z4 v Microsoft Corporation

__Name: z4 Technologies v Microsoft Corporation

__Cite: 434 F. Supp. 2d 437 (E.D. Tex. 2006)

Lexis: 434 F. Supp. 2d 437

• __Court: United States District for the Eastern District of Texas

• __Facts: Z4 brought suit against Microsoft and Autodesk, Inc. (Autodesk), alleging infringement of two of its patents which disclose methods for limiting the unauthorized use of computer software. In April 2006, a jury found that Microsoft and Autodesk willfully infringed two of z4’s patents. The jury awarded $115 million in damages against Microsoft and $18 million against Autodesk.

• __Background: The Supreme Court recently made clear that when considering whether to award permanent injunctive relief to a prevailing plaintiff in a patent infringement dispute, courts should apply the traditional four-factor test used by courts of equity. See eBay, Inc. v. MercExchange, LLC, U.S. , , 126 S. Ct. 1837, 1839, 164 L. Ed. 2d 641 (2006). The prevailing plaintiff must demonstrate: "(1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction." Id *7 . The Supreme Court held "the decision whether to grant or deny injunctive relief rests within the equitable discretion of the district courts, and that such discretion must be exercised consistent with traditional principles of equity, in patent disputes no less than in other cases governed by such standards."

• __Procedural Posture: z4 moved for entry of permanent injunction after a jury awarded damages against Microsoft in z4’s patent infringement action.

• __Unanswered Questions: Does the application of the traditional four-factors before deciding whether or not to grant a permanent injunction achieve the appropriate balance between the competing interests of a patent owner who has been granted the right to exclude and the liable infringer? Does it advance the goal of promoting the progress of science articulated in the Constitution? Does it create a compulsory license for patent owners?

• __Holding: The United States District for the Eastern District of Texas ruled that the principles of equity in the four-part test did not call for an injunction against Microsoft Corporation.

• __Critical Analysis: In the ruling issued by Judge Leonard Davis in z4, the Court applied the traditional four-factor test demanded by the Supreme Court and concluded that z4 would not suffer irreparable harm without a permanent injunction. The Court in its analysis of the four equitable factors provided guidance on the issue of permanent injunctions, rejecting z4’s argument that a verdict of infringement raises a rebuttable presumption of irreparable harm. The Court reasoned that z4 would not suffer lost profits, a loss of brand name recognition, or a loss of market share from Microsoft’s sale of infringing products because Microsoft only uses the infringing technology as a small component of its own software. Further, z4 did not demonstrate that it would suffer irreparable harm absent a permanent injunction. Judge Davis did acknowledge that z4 might suffer irreparable harm if Microsoft produced activation software that it individually sold or licensed to other software manufacturers, but because Microsoft is not a direct competitor z4, no irreparable harm is suffered.

The Court also rejected z4’s argument that monetary damages were an inadequate remedy to compensate for the loss to its right to exclude Microsoft’s use of its patent. In this case, Microsoft is infringing only a small component of the patented invention and Justice Kennedy stated that “legal damages may well be sufficient to compensate for the infringement and an injunction may not serve the public interest.” In addition, Microsoft indicated that it was phasing out all infringing products with the release of its new versions of Windows and Office. Z4 was unsuccessful in convincing the court that monetary damages were inadequate to compensate for patent infringement.
In analyzing the balance of the hardships, the court concluded that “the potential hardships Microsoft could suffer if the injunction were granted outweigh any limited and reparable hardships that z4 would suffer in the absence of an injunction.” Z4 proposed that the court enjoin Microsoft from making and selling its Windows and Office software products and forcing Microsoft to deactivate its product activation servers. Microsoft asserted that the resources, time, and expense required to redesign its products would be enormous. Microsoft would have to redesign its Office software with 450 variations in thirty-seven languages and its Windows software with 600 variations in over forty languages. Microsoft argued that the repercussions of deactivating its product activation system could result in the market being flooded with pirated software. The court found the scenarios Microsoft described to be likely to occur and rejected z4’s proposed injunction.
In analyzing the final equitable factor, the public interest, Judge Davis began his analysis with the statement that “Microsoft’s Windows and Office software products are likely the most popular software products in the world.” The Court could not find any negative effects that might befall the public in the absence of an injunction. Even if there were a potential for negative effects on the public, the court acknowledged that the public interest weighed against granting an injunction. The Court concluded that the public interest would likely be “disserved if a permanent injunction were entered against Microsoft.”