Judge Sides With Microsoft, Overturns $1.5B Patent Award

A federal judge handed Microsoft (Nasdaq: MSFT) a huge victory in a years-old patent spat with telecom giant Alcatel-Lucent (NYSE: ALU) focusing on how personal computers running Windows play back MP3 music files, setting aside a US$1.5 billion jury award granted after the software giant was found to have infringed on two digital music playback patents.

Judge Rudi Brewster of the U.S. District Court for the Southern District of California in San Diego ruled that one of the patents involved in the case was not infringed upon by Microsoft -- directly contradicting the jury's findings. On the second patent, Brewster ruled that the court should not have considered the patent dispute because a co-owner of the intellectual property was not a party to the lawsuit.

"The jury's verdict was against the clear weight of the evidence," Brewster wrote in the 43-page ruling.

Appealing the Ruling

Alcatel-Lucent said it will appeal the judge's rulings to the U.S. Court of Appeals for the Federal Circuit, shifting the case to Washington.

In a statement, Alcatel-Lucent -- formed in a $13.4 billion merger in the spring of 2006 -- called the ruling "shocking and disturbing" and noted that the judge reversed some of his own rulings, including the decision to allow the second patent dispute to be heard without the third party involved.

"After a three-week trial and four days of careful deliberation, the jury unanimously agreed with us, and we believe their decision should stand," Alcatel-Lucent said.

More to Come

Microsoft did not respond to requests for comments on the case. In February, a jury found Microsoft had infringed on the two patents and said Microsoft should pay $1.52 billion. The award is one of the largest in patent case history but fell well short of the $4.5 billion being sought -- a number Alcatel-Lucent said reflected the fact that millions of PCs around the world play back music files using the disputed technology.

Microsoft said at the time it would appeal and said if it stood, the ruling could have far-reaching implications given the ubiquitous nature of MP3 technology into today's world. The judge's ruling came during a review of mainly routine post-trial motions for reconsideration of facts and legal procedure in the case. During a hearing on those motions, Alcatel asked that the jury's award be increased since the original amount only covered PC sales through November 2005.

Microsoft maintains it licensed the technology in question from a German research institute, Fraunhofer-Gesellschaft, paying $16 million for essentially an unlimited license. Lucent maintains it holds MP3 patents developed by Bell Labs -- when it was still owned by AT&T (NYSE: T), which later spun it off -- and has filed a barrage of suits aimed at PC makers and others.

The absence of Fraunhofer in the suit nullified the second patent verdict, Brewster said. As a result, the award is also removed, meaning that if Alcatel-Lucent were to prevail on appeal, a new award would have to be calculated. The $1.5 billion payment was arrived at by calculating a percentage of the value of all PC sold with Windows installed.

Broad Implications

It's not unheard of for judges to set aside a jury's ruling, particularly in complex patent litigation cases, Lee Eulgen, chair of the intellectual property group at Neal, Gerber & Eisenberg, told the E-Commerce Times, but it's also not common.

"It is very unusual for a judge to overturn a jury verdict in the IP arena particularly when the issues for trial were probably well honed by pretrial motions," he said. As for the appeals of the ruling, whether Alcatel-Lucent prevails will depend largely on how the court views Brewster's ruling.

"Appellate courts are very reluctant to tinker with decisions of a jury," he added.

The ruling could have broader implications as well, Vern Winters, a trial lawyer in the global patent litigation practice of Weil Gotshal & Manges, told the E-Commerce Times, particularly because the original award was so large.

"Plaintiffs' lawyers around the country were trying to use that award as leverage in negotiations," he said.

It also speaks to a complex issue about the "bundling" of technology because Alcatel-Lucent had sought to tie its award to the overall sales of PCs. "This opinion will bring a sigh of relief to companies that sell highly bundled products or services," Winters added. "It's a judicial recognition of a commercial reality -- that when patented technology is only a small part of a much larger product or system, it can be inappropriate to get royalties on the whole system."

Opening Doors

The win against Microsoft was seen as opening many doors for Alcatel-Lucent to possibly turn its vast portfolio of intellectual property -- much of it inherited from Bell Labs -- into a cash-generation machine, with the company likely to make claims against others that had licensed MP3 technology from Fraunhofer if the Microsoft ruling had stood.

"For those that create systems using MP3 technology, it removes a little bit of dissonance concerning whether they should pursue a license from Alcatel in addition to licensing from the consortium," said Eulgen. "My guess is that no one else will sign up with Alcatel until this shakes out."

Brewster has sided with Microsoft in the past. In 2005, he tossed out one of Alcatel's claims relating to video playback in the Xbox, saying the patent in question contained a typographical error. Alcatel-Lucent pursued correction of that error from the U.S. Patent and Trademark Office and the suit was filed against late last year.