Microsoft Loses Court Ruling in Uniloc Patent Case

Microsoft Corp., the world’s biggest software maker, infringed a patent on technology used to deter piracy, an appeals court ruled in a decision that may change how damages are calculated in future cases.

The ruling by the U.S. Court of Appeals for the Federal Circuit in Washington today upholds the validity of a patent owned by Uniloc USA Inc. and Uniloc Singapore Private Ltd., while ordering a new trial to reassess the damages Microsoft should pay.

“It’s a strong validation of the value of the patent,” Brad Davis, chief executive officer of Irvine, California-based Uniloc USA, said in a telephone interview. “The damages issue is what it is, and we’ll live with it. We have a sense of how much we contributed to Microsoft’s bottom line.”

The ruling throws out a common tool used to calculate infringement awards, and will likely reduce the amount Redmond, Washington-based Microsoft will have to pay closely held Uniloc. The Federal Circuit called for a new trial on damages, saying a 2009 lower-court verdict of $388 million was “fundamentally tainted by the use of a legally inadequate methodology.”

“This is an important and helpful opinion with respect to the law of damages, and it may signal the end of unreasonable and outsized damages awards based on faulty methodology,” David Howard, deputy general counsel for Microsoft, said in an e- mailed statement. “We look forward to the new trial.”

U.S. District Judge William Smith in Providence, Rhode Island, had thrown out the 2009 verdict Uniloc won. The company was appealing Smith’s decision, while Microsoft was seeking a court ruling that would limit the ability of patent owners to seek big damage awards from large technology companies.

$19 Billion Chart

Uniloc’s lawsuit, filed in October 2003, targeted Microsoft’s Windows XP operating system and some Office programs. Microsoft argued that it used a different method for registering software and that the patent was invalid.

The Federal Circuit’s decision to uphold the validity of the patent may boost Uniloc’s efforts to collect royalties from additional companies including Symantec Corp. and Adobe Systems Inc. Uniloc Singapore owns the patent and Uniloc USA is the exclusive licensee, Davis said

Lawyers for Uniloc showed jurors during the 2009 trial a pie chart with $19 billion in revenue from the Windows XP operating system and some versions of Word. Uniloc was seeking 2.9 percent of that total, or about $564 million. The jury awarded $388 million.

The award was the third-largest jury verdict in 2009 and the second-biggest patent verdict, behind a $1.67 billion award that Johnson & Johnson won against Abbott Laboratories.

‘Rule of Thumb’

Smith ruled that, even if the Federal Circuit decided the jury verdict on infringement was appropriate, Microsoft would be entitled to a new trial on the damages because Uniloc shouldn’t have been able to use the $19 billion figure in front of jurors.

The Federal Circuit said courts shouldn’t allow damages to be based on a common calculation that has as a starting point the “rule of thumb” that 25 percent of a product’s value goes to the patent owner.

That method “fails to tie a reasonable royalty base to the facts of the case at issue,” the Federal Circuit ruled. “Beginning from a fundamentally flawed premise and adjusting it based on legitimate considerations specific to the facts of the case nevertheless results in a fundamentally flawed conclusion.”

The appeals court also agreed with Microsoft that Uniloc shouldn’t have been able to show the chart.

Skew the Verdict

“The disclosure that a company has made $19 billion dollars in revenue from an infringing product cannot help but skew the damages horizon for the jury, regardless of the contribution of the patented component to this revenue,” Circuit Judge Richard Linn wrote for the court.

A Uniloc lawyer, Paul Hayes of Mintz Levin in Boston, said Microsoft would have lost $5 billion in sales were it not for the piracy-deterrent invented by Uniloc’s founder. That estimate, combined with the additional two years of infringement since the jury verdict, may result in another big award against Microsoft, he said.

“I don’t think the decision by the Federal Circuit necessarily means there will be any difference in the amount, it’s just the methodology,” Hayes said in a telephone interview. “There are many ways you can figure this out.”

Additional Lawsuits

Uniloc has filed suit over the same patent against software companies in federal court in Tyler, Texas. Davis said the company has settled with about 40 companies and has claims pending against 100 more.

The decision today builds on a 2009 ruling won by Microsoft in another case that limited the amount technology companies have to pay when they lose patent trials over features of their products. In that case, the Federal Circuit ruled that damage awards have to be linked to the extent the feature is used by consumers and whether it drives demand for the overall product.

The case is Uniloc USA v. Microsoft Corp., 10-1035, U.S. Court of Appeals for the Federal Circuit (Washington). The lower court case is Uniloc USA Inc. v. Microsoft Corp., 03cv440, U.S. District Court, District of Rhode Island (Providence).

To contact the reporter on this story: Susan Decker in Washington at sdecker1@bloomberg.net.

To contact the editor responsible for this story: Allan Holmes at aholmes25@bloomberg.net.

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