Z4 Technologies, Inc. v. Microsoft Corp.

• Decision Date: 16 November 2007
• Docket Number: No. 2006-1638.,2006-1638.
• Citation: 507 F.3d 1340
• Parties: Z4 TECHNOLOGIES, INC., Plaintiff-Appellee, v. MICROSOFT CORPORATION, Defendant-Appellant, and Autodesk, Inc., Defendant.
• Court: U.S. Court of Appeals — Federal Circuit

507 F.3d 1340

Z4 TECHNOLOGIES, INC., Plaintiff-Appellee, v. MICROSOFT CORPORATION, Defendant-Appellant, and Autodesk, Inc., Defendant.

No. 2006-1638.

United States Court of Appeals, Federal Circuit.

November 16, 2007.

Frank A. Angileri, Brooks Kushman P.C., of Southfield, MI, argued for plaintiff-appellee. With him on the brief were Ernie L. Brooks, Thomas A. Lewry, and John S. Le Roy.

John E. Gartman, Fish & Richardson P.C., of San Diego, CA, argued for defendant-appellant. With him on the brief were Matthew C. Bernstein, Seth M. Sproul, and John M. Bustamante. Also on the brief were Robert E. Hillman and John A. Dragseth, of Boston, MA. Of counsel on the brief was Isabella Fu, Microsoft Corporation, of Redmond, WA.

Before LOURIE and LINN, Circuit Judges, and BUCKLO, District Judge.^*

LINN, Circuit Judge.

Microsoft Corporation ("Microsoft") appeals from a final judgment of the United States District Court for the Eastern District of Texas, z4 Techs., Inc. v. Microsoft Corp., No. 06-cv-142, 2006 WL 2401099 (E.D.Tex. Aug. 18, 2006). The district court denied Microsoft's renewed motion for judgment as a matter of law ("JMOL") following a jury trial in which the jury found that Microsoft had infringed z4 Technologies, Inc.'s ("z4's") U.S. Patents No. 6,044,471 ("the '471 patent") and No. 6,785,825 ("the '825 patent") and had failed to prove these patents invalid. z4 Techs., Inc. v. Microsoft Corp., No. 06-cv-142, 2006 WL 2401099 (E.D.Tex. Aug. 18, 2006) ("JMOL Opinion"). Because substantial evidence supports the jury's verdict, and because the district court did not abuse its discretion in denying Microsoft's motion for a new trial, we affirm.

I. BACKGROUND

z4 is the assignee of two patents related to the prevention of software piracy. The inventor of these patents, David Colvin ("Colvin"), founded and owns z4. The '825 patent claims priority to the '471 patent through continuation applications, and thus shares an effective filing date of June 4, 1998. Because these patents also share a common specification, we will refer generically to "the specification" in reference to both the '471 and '825 patents. These patents are directed specifically to the problem of "illicit copying and unauthorized use" of computer software. '825 patent col.1 ll.21-25. The patent specification explains that "[t]he advent of the Internet has contributed to the proliferation of pirated software, known as `warez', which is easily located and readily downloaded." Id. col.1 ll.33-35. Prior art solutions to this problem were either easily circumvented or imposed substantial burdens on the consumer. For example, requiring the entry of a serial number was "easily defeated by transferring the serial number . . . to one or more unauthorized users." Id. col.1 ll.45-51. Similarly, the use of "hardware keys," which must be physically present to enable the software, proved "relatively expensive for the developer and cumbersome for the authorized user." Id. col.1 ll.36-44.

z4's invention "controls the number of copies of authorized software by monitoring registration information," and by "[r]equiring authorized users to periodically update a password or authorization code provided by a password administrator." '471 patent col.3 ll.15-24. More particularly, the patents disclose a multi-step user authorization scheme whereby an initial password or authorization code grants the user a "grace period" for a fixed number of uses or period of time. Users must then submit registration information to a representative of the software developer to receive a second password or authorization code, which is required to enable the product for use beyond this grace period. In the patented system, users are able to choose between a manual registration mode and an automatic or electronic registration mode. Upon receipt of the registration information, the software representative compares the submitted information to previously-stored registration information, and determines whether the user is authorized. If the user is not authorized, the software representative may disable the software.

On September 22, 2004, z4 sued Microsoft and Autodesk, Inc. ("Autodesk")¹ alleging infringement of claim 32 of the '471 patent and claims 44 and 131 of the '825 patent. Claim 32 of the '471 patent reads as follows, with disputed portions highlighted:

32. A computer readable storage medium having data stored therein representing software executable by a computer, the software including instructions to reduce use of the software by unauthorized users, the storage medium comprising:

instructions for requiring a password associated with the software;

instructions for enabling the software after the password has been communicated to the software;

instructions for subsequently requiring a new password to be communicated to the software for continued operation of the software; and instructions for automatically contacting an authorized representative of the software to communicate registration information and obtaining authorization for continued operation of the software.

Claims 44 and 131 of the '825 patent are identical for purposes of this appeal. They differ only in their definition of the "initial authorization period," or grace period. Claim 44 reads as follows, with disputed portions highlighted:

44. A method for reducing unauthorized software use, the method comprising:

providing a representative to monitor software license compliance;

associating a first authorization code with the software, the first authorization code enabling the software on a computer for use by a user for an initial authorization period, the initial authorization period being based on usage of the software;

supplying the first authorization code with the software;

requiring the user to enter the first authorization code to at least partially enable the software on the computer for use by the user during the initial authorization period;

requiring the user to contact the representative for retrieval of at least one additional authorization code to repeat the enablement of the software on the computer for use by the user during a subsequent authorization period beyond the initial authorization period and allowing the repeat of the enablement of the software to be performed prior to the expiration of the initial authorization period so the enablement of the software can be continuous from the initial authorization period to the subsequent authorization period, the software being enabled on the computer for use by the user during the subsequent authorization period beyond the initial authorization period requiring without further communication with the representative following entry of the at least one additional authorization code;

requiring the user to selectively choose either manual or electronic registration and provide registration information to the representative prior to retrieval of the at least one additional authorization code, the registration information including computer specific information; comparing previously stored registration information related to at least one of the software, the user, and the computer with the registration information provided by the user to the representative to determine if the user is an authorized or an unauthorized user; and

at least partially disabling, the software if the user [sic] an unauthorized user.

In the litigation, z4 alleged that Microsoft's "Product Activation" feature, as implemented in its "Office" group of software applications and its "Windows" operating system, infringed each of the asserted claims, beginning in 2000 and 2001, respectively. Microsoft countered that it did not infringe z4's patents, that the '471 and '825 patents were invalid for anticipation and obviousness, and that both patents were unenforceable due to inequitable conduct by Colvin. In particular, Microsoft contended that it had developed its own technology to reduce software piracy, called the Licensing Verification Program ("LVP"), which it implemented in its 1998 Brazilian Publisher ("BP 98") software product. Because this product was released prior to the filing date of z4's patents, Microsoft alleged that it constituted a prior invention sufficient to invalidate the asserted claims.

A magistrate judge held a Markman hearing, and subsequently construed several disputed claim terms. z4 Techs., Inc. v. Microsoft Corp., No. 06-cv-142, 2005 WL 2304993 (E.D.Tex. Sep. 20, 2005) ("Claim Construction Opinion"). Later, during the course of the jury trial, the court construed an additional term, "user," which had become central to Microsoft's litigation arguments. z4 Techs., Inc. v. Microsoft Corp., No. 06-cv-142 (E.D.Tex. Apr. 12, 2006) ("Supplemental Claim Construction Opinion"). The jury returned a verdict of willful infringement of all three asserted claims against Microsoft and awarded damages of $115 million.

Following the jury verdict, Microsoft filed various renewed motions for JMOL under Rule 50(b) and a motion for a new trial under Rule 59(a) of the Federal Rules of Civil Procedure. The district court denied all of Microsoft's motions for JMOL and a new trial, thereby upholding the jury's verdict in its entirety. The district court also held both patents to be enforceable. JMOL Opinion at 2. It declined, however, to issue a permanent injunction against Microsoft. See z4 Techs., Inc. v. Microsoft Corp., 434 F.Supp.2d 437 (E.D.Tex.2006).

Based on the jury's finding of willful infringement, z4 requested enhanced damages. Although the district court chose not to enhance damages to the maximum of three times the jury verdict, it did award an additional $25 million against Microsoft. JMOL Opinion at 47. It also awarded attorney's fees to z4 based on the jury's willfulness verdict and its own determination of litigation misconduct by Microsoft. Id. at 43. Microsoft timely appealed. We have jurisdiction pursuant to 28 U.S.C. § 1295(a)(1).

II. DISCUS...