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Microsoft loses music patent case

Times Staff Writers

A San Diego jury on Thursday told Microsoft Corp. to pay $1.52 billion for infringing patents underpinning the world’s most popular digital music standard, known as MP3.

The verdict, one of the largest patent awards on record, could open other technology companies to massive liability.

Virtually every portable digital music player uses MP3 technology to read music files, including Apple Inc.'s iPod. The format is also used in computer desktop software such as Microsoft’s Windows Media Player, RealNetworks’ Real Player and Apple’s iTunes.

“Anybody who uses the MP3 standard would be subject to the same arguments,” said John Desmarais of Kirkland & Ellis in New York.

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Desmarais represented the winner in the case, Alcatel-Lucent. The French telecommunications equipment giant owns patents for compressing music files developed by Bell Labs, a unit of Lucent Technologies Inc., which Alcatel acquired last year.

Alcatel convinced the jury that Bell Labs was the first to develop the fundamental technology for compressing music files that would become the basis for the MP3 format.

Alcatel’s executives “have to have stars in their eyes about how much they can extract,” said Mark Radcliffe, a Silicon Valley intellectual property attorney at Gray Cary Ware & Freidenrich.

Microsoft said it would petition the judge to reduce or set aside the verdict.

“We don’t think that there is any realistic chance of this verdict being sustained through ultimate review by the courts,” Microsoft deputy general counsel Tom Burt said.

Microsoft had argued in the case that it protected itself by paying $16 million in royalties to Germany’s Fraunhofer Institute, which is credited with developing the MP3 audio-compression technology.

More than a hundred companies have paid Fraunhofer licensing fees to protect themselves against a lawsuit. Among them are Apple, Hewlett-Packard Co., Toshiba Corp., Intel Corp., Bang & Olufsen, RealNetworks and Yahoo Inc.

Microsoft argued during the trial that just one of the licensees paid Alcatel a licensing fee of $1,450.

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Jennifer Urban, director of the Intellectual Property Clinic at USC, said the case illustrated one of the largest fears for technology companies.

“Companies have long been worried that there are patents out there that they may not know about that someone could bring back and sue them over, over some kind of foundational technology that everybody uses,” Urban said. “Microsoft has had that worry made real to them to the tune of $1.52 billion.”

The damages, yet to be finalized by the judge hearing the case, were based on the number of Windows Media Player programs that have been installed on hundreds of millions of personal computers since 2003.

Burt of Microsoft questioned whether it was appropriate to base damages on the sale of computers, instead of the much lower cost of the Windows software within it. He said that Microsoft would challenge that formula either before the trial judge or on appeal.

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In 2003, Alcatel sued computer makers Gateway Inc. and Dell Inc., which sell computers with the Media Players pre-installed. Microsoft intervened, filing a complaint against Alcatel and seeking a judge’s ruling that its software did not infringe Alcatel’s patents. Alcatel then filed a counterclaim.

Testimony in the jury trial spanned three weeks and included highly technical testimony about compression techniques.

In the end, Alcatel won money equal to one half of one percent of the average price for Windows-based computers sold since the second half of 2003.

If the Alcatel ruling holds up, it would be by far the largest financial judgment against the world’s biggest software company. In antitrust settlements, Microsoft has paid out billions, topped by the $2 billion it gave Sun Microsystems Inc. in 2004.

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Although Microsoft would hardly feel the pain from such an award considering the $29 billion in cash and securities on its balance sheet, other companies could be squeezed if such a formula was applied across the digital music landscape.

“This is a high-volume, low-margin industry, so when you talk about half a point, right off the bottom line, that’s a significant number,” said Jonathan Potter, executive director of the Digital Media Assn., a Washington-based trade group.

“We have made strong arguments supporting our view, and we are pleased with the court’s decision,” Alcatel spokeswoman Mary Lou Ambrus said.

Microsoft and Alcatel are embroiled in a wide range of disputes over each other’s use of technology.

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The San Diego judge will preside over three more patent disputes between the companies. Each will be tried before different juries. One of the claims yet to be heard, concerning Alcatel’s video patents, could also lead to damages of more than $1 billion, according to Microsoft.

The Microsoft ruling could add momentum to calls for patent reform by Congress in the wake of record awards by juries.

In 1993, a L.A. jury awarded Litton Industries Inc. a then-record $1.2 billion from Honeywell in a fight over a gyroscope patent. After the verdict was reversed and a lower amount was awarded at retrial, the two sides settled for $440 million.

And in 2004, Los Angeles back surgeon Gary Michelson won $510 million in cash and as much as $2 billion in royalties, covering two decades, for spinal implants and other patented inventions. He later settled with Medtronic Inc. for $1.35 billion, which included Medtronic’s purchase of some of Michelson’s creations.

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joseph.menn@latimes.com

dawn.chmielewski@latimes.com

Times staff writer Michelle Quinn and researcher Scott Wilson contributed to this report.


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