Microsoft Indemnifies Its OEM Partners Against IP AttacksBy Peter Galli | Posted 2005-06-23 Email Print
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The company undertakes to protect its OEM and ISV Royalty partners from the legal costs of IP-violation lawsuits.The litigation between the SCO Group and IBM is having repercussions in the most unexpected place: at Microsoft.
Microsoft Corp. announced Thursday that it is strengthening the IP (intellectual property) protection, or indemnification, it provides to all the PC manufacturers it works with, from the larger OEMs and smaller OEM System Builder partners, to OEM distributors and ISV Royalty partners.
The enhanced indemnification, which will be effective on Thursday, is designed to help shield partner companies from exposure to legal costs and damage claims related to patent or other IP disputes.
"The IBM-SCO case has raised this front and center for our channel partners," he said.
Essentially, this latest indemnity covers all those Microsoft products currently being shipped, from the Windows Server System, which includes Microsoft SQL Server and Exchange Server, to Microsoft Office System and Windows client software. But Microsoft's embedded offerings are excluded, given that some OEMs are allowed to modify that code, which complicates the issue of indemnification for those products, he said.
Microsoft has more work to do regarding indemnification for the embedded space and will continue working on that, Kaefer said, adding that indemnification is as valuable and important an issue for channel partners as it is for users, given the large volumes of the Microsoft's software products that they ship.
In 2003, the company removed monetary caps for volume licensees, while last November it extended its IP protection for customers by taking coverage previously available only to volume licensees and making it available to all end users. As these OEM and ISV partners account for more than $18 billion of Microsoft's annual software revenue, it is clearly in Microsoft's interest to indemnify them against potential IP disputes.
As Kaefer said, "IP claims historically have been against the channe,l as they don't always have the defensive capabilities, like their own patent portfolios, to properly defend themselves. Our channel partners have been approached in this regard in the past, and the channel has seen some high-profile IP disputes."
Recent high-profile cases have brought greater industry awareness of the importance of IP management, and, when IP disputes arose, it was all too common for a technology company's channel partners to be pursued for the alleged IP violations, Kaefer said.
Microsoft's willingness to help protect Dell Inc. and Gateway Inc. when Lucent Technologies filed a patent suit against their use of Microsoft software is one such example of the complex and real nature of IP issues in the industry today, he added.
Another example of channel-partner patent litigation is the case in which Multi-Tech Systems Inc. sued several Microsoft OEMs in 2000, including Compaq Computer, Dell and Gateway.
Multi-Tech also sued 10 Internet telephony companies, including Net2Phone Inc. and VocalTec Communications Ltd. It asserted patents related to Internet voice communications, but Microsoft ultimately stepped in on behalf of the OEMs and prevailed at the Appeals Court level last year, Kaefer said.
Microsoft believed it was important to send a clear signal to the market that it would stand behind its software and defend any of its partners and customers in this regard, Kaefer said, adding that PC makers have already lived through the myriad of corporate compliance issues and, as IP legal disputes are on the rise, "They have started a drumbeat of wanting the vendors to stand behind their own products."
IP claims overall had doubled globally between 1990 and 2000, with litigation in general having also risen, he said.
Next Page: Microsoft's offer beats Linux companies' protection, Kaefer says.
Under this latest indemnification move, Microsoft is also now offering its OEM partners trade secrets-related claim coverage, which had not been offered before, as this is a concern to its channel partners.
Asked whether Microsoft and its channel partners had seen a spike in litigation specific to its products and IP, Kaefer said there had been a "modest rise, mostly in the OEM category, which is where most of the claims come, given that they are our largest volume distributors."
While Microsoft's 200 largest OEM partners already had some liability coverage before, they are now all being given uniform termsas part of the company's antitrust settlement with the Department of Justicewhich are generally updated and published in August.
Microsoft's ISV Royalty partners had also previously had geographic limitations on their coverage, but those have now been removed and they have the same protections as the OEMs. "This latest move shows our commitment to giving the same protections across the channel," Kaefer said.
Microsoft also removed the previous caps for legal defense costs, but it introduced financial caps for settlements and damage claims. "Those caps are based on an equation that looks at the amount of business that particular channel partner has done with Microsoft over a period of time, essentially the value of our product that they shipped over a specific period of time, and that is the capped amount," he said.
Microsoft believes this is a reasonable solution given what we see in the industry, Kaefer said. For example, Hewlett-Packard Co., Novell Inc. and Red Hat Inc. have all made moves recently to protect their enterprise Linux customers.
Red Hat's Open Source Assurance Plan is designed to protect customers' Linux investments and ensure that they are legally able to continue to run Red Hat Enterprise Linux without any interruption.
Novell, of Provo, Utah, set up a Linux Indemnification Program for its SuSE Enterprise Linux customers, under certain conditions, to protect against IP challenges to Linux and help reduce the barriers to Linux adoption in the enterprise.
HP in September announced that it will indemnify its customers against any legal liability from the use of Linux.
Microsoft's plan goes further, according to Kaefer. "What you see from the Linux providers is not even close to the bar of what we are offering here," he said.
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