Microsoft Corp. will pay Lindows Inc. $20 million to resolve their 2 1/2-year fight over Lindows' name, the companies announced last week.

The move comes as Lindows, a San Diego software company that is the brainchild of MP3.com founder Michael Robertson, lines up on the runway for its initial public offering.

The University City-based company plans to change its name to Linspire, Inc. by mid-September. The company began using that name in some markets in the spring, after Microsoft succeeded in challenging the Lindows name in Europe.

A Lindows spokeswoman declined to say how long Lindows had been in negotiations with Microsoft, and said Robertson would not make comments about the matter outside published statements.

"We are pleased to resolve this litigation on terms that make business sense for all parties," Robertson said in a press release. Identical copies of the release were posted on the Lindows and Microsoft Web sites.

Settlement terms were confidential, though at least some details were available in registration documents Lindows filed with the Securities and Exchange Commission.

Microsoft will make an initial payment of $15 million by Aug. 15 and follow up with a $5 million payment by Feb. 1. For its part, the San Diego company will give up the "www.lindows.com" Web site address, and a list of similar addresses.

"It sounds as though Lindows made a pragmatic decision to cut its risks in anticipation of a reported IPO," said John C. Baum, an attorney and partner in the San Francisco office of Townsend and Townsend and Crew LLP.

"Naturally, Microsoft is also cutting its risk of further injury to its trademark rights in the Windows mark, which Lindows called into question in defending against Microsofts claims."

Several observers said Robertson's company had made a significant challenge to the Windows trademark. The judge in the case, filed in U.S. District Court in Seattle, was at the point of letting a jury decide whether the term "windows" was a generic word among computer engineers at the time Microsoft started to use it.

Pocket Change

Glenn Peterson, an intellectual property attorney from Sacramento, told the Seattle Times that "Microsoft paid $20 million for the privilege of digging a hole and burying Lindows in it."

And Microsoft apparently did it for pocket change.

The payment comes against the backdrop of another announcement, that Microsoft will dip into its $56.4 billion cash reserve to increase its dividend, buy back stock, and pay shareholders a special, one-time dividend of $3 per share.

Roger Kay, an analyst for Framingham, Mass.-based IDC, told the Seattle Post-Intelligencer that the size of the settlement depends on one's perspective.

"You look at it from the Lindows point of view, and it's like they just hit the jackpot," Kay said. For Microsoft, it "doesn't even show up in the decimal point."

Lindows is losing money, according to documents filed with the SEC. Between the company's inception in 2001 and March of this year, the company had lost $13.4 million. The documents say Lindows' auditors have expressed "substantial doubt about our ability to continue as a going concern" - though the filing says the Microsoft settlement and money raised through the IPO may help the company endure.

Lindows' software, marketed for desktop computers, is based on Linux, a type of computer code that is in the public domain. Computer engineers are free to tinker with the Linux code to improve it. By contrast, Microsoft keeps its proprietary code secret.

Started With MP3.com

Robertson, Lindows' founder and chief executive, first gained recognition as founder of MP3.com.

From 1998 until early this decade, MP3.com ran a Web site that carried songs from obscure artists and major-label musicians. MP3.com quickly grew to become San Diego's brightest dot-com IPO. The major music labels sued MP3.com and one label, Vivendi Universal, went on to buy the company.

Then, as now, Robertson posted a Weblog on the company Web site. Robertson's latest "blog" at Linspire.com contains a link to a multimedia presentation that criticizes Microsoft products. It's also a parody of "Light My Fire," a song recorded by The Doors in the late 1960s.

Among the minutiae of the Microsoft settlement is a provision that lets Robertson's company use the "www.lindows.com" Web address through mid-July 2008 - but only to redirect surfers to its new Web site. After July 15, 2008, the lindows.com Web address belongs to Microsoft.

One other term of the deal, spelled out in Lindows'SEC filing: "We agree to acknowledge Microsoft's ownership of, and the validity of, the Windows trademark."