UPDATE 2-Novell could be banned from selling Linux--group

(Adds analyst comment, context)

BOSTON, Feb 2 (Reuters) - The Free Software Foundation is reviewing Novell Inc.'s NOVL.O right to sell new versions of Linux operating system software after the open-source community criticized Novell for teaming up with Microsoft Corp. MSFT.O

“The community of people wants to do anything they can to interfere with this deal and all deals like it. They have every reason to be deeply concerned that this is the beginning of a significant patent aggression by Microsoft,” Eben Moglen, the Foundation’s general counsel, said on Friday.

The foundation controls intellectual property rights to key parts of the open-source Linux operating system.

Novell angered members of the open-source community that develops Linux and other free software programs in November when it entered a wide-ranging business deal with Microsoft.

Critics called on the board to punish Novell by banning it from distributing new versions of Linux software, said Moglen.

Linux is the most popular variant of open-source software. Unlike proprietary software such as Microsoft Windows, open-source software lets developers share code and add functions and is generally available at no cost.

Moglen said the board has not made a decision on the matter but that he expects it to announce a ruling within two weeks.

If the foundation decides to take action, the ban would apply to new versions of Linux covered under a licensing agreement due to take effect in March.

John Dragoon, senior vice president and chief marketing officer at Novell, declined to comment saying it would be premature to speculate on how the issue would be resolved.

“We’ll take a look at the final determination and we’ll react accordingly,” he said.

Software companies such as Novell sell standardized versions of open-source programs with custom features, maintenance plans and technical support.

Linux sales accounted for 5 percent of the $967 million in revenue that Novell reported last year. The deal with Microsoft has turned into a far bigger cash generator as it calls for Microsoft to make two upfront payments totaling $348 million.

The two companies agreed to jointly sell their products and also develop technologies to make it easier for businesses to use Linux alongside Windows software. They will also license each other’s intellectual property.

Members of the open-source community have called on Novell to pull out of the pact, saying it would undermine the patent position of Linux software and also give Microsoft an edge in persuading businesses to use Microsoft products over Linux and other types of open-source software.

Jefferies & Co. analyst Katherine Egbert said Novell’s business was likely to suffer if it was banned from using the new versions of Linux.

It would have to boost spending on research and development to upgrade its software without access to the latest versions of the open-source code provided by the Foundation.

Novell shares ended down 2 cents at $7.16 on the Nasdaq.

The stock is likely to trade down before the Foundation discloses its ruling as investors stay on the sidelines to avoid the worst-case scenario, analysts said.

“Investors don’t like uncertainty,” Egbert said. “This isn’t good to the extent that it creates uncertainty around the technical road map.”