Resignation, hope frame Microsoft patent deal

Settlement clears way for digital rights management features

The announcement Monday of a settlement in the patent dispute between InterTrust Technologies Corp. and Microsoft Corp. marked a new beginning for the Santa Clara, California, company and the end of another long and ultimately fruitless battle for the Redmond, Washington, software maker.

A $440 million payment to InterTrust will clear the way for Microsoft to build digital rights management (DRM) features into a wide range of products. However, the deal also brings to a dubious end a six-year effort by Microsoft to clarify its ownership of DRM technology that may have actually hampered DRM adoption, while costing Redmond dearly.

The legal dispute between the two companies began in 2001 with InterTrust claiming infringement in the Windows Media Player of a DRM patent, number 6,185,683, for "trusted and secure techniques, systems and methods for item delivery and execution." In three years, that suit against Microsoft expanded from one violated patent to 11 covering Windows Media Player, the Windows operating system, Microsoft's .NET framework, Office XP suite of programs and more, according to InterTrust.

But the relationship between Microsoft and InterTrust stretches back well before that, to the late 1990s, when the two companies first began negotiations to use InterTrust's DRM technology.

"We tried to do two major deals in 1999 and 2000 that collapsed," said Talal Shamoon, chief executive officer of InterTrust. Following the failure of two separate negotiations, InterTrust began seeing more of its inventions in Microsoft products, he said.

One example of the infringement was Microsoft's Windows File Protection, which was designed to prevent system files from being overwritten or corrupted. In October 2001, InterTrust expanded its suit against Microsoft, claiming that Windows File Protection infringed on a patent it had that covered a way to designate some files as critical and protect them from being overwritten using a unique mathematical value to identify each file.

In a preliminary "Markman" hearing in July, U.S. District Court Judge Saundra Brown Armstrong ruled strongly in InterTrust's favor regarding the wording and construction of its claim for that patent and 10 others. The judge ordered both companies into mediation, which finally produced a settlement on April 3, 2004, Shamoon said.

Speaking on Monday, executives from InterTrust denied persistent accusations from Microsoft and others that theirs was a shell company that existed only to win legal settlements. The lawsuit against Microsoft was a last defense against a company that was determined to ignore their intellectual property rights, executives said.

"This company has never sued anyone for patent infringement before. ... When you can't do business on regular terms and they ignore your rights, you need to turn to the courts," Shamoon said.

InterTrust executives hailed the settlement and depicted Microsoft as a hapless giant blinded by its own desire to acquire DRM technology.

"Microsoft was in the middle of a 'bet-the-farm' strategy in digital rights management, and unfortunately that caused them to walk right into the middle of our patent portfolio," Shamoon said.

The company, now jointly owned by Sony Corp. and Royal Philips Electronics NV, is not planning to sue other companies. Instead, it will now shift its focus back to developing products instead of litigating, said Dave Maher, InterTrust chief technology officer.

A Microsoft executive declined to comment on Shamoon's accusation that Microsoft lifted technology from InterTrust after negotiations broke down, but acknowledged that Microsoft may have miscalculated in its dealings with the company.

In the late 1990s, Microsoft had a series of conversations about taking an equity position in InterTrust, according to David Kaefer, director of business development in the Intellectual Property and Licensing group at Microsoft. Those talks broke down, possibly because Microsoft did not have a "complete picture of what we needed to implement," he said.

After deciding to go its own route, Microsoft found that InterTrust had an "interesting set" of intellectual property that meshed with Microsoft's future product plans, he said.

The $440 million dollar payment to InterTrust covering the 20-year life of its patents is far less than InterTrust was seeking from the courts and will probably be a worthwhile investment, particularly considering the wide range of products that will use DRM technology, from the Windows operating system to the Office suite of applications and media players, he said.

Still, the company may well have gotten the same deal for a fairer price had it agreed to take a stake in InterTrust.

"In hindsight, you look back and say 'I wish we made that equity stake,'" Kaefer said.

The settlement will remove a big impediment to adoption of DRM technology by content providers using Microsoft's technology, said John Pescatore of Gartner Inc.

"As long as (the InterTrust patent) issue was outstanding, there was the possibility that Microsoft might have to yank out their DRM technology and go with something different," he said.

The three-year lawsuit further complicated a technical challenge that was already fraught with competing interests, technology platforms and standards, according to David Schatsky, senior vice president at Jupiter Research Inc.

"There are so many obstacles out there to realizing the full potential of digital media. Squabbles over the technology are the least of the problems, so it's good to put those behind us in this case," he said.

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