Federal Circuit affirms district court’s decision setting aside $1.5 billion infringement verdictSeptember 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 Circui