The Honorable Dale Kimball has issued his Memorandum Decision and Order [PDF] on Novell's Motion to Stay Claims Raising Issues Subject to Arbitration, the motion that asked that the arbitration go first and only nonarbitrable claims, if any, go forward in SCO v. Novell. That's pretty much what the judge decided to do, ordering that all claims that relate to SUSE are stayed but that claims related to the agreements between SCO and Novell are to go forward. He reserves the right to think about it again if the arbitration is still ongoing when the rest is ready for trial.
Basically, he'd like the show to get on the road, and he'll handle the logistics as they arise. Here's the heart of the decision: The Tenth Circuit has also recognized that "the mere fact that piecemeal litigation results
from the combination or arbitrable and nonarbitrable issues is not reason enough to stay [the]
entire case." Riley Mfg., 157 F.3d at 785. The "litigation must proceed in a `piecemeal' fashion
if the parties intended that some matters, but not others, be arbitrated." Coors Brewing Co. v.
Molson Breweries, 51 F.3d 1511, 1517 (10th Cir. 1995). Because it is possible that the
arbitrator's ruling could have little effect on the nonarbitrable claims in this case, the court
concludes that only the portions of the claims relating to SuSE should be stayed in this court
pending SuSE's arbitration. The claims asserted in relation to the APA and TLA should go
forward. The claims are distinct enough that it would not be too great of a burden on the parties
to proceed with the litigation and arbitration at the same time. The case has been on this court's
docket for over two years. The case should proceed so that it is ready for trial regardless of the
arbitrator's ruling on the claims relating to SuSE. If the arbitration concludes before the parties
are ready for trial in this matter, then the court will address the preclusive effect of the
arbitrator's ruling on the claims in this case. If this case is ready for trial before the arbitration
concludes, the court will revisit the issue of whether to stay the trial on the APA and TLA claims
pending the conclusion of the arbitration.
Novell had suggested that all claims could be stayed, although it didn't fight for that, saying it was up to the judge's discretion, and SCO had claimed that there were no claims subject to arbitration at all, or that the court should decide that issue first, one by one, and it also argued that Novell shouldn't be allowed to have a stay on anything because it waited too long. I told you that argument was going to fall flat and it did. In fact, none of their arguments went anywhere with this careful judge, who follows the law, and he found 10th Circuit cases that hold that you should go forward piecemeal if necessary and so that's what he's said will happen here. SUSE goes to arbitration in Europe, and everything else hits the road running in Utah. So, off they go. Personally, I'm glad, because the arbitration is behind closed doors, and I like to watch. You'll enjoy reading some details about what the agreements around UnitedLinux said, because Judge Kimball quotes a fair chunk. Enjoy. ************************
IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF UTAH
CENTRAL DIVISION
_________________________________________________________
THE SCO GROUP, INC.,
Plaintiff,
vs.
NOVELL, INC.,
Defendant.
_________________________________________
MEMORANDUM DECISION
AND ORDER
Civil Case No. 2:04CV139DAK
__________________________________________
This matter is before the court on Defendant Novell, Inc.'s Motion to Stay Claims
Raising Issues Subject to Arbitration. The court held a hearing on the motion on July 17, 2006.1
At the hearing, Defendant was represented by Michael A. Jacobs and Thomas R. Karrenberg,
and Plaintiff was represented by Stuart H. Singer, William Dzurilla, and Brent O. Hatch. The
court took the motion under advisement. The court has considered the memoranda submitted by
the parties as well as the law and facts relating to the motion. Now being fully advised, the court
renders the following Memorandum Decision and Order.
BACKGROUND
In January 2004, this case originated in state court as a single claim for slander of title.
Novell removed SCO's state court action to this court. After this court's ruling on SCO's
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motion to remand and Novell's motion to dismiss, SCO filed its First Amended Complaint.
Novell filed a second motion to dismiss, which was denied in June, 2005.
In July 2005, Novell filed its Answer to SCO's First Amended Complaint, which
included eight affirmative defenses and a Counterclaim including seven causes of action. Novell
asserted counterclaims for various breaches of the Asset Purchase Agreement ("APA") between
Novell and SCO, declaratory relief under the APA, restitution/unjust enrichment, and an
accounting pursuant to the audit provisions of the APA.
After SCO answered Novell's Counterclaims and the parties proceeded to conduct some
discovery, the parties stipulated to SCO's filing of a Second Amended Complaint. The Second
Amended Complaint asserts several new causes of action, including claims for breach of the
APA and the Technology License Agreement ("TLA"), copyright infringement, and unfair
competition.
SCO's Second Amended Complaint also claims for the first time that Novell's
distribution of SuSE Linux infringes SCO's alleged UNIX copyrights, constitutes unfair
competition, and a breach of contract. SuSE Linux is a version of the Linux operating system
developed by SuSE Linux, GmbH, a wholly-owned subsidiary of Novell. SCO, SuSe, and two
other Linux vendors (Turbolinux and Conectiva) jointly developed a standard form of the Linux
operating system, referred to as "UnitedLinux." In connection with developing UnitedLinux, the
parties entered two contracts: the Master Transaction Agreement ("MTA"), and the UnitedLinux
Joint Development Contract ("JDC"). These two contracts are collectively referred to as the
UnitedLinux contracts.
The UnitedLinux members agreed that each member would have a broad license to use
2
the technology included in the UnitedLinux Software, including any related intellectual property
rights of the other members. The contracts provided that "All intellectual property rights related
to the UnitedLinux Software (with the exception of certain "Pre-existing Technology" and
"Enhancements" thereto) shall be assigned by the members to a new company, UnitedLinux,
LLC. In addition, the contracts provided that "[e]ach member shall have a broad, royalty-free
license to all intellectual property rights in the UnitedLinux Software, entitling each member to
"use, copy, modify, distribute, market, advertise, sell, offer for sale, sublicense . . . in any manner
the Software, including the rights to make derivative works of the Software, to provide access to
the Source Code and/or Object Code to any third party, to incorporate the Software into other
products or bundle the Software with other products for its own business purposes and any other
unlimited right of exploitation." The contracts further state that the UnitedLinux Software shall
be subject to any existing "open source" licenses.
Significant to the present motion before the court, the UnitedLinux contracts require any
disputes arising under the contracts to be "finally and exclusively settled under the Rules of
Arbitration of the International Chamber of Commerce then in force (Rules) by three arbitrators
appointed in accordance with said Rules." After SCO asserted claims relating to SuSE in its
Second Amended Complaint, on April 10, 2006, SuSE submitted a Request for Arbitration
against SCO pursuant to the terms of the arbitration clause in the UnitedLinux contracts. SuSE
contends in the arbitration that the UnitedLinux contracts preclude SCO from asserting that
SuSE Linux infringes any copyrights of SCO because they divested SCO of ownership of any
copyrights in technology included in UnitedLinux, they conferred a broad license on SuSE to use
the technology included in UnitedLinux, and they contained an agreement by SCO that any open
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source code included in UnitedLinux would remain subject to the terms of any open source
license. Therefore, SuSE has requested a declaration in the arbitration that (1) SCO is precluded
from asserting copyright infringement claims against SuSe and that (2) the UnitedLinux
contracts divested SCO of ownership of any copyrights related to technology included in
UnitedLinux, except for pre-existing technology and enhancements.
DISCUSSION
Novell contends that the entire case should be stayed in this court pending the arbitration
between SuSE and SCO because, with the exception of SCO's claim for specific performance,
all of the claims in SCO's Second Amended Complaint are impacted by the determination of the
parties' respective rights and obligations under the UnitedLinux contracts. SCO argues that
Novell has waived its right to arbitrate based upon the course of proceedings in this litigation
and, in any event, its claims are not arbitrable or brought upon any issue referable to arbitration.
Novell brings its motion under Section 3 of the Federal Arbitration Act, which provides:
If any suit or proceeding be brought in any of the courts of the
United States upon any issue referable to arbitration under an
agreement in writing for such arbitration, the court in which such
suit is pending, upon being satisfied that the issue involved in such
suit or proceeding is referable to arbitration under such an
agreement, shall on application of one of the parties stay the trial
of the action, until such arbitration has been had in accordance
with the terms of the agreement, providing the applicant for the
stay is not in default in proceeding with such arbitration.
9 U.S.C. § 3.
SCO first opposes Novell's motion to stay on the grounds that Novell's prior actions in
this litigation constitute a default in proceeding with the arbitration. The Tenth Circuit has set
forth a six-part test for determining whether a party has waived the right to arbitrate:
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(1) whether the party's actions are inconsistent with the right to
arbitrate; (2) whether the litigation machinery has been
substantially invoked and the parties were well into preparation of
a lawsuit before the party notified the opposing party of an intent
to arbitrate; (3) whether a party either requested arbitration
enforcement close to the trial date or delayed for a long period
before seeking a stay; (4) whether a defendant seeking arbitration
filed a counterclaim without asking for a stay of the proceedings;
(5) whether important intervening step had taken place; and (6)
whether the delay affected, misled, or prejudiced the opposing
party.
Metz v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 39 F.3d 1482, 1489 (10th Cir. 1994).
SCO asserts that this test should be applied to the present motion because the case is over
two years old and Novell has owned and controlled SuSE since the commencement of this
litigation. However, neither of SCO's prior complaints asserted any claims regarding SuSE or
made any factual allegations regarding SuSE. Before SuSe was mentioned in the Second
Amended Complaint, SuSe would have had no basis for instituting arbitration proceedings
pursuant to the UnitedLinux contracts and Novell would have had no basis for seeking a stay of
the litigation in this court. Even though Novell stipulated to SCO's filing of the Second
Amended Complaint, there are liberal standards applicable to the amendment of complaints
under the Federal Rules of Civil Procedure and such conduct is not, in itself, inconsistent with
the right to arbitrate. See Fed. R. Civ. P. 15(a). Furthermore, there has been little discovery
conducted in this case and none relating to the SuSe claims. Therefore, the court finds that there
is no basis for finding an inappropriate delay in this case.
Next, SCO contends that none of its claims are within the scope of the arbitration
clauses. The parties disagree on the appropriate standards under this issue. SCO asserts that the
court must determine the scope of the arbitration clause, determine whether the dispute falls
5
within the scope of the clause, and then determine if any collateral issues are arbitrable. See
Cummings v. Fedex Ground Package Sys., Inc., 404 F.3d 1258, 1261 (10th Cir. 2005).
However, Novell argues that Cummings is a case under Section 4 of the FAA, not Section 3, and
the only issue under Section 3 of the FAA is whether there are issues referable to arbitration.
The court agrees with Novell that there is a policy distinction between Section 3 and
Section 4 of the FAA. Besides the difference in the language of the two sections, there is a
relevant distinction between a party seeking to compel an entire dispute to be resolved through
arbitration and a party seeking a stay for purposes of allowing a proper order of decision to
occur. The present motion is not a motion to compel arbitration and it does not require the court
to determine whether SCO must arbitrate its claims regarding SuSE. The SuSE litigation has
been instituted and will proceed regardless of this court's decision on the present motion. Thus,
the only issue before this court is what claims, or portions of claims, should properly be stayed in
this court pending that ongoing arbitration. In making that determination, however, the court
finds the analysis in cases brought under Section 4 of the FAA to be instructive and helpful to
the court's decision under Section 3 to the extent that the analysis overlaps.
There is "a liberal federal policy favoring arbitration agreements," and "any doubts
concerning the scope of arbitrable issues should be resolved in favor of arbitration." Moses H.
Cone Memorial Hosp., 460 U.S. 1, 24-25 (1983). While courts have broad discretion in staying
litigation of arbitrable issues, courts recognize that arbitration is "a matter of contract and a party
cannot be required to submit to arbitration any dispute which he has not agreed so to submit."
Cummings v. Fedex Ground Package Sys., Inc., 404 F.3d 1258, 1262 (10th Cir. 2005).
SCO argues that none of the claims are arbitrable because none of them fall under the
6
narrow scope of the arbitration clauses contained in the UnitedLinux contracts. SCO contends
that, at most, Novell can claim only a partial, secondary defense to parts of SCO's claims on the
basis of provisions in the United Linux contracts. The court, however, has found no case law
stating that under Section 3, the plaintiff's claims, rather than the defendant's defenses, must
form the basis for the arbitration. The language of Section 3 states only that a case has been
brought "on issues referable to arbitration." 9 U.S.C. § 3. The court finds that SCO's claims
regarding SuSE, and Novell's defenses to those claims under the UnitedLinux contracts clearly
raise issues referable to arbitration.
Where a court has found that a party's lawsuit contains some claims that raise arbitrable
issues and others that do not, the court has discretion as to whether it stays the claims that do not
raise arbitrable issues. See Moses H. Cone, 460 U.S. at 20 n.23. The Tenth Circuit has stated
that district courts considering a broad stay should determine "whether resolution of [the]
arbitrable claims will have a preclusive effect on the nonarbitrable claims that remain subject to
litigation." Riley Mfg. Co. v. Anchor Glass Container Corp., 157 F.3d 775, 785 (10th Cir.
1998). This is so "especially if the arbitrable issues predominate." Id
Novell claims that the arbitrable issues predominate. Novell also asserts that it is highly
likely that the arbitrator's ruling will have collateral estoppel effect on this litigation. It is true
that the arbitrator's determination of whether SCO assigned the copyrights at issue to the
UnitedLinux entity bears on the question of whether SCO owns the copyrights it is suing upon.
It is also true, however, that a significant portion of SCO's claims and Novell's defenses are
based upon the agreements between SCO and Novell--the Asset Purchase Agreement, as
amended ("APA"), and the Technology License Agreement ("TLA"). Determinations on these
7
agreements in this court could have a similarly preclusive effect on the arbitration. Although
Novell attempts to argue that there is an overlap between its defense of the claims relating to
SuSE and SCO's claims relating to the APA and TLA, they are distinct in time and based on
entirely separate agreements. Both require an underlying finding that SCO did, in fact, have
ownership of the copyrights. But they appear to be factually and legally distinct. The court,
therefore, cannot conclude that the arbitrable issues predominate.
The Tenth Circuit has also recognized that "the mere fact that piecemeal litigation results
from the combination or arbitrable and nonarbitrable issues is not reason enough to stay [the]
entire case." Riley Mfg., 157 F.3d at 785. The "litigation must proceed in a `piecemeal' fashion
if the parties intended that some matters, but not others, be arbitrated." Coors Brewing Co. v.
Molson Breweries, 51 F.3d 1511, 1517 (10th Cir. 1995). Because it is possible that the
arbitrator's ruling could have little effect on the nonarbitrable claims in this case, the court
concludes that only the portions of the claims relating to SuSE should be stayed in this court
pending SuSE's arbitration. The claims asserted in relation to the APA and TLA should go
forward. The claims are distinct enough that it would not be too great of a burden on the parties
to proceed with the litigation and arbitration at the same time. The case has been on this court's
docket for over two years. The case should proceed so that it is ready for trial regardless of the
arbitrator's ruling on the claims relating to SuSE. If the arbitration concludes before the parties
are ready for trial in this matter, then the court will address the preclusive effect of the
arbitrator's ruling on the claims in this case. If this case is ready for trial before the arbitration
concludes, the court will revisit the issue of whether to stay the trial on the APA and TLA claims
pending the conclusion of the arbitration.
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CONCLUSION
For the reasons stated above, Novell's Motion to Stay is GRANTED IN PART AND
DENIED IN PART. The portions of the claims relating to SuSE are stayed pending arbitration.
The parties shall proceed to litigate the remaining claims.
DATED this 21st day of August, 2006.
BY THE COURT:
DALE A. KIMBALL
United States District Judge
9
1
Novell's Motion for a More Definite Statement was also scheduled to be heard at the
court's hearing. But the parties informed the court at the hearing that they had reached an
agreement that had resolved the motion. Therefore, the motion is moot.
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