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Microsoft Corp. has been given another chance to prove it did not infringe a University of California patent covering Web browser technology and thereby sidestep a $521 million jury verdict. The Federal Circuit U.S. Court of Appeals ruled Wednesday that a lower court erred in preventing Microsoft from presenting evidence to a jury that could invalidate the patent, which UC licensed exclusively to Eolas Technologies Inc. The decision sends the closely watched case back to U.S. district court in Chicago for a new trial on the validity of the Eolas patent. However, the appeals court did uphold the lower court’s interpretation of patent claims and found Microsoft liable for damages on foreign sales of its Windows and Internet Explorer products. Microsoft had argued that it was not liable for damages on foreign sales because it hadn’t shipped software abroad, only the software code, which was embedded on a “golden master disk.” But the court ruled that software code made in the United States and exported abroad is a component of a patented invention and thus could be found to be infringing even where the software is only sold and used abroad. This issue is particularly worrisome to the software industry. Oracle Corp., Netscape Communications Corp. and Autodesk Inc. had filed amicus curiae briefs arguing against this interpretation of the law. On Wednesday, Microsoft focused on the court’s order for a new trial on the validity of the Eolas patent. “It’s certainly a very positive development,” said Microsoft attorney Constantine Trela Jr., a partner in the Chicago office of Sidley Austin Brown & Wood. “Microsoft feels it has a strong invalidity defense we didn’t get to present at trial, and we get to go back and present it.” But Martin Lueck, an attorney for Eolas and the Regents of the University of California, said he doesn’t believe Microsoft will prevail on the narrow issue of whether prior art existed before UC filed its patent application. He defends the work of Eolas’ founder, Michael Doyle. “What Doyle and others at UC invented was new,” said Lueck, a partner at Minneapolis’ Robins, Kaplan, Miller & Ciresi. “We don’t think Microsoft can prove otherwise.” Eolas and the UC Regents filed suit against Microsoft in 1999, claiming that certain aspects of Microsoft’s Internet Explorer browser incorporated UC’s invention. The UC patent covers browser plug-ins, the tools that enable Web page developers to embed interactive programs in Web pages. In August 2003 a federal jury in Chicago found that Microsoft had infringed the patent and ordered the company to pay UC and Eolas $520.6 million in damages. Microsoft spokeswoman Stacy Drake said this was the biggest judgment against Microsoft. Lueck said that if Microsoft is found to have infringed the patent in the next trial, the damages award would stand against it. At issue in the case is whether prior art existed at the time UC filed its patent application. The Federal Circuit said the district court should have allowed Microsoft to present evidence that Perry Pei-Yuan Wei, of O’Reilly and Associates, had invented a version of the Web browser in 1993, a year before UC filed a patent application on the technology, and that Wei had demonstrated the invention to engineers at Sun Microsystems. Microsoft contends that this prior art would invalidate UC’s patent. Finally, the Federal Circuit agreed with the lower court that software code on a golden master disk is a component of a computer program invention. “Exact duplicates of the software code on the golden master disk are incorporated as an operating element of the ultimate device,” Federal Circuit Judge Randall Rader wrote for the three-judge panel. “This part of the software code is much more than a prototype, mold or detailed set of instructions. � Without this aspect of the patented invention, the invention would not work at all and thus would not even qualify as new and ‘useful.’” Patent lawyers said this was a new interpretation of patent law that could harm the software industry. “Leading software companies are concerned the United States patent law is now being extended to create liability for software sold and used outside the country — even though these activities have generally been treated as not subject to U.S. patent law,” said Edward Reines, a partner at Weil, Gotshal & Manges who filed an amicus brief for Oracle. Michael Barclay, a partner at Wilson Sonsini Goodrich & Rosati, said it was unclear from the Federal Circuit’s decision whether the court was referring to source code — text format that people can read — or executable code that directs computers what to do. “If the court meant to foreclose shipping source code abroad, that is troublesome,” Barclay said. In response to industry concerns, the director of the U.S. Patent and Trademark Office ordered a re-examination of the patent, which is under way. The case is Eolas Technologies v. Microsoft, 04-1234.

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