Free Software Foundation Europe's concerns regarding the acquisition of Novell's patents by CPTN Holdings

[Original letter (German)]

We are writing to share our concerns regarding the acquisition proceedings in the case regarding Microsoft, Apple, EMC and Oracle / CPTN Holdings LLC (reference number B5-148/10).

Free Software Foundation Europe (FSFE) is an independent, non-profit, charitable organisation dedicated to Free Software. FSFE maintains that the freedoms to use, study, share and improve software are critical to ensure equal participation in the information age. We work to create general understanding and support for software freedom in politics, law and society-at-large. We also promote the development of technologies, such as the GNU/Linux operating system, that deliver these freedoms to all participants in digital society.

In pursuit of these goals, we have a long history of active involvement in competition proceedings that affect Free Software. The merger, in which a collateral sale of patents involves Microsoft, Apple, EMC and Oracle / CPTN Holdings LLC, is such a case.

Many of Novell's patents are likely to read on Free Software

Novell has a long history of Free Software development, in particular through Suse Linux GmbH, which it acquired in 2004. Novell has a large stake in Unix development - a family of operating systems closely related to GNU/Linux, the most important piece of software in the Free Software world -, as well as in security and authentication, with huge bearings on network applications and Internet technologies.

To our knowledge, the proposed merger represents the first time that in an acquisition of this type such a substantial patent portfolio is spun off to a non practicing entity, arguably a consortium of software enterprises. (For example, nothing of this sort was done during the recent acquisition of Sun by Oracle.) The list of patents to be acquired by CPTN Holdings is not public. But given Novell's long-standing involvement in Free Software, it is very likely to contain a large number of patents which can be alleged to read on technologies related to the Linux kernel and other technologies of crucial importance to Unix and GNU/Linux operating systems.

Microsoft has a history of anti-competitive behaviour involving patents

Microsoft has been found several times in breach of antitrust regulations in both Europe and the United States, and has a significant and growing track record of using its patents in order to restrict competition from Free Software.

In May 2007, Microsoft publicly claimed to hold 235 patents which read on the Linux kernel and other Free Software technologies1. The company continues to refuse to identify these patents.

Based on this unfounded claim, Microsoft has concluded patent deals with a number of companies particularly in the embedded sector, such as Brother International Corp., Fuji Xerox Co. Ltd., Kyocera Mita Corp., LG Electronics, Samsung Electronics Co. Ltd. and TomTom International BV2.

The company reportedly uses these deals as the basis for an ongoing campaign to seed fear, uncertainty and doubt among companies that offer Free Software, and among their customers. We have received a number of unconfirmed and unofficial reports consistently mentioning that this approach always takes place under a very strict non-disclosure agreement. The confidentiality of those reports leaves us unable to confirm their sources.

More recently, a plan of Microsoft to seed a number of patents with non-practicing entities (commonly known as "patent trolls") has been exposed and neutralized by the Open Invention Network, an entity that aims to protect GNU/Linux and the "Linux environment" form patent threats. A number of patent were offered to an invitation-only auction. The winning bidder then offered the same to OIN, which made them available free of charge to OIN licensees3.

More clarity needed on CPTN Holdings' structure

Allowing CPTN Holdings to proceed in acquiring the patents in question from Novell without any conditions would be likely to significantly increase Microsoft's capacity to take offensive legal action against Free Software. It would also make Microsoft's campaign of fear, uncertainty and doubt much more effective. This is particularly true as the patents contained in the deal have not been disclosed.

While Microsoft is only one of four partners in CPTN holdings, this does not effectively prevent Microsoft (or any of the other partners) from using the patents in question to restrict competition, whether by legal action or by the mere threat thereof.

Apart from Oracle, none of the partners in CPTN Holdings have a substantial stake in public and relevant Free Software projects. Oracle is the second largest proprietary software company in the world, and has a substantial patent portfolio. This is sufficient to shield it from any attacks from practicing entities. Oracle could be uninterested in the fate of other companies who have based their business on the Free Software projects affected by the patents which CPTN Holdings wishes to acquire. All the acquirers – to different degrees – receive a substantial competitive threats from Free Software alternatives in more than one of their core business (operating systems, middleware, virtualization).

There is no information publicly available regarding the internal governance structure of the consortium. It is not clear which share in the consortium is held by each partner, and how decision power is allocated.

Furthermore, it is possible that CPTN is merely intended to serve as an interim vehicle to hold the patents until the acquisition of Novell by Attachmate is complete. The patents may be sold on at any point in time, and/or the consortium may be dissolved. If Microsoft or a proxy were to become the sole holder of the patent portfolio affected by the deal, the company's potential to restrict competition would be increased even further.

Suggestions to safeguard competition

Based on these considerations, we ask the Bundeskartellamt to analyze in depth the acquisition in order to better understand the implications and possible consequences of this deal. In particular, there is a need for clarity regarding the governance structure of CPTN Holdings, and the respective shares of the partners in the holding company. It is also necessary to investigate the consequences for competition in the software market of the role, long time commitments, and rules of liquidation of CPTN Holdings, as well as how the patents could sooner or later be put on sale by CPTN Holdings to a third party (or indeed one of the consortium partners, Microsoft in particular). Yet even before such analysis, the potential risks of this deal to competition in the software market are sufficiently clear. For this reason, we ask the Bundeskartellamt to make its approval of this deal conditional on effective measures to prevent the patents in question from being used against Free Software in an attempt to restrict competition. The nature of such effective measures would need to be ascertained after a thourough examination of all the aspects of both the main deal (B7-103/10) and of the collateral one (B5-148/10).

As an effective measure, CPTN Holdings should be required to make the patents in question available under conditions which allow their use in programs distributed under the GNU General Public License and other copyleft licenses4.

Footnotes

1. Microsoft takes on the free world" Fortune, May 14, 2007
2. Please see Annex I for a collection of reports on such deals.
3. "OIN outmaneuvers Microsoft, buys Linux patents" ZDNet, September 9, 2009
4. Copyleft is the practice of using copyright law to offer the right to distribute copies and modified versions of a work and requiring that the same rights be preserved in modified versions of the work. In other words, copyleft is a general method for making a program (or other work) free, and requiring all modified and extended versions of the program to be free as well. [Copyleft - on Wikipedia]

Annex 1

1. Linspire (June 2007)

"Linspire will work with Novell and Microsoft to develop open-source "translators" that allow Open Office and Microsoft Office users to share documents more easily. The company has also licensed Microsoft's RT audio codec to make its Pidgin IM (instant messaging) client interoperable with Windows Live Messenger and other Microsoft products. As part of the deal, Linspire also pledged to add support for Windows Media 10 in future releases of its Linux OS distribution. The company also agreed to make Windows Live Search the default search engine in Linspire 5.0. Financial terms of the agreement between Linspire and Microsoft were not disclosed."

2. LG (June 2007)

"As part of the deal, LG, one of the world's largest electronics companies, can use undefined "patented Microsoft technology" in its products, including Linux-based devices. […] As in similar deals with Xandros (announced earlier this week), Novell, Samsung and Fuji Xerox, Microsoft did not detail just what patents LG was licensing, and LG did not say if its Linux-based devices violated any Microsoft patents."

3. TomTom (February 2009)

"What Microsoft really wants from TomTom isn't money, it's support in building fear about Linux in other companies, especially the makers of mobile and wireless devices just like TomTom's own product. Microsoft wants you to believe you need a Microsoft license to deploy Open Source software. This settlement is likely to deter some of those companies from using Linux at all."

4. Novell (Moonlight) (December 2009)

"As a result of today's expansion of that deal, Moonlight users will enjoy protection under the patent covenant regardless of whether they're using Novell's (NASDAQ: NOVL) Linux distro or another distributor's."

5. Amazon (February 2010)

"(Redmond has claimed that Linux violates more than 200 of Microsoft's patents for years. There's one little problem with this assertion: It's not true.) […] Amazon just signed a patent cross-licensing deal that pays Microsoft intellectual property fees for, among other things, patents that cover Amazon's Linux-based Kindle e-reader and its Linux servers. Too bad Microsoft has never, ever been able to show that its patents cover anything to do with Linux."

6. HTC (April 2010)

"Dealing directly with Google would run the risk of Microsoft having to prove that their patents were both valid and that Linux infringes them. That's taking chances that Microsoft doesn't want to take. Besides, that might lead to Microsoft suing Google and Google returning the favor. Microsoft doesn't want that. They might lose. Even if they won, they'd be looking at years of expensive litigation. It's so much more profitable to just threaten smaller companies into paying them off."