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Contracts - California law on witness testimony - Updated 2Xs
Thursday, May 14 2009 @ 11:56 AM EDT

When does California law allow a court to look at parol evidence in a contract dispute? That's a big part of what the parties argued about in appeals court in SCO v. Novell.

Novell claims the APA and amendments are clear within their four corners; SCO claims the documents are ambiguous, so it wants the court to let a jury consider external testimony from its witnesses. The applicable law is California law, so which of them is right? What is the law about this in California?

I stumbled across a case that explains precisely that, Netbula v. Storage Tech. Corp. [PDF], 2008 U.S. Dist. LEXIS 12182 (N.D. Cal. Feb. 8, 2008). While we await the decision of the appeals court, the court in this prior case can help us understand what the judges are being guided by.

As you know, if you are a longtime Groklaw person, each state in the US can write its own laws, within the parameters of the US Constitution and as long as there is no federal preemption. An example of the latter would be, for example, copyright infringement claims, which must be handled only in federal courts. But contracts are handled in state courts (unless the parties are in two different states, and then contract cases can be decided in a federal court but applying the appropriate state law).

Because each state writes its own laws on contracts, it can matter which state's law applies to your contract. So if you are asked to sign a contract and it states that all disputes will be handled in a particular state, you probably want to ask your lawyer to explain what that state's law is.

So, back to SCO v. Novell and their dispute. Will SCO be successful in getting the court to order a trial based on the alleged need to look beyond the contract? Let's see what Netbula says about when a court will do that and when it will not. You'll understand more deeply the arguments SCO and Novell have presented. From the PDF:

It is a well-established rule that "[a] contract must be interpreted to give effect to the mutual, expressed intention of the parties. Where the parties have reduced their agreement to writing, their mutual intention is to be determined, whenever possible, from the language of the writing alone.' Ben-Zvi, 40 Cal. App. 4th at 473. If, however, the written agreement is uncertain or ambiguous, then extrinsic evidence may be reviewed to determine the intent of the parties. See Brawthen v. H & R Block, Inc., 28 Cal. App. 3d 131, 136 (1972). The California Court of Appeals offers a two-step process for determining whether extrinsic evidence may be considered when a written agreement exists that is allegedly ambiguous: (1) whether the writing was intended to be integrated, or the complete and final expression of their agreement; and 2) whether the agreement is susceptible of the meaning contended for by the party offering the evidence. Bionghi v. Metropolitan Water District of Southern Cal., 70 Cal. App. 4th 1358, 1364 (1999). Even if a contract appears unambiguous on its face, there are still two instances in which parol evidence is admissible. See Brawthen, 28 Cal. App. 3d at 136. First, extrinsic evidence is admissible to show "the parties' understanding and intended meaning of the words used in their written agreement." Id. Second, when the written instrument is not integrated, then "extrinsic or parol evidence will ordinarily be admitted in aid of establishing the complete agreement." Id. at 137. The court determines, as a matter of law, whether the contract is integrated and allows parol evidence of additional terms or agreements when the additional agreement is one that "might naturally be made as a separate agreement by parties situated as where the parties to the written contract.' Id. (quotation omitted).
The rule, then, as I understand it, is that if there is a writing, you look for what the parties intended by the actual wording, not by testimony from participants or from anyone. But if the wording is unclear, or ambiguous, then you can look to find out what the intent was by asking witnesses. Even then, there are two more questions, one, whether the contract is integrated and whether the agreement is "susceptible of the meaning contended for by the party offering the evidence". That just means 1) did the parties include a clause that the contract represents their complete agreement, and 2) does the suggested meaning by one of the parties later in explanation make any sense? Or is it so off-the-wall, it can't be what the parties intended?

[Update 2: And just to be clear, the APA has an integration clause. Here it is:

9.5 Entire Agreement. This Agreement, and the Schedules and Exhibits hereto: (a) constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof; (b) are not intended to confer upon any other person any rights or remedies hereunder, unless expressly provided otherwise; and (c) shall not be assigned by operation of law or otherwise except as otherwise specifically provided.
- end update.]

We're just studying about this, but the lawyers know all this already, and they make sure their arguments fit within this guidance. SCO, in its summary of its arguments in its appeal brief, listed this reason why the appeals court should not accept Judge Kimball's decision:

Third, although it had previously found the APA to be ambiguous on the subject of copyright transfers, the district court disregarded the probative extrinsic evidence of numerous witnesses and documents drawn from both sides of the transaction and the subsequent course of performance. The court then improperly drew inferences in favor of Novell in resolving what both it and Novell had previously recognized to be ambiguities....

At minimum, there was ambiguity created by Amendment No. 2, as Novell has publicly and repeatedly admitted: "The amendment appears to support SCO's claims that ownership of certain copyrights for UNIX did transfer to SCO in 1996." (05889.) Novell acknowledged "that a reader of this language, you know you know, might be able to conclude that SCO's claim of ownership did transfer, that SCO's claim of ownership was supported by this language." (10598 (emphasis added).) Indeed, the district court itself recognized "the ambiguities of the APA as amended" with respect to the transfer of copyrights in denying Novell's motions to dismiss. (16713;16707.) Yet the court subsequently concluded that the language in Amendment No. 2 was unambiguous as a matter of law in Novell's favor.

I think it's hardly surprising to find a judge deciding early in litigation that something isn't clear but then after discovery for several years and numerous summary judgment briefs, not to mention hearings, deciding that it's plenty clear enough after all that. But SCO needs ambiguity. That's the *why* of it, why SCO keeps quoting that supposed Novell admission about Amendment 2 from 2003, even though Novell almost immediately changed what it had said, after having a little time to examine the amendment and the history of the deal. It's all SCO has, that and the earlier ruling by Judge Kimball, to try to demonstrate ambiguity. SCO's argument is that while the APA might be clear, Amendment 2 introduced ambiguity. That, I think, is SCO's best shot, or more accurately probably its only shot, and the pivot on which the decision on the appeal will turn.

The explanation from Netbula can help us understand this interaction from the oral arguments in the SCO v. Novell appeal last week, beginning with a description of a Novell argument:

Also stated that when you look at the amendment on top of the APA, it's an integrated whole -- it's not a separate agreement that could create ambiguity between the two.

Lucero asked about whether or not Amendment 2 created ambiguity in a document that was on its face apparently clear in the form of the APA and Amendment 1. Jacobs said to look at it as the "entire package" and that the judge should not have to look at the extrinsic evidence to make a determination on the contracts.

McConnell said that the amendment was a clarification to the APA and if that is a clarification and if the legal language is inconsistent between the agreement and the amendment, does it create an inconsistency?

Jacobs replied to the effect that the amendment is controlling because in the chronology it specifically states that it is amending the terms of the previous agreements.

"Integrated" is the magic word, obviously, now that we've read Netbula. In Novell's appeals brief, it used that magic word in making its summary:
1. The district court correctly held that the unambiguous language of the APA, as executed in September 1995 and amended as of the December 1995 closing, did not meet the requirements of the Copyright Act for transferring copyright ownership to SCO's predecessor, Santa Cruz. The APA asset schedules unequivocally excluded "[a]ll copyrights." The Bill of Sale executed in December 1995 transferred only those assets included in the APA. Extrinsic evidence purporting to show that the parties intended to transfer copyright ownership is irrelevant and inadmissible under California's parol evidence rule because the APA is an integrated agreement, and its clear and explicit language is not susceptible to that interpretation.

2. The district court correctly held that the APA as amended by Amendment No. 2, which amended the APA's schedule of excluded assets "as of October 16, 1996," did not transfer copyright ownership for several independent reasons.

Third, SCO presented no evidence that Santa Cruz "required" copyright ownership to exercise its APA rights. SCO argues circularly that Santa Cruz required copyright ownership to sue for copyright infringement because the APA transferred "claims" related to the acquired assets. But this would follow only if those assets included copyright ownership, which the APA specifically excluded. Moreover, Santa Cruz and SCO operated the acquired business for seven years without asserting a copyright ownership claim, until SCO changed its business model and sued IBM in 2003.

3. SCO's claim for specific performance suffers from the same deficiencies and circularity as its claim for copyright ownership. The district court correctly denied that claim as a matter of law for the same reasons it denied SCO's copyright ownership claim.

As for SCO, the magic word is 'ambiguity', and reading this exchange from our eyewitness notes from the hearing becomes a lot clearer now:
Singer started for SCO.

Singer stated that the district court's error was in disregarding the ten strong witnesses they had to provide evidence around the business intent and was in the middle of making a statement to the effect that an opposing side usually has difficulty finding one witness from the other side that supports their position and that SCO has ten.

Baldock or McConnell (I didn't write down which) interrupted to note that we hadn't gotten that far yet. The court needs to find ambiguity to get to parol evidence and to look at the strength of your parol evidence; the APA has a plain exclusion for copyrights. Baldock jumped in with "I'm with Judge McConnell, it's pretty clear on this to me."

SCO's burden, then, is to persuade the court that the contract is ambiguous, because otherwise the court can't look at the witness testimony, or more precisely, it can't remand the case back to Utah to have a jury do so. The default in California is that the contract speaks for itself. So if the court agrees that it's clear enough, then SCO will not prevail. SCO argued that Amendment 2 transferred the copyrights, but that there is ambiguity. I'm not sure how both can be so, personally. Evidently, that is the ambiguity, whether the contract is ambiguous:
SCO finished its time saying that they are asking for remand to a jury to appropriately put the issues of whether the contract was clear and whether the copyright transferred before a jury.
After Novell spoke, SCO was asked some pertinent questions about whether there was a clear transfer document under the relevant copyright law requirements:
Before SCO said anything, McConnell commented that "I hope you will address the 204(a) issue."

Singer stated that he believed that the contracts satisfy 204(a) as 204(a) even lists a memorandum as a means of conveyance for contracts.

McConnell asked, if the first transfer used a bill of sale then how does Amendment 2 relate to that first bill of sale, when there is no other bill of sale for further asset transfer?

SCO replied that they felt that Amendment 2 is like a curative deed in that it was retroactively correcting the bill of sale through a contract to address a loophole that had come up in a dispute with IBM before Amendment 2 had been signed.

McConnell said something about he didn't entirely accept that line of reasoning and treating the contract amendment like a curative deed and Lucero indicated SCO was out of time at that point and made his speech about the appeal being fully briefed.

Judge McConnell asked the right question, one I've wondered about when trying to see things SCO's way. If, as SCO alleges, Amendment 2 is the document that effectuated the copyright transfer, not the earlier APA, where is the bill of sale showing that? There was a bill of sale with the APA, but if the copyrights didn't transfer then, that bill of sale won't be expected to list or mention copyrights. If SCO got more stuff later, though, under Amendment 2, there would normally be a bill of sale reflecting what the new stuff was that the buyer paid for. But there isn't any second bill of sale. SCO's argument that Amendment 2 was retroactive to the earlier bill of sale makes no sense to me, because Amendment 2 became effective on October 16, 1996, some ten months after the APA, and I see no retroactive language in it, but all this does clarify for me why the judges were asking a lot of questions about dates on the various documents. They were probably trying to figure out if SCO's explanation makes any sense. Novell talked quite a lot about copyright transfers in its appeals brief:

Two sets of legal principles govern copyright ownership. First, Section 204(a) of the Copyright Act requires a signed, written "instrument of conveyance" to transfer copyright ownership. 17 U.S.C. 204(a). Second, California law governs contract interpretation, and its parol evidence rule prohibits use of extrinsic evidence to support an interpretation to which the plain language is not "reasonably susceptible."

1. The Copyright Act Requires a Clear and Definite "Instrument of Conveyance"

The Copyright Act's "instrument of conveyance" requirement "enhances predictability and certainty of copyright ownership Congress' paramount goal" when it amended the Copyright Act in 1976. Effects Assocs. v. Cohen, 908 F.2d 555, 557 (9th Cir. 1990), citing Community for Creative Non-Violence v. Reid, 490 U.S. 730, 749-50 (1989). Section 204(a) has been strictly applied consistent with this purpose. See Konigsberg Int'l v. Rice, 16 F.3d 355, 357 (9th Cir. 1994); Radio Television Espanola S.A. v. New World Entm't, 183 F.3d 922, 926 (9th Cir. 1999). It is a substantive prerequisite, not merely an evidentiary rule; a copyright transfer is "not valid" without the required written instrument. Konigsberg, 16 F.3d at 357. Unlike a statute of frauds, Section 204(a) is not subject to equitable defenses, which would "undermine the goal of uniformity and predictability in the field of copyright ownership and transfer." Pamfiloff v. Giant Records, 794 F.Supp. 933, 937 (N.D. Cal. 1992).

Section 204(a) requires a written instrument sufficiently "clear and definite" that "such property will be readily marketable" and the "parties need only look to the writing that sets out their respective rights." Konigsberg, 16 F.3d at 357. This prevents misunderstandings by "spelling out the terms of a deal in black and white," and "forc[ing] a party who wants to use the copyrighted work to negotiate with the creator to determine precisely what rights are being transferred." Effects, 908 F.2d at 557 (emphasis added).

2. California Law Prohibits Using Extrinsic Evidence to Support a Contract Interpretation to Which the Plain Language Is Not Reasonably Susceptible

California law governs the APA pursuant to its choice-of-law clause. (00310(Art.9.8).) Under California law, "[t]he language of a contract is to govern its interpretation, if the language is clear and explicit, and does not involve an absurdity." Cal.Civ.Code 1638. Extrinsic evidence cannot be used to support an interpretation to which the contract language is not "reasonably susceptible." Dore v. Arnold Worldwide, 39 Cal.4th 384, 391 (2006). "When a dispute arises over the meaning of contract language, the first question to be decided is whether the language is 'reasonably susceptible' to the interpretation urged by the party. If it is not, the case is over." Id. at 393.

Under California's parol evidence rule, "Terms set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement." Cal.Civ.Proc.Code 1856(a). "[W]hen the parties intend a written agreement to be the final and complete expression of their understanding, that writing becomes the final contract between the parties, which may not be contradicted by even the most persuasive evidence of collateral agreements. Such evidence is legally irrelevant." EPA Real Estate P'ship v. Kang, 12 Cal.App.4th 171, 175 (1992)(emphasis added); Gerdlund v. Elec. Dispensers Int'l, 190 Cal.App.3d 263, 270 (1987)("The parol evidence rule generally prohibits the introduction of any extrinsic evidence to vary or contradict the terms of an integrated written instrument.").

The court may "provisionally receive, without actually admitting," extrinsic evidence to determine "whether or not the written agreement is reasonably susceptible to the interpretation offered by a party." Blumenfeld v. R.H. Macy & Co., 92 Cal.App.3d 38, 45 (1979). However, "if the court decides in light of this extrinsic evidence that the contract is not reasonably susceptible to the offered interpretation, then the evidence is irrelevant and inadmissible to interpret the contract." Blumenfeld, 92 Cal.App.3d at 45.

California courts have strictly applied the parol evidence rule. In Gerdlund, plaintiffs relied on "[t]estimony by all parties at the in limine hearing [] that all had the same general intent regarding the length of employment, namely that [plaintiffs] would not be terminated as long as they were doing a good job," to argue that a contract allowing termination for "any reason" should be interpreted as "any good reason." 190 Cal.App.3d at 273 (bold emphasis added). The court rejected this evidence as inadmissible because "any reason" is "plainly all-inclusive, encompassing all reasons 'of whatever kind,' good, bad, or indifferent." Id. at 273, 278; see also Blumenfeld, 92 Cal.App.3d at 46 (rejecting extrinsic evidence that transfer of "all claims against third parties" did not include plaintiff's claim against defendant, because "all-inclusive language" was not "reasonably susceptible" to this interpretation, so plaintiff "was simply mistaken in its belief that it had retained [that] claim").

SCO cites cases that considered extrinsic evidence (AB39), but those cases confirm that extrinsic evidence should not be admitted unless the contract is "reasonably susceptible" to the proposed interpretation. Wolf v. Walt Disney Pictures & Television, 162 Cal.App.4th 1107, 1126 (2008); Employers Reins. Co. v. Superior Court, 161 Cal.App.4th 906, 920 (2008); Morey v. Vannucci, 64 Cal.App.4th 904, 912 (1998); Halicki Films v. Sanderson Sales & Mktg., 547 F.3d 1213, 1223 (9th Cir. 2008); see Universal Sales Corp. v. Cal. Press Mfg., 20 Cal.2d 751, 761, 776 (1942)(considering extrinsic evidence after finding "ambiguity").

The Blumenfeld decision was cited by Judge Kimball in his ruling on the summary judgment motions, a ruling being appealed by SCO Group:
Furthermore, SCO's attempt to rewrite "all copyrights" in Schedule 1.1(b) to mean "NetWare Copyrights Only" is contrary to the plain language of the Schedule 1.1(a) and Schedule 1.1(b). Schedule 1.1(b) clearly distinguished UNIX and UnixWare trademarks as assets being transferred. Schedule 1.1(a) also clearly transferred only UNIX and UnixWare trademarks. If the parties intended to transfer UNIX and UnixWare copyrights as well, they could have easily demonstrated that intent while they were making the distinction for UNIX and UnixWare trademarks. There is nothing in the text of the APA that would support an interpretation of "all copyrights" to mean only Netware copyrights.

In Blumenfeld v. R. H. Macy & Co., 92 Cal. App. 3d 38 (1979), the California Court of Appeals rejected a similar attempt to interpret "all" to mean "less than all." The trial court relied on extrinsic evidence to interpret a contract assigning "all claims against third parties relating to the [shopping] Center" as limited to claims against current tenants of the Center. The court of appeals reversed, holding that the "all-inclusive language of the agreement is not reasonably susceptible of the meaning advanced." Id. at 46.

The language of Schedule 1.1(b) is not reasonably susceptible to being interpreted to mean "all copyrights except for UNIX and UnixWare copyrights." The parties clearly delineated that the UNIX and UnixWare trademarks were exceptions and they clearly chose not to make a similar exception for the copyrights. There is also no basis for reading the language to mean that the only copyrights excluded were NetWare copyrights. If the parties had intended to exclude only NetWare copyrights, it would have been simple to use "NetWare copyrights" instead of "all copyrights. However, the parties used "all copyrights." The exclusion of "all copyrights" was all inclusive. Interestingly, SCO does not argue that Schedule 1.1(b)'s exclusion of "all patents" means "only Netware patents." The use of "all patents" after "all copyrights" clearly shows that "all copyrights" cannot be interpreted to mean "only Netware copyrights" while "all patents" means "all patents."

The court concludes that the APA as amended by Amendment No. 1 excluded UNIX and UnixWare copyrights from the Assets transferred to Santa Cruz by the Bill of Sale. The Bill of Sale executed by the parties on December 6, 1995, transferred ownership to Santa Cruz of the Assets as defined by the APA and Amendment No. 1. Thus, the scope of the Assets transferred by the Bill of Sale is determined by the definition of Assets set forth in the APA and Amendment No. 1. Amendment No. 1 made some revisions to Schedules 1.1(a) and (b) but did not change the description of the Intellectual Property included and excluded from the transfer. A review of Schedule 1.1(a) listing transferred assets and Schedule 1.1(b) listing Excluded Assets demonstrates that the transferred assets did not include the UNIX and UnixWare copyrights. The only "Intellectual Property" listed in the Schedule 1.1(a) list of assets to be transferred are the UNIX and UnixWare trademarks. Schedule 1.1(a) did not identify UNIX or UnixWare copyrights as an asset to be transferred. Conversely, the Schedule 1.1(b) list of "Excluded Assets" expressly excluded from the transferred assets "[a]ll copyrights and trademarks, except for the trademarks UNIX and UnixWare." Thus, the language of the APA and Amendment No. 1 at the time of the Bill of Sale is clear: all copyrights were excluded from the transfer.

Apart from the language of the agreements, SCO maintains that it has provided the court with extrinsic evidence that the parties intended the APA to transfer the UNIX and UnixWare copyrights to Santa Cruz. Under California law, extrinsic evidence is admissible both to support interpretations of contracts to which the language at issue is reasonably susceptible and to demonstrate the parties' intent under contractual provisions that the court deems to be ambiguous. Universal Sales Corp. v. Call Press Mfg. Co., 128 P.2d 665, 671-72 (Cal. 1942). Therefore, oral testimony and other extrinsic evidence are not admissible to support an interpretation of a contract that is contrary to the plain language. The critical issue is "whether the offered evidence is relevant to prove a meaning which the language of the instrument is reasonably susceptible." Dore v. Arnold Worldwide, Inc., 39 Cal. 4th 384, 391 (2006). If the contract is not reasonably susceptible to the proposed interpretation, extrinsic evidence is inadmissible and does not create a triable issue of fact that would defeat summary judgment. Id. at 388, 391-93.

When a contract is integrated, "extrinsic evidence is admissible only to supplement or explain the terms of the agreement--and even then, only where such evidence is consistent with the terms of the integrated document." EPA Real Estate Partnership v. Kang, 12 Cal. App. 4th 171, 175-77 (1992). The APA includes an express integration clause stating that the "Agreement, and the Schedules and Exhibits" "constitute the entire agreement among the parties with respect to the subject matter . . . and supersede all prior agreements and understanding, both written and oral." APA 9.5. Novell and Santa Cruz further agreed, in connection with the Bill of Sale, that the APA is an integrated agreement not to be altered by any other understandings: "It is acknowledged and agreed . . . that the Agreement is the exclusive source of the agreement and understanding between the Seller and Buyer respecting the Assets." Bill of Sale 5.

The parol evidence rule precludes SCO from relying on extrinsic evidence to try to rewrite the exclusion of "all copyrights" from APA because the language is unambiguous and not reasonably susceptible to SCO's interpretation. Moreover, even if the court considered the extrinsic evidence, there is significant evidence that the exclusion "all copyrights" was deliberate and consistent with the basic objectives of the APA. While there is no specific evidence that business executives negotiated the issue of copyrights, the changes to the drafts of the agreement show that a significant change occurred. Novell has provided extrinsic evidence supporting the change in the language and the fact that it was relayed to SCO, whereas SCO has failed to present any evidence from witnesses on its side of the transaction who had any involvement with the actual drafting or negotiation of the language in the contract.

Attorneys for Novell and Santa Cruz exchanged specific communications about the scope of the assets to be transferred. The initial draft of the APA included "all patents, patent applications, copyrights . . . and all other intellectual property . . . that pertain to Unix or UnixWare" in the list of assets to be transferred to Santa Cruz. Novell then revised the list of assets to be transferred by deleting patents and copyrights, leaving only UNIX and UnixWare trademarks as intellectual property to be transferred. These revisions were sent to SCO sometime before September 18, 1995, because the September 18, 1995 draft, which ultimately became the final versions of Schedule 1.1(a) and Schedule 1.1(b), already included such changes.

Extrinsic evidence of business negotiators prior to the finalization of the agreement is not probative of the issue regarding copyrights because it is obvious that the deal changed over time. The extrinsic evidence demonstrates that Santa Cruz did not have the cash necessary to complete the deal. Therefore, the parties constructed a fairly complex mechanism to ensure Novell a future revenue stream. Novell has presented evidence that the transaction evolved as it became necessary for Novell to protect its future stream of revenue. Novell deliberately excluded the UNIX and UnixWare copyrights to protect its retained right to receive 95% of future SVRX revenues. Braham testified that the exclusion of UNIX and UnixWare copyrights ensured that copyrights would not be part of the bankruptcy estate if Santa Cruz went into bankruptcy and the retention of the UNIX and UnixWare copyrights strengthened Novell's legal basis for receiving royalties and negotiating buy-outs of SVRX licenses. SCO, however, provides no extrinsic evidence regarding the final negotiations of the deal that would contradict Novell's evidence.

In its attempt to argue that extrinsic evidence is necessary, SCO repeatedly overstates its case. SCO contends that the exclusion of the UNIX and UnixWare copyrights would render the APA meaningless because it would prevent Santa Cruz from pursuing its UNIX business. Braham testified that Novell's sale of UNIX and UnixWare products to Santa Cruz under the APA necessarily conferred a license on Santa Cruz to use the copyrights as needed to implement the APA. Contrary to SCO's assertions, there is evidence that SCO did not need to own the UNIX and UnixWare copyrights to pursue its UNIX business.

It is well established that a contract involving copyrighted works confers an implied license to use the copyrights as needed to implement the transaction. In Food Consulting Group, Inc. v. Musil Govan Azalino, 270 F.3d 821 (9th Cir. 2001), the defendant's predecessor paid $175,000 to plaintiff to prepare a preliminary plot plan and final engineering drawings for a proposal to build a shopping center. Id. at 824. When defendant hired a different firm to complete the project using a modified version of plaintiff's plan, plaintiff claimed that the defendant had no right to use or modify plaintiff's copyrighted drawings. Id. at 824-25. The Ninth Circuit rejected this claim, holding that the contractor granted "an implied license to use the revised plot plan to build the project." Id. at 828. The Ninth Circuit emphasized that "[t]he central purpose of the contract" was the production of engineering documents for the shopping center and given this purpose and the amount of money paid, "it would have been surprising if the parties had intended for [defendant] to seek [plaintiff's] permission before using the plans to build the project." Id.

In this case, while copyrights were excluded from the transferred assets, Santa Cruz did acquire ownership of other rights in multiple versions of UNIX and UnixWare. Moreover, a central purpose of the APA was to enable Santa Cruz to develop and distribute an improved version of UNIX that combined Novell's "UnixWare" product with Santa Cruz's "OpenServer." Implementing this purpose required Santa Cruz to copy, modify, distribute, and sublicense code in Novell's UnixWare products. Thus, Novell's sale of its UNIX and UnixWare products necessarily conferred a license on Santa Cruz to use the related copyrights as needed to carry out the business activities contemplated by the APA.

The conclusion that Santa Cruz had a license to the UNIX copyrights is reinforced by the fact that Santa Cruz indisputably did not acquire ownership of Novell's UNIX-related patents. Santa Cruz needed to use these patents to be able to distribute and modify UNIX products. Therefore, Novell's sale of its UNIX products to Santa Cruz necessarily conveyed a license to use the patents as needed to implement the APA.

Burt Levine, a former paid consultant to SCO and in-house attorney for AT&T, USL, Novell, and Santa Cruz, acknowledged that the APA "convey[ed] enough of a patent license under Novell's patents that would be necessary for SCO to conduct its business." Similarly, he agreed that if Novell had retained the copyrights, SCO would have had an inherent license to use those copyrights as necessary in the business.

Furthermore, there is extrinsic evidence that during the period of time between the signing of the APA on September 19, 1995, and its closing on December 6, 1995, the parties spent considerable time going through the documents and determining what amendments should be made. While there may be some claims that the original signing of the APA was rushed, there were months of further negotiations regarding certain provisions before the Closing. This resulted in the changes made in Amendment No. 1. Although changes to Schedule 1.1(a) and 1.1(b) were made in Amendment No. 1, there were no changes made to the intellectual property provisions.

SCO also argues that there is no evidence that Novell publicly asserted ownership of the UNIX copyrights between the APA's Closing and May 28, 2003. While the court fails to appreciate why SCO believes that Novell would have had a reason for publicly announcing its ownership of copyrights before that date, there is substantial evidence that Novell privately asserted its right to the copyrights during that time period. When SCO contacted Novell to enter into Amendment No. 2, Novell asserted its ownership of the copyrights and it refused to transfer them. There is evidence that when Santa Cruz sold its business to Caldera, Santa Cruz was unable to obtain a chain of title to the copyrights. In addition, there is evidence that in response to several telephone calls from Darl McBride to various individuals at Novell, Novell refused to transfer copyrights to SCO. A failure to publicly announce its ownership is not particularly probative of whether the copyrights transferred.

In addition, the evidence with respect to joint copyrights being used on products does not demonstrate that copyrights transferred under the APA. Novell's explanation for the joint reference of both Novell's and Santa Cruz's copyrights is consistent with the fact that the copyrights in the original UNIX and UnixWare products remained with Novell, and SCO retained the copyright in the newly produced derivative products.

Therefore, even relying on the extrinsic evidence from the time the APA was signed and closed, the court is convinced that the UNIX and UnixWare copyrights did not transfer under the APA or the agreements executed in connection with the APA's Closing.

So, Judge Kimball clearly stated that even if he were to consider SCO's witness testimony, which the law in California said he couldn't, as he read it, he'd still say the copyrights didn't transfer.

But SCO claims that he failed to consider Amendment 2 and its effect on the deal, so let's see what he said about that:

SCO contends that Amendment No. 2 clarified that the UNIX and UnixWare copyrights were not Excluded Assets. Amendment No. 2 amended the Excluded Asset schedule to read: "All copyrights and trademarks, except for the copyrights and trademarks owned by Novell as of the date of the Agreement required for SCO to exercise its rights with respect to the acquisition of UNIX and UnixWare technologies." APA Amend. No. 2 (Emphasis added to demonstrate amendment.) SCO asserts that it is plain that the UNIX and UnixWare copyrights were so required because of the substantial rights to the Business Santa Cruz received in the transaction. Obviously, this contention is rebutted by the evidence above demonstrating that SCO could conduct its business with a license to the copyrights.

Novell argues that Amendment No. 2 did not transfer UNIX and UnixWare copyrights because (1) it does not constitute an instrument of conveyance under the Copyright Act, (2) it did not include any provisions transferring ownership of copyrights nor did it purport to retroactively amend the Bill of Sale to transfer copyrights, (3) it did not specifically identify which copyrights, if any, should be transferred, and (4) Santa Cruz did not "require" ownership of the UNIX and UnixWare copyrights for its business because it already had a license to use these copyrights as needed to implement the APA.

The Copyright Act requires a signed written instrument to transfer ownership of copyrights. Section 204(a) states: "A transfer of copyright ownership, other than by operation of law, is not valid unless an instrument of conveyance, or a note or memorandum of the transfer, is in writing and signed by the owner of the rights conveyed or such owner's duly authorized agent. 17 U.S.C. 204(a). This requirement is meant to "enhance[] predictability and certainty of copyright ownership." Effects Assoc. v. Cohen, 908 F.2d 555, 557 (9th Cir. 1990).

Section 204 is a prerequisite to a valid transfer of copyright ownership, and not merely an evidentiary rule. A transfer of copyright is simply "not valid" without the required written instrument. Konisberg Int'l, Inc v. Rice, 16 F.3d 355, 357 (9th Cir. 1994). Further, unlike a statute of frauds, Section 204 is not subject to equitable defenses, such as estoppel, because such defenses would "undermine the goal of uniformity and predictability in the field of copyright ownership and transfer." Pamfiloff v. Giant Records, Inc., 794 F. Supp. 933, 937 (N.D. Cal. 1992).

"As with all matters of contract law, the essence of the inquiry here is to effectuate the intent of the parties. Accordingly, even though a written instrument may lack the terms 'transfer' and copyright,' it still may suffice to evidence their mutual intent to transfer the copyright interest." Nimmer on Copyrights 10.03[2]. SCO contends that, under the applicable authority, the language identifying the Assets by reference in Section 1.1(a) of the APA, as amended by Amendment No. 2, meets the statutory requirements.

Amendment No. 2 does not include any provision that purports to transfer ownership of copyrights. It merely revised the definition of the intellectual property category of the Excluded Assets schedule. Unlike the APA, Amendment No. 2 was not accompanied by a separate "Bill of Sale" transferring any assets. Nor did Amendment No. 2 purport to retroactively change the scope of the assets transferred by the Bill of Sale that was executed in connection with the APA in December 1995. Amendment No. 2 states that it "amended" the APA "[a]s of the 16th day of October, 1996." Thus, Amendment No. 2 did not retroactively cause the Bill of Sale to transfer copyrights that were expressly excluded from transfer by the APA and Amendment No. 1.

Furthermore, Amendment No. 2 also did not amend Schedule 1.1(a). It is undisputed that the Bill of Sale transferred the Assets contained on Schedule 1.1(a). Even after the execution of Amendment No. 2, however, Schedule 1.1(a) did not include any language regarding copyrights.

Also, significantly, Amendment No. 2 did not identify which copyrights, if any, were "required for SCO to exercise its rights with respect to the acquisition of UNIX and UnixWare technologies." The written instrument required by Section 204 should contain sufficient information "to serve as a guidepost for the parties to resolve their disputes." Konisberg Int'l, 16 F.3d at 357. Amendment No. 2 does not meet these standards. SCO now claims that Santa Cruz required ownership of all of Novell's UNIX and UnixWare copyrights to exercise its rights regarding the UNIX assets it acquired under the APA. Novell, in contrast, contends that Santa Cruz did not need to own these copyrights because Santa Cruz already had a license to the copyrights.

Where the plain language does not resolve the issue, among the relevant extrinsic evidence courts review to determine such "mutual intention" is "the surrounding circumstances under which the parties negotiated or entered into the contract" and "the object, nature and subject matter of the contract." Morey v. Vannucci, 64 Cal. App. 4th 904, 912 (1998). The contract may be explained by reference to the circumstances under which it was made. Cal. Civ. Code 1647.

In this case, the extrinsic evidence surrounding Amendment No. 2 strongly favors Novell's position that Amendment No. 2 was merely affirming Santa Cruz's implied license to use the UNIX and UnixWare copyrights. Santa Cruz's in-house counsel, Steve Sabbath, approached Novell's in-house counsel, Allison Amadia, about obtaining the UNIX and UnixWare copyrights. Amadia testifies that she then reviewed the APA and spoke with Braham to learn about the history of the agreement and the intent of the parties.

Santa Cruz's first proposed draft of Amendment No. 2 referred to copyrights "owned by Novell as of the date of this Amendment, which pertain to the UNIX and UnixWare technologies and which SCO has acquired hereunder." This proposed language clearly intended to transfer the UNIX and UnixWare copyrights through the amendment. However, Novell rejected Santa Cruz's proposed language. Amadia testifies that she told Sabbath that while Novell was willing to affirm that Santa Cruz had a license under the original APA to use the UNIX and UnixWare copyrights in its business, it was not willing to transfer ownership of the copyrights. As a result, the final version of Amendment No. 2 does not refer to any specific copyrights and does not refer to Santa Cruz's "acquisition" of any copyrights.

This extrinsic evidence is consistent with the language of the Amendment, which reads like an implied license. It is also consistent with the fact that the parties did not amend Schedule 1.1(a) when they executed Amendment No. 2. No specific copyrights were, therefore, included as Assets to be transferred on Schedule 1.1(a). As in interpreting the original APA, "the whole of a contract is to be taken together, so as to give effect to every part, if reasonably practicable, each clause helping to interpret the other." Cal. Civ. Code 1641. Construing the language of Amendment No. 2 to be an affirmation of an implied license to the copyrights does not put the amended Excluded Assets Schedule at odds with the transferred Asset Schedule 1.1(a).

There is also significant evidence that Santa Crux did not "require" the UNIX and UnixWare copyrights. Santa Cruz had been able to pursue its UNIX business from December 6, 1995 until October 16, 1996, without any problems due to its lack of ownership of the copyrights. Santa Cruz indisputably did not own the copyrights during those ten months. While SCO has submitted testimony from witnesses stating generally that the copyrights were necessary to running a software business, none of those witnesses give specific examples of how a lack of copyright ownership impeded Santa Cruz's ability to exercise its rights under the APA. The APA conferred an implied license on Santa Cruz to use Novell's copyrights as needed to implement the purposes of the APA. That implied license allowed SCO to license the copyrights to others. Because Santa Cruz already had that license, it did not require ownership of the copyrights. Therefore, even if Amendment No. 2 had a means of conveyance or conveyance language, Amendment No. 2 would not have transferred the UNIX and UnixWare copyrights as there is no evidence that any of the copyrights were "required."

For these reasons, the court concludes that Amendment No. 2 did not transfer the UNIX and UnixWare copyrights to SCO. Even if the Amendment met the requirements of Section 204, the extrinsic evidence demonstrates that the parties intended only to affirm the implied license granted under the original APA. Furthermore, SCO has not provided evidence that it required ownership of the copyrights to exercise its rights under the APA. Accordingly, the court concludes that Novell is the owner of the UNIX and UnixWare copyrights.

I think it's clear that Judge Kimball *did* consider Amendment 2, in some detail, and he ruled that it wasn't a copyright transfer document, for all the reasons he enumerates. Whether his reasons will be convincing to the appeals court judges is the issue. But do you see why I think Roger Parloff's analysis of Judge Kimball's ruling ran off the tracks? His argument, aside from asserting ambiguity, was that determining witness credibility wasn't the judge's role in a summary judgment setting. But he missed that the real issue lay elsewhere, namely, could anyone consider the witness testimony in the first place? That is what the appeals court is looking at, and it's what Kimball looked at, not who decides credibility issues. Kimball mentioned in passing that the witnesses were not credible to him, so that even if he were allowed to consider their testimony, he would still rule as he had, but he didn't decide the issue based on credibility, so it doesn't matter whether the California statute gives him or a jury the role of deciding credibility. Instead, Kimball analyzed whether or not their testimony could be considered by *anybody*, and he ruled that it could not.

It's impossible to predict what an appeals court will do. Just because these issues are what they discussed at the hearing doesn't mean the court can't reach a decision based on something else entirely argued only in the briefs, after all. But I think it's fair to say that while it is conceivable SCO could prevail, if the court wants to find for them, it's a severely uphill climb. And while SCO's attorney, Stuart Singer, apparently did his usual excellent job of representing SCO's interests, the truth is, as far as I can see, that their prospects are very bleak indeed, no matter what the appeals court decides. And the reason is a good one: contracts are supposed to be reliable, predictable. What they say is what they are supposed to mean, barring extraordinary circumstances. You can't just rewrite them decades later to say what you wish they had said.

That's not even the elephant in the room, to me. The elephant in the room is this: if the contract is ambiguous, as SCO requires it to be to introduce its witnesses, how is it possible that there was a copyright transfer? A copyright transfer document has to be unambiguous in order to meet 204(a). If it's not clearly intended to be a transfer, then the copyrights stay where they were. So let's say SCO got the case remanded to Utah for a jury trial on the basis that the contract is ambiguous. Then what? If the jury finds it ambiguous, too, and struggles to figure out its meaning, then it's not likely they'd also find that it was a clear copyright transfer document, I don't think. And SCO needs both. It's not impossible, but SCO's argument seems to be so delicate, it's like brain surgery, where 1/8th of an inch too far, and you ruin everything. No doubt that is why Boies Schiller sent Mr. Singer.

Update: The more I think about this, the more clearly I see that SCO is in a logic pickle. Here's why: They claim that the APA is clear, but that Amendment 2 presented ambiguity, since it alters the APA. Yet, they say it is Amendment 2 that officially transferred the copyrights. They have a lot of witnesses about the APA and its intent, as seen by a group of executives, paralegals and such, none of whom was there for the actual drafting in the end, couldn't testify about copyrights as far as the legal drafting was concerned, and none of whom knew one thing about Amendment 2, which happened almost a year later, without their participation at all. Don't you see how fatal that is? SCO has only one witness regarding the Amendment 2 drafting, with blanks in his recollection. Novell has at least four witnesses with direct involvement and total recall, plus saved drafts.

Since SCO now claims it was Amendment 2 that did the copyright transfer, they need witnesses about *Amendment 2*, not the APA. They have only Sabbath for that, as far as direct involvement, who couldn't recall copyright discussions and who contradicts not only four witnesses of Novell's (Amadia, Braham, David Bradford, and Jim Tolenen), but the witnesses' saved draft documents to boot. Here's what Judge Kimball wrote about SCO's witnesses, and Novell's, regarding Amendment 2:

David Bradford, Novell's Senior Vice President and General Counsel, oversaw the negotiation and drafting of a contract between Novell and Santa Cruz. Decl. David Bradford at 4. During the negotiations of the APA, he discussed with Braham the need to increase Novell's protections in the transaction, including but not limited to retaining Novell's intellectual property rights in UNIX and UnixWare. Id. 9. Bradford testified that the exclusion of copyrights was intentional and "should any person suggest otherwise, they are mistaken." Id. 12. Bradford reviewed the terms of the APA with the Novell Board of Directors at a meeting held on September 18, 1995, the day before the APA was signed. Id. 13. Bradford received the final APA on the day it was executed and was responsible for reviewing it and approving it for final signature by Frankenberg. Id. 17. Bradford wrote a memorandum reflecting his approval of the APA. Id. He testified in this litigation that he still agrees with the statement that the APA is "an accurate reflection of the business and legal terms and conditions negotiated between the parties." Id.

James Tolonen, Novell's Chief Financial Officer from 1989 through 1998, testified that he was actively involved in the preparation of the APA. Tolonen Decl. 3, 7. Tolonen interacted with Bradford, who he described as the "point person" heading up Novell's negotiation team, and Braham. Id. 8, 9. Tolonen reviewed drafts of the APA and reviewed the final version of the APA to ensure that its terms were consistent with the intent of the deal. Id. 9, 10. Tolonen testified that "[a]s reflected in the plain language of the executed [APA], Novell intended to retain and did retain, as an 'Excluded Asset,' all copyrights, including all UNIX and UnixWare copyrights." Id. 11. ...

Jim Tolonen, Novell's Chief Financial Officer and Novell's business executive assigned to Amendment No. 2, confirms that it was never Novell's intent to transfer copyrights by way of Amendment No. 2. Decl. Jim Tolonen at 13, 14. He states that he would not have signed it if he had believed it would do so. Id. 15. He testifies that Amendment No. 2 was also not meant to "clarify" what the parties intended to transfer in the original APA. Id. 14. Rather, he states that Novell intended to retain the UNIX and UnixWare copyrights in the APA, and Amendment No. 2 confirmed that Santa Cruz would be allowed to continue to use the Novell-retained copyrights as it had been doing as was required to exercise its rights under the APA. Id. 16.

Sabbath has no recollection of negotiating the copyright portion of Amendment No. 2. SCO relies on the testimony of Robert Frankenberg and Ed Chatlos regarding Amendment No. 2. However, both men had left Novell before Amendment No. 2 was negotiated and had no involvement in the negotiation of the amendment. Frankenberg Dep. at 86; Chatlos Decl. 4. SCO relies on the testimony of several other individuals involved in the business, but none of them admits to being involved in the negotiations of Amendment No. 2 or to having any specific recollection of the negotiations with respect to the transfer of copyrights.

Of course, SCO can't win against all that, even if they were successful in getting extrinsic testimony included. They literally haven't got a single witness they can use to rebut the clear story Novell presents.

So while SCO argues, as it must on the appeal, that Amendment 2 is ambiguous, there are a lot of witnesses that will clearly testify for Novell as to its purpose, meaning and intent, with Show and Tell on the documents for the jury, if it ever goes to trial before a jury. And their testimony is that Novell never agreed to transfer the copyrights.

See? No matter how you slice and dice, SCO can't get the copyrights, I don't think.


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