In a significant legal victory for Tactical Law Group's client River Supply, Inc. ("RSI"), a federal district court in California has rejected Oracle's argument that the Economic Loss Rule bars RSI's fraud based claims, including a claim under Penal Code Section 496 for theft of money. In her ruling, Judge Beeler granted in part and denied in part Oracle's motion to dismiss RSI's Second Amended Complaint ("SAC"). A copy of the Court's Order can be found here. RSI will be allowed to proceed with its claims against Oracle for fraud in the inducement, negligent misrepresentation, breach of contract, breach of warranty, negligence and for violation of California Penal Code Section 496.
Like a dog on a bone and citing a number of products liability cases, Oracle had argued vehemently in both its first and second motion to dismiss that because RSI had not suffered personal injury or damages to property, the Economic Loss Rule precluded its claims. The Court soundly rejected this argument. According to the Court, "Again citing product-liability cases, Oracle contends that there must be personal injury or property damage for extracontractual recovery. That makes sense in product-liability cases: what other damage is there. See Yarber v. Kia Am. Inc. No. 22-CV-03411-HSG, 2023 WL 2654186, at *2 N.D. Cal. Mar. 27, 2023) (automobile-defect case that claimed fraudulent concealment, not fraudulent inducement; the economic-loss doctrine barred the claim because the plaintiff alleged only economic loss, not personal injury or damage to property); Barela v. FCA US, LLC, No. EDCV-22-01444 (JGB), 2022 WL 19333334, at *2 (C.D. Cal. Oct. 11, 2022) (automobile defect); Sum v. FAC US, LLC, No. 2:22-cv-00213-RGK-RAO, 2022 WL 2189628, at *2–3 (C.D. Cal. Apr. 25, 2022) (automobile defect). But it does not follow that that extracontractual recovery allows recovery only in cases involving injury to person or property because the economic-loss doctrine does not bar claims for fraud in the inducement." In her ruling the Court further reasoned that: "In concluding that the economic-loss doctrine did not preclude the misrepresentation claims here, the court rejected Oracle’s argument that courts apply the fraud exception only in product- liability cases. The fraud exception does make sense in product-liability cases: as a matter of policy, it allows recovery for extra-contractual injury (injury to person or property) and allocates the duty to the party most able to identify the risk of that injury (the manufacturer).15 See Erlich, 21 Cal. 4th at 550–51 (contract law enforces the intentions of the parties to the agreement, and “tort law is primarily designed to vindicate ‘social policy.’”). But no binding authority categorically limits the doctrine to product-liability cases." And this part of the Court's ruling is key and important for Oracle/NetSuite customers who believe that they have been defrauded by an aggressive Oracle's sales team who promised them that Oracle could deliver all the functionality they required, and only after contract execution learned that the functionality did not exist and the expensive system they had invested in to run their business was a bust and not a boon. "The economic-loss rule exists because the parties to a contract have agreed to allocate risk. A party that is the victim of fraud has not assumed contract risk voluntarily. Here, River Supply relied on Oracle’s misrepresentations, exposing it to a loss that exceeded its contract damages (given the limitation of liability), at least somewhat analogously to a customer who does not assume the risk of personal injury from a defective product. And it is bad policy if a party can induce a contract that limits its liability by lying about its product’s capabilities." If you are an Oracle or NetSuite customer who believes that Oracle misrepresented the capabilities of its product in pre-contract discussions, we would be happy to talk to you about your case.
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By Pam Fulmer
We have previously blogged on the Daramola v. Oracle case brought by a former Oracle employee who blew the whistle on Oracle and NetSuite's fraudulent sales practices involving their ERP line of software solutions. Mr. Daramola's Complaint was dismissed not because a court found that his allegations about Oracle's alleged unlawful conduct was without merit, but instead on the grounds that the whistleblower anti-retaliation laws he was proceeding under could not be invoked by an Oracle employee who was a Canadian citizen, employed by an Oracle Canadian subsidiary, and who worked from Canada and not the U.S. The Ninth Circuit affirmed the lower court's ruling reasoning that "the employment relationship in this case is between a Canadian employer and Canadian employee, to be governed by Canadian law, with the employee residing in Canada. Any domestic duties he performed were incidental to his foreign employment" and that merely accessing Oracle servers in California was not enough to establish the needed domestic conduct such as to make the protections of U.S. whistleblower laws applicable to Mr. Daramola. The Ninth Circuit described the facts of the case as follows: By logging into Oracle’s computer systems, Daramola could conduct business and collaborate with colleagues in the United States, including employees of Oracle America. Both Oracle America and Oracle Canada are wholly owned subsidiaries of Oracle Corporation, a California-based company that develops and hosts software applications for institutional customers. One such Oracle product was the “Campus Store Solution,” a subscription software service for college bookstores. In July 2017, Daramola was assigned as lead project manager for the implementation of Campus Store Solution at institutions of higher education in Texas, Utah, and Washington. Daramola came to believe that Campus Store Solution was defrauding customers. The product was billed as an ecommerce platform with specific functionalities, but Daramola thought Oracle had no way of delivering the promised features, at least at the agreed-upon price. Daramola reported the suspected fraud to Oracle America and the SEC. After doing so, Daramola was removed as a project manager. Daramola’s supervisor at Oracle America, Douglas Riseberg, offered Daramola an opportunity to work on another Campus Store Solution project, but Riseberg revoked the offer when Daramola again expressed his unwillingness to take part in fraud. Riseberg also downgraded Daramola’s job performance rating. Believing he had no other option, Daramola resigned from the company. " For those who are interested, the entire Daramola Complaint can be found as Exhibit 1 to the Second Amended Complaint that we filed on behalf of our client River Supply Inc. If you are a company that has contracted with Oracle or NetSuite and had a similar experience to the experience of RSI set forth in the Second Amended Complaint, we would be interested in talking to you. By Pam Fulmer
Introduction In an era where digital transformation dictates the pace of business evolution, software has become the backbone of enterprise operations. This surge in software dependency, coupled with a complex web of licensing agreements, has set the stage for an inevitable increase in software audits by enterprise software publishers. This blog post delves into the reasons behind this trend, its implications for businesses, and strategies to navigate the future landscape of software compliance. The Rising Tide of Software Audits Why Software Audits Are on the Rise 1. Complex Licensing Agreements: As software solutions become more sophisticated, so do their licensing agreements. Enterprises often find themselves entangled in the complexities of these contracts, inadvertently breaching terms due to misunderstanding or oversight. This is especially true due to the extensive use of hyperlinks in enterprise software related agreements. Publishers such as Oracle, Microsoft and Quest extensively use hyperlinks to serve up key agreements. Before signing a license agreement, a prudent company should review and bring down PDF copies of these hyperlinked agreements and save them in one file. In addition, it is important to consider pushing back on language that would allow the publisher to unilaterally amend such agreements. 2. Cloud Migration: The shift towards cloud computing adds another layer of complexity to software licensing. The dynamic nature of cloud environments, with scalable resources, makes it challenging for businesses to maintain compliance. And if a publisher conducts an audit and claims non-compliance, even if the audit findings lack merit the customer must deal with the threat of the publisher cutting off access to the cloud for non-payment. 3. Revenue Recovery: For software publishers, audits are a significant revenue source. In the post-pandemic economy, as publishers seek ways to recover lost revenue, audits present a lucrative opportunity to enforce licensing agreements and identify non-compliance. We see this each day in our legal practice. In addition to formal audits, software publishers such as Oracle are notorious for their “soft audits”. In fact, companies in the United States are getting hit each day with Oracle’s soft audits of Java. We have previously blogged on these predatory audit tactics engaged in by Oracle. Our phone is ringing off the hook with companies who have innocently provided information to Oracle due to a soft audit, only to be hit by a demand for payment of hundreds of thousands if not millions of dollars. And these demands have only been exacerbated by Oracle’s move to a “Total Employee” model, and Oracle’s expansive definition of who is included in the definition of “Employee”. We have also blogged on this issue previously. 4. Technological Advancements: The development of sophisticated tools and technologies has made it easier for publishers to monitor and enforce compliance remotely, increasing the frequency of audits. In fact, Oracle has included in its Java software the ability of the software to call home to Oracle. Oracle has been known to use this trail to contact companies and conduct a soft audit of Java. Implications for Businesses 1. Financial Risk: Non-compliance can result in hefty fines and the need to purchase additional licenses, significantly impacting a company's financial health. 2. Operational Disruption: The audit process can be time-consuming and disruptive, diverting resources from core business activities. 3. Reputational Damage: Being found non-compliant can tarnish a company's reputation, affecting customer trust and future partnerships. Navigating the Future Landscape Preparing for the Inevitable 1. Understanding Licensing Agreements: It's crucial for businesses to thoroughly understand their software licensing agreements. This may involve seeking legal advice to navigate the complexities of these contracts, including thoroughly reviewing all hyperlinks. 2. Implementing Software Asset Management (SAM) Tools: SAM tools can help businesses monitor software usage and compliance in real-time, providing insights to manage licenses effectively and avoid non-compliance. 3. Regular Audits and Compliance Checks: Conducting regular internal audits and compliance checks can help businesses identify and address potential issues before they escalate into major non-compliance findings during an external audit. 4. Hiring Experienced Software Audit Defense Counsel: Software licensing agreements are complex and attorneys who have dealt with the various intricacies of the agreements and have successfully pushed back on audit findings need to be retained early to assist the company in best positioning itself to successfully weather the inevitable audit. Conclusion The landscape of software licensing and audits is becoming increasingly complex, with audits by enterprise software publishers set to rise. This trend poses significant challenges for businesses in terms of financial risk, operational disruption, and reputational damage. However, by understanding the intricacies of licensing agreements, leveraging technology, and implementing robust software asset management practices, businesses can navigate this challenging landscape. The key to thriving in this new era lies in preparation, proactive management, and a strategic approach to software compliance. Final Thoughts As we move forward, the importance of software compliance cannot be overstated. The rise in software audits is a reflection of the changing digital landscape and the increasing value placed on intellectual property. For businesses, the path to compliance is not just a legal necessity but a strategic advantage that can safeguard financial health, operational integrity, and brand reputation in the long run. By embracing the challenges and opportunities presented by this trend, enterprises can position themselves for success in the digital age. |
By Tactical Law Attorneys and From Time to Time Their Guests
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