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.