By Susan Decker and William McQuillen
(Bloomberg) — Microsoft Corp. (MSFT), the world's biggest software maker, must alter its popular Word software or stop selling the product after it lost its appeal of a $200 million patent-infringement verdict won by a Canadian company.
The company, based in Redmond, Washington, was given until Jan. 11 — five months from the original order issued in August — to make the change by the U.S. Court of Appeals for the Federal Circuit in Washington. Word is part of Microsoft's Office software, used by more than 500 million people.
The court today upheld a verdict which has since grown to $290 million won by closely held I4i LP of Toronto. The dispute is over a patented invention related to customizing extensible markup language, or XML, a way of encoding data to exchange information among programs. Microsoft has called it an "obscure functionality."
Microsoft said it has been working on making the change since August and has "put the wheels in motion to remove this little-used feature from our products."
Copies of Word 2007 and Office 2007, with this feature removed, will be available for U.S. 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," said company spokesman Kevin Kutz.
Microsoft can continue to provide technical support to current Word users. It can't instruct new users who buy Word after the deadline on how to use the custom XML editor or sell copies of Word with the feature, the court said. The unit that sells Office is Microsoft's biggest, with $18.9 billion in sales in the year ended June 30.
I4i's business was based on preserving its patent rights, and "Microsoft is not entitled to continue infringing simply because it successfully exploited its infringement," the three- judge panel said.
"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 court said. "The district court found that Microsoft captured 80 percent of the custom XML market with its infringing Word products, forcing i4i to change its business strategy."
The decision is "an important step in protecting the property rights of small inventors," Michael Vulpe, i4i's co- founder, said in an e-mail.
There was "sufficient evidence" for the jury to reach both its verdict and damage award, the court said. It also upheld the trial judge's decision to add $40 million to the original $200 million verdict for intentional infringement. The remaining $50 million is for post-verdict damages and interest.
Microsoft claimed the product was a small part of its Word package and the damages are inordinately high. The company also argued in court papers that it was under an unrealistic deadline to "redesign its flagship Word software to remove an obscure functionality" or be "compelled to stop distributing Word and the popular Office software suite."
The appeals court said the scope of the order was narrow in that it wouldn't affect existing customers. It did say Microsoft should have been given more time to implement any change to Word, based on a declaration from a Microsoft employee that it would take at least five months to do so. The judge originally allowed just 60 days.
XML is a common way of encoding data, and nothing in the order prevented Microsoft from continuing to offer that feature in Word, or for allowing customized XML when it's used in plain text. The disputed feature is one used by large companies to add special data to Word files, such as information in forms submitted by customers.
Customized XML is a key feature of the software and services sold by I4i, company Chairman Loudon Owen has said. Customers including drugmakers Merck & Co. (MRK) and Bayer AG (BAYA:GR) use I4i's software to make sure that people get the correct and most up- to-date information on the labels of their medicine.
The case is I4i LP v. Microsoft Corp., 2009-1504, U.S. Court of Appeals for the Federal Circuit (Washington). The lower-court case is I4i LP v. Microsoft Corp., 07-cv-113, U.S. District Court, Eastern District of Texas (Tyler).
To contact the reporters on this story: Susan Decker in Washington at email@example.com; William McQuillen in Washington at firstname.lastname@example.org.
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