Microsoft Likely to Dodge Injunction in MP3 Patent Dispute

The Alcatel-Lucent dispute is over MP3 codecs Microsoft licensed from Fraunhofer. Alcatel-Lucent claims that two of its patents pertaining to MP3 technology are not covered by the Fraunhofer license. The patents were originally developed by Bell Labs, which Alcatel acquired as Lucent last year.

Typically, when the court finds infringement, the patent holder requests an injunction against the infringing product, which in this case would be Windows Media Player. Alcatel-Lucent could request an injunction against Windows, since the media player is integrated into the operating system. If not for a recent eBay case, the court likely would have granted the injunction.

A May 2006 Supreme Court ruling put "an end to the 'general rule' that a permanent injunction should follow a finding of infringement of a valid patent," wrote Dennis Crouch, a lawyer with Chicago-based McDonnell Boehnen Hulbert & Berghoff, in a post on the Patently O Patent Weblog.

"Because of eBay v. MercExchange an injunction shouldn't be automatic," said Stephen Kramarsky, a patent attorney with Dewey Pegno & Kramarsky, in New York. If not for the ruling, Kramarsky said, he believes that Alcatel-Lucent could have made a successful arguemnt for injunction—"no more shipping Windows and Vista."

Were Alcatel-Lucent able to get an injunction, in a strange twist, Microsoft likely could have continued shipping Windows in Europe. Windows Media Player was removed from two "N" versions shipping on the Continent. Microsoft shipped the special Windows versions sans the media player after the European Union found the company had violated local antitrust laws.

The four-factor test
In the case of eBay v. MercExchange, a lower court had ruled that eBay violated a business model patent belonging to MercExchange, which had asked for an injunction. Later, the Supreme Court clarified application of the "four-factor test" for determining injunctive relief. The four factors are: irreparable injury; adequacy of remedies available at law; balance of hardships; and public interest. The High Court's guidance meant that injunctions would no longer be nearly automatic in adverse patent infringement rulings.

One month later, the new rule was applied in the case of z4 Technologies v. Microsoft. A jury found that Microsoft product activation technologies violated z4 patents; Microsoft was ordered to pay z4 Technologies $142 million in damages and court fees. Following the verdict, z4 sought an injunction against the shipping of Windows XP. After applying the Supreme Court's interpretation of the four-point rule, Judge Leonard Davis denied the requested permanent injunction.

While Alcatel-Lucent could still ask for an injunction, application of the four-factor test in the z4 case reveals why the request would likely be denied:

• Irreparable jnjury—Alcatel would suffer no significant profit loss, loss of market share or damage to its brand because of the infringement.
• Adequacy of remedies available at law—A jury has already awarded Alcatel-Lucent a $1.52 billion verdict against Microsoft.
• Balance of hardships—A permanent injunction would put greater hardship on Microsoft than on Alcatel-Lucent because of the recent Windows Vista release. Microsoft's shipping of MP3 technology in Windows wouldn't exclude Alcatel-Lucent from distributing its patented technology.
• Public interest—Because of Windows' widespread usage and sizable economic ecosystem, the injunction could be construed as being against public interest.

Alternatively, Alcatel-Lucent could demand an injunction against Microsoft shipping the infringing technology in new copies of Windows. Kramarsky said he believes that Alcatel-Lucent should show restraint, lest it kills the golden goose.

"If they try to milk a billion dollars out of everyone, they may squander the verdict," he said.

Killing the golden goose?
Dead goose may be the inevitable end, resulting in surprising opportunity for Microsoft.

Microsoft licensed MP3 technology, including the source code, from Fraunhofer for $16 million, which is a pittance compared to yesterday's verdict. The adverse verdict calls into question whether MP3 licensing costs would dramatically increase, should Alcatel-Lucent be in position to collect from the hundreds of licensees.

If Microsoft and other large MP3 licensees abandon the format, they would have to resort to something else. There are plenty of better codecs—at least with respect to audio fidelity—and Microsoft's Windows Media Audio is one of them.

Some of the better codecs also cost more to license than MP3, which has been an inhibitor to their adoption. WMA is fairly cheap to license, and it already is a widely adopted format for stores selling DRM (digital rights management) content. Microsoft is in position to turn the verdict to marketing advantage for WMA, particularly if there is a forced mass exodus from MP3.

The verdict also could give record labels another reason to push DRM formats. While MP3 is hugely popular with the masses, record labels detest the format because there is no DRM . Microsoft's DRM would one alternative.

Hundreds of worrywarts
"Everybody else has to worry now," Kramarsky said. Apple would be the next logical company for Alcatel-Lucent to sue, he said.

But "going after iPod would not be a smart thing to do," Kramarsky warned. He said a sounder strategy would be a "back-room deal" where Alcatel-Lucent licenses its patents to Apple for fairly low cost. "They could then go to the judge and say they have signed on Apple as a major licensee," he said.

Ultimately, Alcatel-Lucent's big risk is greed. Alcatel acquired Lucent in 2006 for about $13.4 billion. Yesterday's verdict works out to more than 10 percent of the acquisition's value, from just two patents.

Already, Alcatel-Lucent has several other patent cases pending against Microsoft. In November, Alcatel filed two separate lawsuits against Microsoft with the federal court in Tyler, Texas. The lawsuits alleged violation of seven patents, related to video. A separate lawsuit filed by Lucent in 2003 contends that Xbox 360 violates a patent for decoding video.

The former Bell Labs has a huge patent portfolio, which now belongs to Alcatel. Many of the patents, like those for MP3, were developed for hardware—but they have potential application to software, too.

The breadth and depth of patent portfolios from companies like Alcatel-Lucent or IBM go back decades and put Microsoft at risk for ongoing trouble. It's not uncommon for patent holders to settle patent disputes through cross-licensing agreements—something even Microsoft has done. But with respect to patent litigation, Microsoft is a target because it has lots of cash in the bank and not enough patents to bank on.

"Microsoft would need an incredibly deep patent portfolio to protect its innovations," Kramarsky said.