Microsoft 2004 Annual Report Download - page 58

PAGE 58
The Patent Covenant and Standstill Agreement provides that neither Sun nor Microsoft will sue the other, or certain
authorized channel and end user licensees, for damages for past patent infringement. Microsoft has the option of
extending this covenant not to sue each year until 2014 in exchange for an annual extension payment, so long as certain
conditions are met. The agreement provides that on April 1, 2014, provided that certain conditions are met, the companies
will grant each other irrevocable, non-exclusive, perpetual patent licenses, with some reciprocal limitations as to scope
and use, as well as an additional ten year covenant not to sue for patent infringement with respect to certain products.
Pursuant to the terms of this Agreement, Microsoft paid Sun $900 million, which was recorded as litigation related
expense.
Sun and Microsoft also entered into a reciprocal Technology Collaboration Agreement. This collaboration agreement
provides both companies with access to aspects of each other’s server-based technology for use in developing new
server software products and/or enhancing existing server software products, in order to improve interoperability. It
provides a perpetual license between Microsoft and Sun pursuant to all subject intellectual property rights (including
patents and trade secrets) to enable either company to implement in its server operating system products any server-
based communications protocols that are implemented over a seven year period by the other company in order to
interoperate with their respectively identified server and/or client operating system products. Royalty obligations incurred
by Microsoft for use or inclusion of covered Sun technology in Microsoft products will, as incurred, be credited against the
$350 million already paid pursuant to the terms of the Technology Collaboration Agreement, based on royalty rates to be
determined in the future by Sun. This license removes concerns under traditional patent and trade secret intellectual
property frameworks by enabling Microsoft’s current and future client and server operating system products to
interoperate with the most popular Sun products in a wide range of customer computing environments.
The extent and timing of Microsoft’s consumption of this credit is subject to uncertainty. Much of the technology that the
companies agreed to license to each other does not exist in a useable form and the agreement does not specify individual
royalty payments for implementation of specifications for particular communications protocols. After reaching this
agreement with Sun, we valued the intellectual property rights received. In determining the fair value of the intellectual
property received, we considered the uncertainty associated with the timing and likely use of Sun’s technology, which
included estimating the likelihood of adoption of protocols and potential royalties saved. That valuation resulted in a fair
value of $29 million for the right to use Sun’s licensed protocols in certain products, which we recorded as an intellectual
property asset. Reflecting the uncertainty associated with the timing and likely use of Sun’s technology, the remaining
amount of $321 million was recorded as litigation related expense.
Intertrust settlement. On April 3, 2004, the previously reported case of InterTrust v. Microsoft was settled by
agreement of the parties. Under the terms of this agreement, we have taken a comprehensive license to InterTrust’s
patent portfolio, including pending patent applications, and agreed to make a one-time payment to InterTrust of $440
million. The agreement involved a combination of a license of intellectual property assets for which we recorded an
intangible asset of $266 million and a payment of $174 million for settlement of legal claims. Of the total payment, $174
million was recovered through insurance and had no impact on our results of operations. The agreement resolves all
outstanding litigation between the parties.
Other. We are also subject to a variety of other claims and suits that arise from time to time in the ordinary course of our
business. While management currently believes that resolving all of these matters, individually or in aggregate, will not
have a material adverse impact on our financial position or our results of operations, the litigation and other claims noted
above are subject to inherent uncertainties and management’s view of these matters may change in the future. Were an
unfavorable final outcome to occur, there exists the possibility of a material adverse impact on our financial position and
the results of operations for the period in which the effect becomes reasonably estimable.