Federal Circuit Vacates $12.7M Software Infringement Award Against Government, Places Limits on the “Book of Wisdom”
A recent decision by the U.S. Court of Appeals for the Federal Circuit sheds new light on the calculation of “reasonable and entire compensation” under 28 U.S.C. § 1498(b) when the government infringes a copyright by exceeding the scope of a commercial software license. In 4DD Holdings, LLC v. United States, No. 24-1996 (Fed. Cir. July 16, 2026), the Federal Circuit affirmed in part and vacated in part a prior U.S. Court of Federal Claims award of $12.7 million to software developer 4DD Holdings, LLC (4DD) for the government’s infringement of its copyrighted TETRA software. Although the Federal Circuit held that the trial court properly calculated damages using a hypothetical negotiation rather than the parties’ actual license rates, the court vacated the award because the trial court: (1) improperly relied on the “book of wisdom” doctrine to consider the government’s later, unforeseeable cancellation of the TETRA program; and (2) erroneously awarded enhanced statutory damages for willful infringement, which are not available against the government under § 1498(b).
Background
As we discussed in our December 2023 client alert, 4DD licensed 64 Federator cores and 50 Studio seats of its TETRA software to the U.S. Department of Defense (DOD) in 2013 through an authorized reseller. The license permitted only a single backup copy, and because TETRA’s built-in copy detection tools had been disabled for security reasons, the government was left to police its own compliance but failed to do so.
In adapting TETRA to the government’s networks, the lead contractor created “thousands” of unauthorized copies. After 4DD notified the government, the parties negotiated a “true-up” in which the government paid roughly $1.7 million for 168 cores at the negotiated rate. But while those negotiations were ongoing, a government official ordered the deletion of every TETRA copy in the government’s possession even though it had not acknowledged the copies’ existence during the true-up process. After a change in leadership, DOD ended its work with TETRA before final implementation.
In 2015, 4DD sued for copyright infringement under 28 U.S.C. § 1498(b), seeking more than $5 billion in damages. The Court of Federal Claims sanctioned the government roughly $1.1 million for spoliation arising from the destroyed TETRA copies and found that the government had exceeded its license by more than 290,000 cores and 171,000 Studio seats. Based on a hypothetical negotiation, the court awarded 4DD $12.7 million, a small fraction of the $5 billion that 4DD claimed using its established rates.
The Federal Circuit’s Decision
4DD appealed, claiming the Court of Federal Claims erred by (1) measuring damages using a hypothetical negotiation rather than the pricing in the parties’ license agreement; and (2) alternatively, if a hypothetical negotiation was permissible, constructing the negotiation improperly. The Federal Circuit’s opinion included three important holdings clarifying how copyright damages are assessed against the government under 28 U.S.C. § 1498(b).
First, it rejected 4DD’s claim that previously-agreed rates control as a matter of law when the same parties later litigate copyright infringement of the same software. The Federal Circuit explained that no statute or precedent requires courts to adopt negotiated rates automatically. Their relevance instead turns on how closely the agreements track the infringing activity. And if the infringing use diverges from the licensed use, a court may instead use a hypothetical negotiation.
Second, the court limited the application of the “book of wisdom” doctrine, which allows courts to consider post-negotiation events when valuing a patent or copyright as of an earlier date, holding that, although the doctrine allows courts to use later evidence to inform the value that existed at the time of negotiation, it is not without limits. Most notably, it does not permit courts to impute knowledge of later events that were unforeseeable when the negotiation would have occurred (here, the government’s change in leadership and decision to abandon TETRA before implementation). Because the Court of Federal Claims treated that cancellation as the fact “most damaging” to 4DD’s position, and that error could not be separated from its conclusion that the government held a “substantially superior” negotiating position, the Federal Circuit vacated and remanded.
Third, the court held that the Court of Federal Claims erred in awarding $150,000 for the Studio copies, an amount pegged to statutory damages under the Copyright Act. Section 1498(b) incorporates only “the minimum statutory damages as set forth in section 504(c) of title 17.” Given § 1498’s eminent domain roots, non-compensatory damages, including enhanced statutory damages for willful infringement, are unavailable against the government.
Implications for Software Licensors
For software licensors, 4DD reinforces lessons from our prior coverage of government software licensing disputes. Foremost: even massive over-copying by the government will not automatically yield damages at contract rates. Contractors might instead be subject to hypothetical negotiations in which the government’s leverage and other unpredictable factors can sharply reduce recovery.
The decision also curbs the government’s ability to bargain with hindsight. On remand, the Federal Circuit directed the Court of Federal Claims to reassess the parties’ relative positions as of the negotiation date, setting aside the government’s later abandonment of the program – a correction that could meaningfully increase 4DD’s recovery, unless the remaining evidence independently supports the same result. Either way, 4DD is a pointed reminder that a licensor’s path from headline infringement numbers to actual compensation runs through a hypothetical negotiation the government is often well-positioned to win.
Attorneys in Wiley’s Government Contracts and Intellectual Property practices are available to help evaluate and advise on intellectual property matters, including negotiation of data rights and technology licensing.
