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8/17/2007
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SCO Mulls Options After Court Strikes Company’s Unix Claims

Linux community breathes a sigh of relief, while SCO considers an appeal.

While Linux users breathe a sigh of relief, officials at SCO Group are pondering their next move after a court dismissed the business software developer's longstanding ownership claim on the Unix operating system.

The Aug. 10 ruling by Utah federal court Judge Dale Kimball renders moot SCO's claim that Linux contains parts of Unix it owns and that Linux users are therefore violating SCO copyrights.

In his decision, which sent SCO shares plummeting last week, Kimball said an asset-transfer agreement between Novell and SCO in 1995 didn't transfer the Unix copyrights to SCO and that they remained with Novell. The decision effectively guts a suit SCO filed against Novell in 2004, in which it claimed that Novell's refusal to recognize SCO's ownership of Unix was hurting its business. The ruling could cost SCO millions of dollars since it requires the company to hand over to Novell fees it collected from Sun and Microsoft for Unix licenses.

A year before it sued Novell, SCO sued IBM, alleging that IBM was placing parts of Unix owned by SCO into the open source Linux operating system without authorization. Kimball has asked SCO and IBM to provide the court with an update by the end of August on how they believe the case is affected by his Novell decision. SCO also sued Linux users DaimlerChrysler and AutoZone in 2004. Most of the former case was dismissed, and the latter was stayed pending resolution of the IBM and Novell suits.

The Linux community celebrated the decision as a victory. "I think this is the last word on the SCO suit," says Jim Zemlin, CEO of the Linux Foundation. With a definitive ruling on who owns the copyright, "there's nothing left to fight over on any front," he says.

Still, the decision doesn't resolve nagging questions about Linux's true heritage, it simply takes SCO out of the picture as a potential litigant. Microsoft, for instance, claims Linux violates 107 of its patents.

The unusual nature of the transfer agreement between Novell and SCO helped fuel the legal wrangling, says Tom Carey, partner in the Boston intellectual property law firm of Bromberg & Sunstein. It appears that SCO couldn't pay Novell what Novell thought the rights to Unix were worth. At the same time, Novell wanted to invest its efforts in Linux rather than Unix, so it sold the Unix code to SCO but retained the Unix copyright. "That's totally strange, in my view," Carey says. For clear ownership to exist in such a deal, the copyright needs to be purchased with the code. Novell wanted SCO as an active Unix seller but also wished to retain ultimate ownership, he says.

SCO may have signaled it understood the terms of the deal when, after its Unix purchase, it tried to launch follow-up negotiations to purchase the copyright. Novell rejected the overtures, documents filed in the case indicate. That second round of negotiations casts doubt on claims by SCO president and CEO Darl McBride that the company believed it had clear ownership of the Unix copyright at the time it bought the Unix code.

"The company is obviously disappointed with the ruling," McBride said in a letter to customers, a copy of which was filed with the Securities and Exchange Commission. The ruling doesn't change McBride's belief that SCO acquired full ownership of Unix in 1995, he said in the letter. Quoting from the agreement, McBride said, "We believe that 'All rights and ownership of Unix and UnixWare ...' means just what it says."

McBride said the ruling doesn't impact SCO's ability to develop and maintain its existing product lines, including its OpenServer and MobileServer platforms. But SCO in the past has warned investors that failure in the Novell case could put the company out of business.

McBride implied that SCO may appeal the decision. Although the judge ruled in Novell's favor on important issues, he said, "the case has not yet been fully vetted by the legal system and we will continue to explore our options with respect to how we move forward from here."

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