Microsoft Mega-Verdict Appeal Primed to Test Patent-Damages Law

Microsoft Corp.’s promised appeal of a massive patent verdict is likely to bolster already fierce debates about the significance of foreign activities and apportionment in juries’ damages calculations.

Last week, a federal jury in Delaware awarded IPA Technologies Inc. $242 million after finding Microsoft’s Cortana infringed a patent that expired in January 2019. The core of the conflict over the apportionment of the royalty—carving out the value of non-infringing aspects of infringing products—hinges on how much of Cortana’s infringement occurred in Microsoft’s US-based servers.

The jury agreed with IPA that Cortana’s interface in the Windows 10 operating system infringed US Patent No. 7,069,560 each time a user command was processed by a US-based Microsoft server, regardless of the location of the user’s device. Companies in Microsoft’s position, though, tend to argue on appeal that such a verdict oversimplifies how the accused product functions, said Karl Fink, a patent lawyer at Nixon Peabody who isn’t involved in the Microsoft dispute.

“It’s almost a guarantee that, in a big case, the apportionment issue and the royalty rate will be a big part of the appeal,” Fink said. For targeted companies with a worldwide presence and customer base, Fink said, collecting damages accrued abroad that are “proximately caused” by infringement in the US “is a now a bigger deal than it used to be because it potentially increases exposure to much higher damage awards.”

IPA, owned by the patent-monetization firm Wi-LAN Inc., sued Microsoft in January 2018 as part of a broader litigation campaign involving Amazon.com Inc. and Alphabet Inc.’s Google. Originally issued to the former research arm of Stanford University, the patent covered how to break down big computer jobs into smaller tasks for multiple devices to work on together.

He noted that a three-judge panel of the US Court of Appeals for the Federal Circuit in March issued a decision that extended the concept of extraterritoriality to allow plaintiffs to seek damages for wholly foreign sales caused by the making, using, offering to sell, or importing of an infringing product inside the US. That expanded its reach beyond a provision covering the manufacturing of components in the US and their subsequent shipment overseas for assembly.

That opinion, in Brumfield v. IBG LLC, underpinned much of Judge Richard G. Andrews’ May 2 rejection of Microsoft’s bid to reconsider his order denying summary judgment on damages and exclusion of expert testimony.

Andrews, of the US District Court for the District of Delaware, said foreign conduct that doesn’t independently infringe can nevertheless be considered when calculating reasonable royalty damages if it increased the value of the domestic infringement. IPA’s damages theory, which is based on Cortana’s use in the Windows 10 operating system, “properly apportioned patented features from unpatented features,” he ruled. Cortana was available on all devices running Windows 10, according to a pretrial order.

“Brumfield makes clear that no categorical bar exists prohibiting consideration of non-infringing activities,” Andrews wrote, adding that it’s “undisputed that the only way users can access Cortana, and thereby trigger the accused server code to run, is through Windows 10.”

Microsoft declined to comment on its next steps in the IPA dispute.

‘Danger Zone’

Though Microsoft will probably challenge the infringement finding, it’s unlikely to find help on that issue from two other high-profile cases involving the same patent, attorneys said.

Google’s success invalidating some claims in the patent “probably wouldn’t have any impact” on Microsoft, Shaw Keller LLP partner Andrew Russell said. Meanwhile, Andrews’ 2021 ruling that Amazon’s Alexa virtual assistant didn’t infringe likely “won’t matter at all” because that product may work differently than Microsoft’s, said Russell, who is also the founder and editor of IP/DE, a blog associated with Shaw Keller focusing on intellectual property litigation in the District of Delaware.

That leaves the damages accrued overseas for domestic infringement—and the roles infringing and noninfringing features played in Microsoft’s sales of Windows 10—as issues likely to take center stage if, and when, Microsoft takes the case to the Federal Circuit.

Considering sales that don’t infringe as part of a “reasonable royalty” calculation is “kind of a danger zone and a place where the law could be tricky to apply,” Russell said. “And it’s possible that the plaintiff may not have done it correctly,” so Microsoft may target its appeal accordingly, he said.

Andrews has authored multiple damages opinions that have been cited in other cases, Russell said, and the lawyer generally trusts Andrews’ determinations on such issues.

“There’s certainly nothing that I saw that looks wrong, that looks like an issue that they would win on appeal,” Russell said of Andrews’ opinion. “I just think this is an area they’ll probably go after because it’s something courts generally have struggled with.”

Both sides will debate the economic and technical opinions that emerged in district court. If a very large portion of the product is deemed to use the patented technology, Fink said, a higher rate would be justified.

Last week’s verdict listed only the total amount of the royalty awarded. Court filings regarding each side’s proposed base and rate are redacted.

“It’s a very complex technical and economic analysis,” he said. And the Federal Circuit “is not shy about reviewing all the details of the economic and technical testimony.”

‘Slippery Concept’

A reasonable royalty is “a remedial measure of damages that should apply when it is impossible to discern or apportion lost profits,” according to a December 2016 article in the Boston University Law Review titled “(Un)Reasonable Royalties.” In the article, Michael Risch—a Villanova University law professor and member of the school’s IP policy board—concluded that “courts should return to the roots of reasonable royalty analysis by focusing on a patent’s value above all else.”

The calculation, he wrote, “was meant to be flexible and imprecise.” He also noted historical concerns about licensing fees, including that “there are few benchmarks to determine what an appropriate fee might be, and experts diverge wildly in their assumptions when estimating an appropriate fee.”

Fink said a typical appeal for a company in Microsoft’s situation would include clashes over the royalty rate and base. The royalty base—here, the value that the accused feature adds to Windows 10—“usually is kind of pretty clear-cut,” he said. “It’s the rate that’s usually the hotly debated thing, because it’s a battle of the experts as to what an appropriate royalty rate should be.”

“It’s constantly being reviewed by the Federal Circuit,” Fink said of apportionment. “It’s always being debated. It’s a very slippery concept to apply in real life.”

The case is IPA Technologies Inc. v. Microsoft Corp., D. Del., No. 18-cv-1.