Update: SCO to pay lawyers millions for more legal firepower

It plans to take an $8.9M charge in Q4 for legal fees

Unix developer The SCO Group Inc. said today that it is extending an agreement with its lawyers to defend itself against new copyright issues in a move that will take a multimillion-dollar bite out of its fourth-quarter 2003 financial results to go toward paying legal fees.

With the boost in legal resources, SCO plans to, among other things, sue within the next 90 days an end-user company over its use of the Linux operating system, which SCO alleges infringes on its Unix intellectual property.

"Clearly, large customers that are using a lot of Linux machines inside their environment would be the starting point" of SCO's beefed-up legal initiative, said SCO President and CEO Darl McBride during a conference call today.

The company, which is currently embroiled in a lawsuit with IBM over a Unix license, said it plans to take a charge of $8,956,000 in its fourth quarter, which ended Oct. 31, to pay Boies, Schiller & Flexner LLP and other law firms representing SCO. Of that total, $1 million will be paid in cash, and the remaining amount will go toward the issuance of 400,000 shares of common stock, the company said.

"Throughout the course of this year, Mr. [David] Boies and his colleagues have served us extremely well, focusing primarily on contract issues related to IBM. With today's announcement we're confirming a significant expansion of that scope to include broader protections and enforcement of our Unix System V source code, our copyrights and related intellectual property," McBride said. "We're very pleased to have Mr. Boies' firm and his colleagues join us as significant shareholders in SCO."

In addition, SCO said that it plans to take another $8,741,000 noncash charge for the fourth quarter of 2003 related to the issue of Series A Convertible Preferred Stock.

Despite the nearly $17.7 million in charges, SCO said it is holding to its previous fourth-quarter guidance of revenue between $22 million and $25 million. The company is due to release its fourth-quarter and fiscal-year 2003 results on Dec. 8.

With the additional legal representation, SCO is looking to up the ante in the defense of its intellectual property. The company said Boies, Schiller & Flexner will now be dealing with issues related to copyrighted Unix code incorporated into Linux without authorization of appropriate copyright notices. SCO said that code identified includes Unix System V and copyrighted code covered in the 1994 settlement between Unix Systems Laboratories Inc. and Berkeley Software Design Inc. SCO said it bought this code and its associated copyrights from Novell Inc. in 1995.

"One of the things we'll be looking to do is identify a defendant that will illustrate the nature of the problem," said Boies, managing partner of Boies, Schiller & Flexner, during the conference call. "We're going to continue to vigorously prosecute the existing litigation against IBM, but you will be seeing in the near term ... the identification of a significant user that has not paid license fees and is in fact using proprietary and copyrighted material."

The Lindon, Utah-based company sued IBM for $1 billion in March, claiming that IBM had tried to destroy the economic value of Unix to benefit its Linux services business.

SCO and its lawyers planned to detail their new legal agreement and its effect on the company's financial results later today.

"For the last several months, we have consistently stated and maintained that our System V code is in Linux," McBride said. "The claims SCO has are both broad and deep. These claims touch not just IBM but other vendors as well. They also touch certain industry consortia and corporate Linux end users.

"Our claims aren't trivial," he said. "The violations of our intellectual property are not easily repaired. It is our intention to vigorously protect and enforce SCO's intellectual property, System V source code and our copyrights. We're now fully prepared to do that."

McBride also said SCO has signed licensing agreements related to Linux use with large end-user companies in the past several months, but he declined to say how many, with whom and the size and scope of those agreements. He also said there are end-user companies now evaluating whether to enter into a Linux licensing agreement with SCO.

"The pipeline is very healthy there," he said.

Asked about claims that Microsoft Corp. is bankrolling SCO's legal initiatives against Linux, both McBride and Boies said those claims are untrue.

"I haven't had any conversation, nor insofar as I know, and I think I would know, has anybody from my firm, had any conversation with Microsoft nor with Microsoft representatives [related to this issue]. This has been entirely litigation that we have undertaken on behalf of SCO," Boies said.

"We're 100% driving our strategy here. There is no connection with Microsoft on this," McBride said.

The monetary fuel for expanding SCO's legal activities is directly linked to its $50 million private placement of Series A Convertible Preferred Stock, completed on Oct. 16, McBride said. "Now we have a significant war chest to fund this effort," he said.

Getting a substantial part of its payment in a client's stock "isn't usual but it isn't unique either," Boies said, adding that his firm bills clients in a variety of ways. It decided to receive SCO stock as payment "because we have confidence in where the company [SCO] is going," Boies said.

In related news, McBride told IDG News Service in an interview yesterday that the company might take legal action against Novell because its $210 million bid for SUSE Linux AG violates a noncompete agreement.


Copyright © 2003 IDG Communications, Inc.

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