The parties have stipulated [PDF] to IBM getting more time to file its Reply Memorandum in Support of its Motion to Compel Production of Documents on SCO's Privilege Log and the Court has so ordered [PDF]. IBM's new date will be December 8.
IBM's Motion to Compel is here, and SCO's Opposition Memo is here [PDF]. I'm working my way through the cases and will write about what I'm finding when I'm done. I know you want to know which party is right, but it makes little sense to comment on that until the motion is fully briefed. Meanwhile, if someone could please OCR SCO's Opposition Memo, I'd appreciate it very much. Thank you. For now, let's look at what each side is claiming.
In SCO's Memorandum in Opposition to IBM's Motion to Compel Production of Documents on SCO's Privilege Log [PDF], they sum up their position like this, in the Preliminary Statement:
SCO is the successor-in-interest to the UNIX business. In 1993 the original owner of the UNIX technology, AT&T, transferred the UNIX business to Novell, Inc. ("Novell"); in 1995 Novell sold the UNIX business to The Santa Cruz Operation ("Santa Cruz"); and in 2001, Santa Cruz sold that business to SCO, which was then named Caldera, Inc. ("Caldera"). Through this unbroken chain, SCO became the owner of the UNIX business.
IBM's motion turns on whether the transfer of control of a continuing business also transfers control of the attorney-client privilege attending that business. In seeking to sidestep the cases that have examined that question (answering in the affirmative), IBM repeatedly describes the transactions that transferred the UNIX business to Santa Cruz and SCO as sales of mere assets that do not, either as a formal or practical matter, transfer control of a business.
The cases on which IBM relies are inapposite. Santa Cruz acquired from Novell, and SCO from Santa Cruz, not only the UNIX technology and related assets, but also a business that continued in operation through each transaction. SCO has properly asserted the privilege once held by its predecessors with respect to the UNIX business. The Court should deny IBM's motion.
IBM's position, in contrast, as delineated in its Motion, goes like this:
SCO claims that documents created by or for four entirely different companies, AT&T, USL, Novell, and Santa Cruz, are privileged as to SCO. Although SCO has nowhere articulated the precise basis for such a claim, SCO apparently contends that it may assert an attorney-privilege belonging to other companies still in existence because these companies, like SCO, once owned certain of the UNIX assets at issue in this and other litigation. SCO cannot properly claim attorney-client privilege over documents originating with other corporations and their attorneys. The transfer of assets from one entity to another does not transfer the attorney-client privilege as well. Instead, control of the entity possessing the privileges must pass to the purchaser for the privilege to pass. It is undisputed that SCO does not control any of the corporations whose privilege it now claims. To the extent documents that were once privileged as to these corporations have been transferred to SCO, any privilege in them has been waived. For the foregoing reasons, and as set forth in further detail in IBM's memorandum in support of its motion to compel production of privileged documents, IBM respectfully requests that this Court order SCO to produce to IBM all documents on its privilege log created by or for third parties.
Marbux says that his opinion is that the unsworn declaration of William Broderick which SCO offers in support of their memo is inadmissible evidence, and the judge could hold that they have failed to prove the applicability of the privilege in any event because of that problem. It's on page 14 of their filing. The form of attestation "to the best of my knowledge" fails the personal knowledge requirement, he says, and highlights the fact that most of the declaration is obvious hearsay, as you can see clearly in paragraph 11 of the Broderick attachment. The crux of Broderick's argument, and it's what SCO relies on, is in paragraph 16:
As stated, AT&T/USL, Novell, and Santa Cruz each successively transferred the continuing UNIX technology and business to its respective successor. Even though the transfer from AT&T to Novell was structured as a merger and the subsequent transfers from Novell to Santa Cruz and from Santa Cruz to Caldera were structured as asset purchases, the transactions did not differ except as to form. The same continuing UNIX enterprise, including all the assets listed in paragraphs 10-14 above and more, changed hands in all three transactions.
Unfortunately for SCO, that is not completely accurate, in that paragraph 11 says that intellectual property transferred. We know that the UNIX trademark didn't transfer from Novell to any of the later entities. And Novell itself is asserting with vigor that it never transferred the copyrights either in SCO v. Novell. And the most the Novell-Santa Cruz agreement called for under Amendment 2 was the copyrights deemed "required for SCO to exercise its rights with respect to the acquisition of UNIX and UnixWare technologies," as opposed to all, and that's if you accept SCO's claim that they shoulda woulda coulda already got those copyrights. There's a difference between acquiring technologies and acquiring someone's business. And if everything transferred, why is SCO paying proceeds to Novell and getting a 5% administrative fee? So it is a puzzlement to me how Mr. Broderick can make the statement that he did.
SCO, and Broderick, are also claiming that although some of the contracts in the transfers were specifically called asset transfer agreements, in reality they were more than that. They are defining a UNIX business as being what transferred. Of course, they need to, or they are sunk. It's not an argument that has zero merit, however, from where I sit, particularly if the facts were better than they are, and I'm looking forward to seeing what IBM says in response. I doubt it matters, from a practical standpoint, since IBM has subpoenaed Arthur Andersen and other accountants involved over the years for all the documents regarding all of the transfers.
The problem SCO has, as I see it, is that the facts don't match what they wrote. For just one example, in the Novell-Santa Cruz deal, the Asset Purchase Agreement specifically lists "Excluded Assets", and it requires Novell to pay an administrative fee to SCO (who has to pay 100% to Novell first) for collecting SVRX royalties:
(b) Royalties. Buyer agrees to collect and pass through to Seller one
hundred percent (100%) of the SVRX Royalties as defined and described in
Section 4.16 hereof. Seller agrees to pay Buyer an administrative fee of
five percent (5%) of the SVRX Royalties. Seller and Buyer further
acknowledge and agree that Seller is retaining all rights to the SVRX
Royalties notwithstanding the transfer of the SVRX Licenses to Buyer
pursuant hereto, and that Buyer only has legal title and not an
equitable interest in such royalties within the meaning of Section
541(d) of the Bankruptcy Code. For purposes of administering the
collection of SVRX Royalties, the Parties acknowledge that the royalties
shall continue to be recognized as royalties by Seller on an ongoing
basis and the parties shall take such commercially reasonable steps as
may be necessary to effectuate the foregoing for financial accounting
and tax purposes. In addition, Buyer agrees to make payment to Seller of
additional royalties retained by Seller in respect of the transfer of
UnixWare and on account of Buyer's future sale of UnixWare products. The
amounts and timing of additional royalties to be paid in connection with
Buyer's sale of the UnixWare products are identified in detail on
Schedule 1.2(b) hereto. Seller shall be entitled to conduct periodic
audits of Buyer concerning all royalties and payments due to Seller
hereunder or under the SVRX Licenses, provided that Seller shall conduct
such audits after reasonable notice to Buyer and during normal business
hours and shall not be entitle to more than two (2) such audits per
year. The cost of any such audit shall be borne by Seller, unless such
audit reveals a payment shortfall in excess of 5% of amounts due
hereunder in which case the cost of such audit shall be borne by Buyer.
That was something new, a new twist to the "UNIX business" and Broderick's statement that the business changed not one bit from owner to owner doesn't seem to me to match the wording here. Had SCO claimed less, I think their argument would have been stronger, actually. That agreement also gave Novell a Right of First Refusal on Change of Control, so that if Santa Cruz wanted to sell to certain companies, it had to give Novell a chance to buy first, and it defines what Change of Control means for purposes of the agreement:
(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.
That definition is certainly not helpful to SCO, who would like the court to define things differently. And there were other restrictions on Santa Cruz, like this, for example:
(b) Buyer shall not, and shall not have the authority to, amend, modify
or waive any right under or assign any SVRX License without the prior
written consent of Seller. In addition, at Seller's sole discretion and
direction, Buyer shall amend, supplement, modify or waive any rights
under, or shall assign any rights to, any SVRX License to the extent so
directed in any manner or respect by Seller. In the event that Buyer
shall fail to take any such action concerning the SVRX Licenses as
required herein, Seller shall be authorized, and hereby is granted, the
rights to take any action on Buyer's own behalf. Buyer shall not, and
shall have no right to, enter into future licenses or amendments of the
SVRX Licenses, except as may be incidentally involved through its rights
to sell and license the Assets or the Merged Product (as such term is
defined in the proposed Operating Agreement, attached hereto as Exhibit
5.1(c)) or future versions thereof of the Merged Product.
Further, the preamble of the agreement states that only certain assets, not all, were being transferred:
B. The Boards of Directors of each of Seller and Buyer believe it is in
the best interests of each company and their respective stockholders
that Buyer acquire certain of the assets of, and assume certain of the
liabilities of Seller comprising the Business (the "Acquisition").
If Novell retained certain rights, and the contract itself says only certain assets were to transfer, on what basis can SCO argue, and Mr. Broderick state, that the entire UNIX business transferred? All in all, I think SCO's position would have been more solid if they had not attached the Broderick statement. That may remind you of Mr. Broderick's affidavit, and his supplemental affidavit in the SCO v. DaimlerChrysler affair, where SCO got stomped, despite SCO employee Broderick's efforts to help his employer.