On September 11, 2009, the Federal Circuit issued an opinion of importance in the area of patent damages in Lucent Technologies, Inc. v. Gateway, Inc. (consolidation of appeals 2008-1485, -1487, and -1495). At issue on appeal was Microsoft’s liability for the alleged infringement of a patent now owned by Lucent, and the award of damages to Lucent. Microsoft appealed from the denial of post-trial motions following a jury verdict that the patent in suit was infringed and not invalid, and that Microsoft was liable for damages based on a lump-sum reasonable royalty of approximately $358 million. The Federal Circuit affirmed the findings of infringement and validity, but vacated the damages award as not supported by substantial evidence and remanded to the district court for further proceedings.

The patent claims at issue are directed to a method for entering data using a graphical interface. The accused product that accounted for the vast majority of the damages award was Microsoft Outlook, which was found to incorporate the claimed method in a feature referred to as the “date picker.” In essence, infringement of the method occurred whenever a user entered a date field by clicking on the date in the Outlook calendar rather than by entering the date by keyboard, which was non-infringing.

With respect to the damages award, the Federal Circuit held that Lucent failed to present substantial evidence to support the jury’s damages award under the Georgia-Pacific factors for determining a reasonable royalty. At trial, Lucent argued that a lump-sum reasonable royalty should be calculated as approximately 8 percent of the sales price of the Outlook software. While Microsoft suggested that the district court had “abdicated” its role as a gatekeeper, the Federal Circuit made clear that “[t]he responsibility for objecting to evidence … remains firmly with the parties.”

Lucent’s damages expert did not testify as to the significance of the differences between the running-royalty licenses and the lump-sum licenses offered. Nor was there testimony about the importance of the infringing feature to Microsoft’s programs in the context of their entire product line, or of how frequently the feature was used by Microsoft end users. The court criticized the conclusory nature of the evidence and, with respect to the existing licenses that Lucent relied on, noted that “a lump sum damages award cannot stand solely on evidence which amounts to little more than a recitation of royalty numbers.” The Federal Circuit also noted that the evidence supported a finding that the infringing feature was only a small part of a larger software program and that most of the “realizable profit must be credited to non-patented elements.” Thus, because the Federal Circuit determined there was not substantial evidence from which a jury could reasonably believe that a lump sum approximating 8 percent of Microsoft’s sales revenue from Outlook could be credited to the “date picker” feature, the damages award was vacated. 

Microsoft argued that the district court erred in applying the “entire market value” rule in determining the royalty base for Outlook and its other infringing products. The Federal Circuit rejected this argument, stating that, despite “certain mandatory conditions for applying the entire market value rule” in prior case law, “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).”

The court deflected criticism of the entire market value rule by turning its attention to the real market conditions in which patent licensing takes place. Microsoft, the court said, would have no basis for argument if the jury, applying the entire market value of Outlook to determine the royalty base, had found that a 0.1 percent royalty rate was reasonable. The resulting damages would then have been less than Microsoft’s proposed $6.5 million. 

Because “sophisticated parties routinely enter into license agreements that base the value of the patented inventions as a percentage of the commercial products’ sales price,” the court reasoned, using the entire market value as a royalty base for damages is justified “especially when there is no established market for the infringing component or feature.” The Federal Circuit emphasized the need for evidence establishing the relative value added by the patented invention to the overall product over any bright line formulation of the entire market value in the future.

For more information about this decision, or any other matter raised in this Client Alert, please contact Sharon A. Israel at +1 713 238 2630 or your regular Mayer Brown lawyer.

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