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June 15, 2006

Principles of Equity

z4 Technologies won a jury award of damages against Microsoft ($115m) and Autodesk ($18m) for infringing software piracy patents 6,044,471 and 6,785,825. Microsoft's infringement was found willful. But the same Eastern District of Texas court has ruled (6:06-CV-142), in light of the recent eBay case, that a permanent injunction against Microsoft is not within "the principles of equity."

Principles of equity -

[I]n eBay, the Supreme Court indicated that the right to exclude alone is not sufficient to support a finding of injunctive relief and that such relief “‘may’ issue only ‘in accordance with the principles of equity’” under § 283 of the patent act. See eBay, 126 S. Ct. at 1840. Accordingly, a violation of the right to exclude does not inevitably lead to the conclusion that a patent holder cannot be adequately compensated by remedies at law such as monetary damages without first applying the principles of equity.

The violation of a patent owner’s right to exclude can present a situation where monetary damages cannot adequately compensate the patent holder for that injury. For example, when an infringer saturates the market for a patented invention with an infringing product or damages the patent holder’s good will or brand name recognition by selling infringing products that infringer violates the patent holder’s exclusionary right in a manner that cannot be compensated through monetary damages. This is because it is impossible to determine the portions of the market the patent owner would have secured but for the infringer or how much damage was done to the patent owner’s brand recognition or good will due to the infringement. However, this is not the scenario in the present case. Microsoft’s use of z4's intellectual property does not exclude z4 from selling or licensing its product to any sector of the market or threaten z4's brand name recognition or good will in any way. z4 is only excluded from selling or licensing its technology to Microsoft. Accordingly, z4 is not excluded from the use of its intellectual property in a way that cannot be calculated with reasonable certainty in the form of monetary damages, just as the past damages for infringement were calculated at trial.

Injunction for a "small component" -

In his concurrence, Justice Kennedy instructed courts to be cognizant of the nature of the patent being enforced and the economic function of the patent holder when applying the equitable factors. Id. at 1842 (Kennedy, J., concurring). Justice Kennedy specifically mentioned the situation where a “patented invention is but a small component of the product the companies seek to produce” and states that in such a situation, “legal damages may well be sufficient to compensate for the infringement and an injunction may not serve the public interest.” Id. (Kennedy, J., concurring). Here, product activation is a very small component of the Microsoft Windows and Office software products that the jury found to infringe z4's patents. The infringing product activation component of the software is in no way related to the core functionality for which the software is purchased by consumers. Accordingly, Justice Kennedy’s comments support the conclusion that monetary damages would be sufficient to compensate z4 for any future infringement by Microsoft.

Irreparable harm -

In the absence of a permanent injunction against Microsoft, z4 will not suffer lost profits, the loss of brand name recognition or the loss of market share because of Microsoft’s continued sale of the infringing products. These are the type of injuries that are often incalculable and irreparable. The only entity z4 is possibly prevented from marketing, selling or licensing its technology to absent an injunction is Microsoft... z4 can be compensated for any harm it suffers in the way of future infringement at the hands of Microsoft by calculating a reasonable royalty for Microsoft’s continued use of the product activation technology.

The balance of hardships (basically, an inverse variation on the "small component" argument, with heft) -

Microsoft argues that the resources, time, and expense required to redesign its Windows and Office software products would create a significant hardship on Microsoft. Redesigning Microsoft Windows and Office software products, even to remove a small component such as product activation, is undoubtedly an enormous task... [T]he potential hardships Microsoft could suffer if the injunction were granted outweigh any limited and reparable hardships that z4 would suffer in the absence of an injunction.

The public interest -

Microsoft’s Windows and Office software products are likely the most popular software products in the world... [T]he Court is unaware of any negative effects that might befall the public in the absence of an injunction... [A]ny minor disruption to the distribution of the products in question could occur and would have an effect on the public due to the public’s undisputed and enormous reliance on these products.

The wrap-up -

z4 has not demonstrated that it will suffer irreparable harm in the absence of a permanent injunction. Any harm z4 might suffer can be adequately remedied through the recovery of monetary damages. The balance of the hardships, although speculative, weighs in favor of Microsoft. And certain sectors of the public could suffer some negative effects if the Court were to grant z4's proposed permanent injunction. Accordingly, a permanent injunction should not issue, and z4's motion is DENIED.

Commentary: Don't expect an appeal, and most certainly don't expect an appeal to succeed.

P.S. A hat tip to Hal Wegner for the tip-off.

Posted by Patent Hawk at June 15, 2006 1:22 PM | Injunction

Comments

So, a thief can steal another's IP, then when caught plead it would be a "significant hardship" to stop the theft? Nice.

Questions....

(1) Is the Lizzie Borden defense (yes, I killed my parents, but have mercy since I'm an orphan) actually admissable in federal court? (Remember that MSFT's hardship is self-imposed, i.e. is a consequence of its infringement.)

(2) Who determines damages, and does Z4 receive compensation for attorney's fees?

(3) Suppose a patent holder does not wish to license his invention to X. Doesn't this ruling mean that he cannot stop X from infringing (X merely has to pay damages)?

Posted by: john walker at June 16, 2006 4:26 AM

Answers (sort of):
(1) Lizzie Borden defense - doesn't work that way.
(2) Damages - there are a few methods for determining damages. There is a Patent Prospector category on damages. See the March 24, 2005 primer to begin. z4 has to request attorney's fees from the court.
(3) This ruling is exemplary of how the ground has shifted towards a fuzzy assessment of fairness for all concerned (including infringing product consumers, which is a very European concept). The basic idea that a patent grants a right to exclude certainly has been diluted. Large companies with products for which infringement is a small component will benefit. This primarily affects the so-called "high-tech" (computer processor based) industry, which has been carping loudest for patent reform. As an externality to limiting injunctive relief, the howling for patent reform may soften, as infringement becomes less of a showstopper and more of a "money changes hands" business-as-usual affair.

Posted by: Patent Hawk at June 17, 2006 12:51 AM

Balance between all stake-holders requires:

1. loser pays

2. patent goes down when a preponderance of evidence says it should

3. an objective and efficient (EPO?) way to test whether a claim contains obvious subject matter.

4. dependent claims that represent real positions of enhanced validity

5. the chance, post-issue, to amend down to a narrower valid scope; and

6. no narrowing down to a position that Applicant did not recognise in the original patent filing.

Then, those asked to write clearance opinions can make, on the basis of the USPTO publn of the appln as filed, and what client knows of the art, accurate predictions whether client's product idea will infringe a prospective claim.

Then, the system is capable of doing justice between rights-holders, and those against whom rights are asserted.

But it would go better with first instance judges who understand patents, and no juries.

Posted by: MaxDrei at June 17, 2006 4:13 AM

"But it would go better with first instance judges who understand patents, and no juries."

That's how we do it in UK. But we tend to grant injunctions to people whose patents are valid and infringed. I'm for eBay, though. An injunction is an equitable remedy, and should always be discretionary.

Presumably if Microsoft continue infringing (and presumably they will) they're liable to triple damages from here in? They can hardly claim they're not doing it deliberately?

Posted by: Tim Roberts at June 19, 2006 1:40 PM