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Red Hat & Novell Beat IP Innovation and in Marshall, Texas, too - Updated 2Xs
Friday, April 30 2010 @ 10:33 PM EDT

Do you remember the patent infringement case IP Innovation filed against Red Hat and Novell in 2007? We looked for prior art, if you recall.

Well, I'm very happy to tell you that Red Hat and Novell have prevailed in the litigation:

Red Hat, Inc. (NYSE: RHT), the world's leading provider of open source solutions, announced that today a jury in federal court in Marshall, Texas, returned a verdict in favor of Red Hat, Inc. and Novell, Inc. in a case alleging patent infringement brought by IP Innovation LLC, a subsidiary of Acacia Research Corporation and Technology Licensing Corporation.

The patents at issue were found to be invalid and worthless.

"This is the result we expected and we are gratified that the jury recognized the tremendous innovative value of open source software. The jury knocked out three invalid patents that were masquerading as a new and important inventions, when they were not," said Michael Cunningham, Executive Vice President at Red Hat. "We appreciate the jury's wisdom and remain committed to providing value to our customers, including through our Open Source Assurance program. We also remain stalwart in resisting bogus shakedown tactics."

Here's the final judgment [PDF].

The News & Observer tells us a bit more:
IP Innovation sought royalties on all sales of Linux-based products.
Say, that's what SCO wanted, and Microsoft. Everyone wants to use IP bogo lawsuits to get money from Linux, it seems.

Here are the Jury Instructions [PDF], which lays out for the jurors the position of the parties, so it will give you the best overview.

Dear U.S. Supreme Court,

Please will you address the software patent madness? In Re Bilski gives you an opportunity. .

Update: Back in March, the Patent Prospector provided some insight into the case, particularly with respect to plaintiff's efforts to inflate the value of the patent damages, and the reaction from the newly assigned judge, Judge Randall R. Rader, who excluded evidence from the plaintiff's expert in part. From the Order [PDF]:

A reliable reasonable royalty calculation depends on trustworthy evidence of both the royalty base and the royalty rate. Mr. Gemini invoked the "entire market value rule" in identifying the royalty base in this case. Under the entire market value rule, damages are recoverable only "if the patented apparatus was of such paramount importance that it substantially created the value of the component parts." Rite-Hite Corp. v. Kelley Co., Inc., 56 F.3d 1538, 1549 (Fed. Cir. 1995) (citation omitted). Therefore, "the patentee must prove that the patent-related feature is the basis for customer demand." Lucent Techs., 580 F.3d at 1336.

In this case, IPI has accused Red Hat's and Novell's Linux-based operating systems of infringing the patents-in-suit, including the Enterprise Linux Desktop and Server products. IPI alleges that the operating systems' multiple virtual workspaces and workspace switching features infringe the patents-in-suit. In invoking the "entire market value rule," Mr. Gemini included 100% of Red Hat's and Novell's total revenues from sales of subscriptions to the accused operating systems in his proposed royalty base. Mr. Gemini's methodology however does not show a sound economic connection between the claimed invention and this broad proffered royalty base.

The claimed invention is but one relatively small component of the accused operating systems. The evidence shows that the workspace switching feature represents only one of over a thousand components included in the accused products. Mr. Gemini relies on an online user forum for a third-party product to show that some users tout a desktop switching feature as essential. However, selected users' statements in isolation and without a relationship to the actual claimed technology do not show an accurate economic measurement of total market demand for the switching feature, let alone its contribution to the demand for the entire product asserted as the royalty base. The workspace switching feature's small role in the overall product is further confirmed when one considers the relative importance of certain other features such as security, interoperability, and virtualization. Moreover this proffered evidence has no economic foundation.

Contrary to the proffer of Mr. Gemini, the record---even at this pretrial stage after discovery-suggests that users do not buy the accused operating systems for their workspace switching feature. Most of Red Hat's and Novell's accused sales come from their Server products, the majority of which are not connected to a display and thus do not take advantage of the workspace switching feature. Mr. Gemini made no effort to factor out of his proffered royalty base these products which do not even feature the claimed invention. Once again, this blatant oversight shows that Mr. Gemini did not use the type of reliable economic principles and methods required by Rule 702 for an economic damages expert. Also, the record shows that some accused operating systems are sold to the public with a default setting that does not enable the workspace switching feature. Mr. Gemini made no effort to factor out of his proffered royalty base those operating systems in which the user never affirmatively enables the claimed switching feature. In fact, he made no effort to even discern the percentage of users who would never enable or use the claimed feature. This aspect of his questionable methodology also shows inattention to the economic and factual data necessary for a reliable assessment of a compensatory royalty. Overall, Mr. Gemini never accounts for the record evidence that most users of the accused operating systems do not seem to use the workspace switching feature at all. Accordingly, the record cannot support the unfounded conclusion that the often-unused feature drives demand for a royalty base of 100% of the operating systems as a whole. In sum, this stunning methodological oversight makes it very difficult for this court to give any credibility to Mr. Gemini's assertion that the claimed feature is the "basis for customer demand." See Lucent Techs., 580 F.3d at 1336....

Accordingly, Mr. Gemini's current expert report improperly inflates both the royalty base and the royalty rate by relying on irrelevant or unreliable evidence and by failing to account for the economic realities of this claimed component as part of a larger system. This court hereby precludes Mr. Gemini from testifying at the trial ofthis case or otherwise presenting his opinions on the issue of damages based on his current expert report... The parties are reminded that expert testimony on the topic of damages will not be allowed absent a firm basis in accepted economic principles with an eye to the facts of this record.

Patent Prospector calls this attempted royalty inflation simple greed. Calculating damages is a hot issue in patent law -- and why wouldn't it be? -- and Patently O has an article on the latest, including the patent reform bill meandering through the back roads and hills and dales of Congress. Everyone knows it's a problem, but how to fix it, when the patent lobby loves its money?

Judge Rader is, of course, a judge in the special patent appeals court, the Federal Circuit Court of Appeals, but sometimes he takes patent cases at the district court level. This was one such happy event, when he took over in late 2009 the Red Hat/Novell patent case from Judge Leonard Davis in the Marshall Division of the Eastern District of Texas. It was in March that he reminded plaintiffs they have to have solid evidence to support a broad damages theory and that the type of theory the plaintiffs had chosen, the "entire market value rule" can only be used when the feature that is patented is the "basis for customer demand" meaning that is why they buy the product. The law firm Morgan Lewis puts out a newsletter on IP news, and here's their take on Rader's role in this litigation [PDF]:

Judge Randall Rader of the Federal Circuit Court of Appeals periodically takes a break from his appellate duties to preside over trials of patent cases at the district court level. In one such case, IP Innovation, LLC v. Red Hat, Inc. , Case No. 2:07-cv-447, Judge Rader on March 2, 2010, issued a decision reminding lawyers, litigants, and expert witnesses that plaintiffs must have a firm evidentiary foundation before submitting a broad damages theory to the jury.

In late 2009, the parties in IP Innovation were preparing to try their case before Judge Leonard Davis in the Marshall Division of the Eastern District of Texas when they got a surprise—Judge Rader, sitting by designation, would be presiding over the trial. In March, Judge Rader made his presence felt when he issued an order completely excluding the proposed testimony of the plaintiffs’ damages expert.

The asserted patents in this case involved a method for allowing computer users to switch around among multiple different workspaces. The plaintiffs and their expert accused the defendants’ Linux-based operating systems of infringement, and sought to recover a royalty for each system in question based on the value of the entire operating system. The plaintiffs’ damages model was based on the theory known as the “entire market value rule,” which can allow a patentee to collect damages based on the entire market value of an accused instrumentality, even if the patented invention is only one component of a larger apparatus. Under the facts of this case, Judge Rader emphatically rejected the plaintiffs’ approach.

Judge Rader began by noting that the entire market value rule may only be invoked where the patented feature forms “the basis for customer demand” for the larger accused device. In this case, he found that “[t]he claimed invention is but one relatively small component of the accused operating systems. The evidence shows that the workplace switching feature represents only one of over a thousand components included in the accused products.” Although the plaintiffs’ expert pointed to some isolated statements about the popularity of workplace switching in general, the court held that such evidence had no “relationship to the actual claimed technology.”

Judge Rader went further and noted that the record in the case “suggests that users do not buy the accused operating systems for their workspace switching feature.” He noted that some accused products did not even include the allegedly infringing feature, others did not have the feature enabled, and, even in those products where it was included and enabled, many consumers still did not use the feature.

In the decision, Judge Rader noted that the plaintiffs had tried to “shift the burden” to the defendants by arguing that they had failed to produce evidence sufficient for the plaintiffs’ expert to perform the kind of analysis the court required. The court was unmoved, noting that it was the plaintiffs’ burden to prove damages and that they “must show some plausible economic connection between the invented feature and the accused operating systems before using the market value of the entire product as the royalty base.”

Clearly his role was significant, and so was the jury's. Once again I say, give me a jury any day, but a sensible and courageous judge is the cherry on top.

Update 2: There is a statement from Novell now also:

Novell announced that on Friday a jury in federal court in Marshall, Texas, returned a verdict in favor of Novell, Inc. and Red Hat, in a case alleging patent infringement brought by IP Innovation LLC. IP Innovation argued that the Linux operating system infringed three patents related to the display of multiple desktops and other desktop effects. All the patents at issue were found to be invalid by the jury.

“We are very pleased that the jury reached a verdict in favor of Linux and of open source,” said Jim Lundberg, Vice President, Legal. “We hope this verdict sends a strong and unequivocal message to others that Novell and the open source community will vigorously defend any unsupported attacks on Linux and on open source innovation. ”

Amen to that.

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