SCO to Sue Corporate Linux Users

By Matthew Hicks  |  Posted 2003-11-18

SCO to Sue Corporate Linux Users

The SCO Group Inc. on Tuesday ratcheted up its attacks against the Linux community, the vendors who sell the software and those corporations that use it.

SCO CEO Darl McBride told in an interview ahead of a keynote address scheduled for Tuesday at the Enterprise IT Week at Computer Digital Expo show in Las Vegas, that his company plans to file at least one lawsuit against a large user of Linux within the next 90 days as part of its effort to expand the scope of its legal battle with the open-source operating system.

McBride said that 1,500 of the worlds largest enterprises had received warnings letters about their Linux use from the SCO Group in May. His message today was that they now should be on notice about possible legal action.

This latest move follows McBrides warnings in August that the company had compiled a list of all the large companies with numerous servers running Linux and warned that it would not hesitate to drag them into court if they refused to pay for UnixWare licenses.

McBride told eWeek at that time that there were some 2.5 million servers running Linux and that SCO had "identified by name those companies running many of them. "We are in the process of contacting them about coming into compliance and taking a UnixWare license from us. If they refuse to do so, we will sue them directly and see them in court," he said.

On Tuesday McBride said that SCO and its attorneys, led by David Boies, managing partner of Boies, Schiller & Flexner LLP of Armonk, N.Y., will be basing at least part of any case on provisions of the Digital Millennium Copyright Act that covers software copyrights.

"Now were going to the other side of the playing field and opening it up the part that has to do with copyright inside of Linux," McBride said. "Were not going to go out and sue a thousand companies on day one. Well start off, well get a domino and well go from there."

SCO created a short list of targets and Boise and the legal team will decide the details of the lawsuits. McBride said that among the code in dispute is Unix System V code, as well as copyrighted code included in the 1994 settlement between Unix Systems Laboratories Inc. and Berkeley Software Design Inc., which SCO acquired in 1995 from Novell Inc. of Provo, Utah.

The copyright claims are different from SCO Groups legal claims in its high-profile lawsuit against IBM. There the company alleges that IBM violated contractual terms of SCOs Unix license and contributed derivative works to the open source community and Linux.

On another legal issue, McBride said that SCO Group is considering possible legal action against Novell once it completes its recently announced acquisition of SuSE Linux. SCO claims that it holds a non-compete agreement with Novell from the time it purchased the Unix System V code from Novell, which had then denied that claim.

Because Linux is a variant of Unix, McBride said he would consider Novell to be competing once it ships a Linux version from its SuSE acquisition. "Our core product is Unix; Linux is a knock off of Unix," McBride said. "By any stretch of the imagination this would be a competitive offering to our core product."

McBride also announced on Tuesday that his firm had expanded the scope of its agreement with Boies, Schiller & Flexner LLP away from just representing it on the contract issues SCO has with IBM to now having the law firm support SCO on is-sues relating to alleged copyrighted Unix code incorporated into Linux without authorization or appro-priate copyright notices.

As part of the new and expanded agreement, SCO will pay Boies, Schiller & Flexner LLP and the other law firms representing it, $1 million in cash out of the $50 million the company recently raised through a private placement of Series A Convertible Preferred Stock. SCO will also issue 400,000 shares of SCOs common stock.

David Boies, the managing partner, said that his law firm "looks forward to continuing our work with SCO to protect the companys important and valuable intellectual property rights."

McBride said that over the past seven months a number of substantial software code issues had been discovered that pertained to its Unix intellectual property and Linux. "By far the most important asset of this company is our ownership of the Unix operating system and today we are investing in the protection and future of Unix.

Next page: The Lawsuit and SCOs Financial Picture.

The Lawsuit and SCOs

Financial Picture">

"Boies, Schiller & Flexner is now moving beyond the contract issues we have with IBM. The firm will be enforcing and defending SCOs intellectual property rights, including the protection of our Unix System V source code and our copyrights that were reaffirmed as a result of the BSDI settlement agreement," McBride said.

As a result of the share issuance, SCO anticipates a charge to earnings of some $8,96 million in its fourth quarter that ended October 31, 2003. This $8,96 million charge to earnings is comprised of non-cash expense of $7,96 million related to the issuance of the 400,000 shares of common stock and the $1 million cash expense.

Additionally, SCO anticipates recording a non-cash charge for the beneficial conversion feature related to the issuance of the Series A Convertible Preferred Stock of approximately $8,74 million in the fourth quarter that ended October 31, 2003.

The beneficial conversion feature represents the intrinsic value of the difference in the Series A conversion price of $16.93 per share and the closing market price of SCOs common stock on October 16, 2003 of $19.89 per share. In addition to the stated dividend rate, dividends on the Series A Convertible Preferred Stock will accrue on the difference between the stated dividend rate and 12 percent per annum. These dividends will reduce earnings available to common stockholders if or when incurred," McBride said.

In line with its previous guidance, SCO said it now expected revenue for its fourth quarter ended October 31, 2003 to be between $22 million and $25 million.

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