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z4 Technologies Inc. v. Microsoft Corp.

In z4 Technologies Inc. v. Microsoft Corp., Microsoft learned that the rules for mud and appellate arguments aren't always the same-at least not in the Federal Circuit. Apparently, following the old adage that something should stick if enough is flung, Microsoft offered up a bevy of alleged errors, arguments and attacks on appeal in an effort to defeat z4's $115 million patent infringement verdict.  The Federal Circuit acknowledged that many of Microsoft's arguments were technically correct.  Nonetheless, it affirmed the jury's verdict because it found that all the issues raised by Microsoft were either harmless or not substantial enough to overturn the verdict-holding fast instead, it appears, to that one about the wheat and the chaff. 

At issue was z4's patent for technology that prevents software piracy and illicit copying and unauthorized use of computer software.  Specifically, z4's invention created a multi-step user authorization scheme requiring users to re-register their software after an initial grace period.  Users had the option of re-registering manually or "automatically" using an electronic mode.  Both systems enabled the comparison of key information from the initial and secondary registrations in order to verify the registrant as an authorized user.

z4 sued Microsoft, alleging that the "Product Activation" feature in Microsoft's "Office" and "Windows" application software infringed its patent.  (Similar claims against Autodesk were settled before trial).  Microsoft denied infringement and sought to invalidate the relevant patents on grounds of obviousness and anticipation.  After a lengthy trial, the jury returned a verdict of willful infringement and awarded damages in the amount of $115 million, which the trial court enhanced by $25 million, along with an award of attorneys' fees.  After bringing, and losing, various post-trial motions, Microsoft appealed on a multiplicity of issues.

The Federal Circuit systematically dismantled each issue Microsoft raised.  Microsoft challenged the district court's construction of the term "user" to mean a person or a computer.  Agreeing with Microsoft that under the terms of the patent a "user" couldn't be a computer, the court went on to reject as "artificial and inconsequential" the non-infringement argument Microsoft had attached to the construction of the term.  The patent specifications described a methodology based on computer specific information and other claim language referenced using computer specific information as a basis for the authorization code.  Ample evidence, the Federal Circuit found, for a jury to conclude that Microsoft had infringed the patent.

Next, Microsoft challenged whether there was sufficient evidence for the jury to conclude that its software did not have the requisite "authorization code" because there was not a unique code for each copy of the software; i.e., one authorization code could be used with a number of revisions/versions of the software.  The court side-stepped the question of whether the claim required the particular one-for-one relationship by characterizing Microsoft's argument as at best identifying non-infringing modalities, stating:  "We are unpersuaded by Microsoft's assertion that it does not infringe because a single copy of the accused software can be installed on an unlimited number of machines using a single product key."

Microsoft's invalidity defenses faired no better.  Microsoft founded its anticipation argument on one of its own products -a Licensing Verification Program ("LVP") embedded within a 1998 software product called Brazilian Publisher ("BP 98").  Microsoft alleged that the district court erred when it required that BP 98 "stop piracy" in order to qualify as invalidating art for purposes of anticipation.  It claimed that BP 98's intended purpose of "reducing piracy" should have been sufficient.  The Federal Circuit agreed--but then went on to find "substantial evidence" from which the jury could find that BP 98 failed even that purpose because the product never actually worked.  (Interestingly, the key evidence regarding the problems with BP 98 came from a document which Microsoft was found to have "improperly withheld" until the day before trial started).

The Federal Circuit also rejected any claim of error based on jury instructions, including an instruction regarding obviousness based on the pre-KSR "teaching, suggestions or method" (TSM) standard.  Microsoft claimed the holding of KSR required a new trial because of KSR's broader considerations regarding obviousness.  Not so, the Federal Circuit held.  Even under KSR (and the factors enumerated in Graham v. John Deere), a prima facie case of obviousness requires something more than the conclusory testimony of an expert-evidence, the court found, Microsoft had failed to produce or identify.

Perhaps most painfully, the Federal Circuit refused Microsoft's request for a reconsideration of foreign sales damages in light of the Supreme Court's decision in Microsoft v. AT&T.  Significant questions existed whether Microsoft had properly preserved a §271(f) question for appeal in the district court.  However, the Federal Circuit chose to address the issue on substantive grounds.  The record showed that the jury did not and could not have relied on §271(f)'s provision in determining damages.  Both the complaint and jury instruction were based on the provisions of  §271(a), which addresses infringing products made, used or sold in the United States and z4 never argued any §271(f) type infringement.  Though Microsoft claimed that the same "golden master" distribution system at issue in AT&T was in use here, it never offered evidence segregating foreign sales from domestic sales at trial and it never argued against the appropriateness of including foreign sales damages under §271(a).  Without such evidence, there was no properly argued or preserved foreign sales issue.

Admittedly, one would expect a litigant faced with an adverse verdict in the amount of $115 million to marshal an aggressive, all encompassing appeal.  Nevertheless, it is clear that in its efforts to scour the record for every conceivable error, Microsoft based its arguments more on formalities and linguistic technicalities than on the substance of the technology at issue.  In its effort to be comprehensive, Microsoft appears to have ignored the fact that appellate courts - like juries - respond to themes and can and will focus upon the essentials of the patent over its less relevant technicalities.

Our take away?  Only an idiom would lose the forest for the trees.

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