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Sanity prevails in MP3 patent case

Earlier this year, a jury ordered Microsoft to pay Alcatel-Lucent $1.52 billion in a patent dispute over MP3 technology. The verdict seemed ridiculous at the time, and has now been reversed.

Back in February, a jury in the District Court of Southern California found Microsoft guilty of infringing two patents held by Alcatel-Lucent related to MP3 technology, and awarded Alcatel-Lucent $1.52 billion. It was the biggest patent-infringement verdict in U.S. history, and also the biggest fine ever levied against Microsoft. (Although the company did pay a larger amount--$1.95 billion--in 2004 to settle antitrust and patent infringement claims brought by Sun Microsystems.)

I'm not a patent lawyer, and Microsoft has certainly been found guilty of illegal business tactics before, but this verdict seemed crazy at the time.

First, Microsoft didn't particularly want to support MP3 in Windows--the company spent hundreds of millions of dollars developing its MPEG competitor, the Windows Media Format. (MP3 is shorthand for MPEG 2-Layer 3).

In fact, until the Sept. 2004 release of Windows Media Player 10, users couldn't even rip CDs into MP3 format using the Windows Media Player, but instead had to download an encoder pack from a third-party. (This is typical of Microsoft: the company still requires third-party add-ons to play back DVDs and HD DVDs because it doesn't want the expense of licensing the MPEG-2 video decoders for every copy of Windows.) The company only reneged and built MP3 decoding into the Windows Media Player because customers kept switching to third-party digital media apps with full MP3 support, such as the RealPlayer, WinAmp, and MusicMatch. Still, good intentions are no defense.

Second, Microsoft--like nearly everybody else creating hardware and software that plays MP3 files--had licensed what it thought were the necessary patents via Thompson, which represented a consortium including the Fraunhofer institute, which developed much of the technology used in MPEG. (MP3 stands for MPEG-2, Layer 3.) Alcatel-Lucent argued that the two patents at issue were developed by Bell Labs before it joined with Fraunhofer to develop the MP3 format. (Bell Labs later became Lucent, which merged with Alcatel in Sept. 2006).

Finally, the jury calculated the fine as 0.5% of the value of each copy of Windows, suggesting that MP3 playback ability was 1/200th of the value of Windows. Thinking about the thousands of features and components in Windows, this seems absurd.

The jury verdict created significant uncertainty throughout the industry--would other digital media hardware and software makers have to license these two patents separately, and if so, at what cost?

Today, a district court judge reversed the jury verdict. According to this report in the L.A. Times, Judge Rudi Brewster said that Bell Labs contributed only some of the ideas for one patent, and that Fraunhofer--the other contributor--had not filed suit against Microsoft. Therefore, the court didn't have jurisdiction to find Microsoft guilty of violating that patent. For the other patent, the judge said that any "reasonable jury" wouldn't have found that Microsoft violated the patent. Anticipating an appeal by Alcatel-Lucent, Judge Brewster also ruled that even if Microsoft is found guilty of patent violation on appeal, the amount of the fine was excessive and should be recalculated.

Overall, this case seems to echo another big patent-infringement case involving Microsoft. In 2003, a jury ordered Microsoft to pay Eolas Technologies and the University of California more than $500 for allegedly violating some patents related to Web browsing technology. The verdict caused alarm in the relevant communities--in this case, Web developers. A judge later reversed the verdict, and now Microsoft and Eolas seem to be heading for a settlementwhich will, no doubt, be significantly smaller than the original fine.

The lesson? Don't pay too much attention to patent verdicts until they've wound their way through the legal system.