The fate of a small Lindon software firm that gained notoriety when it launched a legal offensive against Big Blue and advocates of the freely distributed Linux operating system now hangs by a thread, some analysts say.

Shares of SCO Group took a severe beating Monday following what one analyst called an "utterly damning" federal ruling Friday that found SCO does not, in fact, own the copyrights to the Unix operating system.

That ruling, according to Linux fans, dealt a death blow to SCO's claims that IBM stole code from Unix and put it into Linux, and also potentially puts an end to SCO's attempts, over the past four and a half years, to force hundreds of Linux users to pay licensing fees.

The ruling issued Friday by U.S. District Judge Dale Kimball raises questions among analysts over SCO's financial viability -- from its ability to defend its lawsuits against IBM, to whether it has the funding to continue its legal campaign. Or worse, whether disgruntled shareholders, which saw their stock value plunge, may take legal action against the company.

"SCO took a devastating blow to its market capitalization today, which has dropped to less than $10 million. It'll be difficult for them to raise capital given how severely punished their stock is," said James Zemlin, executive director of the Linux Foundation, a nonprofit consortium formed to foster the Linux operating system.

In Monday's trading, SCO shares lost 72 percent of their value, or $1.12, to close at 44 cents. In afterhours trade, SCO shares clawed back 1 cent or 2.27 percent to 45 cents a share. The stock closed at $1.56 on Friday.

"The remaining dismemberment of SCO has accelerated," said Eben Moglen, a professor of law at Columbia University and the founding director of the Software Freedom Law Center, which advocates freely-distributed open-source software.

"SCO's shareholders may sue on grounds they were defrauded by SCO's claims that they own Unix copyrights," Moglen said.

Meanwhile, the overall sentiment at the Lindon company was described by one employee as one of "absolute shock," as its executive management and newly appointed public relations company, New York-based Coltrin & Associates, evaluated the situation Monday.

SCO's response

In a statement posted on its Web site late Monday, SCO said it is "obviously disappointed" with the ruling, but still maintains it owns the technology it developed using UnixWare after Novell sold the Unix operating system to SCO in 1995.

"The court clearly determined that SCO owns the copyrights to the technology developed or derived by SCO after Novell transferred the assets to SCO in 1995. This includes the new development in all subsequent versions of UnixWare up through the most current release of UnixWare and substantial portions of SCO UnixWare Gemini 64," SCO said in Monday's statement.

"What's more, the court did not dismiss our claims against Novell regarding the non-compete provisions of the 1995 Technology License Agreement relating to Novell's distribution of Linux to the extent implicated by the technology developed by SCO after 1995. Those issues remain to be litigated," the company said.

SCO also said its main revenue generators, which consists of licensing its proprietary OpenServer and Mobile Server platforms, are still in good health. SCO has a total of 150 workers companywide.

"SCO owns the exclusive, worldwide license to use the UnixWare trademark, now owned by The Open Group. SCO's ownership of OpenServer and its Mobile Server platforms were not challenged and remain intact. These SCO platforms continue to drive enterprises large and small and our rapidly developing mobile business is being well received in the marketplace," the company said.

SCO executives declined to comment on what impact Friday's ruling will have on its ongoing lawsuits against IBM and other Linux corporate users including AutoZone.

The Lindon company claims IBM violated its software licensing contracts by distributing Unix code into IBM's Aix and Dynix software. Now that Friday's ruling found SCO does not own the Unix copyright, those claims are in question.

IBM declined comment on how Friday's ruling will influence its legal battle against SCO. Earlier this year, U.S. Magistrate Judge Brooke C. Wells tossed out two-thirds of SCO's claims against IBM because SCO had refused, despite repeated requests, to provide specific details about which lines of code allegedly were stolen. That case goes to trial next year.

SCO declined to comment on whether it has to return the SCO source licensing fees it collected over the years from companies it accused of using Linux systems containing Unix code.

But in the past year, SCO hasn't been successful in its attempts to collect licensing fees as many companies are awaiting the outcome of SCO's case against Novell. In its latest second-quarter earnings report ended April 30, SCO source revenues were nil, compared with $34,000 a year ago.

A red herringfi

Zemlin said Friday's ruling is likely to render SCO's suit against IBM moot.

He also said SCO's legal campaign was aimed at "creating uncertainty" and "distracting the market from adopting Linux more widely."

"SCO would have been more successful offering Linux solutions instead of suing Linux providers. Red Hat, which sued SCO to protect its Linux distribution rights, had a $1 billion market capitalization then," he said. "Today it has a $4 billion market capitalization. SCO on the other hand, substantially reduced the value of its company to shareholders."

Zemlin described Friday's ruling as a validation for using open-source software.

"This eliminates uncertainty over the risk of adopting open-source, making it an attractive alternative to Microsoft's Windows," he said.

Zemlin described Linux as a multi-billion dollar industry. "Seventy-five percent of the top 500 supercomputers in the world are Linux-based. Google runs on Linux. The trading terminals at the New York Stock Exchange runs on Linux. Linux could be a dominant platform for computing in the future."

For Novell, Friday's ruling is a "great outcome for Linux and the open-source community."

"A big cloud has been lifted," said Bruce Lowry, Novell's spokesman. "Customers and developers can deploy and develop on Linux with increased confidence that SCO's copyright allegations around Linux will be put to rest. Novell's defense against SCO has been a cornerstone of our overall approach to intellectual property and Linux. Novell has spent significant resources (double-digit millions of dollars) fighting this case."

SCO, which had also spent millions of dollars in its four-and-a-half year legal campaign, is, as one worker puts it, "sticking it out to the end. The floor may be gone, but we're still hanging on to the pipes."

This story appeared in The Daily Herald on page A1.