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Court Hears Alcatel-Lucent’s Appeal

Washington – A U.S. Federal Circuit Court yesterday heard arguments by Alcatel-Lucent to reinstate a jury’s $1.53 billion compensatory-damage award against Microsoft over alleged infringement of two MP3-related patents used in Microsoft’s Windows Media Player application.

It could be months, however, before the court issues a decision, an Alcatel-Lucent spokeswoman said.

Both patents deal with “encoding in the most efficient way possible using as little memory as possible,” the spokeswoman said. The patents in dispute, however, represent only two of hundreds of patents licensed for use in MP3 players, PC software, and the like. Germany’s Fraunhofer Institute licenses more than 400 MP3-related patents that it and Thomson jointly hold, and Philips and France Telecom license out less than 100 or so MP3-related patents through a company called Sisvel.

The damages were awarded in February 2007 by a jury in U.S. District Court in San Diego, but in August of that year, the presiding judge reversed the jury’s decision at Microsoft’s request, citing a lack of “substantial evidence” to support the verdict. The “jury verdict of infringement was against the clear weight of evidence,” the judge said in his ruling.

When the judgment was awarded, Microsoft and Fraunhofer raised concerns that Alcatel-Lucent’s licensing fees would not be reasonable and could add significantly to the cost of producing MP3 players and encoding software. The companies pointed to the size of the jury award for only two of the hundreds of patents related to MP3 and to Alcatel-Lucent’s initial request for $4.5 billion in damages. In contrast, Microsoft at the time said it had paid only $16 million to Fraunhofer in licensing fees.

In the decision to overturn the jury’s finding, the district court judge contended that Alcatel-Lucent didn’t have standing to sue over one of the disputed patents because Fraunhofer can legally license the patent under the terms of a 1989 joint-development agreement with AT&T’s Bell Labs division, now a part of Alcatel-Lucent. Under the agreement, the judge said, joint ownership rights to the patent allow Fraunhofer to license the patent. For its part, Microsoft contended that it has already licensed the patent from Fraunhofer.

As for the other disputed patent, the judge contended that Alcatel-Lucent never provided evidence that a component of Windows Media Player “performed the patented methods.”

The judge also struck down the jury’s royalty rate of 0.5 percent of the average price of a personal computer sold worldwide since around mid-2003. “The evidence demonstrated that although the inventions of these patents could be used with the MP3 standard, they were not required or critical to practice the MP3 standard,” the judge said. The patents, he continued, “related to only particular features that could be used in conjunction with MP3 encoders.”