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IBM's Unsealed Sur-Reply Memo in Opposition to SCO's 3rd Amended Complaint
Saturday, May 07 2005 @ 11:58 PM EDT

Here's another of IBM's newly released unsealed documents, IBM's Unsealed Sur-Reply Memorandum in Further Opposition to SCO's Motion for Leave to File a Third Amended Complaint [Docket 407] [PDF], and it gives us a peek, even before the transcript of the hearing is released, what the main IBM arguments likely were that day.

There are so many cases submitted by IBM to support its arguments listed at the beginning, IBM doesn't even start to argue until page 7. As you may remember, IBM had to file a motion to be able to do a sur-reply, and got it, and then had to seek leave to file an overlength sur-reply [PDF], and got it [PDF]. The reason they asked for a chance to do a sur-reply is because SCO brought up new issues in its Reply that IBM had had no opportunity to rebut. That's like hitting below the belt, so the court granted IBM its chance to speak.

Normally it goes like this: someone submits a motion, the other side files a memorandum in opposition, and then the submitter gets to reply. Then the judge rules on the motion. Here, SCO filed a motion for leave to file a 3rd amended complaint (its memorandum in support of the motion was filed under seal and is still sealed, number 323 on the list), IBM opposed the motion (sealed, number 337 on the docket), and SCO then filed its reply (sealed still, number 369 on the docket). Because new issues were raised by SCO in the reply, IBM got another chance to speak, and here it answers the new issues raised. So, that is the context, and now let's break it down into the essential arguments.

Their preliminary statement gives us the overview of their position:

SCO seeks improperly to extend and expand this case just as it should be coming to a close. SCO asks the Court to add a complicated, new claim that cannot (by contract) be brought in this Court and that SCO could seek to file in another forum without causing much of the prejudice threated by the present motion. SCO's motion to amend should be denied for two primary reasons.

First, SCO's motion should be denied because SCO cannot establish good cause under Rule 16 of the Federal Rules of Civil Procedure for its failure to make this motion before the deadline for amending the pleadings. SCO's reply papers dismiss the documentary evidence showing that it knew of the proposed claim years ago on the grounds that it is unclear or ambiguous, and on the grounds that SCO knew nothing of the evidence in any event. As we show below, SCO's papers distort the record. There is no reasonable doubt that SCO knew of the proposed claim years ago. Moreover, even if the documentary evidence were ambiguous and SCO did not actually know of the proposed claim, it clearly should have known of the claim. At a minimum, SCO was on inquiry notice, based upon the public record and the documents in SCO's own files, of a claim it failed to investigate. Having failed to investigate the proposed claim. SCO cannot establish good cause to bring it at this late date in this litigation. . . .

Second, SCO's motion should be denied under Rule 15 of the Federal Rules of Civil Procedure because (1) it is unduly delayed; (2) adding the proposed claim would be unduly prejudicial to IBM; (3) denying the motion would result in no prejudice to SCO as it could seek to bring the claim in another forum; and (4) the proposed claim is futile insofar as it is barred by contractual venue and limitations provisions. SCO's reply papers raise new and contradictory arguments that, in the end, fail to support its motion for leave to amend....

While the proposed claim is demonstrably without merit, we do not dwell on the merits in deciding this motion. The primary issue here is whether SCO should be allowed to amend its complaint to add a claim that will complicate and delay an already complicated case, where that claim could be -- indeed, by contract, must be -- asserted in a New York forum and there would be no prejudice to SCO in requiring it to assert the claim there.

You can read Rule 16 of the FRCP here and Rule 15 is here. IBM is referring particularly to 16(b)'s pertinent language, "A schedule shall not be modified except upon a showing of good cause and by leave of the district judge or, when authorized by local rule, by a magistrate judge." All the Federal Rules of Civil Procedure are here, if you want to bookmark them. You will probably want to have the Project Monterey contract handy too, to follow along with the arguments. Now let's decipher what all IBM is saying. Their arguments boil down to this:

  • It's too late to bring it up now. SCO knew or should have known about the facts underlying their proposed copyright infringement claim many years ago, at least two years before it brought this action. A copyright claim "accrues when the alleged copyright holder 'knows or reasonably should have known of the infringement.'"

  • It's also too late with respect to the scheduling for this case, because the deadline to amend the pleadings has come and gone, and SCO has failed to show good cause under Rule 16 of the Federal Rules of Civil Procedure to amend. SCO is saying that all the evidence showing that they coulda, shoulda have had knowledge about SVR4 for Power was confusing or ambiguous. They only just learned about this copyright issue, they claim.

    Nonsense, says IBM. This is a software company, with sophisticated knowledge, the "alleged successor" of a partner in Project Monterey and "alleged owner of UNIX". Their predecessor in interest helped develop AIX 5L. IBM's submitted evidence showed clearly that it was known back then that AIX 5L operated on Power and contained SVR4 code. Most of the evidence IBM submitted, by the way, came from materials SCO itself turned over in discovery, they say, so how can they plead ambiguity?

    SCO has apparently submitted a statement by employee, Jay Petersen, saying he didn't know about it, but IBM counters that others at Santa Cruz surely did. IBM submitted evidence that Santa Cruz employee John Boland back in 2000 distributed internally an IBM press release mentioning AIX 5L for Power and adding that it included key "System V [SVR4]" technologies. Petersen, they point out, can't speak for the company as a whole, anyhow, only for himself. He claims his first awareness of AIX 5L on Power including SVR4 code was in reading IBM's opposition papers. In a footnote, IBM lists an IDC report as well, that also mentioned the same information, dated August 2000. How could SCO not know?

    I find the Peterson argument particularly difficult to swallow, simply because we know SCO reads Groklaw, and Groklaw wrote an article on AIX 5L on Power and about it including SVR4 back in July of 2003, when Groklaw was only two months old, and this information was repeated in August of 2004, with additional evidence Groklaw members collected. I did the July 2003 article when I found Santa Cruz had put up a web page in praise of AIX 5L, copyrighted 2000, that said this:

    AIX technology will help contribute to the success of the future systems running AIX 5L on Power and IA-64. . . .

    Among the UNIX System 5 technologies to be incorporated in this release is the SVR4 printing subsystem providing industry-standard print administration and drivers.

    Mr. Petersen may claim he doesn't personally read Groklaw and only reads the funny papers, not the trade press, so his first inkling was when he read IBM's opposition papers in this litigation, but we know SCO's CEO reads Groklaw, because of his public remarks about it and because the company acknowledged to the Washington Post's Jonathan Krim in June of 2004 that their lawyers used Groklaw as a resource. Frankly, I think Groklaw gave SCO notice back then, in 2003, certainly in August of 2004, after they said publicly they use Groklaw as a resource, even if they missed the earlier Groklaw article and all the Santa Cruz evidence IBM lists. So how do they explain missing the deadline to amend pleadings? (By the way, Krim has written a valuable article on patent "reform" you don't want to miss.)

  • SCO, today's SCO, has argued that they can't be charged with the knowledge of Santa Cruz, oldSCO. Wrong, as a matter of law, IBM argues, and cites three cases, all of which say the successor in interest is charged with the knowledge and actions of a predecessor in interest.

  • Even if they could bring it up now, they can't bring it up here in this litigation, because the contract says all disputes are to be handled in New York, under NY law.

  • SCO, even if it could win the ambiguity argument, had enough evidence from the public record and from their own files that it triggered a duty to investigate back then. Copyright holders do have a duty to investigate possible infringement when evidence of an alleged infringement comes to their knowledge. Failure to do so results in the copyright holder being "charged with knowledge of facts constituting infringement which could have been discovered in the exercise of reasonable diligence." It is a simple matter of fairness. Those of you who have been here with Groklaw a while will remember that in our first article about Judge Kimball years ago, we noted that he ruled against a copyright holder, represented by Brent Hatch, for waiting too long to assert a copyright. Having failed to exercise reasonable diligence, IBM says, SCO can't now excuse its delay in bringing the claim.

  • Allowing SCO to bring the claim in Utah is prejudicial to IBM, which negotiated terms and rights under the venue and limitations provisions of the Joint Development Agreement (JDA). SCO didn't even try to argue that its rights would be prejudiced if not allowed to bring the claim in Utah; IBM is arguing that its rights *would* be prejudiced by allowing them to. Where is there any harm to SCO if they are required to bring a new and separate action in New York, as stipulated in the contract?

  • SCO has tried to argue that IBM's Ninth Counterclaim encompasses their proposed copyright claim, but IBM has already answered that and has stipulated to the limited scope of its claim. Its counterclaim seeks only a declaration that IBM's continued distribution of AIX after SCO's "termination" does not infringe. It wasn't seeking any ruling about AIX on Power, because at the time the counterclaim was entered, nobody had said a word about that subject.

  • Allowing SCO to amend its complaint now will involve more time and more discovery, something SCO admits. The law, says IBM, is clear that a need for additional discovery can be sufficiently prejudicial to justify denial of a motion to amend. (You can understand why, if you think about what it could be like with a plaintiff like SCO, who could otherwise just keep coming up with new and additional claims 'til the end of time. Remember the 9-year-old Habie case?)

  • SCO has previously argued that IBM waived its right to enforce the venue clause by asserting its Ninth Counterclaim, and now instead says that IBM waived its right by failing to raise "the 'defense of improper venue' in its responsive pleading. Courts normally don't consider arguments that are raised in a reply brief for the first time or that reflect a change in position from that given in the opening brief, IBM notes, providing some cases to prove that point, and here SCO has done both. Anyway, IBM neatly slices through that argument by simply pointing out that they haven't filed their responsive pleading yet, because SCO has yet to file a 3rd Amended Complaint. It's still working on getting the right to file it. So IBM can hardly be argued to have waived anything in its responsive pleading. (This is all about the fact that if you are charged in a civil case with a claim, you have to raise all your defenses the first time you answer, or you waive them. SCO cited that rule, but it either forgot that IBM hasn't yet had a chance to file a response, or hoped IBM and the judge wouldn't notice. Nope. IBM noticed.)

    In any case, IBM did raise the defense of improper venue in its answer to SCO's original complaint, its amended answer to the complaint, its answer to SCO's amended complaint, and its answer to SCO's 2nd Amended Complaint.

  • The clause in question in the JDA governs "[a]ny legal or other action related to a breach of this Agreement." SCO and IBM differ as to whether the language encompasses a claim for copyright infringement. IBM argues it's broad enough to cover (see especially their footnote 12 on page 16), and SCO says it only covers breach of contract. That requires removing language from the clause, IBM says, or rewriting it. SCO, in its opening brief, framed their claim as a breach of contract-related claim, resulting in a copyright infringement, did it not? SCO said that "IBM converted SCO's copyrighted code for IBM's own use, in violation of the specific restrictions of the parties' Joint Development Agreement" and that IBM "ignored the [JDA's] restrictions on its use of SCO's SVR4 code" and that, IBM says, is breach of contract language, so that too brings it within the JDA's venue clause, even if that clause only applied to breach of contract. Again IBM cites multiple cases, including several where copyright claims were held to come within such forum selection clauses, one in particular where the ruling was that "analysis of the copyright infringement claims will inevitably require reference to rights and duties defined in the Agreement", as they will here ( Direct Mail Prod. Servs. Ltd. v. MBNA Corp).

  • Asserting a counterclaim doesn't preclude IBM from asserting a forum selection clause, but even if it did, it doesn't here, where the JDA specifically states that there can be no waiver of any provision of the agreement "unless it is set forth in a writing which refers to the provisions so affected and is signed by an authorized representative of each Party," and entering a counterclaim doesn't meet the requirements in that clause. Again, IBM presents multiple cases to the judge, including one that found that "the fact that [the defendant] filed a counterclaim and participated in discovery does not render its objections to venue abandoned," which is right on point. (Rogen v. Memry Corp., 886 F.SUpp. 393, 396 (S.D.N.Y 1995).)

    Several times in this document, IBM mentions that SCO has offered only one case on a certain point, including this one. If you read between the lines, I think you can see what happens when you cap legal fees. Legal research is one of the most expensive aspects of litigation, and when there is no money, it's the first thing that gets cut back.

    Here, the case SCO relied on, IBM says, talked about waiver only in dicta. That is a big NO. You don't cite dicta in a case. Dicta is, roughly explained, where the judge chats about stuff he isn't ruling on directly. It's not supposed to be used as precedent, as SCO apparently has here in its only case. See what I mean? See also IBM's footnote 20, where they massacre another SCO case.

  • As a "fallback position", SCO has argued that "the principle of continuing infringement" should govern their copyright claim, even though they admit that the doctrine has never been recognized in the Tenth Circuit. The JDA clearly sets a 2-year limitation period to bring a claim and doesn't recognize a "continuing infringement" exception.

On all those bases, IBM asks that the court deny SCO's motion for leave to file a 3rd Amended Complaint.

So what is the takeaway?

To me, it's the irony that SCO, who has piously claimed to be the innocent victim of a breach of contract, now tries like mad to escape the same contract's wording about venue and time-to-sue limitations, when it is in *its* own interest to do so.


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