Jury verdict against Microsoft overturned in precedent-setting ruling

At one time, French networking systems producer Alcatel-Lucent -- the caretaker of patents once belonging to AT&T's Bell Laboratories -- stood likely to receive infringement payouts from Microsoft that may have collectively exceeded $2 billion, including for licensing MP3 technology from what some believed was the wrong authority. But the MP3 ruling was reversed in August 2007; and today, the second largest jury verdict against Microsoft -- and still one of the largest in history -- has also been struck down by a federal appeals court.

Today, the Federal Circuit panel of judges ruled in Microsoft's favor, overturning a jury award of over a third of a billion dollars, in a case involving infringing an old Bell Labs patent for a technique for users selecting a date from an onscreen calendar. Last spring, the US Patent Office overturned the validity of that patent anyway.

But surprisingly, that's not the reason the panel voted on Microsoft's side. Instead, in what clearly appears to be an effort to establish (or re-establish) legal precedent for patent reform in the absence of new legislation to achieve the same goals, the judges found fault with the jury award. Specifically, no one really knows how the jury arrived at an award of $357,693,056.18.

"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," the judges wrote. "Furthermore, as Microsoft explains in its brief, working the math backwards strongly suggests that the jury must have used some calculation of a rate applied to the entire market value of the software." The judges themselves tried out some variables and came up with alternate theories as to the final figure.

They literally had to guess at how the award amount was reached. If it was arbitrary, then that alone would justify it being thrown out; but assuming it wasn't, the judges presumed the following: The jury may have calculated the total number of Dell systems during the period in question that were sold with Microsoft Outlook pre-installed (Dell being the original defendant in this case), and multiplied the estimated revenue from those sales by a royalty rate Lucent (the original plaintiff) used in its early briefs: 8%.

If that's what the jury did, the judges concluded, then they were at fault for misinterpreting the law. However, this particular misinterpretation as the Appeals Court describes it could apply to a huge number of patent infringement verdicts on appeal. Specifically, the law states that estimating damages in terms of royalties for all units sold where the infringing feature was included, can only take place in instances where customers purchased those units specifically because it had that feature. Imagine customers all over the world saying, "I want to buy that new Dell I've been reading about that has that cool new software where you can click on a date from a calendar!"

It's called the entire market value rule; and the case law the judges cite for it reads as follows: "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."

As Chief Judge Paul R. Michel illustrated in the ruling today, writing for the panel's unanimous behalf, a Lucent expert early in the case attempted to estimate for the court what a hypothetical licensing agreement between Lucent and Dell might have looked like -- and that may be where the 8% number came from. But when it so happened that the defendant shifted from the maker of the hardware to the maker of the software that was included on it, that same expert was called back. The base price for his formula had to change, because now the subject wasn't Dell computers but Microsoft Outlook. But he increased his royalty rate to compensate for the drop in base price, for reasons that may never have been established.

"The only reasonable conclusion that can be drawn from this evidence," Judge Michel wrote, "is that the infringing use of Outlook's date-picker feature is a minor aspect of a much larger software program and that the portion of the profit that can be credited to the infringing use of the date-picker tool is exceedingly small."

"Exceedingly small" is one of those phrases that paints a picture of an amount of money that isn't worth bothering with -- if your main business in life any more is defending your software patent portfolio, you don't take anyone to court in hopes of obtaining "exceedingly small" jury awards. If the Appeals Court's resurrection of a 1970 formula for obtaining the base value for the hypothetical royalty formula (an estimate of the value that the infringed work contributed to the whole product, rather than the sales of the product itself) can be upheld by the Supreme Court -- which may very well happen -- then appeals panels everywhere in the country may cite this case as precedent for overturning colossal jury verdicts. What's more, the prospect of similar verdicts in the future in software-related cases may have just dwindled to something "exceedingly small."

As it stands, the case has been remanded to a lower court for retrial, although Alcatel-Lucent may very well consider whether it's worth bothering with at this point.