April 8, 2004 6:21 PM PDT

Millions more for Sun from Microsoft patent pact?

Microsoft is paying Sun Microsystems $1.95 billion as part of a deal signed last week--but Sun could gain as much as $450 million more over the next 10 years through a patent provision in the agreement.

Santa Clara, Calif.-based Sun disclosed the 10-year schedule in a Thursday filing with the Securities and Exchange Commission that detailed the Sun-Microsoft pact, an alliance between bitter enemies that surprised the technology world. A patent provision in the agreement creates the potential for Sun to benefit from further Microsoft cash or from access to the software colossus' patent portfolio.

The 10-year payment schedule is part of a covenant the two companies signed that permits them to sue each other for patent infringement but discourages this by prohibiting the collection of financial damages from such a suit, said Lee Patch, Sun's vice president of legal affairs.

Microsoft agreed to pay Sun $900 million for the covenant governing patents up to the date of last week's agreement, Patch said. According to the filing, Microsoft has the option to extend the covenant each year afterward for a further payment. If Microsoft extends the covenant for all 10 years, the payments total $450 million, Patch said.

In addition, the filing said, if Microsoft makes the payments for all 10 years, the companies will automatically strike a patent cross-licensing agreement--a perpetual license to use all of each other's patents. But the covenant would be superseded if the companies sign a patent cross-license agreement before that--and they've said they intend to begin negotiations for such an agreement.

The deal is unusual, said Rich Belgard, an independent patent consultant. He expects Microsoft to delay signing a patent cross-license until it has improved its bargaining position by getting more patents.

"It's in Microsoft's best interest to delay it until they feel that the equity is appropriate...This gives Microsoft as long as they want--or 10 years--to get patents to offset the equivalent of $450 million," Belgard said. If a cross-license is signed, "I would expect terms much less cash-favorable to Sun, but much more intellectual property-favorable to Sun."

Belgard based his interpretation on the observation that Microsoft has become more aggressive over the last year in its attempt to obtain more patents through invention or acquisition. "They have woken up to the fact that patents are very important," Belgard said.

Microsoft didn't comment for this story. But clearly, patents at Microsoft are becoming a bigger business; the Redmond, Wash.-based company launched a broader program last year to license its technology to others.

In the Sun-Microsoft deal, the covenant is separate from a technical agreement in which the companies will pay each other for use of the others' technology. In that agreement, Microsoft is paying Sun $350 million up front, with each company making further payments for use of later technology.

The covenant also is separate from Microsoft's $700 million payment to resolve Sun's 2002 antitrust lawsuit.

 

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