Microsoft Ordered To Pay $1.5 Billion In MP3 Lawsuit

Microsoft Corp. must pay $1.52 billion in damages to telecommunications equipment maker Alcatel-Lucent SA for violating two patents related to digital music, a federal jury ruled Thursday (Feb. 22).

The Redmond, Wash.-based software company said the patents in question govern the conversion of audio into the digital MP3 file format on personal computers.

In 2003, Lucent Technologies Inc., which last year was acquired by Alcatel, filed 15 patent claims against Gateway Inc. and Dell Inc. for technology developed by Bell Labs, its research arm. In April 2003, Microsoft added itself to the list of defendants, saying the patents were closely tied to its Windows operating system. The PC makers are still defendants.

Microsoft said a judge threw out two of the 2003 patent claims and scheduled six separate trials to consider the remaining disputes. The case that was just decided went to trial in U.S. district court in San Diego on Jan. 29.

"We think this verdict is completely unsupported by the law or the facts," said Tom Burt, a Microsoft deputy general counsel.

Microsoft disputed that Paris-based Alcatel-Lucent's patents govern its MP3 encoding and decoding tools, and said it licenses the MP3 software used by its Windows Media Player from Fraunhofer-Gesellschaft, a German company.

"We believe that we properly licensed MP3 technology from its industry recognized licenser ? Fraunhofer. The damages award seems particularly outrageous when you consider we paid Fraunhofer only $16 million to license this technology," Burt said.

Microsoft said the damages were calculated by multiplying Windows sales volumes and PC sales prices worldwide since May 2003.

"We've made strong arguments supporting our view, and we are pleased with the court's decision," Alcatel-Lucent spokeswoman Mary Lou Ambrus said.

Goldman Sachs analyst Rick Sherlund wrote in a note to investors Thursday that while $1.52 billion is not a small sum, it's less than the $4.5 billion Alcatel-Lucent originally sought. Microsoft said the court threw out Alcatel-Lucent's claims that it willfully violated the patents, which would have tripled the damages.

"Patent infringement risk is an ongoing part of doing business as a technology company," Sherlund wrote. "We observe Microsoft has ten counter claims pending, perhaps implying some eventual negotiated settlement."

Microsoft plans to appeal the jury's decision, but it could take more than two years for the case to reach the U.S. Court of Appeals for the Federal Circuit in Washington, where all patent appeals are heard. In the interim, Microsoft's Burt said the case could have broader implications for the hundreds of companies that license MP3 technology from Fraunhofer ? including Apple Inc., Nokia Inc. and Sony Corp.

"I think the entire MP3 industry has to take notice and be gravely concerned about this verdict," Burt said.

Trip Chowdhry, an analyst at Global Equities Research, countered that he doesn't think the win for Alcatel-Lucent will reach beyond Microsoft.

"I think they have just gone against Microsoft because they felt Microsoft would compromise with them," Chowdhry said. "I don't think Microsoft will be compromising."

In the meantime, the court will consider the next of the patent suits, which relates to speech coding, in March or April, Microsoft said. Other areas in dispute include video coding on Microsoft's Xbox game console and Windows user interface.

Microsoft also filed another patent claim of its own last week, this time with the International Trade Commission, seeking to keep Alcatel-Lucent from importing unified messaging technology into the U.S.

Shares of Microsoft slipped 3 cents to close at $29.32 on the Nasdaq Stock Market. Alcatel-Lucent's stock added 10 cents to end the day at $13.17 on the New York Stock Exchange.