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Microsoft's Patent Dust-Ups


For the past half dozen years, Microsoft has been busily getting its patent house in order. In a bid to protect itself against lawsuits alleging that it has infringed on other companies’ patents, Microsoft has issued more patents on its inventions and carefully set up licensing agreements with other companies to keep itself out of court. But two recent cases show that the software giant is still susceptible to allegations of infringement.

The latest involves a tiny Toronto software company called i4i in a case that threatens Microsoft’s ability to sell its word processing software Word. On Aug. 18, Microsoft asked a federal appeals court in Washington, D.C. to refrain from abiding by an Aug. 11 U.S. District Court ruling that said Microsoft couldn’t sell its word processing software in the U.S. as of October. The ruling, by a federal judge in the Eastern District of Texas, stems from a 2007 lawsuit by i4i that says Microsoft infringed on one of its patents in newer versions of Word and other products.

In addition to the injunction against selling one of its most popular products, the court ordered Microsoft to pay $290 million in damages to i4i, including a fine of $40 million after the judge ruled that Microsoft’s lead lawyer in the case made misleading statements to the jury.

While a ban on Word sales is unlikely any time soon —appeals in patent suits can stretch out for years—the ruling against Microsoft has garnered attention because Microsoft usually wins infringement cases filed against it by small companies. “It’s this kind of company against which the Microsoft patent portfolio defense should work,” says Rob Enderle, president of consulting company the Enderle Group.

In a statement e-mailed to BusinessWeek.com, Microsoft spokesman Kevin Kutz said the evidence in the case “clearly demonstrates that we do not infringe and that the i4i patent is invalid.” Microsoft is seeking an expedited review of its appeal, and an immediate stay of the injunction against Word.

The Texas dust-up over Word isn’t Microsoft’s only recent legal setback. in April, Microsoft lost a patent infringement case against computer security company Uniloc, when a federal court in Rhode Island ordered Microsoft to pay Uniloc $388 million in damages. Uniloc CEO Brad Davis told my colleague Peter Burrows recently that Microsoft was interested in buying Uniloc in the mid-‘90s, but that the price was too high. Uniloc is on track for about $25 million in sales this year, Davis says.

Microsoft has a long history of fending off patent lawsuits from startups that claim Redmond nicked their best ideas. Starting in 2003, Microsoft has taken steps to fortify its intellectual property protection. It hired Marshall Phelps, a former IBM executive, as Corporate Vice President for IP Policy and Strategy. Microsoft has increased the number of patents it uses, and stepped up so-called “cross-licensing” agreements that let tech vendors gain access to one another’s patent portfolios.

To be sure, negative judgments in patent cases are a cost of doing business in the tech industry, which is marked by complex products that incorporate ideas sometimes incubated elsewhere. “Regardless of how careful you are, from time to time, you’ll find yourself in a situation where, despite your best efforts, you’ve infringed,” says Michael Cherry, an analyst at the consulting firm Directions on Microsoft.

Microsoft has long had patent infringement safeguards that went so far as tying the hands of its engineering rank and file. When Cherry left Microsoft in 2000, the open source Linux operating system was seen as a threat to Windows. “A lot of us on the Windows team were told we shouldn’t go poking around [in Linux] because we didn’t want to get any ideas from it,” he says.

Yet i4i’s chairman says the company held detailed discussions with Microsoft about its technology. Chairman Loudon Owen told Burrows in a recent interview that the company once wrote a letter to Microsoft chairman Bill Gates explaining its software. “They knew we had a patent and knew that patent number, but used the technology in their product nonetheless,” he says.

i4i’s suit, filed in March 2007, revolves around what’s known as the “’449 patent,” which allows Word to open PC files that contain custom types of XML code. The XML language lets companies create invisible “tags” in documents that describe their contents, and i4i sells software add-ons to Word that let pharmaceutical companies and others create and edit XML documents using Word. Drug companies need to manipulate XML data for submitting information to the Food and Drug Administration.

Starting in 2003, Microsoft enabled Word to read these custom XML codes that users created. i4i has said Microsoft infringed the ‘449 patent in Word 2003 and 2007, its .Net Framework software for programmers, and in its Windows Vista operating system.

In its Aug. 18 motion, Microsoft said i4i wouldn’t be harmed by a stay of the Word injunction order, and that “the public will face hardship” if Word and the Office suite aren’t available for any length of time.

Yet even the fact that Word’s fate is up to an uncertain appeal process is evidence that Microsoft’s tactics went awry in this case, Enderle says. For a company that's taken such careful steps to amass a defensive portfolio of patents, Microsoft perhaps should have never let things go this far.


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