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7/7/2006
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Legal Setback Raises Questions Of SCO's Survival

The Unix vendor says failure to win the lawsuit against IBM could kill off the company.

Unix vendor SCO Group's intellectual property lawsuit against IBM has been widely seen as a go-for-broke strategy. Now it looks more like just a plan to go broke.

Utah District Court Magistrate Judge Brooke Wells in late June dismissed 182 of the 201 claims IBM sought to have thrown out of the case; 112 claims remain. The legal action dates back to March 2003, when SCO charged that IBM's contributions to the Linux open source operating system contained lines of code that it had purloined from SCO's Unix software.

Judge Wells said the dismissed claims lacked the specificity needed to hold up in court. SCO, in most instances, failed to identify which lines of code IBM is alleged to have taken improperly, she said. "If an individual was stopped and accused of shoplifting after walking out of Neiman Marcus, they would expect to be eventually told what they allegedly stole," Wells wrote. "SCO should have supplied not only line but version and file information for whatever claims form the basis of SCO's case against IBM."

The company hasn't decided whether to appeal, a SCO spokesman says. An IBM spokesman declined comment.

Remote Possibilities

One analyst says the ruling means that commercial Linux users can breathe easier because it's less likely that SCO will gain control over significant pieces of the freely distributed operating system. "There's still that possibility, but it's getting more remote," Enderle Group principal Rob Enderle says.

SCO president and CEO Darl McBride said in an open letter in 2003 that the company would instruct its attorneys to sue not just Linux distributors but also Linux users. "SCO intends to fully protect its rights granted under these [copyright] acts against all who would use and distribute our intellectual property for free," McBride wrote. SCO did exactly that, suing Linux users DaimlerChrysler and AutoZone in 2004. Those cases are on hold pending the outcome of SCO's suit against IBM.

A SCO spokesman said there has been "no change" in the policy outlined in McBride's screed. But given last week's ruling, odds are that SCO won't be around long enough to chase down any more Linux users.

SCO also has become a pariah in the tech industry, a company with which few want to be associated. To draw Unix developers back into its embrace, SCO is offering cash incentives for them to attend its user group conference next month. Training in SCO's EdgeBuilder developer kit will be offered; attendees completing it will be given $1,000. SCO also is offering a 10-cylinder BMW car or a $100,000 cash prize for the developer who uses the toolkit to produce the best wireless app.

The Unix-Linux Court Docket
March 2003
SCO sues IBM
Aug. 2003
Red Hat sues SCO for harming Linux business
Jan. 2004
SCO sues Novell for copyright infringement
March 2004
SCO sues AutoZone and DaimlerChrysler
July 2006
Judge dismisses 182 of SCO's
294 claims against IBM

In its most recent quarterly financial statement, SCO concedes that the lawsuit is a bet-the-company move. "If we do not prevail in our action against IBM ... we may not be able to continue in business," says the filing. SCO in the last two years has made payments to attorneys totaling $26 million in what amounts to a flat fee for present and future services in the IBM case. SCO's coffers now hold only about $10 million in cash or cash equivalents, and sales of its core Unix products fell 23% in the most recent quarter. SCO is also locked in an expensive legal tussle with Novell over IP rights.

SCO is getting deeper into the red with each passing quarter. Its net loss ballooned from $1.96 million in the second quarter of 2005 to $4.69 million in the second quarter of 2006. Revenue decreased in each of the past four quarters, from $9.35 million in the third quarter of 2005 to $7.13 million in the second quarter of this year.

SCO, of course, blames IBM and those grabby Linux users for the drop-off in sales. "We believe the inclusion of our Unix code in derivative works in Linux has been a contributor to the decline of our Unix business," its SEC filing says. Tell it to the judge.

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