Judge Undoes $1.5B MP3-Patent Ruling Against Microsoft

SEATTLE – A U.S. judge on Monday threw out a record $1.5 billion verdict against Microsoft Corp. (MSFT), ruling the world's largest software had not infringed on audio technology patents held by France's Alcatel-Lucent (ALU).

Microsoft said the reversal was a victory for other technology companies who could have been at risk to patent infringement charges if Alcatel won.

A federal jury in San Diego ruled in February that Microsoft had violated two patents related to MP3 audio files and handed Alcatel-Lucent the largest-ever damages award in a U.S. patent case.

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MP3 is the standard digital music format, which allows audio to be compressed so that it can be easily played on computers, mobile phones or digital music players.

The court heard a post-trial motion on July 25 and 26 when Microsoft asked for the verdict to be reversed, a new trial or dramatic reduction in damages.

U.S. District Judge Rudi Brewster said in a 43-page order that the jury's damages could not stand because Microsoft had not violated one of the two patents.

The judge also called into question the second patent claim in the case, saying that Microsoft licensed the technology from the German research organization Fraunhofer Gesellschaft, a co-owner of the patent.

"The Court finds that the jury's verdict of infringement was against the clear weight of evidence," Brewster wrote in his opinion.

Alcatel-Lucent spokeswoman Mary Ward said the reversal was "shocking and disturbing" and the company planned to appeal the latest decision.

[French telecoms giant Alcatel and Lucent, formerly the research-and-development arm of AT&T, merged in December 2006. The MP3 patent dispute is based on work done at Bell Labs, later Lucent, in the 1980s. Several other companies claim to hold patents on MP3 encoding, though the informally recognized clearinghouse for licensing is the non-profit Fraunhofer Institute.]

Redmond, Wash.-based Microsoft said there will no new trial unless the French networking company appeals the decision to the U.S. Federal Circuit Court and succeeds in overturning the San Diego court's ruling.

Even if that is the case, damages from the original ruling will not be reinstated, Microsoft said.

Analysts and lawyers said the jury's ruling had left other providers of hardware and software that support MP3 files vulnerable to claims from Alcatel-Lucent. Those companies included Apple Inc. (AAPL) and Sony Corp. (SNE)

"Today's ruling by the judge reversing the jury's $1.52 billion verdict against Microsoft is a victory for consumers of digital music and a triumph for common sense in the patent system," said Brad Smith, Microsoft's general counsel.

PATENT BATTLES

Intellectual property lawyers said the jury's $1.5 billion ruling — based on an award of 0.5 percent of global personal computer sales since around mid-2003 — was bound to be lowered after a landmark U.S. Supreme Court ruling in April.

By a 7-1 vote on an unrelated case, the justices overturned a ruling that Microsoft should be held liable for patent infringement on copies of the Windows operating system sold overseas.

"Some modification to the jury verdict was inevitable in light of the recent landmark Supreme Court decision," said Alan Fisch, an intellectual-property attorney at Kaye Scholer LLP in Washington.

Microsoft and Alcatel-Lucent are locked in a number of patent disputes, including a suit over the video-decoding technology in Microsoft's Xbox 360 video game console

The software maker also joined Dell Inc. (DELL) and Gateway (GTW) to fight a suit brought by Lucent over a group of four patent cases involving user interface technology in Windows technology licensed by those hardware manufacturers.

Based on Microsoft's 9.4 billion shares outstanding, the original damages ruling could have cost the company about 16 cents per share. Shares of Microsoft closed up 58 cents at $29.54 in Monday Nasdaq trade.