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To read comments to this article, go here
Who Breached the APA, and When?
Sunday, October 28 2007 @ 10:03 PM EDT

In SCO's Response to Novell's motion for an order directing SCO to pay them all future royalties upon receipt, SCO made this remarkable statement:
Nowhere in the Motion does Novell state (because it cannot) that the Debtors (or their predecessors in interest) have ever failed to remit the required royalty payments in a timely fashion in the 12 years since the APA was executed.

I beg to differ. Allow me to fill in some blanks. I believe I can demonstrate that Novell can indeed demonstrate a SCO failure to timely pay required royalties, and prior to any alleged breach on its part.

I propose to trace out a full and fair account and let you be the judge, using both the SCO v. IBM and the SCO v. Novell litigation filings, including the correspondence between SCO and Novell over that precise issue. I will not address the Sun/Microsoft/SCOsource royalties, only the rest of the royalties, what the parties are now calling the undisputed royalties, as the Utah court in its August 10th ruling [PDF] already determined regarding the former that "SCO's conduct also amounts to a breach of fiduciary duty, conversion, unjust enrichment, and breach of express contract, all of which are sufficient 'wrongful conduct' to impose a constructive trust."

Imagine, therefore, my surprise to read SCO's new attorneys claim that Novell's motion should be denied because Novell has "unclean hands", having been allegedly "the first to breach" the APA. As you read the materials I have collected, you may form a different opinion.

Let's begin with the SCO-Novell correspondence, which can be viewed as text here or as the original PDFs on Novell's website.

If you scroll down to the June 24, 2003 letter to Darl McBride, you will see that Novell's general counsel, Joseph A. LaSala, Jr., brought to SCO's attention a violation of the APA's terms regarding SCOsource and the April 2003 Sun/Microsoft agreements, but keep scrolling down to July 11, 2003, when Novell sent to Robert Bench, then SCO's CFO, a demand for unpaid royalty payments and announced an audit. Why? Because, Novell wrote, it had not received any royalties or reports for six months. Emphasis added:

07/11/2003

Via Telefacsimile [number] and Overnight Mail

Robert Bench
Chief Financial Officer
The SCO Group
[address]

Re: Demand for Outstanding Royalty Reports and Payments, and Notice of Audit, under the Asset Purchase Agreement Between The Santa Cruz Operation, Inc. and Novell, Inc., September 19, 1995.

Dear Mr. Bench:

I write to address two issues relating to payments owed by SCO to Novell under the Asset Purchase Agreement, including both SVRX royalties and the royalties payable through June 30, 2003 on Royalty-Bearing Products.

First, it has been more than six months since Novell received any royalty reports or payments from SCO (we last received a royalty payment for October 2002, a royalty report for November 2002, and it appears that we have not received a royalty report or payment since). We have tried to address this issue in the ordinary course through SCO's accounts receivable staff, but we have not received either the reports or payments or an explanation for SCO's failure to provide them.

Accordingly, we demand that SCO provide immediately (and, for the future, provide on a timely basis) the royalty reports and payments required by the Asset Purchase Agreement. Please provide the reports in the format specified in Section 1.2(f) of the Asset Purchase Agreement (as amended by Amendment No. 1), including breakdowns by revenue type, product, customer, quarterly period of distribution, and (if available) country of distribution. Please also provide us with the single point of contact (to give us supplemental information that we deem appropriate) and the monthly reconciliation (of revenues and accounts receivable to cash remittances) that are required by Section 1.2(f).

Second, we notify you that we will conduct an audit of SCO concerning royalties and other payments due under the SVRX licenses and the Asset Purchase Agreement. We will begin the audit at 10:00 a.m. on August 18, 2003, although we would be pleased to begin on another day that same week if another day is more convenient for your accounting personnel. As you may be aware, Novell last conducted an audit in February 1998, covering the period ending December 31, 1997.

Accordingly, the audit will focus on royalties for the period beginning January 1, 1998 and ending June 30, 2003. Please acknowledge receipt of this letter and let us know the SCO contact person with whom we should coordinate the audit.

Please let us know if you have any questions.

Sincerely,

Mike Bready
Director, Contract Management

As you can see, SCO's current story to the bankruptcy court that SCO has always promptly paid and accounted for all royalties is simply at odds with this record. Novell said that it had not received any money since the payment for October 2002. It's by then July of 2003. Furthermore, in contradiction to SCO's current story, SCO back in 2003 admitted it had withheld payment, as you can see in this segment from Mr. Bench's letter back to Novell, dated July 17, 2003:

Attached with this letter please find SVRx royalty payments from November 2002 through and including May 31, 2003. As you know, these payments are typically made to Novell on a quarterly basis. Recent payments were withheld pending our review of Novell's recent announcements regarding Linux. We are currently evaluating the scope of Novell's Linux-related activities for compliance with the terms of the September 19, 1995 Asset Purchase Agreement and its various amendments (collectively, the "Asset Purchase Agreement").

We have provisionally determined that Novell announcements, standing alone, may not have violated the terms of the Asset Purchase Agreement for the royalty period in question. For this reason SCO management has authorized payment of the above-referenced royalty amounts. However, SCO expressly reserves and does not waive its right to withhold royalty payments for future periods if it is determined that Novell violates its obligations under the Asset Purchase Agreement with respect to any Linux-related activity.

Novell's LaSala then escalated the matter in a letter to the CEO, McBride, dated August 7, 2003, in which it protested vigorously the very idea that SCO had any right to withhold:

We are in receipt of Mr. Bench's letter to Mr. Bready concerning SCO's royalty payments to Novell and the audit to be conducted in August. Mr. Bready will be replying separately concerning certain audit and financial details.

I write with respect to the statement in Mr. Bench's letter that "recent payments were withheld pending our review of Novell's recent announcements regarding Linux." There is absolutely no basis for SCO to be withholding royalty payments to Novell on any ground whatsoever, and we categorically reject the proposition that SCO had or has a right to withhold payments based on Linux concerns.

Permit me to remind you of the structure of the Asset Purchase Agreement. Under Section 1.2(b) (Royalties), SCO agreed to "collect and pass through to [Novell] 100 percent (100%) of the SVRX Royalties." This section goes on to state that "[Novell] is retaining all rights to the SVRX Royalties notwithstanding the transfer of the SVRX Licenses to [SCO] pursuant hereto."

Moreover, Section 4.16(a) of the Asset Purchase Agreement, as amended by Amendment No. 1, requires that SCO make payment of 100% of all royalties to Novell within one calendar month of receipt. Novell then is to remit payment of SCO's administrative fee to SCO.

Finally, Section 1.2(f) (added by Amendment No. 1) requires detailed monthly reports on all royalties.

While the parties may have agreed in the past to modify the payment and report schedule, no such modification went to the structure of the Asset Purchase Agreement, pursuant to which Novell is the owner of the SVRX Royalties. Moreover, the Asset Purchase Agreement contains no provision allowing SCO to offset any claim against Novell - even assuming for purposes of argument that SCO had or has such a claim.

Novell regards SCO's withholding of payment, and perhaps even more importantly, its rationale for withholding payment, as a very serious matter, and we request your clear and unambiguous assurances that there will be no repetition of this occurrrence.

Did you notice that the payments under the agreement, Novell points out, were to be made by SCO monthly, not quarterly or after 45 days:

Section 4.16(a) of the Asset Purchase Agreement, as amended by Amendment No. 1, requires that SCO make payment of 100% of all royalties to Novell within one calendar month of receipt.

Here: look it up for yourself in Amendment 1 to the APA:

In Section 4.16, paragraph (a):
1. The second sentence ("Within 45 days ... preceding quarter") is amended to read as follows:
-- Within one (1) calendar month following each calendar month in which SVRX royalties (and royalties from Royalty-Bearing Products) are received by Buyer [except for those SVRX Royalties to be retained in their entirety by Buyer pursuant to paragraph (e) of Section 1.2 hereof] Buyer shall remit 100% of all such royalties to Seller or Seller's assignee. Buyer shall also provide to Seller, within six (6) days following the calendar month in which such royalties are received, and estimate of the total amount of such royalties. --

2. In the last sentence ("In consideration ... SVRX Royalties") the following is added at the end before the period:

-- together with a remittance sufficient to cover applicable third party payments, (if any) which are attributable to distributions giving rise to such SVRX Royalties (and royalties from Royalty-Bearing Products) and for which Buyer has assumed Seller's obligation of payment to such third party. --

SCO writes in its response:

Indeed, there is one undisputed crucial fact that Novell cannot ignore: the APA provides that payment to Novell is not due until 45 days after the close of the previous quarter. See section 4.l6(a) of the APA, page 24. Even Novell admits this fact. See Jones Affidavit at 16. Nothing in the APA permits Novell to unilaterally change or modify this payment term, and Novell has not cited a single provision in the APA that provides it with any such authority.

Well, if there had never been Amendment 1, that would be so. But there was an Amendment 1. The 45 days was in the original APA. So... what can I say? That SCO's lawyers maybe need to be a little less certain of what is an undisputed crucial fact? This is just one obvious example of why the SCO-Novell litigation needs to go back to Utah. No one in Delaware knows what happened.

Next, on August 20, LaSala wrote to McBride again, this time about another violation as Novell viewed it of the agreement:

Under Section II of the TLA, Novell retains "a non-exclusive, non-terminable, world-wide, fee-free license to" the "Licensed Technology," as that term is defined in the APA. Section 1.6 of the APA defines the term "Licensed Technology" as "all of the technology included in the Assets and . . . all derivatives of the technology included in the Assets, including the 'Eiger' product release." In turn, Section 1.1(a) of the APA defines the "Assets" as those assets and properties identified on Schedule 1.1(a), exclusing the assets identified on Schedule 1.1(b). Schedule 1.1(a) includes "all versions of UNIX and UnixWare," including Unix source code products and UnixWare binary product releases. Thus, Novell retained a license to all derivatives of all versions of UNIX and UnixWare.

It follows from the foregoing that Novell is entitled to, among other things, copies of the source and binary code for all versions of UNIX and UnixWare under SCO's control.

Novell has made several informal attempts in phone conversations between Chris Sontag and Novell's Dave Wright to obtain copies of the source and binary code for Unix and UnixWare, but to no avail. Recent phone messages Dave Wright has left with Chris Sontag have not been returned.

Since our informal requests have met with no success, Novell now formally demands that SCO promptly supply to Novell copies of the source and binary code for all versions of UNIX and UnixWare under SCO's control. Novell would prefer to receive the code via a secure ftp site given the considerable volume involved, but we are open to other delivery methods if SCO has its own preference.

SCO declined to provide same. All of this happened *before* the October 2003 date that SCO tells the Bankruptcy Court, with Jean Acheson's support, is the date Novell allegedly violated the APA "first". First by what calculation?

Here's the sleight-of-hand in the SCO Response, reiterated in the Declaration of Jean Acheson, that I think I see. Acheson relates how in October of 2003, there was allegedly a change in the way payments were made:

6. Since that time, the Debtors have repaid Novell all of the undisputed royalties on a timely basis, but Novell has failed to ever repay the Debtors the 5% administrative fees due to the Debtors under section 4.16(a) of the APA.

7. As a result of Novell's failure to remit the 5% administrative fee and the third-party royalty reimbursement, the Debtors have been required to come out of pocket to repay third-party royalties.

SCO, in its Response, then adds on the following:

In October 2003, this verbal agreement came to an end. The parties then went back to the method set forth in the APA. What Novell failed to explain in the Statement of Facts portion of the Motion was that the APA obligated Novell to repay the Debtors the 5% administrative fee within five days after Novell received the undisputed royalties from the Debtors. See section 4.16(a), p. 24. When the parties returned to the payment protocol under the APA, the Debtors remitted to Novell the undisputed Novell royalties, but Novell never once remitted to the Debtors the 5% administrative fee as it was required to do. Therefore, SCO wound up coming out of pocket to pay the third-party royalties. When there were enough undisputed royalties owed to Novell, the Debtors would offset the amounts due by Novell to the Debtors against the undisputed royalties it then paid to Novell. This method is what has been happening for the last four years.

Because Novell was the party that first breached the APA by failing to remit the 5% administrative fee within the five-day period required, Novell hardly has the right to seek equitable relief now, and certainly when the relief it seeks is not required or even permitted under the APA itself.

Amazing, no? First as in the first after October of 2003, and ignoring all that went before. And we have yet to hear Novell's side of the 5% fee payments, I hasten to add.

See how SCO counts? 1+1=3 "You Are Guilty", unless they do it, in which case it's 1+1=0 "No Harm, Because We'll Act Like It Never Happened". By picking October as the starting date from which all breaches of the APA should be measured, it claims Novell breached *first* -- leaving the court in the dark about all the pre-October events, all of which were breaches of the APA as determined by the Utah court, and which you can verify for yourself by just reading it. You'll find the APA and all the Amendments on Groklaw's Contracts page. It would be bad enough if they had said it in passing. But they actually ask the court to find that Novell has unclean hands based on SCO's higher math, shall we say.

Now, I hope SCO's lawyers just don't know any better and are simply recording what their client is telling them. But as you can already see, whatever the cause might be, the story they are spinning is misleading. At best.

How about the royalties and the audit? How did that go? On November 21, 2003, we find yet another letter to Bench from Bready, trying to get the complete information to complete the audit:

As you are aware, Novell is auditing SCO's compliance with its obligations under the Asset Purchase Agreement. Among other things, Novell's audit focuses on SCO's compliance with Section 1.2 of the APA, and its performance as Novell's agent in administering and collection SVRX license fees. We have completed significant portions of the audit, but are still lacking critical information and documentation necessary to finish the audit.

The purpose of this letter is to emphasize and repeat Novell's outstanding request for information and documentation. In addition, this letter sets forth additional requests for information and documentation we must receive before we can close the audit.

Specifically, Novell's audit team has requested certain information and documentation from SCO's representatives and has yet to receive a full response. Attached hereto is a list of specific information that Novell must receive from SCO. We appreciate your assistance in expediting SCO's response to these requests.

In addition, Novell, makes the following additional requests for information and documentation that we must receive before we can close the pending audit:

1. Amendments and Modifications to SVRX Licenses

1.1. Section 4.16(b) of the APA specifies that SCO "shall not, and shall not have the authority to, amend, modify, or waive any right under or assign any SVRX License without the prior written consent of" Novell.

1.2. Section J of Amendment No. 1 to the APA establishes certain exceptions to the prohibition on amendments by SCO, namely, those amendments (i) "as may be incidentally involved through [SCO's] rights to sell and license UnixWare software or the Merged Product," or (ii) that "allow a licensee ... to use the source code ... on additional CPU's or to receive an additional distribution, from [SCO], of such source code."

1.3. Also, Section B of Amendment No. 2 to the APA provides that "any potentional transaction with an SVRX licensee which concerns a buy-out of any such licensee's royalty obligations shall be managed as" specified in subsections 1 - 6.

1.4. With these obligations and prohibitions in mind, Novell has noted recent public statements by SCO indicating that SCO has unilaterally amended and modified SVRX Licenses with Sun Microsystems and Microsoft. These public statements also indicate that SCO may have agreed to a buy-out of Sun and Microsoft's royalty obligations under their SVRX Licenses.

1.5. Novell requests copies of the Sun and Microsoft amendments to verify SCO's compliance with Section 4.16(b) of the APA and Section B of Amendment No. 2. In addition, Novell, requests copies of any similar agreements SCO has entered into, or assurances that SCO has not entered into any similar agreements. Finally, Novell requests that SCO identify any potential buy-out transactions it has become aware of, or that SCO assure Novell that no such potential buy-outs have come to its attention.

1.6. If SCO contends that either the exceptions (i) and (ii) under Section J of Amendment No. 1 has been triggered, Novell requests a detailed explanation of SCO's position.

2. New SVRX Licenses

2.1. Section J of Amendment No.1 prohibits SCO from entering "into new SVRX Licenses" except "as may be incidentally involved through [SCO's] rights to sell and license UnixWare software or the Merged Product."

2.2. With this prohibition in mind, Novell has noted SCO's recent introduction of its "SCO Intellectual Property License for Linux," in which SCO attempts to enter into new SVRX Licenses with Linux end users.

2.3. Novell requests copies of all SCO Intellectual Property Licenses for Linux, and any other agreements connected with attempts by SCO to enter into new SVRX Licenses, so Novell can verify SCO's compliance with Section J of Amendment No. 1. If SCO contents that exception (i) under Section J of Amendment No. 1 has been triggered, Novell requests a detailed explanation of SCO's position.

3. SVRX to UnixWare Conversions

3.1. Novell requests that SCO identify and provide documentation for any allegedly valid conversions from SVRX to UnixWare under Section (f) of Schedule 1.2(b) of the APA. For any such allegedly valid conversion SCO identifies, Novell requests that SCO explain in detail how the alleged conversion complies with the requirements of Section (f) of Schedule 1.2(b). If SCO contends that any of the exceptions (i), (ii), (iii), and (iv) under Section E of Amendment No. 1 have been triggered, Novell requests a detailed explanation of SCO's position.

We anticipate and look forward to your prompt assistance with and response to these requests.

Sincerely,

Mike Bready
Director, Contract Management

Enclosure

Then in December, Bready asked Bench again, on the 29th, for the complete information:

On November 21st, 2003, Novell requested additional information and documentation necessary to complete the aforementioned audit. Novell has not received a response to these requests.

The purpose of this letter is to repeat Novell's request stated in the letter you received November 21st, 2003 and ask SCO to return a full response no later than January 12th, 2004.

How can SCO claim it timely filed, when it hadn't fully reported? As some commenters have put it, they paid 100 percent of "We Won't Tell You". Kimball, in his August 10 ruling, said he assumed that Novell must have all the information needed by August of 2007, because he assumed SCO must have turned it over in discovery, and that is why he didn't order an accounting:

To prove a constructive trust cause of action, Novell must demonstrate the "existence of a res (some property or some interest in property), the plaintiff's right to that res, and the defendant's gain of the res by fraud, accident, mistake, undue influence or other wrongful conduct." Pegg, 782 F.2d at 1500.

In this case, the res is the SVRX Royalties, to which Novell retains "all right, title, and interest." This res is traceable to the monies received from the Sun and Microsoft Agreements. SCO's conduct also amounts to a breach of fiduciary duty, conversion, unjust enrichment, and breach of express contract, all of which are sufficient "wrongful conduct" to impose a constructive trust.

In GHK Assoc. v. Mayer Group Inc., the trial court imposed a constructive trust based on breach of obligations flowing from a contract. 224 Cal. App. 3d 856, 878 (1990). The appellate court explicitly recognized the lower court's power to grant equitable relief in the form of a constructive trust and held that the imposition of the constructive trust was proper to ensure the owner received its damages. Id. Like the defendants in GHK, SCO breached its fiduciary obligations by failing to remit the SVRX Royalties it collected from the SVRX License portions of the 2003 Sun and Microsoft Agreements. Although the court finds that Novell meets the requirements for the imposition of a constructive trust, the question of fact as to the SVRX portion of the 2003 Sun and Microsoft Agreements precludes the court from imposing a trust for the appropriate amount. Furthermore, despite Novell's fears regarding its ability to collect its royalties, the appropriate amount of SVRX Royalties can be determined at trial. Because of the question of fact, the court denies both Novell's and SCO's motions for summary judgment on Novell's Sixth Claim for Relief for constructive trust.

Novell also seeks the equitable remedy of accounting under its Ninth Claim for Relief. The APA obligates SCO to give detailed monthly reports and to comply with audits. APA 1.2(b), (f). To the extent that SCO has failed to comply with these requirements with respect to the 2003 Sun and Microsoft Agreements, the court notes that it has a continuing duty to fulfill its contractual obligations. Novell also has continuing rights under the APA to conduct audits as to SVRX Royalties.

The court assumes that, through discovery in this action, Novell has actually obtained the information it needs to demonstrate its damages with respect to the SVRX Royalties it is due under the 2003 Sun and Microsoft Agreements. The imposition of an accounting usually arises where "the facts are peculiarly within the knowledge of one of the parties." Van de Kamp, 204 Cal. App. 3d 819, 864 (1988). In this case, Novell acknowledges that it received copies of the 2003 Sun and Microsoft Agreement during discovery. It is also apparent that Novell has received relevant financial records and documentation from SCO because it is aware of how SCO accounted for the payments under the 2003 Sun and Microsoft Agreements. Because Novell has the information that it would otherwise obtain through an accounting, the court denies Novell's Ninth Claim for Relief for an accounting.

However, in point of fact, Novell had not received all that information, and for that matter it had not received all the royalties, and it still has not. Why not? Let's take a look.

Going back to December of last year, SCO filed on December 12, 2006, with the District Court a Memorandum of Law in Opposition 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, the redacted version [PDF] of which is available to us. In that filing (which we need someone to OCR, by the way), SCO set forth its excuses for *not* paying all the royalties that the court later agreed with Novell were and are due:

The Asset Purchase Agreement ("APA") and Amendments thereto, considered as a whole, obligated Santa Cruz to remit to Novell only the binary royalties that were being paid and that would continue to be paid under the existing SVRX licenses, which Novell conveyed to Santa Cruz as part of its sale of the entire UNIX business.

That's all SCO paid, even when they did pay. They elaborate on their theory that SVRX Royalties meant only binary royalties on page 9 of that document, which is page 18 of the PDF, and the next page details its view that UnixWare royalties were excluded. The District Court disagreed and said that's not all that was due. And since SCO hasn't yet complied, from all I've heard, that would mean it hasn't complied to date. That's what the Utah trial is supposed to determine -- the only ambiguous part of the APA, namely how much is due.

On page 18 of the document, page 29 of the PDF, we find Ms. Acheson being quoted:

45. Jean Acheson, who administered the royalties paid to Novell pursuant to Section 1.2(b) of the APA, states:
My understanding from the company meetings and from the course of performance of the parties, in which I participated, was that Santa Cruz acquired the entire ongoing UNIX business from Novell, and only owed Novell binary royalties on the SVRX licenses that were in existence at the closing of the APA. In other words, the only part of SCO's ongoing business in which Novell retained an interest was the binary royalties from SVRX product licenses that existed at the time of the APA.

Obviously, the judge in Utah most definitely did not agree. You know who I'd want to talk to if I were the trustee? The employees in SCO's Finance Department who suddenly quit or were fired when SCO filed for bankruptcy. Just imagining for a minute -- not saying this is the case, but just as a what-if -- what if it were to happen that a company decided to perpetrate a fraud, say, oh, let's say a stock scam. They end up in bankruptcy, after certain employees tell untrue stories under oath in court testimony. What if at the point of bankruptcy, other employees who are honest refuse to go along with the story? No? Couldn't ever happen? Perhaps not. I'll leave that to you. But I just think that in such a hypothetical situation, their testimony might be quite helpful as to just what was going on in that imaginary company.

Back to real life, in paragraph 61 we find again that what SCO says it paid to Novell was only binary royalties, which it claimed was in compliance with the APA but which the court later ruled was not. And in Part II [PDF] of the document, on page 38, page 9 of the PDF, SCO begins its argument that it didn't need to pay Novell source code right to use fees under existing SVRX Licensees from the licensing of additional CPUs or from the distribution by buyers of additional source code copies, and a couple of pages later, it goes into why it didn't owe Novell anything for UnixWare licenses. In short, they didn't pay Novell what Novell claimed was due, or on time, and the court found in Novell's favor on the matter, and now SCO is telling the Bankruptcy Court that it always paid timely? That Novell has unclean hands because it was the first to breach? So now you know why my eyes bugged out when I read that.

Oh, and by the way, you might like to know about this paragraph in SCO's memorandum, in Part I, on page 12, considering its argument is apparently going to be the same in bankruptcy court, namely that all the Sun/Microsoft monies are long gone and that therefore Novell has no res over which to impose a constructive trust, a theory that the judge did not accept:

Second, there are no grounds on which the Court could impose the equitable relief that Novell seeks. The monies that SCO received under the Sun and Microsoft Agreements were spent long before Novell brought this Motion. Under the controlling law, Novell thus cannot show the existence of the "res" that is a precondition for imposition of a constructive trust. SCO therefore is entitled to summary judgment on that basis.

You'll find more of SCO's theory that the Sun/Microsoft money is long gone and therefore unretrievable via a trust beginning on page 52 onward of Part II (page 28 of the PDF), just so you know that the argument was played and sank like a stone in Utah already. The court did not agree with SCO's theory. I just thought it might be useful for the bankruptcy court and SCO's new lawyers to know. How could it not fail? If SCO were right, then it would be a workaround to conversion to just spend the money fast, so that the victim has no remedy. That doesn't pass the snort test.

One last thing. In Part II, on page 58, page 29 of the PDF, SCO makes an admission that ought to be of interest to the US Trustee:

The preliminary injuction Novell seeks would likely preclude SCO from sustaining its operations. The very premise of Novell's request is that the Court impose a constructive trust on SCO's remaining cash reserves.

REDACTED

In contrast, Novell does not (because it cannot) even claim that, absent the injunction, Novell's business would be threatened in the least. Novell argues only an immediate desire for money, asserting without explanation that absent an injunction it "will permanently lose" the requested royalties, but that is plainly untrue. If there ever were a bankruptcy, the estate would pursue SCO's valuable legal claims; and if there ever were a net judgment in Novell's favor, Novell would be a creditor to be compensated. Accordingly, the balance of harships weights heavily in SCO's favor.

The court nevertheless did find that Novell was entitled to a constructive trust, and SCO is so far trying very hard to avoid "pursuing its valuable legal claims" in Utah. For more details on SCO's financial prospects, you may find Appendix A [PDF] helpful. It includes the quotation from SCO's SEC filing, "If we do not prevail in our action against IBM, or if IBM is successful in its counterclaims against us, our business and results of operations would be materially harmed and we may not be able to continue in business." That's on page 22. The August 10th ruling pretty much means that SCO has no claims left; the only things left on the table are IBM's counterclaims.

As for unclean hands, SCO already tried that too, in an abortive fashion. If you read Novell's Trial Brief [PDF] in the Utah litigation, you find Novell responding and ending like this:

In any event, Novell has always acted with good faith toward SCO (see, e.g., Order at 65), and the cases actually granting such a defense make clear that no conduct by Novell rises to the level of unclean hands.

The Order, at page 65, reads like this:

SCO's breach of contract claim alleges that Novell "breached the covenant of good faith and fair dealing under the APA and TLA" by "numerous acts of bad faith," including "making false and misleading statements denying SCO's ownership of the copyrights in UNIX and UnixWare." Sec. Am. Compl. 99. SCO has cited to no California case holding that the implied duty of good faith and fair dealing prohibits a party to a contract from making statements related to its understanding of the rights that are conferred or not conferred by the contract.

A breach of the implied covenant requires "objectively unreasonable conduct, regardless of the actor's motive." Carma Developers Inc. v. Marathon Dev. Cal., Inc., 2 Cal. 4th 342, 374 (1992). A comment to Section 205 of the Restatement Second of Contracts states that the implied covenants are violated "by dishonest conduct such as conjuring up a pretended dispute, asserting an interpretation contrary to one's own understanding, or falsification of facts." Id. comment e.

Even if this court had ruled in SCO's favor on the copyright ownership issue, there is no evidence to demonstrate that Novell's position was contrary to its own understanding of the contractual language or objectively unreasonable given the history of the dispute between the parties.

I certainly hope this goes back to Utah, where at least everyone has a clue what has happened so far. I'm having to work too hard correcting Delaware filings.


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