The Rochester Democrat and Chronicle reports today that Eastman Kodak reached an out-of-court settlement with Sun Microsystems regarding damages over patent infringement. Financial terms of the agreement have not been disclosed. This announcement comes two days after speculation that the Sun-Kodak case could prove pivotal for the tech industry yet have minimal impact on Sun Microsystems, with their $7 billion in cash and other assets.

A jury had been scheduled to hear arguments today in the damages phase of the Kodak vs. Sun trial (Eastman Kodak Company v. Sun Microsystems, Inc, U.S. District Court, Western District of New York, Rochester, NY, Civil Action No. 02 6074T(F)). A jury already determined that Sun Microsystems did infringe on Kodak’s patents by adding activatable-object technology to Java in late 1997. The amount of damages did not need to be proven with precision, yet the amount of damages sought by Kodak was $1.06 billion, substantially more than the $25 million maximum that Sun Microsystems thought it should pay as a “reasonable royalty.” Both parties agreed that a hypothetical negotiation, representing the date used to determine the damages, would be no later than December, 1997.

To mitigate the damages, Sun took action this week to bring Lloyd Day Jr., one of the founding partners of Day Casebeer Madrid & Batchelder, to the position of lead attorney to represent the company during the damages phase, replacing Michael A. Ladra who served as the lead during the liability phase of the trial. Previously, Mr. Day served as the lead attorney for Sun Microsystems’ victorious suit against Microsoft Corporation (Sun Microsystems, Inc. v. Microsoft Corporation, U.S. District Court, Northern District of California, San Jose, Case Number 97-CV-20884). See Sun’s article and press release about that lawsuit and settlement.

According to Kodak’s Trial Brief Concerning Damages (court services) filed by Kodak on Monday with the court, Kodak was seeking $1.06 billion, an amount determined as “a one-time lump-sum royalty for non-exclusive license to the patents” from December, 1997, the first date of patent infringement. Kodak reasoned that Sun, hypothetically, would have agreed to give Kodak 50% of the $2.1 billion additional operating profit Sun expected to earn from sales of servers and storage equipment for 3 1/2 years beginning in 1998. Kodak pointed out that Sun’s revenues increased from $8.6 billion in June, 1997 to $18.2 billion in June, 2001.

Supporting their assertion of this hypothetical financial agreement between the two companies back in 1997, Kodak stated Sun had a dire need for the Kodak technology in 1997, particularly because of an a economic and strategic need to compete with Microsoft’s DCOM server technology contained in Windows NT. Microsoft licensed the patented technology in 1995, before Kodak bought the patents from the now-defunct Wang Laboratories. Hence, Kodak’s arguments were to rely heavily on showing that the patents were an essential part of Java. It also appears that by establishing that Microsoft (for use in DCOM and OLE), IBM, and HP legally used the patents, Kodak was ready to mitigate and refute Sun’s defense that there were other viable alternatives that Sun could have used, a central concept outlined in Sun’s Trial Brief.

Kodak intended to provide internal documents and public statements by Sun officials, including Scott McNeally and Jonathan Schwartz, supporting Kodak’s claims, as well as videotapes of Sun officers and employees outlining the motivations for the strategic development of Java and what Sun refers to as “developer capture.”

Unless Sun could persuade developers to write applications that ran
on the SPARC/Solaris platform rather than Microsoft Windows, Sun's
entire business was in jeopardy. "Developer capture" was and is
critical to Sun, and has been described by Sun as the "flywheel"
of its business.
- p. 6, Kodak Trial Brief Concerning Damages

Kodak acknowledged that Java would run on non-Sun hardware and software, but stated Sun’s strategy was to get developers to write for the “Java platform” instead of Windows, thus blunting the importance of Sun’s competitor. Kodak claimed Sun’s strategy paid off, making Sun Microsystems the No. 1 supplier of Unix-based computers by 1997 and making the company billions of dollars selling servers during the Internet boom years.

Kodak intended to show that Sun had no choice but to use the patents. Java needed an “identify and call when needed” functionality provided by Kodak’s patents. (This is the functionality that allows, for instance, an EJB container to activate an instance of the bean upon a client’s request.)

Sun was under enormous pressure at the time ...
to add the infringing technology to the Java platform...
Without the infringing technology, server-side Java was doomed.
- p. 8, Kodak Trial Brief Concerning Damages

Back in 1997, the developer community and technical press were buzzing about the fate of Java and RMI. Sun received so much feedback they issued a press release, known as the RMI and IIOP Statement, which was issued as “a courtesy to developers for problem resolution” to directly address developers’ concerns, including the issue of whether “Java Remote Method Invocation (RMI) is being ‘dead-ended’ in favor the other mechanisms for distributed network applications.”

In Sun’s Trial Brief Regarding Damages (court services), a succinct 5 pages including the title page, Sun countered that had Sun negotiated a license to use the patented technologies in 1997, it would have paid no more than $25 million. Sun was expected to offer expert testimony from Emmett J. Murtha, Jonathan Putnam, and Carl Ledbetter. Sun planned to show their calculation of “reasonable royalty” derived from:

...comparable license and sale transactions involving the Khoyi patents,
the sums paid for other, commercially comparable improvements or
additions to the Java platform, and the various non-infringing
alternatives that would have been available to Sun in 1997...
- p. 3 Sun's Trial Brief Regarding Damages

The critical difference between the two sides appeared to be the existence and valuation of alternative technologies that Sun claims would have provided the same benefit of the Kodak patented technologies, “at significantly less cost to Sun than the sums demanded by Kodak.”

In April, 2004, Sun settled their litigation issues with Microsoft out of court. That settlement involved “payments of $700 million to Sun by Microsoft to resolve pending antitrust issues and $900 million to resolve patent issues” and a commitment to a 10-year collaboration for interoperability between Java and Microsoft technologies.