Day 2 of the SCO v. Novell Trial - Opening argument - Updated Repeatedly - 1st Witness, Frankenberg


March 09 2010

Part 1

Before the opening of the session, SCO attorney Brent Hatch was pacing. It looked like he was perhaps rehearsing - I saw at one point a hand gesture like he was trying to make a point to the jury. As far as I could tell, he was the only one wearing a bow tie.

There seemed to be more nervous energy among the SCO lawyers than among the Novell people.

Just before the session began, the clerk (I think) asked if people were ready. Singer responded "I believe we're ready, your Honor", then realized his mistake. It was the clerk, not the judge.

Judge Stewart is bald, with glasses. My overall impression is that he is really solid. He seems to know what he has to think about and what he doesn't, what he needs more information to decide and what he already knows.

The session began with a discussion about one of the jurors. Novell noticed after jury selection that the juror had the last name of one of the corporate officers of SCO, and asked how to handle that. They discussed whether the name was mentioned, and whether it would be. Turns out the officer is on SCO's "may call to testify" list. They'll try to avoid mentioning said officer if they can, but they'll keep an eye on the situation.

Some discussion of the alternate juror instructions, but Hatch hadn't seen them yet. Then the jurors entered. I was rather surprised that all rose for the jurors, like they do for the judge. I saw that several of the jurors were taking paper notes.

Judge Stewart read a statement of uncontroverted facts, and spelled out what that meant for the jurors. The only thing that was interesting (to me) in that statement was that SCO acquired from Santa Cruz everything that Santa Cruz got from Novell.

Then Singer gave the first half of SCO's opening statement. He said that Unix is "like Windows, but for business computers".

He talked about what slander of title is, using the example of a house that you own but can't sell because someone else is claiming that they own the title.

He talked about copyrights, how that's the title that was slandered. The slander came "from the very company that sold it" (said with outrage).

He talked about the Novell press release, on the very day that SCO announced record earnings. Again, lots of outrage in his voice. He said that Messman (Novell CEO at the time) didn't bother to have anyone check their files. Eight days later Novell admitted that they were wrong. (Long pause to let this sink in.) Novell retracted their statement after SCO pointed out Amendment 2.

He gave some chronology: On May 28, 2003 Novell made their initial statement. The retraction was on June 6. On August 4, Novell renewed their statement. In October, Novell registered the copyrights. On December 22, they put up a web page declaring that they own the copyrights. In January 2004, Novell began their own program to license Linux. In March, they declared "we still own it" at a convention.

He said that executives on both sides agree that copyrights were sold. SCO has testimony from 10 witnesses. Frankenberg: the intent was to sell, even at the end of the transaction. Duff Thompson: the copyrights were sold. Ed Chatlos (the head negotiator). People from Santa Cruz: of course we got the copyrights. Doug Michaels: the only way to do a software business is to own the copyrights.

He raised the issue of malice. Novell knew better; they were the seller.

Here we saw the tree diagram again, with the point being that SCO owned the trunk. The origin of Unix was at AT&T in 1969. Novell bought it in 1993 for $300 million. Santa Cruz bought it in 1995 for $200 million (stock, and the revenue stream of SVRX licenses). Then Caldera bought it, and Caldera became SCO.

(Side note: Singer was pretty careful in his opening argument to distinguish Santa Cruz from SCO.)

Why did Novell slander SCO's title? Because of Linux. Linux started as a hobbyist tool. It's open source; "nobody can be completely sure where the code comes from". Starting around 2000, IBM inserted into Linux stuff that belonged to SCO. SCO sued, and started their licensing program (SCOsource). Novell stated that SCO doesn't have the copyrights and can't sue IBM.

Singer said that Novell was going to claim that SCO doesn't own the copyrights. He did a lot of stating what Novell was going to argue.

He said that the intent of the APA was to transfer the whole business. He read part of the APA. He read the excluded assets, and said that that was inconsistent with the intent. This was caught a year later, and the contract was clarified that the copyrights were not excluded. It was not caught before, because everyone assumed that they transferred. Everyone's actions reflected their understanding that the copyrights were sold. He points to the joint press release, which says that what was sold includes "... and UNIX intellectual property".

Singer said that the thing that made the issue apparent was the IBM license buy-out. He said that Novell backed down when the issue was revealed. It was fixed with Amendment #2. Novell agreed that the amendment was valid on June 6, 2003.

He asked how SCO was going to run the business without the copyrights. Davis will testify that it's not done that way.

Singer said that the only license in the APA is a license back to Novell.

Sabbath and Madsen will testify that the intent was to confirm sale of copyrights to Santa Cruz.

He asked how the parties conducted themselves (actions speak louder than words).

He waived a couple of thick books. "Here are the copyrights", he said. Novell registered in 2003, but SCO already had them. Novell worked with Santa Cruz to mark product with Santa Cruz copyrights. (I presume he's talking here about executables, not source code, so it's a red herring to me.)

He read from a letter from Novell to Prentice Hall that indicated that the ownership of the SVRX products transferred to Santa Cruz.

He raised the issue of good faith. How can it be done in good faith if you're the seller?

He said that Messman didn't check. He (Messman) made an intentional claim, he wasn't aware of Amendment #2 (as he said in his deposition). He made the claim (that SCO didn't own the copyrights) because of ties to IBM, Singer claimed. He retracted the retraction and continued the slander.

Novell falsely registered the copyrights.

Novell bought SuSE with $50 million that IBM invested in Novell while all this was going on.

Stone repeated the slander at the convention in 2004. (He played a video clip here.)

Novell did this to try to harm SCO. Maureen O'Gara said that Stone told her that Novell picked SCO's earnings announcement day in order to "upend the stock", and that Stone laughed about it.

December 22, 2003, when Novell repeated the charge, was also a SCO earnings announcement day.

Singer closes by saying that 19 to 45 percent of Linux users believed that there was enough to SCO's claim to consider buying SCOsource licenses. And that's probably enough for the first section...

Part 2

Hatch continued SCO's opening statement. He seemed much less polished than Singer.

Hatch said "actions cause effects". Novell seriously harmed SCO's business, especially SCOsource. Many of the largest companies considered buying SCOsource licenses and didn't because of Novell.

Hatch showed a chart of SCO's stock price on the day of Novell's announcement. He showed the drop in SCO's price. But, he said, Novell now claims this is a coincidence.

When seeing Amendment #2, Novell's first reaction was "we sold it" (the copyrights).

Then the stock gradually rose by the amount that it fell. Then, on December 22nd, Novell talked again about SCO not owning the copyrights, and the stock trended down. The market "got it" (understood Novell's statement).

Earnings announcement days for public corporations are known in advance. Novell talked on those days. That's malicious.

After Novell talked, customers turned down deal after deal. Morgan Stanley wouldn't meet with SCO until SCO proved it. Novell's a substantial factor in the deals disappearing.

Right about here, Hatch got called for stepping out of the bounds of an opening statement. Stewart agreed. This seemed to fluster Hatch for a few moments.

Hatch highlighted a deal with HP for tens of millions of dollars. It fell through because of Novell.

SCO just wants to be made whole.

Pisano and Botosan will testify about the damages. Their estimates are conservative calculations. Their numbers are large but fair.

End of SCO's opening statement.

Sterling Brennan gave all of Novell's opening statement. He said there is no slander because:

- Novell owns the copyrights,
- it's protected free speech, and
- Novell's statements were in response to SCO's (public) statements and threats.
Brennan then spent some time giving background on Novell and SCO. He also defined and/or described copyright, OS, SVRX, license, royalty, Netware, Unixware (a joint venture between Novell and AT&T), APA, and SCOsource. He said that SCOsource was a complete turnaround on SCO's part. He came back to this later.

He said, "Don't judge until you hear both sides." Like Paul Harvey's old radio program, "The rest of the story".

He said the main themes of the trial would be:

- That Novell had a free speech right to say what they said.
- That words really matter. The words in the APA, drafted by the lawyers, those words really matter. It's not just a matter of what management said or thought.
- The Linux operating system, which is open source. He gave Wikipedia as an example of open source, which it isn't exactly, but it gave the jurors a flavor of the way it works.
Brennan said that Novell acquired all the rights in 1993. It was a merger, not an APA. The transfer to Santa Cruz, in contrast, was an APA. They bought part, not everything. They took 3 months to look at the APA, and did Amendment #1 to fix the errors and issues that they found.

Then, in 2002, Caldera hired McBride. Caldera was not doing well at the time. So they changed direction. They turned on their previous customers to try to extract license fees. This was SCOsource, and letters were sent in May 2003.

Brennan said that there were four components to the Unix business:

- Copyrights
- License revenue
- Future development rights
That's all he said. There may have been a fourth point on the slides that the jury saw, but we could barely see them.

Novell bought it all in 1993 for $330 million. It tried to sell it all in 1995, and it hoped for at least $330 million. Santa Cruz didn't have that.

Novell sold the future development rights, and the revenue from that. They kept the copyrights and the revenue from that. Novell got somewhere between $39 million and $73 million in stock (depending on which day's stock price you take).

Since Novell retained the copyrights, revenue from copyright is NOT part of what SCO paid.

Novell got paid license fees from SVRX and UnixWare (if a threshold was exceded). SCO got license fees from UnixWare. Novell got license fees from SVRX, and SCO got 5% for collecting it.

Brennan talked about lawyers and executives. Lawyers know the details. The details exclude some assets, like the copyrights.

He started going through the APA in some detail. There are two schedules - the included assets and the excluded assets. The APA says what the business is - it's Unix and UnixWare. What's the sale? What's in schedule 1.1a, and what's not in schedule 1.1b.

He read from 1.1a, under the intellectual property section: "The trademarks Unix and UnixWare". That's the whole IP that transfers.

Then, from 1.1b (excluded assets): All copyrights excluded, all patents excluded, all trademarks excluded except Unix and UnixWare.

He read the part about SVRX license revenue going 100% to Novell, then 5% back to SCO.

He read section 4.16, which says that Novell can tell SCO what it can and can't do to SVRX licensees.

The *words* matter, not what the executives *thought*. He read the integration clause, which says that the APA is the whole agreement, and "supercedes any prior understanding" between the two parties.

The contract is this way because, first, Santa Cruz couldn't afford to buy the whole business, and second, because Novell was concerned about the financial viability of Santa Cruz. They wanted to not have their rights disappear into a bankruptcy black hole if Santa Cruz went under.

Brennan read from the minutes of the Novell board of director's meeting the day before the APA was signed. "Novell will retain all patents, copyrights, and trademarks except the trademarks Unix and UnixWare." Messman was present at that meeting, and Frankenberg chaired it.

There were adjustments to the APA. Amendment #1 made no change with respect to copyright transfer. Also, the APA did not itself transfer anything; a bill of sale did that. The bill of sale says nothing about copyrights. It says look to the APA for what transferred.

Santa Cruz had good lawyers on this, too. Nobody pulled the wool over their eyes.

Later, Santa Cruz wanted the copyrights and raised the issue with Novell. Amadia asked Tor Braham, "Did they transfer?" Braham said no.

Amendment #2 didn't transfer them either. It says "required for SCO to exercise its rights". SCO ran their business without the copyrights from 1995 to 2003, when McBride switched strategies.

Santa Cruz sold the business to Caldera. What did Caldera get? That document said: "except that Signer may not be able to establish chain of title to Novell".

McBride asked Chris Stone (Novell) for the copyrights.

McBride's letter caused a backlash against SCO. SCO never demonstrated any infringing code.

On the day of Novell's statement, SCO stock dropped before Novell's statement, and dropped about the same amount again after Novell's statement. Then, in the next six months, it rose a lot.

Slander of title fails because:

- Novell retained the copyrights.
- Novell had a good faith belief that they retained the copyrights, based on the plain text of the APA.
- Novell's statement is covered by the 1st amendment.

Here ended Novell's opening statement. Court adjourned for a 15-minute break, and I will also adjourn part 2 of my report.

Part 3

After the break, SCO called its first witness: Robert J. Frankenberg, former CEO of Novell.

Singer on direct:

There was a bit about Frankenberg's background.

Was it Novell's intent to sell all the Unix business? Yes. Copyrights too? Yes.

Frankenberg said that UnixWare was "the current version of Unix".

Duff Thompson, Ed Chatlos, and David Bradford had conversations with the principals of Santa Cruz. Santa Cruz was a good business, but not large or with a lot of cash behind them.

Frankenberg said that nobody ever told him that the copyrights were being retained.

Schedule 1.1a (included assets) includes "source code". Was that to Unix and UnixWare? Yes. Frankenberg understood that to mean that the source code was being sold. The copyrights? Yes. The trademarks as *additional* IP? Yes.

Frankenberg never instructed or authorized copyrights being excluded.

Is the copyright exclusion in 1.1b consistent with Frankenberg's understanding of the deal? No.

If the board minutes said no copyrights transferred, was that consistent with Frankenberg's understanding? No.

What about APA Amendment #2? At this point Novell raises a motion in limine objection, and wins. (The issue is that Frankenberg was not at Novell at the time of Amendment #2, and therefore is not competent to testify about it.)

This was interesting, because Brennan objected, Stewart overruled the objection, and Brennan immediately re-stated the objection more precisely and/or with more detail. Stewart then agreed with Brennan, rather than sticking to his initial response.

Singer continues on direct:

The employees went to Santa Cruz? Not all; some were laid off.

The license back to Novell was entered at the same time as the APA closed. If Novell kept the copyrights, would Novell need the license? No.

Frankenberg said that royalties were part of the payment terms. Section 1 covered the stock; section 2 covered royalties. Could Novell receive the royalties after selling the copyrights? Yes.

Section 4.16 was to make sure that customers could do royalty buyouts. It was never intended to block SCO asserting IP rights.

The joint press release said that Santa Cruz was acquiring the business IP. Did that include the copyrights? Yes.

Sterling Brennan on cross:

What is the purpose of the board of directors?

To oversee the operations of the company.

The ultimate APA decision was the board of directors'.

Brennan moved on to the minutes of the September 18, 1995 board of directors' meeting. Who was present? Among others, David Bradford (Novell general counsel) and Larry Sonsini (of Wilson Sonsini, outside counsel for the APA).

Frankenberg said that he would not have presented any inaccurate information in a board meeting, would have prevented any inaccurate information from being presented that he knew about, and that he assumed that others would do the same.

Brennan focused on three paragraphs from the BOD minutes that were a "resolution" about the APA. Paragraph one said that the directors received a packet of information about the deal. Paragraph two said that this was the sale of "a portion of" the Unix business. Frankenberg said that it excluded Tuxedo, which Novell got from AT&T as part of the Unix purchase. He admitted that no patents transferred to Santa Cruz.

At this point the jury was dismissed for a motion in limine battle over the question of Frankenberg's reading of the plain meaning of the words of schedule 1.1b of the APA. SCO's point was that Amendment #2 had superceeded those words, and Frankenberg wasn't there for Amendment #2. But Novell won, because SCO had questioned Frankenberg about the wording in 1.1b.

Then there was another 15-minute break.

The trial resumed, but there is a ten-minute gap in my notes here, because my pen died, and I had to run two blocks up the street to buy a new pen. I hope others' notes can fill in the gap here. (Memo to future attendees: Take a spare pen. And take LOTS of paper - I took maybe 15 pages of notes.)

Anyway, back at the courtroom, it's still Brennan on cross of Frankenberg:

Bradford and Sonsini reviewed the APA. Frankenberg said that Novell got royalties even on new SVRX licenses.

The BOD minutes contain a motion to approve the APA. It passed unanimously. The minutes said that Novell retained the copyrights. Frankenberg admits that that's what the minutes say. He admits that the minutes are accurate.

Frankenberg did not read all of the APA when he signed it. He relied on the lawyers and his negotiating team.

Novell and Santa Cruz had nearly three months to review the APA. The result was Amendment #1, which didn't say anything about copyrights. It was signed by Duff Thompson, and presumably reviewed by him.

The APA said that it was selling "certain assets" which comprised the business. Frankenberg admits that he understood that the assets being sold were listed in schedule 1.1a, and the exclusions were listed in 1.1b.

Brennan read from section 1.2a that full payment consisted of Santa Cruz assuming certain liabilities, plus the stock. Frankenberg said that it was the royalties, too. Brennan then beat him over the head with the wording of the APA (figuratively speaking). The royalties aren't part of the payment. Frankenberg replied that Novell viewed it as part of the payment.

Brennan turned to section 9.5, which said that this was the entire agreement. Frankenberg pointed out that it was amended. Brennan replied that expectations, prior understandings, hopes and wishes weren't part of the agreement. Singer objected twice. The first was overruled. The second was withdrawn because, the judge said, Brennan had objected when Singer went there, and if Stewart allowed Brennan to continue, he was going to allow Singer to return to it on redirect. Brennan said he didn't want an answer that bad.

Then they turned to Frankenberg's deposition. Stewart interpolated an explanation of depositions for the jury. But Brennan didn't ask anything specific about the deposition; he asked about Frankenberg meeting with Duff Thompson (with Novell's permission) before he (Frankenberg) was deposed. Brennan points out that Thompson became SCO's head of litigation (or something similar) and, in fact, it was Thompson who authorized the SCO v. Novell lawsuit. But Novell's counsel didn't object to Frankenberg meeting Thompson before being deposed.

Singer on redirect of Frankenberg:

Frankenberg said that Novell didn't intend for the Unix/UnixWare copyrights not to go to Santa Cruz. They were taking care not to transfer the NetWare copyrights. The lawyers were acting outside his authority in creating a document that withheld the copyrights. Nobody else on the board had the authority to negotiate a different deal.

Were the BOD resolutions a formality? Frankenberg won't go that far.

Frankenberg said that payment was the stock, plus two royalty streams. But the UnixWare stream was conditional. He doesn't know if Novell ever got any money from it. Novell estimated the value of the deal as greater than $100 million.

Frankenberg said that he had no knowledge of anybody saying "We're going to change the deal and keep the copyrights".

Brennan on re-cross:

The point of the BOD minutes is to create an official record of what was done. Resolutions were not only done in advance, they were available for the board to read before the meeting. They were not a surprise to the board.

Frankenberg admits that the minutes are consistent with the APA with respect to the copyright not transferring.

Frankenberg was dismissed at this point. Neither side is going to recall him for more questions.

The jury was dismissed for the day at this point.

Singer requested that both sides use the wording "the original language" or "the prior language" when talking about 1.1b, to avoid confusing the jury, because due to Amendment #2, that language no longer exists. I didn't note the response, but I seem to recall that Stewart agreed.

Second, Singer said that relying on section 9.5 (that the APA is the entire agreement) is against the 10th Circuit appeals decision, which is why parol evidence is in this case. Stewart said that he didn't think any harm had been done with one witness, but that 9.5 should not be stressed unduly going forward.

At that point, court was dismissed for the day.

Some overall impressions:

Novell seemed less tense than SCO. I saw Brennan kind of smile a couple of times, and I never saw a smile from SCO's legal team. (Of course, their backs were to me and Novell's team had their side to me, so that may not mean much.)

Singer was "pounding on the table", pushing emotional buttons; Brennan was pounding on the words of the document. (Singer was also pushing on "intent", whereas Brennan kept pointing to the words of the document.) This "high-level executive intent" seems to be all that SCO actually has as to whether the copyrights actually transferred.

As I was walking away from the courthouse, I wound up walking quite near a couple of men in suits who were discussing the case. One seemed to be saying that he thought that Frankenberg was a case of "the executives get a few bullet points, not the details". I said that it sounded like they were discussing the same trial I just came out of, and that as I was reporting on the case for a blog, I would be interested in their thoughts and who they were. They said that what they thought about the case didn't actually matter (fair enough; what the jury thinks matters, not what bystanders think). But they said that they were financial consultants to the debtor.

UTA's Trax is a great way to get to the courthouse. The courthouse stop is only a block from the Federal courthouse (not to be confused with the state courthouse, which is also a block away). Round trip fare costs less than parking downtown (at least, I believe so - I didn't actually price the parking).

06:14 PM EST

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