Feature Comment: The Impact of Uniloc USA, Inc. v. Microsoft Corp. on Patent Damages under 28 U.S.C. §1498(a)

By James G. McEwen[1]

While many of the aspects of infringement claims against the Government have seemingly similar elements to actions against private parties under 35 U.S.C. §271, it is important to understand that 28 U.S.C. §1498(a) is not an exact counterpart to 35 U.S.C. §271.  For instance, 28 U.S.C. §1498(a) does not allow for actions against the Government for inducement and contributory infringement, or infringement through infringement of product by process claims.[2]  At the same time, the Government is directly liable for infringement by its contractors if the Government has authorized and consented to such uses of the patented invention, which outside of claims of inducement, contribution, or vicarious liability, does not exist in private party litigation under 35 U.S.C. §271.  The requirement for such authorization and consent claims is to ensure that the Government is able to secure contractor-provided goods and services by extending its immunity to contractors and thereby ensure that the contractors cannot be enjoined.[3]

This same distinction exists in relation to damages.  Under 35 U.S.C §271(a), a court can award an injunction under 35 U.S.C §283 and “damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer” under 35 U.S.C §284.  In contrast, the Government may not be enjoined for infringing a patent or authorizing a contractor to do the same. Instead, where the Government utilizes a privately owned patent, the exclusive remedy available to the owner is set forth in 28 U.S.C. § 1498 (a), which limits relief to “recovery of [the patentee’s] reasonable and entire compensation for such use and manufacture.” This limit also prevents the imposition of damages for willfulness under in 28 U.S.C. § 1498 (a) even where such damages would be appropriate under 35 U.S.C §284.[4]

Accepted measures of damages under 28 U.S.C. §1498(a) include (1) a “reasonable royalty” based on the hypothetical willing buyer/willing seller approach,[5] (2) a lost profits analysis,[6] or (3) the savings-to-the-Government approach.[7] The “reasonable royalty” analysis is the preferred approach.[8] Importantly, the “reasonable royalty” analysis generally tracks the analysis performed under 35 U.S.C §284 in regards to what royalty rate would be reasonable under a hypothetical negotiation, and what systems are included in the entire market of the invention.  Thus, given the distinction between damages awarded under 35 U.S.C §283 and those available under 28 U.S.C §1498(a), the Federal Circuit’s decision in Uniloc USA, Inc. v. Microsoft Corp.[9] is of interest to the procurement community as well as to third parties believing that the Federal Government has infringed their patent.

As noted in Gargoyles Inc. v. U.S,[10] “[w]hile perhaps in some cases government contractors can expect less profit when licensing to the government than in the private sector, the success in the private marketplace was a reasonable starting point for the trial court to analyze the hypothetical royalty negotiation.”  Given the reliance on commercial practices for royalty rates, the Unlioc decision at the very least is going to require use of true license comparisons to arrive at damages.  Short cuts, such as the now-discredited 25% rule of thumb, will not be usable as a matter of law.

In theory, starting without this 25% rule should result in lower royalty rates.  For instance, in Uniloc, there was evidence that the actual starting royalty rate used in licensing within the industry was rarely 25%.  At the same time, the starting point in a particular industry is generally not well known or publicized.  Therefore, what is likely to happen is experts will be sought who start at higher rates (and can testify that their normal starting point for negotiations is high), and then to a negotiated rate.  Indeed, it was Dr. Gemini’s whole reliance on a rule of thumb as opposed to testifying that, in fact, the industry standard is to start at 25% and work downward which doomed his testimony.  Therefore, it is just as likely that the battle of the experts will now focus on justifying a high starting royalty rate in order to obtain, from the plaintiff’s point of view, an adequate measure of damages.  And this battle will extend into damages under 28 U.S.C. §1498 in like manner. Continue reading

Court of Federal Claims Indicates Contractor Liable Where Government is Immune

Federal Claims Allows Transfer To Allow Patent Infringement Suit Against Contractor Where Government Immune from Infringement

In Zoltek Corp. v. United States, No. 96-166 C (Fed.Cl. Jan. 23, 2009), Zoltek Corporation owns Patent No. Re. 34,162 (“the ‘162 patent).  Originally, Zoltek asserted the ‘162 patent against the Federal Government under 28 U.S.C. § 1498(a).  28 U.S.C. §1498(a) sets forth a remedy for patentees whose patents are “used or manufactured” by government contractors acting with the “authorization or consent” of the Government. Zoltek has alleged that the Government caused the manufacture of carbon fiber products according to processes covered by the ‘162 patent and that these products were incorporated into Lockheed Martin Corporation’s F-22 Fighter Planes. 

In 2001, the Government moved for partial summary judgment, raising 28 U.S.C. § 1498(c) as an affirmative defense to liability under 28 U.S.C. § 1498(a).  Specifically, the Government asserted that 28 U.S.C. §1498(c) provides that “[t]he provisions of this section shall not apply to any claim arising in a foreign country,” and therefore this provision provides an exception to 28 U.S.C. § 1498(a).  The Government next asserted that Zoltek’s F-22 claim arose in a foreign country within the meaning of 28 U.S.C. § 1498(c) because the accused processes included the manufacture of fibers inJapan, and therefore 28 U.S.C. § 1498(c) nullified the possibility for liability under § 1498(a).

To determine when a claim arises in a foreign country, the Court of Federal Claims looked to the Patent Act, which requires that the infringing act be performed within theUnited States. Zoltek argued that the remedies provided by 35 U.S.C. § 271(g) for the importation, sale, offer to sell, or use of a product made by a process patented in the United States would apply in this case, and that this type of infringement was within the scope of the authorization and consent allowed under 28 U.S.C. § 1498.  Thus, despite 28 U.S.C. § 1498(c), Zoltek would still have a cause of action against the Government even though the patented process was not practiced entirely in theUnited States. The Court of Federal Claims, however, held that 28 U.S.C. § 1498, by its terms, does not provide for such a remedy, and, thus, Zoltek could not bring such a claim against the Government. The Court stated that, “[b]ecause nothing in the legislative history indicates that Congress intended for the meaning and effect of section 1498 to change in congruence with changes in 35 U.S.C. § 271, the Court is constrained to hold that section 1498 does not apply to all forms of direct infringement as currently defined in 35 U.S.C. § 271.”

On appeal, the Federal Circuit affirmed the Court of Federal Claims’ judgment, but it used different reasoning. The Federal Circuit held that “direct infringement under section 271(a) is a necessary predicate for government liability under section 1498” and that “a process cannot be used ‘within’ the United States as required by section 271(a) unless each of the steps is performed within this country.”

On remand, Zoltek moved to transfer in order to directly bring an action against the contractor performing the work under 35 U.S.C. §271(g).  The transfer statute under which Zoltek has brought its motion for transfer, 28 U.S.C. § 1631, permits transfer of a civil action to another jurisdiction when: (1) the transferor court lacks jurisdiction, (2) the transferee court would have had jurisdiction at the time the original case was filed, and (3) transfer would serve the interests of justice. As discussed above, the Federal Circuit had already concluded that the Court of Federal Claims lacked jurisdiction to hear Zoltek’s claims against the Government regarding the F-22, so only the second and third requirements of 28 U.S.C. § 1631 remained to be discussed.

As to the second requirement, Zoltek argued that because 28 U.S.C. § 1498(a) does not apply, there was no question that the action could have originally been brought in the Northern District of Georgia, where Lockheed conducts a substantial amount of business and does a substantial amount of building for the F-22. In first looking to the plain language of 28 U.S.C. § 1498, the Court determined that there is no reason why a government contractor cannot be subject to suit under 35 U.S.C. § 271 when 28 U.S.C. § 1498(c) has been triggered. Next, because 28 U.S.C. §1498(a) is not a jurisdictional bar and does not procedurally prevent suit against Lockheed, the Court discussed whether the Northern District of Georgia could have heard any of Zoltek’s claims when Zoltek filed its original complaint. The problem lay in the fact that Zoltek had never expressly included a claim for infringement under 35 U.S.C. § 271 against Lockheed in its complaint. The Court refused to accept Zoltek’s promise that it would amend its complaint once the F-22 claim is transferred. It was not enough for Zoltek to point to factual allegations in the complaint that could support a transferable claim because 28 U.S.C. § 1631 requires a more certain finding that the transferee court would have had subject matter jurisdiction over the claim to be transferred, as it is alleged. For a transfer to take place, Zoltek’s complaint must allege an infringement claim against Lockheed of a type which is not precluded by 28 U.S.C. § 1498(a). The Court of Federal Claims specifically noted that if properly alleged under 35 U.S.C. §271(g), the Northern District of Georgia could have heard Zoltek’s claim of unauthorized importation or use in the United States of a sheet product made from partially carbonized fibers if it were alleged against Lockheed.

As to the third requirement, Zoltek argued that it is entitled to its day in court, that Lockheed was made aware of this litigation through participation in discovery for the last decade, and that transferring the F-22 portion of the case, as opposed to requiring Zoltek to file an entirely new suit, would potentially avoid a statute of limitations bar. The Government, on the other hand, argued that transfer would not serve the interests of justice.  Specifically, the Government argued that transfer would be futile since the Northern District of Georgia would not have had jurisdiction over the F-22 claim because Lockheed was acting with the Government’s “authorization or consent.” The Government’s additional argument against transfer is that it would be unfair to Lockheed because Zoltek’s original complaint against the Government under 28 U.S.C. § 1498 could not give Lockheed fair notice that it might be a defendant eleven years later on a claim of infringement under 35 U.S.C. § 271.

The Court of Federal Claims noted that, previously, the Federal Circuit in Texas Peanut Farmers v. United States, 409 F.3d 1370, 1374 (Fed. Cir. 2005) held that if a plaintiff will be time-barred by the statute of limitations if his case is dismissed and thus has to be filed anew in the right court, that is a compelling reason for transfer. The Court of Federal Claims was satisfied based on evidence that at least some importations of the alleged infringing products occurred more than six years ago and would, thus, be time-barred. As to the Government’s first futility argument, the Court reemphasized that 28 U.S.C. § 1498(a) does not prevent Zoltek from bringing its claim against a private party in a district court. Also, the Court of Federal Claims agreed with Zoltek that although being brought into an eleven year old suit without any prior warning seems unfair, Lockheed was aware that its product is at issue in this litigation. Lastly, the interests of justice favored transfer because Zoltek was stuck in the position as the unfortunate first plaintiff to encounter the legislative gap between the definition of infringement under 28 U.S.C. § 1498 and the definition of infringement under 35 U.S.C. § 271. Based on the law existing at the time it filed its complaint, Zoltek reasonably and diligently attempted to have its claim heard in what it thought was the proper court, and the Court decided that Zoltek is entitled to have its day in some court.

By operation of 28 U.S.C. § 1498(c), the 28 U.S.C. §1498(a) contractor immunity from suit for patent infringement when a patented invention is used or manufactured for the federal government has no effect for infringement under 35 U.S.C. § 271(g). Also, the Northern District of Georgia would have had jurisdiction over a patent infringement suit brought by Zoltek against Lockheed, and justice would favor transfer in these circumstances. Although Zoltek’s complaint does not recite any claim over which the Northern District of Georgia would have had jurisdiction when the present action was filed, the Court of Federal Claims recognized that due to the unique circumstances of Zoltek’s claim and the issues of first impression, there would have been no reason for Zoltek to have thought to present its original claim as one against Lockheed. The Court also noted that courts do not seem to have been particularly concerned with the requirement of the second prong of the transfer statute, and in the single case it found in which a district court appeared to be concerned by this requirement, it had allowed to the complaint to be amended before transfer. Therefore, the Court of Federal Claims granted Zoltek leave to amend its complaint to assert a claim against Lockheed under 35 U.S.C. § 271. Upon satisfaction that Zoltek has properly framed its F-22 claim, the Court will grant Zoltek’s present motion and enter an order transferring Zoltek’s claim to the Northern District of Georgia.

Significance to Patent Owners

In allowing a transfer of venue without requiring a refilling of a new infringement case, the Court of Federal Claims provides a hint as to how a District Court is likely to view a government contractor’s liability for patent infringement where the contractor is working without the Government’s authorization and consent.  Specifically, where a patent owner determines that a contractor is infringing under a government contract, it is reasonable to only file an action against the Government under 28 U.S.C. §1498 and the patent owner should not prejudiced if a concurrent suit is not brought in district court.  Moreover, the Court broadly hinted that, without 28 U.S.C. §1498 providing a shield against infringement, the government contractor is likely to be held liable for any infringement as would any commercial contractor.  However, it remains to be seen what liability will attach, and whether continued infringing use under a government contract could form grounds for willful infringement or even whether an injunction can even be granted in light of the likely substantial public interest in allowing the government to acquired the contracted-for good.