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SCO's Memo in Support of its Motion for Reconsideration or Clarification
Sunday, September 02 2007 @ 11:42 PM EDT

Here is SCO's Memorandum in Support of its Motion for Reconsideration or Clarification of the Court's August 10, 2007 Order as text. We have Groklaw member brindabrain to thank this time for doing the HTML work for us. Here's the motion [PDF] it supports.

Yes, friends, SCO would like the judge to reconsider. They think he misunderstood the facts, or else they misunderstood his ruling, and so we have a chance to hear them tell us again that they think they owe Novell nothing from the 2003 Sun and Microsoft agreements, something the judge has already ruled differently on, and if he thinks they do, they'd like him to clarify. Count yourself fortunate, since they held themselves to only that one issue, in view of the nearness of trial. SCO's position is:

The plain language of the APA and the evidence in the record both support the conclusion that Novell has no interest in royalties SCO receives under UnixWare Licenses, even when an incidental license to SVRX products is included therein.

SCO now wishes to call the Sun and Microsoft licenses UnixWare Licenses. I'll take you through some history on that, but what stands out to me in this filing is what seems to me a strategic mistake on SCO's part, a surprising admission found in footnote 1:

1In fact, UnixWare is not a separate system, but rather is just the latest version of SVRX; much of the code in UnixWare previously appeared in previous SVRX releases or is based on code from previous SVRX releases.

That happens to be true, from all I can see from the research I've done so far, and from my research, I don't find a lot of updates to UnixWare after 1995. But it's saying to my mind that SCO has very little, maybe nothing, to use from UnixWare against anyone as far as any conceivable copyright infringement accusations regarding post-1995 UnixWare is concerned. But more significantly, I view it as an indication that SCO indeed does owe Novell for the Sun and Microsoft licenses. Let me show you my reasoning.

I don't know why they would make such an admission now that the court has ruled that the UNIX and UnixWare copyrights were retained by Novell in 1995, unless SCO was working so fast it didn't think it through to the end. But I think it inevitably will come back to haunt them.

SCO characterizing the Sun and Microsoft agreements as UnixWare licenses, with only incidental SVRX aspects, is not what they told the SEC, of course. Here's what I remember them saying, in, for example, the 10 K for 2003:

SCOsource Business

Background

We acquired our rights relating to the UNIX source code and derivative works and other intellectual property rights when we purchased substantially all of the assets and operations of the server and professional services groups of The Santa Cruz Operation, Inc. in May 2001. The Santa Cruz Operation (now known as Tarantella, Inc.) had previously acquired such UNIX source code and other intellectual property rights from Novell in September 1995, which were initially developed by AT&T Bell Labs. Through this process, we acquired all UNIX source code, source code license agreements with thousands of UNIX vendors, all UNIX copyrights, all claims for violation of the above mentioned UNIX licenses and copyrights and other claims, and the control over UNIX derivative works. The UNIX licenses we obtained have led to the development of several proprietary UNIX-based operating systems, including but not limited to our own UnixWare and OpenServer products, Sun's Solaris, IBM's AIX, SGI's IRIX, Hewlett-Packard's UX, Fujitsu's ICL DRS/NX, Siemens' SINIX, Data General's DG-UX, and Sequent's DYNIX/Ptx. These operating systems are all derivatives of the original UNIX source code owned by us.

The success of our SCOsource business depends on our ability to protect our proprietary UNIX source code as well as our copyrights and other intellectual property rights.

The Linux IP licenses were described as being about UNIX, not UnixWare also:

Warning Letters to Linux End Users.

In response to our belief that parts of our UNIX source code and derivative works have been inappropriately included in the Linux operating system, in May 2003, we sent letters to approximately 1,500 large corporations notifying them that using the Linux operating system may violate our asserted intellectual property rights. Subsequently, we began contacting Linux end users about their use of Linux, and in December 2003, we began sending additional letters to selected Fortune 1000 Linux end users specifically asserting that using the Linux operating system in a commercial setting violates our rights under the United States Copyright Act, including the Digital Millennium Copyright Act, because certain copyrighted application binary interfaces, or "ABI Code," have been copied from our copyrighted UNIX code base and derivative works and contributed to Linux without proper authorization and without copyright attribution. In the letter we also warned Linux end users that we intend to take appropriate actions to protect our rights and that they may not use our copyrighted code except as authorized by us.

Linux End User Intellectual Property ("IP") License Initiative. In August 2003, we first offered to Linux end users our IP license in the United States and recently began offering the license in countries outside the United States. The license permits the use of our intellectual property, in binary form only, as contained in the Linux operating system. By purchasing the license, customers will properly compensate us for our UNIX intellectual property as currently found in Linux.

And here's the description of SCOsource in the 10K for the fiscal year ended October 31, 2005:

SCOsource Business

Background

We acquired our rights relating to the UNIX source code and derivative works and other intellectual property rights when we purchased substantially all of the assets and operations of the server and professional services groups of The Santa Cruz Operation, Inc. in May 2001. The Santa Cruz Operation had previously acquired such UNIX source code and other intellectual property rights from Novell in 1995, which technology was initially developed by AT&T Bell Labs. Through this process, we acquired all UNIX source code, source code license agreements with thousands of UNIX vendors, certain UNIX intellectual property, all claims for violation of the above mentioned UNIX licenses and copyrights and other claims, and the control over UNIX derivative works. The UNIX licenses we obtained have led to the development of several proprietary UNIX-based operating systems, including but not limited to our own UnixWare and OpenServer products, IBM’s AIX, Sequent’s DYNIX/Ptx, Sun’s Solaris, SGI’s IRIX and Hewlett-Packard’s HPUX. These operating systems are all derivatives of the original UNIX source code owned by us.

The success of our SCOsource business depends on our ability to protect and enforce our rights to proprietary UNIX source code, copyrights and other intellectual property rights. To protect our proprietary rights, we rely primarily on a combination of copyright laws, contractual rights and an aggressive legal strategy.

During the year ended October 31, 2003, we commenced our first SCOsource initiative in which we began reviewing the status of our existing UNIX license agreements with UNIX vendors and to identify those in the software industry that may be using our intellectual property without obtaining the necessary licenses. As part of this process, we became aware that parts of our proprietary UNIX source code and derivative works had been included in the Linux operating system without attribution or our authorization in violation of our intellectual property rights. We filed a complaint against IBM in March 2003 alleging that IBM breached its license agreement with us related to its efforts to promote and support the Linux operating system. In addition to our action against IBM, we have filed other complaints against Novell, AutoZone, and DaimlerChrysler. In our litigation with Novell, we seek relief for, among other things, Novell’s alleged bad faith efforts to interfere with our ownership and enforcement of our copyrights related to our UNIX source code. A related lawsuit was filed against us by Red Hat. We describe our legal actions in more detail below under Part I, Item 3 of this Form 10-K.

In August 2003, we offered to Linux and other end users a license to use our UNIX intellectual property. The SCOsource intellectual property (“IP”) license permits the use of our UNIX intellectual property, in binary form only, as contained in the Linux operating system. By purchasing the license, customers will properly compensate us for our UNIX intellectual property as currently found in Linux. The SCOsource IP license was created in response to requests to provide a licensing program for those in the industry using our UNIX intellectual property to allow them to continue to run their mission-critical business solutions running in other environments.

See the word UnixWare anywhere at all? Neither do I.

When talking about the legal efforts against IBM, SCO talked exclusively about UNIX, not Unixware:

Item 3. Legal Proceedings

IBM Corporation

On or about March 6, 2003, we filed a civil complaint against IBM in the United States District Court for the District of Utah, under the title The SCO Group, Inc. v. International Business Machines Corporation, Civil No. 2:03CV0294. In this action we claim, among other things, that IBM breached its UNIX source code licenses (both the IBM and Sequent Computer Systems, Inc. “Sequent” licenses) by disclosing restricted information concerning the UNIX source code and derivative works and related information in connection with its efforts to promote the Linux operating system. Our complaint includes, among other things, claims for breach of contract, unfair competition, tortious interference and copyright infringement. As a result of IBM’s actions, we are requesting damages in an amount to be proven at trial and seeking injunctive relief.

On or about March 6, 2003, we notified IBM that they were not in compliance with our UNIX source code license agreement and on or about June 13, 2003, we delivered to IBM a notice of termination of their UNIX source code license agreement, which underlies IBM’s AIX software. On or about August 11, 2003 we sent a similar notice terminating the Sequent source code license. IBM disputes our right to terminate those licenses. In the event our termination of those licenses is valid we believe IBM is exposed to substantial damages and injunctive relief based on its continued use and distribution of the AIX operating system. On June 9, 2003, Novell sent us a notice purporting to waive our claims against IBM regarding its license breaches. We do not believe that Novell had the right to take any such action relative to our UNIX source code rights.

In contrast, when describing the Novell litigation in the following section, SCO mentions both UNIX and UnixWare:

Novell, Inc.

On January 20, 2004, we filed suit in Utah state court against Novell, Inc. for slander of title seeking relief for its alleged bad faith effort to interfere with our ownership of copyrights related to our UNIX source code and derivative works and our UnixWare product. After removal to federal court, the case is now pending in the United States District Court for the District of Utah under the caption The SCO Group, Inc. v. Novell, Inc., Civil No. 2:04CV00139. In the lawsuit, we requested preliminary and permanent injunctive relief as well as damages. Through these claims, we seek to require Novell to assign to us all copyrights that we believe Novell has wrongfully registered, prevent Novell from representing any ownership interest in those copyrights and require Novell to retract or withdraw all representations it has made regarding its purported ownership of those copyrights and UNIX itself.

Those claims are precisely what SCO just lost in the August 10th ruling. And now that it has lost on the issue of copyrights, it would like to describe the 2003 Sun and Microsoft licenses as being about UnixWare. If they are, I suggest they'd best tell the SEC, who may be under a misapprehension or need clarification. Joke. Joke.

If you continue reading, you will note that SCO also says that it sued AutoZone and DaimlerChrysler over UNIX copyrights, not UnixWare. UnixWare to be sure is a Unix product, but it's not what IBM licensed from AT&T. As SCO describes it, it's their version of UNIX, just like AIX is IBM's.

SCO's 2006 10K talks also about what SCOsource was about, and it's the first time that I can find of a mention of UnixWare being even peripherally involved:

We developed our SCOsource business as part of our ongoing efforts to establish and protect our intellectual property rights, particularly relating to our ownership of the original UNIX source code. This business’ primary objective is to protect and defend our UNIX intellectual property rights....

SCOsource Business

Background

We acquired our rights relating to the UNIX (including UnixWare) source code and derivative works and other intellectual property rights when we purchased substantially all of the assets and operations of the server and professional services groups of The Santa Cruz Operation, Inc. in May 2001. The Santa Cruz Operation had previously acquired such UNIX source code and other intellectual property rights from Novell in 1995, which technology was initially developed by AT&T Bell Labs. Through this process, we acquired all UNIX source code, source code license agreements with thousands of UNIX vendors, certain UNIX intellectual property, all claims for violation of the above mentioned UNIX licenses and copyrights and other claims, and the control over UNIX derivative works. The UNIX licenses we obtained have led to the development of several UNIX-based operating systems, including but not limited to our own UnixWare and OpenServer products, IBM’s AIX, Sequent’s DYNIX/Ptx, Sun’s Solaris, SGI’s IRIX and Hewlett-Packard’s HP-UX. These operating systems are all derivatives of the original UNIX source code owned by us.

The success of our SCOsource business depends on our ability to protect and enforce our rights to proprietary UNIX source code, copyrights and other intellectual property rights. To protect our proprietary rights, we rely primarily on a combination of copyright laws, contractual rights and related claims.

That is the closest they ever came to even mentioning UnixWare, and it's hardly direct. SCO describes its business as being divided in two parts: "As indicated in Item 1, we have two business segments: UNIX and SCOsource." Where did Sun and Microsoft monies belong? In the SCOsource bucket:

Our profitability for the year ended October 31, 2003 resulted primarily from our SCOsource business.

And once again, it's only in connection with Novell that SCO mentions UnixWare directly:

In an effort to reinforce our ownership rights in UNIX, we brought suit against Novell on January 20, 2004 for slander of title seeking relief for, among other things, Novell's alleged bad faith efforts to interfere with our copyrights related to our UNIX source code and derivative works and our UnixWare products. We also plan to continue to pursue our litigation against IBM, and have announced that we expect in the near term to commence our first legal action against an end user violating our intellectual property and contractual rights.

Could "derivative works" mean UnixWare? Not according to the clear distinction made in the 2004 10K:

As a further response to our SCOsource initiatives and claim that our UNIX source code and derivative works have inappropriately been included in Linux, Novell has publicly asserted its belief that it owns certain copyrights in our UNIX source code, and it has filed 15 copyright applications with the United States Copyright Office related to UNIX. Novell also claims that it has a license to UNIX from us and the right to authorize its customers to use UNIX technology in their internal business operations. Specifically, Novell has also claimed to have retained rights related to legacy UNIX SVRx licenses, including the license with IBM. Novell asserts it has the right to take action on behalf of SCO in connection with such licenses, including termination and waiver rights. Novell has purported to veto our termination of the IBM, Sequent and SGI licenses. We have repeatedly asserted that we obtained the UNIX business, source code, claims and copyrights when we acquired the assets and operations of the server and professional services groups from The Santa Cruz Operation (now Tarantella, Inc.) in May 2001, which had previously acquired all such assets and rights from Novell in September 1995 pursuant to an asset purchase agreement, as amended. In January 2004, in response to Novell’s actions, we brought suit against Novell for slander of title seeking relief for Novell’s alleged bad faith effort to interfere with our copyrights and contract rights related to our UNIX source code and derivative works and our UnixWare products. Our lawsuit against Novell is also described in more detail in Item 3 of Part I of this Form 10-K.

And then, after listing the three items, (1) UNIX source code, (2) and derivative works, (3) and our UnixWare products, notice which two are connected to Linux users in SCOsource:

Notwithstanding our assertions of full ownership of UNIX-related intellectual property rights, as set forth above, including copyrights, and even if we are successful in our legal action against Novell and end users such as AutoZone and DaimlerChrysler, the efforts of Novell and the other Linux proponents described above may cause Linux end users to be less willing to purchase from us our SCOsource IP licenses authorizing their use of our intellectual property contained in the Linux operating system, which has and may continue to adversely affect our revenue from our SCOsource initiatives. These efforts of Linux proponents also may increase the negative view some participants in our marketplace have regarding our SCO Litigation and regarding our SCOsource initiatives and may contribute to creating confusion in the marketplace about the validity of our claim that the unauthorized use of our UNIX source code and derivative works in Linux infringes on our copyrights. Increased negative perception and potential confusion about our claims in our marketplace could impede our continued pursuit of our SCOsource initiatives and negatively impact our business.

And then, when discussing the future of SCOsource, notice which two of the three are mentioned in the context of the Sun and Microsoft money:

Our future SCOsource licensing revenue is uncertain.

We initiated the SCOsource licensing effort in fiscal year 2003 to review the status of UNIX licensing and sublicensing agreements. This effort resulted in the execution of two significant vendor license agreements during fiscal year 2003 and generated $25,846,000 in revenue. During fiscal year 2004, our SCOsource licensing revenue declined significantly and was only $829,000. Due to a lack of historical experience and the uncertainties related to SCOsource licensing revenue, we are unable to estimate the amount and timing of future SCOsource licensing revenue, if any. If we do receive revenue from this source, it may be sporadic and fluctuate from quarter to quarter. Our SCOsource initiatives are unlikely to produce stable, predictable revenue for the foreseeable future. Additionally, the success of these initiatives may depend on the strength of our intellectual property rights and contractual claims regarding UNIX, including the strength of our claim that unauthorized UNIX source code and derivatives are prevalent in Linux.

Now, that doesn't mean that there was no UnixWare component to the Sun and Microsoft license agreements. Given that royalties were to end on UnixWare sales in 2002, no doubt they'd try to make the agreements as much about that as possible. But, is that what SCO told the SEC? From the beginning, SCO stressed UNIX source code, not UnixWare, and mostly it never mentioned UnixWare at all in connection with SCOsource, not until it filed at the beginning of this year. Now, the licenses are supposedly all about UnixWare and only incidentally about SVRX. Well, we'll see, but it's not the impression that SCO gave me.

Of course the SCOsource story keeps changing. We're used to that. You may remember that in SCO's Answer to Novell's Counterclaims, SCO denied that the Microsoft and Sun license agreements were SCOsource licenses at all:

50. Admits that SCO, through its SCOsource division, entered into agreements related to UNIX and Unixware with Sun Microsystems, Inc., and Microsoft Corporation (in that order) and that the Microsoft agreement covered UNIX compatibility products; but denies each and every other allegation of ¶50, including the allegation that the Sun and Microsoft agreements were part of the SCOsource licensing program.

I guess that story bit the dust. But as you see they do mention UnixWare, so I wanted to be fair and point it out. The Morgan Keegan letters that came to light when SCO filed them as exhibits to its 2003 10K called both the Sun and Microsoft licenses part of the SCOsource licensing program, so that was that. In any case, in the 10-Q for the quarterly period ended April 30, 2003, SCO said this:

Our fiscal year ended October 31, 2003 was the first full year we were profitable in our operating history. Our profitability in fiscal year 2003 resulted primarily from our SCOsource licensing initiatives. . . .

We initiated the SCOsource licensing effort in fiscal year 2003 to review the status of UNIX licensing and sublicensing agreements. This effort resulted in the execution of two significant vendor license agreements during fiscal year 2003 and generated $25,846,000 in revenue. . . .

The SCOsource revenue generated in the third quarter and first three quarters of fiscal year 2003 was from two contracts executed with Sun Microsystems (“Sun”) and Microsoft Corporation (“Microsoft”).

You can find many more examples in this article I did back in 2005, describing the agreements as being part of SCOsource and describing SCOsource like this, in this example from the 2003 10Q:

During the quarter ended April 30, 2003, we recognized $8,250,000, or 39 percent of our quarterly revenue, from our intellectual property licensing initiative, SCOsource, launched in January 2003.

One of the assets we acquired from Tarantella was the intellectual property rights to UNIX. These rights had initially been developed by AT&T Bell Labs and over 30,000 licensing and sublicensing agreements have been entered into with approximately 6,000 entities. These licenses led to the development of several proprietary UNIX-based operating systems, including our own SCO UnixWare and SCO OpenServer, Sun’s Solaris, IBM’s AIX, SGI’s IRIX, HP’s UX, Fujitsu’s ICL DRS/NX, Siemens’ SINIX, Data General’s DG-UX, and Sequent’s DYNIX/Ptx. We believe these operating systems are all derivatives of the original UNIX source code owned by us.

We initiated the SCOsource effort to review the status of these licensing and sublicensing agreements and to identify others in the industry that may be currently using our intellectual property without obtaining the necessary licenses. This effort resulted in the execution of two license agreements during the April 30, 2003 quarter. The first of these licenses was with a long-time licensee of the UNIX source code which is a major participant in the UNIX industry and was a “clean-up” license to cover items that were outside the scope of the initial license. The second license was to Microsoft Corporation (“Microsoft”), and covers Microsoft’s UNIX compatibility products, subject to certain specified limitations. These license agreements will be typical of those we expect to enter into with developers, manufacturers, and distributors of operating systems in that they are non-exclusive, perpetual, royalty-free, paid up licenses to utilize the UNIX source code, including the right to sublicense that code.

The amount that we receive from any such licensee will generally depend on the license rights that the licensee previously held and the amount and level of our intellectual property the licensee desires to license. The two licensing agreements signed by us to date resulted in revenue of $8,250,000 during the April 30, 2003 quarter and provide for an aggregate of an additional $5,000,000 to be paid to us over the next three quarters. These contracts do not provide for any payments beyond 2003, except that Microsoft was granted the option to acquire expanded licensing rights, at its election, that would result in additional payments to us if exercised. In connection with the execution of the first license agreement, we granted a warrant to the licensee to purchase up to 210,000 shares of our common stock, for a period of five years, at a price of $1.83 per share. This warrant has been valued, using the Black-Scholes valuation method, at $500,000. Because the warrant was issued for no consideration, $500,000 of the license proceeds have been recorded as warrant outstanding and the license revenue reduced accordingly.

Now, I know this has been a long route to get where I'm going, but notice, as we tie this all back to footnote 1, what Judge Kimball wrote in his order:

The conversion of an SVRx customer to UnixWare will validly occur and result in the UnixWare based revenue flowing to SCO, without giving rise to a continued obligation to make payment to Seller of royalties due under the SVRx licenses, only if the following are true (note: if the customer continues to sell their SVRx based product separately, then these SVRx revenues continue to flow to Novell): .... (ii) The product is derived from a source version of UnixWare . . . and (i) none of the original SVRx code provided by Novell to the customer, under the SVRx license, is included in the new product or (ii) [Santa Cruz] shall demonstrate to [Novell]'s reasonable satisfaction that an insignificant amount of original SVRx code is so included and the adoption of UnixWare is so substantial as to constitute a valid conversion. Id. Therefore, even where a customer moves to a UnixWare product, SCO's SVRX Royalty obligations to Novell can continue unless there is no SVRX code or only an insignificant amount of SVRX code in the product. It is undisputed that some of the original SVRX code is included in the Sun and Microsoft Agreements. And, based on the arguments presented in this motion, it is also clear that SCO has not demonstrated to Novell's satisfaction that the amount of original SVRX code in these licenses is insignificant. Moreover, whether or not Novell's present satisfaction is reasonable, which could present a question of fact, the language suggests that SCO was obligated to present the information to Novell before the customer would be considered validly converted. The facts here demonstrate that Novell was not made aware of the 2003 Sun and Microsoft Agreements. Therefore, SCO never attempted to validly convert Sun or Microsoft. Under Schedule 1.2(b), then, Sun and Microsoft would not be considered validly converted.

So, the only way SCO could convert Sun or Microsoft to UnixWare, according to Judge Kimball, even if SCO had properly notified Novell, which it failed to do, would be if what was licensed included no SVRX code or only insignificant amounts. Now, read footnote 1 again:

1In fact, UnixWare is not a separate system, but rather is just the latest version of SVRX; much of the code in UnixWare previously appeared in previous SVRX releases or is based on code from previous SVRX releases.

So, for the licenses to be UnixWare and not just SVRX licenses, since SCO doesn't dispute some SVRX component, wouldn't SCO have to prove that whatever part of the license agreement that was about UnixWare was about code distinguishable from the part of UnixWare that is directly SVRX code or derivative of it? Wouldn't it have to be unique code in UnixWare? And what exactly would that be? I've been researching that, what was new after 1995 in UnixWare, and I'll tell you what I found in a separate article, but it's not much, from what I've found so far. Further, Sun has stated that it wanted things like a license to Xenix, to open source OpenSolaris. Is that post-1995 UnixWare code? Hardly. You see the pickle I think SCO is in? I think it has to show at trial that Sun and Microsoft needed something uniquely in UnixWare. What in the world might that be?

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

Brent O. Hatch (5715)
Mark F. James (5295)
HATCH, JAMES & DODGE, PC

David Boies (admitted pro hac vice)
Robert Silver (admitted pro hac vice)
Edward Normand (admitted pro hac vice)
BOIES SCHILLER & FLEXNER, LLP

Devan V. Padmanabhan (admitted pro hac vice)
DORSEY & WHITNEY LLP

Stephen N. Zack (admitted Pro Hac Vice)
BOIES SCHILLER & FLEXNER LLP

Stuart Singer (admitted pro hac vice)
BOIES SCHILLER & FLEXNER, LLP


Attorneys for Plaintiff, The SCO Group, Inc.

_________________________________________________

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF UTAH

THE SCO GROUP, INC., a Delaware corporation,
Plaintiff/Counterclaim-Defendant,
vs.

NOVELL, INC., a Delaware corporation,

Defendant/Counterclaim-Plaintiff.

SCO'S MOTION FOR
RECONSIDERATION OR
CLARIFICATION OF THE COURT'S
AUGUST 10, 2007 ORDER


Civil No. 2:04 CV-00139

Judge Dale A. Kimball
Magistrate Brooke C. Wells


Plaintiff/Counterclaim-Defendant, the SCO Group, Inc. ("SCO"), respectfully moves this court to reconsider or clarify its Memorandum Decision and Order of August 10, 2007, as explained and for the reasons set forth in SCO's Memorandum in support of this motion.

DATED this 31st day of August, 2007.

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

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

DORSEY & WHITNEY LLP
Devan V. Padmanabhan

Counsel for The SCO Group, Inc.

By: ___/s/ Edward Normand___________

2

CERTIFICATE OF SERVICE

Plaintiff/Counterclaim-Defendant, The SCO Group, Inc., hereby certifies that a true and correct copy of SCO'S MOTION FOR RECONSIDERATION OR CLARIFICATION OF THE COURT'S AUGUST 10, 2007 ORDER was served on this 31st day of August, 2007, via CM/ECF to the following:

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

Michael A. Jacobs
Matthew I. Kreeger
Kenneth W. Brakebill
David E. Melaugh

MORRISON & FOERSTER
[address]

3

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

Brent O. Hatch (5715)
Mark F. James (5295)
HATCH, JAMES & DODGE, PC

David Boies (admitted pro hac vice)
Robert Silver (admitted pro hac vice)
Edward Normand (admitted pro hac vice)
BOIES SCHILLER & FLEXNER, LLP

Devan V. Padmanabhan (admitted pro hac vice)
DORSEY & WHITNEY LLP

Stephen N. Zack (admitted Pro Hac Vice)
BOIES SCHILLER & FLEXNER LLP

Stuart Singer (admitted pro hac vice)
BOIES SCHILLER & FLEXNER, LLP


Attorneys for Plaintiff, The SCO Group, Inc.

______________________________________________________________________________

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF UTAH

THE SCO GROUP, INC., a Delaware corporation,
Plaintiff/Counterclaim-Defendant,
vs.

NOVELL, INC., a Delaware corporation,

Defendant/Counterclaim-Plaintiff.

SCO'S MEMORANDUM IN SUPPORT
OF ITS MOTION FOR
RECONSIDERATION OR
CLARIFICATION OF THE COURT'S
AUGUST 10, 2007 ORDER


Civil No. 2:04 CV-00139

Judge Dale A. Kimball
Magistrate Brooke C. Wells


Plaintiff/Counterclaim-Defendant, The SCO Group, Inc.("SCO"), respectfully submits this Memorandum in support of SCO's Motion for Reconsideration or Clarification of the Court's Order dated August 10, 2007 (the "Order").

ARGUMENT

Although SCO respectfully disagrees with a number of the factual and legal findings in the Order, considering the approaching trial date, SCO confines this Motion to a single issue that bears on the issue of SVRX Royalties due Novell. That issue is the Court's determination (at 95) that while the Asset Purchase Agreement ("APA"), as amended by Amendment No. 1, allowed SCO to enter into new or amended licenses of SVRX "incidentally involved through its rights to sell and license UnixWare Software," such incidental licensing of SVRX components constituted an "SVRX License" on which royalties were due to Novell.

On reconsideration, relief is appropriate "where the court has misapprehended the facts, a party's position, or the controlling law." Servants of the Paraclete v. Does, 204 F.3d 1005, 1012 (10th Cir. 2000).

Reconsideration of this issue is appropriate because the parties' arguments and memoranda regarding SVRX Royalties centered on whether SVRX Licenses were limited to existing licenses at the time of the APA and licenses of binary code. SCO also argued that any license to SVRX products included in the Sun and Microsoft Agreements was incidental to the core UnixWare License, and that SCO was therefore entitled to the payments from those Agreements as UnixWare Royalties. (SCO Memorandum in Opposition Opp. to Novell's Motion for Partial Summary Judgment or Preliminary Injunction and in Support of SCO's Cross-Motion for Summary Judgment or Partial Summary Judgment at 40-41.) In response, Novell

2

principally argued that "SVRX is central, and not incidental, to the Sun and Microsoft Agreements," and that Novell was therefore entitled to the payments from those Agreements as SVRX Royalties. (Novell Reply to SCO's Opp. to Novell's Motion for Partial Summary Judgment or Preliminary Injunction at 7.) Although Novell asserted that it should receive the royalties even if the licensing of SVRX was incidental, that was not the central argument. SCO nonetheless presented evidence not only that the Sun and Microsoft Agreements' licensing of SVRX was only incidental to a UnixWare license, but also that the APA should not be construed as making such incidental licenses of SVRX subject to a separate royalty to Novell, apart from whatever royalty Novell was entitled to pursuant to the UnixWare royalty provisions.

In the discussion below, SCO points to that evidence and argument. At a minimum, a triable issue exists as to whether SVRX licensing incidental to a UnixWare license constitutes a separate "SVRX License" as to which Novell is entitled to royalties. SCO further suggests that, at a minimum, it would be appropriate for the issue of whether the Microsoft and Sun Agreements license SVRX in only an incidental manner be submitted to the jury so that if SCO's position were determined to be correct, no retrial of that issue would be required.

Insofar as SCO has misapprehended the Court's ruling on this issue, this Motion should be treated as a request for clarification.

I. SCO IS ENTITLED TO ROYALTIES FROM UNIXWARE LICENSES THAT
LICENSE SVRX INCIDENTALLY.

The plain language of the APA and the evidence in the record both support the conclusion that Novell has no interest in royalties SCO receives under UnixWare Licenses, even when an incidental license to SVRX products is included therein.

3

A. The Plain Reading of the APA Grants SCO the Royalties from UnixWare
Licenses that License SVRX Incidentally.

In its Order, the Court (at 93) recognizes that the APA "makes a clear distinction between royalties from SVRX Licenses and UnixWare licenses." The APA further recognizes that SCO can include in a UnixWare License an "incidental" license of SVRX, where SVRX was routinely listed in a UnixWare License's list of licensed prior products.1(APA Section 4.16(b); Amend. No. 1 ¶ J.) The Court (at 93) found that the provision of "Section 4.16(b) regarding the incidental licensing of SVRX technology with UnixWare" was particularly relevant to Novell's claim for royalties from the Sun and Microsoft Agreements.

Section 4.16(b) of the APA, as amended by amendment No. 1, ¶ J, provides that SCO "shall have the right to enter into amendments of the SVRX Licenses (i) as may be incidentally involved through its rights to sell and license UnixWare software." That provision, as amended, also allows SCO to enter into "new SVRX Licenses" in the same situation. That provision does not indicate that the inclusion of such an incidental license to SVRX in a UnixWare License alters that license's status as a UnixWare License or changes the royalty rights of either party. Nowhere in the APA is there any statement that a license of SVRX incidental to a UnixWare License triggers not only whatever royalty obligation exists as a UnixWare License, but also a royalty as an SVRX License.2

The APA, as amended, is therefore at least "reasonably susceptible" to the interpretation

4

that the only royalty due from a UnixWare license that incidentally licensed SVRX is enumerated in Section 1.2(b) and Schedule 1.2(b), which govern the parties' royalty rights and obligations under UnixWare Licenses. Those provisions state that "no royalties shall be payable in connection with any of the UW [UnixWare] Products" unless certain specified conditions are satisfied; Novell does not dispute that it has not satisfied those conditions.

B. The APA's Failure to Specify Any Method for Calculating an Incidental SVRX
Royalty Right Demonstrates That Novell Never Received Such a Right.

The absence of any provision delineating a different royalty provision for UnixWare Licenses that license SVRX incidentally demonstrates the parties' intent to have those licenses treated like all UnixWare Licenses under the terms of Schedule 1.2(b). The APA is silent on what amount of a royalty would be paid to Novell if the only licensing of SVRX is incidental to a UnixWare License. If the APA had intended to subject that incidental piece to SVRX Royalty obligations, it would have explained how such an additional royalty was to be calculated. Being incidental to a UnixWare license, the SVRX component of such a license would not have a separate price. The absence of such a mechanism for calculating a royalty amount is proof that no separate royalty on the SVRX aspect of a UnixWare License was contemplated.3

To the extent that the Court finds that the APA is ambiguous regarding the treatment of UnixWare Licenses that include incidental licenses to SVRX products, the only permissible


5

inferences on summary judgment must be made in SCO's favor.4

C. The Extrinsic Evidence Confirms That Novell Is Not Entitled to Royalties
from UnixWare Licenses That License SVRX Incidentally.

The record also contains evidence that the parties' intent and course of performance was to treat UnixWare Licenses that licensed SVRX incidentally as subject only to the contingent interest Novell retained in UnixWare Royalties, which expired in 2002.

First, the record demonstrates that UnixWare Licenses routinely included incidental licenses to SVRX, and the SVRX components of UnixWare were listed in a manner similar to what was done in the Sun and Microsoft agreements. Before selling the UNIX and UnixWare business to SCO in 1995, for example, Novell itself included incidental licenses to SVRX in its own UnixWare Licenses. (SCO Reply (1/31/07) at 6.) Similarly, Santa Cruz included incidental licenses to SVRX in UnixWare Licenses that it entered into after it acquired the UNIX and UnixWare business from Novell in 1995. (Id)

The evidence shows that, despite that standard practice, Novell has never sought SVRX royalties from any UnixWare Licenses that licensed SVRX incidentally until this litigation. The evidence in the record also demonstrates that Novell was aware of many such licenses through audits of SCO's royalty reports. (SCO Opp. Mem. (12/12/06) ¶ 60.) Moreover, during several of these years, in which SCO publicly filed financial statements, Novell was a significant shareholder of SCO and held a board seat where it was privy to all aspects of SCO's business. Novell nevertheless failed to proffer any evidence that it had requested (or was entitled to request) SVRX royalties from UnixWare Licenses that Santa Cruz or SCO entered into since the

6

transfer of the business in 1995. Such course of performance evidence is recognized as the best evidence of the parties' intentions.5The Order does not address such evidence.

Second, the uncontroverted testimony demonstrates that the parties always treated revenues from UnixWare Licenses that included incidental licenses to SVRX as UnixWare revenues under Schedule 1.2(b) of the APA, not as SVRX Royalties.

Jean Acheson served as former Novell Contract Administrator, SCO Revenue Manager, and currently serves as SCO Director of Revenue. (Acheson Decl. (12/11/06) ¶ 2.) In those capacities, Ms. Acheson was "responsible for tracking and transmitting the royalty payments that SCO collects on behalf of Novell and that are due to Novell." (Id) Ms. Acheson testified that "the fact that a license to current technology included an incidental license to old technology in no way entitled Novell to revenue from that license," and that accordingly, Santa Cruz and SCO "never included such revenues when transmitting royalty payments to Novell, and Novell never requested them, until 2003." (Id ¶ 12.)

John Maciaszek has been involved in the UNIX business for almost two decades. (Maciaszek Decl. (12/11/06) ¶ 2.) He testified that Novell's interest in UnixWare Licenses that included an incidental license for prior SVRX products was always treated under the UnixWare Royalty provisions of Schedule 1.2(b), and that interest "expired in 2002." (Id ¶ 27.)

Bill Broderick has also been involved in the UNIX business for almost two decades, working for USL, Novell, Santa Cruz, and SCO. (Broderick Decl. (12/11/06) ¶ 2.) He similarly testified that Novell's interest in UnixWare Licenses that included an incidental license for prior


7

SVRX products was the UnixWare royalty interest that "expired in 2002" under Schedule 1.2(b). (Id ¶ 31.) This evidence is accepted as true on summary judgment.

8

CONCLUSION

SCO respectfully submits, for the reasons set forth above, that the Court should reconsider and clarify that if the jury finds that if SCO has licensed SVRX technology as incidental to a UnixWare license, that there is no separate royalty payable, or at a minimum, should leave this issue open for trial.

DATED this 31st day of August, 2007.

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

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

DORSEY & WHITNEY LLP
Devan V. Padmanabhan

Counsel for The SCO Group, Inc.

By: ___/s/ Edward Normand___________




1 In fact, UnixWare is not a separate system, but rather is just the latest version of SVRX; much of the code in UnixWare previously appeared in previous SVRX releases or is based on code from previous SVRX releases.

2 The issue is not resolved by the use of the capitalized term "SVRX License" in Amendment No. 1, as it would make sense for the agreement to use that as the identified term to designate that products may be incidentally licensed whether or not a separate royalty on such incidental licensing as intended.

3 Cf. In re Mason, 46 B.R. 119, 121-22 (Bankr. Mich. 1985) (declining to develop an apportionment formula when the parties failed to expressly delineate a formula in the underlying contract, and denying creditor's claim for purchase-money security interest in debtor's stereo because "a regard for workable guidelines in transactions of this sort suggests that in the absence of a clear contractual or statutory basis for determining the extent of a creditor's remaining purchase-money interest, the entire transaction should be declared to be nonpurchase-money").

4 See, e.g., Williams v. Tim Dahle Imports, Inc., No. 2:03CV46 DAK, 2007 WL 752170, at *1 (D. Utah Mar. 7, 2007) (Ex. A) (all inferences drawn in favor of non-moving party); McReynolds v. Wynn, No. 2:05CV122 DAK, 2006 WL 456256, at *2 (D. Utah Feb. 23, 2006) (Ex. B.) (same).

5 See, e.g., Universal Sales Corn., Ltd. v. Cal. Press Mfg. Co., 128 P.2d 665, 672 (Cal. 1942) (stating that "a practical construction placed by the parties upon the instrument is the best evidence of their intention."); accord Hernandez v. Badger Constr. Equip. Co., 28 Cal. App. 4th 1791, 1814-15 (1994).


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CERTIFICATE OF SERVICE

Plaintiff/Counterclaim-Defendant, The SCO Group, Inc., hereby certifies that a true and correct copy of SCO'S MEMORANDUM IN SUPPORT OF ITS MOTION FOR RECONSIDERATION OR CLARIFICATION OF THE COURT'S AUGUST 10, 2007 ORDER was served on this 31st day of August, 2007, via CM/ECF to the following:

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

Michael A. Jacobs
Matthew I. Kreeger
Kenneth W. Brakebill
David E. Melaugh

MORRISON & FOERSTER
[address]

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