A jury has fined Microsoft US$1.52 billion—the largest patent-infringement fine ever recorded—for infringing patents held by Alcatel-Lucent in the area of digital music, but the fine could be reduced or eliminated on appeal. A judge threw out one of Alcatel-Lucent's other patent-infringement claims against Microsoft, but several other claims between the companies are still outstanding. Also in early 2007, Microsoft was threatened with further fines by the European Union (EU) for lack of compliance with its Mar. 2004 antitrust order, faced new complaints about lack of compliance with its 2002 antitrust decree with the U.S. Department of Justice (DoJ), was struck by a trademark-infringement suit over Office Live, and settled a class-action antitrust suit filed on behalf of Iowa consumers.

US$1.52 Billion Fine

Lucent (formerly Bell Labs) and Microsoft have been in a complicated legal fight over patent-infringement since Apr. 2003, when Microsoft intervened on behalf of OEMs Dell and Gateway, whom Lucent sued for infringing on 13 patents related to audio and video coding/decoding (codec) technology, position-sensing styluses, and touch-screen technology. Subsequently, in Apr. 2006, Lucent filed a patent-infringement claim over video decoding technology in the Xbox 360. That November, shortly after Alcatel completed its acquisition of Lucent, the combined company filed another set of patent-infringement claims against Microsoft over video decoding technology used in Microsoft's IPTV platform. Over the course of the dispute, Microsoft has filed at least two countersuits alleging that Alcatel-Lucent infringes on 14 of its patents.

In Feb. 2007, a federal court in the U.S. District of Southern California (San Diego) handed down two verdicts in these cases.

In the first, a jury agreed that Microsoft infringed on two Alcatel-Lucent patents related to the popular MPEG-2, Layer 3 (MP3) audio codec, which Microsoft supports in its Windows Media Player. (Ironically, the Windows Media Player offered only limited support for MP3 until 2004—for example, users couldn't rip CDs to higher-quality MP3s—because Microsoft was trying to promote its own Windows Media codecs and related technologies.) The jury fined Microsoft US$759 million for violating each of the patents. The award is particularly large because the Windows Media Player has shipped with every copy of Windows since Windows ME (except in a few thousand copies shipped in Europe and South Korea, as mandated by antitrust rulings there), and the jury calculated the award as a 0.5 percent royalty on every copy of the infringing product shipped. The award could be halved, however, if the Supreme Court decides in another case that American courts cannot award damages for counts of patent infringement overseas. (Microsoft is the appellant in that case, which was originally brought by AT&T. The Supreme Court heard arguments in Feb. 2007 and will probably rule by the summer.)

Microsoft is appealing the verdict, claiming that it licensed the MP3 technology from German company Fraunhofer for a one-time payment of US$16 million. If the verdict stands, however, other companies might also be forced to pay Alcatel-Lucent a separate license fee. In particular, Apple, which supports MP3 in its iTunes software and iPod portable player, has licensed MP3 technology from Fraunhofer and Thomson, but not from Alcatel-Lucent.

In the second verdict, Judge Rudi Brewster in the same court ruled that Microsoft did not infringe an Alcatel-Lucent patent on computer speech. Two more trials are scheduled in coming months in the same court, and other claims involving the two companies are progressing in other U.S. venues.

Antitrust Compliance

The European Commission (EC), which oversees antitrust enforcement for the EU, has threatened Microsoft with daily fines of up to 3 million euros (US$4 million) for continuing noncompliance with an Apr. 2004 antitrust order. In that order, the EC required Microsoft to document certain protocols necessary for third-party software to interoperate with Windows PCs and to license this documentation on a reasonable and nondiscriminatory basis. Since then, the EC has accused Microsoft several times of dragging its feet, and in July it fined the company 280.5 million euros (US$357 million), or 1.5 million euros (US$2 million) per day for a six-month period, for not providing adequate documentation.

In Mar. 2007, the EC accused Microsoft of charging too much to license the protocols, pointing to the fact that nobody had chosen to license them yet. (Shortly after the EC's threat, Microsoft announced its first licensee: Quest Software.) The EC has given Microsoft until early April to respond. In a public statement, Microsoft said it wants to cooperate with the EC, but was given insufficient guidance in the original order regarding pricing, and it noted that IBM charges more to license similar interoperability protocols.

Microsoft's appeal of the original EC order, as well as the June 2006 fine, has been heard by the Court of First Instance, and Microsoft Chief Counsel Brad Smith says he expects a decision in that appeal to come by April.

In a March hearing in the United States, the judge overseeing Microsoft's 2002 antitrust consent decree expressed concern over the amount of time it is taking Microsoft to document similar protocols.

Also in March, an unnamed company complained to the judge that Microsoft is not obeying the U.S. consent decree as it relates to "middleware." One possible complainant is VMware, which has previously expressed concern over Microsoft's licensing restrictions for running virtualization software on Vista. VMware's virtualization products might qualify as "non-Microsoft middleware" under the consent decree because they make it easier for third-party software to run on multiple OS platforms. Under the consent decree, Microsoft is prevented from taking certain steps to promote its own products over competing non-Microsoft middleware, such as striking exclusionary deals with OEMs.

Office Live Trademark

Office Live LLC, a California-based company that provides small businesses and consumers with online business information, marketing assistance, and access to expert advice, sued Microsoft for trademark infringement in Feb. 2007.

Office Live LLC received a federal trademark on the name "Office Live" in 2002, more than three years before Microsoft announced its own Office Live product, a set of online services (such as Web hosting, e-mail, and Web-based collaboration) for small businesses. Office Live LLC seeks both monetary relief and an injunction preventing Microsoft from using the name. Microsoft argues that its use of "Office Live" does not infringe because it already owns the "Office" brand, and "Live" is a modifier applied to that and other Microsoft brands (e.g., Windows Live, CRM Live).

Iowa Case Settled

Microsoft has settled a class-action antitrust lawsuit brought on behalf of consumers in Iowa. Similar to more than 20 cases that have been brought in other states and localities, the suit alleged that Microsoft used its monopoly position to overcharge for software, including Word, Excel, Office, and Windows, during the period from May 18, 1994, through June 30, 2006. In most previous cases like this, the claims were dismissed or Microsoft settled with plaintiffs before trial. However, in Iowa, the case went to trial, and some of the evidence presented was embarrassing for Microsoft, such as a 2004 e-mail from executive Jim Allchin in which he claimed he'd prefer a Macintosh over a Windows PC, and a 2002 e-mail exchange in which executives appeared to consider threatening Dell for shipping the Linux OS.

Under the settlement, announced in Feb. 2007, Microsoft will offer vouchers good for hardware and software from Microsoft or third parties to consumers who feel they were overcharged. After a certain period, Microsoft will donate half of the unclaimed amount of the vouchers to Iowa school districts. However, the parties did not announce the value of the vouchers, which in previous cases has ranged from US$70 million (for users in several California cities) to US$1.1 billion (for users in the entire state of California).

According to Microsoft, the company has now resolved 18 of these cases and faces only two more: one in Mississippi and an appeal of an earlier dismissal in Michigan.

Microsoft's overview of its legal situation is at www.microsoft.com/about/legal/default.mspx.