SCO in chapter 11
SCO Group (SCOX) has just filed for voluntary reorganization under Chapter 11 of the bankruptcy laws while it “addresses potential financial and legal challenges,” according to a company press release (available here). The release states that the company “intends to maintain all normal business operations throughout the bankruptcy proceedings.”
The legal challenges faced by the company obviously include the ones discussed in the previous post, here.
By statute, a bankruptcy filing ordinarily stays all pending litigation against the filer, raising questions about whether SCO’s trial against Novell (NOVL), scheduled to start Monday(September 17), will proceed as planned. I am trying to find out now whether SCO will ask to lift that stay to allow the Novell case to proceed as quickly as possible — which might seem to be in its best interests, since it needs to appeal as quickly as possible — or whether its attorneys and board have some other strategy in mind now. [Update: SCO is not commenting today beyond the press release.]
The bankruptcy petition has been filed in the U.S. bankruptcy court for the district of Delaware, and has been assigned to Bankrupcy Judge Kevin Gross. (Docket number for the petition is 07-11337-KG.)
Here’s the list of SCO Operations’s 20 largest unsecured creditors. The largest are Amici LLC, an online document management company, which is owed about $500,000, and the Boies Schiller & Flexner firm, which is owed a little more than $287,000 in “trade debt,” which probably means reimbursement for out-of-pocket expenses. (The Boies firm has already been paid long ago all the attorneys fees that it is entitled to under its retainer agreement through appeal; any additional attorneys fees it will get are to come in the form of a contingency fee in the event that SCO ultimately recovers a judgment from someone–an eventuality that is beginning to seem remote.)
Fifth and sixth on the list are Microsoft (MSFT) and Sun Microsystems (JAVA), owed about $125,000 and $50,000 respectively.
UPDATE (Sept 15, 7:30 am): The automatic stay provision of the bankruptcy code has, in fact, acted to postpone indefinitely Monday’s trial.
Neither Novell nor SCO would comment on what to expect. On sleeping on it, I now think that SCO must hope somehow to wrench the case out of Kimball’s hands and place into those of the Delaware bankruptcy judge and of the U.S. District Judge in Delaware who will oversee that action. Such an eventuality seems like an extremely long shot; the more likely eventuality is that the bankruptcy judge will eventually send the case back to Kimball for trial.
In that trial Judge Kimball intended to decide, among other things, how much money SCO must return to Novell from its 2003 licensing agreements with Sun Microsystems (for about $10 million) and Microsoft (for about $26.75 million). Novell argues that these licenses were, in whole or in part, royalties on the Unix System V releases, to which Novell retained all royalty rights. Novell contends that SCO was not even empowered to enter into those licensing agreements without its permission and, accordingly, should turn over the entire sum.
SCO claims that the licenses were based on its newer UnixWare products, not on the older Unix System V releases, and that Novell’s rights to a share of the UnixWare royalty stream expired in 2002 under the terms of the 1995 Asset Purchase Agreement between Novell and SCO’s predecessor, Santa Cruz. SCO also claims that any System V rights involved were “incidental” to the UnixWare rights, and were to be treated as part of the UnixWare licenses. Judge Kimball appears to have already rejected SCO’s arguments, however, in his August 10 ruling on summary judgment.
CORRECTION: An earlier version of this post incorrectly described the purpose of the Microsoft and Sun licenses, whose terms remain confidential. SCO has described both agreements as part of its SCOsource campaign, whose purpose was to seek licenses from the Linux community for code SCO claimed to own. (Novell also seeks recovery of all SCOsource royalties SCO may have collected.) SCO and Sun have each said publicly that the main specific purpose of Sun’s license was to allow Sun to open-source its Solaris operating system.
QUOTE
SCO claims that the licenses were based on its newer UnixWare products, not on the older Unix System V releases, and that Novell’s rights to a share of the UnixWare royalty stream expired in 2002 under the terms of the 1995 Asset Purchase Agreement between Novell and SCO’s predecessor, Santa Cruz.
/QUOTE
…so where exactly within the APA did these royalties cease? (page/line reference would be nice)
Roger, check out what Groklaw has to say about what might be SCO’s motives: http://www.groklaw.net/article.php?story=2007091616513966. This may legitimately let the shadows in the background come out of hiding.
Todd, the company we call SCO today, the SCO of these lawsuits, is not the same SCO that was in business in the 80s.
The SCO of today (a Utah corporation) is actually Caldera, a Linux distributor, who helped found UnitedLinux with Suse and others, to compete against Red Hat. When they were unsuccessful, Caldera bought certain limited rights to the stewardship of Unix, and the SCO trademark, from “old SCO” (a california company) who wanted to get out of the unix business. Caldera later changed their name to “SCO” to confuse people.
So it’s possible that the SCO of yesteryear was a decent heard-working company, but the SCO of today, the SCO of these lawsuits, probably has never made an honest dime except through threats of litigation.
All of this can be verified in excruciating detail on groklaw.
“… in which those companies paid SCO for the right to use Linux on the theory that Linux incorporated code to which SCO held copyrights.”
They paid for the right to use LINUX? Okay sir, step away from the crackpipe…
If that was what this suit is about, it would be brilliant from the point of view of SCO’s antagonists (in that SCO would be utterly screwed to hell and back), but it’s entirely and utterly wrong.
The fight centres over what proportion of these licenses were for the Unix code that Novell owned and receives royalties for, and what proportion was for the Unixware bits that SCO added after the APA was signed. The parts of the case involving ‘SCO Intellectual Property Compliance Licenses for Linux’ will be settled in IBM’s counterclaims, probably sometime next year.
With resepect to these deals Sun was changing it’s Solaris license so it needed the blessing of whoever owned the bits of Unix in Solaris. And Microsoft just wanted excuses to throw money at SCO either directly (like this) or via a proxy (Baystar). Neither of them actually needed to pay for the right to use Linux, though both were obviously happy to give Linux a sly kick in the face when the occasion arose…
It’s not the same company, Todd. The Santa Cruz Operation was for many years the leading Unix/Xenix vendor for PCs. Prior to the rise of Windows, many turnkey system integrators used Unix and Xenix to deliver vertical applications to small businesses. As its business declined in the 1990s, it developed a product called Tarantella, and spun off the Unix business (which now included the Unix System V code bought/licensed - take your choice - from Novell). That business, along with the SCO name (the original SCO renamed itself Tarantella) was acquired by Caldera, an early Linux company. Caldera took the SCO name and called itself the SCO Group. Caldera also split itself into two companies at this time, but I’m working from memory and don’t remember what happened to the other half.
Ironically, Ray Noorda, founder of Novell, was one of the original investors in Caldera. And the original Santa Cruz Operation was, in fact, headquartered in Santa Cruz, not Utah.
Todd, you’re talking about old-SCO which is now Tarantella. The SCO Group aka new-SCO is really Caldera, a failed Linux company that’s never really made any money except when they got paid by Sun and Microsoft to engage in the now failed linux litigation and FUD-scam, money that they took under the guise of “IP licenses”, which of course they now owe Novell.The SCO Group renamed themselves from Caldera to confuse people into believing they actually have a pedigree and to confuse matters around their “owning unix” lies. If you read their legal briefs you’ll see that they like to pretend they’re old-SCO there too.They’re going Chapter 11 because they needed to stay the litigation so that the judge couldn’t rule on how much of TSGs coffers really belong to Novell, instead the officers of TSG are out the pick up their last paychecks and make sure that friends and family, which are are listed as creditors gets paid off. Them and companies owned by TSGs lawyers, a neat way to siphon off the last bit of money out of the shell of a company they’ve jointly destroyed.
Even with the litigation stayed though, I hope that TSG doesn’t get away with their plan, because they were actually warned about doing something like this after they swore up and down in court, when Novell asked for a protective trust to be set up, that they weren’t about to go under and Novell shouldn’t worry about not getting their dues.Well, Novells plea for a trust was denied on the assurances by Darl and the rest of the gang, and now the judge get to ponder then why are they all of a sudden in such dire straits…
chapter 11 is illegal by the laws of oz and usa or it needs to be dismantled its a corrupt law. for the rich
mike
A long time ago, back in the mid-80’s, SCO was a legitimate, hard-working organization with a potentially very bright future. It is sad to look now upon how far the company that was has fallen but it’s unfair to say that SCO “never honestly made a dime” — although it looks like the last time it *did* honestly make a dime was about the mid-80’s.
Now that it is clear that Darl McBride was incompetant, and quite frankly criminal in is pursuit of billions, a motion should be filed with the courts for a Case Trustee.
In addition, every creditor which has valid claim, should file an Adversary Complaint for what could only be referred to as “debtor knowing and fraudulently made a false oath or account” in regards to owning the UNIX copyright. SCO not only took its shareholder for a ride, but used the finanical resources of others to wage an ill-fated war against Novell.
SCO’s Board of Directors and the executive officer, including the IP attorney and general cousel should be help personally accountable to every creditor and shareholder.
More importantly, the IP attorny should be disbarred for knowing that the lawsuit was either frivilous or at least knowing that this case against Novell was a waste of time and money.
This whole legal battle has been a cluster %@#& from the very beginning. Starting with the request that Novell transfer the copyright, which basically said, ‘we know we don’t own it, but we hope you’ll be nice and give it too us.” Ending with not properly researching Novell’s copyright claims.
This will certainly go down in IT history as the most fumbled, scrambled, and jacked-up company that has ever existed on the face of the planet.
I don’t think that SCO has ever honestly made a dime! The only money they have ever had is by sueing another company. Weird business model! We will sue every giant company there is!
What’s REALLY bad is that this vermin can hide under a rock after starting all this mess to begin with. They should not be allowed to seek protection from the courts from a mess which they started - they should have to deal with these cases since not doing so adversely impacts the rights of those which SCO …. SCO decided to sue. Why should THEY have to wait because SCO realized that they have no chance of winning their case? Why allow them to ‘reorganize’ and hide sell move assets which they would have likely lost had they gone to trial?
This stinks!
Gee whiz, this is really too bad. There simply is no justice in this world. You can’t even run a scam anymore without getting called on it.
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This blog is about legal issues that matter to business people, and it's geared for nonlawyers and lawyers alike. Roger Parloff is Fortune magazine's senior editor (legal affairs). He practiced law for five years in Manhattan before becoming a full-time journalist.
To M. Echer of Vancouver, BC.
the termination provision regarding unixware royalties is in schedule 1.2(b), and is clause (c):
(c) Termination of Royalty Obligations. The royalty obligations set forth in subsection (b) above will terminate (f) after Buyer shall have made aggregate cumulative payments to Seller equal to such amount which has a total net present value of $84,000,000 (determined as of the date of Closing) or (ii) December 31, 2002, whichever is sooner. A discount rate of 15% will be used to calculate the net present value.
you can find the provision on groklaw’s schedules page, although they currently seem to have it mislabeled as Schedule 2.2 (b).