July 22, 2003 4:00 AM PDT
Microsoft easing customers' legal stress
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The Redmond, Wash.-based software giant has expanded the indemnity provisions that go with its software licensing agreements to remove a perennial sticking point in sales negotiations: who picks up the tab if a Microsoft customer gets sued because of Microsoft's products.
In older contracts, Microsoft agreed to pay all legal fees for volume license customers who got sued because of Microsoft, but only up to the value of the software they bought.
Under the new provision, which took effect March 1, Microsoft removed the liability cap in intellectual property suits and altered other parts of the agreements that potentially expand its liability.
The company also expanded its product warranties for licensing customers from 90 days to a year and expanded the minimum notice given to customers regarding software audits from 15 days to 30 days.
"The former clause allocated too much risk to third parties," said Laura DiDio, an analyst at the Yankee Group. "Intellectual property issues relating to Microsoft software are entirely in the control of Microsoft."
In real world terms, the changes won't likely dent Microsoft's legal budget. The indemnity provision rarely comes into play, said Morris Kremen, associate general counsel for licensing at Microsoft. Customers, though, hated the old one.
"There was a risk manager, a lawyer and a procurement guy on every deal who was concerned about this. We would close the deals, but it might take an extra 50 to 60 days," Kremen said. "We also walked away from the deals with a sour taste in the customer's mouth. What we were trying do (with the new provision) is eliminate the sour taste."
More changes will likely be made in the future, Kremen added.
The new provision will also give the company another weapon to take on Linux. Earlier this year, SCO Group alleged that some of its proprietary Unix code had been improperly incorporated into Linux. The Lindon, Utah-based company sued IBM over alleged misuse of its Linux code and sent letters to 1,500 Linux users warning of potential copyright infringement issues and other legal problems.
With its new contract, Microsoft is effectively promising customers it will insulate them from those kind of messy legal problems.
In fact, Microsoft signed a licensing deal with SCO two months after the new indemnity provision went into effect, which will help insulate Microsoft customers from SCO actions.
A friend in Microsoft
Overall, the new legal provisions are part of an umbrella strategy at Microsoft to essentially be nice to the people who buy their products. CEO Steve Ballmer has warned that the company will start to lose customers through inattention and arrogance.
Issue: Infringement
Issue: Third-party injury
Issue: Product warranty
Issue: Audits
Issue: Statute of limitations
Microsoft's new legal plan
To calm licensing customers' fears, the software company has expanded their contractual rights.
Old: Microsoft covered legal costs up to value of software purchased in copyright and patent suits arising out of the use of that software.
New: No limit. Coverage now also applies to costs in trade secret and trademark suits. Also, if necessary, Microsoft will modify software, replace products or cancel licenses.
Old: Costs covered to value of software purchased.
New: No liability cap, if Microsoft was grossly negligent or acted intentionally.
Old: 90 days' coverage.
New: One-year coverage for licensing customers only.
Old: Customers got a 15-day warning before "licensing compliance" audits.
New: Expanded to 30 days. Also, compliance actions following an audit can now proceed in just a division or subsidiary, rather than in an entire company.
Old: Customers had two years to file suit against Microsoft.
New: Local law applies.
"They are saying, 'We've got to take care of these smaller businesses?We can't get (every account) in a begrudging fashion,'" said Steven Edwards, vice president and IT director of Solomon Cordwell Buenz & Associates, an architectural firm in Chicago. For the past year and half, Microsoft has increased the contact it has with its customers, especially small ones. Edwards himself has sat through a couple of Microsoft focus groups.
The indemnity provision, which was included in a document called the master business agreement and is part of volume license agreements such as Select and Enterprise, had been a thorn for years because it seemed to allocate all the risk on the customer.
At worst, Microsoft would come out of the transaction no worse for wear. If the claim related to Office, Microsoft's legal budget would be limited by how much Office you bought, Kremen said.
Punitive damages, which can exceed the verdict for damages, were not addressed.
"Customers said 'you are protecting Microsoft more than you should,'" Kremen said. "I had heard this in literally hundreds of negotiations for four to five years.'"
A phantom menace
Microsoft, however, was defending against a phantom menace. Kremen could recall only one case where a plaintiff brought an intellectual property action against Microsoft's customers rather than the multi-billion dollar company. (In that case, IBM and Microsoft actually picked up the defense anyway and obtained a verdict in favor of their customers).
Neither Kremen nor Mark Bolender, senior attorney at Microsoft, could recall any cases where customer sued a Microsoft customer for software security breaches or personal injury relating to a Microsoft product.
Even if a suit were brought, the old indemnity provisions, which are similar to contractual provisions issued by other software companies, would likely have been adequate to protect licensees.
"It is hard to imagine a royalty claim that is higher than the cost of the software," Kremen said.
Some of the older provisions also could have been challenged in court. Under the old contract, Microsoft declared that customers had to bring any claim they had against Microsoft within two years. Courts can toss out such clauses under certain circumstances. The new contract states that the statutes of limitations used by the court where any lawsuit is filed will prevail.
DiDio added that the explicitly remedy provisions in the contract will likely mollify customers. If it is determined that Microsoft infringed a third party's intellectual property, the new contract states that Microsoft will procure a license so its customers can continue to use the infringing product, replace the existing product, modify the code so it no longer infringes, or refund that portion of the license.
The 15-day audit notification, meanwhile, was annoying to many large customers, both DiDio and Kremen said.
Microsoft began to include the new provisions in licensing agreements signed on March 1 or later. However, any existing licensing customer will be given the opportunity to take advantage of them if they get sued, Kremen said.
Although the indemnity provision raised hackles in the past, the reaction so far has been fairly positive, but muted. The licensing advisory council, a group of 45 to 50 large licensing customers, said it liked the changes, but also asked when further changes were coming, Kremen said.
To date, Microsoft has soft-pedaled the changes, but the company could increase the volume as the SCO controversy continues.
"It was kind of good timing for them," said Alvin Park, an analyst at Gartner. "It is a good thing for customers. It shows that Microsoft is willing to change some of the language in its contracts. But in legal terms "I don't know if it is anything monumental," he added.
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