How do you calculate damages when a licensed software user exceeds the number of permitted copies by a factor of more than 1,000?  And the user destroys incriminating evidence?  And the user is the United States government?

By multiplying the per user license fee by more than 1,000?  By estimating what the license fee would have been had the vastly increased use been licensed?  And if the model is a hypothetical negotiated fee for the increased use, can the court take cognizance of events that happened after the time of the hypothetical negotiation?

The Federal Circuit recently answered these last three questions no, yes, and yes but not the way the trial court did it, in 4DD Holdings, LLC v. United States, 2026 WL 2053795 (Fed. Cir. 7/16/26).  Damages in copyright cases involving licenses is a contentious issue. Courts have wrestled with whether to award a reasonable license fee or to use some other measure of damages.  The 4DD Holdings decision provides guidance.

4DD Holdings, LLC v. United States:  What Happened

The U.S. Defense Department licensed software called TETRA from 4DD for a database project.  The fee was $10,447 for each of 64 computer “cores” and $3,337 for each of 50 users (“seats”), a total of about $800,000.  Six months later, 4DD became aware that the Defense Department had applied the software to more than 64 computer cores.  4DD and the Defense Department negotiated an added fee, at the contract unit price, for 168 more cores, about $1.7 million.

What 4DD didn’t find out until later was that a contractor assisting the Defense Department had made thousands of additional copies of TETRA.  4DD sued the government, asking for $5 billion in damages, at the license rate per core and seat.

The trial court found that the Defense Department had exceeded its licensed units by 290,334 computer cores and 171,421 user seats, more than 1,000 times the number of licensed cores and seats.  The trial court also found that the Defense Department had destroyed evidence, resulting in an adverse inference and about $1.1 million in sanctions.

However, the trial court, seeking to determine “reasonable and entire compensation,” rejected the license rate per unit as the measure of damages. (The “reasonable and entire compensation” standard comes from the statute under which U.S. sovereign immunity is waived, but the Federal Circuit stated that the methods used to determine actual damages under the Copyright Act are also appropriate for assessing damages under the sovereign immunity waiver statute.)

Instead of using the license rate per unit, the trial court constructed a hypothetical negotiation to approximate what the parties would have agreed to had the Defense Department contracted for all of the use that was actually made.  The trial court took the following factors into consideration:  TETRA “provided the Government with little value, TETRA had no established profitability, and there existed a similar and cheaper software.” The trial court arrived at a hypothetical license fee of $12.6 million.

The Appeals Court Ruling

On appeal, the Federal Circuit affirmed the hypothetical license method of measuring damages, but found that the trial court had erred in applying one aspect of that method.

The Federal Circuit agreed that applying the unit rates from the actual license was not compulsory and that “the use of past licenses [viz., the actual license] as evidence must always take account of economically relevant differences between the circumstances of those licenses and the circumstances of the matter in litigation.” The Federal Circuit also held that in constructing the hypothetical license that the parties would have agreed to for the use actually made, the courts are not confined to facts that occurred before the time of the hypothetical negotiation.  Citing Supreme Court precedent, the Court said that “factual developments that occur after the date of the hypothetical negotiation may nonetheless still inform a court's damages analysis.” The Court cited an old (1933) Supreme Court patent case, which stated “the use that has been made of the patented device is a legitimate aid to the appraisal of the value of the patent at the time of the breach.”

The Federal Circuit said that the trial court properly considered how the Defense Department's contractor adapted TETRA for the Defense Department, which occurred after the making of the license.  The Court said, however, that there is a limit to use of what it called the “book of wisdom.” (Events occurring after the date of the hypothetical negotiation are referred to, both in the 4DD case and earlier cases, quaintly, as “the book of wisdom.”) The Court stated that the “book of wisdom” may not be used “to impute knowledge of later-occurring events... that were unforeseeable at the time of negotiating.” The Court held that the trial court erred in considering the fact that the Defense Department canceled the TETRA license after only two years of use.  The Federal Circuit vacated the judgment below and remanded the case for further proceedings.

In peering into the “book of wisdom,” it is an interesting question what “later-occurring events” should be deemed “unforeseeable at the time of negotiating.” How foreseeable are any later-occurring events? One astute commentator has said, “it is very difficult to make predictions, especially about the future.”[1]

Whatever the dividing line is between foreseeable and unforeseeable future events, the 4DD case clearly stands for the propositions that damages for exceeding the scope of a software license need not always be measured by the unit price in the license, and that in assessing the licensor’s damages, at least some events occurring after a hypothetical negotiation for a hypothetical license for the use actually made may be considered.