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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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