The Secret Novell-SCO Correspondence

There is a new front in the SCO wars, or more accurately a newly revealed front. The new player, stage front and center, is Novell. Some of SCO's otherwise puzzling decisions in the last nine months have become more comprehensible, now that Novell's behind-the-scenes role has come to light.

It turns out that Novell strongly challenged SCO each step of the way, based on contractual rights Novell says it retained in its 1995 deal with the Santa Cruz Organization (now Tarantella), which subsequently sold certain Unix assets to Caldera, which is now the SCO Group. SCO denies Novell retained those rights. Nevertheless, its decision not to go forward with mailing invoices in the fall and not to sue SGI, or file copyright infringement claims against IBM may be at least in part influenced by Novell's claims.

Some now expect legal action between the two companies, if only because Novell's asserted rights could pull the rug out from under SCO's law suit against IBM and prevent any copyright infringement action against Linux end users, if Novell's rights prove solid.

Everything came to light this week when Novell announced it had completed its SuSE acquisition and said that it will offer enterprise SuSE customers indemnification, covering legal fees and damage awards up to $1.5 million or 125% of a customer's contract with Novell. It also put up on its web site its increasingly cold correspondence with SCO, going back to May of 2003, when SCO sent it a Letter to Linux Customers. There is a connection between the correspondence and the indemnification. The foundation of Novell's confidence in offering indemnification is found in the legal analysis it sets forth in the correspondence.

Jack Messman, CEO of Novell, says the company is in a unique position and is able to indemnify customers because it retained the copyright to Unix in that 1995 deal and also has a contractual right to license Unix to its customers. In October, when SCO said it was about to send invoices to Linux users, Novell reminded them of the "Technology License Agreement", which it says gives Novell the license to not only use the "licensed technology" but also to "authorize its customers to use, reproduce and modify" it and to sublicense and distribute same "in source and binary form". Further, Novell points to a section II.B., where restrictions on Novell cease to exist in the event of a change of control of SCO, which Novell says the agreements define as such an event as Santa Cruz selling the assets it got from Novell to Caldera.

If you were wondering why SCO didn't sue SGI, an October 7 letter and another letter, dated October 10, shed some light. Novell first directed SCO "to waive any purported right SCO may claim to terminate SGI's SVRX license" and to "waive any purported right SCO may claim to require SGI to treat SGI Code itself as subject to the confidentiality obligations or use restrictions of SGI's SVRX license", saying that Section 2.01 of the license specifically states that 'ATT-IS claims no ownership interest in any portion of such a modification or derivative work that is not part of a SOFTWARE PRODUCT.'" SCO failed to waive as directed, so on October 10, Novell waived all SCO's purported rights to terminate SGI's license.

Novell flexed its muscles, based on its interpretation of the 1995 Asset Purchase Agreement, the Technology License Agreement, and Amendment 2, to the APA. On that basis, Novell in its June 9, 2003 letter says SCO has no right to unilaterally terminate IBM's SVRX Licenses and that it is inappropriate for SCO to make such threats. Amendment No. X granted IBM the "irrevocable, fully paid-up, perpetual rights". It eventually waived SCO's "termination" of IBM's license.

Additionally, as the annoyance level rose on both sides, each claiming the other was harming its business, hints of legal action began to appear. Aspects to their contract that Novell had apparently let slide for years, such as their right to audit SCO's collection of royalties for Novell, are now scrupulously being required by Novell. They began an audit of SCO in August, something that had not happened since 1998, for example. Novell also demanded SCO supply copies of the source and binary code for all versions of UNIX and UnixWare under SCO's control.

More significantly, Novell demanded copies of the Microsoft and Sun licenses with SCO and asked SCO to explain why SCO thinks the Asset Purchase Agreement allows them to do this. Novell demanded it cease "all such negotiations and other communications with licensees concerning any such transaction without Novell's prior written consent and continued participation". After they address any "violation of the Asset Purchase Agreement", there will be the matter of "royalties and other amounts owed to Novell based on the above-mentioned license agreements" to discuss. Insofar as the demand is to licensees of SVRX, SCO has, it believes, no right to proceed without Novell's approval, reminding SCO of Novell's 95% interest in revenues from preexisting SVRX licenses.

In turn, SCO has put up some documents on its web site. In the letter of June 11, SCO writes that it "acquired all of Novell's right, title and interest: (a) to the AT&T Software and Sublicensing Agreements, including the AT&T/IBM Software Agreement, and (b) to all claims against any parties. SCO therefore acquired all right, title and interest to enforce the Software and Sublicensing Agreements against IBM, without answering to Novell."

Not so, Novell replies. Novell retained certain rights "critical to protecting the interests that Novell retained as part of the Asset Purchase Agreement (including its interests in royalty payments and the contractual commitments Novell made in return for royalty payments)." SCO acquired certain assets from Novell but acquired those assets subject to certain rights of Novell. "You can't have one without the other," Novell asserts. "We don't agree with your interpretation of our contracts," SCO writes back. It appears to them, it says, that Novell "is acting in concert with IBM to destroy the value of SCO UNIX and UnixWare intellectual property acquired from Novell in the Asset Purchase Agreement."

SCO's copyrights in Unix are now in dispute. Novell lists all of its registered copyrights on its web site. What we now learn is that they have been in dispute consistently from day one. In a letter dated August 4, Novell writes to Darl McBride, SCO CEO, that according to their agreements, copyrights were not to be transferred to Santa Cruz Operation unless SCO could demonstrate that such a right was required. They never did that and they don't need copyrights, Novell says, "in order to exercise the limited rights granted SCO" and so unless or until SCO demonstrates such a need, all copyrights remain with Novell. Of course, SCO disagrees with Novell on this utterly.

Finally, Novell on SCO's behalf "waives any purported right SCO may claim to require IBM to treat IBM Code, that is code developed by IBM, or licensed by IBM from a third party, which IBM incorporated in AIX but which itself does not contain proprietary UNIX code supplied by AT&T under the license agreements between AT&T and IBM, itself as subject to the confidentiality obligations or use restrictions of the Agreements."

SCO's position regarding Novell's waivers on behalf of SGI and IBM? In an October 13 letter: "Novell is without authority to make such a waiver and thus it is of no force and effect."

So now you know the rest of the Novell-SCO story.