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Red Hat's Memorandum in Opposition - An Analysis
Wednesday, October 01 2003 @ 05:11 AM EDT

Having an argument with your wife isn't the same as having an argument in a courtroom or in court papers.

A domestic argument has no rules, except whatever the couple may have decided between them are necessary to keep them out of divorce court or whatever restraint their personal morality or faith or personal ethics require. "That doesn't deserve an answer," you might tell her, and get away with it. You might tell your mate she is stupid or he is lazy or that he hates your mother or whatever you feel you can get away with, and it might or might not be taken seriously.

In a legal argument, it's not like that. You can't just show up and tell the judge, "SCO is low-down scum, their posturing is a scam, and they need to be shut up this exact minute." Even if it's all true, it's not legally true, so the judge won't respond the way you want. A legal argument has rules. Irrational, emotional arguments are useless, and you can't ignore one thing your opponent says. And the argument is played out on at least two tracks simultaneously.

The first track is what you might call the factual track. You have to tell the judge what happened and why you are there in front of him, or in the Red Hat case, her. You have to tell precisely what you want the judge to do for you. The second track is the legal track. You have to tell what the other side did that broke the law, which law they broke, exactly what it was the other side did that broke that law, and why you legally deserve the exact legal remedy you are asking for. You can't fail on either track or you lose. The facts you choose to tell the judge are chosen based on the law you are trying to have applied to your situation. You'll see that as we go through Red Hat's Motion in Opposition. All the facts in the story they tell are leading up to the legal punchline, in this case, that they deserve the judge's attention, because of meeting all the elements necessary when asking for a declaratory judgment.

Reading legal documents means you must follow both tracks. Lay people see the factual track readily enough, but they normally miss the legal track underpinning. That is often why they are outraged by events, because they can't see why the facts alone are not enough to win on their own. So, as we talk about SCO's Motion to Dismiss and Red Hat's Memorandum in Opposition, I'll try to highlight the way both tracks weave in and out. It's a bit like a tennis match, but with this difference: instead of the ball being hit back and forth, it's more like one side gets to choose which kind of tennis balls it wants, with each one being used for a unique purpose, and then batting as many balls as it can over the net, while the other side waits for its turn, and then it picks up each ball that has lobbed over the net to them and figures out how to hit it back just as hard and as creatively as it can, according to what kind of ball each one is and what rules apply to that kind of tennis ball, and then they get to pick up any new tennis ball types the other side didn't throw at them and hit them over the net. Then the first side gets a chance to do the same back, paying special attention to the new balls. The judge watches and he then decides who did the best. Both sides are judged not only on how they played, what tennis balls they chose to use and how well they used them, but on knowing and playing by all the rules of the game.

It's mental play, but it's exhilarating, once you get a taste for it, just like a great game of tennis. So let's begin, and see what Red Hat did in its memorandum.

The most important element Red Hat had to meet successfully is demonstrating to the judge that there is an "actual controversy". That's because the law regarding declaratory judgments says that is what you need to prove in order to ask for that relief. That's why the main theme of SCO's Motion to Dismiss was that there was no actual controversy, that SCO wasn't on the brink of suing Red Hat, and anyway all the issues would be cared for in the IBM case, so the judge didn't need to involve herself and had no right to because Red Hat, they claimed, had failed to demonstrate an actual controversy.

Red Hat knew it had to address that particular tennis ball first and foremost by demonstrating that SCO really was threatening Red Hat and so there was an actual controversy requiring the judge's attention. If a company is threatening to sue, the threatened company doesn't have to wait for it to take action. It can take the initiative. With a declaratory judgment, you go to court and in essence say to the judge: "This company is going to sue me and I need our rights with respect to this dispute settled ASAP, so this cloud over my company's head doesn't ruin my business while I wait for them to get good and ready to sue me." If the judge accepts the dispute as one she wants to settle, she can, and after hearing both sides she can issue a declaratory judgment, in which she "declares" what is what and exactly what each party's rights are.

There are two advantages to not waiting to be sued in such a scenario, aside from getting it settled faster. One, the petitioner gets to pick the court to sue in, and two, the defendant has the burden of proving that there is no claim meriting the judge's intervention.

Now, a judge doesn't have to hear a request for a declaratory judgment. He or she has discretion. It's an enabling statute, not one that confers rights on you, the litigant. Your case has to fit into the confines of the Declaratory Judgment Act.

What confines? First, you have to have an actual controversy in the constitutional sense. Basically, that means it isn't a hypothetical problem, the court must be able to settle your problem, and you must have a reasonable apprehension of being sued.

Here's US Code Title 28, Ch 151, Sec 2201, the Declaratory Judgment Act. And here is the definition from Cornell or you can just click on the link to Law. com's dictionary, on the left. Here's a tutorial on declaratory judgments. Back in June I wrote that I thought that some of SCO's conflicting statements about suing and then not suing Linux users might be because of worry that somebody might try for a declaratory judgment. Red Hat did exactly that, and now SCO is offering all the statements they made where they said they wouldn't sue Red Hat, and Red Hat is offering all the ones that indicated they absolutely intended to.

But they haven't stopped there. They've offered two good twists. They are saying that threatening Red Hat's customers and potential customers (by public statements and by sending out the letter saying users needed a license or they could be sued) is enough to establish an actual controversy in the constitutional sense, and they offer cases (several times in Red Hat's papers, it points out SCO failed to provide cases for a number of important points).

You offer cases to judges because if it's a case with a fact pattern like yours -- especially one in their particular circuit -- they are supposed to take it seriously and, unless the defendant can demonstrate a good reason not to follow it, it should influence their decision. That's called case law, and it's how the written laws get refined by use in the real world. Here's the way Red Hat puts it:

In addition to the allegations that SCO addresses in its motion, Red Hat alleges a second set of facts that independently establish an actual controversy between Red Hat and SCO: SCO has sought to coerce Red Hat's customers into paying for a license with SCO to use Red Hat LINUX. Further, Red Hat has alleged that while explaining its licensing program at its recent conference call on July 21, 2003, SCO specifically stated that it anticipated such a disruption (Complaint 61.) The Complaint quotes the transcript from the SCO's conference call: "And so I'm guessing that those end users are going to be looking around to the vendor or vendors involved in supplying [LINUX software] to them whether it's Red Hat or IBM and saying, 'What's up, guys? You know what's happening here?' But, you know, that is going to be their beef with their particular vendor." (Id.)

The Third Circuit has found that such public statements aimed at the plaintiff's customers establish an actual controversy. Treemond Co. v. Schering Corp., 122 F.2d 702, 705 (3d Cir. 1941) (reversing dismissal of complaint for declaratory judgment of patent invalidity and noninfringement based on finding that defendant's notice in trade journal threatened purchasers with suits if they purchased plaintiff's product). SCO's motion must be denied on this basis as well.

The second twist is Red Hat uses SCO's own words that they were not going to sue Red Hat until after they finished with IBM and point out, with cases, that that is enough to meet the actual controversy element. Slamdunk.

They also argue that any threat against Linux is a threat against Red Hat's business, because that is their business. SCO had argued that Red Hat was asking for just general guidance for the Linux industry, too vague to meet the actual controversy requirement, but Red Hat lobs a tennis ball back, saying in effect, "You forgot one detail. Linux is our business. We're the leading distributor of Linux. So that makes your threats threats against us, by definition":

SCO, however, completely misses the point. Red Hat's business is all about LINUX. Red Hat is the "leading provider of the LINUX operating system, and the most recognized LINUX brand name in the world." (Complaint, 14). Red Hat is "the most well-known" provider of LINUX software (Id. 28). Red Hat was hardly acting primarily on behalf of someone else, or seeking "general guidance" for others, when it brought this case. Red Hat is seeking a resolution to a controversy that directly affects its core product. SCO knows this, and the Complaint, fairly read, plainly states as much.

In these circumstances, even if SCO's assertions and threats are targeted at LINUX generally -- without any specific mention of Red Hat -- an actual controversy exists. See Nippon Glass, 489 F. Supp. at 121-22 (accusation may be made "to the industry at large" and still be actionable); Cargill, 2002 WL 31426308, at *5 (alerting industry as a whole to alleged infringement constitutes "reasonable apprehension"); see also Dr. Reddy's Labs., Ltd. v. aaiPharma, Inc., No. 01 Civ. 10102, 2002 WL 31059289, at *7 (S.D.N.Y. Sept. 13, 2002) (denying motion to dismiss and stating threats of infringement suits against an entire product industry can create reasonable apprehension among all individual members of that industry).

As for SCO's attempt to get the court to believe that the court should decline to hear the case because the IBM case covers the same issues, Red Hat points out that, first of all, the parties aren't the same. If parties are the same, and there are two disputes in two courts, sometimes the two disputes will be joined into one action, or one will be dropped and the other go forward, but here, the IBM case doesn't resolve Red Hat's issues, because Red Hat isn't IBM. Red Hat has raised issues involving damage to its business. So has IBM. But if IBM wins, no damages paid will flow to Red Hat. And besides, they are asking the judge for a declaratory judgment that Red Hat isn't infringing SCO's copyrights. The IBM case isn't about copyright infringement, so how would dropping this action in favor of IBM's solve that question? Obviously it can't. The IBM case is contractual in nature, and Red Hat's isn't, so it's apples and oranges, your honor:

The IBM action is contractual in nature. It involves three counts for breaches of software and licensing agreements and a count for interference with contract. As SCO itself acknowledges, "Red Hat, unlike IBM, has never signed a license agreement giving it access to SCO's confidential trade secrets." (See SCO Br. at 14; Decl., Ex. A at 26-43.) In contrast, this case focuses on the infringement of intellectual property rights and the unfair actions that SCO has taken with respect to Red Hat. (See Complaint, Counts I-VII.) Nor is Red Hat's declaratory judgment claim for non-misappropriation of trade secrets dependent on the result in the IBM litigation. Red Hat may prevail simply upon a showing that the alleged trade secrets are in fact public and not trade secrets at all. Red Hat has alleged that SCO itself publicized the alleged trade secrets, destroying their status as such - if in fact they ever were. (Complaint, 2).

This Court may not refrain from hearing a case "merely because of the pendency of another suit, if the controversy between the parties will not necessarily be determined in that suit." Maryland Cas. Co. v. Consumers, 101 F.2d at 515 (holding dismissal of petition for declaratory judgment was abuse of discretion, because action pending in separate court with different parties did not address same issue); see also La Reunion Francaise, S.A. v. Fleming, No. 97 C 1714, 1998 WL 111686, at *3 (N.D. Ill. Mar. 12, 1998) (denying motion to dismiss and refusing to decline jurisdiction because other pending suit was not duplicative and plaintiff was not a party to it). A suit is duplicative "only if it involves the same claims, parties, and available relief." La Reunion Francaise, 1998 WL 111686, at *3.

That is not the case here. As set forth above, the claims in this action will not be resolved in the IBM action, because (1) Red Hat is not a party, (2) there is no copyright claim asserted against IBM, and (3) the subject matter of the two actions is not the same. Further, no judicial economy will be achieved by dismissing Counts I and II for declaratory judgment because Red Hat's allegations in the remaining Counts III through VII will require resolution in any event.

Moreover, refusing jurisdiction in this case would be inequitable, unjust and contrary to the policies underlying the Declaratory Judgment Act. One of the primary purposes of that statute is "to enable a person caught in controversy to obtain resolution of the dispute, instead of being forced to await the initiative of the antagonist." Chase Manhattan Bank, 265 F. Supp.2d at 450 n.8. Declining jurisdiction will prejudice Red Hat and merely delay the "day of reckoning" that SCO itself has announced. In the meantime, SCO will be able to continue to "aggressively" pursue its licensing program and make repeated claims to the public about Red Hat and its products without taking any steps to establish that those claims have any validity or support. As Red Hat alleges, this tactic has already had an adverse impact on Red Hat and its business, and it will apparently continue. If this Court refuses to exercise its jurisdiction, Red Hat will have no recourse to stop that ongoing harm.

SCO also claimed that its speech was protected by the First Amendment. Frankly, that argument is so funny it seems pointless to stay up late to explain it to you. Just read Section III, "SCO's Motion To Dismiss Count IV Alleging Violations Of The Lanham Act Should Be Denied Because SCO's Statements Are Not Protected Speech And Are Not Privileged", if you are interested. Red Hat had to actually research the point and answer it in detail. I'll bet they were rolling on the floor laughing, though. Once they pulled themselves together, they point out to the judge that there are laws specifically written that forbid companies from making "false or misleading statements" about another's product, and it's called the Lanham Act, which you can read here.

If free speech allowed companies to make false and misleading statements about another company's products, then the Lanham Act must be unconstitutional. Nah, they don't say that. I'll bet they made jokes about it at the water cooler, though:

The Third Circuit has held that to state a prima facie case under Section 43(a), a plaintiff need only allege that: (1) defendant made false or misleading statements about its product [or another's product]; (2) there is deception or a tendency to deceive a considerable portion of the relevant consumers; (3) this deception is significant and likely to influence purchasing decisions of these consumers; (4) the goods advertised are in interstate commerce; and (5) a likelihood that plaintiff will be injured. See U.S. Healthcare, Inc. v. Blue Cross of Greater Phila., 898 F.2d 914, 922-23 (3d Cir.1990) (quoting Max Daetwyler Corp. v. Input Graphics, Inc., 545 F. Supp. 165, 171 (E.D. Pa.1982)).

Red Hat has alleged each of these elements in its Complaint: SCO has intentionally made false accusations that LINUX infringes SCO's intellectual property rights (Complaint 51); SCO has made these false claims for the purpose of influencing LINUX end-users to pay SCO for the UNIX license it is offering as part of its licensing program (Id. 60-62); SCO has sent 1,500 letters to large companies to promote its claims of infringement (Complaint 42; Decl., Ex. C); SCO generally has attempted to disrupt the LINUX industry and has specifically targeted Red Hat's customers (Complaint 8, 61); SCO has wrongfully attempted to interfere with and disrupt Red Hat's business (Id. 61) by attempting to convince LINUX users that they need to pay SCO a license fee in order to use Red Hat's product (Id. 6), and; SCO has stated publicly that it is aware that it has deterred LINUX customer from proceeding to implement LINUX. (Id. 65.) In its motion, SCO erroneously claims that its conduct does not constitute advertising under the Lanham Act, because it has not engaged in commercial speech. (SCO Br. at 17-18.) SCO's characterization of its conduct as protected speech is indefensible given the allegations of the Complaint. SCO's campaign against Red Hat is undeniably commercial in nature. SCO seeks to generate licensing revenues from its UNIX technology through commercial transactions with Red Hat's LINUX customers. (Complaint 6, 61.) SCO has conducted the campaign broadly and openly in the public, even sending letters containing false statements about LINUX to over 1,500 potential customers/licensees. (Id. 42, 59.) SCO's CEO, Darl McBride, has stated publicly that portions of UNIX code were taken and can be found in Red Hat LINUX. (Id. 51.) In addition to targeting Red Hat's customers, SCO also has made presentations to Red Hat's investors, industry analysts and financial analysts that falsely characterize both SCO's rights and Red Hat's alleged infringement of those rights. (Id. 63-66.) Everything about SCO's campaign is commercial in nature. It is the last gasp of a failing company attempting to generate much-needed revenues any way it can, including by making false statements about its competitors. (Id. 67, 68.) Advertising and promotion under the Lanham Act are broadly defined and encompass the same types of conduct alleged in the Complaint. Courts routinely have held that, to achieve the purposes of the Lanham Act, its provisions are to be broadly construed. See, e.g., Seven-Up Co. v. Coca-Cola Co., 86 F.3d 1379, 1383 (5th Cir.1996). To that end, courts have adopted the following test to determine whether speech qualifies as "commercial advertising and promotion" under the Lanham Act:

(1) [the statement is] commercial speech;
(2) by a defendant who is in commercial competition with plaintiff;
(3) for the purpose of influencing consumers to buy defendant's goods or services;
(4) that is disseminated sufficiently to the relevant purchasing public to constitute 'advertising' or 'promotion' within that industry."

Well, duh. They then cite gobs of cases. When you can cite gobs of cases, it usually means the point is so established in case law, it's silly to even go over it again. They point out that offering licenses is a commercial act, and that when SCO did so, they stated that "[s]ince the year 2001 commercial Linux customers have been purchasing and receiving software that includes misappropriated Unix software owned by SCO." If it looks like a duck, etc.

As for SCO's governmental interest argument, Red Hat goes into the kind of detailed arguments that only a lawyer (or types like me) would love to read, so I'll spare you the details, and besides any real analysis would require reading all the many cases cited first, and I don't have the time right now. But if you want to analyze that section of the document, just look up each case cited, compare what SCO wrote about it and then what Red Hat wrote and see which one seems to be right. That's what the judge will do, by the way.

There are valid arguments to be made about the First Amendment and how loathe the US government should be to interfere with free speech, and there are basic guidelines that have been worked out through the years as to when the government has a valid interest in limiting speech and when it doesn't. Commercial speech has a lesser claim to free speech, as a general rule.

SCO gave four reasons why it believed commercial speech should not be regulated: to protect copyrights, to ensure access to the courts, to ensure efficient adjudications, and to promote a free and impartial press. Do any of them sound reasonable to you in looking at their mouthings? No? Then skip that part. The judge won't but I'm guessing he'll read their arguments with the speed they merit.

It's kind of a no-brainer that making false claims isn't OK under any law anybody can think of. Red Hat calls one of SCO's arguments in this section "nonsensical" and says another "borders on the absurd", and that about wraps up that section.

The next is even quicker to explain. SCO had argued that it could say whatever it said because Delaware law says you can speak in the context of a judicial proceeding without having to worry about being sued for defamation. Red Hat says, in a nice legal way, "Puh-lease":

SCO's false statements concerning Red Hat's products are neither fair reports of a judicial proceeding entitled to a qualified privilege nor were they statements made in the course of a judicial proceeding and entitled to an absolute privilege. SCO cannot, as it suggests, continue to malign Red Hat and its products in the press simply because it has a lawsuit pending against IBM. Red Hat is not a party to that suit, and the privilege, thus, does not extend to statements concerning Red Hat. See Klein, 94 A.2d at 392 (privilege only extends to parties of suit). The absolute privilege is strictly limited and does not extend to statements made outside of the courtroom, such as here, in interviews with the press. See Barker, 610 A. 2d at 1347 (finding that false and defamatory statements were outside of the judicial context and were not privileged because interviews occurred wholly outside of and not in the course of any judicial proceeding); See also Rodriguez v. Panayioyou¸ 314 F. 3d 979, 988-89 (9th Cir. 2002) (finding there was no privilege because there was no litigation pending between the parties; a functional connection between interview statements and the purposes of litigation proceeding was absent); Bridge CAT Scan Assocs. v. Ohio-Nuclear, Inc., 608 F. Supp. 1187, 1195 (S.D.N.Y. 1985) ("delivery of a copy or report of a complaint to the press is not a statement made during the course of judicial proceedings and therefore is not protected by the common law privilege afforded such statements").

As alleged in the complaint, SCO is conducting its campaign against Red Hat and its LINUX products publicly, outside of the courtroom. (See Complaint 45-48.) The privilege relied upon by SCO simply does not extend to such a campaign of false statements gratuitously provided to the press and public.

Red Hat doesn't argue this point, but it occurs to me that SCO can't really argue that they weren't planning on suing Red Hat and at the same time argue their speech is protected because they spoke in the context of a judicial proceeding. Well, logic has always been SCO's second worst subject. As we know, they flunked GPL Summer School, despite my best efforts.

Finally, Red Hat has alleged additional claims under the Delaware Deceptive Trade Practices Act and SCO, they say, offered no case law to back up their request that the court dismiss those claims. The defendant in a declaratory judgment action has the burden of proving that there is no valid claim to be determined, and SCO failed to meet that burden, Red Hat states, and Red Hat therefore deserves its day in court. They sum up like this:

In effect, SCO’s position is that no matter how nefarious its objectives or baseless its claims, SCO can completely avoid the reach of the Declaratory Judgment Act, the Lanham Act, and state laws prohibiting its conduct. This is not the law.

If you were wondering why Utah suddenly become so quiet, I think you need look no further than this document to figure out why the cat has their tongue. And about those invoices, what do you think the odds are that they'll ever see the light of day now? I'm guessing that they are immobilized by Red Hat's arguments, like a butterfly pinned to a card.

Everything they said and did has come back to haunt them. And after reading this legal work, I'm guessing there is no joy in SCOville tonight.

Even before this fine Memorandum in Opposition was filed, attorney and law professor A. Michael Froomkin was already saying that SCO's Motion to Dismiss would fail:

I'll Go Out On A Limb Here: SCO's Motion to Dismiss Will Fail

Predicting the outcome of lawsuits is a risky game. But I’m going to predict that this motion by SCO seeking to dismiss the declaratory judgment complaint filed against it by Red Hat will fail. Miserably. Unless of course SCO’s lawyers were to promise the court that they would never bring a copyright infringement claim against Red Hat or any of its customers. That’s highly unlikely, but it would certainly moot the case.

SCO is the company that has been running around claiming that Linux violates its intellectual property rights. While trumpeting this claim, and offering purported licenses to users of Linux, SCO has been unwilling to make public a single convincing example of infringing code. It seems pretty obvious that SCO’s own actions create a live controversy sufficient to satisfy the Declaratory Judgment Act, 28 UCS § 2201. Furthermore, the suggestion that the case is somehow precluded by a related action involving SCO and IBM is not at all persuasive, especially as many of the issues in that case involve a contract to which only IBM was a party. SCO is represented by David Boise’s firm, Boies, Schiller & Flexner. So far, the paper in SCO’s case and the client’s general behavior are not making the Boise firm look good (yes, yes, I know some clients are beyond their lawyers’ control...). Usually top-quality firms have aces up their sleeves before filing stuff like this motion, something that over time gives them credibility with judges, but right now I just can’t see where an ace might be hiding.

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