CAFC: Jury's $360 M Damages Award Against Microsoft, In Favor of Lucent, Not Supported by Evidence

In a decision affirming the jury's finding of Microsoft's liability for infringement of Lucent's U.S. Patent No. 4,763,356, the Court of Appeals for the Federal Circuit ("CAFC") reversed and remanded the damages award, which the jury had calculated to the penny, in the amount of $357,693,056.18. This decision represents a rejection of the the "entire market value" approach to patent damages, but not in the way that some might have hoped. Particularly, the opinion leaves the rule viable for application in other cases. Here is some relevant language from the opinion, authored by Chief Judge Michel:

Microsoft argues that the damages award must be reversed because the jury erroneously applied the entire market value rule. Despite the jury’s indication on the verdict form that it was awarding a lump-sum reasonable royalty, Microsoft believes that the only way the jury could have calculated a figure of $357,693,056.18 was by applying a royalty percentage to a total sales figure of the infringing software products. Indeed, it is difficult to understand how the jury could have chosen its lump-sum figure down to the penny unless it used a running royalty calculation.

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Assuming that the jury did apply the entire market value rule, such application would amount to legal error for two reasons.

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For the entire market value rule to apply, the patentee must prove that “the patent-related feature is the ‘basis for customer demand.’” Rite-Hite, 56 F.3d at 1549 (quoting State Indus., 883 F.2d at 1580); see also Bose Corp v. JBL, Inc., 274 F.3d 1354, 1361 (Fed. Cir. 2001); TWM Mfg., 789 F.2d at 901 (“The entire market value rule allows for the recovery of damages based on the value of an entire apparatus containing several features, when the feature patented constitutes the basis for customer demand.”).

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Notwithstanding this obstacle, the objective of the Court’s concern has been two-fold: determining the correct (or at least approximately correct) value of the patented invention, when it is but one part or feature among many, and ascertaining what the parties would have agreed to in the context of a patent license negotiation.

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The first flaw with any application of the entire market value rule in the present case is the lack of evidence demonstrating the patented method of the Day patent as the basis—or even a substantial basis—of the consumer demand for Outlook.

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The second flaw with any application of the entire market value rule in this case lies in the approach adopted by Lucent’s licensing expert. He had first tried to apply the entire market value rule to the sale of the “infringing” computers loaded with the software, opining that Microsoft and Lucent would have agreed to a 1% royalty based on the entire price of the computer containing Outlook.

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At trial,Lucent’s expert changed his opinion, contending that the royalty base should be the price of the software (and not the entire computer) but also that the royalty rate should be increased to 8% (from 1%). This opinion contrasted starkly to the rates he proposed for the other patents in suit, which were in the 1% range. In choosing 8%, he reasoned that, “in a typical situation, if one applied a royalty to a smaller patented portion in a computer as opposed to the entire computer using typically infringed patents, 8-percent . . . of the fair market value of the patented portion would equate to 1-percent of the fair market value of the entire computer.

MSFTLucentCAFC.pdf