SCO builds 'significant' war chest for legal fight

The SCO Group has extended an agreement with its lawyers to defend itself against new copyright issues in a move that will take a...

The SCO Group has extended 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," said SCO's president and chief executive officer Darl McBride.

The company will take a charge of $8,956,000 in its fourth quarter ended 31 October 2003, to pay Boies, Schiller & Flexner and other law firms representing it. SCO will pay $1m in cash while the remaining amount will go toward the issuance of 400,000 shares of common stock.

"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."

With the additional legal representation, SCO is looking to up the ante in the defence of its intellectual property. The company said Boies, Schiller & Flexner will now be dealing with issues related to copyright Unix code incorporated into Linux without authorisation or appropriate copyright notices.

SCO said that code identified includes Unix System V and copyrighted code covered in the 1994 settlement between Unix Systems Laboratories and Berkeley Software Design. SCO said it bought this code and its associated copyrights from Novell 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 David Boies, managing partner of Boies, Schiller & Flexner.

"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 licence fees and is, in fact, using proprietary and copyrighted material."

SCO sued IBM for $1bn in March, claiming that IBM had tried to destroy the economic value of Unix to benefit its Linux services business. [

"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. 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 over 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.

Both McBride and Boies insisted claims that Microsoft is bankrolling SCO's legal initiatives against Linux 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.

The monetary fuel for expanding SCO's legal activities is directly linked to its $50m private placement of Series A Convertible Preferred Stock, completed on 16 October. "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".

Scarlet Pruitt writes for IDG News Service

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