A contract provision that prevents OEMs from enforcing patents against Microsoft for proprietary code that OEMs include in Windows PCs will be removed from OEM licenses. Microsoft announced the change shortly before investigators from Japan’s Fair Trade Commission (FTC) raided its offices looking for documents related to the company’s OEM licenses.

Non-Assertion of Patent Rights

The contract provision in question, known as non-assertion of patents, is included in contracts that OEMs negotiate with Microsoft. The clause says that an OEM cannot sue Microsoft if Microsoft appears to infringe on the OEM’s patents related to computer systems that include Microsoft OSs.

This clause was an issue during Microsoft’s antitrust trial with the U.S. Department of Justice (DoJ). Sony told the court that it has a "significant history and patent portfolio in various areas, including audio, video, software applications and other technologies" and it had successfully negotiated limits on the non-assertion clause to protect its intellectual property. However, the settlement between the DoJ and Microsoft changed that. It required that the top 20 OEMs have uniform contracts with Microsoft, which prevented the negotiation of special limitations—including limits on or the suspension of the non-assertion of patents clause.

As a result, Sony and other PC makers argued that the settlement, intended to promote competition and reduce Microsoft’s control over OEMs, had in this case the opposite effect: Microsoft claimed that it was unable to modify the non-assertion clause for Sony because the settlement prevented it.

Microsoft also said the clause had been approved by the DoJ and an appeals court in the United States, and by the European Commission (EC). However, this statement was quickly challenged by the EC, which said it had reviewed the clause when a British OEM complained about it, but the EC saw no reason to pursue the issue further because Microsoft ended up modifying the clause for that OEM. Nonetheless, this chain of events did not mean the EC approved of the clause. The EC is in the final stages of its own antitrust action against Microsoft.

Effect of the Clause

There is no evidence that Microsoft ever took advantage of the clause to infringe on the patent rights of OEMs. The clause’s more likely purpose was to provide long-term protection for Microsoft so that as new hardware technology became available, the company could write code in Windows to support that hardware without having to do patent searches or negotiate terms with patent holders. In some cases, such as the Eolas case now pending in the United States, patent holders have claimed rights well after Microsoft incorporated supporting software into its OSs, leading to long and expensive legal battles.

Nevertheless, the issue was important for Sony, which, unlike most OEMs, has patents on a broad range of consumer electronics technology that it incorporates into its PCs. In a deposition related to the DoJ trial, Richard Fade, Microsoft’s director of OEM relationships, said that the non-assertion clause would allow Microsoft to include some OEM technologies in products such as the Xbox game console, for example. The Xbox’s main competitor is Sony’s PlayStation.

Some Sony PCs also include advanced multimedia technology similar to that in the Media Center version of Windows. By developing their own technology, Sony (and other OEMs) can build PCs that incorporate all the functions of Media Center without paying Microsoft higher royalties for the special OS. However, the non-assertion clause would permit Microsoft to build support for these OEMs' technologies into Media Center, reducing the OEMs’ competitive advantage.

A Legal Liability

Although Microsoft has not been accused of infringing on any patents as a result of the clause, its presence in OEM contracts is a legal liability for the company because it leaves the impression that Microsoft wants the right to use other companies’ intellectual property without payment.

The Japanese action came at a particularly sensitive time for Microsoft—just as the EC was considering its final judgment in its own case against the company. Penalties in that case could include a requirement that Microsoft remove its Media Player technology from Windows and pay a large fine based on its worldwide revenues.

Under the circumstances, removing the clause appears to be the most politic decision. However, the company has the option in the future to negotiate a modified clause, acceptable to all OEMs, that gives Microsoft leeway to support new hardware technologies in Windows while providing protection for OEMs’ intellectual property.

Resources

The EC and DoJ antitrust cases were recently discussed in "Antitrust Fears Remain Despite Settlements" on page 29 of the Dec. 2003 Update and "Patents, Trademarks, MCPP at Issue" on page 30 of the Mar. 2004 Update.