Change in Address

I have moved my blog to www.lawandlifesiliconvalley.com/blog/. I hope that you will join me there!

Silicon Valley: Financial Crisis or Opportunity

I just returned from Silicon Valley Bank's Twenty Fifth Anniversary celebration (Silicon Valley Bank is the leading bank for venture capitalists and venture backed companies). It was attended by many venture capitalists and entrepeneurs, so it was a great event to determine the attitude of the Silicon Valley ecosystem to the rapid changes in the last month. Until recently, Silicon Valley had watched the financial meltdown as an observer, but last week the financial crisis reached Silicon Valley. The crisis became very real to Silicon Valley when Sequoia Ventures, one of the most successful venture capital firms, held a meeting for its CEOs announcing that the "Good Times" are over.
http://www.slideshare.net/eldon/sequoia-capital-on-startups-and-the-economic-downturn-presentation?type=powerpoint . They recommended strong measures: cutting expenses very aggressively, raise as much money as possible, establish a heavily commissioned sales structure and become cash flow positive as soon as possible. Further, they suggested that any company without a year of cash in the bank was in trouble.

However, this message of gloom has generated a contrary response from experienced investors such as Alan Patricof, founder of Apax Ventures. http://www.paidcontent.org/entry/419-patricof-on-rip-good-times-dont-burrow-into-a-dark-hole/ . However in a tribute to the respect for Sequoia Ventures and its success, the Sequoia powerpoint has been on the agenda for every Board meeting which I have attended (my friends who are Board members confirm that this discussion is ubiquitous). My experience has been that the Boards have decided that they need to be cautious, but that business will continue. The Sequoia presentation has even generated its own parody. http://www.alleyinsider.com/2008/10/the-last-vc-memo-we-ll-publish-this-week-

This view was confirmed by the conversations that I had at the Silicon Valley Bank event. Both venture capitalists and entrepeneurs were modestly optimistic. They believe that the situation is serious, but that the need for innovative products and services will continue. We will all find out in five years, so stay tuned.

Raku Museum: A Japanese Gem in Kyoto

I was in Japan on business for the first week of October visiting my Japanese clients. I always to try extend these trips over a weekend to visit other parts of Japan. I was fortunate to be able to a short weekend in Kyoto this trip. Kyoto is a charming city which is best known for its many beautiful temples and their gardens. Although I was enchanted by the gardens that I visited, the concierge at the hotel also suggested that I visit the Raku Museum http://www.raku-yaki.or.jp/museum/index-e.html. Until I visited the museum, I had always thought of Raku as a technique for making pottery originating in Japan which is characterized by low firing temperatures and removing the pot from the kiln while still hot. The results are difficult to predict, but have a special charm for that reason. The ceramics produced using Raku techniques are quite identifiable and striking (many years ago, I worked with ceramics and used the Raku technique).

However when I visited the museum, I learned that Raku was developed in the sixteenth century and is actually the name adopted by the family that developed the technique (the name is based on a seal granted the family by Toyotomi Hideyoshi, the leading warrior statesman of the sixteenth century). The museum is small, with only three rooms, but this size and focus makes it a gem. In fact, the museum is in a building next to the family's kiln. The kiln is still being used. The visit reminded me of several other Japanese museums of similarly small size (all very focused) which I have visited. They appear to form a special class of museums in Japan. They are well worth the effort of seeking them out. If you are in Kyoto, you should visit the Raku Museum and when in Japan you should try to visit its other small museums!

Competing with Open Source: Strategies by Harvard and Stanford

You know that open source has arrived as a business strategy when Harvard and Stanford professors write papers about how to compete with the open source model (although the article covers all free goods).

In their words:

It’s not easy, and it’s more than just a theoretical question. U.S. newspapers are finding it difficult to compete with free news and the commentary of bloggers and other internet sources. And in the software world, the rise of open source products, which are available for free on the internet, is reshaping the technology industry.

“Divide and Conquer: Competing with Free Technology Under Network Effects,” Deishin Lee and Haim Mendelson, Production and Operations Management, January-February, 2008 http://www.gsb.stanford.edu/news/research/mendelson_div_conq.html

They mention three strategies for commercial companies to compete with "free" products:

1. Timing

2. Product features

3. Network effects across other markets.

Thanks to Matt Asay on finding this article and his insightful commentary. http://news.cnet.com/8301-13505_3-10047872-16.html

Open Source Think Tank Paris 2008: Day Two

Unfortunately, computer problems (my hard drive died) and travel have delayed my summary of the second day. First, we ended the first day with a magnificent dinner cruise on the Seine River. Our hosts, Alexandre and Celine arranged for a sommelier to select special wines for the cruise which meant that we had great wines from all over France. On the second day, we focused the brainstorming sessions on Open Source Licensing and the Definition of Open Source. The licensing discussion was lively, with the European attendees focusing on the challenges imposed by the number of open source licenses. During the licensing discussion, they were particularly interested in the effect of the Jacobsen decision which clarifies the enforceability of open source licenses in the US, an issue was viewed as settled in the European Union.

The discussion of the definition of open source ranged from who should control the definition to whether a new group, focused on commercial open source should be created to provide guidance about how to determine whether products (or companies) are “open source”. The consensus was that OSI definition has served the industry well and should continue to be the core definition and that a new non profit focused solely on commercial open source is unnecessary. The discussion about whether a company can be considered “open source” was very interesting. Most attendees agreed that it is very difficult to meaningfully designate a company as “open source” because most companies follow a variety of approaches to software development and distribution. The better approach is to focus on products as following an open source model. An interesting side note to this discussion was the conclusion that all companies are now following a “hybrid” business model which includes both proprietary and open source products. Even Microsoft is now part of this trend. This conclusion is consistent with the results of our 2008 Napa Open Source Think Tank that open source software is now becoming part of the mainstream. The final presentation was by Rudy Salles, the Vice President of the French National Assembly. Linagora had assisted the French National Assembly in implementing an open source environment and Mr. Salles discussed open source from the point of view of both a user and a policy maker.

The Open Source Think Tank Europe was a great success and was particularly useful in helping the US companies understand the European perspective. We hope to see you there next year!

Open Source Think Tank Paris 2008: First Day

The first day of the Open Source Think Tank has been very productive. Alexander Aitken of Olliance Group and Alexandre and Celine Zapolsky (both of Linagora) have done a great job in organizing the conference. The discussion has quite different from our Napa Open Source Think Tank and emphasized the differences between the US and EU software industries. For example, system integrators are the primary contact for European customers in contrast to the United States where the software vendor frequently has direct contact with the customers.


During the brainstorming, my group identified two major challenges for the open source market:

1. The rejection in the EU of commercial open source companies by many customers because they are not viewed as "true open source". Based on the discussion, a significant number of customers in the EU identified "open source software" as a product which is community supported and preferably has multiple service providers providing support to licensees. Clearly, this position poses a significant challenge to many of the US commercial open source vendors which use a dual distribution model based on a commercial product with more functionality than the open source version.


2. The reluctance of major corporations to "openly" contribute to projects. Although many major corporations do contribute to open source projects, they frequently do so in an indirect manner so that their contribution cannot be associated with them. If the corporation does not contribute its improvements to the open source project, then the community and all licensees will not be able to take advantage of the changes. If the corporation contributed indirectly, the open source project misses the legitimacy which open support would confer. Although this reluctance can be based on valid legal concerns, these concerns appear to be exaggerated.

More tomorrow!

Open Source Think Tank: Paris September 21-23, 2008

I wanted to alert you to the Open Source Think Tank this month in Paris Sept 21-23, in conjunction with the Paris Capital du Libre conference. It takes a lot to pull me away from Northern California during the grape harvest, but this event will be great. As in the United States, the Open Source Think Tank is the only by-invitation gathering where leading global experts will come together to collaborate on the issues facing commercial open source. Like the Open Source Think Tank in Northern California, the format will focus on brainstorming sessions, CIO panels and networking activities. We expect that all attendees will actively participate. We have a great agenda and confirmed list of attendees, and unique networking activities including a private reception at the Paris Chamber of Commerce and the main event - wine tasting and dinner while cruising down the Seine through Paris. We have some great speakers including Marten Mickos and Larry Augustin. You can learn more at http://thinktank.olliancegroup.com/. If you need an invitation, please contact Andrew Aitken at andrew@olliancegroup.com.

I have participated with Andrew in all of the prior Open Source Think Tanks and they are great events. They provide an opportunity for everyone to work together in small and large brainstorm groups, addressing the future of open source. The Think Tank will also ensure that you have great opportunities to network with your fellow attendees. In Paris, the first night we will have a reception at the Paris Chamber of Commerce and the second night main event, wine tasting and dinner while on a barge cruising down the Seine through Paris

Most of the attendees of our annual Napa events have said it was either the best or one of the best events they have ever attended and we have almost 100% return attendance. In Paris, the schedule will include analyst meetings, press events (Sun and Jaspersoft and some of the other attendees are planning announcements) and a meeting of North American ISV and European SI/VAR.

I hope to see you there!

DEMO: Web 3.0 and Beyond

I have been attending DEMO on San Diego since Sunday. The presentations have been lively and the six minute limit ensures a brisk pace. Having worked with startups for over 25 years, I was impressed by the maturity of the “demos”. The presenters manage to get their message across (frequently with a few jokes).

Many of the companies focus on “Web 3.0” (and one company claimed to be the first Web 4.0 company). Two of the most interesting companies provided solutions to the problem of user generated content: how do encourage users to continue to contribute without any income. They combined the web’s capability for distributed collaboration with micropayments. This combination could be very powerful, enabling user generated content to go to the next level: income generation.

Photrade (http://www.photrade.com/) has developed the infrastructure to permit photographers to share, store, protect and license their photographs to advertisers and web publishers. Photographers get paid for each view of their photos.

MixMagicMusic Service (http://www.mixmatchmusic.com/) provides all the tools needed for musicians to collaborate online. They can also communicate with fans and sell their works. It includes a Remix Wizard to permit fans to create music mashes.

However, some of the most interesting companies were not material companies, but more about that later

Practical Guide to GPL Compliance: Both Practical and Valuable

The Software Freedom Law Center (“SFLC”) recently published “Practical Guide to GPL Compliance” (“Guide”).
http://www.softwarefreedom.org/news/2008/aug/20/compliance-guide/The Guide is a major contribution to the open source community. It is very clear and valuable explanation about how to comply with the obligations in General Public License Version 2 (“GPLv2”), General Public License Version 3 (“GPLv3”), Lesser General Public License Version 2 (“LGPLv2”) and Lesser General Public License Version 3 (“LGPLv3”) and more generally how to best manage the use of FOSS.

The most critical point made by the Guide is the need to understand what third party open source software is in your software product in order to comply with obligations under FOSS licenses. However, companies should be equally concerned about complying with the terms of upstream proprietary software licenses. The Internet has made numerous software components easily available and my experience is that most software programs now include numerous third party components (both open source and proprietary).

Yet software companies frequently do not have an effective procedure for managing this new reality. This failure can raise significant problems at critical points in a company’s history, such as a financing and a merger. Many acquiring companies regularly perform a software scan of the target company’s software: they will discover these third party components and demand that the target company provide proof of compliance with the upstream licenses (both FOSS and proprietary). The failure to have a procedure for monitoring use of third party software means that the target company must scramble during the merger (or financing) process to prove compliance with upstream obligations. These problems are likely to cause delay in closing the merger (or financing) and, in some cases, may cause a reduction in the price or, rarely, termination of the merger. Recently, I assisted a startup in its sale to a large publicly traded company: the target company had over 100 third party software components of which it was not aware. We had to find a method to comply with the obligations in these upstream licenses in a very short period. The result was costly in management time and legal fees (rush jobs always cost more). In that case, however, the resolution of compliance with the obligations imposed by third party proprietary software component licenses created more problems than the FOSS components licenses.

The Guide is also very valuable for its practical suggestions about how to avoid compliance problems with the GPL such as training multiple developers how to “build” the software and distributing the Corresponding Source with the binary code (rather the alternative of making a written promise to provide the Corresponding Source). The Guide also provides detailed instructions on how to comply with the obligations relating to providing Source Code: the definition of Corresponding Source and the different options available under GPLv2 and GPLv3. For example, one nuanced, but important point is that Corresponding Source under GPLv2 cannot be provided solely by download (although it can be an option), but that option is available under GPLv3.

I strongly recommend that anyone dealing with FOSS compliance should read this guide.

Jacobsen: Critical to Commercial Software and Other Copyright Licenses

Although my earlier post focused on the effect of the Jacobsen decision for the open source industry, the case has significantly broader implications. http://lawandlifesiliconvalley.blogspot.com/2008/08/major-victory-for-open-source-in.html. The court’s reasoning applies to any copyright license which means that it will have an impact on licenses well beyond open source licenses: it will impact licenses for commercial software, books, music, television, and movies. The decision will also be important for licenses which govern the growing amount of user generated content on the Web; such content is frequently subject to standardized licenses, such as those created by the Creative Commons and websites like Wikipedia, which do not involve direct economic consideration. The decision sets forth the basic rule very clearly:

“Copyright licenses are designed to support the right to exclude: monetary damages alone do not support or enforce that right. The choice to exact consideration in the form of compliance with the open source requirements of disclosure and explanation of changes rather than as a dollar-denominated fee, is entitled to no less legal recognition.”

Jacobsen deals with the fundamental issue of the appropriate remedy for breach of a copyright license: the basic remedy for breaching a contract such as a license is monetary damages, but under some circumstances a copyright licensor can obtain remedies under copyright law. The courts have established a standard that the breach of obligations that are covenants rather “conditions” or “restrictions” on the scope of the license can only obtain contract remedies. However the line between covenants and “conditions” or “restrictions” has always been murky. The decision provides clear guidance: obligations in a license agreement which are expressly described as a “condition” or, even better, which are introduced by the phrase “provided that” meet the criteria in Jacobsen.

Copyright law remedies include injunctive relief, attorneys fees, actual damages and, potentially, statutory damages. The remedy of injunctive relief is particularly valuable for many licensors because such licensors frequently seek compliance with the terms of the contract. Courts may grant attorneys fees at their discretion and such fee awards can be significant and even exceed the damage awards. Actual damages can be difficult to determine for many copyrightable works and are particularly difficult for breaches of licenses to open source software or other works which are licensed without fee. Statutory damages,on the other hand, are not connected to actual damages and can be as much as $150,000 per copyright for willful infringement and are awarded by the court. However, such statutory damages are only available if the copyright is registered prior to the infringement (or in the case of a recently published work, the copyright is registered within three months of first publication).

Since many open source companies use the dual license model, the decision may be equally important to them for their commercial licenses. In addition, the decision will be important for software vendors with a pure commerical model as well as licensors of other copyrightable works such as books, music and film. These licensors should read Jacobsen carefully and revise these licenses appropriately to take advantage of the new clarity on these issues provided by the decision.

Major Victory for Open Source in Jacobsen Decision

On August 13, the Court of Appeals for the Federal Circuit (CAFC) issued its decision in the Jacobsen v. Katzer case.
http://www.cafc.uscourts.gov/opinions/08-1001.pdf
This case was the first real test of the remedies for breach of open source licenses in US courts (for more background, see http://lawandlifesiliconvalley.blogspot.com/2007/08/new-open-source-legal-decision-jacobsen.html). Unfortunately, the District Court decision was wrong and wrong in a way that could have been a disaster for open source community. The District Court found that the requirements in the Artistic License for notice were merely a contractual covenant rather than a condition on the scope of the license (the courts sometimes use the word "restriction" on the scope of the license and "condition" at other times, but they have the same meaning). Consequently, under the District Court's analysis, Katzer's actions were not copyright infringement. Thus, Jacobsen was limited to the traditional remedy for breach of contract, monetary damages, rather than the copyright remedy of injunctive relief (injunctive relief means that the court will order Katzer to comply with the terms of the contract).

The CAFC reversed the District Court's decision and its reasoning is very helpful for the open source community. The court found that the limitations in the Artistic License were "conditions" on the scope of the license and, thus, Katzer was liable for copyright infringement (as well as breach of contract). The CAFC noted that the Artistic License imposed its obligations through the use of the words "provided that" which is generally viewed as imposing a condition. Although the reasoning is limited to the Artistic License and the interpretation of each open source license will depend on the wording of its provisions, this decision is a welcome change to the District Court decision. The case has been remanded for the District Court to determine if the other criteria for injunctive relief have been met, but the CAFC's decision strongly suggests that they have been met.

The open source community should thank the lawyers who worked hard and on a pro bono basis (i.e. free) to achieve this victory. Any such list is bound to be incomplete and I apologize in advance for anyone that I have missed, but I think that the major contributors were: Victoria Hall (Jacobsen's counsel), Chris Ridder and Anthony Falzone (Creative Commons counsel, authors of the amici brief), Karen Copenhaver (Choate Hall, counsel for the Linux Foundation who assisted on the Creative Commons amici brief), Allison Randal and Roberta Cairney (counsel for Perl Foundation who assisted on the Creative Commons amici brief), Larry Rosen (Rosenlaw & Einschlag, who assisted on the Creative Commons amici brief), Scott Peterson (HP, member of OSI's Legal Advisory Council who assisted on the Creative Commons amici brief), David Gross (DLA Piper, counsel for OSI who assisted on the Creative Commons amici brief) and Steve Chiari (DLA Piper, counsel for OSI who assisted on the Creative Commons amici brief).

Linuxworld: Looking to the Future of Open Source

Linuxworld was very interesting this year. As Bob Sutor noted, we stand at a crossroads on the development of Linux and open source (see below for Bob’s predictions).

I spoke on Implementing Your Open Source Business Strategy http://linuxworldexpo.com/live/12/conference//tracks/tracksessions/Legal+and+Licensing/QMONYB00BIOE. The audience was very interesting: although we had some open source companies, most of the attendees were traditional software companies who are trying to learn about implementing open source strategies. This shift is consistent with my experience working with software companies in Silicon Valley and around the world: open source software is becoming part of the mainstream software industry. We have recently seen this trend among large companies: Adobe Systems, Inc. released Flex and Nokia releasing the Symbian operating system under an open source license. This is consistent with the conclusion of the CEOs and senior executives of the Open Source Think Tank 2008 http://thinktank.olliancegroup.com/ and the recent Open Source Alliance survey http://www.opensolutionsalliance.org/.

One of the most interesting presentations was by Bob Sutor from IBM. Bob reviewed the history of IBM’s involvement with Linux and then went on to discuss the future (you can see his slides at http://www.sutor.com/newsite/blog-open/?p=2446). His predictions are as follows:

1. The desire to be “green” will drive use of Linux with hardware optimized to reduce energy use

2. Linux will not be replaced by another open source operating system

3. Linux will expand on many hardware platforms but x86 will be less important; the use of Linux will be less visible through SAAS and cloud computing where the operating system is not clear

4. The concept of Linux desktop will shift as Web 2.0 and new technologies will change the concept of desktop

5. The path of SMB adoption is unclear: will they adopt open platforms vs. cloud computing

6. The adoption of new FOSS licenses will probably slow down and the adoption of licenses will focus on the five or six most frequently used licenses, but products will be issued under multiple licenses increasing complexity of legal issues

7. Open standards in licenses will grow and a model similar to Creative Commons will evolve

8. Proprietary applications will be developed for Linux, but some industries (such as education and health care) will continue to develop open source applications specific to that industry

I think that most of these predictions are very insightful. However, I don’t agree with his seventh predictions on licensing. As the General Counsel of the Open Source Initiative for many years and being involved in our efforts to reduce license proliferation, I think that the legacy of multiple licenses (we now have more OSI approved licenses than when I started) will be difficult to overcome. Sadly, I think that we are beyond the point where we can take the rational approach adopted by Larry Lessig in the Creative Commons. The existing licenses have such strong backing that the adoption of a new “cleaner” approach is not likely to be successful. I hope I am wrong, but habit is hard to overcome.

Red Hat: How to Settle a Patent Lawsuit for an Open Source Community

In a recent post, I described at a very general level the patent litigation settlement agreement between Red Hat and Firestar and that the settlement was unusual for its protection of the Red Hat open source ecosystem, not just its own products. http://lawandlifesiliconvalley.blogspot.com/2008/06/red-hat-settlement-and-linux-ecosystem.html.

I am pleased to note that Red Hat has recently published the text of the settlement which I believe will serve as a model for future settlements (in the interests of transparency, my firm does a modest amount of work for Red Hat, but we were not involved in the litigation or drafting the settlement agreement). The settlement is sufficiently important that I am going to write several posts about it and describe it in some detail (non lawyers be warned!).http://www.redhat.com/f/pdf/blog/patent_settlement_agreement.pdf.

I strongly recommend that lawyers who work with open source companies should review the entire settlement agreement because it is a great guide to the special issues arising in settling lawsuits involving open source products. Rob Tiller who was in charge of the settlement provides a "Reader's Guide to the Firestar Settlement" in the Red Hat blog. http://www.press.redhat.com/2008/07/15/a-readers-guide-to-the-firestar-settlement/

The scope of the settlement agreement is particularly important because of the complexity of many open source products (including Red Hat's products): they include software from a wide variety of sources and the software, in turn, may be modified by any of the licensees. And the settlement must take into account "upstream licensors" of products used in the Red Hat products to avoid an end run by the patent owner. And the scope of the patent license must be carefully drawn to avoid "free riding" because much of this third party software is distributed in third party products which are not Red Hat products. Red Hat does not want to cover uses of third party products when they are not linked to Red Hat products. This complexity undoubtedly created tension in the settlement negotiations because patent owners want to describe the scope of the settlement as narrowly as possible. Red Hat solved this problem by defining the scope of the settlement as including "Red Hat Licensed Products" which includes "Red Hat Products"(which covers more than simply products distributed under the Red Hat brand), "Red Hat Derivative Products" and "Red Hat Combination Products". The relevant definitions are set forth below:

"Red Hat Product" means (a) any product, process, service, or code developed by, licensed by, authored by, distributed under a Red Hat Brand by, made by, sold under a Red Hat Brand by, offered for sale under a Red Hat Brand by, sponsored by, or maintained by Red Hat, (b) any predecessor version of any of the foregoing, including without limitation any upstream predecessor version of any of the foregoing, (c) an identical copy of the foregoing or (d) a combination of the foregoing.

"Red Hat Derivative Product" means any product, process, service, or code that is a direct or indirect Derivative of at least one Red Hat Product. "Red Hat Derivative Product" does not include any Red Hat Product. An indirect Derivative of a Red Hat Product includes, for example, a derivative work based on a derivative work of the Red Hat Product.

"Derivative" means any derivative work or any other product, process, service, or code that is based on another product, process, service, or code."

"Red Hat Combination Product" means any product, process, service, or code that is a combination of (a) at least one Red Hat Product or Red Hat Derivative Product and (b) at least one product, process, service or code portion that is neither a Red Hat Product nor a Red Hat Derivative Product. A "Red Hat Combination Product" does not include any Red Hat Product or Red Hat Derivative Product. A combination includes, without limitation, two products distributed together, two products that interact or that interoperate, and two products that call each other.

Red Hat must then define to whom the license applies so they have a definition of Red Hat Community Member:

“Red Hat Community Member” means any Entity that is a licensee or licensor of, contributes to, develops, authors, provides, distributes, receives, makes, uses, sells, offers for sale, or imports, in whole or in part, directly or indirectly, any Red Hat Licensed Product, including without limitation any upstream contributor to, or downstream user or distributor of, a Red Hat Licensed Product. An upstream contributor includes, for example, an Entity that contributes to a software product, so long as a copy or derivative work of that software product is distributed or used by Red Hat. For example, an Entity would be an upstream contributor if it contributes to a version of Open Office if that version or a derivative work of that version is distributed by Red Hat as part of Red Hat Enterprise Linux. A downstream distributor includes, for example, an Entity that distributes a copy of a Red Hat software product received from Red Hat or another Entity or that distributes a derivative work of such software product. For example, an Entity would be a downstream distributor if the Entity received a derivative work of Hibernate Tools from either Red Hat or another Entity and then distributed a copy of the derivative work.

“Entity” means an individual, company, trust, corporation, partnership, sole proprietorship, joint venture, limited liability company, association, unincorporated organization, university, college, or other legal, governmental, or other entity.

The Settlement Agreement in Section 5.1 grants Red Hat a perpetual, irrevocable license under the subject patents for any and all purposes and to engage in any and all activities without restriction.

The license to the Red Hat Community Members in Section 5.2 is more limited (it applies only to Red Hat Licensed Products), but very broad: a perpetual, irrevocable license under the subject patents to engage in any and all activities related to the Red Hat Licensed Products. They further define it to include, without limitation, to include make, have made, use, have used, sell, have sold, offer for sale, have offered for sale, provide or have provided, distribute or have distributed, import or have imported any Red Hat Licensed Product or services related to any Red Hat Licensed Product. Neither the grant in Section 5. 1 nor 5.2 permits the right to sublicense (just a reminder that the GPL, under which much of Red Hat's products are distributed, also does not permit sublicensing).

However, Section 5.3 provides the Red Hat and Red Hat Community Members the right to grant sublicenses to the patents to the same extent of the license for Red Hat Community Members in Section 5.2.

These license grants are limited in Section 5.4 with respect to certain Red Hat Derivative Works or Red Hat Combination Products: they do not apply to situations in which the infringement by the Red Hat Combination Product or the Red Hat Derivative Product are not caused by the use or reference to the underlying Red Hat Product. These limitation was probably very important for the patent owner to avoid the license being used "to launder" third party software by combining it with Red Hat Software.

The Settlement Agreement provides very broad protection for the Red Hat Community and reflects the issues which a company settling patent litigation must address.

The Settlement Agreement also includes covenants not to sue which will be the subject of another post.

Microsoft & Open Source: The Battleship Microsoft Continues its Turn Towards Engagement with Open Source

EWeek had an interesting interview with Steve Ballmer that covered Microsoft's view of open source along with other topics after the Microsoft Worldwide Partner Conference. http://www.eweek.com/c/a/Enterprise-Apps/Microsofts-Ballmer-Opens-Up-to-Partners/?sp=0&kc=EWKNLLIN071508STR3. Although Ballmer denies that Microsoft will be "open sourcing" any of its core products, he emphasizes that Microsoft wants to encourage opens source development on its platform (see below):

However Microsoft will support and interoperate with open-source software in various ways, Ballmer said. "Will we interoperate with products that come from like Linux, from the open-source world? Yes, we will," he said. "Will we encourage people who want to do open-source development to do it on top of Windows? Yes, we're proud that the best PHP system in the world is actually the one that runs on Windows today, not the one that runs on Linux.

"So we're going to encourage open-source innovation on our platforms, and around our platforms. And, you know, we see interesting things where bits and pieces of technology, commercial companies are now starting to provide it in an open-source form or to digest in an open-source form. And we're open to that as well. But our fundamental business model will remain kind of commercial software, advertising, enterprise licensing, etc."


As this interview indicates, Microsoft is continuing to move towards engagement rather than confrontation with the open source community. However, remember that Microsoft is a big organization with a very strong culture to which these changes are very difficult. This change will take time and we should expect relapses in their engagement with the open source community. And this change should not be mistaken for adoption of the open source philosophy, rather it is a recognition of reality. Microsoft recognized that the world has changed and they need to deal with the world as it is, not as they wish it to be.

This change does provide an opportunity for open source companies.

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. http://www.press.redhat.com/2008/06/11/red-hat-puts-patent-issue-to-rest/

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.

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") http://www.ali.org/index.cfm?fuseaction=projects.proj_ip&projectid=9 <http://www.ali.org/index.cfm?fuseaction=projects.proj_ip&projectid=9> . 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 defend 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.

2008 Open Source Think Tank: The Future of Open Source

Olliance Group, the leading consulting firm for open source companies, has published the Summary Report from the 2008 Open Source Think Tank in Febuary of this year. http://thinktank.olliancegroup.com/images/stories/2008%20think%20tank%20summary%20report.pdf. The Think Tank is sponsored by Olliance Group and DLA Piper and is an opportunity for 120 leading members of the open source community to come together and discuss the future of open source software. The attendees include CEOs of Open Source Software companies, CIOs of large companies, venture capitalists, attorneys and other luminaries.

The Summary Report focuses on three major themes:

1. Open source software companies are recognized as a viable strategy for building a software business. The past skepticism has been washed away by the increase in venture capital financing for open source companies http://lawandlifesiliconvalley.blogspot.com/2008/04/venture-capital-investments-in-open.html and the significant acquisitions of open source companies last year, including the acquisition of Zimbra by Yahoo and MySQL by Sun Microsystems, Inc.

2. Open source software vendors have matured sufficiently so that client expectations are that open source vendors should maintain the same standards as traditional commercial software vendors. Open source vendors, like commercial software vendors, must ensure that they address the entire product lifecycle, from support and maintenance to integration and work with third party products.

3. Open source software vendors need to mature and deal with the confusion and, sometimes fear, about the the risk of using open source software. The attendees expressed concern about the dichotomy between the ubiquity of open source software and the lack of recognition of companies of such widespread use.

Please read the Summary Report and we hope to see you next year at the 2009 Think Tank.

Venture Capital Funding for Open Source Shows Significant Increase in First Quarter

The Venture Capital Journal noted in its April issue that investments in open source software increased dramatically in the first quarter of 2008 to $112 million from $200 to 250 million each year. The VCJ attributes this increase to the demise of the traditional multi year enterprise software licensing model as well as the recent very successful exits by open source companies such as MySQL and Xensource. One of the most significant advantages of the open source business model is the reduction of the cost of sales and marketing. For example, Amit Pandey, CEO of Terracotta, which provides infrastructure software for enterprise Java, notes that his download rate has risen 1000% since they shifted to an open source model; he estimates that a traditional software company would have had to spend $4-5 million dollars to achieve the same effect. Yet the article concludes in controversy: several VCs believe that early stage open source investments are no longer of interest because all of the good deals have been done yet other venture capitalists, such as Larry Augustin, believe that many new early stage open source companies are attractive and will get funded this year.

My experience is consistent with Larry’s view. I am seeing an increase in companies which have started with an open source business model as well as many companies which are shifting either in whole or in part to an open source business model. However, entrepreneurs need to be careful not to believe that “open source” is funding “pixie dust”.

This reality was emphasized in a recent SD Forum presentation on Successful Open Source Venture Investing. The venture capitalists, Kevin Efrusy from Accel and Prashant Shah of Hummer Winblad, are very experienced in open source investments. They emphasized that “open source” was not magic: companies must fit the same financial criteria as other software investments. Both venture capitalists noted that the open source business model does provide significant advantages in swift and inexpensive adoption by end users. Yet the company needs to take advantage of these “free downloads’ by finding a way to monetize them. The most popular model for venture backed companies is “dual” licensing in which proprietary additions are made available in a commercial offering which also includes the “free” open source software. However, the typical open source company uses a variety business models: dual licensing, advertising, maintenance services and professional services (including customization and installation). In fact, many of the older open source companies started with a service only model, providing only maintenance and professional services. David Lilly, the founder and CEO of Groundwork Open Source, described how the company shifted their business model by reducing service based revenues from 80% to 30%. The open source business model continues to have significant advantages over traditional software business models, but open source companies must still meet the traditional economic criteria for venture backed software companies.

OSBC: Aligning Intellectual Property Strategy and Open Source Strategy

Recently, at the OSBC, I spoke on how to align your intellectual property strategy to your open source business strategy. This issue can be very simple if you are joining or contributing to an existing project, because you will be bound to use the license of the project. However, if you have more flexibility, you need to consider a number of elements: (1) the sources of revenue (2) the type of product (3) business model (4) type of project (5) channels (6) type of community and (7) competitors. Once you have answered these questions, you then need to review your intellectual property options, such as such as patent, trademark, trade secret, copyright, licenses and domain names to implement your open source business strategy.

For example, a new web infrastructure software company might decide to adopt a dual licensing model and to adopt a license which is relatively compatible in order to interact effectively with other open source software used on the web. The company has decided that its most important intellectual property will be patents and trademarks. The license options include MPL, CDDL, CPAL or if integration is less important, GPLv2, GPLv3 and AGPL.

The materials also describe some of the mistakes that open source companies have made. If you are interested in the presentation it is posted on the OSBC website. http://akamai.infoworld.com/event/osbc/08/docs/GC-Radcliffe.pdf

HBS Open Source Case: Salvation or Suicide

Harvard Business School recently published a case on whether a software game company, KMS, which makes a device which permits amateurs to sound like professional musicians should adopt an open source business model. http://harvardbusinessonline.hbsp.harvard.edu/b02/en/common/item_detail.jhtml?id=R0804XThe case demonstrates the increased recognition of the strategic importance of decisions about the adoption of the open source software business model. Unfortunately, the case does not reflect the developments in business models for commercial open source software. The case focuses on an open source business model based primarily on providing technical services. Yet most commercial open source companies have adopted a dual distribution model. Moreover, as Marten Mickos noted in his 2007 keynote at OSBC, commercial open source companies have thirteen ways to make money, with four of them which he identifies as “scalable”. In addition, the analysis in the case if confused because KMS’ product includes hardware as well as software. Such hardware could give KMS a substantial advantage against competitors trying to provide an open source version of the product. In my experience, virtually all decisions about the adoption of open source business model deal solely with software products. Consequently, I think that the case would have been more powerful (and more realistic) to focus on case in which the product was solely software.

The Case Commentaries are very interesting. Jonathan Schwartz of Sun Microsystems, Inc. makes the critical point that KMS needs to determine its business goals before the company can make a meaningful decision about adopting an open source business model. He draws a contrast between Apple and Nokia in the handset market: Apple is trying to define what a handset should be and they sold 4 million iPhone handsets last year. On the other hand, Nokia is trying to be the largest handset maker in the world, has adopted an open platform and sold 400 million handsets last year.

Gary Pisano of Harvard Business School was also very insightful about the necessary elements for success in converting to an open source business model: ensuring that your software architecture is “modular” and creating a developer community. The creation of a developer community is a significant challenge for a new product and quite different from the skills required for developing and distributing proprietary software. He also notes that natural advantages conferred on KMS by its role as the creator of the “platform”. Finally, he focuses on the new reality for all “proprietary” software vendors: they need to be prepared for competitors who adopt an open source model.

Eric Levin makes good points about the importance of being able to control the brand and the strategic life cycle, but concludes that KMS has alternatives to adopting an open source business model such as adding personalization. However, I think that this alternative is an illusion and it seems to contradict his prior points.

The final Case Commentary by Michael Bevilacqua focuses on legal issues and, from his view, the significant additional risk of intellectual property infringement in an open source business model. I don’t agree with his conclusions. First, most “proprietary software” includes significant amounts of open source code which would carry risks similar to a pure open source business model. Second, he notes the increased risk of patent infringement in open source software. I disagree that the risk of patent infringement is greater in open source companies than in proprietary software companies. Most proprietary software companies do not undertake patent searches prior to writing software, so both types of companies are equally at risk of infringing a third party’s patents. However, the open source business model does entail legal risks: the scope of many important open source licenses (such as the GPL) are unclear because they use terms, such as derivative works, which are poorly defined in copyright law when applied to software and the licenses have never been interpreted by courts. In addition, the remedies available under open source licenses, whether injunctive relief or only monetary damages, are not clear. Consequently, many companies limit the use of open source software based on the open source license under which it is provided.

It is great that Harvard Business School has acknowledged the strategic importance of decisions about the open source business model, but we hope that their next case is more focused.

Open Source as the Borg: Resistance is Futile

The recent report by Gartner, the State of Open Source 2008 (http://www.gartner.com/; report G00156659), as summarized on their site provides some very interesting conclusions:

1. By 2013, a majority of Linux deployments will have no real software TCO advantage over other operating systems.

2. By 2012, 90% of enterprises will use open source either direct or embedded.

3. By 2011, open source will dominate software infrastructure for cloud-based providers.

4. By 2012, software as a service (SaaS) will eclipse open source as the preferred enterprise IT cost cutting method.

I agree with Gartner that open source will continue to penetrate more companies, but I think that it will occur much more rapidly than suggested by Gartner. And they are absolutely correct that use of open source is "elusive". We find that virtually all of our clients use open source even if they are not aware of it. Gartner captures the reality of open source use in their statement that: "Users who reject open source for technical, legal or business reasons might find themselves unintentionally using open source despite their opposition."

I don't agree with their conclusion about Linux and SaaS. I agree with the skepticism expressed by Mark Taylor http://news.zdnet.co.uk/software/0,1000000121,39379900,00.htm. My experience is that the use of Linux continues to grow rapidly and it is likely to take an even more important role in mobile devices. The statement about SaaS confuses a business model with a method of developing software. Many open source companies use SaaS as a distribution model and it does not make them less "open source." http://lawandlifesiliconvalley.blogspot.com/2008/03/open-source-overview-from-osbc.html

The report once again emphasizes how open source is becoming part of the mainstream. A decade can make a big difference: "Microsoft: Resistance is Futile" http://www.news.com/2009-1023-229218.html.

Venture Capital Investments in Open Source Accelerate

A recent 451 Group report notes that venture capital investments in open source companies are at an all time high this quarter. http://blogs.the451group.com/opensource/2008/04/01/vc-funding-for-open-source-hits-an-all-time-high/. They raised $203.75m, up from $100.40m in the same quarter of 2007. He expresses caution that few of the deals were seed or Series A and that much of the funding was raised by some mature companies, such as SugarCRM.

This increase in funding for open source experience is consistant with what I am seeing in Silicon Valley where I work with about 40 startups (not all open source). Most software venture deals have an open source component to them and venture capitalists are very interested in new open source projects. I know of at least four new open source companies that are seeking funding, several are based on existing projects. So I disagree with Matt that the relatively smaller number of seed and Series A deals are a cause for concern. Seed deals in particular are difficult to find (several of the companies that I mentioned above have bootstrapped or used friends and family money, so they are basically invisible). In addition, I know of four foreign open source companies that are coming to the US because of the size of the market and the depth of the venture capital market. I think that 2008 will be another record year for open source funding.

Rapid GPLv3 Adoption Continues

The most recent report from Palamida indicates that open source companies are continuing to adopt GPLv3 at a rapid pace: over 2000 projects have adopted GPLv3. http://gpl3.blogspot.com/2008/03/gpl-project-watch-list-for-week-of-0328.html.


Palamida notes that: At this rate the GPL v3 is being adopted by 1000 projects every 4-5 months, and if the trend continues, the license will be used by 5000 projects by the end of the year. 5k will be a very substantial amount of projects under the GPL v3, which may influence larger projects to move over the the GPL v3 as well.

Open Source Overview from OSBC

The slides from the presentation by the NorthBridge Capital Partners from OSBC has some interesting information. The most interesting finding is that the subscription business model is likely to become much more important in the future. This finding certainly reflects my experience. Most of my open source clients are adopting a subscription model because of its attractiveness to potential customers. http://acquia.com/northbridgesurvey. They also stated that SAAS (among cloud computing, software appliances and virtual infrastructure) is likely to have the greatest effect on software delivery and business models. If SAAS continues to be important it may drive the adoption of the Affero GPL (with its focus on "network use") instead of the GPLv3 (just a reminder that the Affero GPL is simply the GPLv3 with a network use provision added). http://lawandlifesiliconvalley.blogspot.com/2007/11/free-software-foundation-announces.html

The survey confirms the Gartner report that open source will continue to expand rapidly. http://lawandlifesiliconvalley.blogspot.com/2007/09/open-source-paradigm-shift.html According to the survey, more than half (55 percent) of the respondants believe that open source software will increase to 25% to 50% percent of software used as compared with proprietary software. The respondants believed that over the next five years open source software would have the greatest effect in the Web publishing and content management system (CMS) markets, but the least effect in security tools.

















http://www.slideshare.net/jwhatcott/annual-future-of-open-source-survey-results-2008/

Open Source Growing at an Exponential Rate

Although many of those of us in the open source community believe that open source is growing rapidly, a new study validates these conclusions: the study released March 14 by SAP Research concludes that open source software is growing at an exponential rate in "additions to open source projects, the total project size (measured in source lines of code), the number of new open source projects, and the total number of open source projects". They also noted that the total amount of source code and the total number of projects double about every 14 months. http://www.riehle.org/2008/03/14/the-total-growth-of-open-source/. The report is based on information from the http://www.ohloh.net/ service.

The consequences of such growth are dramatic. As we noted at the Open Source Think Tank, open source software is becoming standard and the comparison for users is now between functionality and price rather than "closed" and "open" source software. In fact, this report suggests that "open source" may cease to be a different type of software, it will simply become another way (and probably the dominant way) of developing and distributing software.

What Questions Should the Open Source Community Ask Brad Smith, General Counsel, of Microsoft

Stephen Walli brought to my attention that the open source community will have the chance to ask questions of Brad Smith, the General Counsel of Microsoft, who will be giving the keynote presentation at OSBC next week. Stephen has some interesting thoughts about how the open source community should take advantage of this opportunity. http://stephesblog.blogs.com/my_weblog/2008/03/brad-smith-keyn.html.

He also mentioned that a website has been set up to suggest questions to the panel. http://www.initmarketing.com/questions. I encourage you to participate!

Advice for Startups: Working with Large Corporations as Partners and Investors

I recently participated in a webinar with Bob Ackerman of Allegis Capital, Mark Klopp of BellMason Group (formerly head of Eastman Chemical's venture capital program) and Claudia Fan Munce of IBM (Managing Director of their venture program). I was included because of my experience in working with startups as well as corporate investors (I run DLA Piper's Corporate Venture practice). The webinar addressed the issues of dealing with corporations as partners and as investors.

Large corporations are the major customers and the most common exit strategy for venture-backed startups. The webinar was a very valuable summary of how to deal with corporations as partners and potential investors. For example, Bob Ackerman described how IronPort was able to obtain a dominant position in the French market by partnering with Societe Generale.

As I noted in the discussion, startups need to be careful about being too reliant on large corporations for critical functions: large corporations may decide that a market is no longer attractive and leave them and the startup may be left in a very difficult position. For example, we worked with one startup who was making lead/acid batteries and relied upon a corporate partner to manufacture the batteries. Lead/acid batteries are difficult to manufacture and require careful attention to environmental issues. They are not popular neighbors, so the corporate partner was very important to the startup. Working with our client, we negotiated a six month notice period prior to termination of the manufacturing agreement. About a year later, the corporate partner unexpectedly declared that they were leaving the manufacturing business and told the startup that they were shutting down the factory in thirty days. We reminded them of the six month notice period and were able to find an alternative manufacturer.

Startups also need to understand the different expectations of large corporations: large corporations value predictability and planning. Startups, on the other hand, change their products and strategies. This mismatch of business cultures and expectations needs to be recognized and managed.

And corporate investors are very different from traditional venture capital investors. Corporate investors are frequently very concerned about the potential sale of their portfolio companies to "competitors", a term which can vary over time. Startups and traditional venture capital investors are focused on economic returns. Consequently, startups need to be careful that their corporate investors do not control the potential sale of the startup such as by owning a majority of a series of preferred stock which has a protective provision providing approval rights over the sale of the company.

If you are interested in learning more you can get more information on obtaining a CD of the webinar at: http://events.dowjones.com/webinars/20080314.html

Thinking Legal for Open Source Success: Trademarks & Licenses

I have been reading the dueling posts between Matthew Aslett, Tim Bowden and Ian Skerrett about the relative value of licenses and trademarks to the success of an open source company. http://blogs.the451group.com/opensource/2008/03/07/further-thoughts-on-the-impact-of-licensing-choice/They are particularly interesting to me because I have been putting together my material for my presentation at OSBC: Implementing Your Open Source Business Strategy through Your Legal Strategy. http://www.infoworld.com/event/osbc/08/osbc_agenda.html.

I think that any such discussion needs to first clarify the business model of the company: a dual licensing model has very different legal strategy from a services based model. You also need to consider the context of the business: the nature of the software (applications v. infrastructure), competitors, ownership of intellectual property rights and channels. For example, Tim discusses the difficulty of Linux distributors who are competing with the same code base. http://ianskerrett.wordpress.com/2008/03/03/successful-trademarks-are-more-important-than-os-licenses/. Yet Linux companies have a very significant problem: they do not control the intellectual property rights in the code base. These rights are distributed among the thousands of contributors. This situation is quite different from a company such as MySQL, Zimbra or SugarCRM who own the intellectual property rights in their code base. MySQL, Zimbra and SugarCRM can offer their products under a commercial license as well as the open source license (the "dual license" model) and even change the licenses (SugarCRM shifted from the Sugar Public License to GPLv3). Consequently, some of the discussions are comparing apples to oranges because new companies have much more flexibility in developing a legal strategy than companies working with an existing project.

If you are starting a company and will control the intellectual property rights in the code base, you will be able to use licenses, trade secrets, trademarks and patents as part of your legal strategy. However, if you are using an existing project licensed under the GPL, you will be limited in your license choice and you will not be able to use trade secrets and your patents will be of limited value because they may be licensed under GPLv2 (they are licensed under GPLv3 if you have modified the code).

License choice can be very important: I was speaking with a senior executive of JBoss and he was convinced that the choice of LGPL significantly limited their success because it is such a difficult license to understand (I personally view the LGPL as harder to interpret than the GPL). However, I don't think that the selection of GPL is a silver bullet for a company. http://blog.mapforge.com.au/index.php/2008/02/27/when-open-source-doesnt-add-up/. Zimbra was using the Zimbra Public License, a version of the Mozilla Public License. Sleepycat was using its own special license (a form of BSD).

If your business model requires that your software integrate with third party software, the GPL is a poor choice. Many third party software vendors will be reluctant to integrate their software with the code if they need to license their software under the GPL. In that case, BSD or the MPL (a weak copyleft license) will be a better choice.

However, trademarks are very important in the open source software industry. In fact, they may be the major asset of a company that is using a common code base such as Linux. Trademarks take on a special importance because open source software is frequently distributed outside of traditional channels.

Unfortunately, the question of the importance of license vs. trademark cannot be answered in general. Like many questions in business (and the law) context is critical. If you are interested in more discussion about this question, join me at OSBC!

Affero General Public License Approved by OSI

The Affero General Public License ("AGPL") has been approved by the OSI. The AGPL is an important option for companies whose software can be used to provide a service. It includes a "network use" provision which requires that the source code be made available to "users" of the service. For a more information about the AGPL, you can read my earlier post. http://lawandlifesiliconvalley.blogspot.com/2007/11/free-software-foundation-announces.html

Thanks to Funambol for submitting the license to the OSI and following up. http://www.funambol.com/blog/capo/. OSI approval is important for adoption in many large organizations which use OSI approval as a basis to approve the use of software distributed under such a license. I am particularly pleased that OSI adopted AGPL because Fabrizio Capobianco at Funambol and I have a bet about whether GPLv3 or AGPL will be the dominant license in five years. He can no longer complain that it is not a level playing field! So consider AGPL, but remember I have money riding on your adoption of GPLv3.

Jacobsen Redux: Remedies for Breach

As I mentioned in my post on Jacobsen v. Katzer http://lawandlifesiliconvalley.blogspot.com/2007/08/new-open-source-legal-decision-jacobsen.html, the issue of remedies for the breach of open source licenses is a difficult one. A recent decision in the Northern District of California, Netbula, LLC v. Storage Technology Corporation ("STC"), is a reminder of these difficulties. Netbula tried to convince the court that STC's alleged violation of the license agreement should be copyright infringement as well as breach of contract. As I noted in that post, most licensors prefer copyright infringement remedies:

Generally, the remedy for contract violations under US law is damages, not "injunctive relief" (which means that the court order a party to cease their violation). On the other hand, copyright infringement generally includes a presumption that injunctive relief is appropriate. Thus, the question of whether the violation of a license is a contract violiation or copyright infringement (it can be both) is very important, because licensors would prefer to obtain an injunction prohibiting the breach of the license. The question turns on a nuanced legal issue of whether the term in the license is a "restriction on the scope" of the license or a covenant. In the first case, the failure to comply with the provision means that the licensee is outside the scope of the license and thus is a copyright infringer (as well as liable for breach of the contract). On the other hand, if the term is merely a covenant, then the failure to comply with it is a breach of contract. The most celebrated case dealing with this issue involved the Java license between Sun and Microsoft in which the court found that the obligation on Microsoft to meet the Java compatability tests was a covenant, not a restriction on the scope of the license and the court denied Sun an injunction on those grounds (Sun got an injunction for unfair competition).

The Netbula decision demonstrates the difficulty of proving that a license obligation is a "condition". Briefly, STC licensed Netbula's SDK for development and runtime version for distribution. Netbula alleges that STC used the SDK for more users than was permitted and on operating systems that were not permitted. The license grant is as follows: " a non-exclusive, perpetual, irrevocable license for Storagetek's employees, consultants and subsidiaries for up to ONE user(s) for each of the licenses purchased, to use the PowerRPC SDK Product under Windows NT and 95/98 platforms; each user can only use the software on one computer." The court found that the limitation on users was not a condition, but only a covenant. Consequently, the remedies for breach of the license would be damages and the breach was not copyright infringement. On the other hand, the court found that the restriction on the use of the SDK for certain operating sytems was a condition and its breach would be copyright infringement. However, Netbula did not prove that STC had used the SDK on the non permitted operating system.

Netbula also alleges that STC did not pay the royalties for all of the copies which it distributed. The license provided for payment of a fixed amount for 1000 copies. The court found that this obligation is covenant, not a condition.

This case demonstrates the difficulties in making these distinctions. The case demonstrates the reluctance of the courts to find a "limitation" on the license and provide a licensor with copyright infringement remedies. This case is important for open source licensors: even though the Jacobsen case was probably wrongly decided, this issue is a difficult one. The appeal of the Jacobsen case has the potential for disaster for open source licensors: if the CAFC decides the issue incorrectly and uses sweeping language (as opposed to narrowly focusing on the provisions of the Artistic License), open source licensors will be in a considerably weaker position in pursuing licensees who are in breach.

SCO Rises From the Dead with $100M

The Wall Street Journal reported today that the SCO Group Inc. ("SCO") raised $100M to go private and exit bankruptcy. The funding came from the private equity firm Stephen Norris Capital Partners and partners in the Middle East. The Journal reports that Stephen Norris Capital Partners and their partners will have a controlling interest in SCO. http://online.wsj.com/article/SB120301098306668879.html?mod=rss_whats_news_technology

The announcement is puzzling because SCO's principal assets were its UNIX rights (the scope of which are unclear). Yet, a court decision in August rejected all of SCO's claims to enforce copyrights in Linux that it claimed to own. The court rejected both SCO's contract claims for breach of the UNIX license agreements against existing UNIX licensees, such as IBM, and for copyright infringement of UNIX copyright by users of Linux (the court found that Novell owned the copyright in UNIX software and had not assigned it to SCO. In my 25 years of practice, the SCO decision was one of three most dramatic failures of an intellectual property strategy. The decision also made clear that SCO knew about these problems when they launched their litigation against IBM because they tried to get Novell to confirm the transfer of the copyrights. Apparently, we have not heard the end of this story.

Open Source Think Tank: Legal Issues

This morning we are discussing legal issues at the Open Source Think Tank (for more information, please see http://thinktank.olliancegroup.com/). I started by providing an overview of legal developments from 2007 based on my earlier post. http://lawandlifesiliconvalley.blogspot.com/2007/12/2007-top-ten-free-and-open-source-legal.html. I will summarize my predictions for 2008 in posting later this weekend.

We also had a "Brain Storming" session on the topic of "What are the three major licenses for commercial adoption?" The discussion groups noted that the use of licenses depends on the community, the business strategy and status of the project. For projects that are just launching and want to ensure that all of the developments are contributed back to the community, the GPLv2 is frequently the best choice since many projects use it and it is a clear signal that you intend to be live by the rules of the open source community. However, a project that is more mature could choose GPLv3 which resolves many of the ambiguities of GPLv2, but it is new and not completely understood. A company that is interested in widespread adoption and is not concerned about ensuring that contributions are returned to the community would choose either BSD or Apache. One group noted that Apache License is particularly attractive because of Apache's strong reputation for excellent code. One surprising statement was that the GPLv2 continues to be a problem for some companies: the representative of a major company recently released a project under a dual distribution model, the company was told by their "commercial" licensees that they would drop the software if the GPLv2 was chosen as the "open source" license in the dual distribution. This statement was particularly surprising since these licensees would receive the software under the commercial license.

We all agreed that legal issues will continue to be important for the industry and we are likely to continue see important legal developments this year.

Open Source Think Tank: The Long Tail for Open Source by Chris Anderson

After tasting some great wine (I recommend Pine Ridge Stags Leap 2005 Cabernet Sauvignon and the tour at Pine Ridge was very interesting even for those who have taken many wine tours http://www.pineridgewinery.com/index.cfm?fuseaction=category_detail&category_id_int=12541), we had the keynote from Chris Anderson, Editor in Chief of Wired magazine and author of The Long Tail.http://www.thelongtail.com/

Chris discussed how the concepts of the Long Tail applied to open source. He noted that the lower cost of development, lower cost of distribution and the lower cost of search which are characteristic of open source software fit the Long Tail model. He summarized the opportunity with a quote from Joe Kraus (founder of JotSpot): "Millions of markets of dozens."

Chris then predicted that the next wave of open source software will involve open source hardware. He has been working on these issues as part of his DIY Drones project. He noted some of the problems in applying open source concepts from bits to atoms. He identified that each of the six layers of open source hardware pose separate problems: mechanical drawing, parts list, schematics, PCB layouts, firmware and software. The problems range from rights owned by third parties to the protectability of items such as a parts list. His project is currently using Creative Commons license but he is not sure if it meets all of his needs.

We are able to continue the discussion at the dinner at Silverado Country Club where we capitalized on the wine tours by sharing bottles from different wineries.

Open Source Think Tank: CIOs Speak

We are in Napa at the Open Source Think Tank (for more information, please see http://thinktank.olliancegroup.com/) and we have had two very interesting panels with CIOs telling us about their adoption and management of open source. They had a very consistent message: open source is everywhere and growing. But open source companies need to act more like traditional software companies: they need to have better support services and more professional sales. They also made clear that the future is "mixed" environment with a combination of third party proprietary software, third party open source software and internally developed software. These statements are consistant with Gartner's recent prediction that 80% of proprietary software will include open source software by 2012. http://blogs.cnet.com/8301-13505_1-9863802-16.html. In the words of Gartner: By 2012, 80 percent of all commercial software will include elements of open-source technology. Many open-source technologies are mature, stable and well supported. They provide significant opportunities for vendors and users to lower their total cost of ownership and increase returns on investment. Open source companies need to be prepared to work in the mixed environment and to find ways for the end user to get support that they need for the entire stack.

In discussing the advantages of open source adoption, they went beyond the traditional focus on price to note that open source adoption also helps build community within the organization and saves time. They also provided some advice for selling to large enterprises: focus on the "use case". As the representative of a major bank noted "Chaos breaks out after the third power point slide" so make sure that your use case appears on slide two. More to come.

Nokia Acquires Trolltech, Continuing the Trend of Greater Involvment of Traditional Software Companies in Open Source

Nokia announced that it will be acquiring Trolltech. This acquisition continues a trend of traditional software companies becoming active in using open source software and business models. For example, Citrix acquired Xensource and Yahoo acquired Zimbra. Consistant with this trend, Nokia provided the following explanation:

"The technology landscape evolves and, for Nokia, software plays a major role in our growth strategy for devices, PCs and the integration with the Internet. We continue to focus on areas where we can differentiate and add more value. Common cross-platform layers on top of our software platforms attract innovation and enable Web 2.0 technologies in the mobile space," said Kai Oistamo, Executive Vice President, Devices, Nokia. "Trolltech's deep understanding of open source software and its strong technology assets will enable both Nokia and others to innovate on our device platforms while reducing time-to-market. This acquisition will also further increase the competitiveness of S60 and Series 40."

http://money.cnn.com/news/newsfeeds/articles/prnewswire/UKM00728012008-1.htm


Traditional software companies understand that open source is a very powerful force in the software industry, a view confirmed by several recent reports on the penetration of open source software. Dennis Byron, the anaylst, summarized these reports very effectively in his post http://www.ebizq.net/topics/open_source/features/8842.html?page=1. He notes that according IDC open source software revenue in 2006 was $1.8 billion (about 1% of all software revenue), but has a growth rate three times the growth rate of traditional software. He also provides a very useful discussion of the difficulty of measuring the growth of open source software.

These reports are consistant with Gartner's report last year: Gartner declared open-source software "the biggest disruptor the software industry [Gartner] has ever seen and [Gartner] postulated it will eventually result in cheaper software and new business models." They stated that open-source products accounted for a 13 percent share of the $92.7 billion software market in 2006, but should account for 27 percent of the market in 2011 when revenue is expected to be $169.2 billion, according to Gartner research. http://lawandlifesiliconvalley.blogspot.com/2007/09/open-source-paradigm-shift.html. IDC has estimated that open source revenues will increase to $5.8 billion in 2011, which represents an annual growth rate of 26 percent from 2006 to 2011.

Byron's conclusion is that open source and closed source models are converging and that over time software users will be more concerned about functionality and price rather than "open source" or proprietary. http://www.ebizq.net/topics/open_source/features/8842.html?page=5. This conclusion is consistent with the results from our 2007 Open Source Think Tank http://thinktank.olliancegroup.com/index.php?option=com_content&task=view&id=34&Itemid=61 (We will be holding our Third Annual Open Source Think Tank next week and you may find out more about this invitation only event athttp://lawandlifesiliconvalley.blogspot.com/2008/01/thinking-forward-on-commercial-open.html)

Open source has entered the mainstream and needs to be part of the strategy of all software companies.

HP Launches New Websites to Manage Open Source Software

HP announced the launch of two websites to assist companies in managing open source software:

http://www.fossology.org/: This site provides a tool that HP developed internally to assist in the management of FOSS. The tool was designed to "quickly and accurately describe how a given open source project was licensed." It is designed to analyze all of the source code for a given project and uses license declarations and "tell tale" phrases to identify which software licenses are being used.

http://www.fossbazaar.org/: This community site provides access to information on FOSS and how to manage it. FOSSBazaar is designed to be a site share information and best practices on managing open source software, with issues ranging from license management to vulnerabilities in FOSS projects. HP has posted significant material on FOSS Governance in the "Getting Started" folder.https://fossbazaar.org/?q=topics/gettingStarted


The site is unique because it provides a single location to discuss information which is currently spread across multiple sites. I think that the site will be very valuable to the FOSS community, but only if they use it. In fact, I have contributed information on intellectual property to the site: https://fossbazaar.org/?q=topics/ipIssues.


The availability of this tool as well as the more familiar Black Duck and Palamida tools mean that the use of FOSS will be receiving increasing levels of scrutiny. We have already seen much greater scrutiny of these issues both at funding for venture capital backed startups and in mergers and acquisitions. In fact, several large companies have established specific, separate due diligence procedures focused solely on open source use. Since more than 95% of venture backed startups exit through acquisition, the management of FOSS use should be a priority for technology startups. Moreover, with the increasing use of litigation by some projects, http://lawandlifesiliconvalley.blogspot.com/2007/12/busybox-files-lawsuit-against-verizon.html the management of FOSS use needs to become a priority for all companies using software (which is essentially all companies)


I recommend that you take the sites for a spin.

Buying an Open Source Company

451 Group has recently published a report on why companies would buy an "open source" company. Although I have not read the report, I have been impressed by the quality of their work in the past. Ironically, the report came out on the day of announcement of the Sun acquisition of MySQL. Such acquisitions will be attractive to the open source companies for the same reasons that it was attractive to MySQL: the ability of a large company like Sun to provide the strong service component which is critical for smaller software companies (and particularly open source software companies) to be successful in selling to the enterprise. http://lawandlifesiliconvalley.blogspot.com/2008/01/sun-microsystems-buys-mysql-for-1.html

Matthew Aslett summarizes the report in his posting. http://blogs.the451group.com/opensource/2008/01/18/why-buy-an-open-source-company/. The 451 Group identifies the following drivers for open source M&A:

Entrance into new markets
Portfolio expansion
Consolidation play
Business overhaul
Technology play
Project acquisition
Technology transfer
Carve out

I agree with Martin Schneider that for many traditional software companies "Business Overhaul" is the most compelling reason for an open source acquisition. They need to learn more about the open source business model. However, I think that it is important to place open source acquisitions in the broader context of the consolidation going on generally in the software industry. http://www.networkworld.com/news/2007/111307-hp-ceo-consolidation-openworld.html. The factors driving this general consolidation will also drive open source acquisitions.

Sun Microsystems Buys MySQL for $1 Billion

Sun announced today that they are purchasing the open source database vendor, MySQL AB, in a deal valued at around $1 billion. The transaction is scheduled to close late in the third quarter or early in the fourth quarter of Sun's fiscal 2008. According to The Street: "Sun will pay approximately $800 million in cash for all of MySQL's stock and assume about $200 million in options." http://www.thestreet.com/s/sun-to-buy-mysql/newsanalysis/techsoftware/10398964.html?puc=_googlen?cm_ven=GOOGLEN&cm_cat=FREE&cm_ite=NA



Sun's CEO, Jonathan Schwartz, described the acquisition as based on MySQL's unique position: MySQL's database is the "M" in the LAMP stack which is favored by web companies, yet MySQL is having difficulties selling to more traditional companies, because CIOs want traditional "big company" commercial support. MySQL has stated that "more than 100 million copies of MySQL's open source database software have been downloaded and distributed and an additional 50,000 copies are downloaded daily." Sun gains the advantage of MySQL's customer base while supplying the commercial support that MySQL needs to sell into more traditional enterprises. http://blogs.sun.com/jonathan/ Jonathan's post is particularly interesting for the vision behind the acquistion:

So why is this important for the internet? Until now, no platform vendor has assembled all the core elements of a completely open source operating system for the internet. No company has been able to deliver a comprehensive alternative to the leading proprietary OS. With this acquisition, we will have done just that - positioned Sun at the center of the web, as the definitive provider of high performance platforms for the web economy.


Jonathan's post also provides details about how Sun will integrate MySQL into its offerings.


And he announced that Sun will be funding additional developments at universities through global research fellowships designed to advance the state of engineering on the internet. The announcement of this academic initiative follows Sun's announcement in December that Sun will be establishing an "award program" to support innnovation and advance open source development relating to its products. http://lawandlifesiliconvalley.blogspot.com/2007/12/paying-developers-new-way-to-develop.html



2008 is starting with a bang for open source.

Thinking Forward on Commercial Open Source: Third Annual Open Source Think Tank

Commercial open source software is at an exciting cross roads. In the last year, its importance has been acknowledged by Gartner which declared open-source software "the biggest disruptor the software industry [Gartner] has ever seen and [Gartner] postulated it will eventually result in cheaper software and new business models." http://lawandlifesiliconvalley.blogspot.com/2007/09/open-source-paradigm-shift.html. The first revision of the General Public License in 15 years was completed. http://lawandlifesiliconvalley.blogspot.com/2007/07/general-public-license-version-3-legal.html. The cloud over Linux created by SCO's litigation, almost forgotten, came to a dramatic end in one of the most spectacular melt downs in the history of intellectual property litigation. And many traditional software companies, such as Adobe and Yahoo, have become involved in open source software. http://netscape.com.com/Year-in-review-New-players-enliven-open-source/2009-7344_3-6223153.html

However, success brings new challenges. We will be discussing those challenges again at the Third Annual Open Source Think Tank on February 7 to 9 at the Silverado resort in Napa Valley which is an invitation only gathering for leading global experts to get together and work collaboratively on the issues facing commercial open source. The Think Tank will focus on the continuing evolution of commercial open source companies, customer adoption trends, impact of software-as-a-service, implications of industry consolidation, and legal developments. The keynote speaker will be Chris Anderson of author of the Long Tail and editor in chief of Wired. For a preview of his thoughts, you can read his interview on Matt Asay's blog: http://blogs.cnet.com/8301-13505_1-9845106-16.html?part=rss&subj=news&tag=2547-1040_3-0-5.

The Open Source Think Tank is unlike a traditional conference; all the attendees who participate are expected to contribute in the brainstorming and workshop format and to take advantage of the CIO panels. If you are interested, you can apply to participate at https://thinktank.olliancegroup.com/

Like last year, we will publish a report of the results of the http://thinktank.olliancegroup.com/