LINN, Circuit Judge.
Uniloc USA, Inc. and Uniloc Singapore Private Limited (collectively, "Uniloc") appeal from the decision of the United States District Court for the District of Rhode Island granting Microsoft Corporation's ("Microsoft") motion for judgment as a matter of law ("JMOL") of non-infringement and no willful infringement of asserted claims of Uniloc's U.S. Patent No. 5,490,216 ("'216 patent"), and, in the alternative, granting a new trial on infringement and willfulness. Uniloc USA, Inc. v. Microsoft Corp., 640 F.Supp.2d 150 (D.R.I. Sept.29, 2009) ("Uniloc II"). Uniloc also appeals the district court's alternative grant of a new trial on damages. Microsoft cross-appeals the district court's denial of its motion for JMOL of invalidity of the '216 patent. Id. at 179-83.
Because the jury's verdict on infringement was supported by substantial evidence, this court reverses the district court's grant of JMOL of non-infringement; this court also reverses the district court's alternative grant of a new trial on infringement as an abuse of discretion. Because the jury's verdict on willfulness was not supported by substantial evidence, this court affirms the district court's grant of JMOL of no willfulness; the district court's alternative grant of a new trial for willfulness is thus rendered moot. Because the jury's damages award was fundamentally tainted by the use of a legally inadequate methodology, this court affirms the grant of a new trial on damages. Finally, because the district court did not abuse its discretion in determining that the jury verdict of no invalidity of the '216
Commercial software manufacturers like Microsoft lose significant sales as a result of the "casual copying" of software, where users install copies of a software program on multiple computers in violation of applicable software license conditions. Uniloc's '216 patent was an early attempt to combat such software piracy. There is no dispute as to the actual functioning of Uniloc's patented invention and Microsoft's accused products. The following background information is taken from the district court's opinion. Uniloc II, 640 F.Supp.2d 150.
Uniloc's '216 patent is directed to a software registration system to deter copying of software. The system allows the software to run without restrictions (in "use mode") only if the system determines that the software installation is legitimate. A representative embodiment functions as follows. First, a user intending to use the software in "use mode" enters certain user information when prompted, which may include a software serial number and/or name and address information. An algorithm on the user's computer (a "local licensee unique ID generating means") combines the inputted information into "a registration number unique to an intending licensee" (a "local licensee unique ID"). '216 patent, Abstract. The user information is also sent to the vendor's system, which performs the identical algorithm (a "remote licensee unique ID generating means") to create a "remote licensee unique ID" for the user. When the application boots again, a "mode switching means" compares the local and remote licensee unique IDs. If they match, the program enters into "use mode." If they do not match, the program enters into "demo mode," wherein certain features are disabled. Figure 8 from the '216 patent shows the fifth preferred embodiment:
'216 patent, Fig. 8.
Uniloc asserts only independent claim 19:
'216 patent, col. 15 l.21 — col. 16 l.9 (emphasis added).
The accused product is Microsoft's Product Activation feature that acts as a gatekeeper to Microsoft's Word XP, Word 2003, and Windows XP software programs. Upon receipt of Microsoft's retail software program, the user must enter a 25-character alphanumeric product key contained within the packaging of Microsoft's retail products. If the Key is valid, the user is asked to agree to the End User License Agreement ("EULA"), by which the licensor-licensee relationship is initiated.
The functionality of the MD5 and SHA-1 algorithms is at the heart of this case. As the district court noted, Microsoft's expert, Dr. Wallach, provided a demonstrative animation, which gives a clear, detailed, and uncontested explanation of the functionality of these algorithms. The animation and the explanation of it given by Dr. Wallach at the trial (Trial Tr. 157:21-166:3, Mar. 31, 2009) may be downloaded at http://oralarguments.cafc.uscourts.gov/ animation/Uniloc.2010-1035.Animation. pdf. The first frame is explained below.
First, A, B, C, and D are 32-bit numbers and F, G, H, and I are logical operations
Second, the resulting number is added to A using modular addition. Modular addition is a way of adding that resets the count of a sum after a certain threshold number is reached. The most familiar example is the American A.M./P.M. clock system. If a three hour movie begins at 11:00 A.M., it will end at 2:00 P.M. This is an example of mod12 addition: one first adds 11 + 3=14 then subtracts 12 to get 2. Modular addition, or modulo-addition, is used throughout the MD5 algorithm.
Third, M1, the first component of the source message being hashed, is modulo-added to the result from step 2.
Fourth, additive constant K
Fifth, the resulting number is "circular shifted" (according to Microsoft) or "left shifted" (according to Uniloc); the shift is depicted by the green box with the three arrows in the diagram. Because the actual functionality is not disputed, we will refer to it as "circular shifting" for the purposes of this opinion. Inserting into the shifter the binary number 0100 1011
Sixth, the resulting number is then modulo-added to initial value B, which final number becomes the new value B'. Initial value C becomes new value D', D becomes A', and A becomes B'. The hashing algorithm is then run again using these new values (A', B', C', D') in place of the old (A, B, C, D) and the second component of the message (M2) in place of the first (M1). After sixteen rounds of this, a different logical function, G(x, y, z) is used, and the same message string is input in a different order. The function G is used for sixteen rounds, followed by sixteen rounds of function H and sixteen rounds of function I. The end result is a "license digest," i.e. "a shortened fixed-bit output," Uniloc II, 640 F.Supp.2d at 157, derived from the original message.
Microsoft encrypts this digest, and sends it along with the original data back to the user's computer. The software on the user's computer decrypts the message and recovers the "license digest." It then inputs the original data (i.e. the PID, HWID, and additional activation information) and enters it into the same MD5 or SHA-1 algorithm used by Microsoft's computers, resulting in a local "license digest." Microsoft's Product Activation software compares the local license digest and the remote license digest; if they match, the software product is activated. If they do not, the software returns to pre-Product Activation mode.
In the first iteration of this case, the district court issued a claim construction
------------------------------------------------------------------
"Licensee "A unique identifier associated
unique ID" with a licensee." Id. at 183.
------------------------------------------------------------------
"Local licensee Means plus function. "Function:
unique ID generating to generate a local or
means" remote licensee unique ID"
and "Remote and "Structure: a summation
licensee unique algorithm or a summer and
ID generating equivalents thereof." Id. at
means" 190.
------------------------------------------------------------------
"Use mode" "A mode that allows full use of
the digital data or software in
accordance with the license."
Id. at 196.
------------------------------------------------------------------
"Mode switching Means plus function. "Function:
means" to permit the digital data
or software to run in a use
mode if the locally generated
licensee unique ID matches
with the remotely generated licensee
unique ID." and "Structure:
program code which performs
a comparison of two
numbers or a comparator and
equivalents thereof." Id. at
198 (synonyms in the claim
construction not relevant to
the claim at issue are removed
for simplicity).
------------------------------------------------------------------
"Registration "A system that allows digital
system" data or software to run in a
use mode on a platform if and
only if an appropriate licensing
procedure has been followed."
Id. at 202.
-----------------------------------------------------------------
The district court granted summary judgment of non-infringement, Uniloc USA, Inc. v. Microsoft Corp., No. 03-440 (D.R.I. Oct. 19, 2007), concluding that the algorithm used at Microsoft's remote station to generate a licensee unique ID was not identical to the algorithm used on the user's local station as required by the last limitation in the claim. Id. at 24.
On appeal, this court reversed and remanded the finding of non-infringement, holding that Uniloc had put forth "extensive and by no means conclusory" evidence that Microsoft's Product Activation used the same algorithm at the local and remote sites (respectively, the "local licensee unique ID generating means" and "remote licensee unique ID generating means"), and that the issue of whether the accused products met this limitation should have gone to the jury. Uniloc USA, Inc. v. Microsoft Corp., 290 Fed.Appx. 337, 343 (Fed.Cir.2008) (non-precedential) ("Uniloc I"). In that appeal, Microsoft presented several alternative grounds for affirmance, including several arguments centered around the lack of any information in that is "uniquely associated with the person" that results in a "licensee unique ID." Br. of Microsoft Corp. at 37-53, Uniloc I (Mar. 19, 2008). This court held that "the licensee unique ID does not require personal information about the user," so long as it is "unique," and not "based solely on platform-related user information." Uniloc I, 290 Fed.Appx. at 342-43. We explicitly noted that the specification of the '216 patent "leave[s] open the possibility that vendor-provided information, like Microsoft's Product Key, could be the basis for a `licensee unique ID.'" Id. at 344. Microsoft also argued that Product Activation lacked a "licensee unique ID generating means." This court summarily rejected that argument, noting that "[w]e have considered these arguments [for affirmance on alternative grounds] and conclude they are without merit." Id. at 342.
On remand, the district court first rejected several in limine motions, including a motion by Microsoft to exclude any testimony by Uniloc's damages expert, Dr. Gemini, under Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 589, 113 S.Ct. 2786, 125 L.Ed.2d 469 (1993) and Federal Rule of Evidence 702, for his use of an allegedly arbitrary baseline rate of $10-per-activation, and the use of a 25 percent rule of thumb. Uniloc USA, Inc. v. Microsoft Corp., 632 F.Supp.2d 147, 150-51 (D.R.I. 2009) ("In Limine"). After a full trial, the jury returned a verdict of infringement and no invalidity of claim
The district court, in a comprehensive and well-reasoned opinion, denied JMOL of invalidity, granted JMOL of non-infringement on the basis of both contested claim limitations, granted JMOL of no willfulness, granted a new trial on damages on the improper use of the entire market value rule, rejected Microsoft's arguments regarding the 25 percent rule of thumb as having been previously decided, Uniloc II, 640 F.Supp.2d at 184 and n. 42, and granted in the alternative a new trial on infringement and willfulness. The district court also considered and rejected Microsoft's contentions that it could not directly infringe the asserted claims. The details of the district court's opinion are discussed more fully below.
Uniloc appeals all but the denial of JMOL of invalidity, which Microsoft cross-appeals. We have jurisdiction under 28 U.S.C. § 1295(a)(1).
To prove infringement, the plaintiff bears the burden of proof to show the presence of every element or its equivalent in the accused device. Lemelson v. United States, 752 F.2d 1538, 1551 (Fed.Cir.1985). The underlying infringement issue is a question of fact reviewed for substantial evidence. Finisar Corp. v. DirecTV Group, Inc., 523 F.3d 1323, 1332 (Fed.Cir. 2008).
This court's review of a district court's grant of JMOL is governed by regional circuit law. Union Carbide Chems. & Plastics Tech. Corp. v. Shell Oil Co., 425 F.3d 1366, 1372 (Fed.Cir.2005). The First Circuit reviews a district court's denial of JMOL after a jury verdict de novo, asking whether "the evidence points so strongly and overwhelmingly in favor of the moving party that no reasonable jury could have returned a verdict adverse to that party." Keisling v. SER-Jobs for Progress, Inc., 19 F.3d 755, 759-60 (1st Cir. 1994). This court may not evaluate "the credibility of witnesses, resolve conflicts in testimony, or evaluate the weight of the evidence," but must view the evidence in the light most favorable to Uniloc. Gibson v. City of Cranston, 37 F.3d 731, 735 (1st Cir.1994).
Microsoft argues that because there is no dispute about how the accused products work, infringement should be reviewed de novo. Br. of Microsoft Corp. at 18, 22-23 (citing Athletic Alts., Inc. v. Prince Mfg., Inc., 73 F.3d 1573, 1578 (Fed.Cir.1996) ("Where, as here, the parties do not dispute any relevant facts regarding the accused product but disagree over which of two possible meanings of Claim 1 is the proper one, the question of literal infringement collapses to one of claim construction, and should thus be reviewed de novo.") and General Mills, Inc. v. Hunt-Wesson, Inc., 103 F.3d 978, 983 (Fed.Cir. 1997) (similar)). It is well-settled that infringement is a factual issue, reviewed for substantial evidence. E.g. Finjan, Inc. v. Secure Computing, Corp., 626 F.3d 1197
This case presents three primary infringement issues: 1) whether the accused products contain "licensee unique ID generating means"; 2) whether the accused products contain a "registration system" with a "mode switching means" that precludes full use of the software unless the outputs of the local and remote algorithms match; and 3) whether Microsoft can be liable for direct infringement when it has no control over the user's computer.
The '216 patent specification describes the licensee unique ID generating means as an algorithm that functions by "combin[ing] by addition the serial number
The district court determined that no reasonable jury could find that the accused products were summation algorithms, and granted JMOL of non-infringement. The district court gave seven reasons for its decision: (1) the "circular shifting and mixing functions fundamentally create a more secure result compared to an algorithm based in summation as the specification discloses," Uniloc II, 640 F.Supp.2d at 170; (2) summation is reversible and MD5 is irreversible and much more complicated, id. (citing Business Objects, S.A. v. Microstrategy, Inc., 393 F.3d 1366, 1370 (Fed. Cir.2005)); (3) "MD5 achieves its function in a way an algorithm based in summation could not," id.; (4) the '216 patent contained only a narrow structural disclosure that is not entitled to a broad scope, id. at 171; (5) the documentary evidence presented by Uniloc did not show what "the complex hashes in this case actually do, and whether that is equivalent to the `by addition' structure Uniloc disclosed," id. at 172; (6) Uniloc did not put forth expert opinion interpreting the documents, except for Klausner's presentation of "factual information
Uniloc argues that a reasonable jury could have concluded that MD5 and SHA1 were summation algorithms within the meaning of the '216 patent, and that the district court erred in granting JMOL of noninfringement. The jury heard two sets of evidence in favor of Uniloc's contention that MD5 and SHA1 were summation algorithms. First, Dr. Klausner, Uniloc's expert, testified that MD5 makes a digest of the message it receives
He also testified that MD5 uses "two primary kinds of operations to do its work. One is addition, summing; and the other is what we call left shifting . . . [which is] actually nothing more than multiplication. . . [which] is nothing more than addition done over and over again." Klausner then identified the source code that was the basis of his understanding that MD5 performed addition, noting that "I'm not saying that that's all that MD5 does, but that's a significant portion of the MD5 algorithm." Second, the jury saw documentary evidence identifying MD5 as, or equating it to, a summation algorithm. For example, in Microsoft's Windows Protocols Master Glossary, one entry reads
'432 patent col. 9 ll.50-57.
Uniloc also argues that the district court improperly narrowed the claim construction on JMOL from "summation algorithm" to a "simple combination of inputs by addition," Uniloc, 640 F.Supp.2d at 170, which was improper under Hewlett-Packard Co. v. Mustek Sys., Inc., 340 F.3d 1314, 1320 (Fed.Cir.2003).
Microsoft counters with three arguments. First, Uniloc's interpretation of "summation algorithm" would be so broad as to cover any algorithm with a plus sign, and would be akin to adopting the rejected claim construction of licensee unique ID generating means as simply "an algorithm." Microsoft argues that such a broad reading is inconsistent with the patent, which disclosed only the specific structure where "the algorithm, in this embodiment, combines by addition," '216 patent, col. 11 ll.53-56. Second, Microsoft notes that its expert, Dr. Wallach, established that the algorithms as a whole are not "summation algorithm[s]" because neither circular shifting nor the logical operations of MD5 and SHA1 are addition-based, and that his testimony was unrebutted, because the district court prevented Uniloc's expert, Dr. Klausner, from opining that MD5 and SHA1 were summation algorithms within the scope of claim 19 of the '216 patent. Finally, Microsoft contrasts the purpose of MD5 and SHA1—to irreversibly scramble the data so that the inputs cannot be derived—with the purpose of the summation algorithms in the '216 patent, to put data together by addition.
As this court held in Uniloc I, 290 Fed.Appx. at 342, there was substantial evidence for a jury to conclude that the output of the MD5 and SHA1 algorithms was a licensee unique ID. Thus, both MD5 and the summation algorithm in the '216 patent perform the same function of generating a licensee unique ID. It is also undisputed that MD5 and SHA1 use some addition to perform this function. Uniloc II, 640 F.Supp.2d at 168. Thus, the issue is whether the additional structural components of MD5 and SHA1 preclude a reasonable jury from finding that they are "summation algorithm[s]." This court agrees with Uniloc that they do not.
First, the breadth of claim 19 is not as narrow as Microsoft argues and the district court concluded. "The literal scope of a properly construed means-plus-function limitation does not extend to all means for performing a certain function. Rather, the scope of such claim language is sharply limited to the structure disclosed in the specification and its equivalents." J & M Corp. v. Harley-Davidson, Inc., 269 F.3d 1360, 1367 (Fed.Cir.2001). Nevertheless, in determining equivalence under § 112 ¶ 6, "the range of permissible equivalents depends upon the extent and nature of the invention." IMS Tech., Inc. v. Haas Automation, Inc., 206 F.3d 1422, 1436 (Fed.Cir. 2000) (citing Tex. Instruments, Inc. v. ITC, 805 F.2d 1558, 1563 (Fed.Cir.1986)). "More particularly, when in a claimed `means' limitation the disclosed physical structure is of little or no importance to the claimed invention, there may be a broader range of equivalent structures than if the physical characteristics of the structure are critical in performing the claimed function in the context of the claimed invention." Id. The structural disclosure in the '216 patent is not limited to simple addition in the colloquial sense of adding numbers together and nothing more. In the sixth embodiment, from which the summation structure was derived, the algorithm "combines by addition the serial number
Second, a jury could reasonably determine that MD5 and SHA1 were not as radically different from the summation algorithm disclosed in the '216 as Microsoft and the district court determined them to be. Klausner testified that the "essence" of MD5 is that it "adds each of the results of [the logical operations and shifts] into a bucket or hash," and that addition is one of the "two primary kinds of operations [that MD5 performs]," and the second is left shifting, which he equated to multiplication, which he testified "is nothing more than addition done over and over again." To be sure, Microsoft's Dr. Wallach disagreed with Klausner's testimony, choosing to focus on the logical functions, which he called the "heart and soul that makes MD5 what it is," and the circular shifter, both of which he opined were not "summation." However, Microsoft has not explained why all the steps of an algorithm must be summation steps in order for the algorithm to qualify as a summation algorithm. The jury could reasonably have believed that MD5 is a summation algorithm. As this court noted in IMS Tech., "though two structures arguably would not be considered equivalent structures in other contexts, e.g., if performing functions other than the claimed function," they may nevertheless be equivalent under § 112 ¶ 6 when performing the same function. 206 F.3d at 1436. Here, the claimed function is the generation of a licensee unique ID, see infra section I.C, and if as Klausner testified, MD5 uses addition to perform this function, the enhanced functionality of MD5 in making the output more secure should not prevent it from being considered an equivalent structure. Microsoft's argument that because MD5 is irreversible it cannot be a summation algorithm—such that even if "you know the output of the algorithm, it is impossible even to guess any one input that would create the output," Br. of Microsoft at 21—is likewise unconvincing, because the same is true of the most basic simple addition algorithm (e.g., it is impossible to identify the two numbers whose sum is 23).
Third, the district court improperly rejected Klausner's testimony as "incomplete, oversimplified and frankly inappropriate," justifying its rejection by Klausner's failure to discuss hashing, summation, or left-shifting in his expert report, and his analogizing of an MD5 digest to a Reader's Digest book. Uniloc II, 640 F.Supp.2d at 170 n. 21. In common with the other circuits, First Circuit law does not allow the district court in a jury trial to
Klausner's testimony was certainly a simplification of the functioning of MD5, but neither the district court nor Microsoft demonstrate why it was "oversimplified," Uniloc II, 640 F.Supp.2d at 171 n. 21, or even why it was inaccurate. Klausner recognized that summation was not all that MD5 did, but opined that it was "a significant portion of the MD5 algorithm."
Finally, Microsoft's attacks on the documentary evidence presented by Uniloc are unwarranted. In particular, the contemporaneous Microsoft documents that define the output of MD5 as a "checksum," or "cryptographic checksum," or indicate that MD5 is indicative of a summation algorithm, '432 patent col. 9 ll.50-57, help to associate the MD5 procedure within the reasonable bounds of the word "summation." It is reasonable to consider MD5 a summation algorithm where those skilled in the art refer to its output as a "hashsum" or an "MD5 sum." Dr. Wallach had the opportunity to respond at trial. For example, in discussing Microsoft's Tech-Net document, which included an entry, "Hashing. Hashing is also referred to as MD5 checksum," Dr. Wallach and Uniloc's attorney engaged in the following colloquy:
Microsoft has failed to show why a reasonable jury could not have rejected this distinction. Moreover, the district court's response to these documents is puzzling. The district court acknowledged that "[s]ome of these documents no doubt say that MD5 and SHA-1 are a type of hash, or checksum," but noted that the documents did not show what "the complex hashes in this case actually do," Uniloc II, 640 F.Supp.2d at 172. However, MD5 and SHA-1 are the complex hashes in this case.
For the above reasons, this court concludes that a reasonable jury could rely on Klausner's testimony and the documentary evidence to conclude that MD5 and SHA1
In the alternative, the district court granted JMOL of non-infringement because of Product Activation's failure to incorporate a "registration system" or "mode switching means" using the following constructions:
"Mode switching Means plus function. "Function:
means" to permit the digital data
or software to run in a use
mode if the locally generated
licensee unique ID matches
with the remotely generated licensee
unique ID." and "Structure:
program code which performs
a comparison of two
numbers or a comparator and
equivalents thereof." Uniloc I
Claim Construction, 447
F.Supp.2d at 198 (synonyms in
the claim construction not relevant
to the claim at issue are
removed for simplicity).
"Registration "A system that allows digital
system" data or software to run in a
use mode on a platform if and
only if an appropriate licensing
procedure has been followed."
Id. at 202.
"Use mode" "A mode that allows full use of
the digital data or software in
accordance with the license."
Id. at 196.
These constructions are undisputed on appeal. It is also undisputed that the relevant "license" in the definition of "use mode" is the EULA, to which the user agrees prior to initiation of Product Activation in the accused product. The crux of the question is whether the use of the accused products before Product Activation constitutes full use in accordance with the EULA.
Microsoft argues that the legal licensing occurred at the time the EULA was accepted by the user, and that whatever use this permitted was full use in accordance with the license. In other words, because the terms of the EULA only give the user the right to use the accused products with certain temporal and functional restrictions, such restricted use is "full use" under the terms of the EULA, and "fulfill[s] the seller's/licensor's obligations in relation to the sale or license of the right to execute the digital data or software in the use mode." '216 patent col. 2 ll.42-44. Microsoft contrasts its system with that disclosed in the '216 patent, which it says is limited to systems in which legal licensing and registration occur concurrently.
The district court agreed with Microsoft, holding that once the user agrees to the EULA, "the user becomes a licensee, and can use the software in accordance with the terms of the license, and with the provided functionality . . . . Activation itself simply opens additional doors which were previously locked to the licensee." Uniloc II, 640 F.Supp.2d at 175-77.
Microsoft's argument ultimately fails because it rests on the false factual premise that the functionality during the "grace period" between the EULA and Product Activation satisfies Microsoft's obligations under the EULA. This factual premise is false for three reasons. First, the EULA accompanying Microsoft Office states:
This court thus concludes that use during the "grace period" after agreement to the EULA and before Product Activation in the accused product does not constitute full use in accordance with the EULA. It is undisputed that Product Activation lifts all the grace period restrictions if and only if the information entered indicates a legitimate copy of Office or Windows.
Moreover, the '216 patent is not limited to the situation where activation and licensing are concurrent. In the preferred embodiment shown in Figures 2a-c, the registration system requires the user to view the license and to "continue" with the registration, far upstream of the activation. Until the user inputs confirmed payment details and plugs in a valid registration number, only the "demo version" of the software will run. Once the user performs these steps, the registration system switches the software into the "full version." '216 patent, Figs. 2a-c.
For the above reasons, the jury had substantial evidence to find that Microsoft's Product Activation included a "registration system" and "mode switching means," and thus the district court erred in granting JMOL of noninfringement on the basis of this limitation.
Microsoft also argues as an alternative ground for affirmance of JMOL that the output of its MD5 and SHA1 algorithms was not a licensee unique ID as required by claim 19 of the '216 patent because it was not "associated with a licensee." This argument was sufficiently addressed and decided against Microsoft by this court in the prior appeal, and is thus law of the case here. Uniloc I, 290 Fed.Appx. at 345 (reversing summary judgment of non-infringement and holding that the output of Product Activation "generate[s] what might qualify as a licensee unique ID, the hash value").
Microsoft presents an alternative ground for affirmance of JMOL of noninfringement, on the basis that Uniloc failed to prove direct infringement because Microsoft did not supply or use the endusers' computers that implemented the local licensee unique ID generating means and mode switching means. Microsoft relies
Microsoft's argument is severely hampered by the language of claim 19. Claim 19 is directed to "A remote registration station incorporating remote licensee unique ID generating means, said station forming part of a registration system . . . including local licensee unique ID generating means . . . ." '216 patent col.15 ll.21-26. As we noted in BMC, "[a] patentee can usually structure a claim to capture infringement by a single party," by "focus[ing] on one entity." 498 F.3d at 1381. This is exactly what Uniloc did in claim 19, which focuses exclusively on the "remote registration station," and defines the environment in which that registration station must function. It cannot be disputed that during each Product Activation, Microsoft "uses" a "remote registration station" that incorporates a "remote licensee unique ID generating means," and this station forms part of a "registration system" that also includes a "local licensee unique ID generating means" and a "mode switching means." That other parties are necessary to complete the environment in which the claimed element functions does not necessarily divide the infringement between the necessary parties. For example, a claim that reads "An algorithm incorporating means for receiving e-mails" may require two parties to function, but could nevertheless be infringed by the single party who uses an algorithm that receives e-mails.
The claim here is thus distinguishable from those at issue in Muniauction and BMC, because here, only one party, Microsoft, makes or uses the remote registration station. See Muniauction, 532 F.3d at 1329; BMC, 498 F.3d at 1373. Nor is claim 19 analogous to the claim at issue in Cross Medical. There, the claim called for "[a] fixation device comprising . . . an anchor seat means which has a lower bone interface operatively joined to said bone segment." 424 F.3d at 1299 (citing U.S. Patent No. 5,474,555 col. 8 ll.33-41). This court construed "operatively joined" to mean that the interface and the bone must be in contact, id. at 1305, and held that Medtronic did not infringe the claims because "Medtronic does not itself make an apparatus with the `interface' portion in contact with bone," id. at 1311. Here, however, Microsoft does make and use the remote registration station in the environment required by the claims, when the MD5 and SHA1 generate a remote licensee unique ID. Moreover, this court agrees with the district court that "[a]ccepting Microsoft's argument that the local side of Claim 19 requires an end-user's participation, similar to the surgeons' participation in Cross Medical, would be akin to importing a method step into this software system—something the language of Claim 19 does not support." Uniloc II, 640 F.Supp.2d at 162.
Citing the closeness of the questions presented on JMOL in this case, the district court also granted in the alternative Microsoft's motion for a new trial on infringement.
This court's standard of review over a district court's grant of a motion for new trial is governed by regional circuit law. WMS Gaming, Inc. v. Int'l Game Tech., 184 F.3d 1339, 1361 (Fed.Cir.1999). In the First Circuit, a new trial is only appropriate when "the outcome is against the clear weight of the evidence such that upholding the verdict will result in a miscarriage
"[A] district judge cannot displace a jury's verdict merely because he disagrees with it or because a contrary verdict may have been equally supportable. As we have repeatedly observed, trial judges do not sit as thirteenth jurors, empowered to reject any verdict with which they disagree." Id. (internal citation omitted). Nevertheless, the district court is entitled to deference in granting a new trial motion, and the First Circuit only overturns the grant of a new trial if the district court has abused its discretion. Id. at 435 (citing Gasperini v. Ctr. For Humanities, Inc., 518 U.S. 415, 435, 116 S.Ct. 2211, 135 L.Ed.2d 659 (1996)). As the Supreme Court noted, "[t]rial judges have the unique opportunity to consider the evidence in the living courtroom context, while appellate judges see only the cold paper record." Gasperini, 518 U.S. at 438, 116 S.Ct. 2211.
The district court granted Microsoft's motion for a new trial on the infringement issues in the alternative to its JMOL motion, and did not present any analysis apart from its analysis of the JMOL infringement issues discussed above. This court is convinced that the district court's grant of a new trial on infringement has no more merit than the district court's grant of JMOL on infringement. Though it is a close issue, this is not a situation where the evidence falls within the zone where substantial evidence supports the verdict and the district court's discretion in granting a new trial trumps such evidence. This court thus reverses the district court's grant of a new trial on infringement for the same reasons as it reverses the grant of JMOL of non-infringement.
"[T]o establish willful infringement, a patentee must show by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent." In re Seagate Tech., LLC, 497 F.3d 1360, 1371 (Fed.Cir.2007) (en banc). This is an objective inquiry. Id. In addition, a patentee must show that this risk "was either known or so obvious that it should have been known to the accused infringer." Id. This is a subjective inquiry.
The district court concluded that no reasonable jury could have found that Microsoft's conduct fell under either Seagate prong. Uniloc II, 640 F.Supp.2d at 176-77 (objective prong), 177-79 (subjective prong). If the accused infringer's position is susceptible to a reasonable conclusion of no infringement, the first prong of Seagate cannot be met. See Cohesive Techs., Inc. v. Waters Corp., 543 F.3d 1351, 1374 (Fed. Cir.2008) ("Because `rigid' was susceptible to a reasonable construction under which Waters's products did not infringe, there was not an objectively high likelihood that Waters's actions constituted infringement.").
Uniloc has failed to meet the threshold objective prong of Seagate. Uniloc has not presented any evidence at trial or on appeal showing why Microsoft, at the time it began infringement, could not have reasonably determined that MD5 and SHA1 did not meet the "licensee unique ID generating means," "licensee unique ID," or "registration system"/"mode switching means" limitations. Specifically, infringement of the "licensee unique ID generating means" limitation is a complicated issue, made more so because "equivalence requires an intensely factual
Given this court's conclusion that Uniloc failed to show that a reasonable jury could find Microsoft's conduct objectively reckless on the evidence presented, this court need not address the subjective prong of Seagate. This court thus affirms the district court's grant of JMOL of no willfulness, and need not address the district court's alternative grant of a new trial on willfulness.
The jury here awarded Uniloc $388 million, based on the testimony of Uniloc's expert, Dr. Gemini. Dr. Gemini opined that damages should be $564,946,803. This was based on a hypothetical negotiation between Uniloc and Microsoft and the Georgia-Pacific factors. See Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F.Supp. 1116 (S.D.N.Y.1970). Gemini began with an internal prelitigation Microsoft document that stated:
In Limine, 632 F.Supp.2d at 150 n. 2. Gemini took the lowest value, $10, and testified that this is "the isolated value of Product Activation." Gemini then applied the so-called "25 percent rule of thumb," hypothesizing that 25% of the value of the product would go to the patent owner and the other 75% would remain with Microsoft, resulting in a baseline royalty rate of $2.50 per license issued. Gemini justified the use of the rule of thumb because it has "been accepted by Courts as an appropriate methodology in determining damages, in [his] experience, in other cases." He then considered several of the Georgia-Pacific factors, with the idea being "to adjust this 25% up or down depending on how [the Georgia-Pacific factors] favor[] either party." At bottom, he concluded that the factors in favor of Uniloc and Microsoft generally balanced out and did not change the royalty rate. He then multiplied the $2.50 royalty rate by the number of new licenses to Office and Windows products, 225,978,721, to get a final reasonable royalty of $564,946,803. Gemini then "did kind of a check to determine whether that number was reasonable. It's obviously, you know, a significant amount of money. I wanted to check to make sure it was a reasonable number." The "check" was performed by "estimating the gross revenues for the accused products" by multiplying the 225,978,721 licenses by the average sales price per license of $85. The resulting gross revenue value was $19.28 billion. Gemini then calculated that his damages calculation resulted in a royalty rate over the gross revenue of Office and Windows of approximately 2.9%. Gemini presented this information in a demonstrative pie chart to accompany his testimony. In response to Uniloc's attorney's question: "And have you prepared a chart or a graph or a pie chart to show us this comparison?" Uniloc's attorney, Mr. Cronin stated, "Your honor, there's no objection,"
Microsoft had challenged the 25% rule in limine and attempted to exclude Mr. Gemini's testimony. The district court noted that "the concept of a `rule of thumb' is perplexing in an area of the law where reliability and precision are deemed paramount," but rejected Microsoft's position because the rule has been widely accepted. The district court thus considered the use of the rule of thumb to be reasonable. In Limine, 632 F.Supp.2d at 151. Microsoft contested Gemini's use of the entire market value rule "check" because Product Activation was not the basis of the consumer demand for Microsoft's Office and Windows products. The district court agreed with Microsoft, and granted a new trial on damages, because the "$19 billion cat was never put back into the bag" and the jury may have "used the $19 billion figure to `check' its significant award of $388,000,000." Uniloc II, 640 F.Supp.2d at 185.
On appeal, the parties present the court with three damages issues: 1) the propriety of using the 25 percent rule; 2) application of the entire market value rule as a "check"; and 3) excessiveness of damages. Because this court affirms the district court's conditional grant of a new trial on damages, this court need not reach the last issue.
Section 284 of Title 35 of the United States Code provides that on finding infringement of a valid patent, damages shall "in no event [be] less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court." In litigation, a reasonable royalty is often determined on the basis of a hypothetical negotiation, occurring between the parties at the time that infringement began. Wang Labs. Inc. v. Toshiba Corp., 993 F.2d 858, 869-70 (Fed.Cir. 1993). A reasonable royalty is the predominant measure of damages in patent infringement cases. William C. Rooklidge and Martha K. Gooding, When Hypothetical Turns to Fantasy: The Patent Reasonable Royalty Hypothetical Negotiation, BNA Insights Vol. 80:1983, at 701 n. 10 ("Hypothetical Negotiation") (citing PriceWaterhouseCoopers, A Closer Look: Patent Litigation Trends and the Increasing Impact of Nonpracticing Entities at 5 (2009)).
The 25 percent rule of thumb is a tool that has been used to approximate the reasonable royalty rate that the manufacturer of a patented product would be willing to offer to pay to the patentee during a hypothetical negotiation. Robert Goldscheider, John Jarosz and Carla Mulhern, Use Of The 25 Per Cent Rule in Valuing IP, 37 les Nouvelles 123, 123 (Dec. 2002) ("Valuing IP"). "The Rule suggests that the licensee pay a royalty rate equivalent to 25 per cent of its expected profits for the product that incorporates the IP at issue." Id. As explained by its leading proponent, Robert Goldscheider, the rule takes the following form:
Id. at 124. The underlying "assumption is that the licensee should retain a majority (i.e. 75 percent) of the profits, because it has undertaken substantial development, operational and commercialization risks, contributed other technology/IP and/or brought to bear its own development, operational and commercialization contributions." Id.
The rule was originally based on Goldscheider's observations of commercial licenses entered into by a "Swiss subsidiary of a large American company, with 18 licensees around the world, each having an exclusive territory." Id. The rights transferred were a portfolio of patents and other intellectual property apparently related to the patented products. Id. The term of each of these licenses was for three years, with the expectation that the licenses would be renewed. Id. at 123. The licensees "faced strong competition," and "were either first or second in sales volume, and probably profitability, in their respective market." Id.
According to its proponents, the veracity of the 25 percent rule has been "confirmed by a careful examination of years of licensing and profit data, across companies and industries." John C. Jarosz, Carla S. Mulhern and Michael Wagner, The 25% Rule Lives On, IP Law360, Sept. 8, 2010. Goldscheider published a further empirical study in 2002, concluding that across all industries, the median royalty rate was 22.6 percent, and that the data supported the use of the 25 percent rule "as a tool of analysis." Valuing IP, 37 les Nouvelles at 132-33. Additionally, in a 1997 study of licensing organizations, 25 percent of the organizations indicated that they use the 25 percent rule as a starting point in negotiations. Stephen A. Degnan & Corwin Horton, A Survey of Licensed Royalties, 32 les Nouvelles 91, 95 (June 1997).
The 25 percent rule has, however, met its share of criticism that can be broadly separated into three categories. First, it fails to account for the unique relationship between the patent and the accused product. See Gregory K. Leonard and Lauren J. Stiroh, Economic Approaches to Intellectual Property Policy, Litigation, and Management, 949 PLI/Pat 425, 454-55 (Sept.-Nov. 2008) ("[The 25 percent rule] takes no account of the importance of the patent to the profits of the product sold, the potential availability of close substitutes or equally noninfringing alternatives, or any of the other idiosyncrasies of the patent at issue that would have affected a real-world negotiation."); Richard S. Toikka, Patent Licensing Under Competitive and Non-Competitive Conditions, 82 J. Pat. & Trademark Off. Soc'y 279, 292-93 (Apr. 2000) (arguing that it fails to "distinguish between monopoly and normal profit. . . . Thus for narrow patents, the rule may be overly generous to the patentee, and for broad patents it may be overly stingy"). Second, it fails to account for the unique relationship between the parties. See Ted Hagelin, Valuation of Patent Licenses, Tex. Intell. Prop. L.J. 423, 425-26 (Spring 2004) (noting that the rule should not be used in isolation because it fails to "account[] for the different levels of risk assumed by a licensor and licensee"); Hypothetical Negotiations at 702 ("[T]he rule is unlikely to have any basis in the accused infringer's industry, in the technology involved in either the patent or the accused product or service, or in the claimed invention's contribution to the infringing product or service."). Finally, the rule is essentially arbitrary and does not fit within the model of the hypothetical negotiation within which it is based. See Roy J. Epstein and Alan J. Marcus, Economic Analysis of the Reasonable Royalty:
The admissibility of the bare 25 percent rule has never been squarely presented to this court. Nevertheless, this court has passively tolerated its use where its acceptability has not been the focus of the case, see e.g., i4i Ltd., 598 F.3d 831; Fonar Corp. v. General Elec. Co., 107 F.3d 1543, 1553 (Fed.Cir.1997), or where the parties disputed only the percentage to be applied (i.e. one-quarter to one-third), but agreed as to the rule's appropriateness, Finjan, Inc. v. Secure Computing Corp., 626 F.3d 1197, 1210-11 (Fed.Cir.2010). Lower courts have invariably admitted evidence based on the 25% rule, largely in reliance on its widespread acceptance or because its admissibility was uncontested. See In Limine, 632 F.Supp.2d at 151 ("The '25% Rule' has been accepted as a proper baseline from which to start [a royalty] analysis." (internal citations omitted)); GSI Grp., Inc. v. Sukup Mfg., Co., 641 F.Supp.2d 732, 745 (C.D.Ill.2008) (same); i4i Ltd. P'ship v. Microsoft Corp., 670 F.Supp.2d 568, 592 (E.D.Tex.2009), aff'd on other grounds by 598 F.3d 831 ("[i4i's expert] testified that it was customary within his field to apply a '25% rule of thumb'. . . . Thus, considering the foundation laid by [i4i's expert's] testimony, his application of the 25% rule was relevant and appropriate considered."); Static Control Components, Inc. v. Lexmark Int'l, Inc., Nos. 5:02-571, 5:04-84, 2007 WL 7083655 at *13-14 (E.D.Ky. May 12, 2007) ("While Lexmark does not believe the `rule of thumb' approach is the most appropriate way to calculate `reasonable royalty,' as SCC correctly notes, case law suggests it is one way of doing so" (citing Standard Mfg. Co. v. United States, 42 Fed.Cl. 748, 766 (1999))); Novozymes A/S v. Genencor Int'l, Inc., 474 F.Supp.2d 592, 606 (D.Del. 2007) ("While there is no particular analytical justification for [the rule of thumb], it has been used to estimate royalties."); Inline Connection Corp. v. AOL Time Warner Inc., 470 F.Supp.2d 424, 432 n. 38 (D.Del.2007) (allowing 25% rule because its use was not disputed); Bose Corp. v. JBL, Inc., 112 F.Supp.2d 138, 167 (D.Mass.2000) ("Courts have found the 25%/75% approach to be a useful approach to arriving at a baseline royalty rate. . . . [The opposing expert] conceded that this approach is a common and reasonable one, though he has never used that approach in negotiating licenses" (citing Standard Mfg., 42 Fed.Cl. at 764)); Standard Mfg., 42 Fed.Cl. at 766 ("[T]he 25% rule or a close variant of it has been recognized by a number of other federal courts as a `rule of thumb' or `typical' in the licensing field."); Procter & Gamble Co. v. Paragon Trade Brands, Inc., 989 F.Supp. 547, 612 (D.Del. 1997) ("Although the Court will consider the Rule-of-Thumb analysis in determining the royalty rate, this approach will not receive substantial weight."); Secure Energy, Inc. v. Coal Synthetics, LLC, No. 4:08-CV-1719, 2010 WL 1692076 at *1 (E.D.Mo. Apr. 27, 2010) ("The parties agree that application of the 25% `rule of thumb' is acceptable to determine a reasonably royalty case such as this."). See also Paice LLC v. Toyota Motor Corp., 609 F.Supp.2d 620, 629-30 (E.D.Tex.2009) (applying
In Daubert, 509 U.S. at 589, 113 S.Ct. 2786 and Kumho Tire, 526 U.S. 137, 119 S.Ct. 1167, the Supreme Court assigned to the district courts the responsibility of ensuring that all expert testimony must pertain to "scientific, technical, or other specialized knowledge" under Federal Rule of Evidence ("FRE") 702, which in turn required the judge to determine that the testimony was based on a firm scientific or technical grounding. Daubert, 509 U.S. at 589-90, 113 S.Ct. 2786; Kumho Tire, 526 U.S. at 148, 119 S.Ct. 1167. "Expert testimony which does not relate to any issue in the case is not relevant and, ergo, nonhelpful." Daubert, 509 U.S. at 591, 113 S.Ct. 2786 (citing 3 Weinstein & Berger ¶ 702[02], p. 702-18).
This court now holds as a matter of Federal Circuit law that the 25 percent rule of thumb is a fundamentally flawed tool for determining a baseline royalty rate in a hypothetical negotiation. Evidence relying on the 25 percent rule of thumb is thus inadmissible under Daubert and the Federal Rules of Evidence, because it fails to tie a reasonable royalty base to the facts of the case at issue.
The patentee bears the burden of proving damages. Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1324 (Fed.Cir.2009). To properly carry this burden, the patentee must "sufficiently [tie the expert testimony on damages] to the facts of the case." Daubert, 509 U.S. at 591, 113 S.Ct. 2786 ("An additional consideration under Rule 702—and another aspect of relevancy—is whether expert testimony proffered in the case is sufficiently tied to the facts of the case that it will aid the jury in resolving a factual dispute.") (citing United States v. Downing, 753 F.2d 1224, 1242 (3d Cir.1985)). If the patentee fails to tie the theory to the facts of the case, the testimony must be excluded. For example, in General Electric Co. v. Joiner, 522 U.S. 136, 118 S.Ct. 512, 139 L.Ed.2d 508 (1997), the Supreme Court allowed the exclusion of eight of Joiner's experts who opined that polychlorinated biphenyls ("PCBs") could cause cancer on the strength of several studies showing that mice receiving high doses of PCB developed cancer. The Supreme Court noted that "[t]he studies were so dissimilar to the facts presented in this litigation that it was not an abuse of discretion for the District Court to have rejected the experts' reliance on them," id. at 144-45, 118 S.Ct. 512, and affirmed the exclusion because Joiner had failed to tie the experts' opinions to the "seemingly far-removed animal studies," id. at 144, 118 S.Ct. 512. Likewise, in Kumho Tire, a products liability case arising out of a blown tire, the Supreme Court affirmed the exclusion of an expert opinion that argued that the cause of the accident at issue was a defect in the tire, based on the expert's visual and tactile inspection of the tire. 526 U.S. at 153, 119 S.Ct. 1167. The specific issue was not whether the visual and tactile inspection methodology was "reasonable[ ] in general," but whether "it was [reasonable to] us[e] such an approach . . . to draw a conclusion regarding the particular matter to which the expert testimony was directly relevant." Id. at 153-54, 119 S.Ct. 1167.
The bottom line of Kumho Tire and Joiner is that one major determinant of whether an expert should be excluded under Daubert is whether he has justified the application of a general theory to the facts of the case. Consistent with this conclusion, this court has held that "[a]ny evidence unrelated to the claimed invention does not support compensation for infringement but punishes beyond the reach of the statute." ResQNet.com, Inc. v. Lansa, Inc., 594 F.3d 860, 869 (Fed.Cir. 2010).
In ResQNet, Lucent Technologies, 580 F.3d 1301, and Wordtech Systems, Inc. v. Integrated Networks Solutions, Inc., 609 F.3d 1308 (Fed.Cir.2010), this court determined that a patentee could not rely on license agreements that were "radically different from the hypothetical agreement under consideration" to determine a reasonable royalty. Lucent Techs., 580 F.3d at 1327. See also ResQNet, 594 F.3d at 870-72 (holding that evidence of royalty rates from licenses without a relationship to the claimed invention could not form the basis of a reasonable royalty calculation). In Lucent Technologies, the patentee's expert relied in large part on "eight varied license agreements," four of which involved "PC-related patents," but either the specific subject matter of the patents was not explained to the jury or the license was "directed to a vastly different situation than the hypothetical licensing scenario of the present case," and four of which Lucent did not describe the relationship between the patented technology licensed therein and the licensee's products. See 580 F.3d at 1328-31. This court noted that the "licenses relied on by the patentee in proving damages [must be] sufficiently comparable to the hypothetical license at issue in suit," id. at 1325, and that the patentee's failure to do so "weighs strongly against the jury's award" relying on such noncomparable licenses, id. at 1332. Similarly, in ResQNet, the patentee's expert "used licenses with no relationship to the claimed invention to drive the royalty rate up to unjustified double-digit levels," looking at licenses that did not mention the patents and had no "other discernible link to the claimed technology." 594 F.3d at 870. This court rejected the expert's testimony, holding that the district court "must consider licenses that are commensurate with what the defendant has appropriated. If not, a prevailing plaintiff would be free to inflate the reasonable royalty analysis with conveniently selected licenses without an economic or other link to the technology
Similarly, in Wordtech, the patentee "introduced thirteen patent licenses that it previously granted to third parties for rights to some or all of the patents-in-suit" to argue to support the jury's damages determination. 609 F.3d at 1319. This court rejected eleven of the licenses because they were running royalty licenses (the patentee had only asked for a lump sum payment) and represented far lower rates than the jury returned. Id. at 1320-21. This court rejected the remaining two licenses (both for lump sum payments) because "[n]either license describe[d] how the parties calculated each lump sum, the licensees' intended products, or how many products each licensee expected to produce." Id. at 1320.
The meaning of these cases is clear: there must be a basis in fact to associate the royalty rates used in prior licenses to the particular hypothetical negotiation at issue in the case. The 25 percent rule of thumb as an abstract and largely theoretical construct fails to satisfy this fundamental requirement. The rule does not say anything about a particular hypothetical negotiation or reasonable royalty involving any particular technology, industry, or party. Relying on the 25 percent rule of thumb in a reasonable royalty calculation is far more unreliable and irrelevant than reliance on parties' unrelated licenses, which we rejected in ResQNet and Lucent Technologies. There, the prior licenses at least involved the same general industry and at least some of the same parties as the hypothetical negotiations at issue, and in Wordtech even involved licenses to the patents in suit entered into by the patentee-plaintiff. Lacking even these minimal connections, the 25 percent rule of thumb would predict that the same 25%/75% royalty split would begin royalty discussions between, for example, (a) TinyCo and IBM over a strong patent portfolio of twelve patents covering various aspects of a pioneering hard drive, and (b) Kodak and Fuji over a single patent to a tiny improvement in a specialty film emulsion.
It is of no moment that the 25 percent rule of thumb is offered merely as a starting point to which the Georgia-Pacific factors are then applied to bring the rate up or down. Beginning from a fundamentally flawed premise and adjusting it based on legitimate considerations specific to the facts of the case nevertheless results in a fundamentally flawed conclusion. This is reflected in Lucent Technologies, in which unrelated licenses were considered under Georgia-Pacific factor 1, but this court held that the entire royalty calculation was unsupported by substantial evidence.
To be admissible, expert testimony opining on a reasonable royalty rate must "carefully tie proof of damages to the claimed invention's footprint in the market place." ResQNet, 594 F.3d at 869. This court has sanctioned the use of the Georgia-Pacific factors to frame the reasonable royalty inquiry. Those factors properly tie the reasonable royalty calculation to the facts of the hypothetical negotiation at issue. This court's rejection of the 25 percent rule of thumb is not intended to limit the application of any of the Georgia-Pacific factors. In particular, factors 1 and 2—looking at royalties paid or received in licenses for the patent in suit or in comparable licenses—and factor 12—looking at the portion of profit that may be customarily allowed in the particular business for the use of the invention or similar inventions—remain valid and important factors in the determination of a reasonable
In this case, it is clear that Gemini's testimony was based on the use of the 25% rule of thumb as an arbitrary, general rule, unrelated to the facts of this case. When asked the basis of his opinion that the rule of thumb would apply here, Gemini testified: "[i]t's generally accepted. I've used it. I've seen others use it. It's a widely accepted rule." Upon further questioning, Dr. Gemini revealed that he had been involved in only four or five non-litigation related negotiations, and had recommended the 25% rule only once in a case involving a power tool. He did not testify that the parties here had a practice of beginning negotiations with a 25%/75% split, or that the contribution of Product Activation to Office and Word justified such a split. He did not base his 25 percent baseline on other licenses involving the patent at issue or comparable licenses. In short, Gemini's starting point of a 25 percent royalty had no relation to the facts of the case, and as such, was arbitrary, unreliable, and irrelevant. The use of such a rule fails to pass muster under Daubert and taints the jury's damages calculation.
This court thus holds that Microsoft is entitled to a new trial on damages.
As discussed above, Gemini performed "a check to determine whether" his $564,946,803 royalty figure was reasonable by comparing it to his calculation of Microsoft's approximate total revenue for Office and Windows of $19.28 billion. During trial, Gemini testified that his calculated royalty accounted for only 2.9% of Microsoft's revenue, and accented his point by reference to a prepared pie chart, showing Microsoft's $19.28 billion in revenue with a 2.9% sliver representing his calculated royalty rate. He concluded that 2.9% was a reasonable royalty based on his experience that royalty rates for software are "generally above—on average, above 10% or 10, 11%."
The entire market value rule allows a patentee to assess damages based on the entire market value of the accused product only where the patented feature creates the "basis for customer demand" or "substantially create[s] the value of the component parts." Lucent Techs., 580 F.3d at 1336; Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1549-50 (Fed.Cir.1995). This rule is derived from Supreme Court precedent requiring that "the patentee . . . must in every case give evidence tending to separate or apportion the defendant's profits and the patentee's damages between the patented feature and the unpatented features, and such evidence must be reliable and tangible, and not conjectural or speculative," or show that "the entire value of the whole machine, as a marketable article, is properly and legally attributable to the patented feature." Garretson v. Clark, 111 U.S. 120, 121, 4 S.Ct. 291, 28 L.Ed. 371 (1884). See also Lucent Techs., 580 F.3d at 1336-37 (tracing the origins of the entire market value to several Supreme Court cases including Garretson).
Microsoft argues that Uniloc employed the entire market value of Office and Windows by virtue of Gemini's pie chart, his comparison of his calculated royalty to the total revenue Microsoft earns through the accused products, and Uniloc's attorneys' belittlement of Microsoft's expert's royalty figure as representing only .0003% of total revenue. Microsoft argues that Uniloc's
Uniloc responds that: (1) Microsoft did not object at trial and so waived any evidentiary argument to Gemini's testimony and demonstratives; (2) the entire market value of the product can be used if the royalty rate is low enough; and (3) the $19 billion figure was used only as a "check," and the jury was instructed not to base its damages determination on the entire market value, an instruction it should be presumed to have followed.
The district court agreed with Microsoft, and ordered a conditional new trial on damages. It noted that "Uniloc conceded customers do not buy Office or Windows because of [Product Activation] and said it would not base a royalty calculation on the entire market value of the products." Uniloc II, 640 F.Supp.2d at 184-85. As such, the use of the entire market value of Office and Windows in the form of the $19 billion figure was "irrelevant" and "taint[ed]" the jury's damages award. Id. at 185. The district court also disagreed with Uniloc that Microsoft had waived its arguments to the entire market value, noting that "Microsoft objected specifically under the entire market value rule to use of a demonstrative pie chart," and that "[t]he Court preliminarily allowed it but after hearing the testimony instructed counsel to stay away from the $19 billion figure." Id.
This court agrees with Microsoft and the district court that Uniloc's use of the $19 billion "check" was improper under the entire market value rule. First, regarding Uniloc's assertion that Microsoft has waived the issue, this court will not second-guess the district court's explicit recognition of Microsoft's objections to Gemini's testimony. FRE 103(a) notes that "Error may not be predicated upon a ruling which admits or excludes evidence unless . . . (1) Objection.—In case the ruling is one admitting evidence, a timely objection or motion to strike appears of record . . . . Once the court makes a definitive ruling on the record admitting or excluding evidence, either at or before trial, a party need not renew an objection or offer of proof to preserve a claim of error for appeal." The district court here explicitly noted that Microsoft's objection fell into the exception at the last line of FRE 103(a): "Although Microsoft did not continue to repeat an objection, it made its position on this evidence sufficiently clear to preserve the instant challenge" to Gemini's use of the entire market value rule. Uniloc II, 640 F.Supp.2d at 184 n. 43. This is supported by Microsoft's in limine filings and Uniloc's response, where Uniloc explicitly said that it would not be relying on the entire market value of the accused products. This court thus agrees with the district court that Microsoft has not waived its objection.
Uniloc argues that the entire market value of the products may appropriately be admitted if the royalty rate is low enough, relying on the following statement in Lucent Technologies:
This case provides a good example of the danger of admitting consideration of the entire market value of the accused where the patented component does not create the basis for customer demand. As the district court aptly noted, "[t]he $19 billion cat was never put back into the bag even by Microsoft's cross-examination of Mr. Gemini and re-direct of Mr. Napper, and in spite of a final instruction that the jury may not award damages based on Microsoft's entire revenue from all the accused products in the case." Uniloc II, 640 F.Supp.2d at 185. This is unsurprising. The disclosure that a company has made $19 billion dollars in revenue from an infringing product cannot help but skew the damages horizon for the jury, regardless of the contribution of the patented component to this revenue. Uniloc exacerbated the situation in colloquies like the following on cross-examination of Microsoft's damages expert, in which it implied a relationship between the entire market value of the accused products and the patent:
This is in clear derogation of the entire market value rule, because the entire market value of the accused products has not been shown to be derived from the patented contribution.
Uniloc's final argument is that the use of the $19 billion figure was only as a check, and the jury must be presumed to have followed the jury instruction and not based its damages calculation on the entire market value rule. This argument attempts to gloss over the purpose of the check as lending legitimacy to the reasonableness of Gemini's $565 million damages calculation. Even if the jury's damages calculation was not based wholly on the entire market value check, the award was supported in part by the faulty foundation of the entire market value. Moreover, Uniloc's derision of Microsoft's damages expert by virtue of the .00003% of the entire market value that his damages calculation represented may have inappropriately contributed to the jury's rejection of his calculations. Thus, the fact that the entire market value was brought in as only a "check" is of no moment.
For the foregoing reasons, this court concludes that the district court did not abuse its discretion in granting a conditional new trial on damages for Uniloc's violation of the entire market value rule.
As an alternative ground for affirmance of the district court's alternative grant of a new trial on damages, Microsoft argues that the damages here were excessive. Because this court is affirming the district court's grant of new trial on damages, and because the two bases on which Uniloc's damages case was built have both been rejected, it would be premature to consider the excessiveness of damages that could arise on remand. This court thus expresses no opinion on the excessiveness or reasonableness of the damages awarded by the jury.
Microsoft also cross-appeals the district court's denial of its motion for JMOL of invalidity. Microsoft argues that under Uniloc's interpretation of the claim construction in its infringement case, claim 19 is invalid as anticipated or obvious over U.S. Patent No. 4,658,093 ("'093 reference") titled, "Software Distribution System."
Before this court addresses the merits, two procedural issues must be addressed. First, Microsoft argues that its burden for both the new trial and JMOL motions was to show invalidity simply by a preponderance of the evidence, because the '093 reference was not before the PTO. This argument is based on a statement in KSR Int'l Co. v. Teleflex Inc., 550 U.S. 398, 426, 127 S.Ct. 1727, 167 L.Ed.2d 705 (2007) ("[T]he rationale underlying the presumption—that the PTO, in its expertise, has approved the claim—seems much diminished here [where the allegedly invalidating prior art was not before the patent office]."). Microsoft has made this argument before, and we held that the statutory presumption of validity can be overcome only by showing invalidity by clear and convincing evidence, even where allegedly invalidating prior art was not before the patent office. See i4i, 598 F.3d at 848, cert. granted 562 U.S. ____, 131 S.Ct. 647, 178 L.Ed.2d 476 (2010); Am. Hoist & Derrick Co. v. Sowa & Sons, Inc., 725 F.2d 1350, 1359 (Fed.Cir.1984). Until changed by the Supreme Court or this court sitting en banc, that is still the law.
Turning then to the merits. Microsoft frames its validity arguments as follows: if claim 19 reaches far enough to read on Microsoft's Product Activation, then it necessarily extends far enough to read on the prior art '093 reference. Thus, Microsoft uses Product Activation as a proxy for the scope of claim 19 (under the assumption that the jury verdict of infringement is upheld and Product Activation infringes), and compares it to the '093 reference. According to Microsoft, the prior art '093 reference discloses a software authorization process and system, which generates an authorization code from the following inputs: "a secret key identifier of the computer embodied in the hardware (SK), a random or nonrepeating number (R), the serial number, the software package name (H), the number of uses (N), and user billing information." Uniloc II, 640 F.Supp.2d at 181.
In the prior appeal, this court held that the licensee unique ID must be "a unique identifier associated with a licensee," but one "that cannot be based solely on platform-related user information." Uniloc I, 290 Fed.Appx. at 343-44. The question in this appeal is whether no reasonable jury could have concluded that the inputs to the cryptographic hash function in the '093 reference are not sufficient to create an association with the licensee. The focus of the dispute on appeal, just as below, is whether random number R in the '093 reference is uniquely associated with a user. We think that it is not and that the '093 reference does not anticipate claim 19.
Uniloc argues that R is "platform-related" because it is generated by the user's computer. Microsoft argues that "platform-related" must be narrower than "generated by a computer," otherwise it could not infringe because the output of Product Activation (the PID) is also generated by a computer.
It is undisputed that R and SK, the only inputs that Microsoft argues are associated with the user, are generated by the computer.
Microsoft's argument that R is not platform-related though it is generated by a computer (without user input) is unconvincing for two reasons. First, the proper
Though obviousness is a question of law, this court gives the jury its usual deference on the underlying factual questions. What the prior art shows is a question of fact. Graham v. John Deere Co., 383 U.S. 1, 17, 86 S.Ct. 684, 15 L.Ed.2d 545 (1966). As discussed above, a reasonable jury could have found that the '093 reference failed to disclose a licensee unique ID. Microsoft has presented no convincing argument for why incorporating an input into the hash function that is associated with a user would have been obvious to one of ordinary skill in the art. This court thus affirms the district court's denial of JMOL of invalidity on the basis of obviousness.
For the foregoing reasons, this court reverses the district court's grant of JMOL of non-infringement, affirms the district court's grant of JMOL of no willfulness, affirms the district court's grant of a new trial on damages, vacates the district court's grant of an alternative motion for new trial on infringement, and affirms the district court's denial of JMOL of invalidity of claim 19 of the '216. The case is remanded for proceedings consistent with this opinion.
Each party shall bear its own costs.
