Microsoft Deepens IP Indemnity Coverage

In the wake of rising concerns within companies about intellectual-property lawsuits over software, Microsoft is considering ways to broaden the indemnification policy that provides legal protection to its customers.

The vendor already promises to shield business customers that sign its volume license agreements from patent-infringement or other claims that might be made against its products by outside parties. Now, amid growing questions from customers about their legal exposure, "we're revisiting ways to make our indemnification as compelling as possible," says David Kaefer, Microsoft's director of business development for IP and licensing.

It's unclear what Microsoft has in mind, but the possibilities include expanding its indemnification policy to cover all business customers and maybe consumers. Microsoft executives have been promoting the company's indemnification coverage as a reason to license Windows at a time when questions are being raised in the courtroom and elsewhere over the source-code lineage of the Linux operating system.

"We understand that being on the wrong end of a software-patent lawsuit could cost a customer millions of dollars and massively disrupt their business," CEO Steve Ballmer wrote in a letter distributed via E-mail last week to Microsoft customers and partners.

The potential legal ramifications for software customers were driven home earlier this year when SCO Group filed lawsuits against AutoZone Inc. and DaimlerChrysler AG, after months of warning hundreds of companies that the use of Linux infringed on its Unix intellectual-property holdings. (In a related action, SCO Group is locked in a $3 billion suit with IBM over the alleged misappropriation of SCO Group's trade secrets.) More recently, Java users worried that they might be susceptible when a software-patent lawsuit by Eastman Kodak Co. against Sun Microsystems swung in Kodak's favor. Sun agreed a few weeks ago to pay Kodak $92 million to settle the matter.

In a September speech to the Massachusetts Software Council, Ballmer warned that commercial software companies need to be thinking about the same issues. "Let's say you know you want to build your business around Windows or Linux," Ballmer said. "You have to decide what intellectual-property risk you want to build, what additional cost you might be pushing to your customers that is unanticipated because nobody stands behind the stuff."

That last remark is somewhat of an overstatement. While it's true that some Linux distributors don't offer indemnification, others do, though their offers of legal protection vary. Just over a year ago, Hewlett-Packard began offering indemnification to customers that run Linux on HP computers, subject to certain limitations. And in January, Novell introduced an indemnification program to cover customers of its newly acquired SuSE Linux. The Open Source Development Lab, a consortium of open-source developers and commercial software companies, has created a defense fund to help defray potential legal expenses of Linux users. However, the fund can be applied only to cases associated with SCO Group's litigation, and source-code contributors aren't covered.

Microsoft strengthened its original indemnification, or "duty to defend," policy in April of last year. It expanded the policy's provisions to cover trade-secret and trademark claims and removed a monetary cap on damages. "They're saying, 'We accept full responsibility.' That's almost unheard of in the industry," says Yankee Group analyst Laura DiDio. In doing so, Microsoft is exploiting the fact that some Linux distributors have been unwilling to provide their customers with similar guarantees, she adds.