Novell Sold Code To SCO, Retained Copyright; Game Over?

Normally, when one company buys exclusive rights to code, the copyright on the code transfers with the sale. When SCO Group bought Unix from Novell, the code moved to SCO, but the copyright didn't.

That's one conclusion in the decision handed down by Judge Dale A. Kimball Friday in the court case launched by SCO in 2003. SCO asserted in the case that Novell was violating the terms of SCO's Unix copyright. "The contract said Novell is selling the code but retaining the copyright," said Tom Carey, partner in the Boston intellectual property law firm of Bromberg & Sunstein, who has pored over the documents of the agreement. "What the judge did was take a hard look at what they were thinking when they wrote such a contract," he added.

Carey suggests 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 adds. 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 Novell also wished to retain ultimate ownership.

SCO signaled it understood the terms of the deal when it again attempted to enter into negotiations with Novell after its Unix purchase to make a follow-up purchase of the copyright. Novell rejected the overtures, the documents in the case indicated. That second round of negotiations casts doubt on claims made by SCO CEO Darl McBride that SCO believed it had clear ownership of the Unix copyright. "I think this is the last word on the SCO suit," said 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."

SCO has not yet indicated whether it will appeal the ruling. Zemlin charges that SCO investors have concluded that SCO's claims are "baseless." But investors are also concluding that management will expend the company's remaining cash reserves pursuing those claims, driving company value toward zero.

Zemlin bases the comment on the hit SCO stock took Monday as news of the ruling spread. SCO was worth $20 a share as it launched its suit four years ago. SCO closed Friday before the ruling was announced at $1.56. Opening bid Monday was 40 cents, down $1.16, or 74% of its remaining value.

Over the same four years, Zemlin notes, Red Hat's market capitalization as a company increased from $1 billion to $4 billion.

Another piece of fallout from the ruling is that Novell as owner of the copyright retained the right to take a share of Unix license fees from SCO and could order SCO to cease any copyright infringement claims against another party. "If effect, Novell said to SCO [in the original contract], you go and act as our collection agent" on Unix sales, said Carey.

With Novell in the Unix copyright driver's seat, it had the right to order SCO to halt an infringement action.

"The judge ruled Friday that Novell could tell SCO what to do," Carey said, and Novell during the suit delivered a letter to IBM stating that Novell had no copyright infringement claims against it. It may be only a matter of time before Novell tells SCO to drop its 2003 suit against IBM, Carey said.

Such a move would aid IBM, even though it purchased broad rights to produce its own version of Unix, called AIX, from Unix's original inventor, AT&T, before Novell assumed ownership. IBM also acquired Sequent Computer, which had its own version of Unix and had contributed code to Linux. It's not clear, Carey said, that Sequent's rights to use Unix were as broad as IBM's and it's possible IBM's acquisition left "a chink in its armor."

"IBM was possibly on the hook for its acquisition of Sequent," he said. But recent IBM-Novell cooperation on the open source front indicates that they want to maximize Linux and other open source revenue and put the SCO case behind them.