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IBM Bashes SCO's Declarations - Reply Memo in Support of Motion to Strike and SCO's 10Q
Thursday, September 16 2004 @ 04:42 PM EDT

Here's IBM's Reply Memorandum in Support of its Motion to Strike Materials Submitted by SCO in Oppostion to IBM's Cross-Motion for Partial Summary Judgment. It's quite a long title, but with so much motion practice, we need all the help we can get identifying what goes with what, no? Here's a sample:

"... SCO concedes that the Declarations of Chris Sontag, Sandeep Gupta, and John Harrop were not submitted for the purpose of attempting to show that a genuine issue of material fact exists that would preclude summary judgment."

The footnote says:

"SCO spends half of its opposition to IBM's motion to strike ... simply by reviewing and repeating the statements contained in those Declarations. SCO's lengthy description of the Declarations, however, does not make them any more admissible."

And yes, Judge Kimball will have read it. Bob Mims, who was in the courtroom for the hearing, reports that Kimball was visibly frustrated with SCO's attorneys:

  "'Unix is yours and Linux everybody can get hold of it, right?' Kimball asked at one point, and later, visibly frustrated, the judge pressed further: 'What is it you think you need?'"

I can answer that. A case. They need a case. You know, what you have before you file a lawsuit.

And here's the Seattle Times' coverage. It printed a Bloomberg News article. If you compare it with an earlier Bloomberg article that day published in the Dallas Morning News, which you can read if you are willing to tell them all about yourself, and you will see that even Bloomberg has had to get a clue from the hearing.

Bloomberg's morning story hyped the alleged fearsome impact SCO's lawsuit against IBM will have on Linux. They even titled it, "LINUX growth threatened by suit brought against IBM." They appeared to be stuck in a time warp. It reads like stories from March of 2003:

"The growth of Linux, the free operating system created by a Finnish college student 13 years ago, is being threatened by a $50 billion lawsuit against International Business Machines Corp.

"SCO Group Inc., a Lindon, Utah-based company run by Darl McBride that claims to own the rights to some of the code, is suing IBM, claiming it is owed royalties from the computer maker. A hearing on the case begins today before U.S. District Judge Dale Kimball in Salt Lake City.

"The lawsuit is the biggest challenge to efforts by companies including IBM, Red Hat Inc. and Hewlett-Packard Co. to maintain Linux as a free operating system. The decision by creator Linus Torvalds to make Linux available free on the Internet has contributed to its growth. The use of Linux in server computers is growing almost three times faster than Microsoft Corp.'s Windows.

"'It's been pretty painful to watch at times,' said Linux creator Torvalds, 34, in an e-mailed response to questions about the legal battle."

If there is one thing that can be safely said, it's that SCO's lawsuits are irrelevant to Linux adoption. Linux is going forward, because companies that have muscle and money want it to. Here's more Linus:

"'What this case has shown even at this point is how a number of companies are willing to step to the plate and say, 'We will protect our Linux use'," Torvalds said. "Not just IBM and Novell, but even regular end-users of Linux that SCO tried to harass."

I love watching the media deal with this story. The AP covered the hearing too, and they got it about right, except for mispelling Mr. Frei's name, which I'm sure he is used to. Even Forbes printed the AP story, and you know how painful that must have been for them.

Phil Albert has an interesting explanation on the new contingency fee, or partial contigency fee, arrangement between SCO and Boies, called "SCO's Woes: Too Late To Turn Back". Because he is a lawyer himself, Albert is in a position to explain what the new terms might mean:

"For SCO and Boies, at this point it is a case of too late to turn back now. They've already invested millions. The fact that SCO is willing to give up a potentially higher pay-off might mean it is less confident in the outcome. At some point, if it looks like the recovery will be less than the investment, everyone might decide to look for a way out by wrapping up the case."

However, I feel I must point out that the terms announced have not yet been signed, according to the latest SEC filing by SCO:

"As described in more detail in Note 10, the Company and Boies Schiller & Flexner, LLP (“BSF”) have entered into a nonbinding letter of intent to enter into a revised definitive fee agreement.  The revised definitive fee agreement has not yet been completed. . . .

"Agreement with Boies, Schiller & Flexner, LLP  

"On August 31, 2004, the Company announced it had entered into a nonbinding letter of intent with BSF, to revise the existing fee agreement with BSF to limit the Company’s overall future cash costs of legal fees, including accrued legal fees to BSF as of July 31, 2004, associated with the Company’s pending intellectual property litigation to a total of $31,000,000.  In addition, the nonbinding letter of intent contemplates that BSF will lead the Company’s intellectual property legal efforts through the duration and completion of the pending litigation.  In return for the new fee arrangement, the nonbinding letter of intent provides that the contingency fee payable to BSF and other law firms associated with any settlement or judgment award will vary on a scaled basis from 20 to 33 percent, depending on the size of the award.  The revised fee agreement is subject to the Company and BSF entering into a definitive revised fee agreement. . . ."

I found this little tidbit of interest too, about the new poison pill:

"Under the terms of the Rights Plan, preferred stock purchase rights will be distributed as a dividend at the rate of one right for each share of common stock of the Company held by stockholders of record as of the close of business on August 30, 2004.  The Rights Plan would be triggered if a person or group acquired beneficial ownership of 15 percent or more of our common stock other than pursuant to a board-approved tender or exchange offer or commences, or publicly announces an intention to commence, a tender or exchange offer upon consummation of which such person or group would beneficially own 15 percent or more of our common stock.The adoption of the Rights Plan had no impact on the financial statements for the third quarter or first three quarters of fiscal year 2004.  However, if a triggering event occurs in the future, there may be an impact to the financial statements at the time a triggering event occurs."

And they say the company didn't buy back any shares this last quarter, compared with 290,000 shares the previous quarter. And they paid a consultant $30,000 to advise them on finance and investing:

"During the three months ended April 30, 2004, the Company entered into an agreement with a consultant to provide financial consulting and investor relations services to the Company.

"The agreement was for a period of three months and was renewable for additional three-month periods.  The Company paid the consultant a fixed fee of $10,000 per month.  As part of the agreement, the Company granted to the consultant an option to acquire 200,000 shares of the Company’s common stock at a price of $10.03 per share, the fair value of the Company’s common stock on the date the agreement was finalized.    The option expired unexercised and the agreement with the consultant was not renewed."

I note they list the value of their goodwill as $0. That sounds a little high to me. Also, they expect to blow about $2 million on restructuring costs.

Speaking of value, here's a nice look at Microsoft's "higher" math showing it is cheaper than Linux:

"A quick look at the substance behind these claims reveals that, as you would expect, the methodology and science of the analysis is mostly spot on, but some of the assumptions along the way seem to be a little unusual.

Twisted logic

For example, a common assumption is that having selected a ‘free’ operating system (although all the studies seem to ignore anything but Red Hat, hardly the cheapest option), businesses would then opt for the most expensive database solution available to humanity, rather than more reasonably-priced alternatives.

In another study we discover that application development on Windows takes less time (and therefore less money) because it’s just a more productive environment. One wonders what Microsoft itself is using, given the production delays to its Longhorn system update.

For almost all of the research companies used, the main factor that tipped the balance Microsoft’s way in terms of the total cost of ownership is staffing costs. Apparently this is because Linux solutions are harder to manage, and require more expensive people. That may be true up to a point. But multiplying flat costs for long-term projections, as many of the reports do, assumes Linux won’t continue to grow when conventional wisdom suggests it will, increasing the availability of knowledgeable staff and improving the software needed to manage it more efficiently.

I bet they didn't factor in down time for dealing with security issues, either. Or the expense involved in funding innovative lawsuits.

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