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Hearing Transcript, SCO v Novell, July 17, 2006
Tuesday, November 07 2006 @ 08:39 AM EST

Here is the hearing transcript [PDF] from July 17, 2006 in SCO v. Novell. Our thanks to Chris Brown for obtaining it from the court for us and to feldegast for helping with the text.

This was the hearing on the Novell Motion to Stay Claims Raising Issues Subject to Arbitration. (SCO's opposition arguments.)

And here is Judge Kimball's decision, in which the judge ordered that all claims that relate to SUSE are stayed but that claims related to the agreements between SCO and Novell were to proceed, which is something I believe SCO now very much regrets, despite having fought for it at this hearing, after Novell subsequently amended its counterclaims and then filed a motion for partial summary judgment or preliminary injunction, the "we want our money and we want it now" motion, which SCO then begged the court to stay until after the IBM case was decided, or at least give them more time to respond, but without success on the first, winning only a small extension.

This is, to me, one of the most interesting of all the hearings, but you may not think so. I found it fascinating, because you can measure an attorney's skill -- and both these attorneys are really, really good at what they do -- by what he does when he knows he is only partly right. Both sides entered the courtroom kind of knowing they had some strengths and some definite weaknesses.

And you can see that Judge Kimball realized that also by the joke he made about Novell wanting to have only its own counterclaims go forward. What complicated the picture was that the arbitration is under Swiss law, and it is SUSE doing it. And as Novell's lawyer, Michael Jacobs, points out, there was no clear line where everyone can just look up in a book and know exactly how this motion should be handled. What kind of case was it, even? So both sides looked at cases and tried to find some that at least to some degree supported their side. You can see that both had prepared well.

That is part of what Eben Moglen meant when he said that there is a squishiness to the law. What do you do when your fact pattern is unique? What are the rules of the road? Here, Novell suggested that if all else was unclear, what was clear was that Judge Kimball had discretion to decide that it made sense to figure out what should be decided first. And that is in the end exactly what he did, because that does make sense, and so that argument resonated.

SCO's attorney, Stuart Singer, argued very well, but as always, is limited by his material, what he has to work with. I would love to see him in action when he has more substance on his side. He had to argue as best he could what he had to know couldn't happen and wouldn't happen, so that is why you see him arguing things like, well, even if you do decide we are wrong on X and you do decide to look to the issue of Y, then we still say Z. That's what you have to do, to try to limit how broadly you are going to lose. SCO, because it didn't make the whiney, over-the-top arguments we've sometimes seen, did the best it could expect to do in the situation, which was to get some of the case going forward. As Singer correctly pointed out, the slander of title claim didn't arise from the UnitedLinux agreement, so in fairness, it ought to be able to continue.

Novell's argument was subtle. It didn't argue that the claims themselves were arbitrable and hence should be sent to Switzerland to be decided there, only that there were issues that needed to be decided first in arbitration because they could impact on the claims, which would then return to Utah for decision. It's a fine point SCO didn't see prior to the hearing, I don't think, so it raised arguments that weren't on point on that issue. At least I didn't see that distinction prior to the hearing, but if you look at the title of the motion, you can see that Novell knew what it was doing. I did wonder why they chose that title, but it wasn't until this hearing transcript that I understand it. But Judge Kimball naturally would want matters decided in the proper, logical order, and so that is why the Swiss arbitration continued on the SUSE matters, as he outlines in his Order:

Because it is possible that the arbitrator's ruling could have little effect on the nonarbitrable claims in this case, the court concludes that only the portions of the claims relating to SuSE should be stayed in this court pending SuSE's arbitration. The claims asserted in relation to the APA and TLA should go forward. The claims are distinct enough that it would not be too great of a burden on the parties to proceed with the litigation and arbitration at the same time. The case has been on this court's docket for over two years. The case should proceed so that it is ready for trial regardless of the arbitrator's ruling on the claims relating to SuSE. If the arbitration concludes before the parties are ready for trial in this matter, then the court will address the preclusive effect of the arbitrator's ruling on the claims in this case. If this case is ready for trial before the arbitration concludes, the court will revisit the issue of whether to stay the trial on the APA and TLA claims pending the conclusion of the arbitration.

So, in the end, each side made its arguments, but I suspect each knew going in that the result would be a decision that would read pretty much the way it does.

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

APRIL 21, 2005 - Hearing Transcript
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF UTAH CENTRAL DIVISION

THE SCO GROUP, INC.,

Plaintiff,

vs.

NOVELL, INC.

Defendant.

Civil No. 2:04-CV-139

BEFORE THE HONORABLE DALE A. KIMBALL

JULY 17, 2006

REPORTER'S TRANSCRIPT OF PROCEEDINGS

MOTION HEARING

Reporter: REBECCA JANKE, CSR, RMR

1

A P P E A R A N C E S

FOR THE PLAINTIFFS: HATCH, JAMES & DODGE, PC
BY: BRENT O. HATCH, ESQ.
[Address]

BOIES, SCHILLER & FLEXNER, LLP
BY: WILLIAM T. DZURILLA, ESQ.
STUART H. SINGER, ESQ.
[Address]

FOR THE DEFENDANT: ANDERSON & KARRENBERG
BY: THOMAS R. KARRENBERG, ESQ.
[Address]

MORRISON & FOERSTER

[Address]

2

JULY 17, 2006 SALT LAKE CITY, UTAH

P R O C E E D I N G S
* * *

THE COURT: We're here this morning in the
matter of SCO Group vs. Novell, Inc., 2:04-CV-139. For
plaintiff, Mr. Brent Hatch. There you are. Mr. Brent
Hatch. Mr. William Dzurilla -- did I say that right --
and Mr. Stuart Singer.

MR. SINGER: Good morning, Your Honor.

THE COURT: For defendant, Mr. Thomas
Karrenberg and Mr. Mike Jacobs, correct?

MR. KARRENBERG: Good morning, Your Honor.

THE COURT: Let's see. These are your motions.
Who's going to argue?

MR. KARRENBERG: Mr. Jacobs will, Your Honor.

THE COURT: Who is going to argue for you
folks?

MR. SINGER: I will, Your Honor.

THE COURT: Mr. Singer?

MR. SINGER: Yes.

THE COURT: Go ahead, Mr. Jacobs.

MR. JACOBS: Your Honor, I've been informed by
Mr. Singer that SCO will be amending its pleading and
will be specifying that the unfair competition claim
arises out of Utah law, so I think that the motion for a

3

more definite statement should be susceptible of
resolution without need for an opinion. Mr. Singer
can --

THE COURT: All right. Is that right,
Mr. Singer?

MR. SINGER: That's correct.

THE COURT: So, we assume for now that the
motion for more definite statement is moot. All right.

So argue the arbitration motion.

MR. JACOBS: First let me update Your Honor on
the status of the arbitration. Both sides have appointed
arbitrators. There is a procedural step in the ICC
arbitrations where the ICC decides to set the arbitration
in motion, and that has occurred. The party-appointed
arbitrators are now conferring about the appointment of
a -- of a third arbitrator. All three arbitrators will
then be neutral and the arbitration will be underway.
Some of the issues that SCO is raising here
will be raised in the arbitration based on the pleadings
they have filed. The arbitration, of course, takes place
under Swiss law, and the arbitration clause in the
relevant agreements is governed by Swiss law. So, in
terms of what this Court should be doing in view of the
fact that an arbitration is underway, I think it's
important to note that the arbitration is, indeed, as we

4

represented, getting underway.
Could the arbitration conceivably result in a
threshold determination that might cause this Court to
revisit a grant of a stay? I suppose that's right, and
so one of the things we would be contemplating is -- one
side or the other would -- if the stay were granted as
we've requested, if there were an outcome in the
arbitration that led the stay to be no longer relevant,
one side or the other would come to the Court and advise
the Court, but I think our basic argument to you, Your
Honor, is that with that arbitration underway and with
the parties broadly in agreement that there is overlap
between many of the issues between SCO and Novell --

THE COURT: Not all.

MR. JACOBS: Not all. That's correct. And let
me distinguish -- let me go to that, Your Honor, because
I think it is appropriate to distinguish the claims that
are the subject of the motion to stay, put them into two
baskets. Basket one are the claims that SCO newly added
in its Amended Complaint at the turn of the year. And
those are the claims that specifically cited SUSE and
SUSE LINUX as infringing and were the claims that gave
rise to the united Linux arbitration. So I would put
those claims into basket one. I don't think there could
be any credible argument whatsoever of delay or waiver --

5

or, actually, as it arises under Section 3, I realize
after rereading the statute, the term is "default" under
Section 3.

But as to those claims, those are all new in
this litigation, and there is really -- I don't think
there is any colorable argument that Novell has in some
way or SUSE has in some way acted so as to defeat
Novell's motion under Section 3 of the FAA.
Then there is the motion -- the part of the
motion that addresses the overlap between the slander of
title claim SCO has brought and the ownership in Linux
issue that is in the arbitration. Just to make clear
exactly what that argument is, in the arbitration, SUSE
will be -- is contending that by operation of the United
Linux agreements, if SCO owned UNIX and if there was UNIX
code in Linux that SCO otherwise would have had a claim
to, it gave up that claim, if you will, by operation of
those agreements.

So it's a pretty heavily conditional argument
even in the arbitration. It would, nonetheless, have a
substantial impact on the slander of title claim were
SUSE to prevail on that contention because what SCO would
then -- SCO's argument here on slander of title is that
Novell has slandered its title to UNIX, especially
insofar as SCO has asserted that there is UNIX in Linux.

6

And the arbitration would address that.

There is, of course, the different chronology.
That claim was filed. We have had a fair amount of
motion practice under it, and so one could differentiate
the slander of title claim from the copyright claims and
the claims that are derivative of the copyright claims
that SCO has brought here. And I emphasize that, as to
those copyright claims, SCO has specifically cited SUSE
and SUSE Linux. Its Exhibit B to the Complaint says,
"This function is implemented in SUSE Linux. This
function as implemented in SUSE Linux."
I mention that because after rereading the
Section 3 cases in preparation for the argument, I
actually don't think that our fact pattern is very well
explicated or revealed in the case law in Section 3.
What this case presents is the case where -- let's just
use the parties here. SCO has an intellectual property
agreement with SUSE. SUSE is a licensor of Novell, and
Novell distributes the code that SUSE licenses to Novell.

SCO then sues Novell based on the code that Novell
distributes from SUSE. And there's an agreement between
SUSE and SCO, that intellectual property agreement, and
that intellectual property agreement has an arbitration
clause.

The meaning of that agreement, the impact of

7

that agreement, therefore, should, I think -- maybe I
should say must be arbitrated, and it would not be
appropriate, given the deference to arbitration,
particularly in the international context, for the Court
to have to construe that agreement when Novell would
interpose that agreement and its impact on SCO. And so,
having -- SCO having made this choice, at the highest
level, the choice SCO has made is to change business
direction.

During the period of United Linux, it was a
pro-Linux company. It was an advocate of Linux. It was
a supporter of Linux. And, hence, it signed the United
Linux agreement and it signed up to an arbitration clause
with SUSE.

That's the next level of the decision-making it
made. It agreed to arbitrate with SUSE its disputes
arising out of the United Linux agreements. What we're
really doing in Section 3 -- in our Section 3 motion here
is saying -- is saying to the Court: Defer to that
arbitration. Let that arbitration proceed so that the
arbitrators can confirm that we're correct, we hope, as
to the meaning of that agreement and its impact on SCO's
copyright claims.

The other aspect of this, the more formal
aspect of this motion, that very few of the cases treat,

8

is the fact that the arbitration is underway, and there
is no -- usually the cases come up where there is a
Section 3 and a Section 4 motion, and one reads the
decisions, and it appears the Courts conflate the Section
3 analysis with the section 4 analysis. our case before
you requires teasing out a little bit the distinction
between Section 3 and Section 4, and, hence, the focus in
our brief on the "issues" language of Section 3.

And at the end of the day, after we have
parsed -- I think perhaps the most useful part of our
reply brief is that section where we parsed the two
sides' competing views of what impact the arbitration
would have on the claims here. And while there is
disagreement, I would say, at the margins about how
significant the arbitration would be for the claims SCO
has brought here, the copyright basket of claims in
particular, there is agreement that it will have an
impact. And, hence, we think that agreement confirms
that relying on the "issues" language of Section 3,
Novell is entitled to a stay.

THE COURT: Thank you, Mr. Jacobs.
Mr. Singer.

MR. SINGER: Thank you, Your Honor. Your
Honor, this is the first time I've had the opportunity to
appear before this Court, before Your Honor,

9

specifically, in these cases, and I appreciate that
opportunity.

On this motion to stay, I'd like to start with
what is the second argument in our brief, what we believe
is the logical starting point here, which is that no stay
under 9 USC Section 3 is authorized or appropriate here
because the issues and claims in the lawsuit we have
brought against Novell are not shown to be arbitrable.
Now, the language of Section 3 says that the
Federal Arbitration Act requires a stay if a suit is,
quote, brought in any of the Courts of the United States,
quote, upon any issue referable to arbitration. So we
disagree with Novell on the idea that somehow the Court
can impose a stay, under Section 3, without considering
the issue of whether or not the claims in this suit, the
issues in this suit as framed by those claims are
arbitrable. We think the Court has to do that, and the
cases support that, and that because they have brought a
motion to stay in this Court, it is this Court, and not
the Swiss arbitration, that decides whether the claims
brought here in this action are in fact arbitrable. And
you cannot separate that and put it aside from the issue
of whether a stay should be granted.

Now the focus under the case law on whether or
not claims are arbitrable are on the plaintiff's case.

10

The statute itself we think addresses that. 9 USC
Section 3 talks about a suit brought upon an issue
referable to arbitration. And the Tenth Circuit, we
think, indicates that it's the issue of whether claims
are referable to arbitration. It's to be determined by a
three-part test that really the Court adopted from the
Second Circuit. And I'm referring to the Tenth Circuit
case of Cummings vs. Federal Express, which is found at
404 F3d 1250, a 2005 case.
And the Court expressly said that to determine
whether a particular dispute falls within the cope of an
agreement of arbitration clause, the first part of that
test is to examine whether it is a narrow clause or a
broad clause. And then, if it's a narrow clause --

THE COURT: The arbitration clause.

MR. SINGER: The arbitration clause, exactly,
Your Honor. If the arbitration clause is narrow, then it
has to be -- it says the dispute should be determined as
to whether its over an issue that is, on its face, within
the purview of the clause and that, generally -- and this
seems to be the third part of the test -- that the
collateral matters will in that case be beyond the
purview of arbitration.

Now, the Cummings case also has two other
holdings we think are very important. First of all, they

11

said that while generally there is a presumption in favor
of arbitration, a policy in favor of arbitration, that
isn't the same if you have a narrow arbitration clause.
The Court noted that arbitration is a matter of contract,
and a party cannot be required to submit to arbitration
in any dispute which he has not agreed so to submit, and
when an arbitration clause is narrowly drawn, the policy
in favor of arbitration does not have the strong effect
here it would have if we were construing a broad
arbitration clause.

The second point I would make about Cummings is
that it seems to indicate that it is not enough that
there is a defense that the defendant would seek to raise
which may involve interpretation of an agreement that is
subject to arbitration. In the Cummings case itself --
it was a Federal Express contractor who said there were
various oral representations. You had a narrow
arbitration agreement that dealt with the written
document. The Court said these were not within -- the
oral representation claims were not within the scope of
the arbitration clause.

And then they dealt with Federal Express'
argument saying that, well, but, there is a merger
clause, and that merger clause would give us a defense of
a written agreement that would prevent you having a valid

12

oral representation claim. And the Court, at page 1263,
said that this argument is only relevant to the question
of whether Fed Ex has defenses, not to the question of
whether the claims are subject to arbitration.
And we think that is consistent with how other
Courts have looked at the issue of arbitrability. For
example, cited in our brief is the Tracer Research Corp.
case in the Ninth Circuit, 42 F3d 1292, where you had a
misappropriation-of-trade-secrets claim that the Court
found did not arise from a licensing agreement that had
an arbitration claim, even though there was some
relationship between the two.

So we think it's important, then, to turn to
the arbitration clause in this case and whether it is
narrow or broad. And we have briefed this issue, and
there doesn't seem to be a defense of the breadth of the
clause in the reply, so I'm not going to spend a lot of
time here, but I do want to note the language of those
clauses. There are two. One is in the master
transaction agreement, and the other is in what's called
the joint development contact. Both of these were
entered into between SCO and SUSE back in 2002.
And the language is almost identical. In the
master transaction agreement, Section 9.2 -- and these
are in the exhibits before the Court -- it says that any

13

differences or disputes arising from this MTA, this
master transaction agreement, or from contracts regarding
its performance shall be -- and it says settled by an
amicable effort, and if the parties couldn't settle it,
then it goes to arbitration. In Section 12.2 of the
joint development contract, it provides that any
differences or disputes arising from this JDC or from
contracts regarding its performance shall be settled by
amicable efforts and, if necessary, arbitration.

There is no relating-to language. There is
nothing which is, in broad form, saying any disputes
arising from or relating to these agreements are subject
to arbitration. It is simply disputes basically over the
interpretation arising from this development agreement
where it is a contract that implements it.

THE COURT: How would you define the boundaries
between arising from and relating to?

MR. SINGER: That's a question I think
certainly the Courts have struggled with, but I think
that the Courts have said relating to is broader, that
arising from, meaning that it's the source of the claim,
that the claim arises from, say, a contract. If you have
a dispute over whether an interpretation of an agreement
is right, that that dispute arises from it; whereas, a
collateral dispute, like whether or not it might create a

14

defense, might relate to those agreements, but the
dispute does not arise from those agreements.

This is, therefore, a narrow clause, not a
broad clause. And I would submit, Your Honor, that an
analysis of the claims in our Second Amended Complaint
show that they do not arise from this joint development
agreement that SCO entered into with SUSE in 2002, but
rather they arise from the asset purchase agreement
entered into seven years later -- or excuse me -- seven
years earlier, in 1995, between SCO and Novell.

And one item of support for that -- not only do
our own pleadings say that, but, interestingly, if one
were to turn to the other motion that was before the
Court today, the motion by Novell for a more definite
statement, on page 1 how they characterize this case,
they say the following quote: "As the Court is aware,
this case arises from an asset purchase agreement entered
into on September 19, 1995, between Novell and the Santa
Cruise operation," our predecessor in interest, under
which we allegedly acquired all rights under the APA
through a subsequent acquisition of Santa Cruise's
assets.

And we think that's right. The first cause of
action we have is a slander of title action that has been
pending from the beginning of this case. And it's the

15

issue of whether we are the owner by virtue of that asset
purchase agreement to all UNIX and UnixWare copyrights
and whether Novell has slandered our title by -- in
various forms, not all related to SUSE Linux activities,
but simply going public and saying, no, we don't have
those copyrights and other activities spelled out in the
Complaint. That does not arise within the scope of the
SUSE Linux agreement and, therefore, is not arbitrable.

Similarly, the argument for breach of that
agreement, the non-compete provision, which says that
Novell should not compete by using the technology which
is being licensed under that agreement -- that is Section
1.6 of the asset purchase agreement -- that issue arises
from that agreement. It is a question of whether that
contract has been broken. Now maybe there is a defense
that Novell wants to argue that under some later
agreement that has been changed. And they can raise that
on the merits in this Court, but it doesn't mean that our
claim for breach of the APA suddenly becomes arbitrable.

There is no arbitration provision in the APA.
The parties had an opportunity to agree on how they would
resolve disputes arising under that agreement, and they
didn't put an arbitration agreement in there. Even
Novell agrees, I believe, that the third claim, one for
specific performance as an alternative, if these

16

contracts had not conveyed this intellectual property, in
the sense that all the documents were signed, that the
transfers effectuated, we are entitled to specific
performance of that. Even Novell is not claiming that is
arbitrable.

The fourth claim is the one that they focus on,
which is added in our Second Amended Complaint, and that
is a claim for copyright infringement. But, again, we
made our case for copyright infringement by virtue of
Novell's distribution and use of technology infringes our
copyrights. Whether they have a defense related to the
fact -- which we dispute, of course, on the merits --
that SUSE Linux and the United Linux Consortium gained
rights to certain intellectual property that Novell can
now use, that may be a defense, but it does not make the
copyright infringement claim arbitrable.

And the unfair competition claim goes back to a
variety of issues, including the effect on our business
by Novell publicly saying that we do not own the
copyrights which we believe we acquired back in 1995
under the asset purchase agreement.
So, a stay under Section 3 requires arbitrable
claims, and it's interesting, Novell has not sought to
compel arbitration of these claims. If they really
believed these were arbitrable claims, they should have

17

filed a motion to compel action. Instead, they haven't.
And, instead, they have brought their own Counterclaims,
seven Counterclaims, which they are curiously silent
about what is to happen with those. But those also have
invoked the Court's judicial authority.
Now, the second issue --

THE COURT: Maybe they want me to stay your
case and let them proceed on the Counterclaim.

MR. SINGER: Well, I can understand why if that
was what they intended, they hesitate to articulate that.
We think that -- we assume, at least, that when they are
calling for a stay, they are not suggesting that it be a
one-sided stay.

THE COURT: I assume that's so.

MR. SINGER: But we think that bringing of
those Counterclaims is still significant because it is,
to use the language of the Courts when they are talking
about waiver, the next issue I wanted to address, it is a
clear invocation of the judicial machinery to bring
Counterclaims. And they brought Counterclaims in 2005,
with respect to the first Amended Complaint, to which
they did not make any motion to stay back then and to
which they believe now that there were arbitrable claims
because they believe our slander of title claim, going
back to the very beginning of this suit was, according to

18

their papers, an arbitrable claim.
So, notwithstanding that, they didn't move to
compel arbitration on that claim. Instead, they went
ahead with the lawsuit here. We have had two rounds of
briefing and arguments and decisions on motions to
dismiss, one of which they sought to convert to a motion
for summary judgement. We have had litigation on a
motion to remand, and we have had Counterclaims brought
on six or seven different fronts, as recently as 2005.

And we think the right test the Court should
use to analyze the issue of waiver is Metts vs. Merrill
Lynch, a Tenth Circuit case, 396 -- excuse me -- at 39
F.3d 1482. And it sets forth six factors which we think
all point here in favor of finding a waiver so that even
if one of these claims, like the copyright claim, is
found to be arbitrable or the slander claim is found to
be arbitrable, which we don't think is true, you still
have to look under the language of Section 3 as to
whether or not there has been a waiver. And here the
six-factor test we think points toward a waiver.

The first is whether or not the actions are
inconsistent with the right to arbitrate. We think
litigating in Court for two years and bringing six
Counterclaims is inconsistent.

The second factor is whether the litigation

19

machinery has been substantially invoked. They have
invoked it through their motions to dismiss, requesting a
jury trial, filing of pleadings, discovery, all of that.

The third factor is the length of delay. And
we cite four cases at pages 13 of our brief which found
waiver on seven to ten months of delay, and here you have
over two years of delay after the first allegedly
arbitrable claim, the slander claim, was brought before
they have now brought this motion. They could have filed
their own motion to compell arbitration of that either
from SUSE Linux or through Novell if they believed they
were a third-party beneficiary of those agreements, but
they chose not to do so. They waited to see how they
would do on two substantive motions to dismiss, and now
they have taken this approach.

The fourth issue is the fact that they filed a
Counterclaim without seeking a stay. They did that in
July of 2005.

The fifth issue is whether or not there's been
substantial discovery. They have requested, and we have
produced virtually all of the documents we have relevant
to this. They have even asked us to agree to use those
in the arbitration. And even after filing this motion to
stay, they have subpoenaed third parties for discovery.
That is trying to have, we suggest, your cake and eat it,

20

too, to use the discovery tools in Federal Court while,
on the other hand, litigating this arbitration.

And the prejudice to SCO is there. We have
spent two years litigating these motions. We shouldn't
have to wait -- we're the plaintiff here -- to go back to
square one to see what's going to happen in a Swiss
proceeding.

Your Honor, I would like to briefly deal with
our third argument, which is that even if the Court finds
there is an arbitrable claim, and even if it finds that
that claim -- there has not been a waiver, should the
Court exercise its discretion to stay other parts of the
case? Clearly, if there is no arbitrable claim at all,
as we contend and we have argued, then you don't even
have to reach a decision. There is simply no stay.

If the Court were to find, let's say, one claim
or two claims were arbitrable, the issue of then staying
the case or allowing the case to proceed on the other
claims arises. We think this Court should follow Justice
White's concurring opinion in the Bird case which says
that there is a heavy presumption in these circumstances
against the stay. That concurring opinion has been
adopted expressly by two U.S. Court of Appeals, the
Second and Third Circuit, and a number of District Courts
which we cite on page 23 of our brief.

21

The Tenth Circuit has not expressly addressed
whether it's going to adopt that but in both the Coors
Beverages vs. Molson case and in the Riley Manufacturing
case, it indicated that if the parties intended, by not
having an arbitration agreement that covered everything,
to litigate in piecemeal fashion, then the Courts need to
respect that.

Here you have certainly an agreement in the APA
which had no arbitration provision, and then you have the
SUSE Linux Company which has an arbitration provision of
a narrow scope. It falls within the meaning of those
cases. Now, if the Court gets to the issue of, what are
the discretionary factors it should look at and whether
or not to order a stay, we think those point against a
stay. All the arguments I have made with respect to
waiver are also arguments against giving a party a stay
that has invoked the judicial machinery on all these
claims which we've been litigating for the last two
years. The Court is familiar with these issues. It
would not resolve the whole case.

Even if -- and this is the point of our chart
on page 25. Even if the claims in the SUSE arbitration
are first of all found to be arbitrable -- and we're
challenging that in front of the arbitration panel in
Switzerland -- and, second, even if we lost all of those

22

claims, and, third, even if all those findings by an
arbitration panel were given collateral estoppel effect
in this Court, which is a real question because that's
under Swiss law and there's different issues, even then
that would not resolve all the claims in this case; the
claims under the APA with respect to slander of title,
issues of infringement that deal with the 2.6 version of
Linux that is the 2.41 distributed by United Linux, and
other issues.

On the other hand, if this suit were to go
forward and Novell were to win its contention that we
never got any UNIX copyrights to begin with, then that
would essentially be the end of the day, and there
wouldn't be anything worth arbitrating over in
Switzerland.

Now, one final point I would like to make, Your
Honor. If the Court is considering a stay of any type,
we submit the proper time to consider that would be
before trial, which is set in June of 2007, but certainly
to allow discovery to proceed on these issues. They have
wanted to make use of discovery. There is no reason the
case should be slowed down with respect to discovery.
Their argument is really a question, we submit, of
whether or not that proceeding in deciding certain issues
should go ahead of the trial in this case. We disagree

23

on that, but there is no good reason why the most that
the Court should do in this discretionary area is say --
allow the discovery to go forward and revisit the issue
before the trial in the spring.

Thank you very much.
THE COURT: Thank you, Mr. Singer.
Mr. Jacobs, what do you say to Mr. Singer's
arguments about the Cummings case and its effect here?

MR. JACOBS: I don't think it has the effect
that Mr. Singer proposes. It's a Section 4 case, Your
Honor. It's a motion to compel arbitration, and that is
precisely the distinction we were drawing in our papers
and in my arguments, so I think we're not -- I don't
think our arguments before you today have yet really
converged. If you decide that Section 3 and Section 4,
notwithstanding their difference in wording and
notwithstanding the -- some differences in the juris
prudence are the same, then his argument has a lot of
force.

We are not contending that they have brought
arbitrable claims. We are contending that they have
brought claims raising arbitrable issues. And we have
flagged -- and at the very least, we wanted to be sure we
flagged those for you so you could see the intersection
between the arbitration and the case that you're

24

presiding over, but, moreover, we think Section 3 calls
for a mandatory stay where they have brought claims that
raise arbitrable issues.

There is an interesting question in the case
law, even if you're in Section 4 territory, about how you
treat affirmative defenses. And we cover that in our
brief, but I'd like to flag a passage for you in the
Coors case, which is also a Tenth Circuit case, and we
are looking for strands of reasoning, Your Honor, because
there really aren't crisp holdings on point. This is 51
F.3d 1511. At 1516, the Tenth Circuit is describing the
First Circuit's inquiry of the Mitsubishi case which
ultimately made it into the Supreme Court.

And without in any way suggesting that the
First Circuit had it wrong, it cites the First Circuit
as: Quotes, having, quote, phrased its initial inquiry
as, internal quotes, whether the factual allegations
underlying Solar's Counterclaims and Mitsubishi's
bonafide defenses to those Counterclaims are within the
scope of the arbitration clause, end internal quote, and
end of quote.

So, there's at least a -- something one could
cite to say that, in doing this analysis, one looks to
the facts that are at issue rather than the form of the
pleading, whether it's in the form of their affirmative

25

pleading or a potential affirmative defense.

THE COURT: Is this a narrow or broad
arbitration clause? You heard his argument on that.

MR. JACOBS: I did, Your Honor. It's
actually a little tricky here because it's a Swiss law
arbitration clause and so I think to prove the breadth of
the arbitration clause, one would have to go to what
Swiss law says about arbitration clauses. And I say that
for two reasons.

One. I would urge the Court not to make a
determination on that without -- that might have an
impact on a Swiss law arbitration which will be
considering the scope of its arbitrable jurisdiction.
The ICC rules make it clear, by the way -- the ICC rules
make it clear that the arbitral panel is to determine the
scope of its jurisdiction.

Secondly, I'm informed -- and we could brief
this if you would like, Your Honor -- I am informed that
the way the Swiss law treats an arising-under arbitration
clause is somewhere in between the way U.S. law would
treat an arising-under versus an arising-under and
related-to arbitration clause. So it's a somewhat tricky
issue. Our contention here is that if it turns out that
we were incorrect, that the arbitrators decide that the
issues that we have identified as overlapping are not in

26

fact subject to arbitrable -- to arbitral jurisdiction,
then you will find out right away because SCO will let
you know and we'll be off and running.

You do have broad discretion -- notwithstanding
Section 3 and its provisions, you have broad discretion
to control your docket, and all the cases say that, and I
think we have told you -- both sides have told you what
we think you should do in that connection.

But on this waiver issue, I think the statute
is pretty clear. Section 3 says that the party moving
for the stay cannot be in default under the arbitration.
Now, they may argue -- it would be very surprising to me
if this argument would have any legs because they trigger
the arbitration with their very recent filing. They may
try to argue that there is some kind of waiver or default
in the arbitration that should somehow be imputed to
Novel, but that, too, is an arbitrable issue in the
context of this case.

So I think that -- you do, in a way, face a
kind of a fork in the road. If you decide that Section 3
and Section 4 have the same analysis, we are not
contending that they have pled arbitrable claims. We are
not -- we did not petition to compel arbitration. He is
absolutely right. And so, if you decide that they are
right and we are wrong on this statutory construction

27

issue, then you would be in the territory of your
jurisdiction to control your docket.

THE COURT: Discretionary.

MR. JACOBS: Discretionary. Exactly. If, on
the other hand, we are correct that Section 3, in
reference to issues, has considerable significance and
that the statute was deliberately worded to distinguish
between petition to compel claims being arbitrated versus
a stay, then I think they just haven't met the force of
that argument. They have maybe scored a few hits as to
the slander of title claim and our suggestion of overlap
there, but nothing that they have said has any bearing
whatsoever on the copyright claim and the claims that are
derivative of the copyright claim.

There is a principle -- there is one -- there is
a policy point here that's probably important. In a
petition to compel arbitration, you're saying to the
Court: Send them off for the resolution of their claims
to an arbitrable panel -- to an arbitral panel.
And so the Court has to make the gateway
determination about arbitrability that the Supreme Court
cited in its recent Howsow case, I think it is, where the
Supreme Court articulated this gateway principle.
Precisely because we are not contending that their claims
are arbitrable, but rather only the issues in -- lurking

28

in their claims are arbitrable, Section -- it makes sense
that a motion to stay pending the arbitration would have
a different standard because we are not saying that, at
the end of the day, they don't get to come back to you
and litigate those claims.
We will argue, presumably, depending on how it
comes out, that the arbitration is preclusive on certain
issues, but their claims are not being sent forever into
arbitration, so it makes sense that Section 3 and Section
4 would be worded differently and be interpreted
differently.

THE COURT: I think you're talking now about an
order of decision question.

MR. JACOBS: I'm sorry?

THE COURT: An order of decision.
MR. JACOBS: Yes.

THE COURT: What makes sense to decide first
and what makes sense to decide after.

MR. JACOBS: That's exactly right, Your Honor.
We think that -- I guess another way of saying it, then,
is that Section 3 proposes or prescribes an order of
decision in this context.

THE COURT: Thank you.

MR. JACOBS: Thank you very much.

THE COURT: Thank you, all. I'll take the

29

Motion under advisement and get a ruling out in due
course. We'll be in recess.

(Whereupon the proceedings were concluded.)

30


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