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Is Microsoft Corporation turning into Microsoftie? For years it’s been a litigation magnet, largely because of its dominant position in the software industry. The company has historically refused to settle with anyone, battling its antagonists straight into the courtroom if necessary. But now Microsoft seems to prefer the cushy chairs of the negotiating room to the hard wooden ones of the witness stand. After the company reached a settlement two years ago with the federal government in its massive antitrust action, chairman Bill Gates and CEO Steve Ballmer turned their attention to the other 30-odd suits the company faced. The two executives initiated peace talks with several of their biggest antagonists, and authorized GC Bradford Smith to settle as much outstanding litigation as possible. The result? Over the past year Microsoft has settled 21 actions at a combined cost of around $7 billion. (Still, the Croesus-rich company has $53 billion left in cash reserves.) In April alone Microsoft announced a triple-whammy of settlements with bitter rival Sun Microsystems, Inc., InterTrust Technologies Corporation, and class action plaintiffs in Minnesota. The change in tactics was baffling at first to people like Douglas Derwin. The senior vice president of intellectual property strategy at Santa Clara, California-based InterTrust, Derwin says his company’s patent infringement suit against Microsoft has been “a nasty seven-year battle.” But last November, Microsoft suddenly started talking to InterTrust about settling. Derwin says, “We spent some time trying to figure out what was going on.” He adds, “We couldn’t figure out why they had become so very motivated [to settle].” The answer, it turned out, wasn’t a switch to decaf at the sprawling Microsoft campus in Redmond, Washington. According to GC Smith, Microsoft realizes that if it wants to move its business forward, it has to cooperate with other companies in the computer industry. “I think it’s fair to say that as a company, we are moving from adolescence to adulthood,” Smith explains. “If you think about computing, different products need to work with each other, much more so than a decade ago or five years ago. And so what that means is that it’s much more important to have a level of collaboration and dialogue across the industry.” Some of Microsoft’s rivals are willing to concede that the change in the company’s legal strategy is real. “I certainly believe that Microsoft is maturing,” says Mary Doyle, GC at Milpitas, California-based PalmOne, Inc., which competes with Microsoft in the handheld market. “Brad Smith is definitely having an impact on their litigation strategy.” But Edward Black doesn’t buy Microsoft’s make-nice rhetoric at all. Black is president of the Computer & Communications Industry Association, a Washington, D.C.-based trade group. He’s skeptical of Microsoft’s motives, adding that the company “makes so much [money it] can afford to buy out those who attack [it].” CCIA is currently pursuing an antitrust action in the European Union over Microsoft’s Windows XP operating system software. Black says he suspects that Microsoft hasn’t contacted the group about a settlement because CCIA isn’t seeking cash, but “de-structural remedies” such as breaking up the company or forcing it to make changes in its software. Microsoft says that because the case is still in discovery, it’s too soon to comment about whether CCIA has a legitimate complaint. But whether Microsoft’s recent binge of settlements comes from decent or devious motives, one thing is clear: They were part of a plan. “This is by design,” Smith says. “There’s no doubt about that.” Ever since the mid-nineties, when the federal government, rival businesses, and other entities began to accuse Microsoft of anticompetitive behavior, the company has steadfastly refused to concede any wrongdoing. Even when faced with the possibility of a court-ordered breakup during the federal government’s antitrust suit, Microsoft executives refused to admit mistakes. Though the government won its case, Microsoft caught a break with the change of presidential administrations in 2001. In the view of several observers, Bush officials were less interested in dismantling the company than their Clinton predecessors. Microsoft and the U.S. Department of Justice reached a settlement to end the remedy phase of the government’s antitrust case, which was accepted by a federal district court judge in November 2002. Around that time, Gates and Ballmer directed GC Smith to start thinking about settling the company’s remaining litigation, says Microsoft legal spokesman Jim Desler. In documents filed with the Securities and Exchange Commission in fall 2002, the company reported that it faced class action suits in dozens of states, more than 20 patent infringement claims, and at least three antitrust disputes filed by companies. Gates and Ballmer set the stage for the new settlement policy by starting a friendly dialogue with executives at some of their biggest antagonists, including Sun and Intertrust, according to lawyers working for those companies. Smith says that in early 2003, he gathered senior members of his legal department to outline the new approach, and unveil a specific action plan to retire as much pending litigation as possible in the coming months. “The strategy was to pick some large cases where we thought we’d have the chance to make progress and start to generate momentum,” Smith explains. He gave his department some specific targets. Smith wanted to settle a big private action suit by the end of summer 2003. He wanted to settle ten class action suits by November of that year. And finally, by the end of 2003, he wanted to rid the company of a second large private action suit. Smith’s legal team has largely met its goals. Now that they’ve settled with Time Warner, Inc., Be Incorporated, and Sun, Microsoft has put an end to the three antitrust law suits filed by other companies. It has also taken care of many of the class actions it faced. And the company has settled seven patent infringement suits, including the one brought by InterTrust, which many observers considered to be the most serious. Still, Microsoft’s legal worries aren’t completely over, says spokesman Desler. “We have two antitrust cases, about six consumer class action cases, and the European Union [antitrust] case,” Desler notes. “We also have close to 35 patent infringement cases.” Smith says Microsoft isn’t just settling because it’s tired of fighting. The GC notes that the company hasn’t walked away from the negotiating table empty-handed. In many of its recent settlements, Microsoft has gotten the other party to agree to cross-licensing arrangements and business collaborations. “Where we can resolve a case on reasonable terms and use that to harmonize business relationships, we try to do that,” says Smith. “But we’re not going to do it at any price. It’s clearly got to be reasonable to both sides.” That’s the line InterTrust’s Derwin says he heard when his company entered into settlement talks with Microsoft. InterTrust, which specializes in digital rights management solutions, claimed infringement on 11 of its patents. Derwin says that Microsoft “told us in settlement discussions that the real issue was not the current case, but the future. They needed a license to allow them to move forward. It would have been very difficult for them to design around [our] patents.” Smith admits that InterTrust’s patents were “seminal” to Microsoft’s future. “They represented the biggest potential legal impediment to our ability to keep innovating,” he says. As for the settlements in Microsoft’s other patent cases, Smith says: “The first two questions we ask are whether we think someone has a valid patent, and whether in fact we’re infringing it. If those two conditions are met, then we’re in a position where we’re able to talk.” But the company hasn’t been able to settle every case, especially two high-profile actions brought by the European Union and RealNetworks, Inc. (The E.U. case is separate from the action that CCIA filed in Brussels.) Both the E.U. and RealNetworks claim that Microsoft is trying to unfairly control the media player market by integrating its Windows Media Player into its Windows operating system. Seattle-based RealNetworks, which produces the competing RealPlayer product, did not respond to requests for comment, nor did E.U. officials. Smith says that CCIA is the real reason why Microsoft’s settlement talks with the European Union broke down this spring. According to Smith, the E.U. didn’t want to settle unless Microsoft also resolved its dispute with CCIA, and Microsoft refused to do that. Smith says that he’s not discouraged, however. “We have to look at [the E.U.] much the same way we looked at Sun Microsystems,” Smith says. “You have a negotiation. And if it doesn’t succeed, you move the relationship and the dialogue forward. When you fail, you have to fail gracefully. You want to keep the door open if the opportunity to sit down again arises in the future.” In other words, don’t be surprised if Brussels also makes its peace with Redmond someday soon.

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