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SCO Finally Answers Novell's Motion to Dismiss
Friday, October 08 2004 @ 05:57 PM EDT

SCO has finally filed its Memorandum in Opposition to Novell's Motion to Dismiss. There is also on Pacer a Stipulation, giving Novell until November 8 to reply and the Order granting the Stipulation. This is an overlong memo, so there is also an Order granting SCO's Ex Parte Motion for Leave to File an Overlength Memorandum.

The document that matters is the Memorandum in Opposition.

Novell filed its second motion to dismiss, on the basis that Judge Dale Kimball's ruling on the first motion demonstrated that Novell couldn't have been acting with malice as a matter of law, malice being a necessary element in a slander of title action, and that it had a privilege to speak because SCO spoke publicly about it first. Since the judge himself wrote that Novell seemed to have the stronger argument as to whether the copyrights transferred to SCO or not, writing "the agreements raise substantial doubt as to whether the [Asset Purchase Agreement] as amended by Amendment No. 2 qualifies as a Section 204(a) writing," and "Novell has raised persuasive arguments as to whether a sufficient writing exists and whether there was any intent to transfer copyrights under the [Asset Purchase Agreement] as amended or under a separate agreement," on what basis could Novell be accused of malice for thinking exactly the same thing the judge is thinking?

SCO's answer is to say that the same order said that the issue of ownership would more properly be handled in a summary judgment motion or at trial, not in a motion to dismiss, and that he couldn't conclude that SCO could present *no* set of facts to prove its claim.

That's not really an answer, to my mind. What Novell is saying is, put all that to the side. Whoever owns the copyrights is not the question before us at this juncture. The question is, is Novell guilty of slander of title? That's the accusation, and since the judge thought the Asset Purchase Agreement and Amendment No. 2 "are ambiguous and arguably support Novelll's claims of ownership", that negates any accusation of slander of title, because to prove slander of title, you must prove the defendant acted with malice, in other words, that it knew its public statements were false. Here is how Novell put it in their Motion to Dismiss:

"Malice is a necessary element in any action for slander of title. See First Sec. Bank, N.A. v. Banberry Crossing, 780 P.2d 1253, 1257 (Utah 1989) ('A published false statement. . . does not constitute slander of title without the element of malice.'). As this Court recognized in its June 9 Order, 'in order for [a] statement regarding copyright ownership to be malicious, it would have to be knowingly false.' (Order at 5 (citing First Sec. Bank, 780 P.2d at 1257).) "

How can SCO prove that malice element, even if Novell is wrong ultimately about copyright ownership, when even the judge thinks they have the better case? They have to prove that Novell made its statements while knowing they were materially false. Where is the malice if you truly believe, as Novell says it did, that you are the copyright holder? Whether in time, in a trial, you might find out differently doesn't matter. There is no malice if you acted in good faith. Besides, the judge's order, Novell says, precludes a finding of malice. They list in their Motion to Dismiss some of what he found:

"In its June 9 Order, this Court stated:

  • 'It is undisputed that the [Asset Purchase Agreement] did not transfer any copyrights.' (Order at 8.)
  • 'Amendment No. 2 ... does not constitute a transfer of copyrights on its own.' (Id.)
  • 'There is enough ambiguity in the language of Amendment No. 2 that ... it is questionable whether [it] was meant to convey the required copyrights or whether the parties contemplated a separate writing to actually transfer the copyrights after the 'required' copyrights were identified.' (Id. at 9-10.)
  • 'The agreements raise substantial doubt as to whether the [Asset Purchase Agreement] as amended by Amendment No. 2 qualifies as a Section 204(a) writing.' (Id. at 10.)
  • 'Novell has raised persuasive arguments as to whether a sufficient writing exists and whether there was any intent to transfer copyrights under the [Asset Purchase Agreement] as amended or under a separate agreement.' (Id. at 15.)

"The sum of these findings is that Novell's claims of ownership to the UNIX copyrights have merit even when weighed against the most persuasive arguments SCO could advance on its behalf. Novell's public assertion of such claims cannot represent the sort of knowing falsehood sufficient to constitute malice. Because this Court has indicated that Novell has meritorious legal arguments, it has made a sufficient determination to reject any claim that Novell lacked a good-faith basis to make its rival claim to the UNIX copyrights. See, e.g., Timpanogos Highlands, Inc. v. Harper, 544 P.2d 481, 486 (Utah 1975) ('[Where a party] had sufficient basis for believing that it had rights under the contract . . . there is no foundation upon which it could be found that it willfully and knowingly recorded a false or fraudulent instrument for the purpose of slandering the defendants' title.').

"Indeed, SCO itself has asserted likewise when faced with a similar accusation made against it in other proceedings. On August 4, 2003, Red Hat filed a complaint in the United States District Court for the District of Delaware alleging, inter alia, that SCO committed trade libel and disparagement by publicly asserting an ownership interest in certain intellectual property. SCO moved to dismiss this count, arguing that it had a good-faith basis to make its ownership claims because 'bad faith is not supported when the information is objectively accurate' and that inquiry into any subjective motivation SCO might have had was unnecessary. (Melaugh Decl. Ex. G at 20, quoting Mikohn Gaming Corp. v. Acres Gaming, Inc., 165 F.3d 891, 897 (Fed. Cir. 1998).)"

SCO's answer is to claim that it's too early in the case to even decide falsity. It wasn't too early in Red Hat, but it's too early in Novell. That's not, they say, a matter that can be resolved in a motion to dismiss. Of course, that doesn't prevent them from going on and on about the facts and how they "prove" SCO's claims are meritorious, but they claim they are providing the arguments just to "provide context". The idea may be that this way, if the judge rules in SCO's favor on this motion, say on a technicality, then it will look like he bought their contextual arguments. But in fact, whatever is in there for "context" isn't going to be what he rules on at this time. Obviously, they hope to change his mind about how he views who probably owns the copyrights, and it's natural they would want to try to do that.

You'll see the technique in full flower in footnote 3, where SCO tries to persuade the judge once again that the evidence that SCO got the copyrights is enough to comply with Section 204 of the Copyright Act. Judge Kimball has already indicated he thinks otherwise, but they have at it again. This time, their argument appears to be that they had some kind of oral agreement with Novell. The later documents merely confirmed the oral agreement by putting it in writing, and they cite some cases that hold that would be enough. That may be the case, the oral agreement. But SCO's problem is that some observers believe the later writing explicitly excluded copyrights.

SCO moves on to claim that the judge's ruling held that SCO's allegations are sufficient to state a claim. Again, they are not acknowledging the new point Novell has made. Maybe it was sufficient before Judge Kimball issued his ruling. Novell's position is that the ruling shifted the balance around, and that now they would like a ruling based on the new facts.

SCO replies that Novell waived its right to raise those arguments under Fed.R.Civ.P. 12(g), which they say precludes a defendant from raising in a second motion to dismiss arguments it could have raised in its first motion. Novell already brought a motion to dismiss, with a defense of failure to state a claim. Now they are bringing a second version of a defense of failure to state a claim, but that's against the rules. Their position is that the court's ruling "does not constitute new matter in the Amended Complaint" so, they argue, Novell should file an Answer to the Complaint, not a motion to dismiss.

They are standing on a dime, the argument being that the statute says you can only bring new matter into a second motion to dismiss, and there is no new matter in SCO's Amended Complaint, which would have given Novell a second fresh opportunity. But I think it's the wrong dime, because it is a new fact -- the judge's order -- that obviously Novell didn't have when it filed the first motion. They can hardly be faulted for failure to claim something that had not happened at the time of their first filing.

SCO even quotes from the statute, which clearly says you can assert only those defenses "as were not available at the time of his response to the initial pleading." Obviously, Novell didn't have Judge Kimball's ruling available at the time of filing their first motion to dismiss. It's one of those nicey-nice legal arguments that sometimes work and causes the non-legal world when they see it working to decide they hate lawyers. Here it seems so unlikely to succeed, I can't help but wonder if SCO raises it seriously. I'm not a lawyer, of course, so it's always possible I'm just missing something, but for sure if it was my assignment to read this document and highlight for my boss the strengths and weaknesses, I'd list this in the weak column.

Anyway, SCO says, for a motion to dismiss, all it needs to do is "aver malice," properly plead it, imply it, not prove it. And they surely have averred it by saying Novell made its public statements "intentionally", "maliciously" and "with utter disregard for the truthfulness thereof". This is a too-cute-for-words technical argument. And what they are after is a ruling that it's too soon for a ruling on whether or not Novell had a malicious intent, that a summary judgment proceeding would be the earliest opportunity Novell could make use of and that this question of Novell's state of mind really belongs in a trial, not in a motion to dismiss, because it's a fact in dispute, at best. That would seem to depend on whether the judge here agrees with Novell that his order precludes a finding of malice as a matter of law. Malice, SCO quotes from a case, may be implied "where a party knowingly and wrongfully records or publishes something untrue or spurious or which gives a false or misleading impression adverse to one's title under circumstances that it should reasonably foresee might result in damage to the owner of the property."

Again, no matter how loose the pleading standard may be in Utah, there is still that little word "knowingly". Where in this fact pattern do they see that? Yet, in footnote 13, they make the claim that since they have accused Novell of making a claim of ownership with knowledge of the falseness of their claim, the judge has to infer ill will. Yipes. In what dictatorship would that be the law? Maybe in the Salem witch trials, where an accusation more or less meant you had to be guilty. I certainly hope that isn't the law here and now.

Anyway, SCO says, it's their motion, not ours, and that means you have to resolve all questions -- including Novell's state of mind and their maliciousness or lack thereof -- in SCO's favor. Then they make the following argument:

"Although the legal plausibility of a party's argument for ownership may be relevant (if only indirectly) to whether that party in fact possessed a 'good-faith belief' in its public statements of ownership, such plausibility does not even constitute direct evidence of the party's 'good faith,' let alone resolve the question."

They seem to be saying that there can be no valid motion to dismiss based on good faith. I believe they want the case to continue, so they can do discovery, and they want the judge to rule that even if Novell had a good-faith belief its statements were correct and accurate, SCO should be allowed to bring a slander of title action and force them to prove it at a trial later. Much later. So, any entity can bring implausible claims of slander of title, and the vicitim, despite having a good-faith basis for believing it is the owner of the copyrights, must endure the agony and expense of a full trial before it can escape the lawsuit's clutches? That would indeed be SCO's perfect world.

Then SCO brings up the press release again, the one Kimball already said could be interpreted differently than SCO does. That doesn't seem like a powerful argument, under those circumstances. SCO persists in claiming that Novell in that press release made an "admission" that Novell does not own the copyrights. They already said that the first time, and Judge Kimball didn't buy it. But they make it again. And since they made that "admission", saying that they owned the copyrights without first having reviewed all the documents and making sure, SCO argues, there's your malice, Your Honor, not making sure. They also say something else. They claim that the press release constitutes an admission regarding the relevance of Amendment No. 2 on the question of copyright ownership. That's a mighty big leap, and I'm sure Novell will have something to say about that. I've always hoped someone thought to have that document examined as to authenticity. It does seem a bit unusual that Novell appears to have had absolutely no awareness of such a document existing until SCO discovered it in a file cabinet.

SCO argues that because Novell could find no Utah case regarding their privilege to answer the public claims SCO was making to the media, that there is no such privilege in Utah:

"The absence of any such case law appears to reflect the elements of the claim under Utah law, under which SCO must prove malice and by doing so would preclude any privilege. Novell in fact concedes that its malice would overcome any applicable privilege. See Novell Mem. at 15-16. SCO's plainly sufficient allegations of malice thus preclude dismissal of SCO's claims on the basis of any asserted privilege."

The problem with this argument, aside from the fact that not all observers may agree that SCO's claim of malice is sufficient, is that just because there is no case ruling on a certain point before you arrive at court, it doesn't mean there can't be a first time. That's the way the system works. If you are the first, you get to be the first. They don't tell you that you can't be heard because you are the first. Here is what Novell said in its Motion to Dismiss:

"What we really have here—and what the Court can take cognizance of even on a motion to dismiss—is a legal issue of considerable industry and public interest. The dispute is public because SCO made it so, bringing suit against IBM and other parties, threatening 1,500 major corporate users of Linux with a copyright claim, and making broad accusations in the press.

"Under these circumstances, the law permits Novell to assert its 'rival claim' and to share its legal position with interested parties without facing the chilling threat of litigation. The only way SCO can overcome such a privilege, even on a motion to dismiss, is to adequately plead that Novell acted with the requisite level of malice. But no pleading can be sustained when the Court (by its own analysis and ruling) has before it the existence of a genuine property dispute in which the alleged slanderer is simply asserting its claim to the disputed property. Nor can SCO cure these flaws in its claim by amendment. It is therefore appropriate, as a matter of law, to dismiss SCO's Amended Complaint with prejudice."

Is SCO seriously arguing that they had the right to speak publicly but Novell was legally bound to absolute silence, given no rights at all to defend itself? They probably are, but does that sound fair to you? That someone would write a law saying that? SCO's next shot is that Novell over-publicized its position, even if it did have a privilege to speak. They claim they can prove that in discovery and that this too is a matter that depends on evidence, so it has to go to a jury. Maybe you are discerning by now that SCO wants to make it to a jury trial.

SCO submits a Bill of Sale, which the court didn't have before it when it made its ruling back in June. The Bill of Sale says:

"In accordance with Article 1.1(a) of the Agreement, Seller, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, does hereby transfer, convey, sell, assign and deliver to Buyer, without recourse, representation or warranty except as otherwise expressly provided in the Agreement, all of the Assets. Excepted from the transfer of Assets pursuant to the preceding sentence are the rights reserved by Seller pursuant to that certain Technology License Agreement between Seller and Buyer dates as of December 6, 1995" Exh. 1 (emphasis added)."

Novell, of course, would say SCO has emphasized the wrong sentence, and that what needs to be underlined is the "excepted from the transfer of Assets" sentence. Anyway, the Bill of Sale just references the APA when defining what was sold. It says, in effect, "we hereby sell you whatever it was we agreed to sell you." And it references the APA, which the judge has already found wanting. SCO says the excluded assets were the copyrights to "non-Unix-related products, such as NetWare".

Novell might also point to SCO's footnote 6, the wording that the Amendment No. 2 reiterated that Novell had no "right to increase any SVRX licensee's rights to SVRX source code", no "right to grant new SVRX source code licenses", and no right to "prevent SCO from exercising its rights with respect to SVRX source code in accordance with the Agreement." But if SCO got everything, including the copyrights, why would such language even apply, be appropriate, or be needed?

SCO asks why there was any need for a "license back", if Novell retained the copyrights? It's a valid question. I believe the answer to that may have to do with the definition of "Licensed Technology" in the agreement, and that it may refer to licensed source code that belonged to third parties Novell had licensed for use in their Unix, and which it wished to guarantee it could continue to use after the sale of the business to SCO. SCO also argues that the parties behavior indicates that each thought the copyrights transferred. As one proof, they mention that SCO distributed Unix with copyright notices. However, as Groklaw pointed out in an earlier article, the copyrights continued to say Novell long after the transfer, so if the evidence to prove what the parties thought is by their behavior, what is the explanation for that? It would seem to prove Novell's position, not SCO's. If oldSCO had been told and honestly believed that they had been assigned the UNIX copyrights, why the continuing "(c) Novell"?

Then SCO trots out an ex-Novell employee, Ed Chatlos, who they say testifies that he negotiated the APA for Novell (although apparently not the later amendments, I gather), and according to his declaration, it was his understanding that all copyrights were to go to SCO. It isn't clear from this document whether he was a lawyer or on the business side, but it sounds like the latter. It says it was his responsibility to negotiate and complete the deal to sell Novell's UNIX business to SCO and that he was "the principal interface with SCO on the business negotiations for Novell".

None of his superiors told him that Novell was retaining the copyrights, he says (which indicates to me that he might not have been high enough in the chain to even have the whole story) but he thinks he likely would have known if they were not being transferred. Maybe. Maybe not. He may not have been fully informed. Nor does it seem that he was a party to the negotiations on the later amendments, or at least I don't see him saying he was.

You may have noticed in I Cringeley's story today about the Burst v. Microsoft case that Microsoft made that very argument, that what a business person negotiated didn't count. What the later lawyers drew up -- that's what counts. And that is true. That's not commenting on the case itself, because I'm not at all familiar with it. But what the lawyer drafts is what matters. Nothing said prior counts in comparison. The point of saying all this is just to point out that this ex-Novell employee may not have been in the final loop or be the last word on the subject.

Chatlos also says he thinks the Technology License Agreement was Novell licensing from SCO the use of the UNIX source code. Well, others may differ on that interpretation, as we've seen, and anyway, which UNIX source code? Novell already has told us what they believed that document was for in the May hearing:

"What did they get? Well, what they get, if you go ahead to 4.18, is a provision that says development of a merged product. And it says in the second sentence: Buyer is going to commercial use with commercially reasonable efforts to complete the merged product.

"The merged product was basically what this deal was about from Novell's standpoint. What SCO was going to do was enhance some additional kinds of UNIX, some additional UNIX flavors for special kinds of processors or non-special processors, but evolve the UNIX business, evolve UnixWare in particular, and that's the reference there to the merged product. . . .

"Here's the interesting question. We alluded to it in our reply brief. What ownership of copyrights falls out of this arrangement?

"Because SCO is developing enhancements, is writing its own code, SCO does as a matter of copyright law own the copyright rights and the rights to enforce the copyright rights in the code that it developed. There is no so-called grant back provision in this agreement that's referred to here which does have a license back to Novell. It's not at issue today, but the point is, in terms of the copyright ownership, it's not correct to say that they didn't get any copyright ownership. As a matter of copyright law and how copyright law treats derivative works, they own the code that they wrote. The code that they were merely taking from Novell and incorporating that product they don't own, and they have no need to own."

Novell seems to here be indicating that Novell wanted to guarantee it could use the merged product, including whatever SCO wrote in the future to enhance what Novell was selling.

I see a change in tone in the quoted portions of the Chatlos declaration, from paragraph 1 through 10 compared to paragraphs 11 and 12. In the former, he is talking about his firsthand experiences in the negotiations. In the latter, he is looking at and giving his opinion on some documents. It doesn't sound as if he was involved in actually drafting those documents. I don't see him saying that he helped to draft any of the documents, for that matter. But he doesn't state that he was involved in the negotiations of any document but the APA. If he had been, wouldn't SCO want him to say so? Note the strange phrasing in paragraph 9:

"It was always my understanding and intent, on behalf of Novell, that the UNIX source code and its copyrights were part of the assets SCO purchased. I do not recall anyone else ever suggesting that Novell would retain any copyright relating to UNIX, nor was I present for any discussions, general or specific, during the negotiations that contradicted my understanding of the transaction described herein. None of my superiors at Novell ever informed me that Novell was not transferring the UNIX copyrights to SCO. Likewise, I never communicated to SCO in any way that the UNIX copyrights were not being sold to SCO. Nor am I aware of any instance in which anyone from Novell ever informed SCO in any waqy that the UNIX copyrights were not being sold to SCO as part of this transaction."

Let me parody it:

"None of my bosses ever informed me that the moon was not made of blue cheese. Likewise, I never told my neighbour that the moon was not made of blue cheese."

"At dinner time, I did not observe anyone stating or acting as if the the moon was not made of blue cheese."

Can you conclude from that that neither I nor my bosses ever said the moon *was* made of blue cheese? No, you can't. It could equally well have been the case that nobody ever mentioned the composition of the moon. Or to put it another way: why does he not state in his declaration: "I told [old]SCO that the copyrights were being transferred"?

I don't see him say that. He says that it was his understanding and his intent and that he didn't say the copyrights weren't being transferred, but that's not quite the same thing. Surely, if the matter of the copyrights were being discussed and he was the chief negotiator, he would have talked to oldSCO about it. In which case he could honestly say "I told SCO they were getting the copyrights." Why can't he declare that? We have seen many such declarations in the SCO v. IBM case, where IBM found many parties to that negotiation who clearly say that the matter was discussed and IBM was told by AT&T exactly where it stood on ownership and control rights. And given the rules of copyright transfer writing, why don't the documents state it clearly?

All Novell has to do to rebut is find some oldSCO or Novell folks who were party to negotiations, the legal negotiations, for example, that Mr. Chatlos didn't participate in that contradicts what his understanding, however sincerely held, was.

Or is it perhaps the case that during the course of the negotiations the copyrights were never really discussed because that was up to the lawyers or highers up and he was really engaged in other, important but non-copyright, aspects of the deal? SCO has already alleged that the writings were merely to make formal an earlier oral agreement, which this man doesn't even mention and clearly was not a party to, in which case he might well have assumed he was selling everything, because he knew no better.

What if, just to imagine possibilities for a minute, Novell wasn't precisely sure what it owned and therefore wished to be as vague as possible, letting folks assume whatever they assumed? What if there were oral discussions nobody wanted to put in writing, because both sides knew, from the BSDi case, that ownership of UNIX copyrights was a wobbly reed to lean on to begin with?

Assume that this man is sincere, and that he thought the APA transferred copyrights. That does not confirm that both Novell and SCO intended the APA to convey copyrights, no matter how much SCO wishes it could, because this man cannot speak for oldSCO. Strangely, SCO has not yet gotten a similar declaration from anyone from oldSCO. Why not?

Is this witness the best one SCO has? It may be simply the one they are using to try to survive a motion to dismiss, and it may indeed be enough for that, but if this is all they have, it hardly seems enough to win at trial. Maybe they have more hidden away for later. But at best they can use him to raise doubts about the APA, but if the APA is in doubt, how can there be any Novell malice?

Then SCO argues that for 8 years, Novell never objected. But Novell, of course, would say that the agreement said SCO could ask for copyrights if it needed them for its business, but in 8 years it never asked. This part is like listening to a divorcing couple argue. You can read Novell's Motion to Dismiss for their side of the argument, including the letters that passed back and forth when this story was young and new, and whether Novell intended to harm SCO by speaking publicly.

Footnote 7 is interesting. SCO makes the following claim:

"Although Novell 's copyright ownership claims do impact certain copyright right claims in the SCO v. IBM case, Novell does not (and cannot) dispute SCO's ownership of the rights to the IBM and Sequent license agreements. Novell's copyright-ownership claims do not impact those agreements."

Here SCO acknowledges that what the judge decides here will impact on their claims against IBM regarding copyright. I see it as an acknowledgment that they might just lose on the copyright issue, and they are wanting all of us to know that they would still be holding the breach of contract claims against IBM and Sequent. That, of course, is currently being briefed, as to whether or not SCO even has any such claims that will survive the mountains of declarations IBM has presented to the court.

This memorandum is certainly fine legal work, in that they make something out of almost nothing. We won't get into the morality of it. You have to give credit where credit is due, and I'm surely glad they didn't start out with legal documents on this level. I think, however, it may be too late. The judge knows now, from the IBM case, what is missing from the table. Without one other piece -- somebody actually finding some System V code in Linux -- absolutely none of these fancy arguments mean a thing in the end, no matter who owns the copyright.

So while you can't rule out the possibility that Judge Kimball will decide it's too early to decide certain matters or be persuaded that one of the technical arguments SCO raises is valid and thus denies Novell's motion, the bottom line is this: can SCO persuade the judge, or later a jury if it goes that far, that Novell acted with malicious intent, desiring to harm SCO? So much of their argument depends on that. But what about you? Did they persuade you, accepting all their arguments as being true? Or is there a little common sense voice in the back of your mind saying, This is silly?

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