The judgment, the largest patent award in history, came one day after Microsoft presented oral arguments before the Supreme Court, in a separate patent dispute with AT&T.
The fates of both cases are intertwined, with the outcome of one possibly affecting the other. At issue is liability for infringement for products produced in the United States and sold overseas. About half of the Alcatel-Lucent judgment pertains to Microsoft products sold abroad. The ratio is consistent with Microsoft sales, about 55 percent of which are outside the United States.
A third patent dispute Microsoft was engaged in, with Eolas Technologies over browser plug-ins, established a precedent Microsoft has been trying to reverse. Microsoft appealed to another court and lost; later the Supreme Court refused to hear Microsofts Eolas appeal. The loss meant that Microsoft had to pay for infringing products distributed outside the United States.
Microsofts situation is similar with the AT&T case. The Patent Act, or Title 35 of the United States Code, governs U.S. patents—in all three patent disputes Section 271(f). The court decided that under 271(f), Microsoft was liable for patent infringement of Windows copies sold overseas. The ruling treated Microsoft software as a component of the PC manufactured in the United States and reassembled overseas.
A favorable ruling in the AT&T case could curtail Microsofts infringement liability in both cases and other pending patent disputes. But a win also would limit Microsofts ability to collect on patent infringement. Such an outcome would actually benefit Microsoft in the long run.
"Microsoft knows that fundamentally they have a big target painted on their back," said Stephen Kramarsky, a patent attorney with Dewey Pegno & Kramarsky, in New York. Microsoft is more likely to be sued rather than do the suing, he said.
Meanwhile, Microsoft has said it plans to ask judge Rudi Brewster to either set aside the verdict or reduce the damages.
"We think this verdict is completely unsupported by the law or the facts," said Tom Burt, Microsofts deputy general counsel, in a prepared statement. "We will seek relief from the trial court, and if necessary appeal."
The two cases share other similarities: Microsoft licensed from other companies the infringing technologies rather than developing them. The AT&T patent dispute was over TrueSpeech technology that Microsoft licensed from DSP Group and incorporated into NetMeeting and all versions of Windows shipping when the case was filed in 2001. The Alcatel-Lucent dispute is over MP3 codecs Microsoft licensed from Fraunhofer-Gesellschaft.
Alcatel-Lucent claims that two of its patents pertaining to MP3 technology are not covered by the Fraunhofer license. Acquisitions overshadow the patents legacy. The patents were originally developed jointly by AT&Ts Bell Labs before Bell Labs was spun off as a separate entity. Lucent, which had been Bell Labs, filed the lawsuit against Microsoft before being acquired by Alcatel in 2006.
Microsoft contends that the license it has from Fraunhofer, for which it paid $16 million, is adequate.
Where the two cases differ is industry impact. While Microsoft claims that a loss in the AT&T case would harm the broader industry, Kramarsky and Gary Abelev, a partner with Dorsey & Whitney, in New York, say they disagree.
The situation with the Alcatel-Lucent case is different. A win for Microsoft would have been one for many other companies.
The verdict "is disappointing for us and for the hundreds of other companies who have licensed MP3 technology," Burt said. "We are concerned that this decision opens the door for Alcatel-Lucent to pursue action against hundreds of other companies who purchased the rights to use MP3 technology from Fraunhofer, the industry-recognized rightful licensor."
Apple and RealNetworks are among the many Fraunhofer licensees. The ruling puts all of them at risk and jeopardizes Fraunhofer MP3 licensing.
Kramarsky noted there are lots of free MP3 players. Larger developers like Microsoft seek to do the right thing and to limit their potential liability, he said. "The reason you have the Fraunhofer license is that you want to be safe," he said.
Microsoft is only one of companies Alcatel-Lucent is suing over the patents. Alcatel also has cases pending against hardware manufacturers, including Dell and Gateway.
Because of the verdict, "I expect you will see a flurry of settlement activity," Kramarsky said.
The verdict calls into question other dealings between Alcatel-Lucent and Microsoft. In early 2005, Alcatel and Microsoft announced a sweeping agreement to work together on IPTV (IP television). Surprisingly, despite their work together on the IPTV solution, in November, Alcatel filed two separate lawsuits against Microsoft with the federal court in Tyler, Texas. Alcatel-Lucent alleged violation of seven patents related to video. A separate lawsuit filed by Lucent in 2003 contended that the Xbox 360 violates a patent for decoding video.
The MP3 case "is only one part of a larger dispute between Microsoft and Alcatel-Lucent over intellectual property that began when Alcatel-Lucent took aggressive action against our customers and later against Microsoft," Burt said. "We will continue to defend our customers against unfounded claims and are pursuing a number of patent claims against Alcatel-Lucent, including the International Trade Commission case filed earlier this week."