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SCO's Response to IBM's Objections to SCO's Proposed Partial Judgment ~pj Updated
Monday, July 08 2013 @ 12:51 PM EDT

SCO has filed its response [PDF] to IBM's objections to SCO's Proposed Partial Judgment order [PDF], which SCO had improperly titled "Proposed Judgment Dismissing SCO's Claims Mooted by the Final Judgment in SCO v. Novell".

SCO says, OK, you can remove the word "moot" from the proposed order, despite stubbornly insisting it was correct wording: "Because the Novell judgment resolved the claims that SCO agrees can be dismissed, those claims no longer present a controversy and thus can be properly said to be mooted by the Novell judgment." In short, SCO doesn't know what "moot" means, but IBM taught them that the right terminology would be "decided on the merits, meaning SCO can't sue later on the same claims, and SCO says, fine, change the wording. IBM caught them in a trick, or just sloppy wording, and the parties move on. And OK, SCO agrees to change the wording about Project Monterey agreement being a joint venture, which it wasn't, and almost everything else IBM objected to SCO agrees to change. IBM is right, SCO agrees, that almost all of the claims in SCO's complaint are dead as a door nail now, because of Novell's victory over SCO regarding the ownership of copyrights, SCO concedes.

In fact, SCO's revised proposed order [PDF] is almost identical to the one IBM proposed [PDF], except for one added paragraph by SCO:

The following SCO claims remain ripe for adjudication by the Court: SCO’s Unfair Competition claim (Count VI) concerning Project Monterey, SCO’s Interference with Contract claim (Count VII), and SCO’s claim for Interference with Business Relationships (Count IX).
I doubt IBM wants that as part of the order, in that IBM is planning to contest that any of them survived the Novell judgment. That will be handled in the forthcoming IBM motion on this very topic, which SCO knows is the next step. In effect, SCO is asking for the judge to agree that these claims are still standing. SCO never quits with the tricks, but what does it mean? The SCO response reveals what SCO's plan is, as I'll show you.

Finally, SCO says it also attached a black-lined version of its proposed order showing the changes, but it is not, in fact, black-lined.

The SCO filing:

07/08/2013 - 1122 - RESPONSE re 1120 Response (NOT to motion),,re IBM's Objections to SCO's Proposed Partial Judgment filed by SCO Group. (Attachments: # 1 Exhibit A - Updated Judgment Form, # 2 Exhibit B - Updated Judgment Form (Blackline Version))(Hatch, Brent) (Entered: 07/08/2013)

First, what SCO more or less agrees to. The title of the order will now be changed to "PARTIAL JUDGMENT DISMISSING SCO CLAIMS", which is why the allegedly remaining claims don't belong in this document. And here's what SCO agrees should be dismissed with prejudice, because of the Novell victory over SCO:
Breach of IBM Software Agreement (Count I)
Breach of IBM Sublicensing Agreement (Count II)
Breach of Sequent Software Agreement (Count III)
Breach of Sequent Sublicensing Agreement (Count IV)
Copyright Infringement (Count V)
Copyright Infringement (see Docket No. 398 at 4-5)
Interference with the 1995 Asset Purchase Agreement at Issue in Novell (Count VIII)
SCO’s Unfair Competition claim (Count VI) "insofar as that claim is based on the allegations that Novell does not own the copyrights to pre-1996 UNIX source code and does not have the right to waive breaches of the licensing agreements pursuant to which IBM and others licensed pre-1996 UNIX source code".
This is identical to the list in IBM's proposed judgment [PDF]. SCO doesn't agree with IBM that IBM is the prevailing party but it does agree with IBM's suggestion to postpone all that until after the final judgment; and it objects to deleting the bankruptcy trustee's name from the order:
IBM finally objects (at ¶3d) to the last sentence of the Proposed Partial Judgment. While SCO disagrees that IBM is a “prevailing party” under the controlling law, SCO does not object to IBM’s proposal to “defer the issue of fees and costs until after the entry of final judgment on all claims and issues in this case.” Accordingly, SCO does not object to deleting the last sentence of the Proposed Partial Judgment.

SCO also does not object to IBM’s suggestion (at ¶5) that the Proposed Partial Judgment reflect SCO’s name change to “TSG Group, Inc.” Although IBM states (at ¶5) that “the caption need not be amended,” IBM’s version of the Proposed Partial Judgment, without explanation, deletes the reference to SCO’s bankruptcy trustee in the caption. SCO objects to this change.

So what is left at issue?
IBM finally asserts (at ¶4) that it “believes that the Novell judgment forecloses more claims than does SCO (and more claims than are covered by SCO’s Proposed Partial Judgment),” noting that “IBM will address the impact of the Novell judgment on all of SCO’s remaining claims” in IBM’s “forthcoming summary motion.” In addition to disagreeing that the Novell judgment had any impact on “SCO’s remaining claims,” SCO notes that, in its argument and briefing on IBM’s summary judgment motion directed at the Project Monterey claim, given IBM’s own arguments, SCO requested leave to assert a copyright infringement claim based on IBM’s conduct in connection with Project Monterey. By agreeing that certain of its claims (including its copyright infringement claims and portions of its unfair competition cause of action) may be dismissed on the basis of the Novell judgment, SCO in no way has abandoned that request, which remains pending together with the summary judgment motion.
What is SCO talking about? Pretty much what I explained in some detail here. But when SCO writes: "...in its argument and briefing on IBM’s summary judgment motion directed at the Project Monterey claim, given IBM’s own arguments, SCO requested leave to assert a copyright infringement claim based on IBM’s conduct in connection with Project Monterey", it's referring to the IBM summary judgment motions about Project Monterey. The quickest way to understand what that is about is to read this transcript of the oral argument over the motions that happened on March 5, 2007. Note this brief excerpt where David Marriott of Cravath for IBM explains SCO's theory:
MR. MARRIOTT: The claim at issue here is preempted.

THE COURT: Preempted by the copyright law?

MR. MARRIOTT: Correct, Your Honor.

Again, the only aspect here that could represent unfair competition is the alleged misappropriation. Claims based upon misappropriation are preempted under federal law as we illustrate at tab 22 of the book. For example, Your Honor, the Tenth Circuit in the Ehat versus Tanner case held that unfair competition claims based on misappropriation are preempted.

Likewise, in Warner Brothers versus American Broadcasting Corporation case, 1983, out of the Second Circuit, the court held, quote, state law claims that rely upon the misappropriation branch of unfair competition are preempted. Other cases are to the same effect.

Now, what SCO argues, Your Honor, is that its claims here are not preempted because, and this is out of its paper at page 51, quote, SCO's unfair competition claim focuses on IBM's fraudulent and deceptive breaches of its fiduciary duty and confidentiality duties, close quote. The idea seems to be, Your Honor, that because SCO has alleged in its complaint and purports to have put forward evidence of a breach of a fiduciary duty, that that somehow insulates SCO's allegations of unfair competition relating to misappropriation from a finding of preemption. That, Your Honor, respectfully is wrong.

If you recall, the judge had already ruled that SCO couldn't amend its complaint a third time to include such claims about Project Monterey, but this is SCO trying for a workaround.

To get up to speed in more detail on what the hearing was talking about, here's IBM's Motion for Summary Judgment on SCO's Unfair Competition Claim (PDF; Memorandum in Support) and IBM's Motion for Summary Judgment on SCO's Interference Claim (PDF; Memorandum in Support).

SCO responded to both. Here's SCO's Memorandum in Opposition to the IBM summary judgment motion on the unfair competition claim [PDF], the one about Project Monterey. Here's SCO's Memorandum in Opposition on the Interference claim [PDF].

In its memorandum, SCO argued why its unfair competition claim was not preempted:

IBM finally contends that the portion of SCO's unfair competition claim relating to IBM's unauthorized use of SCO's code in AIX for Power12 is barred by federal preemption. Incredibly, IBM fails even to mention the "extra element" test that the Tenth Circuit and other courts have adopted for copyright preemption analysis. Under this test, SCO's claim is not preempted, because it has the requisite "extra element" that makes it qualitatively different from a copyright claim.

It is settled that if "a state cause of action requires an extra element, beyond mere copying, preparation of derivative works, performance, distribution or display, then the state cause of action is qualitatively different from, and not subsumed within, a copyright infringement claim and federal law will not preempt the state action." Harolds Stores, Inc. v. Dillard Dept. Stores, Inc., 82 F.3d 1533, 1543 (10th Cir. 1996) (quoting Gates Rubber Co. v. Bando Chem. Indus., Ltd., 9 F.3d 823, 847 (10th Cir.1993)). Thus, a state cause of action is preempted if it imposes liability for the mere "act of reproduction, performance, distribution, or display," but if an extra element is required, "instead of or in addition to such acts, "there is no preemption, provided that the extra element changes the nature of the action so that it is qualitatively different from a copyright-infringement claim." 18 Am. Jur. 2d Copyright and Literary Property § 6.

Where the state claim "entails the additional element of the wrongful possession of the tangible embodiment of a work," there is no preemption. Id Thus, there is no preemption of "unfair competition claims based upon breaches of confidential relationships, breaches of fiduciary duties and trade secrets." Computer Assoc. Intern., Inc. v. Altai, Inc., 982 F.2d 693, 717 (2d Cir.1992) (cited with approval by the Tenth Circuit in both Harolds Stores and Gates Rubber).

This is precisely the case here. Utah and New York unfair competition law do not impose liability for mere copying or distribution of another's work, and SCO's unfair competition claim is not based on mere copying or distribution. Instead, it is based on IBM's misappropriation of the SCO code used in AIX for Power by a fraudulent, deceptive scheme involving a sham PRPQ of the IA-64 Product, concealment and affirmative deception in breach of common law, fiduciary and contractual duties of confidentiality, loyalty and candor, and the duping of SCO into believing that IBM intended to partner with SCO in the development of a Monterey "family of products." (¶¶ 25-76.)13

There's plenty more where that comes from. I call that nonsense, of course. I think it's just SCO trying to survive by leaning on the law its own then-Chairman got passed in Utah just in time for this litigation, what I call "Yarro's Law." But here's how IBM responded when the first presiding judge asked the parties to tell him what they thought was killed off by the Novell victory:
SCO's Claim for Copyright Infringement In its Order dated February 9, 2005, the Court agreed with IBM's arguments on the question and found that SCO had asserted a general Linux copyright claim in this case. As the Court further noted in the same Order, "IBM's Tenth Counterclaim appears to be broader in scope that SCO's claims." The Order as pertaining to ownership of copyrights bears on this claim inasmuch as it would bar SCO from pursuing such claims as the purported owner of all UNIX and UnixWare copyrights. SCO submits that the Order does not preclude SCO from pursuing copyright infringement claims insofar as it occupies the position of an exclusive licensee from Novell, or as the owner of the post-1995 UnixWare copyrights.
Here's that February 9, 2005 order IBM referenced. It's the one that said, "Viewed against the backdrop of SCO's plethora of public statements concerning IBM's and others' infringement of SCO's purported copyrights to the UNIX software, it is astonishing that SCO has not offered any competent evidence to create a disputed fact regarding whether IBM has infringed SCO's alleged copyrights through IBM's Linux activities. Further, SCO, in its briefing, chose to cavalierly ignore IBM's claims that SCO could not create a disputed fact regarding whether it even owned the relevant copyrights." In the end, SCO doesn't own them, and given all the licenses IBM had to the post-1995 work, it doesn't think SCO can prove any kind of infringement. But SCO wants to make them kill off this last, convoluted nonsense. Here's how Mr. Marriott described what SCO is talking about at the hearing:
Item A, Your Honor, represents the crux of what this claim is about. Again, supposedly taking code from Monterey and putting it into IBM's AIX for Power operating system in violation of SCO's rights. Items F and G broadly allege misconduct, deceptive means and practices and other unlawful and unfair competition. At the end of the day the only thing that is identified by SCO in its opposition papers as representing the supposed misconduct, is IBM allegedly failing to disclose that it was going to support Linux and move away from project Monterey, IBM supposedly stringing along the project, the Monterey project in an effort to put out a sham PRPQ, a sham release of this product to get a license.

At the bottom, Judge, those allegations are either contract based, because they allege a failure of the implied covenant of good faith and fair dealing in the Monterey agreement, or they are merely predicates to SCO's claim that IBM has no license to include code from Monterey in its AIX for Power product.

With that introduction, let me come to the five separate reasons why SCO's claim fails. And I should note, Your Honor, here at the outset, that if the allegation sounds familiar that IBM improperly took code from Monterey and put in it its AIX for Power product, it is because SCO endeavored to include in this case that exact allegation and that exact conduct by way of its proposed third amended complaint, which the Court said they could not properly bring because it was not timely brought.

So the independent reasons why summary judgment should be entered in favor of IBM, Your Honor, are, one, SCO can't adduce evidence sufficient to make out a claim for unfair competition; two, the claim is preempted by federal copyright law; three, the claim is untimely, and under the joint development agreement and the limitations provision --

THE COURT: With respect to three, they are going to tell me that the tort time line is not governed by that two-year statute or it was tolled or began to run late, but you'll address all of that?

MR. MARRIOTT: Absolutely, Your Honor.

Four, they say that the allegation -- four, the claim should be dismissed, Your Honor, because they can't establish it as required bad faith. Finally, they can't prove damages sufficient to support a claim. Let me come to the first of these points. The evidence simply doesn't support in this instance a cause of action for unfair competition. That is true, Your Honor, for three reasons. Utah law and New York law limit the cause of action for unfair competition.

THE COURT: Which apply?

MR. MARRIOTT: We believe, Your Honor, that New York law applies. We set the reasons for that out in our opening papers, and there is a limitation provision in the joint development agreement between IBM and Santa Cruz that says that any allegation or breach -- any claim or action related to a breach of the JDA is governed by New York law.

In any event, Your Honor, SCO contends that there is no meaningful, material difference between the law of New York and the law of Utah. We respectfully submit that under either law, SCO's claim for unfair competition fails.

Now, I have shown at tabs five and six of the book, Judge, under New York and Utah law a claim for unfair competition is a claim based on misappropriation and palming off. The Tenth Circuit affirmed the ruling of this Court in Proctor & Gamble saying that. In the Klein-Becker case, Judge Cassell likewise declined to extend the claim for unfair competition beyond misappropriation and palming off. There are more cases to be sure, but --

THE COURT: That Proctor & Gamble case brings back so many happy memories.

Excuse me. Go ahead.

MR. MARRIOTT: There are many more cases, Your Honor, under New York law than there are under Utah law. The are roughly 15 cases, less than 15 cases in Utah law, and not a single one of them extends the law in the way SCO proposes here. There are more cases under New York law, Your Honor, but at the end of the day the essence of a claim for unfair competition under New York law is misappropriation or palming off.

At tab six of the book you'll see, for example, the Dow Jones case out of the Second Circuit where that court said, quote, in order to succeed on their misappropriation and unfair competition claims, plaintiffs must establish some wrongful appropriation or use of plaintiff's intellectual property.

Likewise Judge, in the Eagle Comtronics case, the New York Appellate Division said that bad faith, misappropriation is an essential element, the gravamen the court said, of a claim for unfair competition.

Now, SCO seeks to expand, Your Honor, a claim for unfair competition under either state law by arguing that any form of commercial immorality is sufficient. But SCO cites only four cases in support of that proposition. Two of them, Your Honor, are misappropriation/palming off cases and they, therefore, do not support the proposition for which they are offered. The other two cases admittedly, Your Honor, contain broad language. However, those cases we would respectfully submit contrary to the weight of authority under New York law.

For example, the Ruder & Finn case from the Court of Appeals of New York said, and I quote, misappropriation of another's commercial advantage, and this is at tab seven, is a cornerstone of the court of unfair competition. Likewise, in the Czech Beer case out of the Southern District of New York, the Court there said that the essence of unfair competition is that the defendant in bad faith has misappropriated the labors and the expenditures of another.

If you look back at the early tab in the book, SCO's paragraph 184-A, only that allegation of misappropriation could potentially state a claim for unfair competition under either New York or Utah law. Any such claim fails here, Your Honor, because the essence of the allegation is that IBM took code from Monterey and put it into its AIX for Power product. That, fundamentally, Your Honor, is linked to the contract here. Any claim or effort to turn a cause of action for breach of contract into tort is, we respectfully submit, barred by the rule that precludes doing just that.

If you look, Your Honor, at tab eight of our book, you will see cases making clear that a claim for breach of contract is not an adequate basis for the creation of a tort unless there is a separate duty involved. Here, Your Honor, the taking of code from project Monterey and putting it into the AIX for Power product went to the terms and conditions of the joint --

THE COURT: You say if that is anything it is a breach of contract?

MR. MARRIOTT: Correct, Your Honor.

The allegation is that IBM obtained the code in excess of the rights provided it under the joint development agreement, and that it used that code in violation of its obligation to SCO. Those rights and those obligations are governed by the joint development agreement and, as a result, this claim, the misappropriated claim, the only form of the claim that should survive is barred under the independent tort doctrine.

Likewise, Your Honor, the joint development agreement includes a provision that says that neither party may assign or otherwise transfer its rights or delegate its duties without the prior written consent of the other party. In this case IBM did not consent to the transfer in question and, as a result, any claim that is based upon rights or obligations related to the JDA is a claim that can't be brought under that provision.

THE COURT: Now, what about the argument that the JDA may have prohibited the assignment of contract rights, but didn't prohibit the assignment of litigation rights?

MR. MARRIOTT: SCO raises that argument in its opposition papers, and it points to an assignment as between Santa Cruz and Caldera. The assignment on its face purports to transfer certain rights and not transfer other rights. Among the excluded rights, i.e., those not transferred, are any rights that Santa Cruz lacks the authority to transfer. That is point one.

Point two, Your Honor, is that the assignment by its terms relates to intellectual property. Nowhere in any of the three schedules to that agreement will you find references made to the transfer of rights to sue or to bring claims that fundamentally depend upon an alleged breach of the JDA. Again, the claim is that we are exceeding the rights that we were granted under the JDA.

See what I mean? The Marriott style is to tell you what he intends to prove in brief, and then do it. So do read on if you find this interesting. But this is enough, I think, to show that SCO wants Utah law for a reason that isn't so noble. And it wants copyright instead of contract law because you have to prove damages under contract law, actual damages, whereas in copyright law, you don't have to. It's more like hitting the lottery. So this is lawyers trying to figure out how to scrape the bottom of a very ugly barrel.

[ Update: Unfortunately, the judge has signed the order [PDF] as proposed. But we have yet to hear from IBM, but it will be very soon that we will.]

And here's the full text of the SCO response, minus the first list of lawyers, as text:

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF UTAH

_____________

THE SCO GROUP, INC., by and through the
Chapter 7 Trustee in Bankruptcy, Edward N.
Cahn,

Plaintiff/Counterclaim-Defendant,

vs.

INTERNATIONAL BUSINESS
MACHINES CORPORATION,

Defendant/Counterclaim-Plaintiff.

_____________

THE SCO GROUP, INC.’S (“SCO’S”)
RESPONSE TO IBM’S OBJECTIONS TO
SCO’S PROPOSED PARTIAL
JUDGMENT

Civil No.: 2:03-CV-00294-DN

Honorable David Nuffer

__________

Plaintiff/Counterclaim-Defendant, The SCO Group, Inc. (“SCO”), respectfully submits this response to IBM’s Objections to The SCO Group, Inc.’s Proposed Partial Judgment.

In its order of June 14, 2013 (the “Order”), the Court directed SCO to “file a brief statement identifying its claims which it agrees are foreclosed by the Novell judgment and the form of a judgment dismissing those claims.” (Docket No. 1115 at 1.) The Order also provided that “[o]n or before June 28, 2013, IBM may file any objections to the form of that order.” (Id.)

On June 24, 2013, SCO timely filed its papers required by the Order, including a proposed judgment form dismissing the SCO claims that it agrees are foreclosed by the Novell judgment (the “Proposed Partial Judgment”). (Docket No. 1119.) On June 28, 2013, IBM timely filed its Objections to SCO’s Proposed Partial Judgment (the “Objections”). (Docket No. 1120.)

On July 1, 2013, the Court entered a minute order directing SCO to file this response to IBM’s Objections by Monday, July 8, 2013. (Docket No. 1121.)

SCO’S RESPONSE TO IBM’S OBJECTIONS

IBM first objects (at ¶3a) to “SCO’s Proposed Partial Judgment insofar as it states that the claims to be dismissed are moot.” Because the Novell judgment resolved the claims that SCO agrees can be dismissed, those claims no longer present a controversy and thus can be properly said to be mooted by the Novell judgment. Nevertheless, SCO does not object to deleting the three references to mootness in the Proposed Partial Judgment, as IBM proposes, provided that the title of the Proposed Partial Judgment is changed to “Partial Judgment Dismissing SCO Claims” so as to make clear that only certain of SCO’s claims – those that SCO agrees are foreclosed by the Novell judgment—are being dismissed.

1

IBM also objects (at ¶3b) to SCO’s statement that the Novell judgment “has no bearing” on the balance of SCO’s claims. Based on this objection, IBM proposes deleting the entire paragraph containing that phrase, which paragraph identifies the claims that SCO believes are not foreclosed by the Novell judgment and that therefore, pursuant to the Court’s Order, are not being dismissed in the Proposed Partial Judgment. Although SCO does not object to deleting the paragraph’s introductory clause, which contains that phrase, SCO submits that the balance of the paragraph should remain, as revised in the Exhibits hereto, because it clarifies the scope of the Proposed Partial Judgment by expressly identifying the SCO claims that remain in the case. IBM next objects (at ¶3c) to the Proposed Partial Judgment “insofar as it uses the phrase ‘joint venture’ to describe Project Monterey.” Without waiving any rights, SCO does not object to deleting that phrase from the Proposed Partial Judgment.

IBM finally objects (at ¶3d) to the last sentence of the Proposed Partial Judgment. While SCO disagrees that IBM is a “prevailing party” under the controlling law, SCO does not object to IBM’s proposal to “defer the issue of fees and costs until after the entry of final judgment on all claims and issues in this case.” Accordingly, SCO does not object to deleting the last sentence of the Proposed Partial Judgment.

SCO also does not object to IBM’s suggestion (at ¶5) that the Proposed Partial Judgment reflect SCO’s name change to “TSG Group, Inc.” Although IBM states (at ¶5) that “the caption need not be amended,” IBM’s version of the Proposed Partial Judgment, without explanation, deletes the reference to SCO’s bankruptcy trustee in the caption. SCO objects to this change.

IBM finally asserts (at ¶4) that it “believes that the Novell judgment forecloses more claims than does SCO (and more claims than are covered by SCO’s Proposed Partial

2

Judgment),” noting that “IBM will address the impact of the Novell judgment on all of SCO’s remaining claims” in IBM’s “forthcoming summary motion.” In addition to disagreeing that the Novell judgment had any impact on “SCO’s remaining claims,” SCO notes that, in its argument and briefing on IBM’s summary judgment motion directed at the Project Monterey claim, given IBM’s own arguments, SCO requested leave to assert a copyright infringement claim based on IBM’s conduct in connection with Project Monterey. By agreeing that certain of its claims (including its copyright infringement claims and portions of its unfair competition cause of action) may be dismissed on the basis of the Novell judgment, SCO in no way has abandoned that request, which remains pending together with the summary judgment motion.

For the Court’s convenience, submitted as Exhibits A and B hereto respectively are clean and black-lined versions of the revised Proposed Partial Judgment, reflecting SCO’s responses herein.

DATED this 8th day of July, 2013.

By: /s/ Brent O. Hatch
HATCH, JAMES & DODGE, P.C.
Brent O. Hatch
Mark F. James

BOIES, SCHILLER & FLEXNER LLP
David Boies
Robert Silver
Stuart H. Singer
Edward Normand
Jason Cyrulnik
Mauricio A. Gonzalez

Counsel for The SCO Group, Inc.

3


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