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The extraterritorial reach of U.S. patent law has been tested repeatedly during the past several years in such high- profile decisions as Microsoft Corp. v. AT&T, 127 S. Ct. 1746 (2007), and NTP v. Research in Motion, 418 F.3d 1282 (Fed. Cir. 2005), cert. denied, 546 U.S. 1157 (2006). Overall, these decisions have helped resolve issues about the scope of U.S. patent law outside U.S. borders. But the U.S. Court of Appeals for the Federal Circuit’s recent decision not to address such issues in z4 Technologies Inc. v. Microsoft Corp., 507 F.3d 1340 (Fed. Cir. 2007), may create uncertainty about the appropriateness of considering foreign sales in domestic damages calculations. In patent circles, z4 v. Microsoft, 434 F. Supp. 2d 437 (E.D. Texas 2006), is best known for Judge Leonard Davis’ controversial decision not to grant permanent injunctive relief against Microsoft’s ongoing infringement � the first such denial in the wake of the U.S. Supreme Court’s opinion in eBay v. MercExchange LLC, 126 S. Ct. 1837 (2006). Microsoft’s appeal to the Federal Circuit, however, focused on other issues. On appeal, a Federal Circuit panel composed of circuit judges Alan Lourie and Richard Linn, and Northern District of Illinois Judge Elaine Bucklo, sitting by designation, affirmed the jury’s infringement verdicts and Davis’ refusal to enter judgment as a matter of law on the issue of validity. In addition, the panel upheld Davis’ decision not to order a new trial in light of allegedly erroneous jury instructions or in light of the Supreme Court’s decision in Microsoft v. AT&T. But the panel declined to resolve one issue of particular interest: whether the district court properly considered Microsoft’s global sales when awarding damages for domestic infringement of z4′s U.S. patents. As district courts struggle to resolve cross-border patent disputes, uncertainty over how to instruct juries on the calculation of an appropriate royalty base is troubling. Calculating a royalty base The sole statutory provision regarding the amount of a patent damages award is 35 U.S.C. 284, which allows for “damages adequate to compensate for the infringement” with little additional guidance. Over the years, the courts have added meat to these bones through the creation of two primary damages theories: “lost profits” and a “reasonable royalty.” Under the former theory, a patentee may recover for the lost profits attributable to sales that would have been made but for the infringer’s activities. Under the latter theory, a patentee may recover a portion of the infringer’s profits based on the results of a fictional hypothetical licensing negotiation. Neither theory, however, identifies explicitly which of the infringer’s sales should be considered as part of the “royalty base.” Instead, courts look to the grounds on which infringement was found under 35 U.S.C. 271 � a natural consideration, given � 284′s reference to “the” infringement. Section 271(a) of the Patent Act provides: “whoever makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent therefore, infringes the patent.” Under this provision, even if a product is sold internationally, it may nonetheless be infringing so long as it was manufactured or used in the United States. But it is less clear whether the foreign sales price of a product should be used as the basis for damages when the act of infringement is merely making the product. In August 2000, Judge Patti Saris touched on the issue of foreign sales in a footnote to her decision in Bose Corp. v. JBL Inc., 112 F. Supp. 2d 138 (D. Mass. 2000). After a jury-waived trial, Saris ordered judgment in favor of Bose and awarded approximately $5.7 million in damages. JBL objected to Bose’s expert witness’s consideration of its foreign sales in his royalty-base calculation. Adopting the expert’s royalty base nonetheless, Saris noted: “[The expert] testified that he included foreign sales of products that were either made in the United States or warehoused here for some period of time. JBL neither developed this argument, nor cited any cases to support its position that such sales should not be included in a damages calculation. The Court found no clear precedent that precludes such foreign sales. The argument is waived.” Id. at 168 n.20. Saris’ lead on this issue has been followed by other courts, but typically without extensive commentary. See, e.g., 3Com Corp. v. D-Link Systems Inc., 2007 WL 949596, at *4 (N.D. Calif. March 27, 2007). In other cases, however, courts have limited the damages royalty base to only U.S. sales, without express consideration of whether the products sold internationally might be made in the United States or otherwise infringe U.S. patent rights. See, e.g., Integra Lifesciences I Ltd. v. Merck KGaA, No. CV.96 CV 1307-B, 2004 WL 2284001, at *7 n.6 (S.D. Calif. Sept. 7, 2004). The ‘golden master’ problem During the past several years, a series of cases involving Microsoft has thrown a monkey wrench into this already complex issue. Microsoft sells a large portion of its Office and Windows operating system software to computer manufacturers using what it calls the “golden master” distribution system. In effect, each manufacturer receives a limited number of master copies of Microsoft’s software, either on disk or via the Internet. These master copies are subsequently used to create additional copies and to install the Microsoft software on computers for downstream sale. In Eolas Technologies Inc. v. Microsoft Corp., 399 F.3d 1352 (Fed. Cir. 2005), and later AT&T Corp. v. Microsoft Corp., 414 F.3d 1366 (Fed. Cir. 2006), the Federal Circuit considered whether Microsoft’s golden master distribution system qualifies as the supply from the United States of a component of a patented invention for combination abroad � infringement by exportation under 35 U.S.C. 271(f). This issue was seemingly put to rest by the Supreme Court in its February 2007 reversal of the Federal Circuit’s decision in Microsoft Corp. v. AT&T, 127 S. Ct. 1746 (2007). Reasoning that a copy of Microsoft’s software, not the golden master itself, was combined with other elements to create infringing computer systems, the Supreme Court majority held that Microsoft was not liable for infringement under � 271(f). But the golden master problem persists and has spilled over into the damages debate in the recent z4 v. Microsoft case. At trial, a jury returned a verdict of infringement under � 271(a) and awarded damages of $115 million, based in part on global sales of Microsoft’s software products. On appeal, counsel for Microsoft argued that, because its golden master distribution system was held not to be an act of infringement under � 271(f) in the AT&T case, those sales should not be considered as part of the royalty base for its infringement under � 271(a). Striking down Microsoft’s arguments, the Federal Circuit panel commented that “a damages award based in part on global sales does not necessarily implicate � 271(f),” but noted that “Microsoft may or may not have legitimate arguments regarding the propriety of considering specific foreign sales in a damages calculation for infringement under � 271(a).” 507 F.3d at 1356. The panel gave no hint, however, as to which specific foreign sales may raise legitimate arguments. The possibilities remain: Should all of the downstream sales resulting from the distribution of golden master copies be considered in calculating a royalty base? Should only the sales of the golden master copies themselves be considered? Should only the manufacture of the golden master copies be considered, and if so, how should the manufacture be valued? Another Microsoft battle sheds light on the uncertainty the z4 decision leaves unresolved. In Lucent Technologies Inc. v. Gateway Inc., 509 F. Supp. 2d 912 (S.D. Calif. 2007), Microsoft urged Senior Judge Rudi Brewster to overturn a jury’s $1.53 billion damages award and to order a new trial on the issue of damages in light of the AT&T decision. Denying Microsoft’s motions as moot � a new trial was ordered on other grounds � Brewster lamented the difficulty of segregating foreign sales into those that should be considered as part of a damages calculation and those that should not. But until the Federal Circuit or the Supreme Court squarely addresses this issue, courts will continue simply to do their best. Paul M. Schoenhard is an associate in the Washington office of Ropes & Gray and a visiting professor at the University of Utah S.J. Quinney College of Law. He can be reached at [email protected].

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