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By Steven Vaughan-Nichols  |  Posted 2004-03-03 Print this article Print

John S. Ferrell, founder of Carr & Ferrell LLP, a Silicon Valley intellectual property and corporate law firm, thinks that SCOs latest move is a risky one. "Suing the end user in a supply chain can be the most profitable litigation strategy, but it is also the costliest. Since IP infringement royalties are often calculated as a percentage of the product sale price, the farther down the supply chain you attach the royalty, the greater the value of the royalty assessed. The downside is that you have to collect lots of smaller payments, and you run the risk of alienating more potential future customers."

Glenn Peterson, intellectual property attorney and partner with the Sacramento-based law firm McDonough Holland & Allen PC, thinks even less of SCOs lawsuit. "Suing an end user seems incredibly stupid. The direct and tangible costs of this litigation are daunting enough. I cant imagine that they have thoughtfully considered the intangible costs: damage to good will, public relations and customer satisfaction. I am leery of any company that has litigation as the centerpiece of its business plan."

Peterson goes on to explain, "Their choice of suing IBM on a misappropriation theory, instead of for copyright infringement, is revealing. They have another huge obstacle to overcome with the GPL license issue. All indications are that SCO does not have the ownership rights [copyrights] to the relevant code. And, even if they did have the rights, they licensed those rights to the general public under the GPL. Stated simply, they never had what they claim is being misappropriated. But if they did, they gave it up to the public domain."

He adds, "SCO has declined every invitation to reveal any specific information underlying the merit of its claims. This latest announcement about suing end users is truly a tempest in a teapot. I agree with Professor Moglens [Eben Moglen, Columbia University law professor and general counsel for the Free Software Foundation] statement that SCOs threatened litigation letters can be safely put in the wastebasket. I think the same sentiment will ultimately apply to their court papers."

Not every attorney thinks SCOs first end-user case can be dismissed out of hand though. Kelly Talcott, an IP specialist and partner in the New York offices of Kirkpatrick & Lockhart LLP, a major corporate law firm, comments, "Obviously this is a questionable move strategically, as it may drive future customers away from SCO. The question of whether the move will be successful depends in large part on the strength of SCOs claim that IBM misappropriated material amounts of code owned by SCO and included it in its version of Linux. There is no innocent infringer defense for copyright infringement. If the end-user company is using tainted code, then it is liable. SCO has been a bit stingy about disclosing exactly what code was taken, so the true merits of both of these cases remain subject to speculation."

SCO announced earnings Wednesday. SCO for the first quarter took in $11.4 million, a drop from its year-ago revenue of $13.5 million. For the quarter, ended Jan. 31, the company reported a net loss of $2.25 million, or 16 cents per share, which compares to $724,000, or 6 cents per share, for the same year-ago period. SCO reported costs of $3.44 million related to its SCOsource licensing initiatives. Additional reporting by Shelley Solheim, Peter Galli and Scot Petersen Editors Note: This story was updated to include information and comments from a phone conference with analysts. Discuss This in the eWEEK Forum

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Steven J. Vaughan-Nichols is editor at large for Ziff Davis Enterprise. Prior to becoming a technology journalist, Vaughan-Nichols worked at NASA and the Department of Defense on numerous major technological projects. Since then, he's focused on covering the technology and business issues that make a real difference to the people in the industry.

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