Microsoft Expands Legal Protection For PC Makers

Microsoft will expand the legal protection it offers PC makers that are the targets of intellectual-property lawsuits resulting from their distribution of Microsoft products.

The world's largest software company said Wednesday it will remove caps on the legal fees it would reimburse to PC makers that were the subject of such suits, and cover the costs of legal settlements or adverse judgments up to the amount of annual business they do with Microsoft. The moves apply to the largest manufacturers of PCs, such as Dell, Gateway, Hewlett-Packard, and Lenovo, as well as to smaller distributors and system builders. Collectively, those companies and independent software vendors that use Microsoft technology in their products--also covered by the new program--account for more than $18 billion of Microsoft's annual revenue. Microsoft said the largest PC makers had asked it to step up its coverage amid an environment of increased intellectual-property rights litigation in the technology industry.

"Intellectual-property issues are getting more important in software," says David Kaefer, director of business development for IP and licensing at Microsoft. "We've seen a general increase in IP litigation," he says, and "the largest PC makers for years have asked us to step in and indemnify them" against lawsuits. "Over the last couple of years, we've heard from smaller partners as well." A meeting last September in Redmond, Wash., between Microsoft general counsel Brad Smith and executives from large PC makers was a "catalyst" to the change, Kaefer says.

Microsoft indemnifies its distributors, corporate customers, and retail customers against lawsuits that charge infringement of patents, copyrights, trademarks, and trade secrets as a result of using its products, with varying degrees of compensation. Now, says Kaefer, the company is trying to be more consistent. "We want to set a high bar we think others are not matching in our industry as a reason to partner with Microsoft," he says.

A number of high-profile intellectual-property lawsuits in the technology industry in recent years have led companies such as Hewlett-Packard, IBM, Red Hat, and Sun Microsystems to offer or expand the protection they give customers:

--Three years ago, Lucent Technologies Inc. filed suit against Dell and Gateway alleging the PC makers had infringed on patents held by Lucent's Bell Labs and contained in Microsoft software, which Dell and Gateway distributed on their computers.

--In August 2003, startup Eolas Technologies won a $521 million judgment against Microsoft for infringing on Eolas patents in Microsoft's Internet Explorer Web browser. Microsoft is appealing the ruling.

- SCO Group last year filed suits against DaimlerChrysler AG and AutoZone Inc. for infringements of its Unix holdings, and it has filed a related trade-secret infringement suit against IBM.

--In April 2004, Microsoft agreed to pay Sun Microsystems $900 million to resolve patent disputes between the companies related to the Java programming language, plus $350 million in royalties.

--Last October, Sun paid Eastman Kodak Co. $92 million to settle a patent dispute over Java.

Microsoft's Kaefer called the Lucent lawsuits "the marquee example" of actions it's trying to avoid. Litigants who own software intellectual-property portfolios often file suit against small distributors that don't have the resources to defend themselves, he says. Even large companies such as Dell often don't have extensive patent portfolios that can be used as a defense in countersuits.

Since 2003, Microsoft has been taking steps to bring its own intellectual-property mechanisms up to date. It's hired a former IBM executive as its deputy general counsel in charge of intellectual-property licensing; expanded the number of patents it issues from about 2,000 in fiscal 2004 to more than 3,000 this year; and entered cross-licensing agreements with large technology companies such as Cisco Systems, SAP, Siemens, and Toshiba to gain access to broad portfolios of patents. Kaefer says Microsoft plans to enter 30 to 40 such agreements over the next five years.