November 21, 2006 6:19 AM PST

Microsoft, Novell spar over Linux agreement

A correction was made to this story. Read below for details.

update Novell's CEO on Monday issued a letter to the open-source community disputing Microsoft's contention that Linux infringes on Microsoft patents.

In the open letter, Novell's Ron Hovsepian outlined the rationale behind an agreement, signed early this month, under which Microsoft will offer support and legal idemnification for users of Suse Linux, a Novell product line. The two companies also agreed to work on product interoperability.

Ballmer Hovsepian

Hovsepian also took issue with comments made by CEO Steve Ballmer last week that Linux "uses our patented intellectual property."

The deal between Microsoft and Novell calls for the two companies not to sue each other's customers over patent issues.

But that patent provision, Hovsepian said, did not amount to an admission that Suse Linux infringes on Microsoft's patents.

"We disagree with the recent statements made by Microsoft on the topic of Linux and patents. Importantly, our agreement with Microsoft is in no way an acknowledgment that Linux infringes upon any Microsoft intellectual property. When we entered the patent cooperation agreement with Microsoft, Novell did not agree or admit that Linux or any other Novell offering violates Microsoft patents," Hovsepian said.

A Microsoft representative on Monday issued a response to the Novell letter, saying the two companies disagree on this point.

"We at Microsoft respect Novell's point of view on the patent issue, even while we respectfully take a different view," the statement said. "At Microsoft, we undertook our own analysis of our patent portfolio and concluded that it was necessary and important to create a patent covenant for customers of these products."

In his letter, Hovsepian indicated that Microsoft initiated the pursuit of a patent covenant. The intended effect was to give customers who use both Windows and Linux "peace of mind" from potential legal problems, he said.

In its statement released Monday, Microsoft called the legal aspect of the deal an effort to "put in place a new intellectual-property bridge between proprietary and open-source software."

Ballmer has also indicated that Microsoft has tried to forge similar legal and technical agreements with other Linux distributors.

However, there is no deal with leading Linux distributor Red Hat. The day after the announcement of the Novell deal, Red Hat responded with a statement saying that it will not pay an "innovation tax."

Legal claims
Scott Handy, IBM's vice president of Linux and open source, said that the patent protections included in the Novell-Microsoft deal are unnecessary.

"We aren't sure what Microsoft's intentions here are, but IBM has long asserted that we don't see the need for this coverage," Handy said. "To our knowledge, there has never been a patent suit against Linux, and it is our view that legal claims, if they exist, should be settled without involving end-user customers."

Handy said that Microsoft is trying to create "fear, uncertainty and doubt" around Linux because it poses a competitive threat.

In addition, the Open Invention Network--a group formed to provide a patent-based legal defense of Linux--issued a statement on Tuesday, echoing Handy's comments.

"Through the accumulation of patents that may be used to shield the Linux environment, including users of Linux software, OIN has obviated the need for offers of protection from others," the statement said.

The members of the Open Invention Network, which was started last year, are IBM, Red Hat, Novell, Sony, Philips and NEC.

Eben Moglen, the attorney representing the Free Software Foundation, which created the General Public License (GPL) used by Linux, said Microsoft's deal with Novell puts Red Hat at a competitive disadvantage.

"Either customers desert Red Hat to go to Novell, to get safety, or Red Hat will be forced into a similar deal with Microsoft," Moglen told Reuters.

Moglen has also voiced concern that Novell's pact with Microsoft could violate the license.

The pact calls for a Microsoft payment to Novell of about $348 million and Novell payments of at least $40 million over the course of the five-year deal to ensure that Microsoft won't sue Suse customers for patent infringement.

Deal structure
Analyst Rick Sherlund also expressed doubts the parties will walk away from their earlier agreement, but he questioned the deal's structure.

"It is curious as to why Microsoft would make such a large payment to Novell (spread over five years)," Sherlund said in a recent analyst note. "Since the agreement does involve the cross-licensing of patents, we suspect Microsoft's motivations may have significantly been to resolve patent-related issues."

Novell, as a result of the deal's structure, will be able to count the revenue it receives from Microsoft as Linux-related sales for the next five years, a move that may appease investors who are looking for growth in that segment of Novell's business, analysts said.

That deal structure may prove to have more advantages than taking the entire sum as a one-time gain for its patents, analysts said.

When the agreement was announced with much fanfare, several industry observers expressed skepticism that the honeymoon would last.

Concerns arose that the partnership would be perceived as Microsoft forcing its patent philosophy onto the open-source world. The open-source community operates under a system that largely shares intellectual property, whereas Microsoft comes from a world of proprietary software.

Raven Zachary, an analyst at The 451 Group, said in a recent interview that the agreement gave new prominence to legal protection.

"Indemnification was a hot issue a few years ago, and now it seems to be back," Zachary said. I think it elevates the level of fear."

Another analyst said the companies' verbal barbs are far from shocking.

"This shouldn't surprise anybody," said Brad Reback, a CIBC World Markets analyst. "It's just corporate posturing, and the agreement remains intact."

Patent attorney Bruce Sunstein, of Bromberg & Sunstein in Boston, shares that sentiment. He noted that both companies stand to gain from the agreement and, as a result, have a strong incentive to keep it in place.

"Microsoft mainly wants to sell licenses...and if (Microsoft leaders) can find a way to do that and sit in the Linux environment, that's good for them," Sunstein said. "Fundamentally, they're not interested in patent litigation. Fundamentally, they're interested in selling licenses."

The squabbling between Microsoft and Novell also shows signs that the deal might have been rushed, Zachary said Tuesday, noting that the companies' deal announcement came within a week of Oracle announcing that it would sell Red Hat Linux support.

"After Oracle announced its Unbreakable Linux campaign, Novell and Microsoft probably felt compelled to announce something fast," Zachary said.

Oracle, in essence, validated Red Hat as the standard for Linux, placing Novell in an awkward position with its Suse Linux, he added.

"Novell had to do something dramatic, and by selling to the Microsoft customer, it showed it was a strong enterprise play," Zachary said.

 
Correction: This story misstated the amount Microsoft will pay Novell in a pact the two companies made earlier this month. The pact calls for a Microsoft payment to Novell of about $348 million and Novell payments of at least $40 million over the course of the five-year deal.

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