Uniloc USA, Inc. v. Microsoft Corp.

United States Court of Appeals

for the Federal Circuit

__________________________

UNILOC USA, INC. AND UNILOC SINGAPORE

PRIVATE LIMITED,

Plaintiffs-Appellants,

v.

MICROSOFT CORPORATION,

Defendant-Cross Appellant.

__________________________

2010-1035, -1055

__________________________

Appeal from the United States District Court for the

District of Rhode Island in Case No. 03-CV-0440, Judge

William E. Smith.

__________________________

Decided: January 4, 2011

__________________________

DONALD R. DUNNER, Finnegan, Henderson, Farabow,

Garrett and Dunner, LLP, of Washington, DC, argued for

plaintiff-appellant. With him on the brief were DON O.

BURLEY; ERIK R. PUKNYS and AARON J. CAPRON, of Palo

Alto, California. Of counsel on the brief were PAUL J.

HAYES and DEAN G. BOSTOCK, Mintz, Levin, Cohn, Ferris,

Glovsky & Popeo PC, of Boston, Massachusetts

UNILOC USA v. MICROSOFT 2

FRANK E. SCHERKENBACH, Fish and Richardson P.C.,

of Boston, Massachusetts, argued for defendant-cross

appellant. With him on the brief were KURT L.

GLITZENSTEIN; JOHN W. THORNBURGH, of San Diego,

California and LAURA R. BRADEN, of Washington, DC.

__________________________

Before RADER, Chief Judge, LINN and MOORE, Circuit

Judges.

LINN, Circuit Judge.

Uniloc USA, Inc. and Uniloc Singapore Private Lim-

ited (collectively, “Uniloc”) appeal from the decision of the

United States District Court for the District of Rhode

Island granting Microsoft Corporation’s (“Microsoft”)

motion for judgment as a matter of law (“JMOL”) of non-

infringement and no willful infringement of asserted

claims of Uniloc’s U.S. Patent No. 5,490,216 (“’216 pat-

ent”), and, in the alternative, granting a new trial on

infringement and willfulness. Uniloc USA, Inc. v. Micro-

soft Corp., 640 F. Supp. 2d 150 (D.R.I. Sept. 29, 2009)

(“Uniloc II”). Uniloc also appeals the district court’s

alternative grant of a new trial on damages. Microsoft

cross-appeals the district court’s denial of its motion for

JMOL of invalidity of the ’216 patent. Id. at 179-83.

Because the jury’s verdict on infringement was sup-

ported by substantial evidence, this court reverses the

district court’s grant of JMOL of non-infringement; this

court also reverses the district court’s alternative grant of

a new trial on infringement as an abuse of discretion.

Because the jury’s verdict on willfulness was not sup-

ported by substantial evidence, this court affirms the

district court’s grant of JMOL of no willfulness; the dis-

trict court’s alternative grant of a new trial for willfulness

3 UNILOC USA v. MICROSOFT

is thus rendered moot. Because the jury’s damages award

was fundamentally tainted by the use of a legally inade-

quate methodology, this court affirms the grant of a new

trial on damages. Finally, because the district court did

not abuse its discretion in determining that the jury

verdict of no invalidity of the ’216 patent was supported

by substantial evidence, we affirm the district court’s

denial of Microsoft’s motion for JMOL of invalidity.

I. BACKGROUND

Commercial software manufacturers like Microsoft

lose significant sales as a result of the “casual copying” of

software, where users install copies of a software program

on multiple computers in violation of applicable software

license conditions. Uniloc’s ’216 patent was an early

attempt to combat such software piracy. There is no

dispute as to the actual functioning of Uniloc’s patented

invention and Microsoft’s accused products. The following

background information is taken from the district court’s

opinion. Uniloc II, 640 F. Supp. 2d 150.

A. The ’216 Patent

Uniloc’s ’216 patent is directed to a software registra-

tion system to deter copying of software. The system

allows the software to run without restrictions (in “use

mode”) only if the system determines that the software

installation is legitimate. A representative embodiment

functions as follows. First, a user intending to use the

software in “use mode” enters certain user information

when prompted, which may include a software serial

number and/or name and address information. An algo-

rithm on the user’s computer (a “local licensee unique ID

generating means”) combines the inputted information

into “a registration number unique to an intending licen-

see” (a “local licensee unique ID”). ’216 patent, Abstract.

The user information is also sent to the vendor’s system,

UNILOC USA v. MICROSOFT 4

which performs the identical algorithm (a “remote licen-

see unique ID generating means”) to create a “remote

licensee unique ID” for the user. When the application

boots again, a “mode switching means” compares the local

and remote licensee unique IDs. If they match, the pro-

gram enters into “use mode.” If they do not match, the

program enters into “demo mode,” wherein certain fea-

tures are disabled. Figure 8 from the ’216 patent shows

the fifth preferred embodiment:

’216 patent, Fig. 8.

Uniloc asserts only independent claim 19:

19. A remote registration station incorpo-

rating remote licensee unique ID generat-

5 UNILOC USA v. MICROSOFT

ing means, said station forming part of a

registration system for licensing execution

of digital data in a use mode, said digital

data executable on a platform, said system

including local licensee unique ID generat-

ing means, said system further including

mode switching means operable on said

platform which permits use of said digital

data in said use mode on said platform

only if a licensee unique ID generated by

said local licensee unique ID generating

means has matched a licensee unique ID

generated by said remote licensee unique

ID generating means; and wherein said

remote licensee unique ID generating

means comprises software executed on a

platform which includes the algorithm

utilized by said local licensee unique ID

generating means to produce said licensee

unique ID.

’216 patent, col. 15 l.21 – col. 16 l.9 (emphasis added).

B. The Accused Product

The accused product is Microsoft’s Product Activation

feature that acts as a gatekeeper to Microsoft’s Word XP,

Word 2003, and Windows XP software programs. Upon

receipt of Microsoft’s retail software program, the user

must enter a 25-character alphanumeric product key

contained within the packaging of Microsoft’s retail

products. If the Key is valid, the user is asked to agree to

the End User License Agreement (“EULA”), by which the

licensor-licensee relationship is initiated.

At about this time, the software creates a Product ID

(“PID”) and a Hardware ID (“HWID”) on the user’s com-

puter. The PID is formed from the combination of the

UNILOC USA v. MICROSOFT 6

Product Key, information from the software CD, and a

random number from the user’s computer. The HWID is

generated from information about the user’s computer.

The user may use the software without initiating Product

Activation, but such use is temporally limited (50 start-

ups of Office and 30 days use of Windows until basic

functions like saving and printing are deactivated) and

functionally limited (no updates can be downloaded and

installed). If the user elects to initiate Product Activation,

the software sends a digital license request to Microsoft

over the internet, which includes: the PID, the HWID,

and additional activation information. At Microsoft’s

remote location, this information is entered into one of

two software algorithms: the MD5 message digest algo-

rithm (“MD5”) for Office products and the SHA-1 secure

hash algorithm (“SHA-1”) for Windows products. 1

The functionality of the MD5 and SHA-1 algorithms is

at the heart of this case. As the district court noted,

Microsoft’s expert, Dr. Wallach, provided a demonstrative

animation, which gives a clear, detailed, and uncontested

explanation of the functionality of these algorithms. The

animation and the explanation of it given by Dr. Wallach

at the trial (Trial Tr. 157:21-166:3, Mar. 31, 2009) may be

downloaded at http://oralarguments.cafc.uscourts.gov/ani

mation/Uniloc.2010-1035.Animation.pdf. The first frame

is explained below.

1 As discussed in the animation referred to, in-

fra, the only differences between MD5 and SHA-1 are the

added logical operation group and shifting step in SHA-1.

Throughout this litigation, the two algorithms have been

treated as functionally identical for infringement pur-

poses. For ease of presentation, this opinion discusses

only the MD5 algorithm, but it is uncontested that the

same analysis applies to both.

7 UNILOC USA v. MICROSOFT

First, A, B, C, and D are 32-bit numbers and F, G, H,

and I are logical operations into which the numbers B, C,

and D are entered. For example,

F(x, y, z) = (x AND y) OR ((NOT x) AND z). Thus, if B, C,

and D are 0, 1, 1, respectively, F(0, 1, 1) = 1. The result is

that three 32-bit numbers are compressed into a single

32-bit number.

Second, the resulting number is added to A using

modular addition. Modular addition is a way of adding

that resets the count of a sum after a certain threshold

number is reached. The most familiar example is the

American A.M./P.M. clock system. If a three hour movie

begins at 11:00 A.M., it will end at 2:00 P.M. This is an

example of mod12 addition: one first adds 11+3=14 then

subtracts 12 to get 2. Modular addition, or modulo-

addition, is used throughout the MD5 algorithm.

UNILOC USA v. MICROSOFT 8

Third, M1, the first component of the source message

being hashed, is modulo-added to the result from step 2.

Fourth, additive constant Ki is modulo-added to the

result from step 3.

Fifth, the resulting number is “circular shifted” (ac-

cording to Microsoft) or “left shifted” (according to Uniloc);

the shift is depicted by the green box with the three

arrows in the diagram. Because the actual functionality

is not disputed, we will refer to it as “circular shifting” for

the purposes of this opinion. Inserting into the shifter the

binary number 0100 1011 2 (which is the binary equiva-

lent of 75), and shifting it by 1 place would yield 1001

0110 (which is the binary equivalent of 150). The result

of this operation is a multiplication by two for each single

unit shift. If the number is again shifted (or if the origi-

nal shift was by 2 places), the output becomes 0010 1101

(which is the binary equivalent of 45). Because a single 8-

bit string cannot represent numbers larger than 255

(1111 1111), such numbers are represented in mod255;

thus the 300 expected from multiplying 150 by 2, becomes

45 in mod255 (300-255).

Sixth, the resulting number is then modulo-added to

initial value B, which final number becomes the new

value B’. Initial value C becomes new value D’, D be-

comes A’, and A becomes B’. The hashing algorithm is

then run again using these new values (A’, B’, C’, D’) in

place of the old (A, B, C, D) and the second component of

the message (M2) in place of the first (M1). After sixteen

rounds of this, a different logical function, G(x, y, z) is

used, and the same message string is input in a different

2 For demonstration purposes, we use an 8-bit

number, though the MD5 algorithm uses a 32-bit number.

Four of the characters are italicized to demonstrate the

effect of the circular shifter.

9 UNILOC USA v. MICROSOFT

order. The function G is used for sixteen rounds, followed

by sixteen rounds of function H and sixteen rounds of

function I. The end result is a “license digest,” i.e. “a

shortened fixed-bit output,” Uniloc II, 640 F. Supp. 2d at

157, derived from the original message.

Microsoft encrypts this digest, and sends it along with

the original data back to the user’s computer. The soft-

ware on the user’s computer decrypts the message and

recovers the “license digest.” It then inputs the original

data (i.e. the PID, HWID, and additional activation in-

formation) and enters it into the same MD5 or SHA-1

algorithm used by Microsoft’s computers, resulting in a

local “license digest.” Microsoft’s Product Activation

software compares the local license digest and the remote

license digest; if they match, the software product is

activated. If they do not, the software returns to pre-

Product Activation mode.

C. Procedural History

In the first iteration of this case, the district court is-

sued a claim construction ruling, construing several terms

that are relevant to the instant appeal. Uniloc USA, Inc.

v. Microsoft Corp., 447 F. Supp. 2d 177 (D.R.I. 2006)

(“Uniloc I Claim Construction”). These appear below.

UNILOC USA v. MICROSOFT 10

“Licensee unique “A unique identifier associated with

ID” a licensee.” Id. at 183.

“Local licensee Means plus function. “Function: to

unique ID generat- generate a local or remote licensee

ing means” and unique ID” and “Structure: a sum-

“Remote licensee mation algorithm or a summer and

unique ID generat- equivalents thereof.” Id. at 190.

ing means”

“Use mode” “A mode that allows full use of the

digital data or software in accor-

dance with the license.” Id. at 196.

“Mode switching Means plus function. “Function: to

means” permit the digital data or software

to run in a use mode if the locally

generated licensee unique ID

matches with the remotely gener-

ated licensee unique ID.” and

“Structure: program code which

performs a comparison of two

numbers or a comparator and

equivalents thereof.” Id. at 198

(synonyms in the claim construction

not relevant to the claim at issue

are removed for simplicity).

“Registration “A system that allows digital data

system” or software to run in a use mode on

a platform if and only if an appro-

priate licensing procedure has been

followed.” Id. at 202.

The district court granted summary judgment of non-

infringement, Uniloc USA, Inc. v. Microsoft Corp., No. 03-

440 (D.R.I. Oct. 19, 2007), concluding that the algorithm

used at Microsoft’s remote station to generate a licensee

11 UNILOC USA v. MICROSOFT

unique ID was not identical to the algorithm used on the

user’s local station as required by the last limitation in

the claim. Id. at 24.

On appeal, this court reversed and remanded the find-

ing of non-infringement, holding that Uniloc had put forth

“extensive and by no means conclusory” evidence that

Microsoft’s Product Activation used the same algorithm at

the local and remote sites (respectively, the “local licensee

unique ID generating means” and “remote licensee unique

ID generating means”), and that the issue of whether the

accused products met this limitation should have gone to

the jury. Uniloc USA, Inc. v. Microsoft Corp., 290 Fed.

App’x 337, 343 (Fed. Cir. 2008) (non-precedential)

(“Uniloc I”). In that appeal, Microsoft presented several

alternative grounds for affirmance, including several

arguments centered around the lack of any information in

that is “uniquely associated with the person” that results

in a “licensee unique ID.” Br. of Microsoft Corp. at 37-53,

Uniloc I (Mar. 19, 2008). This court held that “the licen-

see unique ID does not require personal information

about the user,” so long as it is “unique,” and not “based

solely on platform-related user information.” Uniloc I,

290 Fed. App’x at 342-43. We explicitly noted that the

specification of the ’216 patent “leave[s] open the possibil-

ity that vendor-provided information, like Microsoft’s

Product Key, could be the basis for a ‘licensee unique ID.’”

Id. at 344. Microsoft also argued that Product Activation

lacked a “licensee unique ID generating means.” This

court summarily rejected that argument, noting that “[w]e

have considered these arguments [for affirmance on

alternative grounds] and conclude they are without

merit.” Id. at 342.

On remand, the district court first rejected several in

limine motions, including a motion by Microsoft to exclude

any testimony by Uniloc’s damages expert, Dr. Gemini,

UNILOC USA v. MICROSOFT 12

under Daubert v. Merrell Dow Pharmaceuticals, Inc., 509

U.S. 589 (1993) and Federal Rule of Evidence 702, for his

use of an allegedly arbitrary baseline rate of $10-per-

activation, and the use of a 25 percent rule of thumb.

Uniloc USA, Inc. v. Microsoft Corp., 632 F. Supp. 2d 147,

150-51 (D.R.I. Mar. 16, 2009) (“In Limine”). After a full

trial, the jury returned a verdict of infringement and no

invalidity of claim 19 of the ’216 patent, and found Micro-

soft’s infringement to be willful. The jury awarded Uniloc

$388 million in damages. In post trial motions, Microsoft

asked for: (1) JMOL of invalidity due to anticipation and

obviousness; (2) JMOL of non-infringement of the “licen-

see unique ID generating means” and “registration sys-

tem”/“mode switching means” limitations; (3) JMOL of

non-infringement because Microsoft could not have di-

rectly infringed the system because claim 19 requires acts

to be taken on the user’s local computer over which Micro-

soft has no control; (4) JMOL of no willfulness; (5) a new

trial on damages for the improper use of the 25% rule of

thumb and the entire market value rule; and (6) in the

alternative, a new trial on infringement and willfulness.

The district court, in a comprehensive and well-

reasoned opinion, denied JMOL of invalidity, granted

JMOL of non-infringement on the basis of both contested

claim limitations, granted JMOL of no willfulness,

granted a new trial on damages on the improper use of

the entire market value rule, rejected Microsoft’s argu-

ments regarding the 25 percent rule of thumb as having

been previously decided, Uniloc II, 640 F. Supp. 2d at 184

and n.42, and granted in the alternative a new trial on

infringement and willfulness. The district court also

considered and rejected Microsoft’s contentions that it

could not directly infringe the asserted claims. The

details of the district court’s opinion are discussed more

fully below.

13 UNILOC USA v. MICROSOFT

Uniloc appeals all but the denial of JMOL of invalid-

ity, which Microsoft cross-appeals. We have jurisdiction

under 28 U.S.C. § 1295(a)(1).

II. DISCUSSION

A. Infringement

To prove infringement, the plaintiff bears the burden

of proof to show the presence of every element or its

equivalent in the accused device. Lemelson v. United

States, 752 F.2d 1538, 1551 (Fed. Cir. 1985). The under-

lying infringement issue is a question of fact reviewed for

substantial evidence. Finisar Corp. v. DirecTV Group,

Inc., 523 F.3d 1323, 1332 (Fed. Cir. 2008).

This court’s review of a district court’s grant of JMOL

is governed by regional circuit law. Union Carbide

Chems. & Plastics Tech. Corp. v. Shell Oil Co., 425 F.3d

1366, 1372 (Fed. Cir. 2005). The First Circuit reviews a

district court’s denial of JMOL after a jury verdict de

novo, asking whether “the evidence points so strongly and

overwhelmingly in favor of the moving party that no

reasonable jury could have returned a verdict adverse to

that party.” Keisling v. Ser-Jobs for Progress, Inc., 19

F.3d 755, 759-60 (1st Cir. 1994). This court may not

evaluate “the credibility of witnesses, resolve conflicts in

testimony, or evaluate the weight of the evidence,” but

must view the evidence in the light most favorable to

Uniloc. Gibson v. City of Cranston, 37 F.3d 731, 735 (1st

Cir. 1994).

Microsoft argues that because there is no dispute

about how the accused products work, infringement

should be reviewed de novo. Br. of Microsoft Corp. at 18,

22-23 (citing Athletic Alts., Inc. v. Prince Mfg., Inc., 73

F.3d 1573, 1578 (Fed. Cir. 1996) (“Where, as here, the

parties do not dispute any relevant facts regarding the

UNILOC USA v. MICROSOFT 14

accused product but disagree over which of two possible

meanings of Claim 1 is the proper one, the question of

literal infringement collapses to one of claim construction,

and should thus be reviewed de novo.”) and General Mills,

Inc. v. Hunt-Wesson, Inc., 103 F.3d 978, 983 (Fed. Cir.

1997) (similar)). It is well-settled that infringement is a

factual issue, reviewed for substantial evidence. E.g.

Finjan, Inc. v. Secure Computing, Corp., 2010 U.S. App.

LEXIS 23216 (Fed. Cir. Nov. 4, 2010); Connell v. Sears,

Roebuck & Co., 722 F.2d 1542, 1546 (Fed. Cir. 1983). The

cases cited by Microsoft involve a procedural posture not

present in this case. As this court noted in International

Rectifier Corp. v. IXYS Corp., 361 F.3d 1363, 1374 (Fed.

Cir. 2004), the infringement issue in General Mills col-

lapsed into claim construction because “the parties agreed

with each other and the district court about how each of

two competing claim constructions would apply to the

undisputed structure of the accused invention.” In other

words, the parties conceded that under one claim con-

struction there was infringement and under the other

there was none, and were arguing only over which claim

construction was appropriate. The infringement issue in

Althetic Alternatives also came to this court with the same

posture. See 73 F.3d at 1581 (“We conclude that Claim 1

of the ’097 patent includes the limitation that the splay-

creating string end offset distance take on at least three

values, i.e., a minimum, a maximum, and at least one

intermediate value. We thus affirm the district court’s

conclusion that Claim 1 does not literally read on the

Vortex racket.”). As discussed below, this case presents

the opposite procedural posture; the claim construction

itself is not contested, but the application of that claim

construction to the accused device is. Thus, this court

applies the traditional rule for review of jury verdicts of

factual issues discussed above.

15 UNILOC USA v. MICROSOFT

This case presents three primary infringement issues:

1) whether the accused products contain “licensee unique

ID generating means”; 2) whether the accused products

contain a “registration system” with a “mode switching

means” that precludes full use of the software unless the

outputs of the local and remote algorithms match; and 3)

whether Microsoft can be liable for direct infringement

when it has no control over the user’s computer.

1. “Licensee Unique ID Generating Means”

The ’216 patent specification describes the licensee

unique ID generating means as an algorithm that func-

tions by “combin[ing] by addition the serial number 50

with the software product name 64 and customer infor-

mation 65 and previous user identification 22 to provide

registration number 66.” Id. col. 11 ll. 53-56. The district

court’s construction of “licensee unique ID generating

means” is undisputed on appeal: it is a means plus func-

tion claim, with the function being “to generate a local or

remote licensee unique ID” and the structure being “a

summation algorithm or a summer and equivalents

thereof.” Uniloc I Claim Construction, 447 F. Supp. 2d at

190.

The district court determined that no reasonable jury

could find that the accused products were summation

algorithms, and granted JMOL of non-infringement. The

district court gave seven reasons for its decision: (1) the

“circular shifting and mixing functions fundamentally

create a more secure result compared to an algorithm

based in summation as the specification discloses,” Uniloc

II, 640 F. Supp. 2d at 170; (2) summation is reversible and

MD5 is irreversible and much more complicated, id.

(citing Business Objects, S.A. v. Microstrategy, Inc., 393

F.3d 1366, 1370 (Fed. Cir. 2005)); (3) “MD5 achieves its

function in a way an algorithm based in summation could

UNILOC USA v. MICROSOFT 16

not,” id.; (4) the ’216 patent contained only a narrow

structural disclosure that is not entitled to a broad scope,

id. at 171; (5) the documentary evidence presented by

Uniloc did not show what “the complex hashes in this case

actually do, and whether that is equivalent to the ‘by

addition’ structure Uniloc disclosed,” id. at 172; (6) Uniloc

did not put forth expert opinion interpreting the docu-

ments, except for Klausner’s presentation of “factual

information under the guise of opinion,” id. at 172 and

n.25 (citing Centricut, LLC v. Esab Grp., Inc., 390 F.3d

1361, 1369-70 (Fed. Cir. 2004), but noting that that case

is “not a perfect fit”); and (7) “[t]he jury ‘lacked a grasp of

the issues before it,’” id. at 173 (citing Tex. Instruments

Inc. v. Cypress Semiconductor Corp., 90 F.3d 1558, 1570

(Fed. Cir. 1996)) because it “ignored Dr. Wallach’s admit-

tedly complex explanation and embraced Mr. Klausner’s”

“incomplete, oversimplified and frankly inappropriate

explanation,” id. at 170 n.21.

Uniloc argues that a reasonable jury could have con-

cluded that MD5 and SHA1 were summation algorithms

within the meaning of the ’216 patent, and that the

district court erred in granting JMOL of non-

infringement. The jury heard two sets of evidence in

favor of Uniloc’s contention that MD5 and SHA1 were

summation algorithms. First, Dr. Klausner, Uniloc’s

expert, testified that MD5 makes a digest of the message

it receives

by doing addition and multiplication in a

series of rounds over and over again. It

takes a piece of the input, adds and shifts

it, takes another piece of the input, adds

and shifts it. It does a number of other

operations, what are called logical opera-

tions in mathematics. But the essence is

it eventually adds each of the results of

17 UNILOC USA v. MICROSOFT

these piece-wise operations into a bucket

or a hash, and that hash becomes the out-

put of the algorithm.

He also testified that MD5 uses “two primary kinds of

operations to do its work. One is addition, summing; and

the other is what we call left shifting . . . [which is] actu-

ally nothing more than multiplication. . . [which] is noth-

ing more than addition done over and over again.”

Klausner then identified the source code that was the

basis of his understanding that MD5 performed addition,

noting that “I’m not saying that that’s all that MD5 does,

but that’s a significant portion of the MD5 algorithm.”

Second, the jury saw documentary evidence identifying

MD5 as, or equating it to, a summation algorithm. For

example, in Microsoft’s Windows Protocols Master Glos-

sary, one entry reads “checksum: A value that is the

summation of a byte stream. By comparing the check-

sums computed from a data item at two different times,

one can quickly assess whether the data items are identi-

cal.” That same document equates “hashes” and “check-

sums,” and notes that “[w]ell-known hash algorithms for

computer hashes include MD4, MD5, and SHA1.” Other

Microsoft documents also refer to the outcome of the MD5

algorithm as a “checksum.” See Kenneth Pfeil, Data

Security and Data Availability in the Administrative

Authority, Microsoft TechNet, available at

http://technet.microsoft.com/en-us/library/cc722918.aspx

(“Hashing. Hashing is also referred to as MD5 check-

sum.”). See also Windows Driver Kit: Network Devices

and Protocols: NDIS_TASK_IPSEC, MSDN, updated

document available at http://msdn.microsoft.com/en-

us/library/ff558990.aspx (“MD5 Set by a miniport driver

to indicate that its NIC can use the keyed MD5 algorithm

for computing and/or validating a cryptographic checksum

for an AH payload and/or ESP payload.”). In addition,

UNILOC USA v. MICROSOFT 18

Uniloc relied on U.S. Patent No. 6,263,432 (“’432 patent”),

which, in describing the procedure for generating a secure

e-ticket, includes the following step:

In this example, each of the four fields in

the ‘eticket’ framework 302 and user ex-

tension 304 include data represented by

the number ‘1’ in step S1. The message

Digest/Hash is represented by a summa-

tion (Σ) algorithm (equated to, or exem-

plary of, the MD5 protocol or other

hashing algorithm). Hence, to calculate

the Message Digest/Hash, a summation

algorithm is implemented using all eight

fields of data in step 2.

’432 patent col. 9 ll.50-57.

Uniloc also argues that the district court improperly

narrowed the claim construction on JMOL from “summa-

tion algorithm” to a “simple combination of inputs by

addition,” Uniloc, 640 F. Supp. 2d at 170, which was

improper under Hewlett-Packard Co. v. Mustek Sys., Inc.,

340 F.3d 1314, 1320 (Fed. Cir. 2003).

Microsoft counters with three arguments. First,

Uniloc’s interpretation of “summation algorithm” would

be so broad as to cover any algorithm with a plus sign,

and would be akin to adopting the rejected claim con-

struction of licensee unique ID generating means as

simply “an algorithm.” Microsoft argues that such a

broad reading is inconsistent with the patent, which

disclosed only the specific structure where “the algorithm,

in this embodiment, combines by addition,” ’216 patent,

col. 11 ll.53-56. Second, Microsoft notes that its expert,

Dr. Wallach, established that the algorithms as a whole

are not “summation algorithm[s]” because neither circular

shifting nor the logical operations of MD5 and SHA1 are

19 UNILOC USA v. MICROSOFT

addition-based, and that his testimony was unrebutted,

because the district court prevented Uniloc’s expert, Dr.

Klausner, from opining that MD5 and SHA1 were sum-

mation algorithms within the scope of claim 19 of the ’216

patent. Finally, Microsoft contrasts the purpose of MD5

and SHA1—to irreversibly scramble the data so that the

inputs cannot be derived—with the purpose of the sum-

mation algorithms in the ’216 patent, to put data together

by addition.

As this court held in Uniloc I, 290 Fed. App’x at 342,

there was substantial evidence for a jury to conclude that

the output of the MD5 and SHA1 algorithms was a licen-

see unique ID. Thus, both MD5 and the summation

algorithm in the ’216 patent perform the same function of

generating a licensee unique ID. It is also undisputed

that MD5 and SHA1 use some addition to perform this

function. Uniloc II, 640 F. Supp. 2d at 168. Thus, the

issue is whether the additional structural components of

MD5 and SHA1 preclude a reasonable jury from finding

that they are “summation algorithm[s].” This court

agrees with Uniloc that they do not.

First, the breadth of claim 19 is not as narrow as Mi-

crosoft argues and the district court concluded. “The

literal scope of a properly construed means-plus-function

limitation does not extend to all means for performing a

certain function. Rather, the scope of such claim lan-

guage is sharply limited to the structure disclosed in the

specification and its equivalents.” J&M Corp. v. Harley-

Davidson, Inc., 269 F.3d 1360, 1367 (Fed. Cir. 2001).

Nevertheless, in determining equivalence under § 112 ¶ 6,

“the range of permissible equivalents depends upon the

extent and nature of the invention.” IMS Tech., Inc. v.

Haas Automation, Inc., 206 F.3d 1422, 1436 (Fed. Cir.

2000) (citing Tex. Instruments, Inc. v. ITC, 805 F.2d 1558,

1563 (Fed. Cir. 1986)). “More particularly, when in a

UNILOC USA v. MICROSOFT 20

claimed ‘means’ limitation the disclosed physical struc-

ture is of little or no importance to the claimed invention,

there may be a broader range of equivalent structures

than if the physical characteristics of the structure are

critical in performing the claimed function in the context

of the claimed invention.” Id. The structural disclosure

in the ’216 patent is not limited to simple addition in the

colloquial sense of adding numbers together and nothing

more. In the sixth embodiment, from which the summa-

tion structure was derived, the algorithm “combines by

addition the serial number 50 with the software product

name 64 and customer information 65 and previous user

identification 22 to provide registration number.” ’216

patent col.11 ll.54-57. This “combination by addition”

necessarily incorporates an initial step of converting the

information into a common format to be added, which

requires more than simple addition. Moreover, there is no

indication that the summation structure was critical to

the ’216 patent’s licensee unique ID generating means

algorithm’s function of generating a licensee unique ID.

In fact, the ’216 patent repeatedly refers to the licensee

unique ID generating means by the generic phrase, “an

algorithm,” e.g. ’216 patent col.2 ll.65-66, and makes clear

that the importance of the algorithm is only that it be

“adapted to generate a registration number which is

unique to an intending licensee.” Id. col.2 ll.66-67. It

may well be that the structural disclosure of the licensee

unique ID generating means limitation is minimal be-

cause of the relative unimportance of the particular

structure of that element. This does not, as Microsoft

argues, result in pure functional claiming, nor expand the

claim construction to Uniloc’s proposed and rejected one of

“an algorithm.” Declining to limit the construction to

simple addition does not also extend the claims to any

algorithm that includes a plus sign; the construction

retains its explicit limitation that the algorithm used be

21 UNILOC USA v. MICROSOFT

fairly capable of categorization as “a summation algo-

rithm.”

Second, a jury could reasonably determine that MD5

and SHA1 were not as radically different from the sum-

mation algorithm disclosed in the ’216 as Microsoft and

the district court determined them to be. Klausner testi-

fied that the “essence” of MD5 is that it “adds each of the

results of [the logical operations and shifts] into a bucket

or hash,” and that addition is one of the “two primary

kinds of operations [that MD5 performs],” and the second

is left shifting, which he equated to multiplication, which

he testified “is nothing more than addition done over and

over again.” To be sure, Microsoft’s Dr. Wallach disagreed

with Klausner’s testimony, choosing to focus on the logical

functions, which he called the “heart and soul that makes

MD5 what it is,” and the circular shifter, both of which he

opined were not “summation.” However, Microsoft has

not explained why all the steps of an algorithm must be

summation steps in order for the algorithm to qualify as a

summation algorithm. The jury could reasonably have

believed that MD5 is a summation algorithm. As this

court noted in IMS Tech., “though two structures argua-

bly would not be considered equivalent structures in other

contexts, e.g., if performing functions other than the

claimed function,” they may nevertheless be equivalent

under § 112 ¶ 6 when performing the same function. 206

F.3d at 1436. Here, the claimed function is the genera-

tion of a licensee unique ID, see infra section I.C, and if as

Klausner testified, MD5 uses addition to perform this

function, the enhanced functionality of MD5 in making

the output more secure should not prevent it from being

considered an equivalent structure. Microsoft’s argument

that because MD5 is irreversible it cannot be a summa-

tion algorithm—such that even if “you know the output of

the algorithm, it is impossible even to guess any one input

UNILOC USA v. MICROSOFT 22

that would create the output,” Br. of Microsoft at 21—is

likewise unconvincing, because the same is true of the

most basic simple addition algorithm (e.g., it is impossible

to identify the two numbers whose sum is 23).

Third, the district court improperly rejected Klaus-

ner’s testimony as “incomplete, oversimplified and frankly

inappropriate,” justifying its rejection by Klausner’s

failure to discuss hashing, summation, or left-shifting in

his expert report, and his analogizing of an MD5 digest to

a Reader’s Digest book. Uniloc II, 640 F. Supp. 2d at 170

n.21. In common with the other circuits, First Circuit law

does not allow the district court in a jury trial to evaluate

“the credibility of witnesses, resolve conflicts in testimony,

or evaluate the weight of the evidence.” Gibson, 37 F.3d

at 735. Under Daubert, the district court must exercise

its “gatekeeper” function in ensuring that scientific testi-

mony is relevant and reliable. Kumho Tire Co. v. Carmi-

chael, 526 U.S. 137, 137 (1999) (discussing Daubert v.

Merrell Dow Pharm., Inc., 509 U.S. 589 (1993)). Here, the

district court explicitly noted that Klausner was “quali-

fied.” Uniloc II, 640 F. Supp. 2d at 172 n.25. It is decid-

edly the jury’s role to evaluate the weight to be given to

the testimony of dueling qualified experts. i4i Ltd. P’ship

v. Microsoft Corp., 598 F.3d 831, 856 (Fed. Cir. 2010), cert.

granted, 562 U.S. --- (U.S. Nov. 29, 2010) (No. 10-290)

(“[I]t is not the district court’s role under Daubert to

evaluate the correctness of facts underlying an expert’s

testimony.”). The district court’s criticism of Klausner’s

use of the analogy of a digest to a “reader’s digest” is also

improper, because Microsoft did not object at trial and has

used the same analogy in describing the output of SHA1

as a “hash digest, where digest indicates a shortened size,

similar to Reader’s Digest condensed books.”

Klausner’s testimony was certainly a simplification of

the functioning of MD5, but neither the district court nor

23 UNILOC USA v. MICROSOFT

Microsoft demonstrate why it was “oversimplified,” Uniloc

II, 640 F. Supp. 2d at 171 n.21, or even why it was inaccu-

rate. Klausner recognized that summation was not all

that MD5 did, but opined that it was “a significant portion

of the MD5 algorithm.”

Finally, Microsoft’s attacks on the documentary evi-

dence presented by Uniloc are unwarranted. In particu-

lar, the contemporaneous Microsoft documents that define

the output of MD5 as a “checksum,” or “cryptographic

checksum,” or indicate that MD5 is indicative of a sum-

mation algorithm, ’432 patent col. 9 ll.50-57, help to

associate the MD5 procedure within the reasonable

bounds of the word “summation.” It is reasonable to

consider MD5 a summation algorithm where those skilled

in the art refer to its output as a “hashsum” or an “MD5

sum.” Dr. Wallach had the opportunity to respond at

trial. For example, in discussing Microsoft’s TechNet

document, which included an entry, “Hashing. Hashing is

also referred to as MD5 checksum,” Dr. Wallach and

Uniloc’s attorney engaged in the following colloquy:

Q. Thank you. And so, then, apparently,

you disagree that it would be fair to say

that a – that an MD5 is a checksum?

A. MD5 is a cryptographic checksum. It’s

a specialized kind of checksum.

Q. No, no, I didn’t ask that question.

A. Yes, you did.

Q. I said would you agree that it would be

fair to refer to the MD5 as just a check-

sum, as specifically done in Microsoft’s

document here?

UNILOC USA v. MICROSOFT 24

A. Computer scientists would call MD5 a

cryptographic checksum to distinguish it

from other kinds of checksums.

Microsoft has failed to show why a reasonable jury could

not have rejected this distinction. Moreover, the district

court’s response to these documents is puzzling. The

district court acknowledged that “[s]ome of these docu-

ments no doubt say that MD5 and SHA-1 are a type of

hash, or checksum,” but noted that the documents did not

show what “the complex hashes in this case actually do,”

Uniloc II, 640 F. Supp. 2d at 172. However, MD5 and

SHA-1 are the complex hashes in this case.

For the above reasons, this court concludes that a rea-

sonable jury could rely on Klausner’s testimony and the

documentary evidence to conclude that MD5 and SHA1

were “summation algorithm[s]” as that phrase is used in

the context of the ’216 patent.

2. “Registration System” and “Mode

Switching Means”

In the alternative, the district court granted JMOL of

non-infringement because of Product Activation’s failure

to incorporate a “registration system” or “mode switching

means” using the following constructions:

25 UNILOC USA v. MICROSOFT

“Mode Means plus function. “Function: to permit

switching the digital data or software to run in a use

means” mode if the locally generated licensee

unique ID matches with the remotely

generated licensee unique ID.” and “Struc-

ture: program code which performs a

comparison of two numbers or a compara-

tor and equivalents thereof.” Uniloc I

Claim Construction, 447 F. Supp. 2d at

198 (synonyms in the claim construction

not relevant to the claim at issue are

removed for simplicity).

“Registration “A system that allows digital data or

system” software to run in a use mode on a plat-

form if and only if an appropriate licensing

procedure has been followed.” Id. at 202.

“Use mode” “A mode that allows full use of the digital

data or software in accordance with the

license.” Id. at 196.

These constructions are undisputed on appeal. It is also

undisputed that the relevant “license” in the definition of

“use mode” is the EULA, to which the user agrees prior to

initiation of Product Activation in the accused product.

The crux of the question is whether the use of the accused

products before Product Activation constitutes full use in

accordance with the EULA.

Microsoft argues that the legal licensing occurred at

the time the EULA was accepted by the user, and that

whatever use this permitted was full use in accordance

with the license. In other words, because the terms of the

EULA only give the user the right to use the accused

UNILOC USA v. MICROSOFT 26

products with certain temporal and functional restric-

tions, such restricted use is “full use” under the terms of

the EULA, and “fulfill[s] the seller’s/licensor’s obligations

in relation to the sale or license of the right to execute the

digital data or software in the use mode.” ’216 patent col.

2 ll.42-44. Microsoft contrasts its system with that dis-

closed in the ’216 patent, which it says is limited to sys-

tems in which legal licensing and registration occur

concurrently.

The district court agreed with Microsoft, holding that

once the user agrees to the EULA, “the user becomes a

licensee, and can use the software in accordance with the

terms of the license, and with the provided functionality .

. . . Activation itself simply opens additional doors which

were previously locked to the licensee.” Uniloc II, 640 F.

Supp. 2d at 175-77.

Microsoft’s argument ultimately fails because it rests

on the false factual premise that the functionality during

the “grace period” between the EULA and Product Activa-

tion satisfies Microsoft’s obligations under the EULA.

This factual premise is false for three reasons. First, the

EULA accompanying Microsoft Office states: “Manda-

tory Activation. You may not be able to exercise Your

rights to the Software Product under this EULA after a

finite number of product launches unless You activate

Your copy of the Software Product in the manner de-

scribed during the launch sequence.” This sentence

indicates that “rights . . . under this EULA” are restricted

unless the product is activated, and do not encompass

some abstract right to full functionality. Consistently, the

Windows EULA, in a clause discussing “Mandatory

Activation” notes that “[t]he license rights granted under

this EULA are limited to the first thirty (30) days after

you first install the Product unless you supply informa-

tion required to activate your licensed copy.” These

27 UNILOC USA v. MICROSOFT

“license rights granted under this EULA” are rights that

had already been defined by the EULA without temporal

or functional restrictions: “You may install, use, access,

display and run one copy of the Product on a single com-

puter,” subject only to limitations on the number of proc-

essors and computers that may use the program. Second,

both the Windows license (“Microsoft grants you the

following rights provided that you comply with all terms

and conditions of this EULA”) and the Office license (“The

license rights described in this Section are subject to all

other terms and conditions of this EULA”) are conditional.

Both also note that Product Activation is “[m]andatory.”

Thus, unless the user activates the product, she is not

entitled to the rights granted by the EULA. Finally,

Klausner testified that unless the accused products are

activated, they cannot receive product updates or up-

grades. However, the Windows EULA allows a user to

install “updates, supplements, add-on components, or

Internet-based services components, of the Product that

Microsoft may provide to you or make available to you

after the date you obtain your initial copy of the Product.”

Thus, in order to have “full use . . . in accordance with the

license,” the user must have access to these upgrades.

This only occurs upon activation.

This court thus concludes that use during the “grace

period” after agreement to the EULA and before Product

Activation in the accused product does not constitute full

use in accordance with the EULA. It is undisputed that

Product Activation lifts all the grace period restrictions if

and only if the information entered indicates a legitimate

copy of Office or Windows.

Moreover, the ’216 patent is not limited to the situa-

tion where activation and licensing are concurrent. In the

preferred embodiment shown in Figures 2a-c, the regis-

tration system requires the user to view the license and to

UNILOC USA v. MICROSOFT 28

“continue” with the registration, far upstream of the

activation. Until the user inputs confirmed payment

details and plugs in a valid registration number, only the

“demo version” of the software will run. Once the user

performs these steps, the registration system switches the

software into the “full version.” ’216 patent, Figs. 2a-c.

For the above reasons, the jury had substantial evi-

dence to find that Microsoft’s Product Activation included

a “registration system” and “mode switching means,” and

thus the district court erred in granting JMOL of non-

infringement on the basis of this limitation.

3. Alternative Ground for Affirmance:

Licensee Unique ID

Microsoft also argues as an alternative ground for af-

firmance of JMOL that the output of its MD5 and SHA1

algorithms was not a licensee unique ID as required by

claim 19 of the ’216 patent because it was not “associated

with a licensee.” This argument was sufficiently ad-

dressed and decided against Microsoft by this court in the

prior appeal, and is thus law of the case here. Uniloc I,

290 Fed. App’x at 345 (reversing summary judgment of

non-infringement and holding that the output of Product

Activation “generate[s] what might qualify as a licensee

unique ID, the hash value”).

4. Alternative Ground for Affirmance:

Direct Infringement

Microsoft presents an alternative ground for affir-

mance of JMOL of non-infringement, on the basis that

Uniloc failed to prove direct infringement because Micro-

soft did not supply or use the end-users’ computers that

implemented the local licensee unique ID generating

means and mode switching means. Microsoft relies

primarily on Cross Medical Products, Inc. v. Medtronic

29 UNILOC USA v. MICROSOFT

Sofamor Danek, Inc., 424 F.3d 1293 (Fed. Cir. 2005), and

a line of cases including Muniauction, Inc. v. Thompson

Corp., 532 F.3d 1318 (Fed. Cir. 2008) and BMC Res., Inc.

v. Paymentech, L.P., 498 F.3d 1373 (Fed. Cir. 2007). The

district court rejected this argument in its JMOL opinion.

Microsoft’s argument is severely hampered by the

language of claim 19. Claim 19 is directed to “A remote

registration station incorporating remote licensee unique

ID generating means, said station forming part of a

registration system . . . including local licensee unique ID

generating means . . . .” ’216 patent col.15 ll.21-26. As we

noted in BMC, “[a] patentee can usually structure a claim

to capture infringement by a single party,” by “focus[ing]

on one entity.” 498 F.3d at 1381. This is exactly what

Uniloc did in claim 19, which focuses exclusively on the

“remote registration station,” and defines the environ-

ment in which that registration station must function. It

cannot be disputed that during each Product Activation,

Microsoft “uses” a “remote registration station” that

incorporates a “remote licensee unique ID generating

means,” and this station forms part of a “registration

system” that also includes a “local licensee unique ID

generating means” and a “mode switching means.” That

other parties are necessary to complete the environment

in which the claimed element functions does not necessar-

ily divide the infringement between the necessary parties.

For example, a claim that reads “An algorithm incorporat-

ing means for receiving e-mails” may require two parties

to function, but could nevertheless be infringed by the

single party who uses an algorithm that receives e-mails.

The claim here is thus distinguishable from those at

issue in Muniauction and BMC, because here, only one

party, Microsoft, makes or uses the remote registration

station. See Muniauction, 532 F.3d at 1329; BMC, 498

F.3d at 1373. Nor is claim 19 analogous to the claim at

UNILOC USA v. MICROSOFT 30

issue in Cross Medical. There, the claim called for “[a]

fixation device comprising . . . an anchor seat means

which has a lower bone interface operatively joined to

said bone segment.” 424 F.3d at 1599 (citing U.S. Patent

No. 5,474,555 col. 8 ll.33-41). This court construed

“operatively joined” to mean that the interface and the

bone must be in contact, id. at 1305, and held that Med-

tronic did not infringe the claims because “Medtronic does

not itself make an apparatus with the ‘interface’ portion

in contact with bone,” id. at 1311. Here, however, Micro-

soft does make and use the remote registration station in

the environment required by the claims, when the MD5

and SHA1 generate a remote licensee unique ID. More-

over, this court agrees with the district court that

“[a]ccepting Microsoft’s argument that the local side of

Claim 19 requires an end-user’s participation, similar to

the surgeons’ participation in Cross Medical, would be

akin to importing a method step into this software sys-

tem—something the language of Claim 19 does not sup-

port.” Uniloc II, 640 F. Supp. 2d at 162.

5. New Trial on Infringement Issues

Citing the closeness of the questions presented on

JMOL in this case, the district court also granted in the

alternative Microsoft’s motion for a new trial on infringe-

ment.

This court’s standard of review over a district court’s

grant of a motion for new trial is governed by regional

circuit law. WMS Gaming Inc. v. Int’l Game Tech., 184

F.3d 1339, 1361 (Fed. Cir. 1999). In the First Circuit, a

new trial is only appropriate when “the outcome is

against the clear weight of the evidence such that uphold-

ing the verdict will result in a miscarriage of justice.”

Ramos v. Davis & Geck, Inc., 167 F.3d 727, 731 (1st Cir.

1999). In contrast to JMOL, in considering a motion for a

31 UNILOC USA v. MICROSOFT

new trial, the district court may “independently weigh the

evidence.” Jennings v. Jones, 587 F.3d 430, 436 (1st Cir.

2009).

“[A] district judge cannot displace a jury’s verdict

merely because he disagrees with it or because a contrary

verdict may have been equally supportable. As we have

repeatedly observed, trial judges do not sit as thirteenth

jurors, empowered to reject any verdict with which they

disagree.” Id. (internal citation omitted). Nevertheless,

the district court is entitled to deference in granting a

new trial motion, and the First Circuit only overturns the

grant of a new trial if the district court has abused its

discretion. Id. at 435 (citing Gasperini v. Ctr. For Hu-

manities, Inc., 518 U.S. 415, 435 (1996)). As the Supreme

Court noted, “[t]rial judges have the unique opportunity

to consider the evidence in the living courtroom context,

while appellate judges see only the cold paper record.”

Gasperini, 518 U.S. at 438.

The district court granted Microsoft’s motion for a

new trial on the infringement issues in the alternative to

its JMOL motion, and did not present any analysis apart

from its analysis of the JMOL infringement issues dis-

cussed above. This court is convinced that the district

court’s grant of a new trial on infringement has no more

merit than the district court’s grant of JMOL on in-

fringement. Though it is a close issue, this is not a

situation where the evidence falls within the zone where

substantial evidence supports the verdict and the district

court’s discretion in granting a new trial trumps such

evidence. This court thus reverses the district court’s

grant of a new trial on infringement for the same reasons

as it reverses the grant of JMOL of non-infringement.

UNILOC USA v. MICROSOFT 32

B. JMOL and New Trial for Willfulness

“[T]o establish willful infringement, a patentee must

show by clear and convincing evidence that the infringer

acted despite an objectively high likelihood that its ac-

tions constituted infringement of a valid patent.” In re

Seagate Tech., LLC, 497 F.3d 1360, 1371 (Fed. Cir. 2007)

(en banc). This is an objective inquiry. Id. In addition, a

patentee must show that this risk “was either known or so

obvious that it should have been known to the accused

infringer.” Id. This is a subjective inquiry.

The district court concluded that no reasonable jury

could have found that Microsoft’s conduct fell under either

Seagate prong. Uniloc II, 640 F. Supp. 2d at 176-77

(objective prong), 177-79 (subjective prong). If the ac-

cused infringer’s position is susceptible to a reasonable

conclusion of no infringement, the first prong of Seagate

cannot be met. See Cohesive Techs., Inc. v. Waters Corp.,

543 F.3d 1351, 1374 (Fed. Cir. 2008) (“Because ‘rigid’ was

susceptible to a reasonable construction under which

Waters’s products did not infringe, there was not an

objectively high likelihood that Waters’s actions consti-

tuted infringement.”).

Uniloc has failed to meet the threshold objective

prong of Seagate. Uniloc has not presented any evidence

at trial or on appeal showing why Microsoft, at the time it

began infringement, could not have reasonably deter-

mined that MD5 and SHA1 did not meet the “licensee

unique ID generating means,” “licensee unique ID,” or

“registration system”/“mode switching means” limitations.

Specifically, infringement of the “licensee unique ID

generating means” limitation is a complicated issue, made

more so because “equivalence requires an intensely fac-

tual inquiry,” DePuy Spine, Inc. v. Medtronic Sofamor

Danek, Inc., 567 F.3d 1314, 1337 (Fed. Cir. 2009).

33 UNILOC USA v. MICROSOFT

Uniloc’s argument about copying is largely inapposite.

See id. at 1336 (“[E]vidence of copying in a case of direct

infringement is relevant only to Seagate’s second prong.”).

As the district court noted, the facts here presented are

“hardly the stuff of which objectively reckless unreason-

able conduct is made.” Uniloc II, 640 F. Supp. 2d at 177.

Given this court’s conclusion that Uniloc failed to

show that a reasonable jury could find Microsoft’s conduct

objectively reckless on the evidence presented, this court

need not address the subjective prong of Seagate. This

court thus affirms the district court’s grant of JMOL of no

willfulness, and need not address the district court’s

alternative grant of a new trial on willfulness.

C. New Trial on Damages

The jury here awarded Uniloc $388 million, based on

the testimony of Uniloc’s expert, Dr. Gemini. Dr. Gemini

opined that damages should be $564,946,803. This was

based on a hypothetical negotiation between Uniloc and

Microsoft and the Georgia-Pacific factors. See Georgia-

Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116

(S.D.N.Y. 1970). Gemini began with an internal pre-

litigation Microsoft document that stated:

Product Keys are valuable for two major

reasons. First, since Product Keys can be

used to install a product and create a valid

Product ID, you can associate a monetary

value to them. An appraisal process found

that a Product Key is worth anywhere be-

tween $10 and $10,000 depending on us-

age. Secondly, Product Keys contain short

digital signature technology that Microsoft

Research created. For these reasons, it is

crucial that Product Keys are handled

with maximum security.

UNILOC USA v. MICROSOFT 34

In Limine, 632 F. Supp. 2d at 150 n.2. Gemini took the

lowest value, $10, and testified that this is “the isolated

value of Product Activation.” Gemini then applied the so-

called “25 percent rule of thumb,” hypothesizing that 25%

of the value of the product would go to the patent owner

and the other 75% would remain with Microsoft, resulting

in a baseline royalty rate of $2.50 per license issued.

Gemini justified the use of the rule of thumb because it

has “been accepted by Courts as an appropriate method-

ology in determining damages, in [his] experience, in

other cases.” He then considered several of the Georgia

Pacific factors, with the idea being “to adjust this 25% up

or down depending on how [the Georgia Pacific factors]

favor[] either party.” At bottom, he concluded that the

factors in favor of Uniloc and Microsoft generally balanced

out and did not change the royalty rate. He then multi-

plied the $2.50 royalty rate by the number of new licenses

to Office and Windows products, 225,978,721, to get a

final reasonable royalty of $564,946,803. Gemini then

“did kind of a check to determine whether that number

was reasonable. It’s obviously, you know, a significant

amount of money. I wanted to check to make sure it was

a reasonable number.” The “check” was performed by

“estimating the gross revenues for the accused products”

by multiplying the 225,978,721 licenses by the average

sales price per license of $85. The resulting gross revenue

value was $19.28 billion. Gemini then calculated that his

damages calculation resulted in a royalty rate over the

gross revenue of Office and Windows of approximately

2.9%. Gemini presented this information in a demonstra-

tive pie chart to accompany his testimony. In response to

Uniloc’s attorney’s question: “And have you prepared a

chart or a graph or a pie chart to show us this compari-

son?” Uniloc’s attorney, Mr. Cronin stated, “Your honor,

there’s no objection,” and Microsoft attorney Mr. Scherk-

enbach stated, “Right, there is no objection.” Gemini then

35 UNILOC USA v. MICROSOFT

opined that “in my experience, and data I’ve seen as far as

industry royalty rates for software, which are generally

above – on average, above 10% or 10, 11%, I felt that this

royalty was reasonable and well within that range.”

Microsoft had challenged the 25% rule in limine and

attempted to exclude Mr. Gemini’s testimony. The dis-

trict court noted that “the concept of a ‘rule of thumb’ is

perplexing in an area of the law where reliability and

precision are deemed paramount,” but rejected Microsoft’s

position because the rule has been widely accepted. The

district court thus considered the use of the rule of thumb

to be reasonable. In Limine, 632 F. Supp. 2d at 151.

Microsoft contested Gemini’s use of the entire market

value rule “check” because Product Activation was not the

basis of the consumer demand for Microsoft’s Office and

Windows products. The district court agreed with Micro-

soft, and granted a new trial on damages, because the

“$19 billion cat was never put back into the bag” and the

jury may have “used the $19 billion figure to ‘check’ its

significant award of $388,000,000.” Uniloc II, 640 F.

Supp. 2d at 185.

On appeal, the parties present the court with three

damages issues: 1) the propriety of using the 25 percent

rule; 2) application of the entire market value rule as a

“check”; and 3) excessiveness of damages. Because this

court affirms the district court’s conditional grant of a

new trial on damages, this court need not reach the last

issue.

1. 25 Percent Rule

Section 284 of Title 35 of the United States Code pro-

vides that on finding infringement of a valid patent,

damages shall “in no event [be] less than a reasonable

royalty for the use made of the invention by the infringer,

together with interest and costs as fixed by the court.” In

UNILOC USA v. MICROSOFT 36

litigation, a reasonable royalty is often determined on the

basis of a hypothetical negotiation, occurring between the

parties at the time that infringement began. Wang Labs

Inc. v. Toshiba Corp., 993 F.2d 858, 869-70 (Fed. Cir.

1993). A reasonable royalty is the predominant measure

of damages in patent infringement cases. William C.

Rooklidge and Martha K. Gooding, When Hypothetical

Turns to Fantasy: The Patent Reasonable Royalty Hypo-

thetical Negotiation, BNA Insights Vol. 80:1983, at 701

n.10 (“Hypothetical Negotiation”) (citing PriceWater-

houseCoopers, A Closer Look: Patent Litigation Trends

and the Increasing Impact of Nonpracticing Entities at 5

(2009)).

The 25 percent rule of thumb is a tool that has been

used to approximate the reasonable royalty rate that the

manufacturer of a patented product would be willing to

offer to pay to the patentee during a hypothetical negotia-

tion. Robert Goldscheider, John Jarosz and Carla Mul-

hern, Use Of The 25 Per Cent Rule in Valuing IP, 37 les

Nouvelles 123, 123 (Dec. 2002) (“Valuing IP”). “The Rule

suggests that the licensee pay a royalty rate equivalent to

25 per cent of its expected profits for the product that

incorporates the IP at issue.” Id. As explained by its

leading proponent, Robert Goldscheider, the rule takes

the following form:

An estimate is made of the licensee’s ex-

pected profits for the product that embod-

ies the IP at issue. Those profits are

divided by the expected net sales over that

same period to arrive at a profit rate.

That resulting profit rate, say 16 per cent,

is then multiplied by 25 per cent to arrive

at a running royalty rate. In this exam-

ple, the resulting royalty rate would be 4

per cent. Going forward (or calculating

37 UNILOC USA v. MICROSOFT

backwards, in the case of litigation), the 4

per cent royalty rate is applied to net sales

to arrive at royalty payments due to the IP

owner.

Id. at 124. The underlying “assumption is that the licen-

see should retain a majority (i.e. 75 percent) of the profits,

because it has undertaken substantial development,

operational and commercialization risks, contributed

other technology/IP and/or brought to bear its own devel-

opment, operational and commercialization contribu-

tions.” Id.

The rule was originally based on Goldscheider’s ob-

servations of commercial licenses entered into by a “Swiss

subsidiary of a large American company, with 18 licensees

around the world, each having an exclusive territory.” Id.

The rights transferred were a portfolio of patents and

other intellectual property apparently related to the

patented products. Id. The term of each of these licenses

was for three years, with the expectation that the licenses

would be renewed. Id. at 123. The licensees “faced strong

competition,” and “were either first or second in sales

volume, and probably profitability, in their respective

market.” Id.

According to its proponents, the veracity of the 25

percent rule has been “confirmed by a careful examination

of years of licensing and profit data, across companies and

industries.” John C. Jarosz, Carla S. Mulhern and Mi-

chael Wagner, The 25% Rule Lives On, IP Law360, Sept.

8, 2010. Goldscheider published a further empirical study

in 2002, concluding that across all industries, the median

royalty rate was 22.6 percent, and that the data sup-

ported the use of the 25 percent rule “as a tool of analy-

sis.” Valuing IP, 37 les Nouvelles at 132-33. Additionally,

in a 1997 study of licensing organizations, 25 percent of

UNILOC USA v. MICROSOFT 38

the organizations indicated that they use the 25 percent

rule as a starting point in negotiations. Stephen A.

Degnan & Corwin Horton, A Survey of Licensed Royalties,

32 les Nouvelles 91, 95 (June 1997).

The 25 percent rule has, however, met its share of

criticism that can be broadly separated into three catego-

ries. First, it fails to account for the unique relationship

between the patent and the accused product. See Gregory

K. Leonard and Lauren J. Stiroh, Economic Approaches to

Intellectual Property Policy, Litigation, and Management,

949 PLI/Pat 425, 454-55 (Sept.-Nov. 2008) (“[The 25

percent rule] takes no account of the importance of the

patent to the profits of the product sold, the potential

availability of close substitutes or equally noninfringing

alternatives, or any of the other idiosyncrasies of the

patent at issue that would have affected a real-world

negotiation.”); Richard S. Toikka, Patent Licensing Under

Competitive and Non-Competitive Conditions, 82 J. Pat. &

Trademark Off. Soc’y 279, 292-93 (Apr. 2000) (arguing

that it fails to “distinguish between monopoly and normal

profit. . . . Thus for narrow patents, the rule may be overly

generous to the patentee, and for broad patents it may be

overly stingy”). Second, it fails to account for the unique

relationship between the parties. See Ted Hagelin,

Valuation of Patent Licenses, Tex. Intell. Prop. L.J. 423,

425-26 (Spring 2004) (noting that the rule should not be

used in isolation because it fails to “account[] for the

different levels of risk assumed by a licensor and licen-

see”); Hypothetical Negotiations at 702 (“[T]he rule is

unlikely to have any basis in the accused infringer’s

industry, in the technology involved in either the patent

or the accused product or service, or in the claimed inven-

tion’s contribution to the infringing product or service.”).

Finally, the rule is essentially arbitrary and does not fit

within the model of the hypothetical negotiation within

39 UNILOC USA v. MICROSOFT

which it is based. See Roy J. Epstein and Alan J. Marcus,

Economic Analysis of the Reasonable Royalty: Simplifica-

tion and Extension of the Georgia-Pacific Factors, 85 J.

Pat. & Trademark Off. Soc’y 55, 574 (July 2003) (“[The

25% and the 5%] rules of thumb are best understood as

special cases [] that may be appropriate to a given situa-

tion only by chance.”); Roy J. Epstein, Modeling Patent

Damages: Rigorous and Defensible Calculations (2003)

(paper presented at the AIPLA 2003 Annual Meeting) at

22 available at http://www.royepstein.com/epstein_aipla_

2003_article_website.pdf (last accessed Nov.19, 2010)

(arguing that the 25% rule “shortcut” “is essentially

arbitrary. Because it is based on ex post results, it does

not necessarily relate to the results of a negotiation that

took place prior to the infringement”).

The admissibility of the bare 25 percent rule has

never been squarely presented to this court. Neverthe-

less, this court has passively tolerated its use where its

acceptability has not been the focus of the case, see e.g.,

i4i Ltd., 598 F.3d 831; Fonar Corp. v. General Elec. Co.,

107 F.3d 1543, 1553 (Fed. Cir. 1997), or where the parties

disputed only the percentage to be applied (i.e. one-

quarter to one-third), but agreed as to the rule’s appropri-

ateness, Finjan, Inc. v. Secure Computing Corp., slip op.

No. 2009-1576, -1594 at 23 (Fed. Cir. Nov. 4, 2010).

Lower courts have invariably admitted evidence based on

the 25% rule, largely in reliance on its widespread accep-

tance or because its admissibility was uncontested. See In

Limine, 632 F. Supp. 2d at 151 (“The ‘25% Rule’ has been

accepted as a proper baseline from which to start [a

royalty] analysis.” (internal citations omitted)); GSI Grp.,

Inc. v Sukup Mfg., Co., 641 F. Supp. 2d 732, 745 (C.D. Ill.

2008) (same); i4i Ltd. P’Ship v. Microsoft Corp., 670 F.

Supp. 2d 568, 592 (E.D. Tex. 2009), aff’d on other grounds

by 598 F.3d 831 (“[i4i’s expert] testified that it was cus-

UNILOC USA v. MICROSOFT 40

tomary within his field to apply a ‘25% rule of thumb’ . . . .

Thus, considering the foundation laid by [i4i’s expert’s]

testimony, his application of the 25% rule was relevant

and appropriate considered.”); Static Control Components,

Inc. v. Lexmark Int’l, Inc., Nos. 5:02-571, 5:04-84, 2007

WL 7083655 at *13-14 (E.D. Ky. May 12, 2007) (“While

Lexmark does not believe the ‘rule of thumb’ approach is

the most appropriate way to calculate ‘reasonable royalty,’

as SCC correctly notes, case law suggests it is one way of

doing so” (citing Standard Mfg. Co. v. United States, 42

Fed. Cl. 748, 766 (1999))); Novozymes A/S v. Genencor

Int’l, Inc., 474 F. Supp. 2d 592, 606 (D. Del. 2007) (“While

there is no particular analytical justification for [the rule

of thumb], it has been used to estimate royalties.”); Inline

Connection Corp. v. AOL Time Warner Inc., 470 F. Supp.

2d 424, 432 n.38 (D. Del. 2007) (allowing 25% rule be-

cause its use was not disputed); Bose Corp. v. JBL, Inc.,

112 F. Supp. 2d 138, 167 (D. Mass. 2000) (“Courts have

found the 25%/75% approach to be a useful approach to

arriving at a baseline royalty rate. . . . [The opposing

expert] conceded that this approach is a common and

reasonable one, though he has never used that approach

in negotiating licenses” (citing Standard Mfg., 42 Fed. Cl.

at 764)); Standard Mfg., 42 Fed. Cl. at 766 (“[T]he 25%

rule or a close variant of it has been recognized by a

number of other federal courts as a ‘rule of thumb’ or

‘typical’ in the licensing field.”); Procter & Gamble Co. v.

Paragon Trade Brands, Inc., 989 F. Supp. 547, 612 (D.

Del. 1997) (“Although the Court will consider the Rule-of-

Thumb analysis in determining the royalty rate, this

approach will not receive substantial weight.”); Secure

Energy, Inc. v. Coal Synthetics, LLC, No. 4:08-CV-1719,

2010 WL 1692076 at *1 (E.D. Mo. Apr. 27, 2010) (“The

parties agree that application of the 25% ‘rule of thumb’ is

acceptable to determine a reasonably royalty case such as

this.”). See also Paice LLC v. Toyota Motor Corp., 609 F.

41 UNILOC USA v. MICROSOFT

Supp. 2d 620, 629-30 (E.D. Tex. 2009) (applying 25% rule

without discussion); EZ Dock, Inc. v. Schafer Sys., Inc.,

No. 98-2364, 2003 WL 1610781 (D. Minn. Mar. 8, 2003)

(same). In at least one case, the district court admitted

the evidence, but refused to give it substantial weight

because, “neither expert testified as to the customary

profit percentage used to set the royalty rates in licenses

in other businesses” and because “[t]here was no testi-

mony advocating the use of the [sic] this approach as an

appropriate guidepost for the determination of a royalty

rate under a Georgia-Pacific analysis.” Procter & Gamble

Co. v. Paragon Trade Brands, Inc., 989 F. Supp. at 612.

In Daubert, 509 U.S. 589 and Kumho Tire, 526 U.S.

137, the Supreme Court assigned to the district courts the

responsibility of ensuring that all expert testimony must

pertain to “scientific, technical, or other specialized

knowledge” under Federal Rule of Evidence (“FRE”) 702,

which in turn required the judge to determine that the

testimony was based on a firm scientific or technical

grounding. Daubert, 509 U.S. at 589-90; Kumho Tire, 526

U.S. at 148. “Expert testimony which does not relate to

any issue in the case is not relevant and, ergo, non-

helpful.” Daubert, 509 U.S. at 591 (citing 3 Weinstein &

Berger ¶ 702[02], p. 702-18).

This court now holds as a matter of Federal Circuit

law that the 25 percent rule of thumb is a fundamentally

flawed tool for determining a baseline royalty rate in a

hypothetical negotiation. Evidence relying on the 25

percent rule of thumb is thus inadmissible under Daubert

and the Federal Rules of Evidence, because it fails to tie a

reasonable royalty base to the facts of the case at issue.

The patentee bears the burden of proving damages.

Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1324

(Fed. Cir. 2009). To properly carry this burden, the

UNILOC USA v. MICROSOFT 42

patentee must “sufficiently [tie the expert testimony on

damages] to the facts of the case.” Daubert, 509 U.S. at

591 (“An additional consideration under Rule 702—and

another aspect of relevancy—is whether expert testimony

proffered in the case is sufficiently tied to the facts of the

case that it will aid the jury in resolving a factual dis-

pute.”) (citing United States v. Downing, 753 F.2d 1224,

1242 (3d Cir. 1985)). If the patentee fails to tie the theory

to the facts of the case, the testimony must be excluded.

For example, in General Electric Co. v. Joiner, 522 US 136

(1997), the Supreme Court allowed the exclusion of eight

of Joiner’s experts who opined that polychlorinated bi-

phenyls (“PCBs”) could cause cancer on the strength of

several studies showing that mice receiving high doses of

PCB developed cancer. The Supreme Court noted that

“[t]he studies were so dissimilar to the facts presented in

this litigation that it was not an abuse of discretion for

the District Court to have rejected the experts’ reliance on

them,” id. at 144-45, and affirmed the exclusion because

Joiner had failed to tie the experts’ opinions to the “seem-

ingly far-removed animal studies,” id. at 144. Likewise,

in Kumho Tire, a products liability case arising out of a

blown tire, the Supreme Court affirmed the exclusion of

an expert opinion that argued that the cause of the acci-

dent at issue was a defect in the tire, based on the ex-

pert’s visual and tactile inspection of the tire. 526 U.S. at

153. The specific issue was not whether the visual and

tactile inspection methodology was “reasonable[] in gen-

eral,” but whether “it was [reasonable to] us[e] such an

approach . . . to draw a conclusion regarding the particu-

lar matter to which the expert testimony was directly

relevant.” Id. at 153-54. “The relevant issue was whether

the expert could reliably determine the cause of this tire’s

separation.” Id. at 154. The Court held that the expert

had failed to reliably opine on this issue under Daubert

because his general theory—“that in the absence of at

43 UNILOC USA v. MICROSOFT

least two of four signs of abuse . . . he concludes that a

defect caused the separation,” id.—did not take into

account the facts of the particular tire at issue: that the

tire “had traveled far enough so that some of the tread

had been worn bald; it should have been taken out of

service; it had been repaired (inadequately) for punctures;

and it bore some of the very marks that the expert said

indicated, not a defect, but abuse through overdeflection.”

Id. In responding to the plaintiff’s argument, “that a

method of tire failure analysis that employs a vis-

ual/tactile inspection is a reliable method,” based on “its

use by other experts and to Carlson’s [the expert in the

case] long experience working for Michelin,” the Court

reaffirmed that “the question before the trial court was

specific, not general. Id. The trial court had to decide

whether this particular expert had sufficient specialized

knowledge to assist the jurors ‘in deciding the particular

issues in the case.” Id. at 156. The Court held that he did

not.

The bottom line of Kumho Tire and Joiner is that one

major determinant of whether an expert should be ex-

cluded under Daubert is whether he has justified the

application of a general theory to the facts of the case.

Consistent with this conclusion, this court has held that

“[a]ny evidence unrelated to the claimed invention does

not support compensation for infringement but punishes

beyond the reach of the statute.” ResQNet.com, Inc. v.

Lansa, Inc., 594 F.3d 860, 869 (Fed. Cir. 2010).

In ResQNet, Lucent Technologies, 580 F.3d 1301, and

Wordtech Systems, Inc. v. Integrated Networks Solutions,

Inc., 609 F.3d 1308 (Fed. Cir. 2010), this court determined

that a patentee could not rely on license agreements that

were “radically different from the hypothetical agreement

under consideration” to determine a reasonable royalty.

Lucent Techs., 580 F.3d at 1327. See also ResQNet, 594

UNILOC USA v. MICROSOFT 44

F.3d at 870-72 (holding that evidence of royalty rates from

licenses without a relationship to the claimed invention

could not form the basis of a reasonable royalty calcula-

tion). In Lucent Technologies, the patentee’s expert relied

in large part on “eight varied license agreements,” four of

which involved “PC-related patents,” but either the spe-

cific subject matter of the patents was not explained to

the jury or the license was “directed to a vastly different

situation than the hypothetical licensing scenario of the

present case,” and four of which Lucent did not describe

the relationship between the patented technology licensed

therein and the licensee’s products. See 580 F.3d at 1328-

31. This court noted that the “licenses relied on by the

patentee in proving damages [must be] sufficiently com-

parable to the hypothetical license at issue in suit,” id. at

1325, and that the patentee’s failure to do so “weighs

strongly against the jury’s award” relying on such non-

comparable licenses, id. at 1332. Similarly, in ResQNet,

the patentee’s expert “used licenses with no relationship

to the claimed invention to drive the royalty rate up to

unjustified double-digit levels,” looking at licenses that

did not mention the patents and had no “other discernible

link to the claimed technology.” 594 F.3d at 870. This

court rejected the expert’s testimony, holding that the

district court “must consider licenses that are commensu-

rate with what the defendant has appropriated. If not, a

prevailing plaintiff would be free to inflate the reasonable

royalty analysis with conveniently selected licenses

without an economic or other link to the technology in

question.” Id. at 872. This court held that on remand,

“the trial court should not rely on unrelated licenses to

increase the reasonable royalty rate above rates more

clearly linked to the economic demand for the claimed

technology.” Id. at 872-73.

45 UNILOC USA v. MICROSOFT

Similarly, in Wordtech, the patentee “introduced thir-

teen patent licenses that it previously granted to third

parties for rights to some or all of the patents-in-suit” to

argue to support the jury’s damages determination. 609

F.3d at 1319. This court rejected eleven of the licenses

because they were running royalty licenses (the patentee

had only asked for a lump sum payment) and represented

far lower rates than the jury returned. Id. at 1320-21.

This court rejected the remaining two licenses (both for

lump sum payments) because “[n]either license de-

scribe[d] how the parties calculated each lump sum, the

licensees’ intended products, or how many products each

licensee expected to produce.” Id. at 1320.

The meaning of these cases is clear: there must be a

basis in fact to associate the royalty rates used in prior

licenses to the particular hypothetical negotiation at issue

in the case. The 25 percent rule of thumb as an abstract

and largely theoretical construct fails to satisfy this

fundamental requirement. The rule does not say any-

thing about a particular hypothetical negotiation or

reasonable royalty involving any particular technology,

industry, or party. Relying on the 25 percent rule of

thumb in a reasonable royalty calculation is far more

unreliable and irrelevant than reliance on parties’ unre-

lated licenses, which we rejected in ResQNet and Lucent

Technologies. There, the prior licenses at least involved

the same general industry and at least some of the same

parties as the hypothetical negotiations at issue, and in

Wordtech even involved licenses to the patents in suit

entered into by the patentee-plaintiff. Lacking even these

minimal connections, the 25 percent rule of thumb would

predict that the same 25%/75% royalty split would begin

royalty discussions between, for example, (a) TinyCo and

IBM over a strong patent portfolio of twelve patents

covering various aspects of a pioneering hard drive, and

UNILOC USA v. MICROSOFT 46

(b) Kodak and Fuji over a single patent to a tiny im-

provement in a specialty film emulsion.

It is of no moment that the 25 percent rule of thumb is

offered merely as a starting point to which the Georgia-

Pacific factors are then applied to bring the rate up or

down. Beginning from a fundamentally flawed premise

and adjusting it based on legitimate considerations spe-

cific to the facts of the case nevertheless results in a

fundamentally flawed conclusion. This is reflected in

Lucent Technologies, in which unrelated licenses were

considered under Georgia-Pacific factor 1, but this court

held that the entire royalty calculation was unsupported

by substantial evidence.

To be admissible, expert testimony opining on a rea-

sonable royalty rate must “carefully tie proof of damages

to the claimed invention’s footprint in the market place.”

ResQNet, 594 F.3d at 869. This court has sanctioned the

use of the Georgia-Pacific factors to frame the reasonable

royalty inquiry. Those factors properly tie the reasonable

royalty calculation to the facts of the hypothetical nego-

tiation at issue. This court’s rejection of the 25 percent

rule of thumb is not intended to limit the application of

any of the Georgia-Pacific factors. In particular, factors 1

and 2—looking at royalties paid or received in licenses for

the patent in suit or in comparable licenses—and factor

12—looking at the portion of profit that may be customar-

ily allowed in the particular business for the use of the

invention or similar inventions—remain valid and impor-

tant factors in the determination of a reasonable royalty

rate. However, evidence purporting to apply to these, and

any other factors, must be tied to the relevant facts and

circumstances of the particular case at issue and the

hypothetical negotiations that would have taken place in

light of those facts and circumstances at the relevant

time.

47 UNILOC USA v. MICROSOFT

In this case, it is clear that Gemini’s testimony was

based on the use of the 25% rule of thumb as an arbitrary,

general rule, unrelated to the facts of this case. When

asked the basis of his opinion that the rule of thumb

would apply here, Gemini testified: “[i]t’s generally ac-

cepted. I’ve used it. I’ve seen others use it. It’s a widely

accepted rule.” Upon further questioning, Dr. Gemini

revealed that he had been involved in only four or five

non-litigation related negotiations, and had recommended

the 25% rule only once in a case involving a power tool.

He did not testify that the parties here had a practice of

beginning negotiations with a 25%/75% split, or that the

contribution of Product Activation to Office and Word

justified such a split. He did not base his 25 percent

baseline on other licenses involving the patent at issue or

comparable licenses. In short, Gemini’s starting point of a

25 percent royalty had no relation to the facts of the case,

and as such, was arbitrary, unreliable, and irrelevant.

The use of such a rule fails to pass muster under Daubert

and taints the jury’s damages calculation.

This court thus holds that Microsoft is entitled to a

new trial on damages.

2. Entire Market Value Rule

As discussed above, Gemini performed “a check to de-

termine whether” his $564,946,803 royalty figure was

reasonable by comparing it to his calculation of Micro-

soft’s approximate total revenue for Office and Windows

of $19.28 billion. During trial, Gemini testified that his

calculated royalty accounted for only 2.9% of Microsoft’s

revenue, and accented his point by reference to a prepared

pie chart, showing Microsoft’s $19.28 billion in revenue

with a 2.9% sliver representing his calculated royalty

rate. He concluded that 2.9% was a reasonable royalty

UNILOC USA v. MICROSOFT 48

based on his experience that royalty rates for software are

“generally above – on average, above 10% or 10, 11%.”

The entire market value rule allows a patentee to as-

sess damages based on the entire market value of the

accused product only where the patented feature creates

the “basis for customer demand” or “substantially cre-

ate[s] the value of the component parts.” Lucent Techs.,

580 F.3d at 1336; Rite-Hite Corp. v. Kelley Co., 56 F.3d

1538, 1549-50 (Fed. Cir. 1995). This rule is derived from

Supreme Court precedent requiring that “the patentee . . .

must in every case give evidence tending to separate or

apportion the defendant’s profits and the patentee’s

damages between the patented feature and the unpat-

ented features, and such evidence must be reliable and

tangible, and not conjectural or speculative,” or show that

“the entire value of the whole machine, as a marketable

article, is properly and legally attributable to the pat-

ented feature.” Garretson v. Clark, 111 U.S. 120, 121

(1884). See also Lucent Techs., 580 F.3d at 1336-37

(tracing the origins of the entire market value to several

Supreme Court cases including Garretson).

Microsoft argues that Uniloc employed the entire

market value of Office and Windows by virtue of Gemini’s

pie chart, his comparison of his calculated royalty to the

total revenue Microsoft earns through the accused prod-

ucts, and Uniloc’s attorneys’ belittlement of Microsoft’s

expert’s royalty figure as representing only .0003% of

total revenue. Microsoft argues that Uniloc’s use of the

entire market value rule was not proper because it is

undisputed that Product Activation did not create the

basis for customer demand or substantially create the

value of the component parts. Microsoft continues that

Gemini’s testimony tainted the jury’s damages delibera-

tions, regardless of its categorization as a “check.”

49 UNILOC USA v. MICROSOFT

Uniloc responds that: (1) Microsoft did not object at

trial and so waived any evidentiary argument to Gemini’s

testimony and demonstratives; (2) the entire market

value of the product can be used if the royalty rate is low

enough; and (3) the $19 billion figure was used only as a

“check,” and the jury was instructed not to base its dam-

ages determination on the entire market value, an in-

struction it should be presumed to have followed.

The district court agreed with Microsoft, and ordered

a conditional new trial on damages. It noted that “Uniloc

conceded customers do not buy Office or Windows because

of [Product Activation] and said it would not base a roy-

alty calculation on the entire market value of the prod-

ucts.” Uniloc II, 640 F. Supp. 2d at 184-85. As such, the

use of the entire market value of Office and Windows in

the form of the $19 billion figure was “irrelevant” and

“taint[ed]” the jury’s damages award. Id. at 185. The

district court also disagreed with Uniloc that Microsoft

had waived its arguments to the entire market value,

noting that “Microsoft objected specifically under the

entire market value rule to use of a demonstrative pie

chart,” and that “[t]he Court preliminarily allowed it but

after hearing the testimony instructed counsel to stay

away from the $19 billion figure.” Id.

This court agrees with Microsoft and the district court

that Uniloc’s use of the $19 billion “check” was improper

under the entire market value rule. First, regarding

Uniloc’s assertion that Microsoft has waived the issue,

this court will not second-guess the district court’s explicit

recognition of Microsoft’s objections to Gemini’s testi-

mony. FRE 103(a) notes that “Error may not be predi-

cated upon a ruling which admits or excludes evidence

unless . . . (1) Objection. – In case the ruling is one admit-

ting evidence, a timely objection or motion to strike ap-

pears of record . . . . Once the court makes a definitive

UNILOC USA v. MICROSOFT 50

ruling on the record admitting or excluding evidence,

either at or before trial, a party need not renew an objec-

tion or offer of proof to preserve a claim of error for ap-

peal.” The district court here explicitly noted that

Microsoft’s objection fell into the exception at the last line

of FRE 103(a): “Although Microsoft did not continue to

repeat an objection, it made its position on this evidence

sufficiently clear to preserve the instant challenge” to

Gemini’s use of the entire market value rule. Uniloc II,

640 F. Supp. 2d at 184 n.43. This is supported by Micro-

soft’s in limine filings and Uniloc’s response, where Uniloc

explicitly said that it would not be relying on the entire

market value of the accused products. This court thus

agrees with the district court that Microsoft has not

waived its objection.

Uniloc argues that the entire market value of the

products may appropriately be admitted if the royalty

rate is low enough, relying on the following statement in

Lucent Technologies:

Simply put, the base used in a running

royalty calculation can always be the

value of the entire commercial embodi-

ment, as long as the magnitude of the rate

is within an acceptable range (as deter-

mined by the evidence). . . . Microsoft

surely would have little reason to com-

plain about the supposed application of

the entire market value rule had the jury

applied a royalty rate of .1% (instead of

8%) to the market price of the infringing

programs.”

580 F.3d at 1338-39. Just before this statement, however,

this court held that one of the flaws in the use of the

entire market value in that case was “the lack of evidence

51 UNILOC USA v. MICROSOFT

demonstrating the patented method of the Day patent as

the basis—or even a substantial basis—of the consumer

demand for Outlook. . . . [t]he only reasonable conclusion

supported by the evidence is that the infringing use of the

date-picker tool in Outlook is but a very small component

of a much larger software program.” Id. at 1338. Thus, in

context, the passage relied on by Uniloc does not support

its position. The Supreme Court and this court’s prece-

dents do not allow consideration of the entire market

value of accused products for minor patent improvements

simply by asserting a low enough royalty rate. See Gar-

retson, 111 U.S. at 121; Lucent Techs., 580 F.3d at 1336

(“In one sense, our law on the entire market value rule is

quite clear. For the entire market value rule to apply, the

patentee must prove that the patent-related feature is the

basis for customer demand” (emphasis added, internal

citations omitted)); Rite-Hite, 56 F.3d at 1549 (same); Bose

Corp. v. JBL, Inc., 274 F.3d 1354, 1361 (Fed. Cir. 2001)

(same); TWM Mfg. Co. v. Dura Corp., 789 F.2d 895, 901

(Fed. Cir. 1986) (“The entire market value rule allows for

the recovery of damages based on the value of an entire

apparatus containing several features, when the feature

patented constitutes the basis for customer demand.”).

This case provides a good example of the danger of

admitting consideration of the entire market value of the

accused where the patented component does not create

the basis for customer demand. As the district court aptly

noted, “[t]he $19 billion cat was never put back into the

bag even by Microsoft’s cross-examination of Mr. Gemini

and re-direct of Mr. Napper, and in spite of a final in-

struction that the jury may not award damages based on

Microsoft’s entire revenue from all the accused products

in the case.” Uniloc II, 640 F. Supp. 2d at 185. This is

unsurprising. The disclosure that a company has made

$19 billion dollars in revenue from an infringing product

UNILOC USA v. MICROSOFT 52

cannot help but skew the damages horizon for the jury,

regardless of the contribution of the patented component

to this revenue. Uniloc exacerbated the situation in

colloquies like the following on cross-examination of

Microsoft’s damages expert, in which it implied a rela-

tionship between the entire market value of the accused

products and the patent:

Q [Uniloc]. You understand that there are

approximately $20 billion in sales of in-

fringing product, correct?

A [Napper]. That’s the calculation by Mr.

Gemini, yes, the entire market value of

those products.

Q. And you understand your lump-sum

max theory is $7 million?

A. Yes.

Q. And that would be an effective royalty

of approximately .000035%?

A. If one were inappropriately putting the

entire market value of the products, that’s

what it would result in.

Q. Uniloc invents it, correct?

A. They have a patent, yes.

Q. And under your theory, Microsoft goes

out and infringes a valid patent, right?

A. That’s my assumption.

Q. Under your theory, Microsoft brings in

billions in revenue and sales from the

sales of the infringing product, to wit, ap-

proximately 20, correct?

53 UNILOC USA v. MICROSOFT

A. The entire market value of those prod-

ucts, that’s correct.

Q. And at the end of the day, the in-

fringer, Microsoft, who violated the patent

law, they get to keep 99.9999% of the box

and the inventor, whose patent they in-

fringed, he gets the privilege of keeping

.00003%?

A. When expressed as the entire market

value of the products, that’s correct.

Q. And that’s reasonable to you?

A. Yes.

This is in clear derogation of the entire market value rule,

because the entire market value of the accused products

has not been shown to be derived from the patented

contribution.

Uniloc’s final argument is that the use of the $19 bil-

lion figure was only as a check, and the jury must be

presumed to have followed the jury instruction and not

based its damages calculation on the entire market value

rule. This argument attempts to gloss over the purpose of

the check as lending legitimacy to the reasonableness of

Gemini’s $565 million damages calculation. Even if the

jury’s damages calculation was not based wholly on the

entire market value check, the award was supported in

part by the faulty foundation of the entire market value.

Moreover, Uniloc’s derision of Microsoft’s damages expert

by virtue of the .00003% of the entire market value that

his damages calculation represented may have inappro-

priately contributed to the jury’s rejection of his calcula-

tions. Thus, the fact that the entire market value was

brought in as only a “check” is of no moment.

UNILOC USA v. MICROSOFT 54

For the foregoing reasons, this court concludes that

the district court did not abuse its discretion in granting a

conditional new trial on damages for Uniloc’s violation of

the entire market value rule.

3. Excessiveness of Damages

As an alternative ground for affirmance of the district

court’s alternative grant of a new trial on damages, Mi-

crosoft argues that the damages here were excessive.

Because this court is affirming the district court’s grant of

new trial on damages, and because the two bases on

which Uniloc’s damages case was built have both been

rejected, it would be premature to consider the excessive-

ness of damages that could arise on remand. This court

thus expresses no opinion on the excessiveness or reason-

ableness of the damages awarded by the jury.

D. Cross-Appeal

Microsoft also cross-appeals the district court’s denial

of its motion for JMOL of invalidity. Microsoft argues

that under Uniloc’s interpretation of the claim construc-

tion in its infringement case, claim 19 is invalid as antici-

pated or obvious over U.S. Patent No. 4,658,093 (“’093

reference”) titled, “Software Distribution System.”

Before this court addresses the merits, two procedural

issues must be addressed. First, Microsoft argues that its

burden for both the new trial and JMOL motions was to

show invalidity simply by a preponderance of the evi-

dence, because the ’093 reference was not before the PTO.

This argument is based on a statement in KSR Int’l Co. v.

Teleflex Inc., 550 U.S. 398, 426 (2007) (“[T]he rationale

underlying the presumption—that the PTO, in its exper-

tise, has approved the claim—seems much diminished

here [where the allegedly invalidating prior art was not

before the patent office].”). Microsoft has made this

55 UNILOC USA v. MICROSOFT

argument before, and we held that the statutory pre-

sumption of validity can be overcome only by showing

invalidity by clear and convincing evidence, even where

allegedly invalidating prior art was not before the patent

office. See i4i, 598 F.3d at 848, cert. granted 562 U.S. ---

(Nov. 29, 2010) (No. 10-290); Am. Hoist & Derrick Co. v.

Sowa & Sons, Inc., 725 F.2d 1350, 1359 (Fed. Cir. 1984).

Until changed by the Supreme Court or this court sitting

en banc, that is still the law.

Second, Microsoft argues that the district court’s

grant of a new trial extended to validity even though the

district court did not mention validity in the new trial

section of its opinion. See Uniloc II, 640 F. Supp. 2d at

183-86. Microsoft failed to raise this issue in its motion

for a new trial, and this court finds no basis to conclude

that the district court implicitly decided the issue. The

issue is thus not before this court and we do not reach it.

Turning then to the merits. Microsoft frames its va-

lidity arguments as follows: if claim 19 reaches far enough

to read on Microsoft’s Product Activation, then it neces-

sarily extends far enough to read on the prior art ’093

reference. Thus, Microsoft uses Product Activation as a

proxy for the scope of claim 19 (under the assumption that

the jury verdict of infringement is upheld and Product

Activation infringes), and compares it to the ’093 refer-

ence. According to Microsoft, the prior art ’093 reference

discloses a software authorization process and system,

which generates an authorization code from the following

inputs: “a secret key identifier of the computer embodied

in the hardware (SK), a random or nonrepeating number

(R), the serial number, the software package name (H),

the number of uses (N), and user billing information.”

Uniloc II, 640 F. Supp. 2d at 181.

UNILOC USA v. MICROSOFT 56

In the prior appeal, this court held that the licensee

unique ID must be “a unique identifier associated with a

licensee,” but one “that cannot be based solely on plat-

form-related user information.” Uniloc I, 290 Fed. App’x

at 343-44. The question in this appeal is whether no

reasonable jury could have concluded that the inputs to

the cryptographic hash function in the ’093 reference are

not sufficient to create an association with the licensee.

The focus of the dispute on appeal, just as below, is

whether random number R in the ’093 reference is

uniquely associated with a user. We think that it is not

and that the ’093 reference does not anticipate claim 19.

Uniloc argues that R is “platform-related” because it

is generated by the user’s computer. Microsoft argues

that “platform-related” must be narrower than “generated

by a computer,” otherwise it could not infringe because

the output of Product Activation (the PID) is also gener-

ated by a computer.

It is undisputed that R and SK, the only inputs that

Microsoft argues are associated with the user, are gener-

ated by the computer. 3 In the prior appeal, this court

noted that the licensee unique ID “cannot be based solely

on platform related user information.” Id. at 343. This

was based in part on Uniloc’s distinction made during

prosecution of the ’216 patent between its invention and a

prior art reference that “relie[d] for its security on a

machine identification code unique to the machine.” Id.

at 343-44. The number R in the ’093 reference does just

what the distinguished prior art does: whatever associa-

tion it creates does not identify the user, but rather it

3 The “user billing information” in the ‘093 ref-

erence is not an input into the hash function and is thus

irrelevant in determining whether the ‘093 reference

discloses the “licensee unique ID” and “licensee unique ID

generating means” elements of the ’216 patent.

57 UNILOC USA v. MICROSOFT

identifies the machine. In other words, the R in the ’093

reference is platform-related, and thus cannot form the

basis of the association between the output of the crypto-

graphic hash function and the licensee. The same is true

for SK, which is based on a computer-generated serial

number.

Microsoft’s argument that R is not platform-related

though it is generated by a computer (without user input)

is unconvincing for two reasons. First, the proper frame-

work for challenging the validity of a patent is not for the

accused to show that it is practicing the prior art, but to

show that every element of the patent claims reads on a

single prior art reference. See Zenith Elecs. Corp. v. PDI

Comm. Sys., Inc., 522 F.3d 1348, 1363 (Fed. Cir. 2008)

(“[M]ere proof that the prior art is identical, in all mate-

rial respects, to an allegedly infringing product cannot

constitute clear and convincing evidence of invalidity.

Anticipation requires a showing that each element of the

claim at issue, properly construed, is found in a single

prior art reference.”). Second, although the output of the

hash algorithm in Product Activation, the PID, is com-

puter generated, the information that is input into the

MD5 algorithm is associated with a user, in the form of

the product key provided by the vendor. This court has

held that it is reasonable to determine that such informa-

tion creates an association with the user. Uniloc I, 290

Fed. App’x at 343 n.4 (“The specification [of the ’216

patent] certainly does allow for the use of vendor-provided

information to generate a licensee unique ID.”). As noted,

supra section II.A.3, this court is bound by the first appeal

that inputs associated with the licensee are sufficient to

maintain the association in the output as well. See also

Uniloc I, 290 Fed. App’x at 344 (“Microsoft’s Product

Activation system inputs non-platform-related informa-

tion unique to a user, such as a Product Key, to generate

UNILOC USA v. MICROSOFT 58

what might qualify as a licensee unique ID.”). Unlike the

PID, the output of the hash algorithm in the ’093 refer-

ence is “based solely on platform-related user informa-

tion,” see id. at 343, in the form of R and SK, neither of

which are “vendor-provided,” and both of which are gen-

erated by the user’s computer. The PID is thus distin-

guishable from the output of the hash algorithm in the

’093 reference, and a reasonable jury could have returned

a verdict that the ’093 reference does not disclose a “licen-

see unique ID” as required by claim 19 of the ’216 patent.

This court thus affirms the district court’s denial of JMOL

of invalidity based on anticipation.

Though obviousness is a question of law, this court

gives the jury its usual deference on the underlying

factual questions. What the prior art shows is a question

of fact. Graham v. John Deere Co., 383 U.S. 1, 17 (1966).

As discussed above, a reasonable jury could have found

that the ’093 reference failed to disclose a licensee unique

ID. Microsoft has presented no convincing argument for

why incorporating an input into the hash function that is

associated with a user would have been obvious to one of

ordinary skill in the art. This court thus affirms the

district court’s denial of JMOL of invalidity on the basis of

obviousness.

CONCLUSION

For the foregoing reasons, this court reverses the dis-

trict court’s grant of JMOL of non-infringement, affirms

the district court’s grant of JMOL of no willfulness, af-

firms the district court’s grant of a new trial on damages,

vacates the district court’s grant of an alternative motion

for new trial on infringement, and affirms the district

court’s denial of JMOL of invalidity of claim 19 of the

’216. The case is remanded for proceedings consistent

with this opinion.

59 UNILOC USA v. MICROSOFT

AFFIRMED-IN-PART, REVERSED-IN-PART,

VACATED-IN-PART, and REMANDED

COSTS

Each party shall bear its own costs.