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Microsoft Gets High Court Review on I4i Patent Award

The U.S. Supreme Court will consider making some patents more vulnerable to legal challenge, agreeing to hear Microsoft Corp.’s appeal in a case that forced changes in the company’s Word software and may cost it $300 million.

Microsoft, fighting a verdict won by closely held I4i LP, says the federal appeals court that handles patent cases is making it too hard for those accused of infringement to argue that a patent never should have been issued and is invalid.

The world’s largest software maker has support in its appeal from more than a dozen publicly traded companies, including Apple Inc. and Google Inc. Apple told the justices that the patent system “is tilting out of balance,” giving disproportionate power to people who secure patents of questionable legitimacy.

The award stood as the largest ever upheld by an appeals court in a patent case. The U.S. Court of Appeals for the Federal Circuit in Washington concluded that Microsoft didn’t prove that the disputed patent was based on technology that was already in the marketplace.

Microsoft, which had $5.41 billion in profit in the most recent quarter, hasn’t yet paid any damages to I4i. The unit that sells Office is Microsoft’s biggest, with $5.13 billion in sales in the quarter that ended Sept. 30. Microsoft rose six cents to $25.31 at 4 p.m. in trading on the Nasdaq Stock Market.

Traditional Presumption

In its ruling, the appeals court said Microsoft needed to offer “clear and convincing evidence” to overcome the traditional presumption that patents approved by the U.S. Patent and Trademark Office are valid.

Microsoft contends that a less-demanding standard should apply when a jury is presented with evidence about pre-existing technology that the patent examiner didn’t consider. In such a case, “there is no factual determination with respect to patentability that warrants deference in the form of a clear-and-convincing-evidence standard,” the Redmond, Washington-based company argued.

Toronto-based I4i urged the Supreme Court not to hear the appeal, arguing that the clear and convincing standard is a longstanding rule that has encouraged innovation.

“The heightened burden benefits the public by increasing inventors’ incentive to commit the resources required for innovation and then to disclose their inventions,” I4i argued.

Markup Language

The case concerns a method developed by I4i for editing some documents using XML, a so-called markup language that tells the computer how text should appear. I4i created a way to store the content and the XML codes separately, making it easier for users to work alone with either the content or the codes.

The disputed feature is one used by large companies to add special data to Word files, such as information in forms submitted by customers. Customers including drugmakers Merck & Co. and Bayer AG use I4i’s software to make sure that people get the correct and most up-to-date information on the labels of their medicine.

In its 2007 lawsuit, I4i accused Microsoft of incorporating the invention into the larger company’s Word program, which is used by 500 million people worldwide.

Microsoft argued in defense that I4i had included its innovation in a product it sold to a client more than a year before it filed its patent application. That prior use would have rendered the invention ineligible for patenting under federal law.

$200 Million Award

A jury agreed with I4i and awarded $200 million. The judge overseeing the case increased that sum because of misconduct by Microsoft’s trial lawyer, and the figure has continued to grow with interest. The court also ordered Microsoft to stop using the invention, forcing the company to update the Word software.

Microsoft also has support in its appeal from trade groups representing the financial services and wireless industries. The Securities Industry and Financial Markets Association and the Clearing House Association told the justices that suits based on questionable patents “are a plague upon the financial industry.”

The court’s decision to hear the case “is a clear affirmation that the issues raised in this case are critical to the integrity of our patent system,” David Howard, Microsoft’s deputy general counsel for litigation, said in an e-mailed statement.

‘Simplistic Appeal’

I4i Chairman Loudon Owen said in a telephone interview that Microsoft’s argument has a “simplistic appeal” that “does not take into consideration at all what the patent office actually does.” If Microsoft wins, he said, inventors would inundate the already overburdened patent office with data and examiners would have to fill out more paperwork to explain their decisions.

“What it’s going to result in is tremendous uncertainty for anyone who owns a patent,” he said. “It would be a sea change in the operations of the patent office and would be a dramatic body blow to the health of the U.S. patent industry and the value of patents.”

The case, which the court will consider in the first half of 2011, is Microsoft v. I4i Limited Partnership, 10-290

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