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The dispute between The SCO Group and Novell, Inc. over the ownership of copyrights in the code to certain versions of the UNIX operating system, which started eight years ago, appears to have been handed its retirement papers by the Tenth Circuit. Yesterday, on the case’s second visit to the circuit, the court upheld the jury verdict in Novell’s favor on the issue of copyright ownership. The SCO Group v. Novell, Inc., No. 10-4122 (10th Cir. Aug. 30, 2011).

The case is important because the issue of UNIX copyright ownership underlies the copyright litigation campaign that SCO commented in 2003, targeting the LINUX open source operating system. When SCO filed multiple lawsuits claiming that the LINUX OS infringed its UNIX copyrights, it raised concerns that users of LINUX could be held liable for infringement, and subject to the payment of royalties to SCO. The ruling that SCO does not own the copyrights that it asserted in those litigations puts an end to that threat.

Despite the concerns raised in 2003 that the threat of copyright litigation and royalty payments would stall not only the adoption of the LINUX OS but also other open source software, users appeared to factor in the threat of future liability. Both LINUX and other open source software projects marched on as the SCO litigations ground on.

Last week, the LINUX OS turned 20. As this CNN article observes, LINUX is now invisible and ubiquitous. While its share of the desktop operating system remains miniscule, LINUX code is present in 30% and 43% of tablets and smartphones, respectively, as part of the Android operating system.  And LINUX code is present in the firmware of countless other devices, and is pervasive in enterprise data systems.

As for open source generally, as long as we’re keeping score, it’s a good time to note that the Apple operating system is based on open source code as well. In fact, it has the same roots as the code at issue in SCO v. Novell – the earliest versions of the UNIX operating system.

Notwithstanding that SCO may seek en banc review and even file a petition for certiorari to the U.S. Supreme Court (it’s done that before), the SCO v. Novell case appears to be, finally, over. Ultimately, the related SCO litigations, including its copyright infringement case against IBM, will fold up as well.

There are a few lessons for technology lawyers in the SCO v. Novell litigation, which you can read about in our prior blog post.

The SCO v. Novell endgame doesn’t seem to have gotten a lot of press, at least so far. Perhaps this is because attention has already turned to the next big “open source” battle – the complex web of litigations involving Google’s Android operating system. This time, the battle isn’t for the desktop, it’s for mobile market share.

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Last week, the district court in SCO, Inc. v. Novell (D. Utah), the current act in the long-running drama of the SCO litigations aimed at the Linux operating system, refused to grant SCO's motion to set aside the jury verdict rendered last March. The jury concluded that Novell owned the copyrights in the UNIX code that SCO claims is infringed by the Linux operating system.  Once again, open source advocates were  celebrating, and with good reason. The ownership of the UNIX code goes to the heart of all of the claims that SCO has raised in the other litigations, and if thet verdict stands, those litigations are effectively over. Although SCO's long-standing fee agreement with its attorneys apparently includes another trip to the U.S. Court of Appeals, it will be up to the Bankruptcy Trustee and the Bankruptcy Court in Delaware to decide whether that trip is actually made. We will learn their decision in due time.
 
Meanwhile, there are many answers to the question of what can be learned from the SCO litigations, but one of them has nothing to do with the future of open source software, or the potential futility of high-stakes, bet-the-company litigation tactics. For attorneys who are engaged in the daily exercise of drafting and negotiating complex technology licensing deals, one lesson is this: When there is a communications or knowledge gap between the lawyers that give final shape to a business deal  and the executives that will live with the deal over time, the result may be a fundamental and detrimental misunderstanding of just what the deal accomplished.

The district court's post-verdict opinion disposing of issues  reserved for judicial decision describes precisely that kind of fundamental disconnect at the core of SCO's litigation campaign. That disconnect had its roots back in the day (1995) when Santa Cruz, a predecessor entity to SCO, sought to acquire Novell's UNIX software business, including rights in the legacy UNIX software code that Novell had itself earlier acquired from AT&T.  As the court opinion relates, numerous former Santa Cruz executives testified that they wanted the deal to include, and assumed that the deal would and did include, the copyrights in the code that Santa Cruz required to take over that business. But the testimony of those executives also reflected the fact that at a certain point, they stepped back from the bargaining table and the attorneys took over, and that's not how the deal went down.
 
Novell's outside counsel, who drafted the Asset Purchase Agreement that embodied the transaction, testified that it was agreed that Novell would retain the copyrights in the UNIX code. The court found his testimony “particularly persuasive.” Given the jury verdict, it is clear that the jury also credited his testimony.
 
On the Novell side of the deal, the reasons behind the retention of the copyrights pertained to Santa Cruz's status as a “fledgling company” and Novell's wish to secure the royalty streams that it expected from the transaction.
 
Key conclusions drawn by the court from the testimony as a whole were:

• SCO's key witnesses were involved only in the “high level” negotiations and did not participate in the actual drafting of the deal documents, including the Asset Purchase Agreement that embodied the deal , and similarly, they did not participate in the drafting of a subsequent amendment to the Agreement.
• Novell retained the copyrights in order to protect the royalty stream that it would receive as part of the transaction, because Santa Cruz did not have the financial resources to acquire the full extent of the rights it wanted, and there were questions about its long-term viability.
•  The subsequent amendment to the Asset Purchase Agreement, which included a reference to the transfer of “all copyrights … required by SCO to exercise its rights with respect to the acquisition” of the UNIX technology also did not transfer the copyrights.
• Novell affirmatively refused to to amend the Asset Purchase Agreement in a manner that would have transferred the copyrights (or affirmed that they had been transferred), and the amendment that was executed was intended only to clarify Santa Cruz's rights to use the UNIX technology. 
• Novell's version of the intent behind the Asset Purchase Agreement and the subsequent amendment to it are bolstered by the reality, as shown in the years subsequent to the transactions, that Santa Cruz (and its successor entities) in fact did not require ownership of the copyrights to to operate the UNIX software business that it had acquired.
• While SCO, Santa Cruz's successor entity, may have “required” the copyrights in order to embark upon the “SCO Source” licensing program that sought licensing fees from users of the Linux operating system, that licensing program was not something that was acquired by SCO from Novell,  nor was it envisioned by either party to the transaction at the time the Asset Purchase Agreement or amendments to it were executed.

It should also be mentioned that the district court noted that SCO's witnesses were entitled to less credibility because of their ongoing financial interest in the company, and thus in the ultimate outcome of the dispute over copyright ownership.

Exactly why the disconnect developed in the first place between the expectation of Santa Cruz's executives and the realities of the deal as done may be something that can't be completely decoded at this distance, at least without poring through every last word of testimony (and the record in this case is particularly voluminous). But the subsequent dispute stands as a reminder that communication with the client about the details of a deal is just as important as communication with the attorneys on the other side of the deal.
 

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The jury in The SCO Group v. Novell, Inc. litigation over ownership of the copyrights in UNIX source code has ruled in favor of Novell, the company announced on its blog this afternoon. Novell had previously prevailed on the issue of copyright ownership in a ruling by Judge Dale Kimball on Novell's motion for summary judgment, but as we blogged in August 2009, the U.S. Court of Appeals for the Tenth Circuit reversed that ruling, holding that the issue of copyright ownership was, under the circumstances presented, an issue for the jury. The jury in the federal district court in Utah spoke in Novell's favor following a three-week jury trial before Judge Ted Stewart (following Judge Kimball's recusal and subsequent retirement).

Presumably, the next act in this long-running drama (the litigation commenced in 2005) will focus on SCO's litigation against IBM, which was stayed when SCO filed a (still pending) bankruptcy proceeding. The ownership of the copyrights that are the subject of this jury verdict underlie SCO's claims in that litigation that IBM infringed SCO's copyrights by contributing certain of the UNIX source code to the open source Linux operating system project. And on that basis, SCO has claimed that the Linux operating system itself infringes SCO's copyrights, and has sought licensing fees from users of the Linux OS.

Whether SCO will be financially able to continue following this verdict remains to be seen.

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The back story to the dispute between The SCO Group and Novell, Inc., over the ownership of copyrights to UNIX source code is lengthy indeed. But we'll spare you the details and just say that the ownership of the copyrights is a critical issue because it is that very source code that underlies SCO's claims that the open source Linux Operating System infringes on its intellectual property rights, thereby obligating just about everybody who uses the Linux OS to pay royalties to SCO. So needless to say, the open source community is very interested in the outcome of the current trial in The SCO Group v. Novell, Inc., which commenced in U.S. District Court in Utah on Monday.

To briefly recap, the issue of code ownership is being resolved in a slander of title lawsuit brought by SCO against Novell, which formerly owned (and claims to still own) the copyrights in the disputed code. When SCO claimed ownership of the UNIX code in its lawsuit against IBM, Novell made public statements disputing SCO's ownership, thus the claim by SCO that Novell slandered its title to the code. District Court Judge Dale Kimball ruled in favor of Novell on the ownership issue, granting summary judgment dismissing SCO's claims. But last August, the U.S. Court of Appeals for the Tenth Circuit ruled that there were disputed issues of material fact that precluded the grant of summary judgment, and remanded back to the District Court. Judge Kimball recused himself and the trial is now being held before District Court Judge Ted Stewart.

Meanwhile, the main event, the SCO lawsuit against IBM, is being held in abeyance pending resolution of the code ownership issue. If SCO prevails against Novel on the issue of ownership of the code, then the litigation against IBM should be the next event. The allegations in that lawsuit are, in brief summary, that IBM misappropriated SCO's UNIX code and contributed it to the Linux operating system.

We cannot do justice to all of the ins and outs of the SCO v. Novell litigation, nor to the several related lawsuits, in a short blog post. But we can point you to the mother of all Web sites on the subject, www.Groklaw.net, that has been following these litigations in the greatest of detail since at least 2003. Be forewarned that the operator of the site has strong opinions on the issues, but whether you agree with those opinions or not, the site is an invaluable source of relevant documents and up to date information on the conduct of the trial.

The trial is scheduled to take three weeks.

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The Tenth Circuit has ruled in the closely watched SCO v. Novell appeal, and while it upheld a judgment in favor of Novell for royalties due from The SCO Group, the appeals court remanded for a trial on the issue of ownership of the copyrights in the UNIX code that is at the heart of SCO's copyright litigation against IBM over its contribution of code to the Linux operating system.

The SCO v. Novell case is one of a complicated series of litigations that commenced in 2003 when SCO claimed that copyrights in the UNIX code that it acquired as a result of a transaction with Novell in 1995 were infringed by IBM and users of the Linux OS. When Novell publicly stated that SCO did not acquire the copyrights in as a result of the 1995 transaction, SCO sued Novell for slander of title. The issue of ownership of the code was the subject of the 2007 ruling by the U.S. District Court in Nevada from which SCO appealed.

In a lengthy opinion, the Tenth Circuit reviewed the evidence and arguments presented on the motion for summary judgment and concluded that the issue of should not have been resolved summarily. The court recognized Novell's "powerful arguments" in support of its interpretation of the transaction, and allowed that there might be cause "to discount the credibility, relevance, or persuasiveness" of SCO's extrinsic evidence in support of its view of the transaction. Nevertheless, the court said, "when conflicting evidence is presented such that the ambiguities in a contract could legitimately be resolved in favor of either party, it is for the ultimate finder of fact—not the court on summary judgment—to interpret the contract."

Judge Dale Kimbell, who presided over both the SCO v. Novell litigation and the underlying SCO v. IBM litigation in the District of Nevada since 2003 has already filed a notice of recusal, and both  matters have been reassigned.

Meanwhile, it remains to be seen whether SCO will survive to press forward with the Novell and other litigations, including the underlying copyright infringement case against IBM, which had been stayed pending the outcome of SCO v. Novell and by SCO bankruptcy filing. SCO filed a Chapter 11 petition in the District of Delaware shortly after the district court's ruling in SCO v. Novell in 2007. The bankruptcy proceeding ground on as the appeal to the Tenth Circuit was pending, with SCO having yet to file a reorganization plan. On August 5, the bankruptcy court ordered the appointment of a Chapter 11 trustee to take over management of SCO. As recognized in SCO's 8K filing following the order, "the Chapter 11 Trustee will have, upon appointment, authority over the Debtors’ assets and affairs and the future course of the Debtors’ litigation against Novell, IBM, et al."

SCO also appealed from the district court ruling awarding Novell $2.5 million plus in royalties, but on that issue the Tenth Circuit affirmed, so the favorable ruling on copyright ownership brings no monetary relief for SCO's remaining financial resources.

The SCO Group, Inc. v. Novell, Inc., No. 08-4217 (10th Cir. Aug. 24, 2009)
 

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