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By Pam Fulmer
On January 23, 2023 Oracle changed how it licenses Java SE moving away from named user plus and processor metrics and instead transitioning to an employee metric based on the total number of full and part time employees and contractors of a company. You can read more about the changes here. For many companies the prices for licensing Java exploded with the new metric as all employees need to be licensed rather than just the ones using Java. We have received reports that for many months prior to the price change the Oracle Java sales team had been reaching out aggressively to companies about licensing Java. As part of Oracle’s approach, the Java team requested detailed information about a company’s IT environment, including its virtual environment. Reportedly Oracle sales sought information about servers, even ones that were not running Java and where no Java software was installed. Many companies innocently provided the information not understanding that Oracle likely did not have a legal or contractual basis to demand such information. We have discussed this previously here. Often companies would seek to place an order for the number of Java licenses they believed that they needed based on where Java software was installed and/or running. But in some cases, the Oracle sales team apparently refused to provide an Ordering Document for the requested licenses, if the Oracle customer refused to capitulate to Oracle’s inflated licensing demands. In our opinion, Oracle may have run into some headwinds when demanding information about the entire virtual environment even where no Oracle software was installed from at least some of its targets. Perhaps that is what ultimately triggered Oracle to change its licensing to the employee metric so that it could claim exorbitant licensing fees without all of the complexities around Oracle’s non-contractual arguments around the use of VMware. We just can’t be sure. But for those customers who wanted to purchase the Java licenses and Oracle declined to sell the licenses unless the company provided the confidential information that Oracle demanded or paid the higher (and baseless) licensing fee demands, what about them? Oracle essentially forced these companies into being non-compliant when it refused to sell the requested licenses. In our opinion, Oracle should have sold the licenses and if it really believed that the company was inadequately licensed, it could have issued an audit notice and made its formal audit findings. Then the Oracle customer would have had the protections of the Oracle audit clause and would have had an orderly process for pushing back on Oracle’s assertions and demonstrating that the customer was actually compliant. Importantly, the Oracle customer also would have only needed to purchase licenses for its actual usage of Java, and not for its entire employee population. But that is not what Oracle did in some cases. We believe Oracle's actions may have damaged these companies, which are now faced with licensing Java on a total employee basis, which can be very expensive. Additionally, where Java SE is important to the business of the company, Oracle's actions may have caused uncertainty and cast a cloud over the business. If you are a company that was approached by the Oracle Java sales team and Oracle requested information about your IT environment even where no Java software was installed and/or running, we would like to talk to you. If you purchased Java licenses not based on where the software was installed and/or running but were instead misled by Oracle’s assertions and believe that you paid more than was required, we would like to talk to you as well. Finally, if Oracle refused to sell you Java licenses that you requested, and now you are facing either actual or potential demands by Oracle to license all of your employees and contractors we would also like to discuss your situation. We advise companies on licensing Java and in related disputes with Oracle concerning the licensing of Java, including disputes arising out of Java software audits.
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By Pam Fulmer
Several years ago, a Canadian firearms and outdoor sporting goods retailer called Grouse River Outfitters Ltd. (“Grouse River”) sued Oracle Corporation (“Oracle”) in federal court in the Northern District of California for fraud and other claims arising out of a NetSuite cloud-based business management software agreement and a related contract for professional services to implement the software solution. Grouse River argued that Oracle had completely failed to deliver the ERP solution that it had promised. Over the course of the litigation Oracle was able to knock out several claims and to narrow the case, including whittling down the number of allegedly fraudulent statements and arguing that most were merely puffery. We have previously written here about Oracle’s attack on the fraud-based claims. For its part, Grouse River voluntarily dismissed certain claims on the eve of trial. The case went to trial in July of 2019 and after a 5-day jury trial Oracle scored a complete defense verdict. Grouse River’s sole claim at trial was fraud in the inducement. Grouse River sought a very large damages award against Oracle trying to put the blame for the failure of its entire business on Oracle and arguing that its business failed due to Oracle’s inability to implement a software solution that worked. The jury did not buy it. Instead, Oracle skillfully blamed Grouse River and its management for its own demise. Oracle also did a good job of blaming Grouse River for not meeting its contractual obligations and was successfully able to convince the jury that the functionality that Grouse River claimed was promised was not included in the contract price and the functionality scoped. We are reviewing the trial transcripts and over the coming weeks will have interesting nuggets that Oracle/NetSuite customers might find educational and enlightening and helpful in their own interactions with Oracle. Some of the testimony that I found particularly fascinating involved how Oracle scopes and estimates the price of these projects’ pre-contract, and whether Oracle sells functionality to its customers as currently existing, when in fact it is not. Oracle customers are aware that Oracle absolutely forbids its customers from recording the Zoom calls with the NetSuite sales team prior to contract execution. It is our opinion that Oracle does so because it does not want there to be a recording of what its aggressive sales team is promising the prospective client that Oracle can deliver. Based on publicly available filings against Oracle there seems to often be a huge disconnect between what the aggressive Oracle sales team promises and what the post contract implementation team says that it can deliver. In reviewing the various filings against Oracle including the Grouse River trial transcript it appears that Oracle’s sales team is accused of representing that certain functionality is included in an existing product when in fact the functionality does not currently exist. Then after contract execution, Oracle apparently claims that what it promised the customer pre-contract actually will require an expensive change order to deliver as it is not included in the Professional Services Scope of Work or detailed in the breakdown of modules included on the Estimate Form. During trial, Grouse River’s lawyers discussed several internal emails amongst the Oracle implementation team assigned to the project that supports the allegation that Oracle sells it customers a system with functionality that they say currently exists, when in fact it does not exist. For example, one of Oracle employee when discussing the customer loyalty functionality with regard to NetSuite stated “[w]e sold this as though it already works to Grouse River and we’re going to use Grouse River to test it.” Meaning that they sold it as a functioning product, when in reality they were going to use Grouse River as a guinea pig to test the product. Another Oracle employee stated “[s]ales really screwed us all when they sold POS (i.e. Point of Sale) for firearms to have serial controls when POS does not have that capability. We should all have walked away at that point.” And the Oracle project manager on the project said “[t]he product was perceived by the customer as best in class omni-channel product and it was FAR from it.” In other words, sales represented the omni-channel product as best in class in Canada when it was not. Later another Oracle witness was forced to admit that although they had an omni-channel product at the time, they did not have one that worked in Canada, which had different requirements and regulations than the U.S. And finally, from the Project Manager overseeing the implementation, “I was given the poison chalice of Grouse River with its first Canadian omni-channel deal with a third-rate ERP consultancy team and with a customer that was promised so much and then left to fight my own battles.” All of these internal communications become especially interesting when viewed through the lens of the whistleblower complaint that was filed by a NetSuite former employee, Mr. Tayo Daramola. We have blogged previously on Mr. Daramola’s whistleblower complaint. According to this former Oracle-NetSuite employee, Oracle through its NetSuite entity contacted universities and colleges to sell them a campus store SaaS solution, which the customer could then subscribe to. Daramola claimed that Oracle would provide its customer with an al-a-carte Order Form including certain NetSuite modules, which it claimed taken together would deliver the functionality that had been promised. However, according to the complaint, “unbeknown to the customer but known to Oracle, was that the customer’s menu of modules was not able to accomplish the functionality expected by the customer then, and it wouldn’t be able to do that in the near future, at least not without the customer paying hundred of thousands of dollars more to help Oracle actually develop the functionality it represented as then existing to that customer for that customer.” Daramola further explained that post sale this lack of functionality caused Oracle to implement its second phase, which was “to assess the “gap” between the customer’s anger regarding what they thought they bought, verses what they received. Oracle would then sell additional “modules” for additional money to its “escalating” customers to fill the gap.” Realizing that what Oracle had done is sold functionality as presently existing that actually did not exist, Daramola claims that the Oracle-NetSuite employees would try stealthily to pro rata “divide the cost of the necessary development among all of the customers who had bought the represented functionality.” And this division of the costs would come from Oracle demanding the execution of expensive change orders from its customers in order to implement the functionality. Mr. Daramola’s allegations about Oracle selling a solution that does not exist and then frantically seeking to fund its development through customers in a similar industry that desire that functionality seems plausible, given the various lawsuits brought against Oracle/NetSuite. Consider for a moment the possibility that Oracle wishes to develop a new functionality to buttress its retail solution. Or Oracle wishes to grow its sales into a completely separate country. Oracle could decide to target certain companies in certain countries (like Grouse in Canada) and seek to entice them into entering into a NetSuite agreement. The enticement could come in the form of steep discounts. In the Grouse River case Oracle employees testified that certain items were being provided at a 90% discount. What if Oracle were offering huge discounts upfront in order to beat its competitors and win the contract? Then after it has had the customer sign on the dotted line, it tells the customer that the functionality was out of scope and Oracle will need a change order to provide it. In this way Oracle could inflate the contract price and increase its profits, while still ensuring that it got the gig. A few lessons learned from the Grouse River trial for the prospective Oracle customer to consider before signing the various contractual documents, as well as during contract performance:
Check back periodically for additional blog posts about this interesting trial. Tactical Law assists Oracle/NetSuite customers in resolving disputes they may have with Oracle arising out of NetSuite ERP SaaS cloud subscription services and related professional services agreements. |
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