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Microsoft Corporation v. Eolas Technologies

June 1, 2012


The opinion of the court was delivered by: Judge Rebecca R.Pallmeyer


In 1999, Eolas Technologies sued Microsoft Corporation in this district, alleging that Microsoft had infringed Eolas's Patent No. 5,838,906 ("the '906 patent") in "technology directed to providing interactive content on websites viewed by Web visitors using browsers." The case was tried before Judge Zagel of this court in 2003, and Eolas prevailed: the jury found that Microsoft had infringed two claims of the '906 patent and had actively induced United States users of Internet Explorer to infringe one of those claims, as well. Microsoft appealed the judgment and $520 million damages award to the Federal Circuit. See Eolas Techs., Inc. v. Microsoft Corp., 399 F.3d 1325, 1332 (Fed. Cir. 2005). That court vacated the judgment and remanded. Then in August 2007, on the eve of a second lengthy trial, the parties entered into an agreement in which Eolas dismissed the lawsuit and granted a license to Microsoft in return for substantial consideration. The License Agreement provides that disputes are to be resolved in this district.

In 2009, Eolas brought a patent infringement lawsuit against twenty-three defendants in the Eastern District of Texas ("the Texas Action"), asserting infringement of the patented technology previously at issue with Microsoft. Microsoft is not a named defendant in the Texas Action, but several months after it was filed, Microsoft filed this lawsuit, alleging that Eolas's filing and maintaining the Texas Action is a breach of the 2007 License Agreement between Microsoft and Eolas. The court denied Microsoft's request for a preliminary injunction against further proceedings in Texas, and that litigation continued; the court takes judicial notice that in February of this year, a Texas jury declared the patent invalid, and that Eolas's post-trial motions are pending. In this court, Microsoft has moved for partial summary judgment of liability for breach of contract. For the reasons set forth here, the motion is denied without prejudice.



Microsoft is a Delaware corporation with its principal place of business in Redmond, Washington. (Plaintiff's 56.1 Statement (hereinafter "Pltf.'s 56.1") ¶ 1.) Defendant Eolas Technologies, Inc. is incorporated in, and has its principal place of business in Texas. (Id. ¶ 2.) The parties agree that the court has subject matter jurisdiction over the case and personal jurisdiction over Eolas. (Id. ¶¶ 3,4.) They agree that venue is proper here, as well, though Eolas has urged that the dispute is best resolved before Judge Leonard Davis, who presided over the Texas litigation. (Id. ¶ 5; Defendant's 56.1 Statement (hereinafter "Def.'s 56.1") ¶ 5.)

The Parties' Agreements

In 1999, Eolas sued Microsoft for infringing the '906 patent. (Pltf.'s 56.1 ¶ 6.) After several years of litigation in this court and the Federal Circuit, the parties entered into a Confidential Settlement Agreement (the "Agreement") in which Eolas agreed to dismiss its lawsuit with prejudice and grant a license to Microsoft. (Agreement ¶¶ 6.1, 5.1.) The Agreement provided for a substantial payment from Microsoft to Eolas (id. ¶ 4.1) and for entry of a judgment against Microsoft in an interference proceeding pending in the United States Patent and Trademark Office. (Id. ¶ 7.1.) In addition, Microsoft agreed that unless it became a defendant in litigation or subject to an indemnification obligation, Microsoft would not challenge the validity of the '906 patent or any successor to that patent. (Id. ¶ 8.1) The Agreement also included provisions for mutual releases of claims against the parties and their customers, licensees, and affiliates. (Id. ¶¶ 9.1, 9.2.) Those releases covered all claims, known or unknown which either were raised or could have been raised, that arise out of or are in any way connected to the Action and underlying facts and circumstances asserted therein provided, however that such release and discharge is only to the extent that [Eolas's] claims are based in whole or in part upon Microsoft actions, products, and/or services or the use thereof. (Id. ¶ 9.1; see also ¶ 9.2). The parties acknowledged certain provisions of California law that prohibit enforcement of a release of claims that the "creditor does not know or suspect" at the time of the release, but they expressly waived those protections. (Id. ¶ 9.2.) They agreed, further, to the exclusive jurisdiction of this court for enforcement of the agreement. (Id. ¶ 22.1.)

Under the License Agreement executed as part of their settlement, Eolas granted Microsoft a "non-exclusive, irrevocable, perpetual, non-transferable, fully paid-up, royalty-free, world-wide license" to use the '906 patent. (License Agreement, Ex. 2 to Pl.'s 56.1, ¶ 2.1.) Eolas further agreed that it would not sue any of [Microsoft]'s or its Affiliates' customers, developers, manufacturers, distributors . . . or end-users . . . for their making, using, selling . . . or distributing Licensee Products or practicing any method in connection with their making, using, selling, offering for sale, licensing, leasing, importing or otherwise disposing or distributing Licensee Products. (Id. ¶ 2.4.)

On October 6, 2009, the Patent Office issued U.S. Patent No. 7,599,985 ("the '985 patent"), a continuation of the '906 patent. (Pl.'s 56.1 ¶ 25.) Both the original patent and the continuation are covered by the License Agreement between Microsoft and Eolas. (Id. ¶ 26.) In this lawsuit, Microsoft alleges breach of the parties' Agreements, and seeks a declaratory judgment and an injunction against some of the claims Eolas asserted in the Texas Action. (Defendant's Additional Material Facts (hereinafter "Def.'s Add'l.") ¶ 1; Plaintiff's Reply to Eolas's Local Rule 56.1 Statement (hereinafter, "Pl.'s Rep.") ¶ 1.)

Positions Taken in the Earlier Litigation

Eolas's claimed invention, in the words of the Federal Circuit, "allows a user to use a web browser in a fully interactive environment." Eolas Techs., 399 F.3d at 1328. As the court noted, Eolas contended in the earlier litigation that its invention "'was the first instance where interactive applications were embedded in Web pages.'" Id. at 1329. Microsoft contends the broad claims that Eolas made in the original litigation before this court are relevant to interpretation of the License. Thus, Microsoft points out that, in that earlier litigation, Eolas's expert witness recognized the importance of the patented technology to Microsoft, and characterized possible loss of access to that technology as having "devastating impact" on Microsoft's customer relations. (Pl.'s 56.1 ¶ 13.) Eolas argued, as well, that although Microsoft had asserted that non-infringing alternatives to the '906 patent were available, third parties had made public statements that Microsoft's loss of access to the '906 technology would have "dire consequences." (Pl.'s 56.1 ¶ 19.) Eolas prepared trial exhibits showing that Microsoft's Internet Explorer product infringed the patent by accessing "websites containing Quicktime, Flash, or Java Applet embedded objects." (Id. ¶ 14.) Similarly, in the original litigation, Eolas did not specifically allege that third-party websites themselves infringed, but did accuse, as infringing, Microsoft Internet Explorer's access to third-party websites containing interactive content. (Pl.'s 56.1 ¶ 23;¶¶ 14, 23.) Eolas's infringement expert attempted to "illustrate" Internet Explorer's "infringing behavior" by reference to a "sampling of additional web sites." (Def.'s 56.1 ¶ 15, quoting report of Edward W. Felton.)

Consistent with Judge Zagel's construction of the patent's claims, the jury instructions that Eolas proposed for the earlier litigation focused on the browser as central to the infringing activity: "[I]t must be the browser, not the operating system, that must do the heavy lifting of identifying and locating the executable application." (Pl.'s 56.1 ¶ 16.) The instructions defined the term "executable application" in the patent to mean "any computer program code that is not the operating system or a utility, that is launched to enable an end-user to directly interact with data." (Def.'s 56.1 ¶ 16.)

Eolas nevertheless broadly claimed that Microsoft infringed by using the '906 technology "through all versions of its Windows OS products." (Pl.'s 56.1 ¶ 17.) At trial, in 2003, Eolas asserted that the accused products were versions of Microsoft Windows with Internet Explorer, and disputed Microsoft's contention that the term "utilized by the browser" meant that the browser did its job "without help from the operating system." (Pl.'s 56.1 ¶¶ 20, 22.) Eolas also asserted that although it was the Internet Explorer browser, not an operating system, that satisfied the elements of the infringement claim, the browser could infringe by "call[ing] upon or working in conjunction with . . . the operating system, so that the browser may identify and locate the needed executable application" as required by the patent claims. (Def.'s Add'l. ¶ 22; Pl.'s Rep. ¶ 22.) Microsoft suggests these references to the involvement of the operating system in the patented technology confirm that the License must be construed as barring the claims Eolas has asserted in Texas.

Eolas acknowledges having taken these positions, but urges that they do not support Microsoft's proposed expansive construction of the License. In its claim construction briefs in the earlier lawsuit, Eolas observed that the "preferred embodiment" of its invention "uses resources of the operating system," but pointed out that whether the browser works in conjunction with the operating system or with any other file or resource was "irrelevant" to its infringement claims. (Pl.'s 56.1 ¶ 21.) Eolas explains that the Windows Operating System ("OS") was relevant because at the time Eolas made this allegation, Microsoft's Internet Explorer product was being "bundled" and sold as part of the Windows OS; the accused product was nevertheless Internet Explorer (the browser), not Windows (the operating system). (Def.'s 56.1 ¶¶ 17, 22.) And, although the patented programs function with the help of the operating system, Judge Zagel concluded that the phrase "utilized by the browser" means "that the enumerated functions are performed by the browser," and that "[t]his is a fact-intensive inquiry." (Def.'s 56.1 ¶ 20.) Moreover, his claim construction order defined an "executable application" as "any computer program code, that is not the operating system or a utility, that is launched to enable an end-user to directly interact with data." (Def.'s 56.1 ¶ 21.)

Eolas admits that, in the earlier litigation, it asserted that Microsoft had induced infringement by developing and promoting web sites that cause users to infringe the '906 patent. Eolas points out, however, that, as Microsoft urged prior to the scheduled retrial, the large damages claim generated by this assertion would need to be revisited "in light of factual and legal developments" since the entry of the verdict. (Pl.'s 56.1 ¶ 24; Def.'s 56.1 ¶ 24.) Eolas nevertheless recognizes that the earlier litigation related to technology of significant value to Microsoft (and, it follows, that the license for that technology was of great value as well). Indeed, Microsoft worked with an industry group in 2003 to design the HTML standard in such a way as to avoid Eolas's patented technology. (Def.'s Add'l. ¶ 23.) And there were two reexamination proceedings challenging Eolas's patent, but it ultimately survived. (Pl.'s Rep. ¶ 24.)

Texas Litigation

More than two years after the parties settled their lawsuit in this court, on October 6, 2009, Eolas initiated a lawsuit in federal court in Texas against 23 Defendants, Eolas Technologies, Inc. v. Adobe Systems, Inc., et al., No. 09 C 446(the "Texas Action"). In its complaint in the Texas Action, Eolas accused each Defendant of infringement of each claim of the '906 and '985 patents. (Id. ¶¶ 27, 31.) The Defendants in that action are the makers of browsers, websites, and plug-ins alleged to infringe Eolas's patents; some of the Texas Defendants are direct competitors of Microsoft. (Def.'s Add'l. ¶ 26.) Eolas alleged that each Defendant engaged in direct infringement, contributory infringement, or inducement of infringement of the '906 and/or '985 patent by "making, using, selling, offering to sell, . . . without authority" (a) "web pages and content to be interactively presented in browsers"; (b) "software . . .that allows content to be interactively presented in and/or served to browsers"; and (c) "computer equipment . . . that stores, serves, and/or runs any of the foregoing." (Id. ¶ 29.)*fn1

Certain of the patent claims Eolas asserts in the Texas Action "read solely" on the "browser-side" and other claims solely on the "server-side" of the "recited action." (Def.'s 56.1 ¶ 66.) In Claim 1 of the '906 patent, Eolas claims a method for running an application program in a computer network, comprising at least one client work station and one network server "coupled to" the network. (Pl.'s 56.1 ¶ 67.) Claim 20 of the '985 patent claims a "method for serving digital information in a computer network environment having a network server . . . ., " a claim that, according to Eolas, relates to what is done by the server. (Id. ¶¶ 68, 71.) ...

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