SCO Grp v. Novell Inc

Filing 538

TRANSCRIPT of Proceedings held on April 30, 2008-Motion for Summary Judgment before Judge Dale A. Kimball. Court Reporter/Transcriber Laura W. Robinson, CSR, RPR, CP, Telephone number 801-328-4800. NOTICE RE REDACTION OF TRANSCRIPTS: Within 7 calendar days of this filing, each party shall inform the Court, by filing a Notice of Intent to Redact, of the parties intent to redact personal data identifiers from the electronic transcript of the court proceeding. The policy and forms are located on the court's website at www.utd.uscourts.gov. Please read this policy carefully. If no Notice of Intent to Redact is filed within the allotted time, this transcript will be made electronically available on the date set forth below. Transcript may be viewed at the court public terminal or purchased through the Court Reporter/Transcriber before the deadline for Release of Transcript Restriction. After that date it may be obtained through PACER. Redaction Request due 6/4/2008. Redacted Transcript Deadline set for 6/16/2008. Release of Transcript Restriction set for 8/12/2008. (jmr) Modified on 9/9/2008 removed restricted text(rak).

SCO Grp v. Novell Inc

Doc. 538

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF UTAH CENTRAL DIVISION In re: SCO GROUP, Plaintiff, vs. NOVELL INC. Defendant. ________________________ ) ) ) ) ) ) ) ) ) ) ) ) ) )

Case No. 2:04-CV-00139

BEFORE THE HONORABLE DALE A. KIMBALL April 30, 2008 Motion for Summary Judgment

Laura W. Robinson, CSR, RPR, CP 350 South Main Street 144 U.S. Courthouse Salt Lake City, Utah 84101-2180 [phone] 1

Dockets.Justia.com

Appearances of Counsel: For Novell: Michael A. Jacobs Attorney at Law MORRISON & FOERSTER LLP 3625 Market Street San Francisco, California 94105 Edward J. Normand Stuart H. Singer Attorneys at Law BOIES, SCHILLER & FLEXNER LLP 401 East Las Olas Blvd. Suite 1200 Fort Lauderdale, Florida 33301

For SCO:

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Salt Lake City, Utah, April 30, 2008 ***** THE COURT: We're here this afternoon to argue

Novell's motion for summary judgment on its fourth claim for relief and SCO's motion for judgment on the pleadings on Novell's claim for money or claims for declaratory relief, correct? MR. NORMAND: THE COURT: Correct. And we're here in SCO Group, Inc. versus

Novell, Inc., 2:04-CV-139 and I see all of the usual suspects here and present. MR. SINGER: MR. JACOBS: THE COURT: Which one should we do first?

We don't have a particular preference. Nor do we, Your Honor. Well, on my list, Novell's motion on the

fourth claim for relief is first. How long do you need for this one, do you think? MR. JACOBS: THE COURT: MR. JACOBS: THE COURT: MR. SINGER: can keep it down. THE COURT: I'm so heartened by that, I'm afraid to Five minutes, Your Honor. Five minutes? Yes. And how long do you need, Mr. Singer? I was going to say 10, but I'll see if I

ask how much time you need on the second motion? MR. JACOBS: Five minutes, Your Honor. 3

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THE COURT: MR. JACOBS:

Okay.

Go ahead. Of course, this

Thank you, Your Honor.

in some sense, this motion has been overtaken by events we're trying many of the underlying issues before Your Honor, and we're also sort of in a fashion, unusual perhaps to a legal dispute in which lawyers are principal witnesses or arguing the motion through the witnesses to some degree. Nonetheless, it is worth stating our view that the question of whether SCO had the authority under these agreements is a question of law that there are no genuine disputed, no genuinely disputed facts, no material disputed facts. I

think that is probably easiest to show with respect to the Sun agreement. The agreement on its face purports to amend There is a question of law about the The language is clear. It doesn't say any It

the 1994 agreement.

meaning of amendment number two.

is any agreement concerning a buy out.

agreement representing a buy out or some narrower language. I suspect as a matter of the history that language came from Santa Cruz at the time which wanted broad language but the language is what the language is. And the Sun agreement,

the 2003 agreement, purports to amend an SVRX agreement. There is no dispute that the 1994 agreement is an SVRX agreement particularly in the wake of Your Honor's summary judgment ruling. So that really is the -- on the Sun agreement we do 4

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think that is a question of law.

And the Microsoft

agreement, as a matter of law, we think that the agreement on its fashion purports to grant substantial brand new SVRX rights. Those are -- it is therefore an SVRX license. We're They

had no authority to enter into that SVRX license.

hearing a lot of testimony around the significance of SVRX rights. As a matter of undisputed fact, SCO is out in the

marketplace saying legacy UNIX code has substantial value. And it was in the wake of that activity that that agreement was entered into. So, again, as a matter of law, we think that agreement that they had no authority to enter into that agreement. Thank you very much. THE COURT: Thank you, Mr. Jacobs. Mr. Singer, I

assume you have a different view? MR. SINGER: Well, we do, Your Honor. And as we have

customarily done, we have put together a few argument slides, although fewer than usual if I might approach. THE COURT: MR. SINGER: Yes, thank you sure. I think as an opening proposition we

agree with what Mr. Jacobs said about events overtaking the motion. I think it is hard to see a rationale for summary

judgment being a vehicle to decide this issue now that we're in the middle of trial and the same issues are going to be fully tried by the time, what within the next 48 hours we 5

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hope. We look at the first slide here. Four issues which we

think leads to why the motion should be summarily denied. The first is a genuine fact dispute over whether the Sun and Microsoft agreement, SVRX component, is incidental to the licensing of UNIX ware. If it is incidental, then we have The issue of whether it is

the authority to enter into it.

incidental we don't think can be resolved as an issue of law. You don't just count up the number of releases of a

prior product and say well that must mean it is substantial. For example, we have evidence in this case showing a prior pattern and practice of licensing those earlier versions incidental to the current version. That itself is

grounds to deny summary judgment as well as the question of what is the value of those earlier products. If you have

new equipment, you need newer products to run on, there certainly has been no showing on summary judgment or really no showing in the plaintiffs case that there has been any commercial value to those older products. Now with respect to intellectual property rights, when we're talking about giving someone a license, it is the license that gives them those rights. And the UNIX ware

license gave them all the rights they needed because they included rights to everything that was in that UNIX ware product. So on the first point, we think there is a genuine 6

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factual issue. The second point only relates to the Sun agreement. Because obviously there is no issue about the Microsoft agreement being a buy out. There is nothing to buy.

Mr. Jacobs says that you only have to concern a buy out and this clearly concerned a buy out and so it triggered that provision of the APA that required Sun's approval. And

while Mr. Jacobs accurately states the language in the APA, I think there are two reasons why it doesn't lead to the conclusion he suggests. The first is that concerning a buy out means more, we submit, than simply that in the whereas clauses in the 2003 agreement it says it amends and restates that 1994 agreement which was a buy out. We think it is important that nothing They got paid 82 and a half

here changed that buy out.

million dollars for buying out all of these binary royalties in 1994. Nothing in 2003 amended that. So nothing

concerned it.

We don't think that the plain language of

that agreement means that when you already have a buy out years before, and you come up with a new agreement that doesn't change the terms of that, that that is something that we had to go back to Novell. But there is a second

reason why their argument is, we believe, doesn't lead to the conclusion they suggest and that if we could, turn to -it is slide number seven. 7

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THE COURT: MR. SINGER: THE COURT: MR. SINGER:

Seven? Seven. Okay. And which is also on the screen. And

that is the language of amendment two which is the amendment that deals with the buy out issue. It says specifically in

paragraph B(5) that Novell may not prevent SCO from exercising its rights with respect to SVRX source code in accordance with this agreement. So even if that amendment

number two was triggered by it being an agreement that concerns a buy out, all the elements of our amendment involving source code are not things that Novell had a right to prevent us from doing by the very language of amendment number two. So we think even if amendment number two applied, overwhelming the Sun agreement deals with source code rights and therefore all aspects -- all those aspects of the agreement are authorized. So to the extent they have an

argument here, it only applies to non source code issues in the Sun 2003 agreement and I don't even think they have identified any of those. Now if we go back then to the four issues that are implicated in this -- that deals with the first two. third involves SCO's source licenses. the -8 The

Turn to tab eight in

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 this.

THE COURT: MR. SINGER:

Tab eight? Tab eight. And I'll be very brief on

There is no -- first of all, summary judgment

determination by this court in your prior order regarding SCO source licenses being SVRX licenses at all, that was never raised, never dealt with in the August 2007 order. There is ample evidence in this record, and also in the summary judgment record, that SCO was concerned with technology that was in open server at UNIX ware being improperly used at Linyx. It is not just a concern with the

historical Unix System V code although that was certainly part of the concern but as well as things that in the more recent UNIX library and open server. But I think the most That SCO had the

important fact here is the third point. right to release its own claims.

Because these SCO source

licenses are essentially releases and licenses of SCO's intellectual property rights. If Novell's argument is right

here, that because of their ownership of certain copyrights we didn't have much to release to these third parties who bought these licenses as we thought, it just meant that those third parties didn't get as much. But it doesn't

change the SCO source license into a license of Novell's intellectual property. agreement that does it. There is nothing on the face of the And unless it did that, there is no

issue here about it being an SVRX license within the meaning 9

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of that agreement or something that required Novell's approval. These aren't people who are being given source code licenses or going off and doing things with this. a release from litigation claims, essentially. This was

If it is a

smaller release than we thought, that may be an issue between SCO and that licensee about what they paid for. is not an issue that relates to Novell. The final point, the fourth issue, also relates to the SCO source licenses and that is our estoppel argument. we think that is inherently factual. some of those facts in this trial. And you're hearing That Novell was aware And It

from late 2002 and early 2003 that SCO intended to launch a licensing program for the intellectual property of UNIX that was in Linyx. And they said they wouldn't help us. They

never said don't do it, they never said we don't have the rights to do it, they never said if you do it you're going to owe us the money. And so there is at least a factual

issue on that estoppel defense that precludes summary judgment. Thank you, Your Honor. Thank you, Mr. Singer. Any reply,

THE COURT: Mr. Jacobs? MR. JACOBS:

Briefly, Your Honor.

The only thing

worth focusing on, because I don't think the briefing really paid a lot of attention to this, is the B(5) provision in 10

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amendment number two.

The language is under the category of In addition,

heading B which is relating to buy outs.

Novell may not prevent SCO from exercising its rights with respect to SVRX source code in accordance with the agreement. The only way to read that is as a reminder that

SCO has some rights in accordance with the agreement and SCO can't and Novell can't prevent SCO from using those rights. It doesn't expand anything. It doesn't contract anything.

It is language that is sort of inherently circular and adds nothing or detracts nothing from the overall asset purchase agreement or from amendment number two. Honor. THE COURT: Thank you. Thank you both. We'll now Thank you, Your

move to SCO's motion for judgment on the pleadings on Novell's claim for money or their claim for declaratory relief. Mr. Normand, how much time do you need on this matter? MR. NORMAND: I don't want to be a drag on the ticket,

but I probably need 20 minutes, Your Honor. THE COURT: MR. NORMAND: THE COURT: MR. NORMAND: All right. May I approach, Your Honor? Yes. Your Honor, we think there are five Now, this is a

questions before the court on this motion.

motion for judgment on the pleadings, of course, so this 11

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pertains to Novell's own allegations, Novell's own version of the facts. Arguments out of Novell's mouth. Your Honor

will appreciate, given that we're in the middle of trial, there are aspects of these allegations that we disagree with. But the question here is under Novell's own version We don't think they

of the facts, did they have a claim? do.

The first question was SCO Novell's agent?

Second

question was SCO authorized to execute the agreements at issue? Third question, if SCO was not authorized to execute

the agreements, as SCO's principal has Novell ratified them? Here we get in to the principal agent law in terms of our ratification. Four, if SCO was not authorized to execute

the agreements, and Novell has not ratified them, do the counter parties to the agreement get back the money they paid under principals of restitution? And the fifth

question, where SCO was not authorized to execute the agreements, Novell has not ratified them, and the counter parties do get back the money they paid, does Novell have any claim to hold the money in the interim? Question one, Your Honor, was SCO Novell's agent? Under Novell's version of the facts, we were. Novell makes

the specific allegation and we acknowledge that the court concluded in its August 2007 order that SCO was and is Novell's quote agent for SVRX licenses. I don't think this 12

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is a controversial point. Question two, was SCO authorized to execute the agreements? clearly not. Again, under Novell's version of the facts, Novell alleges in its pleadings that SCO Novell has

lacked the authority to execute the agreements.

moved for summary judgment on the grounds that SCO lacked the authority to execute the agreements. And Novell is

arguing at trial, of course, that SCO lacked the authority to execute the agreements. So far so good. Question three, if SCO was not

authorized to execute the agreements as SCO's principal, has Novell ratified? No. Novell does not allege in its In support

pleadings that it has ratified the agreements.

of its pending motion for summary judgment, Novell emphasizes that it has rejected the agreements at every step. And when we explained a few months ago in opposition

to that motion that we were confused as to that position, they explained that our view that they had implicitly approved the agreement that was wrong. nothing could be further from the truth. Now, Novell also wrote letters to Sun and Microsoft in September 2007, those came in today as exhibits, those were produced yesterday morning. I don't know why they were I don't know why They said that

produced six months after they were sent.

they were produced two months after we brought our motion. 13

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And I don't know why they were produced the morning of trial. Um, but they don't help Novell. One quote, we'll go

through some more in both letters, we believe that the 2003 agreement is unenforceable, void or invalid. And, of

course, you heard Mr. Jones from Novell say today repeatedly if he had known about the Sun and Microsoft and SCO source agreements, if Novell had known about them, they would not have approved them. Clearly, under its own version of the

facts, Novell has not ratified these agreements. Question four, SCO was not authorized to execute the agreements and Novell has not ratified them, do the counter parties get back the money they paid under the agreements? Again, this is Novell's version of the facts. law, they do. They get restitution. Under the

As to any void or

invalid contract, taking a step back from principal agent law, for a second, as to any void or invalid contract, the counter party who made payments under the contract is entitled to restitution of them. As to a principal in

particular, if the principal disclaims the agents acts as unauthorized, he has no grounds to retain the fruits thereof. That is from the Tenth Circuit. That is the

Maryland Casualty case.

And we put in another quote because

we like it so much, one court says it is repugnant in every sense of justice and fair dealing that a principal shall avail himself of the benefits of the agent's act and at the 14

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same time repudiate his authority.

And in these letters

that were produced yesterday, Novell acknowledges the likelihood of restitution telling Microsoft and Sun if we recover money from SCO on account of the 2003 agreement, we intend to hold it for remittance to Microsoft or Sun or a determination that no such remittance is necessary. So I think it is clear that the answer to question four is yes, these counter parties have restitution rights. So we come to question five where SCO was not authorized to execute the agreements, Novell has not ratified them, and the counter parties get back the money, does Novell somehow have a claim to hold the money in the interim. Hold being

the word that Novell actually used in the Sun Microsoft letters. The answer to that question under the law is no.

The most recent authority, from the restated third and reflects as well the restated second agency, makes clear that quote, "as between the principal and the agent," that is a phrase Novell itself used in opposing our motion, "as between the principal and agent, if the principal declines to ratify the agent is not even under a duty to account to the principal." Can you pull up section 402 and blow up that highlighted part. agency. This is from the restatement third of Ratification has an immediate

This is from 2006.

effect on legal relations between the principal and agent. 15

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Ratification recasts those legal relations as they would have been had the agent acted with actual authority. Legal

consequences thus relate back to the time the agent acted. Once the principal has ratified the agent's act, the agent is subject to a fiduciary duty to account to the principal as if the agent had acted with actual authority. And then

the next paragraph, legal relations as between agent and principal, are affected by whether the agent has acted with actual authority. relationship. If we pull up Section 401, this is also from the restatement third of agency. "When a person ratifies So ratification clearly bears on this

another's act, the legal consequence is that the person's legal relations are affected as they would have been had the actor been an agent acting with actual authority at the time of the act." Again, ratification is keen. If you would pull that

One more here on Section 408. up.

We show, Your Honor, this language as a sort of a Novell's argument has been somehow the

fortiori argument.

court should assess as between Novell and SCO who has a better claim, who would it be more just to allow it to hold onto the money. That is not what the law says. The law

actually says if you're not even an agent, let alone whether you lack the authority, if you were just purporting to be an agent, it is still the case that the principal can't get the 16

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money if he doesn't ratify.

If he was not an agent when he

acted, the subsequent ratification by the principal subjects him to the liability of a fiduciary with respect to the transaction. Thus, if he made a profit or received

property, the ratification subjects him to a duty to the principal as to what he has received. Why don't we go back to the slides, slide six. The

well-established authority, Your Honor, also makes clear that the third-party, the counter party, is entitled to restitution from either the principal or agent. There is no

suggestion in the law that the third-party has to wait until the money goes to the principal and then seek restitution on the principal. Let's pull up Section 47, and blow that up, just the highlighted part. I won't belabor these, Your Honor. And

sometimes A's, B's and C's are hard to follow but I think these are pretty straightforward. These are illustrations A shows B a telegram

from the restatement of restitution. from C.

A is a principal and the owner of Black Acre by an

erroneous interpretation of the legal effect of the telegram, both parties believe that it authorizes A to sell Black Acre. B pays A for Black Acre. B is entitled to

restitution from A unless C ratifies or A before learning of the mistake pays C the money. And number two, the same

facts as illustrated in one, except that B now sends the 17

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money to C. ratifies.

B is entitled restitution from C unless C

The point of these illustrations, Your Honor, to get a chance to stick with them for a minute, is there is no suggestion in here that the third-party has to wait for the principal to get the money. That the third-party has to

wait for the principal to resolve its dispute with the agent and then it has a right to restitution. suggestion of that. There is no

Whoever has the money, if the principal

was entitled to get it, the third-party gets restitution from the agent. I submit. And finally, Your Honor, to go back to slide six. point out that the Tenth Circuit has long observed that faced with the question of ratification, quote, the principal is impelled on the horns of a dilemma. I think We So Novell is wrong about that area of law,

Novell suggested in its opposition brief that we're trying to put them in some uncomfortable or incongruent situation that they're not. principal. They are in the same situation as any

You have to choose whether to ratify, and if you

have chosen not to, which Novell has chose not to, legal consequences follow. Two more slides, Your Honor, to try to bring this home. We read the court's August 2007 order as leaving open

for determination in this trial as to whether we owe Novell 18

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money.

And, you know, our position is that any SVRX

component in these agreements at issue has de minimis value. So our position is that liability on SCO's part to Novell has not been established as such. different view. We suspect Novell takes a

If they do, we respectfully submit that

reconsideration of at least part of the August 2007 order is appropriate. Now why would that be? I can understand Your

Honor's reluctance to hear motions for reconsideration so many months later, but we think we have good grounds. would be happy to set them forth in more detail, but in summary, first, the authority we have gone through reflects it would be a manifest injustice in one of the standards for reconsideration for Novell to recover any money while it disclaims SCO's authority. Remember the quote that we like We

so much, "repugnant in every sense of justice and fair dealing." And second, Novell's production yesterday of the September 2007 letters is crucial new evidence. I think

that would have been very relevant for the court to know if at the time of the summary judgment ruling it had been made clear that Novell had rejected these agreements and at the same time was acknowledging the possibility of remittance. Or, as we go to the next slide, the -- actually let me finish that thought, the possibility that Novell reserves the right to keep the money. They have told Sun and 19

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Microsoft there may be grounds for remittance, but if we get money from SCO we may keep it. under any theory of law. Well, they can't keep it

We don't think they can get it

from us but they certainly can't keep it if at the same time they are claiming authority. This would have been relevant

information to know if at the time of summary judgment they were taking these positions and therefore we submit that reconsideration might be appropriate. Final point, Your Honor, and we have made this point in our trial brief so I won't belabor it. Under the APA

amendment number one, SCO is entitled to retain 100 percent of quote, "source code right to use fees attributable to USVRX licenses as approved by the seller," that is Novell, "pursuant to Section 4.16(b) hereof." If Novell now

reverses course and chooses to ratify the agreements, and the court were to allow it, SCO keeps a substantial portion of the alleged SVRX royalties that Novell seeks under these agreements. Now why would that be? approval, we never sought it. We know Novell didn't give its Why would section 4.16(b) in Two

this language of amendment number one be satisfied? reasons.

One, the literal effect of ratification as we saw

in the earlier authority makes Novell's approval relate back to the time of the execution of the agreement. as if they had approved the agreements. It would be

If they have 20

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approved them, as Novell has argued up and down for the first two days, the agreement's at issue involve significant source code right to use fees. to use source code. And second, Your Honor, we do detail this in our trial brief, Novell might argue that it can't be that we get this money under any theory because they didn't give approval at the time. Well to preclude us from attaining these fees Monies paid for the rights

because we failed to get their approval at the time would create penalty provision. There has to be some relationship

between how much money we would be forfeiting, to use the word Mr. Jones used today, how much money we would be forfeiting, and whether at the time of the agreement, whether at the time of amendment number one, Novell actually thought it could be harmed in any where approaching that amount, the amount that we would be forfeiting. to be a relationship between those things. In Novell's view, SCO could forfeit millions of dollars when Novell has not even alleged in its pleadings that our failure to get approval has harmed Novell. They There has

are presenting no evidence at trial that they have been harmed. contract. They are not even pursuing a claim for breach of So in short there would be incongruity between

the size of SCO's forfeiture on the one hand and on the other hand that prospect that Novell could have been harmed 21

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by our failure to get their approval before the execution of the agreements. So for all these reasons, Your Honor, under Novell's own version of the facts, we don't think they have a claim to hold onto this money. THE COURT: MR. JACOBS: Thank you. Mr. Jacobs?

Thank you, Mr. Normand.

I have to confess, Your Honor, this is in

a case that has had lots of interesting issues, this is one of the more -- more interesting ones because of this issue. And we have had a lot of law school exam questions in this case and this is another one of those. the problem with SCO's argument. Number one, the third parties aren't here. In the But I think here is

cases that SCO is advancing in the sections of restatement that SCO is talking about, we're talking about three way disputes. We should not be ourselves penalized for

proceeding step wise to determine -- to be absolutely sure that SCO didn't have the authority to enter into these agreements before we go off and create our own imbroglio in the computer industry by filing lawsuits and creating uncertainty about whether code is infringing or isn't infringing. So the fact that we have decided to proceed, if you will, between SCO and Novell first, means that our situation is different from the situations that SCO is citing in the 22

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case law.

In the case law it is true that the third-party

could proceed against SCO or could proceed against Novell for the restitution. That isn't our case. We don't have

Sun and Microsoft or any of the other licensees here seeking restitution from SCO and Novell. In the third-party case, it is also true that if we retain the benefits of the agreement, if we retain those benefits, they may then claim if we have a subsequent follow on dispute with them look Novell you retained the benefits you can't now disclaim the agreement. third-party argument. But that again is a

That is an argument that Sun or

Microsoft or the SCO source licensees might make but again only if we retain the benefit of that. The purpose of these

letters was to two parties who are not in this proceeding. We don't think -- SCO doesn't stand in their shoes and argue their case for them about why the agreement is or is not void or is or is not ratified. Those are arguments for Sun,

Microsoft for the third-party licensee to make. Here is an analogy that makes this point clear. have a business. I have an employee. I

The employee goes

off, signs an agreement, collects money and keeps the money. And meanwhile, we're the employer, we look at that agreement we go that is not an agreement that the employee could -could permissibly have entered into. not valid. We think that it is

In the meantime, does the employee get to hold 23

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the money?

That can't be right.

One reason it isn't right

one reason it is right is that the employer and the employer employee situation there is no question about the agency status of the employee. The employee is an agent. So we're

not disclaiming -- the employer in that case is not disclaiming the agency as such and that is true here as well. There is no question that SCO is Novell's agent. And there is

We're not disclaiming the agency relationship.

no question that SVRX, in its broadest sense, is the scope of that agency. We are claiming, we are alleging that they lacked the authority as our agents to enter into those agreements. that is -- that is why these cases about disclaiming the agency are irrelevant. And that is why the So

employer/employee hypothetical, I think, is the right one to think about when considering whether SCO gets to hold the money. There is another reason SCO doesn't get to hold the money which makes this case different from the cases that SCO cited. We have this complex agreement that defines the

nature of the relationship and defines SCO's duties to Novell. Those duties include the duty to account. They

include the duty to remit.

They include the duty to make

the -- to have, as the court has found, a fiduciary relationship with Novell as to the SVRX revenues. The 24

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manifest injustice would be if SCO gets to keep the money under those circumstances. And again our case here is not

analogous to the cases that SCO has cited. In fact, Your Honor, I don't -- I cannot claim to have perused every one of the dozens of cases that SCO cited throughout its brief. But if SCO had a case that answered

their question, the last question that they posed on all fours with ours, I'm sure they would have cited it. question is what happens in the interim? That

In this case does

SCO get to hold the money having breached their fiduciary duties, having failed to account, having converted, having been unjustly enriched, as the court has found, or is the right answer here for the principal to hold the money and for the principal to work this out with the third parties, Sun, Microsoft and the SCO source licensees. There is nothing inconsistent with the position we have taken in the case or in our letter to Sun and Microsoft with that proposition. here. It is the right thing to happen

Novell is ultimately going to have to work out with

Sun and with Microsoft and the SCO source licensees exactly what happened here and exactly what should follow as a consequence. There are a couple of other minor points. exceeding five minutes, I apologize. arguments. I'm

They anticipated our

It cannot be that what happens as a result of 25

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the follow-on negotiation dispute, whatever, with Sun, Microsoft and the SCO source licensees necessarily amounts to a ratification that necessarily relates back and constitutes approval dating back to 2003 of what SCO did here. There is far too much water under the bridge for that

to be the legal effect of the outcome when Novell and the third parties sit down and figure out what to do about that. There are all sorts of intermediate scenarios between Novell saying at the end of all of this oh yeah those agreements are fine, no problem. And by the way, whatever

we said about SCO breaching, whatever we said about their breach of our fiduciary duties, whatever the court's findings that they breached, oh, this is all retroactive, a ratification back to 2003. SCO has no -- cites no case that

is on all fours with that scenario and the idea that this is an unenforceable penalty, this is not a contract case, this is an unjust enrichment case. This is a conversion case.

SCO has no cases in which a defendant who has been found liable for unjust enrichment and now we're figuring out exactly how much should be awarded, gets to say well that is a penalty that is an unlawful penalty. There are no penalty

cases that deal with the situation we're dealing with here. So I started out by saying that this is an interesting issue, but our case is unusual and our case doesn't fit with SCO's cases. The most -- the basic failure of SCO's legal 26

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argument is they have no case that deals with the situation between a principal and an agent as between the two of them when the third-parties are not present and the court is not actually called upon to declare, with the third-party present, whether the agreements are void or not. Last point. We believe, as we say in our letters,

that the agreements are void or invalid or not enforceable or whatever. That is our belief. But we'll find that out.

But when an authoritative decision-maker like a court decides that question. And until that question is finally

decided, this is the statement of our position and a statement of our belief but it is not -- but the legal effect of voiding of the agreement has not yet occurred. Thank you very much. THE COURT: MR. NORMAND: Thank you, Mr. Jacobs. Thank you, Your Honor. Mr. Normand? Five quick

points, Your Honor, to mirror the five points I started with. First, Novell cites no cases that support its theory that it gets to hold this money. If you look at Novell's

brief there are no cases that use counsel's phrase are on all fours. Second, the law has long made clear, including the Tenth Circuit, that when a principal learns of what the agent has done, the principal is on the horns of a dilemma. 27

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Novell suggests that it gets to go to court, have a resolution of the issues that will bear in this decision and then make the decision. That is not the horns of a dilemma.

Three, the law says that in this sort of situation principal has to quote promptly make a decision. If there

was any ambiguity as to whether a principal got to go to court, that language clarifies it. law in our brief. promptly. Now, what happens when the principal makes its decision? The question is whether the principal wants to We cited a lot of that

The principal has to make its decision

use a phrase, fall into the principal agent box or not. That is the horns of the dilemma. transaction? Do I want to ratify this

Do I want to regard it as one that is within Do I want to go into the

my relationship with the agent? principal agent box or not? but you have to make it.

It could be a hard decision, It

Novell has made the decision.

did not ratify the agreements. Fourth, the question on this motion is not whether SCO gets to keep the money. entitled to the money. my argument, Your Honor. The question is whether Novell is This is what I alluded to earlier in It is not a court of equity where We have got allegations of

we're assessing relative rights.

principal agent relationship and the question on Novell's claims and therefore on our motion is Novell affirmatively 28

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entitled this money.

The law says it is not.

Fifth, do we have any authority that is on all fours? We do. Can we pull up Section 402. The key phrase that

Mr. Jacobs keeps using and suggesting that we don't have any direct authority bearing on it is as between the principal and agent. We all agree we're in a trial as between the We saw this law earlier.

alleged principal and agent.

Ratification retests those legal relations as they would have been had the agent acted with actual authority. consequences thus relate back. Legal

Bottom Your Honor, legal

relations as between agent and principal are affected by whether the agent has acted with actual authority. they affected? How are

They're affected because if you ratify, It is at that point once

you're in the principal agent box.

the principal has ratified the agent's act, once the principal has ratified the agent's act, the agent is subject to a fiduciary duty to account to the principal. Finally, Your Honor, to use Mr. Jacobs example, and to bring it home as to the claims at issue, if that employer wanted to go to court and seek money, he would have to have ratified. opposite. Novell has not done that. They have done the

And our motion for judgment on the pleadings even

bending over backwards to draw all inferences in favor of Novell, the court cannot infer the opposite of what Novell has alleged and we cited that law as well. Thank you, Your 29

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Honor. THE COURT: advisement. generally. Thank you. I'll take the motions under

Let me just ask you a couple of questions There was a suggestion, and it might have been

in Novell's briefing, that you were defending on among other things estoppel and unclean hands, but I didn't see any unclean hands in the briefing, in your briefing. MR. SINGER: defense. THE COURT: MR. SINGER: THE COURT: Estoppel yes? Estoppel with respect we are. And then in Novell's briefing, there was We are not pursuing that aspect of the

some reference toward the end of your trial brief about a constructive trust. But that didn't come out -- that was

not released from the stay, that is part of the bankruptcy, right? MR. JACOBS: That is exactly right, Your Honor. What

we told the bankruptcy judge was that because that affects the bankruptcy estate, we would seek a judgment here as to the amount. We have a finding that we're entitled to a

constructive trust but because it is a preference, arguably a preference related impact on the bankruptcy estate, that quantification would occur in the bankruptcy court. THE COURT: to say about that? 30 All right. Do you have anything you want

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MR. SINGER:

We agree with Your Honor that the issue

of constructive trust is not before this court because of the ruling of the U.S. Bankruptcy Court. THE COURT: And I assume that the time we have spent

here this afternoon does not count against the 20 hours; is that correct? MR. JACOBS: MR. SINGER: That is correct, Your Honor. Although I think that we are making

pretty good progress. THE COURT: Let me raise one potential problem and a I agreed several months ago to

solution if it is a problem.

help make a presentation to the Federal Bar Association Criminal Law Seminar on Friday which I thought started at 3:00 when I made the agreement. at 2:00. Now, it is just up just a block away so that isn't a problem. But if we need to, we can start at eight on Friday They tell me now it starts

and still get in our five hours if we need them on Friday and be done at 1:30 instead of 2:00. MR. JACOBS: MR. SINGER: Is that --

Absolutely, Your Honor. That is certainly fine with us. And we

may -- we'll probably know by the end of the day tomorrow. THE COURT: By the end of the day tomorrow, you'll But if you need the

know how much time you need Friday.

whole five, we'll start at eight if that is okay. 31

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MR. JACOBS: THE COURT: recess. MR. JACOBS: MR. SINGER:

Great. All right. Thank you. We'll be in

Thank you, Your Honor. Thank you.

(Whereupon, the hearing concluded at 3:59 p.m.)

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STATE OF UTAH

) )ss

COUNTY OF SALT LAKE

)

I, Laura W. Robinson, Certified Shorthand Reporter, Registered Professional Reporter and Notary Public within and for the County of Salt Lake, State of Utah, do hereby certify: That the foregoing proceedings were taken before me at the time and place set forth herein and were taken down by me in shorthand and thereafter transcribed into typewriting under my direction and supervision; That the foregoing pages contain a true and correct transcription of my said shorthand notes so taken. In witness whereof I have subscribed my name and affixed my seal this 7th day of May, 2008.

________________________________ Laura W. Robinson, CSR, RPR, CP and Notary Public

MY COMMISSION EXPIRES: December 1, 2008

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