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11/22/2003
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John Foley
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SCO Group is taking its Linux fight directly to users. Will your company face a lawsuit?

SCO Group, the software company that claims Linux is infused with a million lines of its Unix source code, is taking its fight directly to Linux users. The vendor said last week that it will initiate legal proceedings against one or more large companies, charging that their use of the open-source operating system violates its copyrights. If a court were to eventually rule in SCO's favor, the outcome could have implications for all companies that use Linux. And that's the way SCO wants it.

There has been ample warning this day would come. From the time SCO filed a $1 billion breach-of-contract suit against IBM eight months ago—charging, among other things, that IBM illegally moved copyrighted Unix code into Linux during development—the vendor has signaled that Linux users might one day be held accountable, too. "We've always said it was license or litigate," SCO CEO Darl McBride says.

In May, SCO sent letters to 1,500 companies alerting them to its intellectual-property concerns. Then, in August, the vendor introduced a licensing program intended to persuade IT departments to voluntarily pay SCO $800 per CPU for the right to use Linux. (That fee doubled on Oct. 15.) A week after launching the program, SCO said more than 300 companies had responded, yet only one had signed up. McBride declines to give a current tally on licenses.

SCO's pending legal action appears to be an attempt to prompt more companies to sign its license to avoid being sued. "They're [trying] to make the users nervous and bring them to the table," says Brian Ferguson, a partner in the intellectual-property practice of law firm McDermott, Will & Emery.

It's not certain the strategy will work. Linux distributors IBM and Red Hat Inc. insist SCO's claims have no merit, while an angry chorus of open-source advocates argues that SCO's actions are misguided, hypocritical (SCO used to sell Linux), and doomed to fail. What's more, if the uptake of Linux is any measure, businesses are moving ahead with deployments: Subscriptions for Red Hat's Enterprise Linux grew 10% in the fiscal quarter ended Aug. 31, compared with the previous quarter.

"SCO's threat to sue a Linux user doesn't worry me," says Cliff Rittel, director of IT at ADCS Inc., a secure-document-management company. Rittel figures Linux can replace his company's Windows environment at about one-fifth the cost. "We're going to go on a big push to install Linux," he says.

But make no mistake: The decision to use Linux in business-technology environments just took on added risk. At least one company using Linux now has a "target on its back," says attorney Ferguson, who estimates damages sought by SCO in a single case could run into the hundreds of millions of dollars.

Like some other Linux supporters, ADCS's Rittel says the General Public License, which governs the use of Linux, provides all the protection his company needs. Yet McBride is focused on two words that appear at the end of the license: No Warranty. CIOs already are tuned in to the issue. When InformationWeek Research recently asked 400 business-technology professionals about their concerns with open-source software, 37% cited accountability if problems were to arise, and 28% cited intellectual-property issues. SCO's pending legal action underscores those concerns. "I would recommend they pay very close attention," says Yankee Group analyst Laura DiDio.

Peter Schamel, senior VP and CIO with iN Demand Networks, which distributes content to cable-TV networks, believes SCO should provide more evidence to support its copyright claims before going after users. "I wish I had enough information to understand if they have a valid claim," he says. If SCO is correct, Schamel says, the company should be fairly compensated. "We're an [intellectual-property] company, too," he explains.

Which company or companies does SCO have in its sights? As of last week, that decision had not yet been made. "We're culling the list down," McBride says. The mystery will be over shortly; SCO plans to initiate legal action within 90 days. The target will be a large, "fairly high-profile" company or companies that have been uncooperative to date, McBride says.

SCO has been getting its finances in order for a legal fight. Last week, it revealed it would give $1 million in cash and 400,000 shares of common stock, valued at $8 million, to the law firm heading up its legal maneuvers, Boies, Schiller, & Flexner LLP, as compensation for work already done. The firm also stands to get 20% of any award or settlement that may come to SCO. Partner David Boies, who provided outside counsel to IBM for years, is overseeing the legal strategy. Separately, SCO last month secured $50 million in private financing to fund its litigation for the long run.

It's possible, even likely, that other lawsuits will result from SCO's intellectual-property push. McBride warns that Novell will be in violation of a noncompete clause signed in 1995, when the former Santa Cruz Operation purchased Unix assets from Novell, if Novell begins distributing the open-source operating system after its planned acquisition of SuSE Linux AG. "They'll be hearing from us," McBride says. And SCO last week also warned that "industry consortia" and other technology companies are fair game, too.

The result of all this is that SCO has become about as popular in Linux circles as Code Red was with system administrators. But McBride, a self-described cowboy, isn't about to back down. He once had his administrative assistant return the call of someone who challenged McBride to a fight—to get a time and place. "We have developed thick skin," he says.

SCO has been on the receiving end of court papers, too. IBM countersued SCO, and a court date has been set for the spring of 2005 in Utah district court. Red Hat filed its own suit "to stop SCO from making unsubstantiated and untrue public statements" in the matter.

SCO's Escalating Battle chart

Both sides have begun to rope in outside parties. IBM recently subpoenaed the Yankee Group and three financial companies as it tries to build a case; SCO subpoenaed Linux creator Linus Torvalds.

With all the suits, countersuits, and threatened suits, some companies are being careful about what they say. A spokesman for Google Inc., which uses 8,000 Linux servers, declined to comment for this article, as did a spokesman for VeriSign Inc., another large Linux shop. "I'm not going anywhere near this fireball," responded the CIO of a financial firm that uses Linux to a request for an interview.

The impulse to seek protection from SCO's claims may be growing. Hewlett-Packard says at least 10 companies, most of them major corporations, have signed up for a plan it introduced Oct. 1 that offers customers indemnity from potential SCO legal action, as long as they get their Linux technology from HP. Neither IBM nor Red Hat offers similar protection (see "HP's Big Bet," Sept. 29, 2003). "We haven't changed our position at all" about offering customers indemnity, an IBM spokeswoman says.

Some experts continue to advise CIOs to wait for a court ruling before signing SCO's Unix-Linux license. Yet, given SCO's aggressive pursuit of, in McBride's words, "justice," it's getting harder for Linux vendors and users to duck the trouble. Many believe SCO's strategy will ultimately unravel in court. But what if SCO prevails? In that case, says lawyer Ferguson, "The industry is going to be faced with having to write a lot of checks to SCO."

--with Charles Babcock and Larry Greenemeier

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