Would you like to join me in working on answering/clarifying SCO's handiwork? If so, let's get started. To those who are accustomed to old-fashioned journalism, this means this article is the beginning of a group work, one which will keep changing massively for a couple of days, or until you see me post an update notice that we're finished with the article.



I am republishing the transcript here in full, so we can interject corrected information throughout. As I see your comments, I'll copy and paste in your additional finds. Or just email me, if you prefer.

Please provide urls for proof of any statements you make, as appropriate. Courts care about evidence, not opinions. That's why SCO included 118 footnotes. I doubt the judge will look up all 118 footnotes, because he may not have the time, and even if he did, he won't know where to find countervailing information, at least until IBM and Novell and the US Trustee respond, which I expect they will. But let's do it for ourselves, for the fun of it, particularly because SCO has regurgitated almost all of its failed arguments from the IBM and Novell Utah cases in this one filing, so it'll be a way to capture the last six years of that litigation and put it all in one place. Then when someone asks you for an overview, you can point them here.

To make it very clear when Groklaw is commenting on the text, I'll put our responses in colored text. And for those who are color-blind, look for the material between the rows of stars. I have some remarks already inserted in the text, but there will be a lot more. This is one of the moments when I wish Google's Wave was already available and part of Geeklog! How perfectly it would handle this task, and you all could join in, instead of me having to search for your input myself. But while I live in hope on that score, we can still get the job done.

If you vaguely remember some document filed in one of the many SCO litigations, you may find this page particularly helpful in finding all the major Timeline pages on Groklaw, the Timelines being our lists of documents filed in each litigation. It also has the link to the massive collection of exhibits that IBM filed in support of its many summary judgment motions. Also the search app can help you. Don't forget the ArchiveExplorer, particularly if you are looking for something on a Groklaw static page, and the simple chronological list, Archives, which you can also search by keyword. I find that helpful, particularly when I remember the general time frame something happened. And if all else fails, at least leave a comment telling us what you recall, and someone else will build on your work and someone will surely find it.

****************************************************

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF DELAWARE

________________________

In re:

The SCO GROUP, INC. et al .,

Debtors.

_______________________

Chapter 11

Case No. 07-11337 (KG)

(Jointly Administered)

Hearing Date: June 15, 2009 at 2:00 P.M.

DEBTORS' RESPONSE TO MOTIONS TO DISMISS OR CONVERT FILED BY

UNITED STATES TRUSTEE (D.E. #750), INTERNATIONAL BUSINESS MACHINES

CORPORATION (D.E. #751) AND NOVELL, INC. (D.E> #753)

Arthur J. Spector

BERGER SINGERMAN, P.A.

[address, phone, fax, email]

Co-Counsel for the Debtors

TABLE OF CONTENTS

Page

BACKGROUND .............................3

ARGUMENT ...............................4

I. THE MOTIONS SHOULD BE DENIED BECAUSE THERE IS NO CAUSE TO

DISMISS OR CONVERT THE CASES...............4

A. "Cause" Does Not Exist Under Section 1112(b)(4)(A)........4 1. There Has Been No "Substantial" Diminution of the Estate........5 2. There Is a Reasonable Likelihood ofRehabilitation...........8 3. The Nature of SCO's Claims Against IBM and Novell...........16 4. The Strength of SCO's Claims Against Novell.................20 5. The Strength of SCO's Claims Against IBM....................31 B. "Cause" Does Not Exist Under Section 1112(b)(4)(B) Because the Estates

Have Not Been Grossly Mismanaged..................................38 C. "Cause" Does Not Exist Under Section 1112(b)(4)(J) Because That

Subsection Does Not Apply............................40

III. EVEN IF THE COURT FINDS CAUSE AND INSUFFICIENT UNUSUAL

CIRCUMSTANCES, CONVERSION IS NOT IN THE BEST INTERESTS OF THE

ESTATES AND THEIR CREDITORS....................43

IV. THE COURT SHOULD STAY ANY ORDER THAT WOULD GRANT ANY OF

THE RELIEF REQUESTED...............................52

CONCLUSION..................................53

i

INTRODUCTION

************************ *Will* rehabilitate SCO? Or *might*? Here are the three issues SCO listed in its appeal in SCO v. Novell: (1) SCO's predecessor-in-interest, The Santa Cruz Operation, Inc. ("Santa Cruz"), purchased the UNIX operating system business from Novell under an Asset Purchase Agreement ("APA"). Did the district court err in concluding, as a matter of law, that Santa Cruz did not obtain the copyrights to the UNIX and UnixWare source code under the APA, but only an implied license? (2) Did the district court err in concluding, as a matter of law, that if the APA did not itself transfer the copyrights, then SCO is not entitled to specific performance, requiring the transfer of the copyrights now? (3) Did the district court err in concluding, as a matter of law, that Novell has the right under the APA to force SCO to waive legal claims against IBM for its breach of Software and Sublicensing Agreements that Novell had sold to Santa Cruz under the APA? (4) Did the district court err in concluding that if Novell has the right under the APA to waive SCO's rights against IBM, then Novell did not have to comply with the implied covenant of good faith and fair dealing in exercising that right? (5) Did the district court err in concluding, as a matter of law, that Novell retained an interest in royalties from SCO's 2003 agreement with Sun Microsystems ("Sun") and other post-APA contracts related to SVRX technology? Suppose the court were to rule that the district court judge did err, let's say on all the issues on appeal. Then what? Likely they would sent it back to Utah District Court for a jury to decide it. Let's say they find that SCO doesn't have to pay Novell royalties on the Sun deal. Would that rehabilitate SCO? OK. I agree. It would reduce their liabilities, but it would not rehabilitate SCO. What about if the jury found that Novell lacked the right to compel SCO to waive. Would that rehabilitate SCO financially? How could it? It merely would give SCO the right to go forward in litigation without Novell's ability to block. So, really it's only if SCO can get both the appeals court to send it back to a jury AND get the jury to rule that the copyrights did pass from Novell to SCO in 1995 AND then successfully sue IBM and others for infringed copyrights that it can get any money from the litigation at all. I consider that virtually impossible as far as IBM goes, because after all the motion practice, SCO didn't show any specific infringement in Linux. Remember the Magistrate Judge's famous question to SCO, "Is that all you've got?" So here we see SCO assuming a better than the best-case scenario, against all reason, as far as I'm concerned, since we already know what SCO put on its list, and there's nothing there to get a fortune from. I doubt there is anyone on the planet who isn't directly involved in the case who has followed it any closer than I have, and that's what I've been seeing. And here's what SCO told the appeals court was the reason why it needed the court to expedite the case: 3. In addition, SCO is currently involved in Chapter 11 bankruptcy proceedings in Delaware and recently filed a proposed reorganization plan. The Bankruptcy Court will address the plan during the next few months. A significant aspect of that plan is designed to protect SCO and keep it operating as a going concern until this appeal is resolved. Accordingly, the sooner this appeal is resolved, the sooner the four related cases can proceed in an orderly and expeditious manner and the sooner SCO will be able to execute its plan to successfully emerge from Chapter 11 proceedings. And here we are in bankruptcy court, with no such plan on the table at all. Naughty, naughty. ***************************

Against this backdrop, the Motions can be seen for what they are -- ploys by IBM and Novell to avoid responsibility for their actions against the estate on the pretense that they are now acting in its interests.

************************* Even if that were so -- and in the case of Novell a court has already ruled Novell was not guilty of slander of title against SCO, despite SCO's claims -- what about the US Trustee's Office? It filed first, ahead of IBM and Novell to convert SCO to Chapter 7. *****************************

As of their last quarterly filings, IBM, currently listed as No. 14 among the Fortune 500, is a global company with a market capitalization of $128 billion and Novell is a global company with a market capitalization of approximately $1.42 billion. It strains credulity for such behemoths to argue that Novell's $3.5 million judgment against SCO -- and not their desire to neutralize the threat that SCO's rights pose to their interests and to avoid billions of dollars in

1

*************************** Might that be explained by looking at the list of the 20 largest creditors, a list which doesn't include, by SCO's counting, either IBM or Novell? It's folks like SCO's lawyers, their trial experts, Canopy Group, Sun Microsystems, Microsoft Licensing, and Amici, the document production company Boies uses. Also look at the amounts for those who are not insiders of some type. The amounts are relatively low, low enough that they may not feel it's cost effective to try to get money from SCO, particularly if they've been watching this long song and dance. It's the same reason, or one of them, why I haven't sued them myself, the absolute unlikelihood of there being anything to collect. Litigation of any kind has to pay, or it's not worth doing. **********************

Instead, the Debtors expect that several have asked or will ask the Court to deny the Motion.

****************************** Again, look at the list. ***********************************

SCO's claims against IBM and Novell stem from their concerted efforts to promote the Linux operating system at the expense of SCO's core asset, the UNIX operating system and intellectual property. SCO's claims are supported by evidence that IBM contributed valuable UNIX-derived technology to Linux development in order to transform Linux from a hobbyist's program into a viable competitor. SCO's claims are supported by such IBM admissions as Linux is "Derived from UNIX" and that "UNIX was a pre-write of Linux," and by credible and extensive expert testimony that Linux is indeed a derivative of UNIX under the Copyright Act.

**************************** SCO doesn't mention it here, but some expert testimony, particularly with respect to methods and concepts, will not be part of the SCO v. IBM trial. It was specifically excluded by the Magistrate Judge, as a sanction for trying to "litigate by ambush" by trying to introduce new evidence by expert reports for the first time, after discovery was closed. Here's IBM's successful motion on the point. SCO is consequently restricted to whatever it had put on the table by the court deadline for SCO to tell the court and IBM all allegedly misused materials. So a fair amount of what SCO is talking about, testimony from three of SCO's eight experts, is no longer part of the case, and it won't be, no matter what the appeals court rules in the Novell case. Here's who the three are, so you will have that knowledge to guide you as you read this new SCO document, from IBM's motion: Despite this, three of SCO's May 19, 2006 expert reports, those of Drs. Cargill and Ivie and Mr. Rochkind, significantly exceed the scope of the Final Disclosures -- indeed, Dr. Cargill's report effectively seeks to reinvent the case, introducing both new categories of allegedly misused material and a new theory of recovery which relates to them. The Rochkind and Ivie Reports also exceed the Final Disclosures, adding material never before disclosed by SCO. So when SCO quotes from these three (note footnote 100), it means absolutely nothing as far as SCO's hopes at trial are concerned. ********************************

By seeking to liquidate SCO before the Tenth Circuit decides critical issues underlying SCO's claims, SCO and Novell seek to avoid responsibility for their actions in support of Linux -- precisely the actions that damaged SCO's business to the point of bankruptcy.

************************ What sent SCO into bankruptcy was its own decision to sue Novell for "slander of title", a claim they had almost no chance of winning, and they didn't prevail, and in the course of all that, they ended up owing Novell quite a lot, and that is what propelled them into bankruptcy, not any support of Linux on the part of IBM or Novell. Boies Schiller got a cool million as a retainer in 2003, under the terms laid out in this letter, plus at the time it was contemplated that there would also be shares given to the firm. It was touted as a contingency arrangement primarily, however. Some months later, SCO agreed to pay them another $1.6 million in licensing fees, presumably from the investment deals. That letter said Boies would also get SCO shares, but that was later changed, and instead there was a lump sum payment of $12.6 million for work already done, and for the future, up through appeals, they were paid another $12 million. This doesn't cover expenses or experts fees, which Boies had warned in the retainer letter could come to a million or more. Expenses have been amazing also. Boies Schiller billed SCO in just the year prior to the bankruptcy for $887,523.55, according to Stuart Singer's Declaration, when Boies Schiller asked the bankruptcy court to let it be SCO's special litigation counsel. And on the list of creditors, SCO is shown owing Boies Schiller $287,256.39 for expenses. So that's another million and then some right there, and that's after the cap on legal fees. And if there were a victory or settlement on favorable terms, Boies Schiller gets a contingency fee, at least 33 percent up to $350 million. If the award is more, the fee goes up too. As Darl McBride described the arrangement in a November 18, 2003 teleconference: And if we have a license fee, as we succeed then the Boies firm will succeed. As we have success in the courtroom, the Boies firm will also share in that success.... We've had some licensing events occur, and we've shared that with David. We've had some successful events to get some money in here, we've shared that with David. That's going to help us go out and fight this next battle, OK? So we went out and said we're setting up for the long haul here, we've raised $50 million, we didn't raise $50 million to get CD interest sitting over in the bank. We've brought this money in . . . now in this case we're able to -- David's coming in at a partnership level, he's coming in, he's taking stock for the most part. He's coming in with his firm and we're going after this in a very strong partnership way. So we couldn't be more pleased with getting him on board with this strong partnership arrangement. Later, the stock arrangement ended, replaced by cash, which SCO said in 2004 came to $31 million, but the payments for the PIPE deals and the licensing, however much that came to, was Boies Schiller's to keep, I suppose. The Singer Declaration tells us on page 2 that the capped legal fee doesn't cover the Swiss arbitration, but on the next page, it says the firm agreed to charge just 50 percent of its normal fees, but SCO was responsible for expenses. Like flying to Paris, I would think. It also separately had to pay Hatch, Dodge and Dorsey and Whitney. What I've always wondered about is whether the firm had to pay back any of the money it presumably was paid regarding the $50 million Baystar deal when Baystar backed out, or if it got to keep it. Did they get paid? I don't know. The thing is, it's not clear to me. I tried to trace it all carefully in 2007, but I ran into a wall, beyond which the public can't go, or at least I couldn't figure out how, so without complete information, I can only guess and wonder. But for sure, from what is public, we know SCO paid out millions to lawyers. At that July 2004 teleconference, Bert Young said this about SCO's financial state at the time, "Finally our cash and available for-sale securities were 43 million as of July 31, 2004." Now, in June of 2009, SCO is essentially broke, I gather. That's millions in legal fees and expenses prior to the bankruptcy, but the bleeding didn't stop then. Just one of SCO's law firms, Berger Singerman, has billed SCO [PDF] for the last 20 months a total of $308,278.91 That's just one firm. Who can forget Mesirow Financial Consulting's bill for a half a million in December of 2007, for two and a half months' work? Some of that was in connection with the withdrawn York deal, of course. It's hard to avoid the conclusion, in short, that SCO litigated itself into bankruptcy, pure and simple. *******************************

IBM has profited from its transformation of Linux to the tune of billions of dollars in quarterly revenues and profits and from the sale of hardware, software, and services as part of integrated "Linux solutions," where Linux -- an open-source program -- is included in the solution at little or even no cost to the customer.

************************** It's worth mentioning that until SCO sued IBM, it was a Linux company. And it partnered with IBM, and was sponsored by IBM. IBM surely had no reason to imagine that helping Linux would harm SCO, then called Caldera, in any way. SCO partnered with IBM even up to the time of the UnitedLinux project, a version of which was released after the litigation began, and with SCO patches to the vanilla Linux kernel, by the way, so that SCO distributed under the GPL the four items it was suing IBM about. If IBM has profited from "transforming" Linux, SCO could have benefited directly from those improvements, too, being at the time a Linux vendor. In fact, it did benefit, in that IBM's file system, JFS, the one SCO sued IBM over, was included in UnitedLinux, which SCO distributed evan after it sued IBM. Note the date on the press release, more than a month after the litigation began. *********************

As described in detail in the Appendix hereto, IBM set out to transform Linux into an enterprise-grade operating system to gain a competitive advantage and currently bases its core business model on its Linux solution. Similarly, Novell is a self-proclaimed "ardent supporter of Linux" and owns one of the major Linux distributors in the

2

SCO represents a daunting threat to IBM and Novell, even setting aside the billions of dollars that SCO stands to recover directly if it prevails in court. Since SCO claims copyrights and contractual rights in UNIX and has amassed credible evidence that Linux is an unauthorized derivative of UNIX, SCO represents a threat to the very lifeblood of the Linux-based business model IBM and Novell have adopted. If SCO establishes those rights in court, SCO also would have profitable claims in countless Linux distributions to customers who could then potentially seek indemnification from IBM and Novell.

The Tenth Circuit has thus far handled the pending appeal on an expedited basis, setting a date for oral argument only days after SCO's initial brief was filed, and by all indications will issue a decision promptly. Judge Michael McConnell, one of the panel members deciding the appeal, has announced that he will retire from the bench on August 31, 2009, making it highly probable that a decision will issue by that date. In light of the likelihood of SCO's rehabilitation if it prevails on even one of the three issues on which the panel is set to rule and since the company stand to proceed on its significant claims against IBM and Novell with a reversal, there is simply nothing to be gained and everything to lose by converting these cases before the Tenth Circuit issues its decision.

BACKGROUND

On May 5, 2009, the United States trustee filed a motion to dismiss these cases or to convert them to cases under Chapter 7. On May 11, 2009, five days after SCO's appeal to the Tenth Circuit was argued, both IBM and Novell filed their own motions.

3

The Debtors have tried to avoid involving the Court in the merits of the competing claims of these parties, but can no longer do so in light of the terminal nature of the relief the Movants now see. When considering whether the Movants have established "cause," the Court will need to evaluate whether the cash lost by the Debtors during their stay in Chapter 11 can be considered "substantial" in light of their other assets, including the claims for damages against IBM, Novell, and others. The litigation claims are also relevant to the question of whether there is a reasonable likelihood of rehabilitation. See, e.g., In re Original IFPC Shareholders, Inc., 317 B.R. 738, 742-43 (Bankr. N.D. Ill. 2004) (weighting the strength of a debtor's litigation claims in deciding whether the debtor had a reasonable likelihood of rehabilitation). Moreover, it is imperative that the Court understand the ramifications of a ruling that would put the Debtors out of business. Such consideration is implicit in the discretion afforded to bankruptcy courts to decide: First, whether "unusual circumstances" exist notwithstanding a finding of "cause" to avoid granting dismissal or conversion; and second, even if the Court did not find unusual circumstances, to decide which among the three (or four) forms of relief provided for under section 1112(b)(1) of the Bankruptcy Code the Court should choose. Id. at 753-54.

*********************************** I can't believe SCO has cited this case, IFPC [PDF]. They surely must not have read it all the way through, because the court ruled that a speculative lawsuit wasn't enough to pin a bankrupt's hopes on. On a record like that, the court here dismissed IFPC from Chapter 11, since it had no reasonable plan. And by my reading IFPC was in better shape than SCO, in that it had investors willing to pony up some real money. Here's an excerpt from the decision: The procedural history of this matter is relatively straightforward. The debtor-in-possession, Original IFPC Shareholders, Inc. ("IFPC"), incorporated under Illinois law in 1995 for the sole purpose of prosecuting a trade-secret-misappropriation claim against AT&T Wireless Devices, Inc. ("AT&T") and Hughes Network Systems, Inc. in the Circuit Court of DuPage County, Illinois (Case No. 93 CH 1065). The decade-old claim became one of two bankruptcy-estate assets after IFPC filed a Chapter 11 bankruptcy case on April 7, 2004. By that time two state court judgments had been entered in favor of the defendants. The first judgment resulting from a bench trial was reversed on appeal after the Appellate Court of Illinois found that the plaintiff had a right to trial by jury. The second trial was by jury; it produced the same result after a six-week trial in 2003, a verdict in favor of the defendants. By means of its July 6, 2004 Chapter 11 Plan of Reorganization, IFPC intends to use the second estate asset, a bank account worth approximately $17,000, and expected post-petition investments of approximately $1,750,000 (given priority repayment status under the plan) to finance both an appeal seeking a third trial and the third trial, should the second adverse verdict get reversed on appeal. The proceeds from an IFPC triumph in a third trial would fund 100% payment of all allowed prepetition and postpetition claims plus interest under the proposed plan, with equity security holders retaining their ownership interests in the debtor corporation. IFPC totaled the nonpriority unsecured claims in this case at $14,828,444, an amount which can be broken down into three groups: 1) a group of investors holding a "Promissory Note and Equity Interest;"1 2) a group of professionals providing legal, expert-witness, and other litigation-support services for the trial of the trade secret claim;2 and 3) AT&T's and Hughes' contingent, unliquidated, and disputed claims for costs as prevailing defendants in the state court litigation - claims which will ultimately be valid only if IFPC continues to lose in state court. The listings for the first group do not reveal whether one portion of each scheduled dollar amount is attributable to a promissory note and the other portion to an equity interest or, alternatively, whether each dollar represents both types of interests. The U.S. Trustee filed a "Motion to Convert or Dismiss Case" pursuant to 11 U.S.C. §1112(b), arguing that IFPC did not file this Chapter 11 case in good faith, that it has no real need for business-reorganization bankruptcy relief, that its plan is both unconfirmable and unfeasible, and that the true creditor body (as opposed to shareholders) will not be well served by continued prosecution of the trade-secret-misappropriation claim in state court. ... In this case, the debtor IFPC has continued to incur post-petition quarterly U.S. Trustee fees and administrative costs, primarily for legal representation in this bankruptcy case, and will continue to incur costs of up to $1,750,000 for legal representation in the state court litigation (assuming it wins the first of at least two rounds) if IFPC concurrently remains in Chapter 11. It is undisputed that IFPC sells no goods or services to produce a cash flow to raise this amount; IFPC would be required to gather post-petition investors to either lend this amount and/or buy additional stock. The U.S. Trustee, furthermore, has established the continuing loss element of § 1112(b)(1): IFPC has an ongoing negative cash flow resulting in a net decrease in value and no definite source of income. See In re Citi-Toledo Partners, 170 B.R. 602, 606-07 (Bankr. N.D. Ohio 1994); 7 King et al., supra, ¶ 1112.04[5][a][I], at 1112-31. The second standard under section 1112(b)(1) is not the technical one of whether the debtor can confirm a plan, but, rather, whether the debtors business prospects justify continuance of the reorganization effort. 7 King et al., supra, ¶ 1112.04[5][a][ii], at 1112-33. In a traditional Chapter 11 case, the second element, whether the debtor has a reasonable likelihood of rehabilitation, would not turn on the anticipated future outcome of a single lawsuit, because cash flow from another valuable activity would provide the means for paying at least a portion of pre-petition debt from post-confirmation profits. In this unusual case, however, the reasonable likelihood of rehabilitation test must be conflated with the anticipated future outcome of a single lawsuit. This would be a difficult task were the cause of action at the discovery stage, having never been tried once. In this case, however, two neutral triers of fact, a judge and a jury, have independently evaluated the debtors claim on the merits and found its primary asset to be worth zero. While the third time might indeed be a charm (assuming that the appellate court or trial court first orders a new trial), this information is simply too much to ignore and must be given substantial weight in an evaluation of the totality of the circumstances under both subsections 1112(b)(1) and (b)(2). Aside from the unwieldy task of acquiring and then taking a third bite at the apple, the debtor has no other business plan that would reverse the negative cash flow. Cf. Quarles v. U.S. Trustee, 194 B.R. 94, 98 (W.D. Va.), affirmed, Quarles v. Miller, 86 F.3d 55 (4th Cir. 1996). Its premise that outcomes in pending litigation favorable to him will cure [its] financial ills is pure speculation. Id. at 96-97; see also Matter of Imperial Heights Apartments, 18 B.R. 858, 863-64 (Bankr. S.D. Ohio 1982); In re Citi-Toledo Partners, 170 B.R. 602, 606-07 (Bankr. N.D. Ohio 1994); In re N.R. Guaranteed Retirement, 112 B.R. 263, 278-79 (Bankr. N.D. Ill. 1990),3 affirmed, 119 B.R. 149 (N.D. Ill. 1990). When visionary schemes for rehabilitation entail significant risk to creditors without any reasonable probability that the debtor can successfully rehabilitate, conversion or dismissal is generally in order. In re Great American Pyramid Joint Venture, 144 B.R. 780, 790-91 (Bankr. W.D. Tenn. 1992).... The Court concludes that cause for conversion or dismissal has been established under § 1112(b)(1).... On either account, it is significant that the debtor has no marketable goods or services and no other types of income-producing investments that would sustain payments to pre-petition and post-petition creditors if any one of its uphill litigation battles does not resolve in its favor. See 7 King et al., supra, § 1112.04[5][b][ii], at 1112-35. As discussed, the two prior losses against AT&T and Hughes indicate at the very least that the evidence is not overwhelmingly in IFPC's favor, and other than the cause of action, no means of satisfying claims (aside from liquidating the bank account) are available.... Also, "[a] Chapter 11 case can be dismissed at any time. Creditors need not wait until a debtor proposes a plan or until the debtor's exclusive right to file a plan has expired. . . . The very purpose of § 1112(b) is to cut short this plan and confirmation process where it is pointless." Matter of Woodbrook Associates, 19 F.3d 312, 317, 320 n.9 (7th Cir. 1994); see Citi-Toledo, 170 B.R. at 606; Great American Pyramid, 144 B.R. at 792; 7 King et al., supra, ¶¶ 1112.04[4][c], at 1112-29. 3. Conclusion As an alternative to its ruling under § 1112(b)(1), the Court finds that the U.S. Trustee has established grounds for dismissal or conversion under § 1112(b)(2), as the debtor-in-possession is unable to effectuate its Chapter 11 plan. And get a load of footnotes 4 and 5: 4 "However honest in its efforts the debtor may be, and however sincere its motives, the District Court is not bound to clog its docket with visionary or impracticable schemes for resuscitation." Tennessee Pub. Co. v. American Nat. Bank, 299 U.S. 18, 22, 57 S.Ct. 85, 87 (1936). 5 A reorganization plan under chapter 11 must be more than a nebulous speculative venture and must have a realistic chance of success which would lead to rehabilitation, and if outside financing is needed, it must be clearly in sight. In re K.C. Marsh Co., Inc., 12 B.R. 401 (Bankr. D. Mass. 1981). The Bankruptcy Code does not guarantee successful reorganization, nor does it provide a framework within which the debtor may indefinitely operate; rather, it only provides a breathing period for the debtor to seek to reorganize. In re Jones, 115 B.R. 351 (Bankr. N.D. Fla. 1990). That's enough to show you why I am astounded SCO cites the case. And I'm sure the US Trustee is very glad they did. They'll like the section on good faith filing, too, I suspect. Did you notice that in describing the background of the case, the court said that IFPC had been successful in getting its appeal granted, when it asked for a jury trial instead of a bench trial? That is exactly what SCO wants, but IFPC lost before the jury too. And it still wanted to continue, and the cost of doing so was prejudicing the rights of the true creditors, as opposed to the shareholders. And IFPC had investors willing to fund the litigation adventure. Like I say, I can't believe SCO would want to put this case on the record. ***************************

ARGUMENT

A. "Cause Does Not Exist Under Section 1112(b)(4)(A).

4

I. There Has Been No "Substantial" Diminution of the Estate

The primary component of the aggregate net operating loss consists of bankruptcy and related reorganization expenses of $2,305,000 -- over 50% of the aggregate net operating loss. Litigation expenses related to the multiple-day trial in the Novell case came to $1,491,000 -- or about 34% of the aggregate net operating loss. Together, legal issues in and out of bankruptcy account for over 84% of the Debtors' aggregate net operating loss. The other 15% -- $561,000 -- are true losses from business operations. That figure over 19 months equates to an operating loss of just over $29,500 a month. Isolating the pure UNIX/OpenServer products business, the MORs confirm Mr. McBride's assertion that the Debtors have recently run at or near break-even.

The $3.5 million cash erosion in those 19 months, due primarily to the high cost of litigation and restructuring is of concern. When averaged over that time period, the rate of cash burn is around $184,000 a month. The MORs show that the greatest portion of that cash erosion occurred when the Debtors employed a team of lawyers and investment brokers to try to accomplish an early and profitable exit from Chapter 11 with the York deal. That aborted effort

5

********************** Wait a sec. The York deal wasn't the only one. There were three aborted attempts to file a plan. They were all costly. I'll let the US Trustee's Office tell it like it is: 15. Additionally, not only is there no reasonable chance of "rehabilitation" in these cases, the Debtors have tried  and failed  to liquidate their business in chapter 11. In the fall of 2007, the Debtors filed a motion seeking approval of emergency sale and bidding procedures and, later, the Debtors filed a copy of their proposed asset purchase agreement with York Capital Management, Inc. The sale process with York failed to move forward. Next, in or about February, 2008, the Debtors proposed that Stephen Norris Capital Partners, LLC ("SNCP") would fund a "100 percent" plan that would make allowed, general unsecured claims whole. Like the York deal, the SNCP deal never materialized. Most recently, in January 2009 the Debtors again initiated a sale/plan process that was abandoned. In sum, there have been three unsuccessful attempts by the Debtors over the span of nearly two years to bring these cases to closure. *****************************

Although the Debtors thus have experienced continuing losses, the losses are not substantial. "Courts must evaluate losses on a case-by-case basis. Small losses over an extended period may be acceptable, whereas large losses in a short period may indicate that rehabilitation is not likely." In re AdBrite Corp., 290 B.R. 209, 215 (Bankr. S.D.N.Y. 2003). Moreover, "a court must make a full evaluation of the present condition of the estate, not merely look at the debtor's financial statements." Id. "Negative cash flow and an inability to pay current expenses as they come due can satisfy the continuing loss or diminution of the estate for purposes of §1112(b)."

************* Here's AdBrite [PDF] for you to compare with how they represent it throughout. Here's what it says more fully on this point: A Chapter 11 case may be converted or dismissed under § 1112(b)(1) for continuing loss to or diminution of the estate and absence of a reasonable likelihood of rehabilitation. The purpose of this ground is "to prevent the debtor-in-possession from gambling on the enterprise at the creditors' expense when there is no hope of rehabilitation." United States Trustee v. GPA Technical Consultants, Inc. (In re GPA Technical Consultants, Inc.), 106 B.R. 139, 141 (Bankr. S.D. Ohio 1989). Section 1112(b)(1) was written in the conjunctive; the movant must prove not only a continuing loss to or diminution of the estate, but also must prove that there is no likelihood of rehabilitation. Lizeric, 188 B.R. at 503. To determine whether there is a continuing loss to or diminution of the estate, a court must make a full evaluation of the present condition of the estate, not merely look at the debtor's financial statements. In re Moore Construction, Inc., 206 B.R. 436, 437-38 (Bankr. N.D. Tex. 1997). A continuing loss or diminution of the estate may be tolerated where reorganization is feasible and the pattern of unprofitable operations can be reversed as a result of a successful reorganization. The debtor, however, should not continue in control of the business beyond a point at which reorganization no longer remains realistic. The courts must evaluate losses on a case-by-case basis. Small losses over an extended period may be acceptable, whereas large losses in a short period may indicate that rehabilitation is not likely. In re Photo Promotion Assocs., 47 B.R. 454, 458-59 (S.D.N.Y. 1985). In addition to the amount and the nature of the losses, there is a temporal quality to the determination. At the early stages of the case, to prove an absence of a reasonable likelihood of rehabilitation, the movant must show that there is no more than a "hopeless and unrealistic prospect" of rehabilitation. In re Economy Cab & Tool Co., Inc., 44 B.R. 721, 724 (Bankr. D. Minn. 1984). Section 1112(b)(1) codifies a two-prong test: continuing loss to or diminution of the estate and absence of a reasonable likelihood of rehabilitation. In re Denrose Diamond, 49 B.R. 754, 756 (Bankr. S.D.N.Y. 1985).... Conversion is not warranted despite the existence of short-term postpetition operating losses where there exists a realistic possibility of rehabilitation. However, "a positive cash flow will not guard against conversion when it masks a static enterprise whose financial statements do not account for costs necessary to doing business." Id.; see also In re Nugelt, Inc., 142 B.R. 661, 667 (Bankr. D. Del. 1992) ( debtors shareholders and insiders using property of the estate to fund postpetition expenses constituted a continuing loss to or diminution of the estate ). With respect to the second prong of § 1112(b)(1), rehabilitation does not mean the same thing as reorganization for purposes of Chapter 11 because a reorganization may include an orderly or complete liquidation. In re Rundlett, 136 B.R. 376, 380 (Bankr. S.D.N.Y. 1992). In this context, rehabilitation means to put back in good condition and reestablish on a sound basis . Lizeric, 188 B.R. at 503; In re Kanterman, 88 B.R. 26, 29 (S.D.N.Y. 1988). It signifies that the debtor will be reestablished on a secured financial basis, which implies establishing a cash flow from which its current obligations can be met. Rundlett, 136 B.R. at 380. Courts have held that the occurrence of short-term postpetition losses is not grounds to convert or dismiss a bankruptcy case where financial viability is reasonably likely in the near future. See, e.g., In re Garland Corp., 6 B.R. 456, 460 (1st Cir. BAP 1980). A court may convert or dismiss a Chapter 11 case under § 1112(b)(2) for the "inability to effectuate a plan." "Inability to effectuate a plan" means that the debtor lacks the ability to formulate a plan or to carry one out. In re Dark Horse Tavern, 189 B.R. 576, 582 (N.D.N.Y. 1995). Pursuant to § 1112(b)(3), the court may convert or dismiss a Chapter 11 case for "unreasonable delay by the debtor that is prejudicial to creditors." The key words are "unreasonable" and "prejudicial." Not all delays are unreasonable, and not all unreasonable delays are prejudicial. In re Sphere Holding Corp., 162 B.R. 639, 643 (E.D.N.Y. 1994) (In determining whether a debtors delay has been unreasonable, a bankruptcy court must take into consideration the context of the delay.). Decisions under § 1112(b)(3) generally focus on the time taken by the debtor to submit a confirmable plan. I've emphasized the parts you need to have clearly in mind to understand the points being made.

In re Gateway Access Solutions, Inc., 374 B.R. at 215 ("Negative cash flow is considered by courts to be evidence of continuing losses required by section 1112(b)(I)" (quoting In re Galvin, 49 B.R. 665, 669 (Bankr. D. N.D. 1985) (emphasis added). A bankruptcy court "has wide discretion to determine if cause exists and how to ultimately adjudicate the case." In re 1031 Tax Group, LLC, 374 B.R. 78, 93 (Bankr. S.D.N.Y. 2007). And, as the court in Gateway explained, such findings do not ipso facto satisfy the continuing loss standard under § 1112(b)(4)(A).

*********************** Here's Gateway [PDF], so you can compare it with how SCO characterizes it throughout. *************************

The word "substantial" implicitly begs the question: Substantial compared to what? Compared to the Debtors' losses before bankruptcy, these losses are hardly substantial.

SCO had only one profitable quarter of operations -- the quarter ended April 30, 2003. The profit resulted principally from SCOsource licensing activity with Sun Microsystems and Microsoft Corporation, licensing activity that then was undermined by Novell claiming it owned the UNIX copyrights, which is one of the issues before the Tenth Circuit on appeal. For the fiscal years ended October 31, 2002, through September 2007, SCO generated cumulative net

6

Cumulative losses generated by SCOsource and SCO's litigation efforts for those periods was $39.6 million, with cash used in operations of $29.6 million. Cumulative losses from operation from SCO's UNIX and mobility businesses for those periods was $43.8 million and cash used in operations was $26.1 million, representing a monthly burn rate of $368,000 over the 71-month period.

As a result of the bankruptcy, management has reduced R&D efforts on its UNIX and mobility businesses, limiting new product enhancements and development; reduced staffing levels to match to the declining revenue streams; and thereby improved the monthly cash burn rate from $368,000 to approximately $29,500.

Compared to a market basket of other software companies, again these losses are hardly substantial. It is not uncommon for software companies to rack up large operating losses and then get purchased for substantial sums of money. For example, JBoss reported revenues for 2006 of $16 million and a net loss of $22 million. Red Hat acquired JBoss in 2006 for $420 million. Similarly, in 2003, SuSE was purchased by Novell (with assistance from IBM) for $210 million after racking up losses in the tens of millions of dollars.

Compared to the improvement in the liabilities side of the Debtors' balance sheet, the losses are not substantial. When these cases commenced, the Debtors' liabilities included claims asserted by Novell of approximately $40 million, by the IPO class action claimants of $59 million, and by SuSE of (apparently, based on its proof of claim) $1.3 million. But since then

7

The Debtors below explain how their assets include claims worth billions of dollars. See I_A_3-5, below. Compared to the Debtors' assets, the losses occasioned in order to preserve these litigation assets are de minimis, not substantial.

2. There Is a Reasonable Likelihood of Rehabilitation.

8

Similarly, in In re Court Living Corp., the Southern District of New York affirmed a bankruptcy court's denial of a creditor's motion to convert because the debtor - a real estate corporation that owned decrepit property - argued that its prospects of rehabilitation were "linked to another debtor in another bankruptcy action" first successfully emerging from bankruptcy and renovating its adjacent property. 1996 WL 527333 (S.D.N.Y. 1996). The court concluded that "this is not a situation where the debtor is gambling on the enterprise at the creditors' expense when there is no hope of rehabilitation" and denied a for-cause conversion under section 1112(b)(l) pending the resolution of the third-party owner's plan to repair his property. Id. at *4.

The three holdings underlying the district court's order regarding SCO's ownership of the UNIX intellectual property on which the Tenth Circuit will imminently rule is undeniably the hurdle blocking the rehabilitation of SCO's business. To be sure, that is why IBM and Novell

9

In addition, a reversal will permit SCO to move forward and present a compelling case to a jury. SCO will be able to present the overwhelmingly favorable extrinsic evidence that the district court disregarded on summary judgment, which includes admissions from Novell's then-Chief Executive Officer and its lead negotiator that the copyrights were in fact transferred to SCO's predecessor and that SCO owns all rights in the agreements underlying its contract claims against IBM. See Part I.A.4, below. On the other hand, Novell will have almost nothing to say to a jury, since its position has rested squarely on the lack of ambiguity in the contract language and a reversal would necessarily mean that the Tenth Circuit found the language ambiguous.

Even a partial reversal by the Tenth Circuit will likely have a rehabilitative effect on SCO.

First , if the Tenth Circuit reverses the district court's ruling regarding Novell's royalty rights, Novell's judgment of approximately $3.5 million against SCO will be vacated. This fact alone will result in rehabilitation, because SCO will have sufficient cash to pay all remaining creditors and to continue its business without fear of imminent shutdown by a judgment creditor.

10

The Movants do not even address the results of a reversal of Novell's money judgment, much less establish the absence of a reasonable likelihood of rehabilitation following the reversal. Instead, they rely on inapposite cases such as In re Gateway Access Solutions, Inc., 31A B.R. 556 (Bankr. M.D. Pa. 2007). Gateway Access Solutions was a company that owned "FCC licenses and leases to operate wireless broadband services." Id. at 559. Its management team consisted of one part-time owner-director-employee, Dr. Poler, and an '"acting president,' who is ill and was unable to appear at the conversion hearing, either in person or telephonically." Id. at 565. Dr. Poler worked "no less than six or seven days a week putting in more than eight hours on those days as an anesthesiologist, and then comes home and works another forty plus hours on rehabilitating the debtor." Id. Management had no time to produce business models or projections to present to the court to establish the likelihood of rehabilitation. Id. Moreover, the debtor produced "very few details" about its future business prospects at the trial of the conversion motion. Id. at 562. And the debtor called no witnesses other than Dr. Poler nor

11

Unlike the situation in Gateway, the Debtors in these cases will provide business models and projections. They will produce witnesses who will testify to facts, and not visionary schemes, that will establish that the Debtors have a reasonable likelihood of rehabilitation. The Debtors will do this even though the burden is on the Movants to prove the opposite. See AdBrite, 290 B.R. at 215 ("Section 1112(b)(l) was written in the conjunctive; the movant must prove not only continuing loss to or diminution of the estate, but also must prove that there is no likelihood of rehabilitation.") (citing In re Lizeric Realty Corp., 188 B.R. 499, 503 (Bankr. S.D.N.Y. 1995) (emphasis added); see also Loop Corp. v. United States Trustee, 290 B.R. 108, 112 (D.Minn. 2003).

************************ Regarding what movants must establish, here's what AdBrite actually says: Under § 1112(b), the burden is on the movant to establish cause. Loop Corp. v. United States Trustee, No. CIV. 02-793, 2003 WL 262413, at *3 (D. Minn. Feb. 5, 2003); In re Lizeric Realty Corp., 188 B.R. 499, 503 (Bankr. S.D.N.Y. 1995). A Chapter 11 case may be converted or dismissed under § 1112(b)(1) for continuing loss to or diminution of the estate and absence of a reasonable likelihood of rehabilitation. The purpose of this ground is "to prevent the debtor-in-possession from gambling on the enterprise at the creditors' expense when there is no hope of rehabilitation." United States Trustee v. GPA Technical Consultants, Inc. (In re GPA Technical Consultants, Inc.), 106 B.R. 139, 141 (Bankr. S.D. Ohio 1989). Section 1112(b)(1) was written in the conjunctive; the movant must prove not only a continuing loss to or diminution of the estate, but also must prove that there is no likelihood of rehabilitation. Lizeric, 188 B.R. at 503.... A finding of cause is not limited to the grounds stated in § 1112(b). See 11 U.S.C. § 102(3) (in construing the Bankruptcy Code, the terms "includes" and "including" are not limiting); In re Gonic Realty Trust, 909 F.2d 624, 626 (1st Cir. 1990) ("in determining 'cause' for dismissal the court may consider other factors as they arise... Additional factors upon which Courts have based decisions to convert or dismiss include: 1. The failure to file required operating reports. See In re Berryhill, 127 B.R. 427, 433 (Bankr. N.D. Ind. 1991) (the failure to file operating reports in itself constitutes cause for dismissal); 2. Filing materially inaccurate operating reports. See In re Continental Holdings, Inc., 170 B.R. 919, 929 (Bankr. N.D. Ohio 1994) (timely and accurate financial disclosure is the life blood of the Chapter 11 process); 3. A debtor-in-possession's dereliction of its fiduciary duty to creditors. When a corporation files for protection under Chapter 11, the officers and managing employees have a fiduciary duty to creditors and shareholders. This creates an " obligation to treat all parties, not merely the shareholders, fairly. " Commodity Futures Trading Commn v. Weintraub, 471 U.S. 343, 355-56, 105 S. Ct. 1986 (1985); see also In re Hampton Hotel Investors, L.P., 270 B.R. 346, 358 (Bankr. S.D.N.Y. 2001)...; 4. Lack of good faith in filing the petition or proposing a plan. See In re Copy Crafters Quickprint, Inc., 92 B.R. 973, 985 (Bankr. N.D.N.Y. 1988);... 7. Inability to effectuate confirmation. See Larmar Estates, 6 B.R. at 936; 8. A defunct debtor incapable of reorganizing. In re Westerleigh Development Corp., 141 B.R. 38, 41 (Bankr. S.D.N.Y. 1992) (nothing to reorganize where debtors business is defunct); ... In addition to a lack of good faith in filing the petition or proposing a plan, "bad faith" can be grounds for dismissing or converting a case in which the debtor has acted fraudulently. Generally, a determination of a lack of good faith involves finding an intent to abuse the judicial process and the purposes of the reorganization process. An oft-cited list of indicia of "bad faith" has developed in the case law. These factors include: 1. The prepetition conduct of the debtor has been improper;

2. There are few debts to non-moving creditors;

3. The petition was filed on the eve of foreclosure;

4. The foreclosed property is the sole or major asset of the debtor;

5. The debtor has no ongoing business or employees;

6. There is no possibility of reorganization;

7. The debtor's income is not sufficient to operate; and

8. The debtor filed solely to create the automatic stay. Here's the Loop decision [PDF] also referenced. ***********************

Second , if the Tenth Circuit reverses the district court's ruling that Novell owns UNIX copyrights, that reversal is sure to attract customers and investors who are on the sidelines awaiting the Tenth Circuit's decision. SCO reasonably expects the following favorable results from that reversal:

Revenues from OpenServer and UnixWare products will rise when the reversal removes the cloud over SCO's ownership of those UNIX derivatives.

In light of the advantages (discussed below) that SCO would enjoy at a trial on this issue, there will be a substantial market for SCOsource agreements among Linux users wishing a release of claims SCO might bring based on the copyrights.

SCO's legal claims predicated on its ownership of the copyrights will significantly increase in value.

12

Novell

Moreover, based on the foregoing results, SCO also reasonably expects that other assets of the company will increase in value. SCO reasonably expects that the value of its legal claims not predicated on ownership of the copyrights

will increase, because the market will understand that SCO will survive as a going concern to prosecute those claims. Similarly, SCO reasonably believes that sales of SCO's Virtualization and Mobility products, which are based on a separate, non-UNIX technology will also increase when the market understands that SCO will thus survive.

For SCO customers with virtualized versions of SCO OpenServer and SCO UnixWare using Hyper-V or VMware, SCO UNIX will support the latest computer system hardware. That

13

With regard to SCO's Mobility Products, SCO recently developed, under the direction of FranklinCovey, worldwide leaders in time management, FCmobilelife Tasks by FranklinCovey. FC Tasks is an easy-to-use, feature-rich task management tool that incorporates proven planning methodology to quickly manage daily, personal, and professional tasks from an iPhone and iPod Touch. The FC Tasks application, having sold over 5,000 units in a matter of weeks, is consistently in the top 20 paid productivity applications on the Apple App Store and currently resides at number 14. A BlackBerry version is nearing completion as well and will be available on the new BlackBerry App World mobile store.

SCO's mobile strategy is to be a technology partner to create applications that SCO's business partners then market to their customer bases. The first such partnership, FranklinCovey, has produced two applications so far: FCmobilelife and FC Tasks for the iPhone, and two more iPhone applications are planned this year. FranklinCovey is marketing the solutions heavily in e-mail and web campaigns, in print catalogs to the point that FC Tasks is the cover of the current catalog, and in retail. The mobile clients on the iPhone function as standalone applications and will also synchronize with FCmobilelife in the future providing additional annuity subscription revenue for FCmobilelife.

SCO is, therefore, on the threshold of a break-out performance if it can get out of bankruptcy. Conversion to Chapter 7 is hardly the preferred method of doing so.

14

Third

Of course, if the Tenth Circuit reverses on two or all three of the issues on appeal, the foregoing positive effects on SCO's assets will synergize to further benefit the company.

The Movants do not offer any analysis of the effects a reversal would have on SCO's likelihood of rehabilitation, much less establish an absence of a reasonable likelihood of rehabilitation should the Tenth Circuit reverse. The Movants cannot meet their burden without showing that SCO is more likely than not to lose on appeal.

On the other hand, though it does not bear the burden of proof, SCO will show that even a partial reversal on appeal would result in a reasonable likelihood of rehabilitation. The appeal thus represents three independent chances for rehabilitation. In addition, neutral observers who have actually assessed the strength of the appealed-from decision agree that SCO stands to prevail on appeal. In an article entitled "Did SCO Get Linux-Mob Justice?," a former lawyer who writes for Fortune Magazine observed: "Once in a while a judicial ruling comes down that's so wrong at such a basic level that you're just left scratching your head."

*********************** SCO avoids quoting from the reasons why Mr. Parloff thought the ruling was in error, reasons that some, including me, find mistaken. Here's some rebuttal Groklaw presented. For example, Parloff thought Judge Kimball didn't consider Amendment 2, but he did, and I showed in the article that he did by quoting from the ruling, and then there was another big Parloff misunderstanding: I think it's clear that Judge Kimball *did* consider Amendment 2, in some detail, and he ruled that it wasn't a copyright transfer document, for all the reasons he enumerates. Whether his reasons will be convincing to the appeals court judges is the issue. But do you see why I think Roger Parloff's analysis of Judge Kimball's ruling ran off the tracks? His argument, aside from asserting ambiguity, was that determining witness credibility wasn't the judge's role in a summary judgment setting. But he missed that the real issue lay elsewhere, namely, could anyone consider the witness testimony in the first place? That is what the appeals court is looking at, and it's what Kimball looked at, not who decides credibility issues. Kimball mentioned in passing that the witnesses were not credible to him, so that even if he were allowed to consider their testimony, he would still rule as he had, but he didn't decide the issue based on credibility, so it doesn't matter whether the California statute gives him or a jury the role of deciding credibility. Instead, Kimball analyzed whether or not their testimony could be considered by *anybody*, and he ruled that it could not.... That's not even the elephant in the room, to me. The elephant in the room is this: if the contract is ambiguous, as SCO requires it to be to introduce its witnesses, how is it possible that there was a copyright transfer? A copyright transfer document has to be unambiguous in order to meet 204(a). If it's not clearly intended to be a transfer, then the copyrights stay where they were. So let's say SCO got the case remanded to Utah for a jury trial on the basis that the contract is ambiguous. Then what? If the jury finds it ambiguous, too, and struggles to figure out its meaning, then it's not likely they'd also find that it was a clear copyright transfer document, I don't think. And SCO needs both. It's not impossible, but SCO's argument seems to be so delicate, it's like brain surgery, where 1/8th of an inch too far, and you ruin everything. No doubt that is why Boies Schiller sent Mr. Singer. Update: The more I think about this, the more clearly I see that SCO is in a logic pickle. Here's why: They claim that the APA is clear, but that Amendment 2 presented ambiguity, since it alters the APA. Yet, they say it is Amendment 2 that officially transferred the copyrights. They have a lot of witnesses about the APA and its intent, as seen by a group of executives, paralegals and such, none of whom was there for the actual drafting in the end, couldn't testify about copyrights as far as the legal drafting was concerned, and none of whom knew one thing about Amendment 2, which happened almost a year later, without their participation at all. Don't you see how fatal that is? SCO has only one witness regarding the Amendment 2 drafting, with blanks in his recollection. Novell has at least four witnesses with direct involvement and total recall, plus saved drafts. Since SCO now claims it was Amendment 2 that did the copyright transfer, they need witnesses about *Amendment 2*, not the APA. They have only Sabbath for that, as far as direct involvement, who couldn't recall copyright discussions and who contradicts not only four witnesses of Novell's (Amadia, Braham, David Bradford, and Jim Tolenen), but the witnesses' saved draft documents to boot. Comments to Mr. Parloff's article clearly pointed out these and other errors, but the article, originally available on Mr. Parloff's blog [link broken] was moved at some point, and the comments disappeared. You can still read them on Wayback though, if you'd like to dig a bit more deeply. I think you'll understand why SCO didn't quote from the article and why the comments disappeared. ****************************************

Similarly, the online publication Managing L'unix observed: "Since [Judge] Kimball's decision to decide on disputed

15

************************* Mr. Murphy has been supportive of SCO since the beginning, and he is the one who wrote, when the decision came down, that he would have gladly bet it never could have happened. But it did. What does that tell you? He shows that he is definitely not a lawyer when he wrote this, huh? SCO and knowing what I don't know on August 20, 2007: With respect to the SCO case, for example, Im convinced that I know who did what to whom and when with respect to the core contractual breach allegations and had, correspondingly, dismissed this whole Novell copyright business as utterly beside the point. Oops. Or maybe not, because the judgement has nothing to do with the validity of SCOs core charges but does raise questions to which I havent got an answer. When AT&T sold USL to Novell they transfered everything - and Novell did the same when it sold everything to SCO, which sold everything to Caldera, which became the new SCO. But lawyers love boilerplate and its hard to believe that all of the agreements got rewritten at each stage, so if the Judges decision holds up - then if one agreement in this chain of transfers impossibly separated copyright from intellectual property, can we ask whether the same split is implicit in the earlier or later transfers? Im not a lawyer and I dont understand how that could happen or what it would mean - but its suddenly become interesting because if its possible to argue that the same split is implicit in either earlier or later transactions, a lot of very important deals, including Suns 1993 royalty buyout from Novell would have to be revisited. Most importantly, if the split is arguably present in the original transaction, wouldnt the new AT&T be compelled to review SCOs allegations with a view to settling or joining the lawsuit - against both Novell and IBM? Oops indeed. He is not a lawyer, and you see that not only in his statement of fact that he is not, but also in that he never considered it possible that SCO would lose. There isn't a lawyer in the world who doesn't carefully consider all options, likely or not, and the rest of the spinach he places on the plate are utterly wrong, legally, so I think we can simply assume that when it comes to the law, as he himself acknowledges, he really doesn't know much about it. So his opinion that the judgment was flawed is itself flawed, wouldn't you think? Where are all the lawyers out there who spoke out to condemn this ruling? I can't find any, and apparently neither could SCO. As for journalists, their coverage of this SCO story has been abysmal, with only a few exceptions, since they all thought SCO would prevail, and they were dead wrong. Here's an article showing all the media coverage immediately after the August 10 ruling by Judge Kimball. It's laughable. The fact that SCO uses some of it as "proof" that the ruling was flawed demonstrates, to me, that they are desperate and standing alone, legally. It also indicates to me that they are continuing to smear Groklaw. All we did, by the way, is report on the litigation to the best of our ability, which as an American citizen I am allowed to do, and we called it right. That's all we did. For that we have been attacked, stalked, threatened, even receiving death threats, and harassed. Incidentally, if you notice any dead links on that page, please let me know. ********************************

The Movants also cannot meet their burden by showing that the Tenth Circuit decision may be issued too late to result in a reasonable likelihood of rehabilitation. The Tenth Circuit has thus far handled the pending appeal on an expedited basis, setting a date for oral argument only days after SCO's initial brief was filed, and by all indications, will issue a decision promptly. A member of the panel hearing the appeal will leave the bench on August 31, 2009, thus making it highly probable a decision will issue by that date. In light of the fact that SCO can be rehabilitated by prevailing on even one of the issues on appeal and that the company could then pursue its valuable claims against IBM and Novell to the benefit of the estate, there is simply nothing to lose and everything to gain by waiting for the Tenth Circuit's decision.

3. The Nature of SCO's Claims Against IBM and Novell. 

UNIX is a computer software operating system. Operating systems serve as the link between computer hardware and the various software programs ("applications") that run on the computer. Operating systems allow multiple software programs to run at the same time and

16

In the business computing environment for the Fortune 1000 and other large corporations (called the "Enterprise" environment), UNIX is widely used. In contrast, before IBM wrongfully transformed Linux into a competitive operating system as detailed in the Appendix hereto, Fortune 1000 companies were not using Linux for mission critical applications, such as wire transfers and satellite control systems. Linux, as an operating system, simply was not capable of performing such high-level enterprise computing before IBM's improper contributions.

17

In consideration for the competitive head-start provided to licensees by the UNIX source code that was the foundation for their UNIX flavors, AT&T's Software and Sublicensing Agreements required licensees to keep their flavors confidential, the same as the UNIX code itself.

********************* Not exactly. For example, AT&T sent out a 1985 newsletter stating the exact opposite: Section 2.01 - The last sentence was added to assure licensees that AT&T will claim no ownership in the software that they developed -- only the portion of the software developed by AT&T. In addition, IBM negotiated for itself a side letter in that same year, 1985, the year IBM first licensed UNIX from AT&T, and it said the same thing: 2. Regarding Section 2.01, we agree that modifications and derivative works prepared by or for you are owned by you. However, ownership of any portion or portions of SOFTWARE PRODUCTS included in any such modification or derivative work remains with us. In any case, the license agreement included this loosening of even the confidentiality of the AT&T code, if trade secrets were revealed by others: 7.06 (a) LICENSEE agrees that it shall hold all parts of the SOFTWARE PRODUCTS subject to this Agreement in confidence for AT&T. LICENSEE further agrees that it shall not make any disclosure of any or all of such SOFTWARE PRODUCTS (including methods or concepts utilized therein) to anyone, except to employees of LICENSEE to whom such disclosure is necessary to the use for which rights are granted hereunder. LICENSEE shall appropriately notify each employee to whom any such disclosure is made that such disclosure is made in confidence and shall be kept in confidence by such employee. If information relating to a SOFTWARE PRODUCT subject to this Agreement at any time becomes available without restriction to the general public by acts not attributable to LICENSEE or its employees, LICENSEE'S obligations under this section shall not apply to such information after such time. Anyway, SCO dropped its claim that IBM misappropriated trade secrets. **********************************

Yet, in early 2000, as part of its new "Linux Strategy" aimed at transforming Linux from an "open source" program developed by a community of volunteers into a viable business alternative, IBM started publicly disclosing valuable source code and other intellectual property from AIX and Dynix - in plain violation of its Software and Sublicensing Agreements. Since AIX was derived from UNIX, the AIX source code that IBM dumped wholesale into Linux contained hundreds of thousands of lines of source code derived from UNIX.

***************************** The problem, as IBM's attorney David Marriott pointed out at a hearing in 2006, is that SCO hasn't been able to tie any donated code to anything SCO owns. Talk about your missing link. ************************************

In early 2000,

18

*********************** Then SCO has only itself to blame, because a Caldera employee contributed code to JFS. So not only did Caldera/SCO release JFS in UnitedLinux under the GPL, as well as in Skunkworks, its own employee helped to develop the code for Linux. In a UnitedLinux whitepaper [PDF] Caldera put on its website, we see that they knew JFS was in UnitedLinux, and where it came from: The Journaled File System (JFS) is a full 64-bit file system. All of the appropriate file system structure fields are 64-bits in size. This allows JFS to support both large files and partitions. JFS was developed by IBM under the GPL license and is ported from its AIX systems. JFS provides a log-based, byte-level file system that was developed for transaction-oriented, high performance systems. Scalable and robust, its advantage over non-journaled file systems is its quick restart capability. JFS can restore a file system to a consistent state in a matter of seconds or minutes. ******************************

By 2003 IBM had committed vast resources to its Linux Strategy, and Novell had become a self-proclaimed "ardent supporter of Linux." That year, after SCO brought suit against IBM in March, Novell announced the purchase of SuSE - a leading distributor of Linux - with a $50 million investment by IBM.

In March 2003, SCO sued IBM for breach of IBM's Software and Sublicensing Agreements, copyright infringement based on IBM's continued distribution of AIX and Dynix after SCO terminated those Agreements for breach, and unfair competition in connection with a joint venture named Project Monterey.

******************************* When SCO first filed its lawsuit, analysts reacted to it like this, as published in this CNET article by Stephen Shankland on March 6, 2009, SCO sues Big Blue over Unix, Linux: Analysts saw the move as a desperate one for SCO, a company that hasn't been profitable in its current incarnation. "It's a fairly end-of-life move for the stockholders and managers of that company," said Jonathan Eunice, an Illuminata analyst. "Really what beat SCO is not any problem with what IBM did; it's what the market decided. This is a way of salvaging value out of the SCO franchise they can't get by winning in the marketplace." *****************************

Novell then came to IBM's defense, announcing to the world that it - and not SCO - owned the UNIX copyrights upon which SCO's claims against IBM were partly predicated, and that Novell also had the unfettered right to waive IBM's violations of its Software and Sublicensing Agreements. In 2004, based on such conduct by Novell, as well as its distribution of SuSE-Linux products, SCO sued Novell for slander of title, breach of contract, unfair competition, and copyright infringement.

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4. The Strength of SCO's Claims Against Novell.

Slander of Title.

Nine days later, after SCO had faxed a copy of Amendment No. 2 to the APA to Mr. Messman, Novell immediately issued a press release, admitting:

Amendment #2 to the 1995 SCO-Novell Asset Purchase Agreement was sent to Novell last night by SCO. To Novell's knowledge, this amendment is not present in Novell's files. The

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amendment appears to support SCO's claims that ownership of certain copyrights for UNIX did transfer to SCO in 1996.33

*********************** Actually by midmorning, according to my research, the stock was up, not down, after Novell's statement: According to what I've found, as I'll show you, Novell put out a press release early in the morning, apparently even before the market opened, and yet IDG reported that same day that the stock at mid-morning was trading *up* by 3.33%. By the end of the day, the stock was down, for sure, but what made it happen? We can only guess. SCO also put out a prepared statement in the morning, almost immediately after Novell's, and then at 11 AM, SCO held a conference call. If the stock went down by the end of the day, who is to say that it wasn't the conference call that caused it? Or SCO's prepared statement, for that matter? Or some combination of all of them? What is SCO's basis for its claim that it was Novell's statement that caused the stock to "plummet"? At any rate, piecing together all the evidence I have collected, I am unable to confirm that the stock plummeted within two hours of Novell's statement, and I see indications that it didn't happen that way. I will show you what I found so you can draw your own conclusions. Again, here's the IDG article, published, it shows, at 10:12 AM on May 28, 2003, and notice it says the stock was up at that point. It also mentions the 11 AM conference call as something that had not yet begun *********************************

In discovery, SCO learned that the timing of Novell's announcement was not "entirely coincidental," as Mr. Messman had claimed. Novell Vice Chairman Chris Stone had informed Maureen O'Gara, a journalist who has covered the computer industry since 1972, that Novell intentionally was making the announcement on the day of SCO's earnings report to "confound SCO's stock position" and "upset the stock price." According to her testimony, Mr. Stone leaked this information "with laughter" and "chortling."

In footnote 4 of Novell's appellate brief, you will find this important rebuttal: 4 SCO makes the unfounded and irrelevant accusation that Novell deliberately announced that it owns the UNIX copyrights on the day of SCO's earnings report to harm SCO's stock price. (AB12.) Chris Stone, the alleged source of this information, testified that he did not even know that SCO was announcing its earnings on that date. (07584-88.) Unfounded means there is no foundation for the conclusion reached. A bit about her history of helping out anti-Open Source entities like Microsoft. Her support for SCO has been, I believe, obvious. I'll let you judge for yourself, though, and you can form your own opinion. Here's a page from Linux Business News in 2005 where you can start. Decide for yourself if you think she was biased or accurate in her coverage. Scroll down to the bottom of the page and you'll see several of her LinuxGram articles about SCO. This might be the time to put something on Groklaw, to preserve it in our permanent collection, the apology Fuat Kircaali, Publisher of SysCon Media, posted after running one of her LinuxGram articles, which I and others viewed as a hatchet job on me: We had a link to that apology in an earlier article back in 2005, but the link is now broken. So that's why I decided it would be time to include a screen shot and the Wayback link, to preserve it for historians. It was by no means the only hatchet job. A concerted effort by SCO to get the media to smear Groklaw bore fruit. I consider Mr. Murphy's attack on Groklaw in the above-referenced article to be part of that campaign, by the way, and Mr. Parloff also attacked Groklaw. Here's another article about me by O'Gara, in which she reports that SCO's Darl McBride asked the media to investigate me, an invitation she accepted, which led to the need for a SysCon apology to me. *****************************

In January 2004, SCO sued Novell for slander of title to the UNIX copyrights. On Novell's motion for summary judgment, the district court dismissed that claim, ruling that Novell had retained the copyrights under the APA. The court reasoned that neither the original APA nor Amendment No. 2 to the APA, each standing alone, transferred the copyrights to Santa Cruz. SCO appealed the ruling, arguing that the district court erred in reading the APA and Amendment No. 2 as separate and distinct documents and that when properly read together, as required by basic rules of construction, they provide for the transfer of copyrights.

The APA identifies "all of Seller's right, title, and interest in and to the assets" listed in the Assets Schedule, and not listed in the Excluded Assets Schedule, as assets transferred in the

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All copyrights and trademarks, except for the copyrights and trademarks owned by Novell as of the date of the Agreement required for SCO to exercise its rights with respect to the acquisition of UNIX and UnixWare technologies.

Robert Frankenberg, President and CEO of Novell at the time of the APA, testified that it was his "initial intent," his "intent at the time when the APA was signed," and his "intent when that transaction closed" that "Novell would transfer the copyrights to UNIX and UnixWare technology to Santa Cruz" and that "that intent never changed." Ed Chatlos, who served as Novell's lead negotiator for the asset purchase and who participated in "detailed discussions"

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NOVELL SIDE

Robert Frankenberg, President and CEO

Ed Chatlos, Senior Director for UNIX Strategic Partnerships and Business Development and Lead Negotiator of the APA

Duff Thompson, Senior Vice President

Burt Levine, In-House Counsel

Ty Mattingly, Vice President for Strategic Relations

SANTA CRUZ SIDE

Alok Mohan, President and CEO

Jim Wilt, Vice President and Lead Negotiator of the APA

Doug Michels, Founder and Vice President

Steven Sabbath, General Counsel

Kimberlee Madsen, Assistant Negotiator

********************** As is SCO's wont, they phrase this in such a way to make it seem to a newbie that this is a list of Novell witnesses, some who ended up helping SCO, but it isn't. As SCO acknowledges, Novell didn't call these witnesses. These were witnesses SCO called, who happened to have previously worked for Novell, not current employees, and not called by Novell to testify. By the way, Ms. Madsen is a paralegal, not that there's anything wrong with that. But "Assistant Negotiator" might be a bit of a promotion and confusing to those new to this story. She is the paralegal who testified that she never heard anyone mention copyrights at any of the meetings she attended: Brakebill: At any point in time did Novell, anyone from Novell, say to you, "We're going to transfer the UNIX copyrights to Santa Cruz"? Madsen: No, I don't recall that. It was assumed by everyone that, of course, the copyrights were accompanying. Brakebill: There were no express words from anyone from Novell to you saying Novell is going to transfer the UNIX copyrights to Santa Cruz, correct? Normand: Objection, asked and answered. Madsen: That's correct.... Brakebill: Again, you didn't have any discussions with anyone at Novell where they told you that UNIX copyrights were being transferred, correct? Normand: Objection to form and asked and answered. Madsen: I don't recall any conversations with Novell pertaining to copyrights. Brakebill: Were you part of any conversation between Santa Cruz representatives and Novell representatives where Santa Cruz put the question to Novell, "Can you transfer the UNIX copyrights to us?" Normand: Objection to form. Madsen: No, I don't recall that. Brakebill: Are you aware of any conversations that may have taken place between Santa Cruz representatives and Novell representatives where anyone from Santa Cruz asked Novell to give them the UNIX copyrights as part of this deal? Normand: Objection to form. Madsen: No, I do not recall any conversation regarding the copyrights. It was assumed that the copyrights came with the business, but I do not have any specific recollection about a conversation regarding copyrights. Brakebill: So it's fair to say that you were assuming that the UNIX copyrights were being transferred? Normand: Objection to form. Madsen: I don't believe that was my assumption alone, but yes, I was assuming that. Let's give Ms. Madsen her SCO promotion. Now we have the "Assistant Negotiator" for the APA testifying that she never heard anyone even discuss copyrights one way or another. That is fatal to SCO, I think, because my understanding is that with copyrights, there has be a writing, a clear writing, to transfer copyrights, and if it isn't clear, at least you need witnesses to testify that it was discussed and everyone agreed as to the copyright transfer, with specificity. Otherwise the copyrights stay where they were. That would be with Novell. Instead, the "Assistant Negotiator" says it didn't happen that way. And on the other side, Novell has presented the 1995 Board minutes of a board meeting held the day before the APA was signed that state unequivocally that no copyrights were to transfer under the APA. The minutes have one resolution that reads in part like this: Novell will retain all of its patents, copyrights and trademarks (except for the trademarks UNIX and UnixWare), a royalty-free, perpetual, worldwide license back to UNIX and UnixWare for internal use and resale in bundled products, Tuxedo and other miscellaneous, unrelated technology. So Novell did discuss copyrights, and it resolved that they would not transfer. And on the other side, the Assistant Negotiator says no one discussed copyrights at all, that she ever heard tell. Here's what Judge Kimball wrote about some other SCO and Novell witnesses in the order SCO is appealing regarding Amendment 2, the part of the APA that SCO is relying upon: David Bradford, Novell's Senior Vice President and General Counsel, oversaw the negotiation and drafting of a contract between Novell and Santa Cruz. Decl. David Bradford at ¶ 4. During the negotiations of the APA, he discussed with Braham the need to increase Novell's protections in the transaction, including but not limited to retaining Novell's intellectual property rights in UNIX and UnixWare. Id. ¶ 9. Bradford testified that the exclusion of copyrights was intentional and "should any person suggest otherwise, they are mistaken." Id. ¶ 12. Bradford reviewed the terms of the APA with the Novell Board of Directors at a meeting held on September 18, 1995, the day before the APA was signed. Id. ¶ 13. Bradford received the final APA on the day it was executed and was responsible for reviewing it and approving it for final signature by Frankenberg. Id. ¶ 17. Bradford wrote a memorandum reflecting his approval of the APA. Id. He testified in this litigation that he still agrees with the statement that the APA is "an accurate reflection of the business and legal terms and conditions negotiated between the parties." Id. James Tolonen, Novell's Chief Financial Officer from 1989 through 1998, testified that he was actively involved in the preparation of the APA. Tolonen Decl. ¶¶ 3, 7. Tolonen interacted with Bradford, who he described as the "point person" heading up Novell's negotiation team, and Braham. Id. ¶¶ 8, 9. Tolonen reviewed drafts of the APA and reviewed the final version of the APA to ensure that its terms were consistent with the intent of the deal. Id. ¶¶ 9, 10. Tolonen testified that "[a]s reflected in the plain language of the executed [APA], Novell intended to retain and did retain, as an 'Excluded Asset,' all copyrights, including all UNIX and UnixWare copyrights." Id. ¶ 11. ... Jim Tolonen, Novell's Chief Financial Officer and Novell's business executive assigned to Amendment No. 2, confirms that it was never Novell's intent to transfer copyrights by way of Amendment No. 2. Decl. Jim Tolonen at ¶ 13, 14. He states that he would not have signed it if he had believed it would do so. Id. ¶ 15. He testifies that Amendment No. 2 was also not meant to "clarify" what the parties intended to transfer in the original APA. Id. ¶ 14. Rather, he states that Novell intended to retain the UNIX and UnixWare copyrights in the APA, and Amendment No. 2 confirmed that Santa Cruz would be allowed to continue to use the Novell-retained copyrights as it had been doing as was required to exercise its rights under the APA. Id. ¶ 16. Sabbath has no recollection of negotiating the copyright portion of Amendment No. 2. SCO relies on the testimony of Robert Frankenberg and Ed Chatlos regarding Amendment No. 2. However, both men had left Novell before Amendment No. 2 was negotiated and had no involvement in the negotiation of the amendment. Frankenberg Dep. at 86; Chatlos Decl. ¶ 4. SCO relies on the testimony of several other individuals involved in the business, but none of them admits to being involved in the negotiations of Amendment No. 2 or to having any specific recollection of the negotiations with respect to the transfer of copyrights. How rosy do SCO's prospects look to you now? Even if they could get the case remanded back to Utah for a jury trial, how can they win against all that? They literally haven't got a single witness that I've seen put forward that they can use to rebut the clear story Novell presents. No doubt that is why Judge Kimball ruled as he did. SCO is presenting to the bankruptcy court that if they can just win the appeal, it's a slam dunk for them after that. I disagree. ********************************

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Transferred its UNIX copyright registrations to Santa Cruz, which transferred them to SCO in 2001. SCO has possession of the registrations.

Modified the copyright notices on the UNIX source code existing at the time of the APA to reflect the change in ownership of the copyrights from Novell to Santa Cruz.

Reported to the APA transition team that "the following changes have been made" to existing UNIX code at the request of Santa Cruz: "SCO copyrights added to documentation and software."

Admitted that "All of the technology and intellectual assets" in existing UNIX source code "will be transitioned to SCO sometime after December 1, 1995."

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Announced in a joint press release that "SCO will acquire Novell's UnixWare business and UNIX intellectual property."

Notified its customers that Novell had transferred "its existing ownership interest in UNIX System-based offerings and related products" to Santa Cruz and referred to Santa Cruz as "the owner" of the UNIX software. These UNIX assets were identified as "All Releases of UNIX System V and prior Releases of the UNIX System."

Admitted that Santa Cruz had purchased the UNIX business "lock, stock and barrel."

Contemporaneous with the APA and its amendments, Santa Cruz: Shipped countless UnixWare products with a Santa Cruz copyright notice on the product discs, without objection from Novell.

Announced in its 1995 Annual Report that it had acquired "certain assets related to the UNIX business including the core intellectual property from Novell." Wilson Sonsini, the law firm that represented Novell in the APA, was Santa Cruz's counsel in connection with the 1995 Annual Report.

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Stated through its investment banker that, under the APA, Santa Cruz "will obtain the IP " for UNIX, UnixWare, and all UNIX-related products.

" for UNIX, UnixWare, and all UNIX-related products. Recited in a 1998 agreement with Microsoft that "SCO has acquired AT&T's ownership of the copyright in the UNIX System V operating system."

As UNIX copyright holder, brought a complaint against Microsoft before the European Commission in 1997, representing that it had "acquired ownership of the copyright to UNIX," and referring to itself as "the copyright owner of UNIX."

operative

Breach of Contract and Unfair Competition.

SCO also brought claims against Novell for breach of contract and unfair competition based in part on Novell's wrongful exercise of its rights under Article 4.16(b) of the APA in defense of IBM. For its part, Novell sought a declaration that its Article 4.16(b) rights extend to

26

Article 4.16(b) grants Novell the right to "amend, supplement, modify or waive any rights" under certain licenses called "SVRX Licenses" in the APA. The scope of Novell's rights therefore turns on the meaning of the term "SVRX Licenses" as used in the contract. Novell argued, and the district court on summary judgment ruled, that the term "SVRX Licenses" unambiguously includes IBM's Software and Sublicensing Agreements. But that is not what the APA provides. Article 4.16(a) identifies the "SVRX Licenses" by pointing to a list in Item VI of the Assets Schedule:

Following the Closing, Buyer shall administer the collection of all royalties, fees and other amounts due under the SVRX Licenses (as listed in detail under Item VI of Schedule 1.1 (a) hereof and referred to herein as "SVRX Royalties).

All contracts relating to the SVRX Licenses and Auxiliary Product Licenses (collectively "SVRX Licenses") listed below :

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In addition, the district court confused the introductory sentence of Item VI with the list that appears under that sentence. Like all other Items in the Asset Schedule, Item VI identified assets being transferred to Santa Cruz under the APA. In that context, Item VI identifies "all contracts relating to the SVRX Licenses" listed below it as assets that Santa Cruz was purchasing. Instead of independently listing the "SVRX Licenses" over which Novell was retaining waiver rights, Article 4.16 cross-referenced a portion of Item VI - the list. By its own terms, the clear language of Article 4.16 applies only to the SVRX Licenses "listed below" the introductory sentence of Item VI - not to "all contracts relating to" the list.

Finally, the Software and Sublicensing Agreements, such as those executed by IBM, are separately listed as assets sold to Santa Cruz without any reservation of rights for Novell, under Item III of the Assets Schedule:

All of Seller's rights pertaining to UNIX and UnixWare under any software development contracts, licenses and any other contracts to

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which Seller is a party or by which it is bound and which pertain to the Business . . . including without limitation . . . Software and Sublicensing Agreements .

Messrs. Frankenberg, Chatlos, Thompson, Mattingly, Mohan, Wilt, Michels, and Sabbath, and Ms. Madsen all testified that Article 4.16(b) was not intended to apply to Software and Sublicensing Agreements. William Broderick and John Maciaszek, executives in Novell's UNIX licensing group, specifically testified that Novell used the term "SVRX Licenses" to refer to other agreements that Novell and AT&T used in licensing individual SVRX products under the terms of the Software and Sublicensing Agreements.

SCO also showed that Novell and Santa Cruz previously resolved in SCO's favor the very same dispute concerning the scope of the Article 4.16(b) rights. In April 1996, without informing Santa Cruz, Novell and IBM entered into a so-called amendment of IBM's Software and Sublicensing Agreements granting IBM limited rights to distribute AIX source code.

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Novell's CEO, Mr. Frankenberg, did not challenge those assertions, and indeed, over the ensuing six months of negotiations, Novell did not once invoke its Article 4.16(b) rights, as it did in 2003. Instead, Novell and Santa Cruz resolved the issue by executing Amendment No. 2 to the APA and two related agreements. Pursuant to this resolution, Novell paid Santa Cruz $1.5 million for a release of claims against Novell for its execution of the unauthorized amendment and Novell also agreed that it "may not prevent SCO from exercising its rights with respect to SVRX source code in accordance with" the APA.

Copyright Infringement Claim.

SCO also brought a claim for copyright infringement against Novell based on its distribution of Linux products through its wholly owned subsidiary SuSE Linux, which Novell acquired in 2004 with a $50 million investment by IBM. In addition, Novell's distribution of Linux was also a partial basis for SCO's breach of contract and unfair competition claims. The

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5. The Strength of SCO's Claims Against IBM.

In May 2006, Dr. Jeffrey Leitzinger concluded that "IBM has received over $12 billion in Linux-related revenues and over $4 billion in Linux-related profits" since 2000.

Dr. Leitzinger also concluded at that time that "SCO lost $753 million in profits and ongoing business value" since 2000, "in connection with IBM's unauthorized disclosures of SCO's intellectual property, technology, methods and concepts." Consistent with Dr. Leitzinger's opinion, Professor Avner Kalay, another expert, concluded that "the market value of the asset that SCO lost through the alleged breach of contract by IBM" was "between a low of $597,845,000 and a high of $717,414,000" at the onset of the breach in February 2000.

As to damages resulting from IBM's unauthorized distribution of AIX after the termination of its Software and Sublicensing Agreements, Professor Christine Botosan concluded that "IBM generated actual AIX related revenues of $9,373.51 million during the

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In addressing damages resulting from IBM's misuse of SCO code provided in Project Monterey, Professor Botosan concluded that "IBM generated actual AIX related revenues of $9,490.55 million" and "AIX related profits of $4,694.82 million," between October 1, 2000 and June 13, 2003, the date SCO terminated IBM's Software and Sublicensing Agreements. Professor Botosan calculated damages only through June 13, 2003, to avoid double-counting damages already included in her analysis of the copyright infringement claim for AIX.

Contract Claims.

AT&T's legal department created a Software Agreement and a Sublicensing Agreement that imposed strict requirements on licensees' use, export, transfer, and disclosure of the UNIX-derived software. The cornerstones of these protections were Sections 7.06(a) and 2.01 of the Software Agreement. Section 7.06(a) of the Agreement states in relevant part:

LICENSEE agrees that it shall hold all parts of the SOFTWARE PRODUCTS subject to this Agreement in confidence for AT&T. LICENSEE further agrees that it shall not make any disclosure of

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any or all of such SOFTWARE PRODUCTS ( Including methods or concepts utilized therein ) to anyone, except to employees of LICENSEE to whom such disclosure is necessary to the use for which rights are granted hereunder.

AT&T grants to LICENSEE a personal, nontransferable and nonexclusive right to use in the United States each SOFTWARE PRODUCT identified in the one or more Supplements hereto, solely for LICENSEE'S own internal business purposes and solely on or in conjunction with DESIGNATED CPUs for such SOFTWARE PRODUCT. Such right to use includes the right to modify such SOFTWARE PRODUCT and to prepare derivative works based on such SOFTWARE PRODUCT, provided the resulting materials are treated hereunder as part of the original SOFTWARE PRODUCT .

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SCO also brought claims against IBM for breach of its Sublicensing Agreements. IBM's Sublicensing Agreements authorized it to distribute binary-code versions of its UNIX-derivative products - AIX and Dynix - provided that IBM complied with the requirements of the Software Agreements. In light of IBM's breaches of its Software Agreements, SCO terminated IBM's Sublicensing Agreements in 2003. When IBM continued thereafter to distribute AIX and Dynix, SCO brought claims for breach of the Sublicensing Agreements based on those ongoing distributions.

IBM has not disputed the facts that underlie SCO's contract claims: AIX and Dynix are UNIX-derivative works, and IBM dumped substantial portions of AIX and Dynix into Linux and disclosed the methods and concepts found in UNIX, AIX, and Dynix in developing Linux.

Instead of disputing these facts, IBM has primarily argued that the protections in the Software Agreement apply only to the literal source code from the licensed UNIX product, and not to the methods and concepts and other intellectual property embodied in the code, or to any part of code physically written by IBM or Sequent in developing AIX and Dynix. That is not remotely what the Software Agreement says, and IBM's interpretation gives no meaning to entire provisions. Section 2.01 required IBM to use the UNIX product "solely for [its] own internal business purposes" on specified CPUs, and Section 7.06(a) required IBM to keep "all parts" of the UNIX software confidential, including specifically the "methods and concepts"

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Copyright Infringement.

In addition to the fact that over 440,000 lines of source code in AIX are literally copied from SVr4, IBM itself placed "Origin Codes" on 179 files in AIX to signify that the files were derived from UNIX System V. Those files form the most important part of the AIX kernel. They form the heart of AIX functionality; it is impossible for AIX to function on any level without them.

The structure of AIX 4.3 is substantially similar to the structure of SVr4. AIX includes approximately 90% of the SVr4 system calls. In addition, AIX brings together several elements in a manner similar to SVr4, such as the system calls, file system, shared memory, sockets, files, and pipes, as well as the fact that AIX is structured as a monolithic kernel.

The structure of AIX 5.3 is substantially similar to the structure of SVr4 in the same way as AIX 4.3, which compels the inference that all versions of AIX

35

between those two versions share the same similarity in system calls and structure.

Dr. Thomas Cargill concluded that "it would be an astonishing coincidence if the selection, arrangement, and coordination of elements in Linux were developed independently from the remarkably similar selection, arrangement, and coordination of elements in SVr4."

Linux was developed through systematic copying of SCO's copyrighted material. Linux Torvalds, the person who conceived Linux, started with a "UNIX variant." He then referred to the manuals for the Sun Microsystems version of UNIX: "That's how early development was done. I was reading the standards from either the Sun OS manual or various books, just picking off system calls one by one and trying to make something that worked."

In a presentation touting the UNIX-derived strengths of Linux, IBM admitted that "UNIX was a pre-write to Linux" and that Linux is "a UNIX-like operating system." IBM described Linux as "an independent UNIX OS implementation, that complies with the standard specifications that define the basic UNIX

*********************** SCO seems not to realize that they undermine themselves by the second quotation. In saying that IBM described Linux as "an independent" implementation, it is saying that it is NOT a derivative of UNIX or anything else. So the statement does not prove that IBM "admitted" that Linux is a derivative of UNIX. In fact, it proves the opposite, that IBM said it wasn't a derivative. ***************************

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environment," as a "community-developed version of UNIX," or simply as "derived from UNIX." IBM has also repeatedly admitted that it copies Linux onto its machines, contributes to the Linux code base, and provides and promotes Linux products and services - all violations of the Copyright Act if SCO is found to be the owner of the relevant UNIX copyrights. Instead of disputing that it has engaged in its undeniable Linux-related activities, IBM has primarily argued that SCO is not the owner of the relevant UNIX copyrights because Novell retained them under the Asset Purchase Agreement by which it transferred the UNIX business to Santa Cruz, SCO's predecessor, in 1995 (the "APA").

Unfair Competition .

SCO's unfair competition claim was based primarily on IBM's conduct in connection with Project Monterey, which was supposed to be a joint venture between IBM and Santa Cruz to develop a UNIX-based operating system and related products for a new Intel 64-bit chip in the late 1990s. Through a trail of smoking-gun e-mails and other IBM internal documents, SCO showed that IBM made a conscious decision to abandon the project, concentrate instead on a competing Linux solution, and keep SCO in the dark about this decision. IBM led SCO to believe that IBM intended to continue the project to the benefit of both partners. This deprived SCO of the opportunity to find other partners, to upgrade its UNIX products to compete with Linux, and to avoid wasting the company's resources on Project Monterey.

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B. Cause" Does Not Exist Under Section 1112(b)(4)(B) Because the Estates Have

Not Been Grossly Mismanaged .

It is no secret that the Debtors filed bankruptcy, among other reasons, to stay alive long enough to allow SCO to prosecute an appeal of a seriously prejudicial ruling by the district court in Utah.

*********************** Judge Kimball is certainly not prejudiced against SCO, although some trolls are pushing that thought and SCO executives have been busy saying negative things about him to the media. All that means to me is that if the case is sent back to Utah, SCO may try to get a different judge. If a judge is "prejudiced", it can be grounds t