Microsoft wins appeals ruling in Alcatel-Lucent MP3 case

Microsoft on Thursday was released from a payout to Alcatel-Lucent that at one time was as high as $1.5 billion, when a federal appeals court tossed the original jury's verdict in a long-running patent case.

The original case concerned Windows Media Player and Microsoft's MP3 license for that software. Microsoft licensed its MP3 codecs for $16 million from Fraunhofer Labs, the German research institute that, with Bell Labs and French electronics giant Thomson, invented the MP3 audio-compression standard.

That invention claim has been challenged by the French telecom Alcatel-Lucent, which claims that Bell -- part of Lucent, which was acquired by Alcatel in 2006 -- was working on MP3 and held several patents to that effect before Fraunhofer came on the scene. To that end, in 2003 Lucent launched a series of lawsuits against licensees of Fraunhofer's codecs.

The first of those targeted Dell and Gateway, which sold PCs with Windows Media Player pre-installed; Microsoft stepped up to voluntarily assume the defendant's role in the case. A flurry of suits and countersuits ensued, touching on not only MP3 but assorted other technologies that each side disputed the other's right to use.

The two patents in question were #5,341,457, which concerns noise reduction at lower bitrates, and RE39080, concerning a rate loop processor.

In February 2007, a jury found that Microsoft had violated those patents (though it deadlocked on whether the company did so willfully) and levied the ten-figure fine, which as per patent law was based on the total value of the PCs sold. The presiding judge, Rudi M. Brewster, vacated that ruling later in the year.

Tom Burt, Microsoft Corporate Vice President and Deputy General Counsel, called the decision "a victory for consumers of digital music and a triumph for common sense in the patent system. The Federal Circuit confirmed that Judge Brewster was correct when he ruled that Microsoft did not infringe the '457 patent and that Fraunhofer was a co-owner of the '080 patent, finding that Lucent's arguments were "strained."

One predicted outcome of the 2007 ruling has yet to come to pass: Some observers at the time thought that the gigantic fine, and the threat of more lawsuits to come, would push companies making MP3-related hardware and software to flee the format in favor of royalty-free open-source options such as Ogg Vorbis. Microsoft, ironically, developed its own WMA format in part as a response to patent uncertainties.