SCO Grp v. Novell Inc

Filing 586

NOTICE OF FILING OF OFFICIAL TRANSCRIPT for dates of 7/17/06 - Motion Hearing before Judge Dale A. Kimball, re 567 Notice of Appeal. Court Reporter/Transcriber Rebecca Janke, CSR, RMR, Telephone number 801-521-7238. 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 2/24/2009. Redacted Transcript Deadline set for 3/6/2009. Release of Transcript Restriction set for 5/4/2009. (jwt) Modified on 5/4/2009 - removed restricted text (rak).

SCO Grp v. Novell Inc

Doc. 586

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF UTAH, CENTRAL DIVISION

4 ________________________________ SCO GROUP, ) 5 ) ) 6 Plaintiffs, ) ) 7 vs. )Case No. 2:04-CV-139 DAK ) 8 NOVELL, INC., ) ) 9 ) Defendant. ) 10 ________________________________) 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 1 Reporter: REBECCA JANKE, CSR, RMR BEFORE THE HONORABLE DALE A. KIMBALL DATE: JULY 17, 2006

REPORTER'S TRANSCRIPT OF PROCEEDINGS MOTION HEARING

Dockets.Justia.com

1 2

APPEARANCES

3 FOR THE PLAINTIFF: 4 5 6 7 8 9 10 11 12 13 14 15 16 FOR THE DEFENDANT: 17 18 19 20 21 22 23 24 25

HATCH, JAMES & DODGE BY: BRENT O. HATCH, ESQ.

10 WEST BROADWAY, SUITE 400 SALT LAKE CITY, UTAH 84101

BOIES, SCHILLER & FLEXNER BY: WILLIAM T. DZURILLA, ESQ. STUART H. SINGER, ESQ. 401 EAST LAS OLAS BOULEVARD FORT LAUDERDALE, FLORIDA 33301

ANDERSON & KARRENBERG BY: THOMAS R. KARRENBERG, ESQ.

50 WEST BROADWAY, SUITE 700 SALT LAKE CITY, UTAH 84101

MORRISON & FOERSTER BY: MICHAEL A. JACOBS, ESQ.

425 MARKET STREET SAN FRANCISCO, CALIFORNIA 94105

2

1 JULY 17, 2006 2 3 4 THE COURT:

SALT LAKE CITY, UTAH PROCEEDINGS *** We're here this morning in the For

5 matter of SCO Group vs. Novell, Inc., 2:04-CV-139. 6 plaintiff, Mr. Brent Hatch. 7 Hatch. There you are.

Mr. Brent

Mr. William Dzurilla -- did I say that right --

8 and Mr. Stuart Singer. 9 10 MR. SINGER: THE COURT: Good morning, Your Honor. For defendant, Mr. Thomas

11 Karrenberg and Mr. Mike Jacobs, correct? 12 13 MR. KARRENBERG: THE COURT: Good morning, Your Honor. These are your motions.

Let's see.

14 Who's going to argue? 15 16 17 folks? 18 19 20 21 22 MR. SINGER: THE COURT: MR. SINGER: THE COURT: MR. JACOBS: I will, Your Honor. Mr. Singer? Yes. Go ahead, Mr. Jacobs. Your Honor, I've been informed by MR. KARRENBERG: THE COURT: Mr. Jacobs will, Your Honor.

Who is going to argue for you

23 Mr. Singer that SCO will be amending its pleading and 24 will be specifying that the unfair competition claim 25 arises out of Utah law, so I think that the motion for a

3

1 more definite statement should be susceptible of 2 resolution without need for an opinion. 3 can -4 THE COURT: All right. Is that right, Mr. Singer

5 Mr. Singer? 6 7 MR. SINGER: THE COURT: That's correct. So, we assume for now that the All right.

8 motion for more definite statement is moot. 9 So argue the arbitration motion. 10 MR. JACOBS:

First let me update Your Honor on Both sides have appointed

11 the status of the arbitration. 12 arbitrators.

There is a procedural step in the ICC

13 arbitrations where the ICC decides to set the arbitration 14 in motion, and that has occurred. The party-appointed

15 arbitrators are now conferring about the appointment of 16 a -- of a third arbitrator. All three arbitrators will

17 then be neutral and the arbitration will be underway. 18 Some of the issues that SCO is raising here

19 will be raised in the arbitration based on the pleadings 20 they have filed. The arbitration, of course, takes place

21 under Swiss law, and the arbitration clause in the 22 relevant agreements is governed by Swiss law. So, in

23 terms of what this Court should be doing in view of the 24 fact that an arbitration is underway, I think it's 25 important to note that the arbitration is, indeed, as we

4

1 represented, getting underway. 2 Could the arbitration conceivably result in a

3 threshold determination that might cause this Court to 4 revisit a grant of a stay? I suppose that's right, and

5 so one of the things we would be contemplating is -- one 6 side or the other would -- if the stay were granted as 7 we've requested, if there were an outcome in the 8 arbitration that led the stay to be no longer relevant, 9 one side or the other would come to the Court and advise 10 the Court, but I think our basic argument to you, Your 11 Honor, is that with that arbitration underway and with 12 the parties broadly in agreement that there is overlap 13 between many of the issues between SCO and Novell -14 15 THE COURT: MR. JACOBS: Not all. Not all. That's correct. And let

16 me distinguish -- let me go to that, Your Honor, because 17 I think it is appropriate to distinguish the claims that 18 are the subject of the motion to stay, put them into two 19 baskets. Basket one are the claims that SCO newly added And

20 in its Amended Complaint at the turn of the year.

21 those are the claims that specifically cited SUSE and 22 SUSE LINUX as infringing and were the claims that gave 23 rise to the united Linux arbitration. 24 those claims into basket one. So I would put

I don't think there could

25 be any credible argument whatsoever of delay or waiver --

5

1 or, actually, as it arises under Section 3, I realize 2 after rereading the statute, the term is "default" under 3 Section 3. 4 But as to those claims, those are all new in

5 this litigation, and there is really -- I don't think 6 there is any colorable argument that Novell has in some 7 way or SUSE has in some way acted so as to defeat 8 Novell's motion under Section 3 of the FAA. 9 Then there is the motion -- the part of the

10 motion that addresses the overlap between the slander of 11 title claim SCO has brought and the ownership in Linux 12 issue that is in the arbitration. Just to make clear

13 exactly what that argument is, in the arbitration, SUSE 14 will be -- is contending that by operation of the United 15 Linux agreements, if SCO owned UNIX and if there was UNIX 16 code in Linux that SCO otherwise would have had a claim 17 to, it gave up that claim, if you will, by operation of 18 those agreements. 19 So it's a pretty heavily conditional argument It would, nonetheless, have a

20 even in the arbitration.

21 substantial impact on the slander of title claim were 22 SUSE to prevail on that contention because what SCO would 23 then -- SCO's argument here on slander of title is that 24 Novell has slandered its title to UNIX, especially 25 insofar as SCO has asserted that there is UNIX in Linux.

6

1 And the arbitration would address that. 2 There is, of course, the different chronology. We have had a fair amount of

3 That claim was filed.

4 motion practice under it, and so one could differentiate 5 the slander of title claim from the copyright claims and 6 the claims that are derivative of the copyright claims 7 that SCO has brought here. And I emphasize that, as to

8 those copyright claims, SCO has specifically cited SUSE 9 and SUSE Linux. Its Exhibit B to the Complaint says, This

10 "This function is implemented in SUSE Linux. 11 function as implemented in SUSE Linux." 12

I mention that because after rereading the

13 Section 3 cases in preparation for the argument, I 14 actually don't think that our fact pattern is very well 15 explicated or revealed in the case law in Section 3. 16 What this case presents is the case where -- let's just 17 use the parties here. 18 agreement with SUSE. SCO has an intellectual property SUSE is a licensor of Novell, and

19 Novell distributes the code that SUSE licenses to Novell. 20 SCO then sues Novell based on the code that Novell 21 distributes from SUSE. And there's an agreement between

22 SUSE and SCO, that intellectual property agreement, and 23 that intellectual property agreement has an arbitration 24 clause. 25 The meaning of that agreement, the impact of

7

1 that agreement, therefore, should, I think -- maybe I 2 should say must be arbitrated, and it would not be 3 appropriate, given the deference to arbitration, 4 particularly in the international context, for the Court 5 to have to construe that agreement when Novell would 6 interpose that agreement and its impact on SCO. And so,

7 having -- SCO having made this choice, at the highest 8 level, the choice SCO has made is to change business 9 direction. 10 During the period of United Linux, it was a It was an advocate of Linux. It was

11 pro-Linux company.

12 a supporter of Linux.

And, hence, it signed the United

13 Linux agreement and it signed up to an arbitration clause 14 with SUSE. 15 16 made. That's the next level of the decision-making it It agreed to arbitrate with SUSE its disputes What we're

17 arising out of the United Linux agreements.

18 really doing in Section 3 -- in our Section 3 motion here 19 is saying -- is saying to the Court: 20 arbitration. Defer to that

Let that arbitration proceed so that the

21 arbitrators can confirm that we're correct, we hope, as 22 to the meaning of that agreement and its impact on SCO's 23 copyright claims. 24 The other aspect of this, the more formal

25 aspect of this motion, that very few of the cases treat,

8

1 is the fact that the arbitration is underway, and there 2 is no -- usually the cases come up where there is a 3 Section 3 and a Section 4 motion, and one reads the 4 decisions, and it appears the Courts conflate the Section 5 3 analysis with the section 4 analysis. Our case before

6 you requires teasing out a little bit the distinction 7 between Section 3 and Section 4, and, hence, the focus in 8 our brief on the "issues" language of Section 3. 9 And at the end of the day, after we have

10 parsed -- I think perhaps the most useful part of our 11 reply brief is that section where we parsed the two 12 sides' competing views of what impact the arbitration 13 would have on the claims here. And while there is

14 disagreement, I would say, at the margins about how 15 significant the arbitration would be for the claims SCO 16 has brought here, the copyright basket of claims in 17 particular, there is agreement that it will have an 18 impact. And, hence, we think that agreement confirms

19 that relying on the "issues" language of Section 3, 20 Novell is entitled to a stay. 21 22 23 THE COURT: Mr. Singer. MR. SINGER: Thank you, Your Honor. Your Thank you, Mr. Jacobs.

24 Honor, this is the first time I've had the opportunity to 25 appear before this Court, before Your Honor,

9

1 specifically, in these cases, and I appreciate that 2 opportunity. 3 On this motion to stay, I'd like to start with

4 what is the second argument in our brief, what we believe 5 is the logical starting point here, which is that no stay 6 under 9 USC Section 3 is authorized or appropriate here 7 because the issues and claims in the lawsuit we have 8 brought against Novell are not shown to be arbitrable. 9 Now, the language of Section 3 says that the

10 Federal Arbitration Act requires a stay if a suit is, 11 quote, brought in any of the Courts of the United States, 12 quote, upon any issue referable to arbitration. So we

13 disagree with Novell on the idea that somehow the Court 14 can impose a stay, under Section 3, without considering 15 the issue of whether or not the claims in this suit, the 16 issues in this suit as framed by those claims are 17 arbitrable. We think the Court has to do that, and the

18 cases support that, and that because they have brought a 19 motion to stay in this Court, it is this Court, and not 20 the Swiss arbitration, that decides whether the claims 21 brought here in this action are in fact arbitrable. And

22 you cannot separate that and put it aside from the issue 23 of whether a stay should be granted. 24 Now the focus under the case law on whether or

25 not claims are arbitrable are on the plaintiff's case.

10

1 The statute itself we think addresses that.

9 USC

2 Section 3 talks about a suit brought upon an issue 3 referable to arbitration. And the Tenth Circuit, we

4 think, indicates that it's the issue of whether claims 5 are referable to arbitration. It's to be determined by a

6 three-part test that really the Court adopted from the 7 Second Circuit. And I'm referring to the Tenth Circuit

8 case of Cummings vs. Federal Express, which is found at 9 404 F3d 1250, a 2005 case. 10 And the Court expressly said that to determine

11 whether a particular dispute falls within the cope of an 12 agreement of arbitration clause, the first part of that 13 test is to examine whether it is a narrow clause or a 14 broad clause. 15 16 And then, if it's a narrow clause -The arbitration clause. The arbitration clause, exactly,

THE COURT: MR. SINGER:

17 Your Honor.

If the arbitration clause is narrow, then it

18 has to be -- it says the dispute should be determined as 19 to whether its over an issue that is, on its face, within 20 the purview of the clause and that, generally -- and this 21 seems to be the third part of the test -- that the 22 collateral matters will in that case be beyond the 23 purview of arbitration. 24 Now, the Cummings case also has two other First of all, they

25 holdings we think are very important.

11

1 said that while generally there is a presumption in favor 2 of arbitration, a policy in favor of arbitration, that 3 isn't the same if you have a narrow arbitration clause. 4 The Court noted that arbitration is a matter of contract, 5 and a party cannot be required to submit to arbitration 6 in any dispute which he has not agreed so to submit, and 7 when an arbitration clause is narrowly drawn, the policy 8 in favor of arbitration does not have the strong effect 9 here it would have if we were construing a broad 10 arbitration clause. 11 The second point I would make about Cummings is

12 that it seems to indicate that it is not enough that 13 there is a defense that the defendant would seek to raise 14 which may involve interpretation of an agreement that is 15 subject to arbitration. In the Cummings case itself --

16 it was a Federal Express contractor who said there were 17 various oral representations. You had a narrow

18 arbitration agreement that dealt with the written 19 document. The Court said these were not within -- the

20 oral representation claims were not within the scope of 21 the arbitration clause. 22 And then they dealt with Federal Express'

23 argument saying that, well, but, there is a merger 24 clause, and that merger clause would give us a defense of 25 a written agreement that would prevent you having a valid

12

1 oral representation claim.

And the Court, at page 1263,

2 said that this argument is only relevant to the question 3 of whether Fed Ex has defenses, not to the question of 4 whether the claims are subject to arbitration. 5 And we think that is consistent with how other For

6 Courts have looked at the issue of arbitrability.

7 example, cited in our brief is the Tracer Research Corp. 8 case in the Ninth Circuit, 42 F3d 1292, where you had a 9 misappropriation-of-trade-secrets claim that the Court 10 found did not arise from a licensing agreement that had 11 an arbitration claim, even though there was some 12 relationship between the two. 13 So we think it's important, then, to turn to

14 the arbitration clause in this case and whether it is 15 narrow or broad. And we have briefed this issue, and

16 there doesn't seem to be a defense of the breadth of the 17 clause in the reply, so I'm not going to spend a lot of 18 time here, but I do want to note the language of those 19 clauses. There are two. One is in the master

20 transaction agreement, and the other is in what's called 21 the joint development contact. Both of these were

22 entered into between SCO and SUSE back in 2002. 23 And the language is almost identical. In the

24 master transaction agreement, Section 9.2 -- and these 25 are in the exhibits before the Court -- it says that any

13

1 differences or disputes arising from this MTA, this 2 master transaction agreement, or from contracts regarding 3 its performance shall be -- and it says settled by an 4 amicable effort, and if the parties couldn't settle it, 5 then it goes to arbitration. In Section 12.2 of the

6 joint development contract, it provides that any 7 differences or disputes arising from this JDC or for 8 contracts regarding its performance shall be settled by 9 amicable efforts and, if necessary, arbitration. 10 There is no relating-to language. There is

11 nothing which is, in a broad form, saying any disputes 12 arising from or relating to these agreements are subject 13 to arbitration. It is simply disputes basically over the

14 interpretation arising from this development agreement 15 where it is a contract that implements it. 16 THE COURT: How would you define the boundaries

17 between arising from and relating to? 18 MR. SINGER: That's a question I think

19 certainly the Courts have struggled with, but I think 20 that the Courts have said relating to is broader, that 21 arising from, meaning that it's the source of the claim, 22 that the claim arises from, say, a contract. If you have

23 a dispute over whether an interpretation of an agreement 24 is right, that that dispute arises from it; whereas, a 25 collateral dispute, like whether or not it might create a

14

1 defense, might relate to those agreements, but the 2 dispute does not arise from those agreements. 3 This is, therefore, a narrow clause, not a And I would submit, Your Honor, that an

4 broad clause.

5 analysis of the claims in our Second Amended Complaint 6 show that they do not arise from this joint development 7 agreement that SCO entered into with SUSE in 2002, but 8 rather they arise from the asset purchase agreement 9 entered into seven years later -- or excuse me -- seven 10 years earlier, in 1995, between SCO and Novell. 11 And one item of support for that -- not only do

12 our own pleadings say that, but, interestingly, if one 13 were to turn to the other motion that was before the 14 Court today, the motion by Novell for a more definite 15 statement, on page 1 how they characterize this case, 16 they say the following quote: "As the Court is aware,

17 this case arises from an asset purchase agreement entered 18 into on September 19, 1995, between Novell and the Santa 19 Cruise operation," our predecessor in interest, under 20 which we allegedly acquired all rights under the APA 21 through a subsequent acquisition of Santa Cruise's 22 assets. 23 And we think that's right. The first cause of

24 action we have is a slander of title action that has been 25 pending from the beginning of this case. And it's the

15

1 issue of whether we are the owner by virtue of that asset 2 purchase agreement to all UNIX and UnixWare copyrights 3 and whether Novell has slandered our title by -- in 4 various forms, not all related to SUSE Linux activities, 5 but simply going public and saying, no, we don't have 6 those copyrights and other activities spelled out in the 7 Complaint. That does not arise within the scope of the

8 SUSE Linux agreement and, therefore, is not arbitrable. 9 Similarly, the argument for breach of that

10 agreement, the non-compete provision, which says that 11 Novell should not compete by using the technology which 12 is being licensed under that agreement -- that is Section 13 1.6 of the asset purchase agreement -- that issue arises 14 from that agreement. It is a question of whether that Now, maybe there is a defense

15 contract has been broken.

16 that Novell wants to argue that under some later 17 agreement that has been changed. And they can raise that

18 on the merits in this Court, but it doesn't mean that our 19 claim for breach of the APA suddenly becomes arbitrable. 20 There is no arbitration provision in the APA.

21 The parties had an opportunity to agree on how they would 22 resolve disputes arising under that agreement, and they 23 didn't put an arbitration agreement in there. Even

24 Novell agrees, I believe, that the third claim, one for 25 specific performance as an alternative, if these

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1 contracts had not conveyed this intellectual property, in 2 the sense that all the documents were signed, that the 3 transfers effectuated, we are entitled to specific 4 performance of that. 5 arbitrable. 6 The fourth claim is the one that they focus on, Even Novell is not claiming that is

7 which is added in our Second Amended Complaint, and that 8 is a claim for copyright infringement. But, again, we

9 made our case for copyright infringement by virtue of 10 Novell's distribution and use of technology infringes our 11 copyrights. Whether they have a defense related to the

12 fact -- which we dispute, of course, on the merits -13 that SUSE Linux and the United Linux Consortium gained 14 rights to certain intellectual property that Novell can 15 now use, that may be a defense, but it does not make the 16 copyright infringement claim arbitrable. 17 And the unfair competition claim goes back to a

18 variety of issues, including the effect on our business 19 by Novell publicly saying that we do not own the 20 copyrights which we believe we acquired back in 1995 21 under the asset purchase agreement. 22 So, a stay under Section 3 requires arbitrable

23 claims, and it's interesting, Novell has not sought to 24 compel arbitration of these claims. If they really

25 believed these were arbitrable claims, they should have

17

1 filed a motion to compel action.

Instead, they haven't.

2 And, instead, they have brought their own Counterclaims, 3 seven Counterclaims, which they are curiously silent 4 about what is to happen with those. But those also have

5 invoked the Court's judicial authority. 6 7 Now, the second issue -THE COURT: Maybe they want me to stay your

8 case and let them proceed on the Counterclaim. 9 MR. SINGER: Well, I can understand why if that

10 was what they intended, they hesitate to articulate that. 11 We think that -- we assume, at least, that when they are 12 calling for a stay, they are not suggesting that it be a 13 one-sided stay. 14 15 THE COURT: MR. SINGER: I assume that's so. But we think that bringing of

16 those Counterclaims is still significant because it is, 17 to use the language of the Courts when they are talking 18 about waiver, the next issue I wanted to address, it is a 19 clear invocation of the judicial machinery to bring 20 Counterclaims. And they brought Counterclaims in 2005,

21 with respect to the first Amended Complaint, to which 22 they did not make any motion to stay back then and to 23 which they believe now that there were arbitrable claims 24 because they believe our slander of title claim, going 25 back to the very beginning of this suit was, according to

18

1 their papers, an arbitrable claim. 2 So, notwithstanding that, they didn't move to Instead, they went

3 compel arbitration on that claim. 4 ahead with the lawsuit here.

We have had two rounds of

5 briefing and arguments and decisions on motions to 6 dismiss, one of which they sought to convert to a motion 7 for summary judgement. We have had litigation on a

8 motion to remand, and we have had Counterclaims brought 9 on six or seven different fronts, as recently as 2005. 10 And we think the right test the Court should

11 use to analyze the issue of waiver is Metts vs. Merrill 12 Lynch, a Tenth Circuit case, 396 -- excuse me -- at 39 13 F.3d 1482. And it sets forth six factors which we think

14 all point here in favor of finding a wiaver so that even 15 if one of these claims, like the copyright claim, is 16 found to be arbitrable or the slander claim is found to 17 be arbitrable, which we don't think is true, you still 18 have to look under the language of Section 3 as to 19 whether or not there has been a waiver. And here the

20 six-factor test we think points toward a waiver. 21 The first is whether or not the actions are We think

22 inconsistent with the right to arbitrate.

23 litigating in Court for two years and bringing six 24 Counterclaims is inconsistent. 25 The second factor is whether the litigation

19

1 machinery has been substantially invoked.

They have

2 invoked it through their motions to dismiss, requesting a 3 jury trial, filing of pleadings, discovery, all of that. 4 The third factor is the length of delay. And

5 we cite four cases at pages 13 of our brief which found 6 waiver on seven to ten months of delay, and here you have 7 over two years of delay after the first allegedly 8 arbitrable claim, the slander claim, was brought before 9 they have now brought this motion. They could have filed

10 their own motion to compell arbitration of that either 11 from SUSE Linux or through Novell if they believed they 12 were a third-party beneficiary of those agreements, but 13 they chose not to do so. They waited to see how they

14 would do on two substantive motions to dismiss, and now 15 they have taken this approach. 16 The fourth issue is the fact that they filed a They did that in

17 Counterclaim without seeking a stay. 18 July of 2005. 19

The fifth issue is whether or not there's been They have requested, and we have

20 substantial discovery.

21 produced virtually all of the documents we have relevant 22 to this. They have even asked us to agree to use those And even after filing this motion to

23 in the arbitration.

24 stay, they have subpoenaed third parties for discovery. 25 That is trying to have, we suggest, your cake and eat it,

20

1 too, to use the discovery tools in Federal Court while, 2 on the other hand, litigating this arbitration. 3 And the prejudice to SCO is there. We have

4 spent two years litigating these motions.

We shouldn't

5 have to wait -- we're the plaintiff here -- to go back to 6 square one to see what's going to happen in a Swiss 7 proceeding. 8 Your Honor, I would like to briefly deal with

9 our third argument, which is that even if the Court finds 10 there is an arbitrable claim, and even if it finds that 11 that claim -- there has not been a waiver, should the 12 Court exercise its discretion to stay other parts of the 13 case? Clearly, if there is no arbitrable claim at all,

14 as we contend and we have argued, then you don't even 15 have to reach a decision. 16 There is simply no stay.

If the Court were to find, let's say, one claim

17 or two claims were arbitrable, the issue of then staying 18 the case or allowing the case to proceed on the other 19 claims arises. We think this Court should follow Justice

20 White's concurring opinion in the Bird case which says 21 that there is a heavy presumption in these circumstances 22 against the stay. That concurring opinion has been

23 adopted expressly by two U.S. Court of Appeals, the 24 Second and Third Circuit, and a number of District Courts 25 which we cite on page 23 of our brief.

21

1

The Tenth Circuit has not expressly addressed

2 whether it's going to adopt that but in both the Coors 3 Beverages vs. Molson case and in the Riley Manufacturing 4 case, it indicated that if the parties intended, by not 5 having an arbitration agreement that covered everything, 6 to litigate in piecemeal fashion, then the Courts need to 7 respect that. 8 Here you have certainly an agreement in the APA

9 which had no arbitration provision, and then you have the 10 SUSE Linux Company which has an arbitration provision of 11 a narrow scope. 12 cases. It falls within the meaning of those

Now, if the Court gets to the issue of, what are

13 the discretionary factors it should look at and whether 14 or not to order a stay, we think those point against a 15 stay. All the arguments I have made with respect to

16 waiver are also arguments against giving a party a stay 17 that has invoked the judicial machinery on all these 18 claims which we've been litigating for the last two 19 years. The Court is familiar with these issues. It

20 would not resolve the whole case. 21 Even if -- and this is the point of our chart Even if the claims in the SUSE arbitration

22 on page 25.

23 are first of all found to be arbitrable -- and we're 24 challenging that in front of the arbitration panel in 25 Switzerland -- and, second, even if we lost all of those

22

1 claims, and, third, even if all those findings by an 2 arbitration panel were given collateral estoppel effect 3 in this Court, which is a real question because that's 4 under Swiss law and there's different issues, even then 5 that would not resolve all the claims in this case; the 6 claims under the APA with respect to slander of title, 7 issues of infringement that deal with the 2.6 version of 8 Linux that is the 2.41 distributed by United Linux, and 9 other issues. 10 On the other hand, if this suit were to go

11 forward and Novell were to win its contention that we 12 never got any UNIX copyrights to begin with, then that 13 would essentially be the end of the day, and there 14 wouldn't be anything worth arbitrating over in 15 Switzerland. 16 17 Honor. Now, one final point I would like to make, Your If the Court is considering a stay of any type,

18 we submit the proper time to consider that would be 19 before trial, which is set in June of 2007, but certainly 20 to allow discovery to proceed on these issues. 21 wanted to make use of discovery. They have

There is no reason the

22 case should be slowed down with respect to discovery. 23 Their argument is really a question, we submit, of 24 whether or not that proceeding in deciding certain issues 25 should go ahead of the trial in this case. We disagree

23

1 on that, but there is no good reason why the most that 2 the Court should do in this discretionary area is say -3 allow the discovery to go forward and revisit the issue 4 before the trial in the spring. 5 6 7 Thank you very much. THE COURT: Thank you, Mr. Singer.

Mr. Jacobs, what do you say to Mr. Singer's

8 arguments about the Cummings case and its effect here? 9 MR. JACOBS: I don't think it has the effect It's a Section 4 case, Your

10 that Mr. Singer proposes. 11 Honor.

It's a motion to compel arbitration, and that is

12 precisely the distinction we were drawing in our papers 13 and in my arguments, so I think we're not -- I don't 14 think our arguments before you today have yet really 15 converged. If you decide that Section 3 and Section 4,

16 notwithstanding their difference in wording and 17 notwithstanding the -- some differences in the juris 18 prudence are the same, then his argument has a lot of 19 force. 20 We are not contending that they have brought We are contending that they have And we have

21 arbitrable claims.

22 brought claims raising arbitrable issues.

23 flagged -- and at the very least, we wanted to be sure we 24 flagged those for you so you could see the intersection 25 between the arbitration and the case that you're

24

1 presiding over, but, moreover, we think Section 3 calls 2 for a mandatory stay where they have brought claims that 3 raise arbitrable issues. 4 There is an interesting question in the case

5 law, even if you're in Section 4 territory, about how you 6 treat affirmative defenses. And we cover that in our

7 brief, but I'd like to flag a passage for you in the 8 Coors case, which is also a Tenth Circuit case, and we 9 are looking for strands of reasoning, Your Honor, because 10 there really aren't crisp holdings on point. 11 F.3d 1511. This is 51

At 1516, the Tenth Circuit is describing the

12 First Circuit's inquiry of the Mitsubishi case which 13 ultimately made it into the Supreme Court. 14 And without in any way suggesting that the

15 First Circuit had it wrong, it cites the First Circuit 16 as: Quotes, having, quote, phrased its initial inquiry

17 as, internal quotes, whether the factual allegations 18 underlying Solar's Counterclaims and Mitsubishi's 19 bonafide defenses to those Counterclaims are within the 20 scope of the arbitration clause, end internal quote, and 21 end of quote. 22 So, there's at least a -- something one could

23 cite to say that, in doing this analysis, one looks to 24 the facts that are at issue rather than the form of the 25 pleading, whether it's in the form of their affirmative

25

1 pleading or a potential affirmative defense. 2 THE COURT: Is this a narrow or broad You heard his argument on that. I did, Your Honor. It's

3 arbitration clause? 4

MR. JACOBS:

5 actually a little tricky here because it's a Swiss law 6 arbitration clause and so I think to prove the breadth of 7 the arbitration clause, one would have to go to what 8 Swiss law says about arbitration clauses. 9 for two reasons. 10 One. I would urge the Court not to make a And I say that

11 determination on that without -- that might have an 12 impact on a Swiss law arbitration which will be 13 considering the scope of its arbitrable jurisdiction. 14 The ICC rules make it clear, by the way -- the ICC rules 15 make it clear that the arbitral panel is to determine the 16 scope of its jurisdiction. 17 Secondly, I'm informed -- and we could brief

18 this if you would like, Your Honor -- I am informed that 19 the way the Swiss law treats an arising-under arbitration 20 clause is somewhere in between the way U.S. law would 21 treat an arising-under versus an arising-under and 22 related-to arbitration clause. 23 issue. So it's a somewhat tricky

Our contention here is that if it turns out that

24 we were incorrect, that the arbitrators decide that the 25 issues that we have identified as overlapping are not in

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1 fact subject to arbitrable -- to arbitral jurisdiction, 2 then you will find out right away because SCO will let 3 you know and we'll be off and running. 4 You do have broad discretion -- notwithstanding

5 Section 3 and its provisions, you have broad discretion 6 to control your docket, and all the cases say that, and I 7 think we have told you -- both sides have told you what 8 we think you should do in that connection. 9 But on this waiver issue, I think the statute Section 3 says that the party moving

10 is pretty clear.

11 for the stay cannot be in default under the arbitration. 12 Now, they may argue -- it would be very surprising to me 13 if this argument would have any legs because they trigger 14 the arbitration with their very recent filing. They may

15 try to argue that there is some kind of waiver or default 16 in the arbitration that should somehow be imputed to 17 Novel, but that, too, is an arbitrable issue in the 18 context of this case. 19 So I think that -- you do, in a way, face a If you decide that Section 3

20 kind of a fork in the road.

21 and Section 4 have the same analysis, we are not 22 contending that they have pled arbitrable claims. 23 not -- we did not petition to compel arbitration. 24 absolutely right. We are He is

And so, if you decide that they are

25 right and we are wrong on this statutory construction

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1 issue, then you would be in the territory of your 2 jurisdiction to control your docket. 3 4 THE COURT: MR. JACOBS: Discretionary. Discretionary. Exactly. If, on

5 the other hand, we are correct that Section 3, in 6 reference to issues, has considerable significance and 7 that the statute was deliberately worded to distinguish 8 between petition to compel claims being arbitrated versus 9 a stay, then I think they just haven't met the force of 10 that argument. They have maybe scored a few hits as to

11 the slander of title claim and our suggestion of overlap 12 there, but nothing that they have said has any bearing 13 whatsoever on the copyright claim and the claims that are 14 derivative of the copyright claim. 15 There is a priciple -- there is one -- there is In a

16 a policy point here that's probably important.

17 petition to compel arbitration, you're saying to the 18 Court: Send them off for the resolution of their claims

19 to an arbitrable panel -- to an arbitral panel. 20 And so the Court has to make the gateway

21 determination about arbitrability that the Supreme Court 22 cited in its recent Howsow case, I think it is, where the 23 Supreme Court articulated this gateway principle. 24 Precisely because we are not contending that their claims 25 are arbitrable, but rather only the issues in -- lurking

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1 in their claims are arbitrable, Section -- it makes sense 2 that a motion to stay pending the arbitration would have 3 a different standard because we are not saying that, at 4 the end of the day, they don't get to come back to you 5 and litigate those claims. 6 We will argue, presumably, depending on how it

7 comes out, that the arbitration is preclusive on certain 8 issues, but their claims are not being sent forever into 9 arbitration, so it makes sense that Section 3 and Section 10 4 would be worded differently and be interpreted 11 differently. 12 THE COURT: I think you're talking now about an

13 order of decision question. 14 15 16 17 MR. JACOBS: THE COURT: MR. JACOBS: THE COURT: I'm sorry? An order of decision. Yes. What makes sense to decide first

18 and what makes sense to decide after. 19 MR. JACOBS: That's exactly right, Your Honor.

20 We think that -- I guess another way of saying it, then, 21 is that Section 3 proposes or prescribes an order of 22 decision in this context. 23 24 25 THE COURT: MR. JACOBS: THE COURT: Thank you. Thank you very much. Thank you, all. I'll take the

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1 motion under advisement and get a ruling out in due 2 course. 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 (Whereupon the proceedings were concluded.) We'll be in recess.

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1 2 3 STATE OF UTAH 4 5 COUNTY OF SALT LAKE 6 7 I, REBECCA JANKE, do hereby certify that I am a REPORTER'S CERTIFICATE ) ) ss. )

8 Certified Court Reporter for the State of Utah; 9 That as such Reporter I attended the hearing of

10 the foregoing matter on July 17, 2006, and thereat 11 reported in Stenotype all of the testimony and 12 proceedings had, and caused said notes to be transcribed 13 into typewriting, and the foregoing pages numbered 1 14 through 30 contain a full, true and correct record of the 15 proceedings transcribed. 16 That I am not of kin to any of the parties and

17 have no interets in the outcome of the matter; 18 And hereby set my hand and seal this 16th day

19 of October, 2006. 20 21 22 23 24 25 _______________________________ REBECCA JANKE, CSR, RPR, RMR

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