Center for Advanced Study & Research on Intellectual Property

 

CASRIP Newsletter - Spring 2007, Volume 14, Issue 2

Lucent Awarded $1.52 Billion in Section 271(f) Case Lucent Technologies, Inc. v. Microsoft Corp.

By Signe Naeve[1]

I. OVERVIEW

In a recent patent case with extraterritorial implications, a jury in California awarded $1.52 billion in damages to Lucent Technologies for patent infringement by Microsoft. The case involved the Microsoft Windows Media Player and two patents related to MP3 technology owned by Lucent Technologies. The jury found that Microsoft had induced and contributed to infringement in the United States for both patents at issue, as well as induced and contributed to infringement outside of the United States by supplying components to be assembled abroad. The scope and application of §271(f), the provision that covers patent infringement for components supplied from the United States that constitute patent infringement once they are assembled abroad, has received much scrutiny lately in light of the Federal Circuit’s decision in AT&T v. Microsoft, [2] which was recently reversed by the United States Supreme Court. In addition to the concerns raised by the hefty award in this §271(f) case, the Lucent verdict also creates potential unease for other licensors of MP3 technology.

II. PROCEDURAL BACKGROUND OF LUCENT v. MICROSOFT

The Lucent case originated in 2002 when Lucent sued Gateway and Dell in the Eastern District of Virginia for patent infringement.[3] The case was transferred to the Southern District of California and Microsoft filed a declaratory judgment action for non-infringement against Lucent in 2003.[4] The Southern District of California consolidated the Gateway and Microsoft cases and then separated them according to technology.[5] The $1.52 billion verdict was awarded in the case concerning Lucent’s audio coding patents, U.S. Patent Nos. 5,341,457 (“the '457 patent”) and RE 39,080 (“the '080 patent”), wherein only Microsoft was a defendant. Lucent claimed that Microsoft’s Windows Media Players, WMP 10 and 11, and the software for encoding into MP3 format contained therein, violated one or both of Lucent’s patents.[6]

Lucent and Microsoft filed cross motions for summary adjudication and on January 11, the District Court for the Southern District of California ruled against Microsoft.[7] The case proceeded to trial resulting in the special verdict on February 22. On March 19, the district court again ruled against Microsoft on four additional defenses that had not been presented to the jury, including some license-related defenses.[8] Decisions in the remaining cases concerning the other areas of technology were issued in the same time frame.

III. ANALYSIS

A. The §271(f) Controversy

Lucent sought relief under both §271(a), which provides a remedy for patent infringement occurring inside the United States, and §271(f), which provides a remedy for patent infringement occurring outside of the United States from components supplied from the United States. Section 271(f), the scope of which has been under much scrutiny lately, provides:

(f)(1) Whoever without authority supplies or causes to be supplied in or from the United States all or a substantial portion of the components of a patented invention, where such components are uncombined in whole or in part, in such manner as to actively induce the combination of such components outside of the United States in a manner that would infringe the patent if such combination occurred within the United States, shall be liable as an infringer.
(2) Whoever without authority supplies or causes to be supplied in or from the United States any component of a patented invention that is especially made or especially adapted for use in the invention and not a staple article or commodity of commerce suitable for substantial noninfringing use, where such component is uncombined in whole or in part, knowing that such component is so made or adapted and intending that such component will be combined outside of the United States in a manner that would infringe the patent if such combination occurred within the United States, shall be liable as an infringer.

The general controversy surrounding §271(f) has concerned both its scope and applicability.[9] In AT&T v. Microsoft, the case involved a software disc, with allegedly infringing code, that was sent abroad and then copies were made abroad and incorporated into a computer. The case challenged whether software code can be considered a “component” under §271(f) and whether “copying” abroad is the same as “supplying.”

With the AT&T controversy and the scope of §271(f) on the minds of the patent and business communities alike, the Microsoft case represents a substantial award of damages in another §271(f) case. The Microsoft jury, according to a Special Verdict Form, filed February 22, 2007, found that Lucent had proved that the Windows Media Player induced and contributed to infringement outside of the United States by supplying components under the three claims of the � patent at issue and the three claims at issue for the � patent. The jury then awarded $769,028,351 in damages for infringement on each of the patents, totaling $1,538,056,702 in damages, or approximately 0.5% on a running royalty per unit.

B. The Licensing Concern

After the February 22 verdict, Microsoft issued a press release highlighting its concerns with the outcome. In the release, Microsoft Deputy General Counsel, Tom Burt, stated:

Like hundreds of other companies large and small, we believe that we properly licensed MP3 technology from its industry recognized licensor—Fraunhofer. The damages award seems particularly outrageous when you consider we paid Fraunhofer only $16 million to license this technology. . . . We are concerned that this decision opens the door for Alcatel-Lucent to pursue action against hundreds of other companies who purchased the rights to use MP3 technology from Fraunhofer, the industry-recognized rightful licensor.[10]

Microsoft had allegedly bought the accused software from the German corporation, Fraunhofer Gesselschaft, which allegedly owned the rights from AT&T, Lucent’s predecessor. Clearly incensed by the verdict, Burt also stated that Microsoft would seek relief from the district court, and would appeal to the Federal Circuit if necessary.[11]

On March 19, the District Court for the Southern District of California dealt another blow to Microsoft on the licensing issue when it ruled on four additional affirmative defenses that had not been considered by the jury: (1) ownership; (2) license; (3) invalidity under the recapture doctrine; and (4) intervening rights.[12] These additional defenses related, in part, to the Fraunhofer license and Microsoft lost on all four additional affirmative defenses.[13] The court also noted that Microsoft had previously lost when it raised the licensing issue in a partial summary judgment motion in July 2005.[14]

IV. THE VERDICT

Microsoft has indicated that it intends to appeal this decision to the Federal Circuit if necessary.[15] The initial press release from Microsoft, previously quoted, suggests that Microsoft’s main concern and basis for appeal would focus on the licensing issue. However, in light of the recent AT&T ruling by the Supreme Court on April 30,[16] it may decide to challenge the scope and applicability of §271(f) as well. In AT&T, the Supreme Court affirmed the territoriality principle requiring parties to seek relief in the respective countries where infringements occur.[17] The Court also recognized the limited scope of §271(f), contrary to the Federal Circuit’s more expansive recent interpretations, including its decision in AT&T.[18] Although the Court’s retraction may relate only to computer software, software was also at issue in this case. The Court seems to invite Congress in its decision in AT&T to address this potential loophole to the applicability of §271(f), however, and Congress may act before Microsoft’s appeals are exhausted.

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Footnotes

  • [1] Ms. Naeve is the Assistant Director for CASRIP at the University of Washington School of Law.
  • [2] AT&T Corp. v. Microsoft Corp., 414 F.3d 1366 (Fed Cir. 2005), cert. granted, 127 S. Ct. 467 (U.S. Oct. 27, 2006). For an analysis of the Federal Circuit decision, see Benjamin Keim, Gobbledygook or the Future of Obviousness in U.S. Patent Law, CASRIP Newsletter, Vol. 14, Issue 1 (Autumn/Winter 2007) available at: http://www.law.washington.edu/Casrip/Newsletter/Vol14/newsv14i1US2.html.
  • [3] Lucent Tech., Inc. v. Microsoft Corp., ____ F.Supp.2d ____, 2007 WL 172221 at *1 (S.D. Cal. Jan. 12, 2007).
  • [4] Id.
  • [5] Id.
  • [6] Lucent Tech., Inc. v. Microsoft Corp., ____ F.Supp.2d ____, 2007 WL 172220 at *1 (S.D. Cal. Jan. 11, 2007)
  • [7] Id.
  • [8] Lucent Tech., Inc. v. Microsoft, _____ F.Supp.2d _____, 2007 WL 925507 (S.D. Cal. Mar. 19, 2007).
  • [9] See generally, Jennifer Giordano-Coltart, Walking the Line: Why the Presumption Against Extraterritorial Application of U.S. Patent Law Should Limit the Reach of 35 U.S.C. §271(f), 4 Duke L. & Tech. Rev. 4 (2007).
  • [10] Microsoft Statement on District Court Finding in Alcatel-Lucent Patent Lawsuits: Microsoft Deputy General Counsel Tom Burt calls today's finding "completely unsupported by the law or the facts." available at http://www.microsoft.com/Presspass/legal/02-22-07AlcatelLucentStatement.mspx (hereinafter Microsoft Press Release).
  • [11] Id.
  • [12] Microsoft, 2007 WL 925507 at *1.
  • [13] Id. at *11.
  • [14] Microsoft, 2007 WL 172220 at *3.
  • [15] See Microsoft Press Release, supra note 10.
  • [16] Microsoft Corp. v. AT&T Corp., 550 U.S. ___ (2007)
  • [17] For a more detailed analysis of the Supreme Court’s decision in Microsoft v. AT&T, see Toshiko Takenaka, Supreme Court Disagrees with Federal Circuit in Two Controversial Patent Cases: KSR Int’l Co. v. Teleflex and Microsoft Corp. v. AT&T Corp., CASRIP Newsletter, Vol. 14, Issue 2 (Spring 2007).
  • [18] See Giordano-Coltart, supra note 9.

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Last updated 4/27/2012