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3/3/2004
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SCO Sues AutoZone And DaimlerChrysler In Linux Fight

The suits are designed to force companies to respect the software copyrights that SCO claims ought to apply to the Linux and Unix operating systems.

The SCO Group launched its latest Linux-related lawsuit Wednesday, this time accusing automaker DaimlerChrysler of breaking a Unix System V licensing contract and possibly contributing Unix source code to Linux. SCO, which filed the lawsuit in Michigan's Oakland County Circuit Court, alleges the contract was broken when DaimlerChrysler failed to respond to a December letter requesting that the automaker certify it's not sharing or distributing the Unix source code with others, in particular the open-source community.

SCO sent 3,000 similar letters to Unix licensees and has gotten responses from half, CEO Darl McBride said Wednesday during a conference call to discuss first-quarter financials. Although SCO doesn't receive revenue from DaimlerChrysler, McBride says, "they have to uphold their confidentiality restrictions." DaimlerChrysler didn't return calls for comment.

SCO Group's legal action against DaimlerChrysler comes just one day after the company made good on its months-long promise to sue a Linux end user. On Tuesday it filed a lawsuit with the U.S. District Court for the District of Nevada alleging that auto-parts seller AutoZone Inc. is violating SCO's Unix copyrights by using Linux. Since last May's lawsuit against IBM, SCO has alleged that portions of its copyrighted Unix source code have been used to make Linux an enterprise-class operating system. The company is seeking unspecified damages as well as an injunction to keep AutoZone from using Linux in its IT environment.

"Many end users have not considered the ramifications of using SCO-copyrighted property," McBride said Wednesday.

AutoZone, with about 3,300 stores, is one of the nation's largest providers of auto parts and plans to open 195 new stores this year. An AutoZone spokesman said that, as of Wednesday afternoon, the company hadn't seen a copy of the lawsuit. "We haven't seen the lawsuit and therefore can't comment on it," he says. "Our understanding, however, is that SCO has sent letters to hundreds of other companies making similar allegations." Earlier in the day, AutoZone had reported profits of $91.65 million on revenue of $1.16 billion for its second fiscal quarter, ended Feb. 14. This was a 14.5% increase over the $79.28 million in profits on $1.12 billion in revenue for the same quarter a year ago.

"Beginning today, we are moving to reinforce these contract rights against end users who've ignored SCO's position," McBride said Wednesday. The company had been in contact with AutoZone over the past several months, he said, but couldn't reach an agreement about AutoZone's use of Linux. "If people would prefer to work through the court system, we will file a complaint and work through the court system," McBride added.

The lawsuit against AutoZone came as a surprise to Stuart Cohen, president of the Open Source Development Lab, a group that in January set up a $3 million Linux legal defense fund. Once Novell's lawsuit against SCO called SCO's ownership of certain Unix copyrights into question, the company seemed to back off its plans to sue a user, Cohen says. Nevertheless, he adds, AutoZone and DaimlerChrysler can apply for a portion of the defense fund.

SCO Group continues to pursue its cases in court despite any definitive proof of its claims that Unix System V source code has been used to improve Linux. The company also continues to battle Novell over ownership of certain Unix source code copyrights. Still, SCO isn't required to prove one case before launching a new one, says David Byer, a partner in the patent and intellectual-property practice at Boston law firm Testa, Hurwitz & Thibeault.

McBride is confident that Linux users are actually using SCO's copyrighted Unix intellectual property, even stating during Wednesday's conference call that he knows of Linux community members who've admitted that Unix code has been contributed to Linux. He says he has no problem with this, as long as those users are now willing to license that intellectual property.

In pursuing AutoZone, SCO is also seeking reparations from a company that may have played no role in contributing Unix source code or derivative Unix programs to Linux. Byer says AutoZone could still be held liable for infringing on SCO Group's copyrights, even if it didn't know it was committing such a violation. "The fact that they didn't know they were doing anything wrong won't affect the ruling but might affect the penalty," he says. "Willful infringement is treated more harshly when damages are awarded."

In May, SCO Group sent letters to 1,500 companies worldwide, warning them that use of Linux might interfere with SCO's Unix intellectual property. SCO's litigious behavior is likely to get the attention of companies using Linux that have been pushing this issue to the side, Byer says. Although the lawsuits aren't likely to stop companies from implementing Linux, the legal departments of those companies are going to start asking a lot more questions, he says.

Brian Skiba, a Deutsche Bank managing director and senior analyst, agrees that it will take many more lawsuits against users before companies using Linux believe they could be next. Of course, SCO's ability to file new suits depends on its ability to make money. The company said its losses doubled during the past year, to $1.5 million, or 16 cents per share, on revenue of $11.39 million for its first quarter, ended Jan. 31. SCO, which reported a loss of $724,000 in the year-ago quarter, saw revenue slide from the $13.54 million it reported for the same quarter a year ago.

The vast majority of SCO Group's revenue, $9.71 million, came from product sales, while the remaining $1.66 million came from services. Only $20,000 came from the company's SCOsource intellectual-property licensing initiative. The company expects that revenue to increase in the coming quarters, but CFO Robert Bench says he can't predict by how much.

SCO Group spent $3.4 million during its first quarter on legal and enforcement fees for its licensing initiative. The company expects these fees to remain about the same over the next few quarters and classifies them as a cost of revenue.

Regardless of whether SCO wins its lawsuits against IBM, Novell, AutoZone, and DaimlerChrysler, the company could continue to survive--particularly if McBride makes good on his promise to deliver upgraded Unix-on-Intel products, including a 64-bit version of its operating system, later this year. With an installed base of 2 million servers, SCO isn't going away even if its intellectual-property licensing model falls flat, Skiba says. "Software companies are very hard to kill when they have an installed base," he says.

Although Dell, Hewlett-Packard, and IBM continue to see increased revenue from sales of Linux-based servers, the questions SCO has raised about Linux's lineage have affected some CIOs. In Wisconsin, server consolidation is one of the top priorities for 2004, state CIO Matt Miszewski says. SCO's $5 billion lawsuit against IBM and the threat of lawsuits against users have kept him from launching any Linux projects. However, these legal entanglements haven't kept Miszewski from mapping out a Linux strategy to implement when the smoke clears.

"We want to develop a framework through which we can analyze open source and Linux," Miszewski says. "We want to make sure we can make an educated decision on the platform once the legal landscape is cleared up."

Another CIO sees Linux rising above all the legal challenges if IT professionals want it badly enough. "If it's a good idea, and it's good technology, it will be perpetuated one way or another," says Vance Hitch, CIO for the U.S. Department of Justice. Hitch, a former partner at Accenture and a 27-year veteran of the IT industry, has been looking at ways Linux could be used within the Justice Department's IT operations to cut operational costs without sacrificing security or performance. He says the storm over who owns Linux will blow over by the time he's ready to make a move. "You keep your eyes open," he says. "Frankly, this is far enough in advance that the road will be cleared for us."

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