z4 v. Microsoft (E.D. Tex. 2006).
The Eastern District of Texas has been busy leading the post-eBay anti-injunction craze. z4’s motion for injunctive relief against Microsoft was denied (see z4), but the small holding company was still awarded $115,000,000 in damages against the software giant.
Now, the court has added another $25,000,000 in enhanced willfulness damages and $2.3 million in costs and attorneys’ fees. z4 and its owner David Colvin successfully played the underdog:
[T]here is ample circumstantial evidence that to Microsoft[,] Colvin and his patent rights were insignificant because Microsoft never thought Colvin would be able to pursue his rights against it. The evidence presented at trial suggests that Microsoft considered z4 a small and irrelevant company that was not worthy of Microsoft’s time and attention, even if Microsoft was potentially infringing its patents.
In economics literature, this potential for “underenforcement” is a classic justification of punitive damages.
The court then went through a laundry list of examples of Microsoft’s litigation misconduct that formed the basis for the finding of an exceptional case as well as a partial basis for the enhanced willfulness damages. Some of these are listed below:
The Moncau email. It wasn’t until the Sunday one-day before trial that z4 was finally a able to depose Microsoft’s witness Moncau, and during that deposition Moncau revealed information about an important email that had been sent to two other Microsoft witnesses discussing critical information regarding operation of Microsoft’s product. That email had never been produced even though Moncau testified that he had provided all his documents to Microsoft’s counsel over one year before the deposition.
Nevertheless, the email had never been produced by Microsoft during discovery despite the fact that it was between three Microsoft employees referenced in the email, all of whom allegedly gave all of their relevant documents to Microsoft’s counsel for production. Making matters even worse, Defendants admit they were aware of the Moncau email several hours before Moncau’s deposition, but still withheld it from z4 until z4 found out about it during questioning during the deposition. This raises a serious question as to whether the email would have ever seen the light of day, had z4 not uncovered it during Moncau’s deposition the day before trial.
At trial, the Court indicated to the Jury that Microsoft had improperly withheld the communication.
The Hughes Database. Microsoft attempted to use a summary chart at trial based on an underlying database. In his deposition, however, Hughes, the chart’s creator, testified that the database did not exist. One week after the deposition, Microsoft did, in fact, produce the data stored in file on a CD labeled “Source Code,” but z4 never found the database and, even after z4 asked, Microsoft never corrected Hughes original testimony or informed z4 of the database.
It also turned out that the summary was an inaccurate representation of the database and that Microsoft had not accurately disclosed the method used to create the summary chart.
The Court determined that Microsoft had attempted to mislead z4, the Court, and the jury and excluded Hughes from testifying with regard to the database and his summary chart.
Voluminous Exhibit Tactic. Microsoft marked over 3,000 exhibits for trial, but only admitted 107 of these.
The Court concludes that Defendants attempted to bury the relevant 107 exhibits admitted at trial in its voluminous 3,449 marked exhibits in the hope that they could conceal their trial evidence in a massive pile of decoys. This type of trial tactic is not only unfair to z4, but creates unnecessary work on the Court staff and is confusing and potentially misleading to the jury.
Etc.
Finally, the Court is greatly disturbed by the repeated instances where Defendants actions go beyond what can be dismissed as a mere appearance of impropriety and collectively appear to represent a pattern which is of disappointment to the Court and a disservice to legitimate advocacy. The repeated examples, some of which are not even mentioned here, of what can be described as nothing less than misleading on the part of Defendants, justify a conclusion that Defendants committed litigation misconduct. This conduct, coupled with the fact that Microsoft was found to have willfully infringed the patents-in-suit results in this case being deemed exceptional. Accordingly, the Court awards z4 reasonable attorneys’ fees and expenses, excluding expenses related to expert witnesses.
Microsoft is expected to appeal this decision. z4 will likely cross-appeal the denial of injunction.
Notes:
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Patently-O on z4;
Cite as Dennis Crouch, “Litigation Misconduct and Enhanced Damages“, Patently-O, August 22, 2006, available at https://patentlyo.com/patent/2006/08/z4_v_microsoft_.html.
i want my monies back from AOL but they do not listen any one know what to do i have no mony but i do not like people being bullies do you pleas help.
As a patent holder….turned pro-se litigant (rest assured…not by choice) I can certainly agree the laws need to be adjusted to protect the patent holder more effectively. My case was filed in 1998….it just went to trial this past October here in Denver….yes….8 years later. After 8 attorneys and a half a million dollars….I took over the case myself after obviously running out of funds…
All is not lost, as I won the case…although the jury had no clue how to calculate proper damages based upon the defendants misquiding them……they found I was entitled to lost profits…somewhat a victory….yet awarded a mere $74,800.00, (although just one of the 6 defendants I sued had sales near 2-million themselves)…obviously the issue is going to the CAFC on appeal, along with the finding of non-wilfulness as well.
This should be an interesting case for the CAFC, as 5 of the 6 defendants failed to even appear at trial. The remaining defendant claimed at day one of trial that the others had no obligation to be there, as they merely resold what he supplied them…the judge noted that the others were in fact on the defendants will-call list, guaranteeing there appearance….yet he proceeded with the trial in any event without them.
My main issue on appeal are the inadequate amount of damages, and the wilfulness issue…it should be interesting to see how the non appearing defendants plan on disputing my damage calculations..and my argument on wilfulness, considering they failed to even appear to offer any evidence on either.
Another intersting fact is that prior to my patents issuance, one of the defendants actually filed a protest against the patents issuance, claiming prior inventorship, offer of sales allegations. It wasn’t hard for me to uncover facts proving the protest was fraudulent. The protest was reviewed by the examiner (along with my evidence and response) and flatly rejected by the PTO.
Dispite this rejection, the defendant had the same attorney who prepared the protest, prepare him an opinnion of counsel…and get this…using the same story and facts presented in the protest that was already rejected.
In addition, the honorable Judge Johnson on this case used a jury instruction on wilfulness that mentioned absolutely nothing about the opinion of counsel, or quality of the opinion, dispite my offering a proper instruction from the CAFC bar.
The opinion ? It was less then 2 pages long, no claims mentioned etc. In addition, it was only written for the one defendant, the one doing the indemnification to the others. There was not even a representative from the other 5 defendants available to question what it was that they were relying on to avoid wilfulness, as they failed to be present at trial.
The other 5 defendants were large corporations, Snap-On Tools, Matco Tools, Mac Tools, Cornwell tools and Tools USA. It seems that an indemnification in the mind of Steck Manufacturing of Dayton Ohio is actually considered a “get out of jail free card” similar to playing monopoly.
Apparently group infringement is the way to go, this way only one need appear, thus keeping the costs of litigation down. The indemnification was also used as a trump card excuse for the same litigants to not have to appear at any settlement conferences in this case as well.
Take note that 13 witnesses (5 defendants) were listed as will call witnesses, and that it was not until day one of trial that the court or I even knew they were not going to be present. One comment by the judge in justifying going forward with the trial dispite the failure to appear was quote; “considering the size of the corporate defendants, theres no quarantee they would be able to answer your questions or offer any usefull testimony anyways”.
One more victory for corporate America, the bigger you are, the less responsibility, and thus liability you have. If anyone is wondering if this tactic of not appearing would work for your average everyday individual, I can answer that question for you with an absolute NO!!! See Hidebrand V. Steck (Fed. Cir. 2002)..for (as Paul Harvey states)…the rest of the story.
This case originated in Ohio, defendants filed for declaratory judgement against my patent 9 days before my attorney here in Colorado filed my infringement action. Judge Johnson transfered my case to Ohio based on Defendants “imterpretation of the law”.
This case was there from 1998 until 2002. I took the position that jurisdiction in Ohio was not proper, and after spending $250,000.00 arguing this point I refused to participate….it resulted in judgement by default being entered…DO TO MY FAILURE TO APPEAR….go figure.
The CAFC agreed with my position that juristiction was inapropriate, and remanded for further proceedings. Ohio dismissed its action and transfered my action back here to Colorado.
Defendants had actuall sued me for interference with buiseness relations in order to try to get juristiction over me in Ohio, they claimed that juristiction was proper do to my informing Mac and Matco of my patent filings, Steck claimed he was somehow harmed by my communication, (although they all continued to infringe right up untill trial 7 years later.
The CAFC ruled that my contact/actions were neither tortious in, nor outside of Ohio. Regardless, 4 days after Colorado issued a new complaint on Defendants upon remand from the CAFC….defendants counter sued me once again for the same tort claims already reviewed and rejected by the CAFC, and although a copy of the CAFC was provided to Judge Johnson here in Colorado, he would not dismiss the claims on summary judgement. (Defendants convieniently dismissed the counterclaims at day one of trial)
If your an everyday working guy like myself, you may be wondering how I even made it this far, because lets face it, litigation was not taylored to the individual, although I do believe the creation of the CAFC has tipped the scale in favor of the individual patent owner substancially.
The attorneys representing the defendants…Mr. Charles Shane, and Mr. David Greer of Dayton Ohio are nothing short of common thieves and liers. There type seems to feel that the tactic of “lie and deny” is acceptable and honorable, whether it ruins others lives or not, “the damn the torpedo’s and full speed ahead” was all they cared about.
It will be curious to see how the CAFC will address the games and tactics, and it will be interesting to see how these large corporations will react if the damages are adjusted properly, and there actions are found to be wilfull and the damages trebled….as the verdict I managed to get states joint liability.
It will be interesting to see if Steck Manufacturing’s indemnification is worth the paper it was written on, should the damages be corrected to a figure that may well exceed any assets he may have aquired in his life time. Alls one can do is keep faith that justice will prevail at the hands of the CAFC.
The price paid by a great deal of small inventor’s in this country, is there pride, and in some cases their entire life in an attempt to recieve proper justice. These companys use your mony to fight you with, and I can honestly admit its been a humbling experience that I wouldn’t wish on my worst enemy.
The judge entered an injunction this past December, 2 months after trial, ordering the defendants to stop selling ect, the order was respected about as much as a patent is, very little. Ive uncovered over 75 W/D warehouses since then that either still have my invention listed for sale on the web, or that still have it in catologs….the interesting part of this? None of these additional 75 warehouses were ever even listed in the customer list attained from Steck.
I actually live in a small mechanics shop, my landlord allowed me to convert a storage room into a bedroom, and I have been living here for 7 years now.
This case isn’t just an issue of money…its principle as well…and the obligation I have to my partners/investors belief in the product and myself.
If anyone has any sugjestions or advice…or have any questions I may be able to help you with…feel free to e-mail me at pro41willys at aol.com, or at the number listed..and good luck with any idea’s you may personally have. D.L.Hildebrand Denver Colorado (303)-995-9533
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The law encourages bottom line companies to take the property of the little guy because in the end, the bottom line company pretty much will pay out the same in either case (litigation or non-litigation) by with litigation there is a chance of paying much less or nothing at all.
The damages laws needs to be changed.
Posted by: Dan Ferdricks | Aug 23
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I agree totally!
There should be CRIMINAL penalties!
If someone robs your house and AT WORST he only has to return what he stole, what’s to deter that person from committing the crime?
Even if the penalty is some multiple of the stolen property, again having to pay is contigent upon being caught and successfully prosecuted – which simply may not come to pass. Thus once again why not try it?
Clearly there should be criminal penalties under suitable circumstances. And heavier criminal consequences for repeat offenders; including a comparable 3-strikes you’re out statute (and in MSFT’s case that would have resulted in the company’s shutdown years ago).
Well, a denial could also mean a court-ordered obligatory license. See Finisar Corp., v. The DirecTV Group, Inc., et al., in the Eastern Dist. of Texas. link to biz.yahoo.com
“If z4 refuses to licence the infringers because it then wants to practice the patent itself with damages money, under US law, would that make subsequent use by the infringers wilful?”
The two concepts that you are questioning here are independent, at least in this context. Willful infringement is about knowledge, scienter, wrong-doing. It means that you were aware of the patent and you infringed it anyway. Therefore, any future infringement by Microsoft would be considered willful, since they would have a hard time claiming they were unaware of the patent (although they could redesign their software and claim they had a reasonable belief that the new software did not infringe).
This is wholly separated from the issue of whether z4 practices the patent.
“Or does denial of injunction equate to a licence of sorts?”
Yes and no. I want to make it clear at this very moment, and I want everyone to understand that denial of an injunction does NOT mean the defendant has carte blanche to continue infringing. All the denial means is that the court will not exercise its inherent equitable powers to monitor the defendant, and the plaintiff will not be able to use the police power of the court.
Along those same lines, grant of an injunction, especially in these circumstances, will NOT cause thousands (millions?) of customer’s computers to go dark (or television screens if we are talking about EchoStar…). A company like Microsoft will NEVER allow itself to be put out of business. They would negotiate with z4 to obtain a license to practice the invention in the future, and would continue along their way.
What denial of an injunction does mean, in this case, is that z4 has significantly less bargaining power in setting the royalty rate for the forward-going license (although it appears in this case that Microsoft will not license, and will attempt, instead, to design around the patent in their upcoming Vista release). Why less bargaining power? Because, to enforce future infringement, z4 will have to go back to court and file a whole new lawsuit (yes, many issues would be summaried out thanks to res judicata). If they had an injunction, enforcement is as simple as filing a motion with the district judge under the existing lawsuit….
Bottom line, z4 wants money. Microsoft wants money and wants to continue making its software, but it needs a license to do so. The price Microsoft is willing to pay would go up in the face of an injunction, but either way the parties will have to negotiate… My point is, either way there will be a license (hence my response, yes and no).
As to the present damage award applied to future use, it would likely constitute relevant evidence of damages, but would in no way be binding against a subsequent defendant. Everyone is entitled to his or her day in court.
Suppose the defendants loose their appeals but z4 doesn’t get the injunction it wants either. If z4 refuses to licence the infringers because it then wants to practice the patent itself with damages money, under US law, would that make subsequent use by the infringers wilful? Or does denial of injunction equate to a licence of sorts? Would z4’s present damages award be good for future use by the infringers too?
As a housewares patent holder getting ready to manufacture my product and getting to read about the proper legal ramifications put down by this Court in this case just warms the cockles of my heart-now if only all Federal courts play the evidence this way across the board, I will feel saver introducing my consumer product into the marketplace. Unfortunately, I am certain I will be infringed upon by a huge housewares manufacturer once my product sees the light of day- because of the typical Microsoft mentality on infringement practiced by law departments in big corps….You are a fly but you have a great product that carries a patent, however, I am big- I will squash you. Can anyone out there answer the question of whether a ‘practicing patent holder’ carries more weight in a patent infringement case relating to injunctive and relief damages if infringement is deemed by the Court?
“But what does ‘practicing the patent’ actually mean?”
Actually, I don’t think the question is one of “practicing the patent.” Or, if it is, the inquiry is one of results rather than attempts.
Also, this case presents a problem that will be recurring into the future. Let’s suppose Z4 was practicing the patent by using this technology to manage licenses for a video game, word processor, database (take your pick). None of these products would compete directly with Windows, but because MS uses the same method for licensing XP, they still infringe Z4’s patents.
Under these circumstances, an injunction would still shut down Windows (although I will dispute that another time…), but leave no competitor able to service the customers. Now what is more important, the fact that the patentee practices his invention, or the harm to society?
If monetary damages cannot deter misbehaviour, injunctions impacting revenues and directing end users are the only way open to the little inventor. So he would be wise to use damages money to practice the patent to obtain injunctions – particularly if an infringer exploited a technology poorly, adding insult to injury plus damaging the market.
But what does ‘practicing the patent’ actually mean? With software, does this start when product developers are hired or is it when a beta is passed to a potential customer? Is simply licensing the IP to an infringer’s competitor sufficient practice to obtain an injunction? Or does one have to ship product before the issue becomes a question of injunctionable defence of market share?
can we have an upgrade to collapse comments so that I do not have to print them 🙂
[Comment Deleted]
Dear Anonymous,
Your advice is not consistent with your stated principle. If we should abide by all laws passed by Congress, all court rules made by appropriate process, all ratified constitutions, and so on, regardless of whether we think them just or unjust, then clearly you should respect Mircosoft copyrights. After all, nothing in copyright law would abrogate copyrights merely because the right holder had lied to a court in a patent infringement litigation. Perhaps you would like to propose some draft legislation to insert such a provision?
Sincerely,
Anonymoose (formerly anoymous)
Hey, if you think patents are bad for society and bad for the economy, then petition your representative for a constitutional amendment. If Microsoft wants to live in this country, it should be expected to abide by the laws just like you and I do. Z4 did not break any laws. They created a valuable technology which Microsoft stole. Rather than negotiating for a licensing deal in good faith, they chose to step on Z4’s rights. Then, to add insult to injury, they lied to the court (which the court graciously refers to as “misled”) and committed other acts of misconduct. I agree with the first poster. If Microsoft doesn’t respect others’ IP rights, we should not respect thiers.
Microsoft had a gun to its head. The criminal was someone who happened to come up with an idea before Microsoft did (or before Mircosoft could prove it did), and was also able to obtain a patent. The criminal had no moral claim on millions of dollars earned by Microsoft in legitimate productive activity. The criminal was attempting to use the apparatus of the state, including the courts, to steal from Microsoft. Let us not forget that if Microsoft chooses not to comply with a damages award, its assets can be literally siezed at gunpoint by the police. This is very real and not mere hyperbole.
Patents cannot be morally justified as they are merely a means to monopolize and/or cartelize various industries. Even an inventor who invents something valuable through great expenditure of effort has no moral claim on someone who independently invents the same from using the invention. This is probably what happened in the Mircosoft case.
For these reasons, I think Microsoft was entirely justified in its misleading tactics, just as one who is the victim of an attempted street mugging is justified in attempting to mislead his attacker.
Yes, Microsoft itself uses the patent system and the courts. But it is impossible to do business in many industries today without having a patent portfolio that be used as a source of defensive counterclaims in case one should be sued for patent infringement. By all means, respect the courts when they are upholding justice. But if they are attempting to enforce unjust laws, one need not cooperate.
The bean counters at Microsoft may be looking at the $142,300,000 they have to pay out due to the litigation and congradulating themselves. Had Microsoft legitimately licensed the technology from Z4, they may have had to pay Z4 much more royalty than the $142M over the life of Z4s patents. Even though Z4 may have got some money, what about all the individual patent holders who are not able to pursue their rights against big money?
Big money’s choice is to take the little guys property without payment and risk litigation and paying out a reasonable royalty (or not having to pay out a reasonable royalty) or paying a reasonable royalty initially to obtain the property.
The law encourages bottom line companies to take the property of the little guy because in the end, the bottom line company pretty much will pay out the same in either case (litigation or non-litigation) by with litigation there is a chance of paying much less or nothing at all.
The damages laws needs to be changed.
Each instance of infringement is a separate cause of action, hence no double jeopardy.
The denial of an injunction is also of interest here in the light of the size of the damages award – assuming it survives the appeal(s). If the inventor used all that money to practice the patent himself, could he then seek another injunction or would that be putting the defendants in double jeopardy?
It is amazing that Microsoft publicly touts a respect for other’s IP rights as part of its campaign to enforce its own IP rights.
I would think that reports of rampant misconduct such as this would weigh on an individual’s reasoning in deciding whether or not to respect copyright laws as related to Microsoft products.
I think those responsible for directing this litigation strategy might be in need of some grey matter replenishment.
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