Source: http://www.groklaw.net/articlebasic.php?story=20051119111858449
Timestamp: 2019-04-24 04:55:51+00:00

Document:
Here are SCO's Memorandum in Opposition to IBM's Motion to Compel Production of SCO's Privilege Log Documents and Exhibit A, William Broderick's Declaration, as text, thanks to Henrik Grouleff and Rick Stanley. We've discussed them here and here.
Attorneys for The SCO Group, Inc.
Plaintiff, The SCO Group, Inc. ("SCO"), respectfully submits this memorandum in opposition to IBM's Motion to Compel the Production of Documents on SCO's Privilege Log.
SCO is the successor-in-interest to the UNIX business. In 1993 the original owner of the UNIX technology, AT&T, transferred the UNIX business to Novell, Inc. ("Novell"); in 1995 Novell sold the UNIX business to The Santa Cruz Operation ("Santa Cruz"); and in 2001, Santa Cruz sold that business to SCO, which was then named Caldera, Inc. ("Caldera"). Through this unbroken chain, SCO became the owner of the UNIX business.
IBM's motion turns on whether the transfer of control of a continuing business also transfers control of the attorney-client privilege attending that business. In seeking to sidestep the cases that have examined that question (answering it in the affirmative), IBM repeatedly describes the transactions that transferred the UNIX business to Santa Cruz and SCO as sales of mere assets that do not, either as a formal or practical matter, transfer control of a business.
The cases on which IBM relies are inapposite. Santa Cruz acquired from Novell, and SCO from Santa Cruz, not only the UNIX technology and related assets, but also a business that continued in operation through each transaction. SCO has properly asserted the privilege once held by its predecessors with respect to the UNIX business. The Court should deny IBM's motion.
In the 1980s, AT&T owned the UNIX operating system, a seminal innovation that enjoyed unparalleled demand in the computer industry for its unique and powerful capabilities.
AT&T agreed to license UNIX to hundreds of the world's most sophisticated technology companies, including IBM. In late 1989, as UNIX continued to flourish, AT&T transferred ownership and operation of the UNIX business to its new wholly owned subsidiary, UNIX System Laboratories ("USL"). In 1991 AT&T spun off USL into an unaffiliated corporation but retained control of USL as the majority shareholder.
In June 1993, AT&T sold USL to Novell. Pursuant to a Reorganization and Merger Agreement, Novell Acquisitions, Inc., a wholly owned subsidiary of Novell, merged with and into USL. The surviving company was also named UNIX System Laboratories ("post-merger USL") and was a wholly owned subsidiary of Novell. Novell operated the UNIX business through that subsidiary until April 1994, when post-merger USL merged into Novell.
Seller is engaged in the business of developing a line of software products currently known as UNIX and UnixWare, the sale of binary and source code licenses to various versions of UNIX and UnixWare, the support of such products, and the sale of other products which are directly related to UNIX and UnixWare (collectively, the "Business").
"All of Seller's claims arising after the Closing Date against any parties relating to any right, property or asset included in the Business." Id.
"All claims arising after the Closing Date against any parties relating to any right, property or asset" included in the transferred UNIX business. Id. at Section 9.
In sum, Novell and Santa Cruz transferred not only the UNIX technology and related assets, see APA Schedule 1.1(a); APR Exhibit 13.15A, Section 1, but also the business that developed, marketed, and licensed that technology, including licenses and other agreements; rights, liabilities, and claims related to the business; customer, supplier, and vendor relationships; employees; and leaseholds, office space, and tangible property. See APA Sections 1.3(a), 2.11, and 4.13; APA Schedule 1.1(a); APR Schedule 13.15A; Declaration of William M. Broderick ("Broderick Decl.") ¶¶ 10-14 (Exh. A).
Santa Cruz and Caldera each continued the operations of the existing business. Each continued development of the UNIX technology, serviced the same contracts, collected revenues under those contracts, and supported the same customers. See, e.g., Broderick Decl. ¶¶ 10-15. Each took over management and operation of the business from its predecessor. See, e.g., Id.
In 2003 Caldera changed its name to The SCO Group, Inc. SCO is thus the successor to the UNIX business that was transferred from AT&T to Novell to Santa Cruz to Caldera.
On March 10, 2005, SCO and IBM filed their respective privilege logs identifying the documents they each withheld on the basis of the attorney-client privilege. In its log, SCO properly asserted the privilege over the UNIX-related documents at issue in the instant motion. SCO continues to review the documents to identify any non-privileged documents.
As the successor to the UNIX business, SCO is also a successor to the attorney-client privilege attending that business. SCO therefore has properly asserted the privilege over documents related to that business that were privileged in the hands of its predecessors AT&T, USL, Novell, and Santa Cruz.
IBM argues that SCO may not assert the privilege because it and Santa Cruz "never obtained corporate control of the entity from whom they acquired" the UNIX assets. IBM Mem. at 6. That premise misstates the law. A change of control is sufficient to transfer the privilege, but it is not necessary. See Tekni-Plex. Inc. v. Meyner & Landis, 674 N.E.2d 663, 668 (N.Y. 1996) (whether the privilege transfers "turns on the practical consequences rather than the formalities of the particular transaction").
Even the sale of some assets, if they make up a continuing business, transfers the privilege. Soverain, 340 F. Supp. 2d at 763 (rejecting "bright-line rule" that transfer of "some assets" precludes the transfer of the privilege); Graco Children's Prods. v. Regalo Int'l LLC, No. CIV.A.97-6885, 1999 WL 553478, at *4 (E.D. Pa. July 29, 1999) (buyer of only some of seller's assets had "the authority to assert the attorney client privilege" because the lawyer's former representation of seller "was in the interest of" those assets) (Exh. B).
In Soverain Amazon argued that Soverain could not assert the privilege because it had purchased three patents - "a small portion" of the sellers' assets - and therefore was not the "corporate successor" to the sellers. 340 F. Supp. 2d at 762. Soverain countered that it had acquired a "software business" that was "the commercial embodiment of the patents." Id. Noting that Soverain continued to operate that business by servicing the same customers and contracts and relying on the same engineers and consultants, the court concluded that Soverain was "a successor to the Transact business and the attorney-client privilege that attended that business." Id. at 763.
Similarly, Santa Cruz and SCO succeeded to the UNIX business. Each company acquired from its predecessor not only the UNIX technology and related assets, but also control of a commercial enterprise, including licenses and other agreements; rights, liabilities, and claims related to UNIX; customer, supplier, and vendor relationships; office space, leaseholds, and tangible property; personnel; and more. See, e.g., Broderick Decl. ¶¶ 10-15. The employees who followed the business kept doing the same work, with the same people, from the same offices, developing and delivering the same products and services to the same customers. Id. Moreover, Santa Cruz and SCO each took over management and operation of the business. Id.
Thus, the practical consequence of each acquisition was the transfer of control of the UNIX business and the continuation of that business under new management. Therefore, Santa Cruz and SCO also succeeded to the attorney-client privilege that attended that business.
IBM's concession that the privilege did transfer with AT&T's sale of USL to Novell highlights the weakness of IBM's position. See IBM Mem. at 6 n.8. As detailed above, the UNIX business that Novell acquired did not differ in substance from the UNIX business that it sold to Santa Cruz and that Santa Cruz sold to SCO. Novell operated the UNIX business as a subsidiary from June 1993 to April 1994. According to IBM, Novell's transfer of the UNIX assets to Santa Cruz during that period would have transferred the privilege, but the transfer of those very same assets in an asset sale in September 1995 did not. The courts have expressly rejected such subservience to form over substance. See, e.g., Tekni-Plex, 674 N.E.2d at 668-69; Soverain, 340 F. Supp. 2d at 762-63.
(because the asset purchaser "possessed all of the rights, privileges, liabilities and obligations," the privilege "that it might need to defend against these liabilities or pursue any of these rights" was transferred).
Next, seeking to contrast a change of control with a transfer of assets, IBM says: "But when a corporation merely sells or transfers assets to another corporation, without transferring control of the corporation, the attorney-client privilege does not also pass." IBM Mem. at 5. IBM then cites In re Grand Jury Subpoenas, 734 F. Supp. 1207 (E.D. Va. 1990). Neither that case, nor the others in IBM's brief, states that a change of control is necessary for the privilege to pass.
by citing inapposite cases. Like Grand Jury Subpoenas and In-Store Advertising those cases involve the sale of "mere assets, without more" - not assets constituting a business enterprise. Thus, such cases do not address, much less conflict with, the case law recognizing that the transfer of a continuing business entity through an asset sale also transfers the privilege. See e.g., Soverain, 340 F. Supp. 2d at 763 (because the buyer continued to operate the same business it acquired by purchasing some of the seller's assets, the transaction did not amount to "a mere transfer of assets"). By way of further example, IBM cites Zenith Elecs. Corp. v. WH-TV Broad. Corp., No. 01C4366, 2003 WL 21911066 (N.D. Ill. Aug. 7, 2003), for the proposition that "a mere transfer of some assets from one corporation to another - as was done in this case - does not transfer the attorney-client privilege." IBM Mem. at 6. In that case, however, the proponent of the privilege did not argue, and the court did not find, that the transferred assets constituted a business.
Finally, IBM quotes Federal Deposit Insurance Corp. v. McAtee, 124 F.R.D. 662, 664 (D. Kan. 1988), for the proposition that "the transfer of assets from one entity to another does not generally transfer the attorney-client privilege." IBM Mem. at 5 (emphasis added). As the qualifier implies, the court recognized that there are instances when the sale of assets transfers the privilege. Indeed, even a cursory review of the opinion suggests that the Court would have found that the FDIC did succeed to the privilege had it maintained (as opposed to liquidated) "the pre-existing entity, managing its affairs." McAtee, 124 F.R.D. at 664. McAtee thus also recognizes that the issue turns on whether control of a continuing business changed hands.
In sum, as the cases that SCO cites demonstrate, the attorney-client privilege attaches to and passes with the transfer of the business enterprise. Those are the transfers by which SCO owns the UNIX business enterprise.
SCO respectfully requests, for the foregoing reasons, that the Court deny IBM's Motion to Compel Production of Documents on SCO's Privilege Log.
DATED this 21st day of October, 2005.
1 See also In re I Successor Corp., 321 B.R. 640, 653 (S.D.N.Y.2005) ("But if Intrepid had purchased assets as an ongoing entity, then it would have acquired the attorney-client privilege of Interliant as to the assets it acquired and would continue to operate."); Pilates. Inc. v. Georgetown Bodyworks Deep Muscle Massage Ctrs., Inc., 201 F.R.D. 261, 263-64 (D.C. 2000) (recognizing that sale of substantial assets transfers the privilege); R.G. Egan Equip., Inc. v. Plymag Tek. Inc., 758 N.Y.S.2d 763, 769 (N.Y. Sup. Ct. 2002) (stating that "the practical consequences of the transaction must show that the pre-existing operation of a business entity is continued in order for the attorney-client relationship to transfer to the new owners of the business or the assets").
2 IBM then seeks to build on that omission by misquoting In re In-Store Advertising, 163 F.R.D. 452 (S.D.N.Y. 1995), out of context. IBM quotes the opinion to say, "Where confidential attorney-client communications are transferred from a corporation selling assets to the corporation buying the assets, the privilege is waived as to those communications." In fact, the first word in that sentence is "Therefore," and that sentence follows a quotation to the very same excerpt from Grand Jury Subpoenas that IBM quotes. Thus, even In-Store advertising recognizes that only "a transfer of assets, without more" fails to transfer the privilege. In any event, because the assets transferred in In-Store Advertising did not constitute a continuing business, the misquoted statement is dictum and that case is distinguishable.
I am Director of Software Licensing for The SCO Group, Inc. ("SCO"). My office is located in Murray Hill, New Jersey.
Unless otherwise noted or evident from context, this Declaration is based on my personal knowledge.
I submit this Declaration in support of SCO's Memorandum in Opposition to IBM's Motion to Compel Production of Documents on SCO's Privilege Log.
Since December 1991, I have been continuously employed managing contracts for the successive companies that have owned the UNIX technology and business.
From December 1991 to June 1993 I was the Manager of Sales Operation for UNIX System Laboratories ("USL"), a company that owned and operated the UNIX business that AT&T originally created.
When AT&T sold USL to Novell, Inc. ("Novell") in June 1993, I remained with the UNIX business as a Novell employee performing substantially the same work as at USL. During most of my time at Novell my title was Contract Manager.
When Novell sold the UNIX business to The Santa Cruz Operation ("Santa Cruz") in 1995, I remained with the UNIX business as a Santa Cruz employee performing substantially the same work as at Novell. During my employment at Santa Cruz my title was Manager, Law and Corporate Affairs.
remained the same, but it later changed to my current title, Director of Software Licensing. In 2003, Caldera changed its name to SCO.
In sum, my career has followed the UNIX business as it has been transferred successively from AT&T/USL to Novell to Santa Cruz to Caldera (now SCO). I personally witnessed and experienced the transition of the business from one owner to the next.
In each instance (USL to Novell, Novell to Santa Cruz and Santa Cruz to Caldera), the company selling the UNIX technology also transferred control of the commercial enterprise that developed, marketed, and licensed that technology (the UNIX business). In each instance, the makeup and operation of the UNIX business continued as constituted through and after each transition.
In each instance, the transferred UNIX business included without limitation the UNIX source code, binary code, and intellectual property; licenses and other agreements; and the rights, liabilities, and claims related to that business. That is, without exception, I and everyone whom I knew and dealt with on both sides of each transaction understood, and operated without disturbance with the belief, that such tangible and intangible assets were transferred to the buyer in each instance.
In each instance, the transferred UNIX business also included all or many of the people who managed and operated the business, including senior-level managers, engineers, sales people, support staff, and other employees. It also included customer, supplier, and vendor relationships.
In each instance, the transferred UNIX business also included office space, leaseholds, furniture, and equipment.
In short, through and after each transaction, my colleagues and I almost universally kept doing the same work, with the same people, from the same offices and buildings, developing and delivering the same UNIX products and services to the same customers. We also continued to develop the same technology, service the same contracts, and collect revenue under those contracts.
In each instance, after each transaction, neither the seller nor its employees remained involved in managing or operating the business. The buyer (mainly through its newly acquired employees) took over those responsibilities.
As stated, AT&T/USL, Novell, and Santa Cruz each successively transferred the continuing UNIX technology and business to its respective successor. Even though the transfer from AT&T to Novell was structured as a merger and the subsequent transfers from Novell to Santa Cruz and from Santa Cruz to Caldera were structured as asset purchases, the transactions did not differ except as to form. The same continuing UNIX enterprise, including all the assets listed in paragraphs 10 - 14 above and more, changed hands in all three transactions.

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