The US Court of Appeals for the Federal Circuit has vacated part of a damages award against the government in a copyright infringement case involving military healthcare software.
The case, 4DD Holdings, LLC, et al. v. United States, centred on TETRA software licensed to the US Department of Defense and the US Department of Veterans Affairs.
4DD licensed TETRA to improve interoperability among existing military healthcare databases, permitting the government to make only a single backup copy of the software.
4DD later discovered the government had made thousands of unauthorised copies and sued for copyright infringement, eventually also seeking sanctions after evidence was destroyed.
The Court of Federal Claims had imposed roughly $1.1 million in sanctions and awarded approximately $12.7 million in damages based on a hypothetical negotiation framework.
4DD argued on appeal that damages should have been calculated using royalty rates from the parties’ existing licence agreement, which it claimed would have produced an award of between $3 billion and $5 billion.
The Federal Circuit rejected that argument, explaining that 28 U.S.C. ยง 1498(b), which provides for “reasonable and entire compensation,” does not require any particular methodology for calculating copyright damages.
The court noted that the relevance of prior licence agreements depends on whether they are economically comparable to the infringing use, and here the licensed and infringing uses differed materially.
However, the Federal Circuit agreed with 4DD that the claims court had misapplied the book of wisdom doctrine by imputing to the government knowledge of its later decision to abandon the TETRA project entirely.
The court clarified that while later-occurring facts may reduce uncertainty about the value existing at the time of a hypothetical negotiation, they cannot be used to impute knowledge of unforeseeable future events that affect the value of a licence.
The government’s subsequent change in leadership and resulting decision to discontinue TETRA before it was implemented had been improperly used to diminish 4DD’s bargaining position in the damages analysis.
Because that error affected the hypothetical negotiation and the reasonable royalty analysis that flowed from it, the Federal Circuit vacated the damages award and remanded the case for reconsideration.
The court also vacated a separate $150,000 award for unauthorised Studio copies, ruling that 28 U.S.C. ยง 1498(b) authorises only compensatory damages against the government and does not permit enhanced statutory damages for wilful infringement.
The Federal Circuit did affirm the claims court’s consideration of a similar, less expensive competing software product when evaluating the parties’ respective bargaining positions in the hypothetical negotiation framework.