Does Microsoft's settlement fever signal IP offensive?

comment Microsoft's US$536 million settlement with rival Novell is certain to raise eyebrows, as the agreement is another in a closely packed string of settlements that the software giant has reached with opposing litigants in the past year.

comment In team sports like basketball and American football, when a player getting ready to pass the ball locks his or her eyes on one teammate for too long, that person is said to be "telegraphing" the identity and location of his or her intended target to the competing team.

Microsoft's US$536 million settlement with rival Novell is certain to raise eyebrows, as the agreement is another in a closely packed string of settlements that the software giant has reached with opposing litigants in the past year. In dispatching so many suits in such a short period of time for a breathtaking sum of money, the company has taken a significant number of items off the to-do lists of its attorneys and executives. The comprehensiveness of its legal deck clearing begs the question of whether Microsoft needed to free up bandwidth for forthcoming legal offensives of its own. Is Microsoft telegraphing its plans?

Including this week's settlement--related to Microsoft's business practices and Novell's NetWare operating system--Redmond has settled with no fewer than seven existing or potential litigants (and probably more that we don't know about) for a mind-numbing US$3.77 billion over the last 12 months. Just to put that in perspective, if Microsoft was a nation with a 2003 GDP of US$3.77 billion, its rank would be 159th in the world, right after Barbados (US$4 billion) and Burundi (US$3.8 billion), and just ahead of Guadeloupe, Liberia, Guam, Sierra Leone, Virgin Islands and Bermuda.

Faced with certain defeat in a patent infringement suit back in December 2003, Microsoft paid US$60 million to whiteboard technology provider SPX. Earlier this year, Microsoft got Sun off its legal back when it inked a watershed agreement that included a US$1.95 billion payment to the Silicon Valley company. One week later, Microsoft ironed out its differences with digital rights management solution provider InterTrust for US$440 million. Then, in May, Microsoft put to rest its legal disputes with AOL Time Warner and Opera by agreeing to pay those companies US$750 million and US$12 million, respectively. After that came a US$20 million dollar settlement with upstart Linux seller Lindows. And now comes a cool US$536 million to Novell. (While the companies settled one suit, Novell announced plans to file an additional antitrust claim against Microsoft before the end of this week).

Kevin Mitnick in Australia - Register now! Microsoft has other outstanding legal challenges, including the US$1 billion antitrust suit filed by RealNetworks last year; its ongoing deliberations with the European Union, the newly announced suit from Novell, and, according to Microsoft spokesperson Jim Desler, at least 30 other patent infringement suits against the company. Still, one can't help but marvel at the number of suits recently settled, the sum of money that those settlements involved, and the compressed timeframe over which these resolutions took place.

Noting that the settlement with Novell happened before the two companies entered into litigation, and also noting that Microsoft's antitrust deliberations with the CCIA weren't that consuming but had the potential to be should they have escalated to the Supreme Court, Desler acknowledged that lawsuits can consume not just significant legal resources, but also the time of executives and employees who have to testify or give depositions. In that context, Microsoft's blindingly fast and expensive elimination of seven whoppers could be seen as a bit of legal deck clearing for future matters.

What could those matters be? In recent months, Microsoft has grown increasingly assertive on the intellectual property front. When Microsoft inked its deal with Sun, Microsoft CEO Steve Ballmer was very clear about the importance of IP when he said "It's an agreement that comes from two companies that believe in intellectual property, that develop intellectual property, and that are respecting intellectual property."

This week, 11 months after announcing that it would seek to licence more of its technology to other developers, Microsoft's director of intellectual property licensing, David Kaefer, was quoted in a News.com story about Microsoft's interest in cross-licensing deals as saying "It's not possible for us to just look the other way" referring to companies that Microsoft thinks are using its intellectual property and that Microsoft is negotiating with.

Kaefer also played a central role in the recent controversy that erupted within the ranks of the IETF when it came to light that Microsoft had not only applied for patents that overlapped the e-mail authentication technologies under review by the IETF (a baby step towards preventing spam), but that it intended to place certain restrictions on eventual patent licensees. Later, in hopes of eliminating the controversy, Microsoft softened its position by reworking the technology and rewording its patent application. More importantly, however, the licensing language not only remained, but bubbled up again in a Microsoft-authored licensing agreement that, on the surface, appears to be more broadly applicable to some of the most standard protocols behind TCP/IP (Internet) networking such as the Domain Name System (DNS), Dynamic Host Configuration Protocol (DHCP), and the Simple Network Management Protocol (SNMP). Microsoft has promised a clarification.

It addition to all of its recent patent posturing, which included the hiring of IBM's ex-patent portfolio architect Marshall Phelps, a portion of Microsoft's watershed agreement with Sun known as "the stand-still agreement" was recently revealed when Sun filed certain documents with the Securities and Exchange Commission. Though the passage reveals nothing specific about Microsoft's or Sun's plans, it clearly outlines the way in which Sun--as a distributor of StarOffice and a key player in OpenOffice.org--will not be targeted with a Microsoft-launched patent infringement suit should Microsoft decide to enforce any intellectual property rights with respect to the technologies found under the hood of the two closely related productivity suites. More importantly, while the stand-still agreement makes it clear that Microsoft won't sue Sun, it distinctly leaves open Microsoft's option to sue other distributors of OpenOffice such as Red Hat and Novell. How Microsoft can do this is explained in a column I wrote earlier this year--a column that I followed up with a speculative blog entry suggesting that by publishing the stand-still agreement, Sun may have put certain open source profiteers on notice.

If you wanted to take these puzzle pieces and arrange them in a way that makes it look as though Microsoft is moving its legal forces into position for an intellectual property offensive, it would be easy to do so. But Microsoft's Desler offered other explanations.

Referring to the question of mounting an IP offensive, Desler said "You could ask that or you could ask whether it reflects that we wanted to address and resolve these issues in a way that makes sense for the company. This was more about the management of our legal issues rather than any clearing the decks for specific initiatives. Moving forward, our preference is for constructive relationships and the only way to do that is to resolve our differences from the past."

Desler's explanation certainly is plausible. Given the option of being cast as a predator or as playing by the rules, the better choice is obvious. Whether or not clearly articulated licensing frameworks and multi-million dollar settlements will placate Microsoft's harshest critics remains to be seen. For example, in Novell's case, Microsoft may be paying the company US$536 million to settle its differences over one issue.

But the resulting Microsoft-Novell relationship doesn't appear to be as constructive as Microsoft might like. Just after announcing the settlement, Novell made it clear that it was preparing another lawsuit against Microsoft. Said Desler, "There will be issues that remain. But, by settling one issue, there's a constructive framework in place for resolving others." That may be true. But make no mistake about it: With a growing patent portfolio, cross-licensing agreements being worked out, guys like Marshall Phelps on board, and finely worded documents like the Sun-Microsoft stand-still agreement in place, Microsoft has other frameworks in place as well.

Given the way the company's software train--delivery dates, upgrade penetration, et al--has slowed some and the way that open source has forced Microsoft to reconsider how it prices its software (particularly overseas), Microsoft has no other choice. Just as companies like Xerox and IBM sell their own products, but generate huge revenues off their IP portfolios, it's time for Microsoft to seek an annuity base that isn't as tied to the upgrade cycle as its current revenue model is.

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