Z4 Technologies, Inc. v. Microsoft Corp., 6:06-CV-142.

Citation434 F.Supp.2d 437
Decision Date14 June 2006
Docket NumberNo. 6:06-CV-142.,6:06-CV-142.
Partiesz4 TECHNOLOGIES, INC., Plaintiff v. MICROSOFT CORPORATION, and Autodesk, Inc., Defendants.
CourtU.S. District Court — Eastern District of Texas

Elton Joe Kendall, Provost Umphrey, Dallas, TX, Thomas John Ward, Jr., Law Office of T. John Ward Jr., PC, Longview, TX, Ernie L. Brooks, Frank A. Angileri, John S. Leroy, John E. Nemazi, Robert C.J. Tuttle, Thomas A. Lewry, Brooks & Kushman PC, Southfield, MI, for Plaintiff.

Isabella Fu, Katherine Ford Horvath, Microsoft Corporation, Redmond, WA, John Marcus Bustamante, Fish & Richardson, Austin, TX, John A. Dragseth, Fish & Richardson, Minneapolis, MN, John E. Gartman, Matthew C. Bernstein, Seth M. Sproul, Fish & Richardson, San Diego, CA, Jennifer Parker Ainsworth, Wilson, Sheehy, Knowles, Robertson & Cornelius PC, Allen Franklin Gardner, Michael Edwin Jones, Cindy Marie Allen, Potter Minton PC, Tyler, TX, for Defendants.

MEMORANDUM OPINION AND ORDER

DAVIS, District Judge.

Before the Court is Plaintiff z4 Technologies, Inc.'s ("z4") Motion and Brief for Entry of Permanent Injunction (Docket No. 333). For the reasons discussed below, z4's motion is DENIED.

BACKGROUND

z4 brought suit against Microsoft Corporation ("Microsoft") and Autodesk ("Autodesk"), Inc. alleging infringement of U.S. Patent Nos. 6,044,471 ("the '471 patent") and 6,785,825 ("the '825 patent"). The patents disclose methods for limiting the unauthorized use of computer software, referred to as product activation. The case was tried to a jury on April 10 through April 19, 2006. At trial, z4 asserted one claim of the '471 patent and two claims of the '825 patent. The jury found that Microsoft and Autodesk infringed all three claims and that Microsoft's infringement was willful. The jury also found that neither Microsoft nor Autodesk proved by clear and convincing evidence that any of the listed claims of the patents in the lawsuit were invalid. The jury awarded $115 million in damages against Microsoft and $18 million against Autodesk.

Specifically, the jury found that Microsoft's Office and Windows software products infringed the asserted claims of the two patents-in-suit. z4 asks the Court to enjoin Microsoft from making, using, selling, offering for sale, and/or importing its current software products that use product activation, i.e. Windows XP products since 2001 and Office products since 2000. z4's motion proposes that the Court order Microsoft to deactivate the servers that control product activation for Microsoft's infringing products and to re-design its Windows and Office software products to eliminate the infringing technology. Microsoft will release the next generation of its Windows and Office software—Windows Vista (2007) and Office (2007)—in January of 2007, and both products plan to eliminate the infringing product activation technology.

APPLICABLE LAW

When considering whether to award permanent injunctive relief to a prevailing plaintiff in a patent infringement dispute, courts should apply the traditional four-factor test used by courts of equity. See eBay, Inc. v. MercExchange, LLC, ___ U.S. ___, ___, 126 S.Ct. 1837, 1839, 164 L.Ed.2d 641 (2006). The prevailing plaintiff must demonstrate: "(1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction." Id. The Court held "the decision whether to grant or deny injunctive relief rests within the equitable discretion of the district courts, and that such discretion must be exercised consistent with traditional principles of equity, in patent disputes no less than in other cases governed by such standards." Id. at 1841.

ANALYSIS

Irreparable Harm Suffered by z4

z4 contends that a finding of infringement and validity raises a rebuttable presumption of irreparable harm. z4 argues this presumption applies to the irreparable harm element of the test laid out by the Supreme Court in eBay for two reasons. First, z4 argues that the presumption arises because the Supreme Court cited Amoco Production Co. v. Village of Gambell, Alaska, 480 U.S. 531, 542, 107 S.Ct. 1396, 94 L.Ed.2d 542 (1987) in its eBay decision. z4 suggests that the Supreme Court's citing of Amoco Production is significant because in that case the Supreme Court indicated that the standard for a preliminary injunction is essentially the same as that for a permanent injunction. z4 then concludes that because the Federal Circuit has held that a strong showing of infringement and validity raises a presumption of irreparable harm in the context of a preliminary injunction, such a presumption must apply to permanent injunctions.

Next, z4 contends that the Supreme Court's comparison of patent injunctions to copyright injunctions in the eBay decision supports the application of a presumption of irreparable harm. z4 first concludes that the Federal Circuit derived its presumption of irreparable harm in preliminary injunction cases from the copyright law based on language from a footnote in Smith International Inc. v. Hughes Tool Co., that states, "this is the rule in copyright cases." See 718 F.2d 1573, 1581 n. 7 (Fed.Cir.1983). z4 then contends that this mention of copyright law by the Federal Circuit leads to the application of a rebuttable presumption with regard to permanent injunctions because the Supreme Court draws a parallel between the copyright act and the patent act in eBay.

z4's arguments for the application of a presumption of irreparable harm are creative, but z4 cannot cite to any Supreme Court or Federal Circuit case that requires the application of a rebuttable presumption of irreparable harm with regard to a permanent injunction. In Amoco Production, the Supreme Court stated that applying a presumption of irreparable harm in the context of an injunction "is contrary to traditional equitable principles." See Amoco Prod. Co., 480 U.S. at 545, 107 S.Ct. 1396. Furthermore, in eBay, the Supreme Court indicated that an injunction may only issue "in accordance with the principles of equity" under both the patent and the copyright acts but does not in any way imply that a rebuttable presumption of irreparable harm should apply to permanent injunctions under either act. See eBay, 126 S.Ct. at 1840. Rather, the Supreme Court stated, "[A] plaintiff seeking a permanent injunction must satisfy a four-factor test before a court may grant such relief. A plaintiff must demonstrate: (1) that it has suffered an irreparable injury ... ." Id. at 1839. This language does not imply a presumption, but places the burden of proving irreparable injury on the plaintiff. Moreover, in eBay, the Supreme Court warned against the application of categorical rules when applying the traditional principles of equity. See id. at 1840-41. z4's suggestion, that the right to exclude creates a presumption of irreparable harm, is not in line with the Supreme Court's holding, which mandates that courts balance the traditional principles of equity when considering the remedy of a permanent injunction in patent cases. Accordingly, the Court does not apply a presumption of irreparable harm.

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

z4 argues that monetary damages for future infringement are not an adequate remedy because they cannot compensate z4 for the loss of its right to exclude Microsoft from making, using, offering for sale, or selling its invention in the absence of an injunction. z4's argument implies that a violation of the right to...

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