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To read comments to this article, go here
New SCO Filings in SCO v. Novell -- RE Novell's 4th CC - Updated, 266 as text
Tuesday, April 17 2007 @ 04:00 AM EDT

Some new filings in SCO v. Novell, including a three-part memorandum by SCO in opposition to Novell's motion for partial summary judgment on its 4th counterclaim, plus a 26-page Appendix A, and a SCO reply memorandum in support of its cross motion for PSJ on Novell's 4th counterclaim.

That's the counterclaim where Novell wants a declaration that it is entitled to direct SCO to waive or to waive on SCO's behalf all purported claims against IBM, Sequent and other SVRX licensees, and a declaration that SCO is obligated to seek Novell's prior approval to enter into new SVRX licenses or amendments, unless SCO can demonstrate that any exceptions are applicable. In the alternative, Novell asks for a declaration that SCO had no authority to enter into the Sun and Microsoft SVRX licenses or the SCOsource licenses. So there's a lot to cover, and that explains in part why SCO's filing is so long. The other is no doubt that it needs to win, because if Novell prevails, SCO has no money left.

There is also the Boies admission pro hac vice and a stipulated motion for an extension of time, setting the new deadline for dispositive motions as April 20, 2007, and the order granting the motion. Needless to say, I haven't yet read it all myself, so we can do it together.

Here's the full menu of Novell filings on Pacer -- the final two are the memoranda on Novell's 4th counterclaim:

261 - Filed & Entered: 04/09/2007
Terminated: 04/10/2007
Motion for Extension of Time - Docket Text: Stipulated MOTION for Extension of Time to File Dispositive Motions filed by Defendant Novell, Inc.. (Attachments: # (1) Text of Proposed Order) Motions referred to Brooke C. Wells.(Sneddon, Heather)

262 - Filed & Entered: 04/10/2007
Terminated: 04/11/2007
Motion for Admission Pro Hac Vice - Docket Text: MOTION for Admission Pro Hac Vice of David Boies, Registration fee $ 15, receipt number 490587, filed by Counter Defendant SCO Group, Plaintiff SCO Group. (Attachments: # (1) Exhibit A: Application for Admission# (2) Exhibit B: ECF Registration# (3) Text of Proposed Order)(James, Mark)

263 - Filed & Entered: 04/10/2007
Order on Motion for Extension of Time
Docket Text: ORDER granting [261] Motion for Extension of Time to Extend Dispositive Motion Deadline to April 20, 2007. Signed by Judge Dale A. Kimball on 4-10-07. (sih)

264 - Filed & Entered: 04/11/2007
Order on Motion for Admission Pro Hac Vice - Docket Text: ORDER granting [262] Motion for Admission Pro Hac Vice of David Boies for SCO Group. Attorneys admitted Pro Hac Vice may download a copy of the District of Utahs local rules from the courts web site at http://www.utd.uscourts.gov Signed by Judge Dale A. Kimball on 4/11/07. (blk)

265 - Filed & Entered: 04/16/2007
Redacted Document - Docket Text: REDACTION to [213] Sealed Document SCO's Memorandum in Opposition to Novell's Motion for Partial Summary Judgment on its Fourth Counterclaim for Relief, and In Support of SCO's Cross Motion for Partial Summary Judgment by Plaintiff SCO Group. (Attachments: # (1) Part 2 # (2) Part 3 # (3) Appendix A)(Normand, Edward)

266 - Filed & Entered: 04/16/2007
Redacted Document - Docket Text: REDACTION to [251] Sealed Document SCO's Reply Memorandum In Support of its Cross Motion for Partial Summary Judgment on Novell's Fourth Counterclaim by Plaintiff SCO Group. (Normand, Edward)

And in case you want to review the Novell 4th Counterclaim, here you go:

113. Novell seeks a declaration pursuant to 28 U.S.C. § 2201 that:
a. Under § 4.16(b) of the APA, Novell is entitled, at its sole discretion, to direct SCO to waive its purported claims against IBM, Sequent and other SVRX licensees; and

b. Under § 4.16(b) of the APA, Novell is entitled to waive on SCO's behalf SCO's purported claims against IBM, Sequent and other SVRX licensees, when SCO refuses to act as directed by Novell; and

c. SCO is obligated to recognize Novell's waiver of SCO's purported claims against IBM and Sequent.

114. Under § 4.16(b) of the APA, SCO is obligated to seek Novell's prior approval to enter into new SVRX Licenses or amendments of SVRX Licenses, subject to limited exception. SCO did not perform its corresponding duties under § 4.16(b) and substantially and materially breached § 4.16(b) by:

a. Purporting to enter into new SVRX licenses without Novell's prior approval, including agreements with Sun, Microsoft and other licensees of SCO's Intellectual Property Licenses, without demonstrating that either of two limited exceptions was applicable; and

b. Purporting to enter into amendments of SVRX Licenses without Novell's prior approval, including agreements with Sun, Microsoft and other licensees of SCO's Intellectual Property Licenses, without demonstrating that a limited exception was applicable.

115. Novell seeks a declaration pursuant to 28 U.S.C. § 2201 that:

a. Under § 4.16(b) of the APA, SCO was obligated to seek Novell's prior approval to enter into new SVRX licenses or amendments to SVRX licenses, including SCO's agreements with Sun, Microsoft and other licensees of SCO's Intellectual Property Licenses; and

b. Under § 4.16(b) of the APA, SCO is obligated to seek Novell's prior approval to enter into new SVRX licenses or amendments to SVRX licenses, unless SCO can demonstrate to Novell that any exceptions to the prohibitions against new licenses and amendments by SCO are applicable.

116. Novell pleads in the alternative for a declaration pursuant to 28 U.S.C. § 2201 that SCO had no authority to enter into the Sun and Microsoft SVRX Licenses, as well as the Intellectual Property Licenses with Linux end users and UNIX vendors.

Update:

We now have, thanks to MDT and The Cornishman #265, SCO's Memorandum in Opposition to Novell's Motion for Partial Summary Judgment on its Fourth Counterclaim for Relief, and in Support of SCO's Cross Motion for Partial Summary Judgment, and thanks to caecer #266, SCO's Reply Memorandum In Support of its Cross Motion for Partial Summary Judgment on Novell's Fourth Counterclaim, as text.

Note that #265 was filed by SCO in four pieces (three for the main document and one for the Appendix) and the pagination in this text reflects that in the PDFs:

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

Brent O. Hatch (5715)
HATCH, JAMES & DODGE, PC
[address]
[phone]
[fax]

Stephen N. Zack (admitted pro hac vice)
BOIES, SCHILLER & FLEXNER LLP
[address]
[phone]
[fax]

Robert Silver (admitted pro hac vice)
Edward Normand (admitted pro hac vice)
BOIES, SCHILLER & FLEXNER LLP
[address]
[phone]
[fax]

Stuart Singer (admitted pro hac vice)
BOIES, SCHILLER & FLEXNER LLP
[address]
[phone]
[fax]

Devan V. Padmanabhan (admitted pro hac vice)
DORSEY & WHITNEY LLP
[address]
[phone]
[fax]

Attorneys for the Plaintiff, The SCO Group, Inc.

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF UTAH

THE SCO GROUP, INC.,
a Delaware corporation,

Plaintiff/Counterclaim-Defendant,

vs

NOVELL, INC.,
a Delaware corporation,

Defendant/Counterclaim-Plaintiff.
SCO'S MEMORANDUM IN OPPOSITION
TO NOVELL'S MOTION FOR PARTIAL
SUMMARY JUDGMENT ON ITS
FOURTH COUNTERCLAIM FOR
RELIEF, AND IN SUPPORT OF SCO'S
CROSS MOTION FOR PARTIAL
SUMMARY JUDGMENT

FILED IN REDACTED FORM
[ORIGINALLY FILED UNDER SEAL]


Civil No. 2:04CV00139
Honorable Dale A Kimball
Magistrate Judge Brooke C. Wells

1

TABLE OF CONTENTS

TABLE OF AUTHORITIESi
PRELIMINARY STATEMENT1
STATEMENT OF FACTS5
I.NOVELL SOLD THE ENTIRE UNIX BUSINESS TO SANTA CRUZ UNDER THE APA5
A.The APA Plainly Transfers the UNIX and UnixWare Business to Santa Cruz6
B.Payment for the Business Included the Residual SVRX Binary Royalties9
II.NOVELL'S PROPOSED INTERPRETATION CANNOT BE RECONCILED WITH THE LANGUAGE AND PURPOSE OF THE APA12
A.The Term "SVRX Licenses" Is Undefined and Ambiguous12
B.Novell's Interpretation Conflicts with The Language and Purpose of the APA13
C.Novell's Section 4.16(b) Rights Are Limited to Protecting the Royalties Under the Transferred SVRX Product Supplements16
1.The Language and Extrinsic Evidence Show That the SVRX Product Supplements Are the SVRX Licenses16
2.Novell Retained Only the Right to Continue Receiving Residual Binary Royalties Under the SVRX Licenses19
C.Amendment No. 2 Forecloses Novell's Interpretation of Section 4.16(b)21
III.THE EXTRINSIC EVIDENCE DEFEATS NOVELL'S INTERPRETATION22
A.Documents Connected with the APA Belie Novell's Interpretation of Section 4.16(b)22

2

B.The 1996 IBM Buyout Also Belies Novell's Interpretation26
C.Witnesses Who Negotiated and Implemented the APA Reject Novell's Interpretation of Section 4.16(b)33
D.Novell's Conduct in the Years That Followed the APA Also Belies Its Interpretation of Section 4.16(b)39
E.Novell's Interpretation of the APA and Its Amendments Shifted Dramatically in 200341
LEGAL STANDARD ON SUMMARY JUDGMENT43
ARGUMENT43
I.NOVELL'S PROPOSED DEFINITION CANNOT BE RECONCILED WITH THE APA AND THE TRANSACTION THEREUNDER44
A.The Governing Law of Contract Interpretation44
B.The Term "SVRX" Licenses" is Ambiguous on Its Face49
C.Section 4.16(b) Cannot be Read to Conflict With the Language and Purpose of the APA52
D.The Term "SVRX Licenses" Refers to the Product Supplements58
1.The SVRX Supplements Actually Licensed the SVRX Products58
2.Novell Retained Only the Right to Continue Receiving Residual Binary Royalties Under the SVRX Licenses61
E.Amendment No. 2 Forecloses the Rights Novell Claims Under Section 4.16(b)64
F.The Extrinsic Evidence Confirms That Novell Did Not Retain the Rights It Claims66

3

1.Documents Connected with the APA Belie Novell's Interpretation66
2.The 1996 IBM Buyout Belies Novell's Newly Conceived Claim of Rights Under Section 4.16(b)68
3.Novell's Other Conduct in the Years That Followed the APA Also Belies Its New Interpretation of Section 4.16(b)74
II.NOVELL'S MOTION ALSO FAILS FOR NOVELL'S BREACH OF THE COVENANT OF GOOD FAITH AND FAIR DEALING UNDER CALIFORNIA LAW76
CONCLUSION80

4

TABLE OF AUTHORITIES

Cases
Bay Cities Paving & Grading, Inc. v. Lawyers' Mut. Ins. Co.,
5 Cal. 4th 854 (Cal. Ct. App. 1993)
50
Bionghi v. Metro. Water Dist. of So. Cal.,
70 Cal. App. 4th 1358 (1999)
46
Blackhawk-Cent. City Sanitation Dist. v. Am. Guar. & Liab. Ins. Co.,
214 F.3d 1183 (10th Cir. 2000)
43
Boyer v. Bd of County Comm'rs of Johnson County,
922 F. Supp. 476 (D. Kan. 1996)
43
Cal. Sate Auto. Ass'n Inter-Ins. Bur. v. Superior Ct.,
177 Cal. App. 3d 855 (1986)
45
Carma Developers, Inc. v. Marathon Dev. Cal., Inc.,
2 Cal. 4th 342 (1992)
46
Cooper v. Mart Assocs.,
225 Cal. App. 2d 108 (1964)
54
County of Marin v. Assessment Appeals Bd.,
134 Cal. Rptr. 349 (Ct. App. 1976)
52, 54
Crestview Cemetery Ass'n v. Dieden,
356 P.2d 171 (Cal 1960)
48,49
David v. City & County of Denver,
101 F.3d 1344(10th Cir. 1996)
43
Dore v. Arnold Worldwide, Inc.,
39 Cal. 4th 384(2006)
45,47
EOTT Energy Corp v. Storebrand Int'l Ins. Co., A/S,
45 Cal. App. 4th 565 (Cal Ct. App. 1996)
50

5

Haggard v. Kimberly Quality Care, Inc.,
39 Cal. App. 4th 508 (1995)
45, 46
Heidlebaugh v. Miller,
271 P.2d 557 (Cal. Ct. App. 1954)
53
Hernandez v. Badger Constr. Equip.. Co.,
28 Cal. App. 4th 1791 (1994)
48, 49
Hess v. Ford Motor Co.,
27 Cal. 4th 516 (2002)
48
Hicks v. City of Watonga,
942 F.2d 737 (10th Cir. 1991)
43
Jensen v. Traders & General Ins. Co.,
52 Cal. 2d 786 (1959)
46
Kavruck v. Blue Cross of Cal.,
134 Cal. Rptr. 2d 152 (Cal. App. 2003)
54
Kunkel v. Continental Casualty Co.,
866 F.2d 1269 (10th Cir. 1989)
46
Leo F. Piazza Paving Co. v. Found. Constructors, Inc.,
128 Cal. App. 3d 583 (Ct. App. 1981)
52
Med. Operations Mgmt., Inc. v. Nat'l Health Labs., Inc.,
76 Cal. App. 3d 886 (1986)
48
Morey v. Vannucci,
64 Cal. App. 4th 904 (1998)
45, 48
Niederer v Ferreira,
189 Cal. App. 3d 1485 (1987)
46
Pac. Gas & E. Co. v. G.W. Thomas Drayage, & Rigging Co.,
69 Cal. 2d 33 (1968)
45

6

Parsons v Bristol Dev. Co.,
62 Cal. 2d 861 (1965)
48
Ramming v. Barnard,
No. E030334, 2002 WL 393118 (Cal. Ct. App. Mar. 13, 2002)
50
Rogers v. United States,
281 F.3d 1108 (10th Cir. 2002)
43
S. Cal. Edison Co. v. Superior Ct.,
37 Cal. App. 4th 839 (1995)
48,49
Shaw v. Regents of the Univ. of Cal.,
58 Cal App. 4th 44 (1997)
46
Skrbina v. Fleming Cos.,
45 Cal. App. 4th 1353 (1996)
48
Tahoe National Bank v. Philips,
4 Cal. 3d 11 (1971)
44
Universal Sales Corp., Ltd. v. Cal. Press Mfg. Co.,
128 P.2d 665 (Cal. 1942)
48, 49
Viacao Aerea Sao Paulo, S.A. v. Int'l Lease Fin. Corp.,
1988 WL 103286 (9th Cir. 1988)
52
Wolf v. Super. Ct.,
114 Cal. App. 4th 1343 (Cal. Ct. App. 2004)
50
World Trade Ctr. Props. v. Hartford Fire Ins. Co.,
345 F.3d 154 (2d Cir. 2003)
50

Statutes

California Civil Code § 163845
California Civil Code § 163945
California Civil Code § 164745

7

California Civil Code § 164145

Federal Rules of Civil Procedure
Federal Rule of Civil Procedure 56(f)76

8

Plaintiff/Counterclaim-Defendant, The SCO Group, Inc. ("SCO"), respectfully submits this memorandum in opposition to the Motion of Defendant/Counterclaim-Plaintiff, Novell, Inc. ("Novell"), for Partial Summary Judgment on its Fourth Counterclaim, and in support of SCO's Cross Motion for Summary Judgment.

PRELIMINARY STATEMENT

In again seeking partial summary judgment on its interpretation of the agreements at issue, Novell again has it exactly backwards. Neither the plain language of the agreements nor any extrinsic evidence supports Novell's claim of the authority to waive, or direct SCO to waive, SCO's rights with respect to IBM's and Sequent's source code agreements. As a matter of plain language, these agreements are not listed as UNIX System V ("SVRX") licenses, are not in fact themselves SVRX licenses, and were transferred to SCO's predecessor-in-interest The Santa Cruz Operations, Inc. ("Santa Cruz") in an entirely different section of the Schedule of transferred assets.

Moreover, Novell's interpretation would have given Novell rights to completely frustrate Santa Cruz's operation of the business it bought, contrary to the stated purpose of the Asset Purchase Agreement between Novell and Santa Cruz ("APA") to transfer the entire business to Santa Cruz, and in derogation of the well-established rule that a court not interpret a contract so as to defeat the whole purpose of the transaction. Novell's interpretation also is clearly prohibited by Amendment No. 2 to the APA, which provides that Novell was not authorized to "prevent SCO from exercising its rights with respect to SVRX source code in accordance with" the APA. Finally, the testimony of principals involved in the transaction on both the Santa Cruz and Novell sides proves that Novell's interpretation is simply not what was intended by either

9

party. Accordingly, as with Novell's previous motion,1 the Court should deny Novell's motion and enter summary judgment for SCO.

Under the APA, Santa Cruz acquired from Novell, in Novell's words, the entire UNIX business "lock, stock and barrel." SCO has shown in opposition to Novell's previous motion for summary judgment, and in support of SCO's cross-motion for summary judgment, that Novell retained a financial stake only in the binary royalties paid under the existing SVRX licenses. The corollary to that interest, as the logical reading of the APA and the uncontroverted extrinsic evidence shows, was Novell's limited right under Section 4.16(b) of the APA to preclude SCO from taking steps to interfere with that binary-royalty stream.

In now asserting an unfettered right to direct SCO to waive any of its rights under the UNIX agreements that Santa Cruz had acquired and to require Novell's approval of any new UNIX-related agreement, Novell fails entirely to reconcile (1) the internal provisions of the APA, (2) the agreements the parties negotiated concurrently with the APA, (3) the amendments to the APA, the parties' course of performance, and (4) the uncontroverted testimony of the people who negotiated the APA. Section 1.1 and Schedule 1.1(a) of the APA, for example, grant SCO "All rights and ownership of UNIX and UnixWare including but not limited to" the "source code" to the "UNIX Source Code Products." If Novell had the right to change or cancel any of the terms of the SVRX software agreements, such a right would have nullified the express asset-transfer provision. Similarly, under Section 4.16(c), Novell agreed that "immediately following the Closing Date, neither it, nor any of its officers, directors or employees shall ... take any

10

material action designed to promote the sale of SVRX products." If Section 4.16(b) were as broad as Novell contends, then Novell purportedly could have directed Santa Cruz to amend or modify its SVRX licenses in any of several ways to promote the sale of SVRX products.

Novell's reading also renders meaningless the Technology License Agreement ("TLA") that the parties entered into contemporaneously with the execution of the APA. As Section 1.6 of the APA contemplated, the TLA effected a "license back" to Novell of the right to use (among other things) the UNIX System V source code. Under the TLA, Novell was permitted to use the licensed code only for internal purposes and only in bundled products (and then only to the extent that no material part of the bundled product competed with SCO's UnixWare business). Under Novell's interpretation of Section 4.16(b), however, Novell would have the right to waive even its own strict obligations with respect to SVRX code under the TLA. By waiving such obligations, Novell could have given itself the right to continue its UNIX business in competition with SCO, effectively nullifying yet another fundamental purpose of the APA.

Novell's argument also flatly conflicts with the parties' conduct in connection with the buyout of IBM's binary-royalty obligations in Amendment No. X and with the concomitant execution of Amendment No. 2 to the APA. After the execution of the APA, a Novell executive named Larry Bouffard, relying on Section 4.16(b), purported to enter into a buyout by IBM of IBM's binary-royalty obligations "on behalf of" Santa Cruz. Santa Cruz objected, and the three parties subsequently entered into an Amendment No. X to IBM's UNIX agreements. If Novell's rights under Section 4.16(b) were as broad as Novell now asserts, Amendment No. X would not have been necessary, let alone negotiated and executed. Indeed, in conjunction with Amendment No. X, Novell and Santa Cruz entered into Amendment No. 2 to the APA. Mr. Bouffard

11

confirms that the parties did so "to preclude Novell from undertaking the precise type of unilateral conduct with respect to the UNIX license agreements that I had undertaken with respect to the IBM-Novell buyout." Amendment No. 2 in fact expressly states that "Novell may not prevent SCO from exercising its rights with respect to SVRX source code in accordance with the Agreement." Novell's interpretation renders that language meaningless.

The uncontroverted witness testimony regarding the parties' intent under the APA further supports SCO's interpretation, and completely rejects Novell's. The sworn testimony of Novell's chief negotiator, of Santa Cruz's chief negotiator and his support team, of Novell's senior executive overseeing Novell's negotiation of the APA, and of Santa Cruz's CEO overseeing Santa Cruz's negotiation of the APA are all in accord: Novell did not have the right to direct SCO to waive any of its rights under the SVRX licenses, but rather could do so only to protect Novell's binary-royalty stream. Santa Cruz did not need Novell's approval to enter into new UNIX licenses. In the absence of a binary-royalty stream, moreover, Novell lacked any waiver rights at all.

Finally, Novell's request for summary judgment is improper under California law regarding the covenant of good faith and fair dealing. Under that law, Novell's attempt to have this Court declare that the APA grants it unilateral discretionary power to waive any or all of SCO's rights under an SVRX license fails, because it has not remotely demonstrated its compliance with the covenant. Novell' undisputed close Linux partnership with IBM, for example, raises the possibility that Novell's motives in re-interpreting the APA were improper.

12

SCO respectfully submits, for the reasons set forth above and below, that the Court should deny Novell's motion for partial summary judgment and grant SCO's cross-motion for partial summary judgment.

STATEMENT OF FACTS

I. NOVELL SOLD THE ENTIRE UNIX BUSINESS TO SANTA CRUZ UNDER THE APA.

1. In early 1995, about two years after acquiring the UNIX and UnixWare business, Novell decided to sell that business to focus on its flagship product Netware, cut costs, and increase shareholder values. (Ex. 1 ¶ 4.) Through the APA, Novell transferred the business to Santa Cruz. (Ex. 3, Recital A, 1.1(a).)

2. Novell, like all of AT&T's successors to the UNIX business, used a combination of agreements in its relationship with its licensees. Those agreements included the Software Agreement, which set forth the rights and obligations for the use of products the licensee might license; the Sublicensing Agreement, which set for general rights and obligations for the licensee's distributions in binary form of products developed based on any licensed product; and the Product Supplement, which was the actual license to a particular product. Novell used this combination of agreements in licensing its UNIX System V (SVRX"), UnixWare, and Tuxedo Documenter's Workbench ("DWB") technologies.

3. Santa Cruz was itself an SVRX licensee prior to its acquisition of the UNIX and UnixWare business from Novell. (Ex 2 at 6.)

13

A. The APA Plainly Transfers the UNIX and UnixWare Business to Santa Cruz.

4. Paragraph 9.8 of the APA provides that the APA "shall be governed by and construed in accordance with the laws of the state of California." (Ex. 3.) Novell and Santa Cruz intended for the APA to transfer all of the UNIX and UnixWare business to Santa Cruz. Section 1.3(a)(i) of the APA states:

It is the intent of parties hereto that all of the Business and all of Seller's backlog, if any, relating to the Business be transferred to Buyer.
(Ex. 3 § 1.3(a)(i).)

5. The first provision of the APA, Recital A as amended, defines the business that Novell transferred to Santa Cruz:

Seller is engaged in the business of developing a line of software products currently know as UNIX and UnixWare, the sale of binary and source code licenses to various versions of UNIX and UnixWare, the support of such products and the sale of other products ("Auxiliary Products") which are directly related to Unix and UnixWare (Collectively, the "Business").
(Id. at 1.)

6. The second provision of the APA, Recital B, memorialized the parties' mutual understanding that the APA transferred the assets and liabilities of the Business:

The Board of Directors of each 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").

14

7. Article I of the APA, entitled "THE ACQUISITION," sets forth the provisions that effectuated the Acquisition. Section 1.1 describes the assets transferred to Santa Cruz, and Section 1.2 sets forth the payments to Novell. (Id. § 1.2.) 8. Section 1.1(a) of the APA describes the assets pertaining to the transferred Business as:

[A]ll of Seller's right, title, and interest in and to the assets and properties of Seller relating to the Business (collectively the "Assets") identified on Schedule 1.1(a) hereto.
(Id. §1.1.)

9. Schedule 1.1(a), in turn, identifies seven categories of "assets and properties of Seller relating to the Business" transferred to Santa Cruz.

10. Item I of Schedule 1.1(a) identifies:

All rights and ownership of UNIX and UnixWare, including but not limited to all versions of UNIX and UnixWare and all copies of UNIX and UnixWare (including revisions and updates in process), and all technical, design, development, installation, operations and maintenance information concerning UNIX and UnixWare, including source code, source documentation, source listings and annotations, appropriate engineering notebooks, test data and test results as well as all reference manuals and support materials normally distributed by Seller to end-users and potential end-users in connection with the distribution of UNIX and UnixWare, such assets to include without limitation the following:
(Id. Schedule 1.1, Item I.)

11. Item II of Schedule 1.1(a) identifies:

All of Seller's claims arising after the Closing Date against any parties relating to any right, property or asset included in the Business

15

(Id. Schedule 1.1, Item II.)

12. Item III of Schedule 1.1(a) identifies:

All of Seller's rights pertaining to UNIX and UnixWare under any software development contracts, licenses and any other contracts to which Seller is a party or by which it is bound and which pertain to the Business (to the extent that such contracts are assignable), including without limitation:
(Id. Schedule 1.1, Item III.)

13. Item III then lists fourteen categories of transferred contracts. (Id. Schedule 1.1, Items III.A.-III.N.) Item III.L. expressly includes the "Software and Sublicensing Agreements" among such contracts:

Software and Sublicensing Agreements - This includes the source and sublicensing agreements that Seller has with OEM, End User and Educational customers. The total number of these agreements is approximately 30,000.
(Id. Schedule 1.1, Item III.L.)

14. Separately, Item VI of Schedule 1.1(a) identifies: "All contracts relating to the SVRX licenses and Auxiliary Product Licenses (collectively 'SVRX Licenses') listed below:" (Id. Schedule 1.1, Item IV.) But Item VI then lists SVRX products, not licenses.

15. Section 1.1(b) of the APA defined the liabilities and obligations assumed by Santa Cruz at the Closing as "those obligations and liabilities of Seller set forth in Schedule 1.1(c) hereto (collectively the 'Assumed Liabilities')." (Id. §1.1(b).) Schedule 1.1(c), in turn, identified three categories of liabilities assumed by Santa Cruz, including "All obligations, whether existing on the date hereof or arising herafter, under the assigned contracts listed on Schedule 1.1(a)." (Id. § 1.1(b); Schedule 1.1(c).)

16

B. Payment for the Business Included the Residual SVRX Binary Royalties.

16. Section 1.2 provided for the "Payments" to Novell. Specifically, Section 1.2(a) provided that Santa Cruz would assume the "Assumed Liabilities" and issue 6,127,500 shares of common stock to Novell, "as full payment for the transfer of the Assets by Seller to Buyer." (Ex. 3 (emphasis added).)

17. Section 1.2(b) provided that Novell also retained an equitable majority interest in the SVRX Royalties at issue in this litigation:

Except as otherwise provided in paragraph (e) of this Section 1.2, 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 right to the SVRX Royalties notwithstanding the transfer of SVRX Licenses to Buyer pursuant hereto, and that Buyer only has a legal title and not an equitable interest in such royalties within the meaning of Section 541(d) of the Bankruptcy code. For the 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.
(Id §1.2(b).)

18. Novell acknowledges (at 3) that the parties agreed to Novell's continued interest in the SVRX Royalties to bridge the gap between the price Novell deemed appropriate for the Business, including the SVRX Royalties, and the price that Santa Cruz was willing to pay. As Duff Thompson, the Novell senior executive who was the architect of the transaction, explains, referring to communications with Santa Cruz's CEO at the time, Alok Mohan:

17

Early in the process I informed Mr. Mohan that we were selling the entire UNIX business and all related assets. I wanted to be very clear to him as we were asking for a substantial sum for the sale. We continued to inform Santa Cruz that it was buying the entire UNIX business and assets, except as explained below.

During the course of the negotiations, it became clear that Santa Cruz could not afford to pay for the purchase price we were requesting, so various ways were explored to make it possible for Santa Cruz to make the purchase. The solution was that Novell would retain an interest in the binary royalty stream from the existing SVRX sub-licenses.
(Ex. 1 ¶¶ 6-7.)

19. Ed Chatlos, the lead APA negotiator for Novell, states:

This binary royalty interest that Novell retained was simply a means to lower the purchase price to SCO. Novell had no interest in continuing in the UNIX business at all, and if Santa Cruz could have paid the full purchase price originally proposed by Novell, Novell would not have retained the binary royalty stream. In that context, it is clear and easy to understand that it was the intent of the APA and Amendment No. 1 that Novell retained rights to protect that existing royalty stream, but other than the limited interest in UNIX that Novell retained under the Technology License Agreement for use with NetWare, there was no other reason or interest for Novell to have broader rights relative to the UNIX business and assets its sold Santa Cruz.
(Ex. 4 ¶ 5.)

20. Steve Sabbath, who was General Counsel for Santa Cruz and oversaw its negotiation of the APA and its Amendments, states:

Based on my involvement with the APA, I understand that the parties' intent and purpose in executing the APA was to transfer to Santa Cruz Novell's entire UNIX-related business, including all rights to UNIX and UnixWare and the UNIX copyrights; that the parties agreed to permit Novell to retain an interest in future System V binary royalties to enable SCO to afford the asset purchase; and

18

that the parties never intended to give Novell any right with respect to any of Santa Cruz's future source code interests in UNIX and UnixWare, including under the SVRX licenses.
(Ex. 18 ¶ 4.)

21. Jim Wilt, the chief negotiator for Santa Cruz, states in reference to Santa Cruz's founder and senior executive Doug Michels:

During the discussions, SCO made clear to Novell that SCO could not afford a direct purchase of the complete UNIX and UnixWare business, in light of the price being asked for the entire business. Mr. Michels proposed the idea of reducing the proposed purchase price by permitting Novell to retain certain binary royalty payments under certain UNIX licenses.

It was my understanding and intent during those negotiations that SCO would acquire Novell's entire UNIX and UnixWare business including the copyrights. I do not recall, and not believe that there ever was, any instance in which anyone at SCO or Novell ever stated or exhibited any contrary intent or understanding to me or anyone else.
(Ex. 5 ¶¶ 6, 8.)

22. Kimberlee Madsen, who assisted Mr. Wilt in the negotiations, states:

This binary royalty interest that Novell retained was simply a means to lower the purchase price to SCO. My understanding was that Novell had no interest in continuing in the UNIX business at all, and if Santa Cruz could have paid the full purchase prices originally proposed by Novell, Novell would not have retained the binary royalty stream or any rights to protect that royalty stream.
(Ex. 6 ¶ 7.)

23. Doug Michels, founder of Santa Cruz and its CEO after Mr. Mohan, states he has reviewed and agrees with the foregoing statements by Mr. Wilt and Ms. Madsen. (Ex. 2.)

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24. Other than in Section 1.2(b), there is no mention of the terms "SVRX Royalties" or "SVRX Licenses" anywhere in Article I of the APA. Indeed, the only other place in the body of the APA where those terms are mentioned is Section 4.16, the provision that Novell invokes in this Motion for its purported waiver rights. Section 4.16 is found on page twenty-four of the APA, in Article IV, which is entitled "CERTAIN COVENANTS." (Ex. 3 § 4.16.)

II. NOVELL'S PROPOSED INTERPRETATION CANNOT BE RECONCILED WITH THE LANGUAGE AND PURPOSE OF THE APA.

A. The Term "SVRX Licenses" Is Undefined and Ambiguous.

25. As noted, Section 1.2(b) identifies the SVRX Royalties as those "defined and described in Section 4.16 hereof." Section 4.16(a) sets forth that definition and description, stating in pertinent part (brackets in original):

Following the Closing, Buyer shall administer the collection of all royalties, fees and other amounts due under the SVRX Licenses (as listed in detail under item VI of Schedule 1.1(a) hereof and referred to herein as "SVRX Royalties:"). Within one (1) calendar month following the each calendar month in which SVRX royalties (and royalties from Royalty-Bearing products) are received by Buyer [except for those pursuant to paragraph (c) of Section 1.2 hereof] Buyer shall remit 100% of all such royalties to Seller or Seller's assignee.
(Id. § 4.16(a) (emphasis added).)

26. In turn, the introductory sentence of Item VI of Schedule 1.1(a), as amended by Amendment No. 1 to the APA, identifies among the assets of the transferred Business:

All contracts relating to the SVRX Licenses and Auxiliary Product Licenses (collectively "SVRX Licenses") listed below:
(Id. Schedule 1.1(a) (emphasis added).)

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27. Item VI, however, does not list licenses. Instead, it lists twenty SVRX products and identifies six categories of additional SVRX products. Similarly, Attachment A, which is incorporated into Item VI by Item VI by Amendment No. 1 and which is entitled "Listing of Auxiliary Products," lists products, but not licenses.

28. The APA expressly transferred the SVRX Software and Sublicensing Agreements, including the IBM agreements at issue, through Item III, an entirely separately provision of Schedule 1.1(a), which states:

Software and Sublicensing Agreements — This includes the source and sublicensing agreements that Seller has with OEM, End User and Educational customers. The total number of these agreements is approximately 30,000.

B. Novell's Interpretation Conflicts with The Language and Purpose of the APA.

29. Novell claim its rights of waiver are found in the plain language of Section 4.16(b), which states in pertinent part:

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 granted, the rights to take any action on Buyer's own behalf.
(Id. § 4.16(b).)

30. Novell claims that this provision permits it to amend, supplement, modify, waive, or assign any of SCO's rights under the numerous Software and Sublicensing Agreements with

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its licensees, all at Novell's "sole discretion." The very next provision in the APA, however, states:

Seller further covenants that immediately following the Closing Date neither it, nor any of its officers, directors or employees shall (i) take any material action designed to promote the sale of SVRX products or (ii) provide material compensation to any employee designed and intended to incentivize such employee to promote the sale of SVRX products, except for actions incidental to unrelated business activities of Seller.
(Id. § 4.16(c).)

31. Novell's interpretation would permit it to negate its express intent and purpose to transfer the defined Business as set forth in these unambiguous provisions:

  • Recital A expressly defines the Business sold to SCO as "developing a line of software products currently known as UNIX and UnixWare, the sale of binary and source code licenses to various version of UNIX and UnixWare, the support of such products and the sale of other products ('Auxiliary Products') which are directly related to Unix and UnixWare (collectively, the 'Business')." (Id. at 1.)

  • Section 1.3(a)(i) states that the parties' intended that "all of the Business and all of Seller's backlog, if any, relating to the Business be transferred to Buyer." (Ex. 3 § 1.3(a)(i).)

  • Recital B states that parties believed that it was in their best interest for Novell to sell its assets and liabilities "comprising the Business."

32. Novell's interpretation would also permit it to waive SCO's licensing rights notwithstanding the following unambiguous provisions:

  • Section 1.1 and Schedule 1.1(a) grant to SCO "all right, title and interest in and to" and all "rights and ownership of UNIX and UnixWare including but not limited to" the "source code" to the "UNIX Source Code Products" (including UNIX System Five and all prior and subsequent UNIX and UnixWare products).

22

  • Section 1.3(a)(i) states that it was parties' intent "that all of the Business and all of Seller's backlog, if any, relating to the Business be transferred to Buyer."

  • Schedule 1.1(a) grants SCO "All of Seller's rights pertaining to UNIX and UnixWare under any software development contracts, licenses and any other contracts to which Seller is a party or by which it is bound and which pertain to the Business."

33. The APA expressly provided that, as part of the transaction, Santa Cruz would license back to Novell the UNIX and UnixWare technology transferred under the APA (the "Licensed Technology"). (Ex. 3 § 1.6.) On the closing date of the APA, the parties signed a Technology License Agreement (the "TLA") to that end. In a section entitled "Ownership," the TLA states:

As between Novell and SCO:

(1) Ownership of Licensed Technology shall reside in SCO.

(2) Ownership of any modifications made to Licensed Technology pursuant to the licenses specified in Section II above shall reside in Novell.
(Ex. 7 (emphasis added).)

34. In addition, the TLA imposed several strict limitations on Novell's use of the Licensed Technology, including the condition that Novell not use the technology in a general-purpose operating system in competition with Santa Cruz. (Ex. 7.)

35. The TLA plainly "relates to" the SVRX products listed in Item VI of the APA. Under Novell's interpretation, therefore, the TLA is also an "SVRX License."

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C. Novell's Section 4.16(b) Rights Are Limited to Protecting the Royalties Under the Transferred SVRX Product Supplements.

1. The Language and Extrinsic Evidence Show That the SVRX Product Supplements Are the SVRX Licenses.

36. Novell argues (at 22) that its interpretation turns on its definition of the term "SVRX Licenses." SCO has shown why that definition not only finds no support in the ambiguous language of Sections 4.16(a) and Item VI that purportedly defines the term, but also that the definition conflicts with the Agreement.

37. In contrast, a definition that limits the term to the SVRX Product Supplements that actually licensed the SVRX Products listed in Item VI is consistent with the APA. Thus, even if the list in Item VI were read to identify the "SVRX Licenses" for those products, that reading would still exclude the Software and Sublicensing Agreements from the term, for the following reasons.

  • Section 4.16(a) describes the SVRX Royalties as "all royalties, fees and other amounts due under the SVRX Licenses (as listed in detail under item VI of Schedule 1.1(a) hereof and referred to herein as "SVRX Royalties)." Under the long-standing licensing practices of AT&T and all its successors, the only agreements "under" which "royalties, fee and other amounts" could be "due" were the Product Supplements. (Ex 34 ¶¶ 11-15; Ex. 51 ¶¶ 10-14; Ex. 50 ¶¶ 13-17.). Indeed Novell and Santa Cruz maintained such financial information by product, and after the closing, Santa Cruz reported that information to Novell by product. (Ex. 52 ¶ 8) No monies were due or reported under Software or Sublicensing Agreements. (Ex 34 ¶¶ 11-15; Ex. 51 ¶¶ 10-14; Ex. 50 ¶¶ 13-17.)

  • Section 1.2(e)(iv) provided that, notwithstanding its obligation to remit to Novell the SVRX Royalties due under the SVRX Licenses, Santa Cruz could keep royalties due prior to the APA under "its own licenses from Seller acquired before the Closing Date through Software Agreement No. SOFT-000302 and Sublicensing Agreement No. SUB-000302A." (Ex. 49 (emphasis added).) Section 1.2(e)(iv) thus expressly identifies the multiple "licenses" that Santa Cruz had acquired prior to the APA "through" its Software Agreement and Sublicensing Agreements. The

    24

    only such licenses to which "royalties" could be "attributable" were the SVRX Product Supplements that Santa Cruz had executed.

  • Recital A of the APA defined the transferred Business as follows the development of "a line of software products currently known as UNIX and UnixWare, the sale of binary and source code licenses to various versions of UNIX and UnixWare, the support of such products and the sale of other products ("Auxiliary Products") which are directly related to Unix and UnixWare (collectively, the 'Business')." (Ex. 3, Recital A (emphasis added).) The only agreements that licensed "the various versions of UNIX and UnixWare," the "products currently known as UNIX and UnixWare," or the "Auxiliary Products" were the Product Supplements for such versions or products. The only "source and binary licenses" that were for "sale" were the Product Supplements, which identified the licensed product and fees and gave rise to a payment obligation. (Ex 34 ¶¶ 11-15; Ex. 51 ¶¶ 10-14; Ex. 50 ¶¶ 13-17.)

38. Novell, like AT&T and its other successors, used a combination of agreements in licensing its SVRX technology, including the Software Agreement, the Sublicensing Agreement, and the various Product Supplements. (Ex 34 ¶¶ 11-15; Ex. 51 ¶¶ 10-14; Ex. 50 ¶¶ 13-17.) Of these, the only agreement that licensed the products listed in Item VI of the Schedule 1.1(a) were the Product Supplements for each product. (Ex 34 ¶¶ 11-15; Ex. 51 ¶¶ 10-14; Ex. 50 ¶¶ 13-17.) The Software and Sublicensing Agreements did not even mention, much less grant a license to, any specific product listed in Item VI. (Ex 34 ¶¶ 11-15; Ex. 51 ¶¶ 10-14; Ex. 50 ¶¶ 13-17.)

39. The Software Agreement set forth rights and obligations for a licensee's internal use of the unidentified "LICENSED PRODUCT" that the licensee might choose to license under a Supplement, whether that product was an SVRX, UnixWare, Tuxedo, or DWB product. (Ex. 35 at 89-90; Ex 34 ¶¶ 11-15; Ex. 51 ¶¶ 10-14; Ex. 50 ¶¶ 13-17.) Similarly, the Sublicensing Agreement set forth rights and obligations for the distribution in binary form of products based

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on any product the licensee might choose to license under a Supplement. (Ex 34 ¶¶ 11-15; Ex. 51 ¶¶ 10-14; Ex. 50 ¶¶ 13-17.)

40. That is, the Software and Sublicensing Agreements were not unique to UNIX products. NCR Corporation, for example, executed its Software Agreement with AT&T on August 1, 1984. (Ex. 35 at 89.) Thereafter, NCR executed a Sublicensing Agreement on June 25, 1987 and numerous Product Supplements for SVRX, UnixWare, and DWB products. (Id. at 89-90.) During the time that Novell owned the Business, NCR executed the Supplements for SVR 4.2MP, on March 30, 1993, and UnixWare 1.1, on July 13, 1995. (Id. at 90.) After Santa Cruz acquired the Business, NCR executed the Supplement for UnixWare 2.1 on Mar 31, 1997. (Id.)

41. Unlike the Software and Sublicensing agreements, the Product Supplements included a Schedule for the licensed product, and for that reason was sometimes referred to as the Schedule in the licensing groups at AT&T and all its successors, including Novell and Santa Cruz. (Ex 34 ¶¶ 11-15; Ex. 51 ¶¶ 10-14; Ex. 50 ¶¶ 13-17.) Those groups, in fact, used the terms "Supplement," "Schedule," and "license" interchangeably. (Ex 34 ¶¶ 11-15; Ex. 51 ¶¶ 10-14; Ex. 50 ¶¶ 13-17.) Those groups considered the Supplements to be the licenses to the products, including the SVRX products listed in Item VI of Schedule 1.1(a). (Ex 34 ¶¶ 11-15; Ex. 51 ¶¶ 10-14; Ex. 50 ¶¶ 13-17.)

42. The Schedule listed the source-code "right-to-use fees," the "sublicensing fees," and the "per-copy distribution fees" due for the use and distribution of the licensed product or its derivative. (Ex 34 ¶¶ 11-15; Ex. 51 ¶¶ 10-14; Ex. 50 ¶¶ 13-17.) In contrast, Software and Sublicensing agreements did not identify any royalties, fees, or other amounts, or even give rise

26

to any payment obligation. (Ex 34 ¶¶ 11-15; Ex. 51 ¶¶ 10-14; Ex. 50 ¶¶ 13-17.) No payments were due under any Software Agreement or Sublicensing Agreement.

2. Novell Retained only the Right to Continue Receiving Residual Binary Royalties Under the SVRX Licenses.

43. In its opposition to Novell's motion for summary judgment or preliminary injunction, SCO sets forth textual and extrinsic evidence showing that the term "SVRX Licenses" refers only to then-existing Product Supplements. Such evidence includes:

  • Section 4.16(b) and Item VI both identify the SVRX Licenses at those actually "listed in detail" or "listed" under Item VI (Ex. 3.)

  • Section 1.2(b) provided that "Seller and Buyer further acknowledge and agree that Seller is retaining all right to the SVRX Royalties notwithstanding the transfer of SVRX Licenses to Buyer pursuant" to the APA." (Id. (emphasis added).)

  • Nothing in the APA even suggests that the parties intended for Novell to have an interest in any future SVRX license. (Id.)

  • In identifying the SVRX Royalties, Novell's 1995 Annual Report explained that "Novell will continue to receive revenue from existing licenses for older versions of UNIX System source code." (Ex. 43 (emphasis added).)

  • Novell's 1996 Annual Report and Quarterly Reports described the SVRX Royalties using that same language verbatim. (Ex. 44; Ex. 45; Ex. 46; Ex. 47.)

  • On October 18, 1995, Larry Bouffard, Novell's Worldwide Sales Director for UNIX Products, explained in an internal email that Santa Cruz had purchased the UNIX source code business "lock, stock and barrel." Mr. Bouffard further explained that "Once the transaction is close (Nov.-Dec.) we will have no more involvement with this business. Therefor [sic], if a contract is for UnixWare or UNIX, it will be SCO's." (Ex. 12 (emphasis added).)

  • The sworn statements from the Mr. Chatlos, the lead negotiator for Novell; Mr. Wilt, the chief negotiator for Santa Cruz; Ms. Madsen, who assisted Mr. Wilt; Mr. Thompson, the Novell senior executive personally charged with overseeing the transaction; and several other witnesses familiar with the intent and performance of the APA. (Ex I; Ex 4; Ex. 6; Ex. 48.)

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  • Documentary evidence, including the letter dated April 23, 1996, from Santa Cruz CEO Alok Mohan to Novell CEO Robert Frankenberg, in which Mr. Mohan explained that the APA "provided for Novell to receive the residual royalties from the in-place SVRX license stream." (Ex. 25 (emphasis added).)

44. Because the Software and Sublicensing Agreements set forth the rights and obligations for the licensee's use of a software product it might choose to license, the Product Supplements only identified the product the licensee had a right to use and CPUs on which it had that right, and the fees the licensor had a right to receive in exchange. (See Ex. 53; Ex. 54.) The only rights the licensor had in the Supplements were in the payment of the scheduled fees. (See Ex. 53; Ex 54.)

45. Upon execution of the Product Supplement, licensees received the product and were obligated to pay the scheduled one-time source license fee, the fees for designated CPUs, and the one-time sublicensing fee (if any). (See Ex. 53; Ex. 54; Ex 34 ¶¶ 11-15; Ex. 51 ¶¶ 10-14; Ex. 50 ¶¶ 13-17.) As all these fees were paid up-front, at the transfer of the Business in 1996, Novell had already collected such fees due under the SVRX Licenses. (See Ex. 53; Ex. 54; Ex 34 ¶¶ 11-15; Ex. 51 ¶¶ 10-14; Ex. 50 ¶¶ 13-17.) Novell had also been paid the per-copy fees, or royalties, for each licensee's distribution to that point of binary copies of its SVRX-derived product. (See Ex. 53; Ex. 54; Ex 34 ¶¶ 11-15; Ex. 51 ¶¶ 10-14; Ex. 50 ¶¶ 13-17.)

46. The only fees that could be paid under the SVRX Licenses after the day of the APA were (1) the source fees for any additional distributions (that is, copies) of the source code or for its use on any additional CPUs, and (2) the continuing binary royalties from the ongoing distribution of binary products. Section 1.2(e) expressly provided that Santa Cruz need not remit to Novell the first category. (Ex. 49 § 1.2(e)(ii).) Thus, the only payments that Novell could receive under the SVRX Licenses were the second category, the residual binary royalties. Even

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within this remaining category, however, Section 1.2(e) provided that Santa Cruz could keep the binary royalties it paid prior to the APA under its "own licenses with from" Novell. (Id. § 1.2(e)(ii).)

47. After the Closing Date, the only unpaid sums under the SVRX Licenses were any per-copy fees to be paid by other current SVRX licensees for their ongoing distribution of binary products. As the SVRX Licenses did not provide for rights in the licensor other than the right to be paid the various fees, the only Novell "rights" remaining in the SVRX Licenses were the rights to continue receiving the binary royalties.

48. Mr. Chatlos, Mr. Wilt, and Ms. Madsen believe that the only exception to the transfer of the entire Business was Novell's right to continue receiving the "binary royalties paid under existing agreements pursuant to which" SVRX licensees "were paying such royalties." (Ex. 4; Ex. 6; Ex. 48.)

49. Mr. Murphy, Mr. Broderick, and Mr. Maciaszek, who for decades (including their time at Novell), worked on the licensing of UNIX products, all agree that the Product Supplements were "the licenses for individual UNIX or UnixWare products." (Ex. 34; Ex. 50; Ex. 51.)

C. Amendment No. 2 Forecloses Novell's Interpretation of Section 4.16(b).

50. Even if the term "SVRX Licenses" included the Software Agreements and Sublicensing Agreements, Amendment No. 2 makes clear that Novell's rights under 4.16(b) do not extend to source code licensing. Paragraph B of Amendment No. 2 provides:

Except as provided in Section C below, and notwithstanding the provisions of Article 4.16, Sections (b) and (c) of the agreement, any potential transaction with an SVRX licensee which concerns a

29

buy-out of any such licensee's royalty obligations shall be managed as follows:
(Ex. 8)

51. Subparagraph B.5 then provided:

This Amendment does not give Novell the right to increase any SVRX licensee's rights to SVRX source code, nor does it give Novell the right to grant new SVRX source code licenses. In addition, Novell may not prevent SCO from exercising its rights with respect to SVRX source code in accordance with the Agreement.
(Ex. 8.)

52. The rights SCO asserts against IBM relate to its use and disclosure of source code under its Software and Sublicensing Agreements (Ex. 9.)

III.THE EXTRINSIC EVIDENCE DEFEATS NOVELL'S INTERPRETATION

53. The extrinsic evidence, including the sworn statements of key witnesses, consistently and unequivocally confirms that Novell transferred the entire UNIX and UnixWare business and, under Section 4.16(b), retained only the right to continue to receive and protect the existing SVRX binary royalty stream.

A. Documents Connected with the APA Belie Novell's Interpretation of Section 4.16(b).

54. In its 1995 Annual Report, its 1996 Annual Report, and its 1996 Quarterly Reports, Novell described the rights it retained as payments under the APA:

Under the agreement, Novell received approximately 6.1 million shares of SCO common stock, resulting in an ownership position of approximately 17% of the outstanding SCO common stock. The agreement also calls for Novell to receive a revenue stream from SCO based on revenue performance of the purchased UnixWare

30

product line. This revenue stream is not to exceed $84 million net present value, and will end by the year 2002. In addition, Novell will continue to receive revenue from existing licenses for older versions of UNIX System source code.
(Ex. 43-47 (emphasis added.)

55. In connection with the APA, the parties signed an Operating Agreement effective the closing date of the APA, December 6, 1995. Recital B of the Operating Agreement explains its purpose:

In connection with the entering into of the Asset Purchase Agreement, the Parties deem it to be in their respective best interests to provide for an orderly transition of the Business (as such term is defined in the Asset Purchase Agreement), and to set out their mutual understanding of how that business is to be transferred.
(Ex. 10 Recital B.)

56. Paragraph 7 of the Operating Agreement explains:

It is intent of the Parties to transfer the agreements and associated rights and obligations which relate to Novell's UNIX System business to SCO. Novell will use commercially reasonable efforts to assist SCO in effecting such transfers or, if not transferable, to assist in finding alternative solutions.
(Id. ¶ 7 (emphasis added).)

57. The Operating Agreement makes no mention of 4.16(b), let alone any purported rights thereunder qualifying or limiting the "transfer" of "the agreements and associated rights and obligations which relate to Novell's UNIX System business to SCO."

58. Paragraph 5 explains: "The parties have established a transition team to transition the UNIX System and UnixWare business to SCO. The transition will be completed by February 29, 1996 (the 'Transition Period')." (Ex. 10.) During the Transition Period, the transition team

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entered into Statements of Work ("SOW"), which were agreements authorizing Novell to conduct the affairs of the business during the Transition Period. (Ex. 11; Ex. 34.)

59. The SOW for Legal provided that the Novell legal team would:

Provide legal counsel and support to the Contract Management and Licensing group, to Product Development and to others pertaining to the UnixWare and SVRx and any other products and business functions acquired by SCO from Novell.
(Ex. 11 at SCO1299953.)

60. In an email from Novell Senior Product Manager Skip Jonas to other members of the transition team, Mr. Jonas explained that Novell needed a "delegation" or "agency" agreement from SCO "in order for the Licensing group to continue their work after the Closing." He added that the "agreement will protect Novell in the event that there is a dispute about any contract that was processed by Novell during the transition period." (Ex. 11 at SCO1299952.)

61. In an email from Novell team member Lou Ackerman to Santa Cruz dated November 8, 1995, Mr. Ackerman explained the need for a Licensing SOW. (Ex. 11.) "As part of the transition process of the licensing business to SCO," he explained, "there will be a need to continue performing functions for SCO until the employees that SCO will recruit are on SCO's payroll and SCO has the systems in place to support them." (Ex. 11 at SCO1299982.)

62. Mr. Ackerman then proposed an "SOW for LICENSING & CONTRACT MANAGEMENT" permitting Novell to: "Act as SCO's worldwide agent for UnixWare (*) and SVRx (and any other Novell source code products being transferred to SCO) licensing activities with OEM, Commercial, Government and Educational customers," such delegation to include "Executing new agreements (including product supplements) with customers" and "Responding

2

to customer inquiries about the products and transfer of ownership to SCO." (Ex. 11 at SCO1299982.)

63. On October 18, 1995, Larry Bouffard, Novell's Worldwide Sales Director for UNIX Products another participant in the transition team, stated in an internal Novell document:

We are obligated to give SCO all information, contracts, assets etc. pertaining to the UnixWare business and the old UNIX source code business. They have bought it lock, stock and barrel. Once the transaction is closed (Nov.-Dec.) we will have no more involvement with this business. Therefor [sic], if a contract is for UnixWare or UNIX, it will be SCO's.
(Ex. 12.)

64. In an internal email dated December 4, 1995, to other members of the Novell transition team, including Novell attorney Burt Levine, Mr. Jonas explained:

As of the Closing Date (now set for 12/6), all UNIX & UW agreements transfer to SCO ... including the Distributor Agreements. Novell is out of the UNIX/UW business after the Closing and does not have the right to sell UW. So if Novell has any inventory of UW after the Closing, I believe that Novell has only 2 choices: sell it to SCO or destroy it.
(Ex. 13 (emphasis added).)

65. Novell sent letters to third parties with whom it had contractual relationships related to the UNIX and UnixWare business. (See, e.g., Ex. 14, Ex. 15, Ex. 16.) In those letters, Novell either notified the third party of, or sought its concurrence to, the assignment of its respective agreement to Santa Cruz. For example, in a letter to Prentice-Hall regarding its "Publication Agreement," Novell explained:

As you may know, Novell transferred to The Santa Cruz Operation, Inc. ("SCO") its existing ownership interest in UNIX System-based

3

offerings and related products as listed in Attachment A of this letter ("collectively "Transferred Products" [sic]).
(Ex. 16.)

66. This sentence appears verbatim in other letters. (See, e.g., Ex. 14, Ex. 15.) Those letters do not qualify Novell's transfer of "its existing ownership interest UNIX-based System-based offerings and related products as listed in Attachment A" to the letter. (See, e.g., Ex. 14, Ex. 15.) Moreover, Attachment A of the Prentice-Hall letter identified as the Transferred Products the exact same SVRX products listed in Item VI of Schedule 1.1(a) of the APA. (Ex. 16, Attachment A.)

67. The letter to Prentice-Hall also stated:

It makes immeasurably more business sense for SCO, as the owner of the Transferred Products, to handle directly with Prentice-Hall any matters that may become relevant under the subject Agreement. Accordingly, Novell would appreciate Prentice-Hall's concurrence under Section 28 of the subject Agreement, to Novell's assignments of its rights and delegation of any remaining obligations under the subject Agreement insofar as such rights and obligations relate to the Transferred Products, to SCO. Novell represents that SCO has undertaken in writing to assume such obligations.
(Id.) This language also appears verbatim in other letters from Novell.

B. The 1996 IBM Buyout Also Belies Novell's Interpretation.

68. On April 26, 1996, less than five months after the closing date of the APA, Novell and IBM entered into an "Amendment" of IBM's UNIX Software Agreement, Sublicensing Agreement, and SVRX 3.2 Product Supplement Under the purported amendment, Novell, "on behalf of itself and The Santa Cruz Operation," purported to grant IBM a buyout of its SVR3.2 binary-royalty obligations. (Ex. 17 at 1 .)

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69. Mr. Bouffard conceived the April 1996 agreement as a way to generate revenue that Novell needed at the time. He explains:

In early 1996, I had occasion to review the language of Section 4.16 of the APA, and prior to consulting with anyone who had negotiated the APA for Novell, came to the conclusion that Section 4.16 as written permitted Novell to amend IBM's UNIX license agreements to grant IBM a buyout of its UNIX royalty obligations. I viewed Section 4.16 as a way for Novell to generate needed revenue, and I thought that the language of Section 4.16 permitted me to enter into the buyout with IBM.

I clearly recall a discussion with Chris Hogan about the language of 4.16. When he saw that I was drafting a proposed buyout between IBM and Novell, Chris stated that Santa Cruz would not agree that Section 4.16 gave Novell the right to enter into such buyouts or otherwise amend or impair the UNIX agreements transferred to Santa Cruz under the APA.
(Ex. 19 ¶¶ 31-32.)

70. On April 4, 1996, Mr. Bouffard wrote to John Maciaszek of Santa Cruz directing him to prepare a "side letter" granting IBM the buyout. (Ex. 20 at 1.) Mr. Bouffard specified that the side letter should include this "General" provision:

For payments to Novell totaling $10,125,000 per the payment schedule below, Novell will modify IBM's rights and obligations under their Master Software License Agreement, Master Sublicense Agreement, SVR 2.x and SVR 3.x Source Right to Use Agreements and associated Schedules as well as any other agreements necessary, to grant IBM the following rights:
(Id.)

71. Mr. Bouffard's letter then directed Mr. Masciaszek to include provisions granting IBM a buyout of its royalty obligations and limited additional rights to distribute the source code to contractors and other SVRX licensees for support purposes. (Id. At 1-2.)

5

72. In March 1996, soon after Santa Cruz learned that Novell was offering such buyouts, Santa Cruz CEO Alok Mohan corresponded with Novell CEO Robert Frankenberg to convey Santa Cruz's objections. (Exs. 21-27.) On March 28, 1996, Mr. Mohan wrote:

It has been brought to my attention that Novell has initiated discussions with a variety of customers to negotiate paid up licenses for SVR-X. I am concerned that such a move would further fragment the Unix world and is not in the best interest of SCO or Novell because it will reduce the incentive for OEMs to move to Unixware. As our two companies had agreed, we want the industry to move to a common Unixware base. A buyout will effectively ensure that they will move to an independent track to SCO and Unixware.
(Ex. 21 at 1.)

73. On April 10, 1996, Mr. Mohan wrote Mr. Frankenberg "a follow-up" to the March 28 letter, stating:

Novell's solicitation of fully paid up SVR-X licenses is contrary to the purpose of our transaction, constitutes a breach of our agreement, and will cause great harm to SCO's business.
(Ex. 22 at 1-2.)

74. On April 19, 1996, Mr. Mohan explained that the "benefit IBM will receive from the buyout as currently proposed is great and is disproportional to the buyout price." (Ex. 23 at 1.) That same day, Mr. Frankenberg explained why, in his view, the "value of this paid up license is indeed proportional to the other paid-up licenses (SCO, SUN, SGI) that have been previously granted." (Ex. 24 at 1.)

75. In a letter dated April 23, 1996, Mr. Mohan further explained how buyouts undermined Santa Cruz's business:

6

When we originally contemplated SCO's purchase of the UnixWare business, one of the primary goals was to drive the conversion of the industry to UnixWare. We modeled the business based on a high percentage of the existing SVRX and SVR4 licenses eventually converting to UnixWare, and to a large extent the valuation we agreed for this business was based on these models. The deal was structured per NoveIl's stated preference to provide SCO with significant incentives to do everything in its power to accelerate this conversion. The agreement provided for Novell to receive the residual royalties from the in-place SVRX license stream, but SCO was to provide all account management and manage the relationships with the customers in order to further this agreed upon conversion.

I would strongly prefer that we not allow IBM or any other OEM to buyout their SVRX royalties and would request that you instruct your sales force to cease promoting such harmful agreements. In the future if such requests are initiated by OEM's, I would hope our companies could cooperatively respond to them. I do understand that discussions with IBM are quite advanced and, on an exception basis, would be willing to try and accommodate them.
(Ex. 25 at 1 (emphasis added).)

76. In his correspondence, Mr. Frankenberg also addressed Santa Cruz's concerns about a provision in the proposed buyout granting IBM relief from source-code distribution restrictions in the Sublicensing Agreement. In an April 19 letter, Mr. Frankenberg explained that "no right to sub-license source code is being granted." (Ex. 24 at 1.)

77. In his letter of April 23, Mr. Mohan responded:

I am also troubled by the fact that the proposed IBM buyout gives IBM broader rights to the UNIX intellectual property than their current license provides. It is my understanding that our agreements provide SCO with ownership and exclusive rights to license the UNIX source code. The proposed grant of additional source rights and relaxation of the anti-pyramiding provisions, rights which Novell (and formerly USL and AT&T) historically refused to grant to SCO and others at any price, can only be granted directly by SCO.

7

If IBM requires these rights, I would request that they negotiate these directly with us.
(Ex. 25 at 1 (emphasis added.)

78. In a letter dated April 29, 1996, Mr. Frankenberg did not dispute Santa Cruz's claim that it had "ownership and exclusive rights to license the UNIX source code." (Ex. 26.) Instead, Mr. Frankenberg sought to persuade Mr. Mohan that the buyout agreement, which Novell had executed in the interim, "expressly prohibited such a situation, without any limitation on the term of this prohibition." (Id.) Mr. Frankenberg further explained:

Our intentions have always been, and continue to be, to limit this paid up license to only cover IBM's current business model and to avoid creating the situations you are concerned may arise.

* * *

Having addressed your concerns as indicated above, we have proceeded with signing the IBM Amendment.
(Id.)

79. In its letters, Novell did not invoke any rights under Section 4.16(b) of the APA. (Exs. 21-27.) The letters do not even mention that provision.

80. While Mr. Mohan raised Santa Cruz's concerns with Mr. Frankenberg by letter, Santa Cruz prepared for legal action by drafting a complaint and motion for a preliminary injunction against Novell. (See Ex. 63.) Over the subsequent months, the parties signed and renewed a stand-still agreement while they negotiated a new amendment to IBM's UNIX agreements. (Ex. 28.)

8

81 . On October 16, 1996, Novell and Santa Cruz jointly granted IBM the buyout through Amendment No. X, which expressly replaced the April 1996 agreement between Novell and IBM. (Ex. 29.) On the same date, and in conjunction with Amendment No. X, Novell and Santa Cruz also signed two other documents, Amendment No. 2 to the APA and a General Release of Claims Agreement. (Ex. 8; Ex. 30.)

82. Section B of Amendment No. 2 specifically addressed Santa Cruz's two objections to the Unilateral Amendment as expressed by Mr. Mohan in his correspondence with Mr. Frankenberg. (Ex. 8.)

83. Amendment No. 2 expressly foreclosed the kind of unilateral action Novell had undertaken, by requiring the joint management, participation, and consent of the parties for any future buyout. Paragraph B.4., for example, explains:

No such transaction will be concluded unless the execution copy of the amendment is consented to in writing by both parties, and either party will have the unilateral right to withhold its consent should it judge, for any reason whatsoever, the transaction to be contrary to its economic interests and/or its business plans and strategy.
(Ex. 8 at SCO1451873.)

84. Paragraph B.5 of Amendment No. 2 clarified that Novell could not expand source code rights even in the relatively minor ways granted in the April 1996 agreement:

This Amendment does not give Novell the right to increase any SVRX licensee's rights to SVRX source code, nor does it give Novell the right to grant new SVRX source code licenses. In addition, Novell may not prevent SCO from exercising its rights with respect to SVRX source code in accordance with the Agreement.
(Ex. 8 at SCO1451873.)

9

85. Following on the heels of the thwarted April 1996 agreement, and signed in conjunction with the bilateral Amendment No. X, these provisions clarified that Novell's conduct was not permitted under the APA. As Mr. Bouffard, who also negotiated Amendment No. X for Novel], explains:

Novell and Santa Cruz proceeded to negotiate Amendment No. 2 to the APA. I understood Amendment No. 2 to preclude Novell from undertaking the precise type of unilateral conduct with respect to the UNIX license agreements that I had undertaken with respect to the IBM-Novell buyout.
(Ex. 19.)

86. The second agreement the parties signed in conjunction with Amendment No. X was the General Release of Claims Agreement.

REDACTED

87. REDACTED

10

REDACTED

(Id. (emphasis added).)

88. Of the $10,125,000 that IBM paid for the buyout of its SVR 3.2 binary royalty obligations, Novell paid Santa Cruz the 5% administrative fee due under the APA. (Ex. 36; Ex. 37.) In addition, REDACTED

C. Witnesses Who Negotiated and Implemented the APA Reject Novell's Interpretation of Section 4.16(b).

89. Duff Thompson, the Novell senior executive who oversaw the sale of the Business, states:

During the course of the negotiations, it became clear that Santa Cruz could not afford to pay the purchase price we were requesting, so various ways were explored to make it possible for Santa Cruz to make the purchase. The solution was that Novell would retain an interest in the binary royalty stream from the existing SVRX sublicenses. It was never suggested or agreed in the negotiation in which I participated that Novell would retain the right to receive additional royalties or fees from licensing of source code or from new sales of SVRX products. Novell did, however, retain certain limited rights to protect that existing SVRX binary royalty stream. The responsibility for the collection of those royalties was placed upon Santa Cruz because after the closing of the sale, they were to own the customer relationships as they had purchased the entire business and associated assets. Since Novell could report this ongoing binary royalty stream as profit (keeping in mind that this revenue source was simply a mechanism to reduce the upfront purchase price for Santa Cruz) it made the sale more attractive and

11

more easily justified to the Novell shareholders. To the extent Novell claims it retained rights to waive claims that Santa Cruz or its successors might have regarding breaches of the System V source code agreements, this does not comport with the instructions I received from Robert Frankenberg nor with my recollection of the negotiations or the agreements: and, is certainly contrary to discussions I had with representatives of Santa Cruz regarding what Santa Cruz was buying and what Novell was retaining. As the Novell executive charged with the sale of the UNIX business and assets, it was never my intent or understanding that Novell was retaining rights to waive breaches of the UNIX System V source code agreements that may have occurred years after Novell sold those UNIX source assets to Santa Cruz.
(Ex. 1 ¶ 7 (emphasis added).)

90. Ed Chatlos, who was appointed by Mr. Thompson as the chief negotiator for Novell, explains:

Under the APA, Novell received shares of SCO common stock and other consideration, and retained rights to certain binary product royalty payments. SCO acquired all right, title, and interest in and to the UNIX and UnixWare business, operating system, and source code. In the transaction, it was my intent — and to my understanding was Novell's intent — to sell the entire UNIX business to SCO, including source code and all associated copyrights.

* * *

Paragraph 4.16 of the APA was specifically designed and intended to protect Novell's retained binary product royalty stream. Based on the foregoing, including my understanding of the parties' intent, I do not believe that Novell has any right to waive, or to direct or require SCO to waive, any of SCO's source code rights, including under customer source code licenses.
(Ex. 31 ¶¶ 8, 13.)

91. Lawrence Bouffard, who was Worldwide Sales Director for UNIX Products at Novell, states:

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My understanding is that Novell had sold its UNIX business to Santa Cruz lock, stock and barrel, and that Novell only retained the right to continue receiving binary royalties paid by then-existing UNIX licensees for their distribution of binary products based on their UNIX flavor pursuant to their UNIX sublicensing agreements (the "binary royalty stream").

* * *

To clarify, Novell's rights under Section 4.16(b) pertain only to the portion of the UNIX business that Novell retained, namely, the right to continue receiving the binary royalty stream. That is, Novell retained the right to take the actions listed in Section 4.16(b) but only for purposes of protecting its interest in unpaid binary royalties. Novell did not retain the right to waive, modify, revoke, or otherwise impair SCO's rights under the UNIX source code agreements, particularly against a licensee like IBM who previously bought out its royalty obligations.
(Ex. 19 ¶¶ 29,33.)

92. Alok Mohan, who was CEO of Santa Cruz, states:

I have reviewed the declaration of Jim Wilt (10/04) and Steve Sabbath (10/04). Their statements comport with my general understanding of and intent regarding the negotiations and transaction between Novell and Santa Cruz during that time period, including the APA, Amendments No. 1 and No. 2, and the Technology License Agreement. To the extent anyone is claiming that Novell retained the UNIX copyrights or that Novell retained the right to waive material breaches of UNIX System V agreements years after the sale to Santa Cruz, such claims are contrary to my understanding, intent and agreement. I would not have agreed to those terms if anyone had suggested that was what Novell was offering.
(Ex. 32 ¶ 4.)

93. Doug Michels, who founded Santa Cruz and served as its CEO after Mr. Mohan, states:

13

I have reviewed the declarations of former Santa Cruz employees Jim Wilt and Kim Madsen and agree with their explanation of the transaction with Novell and other issues.

* * *

In connection with the 1995 purchase from Novell, the parties agreed that (as is accurately explained by both Mr. Wilt and Ms. Madsen) Novell would retain the existing binary royalty stream even though the entire UNIX business, source code and related assets, including copyrights, were transferred to Santa Cruz. There was no intent to grant Novell any right to waive, or to direct or require SCO to waive, any of its intellectual property rights or protections contained in the UNIX licenses.
(Ex. 2 ¶¶ 5, 9.)

94. Steve Sabbath, who was General Counsel for Santa Cruz and oversaw its negotiation of the APA and its Amendments, explains:

Based on my involvement with the APA, I understand that the parties' intent and purpose in executing the APA was to transfer to Santa Cruz Novell's entire UNIX-related business, including all rights to UNIX and UnixWare and the UNIX copyrights; that the parties agreed to permit Novell to retain an interest in future System V binary royalties to enable SCO to afford the asset purchase; and that the parties never intended to give Novell any right with respect to any of Santa Cruz's future source code interests in UNIX and UnixWare, including under the SVRX licenses.

I understand that IBM has argued that Section 4.16(b) of the APA gave Novell the right to require Santa Cruz to waive any breach of the intellectual property protections provided in the SVRX licenses. That argument is contrary to the intent of Paragraph 4.16(b) as I understood it. Indeed, Santa Cruz would never have agreed to give Novell the right under the APA to waive such protections under the SVRX licenses because such a right could have eviscerated the entire purpose of the APA and the value of the assets transferred to Santa Cruz under the APA.
(Ex. 18 ¶¶ 4-5.)

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95. Jim Wilt, the chief negotiator for Santa Cruz, states:

It was my understanding and intent during those negotiations that SCO would acquire Novell's entire UNIX and UnixWare business including the copyrights. I do not recall, and do not believe there ever was, any instance in which anyone at SCO or Novell ever stated or exhibited any contrary intent or understanding.

Paragraph 4.16 of the APA pertains to the binary royalty income stream that Novell retained through the APA. The parties agreed to the language of Paragraph 4.16(b) in order to allow Novell to manage that royalty stream within the operation of SCO's customer source code licenses — not at the expense of SCO's right to enforce its intellectual property protections under any such licenses, and not to permit Novell to waive any of those protections. I have reviewed Amendment No. 2 to the APA and believe that the language therein confirms that intent. In light of my intent, and based on my understanding of the parties' intent, I do not believe that Novell had or has any right to waive, or to direct SCO to waive, any of its intellectual property rights or protections.
(Ex. 5 ¶¶ 8, 10.)

96. Kim Madsen, who assisted Mr. Wilt in the negotiations, states:

Under the APA, Novell also retained rights to certain binary royalty payments. That retention of rights allowed Novell to manage that royalty stream within the operation of Santa Cruz's customer source code licenses. I did not understand the retention to be at the expense of Santa Cruz's right to enforce its intellectual property protections under such licenses or to permit Novell to waive any of those protections, and I never heard anyone from any negotiation team suggest otherwise. I do not believe that Novell had any right to waive, or direct or require Santa Cruz to waive, any of its intellectual property rights or protections.
(Ex. 33 ¶ 13.)

97. William Murphy, who was a Contract Manager in the licensing group at all of Novell's predecessors and successors to the Business, states:

15

Based on my experiences in both companies and the training I received from them regarding the APA, my understanding is that Novell intended to transfer, and Santa Cruz to acquire, the entire UNIX and UnixWare business under the APA. However, because Santa Cruz could not afford the price that Novell asked for the business, the parties agreed that Novell would retain interests in certain royalties.

Specifically, the parties agreed that Novell would retain an interest in the continuing binary royalties paid by licensees under the SVRX licenses to which Novell was a party and that were transferred to Santa Cruz under the APA. That is, the parties agreed that Novell would retain an interest in the per-copy fees that existing SVRX licensees would continue to pay their existing SVRX product supplements for their distribution of binary products based on the licensed SVRX product.

* * *

Under Section 4.16(b) of the APA, the parties granted Novell certain rights and imposed on Santa Cruz certain obligations with respect to the SVRX licenses. Novell and Santa Cruz intended for those rights and obligations to protect Novell's interest in the binary royalties due under the transferred SVRX licenses. The parties did not intend for Section 4.16(b) to apply to any other assets or properties transferred to Santa Cruz under the APA.
(Ex. 34 ¶¶ 16-17, 23.)

98. John Maciaszek, who was a senior engineer at Novell and a member of the Novell transition team; Bill Broderick, who was a member of UNIX licensing group at Novell and who became a member of the Santa Cruz licensing group after the Transition Period; and Jean Acheson, who administered the royalties paid to Novell pursuant to Section 1.2(b) of the APA, also confirm that Novell's Section 4.16(b) rights were limited to the protection of its interest in the residual SVRX binary royalties. (Ex. 5 ¶¶ 19-24; Ex. 50 ¶¶ 22-25; Ex. 52 ¶ 6.)

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D. Novell's Conduct in the Years That Followed the APA Also Belies Its Interpretation of Section 4.16(b).

99. Under an agreement dated January 28,2000, the parties bilaterally granted HP a buyout of its SVRX binary royalty obligations for $22 million dollars. In Paragraph 2 of that agreement, Novell explained the purpose of that agreement:

NOVELL retained or has acquired all rights to outstanding and future HP binary code royalty and license fee payments, but not source code royalties ("HP BINARY ROYALTY OBLIGATIONS"). NOVELL hereby warrants that as of NOVELL's signature date of this ADDENDUM, as provided below, NOVELL has no present, or future or reversionary interest in any such source code royalties. NOVELL hereby warrants that NOVELL has full right and authority to modify the terms and conditions of the AGREEMENT with respect to the HP BINARY ROYALTY OBLIGATIONS. The purpose of this ADDENDUM is to simplify those obligations, as well as corresponding reporting obligations.
(Ex. 38 at 1 (emphasis added).)

100. Prior to its sale of the Business to Santa Cruz, Novell granted Silicon Graphics, Inc. ("SGI") a buyout of its SVRX binary-royalty obligations. (Ex. 50 ¶ 41.) In April 1996, Cray Research, Inc. ("Cray"), a distinct SVRX licensee, became a subsidiary of SGI. (Id.) In 1997, Cray stated it intended to operate under the SGI buyout. (Id.) After lengthy negotiations, Santa Cruz turned over the dispute to Novell.

101. In doing so, Santa Cruz advised Novell that it had no right under the APA to negotiate source code rights or fees, and Novell agreed. (Id. ¶ 42.) In fact, before negotiating with Cray, Novell asked Santa Cruz to execute a letter agreement to "enable Novell to negotiate directly with Cray on the issue of Cray's intention to operate under the SGI Agreements for all

17

SVRX royalty-generating binary shipments without requiring direct involvement from SCO." (Ex. 39.) That letter also stated:

By signature below, SCO authorizes Novell to negotiate and conclude with Cray the issue of Cray's intention to operate under the SGI agreements for all SVRX royalty-generating binary shipments. Novell agrees to inform SCO of any settlement prior to concluding a settlement with Cray. SCO's prior approval of any such settlement will be required only if the proposed settlement would alter Cray's obligation to SCO for source code royalties currently due under the Cray Agreements, including allowing Cray to operate wholly under the SGI Agreements instead of the Cray Agreements. In such a case, in addition to having the right to give prior approval, SCO shall have the right to negotiate directly with Cray for the continuation of Cray's rights to distribute source code currently provided under the Cray Agreements.
(Id. (emphasis added.))

102. In 1998, Novell conducted an audit of SCO's royalty payments to Novell pursuant to Section 1.2 and Section 4.16 of the APA. (Ex. 52 ¶ 9-10.) Novell representatives did not ask for anything other than the reports of the binary royalties from the SVRX licenses that existed at the time of the APA, and never asked about licensing of source code. (Id.)

103. From the closing of the APA until a second audit in 2003, Santa Cruz and SCO sent Novell nearly 100 monthly reports in compliance Sections 1.2(b) and 4.16(a). Those reports contained invoicing or revenue data only for the SVRX binary royalties paid during each period, and did not contain information on SVRX source code fees or any other payments. (Ex. 55 26-28.)

104. Through 2005, SCO paid to Novell approximately $174,545,098.90 in SVRX binary royalties. (Ex. 52 ¶ 13.) In addition, Novell received $28,521,250 in lump payments from buyouts granted after the APA to such companies as IBM, HP, and Cray. (Id.)

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E. Novell's Interpretation of the APA and Its Amendments Shifted Dramatically in 2003.

105. In early 2003, Novell undertook plans to acquire SuSE Linux, one of the world's leading distributors of Linux operating systems. In November 2003, Novell announced the acquisition, financed in part by a $50 million dollar investment by IBM. (Ex. 58.)

106. Under the IBM-Novell deal, Novell became a major Linux distributor, allowing IBM to continue its official distance from the Linux distribution channel. IBM spokesman Mike Darcy stated: "IBM is not a Linux distributor and has no interest in being in that business." (Ex. 41.) Nevertheless, IBM benefits significantly from the Linux distributions made by Novell. As Jack Messman, Novell's CEO at the time, explained: "IBM stands to gain a great deal of revenue by providing systems, peripheral devices, software and services for Linux." (Ex. 42.)

107. On March 6, 2003, SCO filed its lawsuit against IBM alleging, among other things, that IBM had violated its UNIX Software and Sublicensing Agreements, by contributing to Linux source code subject to restrictions in those agreements. (Ex. 9 at 32-50.) Thereafter, Novell undertook a course of conduct diametrically opposed to the above-cited course of performance and conduct of the prior seven-plus years, as detailed above.

108. Novell announced that it, and not SCO, owned the UNIX copyrights under the APA. Soon thereafter, Novell received from SCO a copy of Amendment No. 2, which Novell inexplicably said it did not have in its files and had not reviewed. (Ex. 59 ¶ 13.) After receiving the document, Novell stated in a press release dated June 6,2003:

Amendment #2 to the 1995 SCO-Novell Asset Purchase Agreement was sent to Novell last night by SCO. To Novell's knowledge, this amendment is not present in Novell's files. The amendment appears

19

to support SCO's claim that ownership of certain copyrights for UNIX did transfer to SCO in 1996.
(Ex. 40.)

109. In subsequent public statements, however, Novell downplayed this recantation of its previous ownership claims, and reasserted those claims. (Ex. 60.)

110. In November 2003, the same month it announced its acquisition of SuSE, Novell conducted a second audit of SCO's royalty reports. (Id. ¶ 10.) For the first time since its sale of the Business to Santa Cruz, Novell asked for information regarding the licensing of source code. (Id.) In connection with the audit, Novell also requested and claimed rights to the 2003 Sun and Microsoft Agreements.

111. Starting in 2003, although Novell had not previously invoked its rights under Section 4,16(b), Novell wrote SCO a series of letters purporting to direct SCO to waive, and later waiving on SCO's behalf, its contractual rights and claims against IBM. (See e.g., Ex. 56.)

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LEGAL STANDARD ON SUMMARY JUDGMENT

"Summary judgment should not be granted unless the evidence, viewed in the light most favorable to the party opposing the motion, shows there are no genuine issues of material fact and the moving party is due judgment as a matter of law." Blackhawk-Cent. City Sanitation Dist. v. Am. Guar. & Liab. Ins. Co., 214 F.3d 1183, 1188 (10th Cir. 2000).

It is axiomatic that the "moving party carries the burden of showing beyond a reasonable doubt that it is entitled to summary judgment," and that "the court must review the record in the light most favorable to the opposing party." Hicks v. City of Watonga, 942 F.2d 737,743 (10th Cir. 1991). Thus, the Court "must resolve factual disputes and draw inferences" in favor of the non-moving party, Rogers v. United States, 281 F.3d 1108, 1113 (10th Cir. 2002), and the Court may not "act as the jury and determine witness credibility, weigh the evidence, or decide upon competing inferences." Bover v. Bd. of County Comm'rs of Johnson County, 922 F. Supp. 476, 484 (D. Kan. 1996). In short, summary judgment may not be granted unless "the uncontroverted material facts establish that the moving party is entitled to judgment as a matter of law." David v. City & County of Denver, 101 F.3d 1344 (10th Cir. 1996).

ARGUMENT2

Novell's Motion is predicated on a fundamental misinterpretation of the limited rights Novell retained under Section 4.16 of the APA. The interpretation Novell proposes simply does not square with the text of the APA, the parties' course of performance in the seven-plus years after the following execution of the APA, and the overwhelming and uncontroverted statements of relevant witness including the principals who negotiated the agreement.

21

Article I of the APA unambiguously sets forth the transaction between Novell and Santa Cruz. It provides for the transfer of the UNIX and UnixWare "Business" to Santa Cruz, and for Santa Cruz's payment in the form of the issuance of stock, the assumption of liabilities, and the retention by Novell of an interest in residual SVRX binary royalties. Novell does not even acknowledge these provisions, let alone explain them or reconcile them with its proposed interpretation of Section 4.16(b), a miscellaneous covenant in Article IV that relates only to Novell's retained royalty interest.

I. NOVELL'S PROPOSED DEFINITION CANNOT BE RECONCILED WITH THE APA AND THE TRANSACTION THEREUNDER.

Novell openly acknowledges that its Motion hinges on the meaning of the term "SVRX Licenses." As used in the APA, the term is ambiguous. Under the governing law, the Court should resort to extrinsic evidence both to expose and resolve the ambiguity. The interpretation Novell proposes fails because it conflicts with the unambiguous provisions of the APA, defeats the entire purpose of the agreement, and runs counter to the overwhelming extrinsic evidence.

A. The Governing Law of Contract Interpretation.

The term "SVRX Licenses" in the relevant APA provisions is ambiguous on its face. Even the term were to appear to the Court to be unambiguous, under the governing law, the Court should resort to the extrinsic because it is relevant to prove a meaning to which the language of the instrument is reasonably susceptible.3

22

In Dore v. Arnold Worldwide, Inc., 39 Cal. 4th 384 (2006), the California Supreme Court confirmed the relevance of extrinsic evidence in exposing contractual ambiguities. Addressing the existing California law of contracts, the court first confirmed the precedent providing that the "'meaning of language is to be found in its applications. An indeterminacy in the application of language signals its vagueness or ambiguity. An ambiguity arises when language is reasonably susceptible of more than one application to material facts.'" Id. at 391 (quoting Cal. Sate Auto. Ass'n Inter-Ins. Bur. v. Superior Ct., 177 Cal. App. 3d 855, 859 n.1 (1986)). Further confirming the precedent, the court further explained:

Accordingly, "even if a contract appears unambiguous on its face, a latent ambiguity may be exposed by extrinsic evidence which reveals more than one possible meaning to which the language of the contract is yet reasonably susceptible." "The test of admissibility of extrinsic evidence to explain the meaning of a written instrument is not whether it appears to the court to be plain and unambiguous on its face, but whether the offered evidence is relevant to prove a meaning to which the language of the instrument is reasonably susceptible."
Id. (brackets omitted) (quoting Morey v. Vannucci, 64 Cal. App. 4th 904, 912 (1998), and Pac. Gas & E. Co. v. G.W. Thomas Drayage & Rigging Co., 69 Cal. 2d 33,37 (1968)).4 5

23

If the Court were to decide that the relevant language of the APA and Amendments does not unequivocally support SCO's interpretation, Dore and the precedent endorsed therein make

24

clear that extrinsic evidence is relevant and admissible on, for example, the following areas involving the application of contractual language to the facts:

  • Under the APA, Novell sold "all right, title and interest" to the UNIX and UnixWare Business to Santa Cruz, except for an interest in the residual SVRX binary royalties.

  • Novell's right to take the actions listed in Section 4.16(b) is limited to the protection of those royalties.

  • The term "SVRX Licenses" in Sections 1.2(b) and 4.16(a) of the APA, and in Section VI of Schedule 1.l(a), are those agreements that were transferred to Santa Cruz and pursuant to which licensees paid the royalties and fees enumerated therein, that is, the Product Supplements.

  • Irrespective of the definition of the term "SVRX Licenses," Section B of Amendment No. 2 clarified that Novell's rights under Section 4.16(b) were limited to the protection of the residual binary royalties and could not prevent SCO from exercising its exclusive rights with respect to source code.

SCO therefore sets forth below the uncontroverted extrinsic evidence to date confirming SCO's interpretation of the relevant language and establishing that the rights Novell retained under Section 4.16(b) were intended to apply, and could only apply, to the protection of its interest in the continuing SVRX binary royalties.

SCO further submits that, because the extrinsic evidence uniformly supports SCO's interpretation, SCO is entitled to summary judgment based on such uncontradicted extrinsic evidence. Under California law, where the extrinsic evidence is uncontroverted, the court may interpret the contract as a matter of law. See Parsons v. Bristol Dev. Co., 62 Cal. 2d 861, 865

25

(1965) (citing cases); accord Med. Operations Mgmt., Inc. v. Nat'l Health Labs., Inc., 76 Cal. App. 3d 886, 891-92 (1986) (citing cases and reversing the trial court); see also Hess v. Ford Motor Co., 27 Cal. 4th 516, 525-26 (2002) (determining mutual mistake as a matter of law where the "extrinsic evidence is uncontroverted"); Skrbina v. Fleming Cos., 45 Cal. App. 4th 1353, 1370-71 (1996) (affirming summary judgment granted in part on the basis of "uncontroverted extrinsic evidence" of the meaning of the contract at issue). When the interpretation of a contract turns on the credibility of conflicting extrinsic evidence, moreover, the interpretation is for the jury, not the court. See Morey, 64 Cal. App. 4th at 913-14; S. Cal. Edison Co. v. Superior Ct., 37 Cal. App. 4th 839, 851-52 (1995).

The California Supreme Court and lower courts have emphasized the relevance of various forms of extrinsic evidence:

As an aid in discovering the all important element of intent of the parties to the contract, the trial court may look to the circumstances surrounding the making of the agreement, including the object, nature and subject matter of the writing, and the preliminary negotiations between the parties, and thus place itself in the same situation in which the parties found themselves at the time of contracting. Also applicable here is the familiar rule that when a contract is ambiguous, a construction given to it by the acts and conduct of the parties with knowledge of its terms, before any controversy has arisen as to its meaning, is entitled to great weight, and will, when reasonable, be adopted and enforced by the court.
Universal Sales Corp., Ltd. v. Cal. Press Mfg. Co., 128 P.2d 665,671-72 (Cal. 1942) (citations omitted); accord Crestview Cemetery Ass'n v. Dieden, 356 P.2d 171, 176-77 (Cal. 1960); Hernandez v. Badger Constr. Equip. Co., 28 Cal. App. 4th 1791, 1814-15 (1994). The court in Universal Sales emphasized that "a practical construction placed by the parties upon the

26

instrument is the best evidence of their intention." 128 P.2d at 672; accord Crestview, 356 P.2d at 176-77. The court in Universal Sales reasoned:

Parties are far less liable to have been mistaken as to the intention of their contract during the period while harmonious and practical construction reflects that intention, than they are when subsequent differences have impelled them to resort to law, and one of them then seeks a construction at variance with the practical construction they have placed upon it.
Id.; accord Crestview, 356 P.2d at 176-77; S. Cal. Edison, 37 Cal. App. 4th at 850-51 (further explaining that one party's practical interpretation of the contract is relevant extrinsic evidence in addition to the "joint conduct of the parties in the course of performance of the contract"); Hernandez, 28 Cal. App. 4th at 1814-15 & n.19.

SCO shows below that the substantial evidence falling into the foregoing categories plainly and uniformly precludes Novell's interpretation and motion for partial summary judgment, and supports SCO's interpretation and cross motion for partial summary judgment.

B. The Term "SVRX Licenses" Is Ambiguous on Its Face.

Novell relies on the plain language of the relevant provisions for its definition of the term. Instead of defining or elucidating the term, however, those provisions only render it ambiguous on its face. Novell's contention that the term is unambiguous, and particularly in favor of the definition it proposes, fails for at least the following textual reasons:

First, contrary to Novell's contention, the term is not defined in the APA, except in a circular reference to itself. (¶¶ 25-28.) Section 4.16(a) appears to identify the "SVRX Licenses" by pointing to Item VI of Schedule 1.l(a). The introductory sentence of Item VI, in turn, states:

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All contracts relating to the SVRX Licenses and Auxiliary Product Licenses (collectively "SVRX Licenses") listed below:
(¶ 26.) The absence of a definition alone may support a finding of ambiguity.6

Second, Novell contends that Section 4.16(a) says that the "SVRX Licenses" are "listed -- in detail" in Item VI and that the introductory sentence of Item VI states that the "SVRX Licenses" are "listed" therein. Item VI, however, plainly does not list any licenses or agreements, whether by title, licensee, date, or any other information. Rather, Item VI plainly lists twenty SVRX products and several categories of such products. (¶¶ 26-27.)

Third, the Software and Sublicensing Agreements that Novell attempts to fold into Item VI, including "All of Seller's rights" in those Agreements, are expressly transferred in a distinct provision of the APA. (¶ 28.) There is no basis to believe that the Software and Sublicensing Agreements are redundantly transferred in another part of the Schedule, especially a mere seven lines down the page from Item III.L.

Novell argues (at 25) that SCO is not helped by the fact that the Software and Sublicensing Agreements are transferred separately in Item III. According to Novell, "This same

28

reasoning, however, would exclude binary licenses from the universe of SVRX Licenses. That is because Item VI also does not mention 'sublicensing agreements' governing SVRX binary code, which like software agreements, are expressly referred to in Item III.L of Schedule 1.1(a)."

Novell misapprehends both the agreements and SCO's position. The Sublicensing Agreements are not "binary licenses," nor do they govern "SVRX binary code." Novell apparently confuses the Sublicensing Agreements with the end-user licenses for licensees of SVRX binary products. Instead, among other things, the Sublicensing Agreements grants rights to copy and distribute the licensed product in binary format. They also grant rights and impose restrictions on the distribution of source code to the licensee's contractors or other licensees. SCO does not argue that the Sublicensing Agreements are the SVRX Licenses. On the contrary, SCO positively argues that they are not. SCO's position is that the only interest Novell retained was the right to receive the residual royalties that licensees paid for their distribution of binary SVRX products. The licensee paid those royalties pursuant to the Product Supplements, which are the "SVRX Licenses" under the APA. (See Part I.D., below.)

Fourth, Item VI is plainly part of the provision of payments to Novell in the form of royalties. Section 1.2(b), which provides that, "notwithstanding the transfer of the SVRX Licenses to Buyer, the SVRX Royalties "shall continue to be recognized as royalties by Seller on an ongoing basis," points to Section 4.16(a) for a description of those royalties. (¶¶ 17, 26-27.) Section 4.16(a), in turn, describes those royalties by reference to the "SVRX Licenses" and points to Item VI for the purported definition of that term. (¶ 25.) Given that the software and Sublicensing Agreements are expressly transferred elsewhere and that Item VI is not referenced elsewhere in the body of the agreement, Item VI serves no purpose other than to identify the

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royalties due to Novell. The APA does not anywhere identify the agreements under such ongoing royalties were paId. Accordingly, the Court must look outside the four corners of the agreement to determine which agreements are the "SVRX Licenses."

For the foregoing reasons, the provisions Novell relies on as a plain language definition do nothing to establish a definite meaning of the term. They do not reveal one way or other which contracts are covered by the term "SVRX Licenses," let alone establish that the Software and Sublicensing Agreements at issue are included. The term is plainly ambiguous.

C. Section 4.16(b) Cannot Be Read to Conflict With the Language and Purpose of the APA.

The language of the APA could not be more expansive and unequivocal in its transfer of the UNIX and UnixWare business from Novell to Santa Cruz. Novell's proposed interpretation of Section 4.16(b), which Novell acknowledges hinges on the meaning of "SVRX Licenses," is utterly at odds with that language as well as the stated purpose of the transaction.

"The words, phrases and sentences employed are to be construed in light of the objectives and fundamental purposes of the parties to the agreement." Leo F. Piazza Paving Co. v. Found. Constructors, Inc., 128 Cal. App. 3d 583, 591 (Ct. App. 1981); see also County of Marin v. Assessment Appeals Bd., 134 Cal. Rptr. 349 (Ct. App. 1976) ("A contract entered into for the mutual benefit of the parties is to be interpreted so as to give effect to the main purpose of the contract and not to defeat the mutual objectives of the parties; language which is inconsistent with the objective of the contract shall be rejected."); Viacao Aerea Sao Paulo, S.A. v. Int'l Lease Fin. Corp., 1988 WL 103286, at *4 (9th Cir. 1988) (reversing summary judgment because "the language of a contract is to be construed in light of the purposes of the parties to the

30

agreement") (Ex. B). (Paragraph 9.8 of the APA provides that the APA "shall be governed by and construed in accordance with the laws of the state of California" (¶ 4).)

As Novell attempts to read it, Section 4.16(b) of the APA would give Novell the unfettered right to, among other things:

  • require SCO to permit any and all SVRX licensees to copy, distribute, export, or even open source the licensed UNIX source code (and all of the protected elements contained in that code) — the very value of the assets SCO had acquired — without any protection or compensation for SCO;

  • direct SCO to waive any of its rights to enforce any licensee's material breach of any Software and Sublicensing Agreement — even where such rights have no bearing whatsoever on Novell's binary royalty stream; and

  • because UnixWare is built on the prior SVRX source code, effectively destroy the value of UnixWare technology (which even Novell accepts was transferred to SCO without strings) by requiring SCO to permit SVRX licensees to ignore the use and disclosure restrictions in the Software and Sublicensing Agreements that protect the prior SVRX source code upon which UnixWare is built.

Novell thus argues that in a single sentence of Section 4.16(b), SCO gave Novell the authority — for any reason or no reason at all — to extinguish the value of the UNIX assets that SCO had acquired through the APA even though Novell's sole continuing interest under the APA was limited to the SVRX binary royalties. That implausible construction of Section 4.16(b) cannot be accepted as a matter of well-settled contract interpretation law.

As a corollary to the requirement that contractual provisions are not to be construed as meaningless,7 it is well settled that a contract which confers certain rights or benefits in one clause will not be construed in other provisions completely to undermine those rights or benefits.

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See Kavruck v. Blue Cross of Cal., 134 Cal. Rptr. 2d 152, 159 (Cal. App. 2003) ("A contract may not be interpreted in a manner which would render one of its terms meaningless."); County of Marin, 134 Cal. Rptr. at 353-55 (rejecting interpretation of clause that would have permitted party to unilaterally deny the other party the bargained-for benefit provided for in another clause of the contract); Cooper v. Mart Assocs., 225 Cal. App. 2d 108, 114-16 (1964) (holding that contract's waiver clause would not be read to nullify the right to sue provided in another clause, because a "contract is to be construed as a whole," with "each clause helping to interpret the other").

Novell's proposed reading of Section 4.16(b) must fail because it would completely undermine numerous other clear provisions of the APA, including:

  • Section1.1 and Schedule 1.1(a) grants to SCO "all right, title and interest in and to" and "All right and ownership of UNIX and UnixWare including but not limited to" the "source code" to the "UNIX Source Code Products" (including UNIX System Five and all prior and subsequent UNIX and UnixWare products). (¶ 32.) But if Novell had the right to amend or nullify any of the intellectual-property protections in the Software Agreements and Sublicensing Agreements, this express asset-transfer provision would be rendered hollow for the same reasons that IBM's interpretation would undermine the purpose of the APA itself.

  • Schedule 1.1(a) grants SCO "All of Seller's rights pertaining to UNIX and UnixWare under any software development contracts, licenses and any other contracts to which Seller is a party or by which it is bound and which pertain to the Business." (Id.) But if Novell had the rights it claims, it could amend, modify, or waive at its sole discretion SCO's rights under all such contracts related to SVRX.

  • Section 4.16(a) provides that in consideration for collecting binary royalties and ensuring proper payment of such royalties, "Seller shall pay Buyer within 5 days of receipt of SVRX Royalties from Buyer." But if Section 4.16(b) were as broad as IBM contends, then Novell purportedly could have vitiated this provision by simply requiring SCO to direct licensees to make their royalty payments directly to Novell.

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  • Section 4.16(c) states: "Seller further covenants that immediately following the Closing Date neither it, nor any of its officers, directors or employees shall ... take any material action designed to promote the sale of SVRX products." APA § 4.16(c). But if Section 4.16(b) were as broad as IBM contends, then Novell could "at its sole discretion" modify, amend, or supplement the SVRX agreements to sell licensees additional SVRX products or rights.

Novell's interpretation makes a sham of the APA in other ore-preposterous ways.

First, because Novell defines "SVRX Licenses" as any contract "related to" SVRX products, the TLA fits that definition as it relates to the Licensed Technology, including UNIX System V. Under Novell's interpretation, therefore, Novell could "at its own discretion" waive SCO's rights under the TLA, including the non-compete provision. indeed, Novell could breach the TLA at will and then direct SCO to waive, or waive on SCO's behalf, its claims against Novell. In addition, Novell could amend, supplement, or modify rights under the TLA at its sole discretion. In effect, Novell could use its purported Section 4.16(b) rights to grant itself unlimited ownership and control of the very UNIX and UnixWare technology it sold to Santa Cruz under the APA, thus rending both the APA and TLA an exercise in futility and utterly destroying the value of the Business to SCO.

Second, Santa Cruz was itself an SVRX licensee. Under its Software and Sublicensing Agreements, Santa Cruz developed and distributed its own UNIX flavor known as Open Server. Even today, SCO continues to develop and distribute its Open Server line of products. Under its interpretation of Section 4.16(b), Novell could have directed Santa Cruz to waive its rights under any and all Software and Sublicensing Agreements, including its own. Thus, after signing the APA and paying millions of dollars in stock consideration, Santa Cruz would have been left with fewer rights than before it signed the APA.

3

In sum, Novell's proposed interpretation of a miscellaneous provision in the "Certain Covenants" Article of the APA makes a sham of the "Acquisition" as set forth in Article I. That interpretation defeats the purpose of the APA, conflicts with its unambiguous key provisions, and makes a sham of the APA and TLA. Under the applicable law, even if (contrary to fact) Novell's interpretation were reasonable and not rooted in ambiguous language, the Court could not read Section 4.16(b) as Novell proposes.


In its reply memorandum dated January 12, 2007, IBM addresses some of the same issues as Novell regarding Novell's alleged rights of waiver.8 None of IBM's arguments supports Novell's motion, and many of them highlight points that plainly support SCO's position.

IBM first argues (at 72-73) that the plain language of Section 4.16(b) "forecloses SCO's position," but IBM fails to undertake any serious effort to reconcile the supposed meaning of that language with the rest of the APA, the amendments thereto, or the whole purpose of the transaction thereunder. IBM says (at 77) that Novell's alleged right unilaterally to control the very business that Santa Cruz had just acquired does not raise any problem because the parties' "incentives are aligned." That argument misses the point. If the parties' interests were indeed "aligned," and where Santa Cruz had just acquired the entire UNIX business, why would Santa Cruz have given Novell the unilateral right to modify or amend any provision of any of the thousands of contracts that Santa Cruz had just acquired? A fair reading of the quoted language

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of Section 4.16(b) in context, and in light of Amendment No. 2, simply precludes the meaning that IBM and Novell give that language.9

When IBM elsewhere tries (at 76-77) to reconcile its interpretation of the APA with the purpose of the Agreement, moreover, IBM in fact relies on extrinsic evidence. IBM thus directly undercuts its later assertion (at 79-81) that SCO's evidence is "irrelevant." IBM also fails even to acknowledge the California Supreme Court's controlling decision in Dore,39 Cal. 4th at 391, which makes clear that extrinsic evidence is admissible in this context.

In addition, IBM chooses extrinsic evidence that subsequent testimony has overridden (or contradicted). IBM first cites a generic allusion to the "economic benefit" going to Novell under the transferred UNIX licenses in a declaration signed by Steve Sabbath of Santa Cruz, but Mr. Sabbath subsequently testified repeatedly at deposition in the IBM case that that it was only the binary-royalty payments under the existing SVRX Licenses that Santa Cruz had to remit to Novell. (Ex. 61 at 19-21, 31-37, 40-41, 97, 140, 143, 267.) IBM then cites the same language in the declaration of Michael DeFazio of Novell, but Mr. DeFazio did not specify (in either his declaration or his deposition) what he meant by the referenced "economic benefits." In addition, Mr. DeFazio acknowledged that Ed Chatlos understood Novell's intent under the APA (Ex. 62 at 315-16, 318, 325), and Mr. Chatlos has testified in both this case and the IBM case that it was only the binary-royalty payments under the existing SVRX Licenses that Santa Cruz had to remit to Novell. (¶¶ 4, 31.)

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D. The Term "SVRX Licenses" Refers to the Product Supplements.

1. The SVRX Supplements Actually Licensed the SVRX Products.

Novell argues (at 22) that its interpretation turns on its definition of the term "SVRX Licenses." SCO has shown why that definition not only finds no support in the ambiguous language of Sections 4.16(a) and Item VI, but also conflicts with the unambiguous portions of the agreement. In contrast, a definition that limits the term to the agreements that actually licensed the SVRX Products listed in Item VI is consistent with the APA. Thus, even if the list of products in Item VI were read to identify the "SVRX Licenses" for those products, that reading would still exclude the Software and Sublicensing Agreements from the term, for the following textual reasons.

First, Section 4.16(a) describes the SVRX Royalties as "all royalties, fees and other amounts due under the SVRX Licenses (as listed in detail under item VI of Schedule 1.1(a) hereof and referred to herein as "SVRX Royalties)." Under the licensing practices of AT&T and its successors, the only agreements "under" which "royalties, fee and other amounts" could be "due" were the Product Supplements. (¶ 37.) Indeed, Novell and Santa Cruz maintained such financial information by product, and after the closing, Santa Cruz reported that information to Novell by product. (Id.) No monies were due or reported under Software or Sublicensing Agreements. (Id.)

Second, Section 1.2(e)(iv) provided that, notwithstanding its obligation to remit to Novell the SVRX Royalties due under the SVRX Licenses, Santa Cruz could keep royalties formerly due under "its own licenses from Seller acquired before the Closing Date through Software

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Agreement No. SOFT-000302 and Sublicensing Agreement No. SUB-000302A." (Id.) Section 1.2(e)(iv) thus expressly identifies the multiple "licenses" that Santa Cruz had acquired "through" its Software Agreement and Sublicensing Agreements. The only such licenses to which "royalties" could be "attributable" were the numerous SVRX Supplements that Santa Cruz had executed under its Software and Sublicensing Agreements. In addition, Santa Cruz obtained its Software and Sublicensing Agreements from AT&T. Santa Cruz's only "licenses from Seller" under those Agreements were the product supplements it executed with Novell.

Third, Recital A of the APA defined the transferred Business as the development of "a line of software products currently known as UNIX and UnixWare, the sale of binary and source code licenses to various versions of UNIX and UnixWare, the support of such products and the sale" of "Auxiliary Products." (Id.) The only agreements that licensed "the various versions of UNIX and UnixWare," the "products currently known as UNIX and UnixWare," or the "Auxiliary Products" were the Product Supplements for such versions or products. The only "source and binary licenses" that were for "sale" were the Product Supplements, which identified the licensed product and fees and gave rise to a payment obligation. (Id.) The Software and Sublicensing agreements did not identify any such fees or give rise to any payment obligation. (¶¶ 37-38.)

Novell, like AT&T and its other successors, used a combination of agreements in licensing its SVRX technology, including the Software Agreement, the Sublicensing Agreement, and the various Product Supplements. (¶ 38.) Of these, the only agreement that licensed the products listed in Item VI of the Schedule 1.1(a) were the Product Supplements for each product.

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(Id.) The Software and Sublicensing Agreements did not even mention, much less grant a license to, any specific product listed in Item VI. (Id.)

The Software Agreement set forth rights and obligations for a licensee's internal use of the unidentified "LICENSED PRODUCT" that the licensee might license under a Supplement, whether that product was an SVRX, UnixWare, Tuxedo, or DWB product. (¶ 39.) Similarly, the Sublicensing Agreement set forth the general rights and obligations for the distribution in binary form of products based on any product the licensee might choose to license under a Supplement. (Id.) Without executing the Supplement for the product it desired, a licensee did not obtain delivery of, let alone a license to, the product.

The licensing groups of the companies that have owned the UNIX and UnixWare business considered the Product Supplements to be the licenses to UNIX and UnixWare products. (Id.)

Novell attempts in several ways to conflate the Software Agreement, Sublicensing Agreement, and Supplements. Novell states (at 8), for example, that licensees paid source code fees "[u]nder the Software Agreement," and suggests that licensees also paid sublicensing fees and royalties under the Sublicensing Agreement. That is flatly wrong. No fees, royalties, or other amounts were ever due or paid under those Agreements. Novell points out (at 8) that, between February 1, 1985, the date IBM signed its Software Agreement, and October 17,1996, the day after Amendment No. X, "IBM entered into various agreements, supplements, and amendments concerning its rights to use" SVRX products. In the parenthetical, Novell then labels all these agreements "collectively" as the "IBM SVRX License," and Novell then uses that

8

term throughout its brief. Similarly, Novell (at 9) labels a collection of distinct documents, executed separately, as "the 1985 IBM Agreement."

Novell also states (at 9) that IBM and AT&T executed "numerous supplements to the 1985 IBM Agreement," and that these "supplements granted IBM additional rights to" several SVRX releases. Novell's attempt to consolidate the supplements with the "1985 IBM Agreement" aside, the referenced Supplements did not grant IBM "additional" rights to the SVRX releases. Those supplements simply granted rights to those products.10

2. Novell Retained Only the Right to Continue Receiving Residual Binary Royalties Under the SVRX Licenses.

In its memorandum dated December 12, 2006, in opposition to Novell's motion for summary judgment or preliminary injunction, SCO sets forth textual and extrinsic evidence showing that the term "SVRX Licenses" refers only to then-existing Product Supplements. Such evidence includes:

  • Section 1.2(b) provided that "Seller and Buyer further acknowledge and agree that Seller is retaining all right to the SVRX Royalties notwithstanding the transfer of SVRX Licenses to Buyer pursuant" to the APA." (¶¶ 17,43.)

  • Nothing in the APA even suggests that the parties intended for Novell to have an interest in any future SVRX license. (¶ 43.)

  • In identifying the SVRX Royalties, Novell's 1995 Annual Report explained that "Novell will continue to receive revenue from existing licenses for older versions of UNIX System source code." (Id (emphasis added).)

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  • Novell's 1996 Annual Report and Quarterly Reports described the SVRX Royalties using that same language verbatim. (Id.)

  • The sworn statements from the Mr. Chatlos, the lead negotiator for Novell; Mr. Wilt, the chief negotiator for Santa Cruz; Ms. Madsen, who assisted Mr. Wilt; Mr. Thompson, the Novell senior executive personally charged with overseeing the transaction; and several other witnesses familiar with the intent and performance of the APA. (Id.)

  • Documentary evidence, including the letter dated April 23, 1996, from Santa Cruz CEO Alok Mohan to Novell CEO Robert Frankenberg, in which Mr. Mohan explained that the APA "provided for Novell to receive the residual royalties from the in-place SVRX license stream." (Id (emphasis added).)

Because the Software Agreement and Sublicensing Agreement set forth the general rights and obligations for the licensee's use of any software product it might choose to license, the Product Supplements only identified the product the licensee had a right to use and the CPUs on which it had that right, and the fees the licensor had a right to receive in exchange. (¶ 14.) The only rights the licensor had in the Supplements were the rights of payment of any applicable fees listed in the Schedule. (Id.)

Upon execution of the Product Supplement, licensees received the product and were obligated to pay the scheduled one-time source license fee, the fees for any CPUs designated in the Product Supplement, and the one-time sublicensing fee (if any). (¶ 45.) As all these fees were paid up-front, at the transfer of the Business in 1996, Novell had already collected such fees due under the SVRX Licenses. (Id.) Novell had also been paid the per-copy fees, or royalties, for each licensee's distribution to that point of binary copies of its UNIX-derived product. (Id.)

The only fees that could be paid under the SVRX Licenses after the day of the APA were (1) the source fees for any additional distributions (that is, copies) of the source code or for its use on any additional CPUs, and (2) the continuing binary royalties from the ongoing

10

distribution of binary products. (¶ 46.) Section 1.2(e) expressly provided that Santa Cruz need not remit to Novell fees in the former category. Thus, the only payments that Novell could receive under the SVRX Licenses were the binary royalties for the ongoing binary distributions. But even within this remaining category, Section 1.2(e) provided that Santa Cruz could keep the binary royalties it paid prior to the APA under its "own licenses with from" Novell. (Id.) After the Closing Date, therefore, the only unpaid sums under the SVRX Licenses were any per-copy fees paid by other current SVRX licensees for their ongoing distribution of SVRX products. As the SVRX Licenses did not provide for rights in the licensor other than the right to be paid the various fees, the only Novell payment "rights" remaining in the SVRX Licenses were the rights to continue receiving the binary royalties.

Mr. Chatlos, Mr. Wilt, and Ms. Madsen believe that the only exception to the transfer of the entire Business was Novell's right to continue receiving the "binary royalties paid under existing agreements pursuant to which" SVRX licensees "were paying such royalties." (¶ 47.) Mr. Murphy, Mr. Broderick, and Mr. Maciaszek, who for decades, including at Novell, worked on the licensing of UNIX products all agree that the Product Supplements were "the licenses for individual UNIX or UnixWare products." (¶ 49.)


In its memorandum, IBM argues (at 73) that "nothing in the APA" supports SCO's interpretation of the meaning of the term "SVRX Licenses" therein. IBM commits another interpretative error. The fact is that IBM's and Novell's interpretation fails to draw any distinction between the agreements referenced in the list of transferred assets in Item III.L of Schedule 1.1(a) and those referenced in Item VI. Under the law, the Court must not interpret the

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Agreement to create such a redundancy. SCO interprets Item VI to refer to that subset of the agreements referred to in Item III.L under which the binary-royalty payments are made. It follows that, as IBM acknowledges (at 74), Item VI is specifically referenced by Section 4.16(b) — the provision of the APA referring to such payments. In attempting to support its assertion that the "Software Agreements are agreements that license various UNIX System V releases," IBM makes SCO's point. The document IBM cites (at 73) is the "Schedule" to the IBM Software Agreement, which on its face is plainly not an agreement unique to UNIX software at all. It is such Schedules, or Product Supplements, pursuant to which SVRX licensees license specific UNIX products and make payments for the use and distribution of such products.11

E. Amendment No. 2 Forecloses the Rights Novell Claims Under Section 4.1 6(b).

Even the term "SVRX Licenses" included the Software Agreements and Sublicensing Agreements, Amendment No. 2 makes clear that Novell's rights under 4.16(b) do not extend to such licenses. Paragraph B of Amendment No. 2 provides:

Except as provided in Section C below, and notwithstanding the provisions of Article 4.16, Sections (b) and (c) of the Agreement, any potential transaction with an SVRX licensee which concerns a buy-out of any such licensee's royalty obligations shall be managed as follows:
(¶ 50.) Subparagraph B.5 then provides:
This Amendment does not give Novell the right to increase any SVRX licensee's rights to SVRX source code, nor does it give

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Novell the right to grant new SVRX source code licenses. In addition, Novell may not prevent SCO from exercising its rights with respect to SVRX source code in accordance with the Agreement.
(¶ 51.)

Amendment No. 2 thus provides that, "notwithstanding the provisions of Article 4.16," Novell is not authorized to "increase any SVRX licensee's right to SVRX source" or "grant new SVRX source code licenses," even in the context of granting a buyout of its majority interest in the binary royalties. That is, following as it did Novell's attempt relax the restrictions concerning the distribution of source code in the IBM's Sublicensing Agreement, Amendment No. 2 clarified that Novell had no authority to license source code rights, even incident to a buyout.

But Amendment No. 2 provides an additional protection. It states that "In addition, Novell may not prevent SCO from exercising rights with respect to SVRX source code in accordance with" the APA. That is, "notwithstanding the provisions of Article 4.16," Novell may not prevent SCO's exercise of rights with respect to source code under any of the other provisions of the APA, including those in Article I and Schedule 1.1(a) effectuating the transfer of "all right, title and interest in and to" and all "rights and ownership" in the UNIX source code and products and "all rights pertaining to UNIX and UnixWare" under the "Software and Sublicensing Agreements."

The Court may deny Novell's Motion, and grant SCO's, on the basis of this language in Amendment No. 2 alone. The rights SCO asserts against IBM relate to its use and disclosure of source code under its Software and Sublicensing Agreements. (¶ 52.) In addition, contrary to

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Novell's misguided attempt to categorize the Software Agreement as a "source code license" and that Sublicensing Agreement as a "binary" license, both agreements plainly concern and grant source code rights. Amendment No. 2 simply forecloses Novell's attempt to exploit Section 4.16(b) in derogation of SCO's rights under the IBM and Sequent Software and Sublicensing Agreements.12

F. The Extrinsic Evidence Confirms That Novell Did Not Retain the Rights It Claims.

Even if the Court concludes that Amendment No. 2 insufficiently clarified Section 4.16(b), Novell's Motion fails because it has no extrinsic evidence to support it. In addition, because the extrinsic evidence, which Novell does not even attempt to refute, uniformly supports SCO's position, the Court should grant SCO's request for summary judgment.

1. Documents Connected with the APA Belie Novell's Interpretation.

Numerous documents that Novell generated in connection with the APA during the Transition Period reflect Novell's intent to transfer the Business without any of the limitations that Novell now reads into Section 4.16(b). Such documents include:

  • Novell's 1995 Annual Report identified only two rights Novell retained under the APA: the contingent right to future UnixWare royalties, and the right to the residual SVRX royalties. With respect to the latter, the Report explained that "Novell will continue to receive revenue from existing licenses for older versions of UNIX System source code." That language was repeated verbatim in Novell's 1996 Annual and Quarter Reports.

  • The TLA provided that, as between Novell and Santa Cruz, "Ownership of Licensed Technology shall reside in SCO."

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  • Mr. Bouffard's email, dated October 18, 1995, stating: "We are obligated to give SCO all information, contracts, assets etc. pertaining to the UnixWare business and the old UNIX source code business. They have bought it lock, stock and barrel. Once the transaction is closed (Nov.-Dec.) we will have no more involvement with this business. Therefor [sic], if a contract is for UnixWare or UNIX, it will be SCO's. (¶ 43.)

  • Mr. Jonas's email of December 4, 1995, to Novell attorney Burt Levine and other, stating: "As of the Closing Date (now set for 12/6), all UNIX & UW agreements transfer to SCO ... including the Distributor Agreements. Novell is out of the UNIX/UW business after the Closing and does not have the right to sell UW." (¶ 64.)

  • Novell letters to third parties announcing that "Novell transferred to The Santa Cruz Operation, Inc. ('SCO') its existing ownership interest in UNIX System-based offerings and related products as listed in Attachment A of this letter ('collectively 'Transferred Products' [sic])," where the Transfered Products were exact same SVRX products listed in Item VI of Schedule 1.1(a) of the APA. (¶ 65.)

  • Statements in such letters saying that it "makes immeasurably more business sense for SCO, as the owner of the Transferred Products, to handle directly with" the third party "any matters that may become relevant under the subject Agreement." (¶¶ 66-67.)

These contemporaneous documents reveal Novell's intent to transfer the UNIX and UnixWare business without qualification. None even mentions the rights Novell now claims for itself. Moreover, those purported rights would have made the foregoing statements unnecessary or untrue. Similarly, the following documents concerning the joint efforts during the Transition Period reveal Novell's intent:

  • The Operating Agreement explains that "It is intent of the Parties to transfer the agreements and associated rights and obligations which relate to Novell's UNIX System business to SCO." The Operating Agreement makes no mention of 4.16(b), let alone any purported rights thereunder qualifying or limiting the "transfer" of "the agreements and associated rights and obligations." (¶¶ 55-57.)

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  • The Transition Team's SOW for Legal provided that the Novell legal team would "Provide legal counsel and support to the Contract and Management and Licensing Group, to Product Development and to others pertaining to the UnixWare and SVRx and any other products and business functions acquired by SCO from Novell. (¶ 59.)

  • In an email, Mr. Jonas explained that Novell needed a "delegation" or "agency" agreement from Santa Cruz "in order for the Licensing group to continue their work after the Closing." He added that the "agreement will protect Novell in the event that there is a dispute about any contract that was processed by Novell during the transition period." (¶ 60.)

  • In an email from Novell team member Lou Ackerman to Santa Cruz dated November 8,1995, Mr. Ackerman proposed an "SOW for LICENSING & CONTRACT MANAGEMENT" permitting Novell to "Act as SCO's worldwide agent for UnixWare (*) and SVRx (and any other Novell source code products being transferred to SCO) licensing activities with OEM, Commercial, Government and Educational customers," such delegation to include "Executing new agreements (including product supplements) with customers" and "Responding to customer inquiries about the products and transfer of ownership to SCO." (¶ 61.)

These documents reflect the transfer of the "agreements and rights and obligations" to Santa Cruz without any qualification. In addition, they show that Novell understood that it needed, and indeed sought, Santa Cruz's "delegation" of authority to license "SVRX" and "any other source code products being transferred to SCO" during the Transition Period. Had Novell possessed the rights it now claims such delegation would have been unnecessary. Thus, these documents pointedly contradict Novell's assertions that it has unfettered rights over the UNIX agreements and licensing rights, and that SCO merely manages the business as its agent.

2. The 1996 IBM Buyout Belies Novell's Newly Conceived Claim of Rights Under Section 4.1(6).

The Court should deny Novell's motion on the basis alone of Novell's course of performance during the dispute over the 1996 IBM buyout. In the early part of the year, Mr.

16

Bouffard, without consulting those who had negotiated the APA, decided to grant IBM a buyout of its SVRX binary royalty obligations, in order to generate revenue Novell needed. (¶¶ 68-70.) Mr. Bouffard relied on a reading of Section 4. 16(b) much less restrictive than the interpretation Novell proposes. (Id.) Whereas Novell now claims unfettered rights with respect to any SVRX agreement, Mr. Bouffard only sought to grant IBM a buyout of the royalties that Novell unquestionably retained under the APA. (Id.)

Despite this relatively restrained interpretation, Santa Cruz rejected his "direction" to draft a letter effectuating the buyout and contested Novell's interpretation. (¶¶ 71-80.) Over the weeks that followed, Santa Cruz CEO Alok Mohan communicated his objections directly to Novell CEO Robert Frankenberg. Specifically, Mr. Mohan complained that the buyout ran counter to the provisions of the APA that contemplated the conversion of SVRX licensees to UnixWare products and violated Section 4.16(c), which prohibits Novell from selling or promoting SVRX products. (¶¶ 72-75.) Mr. Mohan also observed that the buyout agreement Novell proposed relaxed restrictions in IBM's Sublicensing Agreement. During the period of these communications, Santa Cruz prepared a complaint and a motion for a preliminary injunction against Novell. (¶ 80.) Mr. Mohan's response to the proposed buyout evidences Santa Cruz's understanding and intent that Section 4.16(b) granted Novell limited rights even with respect to the protection of its interest in the SVRX binary royalty stream.

Novell manifested the same understanding and intent. In responding to Mr. Mohan's letters, Mr. Frankenberg did not question Mr. Mohan's argument that Santa Cruz had exclusive rights to license the source code. (¶¶ 76,78.) Instead, Mr. Frankenberg sought to convince Mr. Mohan that the proposed agreement did not relax the restrictions in IBM's Sublicensing

17

Agreement. (Id.) The dispute thus focused on Novell's purported unilateral right to grant the buyout of binary royalties.

Even though Novell unquestionably owned the majority (95%) interest in IBM's residual royalties, Novell did not even mention Section 4.16(b), much less invoke the rights it now claims for itself, to effectuate the buyout without interference from Santa Cruz. Instead, having warranted to IBM that it had the right to grant it the buyout on behalf of Santa Cruz, Novell executed the buyout agreement, but immediately entered into a stand-still agreement with Santa Cruz and IBM. (¶¶ 80-81.) Over the months that followed, the parties negotiated a new buyout agreement, Amendment No. X, which they signed on October 16, 1996. (¶ 80.)

In connection with Amendment No. X, the parties also entered into two additional agreements on the same date. First, the parties entered into Amendment No. 2 to the APA. With respect Novell's attempt to grant a unilateral buyout without regard for the impact on Santa Cruz's economic and strategic interests, Paragraph B of Amendment No. 2 provided:

Except as otherwise provided in Section C below, and not withstanding the provisions of Article 4.16, Sections (b) and (c) of the Agreement, any potential transaction with an SVRX licensee which concerns a buy-out of any such licensee's royalty obligations shall be managed as follows:
(¶ 82.) Section B then required the joint management, participation, and consent of the parties for any future buyout, including at Paragraph B.4:
No such transaction will be concluded unless the execution copy of the amendment is consented to in writing by both parties, and either party will have the unilateral right to withhold its consent should it judge, for any reason whatsoever, the transaction to be contrary to its economic interests and/or its business plans and strategy.

18

(¶ 83.) With respect to Novell's attempt to relax the restrictions on the redistribution of SVRX source code, Paragraph B.5 of Amendment No. 2 stated:

This Amendment does not give Novell the right to increase any SVRX licensee's rights to SVRX source code, nor does it give Novell the right to grant new SVRX source code licenses. In addition, Novell may not prevent SCO from exercising its rights with respect to SVRX source code in accordance with the Agreement.
(¶ 84.) Following, as it did, on the heels of aborted Unilateral Amendment, and signed in conjunction with the bilateral Amendment No. X, these provisions made clear that Novell's conduct — even with respect to the binary royalties — ran afoul of the APA. As Mr. Bouffard, who also negotiated Amendment No. X for Novell, explains:
Novell and Santa Cruz proceeded to negotiate Amendment No. 2 to the APA. I understood Amendment No. 2 to preclude Novell from undertaking the precise type of unilateral conduct with respect to the UNIX license agreements that I had undertaken with respect to the IBM-Novell buyout.
(¶ 85.)

REDACTED

19

(¶ 87 (emphasis added).) Of the $10,125,000 that IBM paid for the buyout of its binary royalty obligations, Novell paid Santa Cruz the 5% administrative fee due under the APA. (¶ 88.) In addition, under the General Release of Claims Agreement, Novell paid Santa Cruz $1,500,000 for the release of claims. (Id.)

In light of the foregoing account, it is unbelievable that Novell now claims the Section 4.16(b) rights it invokes. Had Novell believed in 1996 — in the days following the closing of the APA — that Section 4.16(b) provided it such rights, Novell surely would not have suspended its agreement with IBM, addressed Santa Cruz's concerns without mention of Section 4.16(b), negotiated with Santa Cruz for over six months, agreed to Amendment No. 2 whose language specifically precludes Novell's conduct,

REDACTED

If its interpretation of Section 4.16(b) were not newly concocted, IBM could have simply "directed" SCO to waive its rights in the IBM agreements. Instead, Novell recognized that its April 1996 amendment, and the underlying misinterpretation of Section 4.16(b), ran afoul of the APA.

Novell's attempt (at 29-30) to convert the IBM buyout into evidence in its favor is without merit. Novell alleges that SCO acknowledged its obligation to remit source code fees because it remitted 95% of the proceeds of Amendment No. X, which amended IBM's Software Agreement and granted limited source code rights. Novell revises history by ignoring it.

First, Santa Cruz recognized and specifically objected to Novell's attempt to grant IBM source code rights. In his letter of April 23, 1996, Mr. Mohan told Mr. Frankenberg that "our agreements provide SCO with ownership and exclusive rights to license the UNIX source code." Mr. Frankenberg did not dispute that assertion, instead reassuring Mr. Mohan that the proposed

20

buyout did not expand IBM's source code rights and addressing his concerns. Mr. Mohan disagreed but recognized that Novell, by representing to IBM that it had the authority to grant the buyout, had painted itself into a corner. He explained: "I understand that discussions with IBM are quite advanced and, on an exception basis, would be willing to try and accommodate them." (¶ 75 (emphasis added).) Thus, the minor source code rights that IBM received under Amendment No. X were an accommodation by Santa Cruz, not any grant of rights by Novell.

Second, Santa Cruz did not retain only 5% of the proceeds from Amendment No. X.

REDACTED

Third, Novell's unauthorized relaxation of restrictions on source code were clearly a secondary issue in the dispute. Even though Novell unquestionably had the right to receive 95% of the IBM binary royalties, Mr. Mohan objected to the buyout itself. As a secondary matter, Mr. Mohan explained that he was "also troubled by the fact that the proposed IBM buyout gives IBM broader rights to the UNIX intellectual property than their current license provides." (¶ 77 (emphasis added.).) Indeed, Mr. Frankenberg even attempted to convince Mr. Mohan that source code rights were not at stake. Thus, the parties understood that their disagreement was at heart about Novell's authority to grant buyouts.

21

3. Novell's Other Conduct in the Years That Followed the APA Also Belies Its New Interpretation of Section 4.16(b).

In Paragraph 2 of the agreement jointly granting HP a buyout in 1998, Novell explained the purpose of the agreement:

NOVELL retained or has acquired all rights to outstanding and future HP binary code royalty and license fee payments, but not source code royalties ("HP BINARY ROYALTY OBLIGATIONS"). NOVELL hereby warrants that as of NOVELL's signature date of this ADDENDUM, as provided below, NOVELL has no present, or future or reversionary interest in any such source code royalties. NOVELL hereby warrants that NOVELL has full right and authority to modify the terms and conditions of the AGREEMENT with respect to the HP BINARY ROYALTY OBLIGATIONS. The purpose of this ADDENDUM is to simplify those obligations, as well as corresponding reporting obligations.
(¶ 99 (emphasis added).) Novell specifically warrants that it has "no present, or future or reversionary interest in any such source code royalties." In view of its purported right to amend the SVRX agreements at whim, this warranty represents an inexplicable and gratuitous self-imposed limitation.

In 1997, Santa Cruz turned over to Novell negotiations with Cray Computers. Santa Cruz advised Novell that it had no right under the APA to negotiate source code rights or fees, and Novell agreed. (¶¶ 100-101.) In fact, before negotiating with Cray, Novell asked Santa Cruz to execute a letter agreement to "enable Novell to negotiate directly with Cray on the issue of Cray's intention to operate under the SGI Agreements for all SVRX royalty-generating binary shipment without requiring direct involvement from SCO." (¶ 101.) That letter also stated:

By signature below, SCO authorizes Novell to negotiate and conclude with Cray the issue of Cray's intention to operate under the SGI agreements for all SVRX royalty-generating binary shipments.

22

Novell agrees to inform SCO of any settlement prior to concluding a settlement with Cray. SCO's prior approval of any such settlement will be required only if the proposed settlement would alter Cray's obligation to SCO for source code royalties currently due under the Cray Agreements, including allowing Cray to operate wholly under the SGI Agreements instead of the Cray Agreements. In such a case, in addition to having the right to give prior approval, SCO shall have the right to negotiate directly with Cray for the continuation of Cray's rights to distribute source code currently provided under the Cray Agreements.
(Id.) Had Novell believed that it had the broad rights it now claims, it would not have needed SCO's "prior approval" to negotiate the continuation of Cray's rights to distribute source code.

In 1998, Novell conducted an audit of SCO's royalty payments to Novell pursuant to Section 1.2 and Section 4.16 of the APA. (¶ 102.) Novell representatives did not ask for any data other than the reports of the binary royalties from the SVRX licenses that existed at the time of the APA, and never asked about licensing of source code.

Before the 2003 audit, Santa Cruz and SCO sent Novell nearly 100 monthly reports in compliance with their obligations to collect and remit 95% of the SVRX Royalties. (¶ 103.) Those reports contained data only for the SVRX binary royalties paid during each period, and did not contain information on SVRX source code fees or any other payments. (Id.)

Through 2005, SCO paid to Novell approximately the following amounts in binary royalties, complying with the APA: $174,545,098.90. (¶ 104.) In addition, Novell received the following lump payments from buyouts granted after the APA to such companies as IBM, HP, and Cray: $28,521,250. (Id.)

Novell's conduct in the seven years that followed the APA contrasts starkly with its current conduct. Starting in 2003, when SCO sued IBM and Novell undertook its Linux

23

partnership with IBM, Novell suddenly starting claiming Section 4.16(b) and other rights belied by its prior conduct.13


SCO submits that the uncontroverted extrinsic evidence thus confirms the parties' intent under the APA and Amendments thereto, and therefore warrants summary judgment for SCO. Accordingly, in addition to the grounds for denying Novell's Motion set forth throughout this Memorandum, and to the extent the Court may not enter summary judgment in SCO's favor, Novell's Motion also fails under Federal Rule of Civil Procedure 56(f).

II. NOVELL'S MOTION ALSO FAILS FOR NOVELL'S BREACH OF THE COVENANT OF GOOD FAITH AND FAIR DEALING UNDER CALIFORNIA LAW.

Novell's request for summary judgment on the entirety of its Fourth Request for Relief is also improper under California law regarding the covenant of good faith and fair dealing. SCO alleges in its Second Claim for Relief that "Novell has also breached the covenant of good faith and fair dealing under the APA and TLA," including by "purporting to waive and revoke SCO's rights and claims against IBM." (SCO's Second Amended Complaint (¶¶ 96-100.)

"The covenant of good faith finds particular application in situations where one party is invested with a discretionary power affecting the rights of another. Such power must be exercised in good faith." Carma Developers (Cal.). Inc. v. Marathon Dev. Cal., Inc., 2 Cal. 4th 342, 372 (1992). In other words, "where a contract confers on one party a discretionary power

24

affecting the rights of the other, a duty is imposed to exercise that discretion in good faith and in accordance with fair dealing." Perdue v. Crocker Nat'l Bank, 38 Cal. 3d 913, 923 (1985) (quotations omitted); accord Kendall v. Ernest Pestana, Inc., 40 Cal. 3d 488, 500 (1985); Gal. Lettuce Growers v. Union Sugar Co., 45 Cal. 2d 474, 484 (1955); Badie v. Bank of Am., 67 Cal. App. 4th 779, 795-96 (1998); Locke v. Warner Bros, Inc., 57 Cal. App. 4th 354, 363 (¶ 997).14 The duty is violated where the party either exercises the discretionary right in bad faith or in an objectively unreasonable way, regardless of the actor's motive. Carma, 2 Cal. 4th at 372-73; Badie, 67 Cal. App. 4th at 795-96. Under the objective test, the covenant "requires the party holding such power to exercise it for any purpose within the reasonable contemplation of the parties at the time of formation -- to capture opportunities that were preserved upon entering into the contract." Carma, 2 Cal. 4th at 372 (quotations and citations omitted); accord Badie, 67 Cal. App. 4th at 796.

Novell seeks a blanket declaration that it "has the right, at its sole discretion, to direct SCO to waive any rights under any SVRX Licenses." (Novell's Amended Counterclaims ¶ 118.) Novell also seeks a specific declaration, pertaining to its conduct with respect to IBM, that "Novell is entitled, at its sole discretion, to direct SCO to waive its purported claims against IBM, Sequent and other SVRX licensees." (Id. 119(a).) Novell is not entitled to summary judgment on either declaration, because there are material issues of fact indicating Novell's waiver is in breach of the covenant of good faith and fair dealing.

25

SCO's evidence showing that at the time Novell directed SCO to waive its rights, Novell was improperly seeking to promote business interests entirely separate from any rights it retained under the APA. In a series of deals struck between November 2003 and March 2004, Novell and IBM have formed a very close Linux partnership: Novell acquired Linux distributor SuSE Linux, and IBM invested $50 million in Novell to finance part of the acquisition. Press Release, Novell, Inc., Novell Finalizes IBM Investment (Mar. 3,2004) (Ex. 45). Under the IBM-Novell deal, Novell became a major Linux distributor, allowing IBM to continue its official distance from the Linux distribution channel. IBM spokesman Mike Darcy stated: "IBM is not a Linux distributor and has no interest in being in that business." Hiawatha Bray, Novell to Buy SuSE Linux for $210M: Firm's Commitment to Software Boosted, The Boston Globe, Nov. 5, 2003 (Ex. 41.) IBM benefits significantly from the Linux distributions made by Novell. Novell CEO Jack Messman explained the benefits of its partnership with IBM as follows: "IBM stands to gain a great deal of revenue by providing systems, peripheral devices, software and services for Linux." Bob Mims, Novell, IBM and HP unite efforts to put Linux on top: Three companies unite to boost Linux and topple Microsoft, The Salt Lake Tribune, Mar. 25,2004, at El (Ex. 42.)

Whether Novell exercised it purported waiver right in conjunction with IBM's decision to invest in Novell or for other motives, it is clear that the action damages SCO, interferes with its rights to manage the UNIX business the APA was intended to transfer, and thus cannot be accepted as a good faith exercise of discretion, beyond factual dispute. Novell has not even attempted to present evidence establishing that its exercise of any waiver rights protected interests that Novell and Santa Cruz contemplated when they executed the APA and amendments

26

thereto. Accordingly, for this additional, independently sufficient reason, the Court must deny Novell's motion.

27

CONCLUSION

SCO respectfully submits, for the foregoing reasons, that the Court should deny Novell's Motion for Partial Summary Judgment on Its Fourth Counterclaim and grant SCO's Cross-Motion for Partial Summary Judgment.

DATED this 17th day of January, 2007.

HATCH, JAMES & DODGE, P.C.
Brent O. Hatch
Mark F. James

BOIES, SCHILLER & FLEXNER LLP
Robert Silver
Stuart H. Singer
Stephen N. Zack
Edward Normand

Counsel for The SCO Group, Inc.

By: (signature)

28

CERTIFICATE OF SERVICE

Plaintiff/Counterclaim Defendant, The SCO Group, Inc., hereby certifies that a true and correct copy of the foregoing was served on Defendant, Novell, Inc., on this 16th day of April, 2007, via CM/ECF to the following:

Thomas R. Karrenberg
John P. Mullen
Heather M. Sneddon
ANDERSON & KARRENBERG
[address]

Michael A. Jacobs
Matthew I. Kreeger
Kenneth W. Brakebill
MORRISON & FOERSTER
[address]

/s/ Edward Normand

29

1 While SCO has made this Memorandum and its attachments a self-contained and complete response, because of the similarity in the issues, SCO incorporates by reference its memoranda and exhibits filed in opposition to Novell's Motion for Partial Summary Judgment or Preliminary Injunction.

(Referenced here)
2 The facts are cited in this Part as "¶ ___", referring to the relevant paragraph number(s) in the foregoing Statement of Facts.

(Referenced here)
3Novell mistakenly cites two cases for the principle that extrinsic evidence should not be examined in this case. In Tahoe National Bank v. Phillips, 4 Cal. 3d 11, 23 (1971), the court noted that under California law, "[r]ecent decisions make clear that, in most cases, extrinsic evidence must be admitted provisionally in order that the court may determine if that evidence is relevant to establish an interpretation of the instrument to which it is reasonably susceptible," Id. at 22, and held that the defendant "cannot now take exception to the trial court's receipt of extrinsic evidence, but that she may argue on appeal that such extrinsic evidence conflicts with any interpretation to which the instrument is reasonably susceptible." Id. at 23-24.

Novell also mischaracterizes the Court's finding in Haggard vs Kimberly Quality Care, Inc., 39 Cal. App. 4th 508, 519-20 (1995) by implying (at 21) that the Court found that California courts "will not consider" extrinsic evidence in an integrated contract. To the contrary, the court correctly stated California law as allowing parol evidence, even in an integrated contract. Id. ("Where the contract is integrated, parol evidence still might be admissible if it is 'relevant to prove a meaning to which the language of the instrument is reasonably susceptible.'") (citation omitted). The contract in that case, unlike the APA, was not 'reasonably susceptible' to the plaintiff's interpretation.

(Referenced here)
4Novell does not even acknowledge Dore or Pacific Gas & Electric. Novell does cite (at 20, 22) California Civil Code Sections 1638 and 1639 , which must be read in the context of two other provisions of the California Code, Sections 1647 and 1641. Under Section 1647, a contract may be explained by reference to the circumstances under which the contract was made, and the matter to which it relates; and under Section 1641, the court must consider the contract as a whole and interpret the language in context.

The cases Novell does cite are inapposite as well as decided prior to Dore. Novell's attempt (at 24) to use a Tenth Circuit case that applied federal law, Kunkel v. Continental Casualty Co., 866 F.2d 1269, 1275-76 (10th Cir. 1989), concerning the APA (governed by California law) is unfounded.

Novell cites four cases, including one from 1959 that involve attempts to supersede a clearly stated express contract provision with an implied covenant in the very specific contexts of cancellation clauses and termination clauses. Carma Developers. Inc. v. Marathon Dev. Cal., Inc., 2 Cal. 4th 342,374 (1992) (implied covenant of good faith cannot be used to prohibit invoking an express cancellation clause); Jensen v. Traders & General Ins. Co., 52 Cal. 2d 786,790 (1959) (same); Bionghi v. Metro. Water Dist. of So. Cal., 70 Cal. App. 4th 1358, 1363-66 (1999) (implied covenant to terminate only for cause could not prohibit express provision allowing termination at will); Haggard, 39 Cal. App. 4th at 519-20 (same). SCO shows here that there is no express provision that governs and so the Court must look to extrinsic evidence to determine intent.

Novell cites two other cases that involve situations where no extrinsic evidence was presented. See Shaw v. Regents of the Univ. of Cal., 58 Cal App. 4th 44, 53-55 (1997); Niederer v. Ferreira, 189 Cal. App. 3d 1485, 1499 (1987) (where the parties "presented no extrinsic evidence as to their intent at the time the document was signed" contract was considered "clear and unambiguous"). Here, SCO presents significant extrinsic of the parties' intent.

(Referenced here)
5In Bionghi, 70 Cal. App. 4th at 1363-66, cited by Novell to support their incorrect assertion that the parol evidence rule prohibits introduction of extrinsic evidence of intent, the court found that a clause of an employment contract requiring only thirty days notice in order to terminate was not superseded by an implied covenant to terminate only for cause. Within the pages cited by Novell, the Bionghi Court summarized California law as follows:
First, the court must determine whether the language of the contract is reasonably susceptible to the meanings urged by the parties. In so doing, the court must give consideration to any evidence offered to show that the parties' understanding of words used differed from the common understanding. If the court determines that the contract is reasonably susceptible of the meanings urged, extrinsic evidence relevant to prove the meaning agreed to by the parties is admissible.
Id. at 1365 (emphasis added). Bionghi also notes that had the parties disputed whether the "30 days" in the contract referred to 'calendar' days or 'business' days, then extrinsic evidence would have been permitted to resolve the issue. Id. At 1366.

(Referenced here)
6The "absence of a [contract] definition, though perhaps not dispositive, might weigh, even strongly, in favor of finding an ambiguity, for example, when the term in question has no generally accepted meaning outside the context of the [contract] itself." Bay Cities Paving & Grading, Inc. v. Lawyers' Mut. Ins. Co., 5 Cal. 4th 854, 867 (Cal. Ct. App. 1993). Indeed, California courts routinely deny summary judgment where an undefined relevant term is subject to more than one reasonable interpretation. See, e.g., Wolf v. Super. Ct., 114 Cal. App. 4th 1343, 1357 (Cal. Ct. App. 2004) (reversing summary judgment because "the only way to construe the meaning of the term" was by considering extrinsic evidence); EOTT Energy Corp. v. Storebrand Int'l Ins. Co., A/S, 45 Cal. App. 4th 565, 574, 578 (Cal. Ct. App. 1996) (undefined term "certainly presents a problem [precluding summary judgment] if the term is reasonably susceptible to more than one meaning"); cf. Rammine v. Barnard, No. E030334, 2002 WL 393118, at *5 (Cal. Ct. App. Mar. 13, 2002) ("It cannot seriously be contended that the [agreement] is not ambiguous. For example, the use of the undefined term 'sale proceeds' is susceptible to many meanings[.]") (Ex. A.); accord World Trade Ctr. Props. v. Hartford Fire Ins. Co., 345 F.3d 154, 190 (2d Cir. 2003) (summary judgment was properly denied because meaning of undefined term was "an open question as to which reasonable finders of fact could reach different conclusions").

(Referenced here)
7See, e.g., Heidlebaugh v. Miller, 271 P.2d 557, 559 (Cal. Ct. App. 1954) ("The court will if possible give effect to all parts of the instrument and an interpretation which gives a reasonable meaning to all its provisions will be preferred to one which leaves a portion of the writing useless or inexplicable.").

(Referenced here)
8 In addressing IBM's arguments from that IBM memorandum, SCO references page numbers from the memorandum.

(Referenced here)
9 IBM later asserts (at 76) that SCO's CEO once referred to IBM's UNIX license agreement as its "SVRX License," but IBM does not even claim that Mr. McBride was purporting to use that term within its meaning in the APA. Indeed, IBM's citation to the statement underscores the importance of the context of the use of the term in the APA, because on its own the term permits multiple meanings.

(Referenced here)
10 Novell also attempts to conflate the agreements physically. As its Exhibit 5, Novell submits IBM's Software Agreement and an unsigned copies of what appear to be IBM's Supplement No. 1 and Supplement No. 2. The pages of these documents are separately paginated, so that the Software Agreement, for instance, starts with page "1 of 6" and ends with page "6 of 6." Novell has apparently added page numbers to these documents, so that they run consecutively from page 1 through 20 in a format in which they were never negotiated or executed.

(Referenced here)
11 IBM argues (at 75 n.50) that such schedules may refer to "fees due for use and distribution of both binary and source SVRX products," but Santa Cruz retained such source fees under Section E of Amendment No. 1.

(Referenced here)
12 IBM finally argues (at 78-79) that "Amendment 2 is irrelevant," but SCO has shown in detail why IBM is incorrect, and why both the existence and language of Amendment No. 2 confirm SCO's interpretation of the APA.

(Referenced here)
13 In contrast, the vast evidence of Novell's conduct that SCO presents, Novell and IBM strain to identify any conduct by SCO or Santa Cruz that creates an issue of fact. Both cite (at 31 and 75, respectively) SCO's public statement that it acts as Novell's agent "in the collection of royalties for customers who deploy SVRX technology." But that statement directly supports SCO's arguments here. The reference to "royalties" in the context of source-code licensing plainly refers to binary payments; source-code right-to-use fees are just that: "fees," not royalties.

(Referenced here)
14 Indeed, to the extent Novell seeks to argue that Section 4.16(b) disclaimed any such obligation of good faith in the exercise of Novell's discretion, Novell was not then permitted to obtain any such disclaimer, which would have constituted an unconscionable contractual provision. See Seaman's Direct Buying Serv., Inc. v. Standard Oil Co. of Cal., 36 Cal. 3d 752, 769 n.7 (1984). In addition, the argument that Novell had no obligation of good faith or fair dealing in the exercise of its discretion would render the APA illusory. See Perdue, 38 Cal. 3d at 924; Cal. Lettuce, 45 Cal. 2d at 484.

(Referenced here)


Appendix A

Response to Novell's Statement of Undisputed Facts1

A. The APA and Novell's Retained Rights Under Section 4.16(b) to Direct SCO to Take Action, or Upon SCO's Refusal, to Take Action on Behalf of SCO.

1. In 1995, Novell was engaged in the business of developing a line of operating system software products called UNIX and UnixWare, and was selling binary and source code licenses to various versions of these products. (Brakebill Decl., Ex. 1 (APA) at 008 (Recital A).)
Disputed in that on September 19, 1995, Novell transferred the entire UNIX business, including the UNIX source code and copyrights, to Santa Cruz, except for the binary royalties paid under the existing agreements pursuant to which UNIX System V (or "SVRX") licensees were paying such royalties, and which Novell conveyed to Santa Cruz under the APA as part of the UNIX business. (¶¶ 1 - 15.)

2. On September 19, 1995, Novell and Santa Cruz entered into the APA. (Id. at 008.)
Undisputed.

3. Through the APA, Santa Cruz acquired "certain of the assets" comprising Novell's UNIX and UnixWare business. (Id. at 008 (Recital B), 008-9 (§ 1.l(a)); Ex. 2 at 001 (Recital A).)
Disputed to the extent that the term "certain of the assets" suggests that after September 19, 1995, Novell retained any portion of the UNIX business, including the UNIX source code and copyrights, except for the binary royalties paid under the existing agreements pursuant to which SVRX licensees were paying such royalties. (¶¶ 1-24.)

1

4. Through the APA, Santa Cruz also acquired the right to develop, license, and sell a new consolidated Intel UNIX product referred to as the "Merged Product." (Id., Ex. 1 at 032 (§ 4.18); Ex. 2 at 001-2 (§§ 1-2); SCO v. Novell, SCO's Reply to Novell's Amended Counterclaims, PACER No. 158 at 3-4 (¶ 14).) Santa Cruz also obtained the right to convert "SVRX-based customers" to a UnixWare derived product. (See, e.g., Brakebill Decl., Ex. 1 at 065-066 (Sch. 1.2(b) at subsection (f)).)
The first sentence is disputed because the APA did not grant the referenced right. (See Ex. 3.) The second sentence is disputed to the extent the statement suggests that the right to "convert SVRX-based customers" to UnixWare was not one of the numerous rights SCO acquired in acquiring "all right, title and interest" and "All rights and ownership" in the Business. (See Ex. 3 § 1.l(a), Schedule 1.l(a) Item I.)

5. Because Santa Cruz did not have the financial capacity to pay the purchase price contemplated by Novell, Novell and Santa Cruz agreed that Novell would receive Santa Cruz stock and retain certain UNIX rights. (The SCO Group, Inc. v. IBM Corp., No. 2:03CV294 (D. Utah 2005) (hereinafter "SCO v. IBM"), SCO's Memorandum in Opposition to IBM's Motion for Summary Judgment on SCO's Contract Claims, dated November 11, 2006 (hereinafter "SCO's Opp. to IBM's MSJ on SCO's Contract Claims"), PACER No. 872-75 at Appendix A, p. 69 (Undisputed Fact ¶ 136).)
Disputed to the extent the statement suggests that Novell retained any rights in UNIX other the right to receive and protected the residual SVRX binary royalties due under then existing SVRX Licenses (the "binary royalty stream"). (¶¶ 1-20.)

6. In consideration of Novell's transfer of certain assets to Santa Cruz, Santa Cruz issued 6,127,500 shares of its common stock to Novell. (Brakebill Decl., Ex. 1 at 009 (§ 1.2).)
Undisputed.

7. As further consideration, Novell retained rights, and Santa Cruz assumed certain obligations, relating to "the SVRX Licenses." (Id. at 009 (§ 1.2(b)), 031 (§ 4.16), 059-60 (Sch. 1.1(a) (Item VI)), and 062 (Sch. 1.1(b) (Item VIII)).)
Disputed to the extent that the statement "Novell retained rights" suggests that pursuant to the APA, Novell retained any portion of the UNIX business, including the UNIX source code

2

and copyrights, except for the binary royalties paid under the existing agreements pursuant to which SVRX licensees were paying such royalties. (¶¶ 1-20.) Disputed to the extent the term "SVRX Licenses" includes agreements other than the product Supplements (also known as product Schedules) under which Novell, like its predecessor and successors, actually licensed SVRX products. (¶¶ 36-49.)

8. First, Novell retained ''[a]ll right, title and interest" to "all royalties, fees, and other amounts due under all SVRX Licenses" — referred to as "SVRX Royalties." (Id. at 031 (§ 4.16(a)), 062 (Sch. 1.1(b) (Item VIII)).) Although the APA transferred "the SVRX Licenses" to Santa Cruz, Novell and Santa Cruz expressly acknowledged and agreed "that [Santa Cruz] only has legal title and not an equitable interest in such royalties." (Id. at 009 (§ 1.2(b)).) As Novell's "administrative agent" for the sums due under all SVRX Licenses, Santa Cruz agreed "to collect and pass through to [Novell] one hundred percent (100%)" of these monies and Novell, in turn, agreed to pay Santa Cruz a 5% administrative fee. (Id. at 009 (§ 1.2(b)), 031 (§ 4.16(a)); Ex. 42 at 42).)
Disputed in that the APA transferred the entire UNIX business, including the UNIX source code and copyrights, to Santa Cruz except for the binary royalties paid under the existing agreements pursuant to which SVRX licensees were paying such royalties, and which Novell conveyed to Santa Cruz under the APA as part of the UNIX business. (¶¶ 1-1 5.) Disputed to the extent the term "SVRX Licenses" includes agreements other than the product Supplements (also known as product Schedules) under which Novell, like its predecessor and successors, actually licensed SVRX products. (¶¶ 36-49.) Disputed to the extent the term "SVRX Royalties" includes fees other than the per-copy, or binary-royalty, fees paid by licensees under SVRX licenses transferred to Santa Cruz under the APA for the distribution of SVRX products in binary form. (¶¶ 16-24.)

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9. Prior to this lawsuit, SCO publicly acknowledged that these administrative duties with respect to SVRX Licenses extend to "customers who deploy SVRX technology." Specifically, SCO stated that:
[SCO] acts as an administrative agent in the collection of royalties for customers who deploy SVRX technology. Under the agency agreement, the Company collects all customer payments and remits 95 percent of the collected funds to Novell and retains 5 percent as an administrative fee.
(Id., Ex. 42 at 42 (emphasis added).) In this announcement, SCO did not report that its administrative duties under the APA are limited to a more narrow set of SVRX customers that includes only those licensing SVRX products in binary code format.
Disputed because the quotation actually supports SCO's position, in that the word "royalties" shows that SCO's obligations (and Novell's rights) are limited to the SVRX binary royalty stream. Disputed to the extent the term "SVRX Licenses" includes agreements other than the product Supplements (also known as product Schedules) under which Novell, like its predecessor and successors, actually licensed SVRX products. (¶¶ 36-49.) Disputed to the extent that the statement includes any agreement other than the SVRX licenses transferred to Santa Cruz under the APA. (Id.) Disputed to the extent that the public statement, when taken in context, accurately describes SCO's obligations under the APA.

10. As part of the agency relationship created by the APA, Santa Cruz agreed to provide Novell with monthly reports concerning its administration of the SVRX License revenue. (Id., Ex. 3 at 4 (§ E(f)), 6 (I(1)).) In those reports, Santa Cruz recorded SVRX revenue it received from customers and detailed the cash Santa Cruz remitted to Novell. In particular, Santa Cruz set forth the total SVRX revenue due or collected from customers (which it recorded as "Total Revenue for Administrative Consideration for Period"), SCO's 5% administrative fee (which it recorded as "Administrative Fee" or "Domestic Administrative Fee Calculation"), and the cash amount it would pay Novell after deduction of SCO's administrative fee, third party royalty payments, bank fees or other miscellaneous offsets (which it recorded as "Total Payment Due to Novell for Period"). (See, e.g., id., Ex. 14 at 1; Ex. 43 at 1.)
Disputed to the extent the term "SVRX Licenses" includes agreements other than the product Supplements (also known as product Schedules) under which Novell, like its

4

predecessor and successors, actually licensed SVRX products. (¶¶ 36-49.) Disputed to the extent the document relies on reports in Novell's, but not SCO's, possession, custody, or control. Disputed to the extent the term "SVRX revenue" includes fees other than the per-copy, or binary-royalty, fees paid by licensees under SVRX licenses transferred to Santa Cruz under the APA for the distribution of SVRX products in binary form. (¶¶ 16-24.)

11. Second, Novell retained the right, "at [its] sole discretion and direction," to direct Santa Cruz to take certain actions as to "any SVRX License" — including to direct Santa Cruz to waive any rights under "any SVRX License" — and to take such action on Santa Cruz's behalf should Santa Cruz fail to follow Novell's direction. (Id., Ex. 1 at 031 (§ 4.16(b)).) Section 4.16(b) provides, in pertinent part:
(b) [SCO] 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 [Novell]. In addition, at [Novell]'s sole discretion and direction, [SCO] 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 [Novell]. In the event that [SCO] shall fail to take any such action concerning the SVRX Licenses as required herein, [Novell] shall be authorized, and hereby is granted, the rights to take any action on [SCO]'s own behalf...
(Id. (emphasis added).)
Disputed to the extent the term "SVRX License" includes agreements other than the product Supplements (also known as product Schedules) under which Novell, like its predecessor and successors, actually licensed SVRX products. (¶¶ 36-47.) Disputed to the extent the statement asserts or suggests that the rights in Section 4.16(b) extend beyond the right to protect the binary royalty stream. Disputed to the extent the statement suggests that, pursuant to the APA, Novell transferred the entire UNIX business, including the UNIX source code and copyrights, to Santa Cruz except for the binary royalties paid under the existing agreements pursuant to which SVRX licensees were paying such royalties, and which Novell conveyed to Santa Cruz under the APA as part of the UNIX business.

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12. Section 4.16 of the APA — entitled SVRX Licenses — defines that term. (Id. at 031 (§ 4.16(a)).) The first sentence of subparagraph (a) of Section 4.16 refers to "SVRX Licenses" and is then immediately followed by an explanatory parenthetical stating: "as listed in detail under item VI of Schedule 1.1(a) hereof..." (Id.) Item VI of Schedule 1.1(a), in turn, provides a list of "the SVRX Licenses" that relate to various UNIX System V software releases, including UNIX System V Release Nos. 2.0, 2.1, 3.0, 3.1, 3.2, 4.0, 4.1, and 4.2 and "[a]ll prior UNIX System releases and versions preceding UNIX System V Release No. 2.0." (Id. at 059-60 (Sch. 1.1 (a)).)
Disputed in that Sections 4.16(a) and Item VI do not define the term "SVRX Licenses" except in a circular reference to itself in Item VI. Disputed in that Item VI does not list any licenses. Disputed to the extent the term "SVRX Licenses" includes agreements other than the product Supplements (also known as product Schedules) under which Novell, like its predecessor and successors, actually licensed SVRX products. (¶¶ 26-49.)

B. The APA Amendments As Related to SVRX Licenses and Novell's 4.16(b) Right to Take Action.

13. Novell and Santa Cruz amended the APA twice — on December 6, 1995 ("Amendment No. 1"), and on October 16, 1996 ("Amendment No. 2"). (Id., Exs. 3-4.)
Undisputed.

14. Amendment No. 1 confirms that SVRX Licenses includes those contracts relating to the UNIX System V software releases listed under Item VI of Schedule 1.l(a) of the original APA. Amendment No. 1 also expands SVRX Licenses to additionally include those contracts relating to certain "Auxiliary Products" expressly identified in Attachment A to that Amendment (which is alternatively referred to as "Attachment 1 to Schedule 1.1(a)). (Id, Ex. 3 at 9 (§ K.4), 8 (§ K.1(vi)), 10 (§ 0).)
Disputed in that Amendment No. 1 does make the confirmation Novell contends. (See 49.) Disputed in that Attachment A does not list any licenses. (¶¶ 25-29.) Disputed in that Sections 4.16(a) and Item VI do not define the term "SVRX Licenses" except in a circular reference to itself in Item VI. (Id.) Disputed in that Item VI does not list any licenses. (Id.)

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Disputed to the extent the term "SVRX Licenses" includes agreements other than the product Supplements (also known as product Schedules) under which Novell, like its predecessor and successors, actually licensed SVRX products. (¶ 26-49.)

15. Amendment No. 1 modifies Section 4.16(b) in only one respect: it carves out two limited exceptions where Santa Cruz has "the right to enter into amendments of the SVRX Licenses" and "new SVRX Licenses" — exceptions that are not at issue in this motion. (Id. at 6-7 (§ J).) Amendment No. 1 contains no language purporting to modify Section 4.16(b)'s grant of authority to Novell to direct SCO to take action, or to take action on behalf of SCO. (Id., Ex. 3.)
Disputed to the extent the statement does not identify the universe to which the purported exceptions apply. Disputed to the extent the term "SVRX Licenses" includes agreements other than the product Supplements (also known as product Schedules) under which Novell, like its predecessor and successors, actually licensed SVRX products. (¶¶ 26-49.) Disputed to the extent that the statement includes any agreements other than the SVRX licenses transferred to Santa Cruz under the APA. (Id.)

16. Amendment No. 2 addresses Section 4.16 of the APA in one limited respect: it details how prospective buy-outs with SVRX licensees shall be managed by Novell and Santa Cruz. (Id., Ex. 4 at 1.) In relevant part, Section B of Amendment No. 2 provides:
B. Except as provided in Section C below, and notwithstanding the provisions of Article 4.16, Sections (b) and (c) of the Agreement, any potential transaction with an SVRX licensee which concerns a buy-out of any such licensee's royalty obligations shall be managed as follows. ...
(Id. (emphasis added).) Section B then immediately proceeds to list six subsections to be followed by Novell and Santa Cruz in managing future buy-out transactions. (Id. at 1-2.)
Disputed in that Amendment No. 2 addressed Section 4.16 in other respects. Disputed to the extent Paragraph B.5. set forth clarifications that applied far beyond the management of buyouts. (¶¶ 50-52.) Disputed to the extent the term "SVRX licensees" includes parties to agreements other than the product Supplements (also known as product Schedules) under which

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Novell, like its predecessor and successors, actually licensed SVRX products. (¶¶ 26-49.) Disputed to the extent the term "royalty" includes fees other than the per-copy, or binary-royalty, fees paid by licensees under SVRX licenses transferred to Santa Cruz under the APA for the distribution of SVRX products in binary form. (¶¶ 16-24.)

17. Subsections B(l) through B(4) of Amendment No. 2 require participation of both Novell and Santa Cruz in any prospective buy-out transaction with SVRX licensees. (Id. at 1.) Subsection B(5) of Amendment No. 2 confirms that Amendment No. 2's new procedure for managing future buy-out transactions does not alter the parties' existing source code rights under the APA. (Id.) Subsection B(6) of Amendment No. 2 prohibits Novell's sales force from receiving sales incentives as a result of these prospective buy-out transactions. (Id. at 2.)
Disputed to the extent the statement attempts to paraphrase in one paragraph a two-page document that speaks for itself. Disputed in that Paragraph B clarified and was intended to clarify that, in granting buyouts, Novell could not grant any source code rights. (¶¶ 50-51.) Disputed in that Paragraph B clarified and was intended to clarify that, notwithstanding Section 4.16(b) or any prior Novell interpretation of that provision, Novell did not have any rights with respect to the licensing of source code under the APA. (¶¶ 50-52.) Disputed in that that paragraph made clear that under the APA Santa Cruz had exclusive right to license source code. (Id.) Disputed to the extent the term "SVRX licensees" includes parties to agreements other than the product Supplements (also known as product Schedules) under which Novell, like its predecessor and successors, actually licensed SVRX products. (¶¶ 26-49.)

C. The AT&T License Agreements Granting Rights to UNIX System V Software.

18. UNIX was originally developed by AT&T. Over time, AT&T, through various business units and subsidiaries, licensed various versions of its UNIX software, in both source and object code form, to universities, corporations, other entities and individuals. (SCO v. Novell, Novell's Amended Counterclaims, PACER No. 142 at 1-2 (¶ 6); SCO v. Novell, SCO's Reply to Novell's Amended Counterclaims, PACER No. 158 at 2 (¶ 6); SCO v. IBM, SCO's

8

Opp. to IBM's MSJ on SCO's Contract Claims, PACER No. 872-75 at Appendix A p.3 (Undisputed Facts ¶¶ 10-11).)
Undisputed.

19. In 1983, AT&T developed a new version of UNIX called UNIX System V, Release 1. Subsequently, AT&T released other versions of System V, including Releases 2, 3 and 4. These releases of UNIX System V are referred to as SVR1, SVR2, SVR3 and SVR4, or generically as SVRX. (SCO v. IBM, SCO's Opp. to IBM's MSJ on SCO's Contract Claims, PACER No. 872-75 at Appendix A p.3 (Undisputed Fact ¶ 9); SCO v. Novell, Novell's Amended Counterclaims, PACER No. 142 at 2 (¶ 7); SCO v. Novell, SCO's Reply to Novell's Amended Counterclaims, PACER No. 158 at 2 (¶ 7).)
Undisputed.

20. AT&T licensed its UNIX System V software products through a combination of Software Agreements, Sublicensing Agreements, Supplements, and Schedules. The "Software Agreements" granted the licensee the right to use, modify and prepare modifications and derivative works of the "SOFTWARE PRODUCT." (See, e.g., Brakebill Decl., Ex. 5, at 002 (§ 2.01).) The SOFTWARE PRODUCT was defined to include COMPUTER PROGRAMS in source-code or binary-code (i.e., "object-code") format. (Id. (§§ 1.02, 1.04).)
Disputed in that AT&T used the Product Supplements, which included the Schedule, to license its software products, including non-UNIX products. (¶ 2.) Disputed in that Software Agreement granted the listed rights only with respect to any product that the licensee actually licensed under that product's respective Supplement. (Id.) Disputed in that a licensee did not obtain any rights to, or even delivery of, any product until the licensee signed the respective Supplement. (¶¶ 35-40.) Disputed, here and elsewhere in this response, to the extent the statements place the referenced agreements in quotations marks without any explanation for doing so.

21. The "Sublicensing Agreements" permitted the licensee to sublicense derivative works of the SOFTWARE PRODUCT to others in binary-code format. (See, e g., id., Ex 6 at 002 (§§ 1.04, 2.01).) These derivative works were referred to as the SUBLICENSED PRODUCT. (Id. (§ 1.04).)

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Disputed in that the Sublicensing Agreements granted the referenced right only with respect to any product that the licensee actually licensed under the product's respective Supplement. (¶¶ 35-40.) Disputed in that a licensee did not obtain any rights to, or even delivery of, any product until the licensee signed the respective Supplement. (Id.)

22. The "Software Agreements" were accompanied by one or more "Supplements" (through attached "Schedules") that set forth the specific SOFTWARE PRODUCT being licensed, listed the designated CPUs on which the SOFTWARE PRODUCT was to be used, and enumerated the fees owed. (See, e.g., id., Ex. 5 at 007-15.) Any given Supplement (through an attached "Schedule") identified, among other things, both the fees owed for use and distribution of source code and the fees owed for use and distribution of binary code. (Id. at 007; Ex. 10 at 009.) They also contained additional provisions governing sublicensed code. (See, e.g., id., Ex. 12 at 043-44, Ex. 22 at 006-14.)
Disputed in that the Software Agreements were not accompanied by one or more Supplements, but were entered into independently, sometimes over the course of many years. (See Ex. 35.) Licensees who signed a Software Agreement were under no obligation to sign any Supplement. (See e.g., Ex. 57.) Licensees who signed a Software Agreement typically licensed numerous Supplements over the course of their licensing relationship with AT&T and/or its successors. (See Ex. 35.) Disputed to the extent the last sentence is vague and ambiguous. Disputed in that the pagination Novell has apparently applied to the cited exhibit gives the incorrect impression that the Supplement and Software Agreement are one continuous document. (n. 10)

23. Under the Software Agreements, the licensee typically paid a one-time source code right-to-use fee and a distribution fee for each additional copy of the SOFTWARE PRODUCT distributed by the licensee. (See, e.g., id., Ex. 5 at 007 (Items 1(a) & l(b)), 003 (§ V) (referring to fees set forth in attached "Supplement(s)" and "Schedule(s)").) The Sublicensing Agreements explicitly reference the Schedules to the Software Agreements for the amounts of sublicensing fees due for each SOFTWARE PRODUCT. (See, e.g., id., Ex. 6 at 006 (§ 4.01(a)).) The licensee typically paid a one-time "sublicensing fee" in addition to a "per copy" fee for each

10

copy of the SUBLICENSED PRODUCT sold to a customer of the licensee. (Id., Ex. 5 at 007 (Item 1(c)).)
Disputed in that licensees did not pay any fees under the Software Agreements and those Agreements did not give rise to any payment obligation. (¶ 42.) Disputed in that the phrase "distribution fee for each additional copy of the SOFTWARE PRODUCT distributed by the licensee" is vague and ambiguous. Disputed in that there were no "Schedules to the Software Agreements." Instead, the Schedules were part of the Product Supplement, and each Product Supplement had its own Product Schedule. (¶¶ 36-42.) Disputed in that the pagination Novell has apparently applied to the cited exhibit gives the incorrect impression that the Supplement and Software Agreement are one continuous document. (n. 10.) Disputed to the extent the statement conflates the referenced agreements. (¶¶ 36-42.)

D. The IBM SVRX License.

24. Between February 1, 1985 and October 17, 1996, IBM entered into various agreements, supplements, and amendments concerning its rights to use UNIX System V software products (hereinafter, collectively termed the "IBM SVRX License"). (See ¶¶ 25-27, infra.)
Disputed to the extent the statement conflates or blurs the distinction between discrete agreements. (¶¶ 36-42; Part I.D.) Disputed to the extent the term "IBM SVRX License" is misleading and nonsensical in that it tries to merge distinct documents into a single purported agreement. (Part I.D.) Disputed in that the statement incorrectly equates the various agreements with an "SVRX License" under the APA. (Id.)

25. Specifically, on February 1, 1985, IBM and AT&T entered into a software agreement (SOFT-00015), sublicensing agreement (SUB-00015A), substitution agreement, and side letter (hereinafter, collectively referred to as "the 1985 IBM Agreement"). In these agreements, AT&T granted IBM a license to, among other things, use, modify, prepare derivative works of, and sublicense designated "Software Products," including UNIX System V Release No. 2.0. (Brakebill Decl., Exs. 5-8.)

11

Disputed to the extent the statement conflates or blurs the distinction between discrete agreements. (¶¶ 36-42; Part I.D.) Disputed to the extent the term "the 1985 IBM Agreement" is misleading and nonsensical in that it tries to merge distinct documents into a single purported agreement. (Part I.D.) Disputed to the extent the statement incorrectly equates the various agreements with an "SVRX License" under the APA. (Id.) Disputed in that AT&T did not grant "a license" to any particular product under the Software and Sublicensing Agreements. (¶¶ 36-42.) Disputed in that only a Product Supplement actually granted a license to a product. (¶¶ 36-42.)

26. Between April 21, 1986 and January 25, 1989, IBM and AT&T executed numerous supplements to the 1985 IBM Agreement. (Id., Exs. 9-12.) These supplements granted IBM additional rights to UNX System V Release Nos. REDACTED
Disputed to the extent the statement conflates or blurs the distinction between discrete agreements. (¶¶ 36-42; Part I.D.) Disputed to the extent the term "the 1985 IBM Agreement" is misleading and nonsensical in that it tries to merge distinct documents into a single purported agreement. (Part I.D.) Disputed to the extent the statement incorrectly equates the various agreements with an "SVRX License" under the APA. (Id.) Disputed in that the supplements did not grant "additional" rights to the referenced products; the supplements granted rights to the products. (¶¶ 36-42.)

27. On October 17, 1996, IBM entered into Amendment No. X, also executed by Novell and Santa Cruz on October 16, 1996. (Id., Ex. 13 at 007.) Amendment No. X modified the terms of the 1985 IBM Agreement and the various supplements thereto, including Supplement No. 170 to the software agreement (pertaining to SVR3.2) and "any other Supplements that pertain to prior versions or releases" of UNIX System V software. (Id. at 001.) Amendment No. X granted additional source code rights to IBM. (Id., Ex. 13 at 001-5; SCO v. IBM, SCO's Opp. to IBM's MSJ on SCO's Contract Claims, PACER No. 872-75 at 103-04.)

12

Disputed to the extent the statement conflates or blurs the distinction between discrete agreements. (¶¶ 36-42; Part I.D.) Disputed to the extent the term "the 1985 IBM Agreement" is misleading and nonsensical in that it tries to merge distinct documents into a single purported agreement. (Part I.D.) Disputed to the extent the statement incorrectly equates the various agreements with an "SVRX License" under the APA. (Id.) Disputed to the extent that phrase "additional source code rights" suggests that that IBM received any such rights other than the limited right to distribute the source code to its contractors or certain other licensees for specified purposes. (¶¶ 36-42.)

28. Amendment No. X also granted IBM an "irrevocable, fully-paid-up, perpetual right to exercise all of its rights ... beginning January 1, 1996 at no additional royalty fee." (Brakebill Decl., Ex. 13 at 001 (§ 1).) As consideration for the rights granted by Amendment No. X, IBM paid Santa Cruz $10,125,000 in two installments — one payment of $4,860,000 and a second payment of $5,265,000. (Id. at 005 (§ 4).)
Disputed to the extent the statement quotes the Amendment No. X out of context. Disputed to the extent the statement equates the quoted language with a "non-terminable right."

29. In Amendment No. X, the parties to that Agreement, including Santa Cruz, explicitly recognized that Novell "retained certain rights with respect to" to the agreements that IBM had entered into with AT&T, including "Software Agreement SOFT-00015 as amended" and "Sublicensing Agreement SUB-00015A as amended." (Id. at 001.)
Disputed to the extent the quoted statement refers to any right other than the right to continue receiving the SVRX binary royalties paid by IBM which were the subject of the buyout. (¶¶ 85-88.)

30. In November 1996, Santa Cruz collected $4,860,000 for its first payment from IBM under Amendment No. X. In its monthly report for this period, Santa Cruz treated 100% of this amount as SVRX revenue payable to Novell, subject to a 5% "Administrative Fee for IBM" (or $243,000) that Santa Cruz would pay itself. (Id., Ex. 14 at 1.)

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Disputed in that the statement omits the fact that Santa Cruz retained $750,000 from the IBM payment in addition to the 5% administrative fee. (¶¶ 86-88.)

31. In January 1997, Santa Cruz collected $5,265,000 for its second payment from IBM under Amendment No. X. In its monthly report for this period, Santa Cruz treated 100% of this amount as SVRX revenue payable to Novell, subject to a 5% "administrative fee" for the "IBM Buyout" (or $263,250) that Santa Cruz would pay itself. (Id., Ex. 43 at 1, 3.)
Disputed in that the statement omits the fact that Santa Cruz retained $750,000 from the IBM payment in addition to the 5% administrative fee. (¶¶ 86-88.)

32. REDACTED
Disputed in that the word "separately" indicates the $1.5 million dollars retained by Santa Cruz were unrelated to the buyout effected in Amendment No. X. (¶¶ 86-88.) Disputed in that the SCO retained that money to release Novell of claims arising from its handling of the IBM buyout, including the attempt to unilaterally grant the buyout. (Id.)

33. The contracts comprising the IBM UNIX System V license agreements grant IBM rights to the same versions of UNIX System V software that are included within the universe of SVRX Licenses listed in Item VI of the APA — namely, UNIX System V Release Nos. REDACTED
IBM LicensesItem VI of Schedule l.l(a)
"UNIX* System V, Release 2.0, Version 1" (Brakebill Decl., Ex. 5 at 007, 009) "All prior releases and versions of UNIX System V Release 2.0" (Brakebill Decl., Ex. 1 at 060)
"UNIX System V, Release 2.0, Version 1, International Edition" (Id., Ex. 5 at 007) "# All prior releases and versions of UNIX System V Release 2.0 International Editions" (Id.. Ex. 1 at 060)
'REDACTED (Id., Ex. 9 at 003-6) "All prior releases and versions of UNIX System V Release 2.1" (Id., Ex. 1 at 060)

14

REDACTED (Id., Ex. 9 at 003-6) "# All prior releases and versions of UNIX System V Release 2.1 International Editions" (Id., Ex. 1 at 060)
REDACTED (Id., EX. 10 at 009- 14) "UNIX System V Release 3.0" (Id., Ex. 1 at 060)
REDACTED (Id., Ex. 10 at 009-14) "UNIX System V Release 3.0 International Edition" (Id., Ex. 1 at 060)
REDACTED (Id., EX. 11 at 001, 032-33) "UNIX system V Release 3.1" (Id., Ex. 1 at 060)
REDACTED (Id., Ex. 11 at 032-33) "UNIX System V Release 3.1 International Edition" (Id., Ex. 1 at 060)
"UNIX® System V, Release 3.2" (Id., Ex. 12 at 001-43; Ex. 13 at 0011) "UNIX System V Release 3.2" (Id., Ex. 1 at 060)
"UNIX System V, Release 3.2, International Edition" (Id., Ex. 12 at 042-44) "UNIX System V Release 3.2 International Edition" (Id., Ex. 1 at 060)
Disputed in that Item VI does not list any licenses or agreements. (¶ 27.) Disputed to the extent the statement conflates or blurs the distinction between discrete agreements. (¶¶ 36-42.) Disputed to the extent the statement incorrectly equates any listed agreements with an "SVRX License" under the APA. (¶¶ 36-42.) Disputed in that the supplements did not grant "additional" rights to the referenced products; the supplements granted rights to the products. (Id.) Disputed in that the pagination Novell has apparently applied to the cited exhibits gives the incorrect impression that separate documents are one continuous document. Disputed to the extent the statement, by listing products here in the left column of the chart, suggests that Item VI lists licenses by listing products.

15

34. Novell became the successor-in-interest to AT&T's rights under the IBM SVRX License after it purchased UNIX System Laboratories in 1993. (SCO v: IBM, SCO's Second Amended Complaint, PACER No. 108 at 11 (¶ 47).)
Undisputed.

E. The Sequent SVRX License

35. Between April 18, 1985, and November 9, 1989, AT&T entered into various agreements and supplements licensing rights to UNIX System V software products to Sequent (hereinafter, collectively termed the "Sequent SVRX License"). (See ¶ 36-37, infra.)
Disputed to the extent the statement conflates or blurs the distinction between discrete agreements. (¶¶ 36-42.) Disputed to the extent the term "Sequent SVRX License" is misleading and nonsensical in that it tries to merge distinct documents into a single purported agreement. (¶¶ 36-42.) Disputed in that the statement incorrectly equates the various agreements with an "SVRX License" under the APA. (Id.)

36. In particular, on April 18, 1985, AT&T entered into a Software Agreement (SOFT-000321 or "1985 Sequent Agreement"), supplemented on January 28, 1986, giving Sequent the right to, among other things, use, modify, and prepare derivative works of REDACTED Brakebill Decl., Ex. 15 at 001-2 (§§ 1.01, 1.02, 1.04, 2.01); Ex. 16 at 001.) On January 28, 1986, AT&T and Sequent also entered into a Sublicensing Agreement (SUB-000321A) that gave Sequent the right to sublicense the software products designated in the 1985 Sequent Agreement, including REDACTED (Id., Ex. 17 at 001-2 (§§ 1.01, 1.02, 1.04, 2.01).)
Disputed to the extent the statement conflates or blurs the distinction between discrete agreements. Disputed to the extent the term "the 1985 IBM Agreement" is misleading and nonsensical in that it tries to merge distinct documents into a single purported agreement. (¶¶ 36-42.) Disputed to the extent the statement incorrectly equates various agreements with an "SVRX License" under the APA. (¶¶ 36-42.) Disputed in that AT&T did not grant "a license" to any particular product under the Software and Sublicensing Agreements. (¶¶ 36-42.) Disputed in that only a Product Supplement actually granted a license to a product. (¶¶ 36-42.)

16

Disputed to the extent that the statement suggests that the Sublicensing agreement granted rights to sublicense any particular product. (Id.) Disputed in that the phrase "supplemented on" is ambiguous and misleading. Disputed in that Sequent's Software Agreement, like any other Software Agreement, did not identify, much less "designate," any products. (¶¶ 36-42.)

37. Between REDACTED and November 9, 1989, Sequent and AT&T executed several supplements to the 1985 Sequent Agreement. These supplements REDACTED
Disputed to the extent the statement conflates or blurs the distinction between discrete agreements. (¶ 27.) Disputed to the extent the term "the 1985 Sequent Agreement" is misleading and nonsensical in that it tries to merge distinct documents into a single purported agreement. (¶¶ 36-42.) Disputed to the extent the statement incorrectly equates various agreements with an "SVRX License" under the APA. (¶¶ 36-49.) Disputed in that the supplements did not grant "additional" rights to the referenced products; the supplements granted rights to the products. (Id.)

38. The contracts comprising the Sequent UNIX Svstem V license agreements REDACTED
Sequent LicensesItem VI of Schedule l.l(a)
REDACTED (Brakebill Decl., Ex. 16 at 001-5)"All prior releases and versions of UNIX System V Release 2.0" (Brakebill Decl., Ex. 1 at 060)
REDACTED (Id., Ex. 16 at 002-7)"# All prior releases and versions of UNIX System V Release 2.0, International Edition" (Id., Ex. 1 at 060)
REDACTED (Id., Ex. 18 at 001-5)"All prior releases and versions of UNIX System V Release 2.1" (Id., Ex. 1 at 060)

17

REDACTED (Id., Ex. 18 at 002-5)"# All prior releases and versions of UNIX System V Release 2.1, lnternational Edition" (Id., Ex. 1 at 060)
REDACTED (Id., Ex. 19 at 001-9)"UNIX System V Release 3.0" (Id., Ex. 1 at 060)
REDACTED (Id., Ex. 19 at 003-9)"UNIX System V Release 3.0 International Edition" (Id., Ex. 1 at 060)
REDACTED (Id., Ex. 20 at 001, 003-4)"UNIX System V Release 3.1" (Id., Ex. 1 at 060)
REDACTED (Id., Ex. 20 at 001, 003-4)"UNIX System V Release 3.1 International Edition" (Id., Ex. 1 at 060)
REDACTED (Id., Ex. 21 at 001-5)"UNIX System V Release 3.2" (Id., Ex. 1 at 060)
REDACTED (Id., Ex. 21 at 002-5)"UNIX System V Release 3.2 International Edition" (Id., Ex. 1 at 060)
REDACTED (Id., Ex. 22 at 001, 003)"UNIX System V Release 4.0, Intel 386 Version 1 Implementation";
"UNIX System V Release 4.0, Intel 386 Version 2 Implementation";
"UNIX System V Release 4.0, Intel 386 Version 3 Implementation";
"UNIX System V Release 4.0 MP, Intel 386 Version 4 Implementation";
"UNIX System V Release 4.0 MP, Intel 386 Implementation" (Id., Ex. 1 at 060)
REDACTED (Id., Ex. 22 at 003)"#UNIX System V Release 4.0 International Edition, Intel 386 Version 1 Implementation";
"#UNIX System V Release 4.0 International Edition, Intel 386 Version 2 Implementation";
"#UNIX System V Release 4.0 International Edition, Intel 386 Version 3 Implementation";
"#UNIX System V Release 4.0 International Edition, Intel 386 Version 4 Implementation" (Id., Ex. 1 at 060)
Disputed in that Item VI does not list any licenses or agreements. (¶ 27.) Disputed to the extent the statement conflates or blurs the distinction between discrete agreements. (¶¶ 36-42.)

18

Disputed to the extent the statement incorrectly equates any listed agreement with an "SVRX License" under the APA. (¶¶ 36-49.) Disputed in that the supplements did not grant "additional" rights to the referenced products; the supplements granted rights to the products. (Id.) Disputed in that the pagination Novell has apparently applied to the cited exhibits gives the incorrect impression that separate documents are one continuous document. Disputed to the extent the statement, by listing products here in the left column of the chart, suggests that Item VI lists licenses by listing products.

39. Santa Cruz administered the Sequent UNIX System V license agreements as an SVRX License under the APA. For example, when Santa Cruz administered collection of revenue to be passed on to Novell from SVRX Licenses for the month of January 1997, Santa Cruz accounted for $6,560.49 in fees from the Sequent Licenses and noted a 5% "Admin Fee" in consideration of its administrative duties. (Id., Ex. 43 at 3.)
Disputed in that SCO accounted for and reported the royalties to Novell by product, corresponding to the Product Supplement under which the licensee paid those royalties. (See Ex. 35; Ex. 55 at 20-25.) Disputed in that Santa Cruz did not administer the "Sequent UNIX System V license agreements" as an SVRX License. (¶¶ 36-39.) Disputed in that the cited document does not support the statement.

40. In July of 1999, IBM purchased Sequent in a stock transaction, and assumed its rights and obligations under the Sequent Agreements. (SCO v. IBM, SCO's Second Amended Complaint, PACER No. 108 at 5, 49 (¶¶ 17, 168); SCO v. IBM, SCO's Answer to IBM's Second Amended Counterclaims, PACER No. 141 at 3 (¶¶ 15-16).)
Undisputed.

41. Novell became the successor-in-interest to AT&T's rights under the Sequent SVRX License after Novell purchased UNIX System Laboratories in 1993. (SCO v. IBM, SCO's Second Amended Complaint, PACER No. 108 at 11 (¶ 47).)
Undisputed.

19

F. The 2003 SCOsource Campaign and SCO's Breach Claims Against IBM and Sequent.

42. SCO was not a party to the APA or its Amendments. SCO claims to be the successor-in-interest to Santa Cruz's rights and obligations under the APA. (SCO v. Novell, Novell's Arnended Counterclaims, PACER No. 142 at 4 (¶ 20); SCO v. Novell, SCO's Reply to Novell's Arnended Counterclaims, PACER No. 158 at 5 (¶ 20).)
Undisputed.

43. In January 2003, SCO unveiled its "SCOsource" initiative to "offset the decline in [its] UNIX business" and to increase revenue through license fees it would attempt to procure by licensing UNIX technology it claimed to own. (See, e.g., Brakebill Decl., Ex. 23 at 3-4, 9-10, 17-18; Ex. 24.) In implementing SCOsource, SCO publicly stated that it owned the UNIX copyrights, wrote letters to Linux users and distributors threatening to sue them for infringement, and filed a number of lawsuits against end-users and distributors. (Id.)
Disputed to the extent the statement implies that SCO does not own the UNIX technology, including copyrights, that is the subject of the SCOsource initiative. (SCO's Mem. in Opp. to IBM's Mot. for Summ. J. on SCO's Contract Claims, SCO v. IBM, No. 2:03CV-0294, Nov. 11, 2006, at 63-65.) Disputed to the extent that the statement mischaracterizes SCO's actions to enforce its rights concerning SCO's proprietary UNIX code and other protected materials in Linux as a "threat." Disputed to the extent the statement quotes SCO's statements out of context. Disputed to the extent the statement is not supported by the cited material.

44. As part of SCOsource, SCO threatened and purported to cancel or terminate the IBM and Sequent SVRX Licenses. (Id., Exs. 25-26.)
Disputed in that SCO terminated IBM's and Sequent's Software and Sublicensing Agreements. Disputed to the extent that the statement characterizes SCO's actions to enforce its rights concerning SCO's proprietary UNIX code and other protected materials in Linux as a "threat."

20

1. SCO's Purported Termination of the IBM SVRX License.

45. On March 6,2003, SCO sent a letter to IBM threatening to terminate the IBM SVRX License as of June 13, 2003, if IBM did not remedy certain alleged breaches of that License. (Brakebill Decl., Ex. 25.)
Disputed in that SCO did not threaten but rather gave IBM and Sequent notice of their breaches of their Software and Sublicensing Agreements. Disputed in that SCO terminated those Agreements. Disputed to the extent that the statement characterizes SCO's actions to enforce its rights concerning SCO's proprietary UNIX code and other protected materials in Linux as a "threat."

46. On June 9, 2003, Novell wrote to SCO explaining that Section 4.16(b) of the APA (1) gave Novell the right to require SCO to (among other things) waive any rights under any SVRX License, and (2) authorized Novell to take such action on behalf of SCO should SCO fail to so act. (Id., Ex. 27.) Novell also noted that SCO had no right to terminate IBM's SVRX License because Amendment No. X granted IBM an "irrevocable, fully paid-up, perpetual right" to exercise all of its rights under IBM's SVRX Licenses. (Id.) Novell concluded the letter by directing SCO "to waive any purported right SCO may claim to terminate IBM's SVRX Licenses enumerated in Amendment X or to revoke any rights thereunder, including any purported rights to terminate asserted in SCO's letter of March 6, 2003 to IBM." (Id.) Novell directed SCO to do this by noon on June 12, 2003, and to notify Novell that it had done so by that time. (Id.)
Disputed in that the statement mischaracterizes Novell's rights under the APA. (¶¶ 1-52.) The APA transferred the entire UNIX business, including the UNIX source code and copyrights, to Santa Cruz except for the binary royalties paid under the existing agreements pursuant to which SVRX licensees were paying such royalties, and which Novell conveyed to Santa Cruz under the APA as part of the UNIX business. (Id.) Disputed to the extent the statement suggests that the referenced Novell statements were truthful or correct.

47. Novell's former CEO, Jack Messman, who authored the June 9, 2003 letter to SCO, confirmed that Novell directed SCO to take action, in part, to protect its royalty payment from IBM: "... we'd got a significant royalty payment that we were worried about; that if the

21

licenses were terminated, we might have to pay back; and it was a big risk to Novell." (Id., Ex. 29 at 203:18-204:1.)
Disputed as to the accuracy of the conclusions made by Mr. Messman. Undisputed as to the existence of the statement.

48. On June 11 , 2003, Darl McBride, SCO's President and Chief Executive Officer, responded to Novell on SCO's behalf with a refusal to take the action requested by Novell pursuant to Novell's Section 4.16(b) authority. (Id., Ex. 28.) Mr. McBride acknowledged that IBM's System V license agreements are "SVRX License[s]." (Id. at 1.)
Disputed to the extent the statement suggests that Mr. McBride stated that the Software and Sublicensing Agreements, or any other particular document, were "SVRX Licenses" under the APA.

49. On June 12, 2003, Novell sent a letter to SCO explaining the legal basis for Novell's waiver, including Novell's rights to take action at its "sole discretion" under Section 4.16(b). (Id., Ex. 30.)
Disputed as to the legal accuracy of the statements made in the letter. Undisputed as to the existence of the statements.

50. When SCO failed to take the action demanded by Novell before noon on June 12, 2003, Novell sent another letter that same day to SCO. (Id., Ex. 31.) The letter waived "any purported right SCO may claim to terminate IBM's SVRX Licenses enumerated in Amendment X or to revoke any rights thereunder, including any purported rights to terminate asserted in SCO's letter of March 6, 2003 to IBM." (Id. at 2.)
Undisputed as to Novell's unauthorized attempt to waive SCO's rights. Disputed as to Novell's right or authority to do so.

51. Notwithstanding Novell's directive, SCO publicly announced on June 16, 2003 that it had terminated IBM's SVRX License as of June 13, 2003. (Id., Ex. 32.)

22

Disputed in that SCO announced it had terminated IBM's Software and Sublicensing Agreements. Disputed to the extent that the statement is not supported by the cited material.

52. On October 7, 2003, in response to public positions being taken by SCO concerning code developed by IBM, Novell again sent SCO a letter notifying it of Novell's Section 4.16(b) authority, and "direct[ing] SCO to waive any purported right SCO may claim to require IBM to treat IBM Code itself as subject to the confidentiality obligations or use restrictions of the [IBM] Agreements." (Id., Ex. 33 at 3.) Pursuant to that authority, Novell directed SCO to "take these actions by noon, MST, on October 10, 2003, and to notify Novell that it has done so by that time." (Id.)
Disputed as to Novell's right or authority to waive or direct SCO to waive its rights against IBM. Undisputed as to the existence and content of the letter.

53. SCO responded to Novell's letter on October 9,2003, stating that "[y]our analysis of the obligations that IBM ... owe[s] to SCO pursuant to the relevant Software Agreements is incorrect. However, we need not debate the incorrectness of your views, particularly Novell's purported ability to waive any and all licensees' obligations under the Software Agreements, because, as you are well aware, we are currently litigating these issues with IBM." (Id., Ex. 34.)
Undisputed.

54. On October 10, 2003, Novell again wrote to SCO stating that because "SCO has failed to take the action directed by Novell," Novell "hereby waives any purported right SCO may claim to require IBM to treat IBM Code ... as subject to the confidentiality obligations or use restrictions of the [IBM] Agreements." (Id., Ex. 35.)
Disputed as to Novell's right or authority to waive SCO's rights against IBM. Undisputed as to the existence and content of the letter.

55. SCO responded to Novell on October 13, 2003, stating that "Novell is without authority to make such a waiver and thus it is of no force and effect." (Id., Ex. 36.)
Undisputed.

56. At no point during the written correspondence between SCO and Novell in 2003 concerning Novell's Section 4.16(b) authority to direct SCO to waive IBM's alleged breach of its System V license agreements (or to waive them on SCO's behalf) did SCO argue that the IBM agreements were not SVRX Licenses under the APA. (Id., Exs. 28,34,36.) In addition, SCO never look the position in that correspondence that Novell was not authorized because

23

SVRX Licenses are limited to binaries and that, therefore, Novell's rights under Section 4.16(b) are limited to binary licenses or binary royalty streams. (Id.)
Disputed in that the statement is misleading. Disputed in that the statement suggests SCO had any obligation to make statements Novell alleges SCO did not make. In the cited communications, as in its complaint against IBM, SCO specifically stated that Novell had no right with respect to the Software and Sublicensing Agreements. Disputed in that the phrase "SVRX Licenses are limited to binaries" is unintelligible and misleading.

57. SCO still disputes Novell's rights under Section 4.16(b) to direct SCO to take action, or to take action on SCO's behalf, as to the IBM SVRX Licenses. (SCO v. Novell, Novell's Amended Counterclaims, PACER No. 142 at 4 (¶ 18), 20-22 (¶¶ 89-96); SCO v. Novell, SCO's Reply to Novell's Amended Counterclaims, PACER No. 158 at 4 (¶ 181, 17-18 (¶¶ 89-96).)
Disputed in that the term "IBM SVRX Licenses" is vague and ambiguous. Undisputed to the extent the statement indicates that SCO still contends that Novell's rights under Section 4.16(b) are limited to the protection of its interest in the binary royalty stream.

2. SCO's Purported Termination of the Sequent SVRX License.

58. On May 29,2003, SCO sent a letter to Sequent's Legal Department threatening to terminate the Sequent SVRX License, and all of Sequent's rights thereunder, as of September 2, 2003. (Brakebill Decl., Ex. 26 at 4.) Among other things, SCO alleged that Sequent violated source code restrictions on Sequent's Dynix software product, which SCO said is subject to Sequent's "System V Release 4.0 License." (Id. at 2-3.)
Disputed to the extent that the statement characterizes SCO's actions to enforce its rights concerning SCO's proprietary UNIX code and other protected materials in Linux as a "threat."

59. On August 11, 2003, SCO sent another letter to Sequent purporting to terminate the Sequent License, effective retroactively as of July 30, 2003. (Id., Ex. 37.)

24

Disputed to the extent that the statement implies that SCO did not terminate Sequent's Software and Sublicensing Agreements.

60. On August 14, 2003, IBM, acting on behalf of Sequent, responded to SCO's termination threats by stating that it did not believe it had breached the Sequent License, and requesting more details on the alleged breach. (Id., Ex. 38.) In addition, IBM rejected SCO's claim that it had any right to terminate the Sequent License. (Id.)
Disputed to the extent that the statement characterizes SCO's actions to enforce its rights concerning SCO's proprietary UNIX code and other protected materials in Linux as a "threat." Disputed as to the legal accuracy of the statements made by IBM. Undisputed as to the existence of the statements.

61. On February 6, 2004, Novell sent a letter to SCO outlining the lack of support for SCO's position, and directing SCO "to waive any purported right SCO may claim to require Sequent (or IBM as its successor) to treat Sequent Code as subject to the confidentiality obligations or use restrictions of Sequent's SVRX License" no later than noon on February 11, 2004. (Id., Ex. 39 at 2.)
Disputed as to Novell's right or authority to waive SCO's rights against Sequent or IBM. Undisputed as to the existence and content of the letter.

62. On February 11, 2004, after SCO conveyed its refusal to waive its purported rights against Sequent, Novell waived SCO's purported right to terminate the Sequent SVRX License on SCO's behalf, notifying SCO of this waiver via letter and fax. (Id., Exs. 40-41.)
Disputed as to Novell's right or authority to waive SCO's rights against Sequent. Undisputed as to the existence and content of the letter and the fax.

63. At no point during the written correspondence between SCO and Novell in early 2004 concerning Novell's authority under Section 4.16(b) to direct SCO to waive Sequent's (or IBM as its successor) alleged breach of its System V license agreements (or to waive them on SCO's behalf) did SCO argue that the Sequent agreements were not SVRX Licenses under the APA. (Id., Ex. 40.) In addition. SCO never took the position in that correspondence that Novell was not authorized because SVRX Licenses under the APA are limited to binaries and that, therefore, Novell's rights under Section 4.16(b) are limited to binary licenses or binary royalty streams. (Id.)

25

Disputed in that the statement is misleading. Disputed in that the statement suggests SCO had any obligation to make statements Novell alleges SCO did not make. In the cited communications, as in its complaint against IBM, SCO specifically stated that Novell had no right with respect to the Software and Sublicensing Agreements. Disputed in that the phrase "SVRX Licenses are limited to binaries" is unintelligible and misleading.

64. SCO still disputes Novell's rights under Section 4.16(b) of the APA to direct SCO to take action, or to take action on SCO's behalf, as to the Sequent SVRX License. (SCO v. Novell, Novell's Amended Counterclaims, PACER No. 142 at 4 (¶ 18), 20-22 (¶¶ 89-96); SCO v. Novell, SCO's Reply to Novell's Amended Counterclaims, PACER No. 158 at 4 (¶ 18), 17-18 (¶¶ 89-96).)
Disputed in that the term "Sequent SVRX License" is vague and ambiguous. Undisputed to the extent the statement indicates that SCO still contends that Novell's rights under Section 4.16(b) are limited to the protection of its interest in the binary royalty stream.

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1In citing its basis for disputing a Novell statement of fact, SCO cites herein either paragraphs in SCO's Statement of Facts above or directly to exhibits, or both.

(Referenced here)

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

Brent O. Hatch (5715)
HATCH, JAMES & DODGE, PC
[address]
[phone]
[fax]

Robert Silver (admitted pro hac vice)
Edward Normand (admitted pro hac vice)
BOIES, SCHILLER & FLEXNER LLP
[address]
[phone]
[fax]

Devan V. Padmanabhan (admitted pro hac vice)
DORSEY & WHITNEY LLP
[address]
[phone]
[fax]

Stephen N. Zack (admitted pro hac vice)
BOIES, SCHILLER & FLEXNER LLP
[address]
[phone]
[fax]

Stuart Singer (admitted pro hac vice)
BOIES, SCHILLER & FLEXNER LLP
[address]
[phone]
[fax]

Attorneys for Plaintiff; The SCO Group, Inc.



IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF UTAH

THE SCO GROUP, INC.
a Delaware corporation,

Plaintiff/Counterclaim-Defendant,

vs.

NOVELL, INC.,
a Delaware corporation,

Defendant/Counterclaim-Plaintiff.
SCO'S REPLY MEMORANDUM IN
SUPPORT OF ITS CROSS MOTION FOR
PARTIAL SUMMARY JUDGMENT ON
NOVELL'S FOURTH COUNTERCLAIM

FILED IN REDACTED FORM
[ORIGINALLY FILED UNDER SEAL]



Civil No. 2:04CV00139
Honorable Dale A. Kimball
Magistrate Judge Brooke C. Wells

TABLE OF CONTENTS

Page
TABLE OF AUTHORITIES i
PRELIMINARY STATEMENT 1
STATEMENT OF FACTS 2
I. NOVELL'S INTERPRETATION CANNOT BE RECONCILED WITH THE LANGUAGE AND PURPOSE OF THE APA 2
A. Section 4.16(b) Is Ambiguous on Its Face 2
B. The APA Is Reasonably Susceptible to SCO's Interpretation 6
C. Amendment No. 2 Forecloses the Rights Novell Claims 10
II. THE EXTRINSIC EVIDENCE FORECLOSES NOVELL'S INTERPRETATION 12
A. The Testimonial Evidence 12
B. The Documentary Evidence 16
C. The Parties' Prior Conduct 17
CONCLUSION 20

i

TABLE OF AUTHORITIES

Cases
Dore v. Arnold Worldwide, Inc.,
39 Cal. 4th 384 (2006)
6
Pac. Gas & Elec. Co. v. G.W. Thomas Drayage & Rigging Co.,
69 Cal. 2d 33 (1968)
6
Wolf v. Super. Ct.,
114 Cal. App. 4th 1343 (Ct. App. 2004)
6

i

Plaintiff/Counterclaim-Defendant, The SCO Group, Inc. ("SCO"), respectfully submits this Reply Memorandum in Support of its Cross Motion For Partial Summary Judgment on Novell's Fourth Counterclaim.

PRELIMINARY STATEMENT

In the face of testimony of no fewer than thirteen witnesses on both sides of the transaction, including the deposition testimony of its own CEO at the time of the APA, Novell continues to press its interpretation of the relevant APA provisions. In order to keep that testimony and other overwhelming extrinsic evidence out of the case, Novell insists that such evidence is inadmissible because the APA is not susceptible to any other interpretation. Novell is simply wrong.

In its opening brief, SCO showed the patent ambiguity of the term — "SVRX Licenses" — on which the Fourth Counterclaim admittedly "turns," and why Novell's proposed interpretation cannot be squared with the language and express intent of the APA. SCO accordingly argued that the Court must look at extrinsic evidence. In addition, as an independent basis for the admission of extrinsic evidence, SCO showed why that term is reasonably susceptible to SCO's interpretation, which unlike Novell's, does not conflict with the APA.

In addition, SCO has shown why Amendment No. 2 forecloses Novell's interpretation. The central provisions of the APA provide for an expansive and unequivocal transfer of all rights and ownership in the SVRX source code. Amendment No. 2 plainly provides that, notwithstanding Section 4.16(b), Novell cannot prevent SCO from exercising the unlimited rights granted in those provisions. In response, Novell does not even acknowledge those provisions, but merely states that Amendment No. 2 is irrelevant because it does not alter the

1

parties' rights with respect to source code. That may be right, but those rights under the APA reside entirely with SCO.

Accordingly, because the extrinsic evidence and Amendment No. 2 each independently establishes that Novell does not posses the rights it claims in its Fourth Counterclaim, that Counterclaim fails as a matter of law and the Court should grant SCO's Cross Motion for Summary Judgment.

STATEMENT OF FACTS

I. NOVELL'S INTERPRETATION CANNOT BE RECONCILED WITH THE LANGUAGE AND PURPOSE OF THE APA.

A. Section 4.16(b) Is Ambiguous on Its Face.

Although Novell argued (at 22 of its Opening Brief) that the scope of its authority under Section 4.16(b) "turns on the meaning of SVRX License," Novell has done nothing to establish that the term has a definite meaning, let alone one that includes the Software and Sublicensing Agreements. In its Opposition brief, Novell merely reiterates (at 4) its view that Section 4.16(b) extends to those Agreements because it refers to "any" SVRX License, but that view merely begs the question whether the term "SVRX License" includes those Agreements in the first place. Novell does not address, much less refute, the evidence that the term is ambiguous on its face:

  • The term is not defined anywhere in the APA, except in a circular reference to itself in Item VI of Schedule 1.1(a). Nor does Novell address the case law holding that the absence of a definition alone may support a finding of ambiguity.
  • Section 4.16(a) and Item VI refer to the SVRX Licenses as those listed in Item VI, but Item VI plainly does not list any licenses or agreements. Rather, Item VI lists

    2

    twenty SVRX products and several categories of products. Novell purports to give the APA a plain and literal reading, but that reading only means that Novell did not retain any royalty, waiver, or other rights under Section 4.16. Those rights plainly pertain to the SVRX Licenses listed in Item VI. Where no licenses are listed in Item VI, Novell literally retained rights to nothing under Section 4.16.1
  • The Software and Sublicensing Agreements that Novell attempts to fold into Item VI, including "All of Seller's rights" in those Agreements, are expressly transferred in Item III, a distinct provision of Schedule 1.1(a).
  • Section 1.2(b), which provides that, "notwithstanding the transfer of the SVRX Licenses to Buyer," the "SVRX Royalties shall continue to be recognized as royalties by Seller on an ongoing basis," points to Section 4.16(a) for a description of those royalties. Section 4.16(a), in turn, describes those royalties by reference to the "SVRX Licenses" and points to Item VI. Given that Item VI and the SVRX Licenses are not referenced elsewhere, the only purpose of Item VI is to identify the SVRX Royalties. But, since the APA does not identify the agreements under which such royalties were paid, the Court must look outside the four comers of the agreement.

Such language in the APA forecloses any definite meaning to the term "SVRX Licenses," let alone the meaning that Novell proposes. Novell cannot cure the patent ambiguity of the term

3

merely by stating that it is not ambiguous. The Court must look at evidence extrinsic to the APA to resolve the ambiguity.

Novell is also silent on the other arguments that foreclose its proposed interpretation.

First, Novell does not dispute that its interpretation is hopelessly at odds with the key provisions and express purpose of the APA. Recitals A and B and Section 1.3(a)(I) of the APA could not more clearly reflect Novell's intent to transfer its entire UNIX and UnixWare Business to Santa Cruz. Similarly, Sections 1.1(a) and Schedule 1.1(a) could not be more expansive and unequivocal in their transfer of all rights and ownership of the assets pertaining to that Business. Yet, as SCO shows (at 52-55), Novell argues that a single sentence in Section 4.16(b) should be read to frustrate the purpose of the APA and extinguish the rights granted to Santa Cruz in those key provisions. That implausible construction of Section 4.16(b) cannot be accepted as a matter of settled contract-interpretation law. In its briefing, Novell does not contest the authority establishing that a contractual provision cannot be read that way, nor does Novell even dispute that its interpretation in fact conflicts with the APA.

Second, Novell makes only a glancing attempt, in a footnote, to address the arguments that its interpretation would make a sham of the APA transaction. As SCO argued (at 55), Novell's proposed interpretation would authorize Novell to:

  • Waive its own breaches of the TLA, and modify its limited rights under the TLA, thus granting itself unlimited ownership and control of the very technology it sold under the APA. Novell now argues (at 7 of its Reply) that its purported rights do not extend to the TLA because "the TLA is expressly integrated into the APA." While

    4

    that may true for evidentiary purposes, the TLA remains a distinct contract that fits the sweeping definition of "SVRX License" that Novell proposes.
  • Waive SCO's rights under its own Software and Sublicensing Agreements. As a result, SCO would have fewer rights than it would have had had Santa Cruz not entered into the APA. Novell makes no response to this argument.
  • Extinguish SCO's rights to UnixWare and other products. Licensees such as NCR executed Product Supplements for SVRX, UnixWare, and DWB products. (Ex. 35 at 89-90; James Ex. 10; James Ex. 11.)2 According to Novell, its 4.16(b) rights extend to NCR's Software and Sublicensing Agreements because they "relate" to the licensed SVRX products. But those Agreements also "relate" to UnixWare and DWB products. Thus, Novell would be able to waive SCO's rights even with respect to non-SVRX products, eviscerating the undisputed transfer of such products under the APA. Novell does not address, much less take issue with, this conclusion.

In sum, Novell's interpretation defeats the purpose of the APA, conflicts with its unambiguous key provisions, and makes a sham of the APA and TLA. Under the applicable law, even if Novell's interpretation were reasonable and not rooted in ambiguous language, the Court could not read Section 4.16(b) as Novell proposes.

5

B. The APA Is Reasonably Susceptible to SCO's Interpretation.

Novell argues that SCO's reading of "SVRX Licenses" is unreasonable and thus the Court should disregard SCO's extrinsic evidence. Novell's argument is flawed on several levels.

First, Novell turns the controlling law on its head. Under California law, even if Section 4.16(b) were unambiguous on its face, the Court must provisionally receive extrinsic evidence to determine if the provision is reasonably susceptible to another interpretation.3 Novell itself resorts (at 4-10 of its Reply) to extrinsic evidence, including the standard UNIX agreements and Amendment No. X, to make its purported "plain reading" against SCO's interpretation.

Second, SCO has specifically argued that the term is ambiguous on its face and so the Court must resort to extrinsic evidence to determine the scope and intent of Section 4.16(b). SCO posited its interpretation as an alternative argument for the admission of extrinsic evidence, in the event the Court concluded that the term is not ambiguous. Furthermore, SCO expressly argued (at 47) that "Irrespective of the definition of the term 'SVRX Licenses,' Section B of Amendment No. 2 clarified that Novell's rights under Section 4.16(b) were limited to the protection of the residual binary royalties and could not prevent SCO from exercising its exclusive rights with respect to source code."

6

Third, Novell fails to address SCO's evidence (at 58-59) showing that its interpretation is reasonable and, unlike Novell's, consistent with the language and purpose of the APA:

  • Section 4.16(a) describes the SVRX Royalties as "all royalties, fees and other amounts due under the SVRX Licenses (as listed in detail under item VI of Schedule 1.1(a) hereof and referred to herein as 'SVRX Royalties')." The only agreements "under" which "royalties, fee and other amounts" could be "due" were the Product Supplements. (Exs. 50 ¶¶ 13-17; Ex. 51 ¶¶ 10-14.) Indeed, Novell and Santa Cruz maintained such financial information by product, and after the closing, Santa Cruz reported that information to Novell by product. (Ex. 52 ¶ 8)
  • Section 1.2(e)(iv) provided that Santa Cruz could keep royalties formerly due under "its own licenses from Seller acquired before the Closing Date through Software Agreement No. SOFT-000302 and Sublicensing Agreement No. SUB-000302A." Section 1.2(e)(iv) thus expressly identifies the multiple "licenses" that Santa Cruz had acquired "through" its Software Agreement and Sublicensing Agreements. The only such licenses to which "royalties" could be "attributable" were the numerous SVRX Supplements that Santa Cruz had executed under its Software and Sublicensing Agreements. In addition, Santa Cruz obtained its Software and Sublicensing Agreements from AT&T. Santa Cruz's only "licenses from Seller" under those Agreements were the Supplements it executed with Novell.
  • Recital A defines the Business as the development of "a line of software products currently known as UNIX and UnixWare, the sale of binary and source code licenses to various versions of UNIX and UnixWare, the support of such products and the

    7

    sale" of "Auxiliary Products." (Ex. 50 ¶¶ 13-17; Ex. 51 ¶¶ 10-14.) The only agreements that licensed "the various versions of UNIX and UnixWare," the "products currently known as UNIX and UnixWare," or the "Auxiliary Products" were the Product Supplements for such versions or products. (Id.) The only "source and binary licenses" that were for "sale" were the Product Supplements, which identified the licensed product and fees and gave rise to a payment obligation. (Id.) The Software and Sublicensing agreements did not identify any such fees or give rise to any payment obligation. (Id.)
  • Novell, like AT&T and its other successors, used a combination of agreements in licensing its SVRX technology, including the Software Agreement, the Sublicensing Agreement, and the various Product Supplements. (Id.) Of these, the only agreement that licensed the products listed in Item VI of the Schedule 1.1(a) were the Product Supplements for each product. (Id.) The Software and Sublicensing Agreements did not even mention, much less grant a license to, any specific product listed in Item VI. (Id.)

Fourth, Novell's arguments against SCO's interpretation are unavailing:

  • Novell argues (at 5 of its Reply) that "Section 4.16(b) cannot possibly be referring only to Product Supplements, because those Supplements, by their own terms, indisputably do not grant any rights." But in the very sentence from SCO's Opposition that Novell quotes (at 7 of its Reply), SCO makes clear that the Product Supplements identified "the fees the licensor had a right to receive in exchange." Indeed, the very next sentence in the Opposition, which Novell does not quote, states

    8

    (at ¶ 44): "The only rights the licensor had in the Supplements were the rights of payment of any applicable fees listed in the Schedule." Thus, the Supplements do grant rights, and Novell's belief to the contrary is not undisputed.
  • Novell next argues (at 7-8 of its Reply) that the Software Agreements, Sublicensing Agreements, and Supplements must be read as an integrated whole. Novell argues that SCO's declarants contradict themselves by testifying that they considered the Supplements to be the SVRX Licenses and yet stating that "like its predecessors, Novell licensed UNIX and UnixWare through this set of agreements." There is no inconsistency. SCO has stated that licensing of UNIX products involved "a combination of agreements" which set forth the rights and obligations of the parties. The question is which of those agreements — whether one or more or any — were intended to be the "SVRX Licenses" under the APA.
  • Novell states (at 8 of its Opposition) that Amendment No. X amended the Related Agreements, including the Software and Sublicensing Agreements. But, as SCO has pointed out, Amendment No. X, under Santa Cruz's authority, granted IBM minor source code rights. Thus, Amendment No. X had to amend the Software and Sublicensing Agreements which governed those rights. In addition, because the Software and Sublicensing Agreements contemplate the payment of binary royalties, a royalty buyout might also require the amendment of those Agreements. Finally, the treatment of the Related Agreements as an integration says nothing about the particular contracts that the parties had in mind for the term "SVRX Licenses."
  • 9

  • Novell also argues (at 11 of its Reply) that Amendment No. X states that "Novell retained certain rights with respect to the Related Agreements." Novell then infers that those rights must include its purported rights under Section 4.16(b). But that is wrong. Most obviously, had Novell then believed it had retained those rights, it would not have participated in Amendment No. X in the first place. Novell would have asserted those rights to modify the Related Agreements on its own. The language Novell quotes only establishes that Novell retained the right to participate in buyouts of its binary royalty interests, and to the extent that right implicated the Related Agreements, they would need to be amended upon a buyout. That in no way establishes that the parties intended the term "SVRX Licenses" to include any or all of the Related Agreements.

In sum, Novell's efforts to preclude the admission of extrinsic evidence fail. Not only is the relevant provision ambiguous on its face, but SCO's reasonable interpretation opens the door to that evidence.

C. Amendment No. 2 Forecloses the Rights Novell Claims.

Even if the term "SVRX Licenses" included the Software Agreements and Sublicensing Agreements and was not reasonably susceptible to another interpretation, Amendment No. 2 makes clear that Novell's rights under 4.16(b) do not extend to those Agreements. Novell argues (at 11-12 of its Reply) that Amendment No. 2 is "utterly silent as to what source code rights SCO actually did or did not have under the APA; instead, it only states that those rights will not be altered in the context of any future buyout of SVRX royalty obligations." Novell's views do not square with the language of the Amendment.

10

Paragraph B of Amendment No. 2 provides:

Except as provided in Section C below, and notwithstanding the provisions of Article 4.16, Sections (b) and (c) of the Agreement, any potential transaction with an SVRX licensee which concerns a buy-out of any such licensee's royalty obligations shall be managed as follows:

(Ex. 8 at 1.) While Subparagraphs B.l - B.4 clearly set forth procedures for handling such buyouts, Subparagraph B.5 uses different language and provides:

This Amendment does not give Novell the right to increase any SVRX licensee's rights to SVRX source code, nor does it give Novell the right to grant new SVRX source code licenses. In addition, Novell may not prevent SCO from exercising its rights with respect to SVRX source code in accordance with the Agreement.

(Id.) Amendment No. 2 thus provides that, "notwithstanding the provisions of Article 4.16," Novell is not authorized to "increase any SVRX licensee's right to SVRX source" or "grant new SVRX source code licenses," even in the context of granting a buyout of its majority interest in the binary royalties. That is, Amendment No. 2 clarifies that Novell has no authority to license source code rights, even incident to a buyout.

But Amendment No. 2 provides an additional protection. It states that "In addition, Novell may not prevent SCO from exercising rights with respect to SVRX source code in accordance with" the APA. (Id.) That is, "notwithstanding the provisions of Article 4.16," Novell may not prevent SCO's exercise of rights with respect to source code under any of the other provisions of the APA, including those in Article I and Schedule 1.1(a) effectuating the transfer of "all right, title and interest in and to" and all "rights and ownership" in the UNIX source code and products and "all rights pertaining to UNIX and UnixWare" under the "Software and Sublicensing Agreements."

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As it forecloses the rights Novell claims under Section 4.16(b), Amendment No. 2, without more, supports SCO's motion for summary judgment.4

II. THE EXTRINSIC EVIDENCE FORECLOSES NOVELL'S INTERPRETATION.

SCO previously presented extensive extrinsic evidence foreclosing Novell's interpretation as a matter of law. In both its Reply and Opposition briefs, Novell is utterly silent on most of that evidence. In addition, Novell fails even to acknowledge new evidence the parties have recently discovered, including the deposition testimony of Robert Frankenberg, Novell's CEO at the time of the APA.

A. The Testimonial Evidence.

On February 10, 2007, two days before Novell filed its Opposition brief, Mr. Frankenberg testified:

Q. Do you have an understanding, Mr. Frankenberg, of what the purpose of 4.16(b) was?

A. Yes.

Q. Could you explain that purpose in your words?

A. This was to make sure that Novell continued to receive the SVRX license fees and that those efforts weren't interfered with.

Q. Did it have any broader purpose than that?

12

A. No.

Q. Was it Novell's intent to maintain a veto on how SCO operated its business in the future except for protecting that royalty stream?

MR. JACOBS: Objection, lacks foundation, calls for speculation

A. No.

(James Ex. 1 at 44.) Similarly, on January 19, 2007, Ty Mattingly, Mr. Frankenberg's personal liaison with the Novell negotiating team, testified:

Q. Are you familiar with a claim that's arisen in these litigations in which Novell claims the right to waive SCO's claims against IBM for alleged breaches of IBM's Unix agreements?

A. I am aware of that.

Q. And do you have a view from your experience in negotiating the APA as to the merits of that claim?

A. Well, I mean, my perspective on that is that, you know, quite honestly, Novell doesn't have any rights to do that. And I, personally, you know, look at this whole litigation between Novell and SCO and think it's absurd. I think it's unbelievable to me that, you know, a great company like Novell would suggest that somebody spent 125 million dollars and didn't buy this Unix business. And then I don't know what the relationships or discussions are between Novell and IBM, and I don't know why they have done some of those things. I mean, I have been out of the company for, well, since 1998. So I don't have any idea what transpired and why they felt compelled to do that, but those are the facts.

(James Ex. 2, at 53-54.)

Messrs. Frankenberg's and Mattingly's testimony confirms the sworn statements that SCO previously presented from witnesses on both sides of the transaction. Such witnesses include:

13

  • Duff Thompson, the Novell senior executive who oversaw the APA and its Amendments. (James Ex. 3 at 56-58.) In his recent deposition in this litigation, Mr. Thompson confirmed his declaration. (Ex. 1 ¶ 7.)
  • Ed Chatlos, Novell's chief negotiator. (Ex. 4 ¶ 5; Ex. 31 ¶¶ 8, 13.)
  • Lawrence Bouffard, Novell Worldwide Sales Director for UNIX products. (Ex. 19 ¶¶ 29, 34.)
  • John Maciaszek, UnixWare product manager for Novell and later Santa Cruz. (Ex. 51 ¶¶ 19-24.)
  • William Broderick, contract manager for Novell and later Santa Cruz. (Ex. 50 ¶¶ 22-25.)
  • Jean Acheson, revenue administrator for Novell and later Santa Cruz. (Ex. 52 ¶ 6.)
  • Alok Mohan, CEO of Santa Cruz at the time of the APA. (James Ex. 4 at 229.) In his recent deposition in this case, Mr. Mohan confirmed his declaration. (Ex. 32 ¶¶ 4, 6-7.)
  • Doug Michels, founder of Santa Cruz and its CEO after Mr. Mohan. (Ex. 2 ¶¶ 5, 9.)
  • Steve Sabbath, General Counsel for Santa Cruz, who oversaw its negotiation of the APA and its Amendments (James Ex. 5 at 67-68.) In his recent deposition in this case, Mr. Sabbath confirmed his declaration. (Ex. 18 ¶¶ 4-5.)
  • Jim Wilt, the chief negotiator for Santa Cruz. (James Ex. 6 at 78-79.) In his recent deposition in this case, Mr. Wilt confirmed his declaration. (Ex. 5 ¶¶ 6, 8, 10.)
  • Kim Madsen, assistant to Mr. Wilt in the negotiations. (James Ex. 7 at 129-130, 133- 134.) In her recent deposition in this case, Ms. Madsen confirmed her declaration. (Ex. 6 ¶ 7; Ex. 33 ¶ 13.)

14

Novell responds to such overwhelming testimony with two marginally relevant documents that in fact support SCO's position, and the declaration of Michael DeFazio from the IBM Litigation:

  • Novell quotes (at 6 of its Opposition) a 1996 letter by Mr. Broderick to Novell regarding Unisys, in which he states that the "Agreement requires prior written approval or changes to current agreements relating to UNIX System V." But that statement does not contradict Mr. Broderick's view that the "SVRX Licenses" refers to Supplements. As he explained in his recent deposition, the statement refers to "new agreements or changes to current agreements" with then-existing SVRX licensees, such as Unisys. (James Ex. 8 at 255-258.) Mr. Broderick sought Novell's approval to modify the "per-copy fees due for the SVRX portion" but not the "deducted" UnixWare portion. The letter thus differentiates between UnixWare fees paid under Unisys's UnixWare Supplement, and the SVRX fees paid under Unisys SVR4.0 MP Supplement.
  • Novell (at 7 of its Opposition) tries to make similar use of an internal Santa Cruz email from Kim Madsen, in which she states that "new SVRX licenses have to be approved by Novell."5 But that statement is entirely consistent with her testimony. Ms. Madsen was responding to a question about royalties to be paid by DEC for its prospective shipment of SVR4 products. As DEC was "currently an SVRX licensee," the phrase "new SVRX licenses" cannot mean new Software or Sublicensing Agreements, but must refer to the Product Supplement that DEC needed for the SVR4 product. Indeed, DEC had long

    15

    before signed its Software and Sublicensing Agreements and was at the time distributing SVR3.2 products. (James Ex. 9.)
  • Mr. DeFazio's declaration is insufficient to preclude summary judgment for SCO. First, he admits with respect to Amendment No. 2 that he has no "personal knowledge as to what it was intended to accomplish." (Sneddon Ex. 4 ¶ 43.) Second, no fewer than thirteen witnesses, including the CEOs and negotiators for both Novell and Santa Cruz, flatly contradict his declaration regarding the APA.

B. The Documentary Evidence.

Novell is also silent regarding its numerous documents connected to APA. Such documents (cited at 22-26) include Novell's 1995 and 1996 SEC filings which describe Novell's retained rights without any hint of the rights Novell now claims; the TLA, which provides that "Ownership of the Licensed Technology shall reside in SCO"; Novell internal emails stating Novell "will have no more involvement with" the Business and "Novell is out of the UNIX/UW business" after the closing date; Novell's letters to third parties announcing that it transferred to Santa Cruz "its existing ownership interest in UNIX System-based offerings" including the same products listed in Item VI; and Novell documents showing that it understood that it needed, and indeed sought, Santa Cruz's delegation of authority to license SVRX products during the Transition Period. These contemporaneous documents reveal Novell's intent to transfer the Business without qualification. Had Novell retained the rights it now claims under Section 4.16(b), the relevant portions of those documents would have been unnecessary or untrue.

16

C. The Parties' Prior Conduct.

SCO presented evidence of Novell's conduct during the seven-plus years that followed the signing of the APA. Novell again does not even address most such evidence, including:

  • A part of the HP buyout in 2000, Novell warranted (among other things) that it has "no present, or future or reversionary interest in any such source code royalties." (Ex. 38 at 1.) In view of its purported right to amend SVRX agreements at whim, this warranty represents an inexplicable self-imposed limitation.
  • In 1997, Novell asked Santa Cruz to execute a letter agreement to "enable Novell to negotiate directly with Cray" on the controversy over Cray's royalty obligations. (Ex. 39.) Novell acknowledged that it needed Santa Cruz's "prior approval" to negotiate the continuation of Cray's rights to distribute source code. (Id.) Had it believed that it had the broad rights it now claims, Novell would not have needed or sought Santa Cruz's agreement or prior approval.
  • In 1998, Novell conducted an audit of SCO's royalty payments to Novell pursuant to Section 1.2 and Section 4.16 of the APA. (Ex. 52 ¶¶ 9-10.) Novell representatives did not ask for any data other than the reports of the binary royalties from the SVRX licenses that existed at the time of the APA, and never asked about licensing of source code. (Id.)
  • Before the 2003 audit, Santa Cruz and SCO sent Novell nearly 100 monthly reports in compliance with their obligations to collect and remit 95% of the SVRX Royalties. (Ex. 55 at 26-28.) Those reports contained data only for the SVRX binary royalties

    17

    paid during each period, and did not contain information on SVRX source code fees or any other payments. (Id.)

Novell's continued efforts to convert the IBM buyout into favorable evidence are without merit. Novell contends (at 9-10 of its Opposition) that SCO acknowledged its obligation to remit source code fees because it remitted 95% of the proceeds of Amendment No. X. Novell revises history by ignoring it.

First, Santa Cruz specifically objected to Novell's attempt to grant IBM source code rights. In his letter of April 23, 1996, Mr. Mohan told Mr. Frankenberg that "our agreements provide SCO with ownership and exclusive rights to license the UNIX source code." (Ex. 25 at 1.) Mr. Frankenberg did not dispute that assertion, instead reassuring Mr. Mohan that the proposed buyout did not expand IBM's source code rights. (Ex. 26.) Mr. Mohan disagreed but recognized that Novell, by representing to IBM that it had the authority to grant the buyout, had painted itself into a corner. He explained: "I understand that discussions with IBM are quite advanced and, on an exception basis, would be willing to try and accommodate them." (Ex. 25 at 1.) Thus, the minor source code rights that IBM received under Amendment No. X were an accommodation by Santa Cruz, not any grant of rights by Novell.

Second, Santa Cruz did not retain only 5% of the proceeds from Amendment No. X.

REDACTED

In other words, these were direct payments for Santa Cruz's accommodation.

18

Third, source code rights were a secondary issue. Even though Novell unquestionably had the right to receive 95% of the IBM binary royalties, Mr. Mohan objected to the buyout itself. As a secondary matter, he explained that he was "also troubled by the fact that the proposed IBM buyout gives IBM broader rights to the UNIX intellectual property than their current license provides." (Ex. 25 at 1.) Indeed, Mr. Frankenberg even attempted to convince Mr. Mohan that source code rights were not at stake. (Ex. 26.) Section 1 of the Amendment expressly provided that "If IBM requests delivery of additional copies of the Software Product, IBM will pay the fees listed" in its relevant Product Supplement. (Ex. 29 at 1.) Thus, the parties understood that their disagreement was at heart about Novell's authority to grant buyouts. As is confirmed by Amendment No. 2, Amendment No. X thus only underscores the fact that Novell has limited rights even when seeking a buyout of its undisputable majority interest in binary royalties.

19

CONCLUSION

SCO respectfully submits, for the foregoing reasons, that the Court should grant SCO's cross-Motion for Partial Summary Judgment on Novell's Fourth Counterclaim.

DATED this 16th day of March, 2007.


HATCH, JAMES & DODGE, P.C.
Brent O. Hatch
Mark F. James

BOIES, SCHILLER & FLEXNER LLP
Robert Silver
Stuart H. Singer
Stephen N. Zack
Edward Normand

DORSEY & WHITNEY LLP
Devan V. Padmanabhan
John J. Brogan

Counsel for the SCO Group, Inc.
By: [signed Mark F. James]

20

CERTIFICATE OF SERVICE

Plaintiff/Counterclaim Defendant, The SCO Group, Inc., hereby certifies that a true and correct copy of the foregoing was served on Defendant, Novell, Inc., on this 16th day of April, 2007, via CM/ECF to the following:


Thomas R. Karrenberg
John P. Mullen
Heather M. Sneddon
ANDERSON & KARRENBERG
[address]

Michael A. Jacobs
Matthew I. Kreeger
Kenneth W. Brakebill
MORRISON & FOERSTER
[address]


/s/ Edward Normand


1 In addition, Novell ignores the language of Section 4.16(b) to the extent that it is unambiguous. Section 4.16(b) provides that "at Seller's own discretion and direction, Buyer shall, amend, supplement, or waive any rights under, or shall assign any rights to, any SVRX License to the extent so directed in any manner by the Seller." By its own terms, Section 4.16(b) thus applies only to prospective actions. Where SCO's actions against IBM and Sequent already accrued with the filing of the lawsuit against IBM in March 2003 without Novell even purporting to direct SCO to waive any rights, Novell's alleged waiver rights are inapplicable. That is, Novell itself waived its purported rights. Novell cannot, after the fact, assert its purported rights to make SCO drop its lawsuit against IBM.

(Referenced here)
2 The documents, declarations, and depositions supporting SCO's memorandum are appended to the Declaration of Mark F. James filed herewith and cited herein as "James Ex. __." Where exhibits attached to the January 17, 2007 Declaration of Brent O. Hatch are referenced herein, they are cited as "Ex. __." Where exhibits attached to Novell's February 20, 2007 Declaration of Heather M. Sneddon in Support of Novell's Opposition to SCO's Cross-Motion for Summary Judgment on Novell's Fourth Claim for Relief are referenced herein, they are cited as "Sneddon Ex. __."

(Referenced here)
3 See Dore v. Arnold Worldwide, Inc., 39 Cal. 4th 384, 391 (2006) (holding that "even if a contract appears unambiguous on its face, a latent ambiguity may be exposed by extrinsic evidence which reveals more than one possible meaning to which the language of the contract is yet reasonably susceptible"); Pac. Gas & Elec. Co. v. G.W. Thomas Drayage & Rigging Co., 69 Cal. 2d 33, 37 (1968) ("The test of admissibility of extrinsic evidence to explain the meaning of a written instrument is not whether it appears to be plain and unambiguous on its face, but whether the offered evidence is relevant to prove a meaning to which the language of the instrument is reasonably susceptible."); Wolf v. Super. Ct., 114 Cal. App. 4th 1343, 1351, 1357 (Ct. App. 2004) ("Where the meaning of the words used in a contract is disputed, the trial court must provisionally receive any proffered extrinsic evidence which is relevant to show whether the contract is reasonably susceptible of a particular meaning"; indeed, "it is reversible error for a trial court to refuse to consider such extrinsic evidence on the basis of the trial court's own conclusion that the language of the contract appears to be clear and unambiguous on its face.").

(Referenced here)
4 Even if the Court were to find that Amendment No. 2 itself is ambiguous, SCO's motion should be granted because the extrinsic evidence supports SCO's reading of the Amendment. Novell, for example, does not dispute the facts associated with Amendment No. 2, including the detailed correspondence between Mr. Frankenberg and Mr. Mohan, the General Release of Claims Agreement, and subsequent jointly granted buyouts, all of which establish that Amendment No. 2 clarified that Novell had no rights with respect to source code and had limited rights even with respect to its binary royalty interest in the event of a buyout. In addition, the testimony of those who negotiated Amendment No. 2, including Duff Thompson, Steve Sabbath, and Kim Madsen, supports SCO's interpretation of the Amendment. (Ex. 1 ¶ 9, 11; Ex. 18 ¶ 6; Ex. 33 ¶¶ 14-16.)

(Referenced here)
5 Novell misquotes the clause by replacing the word "licenses" with "licensees."

(Referenced here)

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