On Tuesday a consortium of technology companies, including IBM (IBM), will launch a new initiative designed to help shield the open-source software community from threats posed by companies or individuals holding dubious software patents and seeking payment for alleged infringements by open-source software products.

The most novel feature of the new program, to be known as Linux Defenders, will be its call to independent open-source software developers all over the world to start submitting their new software inventions to Linux Defenders (Web site due to be operational Tuesday) so that the group’s attorneys and engineers can, for no charge, help shape, structure, and document the invention in the form of a “defensive publication.”

Linux Defenders will then also see to it that the publication, duly attributing authorship of the invention to the developer who submitted it, is filed on the IP.com Web site, a database used by the U.S. Patent and Trademark Office and other patent examiners throughout the world when they are trying to determine whether a proposed patent is truly novel, as any patentable invention is supposed to be.

In effect, the defensive-publications initiative mounts a preemptive attack upon those who would try to patent purported software inventions that are not truly novel — i.e., innovations that are already known and in use, though no one may have ever previously bothered to document them, let alone obtain a patent on them, a process usually requiring the hiring of attorneys as well as payment of significant filing fees.

“The idea is to create a defensive patent shield or no-fly zone around Linux,” says Keith Bergelt, the chief executive officer of Open Invention Network, the consortium launching the site. The core members of that group, formed in 2005, are IBM, NEC, Novell (NOVL), Philips, Red Hat (RHT) and Sony.

OIN’s Linux Defender program is being co-sponsored by two of the most prominent guardians of the free- and open-source software community, the Linux Foundation in San Francisco and the Software Freedom Law Center in New York. In addition, the site is being hosted and “co-developed” by New York Law School, which has, since June 2007, been sponsoring, in coordination with the U.S. Patent and Trademark Office, its own well-received, complementary project, known as the Peer to Patent Community Patent Review site. That site solicits assistance from the open-source community to produce evidence that an invention for which a patent is currently being sought was actually already known or in use prior to the patent applicant’s filing.

So-called free- and open-source software is software that, by its licensing terms, confers certain “freedoms” upon users that are usually forbidden by conventional proprietary software companies, like Microsoft. These freedoms include the right to see the software’s source code, alter it, copy it, and redistribute it. The best known open-source product is Linux, or GNU/Linux, a complete open-source operating system that has become quite popular among Fortune 500 corporations for use on their data-center servers. Patents threaten the whole free-and-open-source eco-system, however, in that none of the key open-source freedoms can be practiced if an outsider can establish that a given piece of software infringes a valid patent he holds.

The Linux Defenders program is largely the brainchild of Bergelt, who took over as Open Invention Network’s CEO this past February. The program also reflects a new, more proactive role Bergelt envisions for OIN than the group has played in the past.

Until now, OIN’s purpose has been one-dimensional: to acquire a defensive portfolio of strategically crucial patents, which OIN makes available, royalty free, to any company that reciprocally agrees not to assert any of its own patents against the Linux community. (About 50 companies have already entered into such formal agreements with OIN, of which the best known are probably Google (GOOG) and Oracle (ORCL).) The implicit threat is that if any outsider — a Microsoft, (MSFT) say, which declared publicly in May 2007 that open-source software then violated 235 of its patents — were to ever bring a patent suit against a player in the Linux community, that outsider would, in turn, risk countersuit by OIN or its member companies asserting infringement of their own patents by the outsider.

While this IP-acquisition program remains a central one for OIN, Bergelt says, OIN will also now seek to “think more creatively” about other ways to protect and foster Linux’s development by means of “relationship-building” and “information-sharing,” including efforts to explain the importance of open-source and open-platform approaches to the media, patent officials, and competition authorities, among others.

Befitting someone who plans to tackle this ambitious range of goals, Bergelt has a background that is more diverse than that of his intellectual-property lawyer predecessor, Jerry Rosenthal, who, prior to heading OIN, had served as IBM’s IP-licensing chief. Though Bergelt is also an IP lawyer, he is, in addition, an entrepreneur and diplomat. Immediately prior to joining OIN, Bergelt was the president and CEO of the intellectual-property focused hedge fund Paradox Capital. Before that, he was a senior advisor to private-equity fund Texas Pacific Group (now TPG); headed the strategic intellectual asset management unit at Motorola; and co-founded the strategic intellectual asset management unit within the electronics and telecommunications group at SRI Consulting in Menlo Park. Earlier still in his career, he spent 12 years as a U.S. foreign service officer, including a posting to the U.S. Embassy in Tokyo, where he negotiated IP rights agreements with certain Asian countries, including China.

The Linux Defenders program will actually have three components. The first will be a peer-to-patent component that, like New York Law School’s existing program, will reach out to the open-source community in search of evidence of “prior art” — proof of preexisting knowledge or use of certain inventions — that can be used to challenge applications for patents that have been filed but not yet granted. The goal here is to persuade patent examiners not to grant the patent being sought because the invention is not truly novel.

The second component will be a natural extension of the first, to be known as “Post-Grant Peer to Patent,” which will enlist similar community assistance in the search for prior art relevant to patents that have already actually issued. In this case, the goal would be — assuming such prior art is found — to initiate an administrative reexamination proceeding before the U.S. PTO to get the patent invalidated. (There have been some earlier post-grant, peer-to-patent efforts — sometimes referred to as peer-to-issue programs — by both nonprofits and private companies, but none with the commitment, and on the scale, that OIN envisions, Bergelt says.)

The third component is the defensive-publications initiative. The phenomenon of defensive publication is also not new, Bergelt acknowledges, although it has primarily been used in the past by private companies protecting proprietary business models. Since at least the 1970s, he says, when the filing of an important patent by one company would often spur rivals to respond by seeking inter-related patents designed to restrict the usefulness of the first company’s filing, proprietary companies began using defensive publication to beef up and buffer their core patents.

“They’d file one patent,” Bergelt explains, “and then the next day they’d file thirty defensive publications that would protect all of the extensions of it they could think of, so the core patent was fenced off by layers of barbed wire, if you will. . . . What I’ve done is turn that idea on its head a little bit.” (Defensive publications are cheaper and easier to prepare than full-fledged patent-applications.)

Although some factions of the free- and open-source community are ideologically opposed to the whole notion of software patents — most notably and passionately Richard Stallman, the founder of the Free Software Foundation (which is a client of Linux-Defenders co-sponsor Software Freedom Law Center, which, in turn,  supports the End Software Patents organization) — neither Bergelt nor OIN fall into that camp.

“We’re not anti-patent by any stretch of the imagination,” says Bergelt. “More patents is fine with me, as long as they’re high quality. Quality is the drum we beat.”

In fact, Bergelt says, if a developer wants to get an actual patent on his invention, and then put defensive publications around it, Linux Defenders will help him do so — so long as the developer will ultimately be contributing the patent to the Linux community.

Attempting to ride a wave of corporate and judicial disenchantment with aspects of the current patent system, a new project was unveiled Thursday designed to, as its name bluntly indicates, End Software Patents. (Press release is here. The group’s “first yearly report” on the state of software patents is here.)

The group is intended to become a clearinghouse for information and a hub for those strategizing legal challenges, according to its executive director, Ben Klemens. Though End Software Patents will not initiate litigation of its own, it will be on the lookout for appropriate test cases to support as they arise, he says.

Though the project is being sponsored and funded by leaders of the Free and Open Source Software movement, it hopes to attract support from the wider community of businesses, financial institutions and universities that have all been blindsided in recent years by lawsuits over software patents and their close-cousins, business-method patents.

The End Software Patents Web site, here, highlights a long list of diverse businesses that have been sued for allegedly infringing software patents, including the Green Bay Packers, OfficeMax, Caterpillar, Kraft Foods , ADT Security Services, AutoNation, Wal-Mart , Walgreen , Barnes & Noble, Circuit City Stores , Ford Motor , E I du Pont de Nemours and Co. , and so on. In most cases, the companies have been sued because of certain basic, routine functions performed on their Web sites — the way images are displayed, the way data is gathered or transmitted — which are said to infringe software patents.

The group also hopes to attract support from the many financial institutions, including JP Morgan , Merrill Lynch , and NCR Corp. , that have been asked to pay patent holding company DataTreasury for permission to send check images over the Internet. (For a Washington Post story about remarkable proposed federal legislation directed specifically at the DataTreasury patent, click here.)

The point, explains Klemens, is this: “If you’re running a business of any sort, you have to care about the software and business method patents.” That’s because nearly every business today operates a Web site and employs a staff of in-house IT programmers who enable them to conduct business in the digital age. In that sense, every business is now a software business.

Klemens is a mathematician (a guest scholar at the Brookings Institution since 2003) who uses algorithms to analyze data. In a recent article, for instance, he and his co-authors use data analysis to link certain genes to bipolar disorder. “I often run into patents on statistical methods and mathematical algorithms of the type that I implement,” Klemens says. “I don’t think I violate the ones I’ve seen, but I could be wrong, and I don’t know what else is out there. . . . That’s the thing that really woke me up: by doing pure math, I face legal liability. As far as I know, that’s a first in human history.” Klemens’s personal Web site is here.

In a 2005 book, Mathematics You Can’t Use, Klemens criticizes software patents from an economic and legal perspective, and does so in unusually crystalline, easy-to-understand terms. (For chapter one, see here, and for chapter six, see here.)

The book attracted the attention of the Free Software Foundation, whose president, Richard Stallman, has been railing against software patents since at least 1991, for related, but narrower, reasons: they posed a potentially mortal threat to his brainchild, free software — i.e., software, like Linux, that programmers are able freely to examine, modify, and redistribute without fear that their work will ever be taken out of circulation, declared off-limits, or placed behind a toll-booth by private proprietors. (For a feature story on the tension between patents and free and open software, “Microsoft Takes On the Free World,” see here. Generally speaking, though, software patents present dangerous traps for any programmer. Unlike copyrights, which are difficult to infringe inadvertently, a programmer can easily write software that inadvertently infringes someone else’s patent. That happens whenever the programmer independently comes up with an innovation that, unbeknownst to him, someone else has already staked a claim to. While copyrights are relatively easy to write around — since they protect only particular sequences of words or code — patents present broader, vaguer, and more durable obstacles, since they purport to proprietize implementations of ideas.)

In Klemens, the Free Software Foundation saw a potential ally who, thanks to the breadth of his critique and clarity of his writing, could attract a broader audience than just free and open source programmers. “We came to him,” says Peter Brown, the foundation’s executive director, “and said, we really want to fund your work. And he said yes.”

At the moment, the End Software Patents project is formally an offshoot of the Free Software Foundation. It also enjoys the “sponsorship” — though not monetary support — of the Software Freedom Law Center, which is led by Eben Moglen (an outside lawyer for the FSF and its former general counsel), and of the Public Patent Foundation, an organization led by the center’s legal director Dan Ravicher. The Software Freedom Law Center is itself funded largely by such Linux-supporting corporate patrons as IBM (IBM), Hewlett-Packard (HPQ), Red Hat (RHT), Novell (NOVL), Oracle (ORCL), and Sun Microsystems (JAVA).

To be sure, the goal of abolishing software patents remains a radical position in the sense that very few corporations endorse it. (A surprising exception is pharmaceutical manufacturer Eli Lilly & Co. See here. Evidently Lilly recognizes that poor quality software patents are among the problems spurring the tech industry to seek patent reforms, and it hopes to find of way of placating the tech industry without weakening protections for the drug patents that are the lifeblood of the pharmaceutical industry.)

Though many information technology companies, like IBM, Hewlett-Packard, and Cisco, are publicly championing patent reform, they only favor improving the quality of software patents, not abolishing them. After all, there are estimated to be more than 200,000 active, issued software patents in the United States, and most major tech companies have acquired, at considerable expense, substantial portfolios of them. Companies like Philips Electronics also argue that drawing the line between hardware and software is no longer easy, and that many patents relate to processes that were once accomplished using hardware but are now accomplished using software. Why should the modernization of the medium deprive Philips of recognition for its inventions, its lawyers have argued (albeit, in a slightly different context). See here.

Still, Klemens expects his group to find much common ground with the more moderate IT industry reformers, as well as with those whose main bugaboo is business-methods patents. “Pretty much every argument we make, top to bottom, applies to business methods as well,” Klemens says. In addition, the group’s supporters hope that the major tech players are coming to conclude that the vast number of software patents they have accumulated is part of the problem. “There are so many rights in so many hands,” says Moglen, of the Software Freedom Law Center, “everybody is at risk all the time.”

In any case, even if End Software Patents’ goals are extreme, they are not far-fetched. The U.S. Supreme Court has never ruled on the patentability of software, and at one time the predominant assumption among lawyers was that it could not be, because it amounted to nothing more than mathematical algorithms, which, in turn, were considered nonpatentable “laws of nature.”

That assumption was gradually turned upside down through a series of decisions rendered in the 1990s by the U.S. Court of Appeals for the Federal Circuit, a specialized court that had been set up to handle patent appeals, among other things, in 1984. Those decisions suggested that even if pure software itself was not patentable, software when loaded onto a general-purpose computer created, in effect, a new physical device that could then be patented. Some of the same rulings that opened the door to software patents effectively opened the door to “business method” patents, too.

In the past two years, however, it has become clear to all that the U.S. Supreme Court is extremely unhappy with the patent environment that the Federal Circuit has fostered in the two decades since its creation. In eBay v. MercExchange (May 2006), the Court unanimously junked one longstanding rule of that court, and last term, in KSR International v. Teleflex (April 2007), it unceremoniously dispatched another. (In eBay, the Supreme Court ruled that judges need not always enjoin defendants from infringing, even after a patent-holder has proven its case, and in KSR it made it much easier for judges and patent examiners to invalidate patents due to obviousness.)

For Klemens, however, the most encouraging ruling for his agenda was one that, technically, wasn’t. In LabCorp v. Metabolite Laboratories (June 2006), the Supreme Court had been asked to review the Federal Circuit’s precedents on patentability – the issue that ultimately also determines whether software patents and business-method patents are permissible. After hearing oral argument, the Court punted, deciding that, for technical reasons, it never should have heard the case in the first place. But three justices dissented, writing that they would have overturned the Federal Circuit and invalidated the patent in question, because it clearly amounted to an attempt to patent a nonpatentable “natural phenomenon,” though the phenomenon had been recast in the patent application as a patentable “process.” For that opinion, see here. Klemens contends that software patents amount to much the same thing.

Though only three justices signed the dissent, it does appear that it, in combination with the Supreme Court’s back-of-the-hand treatment of other key Federal Circuit precedents, has led the patent appeals court to engage in some soul-searching. Just two weeks ago, it announced, without having been spurred to do so by the parties, that it would rehear an important patentability case, In re Bilski. (See generally here.) It even asked the parties to brief whether a key ruling it rendered in 1998, State Street Bank & Trust v. Financial Signature Group – one of the pivotal ones greenlighting software and business-method patents — was correctly decided.

“There are test cases all over the place,” observes Klemens. Plainly, his timing is propitious.

Correction:  As a commenter points out, in an earlier version I misused the legal term of art “reads on.” Then I did it again in a comment. Regret both errors.

[For visitors from Groklaw, see addendum at bottom.]

A U.S. bankruptcy judge in Delaware lifted a stay Tuesday that has been postponing momentous litigation in federal court in Utah between The SCO Group (SCOX) and Novell (NOVL).

At the same time, U.S. Bankruptcy Judge Kevin Gross granted SCO’s request — evidently one of SCO’s key objectives in filing for bankruptcy in the first place — to retain control over one crucial piece of the case that had posed particular dangers for SCO. The opinion is here.

SCO voluntarily sought Chapter 11 bankruptcy protection on September 14, on the eve of a trial in which U.S. District Judge Dale Kimball, of Salt Lake City, was set to determine how much SCO owes Novell in licensing revenues SCO had previously received from Sun Microsystems (JAVA), Microsoft (MSFT), and others — a sum that Novell contends could amount to up to $30 million. SCO contends it owes nothing, but in earlier rulings Kimball rejected several of its bases for taking that position.

Novell was also asking Kimball to impose a “constructive trust” upon SCO — an order effectively freezing any funds that he ultimately determines to be owed to Novell and that can be traced to the disputed licensing revenues.

The constructive trust — which could take effect even before SCO would have had a chance to appeal Judge Kimball’s other rulings — could have interfered with SCO’s ability to continue its normal business operations.

Judging from statements SCO’s lawyers have made at the bankruptcy hearings, SCO filed its bankruptcy petition in significant part in order to yank this crucial constructive trust determination out of the hands of Judge Kimball and place it into that of a federal bankruptcy judge.

On August 10 Judge Kimball had surprised SCO by issuing a sweeping ruling granting, by summary judgment — i.e., without letting a jury consider the matter — most of Novell’s key contentions in the litigation, including its claim to own the copyrights underlying Unix operating system software as it existed in 1995. (He rejected SCO’s contention that Novell sold the entire Unix business, including copyrights, to SCO’s predecessor in 1995, retaining only the right to receive royalty streams from certain then-existing license agreements.) That ruling is here.

SCO is struggling to remain operational long enough to appeal Judge Kimball’s ruling to the U.S. Court of Appeals for the Tenth Circuit, where it hopes to win a reversal that would restore its right to have a jury hear its claims.

The ultimate significance of the Novell litigation, however, is its impact on SCO’s other litigation and potential litigation, most importantly its multibillion-dollar claims against IBM (IBM), which are also pending before Judge Kimball. Kimball’s August 10 ruling in the Novell case, if upheld on appeal, would gut SCO’s case against IBM, or possibly end it entirely.

In the IBM case, SCO alleges, among other things, that IBM improperly donated to the free Linux operating system crucial enterprise-grade software code that had ultimately been derived from Unix code, and which, in SCO’s view, was therefore still subject to contractual obligations owed by IBM to the owner of the Unix business, which SCO says is SCO.

In his August 10 order, however, Judge Kimball ruled that Novell — not SCO — retained the ultimate power to determine whether to hold IBM to those contractual obligations (whatever they might be). Since a large part of Novell’s business now revolves around selling subscription services relating to Linux, it has no objection to IBM donating the code in question, regardless of whether doing so might have violated any past contractual obligation.

(In separate suits and threatened suits, SCO has also claimed that various users of Linux code are violating Unix copyrights, though these claims and suits, again, hinge on first overturning Judge Kimball’s finding that SCO, and not Novell, owns those copyrights.)

On balance, SCO’s prospects remain dicey at best. Though I have previously noted (see here) that Judge Kimball’s August 10 ruling looks vulnerable on appeal — since, among other things, he appears to have passed judgment on the relative credibility of various witnesses, which judges are not permitted to do in ruling on a summary judgment motion — even if SCO wins reversal it would still only win the right to make its case to a jury, which could still possibly reach the same conclusions Judge Kimball did.

In a footnote to Tuesday’s order lifting the stay, Bankruptcy Judge Gross alluded to Judge Kimball’s August 10 ruling: “The learned District Court [i.e., Judge Kimball] issued a thorough 105-page opinion carefully analyzing the facts and law. The District Court’s mastery of the facts and law pertaining to the Lawsuit is a powerfully important consideration in the Court’s decision to lift the stay.” Although this could be read as an endorsement of the substance of Judge Kimball’s ruling, and is being so interpreted by some, I believe it represents, instead, the usual courtesies that judges are careful to extend to other judges so as to leave no impression of disrespect. Since Judge Gross is retaining control of the constructive trust issue, I believe he is conveying, in effect, that he is not keeping it out of any lack of trust in Judge Kimball’s ability to correctly decide those issues, but rather simply to fulfill his statutory obligation to retain “core” bankruptcy issues. He is also explaining why he is not retaining the whole case — it would make no sense for him to try to bring himself up to speed with the enormous record that Judge Kimball is already steeped in — which is something even SCO had not asked him to do.

A Novell spokesman, commenting on the lifting of the stay, said “We are pleased that the bankruptcy court is allowing the Utah case to proceed.” A SCO spokesman declined any comment.

ADDENDUM FOR VISITORS FROM GROKLAW

I very belatedly noticed that some people are linking to this post from a “Groklaw Latest News Picks” link marked “Saturday, December 01 2007 @ 02:16 AM EST.” It begins with an introduction/disclaimer that says: “As usual, this account is so off it isn’t even wrong. I include it only because of a desire for a complete record. Just as one example, [1] Novell was not asking for a constructive trust at trial. Or as another, [2] SCO very much did ask the bankruptcy court to take over the litigation. In fact, more than that SCO asked that the bankruptcy court rule fresh on issues that the Utah court had already decided.” (Bracketed numbers are mine.)

I’ll discuss Groklaw’s two misimpressions in sequence:

Groklaw misimpression 1: “Novell was not asking for a constructive trust at trial.”

Yes it was. Novell was asking Judge Kimball to impose a constructive trust (in its 6th claim for relief in its amended counterclaims, here, page 29) and that’s what SCO was evidently most concerned about. They apparently thought he’d run off the tracks with his summary judgment ruling, and they feared that if he ran off the tracks again with the constructive trust ruling he could put SCO out of business before it ever had a chance to appeal.
Novell originally sought imposition of a constructive trust in its motion for partial summary judgment. In his ruling of August 10, Judge Kimball indicated (on pages 97-98) that Novell would probably be entitled to such a trust, but there were additional facts that would have to be established first before he could assess the amount of it. Accordingly, he denied the summary judgment on that issue, and it was clear to all that imposition of the trust was one of the things that remained for Judge Kimball to do in the case.

Mechanically, Novell envisioned that it would not formally seek imposition of the trust until after the trial was over, and that it would do so via a post-trial motion. Some additional factual findings might be necessary at that stage, but they could be based on a paper record, without further witness testimony. Whether you call that “at trial” or “after the trial” is an irrelevant quibble; Novell was asking Kimball to impose a constructive trust and that is what SCO feared. Accordingly, SCO asked the bankruptcy judge to decide that issue instead of letting Kimball do it, and the bankruptcy judge agreed to do so.

Here’s the passage (p. 97-98) in the Judge Kimball’s ruling, here, relating to the constructive trust:
“Although the court finds that Novell meets the requirements for the imposition of a constructive trust, the question of fact as to the SVRX portion of the 2003 Sun and Microsoft Agreements precludes the court from imposing a trust for the appropriate amount. Furthermore, despite Novell’s fears regarding its ability to collect its royalties, the appropriate amount of SVRX Royalties can be determined at trial. Because of the question of fact, the court denies both Novell’s and SCO’s motions for summary judgment on Novell’s Sixth Claim for Relief for constructive trust.”

At the bankruptcy hearing on November 6, 2007, Novell attorney Adam Lewis reiterated Novell’s desire to have Judge Kimball proceed to impose a constructive trust once the case was returned to Utah.

On page 90 of the transcript of November 6, 2007, here, he says:

There’s the whole constructive trust issue that remains to be decided although Judge Kimball has found that the conditions for a constructive trust exists.
…
[Then again on page 91]
So what the judge, Judge Kimball has said plainly in his opinion, which I take to be law of good case, is that the criteria for the imposition of a constructive trust have been proven in the summary judgment motion. The only remaining issue is how much, that is the tracing, of the funds.
…
[And again on page 94]
The passage I just read you, Your Honor, indicates that Judge Kimball has made findings on the factual predicates for everything about a constructive trust except applying the lowest intermediate balance rule to decide what the exact dollars are.

In the following passage, Novell attorney Mike Jacobs explains that he envisions seeking imposition of the trust shortly after the trial:

[page 102]
Then there was going to have to be subsequent phase in which we would address the exact amount of the constructive trust. We anticipated doing that on motion. The two are severable in that sense. What Judge Kimball would be deciding is the gross amounts, if we went back to him for trial. And then we would be going back to him and saying, okay, apply the lowest intermediate balance rule and figure out how much is in the bank account that’s traceable and that’s our constructive trust. That is, we think, fairly mechanical.

Groklaw misimpression 2: “SCO very much did ask the bankruptcy court to take over the litigation … and to rule fresh on issues the Utah court had already decided”

No it didn’t. SCO asked the judge to take over the constructive trust issue only, which is what Judge Gross did. There was some quibbling between the parties about precisely what information would be required in order to decide the “constructive trust issue,” but there was no effort to have Judge Gross redecide issues already decided by Kimball.

At the November 6 hearing, here, SCO lawyer Arthur Spector says:
[page 104]
The judge ruled otherwise. [i.e., against SCO on all the copyright issues.] That’s the law of the case. We have to live with that until and unless its reversed on appeal.
…
[and again on pages 108-109]
What is it for this Court [i.e., the bankruptcy court] to do if the Court were inclined to do anything with regard to this case? Well, we would say, you take everything that precedes, [i.e., you take AS A GIVEN everything that preceded this point; not that you rehear it and decide it all from scratch], we grit our teeth and bear it, and then you say, okay, there’s going to be a constructive trust in the amount of whatever its been determined elsewhere, whatever that number is. And here’s how much of that is now being held by SCO. And that’s how much, through the lowest intermediate balance test, that’s how much would be potentially set asideable, if that were a word, for Novell. … This Court could do that. It doesn’t need to reinvent the wheel. It doesn’t have to pour [sic] through 1500 pages of summary judgment briefing or anything else. … And as I said before, we don’t contest it, I’ve said it enough times.
THE COURT: Now, you mentioned that I would essentially take the allocation determined — is that how you stated it? Determined elsewhere.
MR. SPECTOR: Yeah, we’re not asking you to do that, Your Honor.
THE COURT: Okay.
MR. SPECTOR: I mean, we’re not being ridiculous. They’re right. Its simply, we don’t fight everything. They’re right.

ADDENDUM TO ADDENDUM

Novell’s “motion for relief from the automatic stay” in the bankruptcy court is here. On page 14 you’ll see that Novell asks that the stay be lifted “so that Novell may proceed with all remaining issues in the District Court….” That includes the constructive trust.

With the recent publication of the transcript of the September 18 hearing in SCO’s Chapter 11 proceeding in U.S. Bankruptcy Court in Delaware, it’s now possible to piece together what SCO’s (SCOX) legal strategy apparently was in filing for Chapter 11 protection on the eve of its scheduled trial against Novell (NOVL).

At that trial — drastically narrowed in scope by Judge Dale Kimball’s August 10 ruling throwing out most of SCO’s claims without letting them reach a jury (see earlier post, here) — Kimball would not only have determined what percentage of SCO’s revenue from its SCOsource program he thought properly belonged to Novell, but he also planned to impose a “constructive trust” on SCO to protect Novell’s recovery of that sum. It appears to have been the constructive trust that SCO feared most, since it might have taken immediate effect, even before SCO had an opportunity to appeal Kimball’s rulings. If Kimball found all or a large amount to be owing — and, with prejudgment interest, the $26 million SCO received from licensing agreements with Sun Microsystems (JAVA) and Microsoft (MSFT) could alone have run to more than $37 million — and decided to freeze SCO assets in an attempt to preserve that money, it could have blocked SCO’s ability to continue ordinary business operations. (SCO CEO Darl McBride had earlier alluded to this possibility in an affidavit he submitted in the bankruptcy court on September 14. Here’s the affidavit. See paragraphs 48-49.)

At the September 18 hearing (here’s the transcript) SCO lawyer Arthur Spector (a former bankruptcy judge in Michigan) shed light on exactly what SCO does and does not expect to achieve by having moved the case to bankruptcy court. He appeared to acknowledge that the automatic stay on the Novell trial would need to be lifted and that, when it was, the case would go back to Judge Kimball for trial. He even hinted that SCO might be willing to reach an agreed upon order to that effect with Novell. (See pages 24-25.)Judge Kimball would then arrive upon some dollar amount allegedly owed to Novell.

But Spector also said this: “Once that’s decided, whatever that number is — 10 million, 15 million — then the next question is how much of the money still in the hands of [SCO] is traceable to those, quote, ‘tainted funds.’ That, Your Honor, is the core of bankruptcy jurisdiction. What is and is not property of the estate. We think it’s going to be this, this Court’s determination on that question when the rubber meets the road.” (See page 24.)

So it is the decisions surrounding the constructive trust portion of the case that SCO realistically hopes to wrest from Kimball’s hands and place into bankruptcy judge Kevin Gross’s. Evidently, SCO’s position will be that even if Kimball computes some large sum to be owing, that Novell can impose a trust only on “tainted funds” or funds “traceable” to them, which might be a much smaller number. In other words, if SCO has already spent all the money that it received from Sun and Microsoft, or all but a small portion of it, Novell might only be able to impose a constructive trust on that amount or account, which would not prevent SCO from continuing to do business while it appealed all of Kimball’s rulings to a federal appeals court.

Evidently, SCO believes the constructive trust law in this situation favors such a narrow interpretation, and it trusts a bankruptcy judge to reach that conclusion, while it does not trust Judge Kimball to.

SCO Group (SCOX) has just filed for voluntary reorganization under Chapter 11 of the bankruptcy laws while it “addresses potential financial and legal challenges,” according to a company press release (available here). The release states that the company “intends to maintain all normal business operations throughout the bankruptcy proceedings.”

The legal challenges faced by the company obviously include the ones discussed in the previous post, here.

By statute, a bankruptcy filing ordinarily stays all pending litigation against the filer, raising questions about whether SCO’s trial against Novell (NOVL), scheduled to start Monday(September 17), will proceed as planned. I am trying to find out now whether SCO will ask to lift that stay to allow the Novell case to proceed as quickly as possible — which might seem to be in its best interests, since it needs to appeal as quickly as possible — or whether its attorneys and board have some other strategy in mind now. [Update: SCO is not commenting today beyond the press release.]

The bankruptcy petition has been filed in the U.S. bankruptcy court for the district of Delaware, and has been assigned to Bankrupcy Judge Kevin Gross. (Docket number for the petition is 07-11337-KG.)

Here’s the list of SCO Operations’s 20 largest unsecured creditors. The largest are Amici LLC, an online document management company, which is owed about $500,000, and the Boies Schiller & Flexner firm, which is owed a little more than $287,000 in “trade debt,” which probably means reimbursement for out-of-pocket expenses. (The Boies firm has already been paid long ago all the attorneys fees that it is entitled to under its retainer agreement through appeal; any additional attorneys fees it will get are to come in the form of a contingency fee in the event that SCO ultimately recovers a judgment from someone–an eventuality that is beginning to seem remote.)

Fifth and sixth on the list are Microsoft (MSFT) and Sun Microsystems (JAVA), owed about $125,000 and $50,000 respectively.

UPDATE (Sept 15, 7:30 am): The automatic stay provision of the bankruptcy code has, in fact, acted to postpone indefinitely Monday’s trial.

Neither Novell nor SCO would comment on what to expect. On sleeping on it, I now think that SCO must hope somehow to wrench the case out of Kimball’s hands and place into those of the Delaware bankruptcy judge and of the U.S. District Judge in Delaware who will oversee that action. Such an eventuality seems like an extremely long shot; the more likely eventuality is that the bankruptcy judge will eventually send the case back to Kimball for trial.

In that trial Judge Kimball intended to decide, among other things, how much money SCO must return to Novell from its 2003 licensing agreements with Sun Microsystems (for about $10 million) and Microsoft (for about $26.75 million). Novell argues that these licenses were, in whole or in part, royalties on the Unix System V releases, to which Novell retained all royalty rights. Novell contends that SCO was not even empowered to enter into those licensing agreements without its permission and, accordingly, should turn over the entire sum.

SCO claims that the licenses were based on its newer UnixWare products, not on the older Unix System V releases, and that Novell’s rights to a share of the UnixWare royalty stream expired in 2002 under the terms of the 1995 Asset Purchase Agreement between Novell and SCO’s predecessor, Santa Cruz. SCO also claims that any System V rights involved were “incidental” to the UnixWare rights, and were to be treated as part of the UnixWare licenses. Judge Kimball appears to have already rejected SCO’s arguments, however, in his August 10 ruling on summary judgment.

CORRECTION: An earlier version of this post incorrectly described the purpose of the Microsoft and Sun licenses, whose terms remain confidential. SCO has described both agreements as part of its SCOsource campaign, whose purpose was to seek licenses from the Linux community for code SCO claimed to own. (Novell also seeks recovery of all SCOsource royalties SCO may have collected.) SCO and Sun have each said publicly that the main specific purpose of Sun’s license was to allow Sun to open-source its Solaris operating system.

Once in awhile a judicial ruling comes down that’s so wrong at such a basic level that you’re just left scratching your head.

When U.S. District Judge Dale A. Kimball of Salt Lake City threw out most of SCO Group’s (SCOX) case against Novell (NOVL) on August 10 — effectively dooming most of SCO’s claims in closely related cases against IBM Corp. (IBM), AutoZone (AZO), and Red Hat (RHT), too — his 102-page ruling was greeted with widespread rejoicing and I-told-you-so’s. (I was headed out of the country for vacation at the time and am only now digging out from under.)

Understandably, few people mourned SCO’s humiliating defeat. In a series of incendiary lawsuits and letter demands in 2003, SCO sought licenses from at least 1,500 companies that used or distributed Linux, claiming that, by doing so, they were either breaching UNIX-related contracts or infringing UNIX copyrights, both of which SCO claimed to own. The demands enraged not just the Linux developer community, but many Fortune 500 companies that had become big Linux users and champions. (For a feature story I wrote about the disputes in May 2004, click here.)

Still, as a piece of judicial craftsmanship, Kimball’s work falls squarely within that rare category I describe in the first sentence of this post. Here’s Kimball’s ruling. (Novell and SCO declined to comment for this article, citing the imminence of the trial of the few remaining issues in the case, which starts September 17.)

The problem is not that Judge Kimball’s view of the facts is wrong; it might not be. His judgments about which testimony to believe and which not to believe are, in fact, plausible. So are the inferences he draws from that testimony about how he should interpret the monumentally gnarly, self-contradictory, and, in my humble opinion, ambiguous 1995 contract that lies at the heart of the case. If SCO had asked to have its case tried before a judge (a “bench trial”), and if judge Kimball had then held that trial — so he could see the witnesses testify in the flesh and make informed judgments about their live demeanor — his ruling would make perfect sense and I’d have no objection to it.

But SCO didn’t ask for a bench trial, and Judge Kimball never held one. SCO asked for a jury trial, and Judge Kimball was, therefore, only ruling on Novell’s pretrial motion for summary judgment. And as any second-semester law student knows, a judge can grant such a motion only when, as innumerable courts in every state and federal jurisdiction have repeatedly written, “the evidence, viewed in the light most favorable to the party opposing the motion [i.e., SCO, in this situation], shows there are no genuine issues of material fact.” (If that weren’t the rule, our Seventh Amendment right to a civil jury trial would be a hollow joke.)

In ruling on such a motion, a judge cannot “act as the jury and determine witness credibility, weigh the evidence, or decide upon competing inferences,” according to the well-worn case law. You will find these or equivalent boilerplate recitations of the applicable law pasted somewhere into damn near every summary judgment ruling you will ever come across, with one conspicuous exception: Judge Kimball’s August 10 ruling in the SCO case. (After the ruling, the only claims left in the case were of a nature that do not entitle a party to a jury, and on Friday, September 7, Kimball granted Novell’s request to hold a bench trial on those. But there’s no dispute that SCO would have been entitled to a jury on the claims that were tossed out.)

For those who came in late, the case is principally about an “asset purchase agreement” signed in September 1995 in which Novell sold something — nobody’s sure exactly what any more — to a company called Santa Cruz Operation for $125 million plus certain royalty streams. (Santa Cruz later sold whatever-it-was-that-it-obtained-from-this purchase to a company called Caldera, which later changed its name to SCO.) SCO says Santa Cruz (and, ultimately, SCO) got from Novell the entire UNIX operating system business, including copyrights, while Novell says that Novell actually withheld the UNIX copyrights at the last minute, and only sold Santa Cruz, essentially, a license to take the UNIX code, use it, and make and sell new products out of it.

The then-CEOs of both Santa Cruz and Novell (yes, of Novell too) each supported SCO’s position in their testimony — i.e., the position Judge Kimball rejected without even letting a jury hear it. Each former CEO said that it was his understanding that Novell had sold Santa Cruz the entire UNIX operating system business, including copyrights. Here’s how Novell’s then CEO Robert Frankenberg testified:

Q. Was your initial intent in the transaction that Novell would transfer copyrights to UNIX and UnixWare technology to Santa Cruz?

A. Yes.

Q. Was that your intent at the time when the APA was signed?

A. Yes.

Q. Was it your intent when that transaction closed?

A. Yes.

Q. And did that remain your intent, as you view it, at all relevant times?

A. Yes.

Q. That never changed?

A. No.

That was also the view of Novell’s (yes, Novell’s) then chief negotiator, Ed Chatlos. In fact, it appears to have been the understanding of nearly every negotiator on both sides of the table, with two important exceptions.

The exceptions were Novell’s then-general counsel David Bradford and Novell’s then outside counsel Tor Braham, of Wilson Sonsini Goodrich & Rosati, who each testified that toward the end of the negotiations Bradford told Braham to withhold the Unix copyrights from the deal, either because Santa Cruz couldn’t pay enough money or because they feared Santa Cruz might go bankrupt.

This understanding was news to Burt Levine, another member of Novell’s inhouse legal team, however, who said he had also reviewed and revised drafts of the contract.

Q. Mr. Levine, from the time of the [asset purchase agreement] in 1995 until you left Santa Cruz in 2000, did you ever hear anyone, whether inside or outside of Santa Cruz or inside or outside of Novell, say that Novell had retained the UNIX or UnixWare copyrights?

A. No.

Q. If you had heard anyone make such a statement, would that have been a surprise to you?

A. Very much so, yeah.

The Bradford/Braham recollection was also contradicted by a member of Santa Cruz’s inhouse legal team at the time, paralegal Kimberlee Madsen, who was closely involved in the meetings and negotiations. “It was always my understanding,” Madsen wrote in her declaration, “that the UNIX source code and its copyrights were part of the assets Santa Cruz purchased and were transferred to Santa Cruz at the closing in December 1995. I do not recall anyone in the negotation teams ever saying, or suggesting, that Novell would retain any UNIX copyrights. The negotiation team for Santa Cruz never discussed the possibility, as far as I am aware, that Novell sought to retain any UNIX copyright.”

Again, in choosing to believe that Bradford and Braham were more credible, closer to the action, remembered the situation better, or what have you, Judge Kimball drew plausible and defensible inferences — for a juror. But a judge isn’t allowed to do that in ruling on a summary judgment motion.

Likewise, Judge Kimball weighed the credibility of then-Novell CEO Frankenberg’s testimony, and found it wanting. He writes that Frankenberg was “self-contradictory” at times (he cites no examples), and that portions of his testimony were contradicted by certain board minutes. Fine. Then let a jury sort out those contradictions. As a judge ruling on a summary judgment motion, Kimball’s not allowed to make determinations about credibility.

Similarly, Judge Kimball appears to have discounted then-Novell-chief-negotiator Chatlos’s credibility because, as the judge noted, Chatlos’s wife currently works for SCO. Okay, I can see why you might reach that (rather cynical) conclusion — but only if you’re a juror.

Kimball also appeared to discount paralegal Madsen’s testimony because she was a lowly paralegal, whereas Bradford was a general counsel and Braham a partner at a big firm. Fine, but only if you’re a juror.

Were there any conceivable reasons why a juror might have chosen to give former-Novell-general-counsel Bradford — who, Judge Kimball says, “oversaw the negotiation and drafting” of the contract — less credence than Judge Kimball chose to? Well, come to think of it, there was. Though he doesn’t mention it, Judge Kimball did have before him a May 17, 2007, declaration from Lee Johnson, a longtime friend of Bradford’s, who swore that he had repeatedly asked Bradford about the 1995 contract after the dispute first arose. “Without exception,” Johnson wrote, “[Bradford] has told me that he was not significantly involved in that transaction and did not know much about it. . . . I even . . . specifically recall asking, ‘How could you not know who owns the copyrights given your position at Novell at the time?’ David’s response was . . . : ‘I was busy on more important things and was not involved in that level of detail in the Santa Cruz transaction.’

“The Johnson affidavit then goes on to allege that, after Johnson found out about Bradford’s testimony in the case — the testimony that Judge Kimball ultimately so heavily relied upon — Johnson confronted Bradford about the apparent shift in his recollection. “In response,” Johnson wrote, “he left me a voice message where he specifically stated that he did not remember any of this but he had gone back and read the agreements a few times and concluded that this must have been what happened. In other words, he does not remember this at all but has now convinced himself that this is what happened.”

Would a juror be entitled to disregard Johnson’s testimony? Of course. Maybe Johnson’s a crank. Maybe he has some sort of pecuniary interest in the case. And why didn’t Johnson save the voicemail message if this really happened? Those are all good questions for the jury to ask and answer.

It’s not hard to predict what any appellate lawyer hired to defend Judge Kimball’s ruling would say in its defense. He’d argue that, notwithstanding some unnecessary verbiage, all Judge Kimball really did was decide that the contract itself was so unamibuous on its face that all of the “extrinsic evidence” — the testimony from the CEOs, the other negotiators, Bradford, Braham, Johnson, Madsen — was all irrelevant. Kimball does, in fact, reach that conclusion in the end. Since the contract language was not in question, and not reasonably susceptible to any other interpretation than the one Novell now gives it, Judge Kimball ruled, he could properly grant Novell summary judgment.

But that argument is wrong for at least two reasons: First, from the opinion it’s apparent that Kimball didn’t have the foggiest idea what the parties were up to with this contract — and who could blame him? — until he waded deeply into all the extrinsic evidence. Having done so, he then decided that Bradford’s and Braham’s testimony seemed to make the most sense over all. But having used the extrinsic evidence to figure out a plausible hypothesis for what the contract might mean, he can’t then proclaim the contract to have been “unambiguous” all along, entitling him to disregard all the diametrically conflicting evidence he had to discount and discard in the process of reaching his conclusion. That’s like using a rope ladder to climb up into a helicopter, and then pulling up the ladder so no one else can climb up after you. (Okay, not a perfect metaphor, but I think you see what I’m getting at.)

Second, the language of the contract is ambiguous. What it gives in one provision, it takes back in the next. It’s not fully consistent with either party’s claims, and never will be.The asset purchase agreement says that Novell sold to Santa Cruz “all rights and ownership of UNIX … including source code . . ., such assets to include without limitation” a long list of specific products. SCO argues (and presented an industry expert who said) that if you’re buying “all rights and ownership” of a software business “without limitation,” you’re obviously buying the copyrights. This contractual language is also inconsistent on its face with Novell’s claim that it was only selling a license to use UNIX for limited purposes.

On the other hand, Novell rightly points to another page of the contact, which lists five categories of assets that are to be “excluded” from the deal. Three of the first four categories concern NetWare products — a software business that Novell was unquestionably retaining control of — while the fifth says “all copyrights and trademarks, except for the trademarks UNIX and UnixWare.” SCO claims that “all copyrights” here was supposed to mean “all NetWare copyrights,” and that the rest of the contract would make no sense if Novell was also retaining the UNIX copyrights, too. Novell, on the other hand, says “all copyrights” means “all copyrights,” and, therefore, we just don’t need to worry about what “all rights and ownership of UNIX . . . without limitation” could have meant on the earlier page.

Looks like ambiguity to me, confirmed in spades by the highly conflicting extrinsic evidence that Judge Kimball allowed into evidence and then laboriously waded into and picked his way through before deciding in the end that, you know what?: This contract really has only one possible interpretation!

Readers may have long ago wondered why I’m getting so worked up about this. After all, you may be thinking, if Kimball’s ruling is really as bad as I say, won’t it just get reversed on appeal? Well, that’s the thing. SCO’s got about $10 million in cash and it’s burn rate seems to be about $1 million per quarter. It’s not just fighting Novell and IBM, it’s fighting the clock. Kimball’s ruling could be the coup de grâce. (On Friday Judge Kimball squelched SCO’s long-shot attempt to seek an immediate appeal of his August 10 ruling, so SCO will need to wait until the trial is complete before it can start the appeals process.)

Litigants, especially unpopular ones, are entitled to their day in court. In this case, the last word on SCO’s controversial claims should have been delivered by a jury, not by Dale Kimball.

Dell (DELL) has become the first “systems-provider” to take advantage of the controversial technological collaboration and intellectual property pact concluded in November between Microsoft (MSFT) and Novell (NOVL), which is a distributor of the Linux operating system. (Here’s the press release.)

Dell’s move will enable corporations that wish to run both Windows and Linux server operating systems side-by-side in their datacenters to go to a single shop for all their hardware, software, and support service needs, while also being assured that Microsoft will not go after them seeking patent royalties. (Microsoft claims that Linux infringes its patents, a claim vigorously disputed by Linux distributors, users, and developers.)

Back in November Microsoft and Novell struck a pioneering tech collab/IP deal out of a recognition that most corporate datacenters today either already run, or would like to run, “heterogeneous” software environments, meaning that some server computers run Windows, while others run Linux, while still others run on Unix or Apple platforms. (See earlier posts on that deal, here and here.) Thanks to so-called virtualization software, which enables a single computer to run multiple operating systems, many companies are now consolidating their computing operations onto many fewer computers, seeking to save tens of millions of dollars in hardware, energy, and even real estate costs. But to do this, the companies must be assured that that their various software platforms will play together nicely, that their computer operators will have integrated systems management tools capable of controlling the diverse platforms, and that there will be tech support people to call upon who have all the expertise and certifications necessary to fix things when they go wrong.

So on November 2, 2006, Novell and Microsoft announced a technological collaboration designed to ensure customers that these interoperability needs and concerns would be addressed. At the same time, the companies also worked out an intellectual property agreement that effectively guaranteed Novell’s Linux customers that they would not have to worry about potential patent suits or patent licensing demands from Microsoft, which claims that Linux infringes its patents. As part of the deal, Novell agreed to pay Microsoft an unspecified percentage of all its Linux subscription revenues. (Linux is so-called free software, written by a loose-knit community of developers, rather than by any single legal entity, and the software is typically available for free download over the Internet. Commercial distributors of Linux, like Novell and industry-leader Red Hat (RHT) , give away the software for free but make their money selling subscription support services.)

The IP part of the Microsoft-Novell deal was enormously controversial within the free and open-source software (FOSS) community, both because that community denies that Linux infringes any patents and because the notion of having to pay for permission to use free software (implicit in the notion of paying patent royalties) is antithetical to the most fundamental principles of free software. The Free Software Foundation, which writes and administers the license that covers key portions of the Linux operating system, is revising that license to forbid any other Linux distributors, like Red Hat, from entering into deals structured the way the Microsoft-Novell pact was. The revised license is expected to take effect in July.

Since the original Microsoft-Novell deal was struck, a number of marquee corporate Linux end-users have signed up for the benefits of the deal, including Credit Suisse, AIG, Deutsche Bank, HSBC, and Wal-Mart Stores, but Dell is the first computer distributor to take advantage of the deal.

Nevertheless, Red Hat has claimed that it has seen no adverse impact on its business from the Novell pact. (Due to an unrelated internal inquiry relating to options backdating, Novell has not filed audited financial statements with the SEC in more than a year.)