The Federal Circuit has vacated-in-part and remanded a decision from the Court of Federal Claims that had awarded over $12 million for the US government’s infringement of TETRA software.
As the court explained,
The Department of Defense (DOD) and the Department of Veterans Affairs (DVA) have historically stored military healthcare records in different formats and in distinct, poorly connected databases. As a result, the government has struggled to maintain comprehensive medical records for veterans, service members, and their families. In 2013, the Secretary of Defense directed DOD to coordinate with DVA to develop a data federation, presentation, and interoperability solution to this data sharing problem.
The government decided to use TETRA software developed by 4DD Holdings, LLC.
The software license “prohibited the government from copying TETRA with exception of a single backup copy for use if the original was damaged or destroyed.” However, the government’s contractor, Systems Made Simple (SMS) made thousands of copies in the process of adapting TETRA for government use.
When 4DD became aware of the unauthorized copies, it contacted the government about additional payments, and the parties settled on an amount.
However, the DOD ended its work with TETRA before the software was implemented, telling 4DD that it would pay for TETRA licenses for only one more year.
4DD then sued in August of 2015, seeking more than $5 billion in damages for copyright infringement.
After a bench trial, the court found that the government had in fact exceeded the scope of its license.
The trial court assessed damages via a hypothetical negotiation between the parties.
The trial court determined that 4DD’s bargaining position was weakened given that (1) TETRA provided the government with little value, (2) TETRA had no established profitability, and (3) there existed a similar and cheaper software, Rhapsody.
This resulted in a total award of $12,683,065.86.
4DD appealed, arguing that
where the parties to an infringement lawsuit have previously agreed on rates for licensing the exact copyrighted material at issue, those rates control as a matter of law when calculating damages for infringement under 28 U.S.C. § 1498(b).
The Federal Circuit found that
while a license may inform the reasonable royalty inquiry, no rule of law compels courts to defer to such an agreement in lieu of conducting a hypothetical negotiation, particularly where material differences exist between the terms of the license and the defendant’s infringement.
The circuit court also found that the trial court adopted a legally impermissible view of the “book of wisdom” doctrine. That is, “the trial court constructed the hypothetical negotiation with the knowledge that the government would later cancel its work with TETRA before it could be successfully implemented.”
The Federal Circuit pointed out that
The Supreme Court has made clear that factual developments that occur after the date of the hypothetical negotiation may nonetheless still inform a court’s damages analysis.
However, said the court,
The purpose of the book of wisdom is to provide insight and reduce uncertainty as to the elements of a license the parties are hypothetically negotiating. See Lucent, 580 F.3d at 1333–34. It may not, therefore, be used to impute knowledge of later-occurring events affecting the value of the license that were unforeseeable at the time of negotiating, such as the government’s change in leadership and resulting decision to end its work with TETRA before implementation. Cf. Sinclair, 289 U.S. at 698. Such facts are wholly inconsistent with determining the “reasonable needs and expectations” of the parties at the time of licensing and are improper for consideration in a hypothetical negotiation.
Thus, said the court, “the trial court’s construction of the hypothetical negotiation with knowledge of TETRA’s future cancellation amounts to legal error in its application of the book of wisdom.”
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