Microsoft is fending off over 50 patent infringement cases

With billions lost in damages, are Microsoft's own patent lawsuits merely covering its costs?

"There are over 50 other patent infringement cases pending against Microsoft, 10 of which are set for trial in fiscal year 2010," states a line in Microsoft's latest annual financial report filed with the SEC on July 30. This list of 50 is in addition to the roughly $2 billion in damages that Microsoft has reportedly already lost from lawsuits.

Fight
After combing through the document, my math shows Microsoft on the hook for up to $4.49 billion including a half billion in legal fees. (Interesting note: legal fees were roughly double over the year prior's fees). That means that Microsoft had to allocate 7.2% of its hefty 2010 revenues ($62.5 billion) to payouts. To be clear, it hasn't actually lost that much -- this is the total sum it could lose if all the pending lawsuits went against it.

It got me thinking. For all the grief and hubbub Microsoft gets over its patent portfolio -- is the company making any profit on its IP licensing agreements? There's no way to know, but I'm highly skeptical. More likely is that any income Microsoft makes from cross licensing, and RAND royalties goes right out the door to pay for losses. Microsoft doesn't break out revenue from such agreements in its SEC forms -- and in most cases, doesn't disclose the dollar amounts from individual deals either -- so I admit I'm only guessing that it isn't collecting $2-$4 billion annually on settlements and royalties.

One might claim that Microsoft deserves to lose these sums of money, as it has a long history of taking the intellectual property it wants - and the largest bulk of loses came from suits that claimed it was engaging in anti-competitive behavior and/or overcharging customers.

On the other hand, we're also talking about 50 remaining patent infringement cases which, if all went bad, could cost the company the better part of $1 billion. Some examples include a suit filed by so-called patent troll NTP (the company that won against Research In Motion), and a suit from a Wisconsin ophthalmologist over Zune's "buy from FM" feature.

In recent years, Microsoft has earned the reputation of being the aggressor in patent infringement lawsuits. I think this is overstated, stemming from a lot of loud mouth claims by its top executives, the uproar over the Tom Tom case in 2009 and that its other suits have been fairly high profile. But they have also been relatively sparse.

In 2010, so far, we have had the much ballyhooed Microsoft case against Salesforce.com (in which both parties settled, with Salesforce agreeing to pay Microsoft an undisclosed sum). But mostly, Microsoft announced cross licensing agreements, such as one from HTC for Android. We had a similar one from Panasonic for exFAT and one with Amazon for Kindle. A less flashy deal was a licensing agreement with Tuxera, the Finnish company that created an open source driver for Microsoft NTFS (the NTFS-3G) for exFAT. The Tuxera deal likely won't generate tons of cash, but it stems from the fact that Microsoft managed to get exFAT embedded as part of the new SDXC specification. The Redmond company will collect royalties (perhaps a few cents each) on all SDXC memory cards and devices, and that could add up.

Even so, when it comes to patent infringement, Microsoft is more likely to be the victim than the bully -- at least in terms of the number of lawsuits per year. The obvious and much stated conclusion is that the patent system is insane -- and Microsoft should spend a portion of the money it spends defending itself fighting that system. Instead it has done an about-face since Bill Gate's sentiments in 1991 condemning software patents. But The most recent best hope went up in flames earlier this year. The Bilski ruling reaffirmed software patents instead of squashing them. So I suppose there's little point in wailing about that anymore.

Other than calling payouts "a cost of doing business" what other option does Microsoft have but to try to collect on intellectual property on the one hand, while paying damages with the other? And if that's the case, will we see a Microsoft that becomes more aggressive to collect on intellectual property? I fear so.

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