SCO Can’t Claim Ownership of the UNIX Operating System

The U.S. Court of Appeals for the Tenth Circuit upheld a district court finding that Novell, Inc. had not transferred its copyrights regarding the well-known UNIX computer operating system to The SCO Group, Inc. through a contract between the two parties during the mid-1990s. The SCO Group, Inc. v. Novell, Inc., Case No. 10-4122 (Fed. Cir., Aug. 30, 2011) (O’Brien, J.)

In 1993, Novell owned the rights to the UNIX operating system source code. At that time, Novell licensed the source code and, at the same time, developed its own customized UNIX platform named UnixWare. However, in 1995, Novell sought to exit the UNIX licensing business. Novell subsequently entered an agreement with The SCO Group (SCO), under which SCO would purchase certain assets from Novell, excluding “all copyrights and trademarks, except for the trademarks UNIX and UnixWare.” Because SCO believed that this provision was too restrictive, preventing SCO from selling the UNIX and UnixWare products without fear copyright infringement of the underlying source code, the parties subsequently amended that provision to read, “[a]ll copyrights and trademarks, except for the copyrights and trademarks owned by Novell as the date of the Agreement required for SCO to exercise its rights with respect to the acquisition of UNIX and UnixWare technologies.” (Emphasis added.) A key provision was that Novell retained the right to royalties collected by SCO on sales of original source code UNIX licenses. SCO received only 5 percent for administrative fees for any such sale.

By 2002, the UNIX business was not as profitable as SCO had hoped. So, SCO began an “aggressive marketing” campaign by seeking licenses from users of Linux, another computer operating system, on the theory that Linux incorporated portions of the UNIX source code. Novell was not interested in pursuing this approach, and a dispute arose as to who owned the copyright to the underlying UNIX source code: Novell or SCO via the 1995 agreement.

At trial, SCO testified that the purpose of the contract amendment was to correct the error under which Novell kept the UNIX copyrights in the original contract. SCO argued that UNIX copyrights were “required” for SCO to run its business. Novell countered that the amendment was never intended to transfer the UNIX copyrights to SCO. Rather, the amendment was to pacify SCO’s fears about violating Novell’s intellectual property rights in the everyday operation of the transferred portion of the business. Novell argued that the entirety of transaction consisted of a sale of the UNIX licensing business, which SCO would continue on behalf of Novell in exchange for 5 percent of total royalties while Novell retained the copyrights and 95 percent of the royalty stream, and the sale of UnixWare and the license to use the underlying UNIX source code to develop its own copyright material.

The court recognized that copyright ownership, in general, would be required to protect the existing UNIX licenses. Novell’s interpretation that it retained ownerships of the UNIX copyrights and merely sold the right to SCO to license and develop the UNIX source code was not contrary to the original contract provision or the related amendment. The district court jury found the same. The Court of Appeals affirmed giving discretion to that finding.

Practice Note: Given its intangible nature, intellectual property is more indefinite than physical or tangible assets. Accordingly, transfers and licenses of intellectual property assets should first be clearly delineated and defined in contract. The metes and bounds, including ownership and control of that intellectual property, should be adequately defined as well so as to avoid later ambiguities or interpretations in any contract disputes.