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SCO's 4Q and Y2005 Financial Conference Call
Friday, December 23 2005 @ 03:01 PM EST

The SCO 4th quarter and year-end financial results conference call was the weirdest yet. Ever get invited to a party, and you get there and while the table is set for 25 people, only 4 or 5 ever show up? You feel so awkward. [Cf., for contrast, the SCO 1Q teleconference in 2004.]

Overview: if it were not for the litigation, they'd be making a little money. Most CEOs would take a hint.

Perhaps the problem is they don't want a *little* money.

Here's Steven Vaughan-Nichols' article on the grim financials. And Bob Mims.

SCO announced at the beginning of the call that they'd entertain questions only on their core Unix business. But they did mention yesterday's deadline for filing with the court, which they said would be filed after the call. Darl's description of what they filed regarding allegedly infringing code sounds like it isn't much about copyright infringement, if at all. He wasn't clear as to whether they will make any public announcements. The filing will be nonpublic. So much for the "mountain of evidence" about copied code. Lanham Act, here they come, both IBM and Red Hat, one assumes. Since Red Hat is asking the court to declare that there is no copyright infringement in Linux, it is sounding a bit like a slam dunk on that.

Of course, one never takes what SCO says as cast in stone, or at least I never do, but here's what Darl said:

[16:34]

OK, now let's move over to the litigation front. We'd like to briefly update you on a couple of the key developments with regard to where we are in protecting our rights inside of the court system.

Over the past few months we've made what we believe is good progress in discovery. The Court has denied a few of our requests for discovery that we believe are material but what we have received so far has established a sound basis for claims but there is still more work to be done and more discovery to be finished over the coming next few months.

We believe that we will have a compelling case to be presented at trial in early 2007. On October 28th, working with our outside technical consultants, we identified for IBM and the Courts 217 separate and distinct disclosures of material by IBM which we claim violated the Unix license agreement and enhanced Linux for use in the enterprise.

Today our team will be filing a final report that expands on the October filing. Discovery will be closing early next year and then both sides will be finishing off expert reports, motions, and getting ready for trial.

[17:46]

With regard to the Novell litigation, the court has issued its scheduling order for the case, and the trial date that has been set is June 27, 2007. We look forward to gaining discovery and further preparing that case for trial as well.

To summarize the status of our legal cases, we remain confident of our claims, and our legal team, and look forward to a successful conclusion to the litigation so we can turn our full attention to our business initiatives.

In answer to a question from Steven Vaughan-Nichols as to whether there was more being filed yesterday in addition to the 217 items filed in October, Darl amplified:

[19:02]

We'll take our first question from Steven Vaughan-Nichols with Ziff-Davis.

Vaughan-Nichols: Hello Darl, Blake.

Darl McBride: Hey, Steve.

Vaughan-Nichols: My question concerns what you will be turning in to the courts today. Could you give me any kind of color or characterization if this is just going to be an expansion on the 217 areas or is this going to be digging into new ground?

McBride: Well, it will be out there, and when it is fully filed they'll have some official comment that will surround that. I think that as we see this going in, it's basically taking the 217 that were there before and it will be expanded beyond that and it's going to be deeper and it will be broader but it's basically homing in and polishing the submission that was done in October. So it will be joined in later today and look forward to it. Again that information will be put in front of the courts as well as being sent to IBM and I don't know what will be said about that publicly. Obviously the submission itself won't be public but whether anything else will be flavored around that, I don't know we'll just have to wait and see how the attorneys deal with that.

Translation: nothing much new. No wonder they were begging for more discovery up until the bitter end. Essentially nothing was found between October and December. Certainly no headlines. Of course, the deposition of Sam Palmisano hasn't happened yet. If they can just waterboard him, who knows? They may find their pot of gold at the end of the rainbow yet.

Here's a snip from another Vaughan-Nichols' article, from yesterday:

In these papers, SCO is expected to identify in more detail the exact technology that was improperly disclosed by IBM or Sequent, who made those disclosures, how the disclosure was made, exactly where in the Unix or modified Unix code the disclosure came from, and the manner by which it had been contributed to Linux.

Taken as a whole, SCO will claim that this will show how IBM made a pervasive, sustained effort to disclose methods, concepts, and often, literal code, from Unix-derived technologies in order to enhance Linux.

Uh huh.

The ever-faithful Forbes also put as positive a spin on the ball as one can, under the circumstances:

The SCO Group, a provider of Unix software, reported a narrower loss per share for the fourth quarter. The company posted a loss of 19 cents per share, versus a loss of 37 cents in the year-ago period. Revenue fell to $8.5 million from $10 million. The SCO Group blamed its continued unprofitability on outstanding legal issues and said the decrease in revenue was due to continued competitive pressure. Last month, the company negotiated $10 million in private placement to help cover ongoing litigation costs.

Ah, yes. The PIPE Fairy.

Vaughan-Nichols quotes one of the SCO attorneys from June of 2003 on what SCO's claims were back then:

Back on June 16, 2003, Mark J. Heise, a Miami-based partner in The SCO Group Inc.'s law firm Boies, Schiller & Flexner LLP and complex commercial litigation specialist, said, "Through contributing AIX source code to Linux and using Unix methods to accelerate and improve Linux as a free operating system, with the resulting destruction of Unix, IBM has clearly demonstrated its misuse of Unix source code and has violated the terms of its contract with SCO."

All that's left of that list, I gather, is the contract stuff. And may I take a moment to point out that Unix hasn't been destroyed, but continues to make money, even for SCO, apparently? That's what they told us in the call, that their "core Unix business" is positive cash flow. But that quotation is somewhat misleading, because it doesn't include any of the fiery language that spewed out of SCO like a volcano for two years or so about copied code and copyright violations. Oh, and trade secret violations too. Both now seem to have evaporated into the mists. If you have forgotten, I suggest you visit our Quote Database. For example, on the page of Darl quotes, you'll find that what SCO alleged was actual code being improperly put into Linux, not methods and concepts. One example, from April of 2003:

It's substantial System V code showing up in Linux.

Now it's methods and concepts, based on some aged contracts never before enforced in this novel way that they allege restrict such, as long as they ignore totally all the documents that said IBM was free to use anything but the actual code. Here's an example of SCO's claims from May of 2003:

"We're finding...cases where there is line-by-line code in the Linux kernel that is matching up to our UnixWare code," McBride said in an interview. In addition, he said, "We're finding code that looks likes it's been obfuscated to make it look like it wasn't UnixWare code--but it was."

Remember all that? And what about those three teams that Darl told us in May of 2003 found gobs of Unixware in Linux?

McBride: I understand why people are upset. And I understand why people are asking, 'Those SCO guys, what are they doing now?' But I would turn the question around to them and ask the question: 'What would you do if you were in our shoes?' What would you do if you had turned three independent programming teams loose on the question of 'Is our UnixWare inside of Linux?' and all three of those groups came back independently and said yes.

VB: But being in the legal right isn't always the same as being in a position to move on so many people. So how did you decide to proceed? What's the potential upside to collect or get the violations to stop?

McBride: At that point in time when the teams came back and said, 'Yes, there are violations, and it's not an insignificant amount of code we are talking about,' we, after much dissecting of the problem and kicking it around, came to that we conclusion that we needed to send out an alert or notice to let people know that these problems existed. That notice came in two forms. One was a press release that went out [on May 14,] while the second was a letter that went out to customers.

VB: How many customers did you send that out to?

McBride: We sent that out to the Fortune 1000 and the Global 500 public companies.

So much for MIT deep divers, huh? They were not alleging they found methods and concepts or contract violations. They were talking code. Copied code. And that is precisely what they will have to answer to Red Hat and IBM about. As it happens, you can't legally bad mouth a company's product with false information and get off scot free.

That interview includes a quotation from Darl that, in hindsight, stands out. In talking about Linux and the future, he is asked about their ownership of the Unix IP:

McBride: But, one thing that's interesting, T.C., is if you look at the online music business and the path that that's gone through over the past few years, it started off where Linux is now where millions of people around the world were excited about online music, Napster, because it was music for free. You now have millions around the world that love Linux because it's Unix for free. Free models have a way of not sustaining for a long period of time. And I believe that's the case here as well. But if you look at how the evolution continued on the music side, you have the [Apple] iTunes product line that came out two weeks ago and in the first week you have over 1 million songs that are downloaded for a buck a song. I believe that at some point, you are going to see a more rationale business model attached to Linux than something that is called 'free software.'

VB: I have heard this [comparison] before, but the one thing that those who say this isn't an apples to apples comparison is that there was no question in the world of online music who owned the intellectual property. It was out and out thievery. In the Linux case, some say there's a broader interpretation of who does own things. I guess you guys are stepping forward and saying 'well, from our perspective, at least, it's pretty clear cut.'

McBride: I don't think you are going to have any challenges worldwide with the argument that SCO owns the majority of the Unix operating system intellectual property. The arguments will come in that we don't all of it. And that is a challenge in this case, versus the online music business, I would agree with that.

If I were deposing Darl, and I were Novell, I'd certainly want to ask him what he meant by that. Did he have doubts about owning it all? Was he aware that others, significantly Novell, challenged their ownership? If so, where's the slander of title, pray tell?

That first interview from April 2003 includes my all-time favorite quotation from Darl, by the way:

We're either right or we're not. If we're wrong, we deserve people throwing rocks at us.

Hmm...he's speaking metaphorically, of course.


  


SCO's 4Q and Y2005 Financial Conference Call | 147 comments | Create New Account
Comments belong to whoever posts them. Please notify us of inappropriate comments.
Off topic thread
Authored by: MathFox on Friday, December 23 2005 @ 03:09 PM EST
Other issues related to Open Source and the law.

Please make links clickable and give a small summary of where your link leads
to.

---
When people start to comment on the form of a message, it is a sign that they
have problems to accept the truth of the message.

[ Reply to This | # ]

Corrections here
Authored by: MathFox on Friday, December 23 2005 @ 03:10 PM EST
You know, even Pamela can make a mistake. ;-)

---
When people start to comment on the form of a message, it is a sign that they
have problems to accept the truth of the message.

[ Reply to This | # ]

No doubt
Authored by: GLJason on Friday, December 23 2005 @ 03:23 PM EST
No doubt that RCU and JFS will be among the disclosures of "UNIX" methods and concepts that SCO has issue with. Nevermind that they are not part of the code that IBM licensed and therefore are outside the protection of the licensing agreement. Nevermind that IBM (or its predecessors) developed the methods, concepts, and code themselves and therefore have all the rights. Nevermind that IBM's responsibilities ceased over 95% of the UNIX methods and concepts when they were made available to the public in the form of BSD with AT&T's consent.

The real issue is that SCO seeks to control a multi-billion dollar industry along with billions of dollars of technology for their measly $5.8 million dollar investment. That's right, they only allocted $5.8 million of their $100 million Santa-Cruz/Caldera asset purchase to technology (specifically 'UnixWARE' and not 'Unix'). The rest was goodwill for the SCO brand name ($66 million) and the distribution channel for UnixWARE ($27 million). Check out the 10-Q.

[ Reply to This | # ]

  • Good catch!!! n/t - Authored by: Anonymous on Friday, December 23 2005 @ 03:43 PM EST
  • No doubt - Authored by: Anonymous on Friday, December 23 2005 @ 05:09 PM EST
  • No doubt - Authored by: Anonymous on Friday, December 23 2005 @ 05:27 PM EST
  • No doubt - Authored by: Anonymous on Friday, December 23 2005 @ 06:06 PM EST
What next?
Authored by: Anonymous on Friday, December 23 2005 @ 03:33 PM EST
Now that Discovery is shutting down I am sure I am not the only one who is
wondering what to expect next. It would be very nice if someone who understands
this process better would add an explanation of what to expect over the next few
months as it winds up.

[ Reply to This | # ]

SCO's 4Q and Y2005 Financial Conference Call
Authored by: Anonymous on Friday, December 23 2005 @ 03:42 PM EST
>... Darl:
> "We're either right or we're not. If we're wrong, we
> deserve people throwing rocks at us."
>
> Hmm...he's speaking metaphorically, of course.

As far as I know, geology admits to three kinds of rocks:
igneous, sedimentary, and metamorphic rocks.

Perhaps, PJ, this is a spelling error on your part? :-)

[ Reply to This | # ]

What's the Lanham Act?
Authored by: Anonymous on Friday, December 23 2005 @ 04:01 PM EST

For those who have forgotten, here's link to the Lanham Act. The part about "Section A" is the part that counts.

J

[ Reply to This | # ]

Throwing rocks...
Authored by: Nick_UK on Friday, December 23 2005 @ 04:30 PM EST
That first interview from April 2003 includes my all-time favorite quotation from Darl, by the way: We're either right or we're not. If we're wrong, we deserve people throwing rocks at us.

  
Matthias: Look, I don't think it should be a sin, just 
for  
 saying "Jehovah".
 
 [Everyone gasps]  
 Jewish Official: You're only making it worse for  
yourself!  
 Matthias: Making it worse? How can it be worse? Jehovah!  
Jehovah! Jehovah!  
 Jewish Official: I'm warning you! If you say "Jehovah"  
one more time (gets hit with rock) RIGHT! Who did that?  
 Come on, who did it? 

 Stoners: She did! She did! (suddenly speaking as men) He!  
 He did! He!  
Jewish Official: Was it you?  
 Stoner: Yes.  
 Jewish Official: Right...  
Stoner: Well you did say "Jehovah. "  
 [Crowd throws rocks at the stoner]  
Jewish Official: STOP IT! STOP IT! STOP IT RIGHT NOW!  
 STOP IT! All right, no
one is to stone _anyone_ until I  
 blow this whistle. Even... and I want to
make this  
 absolutely clear... even if they do say, "Jehovah. "  
 [Crowd
stones the Jewish Official to death]  
 
Nick ;-)

[ Reply to This | # ]

SCO's 4Q and Y2005 Financial Conference Call
Authored by: blacklight on Friday, December 23 2005 @ 04:31 PM EST
In retrospect, with respect to SCOG's introduction of OpenServer 6 with great
fanfare at its Expo 2005 - neither the intro nor the fanfare had much if any
positive impacts on SCOG's earnings.

The one thing I am sure about the partnership between MySQL and SCOG is that it
is bound to benefit MySQL much more than SCOG - At some point, SCOG is bound to
go under, in which case the major issue for those who are using OpenServer is
portability of legacy data to say a Linux environment.

Darl the Snarl keeps harping on the alleged fact that were it not for SCOG's
litigations, SCOG would be showing a profit for the quarter and for the year.
However, were it not for the litigation, SCOG's stock would not have jumped from
a nominal value to about $22 back in 2003 and SCOG would not have received at
least $20 mils in funding from the likes of Sun Microsystems and Microsoft back
in 2003.

I expect SCOG to incur signficant legal expenses in 2006, as IBM successfully
challenges the validity of SCOG's evidence and IBM successfully reintroduces its
motions for PSJ. I predict that 2006 will be the year of truth for SCOG, as the
legal battlefield gets shaped into a kill zone where SCOG has a pretty good idea
that it will be slaughtered long before the first shot gets fired.


---
Know your enemies well, because that's the only way you are going to defeat
them. And know your friends even better, just in case they become your enemies.

[ Reply to This | # ]

The "UNIX businesses" is only profitable
Authored by: Anonymous on Friday, December 23 2005 @ 05:08 PM EST
Because they sacked most of their developers as they completed the latest (and
last) offering. Sales are already dropping, and now they have nobody left to
develop new products, so all they can do to retail profitability is to cut, cut
and cut again. Support will be the next to go, then marketing, then sales.
Eventually it will just be lawyers to take money, accountants to count the money
that the lawyers are taking, and Darl.

[ Reply to This | # ]

The List
Authored by: Anonymous on Friday, December 23 2005 @ 05:13 PM EST
PJ said:" All that's left of that list, I gather, is the contract
stuff."

Maybe that is because IBM didn't have the chance at that time to firmly attach
counterclaim 10 to the SCOX list.

[ Reply to This | # ]

Owning all of UNIX
Authored by: Anonymous on Friday, December 23 2005 @ 05:25 PM EST
McBride said: I don't think you are going to have any challenges worldwide with
the argument that SCO owns the majority of the Unix operating system
intellectual property. The arguments will come in that we don't [own] all of it.
And that is a challenge in this case, versus the online music business, I would
agree with that.

PJ said: If I were deposing Darl, and I were Novell, I'd certainly want to ask
him what he meant by that. Did he have doubts about owning it all?

McBride doesn't seem to have doubts about owning today all copyrights in UNIX
"owned by Novell as of the date of the Agreement". And of course
copyrights to derivative code created by Santa Cruz Operation after that.
Nothing more, nothing less. Third party code in original UNIX was AFAIK never
claimed by SCO.

[ Reply to This | # ]

Nonpublic Filing
Authored by: bstone on Friday, December 23 2005 @ 05:42 PM EST
The filing will be nonpublic. So much for the "mountain of evidence" about copied code. Lanham Act, here they come, both IBM and Red Hat, one assumes.

IANAL, but doesn't that mean there goes their billions of dollars in damages, too? As I understand it, hiding the "infringing" code so developers cannot "correct" the situation gives them little or no damage award. It's called mitigating damages, where the "victim" must do whatever they can to minimize the harm. They're still claiming to shareholders that the damage is ongoing, but they're actively avoiding taking simple steps to allow the situation to be corrected.

Is my understanding correct here? Does that also open up a claim from shareholders against the officers and directors of the company for contributing to what they have already stated are billions of dollars in damages?

[ Reply to This | # ]

Defense against summary judgment on CC 10
Authored by: elcorton on Friday, December 23 2005 @ 05:45 PM EST

It looks like their only defense when IBM refiles its motion for partial summary judgment on Counterclaim 10 (non-infringement in Linux) will be the claim that they own the copyrights to Dynix and RCU as works-for-hire. That's essentially all that saved them the first time.

It will be interesting to see what IBM gets from the accountants who handled the Santa Cruz-Caldera asset transfer. The seller's disclosure from that transaction has never been publicized, and SCO probably deep-sixed its copy a long time ago. Santa Cruz never claimed to own any copyrights in UNIX, except on the code it developed itself. If the disclosure doesn't list any copyrights acquired from Novell, the game is over.

[ Reply to This | # ]

Who would waste a perfectly good rock on Darl?
Authored by: kawabago on Friday, December 23 2005 @ 07:56 PM EST
Someone who cares about him enough to lift their arm I guess. It isn't me.

---
TTFN

[ Reply to This | # ]

"... with the resulting destruction of Unix"
Authored by: Anonymous on Friday, December 23 2005 @ 09:02 PM EST
Sounds like an invitation for amicus (friend of the court) briefs from far and
wide to me.

[57th witness]: Your Honor, I am a value-added reseller of Solaris, HP-UX and
AIX; and am a distributor of various flavours of Linux.

[The court]: How much money did you make last year sir?

[57th witness]: Three bazillion dollars your honor.

[The court]: How much of that was related to the Linux side of your business?

[57th witness]: One bazillion your honor.

[The court]: You would not then, I take it, contend that Linux has destroyed
Unix - and with it the majority of your business?

[57th witness]: No your honor.

[The court]: Thank you sir. Next witness!

[ Reply to This | # ]

How "The SCO Group" spin works
Authored by: Anonymous on Saturday, December 24 2005 @ 10:17 AM EST
To describe this "Corp Coriolis":

"This stock is moving fast"
"A swirl of activity in the case"


But no matter how many times it comes around, there will be only one result.
In the end Caldera (AKA The SCO Group)will get what they deserve.

[ Reply to This | # ]

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