03/07/2011 - 1252 - Memorandum Opinion Re Sale Motion (related document(s) 1141 ) (MDW) (Entered: 03/07/2011)

03/07/2011 - 1253 - Order (WITH REVISIONS) (A) Approving the Sale Of Substantially All Of The Debtors Software Product Business Assets Free And Clear Of All Liens, Claims, Interests And Encumbrances, (B) Approving Assumption, Assignment, And Sale Of Certain Executory Contracts And Unexpired Leases, and (C) Granting Related Relief (related document(s) 1141 ) Order Signed on 3/7/2011. (MDW) (Entered: 03/07/2011)

I expect Novell will immediately appeal. You will notice that on page 11 of the Order there is a 14-day waiting period, so it can do so, something Novell requested at the hearing. When the judge said he'd have to make sure Novell had that time, I knew how he would rule.

Interestingly, in SCO's current appeal of its loss to Novell in the Utah trial, it argues that Novell must hand over the copyrights to SCO under the APA, which would make the APA an executory contract with a remaining obligation on Novell's part, something Judge Gross has just decided Novell doesn't have any of. So I take this new argument by SCO in bankruptcy as an indication it knows it can't prevail in the appeal. Either that or they boldly tell two different courts contradictory things. It wouldn't be the first time.

I know also that some of you have lost all respect for the US legal system, as a result of watching the shenanigans in bankruptcy court. And today's ruling will not restore your faith, for sure. All I can say is bankruptcy court is a cesspool. But wait for the appeal to be decided. Frankly, if this is not overturned on appeal, I'll be surprised. Everything has gone the way it should outside of bankruptcy court, has it not? So stay tuned. I confess I have lost respect for Blank Rome for the latest strategy. The judge might not know any better, but they have to, I think.

The order in effect allows the new owners to sell UNIX SYSV without having to pay Novell anything, because Judge Gross doesn't realize that it is a requirement under the APA, having believed William Broderick's statements in his Declaration [PDF] and at the hearing, I guess. SCO thus skips out on having to pay the $3 million it owes to Novell, since the judge apparently thinks that isn't a material breach or obligation. And unXis gets the benefits of the business, but not the liabilities. Nice cynical work. Gross also believed that sublicensing was the normal course for Novell and SCO since 1995, and that is laughable. It's all laughable. Unless you are throwing up by now. Broderick attached ten exhibits to his Declaration, supposedly showing a course of sublicensing, but except for the unXis deal, none of them were like the unXis sublicensing deal. [See update below.]

Judge Gross opens his Memorandum by stating that he's in too much of a rush to tell the entire history of the case. Perhaps he's embarrassed. So let me fill in. When the bankruptcy began, SCO had enough to pay all its creditors. Now it is insolvent, which it was not when it entered Chapter 11 bankruptcy protection, and it will now cease to exist, leaving all the creditors with their empty hands out. Where did the millions go? To the lawyers and accountants and professional advisers, whose conduct is impressively cynical, I must say. Even in the sale, a fair chunk of the deal goes to them. Here's what SCO Operations and SCO Group had [PDFs] in October of 2007, right after it applied for bankruptcy protection.

But truthfully, do you care if SCO behaves badly or if unXis does? What is the difference? Novell cares, of course. It's out millions, thanks to Judge Gross's handling of this case.

The judge also relies on a case, Exide, which you can read about in this Groklaw article, at the end. It was a case about trademarks, not copyrights, and that makes a significant difference in bankruptcy law, although not to Judge Gross. It also was a case that was decided based on New York law. The APA is California-based, with its own rules. So, in short, I think the judge erred.

Here's an analysis of Exide by a couple of attorneys at Skadden Arps, Mark S. Chehi and Robert A. Weber, "Third Circuit Does Not Permit Debtor to Reject Non-Executory Trademark License Agreement":

The Bankruptcy Code generally protects licensees of intellectual property by restricting the ability of debtor licensors to “reject” licenses of intellectual property they have granted to third party licensees. See 11 U.S.C. § 365(n). Importantly, however, trademarks are excluded from the Bankruptcy Code’s definition of “intellectual property.” Accordingly, bankruptcy courts have held that, because trademarks are not intellectual property, Chapter 11 debtors may assume or reject trademark license agreements like any other executory contract.2 In Chapter 11 cases, debtor companies that have licensed trademarks to others may seek to reject such trademark licenses and extinguish licensee rights by using a debtor’s broad power to reject executory contracts.3

A recent Third Circuit Court of Appeals decision, Exide Technologies v. EnerSys Delaware Inc., ___ F.3d ___, 2010 WL 2163190, Case No. 08-1872 (3d Cir. June 1, 2010), focuses on a critical limitation on a debtor’s right to reject a trademark license — namely, that the license arrangement must be “executory” in order to be rejected. If a non-debtor licensee has substantially performed its material obligations under a license agreement, the license may not be executory. If not executory, the license cannot be rejected by a Chapter 11 debtor.

Quoting its prior decisions, the Third Circuit panel instructed that an executory contract is a contract under which, as of the commencement of a Chapter 11 case, “the obligation of both the bankrupt and the other party to the contract are so far underperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other.” Thus, “unless both parties have unperformed obligations that would constitute a material breach if not performed, the contract is not executory” under Section 365 of the Bankruptcy Code. “[T]he time for testing whether there are material unperformed obligations on both sides is when the bankruptcy petition is filed,” and the inquiry requires consideration of “contract principles under relevant nonbankruptcy law.”

In vacating the District Court that affirmed the Bankruptcy Court order authorizing Exide’s rejection of the trademark license to EnerSys, the Third Circuit applied New York8 contract law, including its “substantial performance” doctrine, to determine whether a breach by EnerSys of its remaining obligations under the license would constitute a material breach that would excuse Exide from further performance of its obligations.9 The Third Circuit observed that under New York law, when a breaching party “has substantially performed” before breaching, “the other party’s performance is not excused.” Citing Hadden v. Consolidated Edison Co., 312 N.E.2d 445 (N.Y. 1974), the Third Circuit recognized and applied the multi-factor test in New York for determining when a party has rendered substantial performance. That test considers “the ratio of the performance already rendered to that unperformed, the quantitative character of the default, the degree to which the purpose of the contract has been frustrated, the willfulness of the default, and the extent to which the aggrieved party has already received the substantial benefit of the promised performance.”

The Third Circuit decided that the Bankruptcy Court had “failed to properly measure whether either party had substantially performed” under New York law. Based upon the record on appeal, the appellate panel determined that “EnerSys has substantially performed its obligations” under the 1991 trademark license agreement because, among other things, EnerSys had paid the $135 million purchase price in the 1991 transaction, had operated and used the licensed “Exide” mark for 10 years, and had assumed certain Exide liabilities as part of the 1991 transaction. The Third Circuit rejected Exide’s argument that EnerSys’ ongoing, unperformed obligations under the trademark license (including a limitation on use of the Exide mark to industrial batteries, a quality control requirement, and certain indemnification and further assurances obligations) outweighed the importance of EnerSys’ performance prior to the bankruptcy petition date. Accordingly, the Third Circuit concluded that the license agreement was not executory and could not be rejected by Exide as a Chapter 11 debtor-in-possession.

9.8 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof.

(b) Royalties. Buyer agrees to collect and pass through to Seller one hundred percent (100%) of the SVRX Royalties as defined and described in Section 4.16 hereof. Seller agrees to pay Buyer an administrative fee of five percent (5%) of the SVRX Royalties. Seller and Buyer further acknowledge and agree that Seller is retaining all rights to the SVRX Royalties notwithstanding the transfer of the SVRX Licenses to Buyer pursuant hereto, and that Buyer only has legal title and not an equitable interest in such royalties within the meaning of Section 541(d) of the Bankruptcy Code. For purposes of administering the collection of SVRX Royalties, the Parties acknowledge that the royalties shall continue to be recognized as royalties by Seller on an ongoing basis and the parties shall take such commercially reasonable steps as may be necessary to effectuate the foregoing for financial accounting and tax purposes. In addition, Buyer agrees to make payment to Seller of additional royalties retained by Seller in respect of the transfer of UnixWare and on account of Buyer's future sale of UnixWare products. The amounts and timing of additional royalties to be paid in connection with Buyer's sale of the UnixWare products are identified in detail on Schedule 1.2(b) hereto. Seller shall be entitled to conduct periodic audits of Buyer concerning all royalties and payments due to Seller hereunder or under the SVRX Licenses, provided that Seller shall conduct such audits after reasonable notice to Buyer and during normal business hours and shall not be entitled to more than two (2) such audits per year. The cost of any such audit shall be borne by Seller, unless such audit reveals a payment shortfall in excess of 5% of amounts due hereunder in which case the cost of such audit shall be borne by Buyer.

1.6 License Back of Assets. Concurrent with the Closing, Buyer shall execute a license agreement under which it shall grant to Seller a royalty-free, perpetual, worldwide license to (i) all of the technology included in the Assets and (ii) all derivatives of the technology included in the Assets, including the "Eiger" product release (such licensed back technology to be referred to collectively as "Licensed Technology"). Seller agrees that it shall use the Licensed Technology only (i) for internal purposes without restriction or (ii) for resale in bundled or integrated products sold by Seller which are not directly competitive with the core products of Buyer and in which the Licensed Technology does not constitute a primary portion of the value of the total bundled or integrated product. The license agreement shall include reasonable provisions concerning Buyer's obligation to provide documentation and support for the Licensed Technology. The license agreement shall also provide Seller with an unlimited royalty-free, perpetual, worldwide license to the Licensed Technology upon the occurrence of a Change of Control of Buyer described in Section 6.3(c) hereof. In the event of a Change of Control of Seller (as defined in Section 6.6 hereof, the license granted pursuant to the license agreement shall be limited to Seller's products either developed or substantially developed as of the time of the Change of Control.

IV. REIMBURSEMENT TO SCO FOR CERTAIN PAYMENT OBLIGATIONS

In the event that the exercise of any of NOVELL's licenses specified in Section II above results in an obligation on the part of SCO to remit any payment to a third party under an Assigned Vendor Agreement, NOVELL shall reimburse SCO for the amount of any such payment remitted by SCO to such third party.

VII. ASSIGNMENT

A. Neither party hereto may assign this Agreement or any of its rights hereunder to any other person or entity without the prior written consent of the other party; provided, however, that either party may assign its rights and delegate its obligations under this Agreement to its corporate parent, another subsidiary of such parent, or a third party transferee of substantially the entire portion of such party's business to which this agreement relates.

B. Subject to Paragraph A of this Section, this Agreement shall be binding upon and shall inure to the benefit of the successors and permitted assigns of NOVELL and SCO and is not intended to confer upon any other person any rights or remedies hereunder.

[ Update 3: If you recall, back in 2009, when unXis tried to buy SCO's assets, it put out a press release that SCO put on its website that said that among other goals, it would be doing the following:

• OpenServer and UnixWare product lines will be kept up to date and maintained into the future with new product roadmaps.

• Significant investment will be put into "virtualization" products.

• Significant investment will be made to develop and market a next generation UNIX operating system platform.

There was an Operating Agreement associated with the APA, that sets forth what the merged product was to be. Among other things:

I. OBJECTIVES. The Parties objectives in entering into this Operating Agreement are as follows:

a. Provide seamless UnixWare and OpenServer customer migration.

b. Provide a clear migration path for customers to a P7 based 64-bit UNIX system product.

According to SCO in its appeal, Amendment 2, should SCO ever require copyrights, requires Novell to provide them. If so, that would be an executory contract's unfulfilled obligation. So here's Amendment 2, and you'll see all the obligations:

A. With respect to Schedule 1.1(b) of the Agreement, titled "Excluded Assets", Section V, Subsection A shall be revised to read:

All copyrights and trademarks, except for the copyrights and trademarks owned by Novell as of the date of the Agreement required for SCO to exercise its rights with respect to the acquisition of UNIX and UnixWare technologies. However, in no event shall Novell be liable to SCO for any claim brought by any third party pertaining to said copyrights and trademarks.

B. Except as provided in Section C below, and notwithstanding the provisions of Article 4.16, Sections (b) and (c) of the Agreement, any potential transaction with an SVRX licensee which concerns a buy-out of any such licensee's royalty obligations shall be managed as follows:

1. Should either party become aware of any such potential transaction, it will immediately notify the other in writing.

2. Any meetings and/or negotiations with the licensee will be attended by both parties, unless agreed otherwise. Novell's participation will be by personnel who are engaged in corporate business development.

3. Any written proposal to be presented to the licensee, including drafts and final versions of any proposed amendments to the SVRX licenses, will be consented to by both parties prior to its delivery to the licensee, unless agreed otherwise.

4. Prior to either parties' unilateral determination as to the suitability of any potential buy-out transaction, the parties will meet face to face and analyze the potential merits and disadvantages of the transaction. No such transaction will be concluded unless the execution copy of the amendment is consented to in writing by both parties, and either party will have the unilateral right to withhold its consent should it judge, for any reason whatsoever, the transaction to be contrary to its economic interests and/or its business plans and strategy.

5. This Amendment does not give Novell the right to increase any SVRX licensee's rights to SVRX source code, nor does it give Novell the right to grant new SVRX source code licenses. In addition, Novell may not prevent SCO from exercising its rights with respect to SVRX source code in accordance with the Agreement.

6. The parties agree that no member of Novell's sales force will receive a bonus, commission, quota attainment credit, or other type of sales incentive as a result of the buy-out of an SVRX license.

C. Novell may execute a buy-out with a licensee without any approval or involvement of SCO, and will no longer be bound by any of the requirements stated in Section B. above, if: (i) SCO ceases to actively and aggressively market SCO's UNIX platforms; or (ii) upon a change of control of SCO as stated in schedule 6.3(g) of the Agreement.

D. Novell and SCO agree to indemnify and hold harmless the other from and against any and all losses, liabilities, judgments, and costs incurred ("Liability") if either causes the other to incur Liability under Section 10 of Amendment No. X to Software Agreement SOFT-00015 as amended, Sublicensing Agreement SUB-00015A as amended, Software Agreement SOFT-00015 Supplement No. 170 as amended, and Substitution Agreement XPER-00015B ("Amendment No. X").

Update: To show you what I mean about the exhibits, here they are, and see if you notice that only the first one, the one from SCO to unXis, is a sublicense agreement, with the rest being license agreements, until exhibit 10, which is a fax prior to the APA that mentions sublicensing agreements but doesn't specify what it was for (remember that Novell had book publisher contracts, not just code agreements) nor does it show us one:

• Exhibit 1, The proposed Sublicense Agreement between SCO and UnXis:

  SUBLICENSE AGREEMENT

  This Sublicense Agreement is made and entered into on the _ _ day of ,2011, by and between The SCO Group, Inc. (referred to herein as "Sublicensor"), a corporation of the State of Delaware, with its place of business at 333 South 520 West, Suite 170, Lindon, Utah 84042-1911, U.S.A., and unXis, Inc. (referred to herein as ("Sublicensee"), a Delaware corporation with its place of business at 2711 Centerville Road, Suite 400, Wilmington, Delaware 19807.

  WHEREAS, by an Asset Purchase Agreement, dated as of January 19, 2011 (the "Purchase Agreement"), among the Buyer and the Seller, as defined therein, the Buyer has agreed to purchase the Acquired Assets from the Seller; and

  WHEREAS, as a part of the purchase price for the Acquired Assets, the Seller has agreed to grant a nonexclusive sublicense to the Licensed Properties, as defined in the Purchase Agreement.

  NOW, THEREFORE, in consideration of the premises and the mutual agreements contained herein and in the Purchase Agreement, and intending to be legally bound, the parties agree to the following terms and conditions:

• Exhibit 2, AT&T/Sun Microsystems License Agreement:

  AT&T INFORMATION SYSTEMS INC.
  SOFTWARE AGREEMENT

  1. AT&T INFORMATION SYSTEMS INC., a Delaware corporation ("AT&T-IS"), having an office at 100 Southgate Parkway, Morristown, New Jersey 07960, and SUN MICROSYSTEMS. INC., a California corporation having an office at 2550 Garcia Avenue. Mountain View, California" 94043,

  for itself and its SUBSIDIARIES (collectively referred to herein as "LICENSEE") agree that, after execution of this Agreement by LICENSEE and acceptance of this Agreement by AT&T-IS, the terms and conditions set forth on pages 1 through 8 of this Agreement shall apply to use by LICENSEE of SOFTWARE PRODUCTS that become subject to this Agreement.

• Exhibit 3, USL.AMADA Software Agreement:

  UNIX SYSTEM LABORATORIES, INC.
  SOFTWARE AGREEMENT

  1. UNIX SYSTEM LABORATORIES, INC., a Delaware corporation ("USL"), having an office at 190 River Road, Summit, New Jersey 07001, and U. S. AMADA, LTD., a California having an office at 7025 Firestone Boulevard, Buena Park, California 90621, for itself and its SUBSIDIARIES (collectively referred to herein as "LICENSEE") agree that, after execution of this Agreement by LICENSEE and acceptance of this Agreement by USL, the terms and conditions set forth on pages 1 through 6 of this Agreement shall apply to use by LICENSEE of SOFTWARE PRODUCTS that become subject to this Agreement.

  2. USL makes certain SOFTWARE PRODUCTS available under this Agreement. Each such SOFTWARE PRODUCT shall become subject to this Agreement on acceptance by USL of a Supplement executed by LICENSEE that identifies such SOFTWARE PRODUCT and lists the DESIGNATED CPUs therefor. The first Supplement for a specific SOFTWARE PRODUCT shall have attached a Schedule for such SOFTWARE PRODUCT. Any additional terms and conditions set forth in such Schedule shall also apply with respect to such SOFTWARE PRODUCT. Initially, Supplement(s) numbered 1 are included in and made part of this Agreement.

• Exhibit 4, Novell/Super Computers International 1995 Software Agreement:

  NOVELL, INC.
  SOFTWARE AGREEMENT

  1. NOVELL, INC., a Delaware Corporation ("Novell"), having an office at 190 River Road, Summit, New Jersey 07901, and LICENSEE, as defined in the signature block of this Agreement, for itself and its SUBSIDIARIES agree that, after LICENSEE's execution and NOVELL's acceptance of this Agreement, the terms and conditions set forth in this Agreement shall apply to use by LICENSEE of SOFTWARE PRODUCTS that become subject to this Agreement.

  2. NOVELL makes certain SOFTWARE PRODUCTS available under this Agreement. Each such SOFTWARE PRODUCT shall become subject to this Agreement on NOVELL's acceptance of a Supplement executed by LICENSEE that identities such SOFTWARE PRODUCT and lists the DESIGNATED CPUs therefor. The first Supplement for a specific SOFTWARE PRODUCT shall have attached a Schedule for such SOFTWARE PRODUCT. Any additional terms and conditions set forth in such Schedule shall also apply with respect to such SOFTWARE PRODUCT.

• Exhibit 5, Santa Cruz/Samsung 1997 Software Agreement:

  THE SANTA CRUZ OPERATION, Inc.
  SOFTWARE AGREEMENT 1. The SANTA CRUZ OPERATION, INC. ("SCO"), a California corporation, having an office at 400 Encinal Street, Santa Cruz, California 95061-1900, and SAMSUNG ELECTRONICS CO., LTD. ("SAMSUNG") as defined in the signature block of this Agreement, for itself and its SUBSIDIARIES agree that, after SAMSUNG's execution and SCO's acceptance of this Agreement, the terms and conditions set forth in this Agreement shall apply to use by SAMSUNG of SOFTWARE PRODUCTS that become subject to this Agreement.

  2. SCO makes certain SOFTWARE PRODUCTS available under this Agreement. Each such SOFTWARE PRODUCT shall become subject to this Agreement on SCO's acceptance of a Supplement executed by SAMSUNG that identifies such SOFTWARE PRODUCTS and lists the DESIGNATED CPUs therefor. The first Supplement for a specific SOFTWARE PRODUCT shall have attached a Schedule for such SOFTWARE PRODUCT. Any additional terms and conditions set forth in such Schedule shall also apply with respect to such SOFTWARE PRODUCT….

  II. GRANT OF RIGHTS

  2.01 SCO grants to SAMSUNG a personal, nontransferable and nonexclusive right to use in the Republic of Korea each SOFTWARE PRODUCT identified in the one or more Supplements hereto, solely for SAMSUNG's own internal business purposes and solely on or in conjunction with DESIGNATED CPUs for such SOFTWARE PRODUCT. Such right to use includes the right to modify such SOFTWARE PRODUCT and to prepare derivative works based on such SOFTWARE PRODUCT, provided that any such modification or derivative work that contains any part o f a SOFTWARE PRODUCT subject to this agreement is treated hereunder the same as such SOFTWARE PRODUCT. …

  7.08 Neither this Agreement nor any rights hereunder, in whole or in part, shall be assignable or otherwise transferable by SAMSUNG and any purported assignment or transfer shall be null and void.

  7.09 Except as provided in Section 7.0S(b), nothing in this Agreement grants to SAMSUNG the right to sell, lease or otherwise transfer or dispose of a SOFTWARE PRODUCT in whole or in part.

• Exhibit 6, Caldera/Cisco 2002 Reference Software Agreement:

  CALDERA INTERNATIONAL, INC.
  REFERENCE SOFTWARE AGREEMENT

  This Agreement is between Caldera International, Inc. for itself or its Subsidiaries (collectively referred to herein as ("Caldera"), a corporation of the State of Delaware, with its place of business at 355 South 520 West, Suite 100, Lindon. Utah 84042 USA, and Cisco Systems ("Licensee"), with its place of business at 6450 Wedgwood Road, Maple Grove, Minnesota 55311.

  Subject to the terms and conditions of this Agreement, Caldera will provide Licensee the right to acquire certain Reference Software Products. Each such Reference Software Product that is identified in an Exhibit to this Agreement is made part hereof.

• Exhibit 7, SCO Group/Northrop Grumman 2003 Reference Software Agreement:

  THE SCO GROUP, INC.
  REFERENCE SOFTWARE AGREEMENT

  This Agreement is between The SCO Group. Inc. for itself or its Subsidiaries (collectively referred to herein as ("SCO"), a corporation of the State of Delaware, with its place of business at 355 South 520 West, Suite 100, Lindon, Utah 84042 USA, and Northrop Grumman Space and Mission Systems Corp, acting through its Space Technology sector, having a place of business at One Space Park, Redondo Beach, California, for itself, its subsidiaries, its affiliates and its consultants ("Licensee")".

  WHEREAS, SCO is a licensor, manufacturer and distributor of SCO, third party Open Source software and related products, materials and services, and

  Subject to the terms and conditions of this Agreement, SCO will provide Licensee the right to acquire certain Reference Software Products. Each such Reference Software Product that is identified in an Exhibit to this Agreement is made part hereof.

• Exhibit 8, Caldera/Samsung 2002 Source for Support Agreement:

  SOURCE FOR SUPPORT AGREEMENT

  This Agreement is made and entered into on the date last executed by and between Caldera International, Inc. for itself or its Subsidiaries (collectively referred to herein as "Caldera"), a corporation of the State of Delaware, with its place of business at 355 South 520 West, Lindon, Utah 84042. U.S.A. and Samsung Electronics Co., Ltd.. (hereinafter "Licensee") a Korean corporation, with a place of business at 20F Daechi Building, #889-11, Daechi 4-dong, Kangnam-gu, Seoul, Korea.

  This Agreement is available only to companies who have previously executed and retained in force agreements with The Santa Cruz Operation, Inc. ("Caldera") to distribute Packaged Product Copies and who have executed and retain in force agreements with Caldera for Packaged Product Copies support.

  NOW THEREFORE, the parties agree as follows:

  I. The parties agree that, after Licensee's execution and Caldera's acceptance of this Agreement, the terms and conditions set forth in this Agreement shall apply to use by Licensee of Source Code Product(s) that become subject to this Agreement.

• Exhibit 9, Caldera/Trusted Systems on the Net 2002 Reference Software Agreement:

  CALDERA INTERNATIONAL,INC.
  REFERENCE SOFTWARE AGREEMENT

  This Agreement is between Caldera International, Inc. for itself or its Subsidiaries (collectively referred to herein as ("Caldera"), a corporation of the State of Delaware, with its place of business at 355 South 520 West, Suite 100, Lindon, Utah 84042 USA, and Trusted Systems on the Net., Co., Ltd. ("Licensee"), a corporation of Korea, with its place of business at 204 ETRl TBI, Acun-dong 1, Yusung-gu, Taejon, Korea.

  WHEREAS, Caldera is a licensor, manufacturer and distributor of Caldera, third party Open Source software and related products, materials and services, and

  Subject to the terms and conditions of this Agreement, Caldera will provide Licensee the right to acquire certain Reference Software Products.

• Exhibit 10, November 1995 Fax from Louis Ackerman at Novell to Steve Sabbath at Santa Cruz:

  F*A*X

  DATE: November 22, 1995

  ATTENTION: Steve Sabbath

  COPY TO: Kelly Hicks

  RE: SOW FOR LICENSING & CONTRACT MANAGEMENT

  Steve,

  I have received your November 17, 1995 SO. I can agree to work within your parameters, and still meet Novell's post closing deliverables. (These are the notification of licensee and assignment of licenses, and the delivery of hard copies of the agreements to SCO). Bob Rosenberg has had discussions with Kelly Hicks to identify the banks to be used for deposits, wire transfers, etc.

  I am assuming that there are no systems required by SCO for licensing since these are are not included in your SOW. I have asked Burt to craft a formal agreement that will permit the Contract Managers you have designated to execute the agreements on behalf of SCO, and that will insulate Novell from liability to either SCO or the customer for any agreement executed by the Contract Managers on SCO's behalf.

  I have also asked John Maciaszek to investigate the approval process we should use on any agreement requiring the use of non-standard terms and conditions. I would prefer that there be a method in place that has an SCO employee authorizing any agreement that uses non-standard T's & C's since these will be executed by Novell employees. Currently Novell has a two signature approval on any Special or Standard Pricing Letter where the Director in charge of the Business Unit that owns the product signs off in addition to the Regional Controller.

  Would you also please confirm that SCO intends to:

  1. Use the standard Software Agreement and Sublicensing Agreement currently used by Novell, with the exception of the necessary name and address changes, for any new customers,

  2. Use the current UnixWare product schedules with the necessary name and address changes where appropriate, and

  3. Use the existing schedules for SVRx and Auxiliary Products with the necessary name and address changes where appropriate.

  Best Regards,

  Louis S. Ackerman [fax, voice, email]

  Copies To:
  S. Adams
  W. Bauer
  W. Broderick
  S. Jonas
  B. Levine
  J. Maciaszek
  R. Rosenberg

  As you can see, only the unXis agreement talks about sublicensing. All the other agreements talk about licenses to use software products, and none of them were involving a sale of assets.

  By the way, I can't help but notice paragraph 10 of the Order on page 9, which says unXis is to satisfy any cure amounts associated with assumed contracts up to $50,000, and SCO "shall be responsible for promptly satisfying any cure amounts associated with the Assumed Contracts in excess of Buyer's $50,000.00 Cure Limit."

  I'm sure SCO will get right on that. But what is the next sentence about? "Buyer shall be permitted, up to one day prior to closing, to remove any contract from the list of Assumed Contracts whereupon such contract shall remain with the estate and no cure amounts shall be due and payable in connection with this Order or sale of the software product business." Paragraph 11 says the parties can modify the APA or any related agreements if they sign a written document and provided that the changes are not material and don't change "the economic substance of the transactions contemplated hereby."

  Worse, the bankruptcy judge says he'll keep jurisdiction until the cases are closed or dismissed, so enforcement is under his umbrella.

  He says nothing is due to HP, no cure amounts, and HP "consents" to the deal, including the transfer of the Release HP got from SCO in 2003.

  The Order says the APA is attached, but it's not. But you can find the APA [PDF] and some analysis here. You can find a list of other rulings from Judge Gross here and some case summaries here. He is fairly new to the bench, appointed in 2005. Wikipedia has some information on the Midway Games bankruptcy, and it includes this snippet about Judge Gross, who presided:

  On January 29, 2010, the bankruptcy court dismissed claims brought by Midway creditors in May 2009 for fraud and breach of duty against Sumner Redstone, Shari Redstone and Midway directors, concerning his 2008 loans to the company and his subsequent sale of his 87% stake in the company to Mark Thomas, which increased Midway's net debt and wiped out the company's net operating losses and other tax assets. Judge Kevin Gross wrote that his decision was "not an endorsement of any of the defendants' actions.... The defendants oversaw the ruin of a once highly successful company, only to hide behind the protective skirt of Delaware law, which the court is bound to apply."

  Like I said, Delaware bankruptcy court is a cesspool.

  Update 2: I woke up realizing that the sublicenses mentioned in Exhibit 10 must be referencing the third-party software in OpenServer and UnixWare. If you look at the copyrights file in each, you'll see a very long list.

  For just one small example, at SCOForum 2004, they showed a graphic regarding a tool kit in UnixWare 7 that included the GNU Tool Chain. SCO, obviously, didn't write that, so on any transfer, it would have to sublicense:

  

  OpenServer 6 had the GNU Development Tools, including the GNU g77 FORTRAN compiler and the GNU-based GNAT Ada 95 compiler, none of which SCO wrote or owns. And UnixWare 7 has Java, Apache, Perl PHP, PostgresSQL, and a number of other applications in it, none of which are SCO's:

  

  And here's a chart [PDF] SCO offered on its Benelux website of what is in OpenServer 5.0.7 compared to OpenServer 6.0. You'll see both include things like Mozilla, Apache, Samba, cups, MySQL, FAT32, VFAT, KDE and HP MSA 1000, none of which SCO developed. Hence they'd need sublicenses to transfer OpenServer with those materials inside. On page 2, if you translate from the Dutch, it says "SCO OpenServer Release 6 supports UnixWare applications and is installed with the KDE desktop."

  This technical paper [PDF] explains that OpenServer 6 incorporated the UnixWare 7 kernel, SVR5, as it states on page 8: "SCO OpenServer 6 is built from the System V Release 5 (SVR5) UNIX kernel." Again, though, it allowed for up to 32 CPUs. It had extensions to the Single UNIX Specification "to support 64-bit filesystems on 32-bit systems", instead, as you can see on page 10. You could run Windows XP and 2000 applications on it, with a tool they called MergePro.

  At that same 2004 SCOforum, Darl announced SCO hoped to merge UnixWare and OpenServer and created a merged 64-bit product by 2006. So it certainly hadn't yet happened. It was to be named Diamond. Here's a graphic Eric Hughes showed of the plan:

  

  The merged product was supposed to be on SVR6, Hughes said:

  

  But although SCO announced Diamond, it was cancelled and never happened. Both OpenServer and UnixWare are still on SVR5. In 1998, SCO announced plans for the merged product, once Intel had Merced ready, and they did a kind of a merge of UnixWare with some OpenServer materials, but mostly they did things like LKP and OKP, to make it possible to run applications on other operating systems. And Merced, if you recall, kept not being ready. It's why Project Monterey eventually died. And so the merged product contemplated by the APA has yet to be produced.

  Update 4: I see there are suggestions on what I should title the book I eventually write about the SCO saga. My personal favorite title:

  Trial By Escher, Möbius, & Klein:
  A case of law twisted into injustice

  "M. C. Escher" (Wikipedia article)
  "Möbius strip" (Wikipedia article)
  "Klein bottle" (Wikipedia article)

  I had never heard of a Klein bottle. Hilariously, it's defined like this: "In mathematics, the Klein bottle (pronounced /ˈklaɪn/) is a non-orientable surface, informally, a surface (a two-dimensional manifold) in which notions of left and right cannot be consistently defined." Hahahaha. I so love doing Groklaw with you guys.

  Update 5: I have the audio now, and I'll write more about it after I've listened to all of it, but in listening to Broderick's testimony, he is actually talking about sublicense agreements as agreements a licensee had to get on top of the license agreement if they wished to modify and sell a binary of their own. How that makes unXis a sublicensee of SCO is beyond me, but that is what he says. You can see in Amendment 2 a reference to a sublicensing agreement, in the context of IBM: "Sublicensing Agreement SUB-00015A", which you can read here. It's on top of IBM's license agreement, SUB-00015. But in that case, the licensee also got the sublicense agreement, so it could distribute. So IBM or whoever took a license, and then to distribute to customers it took a sublicensing agreement. Now there is a missing step. Where is the unXis license agreement? It doesn't have one. It skips to the sublicensing agreement. It's totally different than what was normal procedure.

  The Memorandum Opinion Re Sale Motion as text:

  *************************

  IN THE UNITED STATES BANKRUPTCY COURT
  FOR THE DISTRICT OF DELAWARE

  In re:

  The SCO GROUP, INC., et. al.,

  Debtors.

  ______________

  Chapter 11

  Case No. 07-11337 (KG)

  Re Dkt No. 1141

  ________________

  MEMORANDUM OPINION RE SALE MOTION

  The Court held an evidentiary hearing on March 2, 2011, on the motion of the Chapter 11 Trustee for Debtors to authorize the sale of subtantially all of Debtors' software product business assets (excluding certain specified assets) (the "Software Business") and related relief (the "Motion").¹ The necessity of an immediate ruling precludes a detailed recitation of the intricate and interesting history of Debtors' disputes, particularly with Novell, Inc. ("Novell"). The Court will therefore limit its discussion to only the critical facts and law.

  The Court entered a sales procedure order on August 23, 2010 (D.I. 1161), pursuant to which the Trustee conducted an auction. unXis, Inc. ("unXix") was the successful bidder and agreed to pay $600,000 in cash and warrants. A second bidder submitted a bid of only $18 in cash. The Trustee seeks the Court's approval of the sale to unXis.

  The lone objector to the Motion, Novell, raises the following arguments:

  1. In litigation between Debtors and Novell², it was determined that Debtors were licensees, not owners, of UNIX software copyrights. Therefore, if unXis is to operate the Software Business it is purchasing, Debtors must assume and assign the original asset purchase agreement (the "1995 APA") which provided Debtors with the license. Debtors must assume the entirety of the 1995 APA, the benefits and the burdens, and all of the contracts which constitute an integrated transaction. Before they can do so, Debtors must cure the breach of the 1995 APA by paying the $3 million owned Novell.

  2. Any assumption and assignment requires Novell's consent.

  3. The Trustee must provide adequate assurance of future performance.

  The Trustee responds to the Novell arguments with the assertion that he is only selling what Debtors own. The Trustee cites findings of fact and conclusions of law ("F&C") and holdings of the District Court, which include the following:

  a. Novell sold Debtors the UnixWare business.

  b. Debtors had the right to license the UNIX technology.

  c. "the copyrights are not required for SCO to exercise its rights with respect to the acquisition of UNIX and UnixWare technologies. SCO did not acquire the entire UNIX business from Novell, but only acquired the UnixWare business while undisputed evidence is that SCO did not need the UNIX and UnixWare copyrights in order to operate its UnixWare product business. Further, ownership of the copyrights in not required for SCO to protect its own code."

  F&C ¶¶ 72, 79, 80, 123-130.

  2

  It is clear from the foregoing that the Trustee is trying to sell only the rights Debtor received in the 1995 APA, the development. unXis is therefore receiving only the rights that the District Court determined Debtors have -- nothing more and nothing less. Debtors have sublicensed the materials in the ordinary course of its business without Novell's permission or insistence that it had to give its permission, since 1995. Thus, Debtors are seeking authority to sell property of the estate. The Trustee concedes that if it does not own an asset, he is not selling it. Novell's consent is therefore not necessary. Moreover, the parties established a course of conduct precluding consent. Broderick Declaration.

  The Court is also satisfied, contrary to Novell's argument, that the 1995 APA is not an executory contract requiring assumption, or an integrated transaction requiring assumption of all related contracts. See In re Exide Techs., 340 B. R. 222, 229 (Bankr. D. Del. 2006), aff'd, 607 F. 3d 957 (3d Cir. 2010). The Third Circuit Court of Appeals in Exide was very clear. "[U]nless both parties have unperformed obligations that would constitute a material breach if not performed, the contract is not executory under §365." In re Columbia Gas, 50 F.3d 233, 239 (3d Cir. 1995). Novell does not have any unperformed obligations.

  The Court understands Novell's desire to punish Debtors for years of expensive and painful litigation. Here Novell's objection to the Motion will not prevail. The Motion seeks the Court's approval of Debtors' business judgment. The Court will enter an Order granting the Motion.

  Dated: March 7, 2011.

  [signature]
  KEVIN GROSS, U.S.B.J.

  ___________
  ¹ The full title of the Motion is "Motion of Chapter 11 Trustee for Order (1) Authorizing the Marketing, Auction and Sale of Substantially all of the Debtors' Software Business Assets Consistent with Form Asset Purchase Agreement and Free and Clear of Liens, Claims and Encumbrances, (2) Authorizing Assumption, Assignment, and Sale of Certain Executory Contracts and Unexpired Leases, (3) Approving Bidding Procedures in Connection with Auction, (4) Establishing Sale Hearing Date and (5) Granting Related Relief.(D. I. 1141).

  ² The litigation between Debtors and Novell, Case No. 2:04-CV-13QTS, was pending in the United States District Court for the District of Utah (the "District Court" and the "District Court Action").