Microsoft Assembles Hefty Patent Arsenal

By Alexander Wolfe  |  Posted 2004-04-12

Microsoft Assembles Hefty Patent Arsenal

Is Microsoft burying the intellectual-property hatchet, or is it moving to build up a powerful patent portfolio it can use to reap billions in future licensing revenues?

In the wake of two recent, major, intellectual-property-related pacts involving the Redmond software giant, the answer may be both.

In one of the intellectual-property (IP) cases, Microsoft on Monday agreed to pay $440 million to InterTrust Technologies Corp. to license the latters antipiracy patents and to settle outstanding litigation.

In the second case, Microsoft last week signed a 10-year pact with Sun Microsystems Inc., under which it will pay an initial $900 million to resolve patent issues between the two companies and as much as $450 million more over the next 10 years.

That Microsoft ended up paying out money to other companies to settle on patent issues shouldnt obscure the fact that the company has spent the past decade securing its own intellectual-property holdings. During the past two years alone, according to the U.S. Patent and Trademark Offices online search server, Microsoft has received about 1,000 patents, or an average of 10 a week.

David Kaefer, Microsofts director of business development for intellectual property, said the company has strongly taken up the licensing mantle. "Weve provided people with a clear sense that we are willing to do outbound licensing. This is now a significant focus for us," he said. In many cases, Microsofts licensing model will likely take the form of cross-licensing, rather than simply paying out or taking in cash, Kaefer said.

For example, in the case of InterTrust, he noted that the multimedia antipiracy company didnt ship products and earned most of its income through its patent portfolio. But Kaefer added, "If we were going to go to a company like [Hewlett-Packard Co.], youd be talking about a cross-licensing agreement because both of us have large portfolios."

"The bigger users of IP are often going to end up paying out money," said Jonathan Zuck, president of the Washington, D.C.-based industry lobbying group the Association for Competitive Technology, in a discussion of the two recent Microsoft deals. "But Microsoft has a big portfolio of its own."

Indeed, Microsofts list of patents is surprisingly varied.

For example, Microsoft in January was awarded two U.S. patents for a proprietary method of packing a high-definition video signal onto a hard drive: one for a system and method for layered video coding enhancement, patent No. 6,510,177; and another for a system and method for compressing data, patent No. 6,683,980.

Microsoft in February locked up a patent relating to XML, the cutting-edge scripting language. The patent, dubbed XML script automation, describes a method for unpacking multiple scripts contained within a single XML file.

Next Page: Patent-licensing deals could signal new transparency trend.

Transparency Trend

In addition, Microsoft sometimes moves to patent what outsiders might see as self-evident technologies. In March, Microsoft was awarded U.S. patent No. 6,700,564 for a two-way scroll mouse that adds horizontal movement alongside the traditional vertical scrolling feature, which is traditionally found in pointing devices.

"They have had an aggressive patent portfolio since the 1994 case with Stac," said Bruce Perens, co-founder of the Open Source Initiative.

In that famous legal donnybrook, Stac Electronics of Carlsbad, Calif., sued Microsoft, claiming that the latters DoubleSpace disk-compression technology infringed on two of its data-compression patents. Stac was awarded $120 million by a California jury. Microsoft countersued Stac in the same case, claiming misuse of a software preloading feature; the jury awarded Microsoft $13.7 million.

Rather than battle out disputes in court as Microsoft has done in the past, the companys patent-licensing deals with InterTrust and Sun may be evidence of an industry thats more likely to settle than to fight.

"These patent cross-licensing deals signify an industry thats getting more mature," Zuck said. "Companies are having to balance customer demands for interoperability with IP protection. So, patents are taking on a more significant role than they have in the past, when companies could rely on trade secrets for protection."

Zuck noted that Microsoft recently formalized its model for licensing its patents to other companies. "The trend going forward is for transparent sharing of portfolios," Zuck said. "I think were going to see a lot of patent cross-licensing, and thats a good thing."

But Perens, a noted open-source advocate, said he worries that Microsoft may ultimately use its patent clout to protect Windows in its battle against Linux.

"One thing they will do with their patent portfolio is enforce it against open-source software," he said. "Not to get money, because we dont have any, but they will attempt to block our implementations."

Perens said he foresees a scenario in which Microsoft moves to patent technologies such as the standards that form the basis for its file systems and protocols. "Say that you need a particular patent to implement a standard," he said. "Microsoft sues an open-source developer. The developer has to settle because he doesnt have any money. The result is that open source cannot interoperate with other programs that use the standard."

According to Microsofts Kaefer, "Well make our IP available to all comers, open-source or not." Kaefer added that Microsoft isnt focused on what garage-shop developers are doing but that if a major corporation is using its IP, "We would need to look at it."

Whether or not that scenario pans out, Microsoft is clearly moving on the international front to secure its patent portfolio. According to the Boston-based Asian American Lawyers Association of Massachusetts, Microsoft is looking to establishing a new IP practice in China.

The prospectus for an IP attorney job opening reads, "The Intellectual Property and Licensing group at Microsoft is starting a phase of international expansion and is looking for an outstanding IP attorney to build and develop the IP legal function in greater China. The position is based at Microsofts new Beijing facilities in the downtown area."

The lawyer will help identify technologies for potential licensing and develop ideas for increased "patent viability," the document states.

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