Microsoft 2004 Annual Report Download - page 57

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PAGE 57
California, Florida, Kansas, Montana, North Carolina, North Dakota, South Dakota, Tennessee and West Virginia have
received final approval by the relevant court. The proposed settlements in Arizona, the District of Columbia,
Massachusetts, Minnesota, New Mexico and Vermont have received preliminary approval by the courts in those states,
but still require final approval. We estimate the total cost to resolve all of these cases will range between $1.1 billion and
$1.2 billion with the actual cost dependent upon many unknown factors such as the quantity and mix of products for which
claims will be made, the number of eligible class members who ultimately use the vouchers, the nature of hardware and
software that is acquired using the vouchers, and the cost of administering the claims process. In accordance with SFAS
5, Accounting for Contingencies, and FIN 14, Reasonable Estimation of the Amount of a Loss, we have recorded a
contingent liability of $1.04 billion, net of administrative expenses and legal fees paid.
RealNetworks litigation. On December 18, 2003, RealNetworks, Inc. filed suit against us alleging violations of federal
and state antitrust and unfair competition laws, related to streaming media features of Windows and related technologies.
RealNetworks seeks damages and injunctive relief, including a permanent injunction requiring us to offer a version of
Windows products with no streaming media features. We deny the allegations and will vigorously defend the action.
RealNetworks filed the case in federal court in San Jose, California. It has been consolidated for pretrial purposes with
other cases pending in the U.S. District Court in Baltimore.
Patent cases. We are the defendant in more than 30 patent infringement cases that we are defending vigorously. In the
case of Eolas Technologies, Inc. and University of California v. Microsoft, filed in the U.S. District Court for the Northern
District of Illinois on February 2, 1999, the plaintiffs accused the browser functionality of Windows of infringement. On
August 11, 2003, the jury awarded the plaintiffs approximately $520 million in damages for infringement from the date the
plaintiffs’ patent issued through September 2001. The plaintiffs are seeking an equitable accounting for damages from
September 2001 to the present. On January 14, 2004, the trial court entered final judgment of $565 million, including post-
trial interest of $45 million, and entered an injunction against distribution of any new products, but stayed execution of the
judgment and the injunction pending our appeal. We filed our notice of appeal on February 12, 2004. On October 30,
2003, the U.S. Patent Office issued a letter stating that it has initiated a Director-ordered re-examination of the Eolas
patent. On February 26, 2004, pursuant to this re-examination proceeding, the Patent Office issued an Office Action
rejecting the claims of the Eolas patent. We believe the total cost to resolve this case will not be material to our financial
position or results of operations. The actual costs are dependent upon many unknown factors such as success on appeal
and the events of a retrial of the case should the case be remanded to trial following appeal. In Research Corporation
Technologies, Inc. v. Microsoft, filed in U.S. District Court for the District of Arizona, plaintiff has asserted a family of six
patents relating to halftoning which it believes are infringed by certain printing and display functionality allegedly present in
different versions of Windows and Office. Plaintiff seeks an as yet unspecified amount of damages in the form of
“reasonable royalties” on various Microsoft products dating as far back as Windows and Office 2000. The case is
scheduled for trial in April of 2005. In TVI v. Microsoft, filed in U.S. District Court for the Northern District of California,
plaintiff accuses the Autoplay feature of Windows of infringement. This case is scheduled for trial in September 2004. In
Arendi USA, Inc. and Arendi Holding Limited v. Microsoft, filed in U.S. District Court for the District of Rhode Island,
plaintiff has accused certain Smart Tags features in Microsoft Office XP and Office 2003 of infringing one patent. Trial is
scheduled for September, 2004. Adverse outcomes in some or all of the pending cases may result in significant monetary
damages or injunctive relief against us adversely affecting distribution of our operating system or application products.
The risks associated with an adverse decision may result in material settlements.
Sun Microsystems agreements. On April 1, 2004, we entered into a series of agreements with Sun Microsystems, Inc.
to resolve all pending litigation between the parties, attempt to avoid future disputes, and create an environment
conducive to future cooperation. These agreements included a Settlement Agreement, a Patent Covenant and Standstill
Agreement, and a Technology Collaboration Agreement. Pursuant to the agreements, we made payments totaling $1.95
billion to Sun.
In the Settlement Agreement, Sun agreed to discontinue its participation in proceedings pending against Microsoft
instituted by the Commission of the European Communities and agreed to dismiss with prejudice the action it filed in the
Northern District of California, Sun Microsystems, Inc. v. Microsoft Corp., Civil Action No. C-02-01150 RMW (PVT) (N.D.
Cal.), and later transferred to the United States District Court for the District of Maryland under MDL Docket No. 1332.
Sun released Microsoft from any claims that were or could have been asserted in the proceedings pending before the
European Communities, its action pending in the U.S., and any claims based on any actions or events discussed in the
Findings of Fact in United States v. Microsoft Corp. and New York, et al. v Microsoft Corp., 84 F. Supp. 2d 9 (D.D.C.
2002). Pursuant to the terms of the Settlement Agreement, Microsoft paid Sun $700 million, which was recorded as
litigation related expense.