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SCO's IP Gamble

Looking at the challenges from a legal point of view

Anyone reading this is likely aware of The SCO Group's claim to intellectual property (IP) rights in the Linux kernel. SCO hired legal guru David Boies (who prosecuted the government's case against Microsoft) and initiated a two-pronged litigation and marketing attack.

To recap: in March 2003 SCO sued IBM for breach of its software agreements with SCO, misappropriation of SCO's trade secrets in Unix, and wrongful dissemination of those trade secrets via IBM's contributions to open source and Linux. In May, SCO wrote to 1,500 of the world's largest companies, asserting that Linux infringes SCO's IP rights and that end users may face legal liability from the use of Linux. In July, SCO registered for copyrights in its Unix-based systems, and in August announced the availability of a $699 per CPU system "license" for Linux end users "to cure the SCO IP infringement issues for Linux operating systems." And SCO has engaged in an aggressive press campaign, repeatedly asserting that Linux software developers violated SCO's Unix IP rights.

It's no secret that SCO is banking heavily on its IP strategy to achieve profitability after years of multiple million-dollar losses. SCO acknowledged that licensing income would be used in part to "continue our intellectual property protection and licensing initiative," i.e., funding its legal battles with IBM and others such as Red Hat, who initiated a lawsuit against SCO in August in an effort to clear the SCO-created cloud from Red Hat Linux. The plan has worked so far, as SCO's Q3-FY2003 results show positive net income (due primarily to $7.3 million in licensing revenue) and its stock price has risen eightfold since March.

While the open source community fumes, SCO's IP strategy is far from new. As an industry matures, it becomes a target for IP holders. The semiconductor industry saw an explosion of patent litigation in the 1980s, as companies jockeyed for market share and used their IP to protect that share and generate revenue. Texas Instruments, for example, reported patent licensing revenue of $521 million in 1993, primarily from its semiconductorrelated patents; this was more income than TI made from selling semiconductor products. IBM itself is no stranger to the IP game, reportedly realizing $1.7 billion in patent royalties in 2001. And well-known organizations such as the Lemelson Foundation and Ronald A. Katz Technology Licensing do not make or sell products at all, but generate billions of dollars in revenue from patent litigation and licensing.

SCO's effort to emulate these companies, however, is a long shot at best. SCO's asserted IP rights are limited to copyright and trade secrets, whereas successful licensors historically rely on patent rights. The differences are significant. One key distinction is that patent infringement is a strictliability claim; a company so charged cannot rely on the fact that it independently designed the infringing technology. In contrast, copyright and trade secret claims are both subject to the defense of independent creation. Another difference is that welldrafted patents may provide very broad protection over a particular invention, for example, by covering all methods of producing a product or achieving a specific result. Source code copyright claims, however, require more than showing that the offending code achieves the same result as the copyrighted code – there must be evidence that the offending code was copied, at least in part, from the copyrighted code.

These differences mean that IBM and Red Hat may defeat SCO's copyright and trade secret claims by showing they independently wrote the Linux code in question. Further, trade secret claims may also be defeated by showing the "secret" was not properly maintained or was subject to discovery through reverseengineering. This latter point is particularly relevant, as SCO openly marketed UnitedLinux 1.0, and therefore arguably disclosed the very trade secrets (presumably, Unix functionality – SCO has been vague on this point) it now seeks to protect.

SCO faces other challenges. In a countersuit, IBM claimed that SCO's distribution of UnitedLinux was subject to the terms of the General Public License (GPL), and that SCO's attempt to collect licensing fees violates those terms. IBM also sued SCO for patent infringement, asserting four patents against a broad array of SCO products.

Without its own patent claims, the deck is stacked against SCO, and if IBM and/or Red Hat succeeds on the merits, SCO's IP claims against others will be toothless. Nonetheless, there are very few certainties in litigation, as IBM and Red Hat well know. If SCO mounts enough of an attack to sustain the cases towards trial, the risks may be too great for IBM and Red Hat to continue, and settlement is possible. If that occurs, the rest of the industry best be prepared to open its checkbook. And while SCO may be the first to attack the open source community, history shows others will follow. As the popularity of Linux grows, the suppliers of Linux operating systems (i.e., those that generate revenue from Linux product sales) inevitably become a more inviting target for IP holders worldwide.

More Stories By Brian Ferguson

Brian E. Ferguson is a partner in the Washington, D.C. office of the international law firm McDermott, Will & Emery. He specializes in intellectual property litigation and counseling.

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Most Recent Comments
Joe 12/26/03 06:25:53 AM EST

This is an excellent article, congratulations.

Something I would add is that if SCO is to follow copyright laws, it should have tried to mitigate damages by those it claims are infringing its copyrights (which are not their copyrights since Novell is contesting this). SCO has denied Linux developers their right to see where they are purportedly infringing on SCO's "intellectual property".

Another point is the confusion that SCO spokespeople are generating by a whole lot of misleading arguments such as:

- Claim of ownership of UNIX when SCO doesn’t even own the UNIX trademark (the Open Group owns this trademark).
- Claiming to be the same company that bought the UNIX licensing business from Novell, while they are not. The current SCO bought assets (including UNIX licensing business and SCO trademark) from original SCO (Santa Cruz Operations) a couple of years ago, and then changed its name from “Caldera” to “The SCO Group” when started with its litigation against IBM.
- A whole lot more of misleading and false statements…


Rudisaurus 12/01/03 06:18:54 AM EST

"Nonetheless, there are very few certainties in litigation, as IBM and Red Hat well know. If SCO mounts enough of an attack to sustain the cases towards trial, the risks may be too great for IBM and Red Hat to continue, and settlement is possible. If that occurs, the rest of the industry best be prepared to open its checkbook."

Are you seriously attempting to suggest that IBM and Red Hat cannot afford for this matter to reach the trial stage, Brian? That is patent nonsense, as you (should) well know. It has been clearly established over the past 8 months or so (ref. that the one party which cannot afford for this matter to actually reach the courts themselves is SCO, and that the party which continues to sow fear, uncertainty, and doubt about Linux and the GPL far and wide while failing to provide any trace of relevance or shred of credible evidence of copyright infringement or contract breach is that same group of litigious miscreants.

What a pity they didn't choose to devote the amounts of energy and resources they've squandered on this sordid matter to actually improving their so-called IP instead.

Fuzzy 11/30/03 09:49:44 PM EST

Why would IBM or RedHat or that matter any company relying on Linux as it's core business strategy settle ?

As I understand it (and from what I see) IBM had not only spent a LOT of money on marketing and developing Linux but have shifted their whole business strategy on it.

RedHat is a purely Linux business. That's all they do... why would they settle ?

Also, RedHat, from what I understand, have not countersued SCO regarding copyright or patent infringment but rather that SCO is damaging potential business by using scare tactics without providing proof (ie. Attempting to charge $699 for a linux licence without proving that there has been infringment). Their case is to simply have SCO either prove that there has been infringment and show what it is (without an NDA) or to shut-up.

Chuck Talk 10/16/03 08:49:34 PM EDT

I still would never open my checkbook to SCO Group. I would simply throw them out. Anything they do means their ultimate demise as a company, because I would simply move toward HURD or BSD and tell them to go and self-procreate.

That is all that anyone needs to know.