Wednesday, April 20, 2011

US Department of Justice announces modified Novell patent deal

The United States Department of Justice (DoJ) just announced that a deal that originally envisioned the sale of 882 Novell patents has been modified in order to address its concerns. The DoJ also announced close cooperation in this regard with Germany's Federal Cartel Office (FCO; German name: "Bundeskartellamt").

[Update] The German FCO made an announcement of its clearance decision that is materially consistent with the DoJ's announcement. [/Update]

In formal terms, the DoJ's work is not yet finished: its Deputy Assistant Attorney General Sharis Pozen said that "the department will continue to investigate the distribution of patents to ensure continued competition." But in practical terms, this looks like a done deal, and Novell's stock price is now only a hair's breadth below the $6.10 per-share price to be paid by Attachmate, the acquirer of Novell as a company.

[Update 2 on Apr 21] Novell's latest SEC filing just announced that the formal consummation of the patent deal as well as Novell's acquisition is now scheduled for April 27, 2011. Apparently that will be the date barring any unforeseeable events. [/Update 2]

The announcement by the DoJ essentially reaffirms what I blogged about two weeks ago with only smaller changes:

  • The DoJ refers to "approximately 882 patents". A Novell SEC filing revealed a few months ago that there was some disagreement resulting from the fact that Novell originally listed some patent applications that were withdrawn or rejected. There were talks between the parties about whether to replace those assets with others, or whether to adjust the price. The word "approximately" suggests that the number may have changed, or may still change, but only slightly in all likelihood.

  • There are 33 (not 31 as originally announced by the OSI) virtualization-related patents that EMC won't get to acquire.

  • The fact that Microsoft will effectively sell back its allotment of patents is not new. The DoJ's announcement just makes it clearer than the OSI's recent statement that Microsoft is granted a license to all of the patents changing hands (including the roughly 200 patents that Microsoft will own temporarily) as well as "any patents retained by Novell." Considering that Microsoft for hundreds of new patents every month, it seems obvious that they don't have to acquire a couple hundred Novell patents in order to beef up their own patent portfolio. By contrast, Google with its relatively small portfolio would have benefited from such an acquisition in a more significant way, relatively speaking.

  • The DoJ mentions some provisions according to which CPTN Holdings LLC and its owners (Apple, EMC, Microsoft, Oracle) won't be allowed to interfere with Novell's relationship with and commitments to the Open Invention Network. In other words, after the acquisition it will be the prerogative of Attachmate (Novell's acquirer) to make a determination concerning Novell's post-acquisition relationship with the OIN. Maybe the original agreements stipulated that Novell would leave the OIN, or maybe there wasn't any such provision but the DoJ was afraid of the patent deal affecting Novell's partnership with the OIN. In my opinion, the flood of patent lawsuits especially in the smartphone space shows that the OIN doesn't deter anyone from asserting patents against Linux and Linux derivatives like Android. Therefore, whether or not Novell continues to be an OIN member doesn't matter too much.

  • There's one item in the DoJ's announcement that isn't clear without knowing the details:

    "All of the Novell patents will be acquired subject to the GNU General Public License, Version 2, a widely adopted open-source license, and the Open Invention Network (OIN) License, a significant license for the Linux System"

    Novell made some commitments "subject to" the GPL and the OIN license in the past. It's not clear to me inhowfar the DoJ imposed anything new on Novell or any of the acquirers beyond already existing obligations.

    In its criticism of the deal, the OSI, FSF and others claimed (not for the first time) that they believe the GPL is incompatible with obligations to pay patent royalties. However, the DoJ's announcement doesn't necessarily say that the acquirers of those patents are now required to make those patents available on royalty-free terms to publishers, distributors or users of GPL'd software.

    My guess is that the DoJ didn't support those claims by OSI and FSF that royalty-free is the only GPL-compatible option, just like the European Commission also found that royalty-bearing patent license deals can be structured in open source-compatible ways. In other words, some royalty-bearing deals may not work for open source, but others do. Per-unit royalties could be difficult given the way open source software is shared, but fixed royalty amounts or royalties relative to a company's revenues are possibilities.

    There's a perfect example of patent royalties that were paid on software distributed under the GPL: Red Hat's $4.2M FireStar settlement, which is mostly a patent license deal (just with additional provisions to withdraw a lawsuit). In Eben Moglen's opinion, the related deal would have been compatible even with the GPLv3. I assume that such GPL-compatible patent license deals would still be a perfectly valid option for the companies acquiring those Novell patents if they find GPL'd software to infringe any of those patents. But I don't know what exactly the revised patent purchase agreement stipulates (except for what the DoJ just announced, which is vague).

If any additional details become known, then there may be more clarity concerning the "subject to" language. For now this is all a bit speculative. It also remains to be seen inhowfar the regulatory intervention in this case could backfire on some of the complainants should similar issues ever come up in connection with the aforementioned OIN. Regulators didn't seem to care much about the secondary market of patents in the past. They apparently raised concerns (whether or not those would have been defensible in court is another question) in this case, and who knows what questions may come up in connection with the sale of Nortel's patent portfolio.

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