Friday, June 13, 2008

Red Hat Settlement and the Open Source Ecosystem

The recent settlement by Red Hat of its patent litigation with Firestar Software, Inc. demonstrates the differences how the cooperative nature of the open source industry requires a different approach to settlement of patent infringement litigation. Open source companies operate in an ecosystem of third party licensors, individual contributors, corporate contributors and users. Red Hat is in the middle of such an ecosystem, with relationships both to its upstream and downstream members. Any settlement of patent infringement litigation in the open source market needs to recognize the importance of protecting the entire ecosystem.

Although the terms of the settlement agreement are not yet public, the outline indicates that Red Hat understands this new reality.

The settlement has three significant characteristics which differentiate its terms from traditional patent settlement agreements:

1. The settlement covers all software licensed under the Red Hat brand, whether developed by Red Hat or third parties. This provision reflects the complexity of Red Hat's products.

2. Although the settlement focuses on Red Hat branded products, the open source industry, unlike the traditional software industry, permits third parties to create derivative works and combinations with other products. Red Hat reports that the settlement agreement covers derivative works of Red Hat branded products and combinations including Red Hat branded products. The scope of this protection will be very important and the actual terms of the settlement will be important.

3. Traditionally, patent settlement agreements cover the company and its downstream distributors and users. However, Red Hat has recognized that this traditional approach would not meet the needs of its community and negotiated a settlement that included the upstream members of its ecosystem. The settlement agreement also covers predecessor products of the Red Hat branded product.

Unfortunately, patent litigation is likely to become more common in the future. This settlement agreement is likely to studied carefully by those who draft future settlements.

Sunday, June 8, 2008

ALI Legal Recommendations Could Create New Liability for Open Source Licensors

The American Law Institute ("ALI") has recently published the first draft of the ALI Principles of the Law of Software Contracts ("Principles") <> . The ALI was founded in 1923 and has a membership consisting of judges, practicing lawyers, and legal scholars from the United States as well as some foreign countries, selected on the basis of professional achievement and demonstrated interest in the improvement of the law. ALI is a very prestigious non profit institution whose purpose is to: "publishes various Restatements of the Law, model codes, and legal studies to promote the clarification and simplification of the law and its better adaptation to social needs, to secure the better administration of justice, and to encourage and carry on scholarly and scientific legal work."

These Principles have great potential to clarify the difficult issues of software licensing and, when adopted, will have a significant effect on software licensing. The Principles have been developed by a committee of law professors with limited input from an advisory committee. The Principles are now available for public comment and I want to encourage the community to provide comments on the Tentative Draft (see below).

I, as general counsel of OSI, and Karen Copenhaver, as general counsel of the Linux Foundation have written a letter expressing our concern that several of the proposed terms represent very dramatic changes from existing law which are likely to have a very negative effect on the open source software industry. Although a number of provisions in the Principles will be of interest to the open source community, I want to focus on two recommendations which could have a significant negative impact on open source licensors and contributors.

The Principles recommend the creation of two new "non disclaimable" warranties which would result in significant problems for the open source community. The warranties are the (1) warranty of non infringement of intellectual property rights (such as patents or copyrights) if the contributor knew or should have known of the infringement and the contributor holds himself out by occupation as having knowledge or skill peculiar to the software and (2) warranty of no hidden material defects. Current law (and all OSI approved licenses) permit the contributor (and any licensor) of open source software to completely disclaim all warranties i.e. promises about performance or non infringement which could result in liability to a contributor or a licensor(so called AS IS provisions).

Despite some discussion in the Summary Overview of Section 3 suggesting that these warranties would not apply to open source licensors, the actual language of the first warranty, Section 3.01, would apply it to most open source software licensors and contributors. The relevant section follows:

§3.01 Indemnification Against Infringement

a. Except as provided in (c) or as excluded or modified under (d), a transferor that deals in software of the kind transferred or holds itself out by occupation as having knowledge or skill peculiar to the software must defe
nd at its own expense any action brought by a third party against the transferee that is based on a claim under the laws of the United States or a State thereof by way of infringement or the like if the transferor knew or should have known of the infringement at the time of transfer. The transferor must pay those costs and damages finally awarded against the transferee in any such action that are specifically attributable to such claim or those costs and damages agreed to in a monetary settlement of such action.

The exceptions to the obligation are modest: the obligations would not apply if the licensee uses the software outside the scope of the license or the software was developed based on specifications provided by the licensee. The ability to disclaim this warranty is not permitted under the Principles for the following category of software: "Standard Form Transfer of Generally Available Software" (a defined term in the Principles) . The Principles state that open source software is included in this category. Given the view expressed in the Section Overview, we hope that the provision can be clarified to make the warranty disclaimable for open source licensors.

The second warranty, Section 3.05, would apply to all open source software licensors and contributors and appears to present a more difficult problem. The relevant section follows:

§3.05 Other Implied Quality Warranties

a. Unless modified or excluded, implied warranties may arise from course of dealing or usage of trade.

b. The transferor warrants to any party in the normal chain of distribution and to the end user that the software contains no material hidden defects of which the transferor was aware at the time of the transfer. This warranty may not be excluded. In addition, this warranty does not displace an action for misrepresentation or its remedies.

“Disclosure of a material hidden defect occurs when a reasonable transferee would understand the existence and basic nature of a defect. Disclosure ordinarily should involve a direct communication to the transferee, if feasible. A mere posting of defects on the transferor’s website generally should be insufficient.” From Comment b, following
§ 3.05.

These recommendations also raise similar concerns for commercial licensors. OSI and the Linux Foundation will be soliciting comments on the Principles and expect to have a mechanism to receive those comments by the end of June and will post how to provide comments on our sites. We look forward to hearing from you.