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Inside Microsoft's landmark Novell deal

Microsoft lawyer Marshall Phelps has a new book out on Microsoft's intellectual property licensing push that outlines, among other things, its top-secret effort to strike a pact with a Linux vendor.

Just two days before Microsoft and Novell signed a controversial deal in 2006, the two sides still hadn't figured out a way to make peace over Linux without violating the licensing terms that govern the open-source operating system.

The terms of the GNU General Public License made it tough for Microsoft to get paid a royalty for each copy of Linux that Novell sold and also made it tough for Microsoft to offer patent protection to Novell without giving it to all users of Linux. But, just hours before it hoped to announce a deal, Microsoft workers thought up an end-run around the provision. Instead of protecting Novell, Microsoft hit on the idea of offering legal protection to Novell's customers.

Even after they did reach an accord, Microsoft still had trouble signing off. With the press waiting for a news conference that was already behind schedule, Microsoft general counsel Brad Smith found that the pen he had been given to sign the deal was out of ink. Smith looked around, spotted a whiteboard and grabbed a marker, which he used to finish signing the contract.

That story is just one of many interesting tales in "Burning the Ships," a new book that traces Microsoft's moves from intellectual property novice to patent powerhouse. And the author of the book should know. It's co-written by Marshall Phelps, the former IBM lawyer who Microsoft recruited to lead its intellectual property licensing efforts. (Phelps still works at Microsoft, although he notes in the book that the company did not finance the book.)

The timing of the book is interesting, of course, given Microsoft's recent suit against TomTom, which alleges, among other things, patent infringement for TomTom's use of the Linux kernel in its mapping products.

The book itself is an interesting read. "Burning the Ships" traces the history of Microsoft's licensing efforts from the time before Phelps arrived. Former Microsoft Chief Technology Officer Nathan Myhrvold reflects on those early days when Microsoft found itself trying to defend against a slew of patent claims.

"And when our lawyers looked around and asked what sort of patents we could assert back against these companies...the answer was 'we don't have crap,'" Myhrvold is quoted as saying. "So every time one of these companies came by to assert their patents against us, it would cost us money. Sometimes 50 or 100 million dollars. And that's a lot of zeroes to give away just because someone else has patents and you don't."

Ultimately, Microsoft decided it needed to change things. It brought in Phelps and launched moves to both open its IP up for licensing as well as greatly speed up its rate of patent applications.

"My job was to reform and invigorate Microsoft's IP department," Phelps said, "which in my view had been functioning like a football team composed only of defensive linemen, with no one knowing how to throw a forward pass."

With Phelps' arrival--as well as that of general counsel Brad Smith--Microsoft's playbook definitely changed.

The company set upon a new course with regard to intellectual property, making peace with longtime enemies, creating a business around its underused technology, and seeking to strike broad cross-licensing deals with nearly everyone in the industry.

Myhrvold, too, would come to see even more value in patents. After he left Microsoft, he set up Intellectual Ventures, an entity that specializes in acquiring and licensing patents.

The Novell deal, though, is the most interesting tale and the one to which Phelps and co-author David Kline go into the most detail. It began as "Project Summer"--an effort to get at least one major Linux vendor to sign a pact with Microsoft by the summer of 2004. It began with a well-regarded salesperson, Susan Hauser, being tapped to confidentially meet with customers and see how much support there was for some sort of Microsoft-Linux partnership.

The customers were game, Phelps and Kline write, but unwilling to become a party in the negotiations themselves. As the effort took longer than Microsoft wanted it became "project next summer," the authors quip. The company met with Red Hat, starting in the fall of 2004, as part of "Project Bridge Builder," though talks broke down after a year and a half. Just as those talks were collapsing, in June 2006, Microsoft Chief Operating Officer Kevin Turner got a call from Novell's then-president, Ron Hovsepian. A few days after that, Brad Smith called Hovsepian back and a new effort, "Project Blue," was born.

The sides first met face to face two weeks later at a Hyatt near the Chicago airport. That meeting took place amid a convention of female bodybuilders. Another meeting took place in September, this time at Microsoft's outside counsel's office--in the same conference room where several months earlier Microsoft had hammered out an agreement with Sun Microsystems.

"Given the challenges of coming together with Novell," Smith says in the book, "I thought it made sense to meet in the same conference room... Plus, since the room had been lucky for us once before, I figured that couldn't hurt either."

Talks progressed, but had not reached a conclusion. Smith suggested the two sides set an October 31 deadline for reaching a deal. Novell agreed that the deal would be "done or dead by Halloween." After the last-minute end-run around the GPL, the two sides got the deal done and announced it to the world on November 2, 2006.