SCO’s Linux battle: Game over?

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SCO's Linux battle: Game over?

Chicago (IL) – – A district court on Friday confirmed that Novell holds Unix and UnixWare copyrights that are at the focus of SCO’s ongoing multi-billion dollar lawsuit against IBM. It is a far reaching ruling that enables Novell to force SCO to withdraw its suit against IBM and claim licensing fees collected by the company.

It appears that SCO’s legal proceedings against IBM, filed originally back in March of 2003, may be coming to an end. A significant 122-page ruling by district court Judge Dale Kimball that was published last Friday is considered to be a huge blow against SCO: According to Groklaw, the bottom-line message of the ruling is “that SCO is toast.”

This specific case between SCO and Novell was about who actually owned the copyright to Unix “System V Release x”, commonly referred to as SVRx. While SCO claimed that the company acquired the rights with a certain purchase of Unix assets in 1995 and accordingly filed for Unix copyrights in July 2003, Novell disputed this claim and, after a series of letters being sent back and forth between the companies, filed for Unix copyrights in October of 2003. A “slander of title” suit filed in response by SCO was dismissed in June 2004; the battle however continued with complaints filed by both parties as well as a “slander of title” suit brought forward by Novell in July 2005.

According to the August 10 ruling, it is now confirmed by the district court that “Novell is the owner of the Unix and UnixWare copyrights.” Most significantly, Judge Kimball granted Novell the right to “direct SCO to waive its claims against IBM and Sequent.” The ruling states that “SCO is obligated to recognize Novell’s waiver of SCO’s claims against IBM and Sequent,” which effectively would shut down SCO’s legal battle against IBM and Sequent.

On a side note, Kimball also stated that SCO will have to pay Novell for SVRx license fees collected in 2003 from Microsoft and Sun. Under the original license distribution agreement between Novell and Santa Cruz Operations (the legal predecessor of SCO), Santa Cruz agreed to pass through 100% of the SVRx royalties to Novell, and Novell agreed to pay Santa Cruz a 5% administrative fee. As it currently stands, SCO has not sent any of the license revenues collected from Microsoft and Sun Microsystems in 2003 to Novell and both parties disagree on the actual amount due, since it has not been determined how much of Novell’s property was actually covered by the licensing agreements with Sun and Microsoft.

However, the most recent ruling states that “SCO breached its fiduciary duties to Novell by failing to account for and remit the appropriate SVRX Royalty payments to Novell for the SVRx portions of the 2003 Sun and Microsoft agreements.” While Kimball wrote that “SCO is obligated […] to account for and pass through to Novell the appropriate portion relating to the license of SVRx,” he noted that the court “is precluded from granting a constructive trust with respect to the payments SCO received under the 2003 Sun and Microsoft Agreements because there is a question of fact as to the appropriate amount of SVRx Royalties SCO owes to Novell based on the portion of SVRx related code contained in each agreement.”

Since revenues from SCO’s Linux licensing program have essentially dried up and the company’s cash reserves are dwindling, there is of course the question how much SCO could owe to Novell and whether the company is actually can make these payments.

According to SEC reports filed by SCO in 2003, the licensing agreements with Microsoft and Sun Microsystems resulted in payments of $8.25 million in the quarter ended April 30$7.28 million in the quarter ended July 30 and $2.50 million in the quarter ended November 30 – totaling $18.03 million. During 2003, Microsoft and Sun were SCO’s largest revenue sources, with Microsoft accounting for 16% of the firm’s revenues and Sun for 12%.

According to the legally active agreement between Novell and SCO, SCO could owe up to $17.13 million. During the proceedings with SCO, Novell asked Judge Kimball to grant a preliminary injunction imposing a constructive trust and an accounting on the “wrongfully withheld revenues from the 2003 Sun and Microsoft agreements” – covering the full $17.13 million in question. Kimball denied this request.

As of April 30 of this year, SCO had available cash assets of $7.8 million plus an additional $5.39 million of “restricted cash.” $3.394 million of this amount is reserved for consultant cost tied to the case against IBM. $1.995 million have been retained for payments the company may have to make to Novell.

The next court date in the case SCO vs. Novell is scheduled for September 17 and it appears that we will find out in this trial how much SCO will have to pay Novell.