Tuesday, December 13, 2011

You Have to Pay for that Banana!

Last week we reviewed how lack of early patenting left the door open for Microsoft to grab Netscape's bananas. Now let's look at a story where a much smaller chimp was able to make the Gorilla pay for it. This story goes way back to when the MS-DOS operating system was the dominant platform for PCs and hard disk drive storage space was at a premium. Software developers were developing data compression software to increase the effective size of the hard disk drive. The leader in data compression for DOS operating systems was a small software company based in Carlsbad, California, Stac Electronics (Stac). Although Microsoft dominated everybody in its sales of the MS-DOS operating system primarily through its sales to OEMs, it had not developed its own data compression technology for MS-DOS. In contrast, the Novell DR-DOS operating system had it.

In 1991 Microsoft requested Stac grant a world wide license of its data compression technology for its future MS-DOS operating systems. According to Stac's complaint, Microsoft took the position that it did not have to pay a royalty for the license. Microsoft instead suggested that failure to reach an agreement just meant Microsoft would go to another developer, which would have a definite impact on Stac's sales. Negotiation broke off in June 1992. Shortly afterward, the industry became aware that Microsoft intended to release the MS-DOS 6.0 operating system, including a data compression utility called DoubleSpace, sometime in the first six months of 1993. Stac then resumed effort to reach an agreement in November 1992, but was again unsuccessful. However, Microsoft agreed to send a beta copy in January 1993. When Microsoft released the beta copy it attempted to reassure Stac in writing: "Don't worry about the patent stuff. We are just going to keep with our changed code which does not infringe."

After review of the beta copy, Stac somehow reached a different conclusion and sued Microsoft for patent infringement, copyright infringement, and trade secret misappropriation. The court ruled Microsoft had not infringed the copyright nor misappropriated any trade secret, but had infringed the patent(s) and awarded Stac a permanent injunction against future patent infringement and $120M in damages. After about a week of shipping the MS-DOS operating system without the data compression, Microsoft negotiated a settlement reportedly worth $83M to Stac for the right to license, for a royalty, any of Stac's existing or future technology including that unrelated to data compression and Stac received a license to some of Microsoft's technology.

The decision was not precedential, but is worth remembering.

Copyright © 2011 Robert Moll. All rights reserved.