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Lucent Technologies, Inc v. Microsoft Corporation

November 10, 2011

LUCENT TECHNOLOGIES, INC.,
PLAINTIFF,
v.
MICROSOFT CORPORATION,
DEFENDANT.



The opinion of the court was delivered by: Marilyn L. Huff, District Judge United States District Court

ORDER GRANTING IN PART AND DENYING IN PART MICROSOFT'S MOTION FOR JUDGMENT AS A MATTER OF LAW AND IN THE ALTERNATIVE, A NEW TRIAL WITH A REMITTITUR

This case is on remand from the Federal Circuit for a new trial on damages for Microsoft's infringement of claims 19 and 21 of U.S. Patent Number 4,763,356 ("Day patent"). See Lucent Technologies, Inc. v. Gateway, Inc., 580 F.3d 1301 (Fed. Cir. 2009). The first jury returned a finding of infringement and validity of the Day patent, and Microsoft appealed the verdict and damages award. See id. The Federal Circuit affirmed the jury's verdict on the infringement and validity of the Day patent, but remanded the case for a new trial on damages. Id.

On July 29, 2011, the jury returned a verdict of $70 million as the lump-sum reasonable royalty for Microsoft's infringement of the Day patent for Microsoft Outlook (versions 2000, 2002, and 2003); Microsoft Money (versions 2000 through 2006); and Windows Mobile (versions Pocket PC 2000, 2002, and 2003, Windows Mobile 2003, and Windows Mobile 5). (Doc. No. 1383.) On July 29, 2011, this Court issued judgment in favor of Lucent against Microsoft in the amount of $70 million. (Doc. No. 1387.)

On August 26, 2011, Microsoft filed a motion for a new trial (Doc. No. 1434) and a post-trial motion for judgment as a matter of law (Doc. No. 1433).*fn1 On September 27, 2011, Lucent filed a response in opposition to Microsoft's motion for a new trial and post-trial motion for judgment as a matter of law. (Doc. Nos. 1451 & 1454.) On October 4, 2011, Microsoft filed its reply. (Doc. Nos. 1457 & 1458.)

On October 12, 2011, the Court held a hearing on these post-trial motions. Luke Dauchot, Jeanne Heffernan, and Ryan Kane appeared for Plaintiff Lucent. Roger Denning, Michael Florey, Francis Albert, and Craig Countryman appeared for Defendant Microsoft. The Court compliments the attorneys and trial counsel for their excellent advocacy in this case.

After due consideration, the Court grants in part and denies in part the motion for judgment as a matter of law and enters judgment of $26.3 million. The Court also conditionally grants in part and denies in part the motion for a new trial under Federal Rule of Civil Procedure 50(c), with a remittitur of $26.3 million.

I. Background

This case illustrates the difficulty of properly valuing a small patented component, without a stand-alone market, within a larger program. See Lucent, 580 F.3d at 1324; Uniloc U.S.A., Inc. v. Microsoft, 632 F.3d 1292 (Fed. Cir. 2011); ResQNet.com Inc. v. Lansa, Inc., 594 F.3d 860, 869 (Fed. Cir. 2010); Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970).

Microsoft's popular Outlook product infringes claims 19 and 21 of the Day patent. Lucent, 580 F.3d at 1321; (PX-1 at 17:27-18:14, 18:19-22.) Specifically, the date-picker permits users to calendar appointments by clicking on a calendar and populating the field with the resulting date. The Day patent's technology is included in 109.3 million Office suite ("Office") licenses and in 241,800 stand-alone Outlook products, for a total of 109.5 million licenses during the relevant period from January 13, 2003 to December 11, 2006.*fn2 Additionally, Microsoft Money and Windows Mobile infringe the Day patent, but the vast majority of the claimed damages relate to the 109.3 million Office licenses.

In a trial for damages for patent infringement, a prevailing party deserves damages "adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringed." 35 U.S.C. § 284 (2006). The parties dispute whether the jury had a legally sufficient evidentiary basis to award $70 million for the infringement as a lump-sum royalty. Microsoft argues that Lucent failed to provide the jury with a properly-apportioned damages calculation in violation of the entire market value rule. (Doc. Nos. 1434 & 1433.) Lucent responds that it properly apportioned between the patented features and unpatented features under the relevant Georgia-Pacific factors without relying on the entire market value rule. Georgia-Pacific, 318 F. Supp. at 1120.

To support its claim of damages, Lucent called Bruce Tognazzini, a well-recognized technical expert; Dr. Deborah Jay, a survey expert sought by both sides for her renowned expertise in probability surveys; Raymond Sims, an economic expert; Stephen Samuels, Bruce Schneider, and Roger Stricker, Lucent's licensing witnesses; and adverse witness, William Kennedy, a Microsoft executive. Microsoft strategically elected to put Lucent to its burden of proof. In so doing, Microsoft declined to call its survey expert, a licensing witness, or an economist to evaluate damages. Instead, Microsoft called a professor of negotiation theory, Robert Mnookin, and Microsoft executives William Kennedy and Jensen Harris. The jury, after evaluating the credibility of witnesses, agreed with Lucent and rejected Microsoft's arguments and biased witness testimony in reaching its valuation of $70 million.

II. Microsoft's Motion for Judgment as a Matter of Law

A. Legal Standards for Motion for Judgment as a Matter of Law

A jury verdict can be overturned and a post-trial motion for judgment as a matter of law granted "only if, under the governing law, there can be but one reasonable conclusion as to the verdict. In other words, the motion should be granted only if 'there is no legally sufficient basis for a reasonable jury to find for that party on that issue.'" Winarto v. Toshiba Am. Elecs. Components, Inc., 274 F.3d 1276, 1283 (9th Cir. 2001). In ruling on a motion for judgment as a matter of law, the district court "is not to make credibility determinations or weigh the evidence." Id. The district court "must accept the jury's credibility findings consistent with the verdict." Id.

For the motion, the district court must view the evidence in the light most favorable to the non-moving party and draw all reasonable evidentiary inferences in favor of the non-moving party. Reeves v. Sanderson Plumbing Products, Inc., 530 U.S. 133, 150 (2000); Josephs v. Pac. Bell, 443 F.3d 1050, 1062 (9th Cir. 2006). The Court must uphold a jury's verdict even if the record contains evidence that might support a contrary conclusion to the jury's verdict. Pavao v. Pagay, 307 F.3d 915, 918 (9th Cir. 2002). The district court must disregard evidence favorable to the moving party that the jury is not required to believe. Reeves, 530 U.S. at 150-51; Pavao, 307 F.3d at 918; Winarto, 274 F.3d at 1283, 1286-87 (district court must "accept the jury's credibility findings consistent with the verdict" and "disregard all evidence favorable to the moving party that the jury is not required to believe" because "[w]hen two sets of inferences find support in the record, the inferences that support the jury's verdict of course win the day.").

"On post-trial JMOL motions, district court judges must scrutinize the evidence carefully to ensure that the 'substantial evidence' standard is satisfied." Lucent, 580 F.3d at 1336. Although a reasonable royalty analysis "necessarily involves an element of approximation and uncertainty," Unisplay, S.A. v. Am. Elec. Sign Co., 69 F.3d 512, 517 (Fed. Cir. 1995), the damages cannot stand if any part of the calculation leading to it was unsupported or contrary to law. Uniloc, 632 F.3d at 1317, 1321. "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." Id. at 1317. Moreover, when an accused device includes patented and unpatented features, as in this case for the Day patent, "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." Uniloc, 632 F.3d 1292, 1318 (citing Garretson v. Clark, 111 U.S. 120, 121 (1884)); see also Lucent, 580 F.3d at 1336--37. For minor patent improvements, a patentee cannot justify using the entire market value of an accused product simply by asserting a low enough royalty rate. Uniloc, 632 F.3d 1292, 1320. If the plaintiff, as in this case, cannot meet the entire market value rule, the plaintiff must apportion between the patented and unpatented features. Uniloc, 632 F.3d at 1318.

B. Lucent's Damages Calculation

Microsoft challenges the jury's $70 million verdict. (Doc. No. 1434-1 at 1.) Significantly, Microsoft argues that "Lucent presented no evidence, much less substantial evidence, that could have led a reasonable jury to conclude that Microsoft would have lost $67 in revenue for any fraction of the 109 million licenses to Office if Outlook did not include the date-picker." (Id.) Specifically, Microsoft argues that Lucent failed to provide the jury with a properly-apportioned damages calculation for Outlook based on reliable expert methodology as required by the Federal Circuit and this Court's previous rulings. (See Doc. No. 1323, Court's Motion in Limine Order, at 9-10; Uniloc, 632 F.3d 1292.)

Lucent refers to the entire record at trial and the jury's credibility determinations in support of the jury's damage award. Further, Lucent emphasizes that this is a reasonable royalty case based on the outcome of a hypothetical negotiation for a lump-sum, not a lost profits case. (Doc. No. 1451 at 1.)

A lump-sum license is an "upfront, paid-in-full royalty." Lucent, 580 F.3d at 1326. A lump-sum royalty benefits the licensor by raising a substantial amount of money quickly. Id. On the other hand, a lump-sum royalty benefits the licensee by allowing it to use the patented technology without any concerns of further expenditure. Id. Furthermore, a lump-sum royalty removes the inherent risk of under-reporting the actual usage of the patented technology by the licensee, and eliminates administrative burden of having to monitor usage. Id. A lump-sum royalty also eliminates any ability for the licensee to reevaluate the value of the patented technology. The licensee agrees to pay the lump-sum royalty regardless of whether the patented technology is successful or even used. Id.

A lump-sum royalty may also create risks. If either party incorrectly forecasts the use of the patented feature, a licensee may end up paying a lump-sum far in excess of what the patented invention is later shown to be worth or a licensor may end up accepting a lump-sum that is far less than what the patented invention is later shown to be worth. Id. The licensee may also consider its risk of not including the patented invention in its product under Georgia-Pacific. 318 F. Supp. at 1120.

During a hypothetical negotiation for a lump-sum royalty figure, the parties may "consider the expected or estimated usage" of the patented invention. Lucent, 580 F.3d at 1327. Generally, a frequently used invention is more valuable and commands a higher lump-sum royalty. Id. Conversely, a minimally used feature commands a lower lump-sum payment. The lump-sum analysis does not require the parties to precisely calculate the use of the patented feature, unlike a running royalty license. In a typical running royalty, the license is tied to the use of the patented feature standing alone or incorporated into other products. In a lump-sum calculation, the parties agree on a fully paid up amount based on "expected or estimated usage." Id. at 1327.

Here, Lucent sought a lump-sum royalty based on its Georgia-Pacific analysis and the business risk to Microsoft from not including the Day patent technology in its products. Lucent properly points out that its evidentiary burden to show a lump-sum reasonable royalty under Georgia-Pacific was to present sufficient evidence regarding the outcome of a hypothetical negotiation based on competing positions about the value of the Day patent technology to Microsoft. (Id.)

Lucent's $70 million figure considered an expected financial impact to Microsoft without the Day patent technology in Outlook. (R. Tr. at III-244:13-257:4; IV-5:22-32:19.) It is undisputed that Microsoft sold 109.3 million Outlook licenses within Office during the damages period. (R. Tr. at IV-160:4-8.) Mr. Raymond Sims ("Mr. Sims"), Lucent's economic expert, included the 109.3 million Office licenses in his analysis, along with 241,800 licenses for Outlook sold on a stand-alone basis, for a total of 109.5 million licenses. (Id.; see alsoR. Tr. at IV-15:4-16:12.)

Mr. Sims then multiplied the 109.5 million total Outlook licenses by 3% to obtain the number of license sales Microsoft would potentially lose if the Day patent technology was not included in Outlook. The result is a risk of loss of up to 3.3 million license sales. (R. Tr. at IV-14:16-15:3.) He arrived at the 3% figure using data generated by a survey conducted by Lucent's expert Dr. Deborah Jay ("Dr. Jay"). (R. Tr. at IV-11:20-16:12.) Dr. Jay's survey results showed that 7% of Outlook purchase-decision makers that use the drop-down calendar feature would not have bought Outlook if it lacked the drop-down calendar. (R. Tr. at II-66:24-67:7, 153:11-19,118:10-119; PX-1012; PX-1616.) Mr. Sims multiplied the 7% by the percentage of all Outlook users who use the drop-down calendar-43%-to arrive at 3%. (R. Tr. at IV-10:6-14:15; Doc. No. 1454-3 at 33-37, 43-46 (RS11-RS15, RS21-RS24).) Dr. Jay agreed with Mr. Sims' calculation of the 3% figure. (R. Tr. at II-159:7-160:21; Doc. No. 1454-3 at 523 (DJ34).) This evidentiary record supports the conclusion that Microsoft would face a potential loss of 3.3 million licenses at the hypothetical negotiation if Microsoft did not include the Day patent technology in Outlook.

Mr. Sims' next step was to calculate a hypothetical revenue loss associated with selling 3.3 million fewer licenses of Outlook. Mr. Sims testified that Microsoft's average per-unit revenue is $67 from sales of stand-alone Outlook. (R. Tr. at IV-167:23-168:4.) Mr. Sims also testified that Microsoft's average per-unit revenue from sales of Office that includes Outlook is $98.19. (R. Tr. at IV-166:13-167:4.) Based on the testimony of Microsoft's Rule 30(b)(6) witness on the subject, Mr. Sims testified that Microsoft does not attribute revenue received from sales of Office to the individual programs within Office. (R. Tr. at III-186:14-189:10; IV-17:5-18:1.) As a result, Mr. Sims used a $67 stand-alone value of Outlook as a proxy for the value of Outlook sold as part of Office.

Mr. Sims testified that his use of $67 as the value for Outlook sold as part of Office was corroborated by a 2010 Microsoft pricing document. The internal document showed that the difference in retail prices between Office with Outlook ($279.99) and Office without Outlook ($149.99) was $130, roughly the retail price of stand-alone Outlook at that time ($139.99). (PX-1895; R. Tr. at IV-167:23-169:5, 174:6-175:7, 181:10-182:9.)

Mr. Sims also testified that use of $67 as the value of Outlook within Office was appropriate based on internal Microsoft documents showing that Microsoft Outlook is the most frequently used Office application "by far." (PX-838; R. Tr. at III-218:21-219:23; R. Tr. at IV-163:14-164:15.) Mr. Sims testified that he reviewed internal Microsoft records concerning use of the calendar feature within Outlook and Office. (Id.) An internal Microsoft presentation states 83% of respondents use Outlook's calendar to manage their work appointments/events/meetings. In another internal Microsoft survey, Microsoft listed several calendar based tasks as "high-impact," noting that 90% of the respondents used calendar features, 84% set up new appointments or meetings, and 79% forwarded or changed meeting requests. (Doc. No. 1399, PX-838.) Therefore, Mr. Sims multiplied the 3.3 million licenses for Office and Outlook by $67 to arrive at his opinion that Microsoft would have potentially lost $221.4 million in revenue if it did not include the Day patent ...


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