Microsoft: IP indemnification 'does include damages'

Microsoft has clarified its offer of IP indemnification, and says it will provide support for damages as well as legal costs - but has yet to spell out any limits to its liabilities

Microsoft has clarified its IP indemnification policy, saying that it will indemnify claimants against damages as well as just legal costs, but some legal observers say the company still needs to spell out the small print on the protection it is offering customers.

Questions on Microsoft's indemnification policy were initially raised after chief executive Steve Ballmer wrote an email to customers claiming that Microsoft offered better protection against legal action over IP violations than its open-source rivals. His statement was queried by at least one IP lawyer, who said that it only mentioned legal costs, while Linux vendors Red Hat and SuSE offered some degree of damages.

A Microsoft spokeswoman provided ZDNet UK with more details on its policy on Thursday, saying that in fact the company provides legal, damages and settlement costs for all customers which have signed a volume licensing agreement, and will replace or refund infringing software.

"Microsoft's volume licensing indemnification commitment covers damages costs, in addition to legal defence costs," said the Microsoft spokewoman. "To truly stand behind its software, Microsoft pays for damages, settlement costs, and, if there were an injunction, Microsoft would either obtain for its end-users the right to use the software, fix or replace the infringing code, or, as a last resort, refund to the end-user the amount they paid for the software."

But Richard Penfold, a partner in the IP practice of law firm DLA, told ZDNet UK that this statement is confusing and needs clarification.

"In my view Microsoft's statement raises more questions than it answers," said Penfold. "It is vague -- I would like to see the exact details of the indemnity. I'm sure their policy is actually quite prescriptive on when, where and how it would pay out. I can't believe it is as wide and open-ended as they imply."

Penfold raised three specific concerns regarding the "small print" of Microsoft's IP indemnification policy: whether damages are capped; under what conditions Microsoft would pay damages; and what settlement costs are included.

Microsoft was unable to clarify its IP indemnification policy or answer the specific concerns in time for this article.

Penfold said that Microsoft is likely to have a cap on its damages and specific clauses which specify the type of damages it will pay. "I can't believe Microsoft are giving a full uncapped commitment to damages," said Penfold. "In none of the licences I have been involved in does anyone provide open-ended indemnities, as where does it stop -- do you include both direct and indirect damages?"

Damages can include both direct damages, such as the loss of business if a company needs to shut down part of its business due to IP infringement, and indirect damages such as loss of future business. If Microsoft's IP indemnification agreement did not include these restrictions then the cost of a potential claim from a customer could be astronomical, according to Penfold.

"The amount it would cost would be unquantifiable -- if it’s a big business and the software is a large part of it -- it could be millions, or far beyond," said Penfold.

Penfold also raised questions in terms of when Microsoft will pay damages -- whether damages will be paid as soon as a customer is threatened with legal action due to patent violation, or whether it will wait until after the customer has taken the case to court.

"Microsoft may only indemnify for damages which are produced as a result of a successful claim [against the customer] for infringement," said Penfold. "The company would then have to go through the courts -- taking 18 months to two years of management time, and costing legal fees of a million -- before they could get any money back."

Another issue is regarding settlement costs -- whether Microsoft will pay only the legal costs to a customer of obtaining a settlement with the individual claiming infringement, or whether it will also pay the actual settlement sum.

"If a company is found to infringe and says 'I'll pay half a million in royalties' -- which is the way IP infringement cases are normally resolved -- is that half a million included, or are the 'settlement costs' just legal costs?" said Penfold.

However, even if Microsoft does eventually reveal some limitations on this apparently open-ended policy, the fact that Microsoft offers damages as well as legal costs is likely to be a benefit to many organisations.

Geoffrey Brambill, a strategic ICT adviser at Brentwood Council, which uses Linux on servers but Windows on the desktop, told ZDNet UK that full IP indemnification which includes both damages and legal costs is likely to influence the choice between Windows and Linux.

"When you buy something from someone you trust that there is nothing wrong with it," said Brambill. "If they [Microsoft] are able to indemnify their software fully, it would be good. Most authorities will go for what they think is safest -- if Microsoft is indemnifying software that is another reason to stay with Microsoft."