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Novell Shows Its Hand in the SCO Correspondence
Monday, January 26 2004 @ 06:11 AM EST

As you know, there is a new front in the SCO wars, or more accurately a newly revealed front. The new player, stage front and center, is Novell. The correspondence between Novell and SCO helps explain some of SCO's otherwise puzzling decisions in the last nine months. The main thing I take away from the letters, rereading them now that SCO has sued Novell, is that I don't see how all of Novell's claims will be cleared away by SCO's slander to title suit, even if it were to prevail. That lawsuit centers on who owns copyrights to Unix. But the Novell correspondence raises another claim that SCO's suit doesn't address, one based on Novell's license to Unix code.

Novell's position in the correspondence is based on that license as well as on contractual rights it says it retained in a 1995 deal with the Santa Cruz Organization (now Tarantella), which subsequently sold certain Unix assets to Caldera, which is now the SCO Group. While SCO denies Novell retained those contractual rights, nevertheless, one can't help but wonder how much SCO's decision not to go forward with mailing invoices in the fall and not to sue SGI or to file copyright infringement claims against IBM may at least in part have been influenced by Novell strongly challenging SCO every step of the way behind the scenes.

Novell's willingness to do that, to offer indemnification, and to go forward with its Linux plans is founded on their legal analysis as set forth in that correspondence, so it's worth going through it step by step to try to understand their position.

The correspondence began in May of 2003 with SCO sending Novell a Letter to Linux Customers. Jack Messman, CEO of Novell, and later Joseph A. LaSala, Jr., Novell General Counsel, who picks up the Novell side of the conversation as communications between the two companies gets less and less friendly, consistently contend that the company is in a unique position for two reasons: first, because it retained the copyright to Unix in that 1995 deal, and second, because it also has a contractual right to license Unix to its customers. Novell bases its position on its interpretation of the 1995 Asset Purchase Agreement, the Technology License Agreement, and Amendment 1 and Amendment 2, to the APA. SCO's lawsuit addresses the first point, but not the second.

In October, when SCO announced it was about to send invoices to Linux users, Novell immediately fired off a letter reminding SCO of the Technology License Agreement, which it says gave Novell a license to not only use the "licensed technology" itself but also to "authorize its customers to use, reproduce and modify" it and to sublicense and distribute same "in source and binary form":

"Section II.A.(1) of the TLA provides Novell with 'a non-exclusive, non-terminable, worldwide, fee-free license to . . . use, reproduce and modify, and authorize its customers to use, reproduce and modify, Licensed Technology (including related documentation) in their respective internal business operations' (emphasis added).

"Section II.A.(2) provides Novell with 'a non-exclusive, non-terminable, worldwide, fee-free license to . . . sublicense and distribute, and authorize its customers to sublicense and distribute, such Licensed Technology and modifications thereof, in source and binary form' (emphasis added).

"The license in Section II.A.(1) has no restrictive provisions.

"Section II.A.(2) contains apparent restrictions on the scope of the licensed rights, but they apply only to sublicensing and/or distribution by Novell and not to Novell's authorization of its customers to sublicense or distribute."
So you can judge for yourself, here are the cited clauses from the TLA:

"II. NOVELL'S RETAINED LICENSES

"A. Effective upon the Closing Date and in connection with the transfer of the Assets by NOVELL to SCO pursuant to the Asset Purchase Agreement, NOVELL hereby retains, with the consent of SCO and, shall have a non-exclusive, non-terminable, world-wide, fee-free license to

"(1) use, reproduce and modify, and authorize its customers to use, reproduce and modify, Licensed Technology (including related documentation) in their respective internal business operations; and

"(2)subject to paragraphs B and C of this Section II, to sublicense and distribute, and authorize its customers to sublicense and distribute, such Licensed Technology and modifications thereof, in source and binary form; provided, however, that (i) such technology and modifications may be sublicensed and/or distributed by NOVELL solely as part of a bundled or integrated offering ("Composite Offering"); (ii) such Composite Offering shall not be directly competitive with core application server offerings of SCO, and (iii) the Licensed Technology shall not constitute a primary portion of the value of such Composite Offering. SCO understands and acknowledges that such restrictions on sublicensing and/or distribution shall not affect any rights specifically retained by NOVELL under the Asset Purchase Agreement, including but not limited to rights under Transitional Contracts."

I hear Novell saying: We don't believe you can sue Linux users based on your claim that Linux contains code from Unix, because we have a license to use any Unix code in there anyway. How can you sue for copyright infringement of Unix code, even if you had the copyrights, when we have a license that allows us to give our customers the authorization to use, reproduce, and modify it?

Further, Novell points to section II.B. of the Agreement, which says certain restrictions on Novell cease to exist in the event of a change of control of SCO. Novell defines such an event as Santa Cruz Organization selling the assets it got from Novell to Caldera. Here's that part of the letter:

"Moreover, under Section II.B., the proviso 'setting forth restrictions on the sublicense and/or distribution of Licensed Technology and modifications thereof' ceases to exist in the event of a 'Change of Control of SCO.' The 'Definitions' provisions of the TLA specify that 'Change of Control' is defined in the Asset Purchase Agreement ('APA'). The APA defines '"Change of Control" with respect to one party' in Section 6.6(c). That definition easily embraces the transactions pursuant to which the SCO of today acquired the assets sold to the SCO of yesteryear. Accordingly, the restrictions on Novell's sublicensing and distribution of Licensed Technology are no longer applicable.

"In view of SCO's continued harassment of Linux users based on exaggerated and unfounded claims, Novell reserves the right to exercise its rights under the TLA."

This part is saying to me that if there was a change of control event, then the restrictions in II.A.(2) would be wiped away, those restrictions being:

" . . .such technology and modifications may be sublicensed and/or distributed by NOVELL solely as part of a bundled or integrated offering . . .; (ii) such Composite Offering shall not be directly competitive with core application server offerings of SCO, and (iii) the Licensed Technology shall not constitute a primary portion of the value of such Composite Offering."

This appears to be Novell answering SCO's claim that Novell was subject to a noncompete clause. I notice they talked about suing Novell over that noncompete clause if they went ahead with the SuSE deal, but so far nothing like that has happened. Here is Section II.B. and II.C, referenced in II.B, of the Technology License Agreement, referred to by Novell in this letter:

"B. In the event of a Change of Control of SCO, and commencing with the effective date of such Change of Control, the proviso in subparagraph IIA(2) setting forth restrictions on the sublicense and/or distribution of Licensed Technology and modifications thereof shall cease to exist.

"C. In the event of a Change of Control of NOVELL, and commencing with the effective date of such Change of Control, the term "Composite Offering" in the proviso of subparagraph IIA(2) above shall be restricted to bundled and integrated offerings of NOVELL or its customers, as the case may be, that have been developed or substantially developed as of the effective date of such Change of Control."

With regard to defining what constitutes a change of control, here is Section 6.6(c) of the Asset Purchase Agreement, where it defines "Change of Control":

"(c) Change of Control. For purposes of this Agreement a "Change of Control" with respect to one party shall be deemed to have occurred whenever (1) there shall be consummated (1) any consolidation or merger of such party in which such party is not the continuing or surviving corporation, or pursuant to which shares of such party's common stock immediately prior to the merger have substantially the same proportionate ownership of common stock of the surviving corporation immediately after the merger or (2) any sale, lease, exchange or transfer (in one transaction or a series of related transactions) of all or substantially all the assets of such party, or (ii) the stockholders of such party shall approve any plan or proposal for the liquidation or dissolution of such party, or (iii) any party, other than such party or a subsidiary thereof or any employee benefit plan sponsored by such party or a subsidiary thereof or a corporation owned, directly or indirectly, by the stockholders of such party in substantially the same proportions as their ownership of stock of such party, shall become the beneficial owner of securities of such party representing greater than fifty percent (50%) of the combined voting power of then outstanding securities ordinarily (and apart from rights accruing in special circumstances) having the right to vote in the election of directors, as a result of a tender or exchange offer, open market purchases, privately negotiated purchases or otherwise. or (iv) at any time after the date of this Agreement, individuals who at the date hereof constituted the Board of Directors of such party shall cease for any reason to constitute at least a majority thereof, unless the election or nomination for election by such party's stockholders of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the date hereof, or (v) any other event shall occur with respect to such party that would be required to be reported in response to Item 6(e) (or any successor provision) of Schedule 14A or Regulation 14A promulgated under the Exchange Act."

If, like me, you wondered why SCO didn't follow through and sue SGI, an October 7 letter from Novell and another letter, dated October 10, shed some light. Novell first directs SCO to "to waive any purported right SCO may claim to terminate SGI's SVRX license" and to "waive any purported right SCO may claim to require SGI to treat SGI Code itself as subject to the confidentiality obligations or use restrictions of SGI's SVRX license", saying that Section 2.01 of the license specifically states that 'ATT-IS claims no ownership interest in any portion of such a modification or derivative work that is not part of a SOFTWARE PRODUCT.'" When SCO failed to waive as directed, Novell sends another letter and waives all SCO's purported rights to terminate SGI's license.

Novell in its June 9, 2003 letter said SCO had no right to unilaterally terminate IBM's SVRX Licenses and that it was inappropriate for SCO to make such threats. Amendment No. X, Novell said, granted IBM the "irrevocable, fully paid-up, perpetual rights". Novell then waives SCO's "termination" of IBM's license, too. SCO denies they have the authority to do that, of course.

In August, Novell begins to require compliance with clauses in the contract that Novell had apparently let slide for years, such as their right to audit SCO's collecting of royalties for Novell. In the August 7 letter, Novell says they will be doing an audit of SCO, something that had not happened since 1998. Novell on August 20 demands SCO supply copies of the source and binary code for all versions of UNIX and UnixWare under SCO's control.

Novell demands copies of the Microsoft and Sun licenses with SCO and that it cease "all such negotiations and other communications with licensees concerning any such transaction without Novell's prior written consent and continued participation". There is the matter of "royalties and other amounts owed to Novell based on the above-mentioned license agreements". Insofar as preexisting licensees of SVRX are concerned, SCO has, Novell writes, no right to proceed without Novell's approval, reminding SCO of Novell's 95% interest in revenues from preexisting SVRX licenses.

In turn, in SCO's letter of June 11, SCO writes that it "acquired all of Novell's right, title and interest: (a) to the AT&T Software and Sublicensing Agreements, including the AT&T/IBM Software Agreement, and (b) to all claims against any parties. SCO therefore acquired all right, title and interest to enforce the Software and Sublicensing Agreements against IBM, without answering to Novell."

Not so, Novell replies. Novell retained certain rights "critical to protecting the interests that Novell retained as part of the Asset Purchase Agreement (including its interests in royalty payments and the contractual commitments Novell made in return for royalty payments)." SCO acquired certain assets from Novell but acquired those assets subject to certain rights of Novell. "You can't have one without the other," Novell asserts.

On the matter of who owns the copyrights, Novell now lists all of its registered copyrights on its web site with the letters. But what we now know is that they were in dispute from day one. In a letter dated August 4, Novell writes that according to their agreements, copyrights were not to be transferred to Santa Cruz Operation unless SCO could demonstrate that such a right was required. They never demonstrated any such need and today's SCO doesn't need copyrights, Novell says, "in order to exercise the limited rights granted SCO" and so unless or until SCO "is able to establish that some particular copyright is 'required' for SCO to exercise its rights under the APA, SCO's claim to ownership of any copyrights in UNIX technologies must be rejected, and ownership of such rights instead remains with Novell."

Finally, Novell writes in October that on SCO's behalf Novell "waives any purported right SCO may claim to require IBM to treat IBM Code, that is code developed by IBM, or licensed by IBM from a third party, which IBM incorporated in AIX but which itself does not contain proprietary UNIX code supplied by AT&T under the license agreements between AT&T and IBM, itself as subject to the confidentiality obligations or use restrictions of the Agreements."

Novell's position, as I understand it, is that it wouldn't matter even if SCO were successful in its slander to title lawsuit. It has a license to Unix code and it can authorize customers to use it, even if it were to appear in Linux, and even if Novell didn't own the copyrights, which they claim they do anyhow. Does this mean SCO will need to address these other issues in a courtroom at some point? Groan. It looks like it from here, unless Novell were to back down, because if SCO were to sue an end user, why couldn't the end user just say they rely on Novell's license? Then it's back to Novell and SCO to battle that out. At this rate, I won't be telling my grandkids about this case someday; they'll be writing Groklaw to finish telling your grandkids about the final lawsuit after we're gone.

Of course, I'm not a lawyer, just an interested observer, so do ask an attorney if all this matters to you in some important way. This article, for example, doesn't look at SCO's position in the correspondence, because that isn't the theme of the piece. Companies end up in court because each has a position it wishes to assert and feels justified in presenting. In theory, anyway.

And isn't it clear from going through all these contracts and amendments why you need a lawyer before you sign a contract? The words that are so dry on the page you can hardly stand to read them (tell the truth -- you skipped some of the above, didn't you? Or if you didn't, you had to will your eyeballs to stay on course and finish some of the sentences, right? Like the "Change of Control" paragraph?) can spring to life later and either protect you or bite you, depending on how well the contract was written.

Of course, really good lawyers write contracts that are so clear and unambiguous, you don't need a judge to tell you what they mean. When you find a lawyer like that, pay him or her whatever it takes, if you can. It can save you plenty down the road.


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