In Lucent Technologies, Inc. v. Gateway, Inc., the United States Court of Appeals for the Federal Circuit (CAFC) partially vacated and remanded a District Court’s judgment after finding there was insufficent evidence to support damages under 35 U.S.C. § 284 amounting to 8% of the infringing softwear’s huge market value.

Lucent brought suit against Gateway, Inc. and Dell, Inc., Microsoft Corp. intervened and appealed the damages awarded against it. Lucent sued for infringement of U.S. Patent No. 4,763,356 (’365 patent) disclosing a method for entering data into a personal computer using a graphical user interface without typing on a keyboard. The software programs Microsoft Money, Windows Mobile, and specifically a date-choosing tool in the calendar portion of Microsoft Outlook, allegedly infringed the patented technology. The CAFC ruled that the patent was not obvious under 35 U.S.C. § 102 and that Microsoft indirectly infringed it under 35 U.S.C. § 271. However, the CAFC found the jury award of almost $358,000,000 under 35 U.S.C. § 284 was not supported by substantial evidence that the parties would have negotiated this large amount in a hypothetical negotiation.

The CAFC began by addressing whether the ’356 patent was obvious in light of a single piece of prior art, an article from Datamation magazine describing the use of touch screens with computers. The CAFC rejected Microsoft’s argument by noting the article described entering data into “cells,” not “information fields” as required by claim 19 of the ’356 patent. Additionally, the computer in the article was text-based rather than graphical, which was also required by claim 19.

For both the infringement and damages issues the CAFC focused on Outlook’s date-picking tool within its calendar application. Microsoft argued that Lucent did not prove direct infringement, contributory infringement, or inducement, primarily because the products have substantial non-infringing uses. The CAFC found no direct evidence of direct infringement, but pointed out that in Moleculon Research Corp. v. CBS, Inc., 793 F.2d 1261 (Fed. Cir. 1986) circumstantial evidence of widespread sales and instruction manuals that taught the infringing method or invention was sufficient to sustain a finding of direct infringement. The CAFC distinguished Moleculon and the Outlook program at issue from ACCO Brands, Inc. v. ABA Locks Manufacturer Co., 501 F.3d 1307 (Fed. Cir. 2007) and E-Pass Technologies, Inc. v. 3Com Corp., 473 F.3d 1213 (Fed. Cir. 2007) because the Outlook instructions taught the entirety of the infringing use rather than just isolated portions of it.

Regarding contributory infringement, the issue was whether the “material or apparatus” under 35 U.S.C. § 271 was Outlook as a whole or just the infringing date-picker tool. The distinction mattered because Outlook has many non-infringing uses while the date-picker does not. The CAFC reasoned that if the whole package was the “material or apparatus”, no infringing piece or sub-system of a larger system would ever infringe because there would necessarily be many non-infringing uses of the whole. The CAFC also found limited but sufficient circumstantial evidence of inducing infringement because the infringing functionality was used throughout the three products and Microsoft provided several types of training materials that taught the infringing use.

Finally, the CAFC rejected the jury’s $358 million award as unsupported by substantial evidence. Lucent asked for 8% of the $8 billion in sales from the three infringing products, essentially running royalty amounting to $562 million. Microsoft countered it would have paid a lump sum of $6.5 million to license the technology. The CAFC applied the factors from Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970). Georgia-Pacific factor two requires sufficient comparability between the patent in question and the patents relied on to prove damages. The CAFC found that the four lump sum licensing agreements presented for comparison by Lucent had little or no similarity to the patents in the present situation. One licnse had no details and the fourth was for an entire patent portfolio. Lucent also presented four examples of agreements based on a running royalty which contained few details about the patented technologies, and failed to explain why a hypothetical agreement with Microsoft would have used the 8% of market value rate compared to rates that were as low as roughly 0.25% in evidence. Georgia-Pacific factors 10 and 13 estimate how the parties would have valued a feature during a negotiation, and given that the date-picker is such a small part of an Outlook program that is primarily used for e-mail, the CAFC found this feature was incompatible with the large award.

Lucent also failed to present evidence regarding factor 11, which was the amount of use of the infringing feature, despite the CAFC’s openness to considering post-infringement evidence of use. Lucent erroneously relied on the widespread use of the input forms throughout all three programs rather than of the uses that infringed the claim.

Finally, the CAFC agreed with Microsoft that the jury incorrectly applied the market value rule in the damage calculation. The CAFC explained the patented feature must be the basis for customer demand for the rule to be applied. In this case there was no evidence that anyone purchased Outlook because it had a date-picker on its calendar tool. Additionally, there was no evidence that Microsoft had ever paid an 8% royalty on a similar patent. The CAFC rejected criticism of the market value rule and stated it could apply so long as the rate’s relationship to the royalty base was supported by the evidence, and noted Microsoft would not likely complain if the jury had used a much lower rate. Based on the damage calculation errors the CAFC affirmed the finding of infringement and remanded the case for a new trial on damages.