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Things started out innocently enough. In the late 1990s International Business Machines Corporation and a little-known Utah software company worked together to create a joint version of Unix, a widely used operating system. They parted ways in 2001 after IBM decided to concentrate on selling consulting and support services for Linux, a newer operating system modeled on Unix. But the relationship ended badly. In March The SCO Group, Inc., sued IBM in Utah state court, alleging theft of trade secrets, breach of contract, and $1 billion in damages. SCO claimed that IBM stole some of its proprietary Unix code and wove those bits and bytes into its own software products. SCO also says that its copyrighted code made its way into recent versions of Linux. Big Blue’s lawyers thought the allegations were unfounded, but still, they say they wanted to hear SCO out. In early June, IBM summoned SCO’s top executives and its outside counsel to the company’s legal department’s offices in White Plains, New York. At the meeting, SCO president Darl McBride, its new general counsel Ryan Tibbitts, and their outside counsel, famed litigator David Boies of Boies, Schiller & Flexner, showed a PowerPoint presentation with their evidence. According to the attendees, the slide show was less notable for what Boies displayed � chat room messages from a public Internet site, where IBM engineers allegedly bragged how they improved Linux � than what he didn’t, any concrete evidence of alleged theft. A SCO lawyer says that Boies did not want to tip his hand. When it became clear that IBM’s team of in-house and Cravath, Swaine & Moore lawyers was gearing up to fight, the meeting was over. “They tried to pull a rope-a-dope on us,” says the SCO lawyer. Undeterred, SCO carried on. In June the company amended its complaint and upped its damages request against IBM to $3 billion. And in October, SCO disclosed that it had raised a $50 million war chest from private investors to support the litigation. Buoyed by SCO’s offensive tactics, investors have pushed the tiny company’s stock price up as much as 1,300 percent in the last year. But observers say SCO’s chest-pounding won’t cow its opponents. “IBM will try to crush SCO,” says Mark Radcliffe, an IP litigator at Gray, Cary, Ware & Freidenrich. “This is what IBM does.” In September, Big Blue countersued, seeking unspecified damages. This skirmish isn’t just about a $64 million company trying to squeeze money out of a high-tech giant. SCO’s suit is part of a multipronged, controversial effort to grab a part of the Next Big Thing in computing. The once-obscure project of a Finnish computer student, Linus Torvalds, and ad hoc programmers around the world, Linux has, in a few short years, become the world’s fastest-growing computer operating system. Adaptable to many devices and computer chips, Linux controls Web servers, desktop computers, and a multitude of electronic gadgets, like the trendy TiVo video recorder. Torvalds, an unconventional, New Age hippie, encourages programmers around the world (even the pros at IBM) to donate bits of code. And if he likes their work, Torvalds and his team of programmers incorporate it into the latest version of the operating system. This is known as “open source” software. As part of his revolutionary thinking, Torvalds insists that Linux is free. Anyone can download a basic version of the software directly from the Web. But for training and support, companies hire, for example, Red Hat, Inc., or SuSE Linux AG. And to have Linux customized to fit a specific server, messaging platform, or other electronic equipment, companies hire IBM or Sun Microsystems, Inc. That’s how, even though Linux is technically free, companies like Red Hat or IBM make money from it. According to industry analysts, Linux is poised to become the number two computer operating system in 2004, after Microsoft Corporation’s Windows. Businesses around the world, weary of Windows’s higher cost and security flaws, have embraced Linux. Right now there are an estimated 2.6 million Web and file servers running Linux. Computer research company Gartner, Inc., estimates that the Linux server market, worth $2.6 billion now, will become a $6.3 billion business by 2008. But SCO’s actions threaten to slow Linux’s advance. The Lindon, Utah-based company isn’t just after IBM; it’s taking on corporate Linux users around the world, too. SCO maintains that not only did IBM engineers steal their Unix code, but that IBM gave that proprietary data to Linux programmers, and through their efforts the SCO code made its way into recent versions of Linux. As a result, SCO is demanding licensing fees from thousands of corporate Linux users. In May, two months after it sued IBM, SCO sent a warning shot to the Linux community. It mailed letters to the world’s 1,500 largest companies � alerting them to its IP claims in the suit against IBM � and then followed up with calls and meetings, asking those businesses for licensing fees. Many companies that received letters were also customers of Red Hat, the world’s largest Linux distributor. Worried about the impact that SCO’s campaign could have on its business, Red Hat sued SCO in August. The company’s complaint in federal court seeks a declaratory judgment that Red Hat did not violate SCO’s IP rights and an injunction barring SCO from making threats against Red Hat. SCO has moved to dismiss the suit. At press time, only Microsoft and one undisclosed Fortune 500 company had signed Linux licenses with SCO, according to GC Tibbitts. He says that SCO is close to lining up additional licensees, but it is also mulling a lawsuit against a major Fortune 500 company before the end of 2003. “If [SCO's licensing efforts] don’t work out, there’s likely a lawsuit waiting for somebody out there,” warns Tibbitts, who joined the company in early summer. SCO’s direct and unrelenting attack on corporate Linux users stunned the high-tech community. George Weiss, a Gartner analyst, says, “This is a really methodical, concerted effort to keep the open source community off balance.” Corporate Linux users face a stark choice: risk getting dragged into court by SCO, give in to the company’s demands and pay up, or send their programmers back to work to modify Linux and expunge the allegedly infringing code. Analysts say the redevelopment costs for big Linux users could amount to hundreds of thousands of dollars. SCO’s licensing demands understandably worry corporations � and their general counsel � as many gear up for their first major technology investments in recent years. They wonder whether they should continue to use Linux until these issues are resolved. Forrester Research, Inc., reported last September that 16 percent of companies that use open source software are slowing their Linux adoption because of uncertainty over the litigation. SCO’s threats haven’t scared off Ford Motor Company, a recent Linux adopter. Intellectual property counsel David Kelley won’t confirm if the Dearborn, Michigan, carmaker received one of SCO’s letters. But he says that Ford, which continues to use Linux, is taking a wait-and-see approach: “Obviously any company that is using open source is going to have to be watching it very carefully.” SCO is unfazed by Ford’s and others’ concerns and, indeed, the sheer venom of its critics in the high-tech community. (Among other things, hackers have twice shut down the company’s Web site.) Tibbitts says his company’s claims on Linux are legitimate: “Bomber pilots often say, ‘When you’re getting a lot of flack, you must be close to the target.’ “ The SCO�IBM clash has its roots in the early 1970s, when engineers at AT&T Bell Laboratories designed Unix. Throughout the 1970s and 1980s, Bell Labs sold licenses for the operating system to universities and companies, including Sun Microsystems; Silicon Graphics, Inc.; and IBM. These companies developed and sold their own Unix “flavors,” or versions of the software. While expensive, Unix was embraced by corporations as a smooth, glitch-free program for corporate servers. Unix also became, and still is, the engine that powers much of the Internet. In 1992 AT&T sold the rights to Unix to Novell, Inc. Three years later, Novell sold those rights to the Santa Cruz Operation, Inc., which later became known as The SCO Group, Inc. Meanwhile, in 1991, Torvalds set out to build a Unix clone that would outperform its ancestors. He posted raw computer code on the Internet and invited programmers from around the world to pitch in and improve on his work, warning volunteers in a now-infamous e-mail that this was “just a hobby, won’t be big.” The premise was simple. Linux would be transparent and free to anyone who wanted it. Throughout the 1990s Linux was largely the pet project of hard-core engineers. But corporate information technology departments began to download the software and saw its potential, because it was robust and less prone to crashes and security breaches than commercial operating systems, such as Windows. The downside was that Linux, especially in its early versions, was notoriously difficult to install and run. But once they got the hang of it, IT specialists started to use Linux to run Web and file “servers,” or computer repositories for World Wide Web pages and databases. Sensing an opportunity, companies like Red Hat sprouted to develop their own customized Linux versions and to sell tech support and services for the system, which is permitted under Torvalds’s license. The year 2000 marked a turning point for Linux. IBM, long a major Unix developer, announced that it would offer Linux-based services. Then came the U.S. recession in 2001, and corporate technology spending plummeted. Companies turned to Linux as a lower-cost alternative to Windows. Before long, tech giants like Hewlett-Packard Company, Oracle Corporation, and Silicon Graphics followed IBM’s lead and were selling Linux-based servers and workstations. After it bought the rights to Unix in 1995, SCO claims, it poured hundreds of millions of dollars into upgrading the technology. As part of that effort, the company teamed with IBM in 1998 to develop a low-cost Unix-based operating system to run on IBM hardware. IBM canceled the project in 2001, after it shifted its focus to Linux. SCO’s Unix business suffered as Linux grew. Last year SCO posted a $25 million loss. To bolster revenues, SCO executives decided to find innovative ways to leverage their portfolio of Unix copyrights. In January 2003 they launched a new business division, called SCOsource, whose primary mission was to line up new licensees. And they hired David Boies, the litigator of Microsoft-Napster�Al Gore fame, to “see whether there were any problems with how [SCO's] intellectual property was being used…and, if so, what could be done about it,” explains Mark Heise, a Boies, Schiller partner in Miami. Heise adds that the firm soon saw that “there was a real problem with Linux.” Specifically, SCO believed that Linux, in its most recent versions, and IBM’s own Unix-based operating system, called Aix, contained lines of code that SCO originally developed. If true, SCO could reap additional licensing fees and make up for losses it suffered when IBM abandoned its joint venture. SCO also struck an unusual fee deal with Boies. In exchange for working at a reduced hourly rate, Boies, Schiller got the bulk of a $1 million cash advance and 400,000 shares of SCO’s common stock that were given to SCO’s outside firms. Better yet, Boies, Schiller will reap 20 percent of any favorable outcome, whether it is the sale of SCO, a court judgment against IBM, or licensing fees. In the best-case scenario, based on SCO’s current valuation of $238 million at press time, Boies, Schiller stands to reap $47.6 million. The Boies, Schiller attorneys work closely with SCO’s new GC, Tibbitts, who is well versed in software litigation. Tibbitts has a long history with SCO’s majority shareholder, The Canopy Group, Inc. Before joining SCO he was GC of two Canopy subsidiaries: Lineo Inc., a Linux provider; and tech services provider Center 7, Inc., which last summer settled a breach of contract suit against Computer Associates International, Inc., for $40 million. Before joining Lineo in 2001, Tibbitts spent 15 years in private practice at Salt Lake City’s Snow, Christensen & Martineau, where he represented another SCO predecessor, Caldera Inc., in an antitrust suit against Microsoft. (The suit reportedly settled for $250 million.) SCO’s legal firepower didn’t daunt IBM. About three months after the unsuccessful meeting with Boies, Big Blue, represented by Boies’s former firm Cravath, filed a massive counterclaim against SCO that included allegations of copyright and patent infringement. IBM claims that it, not SCO, owns the copyrights on its Linux contributions. Moreover, Linux boosters say that SCO’s unwillingness to seek an injunction against IBM shows that the case is just a publicity stunt. SCO’s Heise says that his client hasn’t sought an injunction for two reasons: It doesn’t have the $50 billion or so it would need to post a bond to get the injunction; and second, to get the injunction, it would have to reveal the offending lines of code. Heise says that SCO can’t risk disclosing that information to anyone who has not signed a confidentiality agreement � which IBM has so far refused to do. IBM, for its part, does not want to risk exposing itself to future infringement claims from SCO. Red Hat also aggressively responded to SCO’s hardball tactics. In June 2003, Bryan Sims, the company’s vice president of business affairs and associate counsel, suggested that Red Hat sue SCO for sowing doubt among current and potential Linux users. A former practicing lawyer who started at the company in the legal department, Sims witnessed firsthand the impact that the IBM�SCO battle was having on customers. “It became a sales objection,” says Sims, adding he continually reassures potential clients that there’s little risk in using open source software. Red Hat’s customers wanted to know what Sims thought of SCO’s case against IBM (not much) and whether Red Hat would indemnify them for any damages if SCO sued them for copyright infringement (Red Hat won’t) [see "Single Indemnity"]. Mark Webbink, Red Hat’s general counsel, was cautious at first. In its ten-year history, Red Hat had rarely been sued and had never been involved in large-scale litigation. Webbink, who waited until he was 40 before going to law school, says he isn’t “a person who relishes running into court and suing people.” But the GC also concluded that it was just a matter of time before SCO sued Red Hat; its customers, including some of the recipients of SCO’s 1,500 letters, were already getting follow-up calls from SCO about licensing fees. Webbink says, “You finally say, ‘Okay, you guys have kicked enough sand on my blanket. I’m not putting up with this anymore.’ “ Red Hat then dumped a truckload full of sand back on SCO. In a suit filed August 4 in Delaware federal court, Red Hat, represented by Hale and Dorr managing partner William Lee, accused SCO of orchestrating a campaign to undermine the company’s business and to create “fear, uncertainty, and doubt” to slow the growth of Linux. The suit seeks, among other things, a declaratory judgment that Red Hat has not violated SCO’s IP rights and an injunction barring SCO from making claims against Red Hat. SCO’s attorneys at Boies, Schiller moved in September to dismiss, claiming the company had never threatened to sue Red Hat and, therefore, Red Hat did not have grounds to go to court. At press time Red Hat and SCO were arguing over discovery and awaiting a hearing on SCO’s dismissal motion. For SCO, it wasn’t enough to attack Linux programmers, suppliers, and users; the company also went after the software program’s founder, Torvalds. SCO made a direct strike in November by subpoenaing him and other open source activists for depositions in the IBM suit. SCO claims that the open source license for Linux is invalid [see "General Public Larceny?"]. Torvalds has also publicly stated that he takes a “don’t ask, don’t tell” stance toward potential intellectual property claims to contributed code: Torvalds has said he accepts donated code without inquiring whether it’s free of any potential claims. SCO says that’s a big quality problem. Companies that make their “living on proprietary software have strict controls on how that code is written and put into their products,” says SCO’s Tibbitts. “There are no such controls in Linux.” A spokesman for the Open Source Development Lab, where Torvalds works, cited SCO’s subpoenas and declined to comment. Linux enthusiasts say Red Hat and other companies carefully vet new versions of Linux for any preexisting code that might be included. What’s more, they say the very openness of Linux makes it easier to spot infringement and write new code to replace it. Adds Webbink: “The concept that we’ve got people from God-knows-where sticking stuff into Linux…is not how this gets created.” Still, Webbink says he isn’t surprised that Linux has finally wound up in court. Open source software, he says, “is so new, is growing rapidly, and is a threat to a lot of companies.” The controversy is causing some companies to review their technology policies, says Ted Schadler, an analyst at Forrester Research. However, he doesn’t see a stampede away from Linux. IBM and other Linux players “can’t afford to let this get in the way and will pay whatever it takes to make it go away,” he says. No matter how far SCO’s claims against IBM get in court, this much is clear: The freewheeling, easygoing days of the open source movement are over. Programs like Linux are now, for better or worse, big business � and yet another item on the agendas of general counsel.

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