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Week 2, Day 8 of SCO v. Novell Trial - McBride's Admission and Pisano, Botosan - Updated
Wednesday, March 17 2010 @ 08:53 PM EDT

Our reporter from the courtroom in the SCO v. Novell jury trial, Chris Brown, has now filed his first reports for today, and I'll add to them as his further reports arrive.

Today saw the finishing up of Darl McBride's testimony and the judge issued rulings on the various motions filed by the parties. But the big news is that Darl McBride has now admitted on the stand that SCO didn't need copyrights to run their Unix business. They need them only to run SCOsource. That is a huge admission, one which undercuts one of SCO's experts, and particularly undercuts SCO's interpretation of the APA and Amendment 2. Why? Because in 1995 and 1996, when those two documents were negotiated and executed, there was no such SCOsource program nor any thought of ever having one. He may be called back to the stand.

We also learn from an exhibit that HP decided not to take a SCOsource license in part because purchasing a license would be the equivalent of supporting terrorism. And then the SCO experts began to testify, beginning with Dr. Gary Pisano. Also, note that the final report from yesterday's session is now posted there.

To remind us, here's how Amendment 2 reads regarding copyrights:

A. With respect to Schedule 1.1(b) of the Agreement, titled "Excluded Assets", Section V, Subsection A shall be revised to read:
All copyrights and trademarks, except for the copyrights and trademarks owned by Novell as of the date of the Agreement required for SCO to exercise its rights with respect to the acquisition of UNIX and UnixWare technologies. However, in no event shall Novell be liable to SCO for any claim brought by any third party pertaining to said copyrights and trademarks.
See anything about SCOsource?

Here's the docket entry, and we need to send the clerk to journalism school:

03/17/2010 - 809 - Minute Entry for proceedings held before Judge Ted Stewart: Jury Trial held on 3/17/2010. Again, the Court addresses pending motions/requests of counsel. The jury is brought in and trial continues. Testimony heard, exhibits admitted. Trial will resume at 8:30 tomorrow morning. Attorney for Plaintiff: Stuart Singer, Edward Normand, Brent Hatch, Attorney for Defendant Sterling Brennan, Eric Acker, Michael Jacobs. Court Reporter: various. (slm) (Entered: 03/17/2010)

Isn't that frustrating? So many words, and no information. Aren't we glad Chris was there? Here's his report, Part 1:
I'm pleased to hear readers have found the reports helpful and I appreciate their thanks.

Part 1 - Initial Matters

Judge Stewart entered the courtroom and commented that the next time he's tempted to send people home 10 minutes early, he will rethink it... The attorneys used their time to submit a large amount of paperwork.

He turns first to SCO's motion to allow deposition testimony of witnesses in prior cases. He sites 10th circuit precedent that provides that such testimony may be permitted providing there is sufficient commonality between the cases and that the deposition attorney making the cross-examination share the same interests. He states that he believes there is sufficient commonality between this SCO v Novell case and that SCO v IBM case. As part of his determination he notes that the defendants in this case made a motion to join the two cases. Judge Stewart rules that SCO may use the deposition testimony provided the specific testimony used is approved by Novell.

Judge Stewart then discusses SCO's motion regarding testimony of why customer's changed their minds in purchasing SCOsource licenses. He states that since yesterday, additional cases have been reviewed which indicates his prior ruling is incorrect. He indicated that in doing so, he had ruled contrary to both party's belief. He states that the court will allow testimony regarding intent.

Regarding Dr. Pisano, Judge Stewart states that if Dr. Pisano does not establish on cross that he has the requisite knowledge of the underlying reports used, he will order that his testimony be struck. That there is to be no 'voir dire.' Counsel for Novell seemed somewhat surprised and asked for confirmation that Judge Stewart is saying it will not be known until after the cross-examination. Additionally Judge Stewart stated that should Dr. Pisano's testimony be struck, Dr. Botosan will not be permitted to use Dr. Pisano's report in her testimony.

Novell moved to introduce additional evidence for cross-examination of Darl McBride. They identified the SCO 8K filed by Mr. McBride following Judge Kimball's summary judgment ruling that SCO does not own the copyrights. Specifically where Darl stated that SCO does not require the copyrights. This was followed by strenuous objection by SCO's counsel claiming that this is yet another attempt by Novell to bring prior rulings before the jury. Novell stated that they are willing to not mention the ruling and use only the statement by Darl regarding the copyrights. Judge Stewart said he believes the statement is appropriate for purposes of impeaching the witness, however he admonished Novell that if the judgment is mentioned, he will be obligated to instruct the jury that it was overturned. Both parties and the judge agreed that Mr. McBride (who was not in the room) should be advised of this ruling in advance lest he believe, when questioned, that the situation regarding the prior rulings had changed and he inadvertently mention the judgment.

There were further discussions regarding Dr. Pisano and Dr. Botosan potentially "opening the door". Judge Stewart stated again that the court feels quite strongly on this matter and that should the prior rulings be brought up that he would be obligated to instruct the Jury that Judge Kimball's judgment was overruled, and that Novell wouldn't like that. He said that he believes that any jury that hears that will be more influenced by hearing the 10th overruled than by anything Judge Kimball ruled.

With the court's permission, most of the SCO legal team left the room to do so. Novell's attorneys likewise received permission to leave and discuss this mornings rulings amongst themselves.

SCO's Mr. Hatch indicates to the judge that he wishes to place a couple of display boards up for Dr. Botosan. Judge Stewart suggests some locations, but states that they must be placed such that the audience may not see their content.

When the two parties had returned, Mr. Singer requests clarification from Judge Stewart that the court has ruled that the prior judgments must not be brought in, not that Novell has an option. Judge Stewart stated that's correct, but that should it come in inadvertently, he would be obligated to inform the jury.

Mr. Singer informed the judge that progress had been made on the jury instructions, that the two parties have reached agreement on half and that the remaining half will be presented to the court with each party's proposed instruction in a chart side-by-side for the court to rule on. Judge Stewart stated that is acceptable and that he intends to provide his proposed jury instructions to the parties by Monday morning.

Mr. McBride was brought in and the jury was told to return.

End of Part 1.

And here's Part 2:
Part 2 - Completion of Darl McBride's testimony (or is it?)

SCO's Mr. Singer continues his re-direct examination of Mr. Darl McBride by referring to his stock options mentioned yesterday. He asks, Is it normal for CEOs to have such grants?

Darl answers, It is.

Q: Did you sell any of the stock you received?

McBride: No.

Q: Could you have sold your stock and made a lot of money?

McBride: Yes.

Q: Since you've become CEO have you sold any stock at all?

McBride: No, only purchase.

Q: Do you believe in this company?

McBride: Yes.

Mr. Singer refers to yesterday's discussion of Google, and Darl confirms that the discussions were held in 2003 and 2004. Why were they important?

Darl answers, They are one of the largest Linux users in the world, having perhaps 500,000 servers at the time.

Darl: $699.

Mr. Singer asks, And what discounted rate did you offer Google?

McBride: $100 per server.

Q: So how much was this deal worth?

McBride: About $50 million.

Mr. Singer asks why Google didn't buy?

Novell objects and Judge Stewart asks for more foundation.

Mr. Singer asks, During discussions with Google, did Novell make statements of ownership?

McBride: Yes.

Q: Was the June 6th retraction made during this time?

McBride: Yes.

Q: Did Google mention the Novell assertions in your discussions?

McBride: Yes.

Q: Did the conversations break down at this time?

McBride: Yes.

Q: Did Novell's statements cause the breakdown?

McBride: Yes. (Novell's simultaneous objection was overruled)

Mr. Singer asks the same general questions of Mr. McBride in relation to Dell and received the same answers. Darl states that Dell did not take a license because of Novell's assertions. When asked, Mr. McBride states that it was Dell's general counsel who first brought up the assertions.

Novell's Mr. Acker then re-cross examined Darl McBride and referred to the Dell and Google negotiations asking, You did not meet face-to-face with Google?

McBride: Correct.

Acker: These discussions with Google continued after Novell's December 22nd posting on it's website?

McBride: Yes.

Acker: And then Google continues to talk to you for two more months?

McBride: Correct.

Acker: And Dell?

McBride: Yes, same.

Acker: After Novell puts up all your correspondence on their website?

McBride: Darl states that Novell did not put up all SCO's letters, only some, not the ones favorable to SCO.

Mr. Acker asks, APA?

McBride: Yes.

Acker: Amendment 1?

McBride: Yes.

Acker: Amendment 2?

McBride: Yes.

Acker: And the negotiations continued?

McBride: Yes, but the posting was like napalm -- it doesn't necessarily kill immediately, but over time.

Acker refers to exhibit Q25 dated August 18, 2003 (internal HP letter?) 1st paragraph, reads: "Today I threatened SCO (that) HP would not attend..." Mr. Acker states, HP was going to participate in the SCOsource forum in Las Vegas?

Mcbride: Yes.

Acker: And HP said If you don't give us a release for free they won't participate?

McBride: True.

Acker reads from HP's request letter... "Release Letter: $0"? Asks Darl, "$0 for Carly's release?

McBride: Yes.

Acker: You originally priced at $100 million?

Mr. McBride answers, Originally they were together, the license and the release, but they were bifurcated.

Acker, You give them a release for free?

McBride: Yes, for Unix. Mr. McBride clarified further that the release for Unix for free but $30 million for copyright.

Acker: In September 2003 the negotiations broke down.

McBride: Yes.

Acker: So this is between June and December 22nd while Darl was saying copyright resolved and before Novell's announcement?

McBride: Darl affirms and says that it was from HP that he first learned that Novell would reassert ownership.

Acker then asks, So when the *general counsel* (stressed) of Novell wrote you a letter on August 4th, 2003 stating in no uncertain terms that Amendment 2 did not transfer copyrights you, as the CEO, did you believe this is a material fact that needed to be reported to the SEC?

McBride: No, not at that time.

Mr. Acker turns to exhibit E20, an HP internal memorandum dated September 3, 2003. He highlights reasons the author recommends not buying SCOsource. He reads each one (I missed some but I expect we'll see these again. "Novell" was not one of the points)... B) likelihood the Open Source community would "revolt"; D) SCO has not shown the infringing code; F) purchasing a license would be the equivalent of supporting terrorism, that any other company could do the same thing; G) doing the deal does not provide full indemnification; H) SCO's pattern of behavior unpredictable; J) negative image as a result.

Mr. Acker asks Mr. McBride, Did you believe in September 2003 that this is the reason HP did not do the deal?

McBride: No.

Mr. Acker refers to exhibit R45 SCO's 8K (the one right after Kimball's summary judgment ruling), notes Darl McBride's signature, and asks, Did you review this document before it was filed?

McBride: Yes.

Acker: You wouldn't have filed it if it's not accurate?

McBride: No.

The exhibit page shown is solid black with redaction with the exception of one or two sentences.

Mr. Acker: Didn't you tell the investing public that you could run your business without copyrights?

McBride: Yes, Unix. But it killed SCOsource. Darl mentions there are other considerations mentioned elsewhere in the document that affected his statement.

Acker: You could run the software business without copyrights but you could not run the SCOsource business?

McBride: That's pretty much correct.

Mr Acker is done with Mr. McBride and Judge Stewart indicates that "in light of things" Mr. Singer may examine again but not to assume he's setting a precedent for allowing third courses.

Mr. Singer refers to Novell's December 22nd, 2003 press release and asks, Did you view this as saying "Go to Novell's website and make up your mind?"

Darl answers, No.

Singer: Regarding Joe Beyer in the HP deal, was the contract complete and ready for (SCO's) signing?

McBride: Yes.

Singer: And what was the amount that SCO would receive?

McBride: $30 million.

Mr. Singer asks, It broke down after you were told Novell was going to assert ownership?

McBride: Yes.

Mr. Singer continues referencing Novell's general counsel letter, Did you view these private statements to have the same impact as Novell's public statement?

McBride: No.

Mr. Singer indicates he's finished with Mr. McBride. Judge Stewart asks Novell if they have further questions and Mr. Acker says they do not. Mr. Singer indicates that they may recall Darl to the stand in the future.

Judge Stewart tells Mr. McBride that he is subject to being called back and to keep himself available.

End of Part 2. Next is testimony of Dr. Gary Pisano.

I believe this is the 8K that Acker was showing to McBride. And now some reflections on the day from Chris:
This morning as I was sitting listening to this mornings motion rulings, I had the distinct impression this trial is like the massive (for Utah) I-15 Corridor Reconstruction Project in the later half of the 1990s.

In order to rebuild 30+ miles of I-15 through Salt Lake City faster and cheaper, Utah decided to use the "Design-Build" method. Though the process is primarily such that the design and construction are given to a single entity, it was also pitched as being designed WHILE it's being built... Sort of a "make up the rules as you go along" method.

See Design-build, especially the part: "Potential problems of design-build"

I'm sure another couple of month's delay before starting this trial could have resulted in greater efficiency and more effective adjudication. The trial as is, seems like one big accident waiting to happen.

Here is Chris's report on the testimony of Dr. Gary Pisano:
Part 3 - Testimony of Dr. Gary Pisano

(As Dr. Pisano describes his report and process, I omit the many questions Mr. Singer used on direct to elicit the information. As might be expected, they were simply prompts for Dr. Pisano to continue the (likely) scripted and practiced testimony. I expect their omission is no loss.)

Dr. Gary Pisano was sworn in and seated. SCO's Mr. Singer asks his name and position. He's a professor at Harvard Business School and has been on the faculty for 22 years. He speaks very fast and as he does he turns toward the jury and in doing so he moves away from the microphone. Judge Stewart asks him to speak into the microphone and slowly. such. that. the. reporter. can. hear. his. words.

Mr. Singer asks him about his report and it is admitted. Mr. Singer tells him that when qualifying a witness it's not the time for modesty, and to tell us his qualifications. He continues with his qualifications, appointments, published papers, citations to his works, & etc. He also provides professional consulting, though Harvard's rules limit such to 52 days per year.

Mr. Singer asks if it's his first time testifying in court. He answers that it is. He is asked what his hourly rate on this case is to which he answers $600/hr. Asked what his normal corporate consulting rate, he answers $1,200/hour. Mr. Singer asks, Do you have many customers at this rate? Dr. Pisano, smiling, answers Yes.

Mr. Singer asks, Were you asked to make any assumptions in producing your report? Yes, 1) SCO does own the copyrights, and 2) Novell had not slandered title. He states that he worked in a "But for" world where those assumptions are made. As in "But for Novell's slandering title, what would SCO's RTU market look like?"

Mr. Singer asked about SCO's Unix market before these events. Answer, SCO had 80% of the Unix market on Intel processors. Then Linux ate into their Unix market share. That Linux was originally created by Linus Torvalds and was essentially a hobbyist system tinkered by developers and others. That it was really only used for simple tasks like web servers and such not requiring many features. However Linux gained features over time.

Mr. Singer asked about "Enterprise Hardening." He answers that enterprise hardening is when an operating system gains stability and high availability features. He said Linux became enterprise hardened with the 2.4 version released in February, 2001. He reports this had a very significant impact on Santa Cruz and ate into their market share. He reports that SCO at some point realized their code had been incorporated into Linux. They then decided to develop a RTU license to give permission to use.

Mr. Singer asked if this is like insurance. Dr. Pisano said it is like insurance, that the end user does not know there is infringing code, so they buy an RTU to protect them in case their is infringing code. Mr. Singer asks, How this is different from proprietary software? Pisano, Proprietary software has indemnification, Linux does not.

Mr. Singer, And as to Novell's statements? Dr. Pisano said he looked at Novell's statements of ownership and determined their statements would have an effect on the market. Asked Why, he reponds: Because Novell was the first party, they sold the product, people would credit them more. The statements were public.

Mr. Singer asked how he determined the size of the market. Dr. Pisano said he looked at the total market for Linux 2.4, the first version SCO identified as infringing, and version 2.6. He determined how many servers there were between 2001 and 2007. Additionally he restricted his analysis to the North American market. He said the Linux market is around the world and SCO could have asserted around the world, but it's easier to enforce in North America.

Dr. Pisano said that Linux could be, and is, used on both desktops and servers. However, SCO's target market is the server market. He used IDC to determine the number of paid shipments and non-paid free downloads. He focused on the 2001 to 2007 period. He determined the size of the market, cumulatively, as 7.4 million Linux servers in North America. However, he reports, he assessed the market penetration possibility since it's obviously impossible to achieve 100% market penetration.

He said some businesses may have many servers. For instance Google, by some reports, have up to 1 million servers. Regarding market penetration considerations, Dr. Pisano says some believe SCO will never prove infringement, others believe they simply won't get caught. He stated these people will never buy a license. He said at the other end of the spectrum are some who are very conservative and want to be protected.

Mr. Singer asks how he goes about determining what percent would buy? Dr. Pisano said the way you go about doing that is to find a "proxy," a similar product with similar characteristics. For instance a proxy to determine how a certain mystery novel might sell in Utah would be to look at how John Grisham novels sell in Utah.

Mr. Singer asks, And did you find a proxy? Yes, The best proxy you could use here is a businesses demand for indemnification. Specifically the percentage who wants indemnification is the percentage who would buy an RTU license. I found three relevant surveys. One from the Forrester Group of 36 large North American companies. It reports that about 36 percent were concerned, and that 22 percent were interested in buying into a plan.

Mr. Singer, And you looked into who's doing the survey? What do you look for? Dr. Pisano, I look at three things: First, Are they biased? In this case; No, Forrester's reputation is based on being unbiased. Second, Are they experienced or the new to taking surveys? They are an organization experienced at making surveys. Forrester is the second oldest company doing IT research. And third, The basic parameters of the survey design. In this case 36 may sound small, but it's not. It's reliable for this study.

The next study I found was by the Yankee Group. I'd said earlier that Forrester is the second oldest, the Yankee Group is the oldest company to do business intelligence for the IT industry. They had asked 1000 companies if indemnification was a concern. They reported that 19 percent gave it their top or very concerned. 26 percent said somewhat concerned. Those numbers gave me a range of 19 percent to 45 percent.

Judge Stewart interjected and asked Dr. Pisano, Did you look at the underlying methodology of the Yankee Group study before forming your opinions? Dr. Pisano answered, Yes.

Judge Stewart asked, Is the Yankee Group study typical of studies used in your industry? Dr. Pisano answered, Yes (and he expanded on his answer, but spoke very quickly). Judge Stewart, for the second time, asked him to slow down for the court reporter. Judge Stewart said that the court reporter (seated adjacent to Dr. Pisano) is not his normal court reporter. He said, I'm just warning you, this one is quite prone to snap at you if you speak too fast. Dr. Pisano, looking warily at the court reporter, promised to speak slower. (The court reporter was either Judge Kimball's Kelly Hicken or Rebecca Janke. My sincere apologies to both wonderful reporters for my forgetting their respective names. There are about four reporters tag-teaming the court reporting on this trial. Their ability to record this fast-paced highly technical case, and turn around a finished transcription on a daily basis, is astounding.)

Mr. Singer asks about overall numbers from the report methodology. Dr. Pisano reports there were 1,000 respondents consisting of (missed)-sized companies. Mr. Singer asks, You don't know how many businesses failed to respond? That's correct.

Dr. Pisano continues, There was a third survey from 2005, also by the Yankee Group, of 550 North American companies of all sizes. The study indicates 20 percent of the companies which were planning on deploying Linux planned on buying indemnification.

The three surveys' results have a high degree of overlap. Mr. Singer obtains court approval to display a demonstrative pie chart of the results. Dr. Pisano reports that the three surveys show a lower estimate of 19 percent buying indemnification. He confirms that all three surveys show 19 percent or higher. And that on the high end 45 percent would purchase. He states that this corresponds to from 1.4 million RTU licenses on the low end to 3.3 million on the high end. He states that he views them as buyers who are likely to buy and avows the product aligns perfectly with what they are seeking.

Mr. Singer asks about reason they did not buy the RTU license? Dr. Pisano states that it's because of Novell's ownership claim.

Mr. Singer asks, What about people who believed the code is not infringing? Dr. Pisano states that those people were not the ones seeking indemnification in the surveys. Dr. Pisano continues, If you're concerned about some third party making claims (other than SCO), then you definitely would have been interested in SCO RTU.

Mr. Singer inquires if the price of the product was taken into account? No, price was not taken into account. Mr. Singer, Where there other companies offering indemnification? Dr. Pisano, Certainly there were other companies offering indemnification. He saw studies by Deutche Bank saying some were asking up to $150,000+ for theirs. He looked at the competing indemnification products and determined they were all inferior products. He states that Novell's indemnification product was inferior as it capped liabilities and provided nothing for the downtime required to correct/replace.

Mr. Singer asked if SCO can recoup these lost sales. Dr. Pisano stated, definitely not... the market momentum has been lost. Momentum is critical in this industry. These servers may have been replaced by now, difficult to locate the people again, SCO no longer has the sales force to do so, with the statements that have been made people no longer see SCOsource as a viable product.

Novell's Mr. Acker cross-examines Dr. Pisano asking first, How many hours have you spent on this? Dr. Pisano replies about 60 hours in the last few weeks. Mr. Acker, And how many originally? He replies that he doesn't recall, he'd have to go back and look at that. Mr. Acker, More than 100 hours? Dr. Pisano says he doesn't recall but he was paid in total around $120,000, and reports "I'd have to do the math." (reporter's comment: I'd done the math in my head one second after he'd given the number. Harvard economists. I'm still upset about purchasing my home just before the economic collapse, I wonder if the jury is too.)

Mr. Acker asks if it's fair to say over $200,000 total? He answers, probably below that. Mr. Acker opines in a question, SCO paid a lot of money for your opinion? Answer, No, for research. Did you write these reports? Yes. Were you careful? Yes. Are the reports accurate? Yes.

Mr. Acker refers to the report and notes Dr. Pisano's May 27th, 2007 dated signature, and reads just above it: "I declare under penalty of perjury..." and asks is that correct? Yes. Did you read the report before signing? Yes.

Mr. Acker asks Dr. Pisano to turn to page 3 and reads "In my professional opinion..." and asks the relevant period for the report. He replies, May 28, 2003 to the end of trial in 2007 is the damages period (there were no objections to the mention of a 2007 trial).

Mr. Acker refers to page 5 paragraph 12c and states, You wrote "based on my knowledge, I know of no other reasons... besides Novell's statements." He asks Dr. Pisano, No other factors? Yes, taking into account the relevant market. Mr. Acker repeats question saying there were those who say they won't buy any license. Dr. Pisano states, Of those who would otherwise have bought one.

Mr. Acker refers to Table 1 on page 41 and asks, For the jury to understand, they must know all the potential factors between 2003 and 2007 that would affect a company's decision to take a license? Dr. Pisano answers, Yes.

Mr. Acker asks, The first Yankee Group survey was the main basis for the percentage of 19 to 49 percent? Yes.

Mr. Acker asks, You're basing your dependence on the reliability of Yankee Group because they're "in the business" like Toyota? Yes. Mr. Acker asks, But like Toyota they don't always get it right? Correct.

Mr. Acker asks if he knows the exact questions, the exact wording of questions, asked of each respondent? Dr. Pisano replies, Yes, it was a web based survey so the questions were known for all. Mr. Acker asked if he knows the demographics of the respondents. Dr. Pisano answered that he does, and cites various percentages by industry type.

Mr. Acker asks if Dr. Pisano considered any other potential factors that a company might not take a license and Dr. Pisano answers, Yes, but they're not affecting the target market. Mr. Acker asks, The surveys did not ask if the respondents would buy SCO? No. Asks, They did not ask why they did not purchase? No.

Mr. Acker refers to exhibit G29, objections (foundation?) Mr. Acker asks, were you aware Mr. McBride stated that the SCOsource program was being harmed by other indemnification programs? Dr. Pisano answers, No. Mr. Acker asks, Would it have changed your analysis? No, absolutely not. (I don't recall if G29 was admitted or what the document was).

Mr. Acker refers to exhibit M18, an August 6th, 2003 internal SCO email discussing indemnification. Within the email thread Mr. Acker calls Dr. Pisano's attention to a June 6th, 2003 email from Janet Sullivan to Blake (Stowell?). The email asks "What would you say to this argument..." There is a direct reference to the SCOsource program not providing indemnification for 3rd party claims. The email states that Red Hat was offering broader coverage than SCOsource was. It's stated that no one can indemnify, therefore SCO cannot indemnify 3rd parties. That SCOsource could only indemnify SCO code. Mr. Acker asks Dr. Pisano if that's correct? Answers: Correct.

Mr. Acker refers to exhibit D20, an internal Hewlett Packard email regarding reasons not to take a license. In it Martin Fink provides reasons not to move forward. Mr. Acker asks Dr. Pisano if he'd seen it before, and he hadn't. Mr. Acker asks if SCO lawyers had provided it to him, and they had not. On each point raised in the email Mr. Acker asks Dr. Pisano if the survey had asked the respondents about that issue. Dr. Pisano reports, No, they hadn't. Included among the points was HP's statement that a SCO license would not provide full indemnification and that the author believed that something with full indemnification would be required. Mr. Acker asks again, This is your first time seeing this? Dr. Pisano replies, Yes.

Mr. Acker refers to exhibit D16, a letter dated June 6, 2003 from General Electric to Darl McBride. I believe Dr. Pisano replied that he'd used letters in his rebuttal report but no change to his conclusions. When Mr. Acker asked why he hadn't used real world letters, Dr. Pisano replied that he relied on the survey because it's "more fair than the real world letters." He said that these companies (from the letters) fall into that portion of the survey which said they weren't interested.

Mr. Acker reads from the letter, "Dear Mr. McBride... GE respects the IP rights of others... please provide the (infringement) specifics." Asks if Dr. Pisano had seen it, and he had not.

Mr. Acker refers to exhibit V15, a letter from Sprint to SCO and reads where Sprint "takes comfort in SCO having distributed Linux" and makes reference to the [GPL]. Mr. Acker asks if the survey responents were asked if their answers would be different if the [GPL] was considered? Answer, No.

Mr. Acker refers to exhibit Z18 upon which Mr. Singer objected and asked for a sidebar. Following the sidebar, Mr. Acker again refers to the exhibit and Mr. Singer starts to object again, but Judge Stewart states that the court will admit the exhibit over the objection of Mr. Singer. It is a Gartner Group email where they make the recommendation that companies not take the license (the exhibit is not yet reveled to the jury). Mr. Acker directs his tech to the 2nd page, bottom. Then he takes a few moments to speak with his technician running the equipment. He returns and apologizes, saying he had to make a very technically complex request of his technician. The document is then displayed with everything blacked out but a small portion. He directs Dr. Pisano's attention to the exhibit and reads "SCO's fees are excessively high", also some mention of the GPL was made. He asks Dr. Pisano if he had seen it, and he had not.

Mr. Acker refers to exhibit X22, and email from Gasparro to (Reg Broughton) on November 13, 2003 with subject of RTU followup. There is some delay while SCO reviews before it's admitted. In the 2nd paragraph starting with "I proceeded..." there is a report from Gasparro on a meeting he'd just had with Regal Group, who has some 5000 (movie) screens in the US, and Regal asking, Isn't this all about IBM and Linux? and Regal's technical person having reviewed some of SCO's infringement claims, opining that SCO is attempting to claim ownership of the words "and," "or," and "the." Mr. Acker asks if Dr. Pisano had seen this email. He had not.

Mr. Acker refers to exhibit W24, a letter from Masco. He refers to the the 2nd paragraph: "In response to your letter..." and they go on to request specifics of SCO's claims. He asks Dr. Pisano if he is aware of any infringement by Masco. He is not.

Mr. Acker refers to exhibit T25, a January 30, 2004 letter from Verizon to SCO regarding SCOsource. The 2nd paragraph states that Verizon respects the intellectual property of third parties... that they "are following closely SCO's" attempts to establish their claims. Verizon says something about being open to having meeting to allow SCO to present proof infringement. Mr. Acker asks Dr. Pisano if he is aware of any Verizon meetings with SCO. He is not. Are you aware of any reasons for no meetings with Verizon? No.

Mr. Acker refers to exhibit F26, a February 6, 2004 letter from Oracle to SCO's Ryan Tibbits. It is a response to SCO's letter to Larry Ellison and SCO's demand for license. It reads "It is difficult to respond to your letter... Impossible to determine.. infringement." Mr. Acker asks Dr. Pisano if he knows if SCO ever identified any code to Oracle that is infringing? No. He states that it's all in his method, he states that his "method picks that up."

Mr. Acker refers to exhibit F27, a March 10, 2004 letter from Google to SCO regarding SCOsource. Mr. Acker asks if Novell had at this date already made slanderous statements in the market place? Yes, they had.

Mr. Acker asks, Isn't the true test of determining how successful SCOsource was is in the real world? Dr. Pisano answers, No, it's about the proxy.

Wouldn't a better measure be the performance of SCOsource between its announcement in January, 2003 and May 28th, 2003, before Novell's statements? Dr. Pisano responds, No, I analyzed RTU. The RTU product was not available until August. Mr. Acker asks, Aren't there only two licenses sold during that time? Dr. Pisano, Not RTU licenses.

Mr. Acker refers to exhibit F27 again. Google states that the prior letters they've received have been form letters and that they are difficult to assess. Google states that SCO did not respond to their request for specifics... That instead SCO replied with another form letter. Google goes on to state, Indeed the letter requests that we contact SCO to arrange a meeting by "(insert date one week from date of letter)." They continue, We assume you had intended to replace the parenthetical with an actual date... Mr. Acker asks Dr. Pisano, Did your surveys ask if respondents would purchase a license from a company that only corresponds with form letters that fail to replace parentheticals? Dr. Pisano replies, No.

The court calls a break.

Mr. Acker continues referring to exhibit M27, a letter dated March 24, 2004 from Morgan Stanley to SCO. Reads, "In our (two previous letters) we requested details of infringing code... You have not provided the details." On Mr. Acker's question, Dr. Pisano reports he has not seen it.

Mr. Acker refers to exhibit Q22, a SCO annual form 10K report to the SEC. Mr. Acker asks Dr. Pisano what a 10K is and what "material statements" are. Dr. Pisano describes both. Mr. Acker asks, Would Novell's slanderous statements be considered a material fact? Dr. Pisano answers that it depends on the date. After Mr. Acker's elaboration of the question, Dr. Pisano replies that he's an economist, not an accountant. He says that accountants have very specialized training and procedures which he does not possess. Mr. Acker asks, as an economist, if Novell's statements are material to SCO's business. Dr. Pisano equivocates, not providing an answer.

Mr. Acker refers to the exhibit's page 37, last sentence, and reads it "additionally the success of this initiative..." then asks Dr. Pisano, During the survey you relied on, were the responents told that SCO may not have proven infringement? He answers, No.

Mr. Acker asks Dr. Pisano what the cost would be for him, or someone he hires, to conduct a survey that he would find reliable? Dr. Pisano answers, About $20,000.

Mr. Acker asks, So you could have conducted it for a fraction of what you were paid? Dr. Pisano answers, Yes, but it would have been flawed being done in 2007 to determine, after the slander, what they would have done in 2003. He went on to state that the public has made up their mind (about SCOsource). On further questioning on this, Dr. Pisano states that "Novell's statements were very powerful and quite credible." Mr. Acker repeats the phrase as if he likes the feel of it on his tongue and asks SCO's expert, Dr. Pisano, if that's correct and he answers that it is.

Mr. Acker then ends his questions.

Mr. Singer then begins his re-direct asking Dr. Pisano, Are surveys more reliable when conducted for a litigation purpose or non? Non. For what purpose are these surveys? Non. He asks further, Could Novell have conducted a survey? Yes.

These people who made statements in those 32 letters, how many stated they did not buy a license because of Novell's statements? Dr. Pisano answers, Eight. Eight out of 32 or 25 percent stated they did not because of Novell's statements.

Mr. Singer refers to exhibit 187, a letter from Sherwin Williams, and exhibit 188, a letter from Morgan Stanley. In the Morgan Stanley letter from January 2004, Mr. Singer calls attention to paragraph 3 where they ask Novell for documents "countering press info" (presumably, containing Novell's assertions). He asks Dr. Pisano if it is surprising that people, who are accustomed to getting something for free, would push back (when asked for money)? Dr. Pisano answers, No. He says it's just like when they (professors?) used to get coffee for free, when they started charging 25c people complained.

Mr. Singer asks, Has anything you've seen here today caused you to change your opinion in any way? No.

That ended the testimony of Dr. Pisano, and Judge Stewart told him he may return to Boston.

I was considering carrying on and doing the direct testimony of Dr. Botosan (four more pages of notes), but on reflection I need the sleep more, I wasn't at good at taking notes first thing this morning when I was tired. Like today, I will provide "Part 4" tomorrow.

Updated: And now, here is his final report for the day:
Part 4 - Testimony (Direct) of Dr. Christine Botosan

SCO's Mr. Brent Hatch called Dr. Christine Botosan to the stand. She was sworn in and states she is a professor at the University of Utah. On Mr. Hatch's request she provides her credentials and history. She speaks directly to the jury. She includes personal details along the way. She says she is married with two children, and about to celebrate her 20th(?) wedding anniversary. When asked if she spends much time as an expert witness she says she doesn't, she has a full-time job and is very busy with her three boys, including her husband. The jury seemed to enjoy her comments and jokes. As she continues with her credentials, they certainly sound impressive.

When asked, she states that she was instructed to make two assumptions 1) SCO actually owned the copyrights, and 2) Novell slandered their copyrights. She says that she included both internal and external evidence in making her lost profit analysis.

She said she determined that SCO lost $114 million on the low end, and $215 million on the high end.

When asked to describe the lost profit analysis she said it was SCO's lost revenues, less cost of sales, that it included both vendor license and RTU revenues. That she calculated up to 15 vendor licenses of up to $10 million each, and 100,000 (?) RTU licenses. In calculating lost revenue she used pre-slander sales projections.

Mr. Hatch places blank poster boards up so Dr. Botosan can demonstrate her calculations to the jury. They were placed such that their contents were not visible to the majority of the audience.

Mr. Hatch prompts her in a conversational style as she walks through how she calculated damages. She faces the jury and "lectures" as she presents the calculations. Asked to discuss internal vs external forecasts, she says she only used 2003 internal forecasts since no external forecasts were available. She discounts concerns about using internal ones since she says those forecasted revenues were almost all realized, and what wasn't only contributes about 1 percent to her total.

She says the vendor license external forecast from Deutche Bank matched the internal estimates of 15 deals worth about $10 million each. She used an analysis to estimate $87.250 million total, less $25 million already realized, for $61.405 million total vendor license revenue.

On RTU analysis she mentioned two approaches, the forecasts and Dr. Pisano's analysis. They forecasted no RTU revenue for 2003 since the program was just getting started late in the year, $23 million for 2003, and $42 million each year for 2005, 2006, and 2007. This totals $149 million.

Asked why she used $42 million for each of those later years she said that she only had forecasts, external forecasts, for 2004 and 2005 and none for 2006 and 2007. So she conservatively chose 0 percent growth. She said she could have supported growth based on Linux adoption rising but chose to be conservative.

The external forecasts she used were from Deutche Bank who had assumed SCO could sell 650,000 licenses at $100 each. They also had forecasts estimating best case of $200 each and also thought it was possible to sell 900,000 licenses at $100. She thought it would be prudent to use the more conservative 650,000 at $100 each. She noted that was also what the Deutche Bank analyst relied upon. She said were she have chosen a more optimistic number, she could have used the $200 each the Deutche Bank analyst thought was "most likely," and that would provide up to $300 million in revenues. For the $150 million she removed the actual revenues obtained, $1,214,000, to result in $147,686,000 in lost revenue.

She said the other analysis, the "market analysis" approach used by Dr. Pisano came to a conclusion with a lower bound estimate that SCO lost 1,478,000 RTU licenses and an upper bound of 3,325,000 licenses. If multiplying that times the conservative price of $100 each, one results in lost RTU revenue of $147.8 million on lower bound and $332.5 million on the upper bound.

Mr. Hatch asked about the differences between the two approaches. Dr. Botosan said she took comfort that his lower bound matched her conservative analysis. Also, if one were to take Deutche Bank's "most likely" number of $200 per license it would result in $300 million to $660 million on the high end and that, too, comports with her upper bound.

She then combined the lost vendor license revenue with that of the lost RTU revenue, $61,404,000 plus $147,786,000 RTU for $209,190,000 total SCOsource revenue.

Mr. Hatch asks, Are these the damages? No, they're not. Why? Because they will incur costs to generate the revenue. Such as? Dr. Botosan states she used three broad categories, cost of goods sold, marketing, and general administration. One must then calculate the cost incurred per dollar of revenue. For that she used a regression analysis and found 46 cents per dollar. Mr. Hatch asked is that conservative? She said Yes, very conservative. Why? Because there is no development incurred for this product, no delivery cost involved. She also looked at analysts' estimates where one (Deutche Bank) said no costs involved.

She says she then did the calculation of 0.46 times the revenue to get $95,211,000 of cost. Subtracting that gives $113.9 million resulting in her $114 million estimated lost revenue. Using the upper bound from Dr. Pisano of $332 million, adding in the vendor license revenue (which Dr. Pisano did not calculate), and subtracting the cost of revenue she came to $215 million.

Mr. Hatch asked what level of confidence she has, to which she replied Very confident.

That was the end of the day with her cross-examination scheduled for the morning. When asked, Novell replied they expect the cross-examination to take longer than the direct. Judge Stewart also announced that he will have a lunch meeting tomorrow requiring an extended break from 11:55am to 12:30pm and still finishing for the day at 1:30pm.

Is she talking about Brian Skiba when she references Deutsche Bank, by any chance? If so, I really wonder how realistic his figures were. He's the guy who said SCO stock would go to $45, which it never did. Other analysts at the time found his report "paradoxical". Here's a reminder of all that from the report by Stephen Shankland in October of 2003:
In other news, SCO's stock surged $4.97, or 32 percent, to close at $20.50 Wednesday, after Deutsche Bank analysts Brian Skiba and Matthew Kelly initiated coverage of the company with a "buy" rating and a $45 price target for the stock.

"Investors with an appetite for risk should, in our view, see an investment in SCO Group as the equivalent of a call option--with most of the risks and rewards often associated with options. The IBM lawsuit and the potential for Linux licensing deals offer plenty to be excited about, while failure could render the shares worthless, in our view," the analysts wrote in a report Tuesday.

Weiss criticized the report as "paradoxical." On one hand, he said, the analysts gave the stock a "buy" rating and put a high price target on the stock. On the other, they're "warning you this is highly speculative, that this whole thing could fall through."

Indeed. IBM mentions Brian Skiba and Deutsche Bank in its counterclaims against SCO:
65. SCO has in fact commenced selling such "intellectual property licenses", which it falsely claims are necessary for the use of Linux. SCO has publicly touted its success in getting Linux users to sign these licenses with SCO in order to bolster its meritless claims that SCO possesses rights to Linux.

66. SCO's campaign has not been limited to press releases and public interviews. SCO has also propagated falsehoods about its and IBM's rights in non-public meetings with analysts. SCO has solicited and participated in these meetings to misuse analysts to achieve wider dissemination of SCO's misleading message about UNIX, AIX and Linux and to damage IBM and the open-source movement. In a luncheon hosted by Deutsche Bank analyst Brian Skiba, on or about July 22, 2003, for example, SCO falsely stated that IBM transferred the NUMA code from Sequent to Linux without any legal basis to do so and that IBM's actions were giving rise to about $1 billion in damages per week. In an interview in June 2003 with Client Server News, SCO misrepresented to analysts that IBM has improperly released "truckloads" of code into the open-source community.

67. SCO's false and misleading statements have also damaged the reputation and prospects of the entire open-source community. SCO's misconduct undermines the substantial public interest in the provision of software that is reliable, inexpensive, and accessible by the general public.

You know how they make movies about the perfect bank heist? Someone could make a really good movie about how to pull off the perfect scam. All you need are some compliant analysts, a few ethics-challenged journalists, and bingo! Tell the jury all about it, as if they weren't part of the scam. What do you think? I smell Oscar.

Just to give you an idea of what analysts' estimates might have been like in the early days of SCO's attack on Linux. Here's an example of such, the wildly inaccurate forecast of Herb Jackson, of Renaissance Ventures, one of the now revealed lenders with Ralph Yarro, as revealed in the 8K SCO has just filed about the newly closed loan to the bankrupt SCO:

As of March 5, 2010, The SCO Group, Inc., (the “Company”) obtained funding for $2.0 million in postpetition financing (the “Loan”) in the form of a secured super-priority credit agreement (the “Secured Credit Agreement”), from a group of private lenders including Seung Ni Capital Partners, LLC, Jan Loeb, Leap Tide Capital Management, Inc., Steven Shin, Henry C. Beinstein, Stanley A. Beinstein, Neil J. Gagnon, Robert Dyson, WBS LLC, Ne Obliviscaris, Ltd., Darcy Mott, Clemons F. Walker and Herbert W. Jackson (collectively, the “Lenders”). Other than WBS LLC and Robert Dyson, all of the other Lenders listed above are direct or indirect shareholders of the Company. Proceeds from the financing will be used to fund the Company’s operating and administrative expenses, as well as litigation-related expenses. In order to document this financing arrangement, the Company entered into a separate Secured Credit Agreement, Stock Pledge Agreement and Security and Pledge Agreement in favor of each Lender. The Secured Credit Agreement and related documents, described below, which were entered into by the Company in connection with the $2.0 million financing were approved by order of the U.S. Bankruptcy Court on March 5, 2010 (the “Bankruptcy Court”).
The complete list of names, including Jackson's, was not revealed publicly prior to the approval of the loan. Here's what Jackson thought was going to happen with the first version of SCOsource, the offering of the shared libraries:
... a large and growing number of business enterprise customers desire to marry their existing UNIX applications and environments to Linux products, and because of the legal need to license the UNIX shared libraries from SCO, it will drive many customers to SCO's products (that include the shared libraries) in preference to the products of other Linux vendors.
That was back when SCO was still "dabbling" in selling Linux, as SCO's prior CEO Darl McBride humorously put it, considering that was all Caldera sold, what it IPO'd on, prior to getting whatever it got from Santa Cruz. (Does this look like dabbling to you? And this? Here's the press release the day Caldera spun off a subsidiary to do nothing but Linux in 1998. "The ever-increasing popularity of Linux-based solutions for business encouraged us to create a company solely focused on these opportunities," Bryan Sparks said.) But in reality, not a single company bought that version of SCOsource, as we found out in the bench trial before Judge Kimball. Not a single license. Analysts could be fooled, because they didn't understand the tech. Or, as in Mr. Jackson's case, perhaps because he was a shareholder. As you may have observed, hope springs eternal in the hearts of shareholders, when money dreams are on parade.

I certainly told him way back then that there was no market there, but as you know, nobody in the money world paid attention to the tech community back then. Wall Street types don't care about reality. The dream's the thing.

And here's what he thought would happen with the IBM litigation:

One possible outcome of the IBM lawsuit is the death of Linux, in which case, we believe, SCO owns the bulk of the intellectual property -- the 'root of the UNIX tree' -- for the world's dominant, hardened enterprise operating system. Certainly software markets would be in disarray, but given the practical alternative to unplugging the lights, we believe a worst-case scenario of the world abandoning Linux and flocking back to UNIX would not be so bad for SCO. SCO once held the dominant UNIX market share, and we believe SCO's current management team is capable of delivering that again if it needs to do so.
Well, not the *current* management team, eh? But the true believers cling to their unholy dream. Darcy Mott is still on board I see. You remember this former member of the board, speaking of the team. He used to be with Canopy too, back when it was in Ralph Yarro's pocket. If you look at the Caldera 2000 Stock Equity Plan and Employee Stock Purchase Plan, Mott is listed as owning at that time 5,318,831 shares of SCO, or 46.2%, just slightly behind Ralph Yarro's 46.8%. At the time he was Vice President, Treasurer and Chief Financial Officer of The Canopy Group also, until he and Yarro were accused of fraud by Canopy in litigation that was finally settled on terms whereby Yarro and Mott left Canopy, with some money and their SCO shares still in their pockets, but giving up all connections with Canopy.

Mott and Yarro were on the SCO board as the company was flown straight into the ground, and then replaced by the bankruptcy court's appointment of Edward Cahn as SCO's Chapter 11 trustee. So, it appears that this little group is back, because that's who Cahn has just hopped into bed with by taking a loan on terms that, should SCO default, gives the company -- without liabilities -- to this happy group of shareholders.

Is there any adult supervision of SCO any more? Why was this list not provided *prior* to the loan being approved? It would be mighty hard to convince me that Cahn didn't know their names.

Mott was, along with Ralph Yarro, sued by the Canopy Group, in 2005:

By this Motion, Canopy and the Noordas seek Yarro's removal from Canopy's Board of Directors for fraudulent and dishonest conduct and gross abuse of authority and discretion. Through a series of self-dealing and wasteful transactions, Yarro, aided and abetted by defendants Darcy G. Mott and Brent D. Christensen, wrongfully enriched himself and others at the expense of Canopy and the Noorda Family Trust, its majority shareholder. Although the precise amount of damages suffered by virtue of Yarro 's conduct is not yet known, the evidence will show at least $20 million has been misappropriated. The evidence will also show Yarro improperly acquired an option pursuant to which he may allegedly acquire forty percent of the company's non-voting shares. As a consequence of his conduct, Yarro's employment as Canopy's President and Chief Executive Officer was terminated for cause on December 17, 2004....

C. Early Incentive Plan Payments.

17. On Yarro's advice, Canopy hired Mott as its Vice President-Finance, Chief Financial Officer, and Treasurer on May 3, 1999.

18. In August 1999, without Board review or approval, Yarro and Mott caused Canopy to distribute 5% of the net proceeds of a Triggering Event relating to the Portfolio Company Vinca, Inc. ("Vinca") to five Canopy employees, including Yarro and Mott. The bonus pool from the Vinca sale totaled approximately $2.1 million. Yarro alone received approximately $1.47 million of the bonus amount, and Mott, whom Canopy had hired only a few months earlier, received approximately $42,000.00.

19. In 1999 or early 2000, Caldera, then a Portfolio Company, settled a significant antitrust lawsuit it had filed against Microsoft Corporation.

20. On or about February 25, 2000, without Board review or approval, Yarro and Mott caused Canopy to distribute a portion of the Caldera settlement proceeds to six Canopy employees, including Yarro and Mott, even though the Caldera settlement was not a Triggering Event as that term is defined in the Incentive Plan. The bonus pool from the Caldera settlement totaled approximately $7.6 million, and Yarro caused himself to be paid approximately $6.75 million of that amount. Mott received approximately $227,000.00.

21. On or about February 25, 2000, without Board review or approval, Yarro and Mott caused Canopy to distribute 10% of the proceeds of a Triggering Event relating to the Portfolio Company KeyLabs, even though the Incentive Plan by its own terms provides for a bonus pool of 5%. The bonus pool from the KeyLabs transaction totaled approximately $3.4 million. Yarro alone received approximately $2.9 million, and Mott received $205,320.

Here's the 2000 Stock Option Plan that was so very generous with options that the fortunate few, including Mott and Yarro, managed to take over a controlling voting bloc of Canopy until they were frog-marched out.

What is Cahn thinking?


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