updated 8/6/2007 8:43:36 PM ET 2007-08-07T00:43:36

Microsoft Corp. does not have to pay $1.53 billion in damages to Alcatel-Lucent SA, a federal judge ruled Monday, reversing a March jury decision that Microsoft programs infringe on Alcatel-Lucent’s digital music patents.

U.S. District Court Judge Rudi M. Brewster in San Diego said Microsoft’s Windows Media Player software does not infringe on one of the two patents in question.

Brewster also said the second patent is owned by both Alcatel-Lucent and Fraunhofer Gesellschaft, a German company Microsoft paid $16 million for rights to use the technology. Since Fraunhofer did not also sue Microsoft, the Redmond-based software maker is in the clear, the judge decided.

Both patents cover the encoding and decoding of audio into the digital MP3 format, a popular way to convert music from a CD into a file on a personal computer and vice versa.

Brewster’s decision seems to ease fears that Alcatel-Lucent would launch legal attacks against the hundreds of other companies that license technology from Fraunhofer, including Apple Inc. and RealNetworks Inc.

In a May court filing, the judge seemed to support the jury’s decisions, and Monday’s turnabout dismayed Alcatel-Lucent.

“This reversal of the judge’s own pretrial and post-trial rulings is shocking and disturbing, especially since — after a three-week trial and four days of careful deliberation — the jury unanimously agreed with us, and we believe their decision should stand,” said Mary Lou Ambrus, a spokeswoman for Alcatel-Lucent, in an e-mail. “We still have a strong case and we believe we will prevail on appeal.”

In Monday’s ruling, the judge also dismantled the logic that led to the massive $1.53 billion fine the jury imposed. He said if Alcatel-Lucent were to win an appeal, he would grant them a new trial instead of reinstating the jury’s original decision.

Microsoft’s general counsel, Brad Smith, said in a statement that the ruling is “a victory for consumers of digital music and a triumph for common sense in the patent system.”

The MP3 trial was just one of six to be heard by the court. All stem from claims made in 2003 by Lucent Technologies Inc. against PC makers Gateway Inc. and Dell Inc. for technology developed by Bell Labs, Lucent’s research arm.

In 2003, Microsoft added itself to the list of defendants, saying the patents were closely tied to its Windows operating system. The PC makers are still defendants. France’s Alcatel bought Lucent last year.

In March, Brewster threw out a speech coding technology lawsuit, saying Microsoft applications do not infringe on an Alcatel-Lucent patent. Other areas under dispute include video coding on Microsoft’s Xbox game console and Windows’ user interface.

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