Politics and Law

The FTC wants Intel to grow up and start acting like a responsible company.

At least that's the goal behind the agency's lawsuit against the chipmaker. Filed on Wednesday, the FTC's suit charges Intel with a host of offenses, including using threats and rewards to convince PC makers not to buy chips from the competition, altering its compiler to weaken the performance of rival chips like those made by AMD, and preserving its CPU monopoly by stifling the market for GPUs (graphics processing units) made by Nvidia and other manufacturers.

On Wednesday, the FTC held a press conference in Washington in which it discussed why it launched the lawsuit now and what it hopes to gain.

Fielding questions from reporters, Richard Feinstein, director of the FTC's Bureau of Competition, explained that the allegations against Intel have been bubbling for the past 10 years. During that time, at each point in which Intel perceived a threat to its dominance, the company responded not by competing aggressively on its own merits but by behaving in a way that was exclusionary and detrimental to the competition and ultimately detrimental to consumers, said the FTC.

Federal officials said they chose now to file the suit in part because the allegations have continued and evolved over time, and also because many of the charges are fairly recent, such as Intel's perceived attacks on the GPU market.

Unlike other complainants against Intel, the FTC is not imposing any fines or financial penalties. Instead, the agency simply wants the company to try a little behavior modification. The government said it is looking for changes in Intel's conduct to help restore market competition.

In its complaint, the FTC provided a laundry list of remedies that it plans to impose on Intel if the company is found to have violated any laws.

The full list of 26 different dos and don'ts can be found in the FTC's complaint, but to name just a few:

• Intel can't directly or indirectly require customers to purchase only its CPUs or GPUs.
• Intel can't require a customer to buy a minimum or fixed number of processors from Intel.
• Intel can't withhold payments or other compensation to OEMs (original equipment manufacturers) just because the companies are not exclusively doing business with Intel.
• Intel can't directly price its processors so its customers pay below cost just to thwart the competition.
• Intel can't make hardware or software designed to inhibit processors made by competing companies.
• For customers who bought "defective" compilers, Intel must provide them with a working compiler at no cost and compensate them for the cost of recompiling their software using the new compiler.
• Intel can't coerce benchmarking organizations to adopt benchmarks that are deceptive or misleading.
• Intel must file periodic compliance reports with the FTC and for a period of time make available any advertisements, tests, reports, studies, and other documents that relate to the charges against it.

In charging Intel, Feinstein said that the FTC is relying on principles from Section 2 of the Sherman Act, which deals with monopolies, and Section 5 of the Federal Trade Commission Act, which covers deceptive or anticompetitive actions that affect consumers.

Section 5 also specifies that the outcome of the FTC's case can't be used to establish liability on Intel's part in any other antitrust actions. That may work in Intel's favor as its lawyers have certainly been putting in overtime dealing with the barrage of lawsuits against the company.

Intel recently closed the books on a 2004 antitrust lawsuit filed against it by AMD. As part of the settlement, the company agreed to pay its rival chipmaker $1.25 billion and promised to refrain from offering incentives to customers to keep them from doing business with AMD.

Intel is still appealing the record $1.45 billion fine imposed on it in May by the European Commission after the company was found guilty of violating European antitrust laws.

And in November, New York Attorney General Andrew Cuomo filed a federal lawsuit against Intel, accusing it of paying off computer makers like Dell with rebates to retain its monopoly and shove AMD out of the marketplace. Though this case is separate and distinct from the FTC's suit, Feinstein did acknowledge that he spoke to and compared notes with the state attorney general.

With Intel already facing severe financial penalties from these other lawsuits, Feinstein said he didn't feel another fine was essential for the FTC's case. But he said that in theory the FTC can go into federal court and seek financial penalties if necessary.

Last-minute allegations
In response to the FTC's action, Intel held its own conference call Wednesday in which the company discussed the allegations in greater detail..

Intel spokesperson Chuck Mulloy told CNET that substantial common ground had been reached in the discussions between the company and the FTC, especially after Intel settled its suit with AMD. But negotiations broke down because the commission raised certain last-minute allegations, such as the benchmarking issue and the GPU matter, and because Intel felt some of the suggested remedies were over the top.

Mulloy said that the benchmarking and GPU concerns had never been addressed in the two years that the FTC had been investigating Intel, both formally and informally, and were added a few weeks prior to the lawsuit being filed. He said the commission issued a subpoena to Intel requesting information on the GPU issue on December 8, about a week before the suit was launched, and did not wait for a response from Intel.

The chipmaker was also unhappy with a couple of the remedies proposed by the FTC. One sticking point in particular was the notion of compulsory licensing, in which the commission would have required Intel to license its x86 architecture to other companies, which includes those trying to make their own chips compatible with Intel processors. But Intel objected because it considers the technology to be its own intellectual property worth tens of billions of dollars.

Mulloy also said that talks broke down because Intel felt the FTC was trying to micromanage the company's pricing schemes--dictating how and under what circumstances it could offer discounts to certain customers. He added that Intel did make some proposals to the commission on discounting schemes, but this issue was never resolved.

Intel's view is that this is overreach on the part of the FTC, said Mulloy. He feels Intel was on track to settle and was disappointed that it couldn't get it done.

To move the case along quickly, the FTC decided to have it heard before an administrative judge rather than a slower federal court. The speedier process of the administrative court will begin with a trial in September, which Feinstein believes will conclude by the end of the year. Depending on the outcome, there may or may not be further proceedings before the FTC. But ultimately, the case would be reviewed by the FTC for a final decision. If the judge rules against Intel and the company appeals, that could take the case to the middle of 2011.

Ultimately, Feinstein believes that Intel's actions have deprived the marketplace of the vigorous competition it needs, affecting innovation, prices, and consumer choice. Despite the gains in the microprocessor market, Feinstein said he believes it's hard to know what the market might have done over the past 10 years had it not been for Intel's conduct.

Updated December 18, 5:45 a.m. PST with response from Intel

Although a judge recently ruled in favor of Apple in its copyright infringement case against Psystar, the two companies have reached a new settlement, according to Computerworld and other reports.

Details are sketchy at this point, and there's no confirmation from Apple, but Psystar claimed in a motion filed Monday that a partial settlement has been reached.

"Psystar has agreed on certain amounts to be awarded as statutory damages on Apple's copyright claims in exchange for Apple's agreement not to execute on these awards until all appeals in this matter have been concluded," noted Psystar's motion filed in federal court in San Francisco. "Moreover, Apple has agreed to voluntarily dismiss all its trademark, trade-dress, and state-law claims. This partial settlement eliminates the need for a trial and reduces the issues before this Court to the scope of any permanent injunction on Apple's copyright claims."

Psystar also seems to be looking for a loophole against any injunctions. Apple had asked the court to prevent Psystar from selling clones not just with Leopard, but also Snow Leopard, which was released after the lawsuit began. But in its filing, Psystar argued that it should be allowed to sell its Rebel EFI utility, which lets customers install Snow Leopard on clones sold by the company, thus moving the legal burden away from Psystar.

Psystar's motion also indicated that another motion with further details would be filed Tuesday with Judge William Alsup.

Apple's lawsuit against Psystar began in July 2008 after Psystar started selling Mac clones with OS X installed on them. Apple has argued that its end user license lets people install its operating system on Apple computers only.

On November 13, Alsup ruled in favor of Apple, finding that Psystar's use of OS X on its clones was not "fair use" as the company contended and further finding that Psystar violated the Digital Millennium Copyright Act (DMCA) by "circumventing Apple's protection barrier."

Since then, Apple has been keen to shut down Psystar's Mac clone business permanently, calling for an injunction against the company and potentially millions of dollars in damages, substantially more money than the clone maker has.

Alsup's findings and Apple's fervor in going after Psystar raise the question of why Apple would agree to any kind of settlement at this point. A hearing was set for December 14, with a full trial scheduled to start in January. But if the latest news from Psystar is true, then the company may be able to avoid further courtroom drama.

Neither Psystar nor Apple has responded to requests for comment. We'll provide further details of this latest development as court documents become available.

eBay is criticizing a French court's ruling that orders the company to pay a $2.55 million fine to European conglomerate LVMH.

The auction giant and its European unit were fined 1.7 million euros on Monday by the Commercial Court of Paris, which ruled that the company violated a 2008 court order by not preventing the sale of legitimate LVMH perfumes and cosmetics. LVMH's brands include Christian Dior, Guerlain, and Givenchy perfumes.

In June 2008, the Commercial Court fined eBay $61 million in a lawsuit filed by the conglomerate, which is officially known as LVMH Moet Hennessy Louis Vuitton. LVMH had asserted that eBay had not done enough to stamp out the sale of fake LVMH goods on its site. The court went a step further, ruling that eBay-traded LVMH products--even authentic ones--were not being sold by an authorized reseller. As a result, eBay was ordered to remove all listings of these products.

eBay criticized the ruling then, saying it was an attempt by LVMH to "protect uncompetitive commercial practices." eBay likewise condemned the new ruling.

"Today's outcome hurts consumers by preventing them from buying and selling authentic items online," Alex von Schirmeister, general manager of eBay in France, said in a statement. "The injunction is an abuse of 'selective distribution.' It effectively enforces restrictive distribution contracts, which is anti-competitive."

Despite its objections, eBay argued that it has complied with the 2008 court order. The company said it has used state-of-the-art filtering software to check millions of listings each day, making thousands of authentic LVMH products invisible or inaccessible to French eBay users.

eBay also discounted the proof brought against it, claiming that LVMH offered details on only 1,341 listings out of 200 million posted on the auction site each day. eBay believes those listings were deliberately posted by people to sneak past the filters. In 1,091 of the listings targeted by LVMH, the seller did not accurately describe the item, using misspelled brand names, no brand names at all, or only pictures to describe the product.

As a result, eBay asserts that both the fine and ruling are unjustified. The fine itself is disproportionate given that eBay complied with the injunction," said von Schirmeister. "It is out of step with our legal victories in France, U.K., Germany, Belgium and the U.S."

eBay plans to appeal the new ruling and two other cases tied to LVMH. "We believe that the higher courts will overturn this ruling and ensure that e-commerce companies such as eBay will continue to provide a platform for buyers and sellers to trade authentic goods," said von Schirmeister.

eBay has been in and out of U.S. and European courtrooms for years, sued by companies trying to clamp down on the sale of fake versions of their legitimate products. It's faced courtroom battles with several European powerhouses, winning cases against L'Oreal and Tiffany, but losing suits filed by LVMH.

Even for a company as powerful as Intel, with $13 billion in cash on the books, $1.25 billion is a lot of money. So why drop that huge quantity of money in the lap of its biggest rival, Advanced Micro Devices?

The payment is, of course, to settle the antitrust suit AMD brought against Intel five years ago. AMD's stock surged 22 percent Thursday after the chipmakers announced the agreement, but Intel's share price dropped 1 percent, indicating which company the investors thought got the better deal.

Paul Otellini, speaking in September and holding a wafer of silicon chips

(Credit: Stephen Shankland/CNET)

AMD does indeed come away with some serious perks--not just the cash, but also a new patent cross-license agreement that removes Intel's objections to AMD spinning off its chip-manufacturing business, enables multiple manufacturers to build AMD's chips, and eliminates the earlier patent agreement's payments to Intel. And it has Intel's agreement not to violate a list of restraints on its business practices.

But Intel gets something out of this, too.

Spend now, save later
Let's start with the money. Sure, shareholders likely frowned when they heard Intel's fourth-quarter expenses are expected to climb from $2.9 billion to about $4.2 billion. But Intel could have been out a lot more money if things had gone south.

In the European Union, Intel is wrestling with an antitrust case that produced a fine of 1.06 billion euros, or $1.6 billion at today's exchange rate. Intel appealed the European Commission fine, but it's a very concrete example of just how severe the Intel punishment could be.

There are other financial factors, too. Intel and AMD were set to begin their jury trial in March, and jury trials are famously unpredictable. Add on top of that risk the fact that antitrust suits can come with triple damages.

"It was a small multiple of the damage that could be awarded in a jury trial," Intel Chief Executive Paul Otellini said of the price tag in a conference call earlier Thursday.

Treble damages of the scale of just the European Commission fine would have been more than $4 billion, Technology Business Research analyst John Spooner observed. Facing that prospect, "Intel chose to control its own destiny and settle up front."

Taking commercial cases to a jury trial is indeed risky, said Richard Brosnick, who's involved in antitrust law at the firm of Butzel Long.

"Any complex commercial case going to the jury phase is challenging, and antitrust, given the economics, is probably more challenging," Brosnick said. "Trial is expensive overall, not in billions, but in terms of the risk you'll be able to explain these issues in a way that will be understood by and persuasive to a jury."

Goodwill in other antitrust cases
AMD's antitrust case isn't the only one Intel faces. It's also got the European Commission fine discussions, a new antitrust lawsuit from New York Attorney General Andrew Cuomo, and an antitrust investigation from the Federal Trade Commission.

The AMD settlement doesn't make those cases evaporate, but Intel hopes it'll help.

"We hope that having this major litigation settled with AMD would be viewed favorably by these regulatory bodies and eventually the cases would be dropped," Intel spokesman Tom Beerman said.

Certainly those regulators won't face as much of AMD's active prodding. Among the terms of the settlement is this, regarding all the regulatory actions AMD is involved in:

AMD agrees to promptly...notify in writing each authority...that except as provided in Section 3.5 AMD has resolved its disagreements with and complaints concerning Intel contained in that Administrative Complaint and believes that this Agreement provides AMD with fair compensation for any and all actual or alleged harm and damages that AMD did or may have suffered in connection with matters discussed in the Administrative Complaint. In addition, AMD agrees that it will not ghost-write or edit any other briefs, pleadings, or "friend of the court" or "friend of the tribunal" materials or briefs in any Administrative Action.

But whether Intel will actually get what it wants isn't certain.

"It's certainly possible that the public agencies will view this as a compromise they can live with, but it's equally possible not," Brosnick said.

One issue is Intel practices described in the section 3.5 mentioned above, where AMD and Intel still disagree. Brosnick said the governmental agencies still might be concerned about any of those practices--called "retroactive discounts," "accused bid bucket," and "accused end-user discounts" in the settlement.

Intel digging in its heels?
Though the agreement didn't preclude those practices as it did some others, it did agree not to defend them as hard as it might in settlement talks with the government organizations.

"Intel agrees that in the event it enters into voluntary settlement discussions with a government authority in the EC litigation, New York litigation, or the FTC investigation, and if such government authority proposes to include in a consent judgment or other governmental order a prohibition against Retroactive Discounts, Accused Bid Buckets or Accused End-User Discounts, Intel will not challenge such a prohibition as a general matter, although it may challenge the scope or specific language of the prohibition," the settlement agreement said.

Just how deeply Intel will dig in its heels in the other cases remains to be seen. Although it settled a big case, Otellini hardly sounded contrite. He reiterated on several occasions his belief that Intel didn't do anything illegal. He said airing the full context of seemingly incriminating e-mail would show Intel in a better light. And he vehemently attacked the New York case.

"We strongly disagree with the New York attorney general case and believe the complaint is entirely without merit," Otellini said. "Discounts and rebates are entirely fair business practices, and it's unfortunate the New York attorney general chose to distort the facts. We would have preferred to engage in a dialog with the New York attorney general."

Then again, Intel spoke in strong terms about the AMD trial. Perhaps Intel's pragmatic side will show in the other cases next.

New York Attorney General Andrew M. Cuomo filed a federal antitrust lawsuit Wednesday against Intel that accuses it of paying computer makers rebates to illegally maintain its monopoly power, the newest among several such attacks that have dogged the chipmaker in recent years.

"Intel has engaged in a systematic worldwide campaign of illegal, exclusionary conduct to maintain its monopoly power and prices in the market for x86 microprocessors," the suit asserts. "By exacting exclusive or near-exclusive agreements from large computer makers in exchange for payments totaling billions of dollars, and threatening retaliation against any company that did not heed its wishes, Intel robbed its competitors of the opportunity to challenge Intel's dominance in key segments of the market. This illegal behavior was highly detrimental to consumers, competition, and innovation."

The suit "seeks to bar further anticompetitive acts by Intel, restore lost competition, recover monetary damages suffered by New York governmental entities and consumers, and collect penalties," Cuomo said in a statement.

The suit (click for PDF) makes the state the newest party to go after the dominant chipmaker. Intel also is in the midst of an antitrust suit brought by top rival AMD in 2005 and appealing a massive $1.5 billion fine from the European Commission from a later case in the European Union.

New York Attorney General Andrew M. Cuomo

(Credit: New York Office of the Attorney General)

Intel will defend itself, Intel spokesman Chuck Mulloy said in response to the New York suit.

"We disagree with the New York attorney general. Neither consumers--who have consistently benefited from lower prices and increased innovation--nor justice are being served by the decision to file this case now," Mulloy said.

Of e-mails the attorney general quoted as evidence Intel abused its position, all already emerged in earlier cases, he added. "It is the AMD case filed 4.5 years ago. It's the same case the EU brought. There's nothing significant or new here that hasn't been discovered," Mulloy said.

According to the suit, computer makers "frequently decided, when faced with the array of incentives and threats which Intel brought to bear, to collaborate with Intel in restricting their purchases from AMD."

"In a February 27, 2003 internal Dell document, for example, it was assumed that 'aggressive' purchases by Dell from AMD could result in '(r)etaliatory (rebate) reductions (by Intel that) could be severe and prolonged with impact to all LOBs (lines of business),'" the suit said. "Another Dell document from March 2003 concluded that '(a)nticipated Intel response wipes out all potential opinc (operating income) upside from going with AMD.'"

And an unnamed IBM executive said in a 2005 e-mail that balancing business interests against Intel's response was hard. From the suit:

I understand the point about the accounts wanting a full AMD portfolio. The question is can we afford to accept the wrath of Intel if we do the AMD full portfolio? It is a very hard question to deal with. On the one hand, having Intel help us has been one element of why we are doing better in the market. If they start to sell against us again I am afraid that we would be in a very difficult spot. On the other hand, if we leave Sun and HP an opening with AMD we will (be) very exposed on that side of things.

Cuomo's office said it began investigating the case in January 2008, "reviewed millions of pages of documents and e-mails and took testimony from several dozen witnesses."

Updated 9:43 a.m. PST with further details from the lawsuit.

A Silicon Valley start-up said it sued Barnes & Noble on Monday, claiming that the bookseller misappropriated trade secrets in creating the Nook e-reader.

Cupertino, Calif-based Spring Design said it had a nondisclosure agreement with Barnes & Noble and had been discussing its e-reader plans with the bookseller since early this year.

"Since the beginning of 2009 Spring and Barnes & Noble worked within a non-disclosure agreement, including many meetings, emails and conference calls with executives ranging up to the president of BarnesandNoble.com, discussing confidential information regarding the features, functionality and capabilities of Alex," Spring Design said in a statement. "Throughout, Barnes & Noble's marketing and technical executives extolled Alex's 'innovative' features, never mentioning their use of those features until the public disclosure of the Nook."

The press release from Spring Design did not say in what court the suit was filed, or mention what damages were being sought.

Spring Design announced its Alex e-reader just days before Barnes & Noble formally unveiled the Nook. Both e-readers use the Android operating system and combine an e-ink screen with a color touch screen.

Eric Kmiec, Spring Design's vice president of sales and marketing, said that the company has been working on the Alex since 2006.

"Spring Design unfortunately had to take the appropriate action to protect its intellectual property rights," Kmiec said in a statement. "We showed the Alex e-book design to Barnes & Noble in good faith with the intention of working together to provide a superior dual screen e-book to the market."

A Barnes & Noble representative was not immediately available to comment. (Update, 9:30 a.m. Nov. 3: A Barnes & Noble representative said that the company does not comment on litigation.)

Barnes & Noble's Nook, which competes head-on with Amazon's Kindle, is due to go on sale later this month for $259.

Here's a look at the Alex:

(Credit: Spring Design)

as compared to the Nook:

(Credit: Barnes & Noble)

Note: This story originally misstated the day that the lawsuit was filed. It was filed on Monday.

Eolas Technologies, a company that ground through a years-long patent infringement lawsuit against Microsoft, now has sued a large swath of corporate powers for infringement of that same patent and another related patent concerning interactive programs on Web sites.

The list of defendants includes many high-profile companies inside and outside the tech world: Adobe Systems, Amazon, Apple, Blockbuster, Citigroup, eBay, Frito-Lay, Go Daddy, Google, J.C. Penney, JPMorgan Chase, Office Depot, Perot Systems, Playboy Enterprises, Staples, Sun Microsystems, Texas Instruments, Yahoo, and YouTube.

Eolas' suit is not to be taken lightly. Although the earlier Microsoft case took many years to resolve, and Eolas by no means won a complete victory, the patent involved did overall withstand heavy legal challenges despite many on the Web rallying to Microsoft's aid. Microsoft and Eolas won't describe terms of their 2007 settlement of the patent case, but Eolas did say it expected to pay its shareholders a 2007 dividend afterward.

"What distinguishes this case from most patent suits is that so many established companies named as defendants are infringing a patent that has been ruled valid by the Patent Office on three occasions," said Mike McKool, head of the national law firm McKool Smith and Eolas' lead attorney.

This diagram shows one example of the newly granted Eolas patent 7,599,985 in use.

(Credit: Eolas)

The U.S. District Court suit, filed in the eastern district of Texas, seeks preliminary and permanent injunctions prohibiting the plaintiffs from using the patented technology; payment for damages from infringement, including treble damages because the alleged infringement was willful; attorney's fees; and a jury trial.

Eolas conducts research and development but also has a separate licensing department. "Eolas seeks to return value to its shareholders by commercializing these technologies through strategic alliances, licensing and spin-offs," the company says of itself.

The earlier Microsoft case involved U.S. patent 5,838,906, "Distributed hypermedia method for automatically invoking external application providing interaction and display of embedded objects within a hypermedia document," which involved browsers launching a helper application such as Adobe Flash.

In the new case, that patent is joined by a newer one granted Tuesday, No., 7,599,985, with a very similar title: "Distributed hypermedia method and system for automatically invoking external application providing interaction and display of embedded objects within a hypermedia document."

"The '985 Patent is a continuation of the '906 patent, and allows Web sites to add fully-interactive embedded applications to their online offerings through the use of plug-in and Ajax (asynchronous JavaScript and XML) Web development techniques," Eolas said in a statement about the lawsuit.

Ajax caught on midway through the decade as a way to endow Web pages with interactive features based in part on the JavaScript programming language. Ajax is used in many Web sites including Google Maps and Yahoo Mail.

The '985 patent, originally filed Aug. 9, 2002, involves a program embedded in a Web page--or "hypermedia document," as the patent language calls it more generally. Here's an excerpt from the patent abstract's description of the technology:

A system allowing user of a browser program on a computer connected to an open distributed hypermedia to access and execute an embedded programming object. The program object is embedded into a hypermedia document much like data objects.

The user may select the program object from the screen. Once selected the program executes on the user's (client's) computer or may execute on a remote server or additional remote computers in a distributed processing arrangement.

After launching the program object, the user is able to interact with the object as the invention provides for ongoing interprocess communication between the application object (program) and the browser program.

And later, in a bit more detail:

The present invention allows a user at a client computer connected to a network to locate, retrieve, and manipulate objects in an interactive way. The invention not only allows the user to use a hypermedia format to locate and retrieve program objects, but also allows the user to interact with an application program located at a remote computer.

Interprocess communication between the hypermedia browser and the embedded application program is ongoing after the program object has been launched. The use is able to use a vast amount of computing power beyond that which is contained in the user's client computer.

Apple, Google, Yahoo, Texas Instruments, and Office Depot each declined to comment on the suit. Staples, Playboy, Sun, Blockbuster, Citigroup, eBay, Frito-Lay, J.C. Penney, JPMorgan Chase, Adobe, and Perot Systems didn't immediately respond to requests for comment.

Elizabeth Driscoll, vice president of public relations for Go Daddy, said in a statement, "We have not seen the lawsuit and, therefore, cannot comment on it. However, we are unaware of the basis for any such claims and we will defend the case vigorously."

Updated 1:26 p.m., 2:09 p.m., 2:35 p.m., and 4:08 p.m. PDT with comment from companies.

A federal appeals court on Friday affirmed a lower court ruling that Microsoft infringed on a patent owned by Alcatel-Lucent, but said the jury award of $358 million in damages was excessive.

The U.S. Court of Appeals for the Federal Circuit in Washington, D.C., upheld a ruling that the patent at issue was valid and had been infringed on, but said there was not sufficient evidence to support the calculation of damages. The question of damages was sent back to the district court.

The patent, whose application was originally filed by engineers at AT&T, covers a method of entering information into fields on a computer screen without using a keyboard. Lucent initially sued computer maker Gateway for the patent infringement in 2002 and Microsoft subsequently intervened. Dell is listed as a third defendant in the case.

The trial court found that the "date-picker" calendar tool in Microsoft Outlook, and similar features in Microsoft Money and Windows Mobile, infringe on what the court refers to as the "Day patent." However, for damages purposes, the court said there was no evidence of widespread use of the infringing tool by customers and questioned the calculation of damages.

Alcatel-Lucent argued that it was owed damages representing 8 percent of the revenue of Microsoft's sales. The jury apparently arrived at its sum based on that percentage of Microsoft's sales or the entire market value of the software products that contain the feature, the opinion said. Microsoft, meanwhile, had suggested a sum of $6.5 million. The appeals court did not suggest a method for calculating the damages, but said the amount chosen by the jury was out of proportion to the potential for infringing use.

The infringing feature is a tiny piece of a large software program, and thus "the portion of the profit that can be credited to the infringing use of the date-picker tool is exceedingly small," the ruling said.

"In short, Outlook is an enormously complex software program comprising hundreds, if not thousands or even more, features. We find it inconceivable to conclude, based on the present record, that the use of one small feature, the date-picker, constitutes a substantial portion of the value of Outlook," the court said.

Representatives from both Microsoft and Alcatel-Lucent said they were pleased with the ruling.

"We are pleased that the court vacated the damages award, and we look forward to taking the next step in the judicial process," Microsoft spokesman Kevin Kutz said in a statement.

"We are very pleased with this decision by the U.S. Court of Appeals for the Federal Circuit affirming the jury's decision that Microsoft infringed the Alcatel-Lucent Day patent and that the Day patent is a valid patent," Alcatel-Lucent spokeswoman Mary Ward said in a statement.

"While we are disappointed that the court did not affirm the jury's decision on damages, we look forward to an upcoming proceeding to determine the compensation to which Alcatel-Lucent is entitled based on the court's finding that Microsoft did use our patented invention, which Microsoft included in each of the infringing products, presumably because they recognized that it added real value for their customers," she said.

The case is just one of a number of patent infringement cases the two companies have filed against each other over the years including cases involving the MP3 format, as well as communications technology, and digital speech compression.

Microsoft late Tuesday filed its formal appeal of a patent infringement ruling that threatens to halt sales of Word in its current form.

In May, a jury ordered Microsoft to pay $200 million for infringing on a patent held by Canada's I4i. Earlier this month, a federal judge increased that monetary award and also issued an injunction barring sales of Word that include the custom XML code found to infringe on I4i's patents.

"We believe the court erred in its interpretation and application of the law in this case and look forward to the September 23 hearing before the U.S. Court of Appeals," Microsoft spokesman Kevin Kutz said in a statement.

In its papers, Microsoft makes a number of arguments for overturning the infringement finding, saying that the judge made several procedural errors and failed to live up to his role as "gatekeeper."

"In patent cases, even more than most, the trial judge's role as a gatekeeper is crucial," Microsoft argued in its appeal. "As gatekeeper, the judge must define the metes and bounds of a patent through claim construction and then ensure that the evidence presented by the parties' numerous experts is both reliable and rooted in the facts of the case at hand. And after the jury has rendered its verdict, it is the judge who, before allowing that verdict to become an enforceable judgment, must ensure that the verdict is adequately supported by the evidence and supportable under the law...This case stands as a stark example of what can happen in a patent case when a judge abdicates those gatekeeping functions."

For its part, I4i has praised the ruling and said that it is not seeking to torpedo Word, but does want the infringing custom XML code removed.

"We're not seeking to stop Microsoft's business and we're not seeking to interfere with all the users of Word out there," I4i Chairman Loudon Owen told CNET News earlier this month.

In a statement on Wednesday, Owen called Microsoft's document "extraordinary."

"It captures the hostile attitude of Microsoft toward inventors who dare to enforce patents against them," Owen said. "It is also blatantly derogatory about the court system."

Owen said that the company is counting on the court system to help it prevail even in the face of Microsoft's massive legal firepower.

"We do not have the gargantuan financial resources of Microsoft, but i4i has the protection of fairness under the U.S. justice system. Microsoft is not above the law. It cannot privately expropriate I4i's patented invention."

Owen said that I4i's response brief is due to be filed by Sep. 7. "We firmly believe the decision of the jury and judge in the United States District Court for the Eastern District of Texas was correct on the facts and we shall prevail on appeal," Owen said.

Microsoft has already gotten the appeals court to set a September 23 hearing to weigh an appeal of the case and potentially hold off the injunction, which is slated to go into effect in October.

In addition to pursuing its appeal, Microsoft has other options including creating a technical workaround, removing the XML function, or reaching a settlement with I4i.