The 8% Solution - Or How Good are the Calculation Economics by the Federal Circuit in Lucent v. Microsoft?, 9 J. Marshall Rev. Intell. Prop. L. 797 (2010)

Lucent v. Microsoft brought to the fore again the complexity of infringement damage estimates. Differences in approaches were laid open in this case with the trial court jury settling $358 million in damages against Microsoft and the appeals court striking down the value as lacking substantial evidence. Damages were established on the “reasonable royalty” basis for a product which was neither licensed nor sold. This article contends that the appeals court took too narrow a view of economics in its analysis of the software sector.

Specifically, the court seems to have applied a “perfect competition” model to a sector which the earlier United States antitrust case against Microsoft documents as being not competitive in the sense of the economist’s model. Notably the court did not consider alternative revenue sources (like advertising) or the use of lump-sum royalties as a funding source for small firms. Most significantly, the appeals court failed to recognize strategic pricing behavior by Microsoft like entry deterrence which could elevate the value of the infringed product as Microsoft strove to maintain its market dominance. Six “Cortez Factors,” patterned after the Georgia-Pacific factors, are proposed for consideration for reasonable royalty calculations in concentrated, high tech industries.

In Lucent, the appeals court seems to have reached the correct decision in vacating the damages, but for many wrong reasons. The Cortez Factors should help to clarify damage considerations in increasingly complex marketplaces for high tech products.