Microsoft Loses a $290 Million Patent Suit and Will Modify Word

David has beaten Goliath, but Goliath isn't going down for the count. A U.S. federal appeals court affirmed on Tuesday an earlier $290 million verdict against Microsoft (MSFT) for patent infringement and banned the company from selling versions of Microsoft Word that contain the infringed-upon code. But Microsoft says it has already removed the code from new versions of the software, suggesting that the ruling won't do much to damage the Redmond, Wash., software giant's sales.The ruling could signal the end of a long-running patent battle between Microsoft, the world's largest software company, and tiny i4i, a Toronto-based software company, over the use of XML (or extensible markup language) in 2003 and 2007 versions of Word, the company's widely used word processing software.

"Microsoft is not entitled to continue infringing simply because it successfully exploited its infringement," the three-judge appellate panel wrote.

An Injunction Is Effective as of Jan. 11, 2010

Microsoft Word is a central piece of Microsoft Office, the company's suite of software tools, which is used by 500 million people worldwide. The Microsoft division responsible for Office racked up $18.9 billion in sales last year.

The ruling affirms an earlier $200 million jury verdict against Microsoft -- handed down on Aug. 12 -- which held that the company had infringed on an XML-related patent held by i4i. Microsoft was also slapped with an injunction barring it from selling versions of Word that contained the code. The court stayed the injunction while Microsoft filed an appeal, which did not succeed. Now, the injunction will go into effect on Jan. 11, 2010.

Toronto-based i4i had sought $200 million in damages. The original judge added $40 million to that number, plus another $50 million to cover legal costs and interest.

"Protecting the Property Rights of Small Inventors"

"A small company was practicing its patent, only to suffer a loss of market share, brand recognition, and customer goodwill as the result of the defendant's infringing acts," the appellate court wrote. "The district court found that Microsoft captured 80% of the custom XML market with its infringing Word products, forcing i4i to change its business strategy."

In a statement, i4i founder Michel Vulpe hailed the ruling. "I4i is especially pleased with the court's decision to uphold the injunction, an important step in protecting the property rights of small inventors," he said.

Since losing the original case in August, Microsoft has been working to address the issues and says it has "put the wheels in motion to remove this little-used feature from our products."

Microsoft will have versions of Word 2007 and Office 2007, with the offending feature removed, ready for sale by Jan. 11, and "beta versions of Microsoft Word 2010 and Microsoft Office 2010, which are available now for downloading, don't contain the technology covered by the injunction," Microsoft spokesman Kevin Kutz said, in comments cited by Bloomberg.

Taking It to the Top?

"While we are moving quickly to address the injunction issue, we are also considering our legal options," Kutz told Reuters. "He said that could include a request for a rehearing by a full panel of judges at the appeals court, or a request for a review by the U.S. Supreme Court," the wire reported.

Tuesday's ruling was a major victory for the proverbial "little guy." But it's highly unlikely that the ruling would derail Microsoft's Office juggernaut.
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