Arrogance or Recklessness? Microsoft Faces a Hefty Judgment and a Permanent Injunction for Willful Infringement

By Edward Dailey.

August 2009 IP Update

While developing WORD 2003, Microsoft engineers reviewed software developed by i4i Inc., a Toronto-based company with a seemingly novel idea protected by U.S. Patent 5,787,449 (the “449 patent”). i4i’s patent claims a method for separating the text or content of a digital document from the formatting code which structures the document.

Historically, in both written and mechanically printed documents, the convention was to embed content and format in the document. This has continued in the digital age. WORD and other proprietary word processing and publishing programs use a “markup language,” now typically a form of XML (Extensible Markup Language) that embeds formatting instructions or codes along with the text content.

In 1994, i4i’s inventors recognized that embedded code and content is inherently inflexible because content and formatting must be modified together. More important, embedded content and format cannot be separated into content and format and ported and applied to a different format or version or form of markup language.

i4i’s invention in the ‘449 patent is a broadly stated method to read and store content and formatting code separately. This permits either to be modified and created as new content, format, or both. Highly customizable documents can be produced, and content from one format can be readily ported to another format or markup language. See, in particular, claim 20 of the ‘449 patent.

In 2007, i4i sued Microsoft for infringement, alleging that Microsoft had incorporated i4i’s invention into WORD through a feature known as Custom XML. Earlier this month, a federal trial judge confirmed a jury’s literal infringement verdict against Microsoft, declared that Microsoft infringed also under the doctrine of equivalents, upheld damages and interest of more than $290 million, and issued a permanent injunction against sale of WORD in its present configuration, effective mid-October.i4i Limited Partnership and Infrastructures for Information, Inc. v Microsoft Corporation (E.D. Tex.). This award includes $40 million in enhanced damages added by the trial judge.

Microsoft’s appeal of the injunction will be heard by the Federal Circuit on September 23d. Of course, Microsoft is also appealing the underlying basis for infringement, and it claims also that the ‘449 patent is invalid.

What led to this megabucks award and permanent injunction? A careful reading of the trial court’s post-trial Memorandum and Order is revealing. Suggesting both arrogance and recklessness, the court notes that Microsoft was aware of the ‘449 patent since at least 2001, well before the introduction of WORD 2003. It did nothing to review the patent for infringement, yet a reasonable person would have appreciated “a high likelihood” that implementing Custom XML would infringe a valid patent. See pp. 18, 39-41, 49.

The court was struck particularly by internal Microsoft documents in which engineers on the WORD development team betrayed intimate familiarity with i4i’s patent and software but then dismissed both with the assertion that WORD 2003 “will make [i4i’s product] obsolete.” …. “My main concern with i4i is that if we do our work properly, there won’t be a need for their product.”

All of this was sufficient to sustain a finding of willful infringement or a “reckless” and unreasonable failure to form a good faith belief in non-infringement. The trial court went on to suggest that Microsoft’s failure to consider and evaluate the ‘449 patent was driven by its “bold,” anticompetitive strategy to drive competitor products into obsolescence. See Memorandum and Order at 40.

In light of its findings, the trial court considered i4i’s motion for enhanced damages, noting that this is a discretionary but punitive remedy grounded in a defendant’s conduct. In pegging such damages at $40 million, the court cited not only Microsoft’s willfulness and its marketplace strategy, but the improper conduct at trial by Microsoft’s counsel.

The lawyer was cited for making prejudicial and legally improper arguments to the jury throughout the trial, from voir dire through closing. See Memorandum and Order at 42-43. Needless to say, this conduct seems to have reflected Microsoft’s own approach to i4i.

Where to now? Certainly, in light of the Supreme Court’s 2006 decision in eBay Inc. v MercExchange LLC, injunctions for patent infringement must be substantially grounded in irreparable harm to the patent holder, the inadequacy of money damages, the efficacy of an equitable remedy upon a balancing of hardships between the parties, and impact on the public interest.

Here, the trial court addressed each of the eBay factors but focused its ruling on a determination of irreparable harm and the inadequacy of money damages because of Microsoft’s success in largely foreclosing i4i from the marketplace.

In seeking to stay the injunction before the Federal Circuit, Microsoft will have to demonstrate a strong likelihood that it will succeed on the merits of its appeal for non-infringement or invalidity and that it, rather than i4i, faces irreparable harm from an injunction against new sales of WORD. Standard Havens Products Inc. v Gencor Industries Inc. 897 F.2d 511 (1990).

Microsoft faces a high threshold. And given that it has already suggested to the trial court that it can fashion a software workaround or patch to “hide” or perhaps even eliminate the Custom XML feature from WORD, it is unlikely that Microsoft can demonstrate irreparable harm. To stay the injunction, then, Microsoft will have to demonstrate a very high likelihood of success on the merits. The strength of that argument remains to be determined by the Federal Circuit in September.