United States: Proof of Damages Must Be Carefully Tied to the Claimed Invention's Footprint in the Marketplace

This article appeared in Last Month At The Federal Circuit, March 2010

Judges: Newman (concurring-in-part, dissenting-in-part), Lourie, Rader (author)
[Appealed from S.D.N.Y., Senior Judge Sweet]

In ResQNet.com, Inc. v. Lansa, Inc., Nos. 08-1365, -1366, 09-1030 (Fed. Cir. Feb. 5, 2010), the Federal Circuit affirmed the district court's rulings on the issues of validity and infringement, reversed the imposition of sanctions against ResQNet.com, Inc. ("ResQNet") and its counsel, vacated the damages award, and remanded for a new trial on damages.

ResQNet owns U.S. Patent Nos. 5,831,608 ("the '608 patent"); 6,295,075 ("the '075 patent"); 5,812,127 ("the '127 patent"); 5,792,659 ("the '659 patent"); and 5,530,961 ("the '961 patent"). The subject matter of these patents relates generally to screen recognition and terminal emulation processes that download screen information from a remote mainframe computer onto a local personal computer. In 2001, ResQNet asserted all five patents against Lansa, Inc.'s ("Lansa") terminal emulation program called "NewLook." In 2002, claims related to the '127 and '659 patents were dismissed with prejudice by entry of a Consent Judgment. Subsequently, claims related to the '961 patent were also dismissed. The district court awarded damages of $506,305 for past infringement based on a hypothetical royalty of 12.5% and imposed Rule 11 sanctions against ResQNet and its counsel. Substantive issues involving the '608 and '075 patents were presented on appeal, and the '127 and '608 patents were relevant to the Rule 11 sanctions.

On appeal, the Federal Circuit first considered the district court's conclusion regarding noninfringement of the '608 patent. Applying the claim construction from an earlier appeal, the Federal Circuit found that the district court did not clearly err in that the '608 patent allows each user to assign its own values to a function key depending on the user's needs, whereas NewLook allows only for key customization for an entire group of users. Thus, the Court concluded that the NewLook technology does not infringe the asserted claim of the '608 patent.

Next, the Court considered whether the claimed subject matter of the '075 patent would have been obvious based on prior art excluded by the district court, and whether the claimed subject matter is anticipated by or obvious in view of Lansa's advertisement for sale of an early version of the accused products. The prior art consists of two user manuals for a software product. The district court determined that neither manual is a "printed publication" for purposes of § 102(b) and excluded the prior art from consideration. One of the manuals is marked with a notification of nonpublication and the second manual did not bear any marking, nor did Lansa present any evidence to indicate that the second manual was published. On appeal, Lansa argued that ResQNet's inclusion of both manuals in an IDS that ResQNet submitted to the PTO during a reexamination proceeding of a different patent constitutes an admission that the two manuals were printed publications. The Court disagreed, relying on Abbott Laboratories v. Baxter Pharmaceutical Products, Inc., 334 F.3d 1274, 1279 (Fed. Cir. 2003), which held that mere submission of an IDS to the PTO does not constitute the patent applicant's admission that any reference in the IDS is material prior art. The Court found that the district court did not err in excluding these manuals.

"The first Georgia-Pacific factor, . . . which the district court . . . adopted, must consider licenses that are commensurate with what the defendant has appropriated. If not, a prevailing plaintiff would be free to inflate the reasonable royalty analysis with conveniently selected licenses without an economic or other link to the technology in question." Slip op. at 18-19.

With respect to the advertisement, Lansa argued that if its accused products were deemed infringing, the advertisement for an earlier version of its accused products constituted an offer for sale of the patented system and thus anticipated the claimed invention. The Court, however, found that the earlier version of the accused products differed from the current accused products and the earlier version of the accused products did not meet all the limitations of the asserted claim. Accordingly, the Court affirmed the district court's finding of validity.

Turning to infringement of the '075 patent, Lansa challenged the Court's claim construction that
"require[s] an algorithm that recognizes the screen based on the information downloaded from the mainframe to the PC." Slip op. at 10 (citing ResQNet.com, Inc. v. Lansa, Inc., 346 F.3d 1374, 1376 (Fed. Cir. 2003)). Specifically, Lansa argued that the '075 patent requires that each screen is identified by a unique Screen ID. Thus, Lansa contended that it cannot infringe the '075 patent because ResQNet stipulated that the accused product does not use a Screen ID generator algorithm. The Court, however, pointed to testimony at trial that the algorithm employed by the accused products generates a unique Screen ID and to the accused products' user manual establishing that a program developer can select Screen IDs that uniquely identify a screen. Given this evidence, the Court found that the district court did not err in finding infringement.

With regard to damages, following the same line of reasoning as Lucent Technologies, Inc. v. Gateway, 580 F.3d 1301 (Fed. Cir. 2009), the Court found most of the licenses relied on by ResQNet to establish a 12.5% reasonable royalty rate "problematic for the same reasons that doomed the damage award in Lucent." Slip op. at 14. Specifically, ResQNet's damages expert determined the 12.5% royalty rate by looking at seven licenses, including five "re-bundling licenses"—licenses that allowed other software companies to bundle and resell ResQNet's products to customers. The Court noted that these five "re-bundling licenses" did not mention the patents-in-suit or show any link to the claimed technology. Thus, the Court found they had no relation to the claimed invention of the '075 patent. With respect to the other licenses that arose out of litigation over the patents-in-suit, one license consists of a lump-sum payment and the other license includes a running royalty that is substantially less than 12.5%.

The Court found the district court's reasonable royalty determination was largely influenced by Lansa's lack of expert testimony to counter ResQNet's calculation. The Court also found that it was ResQNet's burden to provide sufficient evidence to support an appropriate reasonable royalty, and that Lansa had no obligation to rebut until ResQNet had met its burden. Finding that the evidence presented by ResQNet was not legally sufficient to support a royalty rate of 12.5%, the Court held that the district court erred in its reasonable royalty determination, vacated the damages award, and remanded to the district court for recalculation of damages.

Finally, the Court reviewed for abuse of discretion the district court's imposition of sanctions against ResQNet and its counsel on the ground that they should have withdrawn both the '608 and '127 patents at an early stage of the suit. In a letter written before any discovery had taken place, ResQNet's counsel indicated ResQNet's preparedness to drop the '127 and '608 patents if discovery did not show infringement. After discovery had been conducted, Lansa filed motions for SJ of noninfringement of the '608 patent and for Rule 11 sanctions. The district court denied the SJ motion but granted the motion for sanctions, concluding that ResQNet had no good-faith basis on which to allege infringement of the '127 and '608 patents at the time it filed its amended complaint in December 2001. On appeal, the Federal Circuit found Lansa's motion untimely as to the '127 patent, which had been withdrawn two years before the motion for sanctions was filed. The Court found no act of bad faith in ResQNet's not withdrawing the '608 patent, especially where the district court declined to grant SJ of noninfringement and the '608 patent proceeded to full trial. Thus, the Court found the district court's sanctions award was an abuse of discretion and reversed the award of sanctions.

In a separate opinion, Judge Newman concurred with the majority's opinion with the exception of the holding on damages. Judge Newman argued that the majority erred in concluding that the five
"re-bundling licenses" had no bearing on the calculation of reasonable royalty in this case. Specifically, Judge Newman argued that these five licenses all related to the patented technology even if the patents-in-suit were not mentioned in the licenses. In addition, Judge Newman argued that the majority erred in focusing on the two licenses from previous litigations because "negotiations performed in the context of litigation are not reliable as a basis for determining a reasonably royalty." Newman Dissent at 9 (citation omitted). Further, Judge Newman argued that there was sufficient evidence presented to support the 12.5% royalty rate considering all seven licenses.

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