For a time Paul Allen was the head of software development at MITS, though he and Bill Gates were careful to maintain a legal distinction between MITS and their own small company, Microsoft. Ed Roberts, the head of MITS, may not have understood the implications of that distinction. The contract between the two companies stipulated that MITS would make its best efforts to sell Microsoft BASIC to companies that weren’t direct competitors of MITS. Once it became apparent how important software was to sales of the Altair, however, just about every company began to look like competition.

There was already a fair amount of tension between MITS and Microsoft over the MITS 4K dynamic memory board. The board was important because that memory was required to run Microsoft BASIC. In fact, the marketing of BASIC was tied to the board. Buy the board and get BASIC at a greatly reduced rate, otherwise pay full price. The problem with the boards was that they didn’t work. Customers were refusing to buy them and were passing around pirated copies of BASIC.

Bill Gates furiously confronted Roberts over the memory boards. Whatever Roberts thought of Gates before, the meeting definitely darkened the mood between them. The tension was kept in check for a while by an underlying feeling of camaraderie between employees of the two companies, but the conflict over third-party sales brought it to a head in early 1977. By that time Roberts was in the process of selling MITS to a California company called Pertec.

Pertec thought that exclusive rights to Microsoft BASIC was part of the deal; Microsoft disagreed. Pertec took Microsoft to court, but there was an arbitration clause in the original MITS-Microsoft contract, so everyone ended up in arbitration, the Pertec people and their three lawyers sitting across from Paul, Bill, and their single lawyer.

Software litigation was a young area at that time, and the arbitrator probably didn’t fully understand many of the issues. After several months he rendered an ambiguous decision. It seemed to favor Microsoft, but some issues remained unresolved, and both sides asked for clarification. None was forthcoming, and eventually Pertec and Microsoft had to reach their own agreement. Pertec would continue to use BASIC, but Microsoft would retain all rights. Finally Microsoft was free to grow unhindered.