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Kimball Takes It Under Advisement - SCO v Novell Hearing - Updated 2Xs
Thursday, May 31 2007 @ 08:49 PM EDT

Chris Brown just got home from the hearing in SCO v. Novell, and he says it went well. His longer report will come after he can type it up, but as expected the judge took it under advisement. No. Boies didn't argue for SCO. Chris:
I've just gotten home from today's hearings in the SCO v. Novell case. Long day, hot courtroom. Ok, only 3 hours but it felt longer. No surprise here, but Judge Kimball has taken it under advisement. No rulings from the bench.

Regarding the last minute expert declarations, at Judge Kimball's request they were neither used in argument nor rebutted. ... Today's hearing was a "good one" and well worth the read. Not that my report will be all that great. The good stuff is hard to capture. As always Novell's Michael Jacobs was fascinating to listen to. He's easygoing, good-humored, and sharp-as-a-tack.

Jacobs argued for Novell on the first two motions with Edward Normand arguing those for SCO. The last motion (Breach of Contract/Unfair Competition) was argued by Novell's Grant Kim and SCO's Brent Hatch.

So, as soon as he sends the rest, we'll find out the details. If you have questions for Chris, ask away.

Update: Chris' report is in and we have a second eyewitness account.

OK. Here we go, Chris's report, and I've put the Pacer listing of all the motions at the very end, so that if you wish to follow along or check something, you'll have them handy:


Kimball heard oral argument on three motions today, and in the following order:

  • Novell's Motion for Summary Judgment on SCO's First Claim for Slander of Title Based on Failure to Establish Special Damages
  • Novell's Motion for Partial Summary Judgment on SCO's Non-Compete Claim in its Second Claim for Breach of Contract and Fifth Claim for Unfair Competition
  • and SCO's Motion for Partial Summary Judgment on the Copyright Ownership Portions of SCO's Second Claim for Breach of Contract and Fifth Claim for Unfair Competition.

The hearing started at 2pm, ended at 5pm, and had a 10 minute break between the second and third motions.

1. Novell's Motion for Summary Judgment
on SCO's First Claim for Slander of Title
Based on Failure to Establish Special Damages

Novell goes first, Jacobs:

Michael Jacobs argued the first motion for Novell regarding failure to establish special damages. He said that both sides have only identified, or been able to find, two cases of slander of title over intellectual property. He discussed one case. He said that realized and liquidated losses must be shown, and to do this it would require a before and after analysis (before vs after the cloud over, or lien on, the title has been cleared). While most of the cases cited were in Texas, he said that he believes they are in accord with prevailing standards. He said that SCO has not demonstrated such losses, in fact SCO has stated that they will be back before HP, Intel, etc. after clearing the title.

Mr. Jacobs gave an example of a movie script. He might submit a movie script on a topic that is currently "hot", but perhaps Mr. Normand claims ownership of it. Perhaps after some period of time, Mr. Jacobs clears the ownership cloud over the script, but now time has gone by and the movie house passes on the script. Perhaps he sells it somewhere at a much lower value, or never does, thus perhaps he can show a realized or liquidated loss. However in this case, if anything, the value has increased. The Linux market has expanded over the last four years, therefore, the value of the Unix copyrights have increased.

Judge Kimball: At this point Judge Kimball interjected to clarify the value of the copyrights increased for SCO should they get them.

Jacobs: All SCO has offered is speculation on what will happen in the future, Jacobs said. Such speculation is what special damages are designed to weed out.

He referred to a SCO chart from his handout (I believe it to be Novell-285, Exhibit 46) and says that Novell is not listed as a reason for customers not taking a Linux License. SCO's "we are wounded" argument is speculative, but note that the special damages are specific to SCO, not direct and immediate. Regarding attorney fees the Bloomberg case explains that damages are not recoverable in a slander of title action. SCO did not bring an action to quiet title (which can claim attorney's fees). SCO chose the method of bringing action.

He cited next the Brooks Power case (1999... Lexis 11451) and says that the court goes through, with great granularity, what is required in a slander of title case.

SCO's turn, Normand:

Edward Normand, arguing for SCO, opened stating that SCO is entitled to prove damages before a jury.

He said that on May 28th, 2003 when Novell first claimed to own the Unix copyrights, SCO's stock price experienced the statistically largest single day loss, that SCO suffered an effect from Novell's claim of ownership.

After Novell made its claim, sales of SCOsource licenses faded away such that by mid-2004 SCO ended the program. SCO thus lost sales as a result of Novell's actions. The world of Linux users is in the millions. Novell's assertion that SCO contacted these users, or even a significant portion, is a losing argument.

He said that Novell has not presented any cases demonstrating causation is amenable to summary judgment. Utah has adopted the 'Substantial Factors' test. He cited SCO expert testimony that Novell's actions have caused SCO losses. He said that some customers (Merrill Lynch, etc.) cited lack of copyrights as a reason for not purchasing SCOsource licenses. SCOsource was part of SCO's business in 2003 and fell as a result of Novell's actions. There is less willingness in the market to purchase SCOsource licenses now than four years ago.

Slander of title for real property is not the same as intellectual property. It's not a one-time event like real property. One can enter into multiple licenses of IP whereas with real property, only once. Experts state that SCO may not be able to sell licenses at the same value as before Novell's claims. Even if it is proved that SCO has a right to pursue licensing, SCO may no longer have the resources to do so.

After Novell claimed rights to the copyrights, HP began offering indemnification. HP would not be able to enter into agreements to offer SCOsource licenses with sales of its computers.

Novell, Jacobs:

Michael Jacobs rebuts for Novell. He said that this is all about ownership of the copyrights. Does SCO own them or not? If they do, they are able to pursue users.

2. Novell's Motion for Partial Summary Judgment
on SCO's Non-Compete Claim in its
Second Claim for Breach of Contract
and Fifth Claim for Unfair Competition

Novell first, again Jacobs:

Michael Jacobs argued for Novell on the Non-Compete/Technology License Agreement (TLA) motion. He stated that the TLA IIa2 provisions only apply to 2. Composite offerings shall not be competitive to SCO... IIb The proviso shall cease to exist upon "Change of Control"... Look to the APA, page 41, 6.6c for the definition of "Change of Control". It lays out conditions. There is no 2-year limitation or list of companies. If you use logic, there can be no question of what the TLA means. The APA's 6.3c gives a list of companies. SCO "wins" on this provision. In this case the TLA "trumps" the APA 6.3c. When there is a conflict between contracts, the later shall apply. Also the TLA is the terms of the license. It is the license contemplated by the APA.

Judge Kimball: "So this is a legal issue and I get to decide it?"

Mr. Jacobs: Exactly. No extrinsic evidence is required. The contract has an integration clause. There is no ambiguity -- there is a contradiction. There is no clause stating that if there is a conflict, the APA shall rule.

If SCO believes Novell "slipped one past them", put a "gotcha" in the TLA, SCO could have asked to reform the contract. They did not do that, and it's too late now.

Regarding non-compete, Mr. Jacobs discussed breach of covenants versus "License Limitation" clauses, infringement vs contractual breach. I did not follow the details well. He said that the provisions should be treated as license limitations. The document states they are restrictions. He refers to California law regarding non-compete (and later in the day it was noted that the legality of non-compete clauses is now before the California Supreme Court); thus the terms can only be license limitations.

He said that SCO wants to keep their breach of covenants cake and eat their license limitations too. SCO cannot have it both ways.

SCO, Normand:

Edward Normand argued again for SCO and displayed reference charts angled such that we cannot view them from the public seating area. He related that Novell's former CEO, Mr. Frankenberg, stated that Novell had breached their non-compete.

He says the plain language reading, versus Novell's close reading, of the contracts supports SCO's interpretation.

He cites cases demonstrating that a plaintiff can bring claims for both breach of contract and infringement at the same time. He said that the claims are not amenable for summary judgment.

He said that SCO's claims for contract breach and copyright infringement have different elements, and yes (following questions from Judge Kimball), there is overlap.

Regarding change of ownership there is no contradiction. The TLA and APA are an integrated document and must be read together. The APA draws a distinction between change of control of Santa Cruz versus change of control of Novell. Referring to Section 1.6, he says they believe the term "Change of Control" is defined in the APA. SCO believe the plain language is clear. Novell's argument would have Judge Kimball ignore Section 1.6, Section 6.3, and the integration clause.

Regarding California's Section 16.600, the licensor is able to set geographic, temporal, and other means to not conflict with 16.600. Novell and Santa Cruz were in an agency relationship which avoids Section 16.600 because this is "In Term."

Novell, Jacobs:

Mr. Jacobs rebuts saying the arguments have been very well briefed. He asks Judge Kimball to carefully read SCO's cases, claiming SCO ignores the (missing) rescission element that would allow the two claims.

Regarding Novell's former CEO he says that asking what Mr. Frankenberg says 10 years later about a contract 10 years ago (and was not intimately involved in the drafting of) is not the same as asking a lawyer who drafted it. SCO's lawyer, Mr. Sabath, when asked if Section 6.6 applies answered, "Sure looks like it."

3. SCO's Motion for Partial Summary Judgment
on the Copyright Ownership Portions of
SCO's Second Claim for Breach of Contract
and Fifth Claim for Unfair Competition

Novell, Grant Kim:

The court took a 10-minute break after which Grant Kim argued for Novell on the breach of contract/unfair competition motion. He quoted the core elements of this motion from SCO's claim and stated that these must be denied for two reasons: Novell owns the copyrights (briefed and argued on Monday) and SCO doesn't state claims for breach of contract or unfair competition.

He said that in the process of a very public case, Novell made a statement of its interpretation of the contracts and that normally such a statement wouldn't make headlines, let alone be the basis of a claim.

SCO says they are basing their claim on unfair competition, common law, and statutory law. He cited the Proctor & Gamble case heard by Judge Winder.

According to SCO, Novell's statements were misappropriation of SCO's property. There was no seizure. In intellectual property this involves taking the IP and placing it in one's product and selling it (or "palming off" which SCO admits is not claimed).

He said that Judge Winder's Proctor & Gamble case is 90% on-point. In each case SCO cited, they misapplied it in that they don't stand for what SCO says they do.

Simply making statements about copyright ownership is not misappropriation or palming off.

SCO cites three pages of Novell statements, all made between May 2003 and March 2004. He says that statutes (Utah's Unfair Competition Act) cannot be applied retroactively. The only statements cited after March 2004 are Novell's pleadings in this case. Such pleadings are privileged.

SCO points to Novell's web page (containing links to correspondence claiming ownership of Unix) but it was published before March 2004. He cited a Denver case, Bloom v. Goodyear, that indicates that the "first publication" rule should apply, that it is not a "continuing publication."

Utah's Unfair Practices Act has four provisions, none of which apply.

He cited Foley (Cal. Supreme Court, 1988?) about implied covenant of good faith and fair dealing. He said that there are no clauses in the APA that prevent a party from making statements about it. There are no confidentiality terms (other than that each party may keep it's due diligence results confidential). The parties can make statements about the contract. The parties can make statements about the contract. He further claimed there is a strong public policy allowing parties to defend unfair claims by others. He cited a California case to that effect.

SCO, Hatch:

Brent Hatch then argued for SCO starting with: "I keep hearing people say that SCO is in the business of suing people. * I'm* in the business of suing people. SCO is in the business of producing its products and protecting its IP."

He recapped SCO's business timeline. And said that on the day SCO was announcing its most profitable quarter in history, Novell made a public statement that Novell owns the Unix copyrights. He related that Novell's Chris Stone told a journalist that he made the claim at that time to hurt SCO's stock price.

Judge Kimball asks Mr. Hatch about Novell's assertion that this is a duplicate claim. Mr. Hatch replies "That's an interesting question." Judge Kimball says "Yes, it is and I want you to answer it." Mr. Hatch said that each claim has different elements.

He played a video clip of Novell's (Chris Stone?) saying "Al Gore didn't invent the Internet, you (SCO) don't own Linux, and we still own Unix." Mr. Hatch highlighted the last statement "... we still own Unix" and read from Schedule 1.1(a) of the APA.

He said that an element of Utah's Unfair Competition law is misappropriation. We are claiming, he said, that Novell took from SCO its good will and its unfettered right to its IP. We are arguing "straight-up misappropriation." We have demonstrated that words alone can "willy-nilly" steal intellectual property. Novell used more than just words -- they went out and registered the copyrights to Unix. They made statements to the public and SCO's prospective customers. These are affirmative acts.

Regarding the Unfair Competition Act not being retroactive, we are alleging continuing misconduct, he said. If they had a billboard up, and the statute changes, and they left it up, it would be in violation of the statute. Novell's arguing some kind of "grandfather clause." Novell admits they still claim to own the copyrights on their web site.

We didn't say we're claiming (Utah's) Unfair Competition Act. We said "for unfair competition under applicable law." Before the UCA of 2004 went into effect we were under the UPA, the "Unfair Practices Act." We thought they know what laws applied.

On good faith and unfair dealing, Novell calls it a "gap filler."

Judge Kimball: "I think they called it a "Chasm Filler."

Hatch: Mr. Hatch continues, by saying that he thinks this is a classic argument for the need for a good faith and unfair dealing clause. He says that they didn't think that Novell would go out after the agreement and try to destroy SCO's good will and property.

Novell, Kim:

Grant Kim rebuts saying that Novell's actions were defensive. That's what it did with copyrights. Those registrations have no legal effect. If Novell hadn't registered, SCO would now be saying we'd conceded the point since we didn't register.

He requested that Judge Kimball compare the cases in SCO's handout to the court to SCO's filings. He said that the cases SCO has on their tabs 8, 9, and 10 are not in their briefs, so he's not prepared to talk about them.

He said that Utah's Unfair Practices Act's elements are nowhere near this one.

Judge Kimball: Judge Kimball said he will take it all under advisement and held court in recess until Monday.

Thus concluded the day.

Here's our second eyewitness account:


Hearing Notes

First motion: Jacobs for Novell and Normand for SCO

JACOBS: Started out by talking about damages not specified. Cited Macia (sp?) and stated damages must be observable. Their claims are speculative. The Supreme Court follows the same hard line of having to have particular damages. This leads to double recovery. Mentioned Rio case.

JUDGE KIMBALL: What attention should be paid to Texas law?

JACOBS: Texas law should be considered. IP context difficult to show costs. Linux expanded during the past four years. There are evidentiary issues that should be addressed. The value of HP was one issue rebutted in that SCO can go back to HP if they prevail.

The cloud on the title is at fault for this situation. The title should be resolved first. Causation clause heightened for unknown users.

SCOSOURCE staff disbanded is unique to SCO. Damages for attorneys should not be recoverable.

Fees for quieting title are allowed. Dismiss on grounds of damages (Hatch attacks this later)

NORMAND: We have a right to present to a jury and have them decide the facts. Summary judgment is inappropriate. We satisfy evidence threshhold for special damages.

Novell claimed to own IP
25% drop in stock price
Stone statement that Novell wanted to hurt SCO

Attorney fees should be recoverable
Special damages

prevention of sales
amount not necessary

All loss determination is impossible.

Identifying potential customers is impossible.

Costs asked for by Novell.

This is not defamation.

Was damage caused by Novell?

Publication of injurious falsehood
Substantial factor
Utah contexts adopted
evidence is admissible:
requires expert analysis
Botason says it does

Premature and out of context

no prejudice

Novell ownership claim basis of not purchasing SCOSOURCE

Hearsay? State of mind?

SCO executives testify against Novell

Value to be determined by experts

Loss was realized:

residual effect
IP not a one time event (not like real property)
experts claim it cannot be restored
McBride says it is too late & funds are gone

Right does not imply success
SCOSOURCE value was diminished
Stock price
HP indemnification trumps SCOSOURCE

McBride testifies based on personal knowledge.

JACOBS: Expert testimony must be more than just speculation. IP lawsuits based on ownership.

Damage claim applicable.
Licensing by FEAR has been diminished.
Hiding claims previously now exposed.
Speculative as to before/after condition.
Slander of Title suit not clearing ownership issue.

2nd Motion on Non-Compete -- Jacobs and Normand

JACOBS: (Handed copy of APA and TLA to judge. Referred to tabs throughout discussion.)

The amended APA was constructed and he argued that the plain language controls instead of the special interpretation of SCO.

TLA (technical license agreement) was after the APA.

If Novell is right then SCO has no right.

(refer to 2a2)

Shall not be directly competitive: change in control restrictions cease to exist after date of transfer.

(tab1 Pg 48 of APA)

6.6(c) Change of Control
No 2-year limit. Proviso no longer exists.

APA has different provision for change of control.

APA 6.3(c) -- 2 years from closing date

TLA later in time
APA not a license
All prior understandings of TLA mooted

SCO says TLA not following intent
Reformation of their claims is too late
This is a legal issue to be decided by the judge


JUDGE: What year?

JACOBS: Provisions outside the TLA allow suit for copyright infringement claim.

Is this a covenant of the contract of limitation of license?

California law 16600 prohibits covenants of non-compete.

NORMAND: (very careful to place charts where only the judge and recorder can see them)

Frankenberg deposition says that Novell breached the APA on non-compete.

This is a breach of contract of an affirmative promise from Novell not to compete.

These documents apply only to Novell. The Sun v MS case does not cover one or other cases for copyright & breach.

Non-compete not the same as infringement of copyright.

TLA and APA are integrated documents.

APA 1.6 address Novell and Santa Cruz
6.3 and 6.6

Cal 16600 can have geometric and other restrictions on non-compete.

Mentioned unjust enrichment.

JACOBS: 9th District decision says agreement breach must precede infringement
Sun v MS

TLA is not dependent on APA, but is a standalone license.

Also mentioned unjust enrichment -- no context or argument

3rd motion: Breach and Unfair Competition, Kim and Hatch

KIM: The situation is simple and clear.

JUDGE: I like that.

KIM: This is superfluous and improper.

Talks about breach of good faith
Falsely claimed ownership

Both fail for two reasons:
SCO must prove statements are false
No claims for breach or unfair competition

This is extraordinary claim. This was a very public debate where Novell only stated their position.

Common law -- Proctor & Gamble -- misappropriation or palming off

There was not seizure of property.

Statements are not misappropriation.

Unfair competition law enacted May 2004 and alleged acts are later.

Brakebill declaration states web site published before law enacted.

Novell never admitted that it transferred the copyrights.

California law applies.

Good faith is intended to fill gaps in contract but not the chasm that SCO has created.

There are no confidentiality provisions in the APA.

Novell statements were alleged to have deprived SCO of value of the APA. The business at the time in 1995 did not include Linux. SCO's new way of suing people is not the intent of the APA.

HATCH: (in his pink bowtie) "SCO is not in the business of suing people; I am." Novell sues people too. Look at the court records.

Misappropriation is evident
1995 Santa Cruz gets APA
8 yr period before Novell claimed copyright ownership
IBM -->$50M ---> Novell
Novell now more aggressive
Deposition said Stone to hurt SCO

JUDGE: Is this claim duplicative?

HATCH: (I missed it)

JUDGE: Tell me about whether this is duplicative. I want to know.

HATCH: Slander does not require competition.
Unfair competition of Utah
Novell did not just make statements
They registered the copyrights after SCO

Novell modified the copyright statements to say "Santa Cruz Operation" in place of "Novell" in the copyright statements. They never tell you about that.

They showed a video clip (a 15-second extract from a video interview of Stone) where Stone said, "We own Unix" (definitely taken out of context, I thought).

They support IBM
Web site still up

They claim this is an improper attempt to amend the complaint. They submit a motion to dismiss when you should ask for summary judgment and visa versa.

(I was about to fall asleep here, as were others around me; it was hot too)

Bloom v Willards

We suffer daily damage from the ongoing acts

KIM: Unfair practice or unfair competition laws in Utah will not help them anyway. I saw some submissions today for the first time and object. In cursory overview they will not help anyway.

This is like a gag rule.
SCO started this whole thing with their public statements and Novell just responded. Copyright registrations were just a response.

Sometime previous, he also mentioned the 1st Amendment.

Here is, once again, the Pacer listing with links to the motions heard today and the ones that will be heard on the 4th of June:

05/24/2007 - 326 - NOTICE OF HEARING ON MOTION re:

Motion Hearing set for 5/31/2007 09:00 AM in Room 220 before Judge Dale A. Kimball. (kmj) (Entered: 05/24/2007)

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