Linux

 Boies Joins SCO Shakedown
 Lisa DiCarlo, 11.18.03, 2:42 PM ET

 NEW YORK - In an arrangement that legal eagle David Boies characterized as
"not
 usual but not unique," his law firm today said it would accept $1 million
in cash and
 400,000 shares in its client SCO, as part of a partnership that aims to
extract licensing
 fees from Linux customers.

 As a result of the stock issuance and cash
 payout, SCO (nasdaq: SCOX - news - people
 ) will take an $8.9 million charge ($7.9 million
 of which is non-cash) against fourth-quarter
 earnings. SCO will take an additional
 non-cash charge of $8.74 million for the
 conversation related to the issuance of stock.
 The money and shares are separate from a
 20% stake in SCO that Boies' firm would
 receive in the event of a settlement or sale of
 the company.

 Boies' firm, Boies, Schiller and Flexner, has
 been representing SCO in its multibillion-dollar
 lawsuit against IBM (nyse: IBM - news -
 people ). SCO claims that IBM is violating its
 patents by illegally distributing its "System V"
 Unix technology within Linux.

 IBM is the only corporation SCO has sued
 thus far, but it is seeking licensing fees from
 large corporate users. SCO Chief Executive
 Darl McBride said today the company may
 be forced to sue Novell (nasdaq: NOVL -
 news - people ), which is in the process of
 acquiring SuSe, a Linux distributor, on the
 grounds of violating an earlier non-compete
 contract.

 But attorneys don't come cheap. SCO, with
 only $55 million in sales through the first nine
 months of fiscal 2003, ended Oct. 31, needs
 cash to fund its efforts. Last month, the
 company raised $50 million through a private
 placement for this purpose. "We didn't raise
 [the money] to get CD interest sitting in the bank. We have a significant
war chest to
 fund this effort," said McBride on a conference call.

 SCO's executives said the payments to Boies' firm are contingent upon
events that
 have already occurred. "We've had some successful [licensing] events
occur, and
 we've shared that with David. He's coming in at a partnership level," says
McBride,
 who said Boies' firm will share in any windfall that occurs in the event
of judgment,
 licensing or sale of SCO.

 In an effort to demonstrate what it says is the depth of the problem, SCO
and Boies
 will, within 90 days, identify at least one "significant" Linux customer
that is not paying
 licensing fees "and is in fact using proprietary and copyrighted
material," says McBride.


 The alleged intellectual property violations "touch not just IBM but
others, and the
 violations are not easily repaired," says McBride.

 He says SCO has shown some Linux customers a sample file of the allegedly
illegal
 source code. Linux developers, he says, "cleaned up" a simple portion of
the code but
 "the ability to yank one million lines of code out of five million is
substantial."

 SCO has apparently shelved an earlier plan to send invoices to Linux
customers, in
 favor of one-on-one licensing negotiations. "It's license or litigate,"
McBride said.

 Investors seem to believe that SCO's suit has merit. The company's shares
began the
 year at $1.40. "When we signed on [with Boies' firm] our market cap was
$17 million,"
 said McBride. Today, with SCO's shares at $14.30, its market cap is $204
million.





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