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Re: Novell-MS Pact: SEC complaint?

From: Alexander Terekhov
Subject: Re: Novell-MS Pact: SEC complaint?
Date: Wed, 08 Nov 2006 18:25:49 +0100

In comments to
(Details of Novell-MS Pact - The SEC filing)

The SEC should investigate the Novell-MS agreements. For example, Novell has
failed to mention several massive Risks in recent SEC filings. The agreements
will almost certainly lead to the destruction of Novell's entire Linux business
and, quite possibly, to the destruction or bankruptcy of Novell.

Let me explain:

1. The agreements violate the GPL, on which most of Novell's Linux-related
business is based, according to at least the following reasons and arguments:

a. The Novell-MS agreements include (de facto and de jure) a "covenant not
to sue" and therefore, calling it more plainly, a license.

b. With this license, Novell imposes additional license conditions on the GPL
software, at least through contracts with its customers. This is a clear
violation of the GPL. (Section 6: "You may not impose any further
restrictions on the recipients' exercise of the rights granted herein.")

c. The GPL clearly forbids a patent-related deal as was made in the agreements.
Read section 7 and the patent-related paragraph in the preamble of the GPL.
That's a further violation of the GPL.

d. The agreement only protects "end-user customers". No such thing as
an "end-user" exists for Linux, because anyone is usually allowed to
distribute the software further. The agreement means that a Novell
"end-user customer" is unable to provide the protection to others when
he distributes the software further. So he is unable to grant to others all the
rights which he himself received. Another violation of the GPL. (The preamble
clearly states: "For example, if you distribute copies of such a program,
whether gratis or for a fee, you must give the recipients all the rights that
you have.") End-user customers aren't able to fulfill their obligations.
Novell is thereby itself breaking the GPL and telling others to break it too.

e. Eben Moglen clearly stated that the agreements violate the GPL. He is the
drafter of the GPL, no less, so his opinion is important. Novell has been aware
of his statements, but has failed to disclose his concerns in SEC filings,
especially the 8K. And Bruce Perens made similar statements (of which Novell has
been aware) and certainly is someone who shouldn't be ignored... So Novell knew
that at least several "important" people most strongly disagree with
their interpretation of the GPL and with the pact.

f. Novell violates the GPL and therefore loses all right to distribute or modify
the software. Novell's Linux business is gone.

2. The Novell-MS pact looks like an extortion scheme or protection racket. It
basically says: "Buy products from us, not from our competitors, or we'll
sue you out of existence!" Most companies will have to cave in to such a
threat because they can't spend several years and millions of dollars in
litigation. Microsoft and Novell are too dominant and seem to abuse their
dominant position for such threats. The scheme is substantially similar to the
SCOsource license. The only difference is the topic: patents resp. copyrights.
Extortion schemes are clearly illegal? Novell is gambling its reputation and its
entire business.

3. The pact is further a violation of antitrust law. Microsoft is a convicted
monopolist which is known to try to extend its existing monopoly into other
markets by pretty much any means, e.g. by this pact with Novell. Novell
therefore is conspiring with a monopolist in order to make the monopoly position
stronger and to profit from it. That's certainly illegal?

4. Novell must be aware that most of its customers will be disgusted by its
activities and will choose different distributions in the (rather near) future.
For example, Novell is legitimizing Microsoft's claims that Linux actually
violates some patents, doesn't disclose _which_ patents are allegedly at issue
and thereby helps spreading FUD. This means that the "community"
around Novell SuSE Linux will materially shrink or completely vanish. As a
result, commercial customers will lose interest too. Another reason why Novell's
Linux business will vanish, another undisclosed Risk.

5. Novell tried (and still tries) to hide the big legal issues which are caused
by the pact and to make it all seem valid and harmless in public statements.
This is probably some kind of deception on the investing public and therefore
some kind of shareholder fraud?

6. Novell's 8K SEC filing is at odds with other public statements, as PJ points
out in the article. Therefore, Novell presumably tries to mislead or deceive the
SEC or the investing public and to circumvent the governmental control which is
exerted by the SEC.

7. Novell will likely be sued by Linux copyright holders (esp. companies) for
violating their copyrights and the GPL. Novell will have to pay them lots of
money, at the very least. Another undisclosed Risk.

8. The Novell-MS pact is probably related to the SCO litigation, at least from
Microsoft's standpoint. The pact therefore seems to be intended as an
interference with court proceedings or a plain obstruction of justice. Probably
illegal? Let's see how fast Novell drops out of the SCO lawsuit as an
"inofficial" result of the pact.

9. Microsoft is probably barred from actively asserting any patents against
anyone, simply due to antitrust law. If it ever uses patents actively to harm
its main competition (Linux), it would get in trouble. Therefore, Novell has
paid millions of dollars for absolutely nothing. Lack of due diligence. Waste of

10. The agreements seem to imply two admissions (otherwise the pact wouldn't
make sense for Novell and Microsoft):

a. Novell admits that it has violated Microsoft's patents and thereby accuses
itself of actionable wrongdoing. Such wrongdoing is certainly a Risk, e.g.
because (i) it might involve third parties to which Novell is still liable; and
(ii) the current pact might not yet have covered all of Microsoft's
claims/demands, and Novell might still have to pay several further hundred
million dollars to Microsoft.

b. Microsoft admits that it has violated Novell's patents. This implies that
Novell has failed to cash in (including interest for several years) for this
abuse of its Intellectual Property(tm) earlier and has thereby willfully,
materially harmed the company in the past. Shareholder lawsuit, anyone?

Someone more knowledgable please fill in the blanks (if any:-) and send a formal
SEC complaint. I'm not familiar with this, so I could only provide the
argumentation. You may use this comment text as you like, I'm putting it into
the Public Domain.



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