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What the Judge Still Has to Decide in SCO v. Novell - Updated
Monday, April 19 2010 @ 08:02 AM EDT

We know that the jury in SCO v. Novell decided that SCO didn't get the copyrights in 1995 under the APA or by Amendment 2 or any fusion thereof. That killed SCO's slander of title claim as well. But that isn't the end. There were some issues the parties agreed before the trial which would be decided by Judge Ted Stewart. That has yet to happen.

The most important remaining issue is SCO's claim for specific performance. SCO's alternative claim, should it fail to win on the copyright issue, was that even if it were decided that it doesn't get the copyrights to date, under the APA Novell is obligated to turn them over now. I've seen some comments wondering if there will be another trial of these issues left for the judge to decide. The answer is no, I don't think so. It was all tried together. The jury rendered its verdict, and next comes the judge's. I don't know of any time frame.

Remember on the first day of trial there was a question about trying it all at once, whether it would be confusing to the jury? The judge, our eyewitness reported, ruled like this:

Another issue addressed this morning was the presenting of evidence on items which will be decided by the court. This could be confusing for the jury, says Novell. SCO's position is that everything is proof of slander of title, thus there's no need to separate the testimony.

Judge Stewart said that they'd 'play it by ear' during the course of the trial - if either side had evidence which was about something not before the jury, they could let the jury take an extended lunch or go home early, to avoid having to call a witness back on another day.

And that is why, beginning on day 2 of the trial, the judge sometimes asked questions of witnesses, if you recall. To be positive that there are no issues still to be addressed, I need to go through each day of the trial with a fine toothed comb, so this conclusion is pending that more exacting review, and even then, it really awaits the transcripts, to be really sure. But this is my understanding so far. I began the daily review, but by the time I finished day 2 of the trial, I realized I'd better tell you the overview now, and then supplement with details as needed as I continued, or it would be many days before I could tell you even this much.

Here's the breakdown on what the jury was to decide and what would be left to the judge, from docket #761 [PDF], the judge's order, Memorandum Decision and Order on Allocation of Issues for Bench and Jury Trial:

This matter is before the Court for a determination of which issues are to be decided by the Court and which are to be decided by the jury. In the Pretrial Order, the parties agreed that Plaintiff's claim for specific performance should be resolved by the Court and that the parties' claims for slander of title should be tried to the jury, but disagreed as to whether Plaintiff's remaining claim for breach of the implied covenant of good faith and fair dealing and Defendant's claim for declaratory judgment should be tried to the Court or the jury.

The parties now agree that:

1. Plaintiff's slander of title claim against Defendant should be tried to the jury;

2. Defendant's slander of title claim against Plaintiff should be tried to the jury;

3. Plaintiff's remaining claim that Defendant breached the implied covenant of good faith and fair dealing should be tried to the Court;

4. The Court should declare Defendant's rights under Section 4.16 of the APA;

5. Plaintiff's claim for specific performance should be tried to the Court; and

6. If Defendant's unclean hands is tried, it should be tried to the Court.

SCO was the Plaintiff, and its slander of title claim failed when its copyright claim failed. Novell's slander of title claim was tossed out by the judge at the end of the presentation of evidence at trial, on motion by SCO, because there was no evidence, he ruled, in support of the claim. That leaves #s 3, 4, and 5 (and maybe 6), and you can review what all that means to the parties here.

On the specific performance issue, it was SCO's third claim in its Second Amended Complaint:

G. In the Alternative, Novell Should be Ordered to Effectuate the Transfer

83. In its public statements, Novell has alleged that the APA (even together with Amendment No. 2) is a writing insufficient to have transferred the copyrights under Section 204(a) of the Copyright Act. Even if (contrary to precedent) this were true, SCO would be entitled to a transfer of the copyrights under the terms of the APA.

84. The parties to the APA repeatedly covenanted to take further actions necessary to consummate the transfer of the business to SCO.

85. Section 1.7(c) of the APA provides:

(c) Taking of Necessary Action: Further Action. If, at any time after the Closing Date, any further action is necessary or desirable to carry out the purposes of this Agreement the parties agree to take, and will take, all such lawful and necessary and/or desirable action.
86. Section 4.9 of the APA provides in part:
4.9 Commercially Reasonable Efforts. Subject to the terms and conditions provided in this Agreement, each of the parties hereto shall use its commercially reasonable efforts to take promptly, or cause to be taken all actions, and to do promptly, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated hereby ....
87. Section 4.12 of the APA provides:
4.12 Additional Documents and Further Assurances. Each party hereto, at the request of another party hereto, shall execute and deliver such other instruments and do and perform such other acts and things as may be necessary or desirable for effecting completely the consummation of this Agreement and the transactions contemplated herein.
88. The parties to the APA intended for the APA to transfer the business, including the copyrights, to Santa Cruz. As the successor-in-interest to Santa Cruz, SCO alleges that it is the current owner of the business, including the copyrights. In the alternative, if it is determined that the APA did not effectuate the transfer intended by the parties to the APA, Novell must take the actions necessary to effectuate that transaction in order to comply with Sections 1.7(c), 4.9, and 4.12 of the APA....

(Alternative Breach-of-Contract Claim Seeking Specific Performance)

101. SCO re-alleges and incorporates all prior paragraphs as if fully set forth herein.

102. UNIX and UnixWare, as well as the copyrights in UNIX and UnixWare, are unique and possess special value.

103. The intent of the parties to the APA, and the purpose and effect of the APA, were to transfer the UNIX and UnixWare business, including all copyrights, to SCO's predecessor in interest, Santa Cruz.

104. Under Sections 1.7(c), 4.9, and 4.12 of the APA, Novell is obligated to take all actions necessary to effectuate the purposes of the APA and consummate the transactions contemplated therein.

105. In its public statements, including its pleadings in this lawsuit, Novell has repeatedly claimed that the APA (even as amended) did not transfer the copyrights to SCO.

106. In its public statements, including its pleadings in this lawsuit, Novell has repeatedly claimed that, under the APA, it retained the right to take, or direct SCO to take, certain actions (such as waiving SCO's claims against IBM) that extinguish the value of the UNIX and UnixWare business.

107. In light of these continuing claims by Novell, SCO is entitled (as an alternative to its other claims for relief) to an order directing Novell to specifically perform its obligations under Sections 1.7(c), 4.9, and 4.12, by taking the actions necessary to effectuate the intended purposes of the APA and consummate the transactions contemplated therein.

108. In particular, SCO is entitled to an order directing Novell to execute documents (and take any other actions) necessary to transfer to SCO (a) the copyrights and (b) the UNIX and UnixWare business, without subjecting any portion of that business, other than the SVRX binary royalty stream, to Sections 4.16, 1.2(b), and 1.2(f) of the APA.

SCO's position seems foundationally tied to its assertion that the purpose of the agreement was to transfer everything lock, stock and barrel, including the copyrights, but that is exactly what the jury said was *not* the purpose of the agreement or at least not its end result. How that can not affect the above SCO reasoning is something I can't really imagine. That doesn't mean Judge Stewart can't find a way if he wants to, just that I can't imagine any way for it to happen that would make any sense, in that the evidence at trial included the Novell board minutes stating unequivocally that copyrights would not transfer. And if the purpose of the agreement was that copyrights would not transfer, what can the argument be that they should transfer now?

And since there was also evidence that the lower price reflected that the copyrights were not transferring, how can the judge order that they do so now, unless SCO pays for them? And then the question would have to be, with what money?

SCO wants to argue that even though it didn't get the copyrights yet, Amendment 2 gives it the right to get them now, so it can proceed with its litigation business. It is thinking about his part:

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.
The part SCO has never explained in a way that makes sense to me is how this phrase can possibly mean the litigation business: "...required for SCO to exercise its rights with respect to the acquisition of UNIX and UnixWare technologies." Technologies isn't the same thing as copyrights. And if the purpose of the agreement didn't include the copyrights, I can't figure what could change that from this wording, unless SCO's position might be that they need the copyrights to be able to sue, and that one could reasonably have had that in mind as one part of what they wanted to acquire the technologies for. But is that something related to "the acquisition of UNIX and UnixWare technologies"? In his opening statement, Brennan pointed out that SCO ran their business without the copyrights from 1995 to 2003, when Darl McBride switched strategies and the company began to pursue a litigation strategy, so somehow SCO has to have convinced Judge Stewart that crossing that bridge to becoming a litigation company is a necessary and contemplated purpose of the APA necessary to "consummate the transactions contemplated therein", as SCO put it in its request for relief.

SCO's evidence seemed to be pointing to a conclusion that somehow the executives intended copyrights should transfer, but somehow the attorneys goofed or were wayward. But if you recall the verdict [PDF], our eyewitness reported:

When asked, Ms. Malley read the verdict:
Did the the Amended Asset Purchase Agreement transfer the copyrights?

And the jury had entered, No.

That leaves unspoken the answer to whether that means the jury thought it was not the intention of the APA that the copyrights transfer, but I believe that is what they meant. If they thought the copyrights were supposed to transfer, they would have answered that question with a yes. But does Judge Stewart agree?

Novell points out in its Motion in Limine No. 11 [PDF] that to prevail on the specific performance claim, SCO would have to prove it kept up its end of the agreement:

SCO's second and third claims for relief in its Second Amended Complaint are for breach of the covenant of good faith and fair dealing and specific performance.... To prevail on either claim SCO must prove that it substantially performed its own obligations under the Asset Purchase Agreement ("APA"). However, the law of this case is that SCO did not.... Cal. Civ. Code Section 3392 ("Specific performance cannot be enforced in favor of a party who has not fully and fairly performed"); Judicial Council of Cal. Civ. Jury Instr. 303 ("To recover damages ... for breach of contract, [plaintiff] must prove ... [t]hat [plaintiff] did all, or substantially all, of the significant things that the contract required"). SCO never pled that it substantially performed, and as explained below, the law of this case is that it did not.
It goes on to quote what Judge Dale Kimball ruled, affirmed by the Tenth Circuit, that SCO had no authority to enter into the 2003 Sun Agreement and SCO was ordered to pay damages, which to date it has not paid. And Novell cites California law, because the APA chose that as the relevant law.

However, Judge Stewart denied Novell's motion [PDF], so no evidence of SCO's being ordered to pay a monetary judgment could be presented at trial, because it would, in his view, prejudice the jury. I don't know what that decision means with respect to his own ability to include that information in deciding his ruling on specific performance. It would, presumably, preclude him granting SCO's claim on the basis that Novell failed to present evidence of SCO's failure to perform. But truthfully, I didn't understand Judge Stewart's reasoning on a number of decisions he made on motions in limine. If all issues, including the ones he was supposed to decide, were heard in one trial, prejudice to the jury isn't the only consideration in a fair trial, one would assume.

Let's take a brief look at some other details on other issues still pending. On its assertion that Novell can't waive infringement, SCO relies on Section 4.16 of the APA:

4.16 SVRX Licenses.

(a) Following the Closing, Buyer shall administer the collection of all royalties, fees and other amounts due under all SVRX Licenses (as listed in detail under item VI of Schedule 1.1(a) hereof and referred to herein as "SVRX Royalties"). Within 45 days of the end of each fiscal quarter of Buyer, Buyer shall deliver to Seller or Seller's assignee 100% of any SVRX Royalties collected in the immediately preceding quarter. Buyer shall diligently seek to collect all such royalties, funds and other amounts when due (and shall investigate and perform appropriate auditing and enforcement under such licenses at Buyer's cost including auditing two (2) SVRX licensees identified by Seller during each quarter in which SVRX Royalties are collected). In consideration of such activities described in the preceding sentence, Seller shall pay to Buyer within 5 days of receipt of SVRX Royalties from Buyer as set forth in the preceding sentence, an administrative fee equal to 5% of such SVRX Royalties. (b) Buyer shall not, and shall not have the authority to, amend, modify or waive any right under or assign any SVRX License without the prior written consent of Seller. In addition, at Seller's sole discretion and direction, Buyer shall amend, supplement, modify or waive any rights under, or shall assign any rights to, any SVRX License to the extent so directed in any manner or respect by Seller. In the event that Buyer shall fail to take any such action concerning the SVRX Licenses as required herein, Seller shall be authorized, and hereby is granted, the rights to take any action on Buyer's own behalf. Buyer shall not, and shall have no right to, enter into future licenses or amendments of the SVRX Licenses, except as may be incidentally involved through its rights to sell and license the Assets or the Merged Product (as such term is defined in the proposed Operating Agreement, attached hereto as Exhibit 5.1(c)) or future versions thereof of the Merged Product.

(c) Seller further covenants that immediately following the Closing Date neither it, nor any of its officers, directors or employees shall (i) take any material action designed to promote the sale of SVRX products or (ii) provide material compensation to any employee designed and intended to incentivize such employee to promote the sale of SVRX products, except for actions incidental to unrelated business activities of Seller.

The part in dispute is whether this section gives Novell the right to make SCO waive any infringement by IBM or anyone Novell wants to protect, even if SCO wants to sue them. When Novell's Sterling Brennan presented his opening statement on day 2 of the trial, he read this section, and our reporter said, "He read section 4.16, which says that Novell can tell SCO what it can and can't do to SVRX licensees." The first SCO witness that day, Robert Frankenberg, however said that Section 4.16 was to make sure that customers could do royalty buyouts. It was never intended to block SCO asserting IP rights, he testified. But you have eyes. You can read.

In SCO's Second Amended Complaint, SCO laid out its reasoning about the waiver issue:

69. To prevent a recurrence of the events leading to Amendment X, the parties decided to clarify Section 4.16 of the APA by entering into Amendment No. 2 to the APA on the same date they executed Amendment X. Paragraph B..5 of Amendment No. 2 provides:
This Amendment does not give Novell the right to increase any SVRX licensee's rights to SVRX source code, nor does it give Novell the right to grant new SVRX source code licenses. In addition, Novell may not prevent SCO from exercising its rights with respect to SVRX source code in accordance with the [APA].
70. Thus, Amendment No. 2 made it redundantly clear that Novell had retained no rights to control SCO's sole exclusive ownership of the source code and associated license agreements. In fact, Amendment No. 2 made clear that Novell could not unilaterally agree to a buyout even of SVRX royalties. Even with respect to its interests in the binary royalty stream, therefore, Novell lacked the authority to waste or forego the royalties, or to grant a licensee a buyout of its relationship with SCO.

71. Despite plain language to the contrary in Paragraph B.5, Novell has attempted to increase a "SVRX licensee's rights to SVRX source code," "prevent SCO from exercising its rights with respect to SVRX source code," and effectively "grant new SVRX source code licenses," by purporting to waive and revoke SCO's claims and rights against IBM.

So that is the issue there. I think you can see that this is in some ways even more important than the issue about specific performance, in that even if SCO owned the copyrights, if Novell can waive infringements, it can continue to do so for as long as SCO might try to sue over those copyrights.

[ Update: Both Michael DeFazio, on videotape, and Tor Braham on week 3, day 13 of the trial testified that Novell had the right to waive, and that the purpose was to protect its revenue stream:

Q: Is it your understanding that Novell had rights to waive without anything being protected?

DeFazio: He answers to the effect, Yes, the right to take action to protect the revenue stream. ...

Mr. Jacobs refers to a September 16th, 1995 draft of the APA with handwritten notes. Mr. Braham says the handwritten notes on the draft are his. Mr. Jacobs draws attention to section 4.1.6 and asks, What's going on?

Mr. Braham replies, Regarding the core Unix business, it would stay with Novell. He says he's making clear they would only act as Novell's agent, that they needed Novell's agreement for new SVRx licenses, that SCO is only an agent and if they don't perform, Novell could step in.

Mr. Jacobs: Define 'agent'. Mr. Braham does so. He says this section was Novell's attempt to protect itself.

Q: Did Novell restrict itself in any way? (Mr. Braham interprets the question substituting SCO) Yes, SCO was constrained by ... Mr. Jacobs asks, Was Novell limited? No.

Mr. Jacobs produces Novell exhibit V3, another draft of the APA (unknown date). Again he draws attention to section 4.1.6 and asks Mr. Braham to read aloud the box at bottom. He does so, "In the event that buyer shall fail to... seller has right to take action on its behalf." Braham said it was intended to be crystal clear that Novell retained the Unix business and Novell can take control.

- end update.]

As for unclean hands, Novell wanted to argue that because of SCO's refusal to identify the code it claimed was infringing, SCO had unclean hands in that it deliberately prevented companies from avoiding infringement or even knowing if it was in fact occurring. But, you say, that doesn't matter, any more, because SCO doesn't own the copyrights. But what if it gets them now? Do you remember when Novell filed its trial brief? It said this about unclean hands:

SCO has unclean hands if it (1) acted unconscientiously, or in bad faith, or unfairly, and (2) the bad conduct was connected with the subject matter of the lawsuit....Novell will show that, even if, arguendo, SCO owns the copyrights, it misused them by trying to collect royalties from companies that might not infringe the copyrights, and by refusing to give those companies the information they needed to either decide if they infringe the copyrights or change their code so they would not infringe.
I think it might still matter in that the IBM case has yet to be finished, and the Red Hat litigation is in the same boat. If SCO were found to have unclean hands, it would not then be able to collect any royalties from either company. I haven't yet found the answer to whether the issue was presented at trial. I'll add on if I find anything.

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