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Friday, February 23, 2007 - Page updated at 12:00 AM

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Patent case hits Microsoft with $1.5 billion penalty

Seattle Times technology reporter

Before oral arguments at the U.S. Supreme Court could really get going Wednesday, Justice Antonin Scalia had a preliminary question for Microsoft attorney Theodore Olson:

"Is there a lot of money involved depending on whether you win or lose?"

"Yes," Olson replied, referring to Microsoft's patent fight with AT&T.

A monumental jury award in a separate case delivered Thursday underscores just how much more is on the line for Microsoft, and the software industry at large, as the high court considers the global reach of U.S. software patents.

In that case, the federal jury in San Diego ordered Microsoft to pay $1.52 billion in damages to Paris-based Alcatel-Lucent after finding that parts of the Windows Media Player infringed on patents related to MP3 digital music encoding technology.

"It's the largest patent-infringement verdict in the history of patent law," said John Desmarais, the lead trial attorney representing Alcatel-Lucent. "We're pretty excited about that."

The largest previous verdict was $925 million won by Polaroid against Kodak in 1991.

But if the Supreme Court favors Microsoft's position in the AT&T case, it could let software makers off the hook for royalties to patent holders on copies of their products sold overseas.

That would likely cut the Alcatel award in half.

Microsoft is involved in about 35 other patent cases, almost all of which could be affected by the Supreme Court's decision, expected by July.

"Microsoft has billions on the line with the Supreme Court case," said Dennis Crouch, a patent-law expert at Boston University.

The company plans to challenge the result in the Alcatel case — argued in U.S. District Court in San Diego — both on the validity of Alcatel's patent claims and on the size of the damage award.

Microsoft Deputy General Counsel Tom Burt said in a statement that Microsoft properly licensed the MP3 technology from German applied-research group FraunhoferGesellschaft for $16 million.

Fraunhofer developed the MP3 technology with Bell Laboratories, which became part of Lucent.

Alcatel's victory raises the possibility it could pursue similar action against other companies that have licensed the technology from Fraunhofer. There are 454 "licensed companies" listed on the Web site mp3licensing.com, which is affiliated with Fraunhofer. They include Apple, Intel, Motorola, Nintendo, RealNetworks and Sony.

An Alcatel spokeswoman would not speculate on future litigation.

Five other jury trials are scheduled between Alcatel and Microsoft over patent-infringement claims for video recording, user interface and other technologies.

Attorney Desmarais said Alcatel would pursue damages in those cases that were similar in scope to the MP3 case.

One Wall Street analyst following Microsoft was unmoved by the jury's large award.

"Patent-infringement risk is an ongoing part of doing business as a technology company," Goldman Sachs analyst Rick Sherlund wrote in a research note. The damage award "is not particularly material" in light of Microsoft's huge cash reserves, he wrote.

Microsoft last week filed its own infringement claims against Alcatel in federal court and before the U.S. International Trade Commission.

"This is just the first volley in a number of disputes between the parties over patents," Microsoft's Burt said in an interview.

That sentiment echoed broader comments by Microsoft General Counsel Brad Smith earlier this week. He said it was symbolic that Microsoft's first-ever appearance before the Supreme Court was not about the antitrust issues that plagued it for much of the last decade, but about intellectual property, which will be the legal focus for the next decade.

Benjamin J. Romano: 206-464-2149 or bromano@seattletimes.com

Copyright © The Seattle Times Company

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