SCO intensifies Linux battle

Eric Auchard

NEW YORK: Software company SCO Group Inc. expanded its legal battle against Linux by suing AutoZone Inc., making good on a threat to target corporate customers in its far-reaching copyright battle.

SCO Group of Lindon, Utah, said that it plans to sue DaimlerChrysler AG, which also uses the software, and reported a wider quarterly loss as revenues fell and legal costs increased. Its shares dropped 13 percent to a six-month low.

In a related case pitting SCO against International Business Machines Corp., a U.S. judge in Utah issued a ruling calling on IBM to divulge all public and non-public contributions it has made to Linux software.

SCO accuses IBM of infringing its technology by contributing key portions of Unix software to develop Linux.

SCO Group claims that Linux, a software operating system that users can copy and modify freely, is based on its Unix software. It is trying to extract royalties from Linux users -- both software developers such as IBM and deep-pocketed corporate customers.

Analysts pegged its stock drop to a disappointing fall in first-quarter revenue and concern that it was being distracted from its own software business by the Linux litigation.

"The numbers were bad (and) the company's business itself was not very healthy," said Dion Cornett, analyst at Decatur Jones Equity Partners.

It reported a net loss of $2.25 million, or 16 cents per share, after preferred dividends, for its fiscal first quarter ended Jan. 31, compared with a loss of $724,000, or 6 cents per share, a year earlier.

Revenue shrank to $11.4 million from $13.5 million.

Its shares fell $1.83 to close at $11.59 on Wednesday in Nasdaq trading, hitting their lowest level since August.

DERAILED SHIFT TO LINUX

Unix is a 35-year-old software system used in many big-business operations. Last year, SCO upset the industry's rapid shift to Linux, a 13-year-old variant of Unix, by alleging that key parts of Linux infringed on its copyrighted intellectual property.

SCO subsequently filed suit against Linux developers IBM and Novell Inc.

In his latest ruling, Judge Brooke Wells of the U.S. Federal District Court Central Division, District of Utah, called on all IBM employees who have worked on Linux to turn over the requested documents, including Chief Executive Sam Palmisano. The judge had earlier ordered SCO to spell out any specific evidence it has of alleged IBM copyright violations in Linux software.

"Such materials and documents are to include any reports, materials and documents on IBM's 'ambitious Linux strategy.'" Wells wrote in his order handed down on Wednesday.

Corporate customers from banks to phone companies have embraced Linux as a flexible, low-cost alternative -- instead of Unix or Microsoft Corp.'s Windows -- for running key business operations.

Charles Di Bona of Berstein Investment Research said its legal push has raised questions among corporate buyers over whether Linux is an intellectual property time bomb because of short cuts taken in developing the software.

SCO Chief Executive Darl McBride said his company plans to sue companies outside the United States but would not identify potential targets.

Looking ahead, SCO said revenue could fall in the second quarter ending April 30. It projected revenue in the range of $10 million to $14 million, blaming the unpredictability of its short-term software licensing deals.

The lawsuit against AutoZone, filed in U.S. District Court in Nevada, seeks to halt the auto parts retailer's use of any part of its copyrighted materials. It is seeking unspecified damages.

Later, in a conference call with investors, SCO Group officials said they planned to file a similar lawsuit against DaimlerChrysler, the world's No. 5 automaker, in Michigan's Oakland County Court on Wednesday.

A spokesman for DaimlerChrysler declined to comment, saying it would not do so until it had been served with a legal complaint. An AutoZone spokesman declined to comment.

(Additional reporting by Franklin Paul and David Zielenziger in New York and Reed Stevenson in Seattle)

© Reuters