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

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

Summary: 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.

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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. 

Topic: Enterprise Software

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  • Plausible?

    Plausible isn't the first adjective that springs to mind--bizantine, maybe. However, I wouldn't say it's beyond the realm of possibility, and if this scenario is what's behind all the verbal sparring, I would say that there's close to an even chance it will backfire on MS.
    ebrke
  • Sounds about right.

    You might add that all the protests and promises to rewrite any piece of open source software that violates Microsoft IP feed the fire. If the possibility of IP violation creates that much response, it should be taken seriously.

    Microsoft can't go into Court for various good reasons. But it has found a way to raise the issue.

    The company's next challenge is to mollify all the people annoyed by this problem surfacing again.
    Anton Philidor
    • rewriting code

      if it's a patent that's involved, the rewrite idea is completely useless. rewrites work with copyrights. With patents, it doesn't matter what the wording of the code is.

      db
      dberlind
      • Partly true

        [i]With patents, it doesn't matter what the wording of the code is.[/i]

        That depends. After all, the USPTO might well have given Microsoft a patent on Quicksort. If so, an alternate sort algorithm would get the same results.

        If, for instance, Microsoft has started using Ingo Molnar's O(1) scheduler and got caught doing it, they could rewrite their scheduler to use one of the other algorithms that are still in the public domain. Who knows? Maybe they could get a patent of their own on one of them.

        There's lots of stuff in Donald Knuth's books that haven't been patented yet, after all.
        anonymous
        • Re: Partly true

          [i]That depends. After all, the USPTO might well have given Microsoft a patent on Quicksort. If so, an alternate sort algorithm would get the same results.[/i]

          I wouldn't put it past the USPTO grant a patent on [i]sorting[/i] - the same way it has granted patents for ordering from a catalog, or taking credit card payments, like in the IBM accusations against Amazon.


          :)
          none none
    • SCOX redux

      [i]You might add that all the protests and promises to rewrite any piece of open source software that violates Microsoft IP feed the fire. If the possibility of IP violation creates that much response, it should be taken seriously.[/i]

      It's called "calling the bluff," Anton. It doesn't mean that the maintainers believe the bluff; just the opposite.

      It's also called "respect for the law." If Microsoft has a statutory right to exclude others from using their preciousssss IP, then [b]if[/b] they will simply state their case plainly instead of playing coy, the law-abiding will do the right thing.

      It's as though you were to state that you own the property along one stretch of a trail and [i]might[/i] sue for tresspass. The hikers, quite reasonably, ask that you identify which parts of the trail are yours and offer to take another route [1].

      Offering to take a different route around your alleged property doesn't mean I think you own any of the land in question -- it just means that you have no excuse not to be clear. It also means that I'm not about to give up on an entire 20-mile trail just because you [b]might[/b] have rights to a few feet of it.

      If you keep playing coy and refuse to post your property, you stand an excellent chance of establishing a right of way by waiver. In other words, you lose forever the right to block access.

      Now, when the situation is in terms of property rights and tresspass, it's pretty obvious that you don't have a case unless you actually post your property; it's even black-letter law. In "intellectual property" situations people aren't used to the equivalent rules, but the analogous ones still apply.

      Notably, you can't claim damages for infringements which you yourself contributed to. It's called "mitigation of damages," and refusal to allow alleged infringers to stop starts by removing your ability to collect damages and rapidly progresses to the IP equivalent of that right of way: license by waiver.

      One reason that Red Hat might well file for a declaratory judgment action is that it's [b]really[/b] cheap to begin with, and the first thing that happens is Red Hat serves Microsoft with a discovery interrogatory over just what MS claims rights to. Anything not identified in reply is off the table -- permanently. Dang useful, that, even if RHAT decides to settle on some of the points. More likely, they then challenge the validity of the claimed patents and get the case stayed while the Patent Office does a review.

      Either way, advantage Red Hat.

      [1] If you're Don "No Ax" Rupert, you refuse on the grounds that you don't have to and are keeping your property boundaries secret so you can increase the damages you'll claim in the lawsuit, of course.
      anonymous
  • Fool's Mate

    Or, alternately, Microsoft fell into the novice chess players' trap of playing for the fool's mate. It's a lousy opening; the only way it works is if the other player makes exactly the moves that you want them to.

    Outside of chess, the fallacy is to assume that your opponent will make the moves that suit your plans -- a fundamental error in game theory, where the opponent must be assumed to make the moves that work [i]worst[/i] for your plans.

    As I've mentioned before, it looks to me as though Ballmer has made more than enough public threats to meet the statutory requirements for a declaratory judgment action and there are plenty of players (IBM and Red Hat to name only two) who have to consider trade libel (FUD) as more expensive than lawyers.

    That move alone -- just the filing of the suit -- would signal a degree of confidence that would go a [b]very[/b] long way to neutralize the FUD as well.
    anonymous
    • You're probably thinking about Scholar's Mate.

      Fool's Mate is a way to lose in two moves if one insists. Scholar's mate is more spophistcated, but does involve excessive vulnerability by exposing the Queen too early.

      The question is whether Red Hat would gain or lose by a full inquiry into any IP problems in Linux.

      If Microsoft's attornies have replicated those by the group which was starting an open source insurance program, for instance, that material could become public in the suit.

      Public questions about the IP status of open source only harm open source. Also, it's just about impossible to avoid having some IP problems, and the result is confirmation that problems exist.

      Not a good sales point for Red Hat or any other open source company. I think that's closer to Fool's Mate than anything Microsoft could or wants to do.
      Anton Philidor
    • Declaratory nonsense

      Declaratory judgment for what? That certain patents are invalid? Why bother spending our money on this? Just to get a court declaration about it?

      As for trade libel, why would Linux sully its wonderful trademark by claiming that Microsoft is libeling it? Who needs a lawsuit? We need patent peace and reconciliation between Microsoft and open source that allows both type of products to coexist (until, perhaps, one does away with the other in the ordinary course of life).

      The Microsoft/Novell deal isn't what we need, but getting a court to declare that won't be helpful.
      lrosen
  • Protection racket

    I'll let this comment from Wikipedia be my comment. I think it about sizes up what Microsoft is doing with the promise not to sue:



    A protection racket is an extortion scheme whereby a powerful organization, most often a criminal organization or gang, coerces individuals or businesses to pay protection money which allegedly serves to purchase the organization's "protection" services against various external threats. Those who do not buy into the protection plan are often targeted by criminals existing outside of the organization. These crimes are typically thought to originate from the organization itself. When a business refuses to pay for protection, word is put out that they are outside of the local organisation's protection (these organisations often exist in the absence of a trusted police force) and that the business in question is therefore free game for freelance criminals or the organization itself.
    lostinspace
    • Protestion racket plus a new level of FUD

      This is Microsoft up to their old tricks, trying to scare GNU-Linux users. After SCO's case has been pretty much blown out of the water, Microsoft needed a new way to keep GNU-Linux out of the corporate server farm. This "protection" scheme looks like just their ticket!

      All Microsoft needs to do to keep GNU-Linux out of many corporate server farms is to say to corporate CEO types that Microsoft might serve GNU-Linux end users with lawsuits for using Microsoft's IP without permission. Internally, corporate lawyers will go ballistic, and order that Microsoft's products or Novell's products be used exclusively in the IT department.

      Microsoft wins two ways!

      First, Microsoft gets a lot of money and publicity for doing nothing more than threaten the GNU-Linux community, resulting a payoff from Novell for "protection".

      Second, Microsoft scares a lot of corporate IT people into ordering dozens of expensive Microsoft Server licenses, precisely because there is some doubt as to whether or not GNU-Linux infringes on Microsoft's IP.

      At this point, Microsoft does not have to prove a damn thing! All they had to do is exactly what they have just done. Step back and watch what is about to happen. I predict Microsoft will soon sell a ton of server licenses. And, you can expect Microsoft will claim those server license sales as "wins" for Microsoft's "superior technology" and their "better ROI".

      If this isn't an obvious "protection" scheme, I don't know what is. By making this deal with Novell, Microsoft is now threatening everyone else, and generating tons of FUD in the process. Worse, until someone with the financial and legal muscle to call Microsoft on there IP claim comes along, Microsoft will continue to rake in tons of money from server licenses, and almost all of them sold out of fear of Microsoft's lawyers.

      It looks to me like Halloween came a few weeks late this year.
      rgetsla
      • and Novell writes it off as ad expense

        $ 40 million - pretty cheap if it's really effective as both advertising and a sales point in selling large-scale corporate customers - just another oprating expense - they've probably spent a lot more for a lot less effective sales tools in the past
        IAFarm2
  • Watch customers actions

    Article is an effective summary of the situation.

    If customer behavior is the best indication of the market's confidence either for or against Novell's new redundant "peace of mind," then it is just as important to watch European <em>defections from</em> SuSE as it would be to watch any potential North American actions in either direction.

    I believe organizations see this move by Microsoft at face value: as an extension of SCO FUD and will be planning on using no corporate Linux but shifting plans to the pure versions, Debian, Ubuntu, etc.
    swhiser
  • Sign the Petition

    If you oppose the MS/Novell deal then sign the <a href="http://techp.org/petition/show/1"> Petition.</a>
    Tim Patterson
  • Mafia money

    If MS wants to interoperate with Linux they should do so freely without money.
    Gridmaster
  • Extortion racket

    "Every time, they (Microsoft) ask us (resellers) to come for meetings and they never allow the local association to get involved in the issue. Resellers are toiling on the field to earn Rs 5/10, while they demand in thousands and lakh as compensation and fine," said another reseller who is also involved in the issue.

    http://www.dqweek.com/content/top_stories/106112401.asp

    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.

    Do I see a method here? The extortion of pirates comes in handy in the above case?
    kmashraf
  • ms and novell

    This is pretty simple, I think:

    divide and conquer.
    sns@...
  • A Game of Poker

    If we look at it today, there is probably nothing in Novell's offerings that Microsoft can sue them or their customers over. (I think Novell should sue Microsoft over their implementation of Active Directory, SMS and a lot of other things, but that is irrelevant).

    The outcome of this "joining" of the two forces <i>may</i> have some Microsoft-developed code in it that technically could be the subject of a lawsuit. $40M pays for piece of mind. It would prevent even a frivolous lawsuit by Microsoft that would probably cost more than $40M in litigation expenses. It would be paying for "piece of mind" in that respect.

    My only thought is: why isn't Microsoft paying Novell? Isn't Microsoft going to get something out of this besides the $40M? Could they possibly get eDirectory? ZenWorks? I really think Novell is dealing from a point of weakness in this whole matter. As many have said, I think that Microsoft is going to benefit more from this than Novell will. I mean, put $40M on Microsoft's side of this package.
    hforman@...
  • How Do You Suppose?

    Microsoft got where they are?
    By using just such Mafia tactics as this.
    And the reason they are so successful is just such media attention, intellectual questions and discussions as these.
    It gives me "piece of mind" to give Novelle a "piece of MY mind". They can do the same as Microsoft....take it and shove it....where the sun don't shine.
    Ole Man
  • Good for Novell

    Good job novell. Keith Knutsson
    KKnutsson