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Report from the Hearing on SCO v. Novell - Updated
Monday, July 17 2006 @ 02:26 PM EDT

Chris Brown is just back from the court hearing and here are his notes from the session. The brief version is that the parties settled the issue about which unfair competition law in the vast universe Novell is alleged to have violated, and SCO has now indicated it is in fact Utah's law. So that Novell motion to make them tell is settled. That's Novell's Motion for a More Definite Statement of SCO's Unfair Competition Cause of Action.

As for the other motion, regarding staying issues until after arbitration, Novell's Motion to Stay Claims Raising Issues Subject to Arbitration, Judge Kimball heard the arguments and took it under advisement. It sounds like both sides said verbally pretty much what they'd said in the court filings. Here's what SCO said in opposing that motion. Update: We have a second report, which I've placed at the end.]

They seem to have concentrated particularly on Cummings v. FedEx, so I found it for you. It indicates to me that SCO is arguing that the contracts don't say all claims have to be arbitrated. Here's a snip from the Cummings decision, so you'll see what I mean:

It is true that "[t]he Supreme Court has long recognized and enforced a liberal federal policy favoring arbitration agreements," and that "[u]nder this policy, the doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration." Nat'l Am. Ins. Co., 362 F.3d at 1290 (quotations omitted). However, "arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." AT & T Techs., Inc. v. Communications Workers of Am., 475 U.S. 643, 648 (1986) (quotation omitted). When an arbitration clause is narrowly drawn, the policy in favor of arbitration does not have the "strong effect here that it would have if we were construing a broad arbitration clause." McDonnell Douglas Finance, 858 F.2d at 832.

Here, as the district court ruled, we are presented with a narrowly drawn arbitration clause. It is not the type of broad provision that "refer[s] all disputes arising out of a contract to arbitration." Id. Rather, the parties clearly manifested an intent to narrowly limit arbitration to specific disputes regarding the termination of the Operating Agreement. In construing the scope of a narrow arbitration clause, we must take care to carry out the specific and limited intent of parties. Id.

Under a narrow arbitration clause, a dispute is subject to arbitration only if it relates to an issue that is on its face within the purview of the clause, and collateral matters will generally be beyond its purview. Louis Dreyfus Negoce, 252 F.3d at 224; Twin City Monorail, Inc. v. Robbins & Myers, Inc., 728 F.2d 1069, 1073 (8th Cir. 1984). The arbitration clause in this case manifests an obvious intent to be narrowly construed. Cf. Nat'l Am. Ins. Co. v. SCOR Reinsurance Co., 362 F.3d at 1291 (determining that parties manifested an intent to limit the scope of arbitration). Thus, a dispute that is merely collateral to the Operating Agreement is beyond the purview of this narrow arbitration clause. ...

The arbitration clause in the Operating Agreement states that, should a dispute be submitted to arbitration, the arbitrator shall only have authority to determine whether the termination was within the terms of the Operating Agreement. Aplt. App. at 198, 264, 328. FedEx has successfully argued that the identical arbitration clause is so narrow as to preclude an arbitrator from ruling that FedEx denied a contractor due process in terminating his agreement. Roadway Package Sys., Inc. v. Kayser, 257 F.3d 287, 289, 300-01 (3d Cir. 2001).(

We can't read the contracts, but now we get a strong hint from the case SCO cited that SCO is wanting to salvage as much as it can from arbitration, and so it is saying the contracts are not broad arbitration clauses. They could be right. Without reading the contract, I have no way to know. Chris says that the case law discussion was, to him, boring, but trust me when I say that if you read the cases first and then listen to the discussion of them, it can be fascinatingly revealing.

An interesting twist is that SCO was represented by Stuart Singer. Michael Jacobs spoke for Novell. Also, we learn the arbitration is getting under way, with two arbitrators on the panel, and they are about to choose a third. It is to take place in Switzerland, under Swiss law.

Finally, I asked Chris if he thought Judge Kimball had been persuaded by SCO's arguments, and he said, no, that he thought the court will stay most if not all pending the arbitration. Here are Chris's notes:

**********************************

I attended today's hearing in the SCO v. Novell case. Expected to be heard today were arguments on Novell's Motion for More Definite Statement relating to SCO's unfair competition claim and Novell's Motion to Stay litigation in federal court pending arbitration of arbitratable claims by a Swiss panel.

I was so looking forward to the first motion's arguments, but alas, parties had settled it before the hearing. Novell's Mr. Jacobs said that SCO will be amending its pleading to specify that the unfair competition claim is under Utah law. He further said that in light of this Novell's motion is moot. No further details were presented thus we can assume SCO is saying that Novell was unfairly competing by way of terrorism under "Yarro's Law". Just kidding, I expect we'll learn more when we see the amended pleading.

Mr. Jacobs [attorney for Novell] told me before the meeting that there "won't be any fireworks" today, and he was right. The remainder of the hearing was on whether to stay litigation in this court pending the outcome of arbitration.

Argument on this mostly involved some pretty boring, at least for me, discussion of various case law that I found difficult to follow. In any case Mr. Jacobs first gave an overview of how arbitration came about and its status. He says that ICC has set the arbitration in motion and that the two arbitrators will appoint a third arbitrator. The arbitration will be under Swiss law and it is "getting under way."

Mr. Jacobs said that 9 USC Section 3 is clear that arbitratable claims should, indeed must, be handled by arbitration. However, those claims that are not arbitratable, and in reading of 9 USC Section 4, are at the discretion of the court to stay or proceed. Mr. Jacobs said they need Judge Kimball to tease out issues separated by Sections 3 and 4.

Mr. Singer argued for SCO, and as it was his first time before Judge Kimball in these matters thanked the court for hearing him. Mr. Singer discussed the 10th Circuit case of Cummings vs. FedEx and how it distinguished between narrow and broad arbitration clauses. He read the arbitration clauses from Master Transaction Agreement 9.2 and the Joint Development Contracts between Caldera and SuSe. The MTA language reads: matters "arising from" these agreements, and the JDC reads differences or ... "arising from" and he noted that neither read "related to." Therefore this was a narrow arbitration clause.

Judge Kimball asked Mr. Singer to define the boundaries between "arising from" and "relating to" to which he replied that he believes "relating to" indicates a broader scope. He said SCO's complaints arise from the Santa Cruz-Novell APA from 7 years earlier than the JDC. Further he said that the slander of title and breach of the APA arise under the APA. And even Novell doesn't claim their request for specific performance is arbitratable. Unfair competition, he said, the effect on their business of Novell's public claims, is not arbitratable. That Novell is curiously silent on what effect arbitration will have on their counterclaims.

Humorously, Judge Kimball opined that maybe they want to stay SCO's case and proceed on their counterclaims. Mr. Singer replied that perhaps they do. Though Judge Kimball indicated he assumes Novell's intentions are to stay everything.

Mr. Singer continued with what six conditions the 10th Circuit had indicated constitute a waiver to arbitration, 1) Acting inconsistent without right to arbitrate, 2) Litigation machinery substantially invoked, 3) Delay, 4) Filed counterclaims without seeking a stay, 5) Substantial discovery, and 6) Prejudice to SCO. Mr. Singer argued that each of these conditions applied, including that Novell waited 2 years before requesting arbitration and that there was substantial discovery conducted (indeed that Novell continues to notice discovery after requesting arbitration).

Mr. Jacobs responded with Judge Kimball first asking him what he thinks regarding what Mr. Singer said about the Cummings case. To which he replied that he doesn't a lot and that it applies to Section 4. [PJ: I asked Chris to clarify what this meant, that he doesn't a lot think of it and here's what he told me: "It was intended that he hadn't given much thought to it, in fact, Novell's demeanor, and arguments in requesting the stay were more that it was Novell's opinion that they should be stayed, but that it was all up to the judge. He wasn't really insistent that it must be stayed, but that it seemed the proper thing to do in this situation and asked for Judge Kimball's assistance in sorting it out. Judge Kimball asked if Novell believed this was an "order of decision" question, to which Mr. Jacobs said that he believed that is what USC Section 3 and 4 amount to, decide the Section 3 claims, *then* decide the section 4 claims.]

Judge Kimball asked him if this is a narrow or broad arbitration clause. Mr. Jacobs responded "That's tricky here" because you'd have to go to Swiss law. That ICC rules are that the panel determines the scope of arbitration. He said that Novell's contention is that if Novell is incorrect, that the claims are not overlapping, that Judge Kimball will know about it very quickly as SCO will let him know, and that then "we're off and running."

Mr. Jacobs said that Novell is not claiming that, on the claims at issue, they compel arbitration, that they believe it's under the court's discretion.

Judge Kimball took it under advisement and court was adjourned.

*****************************

We have a second report now from another eyewitness, Justin Findlay:

The following text will be savory only if well salted, as it is my own representation of the proceedings not an accurate reproduction of the arguments presented. Nevertheless, it is as truthful as I am capable of remembering what was spoken.

Michael Jacobs representing Novell argued first before Judge Kimball. He seemed to argue that since some of the issues contained in SCO's claims are being arbitrated by three neutral arbitrators in Switzerland, therefore the issues are within the jurisdiction of Swiss law, and that both sides agree many of the issues from the arbitration proceedings in Switzerland and the case before Judge Kimball overlap it is prudent to stay the majority if not all of the case.

If SCO owns Unix and has contracted to arbitration in the case of dispute over its United Linux activities, then SCO agreed to arbitration in its intellectual property contracts with Suse. SCO's slander of title to claims to Unix are different from their copyright claims. (Both lawyers cited several cases and tests they found applicable and supportive to their arguments.) Jacobs then says that perhaps sections 3 and 4 ought not to be ambiguously conflated and seems to yield his argumentative prerogative at this point to Judge Kimball.

Both sides agree the arbitration will have an impact on the case. Novell is entitled to stay.

Mr. Singer then argued for SCO that no stay should be authorized or approved. SCO disagrees that the issues framed by this suit can be stayed. He then cites the adoptions of precedent by the 10th circuit and also the 2nd while going on to reason somewhat from Cummings v FedEx from the 10th circuit which must have inspired a three rule test because I have three numbered line items. 1. Whether the claims are narrow or broad, Kimball interjects here with some statement about this being the (an?) arbitration clause, 2. the issue is arbitrable only if on its face it is within the purview of the clause, and 3. relates to something collateral.

Singer then cited another case: 42 f [something unintelligible] 1292, and then talks about two clauses presumably from the case cited: a master transaction agreement and a joint development contract whose language is nearly identical, the effect thereof being that any dispute is to be settled by amicable effort before arbitration.

Kimball then asks about how to define (differentiate between) two kinds of disputes.

Singer responds that "collateral" is different than "arising from". SCO's dispute arises from Santa Cruz's asset purchase agreement of the rights to Unix, SCO being the successor in interest. Some of the issues in the case are not arbitrable and therefore shouldn't be stayed. Novell's public declarations constitute slander of title. This case has gone on for two years. Singer seems to want to emphasize the belabored progress of the case so far and a desire for expediency. Novell has instead of addressing SCO's original claims brought seven of its own claims.

Kimball (in mild mirth, it seems) responds that perhaps they want to stay SCO's claims in order to pursue their own.

Singer goes on to say that Novell has invoked significant judicial machinery by bringing counterclaims. They have brought claims as late as 2005. Another case from the 10th circuit: 396 f [unintelligible] 1482(?) with a six rule test: 1. actions inconsistent (sorry, no elucidation from my memory as to what this means), 2. if the litigation actuates substantial judicial machinery. Novell has instigated counterclaims, discovery, jury trial, etc. 3. delay, 4. counterclaims filed, 5. substantial discovery, and 6. I don't remember what 6. was. If the Suse claims are arbitrable and if SCO loses them and if this results in collateral estoppel, then that does not resolve all of the issues in the case.

Mr. Jacobs then got up to argue for Novell. He seemed to argue that Novell's motion to stay should be permissible if section 4 doesn't apply. He then speaks some more about international case law and then cites another case again from the 10th circuit: 15 f [unintelligible] 1511 Mitsubishi v [insert your worthy Mitsubishi opponent here]. Analysis is fruitful when looking at the facts rather than the pleadings.

Kimball: Is this case narrow or broad?

Jacobs: We have to consider Swiss law. The court is not to determine ICC rules. The arbitration panel determines its own jurisdiction. If anything arising from the arbitration is not subject to arbitration SCO will surely let the court know. Kimball has discretionary control over his own docket. Again, he reasons some more about the differences between section 3 and 4.

Kimball: Discretionary.

Jacobs: Right. SCO haven't met on copyright claims or derivatives of copyright claims. Issues lurking in SCO's claims are conclusive through arbitration.

Kimball: Order of decision.

Jacobs: Section 3 prescribes order.

Kimball: Thank you, will take this motion under advisement.


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