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Tuesday, July 20, 2004 - Page updated at 12:00 AM

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Microsoft sues Lindows — then pays $20 million

Seattle Times technology reporter

Microsoft has settled its trademark-infringement lawsuit against Lindows.com and will pay $20 million to the San Diego-based startup, bringing an unusual end to a case that made Lindows famous.

In the final analysis, getting sued by Microsoft might have been the best thing to happen to Lindows. The company has received vast amounts of free publicity from the lawsuit, positioning itself as David to Microsoft's Goliath.

And now, David is embarrassingly richer, and Goliath is richly embarrassed. On top of the $20 million, Lindows is preparing for an initial public offering that it says could bring as much as $45 million. All this for a company that barely cleared $2 million in sales last year and has yet to make a profit.

Microsoft had little to say yesterday about how it agreed to pay $20 million to make its own case go away. Tom Burt, the company's deputy general counsel, said in a prepared statement that the case centered on Microsoft's efforts to protect its Windows trademark from infringement.

"This settlement addresses those concerns," he said.

Lindows, which will now be known as Linspire, said it would not comment on the settlement, but it included some details about the deal yesterday in a filing with the Securities and Exchange Commission.

Microsoft sued Lindows in late 2001, alleging that the name infringed upon the trademark for its Windows operating system. Lindows makes a version of the Linux operating system for desktop computers.

Momentum seemed to be in Microsoft's favor, at least outside the United States. Microsoft began filing lawsuits in Europe last year to stop the company from doing business under the Lindows name and won enough court battles there that Lindows said in April it would do business under the Linspire name outside the United States.

On Microsoft's own home turf, however, the company was less successful. A jury hearing the case would have to determine whether the word "windows" was generic, and Microsoft argued that the jury should consider the word only as it is understood today.

But the judge in the case, U.S. District Judge John Coughenour in Seattle, said he would instruct a jury to consider how the word was understood before November 1985, when Microsoft released its first version of the Windows operating system.

Microsoft appealed that decision before the trial started, but in May a federal appeals court refused to hear the issue. That cleared the way for a trial to begin.

The settlement, according to Lindows' regulatory filing, calls for Microsoft to pay Lindows $15 million by Aug. 15. It will pay an additional $5 million in exchange for receiving the rights to 13 Web site domain names, including lindows.org and lindowsfan.com.

By mid-September, Lindows will change its corporate name and permanently stop using the word Lindows or including it in its products. It has until 2008 to give Microsoft the lindows.com and lindowsinc.com domain names, so that customers who remember only the Lindows name can still find the right Web site.

Microsoft has agreed to give the company royalty-free licenses to use Windows Media software for four years, and Lindows said it plans to include the software in its operating systems.

Finally, both companies agreed to drop all litigation in the case.

By many accounts, the settlement was a huge win for Lindows and its founder, Michael Robertson, who at one point hung on his office wall the photograph of a man standing up to a tank in Tiananmen Square in Beijing. Robertson founded digital-music company MP3.com in 1998 and incurred the wrath of the record industry when the company archived music online.

Legal experts said yesterday that the settlement was a smart move for Microsoft as well, particularly when it became clear that the trial would consider whether the Windows trademark should even be valid at all. The $20 million payment is of minor importance to Microsoft, which makes $100 million in revenue each day, but the Windows trademark is extremely valuable.

"Microsoft paid $20 million for the privilege of digging a hole and burying Lindows in it," said Glenn Peterson, an intellectual-property attorney in Sacramento, Calif. "I'd be surprised to see it ever come up again."

Microsoft and Lindows reached the business transaction that they should have started with in the first place, said Thomas Moore III, a Bay Area intellectual-property attorney.

"They've battled themselves into a draw, with neither party really in a position in a near term to do anything about the other party's success," he said. "That's where the more rational business types really ought to take over."

Kim Peterson: 206-464-2360 or kpeterson@seattletimes.com

Copyright © 2004 The Seattle Times Company

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