Novell clarifies $40M payment to Microsoft as "peace of mind"

In a series of e-mail exchanges that started a couple of evenings ago with a notification from Novell's press relations department about an open letter to the open source community from the company's CEO Ron Hovsepian, I asked Novell spokesperson Kevan Barney why, if as Novell has so vociferously claimed, the company's products do not infringe on Microsoft's patents, it would send a $40 million dollar check to Redmond.

Recently, while speaking at the Professional Association for SQL Server (PASS) summit in Seattle (which came after the Microsoft/Novell deal closed), Microsoft CEO Steve Ballmer made it pretty clear that Microsoft saw distributions of Linux (such as Novell's Suse Linux) as infringing on Microsoft's patents. According to Todd Bishop's excellent text and audio transcript of the exchange that took place between Ballmer and a PASS attendee Ballmer said (excerpted):

....Linux comes from the community -- the fact that that product uses our patented intellectual property is a problem for our shareholders....

....we  agreed on a, we call it an IP bridge, essentially an arrangement under which they pay us some money for the right to tell the customer that anybody who uses Suse Linux is appropriately covered. There will be no patent issues. They've appropriately compensated Microsoft for our intellectual property, which is important to us. In a sense you could say anybody who has got Linux in their data center today sort of has an undisclosed balance sheet liability, because it's not just Microsoft patents....

....only a customer who has Suse Linux actually has paid properly for the use of intellectual property from Microsoft.....

As a side note, it's worth it to keep the "it's not just Microsoft patents" in the back of your mind. As I've written once already, copyrights and trademarks could be at issue as well. But setting that aside for a moment, whereas Microsoft clearly sees patent coverage as at least part of the role of Novell's $40 million payment, Novell has been clear on numerous occasions that it does not believe its products infringe of Microsoft's patents.

So, if the $40 million or some part of it wasn't to compensate Microsoft for patent rights (as Microsoft clearly is suggesting), then what was it for in Novell's mind? Copyrights? Trademarks? So I asked Barney point blank:

Can someone explain what the $40M was for? Specifically.  Why is Novell so coy about this?

Barney wrote back (unedited):

Hi David:

 

That question is addressed as Q5 here: http://www.novell.com/linux/microsoft/faq_opensource.html.

 

I don't think we're being coy.

 

Given that FAQ answer, and the open letter of yesterday, I think it's fairly clear what our intention is ... to give our customers peace of mind. That's why we offer indemnification: http://www.novell.com/licensing/indemnity/ ... to give customers peace of mind. No matter what you or I say about the safety of using Linux, many enterprise customers want additional assurances.

 

As Ron [Hovsepian] said in the open letter, "our agreement with Microsoft is in no way an acknowledgment that Linux infringes upon any Microsoft intellectual property." This agreement is about the customer, who wants to be able to deploy both Linux and Windows, have them work together, and not have to worry about legal issues.

Hope that helps ...

Kevan

Part of the answer to question 5 on the the FAQ that Barney is referring to says "The payments are for Microsoft's covenant directly to Novell's customers." In addition to Barney's letter, it further suggests that Novell's customers need some sort of peace of mind from Microsoft.

But, providing such peace of mind begs additional questions. First, peace of mind from what? About the only thing that could be, especially given what Ballmer said, is peace of mind that they, Novell's customer end users of Linux, won't get sued by Microsoft for misappropriation of its intellectual property. But wait a minute! Novell has already said that it doesn't believe that Linux (and therefore, we must assume Suse Linux) doesn't infringe on any Microsoft intellectual property.

<sidebar>By the way, when one use the term intellectual property, it means all of the above: patents, copyrights, trademarks, and servicemarks. Also, we have to assume that when Hovsepian is saying "Linux" that he's referring to GNU Linux and not just the Linux kernel. Technically, "Linux" means "just the kernel." But, much to the chagrin of the Free Software Foundation, "Linux" is often used as shorthand for "GNU Linux" which covers the kernel and most of the utilities and software that are packaged with most distributions of Linux.</sidebar>

If that's the case, then Microsoft has no grounds on which to sue Novell's customers for misappropriation of IP. So, why then must Novell secure additional peace of mind for customers who theoretically already have it? Even more confounding is the fact that Novell already offers indemnification to its customers. The tagline to Novell's indemnification program is "making Linux a safe viable option for your business." The Web page describing the program goes onto say "Indemnification is offered for copyright infringement claims made by third parties against registered Novell customers who obtain SUSE Enterprise Linux Server 8, SUSE Linux Enterprise Server 9, SUSE Linux Enterprise Server 10 and/or SUSE Linux Enterprise Desktop 10 and who after January 12, 2004 obtain, (1) Upgrade protection; and, (2) a qualifying technical support contract from Novell or a participating Novell channel partner.

Novell already offered customers this sort of peace of mind. Given that, if Novell believes its products don't infringe of Microsoft's intellectual property, then it makes no sense to pay additional money to Microsoft to secure a guarantee it already offers to its customers.

But wait, there's even more that doesn't add up.

In IP litigation, there's an unwritten rule that you don't sue someone unless they have money that can be won from them. Serious money. So, just assuming Microsoft would sue an end-user for misappropriation of its IP, which of Linux's end users have the sort of money (and have infringed to a point that makes a lawsuit worthwhile) that's worth going after? The Fortune 500? The Fortune 2000? The Fortune 5000? Which of them isn't also a Microsoft customer? Which of them isn't an important part of Microsoft's meal ticket. Except for when SCO sued Daimler-Chrysler and Autozone, which was just part of a charade, when was the last time you heard of a major IT vendor suing large customers for misappropriation of IP when it had nothing to do with outright pirating of software (making illegal copies). 

It would be suicide. Not just for Microsoft. But for any IT vendor that starts suing end users. Customers, even one that don't get sued, would start showing them the door so fast that the IT vendor wouldn't know what hit them. It's just what you want, right? A salesperson from your litigious IT supplier walking around your premises taking stock of how many Linux machines you're running and reporting back to his or her masters so the lawyers can come the next time. 

The more you think about it, the more you have to agree that this peace of mind that Novell is talking about is specious at best. Unless of course, Novell is insecure about its non-infringing claim. But, just assuming it isn't, then how else can we explain the $40 million if the peace of mind argument doesn't hold up (which it doesn't).

We're certainly trying to come up with plausible theories. But if there's one that makes a bit of sense, it's the one where Microsoft uses market forces rather than litigation to force Red Hat into a licensing arrangement. It's the one where Microsoft goes to Novell and says we're ready to make you (Novell) whole on that IP of yours that we're infringing on. But to put it all behind us, the deal has to include a $40 million payment to us, out of respect for our IP. In return for that, we promise not sue your customers and you get to say so. It means the indemnification  you now offer is no longer speculative. It's secured.

Let's say I'm a Red Hat customer and I see a major player like Novell pay money to make sure Microsoft doesn't sue its customers. The message is pretty clear. Novell sees Microsoft's threat to sue customers as being credible enough that it's willing to pay $40 million to neutralize it. Now, if you've got any faith in the judgment of Novell's management, then maybe you see things Novell's way and deem threat credible. Or maybe you don't fully subscribe to Novell's thinking but Novell's decision creates enough fear, uncertainty, and doubt in your own mind that its credible enough.

If I'm Microsoft, whether I'm going to sue or not, that's exactly the way I want Red Hat's customers to be thinking: that the threat is credible enough to warrant action. Credible enough to seek more peace of mind. Credible enough that their only option to guarantee safety is to move from Red Hat to Novell. And just in case there are some customers that are on the fence about the threat's credibility, right after I close the deal with Novell, my chief executive comes out for the first time in public and starts alluding to lawsuits against users of Linux by saying how they have "an undisclosed balance sheet liability" and that "anybody who uses Suse Linux is appropriately covered. There will be no patent issues."  It takes Novell completely by surprise.  Ron Hovsepian and crew feel completely sucker punched. But, regardless of what was said behind closed doors, as the deal was signed, in order for Red Hat's customers to perceive Microsoft threat to sue Linux users as even partially credible, it needs the market to perceive Novell's $40 million as respect for its patents. Period. Was the timing of Ballmer's up-ratcheted rhetoric coincidental? You be the judge.

So, it's a gambit. Some -- those who believe Microsoft has no case -- might call it a bluff. But let's say it works. Let's say Red Hat's customers start to move to Novell. Or let's say they threaten to move to Novell. How many customers have to make that move or threaten to make it before Red Hat CEO Matthew Szulik calls up Steve Ballmer and says "OK. You win. How much?" If that happens, Microsoft will have gotten its way without lifting so much as one litigious finger. Not against Linux users. Not against Red Hat.

Plausible? You tell me.