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The SCO Group, Inc. v. International Business Machines Corp.

United States Court of Appeals, Tenth Circuit

October 30, 2017

THE SCO GROUP, INC., Plaintiff Counterclaim Defendant -Appellant,

         Appeal from the United States District Court for the District of Utah (D.C. No. 2:03-CV-00294-DN)

          Edward Normand, Boies, Schiller & Flexner LLP, Armonk, New York (Jason C. Cyrulnik, Boies, Schiller & Flexner LLP, Armonk, New York, Stuart H. Singer, Boies, Schiller, & Flexner LLP, Fort Lauderdale, Florida, Brent O. Hatch and Mark F. James, Hatch, James & Dodge P.C., Salt Lake City, Utah, with him on the briefs), for Plaintiff Counterclaim Defendant-Appellant.

          David Marriott, Cravath, Swaine & Moore LLP, New York, New York (Evan R. Chesler, Cravath, Swaine & Moore LLP, New York, New York, Amy F. Sorenson and Amber M. Mettler, Snell & Wilmer L.L.P., Salt Lake City, Utah, with him on the briefs), for Defendant Counterclaimant-Appellee.

          Before KELLY, EBEL, and BACHARACH, Circuit Judges.

          EBEL, Circuit Judge.

         This case arises out of a business deal gone wrong. The Santa Cruz Operation, Inc. (Santa Cruz) entered into a business arrangement with International Business Machines Corp. (IBM) to develop a new operating system that would run on a more advanced processor manufactured by Intel Corporation (Intel). The parties signed an agreement memorializing this collaborative effort and called it Project Monterey. Another technology company, The SCO Group, Inc. (SCO), then acquired Santa Cruz's intellectual property assets and now brings this lawsuit for IBM's alleged misconduct during and immediately after Project Monterey.

         Project Monterey involved mutual contributions by IBM and Santa Cruz of proprietary materials, including computer code for their respective operating systems. SCO believes that IBM merely pretended to go along with the arrangement in order to gain access to Santa Cruz's coveted source code. SCO, the successor-in-interest to Santa Cruz's intellectual property assets, accused IBM of stealing and improperly using this source code to strengthen its own operating system, thereby committing the tort of unfair competition by means of misappropriation. The district court awarded summary judgment to IBM on this claim based on the independent tort doctrine, which bars a separate tort action where there is no violation of a duty independent of a party's contractual obligations.

         SCO also accused IBM of disclosing Santa Cruz's proprietary materials to the computer programming community for inclusion in an open-source operating system called Linux. When SCO acquired Santa Cruz's assets involved in Project Monterey and then sought licensing agreements from various technology companies, IBM allegedly instructed SCO's business affiliates and investors to cut ties with SCO. These alleged efforts to disrupt SCO's business relationships, together with the purportedly improper Linux disclosures, prompted SCO also to file suit against IBM for tortious interference of contract and business relations. In a separate order, finding insufficient evidence of actionable interference by IBM, the district court granted summary judgment in favor of IBM on these tortious interference claims.

         Finally, after the deadline for amended pleadings in this case, SCO sought leave to add a new claim for copyright infringement based on the allegedly stolen source code from Project Monterey. SCO claimed it had only discovered the essential facts to support this claim in IBM's most recent discovery disclosures. The district court rejected SCO's proposed amendment for failure to show good cause.

         SCO now appeals all three decisions by the district court: (1) the summary judgment order on the misappropriation claim; (2) the separate summary judgment order on the tortious interference claims, and (3) the denial of leave to amend the complaint. We REVERSE and REMAND the district court's summary judgment order on the misappropriation claim, and AFFIRM as to the remaining issues.

         I. BACKGROUND

         A. UNIX Operating System and Intel Processors

         UNIX is a computer software operating system that is widely used in the business or "enterprise" computing environment.[1] In the late 1960s, AT&T Technologies developed UNIX and began licensing it for widespread enterprise use, and those licensees in turn developed and distributed their own variations of the UNIX platform. One of those distributors, Santa Cruz, created a UNIX variation which eventually dominated the market for UNIX-based operating systems running on Intel processors.

         During the 1980s, most other companies were running their UNIX variations on more expensive non-Intel architectures. Santa Cruz, however, recognized early on that transistors were getting smaller over time, so Intel's cheaper processors were becoming faster and thus more capable of handling the demands of high-power enterprise computing. Santa Cruz predicted that Intel's less-expensive processors would soon be able to run the UNIX operating system more effectively than earlier iterations of the hardware. By 1998, Intel processors had become as capable as the more expensive alternatives, and Santa Cruz had ultimately become the worldwide market leader for UNIX-on-Intel with 80 percent share of the market.

         In contrast to Santa Cruz, IBM had almost no presence in the UNIX-on-Intel market. Instead, IBM distributed its own UNIX derivative called AIX, which was designed to operate on IBM's own proprietary Power processors. The product was thus suitably known as AIX for Power. Recognizing that Santa Cruz had positioned itself as the market leader for UNIX-based systems on the increasingly desirable Intel architecture, IBM began considering the benefits of collaborating with Santa Cruz. Further, IBM knew that Santa Cruz's operating system was based on a more advanced version of the UNIX operating system: UnixWare System V Release 4 (SVr4). IBM's own AIX platform was based on an earlier and less advanced code, so the opportunity to work with SCO and gain access to the SVr4 code may have been appealing. Santa Cruz, for its part, also appreciated the advantages of working with IBM, which was a larger company with more resources, retail relationships, and marketing outlets. So the stage was set for a mutually beneficial cooperative venture.

         B. Project Monterey and the Joint Development Agreement

         Before IBM and Santa Cruz began working together, most processors (including Intel's chips) operated only at a 32-bit capacity, but in 1994, Intel announced its intention to develop a higher-capacity 64-bit chip called Itanium. Anticipating Intel's forthcoming Itanium architecture, Santa Cruz and IBM jointly endeavored to build a new UNIX-based operating system that would run on the faster processor. In October 1998, Santa Cruz and IBM entered into a Joint Development Agreement (JDA) that would govern the mechanics of their collaboration, including licenses, royalties, and project management responsibilities. This endeavor became known as Project Monterey.

         As part of the JDA, each party granted the other a limited license to its own respective technologies for the purpose of developing the IA-64 Product. After signing the JDA, the parties entered into a Project Supplement that provided: "The Licensed Materials . . . are to be used solely for development of the IA-64 Product." Aplt. App. 884 (emphasis added). According to SCO, this provision imposed a default rule that IBM could not use Santa Cruz's contributed materials in its own AIX for Power. That Supplement, however, also included a caveat: "Notwithstanding [that limitation], any such Licensed Material included in the IA-64 Product Release 1 shall be licensed pursuant to the terms and conditions set forth in the [JDA]." Aplt. App. 884 (emphasis added). In other words, any Santa Cruz materials that ultimately found their way into the "IA-64 Product Release 1" would be licensed to IBM pursuant to the JDA, which in turn granted IBM a "worldwide, non-exclusive, royalty free" right of use, Aplt. App. 3085, JDA § 2(d)(2). Under these provisions, IBM would have known that if it wanted to use Santa Cruz's materials in AIX for Power, there must be a "IA-64 Product Release 1" containing those materials.

         SCO further points out that a product release is only regarded as the "IA-64 Product Release 1" if the product is made generally available. This requirement is based on Amendment 5 to the JDA, which provided that if IBM wanted to distribute a "PreRelease IA-64 Product" for testing purposes, that pre-release sublicense would terminate at least by the date of "general availability of the IA-64 Product Release 1." Aplt. App. 5157. Otherwise stated, any distribution of the Monterey system before the product became generally available was regarded merely as a "Pre-Release IA-64 Product, " not the actual "IA-64 Product Release 1" itself. Thus, to the extent that IBM wanted a "worldwide, non-exclusive, royalty free" license to the coveted SVr4 code, it needed to wait until there was a generally available release of the IA-64 Product which included that code.[2]

         C. IBM Transitions Focus from Project Monterey to the Linux Operating System

         The success of Project Monterey hinged on the forthcoming availability of Intel's 64-bit Itanium chip. But Intel was behind schedule in developing and delivering Itanium to market. Intel announced a target date of 1999, but was substantially delayed, and continued to have development difficulties throughout 1999 and 2000. These delays caused a decrease in market interest in the IA-64 Product under construction through Project Monterey.

         The slump in market interest for the IA-64 Product caused IBM to transition its focus to a competing open-source operating system called Linux.[3] At the time, Linux occupied the lower end of the computing market as it was designed for lower-capacity desktop computing. But IBM began to strengthen the Linux platform so that Linux could compete in the enterprise market, which was the focus of Project Monterey's forthcoming UNIX-based product.

         As part of its contributions to Linux, as early as February 2000, IBM began disclosing some of Santa Cruz's proprietary UNIX technologies-acquired through Project Monterey-to the Linux community for the purpose of fortifying Linux as a commercially viable option for enterprise use. The evidence suggests that "SCO's revenues decline[d] precipitously in 2000 through 2002, dropping 74%, immediately after the first alleged contributions of IBM in February of 2000." Aplt. App. 7384. SCO's sales dropped as customers migrated to Linux, which has been referred to as a "free UNIX clone." Aplt. App. 7389. Because of these declining revenues, SCO relies on IBM's Linux disclosures as part of the basis for its tortious-interference claim.

         IBM's general support for Linux, however, was no secret. As early as March 1999, IBM publicly announced its support of Linux at a LinuxWorld conference. But scaling up Linux to compete in the enterprise market posed a potential conflict with Project Monterey. To assuage concerns, IBM began re-assuring the public and Santa Cruz that Linux and the IA-64 Product would compete in different markets, so there was no conflict. For example, in August 1999, IBM officers explained publicly that the Monterey IA-64 Product would target enterprise-level computing needs while Linux was designed for the smaller-scale computing market. IBM made similar representations in a private meeting with Santa Cruz officers in January 2000. But at least one IBM executive recognized that such a distinction was fragile:

The distinction used to position Monterey versus Linux is that Monterey is targetted [sic] for high-end servers, where as Linux comes in at the lower to mid range of servers. However, this distinction is a fragile one, since IBM is working as fast as it can to bolster Linux's ability to compete in the mid to high end range of servers.

Aplt. App. 5693 (emphasis added). Construing the evidence in SCO's favor, it may be that IBM led Santa Cruz to believe its Linux product would not compete against enterprise-level developers-but IBM was actually working quickly, and without Santa Cruz's knowledge, to scale up Linux to compete in the enterprise space. Meanwhile, IBM maintained that it was fully committed to Project Monterey. It reaffirmed that commitment in the January 2000 meeting and, as late as December 2000, IBM stated publicly that its devotion to the success of the IA-64 Product remained strong.

         But a jury could find that IBM's heart was not in Project Monterey. Throughout late 1999 and early 2000, IBM executives began recommending "internally that IBM take more definitive steps to drop Project Monterey and transition even more support to [Linux]." Aplt. App. 9591, Dist. Ct. Op. at 24. In July 2000, another IBM internal report recommended a "significant reduction in emphasis" in Project Monterey. Aplt. App. 6202. Further, IBM's effort to bolster Linux as a potential competitor in the enterprise space could indicate to a jury that IBM was not fully committed to the success of Project Monterey, despite its public assurances to the contrary.

         D. IBM's Alleged Misappropriation of Santa Cruz's Code

         In October 2000, IBM used some of the SVr4 code in a test version of its own AIX for Power product, which was intended for certified software developers and "not intended for general production use." Aplt. App. 8610. This appears to have been a preparatory step in anticipation of later releasing an upgraded AIX for Power product for general distribution. But again, IBM would need to make generally available the Monterey operating system including the SVr4 code before IBM would acquire the royalty-free license for general distribution of that code in its own products.

         With that in mind, IBM announced in April 2001 a forthcoming IA-64 Product, which included the SVr4 code, and planned to make it available on May 4, 2001. As scheduled, IBM released a version of the Monterey operating system on May 4, 2001 as a Programming Request for Price Quote (PRPQ), which is the term used internally at IBM to describe beta test releases. This release lacked what is known as a compiler, which in this case refers to a software program that translates programming code into a language readable by the computer processor. Without a compiler, an operating system cannot be executed by the processing hardware, but it does not seem that IBM had a confirmed plan to include a compiler in the product. Moreover, this Monterey release was offered free of charge and without support, was not on IBM's price lists, and was not marketed. In light of these characteristics, a reasonable jury could find that this PRPQ version was not a generally available release of the product and thus did not entitle IBM to a royalty-free license to the SVr4 code included therein.[4]

         Moreover, the evidence suggests that IBM was conscious of the inadequacies of this May 4, 2001 release of the Monterey product. For example, an IBM project manager stated in an internal e-mail: "I think the compiler MUST be available in some form or the whole thing just doesn't make sense (ie [Santa Cruz] won't buy it)." Aplt. App. 5194 (italicized emphasis added). And another internal IBM strategy document explained that there was "no confirmed compiler plan" and that IBM would "[c]ontinue to ship AIX 5L as a PRPQ" which would be in "[s]tealth mode only."[5] Aplt. App. 5170. That document also indicated that IBM would "[a]t the appropriate time announce plan not to GA AIX 5L and withdraw the PRPQ" sometime during the "July/August timeframe."[6] Id. What is more, one piece of evidence suggests that IBM appears to have known that the May 4, 2001 PRPQ version might not have been sufficient to acquire the SVr4 license. In one internal e-mail, an IBM employee stated: "As you know, we need to GA this PRPQ to gain rights to [Santa Cruz] code we want for our base AIX product delivery . . . I know the fine lines we are walking here." Aplt. App. 5167.

         Nevertheless, despite the deficiencies in the May 4, 2001 release of the Monterey operating system and despite IBM's apparent knowledge of the problem, that very same day IBM released for general distribution a version of its own proprietary AIX for Power product that included the SVr4 code. SCO thus argues that IBM released a "sham" version of the Monterey system in order to legitimize its own general distribution of the AIX for Power product containing Santa Cruz's SVr4 code. (Aplt. Br. 2, 13.) This is the essence of SCO's misappropriation claim.[7]

         E. Santa Cruz Transfers Assets to Caldera International

         Santa Cruz owned a license to use, develop, and distribute its UNIX-based technology.[8] During the life of Project Monterey, however, Santa Cruz decided to sell its UNIX business to SCO.[9] In mid-June 2000, Santa Cruz sent IBM an official notice of the forthcoming asset transfer to SCO.[10] Hearing no formal objection from IBM, Santa Cruz followed through with the agreement and, on May 7, 2001, finalized the deal with SCO. On June 6, 2001, Santa Cruz informed IBM of the consummation of the sale and the assignment of the rights under the JDA. IBM then responded on June 19, 2001, formally objecting to the assignment and officially terminating the JDA, thereby putting a formal end to Project Monterey.

         F. IBM's Alleged Direct Interference With SCO's Business Relationships

         In late 2002 and early 2003, SCO began investigating the intellectual property within Linux and discovered that Linux customers were using SCO's proprietary UNIX technologies. SCO then devised a licensing strategy whereby Linux users would purchase from SCO a license to use Linux, as enhanced by SCO's proprietary technologies. SCO presented this licensing plan to multiple partners, including Oracle, Intel, and Computer Associates, all of which responded favorably. IBM, on the other hand, objected to the proposed strategy.

         IBM asked SCO not to issue its press release announcing and initiating the licensing plan. Nevertheless, in January 2003, SCO announced a new business division, SCOsource, to manage the licensing of its UNIX technologies for Linux customers. The next day, IBM executive Karen Smith told SCO's CEO Darl McBride that she expected SCO's approach to "kill Linux." Aplt. App. 4095. She further threatened:

[I]f [SCO] did not drop [its] library licensing program and [its] investigation of Linux and withdraw [its] press release . . ., that IBM was going [to] cut off all business from [SCO] and they were going to encourage partners and customers from doing any business with SCO as well.

Id. at 4095. SCO did not back down. That afternoon, Smith met with Hewlett-Packard executive Richard Becker. According to Becker's deposition,

[Smith] indicated to [him] that IBM was going to withdraw all their business activities from SCO, and that in the interest of the best outcome for [IBM's and Hewlett-Packard's] joint Linux initiatives that she was going to suggest that HP, and [he] was representing HP, and following [him], Intel should do the same.

Aplt. App. 2352.

         SCO believes that, in addition to Hewlett-Packard, IBM directly communicated with other SCO business affiliates and investors in an effort to persuade those entities to refrain from doing business with SCO. Those entities included Oracle, Computer Associates, Intel, and Baystar. SCO presented evidence that, after SCO began implementing its licensing strategy, these entities began withdrawing or reducing their business dealings with SCO. IBM responded, however, with sworn declarations by executives representing each entity indicating that, to the best of their knowledge, IBM never approached them about cutting ties with SCO and that any change in business dealings with SCO was not the result of IBM's statements or actions. Nevertheless, SCO asserts that IBM directly interfered with SCO's business relationships by inducing SCO's key investors and affiliates to cease doing business with SCO.

         G. Procedural Background

         We are now almost fifteen years into this litigation. SCO filed the initial Complaint on March 6, 2003, which included nine claims against IBM.[11] After twice amending its Complaint, SCO sought leave to amend a third time in October 2004, after the deadline for amended pleadings, for the purpose of adding a tenth cause of action for copyright infringement based on IBM's alleged misuse of the SVr4 code. The district court denied that motion, finding insufficient cause to permit the untimely addition of the claim. The case then proceeded but was administratively closed in 2007 after SCO filed for bankruptcy.

         Alongside its suit against IBM, SCO also filed suit against another company called Novell, which had publicly claimed that it, rather than SCO, owned the UNIX copyrights. Novell entered into an asset purchase agreement with Santa Cruz in 1995 wherein Novell transferred a license to the UNIX technology to Santa Cruz. Santa Cruz believed that it had received through this asset transfer the UNIX copyrights, and thus the right to license all derivations and variations of the UNIX system. That belief, however, ended up being wrong. In 2011, this Court affirmed a jury verdict that found Santa Cruz did not, in fact, receive the UNIX copyrights in that deal, rather it merely received a license to use, develop, and distribute the UNIX technology. See SCO Group, Inc. v. Novell, Inc., 439 Fed.Appx. 688');">439 Fed.Appx. 688 (10th Cir. 2011) (outlining this background).

         When the bankruptcy stay was lifted in this case, the district court here re-opened the case in 2013. Because the Novell litigation had established that SCO did not own the copyrights to the UNIX technologies, SCO voluntarily dismissed many of its claims against IBM that were predicated upon that faulty assumption. All that remained of SCO's case against IBM were allegations that IBM (1) committed unfair competition by means of misappropriation, and (2) tortiously interfered with SCO's business relationships.[12] On February 5, 2016, the district court awarded summary judgment to IBM on ...

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