In the United States District Court, District of Nevada

The SCO Group, Inc., v. AutoZone, Inc., Case CV-S-04-0237

Before the Honorable Robert C. Jones

July 12, 2004

Motion Hearing

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The Court: SCO Group and AutoZone? [pause] Good morning. Your appearances, please.

Stanley Parry for SCO: Good morning, Your Honor. Stanley Parry on behalf of SCO Group and with me this morning is -- I'll let them introduce themselves -- but David Stone is to my right.

David Stone for SCO: Good morning, Your Honor. With Boies, Schiller & Flexner.

Robert Magnanini for SCO: Bob Magnanini, also from Boies, Schiller & Flexner.

Parry: And also corporate counsel Ryan Tibbitts is here with us . Your Honor, we have a motion pro hac vice to allow Mr. Magnanini and Mr. Stone to appear and argue this motion. Could that be granted at this point?

The Court: That would be granted in the normal course and they certainly may argue this morning, without, assuming without objection.

Stone: Thank you, Your Honor.

James Pisanelli for AutoZone: Good morning, Your Honor. James Pisanelli from Schreck Brignone. I'm here with co-counsel from Alston & Bird, Dave Stewart and Mike Kenny.

Both Stewart and Kenny: Good morning.

Pisanelli: Mr. Stewart will be handling our argument.

The Court: OK.

Stewart: Good morning, Your Honor. As you know, we've got three motions before you this morning, a Motion to Transfer, a Motion to Stay, and a Motion for a More Definite Statement. And if you have a preference as to which of those motions you'd like to hear first, I'll certainly. . .

The Court: My preference is to hear all of them from you at the same time, [laughter] but of course one at a time, as you may present the argument.

Stewart: That's what I'll do, and I'll start with the Motion to Transfer and will do my best not to just parrot back our brief to you but sort of hit the high points.

The Court: I've read it.

Stewart: On the Motion to Transfer, it is certainly true, as SCO has pointed out, that ordinarily the plaintiff's choice of forum is not to be disturbed lightly on a motion to transfer. However, the law in this circuit is established, as it is in other circuits as well, that that rule goes out the window essentially if the plaintiff chooses to file outside their home district, and in particular, the Ninth Circuit has said, as we've cited in our brief, that if the plaintiff chooses to file outside its home forum, its choice of forum is to be given "minimal consideration".

There are a number of factors that this court has recognized that are properly considered in connection with a motion to transfer brought under 28 U.S.C. Section 1404(a), as this motion is. First is convenience of the witnesses, second is access to proof, third is convenience of the parties, and fourth is the interest of justice. All four of these factors, we believe, overwhelmingly support transfer of this case to the Western District of Tennessee, which is the district to which we requested this case be transferred, and this case could have been filed there originally, because that's the district where AutoZone's principal residence is.

With regard to the convenience of the witnesses, it is undisputed that not a single relevant witness with material knowledge or information is present within this judicial district. All of the witnesses with knowledge regarding the UNIX code that SCO purports to own reside outside this district and more importantly, the most critical witnesses here, those are the witnesses who have knowledge of AutoZone's alleged infringement of that code, are employees or former employees of AutoZone's IT group and all reside in Memphis. Transfer of the case, naturally, will therefore be more convenient for the witnesses if the case is heard where those witnesses are located.

In terms of access to proof, again all of the relevant documents and code regarding the alleged infringement are located in Memphis. Although it is certainly true, as SCO has pointed out, that in this day and age of CD ROMS and broadband internet connections, documents can be transferred without a horrible amount of burden, the fact remains that is a relevant factor to consider and it weighs in favor of a transfer of the case to Memphis.

With regard to the convenience of the parties, neither party resides here. Both parties will therefore have to fly to get here and fly all the witnesses here for trial and for substantive hearings or motions in the case. Because AutoZone resides in Memphis, naturally it's much more convenient for it to try the case there, and it's not much less inconvenient, if *any* less convenient, for SCO to try this case in Memphis as opposed to trying it here. Again, they're going to have to travel. . .

The Court: Were all these motions presented to the Red Hat court? Certainly a motion to stay was presented to that court.

Stewart: No, actually there was no motion to transfer in that case. The court issued the stay sua sponte. . .

The Court: I see.

Stewart: . . . But did so based upon a statement that SCO made to the court in connection with the Motion to Dismiss the declaratory judgment complaint on ripeness grounds that it would likely move to stay the case because controlling issues are involved in the IBM case. And the court appears to have picked up on that and that appears to be the cause for the stay. Red Hat has moved for, has requested that the court reconsider that order and has requested that the court lift the stay. Naturally, counsel for SCO can address those issues better than I can. My understanding is, though, that those issues are fully briefed and awaiting decision by the judge in Delaware.

And, finally, the interest of justice. The Western District of Tennessee has a greater interest in adjudicating the merits of this claim because that's where the alleged infringement took place and the case load is substantially lighter in the Western District of Tennessee on the civil side than it is here, and as a consequence of that, naturally the Western District of Tennessee is able to get its civil cases to trial much more quickly. In fact, in 2003, the average was 18 months from the date of filing to trial in the Western District of Tennessee versus 32 months. . .

The Court: That's not true here any more. We have two additional judgeships. Our case load is down now. Mine is below 300. And the average is 375. We can get a case to trial as soon as you want to set it.

Stewart: OK.

The Court: I can set it in the next six months. I can set it in four months. Or even next month, if you want it. [laughs]

Stewart: I'm not sure we'll be ready to try it that quickly. [laughter] But for reasons I'll address in a moment, in connection with the Motion to Stay, all of these issues are already being litigated elsewhere, particularly a case that is substantially further down the road. I think it's premature in this case to be thinking about a stay, pardon me, to be thinking about a trial, when . . .

The Court: That's the main concern for me, is just duplicative effort.

Stewart: Right.

The Court: Whether I should simply... the better choices are to either transfer it to that court or to simply stay it here, like Delaware did.

Stewart: Well, I will tell you, Your Honor, our client's principal interest is in the stay. It doesn't want to be investing the substantial time and energy and money into litigating this case when SCO has already brought all of the issues that are relevant to this case in litigation elsewhere, where all of these issues are already in front of courts in Utah and Delaware, and the Motion to Transfer is filed because it does believe that eventually if it becomes appropriate for a stay to be lifted, that this case should go forward in the Western District of Tennessee, it appeared to us that now is the appropriate time to raise that motion, but certainly that's in Your Honor's discretion, and ultimately it is the stay that we are most interested in this morning.

The... with regard to case loads, it sounds like that's changed recently. The most recent statistics from the Western District of Tennessee are, though, that there are an average of 269 civil cases per judge in that district.

The only connection of any kind between this litigation and this forum is the fact that AutoZone's incorporated here. Now we don't, obviously by any means, intend to say that it was improper for this case to be filed here. We're not arguing over jurisdiction. It's simply a convenience of the parties/forum non conveniens type analysis. And this court has recognized in both the Cambridge Filter and Miracle Blade cases that if all you've got to justify keeping the court in this district is the fact that one or more of the defendants is incorporated here, that that alone is not sufficient to outweigh the balance of the Section 1404 factors. And we'd submit that this case should be transferred to the Western District of Tennessee for those reasons.

Now, SCO in its response brief has addressed the possibility of transcribing the case to Utah. We've addressed those issues. We don't believe it's any more appropriate to transfer this case to Utah than it is to leave it here. I'd be happy to address those points, if you'd like to hear them.

The Court: I would. What is the status, primarily, what is the status of the cases pending in Utah?

Stewart: Again, I'll give you my understanding but I will defer to SCO's counsel to make sure that I'm getting all the facts right. I'm sort of looking over everyone's shoulders, watching what's going on. My understanding is that at present, SCO has filed a motion to dismiss IBM's tenth counterclaim. That tenth counterclaim is a counterclaim that IBM filed to say, essentially, "Nothing in Linux infringes any rights that SCO purports to own in UNIX." We believe all of the issues in the present case were already in front of the court in the IBM case prior to the filing of that counterclaim and in fact, as I'll talk about in a moment . . .

The Court: SCO filed a motion to dismiss or, or... IBM filed a motion for summary judgment for . . .

Stewart: Both.

The Court: . . . failure to allow discovery?

Stewart:Both. SCO filed a motion to dismiss or stay the tenth counterclaim pending resolution of this lawsuit, claiming that this was the first-filed suit on those issues, and IBM has filed a motion for summary judgment on its tenth counterclaim, saying that discovery has been completed, SCO says it has complied with all of its discovery obligations, IBM's gone through the code, there is no infringing code, and so IBM has moved for summary judgment on that basis. My understanding is that the District Court in Delaware has scheduled all of those motions for hearing on August 4. And again, I'll ...

The Court: That's in Delaware?

Stewart: No, that's in Utah. That's the IBM case in Utah.

The Court: All right. Delaware is scheduled for a hearing as well?

Stewart: Pardon me?

The Court: Those are scheduled for hearing? The Utah court, the Utah court. That's the one I'm focusing on. That's the one I'm trying to understand. How soon will we get an answer, so we can avoid duplicative effort? How soon will we get an answer on the basic issue in IBM and the Linux versus the Unix code?

Stewart: Right, I'll have to answer that a couple of different ways. If the court grants IBM's motion for summary judgment, it could be very quick. Those issues are briefed, and the court's going to hear argument on that on August 4th. I don't know how quickly the court would rule after that, but if the court grants the motion, then it would, the case would be over.

If that case is decided against SCO, SCO has no cause of action against AutoZone.

The Court: Let me hear from SCO, please.

I'd like you to primarily address those two issues. Of course your argument that it ought to be transferred to Utah. I'm not too enamored with the idea of sending it to Tennessee, but it seems to me that a very good option here is simply to stay it, briefly at least, until we see whether we are going to get an answer from the Utah court.

Stone: Your Honor, first of all I'd like to thank you for allowing me to argue here today. I appreciate it.

If Your Honor will indulge me, I'd like to place this case in context, because I think it's important towards the motions that are before Your Honor to understand the context in which this cause was brought and the importance of this case to SCO. And I think that the Complaint, which is really focusing on the copyright infringement, doesn't give you that overview. But since they've now brought in these other cases, I think it's important to understand why they are not dispositive of this case and why this case really is different to some extent from those cases.

UNIX is an operating system. It's an operating system which for twenty years has been the dominant operating system on enterprise servers. Enterprise servers are computers which run the most sophisticated software in the United States and in the world. For example, Credit Suisse, the New York Stock Exchange, most Fortune 500 companies use some version of this Unix software, which was originally developed by AT&T. The reason they use it is because it's got something called five 9's capability, which means it's 99.999 error-free. It's very, very efficient. If Your Honor has every used, for example, Microsoft Windows, and has noticed where it freezes whenever you try to run any other new programs at the same time, the value of something like Unix is that it's so error-free and so efficient that when you're doing big, important operations or if you're doing national, operations of national scope, you need a much more sophisticated operating system.

Several years ago a person named Linus Torvald, who's from Finland, created a primitive version of a Unix-type operating system, which he essentially put on the internet and invited people to contribute to it to make it better. Basically, it's SCO's position that certain companies, one of them being IBM, contributed code and other types of materials that are protected by not only licensing agreements but copyright laws to Linux for its own business purposes in order to create a competitor to the Microsoft software and the Unix software, which SCO owns and which SCO receives millions and millions of dollars in royalties from every year.

The Court: So that I understand.... I don't want to cut you off, please keep going, but the issue of ownership is pending in the Utah Novell case, and the issue of the conflict is pending in the IBM Utah case.

Stone: Your Honor, that's not quite accurate, if you'll allow me to.... The first statement, I believe is somewhat accurate. In the Novell case, what happened is that Novell was going around saying in the press, "SCO doesn't own the copyrights, even though we sold them to SCO for more than potentially 100 million dollars and even though for the last, you know, umpteen years people have been paying royalties to SCO and we've been receiving percentages of those royalties with the understanding that SCO owned all this," but now they say SCO doesn't own the copyrights. We sued them for essentially a slander of title. It is not a copyright case. It is not a copyright infringement case. It's a slander of title case, which was removed to the federal court.

That case, nothing has occurred in it at this point other than that Judge Kimball has ruled that it's going to stay in the federal court. There's been no discovery, nothing had happened.

As ... to just go on with my story, because I think it's important to place this in context. So one of the concerns that SCO has is entities such as IBM and individuals who have access through their licensing agreements with SCO to our source code, which is proprietary, using that and somehow contributing either modifications, derivative works, concepts and methods, or the code itself into Linux. That's one issue. There's a second issue. The second issue is end users of Linux who had previously been SCO customers, such as AutoZone, which used Unix System V, which is -- they used our OpenServer software for many years, and paid us royalties for it -- migrating, what we call migrating to Linux. In other words, changing all those computers all over the country and instead of running our software, which is proprietary and they pay royalties on it, to Linux.

Now, there are many issues which can arise in this migration process, which don't necessarily have to do with what's in Linux. For example, we allege in our complaint that AutoZone has violated our copyrights in something that's called static shared libraries. Static shared libraries are an older version of libraries that SCO used in its OpenServer software, which is the software that they licensed to AutoZone. Since that time, these libraries have been improved, and now there's something called dynamic shared libraries, which is what Linux uses, because Linux was only recently created. It wasn't created at the time of static shared libraries.

If you wanted to migrate from this OpenServer and take all the applications which have been written to run on that operating system, and then run them flawlessly on Linux, you need the static shared libraries. And we have reason to believe, and that's why we allege it in the complaint, that what they did is they copied our static shared libraries which we ... they have licensed from us, which they owe us royalties for, into these applications so they could run them on Linux. That's something that has nothing to do with IBM or the IBM case, because IBM does not use, to our knowledge, I mean we haven't had discovery yet, but based on what we know, they don't use static shared libraries. So that's an example of how this case could go in a totally different direction than the IBM case, because the IBM case is about putting things into Linux that you don't have a right to. This case is about to illustrate to end users the problems that they have in migrating to Linux and basically leaving our system without violating our copyrights. So this case, if it was resolved on the static shared libraries, based on what we know today -- we haven't had the discovery yet -- wouldn't implicate the IBM case at all.

So that's an example of why you can't just simply look at these cases and say they're the same. They're not the same.

The other point about the IBM case, which I think is credible is that that case was really brought, it was brought by SCO as a license, breach of license case. We had a license which says to IBM that they can have our source code, which is like the keys to the kingdom -- if you don't have the source code, you can't write the applications, you can't run the software, and so, you know, you're very limited in what you can do -- so IBM paid us a lot of money for this source code. They then modified it, created derivative works from it, used methods and concepts in other products that they created, which under our license we claim we control, that they cannot just release that into the public ....

The Court: What's the status of that lawsuit?

Stone: That lawsuit is the lawsuit right now in which there is motions to compel, motions to dismiss, motions for summary judgment are pending. What happened is in March of this year ....

The Court: Who's that before?

Stone: That's before Judge Kimball.

The Court: And how soon are those hearings set?

Stone: August 4th there's going to be an argument on that, Your Honor. But I would point out that the likelihood of IBM getting summary judgment ... their summary judgment motion was not based on material undisputed facts. It was based on the fact that even though there were no copyright claims asserted by either party in the case until February of this year, and in fact IBM did not bring end user or any kind of claims until March of this year, that somehow, you know, SCO has not given them sufficient discovery, and therefore the court should just, as a sanction essentially against SCO, grant summary judgment. I mean they're not saying that they proved or the evidence shows that ....

The Court: Understand. Now Red Hat is ... was it through Red Hat that AutoZone originally licensed?

Stone: Linux? Yeah, what happened is when AutoZone made a decision to move to Linux, it had to find a distributor of Linux to help it do that, and Red Hat was the distributor that it found.

The Court: And the stay in the Red Hat case is applicable how long?

Stone: What the judge has done is put the case on an indefinite stay with 90-day status reports. We just recently reported to the judge within the last two weeks as to what's going on in the IBM case, and the judge has taken no action.

The Court: You've moved to dissolve the stay?

Stone: AutoZone -- I'm sorry, there's a lot of parties here -- Red Hat moved for reconsideration of the judge's stay, and we opposed that, and the judge has made no ruling on that to my knowledge at this point.

But, if I may, Your Honor, I don't know if you want me to address the issues of transfer, because I don't ...

The Court: I don't think so. My inclination is to do just as the Red Hat court has done. That is to give 90-day stays with status checks shortly after status checks are due in the Red Hat case. They're the licensor. But to except from the stay an opportunity for brief discovery and the movement of an injunction, an injunction pending the case. So that ... I mean your complaint is you know, we'll be hurt if you stay us ...

Stone: Yes, Your Honor.

The Court: ... indefinitely. On the other hand, it occurs to me that, first of all the IBM case, and secondarily the Red Hat case, which are the licensors to AutoZone, those cases ought to be resolved, so the court can make ... without duplicating the effort, can make its final conclusions on the case here.

So it seems to me that what I ought to do is impose a stay, just as the Red Hat court has done. Put you on 90-day statuses, shortly after, two weeks after the status is due to the Delaware court, but to allow you an exception for the brief discovery necessary and for the presentation of a motion for an injunction pending trial.

Stone: So Your Honor, if I understand you, you're going to allow us to have some discovery on the infringement issue, to be able to show that there's irreparable harm that could potentially arise from the ongoing infringement....

The Court: Enough to present an issue for preliminary injunction.

Stone: Thank you, your honor. Could you ... unless you have other issues you want me to address, I think I ought to shut up.

The Court: I think I've understood pretty well, and I've reviewed your pleadings.

Stone: Thank you, judge.

Stewart: Your honor, could I be heard on the point about discovery and a preliminary injunction?

The Court: Please.

Stewart: Couple of points. First, SCO's never *asked* for a preliminary injunction in any case.

The Court: Ah.

Stewart: Until today, they had never identified in this case anything that they allege that AutoZone has done that somebody else didn't do. And they don't even know if in fact AutoZone did it. They don't have any evidence to point to to that. From what I've heard they don't even have good-faith information and belief on which to base that claim. We're about ready to engage on a fishing expedition. And it is hard to say how broad that's going to be. It presumably could end up encompassing everything that's also at issue in Red Hat and IBM and Novell. And so if we are going to go down this road, I would like, I would ask the court to enter additional guidance on the scope of the discovery so that it is perhaps very limited to just what, if anything ...

The Court: I think the way I would limit it is I would give them 30 days to propound it. That, the normal 30 day response time follows, of course. And it's, I'm not going to limit SCO other than to say that it is limited to any factual predicates or to obtain factual predicates to a request for preliminary injunction. The only reason for doing that is because they raised that issue in their responses, that they would be harmed if the court simply held off and did not let them proceed here one way or the other.

Stone: Your Honor, I just want to be clear, will we be permitted to take depositions? It will be any type of discovery that is permitted under the rules?

The Court: My contemplation was to allow you during thirty days to propound discovery sufficient to form a factual presentation to the court that you have the right to a preliminary injunction. If you don't have the right to a preliminary injunction, you shouldn't proceed with discovery at all.

But to answer your complaint that, yeah, you would be prejudiced by a stay, because then users, end users, can proceed to use your copyrighted materials without royalties, it occurred to me that I should give you the opportunity to present a motion for a preliminary injunction, and that would be the only exception to the stay. So there would be a brief period. It would be, the discovery would be limited in time -- 30 days, plus the normal, that's interrogs, the 30-day response time to follow from your presentation, and any other discovery necessary, but limited in scope only by the inquiry as to facts predicate to preliminary injunction. Otherwise, you shouldn't go on a free-ranging discovery course preparatory to a trial.

Unknown: Your Honor, there is the rule 26 procedure that I consider discovery. Are we dispensing with that right now, or did the court want us to ...?

The Court: We'll be staying the lawsuit, so you will not go through the normal 26 or 16 time periods and procedures with the magistrate judge.

Unknown: And then Your Honor, just so it's kind of clear so that we don't have to come back. Why doesn't the court say he can take like five depositions or three depositions or something like that? Otherwise, I think we end up coming back and arguing this all.

The Court: I'd be glad to pick an arbitrary number out of the air, but I think maybe it makes sense for you to consult together.

Unknown: OK.

The Court: Here's three or five that we need and this is why we need them, this is why it's applicable.

Unknown: I've always assumed that we could come back to the court, both parties ...

The Court: You can. I'm available on the telephone, of course, and the magistrate judge would be too.

Stewart: Your Honor, before we go too far down this road -- and I may very well be a salmon swimming unsuccessfully upstream -- I respectfully request that the court reconsider this part of its, the order that you're contemplating, for several reasons. One -- and I've not looked at the standards of the Ninth Circuit for the issuance of a preliminary injunction in some time -- but my understanding is that you have to show irreparable harm. It is clear in every circuit I can think of that the loss of a license fee is not irreparable harm and cannot justify the entry of an injunction. That is the only harm that we've heard today. The only other harm that SCO has even alleged in any of their moving papers is a presumption of irreparable harm that just naturally flows by law from proof of copyright infringement. But that is a rebuttable presumption and in this case it's easily rebutted, and just in terms of the irreparable harm factor for the entitlement to a preliminary injunction, they've known about the ....

The Court: You're arguing the merits of a motion that is not even before me.

Stewart: Your Honor, these issues are already before the court on the papers that are in front of you, and so my point is that a preliminary, giving them the opportunity to take discovery before preliminary injunction that you can already ascertain they can't get will cause the parties to engage in substantial time and expense that ultimately will not be fruitful. They cannot ....

The Court: I don't think 60 days' worth is unnecessary time and expense. That will be the order. I'll ask for counsel to prepare an order. Would you like to undertake to prepare an order reflecting the stay, with the exception, one-time exception, for motion for preliminary injunction?

Stewart: We will, Your Honor.

The Court: And pass it by counsel. And then submit it to the court.

Stone: Thank you, Your Honor.

Stewart: Thank you.

Unknown for SCO: Your Honor, one last thing in your order is, they need to file an answer.

Unknown: No!

Unknown: I guess they should put that in the order.

Stewart: Your Honor, my understanding is the case has been stayed.

The Court: It will be stayed. They're not required to file an answer.

Unknown: OK.

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