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Report from Today's Hearing in SCO v. Novell - Updated 4Xs

Tuesday, January 23 2007 @ 07:19 PM EST

Chris Brown just let me know that he made it to the hearing today in SCO v. Novell. This is the Novell "give us our money before it's all gone" motion. Chris'll file a full report in a bit, but here's what he tells me so far:

Having returned from the SCO v. Novell hearing today on Novell's Motion for Partial Summary Judgment or Preliminary Injunction and SCO's Cross Motion for Summary Judgment or Partial Summary Judgment, my eyes are glazed over and my brain is awash in contracts, clauses, contracts, and more clauses. It was a hearing only a lawyer could love.
The bottom line however, is that Judge Kimball took it under advisement.
I will expand on the hearing, as best I can, in the next email.

Here's Novell's motion and SCO's Cross Motion [PDF] which had 46 sealed exhibits filed with it, which may explain Chris's poor brain.

Update: Here we go, the full report from Chris, below, after the row of stars.

Update 2: We also now have Bob Mims' article in the Salt Lake Tribune and the article in the Deseret News by Brice Wallace.

Update 3: Also I notice a fair amount of misunderstanding about the difference between a preliminary injunction and summary judgment motions in comments and in my email. If you go to our permanent Legal Research page, you'll find links to explanations of each. But just so you are clear on this hearing, here's part of 'Lectric Library's definition of preliminary injunction:

A preliminary injunction is appropriate if the moving party demonstrates either (1) a probability of success on the merits and a possibility of irreparable injury, or (2) serious questions going to the merits and the balance of hardships tipping sharply in his favor.

It continues by explaining that it's a discretion matter, meaning the judge has a lot of room to decide:

"The grant or denial of a motion for a preliminary injunction lies within the discretion of the district court, and its order will be reversed only if the court relied on an erroneous legal premise or otherwise abused its discretion." ... An "abuse of discretion" occurs if the district court misapprehends the applicable legal issues or rests its conclusions on clearly erroneous findings of fact.

So, it's pretty hard for the judge to go wrong. Here's a case from the 6th Circuit where the court explained in some detail how it decided a preliminary injunction case:

II. STANDARD OF REVIEW
This court reviews the grant of a preliminary injunction for an abuse of discretion. See Washington v. Reno, 35 F.3d 1093, 1098 (6th Cir. 1994). A "district court's findings of fact underlying its decision to grant a preliminary injunction are reviewed for clear error and the legal conclusions underpinning its decision are reviewed de novo." In re Eagle- Picher Indus., Inc., 963 F.2d 855, 858 (6th Cir. 1992). Because a trial court's decision to grant a preliminary injunction is accorded great deference, this court should disturb such a decision only if the district court "relied upon clearly erroneous findings of fact, improperly applied the governing law, or used an erroneous legal standard." Washington, 35 F.3d at 1098.
The preliminary injunction factors are: "(1) the likelihood that the party seeking the preliminary injunction will succeed on the merits of the claim; (2) whether the party seeking the injunction will suffer irreparable harm without the grant of the extraordinary relief; (3) the probability that granting the injunction will cause substantial harm to others; and (4) whether the public interest is advanced by the issuance of the injunction." Id. at 1099. These are factors to be balanced, not prerequisites that must be met. Id. "[T]he district court's weighing and balancing of the equities is overruled only in the rarest of cases." In re Eagle-Picher, 963 F.2d at 858 (internal quotation marks omitted). The purpose of a preliminary injunction is simply to preserve the status quo; thus, findings of fact and conclusions of law made by a district court in granting a preliminary injunction are not binding at a trial on the merits. University of Texas v. Camenisch, 451 U.S. 390, 395 (1981).

The reason I wanted to highlight all this is because as you can see, the standard for his decision has nothing to do with if it's a matter of law or fact for a jury for that part of the motion, the preliminary injunction part. That's summary judgment motion thinking. Here's the definition of a motion for summary judgment, just to review or for anyone new:

A request made by the defendant in a civil case. Asserts that the plaintiff has raised no genuine issue to be tried and asks the judge to rule in favor of the defense. Typically made before the trial.

Either side in litigation can bring one, if there are counterclaims. Novell asked for a partial summary judgment OR a preliminary injunction and SCO cross moved for its own version of the same. Specifically, Novell asked for this relief:

For the foregoing reasons, Novell respectfully requests that this Court grant partial summary judgment as to Novell's Sixth, Seventh, Eighth, and Ninth Claims for Relief and impose a constructive trust on the monies SCO received and improperly retained from the 2003 Sun and Microsoft Agreements. If summary judgment is denied, Novell requests in the alternative that this Court issue a preliminary injunction requiring an accounting and establishing a constructive trust.

The whole idea of an injunction is to prevent future harm, not to compensate for prior damage. That's why Novell is talking about bankruptcy and the rate of money flying to the heavens, because it's asking the judge, if he doesn't grant summary judgment, to please put the money in a safe place where SCO can't spend it all suing them instead of paying them what Novell argues it is owed. I hope that makes it clearer.

Update 4: Some more references for you:

(1) Law.com's definition
(2) Answers.com's definition
(3) Findlaw
(4)Another case [PDF], one from North Dakota, that provides a definition on pages 11 and 12 of the decision:
An injunction is a court order that either prohibits or compels a party to do a specific act. A preliminary injunction is a provisional remedy granted to restrain action temporarily until the court can render a final decision on the merits. A preliminary injunction is an extraordinary and drastic remedy that is not granted routinely.... However, “a preliminary injunction may issue if the movant has raised questions so serious and difficult as to call for more deliberative investigation.”... The moving party bears the burden of persuasion “by a clear showing.” ... A trial court has discretion to grant or deny a request for preliminary injunctive relief, and that discretion is based on the following factors: (1) substantial probability of succeeding on the merits; (2) irreparable injury; (3) harm to other interested parties; and (4) effect on the public interest.... No single factor is dispositive; the trial court must balance all factors to determine whether an injunction is appropriate.
“A preliminary injunction will usually be denied if the applicant has an adequate alternative remedy in the form of damages or other relief.” ...(“An injury is irreparable when it cannot be adequately compensated in damages, and it is not necessary that the pecuniary damage be shown to be great. ... Acts which result in a serious change of, or are destructive to, the property affected either physically or in the character in which it ha been held or enjoyed, ... do an irreparable injury”). The trial court must also balance the irreparability of injuries and inadequacy of damages if an injunction were not granted against the damages that granting an injunction would cause.
(Citations omitted).

Here's Chris's full report:

**************************

The courtroom was packed today, mostly with SCO folk including Darl McBride. Both of Salt Lake's main newspapers had reporters there -- Bob Mimms from The Salt Lake Tribune and Brice Wallace from the Deseret Morning News. IBM had a reporter there (I believe it was Snell & Wilmer's Curtis Drake). I attribute the turnout to a combination of this being, as far as I know, the first summary judgment motion to go to a hearing and the fact that a negative verdict for SCO could be devastating to SCO financially, possibly spelling an early end to the litigation.

Appearing for Novell was Thomas Karrenberg, Heather Sneddon, with Michael Jacobs arguing. SCO was represented by Brent Hatch, Edward Normand, with Stuart Singer arguing.

Since Michael Jacobs and Stuart Singer were going to be arguing on both motions, Judge Kimball asked them to argue both together with Mr. Jacobs first.

I'll predicate my report with the disclaimer that there were frequent quotes from the Novell/Santa Cruz APA and amendments throughout the hearing, particularly by SCO, which quoted verbiage I failed to document properly. As SCO's arguments hinged primarily on two things -- the shall I say "hairsplitting" reading of the contract and upon the still-sealed declarations of numerous individuals -- I can only give overviews rather than specifics.

To summarize, Novell seemed to focus their argument on three points:
1) The Microsoft and Sun agreements, by their wording, references, and attachments, are SVRx agreements.
2) The Novell/Santa Cruz APA and amendments specifically state Novell is due 100% of the SVRx revenue stream (with 5% back to Santa Cruz).
3) The contract forms a fiduciary relationship, under which SCO has obligations.

SCO's argument was focused on various subclauses of the APA along with the (sealed) declarations of 9 individuals. While their words were not read, I believe their substance was to the effect that it was "normal" for a party purchasing UnixWare (the "merged product") to incidentally receive "legacy" SVRx source-code licenses. That the wording of the APA excluded revenue from SVRx licenses that were sold incidentally to the sale of UnixWare and that the Microsoft and Sun agreements were for UnixWare and only incidentally included SVRx.

Mr. Jacobs opened his argument by saying that they have two powerful things going for them: that SCO admits their fiduciary obligations to Novell (Judge Kimball interjected that there's a question as to what those obligations cover), and that Novell is the equitable owner of the property in question. He said that the fiduciary relationship between the two companies imposes duty for SCO to act in the utmost good faith and to put Novell's interests beyond their own.

Mr. Jacobs related how when the lawyers were preparing this motion they referred to it as "The Three Alls". He said that the Novell/Santa Cruz agreements referred to "ALL royalties, fees, & other amounts due for SVRx licenses", "ALL SVRx licenses", and "ALL contracts relating to SVRx licenses". He stressed that "all" meant "ALL", not just binary licenses.

He said that he doesn't believe he needs to argue this under contract law to win this motion as that would be a "harder row to hoe", but rather through SCO's fiduciary obligations.

He described how the parties to an agreement discuss what the agreement will be and that it then goes to the lawyers who craft a document to reflect those understandings, and that it then goes back to the parties to examine and sign. He continued by saying that the plain language of the agreement is in Novell's favor. But while it's possible for Novell to have had an unfair influence in the crafting of the contract, or that the contract didn't actually reflect the desires of the party, SCO never said that that was the case. SCO has not asked to reform the contract; SCO has not asked that the contract be renegotiated.

Mr. Jacobs outlined how the list of applications in the Microsoft agreement's Appendix B matches up almost exactly with the APA list of SVRx products. After Judge Kimball asked what "almost" means, Mr. Jacobs said that there were an additional two items at the top of the list (the first of which was UnixWare) with the remainder of the list looking like it came almost exactly from the Novell/Santa Cruz APA.

He pointed out that the Sun and Microsoft agreements state that they "amend and restate" a 1994 agreement, which is a SVRx agreement.

Noting that the agreements included both UnixWare and SVRx products, he asked rhetorically if it was possible that somehow the agreements could be carved up to allocate some fees be retained by SCO? Possibly, but it demonstrates the wording of the agreements, that they were for SVRx.

Mr. Singer next argued that it is extraordinary that Novell would ask to interpret the agreement in direct opposition to the intent of all the people involved in the agreement.

Judge Kimball asked, hypothetically, if a contract clearly says A B C, and the parties said it means X Y Z, what should a judge do about it?

Mr. Singer gave an answer I missed, but he quickly noted that the hypothetical doesn't match this situation.

He continues to argue that the SVRx licenses sold were incidental to the sale of the "merged product" (UnixWare). He pointed to an amendment saying source code license revenue for "additional CPUs" is retained by SCO, and revenue for "additional copies of source code" is retained by SCO.

Any licensing of SVRx that goes along with UnixWare came under a different provision (Ammendment 'E') where SCO does not require approval of Novell.

He referenced the nine declarations saying it was "normal practice" when selling the "merged product" that licenses to the "legacy product" (SVRx) would be included.

He claimed that Novell was only interested in binary license revenue rather than souce code, that when Novell audited SCO in 1998 they only asked about binary revenue from SVRx agreements in place at the time of the APA. He cited this as powerful evidence of how Novell interpreted the APA.

Mr. Singer said that the Sun agreement was not in place at the time of the APA. That it's a UnixWare license with the SVRx only incidental to the licensing of UnixWare.

He further argued that the fiduciary relationship does not extend beyond the scope of the contract.

Mr. Singer, referencing Novell's position that SCO is about to go bankrupt, said that they are not, that it's true SCO is lean on cash, but that they have experience with this and fully plan to continue in business through the end of this litigation.

Mr. Jacobs replied that the reason SCO has no declarations covering Novell's position is because Section 4.16 of the APA prohibited SCO from entering into any new agreements without Novell's approval.

He went on to say that the contract was not crafted to cover this situation. He "offered to stipulate for the purposes of this motion, in fact [he's] willing to stipulate for society at large, that the course of conduct of SCO over the last few years was not contemplated at the time of these agreements". He said they did not think Santa Cruz would sell off their business to SCO, who would change their business to one of litigation.

Judge Kimball opined it was probably beyond Mr. Jacob's ability to stipulate for society at large.

Mr. Jacobs summarized his position and asked that judgement be entered in his favor.

Mr. Singer replied again, summarized his position and asked the same.

(I suspect Mr. Singer got the last word in this hearing because of how they were arguing both parties' motions simultaneously, so it didn't follow the normal number of "times at bat").

Well, there you have it. Pretty vague without all the details, especially SCO's, of the APA language. Still, it went pretty much along the lines of what was presented in each party's motion papers.

Chris Brown

Report from Today's Hearing in SCO v. Novell - Updated 4Xs | 456 comments | Create New Account

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Thanks Chris.

Authored by: Anonymous on Tuesday, January 23 2007 @ 07:33 PM EST

Well done.