Microsoft's patent hard line hardest on startups

Microsoft Corp.'s threat to sue open source software users who violate its patents could be hardest on startups and smaller companies unable to take on the software giant, business and legal observers say.

Startup companies with business models based on open source software, or other small businesses, would least be able to afford the legal costs of defending against a patent infringement claim by Microsoft, said Matt Asay, vice president of business development for Alfresco Software Inc., a maker of open source enterprise content management software.

Asay and others in the industry are reacting to a Fortune Magazine article that appeared on Monday in which Microsoft executives claim open-source software violates as many as 235 Microsoft patents and that the company will pursue patent violators for payment of royalties.

Alfresco includes OpenOffice.org, the open source alternative to Microsoft Office, in its products, but it is not core to Alfresco's offering, Asay said.

While Alfresco's legal liability may be minimal, others may face greater jeopardy. If, for example, Microsoft sued the Ford Motor Co., an acknowledged user of Linux software, Ford can probably defend itself, Asay said. Also, larger software companies such as SAP AG and Oracle Corp. can settle a dispute with Microsoft with a cross-licensing agreement with their own patented software. But not so with the little guy.

"There's no way a small company, even if it does secure its own patents, can compete against the patent portfolio of any big company," he said. "The very people that Microsoft's trying to collect from are the people least likely to be able to pay them any significant amount of money."

But Microsoft may have more difficulty defending its patents because of an April 30 U.S. Supreme Court ruling. In the case of KSR International vs. Teleflex Inc., the court ruled that if the innovation being protected is "obvious," the patent can be challenged. The standard of obviousness could be applied to Microsoft's claim, said David Olson, a resident fellow at the Stanford Law School's Center for Internet and Society.

"If it's proved to be obvious, the patent has less value," he said.

Software patents are granted on the innovative function being patented, not any specific software code, so many software products could have similar functionality, Olson said.

Small businesses would be most vulnerable to a Microsoft patent suit because they probably have no preexisting relationship with Microsoft and would have trouble fighting a claim, he said. The potential litigation also could make venture capitalists or other financial backers reluctant to invest in a startup.

Chris Lyman, CEO and cofounder of Fonality Inc., a provider of open source-based business telephone systems, agrees that the recent Supreme Court ruling could weaken Microsoft's position.

The infringement claims are an indication of Microsoft's declining position in the software industry, Lyman said. "It tells me that Redmond is now officially afraid of open source and the negative revenue impact it is having upon Microsoft as a corporation," he said.