Federal Circuit Addresses Excessive Damages Awards. Is Legislative Reform Unnecessary?
Large damages awards in patent litigation has been a hot-button issue for years. For example, whether damages awarded in patent cases may be excessive, and whether juries award inappropriately high sums to patent owners has been an issue addressed in various of the patent reform bills circulating in Congress over the last few years. On September 11, 2009, without waiting for legislative “reform,” the Court of Appeals for the Federal Circuit addressed this issue in Lucent Technologies Inc. v Gateway Inc.
In Gateway, the Federal Circuit affirmed patent validity as well as the infringement judgments that Microsoft had challenged, but vacated a $500 million jury award against Microsoft. The Federal Circuit held that the jury’s damages calculation lacked sufficient evidentiary support and remanded the case for a new trial on the damages issue.
In this case, the damages award involved the use of Microsoft’s “pop-up calendar” in its Outlook program. The Federal Circuit remarked in its ruling that “fundamental differences exist between lump-sum agreements and running-royalty agreements,” especially as applied to “a minimally used feature.” As Chief Judge Michel noted, “in the present case, the jury had almost no testimony with which to recalculate in a meaningful way the value of any of the running royalty agreements to arrive at the lump-sum damages award.”
The Federal Circuit also noted that “There is nothing inherently wrong with using the market value of the entire product, especially when there is no established market value for the infringing component or feature, so long as the multiplier accounts for the proportion of the base represented by the infringing component or feature.” Chief Judge Michel noted in his opinion the court agreed with Microsoft that the jury apparently applied the entire market value rule in this case, using the entire revenues of Microsoft Outlook as the royalty base. But Chief Judge Michel faulted the way the evidence was presented and did not fault the entire market value rule itself.
Much of the patent damages reform debate in Congress is centered on whether the current law adequately allows district court judges to limit awards by performing a “gatekeeper” function. Namely, whether district court judges can keep evidence of questionable value out of a trial that might lead to large jury awards. Chief Judge Michel was clear in enunciating the Federal Circuit’s view that there was no failure by the district court judge in this case (in part because Microsoft did not object at trial to the admissibility of the damages evidence), but rather that there was insufficient evidence for the jury to have concluded that it should award $500 million in damages against Microsoft.
Gateway may signal the Federal Circuit's willingness to forestall, by judicial action, proposed legislative reforms with respect to patent damages. The Federal Circuit, by strictly applying existing rules of evidence, was able to address a major concern of patent reform advocates: allegedly excessive damage awards. Often, infringing devices are merely small features contained within much larger products. When faithfully applied, the entire market value rule can be an effective tool to hold down the size of damages awards. It does so by tying the damages award to specific evidence that customer demand for the infringing feature (rather than some other factor) was the cause of the sale of the product as a whole. If there is insufficient evidence to prove that, the law permits a damages calculation based only on the value of the infringing feature itself. Lack of evidence of customer demand for an infringing feature, therefore, can drastically limit damages. Judicial attempts to apply existing damages rules notwithstanding, it remains to be seen whether Congress will take up patent reform this session.