Microsoft’s announcement that it has extended its Azure IP Advantage (AIPA) programme to China from 1 October 2017 neatly illustrates a number of key contracting trends helping to shape the development of the global, hyperscale Cloud.

In the physical world, we take it for granted that our home and where we work will not be subject to claims from third parties – in legalese, we get, as standard, meaningful commitments of ‘quiet enjoyment’ and ‘freedom from encumbrances’ when we take a lease or buy a property.  These standard commitments have yet to translate to the digital world, where the risk of Cloud patent claims – technically the opposite of ‘quiet enjoyment’ – is real and growing, and Cloud service providers (CSPs) and their customers are prey to the war chests of Non-Practising Entities (NPEs).[1]

The first Cloud trend that the Microsoft AIPA programme points up is towards resetting the risk balance more in favour of the customer. AIPA is available without further charge to eligible Azure customers and with its four prongs of (i) uncapped indemnification, (ii) open source coverage, (iii) patent pick (from 10,000 patents) and (iv) springing licence (sprung if Microsoft sells any covered patents to a NPE), Microsoft has taken the lead in building into its Cloud ecosystem the same kind of meaningful protection we all take for granted in the bricks and mortar world.

Second, as business around the world progressively migrates to the Cloud, the China roll-out of AIPA shows how global coverage built on consistent contract terms is becoming critical. A digital business in China that is growing internationally or a US business looking for a Chinese CSP will want to be able to scale up fast in the knowledge that the same legal security is available at home and abroad. The ability to plug and play Cloud operations that the customer has developed at home quickly into the same provider’s local data centre abroad is critical in those scenarios where local data residency or compliance requirements rule out operating from the home data centre.  This ability to scale abroad fast goes hand in hand with the security of knowing that the CSP gives the same, standard protection against claims as at home since it will mean that the customer can’t be picked off by patent claims in a jurisdiction where there is a void in the CSP’s coverage. This is increasingly relevant in China, where according to the 2016 Annual Report of SIPO, the PRC State Intellectual Property Office, patent filings and patent litigation both more than doubled between 2011 and 2016.[2]

Third, the Microsoft announcement demonstrates some neat contractual footwork in navigating a way to offer all the elements of the AIPA programme in China’s particular regulatory environment. Here, Cloud service customers have to contract with a Chinese company directly and Microsoft will have had to tweak its joint venture agreement with its local partner, 21Vianet, to flow down the AIPA programme so it can be offered to customers locally. Contrast this with the contract terms of Alibaba Cloud (the China market leader by some way) where the boot is on the other foot: the provider gives little or no coverage but takes indemnification from the customer. This is also the position of AWS, both inside (through its local partner Sinnet) and outside[3] China.  As well as moving towards global coverage horizontally through its own operations, Microsoft has found a mechanism to push the AIPA programme down vertically where needed to reach its indirect customers.

Finally, in the Cloud, the product is the contractual terms and conditions. So what one provider’s Ts&Cs say compared with another becomes a genuine choice for the customer, and a crucial point of competitive differentiation for the provider. The question whether the customer indemnifies the CSP or the other way around sits alongside other critical terms like demonstrating compliance on a global basis with data security, privacy and residency requirements (something that only the largest CSPs can really do anyway).  As many large CSPs’ contracts are transparent and publicly available, figuring out what the Ts&Cs really say and mean will become an increasingly important part of due diligence in CSP selection.

Microsoft’s roll out of its AIPA programme to China at the beginning of this month illustrates each of these trends in contracting – more customer friendly ‘quiet enjoyment’ terms, greater global consistency of terms and the growing significance of CSP Ts&Cs – and why they are set to become even more important in the next phase of the development of the global, hyperscale Cloud.

Richard Kemp and Nooreen Ajmal
Kemp IT Law
October 2017

Footnotes:

[1] For further background, see our June 2017 blog

[2] 2016 SIPO Annual Report, page 100

[3] See our August 2017 blog