Microsoft Loses Patent Lawsuit, Must Pay Rival $120 Million


A Los Angeles jury Wednesday ordered Microsoft Corp. to pay $120 million for infringing a software patent held by Stac Electronics Co., a much smaller software firm based in Carlsbad, Calif.

The verdict may help nudge the balance of power in the computer software industry. This is the first time that Redmond, Wash.-based Microsoft, which has a reputation as the industry’s Goliath, has been found to have infringed a patent.

Software patents remain controversial; critics have contended that the U.S. Patent Office does not understand the industry and issues patents that are too broad. Patent attorneys said Wednesday’s decision will encourage small software firms to use patents as leverage against the industry’s big players.


“We have provided a prototype of how small, innovative companies can use patent protection to erect a barrier to entry of a strong competitor,” said Stac Chief Executive Gary Clow. “It wasn’t easy, but we showed we can compete with Microsoft.”

The jury in U.S. District Court found that the data-compression technology contained in Microsoft’s MS-DOS 6.0 software infringed a patent held by Stac, whose core product is a program known as Stacker, which similarly performs data compression.

The technology at issue in the case allows personal computer users to store nearly twice as much data on their hard drives without buying bigger ones, a big plus in an era of swollen software and gigantic graphics files.

Microsoft had negotiated with Stac for several months in 1992 to license the smaller firm’s technology, but the companies failed to reach an agreement. DOS, one of Microsoft’s core products, is the basic operating system used in nearly 100 million IBM-compatible personal computers around the world. The company has shipped about 22 million units of DOS 6.0 and upgrades so far.

Clow said Stac plans to seek a permanent injunction to prevent Microsoft from shipping new copies of MS-DOS with the contested feature. Microsoft said it will appeal the decision and “take every step possible to prevent an injunction,” but will immediately release a version of MS-DOS 6 without data compression.

Sales of DOS 6.2 without data compression are likely to improve sales of Stacker. That may help put to rest Stac’s other legal problem, a shareholder class-action suit that accuses the company and its top executives of misleading investors in connection with an initial public offering last May.

Stac went public at $12 a share, then slipped to $3 after Microsoft announced it was shipping DOS 6.0 with Doublespace, its data-compression feature.

Stac shares stopped trading on Nasdaq before the trial’s outcome was announced. Before the halt, Stac was up 12.5 cents at $4.375. Microsoft closed $1.50 higher at $81, also on Nasdaq. Analysts said Microsoft’s shares rose on separate news about new product releases.

Microsoft said that if it has to pay the $120 million, the figure will account for a 26-cent-per-share charge against earnings. The award represents about three times Stac’s 1993 revenue of $37 million.

Microsoft did win one of seven counterclaims. The jury ruled that Stac illegally used access to Microsoft trade secrets to make one of its software products, Stacker 3.1, compatible with MS-DOS 6.0. Microsoft was awarded about $13.6 million in damages.

During the trial, Stac’s lawyers showed a videotape of Microsoft Chairman Bill Gates--who testified during the monthlong trial--at the unveiling of MS-DOS 6.0 in which he wore a T-shirt saying, “We came, we saw, we doubled,” to underscore the importance of the compression feature.