Litigation Misconduct and Enhanced Damages

Patent, Patent Cases 2006,

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.

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Monsanto’s Roundup Ready Patents Survive Appeal

Patent, Patent Cases 2006,

Monsanto v. Scruggs (Fed. Cir. 2006).

Back in 2000, Monsanto sued Scruggs for infringement of its patents covering Roundup Ready (R) soybeans and cotton. Scruggs, a Mississippi farmer, had allegedly replanted seeds that he had grown on his farm. Monsanto won the infringement case on summary judgment and an injunction issued.

First Sale Doctrine: On appeal, Scruggs argued that because he purchased the seeds in an unrestricted sale, he was entitled to use those seeds in an unencumbered fashion under the doctrine of patent exhaustion. Scruggs’ first sale argument failed for two reasons. First, although Scruggs never obtained a license to use the seeds, he was supposed to under Monsanto policy — therefore the sale was not “unrestricted.” Second, as the CAFC held in McFarling, rights to second generation seeds are lost by unencombered sale of first generation seeds.

The fact that a patented technology can replicate itself does not give a purchaser the right to use replicated copies of the technology. Applying the first sale doctrine to subsequent generations of self-replicating technology would eviscerate the rights of the patent holder.

Antitrust Counterclaims: As a countermeasure, Scruggs asserted that Monsanto was misusing its patents and violating antitrust laws through its licensing requirements that include “an exclusivity provision, a no replant policy, a no research policy, . . . the payment of a technology fee,” and use of Roundup brand herbicide (with certain limitations). The CAFC made quick-work of these arguments — many of which were previously decided in the 2004 MacFarling case. By rearguing the previously decided in MacFarling, Scruggs appears to be set-up for a petition for certiorari based on those general principles.

In dissent from the antitrust conclusion, Judge Dyk argued Monsanto’s Roundup requirement to be unlawful tying.  More particularly, the requirement to use Roundup branded herbicide should be considered unlawful tying even if not other manufactuer had regulatory approval because that license term would chill activity of competitors in seeking their own regulatory approval.

A potential herbicide competitor thus would be concerned that, even if it secured government approval of its product, use of the approved herbicide would still be barred under the contracts. The elimination of such potential competition is not permissible under the antitrust laws.

Interestingly, neither the majority nor the dissent questioned the “no research” requirement of the license that prohibited research and/or experimentation on the seeds.  In fact, all three judges explicity agreed that restriction is a legitimate “field of use” restriction.  (Perhaps legitimizing a contract-based anti-circumvention requirement à la DMCA.).

The CAFC appears to have also ignored the State of Mississippi’s amicus brief arguing, inter alia,

Permanent Injunction: The lower court had issued a permanent injunction based on the CAFC’s “traditional rule.”  Based on eBay, the CAFC vacated the permanent injunction and remaneded for a full reconsideration of that final issue.

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