A Cynical Eye on SCO, MS, and Indemnification

Monday, November 17 2003 @ 10:44 AM EST

Contributed by: PJ

Harvard's Berkman Center for Internet & Society is beginning a new feature, which they are calling "Case in Point". They are going follow a case specifically and discuss it online, and they are starting with SCO v. IBM. They describe Groklaw as a discussion group on the subject and list it as a resource, and while that isn't all that we do, I take it as another confirmation of the value of the comments on Groklaw.

Here is the announcement from their newsletter, The Filter:


"Case in Point is a new feature that will focus on a particular case of significance, track its progress, and ask Filter readers for their input on some of the important issues it raises. The first Case in Point is Caldera v. IBM, also called the case against open-source. Caldera Systems (SCO) sued IBM in a Utah state court. †The complaint alleges that the open-source operating system, LINUX, contains portions of UNIX proprietary code to which SCO has taken title. †SCO claims that IBM:

"- misappropriated SCO trade secrets that were contained in OpenServer and UnixWare and used them to promote sales for LINUX,
" - engaged in unfair trade practices by using this information to damage the market for UNIX,
" - used deceptive practices by misleading SCO as to IBMís true intention to abandon a joint UNIX software development project,
" - interfered with the contracts that SCO had with its UNIX clients by inducing them to switch to LINUX, and
" - breached obligations of confidentiality by distributing copies of UNIX to the public under an open-source licensing scheme. †

"As evidence of these claims, SCO alleges that it would have been far too time-consuming and expensive to independently develop an Intel-based UNIX flavor as quickly as LINUX appeared on the market. † See the complaint and attachments at http://www.sco.com/ibmlawsuit/

"Some press coverage of the case is at

"Some discussion forums looking at the case are

"Before we look at IBMís response, letís consider the complaint. †It doesnít refer to any copyright at all. †All of the claims are based on breach of contract and unfair trade practices. † Discussion Question: †If you are distributing software world wide and losing sales to a competing product that you believe incorporates your technology, what are the advantages of abandoning/postponing copyright claims in favor of breach of contract/unfair trade practices? †Does the answer differ depending on your jurisdiction?

"If you are interested in commenting on this question, please go to H2O and register for the SCO-IBM project. The discussion will begin in one week. †Results will be reported in the next Filter issue."

The Filter is a monthly newsletter, so the report will be on December 14, after which I gather there will be another question for consideration. The director of the Berkman Center, John Palfrey, also Lecturer on Law, Harvard Law School, is going to be a participant in the SCO discussions. The first session will likely include noticing that the case isn't called Caldera v. IBM any more. Only kidding. The newsletter has it wrong, but the web site got it right. There isn't much Harvard doesn't get right, in my experience, when it comes to gathering valuable legal information.

I have taken onlineclasses offered by the Berkman Center in the past, in what they now call their BOLD series, and it was a wonderful experience, as you will discern from looking at the materials they still have online from the course. It caused me to change my area of specialty, actually. Here is a page of just some of their offerings, and if you once start clicking on the links, I guarantee it'll be hard to stop. They are also working on a book about internet law, which will have "an online component".

This isn't a class about SCO, just a discussion, but that doesn't mean it won't be of value. My experience with Berkman was a while ago, so I don't know the new people there, and participating in things like this may have privacy issues, so it's up to you individually to investigate matters like that and make your own decisions as to whether to participate or not. You don't have to register to read the discussion, just to participate. I will let you know their results from the Filter in any case.

While it is a cynical question they pose as the first question for discussion in the series, the answer should be of interest to us addicts.

Speaking of cynical, here is an article in last Sunday's San Francisco Chronicle about short selling. It is about a real case where short sellers did everything they could, according to the judge now sitting on the case, to send a company's stock down, including sending info to journalists badmouthing the stock. Then, they brought a shareholders' suit. Honestly, the more I read about Wall Street, the less I want to participate. Anyway, I've warned you that it's like picking up a rock. It did, however, make it possible for me to understand what short selling is, and maybe it will do the same for you, those of you who are not financial wizards already.

The Inquirer has an article today, in which they do some math on profit margins for various Microsoft offerings:

"The grand-daddy of them all was the unit responsible for Windows. It had costs of just $545 million but generated a profit of $2264 million, a staggering 415.4% profit on the money they put into it.

"Let's put this in context. Dell's recent quarterly statement shows its margin at about 9%, which is a lower margin than even the least productive of Microsoft's profit-making groups. IBM's margin is similar to Dell's but HP's is about 6% in total, thanks mainly to printers, and Sun Microsystems is even lower."

I see something else when I go to read the SEC filing itself. The story I see is that profits for Windows are flat. No wonder GNU/Linux is on Microsoft's radar and no wonder they are hyping Longhorn for all they are worth. Here is how they describe it in the 10Q just filed, and they use the word "Client" here to mean "Windows XP Professional and Home, Windows 2000 Professional, and other standard Windows operating systems":

"Client revenue in the first quarter was flat compared to the first quarter of fiscal year 2003 at $2.81 billion driven by a flat reported license growth and no year over year change in product mix. In the first quarter of fiscal 2003, the Company completed its transition to new licensing terms under which OEMs are billed for products when Certificates of Authenticity (COAs) are acquired, rather than upon PC shipment, resulting in an increase in reported licenses related to inventory accumulation. PC shipments growth in the first quarter of fiscal year 2004, driven primarily by strength in the consumer and small business market segments, enabled Client to offset the inventory accumulation impact in the first quarter of fiscal 2003. Client operating income for the first quarter of fiscal year 2004 was flat compared to the first quarter of the prior year primarily as a result of flat revenue and a 1% growth in operating expenses."

For the three months ended Sept. 30, in millions, Client revenue for 2002 was $2,807; for 2003†, it was $2,809. †Operating Income for 2002† was $2,270; for 2003, it was $2,264.

Here is another part. Microsoft has a paragraph in their 10Q about the new indemnification they are offering:

"We provide indemnifications of varying scope and size to certain customers against claims of intellectual property infringement made by third parties arising from the use of our products. We evaluate estimated losses for such indemnifications under SFAS 5 as interpreted by FASB Interpretation 45, Guarantorís Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45). We consider such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. To date, we have not encountered material costs as a result of such obligations and have not accrued any liabilities related to such indemnifications in our financial statements."

So the indemnnification hasn't yet cost them a thing, which is apparently pretty much what they were expecting. Once again, indemnification proves to be a red herring. This despite the fact that, according to the 10Q, Microsoft is now "the defendant in more than 30 patent infringement cases."