Groklaw's AllParadox thought you might enjoy an explanation of a contract concept called third-party beneficiaries. As you will see, it has a bearing on what the 1994 USL-Regents of California Settlement Agreement means to Linux users. AllParadox is an attorney, now retired.
The USL-Regents of California Settlement Agreement:
What it means to the Linux User
With the recent publication of the 1994 settlement agreement from the
USL v. BSDi lawsuit, a question may arise: what does it mean to Linux
users today? The answer to that requires explaining a contract
concept, “third-party beneficiaries", because with respects to the
settlement, that's what we Linux users are.
In any specialty, understanding the special meanings of terms underpins
understanding their application, and law is no different. In law
school, first-year law students are taught that a contract is an
exchange of promises: a promise for a promise.
A party to a contract may make a promise, or be a promise recipient.
Under the Common Law, a contract may be oral or written. When a
contract is written, one of the first steps is to write out the names
of the parties. Contracts may be among any number of people, but by
far the most frequent situation is two-party contracts. The archaic
but familiar phrases are “the party of the first part” or “the party of
the second part”. Maybe you saw the old Marx Brothers skit.
Parties to a written contract negotiate terms, come to an agreement on
terms, and consummate the transaction by signing the contract. Often,
the negotiation, agreement and consummation by one party amounts to
nothing more than voluntarily signing a pre-prepared document, but that
is enough. The special relationship the parties engage in --
negotiations, agreement, consummation -- has an ancient name: the
parties are said to be “in privity”.
Making things more interesting, a contract may confer a benefit on a
person who has not participated in the negotiations, has not agreed to
the terms, and has not signed the contract. In an atmosphere of “a promise
for a promise”, these people have made no promises. The lack of
participation, of commitment, can cause distinct problems.
In keeping with the other archaic terminology, these people who
benefit, or beneficiaries, are given a specific name. Being not the
parties of the first part or the second part, they are designated
Contracts are enforced in courts, sometimes sitting as equity but
usually sitting as civil. In dealing with these persons, the
Common-Law courts have given names to various categories of third-party
A donee beneficiary is someone who receives the benefit as a
A creditor beneficiary receives the benefit as a satisfaction of
an obligation by one or more of the parties.
Donee beneficiaries and creditor beneficiaries are collectively called
intentional beneficiaries. Any other third-party beneficiary is called
an incidental beneficiary. If you are interested in more depth on this
subject, try the Tennessee Supreme Court Opinion of OOIDA v. Concord
EFS, Inc., Flying J, Inc., et al., 59 S.W.3rd 63 (Tenn. 2001). I have
not shepardized OOIDA recently, so I do not know if it is still good law, but I
think the court’s explanation and analysis is informative.1
“Donee” is the word used because it holds a special position in
contract law. As stated above, a contract is an exchange of promises.
A glaring exception is gifts. Often, a promise to make a gift, with no
return obligation whatsoever, is an enforceable contract. The donee
may go to court and enforce the naked promise. Beware pledges to
charitable organizations if you do not intend to honor them, because
they may be enforced.
Probably the most commonly known example of an explicit third-party beneficiary
is the life-insurance policy. The owner is the individual that
purchases the policy and is usually the insured life, the insurance
company is one of the parties, and the third-party beneficiary is the
Commercial transactions can be quite complicated, requiring many
persons to complete a task. Often, a single proprietorship or company
cannot satisfy all the requirement of contract, so they will enter into
other contracts to fulfill their obligations.
A common example of that situation is the home builder, or general
contractor. The general contractor subcontracts various
construction tasks to specialized craftsmen: carpenters, electricians,
plumbers, architects, and civil engineers, as needed. Depending on
local law and the terms of the subcontract, the person having the
building built may enforce the subcontract as a creditor beneficiary.
A more frequent example, though hardly mentioned, is third-party
beneficiaries of warranties. Many states have enacted laws that make
family members of a purchaser the beneficiaries of any warranty on a
purchased product. (See, for example,
www.moga.mo.gov/statutes/C400-499/40002A0216.HTM, which lists
Missouri’s statutory version of a Uniform Commercial Code (UCC)
regulation, 400.2A-216, “Third-party beneficiaries of express and
Simply put, intended third-party beneficiaries of a contract may
enforce the contract in court. A beneficiary of a life insurance
policy may sue in civil court in his own name to enforce the policy
after the death of the insured. Incidental beneficiaries may not sue
to enforce a contract, but they may still receive contractual benefits
without assuming any obligations under the contract.
Let me bring you back again to that simple statement where we began the analysis: a contract is an
exchange of promises. This says nothing about the title at the top of
the document. If a document codifies an exchange of promises, it is a
contract. That is how it works.
So, for example, suppose we have a document titled simply:
with a first paragraph of:
This Settlement Agreement is entered into between UNIX System
Laboratories, Inc. ("USL"), a Delaware corporation, and The Regents of
the University of California (the "University"), a California
If, within the body of the document, it contains a promise for a promise, it is a
contract, and is to be interpreted according to contract law. The fact
that it settled a lawsuit does not prevent it from being a contract.
Indeed, that fact reinforces the contractual nature of the document.
The fact that the lawsuit itself was started when USL was owned by
AT&T but was settled by Novell after Novell purchased from USL is
irrelevant because if Novell is the successor-in-interest, it had the power to
settle and to contract.
We at Groklaw find this document fascinating merely for its meaning in
the context of the ongoing SCO lawsuits, but there is something else
very interesting buried within it, almost casually thrown in:
c. USL agrees that it shall take no action against any person who
utilizes any methods and concepts in the Restricted Files which as of
this date have become available to the general public by acts not
attributable to the University, its employees or students. Nothing in
this provision shall limit USL's rights against a third party arising
out of a breach of any license agreement with USL or AT&T. . . .
i. USL agrees that it shall take no action based on the use or
distribution by any person of material contained in the Unrestricted
The Regents of the University of California are no ordinary
profit-making corporation. They are a non-profit organization, with a
specific mandate from the State of California to equip members of the
general public, and California residents in particular, with the
education and intellectual tools that are valuable and necessary to
engage in commerce and to promote social welfare.
You and I, dear reader, are the intended third-party beneficiaries of
And to make it even more concrete, think of this settlement in context.
At the time the parties signed the contract, a college student named
Linus Torvalds had recently written and released a kernel called
Linux, and together with the GNU system, it became a complete operating system. You may have heard of it. Although the OS was not used by a
large number of people at the time, it was all the buzz in software
development circles. I think it is a reasonable and enforceable
inference that the users of Linux code were specifically included
members of the third-party class created by the contract.
The USL-Regents Settlement is a broad shield. The way I see it, if you or
I are ever sued by any USL successor-in-interest -- SCO, Novell, oldSCO/Tarantella, or any
conceivable USL successor-in-interest -- for infringing USL copyrights on the code
described in the Settlement, we have a powerful copyright infringement defense.
Remember: it only applies to the code specifically covered by the Settlement Agreement, and we are only discussing persons claiming ownership as successor-in-interest. The defense can be used against every person claiming to be a copyright-owning USL successor-in-interest, claiming to have owned the copyright from before the agreement.
As we know, much of the code copyrights were actually owned by others and there are issues about the validity of "The SCO Group" as successor-in-interest, but it doesn't matter. In trial work, it is often easier to win the obvious than to litigate murky foundational questions like chain-of-ownership.
All successors-in-interest hold the copyright and the
restriction in the same hand (assuming anyone holds a valid copyright in this picture). To assert the copyright in court is to
concede the Settlement restriction. If a plaintiff neglects to mention
the Settlement in the complaint, then the defendants may interpose the
Settlement. That will settle all copyright claims founded on the code
described in the Settlement, with no further evidence or proof. It is
a complete defense to those copyright claims.
Of course, new material, including new code created since the adoption
of the Settlement and added to UnixSysV, will have its own
copyright issues, and none of this discussion applies to any new
One last point: the Settlement was apparently concluded in the State of
California. If so, then this analysis is affected by a California
statute, Civil Code Sec. 1559, which provides that “a contract made
expressly for the benefit of a third person may be enforced by him at
any time before the parties rescind the contract.”
The decision is not available for free on the Internet, but here is a detailed review of what the Court wrote. An excerpt:
"Specifically, the Court held:
A third party is an intended third-party beneficiary of a contract, and thus is entitled to enforce the contract's terms, if
1. The parties to the contract have not otherwise agreed;
2. Recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties; and
3. The terms of the contract or the circumstances surrounding performance indicate that either:
a. the performance of the promise will satisfy an obligation or discharge a duty owed by the promisee to the beneficiary;
b. the promisee intends to give the beneficiary the benefit of the promised performance."