European Commission proposes software patent protection

Microsoft is benefiting from the proposed settlement with the U.S. Department of Justice (DOJ) and nine U.S. states by using it to impose onerous licensing terms that squeeze PC makers out of their patent rights, several nonsettling states charged Tuesday.

In a filing with the U.S. District Court for the District of Columbia, seeking rejection of the proposed settlement, the states cited testimony from a Microsoft executive to prove their claim that the settlement "has fostered new monopolistic practices and fettered the market with new anticompetitive practices."

Based on the Feb. 8 deposition of Richard Fade, a Microsoft senior vice president, the states charge that the proposed settlement "has provided a sword for Microsoft to gather additional fruits and to reap a net gain."

Microsoft, by referring to the proposed settlement, was able to impose "uniform" licensing terms on PC makers that for one gives Microsoft free access to their patents. These customers were precluded from enforcing their patents against Microsoft because of a "nonassertion of patents" provision in the licensing terms, the states said.

"Microsoft took advantage of the opportunities presented by the language (of the proposed settlement) to adopt significantly more onerous licensing terms and to impose those on the (PC makers)," the states said in the filing. Microsoft told PC makers that the patent provision was required by the settlement, the states said.

Sony Corp. detailed a similar concern in a public comment it submitted to the DOJ as part of the 60-day public comment period required under the Tunney Act. In the comment, posted last week on the DOJ's Web site, Sony asked the court to modify the section of the proposed settlement that would force uniform terms on the top 20 PC makers that license the Windows operating system. The company argued that the new terms would threaten its intellectual property rights.

Under terms long enforced by Microsoft, PC makers "agree not to assert patent claims against Microsoft and Microsoft licensees," Sony wrote. However, the Japanese hardware maker had negotiated in its contracts with Microsoft that it would be exempt from those patent provisions.

"Sony believes these limitations are necessary to protect its investments in intellectual property," the company wrote in its public comment.

Similar to the states' argument, Sony said the provisions that would be enforced under the proposed settlement "may have produced new 'uniform terms and conditions' that weaken certain pro-competitive limitations ... and allow Microsoft to leverage its power into other markets." Sony submitted its public comment via the Washington, D.C., law firm O'Melveny & Myers LLP.

Microsoft argued late Wednesday that the states had misinterpreted Microsoft's patent provisions, adding that they have passed regulatory scrutiny by the DOJ and the European Commission, with the EC concluding in its latest antitrust review that the provisions "complied with the requirements of competition law," Microsoft spokesman Jim Desler said in a statement.

"Inevitably some OEMs who had gained unique concessions would be unhappy with particular terms under the new ... 'one-size-fits-all' approach. But many OEMs (original equipment manufacturers) were pleased with the new license terms," Desler said in the statement.

PC makers might have reasonably expected a net benefit in their relationship with Microsoft following a consent decree with the government, but every one of the top twenty PC makers in the world believes that Microsoft has benefited from the proposed settlement at their expense, the states said. The court filing cites specific examples from Hewlett-Packard Co. and Gateway Inc. Both PC makers complained to Microsoft about the licensing terms, the states said.

Furthermore, the states say there is "significant evidence" that Microsoft did not simply take advantage of language that was included in the proposed settlement, but that the software company negotiated the language of the proposed settlement with the intent of profiting from its terms.

Having free access to these patents would allow Microsoft to expand its hardware business and compete directly with the PC makers. Previously, Microsoft had been limited in its ability to produce its own hardware based on the patents owned by the PC makers, the states said.

"The (proposed settlement) has provided the license by which Microsoft can expand its hardware production to present a real threat to the (PC makers), using the (PC makers') own intellectual property," the states said.

According to Fade's testimony, Microsoft has long sought a waiver from the PC vendors of their patent rights, the states said. Up until now the major PC vendors have always managed to keep the patent provision out of their contracts with Microsoft, the states said.

California, Connecticut, Florida, Iowa, Kansas, Massachusetts, Utah, West Virginia and the District of Columbia asked U.S. District Judge Colleen Kollar-Kotelly to allow them to present the evidence gathered in Fade's deposition at a March 6 hearing on the proposed settlement.

Minnesota was missing from the list of states on the motion filed with the court, but a spokeswoman for the attorney general there said that was an oversight. Minnesota remains part of the lawsuit.

The nine states and District of Columbia aren't the only ones that want to participate in the upcoming settlement hearing. A number of technology organizations, including SBC Communications Inc. and the Computer & Communications Industry Association (CCIA), have filed motions for court intervention. They want a chance to testify at the March 6 hearing, when Kollar-Kotelly will review the proposed settlement.

Microsoft and the DOJ are against third-party testimony at the hearing. Earlier this month, the parties filed a joint status report that suggested the judge hold a one-day hearing to clarify any remaining issues related to the proposed settlement. In that document, both parties stressed that other groups should not be allowed to testify in the hearing, since a 60-day public comment period on the settlement has already been held.

"A large number of highly interested and motivated third parties have taken full advantage of the opportunity to submit extensive comments which set forth in painstaking detail their views of the (settlement) and whether or not the court should enter it. As a result, third parties have had a full and effective mechanism to present to the court any arguments or concerns they believe it should address in its public interest determination," read the joint status report.

Judge Kollar-Kotelly has not yet ruled on whether that hearing will be open to third-party testimony. Microsoft and the DOJ must file briefs with the judge by this Friday that detail why they are opposed to allowing others to testify at the hearing, Desler said.

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