Again, it's over: Microsoft loses second review of Word appeal

A permanent injunction against Microsoft selling versions of Word that contain XML editing ability effectively remains in place today, after a shot-in-the-dark appeal by Microsoft of its appeals loss last December was shot down Wednesday by the DC Circuit Court of Appeals.

Although Microsoft is no longer distributing versions of Word or Office with an XML editor that a jury found infringed upon the patents of former development partner i4i, it made a face-saving effort to change the record of history. Such a change would have shown that Microsoft did not borrow the ideas behind a Word plug-in that i4i demonstrated, for its own purposes, knowing that i4i held a patent on those ideas.

What may be more historically important about Wednesday's ruling -- which replaces the December ruling -- is that it may re-establish an older legal precedent with respect to patent infringement. Patent reformers, including Supreme Court judges, have been utilizing their own judiciary discretion with respect to a benchmark for damages. Legislation still on the table in Congress would change US patent law so that judges must estimate what a product would have been worth had it not been infringed upon, under normal market circumstances, in setting damages.

The reason many damage awards by juries reach into the hundreds of millions of dollars, using formulas that sometimes seem arbitrary, is because they agreed with plaintiffs' attorneys that the real-world damage is so great that any attempt to really estimate loss in monetary value is pointless. That was the case in the i4i trial, where in District Court, a jury decided there was no real formula for measuring the extent of Microsoft's transgression.

The problem considered with the District Court trial was that the base of the damages award was set at $200 million, a figure which admittedly came from a rough estimate of how many copies of Word that Microsoft probably sold during the period in question (2.1 million) times the amount of royalties i4i contended it should have received for each of those copies ($95). Microsoft argued against that formula for numerous reasons, including the fact that not all 2.1 million users of Office or Word would even see the XML editor function in question. Weighing against the need to consider the validity of that strict formula was the notion that i4i had suffered irreparable injury, which the law literally defines as something the law cannot define.

Specifically, i4i argued, Microsoft destroyed the relevant market, so that you couldn't measure it any more. Given that set of circumstances, how would it look for judges to go questioning the jury's formula on nickel-and-dime issues of royalties?

"The district court concluded that there were inadequate remedies at law to compensate i4i for its injury," wrote Judge Sharon Prost for the three-judge panel. "The district court found that before and after Microsoft began infringing, i4i produced and sold software that practiced the patented method. The district court found no evidence that i4i had previously licensed the patent, instead finding evidence that i4i sought to retain exclusive use of its invention. It was not an abuse of discretion for the district court to conclude that monetary damages would be inadequate. In this case, a small company was practicing its patent, only to suffer a loss of market share, brand recognition, and customer goodwill as the result of the defendant's infringing acts. Such losses may frequently defy attempts at valuation, particularly when the infringing acts significantly change the relevant market, as occurred here. The district court found that Microsoft captured 80% of the custom XML market with its infringing Word products, forcing i4i to change its business strategy. The loss associated with these effects is particularly difficult to quantify. Difficulty in estimating monetary damages is evidence that remedies at law are inadequate."

So the injunction stands, but not after tossing Microsoft the most hollow of victories: Sixty days, the Appeals Court decided, was not a fair amount of time for Microsoft to comply with the District Court's order, so it extended the period to five months...from the date of the order. That means the injunction now takes effect on January 11...two months ago.

[EDITOR'S NOTE: On Microsoft's request, we changed our original headline, taking note of the fact that Microsoft did not file a complete appeal on December 22. What it did file was a petition for an en banc rehearing of the existing appeal, and that petition was actually granted, even though the revised opinion issued Wednesday effectively clarifies the Appeals' Court's earlier stand.]