Microsoft Settles Burst.com Lawsuit

Burst.com’s lawsuit against Microsoft, which the company filed in 2002, has ended quietly with an out-of-court settlement. Minutes before a scheduled federal court hearing on March 10, Microsoft agreed to pay Burst a licensing fee of $60 million; for the sum, Burst agreed to drop all further litigation against Microsoft on the matter of stolen trade secrets.

The settlement amount has met with mixed reactions, especially from those investors who have watched the lawsuit play out. The market reacted swiftly, sending Burst's shares down more than 50%, to $1.54, as of noon Eastern the business day following the announcement. One investor, posting on a Slashdot.org board on March 12 under the name mapmaker, stated "Not surprisingly, Microsoft settled 1/2 hour before that hearing was to start. Surprisingly, and unfortunately for BRST shareholders like me, the amount they paid to settle was a pittance." The expectation of a higher amount had been fueled by recent articles, especially one by PBS.org pundit Robert X. Cringley, who predicted that Microsoft's refusal to settle could yield a courtroom judgment in the billion-dollar range.

The case had enough intrigue to keep the attention of legal and technical buffs alike:
• A "David vs Goliath" story pitting Burst.com, Inc.--a small company claiming it had revealed trade secrets comprised of 37 patents--against a mega-corporation that at first expressed interest in those secrets, then chose not to buy a license. Later, the smaller company claimed its technology had been built into the mega-corporation's flagship media product (Windows Media Player 9).
• A small company, with very limited resources, hanging on to solvency in the hope that it would prevail despite the lengthy due process period.
• Well-known initial investors, such as the rock group U2.
• A series of "missing" Microsoft emails that spanned the exact time that Burst claimed it was providing the trade secrets to Microsoft (and which, some articles have claimed, would lead to impoundment of Microsoft's email servers if the March 10 court hearing had proceeded)

Commenting on the patent infringement claims, Richard Lappenbusch, director of strategic planning at Microsoft, stated in a late 2003 email: "We evaluated Burst's proposal like we would any other—carefully, under appropriate agreements, and following very conservative business practices. As you can imagine, we never want to be in a position to even appear to have misappropriated someone else's technology. In this case, we determined that their offer for their technology and for their IP was not something we wanted to accept, so we declined."

He went on to add, "We look forward to presenting to the Court the real facts in this matter—Microsoft has innovated with digital media and networking technologies in Windows for more than 10 years. The fast streaming technology in Microsoft's Windows Media 9 series is an example of work by Microsoft to deliver an even more compelling streaming media experience to users. Burst's claims are without merit and the technology at issue in this court proceeding is based on Microsoft's own work and innovation."

The official Microsoft press release noting the settlement used the phrase "allows us to continue," which is especially curious given Lappenbusch's comments that the "technology at issue . . . is based on Microsoft's own work and innovation." This release quotes Tom Burt, corporate vice president and deputy general counsel for Microsoft, saying, "While we were confident of prevailing in this lawsuit, we have been open from the beginning to finding a reasonable way to resolve this case. Securing a license to the Burst patent portfolio through this settlement allows us to focus on the continued development and deployment of Windows Media technologies to deliver the ultimate media experience to our partners and customers."

Burst Co-founder and CEO Richard Lang seems happy with the outcome. "We spent over a decade developing and patenting the technology in anticipation of the markets that are now emerging," he said. "Microsoft taking a license validates the innovation of the burst technology embodied in the underlying patent portfolio. With this action behind us, the company can now focus on its other opportunities."

Cringley's recent article may shed a bit of light on what those "other opportunities" will be. In his January 7 column, Cringley noted that a court win would provide Burst the precedent to approach other media player companies, including Apple and Real, for licensing agreements.

The lack of a court determination, however, leaves the patent and "prior art" question in limbo, especially the "prior art" argument that Microsoft planned to use and Apple will likely use; Charles Wiltgen, formerly with Apple’s QuickTime group and now the host of playbacktime.com, notes that Apple already possessed a similar technology before Burst's patents were granted. The Apple issue will be especially tricky, given the fact that U2’s Bono is friends with Steve Jobs and U2 has appeared in recent iPod commercials.