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Microsoft Hit With $1.5B in Damages in MP3 Case

Microsoft Corp. must pay $1.5 billion in damages to telecommunications equipment maker Alcatel-Lucent SA for violating two patents related to digital music, a federal jury ruled Thursday.

The Redmond, Wash.-based software company said the patents in question govern the conversion of audio into the digital MP3 file format on personal computers.

In 2003, Lucent Technologies Inc., which last year was acquired by Alcatel, filed 15 patent claims against Gateway Inc. and Dell Inc. In April 2003, Microsoft added itself to the list of defendants, saying the patents were closely tied to its Windows operating system. The PC makers are still defendants.

Microsoft said a judge threw out two of the 2003 patent claims, and scheduled six separate trials to consider the remaining disputes. The case that was just decided went to trial in San Diego on Jan. 29.

"We think this verdict is completely unsupported by the law or the facts," said Tom Burt, a Microsoft deputy general counsel.

Microsoft disputed that Paris-based Alcatel-Lucent's patents govern its MP3 encoding and decoding tools, and said it licenses the MP3 software used by its Windows Media Player from Fraunhofer-Gesellschaft, a German company.

"We believe that we properly licensed MP3 technology from its industry recognized licenser -- Fraunhofer. The damages award seems particularly outrageous when you consider we paid Fraunhofer only $16 million to license this technology."

Microsoft said the damages were calculated by multiplying Windows sales volumes and PC sales prices worldwide since May 2003.

"We've made strong arguments supporting our view, and we are pleased with the court's decision," Alcatel-Lucent spokeswoman Mary Lou Ambrus said.

The court will consider the next of the patent suits, which relates to speech coding, in March or April, Microsoft said. Other areas in dispute include video coding on Microsoft's Xbox game console and Windows' user interface.

Shares of Microsoft slipped 3 cents to close at $29.32 on the Nasdaq Stock Market. Alcatel-Lucent's stock added 10 cents to end the day at $13.17 on the New York Stock Exchange.

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