Microsoft can buy off Sun legal threats for 10 years

As part of their landmark agreement reached this month, Microsoft Corp. has the option to pay Sun Microsystems Inc. millions of dollars each year to shield itself from patent infringement lawsuits by its former nemesis, Sun’s vice-president for legal affairs said Thursday.

Microsoft will make the payments if it decides to extend a part of last week’s agreement known as the “Covenant Not to Sue for Damages,” under which the companies agreed not to sue each other for past infringements. The agreement gives Microsoft the option to extend the covenant to apply for up to 10 more years by making annual payments to Sun. The payments could total up to US$450 million by 2014, Lee Patch, Sun vice-president for legal affairs, said through his spokesperson last week.

Furthermore, if Microsoft makes the payments each year and does not take Sun to court over patent issues, in 2014 the companies will enter a broad cross-licensing agreement covering all of their patents and patent applications filed up to that date, Sun said in a regulatory filing Thursday. The cross-licensing agreement would apply to current products and future versions of those products, according to the Sun filing.

The covenant not to sue is part of the settlement and 10 year collaboration pact Microsoft and Sun struck at the beginning of the month. As part of the deal, Microsoft has already agreed to pay Sun US$900 million to clear up patent disputes, as well as US$700 million to settle Sun’s antitrust case against it, and a further US$350 million in royalties to license Sun technology.

The companies said last week they are also working on a separate deal to license selected patents from each other, although they have yet to say which ones. But Microsoft’s ability to extend the covenant not to sue each year is, effectively, the same as a broad cross-licensing agreement, according to one patent attorney.

“It is effectively a cross license over both parties’ complete patent estates,” said Steven Frank, a partner at Testa Hurwitz & Thibeault LLP, a Boston-based law firm.

Sun does not consider the covenant not to sue as being equivalent to a licensing agreement, however. “There is a tremendous amount of complexity in cross-licensing, and creating and finalizing these agreements will take time,” a Sun spokesperson said.

Microsoft did not respond to calls seeking comment for this article.

Two parts of the covenant are unusual, according to Frank. Microsoft gets to decide at the end of each year if it wants to pay Sun to extend the covenant. Also, Sun has no say in the extension, and can’t unilaterally pull out of the agreement.

“Microsoft has it in its power to stop either party from suing, but Sun has not. If Microsoft doesn’t pay, then all bets are off,” Frank said. “Microsoft seems to be unsure about how long the Sun patents will remain relevant to its business, and at the end of every year could stop paying the fee.”

The blanket cross license agreement that takes effect in 2014 if Microsoft makes all its payments to Sun and does not sue the company is not uncommon, Frank said. “It is particularly common when the parties’ objective is to get all of their disputes behind them,” he said.

The surprise pact between Sun and Microsoft, announced April 2 in an unusual public get-together of both companies’ chief executive officers, joined two of the industry’s most visible adversaries in a long-term partnership. By settling their differences, Sun and Microsoft hope to make their products work better together and please their customers, which could help them to more effectively battle their common rival IBM Corp. and the Linux operating system.

– With files from Scarlet Pruitt, IDG News Service

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