2004 B.C. Intell. Prop. & Tech. F. 041601
SCO, IBM Battle Over Software Rights

On March 6, 2003, The SCO Group (formerly called Caldera Systems) filed suit against IBM in the 3rd District Court of Salt Lake City, alleging that IBM misappropriated portions of its Unix operating system and built it into Linux software. SCO’s initial complaint charged IBM with misappropriation of trade secrets, tortious interference, unfair competition, and breach of contract and sought $1 billion in damages. IBM removed the case to the District of Utah in May. SCO amended its complaint in February to add copyright infringement claims and additional breach of contract claims. The amended complaint also withdrew the trade secret misappropriation claims and increased the damages to $5 billion.

Most versions of Unix, including an IBM product called AIX, are based on code invented at AT&T Corp. and now owned and licensed by SCO. Unix has a reputation as one of the most powerful operating systems for heavy-duty computing tasks and is used by many large corporations and universities. When Darl McBride became SCO’s president and CEO in 2002, the company’s revenues were dwindling, partially as a result of the ever-improving and free Linux. When IBM’s software president said he hoped to replace its SCO-derived AIX with Linux, McBride began to wonder how Linux had so quickly changed from a software programmer’s toy to a rival of the heavy-duty Unix code.

In 1991, a computer student in Finland named Linus Torvalds created Linux as an alternative operating system to Microsoft’s Windows and Unix. He put his program online and posted messages asking software programmers around the world to help improve it. Thousands of programmers responded and Torvalds adopted many suggestions into the code. Today, Linux is the fastest-growing operating system in the world, and powers many devices such as Web servers, desktop computers and TiVo digital recorders.

Early versions of Linux paled in comparison to Unix. However, since its inception in 1991, and particularly in the past five years, constant free upgrades have significantly improved Linux. Linux is mostly distributed free over the internet, but paid copies have risen from 1.1M in 2000 to 1.4M in 2003 and now represent 24% of the worldwide market.

Given the rapid pace which Linux seemed to have caught up to Unix, McBride began to wonder whether IBM was donating code from AIX to Linux to make the two operating systems functionally equivalent, and thus bring an end to SCO. McBride said IBM’s license with SCO forbids them from doing this.

McBride ordered SCO’s engineers and outside experts to examine the code. He claims they have uncovered dozens of examples in which IBM took large portions of AIX and incorporated them into Linux. SCO did not disclose which portions of the code were copied until filing the amended complaint in February. IBM has dismissed the lawsuit as a desperate claim from a software company past its prime and countersued in August, charging SCO with patent infringement, breach of contract, deceptive trade practices, unfair competition and violation of the Linux public development and distribution license. IBM further claimed that SCO didn’t have grounds to sue because SCO also distributed Linux.

Linux is “open-source” software, meaning that anyone can get the raw source code of the software and make modifications to it. The GNU General Public License (GPL), on which nearly all open-source software is based, requires that programmers must make their modifications available and accessible to the public. Large companies and the government have been using Linux for years as a low-cost alternative to proprietary systems such as Microsoft’s Windows which cause companies to incur large annual fees. North Carolina-based Red Hat, Inc., which specializes in providing free Linux software while clients pay for service and support, has begun its own fight against SCO, filing suit in federal court seeking a declaratory judgment that it did not violate SCO’s rights. Red Hat claims that SCO is trying to create fear and uncertainty in the company’s business and is seeking an injunction barring SCO from making claims against Red Hat. SCO responded by striking at the heart of the open-source community – asserting in its answer that federal copyright law preempts the GPL.

SCO is also threatening legal action against the companies that use Linux, including Red Hat, and will try to force them to pay millions in licensing fees for parts of the free operating system that SCO claims come from Unix code. In May 2003, SCO sent out letters to 1,500 commercial users of Linux telling them about the lawsuit and saying they were “prepared to take all actions necessary to stop the ongoing violation of our intellectual property or other rights.” The company has already filed suit against DaimlerChrysler and AutoZone, accusing them of using Linux software without permission. SCO has also begun suing Novell, McBride’s former employer and the company that sold Unix to SCO in 1994, alleging that Novell is interfering with SCO’s effort to enforce its copyrights. SCO alleges that Novell improperly filed Unix copyright registrations and made false public statements regarding the ownership of Unix and UnixWare.

In March, EV1Servers, a division of Everyones Internet, Inc., was the first to announce that it had purchased licenses that allow the use of SCO intellectual property on all Linux servers managed by EV1Servers.net in each of its hosting facilities. EV1Servers decided to purchase licenses after believing they would become a target of an SCO lawsuit as another large user of Linux.

Part of the reason for the lawsuit against IBM comes from a failed partnership called Project Monterey where IBM, SCO, and now-extinct Sequent agreed to create a version of Unix for Intel’s Itanium processors. SCO claims that it shared expertise with IBM on how to best run Unix on Intel processors for that project, but IBM canceled its Monterey plans and then appropriated the proprietary information obtained from SCO for its own business.

Over the past year, SCO has been the target of much venom in the software industry, mostly because SCO refused until February to publicly reveal which pieces of its code were copied, leading many to believe the lawsuit was frivolous. Further, people in the open-source community are furious over SCO’s attempt to gain control over Linux and to invalidate the GPL. The SCO Group website also has been targeted by vandals four times in the past year, including the recent Mydoom virus, which sent billions of data requests to the SCO site, apparently knocking it offline.

Fortunately for SCO shareholders, the lawsuit has not had a negative effect on revenues. In fact, the company has seen its revenues rise 25% and its share price rise from $1.89 a year ago to as high as $22 and close at $10.72 on April 5. The SCO Group has $79.3 million in revenues – small for a software company, especially compared to IBM’s $89.1 billion. Critics claim comparing the amount of damages sought to the company’s revenues points to the true motive behind the lawsuit – SCO cannot win in the marketplace, so it will attempt to win in court.

If SCO succeeds in its suit, it will cripple Linux, which has grown to be a major rival to Microsoft’s Windows operating system, and alter the landscape of the open-source community. Proprietary software companies such as Microsoft have sided with SCO, while open-source developers have backed IBM. Some reports have linked Microsoft to venture capital firms that are funding SCO and a recent leaked SCO memo said Microsoft had raised $86 million to help SCO. SCO bolstered its legal team by hiring David Boies of Boies, Schiller and Flexner. Boies is the attorney who prosecuted Microsoft on behalf of the U.S. Justice Department, represented Al Gore in the vote-counting controversy in the presidential election, and represented Napster in its suit against the RIAA.

The outcome is still very much in doubt, but could have far-reaching consequences. IBM has deep pockets and will certainly fight to protect its reputation and the free software community, in which it has invested more than $2 billion. SCO canceled IBM’s AIX license in June and IT departments everywhere are wondering how this legal battle will affect computer systems. If SCO wins, they will begin seeking license fees from all major companies that use Linux-based systems in the range of $699 - $1,399 per computer. Corporate users of Linux must decide whether to risk getting sued by SCO or begin paying licensing fees – the same fees many companies sought to avoid when they decided to use Linux. Many of those companies are presently seeking indemnification from their suppliers, such as Red Hat. Red Hat has not offered indemnification to its customers, and it is unclear if their agreements with its customers cover SCO’s claim. Conversely, Hewlett-Packard customers also received letters from SCO, but HP has agreed to indemnify its customers against claims brought against them by SCO. An SCO victory would not only trigger lawsuits by SCO against corporate users of Linux, but also indemnification suits by those companies against their providers of the software, service, and support. Further, if SCO succeeds in its attempt to subordinate the GPL to its copyright claims, the open-source community would have to wonder whether anyone really has a right to free software.

Whatever the outcome, it is clear that legal teams on all sides will be very busy.

Linux Litigation Endangers Future Of The Open-Source Software Movement
By Krysten Crawford, Broward Daily Business Review, March 17, 2004

EV1Servers Understimated Reaction
By Karen Snider, theWHIR.com, March 5, 2004

SCO Sign Intellectual Property License Agreement with Leading Dedicated Server Provider
Press Release, The SCO Group, March 1, 2004

IBM Won’t Oppose SCO’s Copyright Claim
By Alexander Wolfe, internetnews.com, February 26, 2004

The Great Debate: Is Open Source Software the Future or Mere Fantasy?
By Paul Rubell, New York Law Journal, February 24, 2004

Linux Steps Into The Limelight
By Gregg Wallace, The Hilltop, February 17, 2004

Mr. Unpopular
By Hiawatha Bray, The Boston Globe, February 4, 2004

SCO To Expand Its Lawsuit Beyond Linux
By Michael Singer, atnewyork.com, November 19, 2003

SCO Group Vs. Big Blue: The Free-Software Battle, Unix Owner Takes A Swing At Open-Source Software Community
By Jim Barthold, Corporate Legal Times, November 2003

IBM Countersues SCO Over Patents, Linux Distribution
By William M. Bulkeley and David Bank, The Wall Street Journal, August 8, 2003

SCO sues Big Blue over Unix, Linux
By Stephen Shankland, CNET News.com, March 6, 2003

The SCO v IBM website
http://sco.iwethey.org/

Slashdot
http://www.slashdot.org/

Groklaw
http://www.groklaw.net/

Yahoo! Finance
http://finance.yahoo.com/

Hoover's Online
http://www.hoovers.com/