WASHINGTON (Reuters) - Alcatel-Lucent (ALUA.PA: Quote, Profile, Research, Stock Buzz) lost a fight to win back a $1.5 billion award against Microsoft Corp (MSFT.O: Quote, Profile, Research, Stock Buzz) when an appeals court ruled Thursday in favor of the software giant in a battle over patents to digitize music.

A lower court jury in San Diego found in February 2007 that Microsoft had infringed two MP3 digital music patents and ordered Microsoft to pay $1.5 billion. In August 2007, U.S. District Judge Rudi Brewster disagreed with that jury, saying Microsoft had not violated one of the patents and had a license for the other one. The judge threw out the jury's award.

On Thursday, the U.S. Court of Appeals for the Federal Circuit, which hears appeals in patent cases, agreed with Brewster.

"We affirm the lower court's grant of JMOL (judgment as a matter of law) based on lack of standing for one patent and based on non-infringement for the other patent," the court said in its ruling.

The dispute centered on a 1989 joint development agreement between AT&T and German research organization Fraunhofer Gesellschaft.

Microsoft maintained it obtained a license for the MP3 technology from Fraunhofer for $16 million and was innocent of any infringement.

But Alcatel-Lucent argued the patent was based on work done previously by Bell Labs, now the research arm for Lucent Technologies, and could not legally be licensed by Fraunhofer to Microsoft. Lucent was spun off from AT&T in 1996 and owns Bell Labs.

MP3 is the standard digital music format, which allows audio to be compressed so it can be easily played on computers, mobile phones or digital music players.

Alcatel-Lucent said it had not yet decided on an appeal.

"We are disappointed with the Court's decision on this matter," said spokeswoman Mary Ward. "We will review our options to see what steps we should take."

(Reporting by Diane Bartz; Editing by Tim Dobbyn and Andre Grenon)

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