SCO files for Chapter 11 bankruptcy protection

The SCO Group Inc. today filed for Chapter 11 bankruptcy protection, just a month after losing several key court rulings in its legal fight against Novell Inc., IBM and others over what it asserts is the company’s Unix intellectual property.

In an announcement today, Lindon, Utah-based SCO said it filed a voluntary petition for reorganization, as well as for its subsidiary, SCO Operations Inc.

“The board of directors of The SCO Group have unanimously determined that Chapter 11 reorganization is in the best long-term interest of SCO and its subsidiaries, as well as its customers, shareholders and employees,” the company said in a terse press release late today.

The company said its normal business operations will continue throughout the bankruptcy proceedings.

“We want to assure our customers and partners that they can continue to rely on SCO products, support and services for their business critical operations,” Darl McBride, the company’s CEO and president, said in a statement. “Chapter 11 reorganization provides the company with an opportunity to protect its assets during this time while focusing on building our future plans.”

On Monday, SCO is expected to be in court in a trial that will determine how much money SCO might have to pay to Novell for Unix licensing revenues collected by SCO over the last several years.

Dan Kusnetzky, an analyst at the Kusnetzky Group in Osprey, Fla., said the bankruptcy filing by the company was not unexpected.

“It seemed to be a very odd strategy to go — and before they even had established a court precedent — to attack IBM with litigation and go after Novell and go after customers,” he said. “I don’t believe that at any point that they made it clear what they thought the [Unix code] infringement was.”

Kusnetzky called the bankruptcy filing “an interesting move when they are facing a court battle where almost every single one of their [legal] pillars has been pulled out.”Kusnetzky said SCO “believed that IBM would pay them a lot of money to shut up” after SCO sued IBM in March 2003 in what became a $5 billion lawsuit alleging that IBM had illegally contributed some of SCO’s Unix code to the Linux open-source project.

“Instead, they got an IBM that wanted to fight them.

“I didn’t think they could win and I think this is evidence that that’s true,” he said. Al Gillen, an analyst at IDC in Framingham, Mass., said the move today was not a shock because of the steady decline in SCO’s financial performance since it began its legal battles four years ago.

“SCO had a tough problem on their hands — even if you date back six years ago — about what they were going to do with Linux,” which was invading parts of its Unix customer base, Gillen said. By filing lawsuits against IBM and Novell, SCO “risked alienating customers and partners. I’m not sure if that’s why they’re in Chapter 11 now, but it couldn’t have helped.”

Rival Sun Microsystems Inc. has faced similar market challenges in recent years, but took a different way to adjust, Gillen said, including moving key products like Sun Solaris to open source. “What’s clear is that going after this from a litigation approach [as SCO did] wasn’t going to work for Sun.”

SCO will now have to see how the bankruptcy filing affects its recent mobile software initiatives, Gillen said. “From a bigger picture, some of their mobile applications are looking interesting, if they can stay alive to market it.”

SCO and Novell have been fighting over who legally owns the rights to Unix and UnixWare since 2003. That’s when SCO sued IBM in what became a $5 billion lawsuit, alleging that IBM illegally contributed some of SCO’s Unix code to the then-fledgling Linux open-source project. SCO sued Novell directly in 2004; Novell filed counterclaims that disputed SCO’s case.

Last month, U.S. District Court Judge Dale A. Kimball in Salt Lake City undercut much of SCO’s case in a ruling that declared Novell the owner of the Unix and UnixWare copyrights. As a result, a bench trial that begins Monday will determine how much money SCO might now have to pay Novell for Unix licensing revenue it received from Sun Microsystems and Microsoft Corp.

Earlier this month, in an interview with sister publication Computerworld, SCO CEO Darl McBride said his company will continue to fight its legal case, despite recent setbacks.

The battle between SCO and IBM is not expected to start until next year and is expected to be affected by the results of the SCO-Novell fight.

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Jim Love, Chief Content Officer, IT World Canada

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