Good headline, but very weak on facts. Here's a FAQ that I've written for Jim Finkle, the intrepid Reuters reporter who filed that story:
Can the FSF ban Novell from selling Linux?
No, the FSF cannot ban Novell (and indeed anybody else) from selling Linux. The Linux kernel is under the second version of the General Public Licence (GPLv2). Linus Torvalds holds the copyright to the kernel.
Anything and everything which is included in a distribution of Linux - which I call GNU/Linux because it contains a fair few bits and pieces from the GNU Foundation, a sister organisation of the FSF - is included only if the terms of its licence are compatible with the GPLv2.
Why is this story circulating?
In November last year, Novell signed a deal with Microsoft that has angered a major part of the free and open source software community. The deal does not violate the GPLv2 in word. However, in my opinion, (and that of many others), it does violate GPLv2 in spirit.
What then can the FSF do? Why is this misinformation being spread?
As to why misinformation is being spread, the reporter probably didn't have a clue about the subject he set out to tackle. "Ban" is a very good word to pull readers.
The FSF holds the copyright on a number of bits and pieces that, together with the Linux kernel, (and thousands of other bits and pieces from myriad developers) go to make up the GNU/Linux operating system.
The FSF can change the licence for those bits and pieces to GPLv3, an updated licence which it plans to release in March. It has been threatening to include conditions in GPLv3 which will make it impossible for Novell to use software released under this licence (GPLv3) if it wants to continue with its Microsoft deal.
The GPLv3 was already in preparation long before there was any inkling about the Novell-Microsoft deal so any conspiracy theories about it can be thrown out of the window right here.