The US Court of Appeals for the Federal Circuit vacated in part a US Court of Federal Claims damages award, finding that the court erred in applying the book of wisdom in its damages analysis and assessing noncompensatory damages against the government. 4DD Holdings, LLC, et al. v. United States, Case No. 2024-1996 (Fed. Cir. July 16, 2026) (Hughes, Prost, Stark, JJ.)

4DD licensed TETRA software to the US Department of Defense and the US Department of Veterans Affairs to improve interoperability among existing military healthcare databases. Under the license, the government was permitted to make only a single backup copy of TETRA. 4DD later discovered that the government had made thousands of unauthorized copies of the software and sued for copyright infringement. During discovery, 4DD learned that the government had deleted TETRA copies from its development and test center and had destroyed evidence related to those copies. 4DD moved for sanctions.

The Court of Federal Claims imposed about $1.1 million in sanctions, found that the government had exceeded the scope of the licenses by hundreds of thousands of Federator cores and Studio seats, and awarded about $12.7 million in damages based on a hypothetical negotiation rather than the parties’ license agreement. In assessing the parties’ bargaining positions, the claims court relied in part on the fact that TETRA was never implemented, had no established profitability, and faced competition from a less expensive software product. 4DD appealed.

4DD argued that the claims court should have calculated damages using the royalty rates established in the parties’ license agreement, which it contended would have resulted in an award amount between $3 billion and $5 billion. The Federal Circuit disagreed, explaining that 28 U.S.C. § 1498(b), which provides for “reasonable and entire compensation,” does not require a particular methodology for calculating copyright damages. Although a reasonable royalty may be based on an established royalty rate, it may also be determined through a hypothetical negotiation. The Court explained that the relevance of prior license agreements depends on the extent to which they are economically comparable to the infringing use. Because the government’s licensed use differed materially from the scope of its infringing use, the Federal Circuit concluded that the claims court did not abuse its discretion in determining damages through a hypothetical negotiation rather than by simply applying the parties’ license rates.

4DD also argued that the claims court misapplied the book of wisdom doctrine by imputing to the government (at the time of the hypothetical negotiation) knowledge of its later decision to abandon the TETRA project. The Federal Circuit agreed. The Court explained that although later-occurring facts may be considered to reduce uncertainty and illuminate the value that existed at the time of the hypothetical negotiation, they may not be used to impute knowledge of unforeseeable future events that affect the value of the license. Here, the court’s claims improperly relied on the government’s subsequent change in leadership and resulting decision to discontinue the project before TETRA was implemented to diminish 4DD’s bargaining [...]

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