Where's the Economics Behind Lucent v. Gateway et al.?

23 March 2007
By Dr. David Blackburn et al.

In a recent verdict, a jury in the US District Court for the Southern District of California held Microsoft liable for infringement of two patents held by Alcatel-Lucent (Lucent). It ordered Microsoft to pay just over $1.5 billion in reasonable royalty damages, the largest patent damage award in history. The case, Lucent Technologies et al. v. Gateway Inc. et al., focused on two patents relating to MP3 audio technology and the ability of computers running Microsoft's Windows Media Player to both create and use audio files encoded in MP3 format.

This paper argues that the economic and business analysis presented to the jury to support each side's damages opinions was inadequate. More precisely, the authors contend, the arguments put forth by both sides' damages experts failed to apply basic economic principles to estimate the value of the patent at issue to either Lucent or Microsoft. Instead, they relied on rules of thumb, purportedly comparable rates, and licensor policies. After reviewing the public transcript of both sides' damages presentations, the authors believe that the jury was left without a sound economic basis upon which to base an award.