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Why the Linux Community Needs Open Source Insurance

The Linux community needs a collective, vendor-neutral defense

Last year, after 10 years of almost unbelievably rapid adoption, two new things happened: Linux distributions began to dominate the commercially vital "Post-PC" market for embedded devices; and massive clusters of inexpensive Intel boxes running Linux became a viable way for huge IT-dependent enterprises to run applications from Oracle, SAP, and others, as well as their own custom applications, while saving tens or even hundreds of millions of dollars in direct and indirect hardware and software costs. Providing Linux-related services to corporate clients was a $3 billion opportunity last year - but the explosion of Linux at both the device and enterprise levels now suggests it may well prove to be a $50 billion bonanza within 10 years.

In America, whenever so many billions of dollars get involved, companies under pressure hire lawyers and begin suing each other. Why? Because litigation works well enough, often enough, to get plaintiffs' lawyers excited. For example, before it sued IBM for $3 billion and began claiming publicly that intellectual property it owns got incorporated illegally into the Linux kernel, the SCO Group was a mangy dog of NASDAQ, with a market capitalization of under $25 million, a collapsing business model, and financial statements that suggested it might be a few quarters away from a Chapter 11 filing. Within months of hiring an outstanding litigator, David Boies (best known for humiliating Microsoft in the Justice Department's antitrust case) and hatching a new business plan based on challenging the provenance of the Linux kernel in court proceedings and in public statements, SCO was able to collect over $12 million in new license fees from Microsoft (no hard feelings, David) and Sun, raise over $50 million in new cash from undisclosed equity investors, and see its stock price rise from a low of $1.30 to more than $15 per share, giving it a market capitalization of more than $200 million. Although insiders sold more than $4 million worth of their own stock, an analyst at Deutsche Bank put out a "buy" recommendation and a price target of $25 per share. All this bullishness while the vast majority of journalists and legal analysts who have studied SCO's legal claims find them generally unsupported, at least by the evidence SCO has made public to date.

Regarding both how the Linux kernel got assembled in the first place, and how courts will interpret the General Public License (GPL) under which it is made available, there are a wealth of factual and legal ambiguities out of which skilled lawyers can make plausible-sounding arguments. One can only imagine what will happen to the stock price of the first company that makes a legal claim against the Linux kernel that impartial commentators actually find to be persuasive! When the potential financial rewards of doing so remain so high, it is a virtual certainty that we will see other plaintiffs bringing significant lawsuits, against both vendors and end users of the Linux kernel, within the next few years, even if SCO's current claims are categorically rejected by the courts.

My company, Open Source Risk Management, engages in "war gaming" around Linux and other free and open source software - evaluating "what-if" and "worst-case" scenarios in order to identify the most likely sources of plausible legal claims against end users. We then advise our clients about how to mitigate, or hedge, these risks, and calculate appropriate loss-reserve levels. Two risk areas that have already been well publicized - so I am not giving potential plaintiffs any new ideas - are patent claims and new copyright claims based upon the more than 30 proprietary Unix "flavors" not directly involved in the current copyright dispute between SCO and Novell. (That dispute's impact on end users will in our view eventually boil down to the legal issue of whether AT&T's secret 1993 contractual agreement to drop its copyright lawsuit against BSD and not to sue users of BSD Linux will also remain binding on the successors in interest that are each defending AT&T's rights.

Valid patent claims will be tricky because they potentially cannot be resolved by rewriting, because they ostensibly could cover the "function" of the code. And under some interpretations, if a third-party patent makes it impossible to license the code without paying a royalty of some kind to a third party, the GPL's little-known "freedom or death" provisions could be activated, terminating the entire permission and making the end user liable for extensive copyright violations as well.

On the issue of tracking down who else besides Novell and SCO now holds copyrights that could form the basis for claims against Linux, we have enlisted the help of Pamela Jones, the creator of Groklaw.net. On February 4, 2004, PJ launched the Unix Timeline Project, where more than 400 volunteer contributors, including many of the original creators of Unix and its most eminent historians, are researching every nook and cranny of the tangled licensing history of these sometimes overlooked "other Unixes."

End Users Aren't Protected

A number of prescient for-profit companies calculated that making large financial contributions to an open source operating system that none of them completely owned or controlled but all of them could shape to their needs - Linux - would serve their individual business interests well. For example, IBM and Oracle claim to have each invested over a billion dollars, not only to make their products work well with Linux, but in contributions to the kernel that make Linux work well with their products. And Novell remade itself completely; from a legacy vendor of networking systems, it became the first company to offer a complete Linux stack from enterprise server to desktop application suite. And thanks to a number of innovative vendors, embedded device application developers, who in the past often had to write laboriously hardware-specific software, got powerful new tools that allowed them to write once - for Linux - while leaving Linux to handle the diverse hardware interfaces, rendering proprietary embedded device operating systems largely obsolete.

But the terrible vulnerability of this amorphous shared licensor/copyright holder structure is that the open source code base has no single unified owner who will assume liability, and coordinate a collective defense for the open source community, when end users get sued. And, although this came as a shock to many nonlawyers, both individual and enterprise end users of GPL software that violates a third party's patent rights or copyrights are directly liable (for up to $150,000 per instance of copying for copyright, and up to the lost profits for patent violations) and cannot get these exposures covered by the vendors who licensed them the software or recommended it to them. And if you are paying for legal defense yourself - which can easily cost $3 million in the case of a single patent defense, for instance - the rational course may well be to settle for the nuisance value of the suit rather than fight to the death. Plaintiffs know this, and they know they can extract monies from uninsured defendants even with unmeritorious claims. This is why OSRM looks not only for legitimate claims against Linux, but also superficially plausible ones - what lawyers like to call "colorable" claims.

The for-profit companies have publicly begun to offer limited indemnification - and do more for big customers on a private custom-negotiation basis - but none of the vendors will cover software you got from their competitors or third parties, or modified, or shared with other companies, or fixed bugs in yourself, or got maintenance for from a new service provider without relying on their on-going support contract, etc. In other words, if your company does the things it must be able to do in order to preserve the very efficiencies - or, as Richard Stallman, author of the GPL, prefers, the "freedoms" - of an open source development model, avoiding the "lock-in" of proprietary software, your indemnification will be voided.

The Answer Is Insurance

Rather than demand of vendors that they do what they will never feel comfortable doing - in effect asking them to indemnify their competitors' products and services - we believe that a much better long-term solution is vendor-neutral open source insurance. We propose to offer insurance against a wider range of claims than vendor-based indemnification can cover: not only copyright, but patent, trade secret, and unfair competition as well as other, more novel claims like security breaches, identity theft, etc., and for a wide range of user activities than vendor indemnification reaches: sharing code, modifying code, acquiring code from multiple sources, etc.

OSRM believes that it is in the long-term interests of all the Linux vendors in this marketplace to support a collective, vendor-neutral defense of the open source development model through open source insurance, and we are in fruitful discussions with a number of vendors as I write. One compelling industry-wide result of offering vendor-neutral open source insurance is that end users will be better protected against third-party claims when they use open source and its development model than they are when they use any alternative proprietary software. Then open source wins, not only on grounds of efficiency, freedom, and cost, but in regards comprehensive risk management as well.

More Stories By Daniel Egger

Daniel is the founder and chairman of Open Source Risk Management, LLC, bringing more than 10 years of commercial software development, risk management, and finance experience. Daniel is a graduate of Yale University and the Yale Law School and is currently the first Howard Johnson Foundation Entrepreneur in Residence at Duke University.

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