POSTSCRIPT II SOFTWARE LICENSES

37 Nash & Cibinic Rep. NL ¶ 42

Nash & Cibinic Report | June 2023

The Nash & Cibinic Report

Intellectual Property

Ralph C. Nash

¶ 42. POSTSCRIPT II: SOFTWARE LICENSES

In Postscript: Software Licenses, 35 NCRNL ¶ 32, we discussed Bitmanagement Software GmbH v. U.S., 989 F.3d 938 (Fed. Cir. 2021), 63 GC ¶ 72, where the U.S. Court of Appeals for the Federal Circuit held that the Government had an implied-in-fact license to widely distribute software but it was still liable for copyright infringement. On remand, the Court of Federal Claims has now determined the damages for this infringement, Bitmanagement Software GmbH v. U.S., No. 16-840C, 2022 WL 17077251 (Nov. 1, 2022). The court described the guidance of the Federal Circuit as follows:

[T]he Federal Circuit tasked this Court with determining damages taking the form of a hypothetical negotiation. Id. at 951–52 n.5. In order to do so, the Federal Circuit directed this Court to look at the Gaylord line of cases as a guide. [Footnote 3] The Federal Circuit further directed this Court to focus on the “actual usage” of Plaintiff’s software because of the Navy’s statement: “Contrary to Bitmanagement’s argument [TEXT REDACTED BY THE COURT], it is not entitled to recover the cost of a seat license for each installation.” Id. Instead, “the proper measure of damages shall be determined by the Navy’s actual usage of BS Contact Geo in excess of the limited usage contemplated by the parties’ implied license.” Id.

In footnote 3, the court cites Gaylord v. U.S., 678 F.3d 1339 (Fed. Cir. 2012) (“Gaylord II”), and Gaylord v. U.S., 112 Fed. Cl. 539 (2013), aff’d, 777 F.3d 1363 (Fed. Cir. 2015) (“Gaylord III”). The Gaylord decisions require the trial court analyzing the “hypothetical negotiation” to consider the position of both parties on the date chosen for the negotiation. To do that each party in Bitmanagement employed an expert witness. The court considered each of the experts well qualified but used the Government’s expert report for the basis of its decision. As a result the damages award of $154,400 (plus delay damages) was close to the Government’s expert’s number of $115,000 and far from the contractor’s expert’s number of $155,400,000.

The calculation involved determining the number of uses made of the software (the royalty base) and the royalty rate that the parties would have agreed on. In arriving at the royalty rate both experts looked at the prior dealings of the parties as well as the contractor’s other sales and its financial position. The detailed analysis of the court will provide good guidance to software vendors when the Government has made uses of the software outside of its license.

This manner of determining damages for copyright infringement places the judge in a unique position because the outcome of the hypothetical negotiation involves a good deal of speculation. For example, in the Gaylord cases, the Court of Federal Claims judge awarded $5,000 in his first decision, 98 Fed. Cl. 389 (2011), and $573,092 plus prejudgment interest on remand, 112 Fed. Cl. 539 (2013), noting that: “Determining the fair market value of a license…based on the legal fiction of a hypothetical negotiation involves “more the talents of a conjurer than those of a judge.” Fromson v. Western Litho Plate & Supply Co., 853 F.2d 1568, 1574 (Fed. Cir. 1988). Nonetheless, that’s the game if the parties choose to litigate the issue. A good negotiation might be a better solution. RCN

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