Novell filed its delayed annual report with the SEC on May 25, including as attachments the technical co-operation and patent agreements it entered into with Microsoft in November 2006.
The 10-K filing for the fiscal year, to Oct. 31, 2006, was delayed as a result of a stock option investigation, which was recently concluded, allowing the company to release its annual report. The entire 10-K filing can be found here.
The text of the 144-page 10-K filing does not get into the specifics of the Microsoft deal, but it does include, subject to some redactions, the full three Microsoft agreement documents: the second amended and restated technical collaboration agreement, the first amended and restated business collaboration agreement and the patent cooperation agreement.
One of the most notable things about the report, according to Pamela Jones Groklaw Web site, is that it explains that Microsoft may be forced to stop distributing SUSE Linux coupons if the current text of the third draft of the GNU GPL (General Public License) 3 is included in the final license.
“If the final version of GPLv3 contains terms or conditions that interfere with our agreement with Microsoft or our ability to distribute GPLv3 code, Microsoft may cease to distribute SUSE Linux coupons in order to avoid the extension of its patent covenants to a broader range of GPLv3 software recipients, we may need to modify our relationship with Microsoft under less advantageous terms than our current agreement, or we may be restricted in our ability to include GPLv3 code in our products, any of which could adversely affect our business and our operating results,” the Novell filing said.
“In such a case, we would likely explore alternatives to remedy the conflict, but there is no assurance that we would be successful in these efforts,” the filing said.
That may explain why Microsoft has gone on the offensive about the GPLv3 during the past few weeks, claiming that free and open-source software infringes on 235 of its patents and directing its ire at the upcoming open-source license.
Novell, based in Provo, Utah, first said publicly that it planned to release the documents regarding its agreement with Microsoft on May 23 during a panel discussion at the annual Open Source Business Conference in San Francisco, where the question of whether Novells deal with Microsoft was good for open source was being debated.
Asked by eWEEK if it were unusual for a company to make such contracts public, Novell spokesperson Bruce Lowry said that when the agreements were material—as these are for Novell rather than for Microsoft—it was standard practice to include them in a companys periodic financial reports.
“We would have done so earlier, but for the stock options review and the fact that we werent filing our periodic reports. Microsoft is certainly aware of this. There are confidential elements in the agreement, and SEC rules allow for redaction of those elements. This is a standard practice in situations like this,” Lowry said.
Among other things, companies may redact from their agreements trade secrets and confidential commercial or financial information, including confidential information that refers to specific products or joint work. However, Lowry said, “we believe the text of the agreements, even redacted, will provide important additional detail on the scope of work going on between the two companies.”
Microsoft seemed unconcerned about the release of the agreement documents, with Horacio Gutierrez, vice president of intellectual property and licensing for Microsoft, based in Redmond, Wash., describing the deal as “an historic bridging between the worlds of open-source and proprietary software that was created to address issues of interoperability and intellectual property for our customers.”
The agreements greatly enhanced interoperability between Linux and Windows and gave customers greater flexibility in their IT environments, Gutierrez said, noting that the patent cooperation agreement give customers peace of mind and intellectual property assurance regarding patent issues.
“Customers have asked for this type of solution to address their interoperability and IP needs in a mixed-source environment and we are happy to have been able to come to this agreement for the mutual benefit of our customers. We will continue our bridge-building efforts in this area,” he said.
Asked about the timing of the 10-K release, ahead of the Memorial Day long weekend, Lowry said this was not intentional but rather “the luck of the draw. When we completed the stock options review Wednesday, we were obligated to file our outstanding financial reports as quickly as possible following that. We also have earnings May 30, which Im sure also had finance pushing hard to get these out the door as soon as we could.”
Novell Acknowledges the Realities
In the 10-K filing, Novell said, “the overarching purpose of this partnership [with Microsoft] is to increase the utility, desirability and penetration of Linux by enabling its interoperation with Windows to a mixed environment that is easier to maintain. We believe that this partnership will help us deliver value to customers by giving them greater flexibility and effectiveness in their IT environments.”
The Microsoft partnership essentially consists of three related agreements: the technical collaboration agreement, primarily in the areas of virtualization, Web services management, directory interoperability and document format compatibility; a business collaboration agreement based around joint sales and marketing activities; and a patent cooperation agreement.
“We believe that this partnership addresses pressing, industrywide issues, that it puts customers needs first, and that our company will benefit from it financially and strategically,” Novell said in the report.
Novell described the market for identity-driven computing solutions and Linux and platform services solutions as highly competitive and subject to rapid technological change. “We expect competition to continue to increase both from existing competitors and new market entrants,” it said in the 10-K filing.
However, the company also acknowledged the threat posed by Microsoft. “One pervasive factor facing us and all companies doing business in our industry is the presence—and dominance—of Microsoft … We will continue to be competitors of Microsoft, but it is our goal that through this set of agreements, Microsoft will serve as an important indirect source of channel sales for Novells Linux sales,” the company said.
Regarding copyrights, licensing, patents and trademarks, Novell said its business includes a mix of proprietary offerings and offerings based on open-source technologies.
“With respect to proprietary offerings, we perform the majority of our development efforts internally, but we also acquire and license technologies from third parties. No one license is critical to our business. Our open-source offerings are primarily [composed] of open-source components developed by independent third parties over whom we exercise no control,” the company said in its filing.
But Novell also recognized the potential harmful effects to its business if it lost access to third-party open-source technology.
“The collective licenses to those open-source technologies are critical to our business. If we are unable to maintain licenses to these third-party open-source materials, our distribution of relevant offerings may be delayed until we are able to develop, license or acquire replacement technologies. Such a delay could have a material adverse impact on our business.”
The company also said current trends indicate that the frequent litigation in the software industry regarding patent, copyright and other intellectual property rights might increase.