05 January 2011

Open Software Initiative Submitted Complaint About Novell/CPTN Patent Deal with German Antitrust Authority ("Bundeskartellamt")

The Open Software Initiative (OSI) is a non-profit organisation whose mission is to "educate about and advocate for the benefits of open source" that is particularly concerned about 822 Novell patents that are confirmed to be sold to CPTN Holdings LLC for $450 million in cash, in the course of Novell's merger into Seattle-based software company Attachmate Corporation (see press release).

CPTN Holdings LLC, which has first been described as a "consortium organized by Microsoft", turned out to be a joint venture of the four software heavyweights Microsoft, Apple, EMC, and Oracle from a "notified merger project" (Ref no. B5-148/10 of 06.12.2010; product market: "patents") announced by the German "Bundeskartellamt" (Federal Cartel Office, FCO), as reported on  FOSS Patents.

Like every patent issue involving names like Microsoft, Apple, or Oracle, also this deal receives much attention from the IT community. For instance, John Paczkowski of the All Things Digital blog found it "intriguing" and CPTN an "unusual alliance", while speculating that the - up to now undisclosed - patents relate to networking, virtualization and data center technologies. Apparently, a source inside one of the four companies told him that "it was essentially an alliance of convenience" and "it’s cheap defensive insurance".

As to the deal itself, Glyn Moody, an influential technology journalist and Linux/open source advocate, analysed that "if the sale itself is no surprise, the buyer is", since "many had expected VMware to pick up the company" and referred to Steven J. Vaughan-Nichols unproven speculations that Microsoft might play a role not only in the patent part of that deal:
The last thing Microsoft wanted was for VMware [...] to have a major operating system to offer to its customers. [...] Instead Microsoft used Attachmate as a proxy to take Novell off the operating system chess board as an independent Linux company. At the same time, it retains enough direct and in-direct control of Novell and its intellectual property to put them into play if needed to put trouble into Red Hat, Android, or Ubuntu's paths.
Now, reports occurred (e.g. here) that OSI has lodged a complaint with the Bundeskartellamt to "urge the FCO to investigate the CPTN transaction thoroughly and consider appropriate remedies to address the concerns raised" (see press release). This request is essentially substantiated by the following argumentation:
The proposed CPTN transaction represents a potentially new, and unprecedented threat
against open source software:
  1. CPTN Principals have acknowledged that Linux and Open Source is a major threat to their business and have made hostile statements towards open source. Microsoft and Oracle both call out open source as a competitive threat in their most recent 10-K filings.
  2. CPTN principals have substantial market power in operating systems (Microsoft, Apple, Oracle), middleware (Microsoft, Oracle), and virtualization and cloud (Microsoft, Oracle, EMC).
  3. Open source is a substantial competitive threat in operating systems (Linux, Android), middleware (Apache, JBoss), and virtualization/cloud (KVM, Xen hypervisors).
[...] Given the potential for collusion between these competitors to reduce competition amongst them and to harm competition that exists in the marketplace today [...], competition would be better served by the FCO thoroughly investigating the facts and evidence concerning this transaction, rather than giving them the benefit of the commercial doubt:
  1. [...]
  2. Will the CPTN principals decide strategically who will be offered which patents, thereby choosing amongst themselves who will be allowed to compete? And on what terms?
  3. Will the patents be sold to non-practicing entities (NPEs) which can create havoc for open source software without risking the adverse reaction of the market if a practicing entity were to sue directly? 
The creation of CPTN represents a MAJOR disruption to the competitive landscape. Whereas Novell was sincere in promoting and participating in open source software development and had an incentive to maintain their patent assets as a defensive portfolio, CPTN has all the motives and opportunity to do the opposite. That is, they have no incentive to support open source as a competitive alternative to proprietary software. CPTN creates a cover to launch patent attacks against open source while creating for each principal a measure of plausible deniability that the patent attack was not their idea.
From theses statement it appears that OSI in fact requests the Bundeskartellamt to investigate both the "CPTN transaction" and "the creation of CPTN". Such issues, however, might not lie in the competence of the German antitrust authorities but rather might need to be handled on EU level by the Commissioner for Competition.

This unprecedented move of OSI has been explained by OSI President Michael Tiemann: 
the fact that Microsoft was leading the takeover of Novell’s patents was itself alarming to the open source community, but when it was revealed that Microsoft had recruited Oracle, Apple, and EMC to be co-owners of the patents, the OSI Board felt compelled to request that competition authorities take a closer look at the proposed transaction.
Simon Phipps, OSI director in charge with drafting the complaint, further emphasised that
this is a significant new step for OSI, who have not previously referred a matter to competition authorities. It reflects the changing emphasis for the organisation, shifting from a role focused almost exclusively on approving licenses to a more general role representing the interests of the open source movement. Taking positions on important issues internationally is a valuable counter-balance to the influence of computer industry trade associations, and I hope OSI will keep doing it. 
As to the question, why the OSI filed its complained in Germany, Groklaw discovered in an Amended Proxy Statement Pursuant Section 14(a) of the US Securities Exchange Act, filed with the US Stock Exchange Supervisory Authority (SEC), that the closing of the Atachmate/Novell merger is subject to the satisfaction or waiver of each of a number of conditions, among which is 
the receipt of all consents under other applicable antitrust laws, including the approval by the German antitrust authority, the Federal Cartel Office (“FCO”), under the German Act against Restraints of Competition in the version of 15 July 2005, as amended (the “ARC”).
Further and even more interestingly, the obligations to consummate the merger are also subject to
the prior closing of the transactions contemplated by the Patent Purchase Agreement, dated as of November 21, 2010, by and between CPTN Holdings LLC (“CPTN”) and [Novell].
In other words, it appear that Attachmate and Novell can only merge if the patent deal goes through (it also provides the funding for the merger), which in turn requires that OSI's complaint before the Bundeskartellamt will fail. On the other hand side, however, the patent deal may go through while the merger itself is blocked by antitrust authorities or fails for other reasons.

In fact, under some conditions, CPTN may elect to continue the patent deal even if the merger deal will not enter into effect. In such an event the "Patent Purchase Agreement" will remain in full force and effect and
[Novell] and CPTN will enter into a royalty-free, fully paid-up patent cross license for no additional consideration, effective as of the closing of the patent sale, with respect to all patents and patent applications owned or controlled by [Novell] and CPTN on mutually acceptable terms that are no less favorable in the aggregate to either party than the terms of any other patent cross license offered by CPTN to any other person (other than any member of CPTN or an affiliate of any such member).
Andrew Updegrowe, of Boston law firm GesmerUpdegrove knowledgeably explained in a posting on the Standards blog that these few sentences of the Amended Proxy Statement are "a comparative gold mine" for CPTN:
First, note that not only the 882 patents covered by the patent sale are covered. Instead, the parties will negotiate a cross-license to all of the patents, and patent applications, owned by each party. Next, note that if the Attachmate deal dies and the CPTN deal goes through, then the price Novell will have to pay to continue to conduct its patent-based business will be to license all of its patents to CPTN – for no additional compensation.

The second interesting word is “cross license,” suggesting that perhaps CPTN will be holding patents in addition to those it purchases from Novell. If so, then Novell will in fact get something back in exchange for free access to the rest of its patents.

This may also indicate that Microsoft has formed CPTN not to split the cost of the acquisition (unlikely in any event, given its enormous cash reserves), but instead to create a larger pool of patents, or cross license rights, among itself and its unnamed partners (the question, of course, is what patents, and for what purpose?)

The final term of note is that while Novell would get “most favored nation” terms with other licensees of CPTN, it would not necessarily get terms as favorable as the CPTN members.