry Christmas in Redmond, Washington this year.

© 2009 Eric W. Guttag.

The Author

Eric Guttag

Eric Guttag  
Mr. Guttag has over 38 years of corporate and private intellectual property law experience on patent, trademark, copyright, trade secret and unfair competition matters, computer and Internet law, including patent application drafting, prosecution, and patentability studies; infringement and validity studies; international patent prosecution; patent and know-how licensing; consulting, confidentiality, clinical study and research agreements; trademark searches and opinions; trademark registration and prosecution; trademark freedom-to-use studies and trademark litigation and dispute resolution.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author as of the time of publication and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Discuss this

There are currently 10 Comments comments.

  1. scrappy December 23, 2009 6:28 am

    It seems to me that the Lotus WYSIWYG/Impress format from circa 1991 could anticipate Claim 14:

    A method for producing a first map of metacodes [WYSIWYG format codes] and their addresses [Cell addresses] of use in association with mapped content [Spreadsheet data in a .WK3 file] and stored in distinct map storage means [the .FM3 file] , the method comprising: providing the mapped content to mapped content storage means [stored Spreadsheet data]; providing a menu of metacodes [WYSIWYG menu accessed through the “:” GUI] ; and compiling a map of the metacodes in the distinct storage means [Save the .FM3 file for the WYSIWYG formatted spreadsheet], by locating, detecting and addressing the metacodes [the format codes applied through the GUI being stored in the ASCII .FM3 file by cell location/range]; and providing the document as the content of the document and the metacode map of the document [merging the .FM3 file with the .WK3 file in the WYSIWYG representation].

    The Lotus format allowed you to:

    1) Save a formatted spreadsheet (.WK3 data file with .FM3 formatting metacodes)
    2) Delete the .FM3 metacodes while preserving the .WK3 spreadsheet data
    3) Import the metacodes from a different spreadsheet (or simply a different .FM3 file) to give the spreadsheet data (.WK3) a new “look”

    You could also keep a master “look” which could be applied to any spreadsheet data file.

  2. scrappy December 23, 2009 8:49 am

    Gene, feel free to trash the 8:38 am comment and this one….

    Oops, sorry – the link (currently in moderation) doesn’t work… (well, I broke it actually)

  3. OldTimer December 23, 2009 10:53 am

    The method claims in this patent are clearly invalid as they are non-patentable subject matter under Bilsky. There is no reference whatsoever to a machine in the claims; no physical transformation either. If recent case law is any indication the computer system claim will fall under Bilsky too.

    MS will bide their time until the Bilsky decision comes down from the Supreme Court. Then they’ll file a motion for a new trial, which probably should be granted. These claims will be held invalid on summary judgment at the new trial.

    Plaintiff i4i would be well advised to settle this case for whatever they can get.

    This is also a case-in-point for why reexamination should be broadened to cover reasons other than prior art.

  4. blind dogma December 23, 2009 11:41 am

    Oldtimer – you misread the requirement for the transformation prong of the Bilski test -Bilski does not require the transformation itself to be “physical” (subject matter to a different state).

  5. Gene Quinn December 23, 2009 11:47 am

    Scrappy-

    I deleted that comment. Feel free to repost the link if/when it gets working.

    Thanks.

    -Gene

  6. Gene Quinn December 23, 2009 11:54 am

    Old Timer-

    I understand what you are saying, but I don’t see that happening for several reasons. First, Bilski is hardly something new, at least insofar as this trial and appeal are concerned. It came out in the Fall of 2008. The jury verdict came out in Spring 2009 and the final order in August 2009. Microsoft had ample time to bring up the Bilski case and apparently did not. So I cannot see any reason why there would be grounds for a new trial.

    I also think the Supreme Court will do away with Bilski altogether. Regardless of whether it is the correct test (which I don’t think it is), Bilski is certainly not the right case for saying what was said. The Supreme Court will almost certainly dial it back. If nothing, this court is conservative in every sense of that term, and Sotomayor kept referring to the decision as “extreme” and even Breyer said he was more than a little troubled by how far the CAFC went.

    I definitely agree with you about reexamination though. If it is to be an alternative to litigation then it simply cannot only focus on patents and printed publications. Of course, the USPTO will need more resources to do reexam or any post-grant review properly. Unfortunately, I think Congress is of the mind to force an unfunded mandate onto the USPTO.

    -Gene

  7. OldTimer December 23, 2009 2:38 pm

    >> Oldtimer – you misread the requirement for the transformation prong of the Bilski test -Bilski does not require the transformation itself to be “physical” (subject matter to a different state).

    Nay, I think it is you who are misreading Bilsky. The specific language in Bilsk is: “it transforms a particular article into a different state or thing” which is precisely contrary to your interpretation. Maybe we’re just not communicating effectively, but I’m astounded that you could interpret language which explicitly requires “transform[ing] a particular article into a different state or thing” to mean that it does not require a physical transformation of subject matter to a different state or thing. Can you elaborate?

    Review the case law on Bilsky. I cannot recall a single pure software case that has survived the Bilsky “transformation” test, indicating that a transformation from one data state to another is not sufficient. The cases that are getting by the Bilsky transformation test have claims that recite a physical transformation. You’re dangerously off base here.

    Hopefully Bilsky will go away and this will all be academic. I suspect we can agree on that.

    @ Gene, I sure hope you’re right. In one respect MS is on the horns of a dilemma here because a strict interpretation of Bilsky would invalidate a huge portion of their patent portfolio.

  8. Gene Quinn December 23, 2009 4:09 pm

    Old Timer –

    Would you have any interest in writing an article on Bilski? I am happy to publish it under your pseudonym – “Old Timer.” I would love to publish more on the transformation prong. Whether you are right or wrong (I sadly tend to agree with you but wish I didn’t and don’t think that is what “transformation” should me) it would be great to get more out on the transformation prong. Right at the moment in litigation that seems to be the only hope for passing muster for the patents caught in the middle.

    I agree with you that much of Microsoft’s portfolio is gone unless Bilski is altered, so they may curse the days they complained about trolls! I think many of the big companies will lose a lot of patents. A lot of what are likely Microsoft A patents are implicated, and for others it is probably mainly their B and C tier that are in the crosshairs.

    -Gene

  9. blind dogma December 23, 2009 4:21 pm

    Oldtimer, you are precisely incorrect – “article” is not limited to something physical. A transformation into a different state can mean something non-physical.

    Now mind you, the “article” can REPRESENT something physical, but that is the precise difference that you are missing. Astounding is your oversight on this, as the discussion in Bilski even gives examples of non-physical transformations (think pictures of x-rays and mathematical type transformations on data (integral to the claim) – these types of “articles” are explicitly NOT included as items that Bilski would outlaw).

    and yes, we can agree (I think) on Bilski going away – the saying “bad facts make bad law” comes to mind.

    As far as Microsoft – I believe they would more than gladly sacrifice their PHD (not short for doctorate) set of patents to eviscerate the patent landscape. They are the established power and patents are more a threat to them than a useful tool, no matter how many they collect. What’s ironic is that they are a prime source of the kool-aid of anti-patent fervor to the software world while they are perfectly willing to plunk down the bucks and pursue patents. The rank and file software people blindly lap up the anti-patent rhetoric from the very source they despise.

  10. blind dogma January 4, 2010 11:49 am

    No rejoinder from the Oldtimer? Perhaps he is too old to see the post…