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Novell SJ Hearing Transcript - May 31, 2007 as text
Wednesday, June 13 2007 @ 10:54 AM EDT

Here we go, thanks to Groklaw's bot we call Steve Martin, we have the summary judgment transcripts as text for you. Thank you, Steve.

Well, he's so fast, it seems he simply must be a bot. Yes, bots respond to appreciation shown. He's actually faster than this. He finished both hearing transcripts last night but for some reason, Groklaw fell off the Internet for a while, and then I fell asleep waiting for it to pop back up to the surface again.

Now we get to hear the arguments in detail about whether or not SCO suffered special damages when Novell announced that it believed Novell owns the copyrights, not SCO.

That means we must fall down the rabbit hole once again and enter that special wonderland called SCO.

Here are the motions heard that day:

These arguments were heard on May 31, 2007, and now the moment our eyewitnesses always worry about: we get to see how they did. Kidding. But you can compare and verify now.

Novell's argument in the Failure to Establish Special Damages motion goes something like this:

1. SCO wants a double recovery. It wants to get money from Novell for "lost" licenses, but it also says it'll be back to dun HP and Linux end users if it prevails. Should that happen, it's a double recovery. So what the court needs to do is look at the before and after value, and if there is no dip in value, SCO has no damages to claim. And if it has no special damages to claim, it can't prove slander of title because that is a required element.

2. Actual costs for quieting title are recoverable, but SCO didn't happen to plead that.

3. Attorneys' fees are not special damages in a slander of title case, which is the kind of claim SCO chose to bring.

4. Special damages must be concrete, "direct and immediate", realized, and knowable. There is one gray area, something Judge Kimball wrote earlier in his ruling on the Novell Motion to Dismiss years ago, that if a slander is very widely disseminated to the public, you may not be able to quantify precisely, because you can't know who didn't get a license because they never contacted you in the first place, due to believing the slander. It's the weakest part of Novell's argument, in my view, and probably in theirs, but the way they handle it is by showing that SCO knew who to contact. They had spreadsheets about it. And that makes it something that can be quantified, and on those spreadsheets, there's no notation about Novell getting between SCO and its millions from cowering Linux end users and vendors.

SCO's noxious dream. There is an interesting detail about HP. I gather from Jacobs' words that the HP deal was not really all about SCOsource. That may have been one issue, but the deal itself, or the proposed deal, appears to have been about other things. P. 12:

MR. JACOBS: What exactly was the value of the transaction that they were contemplating doing with HP? And how much of it turned on -- how much of the value of the transaction was actually about the Linux issue and the ownership of the UNIX copyrights? There were a whole bunch of things going on in that transaction as SCO's evidence illustrates. And then there's even more -- there's nothing on the back end of the story because we have no information at all on what would happen if following a successful court decision that SCO owns the UNIX copyrights, SCO went back to HP and said, we're back. We'd like to do this transaction again. On that topic, they're simply silent.... All SCO has really offered on this is speculation about what might or might not occur in the future, and speculation is very much what special damages law is designed to weed out.

There are so few slander of title over IP cases, Novell says, that there is also a discussion on whether or not the judge can instead use Texas cases. And you'll see Novell show him a way where Novell thinks he can, following an earlier ruling in Utah that did exactly that. Judges are supposed to stick to cases in their particular district and circuit, unless there aren't any, in which case they can look elsewhere to see if there is any guidance in other courts. So that is what that part of the argument is about.

I enjoy very much watching Judge Dale Kimball interact with Michael Jacobs, Novell's attorney. Here's a snip where they are talking about the before and after value of Linux, with Novell arguing there not only is no loss in value, there has been an increase:

MR. JACOBS: Let's suppose that I write a script and I submit it to a movie producer, and the topic is hot at that particular moment. And then my friend Mr. Normand comes in, and he says, I own the script. You don't, Jacobs. And so the movie house passes on the script. Then we have a dispute, and we -- and I win. I did have title to the script. I resubmit it to the movie house. The movie house says, you know what, we're not interested anymore.

I had a transaction before. I had a transaction after. I can probably show a realized and liquidated loss. Or I didn't have a transaction after. It was valued at zero, and so I get the value of the lost transaction. There was a moment when my script was valuable. The passage of time caused that to go away.

THE COURT: But you say this is different.

MR. JACOBS: This is absolutely different; because what's happened here is that the Linux -- there's been no showing of the diminution of value of the UNIX copyrights that particularly is applied to Linux. Limit [sic] has blossomed in the intervening period. And at the risk of being a little cute on the question, we've probably done them a favor on this, because if they had been successful in asserting their copyrights --

THE COURT: They ought to be paying you.

MR. JACOBS: Exactly, Your Honor. And we hope they will at the end of this litigation, but not on their claim for slander of title. On our claims.

It is a little -- I realize it comes off as a little cute, but the point is this. The Linux market has expanded dramatically in the four years since SCO launched SCOSource. The cute part of it is that had they been successful with SCOSource in 2003, it undoubtedly would have put brakes on the expansion of the Linux market.

So in the intervening period, Linux has expanded because SCOSource founder for all of the various reasons that we pointed to in our brief, the number of Linux implementations is far larger than when SCO launched SCOSource. So the value of the copyrights has if anything have gone up in the interim, not down. That's the basic problem --

THE COURT: So if they own them, their value has increased.

MR. JACOBS: Exactly.

So in that scenario, if SCO were to get the court to force Novell to pay SCO for lost transactions, and then it goes and bullies people into paying them after the court battle is over, it's a double dip. I'm sure SCO executives wouldn't mind, but Novell argues the court should.

All the above would also depend on SCO actually owning the copyrights or at least convincing the court and then also proving infringement and all the rest of the issues that don't fit into Wonderland, but in court, you argue as if certain things could happen, even if, like Mr. Jacobs, you don't expect them to occur. As Jacobs very economically phrases it to Judge Kimball, "That's if they really can prove infringement. You have before you in the IBM case their evidence of infringement." 'Nuff said.

Some of you wanted to know how the Novell evidentiary objections would be handled. I didn't know myself, but we find out now:

THE COURT: There are motions to strike objections to evidence. I assume you would not really spend a lot of time arguing those.

MR. JACOBS: That's correct.

THE COURT: But I should decide those on the briefs as part of the decision with respect to the motions.

MR. JACOBS: I'm sorry, Your Honor?

THE COURT: I would decide them on the briefs as I'm deciding the motion.

MR. JACOBS: That is our intent, Your Honor; although Mr. Brakebill is here to answer any questions on the evidentiary objections, if you'd like.

So Kenneth Brakebill is the one who drew up the objections, I gather. With his paralegal, one assumes. Just have to say that. That tells us he is the detail guy, the one who notices every little thing that could be used and how. Later Jacobs explains that the evidentiary objections are only if the judge decides not to toss out SCO's entire slander of title claim on the basis of failure to establish special damages.

SCO's case, presented by Edward Normand, goes essentially like this:

1. We want to go to a jury on this matter of special damages. It's not appropriate for summary judgment decision by a judge. "We submit that SCO is entitled to show the jury that we've suffered special damages and that none of the precedent that Novell cites or the evidence that they take issue with suggests otherwise."

2. When Novell first claimed publically to own UNIX and Unixware copyrights, SCO stock price dropped 25 percent in a single day, and Novell meant for that to happen. "And that is the only day since that time in which SCO's stock has fallen in a statistically significant way in a single day." The problem with this argument is that it depends on believing Maureen O'Gara's musings on what Novell executives were thinking. And if you read her coverage of the June 4 hearing, you know she got some facts wrong, let along imaginings. For one thing, she claimed that Groklaw had no one at the hearing. But we did, and we published the report. Just a suggestion to anyone wishing to evaluate her reliability as a witness. As to bias, I leave that to you, gentle reader. Also, is that really the only day there was a huge drop? I thought there was another the first time a negative ruling issued from the court in IBM. I will check that, or you stock market brainiacs can research it.

3. SCO shows three different types of special damages: specific customers who declined a SCOSource license; that prices for such licenses has eroded if not faded away entirely; and that SCO lost sales to unknown purchasers. Those unknown purchasers, Linux end users, number in the millions, so SCO is not limited by the few listed on the spreadsheets.

4. Novell is claiming attorneys' fees for its slander of title counterclaim, so why can't we? "Attorney's fees are permitted as special damages in a slander of title action if incurred to clear title or to undo any harm created by whatever slander of title occurred."

5. There are cases showing that the issue is a substantial factor test. Surely Novell's statements were a substantial factor in SCO's losses. SCO doesn't have to prove it was the only factor, the "direct and immediate" standard Novell proposes.

6. He defends against the Novell evidentiary objections. For one example, he says that executives may be offering hearsay about what a customers told them; but their conclusions about the vendability of their offering isn't hearsay, and anyway, this should be decided by a jury.

7. Novell's slander has had "a damaging residual effect" on the market value of SCOsource. Novell says SCO failed to show the value of the copyrights. But SCO doesn't need to. The value of those copyrights is reflected in what people are willing to pay for a SCOsource license, and that, SCO claims, has gone down even if they win. This, to me, is SCO's weakest argument. It is too early, at best, to even know what the value might be if SCO won. Obviously Microsoft is following the same general "pay me or I'll sue" IP strategy, so the business model is still viable in Microsoft's eyes, so why wouldn't it work for SCO? SCO argument is that if it's foggy, then let the jury decide. But if it's premature, then who decides that? If losses are not realized, they're not realized. And what if SCO guesses wrong, collects from Novell, then goes after victims in the market and they *do* pay? Then you have the double dip, and clear proof that SCO's losses were *not* realized, and that's Novell's argument exactly, that SCO put the cart before the horse. Like that never happens with the SCO Group. As for HP, SCO points out it has an indemnification program now, so it obviously won't buy licenses for its customers from SCO.

Novell of course gets a chance to respond:

1. On "residual impact" there has to be more than speculation. If they had sought to clear title first, and then go back and relaunch SCOsource, then it would be clear what the value is after clarification of the title ownership, although there would still be uncertainty about before. But that was SCO's choice, to do it backwards. The factors SCO offers for special damages -- drop in stock price, residual effects, etc. -- are irrelevant in a special damages analysis.

2. SCOsource was about people taking licenses to avoid copyright lawsuits. "If SCO has ownership of the copyrights, they can bring their infringement lawsuits." That is the bottom line. Even if you are indemnified, *somebody* has to pay for that infringement, and they'll be paying SCO. If no one wants a license now, it's not because of Novell. It's because people have seen the "evidence" of "infringement" SCO has claimed in the IBM case, and they're not afraid any more, due to its paucity. That's SCO's problem with SCOsource, and it's not a problem Novell created. They had a business model based on people not being sure what cards SCO was holding and reacting out of fear. Now they aren't afraid, because SCO's cards are on the table. Jacobs: "I think what SCO is really saying is they were rolling people back in May, June before Novell statements, they had the industry in a turmoil and they had people signing licenses out of fear. Now the facts are out on the table.... the fact that there are more facts out on the table now about the strength of their Linux claims, and maybe those claims are weaker now is just because they were hiding them all back in May and June on the very issue that people were asking them to come forward with. I don't think that's legally probative. But if you drill down to what they're saying, that seems to be the essence of it.

And that ends the first motion. If I see anything particularly noteworthy as I read the second, I'll add it here. But I don't want you to have to wait to read all this, and the first motion is the one I was most interested in.



Plaintiff )
vs. )
NOVELL, INC., ) Case No: 2:04CV00139
Defendant )
__________________ )


May 31, 2007





Attorneys at Law

Attorney at Law

Attorney at Law

Attorneys at Law


* * * * *

THE COURT: We're here this afternoon in the matter of SCO vs. Novell, 2:04-CV-139. The plaintiff is represented by Mr. Brent Hatch.

I don't have your name for some reason.

MR. HATCH: This is Sashi Boruchow.

THE COURT: Okay. I do have your name. Never mind.

Mr. Brent Hatch, Mr. Edward Normand and Ms. Sashi Boruchow; correct?


THE COURT: The defendant is represented by Michael Jacobs, Mr. Thomas Karrenberg.


THE COURT: Mr. Grant Kim.

MR. KIM: Yes.

THE COURT: And Mr. Kenneth Brakebill; correct?


THE COURT: All right. First we'll hear the arguments on Novell's motion for summary judgment on First Claim for Slander of Title for Failure to Establish Special Damages.

Who's arguing?

MR. JACOBS: I will, Your Honor.


THE COURT: Mr. Jacobs.

And for you?

MR. HATCH: Mr. Normand.

MR. NORMAND: I will.

THE COURT: Mr. Normand?

Go ahead.

MR. JACOBS: Good afternoon, Your Honor.

THE COURT: Good afternoon.

MR. JACOBS: We were here several years ago on the question of damages for slander of title.

THE COURT: Several years ago.

MR. JACOBS: And we moved to dismiss. You granted our motion and allowed them to replead, and now we're back on summary judgment.

Two things have happened since then of substance. One, all the evidence is now in front of us; and, two, I think we've exhausted every possible research avenue to discern the law of special damages as it applies to slander of title actions. And the two litigants have brought that law before and asked you to call this particular question.

I want to start out with an observation and not withstanding the thoroughness of the research. Both sides have cited only one slander of title case involving title to intellectual property. And we've looked far and wide for more slander of title cases involving intellectual property, and


they are very few. And the one we cited is the only one that we were able to find that is actually is in any way helpful to the damages issues in front of us today.

That's not because there's a shortage of intellectual property ownership disputes. As you know from the briefing we've done on the copyright ownership issue, there are lots and lots of copyright cases. And if we were to be in patent law or other areas of intellectual property, we would see even more ownership disputes. But there are very few slander of title claims that are brought.

The one that is in front of us, the case that is an IP case is the Macia decision. There the Court noted at the motion to dismiss stage, which is the only published decision in the case, that plaintiff's damages were likely going to be speculative. It's a trademark claim, and the defendant had asserted that it was the rightful owner of the mark against the plaintiff.

The Court also noted in a footnote that because the plaintiff had retained the intellectual property cause of action, the trademark cause of action there, certain potential claims for special damages were not being asserted in the action. The Court was trying, in that footnote trying to I think wind its way through special damages as it applies to intellectual property disputes, which are fundamentally disputes about who owns a right to assert against someone



We don't know what ultimately happened in the Macia case, but we believe that its skepticism about damages was very well-placed. It's not just that damages generally are often difficult to prove and that courts are on the watch for speculative damages theories. In slander of title cases, the damages rules are quite strict. The restatement and the cases applying it show that the kind of modeling and predictions about future markets that often underlie intellectual property laws process disputes just don't meet the legal standard. Instead, courts are instructed to look for realized and liquidated losses that are the direct and immediate result of the alleged slander.

These turn out to be difficult to prove even in the Lanham cases that so populate interestingly the courts of Utah and the courts of Texas. These turn out to be -- yet, these cases get thrown out on damages theories frequently. We did a tally on the cases that are in front of you. And in 15 of the cases, it was zero damages leaving aside the question of attorney's fees.

The Utah Supreme Court has followed this trend towards strictness in evaluating special damages claims. But it's in Texas where the cases seem to have arisen that most clearly present the kind of before-and-after question that is the heart of our -- heart of our brief.


THE COURT: You talk about meeting the legal standards. How would you articulate that standard?

MR. JACOBS: The legal standard in slander of title cases is a requirement to show realized and liquidated losses including -- and this is maybe the heart of the dispute between us or at least one way you can decide this motion. If you agree with us that that includes a showing of the value of the intellectual property, once the cloud on the title has been released or vacated by some action, some release of a lien or some declaratory judgment action, if that before-and-after requirement is an element of the damages claim as the cases we cited indicate, then they've made no such showing. We'll get to what they say about SCO itself, which is a different question. But they made no before-and-after showing.

And the fundemental purpose of that requirement, Your Honor, and this is why I think it has to be an element in this case, is it's the only way to avoid a double recovery. Only if you do a before-and-after analysis of that sort, you avoid the situation which SCO has presented squarely to the Court, we want to have our damages from Novell for lost licenses. Some more or less particularized and some vague and extreme.

But once you decide, once the Court decides that we're the owner, SCO says, we'll be back. We'll be back


asserting our intellectual property rights. We'll be back in front of Hewlitt-Packard. We'll be back in front of literally tens of hundreds of thousands of Linux -- of users of Linux asserting our copyright claim. And they've made no effort to reconcile the double recovery issue that is so well addressed by the Texas court in the Rio case with their damages claim here.

Now, one question is whether you should follow Texas law at all because the Texas cases are pretty strong on this.

THE COURT: I was going to ask that.

MR. JACOBS: I'm sorry?

THE COURT: I was just going to ask, what attention should I pay to Texas law?

MR. JACOBS: Exactly. Well, I have one way to get you will there, which is the Valley Colour case, which is a Utah Supreme Court case, of course, in 1997. And it cited a Texas case Belo, B-E-L-O, for the proposition that a specific lost sale must usually be proven. And then Belo gets followed by other cases in Texas which puts some boundaries around what the essence of that lost sale showing must be.

There are cases in other jurisdictions, though, that have reenforced this before-and-after element of the rule. And so it's not unique to Texas. We believe it's the prevailing standard, and we've cited cases outside of Texas


for that proposition.

In the intellectual property context, it is particularly difficult to show the requisite degree of loss even if you just follow the looser standard that SCO is advancing without this requirement to show that the -- after the cloud on title is released what the value of the intellectual property is.

We agree that the costs of actually quieting title should be readily provable and are recoverable in a slander of title action involving intellectual property. So that part is not difficult, the cost of actually quieting title, and we'll get to the attorney's fees question in a minute. But when it comes to showing a realized and liquidated diminution in value in the intellectual property context, that's tough. And I can imagine scenarios in which it could be readily proven.

Let's suppose that I write a script and I submit it to a movie producer, and the topic is hot at that particular moment. And then my friend Mr. Normand comes in, and he says, I own the script. You don't, Jacobs. And so the movie house passes on the script. Then we have a dispute, and we -- and I win. I did have title to the script. I resubmit it to the movie house. The movie house says, you know what, we're not interested anymore.

I had a transaction before. I had a transaction after. I can probably show a realized and liquidated loss.


Or I didn't have a transaction after. It was valued at zero, and so I get the value of the lost transaction. There was a moment when my script was valuable. The passage of time caused that to go away.

THE COURT: But you say this is different.

MR. JACOBS: This is absolutely different; because what's happened here is that the Linux -- there's been no showing of the diminution of value of the UNIX copyrights that particularly is applied to Linux. Limit has blossomed in the intervening period. And at the risk of being a little cute on the question, we've probably done them a favor on this, because if they had been successful in asserting their copyrights --

THE COURT: They ought to be paying you.

MR. JACOBS: Exactly, Your Honor. And we hope they will at the end of this litigation, but not on their claim for slander of title. On our claims.

It is a little -- I realize it comes off as a little cute, but the point is this. The Linux market has expanded dramatically in the four years since SCO launched SCOSource. The cute part of it is that had they been successful with SCOSource in 2003, it undoubtedly would have put brakes on the expansion of the Linux market.

So in the intervening period, Linux has expanded because SCOSource founder for all of the various reasons that


we pointed to in our brief, the number of Linux implementations is far larger than when SCO launched SCOSource. So the value of the copyrights has if anything have gone up in the interim, not down. That's the basic problem --

THE COURT: So if they own them, their value has increased.

MR. JACOBS: Exactly.

Now, there are a whole bunch of assumptions lurking in that. That if they really can prove infringement. You have before you in the IBM case their evidence of infringement. But for present purposes, I want to just set aside all of those other factors for a minute and just focus on the question of ownership.

So that's the basic problem, though, with SCO's claim. They have not made the requisite showing that if the cloud Novell has cast on its alleged title is removed, it has suffered a realized and liquidated loss, and that any such loss is the direct and immediate result of the alleged slander. Those are the requirements. Realized and liquidated, direct and immediate.

Now, there is one instance that just kind of looms large in the briefing, so it's worth focusing on for a minute, and that's the HP transaction. We are going to be asking -- we are asking you on these motions really to do two things, I


think. One is to patrol the evidence. We have submitted evidence through objections, and there are huge evidentiary issues with SCO's damage claim. The other thing is to make the ruling as a matter of law that certain contentions even after you get through the evidentiary issues survive the requisite filter.

THE COURT: There are motions to strike objections to evidence. I assume you would not really spend a lot of time arguing those.

MR. JACOBS: That's correct.

THE COURT: But I should decide those on the briefs as part of the decision with respect to the motions.

MR. JACOBS: I'm sorry, Your Honor?

THE COURT: I would decide them on the briefs as I'm deciding the motion.

MR. JACOBS: That is our intent, Your Honor; although Mr. Brakebill is here to answer any questions on the evidentiary objections, if you'd like.

So let's focus on HP for a minute. And I'm going to set aside the evidentiary objections because it illustrates the problem SCO has. It's the lack of concreteness on both ends of the HP story. It's the lack of concreteness at the beginning. What exactly was the value of the transaction that they were contemplating doing with HP? And how much of it turned on -- how much of the value of the transaction was


actually about the Linux issue and the ownership of the UNIX copyrights? There were a whole bunch of things going on in that transaction as SCO's evidence illustrates. And then there's even more -- there's nothing on the back end of the story because we have no information at all on what would happen if following a successful court decision that SCO owns the UNIX copyrights, SCO went back to HP and said, we're back. We'd like to do this transaction again. On that topic, they're simply silent. They made no such showing, and I think it's inerrant in the nature of this case in the way they litigated it they can make no such showing, because they put the cart before the horse here and sought to prove slander of title damages before they've been able to release the cloud on the title, or it's just in the nature of the intellectual property right that it's going to be very hard absent that sequence to actually show diminution in value.

All SCO has really offered on this is speculation about what might or might not occur in the future, and speculation is very much what special damages law is designed to weed out.

The one -- so where I think SCO is moving on this and looking ahead of their slides, I think they're jumping in the direction of the large number of unknown purchasers, and they find some comfort in your ruling on the motion to dismiss. It is true that there is law in special damages, and


special damages is supplied to slander of title. That if the communication was widely disseminated and you can't count up, you can't find the people who didn't take the -- in this case didn't take the license that they might have a wedge in proving special damages.

But that's not our case. We know who they contacted. They presented us with a chart. It has -- it's in front of you. It has no -- it has no entries for Novell as a cause for people not taking the license. The number of Linux -- the population of Linux users is knowable. They contacted these people and offered them SCOSource licenses, so we're not in unknowable territory. I don't think they've been able to prove that.

Moreover, we think, and this is something you may have to decide in ruling on this motion, we think the better view of the case law is that once you move over into unknown purchasers, the causation requirement is heightened. And now the plaintiff must rule out other causes by which there was a diminution in value on account of unknown purchasers who didn't enter into a transaction with SCO.

The directed and immediate standards bites at one other element of SCO's argument, and that is the "we are wounded." SCO is a wounded actor now, and it doesn't have money and it's had to disband its SCOSource staff.

Aside from the speculative nature that we've


highlighted in our brief, I want to note that the direct and immediate element of a slander of title damages proof precludes SCO from so arguing. Those are circumstances unique to SCO. That doesn't go to the value of the intellectual property right. And what the direct and immediate cases show is that things like the lost interest you would have gotten on the money had you been able to make the sell earlier, that's all too tangential to meet the direct and immediate test. We think the same thing applies to the "we are wounded" contention that SCO has advanced.

Attorney's fees. We think that there are two principles out there that have to be reconciled in the way that SCO's teed up the attorney's fees claim. One is, and one that this Court has articulated is that damages are not recoverable based on attorney's fees and slander of title actions because that will allow bootstrapping. And the other is that damages are recoverable --

THE COURT: That's the Bloomberg case?


THE COURT: The Bloomberg case?


And the damages are recoverable for expenses of quieting title. So what they've done is they've submitted a declaration from an attorney who says, I can look at the bills, and I can figure out how much of SCO's attorney's fees


are attributable to the ownership element, which is an element of -- which is the falsity element of their slander of title claim.

So what do we do? Can't get attorney's fees in a slander of title action. Can get attorney's fees for quieting title. We think that the answer is to look at the pleading. SCO did not bring an action to quiet title. It brought a slander of title action. Had it brought an action to quiet title, whether it was styled as a quiet title or declaratory judgment action, the claim we have said for the last several years is the right claim to be bringing here if they want to prove their ownership. Then they might be able to allocate attorney's fees to that cause of action. But we think that the principle that attorney's fees are not available in slander of title actions trumps their ability to try and divide up the attorney's fees among various elements of the proof in that action.

So on summary judgment, we're asking the Court to dismiss SCO's slander of title claims on the claim on the grounds that SCO has not proven special damages. In the alternative, we are asking you to go through what they have proven, what you think they have proven and decide which of it meets the standard and which of it doesn't.

There's a case that I want to refer you to in this connection that we found after the briefing that is sort of a


road map in this product disparaging case. It's the Brooks Power case at 1994 US District Lexis, 11451 from the Eastern District of Pennsylvania. In that case, the Court goes through the evidence quite randomly and decides what's out on evidentiary grounds and what meets the special damages requirement in a disparagement case and what doesn't.

Thank you.

THE COURT: Thank you, Mr. Jacobs.

Mr. Normand?

MR. NORMAND: Thank you, Your Honor. Good afternoon.

THE COURT: Good afternoon.

MR. NORMAND: We submit that SCO is entitled to show the jury that we've suffered special damages and that none of the precedent that Novell cites or the evidence that they take issue with suggests otherwise.

And counsel started off by referencing the Macia case. That's a case cited at Tab 25 of our binder, in which the Court denied the motion to dismiss and said it was for the trier of fact to resolve the issues of proof that were presented in that case. We think that case supports our argument for summary judgment here is inappropriate.

Counsel also alluded to the Court's June 2004 order. We summarize that at Tab 1. That's where the Court said that:


The motion to dismiss stage that the harm alleged by SCO to its SCOSource licensing program must be a natural consequence of the alleged cloud of ownership and customer confusion and would amount to a realized pecuniary loss.

I think then we agreed with the other side that that is the other arching standard, and we submit that our evidence easily satisfies it.

Let me take a step back, Your Honor. What's at issue is a series of slanderous statements that we allege that Novell has made over the course of years. And Your Honor has seen those statements summarized in previous briefings. We've also set forth those statements at Tab 6 of the binder. And I think we have a board that summarizes those statements, as well.

Of course, the key statement, Your Honor, May 28, 2003, when Novell first claimed publically to own UNIX and Unixware copyrights. As SCO's expert evidence will show and as the undisputed facts show, SCO stock price dropped 25 percent that day. And that is the only day since that time in which SCO's stock has fallen in a statistically significant way in a single day. Obviously the claim of ownership had an affect on the market.

The evidence further shows that Novell intended such a negative impact when it made the statement. And we


cite at Tab 3, Your Honor, the testimony from an industry reporter who spoke with Novell senior executive Christopher Stone the day before the announcement was made. And Mr. Stone explained that they were making the announcement that day in order to affect the SCO's stock price.

SCO also made repeated claims of copyright ownership to SCO as reflected in the board privately forcing SCO to acknowledge to the many customers who asked that Novell was continuing to make claims of copyright ownership. So we have a mix of private and public statements, which as Your Honor knows we allege to be slanderous.

Now, there is no question that SCO suffered an effect after Novell's statements. The undisputed foundation of the SCOSource program, to which Mr. Jacobs alluded, was that SCO owned the UNIX copyrights. I don't think that is disputed. In the event that issue is disputed, we have expert testimony explaining that the ownership of copyrights was the key foundation for that program. And that's summarized at Tab 7.

Harvard Business School of Economic Gary Pisano explained that because the would-be licensees SCO's intellectual property already had access to that property via Linux, their willingness to pay for a license is a function of their belief that SCO owned the rights. Again, the self-evident proposition and one that certainly couldn't be


decided against you us on summary judgment.

After Novell began to make its claims of copyright ownership, SCO had very little success in entering into its SCOSource licenses to the point that as of the middle of 2004, the program essentially faded away. SCO executives decided to end it. And in addition, since 2004. As Mr. Jacobs acknowledged, SCO has incurred attorney's fees in seeking a clear title to the copyrights.

Now, with this background, we come to the principal issues that Novell's motion raises. The first main issue is whether these damages, these losses that occurred after Novell began making these statements constitute special damages. We submit that they do. We set forth the legal standard, Your Honor, at Tab 8. This is from the Restatement of Torts:

The following specific types of damages are recoverable under a slander of title claim:

Loss caused by prevention of a particular sale.

Loss caused by deprivation of opportunity to sell to a particular purchaser.

Loss resulting from diminution of price.

And loss caused by prevention of sales to unknown purchasers.

And it bears noting that in Your Honor's June 2004 order, Your Honor stated that where the losses are realized, a showing of a specific amount of damages is not necessary.


Now, on the facts and pleadings of evidence, SCO shows three different types of special damages corresponding to the Restatement.

One, that specific customers declined a SCOSource license.

Two, that the prices for such licenses has eroded if not faded away entirely.

And, three, that SCO lost sales to unknown purchasers.

Both this Court's June 2004 order and the Restatement made clear that SCO can prove such damages even more specific identification of all loss of consumers and potential customers may be impossible. And it bears emphasis that the universe of the Linux users is millions.

So the notion as Mr. Jacobs suggested that we contacted many or a significant percentage of these potential customers I think is illusory. We summarize, Your Honor, at Tabs 10 and 11 some law regarding the possibility of identifying all potential customers.

At Tab 10, as Your Honor noted in the June 2004 order:

Once SCO shows that there, in fact, has been a realized pecuniary loss as a result of Novell's statements, a showing of a specific identification of customers may be impossible.


That reflects the standard in the Restatement Section 633 and in cases summarized at Tab 10.

And at Tab 11, until I heard Mr. Jacobs suggest otherwise today, I thought Novell had conceded that it may be impossible to identify potential customers. And that is a tenant that follows from a finding where the slander is widely disseminated, it may be impossible to identify such customers. I think it's undisputed. Certainly the Court would find in favor of summary judgment that Novell's statements were widely disseminated.

The precedent also shows that where the plaintiff has incurred legal costs, through the claims of slander of title, such costs constitute special damages. We summarize that law at Tabs 14 and 16. And we think it's worth noting at the outset that Novell in its reply does not respond to the citation to their own pleading that we make in our opposition brief. In Novell's own slander of title claim, they allege slander:

Has resulted in special damages, inter alia, Novell's cost and fees in prosecuting this action.

We think, as we set forth at Tab 15, that Utah law is clear at this point. That's the Computerized Thermal Imaging case, quoting the Bass case from 1988 that Your Honor is familiar with:


Attorney's fees are permitted as special damages in a slander of title action if incurred to clear title or to undo any harm created by whatever slander of title occurred.

And Tab 16 cites the cases reflecting that that is the clear majority rule.

Counsel has alluded to Your Honor's earlier order regarding special damages. We understood that to be a defamation case, which we think is different from a slander of title case for among other reasons the fact that any slander of title case premises that you can clear title. You can in effect try to solve the problem.

And the premise of a defamation case is that you can't solve the defamation that's occurred. And that is built into the damages that are available to a defamation claim. In short, we've provided direct evidence of the special damages that we've suffered.

Now, the next question that Novell's motion raises is whether the damages that SCO has suffered, special damages, were caused by Novell's conduct. We think the evidence and reasonable inferences certainly show that they were.

It's important to note, Your Honor, the dearth of evidence that Novell has on this point. Novell cites no case resolving the issue of causation on summary judgment and no case even suggesting that it is appropriate to resolve the


issue of causation on summary judgment. In contrast, SCO set the precedent holding the resolution of such issue is not appropriate for summary judgment including the Macia case that now we both refer to. We have summarized that law, Your Honor, at Tabs 24 and 25.

Your Honor asked what the legal standard is. I think the parties are in disagreement on this. We believe the case law shows clearly that we must show that Novell's statements for a substantial factor in causing the losses at issue. We summarize that law at Tabs 19 through 20. Tab 19, Restatement of Torts:

Publication of an injurious falsehood is a legal cause of pecuniary loss if it is a substantial factor in bringing about the loss.

The Restatement has defined substantial factor in the context of a slander of title action specifically.

At Tab 20, Your Honor, we summarized the law showing that courts across the country adopted and applied the substantial factor test in actions evaluating special damages.

And finally, Your Honor, at Tab 23, we show that Utah has adopted the Restatement of substantial factor test in a variety of context.

The direct and immediate standard that Mr. Jacobs referred to as we explained in our briefing we believe is a subset incorporated by the substantial factor test, not a


different or independent test.

In short, SCO does not have to prove let alone show on summary judgment that Novell's conduct was the only or exclusive factor causing the special damages that we've suffered.

Now, as you've heard Novell say, they argue that our evidence is inadmissible or insufficient. We think Novell is wrong for several reasons on this issue of causation. First, causation isn't an issue of expert analysis. And we summarize some of that expert analysis at Tabs 26 and 27.

Tab 26, Professor Pisano testifies that he has:

Concluded that Novell's conduct had a substantial impact on SCO's ability to sell the SCOSource Intellectual Property License for Linux.

And at Tab 27, University of Utah accounting Professor Christine Botosan testifies that she has concluded:

Novell's statements reduced SCO's profits from its SCOSource licensing program.

These opinions are well supported, non-conclusory, and they're supported by the record evidence. The cases make clear that such analysis is appropriate to assess damages on claims for slander of title, and the precedent also shows that it would not be appropriate for the Court to exclude that testimony on summary judgment. The admissibility of the testimony has to be decided after a Daubert examination, and


Novell's objections are premature and don't even begin to cite or acknowledge all the relevant Daubert factors.

And in the reports, SCO's experts do account for other potential causes for the losses and they reconcile those. It's important to note also that objecting to these reports Novell takes these out of context. It was Novell who recently requested the enlargement of time to exchange the initial expert reports. That brought the exchange reports after the time before briefing. And that's what resulted in reports being submitted to the Court yesterday. And in any event, you don't hear Novell to argue that they suffered any prejudice by virtue of the submission of the reports this week.

Now, in addition to this expert analysis, the other evidence goes to show, and again, easily permits the inference that Novell's statements were a substantial factor in causing SCO's special damages. SCO submits, for example, letters from customers specifically called out the issue of copyright ownership as a reason for declining to enter into the SCOSource licenses. We summarize those letters at Tab 35, and I believe we have a board on that, as well.

As Your Honor can see, letters from big players such alleges Merrill Lynch, Sherman Williams, Ford, Morgan Stanley, Google and the like. Novell argues that these letters are inadmissible as hearsay, but we submit that


they're wrong. If the Court were inclined to resolve these issues on summary judgment at all, there's no reason to doubt the reliability or authenticity of these letters. And the evidence is the best evidence that SCO could obtain about the state of mind with such potential customers. The letters satisfy the residual hearsay exception under Rule 807.

Indeed, in a recent copyright case, the Federal District Court applied Rule 807 and admitted evidence of unsworn complaints from customers about their confusion between the plaintiff's work and the allegedly infringing work. I think decisions like that, Your Honor, reflect the fact that there really is no other highly probative source on these customers' state of minds. And we summarize that case and a similar case, Your Honor, in Tab 46.

Novell's new evidentiary objections are also a basis for summary judgment if the Court were inclined to consider that issue. Novell stated in its opening brief actually that it was not objecting on any hearsay grounds. They decided that they wanted to object to SCO's hearsay evidence. Novell itself relied on hearsay evidence in their opening brief. On that basis alone, we submit the objections are no basis for summary judgment.

It's also undisputed with respect to the facts that the SCOSource was part of SCO's business as of May 2003, and that after Novell made its initial statement, SCO stock price


fell precipitous. And based on those facts alone a reasonable juror could concur that Novell's statements are a substantial factor in the decline of SCOSource plummeted.

It's also undisputed as we set forth in the briefs, Your Honor, that SCO's CEO senior vice-president and senior vice-president in charge of the SCOSource program and senior salesperson in charge of SCOSource all testified to their view that Novell's claims of copyright ownership negated the SCOSource business. They reached that conclusion based on evidence and discussions cited in our opposition brief. SCO's experts are entitled to rely on that evidence. There's no question about that.

And we submit that a jury would be entitled to reach the conclusion that those executives based on their experience and their industry knowledge were correct. It may be that the statements that the executives attribute to the customers are themselves hearsay, but the conclusions the executives reach is admissible evidence for the jury to consider.

We think that Novell underscores the genuine factual disputes at issue in arguing that the expansion of the Linux market has increased SCO's value in the copyrights. That's an issue for the experts to fight about. And the crucial issue here is the willingness of the market to enter into SCOSource license. It's not the sheer number of the


potential customers. And we submit the evidence shows there is less willingness now than there was three or four years ago, and that's an issue I'll touch on in a few minutes that I have left, Your Honor.

So this last issue is whether SCO's losses are realized. Again, the evidence and reasonable inferences show that they are. We submit that the legal standard -- and we agree with Mr. Jacobs that there's not a wealth of precedent on this issue. We cited a case at Tab 48 showing that losses are realized where slander has a residual impact on the vendibility of the product at issue. That's the Marseilles case from the Northern District of Illinois 2003.

And the issue there according to the Court was whether you can prove that the alleged slander had a damaging residual effect on the vendibility on market value of the product. We submit that we easily meet that standard.

Now, Novell has cited some real property cases, and that's the lynch pin for their argument that there shouldn't be a double recovery. We see a very fundamental difference between a real property cases and an intellectual property case.

In a real property case, the full value of the lost sale, if you lost that, you might not be entitled to damages because you'd be entitled to damages, you might not be entitled to anything beyond that. Intellectual property is


different. It's not a one-time event. It's undisputed that in the case of an intellectual property, the owner can enter into multiple licenses for his property. In fact, your ability to enter into multiple licenses is the way or at least one principal way that you value the copyrights.

Mr. Jacobs suggests that we should submit evidence of a value of the copyrights. The costs or prices at which you can enter into the license history in intellectual property is the reflection of the value of copyrights. It's a more specific way of rendering that than even trying to estimate what the sale of the business would be. We submit that our evidence is more reliable and more specific than the more general standard that Mr. Jacobs proposes.

Novell also argues that our evidence on realized losses is insufficient or inadmissible. We think they're wrong about that. First of all, like causation, the issue of realized losses is the subject of expert analysis. The main question is if SCO did clear a title of the copyrights, could SCO then sell SCOSource licenses at all or at the same price it could three or four years ago? SCO's experts and CEO explain why SCO could not do so. And we summarize that evidence, Your Honor, at Tabs 51, 52, and 53.

Mr. Pisano, Professor Pisano, quite candidly says:

It is my opinion that even a court's determination that SCO owns the UNIX copyrights


probably would not restore SCO to the position they were in before Novell's statements.

It's not an issue of super clarity, Your Honor. It's an issue for the experts to fight about and for the juries to draw inferences from.

Mr. McBride is more equivocal, of course, and his testimony would be admissible. He says:

The market and SCO's position in it has substantially changed during the four years in which Novell has been making its false claims.

This is the CEO of the company. The jury is certainly entitled to conclude he has experience in the relevant markets and has knowledge of the relevant markets.

And Novell argues that we failed to draw a connection between Professor Pisano's acknowledgement of probability and Mr. McBride's more unequivocal testimony regarding that his view of the market is different. But those two types of testimony are reconciled, and we summarize that at Tab 53. Mr. McBride states:

Companies that have been now using Linux for several years simply will not perceive the risk of an infringement action as credible at this time, even if copyright title is cleared, and SCO would not have the resources to pursue such actions.

That's admissible testimony.


Professor Pisano concludes:

Because would-be licensees of SCO's intellectual property already had access to that property via Linux, their willingness to pay for a license is a function of their belief that SCO owned those rights, and would enforce those rights.

Same testimony we pointed Your Honor to earlier. Taking that testimony together, a reasonable jury certainly could conclude that the value of the SCOSource program has faded significantly, if not entirely disappeared.

In addition to the expert testimony, SCO submits other evidence in support of this assertion. The fact that SCO will have the right to seek licensing fees doesn't mean that is will succeed in doing so.

Indeed, we submit, Your Honor, that the only conclusion that the jury would have to reach to conclude that the market is less favorable for SCO now than it was in 2003. If the jury reached that conclusion, they could conclude that the value of the SCOSource program is faded.

THE COURT: Is what?

MR. NORMAND: That the value of the SCOSource program has faded. That the only conclusion that the jury would have to reach is the market is less favorable than it used to be. The jury could reach that conclusion based on


undisputed facts such as the drop in SCO's stock price since that time, an undisputed fact, and questions raised about SCO's viability in the recent past, an undisputed fact, and, in fact, the subject of Novell's pending motion for preliminary injunction.

It is undisputed, for example, with respect to HP that Mr. Jacobs brought up that since Novell began making these statements, HP launched its own indemnification loan. That fact alone shows that the clock can't be unwound. SCO could not now enter into a deal with HP whereby HP would sell SCOSource with HP hardware to customers who have since taken the HP indemnification. That opportunity is lost. And on that basis alone, the jury could conclude the market conditions are not as favorable.

Novell's evidentiary objections, and this one also is a basis for summary judgment, Mr. McBride's testimony, for example, is based on his personal knowledge.

And finally, Novell cites no relevant precedent for the proposition that the Court can resolve on summary judgment the question of whether SCO's losses are realized.

In closing, Your Honor, the undisputed facts, the well-established precedent will show that SCO is entitled to bring this claim to the jury. We think that Novell cites no cases to support its argument to resolve these issues on summary judgment. And we also think that Novell is wrong on


the merits. We respectfully ask the Court to deny Novell's motion.

THE COURT: Thank you, Mr. Normand.

MR. NORMAND: Thank you.

THE COURT: Reply, Mr. Jacobs?

MR. JACOBS: I think we have converged, Your Honor, on the issues, and it is well-teed up to you. A couple things to highlight in Mr. Normand's comments.

Number one, on this expert testimony and Mr. McBride's testimony on residual impact, there has to be more than just speculation, Your Honor. There has to be more than SCO unique factors that give rise to the market's unwillingness to take SCOSource licenses. It defies -- merely asserting that in the face of the basic legal principles that are at issue here in the assertion of intellectual property rights does not create a fact dispute.

As even Pisano's declaration, leave aside his expert report, as even his declaration admits, this is all about people taking licenses to avoid copyright lawsuits. If SCO has ownership of the copyrights, they can bring their infringement lawsuits. Whether you're indemnified or not, somebody is going to be liable for that infringement. That is a basic A follows B -- B follows A aspect of intellectual property law. And merely speculating that that won't happen if SCO's successful on ownership isn't enough to create a


disputed issue, a disputed issue of fact.

THE COURT: Mr. Normand, with respect to causation, he talked about the quarrel between your direct and immediate standard and what he calls the substantial factor standard. Do you remember his argument on that?

MR. JACOBS: Both are applicable, Your Honor. We don't disclaim substantial factor, but it's in the very next section of the Restatement.

The pecuniary loss for which a publisher of a injurious falsehood is subject to liability is restricted to in relevant part the pecuniary loss that results directly and immediately from the effect of the conduct of third persons including impairment or vendibility or value caused by disparagement.

So direct and immediate is in there, but that's another test. I think the right way to think about this is substantial factor is kind of a course grain filter, and direct and immediate is a very tight filter, a very fine grain filter. And they have kind of written the element of the damage proof out of their claim by saying that it's not applicable.

The irony of this argument, Your Honor, is that -- and in a sense I think what SCO is really saying is they were rolling people back in May, June before Novell statements,


they had the industry in a turmoil and they had people signing licenses out of fear. Now the facts are out on the table, they're saying, including the facts, for example, about the strength of their infringement claim. So there may be some -- the other causational factors that we highlighted in all the letters that came out are still going to be there. They're going to be there. They were there before. The letters say, we don't see any evidence of copying. Well, now the copying has been before the Court, and it's been widely publicized so people can judge for themselves just how strong that evidence of copying is.

But I don't think their ability to roll the industry out of uncertainty is the kind of link to substantial factor and direct and immediate that slander of title was designed to promote. The fact that there are more facts out on the table now about the strength of their Linux claims, and maybe those claims are weaker now is just because they were hiding them all back in May and June on the very issue that people were asking them to come forward with. I don't think that's legally probative. But if you drill down to what they're saying, that seems to be the essence of it.

On residual effect, they really haven't made a showing of a residual effect. Again, I think it's inherent in the way they litigated the case. It's very difficult. It would be speculative inherently to talk about what would


happen once the cloud on title were removed. Had they litigated it differently, had they sought to remove the cloud on title and then go back and relaunch SCOSource, then at least we would have the after condition. I think we would still have a lot of uncertainty about the before condition. But we would have the after condition clearly teed up before the Court. But that's not Novell's problem. That's SCO's problem for the way they sought to tee up the issues for adjudication.

And importantly, direct and immediate does not allow the unique SCO circumstances, drop in stock price, lack of resources, maybe no motivation to pursue SCOSource anymore, those factors are irrelevant to the special damages equation. And that is very clear from the direct and immediate cases.

In sum, Your Honor, we actually think the issue is a legal one here. There are some evidentiary issues. Mr. Normand's recitation about the back and forth is not quite right between us. And in any case, we had it scheduled for summary judgment. All the evidence in opposition should have been in with their oppositions. But at the end of the day, I think what we're asking you to do is take a look at the cases and decide what the legal standard is for proving slander of title and special damages. Thank you.

THE COURT: Thank you, Mr. Jacobs.

Do you want to take a short break between each


motion, or do you want to try to get another one done before we take a break? Or what do you want to do?

MR. JACOBS: We're ready to jump in, Your Honor.

THE COURT: All right. Let's go on the second motion. Novell's motion for partial summary judgment on SCO's noncompete claims and Second and Fifth Claims; right? Same people arguing?


THE COURT: All right.

MR. JACOBS: If I might take one minute.

MR. HATCH: Your Honor, we'll change on the next motion. Maybe take a break.

THE COURT: Yeah. It might kill us to be here three hours straight.

MR. JACOBS: Your Honor, this is the binder that we've all be been waiting for. It is the thin binder in which the key agreement documents are before you so you don't have to go look at the Brakebill declaration or the Normand declaration. Yes, Your Honor, I think that's it.

And at the back of it, this will be more relevant for our arguments on Monday, what we've done is provided the Court with the language of the APA as amended by Amendment Number 1 and Amendment Number 2. In other words, we've gone back at Tab 7, for example, or Tab 8, and we have put --

THE COURT: You red-lined.


MR. JACOBS: Exactly. But the choice of exhibits, Your Honor, reflects the basic thrust of our motion on the TLA and on other issues that we're going to argue Monday, and that is that these disputes are governed by legal documents carefully crafted by trained lawyers, carefully reviewed by sophisticated companies engaged in a complicated transaction, and that the plain language controls. And if you look at the agreements, you should decide these motions -- if you look at the agreements as we believe the law requires, summary judgment motions should be decided in our favor.

On the technology license agreement motion, this is embedded -- this issue is embedded in several causes of action, but what we're in essence asking you to do at this stage on summary judgment is to decide the legal meaning of certain aspects of the TLA. And what we're going to do, what I'm going to do now is reverse the order that we argue these issues in our briefing because if we prevail on the question of which change of control provision controls, then the relevant limitations are out of the TLA, and it doesn't matter whether it's a limitation or a covenant. So if we prevail on our reading of the TLA, then the issue of whether it's a limitation on a license or a covenant giving rise to a contractual lawsuit is mooted.

So that's the issue that I want to talk about first, which change --


THE COURT: But if you don't, then it isn't mooted.

MR. JACOBS: That's correct. So we'll get to it.

Which change of control provision controls? Is it the APA's provision which voids the disputed provisos and the TLA in the case of Santa Cruz only within two years and only as to specified purchasers, or is it the provision the TLA points to which unambiguously we submit drives to a different outcome, that there was a change of control and that the provisos are, therefore, were no longer in legal effect?

Let's start with the TLA so we can walk through together how we're reading the document. The TLA is at Tab 5. And if you look at Roman II-A(2), you'll see the provisos that follow from the grant of the license in (2). Note that the provisos don't apply to (1); they just apply to (2):

Provided, however, that such technology and modifications may be sublicensed and/or distributed by Novell solely as -- skip ahead -- a composite offering. The composite offering shall not be directly competitive with core applications server offerings of SCO, and the licensed technology shall not constitute a primary portion of the value of such composite offering.

We're calling those the disputed provisos.

And then if you go to the next paragraph,


Paragraph B, it says:

In the event of a Change of Control of SCO and commencing with the effective date of such Change of Control, the proviso in Subparagraph II-A(2) setting forth restrictions on the sublicense and/or distribution of licensed technology and modifications thereof shall cease to exist.

So in B, there's a capitalized term, Change of Control. If you go up to the top of that page, there's the language that we rely quite heavily on:

The terms "Assets," "Change of Control," et cetera, shall have the respective meanings attributed to such terms in the asset purchase agreement.

So importantly, we're talking about a capitalized term, and we're talking about looking to the APA to define the meaning of that provision.

So now if we go to Tab 1 and go to Page 41 of the APA. We put some stamps, some bolder numbering stamps on the document. So if you look at the bolder stamps, it's Page 48.

THE COURT: I have it.

MR. JACOBS: So this is 6.6(c). And it says --

THE COURT: Okay. Change of Control.

MR. JACOBS: Change of Control. Exactly. But it's even for our purposes even better than that.


For purposes of this agreement, a, quote, capital C, Change of -- capital C -- Control, close quote, with respect to one party shall be deemed to have occurred when the conditions that are laid out in that paragraph have been met.

And, of course, in this provision, 6.6 (c), there is no two-year limitation, and there is no list of specified acquirers.

So that's -- so the way we read it, then, if you go back to the TLA, if a Change of Control occurs as defined in the asset purchase agreement at 6.6(c), then the provisos are no longer existing. And that's the effect we contend of II-B.

Now, I think that if you just follow the logic so far you'd have to say that is unambiguously what the TLA provides. I don't think there's room for dispute on that question. Where the dispute arise is because the asset purchase agreement has a different provision governing Change of Control of SCO as it relates to the license that will ultimately be provided by the TLA.

And it's at Page 30 or bold Number 37. And this is at 6.3(c), Expansion of Seller's Rights Relating to the License Technology Upon a Change of Control.

Until two years from the closing date, that's the two-year limitation. And if you read on, sold assets to a party identified by seller on Schedule 6.3(a) hereof. So


that's where you get the list of specified companies. So 6.3(c) on a standalone basis, SCO wins on this question in terms of what Change of Control provision applies.

So our argument turns on the TLA, and we think it's a pretty clear cross-references to 6.6 trumping the APA and its provision on about what happens on a change of control with respect to what ultimately will become the TLA. And as we noted in our brief, the TLA is later in time than this disputed language, and the law is clear that when there's a contradiction between two agreements which arguably apply to the same subject matter, the second in time controls.

But there's really I think a deeper sense in which the TLA is later in time than the asset purchase agreement, and that is that the TLA is an implementation of the provisions of the asset purchase agreement. It is the agreement that is contemplated by the APA. In fact, SCO's response to our statement of facts and in other places, they characterize it as an implementation of the asset purchase agreement.

The APA contemplates and requires later execution, later in a sequential sense of what contemplates what. And the TLA is itself that license. The TLA is where you're supposed to look if you want to find out what the terms of the license are. It is the agreement implementing the promise in the APA to enter into a license agreement. And the law is


clear that the later agreement controls.

There are other doctrines that might be applied. It's the more specific agreement in many respects. But for our purposes, I think the argument that is unassailable is that it is the license that was contemplated by the APA. The APA is not itself a grant of a license. So if you want to find out what the terms of the license are, you go to the TLA.

Now, SCO points to cases about multiple documents being read together to comprise an agreement. If you pars those cases closely, we think you will find that they relate to situations in which there are multiple documents and they're not fundamentally inconsistent with each other. There's no deep contradiction in them. And we're just trying to figure out what the entirety of the agreement is.

In our case, we have a contradiction. I think both sides agree with that. The TLA goes one place, and the APA goes another place. And depending on which agreement controls, you'll have a different outcome.

But that's not those cases. Those cases aren't about a contradiction. The contradiction cases say you look at the second agreement, not the first.

Now, there's one other aspect of this, but I think --

THE COURT: And your view is this is a legal issue and I ought to decide it.


MR. JACOBS: Exactly. It's a legal issue that forensic evidence can't help very much on.

Now, the document gives SCO one more argument, which is, that it says --

THE COURT: Which document?

MR. JACOBS: I'm sorry. The TLA, at Paragraph VIII, the entire agreement clause.

By the way, one more point before I miss it. At 6.3(c) back in the APA, there is in the heading the words Change of Control. But there's also a clause in the asset purchase agreement that although it uses slightly different language is essentially a heading for our for convenience clause. And it says that it doesn't bear on the interpretation of the agreement. So again, we think that it's clear the TLA is driving the reader towards Section 6.6.

So the Entire Agreement clause in the TLA says that both agreements constitute the entire understanding between the parties with respect to the subject matter. And all prior understandings are mooted.

So that gives them an argument that you have to read these two agreements together. But we don't think that that clause has the effect that SCO seeks. Number one, it vitiates reliance on parole evidence. It's an entire agreement integration clause, so it has that effect if the agreement is -- if there's an ambiguity, if there's a legal



But we don't think there is a legal ambiguity here. There's a contradiction, and the Court as a matter of law, we ask the Court to decide, that it's the TLA that controls in the event of a contradiction. And, hence, there's no ambiguity; and, hence, there is no need to rely on parole evidence.

Because of the sequence of these agreements, both chronological and in the legal sense that the asset purchase agreement contains a promise to enter into the technology license agreement, because of that sequence, what SCO needs in the Entire Agreement provision is not there. What SCO needs is a provision that says, in the event of a conflict between the TLA and the APA, the APA shall control.

There are provisions like that. It's easy to write a provision like that. It isn't in the technology license agreement, and it isn't in the entire agreement clause.

SCO's real argument when you look at their declarations, when you look at what they're saying is that the TLA does not conform the intent of the parties, that the parties intended some other outcome. And in a sense, I think they're saying here, as I think they will say on Monday, implicitly Novell's lawyers at the time slipped one by Santa Cruz. They got one in there. They got a "gotcha" for Novell. And that's not right.


But the cause of action that SCO needs, if that's their real theory that the TLA -- if we're right that the TLA points to 6.6 and they want to argue that the TLA does not represent the intent of the parties, the answer is not to ask you to interpret the TLA to mean something it can't mean. It's an action for reformation.

We had this discussion in March about how, really, in place after place, we submit, that SCO is actually arguing the elements of reformation, but they didn't plead reformation, and it's too late to amend their pleadings. And besides, Your Honor, the standard of proof and the burden of proof on reformation is clear and convincing evidence, and they can't meet that statement.

So we think it's a legal question which document controls. If you decide the TLA controls, we think there's only one outcome, that the provisos in Section IIA(2) are, in the words of Section B, ceasing to exist.

If you decide to go on, whether because you want to resolve more issues now or if you disagree with us on this question, then we need to decide the legal effect of those provisos. And this is the question on whether they are a limitation or a covenant.

We brought this motion, the causes of action, we have applied the summary judgment motion to our causes of action that depend on the provisos being a covenant. But I


want to make sure that you see the TLA in its entire context.

SCO has sued Novell for copyright infringement based on Novell's distribution of SuSe Linux. Part of that is off in the arbitration. Incidentally, it looks like we're set for hearing in the arbitration on the interpretation of the UnitedLinux agreements. And we'll stick to a schedule that will have that hearing go forward in December.

But setting that aside that for a minute, and just looking at the pleadings here --

THE COURT: Which year?

MR. JACOBS: This coming year, Your Honor.

In the context of this dispute, Novell has asserted the TLA is a defense to SCO's copyright infringement claims. Now, the TLA is undeniably a license to licensed technology. That much I think neither side could dispute. And SCO's view of what licensed technology includes is copyrighted UNIX code. SCO contends that the TLA doesn't immunize Novell's activity and that it can sue for copyright infringement.

In order to do that, it must be contending that Novell's actions are outside the scope of the license granted in the TLA. SCO points to the provisions I read to you about competing with an application server offering or not constituting a primary portion of the value. And they say that Linux falls within the proviso. And, therefore, because they say licensed technology including the copyrighted code is


in Linux, it's outside the scope of the TLA license.

That is precisely the effect of a limitation on the scope of a license. Activities that fall outside the scope of the license are subject to an infringement claim. In this case, SCO's alleged copyright infringement claim. And if that were the full effect of what SCO wanted out of this provision in setting aside our first argument about those provisions the provisos going away, we would not be in disagreement with them. We agree that at one time, at least, that these are limitations on the scope of the license. We agree that the legal effect of that is if we're outside the scope of the license, they have a copyright infringement action.

What SCO is arguing for, however, is to have its infringement cake and eat a contract claim, too. The specific causes of action to which this motion is directed, as I mentioned, are breach of contract claims. And they -- in order to have breach of contract claims, they have to treat these provisos as affirmative covenants, not just limitations on the scope of the license. So the issue is, are these covenants?

Now, what the Sun v. Microsoft case teaches us here is that language and geography in terms of the way the agreement is laid out actually matters. And these, of course, these provisions are provisos in the grant of a license. So it strongly suggests as a matter of just reading the agreement


and how it's laid out that these are limitations on the license.

And SCO has to be acknowledging that for purposes of its copyright claim. What they must be saying is that they're both. They're limitations on the scope of the license, and they're affirmative contractual covenants.

Brief parenthetical. We never argued that they were conditions. A condition is a different beast. It was imagined in their opposition brief as a way of setting up a straw man, but we're arguing limitation versus covenant. And SCO must be contending that this language is dual purpose and that they don't have to elect a remedy and that they don't have to decide which it is.

If you look at the cases or the treatises, and both sides have pointed you to many of them, that's not what the cases teach is going on in these disputes where there's a contract in the form of a license.

In the Ninth Circuit case in Sun v. Microsoft, which is really in many ways of a lone star, they can remand for a determination whether the contractual language there was a limitation on the license, a covenant or both. They said it's got to be one or the other. They didn't say whole. The issue wasn't squarely presented to them. But there's no case that asks the question whether particular language is both.

What causes some confusion in the cases that


require some drilling down into the district court decision is that the way these cases work is that if you have a license agreement and it has a covenant and you breach the covenant, the licensor can rescind the license and then sue for copyright infringement.

So before recision, there's a contract claim, say, for unpaid royalties. After recision, there's a copyright claim. And so you can see both causes of action arising out of a single agreement. But that's because of the recision. And this is very well settled in the case law and in the treatise.

And that's what's going on at the appellate level where SCO cites the appellate decision. We provided you with the district court decisions. You can see that there was a sequence of breach of contract claim for before recision and copyright infringement claim for afterwards.

So what is it? Is it a license limitation or a covenant? SCO doesn't seem to want to tell us what choice it wants to make. But the TLA, we submit again, looking at the plain language points in only one direction. It's a license limitation. You have to look at the geography of the agreement, and importantly, the word that is used in the agreement is restriction. That's used twice at II-A(2) and II-B. Those restrictions are referred to -- those provisos are referred to as restrictions. If you go to the dictionary


and look up restrictions for synonyms or definitions, the first word you hit is limitation. So another argument, if you will, another linguistic argument for why these should be treated as limitations and not covenants.

And perhaps most importantly of all, what these provisions do is they don't deal with some extra license issues, such as, shall Novell be obligated to put copyright notices on? Or shall Novell be obligated to pay on a per-copy basis? Those could be and most often are treated as contractual covenants. These are -- these provisos here go to the scope of what Novell can use license technology for. Provisos limit that scope and, hence, are limitations on the license and nothing more.

Now, if you turn to the Section 16600, which is --

THE COURT: That's the California law.

MR. JACOBS: That's the California law argument. It really just highlights our basic points, and SCO's responsive briefing on the point underlies our basic argument. If you read this language as a covenant, as a covenant not to compete, then you run head-long into 16600 and its prohibition on covenants not to compete.

So when SCO briefed this issue in its opposition, all of a sudden the language changed and these provisions were referred to as limitations on the license. As we said in our brief, we agree. They can only be limitations on the license.


They cannot be covenants.

We believe that the analysis of the TLA and the case law drive the outcome here that we're asking you to render. At most these are limitations on the scope of the license. By virtue of our first argument, we believe that they have ceased to exist. But if they exist, they are not contractual covenants giving rise to a claim for breach.

THE COURT: Thank you, Mr. Jacobs.

Mr. Normand?

(Time lapse.)

MR. NORMAND: Thank you, Your Honor.

As Mr. Jacobs said, the issue of whether Novell has breached the APA and the TLA statement is what briefly pointed out the context in which the motion is brought. Novell's own former CEO Mr. Frankenberg testified in deposition, and in his view Novell has breached the APA and the TLA for its distribution of SuSe Linux. That's an issue for a later day. But as I say, I think it adds color to the motion.

Now, I would like to start with the issue that Mr. Jacobs finished with, if that's okay with Your Honor.

THE COURT: Whatever order pleases you.

MR. NORMAND: Novell argues that SCO can't bring a breach of contract claim because the APA and the TLA noncompete clauses are not covenants, as they say, but are instead merely restrictions on the scope of the license. As


Mr. Jacobs said, we believe that is one and the same thing. We believe a restriction on the scope of the license, a license limitation, whatever phrase you want to use, is a --

THE COURT: Actually he finished with the California argument, but that's all right.

MR. NORMAND: Oh, I'm sorry, Your Honor. I'll get to that.

THE COURT: All right. So you're actually starting with the second argument, not his third. But that's okay.

MR. NORMAND: Very good.

THE COURT: Any order you want.

MR. NORMAND: I'd like to start with his middle argument.

THE COURT: All right.

MR. NORMAND: We think it's worth pointing to the dearth of the case law on this issue of Novell. As Mr. Jacobs concedes, they rely almost exclusively on the Sun case, which I'll get to. Novell cites not a single case holding that a plaintiff cannot bring a breach of contract claim, whether for breach of covenant or breach of license restriction, whatever phrase you want to use. Novell cites not a single case holding that restrictions on the scope of a license cannot constitute affirmative covenants. And they cite not a single case holding that a licensee's failure to comply with a license restriction cannot give rise to a claim for breach of



Now, the noncompete provisions in the APA and TLA or restrictions on the scope of the license are covenants not to compete. They are affirmative promises. They are the basis for a motion for breach of contract. Williston on Contracts is summarizing --

THE REPORTER: I'm sorry. Can you slow down just a tiny bit.

MR. NORMAND: Of course.


MR. NORMAND: At Tab 3 -- I'm trying to get through my oral argument.


MR. NORMAND: At Tab 3, Your Honor, we summarize Williston, who has says:

A promise is a manifestation of an intention to act or refrain from acting in a specified way.

Again, that is the basis for the claim for a breach of contract. In this case, SCO provided Novell a license in exchange for Novell's promise not to use the license technology in competition with SCO. And that's set out clearly, Your Honor, in the slides or board Section 1.6 of the APA:

Buyer shall execute a license agreement.


The license agreement shall provide Seller unlimited, a royalty-free, perpetual, worldwide license.

And TLA, sets forth the license restrictions that the APA directs the parties to create.

Such composite offering shall not be directly competitive with core application server or offering of SCO.

Affirmative promise on Novell's part.

Now, Novell's primary argument on the close reading of the APA and TLA in their opposition opening brief, at least, is it that the license restrictions are not set forth in the section of the APA called "certain covenants." We think that argument fails out of the box. There's no precedent that suggests that the only kind of promise that you can for -- breach of contract based on are those promises set up in the covenants section of the contract.

The APA and TLA provisions apply only to Novell products incorporating license technology, and, therefore, it makes sense to place these covenants in the sections of the APA and TLA dealing with licensed technology rather than certain covenants.

And Novell's interpretations of the APA and TLA assumes that SCO would allow Novell to use the transfer UNIX assets, the license back technology without any contractual


obligation on Novell's part to hold up its end of the bargain.

Novell's theory is that if Novell breached the promise, we can only sue them for copyright infringement, somewhat defeating the purpose of entering into the contract in the first place. So for all those reasons, we think the plain language reading of whether the license restriction constitutes a promise of the sort that will extend alludes to or covenant is incorrect.

Now, Novell cites Sun v. Microsystems as their primary case. For the proposition that contractual provisions must be either limitations on scope of the license or covenants, we think that is fundamentally wrong. We don't think that Sun suggests that.

THE COURT: You don't think Sun suggests one or the other as Mr. Jacobs argued.

MR. NORMAND: We don't, Your Honor. And to summarize -- our basic approach on that is at Tabs 5 and 7. Let me walk through those briefly.

The only issue before the Sun court is whether the plaintiff had properly brought a copyright infringement claim, not whether the plaintiff could bring a breach of contract claim. In fact, the Sun case included both a copyright infringement claim and a breach of contract claim. And as I think as Mr. Jacobs acknowledges, there's no suggestion from the Court that the breach of contract claim was improper or


that it couldn't be brought.

We summarize at Tab 7, Your Honor, what we think the key language in Sun is.

The Court framed the issue as whether the disputed terms limited the scope of the license or were independent contractual covenants, merely separate contractual covenants or contractual covenants that did not limit the scope of the license.

We think the case means that license restrictions are covenants. The question in Sun was just whether the license restrictions at issue related to the copyright claim. They would be if in exceeding the scope of the license the defendant was exercising the exclusive rights of copyright ownership. That's the definition of a copyright claim, unauthorized copy.

The Sun case didn't address the second question, the one framed here, whether you could also bring a claim for breach of contract on the same basis. In other words, independent or merely separate covenants may have no bearing on the scope of the license while other covenants define the scope of the license grant.

Now why does this matter? It matters because there were cases in both respects in our favor. There are cases saying that the conduct in excess or in violation of the scope of license agreement is a basis for breach of contract. And


there are cases and authority saying, you can bring both a copyright infringement claim and a breach of contract claim for conduct in excess of the scope of the license agreement.

At Tab 8, Your Honor, Ninth Circuit precedent is consistent with our position. The Germaine case from 2005:

If defendant was using the song without paying royalties, it was likely both a breach of contract and a violation of the copyright.

The Grosso case:

Reversing district court's holding that plaintiff could not bring a breach of contract claim in addition to copyright infringement claim.

The Bernstein case:

Upholding the district court's damage award for breach of contract and copyright infringement.

At Tab 9, Your Honor the cases reflecting that we can bring a claim for breach of contract based upon conduct in excess of the scope of the licensing agreement.

Kepner-Tregoe case, the Second Circuit --

THE COURT: Of course, in all of these cases the language of the controlling document would be important; correct?

MR. NORMAND: Absolutely, Your Honor. It's not -- I think as both sides agree, it requires assessment of the contract at issue. There's just no overarching principle that


you can't bring both. And I think that's the premise of Novell's motion.

And, in fact, at Tab 10, Your Honor, we cite the Nimmer Information Law treatise. He explained:

Breach of the license creates the potential of liability for contract breach and also the possibility of liability under property rights law.

An intellectual property rights law. It goes on to say:

Both forms of action may exist in a given case.

And acknowledges that an infringement claim can exist in addition to the contract claim.

And we cite other cases at that Tab 10, Your Honor, discussing this area of the law.

And I was going to emphasize among the other cases reflected in the slides the case summarized at Slide 12, the Second Circuit case Kepner-Tregoe, going through again on particular facts, going through and concluding that the claim for copyright infringement and breach of license agreement is appropriate.

We think in short, Your Honor, that the basis for Novell's motion for summary judgment, we think we are entitled to bring both kinds of claims.

Now, I should note, Your Honor, that we don't


understand Novell to go into the level of detail that gave Your Honor's question suggested, the level of detail. Let's examine the kinds of conduct that constitute a copyright infringement versus the kinds of conduct that constitutes the breach of license agreement. I think it's enough to say that in this case we're not alleging that the exact same conduct is all of the facts relevant for both claims. Our claim of breach of contract involves slightly different facts of copyright infringement. And on that additional basis, there would be no reason we couldn't bring both.

THE COURT: Would there be some overlapping facts, however? They wouldn't be completely different sets of fact.

MR. NORMAND: That's correct, Your Honor. And I mean, to be candid with you, this is an area of law discussing preemption which we cited in our opposition brief. The preemption cases are relevant. The cases of arising under jurisdiction are relevant. Even upon examination of those cases which are really collateral, there's nothing to say we can't bring both in those cases.

Now, Mr. Jacobs' initial argument was the question of the change of control provision between the APA and TLA. Let me make sure I have my slides straight, Your Honor.

We think Novell presents a false choice as Mr. Jacobs said between the APA and TLA. I don't think there is a between, and I think the documents made clear that there


isn't a between. They're an integrated set of documents. The TLA makes that clear. As a primary matter, the APA says, the parties shall enter into technology license agreement. And the APA directs what the content of the TLA will be. The TLA then refers back to the APA and says, this is the integrated agreement with the APA.

There's no suggestion that there is any contradiction between the two. There's every suggestion that the TLA is meant to be incorporated into the APA and they're meant to be read as one integrated document. When read that way, there is no contradiction. We think it's wrong to say you've got to choose between the two of them and that there's some sort of contradiction. They're easily reconciled, and they need to be read together.

Now, none of the precedent that Novell cites suggests that the TLA somehow trumps the APA. Precedent really doesn't address these sorts of facts or the second document incorporates the first document or the first document directs the parties to enter into the second document. We don't think there's any reasonable reading of the documents that would state it that way.

Now, the APA draws distinction. And I'd like to spend a minute walking through this verbally, Your Honor, and perhaps trying to show on the boards how we believe this works.


The APA draws distinction between changes of control Santa Cruz versus changes of control of Novell. It draws the distinction in Section 1.6 on the left, the same section in which it directs the parties to enter into the TLA. The TLA in turn incorporates that same distinction between changes of control for Santa Cruz and changes of control for Novell. How does that work?

Buyer shall execute a license agreement. The parties agree that is the TLA. The license agreement shall also provide seller with an unlimited worldwide license.

That's the license we talked about there. And that happens:

Upon the occurrence of a Change of Control of Buyer described in Section 6.3(c).

In the event of a Change of Control of Seller as defined in Section 6.6, certain events shall happen.

Santa Cruz. Novell. Capital "C", Change of Control. Capital "C", Change of Control.

Define terms as defined in Section 1.6.

Section 1.6 attributes meaning, to use the phrase in the TLA, it attributes meaning to the changes of control. In one case Santa Cruz, and in one case Novell.

Now, does the TLA preserve this distinction? It does clear as day. It preserves this distinction.


In the event of a Change of Control of SCO, as incorporating Section 1.6, the proviso of Subparagraph II-A(2) setting forth restrictions on the sublicenses and/or distribution of licensed technology and modifications thereof shall cease to exist.


In the event of the Change of Control of Novell.

Again, preserving the distinction that is reflected in 1.6, these events shall happen.

Now, Novell reads Change of Control to mean only the definition of Change of Control in Section 6.6. But we believe that the section of the TLA that Mr. Jacobs alluded to, the section of the TLA on the top of the second page saying, the term of Change of Control shall have the meaning attributed to that term in the APA, is this meaning with respect to Santa Cruz. And we think that's very clear from the documents.

Now, under 6.3, the parties agree Novell may obtain its unlimited license only if certain events happen within two years of the closing day. Only if there is a sale of substantially all the assets to one of the Novell's principal competitors identified in the schedule.

It's undisputed that that didn't happen. That Santa Cruz/Caldera transaction happened much more than two


years after the closing day of the APA. So we think the plain language of these documents read together makes it clear that the TLA was incorporating what the APA said it would. There is no reason to believe otherwise.

Now, Novell's interpretation would improperly require the Court to, in summary, ignore the language of Section 1.6; ignore the language of Section of 6.3; ignore the list of the entities in the schedule that's identified in Section 6.3; ignore the integration clause of the TLA; and ignore the fact that the APA record department incorporating an interim to the TLA; and assume that the parties reached a completely different agreement in the TLA than the APA had recommended. We don't think that's a reasonable reading.

Now, if the Court were inclined to find some ambiguity on that issue, and we don't think there is, all of the extrinsic evidence is in our favor. If there were an ambiguity, as I think Novell concedes, extrinsic evidence comes in. We cite testimony that we believe is directly relevant to people who negotiated the APA and were with Novell as the TLA was negotiated, that they never heard any inclination and never had any intent that the TLA would be anything other than an incorporation of the APA. There was no discussion according to that testimony of anything different happening. That's admissible extrinsic evidence, and on that basis alone if the Court were to find ambiguity, there would


be no basis for summary judgment on this point.

Finally, Your Honor, we come to the issue of Section 16600. And I won't dwell on this, because we believe by virtue of its arguments regarding the scope of license restrictions Novell makes this an easy decision. Novell concedes in its reply briefly that a licensor obviously is able to set geographic and temporal and usage boundaries on a license without running afoul on Section 16600. And that concession reflects the case law summarized, Your Honor, at Tab 35.

Under California law, as Novell now concedes, clauses restricting a licensee's ability to use the licensor's own licensed property do not violate Section 16600.

And California law at Tab 36, Your Honor:

Allows the use of noncompetition clauses in employment, supplier-distributor, and franchisor-franchisee context.

Finally, I think Novell's concession moots this issue, but Novell raised an argument that this is a different context because Novell and Santa Cruz didn't have any day-to-day involvement. We don't read the case law to suggest such a day-to-day involvement. And as a practical matter, Novell has argued in this case, and to some extent they are correct, that there was an agency relationship between Novell


and Santa Cruz. So the relationship between Novell and Santa Cruz clearly falls within what some courts have called in term restriction that do not run afoul from Section 16600.

Finally, let me just mention a few other arguments in our brief in this area in California law. Section 16601 says where there is a sale of assets and goodwill goes with the assets, there is no problem with a noncompete. We think the record makes clear that the goodwill came over in the APA included assets schedules really couldn't be broader. And Novell's own argument has been only those things specifically enumerated in the excluded asset schedule are excluded. Goodwill is not excluded. We submit in a letter from SCO's auditor saying specifically that goodwill is part of the transaction. That is an admissible document.

Secondly, no California law has established that where there is only a partial restraint on a business that doesn't run afoul with Section 16600.

That is exactly what happened in this case. Novell agreed to nothing more than not using certain technology in a business that it had just sold to compete with a business that it just sold. There is no question that Novell continued with its million dollar network business and continued in its operating business generally in the noncompete restriction doesn't run afoul with California law on that front.

And finally, Your Honor, we made our argument about


unjust enrichment just to make a point that California law makes clear that in deciding whether to apply civil code provisions, the Court should not do so in factual fashion. And by virtue of the stay, the kinds of facts that the Court would consider under California law in deciding whether to enforce the noncompete provisions here haven't been developed. So we think it would be inappropriate to make that decision at this time.

For those reasons, we ask you to deny Novell's motion.

THE COURT: Thank you, Mr. Normand.

Mr. Jacobs?

MR. JACOBS: I'm trying to go green, Your Honor, so I have a lot of documents on the computer.

I'd like to -- I think the arguments are actually very well-briefed, and again the parties have converged in the briefing and the oral argument. I would like to ask Your Honor when you're going through the materials to take a look at the District Court decision in one of the cases SCO relies heavily on. It's this Ninth Circuit decision. They pointed to the Guthy-Renker case. And if you go look at the underlying district court memorandum decision, it's just sort of Black Letter law at this stage.

Under Federal and California law --

This is at Page 5 of the memorandum decision.


Under federal and California law, a material breach of a licensing agreement gives rise to a right of recision which allows the non-breaching party to terminate the agreement but does not automatically terminate the license. If the non-breaching party then terminates the agreement, any further distribution would constitute copyright infringement.

So the way you get two causes of action in the same lawsuit is whether there is a recision. In the court, they're actually divided up in the claims of various photographs and the failure to attribute or to credit on the various photographs depending on whether it was before and after which form of action lay and whether you had a contract claim or a copyright claim. So it's important to look closely at what's going on in these cases and understand what SCO seems to ignore, which is this recision element that allows for two causes of action in a single case.

I think we do rely heavily on Sun V. Microsoft. It really is the case that says you have to look closely at a contract, and you have to decide whether something is a covenant, in which case you only have a contract claim and you don't have the preliminary injunction irreparable harm presumptions that you'd have if it was a copyright claim. Or you look at it as a limitation on the scope of the license


giving rise to a copyright claim. The case sets that question up and asks courts to decide that question based primarily on looking at the language of the agreement and the geography of the agreement.

And what Mister -- the former CEO of Novell says ten years later about what he had in his mind ten years before can't trump what is fundamentally a question of law. We actually do have pretty compelling extrinsic evidence on our side because we took the deposition of not an executive who is closely involved in drafting the agreement, but the lawyer on the other side Steve Sabbath. We provided that in our brief. Sabbath says, the right place to look under the TLA to figure out which chain of control provision you should be looking to in Section 6.6, not Section 6.3(c). More particularly, he said, sure looks like it.

The asset purchase agreement and the TLA are not to be read together when it comes to deciding all of the questions of what is in the scope of the license. I think that's our fundamental divide on this question. The asset purchase agreement contains a promise entered into the TLA. And the TLA is the TLA. And you look to the TLA to decide what the license terms are.

If you pars the TLA the way SCO does and look at the change of control of SCO versus change of control of Novell, it actually would have been very easy to have written,


change of control of SCO or of seller or buyer, and change of control of seller shall have the meanings attributed to them in Section 6.3 and Section 6.6, respectively. That language isn't there. Instead there's the single defined term, Change of Control in caps, in quotes, and I think if you look at the asset purchase agreement, that occurs only in one place in Section 6.6.

On the 16600 point, I don't think there are -- there are the concessions in our briefing that SCO would seek to find. There's a big legal issue in California right now headed to the California Supreme Court about whether there are -- whether limited covenants not to compete are allowed. Our view again is that if this is a limitation on the license but not a covenant, it's a limitation on the license, then we are not running afoul of 16600, whichever way that law ultimately goes, suggesting the benefits of deciding this question in favor of limitation.

The last point is this unjust enrichment point. And I'm not really sure where SCO is going with this. It may be that their suggesting to the Court having agreed we should brief this now, maybe this whole issue should be stayed pending the outcome of the arbitration so we can come back to what's at issue with licensed technology. It's a little late for that. We teed it up to Your Honor. If you decide the TLA issues on summary judgment, it will have a big impact on the


overall posture of this case and be of substantial benefit to the litigants at this stage of the proceeding. Thank you.

THE COURT: Thank you.

We'll take a break. Now, who's arguing the third motion when we come back? Mr. Hatch and --

MR. KIM: I am, Your Honor.

THE COURT: -- and Mr. Kim. All right. Let's try to get back by 10 to.


THE COURT: We'll proceed with the third motion today.

And Mr. Kim?

MR. KIM: Thank you, Your Honor. We've come to the end of a long day, and I'll try to be as simple and clear as possible.

THE COURT: I like that. Some people say that's all I can understand is simple and clear.

MR. KIM: Well, I wouldn't say that. But it is I think in our view a very simple motion. There are quite a few issues that SCO has raised, so I'll have to run down all of those.

THE COURT: All right.

MR. KIM: But at the end of the day, we say this is a very simple motion about two claims which just don't belong in the case. And we actually, frankly, are surprised that


we're even arguing about these, because these claims are not only clearly improper under the governing law, they're just superfluous. They don't add anything to the case.

The claims that I'm talking about are within SCO's Second Claim for breach of contract and the Fifth Claim for unfair competition.


MR. KIM: And does Your Honor have a copy of the complaint in front of you?

THE COURT: No. But I know what you're talking about. Go ahead.

MR. KIM: Okay. Do you mind if I hand it up to you?

THE COURT: Sure. You want me to have it.

MR. KIM: Sure. It's just a very small portion.

THE COURT: Thank you.

MR. KIM: Now, if you look at the breach of contract and unfair competition claims -- first of all, they were added in 2006, two years after the case started. It used to just be a slander of title case. A whole bunch of claims got added. If you look at the Second Claim for breach of contract, which is Page 24. It's got tab on the side.

THE COURT: Right. I have it.

MR. KIM: If you look at this, there are a whole bunch of different things in here that really are not the same


claim. They're jumbled together. The claim that we're concerned with here is Paragraph 99 and specifically Subsection A. The claim is that Novell has breached the covenant of good faith by making false and misleading statements denying SCO's ownership of the UNIX copyrights.

That's the claim. That's the portion we'll talk about now.

And then if Your Honor looks at Page 28, unfair competition, again there are various claims in there. The only part we're talking about here on Page 28, Paragraph 122 is the second sentence:

Novell has falsely claimed ownership of SCO's copyrights in UNIX.

That's what we're talking about. It goes on, by the way, to say that Novell has misappropriated technology. That is a part that's been stayed. That's not at issue here. The only thing we're talking about here is this, like, one sentence or portion of sentence in the unfair competition claim and the corresponding sentence in the breach of contract claim. Do those state claims under the governing law?

Now, we say that these claims actually have to be dismissed for two reasons. The first is that both of them require SCO to prove that Novell's statements were false. In other words, that when Novell said that SCO didn't own the copyrights, that was false because SCO did own the copyrights.


Now that's an issue that's been fully briefed and will be argued on Monday.

THE COURT: Monday, yes.

MR. KIM: So I won't go into it now.

The only thing I want to highlight is that there really is no dispute that if Your Honor determines that the copyrights were not transferred to SCO, then these two claims must be dismissed because critical allegation here which is not be provable. And both sides have simply incorporated by reference of other briefs. So I think that is undisputed.

So the part I'm going to argue today is that regardless of whether the statements are true or false or even if those statements were false, under the governing law, they simply don't state claims for breach of contract or for unfair competition. They do state claims for slander of title. Of course, we have substantive defenses of slander of title, we referred to one of them today, a lot of reasons that it should be dismissed. But this is just a tag-along claim, duplicative claim that adds nothing to the slander of title claim and that has never been recognized by any court and is it not consistent with the statute.

So that's in a nutshell our basic argument. And before I get into details, there's one other point that I really want to highlight. The nature of the claim is quite extraordinary. The claim is not that Novell came into their


premise and stole something or not that Novell took some intellectual property and put it in their products and selling it, that's a different claim. The claim is that in the midst of a very public, very heated debate about the SCOSource claim, Novell made statements about its position on copyright ownership and its interpretation of the contracts. I wouldn't be exaggerating if I say that normally a person making a statement about interpretation of a contract is not going to make the headlines, and it's also not something that you're going to bring claim about. There's no claim. People disagree all the time on meanings of contracts, and you don't see thousands of claims being brought. They would be improper.

Now, why? Because that's really extraordinary. There's no -- it's just normal that people when people have disputes they should be able to talk about their position. And it's a very extraordinary rule that prevents that. Now, we admit that in the case of slander of title, if SCO is going to be able to overcome all of the defenses, show it's false, malicious, unprivileged, all those things, yes, there would be a claim.

But now what's SCO doing? They're trying to bring the same claim under a different theory.

THE COURT: But you're saying if they're right about all these other things, these don't matter because


they're duplicative; right?

MR. KIM: Yeah, exactly. Well, I think there's two possibilities, Your Honor. One is exactly duplicative of the exact same defense, adds nothing at all to the case. Let's just clean up the pleadings and get rid of it. The other possibility, and maybe this is what SCO is trying to get at, I'm not sure. They may say that they don't have to prove it's unprivileged. They don't have to prove malice. They don't have to prove all of that. They're going to be a new body of claims to get around all those defenses. Malice, slander, you don't have to prove special damages. They don't try to do that.

And we're going into a really mirky area because no court has ever recognized such a claim. So Your Honor will be opposed with very knowledgeable issues as to whether certain privileged documents would apply. We say they would. They will argue the opposite. We're just in uncharted waters, and there's no reason to go there. Why? Again, no court, no statute are possible. So that's getting to the heart of this.

Unfair competition. SCO has said Utah law is what they're relying on. Clear. They've also said they're relying on common law, and they're relying on statutory law. So let's take those one at a time.

As to common law, this is one of those dream areas for a lawyer. You do research a lot of times, and you don't


find anything on point. Here we have a case that is closely on point. Is it 100 percent on point? No. But it's like 95 percent on point. That's Judge Winder's decision in the Proctor & Gamble vs. Haugen case, which was affirmed by the 10th Circuit applying Utah law found, first, that basically under Utah law, unfair competition should either be misappropriation or common law. Second, a claim based on allegedly false and defamatory statements did not state a claim for unfair competition and therefore was dismissed. It was just a motion to dismiss.

Now, what's SCO's response? Their first argument is that, in fact, Novell's statements about copyright ownership were seizing their property, that somehow by simply saying Novell believes it owns the copyrights, the property had been taken.

THE COURT: Or misappropriated.

MR. KIM: Or misappropriated. That's just not the way it is. I mean, misappropriation in the normal language means actually taking the property in the case of a physical object taking it, and in the case of intellectual property, it means putting it in your product and selling it. That's not what happened. There was no seizure of property.

Simply stating Novell's position didn't change anything. If they own it, if we own it, same. It's all the same. No seizure. No misappropriation. And SCO has tried to


cite a bunch of cases which they say cite and support them. If you look at them, every one of those cases where the normal situation where misappropriation where somebody allegedly, you know, they took some trade secrets, put them in their computer program and were selling it, that kind of thing. And that's summarized in our reply brief at Footnote 1, Page 2. We just listed all of their cases and said, this is what it's about. It's not our case. Some of them involved palming-off. And SCO is not arguing that there's any kind of palming-off. We're not trying to sell their product as ours.

So really the Judge Winder's decision in Proctor & Gamble is really the most relevant here. They have argued that the Utah Common Law of Unfair Competition goes beyond misappropriation in palming-off. So when we got the opposition paper, I promptly looked at their cases. I was very surprised to find out that they had just really mischaracterized all of those cases. They don't stand for what they said. They've misquoted them. And that's our reply brief at Pages 4 and 5, and I won't repeat what's there.

In fact, the P&G case is very clear itself. Judge Winder said, you know, in Utah there's basically two branches of misappropriation -- I'm sorry -- unfair competition, misappropriation and palming-off. The plaintiff here has not plead either. Therefore -- and there's no Utah court that has ever extended unfair competition to defamation


in the marketplace. So the Court will not create a new cause of the action under the umbrella of unfair competition, which would be essentially identical to an already existing cause of action, and offer no further protection of commercial finding.

The 10th Circuit affirmed in very similar language said, look, no Utah court has gone there, and we're not going there, either.

And SCO has said, well, that's a defamation case. It's not slander of title. Sure, that's true. But those are very close, and it's quite common to look at the law. And it's something that's closest case to our case, in particular just making the statements about copyright one should not use misappropriation or palming-off. There's been no claim recognized by that, recognized by any court. And there's no reason to recognize it because it's duplicative.

The next issue is the Unfair Competition Act, and this fails for multiple reasons. The first issue is SCO has a really big problem because the Unfair Competition Act was enacted in May 2004. That's when it became effective.

And if you look at their complaint, Page 37 has a tab at the top -- I'm sorry -- Page 10. Page 10, Paragraph 37, there's a list of Novell's allegedly false statements. It goes on for three pages. A lot of statements. But you look at the dates. Every single one of those statements is before May 2004. They're between May 2003 and


March 2004. And it's very well established in Utah you can't apply statute retroactively unless there's an expressed statement of that. SCO doesn't dispute that. So as pled in their complaint, there is no claim under the Unfair Competition Act because none of these statements happened before then.

In its opposition, SCO scrambles around and tries to respond statements that were made after the act became effective, and they pointed to two things. First, this is one of the most amazing things, they pointed to Novell's counterclaim, to its pleading in this case. They pointed, they cited Paragraphs 94 to 98 of our answer in counterclaims and said, you know you assert that you owned the copyrights here.

Well, you know, of course pleadings are privileged. And, in fact, SCO argued exactly that point in opposition in support of their summary judgment motion on IBM's unfair competition claims. So I guess when the shoe is on the other foot, it's privileged.

But in any event, the second thing that they've relied on is Novell's web page. Now, this is actually kind of an intellectually issue. I found this and said, interesting. I wonder what the law is, so we looked it up. Well, here's the factual situation. This is supported by Ken Brakebill's second supplemental declaration, Exhibits 7 and 8 in


Paragraph 10 and 11.

The website content that we're relying on which is one page which simply contains links to correspondence that predates the effective day of the act and also provides links to copyright registrations which predate the effective date of the act. That website was posted before the act became effective, and it's just stayed the same since then. So the intellectually interesting question is on the Internet, something is posted and just stays there? Is this a continuing publication even though it's staying there as soon as the act becomes effective law, now we use it?

Well, it turns out that no Utah court has addressed this. We found a District of Colorado decision in 2006 that addresses that issue. They considered the vast weight of authority is in favor of saying that -- it was a statute of limitation case, I should mention. But the statute of limitations case, they said, is a web page that simply stays the continuation publication for the purpose of statute of limitation or is it a single publication at the earlier date? And they said, it's a single publication at the earlier date. And we submit that is the correct rule. So this web page was published before the Unfair Competition Act became effective, so they can't rely on it.

Now, if Your Honor were to -- if SCO were somehow able to get up beyond these procedural hurdle, they still have


a really big problem because the Unfair Competition Act in Utah is very really narrow. It lists four specific categories of unfair competition. The only one they've argued upon is software license violation. And here they say that when Novell said, we think we own the copyrights, not SCO, that violated the technology license agreement. They say it violated Section III, which is a statement that says, SCO shall own the license technology.

Well, it doesn't violate Section III. Section III, what they really want to rewrite it to say is, Novell shall make no statements to the public about its understanding of its right under the contract.

There's nothing like that, and I would submit that would be a really extraordinary provision in the contract. It's not there. It is true, of course, as we just heard, SCO has alleged breach of a different provision of the TLA noncompete clause, but they haven't even alleged that there was a breach of this Section III, and it's way too late for them to amend their claim to bring in a new claim for alleged breach of the TLA.

And I submit, also, the statement SCO owns the license technology does not as they've contended -- they've contended that Novell acknowledges and admitted that they owned the UNIX copyrights. No. That's a totally separate argument. Licensed technology is defined as assets that were



The million dollar question in this case is, what assets were transferred? Our position, of course, is these copyrights were not transferred. Therefore, by saying that they owned the licensed technology -- of course, whatever that licensed technology, which by the way is trade secrets and other sorts of things, that -- you know, they own that, of course. But it's not an admission of anything.

Anyway, so in summary, the Unfair Competition Act doesn't apply both because it's not retroactive and because there is no software license violation that was even plead or that can be proven by the facts.

Finally, they've talked about the Utah Unfair Practices Act, and they've just tried to confuse the issue. First they suggest that somehow part of the Unfair Competition Act, there's two separate chapters of the statute. Second, they say, well, they must have somehow violated the act. But they haven't listed specific things that violate. There's things like price discrimination and below cost sales. None of those provisions apply here.

So, Your Honor, then the last issue is their claim for the breach of the implied covenant of good faith. The good news is they actually, the parties do agree on some things. They agree that California law applies, because now we're in a contract claim. And this is under the APA.


California law applies to the contract issues.

As to the general standard, the parties have both relied on the same California Supreme Court decision, Foley from 1998. And that's just the general standard. But what it says is the implied covenant of good faith has been developed as a safety valve to fill gaps in the contract in order to implement the intent of the deal. That's what it says. Obviously there's a difference in how we would apply it.

SCO says -- well, let me step back a second. SCO says that they win under that standard because we violated their intent of the contract signing. But they haven't cited any provision in the APA that even vaguely suggests that making a statement about what assets were transferred or not is a violation of the APA.

So I checked. There's no general confidentiality provision. Just even the contents of the APA are not confidential. Sometimes they are, and sometimes they're not. Are there any confidentiality provisions in the APA? There's exactly one, which is Section 4.5 that says, with regard to due diligence, if the parties do due diligence, the parties will keep those confidential. Makes sense.

There's nothing in there saying we can't make statements about the legal interpretation of the contract. Again, that would be most extraordinary to find. And I think again, the extraordinary nature of it is very important for


the issue of whether if you are trying to fill a gap. They're not trying to fill a gap. They're trying to fill a chasm. I mean, there's nothing vaguely similar to this.

And if you look at the implied covenant cases, the parties have generally addressed it, but there's something that they haven't quite specifically addressed. But you reach a little bit to imply something. That's not our case.

Now, what SCO does rely on is the Restatement of the contract Section 205 Common E. And I will admit that if you simply read the comment by itself it tends to suggest SCO's position, because what it says is that a dispute, conjuring up a dispute or kind of taking bad faith interpretation of the contract may be a breach of the obligation of good faith. So that tends to suggests something.

But then you have to go look at the examples. And you look at the examples. What are the examples? There are two examples both based on cases, I've looked at both cases. What those stand for is that if you have a dispute about contract and then based on that, you refuse to ship a product or you refuse to accept a product, then there may be a breach of claim. That's obvious. But they don't say that, if I simply tell you, well, you know what, I think I don't have to accept your goods, and then you go ahead and accept the goods, or you say, I'm not going to accept your goods when you ship


them one year from now, one year hasn't happened. You haven't taken any conduct. Those cases don't say that simply telling somebody your legal position is going to be a breach of bad faith. And they're very strong policy reasons for not holding that, because when parties have a breach of contract dispute going on, it's normal that they should be able to talk to each other. And when it affects the public as this Linux dispute heavily does and the other party is resulting to public forums and precedent, it's very normal that you should be able to do that. This is the first amendment among other things. A strong public policy in favor of vigorous debate.

And fortunately for us California Supreme Court has enforced this policy in the case of Freeman, 11 Cal 4th at 97 and 100. What that case did was it rejected, it overruled a prior line of cases that allowed parties to bring a claim for bad faith denial of the existence of the contract. In overruling that line of authority, they said, you know, this is bad, because what it means is every time that you try to defend yourself in a contract breach, you might get sued, not only for breach of contract, but breach of these collateral stuff, and you have a lot of stuff going on.

Now, SCO has pointed out that it involved a tort claim and not a contract claim, but we submit exactly the same policy considerations apply here. They already have a claim of slander of title, so why go out and create a new founded



Now, finally, one point, SCO argues that Novell's statement deprived them much of the expected value of the APA, and, therefore, they've got to be able to go out, and you've got to imply, Your Honor has to imply a duty that wasn't written down. And it just doesn't hold up. They have submitted no evidence that the APA was signed in 1995. The market was entirely different then.

If you look at the APA and you look at the press release, there's no suggestion that the reason Santa Cruz was buying the copyrights because they wanted to go out and sue Linux users. Of course, there was none. What was the purpose? The basic purpose you can look at was for them to develop their UNIX business. They wanted to create a merger product and combine two products lines. They wanted to expand their UNIX business. That's the purpose, and there's been no evidence of that. SCO later had a change of heart, and they have a new business of suing people, Linux people. That was not part of the APA, and it is absolutely not essential to implement the party's intent to sign the APA to imply the duty that simply doesn't exist.

So in sum, they're trying to make an extraordinary new claim. The cases and the statutes are clear that they can't do it. And there's also no reason because we already have slander of title and the accompanying claims.


THE COURT: Thank you, Mr. Kim.

Mr. Hatch?

MR. HATCH: First, I constantly hear this comment that SCO's in the business of suing people. I think Mr. Kim may misunderstand. I'm the one who's in the business of suing people as a lawyer. SCO is conducting business and protecting its intellectual property rights. We're talking about clients who are in the business of suing. I think we need to only look at the docket in the Northern District and see that Novell has done its share of suing, as well. So I don't think that's a particularly productive comment.

I want to start because this particular motion, it comes to us in a slightly unique procedural posture. Novell has argued its motion almost exclusively as a matter of law. They've disputed none of the facts that we have set forth in our opposition. They've advanced no evidence to support its motion for partial summary judgments, and SCO's allegations stand here undisputed for purposes of this motion. With that in mind, I'd like to take just a second with your indulgence to go a little bit into the history behind the claims as outlined in large part in our papers. But I think it puts it in context of misappropriation here. Basically, and I'm not going to go into the detail, you know, of the whole case but just what is fairly relevant here.

In 1995, the Santa Cruz Operation, which we all


know is the predecessor of SCO here, purchased the UNIX and Unixware business including all copyrights from Novell. Mr. Normand talked a little bit about that, and, of course, we'll talk about that even more on Monday.

2003, SCO developed its SCOSource licensing program to protect its UNIX intellectual property. And that was particularly in response to the rise of Linux in SCO's UNIX market. Soon after SCO announced that licensing program and having filed suit against IBM for breach of its UNIX license, Novell for the first time since 1995, almost eight years later for the very first time claimed that it never sold UNIX copyrights to Santa Cruz, predecessor of SCO.

In fact, on the very day that SCO was announcing its most profitable quarter in history, SCO knew that -- I mean, Novell knew that, Novell issued a press release on May 28, 2003, and it's at Tab 2, I believe, in the book that we gave you. They issued a press release claiming that it, not SCO, owned UNIX copyrights. And it was an attempt to affect SCO's stock price.

Now, after that happened, SCO reminded the CEO of Novell of Amendment 2 to the asset purchase agreement and that that clarified that the copyrights had been, indeed, transferred to SCO. Novell then publically admitted that it did appear that SCO owned the copyrights. Novell conveniently forgets that part of its history. After talking to their


lawyers and others, Novell again shifted its position to once again claim ownership of the copyrights. And it was shortly thereafter we've heard in some of the other hearings that IBM then announced that it was investing $50 million in Novell, not long after that change in position.

Novell became more aggressive then in stating its newly changed position that it was the owner of the copyrights, and it became more aggressive in its attack on SCO. And throughout 2003 and 2004 and continuing to the present, Novell continued to make numerous public claims that it owned UNIX copyrights.

Now, facts showed that Novell engaged in this unfair conduct to damage SCO's business. For instance, there's deposition testimony in the case, and I think this is one of the reasons why Novell didn't want to dispute facts and wanted to bring their motion is just something on the law of the pleadings because they didn't want to get into these facts.

But there's deposition testimony that Chris Stone, the vice-chairman of Novell at the time, told the press, and this is at Tab 3, told the press that Novell's May 28th, 2003, press release which claimed the claim that Novell owned the copyrights was specifically timed to hurt SCO and its stock price. As a matter of fact, the journalist testified and said:


Did Novell executive Chris Stone say anything about the reasons why they were issuing that announcement on that date?

He said they were doing it because SCO's earnings were that day.

THE COURT: One of the arguments that Novell here is that the claim is duplicative. You've already brought this claim. You've got a slander of title claim, so why do you need another claim?

MR. HATCH: Well, that's an interesting argument because that's like --

THE COURT: It is an interesting argument, and I want to you respond to it.

MR. HATCH: And the response is every one of the claims here have different elements, and they have different aspects, and they pointed them out. And I'm going to go through those as part of my argument.

But slander claim, for example, doesn't require that it be a competitor. I can slander the title to your home, but I don't have to be a competitor of yours. Unfair competition requires being a competitor, and the Unfair Competition Act requires misappropriation. I'm going to talk about that.

The UPA, the Unfair Practices Act, is older and, frankly, the early Unfair Competition Claim Act in Utah, and


I'll talk about that. But it has slightly different elements, as well, as does the common law -- excuse me -- the UCA requires specific conduct. And each one of them has slightly different elements. And we have the ability, if we can show the elements and we can show the facts that support it, to make those claims even though they may be somewhat similar, because a jury may or may not find, they may find on all of them, but they may find that some of the elements support Unfair Competition Act claim, and they may not support one or the other claims. So we have that right.

Now, they argue, well, maybe that's not efficient, or what have you. But I think that's the wrong argument at the time. That's not a basis for summary judgment. I know of zero cases that would argue that simply because you have claims that are somewhat similar, they each have their own elements, each of them are a separate cause of action, and you have the right to bring them, that just because they don't want to defend them we don't get to bring them.

Now, Novell didn't just make statements. I mean, a lot of what I'm going to go through here and what Novell talked about is that we just -- that they just made statements.

Well, they actually did more than that. They actually took action, and they talk about in their briefs about affirmative conduct. Well, Novell went so far as to


register the UNIX copyrights in their own name, not too much out of time proximity with receiving the $50 million from IBM. And they made those comments in Tab 4. They made those representations and registrations with the United States Government under oath.

Now, significantly, and one of the things that's glossed over here and one of our allegations is that these registrations were for the same UNIX code that in 1995 Novell had placed when it gave -- when it transferred it to Santa Cruz. Before they transferred it, they don't talk about this, they took the code and they turned it from their name, from Novell, to the Santa Cruz Operation saying that the copyright was held by the Santa Cruz Operation. That's a fact in the case.

That alone has to raise a question as to Novell's veracity, that they didn't do any affirmative conduct here. These were merely words alone, and it has to raise a question as to their involvement with IBM.

Now, Novell even went so far as to announce in a heavily attended Opensource business conference that it still owned UNIX. And with your indulgence, I'd just like to play a short clip because this gives you some flavor of the evidence that's out there. And it's like ten seconds, maybe less.

THE COURT: Go ahead.

(Whereupon, the clip was played.)


MR. HATCH: This is then Novell's vice-chairman. And you noticed what he just said at the end. He said, we still own UNIX.

While he's doing that, in the face of Schedule 1.1A of the APA which specifically indicates that all in this first line, it's hard to read:

All rights and ownership of UNIX and Unixware, all versions, all copies including the source code and without limitation.

Were being transferred to then Santa Cruz, predecessor of SCO, and then it lists these things.

Now, on Monday, we're going to go in some detail about those actual transfer issues and go in a little bit more detail about Amendment 2 and the APA. But in the face of all this, these are the statements that they're saying they're privileged to make.

Contrary to their assertions at trial, we're going to show that they lawfully claimed ownership of the copyrights; they made the statements specifically for unfair purposes to hurt SCO's business; they made these statements to support IBM's Linux strategy; and they took affirmative actions consistent with their wrongful statements by putting them on their website, filing for copyright registrations they had no right to file for and then putting those on their website, and making presentations of industry conferences and


continued on till today to do that.

Now, it's odd I think in several parts in his briefing that Novell says SCO cannot rely on statements outside the second amendment complaint. They don't want us to show these types of things. And they made comments that I just found were a little odd for summary judgment. They say:

SCO cannot -- this is Page 6 of their reply.

SCO cannot properly rely on statements that were not identified in SCO's second amended complaint.

Well, that sounds like a motion to dismiss. Maybe it's a motion for judgment on the pleadings. But that's the basis they are coming to you today because they're saying, they can't win these motions because they didn't plead some of these specific statements, one of which is the website that he talked about where they continue to this day to publish the fact that they own the copyrights, which continues to hurt SCO, and we'll talk about that a little bit more in a minute. And they characterize it in the brief. This is SCO's improper attempt to amend its claim. Well, I've never heard evidence made in discovery, found in discovery somehow as an amendment of the claim and that you're limited somehow to what you have in your complaint. That doesn't make any sense. So let's talk about what we did plead, because I think they played a small game


here, as well.

First, I think they've agreed that we've asserted common law unfair competition. Now, Novell claims that we failed to plead it properly, and they cite to the Proctor & Gamble case. And they say numerous times in their briefs and today in oral argument they've said, we've done that in an attempt to expand Utah law.

Well, that's simply not the case, and it's wrong. In citing Proctor & Gamble, Novell admits, and I think it's pretty clear from the case, that it says, Utah unfair competition encompasses at least two forms of violation. One is passing off and palming, which we're not talking about hear; and the second is misappropriation.

Now, while we argue that Utah unfair competition is really broader than that, I don't think we need to for purposes of this motion because at the very minimum, I think it's undenied that we have alleged misappropriation. And again, Novell's the one that chose to put this motion in the procedural posture of attacking the pleadings. I've seen people bring motions to dismiss which are really summary judgment motions. In large part, this is a motion to summary judgment that they brought as a motion to dismiss.

But all we need to do is look at the complaint. They say we didn't plead it, and I think Mr. Kim even cited to it at Tab 16 of the booklet that I gave you, Paragraph 122 of


the second amended complaint. As you can see, it clearly talks about Novell misappropriating SCO's UNIX technology. And so we have asserted it.

Now, we have only argued that Proctor & Gamble doesn't kick us out here because Proctor & Gamble is a slightly different case. One, it's talking about defamation in the marketplace which we're not talking about here. We're talking about misappropriation of our intellectual property rights. We're make a straight-up traditional argument for that, as a matter of fact. Here we're talking about Novell taking from SCO its goodwill and its unfettered right to its IP and to force exclusivity of its IP. Its goodwill and its unfettered right to the IP.

Now, Proctor & Gamble also was a plain defamation case with a party that had no contractual relationship with the opposing party, and that's certainly not the case here. So I think, if anything, the Proctor & Gamble case, which Your Honor is probably far more conversant with it than I am, is actually supportive of SCO's claim here and not a position that Novell has taken.

Now, next Novell makes the attempt to say, well, really these are just words, and words alone can't make a misappropriation. Well, we cited cases, and they're in our brief, and they're also on Tabs 8, 9 and 11 that words are enough, and particularly when you're talking about


intellectual property, which is an intangible right. And you're talking about goodwill, which is an intangible right. Words can certainly be enough and can destroy it. And I think the Royer case makes that inevitably clear, that if you try to read out that, then people can willy-nilly steal people's intellectual property rights by simple words. And that's not what the courts intend to limit unfair competition claims to be.

But we've also alleged that the words here were coupled with actions, because Novell's essentially saying here is, I can say -- I, Novell, can say I own UNIX, but I don't. If I don't, by saying it alone doesn't change the ownership, and so, therefore, that can't be misappropriation.

But even for the Court to accept their erroneous assertion, that's not what they did here, because Novell conveniently ignores the fact that it acted on those statements, and they keep saying in their brief that we need to show affirmative action in furtherance of the words. Well, they did. They went out and filed false copyright registrations representing they own the copyrights. That's not mere words. In the context of this case, words are enough. But here Novell's misappropriation is not mere words.

They engage in other affirmative conduct in furtherance of their unfair competition. For instance, they went to the public and said they own UNIX and would indemnify


the customers who used its products, Suse Linux from SCO lawsuits regarding that use.

In Tab 4 of our briefing book, Novell also began -- we've also shown that Novell began discussions in marketing essentially with SCO's partners and SCO's potential customers saying that SCO did not own the copyrights.

These are affirmative acts. These are acts to go out and destroy someone's business, and that's what Novell did. It's more than just, as I think Novell tried to characterize it, commenting on our interpretation of the contract. These aren't comments only on the interpretation of the contract. These are words that were intended to destroy.

Now, I want to turn to the Unfair Competition Act for a second. They've addressed that, and Novell has said that the Utah Unfair Competition Act was not in effect at the time of the statements, and that, therefore, should not be applied retroactively.

Again, I think they somewhat misstate our claims, because I think our claims can be fairly characterized as going to the ongoing nature of the unfair competition here. And so -- and in that regard, these statements, some of the these statements having been made, some of the them beforehand, they're still ongoing, and that's the allegations in the complaint. Again, they were the ones that said we didn't plead it properly. Well, we did.


If you look at, I think it's Tab 13. Tab 13 I lay out from the second amended complaint Paragraphs 36, 39 and 24 in particular that talks about the fact that we are pleading that they have embarked on this, that they made numerous false and misleading representations, that they continue to cause damage to and that they will continue. This is -- you know, we're in a notice pleading state. They've been put on notice. It's been properly pled that this conduct has gone on. And, indeed, we've shown with no other fact, and the reason they wanted -- they say in their brief, Your Honor, they didn't talk about the website in the second amended complaint, so they ought not be able to show that as an ongoing and affirmative continued misrepresentation.

Well, that's odd, one, because why should we? Why does that have to be in the complaint? The notice in the complaint is already giving notice of the complaint itself. It isn't there to layout every single fact in the case. That's why we have discovery. That's why we have summary judgment motions. And they don't want us to look at that. And we know now and he's admitted these things are on the website.

So that fact alone gets us past summary judgment, even if we show none of the other facts that are in our brief or that I've mentioned in the argument today.

So what do they do? They attack, and this one I


find really kind of humorous partly because they said we misread cases in other areas in the brief, which I totally disagree with. But here I don't think they could have more plain misreading, because you know what he said, he said, I've done a lot of research, and they've got these cases. And he cited one, really. And they cited to Bloom vs. Goodyear. It's out of the District of Colorado. I'm sure they picked it because it was in our circuit. And they said, it had a first publication on it. And it says that you only count the first day the website goes up, and you can't count it as a continuing violation. Remember that?

Well, if you read the Bloom case, and Your Honor I'm sure has, the only thing that the Bloom case is addressing is statute of limitations. When should the statute of limitations run? Well, in a statute of limitations context, that makes a really good point. It says the statute of limitations would begin to run when you first publish it. But it does not stand for and there's absolutely no language in that, and I'm kind of surprised that Novell stretches it that far, to stand for the proposition that it's only the day -- the only day we could have been damaged was the first day it was put up.

The reality is that every single day that sits there, they know it's damaging us because they know people get on that website, they look at it, and they see that they're


still claiming to this day that they own that copyright. And that is a daily damage to my client.

And if they wanted to get out of that, if this was some defamatory billboard on the highway and the statute -- there was a new statute and they left it up, are they really arguing, no, we put it up before. So I think it's a grandfather clause argument of some sort. It doesn't make sense. It now violates the statute.

So we pled enough to get past the summary judgment for certain. And I think that's why they misread these cases because it doesn't stand for that. They haven't retracted it, either. It's still there. I think that says a lot.

Now, then they go to, we haven't plead a software violation, and they site to the Klein Becker case, Judge Cassell's decision. And again, as Your Honor has a connection with the prior case. I have one with this because I was actually for once on the winning side of that one. And --

THE COURT: Is that rare?


MR. HATCH: And Novell makes -- Judge Cassell didn't find the logic they tried to put in their brief. Judge Cassell said, you have to show some specific conduct. And that's because the UCA says, you have to show, and it lists certain things, and one of those is a software violation. And Novell says we didn't plead that.


That's really quite absurd, because if you go to the second amended complaint, right in the fourth claim for relief, we allege copyright infringement with regards to the -- and specifically refer to the technology license agreement that Mr. Normand had been talking about. And Tab 15, and this is Paragraph 118 from the second amended complaint, you'll notice throughout it's talking about the TLA that we, that SCO granted Novell a nonexclusive license. Novell expressly covenanted not to use those technologies to compete with SCO's core application server, and Novell has infringed and is infringing SCO's copyrights.

So they allege that we don't allege a software violation, yet, there it is in Paragraph 118 in the second amended complaint. And they said, well, I guess they could say -- I suppose they could say that's in paragraph -- in Claim Four, and your unfair competition claim is Claim Five.

Well, I believe it's the next slide, 16. I mean, it shouldn't be a big point. But Paragraph 121 says, we fully, that:

SCO re-alleges and incorporates all prior paragraphs as if fully set forth herein.

That's not very novel or unique. But we clearly incorporated that alleged allegation of a software violation in Claim Five for unfair competition. And so I think it's very clear that we've alleged that. They said we haven't, but


it's there. They've been given -- they were given this pleading. They're on notice. Again, we're in the context of them saying we didn't plead it in this motion. They've been given notice, and they know it. All right.

Lastly, they say we didn't plead the Unfair Practices Act. Now, I'm somewhat confused about this because -- where's that -- Kim gave you a copy of the second amended complaint. It's very interesting because I think this is a straw man argument. They want to interpret our Fifth Claim for relief as simply the Unfair Competition Act and I think in part so they could set up a straw man for their retroactivity argument that I've already pointed out doesn't hold water. And they want to ignore that we're making a claim under the UPA, as well.

Well, and part of the problem they say there is the UCA started in 2004. This was the predecessor. If you'd gone and looked for unfair competition and Utah law prior to the enactment of the UCA at the time where most of these statements were made, you would have seen this statute. The UPA. Excuse me.

Well, our complaint doesn't say it's just made under UCA, under the Unfair Competition Act. What does it say? It says it's a claim for relief for unfair competition.

And let's see. If you go to the very next page to Paragraph 126, and it's also at Tab 12 in our book. It says


specifically when it seeks a remedy that we're seeking a remedy under -- available under the applicable unfair competition law.

So you might say, well, that's pretty vague. But as you'll recall, Your Honor, we were in here on a motion for more definite statement where they wanted to know specifically what law we were doing because they were concerned by applicable unfair competition law, they wanted to know what that meant, in part, what jurisdiction, because I think it was a fight whether it was California or Utah. And you'll recall we reached a stipulation, and Your Honor issued an order on the stipulation at Docket 250. And if I could just give you a copy.


MR. HATCH: And this is the stipulation. And you'll notice at the very end of the stipulation, it says:

Consistent with SCO's representation, SCO's second amended complaint is hereby deemed amended to reflect that SCO's Fifth Claim for relief arises out of Utah statutory and/or common law.

Now, it doesn't say just the UCA. They want to read it, and I understand why, I think we all do, but they want to read it as that doesn't mean the UPA. Again, we have a notice pleading statute. They didn't ask for any further clarification. We felt they understood that.


And, you know, I have -- just on a whim, I think you saw me during the last argument send a note back and have somebody run back to my office. I had them just -- we're a notice pleading statute, and I know this may be a little, I think Mr. Jacobs said he didn't want to get cute, and I don't want to get too cute, but I said, go get me our index to the Utah Code. And there it is, right under unfair competition, the first statute cited is the UPA, Unfair Practices Act. The second one cited is the UCA, Unfair Competition Act.

So I think it is very hard to say we didn't plead that. They could have asked for more if they thought there was something more limited, but instead they decided to make arguments that we didn't plead things when we really did.

I think in our brief and in our underlying papers, we've set in our underlying brief and I think the arguments I made setting out the facts very clearly that we've shown unfair practices under UPA. We've shown unfair competition under the UCA and under Utah common law. Each one of them are slightly different elements, and we have a right to go forward with them. You know, and so I think that's completely plead right and it's in the case.

Lastly, we talked about good faith and fair dealing. And I find this one interesting, as well. And I think the telling thing about this is they called it kind of a gap filler. And --


THE COURT: Actually he called it a chasm filler.

MR. HATCH: Chasm filler. And that's fair. I think he did say that. I think the problem is the gap/chasm is of their own making, because what they're essentially saying is, we can enter into a contract, transfer your copyrights, and unless you tell us we can't go out and disparage those copyrights, then we have absolute freedom to do that.

Well, I find it amazing because the arguments in the brief and that was made here again today is that, why isn't there a provision saying we can't do that? That is exactly why there is a cause of action for good faith and fair dealing, because it fills in that gap where people don't act reasonably. People, if they buy something are reasonably intending the other party not to walk out the next moment and try to destroy either verbally or in any other way that right.

And so I think this is actually a classic case of the need for good faith and fair dealing, which is recognized here. They haven't said that it's a law that isn't recognized. They've tried to make kind of a cutesy argument that, well, there wasn't any clause in the contract that said, we can't -- even though we're selling you a copyright, we can't go out and tell people, but we really didn't. Who would even think of putting that clause in? I mean, that would be kind of bizarre because you would never assume that someone


would act with such bad faith that you would have to do that.

And I think if Your Honor rules the way they're asking, I think every corporate lawyer certainly in this jurisdiction is going to have to start putting in clauses that say things that are just patently obvious. And I think that's why contracts start to get this big is because people want to make arguments like that instead of acting in good faith with regard to their contract. And so I find it kind of an offensive argument, frankly.

And the Foley case. Mr. Kim said we both cite the Foley case. But it kind of states it fairly succinctly when it says:

These covenants extend to effectuate the intentions of parties and to protect their reasonable expectations.

I think it would be hard-pressed -- I understand on Monday we're going to argue about the ownership of the copyrights. But assuming we own the copyrights as we believe the contracts say, it would be very hard for I think anybody to argue that a reasonable expectation would be that SCO would -- that Novell would walk out the next day and make every effort to destroy that right. It isn't an intellectual property right. It's goodwill. It's in the air. It's intangible to a large degree. And I think that's why their argument is that much more insidious than normal than if it


was being made with regard to an actual tangible piece of property, because it's that much easier to destroy that right by words than it is by almost any other means, because who's going to license this stuff? And I think Mr. Normand put up that evidence that people who won't contract with us because they clouded the title.

Your Honor, I think -- lastly, I think we talked -- we saw the Stone clip. And one of the reasons I played that and given the history at the beginning is that the Restatement Second of Contracts Section 205 Common E that was referred to in our brief and by Mr. Kim, one of the reasons I talked about Mr. Stone in this is the Restatement clearly says it is a violation to assert an interpretation contrary to one's own understanding.

Mr. Normand and you will see on Monday virtually every single person that was involved in the negotiations and drafting of these contracts has taken the position that the contracts were transferred to SCO. And the statements that they're now making after they're in bed with IBM, after they're getting money with IBM, after they're in litigation, that they own it and being done, and when they have a product that now competes, that's somewhat insidious, and it's clearly the type of thing that the Restatement is talking about.

Thank you, Your Honor.

THE COURT: Thank you, Mr. Hatch.


Mr. Kim?

MR. KIM: Thank you, Your Honor.

Counsel raised a number of arguments, many of which I heard for the first time today. I'll try to get through them as quickly as possible.

I think it is interesting counsel began, ended where he began which is talking about the facts. This is not a motion about the facts. As counsel has rightly said, it could be considered a motion or judgment on the pleadings or a motion to dismiss. But the purpose of this motion only, we will accept that all the allegations are true. The question is, can they bring another claim where they already have a perfectly good claim (unintelligible).

THE REPORTER: I'm sorry?

MR. KIM: Slander of title. When they already have a claim for slander of title.

So the question at the end is the straw man argument, how can it be that the law would permit people to go out and disparage copyrights and there would be no remedy on that? We're not saying there is no remedy. If they can prove false, malicious, unprivileged, et cetera, et cetera, there may be a claim. Should we go out and create a new claim? No.

And it is the implied covenant of good faith, you start with the contract and the parties expectations under the contract. There's not a shred of evidence that would support


imposition of what's basically a gag rule about talking about your interpretation of the contract. And again, there's solid policy reasons against that. And let me just make one mention, one, which counsel started out his argument.

He went through the facts, about half of his argument was about the facts. And one of the things he said is in May 2003, Novell said publicly for the very first time that they owned the copyrights.

Now, Novell will be arguing and has argued and will be arguing on Monday, Novell didn't say anything until May 2003. That means they just admitted the copyrights were transferred. But now they're saying, oh, but, of course, Novell start to talk? That violated something else.

You know, you can't have it both ways. That's exactly why parties should be able to talk. Novell's actions were defenseless. SCO started the whole thing. Novell had to put its position on the record. And that's also, by the way, Your Honor, what a duplicate contract registration is. The facts are in the record. Novell registered second. SCO registered its copyrights in the summer of the 2003. Novell registered the same copyrights in the fall of 2003. Those registrations, certainly there's statements in them, but they have absolutely no legal significance as to who owns the copyrights. The copyright office will simply accept the registration. They won't examine the validity. They don't


get into disputes. And significantly, if you look at 17 USC Section 410(C), it says that:

A copyright registration is prima facie evidence of the validity if made within five years of publication of the order.

These registrations on both sides were more than eight years later. So the registrations themselves have no legal effect. So effectively there are some (unintelligible) it's just another statement of the defense position. You could be sure that if Novell didn't register its copyrights when it did, SCO would argue, it didn't register its copyrights, so it must have conceded the claim.

That's exactly the policy reason why people should be able to take positions on that issue. And by the way, we're not saying that you could never make a claim of any sort based on words alone. For example, false advertising is a well-established branch of the law. It has special rules, special statutes in Utah. They have a special statute I understand. It's separate from unfair competition. False advertising is not part of unfair competition.

In fact, in the P&G case, the 10th Circuit reversed the Lanham Act claim. They said that can proceed, but the unfair competition cannot go ahead.

Counsel has talked about evidence discovered in discovery, and you should be able to add new statements.


Well, what are they talking about? The website, which was up there in 2004. That is not evidence that was discovered in discovery. They knew about that. That's what they want to rely on now.

The District of Colorado case that I mentioned, as I mentioned is a statute of limitations case. We could not find a case involving publication retroactive application of the statute. But we think it's very closely on point. We think the single publication rule should apply, and, therefore, they can't retroactively reach out to a website that was published before the effective date.

But even if it did, there is absolutely no software violation. And what counsel has done, they said, we pledged a different software violation. We've alleged that you've misappropriated our property and things like that. That's a state claim. That's not at issue here. We're talking about the statement itself, the statement itself doesn't seize anything.

Now, there's one thing that counsel said, which is that they have cases for the proposition that words alone can be enough. He said that they cited it in their brief, and it's at Tabs 8, 9 and 11. I invite Your Honor to compare the cases at Tabs 8, 9 and 11 with SCO's brief. None of them are in the brief. The first time I've ever seen those cases was today, so I'm obviously not prepared to talk about those


cases. But from a cursory glance at them -- therefore, we object to them. But a cursory glance at them indicates they're really kind of product disparagement type cases. From their brief description I can't tell. They say it's procedurally different than what is involved in the discovery dispute. They don't seem -- there's nothing in there that suggests that the words in this case, a statement about a legal position on the interpretation of a contract would trigger a claim of any sort.

The Unfair Practices Act, just to be clear, we have two positions. One, we're not clear that it was on notice, but even if it were, the Unfair Practices Act has a list of probative practices, such as price discrimination and tie-ins, and we're not close to any of those. So it just wouldn't help them, anyway.

So I think I'd just like to begin where -- end where I began, I'm sorry, it's the end of the day, which is this is a claim that no court has ever recognized, this kind of claim. There are strong policy arguments why the parties should be able in this kind of dispute to say what their position is. Slander of title could apply if they can prove everything. But there is absolutely no reason to go beyond that. Thank you, Your Honor.

THE COURT: Thank you, Mr. Kim.

Thank you all. I'll take these motions under


advisement. We'll be in recess. I look forward to seeing you all on Monday.

(Whereupon, the court proceedings were concluded.)

* * * * *


) ss.

I, KELLY BROWN HICKEN, do hereby certify that I am a certified court reporter for the State of Utah;

That as such reporter, I attended the hearing of the foregoing matter on May 31, 2007, and thereat reported in Stenotype all of the testimony and proceedings had, and caused said notes to be transcribed into typewriting; and the foregoing pages number from 3 through 116 constitute a full, true and correct report of the same.

That I am not of kin to any of the parties and have no interest in the outcome of the matter;

And hereby set my hand and seal, this ____ day of _________ 2007.



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