Technology Team Newsletter: Canadian Upstart Hands Microsoft a Defeat: Microsoft Must Comply by January 11, 2010

On August 11, 2009, Microsoft was hit with a permanent injunction by the U.S. District Court for the Eastern District of Texas. The injunction bars Microsoft from selling recent versions of its WORD software, because the software violates a patent for processing XML, a markup language that allows users to customize the underlying format of text documents.[1] The patent is held by a small Canadian company named i4i Inc., to whom the court also awarded damages of approximately $290 million.

Microsoft appealed the decision to the U.S. Court of Appeals for the Federal Circuit ("CAFC").[2] In addition to its own brief, Microsoft had some heavyweights backing it up on its appeal. Dell and HP filed amicus curiae briefs (literally, "friend-of-the-court briefs"), asking the court to overturn the injunction against WORD. Their support is understandable, however, because the injunction will force both companies to stop bundling Microsoft Office products with the computers they sell.

On December 22, 2009, the CAFC issued its decision, upholding the ruling of the district court with but one exception.[3] The CAFC found that the sixty-day period in which the injunction was to become effective was too short and granted Microsoft five months from the date of the original order in which to comply with the injunction. Nevertheless, even the extended period runs out on January 11, 2010, at which point the permanent injunction will go into effect.

At this point, Microsoft has very few legal options. The company could seek an expedited rehearing en banc at the CAFC, or the company could file a petition for a writ of certiorari with the U.S. Supreme Court, although these actions are discretionary in nature and, therefore, unlikely to be successful.

Of particular note in the CAFC opinion is the discussion of Microsoft's failure to file a motion for a judgment as a matter of law (a "JMOL") relative to the issue of obviousness. At trial and on appeal, Microsoft claimed that i4i's invention was obvious and, therefore, not entitled to patent protection. Nevertheless, the court held that because Microsoft failed to file a JMOL motion on that issue, the court could no longer consider the issue of the jury's factual findings with respect to obviousness. As the CAFC explained:

In this case, Microsoft has waived its right to challenge the factual findings underlying the jury's implicit obviousness verdict because it did not file a pre-verdict JMOL on obviousness for the Rita, DeRose and Kugimiya references [prior art that, according to Microsoft, renders the i4i patent obvious]. . . . As we explained in Duro-Last, a party must file a pre-verdict JMOL motion on all theories, and with respect to all prior art references, that it wishes to challenge with a post-verdict JMOL. . . .[4]

Because Microsoft was not allowed to challenge the jury's finding on the issue of obviousness, the resulting decision on that issue is not surprising.

The other significant issue was damages. During oral argument, Judge Kimberly Moore questioned the way in which damages were calculated in the original ruling. In particular, she took issue with the assumption that XML users who bought a $90 version of Windows would have been willing to pay considerably more for a substitute, stating, "Not everyone who is willing to pay $90 or $200 for a product is willing to pay $500."[5] Nevertheless, the CAFC decision upheld the district court's award of damages. The CAFC declined to consider the reasonableness of the damages because Microsoft did not file a JMOL motion on that issue either. Consequently, the CAFC reviewed the verdict "under the much narrower standard applied to denials of new trial motions."[6] After reviewing the analysis of i4i's damages expert, the court concluded:

Microsoft is correct that i4i's expert could have used other data in his calculations. The existence of other facts, however, does not mean that the facts used failed to meet the minimum standards of relevance or reliability. . . . Under Rule 702, the question is whether the expert relied on facts sufficiently related to the disputed issue. Here, that issue was a reasonable royalty for the '449 patent. We conclude that Wagner [i4i's expert witness] based his calculations on facts meeting these minimum standards of relevance and reliability.[7]

In its appeal, Microsoft strenuously argued that the district court inappropriately awarded $40 million in enhanced damages. The CAFC disagreed with Microsoft and concluded that the district court did not abuse its discretion by awarding $40 million in enhanced damages, especially since it could have awarded as much as $600 million in enhanced damages.[8]

If Microsoft fails to request, or is unsuccessful in obtaining, either an expedited rehearing en banc at the CAFC or a writ of certiorari from the U.S. Supreme Court, then the company has only three choices:

(1) stop selling the versions of WORD that include the infringing code;

(2) buy a license from, or otherwise settle with, i4i; or

(3) develop a workaround that does not violate i4i's patent.

In a press release issued after the CAFC ruling was announced, Microsoft referred to i4i's XML's editing technology as a "little-used feature." The release further stated that Microsoft has been preparing to remove the feature from Microsoft Word 2007 and Microsoft Office 2007 and expects to have copies available by January 11, 2010 that do not include i4i's technology. In addition, the release stated that Microsoft Word 2010 and Microsoft Office 2010 will not contain the technology covered by the injunction.

[4] Idat 14 
[6] at 37.
[7] Id. at 34.
[8] Id. at 41.