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Report from the March 5 Hearing [updated 4Xs]
Monday, March 05 2007 @ 08:13 PM EST

Today were the hearings on two more of IBM's motions, specifically:
Motion for Summary Judgment on on SCO's Unfair Competition Claims (SCO's Sixth Cause of Action) [PDF] and

Motion for Summary Judgment on SCO's Interference Claims (SCO's Seventh, Eighth, and Ninth Causes of Action) [PDF].

Here's IBM's Redacted Memorandum in Support [PDF] of the motion regarding interference claims, and here's the Redacted Memorandum in Support [PDF] of IBM's motion for summary judgment regarding SCO's unfair competition claims. Finally, they refer to a case, Leigh Furniture & Carpet Company v. Isom, and while the case is too old to be available for free on the Internet, Groklaw covered the ruling once before, using two other cases that quote from it, in case you'd like to know what that part is about.

This is the first time there has been a matter where observers were asked to leave the courtroom. There was no warning in advance that this would come up. It was SCO that raised the matter. While we have heard what SCO says the private matter was about (IBM emails, allegedly), that doesn't mean that is correct or that it is all that was discussed. In time, it will all come out, I'm sure. As expected, Judge Dale Kimball took both of the motions under advisement.

Update: The Deseret News reports on the day's events now too.

Chris Brown's report:

I've just returned from the courthouse hearing IBM's Motion for Summary Judgment on SCO's Unfair Competition Claim and IBM's Motion for Summary Judgment on SCO's Tortious Interference Claim.

At the beginning of the hearing SCO's Edward Normand discussed how to handle SCO's presentation of materials which IBM has marked confidential. Judge Kimball decided to clear the courtroom at the point where those documents will be discussed.

IBM's David Marriott went first and reviewed SCO's claims that IBM improperly took code from Project Monterey and put it into AIX for Power product. He said there are five reasons SCO's claim fails for purposes of summary judgment:

First, that SCO cannot produce evidence of unfair competition.

Second, that SCO's claim is preempted by copyright law.

Third, that SCO's claim is untimely.

Fourth, that SCO cannot establish bad faith.

And fifth, that SCO has not and cannot demonstrate damages.

On the first point, he said that unfair competition involves misappropriation or palming off. He showed various cases that show that breach of contract cannot result in claims of unfair competition. The rights and obligations of the parties are in the Joint Development Agreement. Also, that the agreement between IBM and Santa Cruz only permitted the assignment of the agreement to another with the permission of IBM, and IBM did not give that permission. Judge Kimball asked about the theory that SCO retains the right to sue. Mr. Marriott said that nowhere in the agreement are there terms that give SCO that right.

Second that the claim is preempted by Federal Copyright Law. He discussed various elements in case law pertaining to misappropriation that would not result in preemption and explained that none of those apply.

Third, the complaint is untimely because the JDA had a two-year limitation clause. SCO's claims that IBM either concealed or is in continuing violation are wrong. He cited cases where continuing violation are inapplicable. As far as SCO's claim that IBM was concealing, the parties agreed from the beginning that IBM would place code from Project Monterey in AIX. The head of Santa Cruz acknowledges they were told in 2000 that IBM intended to put Unix System IV code in AIX. IBM publicly announced that they had included the code in AIX in press releases. SCO therefore knew, or should have known, that IBM used the code.

Fourth, he argued SCO has presented no evidence of bad faith.

Fifth, SCO, despite IBM's interrogatories requesting SCO to specify damages and court orders to do so, has not shown damages or lost profit as a result. SCO relies on three expert reports, though not one offers competent evidence of damages.

After Mr. Marriott closed, the courtroom was cleared of those not party to the confidentiality agreements. Reports from a reliable (SCO) source indicate the confidential materials were internal IBM emails. Some were emails presented before by SCO a couple years ago, and others were new. SCO presented the emails on charts and walked the judge through them. IBM's Mr. Marriott also responded while the courtroom was closed.

After we re-entered the courtroom, Mr. Todd Shaughnessy argued on behalf of IBM on the tortious interference claim pertaining to SCO's 7th, 8th, and 9th cause of action.

Mr. Shaughnessy said that the number of companies IBM is alleged to have interfered with has changed throughout SCO's case, with the current count at 177. Of those 177, there are only seven that SCO claims IBM directly contacted. He said that SCO failed to show improper purpose and failed to show damages.

He reported that SCO's 30(b)(6) witness says SCO is not alleging IBM contacted any of the other 170 companies. In the case of the remaining seven companies, each has stated it has made no changes in its relationship with SCO because of IBM.

Baystar's Mr. Goldfarb has stated he has had no contact with IBM. He said he changed his relationship based on a long laundry list of reasons.

Mr. Shaughnessy continued with each of the other companies. He said that there are a lot of reasons a company might change its relationship with SCO, not least of which would be a high-profile attack on Linux.

Novell has submitted a declaration that its actions are entirely independent of IBM. SCO has not submitted any competent eveidence that someone at IBM talked to someone at Novell.

SCO has no evidence that IBM met with any of those companies or that IBM told them not to do business with SCO. But if we hypothetically assumed IBM did meet with each of them and told them not to do business with SCO, there would be nothing wrong with that. IBM's allowed to do so.

SCO failed to prove causation or damages. SCO has not provided such in response to any of IBM's interrogatories. In SCO's 30(b)(6) deposition SCO's witness said he cannot specify damages for any of these companies.

SCO's own employees state the reason SCO's income decreased are for reasons unrelated to IBM.

SCO's Mark James responded. He said that when SCO met with IBM, IBM's Karen Smith was very angry with SCO in a meeting with Darl McBride. She threatened Mr. McBride that IBM would stop doing business with SCO and IBM would stop other companies from doing business with SCO. He said that Ms. Smith carried through with her threat and met with HP telling them to stop doing business with SCO, after which SCO's relationship with HP suffered.

He said that Baystar invested in SCO but subsequently behaved erratically, alternately supporting and criticizing SCO's litigation. Mr. Goldfarb told Darl McBride that IBM is "on him, on him, on him". Judge Kimball interjected, asking if that isn't hearsay. Mr. James replied that it is, but that it demonstrates a controversy of fact requiring a trial and the ability to impugn the witness because of conflicting testimony.

Mr. James recapped the history of Unix on Intel's market share. He said that in 1998 SCO had 80% of the Unix-on-Intel market. In 1999, IBM stated that Linux was not ready for business, though in 2000 IBM announced it would provide Unix technology to Linux to "harden Linux."

He said there are genuine disputes of material fact about why these companies have stopped doing business with SCO.

SCO has provided 35 disputes of material facts and SCO only needs one dispute to prevail.

He claimed it's rare for a moving party to admit to interference, and circumstantial evidence is sometimes the only evidence.

He discussed the Leigh Furniture case in detail. In that case Isom(?) did not itemize loss from individual customers to prove tortious interference. Mr. James then discussed several more cases and how they support SCO's claims.

He further argued that the requirement is that a jury evaluate the cumulative effect of IBM's actions. He said this is not an economic theory case. It's an alternative theory of interference.

He summarized that there are issues of material fact to preclude summary judgment.

Todd Shaughnessy responded that unless Judge Kimball has any questions, he'd close.

Judge Kimball said that he'd take it under advisement.

Pre-hearing impressions: SCO was there with about a dozen lawyers, setting up half an hour before the hearing started. Darl and Kevin McBride were there too, taking the back-bench of the public gallery area.

Before the hearing on the motion for partial summary judgment on SCO's unfair competition claims started, there was a short discussion about procedures; SCO wanted to present some confidential documents. It was decided that the hearing would be closed when Edward Normand would make his argument.

David Marriott made IBM's arguments against SCO's unfair competition claims. He characterized SCO's claims as alleging that "IBM improperly took code from the Monterey project for use in AIX on Power". He argued that such use was intended in the Monterey contracts and SCO's acts here could be seen as tortious interference in the IBM-Santa Cruz contract. He also alleged that SCO's main gripe seemed that "IBM failed to disclose its support for Linux".

SCO shows no evidence of any contract infringement with respect to the Monterey contracts and IBM's AIX. In fact, it has never shown that SCO *acquired* any Monterey rights from Santa Cruz. IBM had the contractual right to block a transfer of the Monterey rights and it blocked the transfer to Caldera. Kimball chimed in here with the question of whether that also concerned a right to sue.

Furthermore, Marriott argued that the claims are preempted under copyright law. I admit that I missed the details of the argument here, but the gist was that these issues should be litigated as either contract or copyright claims. Marriott also discussed the five lawsuits that SCO raised in support of its claims.

Furthermore, IBM argued that SCO brought this claim in an untimely manner. The contracts say that a lawsuit has to be brought within two years after an infringement. IBM never hid its intentions or distribution and even Santa Cruz's head of Unix development declared that he personally knew of IBM's use of the code in 2000.

The last two points that were argued were that IBM didn't act in bad faith, because the Monterey contracts inferred a license and that SCO could not demonstrate that it suffered damages. SCO refused to answer interrogatories, deferred to its expert reports, and even the experts' reports failed to shine light on any SCO's damages here.

[Hearing closed: Groklaw reporters left courtroom.]

We continue when Todd Shaughnessy makes IBM's argument in support for PSJ on SCO's claims for tortious interference with contract, counts 7, 8 and 9 in the complaint. Shaughnessy noted that the extent of the tortious interference claims had changed significantly during the litigation, but that currently SCO alleged 177 cases, mostly from companies that switched from SCO Unix variants to Linux; in 7 cases SCO alleged direct contact from IBM with the company involved.

IBM argues again that SCO fails to produce evidence of interference, fails to show that IBM used improper means or acted with improper intent and that it fails to show causality between IBM's actions and damage to its business.

IBM rebuts the allegation over interference with the Baystar investments with Larry Goldfarb's (Baystar CEO) declaration that he never spoke to IBM and that Baystar made its decisions based on concerns on how SCO's management handled its business. The only thing that SCO has on IBM here is Darl's declaration that Goldfarb said that "IBM was on him, on him, on him."

With respect to Intel, Oracle and Computer Associates Mrs. Smith denies talking the companies; the companies deny talking with IBM on the topic of SCO and from declaration from SCO declaraions it appears that the "decline in business" started in 2001; which is before the alleged 2003 IBM interference.

Mrs. Smith's conversations with HP had one result (according to a declaration of Mr. Becker); HP decided to stop talking to Mrs. Smith, but it didn't cause a change of relation with SCO. In a similar vein Novell doesn't deny talking to IBM, but Novell took "independent action to protect its own business interest."

Which all leaves the fuzzy claim that "IBM interfered with the Unix on Intel market by providing support for Linux". All in all SCO was unable to show bad intent in IBM's actions.

Lastly the issue of injury was discussed: how large were SCO's damages. IBM states that SCO failed to provide relevant information in discovery, deferred to expert reports that also failed to provide numbers. Even in a rule 36 deposition on the topic SCO's wittness could not put a number on it. Furthermore the damages SCO claims seem to be the same as those for the Linux copyright infringement and SCO should not be paid twice for the same injury. Lastly, SCO's employees attribute the decline in business to bad business decisions on SCO's part.

Mark James took up the defense for SCO; he declared that it all started between November 2002 and January 2003 when McBride was having discussions with Smith relating to the initial SCOsource plans, demanding license fees for the use of SCO shared libraries. IBM rejected SCO's plans and, according to Darl, Mrs. Smith threatened to ruin SCO's business should it execute its plans. James rambled on about SCO's conspiracy theories until Kimball interposed, "That's your word."

James went on with describing Santa Cruz buy of the Unix business as "lock, stock and barrel" and Novell's waiver and copyright claim were all IBM's fault. Furthermore it was horribly wrong that IBM helped Novell to buy Suse, with advice, connections and money.

Furthermore IBM destroyed the Unix on Intel market where SCO held 80% of the 3 Billion market. This is due to the January 2000 support announcement for Linux and the subsequent "technology disclosures". SCO still believes that IBM placed AIX JFS (and not OS/2 JFS) into Linux. Linux overtook SCO in its market. There are sufficient disputed facts here, SCO counts 35, to require a jury trial. SCO certainly believes that there is a pattern of circumstantial evidence that may be enough to convince a jury of IBM's improper interference with SCO's earnings.

There was a discussion of several cases and James repeated that the loss of SCO's market was attributable to IBM's contributions to Linux. The cumulative effect of IBM's actions shows improper intent.

Shaughnessy didn't use his option for a rebuttal, whereupon the hearing ended

Ruidh's report:
There were two very unsexy motions heard today. IBM's motions on SCO's Unfair Competition and Tortious Interference claims. The first related to the Monterey contract and IBM putting SVR4 code into AIX for Power PC. The second was SCO's claims 7, 8 and 9. Claim 7 was Interference with Contract (by virtue of supporting Linux), 8 was Interference with Contract (with Novell), 9 was Interference with Business Relationships (The entire Unix-on-Intel market).

I suppose the other reporters will give exhaustive reports, so I'll take the liberty of making some disjointed observations.

The courtroom was cleared of observers who weren't cleared to see or hear about confidential materials for all of SCO's presentation on the first issue, so we have absolutely nothing to say about it. The hallway we waited in was very nice.

Kimball had few questions today. But he did mention early on in reference to the Monterey contract, "That was between IBM and Santa Cruz." I don't think that SCO will be snowing him by blurring the line between Santa Cruz and SCO.

IBM tended to hit on legal issues. In the first issue, David Marriott had 5 reasons why they should get a partial summary judgment:

  1. No admissible evidence of wrongdoing;
  2. Preemption by copyright -- some additional element is necessary beyond copyright infringement for there to be a valid state claim;
  3. Untimely -- SCO waited too long to bring the claim. This is essentially the (successful) line of argument IBM made in opposing SCO's third amended complaint.
  4. Can't establish bad faith;
  5. SCO can demonstrate no damages.

Each of these looks like a fatal bullet to me, but we couldn't hear SCO's responses.

We went back in for the Tortious Interference claims. Again, IBM was hitting on the legal basis of the claims. Todd Shaughnessy offered three main points:

  1. No evidence -- SCO has no admissible evidence of any specific acts by IBM which led to people not buying from SCO.
  2. No improper purpose or means -- mere breach of contract is not improper intent -- it needs intent to injure.
  3. No damages causation -- if the conduct is the same as a copyright claim and the damages are the same, no independent action exists.
IBM complained that SCO wasn't clear how each of its claims was distinct.

Kimball asked IBM about the state of the law on interfering in a market. IBM replied that there was no law or precedent.

SCO, with Mark James speaking, gave some clarity. 7, 8 and 9 were as I described them above. He went into a long recitation of timelines and events repeating the mantra, "A reasonable jury could conclude..." trying to get across the point that there is something somewhere a jury should consider here. On damages, he cited a Utah case where a tortious interference claim was successful without identifying a single lost customer -- just on the strength of lost business.

Unfortunately, I think that line of argument fails as IBM earlier reminded Kimball that Wells ordered SCO to respond to IBM's interrogatories "with specificity".

It was a long afternoon and we broke with IBM opting not to take its rebuttal time. Both motions were taken under advisement.

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