Damages in the case of i4i Limited Partnership v. Microsoft Corporation

Nassim Nasser is a JD candidate at Osgoode Hall Law School and is taking the Patent Law course.

Microsoft Corporation was, yet again, defeated when the United States Court of Appeal for the Federal Circuit upheld the trial’s court’s decision in favour of the Toronto based software company i4i Limited Partnership (i4i). The dispute between the parties arose when i4i brought a patent infringement action against Microsoft in 2009. At issue was i4i’s invention for editing XML, a computer markup language.

i4i claimed that Microsoft had infringed its patent in certain versions of Microsoft Word, in particular Word 2003 and 2007.  At trial, it was decided that i4i’s patent was infringed and i4i was awarded $200 million in damages and $40 million in enhanced damages. The court of appeal affirms these findings.

The $200 Million Figure:
Pursuant to 35 § 284 US code damages awarded should be adequate to compensate for the infringement and should not be less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court. Furthermore, the court may receive expert testimony as an aid to the determination of damages or of what royalty would be reasonable under the circumstances.

In this case the $200 Million figure was calculated by multiplying the royalty rate (estimated by i4i damage expert to be $98) by the number of Word products that were infringing (2.1 million). The royalty calculation was affected by the 15 factors set out in Georgia-Pacific Corp. v. U.S. Plywood Corp. The relevant factors to this case are:
(1)    the commercial relationship between the licensor and licensee, such as whether they are competitors;
(2)    the effect of selling the patented specialty in promoting sales of other products of the licensee;
(3)    the utility and advantages of the patent property over old modes or devices;
(4)    the extent to which the infringer has used the invention and the value of that use;

According to i4i’s damage expert the above factors increased the royalty amount because the two companies were in direct competition indicating that any license to Microsoft would limit i4i’s market. Furthermore, the patented XML editor played an important part in encouraging users to purchase new Word software. In addition Microsoft did not have any commercially acceptable, non-infringing alternatives to using i4i’s patent. Finally the patented software was a critical addition to Word.

The Federal court agreed with Microsoft that damages could have been calculated differently. However, it found the amount of damages were reasonable and did not modify the amount.

The $40 Million Enhanced Damages:
Under the US code, in an event of willful infringement, the court may increase the damages up to three times the amount found or assessed by the jury. US law establishes that 3 conditions should be satisfied before willful infringement is established: (1) whether the defendant was aware of the infringed patent; (2) whether there was an objectively high likelihood that the defendant’s actions infringed a valid patent; and (3) whether this objectively high risk was either known or so obvious that it should have been known to the defendant. In deciding whether enhanced damages are appropriate the court considers whether the defendant acted in bad faith and infringed the patent intentionally.

In this case, the court of appeal was satisfied that enough evidence was presented to support that Microsoft willfully infringed i4i’s patent. Furthermore, the court also agreed that the Microsoft acted in bad faith since the evidence demonstrated that Microsoft knew about i4i’s patent before the production of the infringing software. Also, the court upheld the lower court’s finding that failure to obtain an opinion of counsel was a factor that supported enhancing the damages award. The court of appeal did not change the award of $40 million.

The appeal is not the last resort for Microsoft. The court documents are now being sent to the other appeal court judges who will decide if Microsoft has grounds for a wider review of the case. This decision is due within the next six weeks. If refused, then Microsoft can appeal to the Supreme Court.

This decision affirms that patent law protects property and rights of the inventor and big corporations such as Microsoft are not to neglect the exclusive rights of the inventor to use and manufacture their invention and should think twice before targeting patent protected applications. Furthermore, this case seems to suggest that to avoid finding of willful infringement and to reduce the amount of enhanced damages, obtaining an opinion of counsel may help. In addition, the opinion may be helpful in choosing the litigation strategy. For instance if the opinion suggests that finding of infringement is likely, then the defendant can either attack the validity of patent, try to make further design changes to avoid infringement, or may try to settle the dispute with the patent owner.

One Comment
  1. Nassim, this is an interesting discussion of the case and damage awards in the US. For my comment, I would like to focus on the differences in the US and Canada on damage awards in a patent infringement suit.

    In both Canada and the US, damages can be increased as a result of the defendant’s misconduct. As mentioned by Ms. Nasser, the law in the US allows the court to increase the damages in the event of wilful infringement. Conversely, in Canada, the concepts of wilful infringement or triple damage do not exist; rather, the court can increase damages in the case of truly egregious conduct by the infringer. These exemplary damages are only awarded where the defendant’s behaviour “substantially departs from ordinary standards of decent behaviour” (as discussed in class). Furthermore, the onus is on the plaintiff to plead and prove the relevant facts that would justify such an increased monetary punishment (as discussed in the case of Merck v. Apotex).

    In the US, the plaintiff can try to get an interlocutory injunction, but will have the burden of showing that: (1) they have suffered an irreparable injury; (2) the remedies available at law are inadequate to compensate for that injury; (3) a remedy in equity is warranted; and (4) the public interest would not be “disserved”. In Canada, such an injunction is a rare exception. While the court may issue an injunction, it is not likely to be granted, particularly in the case of a new patent or a case where the validity of a patent is being challenged. In the i4i case, it is interesting to note that the district court used its discretion to order a permanent injunction which, when it goes into effect, will prohibit Microsoft from “selling, offering to sell, importing or using copies of Word with the infringing custom XML editor” (see page 2 of i4i v. Microsoft case). The scope of the injunction is a narrow one as it will not impact users who bought or licensed Word before the injunction becomes effective – those users will still be able to use the infringing custom XML editor and will be able to receive technical support from Microsoft. Microsoft challenged this injunction at the Court of Appeal for the Federal Circuit; however, the injunction and its terms were upheld. The Court of Appeal did change the effective date of the injunction from 60 days to five months from the date of the August 11, 2009 order.

    Furthermore, it is argued that Canada has a more flexible statutory regime for damages than the US. In Canada, the plaintiff can request compensatory damages or the equitable remedy of an accounting of the infringer’s profits; however, a plaintiff cannot have both an account of profit and an award of damages (see Dimplex v. CFM). In the US, the infringer’s profits may be considered as evidence in helping to determine a reasonable royalty, but, as is clear from Ms. Nasser’s analysis, a calculation of profit alone cannot form the basis of the damage award. If this case had been brought in Canada, i4i may have selected the accounting of profits option because Microsoft’s infringing actions resulted in significant profits, thus allowing i4i to obtain a large damages award.

    Lastly, it is interesting to note that patent infringement suits are decided by juries in the US; for example, at the district court, the i4i damage award was determined by a jury. In Canada, where a case is principally about patent law, section 54(2) of the Canadian Patent Act in combination with section 20 of the Federal Courts Act, grants the federal court exclusive original jurisdiction over the case.

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