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Microsoft-Alcatel Patent Dispute Could Have Additional Implications

February 23, 2007

Microsoft has been ordered to pay $1.52 billion in damages to Alcatel-Lucent SA for violating two patents related to digital music, a federal jury ruled Thursday.

The patents at the heart of the dispute are related the conversion of audio into the digital MP3 file format on personal computers.

In 2003, Lucent Technologies Inc., was acquired by Alcatel last year filed 15 patent claims against Gateway Inc. and Dell Inc. for technology developed by Bell Labs, its research arm. In April 2003, Microsoft added itself to the list of defendants, saying the patents were closely tied to its Windows operating system.

Microsoft claims a judge threw out two of the 2003 patent claims and scheduled six separate trials to consider the remaining disputes. The case that was just decided went to trial in U.S. district court in San Diego on Jan. 29.

"We think this verdict is completely unsupported by the law or the facts," said Tom Burt, a Microsoft deputy general counsel.

Microsoft notes that Paris-based Alcatel-Lucent's patents governs its MP3 encoding and decoding tools, but claims said it licenses the MP3 software used by its Windows Media Player from Germany-based Fraunhofer-Gesellschaft,.

"We believe that we properly licensed MP3 technology from its industry recognized licenser — Fraunhofer. The damages award seems particularly outrageous when you consider we paid Fraunhofer only $16 million to license this technology," Burt said.

Microsoft said the damages were calculated by multiplying Windows sales volumes and PC sales prices worldwide since May 2003.

"We've made strong arguments supporting our view, and we are pleased with the court's decision," Alcatel-Lucent spokeswoman Mary Lou Ambrus said.

Microsoft plans to appeal the jury's decision, but it could take more than two years for the case to reach the U.S. Court of Appeals for the Federal Circuit in Washington, where all patent appeals are heard. Yet meanwhile, Microsoft's Burt said the case could have broader implications for the hundreds of companies that license MP3 technology from Fraunhofer — including Apple, Nokia and Sony.

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