Sun, MS settle suit in billion-dollar pact

Sun Microsystems said Friday that it has entered into a "broad cooperation agreement" with Microsoft and settled all outstanding litigation. Microsoft will pay Sun US$700 million (AUD$926m) to resolve all pending antitrust issues and US$900 million to resolve all patent issues, the Santa Clara, California, company said in a release.

Both companies have also agreed to pay royalties for each other's technologies with Microsoft making an up-front payment of $350 million and Sun making payments whenever it uses Microsoft's technology in its server products, it said.

In a telephone press conference to discuss the deal, Sun chairman and Chief Executive Officer (CEO) Scott McNealy said that Microsoft could end up paying an additional $450 million as part of the agreement, "depending on the level of collaboration."

After years of legal wrangling, Microsoft and Sun agreed not to sue each other regarding any past patent infringement claims and to begin negotiations for a patent cross-license agreement. Sun will also be less vocal and visible in opposing Microsoft as it fights the recent European Commission's ruling against it, a Sun executive said.

Declaring a new relationship between itself and Microsoft, Sun also said that the companies have agreed to enable their products to better work together and have entered agreements on patents and other issues.

The agreement includes technical collaboration, giving access to each other's server technology, as well as Sun's licensing of Microsoft's communications protocols and Microsoft support of some Sun products.

The two companies will initially cooperate on Windows Server and Windows Client, but could expand to include cooperation on e-mail and database software. For example, engineers from both companies might work together on problems such as user identity management, allowing information to be more easily shared between Microsoft's Active Directory and Sun's Java System Identity Server identity management products.

Also under the agreement, Microsoft and Sun will work together to improve collaboration between the Java and .NET technologies, while Microsoft will be allowed to continue to provide product support for the Microsoft Java Virtual Machine in its products. Microsoft was set to end support later this year, raising compatibility and security questions for users.

Microsoft and Sun provided little detail on when customers might see better product interoperability as a result of the new-found love between the companies. "It will be an evolution, not just one product," McNealy said at a news conference in San Francisco where he was joined by Microsoft CEO Steve Ballmer.

"It is not one sort of seminal product release, it is a set of things we go after and work on that are very customer driven and based on their input," Ballmer said. "I think there is nothing in this that will do anything other than delight customers."

Technical brains at both companies, Microsoft Chief Software Architect Bill Gates and Sun Executive Vice President and Chief Technology Officer Greg Papadopoulos have already met several times, McNealy said Sun will announce interoperability progress as part of its quarterly product announcements, he said

Customers will have a big say in where Sun and Microsoft focus their interoperability work, McNealy said.

"Steve and I are going to see our mailboxes fill up with (requests from) our enterprise customers who say I'd like to see you work together on single sign-on, or on database interoperability, or I'd like to see you work on Java or .Net or tool interoperability, or whatever," he said.

After taking in requests, Sun and Microsoft each will prioritize, see what intellectual property (IP) needs to be cross-licensed and make interoperability happen, McNealy said.

Friday's agreement is not about joint development, it is about a licensing framework that facilitates licensing of intellectual property between Sun and Microsoft so the companies can make their products interoperable, Ballmer stressed.

"It is not joint development ... it is technical collaboration where (Sun) will pursue their independent vision and innovation as we will," he said. "But ... if customers want something to work together or we want something to work together for our own competitive interest we have a licensing framework that lets us go do that. "

Sun will receive Windows Certification for its server products. The companies announced Windows certification for Sun's Xeon servers, effective immediately. Certification for Sun's Opteron-based servers is "moving forward," the companies said.

Ballmer and McNealy also stressed that their settlement is not about money, but about business opportunity. Both Sun and Microsoft expect significant revenue to result from their collaboration.

The bitter legal dispute between Sun and Microsoft started when Sun filed suit against Microsoft in October of 1997, alleging that Microsoft failed to stick to the Java licensing agreement between the two companies. That breach-of-contract lawsuit was settled in January 2001. when Microsoft agreed to pay Sun $20 million. That deal also ended a countersuit Microsoft had filed against Sun.

But two months later the legal battle was renewed when Sun filed a private federal antitrust lawsuit against Microsoft, accusing the company of using its PC operating systems monopoly to undermine Java's success, thereby harming competition.

The ruling in the U.S. government's federal antitrust lawsuit had determined Microsoft is a monopolist and found the company guilty of abusing that power, partly based on Microsoft's dealing Sun over Java. Sun reiterated that point in the March 2001 lawsuit and asked for a permanent injunction requiring Microsoft to license proprietary software interfaces to other companies and to "unbundle" Internet Explorer, the IIS (Internet Information Server) Web server and the .Net framework from its operating systems.

Sun contended in the lawsuit that Microsoft's "ultimate goal" was Internet access domination so that users would have to use a Microsoft product everytime they connected to the Web. At the time, published reports said that Sun sought damages of more than $1 billion. Sun officials refused then to give an exact figure.

Sun on Friday also said that it has promoted its software head Jonathan Schwartz as the company's new president and chief operating officer.

Sun on Friday also announced that based on preliminary financial results, it expects revenue for its financial third quarter, which ended March 28, to be about $2.65 billion. Net loss, excluding one-time items, is expected to be in the range of $750 million and $810 million, or $0.23 to $0.25 per share. Excluding one-time items, which take into account cost of layoffs, net loss for the quarter would range between $200 million and $260 million, or a net loss per share range of $0.06 to $0.08.

Sun officials said the company would lay off about 3,300 people worldwide.

(Nancy Weil in Boston contributed to this report.)

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