StarDestroyer.Net BBS

Microsoft Told to Pay Alcatel-Lucent $1.52 Billion (Update7)

By Jeff St.Onge and Bill Callahan

Feb. 22 (Bloomberg) -- Microsoft Corp., the world's biggest software company, must pay Alcatel-Lucent $1.52 billion for using digital music technology without permission, a federal jury said in the largest patent ruling ever.

Microsoft infringed two Alcatel-Lucent patents with its Windows Media Player, including the version in the new Vista operating system, a San Diego jury said today. Microsoft said it will appeal the verdict.

The decision allows Alcatel-Lucent, the world's biggest maker of communications equipment, to seek an order barring Microsoft from using the patented technology. Alcatel-Lucent's victory also may clear the way for legal actions against hundreds of companies that rely on MP3, the standard for playing music and sound files on a computer, mobile phone or digital-music player.

``Obviously that's going to be appealed as high as it can be appealed,'' said Brian Ferguson, a patent lawyer at McDermott Will & Emery in Washington who wasn't involved in the case. ``It'll be interesting to see if that royalty can withstand scrutiny.''

The damage award, which represents about six weeks of free cash flow for Redmond, Washington-based Microsoft, may be halved if the software maker wins an unrelated case currently before the Supreme Court that could alter how patent damages are calculated for software companies with overseas sales. Arguments in that case were held yesterday in Washington.

Microsoft shares rose 4 cents to $29.39 at 4 p.m. in Nasdaq Stock Market composite trading. Alcatel-Lucent American depositary receipts, each representing one ordinary share, rose 7 cents to $13.14 on the New York Stock Exchange.

Bell Labs Connection

Microsoft said it licenses the technology from a German researcher, Fraunhofer Institute for Integrated Circuits IIS. Fraunhofer helped develop MP3 audio-compression technology with Bell Labs, once part of Lucent Technologies Inc., which Alcatel SA acquired last year.

``The damages award seems particularly outrageous when you consider we paid Fraunhofer only $16 million to license this technology,'' Microsoft Deputy General Counsel Tom Burt said in an e-mailed statement. ``Today's outcome is therefore disappointing for us and for the hundreds of other companies who have licensed MP3 technology.''

Microsoft, which had almost $29 billion in cash and short- term investments as of Dec. 31, said it will ask U.S. District Judge Rudi M. Brewster to overturn the verdict and will seek further review in an appeals court if necessary.

The damage award is ``not particularly material in our opinion when considered with the amount of cash on Microsoft's balance sheet and substantial free cash flow generation of about $1 billion per month,'' Goldman Sachs Group Inc. analyst Rick Sherlund in New York wrote in a note to clients.

Compensation

The jury was unable to decide whether the infringement was willful, so that count was dismissed. A ruling in Alcatel- Lucent's favor on that could have resulted in a tripling of the verdict.

Alcatel-Lucent will decide later whether to seek to block Microsoft from using the technology, said Alcatel-Lucent lawyer John Desmarais of Kirkland & Ellis in New York.

A witness for Alcatel-Lucent testified during the trial that $1.52 billion would be reasonable compensation for Microsoft's use of the technology without permission. That figure was based on a 0.5 percent royalty on the hundreds of millions of computers sold worldwide that contain the Windows operating system, not the Windows software itself.

``Obviously we're very happy with the verdict,'' said Barbara Landmann, president of intellectual property and standards for Paris-based Alcatel-Lucent. ``We fight hard to protect our intellectual property and are glad the jury agreed with our argument.''

Supreme Court

The issue of whether software makers such as Microsoft should pay damages for programs installed on computers made and sold outside the U.S. was the subject of U.S. Supreme Court arguments yesterday in another patent suit that Microsoft lost.

About half of today's verdict represents foreign sales that could be affected by the outcome of that case, Microsoft said.

The jury found that Alcatel-Lucent is entitled to more than $759 million for each of the two patents found to be infringed. It also upheld the validity of the patents. The jury of eight men and one woman began weighing the case Feb. 15, a day after lawyers made final arguments in a 12-day trial.

``It wasn't easy,'' said jury foreman Ronald Bacon, a retired manager at chipmaker Qualcomm Inc. ``There was a lot of data, whoa. We went through excruciating analysis of each of the counts. We plowed through a lot of that data.''

The dispute started in 2002 when Lucent sued computer makers Gateway Inc. and Dell Inc. over technologies including this one. Microsoft joined the case because it may be obligated to reimburse Dell and Gateway for any damages they have to pay. The trial over MP3 was between only Microsoft and Alcatel-Lucent.

The case is Lucent Technologies Inc. v. Gateway Inc., 02cv2060, U.S. District Court for the Southern District of California (San Diego).

Sharp-kun wrote:Unless I'm missing it, the article doesn't say what patents were infringed.

Please says its not something like "we patented mp3, so anyone that's made a player for it is now a criminal".

Praxis wrote:While part of me cheers to see Microsoft smacked down, if that is truly the case, this sets a TERRIBLE precedent and this company is going to go after everyone using the MP3 codec next (Apple, Creative, Sandisk, all the MP3 players makers...heck who knows, maybe even distributors of various players like RealPlayer and QuickTime and Winamp), so I hope Microsoft wins the appeal.

Archaic` wrote:Seeing that Microsoft and everyone else licensed their MP3 from Fraunhofer, who did help produce the thing in the first place, I'm wondering how this can be patent infringement. Is it simply that Fraunhofer aren't joint holders of the US patent?

MP3 Patents in Upheaval After Verdict
By SAUL HANSELL
Published: February 23, 2007

Microsoft was ordered by a federal jury yesterday to pay $1.52 billion in a patent dispute over the MP3 format, the technology at the heart of the digital music boom. If upheld on appeal, it would be the largest patent judgment on record.

The ruling, in Federal District Court in San Diego, was a victory for Alcatel-Lucent, the big networking equipment company. Its forebears include Bell Laboratories, which was involved in the development of MP3 almost two decades ago.

At issue is the way the Windows Media Player software from Microsoft plays audio files using MP3, the most common method of distributing music on the Internet. If the ruling stands, Apple and hundreds of other companies that make products that play MP3 files, including portable players, computers and software, could also face demands to pay royalties to Alcatel.

Microsoft and others have licensed MP3 — not from Alcatel-Lucent, but from a consortium led by the Fraunhofer Institute, a large German research organization that was involved, along with the French electronics company Thomson and Bell Labs, in the format’s development.

The current case turns on two patents that Alcatel claims were developed by Bell Labs before it joined with Fraunhofer to develop MP3.

“Intellectual property is a core asset of the company,” said Joan Campion, a spokeswoman for Alcatel-Lucent. “We will continue to protect and defend that asset.”

Thomas W. Burt, the deputy general counsel of Microsoft, said the company would most likely petition the judge in the San Diego case, Rudi M. Brewster, to set aside or reduce the judgment. If he does not, Microsoft will probably take the case to the federal appeals court in Washington, which hears patent cases.

Microsoft argued that one patent in question did not apply to its MP3 software and that the other was included in the Fraunhofer software that it paid to license.

Moreover, it argued that the damages sought by Alcatel were unreasonably high, pointing out that it paid Thomson, which represented the consortium in its dealings over the patent, a flat $16 million fee for the rights to the MP3 software.

“We think this is just plain wrong,” Mr. Burt said. “They told the jury to measure damages, not on the value to Microsoft of one of the 10,000 features in Windows, but on the value of the entire computer.”

Alcatel argued that the damages should be based on a royalty of 0.5 percent of the total value of Windows computers sold.

John M. Desmarais, a partner with Kirkland & Ellis who represented Alcatel, said the proposed damages were consistent with patent law. He said it was not appropriate to compare them with the $16 million Microsoft paid Thomson because the rights to the Bell Labs patents were far more valuable.

“It’s like going to the supermarket and paying $1 for a bar of soap,” he said. “That lets you use the soap. We were offering the equivalent of the right to make soap any way they wanted.”

The jury supported Alcatel’s arguments on every count except one. It deadlocked on the question of whether Microsoft willfully infringed on the Bell Labs patents. If the jury had found that it did, Microsoft would have had to pay triple damages.

“Microsoft has been and to some degree continues to be at a competitive disadvantage, as it did not file for patents for many, many, many years,” said Jack Russo, a patent lawyer with Russo & Hale in Palo Alto, Calif.

That makes it harder, he said, to work out deals with other large companies in which they exchange the rights to each other’s patents.

Large companies like AT&T and I.B.M. “have huge patent portfolios and that represents large and unpredictable risks for companies like Microsoft,” he said.

The judgment is part of litigation by Alcatel to enforce claims related to Bell Labs patents. The case was initially brought against Dell and Gateway, which make computers using Microsoft software. Other trials are pending for technology related to speech recognition, user interfaces and video processing.

Microsoft has countered with a claim, filed with the International Trade Commission, that Alcatel is violating its patents related to messaging technology.

The largest award for a patent infringement case to date was the $909 million that Kodak was ordered to pay in 1990 to Polaroid for violating patents related to instant cameras. That case also forced Kodak to exit the instant photography market and recall its cameras.

Mr. Burt said the appeals process might take another year or two. He said he did not expect that the courts would force Microsoft to remove the MP3 functions from Windows.

Ms. Campion of Alcatel declined to comment on whether that company would pursue similar claims against makers of MP3 players, like Apple.

An Apple spokesman declined to comment. A Thomson spokesman did not return calls or e-mail messages requesting comment.

If the judgment is affirmed, the damages payment would make only a modest dent in Microsoft’s cash hoard, which totaled almost $29 billion at the end of last year.

News of the ruling surfaced just before the regular close. Microsoft’s shares closed at $29.39, up 4 cents, and fell 11 cents after hours.

Alcatel-Lucent American depository receipts, each representing one ordinary share, rose 7 cents, to $13.14, in regular trading, and 34 cents after hours.