December 23, 2003 9:40 AM PST

SCO opens new front in Linux war

SCO Group has targeted a new group in an effort to profit from what it says is illegal use of Unix intellectual property in Linux, but Novell, a former owner of the operating system, claims it still holds copyrights.

Last week, SCO started sending out the first of an estimated 3,000 letters to companies, universities and other organizations that licensed Unix, typically from AT&T, the company that invented the operating system and sold it years later. Previously, SCO had limited its legal saber rattling to the world's largest companies.

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What's new:
SCO targets a new group in its Linux legal battle, but Novell, a former owner of Unix, claims it still holds key copyrights.

Bottom line:
With another round of letters to Unix licensees, SCO aims to extract important information for its legal campaign. Meanwhile, Novell's moves could throw a wrench into SCO's effort to sell Unix licenses to Linux users.

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"They're starting 3,000 legal fires here," said Mark Radcliffe, an intellectual property attorney at Gray, Cary, Ware & Freidenrich.

The letter demands that licensees certify within 30 days that their employees and contractors haven't taken any of eight specific actions involving Linux. If a licensee doesn't provide the certification, "SCO may pursue all legal remedies available to it," including termination of the license, the letter said.

"We expect this will also become an area of focus of our enforcement initiatives," SCO Chief Executive Darl McBride said in a conference call Monday.

However, the license agreements describe only limited auditing authority, and SCO might have trouble extracting all the information it wants beyond basics such as how many computers and processors are running Unix, said Jeffrey Osterman, a partner with Weil, Gotshal & Manges.

The moves cap a tumultuous year for Linux that featured a $3 billion lawsuit by SCO against IBM, Big Blue's countersuit, and a separate suit by Linux seller Red Hat against SCO seeking to put the matter to rest as quickly as possible.

The legal actions have injected a high-stakes legal challenge into the Linux project, which thus far has focused on overcoming cultural, technological and business obstacles. The open-source operating system is a serious force in computing today: Sales of servers using Linux in the third quarter grew 50 percent to $743 million, according to IDC.

Novell throws a wrench in the works
But Novell, which bought Unix from AT&T before selling a SCO Group predecessor at least some of the intellectual property in 1995, is disputing SCO's claims of Unix copyright ownership. Spokesman Bruce Lowry said Monday the U.S. Copyright Office has given Novell copyright registrations for 11 versions of System V Unix.


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The copyright registrations by Novell, which is in the process of acquiring No. 2 Linux seller SuSE Linux, are "a pretty clear indicator there will be a litigation between Novell and SCO," said David B. Moyer, an attorney with Wineberg, Simmonds & Narita.

Novell's moves could throw a wrench into SCO's effort to sell Unix licenses to Linux users, a plan under which it's asking $699 to use Linux on a single-processor server, Radcliffe said. "Now basically these guys have got to go to court and prove they own the copyright. That takes a lot of the pressure off the Linux users," Radcliffe said.

After SCO unearthed a 1996 amendment to the 1995 sale of Unix assets to SCO, Novell acknowledged SCO owned some copyrights. But in an Aug. 4 letter Novell sent to SCO earlier this year and disclosed Monday, Novell general counsel Joseph LaSala said, "We dispute SCO's claim to ownership...to copyrights in Unix System V."

SCO, which also has registered Unix copyrights, adamantly disputes Novell's actions. "They are effectively filing inappropriate or incorrect or fraudulent applications with the Copyright Office," Chris Sontag, head of the SCOsource effort to derive more revenue from Unix, said in an interview.

Sontag also said SCO has begun offering a less expensive Unix licensing program under which Linux users can buy a one-year license for 20 percent the cost of the perpetual license.

A lower-priced license could create herd behavior that would boost SCO's fortunes, Radcliffe said. "The thing that is dangerous for Novell and IBM is that the users don't really care much about the GPL," or General Public License, that governs Linux and the core part of the open-source philosophy. "What they're really interested in is making sure they've got the assurance they can continue to use the software. If SCO makes the price low enough, people will buy certainty. (The legal case) is tough to figure out. It's a real hair ball."

A second shot across the bow
In May, SCO sent its first letter to large companies that are potential Linux users, but on Friday, the Lindon, Utah-based company began sending a second, more threatening letter to a subset of several hundred large companies SCO believes use Linux.

The letter discloses a list of files used in Linux that SCO says violate its Unix intellectual property--specifically, "application binary interfaces" (ABIs), a method by which software can call upon operating system features.

"Use in Linux of any ABI Code...constitutes a violation of the United States Copyright Act. Distribution of the copyrighted ABI Code, or binary code compiled using the ABI code with copyright management information deleted or altered, violates the Digital Millennium Copyright Act," section 1202, SCO said in the letter.

Some legal experts were skeptical.

It would be "premature" for a Linux user to take a license now, said Carr & Ferrell attorney John Ferrell. "At this point, I would continue to watch the litigation between SCO and IBM and the litigation between Red Hat and SCO to determine what rights in the software SCO really has," he said.

McBride said SCO's new legal actions are independent of its case with IBM, currently scheduled to go to trial on April 11, 2005.

Radcliffe also was unconvinced, expressing surprise that SCO pointed out in its letter that the ABI code in question is part of a 1993 settlement of the BSD Unix legal case between the University of California at Berkeley and AT&T's Unix System Laboratories subsidiary. In that case, AT&T had sought a preliminary injunction to prohibit the University of California, which had contributed extensively to Unix, from distributing the source code underlying its version of Unix.

But the judge denied AT&T's injunction request. The problems: AT&T's failure to copyright Unix properly, combined with its distribution of the software to thousands of organizations, led the judge to determine that the software likely is public, Radcliffe said.

"If it's in the BSD agreement, you know there's a high likelihood it's in the public domain," Radcliffe said. "A judge has already expressed the pretty strong belief that it is in the public domain."

Ferrell also had hoped SCO would reveal more. "I'm also disappointed the only thing they can point to at this point is ABI codes. I'd like to see some real software that's been copyrighted," he said. ABIs are "some of the weakest part of the program. It's a functional element rather than a creative element," he said.

Business changes
SCO has begun making changes to reflect its new business. SCO is increasing the number of employees assigned to handling sales of Unix licenses to Linux users.

Thus far, SCO has had only two employees handling SCO license sales, McBride, but starting next week, "we're going to be moving dozens of resources onto this project," he said.

"SCO is shifting decisively from a product company to an asset value recovery company," Illuminata analyst Jonathan Eunice said. "Not that there's necessarily anything wrong with that, if they view that as their primary resource and asset, but if they do not score decisive court victories, that revenue stream will be very short-lived indeed."

Sales of Unix products dropped to $14 million in the quarter ended Oct. 31 from $15.5 million in the year-ago quarter, SCO said. The company hopes to boost sales with an effort to add support for Web services software standard and by a new 64-bit version of its OpenServer product code-named Legend due in 2004, McBride said.

At the same time, legal costs that have been about $2.5 million to $3 million to quarter in the last year are increasing by an additional $1 million to $2 million said Chief Financial Officer Bob Bench on Monday.

SCO had $10.3 million in SCOsource licensing revenue in the quarter, but that will drop dramatically in the current quarter, because the bulk of that revenue came from now-complete Microsoft and Sun Microsystems payments. The company expects revenue to drop to a range of $10 million to $15 million in the current quarter, Bench said.

Partly as a result of a $50 million investment arranged by BayStar Capital in October, SCO now has $64.4 million in cash, the company said.

But SCO believes Unix licenses will pick up in its fiscal second quarter, which runs from March through May. "As we move into the second quarter and beyond, that is going to be a very healthy pipeline," he said. In addition, "several" of the world's 1,000 largest companies signed licenses to let them use Linux, McBride said.

McBride, discussing his company's use of the Samba open-source file sharing software, said Monday his company doesn't have a complaint with open-source programming in general. "We're not taking a shot at the whole open-source community...This is not a case of SCO vs. open source," he said, but rather a case of tainted intellectual property in Linux.

However, SCO's legal strategy contradicts that neutrality. A SCO legal filing asserts that the GPL that governs Linux violates copyright, antitrust and export control laws and the U.S. Constitution.

 

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