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SCO Threatens to Derail Novell-SUSE Deal & Sue a Fortune 1000 Linux User

SCO Threatens to Derail Novell-SUSE Deal & Sue a Fortune 1000 Linux User

Talk about amusement value. Man, this thoroughly entertaining SCO thing gets better and better.

For its latest move, SCO CEO Darl McBride has suggested that SCO is going to upset Novell's $210 million acquisition of SUSE. He claims the 1995 asset purchase agreement between Novell and the old Santa Cruz Operation that the new SCO Group inherited prohibits Novell from entering a market where it would compete against SCO's Unix interests.

In a formal statement, Novell denied the existence of the non-compete, adding that it had had no communication on the subject from SCO. SCO insiders claimed they had just starting talking about it internally.

But, if the non-compete doesn't exist, how do you suppose Novell is going to explain away the verbiage in paragraph 1.6 of the 1995 agreement that reads:

"Seller [Novell] agrees that it shall use the Licensed Technology" - in other words Unix - "only (i) for internal purposes without restriction or (ii) for resale in bundled or integrated products sold by Seller [Novell] which are not directly competitive with the core products of buyer [SCO] and in which the Licensed Technology does not constitute a primary portion of the value of the total bundled or integrated product." (Emphasis added.)

Anyway, SCO is also revving its motor about making an example of one or more Fortune 1000 companies - to put the fear of God in the rest of them - and sue whoever draws the short straw for not paying their Linux tax.

According to SCO, it's got a short list of a handful of unidentified brand names to choose from - companies it's talked to directly, it said - and it will lodge suit against one or more of them in the next 90 days. The only thing that will stop a suit is capitulation. McBride said, "It's license or litigate."

In SCO's world, it's got Novell dead to rights.

Its basic premise all along has been that Linux killed its Unix business. Ergo, Novell can't sell Linux.

If a court were to find in SCO's favor, it could upset the delicate two-distribution balance the industry or at least the so-called Chicago 7 have determined is essential in the Linux business.

Somebody would also have to rush in with a transfusion of money to rescue pinched little SUSE.

SCO can't do anything until the Novell-SUSE deal closes, which Novell has said will be by the end of January.

Actually SCO hasn't said it will sue. It is "considering its options." It suggested a negotiated settlement may be possible.

SCO also revealed exactly what it costs to hire a high-profile high-powered lawyer to defend one's IP.

As previously reported, the deal that SCO's lawyer, the famous David Boies, famous by virtue of the Microsoft antitrust case and Al Gore's court-dashed bid for the presidency, cut entitles him to 20% of any license fees, settlement, award, sale of the company or, heck, even any equity infusion in SCO.

So because SCO pocketed $50 million in VC money last month, a "war chest" ensuring it can soldier on in its Linux fight, Boies and SCO's other law firms, if you read the fine print, are getting 2%-3% of the company plus a million dollars in pocket money.

They've been negotiating this "modification" to their "contingency" arrangement for a while. It's supposed to compensate Boies for expanding his charter from the IBM suit to include SCO’s copyright claims, which is what they're going to try to nail end users on. SCO suggestively notes that those copyrights include code in the 1994 settlement between Unix System Labs and Berkeley Software Design Inc (BSDI), making us wonder whether Apple is now on its hit list.

The law firms get 400,000 shares of SCO stock, worth $5.6 million nowadays and enough of a perk, one assumes, to spur them to greater exertion.

We suspect this kind of arrangement is less unusual than one might imagine. We should probably ask Silicon Valley mainstay Wilson Sonsini. Boies called it "not usual but not unique," and added that he didn’t have a piece of any other software company but suggested he had gotten stock from "Internet" firms.

Anyway, when SCO hired Boies its shares were worth about a buck, now they're hovering around $14.

As a result of these financial arrangements, SCO will take an $8.95 million charge in its fourth quarter ended October 31. It also said that there would be another charge of $8.7 million related to its issuing Series A convertible preferred stock in exchange for that $50 million investment. See, the stock was worth more when the deal closed than the price paid for it.

SCO is supposed to disclose its Q4 results on December 8 and give some indication of how its Linux tax program is progressing. Its new "license or litigate" policy suggests it hasn’t been doing that well, though it claims some successes.

It continues to guide to revenues of $22 million to $25 million.

More Stories By Maureen O'Gara

Maureen O'Gara the most read technology reporter for the past 20 years, is the Cloud Computing and Virtualization News Desk editor of SYS-CON Media. She is the publisher of famous "Billygrams" and the editor-in-chief of "Client/Server News" for more than a decade. One of the most respected technology reporters in the business, Maureen can be reached by email at maureen(at)sys-con.com or paperboy(at)g2news.com, and by phone at 516 759-7025. Twitter: @MaureenOGara

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