CAFC Puts Coal in Microsoft’s Stocking by Affirming $240 Million Damage Award and Permanent Injunction

Microsoft has lived a charmed life in the “mega award” world of patent infringement litigation.  For example, Microsoft recently dodged a $357 million jury award bullet in Lucent Technologies, Inc. v. Gateway, Inc. But it now looks like Microsoft’s luck finally ran out.  In i4i Limited Partnership v. Microsoft Corp., Microsoft was tagged with:  (1) a jury award of $200 million in damages; (2) a district court award of an additional $40 million in enhanced damages for willful infringement; and (3) a permanent injunction against “selling, offering to sell, importing, or using copies of Word with the infringing custom XML editor” in the future.  All that Microsoft “won” on appeal was a very minor victory in changing the effective date of the injunction by three months to January 11, 2009.

The David taking on Goliath Microsoft this time was the software developer, i4i.  One of the products developed by i4i was an “add-on” software for Microsoft Word which expanded Word’s capability to work with documents containing custom XML.  i4i also obtained U.S. Patent No. 5,787,449 (the ‘449 patent) which claimed an improved method for editing documents containing markup languages like XML by storing a document’s content and metacodes separately.  (Metacodes refer to tags and information about a document’s structure.)

Since 2003, versions of Microsoft Word had XML editing capabilities.  In 2007, i4i sued Microsoft for infringement of the ‘449 patent.  The jury found Microsoft willfully infringed all of the asserted claims of the ‘449 patent, and that the ‘449 patent was not invalid.  On top of the $200 million jury award, the district court granted i4i a permanent injunction and $40 million more in enhanced damages.

Not surprisingly, Microsoft challenged the jury findings on damages and validity, as well as the district court’s construction of the claim term “distinct,” and the grant of the permanent injunction (including the effective date of the injunction), and the enhanced damages.  The Federal Circuit first dealt with the construction of the term “distinct” used to describe how the metacode map and the mapped content were stored.  Microsoft argued that the term “distinct” added two requirements:  (1) storing the metacode map and mapped content in separate files, not just separate portions of the computer’s memory; and (2) the ability to edit the document’s content and its metacode map “independently and without access” to each other.  The district court rejected each of these requirements suggested by Microsoft.

The Federal Circuit agreed with the district court’s construction of the term “distinct.”  As observed by the Federal Circuit, the term “file” suggested by Microsoft appeared nowhere in the ‘445 patent.  Instead, both “storage means” used in the claims, as well as “structures” used in the specification were broader terms than “file” and suggested no particular format.  While “independent manipulation” of the metacode map and mapped content was a “closer question” because several embodiments in the ‘449 patent allowed the user to manipulate on the metacode map or mapped content, the Federal Circuit’s review of the claim language, the specification, and prosecution history suggested the claims were “not limited to these particular embodiments.”

Microsoft’s validity challenge to the ‘449 patent had two prongs.  The first was for obviousness over one U.S. patent, in view of either a SGML editor know as Rita or a second U.S. patent.  The Federal Circuit ruled that Microsoft waived its right to challenge the factual findings underlying the jury’s obviousness verdict.  Accordingly, the Federal Circuit limited its review to the district court’s legal conclusion of nonobviousness based on the jury’s factual findings.  The Federal Circuit then concluded that the jury must have believed that there were differences between these references and the asserted claims, and that there was no motivation to combine these references.  Put differently, Microsoft “[had] not established that the asserted claims would have been obvious.”

The second and more serious challenge was an “on sale” bar based on an S4 software program developed for a client called SEMI by i4i’s predecessor that was delivered to SEMI more than a year prior to the filing date of the ‘449 patent.  S4 allowed the user to add and edit SGML tags in electronic documents and to divide the document into “entities” for storage purposes.  Both the founder of i4i and the developer of the S4 program testified that S4 didn’t create a “metacode map.”  Unfortunately for Microsoft, the source code for S4 was also destroyed after the project with SEMI was completed and many years before the suit was filed.  That made the issue of S4 as an “on sale” bar to the ‘449 patent a “swearing contest,” which Microsoft ultimately lost.

Microsoft was no more successful in overturning the jury’s infringement verdict.  Microsoft first argued that there were two alleged errors in the jury instructions regarding contributory infringement.  But the Federal Circuit found those alleged errors to be, at most, “immaterial.”  Microsoft next challenged the sufficiency of the evidence to support the jury’s infringement verdict.  But the Federal Circuit concluded there was sufficient evidence to support either a theory of contributory infringement or induced infringement.  Regarding contributory infringement, the Federal Circuit ruled that, based on the evidence at trial, “the jury could have reasonably concluded that the custom XML editor had no substantial, noninfringing uses and that Microsoft knew that the use of the custom XML editor would infringe [the ‘449] patent.”  While viewing the theory of “induced infringement” as no longer necessary because Microsoft had committed contributory infringement, the Federal Circuit also concluded that, also based on the evidence at trial, a reasonable jury could have concluded that Microsoft had the “affirmative intent to cause direct infringement.”

The Federal Circuit also concluded that the district court didn’t abuse its discretion in not granting Microsoft a new trial on the $200 million damage award.  There was a long discussion in the Federal Circuit’s opinion on the correctness of the royalty rate ($98 per copy of Word used in an infringing manner) determined by i4i’s expert based on using the Georgia-Pacific factors.  In the end, the Federal Circuit concluded that the i4i expert’s opinion on the royalty rate was “based on sufficient fact or data.”  Even the Federal Circuit’s recent ruling in Lucent Technologies couldn’t save Microsoft from the $200 million jury damage aware being determined to be “reasonable.”

Microsoft’s feeble effort to appeal the $40 million enhanced damage award went completely for naught.  And the Federal Circuit had little difficulty in holding that the district court didn’t abuse its discretion in granting i4i a permanent injunction, even under the standard set forth by the Supreme Court in eBay.  That i4i was not simply a Non-Practicing Entity (NPE), but instead a direct competitor certainly didn’t help Microsoft on the “irreparable injury,” “inadequate remedies,” or “balance of hardships” factors.  On the “public interest” factor, the district court had wisely tailored the injunction to cover future sales of Word, not sales of Word that had already occurred.  Only on the effective date of the injunction did the Federal Circuit quibble with the district court.

Microsoft’s essentially unsuccessful appeal can be likened to the Dickens’ A Christmas Carol.  No matter whether it was Christmas Past (claim construction and validity), Christmas Present (infringement and damages) or Christmas Future (permanent injunction), Microsoft wound up being Ebenezer Scrooge.  But unlike Scrooge who saw the light and found the true Spirit of Christmas, Microsoft was handed a huge lump of coal for its corporate stocking by the Federal Circuit.  Needless to say, it won’t be a Merry Christmas in Redmond, Washington this year.

© 2009 Eric W. Guttag.