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The Microsoft IP tussle over Android



Lisa Morgan
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March 29, 2012 —  (Page 2 of 6)

Cashing in
In 2003, Microsoft initiated an IP licensing program that now includes about 1,100 licensees. Today, 1% of those agreements are specific to Android and Chrome OS devices.

“Clearly, [Microsoft is] focusing more on making money from its patent portfolio,” said Jon Hyland, shareholder at Munsch Hardt Kopf & Harr, a large, Texas-based law firm with several practice areas, including intellectual property. “They’ve spent tens of billions of dollars on R&D in the last few years, and I really think they’re trying to turn that into a revenue stream now.”

Chris Rourk, a partner at Jackson Walker, one of the oldest and largest Texas-based law firms whose vast practice areas include intellectual property, agreed, adding that Microsoft is taking advantage of patent laws to the extent any corporation creating intellectual property would be advised to do.

“IBM was maybe one of the first to use its large patent portfolio as a licensing revenue generator. Certainly, people were critical of those initial uses,” he said. “[People] called them ‘aggressive’ and ‘anti-competitive.’ Whether or not they are is really fact-specific.”

A September 2011 Goldman Sachs report estimated that Microsoft’s per-device royalty fees from Android device manufacturers who have licensed Microsoft IP are somewhere between US$3 to $6, and that the IP licensing fees for fiscal year 2012 would total $444 million dollars. (Other per-device estimates are higher, ranging from $5 to $15 per device.) At the time of the report, Microsoft had licensing deals with companies representing 50% of the U.S. smartphone market. That was before the LG deal.

After the LG deal, Microsoft touted (and taunted Google with the fact) that 70% of smartphones sold in the U.S. are now covered under Microsoft’s patent portfolio. That squares with comScore’s December 2011 report stating that LG’s U.S. market share was 20%.

Using Goldman Sachs’ September 2011 estimate as a baseline, the addition of LG to the Windows Phone licensee roster raises fiscal year 2012 licensing fees to $621.6 million just for the Android-related agreements.

“[Microsoft’s] IP budget for 2011 was $9.6 billion, which is incredible,” said Munsch Hardt’s Hyland. “Like I said earlier, it really wouldn’t surprise me to see them make patent licensing a bigger part of their business, because they’re in a position where the Windows platform for smartphones is less than [5%] of the market share.”

According to the December 2011 comScore report, Windows Phone market share slipped from 5.6% to 4.7% between September 2011 and December 2011. During the same period, Android’s jumped from 44.8% to 47.3%.

Sign on the dotted line
Microsoft’s overly aggressive reputation is not aided by the fact that it requires Android device manufacturers to sign non-disclosure agreements (NDAs) before they can learn which patents Android, Chrome OS or its product infringe. Whether that’s standard or not depends on which patent attorney you ask.

While NDAs are common before the details of patents, products sales, and distribution discussions ensue, Hyland said he has yet to encounter a situation in which an NDA precedes any type of notice of infringement.

“Typically they’ll send you a letter identifying the patents, because if you give somebody notice [and] if they are willfully infringing, then you can get enhanced damages,” he said. “Damages only start accruing as soon as notice is given, and notice can only be given by putting your patent number on your product or giving them actual notice of infringement. So, if you don’t actually tell [them] which patents they’re infringing, you can’t give them this kind of notice.”

Even though advanced notice may result in enhanced damages, it may also open the door to undesirable outcomes. For example, the company receiving the cease-and-desist letter can go to court and file for a declaratory judgment (a judgment that declares the rights, duties and obligations of the parties) in an effort to swiftly resolve the matter in its own jurisdiction.

“If someone sent [a cease-and-desist] letter to one of my clients, we could go a court where my client is located and file a declaratory judgment suit,” said Hyland. “We would petition the court for a judgment that says the patents aren’t infringed, they’re invalid and that’s something Microsoft is trying to avoid because it takes the choice of forum out of their hands. If the defendant gets to choose the forum, it’s going to choose one that’s more defendant-friendly and maybe a forum that has a long time to trial to try to stretch things out.”

The alleged infringer can also petition the patent office for a re-examination.

“[If] you disclose [which] patents [are infringed], and [the infringer thinks] they’ve found some prior art, they can actually petition the PTO for a reexamination,” said Hyland. “If you’re trying to license a patent and it’s in reexamination, its value goes down because it could end up getting invalidated.”

While Microsoft’s reasons for requiring an NDA up front are known only to those who have signed or read one, an NDA’s terms may bar alleged infringers from filing declaratory actions or filing for reexaminations.

“By using a non-disclosure agreement or other contractual agreement where the parties agree not to do that, then you can more freely explain why you think a license is needed,” said Jackson Walker’s Rourk. “If you’re planning on challenging the patents, then [signing an NDA] might prevent you from doing that. It’s not an uncommon practice.”

Another reason to seek an NDA before identifying patents is to keep secret specific claims that are supposedly being infringed.

“[If specific claims are made public], then everyone could start looking into whether those patent claims are valid (e.g., are they ‘novel’ or have they been ‘anticipated by prior art?’ ” said Updegrove. “If it looks like [the patent claims may be invalid], they can petition the PTO for a reexamination of the claims. There's an old open-source software saying, ‘Many eyes make all bugs shallow.’ That goes for prior art as well, and it's acknowledged by just about everyone that there are many, many software patents that should never have been granted.”

The reason why patenting software is attractive to companies and individuals is because software functionality can easily be copied.

“Copyright will cover the specific code that is used to implement that specific functionality, but not the functionality itself. Microsoft also relies on copyright protection for their code,” said Rourk.

“They don’t release the source code, but if someone were to get it, they would have a hard time trying to use it without violating Microsoft’s copyrights. What Microsoft can’t prevent someone from doing with copyrights is duplicating their system functionality just by observing how it functions and writing a new set of code, so they turn to patents for that.”


Related Search Term(s): Android, intellectual property, Microsoft

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