SCO Grp., Inc. v. Int'l Bus. Machs. Corp., 16-4040

CourtUnited States Courts of Appeals. United States Court of Appeals (10th Circuit)
Writing for the CourtEBEL, Circuit Judge.
Citation874 F.3d 1172
Parties The SCO GROUP, INC., Plaintiff Counterclaim Defendant-Appellant, v. INTERNATIONAL BUSINESS MACHINES CORPORATION, Defendant Counterclaimant-Appellee.
Docket NumberNo. 16-4040,16-4040
Decision Date30 October 2017

874 F.3d 1172

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

No. 16-4040

United States Court of Appeals, Tenth Circuit.

Filed October 30, 2017

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

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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.


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

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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 "Pre-Release 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

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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...

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