<i>Lucent v. Gateway</i>: A Closer Look at Patent Damages

In a move signaling a heightening of evidentiary scrutiny for patent infringement damage calculations, the Court of Appeals for the Federal Circuit, in Lucent Techs. v. Gateway, Inc., 2009 U.S. App. Lexis 20325 (Fed. Cir. Sept. 11, 2009), vacated and remanded an almost $358 million award to Lucent based on Microsoft's infringement of U.S. Patent 4,763,356, entitled “Touch screen form entry system” (hereinafter the “'356 patent”). The Federal Circuit affirmed the lower court's validity and infringement ruling, but sent the damage award back due to lack of sufficient evidentiary support for several Georgia-Pacific factors ( see Georgia-Pacific Corp. v. U.S. Plywood Corp. , 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970)) and the entire market value rule.

The '356 Patent

Lucent initiated the underlying infringement suit against Gateway, in which Microsoft intervened, in 2002. Lucent alleged the following Microsoft products infringed the '356 patent: Microsoft Money, Microsoft Outlook and Windows Mobile. The '356 patent relates generally to computer data input using certain predefined tools and electronic completion of form fields, such as a bitmapped graphics field. Microsoft's Outlook calendar tool that allows the user to enter dates in an electronic manner was the central product feature at issue. The calendar tool displays a monthly calendar as a grid of numbered dates, along with graphical controls that allow the user to scroll to other dates, usually in a monthly time frame. Once the user selects a date with the tool, the software automatically then pre-fills the day, month, and year into the corresponding field in the calendar or appointment screen.

In view of this specific Outlook feature, which was found to infringe the '356 patent, the Federal Circuit undertook an unusually detailed analysis of the evidence provided in the case, such as expert testimony and sample license agreements offered by Lucent in support of its damages claim. The Federal Circuit considered this evidence in view of the framework set forth in Georgia-Pacific that has been used for years and includes a list of 15 factors to estimate reasonable royalty rates. Here, the Federal Circuit concentrated on the following Georgia-Pacific factors:

• 2. Rates licensee pays for use of other comparable patents to the patent in suit.
• 10. The nature of the patented invention; the character of the commercial embodiment of it as owned and produced by the licensor; and the benefit of those who have used the invention.
• 11. The extent to which the infringer has made use of the invention and the value of such use.
• 13. The portion of realizable profit attributable to the invention as distinguished from nonpatented elements, significant features/improvements added by the infringer, the manufacturing process or business risks.

In discussing Georgia Pacific Factor 2, the court discussed Lucent's reliance on eight varied license agreements to support the jury's lump-sum damages award. However, the Federal Circuit found such agreements to be substantively different from the hypothetical agreement under consideration for the '356 patent.

The court also found that simply because a license agreement is related generally to personal computers does not mean it should be probative to the current hypothetical negotiation being contemplated. In addition, the court singled out one of the license agreements as being related to multiple broad PC-based technologies that would have resulted in a vastly different negotiation than the narrow single feature in the '356 patent. The Federal Circuit further stated that while Lucent produced four running-royalty license agreements, these inherently had significant shortcomings due to their “running-royalty” structure, and such a comparison would be untenable given the certain fundamental differences between lump-sum agreements and running-royalty agreements. As the court noted, there was almost no testimony provided to the jury to recalculate the value of any running royalty agreement to arrive at a lump-sum damages award as the jury awarded here.

The Federal Circuit then analyzed Georgia Pacific Factors 10 and 13 together. These two factors basically show how the parties would have valued the patented feature during a hypothetical negotiation. The court affirmed that the infringing feature contained in Microsoft Outlook is only a minor feature of one part of a much larger software program. The court cited certain expert testimony that demonstrated that the program was used for sending and receiving e-mails, creating electronic tasks and notes, storing contact information, and was also a fully functional calendar system in which a user can record appointments, meetings, and other items on one's schedule. In fact, the Federal Circuit noted that Lucent's own expert testified that Outlook is an integrated suite of abilities to send and receive e-mail, set up contacts, arrange meetings, maintain a personal calendar, etc. In short, Outlook is an enormously complex software program comprising potentially thousands of distinct features, and thus a hypothetical licensing arrangement could not have valued one small feature as the date picker so greatly so as to sustain such a large damage award as granted by the jury.

With respect to Georgia-Pacific Factor 11, and similar to Factors 10 and 13, the court noted that this factor informs the court and jury about how the parties would have valued the patented feature during the hypothetical negotiation. Essentially, Factor 11 logically implies that an invention used frequently is generally more valuable than one used infrequently. Again, the Federal Circuit found that the record was conspicuously devoid of any data about how often consumers use the patented date-picker invention. The court further disagreed with Lucent's proffered evidence regarding general use of the infringing Microsoft software programs, containing both patented and non-patented features, and stated that only when the actual date-picker feature is used to fill out a form does infringement occur.

Market Value

The court's damages analysis next turned to the entire market value rule. The entire market value rule has been a powerful and decisive tool for patentees and a constant source of uncertainty and fear for alleged infringers. This doctrine generally permits recovery of damages based on the value of an entire product that contains several features, where the patented feature forms the basis for consumer demand. The question of whether the entire market value rule applies in a particular circumstance has a significant economic impact on the accused infringer's financial exposure. For man- ufacturers and sellers of products with relatively large base prices or potential royalty bases, the possibility that the entire market value rule will apply and lead to an extremely high damage award can play a very large role in settlement negotiations.

The Federal Circuit found that Lucent had not provided sufficient evidence for the jury to conclude that the infringing feature was either the basis, or a substantial part of, consumer demand for the Outlook product. Similar to the court's analysis of Georgia Pacific Factors 10 and 13, the court opined that the infringing date-picker's role in the overall program was minor, especially when compared with the relative importance of other features, such as the e-mail function. The Federal Circuit further noted that Lucent had failed to produce any evidence that anyone had made a purchasing decision purely or substantially based on such a date-picker feature. In fact, it was more likely that, given the other highly used functions like e-mail, the date-picker feature was not the reason consumers purchased the Outlook program. Thus, a critical requirement of the entire market value rule, namely the requirement that the patented feature form the basis for consumer demand, was missing.

The court further found that Lucent's approach of first applying the entire market value rule to the sale of the entire computer system and then changing the approach to the software product with an unsubstantiated royalty rate, was not acceptable and did not reflect what would have transpired in a hypothetical licensing discussion. Lucent's expert had initially tried to submit a 1% royalty rate to be applied to the computer system as a whole, and then reverted to using the software prices as a royalty base with an inflated 8% royalty, despite the fact that there was no evidence in the record establishing that Microsoft had ever agreed to pay an 8% royalty on an analogous patent. It is important to note that the Federal Circuit made certain to clarify that it was not foreclosing the use of the entire market value rule in the correct circumstances as establishing a basis on which to calculate royalties. However, the corresponding royalty rate applied to such a basis must be grounded in reason and supported by actual evidence.

Conclusion

The Federal Circuit is clearly tightening down on broad and undisciplined damages determinations. With a strong emphasis on providing concrete, reasoned and relevant evidence to support any damage calculation, the court seems to be taking on its own form of judicial patent reform to provide guidance in future patent infringement cases.