Microsoft’s Indemnification Program

Last November, Microsoft updated its intellectual property (IP) indemnification program to include virtually all standard Microsoft products, for all users. Under the Microsoft program, if you purchase a copy of Microsoft Office and someone sues you, claiming that Office infringes their patent, Microsoft will defend you in court and will either obtain a license from the owner so you can continue to use Office or will replace the infringing component with something functionally equivalent. Previously, only Microsoft’s “volume customers” were provided with this legal protection. Now Microsoft protects virtually all users (see below for the exception), with no dollar limit on what Microsoft will spend to defend you. (See http://www.microsoft.com/indemnification for details.)

Without wanting to sound cynical, I would suggest that this change in Microsoft’s intellectual property indemnification program is essentially meaningless — except for its marketing value.

Suppose that John’s Flower Shop purchases Office, which is then found to infringe a patent held by someone like Sony. John’s is liable for damages under United States patent law. But the odds that Sony will sue John’s for patent infringement are extremely small. Rather, Sony will sue Microsoft, the party that has money to pay a substantial damage award and the party that’s in a position to license Sony’s patent, generating a revenue stream for Sony. Unlike John’s, large companies like General Electric might be a target, since they likely have thousands of copies of Office and have the money to pay damages.

But wait. Volume customers were already indemnified prior to the November announcement. Hence, the new indemnification program is a great marketing move for Microsoft. It puts them in a position to challenge all of the indemnification programs offered by open source supporters, including Red Hat, Novell, HP, and Open Source Risk Management.

Admittedly, the Linux programs are more limited than what Microsoft offers. Some have a monetary cap; some only cover copyright; and according to Red Hat’s program, it won’t pay legal costs, and will only provide non-infringing replacement software. The reasons for these limitations are simple: a vendor providing Linux indemnification protects a customer from software problems that the vendor didn’t create. That is exactly the sort of thing that Microsoft (and every other commercial software vendor) expressly excludes from the IP indemnification clause in their software licenses. Typical licenses state, “If you change the software, so that it is not in our control, we won’t protect you.” This is the challenge that Linux presents, and this is exactly what the indemnification programs of companies like HP have faced head-on.

Customers considering Linux should be comforted by indemnification programs. The new programs provide a solid business benefit and are an important step in the adoption of Linux in large enterprises. But with its recent move, Microsoft can now call attention to Linux indemnification programs as inadequate and not up to the standard that Microsoft now provides for all of its software. However, potential customers should realize that Microsoft is hyping something that virtually no regular customer ever needs.

Microsoft has hired legal experts to offer opinions on the dangers of intellectual property infringement (links are on the Microsoft web site listed above), and the company has been flying these red flags high above the Redmond campus. But, then again, Microsoft hired the experts, paying them to generate the best legal arguments to plead their case. After all, that’s what lawyers ar hired to do. The other side (remember John’s Flower Shop?) might get some very different views if it hired top lawyers and asked them to evaluate its real risks. Microsoft’s new program doesn’t really alter the risk profile when choosing between a Microsoft product and Linux. It merely increases the FUD.

Even before Microsoft revised their IP indemnification program, they started talking about their new strategy for using patents. Microsoft has hired away IBM’s intellectual property licensing guru, Marshall Phelps, and appears poised to start a “patent war.” The terms of the war are these: Microsoft assumes that everyone is using its patents. (With the FAT file system and the IsNot logic operator being patented these days, who could argue). You can either pay a license fee to Microsoft and keep using the technology, or go to court and pay a very large sum hoping to have the patent invalidated. If Microsoft prefers to drive you out of the market, only the latter option is available to you. Microsoft apparently plans to apply for 3,000 patents in the next year. It’s also trying to use the World Trade Organization’s dispute resolution mechanisms to bludgeon “infringers” without ever filing a real lawsuit in U.S. federal court — a big money saver.

But there’s a problem with this strategy. Mr. Phelps had an incredible array of technology to draw from at IBM, including leading-edge research and myriad hardware components used by a wide variety of market segments. From these, he built a$ 1 billion annual royalty stream for IBM. It’s always dangerous to dismiss Microsoft’s plans, but one assumes that they will be executing their strategy from a different technological foundation, perhaps starting with a patent on that dancing paperclip.

Nicholas Wells is an attorney who practices technology and intellectual property law. However, please do not regard the comments in this column as legal advice. You can reach Nick at class="emailaddress">nwells@kmclaw.com.