EDTex Giveth, CAFC Taketh Away

by Lee Gesmer on April 23, 2008

One of the largest jury verdicts in the notoriously plaintiff- friendly Federal District Court for the Eastern District of Texas was the June 2006 $79 million jury award, enhanced for wilfulnes by $25 million by U.S. District Judge Ron Clark in the case of Finisar Corporation v. DirectTV. (Note: Texas judges often have nicknames as their legal first names. It’s a Texas thing. If he were Massachusetts bred, he’d be Ronald Harrison Clark, III). In addition to this award, the judge refused Finisar a permanent injunction (applying the USSC eBay decision), but ordered DirectTV to pay a compulsory license of $1.60/set-top box until expiration of Finsar’s patent.

This judgment is no more. On April 18th the Court of Appeals for the Federal Circuit held that Judge Clark had misconstrued the term “downloading into a memory storage device.” You would think that such a simple term would be easy to construe, but apparently that wasn’t the case in Beaumont, Texas. Result: infringement verdict of over $104 million (not including interest) vacated, case remanded for a new trial.

In addition to correcting the district court on the construction of the “memory storage” term, the Federal Circuit held that one of Finisar’s patent claims had been anticipated by prior art, and therefore was invalid. Moreover, the Federal Circuit ordered the district court to reconsider its holding of non-obviousness with respect to the surviving claims. Piling on, the Federal Circuit reversed the district court’s finding of wilfulness (the basis for the $25 million enhancement), finding that DirectTV had obtained a proper opinion of noninfringement. This, in the event the issue should arise upon a retrial of the case.

It must be a sad day in Sunnyvale. And, Finisar is in a far weaker position today than it was in 2006, given the Supreme Court’s 2007 KSR decision, which has made patents more difficult to enforce and easier to invalidate. In the process, perhaps the widely-feared Eastern District of Texas has lost a bit of its luster for plaintiffs.

This case illustrates the fragility of any patent infringement verdict. After the expenditure of millions of dollars in costs and fees, thousands of hours of attorney and executive time, stock market gyrations, careers made and destroyed, a case can be reversed simply because the Federal Circuit disagrees with the trial court’s interpretation of a few words found in the patent. In the patent context, more than almost any, id imperfectum dum confectum erit (or, it ain’t over until it’s over, for those of you whose Latin is rusty). For a losing plaintiff, an appeal is “baked into” the process.

There is much more to this important case than I’ve had time to discuss here (including discussion of structural disclosures in “means-plus-function” claims involving a general purpose computer) and Dennis Crouch at Patently-O has done such a fine job that I’ll refer you to two entries in which he discusses other aspects of this decision, here and here.

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