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Declan McCullagh

Staff Writer, CNET

WASHINGTON–A federal appeals court on Thursday wrestled with whether to overturn or uphold a lower court’s $565 million judgment against Microsoft in the biggest patent dispute in Web history.

The U.S. Court of Appeals for the Federal Circuit spent 40 minutes asking about procedures that the district judge followed in the Chicago trial, which ended with an August 2003 jury verdict in favor of the University of California. The school and its spinoff company called Eolas share the rights to a patent that they claim covers plug-ins and applets that are invoked through a Web browser.

Judge Randall Rader suggested that the jury should have been permitted to decide whether earlier research–that could have changed the outcome of the lawsuit filed against Microsoft–was relevant.

“The point is that the district judge didn’t even let this be considered as prior art” by the jury, Rader said. Microsoft was barred from showing the jury information about an early Web browser called Viola created by a computer programmer and artist named Pei Wei and demonstrated to other researchers a year before the university filed for its patent.

Judge S. Jay Plager wondered whether the jury instructions, which said the browser was the software component doing “heavy lifting,” were adequate. “Help me understand how that is an adequate explanation to a jury–no matter how intelligent,” Plager said.

Martin Lueck a partner at Robins, Kaplan, Miller & Ciresi who is representing UC and Eolas, said Wei’s demonstration of his browser in May 1993 didn’t qualify as legitimate prior art because it was on a standalone computer that wasn’t hooked up to the Internet.

In addition, Lueck argued, the details of Wei’s project were “never made public–it was suppressed and canceled…You put a fortune in some code, you never use it, you never show it to anyone–that’s abandonment.”

The judgment of $521 million–later upped to $565 million–has set off alarm bells throughout the Web development community over whether standards would have to be reworked or whether Microsoft would alter Internet Explorer and break certain Web pages.

Microsoft also claimed that the district court erred when deciding that its alleged patent infringement extended to foreign sales. If the appeals court buys that line of thinking, Microsoft could see its damages drop to less than $200 million.

The appeals court seemed skeptical of this argument, with all three judges on the panel at one point lobbing critical questions at an attorney representing Microsoft. One common theme: Why should exports of intangible computer code be treated any differently under patent law than tangible objects?

“You couldn’t have any of these foreign-made computers function unless they had what’s on the golden master” disc, Judge Daniel Friedman said.

No immediate ruling is expected. Meanwhile, a separate process is under way at the U.S. Patent and Trademark Office, which is deciding whether to invalidate portions of the UC and Eolas patent.