Earlier today the United States Supreme Court denied Microsoft Corporation’s petition for writ of certiorari in Lucent Technologies, Inc. v. Gateway, Inc. et al, with Microsoft being among the “et al.” The case dealt with whether certain calendar features contained in Microsoft Outlook infringed U.S. Patent No. 4,763,356, and will now proceed to a re-trial on damages, with the trial set to begin in December 2010.
In the panel decision by the United States Court of Appeals for the Federal Circuit the CAFC per Judge Michel, with Judges Newman and Lourie joining, determined the the validity and infringement decisions Microsoft appealed were not contrary to the law and were supported by substantial evidence. While the Federal Circuit affirmed the validity and infringement aspects of the underlying decision of the United States Federal District Court for the District of Southern California, the Court vacated and remanded the damages portion to the district court for further proceedings because the damages calculation lacked sufficient evidentiary support. Despite the Federal Circuit vacating and remanding of the damages award of $357.69 million Microsoft appealed to the Supreme Court, an appeal that will never happen with the denial of the petition for writ of certiorari.
According to Reuters, Mary Ward, an Alcatel-Lucent spokeswoman, said:
We are pleased, but not surprised, that the Supreme Court rejected Microsoft’s appeal in this case and left intact the jury decision in the federal appeals court that our Day patent is valid and that Microsoft infringes it. We look forward to the upcoming trial in San Diego district court to determine the compensation to which Alcatel-Lucent is entitled based on Microsoft’s infringement.
The Federal Circuit decision to vacate the damages award and remand for a new trial came after an exhaustive review of the familiar Georgia-Pacific factors. The CAFC concluded:
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 or guesswork. When the evidence is viewed in toto, the jury’s award of a lump-sum payment of about $358 million does not rest on substantial evidence and is likewise against the clear weight of the evidence. The evidence does not sustain a finding that, at the time of infringement, Microsoft and Lucent would have agreed to a lump-sum royalty payment subsequently amounting to approximately 8% of Microsoft’s revenues for the sale of Outlook (and necessarily a larger percentage of Outlook’s profits). We need not identify any particular Georgia-Pacific factor as being dispositive. Rather, the flexible analysis of all applicable Georgia-Pacific factors provides a useful and legally-required framework for assessing the damages award in this case. Furthermore, we do not conclude that the aforementioned license agreements (or other evidence) cannot, as a matter of law, support the damages award in this case. Instead, the evidence as presented did not reach the “substantial evidence” threshold and therefore no reasonable jury could have found that Lucent carried its burden of proving that the evidence, under the relevant Georgia-Pacific factors, supported a lump-sum damages award of $357,693,056.18.
However, perhaps most importantly, Microsoft had challenged the so-called entire market value rule. It was unclear whether the jury applied the entire market value rule, but based on the size of the award, the facts in the record and the fact that the damages award went down to the penny; 18 cents to be exact, there was suspicion that they had. In a somewhat conflicted analysis the Federal Circuit observed that had the entire market value rule been used it would have been error, but was unwilling to go as far as certain amici briefs suggested, which was to do away with the entire market value rule all together.
Notwithstanding, the Federal Circuit did acknowledge that it is not per se error to apply the entire market value rule even when the infringing aspect of the invention is only a small portion of the overall infringing product, saying:
Although our law states certain mandatory conditions for applying the entire market value rule, courts must nevertheless be cognizant of a fundamental relationship between the entire market value rule and the calculation of a running royalty damages award. Simply put, the base used in a running royalty calculation can always be the value of the entire commercial embodiment, as long as the magnitude of the rate is within an acceptable range (as determined by the evidence).
At first glance this seems to conflict with earlier statements say that if the entire market value rule were applied it would have been error. On closer scrutiny, however, it seems relatively clear that what the Federal Circuit was saying was that application of the entire market value rule to achieve a $357.69 million verdict would have been in error because it would have been a royalty too large for the infringing product to support given that only modest aspects of the patent in question were copied. But if the royalty were lower, and the Court used an example of a .1% royalty, application of the entire market value rule would be appropriate. Thus, it seems clear that the entire market value rule lives on and goes even beyond the limited applicability that previous cases may have suggested, provided of course that the royalty is an appropriate function of the contribution of the patent and the overall value of the entire infringing product.