Update: Microsoft to settle with InterTrust for $440M

Microsoft makes deal in long-running case over InterTrust's DRM software

Less than two weeks after settling its legal disputes with Sun Microsystems Inc., Microsoft Corp. said on Monday that it reached an agreement with InterTrust Technologies Corp. to settle a long-running case over InterTrust's digital rights management software.

As part of the deal, Microsoft will make a one-time, $440 million payment to InterTrust to license that company's patent portfolio. InterTrust will be given the right, under Microsoft-owned patents, to design and publish digital rights management (DRM) and security technical specifications, Microsoft said in a statement.

Digital rights management is a phrase used to describe a wide range of technology that prevents piracy of digital content, from songs and video to software programs.

Microsoft received rights to use InterTrust's technology for the life of its patents, around 20 years, said David Kaefer, director, business development, intellectual property and licensing at Microsoft.

Customers are covered, as are content providers using Microsoft technology to protect content, he said.

Software developers using Microsoft development tools to create new software applications with DRM that are provided by Microsoft are also covered. However, companies or individuals that want to create new DRM technology or features "over and above" what is in Microsoft's products and tools need a separate InterTrust license, he said.

The settlement resolves a three year-old legal dispute in which InterTrust claimed that features in Microsoft's products infringed on its DRM patents. Initially focused on the Windows Media Player and electronic-book reader programs, the suit was expanded to cover components of the Windows XP operating system, Office XP suite of applications, .Net technology and Windows File Protection technology.

In July, InterTrust cleared an important legal hurdle in that case when a judge ruled in the company's favor in a key preliminary hearing, known as a "Markman hearing," which establishes the terms and definitions that can be used in a patent case.

In that hearing, U.S. District Court Judge Saundra Brown Armstrong accepted, with little or no alteration, InterTrust's definition of key terms that were to be contested in the case, making it easier for the company to prove that Microsoft violated its patents.

The ruling set the stage for a settlement, according to John Pescatore, a vice president at Gartner Inc.

"Once the preliminary ruling came out in July, it was more of a question of how much Microsoft would pay, rather than whether they would pay," he said.

With concern mounting over piracy of music and, increasingly, video on the Internet, Microsoft and other major technology vendors, such as Intel Corp., have been looking to build so-called "trusted platforms" that integrate DRM technology with a new generation of software, processor chips and hardware, Pescatore said.

However, Microsoft's legal wrangling with InterTrust sowed the seeds of doubt about the future of Microsoft's DRM plans among large media companies and other content providers, which held off on backing a specific DRM technology, he said.

In a statement attributed to InterTrust Chief Executive Officer Talal Shamoon, the company said that the settlement with Microsoft "validates InterTrust's intellectual property portfolio as seminal to advancing DRM and trusted computing in the marketplace."

"We're extremely happy that the largest player in the IT space has taken a license for our portfolio. It's a statement to the market of the importance of our inventions to the next generation of computing," Shamoon said.

Kaefer said he hopes the deal will clear up "uncertainty in the DRM space."

"We spent a lot of months hammering out provisions that will give our customers 100 percent protection. This agreement lets customers know they have the right to build on our DRM technologies," he said.

InterTrust will keep working to develop DRM technology and expects to benefit from a "thriving licensing business going forward," Shamoon said in the statement.

The settlement with InterTrust may clear the way for the media and technology industries to begin standardizing DRM technology across platforms, said David Schatsky, senior vice president at Jupiter Research, a division of Jupiter Research Inc.

"The settlement gives InterTrust its due, and it allows Microsoft to focus on enriching its DRM platform," he said.

However, there is still no clear DRM standard, with Microsoft and companies such as RealNetworks Inc. engaged in a "slugfest" to sway content providers and consumers to competing standards, he said.

There are still obstacles to realizing the potential of digital media, but Jupiter's research indicates that consumers recognize value in content protection and may pay for it, if it is implemented properly, Schatsky said.

Microsoft made DRM a key component of the next version of Windows, code named "Longhorn," which is due out in 2006. However, customers may see stronger software-based DRM capabilities if the company releases an interim update to Windows XP before Longhorn, Pescatore said.

Taken together with the company's recent settlement with Sun and AT&T Corp., the deal with InterTrust may also signal a move by Redmond to clear up legal uncertainty surrounding core technology used in their products in advance of Longhorn, he said.

The settlement announced Monday may accelerate some of Microsoft's DRM plans, Kaefer said. He declined to provide more detail on what DRM technology deployments might be stepped up, referring questions to the company's platform group.

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