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.
By Tactical Law Attorneys and From Time to Time Their Guests