SCO suitor vows to keep up Unix copyright war

Firm has no plans to give up legal fights that have battered SCO’s business, reputation; McBride out if deal goes through

The private equity firm that has offered to pump up to $100 million into SCO thinks court rulings against the vendor in its highly publicized Unix copyright lawsuits "don’t make any sense" and it believes those rulings can be reversed on appeal to a higher court.

Meanwhile, some intellectual property lawyers say the private equity firm, Stephen Norris Capital Partners (SNCP), is placing a very risky bet.

“You can get a legal opinion on all sides of this thing. Everyone in the tech world has an opinion. But some of the court rulings on this just don't make any sense at all. We think the case has merits,” Stephen Norris, managing partner of SNCP, told the Associated Press.

The AP report also said executives with SCO, which is in Chapter 11 bankruptcy, and its new SNCP partners believe the federal court summary judgment against SCO in its Unix copyright lawsuit with Novell will be reversed if they appeal it to a higher court.

Novell officials said they had no comment on the SCO developments.

In SNCP’s filing with the U.S Bankruptcy Court in Delaware, which must approve SNCP’s offer to SCO, the private equity firm said it will require SCO to “aggressively continue” its ongoing litigation against Novell, IBM and AutoZone Inc.

SNCP said it hopes to share in any future settlements and get a cut of any settlements made in cases brought prior to its offer. The other major clause in the filing called for SCO CEO Darl McBride to “resign immediately” upon completion of the deal.

The filing shows SNCP is investing just $5 million cash upfront and making another $95 million available to SCO via a high-interest line-of-credit. The credit line comes with an interest rate higher than most consumer credit cards – 17% plus the rate that banks charge each other for loans.

“The $5 million buys them the trial and an appeal,” said Mark Radcliffe, a partner at law firm DLA Piper US, who advises companies on intellectual property issues.

The trial begins April 29, runs for four-days in federal court, and is the follow-up to a summary judgment issued in Novell’s favor in August over who owns the copyright to Unix.

“It’s a small bet for [SNCP], but I think it is a foolish bet for them. I don't know where [SNCP] is getting the advice that you can get a variety of opinions on this case. You can get a variety of opinions but I think the ones that say SCO has a case are wrong,” said Radcliffe.

The filing with the bankruptcy court clearly shows, however, that SNCP is positioning the litigation as the fuel for its investment strategy.

Radcliffe says there are two ways SCO could eventually exploit Unix intellectual property. He says the first would be for SCO to sue companies for breach of contract, which is the route it took against IBM based on a Unix licensing deal SCO signed with Novell in 1996.

That option is impossible, Radcliffe says, because Novell has what he calls a “silver bullet” that allows it to exempt Unix licensees from any suit brought by SCO based on the contract SCO has with Novell.

“I have been doing this for 25 years and I have never seen anything like this, I call it the silver bullet clause,” Radcliffe said.

The second route, and the most likely SCO/SNCP could take Radcliffe believes, is over the question of copyright of Unix. If SCO could reverse the August federal court ruling against it and claim Unix copyrights, and if it can prove there is Unix code in Linux, then it could wreak havoc with Linux users, including an existing case against AutoZone Inc.

“Those are two big ‘ifs’,” said Radcliffe. “And the problem there is that IBM and SCO have spent three years [battling] and SCO has been unable to prove there is Unix code in Linux.”

SNCP came on the scene Thursday with what it initially called an “up to $100 million” offer and a reorganization plan for SCO that includes new product lines.

SCO’s board of directors unanimously agreed that the offer was the best long-term plan for the company.

“It’s not like $100 million has been forwarded to a law firm to continue this lawsuit [against Novell],” says Jim Zemlin, executive director of the Linux Foundation.

“The five million in cash plus a loan at credit card like interest rates is a very small investment for [SNCP] and that sort of speaks to the merit of this. I don’t think it is an action anyone should care that much about.”

A summary judgment in SCO’s case against Novell was issued on Aug. 10, 2007, when Federal Judge Dale Kimball ruled that Novell owned the Unix and UnixWare copyrights. SCO had claimed Unix ownership during a very public campaign that included suits against IBM, Novell and others.

In 2003, SCO claimed that Linux was an illegal derivative of Unix, which SCO said it had purchased from Novell in 1996.

Also in 2003, SCO targeted its first legal fight over Unix royalties at IBM, filing a $1 billion copyright infringement suit claiming Big Blue had violated SCO’s rights by contributing Unix code to Linux.

Eventually, SCO took on Novell and lost on Kimball’s August ruling.

Beginning April 29, Kimball will preside over a four-day trial to determine what SCO owes Novell in licensing fees. The award could reach into the millions.

The SNCP offer is the second offer SCO has entertained to rescue the company.

In October, SCO received an offer of $36 million from JGD Management for its business and intellectual property. JGD Management, a debtor of SCO, is an investing arm of York Capital Management, which owned more than 91,000 shares of SCO stock from March 2005 to September 2006.

The deal ultimately fell through.

In November, SCO bounced back releasing an upgrade to its OpenServer 6 Unix server even while dealing with bankruptcy.

Jeff Hunsaker, president and chief operating officer of SCO, said in a statement, “not only will this deal position us to emerge from Chapter 11, but it also marks an exciting future for our business. This significant financial backing is positive news for SCO's customers, partners and resellers who continue to request upgrades and rely upon SCO's Unix services to drive their business forward.”

Learn more about this topic

Trial set to determine what SCO owes Novell

With bankruptcy, SCO now facing Nasdaq delisting

SCO gets $100 million from private equity firm

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