Alcatel-Lucent (NYSE: ALU) says Monday's U.S. district court decision that undoes an earlier $1.54 billion patent infringement verdict against Microsoft Corp. (Nasdaq: MSFT) is "shocking" and says it will appeal within the next 30 days.

The U.S. District Court of the Southern District of California found that Microsoft had not infringed the two disputed audio compression patents, which cover encoding and decoding into MP3 format and which Microsoft uses in Windows Media Player.

The decision reverses a February jury verdict that Microsoft had infringed these patents and should pay Alcatel-Lucent a record $1.54 billion in damages. (See Microsoft Loses Verdict and Microsoft Battles AlcaLu, AT&T.)

This is a significant blow for AlcaLu, which has high hopes of generating significant revenues from its stable of intellectual property. One way to achieve this is through legal challenges. A win upheld by the courts would allow the vendor to pursue other companies for patent infringements. (See AlcaLu Plays the Patents.)

But yesterday's decision came as no surprise to some.

Back in February, one European financial analyst, who requested anonymity, suggested that AlcaLu had become "very greedy" after the verdict against Microsoft, and didn't expect AlcaLu to get the full $1.54 billion award.

Today, the analyst team at Dresdner Kleinwort issued a report stating that Alcatel-Lucent is likely to reach a settlement of about $30 million, which is "barely sufficient to cover the legal costs."

"[The decision] should lessen investors' unfounded hopes that Alcatel-Lucent's fragile financials would benefit from an 'exogenous injection,' " says the Dresdner team.

In an emailed statement, Brad Smith, Microsoft's senior vice president and general counsel, said: "Today’s ruling by the judge reversing the jury's $1.52 billion [sic] verdict against Microsoft is a victory for consumers of digital music and a triumph for common sense in the patent system. For the hundreds of companies large and small that rely on MP3 technology, the Court’s ruling clarifies that these companies have properly licensed the technology embodied in the [RE 39,080] patent from its co-owner and industry recognized MP3 licensor – Fraunhofer.”

If Alcatel-Lucent loses its appeal, then it will be denied the chance to pursue other companies for MP3 patent infringements. But AlaLu remains hopeful.

"We think we will prevail on appeal… We have a strong case," says a company spokesman. "Technically, [the decision] is a reversal of the verdict from the original trial."

He adds: "This decision is shocking."

So the long-standing legal dispute between the software giant and the telecom equipment vendor, which dates back to 2003, just got longer. And it won't be the end of the legal wrangles between the two companies. Alcatel-Lucent filed two separate suits against Microsoft related to the Xbox 360 gaming console in November last year. (See Is Alcatel Suing over Xbox?)

— Michelle Donegan, European Editor, Light Reading