In the clearest sign yet that the landscape for patent infringement cases was altered significantly by the US Supreme Court, Judge Rudi Brewster of District Court in San Diego late yesterday tossed out a $1.5 billion jury verdict against Microsoft, partially overturning that verdict on one infringement count and remanding the second to a lower court for retrial.

As a result, the tide could be turning in favor of Fraunhofer Labs, the European licensee of the MP3 format. In the US, AT&T was considered the rightful patent holder for the format, based on the theory that it was the first to file in this country.

AT&T's Bell Laboratories division had partnered with Fraunhofer in the development of MP3, though European courts tend to side with Fraunhofer as the format's originator. Bell Labs' patents were passed on to Lucent Technologies, and were later absorbed by Alcatel after it acquired Lucent.

While Lucent at one time appeared to have no quarrel with Fraunhofer, Alcatel did. At the heart of its reconstruction plan -- which involved the whole reason for the acquisition of Lucent, company officials said at that time -- is the establishment of a strong intellectual property portfolio. Now, one of the centerpieces of that portfolio may be in jeopardy, as the old AT&T's original argument that 1) it supplied improvements to Fraunhofer's original concept, and 2) it applied for patent before Fraunhofer in the US (apparently as part of an agreement), may no longer hold up under scrutiny.

The reason is because the standard the lower court may use to determine infringement may have changed. Last May, the very same Judge Brewster upheld the jury's verdict, just weeks after Supreme Court decisions in AT&T v. Microsoft and KSR v. Teleflex changed the standards over what is considered patentable, and when. In the latter decision, justices ruled that an obvious improvement that just about anybody could make to a patented device, cannot be considered patentable in itself.

But in an unusual second review following a fresh series of motions from Microsoft, Brewster reversed his own opinion from three months ago, declaring, "The jury's verdict was against the clear weight of the evidence." Microsoft's motions cut to the chase, directly challenging Alcatel-Lucent's ownership of the MP3 patents.

1:00 pm ET August 7, 2007 - An examination of Judge Brewster’s ruling yesterday reveals that both Microsoft and Alcatel-Lucent tried to leverage the Supreme Court’s new standards in their respective favors, after Microsoft made several motions for a new trial. Not all of Microsoft’s motions were successful, but some were – and they were enough for the jury’s fine to be tossed.

One such successful claim – and a textbook example of how the new standards will be argued and defended – deals with an innovation that was added to MP3 after initial patents had already been filed. Are those innovations something that “a person with ordinary skill in the art” could have added to MP3, as Microsoft contended? Or did the fact that they were obvious mean they were effectively covered in the original patent, as Alcatel-Lucent argued?

The innovation in question is called modified discrete cosine transform (MDCT) - a way to use a trick of wave mechanics to enable errors introduced in-between signal blocks to overlap in such a controlled way that they cancel each other out. The result is noise elimination. Imagine if you were peering with both eyes at something behind a white picket fence, and your eyes crossed in such a way that none of the stakes in the fence appeared to obstruct any part of what you were seeing behind the fence. That’s not a scientific analogy, but that’s the general idea.

Microsoft claimed there was no way for Alcatel to claim patent rights over MDCT, because the methodology was discovered – or at least, may have been discovered – after April 1989, a date specified in the joint development agreement that originally existed between Fraunhofer and AT&T. Alcatel’s counterclaim was that the AT&T patents did cover time-to-frequency transforms used in noise cancellation, and that MDCT – whether it was discovered before or after April 1989 – was just one such method. A person with ordinary skill in the art, Alcatel argued, would have come up with MDCT, but that doesn’t mean Fraunhofer or anyone else could claim it as its own. This was Alcatel trying to argue KSR v. Teleflex in its own favor.

Microsoft’s own KSR argument, though, was that the jury didn’t get to hear any concrete evidence that work on MDCT took place before the critical April 1989 date. If it had, it might have reasonably concluded that one of the two allegedly infringed patents (the ‘457 patent) covered MDCT as an obvious improvement...but it didn’t hear that evidence. In fact, Microsoft cited testimony from one of the researchers credited with the second patent (the ‘938, filed after the agreement date in 1992), saying he’s never seen or heard of MDCT until he read a paper on it written by none other than Dr. Karlheinz Brandenburg – the man credited with inventing MP3 in Fraunhofer’s European patents.

“Although Lucent argues that the jury could have disregarded this testimony,” Judge Brewster wrote yesterday, “there was no other evidence of record that the work was performed prior to April 1989. The only other evidence of the work encompassed by claim 2 [MDCT] was the ‘938 specification itself, with a date of 1992. Therefore, the jury’s finding that claim 2 was not performed on or after April 1989 is not supported by sufficient evidence; the Court therefore grants judgment as a matter of law on this ground. Additionally, because the jury’s verdict was against the clear weight of the evidence, in the alternative, the Court grants a new trial on this issue.”

That 1992 date for the filing of the ‘938 patent ended up being Alcatel’s Achilles’ heel. It describes a variety of enhancements to MP3 and attributes them to AT&T, although those enhancements supersede the dates of Fraunhofer’s patents. In his review, Judge Brewster found evidence that the jury confused the enhancements covered in the ‘938 patent with the groundwork laid by the 1988 ‘457 patent.

That confusion may have been cemented by testimony from a Lucent researcher, who said that a method for using a digital signal processor (DSP) to convert an MP3 signal was covered in the earlier ‘457 patent. It wasn’t, since the ‘457 deals with receiving the signal, not processing or converting it.

“At trial,” Judge Brewster wrote, “Lucent’s expert Dr. Jayant testified in a conclusory fashion that this corresponding structure was disclosed in the ‘457 specification. He did not, however, indicate where these structures could be found in the ‘457 specification. Instead, Jayant’s testimony took two paths - both insufficient as a matter of law to demonstrate that the written description in the ‘457 patent could provide a 1988 priority date for claim 4 [DSP].”

Next: Some of Microsoft’s arguments are denied...