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Transcript of the April 30 SJ Motions in Novell v. SCO - Yay! - as PDF & text
Tuesday, May 20 2008 @ 04:33 AM EDT

We finally have permission from the court to share the transcript of the hearing on the summary judgment motions [PDF] heard on April 30th, on the second day of the Novell-SCO trial in Utah, with you. Yay!

I'm so grateful to Chris Brown for following through and obtaining it for us, and to those who donated to make it possible, and to the court for its gracious permission.

I enjoyed reading this transcript more than any of the other trial transcripts. If you only have time to read one transcript, this is the one, since it sums up the two sides' positions. Morrison & Foerster's Michael Jacobs is, as usual, able to make complexity seem simple and easy to grasp, and Boies Schiller's Stuart Singer, given an impossible position to argue, does so. I'd love to see what he could do with the facts and the law on his side. To say that Sun got nothing new in the 2003 agreement that it didn't have in 1994 is, of course, hard to argue without blushing, when the latter agreement gave Sun the right to open source Solaris.

On the second motion, it's Ted Normand for SCO, and it is he who presents SCO's complex arguments regarding Novell, fiduciary relationships, ratification, and who gets the money. Or, more accurately, he argues why Novell shouldn't get it. If you look at it as an incredibly creative legal argument, which it is, you will understand why, when Jacobs stands up, he says this:

MR. JACOBS: I have to confess, Your Honor, this is in a case that has had lots of interesting issues, this is one of the more -- more interesting ones because of this issue. And we have had a lot of law school exam questions in this case and this is another one of those. But I think here is the problem with SCO's argument.

He means that Boies Schiller raised arguments many law firms might not have. And the case itself presents a lot of tricky issues. That's what he means by law school exam questions -- that you don't see this every day and to figure out the answers, you have to think deeply after doing significant legal research. For sure, SCO can never complain about the level of its representation. It's just the truthiness thing that sinks its ship over and over, in my view.

I've already shared with you my reactions to the transcript, and provided a link to the filings on both motions argued at this hearing, so now I'll just happily share with you the transcript:

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

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF UTAH, CENTRAL DIVISION

________________________________

THE SCO GROUP, INC., a Delaware
corporation,

Plaintiff and Counterclaim-
Defendant,

vs.

NOVELL, INC., a Delaware
corporation,

Defendant and Counterclaim-
Plaintiff.

Case No. 2:04-CV-139 dak

________________________________

BEFORE THE HONORABLE DALE A. KIMBALL

DATE: APRIL 30, 2008

Motion for Summary Judgment

Laura W. Robinson, CSR, RPR, CP
[address, phone]

1

Appearances of Counsel:

FOR NOVELL: Michael A. Jacobs
Attorney at Law
MORRISON & FOERSTER LLP
[address]
FOR SCO: Edward J. Normand
Stuart Singer
Attorneys at Law
[address]

2

Salt Lake City, Utah, April 30, 2008

* * * * *

THE COURT: We're here this afternoon to argue Novell's motion for summary judgment on its fourth claim for relief and SCO's motion for judgment on the pleadings on Novell's claim for money or claims for declaratory relief, correct?

MR. NORMAND: Correct.

THE COURT: And we're here in SCO Group, Inc. versus Novell, Inc., 2:04-CV-139 and I see all of the usual suspects here and present. Which one should we do first?

MR. SINGER: We don't have a particular preference.

MR. JACOBS: Nor do we, Your Honor.

THE COURT: Well, on my list, Novell's motion on the fourth claim for relief is first. How long do you need for this one, do you think?

MR. JACOBS: Five minutes, Your Honor.

THE COURT: Five minutes?

MR. JACOBS: Yes.

THE COURT: And how long do you need, Mr. Singer?

MR. SINGER: I was going to say 10, but I'll see if I can keep it down.

THE COURT: I'm so heartened by that, I'm afraid to ask how much time you need on the second motion?

MR. JACOBS: Five minutes, Your Honor.

3

THE COURT: Okay. Go ahead.

MR. JACOBS: Thank you, Your Honor. Of course, this in some sense, this motion has been overtaken by events we're trying many of the underlying issues before Your Honor, and we're also sort of in a fashion, unusual perhaps to a legal dispute in which lawyers are principal witnesses or arguing the motion through the witnesses to some degree. Nonetheless, it is worth stating our view that the question of whether SCO had the authority under these agreements is a question of law that there are no genuine disputed, no genuinely disputed facts, no material disputed facts. I think that is probably easiest to show with respect to the Sun agreement. The agreement on its face purports to amend the agreement. There is a question of law about the meaning of amendment number two. The language is clear. It is any agreement concerning a buy out. It doesn't say any agreement representing a buy out or some narrower language. I suspect as a matter of the history that language came from Santa Cruz at the time which wanted broad language but the language is what the language is. And the Sun agreement, the agreement, purports to amend an SVRX agreement. There is no dispute that the agreement is an SVRX agreement particularly in the wake of Your Honor's summary judgment ruling. So that really is the -- on the Sun agreement we do

4

think that is a question of law. And the Microsoft agreement, as a matter of law, we think that the agreement on its fashion purports to grant substantial brand new SVRX rights. Those are -- it is therefore an SVRX license. They had no authority to enter into that SVRX license. We're hearing a lot of testimony around the significance of SVRX rights. As a matter of undisputed fact, SCO is out in the marketplace saying legacy UNIX code has substantial value. And it was in the wake of that activity that that agreement was entered into.

So, again, as a matter of law, we think that agreement that they had no authority to enter into that agreement. Thank you very much.

THE COURT: Thank you, Mr. Jacobs. Mr. Singer, I assume you have a different view?

MR. SINGER: Well, we do, Your Honor. And as we have customarily done, we have put together a few argument slides, although fewer than usual if I might approach.

THE COURT: Yes, thank you sure.

MR. SINGER: I think as an opening proposition we agree with what Mr. Jacobs said about events overtaking the motion. I think it is hard to see a rationale for summary judgment being a vehicle to decide this issue now that we're in the middle of trial and the same issues are going to be fully tried by the time, what within the next hours we

5

hope. We look at the first slide here. Four issues which we think leads to why the motion should be summarily denied. The first is a genuine fact dispute over whether the Sun and Microsoft agreement, SVRX component, is incidental to the licensing of UNIX ware. If it is incidental, then we have the authority to enter into it. The issue of whether it is incidental we don't think can be resolved as an issue of law. You don't just count up the number of releases of a prior product and say well that must mean it is substantial.

For example, we have evidence in this case showing a prior pattern and practice of licensing those earlier versions incidental to the current version. That itself is grounds to deny summary judgment as well as the question of what is the value of those earlier products. If you have new equipment, you need newer products to run on, there certainly has been no showing on summary judgment or really no showing in the plaintiffs case that there has been any commercial value to those older products.

Now with respect to intellectual property rights, when we're talking about giving someone a license, it is the license that gives them those rights. And the UNIX ware license gave them all the rights they needed because they included rights to everything that was in that UNIX ware product. So on the first point, we think there is a genuine

6

factual issue.

The second point only relates to the Sun agreement. Because obviously there is no issue about the Microsoft agreement being a buy out. There is nothing to buy.

Mr. Jacobs says that you only have to concern a buy out and this clearly concerned a buy out and so it triggered that provision of the APA that required Sun's approval. And while Mr. Jacobs accurately states the language in the APA, I think there are two reasons why it doesn't lead to the conclusion he suggests. The first is that concerning a buy out means more, we submit, than simply that in the whereas clauses in the agreement it says it amends and restates that 1994 agreement which was a buy out. We think it is important that nothing here changed that buy out. They got paid 82 and a half million dollars for buying out all of these binary royalties in 1994. Nothing in 2003 amended that. So nothing concerned it. We don't think that the plain language of that agreement means that when you already have a buy out years before, and you come up with a new agreement that doesn't change the terms of that, that that is something that we had to go back to Novell. But there is a second reason why their argument is, we believe, doesn't lead to the conclusion they suggest and that if we could, turn to -- it is slide number seven.

7

THE COURT: Seven?

MR. SINGER: Seven.

THE COURT: Okay.

MR. SINGER: And which is also on the screen. And that is the language of amendment two which is the amendment that deals with the buy out issue. It says specifically in paragraph B(5) that Novell may not prevent SCO from exercising its rights with respect to SVRX source code in accordance with this agreement. So even if that amendment number two was triggered by it being an agreement that concerns a buy out, all the elements of our amendment involving source code are not things that Novell had a right to prevent us from doing by the very language of amendment number two.

So we think even if amendment number two applied, overwhelming the Sun agreement deals with source code rights and therefore all aspects -- all those aspects of the agreement are authorized. So to the extent they have an argument here, it only applies to non source code issues in the Sun agreement and I don't even think they have identified any of those.

Now if we go back then to the four issues that are implicated in this -- that deals with the first two. The third involves SCO's source licenses. Turn to tab eight in the --

8

THE COURT: Tab eight?

MR. SINGER: Tab eight. And I'll be very brief on this. There is no -- first of all, summary judgment determination by this court in your prior order regarding SCO source licenses being SVRX licenses at all, that was never raised, never dealt with in the August 2007 order. There is ample evidence in this record, and also in the summary judgment record, that SCO was concerned with technology that was in open server at UNIX ware being improperly used at Linyx. It is not just a concern with the historical Unix System V code although that was certainly part of the concern but as well as things that in the more recent UNIX library and open server. But I think the most important fact here is the third point. That SCO had the right to release its own claims. Because these SCO source licenses are essentially releases and licenses of SCO's intellectual property rights. If Novell's argument is right here, that because of their ownership of certain copyrights we didn't have much to release to these third parties who bought these licenses as we thought, it just meant that those third parties didn't get as much. But it doesn't change the SCO source license into a license of Novell's intellectual property. There is nothing on the face of the agreement that does it. And unless it did that, there is no issue here about it being an SVRX license within the meaning

9

of that agreement or something that required Novell's approval.

These aren't people who are being given source code licenses or going off and doing things with this. This was a release from litigation claims, essentially. If it is a smaller release than we thought, that may be an issue between SCO and that licensee about what they paid for. It is not an issue that relates to Novell.

The final point, the fourth issue, also relates to the SCO source licenses and that is our estoppel argument. And we think that is inherently factual. And you're hearing some of those facts in this trial. That Novell was aware from late 2002 and early 2003 that SCO intended to launch a licensing program for the intellectual property of UNIX that was in Linyx. And they said they wouldn't help us. They never said don't do it, they never said we don't have the rights to do it, they never said if you do it you're going to owe us the money. And so there is at least a factual issue on that estoppel defense that precludes summary judgment. Thank you, Your Honor.

THE COURT: Thank you, Mr. Singer. Any reply, Mr. Jacobs?

MR. JACOBS: Briefly, Your Honor. The only thing worth focusing on, because I don't think the briefing really paid a lot of attention to this, is the B(5) provision in

10

amendment number two. The language is under the category of heading B which is relating to buy outs. In addition, Novell may not prevent SCO from exercising its rights with respect to SVRX source code in accordance with the agreement. The only way to read that is as a reminder that SCO has some rights in accordance with the agreement and SCO can't and Novell can't prevent SCO from using those rights. It doesn't expand anything. It doesn't contract anything. It is language that is sort of inherently circular and adds nothing or detracts nothing from the overall asset purchase agreement or from amendment number two. Thank you, Your Honor.

THE COURT: Thank you. Thank you both. We'll now move to SCO's motion for judgment on the pleadings on Novell's claim for money or their claim for declaratory relief.

Mr. Normand, how much time do you need on this matter?

MR. NORMAND: I don't want to be a drag on the ticket, but I probably need 20 minutes, Your Honor.

THE COURT: All right.

MR. NORMAND: May I approach, Your Honor?

THE COURT: Yes.

MR. NORMAND: Your Honor, we think there are five questions before the court on this motion. Now, this is a motion for judgment on the pleadings, of course, so this

11

pertains to Novell's own allegations, Novell's own version of the facts. Arguments out of Novell's mouth. Your Honor will appreciate, given that we're in the middle of trial, there are aspects of these allegations that we disagree with. But the question here is under Novell's own version of the facts, did they have a claim? We don't think they do.

The first question was SCO Novell's agent? Second question was SCO authorized to execute the agreements at issue? Third question, if SCO was not authorized to execute the agreements, as SCO's principal has Novell ratified them? Here we get in to the principal agent law in terms of our ratification. Four, if SCO was not authorized to execute the agreements, and Novell has not ratified them, do the counter parties to the agreement get back the money they paid under principals of restitution? And the fifth question, where SCO was not authorized to execute the agreements, Novell has not ratified them, and the counter parties do get back the money they paid, does Novell have any claim to hold the money in the interim?

Question one, Your Honor, was SCO Novell's agent? Under Novell's version of the facts, we were. Novell makes the specific allegation and we acknowledge that the court concluded in its August 2997 order that SCO was and is Novell's quote agent for SVRX licenses. I don't think this

12

is a controversial point.

Question two, was SCO authorized to execute the agreements? Again, under Novell's version of the facts, clearly not. Novell alleges in its pleadings that SCO lacked the authority to execute the agreements. Novell has moved for summary judgment on the grounds that SCO lacked the authority to execute the agreements. And Novell is arguing at trial, of course, that SCO lacked the authority to execute the agreements.

So far so good. Question three, if SCO was not authorized to execute the agreements as SCO's principal, has Novell ratified? No. Novell does not allege in its pleadings that it has ratified the agreements. In support of its pending motion for summary judgment, Novell emphasizes that it has rejected the agreements at every step. And when we explained a few months ago in opposition to that motion that we were confused as to that position, they explained that our view that they had implicitly approved the agreement that was wrong. They said that nothing could be further from the truth.

Now, Novell also wrote letters to Sun and Microsoft in September 2007, those came in today as exhibits, those were produced yesterday morning. I don't know why they were produced six months after they were sent. I don't know why they were produced two months after we brought our motion.

13

And I don't know why they were produced the morning of trial. Um, but they don't help Novell. One quote, we'll go through some more in both letters, we believe that the agreement is unenforceable, void or invalid. And, of course, you heard Mr. Jones from Novell say today repeatedly if he had known about the Sun and Microsoft and SCO source agreements, if Novell had known about them, they would not have approved them. Clearly, under its own version of the facts, Novell has not ratified these agreements.

Question four, SCO was not authorized to execute the agreements and Novell has not ratified them, do the counter parties get back the money they paid under the agreements? Again, this is Novell's version of the facts. Under the law, they do. They get restitution. As to any void or invalid contract, taking a step back from principal agent law, for a second, as to any void or invalid contract, the counter party who made payments under the contract is entitled to restitution of them. As to a principal in particular, if the principal disclaims the agents acts as unauthorized, he has no grounds to retain the fruits thereof. That is from the Tenth Circuit. That is the Maryland Casualty case. And we put in another quote because we like it so much, one court says it is repugnant in every sense of justice and fair dealing that a principal shall avail himself of the benefits of the agent's act and at the

14

same time repudiate his authority. And in these letters that were produced yesterday, Novell acknowledges the likelihood of restitution telling Microsoft and Sun if we recover money from SCO on account of the agreement, we intend to hold it for remittance to Microsoft or Sun or a determination that no such remittance is necessary.

So I think it is clear that the answer to question four is yes, these counter parties have restitution rights. So we come to question five where SCO was not authorized to execute the agreements, Novell has not ratified them, and the counter parties get back the money, does Novell somehow have a claim to hold the money in the interim. Hold being the word that Novell actually used in the Sun Microsoft letters. The answer to that question under the law is no.

The most recent authority, from the restated third and reflects as well the restated second agency, makes clear that quote, "as between the principal and the agent," that is a phrase Novell itself used in opposing our motion, "as between the principal and agent, if the principal declines to ratify the agent is not even under a duty to account to the principal."

Can you pull up section 402 and blow up that highlighted part. This is from the restatement third of agency. This is from 2006. Ratification has an immediate effect on legal relations between the principal and agent.

15

Ratification recasts those legal relations as they would have been had the agent acted with actual authority. Legal consequences thus relate back to the time the agent acted. Once the principal has ratified the agent's act, the agent is subject to a fiduciary duty to account to the principal as if the agent had acted with actual authority. And then the next paragraph, legal relations as between agent and principal, are affected by whether the agent has acted with actual authority. So ratification clearly bears on this relationship.

If we pull up Section 401, this is also from the restatement third of agency. "When a person ratifies another's act, the legal consequence is that the person's legal relations are affected as they would have been had the actor been an agent acting with actual authority at the time of the act." Again, ratification is keen.

One more here on Section 408. If you would pull that up. We show, Your Honor, this language as a sort of a fortiori argument. Novell's argument has been somehow the court should assess as between Novell and SCO who has a better claim, who would it be more just to allow it to hold onto the money. That is not what the law says. The law actually says if you're not even an agent, let alone whether you lack the authority, if you were just purporting to be an agent, it is still the case that the principal can't get the

16

money if he doesn't ratify. If he was not an agent when he acted, the subsequent ratification by the principal subjects him to the liability of a fiduciary with respect to the transaction. Thus, if he made a profit or received property, the ratification subjects him to a duty to the principal as to what he has received.

Why don't we go back to the slides, slide six. The well-established authority, Your Honor, also makes clear that the third-party, the counter party, is entitled to restitution from either the principal or agent. There is no suggestion in the law that the third-party has to wait until the money goes to the principal and then seek restitution on the principal.

Let's pull up Section 47, and blow that up, just the highlighted part. I won't belabor these, Your Honor. And sometimes A's, B's and C's are hard to follow but I think these are pretty straightforward. These are illustrations from the restatement of restitution. A shows B a telegram from C. A is a principal and the owner of Black Acre by an erroneous interpretation of the legal effect of the telegram, both parties believe that it authorizes A to sell Black Acre. B pays A for Black Acre. B is entitled to restitution from A unless C ratifies or A before learning of the mistake pays C the money. And number two, the same facts as illustrated in one, except that B now sends the

17

money to C. B is entitled restitution from C unless C ratifies.

The point of these illustrations, Your Honor, to get a chance to stick with them for a minute, is there is no suggestion in here that the third-party has to wait for the principal to get the money. That the third-party has to wait for the principal to resolve its dispute with the agent and then it has a right to restitution. There is no suggestion of that. Whoever has the money, if the principal was entitled to get it, the third-party gets restitution from the agent. So Novell is wrong about that area of law, I submit.

And finally, Your Honor, to go back to slide six. We point out that the Tenth Circuit has long observed that faced with the question of ratification, quote, the principal is impelled on the horns of a dilemma. I think Novell suggested in its opposition brief that we're trying to put them in some uncomfortable or incongruent situation that they're not. They are in the same situation as any principal. You have to choose whether to ratify, and if you have chosen not to, which Novell has chose not to, legal consequences follow.

Two more slides, Your Honor, to try to bring this home. We read the court's August 2007 order as leaving open for determination in this trial as to whether we owe Novell

18

money. And, you know, our position is that any SVRX component in these agreements at issue has de minimis value. So our position is that liability on SCO's part to Novell has not been established as such. We suspect Novell takes a different view. If they do, we respectfully submit that reconsideration of at least part of the August 2007 order is appropriate. Now why would that be? I can understand Your Honor's reluctance to hear motions for reconsideration so many months later, but we think we have good grounds. We would be happy to set them forth in more detail, but in summary, first, the authority we have gone through reflects it would be a manifest injustice in one of the standards for reconsideration for Novell to recover any money while it disclaims SCO's authority. Remember the quote that we like so much, "repugnant in every sense of justice and fair dealing."

And second, Novell's production yesterday of the September 2007 letters is crucial new evidence. I think that would have been very relevant for the court to know if at the time of the summary judgment ruling it had been made clear that Novell had rejected these agreements and at the same time was acknowledging the possibility of remittance. Or, as we go to the next slide, the -- actually let me finish that thought, the possibility that Novell reserves the right to keep the money. They have told Sun and

19

Microsoft there may be grounds for remittance, but if we get money from SCO we may keep it. Well, they can't keep it under any theory of law. We don't think they can get it from us but they certainly can't keep it if at the same time they are claiming authority. This would have been relevant information to know if at the time of summary judgment they were taking these positions and therefore we submit that reconsideration might be appropriate.

Final point, Your Honor, and we have made this point in our trial brief so I won't belabor it. Under the APA amendment number one, SCO is entitled to retain 100 percent of quote, "source code right to use fees attributable to USVRX licenses as approved by the seller," that is Novell, "pursuant to Section 4.16(b) hereof." If Novell now reverses course and chooses to ratify the agreements, and the court were to allow it, SCO keeps a substantial portion of the alleged SVRX royalties that Novell seeks under these agreements.

Now why would that be? We know Novell didn't give its approval, we never sought it. Why would section 4.16(b) in this language of amendment number one be satisfied? Two reasons. One, the literal effect of ratification as we saw in the earlier authority makes Novell's approval relate back to the time of the execution of the agreement. It would be as if they had approved the agreements. If they have

20

approved them, as Novell has argued up and down for the first two days, the agreement's at issue involve significant source code right to use fees. Monies paid for the rights to use source code.

And second, Your Honor, we do detail this in our trial brief, Novell might argue that it can't be that we get this money under any theory because they didn't give approval at the time. Well to preclude us from attaining these fees because we failed to get their approval at the time would create penalty provision. There has to be some relationship between how much money we would be forfeiting, to use the word Mr. Jones used today, how much money we would be forfeiting, and whether at the time of the agreement, whether at the time of amendment number one, Novell actually thought it could be harmed in any where approaching that amount, the amount that we would be forfeiting. There has to be a relationship between those things.

In Novell's view, SCO could forfeit millions of dollars when Novell has not even alleged in its pleadings that our failure to get approval has harmed Novell. They are presenting no evidence at trial that they have been harmed. They are not even pursuing a claim for breach of contract. So in short there would be incongruity between the size of SCO's forfeiture on the one hand and on the other hand that prospect that Novell could have been harmed

21

by our failure to get their approval before the execution of the agreements.

So for all these reasons, Your Honor, under Novell's own version of the facts, we don't think they have a claim to hold onto this money. Thank you.

THE COURT: Thank you, Mr. Normand. Mr. Jacobs?

MR. JACOBS: I have to confess, Your Honor, this is in a case that has had lots of interesting issues, this is one of the more -- more interesting ones because of this issue. And we have had a lot of law school exam questions in this case and this is another one of those. But I think here is the problem with SCO's argument.

Number one, the third parties aren't here. In the cases that SCO is advancing in the sections of restatement that SCO is talking about, we're talking about three way disputes. We should not be ourselves penalized for proceeding step wise to determine -- to be absolutely sure that SCO didn't have the authority to enter into these agreements before we go off and create our own imbroglio in the computer industry by filing lawsuits and creating uncertainty about whether code is infringing or isn't infringing.

So the fact that we have decided to proceed, if you will, between SCO and Novell first, means that our situation is different from the situations that SCO is citing in the

22

case law. In the case law it is true that the third-party could proceed against SCO or could proceed against Novell for the restitution. That isn't our case. We don't have Sun and Microsoft or any of the other licensees here seeking restitution from SCO and Novell.

In the third-party case, it is also true that if we retain the benefits of the agreement, if we retain those benefits, they may then claim if we have a subsequent follow on dispute with them look Novell you retained the benefits you can't now disclaim the agreement. But that again is a third-party argument. That is an argument that Sun or Microsoft or the SCO source licensees might make but again only if we retain the benefit of that. The purpose of these letters was to two parties who are not in this proceeding. We don't think -- SCO doesn't stand in their shoes and argue their case for them about why the agreement is or is not void or is or is not ratified. Those are arguments for Sun, Microsoft for the third-party licensee to make.

Here is an analogy that makes this point clear. I have a business. I have an employee. The employee goes off, signs an agreement, collects money and keeps the money. And meanwhile, we're the employer, we look at that agreement we go that is not an agreement that the employee could -- could permissibly have entered into. We think that it is not valid. In the meantime, does the employee get to hold

23

the money? That can't be right. One reason it isn't right one reason it is right is that the employer and the employer employee situation there is no question about the agency status of the employee. The employee is an agent. So we're not disclaiming -- the employer in that case is not disclaiming the agency as such and that is true here as well. There is no question that SCO is Novell's agent. We're not disclaiming the agency relationship. And there is no question that SVRX, in its broadest sense, is the scope of that agency.

We are claiming, we are alleging that they lacked the authority as our agents to enter into those agreements. So that is -- that is why these cases about disclaiming the agency are irrelevant. And that is why the employer/employee hypothetical, I think, is the right one to think about when considering whether SCO gets to hold the money.

There is another reason SCO doesn't get to hold the money which makes this case different from the cases that SCO cited. We have this complex agreement that defines the nature of the relationship and defines SCO's duties to Novell. Those duties include the duty to account. They include the duty to remit. They include the duty to make the -- to have, as the court has found, a fiduciary relationship with Novell as to the SVRX revenues. The

24

manifest injustice would be if SCO gets to keep the money under those circumstances. And again our case here is not analogous to the cases that SCO has cited.

In fact, Your Honor, I don't -- I cannot claim to have perused every one of the dozens of cases that SCO cited throughout its brief. But if SCO had a case that answered their question, the last question that they posed on all fours with ours, I'm sure they would have cited it. That question is what happens in the interim? In this case does SCO get to hold the money having breached their fiduciary duties, having failed to account, having converted, having been unjustly enriched, as the court has found, or is the right answer here for the principal to hold the money and for the principal to work this out with the third parties, Sun, Microsoft and the SCO source licensees.

There is nothing inconsistent with the position we have taken in the case or in our letter to Sun and Microsoft with that proposition. It is the right thing to happen here. Novell is ultimately going to have to work out with Sun and with Microsoft and the SCO source licensees exactly what happened here and exactly what should follow as a consequence.

There are a couple of other minor points. I'm exceeding five minutes, I apologize. They anticipated our arguments. It cannot be that what happens as a result of

25

the follow-on negotiation dispute, whatever, with Sun, Microsoft and the SCO source licensees necessarily amounts to a ratification that necessarily relates back and constitutes approval dating back to of what SCO did here. There is far too much water under the bridge for that to be the legal effect of the outcome when Novell and the third parties sit down and figure out what to do about that.

There are all sorts of intermediate scenarios between Novell saying at the end of all of this oh yeah those agreements are fine, no problem. And by the way, whatever we said about SCO breaching, whatever we said about their breach of our fiduciary duties, whatever the court's findings that they breached, oh, this is all retroactive, a ratification back to 2003. SCO has no -- cites no case that is on all fours with that scenario and the idea that this is an unenforceable penalty, this is not a contract case, this is an unjust enrichment case. This is a conversion case. SCO has no cases in which a defendant who has been found liable for unjust enrichment and now we're figuring out exactly how much should be awarded, gets to say well that is a penalty that is an unlawful penalty. There are no penalty cases that deal with the situation we're dealing with here.

So I started out by saying that this is an interesting issue, but our case is unusual and our case doesn't fit with SCO's cases. The most -- the basic failure of SCO's legal

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argument is they have no case that deals with the situation between a principal and an agent as between the two of them when the third-parties are not present and the court is not actually called upon to declare, with the third-party present, whether the agreements are void or not.

Last point. We believe, as we say in our letters, that the agreements are void or invalid or not enforceable or whatever. That is our belief. But we'll find that out. But when an authoritative decision-maker like a court decides that question. And until that question is finally decided, this is the statement of our position and a statement of our belief but it is not -- but the legal effect of voiding of the agreement has not yet occurred. Thank you very much.

THE COURT: Thank you, Mr. Jacobs. Mr. Normand?

MR. NORMAND: Thank you, Your Honor. Five quick points, Your Honor, to mirror the five points I started with.

First, Novell cites no cases that support its theory that it gets to hold this money. If you look at Novell's brief there are no cases that use counsel's phrase are on all fours.

Second, the law has long made clear, including the Tenth Circuit, that when a principal learns of what the agent has done, the principal is on the horns of a dilemma.

27

Novell suggests that it gets to go to court, have a resolution of the issues that will bear in this decision and then make the decision. That is not the horns of a dilemma.

Three, the law says that in this sort of situation principal has to quote promptly make a decision. If there was any ambiguity as to whether a principal got to go to court, that language clarifies it. We cited a lot of that law in our brief. The principal has to make its decision promptly.

Now, what happens when the principal makes its decision? The question is whether the principal wants to use a phrase, fall into the principal agent box or not. That is the horns of the dilemma. Do I want to ratify this transaction? Do I want to regard it as one that is within my relationship with the agent? Do I want to go into the principal agent box or not? It could be a hard decision, but you have to make it. Novell has made the decision. It did not ratify the agreements.

Fourth, the question on this motion is not whether SCO gets to keep the money. The question is whether Novell is entitled to the money. This is what I alluded to earlier in my argument, Your Honor. It is not a court of equity where we're assessing relative rights. We have got allegations of principal agent relationship and the question on Novell's claims and therefore on our motion is Novell affirmatively

28

entitled this money. The law says it is not.

Fifth, do we have any authority that is on all fours? We do. Can we pull up Section 402. The key phrase that Mr. Jacobs keeps using and suggesting that we don't have any direct authority bearing on it is as between the principal and agent. We all agree we're in a trial as between the alleged principal and agent. We saw this law earlier. Ratification retests those legal relations as they would have been had the agent acted with actual authority. Legal consequences thus relate back. Bottom Your Honor, legal relations as between agent and principal are affected by whether the agent has acted with actual authority. How are they affected? They're affected because if you ratify, you're in the principal agent box. It is at that point once the principal has ratified the agent's act, once the principal has ratified the agent's act, the agent is subject to a fiduciary duty to account to the principal.

Finally, Your Honor, to use Mr. Jacobs example, and to bring it home as to the claims at issue, if that employer wanted to go to court and seek money, he would have to have ratified. Novell has not done that. They have done the opposite. And our motion for judgment on the pleadings even bending over backwards to draw all inferences in favor of Novell, the court cannot infer the opposite of what Novell has alleged and we cited that law as well. Thank you, Your

29

Honor.

THE COURT: Thank you. I'll take the motions under advisement. Let me just ask you a couple of questions generally. There was a suggestion, and it might have been in Novell's briefing, that you were defending on among other things estoppel and unclean hands, but I didn't see any unclean hands in the briefing, in your briefing.

MR. SINGER: We are not pursuing that aspect of the defense.

THE COURT: Estoppel yes?

MR. SINGER: Estoppel with respect we are.

THE COURT: And then in Novell's briefing, there was some reference toward the end of your trial brief about a constructive trust. But that didn't come out -- that was not released from the stay, that is part of the bankruptcy, right?

MR. JACOBS: That is exactly right, Your Honor. What we told the bankruptcy judge was that because that affects the bankruptcy estate, we would seek a judgment here as to the amount. We have a finding that we're entitled to a constructive trust but because it is a preference, arguably a preference related impact on the bankruptcy estate, that quantification would occur in the bankruptcy court.

THE COURT: All right. Do you have anything you want to say about that?

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MR. SINGER: We agree with Your Honor that the issue of constructive trust is not before this court because of the ruling of the U.S. Bankruptcy Court.

THE COURT: And I assume that the time we have spent here this afternoon does not count against the hours; is that correct?

MR. JACOBS: That is correct, Your Honor.

MR. SINGER: Although I think that we are making pretty good progress.

THE COURT: Let me raise one potential problem and a solution if it is a problem. I agreed several months ago to help make a presentation to the Federal Bar Association Criminal Law Seminar on Friday which I thought started at 3:00 when I made the agreement. They tell me now it starts at 2:00.

Now, it is just up just a block away so that isn't a problem. But if we need to, we can start at eight on Friday and still get in our five hours if we need them on Friday and be done at 1:30 instead of 2:00. Is that --

MR. JACOBS: Absolutely, Your Honor.

MR. SINGER: That is certainly fine with us. And we may -- we'll probably know by the end of the day tomorrow.

THE COURT: By the end of the day tomorrow, you'll know how much time you need Friday. But if you need the whole five, we'll start at eight if that is okay.

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MR. JACOBS: Great.

THE COURT: All right. Thank you. We'll be in recess.

MR. JACOBS: Thank you, Your Honor.

MR. SINGER: Thank you.

(Whereupon, the hearing concluded at 3:59 p.m.)

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STATE OF UTAH )

)ss

COUNTY OF SALT LAKE )

I, Laura W. Robinson, Certified Shorthand Reporter, Registered Professional Reporter and Notary Public within and for the County of Salt Lake, State of Utah, do hereby certify:

That the foregoing proceedings were taken before me at the time and place set forth herein and were taken down by me in shorthand and thereafter transcribed into typewriting under my direction and supervision;

That the foregoing pages contain a true and correct transcription of my said shorthand notes so taken.

In witness whereof I have subscribed my name and affixed my seal this 7th day of May, 2008.

________________________________
Laura W. Robinson, CSR, RPR, CP

and Notary Public

MY COMMISSION EXPIRES:

December 1, 2008

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