Analyst: After the MP3 Reversal, the IP Valuation Landscape Changes

It was perhaps the biggest "Undo" ever done on Microsoft's behalf: Monday's dramatic reversal of a $1.53 billion judgment against it in a critical patent infringement case involving the use of MP3 technologies in Windows Media Player. There were hundreds of MP3 licensees on Fraunhofer Labs' list that Alcatel-Lucent might have pursued next, including Apple and Creative, had the largest such fine in US history been demonstrated to be collected by the French telecommunications firm.

The case isn't over, but the prospects for Alcatel-Lucent salvaging some fragment of its success, either through a lower court ruling or on appeal, appear dim. But after a precedent-setting ruling that may make it more difficult for companies everywhere to capitalize on their intellectual property portfolios, what happens to the rest of the technology industry? Is there still value in IP, or will investors begin shifting their focus toward companies that produce products rather than ideas? Has an "asset light" business structure suddenly become unattractive?

Yesterday, BetaNews had a conversation on the MP3 upheaval and its impact on the rest of global business with Carmi Levy, who since we last spoke with him, has moved up in the world: He's now Senior Vice President with analyst and consulting service AR Communications in Thornhill, Ontario.

CARMI LEVY, AR Communications: From the beginning of this case, I felt the $1.5 billion number was ridiculously high. I felt that the suit was frivolous. When it was originally ruled in favor of Alcatel-Lucent, it set a dangerous precedent for the market, and that at some point, rationality would have to prevail. If you look closely at this reversal, clearly, rationality has prevailed. Logically speaking, the market cannot function effectively if lawsuits like this continue to be thrown into the works, and stop companies from innovating current- and next-generation products and technologies.

SCOTT FULTON, BetaNews: When reading the final order from Judge Brewster, he denies those certain claims from Microsoft that go directly to the US Supreme Court rulings in AT&T v. Microsoft and KSR v. Teleflex. These claims said, "Those rulings change the landscape, and we need to revisit the circumstances." The judge says, "No, we don't. These things were decided prior to my ruling; your basis that the landscape has changed is moot." But when you read what Judge Brewster granted, it's obvious that they really did change the landscape, because suddenly the test is different with regard to, especially, whether the second patent filed in 1992 is really an improvement over the prior art from the patent filed in 1988.

CARMI LEVY: And then he threw another monkey into the works by saying that ownership of that second patent, at this point in time, is disputed. How can you launch a successful suit when the original ownership can't even be confirmed as yours to begin with?

It's interesting, because he goes off on this seemingly very large tangent, but then he really narrows it down, saying, "Patent #1: Microsoft didn't infringe it; Patent #2: You may not even own it. So, done." So his rationale for overturning is fairly cut-and-dried.

Clearly, it's going to be appealed; [Alcatel's] already announced that it will be. But [the judge] is trying to minimize the potential for it to come back and bite him on appeal.

SCOTT FULTON: If this is indeed precedent-setting, we're setting a wide scale for the meaning of the phrase, "a person with ordinary skill in the art." Because when we're applying it to the original case of, "Gee, I improved the gas pedal by sticking a little thingie on it!" that seemed like an ordinary person with a couple of rolls of duct tape doesn't have the right any more to patent the duct tape gas pedal.

CARMI LEVY: That's right. It has to be a material improvement on the way it's built, or the way it works, or the value that it delivers. And the court reserves the right to determine what constitutes "material improvement." And in this case, in setting the bar higher by saying that it has to be a significant enough improvement that the value is clear, the court is shutting the door to a large extent on a large number of future potential frivolous lawsuits, because it raises the burden of proof on the plaintiff that they have to prove before their lawsuit can see the light of day: that they didn't just add duct tape to the gas pedal, they actually made it work much better than it ever had before, and that it was materially improved and not just incrementally improved.

SCOTT FULTON: I am not a judge, nor do I play one on TV, but I would've thought on paper that this concept of "modified discrete cosine transform," just looking at it, would have been a material improvement. And I don't think a guy with ordinary skill and a roll of duct tape would've thought of this. But the judge seemed to set the bar pretty high, by in effect saying that it wasn't worth filing a separate patent over. The second patent doesn't really cover this, and the first patent can't cover any future creation by a guy with non-ordinary skill in the art. So with the bar set pretty high, I would think that '457 patent is in severe jeopardy.

CARMI LEVY: Yep, certainly questionable... In this case, Apple was perceived as a possible future defendant in a lawsuit. Companies like Apple and other organizations that have used this technology for their own business benefit can rest a little bit easier now, because it's going to be that much harder for any possible future lawsuits to ever see the light of day.

I think that Judge Brewster...certainly I wasn't standing next to him when he wrote the ruling, but it's easy to see that he had that in mind; that he was taking the long-term market conditions into consideration as he was crafting it. He wasn't just looking at this as a one-time case. He essentially didn't want this to become the first of many such cases to clog all levels of the US court system.

And I think at some point, judges at all levels of the judiciary want to keep this in mind, because technology - for the past 15, 20 years - has been moving so much faster than the judiciary's ability to keep up with it. Oftentimes what will happen is, a certain ruling will come down that sets a precedent that simply unleashes another landslide of similar cases, into an already overburdened system. I think now, what we're starting to see is recognition that this is not sustainable long-term, and that at some point, the floodgates have to be turned off, or at the very least, the spigot has to be tightened so that the flow slows down.

Next: Is IP worth as much today as it was last week?