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Eyewitness Reports from the SCO Bankruptcy Hearing on SUSE's Motion to Lift Stay - Updated 2Xs
Wednesday, December 30 2009 @ 04:50 PM EST

I have now the notes from our own reporters at the hearing in the SCO bankruptcy today. And I have to say, it's looking good for SUSE, judging from MikeD's notes. I think these notes also clarify what SCO's problem is. They don't understand the GPL at all. And their dreams for the future? It looks like they plan to sue folks, if things go their way. And we get what appears to be absolute confirmation that AutoZone paid something to make SCO go away.

MikeD's report:
Adam Lewis and Sean Greecher were there for Novell. Bonnie Fatell and Judge Cahn were there for SCO. Al Petrofsky and Ted Normand attended by phone

The hearing started with Judge Gross approving the first four items that were not disputed:

1. File Exhibits to Grant Kim under seal
2. Sale of de minimis assets
3. Approval of new lease with Canopy
4. Approval of retention of Hatch, James, and Dodge as special litigation counsel.

They then went into item #5, Al Petrofsky's motion.

Judge Gross gave Mr. Petrofsky the floor to address his concerns. Al was professional and essentially restated what was in his motion [by phone]. The Judge asked Mr. Petrofsky about his standing. Al owns 100 shares of stock, and owned it prior to bankruptcy. That seemed to satisfy Judge Gross.

Ms. Fatell argued that the cited rule 2015.3 did not apply to them. She spoke of the difficulty of getting the MOR's done for the months before the Trustee arrived. She said that the October, November, and hopefully December MOR's will be filed in January. She argued that a firm deadline on these filings would be a burden on the estate. Any requests for extensions would require coming to court to ask for each one.

Judge Gross talked about the late filings and how the new Trustee has had his hands full since coming aboard. Under the circumstances. he excused the late filings. He is not going to require a firm deadline. However, he did say he will point it out if future filings drag on beyond a reasonable time. The motion was denied.

#7 - Motion to file Tibbitts declaration under seal.

Mr. Lewis had no objection to filing under seal - *IF* it is filed at all. There is no excuse for filing this on the eve of the hearing, he said. It contains an opinion from Mr. Tibbetts that is not appropriate.

There was back and forth on this between Mr. Lewis and Ms. Fatell. Mr. Lewis argued that it should be denied because it was late. Same SCO stuff on late filings all over again. It's happened repeatedly in the past, and will likely continue in the future unless the Judge puts his foot down, he argued.

Ms. Fatell argued that the contents were not a surprise to Novell. She conceded that "paragraph five" maybe should not be in there and offers to strike it.

Judge Gross pointed out that "paragraph five" would not be considered by the court and thanked Ms. Fatell for offering to remove it. There is no harm or foul since Novell was well aware of the document, he said. He allows it and agrees to keep it under seal.

#6 SUSE Arbitration

The was the meat of the hearing, and Adam Lewis was very sharp today. More on this later. Adam Lewis:

SCO says they own the copyrights, but they transferred these copyrights to UnitedLinux. Copyrights are at the core of the litigation. Refers to paragraph 16 of SCO's motion to stay the arbitration where SCO points out that the copyrights are the core of the litigation.

The Judge asks Mr. Lewis "If SCO loses in Utah - is the arbitration moot?" Mr. Lewis says yes. Central purpose of the litigation is who owns the copyrights. Points out that SCO Trustee has said they will aggressively pursue this litigation.

There is nothing about costs on the record. The arbitration is almost done. SCO just needs to file a final brief. This arbitration needs to be done. There is no harm to the estate. This has now been stayed for 2.5 years. It's time to get it done.

Judge asks what remains to be done, and how long the hearing will take.

Mr. Lewis says SCO needs to file the brief, and then the merits hearing. He expects that to take 8 days. Not allowing this to proceed gives SCO an unfair advantage. If SCO wins in Utah, they can threaten further litigation even though the arbitration could make their claims worthless. SCO wants to block this "to use as a sword instead of a shield".

Ms. Fatell agrees that deciding ownership of the copyrights is critical. The trial is scheduled for Utah. SCO has not sued SUSE. That may or may not happen in the future. Novell has had its day in court. Now it's SCO's turn for its day in court. It's unfair to allow SUSE to interfere with the upcoming trial.

She argues that despite what SUSE says, SCO would never give its IP away for free. She has documents that will show that certain items were excluded from the UnitedLinux deal. SCO never gave away their IP, and she flatly disagrees with SUSE on what the outcome of arbitration will be. It's prejudicial to SCO because of the costs, time, and travel required. "It's in Switzerland..."

She goes on that the costs could be hundreds of thousands to a million dollars. Boies has already spent $400,000 on this. SCO is on a shoestring budget and this is a real hardship. They cannot fund two trials at the same time. Says there is no hardship to SUSE, and that their claim in arbitration is meritless. Besides, SUSE cannot show the likelihood of success. "We are entitled to our day in court that is coming up in Utah." Also, the Trustee has never said their claims are for $Billions.

Judge Gross: What about Mr. Lewis's point about this being used as a sword instead of a shield?

Ms. Fatell responds she is not sure what that means. Points out that they could sue SUSE, but have not, and are not planning on doing it.

Mr. Lewis responds that the stay should not be used as a sword instead of a shield. If SCO wins in Utah, they will claim they own the copyrights and then they can threaten to sue.

SCO recognizes that the arbitration could say they don't own the copyrights. We have established probable cause of success and have met the standard. Mr. Lewis pointed out that SCO had gotten money from the AutoZone settlement which could be used ....

... which brought Ms. Fatell to her feet with an objection "It's under seal!" - any mention of the terms is sealed.

Mr. Lewis points out that there are few costs for Utah. The attorneys have been paid. Most of the costs for arbitration have already been incurred. It's time to wrap these cases up. They should not be allowed to go on for years more.

Judge Gross asks about a limited lift of stay. Would it be fair to lift the stay for scheduling, but not allow the arbitration to happen until after the Utah trial?

Mr. Lewis points out that such a limited stay could send the wrong message to the arbitration panel. Argues for a full lift of the stay. The parties can appear here if there is a conflict. They are all professionals. They are all involved in the Utah trial and the arbitration. They can work things out. They can't be in two places at the same time so it will all work out.

Mr. Normand is asked to speak by Ms. Fatell. He refers to the sword/shield comment - SCO is not pursuing any claims of infringement against SUSE at this time. They also don't want both going on at the same time.

Judge Gross asks what is involved in SCO filing the brief for arbitration. Mr. Normand responds that equivalent of filing a large summary judgment document.

Ms. Fatell says that SUSE has not established a likelihood of success and have not met the burden which would allow lifting the stay. She says that Novell/SUSE are one and the same. They are just trying to deny SCO their day in court. We are not suing SUSE for infringement. Stay relief should be denied. It's a huge burden to the estate.

Mr. Lewis points out that it was the Utah court that said this piece needed to be decided in arbitration. SCO creating the brief may be hard, but it will only get harder the longer we wait.

[MikeD note: I think the following is the first time this has been point blank said in this court ...]

Mr. Lewis points out that SCO product is not Unix or anything else except litigation. Their product now and in the future is litigation. SCO is all about suing people over copyrights. They are a litigation machine.

It's SCO who has caused these delays, he said. They are the ones who asked for the arbitration to be stayed. Trust us to work out the details on scheduling. The Trustee can always come back here if needed to resolve conflicts. Let us get this back on track. There will be no resolution until this is decided.

Judge Gross: "I was going to rule from the bench, but now I'm going to review this."

He indicated he is looking at a limited lift of stay or a full lifting of the stay "that will be kept on a long leash."

Hearing ended.

Aftermath

Right after the hearing the attorneys shook hands and exchanged pleasantries. Mr. Cahn congratulated Mr. Lewis for a well-argued performance. Mr. Cahn told Mr. Lewis that they do not have the money to do two trials at the same time. Mr. Lewis asked him if they would sign something that says they would not use a favorable ruling in Utah to sue until after the arbitration results.

Mr. Cahn said no, he would not do that.

Mr. Lewis said, exactly - that's why the arbitration needs to be done.

As you can see, it tipped toward at least a partial lifting of the stay, although how a partial lifting helps is a mystery to me. But notice how the SCO position makes very little sense? At one point, Ms. Fatell argues that SUSE and Novell are one and the same, according to our reporter's notes. Then SCO argues that they are not suing SUSE, but if they are one and the same, what difference would that make? SCO is suing Novell *over* SUSE's Linux, which is what brought the arbitration into the picture. So it makes no sense. And is it possible that Ms. Fatell does not know that SCO's litigation filings in the IBM case do ask for billions? And their intentions, SCO's new management's, are now fairly clear, I'd say. I'll wait until I get to see a transcript or listen to the audio to form a definite conclusion, but it appears that newSCOmanagement is very much like oldSCOmanagement in not comprehending the GPL at all and hoping for some short-term gains no matter what happens in the last act.

Sad. But that is how I read things now.

And I disagree with Mr. Lewis that if SCO loses in Utah it makes the arbitration moot. The arbitration will clear all end users, not just Novell or IBM. Utah is about who owns certain copyrights, but not all. For example, any post 1995 copyrights belong to SCO, no matter whether it loses in Utah or not. It might moot the Novell litigation, but the arbitration is actually broader in scope, in that it would block *any* copyright holder, including Novell, from suing anyone over the copyrighted code that was donated to UnitedLinux. When you consider that UL included things like JFS, it's actually a more important forum than Utah, in my view.

Here's the second report, from RFD:

SCO Bankruptcy Hearing, Dec. 30, 2009.

Live Attendees:

Adam Lewis for Novell/SUSE
Sean Greecher for Novell/SUSE
Bonnie Fatell for SCO Chapter 11 Trustee
Edward Cahn - SCO Chapter 11 Trustee
R. Stephen McNeil for IBM (He sat behind the rail and did not participate)

Phone Attendees:

Michael Jacobs for Novell (He did not participate)
Ted Normand for SCO
Alan Petrofsky - Pro Se

The US Trustee was not represented.

10:06 - Judge Gross entered the courtroom and announced several uncontested items he had approved. Bonnie Fatell asked that Ted Normand be admitted pro hac vice, for the purposed of this hearing. APPROVED.

Judge Gross noted that Alan Petrofsky was a shareholder. He asked Mr. Petrofsky how many shares he owns (100) and whether he acquired them before or after the bankruptcy filing (before). Mr. Petrofsky noted that if SCO were to win $5 Billion, as they are seeking, his shares would be worth about $20,000. Judge Gross appeared, to me, to be satisfied with those answers.

Mr. Petrofsky briefly argued his motion and Ms. Fatell responded. Judge Gross indicated that he expected the MOR's to be filed in a timely manner, but that he would not impose hard deadlines. As to including foreign subsidiaries in the MOR's, it was up to the movant to demonstrate good cause why that should be required, which in his opinion, Mr. Petrofsky had not done. He noted that the US Trustee had not joined in this motion, which he considered significant.

DENIED without prejudice.

10:22 - Ms. Fatell asked that the Tibbitts Declaration be filed under seal. Mr. Lewis agreed that it should be filed under seal, if it is admitted at all. He objected to what is yet another very late filing, and specifically to paragraph 5, in which Mr. Tibbitts opines on the merits of the arbitration. Mr. Lewis admitted that Novell/SUSE was not seriously prejudiced by the late filing. It seemed clear that Judge Gross has no intention of getting into the merits of the arbitration, so it is probably irrelevant.

ADMITTED under seal. Paragraph 5 was STRUCK.

10:33 - Mr. Lewis and Ms. Fatell then argued the merits of the Novell/SUSE motion to lift stay on the SUSE arbitration. Judge Gross asked several questions. He obviously was considering whether a partial lifting might be appropriate, which Mr. Lewis did think was a good idea. Judge Gross seemed be impressed with both sides of the argument and wanted to review some of the documents before ruling. He took the motion UNDER ADVISEMENT. He said he will rule within a week.

11:46 - Hearing ended.

I have no idea how Judge Gross will rule -- he seemed truly undecided. After the hearing, I heard Edward Cahn tell Adam Lewis that the motion was well-argued, to which I would agree.

My impression of Ms. Fatell is that she seems to be clueless about the nature of SCO and appears to accept everything Mr. Tibbitts and BSF tell her. Whether that is truly the case, or she is playing dumb for now, I cannot tell.

Update: I have now had the opportunity to listen to the audio and to take some quick notes. I'm excising the part about AutoZone, in case SCO wishes to have it taken out of the record, which I doubt. But out of an abundance of caution, I won't include my notes on that. I will say, though, that it's my opinion now that it wasn't much. You'll see why I say that, when you note what Mr. Lewis says about how Boies Schiller spent $400,000 on the arbitration so far. That's all, and it's almost all done, so if the suggestion was that SCO could use money taken in from AutoZone, it certainly wouldn't need to be much to be enough to finish the arbitration.

As for SCO's new management, they tried to get the court to say that the arbitration couldn't proceed until "the dust settles" for a while after the Utah trial, if SCO succeeds. The purpose of that delay, Novell argues, would be to get a leg up, sue people, execute against Novell, while pretending for the moment, in essence, that the arbitration which at a minimum could deeply slash any value in the copyrights, even if SCO can get a jury to agree it should have them, doesn't matter in the interim. Interestingly, Novell says that just maybe there can't even be a final decision in Utah until the arbitration results are in.

And it was very interesting to see what SCO argues, that it has claims separate from the arbitration. I gather it hopes for money from IBM in particular, and believe it or not, it stated that it has claims against Novell for slander of title. If there is one claim that was never viable, in my view, that was the one. And now that it has take SCO ... what, five years... even to get that mattered teed up to get decided in Utah, on what basis can you argue that Novell had no right to claim ownership, when the District Court agreed with its right as to ownership? So, in short, I was impressed by Novell's implication that all SCO wants is some time period to rustle up some money in the interlude between Utah being decided and Switzerland.

Blech.

As for the Petrofsky motion, you'll see the mistake he made in how he understood the new rule. It's very clear.

Anyway, here are my notes, and keep in mind that for accuracy, you'd need to buy your own audio or just wait for the official transcript for anything that matters. I tried for accuracy but I'm only human, and humans are not perfect, and these are just my personal notes, which are not complete. So realize this is for general interest only, and not in any way official or necessarily reliable, but it's my best effort to capture the flavor of the hearing:

Fatell: Says Ted Normand on the phone, and pro hac vice filed re this hearing.

Judge Gross: Says fine. He'll sign the order.

Fatell: First, on the schedule...

Judge Gross: I've signed the uncontested.

Fatell: Fine that takes care of Item 1, 2 the motion for authorization for sale of de minimis assets, item 3, the lease, and item 4, the retention of Hatch Dodge. This takes us to the contested matters.

The first contended issue is 5, the Petrofsky motion to compel. We did file the MORs.

Judge: Mr. Petrofsky, I've read the papers, but you can make some arguments.

Petrofsky: [by phone] - mentions deadlines for statements of disbursements. SCO missed deadline by 53 days re statement of disbursements. Filing of several MORS makes it moot about filing those MORs, but asked court to do something about deadlines on other issues and going forward, taking into account that failure.

Lack of any deadlines set by the court had caused problems and confusion. Asks for specific deadlines, 20 days after the end of each month. Trustee

Semiannual subsidiary reports -- new rule 2015.3, rule was adopted in 2008 and Sup Ct ordered as far as just and practicable applies to earlier field, and I described why just and practical in my brief. More than a year after the new rule. Sup Ct explicitly didn't put in a grandfather clause, but instead said to use the new rule as soon as just and practicable.

Trustee free to present any evidence, but said he wouldn't, but would ask for another notice period if the court inclined to rule against him. New rule gives plenty of leeway upon cause shown to adjust deadlines. No objection to SCO showing cause for not meeting requirements and getting looser deadlines. Wants burden of showing cause placed on SCO.

Judge: I have one question, because it's never been quite clear to me. You are a sharehholder of the debtors? How many shares?

Al: I own 100 shares.

Judge: Did you buy before or after SCO filing for bankruptcy?

A: Before. The shares are listed in the list of shareholders attached to the petition. And in case there's any suggestion as to what size that interest is, the Trustee said the claims against IBM and Novell are meritorious, and those claims seek a minimum of $5 billion from IBM, that's 'B' as in 'boy', and should SCO succeed, it could pay off creditors with interest and leave more than $20,000 for me, so that is the potential value of the interest.

Fatell: Let me address the new rule and that it's the burden of the trustee to show cause....

Judge: My understanding of the new rule is that cause must be shown by the movant.

Fatell: We understand it that way too. Rule not applicable to case already pending and no request by the US Trustee to oder the debtors to comply with this provision, so I'm not sure why there should now be a burden on trustee to show why it should not comply. I don't think it is required to comply.

We've done the best we could. We have now filed MORs for July and August, both prior to trustee being appointed. We have not yet been through them to scrub those and historical data. Our financial advisors did review them. Caveat that as we wind down the year at end of October and review current financial situation, and prior to our appointment, we reserve right to make some modifications.

We are working on year end, and October is end of year, and we hope to file in January, certainly October and November, and we hope December.

As for setting a deadline, that isn't required by the rule. The rule doesn't require court to set any deadlines. We are concerned that if we need an extension, then we'd have to come in, file a motion, show cause why it is asking for that extension, and not an appropriate burden on this estate. We request motion be denied, and if without prejudice and he thinks he wishes to revisit that issue, that's up to him.

Judge: I understand the circumstances, so let me rule. As to late filing, whether they are excused or unexcused, I think the circumstances of the case provide the appropriate excuse for the lateness of the MORs. We have a new trustee. Working hard. Major issues he is addressing. And so I do believe the late filings are excused. Will not require a firm deadline for filing the MORs for the same reasons. I note the office of the US Trustee is not present, has not joined in the motion, and has not raised a concern, and that is of significance to the court. I am satisfied with the Trustee's diligence and efforts. I don't think it's appropriate to set a firm deadline.Obviously, if it drags on beyond what he thinks is reasonable, I will notify the parties with maybe an order to show cause or something of that kind why the delay is occurring, but Trustee had to do MORs for pre-appointment time months, which obviously required exta effort. So I take note of that and deny the motion re the MORS. As to reports for subsidiaries, it was specifically not a grandfathered rule; it applies prospectively, unless cause is shown, and it has not been shown why the court should extend the amended rule to this debtor.

I will deny the motion regarding the operating reports, without prejudice. If Mr. Petrofsky wants to file a motion and provide evidence as to why the "for cause" requirement can be met and is met, he'll reconsider, but as of now, has not seen a basis to find that the court should apply the new rule applying prospectively to SCO. Fatell: Offers to prepare the order.

Judge says thank you.

Fatell: The next issue is the SUSE motion - we filed an emergency motion to file under seal.

Judge: Any objection to filing that under seal? Mr. Lewis?

Lewis: Do I have any objection, like a true lawyer, my answer is yes and no. No objection if filed at all, and that's the yes part. This filing is pretty late, on the eve of the hearing. We filed our motion on 10th of Nov. The trustee got an extension to file his response until Dec. 15, 35 days. Maybe our filing was the 9th. We had a short time due to holiday, but that's OK.. Why file on the eve of the hearing? I can't see any excuse for it. That's the first question.

This is not the first time in this case when we've seen eve of hearing filings without any real excuse.

While we don't object to the filing of the document under seal, the Declaration includes a legal statement, that we believe is not admissible and is inappropriate. his opinion as to the merits of the SUSE proceedings, is not appropriate for this court to consider. Legal issues are not something an expert can offer.

Asks that it be struck, for both reasons. Concede that the SUSE proceedings is contested, but that is all the Declaration really accomplishes, because what it did was basically it filed an answer to our moving papers, in effect.

Judge: Let's resolve this issue at the outset.

Fatell: As to timing, this is a confidential document, part of the arbitration, not a surprise doc to SUSE, they have it already, and in preparing their submissions, and their redacted version of the counter doc they filed, they are aware of this document. No surprise here. Filed it in response to reply brief, where they said trustee doesn't even attempt to explain evidence and arguments... We didn't explain initially because the burden is on SUSE to show they would prevail, but in light of their reply, we felt we needed to respond.

Purpose of Declaration was merely to Identify the doc as true and correct and happy to have that paragraph 5 stricken, and just have the declaration say the doc is a true and correct copy of the doc filed in the arbitration.

Judge: Does that help, Mr. Lewis?

Lewis: Yes, but I think we need to set some standards for how this case is going to proceed, and an eve of hearing filing is not OK. The issue of the merits was teed up in our motion.

We discussed the merits in our motion. It was clearly a matter for their reply. The fact that we commented that they hadn't done what they should have done doesn't mean they get to file a sur-opposition . It's not appropriate to permit that here. I understand in some sense, it's no harm, no foul. But I don't want this to keep happening, Your Honor.

At least when the Debtor came in on eve of motion to convert, they could say, we just signed it. That's not even true here.

In 35 days, they couldn't figure out they needed to file something that addressed the merits? They had the doc too. It's been in the arbitration all along. Novell asks that court deny filing just to set a standard.

Judge: Are you prejudiced by the filing? It isn't a surprise doc. I realize there have to be standards, and bankruptcy is a little bit of an unusual animal, and as a judge it helps me to consider all the evidence, unless a party tells me it was surprised, a witness never disclosed, or a doc not produced. Is that your situation here?

Lewis: We are not totally surprised in that we know the record, but the fact that you know something exists doesn't mean you know they'll use it at the last minute in an unanticipated way. On the other hand, encouraging last minute thinking on how we can bulk up our response because we didn't do a very good job. It encourages them not to put things before the court, until they see what they need to respond to further.

I favor court wanting to get it right. The question here is that could have been the case without this last-minute filing. If we let this go, then we'll see it again some time and we'll be arguing it again. There really is no excuse there this time. On other occasions, there may be.

Look at the realities on the other side of the coin. In this instance, there is no excuse for why this is done. In the end, I don't think it will affect the outcome of the proceedings. I don't know what arguments, given that Ted Normand is on the phone and don't know what arguments he will make, so I can't say it won't prejudice us. But understands the court's point of view.

Judge: I appreciate the concession re the paragraph. I wasn't going to consider it anyway.

Not prejudicial. I appreciate we need standards and limits, but in this particular case, given the nature of the document and the opposition was aware of the doc,. so he will allow the filing. Declaration not stricken.

Mr. Lewis. The merits of your motion.

Lewis: This is a motion where SUSE asks the court to lift the stay to complete the arbitration which has been pending for 4 years, and stayed at the request of the debtor for 2 and 1/2 years now.

This arbitration, contrary to anything you've read, is important to the outcome of these cases. SCO claims it owns certain copyrights, in the trial in Utah, starting in March. In SUSE lit, what is asserted is that even if the Utah litigation SCO prevails in showing it got the copyrights from Novell, in SUSE, we'll show that SCO turned around and transferred those copyrights, it doesn't own them any more, it gave them to UL. Those copyrights are at the core of the debtors' reorganization. This is the other side of that same coin.

If you don't own the copyrights you can't sue on them. Maybe they don't evaporate to the last penny, though they might, but a lot of that value will evaporate. You can't reorganize until you know the whole picture. Let me quote from paragraph 16 of SCO's reply on its motion to enforce, or find the stay applies, two years ago: we had said that SUSE wasn't suing SCO, just defending itself, and SCO said, no, it's really offensive. Here's what SCO says:

SUSE lastly contends that the Swiss arbitration is not stayed ... In fact, however, SUSE seeks a hundred million $$ and a declaratory judgment that SCO does not own perhaps its most valuable asset, the UNIX intellectual property.

How much clearer can it be that this is central?

We don't know what the ruling will be in Switzerland, but even back then SCO itself realized and said to this court that that ruling could undermine those key assets. That hasn't changed.

The only thing that changed is that the appeals court has overturned the decision that held that Novell owned the copyrights and never transferred them and put that on the table again.

Judge: If SCO loses, doesn't it moot the arbitration?

Lewis: Moots largely and maybe totally.

But what happens if it wins? Then you still have to have this decided? Is the trustee willing to agree to a stay of execution until arbitration is decided? It could be several years from now, if it doesn't go forward now. Why not proceed on a parallel track?

The money in an estate, however limited it is, has to be spent on the central issues of the case.

This is at the heart of the Trustee's attempt to pursue the litigation or sell the litigation assets, or sell the copyrights, etc. The only consequence of allowing Utah lit to go forward and reach a result that is contrary to Novell, without protection for Novell, is that the trustee gets a period of having a leg up in the relationships of the parties which he can try to capitalize on, until the SUSE arbitration is decided, maybe a couple of years away. And that's not fair. It's using the stay as a sword, not as defense.

He said it has to be pursued aggressively now, and that means everything that relates to that issue needs to be pursued. not just what suits him.

On the issue of the expense. We have no evidence of financial burden. Very little in the record about what is available, there's nothing on how much it would cost, nothing about what else is going on with the estate, but even if it has limited assets, this arbitration is every bit as important unless you want the parties to have unequal power. The only way to get them decided at more or less the same time is to go forward now.

Everybody acknowledges that if the stay is lifted today, the arbitration won't happen tomorrow. Arbitration is nearly done. There is one small brief SCO needs to file on its counterclaims; all the other filings are filed. All that remains is the hearing, a few days, at half price except for local counsel. But what else is the money here for? What are we saving the money for, even if it's limited? The only party going to be harmed if we prevail is to us, because we'll never see a penny, but that's ok with us if that is what is required to get this resolved. We all need to know, creditors, shareholders. .. We need to let the arbitration panel know it can schedule. There is no harm or prejudice here, because the estate needs to know the answer to this question. It's got to be done. And the only reason to oppose is to get an unfair advantage.

The arbitration would happen either after the trial or maybe contemporaneously. The lawyers can't be in two places, but we can work that out. If the arbitration is not resumed, who knows what will happen? They might dismiss, and all that money will be wasted and SCO will have to start again and prejudice to Novell who will have to do the same thing.

Judge: Describe for me what remains to be done?

Lewis: Two things. SCO can file one brief on its counterclaim and the merits hearing, that's what remains to be done. Preparation of witnesses.

Judge: Any discovery?

Lewis: No. It's done. All the record is in except for this final brief. And the arbitration will involve experts and some lawyers. Some cost to both sides, but it's not like we're starting from scratch.

Judge: How many days do you think will be required for the hearing?

Lewis: 8 days, maybe. Nothing like the 3-week trial in Utah. Not a jury trial. Just the brief, which SCO was probably already in the process of preparing the anyway. Either it will give the trustee an advantage, if stay not lifted, if SCO wins in Utah, or it will drag things out indefinitely. Neither is acceptable.

Fatell: Fundamental flaws in SUSE's argument. Ownership is the fundamental question that has to be decided first.

The action in Utah isn't just about this infringement, but it's also about a claim for slander of title and breach of contract and a number of claims asserted there.

I need to go through this timeline. In 1995, Novell sold the Unix business to Santa Crux Operations. In 2001 SC sold that business to Caldera, which was the predecessor of SCO. In May of 2002 SCO entered into a series of agreements to form UnitedLinux. In March of 2003, SCO sued IBM, not Novell, to enforce its copyrights to the UNIX technology and for breach of contract and copyright claims arising out of Project Monterey. Novell directed SCO to waive its claims, and alleging for the fist time since 1995, that those copyrights were not transferred to SCO and so in January of 2004, SCO sued Novell for slander of title. That complaint was amended, it added copyright infringement, duty of good faith, etc.

Judge: it's been like a rolling snowball.

Fatell: It has.

Judge: It's gotten larger over time.

Fatell: It has. In April of 2006 SUSE filed for arbitration. Same month Novell sought to lift the stay so the the district court action could continue, as I understand it, but not the arbitration. I'm not an IP expert, so I may have stated it overbroadly. So litigation in Utah went forward, and Novell prevailed on SJ motions. and SUSE didn't interfere. In Aug of 2007, district court ruled in favor of Novell, reversed for trial the amount of royalties, and in Sept. of 07, SCO filed for Ch 11. Debtor asked to enforce the stay re SUSE and in Nov of 2007 Novell obtained stay relief in this court to go forward in Utah liquidate its claims for royalties, and SUSE didn't object. Court in Utah awarded 2 1/2 million dollars. The appeals court reversed and remanded back for trial and at the same time Mr. Cahn was appointed as Ch 11 Trustee. Now we have a trial set to go forward in March.

The copyrights were transferred, according to SCO's position, in 1995. It wasn't until 2003 that it said it never transfered them. From 1995, Santa Cruz and Caldera conducted the UNIX business without issues. SUSE has not objected to anything until 2004, it never objected when Novell was in the winner's seat. It then saw no reason the two had to go on together. So Novell has had its day in court, and it's now time for SCO to have its day in court. The ownership of the copyrights has to be decided first. no reason to put the cart before the horse and decide first about a later transfer.

Unfair to, now when SCO finally has its day in court, to say, no we are going to stop that or we're going to interfere with that and have another proceeding going forward at the same time.

Arbitration, contrary to SUSE's claim, is not the most important asset of the estate. Trustee does not agree that the arbitration is required for reorganization or to decide if reorganization or liquidation is appropriate in this case. Believes has strong claims for slander of title against Novell and breach of contract against IBM, among other claims, and these are separate from SUSE issue. IF estate prevails, it will pay all creditors and accrue to the benefit of the equity holders.

There may be copyright infringement suits against others that may have value to the estate someday, but the question for today is whether it owns those copyrights and whether it has valid claims against Novell and IBM.

Disagree that outcome in Utah is dependent on arbitration. Different issues here, different facts, different contracts, and no reason to decide them in tandem.

With respect to the merits of the arbitration: SUSE's claim is grounded on the unsupported allegation that in 2002 by signing contracts for UL, it gave away its IP rights to its proprietary UNIX operating system, its most valuable asset, that it gave it away to SUSE and every other user of Linux. It's SCO's position, under any fair interpretation SUSE's claims lack merit. There is no way it would have entered into those agreements to give away its entire business. Ridiculous to believe that in entering into those UL contracts, SCO intended to put itself out of business, which is effectively what SUSE's position is.

SCO submitted the arbitration documents to this court. SCO directs the tribunal to look at the entire set of documents in UL. Points to specific carve outs and reserves and excepts regarding certain assets that don't go into the UL venture. There are witness statements, there are documents and emails that completely eviscerate SUSE's claims, and SCO is very confident it will prevail. There are witnesses referenced, and our position is that It did not assign or transfer its UNIX technology to UL.

So the arbitration is not a done deal.

So the court has to go through the necessary factors to see if there is a reason to lift the stay.

1. Prejudice to debtor element: SCO likely to have several witnesses, will have to pay 50% of the arbitrators' fee, who bill at $800/hour, and pay Boies , at 50% of normal fees, and there will be costs, and in-house counsel will have to attend. Swiss counsel resigned from the case some time ago, and so they'll have to get a new lawyer, get him up to speed, and they'll need to bring in experts. And it's going to go forward in Switzerland. So not a minimal expense.

All those people have to go there for an 8-day trial, which is a two-week trial. 8 business days. Huge expense to have all those people housed, fed in Switzerland. Could be hundreds of thousand if not approaching a million dollars. Looked at records, and BS already spent about $400,000 on this litigation. This is not a short hearing. This is a trial. It will involve all of the costs any other trial entails. Respectfully, Novell minimizes the expense.

If stay lifted, no certainty when the tribunal will reconvene. If the panel scheduled for even April or May, after the March trial in Utah, preparation will surely overlap inevitably. It has to prepare both at the same time. It's the same counsel. MORs recently filed do demonstrate and we've represented that SCO is on a very thin shoe string financially. We are trying to create value. But we don't have excess cash lying around to fund two trials, particularly when the SUSE may be moot if Novell prevails in Utah.

2. Balancing hardships factor: Hardship on SCO for sure. No hardship to SUSE in comparison to wait. Copyright will be litigated promptly, and allowing that trial to go forward to completion will advance the arbitration, in that either it will be moot or the issue as to whether SCO had authority to transfer.

3. Likelihood of prevailing factor: SUSE's claim meritless. Burden is on SUSE to demonstrate that it is likely to prevail on the merits and it can't. and hasn't.

Premature motion. It's in our view just an attempt to bury SCO in litigation costs. Utah needs to go forward to its conclusion, and SUSE will say there will be appeals,. etc. so we are prejudiced. SCO isn't suing SUSE, so I don't see prejudice. Arbitration issues can't be decided until Utah decided, and until it is finished the arbitration should not go forward.

Trustee has considered this and his view is that if there is an appeal, the legal issues have already been decided on SJ and the 10th Circ. has laid out a roadmap for how the trial should proceed, and so if there is an appeal it would probably be limited to evidenciary rulings or if there is a jury charge.

Trustee never said litigation is worth billions of dollars. He said there were strong claims and that they should be aggressively pursued.

Judge: Address for me Mr. Lewis's concern that the stay will be used as a sword rather than a shield against SUSE.

Fatell: I am struggling with that comment..

Fatell: ...because we haven't sued SUSE yet. We are entitled to our day in court re Novell. I don't see how an arbitration... I don't understand how we are using the stay as a sword.

There is litigation going forward. We are the plaintiff there, we're entitled to have it go forward. The statements and actions by SUSE to interfere with that, and I do say interfere, because I think trying to press forward with arbitration is an interference because it will cause SCO to have great expense, and interferes with the logical progression of deciding these issues, the ownership of the copyrights, it will cause the professionals of the estate to be torn bet. two tribunals at the same time. If we prevail, if we go forward against SUSE for copyright infringement is an open issue. We've not waived it, we're not walking away from it, but we're Not pursuing it at this time, so I don't see harm to SUSE by a stay.

Judge: Mr. Lewis, you were talking about executing... you were talking about going against SUSE?

Lewis: I never accuse a judge of missing the point. [Laughter in the court.] The stay should not be used as a sword. That injunction, pardon the expression, in the cases doesn't limit itself to just that particular litigant in the stay situation. . Here's what is going on. IF SCO wins in Utah, he now has a judgment he owns the copyrights and can sue lots of people for infringement and can execute against Novell as well.

That's using the stay as a sword, because that ability to use the copyrights for affirmative relief against Novell and others will be without threat for the moment as long as the SUSE issue is undecided. The two cases are tied up, and that is why the judge in Utah bifurcated them because there was a key piece of the Utah case that had to be decided in SUSE first. The Debtor said in invoking the stay two years ago that SUSE seeks a declaratory judgment SCO does not own perhaps its most valuable asset. How can you get away form that?

Because even then, SUSE saw it as a threat, because even if SCO got them, they turned around and transferred them to SUSE.

So it can't sue. That is why SCO wanted the arbitration stopped, because it threatened its most valuable asset. There is no way around that. You can argue that Utah is being decide in Utah. It is, in that the decision will be if copyrights transferred. It is but it isn't. It isn't in the sense that it isn't clear that the copyrights were not then transferred to UL.

Just because it's contested doesn't mean we haven't met our burdern. We have shown the very low level of proof that we will prevail in SW. If you read the language of the contract which we quote from the district court's opinion, quoting the language of the contract, it's pretty clear, that is what the contracts says. SCO has arguments that it didn't mean what it seems to say on the face of it. But the contract itself is enough to show probable success on the merits. If the chances of our succeeding were so slim, there'd be no arbitration at all, because we wouldn't be spending a lot of money pursuing it.

It's like what happened at the hearing about the motion to convert. You can get into the merits, but you don't really want to.

Judge: No.

Lewis: I think we've met the standard.Even a slight prospect is enough.

As to what's fair and not fair, the argument that we are somehow interfering. This arbitration was going on when the bankruptcy filed. Utah trial was set for Sept. Bankruptcy filed the Friday before. We continued with the arbitration because we thought we were entitled to . We didn't ' say we won on partial summary judgment in Utah, so we don't care any more. It was SCO that stopped us.

With that in mind and with the SJs in our favor, there was a question at that point whether it was important enough to bring a lift stay motion. That's changed too. That is what the timing is all about. We would have had the two trials close together if no bankruptcy. We don't know when the tribunal would set the arbitration, but the burden is the same for both of us. Timing can be worked out. IF we don't get it started now, who knows when it will happen. While a favorable decision in the arbitration may not affect all the assets' value, it clearly affects that value materially. That is what SCO said. Nothing has changed since SCO said that.

We have no facts about possible costs, just counsel's representations about costs. $400,000 is all it cost just to get there. It's at half price.The trial in Utah doesn't cost anything, it's on contingency. Costs, only. We don't know what the estate has. [Redacted portion.] We don't know what is going on with the estate, what the finances are, what shutting down, but emphasize, and what better purpose if the resources are limited than to figure out what it has? None. So even if it impinges, even if it continues to lose money, as the MORs suggest, since the Trustee took over, and that was the main reason for the conversion, then maybe it's necessary to shut this down completely if that is what it takes to get through the arbitration because it's going to have to happen. It will have a time period to use a favorable result against Novell and others, when that could be undermined in Switzerland.

Judge: I see now. It's not they will use the favorable result against SUSE, but others too...

Lewis: Yes. They might use it against us too. And we have SUSE customers while this sits around. That is a harm to us. We want to know where we stand. 2 1/2 years is a long time. Trustee has been in this case for 4 months now. He has announced he's decided claims against Novell are meritorious, so there is no more need for a breathing space, if there was one when the stay applied at the beginning of these cases 2 and 1/2 years ago. It's not so any more. It's time to get the cases settled fairly, not drag it out another 2 years before we get the arbitration handled. Whatever it takes to get that SUSE arbitration settled... the scheduling can be worked out.

No one wants to be in two places, but we can come up with a schedule that works. but that was the exact situation prior to the bankruptcy. If we don't get relief and can tell them we're ready to go, let's get a schedule, the arbitrators -- and there are three of them, schedules need to be arranged -- it's not likely the two will conflict, but if it happens, the parties will want to fix that, because it's a burden on us too.

So the notion that we suddenly got interested in this and are trying to interfere... Where we are today isn't our fault. It's makes no sense we area trying to interfere. The only thing that makes sense is that the Trustee is looking for a period of time that he can use as a broad sword while the risk from the arbitration is left hanging in the air. Unfair.

Judge: Let's assume that I granted limited relief to permit the Trustee to to file final briefing and to commence the scheduling process, would that be a workable solution here? I am concerned about a two-front fight going on, particularly for the Trustee, who the stay is designed to protect. But at the same time, I don't want a situation, following that jury trial, assuming for this purpose that SCO is successful, that there is any substantial delay in proceeding with the arbitration.

I would [not] be inclined to continue the stay while an appeal was pending because we all know how long that can take. If there was a remand, there would be delay upon delay. I appreciate that concern about delay. But as a practical matter, it doesn't make practical sense to me to litigate in Utah when a decision against SCO will probably moot the arbitration, and the costs of that arbitration is of concern to the court. I'm trying to fashion whether some limited stay relief can be both efficient and fair.

Lewis: I understand the two fronts concern.

Judge: The witnesses, etc.

Lewis: And you don't start picking people this late in the case and say, go fight in SW. You'll use the same people, because it's the only thing that makes sense from a cost and a result point of view. SO we have the same problem. but had there been no bankruptcy, if there was a scheduling problem, the parties would have found a way to work it out. Same here.

I would suggest the best is to grant stay relief and if a problem comes up let them come back here if they need to.

Concerned about limited in that who knows what the arbitration panel will think about it or what it might do.

And can work out a schedule. We won't be intransigent. Asks the court not to put limitations. Just grant stay relief. Give guidance informally on the record, and we'll try to adhere. But the tribunal may read from limited that we are not going ahead because it's just going to get yanked again, so we are not interested.. And then we will have to file all over again. If we win in Utah, then it seems we will probably say we don't need that arbitration any more or will put it off due to expense. That is pretty much what happened when the stay applied. Because we'd won. But that's not so any more.

Situation has changed. This case is 2 and 1/2 years old. When will we get this decided? It's fair to say, and SCO admitted, that the arbitration will impinge on the value of the copyrights, even if SCO owns them. so it's not true that copyrights are teed up only in Utah and not in Switzerland. It's teed up in both places.

The district court won't decide whether SCO has the right to sue. The district court clearly recognized the interplay bet the two. And that is why it sent it to arbitration; it wasn't going to decide it even though it was important to decide.

Ask that the stay be lifted. Let's get this show on the road so it doesn't go on forever.

Judge: Thank you , Mr. Lewis. It's been very helpful, your comments.

Fatell: If I may, I do want to acknowledge Mr. Normand is on the phone. May we ask if he wishes to add anything, since he is more familiar with SUSE litigation?

Judge: Anything to add at least about what needs to be done still and about the scheduling?

Normand: Two points briefly. First has been mooted given the indication the judge has given as to what he may do. We are not currently pursuing any claims for infringement in any place, not in Switzerland or anywhere. Utah isn't about copyright infringement. Even if we win in Utah, we can't claim we won on copyright infringement. So on the sword/shield argument falls flat.

More sense the court would enter an order that the arbitration shouldn't proceed within a certain number of months after the Utah trial.

Judge: What is involved in filing the brief?

Normand: I'm not the lead attorney, but that is a lengthy, substantive brief meant to reflect all the evidence one has gathered and plans to present to the panel. Equivalent to a lengthy summary judgment brief. Expense would be travel, getting ready, paying the arbitrators, those would be costs that would exceed the significant costs of just doing the final brief.

Fatell: Since I gather the direction you may be going...

Judge: When I ask a question, it really is a question.

Fatell: When the argument was made that SUSE would prevail on likelihood of merits, all they've done is acknowledge a dispute, then any litigant could meet that threshold. That's not sufficient. It may be a low bar, but there is one.

No full, factual evidentiary hearing on the documents at issue has been done, although the court looked at them briefly in deciding arbitration motion, and we submit there is a full story to be told, and to the extent there is ambiguity witnesses will b e allowed to testify as to intent. So we don't think SUSE has met its burden.

Novell and SUSE are interchangeably referred to as "we". We see they are seeking two bites of the apple and seeking to deny SCO its day in court. They want them decided close in time, that they overlap. We are not suing SUSE on copyright infringement, and if down the road we sue, SUSE or anybody else, SUSE isn't here to defend the world, so I don't see why that is the key element as to reorganization, or liquidate, etc.. We have options that are not tied to the SUSE arbitration. We could have a substantial award in IBM or Novell.

Timing: this case was last, there were activities in this case most recent activity in 2007. So to suggest all we need to do is file a brief. We have to review and go back and refresh peoples' memories, can't do it in a short time and shouldn't happen at the same time as Utah, because it involves the same people.

I'm troubled by the tribunal will get the wrong impression from limited stay argument: I'm sure they understand litigation and how it can go on in different fronts. To grant stay relief and throw this case into a black hole would be detrimental. They can come back at the appropriate time. We don't know what will happen in March. We don't know what the court will rule, but there needs to be a time to see where the dust settles after that before an action to stop us from suing SUSE when we aren't suing them.

Limited stay relief is being considered almost in a vacuum. To try to set a scheduling order in that black hole seems unproductive, so I would suggest we see what's happens in Utah on the underlying issue. and maybe SUSE will say I'm not going to stop them from suing us because they are not suing us. We just don't know.

Judge: Mr. Lewis, you get the last word.

Lewis: OK. I wish that worked at home.

Judge: I do too.

Lewis: A couple of things. Two bites. We are not asking for two bites. It's what we have. The d ct. said to have both. The Utah litigation isn't over until the arbitration is decided. I wonder is you can even have a final judgment in Utah until the arbitration is decided. We may get to that someday. The court said go do that, and then bring it back here.

I don't hear the trustee saying, fine , we won't seek to execute until the arbitration is decided. I don't hear that. I only hear, don't do anything yet.

On how long it takes to write the brief, but it'll only get harder the longer this takes.

Tribunal may say it's stale, we'll drop it and you can maybe refile someday. We're then talking about a couple of years from now.

SW is not irrelevant. SCO's whole business model is to sue people for infringement based upon the copyrights. That's what it does. That's what this company is about. The ct recognized that when granting stay relief so Novell to finish the Utah trial. It's not our fault things have gotten stale. It's the debtors' fault. it invoked the stay.

Why let it get more stale? Why risk further costs by further delay?

On the final point, on what the court should do today. I don't think the court can say Novell has been uncooperative or unreasonable. We've granted extensions. I ask the court to trust us to behave professionally as to scheduling. But if you don't turn us loose to get going with the arbitrator, we're going to be here for another two years. And the chances of SW happening before the trial in Utah are virtually nil. No one really argues that.

IF we win in utah, then probably there's no need for the arbitration. And if we go forward anyway, then SCO can come in and argue it is a waste, maybe. Why anticipate all that? Let's just get it back on track. Let's tell the tribunal we are free to go forward, we have some scheduling issues but let's see how it goes.

If you give us stay relief to tippy toe, they'll maybe throw up their hands, say, let's kill this and you guys come back when Judge Gross tells you that you can.

There has been nothing suggest that scheduling of the trial in 2007 and the arbitration in 2007 was done in a way to bury the debtor. Why would we do that now in front of this court?

Judge: I was hoping to decide it here and now, but I want to give it more thought, and go back and reread those statements mentioned in the context of your arguments. I am sensitive that the arbitration has been stayed a long time now, but I am also sensitive to the trial date in a substantial matter two months away that may moot the arbitration. It's two months away. But I do want to think about what, if any, limited relief I may be able to fashion, or if not, whether or not to lift the stay but on a long leash, so if it were to become inequitable to the debtor, then I could yank back on the leash a little bit.

Let me see where we come out, and I am not going to delay matters by delaying my ruling, so you will hear from me with in a week. Meantime, I wish you a Happy New Year.

[Pleasantries all around.]

Update 2: It occurs to me on thinking about all this that when Ms. Fatell argues that the APA was dated 1995 and it wasn't until 2003 that Novell said it never transferred them, perhaps instead she should focus on the fact that the APA was dated 1995 and it wasn't until 2003 that SCO tried to register the copyrights. From 1995, Santa Cruz and Caldera conducted the UNIX business without issues, she argues, which is another way of proving that it didn't need the copyrights during that entire time. And there is something else that I pointed out years ago, but it might bear repeating again now. USL distributed UNIX without copyright registrations for years, and that happened during the time period when you had to register to have a copyright. And around 50 percent of USL's System V Release 4 code was licensed from BSD, as of the time of the BSDi case, according to the Regents of California's Complaint:
10. Substantial portions (perhaps as much as 50%) of the current version of USL's Unix Operating System, "System V, Release 4," is comprised of the University's BSD code. USL has paid no royalties for its use of the University's BSD software, although USL currently licenses its Unix Operating System for approximately $200,000. Although USL itself states, the Unix Operating System has become "one of the most highly regarded computer systems in the world," this is largely the result of BSD software developed by the University and its contributors which has been incorporated into USL's Unix Operating System. The only form of compensation the University required USL to provide (other than the nominal license fee) was credit and recognition to the University for its valuable software and related documentation. USL failed to provide the University with its due credit and recognition under the applicable license agreements.
So some of the later code may in fact be derivative of BSD code. What might that mean? I don't know, but I know it's the right question. Further, the Regents of California, in its Complaint, said that while AT&T and its subsidiaries did have the right to sublicense, that was dependent on providing proper credit, and it alleged that USL had failed to do that, specifically in connection with Santa Cruz:
The University is informed and believes that USL has sublicensed 4.2 BSD, 4.3 BSD and/or 4.3 BSD-Tahoe to sublicensees, including, but not limited to Silicon Graphics, Inc., the Santa Cruz Organization, Inc. and Intel Corporation, who have failed to give the University proper credit and recognition in the following documentation as required under Paragraph 8 of the BSD Agreements: Silicon Graphics' "IRIX User's Reference Manual", Santa Cruz Operation's "Open Desktop Administrator's Guide", and Intel's "IBCS2".
Might that have happened with code as well? We would be excused for thinking it did, when you reflect that when SCO showed the code it claimed Linux was infringing at SCOforum 2003, some of it turned out to be BSD 4.3 code, which SCO never owned and does not now own. But they thought they did, because the copyright credit was missing. How did Boies Schiller let that happen, I wonder.

Novell, even if it did transfer copyrights could only transfer what it actually owned, which surely was not everything, because USL didn't own everything in its UNIX products. So in any copyright infringement action, SCO certainly would pertinently have to demonstrate that the code was actually code it itself owns. It wasn't for nothing that AutoZone raised the issue of whether SCO even owns what it claims to own, and it's a valid question even if SCO were to prevail in Utah.

I truly wonder if the new SCO management has any idea the morass they have fallen into or how truly complicated the UNIX development and ownership history actually is. It worries me that Ms. Fatell says she is not an IP expert. I hope she will find one, someone new, a firm that has not already invested hundreds of thousands of dollars, at a minimum, it would like to get back somehow, and ask what all this means. Because sooner or later, it all will come into play, and time and assets could be wasted.

And where she says that SUSE isn't here to defend the world, that too reflects a lack of actual understanding of Linux, the GPL, and what Novell is fighting for and why SUSE cares. It *is* there to defend the world. It holds the key to bringing SCO's rape-and-pillage scheme against Linux to a halt. And it knows it. This is not a typical IP litigation. Her laughing remarks about SUSE are the give-away that she doesn't yet understand Novell or SUSE's interest, and she needs to look at this picture in a new way to truly grasp what it is all about, and then maybe she'll understand what is realistic to hope for and what is not.

And the other afterthought I had on reflecting on the hearing was how significant it seems that Ted Normand appeared only by phone, and he tells the court he isn't even the lead attorney in the arbitration. I wonder if that means that even Boies Schiller has finally figured out it hopped on a real loser of a case and it is unlikely to get its money out of this turkey.


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