i4i L.P. v. Microsoft Corp.

John Cone and Megan O'Laughlin are attorneys at Hitchcock Evert LLP in Dallas and specialize in IP litigation.

The Federal Circuit's recent decision in i4i L.P. v. Microsoft Corp., on appeal from the Eastern District of Texas, contains valuable lessons on a number of procedural issues, particularly on the importance of timely motions during trial in order to preserve matters for appeal. The Federal Circuit issued its original opinion on Dec. 22, 2009. It subsequently withdrew that decision and issued a revised opinion on March 10, 2010. The revised opinion contains an additional section dealing with the finding of willful infringement.

Motions for Judgment As a Matter of Law

Of particular importance is the filing of motions for judgment as a matter of law (“JMOL”) under Rule 50(a). If the motion is filed before the case is submitted to the jury, the issue raised in the motion can be decided by the trial court, and on appeal, under a sufficiency of the evidence standard, which in effect allows a court to review the weight of the evidence on the issue. If no pre-verdict JMOL is filed, however, the verdict can be challenged only by a motion for a new trial. The standard to succeed on this motion is far higher, namely that there is no evidence to support the verdict.

In the trial court, a jury found Microsoft liable for willful infringement of i4i's patent relating to editing custom XML, a computer language, and rejected Microsoft's attack on the patent's validity.

At trial, Microsoft argued that the claims of the patent were anticipated by the patentee's prior sale of a particular software program. It also argued that the claims would have been obvious in light of a combination of prior published patents.

On appeal, Microsoft challenged, inter alia, the finding of validity, arguing that the patent was anticipated or obvious as a matter of law.

Before the case was submitted to the jury, Microsoft moved for JMOL on its anticipation attack based on the prior sales of software, but did not move for pre-verdict JMOL on obviousness. The verdict form used by the court did not require the jury to make detailed findings on any of the fact issues relevant to obviousness, asking only “Did Microsoft prove by clear and convincing evidence that any of the listed claims of the ' patent are invalid?”

Dealing with the appeal against the finding of non-obviousness, the court noted that while the question of obviousness was a legal one, reviewed de novo, it was in this case based on the jury's implicit factual findings. Moreover, the extent of the court's review of the factual findings is dependent on whether a pre-verdict JMOL was filed on obviousness. Under the court's precedent, a party waives its right to challenge factual findings underlying a jury's verdict unless it files a pre-verdict JMOL. Duro-Last, Inc. v. Custom Seal, Inc. , 321 F.3d 1098, 1107-08 (Fed. Cir. 2003). In the present case, Microsoft's pre-verdict JMOL was limited to the anticipation claim under Section 102(b), and this was insufficient to preserve its right to a post-verdict JMOL on obviousness. Thus, the court did not have to consider whether the evidence at trial was legally sufficient to support the verdict that the patent was not invalid as obvious. It considered only whether the trial court's legal conclusion of non-obviousness was correct, based on the presumed factual findings. Because there were no explicit factual findings by the jury on obviousness, the court had to presume that all factual disputes ' including the scope of the prior art, differences between the prior art and the claims and level of skill in the art ' were resolved in the patentee's favor. Duro-Last, 321 F.3d at 1108. Given this presumption, Microsoft could not establish that the claims would have been obvious.

In explicitly refusing to consider Microsoft's arguments based on prior art that were not the subject of a pre-verdict JMOL, the Federal Circuit made clear that an accused infringer must file a pre-verdict JMOL on all theories and with respect to all prior art references.

Microsoft was able to mount a more substantive challenge on the ground of anticipation because it had filed both pre- and post-verdict motions for JMOL and a motion for a new trial.

The point of dispute on anticipation involved whether the software sold before the critical date included the features of the asserted claims. No examples of the software survived at the time of trial. Microsoft argued that it was entitled to JMOL because it established a prima facie case of anticipation to which the only rebuttal evidence was the testimony of the inventors, which was not corroborated by any documentary evidence. The court rejected that argument, holding that anticipation is an affirmative defense on which the person claiming invalidity has the burden on a clear and convincing evidence standard. Here, the uncorroborated testimony was offered not to establish the invalidity of the patent, but to support its validity. The court's cases certainly require corroboration in the latter circumstances. Finnigan Corp. v. Int'l Trade Comm'n , 180 F.3d 1354, 1369-70 (Fed. Cir. 1999). The court held, however, that this was exclusively “gander sauce” and was not a requirement when the testimony is offered by the goose to defend the validity of the patent. The court offered no explanation as to why an interested third party can only prove invalidity if it has corroboration, but the testimony of an inventor intended to uphold validity needs no corroboration. Because the uncorroborated testimony of the inventors on the content of the prior software was properly admitted despite a lack of corroboration, there was sufficient evidence, the court held, to support the verdict of no anticipation.

Rejecting a challenge to the jury instructions on burden of proof for invalidity, the court maintained the rule that invalidity must be established by clear and convincing evidence, even when the challenge is based on prior art not considered by the PTO.

The Challenge to the Damages Award

Microsoft also challenged the damages award, in particular the testimony of the patentee's damages expert as to a reasonable royalty. The expert calculated a royalty rate of $98 then multiplied this rate by the number of infringing products to produce a damages figure of $200 million. Microsoft argued that this was an unreasonable amount, pointing to license fees it had paid under other patents. The expert, however, testified as to the assumption he made in his calculations, including a benchmark price for the Microsoft product, which was not sold separately; based on a similar product, calculated Microsoft's “profit” based on its profit margin, and applied the 25% rule to the profit. The expert also testified concerning the application of the Georgia Pacific factors to his opinion on reasonable royalty. Microsoft's criticism of the expert's testimony, the court held, was not to the methodology used by the expert, but as to the assumptions made. These arguments did not rise to the level justifying exclusion of the expert's testimony under Daubert and Rule 702. The court held the opinion testimony was “based on sufficient facts or data” and was properly admitted. The objection was as to the weight, not the admissibility, of the expert's evidence. Microsoft urged the court to vacate the damages award as unreasonable, as was the case in Lucent Technologies, Inc. v. Gateway, Inc. , 580 F.3d 1301 (Fed. Cir. 2008). The court declined, pointing out that, unlike the defendant in Lucent, Microsoft had not filed a pre-verdict JMOL on damages. This omission prevented the court from considering whether there was a sufficient evidentiary basis for the damage award. It could review it only under the new trial standard, which permits the verdict to be set aside and a new trial ordered “only upon a clear showing of excessiveness.” Duff v. Werner Enters., Inc. , 489 F.3d 727, 730 (5th Cir. 2007) (applying local circuit law on issues not unique to patent law, including evidentiary rulings and denials of motions for JMOL or new trial). Had the court been able to review the sufficiency of the evidence, it could have considered whether the award was “grossly excessive or monstrous” (Microsoft's characterization) and the validity of the benchmark chosen.

Consideration of the Read Factors

Microsoft also challenged the Court's decision to enhance damages under 35 U.S.C. ' 284, but not the jury instructions on willfulness or the sufficiency of the evidence supporting the willfulness finding. A finding of willfulness is a prerequisite to an award of enhanced damages. In re Seagate Technology, LLC, 497 F.3d 1360, 1368 (Fed. Cir. 2007) (en banc). The standard for the court to decide whether and by how much to enhance damages is set forth not in Seagate , but in Read Corp. v. Portec, Inc. , 970 F.2d 816, 862-27 (Fed. Cir. 1992). The court held the trial court's consideration of the Read factors was within the scope of that court's discretion.

John Cone and Megan O'Laughlin are attorneys at Hitchcock Evert LLP in Dallas and specialize in IP litigation.