There have been a few developments in the SCO case over the last week or
so; time to check in and see what they are up to.
Much noise was made about the $50 million equity investment that the
company received. This money was presented as being from BayStar, a
venture capital firm. In fact, BayStar was the minority investor, having
put in $20 million. The rest came from the Royal Bank of Canada.
This is not a straightforward equity investment. The investors will be
getting "Series A convertible preferred stock," which brings no voting
rights. The holders of the stock do, however, get veto power over a number
of possible corporate actions, including taking on large debts or sales of
assets. The preferred stock can be converted to common stock at
$16.93/share whenever the investors wish. The investors can also force SCO
to buy back the stock (with cash) under certain conditions, including delisting of the
stock or financial problems that suggest bankruptcy is near.
After one year, SCO must pay an 8% dividend on the preferred stock; that
dividend goes up 2% per year to a maximum level of 12%. Starting next
year, SCO will have to come up with $4 million in cash flow to service
this dividend requirement.
In summary, SCO has tied itself to an investment scheme that is rather
more expensive than a straightforward stock issue would have been. For
those who are interested, the
full agreement is online at the SEC.
Meanwhile, in the courtrooms, the story is mostly one of motions going back
and forth. The company has submitted a new brief in support of its motion
to dismiss the Red Hat suit; this brief has been analyzed
in great detail over at Groklaw. Suffice to say that PJ was not
particularly impressed. We'll not duplicate the analysis on Groklaw, but
there is one paragraph (from the opening page) which is worthy of note:
Red Hat, despite the complete absence of any ownership rights
whatsoever in the Linux kernels, seeks a declaration that these
Linux kernels do not infringe SCO's intellectual property rights.
Similarly, Red Hat seeks redress based upon Lanham Act and state
law claims, despite the fact that the Linux kernel is provided to
any and all comers for free. This lack of ownership, combined with
a careful review of complete quotations and accurate statements of
law, makes clear that Red Hat's claims must fail.
A quick grep through the kernel source turns up an awful lot of Red Hat copyright statements.
Red Hat indisputably has ownership rights in the
Linux kernel. The fact that the relevant code has been placed under a
license that allows free redistribution under certain conditions does not
change that fact.
What is going on here is that the SCO Group, despite its ongoing bluster
about intellectual property rights, is trying to deprive those who have
contributed to the Linux kernel of their rights. This denial of Red
Hat's rights goes along with SCO's attacks on the GPL. SCO would like
nothing better than to invalidate all rights on the kernel - except, of
course, those it claims to own itself. As long as others have rights to
the kernel and the GPL holds, SCO cannot make a serious go at a general
The court records in Delaware show that SCO has filed to change its legal
representation in the Red Hat case. Such a change in the middle of an
ongoing case is generally unexpected. According to Groklaw,
SCO is using some of its BayStar money to trade up to a higher-class,
better-connected law firm.
In Utah, SCO is trying to fight (or at least delay) IBM's "motion to
compel" the company to disclose the exact nature of its claims. From IBM's
latest filing opposing a request from SCO for a delay:
There is nothing for SCO to say in response to IBM's motion except
that it will provide all of the information IBM has requested. As
stated in IBM's motion, SCO does not claim the right to withhold
responsive information based on any of its boilerplate objections
to these interrogatories. By contrast, further delay will compound
the prejudice imposed upon IBM by SCO's delay of more than three
months. This case has been pending more than seven months, and SCO
has still failed to disclose what its claims are about.
Groklaw (where else?) for the details.
SCO has a new agreement with Boies, Schiller & Flexner, the law
firm representing it in the IBM case. The
company's recent 8K filing describes the new deal:
As part of this modification, which is subject to a definitive
agreement, the law firm would receive a contingent fee of 20
percent of the proceeds from certain events related to is
protection of SCO's intellectual property rights, including certain
licensing fees, settlements, judgments, equity financings or a sale
of SCO during the pendancy of litigation or through settlement,
subject to certain agreed upon credits for amounts received as
discounted hourly fees or prior contingency payments. In addition,
this modification may result in the payment to such law firm of up
to $1,000,000 and the issuance of up to 400,000 shares of SCO's
In other words, Boies et al. are no longer willing to work for a straight
contingency deal. The 20% fee could yet be lucrative - it is not clear
whether it includes the $50 million from BayStar and RBC - but Boies
is now getting $1 million and almost $7 million worth of stock as
well regardless of the outcome of any litigation. SCO's lawyers win
whether its client does or not.
The 8K filing also notes that Microsoft has pumped another $8 million
worth of "licensing fees" into SCO.
SCO has backed down from its threats to "cancel" SGI's Unix license. At
the latest conference call, Darl McBride noted that SCO was happy with the
(about 200 lines) of code that SGI has removed from the kernel; he seems to
have stopped talking about the XFS filesystem. Mr. McBride also, in
response to a question, stated that SCO did not have any other Unix vendors
in its sights. He did, however, make a rather chilling statement about
SCO's several thousand end-user Unix licensees. There is, apparently,
something in those contracts which makes those users - if they also use
Linux - look like especially tempting targets. SCO remains a good company
to avoid signing contracts with.
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