April 12, 2004 11:14 AM PDT

Microsoft, InterTrust iron out lawsuit

By Matt Hines
Staff Writer, CNET News

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update Microsoft ended another long-standing legal dispute on Monday, announcing a $440 million settlement and licensing deal with InterTrust Technologies, which markets digital rights management tools.

The settlement marks the end of the nearly 3-year-old patent infringement suit. InterTrust's suit contended that virtually all of Microsoft's products--from the company's flagship Windows operating system to its multimedia software--trespassed on InterTrust's content protection holdings.

The deal opens the door for Microsoft to expand the array of antipiracy tools it provides with its digital media software, including Windows Media Player.

The settlement also comes less than two weeks after Microsoft ended a long-running legal battle with rival Sun Microsystems, under which the software giant may end up paying more than $2 billion in patent royalties and licensing fees. In a separate major legal dispute, the European Union ruled last month that Microsoft has been stifling the markets for server and media software.

Under the agreement with InterTrust, Microsoft will license all the technology that had been under dispute between the two companies. Digital rights management technology is intended to protect content such as songs and videos from being copied illegally.

Microsoft has moved aggressively in the emerging antipiracy field. Last week, it acquired a majority stake in ContentGuard, another digital rights management technology provider.

The Redmond, Wash.-based company said the InterTrust agreement should accelerate its media software plans.

"More and more, it became clear to us that InterTrust had some foundational patents that we would need to license," David Kaefer, Microsoft's director of technology policy, said in an interview.

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Kaefer said the two sides had been working toward a settlement for some time. But, he said, it was critical to Microsoft that the deal ensure that neither consumers nor content providers had to pay for an InterTrust license in order to use Microsoft's software.

InterTrust had been seeking more than $1 billion, Kaefer said. "Both sides were able to find some common ground," he added.

While the claim had been tied up in court for some time, InterTrust received a potentially favorable preliminary ruling last year, when the definitions of the terms and the scope of the company's patents were established by a judge overseeing the case. Such a move is typically considered a positive step for a patent holder attempting to defend its claims. InterTrust had asserted 144 counts of patent infringement against Microsoft since filing the suit in 2001.

A cloud lifted?
Executives at privately held InterTrust said the ruling validated the company's intellectual-property holdings and that the deal should help the company expand the number of companies that license its tools.

Talal Shamoon, chief executive at Santa Clara, Calif.-based InterTrust, called the Microsoft settlement a "major deal" for his company. He added that while the company has no current plans to launch antipiracy products, it will continue to release new technologies for use by other developers. Shamoon believes that the deal could also remove a cloud of uncertainty from the antipiracy software market in general, as well as create new levels of competition among vendors looking to make a name in the space.

"Microsoft is clearly very interested in expanding its digital rights protection capabilities, as they're building it into almost every new product they roll out," he said. "They're also trying to show the market that they're being proactive with this kind of security, and it should be interesting to see what they try to do for the consumer electronics space, where there will be a lot of competition."

Shamoon said one particularly interesting element of Microsoft's move into digital rights management will be how the company handles interoperability issues with other vendors' media software and hardware systems. The executive believes that it may be hard for Microsoft to balance its proprietary interests with consumers' demands for file, hardware and security formats that work with different vendors' architectures.

"People are already calling for interoperability between Windows Media Player and their iPod," Shamoon said. "Microsoft is more likely to offer an end-to-end Windows architecture, and it should be interesting to see how the market responds."

Under agreement terms, most users of Microsoft products will not be required to seek any form of a license from InterTrust. However, companies such as systems integrators, which may be combining Microsoft's software with third-party technologies, could be required to do so.

Observers: Microsoft will dominate
Some industry watchers say digital rights management (DRM) is just the sort of business that Microsoft wants to dominate, because it will become an increasingly important element of consumer interaction online, in particular as downloads of music, movies, games and other forms of content grow in volume.

"Microsoft already has pretty wide acceptance of its DRM technology, in part because it is available everywhere and it works--and partly because people know if something goes wrong with it, Microsoft can likely fix it," said Josh Bernoff, an analyst at Cambridge, Mass.-based Forrester Research. "The settlement with InterTrust just shows that Microsoft is serious about doing DRM and will take care of any problems it needs to in order to move forward."

Bernoff said DRM remains something of an ancillary business to Microsoft's existing products. But he added that since many consumers will be using the company's Internet Explorer Web browser software or Windows Media Player to access content online, Microsoft will fight hard to become a de facto source of the technology.

In the media player arena, Microsoft already has a legal fight on its hands. In December, multimedia software company RealNetworks filed a $1 billion lawsuit, alleging that Microsoft illegally uses its Windows monopoly to hurt digital-media rivals.

The Forrester analyst also believes that Microsoft can succeed with digital rights management technology.

"Who can compete: Apple (Computer) or RealNetworks?" he said. "I think that's going to be hard for them, because it's very nice when your software is already bundled with the dominant operating system, as Microsoft's is. I see this as the emergence of another powerhouse business for Microsoft."

CNET News.com's Ina Fried contributed to this report.

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