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Third-Party Beneficiaries of a Contract - by AllParadox |
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Thursday, December 23 2004 @ 07:48 AM EST
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Groklaw's AllParadox thought you might enjoy an explanation of a contract concept called third-party beneficiaries. As you will see, it has a bearing on what the 1994 USL-Regents of California Settlement Agreement means to Linux users. AllParadox is an attorney, now retired.
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The USL-Regents of California Settlement Agreement:
What it means to the Linux User
~by AllParadox
With the recent publication of the 1994 settlement agreement from the
USL v. BSDi lawsuit, a question may arise: what does it mean to Linux
users today? The answer to that requires explaining a contract
concept, “third-party beneficiaries", because with respects to the
settlement, that's what we Linux users are.
In any specialty, understanding the special meanings of terms underpins
understanding their application, and law is no different. In law
school, first-year law students are taught that a contract is an
exchange of promises: a promise for a promise.
A party to a contract may make a promise, or be a promise recipient.
Under the Common Law, a contract may be oral or written. When a
contract is written, one of the first steps is to write out the names
of the parties. Contracts may be among any number of people, but by
far the most frequent situation is two-party contracts. The archaic
but familiar phrases are “the party of the first part” or “the party of
the second part”. Maybe you saw the old Marx Brothers skit.
Parties to a written contract negotiate terms, come to an agreement on
terms, and consummate the transaction by signing the contract. Often,
the negotiation, agreement and consummation by one party amounts to
nothing more than voluntarily signing a pre-prepared document, but that
is enough. The special relationship the parties engage in --
negotiations, agreement, consummation -- has an ancient name: the
parties are said to be “in privity”.
Making things more interesting, a contract may confer a benefit on a
person who has not participated in the negotiations, has not agreed to
the terms, and has not signed the contract. In an atmosphere of “a promise
for a promise”, these people have made no promises. The lack of
participation, of commitment, can cause distinct problems.
In keeping with the other archaic terminology, these people who
benefit, or beneficiaries, are given a specific name. Being not the
parties of the first part or the second part, they are designated
third-party beneficiaries.
Contracts are enforced in courts, sometimes sitting as equity but
usually sitting as civil. In dealing with these persons, the
Common-Law courts have given names to various categories of third-party
beneficiaries: -
A donee beneficiary is someone who receives the benefit as a
gift.
-
A creditor beneficiary receives the benefit as a satisfaction of
an obligation by one or more of the parties.
Donee beneficiaries and creditor beneficiaries are collectively called
intentional beneficiaries. Any other third-party beneficiary is called
an incidental beneficiary. If you are interested in more depth on this
subject, try the Tennessee Supreme Court Opinion of OOIDA v. Concord
EFS, Inc., Flying J, Inc., et al., 59 S.W.3rd 63 (Tenn. 2001). I have
not shepardized OOIDA recently, so I do not know if it is still good law, but I
think the court’s explanation and analysis is informative.1
“Donee” is the word used because it holds a special position in
contract law. As stated above, a contract is an exchange of promises.
A glaring exception is gifts. Often, a promise to make a gift, with no
return obligation whatsoever, is an enforceable contract. The donee
may go to court and enforce the naked promise. Beware pledges to
charitable organizations if you do not intend to honor them, because
they may be enforced.
Probably the most commonly known example of an explicit third-party beneficiary
is the life-insurance policy. The owner is the individual that
purchases the policy and is usually the insured life, the insurance
company is one of the parties, and the third-party beneficiary is the
beneficiary.
Commercial transactions can be quite complicated, requiring many
persons to complete a task. Often, a single proprietorship or company
cannot satisfy all the requirement of contract, so they will enter into
other contracts to fulfill their obligations.
A common example of that situation is the home builder, or general
contractor. The general contractor subcontracts various
construction tasks to specialized craftsmen: carpenters, electricians,
plumbers, architects, and civil engineers, as needed. Depending on
local law and the terms of the subcontract, the person having the
building built may enforce the subcontract as a creditor beneficiary.
A more frequent example, though hardly mentioned, is third-party
beneficiaries of warranties. Many states have enacted laws that make
family members of a purchaser the beneficiaries of any warranty on a
purchased product. (See, for example,
www.moga.mo.gov/statutes/C400-499/40002A0216.HTM, which lists
Missouri’s statutory version of a Uniform Commercial Code (UCC)
regulation, 400.2A-216, “Third-party beneficiaries of express and
implied warranties”.
Simply put, intended third-party beneficiaries of a contract may
enforce the contract in court. A beneficiary of a life insurance
policy may sue in civil court in his own name to enforce the policy
after the death of the insured. Incidental beneficiaries may not sue
to enforce a contract, but they may still receive contractual benefits
without assuming any obligations under the contract.
Let me bring you back again to that simple statement where we began the analysis: a contract is an
exchange of promises. This says nothing about the title at the top of
the document. If a document codifies an exchange of promises, it is a
contract. That is how it works.
So, for example, suppose we have a document titled simply:
Settlement Agreement,
with a first paragraph of:
This Settlement Agreement is entered into between UNIX System
Laboratories, Inc. ("USL"), a Delaware corporation, and The Regents of
the University of California (the "University"), a California
corporation.
If, within the body of the document, it contains a promise for a promise, it is a
contract, and is to be interpreted according to contract law. The fact
that it settled a lawsuit does not prevent it from being a contract.
Indeed, that fact reinforces the contractual nature of the document.
The fact that the lawsuit itself was started when USL was owned by
AT&T but was settled by Novell after Novell purchased from USL is
irrelevant because if Novell is the successor-in-interest, it had the power to
settle and to contract.
We at Groklaw find this document fascinating merely for its meaning in
the context of the ongoing SCO lawsuits, but there is something else
very interesting buried within it, almost casually thrown in:
c. USL agrees that it shall take no action against any person who
utilizes any methods and concepts in the Restricted Files which as of
this date have become available to the general public by acts not
attributable to the University, its employees or students. Nothing in
this provision shall limit USL's rights against a third party arising
out of a breach of any license agreement with USL or AT&T. . . .
and
i. USL agrees that it shall take no action based on the use or
distribution by any person of material contained in the Unrestricted
Files.
The Regents of the University of California are no ordinary
profit-making corporation. They are a non-profit organization, with a
specific mandate from the State of California to equip members of the
general public, and California residents in particular, with the
education and intellectual tools that are valuable and necessary to
engage in commerce and to promote social welfare.
You and I, dear reader, are the intended third-party beneficiaries of
this contract.
And to make it even more concrete, think of this settlement in context.
At the time the parties signed the contract, a college student named
Linus Torvalds had recently written and released a kernel called
Linux, and together with the GNU system, it became a complete operating system. You may have heard of it. Although the OS was not used by a
large number of people at the time, it was all the buzz in software
development circles. I think it is a reasonable and enforceable
inference that the users of Linux code were specifically included
members of the third-party class created by the contract.
The USL-Regents Settlement is a broad shield. The way I see it, if you or
I are ever sued by any USL successor-in-interest -- SCO, Novell, oldSCO/Tarantella, or any
conceivable USL successor-in-interest -- for infringing USL copyrights on the code
described in the Settlement, we have a powerful copyright infringement defense.
Remember: it only applies to the code specifically covered by the Settlement Agreement, and we are only discussing persons claiming ownership as successor-in-interest. The defense can be used against every person claiming to be a copyright-owning USL successor-in-interest, claiming to have owned the copyright from before the agreement.
As we know, much of the code copyrights were actually owned by others and there are issues about the validity of "The SCO Group" as successor-in-interest, but it doesn't matter. In trial work, it is often easier to win the obvious than to litigate murky foundational questions like chain-of-ownership.
All successors-in-interest hold the copyright and the
restriction in the same hand (assuming anyone holds a valid copyright in this picture). To assert the copyright in court is to
concede the Settlement restriction. If a plaintiff neglects to mention
the Settlement in the complaint, then the defendants may interpose the
Settlement. That will settle all copyright claims founded on the code
described in the Settlement, with no further evidence or proof. It is
a complete defense to those copyright claims.
Of course, new material, including new code created since the adoption
of the Settlement and added to UnixSysV, will have its own
copyright issues, and none of this discussion applies to any new
material.
One last point: the Settlement was apparently concluded in the State of
California. If so, then this analysis is affected by a California
statute, Civil Code Sec. 1559, which provides that “a contract made
expressly for the benefit of a third person may be enforced by him at
any time before the parties rescind the contract.”
1
The decision is not available for free on the Internet, but here is a detailed review of what the Court wrote. An excerpt:
"Specifically, the Court held:
A third party is an intended third-party beneficiary of a contract, and thus is entitled to enforce the contract's terms, if
1. The parties to the contract have not otherwise agreed;
2. Recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties; and
3. The terms of the contract or the circumstances surrounding performance indicate that either:
a. the performance of the promise will satisfy an obligation or discharge a duty owed by the promisee to the beneficiary;
or
b. the promisee intends to give the beneficiary the benefit of the promised performance."
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Authored by: Anonymous on Thursday, December 23 2004 @ 07:57 AM EST |
[ Reply to This | # ]
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Authored by: Anonymous on Thursday, December 23 2004 @ 07:58 AM EST |
[ Reply to This | # ]
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Authored by: Anonymous on Thursday, December 23 2004 @ 08:10 AM EST |
Excellent tutorial - as usual.
I can only wish all my lecturers in the past were as good as you.
--
MadScientist[ Reply to This | # ]
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Authored by: Anonymous on Thursday, December 23 2004 @ 08:15 AM EST |
Your explanation takes me back to my days in teachers' college. Our senior law
course was taught by 'Art'. It was my favorite class. Art was a practicing
lawyer. He managed to convey a sense of how the law really works and made it
come alive. The two previous law courses, taught by Education profs. seem like
dry pap compared to Art's class.
Anyway, something about your explanation took me back. Thanks again.
[ Reply to This | # ]
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Authored by: jim Reiter on Thursday, December 23 2004 @ 08:31 AM EST |
Add this to the fact that Novell retained the Unix patents
(APA - Excluded Assets) and major SVRX rights (4.16 (b)),
doesn't leave TSG with very much Actually Intellectual
Property.
The question continues to be "What does TSG own and how
did They (TSG) come to own it?
Even the most untechnical person in Utah will understand
that you can't sell the milk if you don't own the cow.
[ Reply to This | # ]
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Authored by: Jude on Thursday, December 23 2004 @ 08:33 AM EST |
AllParadox has explained how we are beneficiaries of this contract, but the
contract itself was kept secret for many years. Is it legal to prevent the
beneficiaries of a contract from knowing the terms, or even that they are
beneficiaries?
[ Reply to This | # ]
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Authored by: blacklight on Thursday, December 23 2004 @ 09:00 AM EST |
"One last point: the Settlement was apparently concluded in the State of
California. If so, then this analysis is affected by a California statute, Civil
Code Sec. 1559, which provides that “a contract made expressly for the
benefit of a third person may be enforced by him at any time before the parties
rescind the contract.” AllParadox
... And teeth had to be pulled before the terms of said contract (or settlement)
was eventually released to the public, who is the "third person"
affected by the contract. Let's say it was not very nice of the tax supported,
public Univerity of California to keep those terms confidential for so long. On
the other hand, our thanks to UC for making sure those terms were included in
the settlement.
[ Reply to This | # ]
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Authored by: wings on Thursday, December 23 2004 @ 09:22 AM EST |
Regarding the USL Settlement:
I think it is a reasonable and
enforceable inference that the users of Linux code were specifically included
members of the third-party class created by the
contract.
...
You and I, dear reader, are the intended
third-party beneficiaries of this contract.
All I can say is...
wow.
[ Reply to This | # ]
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Authored by: josmith42 on Thursday, December 23 2004 @ 09:37 AM EST |
The transcript of the Marx Brothers skit left out my favorite part of the
skit [this may not be an exact quote, I'm replicating from memory
here]:
Groucho: Now here is the last clause: "If all the parties in this
contract [blah, blah, blah: I can't remember the rest]".
Chico: Well, I
don't know.
Groucho: It's okay! This kind of sentence is in every
contract. It's what's called a "sanity clause."
Chico: [laughs] You
can't fool me! There ain't no Sanity Claus! --- Forty-two: the answer
to the question of life, the universe, and everything. [ Reply to This | # ]
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Authored by: Anonymous on Thursday, December 23 2004 @ 09:42 AM EST |
This begs the question: What if all of those who are part of the "third
party" file suit against SCOX swamping them with, say, 10,000 different
actions?[ Reply to This | # ]
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Authored by: nickieh on Thursday, December 23 2004 @ 10:16 AM EST |
Between the question of ownership on the IP and this agreement, SCO's threats to
sue various Linux users becomes even more tenuous.
May be the reason the only targets to date have been existing contracted
companies, because they'd get bounced out of court based on the settlement
terms.
[ Reply to This | # ]
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Authored by: Anonymous on Thursday, December 23 2004 @ 10:21 AM EST |
This got me thinking, if USL-Regents entered a secret agreement, why not
SCO-DCC?
Secret Agreement Between SCO and DCC
..."In return for letting us have a dismissal without prejudice. We promise
never to sue you for timeleness, contract violations, jaywalking, chewing with
your mouth open or any other foul deed you folks at DCC have comitted against
us." ...
This gets both parties off the hook, DCC never gets sued again, and to all the
world it looks like SCO has reserved the ability to revive the suit agains DCC
(after their big IBM win), instead of having to admit to another loss.[ Reply to This | # ]
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- Not in SCOWorld - Authored by: tangomike on Thursday, December 23 2004 @ 11:16 AM EST
- Release - Authored by: Anonymous on Thursday, December 23 2004 @ 11:21 AM EST
- Secret Agreements - Authored by: Anonymous on Thursday, December 23 2004 @ 11:24 AM EST
- Secret Agreements - Authored by: Anonymous on Thursday, December 23 2004 @ 11:49 AM EST
- Secret Agreements - Authored by: Anonymous on Thursday, December 23 2004 @ 11:46 AM EST
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Authored by: rsteinmetz70112 on Thursday, December 23 2004 @ 10:24 AM EST |
Thanks for the explanation its very clear.
I do have one question about the extent of the material covered.
The settlement specifically talks about material which was "public at the
time of the settlement". Clearly BSD was public and Unix V32 was probably
public, but how much Sys V was public?
The code which ATT/USL/Novell developed in later versions of Unix, after BSD
stopped incorporating ATT code and began removing it, would arguably not be
covered since that ATT code was never made public. Although the methods and
concepts are similar, later versions modified and enhanced those greatly.
In this kind of scenario the providence of the code becomes very important. The
settlement would clearly seem to cover the header files and probably a lot of
other things.
---
Rsteinmetz
"I could be wrong now, but I don't think so."
Randy Newman - The Title Theme from Monk[ Reply to This | # ]
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Authored by: brian on Thursday, December 23 2004 @ 11:08 AM EST |
Here is a
link to a season's greetings that I thought would fit here...;-)
HAPPY
HOLIDAYS ALL!!!!
B. --- #ifndef IANAL
#define IANAL
#endif [ Reply to This | # ]
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Authored by: Ruidh on Thursday, December 23 2004 @ 11:23 AM EST |
With all resepect to AllParadox and fully admitting my status as a
non-lawyer, one aside in the above article gives me
pause.
“Donee” is the word used because it holds a special
position in contract law. As stated above, a contract is an exchange of
promises. A glaring exception is gifts. Often, a promise to make a gift, with no
return obligation whatsoever, is an enforceable contract. The donee may go to
court and enforce the naked promise. Beware pledges to charitable organizations
if you do not intend to honor them, because they may be
enforced.
This does not agree with my understanding of the
formation of a contract. Notably, a promise or pledge to make a donation at a
future date is *not* a contract because there is no consideration. As long as I
receive nothing in exchange for my promise, I may revoke that promise in the
future.
Similarly for license grants or any other one-sided grant of
permission without consideration, they are generally prospectively revocable. I
can give you permission to cross my property at a future date, but I can also
revoke that permission as long as we haven't formed a contract through my
acceptance of a consideration in exchange for my promise.
--- All my
comments on this site are licensed under a Creative Commons License.
http://creativecommons.org/licenses/by-nc/2.0/ [ Reply to This | # ]
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Authored by: ossworks on Thursday, December 23 2004 @ 11:32 AM EST |
It seems to me that the USL agreement is a real smoking gun. Not only does it
release us as AllParadox has said, but it points to SCO fraud.
When
AllParadox first offered comment (November 28, 2004) on the release of the USL
agreement he said it looked like fraud on SCO's part. See:
The
1994 USL-Regents of UCal Settlement Agreement (It's down at the bottom of
the long page.) His points I liked were:
"In preparing the case to be filed,
and at all times when preparing to amend the complaint, the attorneys for TSG
were required to exercise due diligence: to root through the corporate records
and make at least a cursory effort to find
out if any of the copyright titles
had been compromised. USL v. BSD would have been a big file, with lots of
references in lots of places, like board of director's meeting minutes."
"By
attempting to file their own copyright registration on Unix, TSG may havefiled a
fraudulent copyright registration."
"The TSG attorneys, knowing the contents
of the USL v. BSD settlement, persisted in claiming copyright ownership
anyway."
"The TSG attorneys, knowing these facts, appear to have
intentionally ignored the USL v. BSD settlement when drafting the petition or
its amendments."
"I can think of no better term than deceptive
silence".
So here's my question. Why has IBM not jumped on this? Can they
not file some type motion to bring this before the Judge? [ Reply to This | # ]
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Authored by: John Hasler on Thursday, December 23 2004 @ 12:23 PM EST |
What, if any, are the implications of this analysis for third-party recipients
of binaries of GPL software?[ Reply to This | # ]
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Authored by: BWCarver on Thursday, December 23 2004 @ 01:15 PM EST |
Owner-Operator Independent Drivers Association, Inc., et al. v. Concord EFS,
Inc., et al., Supreme Court of Tennessee, Middle Section, at Nashville 59
S.W.3d 63 September 12, 2001.
http://share
alike.net/wiki/tiki-index.php?page=59+S.W.+3d+63
You're
welcome.
--- Like Digital Freedoms? Donate to EFF before they're
gone. [ Reply to This | # ]
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Authored by: jig on Friday, December 24 2004 @ 03:20 AM EST |
The agreement says:c. USL agrees that it shall take no action
against any person who utilizes any methods and concepts in the Restricted Files
which as of this date have become available to the general public by acts not
attributable to the University, its employees or students. Nothing in this
provision shall limit USL's rights against a third party arising out of a breach
of any license agreement with USL or AT&T. . . .
I think this
means that everyone who hasn't entered into any contract with SCO or any of its
predecessors-in-intrest, as far as these specific restricted files are
concerned, ISN'T an actionable entity wrt the files.
What about
derivatives of these files? SCO's arguments about derivatives would seem to put
lots of files in the unactionable Restricted Files list. a plus for
us.
However, am i right in thinking that IBM, having entered into a
contract with SCO, IS an actionable entity as long as SCO can show that their
contract covered something IBM offered to the public? Even if it was originally
part of the restricted file list? maybe a negative for us?
Putting
these two together, can IBM have f-ed all of us by entering into a restrictive
contract that covered the files in question, then released the files or
dervatives of the files, thereby tainting the intellectual content of the files
and making them legal sour milk for the rest of us?
Help me out with
this.
Anyway, even with the last being possible, SCO still has to
prove that the contract restricted various things they haven't even shown that
they own. AND they'd have to probably prove something about derivative code.
basically everything they had to prove before the USL/UCR/BSD settlement became
public, which still puts them way behind. i'm just a little worried about the
IBM (or other contract entity) taint argument.[ Reply to This | # ]
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