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Microsoft ordered to pay $1.52b in dispute

Case could affect other firms using the MP3 format

WASHINGTON -- A federal jury in San Diego yesterday ordered Microsoft Corp. to pay $1.52 billion to Alcatel-Lucent for violating two patents for a technology used by hundreds of companies to play digital music on computers, cellphones, and other devices.

The judgment, which lawyers from both sides called the largest patent award ever, raised the prospect that scores of other companies could now be financially liable for using the popular MP3 format.

"Any of the companies that have licensed and implemented that technology have to have great concern about this verdict," said Thomas Burt, a Microsoft vice president and deputy general counsel.

Alcatel-Lucent argued that it held the rights to the technology because it was developed at Bell Laboratories, which later became part of Lucent. Alcatel bought Lucent last year. The company successfully argued that Microsoft infringed on the patents by including the digital music feature in its Windows operating system starting in 1998. The same technology later was used in Microsoft's Windows Media Player and is included in the Windows Vista operating system, which was released to consumers last month.

Microsoft countered that it had properly licensed the technology from Germany's Fraunhofer Institute, which was involved with Bell Labs in developing the MP3 format. Only after Microsoft and other companies made licensing agreements with Fraunhofer did Alcatel-Lucent raise its claim, Microsoft argued.

Alcatel-Lucent said it will ask for a larger judgment against Microsoft. The $1.52 billion in damages was determined by calculating one-half of 1 percent of all sales of computers equipped with Windows and lacking the proper licensing from mid-2003 through 2005. John Desmarais, Alcatel-Lucent's lead trial lawyer, said the company would ask that 2006 sales be included.

Burt said Microsoft not only would appeal the jury's findings of patent infringement but also would challenge the amount of the damages. He said it was improper to calculate damages based on the value of computer sales rather than the lesser value of sales of the Windows operating system. He also said that the jury improperly included overseas sales of computers in the calculations.

The issue of whether US patent law can be extended to products made abroad figured prominently this week in arguments before the US Supreme Court in a separate case pitting Microsoft against AT&T.

Yesterday's verdict came in one of several patent lawsuits that Alcatel-Lucent brought against Microsoft involving other technologies . Several billion dollars of additional damages could ride on the outcome of these suits, lawyers said.

The judgment surprised industry experts, who said they had not been following the case closely.

"Most of us thought this was going to go bye-bye," said technology analyst Rob Enderle. He said he expects Alcatel-Lucent to approach other companies using MP3 technology and use the court judgment "like a club" to collect fees.

About 400 companies have similar licensing agreements with Fraunhofer, according to Thomson Technology, a San Diego company that identifies itself as the "licensing representative of MP3 patents and software of the Fraunhofer Institute." Those companies include Apple, Creative Technology, Real Networks, Palm, and Samsung.