Judge Kimball rules in SCO v. Novell! Here it is [PDF] at last! I haven't read it yet myself, just quickly skimmed it enough to see that SCO owes Novell some money ($2,547,817 plus interest probably -- SCO can oppose -- from the Sun agreement) and it had no right to enter into the Sun agreement, but it did have the right to enter into the Microsoft and other SCOsource agreements. Requests for attorneys fees are separate, and that part comes next. Then appeals. I know you want to see it immediately, so let's read it together, and after it's clear, I'll come back and explain some more.
OK. I've read it now once through, and the big picture is this: Judge Kimball did not change anything in his August 10th order, which I was afraid might happen. He could have, had he heard anything that he didn't know when he made that order. So, SCO breached its fiduciary duty to Novell, converted funds, and so it has to pay. That is ironic, in that this case started with SCO accusing Novell of slander of title, and asking for millions in damages. Instead it has to *pay* Novell millions.
However, Judge Kimball accepted SCO's argument that UnixWare is the latest version of UNIX and that it was the foundation of all the other agreements, even though SYSV was also involved, or so SCO thought. He accepted SCO's argument that if SCO was wrong about owning the copyrights, and it was, then it's too bad for the licensees -- they just got less than they thought they were paying for, and that is a matter for them to work through with SCO. So if EV1, for example, wanted its money back, or part of it, it would have to sue SCO.
I think this is an appealable issue for Novell, but I don't know if they will bother. This was all about money, this trial, and very narrowly about whether SCO owed Novell anything from the Sun and Microsoft and SCOsource licenses. The rest was decided already on August 10th. And SCO doesn't have much money left, if any, so I would guess that if SCO appeals, Novell will raise issues it certainly can in this new order. And it's a bit hard to fit SCOsource into the APA, since it was just a strange and vague bird. But if SCO doesn't -- and to my mind the order seems designed to discourage it, since if they do appeal, they risk being found liable for even more money than now ordered -- Novell then has to figure out if it is worth it.
That decision, I'd say, would depend on an analysis of what's at stake if SCO begins suing Linux for UnixWare or OpenServer or whatever nonsense they can dream up next.
SCO won one other legal point, having to do with who had the burden of proof.
Here's a bit of that finding:
SCO's argument, however, fails to acknowledge that its fiduciary responsibilities under the APA were based on accurately accounting for such third-party transactions and SCO was in an advantageous position with respect to accounting for its third- party transactions.
SCO is correct, however, that the APA contemplated that SCO would enter into agreements that commingle an SVRX License when it is incidental to a UnixWare license. In such situations, however, the APA appears to still require SCO to account for those licenses and demonstrate that the SVRX portion is only incidental. In those instances, SCO has advantageous information as to whether the SVRX license is incidental. Because Novell was not in a position to make such determinations, SCO had a duty to properly fulfill its fiduciary accounting obligations under the APA.
The court has already found that SCO breached its fiduciary duty in not properly reporting SVRX revenues under the APA. Because of such breach, the court concludes that SCO has the burden of differentiating royalties properly retained by SCO from SVRX Royalties that SCO improperly retained. SCO has the burden of demonstrating the proper allocation of SVRX Royalties.
The court recognizes, however, that additional issues are asserted in this trial that were
not raised or a part of the prior summary judgment motions or the court's summary judgment order. The court concludes that the issue of whether SCOsource licenses were SVRX Licenses under the APA is an issue on which Novell retains the burden of proof. It is not an issue that involves a breach of a fiduciary duty and SCO is not in an advantageous position with respect to facts weighing on that determination. If those licenses are determined to be SVRX Licenses under the APA, then SCO has the burden of establishing the proper allocation of SVRX Royalties under such licenses because it is a part of its fiduciary duty. Similarly, Novell retains the burden of proof on the issue of whether SCO had the authority under the APA, as amended, to enter into additional or amended SVRX licenses. Again, this declaratory judgment issue is not one in which SCO would have obtained any kind of advantageous position.
Having decided that Novell had the burden of proving that SCOsource licenses were SVRX Licenses under the APA, it made it easy to find for SCO that they were not. Again, this is an appealable issue, if Novell wants to bother. I hope they do, actually, so that SCO doesn't crank up the litigation machine again. But SCO seems determined to do so, no matter what happens here, so in that sense, it hardly matters.
Let's just say that Judge Kimball, having decided the matter of burden of proof, then believed more of SCO's testimony than I did. But the judge has to rule based on what is said at trial; it was Novell's job to prove the testimony not true. And with this judge, that didn't really happen, because Novell had made a strategic decision regarding its argument on burden of proof, and that is what we'll see them argue to the appellate division, if there is an appeal.
I'm not personally unduly worried about UnixWare or OpenServer, having researched the code updates, so it is hard to get worked up about the future and SCO. And Judge Kimball accepts the position of Novell that there is no SCO assertion of infringed UnixWare code in the IBM case. SCO would have to invent a new defendant, I guess, and it foreshadows the real The End to the IBM case.
And it's confirmed now that SCO did not behave properly, and it converted funds due to Novell:
SCO's failure to pass through to Novell the SVRX Royalties due under the Sun Agreement was a wrongful act inconsistent with Novell's rights. The Court concludes that Novell has established SCO's conversion of the revenues due under the 2003 Sun Agreement.
3) Unjust Enrichment
SCO was unjustly enriched by retention of the revenue under the Sun Agreement and Novell is entitled to restitution.
That part of things has to go back to bankruptcy court, though, which so far has bent over backwards for SCO. I'm guessing SCO is very relieved. It certainly could have been much worse from a financial perspective. Of course, they still have to face IBM, and Novell can now ask for attorneys fees and interest, so it's likely to get worse, too.
Update: SCO has the following statement, reported by Grace Leong in the Daily Herald in Utah:
In an e-mailed statement today, SCO described the ruling as "an important step in (its) ability to pursue the appeals to try to get all of (its) claims heard by a jury as soon as possible. We are pleased, however, that the court agreed that Novell is not entitled to anywhere near the more than $20 million dollars it was seeking."
"Importantly, the court ruled that Novell has no right to any royalties from UnixWare or OpenServer sales by SCO, which is where the bulk of SCO's revenue is earned," SCO said in the statement. "This is also an important step forward in the capitalization and reorganization plan for SCO that will allow us to emerge from Chapter 11. We continue to disagree with the premise of this trial and believe that Novell is not owed anything, but that they have interfered with SCO's UNIX rights."
The company is reviewing the ruling by Judge Kimball with its attorneys and will be assessing the next steps over the coming days and weeks.
Remember I told you that I thought the appeal, if there is one, would be about getting a jury trial instead of a bench trial? This confirms it. So, if SCO appeals, I think Novell certainly will too. No statement from Novell yet, though, so we'll have to wait and see.
IN THE UNITED STATES DISTRICT COURT FOR THE
DISTRICT OF UTAH
THE SCO GROUP, INC.,
THE SCO GROUP, INC.,
FINDINGS OF FACT, CONCLUSIONS OF LAW, AND
Case No. 2:04CV139DAK
The parties tried this matter to the court on April 29 and 30,
and May 1 and 2, 2008. Plaintiff and Counterdefendant The SCO Group
Inc. was represented by Stuart Singer, Edward Norman, Jason
Cyrulnik, Mauricio Gonzales, and Brent O. Hatch. Defendant and
Counterclaimant Novell, Inc. was represented by Michael Jacobs,
Eric Acker, and David Melaugh. Having heard the testimony of
witnesses, reviewed the evidence, considered the arguments of
counsel at trial, and considered prior submissions of the parties
as well as
undisputed facts as set forth in the Court's August 10, 2007
Summary Judgment Order (Docket No. 377, "Order"), the Court enters
the following Findings of Fact, Conclusions of Law, and Order.
This action began as a slander of title action against Novell.
Novell, however, asserted counterclaims against SCO for slander of
title, breach of contract, and unjust enrichment. The parties then
both amended their pleadings to assert additional claims and
On August 10, 2007, the court issued a Memorandum Decision and
Order on several summary judgment motions. The court dismissed
SCO's slander of title claim, concluding that SVRX copyrights did
not transfer to Santa Cruz, SCO's predecessor, under the 1995 Asset
Purchase Agreement between Novell and Santa Cruz.1 The court further ruled
that (1) Novell retained rights to royalties under the SVRX
Licenses, whether or not the SVRX Licenses were in existence at the
time of the APA; (2) SCO's 2003 agreements with Microsoft and Sun
contained SVRX Licenses because they license SVRX at least in part;
(3) SCO was Novell's agent and fiduciary for purposes of collection
of SVRX Royalties; (4) SCO breached its fiduciary duties to Novell
by failing to account for and remit the appropriate SVRX Royalty
payments to Novell for
the SVRX portions of the 2003 Sun and Microsoft Agreements; (5)
SCO was liable for conversion of such SVRX Royalty payments; and
(6) under the APA, an "incidental" SVRX license is considered an
The court, however, did not determine the value of the SVRX
Licenses contained in the 2003 Sun or Microsoft agreements on
summary judgment. Rather, the court determined that there were
issues of fact with respect to the SVRX Royalties to be paid to
Novell under the Sun and Microsoft Agreements. The court set for
trial the issue of apportionment of value in the Sun and Microsoft
Agreements between the SVRX components and the other components of
The court's prior summary judgment order did not address other
SCOsource license agreements that SCO entered into with Linux
end-users. Therefore, the court was presented at trial with the
issue of whether the other SCOsource license agreements were SVRX
Licenses and, if so, what portion of the license fee should be
attributed to those SVRX Licenses as SVRX Royalties.
In addition, the court set for trial the question of whether SCO
was authorized to execute the SVRX Licenses in the Sun and
Microsoft Agreements under a provision of the APA permitting SCO to
amend or execute new SVRX Licenses "incidentally" with the
licensing of UnixWare. Novell's motion for partial summary judgment
was based on this issue, and the court heard argument on that
motion on the second day of trial.
Accordingly, the bench trial addressed the following issues: (1)
whether the additional SCOsource licenses were SVRX Licenses
triggering SCO's fiduciary duty to account for and
remit the appropriate SVRX Royalties to Novell; (2) the
appropriate apportionment of SVRX Royalties from the SCOsource
licenses; (3) the amount by which SCO was unjustly enriched as a
result of SCO's retention of SVRX Royalties; (4) whether SCO had
the authority to enter into the SCOsource licenses, including the
Sun and Microsoft Agreements, under the APA; and (5) whether SCO
had the authority under the APA to amend Sun's existing 1994
Buy-out Agreement with Novell.
Prior to the bench trial, the parties briefed Novell's partial
motion for summary judgment on its fourth claim for relief and
SCO's motion for judgment on the pleadings on Novell's claims for
money or claim for declaratory relief. Because these motions were
not heard until trial, the court will address these motions in its
conclusions of law.
FINDINGS OF FACT
A. The Governing Contracts Between Novell and SCO
SCO's predecessor, Santa Cruz, and Novell entered into an Asset
Purchase Agreement ("APA") dated September 19, 1995. On December 6,
1995, a few months after the APA was signed and the date the
transaction closed, Novell and Santa Cruz signed Amendment No. 1 to
the APA. Approximately one year after the APA was signed, on
October 16, 1996, Novell and Santa Cruz executed Amendment No. 2 to
B. SCO's Duties Under the APA
When Santa Cruz and Novell negotiated the APA, Santa Cruz did
not have sufficient resources to purchase the entirety of Novell's
UNIX business. To bridge the gap, the parties agreed, under section
1.2(b) of the APA, that Novell would continue to receive one
percent of the SVRX Royalties. Santa Cruz was to collect and
pass through these royalties to Novell, and Novell, in turn, would
pay Santa Cruz an administrative fee of five percent of the SVRX
Section 1.2(b) of the APA states that SVRX Royalties are
"defined and described in Section 4.16." Section 4.16(a) of the APA
provides that Santa Cruz was to "administer the collection of all
royalties, fees and other amounts due under all SVRX Licenses (as
listed in detail under Item VI of Schedule 1.1.(a) hereof and
referred to as 'SVRX Royalties')." Item VI of Schedule 1.1(a), in
turn, refers to "[a]ll contracts relating to SVRX Licenses listed
below." Instead of providing a list of license agreements with
other parties, however, Schedule 1.1(a) provides a list of Unix
System V software releases up to and including Unix System V
Release No. 4.2MP.
Novell retained "all rights to the SVRX Royalties
notwithstanding the transfer of the SVRX Licenses to [Santa Cruz]."
The APA further specifies that Santa Cruz "only has legal title and
not equitable interest in such royalties within the meaning of
Section 541(d) of the Bankruptcy Code." As this court has
previously determined, the APA created an agency relationship
between the parties with respect to SVRX Royalties.
Section 4.16(b) of the APA provides that Santa Cruz "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. Under this section, Novell retained the sole
discretion to direct Santa Cruz to amend, supplement, modify,
waive, or add rights under or to any SVRX Licenses. Novell's rights
and SCO's obligations under section 4.16(b), as amended, apply to
Amendment No. 1 to the APA modifies section 4.16(b) to create
two exceptions whereby Santa Cruz has "the right to enter into
amendments of the SVRX Licenses." Santa Cruz can enter into
amendments of SVRX Licenses (1) as may be incidentally involved
through its rights to sell and license SCO UnixWare software or the
Merged Product or (2) to allow a licensee under a particular SVRX
License to use the source code of the relevant SVRX products on
additional CPUs or to receive additional distribution from Santa
Cruz of such source code. Amendment No. 1 further provides that
Santa Cruz can enter into new SVRX Licenses only as may be
incidentally involved through its rights to sell and license SCO
Amendment No. 2 to the APA included an additional amendment to
Section 4.16(b). Under Section B of Amendment No. 2, Novell and
Santa Cruz agreed to a procedure that would govern "any potential
transaction with an SVRX licensee which concerns a buy-out of any
such licensee's royalty obligations." The parties agreed to provide
written notification to each other upon becoming aware of any
potential transaction concerning a buy-out, to both attend any
meetings or negotiations with the licensee unless agreed otherwise,
to jointly consent to any written proposals to be presented to
licensees, and to meet to discuss any potential buy-out
transaction. The parties further agreed that a transaction
concerning a buy-out should not occur without the prior written
consent of both Novell and Santa Cruz.
Under the Amended APA, SCO is entitled to keep "source code
right to use fees" under existing SVRX Licenses from the licensing
of additional CPUs and from the distribution by SCO of additional
source code copies. Under the Amended APA, SCO is also entitled to
code right to use fees attributable to new SVRX Licenses
approved by Novell. The court's prior August 10, 2007 Order
acknowledged SCO's right to keep 100% of the source code right to
use fees identified in Section 1.2(e) of the amended APA.
SCO has the right to enter into amendments of an SVRX License
and new SVRX Licenses "as may be incidentally involved through its
rights to sell and license UnixWare software." The word
incidentally is not defined in either the APA or its Amendments.
Several witnesses, however, testified that the word incorporates
the practice whereby the owner of Unix or UnixWare technology
granted rights to the System V prior products.
C. UNIX and UnixWare
UnixWare is the brand name for the more recent releases of the
UNIX System V, Release 4 operating system developed and licensed in
the early 1990s by Novell and its predecessors to the technology.
The product was called UnixWare because it was to be a combination
of the latest releases of System V source code and some components
of Novell's NetWare source code. The first releases of UnixWare
contain all or virtually all of the technology included in the
immediately prior System V releases, SVR4.2 and SVR4.2MP.
Novell sold the UnixWare business to Santa Cruz in the 1995 APA
between Novell and Santa Cruz. The core members of Novell's UNIX
licensing group became employees of Santa Cruz. After the APA,
Santa Cruz and then SCO developed and licensed SCO UnixWare. Under
the 2001 transfer of assets from Santa Cruz to SCO, the core
members of Santa Cruz's UNIX licensing group became SCO
SCO released several subsequent releases of UnixWare, including
multiple versions of
each UnixWare 2 and UnixWare 7, which are the latest
implementation of System V and the latest generation of UNIX SVR
4.2 with SVR 4.2MP. All of the releases of UnixWare subsequent to
Novell's transfer of the business are releases of System V.
Witnesses testified that the commercially valuable technology from
the prior versions is included in UnixWare, and UnixWare would not
operate without its System V components. The current version of
UnixWare supports the newest industry-standard hardware.
For the most part, older versions of UNIX are not marketable to
consumers because those earlier versions do not take advantage of
hardware enhancements to new processors and peripherals adopted by
computer manufacturers. As a practical matter, purchasers would not
have the option to purchase the hardware on which the older
versions of UNIX had run because computer manufacturers have
adopted the newer hardware.
D. Royalties from UnixWare Licenses
With respect to the payment of royalties to Novell, the APA
distinguishes between SVRX Licenses and UnixWare licenses. The
APA's requirements for the payment of SVRX Royalties has been
discussed above. Section 1.2(b) of the APA specifies the
circumstances in which any royalties would be paid to Novell for
Santa Cruz's distribution of UnixWare products:
(b)(i) Royalties on UnixWare, Eiger, MXU and
(a) No royalties shall be payable in connection with
any of the UW Products until Buyer shall have shipped or licensed,
in any year, 40% of the units contemplated by the Plan for such
(b) Buyer shall pay royalties equal to $30.00 net per unit in
connection with each and every net unit of
UW Products shipped or licensed by Buyer over an above
40% and less than 70% of the total units contemplated by the Plan
for such year;
. . . .
(c) Buyer shall pay royalties equal to $60.00 per net unit in
connection with each and every net unit of UW Products shipped or
licensed by Buyer over and above 70% of the total units
contemplated by the Plan for such year.
(c) Termination of Royalty Obligation. The royalty obligations set
forth in subsection [b] above will terminate (i) after Buyer shall
have made an aggregate cumulative payments to Seller equal to such
amount which has a total net present value of $84,000,000
(determined as of the Closing) or (ii) December 31, 2002, whichever
The parties agree that the requirements for subsection (b)(i) to
apply were never met. Pursuant to these terms, any royalty
obligation that Santa Cruz could have had to Novell with respect to
UnixWare products terminated on December 31, 2002.
Novell acknowledges that it is not entitled to royalties from
any UnixWare licenses. For example, at trial, Novell did not seek
any payments with respect to the stand-alone UnixWare license in
Section 3 of the Microsoft Agreement.
Novell did not ask or suggest to Santa Cruz that it should remit
any portion of the fees or royalties that Santa Cruz received under
any UnixWare license even where System V prior products were listed
as part of those licenses. Novell never asked or suggested to Santa
Cruz that it should undertake to allocate to the System V prior
products any value of the fees or royalties that Santa Cruz
received under any UnixWare license granting rights to such older
versions of System V.
In 1998, Novell conducted an audit of Santa Cruz to ensure that
Santa Cruz was remitting to Novell all of the royalties to which
Novell was entitled under the APA. Novell knew at that time that
SCO was licensing UnixWare with System V prior products listed,
just as Novell had done, because that practice was discussed and
agreed upon as part of implementing Santa Cruz's licensing
procedures at the time of the asset transfer. In the 1998 audit,
Novell did not ask Santa Cruz to produce any information regarding
the fees and royalties that Santa Cruz received under its UnixWare
licensing business. In the 1998 audit, Novell did not ask or
suggest to Santa Cruz that it should undertake to allocate to the
older versions of System V any value of the fees and royalties that
Santa Cruz received under any UnixWare license granting rights to
such older versions.
Santa Cruz did not believe that it was under any obligations to
remit to Novell any portion of the fees or royalties from any
UnixWare licenses because the thresholds for such payments under
Schedule 1.2 of the APA had not been satisfied and, after 2002, the
term under which the thresholds applied had expired. SCO did not
remit to Novell any of the royalties that SCO received from any of
the UnixWare licenses that Santa Cruz had acquired from Novell in
1995 or into which Santa Cruz or SCO entered after 1995, whether or
not those licenses included a list of System V prior products.
Novell conducted another audit of SCO in 2003. Novell never
asked or suggested to SCO that it should undertake to allocate to
the older versions of System V any value of the fees or royalties
that Santa Cruz received under any UnixWare license granting rights
to such older versions.
OpenServer is the brand name for the release of UNIX System V,
Release 3 that Santa Cruz developed in the 1980s. Novell never
owned, or had any license to, Openserver. OpenServer was Santa
Cruz's flagship product through the 1990s. OpenServer produces two-
thirds of SCO's UNIX revenue and has thousands of customers,
including small to mid-sized businesses and large corporations,
such as McDonald's.
F. Licensing Practices
UNIX licensees often distributed and used binary products that
included code from multiple releases of System V. Novell and its
successors required and allowed such licensees to pay only one set
of royalties for the use or distribution of such a product. To
identify the proper license under which such a product could be
used or distributed and to calculate the appropriate royalty
payments required for using or distributing such a product, Novell
and its successors employed the "one line of code" rule.
Under the "one line of code" rule, Novell and then SCO
determined whether there was as little as one line of code from the
latest release of System V (including UnixWare) contained in a
binary product and then calculated royalty payments for the entire
product under that latest license. Novell and then SCO prohibited
licensees from parsing out the relative amounts of code from
different releases of System V and paying portions of the requisite
royalties under multiple System V licenses.
For example, licensees who distributed a UNIX binary product
that contained code from SVR3.0, SVR4.0, and SVR4.2 did not pay any
SVR 3.0 or SVR4.0 royalties for distributing that
product, but instead paid only SVR4.2 royalties under the terms
and prices of an SVR4.2 license. Similarly, licensees that used a
product that contained SVR3.0, SVR4.0, and UnixWare 2.0 did not pay
any SVR3.0 or SVR4.0 royalties for distributing that product, but
instead paid only UnixWare royalties.
In licensing UnixWare, SCO also licensed each of the prior
products upon which the newest version was built. This practice
began with AT&T, was continued by Novell, and then adopted by
Santa Cruz and SCO. For example, a licensee who executed a license
for SVR4.2, had the same rights to the earlier versions of UNIX on
which 4.2 was built, and the list of prior products reflected that
right. Santa Cruz and SCO regularly listed the older releases of
UNIX, including numerous releases of System V, with the current
license. Customers paid no additional fees for the rights to the
prior products regardless of whether they had a previous license to
the prior products.
In 1995 and 1996, for example, Santa Cruz licensed UnixWare 2.0
and 2.1 to various licensees. A standard UnixWare 2.0 license
included a one-time fee of $375,000 for the right to use the
UnixWare 2.0 source code. As Novell had done, Santa Cruz included
for many UnixWare 2.0 licensees a listing of System V prior
products at no additional cost. The $375,000 price for a UnixWare
2.0 license with Unysis, whose license listed SVRX prior products,
was the same as a contemporaneous UnixWare license with Alps, whose
license did not include SVRX prior products.
The practice of including rights to prior products recognized
that licensees developed their own versions of UNIX based on the
most recent product and as an assurance to the licensee
that they had rights to any of the technology included in that
licensed product. At this time, SCO was primarily contracting with
computer manufacturers, or OEMs.
By the late 1990s, Santa Cruz began to license UnixWare to
distributors as a "packaged product," or product in binary format
that was ready for distribution to end-users without further
development. The UnixWare licenses with such distributors did not
list prior System V prior products because distributors, unlike
OEMs, merely replicated and distributed the packaged product in the
G. The SCOsource Initiative
In late 2002, SCO formally created a new division known as
SCOsource. In approximately January 2003, SCO launched its
SCOsource program. The terms of the specific licenses SCO executed
as part of the SCOsource program are addressed below. As a general
matter, the SCOsource program was an effort to obtain license fees
from Linux users based on SCO's claims to UNIX intellectual
property allegedly contained in Linux.
The parties disputed at trial whether the SCOsource program was
primarily concerned with SVRX or with SCO UnixWare. In litigating
its claims against IBM, Novell, and a variety of other parties, the
only infringing code SCO has identified is SVRX code. SCO's expert
witness in the IBM litigation identified only UNIX SVR4 code in
Linux. And SCO sued Novell for slander of title because Novell
claimed ownership of the SVRX copyrights, not because it claimed
ownership to the copyrights in SCO UnixWare. Many contemporaneous
press releases, correspondence, and other material introduced at
trial describe SCOsource as focused on SVRX infringement in Linux.
SCO's internal memoranda and presentations also describe SVRX as
"trunk" from which SCOsource took its value, distinguishing SVRX
from "branches" such as SCO UnixWare.
Nonetheless, there was also testimony and evidence at trial
demonstrating that SCOsource was not solely focused on SVRX. In
January 2003, when SCO formally announced the SCOsource program,
SCO was still focused on licensing both SCO UnixWare and Openserver
technology. In February 2003, SCO created a "SCO V for Linux Sales
Guide." The guide repeatedly refers to SCO's concern that
"UnixWare" and "OpenServer" technology had been improperly used in
Linux. The guide refers generally to "SCO System V," it did not
specifically identify which technology comprised SCO System V.
Also, in a December 2002 slide presentation, in describing the
proposed "SCO System V for Linux" deliverable, SCO identified
"SCO's shared UNIX Libraries from Open Server and UnixWare for use
There is competing evidence as to whether in the SCOsource
program SCO was attempting to increase revenue based on the SVRX
technology or to protect its latest releases of UnixWare and
OpenServer from competition with Linux. The court can only conclude
that both factors played a role in SCO's determination to pursue
the SCOsource licenses.
H. Novell and SCOsource Program
In late 2002, SCO and Novell engaged in several telephone
conversations concerning SCO's plan to protect its alleged
intellectual property in Linux through agreements with Linux users.
SCO asked Novell to perform "due diligence on UNIX intellectual
property before it launched the SCOsource program." SCO also asked
for documents "to understand its IP rights" for purposes of "IP
tracking" and for "documents that help give the history of SCO's
Novell said it was not interested in providing the requested
information to SCO and that it was not interested in participating
with SCO's proposed program.
Darl McBride, SCO's CEO, testified that during his conversations
with Greg Jones at Novell he pointed out that SCO's efforts to
enforce the intellectual property in Linux would indirectly help
the sale of the various UNIX flavors that compete with Linux in the
market place and that such a boost would potentially increase the
declining SVRX Royalty stream that SCO remitted to Novell from
contracts that licensed out the older products.
Novell, however, at that time, viewed the SVRX Royalty stream as
a less significant stream of income than its potential revenue
interest in becoming directly involved in Linux.
I. The 2003 Microsoft Agreement
On April 30, 2003, SCO and Microsoft entered into a "Release,
License and Option Agreement" ("Microsoft Agreement"). Microsoft
was not a UNIX licensee at the time of entering the Microsoft
Agreement with SCO. SCO described its license with Microsoft as
part of its SCOsource campaign. SCO received a total of $16,680,000
under the Microsoft Agreement. SCO did not pass through any of this
revenue to Novell.
The Microsoft Agreement had several components, each contained
in separate sections of the Agreement. The Microsoft Agreement also
contained an apportionment of the amounts Microsoft paid for each
section of the Microsoft Agreement.
Section 2 of the Microsoft Agreement is entitled "Release and
Licenses." Microsoft paid $1.5 million for the release and license
in that section. Section 2.1 is a "Release of existing
general claims" that releases any claims "known or unknown,
suspected or unsuspected, or contingent or fixed" that SCO might
have against Microsoft. The release does not mention any particular
technology. Section 2.2 is an "IP license to current SCO
intellectual property in any of Microsoft's products."
Section 3 of the Microsoft Agreement is an "Option to Purchase
UnixWare License." Microsoft paid $2 million for the option granted
in Section 3.5 and, thereafter, paid $5 million for the license.
Novell recognizes Section 3 as a UnixWare license and does not
claim entitlement to any of Microsoft's payments to SCO under
Section 4 of the Microsoft Agreement is an "Option to Purchase
License to Other SCO Assets." Microsoft paid $250,000 for the
option granted in Section 4.1. Microsoft could exercise the option
only if it had exercised the option of obtaining the UnixWare
license set forth in Section 3. After exercising its option under
Section 3, Microsoft paid SCO $8 million for the license in Section
Section 4 of the Microsoft SCOsource License lists at least 34
versions of UNIX. At least 28 of those versions are identified in
the APA as SVRX. Section 4.1 and 4.2 state that the License is for
the Assets in Exhibits A, B, and C to the Agreement. Exhibit A
lists components and features of UnixWare 7, Release 7.1.3. Exhibit
B pertains to components for use with UnixWare. Exhibit C is a list
of several operating systems: Open UNIX 8 Release 8.x; UnixWare
Release 7.0.x and prior versions of UnixWare; OpenServer Release
5.x and all prior versions and releases; and older versions of
The license under Section 4 provided Microsoft with broader
rights to distribute the
UnixWare source code than Section 3 granted. Section 4 conveys a
broad set of rights, including the right to license, sublicense,
and sell the identified UNIX versions. The only substantive
limitation imposed is that Microsoft can only distribute the source
code of these UNIX versions "in connection with a Microsoft
platform product or related offering." The licenses to UnixWare and
OpenServer that SCO granted to Microsoft under Section 4 of the
Microsoft Agreement allowed Microsoft to ensure that the company's
software was compatible with the latest releases of UnixWare and
OpenServer that hardware manufacturers were using at the time.
Under Section 4.4 of the Microsoft Agreement, the parties agreed
that SCO may not be able to deliver to Microsoft the assets
"identified as non-deliverable in Exhibit C." Exhibit C provides:
"Items in italics are not readily available and may not be
recoverable." The items in italics include SVR 4.0 and all prior
SVR preceding SVR 2.0.
J. The 2003 Sun Agreement
In 1994, Sun entered into an SVRX License with Novell. In that
agreement, Sun bought out its continuing royalty obligations
regarding certain versions of SVRX. On February 25, 2003, SCO
executed an agreement with Sun that purports .to amend and restate.
the 1994 SVRX License. SCO described its license with Sun as part
of its SCOsource campaign.
Under the 2003 Sun Agreement, Sun paid SCO $9,143,451. SCO did
not pass through any of the Sun revenue to Novell. The 2003 Sun
Agreement does not ascribe any particular prices to any of the
specified rights granted in the Agreement. At trial, SCO did not
establish distinct values for any of the various intellectual
property rights conveyed in the 2003 Sun Agreement.
Section 4 grants a license to all of SCO's intellectual property
rights in the technology listed in Attachment 1 of the Agreement.
Attachment 1 is a chronological list of UnixWare Releases 1.0, 1.1,
1.1.1, 2.0, 2.1, 2.1.2, 7.01, 7.1, 7.1.1, 7.1.1+LKP, MP2, MP3, and
7.1.3; the same prior UNIX products to which Sun already had a
license; and new device drivers for UnixWare and OpenServer.
Attachment 1 comprises three specified categories of technology.
The first category, "Description of Technology," lists over two
dozen releases of System V to which Sun already had rights under
the 1994 Agreement. The second category, "Description of Technology
— Additional Technology," contains the list of UnixWare
Releases, further prior UNIX products to which Sun already had a
license, and five releases of System V to which Sun did not already
have a license. The third category, entitled "Description of
Technology — Device Drivers," lists the device drivers.
Of the five releases of System V to which Sun did not already
have a license, three are not listed in the APA, which contains the
list of products considered "SVRX Licenses." Accordingly, under
Section 4, in addition to new SCO products, Sun received a license
to two older System V versions and two versions of UnixWare that
are considered SVRX in the APA.
In addition to UnixWare source code, Sun purchased drivers that
would enable it to enhance the functionality of its Intel-based
UNIX offering. A driver, also known as a device driver, is a file
that contains information needed by a program to operate a device
such as a hard disk or internet connection. Without the drivers
that work with a particular operating system, a person or company
in effect cannot use the operating system for any conventional
the drivers for a hard disk or internet connection, for example,
the operating system cannot be used for any task that requires a
hard disk or an internet connection. The drivers are thus a
prerequisite for an operating system to have any utility for
conventional business purposes. SCO understood during the
negotiations that Sun was particularly interested in having access
to SCO's UnixWare and OpenServer drivers.
Sun did not obtain any right to the delivery of any drivers for
any of the old System V products. Instead, Sun obtained the right
to the delivery by SCO of all of the "drivers for UnixWare products
and OpenServer products for which SCO has the right to license such
drivers to third parties."
Approximately two months after entering into the Agreement, SCO
and Sun executed a Clarification of License Grant to UnixWare and
OpenServer Drivers ("Clarification Agreement") that detailed the
specific drivers that Sun had received under the Agreement. The
Clarification Agreement and its four attachments identify more than
five hundred individual source and object code drivers, exclusively
relating to UnixWare and OpenServer.
Sun produces and markets a proprietary operating system known as
"Solaris." Solaris is based on UNIX code versions listed in APA
Schedule 1.1(a), Item VI — i.e., SVRX. Sun distributes
Solaris without additional royalty obligations to Novell based on
Sun's rights under the 1994 Sun Agreement.
The 1994 Sun Agreement had a 20-year confidentiality restriction
prohibiting Sun from publicly disclosing the licensed source code.
These confidentiality restrictions prevented Sun from publicly
releasing or "opensourcing" the Solaris source code.
Section 8.1 of the 2003 Sun Agreement provides that "use,
reproduction, distribution or disclosure of the Technology or
Derivative Matter thereof under any licensing model now known or
developed hereafter in Sun's sole discretion, pursuant to the
license granted by SCO herein, shall mean such Technology or
Derivative Matter thereof is not Confidential Information to the
extent that such Technology is licensed by Sun to a third party
without a confidentiality obligation." In other words, Section 8.1
permits Sun to unilaterally remove any confidentiality restrictions
governing the licensed UNIX code if "such Technology is licensed by
Sun to a third party without a confidentiality obligation."
Section 4 of the Agreement permits Sun to "use, reproduce,
prepare Derivative Matters of, compile, publicly perform, publicly
display, demonstrate, market, disclose, make, sell, offer to sell,
import and distribute" SCO's intellectual property in the licensed
technology at Sun's sole discretion, including the licensing of
Solaris. This provision further allows Sun to sublicense those
rights to third parties "through multiple tiers of sublicensees."
In addition, any license "will be subject to SCO's copyright
interest in the Technology," provided that Sun has the license
grant in Section 4.1(a) and "Sun agrees that Sun will not transfer
ownership in any Technology to which Sun does not have an ownership
After entering into the 2003 Sun Agreement, Sun released an
opensource version of its UNIX-based Solaris product, called
"OpenSolaris." As its name suggests, OpenSolaris is based on Sun's
Solaris operating system, which is in turn based on Novell's SVRX
intellectual property. Absent the removal of the 1994 Sun
Agreement's confidentiality restrictions, Sun would not have been
licensed to publicly release the OpenSolaris source code.
The evidence presented at trial established that the 2003 Sun
Agreement conveyed substantial rights to the SVRX intellectual
property retained by Novell because of Sun's ability to open source
Section 10 of the 2003 Sun Agreement also sets forth SCO's
obligation to indemnify Sun for any claim brought against Sun
asserting that the Section 4 licensed technology infringes the
rights of any third parties. Section 10 further provides that if
the intellectual property rights in the technology become the
subject of a claim of infringement, SCO shall ensure that Sun has
the right to continue to use the technology or replace the
technology to make it non-infringing. The provision has not been
implicated or applied.
Section 12 of the 2003 Sun Agreement is a release of any claims
that either party may have with respect to the licensed technology
or any derivative thereof. Sco also waived claims "with respect to
any 'moral' or equivalent rights" regarding the licensed technology
in Section 5.3.
K. Other SCOsource Licenses
SCO entered into SCOsource Licenses with twenty-two companies or
individuals ("Other SCOsource Licenses"), for a total revenue of
$1,156,110. These additional SCOsource licenses include:
(1) Written SCOsource licenses with Computer Associates Int'l;
Everyone's Internet, Ltd.; HEB; Questar Corp.; CDM; Leggett &
Platt Inc.; Parkhead Systems; and Siemens AG (Océ Printing
(2) Electronic SCOsource licenses with Denise Evans; Gotley Nix
Evans Pty Ltd.; John
Curtis; Jose Garcia Rodriguez; Kellogg Corporation; Robert
Twigg; Sphinx CST Ltd.; and Stephen McManus; and
(3) SCOsource licenses Symphonix; DTR Business Systems, Inc.;
IMCORP Inc.; MPA Systems Pty Ltd.; Synnex Canada Ltd.; and Seneca
Data Distributors Inc. each of whom were acting as distributors of
SCO obtained $1,156,110 from the Other SCOsource Licenses, but
SCO did not pass through any of the revenue from the Other
SCOsource Licenses to Novell. Though the Other SCOsource License
terms differ in certain respects, for the purpose of analyzing the
issues before the court, the terms of the SCOsource license with
Everyone's Internet, Ltd. ("EI") are representative of the terms of
the agreements entered with each of the entities.
The EI SCOsource license grants, with certain limitations, the
"right and license to use . . . SCO IP." "SCO IP" is then defined
"SCO IP" means the SCO UNIX®-based Code alleged by
SCO to be included, embodied, or otherwise utilized in the
SCO acknowledges that the central feature of the other SCOsource
Agreements is the
. . . .
"UNIX-based Code" means any Code or Method that: (i) in its literal
or non-literal expression, structure, format, use, functionality or
adaptation (ii) is based on, developed in, derived from or is
similar to (iii) any Code contained in or Method devised or
developed in (iv) UNIX System V or UnixWare®, or (v) any
modification or derivative work based on or licensed under UNIX
System V or UnixWare.
covenant not to sue and the waiver of claims by SCO for the
companies' internal Linux usage. There was testimony at trial that
the SCOsource license agreements differed from traditional licenses
because they did not involve product.
As noted above, SCO's complaint about "companies' internal Linux
usage" was in fact a complaint that those companies were using the
UNIX code that SCO claims is in Linux. SCO has not identified any
unique SCO UnixWare code in Linux supposedly released or waived by
the Other SCOsource Licenses. However, there was testimony at trial
that SCO was concerned with infringement of UnixWare and
L. Novell's Communications to SCO
Novell sent several letters to SCO in an attempt to gain
information regarding the licenses SCO was entering into during
2003. On June 24, 2003, Novell's General Counsel wrote to SCO
requesting information regarding two license agreements SCO had
identified in securities filings. The letter asserted Novell's
rights under Section 4.16(b) of the APA and Amendment No. 2 to the
APA and stated that SCO's actions regarding the licenses referenced
in the securities filings could not be reconciled with Novell's
rights under those APA provisions.
In July 2003, Novell also notified SCO that it intended to
conduct an audit in August of 2003. In November of 2003, Novell
sought documents from SCO relating to amendments and modifications
of SVRX Licenses, specifically copies of the Sun and Microsoft
Agreements, as well as any new SVRX Licenses. SCO did not provide
Novell with the requested documentation, and Novell was required to
again request the information in December of 2003.
Novell did not receive a response from SCO with respect to its
June 24, 2003 letter until
February 5, 2004. SCO asserted in its letter that the 2003 Sun
Agreement did not fall under the APA or its amendments and that the
Microsoft Agreement was a new agreement not covered by the APA.
SCO, however, did not provide Novell with copies of the
Novell responded on March 1, 2004, stating that from its review
of the "Intellectual Property License" on SCO's website, the
licenses appeared to be SVRX Licenses. Novell again requested a
response from SCO in April of 2004, but still did not receive a
response from SCO. At that time, this litigation had commenced.
Novell did not receive copies of the Sun or Microsoft Agreements
until they were produced in discovery during this litigation.
CONCLUSIONS OF LAW
A. Burden of Proof
The parties disagree as to the appropriate burden of proof in
this trial of the remaining claims in the case. The remaining
claims heard at trial consist of Novell's counterclaims for
declaratory judgment, unjust enrichment, breach of fiduciary duty,
and conversion. SCO asserts that Novell has the burden of proof
because Novell is the party asserting the counterclaims. Novell,
however, contends that SCO has the burden to establish the amounts
it owes Novell because this court has already determined that SCO
has breached its fiduciary duties to Novell.
Under California law, the general rule is that a counterclaim
plaintiff bears the burden of proving the elements of its
counterclaims. Section 500 of the California Evidence Code states:
"Except as otherwise provided by law, a party has the burden of
proof as to each fact the existence or nonexistence of which is
essential to the claim for relief or defense that he is asserting."
Cal. Evid. Code § 500.
In general, a plaintiff has the burden of proving the amount of
unjust enrichment, Foerstel v. Jeffrey, No. B154638, 2003 WL
170418, at *2 n.2 (Cal. App. Jan. 27, 2003), the fact and amount of
damages on a breach of fiduciary duty or conversion, In re
Marriage of Kapczynski, No. H025433, 2004 WL 1119735, at *7
(Cal. App. May 20, 2004) (breach of fiduciary duty), In re
Cruz, 198 B.R. 330 (Bkrtcy. S.D. Cal. 1996) (conversion), and
the propriety of a requested declaratory judgment, Benitec
Australia, Ltd. v. Nucleonics, Inc., 2007 WL 2069646, at *2
(Fed. Cir. July 20, 2007). "On rare occasions, the courts have
altered the normal allocation of the burden of proof . . . . But
the exceptions are few and narrow." Sargent Fletcher Inc. v.
Able Corp., 110 Cal App. 4th 1658, 1670 (2003).
Under California law, "where a fiduciary has a legal duty to
allocate receipts between those in which its beneficiary has some
interest and those in which the beneficiary has none, and is fully
and singularly capable of making that allocation but fails to do
so, a court is justified in calling upon the fiduciary to bear the
burden of differentiation at trial." Rosenfeld, Meyer &
Susman v. Cohen, 191 Cal. App. 3d 1035, 1051-52 (1987);
Kennard v. Glick, 183 Cal. App. 2d 246, 250-51 (1960) ("An
agent who fails to keep an account raises thereby a suspicion of
infidelity or neglect, creates a presumption against himself, and
brings upon himself the burden of accounting to the utmost for all
that has come into his hands; and in such case every doubt will be
resolved against the agent, and in favor of the principal . . .
This rule is well established when it comes to accounting for
copyright royalties and in other contexts as well:
[T]he defendants must be content to accept much
the embarrassment resulting from mingling the
plaintiff's property with their own. . . . [W]e must make an award
which by no possibility shall be too small. It is not our best
guess that must prevail, but a figure which will favor the
plaintiffs in every reasonable chance of error.
Sheldon v. Metro-Goldwyn Pictures Corp., 106 F.2d 45, 51 (2d
Cir. 1939); see also Kim v. Fujikawa, 871 F.2d 1427, 1430-31
(9th Cir. 1989) ("In determining the amount that a breaching
fiduciary must restore to the Funds as a result of a prohibited
transaction, the court should resolve doubts in favor of the
plaintiffs" (internal quotation and citation omitted)); Donovan
v. Bierwirth, 754 F.2d 1049, 1056 (2d Cir. 1985) ("The burden
of proving that the funds would have earned less than that amount
is on the fiduciaries found to be in breach of their duty. Any
doubt or ambiguity should be resolved against them. . . . This is
nothing more than application of the principle that, once a breach
of trust is established, uncertainties in fixing damages will be
resolved against the wrongdoer."); Leigh v. Engle, 727 F.2d
113, 138-39 (7th Cir. 1984) ("[T]he burden is on the defendants who
are found to have breached their fiduciary duties to show which
profits are attributable to their own investments apart from their
control of the Reliable Trust assets . . . . [W]hile the district
court may be able to make only a rough approximation, it should
resolve doubts in favor of the plaintiffs.").
In this case, the APA required SCO to account for SVRX
Royalties, even in the circumstances where SCO was entitled to keep
100% of those Royalties. The APA also required SCO to obtain
Novell's prior written approval before amending, modifying, or
waiving any right under any SVRX License. These provisions were
intended, among other things, to further
SCO's duties as Novell's agent to account for and remit SVRX
SCO takes issue with Novell's reliance on breach of fiduciary
cases because these cases are based on the premise that a trustee
has gained some advantage over its beneficiary in a transaction
between them. Whereas, in this case, the transactions at issue are
not ones between SCO and Novell. SCO's argument, however, fails to
acknowledge that its fiduciary responsibilities under the APA were
based on accurately accounting for such third-party transactions
and SCO was in an advantageous position with respect to accounting
for its third- party transactions.
SCO is correct, however, that the APA contemplated that SCO
would enter into agreements that commingle an SVRX License when it
is incidental to a UnixWare license. In such situations, however,
the APA appears to still require SCO to account for those licenses
and demonstrate that the SVRX portion is only incidental. In those
instances, SCO has advantageous information as to whether the SVRX
license is incidental. Because Novell was not in a position to make
such determinations, SCO had a duty to properly fulfill its
fiduciary accounting obligations under the APA.
The court has already found that SCO breached its fiduciary duty
in not properly reporting SVRX revenues under the APA. Because of
such breach, the court concludes that SCO has the burden of
differentiating royalties properly retained by SCO from SVRX
Royalties that SCO improperly retained. SCO has the burden of
demonstrating the proper allocation of SVRX Royalties.
The court recognizes, however, that additional issues are
asserted in this trial that were
not raised or a part of the prior summary judgment motions or
the court's summary judgment order. The court concludes that the
issue of whether SCOsource licenses were SVRX Licenses under the
APA is an issue on which Novell retains the burden of proof. It is
not an issue that involves a breach of a fiduciary duty and SCO is
not in an advantageous position with respect to facts weighing on
that determination. If those licenses are determined to be SVRX
Licenses under the APA, then SCO has the burden of establishing the
proper allocation of SVRX Royalties under such licenses because it
is a part of its fiduciary duty. Similarly, Novell retains the
burden of proof on the issue of whether SCO had the authority under
the APA, as amended, to enter into additional or amended SVRX
licenses. Again, this declaratory judgment issue is not one in
which SCO would have obtained any kind of advantageous
B. SCOsource Licensing Agreements
Separate from its licensing of products, SCO began entering into
SCOsource licensing agreements that were unique in that they did
not involve product. Instead, these license agreements were waivers
and releases of conduct based on the buyer's use of Linux.
Provisions of the 2003 Sun and Microsoft Agreements are such
SCOsource licenses. SCO also entered into twenty-two other
SCOsource licenses. In determining whether the SCOsource Agreements
constitute SVRX Licenses, the court must look to the terms of the
agreements and the provisions of the APA.
The central features of the SCOsource agreements are a covenant
not to sue and a waiver of claims by SCO for the buyer's internal
Linux usage. The agreements grant rights and a license to use SCO
IP. "SCO IP" is defined as SCO UNIX-based code, and "UNIX-based
defined to mean "UNIX System V or UnixWare, or (v) any
modification or derivative work based on or licensed under UNIX
System V or UnixWare." The purpose of these licenses was to excuse
the licensee's purported infringement of SCO's IP.
SCO IP is defined in the agreements to include UNIX System V,
which would appear to include SVRX. But given the terms of the
amended APA between Novell and SCO, as this court has previously
ruled, the SVRX copyrights did not transfer to SCO. Therefore, SCO
IP cannot include SVRX and can only mean SCO UnixWare.
Although Novell asserts that these provisions should be viewed
as a license because a license insulates a party from liability,
the release terms of the SCOsource agreements, including Section 2
of the Microsoft Agreement and Section 12 of the 2003 Sun
Agreement, are not licenses to product. Unlike the licenses to
products included under the APA, these releases are not
royalty-bearing SVRX Licenses. SVRX Licenses involved in the APA
gave licensees rights to use and modify SVRX code to create
royalty-bearing UNIX derivatives. SCOsource licenses did not grant
a right to use or modify any UNIX source code to create such
derivatives. SCOsource agreements did not give any licensee the
right to use any UNIX IP apart from binary code in Linux. The
agreements are only releases of claims that SCO was entitled to
Under the APA, SCO received all of Novell's "claims arising
after the Closing Date against any parties relating to any right,
property or asset included in the Business." The "Business" is
defined as "the business of developing a line of software products
currently known as Unix and UnixWare, the sale of binary and source
code licenses to various versions of Unix and UnixWare, the support
of such products and the sale of other products which are
related to Unix and UnixWare." Based on this court's ruling that
SVRX copyrights were not included in the assets comprising the
Business that was transferred from Novell to Santa Cruz, SCO could
not enter into any release for copyright infringement of SVRX
But SCO did receive some ownership rights and it was authorized
to release whatever claims its was to entitled bring concerning
those ownership rights. There was evidence presented at trial that
SCO was concerned with whether technology from its releases of
UnixWare and OpenServer was improperly in Linux. UnixWare and
OpenServer are both UNIX System V operating systems.
SCO's July 2003 press release regarding SCOsource agreements
states SCOsource Agreements are UnixWare licenses and the hold
harmless clauses are incidental to a UnixWare license. In the
SCOsource program, the pricing of a SCOsource license was set as
the same as SCO's pricing for a UnixWare binary license. This
pricing is consistent with SCO's use of the "one line of code" rule
and practice of not charging additional amounts for the prior
products listed in a license for the latest release. It also
demonstrates that SCO believed that the SCOsource license had a
value equivalent to a binary license to its most recent release of
UnixWare. Therefore, there was evidence that the SCOsource program
was not solely focused on older System V technology.
The court agrees with what SCO's counsel stated in his opening
arguments: If SCO had less to release, it just means that the buyer
got less for its money. The claims SCO released in its SCOsource
licenses were only those claims SCO was entitled to bring. The
Agreements do not encompass claims Novell would be entitled to
bring based on its ownership of the SVRX
copyrights. The court, however, does not agree that there was
evidence at trial that established either way whether the buyer of
a SCOsource license was completely protected because all of the old
technology was part of UnixWare. There was no definitive evidence
on this point and the issue of whether a buyer would be fully
protected by a SCOsource license is not before the court.
Because the SCOsource licenses cannot be construed to include a
release of SVRX copyright infringement, the court does not find the
licenses to be SVRX Licenses that generated SVRX Royalties to
Novell under the APA. SCO could not release Novell's rights to
claims based on its ownership of the SVRX copyrights. Even if the
releases contained in the SCOsource Agreements were considered SVRX
Licenses, there is no value in the agreements with respect to
Novell's SVRX interests. As such, Novell has no entitlement to
monies SCO received with respect to a release of only SCO's rights.
The value of those SCOsource releases is a matter between SCO and
the parties who entered into such releases. In addition, because
the court concludes that the releases in the SCOsource Licenses
were not SVRX Licenses, SCO had authority to execute the
C. 2003 Microsoft Agreement
As discussed above in connection with the Other SCOsource
Licenses, the court determines that the release of claims and
license in Section 2 of the Microsoft Agreement was not an SVRX
License that generated SVRX Royalties. The release in Section 2
does not specify any technology and the license in Section 2 refers
only to SCO Intellectual Property. Therefore, as discussed above,
the court concludes that this provision did not waive claims or
grant a license to SVRX because SCO could not release or waive
Novell's claims or rights in the SVRX
The Microsoft Agreement, however, contained other provisions
involving SVRX technology. Therefore, the agreement is an SVRX
License because it involves SVRX at least in part. Section 4 of
Microsoft Agreement is an option to license UnixWare, OpenServer,
and other SVRX for $8.25 million. This amount is half the price of
the whole agreement.
The Microsoft Agreement was a new SVRX License which § 4.16
of the amended APA prohibits SCO from entering into unless it is
"incidentally involved through its rights to sell and license
Unixware." The question, therefore, is whether the SVRX rights
under Section 4 of the Microsoft Agreement are granted incidental
Neither the APA nor its Amendments define the word incidentally.
The term, however, is generally defined to mean a minor
accompaniment or something of a subordinate nature. The parties
agree as to the general definition of incidental.
Novell contends that in applying the term incidental to the
agreement at hand, the court should not look to the parties'
historical practice with respect to licensing because extrinsic
evidence is unnecessary. The court, however, must consider all
relevant facts to determine whether the license to SVRX technology
was incidental to UnixWare. In addition, to the extent that the
extrinsic evidence supports the general definition of the term
incidental, the evidence is admissible under California contract
In licensing products, SCO adopted Novell's practice of
including all prior products in the license. After the APA, SCO
entered into new UnixWare licenses but had very limited rights with
respect to SVRX licenses. The testimony at trial established that
SCO included SVRX
products as prior products in SCO UnixWare licenses. When such
prior products were listed in the UnixWare license, it did not
change the price paid for the most recent version of UnixWare. SCO
presented evidence of specific licenses entered at relatively the
same time between two different companies. One company received all
of the prior products listed in the license and the other company
had no prior products listed. The parties, however, paid the same
amount for their licenses.
Novell had also licensed UNIX and UnixWare using this procedure.
UNIX licensees often distributed and used products based on code
from multiple releases of System V, including UnixWare. Novell and
its successors required such licensees to pay only one set of
royalties for the use or distribution of such a product. Under the
"one line of code" rule, Novell and its successors required
licensees to identify code from the latest release of System V
contained in a product-- even if there was as little as one line of
code contained in that license — and calculate royalty
payments for that entire product under only that latest
SCO's witnesses further testified that there was not a market
for a license to prior SVRX products because those prior products
no longer utilized the most current hardware. SCO witnesses
testified that they did not market or sell any prior SVRX product
in a stand alone license.
The court finds that the term incidental as used in the APA is
referring to the practice of Novell and SCO to list prior products
in licenses for the newest release and charge only for the license
to the newest release. Under the APA, SCO had the authority to
enter into SVRX licenses that were incidental to UnixWare, and the
court finds that the SVRX licensing in Section
4 of the Microsoft Agreement was incidental to a UnixWare
Accordingly, the court concludes that Novell is not entitled to
any of the revenue SCO received under the 2003 Microsoft
D. 2003 Sun Agreement
The 2003 Sun Agreement increases Sun's rights to at least 30
versions of SVRX products provided in Item VI of Schedule 1.1(a) of
the APA and gives Sun broad rights to several versions of SVRX. The
2003 Sun Agreement is an SVRX License.
Section 12 of the Sun Agreement is a release and waiver
provision similar to the Other SCOsource Licenses. As with those
licenses, the court finds that the provision does not release
Novell's claims based on its ownership of the SVRX copyrights, and
thus does not implicate SVRX technology and cannot be the basis for
Section 4 of the Sun Agreement is a license to UnixWare and
prior SVRX products. Although this section provides a license to
prior SVRX products to which Sun did not previously have a right to
under its 1994 Agreement with Novell, the court concludes that this
section's inclusion of SVRX as prior products is only incidental to
a license to the most recent version of SCO's UnixWare.
Accordingly, Novell is not entitled to revenue attributable to this
section of the Sun Agreement.
Section 8.1 of the Sun Agreement, however, lifts the
confidentiality provisions with respect to 30 versions of SVRX
technology granted to Sun under its 1994 Buy-out Agreement with
Under Section 4.16 of the amended APA, SCO can only amend an
SVRX license if it is
done incidentally to its licensing of UnixWare. Also, Section B
of Amendment No. 2 to the APA provides that before entering into
any potential transaction with an SVRX licensee which "concerns" a
buy-out of any such licensee's royalty obligations, SCO must obtain
Novell's consent. This provision requires either party who even
"become[s] aware of any such potential transaction" to immediately
notify the other in writing. The provision further requires that
any negotiations with the licensee be attended by both parties, and
that both parties consent to any such transaction. There are no
exceptions to this provision.
The 2003 Sun Agreement specifically states that it "amends and
restates" Sun's 1994 SVRX buy-out agreement with Novell. SCO has no
authority to enter such an agreement unless it is incidentally
involved in the licensing of UnixWare.
The court concludes that the release of confidentiality
requirements in Section 8.1 of the 2003 Sun Agreement is not merely
incidental to a UnixWare license. The provision had significant
independent value to Sun as it allowed Sun to opensource its
Solaris UNIX-based product. While several of the provisions in the
Agreement focus on UnixWare and specific device drivers, the
amendment with respect to confidentiality relates to the same
technology licensed in the 1994 Buy-out Agreement and had
significant independent value to Sun apart from a license to the
newest versions of UnixWare.
SCO argues that Section B of Amendment No. 2 to the APA relates
only to future buyout transactions, but the language of the
provision broadly states that it relates to any potential
transaction that "concerns a buy-out of any such licensee's royalty
obligations." This provision refers to any transaction that
"concerns" a buyout, not just buy-outs. SCO's interpretation
allow SCO to unilaterally amend any buy-out agreement negotiated
by all the parties if it wanted to re-negotiate more favorable
terms to itself. Even if there is testimony about the parties
focusing on future buy-outs, it does not change the fact that
Amendment No. 2 was drafted more broadly. In the 2003 Sun
Agreement, SCO renegotiated a contract and expanded Sun's rights to
technology still owned by Novell. And, SCO improperly received the
money for granting such rights even though those rights remained
There is no dispute that Sun's 1994 Agreement with Novell was a
"buy-out" of Sun's SVRX royalty obligations as that term is used in
Amendment No. 2. Sun's 2003 Agreement explicitly acknowledges that
it is intended to "amend and restate" the 1994 buy-out agreement,
including expansion of Sun's existing license rights to permit
opensource licensing of SVRX code. The Court concludes that Sun's
2003 Agreement License, therefore, "concerns" a buy-out, and SCO
was required to follow the additional restrictions imposed by
Amendment No. 2 on transactions that concern buy-outs. SCO did not
comply with these terms. The Court thus concludes and declares that
SCO was without authority to enter into the 2003 Sun Agreement
under Amendment 2, Section B, of the APA.
SCO cites to agency law to argue that if an agreement was
executed without authority and Novell has not approved it, then the
contract must be set aside and Novell is not entitled to any
revenues. Agency law precludes a principal from accepting benefits
of an agent's actions while simultaneously disclaiming the agent's
authority to act. In addition, SCO argues that in the case of an
invalid contract, a counterparty who made payments is entitled to
the restitution of those payments.
This case law, however, does not apply to the 2003 Sun
Agreement. The cases cited by SCO involve situations where the
agent already properly remitted the fruits to its principal and the
dispute was whether the principal was required to return the fruits
to the third party. None of the cases hold that, where an agent
improperly takes money from third parties in the principal's name,
the agent is entitled to keep that money if the principal disclaims
the agent's authority.
In this case, Sun obtained the rights to opensource Solaris, and
SCO received the revenue for granting such rights even though such
rights remained with Novell. If the court were to declare that the
contract was void and should be set aside, the court could not
return the parties to the same position they were in prior to the
2003 Agreement. Sun has already received the benefits of the
agreement and developed and marketed a product based on those
benefits. There was also evidence at trial that OpenSolaris
directly competed with Novell's interest. The court, therefore,
cannot merely void the contract. Had SCO sought Novell's
involvement in the amendment of the 1994 Agreement, Novell and SCO
would have negotiated a suitable division of the royalties.
1) Breach of Fiduciary Duty
Because California law governs actions arising from the APA, and
Novell's claims arise from the agency relationship created by the
APA, California law governs. Nedlloyd Lines B.V. v. Super.
Ct., 3 Cal. 4th 459, 468, 470 (1992). To establish a breach of
fiduciary duty under California law, Novell must show "the
existence of a fiduciary relationship, its breach, and damages
proximately caused by that breach." Roberts v. Lomanto, 112
Cal. App. 4th 1553, 1562 (2003) (internal quotation and citation
omitted). As Novell's agent for purposes of the SVRX
Royalties, SCO owed Novell a fiduciary duty.
The Court concludes that SCO breached its fiduciary duties to
Novell by failing to notify Novell and account for and remit the
revenue it received from Sun as a result of modifying the
confidentiality provisions of Sun's SVRX buy-out agreement with
A conversion claim is based on "the wrongful exercise of
dominion over another's personal property in denial of or
inconsistent with his rights in the property." Kasdan, Simonds,
McIntyre, Epstein & Martin v. World Sav. & Loan Ass.n,
317 F.3d 1064, 1069 (9th Cir. 2003). To establish conversion,
therefore, Novell must establish: (1) its "ownership or right to
possession of the property"; (2) SCO's "conversion by wrongful act
inconsistent with the property rights of the plaintiff; and (3)
Novell held equitable title to the SVRX Royalties under the APA.
SCO's failure to pass through to Novell the SVRX Royalties due
under the Sun Agreement was a wrongful act inconsistent with
Novell's rights. The Court concludes that Novell has established
SCO's conversion of the revenues due under the 2003 Sun
3) Unjust Enrichment
SCO was unjustly enriched by retention of the revenue under the
Sun Agreement and Novell is entitled to restitution. Unjust
enrichment is measured as the benefit the defendant wrongfully
received at the expense of the plaintiff. First Nationwide Sav.
v. Perry, 11 Cal. App. 4th 1657, 1662 (1992); Morlife, Inc.
v. Perry, 56 Cal. App. 4th 1514, 1528-29 (1997).
Here, SCO was unjustly enriched by retaining the revenues Sun
agreed to pay to relax and
amend the confidentiality provisions of the 1994 Agreement.
4) SCO's Affirmative Equitable Defenses
The Court has considered SCO's equitable defenses and finds them
SCO raised estoppel as an affirmative defense. Estoppel arises
out of the rule that "[w]henever a party has, by his own statement
or conduct, intentionally and deliberately led another to believe a
particular thing true and to act upon such belief, he is not, in
any litigation arising out of such statement or conduct, permitted
to contradict it." Cal. Evid. Code § 623.
To make out estoppel, "four elements must be present . . . (1)
the party to be estopped must be apprised of the facts; (2) he must
intend that his conduct shall be acted upon, or must so act that
the party asserting the estoppel had a right to believe it was so
intended; (3) the other party must be ignorant of the true state of
facts; and (4) he must rely upon the conduct to his injury."
Lentz v. McMahon, 49 Cal. 3d 393, 399 (1989). To prevail on
its estoppel claim, therefore, SCO would have to have shown that
Novell knew whether and to what extent SCO collected but did not
remit SVRX Royalties, that Novell failed to seek such Royalties and
intended for that failure to be taken by SCO as indication it could
keep the money, and that SCO relied on Novell to SCO's injury.
The Court concludes that SCO cannot make out any element of its
estoppel defense. SCO had an obligation to keep Novell apprised of
the facts concerning SVRX Licenses and failed to do so. Novell
repeatedly demanded audits and accounting of the 2003 Sun and
SCO introduced evidence it claims shows that Novell was silent
when SCO withheld
SVRX Royalties in connection with a 1996 audit. At best, this
evidence showed that Novell said nothing when SCO licensed SVRX
incidentally. That is not sufficient to estop Novell from
contesting an SVRX License that conveys greater-than-incidental
rights. Even were the evidence otherwise, courts typically require
a duty to speak before imparting preclusive effect to silence.
See, e.g., Feduniak v. Cal. Coastal Comm'n, 148 Cal. App.
4th 1346, 1362 (2007) ("It is settled that when the party to be
estopped does not say or do anything, its silence and inaction may
support estoppel only if it had a duty to speak or act under the
particular circumstances."). In fiduciary relationships, where the
presumption is that the principal need not investigate the
activities of its agent and can instead rely on the agent to
fulfill its duties faithfully, there is no such duty. Hobbs v.
Bateman Eichler, Hill Richards, Inc., 164 Cal. App. 3d 174,
201-02 (1985) ("Where there is a fiduciary relationship, the usual
duty of diligence to discover facts does not exist."). The Court
concludes that Novell is not estopped to pursue its claims to SVRX
SCO also raised "unclean hands" as an affirmative defense. The
doctrine of unclean hands, as partially codified in California
Civil Code Section 3517, provides that "[n]o one can take advantage
of his own wrong." See, e.g., Rosenfeld v. Zimmer, 116 Cal.
App. 2d 719, 722 (1953) ("A court of equity will not assist a party
to a fraudulent scheme to secure the objective of such plan.");
Reynolds v. Roll, 122 Cal. App. 2d 826, 836 (1954) ("courts
will not lend assistance to persons whose claim for relief rests on
an illegal transaction" (internal quotation marks and citation
Even where such conduct is shown, it must be part of the same
transaction at issue, and
the nature of the plaintiff's conduct must be worse than that of
the defendant. See, e.g., Watson v. Poore, 18 Cal. 2d 302,
313 (1941) ("[I]mproper conduct not necessarily connected with the
transaction particularly involved . . . is not a reason for denying
equitable relief on the ground of unclean hands."); Belling v.
Croter, 57 Cal. App. 2d 296, 304 (1943) (unclean hands does not
apply "if it be shown that [the plaintiff] is the one 'least at
fault,' and that the party against whom relief is sought was guilty
of wrongdoing in respect to the same matters and is 'most in
SCO has not shown any conduct by Novell that was in bad faith or
wrongful. The Court thus concludes that these affirmative equitable
defenses do not preclude Novell from receiving equitable
5) Allocation of Revenues to Novell
The court, therefore, concludes that Novell is entitled to the
revenues paid by Sun under the 2003 Sun Agreement attributable to
the release of the SVRX confidentiality provision in the 1994
Agreement. While the parties debated the value of this provision at
trial, neither established a specific value for this particular
provision. Nonetheless, the court believes it is appropriate and
equitable to grant monetary relief in favor of Novell.
SCO contended that, for a variety of reasons, Novell is not
entitled to both monetary and declaratory relief. The Court was not
persuaded by any of these arguments with respect to the 2003 Sun
Under the 2003 Sun Agreement, SCO received from Sun a total
amount of $9,143,451. The court concludes that the release
provision in Section 12 of the Sun Agreement is worth an equivalent
amount to the similar release provision in the Microsoft Agreement,
or $1.5 million.
The remaining portions of the Agreement is divided between the
UnixWare license, the associated UnixWare and OpenServer drivers,
and the release of the confidentiality provisions contained in the
1994 Agreement. Because SCO bears the burden of allocation on this
issue and the law recognizes that the court is to resolve every
doubt against the agent and in favor of the principal, the court
divides the remaining portions of the Agreement equally. Therefore,
Novell is entitled to one-third of $7,643,451, or $2,547,817 as
revenues paid by Sun under the 2003 Sun Agreement attributable to
the release of the SVRX confidentiality provision in the 1994
6) Prejudgment Interest
Novell is directed to file a brief within 15 days of this Order
describing what, if any, prejudgment interest Novell seeks based on
the amount awarded in this Order. At its option, SCO may then file
within 10 days a brief opposing Novell's request for prejudgment
interest. Novell may file a reply within 7 days in further support
of its claim for prejudgment interest. This briefing shall not
affect the deadlines to file requests for costs or attorneys' fees,
which, pursuant to District of Utah Local Rule 54-2, shall run from
the entry of final judgment.
After considering all of the evidence and the law as it applies
to this case, the court awards Defendant and Counterclaimant Novell
$2,547,817 on its Sixth, Seventh, and Eighth Claims for Unjust
Enrichment, Breach of Fiduciary Duty, and Conversion. On Novell's
Fourth Claim for Relief, for the reasons stated above, the court
concludes that SCO was entitled to enter into the 2003 Microsoft
Agreement and the Other SCOsource Licenses, but was not authorized
enter into the 2003 Sun Agreement based on its amendment of the
provisions concerning Sun's SVRX confidentiality requirements under
the 1994 Agreement.
Novell is directed to file within ten days from the date of this
order a Final Judgment consistent with these Findings of Fact,
Conclusions of Law, and Order, the court's August 10, 2007
Memorandum Decision and Order, and the parties' stipulations with
respect to the disposition of certain causes of action. See
Fed. R. Civ. P. Rule 58 ("Every judgment and amended judgment must
be set forth on a separate document"); United States v.
Clearfield State Bank, 497 F.2d 356, 359 (10th Cir. 1974)
(interpreting Rule 58 to "require that there be a judgment set out
on a separate document — distinct from any opinion or
memorandum — which provides the basis for the entry of
DATED this 16th day of July, 2008.
BY THE COURT:
DALE A. KIMBALL
United States District Judge
||1 The parties have, both in motion papers and at trial,
disputed the precise contours of the terms "SVRX," "System V,"
"UnixWare," and other, related terms. Without passing on how those
terms may have been used in any particular document, in this Order,
the court will use the term "SVRX" to refer to the versions of UNIX
listed in the APA (Schedule 1.1(a), Item VI), as to which SCO is
under a fiduciary obligation to remit royalties to Novell. The
Court will use the term "SCO UnixWare" to refer to the versions of
UNIX developed by SCO subsequent to the APA, as to which SCO is
entitled to retain revenue subject to certain limitations not at
issue here. The Court uses the term "UNIX" broadly to apply to all
versions of that operating system.