Analyst: Microsoft Loss in MP3 Case Sets Dangerous Precedent

With Alcatel-Lucent having been awarded $1.5 billion from Microsoft by a Jury in San Diego yesterday, the other hundreds of companies who hold Fraunhofer/Thomson licenses to the MP3 audio format whose names aren't "Microsoft" must be asking themselves whether similar fates await them in the near future. Now that the descendent of Fraunhofer's former partner is staring at a potential platinum mine of litigation success, has this verdict set a legal precedent that the party who has an idea for an invention can successfully sue anyone who implements that idea - even if it was done with consent?

We took this question, among others, to Info-Tech senior research analyst Carmi Levy, who frequently provides his insight to BetaNews.

SCOTT FULTON, BetaNews: I am wondering how in the world a jury could have been convinced that Fraunhofer Labs was not entitled to license this codec, and I'm concerned that their decision will set a precedent.

CARMI LEVY, Senior Research Analyst, Info-Tech Research: What it does is, it sets a precedent that, just because you think you licensed something doesn't necessarily mean that you did, and you may very well be vulnerable in the future for having incorporated technologies that you believed that you rightfully paid for the right to use.

So yes, it clearly sets a dangerous precedent because now former copyright owners will probably be looking back in history, and looking into their lists of their old dealings, and asking themselves whether there's opportunity to go back, rake up some mud, and generate some revenue from it. Which is a scary proposition for any company that develops products that are largely based on not necessarily new technology, but incorporated technology aggregated from multiple sources.

An operating system is, by definition, one of those products that is a combination of many layers of technology, not all of them developed by the company that aggregates them - in this case, Microsoft.

SCOTT FULTON: The other thing that's being discussed here in the US Supreme Court has to do with the whole patentability of software issue, which is another fine mess that Microsoft finds itself in.

CARMI LEVY: Right, what is intellectual property? How do we define it?

SCOTT FULTON: If Microsoft's argument in that court is actually upheld, then I think the aggregate concept from that, which could be precedent setting from a legal standpoint, is that the idea for software cannot be patented, only the implementation. And if you think of it that way, looking at it historically, applying that to the MP3 case, suddenly Alcatel's position falls apart, because it is, in effect, the holder of the holder of the holder of the original idea, but Fraunhofer was who carried it out.

CARMI LEVY: Exactly, and what that does is, it weakens Alcatel-Lucent's claim, because they never actually directly brought a product to market based on that technology. They simply had a disconnected [association] with the original idea, and therefore, are not as deserving of the $1.5 billion as the court today thinks that they would otherwise be.

SCOTT FULTON: So of course, there's going to be an appeal, but you see perhaps there's a good chance of this being overturned.

CARMI LEVY: I think so, because I think the precedent for this is dangerous for the intellectual property space on the whole, because essentially, it'll send a message to everyone that anybody with an idea scribbled in a diner on the back of a napkin can easily come out of the woodwork years later, launch a lawsuit against a company that has successfully brought such technology to market, and win.

And we've seen this before; we saw this with the Research in Motion and NTP lawsuit, that NTP never successfully brought a product to market based on the technology that it originated, but they successfully got a $612 million settlement out of RIM because of that. What it does is, it makes for a very slippery slope for companies that actually succeed in bringing aggregated technologies to market, because they never quite know how far upstream someone is sitting, lying in wait for the moment when that technology takes off and becomes profitable, and they feel they can cash in via lawsuit.

Next: That lost idea you scribbled on a napkin could be a goldmine...