Record-Setting $1.5B Fine Against Microsoft Nixed

[Sunite]

Record-Setting $1.5B Fine Against Microsoft Nixed
By Richard Koman
August 7, 2007 11:25AM

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With a judge overturning the $1.5 billion jury verdict in Alcatel-Lucent's patent case against Microsoft, many tech companies are breathing a sigh of relief. Alcatel-Lucent's case against Microsoft was closely watched in Silicon Valley because if the jury decision were upheld, hundreds of companies could have found themselves facing similar suits.

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   Microsoft
   Bell Labs
   Patents
   Alcatel
   Lucent
   MP3
   Windows Media

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   A federal judge in San Diego shocked Alcatel-Lucent by throwing out its $1.5 billion award against Microsoft Relevant Products/Services for infringement of certain MP3 patents. In March, a jury had found Microsoft liable for infringing two of Alcatel-Lucent's patents and issued the largest patent-infringement award in history.

Responding to a post-trial motion by Microsoft, U.S. District Court Judge Rudi Brewer found that on one of the patents, the jury was simply wrong and that Microsoft had not infringed. On the other, the judge found that because the Fraunhofer Institute, a part-owner of the patent, had not joined in the case, the award should not have been given. A retrial on that issue may be required, the judge said.

Brewer wrote: "The Court finds that the jury's verdict of infringement was against the clear weight of evidence" -- the standard for a court to overturn a jury decision.

Sigh of Relief in Silicon Valley

The case has been closely watched in Silicon Valley because if the jury decision were upheld, hundreds of companies -- from Apple on down -- could have found themselves facing similar infringement judgments.

"Everyone's been holding their breath about this case," said Denise Howell, an appellate and intellectual property attorney in Newport Beach, California. "This would have been a pretty big stick to come after people for licensing fees. The judge clearly thought there was something wrong about the decision."

While Microsoft -- and most other technology companies -- license MP3 patents from a consortium led by Fraunhofer, the Alcatel-Lucent patents were developed by Bell Laboratories before it joined with Fraunhofer in 1989 to develop MP3. Alcatel-Lucent is the descendant of Bell Labs.

A Question of Timing

A key issue in the case was whether the inventions covered by the patents were created before or during the period of cooperation between Bell Labs and Fraunhofer. The judge found that one of the patents was covered by the companies' agreement and that Fraunhofer was therefore a co-owner of the patent. Because "an action for infringement must join as plaintiffs all co-owners," the court dismissed that claim.

The judge found that Microsoft didn't infringe the other patent because Lucent failed to show that the so-called backup HQ encoder in Windows Media Player in fact performed the patented operation. "Lucent offered circumstantial evidence that proved at most" that the encoder was "possibly capable" of running, the judge wrote. "What it failed to show, circumstantially or otherwise was that HQ had actually ever run and performed the claimed method."

Microsoft was jubilant in its victory. The ruling is a "victory for consumers of digital music and a triumph for common sense in the patent system," the company said in a statement.

New Litigation Guaranteed

Alcatel-Lucent announced it will appeal the judge's decision to the U.S. Court of Appeal for the District of Columbia. It called the judge's ruling "shocking and disturbing, especially since -- after a three-week trial and four days of careful deliberation -- the jury unanimously agreed with us."

Howell agreed that the decision is surprising. "That sort of decision by a trial judge is pretty rare," she said. "They usually defer to the jury." It's also unusual to find lack of jurisdiction after the trial is completed, she added.

The jury calculated damages according to an equation of 0.5 percent of the average price of a PC, multiplied by every copy of Windows. According to a Microsoft spokesperson, even if Alcatel were to win on appeal, the rate of royalties and the basis for determining it will be retried.