Would it surprise you to find out that it turns out that apparently one of the jurors might be related to one of SCO's prior corporate officers? At any rate they have the same last name, and Salt Lake City is a big place, so perhaps not. Novell noticed the similarity in names, according to our reporter today, MSS2, only after jury selection was over.
MSS2 has just sent me his first report of day 2 of the jury trial in SCO v. Novell, with more to come. Today was opening arguments by both sides. And we have lots more goodies for you from two eyewitnesses, MSS2 and Tilendor. We begin with SCO's opening argument by Stuart Singer. All I can say after reading it is maybe you needed to be there. Or SCO must be a slow learner or Mr. Singer never reads Groklaw, or ... well, see what you think.
Part 1 of MSS2's report, SCO's opening argument, Stuart Singer:
Before the opening of the session, SCO attorney Brent Hatch was pacing. It looked like he was perhaps rehearsing - I saw at one point a hand gesture like he was trying to make a point to the jury. As far as I could tell, he was the only one wearing a bow tie.
There seemed to be more nervous energy among the SCO lawyers than among the Novell people.
Just before the session began, the clerk (I think) asked if people were ready. Singer responded "I believe we're ready, your Honor", then realized his mistake. It was the clerk, not the judge.
Judge Stewart is bald, with glasses. My overall impression is that he is really solid. He seems to know what he has to think about and what he doesn't, what he needs more information to decide and what he already knows.
The session began with a discussion about one of the jurors. Novell noticed after jury selection that the juror had the last name of one of the corporate officers of SCO, and asked how to handle that. They discussed whether the name was mentioned, and whether it would be. Turns out the officer is on SCO's "may call to testify" list. They'll try to avoid mentioning said officer if they can, but they'll keep an eye on the situation.
Some discussion of the alternate juror instructions, but Hatch hadn't seen them yet.
Then the jurors entered. I was rather surprised that all rose for the jurors, like they do for the judge. I saw that several of the jurors were taking paper notes.
Judge Stewart read a statement of uncontroverted facts, and spelled out what that meant for the jurors. The only thing that was interesting (to me) in that statement was that SCO acquired from Santa Cruz everything that Santa Cruz got from Novell.
Then Singer gave the first half of SCO's opening statement. He said that Unix is "like Windows, but for business computers".
He talked about what slander of title is, using the example of a house that you own but can't sell because someone else is claiming that they own the title.
He talked about copyrights, how that's the title that was slandered. The slander came "from the very company that sold it" (said with outrage).
He talked about the Novell press release, on the very day that SCO announced record earnings. Again, lots of outrage in his voice. He said that Messman (Novell CEO at the time) didn't bother to have anyone check their files. Eight days later Novell admitted that they were wrong. (Long pause to let this sink in.) Novell retracted their statement after SCO pointed out Amendment 2.
He gave some chronology: On May 28, 2003 Novell made their initial statement. The retraction was on June 6. On August 4, Novell renewed their statement. In October, Novell registered the copyrights. On December 22, they put up a web page declaring that they own the copyrights. In January 2004, Novell began their own program to license Linux. In March, they declared "we still own it" at a convention.
He said that executives on both sides agree that copyrights were sold. SCO has testimony from 10 witnesses. Frankenberg: the intent was to sell, even at the end of the transaction. Duff Thompson: the copyrights were sold. Ed Chatlos (the head negotiator). People from Santa Cruz: of course we got the copyrights. Doug Michaels: the only way to do a software business is to own the copyrights.
He raised the issue of malice. Novell knew better; they were the seller.
Here we saw the tree diagram again, with the point being that SCO owned the trunk. The origin of Unix was at AT&T in 1969. Novell bought it in 1993 for $300 million. Santa Cruz bought it in 1995 for $200 million (stock, and the revenue stream of SVRX licenses). Then Caldera bought it, and Caldera became SCO.
(Side note: Singer was pretty careful in his opening argument to distinguish Santa Cruz from SCO.)
Why did Novell slander SCO's title? Because of Linux. Linux started as a hobbyist tool. It's open source; "nobody can be completely sure where the code comes from". Starting around 2000, IBM inserted into Linux stuff that belonged to SCO. SCO sued, and started their licensing program (SCOsource). Novell stated that SCO doesn't have the copyrights and can't sue IBM.
Singer said that Novell was going to claim that SCO doesn't own the copyrights. He did a lot of stating what Novell was going to argue.
He said that the intent of the APA was to transfer the whole business. He read part of the APA. He read the excluded assets, and said that that was inconsistent with the intent. This was caught a year later, and the contract was clarified that the copyrights were not excluded. It was not caught before, because everyone assumed that they transferred. Everyone's actions reflected their understanding that the copyrights were sold. He points to the joint press release, which says that what was sold includes "... and UNIX intellectual property".
Singer said that the thing that made the issue apparent was the IBM license buy-out. He said that Novell backed down when the issue was revealed. It was fixed with Amendment #2. Novell agreed that the amendment was valid on June 6, 2003.
He asked how SCO was going to run the business without the copyrights. Davis will testify that it's not done that way.
Singer said that the only license in the APA is a license back to Novell.
Sabbath and Madsen will testify that the intent was to confirm sale of copyrights to Santa Cruz.
He asked how the parties conducted themselves (actions speak louder than words).
He waived a couple of thick books. "Here are the copyrights", he said. Novell registered in 2003, but SCO already had them. Novell worked with Santa Cruz to mark product with Santa Cruz copyrights. (I presume he's talking here about executables, not source code, so it's a red herring to me.)
He read from a letter from Novell to Prentice Hall that indicated that the ownership of the SVRX products transferred to Santa Cruz.
He raised the issue of good faith. How can it be done in good faith if you're the seller?
He said that Messman didn't check. He (Messman) made an intentional claim, he wasn't aware of Amendment #2 (as he said in his deposition). He made the claim (that SCO didn't own the copyrights) because of ties to IBM, Singer claimed. He retracted the retraction and continued the slander.
Novell falsely registered the copyrights.
Novell bought SuSE with $50 million that IBM invested in Novell while all this was going on.
Stone repeated the slander at the convention in 2004. (He played a video clip here.)
Novell did this to try to harm SCO. Maureen O'Gara said that Stone told her that Novell picked SCO's earnings announcement day in order to "upend the stock", and that Stone laughed about it.
December 22, 2003, when Novell repeated the charge, was also a SCO earnings announcement day.
Singer closes by saying that 19 to 45 percent of Linux users believed that there was enough to SCO's claim to consider buying SCOsource licenses.
And that's probably enough for the first section...
Part 2, SCO's opening statement continues with Brent Hatch carrying SCO's flag, and then Novell's Sterling Brennan presents Novell's opening argument:
Hatch continued SCO's opening statement. He seemed much less polished than Singer.
I have a question. If I lived in Utah, could my relatives appropriately sit on this jury? Shouldn't they at least mention the connection? You think? We'll no doubt be learning more as the story goes on, but put a Post-it right there. The corporate officer with the same last name is on the list of witnesses SCO may call, so the discussion was about how to not mention his last name. I would also personally hope someone inquires of the juror to find out if there is a close connection. In any case, here's SCO's most recent May Call Witness List [PDF]. If I am reading the list accurately with the clues, I think the name is certainly going to come up, with or without direct testimony from him.
Hatch said "actions cause effects". Novell seriously harmed SCO's business, especially SCOsource. Many of the largest companies considered buying SCOsource licenses and didn't because of Novell.
Hatch showed a chart of SCO's stock price on the day of Novell's announcement. He showed the drop in SCO's price. But, he said, Novell now claims this is a coincidence.
When seeing Amendment #2, Novell's first reaction was "we sold it" (the copyrights).
Then the stock gradually rose by the amount that it fell. Then, on December 22nd, Novell talked again about SCO not owning the copyrights, and the stock trended down. The market "got it" (understood Novell's statement).
Earnings announcement days for public corporations are known in advance. Novell talked on those days. That's malicious.
After Novell talked, customers turned down deal after deal. Morgan Stanley wouldn't meet with SCO until SCO proved it. Novell's a substantial factor in the deals disappearing.
Right about here, Hatch got called for stepping out of the bounds of an opening statement. Stewart agreed. This seemed to fluster Hatch for a few moments.
Hatch highlighted a deal with HP for tens of millions of dollars. It fell through because of Novell.
SCO just wants to be made whole.
Pisano and Botosan will testify about the damages. Their estimates are conservative calculations. Their numbers are large but fair.
End of SCO's opening statement.
Sterling Brennan gave all of Novell's opening statement. He said there is no slander because:
- Novell owns the copyrights,
Brennan then spent some time giving background on Novell and SCO. He also defined and/or described copyright, OS, SVRX, license, royalty, Netware, Unixware (a joint venture between Novell and AT&T), APA, and SCOsource. He said that SCOsource was a complete turnaround on SCO's part. He came back to this later.
- it's protected free speech, and
- Novell's statements were in response to SCO's (public) statements and threats.
He said, "Don't judge until you hear both sides." Like Paul Harvey's old radio program, "The rest of the story".
He said the main themes of the trial would be:
- That Novell had a free speech right to say what they said.
Brennan said that Novell acquired all the rights in 1993. It was a merger, not an APA.
The transfer to Santa Cruz, in contrast, was an APA. They bought part, not everything. They took 3 months to look at the APA, and did Amendment #1 to fix the errors and issues that they found.
- That words really matter. The words in the APA, drafted by the lawyers, those words really matter. It's not just a matter of what management said or thought.
- The Linux operating system, which is open source. He gave Wikipedia as an example of open source, which it isn't exactly, but it gave the jurors a flavor of the way it works.
Then, in 2002, Caldera hired McBride. Caldera was not doing well at the time. So they changed direction. They turned on their previous customers to try to extract license fees. This was SCOsource, and letters were sent in May 2003.
Brennan said that there were four components to the Unix business:
That's all he said. There may have been a fourth point on the slides that the jury saw, but we could barely see them.
- License revenue
- Future development rights
Novell bought it all in 1993 for $330 million. It tried to sell it all in 1995, and it hoped for at least $330 million. Santa Cruz didn't have that.
Novell sold the future development rights, and the revenue from that. They kept the copyrights and the revenue from that. Novell got somewhere between $39 million and $73 million in stock (depending on which day's stock price you take).
Since Novell retained the copyrights, revenue from copyright is NOT part of what SCO paid.
Novell got paid license fees from SVRX and UnixWare (if a threshold was exceded). SCO got license fees from UnixWare. Novell got license fees from SVRX, and SCO got 5% for collecting it.
Brennan talked about lawyers and executives. Lawyers know the details. The details exclude some assets, like the copyrights.
He started going through the APA in some detail. There are two schedules - the included assets and the excluded assets. The APA says what the business is - it's Unix and UnixWare. What's the sale? What's in schedule 1.1a, and what's not in schedule 1.1b.
He read from 1.1a, under the intellectual property section: "The trademarks Unix and UnixWare". That's the whole IP that transfers.
Then, from 1.1b (excluded assets): All copyrights excluded, all patents excluded, all trademarks excluded except Unix and UnixWare.
He read the part about SVRX license revenue going 100% to Novell, then 5% back to SCO.
He read section 4.16, which says that Novell can tell SCO what it can and can't do to SVRX licensees.
The *words* matter, not what the executives *thought*. He read the integration clause, which says that the APA is the whole agreement, and "supercedes any prior understanding" between the two parties.
The contract is this way because, first, Santa Cruz couldn't afford to buy the whole business, and second, because Novell was concerned about the financial viability of Santa Cruz. They wanted to not have their rights disappear into a bankruptcy black hole if Santa Cruz went under.
Brennan read from the minutes of the Novell board of director's meeting the day before the APA was signed. "Novell will retain all patents, copyrights, and trademarks except the trademarks Unix and UnixWare." Messman was present at that meeting, and Frankenberg chaired it.
There were adjustments to the APA. Amendment #1 made no change with respect to copyright transfer. Also, the APA did not itself transfer anything; a bill of sale did that. The bill of sale says nothing about copyrights. It says look to the APA for what transferred.
Santa Cruz had good lawyers on this, too. Nobody pulled the wool over their eyes.
Later, Santa Cruz wanted the copyrights and raised the issue with Novell. Amadia asked Tor Braham, "Did they transfer?" Braham said no.
Amendment #2 didn't transfer them either. It says "required for SCO to exercise its rights". SCO ran their business without the copyrights from 1995 to 2003, when McBride switched strategies.
Santa Cruz sold the business to Caldera. What did Caldera get? That document said: "except that Signer may not be able to establish chain of title to Novell".
McBride asked Chris Stone (Novell) for the copyrights.
McBride's letter caused a backlash against SCO. SCO never demonstrated any infringing code.
On the day of Novell's statement, SCO stock dropped before Novell's statement, and dropped about the same amount again after Novell's statement. Then, in the next six months, it rose a lot.
Slander of title fails because:
- Novell retained the copyrights.
Here ended Novell's opening statement. Court adjourned for a 15-minute break, and I will also adjourn part 2 of my report.
- Novell had a good faith belief that they retained the copyrights, based on the plain text of the APA.
- Novell's statement is covered by the 1st amendment.
Part 3, SCO Calls Its First Witness, Robert Frankenberg:
After the break, SCO called its first witness: Robert J. Frankenberg, former CEO of Novell. Before we go on to our next eyewitness report from Tilendor, here are some impressions from MSS2, and we do so thank you both for attending and letting us have a feel for the day's events:
Singer on direct:
There was a bit about Frankenberg's background.
Was it Novell's intent to sell all the Unix business? Yes. Copyrights too? Yes.
Frankenberg said that UnixWare was "the current version of Unix".
Duff Thompson, Ed Chatlos, and David Bradford had conversations with the principals of Santa Cruz. Santa Cruz was a good business, but not large or with a lot of cash behind them.
Frankenberg said that nobody ever told him that the copyrights were being retained.
Schedule 1.1a (included assets) includes "source code". Was that to Unix and UnixWare? Yes. Frankenberg understood that to mean that the source code was being sold. The copyrights? Yes. The trademarks as *additional* IP? Yes.
Frankenberg never instructed or authorized copyrights being excluded.
Is the copyright exclusion in 1.1b consistent with Frankenberg's understanding of the deal? No.
If the board minutes said no copyrights transferred, was that consistent with Frankenberg's understanding? No.
What about APA Amendment #2? At this point Novell raises a motion in limine objection, and wins. (The issue is that Frankenberg was not at Novell at the time of Amendment #2, and therefore is not competent to testify about it.)
This was interesting, because Brennan objected, Stewart overruled the objection, and Brennan immediately re-stated the objection more precisely and/or with more detail. Stewart then agreed with Brennan, rather than sticking to his initial response.
Singer continues on direct:
The employees went to Santa Cruz? Not all; some were laid off.
The license back to Novell was entered at the same time as the APA closed. If Novell kept the copyrights, would Novell need the license? No.
Frankenberg said that royalties were part of the payment terms. Section 1 covered the stock; section 2 covered royalties. Could Novell receive the royalties after selling the copyrights? Yes.
Section 4.16 was to make sure that customers could do royalty buyouts. It was never intended to block SCO asserting IP rights.
The joint press release said that Santa Cruz was acquiring the business IP. Did that include the copyrights? Yes.
Sterling Brennan on cross:
What is the purpose of the board of directors?
To oversee the operations of the company.
The ultimate APA decision was the board of directors'.
Brennan moved on to the minutes of the September 18, 1995 board of directors' meeting. Who was present? Among others, David Bradford (Novell general counsel) and Larry Sonsini (of Wilson Sonsini, outside counsel for the APA).
Frankenberg said that he would not have presented any inaccurate information in a board meeting, would have prevented any inaccurate information from being presented that he knew about, and that he assumed that others would do the same.
Brennan focused on three paragraphs from the BOD minutes that were a "resolution" about the APA. Paragraph one said that the directors received a packet of information about the deal. Paragraph two said that this was the sale of "a portion of" the Unix business. Frankenberg said that it excluded Tuxedo, which Novell got from AT&T as part of the Unix purchase. He admitted that no patents transferred to Santa Cruz.
At this point the jury was dismissed for a motion in limine battle over the question of Frankenberg's reading of the plain meaning of the words of schedule 1.1b of the APA. SCO's point was that Amendment #2 had superceeded those words, and Frankenberg wasn't there for Amendment #2. But Novell won, because SCO had questioned Frankenberg about the wording in 1.1b.
Then there was another 15-minute break.
The trial resumed, but there is a ten-minute gap in my notes here, because my pen died, and I had to run two blocks up the street to buy a new pen. I hope others' notes can fill in the gap here. (Memo to future attendees: Take a spare pen. And take LOTS of paper - I took maybe 15 pages of notes.)
Anyway, back at the courtroom, it's still Brennan on cross of Frankenberg:
Bradford and Sonsini reviewed the APA. Frankenberg said that Novell got royalties even on new SVRX licenses.
The BOD minutes contain a motion to approve the APA. It passed unanimously. The minutes said that Novell retained the copyrights. Frankenberg admits that that's what the minutes say. He admits that the minutes are accurate.
Frankenberg did not read all of the APA when he signed it. He relied on the lawyers and his negotiating team.
Novell and Santa Cruz had nearly three months to review the APA. The result was Amendment #1, which didn't say anything about copyrights. It was signed by Duff Thompson, and presumably reviewed by him.
The APA said that it was selling "certain assets" which comprised the business. Frankenberg admits that he understood that the assets being sold were listed in schedule 1.1a, and the exclusions were listed in 1.1b.
Brennan read from section 1.2a that full payment consisted of Santa Cruz assuming certain liabilities, plus the stock. Frankenberg said that it was the royalties, too. Brennan then beat him over the head with the wording of the APA (figuratively speaking). The royalties aren't part of the payment. Frankenberg replied that Novell viewed it as part of the payment.
Brennan turned to section 9.5, which said that this was the entire agreement. Frankenberg pointed out that it was amended. Brennan replied that expectations, prior understandings, hopes and wishes weren't part of the agreement. Singer objected twice. The first was overruled. The second was withdrawn because, the judge said, Brennan had objected when Singer went there, and if Stewart allowed Brennan to continue, he was going to allow Singer to return to it on redirect. Brennan said he didn't want an answer that bad.
Then they turned to Frankenberg's deposition. Stewart interpolated an explanation of depositions for the jury. But Brennan didn't ask anything specific about the deposition; he asked about Frankenberg meeting with Duff Thompson (with Novell's permission) before he (Frankenberg) was deposed. Brennan points out that Thompson became SCO's head of litigation (or something similar) and, in fact, it was Thompson who authorized the SCO v. Novell lawsuit. But Novell's counsel didn't object to Frankenberg meeting Thompson before being deposed.
Singer on redirect of Frankenberg:
Frankenberg said that Novell didn't intend for the Unix/UnixWare copyrights not to go to Santa Cruz. They were taking care not to transfer the NetWare copyrights. The lawyers were acting outside his authority in creating a document that withheld the copyrights. Nobody else on the board had the authority to negotiate a different deal.
Were the BOD resolutions a formality? Frankenberg won't go that far.
Frankenberg said that payment was the stock, plus two royalty streams. But the UnixWare stream was conditional. He doesn't know if Novell ever got any money from it. Novell estimated the value of the deal as greater than $100 million.
Frankenberg said that he had no knowledge of anybody saying "We're going to change the deal and keep the copyrights".
Brennan on re-cross:
The point of the BOD minutes is to create an official record of what was done.
Resolutions were not only done in advance, they were available for the board to read before the meeting. They were not a surprise to the board.
Frankenberg admits that the minutes are consistent with the APA with respect to the copyright not transferring.
Frankenberg was dismissed at this point. Neither side is going to recall him for more questions.
The jury was dismissed for the day at this point.
Singer requested that both sides use the wording "the original language" or "the prior language" when talking about 1.1b, to avoid confusing the jury, because due to Amendment #2, that language no longer exists. I didn't note the response, but I seem to recall that Stewart agreed.
Second, Singer said that relying on section 9.5 (that the APA is the entire agreement) is against the 10th Circuit appeals decision, which is why parol evidence is in this case. Stewart said that he didn't think any harm had been done with one witness, but that 9.5 should not be stressed unduly going forward.
At that point, court was dismissed for the day.
Some overall impressions:
Novell seemed less tense than SCO. I saw Brennan kind of smile a couple of times, and I never saw a smile from SCO's legal team. (Of course, their backs were to me and Novell's team had their side to me, so that may not mean much.)
Singer was "pounding on the table", pushing emotional buttons; Brennan was pounding on the words of the document. (Singer was also pushing on "intent", whereas Brennan kept pointing to the words of the document.) This "high-level executive intent" seems to be all that SCO actually has as to whether the copyrights actually transferred.
As I was walking away from the courthouse, I wound up walking quite near a couple of men in suits who were discussing the case. One seemed to be saying that he thought that Frankenberg was a case of "the executives get a few bullet points, not the details". I said that it sounded like they were discussing the same trial I just came out of, and that as I was reporting on the case for a blog, I would be interested in their thoughts and who they were. They said that what they thought about the case didn't actually matter (fair enough; what the jury thinks matters, not what bystanders think). But they said that they were financial consultants to the debtor.
UTA's Trax is a great way to get to the courthouse. The courthouse stop is only a block from the Federal courthouse (not to be confused with the state courthouse, which is also a block away). Round trip fare costs less than parking downtown (at least, I believe so - I didn't actually price the parking).
Tilendor's Account of the day:
Today we received the opening statements, and the complete testimony of one witness: Robert Frankenberg. Update: I found an
interesting article in the New York Times about Robert Frankenberg, about him resigning from Novell in August of 1996. The exact date is August 30, 1996, which is months prior to the APA's Amendment 2 being signed by others. That will help you to understand why he can't testify about the intent of Amendment 2 or anything about it. He wasn't there. Here's what the newspaper of record says the sale to Santa Cruz was valued at:
I will be splitting it into 4 parts:
SCO examination of Mr. Frankenberg
Novell's cross & SCO's redirect + final notes.
I arrived a little late, right as Mr. Singer was beginning his opening statement. My summary is below, with my comments in parentheses.
Mr. Singer starts by stating that SCO is in the Unix business, and that the case is about slander of title, and makes a comparison to the title of an automobile. If someone contested your ownership of the title, no new parties would be interested in purchasing it until the dispute is settled.
SCO claims they own the copyrights to Unix, and Novell has slandered their title by claiming and continuing to claim that Novell owns the copyrights.
They did this by issuing a press release on May 28th claiming ownership of Unix.
SCO responded by contacting Novell to point out Amendment 2, and stated they are the owners. Mr. Messman is reported to have said that they did not have Amendment 2 in their files.
On June 6th, Novell issues a press release stating that it appears that SCO owns the copyrights.
Mr. Singer describes this as a retraction of their initial press release.
On Aug. 24th Novell issues a 3rd press release again claiming they own the copyrights.
Mr. Singer calls this a retraction of their retraction.
In October, Novell registers the copyrights with the government.
On September 22 Novell issues another statement and hosts a website page claiming ownership of Unix, and continues to this day to slander SCO's claim of ownership, and begins offering a competing product (later referenced as SUSE Linux).
Mr. Singer explains that both SCO & Novell agreed at the time of sale that SCO got the whole ownership of Unix including copyrights.
He lists Novell employees who were present when the APA was written who will testify to the intent and execution of the contract, including CEO Robert Frankenberg, Duff Thompson, Ed Chatlos & 2 others.
Mr. Singer asserts that it would be ridiculous to buy a software business without the copyrights which are necessary to run that business.
Mr. Singer then explains that Novell has maliciously slandered SCO.
SCO products are used by millions of computers, in companies such as McDonalds, BMW, etc... and that SCO Unix is at the heart of many products (A tree diagram is shown, I wasn't close enough to see well, but it looks like the same one we've seen before.)
AT&T wrote Unix and sold it to Novell in 1993 for $330 million.
Novell sold Unix to Santa Cruz in 1995 for $200 million.
The difference in price from $330m to $200m is offset by the royalties Novell gets as part of the purchase.
Now why would Novell slander SCO's title? Linux.
Linux started as a hobbyist program by Linus Torvalds, called Linus's Unix, or combined Linux. It has many contributors, and its not possible to know where its code came from.
IBM decided to get into Linux business and enhances it with Unix code owned by SCO.
SCO wished to be compensated for its Intellectual Property and began SCOSource to license the code that was used without SCO's permission. This was in 2003, and SCO sued IBM.
Novell gets $50 million from IBM to get into the Linux business and compete with SCO.
SCO will present 3 types of evidence to show the ownership of the copyrights:
1) witness testimony, 2) the APA & amendments, and 3) the companies' behavior after the contract was closed.
Mr. Singer asserts that the executives in both companies believed that copyrights would transfer and didn't make it explicit because the executives knew you needed the copyrights to run the business, and assumed they would.
The part of the contract in Schedule 1.1b about copyrights was added by the lawyers, not by the executives negotiating the deal. It was caught 1 year later and amended stating that no copyrights transfer “except the copyrights necessary to run the business.”
Mr. Singer then talks about licensing. If SCO didn't get the copyrights they would need a license to run the Unix business. The only part of the APA that discusses licenses is the license back to Novell to use Unix. He asks why would Novell need a license back, if they owned it?
Steve Sabbath and Kim Madsen will testify that Amendment 2 does transfer the copyrights.
The final evidence is how did the parties behave after closing the APA? SCO and Novell worked together to change copyrights on their products to reflect SCO's ownership, and Novell sent letters to its customers telling them about the change. He displays the Prentice Hall letter as an example.
Now, did Novell act in good faith? No, it did not. Novell's actions were designed to hurt SCO. The May 28th press release and the December press released were both timed with SCO's quarterly & annual earnings reports to damage SCO.
When issuing the May press release, Mr. Singer claims that Novell CEO Jack Messman did not check to be sure Novell actually owned the copyrights, that he should have discussed it and researched it. He would have found Amendment 2 in the CFO's office had he checked. He was solely focused on damaging SCO on the day of their earnings report. (A video is shown of Chris Stone proclaiming that Novell still owns Unix).
He finally states that there was a significant percentage of corporate users of Linux who were considering the SCOsource license who stopped due to Novell's slander.
(End of Singer's opening statement)
(Mr. Hatch moves to the podium, wearing an eye-catching yellow bowtie. Mr Hatch then presents his opening statement concerning damages.)
Novell has harmed SCO's business. SCO will prove that Novell's slander was a factor for many companies in deciding not to purchase a SCOsource license.
Mr. Hatch shows the May 28th stock price chart for the day of Novell's press release. Showing the dip, which corresponds closely to the release of Novell's statement.
He explains that the stock price did bounce back quickly, and that it was because the market trusted what SCO was saying, but that it's not possible to know what the stock prices would be if Novell had not made their claim of Unix ownership.
Novell's campaign of slander was successful.
Mr. Hatch begins to bring up examples of businesses that declined SCOsource licenses because of Novell's actions. Mr. Brennan objects twice that this is argument & not opening statements and is sustained twice.
He continues that SCO will be asking a large amount in damages, but that they are fair. They had signed successful deals with Microsoft & Sun, and that their research shows that 45% of corporate users of Linux were likely purchasers, which they lost due to this dispute.
SCO experts Christine Botisan and Gary Pisano will discuss damages and their basis for them.
But Mr. Frankenberg spent much of his time at Novell divesting acquisitions Mr. Noorda had made in his latter years in a disastrous attempt to compete head-on with Microsoft. The Wordperfect Corporation, acquired in a stock swap valued at about $855 million, together with the Quattropro spreadsheet purchased from Borland for $145 million, were sold earlier this year to Corel for just $185.8 million. Unix Systems Laboratories, bought from AT&T in 1992 for $360 million, was sold to the Santa Cruz Operation for about $59.5 million in Santa Cruz stock. $59.5 million in stock? For what had cost approximately $360 million only four years before? And yet they want us to believe that everything Novell got from USL, it passed on to Santa Cruz? That's some fire sale.
"On the one hand, Bob inherited an incredible mess; on the other, he didn't understand that going in, so that wasn't a good sign from the beginning," said Craig Burton, a Novell marketing executive during the 1980's who is now an analyst with the Burton Group in Salt Lake City. "He just wasn't providing the leadership they need," Mr. Burton said.
Another detail that struck me is that while he did resign, the board wanted him to do so:
Mr. Young said in a telephone interview yesterday that the board and Mr. Frankenberg had reached the mutual conclusion that he should step down. Such mutual conclusions can sometimes leave people with a bit of an axe to grind about the company, or so I have sometimes noticed. Mr. Young is John Young, who filled his shoes at the company temporarily. And the odd thing is, the things Frankenberg sold ended up in litigation, WordPerfect is currently the core of the antitrust litigation Novell is pursuing against Microsoft, but it's about QuatroPro too. And Unix and UnixWare is now being litigated in Utah. Anyway, it wasn't until March of 1997 that Frankenberg's replacement was announced, Eric Schmidt, now heading up Google. Schmidt's first day at Novell, replacing Young, was April 7.
If you are wanting to understand the APA's purpose better, I think the best document to read is the Operating Agreement [PDF], and I'd describe the APA as a marketing agreement, with the necessary shift of assets to make it work. If you notice on page 11 of the Operating Agreement, Japan viewed Novell and Santa Cruz as being partners in a joint venture, so both had to sign contracts there. And this document will help you to understand the Prentice Hall letter too, because Novell was to turn over all contracts to Santa Cruz, and there is reference to Santa Cruz finding a way to continue Novell's publishing efforts.
The goal was to produce a merged product, merging UnixWare and OpenServer, which years later SCO would claim are actually all the same thing, the branch is the tree and all that mumbo jumbo. But back then, they had to work to try to merge them, and in fact, it never happened, but that was the goal.
Finally, if you are curious about the board of directors' minutes referenced, here is where you can find them. And now we have:
Tilendor's report, part 2:
(Mr. Hatch takes a seat and Sterling Brennan approaches the podium and begins his opening statements)
And here's Tilendor's Part 3, Frankenberg:
Novell's Opening statements by Mr. Brennan:
Novell owns the copyrights and Novell's statements and press releases were in response to public announcements and press releases made by SCO. Novell has free speech rights, just like anyone else and are free to respond to SCO's public claims.
Quick history review: At the beginning of 1995, Novell offered many products, some of them were NetWare, WordPerfect, Unix, & UnixWare. Mr. Brennan explains that he wants to establish some definitions for those who may not be familiar:
Copyrights – right given to the creator of creative works to control said works.
SVRX – System 5 Release X of Unix.
License – Copyright holder grants permission to use copyrighted works.
NetWare – Novell networking product allowing computers, printers, & storage devices to work together.
Unix – Computer operating system like Windows, Macintosh & others
UnixWare – Novell & AT&T developed product giving Unix NetWare's networking capabilities.
SCOsource – A SCO licensing program that represents a 180-degree shift in the company's business model relating to Unix & Linux. Previously SCO was working with the Linux operating system and contributing to it, providing it to their customers. SCOsource now says that those customers, and any other user of Linux, must now pay unreasonably large license fees to protect themselves from a SCO lawsuit. [PJ: These are his notes, but in reality SCOsource was provided to prior SCO Linux customers for no fee.] SCO sent out 1,500 letters explaining to Linux users that they must now pay to use Linux or risk being sued. This program was put in place by Darl McBride, CEO and was a radical change in how the company operated.
Mr. Brennan explains that SCO will have the first half of the trial to present their witnesses and tell their story. He then references a radio program by Paul Harvey called the rest of the story. He asks the jurors to wait until the Novell side has had a chance to present the rest of the story before drawing conclusions.
Through the trial, Novell will focus on three themes:
Novell's right to free speech and that Novell can't be held liable for exercising that right.
History of Unix:
Words matter. The APA was created to establish all the details of the deal between SCO & Novell. People's impressions and intents 15 years after the signing of the document shouldn't decide the nature of the deal. That's what the words in the APA are for.
Linux is a different way of creating software, that is Open Source, shared, & collaborative.
Created by AT&T, Mr. Brennan doesn't know anybody who would dispute this.
In 1993 Novell acquired ALL rights to Unix & UnixWare through a merger, which is a complete acquisition of the business.
In September 1995 SCO & Novell made an Asset Purchase Agreement (APA), which is not a complete purchase, but a portion of the business, otherwise it would be a merger.
There was a three-month period between signing the APA and the deal closing to allow further review, and possible amendment. There was an additional amendment 14 months later to the APA. Mr. Brennan states that the two amendments made no change in the transfer of copyrights.
When Novell purchased from AT&T in 1993 it paid $330 million.
In 1995 Novell wanted to sell the Unix business and get close to the same value for it.
Santa Cruz could not afford $330M for everything, so Novell did not sell the entire Unix business. Novell sold rights to future development of Unix for ~6 million shares of Santa Cruz stock, worth $73 million - $39 million, depending upon the stock price for a given date.
Novell retained 100% royalties to existing SVRX licenses, and was to pay SCO 5% for administrative costs.
SCO gets all revenue for future development of Unix.
Novell also retained some royalties for future development of UnixWare.
Mr. Brennan emphasizes at many points that *Words Matter*, and yes the APA was drafted by lawyers. By professionals retained for that purpose. Without words to document what happened, it would be impossible to know for sure at a later date.
Mr. Brennan explains that Schedule 1.1a of the APA lists included assets. Schedule 1.1b lists excluded assets.
The only intellectual property listed in the included assets are the trademarks Unix & UnixWare.
Intellectual property listed in the excluded assets are All Copyrights, All Patents, & All Trademarks except Unix & UnixWare.
Mr. Brennan produces the minutes of the Novell Board meeting the day before the APA is signed. In the resolutions it states that “Novell will retain all copyrights”.
Amendment 1 to the APA makes no changes to the list of included & excluded assets. Legal counsel was used by SCO & Novell to draft the agreement. You will hear witnesses from the law firm used by Novell to draft the APA, who were directly working on the APA. SCO will not present any witnesses from the law firm on their side that worked on the APA.
14 months after the APA, SCO requested a new amendment to the APA, making clear that copyrights transfered. Novell refused to accept the change.
Novell had previously licensed Unix to other companies to create their own flavors of Unix, without transferring copyrights.
Take a look at the purchase agreement between Caldera and Santa Cruz. In that purchase agreement, it states that SCO can't [may not be able to] establish a chain of title to Unix, meaning that Caldera knew it did not hold the copyrights.
Mr. Brennan mentions the General Public License (GPL) that Linux is distributed under and explains how this license gives others the right to use and modify the source code of Linux.
Mr. Brennan then turns his attention to the stock graph. He points out in the price graph for the day of May 28th that there is a significant drop before Novell released its announcement that SCO did not explain. He goes on to show a stock graph for the 6-month period after May 28th and points out how much the price rose.
Finally, Novell is not guilty of slander, because Novell's statements about ownership of the copyrights is true. It is SCO who has slandered Novell's title.
1st Witness – Robert Frankenberg: On that "joint" press release, here's what Judge Dale Kimball wrote about it in his August 10, 2007 order on summary judgment motions by the parties:
(Mr. Frankenberg is sworn in and takes the witness seat. Mr. Singer begins his examination)
Mr. Singer establishes Frankenberg's education and work history, which involves being an executive at HP and then CEO & Chairman of the Board of Directors of Novell.
Mr. Frankenberg summarized Novell's primary businesses as 1) NetWare, 2) training customers (including Unix training), 3) WordPerfect.
Mr. Singer: Ever want to sell parts of the business?
Mr. Frankenberg: Yes. Novell was spread too thin. Wanted to focus on best businesses and sell ones that were spreading out the time and attention. Did research and considered 16 products/businesses owned by Novell.
Mr. Frankenberg concluded to sell WordPerfect & Perfect Office, Unix & UnixWare, & Tuxedo in 94-95. They wanted to do it quickly for the morale of those working on the projects and for customers not to worry.
Mr. Singer: Did you intend to sell Unix & UnixWare in their entirety?
Mr. Frankenberg: Yes.
Mr. Singer then establishes with Mr. Frankenberg those that worked on the Unix sale:
Duff Thompson, directed to sell at an acceptable price to a company that would continue to develop Unix.
Mr. Singer: Did you ever discuss with this team the retaining of the copyrights?
Ed Chatlos, negotiator working with Duff.
Bradford: Had oversight of negotiations.
Mr. Frankenberg: No.
Mr. Singer then presents the APA and confirms parts of the recital at the beginning & Schedule 1.1.
Mr. Singer: Did you think this transferred the copyrights?
Mr. Frankenberg: Yes.
Mr. Singer: You never instructed or authorized the retention of the copyrights?
Mr. Frankenberg: Correct.
Mr. Singer: Is exclusion of the copyrights consistent with your understanding of the deal?
Mr. Frankenberg: No.
Mr Singer then proceeds to ask about a clarification done through Amendment 2. Mr. Brennan objects and Judge Stewart overrules. Mr. Brennan pauses and mentions that his objection is based on a motion in limine that Judge Stewart approved. Judge Stewart asks for the motion number, Mr. Brennan provides it, and Judge Stewart sustains the objection after all.
Mr. Singer: What is the license back to Novell in the APA for?
Mr. Frankenberg: It gives Novell the rights to use the assets that were transferred to SCO.
Mr. Singer: Would a license back be required or necessary if Novell had kept the copyrights?
Mr. Frankenberg: No.
Mr. Singer: Were royalties part of the payment accepted for the sale of assets?
Mr. Frankenberg: Yes, there were 3 parts of the payment.
~6 million shares
Mr. Singer references a joint press release issued by SCO & Novell, in which it states SCO acquires the Unix Intellectual Property. He asks, would this include copyrights?
Royalties on existing SVRX licenses
Royalty on future development & sales of UnixWare
Mr. Frankenberg: Yes.
Judge Stewart asks Mr. Frankenberg when he was CEO of Novell. He replies from 1994 to 1996.
(Mr. Singer ends his examination)
On September 20, 1995, SCO claims that the parties issued a joint press release regarding the APA, stating that "[a]ccording to the terms of the agreement, SCO will acquire Novell's UnixWare business and UNIX intellectual property." Novell questions whether it was a "joint" press release because unlike a typical joint press release, the September 20, 1995 press release does not contain Novell's logo, contact information, or company description. Instead, it contains information only for Santa Cruz. In any event, the press release does not provide specific information about whether copyrights transferred. It is undisputed that trademarks did transfer, which would account for a statement that intellectual property passed. However, the vague use of the term "intellectual property" could not be read to include all intellectual property because it is also undisputed that no patents were transferred. Therefore, the press release, whether a joint statement or not, provides little information in its reference to unspecified "intellectual property." Novell also issued two press releases about the APA, which are on Novell's website, and neither mention of the transfer of copyrights or, more broadly, the transfer of intellectual property.
And now our final report of the day from Tilendor:
(Mr. Brennan begins his cross examination) If his notes are accurate, I think Judge Stewart is mistaken if he believes that the issue of not being involved in Amendment 2 won't come up again with SCO's witnesses. If you go to our Motions in Limine chart, and read the ones of Novell's that the judge granted in part and denied in part, you'll see what I mean.
Mr. Brennan establishes the same dates that Mr. Frankenberg was CEO of Novell. He then asks for the board members at the time. Mr. Frankenberg lists those he can remember, but states that it was 15 years ago. Judge Stewart tells Mr. Brennan to help him if he has the information. Mr. Brennan asks to approach the witness. Judge Stewart gives permission and states not to ask again.
Mr. Brennan: Was the APA to be approved by you, the CEO, or the Board of Directors?
Mr. Frankenberg: The Board of Directors, such significant business transactions need to be approved by the Board.
The Board of Directors (BoD) meeting minutes for Sept 18th, 1995 are presented, which are from the day before signing the APA, and Mr. Frankenberg confirms the board members as listed. Also present was Bradford & one other. One of the participants (Mr. Sonsini I believe) is a lawyer in the firm Novell used to draft the APA. Mr. Frankenberg confirms that he relied on Bradford & Sonsini for legal advice.
Mr. Brennan: Did you only sell a portion of the Unix business?
Mr. Frankenberg: Yes, we did not sell SCO Tuxedo.
(My notes here are a little sparse, I believe Mr. Brennan was going through the APA Schedules 1.1a and 1.1b and showing the exclusion of copyrights. My notes state that Mr. Brennan was trying to get Mr. Frankenberg to concede that copyrights did not transfer.)
Mr. Singer objects on foundation and is sustained.
Mr. Brennan: Were patents excluded from the purchase?
Mr. Frankenberg: Yes.
Mr. Brennan: Were copyrights excluded from the purchase?
Mr. Singer objects – The APA should be referenced with the changes made in the amendments, not as the Sept. 1995 version only. Judge Stewart overruled, Mr. Singer referenced them separately himself and will allow Mr. Brennan to.
Mr. Brennan: Were the copyrights excluded from the purchase?
Mr. Frankenberg: Yes.
Mr. Brennan: Would other reasonable people reading this language today conclude that copyrights were excluded?
Mr. Singer Objects. Judge Stewart excuses the jury.
Mr. Singer explains that Mr. Frankenberg has been barred from discussing Amendment 2 because he was not at the company at the time. But Mr. Brennan is discussing text that is removed by Amendment 2 and is prejudicing the jury. Judge Stewart replies that Mr. Brennan is discussing the APA in context of the board meeting, so Amendment 2 has not yet happened. Mr. Brennan will be allowed to continue. Mr. Singer in not to discuss Amendment 2 on redirect. He will have to use another witness for that.
A 15-minute recess is declared.
Mr. Brennan continues going through the board minutes. He asks about the discussion item concerning SCO's viability. Mr. Frankenberg explains that there were concerns about SCO not having the cash necessary and the size of company to maintain and develop Unix.
Mr. Brennan reviews the item stating that Bradford and Sonsini reviewed the terms of the APA with the board and discussed them and Mr. Frankenberg confirms that it happened. He also has Mr. Frankenberg confirm the royalty structure – SVRX is 95% Novell's, plus some UnixWare going forward.
Mr. Brennan reviews part by part and asks are the meeting minutes accurate? Mr. Frankenberg confirms they are.
Mr. Brennan asks if the APA language concerning exclusion of “all copyrights, patents, & trademarks except Unix & UnixWare” is consistent with the BoD meeting minutes wording? Mr. Frankenberg confirms it is.
Mr. Brennan explains the APA was signed on Sept. 19th but closed in December, giving SCO & Novell time to review the agreement and make sure it was correct. There was an amendment made, called Amendment 1. Mr. Brennan confirms with Mr. Frankenberg that Amendment 1 does not change Schedule 1.1a or 1.1b in regards to copyrights and Mr Frankenberg agrees.
Mr. Brennan: During the review period from September to December did you talk with SCO executives?
Mr. Frankenberg: Yes.
Mr. Brennan: Were there any discussions regarding copyrights in the APA?
Mr. Frankenberg: No, none that I recall.
Mr. Brennan: What processes did you follow while at HP as an executive when making business transactions?
Mr. Frankenberg: Consulted with managers and other responsible executives on both sides of the deal and negotiated the terms. Lawyers are then brought in to memorialize the deal. Lawyers are not allowed to go wild and negotiate the deals themselves. No offense.
Mr. Brennan: None taken.
Mr. Brennan moves on to Section 1.2a of the APA concerning payment. In the first section regarding the shares, it states that the shares are considered full payment.
Mr. Brennan: Were the shares considered the full payment?
Mr. Frankenberg: Initially yes, but there were also the royalties listed under the Payment heading.
Mr. Brennan: In the APA does it state that the shares and assuming certain liabilities are full payment?
Mr Frankenberg: Yes, initially.
Mr. Brennan then moves to the royalty process. The wording indicates that Novell gets 100% of royalties and then pays SCO the 5% back for administration. Mr. Frankenberg confirms that is what the APA states.
Mr. Brennan: What was the purpose in retaining 100% royalties?
Mr. Frankenberg: If SCO were to go bankrupt, Novell wanted to ensure that the royalties would come to Novell, without needing to petition for the funds from the bankruptcy court. Retaining the royalties also allowed Novell to exercise buyouts of licenses, meaning a customer could buy out their license for a large fee, and no longer need to pay regular licenses. (I think I understood buyout correctly, but I am not completely certain.)
Mr. Brennan moves to Section 9.5 of the APA which states that this agreement supercedes all prior understandings, agreements, etc... and asks Mr. Frankenberg to confirm that.
Mr. Singer objects once (I didn't catch the reason) and Mr. Brennan rephrases.
Mr. Singer objects again. Concerning what the Appeals Court ruled would be decided in this trial.
Judge Stewart lets Mr. Brennan know that if Mr. Frankenberg answers this question, Mr. Singer will be allowed to redirect on Amendment 2 (The judge doesn't mention this explicitly but refers to it as what was earlier discussed) and that Mr. Brennan may not like that.
Mr. Brennan states that he does not want the answer that badly (general laughter).
Mr. Brennan asks Mr. Frankenberg about meetings he had with Novell lawyers before being deposed by Mr. Thompson. (I didn't take good notes here), but he points out that Mr. Thompson was employed by Novell, became a Director for SCO, left Novell, and is now in charge of litigation for SCO. Mr. Frankenberg confirms he is aware that Mr. Thompson does have some quantity of stock in SCO.
(Mr. Brennan returns to his seat.)
Mr. Singer on redirect:
Mr. Singer: Was it ever your intent to transfer the Unix copyrights to SCO?
Mr. Frankenberg: Yes.
Mr. Singer: Did the lawyers act on your intent when the excluded the transfer of the copyrights?
Mr. Frankenberg: No.
Mr. Singer: What did you think the exclusion of copyrights referred to in Schedule 1.1b?
Mr. Frankenberg: Possibly the NetWare copyrights, which were very important that we keep. I wish I had paid more attention then, as we wouldn't be here today.
Mr. Singer: Is what the lawyers drafted, with the exclusion of copyrights in line with your intent?
Mr. Frankenberg: No, it is not consistent with my intent.
Mr. Singer: Was it in Novell's best interest to sell the Unix business for less than they bought it for?
Mr. Frankenberg: Yes. We needed to focus on areas where we could compete successfully against Microsoft. The operating system business was hard to compete in due to Microsoft's strong position in the market.
(Mr. Singer returns to his seat.)
Mr. Brennan: Did you and the BoD review the APA and meeting minutes and approve them?
Mr. Frankenberg: Yes.
Mr. Brennan: Were the APA and the proposed meeting resolutions available before the board meeting for review?
Mr. Frankenberg: Yes.
Mr. Brennan: Is the resolution in the meeting minutes consistent with the exclusion of copyrights in the APA Schedule 1.1b?
Mr. Frankenberg: Yes.
Mr. Brennan ends his redirect.
(At some point in Mr. Brennan's redirect, Mr. Singer objects that he is re-arguing, Judge Stewart overrules this objection on the basis that Mr. Singer did the same).
Judge Stewart asks both parties if Mr. Frankenberg will be called again in this trial as a witness?
Both parties say they will not call him again.
Mr. Frankenberg is excused by the Judge from the rest of the proceedings and is admonished not to discuss his testimony with other witnesses.
Judge Stewart again admonishes the jury not to discuss, research, post, blog, tweet, facebook, share, read, listen, or receive or transmit any other type of communication in relation to the case. If they are approached to discuss the case to please report it to him.
The jury is excused.
Judge Stewart explains a reason for overruling an objection to Mr. Singer (I don't have notes about which.)
Judge Stewart lets the lawyers know that he might need to ask certain questions of the witnesses, which is not what he would like to do, but he has certain responsibilities he must have the information to fulfill. He asks the lawyers to discuss this with him if they have any concerns about these questions.
Judge Stewart asks if there are any concerns to be addressed?
Mr. Singer has two:
1) Mr. Singer is concerned there might be confusion when talking about clauses in the APA that have been modified or removed by amendment.
Judge Stewart thinks that there will not be a need for other witnesses to exclude discussion on Amendment 2 like there was with Mr. Frankenberg. But he does think it would be appropriate to reference the version of the APA being discussed by date: i.e., September 1995 APA.
Both parties agree.
2) Mr. Singer is concerned that talking about section 9.5 which supercedes prior agreements and understandings is prejudicial because the Appeals Court has directed this trial to determine the validity of the APA which means parol evidence is allowed.
Judge Stewart acknowledges that it is something to consider.
(Notes sketchy here.)
The court is recessed until tomorrow.
The jury seemed attentive, and had a wide cross section of age and gender. They all seemed to pay attention and take notes.
Judge Stewart didn't speak much during the trial, except to address objections and to ask Mr. Frankenberg one question. He spoke a fair amount at the end and seemed reasonable and professional.
The courtroom was packed at the beginning of the day, with two people standing for lack of seating (a couple of people squeezed them in after a recess). The gallery thinned out a bit as the day went on. There were plenty of lawyers there. The lawyers were professional and courteous.
I felt rather under-dressed in the presence of so many suits.
One odd thing to note is discussion of dates. There were several instances where a date was being confirmed as 200? when in fact they meant 199?. I believe Mr. Frankenberg confirmed that he was CEO of Novell from 2004 to 1996 at one point.
All my notes are paraphrased and summarized based on my own understanding. I tried to be accurate, but I know my notes are not complete. The transcripts will be key for a complete understanding.
Lastly IANAL & IDWTBAL (I don't want to be a lawyer)
To any volunteers, since I gather the room is very small and I don't know about the building, please exercise great care not to speak to any jurors if you bump into any of them. Skip hello. Just keep moving. Thanks.
And now, good night!! Good morning, actually. Good morning, good morning. We've danced the whole night through. Is this fun, or what?