Proving Patent Damages Is Getting Harder, but Establishing Patent Invalidity May Be Getting Easier - How I4i, L.p v. Microsoft Corp. May Change the Landscape of Patent Litigation

• Publication year: 2010

Audra Dial ⁰ & Betsy Neaf¹

Federal court dockets are flooded with cases of patent infringement claims seeking substantial damages. Parties defending against these claims often argue the patent being asserted is invalid and should not have been issued. The case of i4i v. Microsoft is an excellent example of how evidentiary principles for proving damages and patent validity can affect outcomes, both at trial and on appeal. In this case, a substantial damages verdict was upheld because of a party's failure to properly preserve for appeal questions about the sufficiency of the successful party's damages evidence. Given the substantial amount of damages verdict upheld on appeal, this case had widely been viewed to be another important decision about patent damages. The Supreme Court is now poised to consider another issue from the case: whether to lower the evidentiary burden, which now requires proof through clear and convincing evidence, for establishing patent invalidity. From a practical perspective, a heightened standard unrealistically inflates the consideration that each patent application receives and seems unnecessary, given jurors' inherent tendency to defer to the expertise of the patent examiner. Changing the standard, some argue, will weaken the presumption that an issued patent is valid and discourage innovation. Fortune 500 companies are lining up on both sides of the battle, given their past patent litigation experience. Once the Supreme Court weighs in, potential litigants may reconsider whether to engage in a costly battle, particularly if the patent at issue is of questionable validity.

I. Introduction

Patent infringement trials often involve the presentation of complex evidence about infringement (how the accused device or method infringes the patent), patent validity (whether the invention described in the patent should have received patent protection), and damages (how to adequately compensate the patent owner for the alleged trespass on its rights). They often become extremely expensive, particularly because parties typically hire multiple experts to testify about these complex issues. With so much at stake, parties must balance the costs to pursue patent litigation against the possibility of a favorable verdict. As with any case, assessing the possibility of a favorable verdict requires analysis of the evidentiary issues affecting the claims and defenses likely to be asserted in a patent infringement trial.

This article discusses how a case between i4i, L.P. and Microsoft Corporation highlights the importance of evidentiary principles relating to two of the three key aspects of patent litigation—damages and patent validity. The article first explains i4i's claims of infringement against Microsoft, the damages i4i sought for the infringement, and Microsoft's challenge to the validity of i4i's patent. Then, the surprising appellate decision affirming both the jury's substantial damages award against Microsoft and the finding that the i4i patent was valid is addressed. The article proceeds with a discussion of what could have happened if the appellate court had substantively reviewed i4i's damages evidence. The Supreme Court's grant of certiorari, focusing on whether patent invalidity must be shown through clear and convincing evidence, is then described. A discussion of the arguments on both sides of the debate about this evidentiary standard follows. Finally, the article discusses how one's position in that debate is impacted by a party's past patent litigation experiences. It concludes with a discussion of which side is more likely to prevail before the Supreme Court.

II. The Trial of i4i, L.P. v. Microsoft Corp.

A. The i4i Patent and Microsoft's Alleged Infringement

In early 2007, i4i Limited Partnership ("i4i")² sued Microsoft Corporation ("Microsoft") for patent infringement in the United States District Court for the Eastern District of Texas.³ i4i owns the "'449 Patent," which describes an improved method to edit files containing extensible Markup Language ("XML").⁴ XML helps a computer understand how information is related, such as how a sentence should be displayed.⁵ It does this by providing embedded indicators (or tags) that explain the type of text being displayed.⁶ XML is widely used in documentation, databases, Web sites, and the exchange of information across the Internet.⁷ Here is an example of documentation written in XML format:

Jennifer Kyrnin, Web Design Guide

Use a HTML tag to allow your readers to send email directly from your Web site.

Write a link as usual email me

Where you would normally put a URL, put the code

"mailto" email me

Then put your email address after the colon email me

⁸

As is apparent in the example above, one can create and define tags using custom XML.⁹

The lawsuit alleged that when certain file types (.xml, .docx, or .docm) containing custom XML were opened in versions of Microsoft Word ("Word") with an XML editing feature, i4i's patented method was infringed.¹⁰ Microsoft denied these allegations.¹¹

B. i4i's Damages Evidence

During trial, i4i presented evidence about the amount of money that would be appropriate to compensate it for Microsoft's infringing activities.¹² This evidence was primarily presented through the expert testimony of Michael Wagner, i4i's damages expert.¹³ He opined that a reasonable royalty would be the appropriate way to compensate i4i for the sales it lost as a result of Microsoft's use of i4i's patented method.¹⁴

To arrive at an overall royalty owed to i4i, Mr. Wagner used a hypothetical negotiation model.¹⁵ This damages methodology was articulated in the case of Georgia-Pacific Corp. v. United States Plywood Corp.,¹⁶ and it seeks to determine upon which royalty the parties would have agreed at the time the alleged infringement began.¹⁷ The first step in this analysis, according to Mr. Wagner, is to identify a "benchmark" product that contains the patented technology and is comparable to the infringing product.¹⁸ Mr. Wagner identified XMetaL, a competitive product, as the "least expensive," standalone, comparable program whose functionality primarily involved XML.¹⁹ Taking the price of the benchmark product ($499) and multiplying it by Microsoft's profit margin (76.6%), he arrived at a benchmark royalty of $96 for each Word product containing the XML feature that Microsoft sold.²⁰

As a check on his analysis, he then applied the "25 percent rule."²¹ This "rule" is a theory used by some damages experts to evaluate the reasonableness of a proposed royalty rate because it "assumes the inventor will keep 25% of the profits from any infringing sales."²² Mr. Wagner then evaluated the Georgia-Pacific factors²³ to determine the parties' respective bargaining positions in the hypothetical negotiation.²⁴ In that analysis, he found that his baseline was too low and adjusted the royalty upward by two dollars.²⁵ To obtain a total amount of damages, he multiplied his final per-unit rate ($98) by the number of infringing Word products sold (2.1 million units).²⁶ This resulted in a total royalty of approximately $200 million.²⁷

Microsoft argued that this damages figure vastly overstated the value of the patented technology.²⁸ Specifically, the XML feature is a small part of Word's overall functionality.²⁹ It is used only when documents with custom XML are opened and saved.³⁰ Because this aspect is one of hundreds of capabilities offered by Word, and one that is seldom used by Word customers,³¹ Microsoft argued that any damages resulting from the alleged infringement would be de minimus.³²

C. Microsoft's Challenge to the Validity of i4i's Patent

The Patent Act outlines several requirements for patentability, including that the invention described in the patent is novel (e.g., it was not known or used by others or described in a printed publication before the time that the patent application was submitted) and is not obvious (e.g., it is not so similar to an invention described in an existing patent that it would be obvious to use the patented technology in that manner).³³ Patents duly issued by the United States Patent and Trademark office ("PTo") are "presumed valid" because the patent prosecution process requires that patent examiners evaluate both novelty and obviousness before issuing a patent.³⁴

To establish invalidity, one must demonstrate that the patent should never have been issued in the first instance.³⁵ This can be proven by showing, for example, that the invention described in the patent was not novel or was obvious.³⁶ The Patent Act places "the burden of invalidity" (e.g., rebutting the presumption of validity) on the party challenging the patent.³⁷ Although the Patent Act does not articulate the evidentiary standard for satisfying this burden, for more than twenty-five years the Federal Circuit has required parties to present clear and convincing evidence of invalidity.³⁸ This standard applies regardless of whether the invalidity defense relies on prior art³⁹ considered during prosecution or prior art that was never before the PTo.⁴⁰

At trial, Microsoft alleged that the invention disclosed in i4i's '449 patent was embodied in i4i's S4 software product.⁴¹ It is undisputed that i4i sold S4 in the United States more than one year before it filed the application that led to the issuance of the '449 patent.⁴² In support of this argument, Microsoft relied on internal i4i documents describing S4.⁴³ Microsoft also relied on the S4 user manual (rather than the S4 source code, which had been discarded well before the litigation began).⁴⁴ Microsoft alleged that this public sale of the S4 software rendered the invention unpatentable.⁴⁵

i4i disputed that the S4 technology was the same as that described in the '449 patent. Using the absence of the S4 source code, i4i argued that Microsoft could not prove invalidity.⁴⁶ In other words, the S4 user manual alone did "not provide the level of detail...