Friday, April 8, 2011

Analysis of new Novell patent deal structure according to OSI statement

Having just read the Open Source Initiative's latest statement on the sale of 882 Novell patents to CPTN Holdings LLC, I see a probability of 90% that the consummation of the transaction is now imminent. There's a deadline on Tuesday, April 12, and most likely the deal will close by then. It seems to me that the regulatory agencies have obtained very significant concessions from Microsoft and EMC, and I can't see what else the antitrust authorities could realistically do to address concerns by competitors and open source organizations.

[Update on Apr 14, 2011] A new SEC filing by Novell shows that the US Department of Justice decided to let the April 12 deadline expire, which means that while the DoJ could theoretically still challenge the transaction, it apparently doesn't have any more objections at this stage. In all likelihood closing is now a mere formality. [/Update]

OSI still declares itself unhappy, but I believe they must realize that competition law has its limits. I doubt that the regulators could have imposed the changes that apparently occcurred to the transaction if they had ever had to defend those in court. To me this looks like a deal that the companies agreed upon in order to avoid further delays, not because of a firm legal obligation.

The Bundeskartellamt (the German Federal Cartel Office) gave the OSI permission to publish its latest submission to the regulators and a "non-expert summary" of how the deal has changed since the original announcement. I previously blogged about that late November announcement, was first to publish the names of the four companies who jointly own CPTN Holdings LLC (Apple, EMC, Microsoft, Oracle), and commented on a statement by EU competition chief JoaquĆ­n Almunia, who said the transaction didn't require EU-level notification.

Changes to the deal structure (according to OSI)

The original deal envisioned that CPTN Holdings LLC would become a long-term owner of the 882 patents to be sold under the deal. Now it appears that CPTN Holdings LLC will be dissolved shortly after the transaction. Each of the four owners will

  • be granted a perpetual license to 100% of the acquired patents, and

  • get to own 25% of the acquired patents,

  • but

  • Microsoft will sell its entire 25% allocation right away to Attachmate, i.e., Novell's acquirer, and

  • the parties appear to have promised that EMC's allocation won't include any of 31 patents previously identified by EMC as virtualization-related patents.

The OSI also states that "[a]ll patents will still be subject to all existing licenses, covenants not to sue and similar restrictions." However, I am not sure whether this is any "change". If the license grants made by Novell in the past were already worded in a way that made them survive changes of ownership, then this part is merely declaratory and doesn't signify any modification of existing agreements.

Let me clear up the confusion that may arise from a non-trivial deal structure having changed. Under the deal structure described above, CPTN Holdings LLC will end up like a non-returnable patent bottle, bound to be forgotten, and the lasting net effects will apparently be that

  • Novell sells 882 of its patents, but it will retain hundreds of patents and its new parent company, Attachmate, will own 25% of the 882 patents sold (see further below),

  • Apple, EMC, Microsoft and Oracle will never have to defend themselves against any Novell patents (not just the 882 that are sold but all others as well),

  • Apple buys whichever 25% of those 882 Novell patents,

  • Oracle buys whichever 25% of those 882 Novell patents,

  • EMC buys 25% of those 882 Novell patents, which can also be any of those 882 patents except that 31 patents identified as virtualization-related (the core business of EMC subsidiary VMware) won't be among them,

  • Microsoft's patent portfolio will be the same after all of this as it was before because

  • Attachmate, Novell's new parent company, will own the 25% of those patents that Microsoft could otherwise have received as a result of the dissolution of CPTN Holdings LLC.

The resulting relative growth of the patent portfolios of Apple, EMC and Oracle is fairly limited, given that those companies already own large numbers of patents and file for new ones on a daily basis, so if each of them gets to own approximately 220 more patents, it doesn't make much of a difference.

Competition logic

As I stated in a previous post on this subject, I didn't see any deal-specific theory of harm. I certainly support significant parts of OSI's criticism of software patents and would actually like to see them and their member companies communicate those concerns more effectively to policymakers. But I thought the concerns were generic -- relating in principle to all software patents and to all owners of such patents -- as opposed to particular reasons for which the sale of 882 Novell patents to CPTN Holdings LLC would have had to be blocked by antitrust regulators.

There's a vibrant secondary market for patents, and so far I'm not aware of any antitrust intervention against any such transaction. By the way, just to show how much is going on in terms of patent transfers, Google's $900 million bid for thousands of Nortel patents was made public earlier this week. I haven't blogged about that bidding process yet, but I commented on Google's aggressive pre-auction bid on Twitter (as reported by The Guardian's Technology Blog) and I answered questions I received from the Financial Times, the Los Angeles Times, BBC News, and

I have done a fair amount of work in connection with competition enforcement, and I believe that no one can blame the regulators for having achieved too little in connection with the Novell deal. Realistically, the regulatory agencies would have had a very hard time defending a blocking decision in court. I, personally, doubt very strongly that they could have won such a case. But there is always some leverage in the ability of a competition authority to delay a transaction by additional reviews and requests for information. There are companies that elect, under those circumstances, to make concessions in order to accelerate the process. The changes on which Attachmate, Apple, EMC, Microsoft and Oracle agreed look like what a regulator would usually consider sufficient remedies. And that's why I guess we're only days away from the closing of the deal, which according to earlier reports is scheduled for next Tuesday (April 12, 2011).

While I don't think there was a legally defensible case against the deal even in its originally contemplated form, it's easy to see that the concessions made by the companies reflect the idea that the acquisition of additional patents in a certain field by a company dominant in that field could, theoretically, raise concerns.

Microsoft was found dominant in certain markets by regulators a while ago. While many (probably most) of Novell's patents relate to markets in which Microsoft isn't dominant, my best guess from the outside is that it would have been too time-consuming to sort out exactly which patents relate to Microsoft's core business and which ones don't, so they apparently accepted not to get to buy any of them at all. A recent SEC filing already indicated such a concession.

EMC's VMware subsidiary is a major force in virtualization. I haven't examined that market, but I guess the regulators believed they could perhaps make a dominance case here, which is why VMware accepted to exclude virtualization-related patents from the deal.

Apple and Oracle are free to buy any of those patents because

  • at this stage it would be very difficult to claim that Apple is dominant in the market for mobile communications devices as a whole (its market share isn't high enough for a simple, straightforward dominance case), and

  • while Oracle may or may not be dominant in the database management systems market at this point, I doubt that any of the patents in question would change Oracle's position in that market in any non-negligible way.

OSI's remaining demands are legal nonsense

In its latest statement, the OSI still makes demands concerning remedies it wants the regulators to impose. I have looked at those and, frankly, those are just a political statement that doesn't make any legal sense whatsoever.

OSI basically claims that even after the changes I outlined above, they still think Novell was a great open source-friendly patent owner and companies like Apple and Oracle, and to some degree even EMC, aren't similarly open source-friendly in OSI's opinion. Therefore, they want commitments that none of those patents will ever be asserted against software published under an OSI-approved license.

There's no way that a regulatory agency anywhere in the free world could put open source software above the law. If you don't want patents to be asserted against open source software, you must abolish software patents altogether (I would love that). But if those patents exist, the use of particular kinds of licenses cannot constitute a carte blanche to infringe patents. Open source must abide by the law, including intellectual property law, and considering how widely adopted open source software has become under the legal framework as it stands, there can be no doubt that open source and software patents cannot only coexist but open source can even thrive despite the existence and enforceability of such patents.

If the OSI had come up with any remedy proposal that would make legal sense, maybe the regulators would have given it some thought and held up the deal. But with demands of the just-wishful-thinking kind, OSI effectively admits that the regulators have done whatever they could, and it's time to move on.

OSI's theories include, among others, the fear that "Oracle [could] take Android down based on legal assertions of Middleware and Virtualization patents [and] would [thereby] significantly weaken [OSI's] efforts in promoting open source to mobile developers." OSI claims Oracle is "dominant" with Java. I think this is just propaganda. I'm sure that Google can work out a deal with Oracle anytime if Google recognizes the rights Oracle asserts and accepts reasonable terms. Android's intellectual property issues are unprecedented, and some of those issues will have very significant impact on the market, but that doesn't mean that companies enforcing their rights in connection with Android are no longer allowed to acquire patents.

Two days ago, the Linux Foundation's Executive Director, Jim Zemlin, said that patent and copyright concerns related to Linux (and Linux-based Android) are just "FUD". I don't agree with Zemlin's unsubstantiated and desperate attempt to brush aside legitimate concerns, and the fact that he feels compelled to make such statements is interesting in and of itself, but by making up unrealistic doomsday theories for Android, the OSI clearly contradicts the LinuxFoundation and exposes itself to accusations of "FUDding" whenever Zemlin gives his next speech.

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