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Archived updates for Wednesday, June 28, 2006

Infringing Component Not Enough to Enjoin Sales of Microsoft XP in E.D. Tex.

The first, post-eBay patent injunction decision in z4 Technologies, Inc. v. Microsoft Corp., __ F.Supp.2d __ (E.D.Texas 2006)(Davis, J.)(citing eBay, Inc. v MercExchange, LLC, 126 S.Ct. 1837, 1839 (2006)) is perhaps most-notable for its discussion of 1) the lack of irreparable harm suffered by z4 and 2) the adequecy of remedies at law to compesate z4 for use of its product activation technology by Microsoft's Windows XP and Office software:

Lack of Irreparable Harm Suffered by z4

z4 argues that it will suffer irreparable harm if Microsoft is not enjoined from infringing the patents-in-suit. z4 contends that it made tremendous efforts to commercialize its invention prior to the suit and that its failure to succeed was partly due to Microsoft’s infringement. z4 implies that it was, and will continue to be, irreparably harmed by Microsoft’s infringement because there is no way to calculate the economic success z4 might have enjoyed but for Microsoft’s infringement.

There is no logical reason that a potential consumer or licensee of z4's technology would have been dissuaded from purchasing or licensing z4's product activation technology for use in its own software due to Microsoft’s infringement. Similarly, Microsoft’s continued infringement does not inhibit z4's ability to market, sell, or license its patented technology to other entities in the market. Microsoft does not
produce product activation software that it then individually sells, distributes, or licenses to other software manufacturers or consumers. If it did, then z4 might suffer irreparable harm in that Microsoft would be excluding z4 from selling or licensing its technology to those software manufacturers or consumers. However, Microsoft only uses the infringing technology as a small component of its own software, and it is not
likely that any consumer of Microsoft’s Windows or Office software purchases
these products for their product activation functionality.

In the absence of a permanent injunction against Microsoft, z4 will not suffer lost profits, the loss of brand name recognition or the loss of market share because of
Microsoft’s continued sale of the infringing products. These are the type of injuries that are often incalculable and irreparable. The only entity z4 is possibly prevented from marketing, selling or licensing its technology to absent an injunction is Microsoft. As discussed in the next section, z4 can be compensated for any harm
it suffers in the way of future infringement at the hands of Microsoft by calculating a reasonable royalty for Microsoft’s continued use of the product activation technology. Accordingly, z4 has not demonstrated that it will suffer irreparable harm absent a permanent injunction.

Adequacy of Remedies Available at Law

The violation of a patent owner’s right to exclude can present a situation where monetary damages cannot adequately compensate the patent holder for that injury. For example, when an infringer saturates the market for a patented invention with an infringing product or damages the patent holder’s good will or brand name recognition by selling infringing products that infringer violates the patent holder’s exclusionary right in a manner that cannot be compensated through monetary damages. This is because it is impossible to determine the portions of the market the
patent owner would have secured but for the infringer or how much damage was done to the patent owner’s brand recognition or good will due to the infringement. However, this is not the scenario in the present case.

Microsoft’s use of z4's intellectual property does not exclude z4 from selling or licensing its product to any sector of the market or threaten z4's brand name recognition or good will in any way. z4 is only excluded from selling or licensing its technology to Microsoft. Accordingly, z4 is not excluded from the use of its intellectual property in a way that cannot be calculated with reasonable certainty in the form of monetary damages, just as the past damages for infringement were calculated at trial.

In his concurrence, Justice Kennedy instructed courts to be cognizant of the nature of the patent being enforced and the economic function of the patent holder when applying the equitable factors. Id. at 1842 (Kennedy, J., concurring). Justice Kennedy specifically mentioned the situation where a “patented invention is but a small component of the product the companies seek to produce” and states that in such a situation, “legal damages may well be sufficient to compensate for the infringement and an injunction may not serve the public interest.” Id. (Kennedy, J., concurring).

Here, product activation is a very small component of the Microsoft Windows and Office software products that the jury found to infringe z4's patents. The infringing product activation component of the software is in no way related to the core functionality for which the software is purchased by consumers. Accordingly, Justice Kennedy’s comments support the conclusion that monetary damages would be sufficient to compensate z4 for any future infringement by Microsoft.

Download the z4 decision from Dennis Crouch's Patently-O Blog.
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Blogger Lawrence B. Ebert said...

The issue of which case is the "first" post-eBay injunction case might require further analysis. ND Ga, post-eBay, found "irreparable harm," but required further briefing on adequacy of money damages. Further, there is an interesting district court case within CA3 (indirectly) showing some flaws in the Supreme Court's citation for the four factor analysis within eBay. See

Separately, I doubt the reasoning of the Texas court will stand up to scrutiny at the CAFC. [The result is a different matter.] The more near term issue is what the district court in the eBay case will do on remand, given that the Supreme Court undercut its reasoning. Recall that the Thomas' opinion cited the 1908 Continental Paper case AGAINST the district court's reasoning.

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