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By Pamela K. Fulmer
Oracle further argued in its demurrer in the Barrett Business Services, Inc. v. Oracle America, Inc. case that it expressly disclaimed that its services would meet the customer’s requirements or expectations and that it was not liable for any issues related to “performance, operation or security of the services that arise from your content”. Oracle also relied in its demurrer on the language in the contract which put the responsibility “solely” on BBSI for determining if the cloud services purchased met its “technical, business or regulatory requirements.” Oracle contended that it performed the services using commercially reasonable skill and care as described in its Service Specifications, and therefore was not in breach. Clearly Oracle customers contemplating Oracle cloud should seek to negotiate these provisions, as California courts will enforce warranty disclaimers unless they are unconscionable. A & M Produce Co. v. FMC Corp., 135 Cal. App. 3d 473, 484 (1982). Given the facts alleged in BBSI’s First Amended Complaint (“FAC”), BBSI will likely argue (in addition to its other arguments) that Oracle’s warranty disclaimer is unconscionable. In A&M Produce the court in finding a warranty disclaimer unconscionable reasoned that “the evidence establishes that A & M had no previous experience with weight-sizing machines and was forced to rely on the expertise of FMC in recommending the necessary equipment. FMC was abundantly aware of this fact. The jury here necessarily found that FMC either expressly or impliedly guaranteed a performance level which the machine was unable to meet. Especially where an inexperienced buyer is concerned, the seller's performance representations are absolutely necessary to allow the buyer to make an intelligent choice among the competitive options available. A seller's attempt, through the use of a disclaimer, to prevent the buyer from reasonably relying on such representations calls into question the commercial reasonableness of the agreement and may well be substantively unconscionable. The trial court's conclusion to that effect is amply supported by the record before us.” A & M Produce Co. v. FMC Corp., 135 Cal. App. 3d 473, 492 (1982). Here BBSI appears to be setting up a similar argument, as well as setting up the reliance element of its fraud claim. According to the FAC, “[a]t all of BBSI's discussions with Oracle and KBACE, BBSI's representatives also made clear that they were ignorant as to Oracle's HCM Cloud system or any other Oracle products or how they performed and were relying wholly on Oracle and KBACE to advise them as to the suitability and capabilities of the product or system vis-a-vis BBSI's requirements.” In addition, the FAC recites that “Oracle and KBACE, too, consistently reaffirmed the HCM Cloud system's suitability for BBSI, its capabilities relative to BBSI's requirements as well as KBACE's ability to successfully implement the system in conformity with BBSI's requirements for user interface, payroll, time entry, billing and taxes, among others.” Companies negotiating Cloud Agreements with Oracle should be aware that if something goes wrong with the implementation, despite Oracle’s representations to the contrary, Oracle will likely invoke the contractual language that puts it “solely” on the customer to determine if the cloud services purchased meet the customer’s “technical, business or regulatory requirements.” Oracle will rely on such language to attempt to defeat your claim, and indeed in Barrett, Oracle has asserted defenses including ones for failure to state a claim, intervening or superseding acts of third parties, no duty, assumption of the risk, contractual limitation of liability, and the parol evidence rule. Although not raised in the Barrett case, another problematic provision that prospective Oracle cloud customers should be aware of, involves Oracle’s disclaimers pertaining to third party content or services. Unlike many other cloud providers like AWS and Azure, Oracle rents data centers from other companies and does not own the data centers. And in its disclaimer of warranties Oracle has the following language: “WE ARE NOT RESPONSIBLE FOR ANY ISSUES RELATED TO THE PERFORMANCE, OPERATION OR SECURITY OF THE SERVICES THAT ARISE FROM YOUR CONTENT OR THIRD PARTY CONTENT OR SERVICES PROVIDED BY THIRD PARTIES.” Moreover, at least one of Oracle’s cloud service level agreements provides that “[t]he Service commitment does not apply to any unavailability of the applicable Oracle Cloud Infrastructure Service… that result from… third party equipment, software or other technology (other than third party equipment within Oracle’s direct control).” Reading these two clauses together gives Oracle the ability to point the finger at third parties and say that they own the hardware in the data centers and not Oracle, and that you therefore have no direct claim against Oracle for any disruption in Oracle’s cloud. According to other publicly filed lawsuits, Oracle Sales has been known for pushing cloud, even where Oracle’s on-premises software might be a better solution for the customer. Oracle is accused of doing so, as it seeks to catch up with AWS, Azure, and other market leaders. The Barrett FAC actually notes that Oracle probably could have delivered the product that BBSI was seeking had it simply sold Oracle on-premises software rather than cloud. Oracle customers contemplating moving to the cloud should get Oracle to commit in writing to exactly what it is delivering. If Oracle will not do so, perhaps the customer should explore other options. Tactical Law will continue to monitor the case. Check back for further updates.
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Pamela K. Fulmer We have previously reported on the Barrett Business Services v. Oracle America, Inc. case pending in San Francisco Superior Court. In Barrett, Oracle and KBACE (Oracle’s platinum implementation partner) are accused of over promising and failing to deliver a viable cloud-based system involving payroll and billing processing at the price point and within the time frame promised. The original complaint alleged claims against Oracle for breach of contract, negligent misrepresentation and rescission related to Oracle’s Cloud Services Agreement, but the pleading did not include a fraud claim. Oracle filed a demurrer on a number of grounds only a few of which we will discuss in this and future blog posts. Procedural Posture For its part, Barrett Business Services, Inc. (“BBSI”) did not oppose the demurrer but instead filed an amended complaint, which cleaned up several of the issues that Oracle had raised in its demurrer, thereby mooting much of the demurrer. BBSI’s amended complaint (the “FAC”) added several new claims including ones for intentional misrepresentation (i.e. fraud) and negligence and sought rescission of the Oracle Cloud Services Agreement. BBSI added additional detailed factual allegations pleading the fraud with specificity. Rather than attacking the pleading again with a demurrer, Oracle apparently learned its lesson and answered instead. Unfortunately for Oracle by attacking the complaint with a demurrer, Oracle educated its opponent. Oracle’s demurrer is instructive and should be required reading for those companies thinking about entering into a cloud agreement with Oracle, as the demurrer provides a road map to especially problematic clauses that the customer may want to negotiate. The FAC Added Key Facts and Claims Regarding Oracle’s Fraud in the Inducement Oracle argued that the express provisions of the contract provided only that Oracle must (1) make the ordered services available; and (2) provide the cloud services as described in the Service Specifications. Oracle contended that it fulfilled both of these promises. Oracle also argued that Barrett failed to allege that Oracle breached either of these provisions, and therefore had failed to state a contract claim. Oracle’s goal was therefore to limit the focus to the four corners of its cloud agreement, and use the integration clause of the agreement to exclude evidence of the parties pre-contract negotiations and discussions. For its part, by amending the Complaint to add the tort-based claims, BBSI was required to plead the alleged fraud with specificity including going into great detail about Oracle’s pre-contract representations concerning its cloud product. According to the FAC, it was during these meetings that BBSI explained what it was looking for and received multiple promises from Defendants that their proposed cloud solution could meet BBSI’s requirements. According to the Complaint: “Between June 2017 and February 2018, BBSI had several hours-long in-person meetings and telephonic conferences with Oracle and KBACE. At each of these meetings, BBSI took great pains to educate Oracle and KBACE as to the precise nature of its business operations, its peculiar needs and the business functions that informed BBSI's extensive list of requirements. In meticulously discussing its list of requirements with both Oracle and KBACE, BBSI underscored its need for ease and efficiency of user interface and processes relating to payroll, time entry, billing and taxes given its human resource and payroll management challenges and the fact that payroll was also its revenue source. At all of BBSI's discussions with Oracle and KBACE, BBSI's list of requirements remained unchanged. At all of BBSI's discussions with Oracle and KBACE, BBSI's representatives also made clear that they were ignorant as to Oracle's HCM Cloud system or any other Oracle products or how they performed and were relying wholly on Oracle and KBACE to advise them as to the suitability and capabilities of the product or system vis-a-vis BBSI's requirements.” BBSI, Oracle and/or KBACE met and/or telephonically conferred numerous times throughout 2017 and early 2018 including without limitation, on June 30, 2017; July 13 and 20, 2017; August 3, 10, 23 and 31, 2017; September 6, 13 and 28, 2017; October 2-4, 16, 20, 24 and 26, 2017; November 3 and 14, 2017; December 5, 2017 and February 9, 26-27, 2018 regarding Oracle's HCM Cloud and its implementation by KBACE. Moreover, Heather Gould ("Gould"), BBSI's Chief Strategy Officer, had weekly status calls with Bell, Oracle's Solutions Consultant. Throughout all these communications, BBSI remained consistent in its requirements. Oracle and KBACE, too, consistently reaffirmed the HCM Cloud system's suitability for BBSI, its capabilities relative to BBSI's requirements as well as KBACE's ability to successfully implement the system in conformity with BBSI's requirements for user interface, payroll, time entry, billing and taxes, among others.” By amending the complaint to add the fraud in the inducement claim and more specific allegations of the actual fraud, BBSI significantly strengthened its complaint. It also struck at the core of Oracle’s defense that the integration clause precludes the court from examining representations made by Oracle and KBACE during contract negotiations. Under California law parol evidence is admissible to prove fraud in the inducement “even though the contract recites that all conditions and representations are embodied therein.” Ron Greenspan Volkswagen, Inc. v. Ford Motor Land Dev. Corp., 32 Cal. App. 4th 985, 995 (1995). Clearly Oracle hoped to hide behind the integration clause in the agreement, and sought to limit or completely exclude the evidence of Oracle’s alleged misrepresentations made during pre-contract negotiations. It is unclear to this author why BBSI did not include these claims in the first instance. Perhaps BBSI felt uncomfortable accusing a large and well-known company like Oracle of fraud. That was a mistake. I am reminded of the old adage, never bring a knife to a gun fight. That rings true in disputes and litigation with Oracle. Customers having evidence of fraud in the inducement by Oracle should spell out that evidence upfront. Otherwise Oracle will hit you hard and use its one sided contract against you. Our next blog post will examine how Oracle is attempting to defeat BBSI's breach of contract claim, by pointing to its disclaimer of certain warranties. The case is Barrett Business Services, Inc. v. Oracle America, Inc., San Francisco Superior Court, Case Number CGC-19-572574. A copy of Oracle's Demurrer can be downloaded here. 
Pamela K. Fulmer
Software companies who use aggressive software audits to increase revenues often threaten their customers with lawsuits for copyright infringement and breach of contract, as leverage in order to try to drive sales of additional software products. In fact, we have seen software companies like Quest Software file lawsuits against their customers for copyright infringement arising out of an audit, when in reality their only claim is one for breach of contract. How do you know if the licensor of your software can sue you for copyright infringement for your alleged over-deployment of software? It basically comes down to whether the license provides a remedy for over-deployment such as paying additional fees should an audit uncover excess use. If it does, the clause is viewed by courts as a covenant and not a condition, the breach of which gives rise to only a contract claim. In California, as in other states, conditions are not favored and a court will construe a clause as a covenant and not a condition unless the clear and unambiguous language of the contract requires it to do otherwise. When a copyright owner grants a nonexclusive license to use its copyrighted material, it generally waives its right to sue the licensee for copyright infringement and can sue only for breach of contract. A licensor may sue for copyright infringement only when the licensee acts outside the scope of the license. Courts refer to contractual terms that limit a license's scope as "conditions," the breach of which constitute copyright infringement. MDY Indust. LLC., v. Blizzard Entm’t Inc., 629 F.3d 928, 939 (9thCir. 2010). Courts refer to all other license terms as "covenants," the breach of which are actionable only under contract law. Id. See, e.g., BroadVision, Inc. v. Medical Protective Co., 2010 WL 5158129 (S.D.N.Y. Nov. 23, 2010) (applying California law to find that the license provisions permitting excess use of software in exchange for additional fees are covenants, not conditions.) The distinction between a “condition” and a “covenant” is determined under the law of the state that governs the license agreements. Most Oracle licenses in the United States and older Quest licenses are governed by California law. Under California law a license provision that permits additional use or over-deployment, but requires that a licensee pay for that additional use, is a covenant rather than a condition. See, e.g., Actuate Corp. v. Fid. Nat'l Info. Servs., Inc., No. C 14-02274 RS, 2014 WL 4182093, at *3 (N.D. Cal. Aug. 22, 2014) (dismissing copyright infringement claim because alleged additional use violated covenant rather than condition). A case involving Quest Software is instructive. In Quest Software, Inc. v. DirecTV Operations, LLC , 2011 WL 4500922 (C.D. Cal. 2011) the district court specifically found that a clause, which provided a “true-up” mechanism in the event of excess use, i.e. over-deployment, constituted a covenant and not a condition. In support of his ruling granting summary judgment to the licensee and dismissing the copyright claim, Judge Guilford reasoned that “the over-deployment and true-up provisions in the License Agreement permit [DirectTV] to use Foglight on additional CPUs for an extra fee. These provisions are properly described as covenants because they do not concern the scope of the license, only the number of CPUs the license covers.” In other words, the contract specifically contemplates that excess use may occur, and in that situation the remedy is payment for the additional licenses. Given the law, why do licensors often decide to include a copyright claim in their complaint? Several potential reasons come to mind. First, inclusion of the federal question allows the licensor to file its lawsuit in federal court. Otherwise a licensor would be limited to filing for breach of contract in state court unless diversity existed or it had another federal claim. Second, the copyright owner can recover actual damages such as its lost profits, or even the profits of the infringer on a copyright claim, making it more attractive than regular contract damages. Third, for licensors where actual damages are hard to prove, statutory damages are available. Fourth, damages may be enhanced if a court finds willful infringement. Finally, reasonable attorneys’ fees and costs may also be awarded to the successful licensor if they prevail on their copyright claim. This is helpful in situations where the license agreement does not have an attorneys' fees provision. If your license has not been terminated and contains a clause that provides for a “true up” payment in the event of an over-deployment, the licensor’s sole remedy is likely a claim for breach of contract and not copyright infringement, at least under California law. Push back against licensor assertions to the contrary. |
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