Silicon Valley Watcher - Former FT journalist Tom Foremski reporting from the intersection of technology and media

2.23.07 MP3 patent verdict could hurt whole tech sector

Posted by Richard Koman - February 23, 2007

If you're rejoicing over Microsoft getting wacked with that $1.5 billion patent infringement verdict, you might want to think again. That verdict could enrich Alcatel to the tune of many billions of dollars from technology companies if its upheld, The Times notes. That's because the patents in question cover core MP3 technologies developed by Bell Labs 20 years ago.

Microsoft and most other technology companies license MP3 patents from the Fraunhofer Institute, which, along with Bell Labs and the French company Thomson, developed MP3. They paid $16 million for the patents from Fraunhofer. But Alcatel-Lucent, which is a descendent of Bell Labs, claims earlier patents that were not part of the Fraunhofer patents.

Microsoft is asking the judge to discard the verdict and will appeal the decision if he doesn't. If the verdict stands, Alcatel-Lucent may go after Apple and any other company that makes MP3 playback software.

“Intellectual property is a core asset of the company,” said Joan Campion, a spokeswoman for Alcatel-Lucent. “We will continue to protect and defend that asset.”

Without conceding that the company violated the patents, Microsoft argues that the damages are way too high in any case, given that the cost of the licensed patents was just $16 million. Alcatel valued the patent violation at .5 percent of a computer with Windows installed.

“We think this is just plain wrong,” Microsoft lawyer Thomas Burt said. “They told the jury to measure damages, not on the value to Microsoft of one of the 10,000 features in Windows, but on the value of the entire computer.”

But the situation may be more dire for Microsoft than for many other tech companies. That's because in the past Microsoft did not play the game of defensive patent filing.

“Microsoft has been and to some degree continues to be at a competitive disadvantage, as it did not file for patents for many, many, many years,” said Jack Russo, a patent lawyer with Russo & Hale in Palo Alto, Calif. Large companies like AT&T and I.B.M. “have huge patent portfolios and that represents large and unpredictable risks for companies like Microsoft,” he said.

In a 2005 interview, RedHat GC Mark Webbink explained the way patents work in the software industry:

If others are going to threaten you with patent infringement, your strongest defense is going to be your own patent portfolio. Your patent portfolio may have nothing to do with the technology you're producing, because that only allows you to keep others from what you're doing. When Red Hat and others look at obtaining patents, I'm far more interested in what the other guy's doing. Because if he knows I have a patent that will disrupt his business, he's liable to leave me alone. A lot of the patents we've been filing are not on our own technologies, they're on technologies of other companies and extensions of those technologies. And it's not because we want to tax them, we just want them to leave us alone.

If Microsoft can't play the game of mutually assured destruction, it's at a disadvantage. If Apple has played the game better, they may be less vulnerable.

Alacatel's claims of the importance of its patents are hard to swallow. This is the biggest patent award in history. The previous record setter was a big deal: Kodak had to pay Polaroid $900 million for violating instant photography patents and exit the market and recall its instant cameras. Common sense says that an award more than 50% larger should be based on damages of the sort that Polaroid suffered, not on an arbitrary royalty number.

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Additional Info:

The Coalition for Patent Fairness: www.patentfairness.org

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