Is the Federal Circuit Instituting Patent Reform on Its Own? Lucent v. Gateway Demonstrates a New Willingness to Review Damage Awards

The Court of Appeals for the Federal Circuit’s September 11, 2009 opinion in Lucent Technologies, Inc. v. Gateway, Inc., No. 2008-1485 (Fed. Cir. Sept. 11, 2009) suggests that many of the goals urged by supporters of patent reform legislation might be achievable by application of existing law. In particular, the decision raises the question of whether existing law can provide judges with an adequate basis to control profligate and unreasonable jury awards without the need for new legislation.

The Court’s opinion vacated a $357 million damage award against Microsoft and remanded the case for a new trial on damages. The Court’s analysis demonstrates how strict application of existing law in the review of jury verdicts can provide a means to review and vacate jury awards that are unsupported by substantial evidence.

Background

In 1986, three computer engineers at AT&T filed a patent application that eventually issued as the Day Patent. The Day Patent’s claims are generally directed to a method of entering data into fields on a computer screen without using a keyboard. In 2002, Lucent, the patent’s assignee, sued a series of personal computer manufacturers, alleging that the sales and use of several different programs infringed several patents, including the Day Patent. Because Microsoft sold several of the accused programs, it intervened to defend the suit.

At trial, a jury found all of the asserted patents valid and infringed. The jury awarded Lucent more than $357 million, excluding prejudgment interest, in damages for infringement of the Day Patent. Microsoft’s post-trial motions for judgment as a matter of law regarding the Day Patent were denied. The parties settled the remaining issues regarding the other asserted patents, and Microsoft appealed the judgment regarding the Day Patent to the Federal Circuit.

The Federal Circuit affirmed the jury’s verdicts that the Day Patent’s claims had not been proven invalid for obviousness and that Lucent had proven that Microsoft had induced and contributed to computer users’ direct infringement of the Day Patent.

The jury’s $357 million damage award to Lucent, however, was vacated. The Federal Circuit conducted a detailed analysis of the evidence supporting the jury’s award. Because the Court found that the jury’s verdict was not supported by substantial evidence, it vacated the award and remanded the case for a new trial.

A Careful Review of the Evidence

The Court’s review of the damage award is instructive and suggests that the Federal Circuit — and, by extension, district courts — will carefully consider the actual evidence presented to support a jury’s damage award. The Court started by noting that the parties had both adopted the hypothetical negotiation approach to determining the reasonable royalty and had used the framework provided by the Georgia Pacific factors to guide their analysis.

Other Licenses in Evidence Not Comparable. Although the parties had both used the Georgia Pacific factors to support their hypothetical negotiation analysis, they had disagreed as to form of the royalty that would have been the result of that negotiation. In particular, the parties disagreed as to whether the reasonable royalty should consist of a single upfront payment or a running royalty on all sales, including future sales. Microsoft had argued that the hypothetical negotiation would have resulted in an agreement for a one-time, $6.5 million dollar payment. Lucent, on the other hand argued for an eight percent royalty on the sales price of each copy of the software. As the Court discussed, these licensing forms differ significantly. (Slip op. at 36-39).

Because the verdict form indicated that the jury had awarded a lump-sum damage award with no provision for a running royalty on future sales, the Court determined that much of Lucent’s evidence did not provide support for the jury’s verdict. For example, the Court determined that only four of the eight license agreements offered by Lucent were lump-sum agreements. The four licenses that were not lump-sum agreements could be disregarded. (Slip op. at 39-40, 43-47).

Furthermore, the Court distinguished and diminished the evidentiary value of the remaining licenses. The Court stated that so little information had been presented about the scope and nature of three of the licenses that it was impossible to determine whether they were comparable to the hypothetical agreement in the present suit. (Slip op. at 40, 41-43). The final agreement was so different in scope from the agreement that would have resulted from the hypothetical negotiation that “a reasonable juror could only conclude that [it was] directed to a vastly different situation than the hypothetical licensing scenario of the present case.” (Slip op. at 41).

Because none of the licenses was comparable to the jury’s award, the license agreements could not provide support for the jury’s verdict. As the Court concluded:

Lucent had the burden to prove that the licenses were sufficiently comparable to support the lump-sum damages award. The law does not require an expert to convey all his knowledge to the jury about each license agreement in evidence, but a lump-sum damages award cannot stand solely on evidence which amounts to little more than a recitation of royalty numbers, one of which is arguably in the ballpark of the jury’s award, particularly when it is doubtful that the technology of those license agreements is in any way similar to the technology being litigated here.

(Slip op. at 43.)

The Claimed Invention is a Small Part of a Larger Product. The Court noted that the infringing feature was only one of “hundreds, if not thousands or even more” features in the accused software and that much of the profits from and demand for the accused software is the result of these other features. This was inconsistent with the size of the jury’s damage award. (Slip op. at 48-50.)

Similarly, the Court noted that Lucent failed to present any evidence showing how often the infringing feature was used. Lucent, therefore, could not argue that frequent use of the claimed invention supported the size of the damage award. (Slip op. at 53.)

The Royalty Base and the Entire Market Value Rule. The Court rejected Microsoft’s argument that the jury improperly based its royalty calculation on the sales price of the accused software rather than the value of the specific infringing feature. As the Court noted, the literal application of the entire market value rule would be legally erroneous because there was no evidence showing that the infringing feature was the basis of consumer demand for the accused software. (Slip op. at 58.)

The Court, however, did note that “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).” (Slip op. at 61.) As the Court noted, parties routinely enter into licenses that use the sales price of the commercial product as a royalty base. “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.” (Slip op. at 62). The Court, however, provided little guidance how to determine whether a particular multiplier is appropriate.

Implications for Patent Reform Legislation

The Federal Circuit’s careful review of the damage award in Lucent v. Gateway demonstrates that courts can be deeply involved in the analysis of damages award and are aware of the patent reform debate on Capitol Hill. This is the third Congress in a row that patent reform legislation has been bitterly debated. Much like last Congress, the key sticking point is the calculation of damages — particularly the entire market value rule and apportionment of damages. Both sides of this heated debate will argue that the Federal Circuit’s decision on Friday prove that Congress should adopt their position.

While amending the law on damages has been identified by supporters of reform as the single most important issue, those following the history of patent reform debate know that has not always been the case. On June 5, 2005, Rep. Lamar Smith (R-Texas), then Chairman of the Judiciary Subcommittee on Intellectual Property, introduced H.R. 2795. Section seven of the bill contained language addressing the most critical issue for reform advocates at the time — injunctions. Less than one year later, the Supreme Court decided eBay, Inc. v. MercExchange, LLC, 126 S. Ct. 1837 (2006). Even with divergent concurring opinions, the Court’s decision resolved the injunction debate in Congress and created a new single most important issue.

At the beginning of this Congress, key senators and members of Congress introduced nearly identical provisions to address these damages issues. Both bills focused upon reasonable royalties and defined entire market value, marketplace licensing, and apportionment of damages. Opponents of these provisions argued that Georgia Pacific already provided sufficient authority for judges to properly guide juries for determining damages. They argued that the proposed damages provisions would inappropriately limit the judge’s flexibility to consider all the relevant factors in a damages calculation.

On April 2, 2009, the Senate Judiciary Committee seemed to agree and adopted a compromise by a vote of 15-4. The compromise requires parties to present what legal bases they believe the jury can consider for damages. The judge is then required to specify to the jury what factors it may consider in a damages calculation, and the jury may consider only those factors. This provision is meant to preserve the Georgia Pacific analysis but give the judge more control over what a jury hears and decides on damages. Less than a month later, the leaders of the House Judiciary Committee held a hearing on the House bill and made it clear that the House of Representatives did not necessarily agree. The Chairman of the Committee, Rep. John Conyers, Jr. (D-Mich.), stated that the House is not a “rubber stamp for the Senate,” and Rep. Smith noted that the Senate should not consider the compromise as a “take it or leave it” proposition.

Staff members for the House and the Senate Judiciary Committees are continuing to meet and determine how to fashion a compromise bill that will be well received by both bodies and the patent community. As they do, advocates of each bill will continue to make their cases. Proponents of stricter damages will argue that the original provisions must be adopted now — that Lucent v. Gateway is proof that district court judges lack the guidance and constraints to properly determine damages. Opponents will argue that the Lucent v. Gateway decision solves the problem completely and that Congress merely needs to strengthen Georgia Pacific and give courts flexibility and time to adjust. Over the next several months, we will see how Congress attempts to resolve these contentious issues, and Lucent v. Gateway may be as much of a game-changer as was e-Bay v. MercExchange. 

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