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Microsoft Loses at Top U.S. Court on $300 Million I4i Award

The U.S. Supreme Court upheld a patent-infringement verdict that will cost Microsoft Corp. $300 million and already has forced changes in its Word software.

The justices today unanimously rejected calls from Microsoft and its allies, including Apple Inc. and Google Inc., to overturn the award and make some patents more vulnerable to legal challenge.

The ruling is a victory for closely held I4i LP, which claimed in its 2007 lawsuit that its patented technology had been incorporated into Word, the word processing program used by 500 million people. The award is the largest ever upheld on appeal in a patent case.

“It’s strongly in our favor and strongly in favor of protecting the U.S. patent system and ensuring inventors get protection,” I4i Chairman Loudon Owen said in an interview. “It is one of the most significant business cases that the court has decided in decades.”

Microsoft, which had $5.2 billion in profit in the first quarter of 2011, hasn’t yet paid I4i any damages. Owen said Microsoft will have to pay about $300 million. The world’s largest software maker rose 2 cents to $23.96 at 4 p.m. in trading on the Nasdaq Stock Exchange.

“While the outcome is not what we had hoped for, we will continue to advocate for changes to the law that will prevent abuse of the patent system and protect inventors who hold patents representing true innovation,” said Kevin Kutz, a Microsoft spokesman, in an e-mail.

Sotomayor Opinion

Microsoft contended that the disputed patent was based on technology already in the marketplace. The question for the Supreme Court was whether, as a lower court concluded, Microsoft needed to make that showing by “clear and convincing” evidence to overcome the longstanding presumption that patents approved by the U.S. Patent and Trademark Office are valid.

Microsoft argued 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.

Writing for the Supreme Court, Justice Sonia Sotomayor said that the clear-and-convincing standard is a decades-old rule that Congress has repeatedly declined to revisit.

“Any recalibration of the standard of proof remains in its hands,” Sotomayor said.

Chief Justice John Roberts didn’t take part in the ruling. His family owns at least $100,000 in Microsoft stock, according to his most recent financial disclosure report.

Lobbying Congress

Large technology companies including Intel Corp. and Cisco Systems Inc. have lobbied Congress to make it easier to challenge the validity of patents in courts.

Those efforts so far have failed. A sweeping patent-law overhaul approved by the Senate in March doesn’t address the issue. That legislation, which may come before the House as early as next week, does include a new procedure for reconsideration of issued patents by the patent office.

“It’s been criticized for many years and Congress has looked at the statute many times over the years but never felt the need to change it,” said Paul Devinsky, a patent lawyer with McDermott Will & Emery in Washington. “If this is confronted directly by statute, it would be hugely controversial.”

Jury Award

The disputed feature in the Microsoft case 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.

The case concerned a method developed by Toronto-based 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.

Microsoft, which is based in Redmond, Washington, argued 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.

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.

Companies Divided

Microsoft had support in its appeal from trade groups representing the financial services and wireless industries. I4i had support from the Obama administration and companies that rely on their patent portfolios, including the drug industry.

The ruling has “huge implications for all patent owners that assert their patents,” said Robert Sterne of Sterne Kessler in Washington, who represented I4i before the patent office. “There was a lot of uncertainty in patent litigation over validity challenges and whether there was going to be a new standard of proof.”

Some lawyers questioned whether the high court had done enough to clear up that uncertainty.

“We don’t know what ‘clear and convincing’ means, but it sounds impressive,” said Michael Sacksteder of Fenwick & West in San Francisco, who represents technology companies that supported Microsoft. “It’s something a skilled litigator can use to his or her advantage.”

The case is Microsoft v. I4i Limited Partnership, 10-290.

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