Microsoft has announced that it will indemnify its customers against intellectual property (IP) claims. Why might they have chosen this strategy?
Normally indemnification is the rule with products. What this does with software is to put it on the same footing as other products. As software gets to be more mature, we're going to see more of this because it's something consumers want to expect. Why might a customer of a company such as Microsoft worry that they will fall prey to IP claims? Aren't Linux users the ones with cause for concern?
Another aspect of the maturation of the software industry is that people are getting patents that cover software. Every day you can read about software manufacturers getting sued for patent infringement. If the software vendors can be sued for patent infringement, so can the users. If you have a high enough profile of a user, there is definitely some vulnerability.
Cross-licensing is another thing that we're going to see more of. In the consumer electronics industry, for example, cross-licensing has been around for many decades because so many companies held patent rights in so many areas that few of the companies were able to come out with products without being sued, potentially, for infringement. With cross-licensing, major companies can swap rights to their perspective patent portfolios and come out with products that compete with each other. Indemnification is only part of the story; cross-licensing is also part of it. Do companies need to purchase IP insurance?
There are a couple of different kinds, and none of it is particularly cheap. One kind will allow you to defend against claims of patent infringement. Patent insurance is a funny beast. You can actually get patent insurance working in the other direction. You can buy insurance for that instance when you might be asserting a patent downstream. Typically you can get insurance like this by interacting through the company with a patent lawyer or two and an insurance company that knows about it. But companies that know about this are few and far between. And even when they do know about it, it tends to be relatively expensive stuff.
What we have to do is find out why they're worried about being sued. Is it because of a product they bought? Is it because of a product they're making? Say it's a product they bought. What then?
If it's because of a product they bought, as long as they buy from big companies, those companies will often stand behind them. If I buy Norton Utilities from Symantec, that's a pretty big company these days. If I'm sued for patent infringement because I'm running Norton Utilities, I'll call up Norton and say, "guys, I need some help here!" I think it wouldn't be unlikely that they would come to my rescue, because if it's a problem for me, it's going to be a bigger problem for somebody else. Over the long term, it's going to be a problem for them. Would I buy insurance for that? Nah! What if it's a product they're making?
Now, if I'm a company in the computer industry… maybe I'm making a router. Hopefully, I've worked with patent lawyers and they've been talking with me as I developed different parts of my router. Maybe we notice there's a big company that has a patent on routers. Maybe I'm worried about a particular couple of patents Cisco has. I can consult with my patent lawyer and assess what that risk is. It sometimes happens that a patent lawyer says, "We don't think you're infringing this patent, but we think you'd benefit by having a legal opinion that you're not infringing." How does the customer benefit from a legal opinion?
If the infringement is determined by a court to be willful, then the amount of damages the patent owner get can be multiplied up to three times. If you have a letter from a lawyer on this subject, you can more effectively defend against the claim that your infringement has been willful.
Maybe by working closely enough with the patent lawyer, I've been able to design a product where it's not going to be likely that Cisco will sue me for infringement. That's not the same as insurance, but sometimes it's even more important because it goes to the guts of how my product is going to be received in the market. He can help me design my product in a way that can lower its profile in the gun sights of any patent owners. How important are patents?
Patents are all about leverage in business. If a patent is really well crafted, and if the company's technology is good enough, a patent can give disproportionate leverage to a company and its business. A well-crafted patent can make a big difference. How are IP conflicts most often resolved?
You give each one a sword and let them battle to the death. Well, most cases are not litigated absolutely; they're settled by doing a license deal that everybody finds okay.
Click here to read Part I of this article, in which Sunstein explains why indemnification has a different meaning in the software world than it does in traditional markets.