Earlier this week, U.S. District Judge Rudi Brewster in San Diego let Microsoft off of a 1.5 billion dollar hook. Alcatel-Lucent had sued Microsoft for infringing its patented MP3 technology, and won the largest patent infringement verdict in history. The bad news came in February of this year, and it took a mere five and a half months to have it wiped off the record books. The alleged infringement claims regarding the ‘457 patent were all overturned, and Judge Brewster ruled that Microsoft had a valid license of the ‘080 patent. Some excellent analysis of these rulings can be had courtesy of Mr. Zura. While Microsoft got favorable JMOL rulings on the infringement claims, there was also a favorable ruling on the calculation of damages that is particularly interesting. The judge first discussed the use of the ‘computer’ as the royalty base. Lucent had asked for a royalty based upon each computer sold with the offending software, utilizing the ‘market value rule’. Judge Brewster was not a fan of using such a basis for royalty calculations:

Two major problems arise in applying the entire market value rule here. The first is the failure of the evidence to establish a link between the cost of the computers (rather than the operating system, Windows Media Player, the MP3 codec or some other “unit”) and the customer demand or value of the patented technology. The second and probably even more troublesome problem is the failure to establish that the patented features themselves produced any customer demand or value of the product.

He next discussed the royalty rate of .05%. The Judge could find no real problem with the rate, but there was no evidence in the record to support the jury’s decision:

The Court finds that the jury’s verdict was against the clear weight of the evidence; although a plethora of licensing agreements were admitted into evidence, the majority of these which advocated a royalty rate in the 0.5% range lacked sufficient relevance to the technology at issue here, the relevant date of the hypothetical negotiation and/or the scope of a license that would be negotiated between these parties. Moreover, since the royalty base must be redetermined, the royalty rate dependent thereon also should be reconsidered.

So it seems that Microsoft can breathe easy knowing that should their recent victory be stripped from them on appeal, it is highly likely that the price tag will come in well under $1.5 billion.

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