Federal Circuit Partially Vacates Court of Federal Claims’ Assessment of Copyright Award

In a precedential decision authored by Judge Hughes on Thursday, the U.S. Court of Appeals for the Federal Circuit (CAFC) vacated-in-part and remanded a decision of the Court of Federal Claims that had awarded 4DD Holdings, LLC, and T4 Data Group, LLC $12,683,065.86 for the U.S. government’s infringement of their copyrighted software TETRA®.

4DD sued the Department of Defense (DOD) and the Department of Veterans Affairs (DVA) for infringement of its copyrighted software, TETRA, which served as an interoperability solution for military healthcare records stored by the two agencies in separate databases (dubbed the “Defense Medical Information Exchange (DMIX) program).

TETRA Healthcare Federator (Federator) is the data processing component of the system  and is licensed on a per-computer core basis. TETRA Enterprise Studio (Studio) is the graphical interface and programming component that allows engineers to interact with Federator and is licensed on a per-user, or per-seat, basis. The government ultimately licensed 64 Federator cores at $10,447 per core and 50 Studio seats at $3,337 per seat.

Importantly, the licensing agreement “prohibited the government from copying TETRA with exception of a single backup copy for use if the original was damaged or destroyed,” said the CAFC opinion. But during the development process by the government’s contractor, Systems Made Simple (SMS), to adapt TETRA for use with the government’s databases, “thousands” of copies of TETRA were made, thereby exceeding the scope of the government’s license.

4DD became aware of this violation of the license agreement in February 2014 and contacted the government about payment for “what it estimated to be 68 additional Federator cores.” The parties eventually settled on payment of the license rate of $10,447 per core for 168 cores, following investigation and negotiation.

A change in government leadership, however, led to the DOD ending its work with TETRA before the software could be implemented. In September 2014, the government notified SMS that it would buy TETRA licenses for only one more year.

4DD then filed suit in August 2015, seeking more than $5 billion in copyright infringement damages. The court first determined the government had “intentionally or negligently destroyed several categories of evidence” by deleting all copies of TETRA from the Development and Test Center (DTC) and applied adverse inferences against the government and ordered roughly $1.1 million in sanctions.

After a bench trial, the court also found that the government exceeded its Federator license by 290,334 cores and its Studio license by 171,421 seats, and rejected 4DD’s suggestion that “damages should be calculated by directly applying the established per-core and per-seat” rates established by the Solutions for Enterprise-Wide Procurement (SEWP) contract of authorized software reseller Immix Technology, Inc.

Instead, the court used a a hypothetical negotiation to fix a reasonable royalty, and ultimately found that “the government would have possessed the superior bargaining position.” This was based on its findings that: “(1) TETRA provided the government with little value, (2) TETRA had no established profitability, and (3) there existed a similar and cheaper software, Rhapsody.” The court’s calculation ultimately resulted in an award of $12,683,065.86.

4DD appealed, arguing first that the Court of Federal Claims erred by assessing damages via a hypothetical negotiation and second, “assuming a hypothetical negotiation was legally permissible, 4DD challenges the method by which the trial court constructed the negotiation and relied on certain facts to assess the parties’ relative negotiating leverage.”

As to the first argument, 4DD said that “where the parties to an infringement lawsuit have previously agreed on rates for licensing the exact copyrighted material at issue, those rates control as a matter of law when calculating damages for infringement under 28 U.S.C. § 1498(b).”

But the CAFC determined that, “while a license may inform the reasonable royalty inquiry, no rule of law compels courts to defer to such an agreement in lieu of conducting a hypothetical negotiation, particularly where material differences exist between the terms of the license and the defendant’s infringement.”

Turning to the second argument, the Federal Circuit noted that 4DD argued the court specifically erred in 1) “its application of the so-called book of wisdom doctrine” and 2) “its determination that the availability of an allegedly similar software would have weakened 4DD’s bargaining position.”

With respect to the Court of Federal Claims’ so-called “Book of Wisdom” doctrine, which says that courts can use information that post-dates the date of first infringement to calculate reasonable royalties, the CAFC explained that the Book’s purpose “is to provide insight and reduce uncertainty as to the elements of a license the parties are hypothetically negotiating.” However, here, it was “used to impute knowledge of later-occurring events affecting the value of the license that were unforeseeable at the time of negotiating, such as the government’s change in leadership and resulting decision to end its work with TETRA before implementation.”

Since this is inconsistent with assessing the “‘reasonable needs and expectations’ of the parties at the time of licensing,” it is improper for determining a hypothetical negotiation amounts to legal error, said the Federal Circuit. This portion of the decision was thus vacated and remanded for further proceedings.

The CAFC did not find error in the Court of Federal Claims’ determination that the existence of a less expensive software, Rhapsody, weakened 4DD’s bargaining position, however, noting that “the trial court is within its discretion to consider the availability of similar, even if not coextensive, software products.”

Finally, the CAFC found that the trial court also committed legal error in its calculation of a flat award of $150,000 in compensation for unauthorized copies of Studio and instructed the court on remand to “determine in the first instance whether the parties would have agreed to a per-seat Studio license over other arrangements (e.g., a convenience fee), and, if so, what per-seat rate would apply.”

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