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Feeling safer under Microsoft's cloud patent shield? Don't

Fine words, yes, but you're no better protected

Comment Microsoft’s president and chief legal officer, Brad Smith, recently announced a new deal called the Microsoft Azure IP Advantage Program. It is touted as “the industry’s most comprehensive protection against intellectual property (IP) risks”.

It will be available for users of Azure cloud offerings. The protection is intended to “help foster a community that values and protects innovation and investments in the cloud... without worrying about lawsuits”, especially from non-practising entities (aka patent trolls) and the frivolous patent lawsuits they are infamous for.

Microsoft has been at the forefront of cloud providers in developing and marketing legal strategies to help protect customers against legal risks associated with cloud-based solutions. For example, it recently successfully challenged the validity of a US warrant requiring it to turn over customer data hosted by a Microsoft affiliate in Ireland in Microsoft Corporation v USA (2nd.Cir. Jul. 14, 2016). See summary here.

Others tried unsuccessfully to follow suit. Recently, Google lost a challenge to the extra-territorial aspects of a US warrant in a case in which a District Court judge refused to follow the decision in the Microsoft case. Facebook also lost a challenge to set aside bulk warrants issued for customer data and is waiting to see if a New York appellant court will reverse that decision.

The fights over protection for customer privacy is one example showing that legal maneuvers taken by cloud providers to overcome legal and regulatory risks associated with cloud computing have only been partly successful to date.

Will Microsoft’s Azure IP Advantage program convince prospective customers that they are safe from patent risks if they decide to move to Azure? A close look at the program leaves one with many questions about its efficacy.

Microsoft says it will include three benefits. Let’s examine each.

1) Our best-in-industry intellectual property protection with uncapped indemnification coverage will now also cover any open source technology that powers Microsoft Azure services, such as Hadoop used for Azure HD Insight.

The standard Microsoft Online Subscription Agreement for Azure (last updated September 2016) provides a partial indemnity against certain intellectual property claims. The scope of the indemnity, however, leaves customers exposed to significant patent risks. The coverage has a complete exclusion for the most likely claims, namely, a combination claim that includes the use of Azure with any customer data, or the customer’s or a third-party application. In other words, if the customer is sued just for using Azure, it has protection. But if it is sued because it has used Azure to innovate in the cloud or for using Azure with customer or third-party apps or data, there is no protection.

Further, if there is a claim, Microsoft will seek to obtain the right for the customer to keep using the product, or modify or replace it with a functional equivalent. However, if these options are not commercially reasonable, Microsoft can terminate the customer’s right to use the product. While this situation may be remote, if Microsoft exercised this right it could adversely impact customers.

Microsoft also agrees to defend customers against claims and to pay the amount of any resulting adverse final judgment or settlement. But Microsoft does not cover customers against their own losses in the event of an IP claim and customers must agree to waive any rights to sue Microsoft for them.

These gaps and limits of coverage are not a criticism of Microsoft. There are many IT suppliers including licensors of software, providers of SAAS services, and other cloud providers that have even worse standard terms. Customers with leverage who are willing to take the time to negotiate these terms can usually do better.

The second benefit is described as follows:

2) We will make 10,000 Microsoft patents available to customers that use Azure services for the sole purpose of enabling them to better defend themselves against patent lawsuits against their services that run on top of Azure. These patents are broadly representative of Microsoft’s overall patent portfolio and are the result of years of cutting-edge innovation by our best engineers around the world.

Patents only provide exclusive rights that can be asserted against third parties. They thus provide no legal defense whatsoever to any suits against Azure customers.

Since Microsoft could not reasonably be expected to promote a “benefit” with no value whatsoever, its offer might be construed as an undertaking to enable its customers to assert Microsoft’s patents against third parties and to thereby create a deterrent against third-party patent claims. The patents Microsoft says it will make available are those that could help customers with “patent lawsuits against their services that run on top of Azure”. This benefit therefore appears to be an attempt to fill a gap in Microsoft’s patent indemnity, which, as noted above, doesn’t cover such claims.

When you read Microsoft’s blog and listen to the two videos that help explain the program – Brad Smith: Microsoft Azure IP Advantage video and Microsoft Azure IP Advantage: Protecting Innovation in the Microsoft Cloud animated video – you could come away thinking the program is designed, by and large, to help protect Microsoft customers against frivolous lawsuits brought by NPEs.

But if this is Microsoft’s intent, it has some explaining to do. The threat of being sued for infringement – even a suit under all of Microsoft’s 10,000 patents – wouldn’t have any deterrent effect against NPEs who don’t operate any businesses except those involved in licensing and asserting or threatening to assert their patents if their demands are not met.

The more plausible intended benefit is to deter operating businesses with potentially legitimate claims of patent infringement from enforcing their rights against Microsoft customers by creating a threat of being counter-sued by customers using Microsoft patents. This intent was confirmed by Erich Andersen, vice president and deputy general counsel of Microsoft’s IP Group, who also published the list of US and foreign patents that will be made available to customers.

It would be useful to know how Microsoft will overcome some challenges involved in patent litigation to make the program work. To provide its customers a right to sue under Microsoft patents, Microsoft would need to ensure the customers have the requisite rights in its patents to have standing. In the United States, standing requires that the plaintiff either own the patent being asserted or at least have exclusive rights to the patent. Merely conferring on customers a right to sue for infringement is not enough to meet the standing requirement. Is Microsoft willing to grant an assignment of exclusive rights to its patents to customers, especially when that would also exclude Microsoft and any of its other customers from using the patents offensively or defensively? Further, the usual defense to a patent suit is a claim that the patent is invalid. Is Microsoft willing to let its customers defend its patents and put them at risk of being found to be invalid?

Microsoft’s plan to offer its patents to sue other operating businesses is also bound to raise questions as to the appropriateness of a large conglomerate like Microsoft using its potent patent portfolio to intimidate and deter smaller companies from protecting their intellectual property from being used without permission or compensation by Microsoft customers, only to help Microsoft build its Azure business. Should Microsoft be creating an iron dome defense system for its customers to enable them to evade legitimate patent rights of other innovators to promote adoption of Azure and potential innovation by Microsoft customers – at the expense of other innovators?

The third benefit is described as follows:

3) We are pledging to Azure customers that if Microsoft transfers patents in the future to non-practicing entities, they can never be asserted against them. We do not have a practice of making such transfers, but we have learned that this is an extra protection that many customers value.

This commitment addresses concerns that many businesses have about operating companies assigning patents to NPEs that will bring suits against companies the operating businesses would be unlikely to sue for fears or counterclaims. HP recently sold patents to an NPE that used them to sue Cisco and Facebook, among others. But would customers of Microsoft reasonably expect Microsoft to sell its patents to an NPE and permit the buyer to sue its Azure customers when Microsoft might be required to defend the claim or potentially lose customers and revenues from its Azure offering?

Microsoft, with Brad Smith at the helm, has been an innovator in seeking to overcome or mitigate legal and regulatory challenges associated with cloud computing. He has sought to remove barriers that inhibit customers from switching from on-premises and traditional outsourcing solutions to Microsoft Online products such as Office 365 and Azure. The Microsoft Azure IP Advantage program is a novel and non-obvious approach to assuaging patent fears associated with the cloud. Its promise and utility, however, remain to be seen.

Organizations that read the program benefits should not simply assume that by using Azure products they will be acquiring any kind of IP insurance or guarantee they will not be sued, that Microsoft’s indemnity will actually cover them, or that any of Microsoft’s 10,000 patents will provide a legal defense to a claim.

Still, Microsoft does not claim its program will solve all IP issues in the cloud. It carefully says it will offer “best-in-industry intellectual property protection”. Thus, the claim is really that its program is an improvement over the prior art of what other cloud providers offer.

Reproduced with permission from the original by Barry Sookman on his personal blog here. Barry Sookman is a senior partner with McCarthy Tétrault, specialising in copyright, intellectual property, computer, internet, and e-commerce law, and also adjunct professor of IP law at Osgoode Hall Law school.

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