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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, which could allow the software company to sidestep a nearly $521 million jury verdict. The Federal Circuit U.S. Court of Appeals ruled on March 2 that a lower court erred in preventing Microsoft from presenting evidence to a jury that could invalidate the patent, which the university licensed exclusively to Eolas Technologies Inc. The decision in Eolas Technologies v. Microsoft sends the closely watched case back to a federal courtroom in Chicago for a new trial on the validity of the Eolas patent. However, the appellate court ruling upheld 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 had not shipped software abroad but rather 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. Microsoft, meanwhile, has been focused on the Federal Circuit’s order for a new trial on the validity of the Eolas patent. “It’s certainly a very positive development,” says Constantine Trela Jr., a partner in the Chicago office of Sidley Austin Brown & Wood who represents the company. “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 University of California Board of Regents, says he doesn’t believe Microsoft will prevail on the narrow issue of whether prior art existed before the university filed its patent application. “What [Eolas founder Michael] Doyle and others at UC invented was new,” says Lueck, a partner at Minneapolis’ Robins, Kaplan, Miller & Ciresi. “We don’t think Microsoft can prove otherwise.” Eolas and the university filed a lawsuit against Microsoft in 1999, claiming that certain aspects of Microsoft’s Internet Explorer browser incorporated the university’s invention. The university’s patent covers browser plug-ins, the tools that enable Web page developers to embed interactive programs in Web pages. A federal jury in Chicago found in August 2003 that Microsoft had infringed the patent and ordered the company to pay nearly $521 million in damages to the university and Eolas. If Microsoft is found to have infringed the patent in the next trial, the damages award would stand against it, says Lueck. At issue in the case is whether prior art existed at the time that the university filed its patent application. In its ruling, 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 the university 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 the university’s patent. The Federal Circuit also 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,” wrote Federal Circuit Judge Randall Rader. “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 say Rader’s opinion spells out a new interpretation of patent law that could harm the software industry. “Leading software companies are concerned that U.S. 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,” says Edward Reines, a partner at Weil, Gotshal & Manges who filed an amicus brief on behalf of Oracle. Michael Barclay, a partner at Wilson Sonsini Goodrich & Rosati, says 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 on what to do. “If the court meant to foreclose shipping source code abroad, that is troublesome,” says Barclay. In response to industry concerns, the U.S. Patent and Trademark Office has ordered a re-examination of the patent, which is under way.

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