Shareholder's' Derivative Lawsuit Claims Oracle Management Knew of Predatory Audit Tactics and Misled Public
In a shareholder’s derivative lawsuit filed on May 6, 2019 in the Northern District of California, the City of Providence has accused the top echelons of Oracle’s management and its board of directors, of making materially false and misleading statements about the growth of Oracle’s cloud business and the simultaneous repurchase of common stock at inflated values. The verified 110-page complaint filed by the Cotchett, Pitre & McCarthy law firm, relies heavily on a March 8th Consolidated Class Action Complaint filed in the In Re Oracle Corporation Securities Litigation, and sets out in meticulous detail the alleged misconduct relating to Oracle’s abuse of its audit rights and Oracle’s use of predatory audit tactics. Essentially the Complaint alleges that Oracle License Management Services (“LMS”) improperly used software audits against Oracle customers to come up with bogus audit findings, which Oracle Sales could then leverage to force customers into Oracle cloud purchases. Oracle management in turn would tout these sales to shareholders and the public, without disclosing that in many instances the Oracle customers never wanted or needed the products, but only bought them to get out from under the audit findings. The Complaint alleges that the purpose of this elaborate scheme was to provide Oracle management with ammunition so that it could falsely claim that Oracle cloud sales were experiencing phenomenal growth thereby misleading the market.
The Complaint pleads specific facts, which will be familiar to many Oracle customers who have experienced an Oracle audit. According to the complaint, in the typical “Audit, Bargain, Close” or “ABC deal”, Oracle’s LMS “would audit an existing on-premises client for violations of the software license and present the client with a hefty bill – say, $10 million. Oracle sales would then intervene, offering to reduce the penalties significantly – by, for instance, $4 million – if the customer purchased $2 million in cloud subscriptions. These customers, who neither wanted nor needed the cloud products, “purchased” a cloud subscription simply to save money on audit penalties, and, of course, almost never renewed those subscriptions. The Officer Defendants caused Oracle to misleadingly report these sham “sales” as cloud revenue, highlighting them as evidence of explosive business growth, when, in fact, they were nothing of the sort”.
Oracle customers who have undergone audit may also be able to relate to the following allegations:
“To start, Oracle installed its main on-premises products with extra options and management packs enabled by default, but did not inform its customers that these features had been installed and must be disabled in order to avoid license overages. Once a customer fell into this trap, Oracle’s sales and LMS teams worked in a highly coordinated fashion to audit the client for its license violations and push cloud products”.
The complaint devotes a whopping 44 pages to setting out statements made by various high-level officers and directors of Oracle, which the complaint contends shows that Oracle management knew of and encouraged these improper practices and intentionally misled the public by repeatedly claiming that the growth in cloud sales was due to legitimate business factors and not fueled by improper audit and sales tactics.
If you believe your company has been forced into an unwanted cloud purchase arising out of an Oracle audit, you may have legal remedies. If you are currently under audit, and have been pressured to buy cloud, you may have legal options. Please contact firstname.lastname@example.org if you would like to discuss your possible claims.
Tactical Law Group LLP is continuing to monitor the litigation. Check back here for periodic updates. The case is City of Providence v. Lawrence Ellison, et. al., Case Number 5:19-cv-02448-NMC.
You may read City of Providence’s Complaint by clicking below.
Oracle Corporation and six current and former officers or directors of Oracle moved on April 19, 2019 to dismiss the class action securities Complaint filed by Plaintiff Sunrise Fire Fighters in the Northern District of California. Essentially that Complaint alleges that Oracle and its management intentionally and misleadingly reported cloud revenues and growth and expressed optimism for future growth, without disclosing to the public that Oracle’s financial results and growing cloud sales were not the result of its superior product, but instead a result of abusive software audits of Oracle customers and improper sales tactics arising out of those audits. Plaintiff brought suit on behalf of all persons who purchased Oracle securities between March 15, 2017, and June 19, 2018.
Oracle seeks to dismiss the Complaint arguing that Plaintiff has failed to provide concrete evidence of Oracle’s audit abuses during the relevant class period. According to Oracle’s motion, “Plaintiff provides no details regarding the number of audits conducted or whether the audits materially affected Oracle’s revenue in any quarter. Plaintiff also claims that Oracle pushed so- called “attached” deals, essentially providing on-premise customers a “sharp discount” if they agreed to try Cloud products.” According to Oracle, “Plaintiff contends that these alleged practices were “improper,” but cites no law, accounting rule, or policy that precludes a company from encouraging its existing customers to try new products.”
Oracle’s attempt to portray its abusive audit tactics, which have been widely reported in the business press as well as in several public lawsuits, as simply gentle encouragement by Oracle to its customers to try new products is ludicrous. Many Oracle customers who have undergone an Oracle audit might vehemently disagree with Oracle’s benign characterization of the audit process. And if this securities class action case proceeds past the pleading phase and into discovery, Plaintiff may well discover evidence within Oracle’s own files of massive and systematic abuses by Oracle of its audit rights.
Oracle also argues in its motion that “it is not improper to use aggressive tactics to sell products” and that “Oracle’s software license contracts gave it the right to audit its customers’ compliance with the license and impose fees if it found violations.” Similarly, Oracle contends that it was “Oracle’s right to forgo collecting those fees in exchange for customers agreeing to try Oracle’s Cloud products.” But what if evidence exists that demonstrates that certain of those violations claimed by Oracle were bogus and not grounded in the contract? What if Plaintiff can find evidence that Oracle knew that its claimed deficiencies lacked contractual merit, but they claimed them anyway in order to inflate the alleged licensing deficiency and use it as leverage to drive more sales of Oracle cloud and other software products? And if it is true that Oracle does not need to resort to “scare tactics” to sell its cloud products as Oracle claims, then why is the business press replete with instances of Oracle customers complaining about Oracle’s predatory audit practices?
Oracle license agreements usually provide that Oracle audits cannot unreasonably interfere with the normal business operations of Oracle customers. Was it an unreasonable interference for Oracle to demand hundreds of thousands of documents from Mars Corporation, including information about servers where Oracle software was not installed and/or running? Was it an unreasonable interference for Oracle to then threaten to terminate the license thereby forcing Mars to incur the costs of filing a lawsuit for declaratory relief seeking a court determination that it was not in breach of the license? What if it were to be discovered that Oracle has a standard business practice of issuing Final Audit Reports, which routinely contain alleged compliance gaps not grounded in the contract in order to come up with a “shock number” to gain negotiating leverage over Oracle customers?
In the Sunrise suit, Oracle contends that “Plaintiff has not shown anything improper about upselling and cross-selling or offering discounts, incentives, and audit accommodations. Nor has Plaintiff shown that Oracle’s opinion was subjectively disbelieved, objectively false, or lacking any reasonable basis” and that “at most, Plaintiff’s allegations show “isolated instances” of the alleged conduct “rather than widespread deception, which would be necessary to establish fraudulent intent or reckless ignorance.”
It will be interesting to see whether Plaintiff can get past the pleading stage and into discovery. To the extent evidence of widespread and systematic deception exists, it would be contained in documents at Oracle, which Plaintiff has not yet been able to access. One fertile area that Plaintiff might want to focus on to prove Oracle’s “widespread” and “intentional” deception in Oracle audits is Oracle’s assertions around VMware and the “installed and/or running” language of the license agreement. It is our opinion that should Plaintiff focus on this area it may likely find evidence in Oracle’s files that Oracle routinely includes large compliance gaps in its Final Audit Reports based on its VMware assertions. Yet although such findings may be commonplace we are aware of no instances where Oracle has sought to enforce its view in a court of law, although Oracle has relied on its dubious interpretation to threaten license terminations as the Mars v. Oracle case proves. And as we know, Oracle settled the Mars case quickly and well before a court could rule on the issue.
Plaintiff in the Sunrise case should seek discovery of Oracle audits where VMware assertions were included in the Final Audit Report and resolution of the audit involved large discounts, in part, based on the purchase of cloud credits. Such discovery may lead to evidence that Oracle’s audit tactics are part of a “widespread deception” and do not reflect simply “isolated incidents” but rather are intentional and perhaps ratified by the highest echelons of Oracle’s management.
Oracle customers under audit would be wise to document in written communications to Oracle instances where they believe that Oracle’s actions are abusive and not grounded in the contract.
If you believe your company has been forced into an unwanted cloud purchase arising out an Oracle audit, you may have legal remedies. Please contact email@example.com if you would like to discuss your potential legal options.
Tactical Law Group LLP is continuing to monitor the litigation. Check back here for periodic updates.
You may read Oracle's motion to dismiss here by clicking below.
Claiming total success in the litigation, Hewlett Packard Enterprise Company (“HPE”) is seeking an award of almost $18 million in attorneys’ fees against Oracle. Oracle sued HPE in 2016 alleging claims for indirect (vicarious and contributory) and direct copyright infringement, intentional interference with contract, intentional interference with prospective economic relations, and unfair competition. These claims stemmed from Oracle’s allegations that HPE offered illegal updates to customers of Oracle's Solaris operating system as part of a scheme concocted by another company, Terix Computer Co. Inc.
Judge Tigar of the Northern District of California granted HPE’s motion for summary judgment on all claims while denying Oracle’s motion. As the prevailing party in the copyright infringement case, HPE contends that it is entitled to an award of fees. HPE argues that “[g]iven HPE’s complete success in the case, Oracle’s unreasonable and aggressive approach in the litigation, and the need to compensate HPE and to deter Oracle, the Court should grant HPE’s motion and award HPE the reasonable fees it requests.” HPE claims that “Oracle’s litigation tactics also at times crossed the line from zealous to inappropriately hostile and aggressive” pointing to Judge Laporte’s admonishment of “Oracle for its failure to adhere to the Northern District of California’s ‘Guidelines for Professional Conduct’”. According to Judge Laporte:
"The Court is very disappointed by the extreme, unnecessary, overheated rhetoric employed primarily by Oracle, such as its opening salvo—“Time and time again, HPE and its counsel have shown that there is no game they will not play in the pursuit of misperceived litigation advantage ...”—which is followed by phrases such as “blatant gamesmanship,” “knowingly misrepresenting facts in an attempt to slander,” “empty accusations,” “supposed grievances,” “Nonsense” and the like."
HPE’s fee motion also accuses Oracle of being a “serial plaintiff” and an “aggressive litigant that consistently seeks to run its competitors out of the market.” HPE is also seeking attorneys’ fees on the defense of the state law claims arguing that Oracle’s copyright claims and state court claims were intertwined and arose out of a “common core of facts” or “out of the same course of conduct”. According to the motion, “HPE’s counsel spent 25,758.80 hours and incurred nearly $20 million in fees litigating this case to a complete victory, and here seeks $17,879,638.03. This amount reflects a self-imposed haircut, a reasonable number of hours for a case of this complexity, and reasonable hourly rates.”
We will continue to monitor the case, which is Oracle America, Inc. v. Hewlett Packard Enterprise Company, CASE NO. 3:16-cv-01393-JST in the Northern District of California. Check back here for updates. See below if you would like to download the motion.
Oracle has again suffered a legal setback, this time at the Ninth Circuit. In an unpublished opinion issued yesterday, a panel made up of Justices Schroeder, Rawlinson and Lasnik, affirmed a ruling by District Court Judge Laporte, which granted a former Oracle employee, Marcella Johnson’s motion to compel arbitration. Johnson sued Oracle in February 2017 in federal court on behalf of a proposed class of sales employees in a dispute about how Oracle pays its sales team commissions. Johnson claimed that Oracle changed its commission policies resulting in “clawbacks” of previously paid amounts, and that such clawbacks are illegal under California employment law.
Johnson eventually dropped her suit in federal court and filed a class arbitration in San Francisco before JAMS, after Oracle produced an employment agreement with an arbitration provision. However, although employers usually prefer arbitration, Oracle declined to pay its portion of the arbitration fees, instead contending that Johnson had petitioned for arbitration under a provision that had been superseded by a later agreement that explicitly blocked classwide treatment of claims in arbitration. Johnson then moved to compel arbitration, claiming that the arbitrator could decide which arbitration agreement governed. Oracle argued that the decision on which agreement governed was for the district court and not the arbitrator to decide.
The Ninth Circuit rejected Oracle’s argument finding that the agreements provided for either the applicability of the Federal Arbitration Act (“FAA”) or Judicial Arbitration and Mediation Services (“JAMS”) rules. The court reasoned that “[u]nder those rules, issues concerning arbitrability can be delegated to the arbitrator so long as the delegation is clear,” which it found to be so in the Oracle contracts.
Since the case will now be in private arbitration and not a public court of law, Tactical Law will be unable to monitor the case. That is regretful as it would be interesting to learn more about Oracle’s strong-arm tactics with its own sales people. Companies undergoing Oracle audits know how aggressive Oracle sales can be in pushing expensive audit resolution proposals. It is no wonder given the immense pressure that Oracle apparently imposes on its sales team to meet high Oracle sales goals. If you are a company undergoing an Oracle audit, seek experienced legal counsel knowledgeable about California law to assist you in successfully navigating the audit and defeating aggressive Oracle sales tactics.
Third party software services maintenance provider, Rimini Street, scored a victory today before the U.S. Supreme Court against its arch nemesis Oracle. A unanimous Supreme Court, in an opinion written by Justice Kavanaugh, has reversed the Ninth Circuit by ruling that the phrase “full costs” as used in the Copyright Act means only the 6 categories of costs authorized in the general federal costs statute, as codified at Sections 1821 and 1920 of Title 28. Oracle had argued that the word “full” before the word “costs” meant that a court in awarding litigation expenses in a copyright case could award expenses beyond the ones mentioned in Sections 1821 and 1920, such as the costs of electronic discovery, expert witnesses and jury consultants. In rejecting that argument, Justice Kavanaugh reasoned that “[t]he adjective “full” in §505 [of the Copyright Act] therefore does not alter the meaning of the word “costs.” Rather, “full costs” are all the “costs” otherwise available under law. The word “full” operates in the phrase “full costs” just as it operates in other common phrases: A “full moon” means the moon, not Mars. A “full breakfast” means breakfast, not lunch. A “full season ticket plan” means tickets, not hot dogs. So too, the term “full costs” means costs, not other expenses.”
The case is Rimini Street Inc. et al. v. Oracle USA Inc., case number 17-1625, at the Supreme Court of the United States.
Oracle Hit with New Lawsuit for Fraud, Negligent Misrepresentation, Breach of Contract, Breach of Warranty and Other Claims Involving its ERP and Cloud Offerings
Worth & Company, Inc., (“Worth” or “Plaintiff”) a Pennsylvania corporation in the mechanical contractor business has sued Oracle America, Inc. (“Oracle”) in federal court in the Northern District of California. The Complaint alleges various claims relating to Oracle’s enterprise resource planning (“ERP”) and cloud software offerings including claims for intentional & negligent misrepresentation, breach of contract, breach of warranty, and other related causes of action. Unlike other recent lawsuits against Oracle alleging similar California state law claims, the suit was brought in federal court on the basis of diversity jurisdiction. Plaintiff seeks damages for Oracle’s failure to deliver a fully functioning product, or alternatively restitution of the $4.5 million dollars paid to Oracle for the alleged faulty software solution and rescission of the various Oracle contracts including a Master Agreement, a Subscription Agreement and other related Oracle contracts.
According to the Complaint:
“Worth seeks money damages or rescission for Oracle’s breach of contract and breach of warranty of merchantability and fitness for a particular purpose based on Oracle’s failure to provide an enterprise resource planning (ERP) software system compatible for use in Worth’s business as a mechanical contractor. Despite Oracle’s representations that its integrated software system, i-cloud services, and technical support system was a functioning workable product fully capable of fulfilling Worth’s needs, Oracle failed to provide a collectively suitable and operable software system. Worth paid in excess of $4,500,000.00 to purchase and implement the ultimately non-functioning Oracle ERP product. Alternatively, Worth seeks money damages or rescission under California law for Oracle’s negligent and continued misrepresentations that the integrated software system was suitable for Worth’s needs.”
The Complaint sets forth in detail the long and tortured saga with Oracle, which began in 2014 when Worth sent out a Request for Quotations (“RFQ”) for a new ERP system. Oracle responded to the RFQ and provided a proposal after a series of detailed meetings where “Oracle requested and Worth provided certain data requests for its demonstration/validation sessions with Worth” and Worth provided to “Oracle a detailed project management list of all of the items Worth wanted to ensure the new ERP solution would handle”. According to the Complaint “[t]hroughout the bidding and negotiation of the implementation services contracts, Oracle represented that all of Worth’s business requirements would be met by the EBS application.” Worth contends that these representations turned out to be false.
On February 20, 2015 Oracle and Worth executed several agreements pertaining to the ERP system, but it didn’t take long until it became clear that Oracle would not be able to meet the “go live” date that had been promised. According to the Complaint:
“By November 2015, it was evident to both Oracle and Worth that the on premises implementation and cloud integration was seriously delayed and wrought with issues. Oracle continued to provide assurances that it would work through all of the issues and that its EBS system was the most efficient program for Worth, and that Worth’s needs would be fulfilled by the EBS system.”
Although the “go live” date was eventually kicked to February 2016, it soon became apparent that Oracle would not be able to meet that deadline. In fact, the new “go live” date was eventually pushed an entire year to February 2017. Worth continued to have issues with Oracle’s implementation after the “go live” date of February 2017. In fact, problems continued throughout all of 2017, leading Worth to decide in the Spring of 2018 that it would discontinue the use of the Oracle ERP system and find another solution.
According to the Complaint, Oracle warranted in the Master Agreement “that a Program licensed to You will operate in all material respects as described in the applicable Program Documentation”. Worth contends that despite this representation, the ERP system never worked as promised and that “[t]he breach by Oracle of the Master Agreement is so total and fundamental that the essential purpose of the contract fails, and the limited remedies and warranties provided in the Master Agreement fail of their essential purpose”. According to Worth, “Oracle’s breaches of the Master Agreement resulted in the software and services Oracle was to provide to be absolutely useless to Worth and destroyed the essential objects of the Master Agreement.” As an alternative to money damages, Worth seeks rescission of the agreements and restitution of all monies paid to Oracle under the agreements.
Worth contends that it relied on Oracle’s representations to its detriment. According to the Complaint, “Oracle made the Representations with the intent that Worth would rely on the Representations by entering into the Master Agreement, the Subscription Agreement and the Additional Oracle Agreements by paying the monies due under the agreements. Oracle also knew that Worth would rely on the Representations by devoting substantial resources to implementing the product it was purchasing from Oracle.”
This new suit follows on the heels of another California lawsuit that was filed against Oracle relating to its cloud offerings, Barrett Business Services, Inc. vs. Oracle America, Inc., Cognizant Worldwide, Cognizant Technology and Kbace Technologies, Inc., Case No. CGC-19-572574, San Francisco Superior Court. In Barrett, Oracle likewise was accused of over promising and failing to deliver a viable system at the price point and within the time frame promised. The price of Oracle’s proposed solution in that case mushroomed from $5.4 million to over $33 million. In addition, the completion of Phase I was pushed from July 2018 to April 2019 and Phase II from January 2019 to May 2021. Barrett contends that despite the price jump the new Oracle plan failed to provide a solution as to how to customize Oracle’s HCM Cloud to meet its needs. The company was forced to hire an independent consultant to advise the company on the situation. The independent consultant concluded that Oracle’s HCM Cloud was not a suitable solution as it (1) lacked required functionality; (2) had a poor user interface; (3) had minimal API’s; and (4) needed significant customization. Oracle has not yet made an appearance in that action.
Tactical Law will continue to monitor the Barrett case and the newly filed Worth case, which is entitled Worth & Company, Inc. vs. Oracle America, Inc. Case No. 3:19-cv-00918, in the Northern District of California. Check back for updates.
Yesterday Oracle and technical support arch rival Rimini Street Inc. (“Rimini Street”) took their court fight to the U.S. Supreme Court. The battle is over what constitutes awardable costs for a prevailing party in a copyright lawsuit. Oracle argued that the “full costs” provision of the Copyright Act is broader than the preset categories of “costs” defined elsewhere in the federal code. The Ninth Circuit has previously agreed with Oracle’s interpretation holding that an award of “full costs” should cover a larger list of things including expert and jury consulting fees as well as e-discovery expenses.
During oral argument Justice Sotomayor expressed skepticism over Oracle’s interpretation of the meaning of the statute opining that it was too “open-ended” and doesn’t provide Judges with a “reasonable manner” of exercising their discretion. The government also sided with Rimini Street’s more narrow interpretation.
Tactical Law Group will be monitoring this case and the other remaining litigation between Oracle and Rimini Street that is still winding through the federal courts. Check back here for periodic updates.
House of Brick Technologies has recently published a very interesting blog post about how Oracle often approaches concurrent device licenses during audits. If your company has an older license agreement from the 1990s, you may very well have such licenses included in your entitlement. Oracle appears to dislike these licenses because the Concurrent Device metric is more flexible than Named User Plus (NUP). But there is another consideration. When using the Concurrent Device metric, unlike in NUP licensing, processors are not counted. These licenses essentially allow any number of users or devices to share a single license provided that only one user or device at a time uses the license. Thus, they can be very beneficial from a licensing standpoint as the focus is not on counting processors, with all the complexities that may entail.
Although Oracle often assures its customers in connection with initiating audits that it will work to optimize a customer’s Oracle license entitlement, Oracle licensees should take such assurances with a very large grain of salt. We are aware of instances where Oracle recommended certain actions such as canceling licenses, and later the cancellations came back to bite the customer during the audit.
Licensees also need to be alert as Oracle often points to various non-binding policy documents when auditing customers and attempting to assert that customers are bound by these policy documents. One such area involves virtualization and VMware where Oracle asserts a licensee is bound by its non-contractual Hard Partitioning Policy, which we saw in the Mars case. With regard to concurrent licenses, House of Brick reports in its blog post that it is aware of instances where “Oracle License Management Services (LMS) and the Oracle sales team” attempted to “place these per-processor restrictions on clients with valid contracts that contain no per-processor minimums for Concurrent Device licenses”.
Licensees should not be misled by Oracle’s assertions. Oracle license agreements are fully integrated contracts, which can only be modified by a writing signed by both parties. Oracle by unilaterally posting “policy” documents that are not part of or referenced by the license agreement, and that are not signed by both parties, cannot make them magically part of the contract. Under California Civil Code Section 1636, "a contract must be so interpreted as to give effect to the mutual intention of the parties as it existed at the time of contracting;" see also DVD Copy Control Ass'n, Inc. v. Kaleidescape, Inc. (2009) 176 Cal. App. 4th 697, 712 (“interpretation of the License Agreement is guided by the principle that it “must be so interpreted as to give effect to the mutual intention of the parties as it existed at the time of contracting, so far as the same is ascertainable and lawful.”). California Civil Code Section 1638 provides that "the language of a contract is to govern its interpretation, if the language is clear and explicit, and does not involve an absurdity." See also People ex rel. Lockyer v. R.J. Reynolds Tobacco Co. (2003) 107 Cal. App. 4th 516, 525. Oracle license agreements containing the Concurrent Device license metric are clear and unambiguous, and they are not tied to per-processor minimums or other restrictions.
So, what if you are an Oracle licensee who relied on Oracle’s representations and canceled your Concurrent Device licenses or accepted Oracle’s assertions about per processor minimums and lost money or were otherwise damaged? You may very well have options. Oracle license agreements typically have a California choice of law provision. California has a very strong law to protect consumers and other businesses known as Business & Professions Code Section 17200, which prohibits unfair, unlawful or fraudulent business practices. California courts have interpreted what constitutes a business practice broadly. A business “practice” is doing something habitually, more than once, or repeatedly. It includes a succession of similar acts, habit, and industry custom. California courts have found that even “sporadic” statements made by a defendant’s lower level employees regarding contractual language can be a “practice”. People v. Dollar Rent-A-Car Sys., Inc. (1989) 211 Cal. App. 3d 119, 129. Clearly if Oracle’s stance on Concurrent Device licenses is part of a larger License Management Services (“LMS”) playbook, which we think it may be, then a court could find that false or misleading statements made by Oracle LMS or Oracle Sales to Oracle customers concerning Concurrent Device licensing requiring processor minimums may be actionable under the statute. Although damages are not recoverable under Section 17200, restitution is available giving licensees a path to recover monies spent in overpayment on licenses or alleged areas of non-compliance.
Another reason why Oracle may so strongly dislike Concurrent Device licenses is Oracle would rather focus on processors and VMware in claiming large dollar amounts of alleged non-compliance. For certain customers with older licenses, if Oracle LMS had properly applied the Concurrent Device licenses, the alleged VMware processor deficiency claim could either evaporate or be significantly reduced causing Oracle to lose the benefit of this potentially multi-million dollar lever in the audit resolution discussions. We have discussed in other blog posts why Oracle's non-contractual Hard Partitioning Policy is not binding, and we routinely push back hard on Oracle's non-contractual VMware assertions.
Licensees with Concurrent Device licenses are advised to read their contracts carefully and do not fall for it if Oracle cites a “policy” document that is not part of the contract, and demands that you comply with it. If you find yourself the subject of an Oracle audit or believe that Oracle may have made false statements to you during an audit, consider hiring experienced outside counsel familiar with California law to help guide you through the process or advise you of your legal rights.
Oracle and Its Partners Sued for Negligent Misrepresentation and Breach of Contract Over Oracle Cloud Software Product
Oracle America, Inc. and its partners Kbace Technologies, Cognizant Worldwide and Cognizant Technology were sued by Barrett Business Services, Inc. (“BBSI”) in San Francisco Superior Court, for among other things, negligent misrepresentation and breach of contract arising out of one of Oracle’s Cloud service offerings. The Complaint seeks damages, restitution and rescission of the Cloud Services contract and a related agreement.
According to the Complaint, Oracle touted on its website and in various marketing materials that Kbace and the Cognizant companies demonstrated outstanding and innovative solutions with Oracle’s Human Capital Management (“HCM”) Cloud Products and that Kbace was a leading Oracle Cloud implementation partner. BBSI sought to implement an integrated enterprise system for its customers that would integrate complex payroll and invoicing, and made these requirements clear to Oracle and its partners. Oracle is alleged to have praised Kbace and assured BBSI that with Kbace as its implementation partner, Oracle’s HCM Cloud Product would meet all of BBSI’s requirements. BBSI contends that Oracle represented to BBSI that Kbace was its best payroll implementation partner, and that Kbace had implemented over 300 payrolls and was currently implementing a customer with payroll needs similar to BBSI. According to the Complaint, Oracle and the other Defendants represented that the cost of the project would be between $5.4 and $5.95 million with a “go live” date of mid-2018 for Phase I and an Accounts Receivable/Platform as a Service go live date of January 2019. Throughout the process, the Complaint alleges that BBSI stressed to Defendants the importance of quality and timeliness in the roll-out of the product.
In April 2018 BBSI discovered for the first time that the Oracle software product did not manage local tax configurations and that the HCM Cloud System did not include Oracle’s Time & Labor Application. According to the Complaint, BBSI could not use another payroll software due to the lack of functionality in Oracle’s HCM Cloud. It was not until June of 2018 that BBSI learned that Oracle’s HCM product simply did not include the functionality that BBSI required. At this time Kbace also admitted that contrary to the representations made by itself and Oracle, it had actually been eleven years since it had implemented a similar product, and that it did not currently have the capability to propose a solution that would meet BBSI’s needs.
In June 2018 Cognizant proposed a new plan for implementing the functionality sought by BBSI. However, the price of this new plan mushroomed from $5.4 million to over $33 million. In addition, the completion of Phase I was pushed from July 2018 to April 2019 and Phase II from January 2019 to May 2021. Despite the price jump the new plan failed to provide a solution as to how to customize Oracle’s HCM Cloud to meet BBSI’s needs. BBSI was forced to hire an independent consultant to advise the company on the situation. The independent consultant concluded that Oracle’s HCM Cloud was not a suitable solution as it (1) lacked required functionality; (2) had a poor user interface; (3) had minimal API’s; and (4) needed significant customization.
In the lawsuit, BBSI asserts claims against Oracle and its implementation partners for negligent misrepresentation, breach of contract and rescission of both agreements. BBSI claims damages in the form of the costs of hiring its own consultant as well as the costs of re-deploying internal resources to address the problems due to the defective performance, and related opportunity costs. BBSI also seeks restitution for monies it paid to the Defendants plus pre-judgement interest.
The case is Barrett Business Services, Inc. vs. Oracle America, Inc., Cognizant Worldwide, Cognizant Technology and Kbace Technologies, Inc., Case No. CGC-19-572574, San Francisco Superior Court. Tactical Law will continue to monitor the case. Check back for periodic updates.
Although the complaint in Mars vs. Oracle only contained one claim for declaratory relief, Mars likely had its own breach of contract claims, which it could have asserted against Oracle if the litigation had continued. Oracle audit customers need to remember that audit and termination clauses, even in a contract drafted by one of the parties, usually imposes obligations on both the licensor/drafter of the agreement and its licensee. That is certainly the case with the Oracle licenses that we have reviewed. As a result, Oracle licensees should understand their legal rights and obligations under audit and termination provisions so that they can best protect themselves during an Oracle audit, and hold Oracle to account for Oracle’s own breaches or other wrongful conduct.
The audit clause at issue in the Mars case is instructive: "Oracle may, at its expense, audit Client's use of the Programs. Any such audit shall be conducted during regular business hours at Client's facilities and shall not unreasonably interfere with Client's business activities. If an audit reveals that Client has underpaid fees to Oracle, Client shall be invoiced for such underpaid fees based on the corporate discount (such as a Project User Agreement) in place between Client and Oracle in effect at the time the audit is completed. Audits shall be conducted no more than once annually." (emphasis added)
Even though the focus of the audit clause is on use of Oracle software, Oracle sought information about servers where no Oracle software was installed. According to the public facing documents filed in conjunction with Mars’ motion for preliminary injunction, Oracle demanded that scripts be run, and data be provided about where Oracle software might be “available for use” at some future time. Oracle LMS also admitted in writing that it was seeking information about servers not running Oracle when it contended that given Mars’ usage of VMware 5.1 and higher, “all additional servers and/or clusters not running oracle must be licensed”. We have seen Oracle make similar demands of other Oracle customers.
Mars pushed back on Oracle’s demand for this information writing in a letter that the “contract defines the scope of Oracle’s audit rights” as being limited to Mars’ “use” of the Oracle software. With regard to Oracle’s demand for information about Mars’ servers running VMware, Mars stated that “[s]ervers and clusters that do not run Oracle are not probative of Mars’ use of Oracle software and are outside the scope of Oracle’s audit rights.”
Although Mars cooperated with the audit providing Oracle with over 233,000 pages of documents, it declined to provide Oracle with information about servers where no Oracle software was installed. Despite the audit clause clearly stating that Oracle’s audit rights extended only to Mars’ use of the Oracle software, Oracle embarked on a risky strategy by issuing breach notices that threatened to terminate the license agreement in 30-days if Mars did not capitulate to Oracle’s demands for information about servers not running Oracle software.
Importantly, like other Oracle licenses, the Mars’ license agreement did not give Oracle the unfettered right to terminate the agreement. Instead Oracle could only terminate the license if Mars was in material breach of the contract, after receiving 30-days written notice of the breach and an opportunity to cure. As Mars alleged in its Complaint, there was no breach as Mars had fully cooperated with the audit. Instead, Mars claimed that Oracle breached the agreement by issuing the notice of termination and refusing to withdraw it.
A court could find that Oracle’s audit tactics, including the issuance of multiple breach notices with threats of license termination to extract information to which it was not entitled (and the eventual license termination upon the expiration of the 30-days), had breached the termination provision and caused significant disruption to Mars’ normal business operations. In fact, not only did Mars need to deploy scarce internal IT resources to respond to the audit, but it had to spend money on hiring consultants and lawyers to push back on Oracle’s audit assertions. Ultimately, Mars prepared and filed its Complaint and Preliminary Injunction Motion, which resulted in further damage to Mars, as it defended its right to continue to license the software.
If you are involved in an Oracle audit and Oracle is making similar arguments or demanding information about servers where no Oracle software is installed and/or running, seek competent California legal counsel to advise you of your contractual rights.
We have included for the convenience of our readers a PDF copy of some of the key correspondence between Mars and Oracle that we discuss above.
Pam Fulmer of Tactical Law