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Linus: "The Most Important Thing Has Always Been That People Be Able to Trust Me"
Tuesday, July 15 2003 @ 11:31 PM EDT

A very reassuring interview with Linus here in which he says that Linux hasn't been affected in any real sense by the SCO business, because the way they have done development is so open, when something happens you can just go look and see who did what and when, which isn't so easy in proprietary software models. Clearly he has done so:

So we actually have a very good notion of where the code came from and what the [intellectual property] rights are...when it comes to the stuff that IBM has given Linux, we have been very, very careful about how we accept them. The one thing SCO has mentioned has been the Read Copy Update code that IBM gave us, and that wasn't accepted for the longest time into the kernel exactly because we knew the patents were owned by IBM. [But] we said we couldn't take it until you [IBM] said very explicitly that you also license the patents.
Lots more. As to why he chose to go to OSDL and not a commercial company, he says it's all about people having trust in him, as to his motivations. Now if only dear Darl shared the same values, we could wrap this up.

Thanks For The Memories
Tuesday, July 15 2003 @ 06:58 PM EDT

Dennis Ritchie has posted an old UNIX license issued to Katholieke Univerisity, dated 1974, found and scanned by Prof. Karl Kleine in Germany. This university was, he writes, "one of the early educational users, and probably the same license was used for all the educational organizations at that time":
Despite the name of the file, from the date of the contract, the license probably refers to the Fifth Edition system; the Sixth Edition manual is dated May, 1975. It's quite possible, however, that it was the 6th Edition that was actually delivered.
He mentions the importance of the clause 4.05 and that "the restriction against disclosing methods or concepts (as distinct from actual source code) caused ill-ease to some university lawyers. The restriction was indeed a bit peculiar: the concepts had already been published, for example in the C.ACM paper."

read more (1311 words) 2 comments  View Printable Version
Most Recent Post: 07/15 08:13PM by Anonymous

Decoding Legalese Into English
Tuesday, July 15 2003 @ 04:54 AM EDT

Decoding Legalese Into English

Legal documents aren't written like novels. The creativity is predominantly in the strategy, not the words. In IBM's original Answer in the SCO case, which I am using here for demonstration purposes, it looks like it's written in English, but it's really code. Legal code.

Programmers should be able to grasp this concept easily, because they write in code too. Even when some of the words they use are English words, they don't necessarily mean the same thing when used in software that they do in a novel. The law is like that too. Words have certain very specific meanings in the law. To understand a legal document, you have to know the code and how to translate it into English.

I think misunderstanding this is why there was such a loud shout of frustration and disappointment when IBM's original Answer was filed with the court in April. What a lot of people expressed was, Why didn't IBM really let them have it? The answer is, they did. But to understand what they said, you have to translate the code.

So, here we go. Bear in mind that people write entire tomes on these subjects, and we'll just be skimming along, but at least you'll get enough of a picture to grasp what the terms mean.

First, all the denials. This seemed to really distress some folks, because IBM refused to admit to things people thought they really ought to know. For example, MozillaQuest Magazine took IBM to task for saying they lacked knowledge of whether "an organization was founded by former MIT professor Richard Stallman entitled 'GNU'" and all the other material SCO wrote that IBM responded to in paragraphs 77-84. They thought surely IBM ought to know who Stallman is and that they should have taken their opportunity to explain that SCO was wrong about calling Linux a bicycle compared to UNIX being a luxury car, etc.

But aside from all the errors of fact -- Stallman was never a professor at MIT and the organization wasn't called GNU -- it isn't IBM's responsibility, legally, to take a stand on such matters. Nor is it to their advantage. Saying you lack sufficient facts isn't a cop out. It's just stating that IBM isn't Stallman and they aren't privy to all the facts or responsible to prove anything about him or his organization. It's up to SCO to prove whatever they feel is important to prove about all that.

You don't have the option to write an essay correcting the other side's mistakes in an Answer, although you can correct them at trial later. Your choices here are admit, deny, or say that you lack sufficient information to form a belief. And "form a belief" here doesn't mean the same thing as when you have friends over and you're debating which movie of the summer was the best. It means you can't admit or deny because you can't prove it one way or another; you aren't in possession of enough facts to admit or deny.

Significantly, in paragraph 86, they did deny this paragraph, meaning they believe they can prove that what SCO wrote here in the Complaintis false:

"It is not possible for Linux to rapidly reach UNIX performance standards for complete enterprise functionality without the misappropriation of UNIX code, methods or concepts to achieve such performance, and coordination by a larger developer, such as IBM."

Admit, Deny, or Lack Sufficient Information to Form a Belief

When you get served with a complaint in a civil case, as opposed to a criminal matter, each paragraph in the complaint is numbered and each paragraph is supposed to have one or two clear facts in it, and you then are required to respond to each fact in all the paragraphs. The purpose of this is to get both sides focused on what the case is about. What's the core of the problem the court needs to solve? If you fail to address a point, it's deemed admitted, so you'll notice the care with which IBM answered absolutely everything and even added a line saying in effect, If we forgot anything, we deny it now.

You are required to admit whatever you know is true. If you admit, in a legal document, it means you won't contest that fact in the lawsuit. A corporation, for example, will admit they have their headquarters in New York, if they do, because that's not at issue in the case. But if they admit they breached the contract because they hoped to destroy the other side's business, the case is over. If you deny, it means you feel you can prove it to be false at trial. And that you fully intend to.

Obviously you want to admit as little as possible at this early stage. So you read every single word, and if it's craftily written to try to get you to admit something, you need to catch it and refuse to admit. Anything you want the other side to have to prove, you deny if you reasonably, honestly can. That's what IBM did.

If it's not something you could prove factually yourself, you say, in essence, "How should I know? It might be true or it might not, but I don't have enough inside scoop to say it's true or it isn't." It isn't what you "know" in the common sense of the word; it's what you can prove true or false in a court of law.

IBM's responses in paragraphs 25 -27 and 47-49 are examples of that. Or, significantly, IBM's saying they don't know if Novell acquired "all right, title and interest in and to UNIX from AT&T". By saying they don't know, they mean: you will have to prove this matter at trial. Had they admitted it, SCO would not have had to prove at trial that Novell acquired all rights from AT&T. IBM wants them to have to prove it.

Ditto with paragraph 57 and 58. IBM says they don't know what rights SCO acquired from Novell or whether "SCO became the authorized successor in interest to the original position of AT&T Technologies with respect to all licensed UNIX software products", as SCO claimed in its Complaint.

Sometimes, you'll admit one phrase or one fact in a sentence but deny the rest, because it's the only truthful way to respond. For example, take paragraph 19 of SCO's original complaint. SCO wrote, that "AIX is a modification of AT&T/SCO's licensed UNIX that is designed to run on IBM's processor chip set, currently called the 'Power PC' processor."

IBM responds by admitting it has a software product under the trade name AIX (meaning they have trade mark rights) but it denies the rest. Whether AIX is a "modification" of UNIX is what SCO has to prove. SCO claimed this in its Complaint:

"'IBM's AIX contributions' consisted of the improper extraction, use, and dissemination of SCO's UNIX source code and libraries, and unauthorized misuse of UNIX methods, concepts, and know-how."

In paragraph 96, IBM denied this. This could be why. A white paper available on its site, titled "JFS for Linux", is interesting in this regard:

"Source of the JFS Technology"

"IBM introduced its UNIX file system as the Journaled File System (JFS) with the initial release of AIX Version 3.1. This file system, now called JFS1 on AIX, has been the premier file system for AIX over the last 10 years and has been installed in million s of customer's AIX systems. In 1995, work began to enhance the file system to be more scalable and to support machines that had more than one processor. Another goal was to have a more portable file system, capable of running on multiple operating systems. Historically, the JFS1 file system is very closely tied to the memory manager of AIX. this design is typical of a closed-source operating system, or a file system supporting only one operating system.

"The new Journaled File System, on which the Linux port was based, was first shipped in OS/2 Warp server for eBusiness in April, 1999, after several years of designing, coding, and testing. It also shipped with OS/2 Warp Client in October, 2000. In parallel to this effort, some of the JFS development team returned to the AIX Operating System Development Group in 1997 and started to move this new JFS source base to the AIX operating system. In May, 2001, a second journaled file system, Enhanced Journaled File System (JFS2), was made available for AIX 5L. In December of 1999, a snapshot of the original OS/2 JFS source was taken and work was begun to port JFS to Linux."

So they are saying that the JFS version that got put in Linux is from their own OS/2 code, and that the same code was also added to AIX later. OS/2 doesn't stem from System V UNIX, and some of what got into AIX isn't from System V either, from what they are here saying. But this will be what the trial will determine.

Another example is in paragraph 50, where IBM makes a distinction between SCO and the Santa Cruz Operation, Inc., saying IBM entered into an agreement with the latter, not with SCO, to develop a UNIX operating system for 64-bit processing platform being developed by Intel, namely Project Monterey.

This distinction could be foreshadowing that IBM plans on saying that any breach of the contract would have been a breach of a contract to which SCO, SCO now, wasn't a party. In fact, in their Answer, one of their affirmative defenses is that SCO lacks standing. The argument could be that while SCO may have purchased certain rights to UNIX, they weren't a party to the contract allegedly breached, so they have no basis for complaining about any such breach even if it in fact had been breached.

As you can see, as with all code, you can say a lot with just a few words. So IBM denying as much as it did wasn't because they were too stupid to know. They were too smart to admit whatever they shouldn't or didn't have to. Another example, in paragraph 5 and 6, IBM denies being a Delaware corporation and they deny that SCO is "a Delaware corporation with its principal place of business in Utah County, State of Utah." They denied being a DE corporation because IBM is in fact incorporated in NY, something SCO's lawyers could have checked in IBM's SEC filings. But note they don't give the reason why they denied. I looked it up and so can figure out the reason, but they don't have to tell why they deny. As to whether and why they are denying that SCO is a Delaware corporation, time will tell, but to me it's a big flag. Unless they just goofed. Unlikely, but conceivable.

There's something else you need to understand about legal documents: they are written according to the facts the legal team knows and feels it can prove at trial. No one outside the legal team can know fully before the trial why they made the decisions they did in responding to SCO's complaint because we aren't privy to all the proofs they are holding. We haven't seen all the documents, the agreements over the years, nor do we know what witnesses they have lined up, what experts. They know, for sure, exactly what each word means, what evidence they have that supports their side, and what they plan on doing at trial. You plan your trial strategy before you write a single word.

This isn't, therefore, an attempt to read their minds, just to indicate that a lot of people misread the force of what IBM wrote. Once you understand that not admitting means "We're going to fight you on this point", you can read what IBM submitted and grasp the extent to which it plans to fight. In a word, totally. They didn't give an inch.

In response to what IBM wrote, SCO filed an amended complaint, in which it corrected some factual errors and deleted some interesting material and added some. You could write another article on just the changes, and in fact, I probably will, but my point is that for sure SCO knew better than to leave what IBM wrote unanswered. They understood the code.

IBM then answered their Amended Complaint with an Amended Answer, filed late in May, but I'll leave that for a future installment, when I cover the affirmative defenses, like laches, unclean hands, economic-loss doctrine, etc. No, unclean hands doesn't mean in legalese what it does in English. Note, I am not here intending to speak to the merits of the case between IBM and SCO because I have insufficient information on which to form an opinion.

No. Really.

7 comments  View Printable Version
Most Recent Post: 07/29 04:46PM by Anonymous

Oldies but Goodies
Monday, July 14 2003 @ 01:34 AM EDT

I mentioned last week that SCO/Caldera had at one point released its older UNIX code, what they called "Ancient UNIX". My policy on this blog is to try to say nothing you couldn't prove in a court of law, so to speak, by providing links and references you can all check for yourselves.

You'd have to take my word for it about the release of "Ancient UNIX", though, if you only had the SCO web site to go on. Once again, important historical information that seems directly relevant to their lawsuit has disappeared.

read more (3126 words) 6 comments  View Printable Version
Most Recent Post: 12/13 07:49AM by pcunix

SCO's Impossible Dream
Saturday, July 12 2003 @ 03:34 AM EDT

I was waiting for July 9 to address the issue of licenses on top of the GPL, because SCO had said they would be making a major announcement about their licensing plan on that day. But they didn't make the announcement. At a minimum, it's a dream deferred. Here is some information on the GPL and why SCO has little or no hope of being able to do what they indicated they want to do, because of the GPL.

read more (3169 words) 2 comments  View Printable Version
Most Recent Post: 07/12 09:57AM by Anonymous

You Don't Say?
Friday, July 11 2003 @ 04:20 AM EDT

A Japanese reporter now says that McBride denied going to Japan to meet with CELF members:

He also denied reports that he had come to Japan specifically to meet members of the newly-formed Consumer Electronics Linux Forum. "I am here to speak to large Linux vendors about their businesses, so that both sides can find mutually acceptable solutions for the alleged Linux IP infringement issues," said McBride in response to the question about the purpose of his visit to Japan. . . .

Moreover, when asked about the implications of newly formed CE Linux Forum, whose membership includes Sony, Matsushita (Panasonic) and other Japanese heavy weights, McBride said so far, he had not made any plans to speak to any of them.Compare that with what a SCO spokesman told EETimes on July 7:

A decision by eight consumer giants, most of them Japanese, to throw their support behind Linux has the chief executive officer of SCO Group on the move. Darl McBride, whose company recently launched a legal attack on Linux for alleged contract infringements, will go to Japan this week in an attempt to prove his point with some of the manufacturers that came together last week as the CE Linux Forum (CELF).

McBride, who is fluent in Japanese, will visit with several founding members to show them code samples in which the Linux open-source operating system allegedly damages SCO's Unix business, said an SCO spokesman. CELF's eight founders are Hitachi, Matsushita, NEC, Philips, Samsung, Sharp, Sony and Toshiba. "Members of that consortium are lining up in droves to view that source code," the spokesman said.
I rest my case.

Translation from SCOSpeak: the trip didn't go well.

4 comments  View Printable Version
Most Recent Post: 07/20 09:57AM by Anonymous

It's Free as in Freedom, Stupid
Friday, July 11 2003 @ 01:38 AM EDT

It's Free as in Freedom, Stupid

I've written before about Microsoft's Linux-like UNIX plans. Other businesses have come up with plenty of ideas about how to use Linux to draw customers and/or programmers to give them a free leg up. Sun has the same dream. They have the idea that they can use Linux, and I do mean "use" in every sense, to generate a demand for UNIX platforms. What I see developing is a push to get Linux apps to run on UNIX, so as to kill off Linux as a separate system, and push non-free UNIX with some free apps riding on top, like fleas on a dog's ear, instead.

read more (1361 words) 2 comments  View Printable Version
Most Recent Post: 07/30 05:18PM by Anonymous

Sun Comes Out From Behind the Clouds
Thursday, July 10 2003 @ 10:02 PM EDT

Well, gang, it's official. Sun is the 2nd licensee, just as we suspected. The very alert Stephen Shankland has an article here which clears up all doubt, which a reader "quatermass" brought to my attention:
The pact, signed earlier this year, expanded the rights Sun acquired in 1994 to use Unix in its Solaris operating system. But there's more to the relationship: SCO also granted Sun a warrant to buy as many as 210,000 shares of SCO stock at $1.83 per share as part of the licensing deal, according to a regulatory document filed Tuesday.
We reported here back on June 16, in "SCO's Quarterly Report: UNIX is Mine, All Mine", that the 2nd licensee had that perk, when I wrote in detail about the quarterly report:
In connection with one license agreement SCO says they "granted a warrant to the licensee to purchase up to 210,000 shares of our common stock, for a period of five years, at a price of $1.83 per share. This warrant has been valued, using the Black-Scholes valuation method, at $500,000. Because the warrant was issued for no consideration, $500,000 of the license proceeds have been recorded as warrant outstanding and the license revenue reduced accordingly."
Now that we know who it is, doesn't it make your stomach turn? No consideration? The only other question now is: did the two companies plan this whole thing from the start? We'll know when the code is identified. If it turns out to be Solaris code, that will indicate if the "Solaris trap" was deliberately baited.

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McBride Silent on Licenses but Lets Slip Hint Sun is 2nd Licensee
Thursday, July 10 2003 @ 01:18 PM EDT

Yesterday was supposed to be the big announcement about SCO's licenses. However, McBride, in Japan, although he met with the press, told them nothing about that, or at least didn't report anything in its article. He wouldn't say much about the results of his Japan trip either. What he did say though is surprising and may be an unintentional slip of the tongue, or a translation issue (presumably he spoke in Japanese) that seems to indicate that the second licensee, previously shrouded in mystery, is Sun Microsystems:
"Actually, Microsoft and Sun Microsystems discussed with us, and got licenses from us. I expect we can repeat it with some Japanese counterparts," said McBride. Also he added that SCO are now under discussion with Hewlett-Packard about Unix licensing.
If so, it might explain how Sun had a PR campaign ready as soon as SCO announced it had "terminated" IBM's AIX license.

read more (354 words) 2 comments  View Printable Version
Most Recent Post: 07/10 06:24PM by Anonymous

305,274 Shares of SCO Stock to be Sold
Wednesday, July 09 2003 @ 05:51 AM EDT

SCO has filed, on July 8, a Registration Statement on Form S-3, relating to "the public offering or distribution by selling stockholders of up to 305,274 shares of common stock, par value $0.001 per share, of The SCO Group, Inc." The shares will be sold by Vultus, Inc., The Canopy Group, Inc., Angel Partners Inc., Michael Meservy, Bruce K. Grant Jr., Ty D. Mattingly and R. Kevin Bean. Only Canopy Group, in this list, will retain any SCO stock. SCO "will not receive any proceeds from the sale or distribution of the common stock by the selling stockholders. ... On July 3, 2003, the last price for our common stock, as reported by the Nasdaq National Market, was $10.71."

Because I am simply speechless, I will just let the document speak for itself, with some relevants snips:

"This offering may have an adverse impact on the market value of our stock.

"This prospectus relates to the sale or distribution of up to 305,274 shares of Common Stock by the selling stockholders. We will not receive any proceeds from these sales and have prepared this prospectus in order to meet our contractual obligations to the selling stockholders. The shares subject to this prospectus represent over two percent of our currently issued and outstanding common stock. The sale of such a significant block of stock, or even the possibility of its sale, may adversely affect the trading market for our common stock and reduce the price available in that market. . . .

"No due diligence review of our company has been done in connection with this offering.

"No securities broker-dealer or other person has been engaged to perform any due diligence or similar review of this offering or our company on behalf of the selling stockholders, persons who may purchase common stock in this offering, or any other person. Consequently, individual investors cannot rely on such a due diligence review having been performed in making a decision to invest in our common stock.

"Risks associated with the potential exercise of our options outstanding.

"As of July1, 2003, we have issued and outstanding options to purchase up to 4,011,975 shares of common stock with exercise prices ranging from $0.66 to $59.00 per share. The existence of such rights to acquire Common Stock at fixed prices may prove a hindrance to our future equity and debt financing and the exercise of such rights will dilute the percentage ownership interest of our stockholders and may dilute the value of their ownership. The possible future sale of shares issuable on the exercise of outstanding options could adversely affect the prevailing market price for our common stock. Further, the holders of the outstanding rights may exercise them at a time when we would otherwise be able to obtain additional equity capital on terms more favorable to us.

"Potential for the issuance of additional common stock.

"We have an authorized capital of 45,000,000 shares of Common Stock, par value $0.001 per share, and 5,000,000 shares of Preferred Stock, par value $0.001 per share. As of July 1, 2003, we have 13,334,886 shares of common stock and no shares of preferred stock issued and outstanding. Our board of directors has authority, without action or vote of the shareholders, to issue all or part of the authorized but unissued shares. Any such issuance will dilute the percentage ownership of shareholders and may dilute the book value of our common stock. . . .

"We will not receive any proceeds from the sale or distribution of the common stock by the selling stockholders. We anticipate that we will incur costs of approximately $20,000 in connection with the transactions described in this prospectus, including filing fees, transfer agent costs, printing costs, listing fees, and legal and accounting fees."

So, now we know why they filed the May 2001 Amendment, listing the indemnification of their directors. This July 8th document also addresses the issue of indemnification, in case anybody was thinking about suing anybody:


"Our articles of incorporation provide for the indemnification of our officers and directors to the full extent permitted by Delaware corporate law. Such indemnification includes the advancement of costs and expenses and extends to all matters, except those in which there has been intentional misconduct, fraud, a knowing violation of law, or the payment of dividends in violation of the Delaware General Corporation Law and could include indemnification for liabilities under the provisions of the Securities Act. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been informed that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.

"In the event that a claim for indemnification against such liabilities (other than the payment by our company of expenses incurred or paid by one of our directors, officers, or controlling persons in the successful defense of any action, suit, or proceeding) is asserted by such director, officer, or controlling person in connection with the securities subject to this offering, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by our company is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue."

Speaking of fraud, there is another way that owners of a corporation can be sued, despite indemnification. It's called "piercing the corporate veil", and I wrote an article just prior to finding out about the massive stock sale, so it's lacking a measure of emotion. Still, some of you might find it interesting to read how it works.

Piercing the Corporate Veil

The first thing you need to know about corporate law is that it is complex. You've got to like details. If you do, then it's powerfully interesting, because corporations have pretty much all the real money, so they are almost the only entities that can afford to litigate all the way. As a result, all kinds of corporate minutia gets decided by the courts, which in turn adds to the "On the other hand..." complexity of corporate law. So bear in mind that what I am writing here is a simplification and an overview.

Why form a corporation in the first place, instead of just a bunch of guys shaking hands and getting to work? Because if someone slips on your factory floor and breaks his neck, he's going to sue you and your business. This is America. And if he wins, and you're just a bunch of guys, you have to pay him, even selling your homes to pay the debt if necessary. A chief purpose of setting up in the corporate form, then, is to protect you from personal liability. All you risk are corporate assets, not your house. This advantage stems from the law's recognizing a corporation as a separate legal "person", so its debts are personal to it, just as yours are to you.

That's a legitimate purpose, and the courts recognize it as such. Here's what one court said pointblank on this point:

"The law permits the incorporation of a business for the very purpose of enabling its proprietors to escape liability."

But that protection isn't total. Here's what Findlaw says about "piercing the corporate veil":

"Sometimes, courts will allow plaintiffs to receive compensation from corporate officers or directors for damages rather than limiting recovery to corporate resources. This procedure avoids the usual corporate immunity for organizational wrongdoing, and may be imposed in a variety of situations..."

What kinds of situations? Well, people being people, it does on occasion happen that corporations get formed just to perpetuate a scam and leave creditors holding the bag. When that happens, the court may allow the creditors to "pierce the corporate veil" so that the corporation's liability, when the corp can't pay it, attaches to the owners of the corporation.

Here's what one NY court said on this subject, in IN THE MATTER OF JOSEPH MORRIS, APPELLANT, v. NEW YORK STATE DEPARTMENT OF TAXATION AND FINANCE ET AL., RESPONDENTS, 82 N.Y.2d 135, 623 N.E.2d 1157, 603 N.Y.S.2d 807 (1993):

"In Walkovsky v Carlton (18 NY 414), we stated the general rule that: 'Broadly speaking, the courts will disregard the corporate form, or, to use accepted terminology, 'pierce the corporate veil', whenever necessary to 'prevent fraud or to achieve equity' ( International Aircraft Trading Co. v Manufacturers Trust Co. , 297 NY 285, 292). (id., at 417).'"

Equity just means fairness. Fairness is what the court system is supposed to be about. If a plaintiff can prove that the corporation it is suing abused the privilege of doing business as a corporation to perpetuate a wrong against the plaintiff, a court can intervene by piercing the veil.

What kinds of things make it sometimes possible to pierce the corporate veil? It varies from state to state, because each state has its own laws and point of view, and the piercing concept doesn't come from the laws of the states or federal government anyway. It's a judicial creation. It's what is called "common law," meaning judges build a history of cases that rule on the matter, and over time as more and more cases accumulate on the same topic, you get to see how that state feels about the issue. Judges pay attention to rulings from everywhere to a point, especially if there aren't many local cases, but they are bound by their own state's body of case law when it exists.

You could say that piercing the corporate veil is something judges do when it would just be too cussedly unfair not to. What are some of the other things that a corporation can do wrong, so that creditors get to pierce the veil? Here and here you'll find a list of things, which I will summarize:

-- If a business is indistinguishable from its owners or principal shareholders, especially when they act in their own interests and not those of the business. This would be kind of rare in a public corporation, or at least it used to be rare, but can come up with closely held or family corps, where one common bank account is used by the business and the sole shareholder, for example. This company has a dominant shareholder. Even after the sale, Canopy will have 39.something% of all shares. The other dominant player is also a Canopy guy. There is a case, In re Silicone Breast Implant Litigation, MDL No. 926 (N.D. Ala.), where Bristol-Meyers was the sole shareholder of another company, MEC, which manufactured and distributed silicone breast implants. Bristol Meyers provided common board members, financing, and services to MEC and controlled it, but without carefully maintaining corporate formalities. In addition, MEC was underfunded and unable to satisfy risks of responding to and defending against the numerous and predictable potential claims against it. The corporate veil was pierced in that case. The court in essence found that when one shareholder so dominates a corporation's decision-making, that corporation loses its separate legal "person" status, and with it goes the limited liability. I'm not saying SCO is the equivalent of Bristol-Meyers; just pointing out that it does have dominant shareholders. And Canopy has loaned money to Caldera, which granted Canopy a security interest in all of Caldera's assets, including its IP. Yup. Here's the Security Agreement. It lists these items: "business records, deposit accounts, inventions, intellectual property, designs, patents, patent applications, trademarks, trademark applications, trademark registrations, service marks, service mark applications, service mark registrations, trade names, goodwill, technology, knowhow, confidential information, trade secrets, customer lists, supplier lists, copyrights, copyright applications, copyright registrations, licenses, permits, franchises..."

-- If it's established that the business was set up only to bypass the law. An example might be a man sets up a corporation so as to make it seem like he has no income to pay alimony.

-- If the corporation wasn't set up properly to begin with but does business anyway.

-- If the corporation's executives sign contracts without a line stating that they were acting in their corporate capacity. Example: a contract is signed "Joe Doe" instead of "Joe Doe, President, XYZ Corp., Inc.

-- If corporate debt is knowingly and deliberately incurred by an already insolvent corporation; in other words, when they knew there was no hope of paying the creditors back. It's kind of like a man asking for bankruptcy relief but the court sees that after he was way over his head and lost his job, he went out and bought diamonds for his girlfriend on credit. That's a no-no, and he isn't likely to get relief of that debt. It's kind of the same for a corporation, and in such a case a judge may say the owners can't hide behind the corporate protection.

-- If the corporation is undercapitalized. You're supposed to have enough money on hand to pay your legitimate debts and cover foreseeable risks. If shareholders raid the kitty, endangering the fiscal soundness of the business, piercing the veil may be the consequence.

-- If a corporation does not follow proper corporate procedures, such as doing the proper paperwork. For example, corporations are supposed to follow state laws affecting corporations. In the state I am in, for example, corporations have to keep a corporate kit, and in the kit must be kept all the paperwork for the corporation. If the business leases space, it's supposed to have a meeting of the directors and then they have the shareholders vote to approve or not whatever they decide. Anything that goes beyond day-to-day business and that could affect shareholders' interests has to follow that process. Minutes of all the meetings, verifying that the directors and shareholders voted to approve leasing that space go in the kit. Every year, there is supposed to be a shareholders' meeting, and annually a directors' meeting too, and there are notice requirements and the minutes of all that also must be kept in the kit, detailing who was voted in as officers of the corporation, and any other business that was handled at the meeting, etc., or in the alternative, if the bylaws allow, shareholders can decide matters by written consent procedures instead of actually meeting. But the documentation is a requirement.

The annual meetings are supposed to actually happen, too. Shares of stock must actually be issued and kept track of. There are also SEC requirements for public corporations, and certain kinds of paperwork are supposed to be filed with that agency. One of the drawbacks of incorporating is that it's annoying to keep up all the paperwork, which is why privately owned businesses often choose to be LLCs instead.

When corporations fail to keep up, they risk, in the course of a lawsuit, being asked by the judge to present its corporate kit in half an hour in court. If it doesn't look like the corporation has been acting like a corporation, by which they mean doing all the paperwork and following all the formalities, a tort plaintiff may succeed in getting a new home from the corporation's owners. When the formalities aren't followed, the corp may be deemed to be nothing but an alter ego of the owners. One missing piece of paper isn't enough, but a strong pattern is a big problem.

Normally, contracts make it harder to pierce, because you were supposed to protect yourself in the contract, not by asking a court to make up new protections for you. And passive shareholders aren't in any danger. It's the CEO who is also the principal shareholder that needs to worry.

It's typical for a corporation to indemnify its officers, so they don't need to worry about personal liability in case of lawsuits, because without such a clause, no one would want to be the president of any company. This is America, and companies know they are going to get sued eventually in the normal course of business.

Piercing the corporate veil is only a worry if you are being sued, not when you are suing someone else, and only when the business doesn't have enough money to pay for any liabilities. It's typical to carry insurance, of course, for such times. But even without it, if the business has sufficient assets to pay all claims, there is no need to pierce the veil and go after the owners.

So when a client comes in and he is the defendant being sued, the first thing you are hoping for is that they kept up their corporate kit. And if you are the party suing, you definitely want to look at that kit if the business assets look thin but the shareholders have deep pockets.

Delaware is a corporate-friendly state, and there are fairly simple requirements, compared to CA or NY, but even in Delaware, you are required to file an annual report. A lot of corporations are formed in Delaware, even if they really do business somewhere else, and generally the state where they really are will impose additional requirements on what they view as a "foreign" corporation. SCO, for example, is a Delaware corporation, but it is really doing business in Utah, so presumably they have to file and meet certain requirements in Utah as a foreign corporation as well as meeting filing requirements in Delaware.

And where do you sue (and under what state's law) a corporation that's a Delaware corporation doing business in Utah that damaged you in, say, California is another issue. Example, the VP of the corp drives a company car from Utah to California on business, and in California he hits someone with the car and that person sues him in California courts. Which state's law applies? As I said, it's complex, but if you're interested in such things, here is an article on just such a case, "The Approach of California in Applying Its Law to Foreign Corporations, and Whether a Contractual 'Choice-of-Law' Provision Can Overcome This". It's interesting. No, really. At least it is if you're the person that got hit by the Utah car in California, so to speak. And here's a pierce-the-veil case involving both Utah and NY law.

All of this is what was flooding my mind when I saw that SCO had just filed with the SEC an "Amended and Restated Certificate of Incorporation of Caldera International, Inc." from 2001. My first thought was, Why are they filing this now? It's not unusual to clean up your corporate kit when you expect to be sued. Were they expecting something? After seeing the notice of sale of the stock, I understand. And though the Amended and Restated Certificate of Incorporation specifically and strongly indemnifies the directors, you know by now that no corporation can totally indemnify its execs and shareholders, because of the possibilities of piercing the veil.

So... here's my worst case scenario, and my best fantasy. Worst is that SCO goes down in financial flames (that's not the bad part) and Canopy ends up owning UNIX. And my dream scenario? That Linus and all the other kernel coders sue SCO for defamation and get the UNIX rights as damages, and then set it free, once and for all. I know. I know. But I can dream, can't I?

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