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Federal Circuit affirms district court's decision setting aside $1.5 billion infringement verdict
September 26, 2008

In a decision yesterday, the Federal Circuit affirmed a district court's grant of judgment as a matter of law based on lack of standing for one patent and non-infringement of a second patent. A jury awarded $1,538,056,702 in damages for infringement, but, as a result of the JMOL, the district court set aside the damages award.

The Federal Circuit affirmed. The court agreed with the district court that the jury lacked substantial evidence to find the claims of the first patent in suit encompassed work that was solely owned by the plaintiff based on a Joint Development Agreement. Instead, the court held that, in accordance with the terms of the agreement, the patent-in-suit was jointly owned by the plaintiff and a third party not involved in the suit. Thus, the plaintiff lacked standing to sue in the absence of the other joint owner.

The court likewise affirmed the district court's finding that there was insufficient evidence of direct infringement to support the jury's determination of inducing infringement of the second patent. There was no evidence that the accused method had actually been practiced by the accused product, and the plaintiff's expert testimony was to speculative to support a conclusion that the accused product necessarily infringed.

The patents at issue were directed to methods of compressing digital audio files to reduce storage space without compromising the quality of sound produced from the files. Johnston and Hall were the listed inventors on the earliest application ("the '598 application") which was filed in 1988 while they were working at AT&T. They were likewise inventors of the '457 patent, which was filed in 1993 as a continuation, through two other applications of the '598 application. The claims of the '457 patent were directed to a method of compressing digital audio files wherein "tonality values" are used in generating masking thresholds for quantization.

The '938 patent, filed in 1994, claimed priority to an application filed in 1992. Johnston was the sole inventor of the '938 patent. Three of the claims of the '938 patent were directed to a method that, instead of using tonality values in quantizing, used a masking threshold and an absolute hearing threshold, and an iterative process for achieving a required bit rate.

In April 2006, following a reissue proceeding, the '938 patent was surrendered in favor of RE 39,080. Claim 2 was canceled during the reissue proceeding, and the priority claim was amended such that the '080 patent claimed priority, through several applications, as a continuation-in-part (CIP) of the '598 application.

In 1988, AT&T entered into a joint development agreement (JDA) with a German company, Fraunhofer, which was also working on digital compression technologies. Under the JDA, Fraunhofer's scientist Brandenburg went to work with Johnston at AT&T beginning in April 1989. The JDA preserved ownership of "Existing Technology," technology developed by AT&T or by Fraunhofer before April 1989, in the companies separately. The JDA defined Existing Technology as that which was the result of work relating to Digital Audio Coding needed to cover ISO work done by AT&T's Information Principles Research Laboratory and Fraunhofer at its AIS. In contrast, "New Work", technology developed after April 1989, was to be jointly owned, and each company had the nonexclusive right to make use of, and to grant nonexclusive licenses to others to use the technology.

Working together in late 1989, Johnston and Brandenburg implemented and assisted in setting the industry standard ISO 11172-3 Audio Layer 3 ("MP3") coding techniques. By 1997, Fraunhofer had written software for MP3 functionality, and licensed hundreds of companies to use its MP3 software and patents. Microsoft sought to add to its Windows Media Player the ability to play MP3 files, and therefore obtained a license from Fraunhofer for the MP3 decoder software and incorporated it into computers containing Windows Media Player to allow the computers to play MP3 files.

In 2004, after the commencement of the litigation, Microsoft took another license from Fraunhofer for encoding and decoding software for use in its Windows Media Player 10. The software included two encoders: the "Fast" encoder and the "High Quality" encoder. Only the High Quality encoder uses tonality values as required by the '457 patent. In late 2006, Microsoft released Windows Media Player 11, which retains the Fast encoder, but omits the High Quality encoder.

In 2002, Lucent filed suit against Gateway for patent infringement based on its sale of computers incorporating Windows Media Player 10. Microsoft intervened and filed a declaratory judgment action against Lucent. In 2003, Lucent filed suit against Dell for patent infringement in the District of Delaware. That case was consolidated with the other cases, and in 2007, a jury trial was held regarding the issue of infringement and validity of claims 1, 5, and 10 of the '457 patent and all claims of the '080 patent. The jury was asked to determine whether Microsoft had proven that work performed on or after April 1989 was incorporated into any of the claims of the '938 patent, to which the jury answered in the negative. The jury found contributory and induced infringement of all asserted claims and rejected all invalidity defenses, awarding damages in the amount of $1,538,056,702 based on a 0.5% royalty rate for the value of the entire computer that performed the MP3 encoding functions.

The district court set aside the jury verdict, granting JMOL and, in the alternative, a new trial on infringement of claims 1, 5, and 10 of the '457 patent, and dismissed the claims for infringement of the '080 patent. While the court held that the jury permissibly found that claims 1 and 3 of the '938 patent incorporated only Existing Technology, the jury lacked substantial evidence and acted against the clear weight of the evidence in so finding for claims 2 and 4 as it found that these claims encompassed New Work. Thus, the court concluded that the '938 patent, and hence the '080 patent, was jointly owned by AT&T and Fraunhofer, and Lucent lacked standing to sue in the absence of Fraunhofer. Hence, the court dismissed Lucent's infringement claims based on the '080 patent.

With respect to the '457 patent, the court held that the jury lacked substantial evidence and acted against the clear weight of the evidence in finding infringement of method claims 1 and 5 by Microsoft's Windows Media Player given that Lucent provided insufficient evidence to establish that the High Quality encoder actually ever ran and performed the claimed method. For the same reasons, the court held there was insufficient evidence of infringement of claim 10, which, although directed to a storage medium, used the phrase "manufactured in accordance with a process comprising," thus requiring evidence of practice of the claimed process. Therefore the court granted Lucent's motion for JMOL, or alternatively for a new trial, on infringement of the '457 patent. The district court also granted JMOL or a new trial on damages. In this regard, the court could not definitively conclude that there was insufficient evidence to support the jury's 0.5% royalty rate. Thus, it denied the motion for JMOL on that basis, but granted a new trial. Lucent appealed.

The Federal Circuit affirmed. Lucent contended the district court erred in setting aside the jury's finding and concluding that claims 2 and 4 constitute New Work. Lucent further asserted that for claims 2 and 4 to constitute Existing Technology, it is not necessary for there to be descriptive support for the claims in the specification of the '938 patent since contract law governs, not § 112. Lucent asserted that under the JDA, all that is required is for the claimed subject matter to have been in the public domain prior to April 1989.

The court refused to adopt Lucent's "strained interpretation of the JDA." The court noted "Existing Technology" was clearly defined in the JDA to refer to technology developed by AT&T or by Fraunhofer prior to April 1989, and there was simply no basis for reading Existing Technology more broadly to encompass any technology in the public domain prior to April 1989. The court further disagreed that written descriptive support in the specification was not relevant to determining when the claimed technology was developed. Here, the relevant disclosure was added to the application chain in 1992, three years after the JDA was signed. Based on this lack of earlier disclosure, the court affirmed the district court's conclusion that claims 2 and 4 incorporated "New Work."

Lucent alternatively argued that even if claims 2 and 4 incorporated New Work under the JDA, ownership of the '938 patent (and thus the '080 patent) remained solely with Lucent since claims 1 and 3 are Existing Technology. Lucent further contended that while the JDA may have attempted to assign joint ownership to some of the claims of the '938 patent it was ineffective to do that, and according to Lucent by law a patentee may only assign title to an entire patent; a transfer of less is merely a license. In making this argument Lucent relied primarily on Pope Manufacturing Co. v. Gormully & Jeffery Manufacturing Co., arguing that while the district court correctly recognized that Pope precluded the separation of claims 1 and 3 from claims 2 and 4, its conclusion that the JDA assigned ownership of the entire patent was wrong. Lucent instead contended that Pope mandated the result of the mixed assignment was a mere license. Lucent further argued that Israel Bio-Engineering Project v. Amgen, Inc. was distinguishable from the instant case because it involved co-inventors who began with an ownership interest.

The court found no error in the district court's application of Pope and Israel Bio-Engineering. The issue in Pope was whether the plaintiff in an infringement suit had legal title to a patent and thus had the right to sue. The court held that a transfer of less than the whole patent did not convey title in the patent and the right to sue; instead it conveyed merely a license. The Federal Circuit, however, noted that Pope had limited relevance to the instant case where the issue was determination of ownership of the patent in the first instance, i.e. upon issuance of the patent.

The court further noted that Israel Bio-Engineering was more relevant as it also involved determination of the ownership of a patent when some of the claimed subject matter was invented under a contract and some was invented outside the contract. Here, the court concluded the district court properly relied on Israel Bio-Engineering to conclude that because claims 2 and 4 of the '938 patent were invented during the period covered by the JDA, and thus constituted New Work, Fraunhofer was a co-owner of the '938 patent, and thus also the '080 patent. As such Lucent lacked standing to sue for infringement of the '080 patent in the absence of Fraunhofer.

The Federal Circuit likewise affirmed the district court's JMOL of noninfringement of the '457 patent. Lucent contended the district court erred in setting aside the jury's verdict of direct infringement of claims 1, 5, and 10 of the '457 patent by concluding that the jury lacked substantial evidence in finding that the High Quality encoder was used in Microsoft's Windows Media Player. In this regard, Lucent asserted that the district court mistakenly relied on E-Pass Technologies, Inc. v. 3Com Corp. and Acco Brands, Inc. v. ABA Locks Manufacturer Co. in finding no direct infringement asserting both cases could be distinguished from the present case.

In order to establish liability for inducing infringement, there must be evidence of direct infringement. This may be shown in one of two ways, either by evidence of specific instances of infringement or that an accused device necessarily infringes the patent. Lucent did not show specific instances of direct infringement, but instead relied on circumstantial evidence to attempt to show Microsoft's Windows Media Player necessarily infringed the '457 patent. The district court, however, held the Lucent's circumstantial evidence (in the form of expert testimony based on source code review) established only uncertainty and speculation as to whether the High Quality encoder had run even once. The Federal Circuit agreed with the district court's analysis under E-Pass and Acco Brands, holding that it would have been too speculative to conclude that any customer actually performed the claimed method. As a result, the court affirmed the JMOL of noninfringement as well.

Perhaps not surprisingly, the court declined to consider whether the $1.5 billion in damages originally awarded by the jury was supported by the evidence, given that this case has been cited as an example for the need for the damage apportionment provisions in the various patent reform proposals that have been circulating over the past two years.

To read the full decision in Lucent Techs., Inc. v. Gateway, Inc., click here.

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