In a conference room adjoining the office of IBM (IBM) CEO Samuel J. Palmisano, there's only one framed photograph: A picture of Palmisano arm in arm with Finnish programmer Linus Torvalds.Torvalds is the founding father of a computer operating system called Linux, which is the central pillar of IBM's strategy. With Linux, Palmisano avoids dependence on the Windows operating system, the heart of Microsoft Corp.'s (MSFT) empire.
But on Mar. 6, IBM's love affair with Linux turned into a love triangle. That's when tiny SCO Group (SCOX), of Lindon, Utah, filed a $1 billion suit claiming Big Blue misused elements of its Unix technology. And the company isn't messing around: It hired David Boies, the top gun litigator who tried to bring Microsoft to heel for the Justice Dept.
SHOCKWAVES. According to the suit, back in 1985, AT&T, the original holder of the Unix patents now owned by SCO, licensed Unix to IBM. SCO says that original contract barred IBM from doing anything that could damage the economic value of Unix. It did later, after SCO shared with IBM its technology for making Unix run on chips made by Intel (INTC). It claims that IBM handed that technology over to the Linux developer community, undercutting the Unix market. "They said they would protect it for us," SCO CEO Darl McBride says of IBM, "and they have done just the opposite" by giving it away. SCO says it may sue other companies.
IBM denies that it misappropriated SCO technology. Nevertheless, the suit has sent shockwaves through the software industry, much of which is banking on Linux as a viable alternative to Microsoft's software. In the short term, say legal experts, the lawsuit could have a chilling effect on Linux adoption. Big corporate Linux customers could be leery of installing software whose ownership is being questioned.
Who is this little company that's causing such a stir? SCO, which was formerly known as Caldera International Inc., in 2001 bought the Unix assets of SCO, a California company, later changing its name to SCO Group. SCO's legal hurdles are considerable, according to legal experts. It must prove that its intellectual property is contained in Linux and that IBM shared its secrets with the Linux community. "It would be astonishing to me if IBM had done what it is accused of having done," says intellectual property lawyer Thomas C. Carey, a partner with the Boston law firm Bromberg & Sunstein LLP.
But SCO isn't cowed. "There definitely could be other [lawsuits]," says Mark J.Heise, a law partner of Boies. In January, SCO created a business unit whose mission is to collect money from companies using its intellectual property. SCO won't say who it thinks that is, but it names Linux distributor Red Hat Inc. (RHAT) in its suit as a company to which IBM handed SCO technology. Red Hat General Counsel Mark Webbink says Red Hat is not using any SCO technology. But the Raleigh (N.C.) company is so wary that it has posted a message for customers on its Web site: "Do not violate SCO's copyrights."
HOME-FIELD ADVANTAGE. Unless SCO wins the IBM suit, its prospects look dim. In its most recent fiscal quarter, ended Jan. 31, SCO had just $13.5 million in revenues and a $724,000 net loss. That left just $6.2 million in cash reserves, down from $8 million in October. And while the market for Linux-based server computers has nearly doubled over the last two years, to about $7 billion, only about 2% of SCO's revenues come from Linux sales. The rest comes from older Unix software. SCO denies that its future rides on the case.
Even though the odds run against SCO's winning, don't count out this wily little company. SCO cleverly avoided any discussion of patents or copyrights in its claim, which would have landed the case in federal court. Instead, legal experts say, by alleging violation of trade secrets, SCO gets home-field advantage -- a state court in Salt Lake County. That's one way to gain an edge on IBM. By Jim Kerstetter in San Mateo, Calif., with Spencer E. Ante in New York