Catching up with SCO [LWN.net]

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 Linux tax.

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.

Again, see 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 common stock.

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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Catching up with SCO

Posted Oct 23, 2003 15:13 UTC (Thu) by jre (guest, #2807) [Link]

As one might have expected, the core of SCO's objection to IBM's motion to compel discovery is mere pettifoggery -- they claim that they need more time to respond because the whole matter is very complicated, and they want to make sure the judge understands it all. You see, it goes way beyond "misuse of trade secrets" and involves a bunch of "breach of agreements" which are somehow larger than, and different from, the trade secret issue, so you can see, Your Honor, why it's not as simple as highlighting some lines of code and boxing some documents.

Crank up the smoke machine.

Of greater interest is the fact that SCO's fancy lawyers are still making some surprisingly dumb rookie mistakes. In their earlier objection, they pulled out a Utah court rule governing the content of motions, and kvetched that IBM had not supplied all the required info. As it turns out, that was not the case, and they are now in the position of apologizing to the Court:

The drafters ... worked largely from faxed documents that were incomplete ... Since the filing of the original motion, the contents of the Addendum were discovered. ... SCO apologizes to this Court for filing a motion deficient in that manner.

Talk about the dog eating your homework!

This calls to mind SCO's amateurish original complaint, with its cheesy metaphors about bicycles and luxury cars, avoidable errors of fact such as referring to rms as a professor, and misspelling "Linux"(!)

Boies, Schiller and Flexner seem to be doing somewhat better these days, but they still don't impress me as living up to their reputation. Nor, based on their performance thus far, would I feel an irresistible urge to throw $8M at them.