Microsoft CEO Steve Ballmer has sparked controversy by declaring that Linux infringes on Microsoft's intellectual property.

Answering questions after a speech at a conference in Seattle, Ballmer said Microsoft had been motivated to sign a deal with SuSE Linux distributor Novell earlier this month because Linux "uses our intellectual property" and Microsoft wanted to "get the appropriate economic return for our shareholders from our innovation."

The deal includes an agreement by Novell and Microsoft to improve inter-operability of their competing software products. It also calls for Microsoft to pay Novell $440 million for coupons entitling users to a year's worth of maintenance and support on SUSE Linux to its customers. Microsoft agreed to recommend SUSE software for Windows users looking to use Linux as well.

A key element of the agreement however is Novell's decision to make a $40 million payment to Microsoft in exchange for the latter company's pledge not to sue SuSE Linux users over possible patent violations. Also "protected" are individuals and non-commercial open-source developers who create code and contribute to the SuSE Linux distribution, as well as developers who are paid to create code that goes into the distribution.

That part of the deal have been heavily criticised by a number of companies and open-source advocates inclunding Sun's CEO Jonathan Schwartz and Samba, who argue the deal is tantamount to an admission of patent violations by a key Linux supporter.

Microsoft officials have so far refused to comment on whether they view the Linux kernel as violating its patents. Ballmer had broken that silence, with the clear intention of scaring businesses off the open-source alternatives to Microsoft's Windows operating system just prior to the launch of its latest version, Vista.

"Novell pays us some money for the right to tell customers that anybody who uses SuSE Linux is appropriately covered," Ballmer said. "This is important to us, because [otherwise] we believe every Linux customer basically has an undisclosed balance-sheet liability."

Ballmer comments were, unsurprisingly, not greeted warmly. "My reaction is that so far, what he said is just more FUD (fear, uncertainty and doubt)," said Pamela Jones, editor of the blog, which tracks legal issues in the open-source community. "Let him sue if he thinks he has a valid claim, and we'll see how well his customers like it."

Officials at Red Hat, the leading Linux distributor, also dismissed Ballmer's comments. "We do not believe there is a need for or basis for the type of relationship defined in the Microsoft/Novell announcement," said Mark Webbink, deputy general counsel. Red Hat has called Microsoft's legal threat a looming "innovation tax". It also said that it can protect its customers against patent claims.

Jones also challenged Ballmer to "put his money where his mouth is" and detail exactly what part of the Linux kernel source code allegedly infringes upon Microsoft patents, so that "folks will strip out the code and work around it or prove his patent invalid".

Ballmer did not provide details during his comments Thursday. But he was adamant that Linux users, apart from those using SuSE of course, are taking advantage of Microsoft innovation, and that someone - either Linux vendors or users - would eventually have to pay up.

"Only customers that use SuSE have paid properly for intellectual property from Microsoft," he said. "We are willing to do a deal with Red Hat and other Linux distributors." The deal with SUSE Linux "is not exclusive," Ballmer added.

Original reporting by Computerworld and IDG News Service