Sunrise Firefighters' Lawyer Faces Tough Questions From Judge Overseeing Case Against Oracle Defendants
By Pam Fulmer
The lawyer for Plaintiff Sunrise Firefighters was on the hot seat for most of the hearing on Oracle's Motion to Dismiss the Amended Consolidated Class Action Complaint. Judge Freeman appeared skeptical that Plaintiffs have met their pleading burden. Although the Judge acknowledged that Plaintiff had worked hard to revise the Complaint and that some of the revisions were satisfactory, the Court still had some major problems that may result in her ruling to dismiss the lawsuit. There was much back and forth on fine points of securities law, which we won't go into here. Instead, I will focus on what readers of our blog might find interesting.
The Judge seemed to accept that Plaintiffs have established that up to 90% of cloud sales were "engineered sales". However, the Judge said that Plaintiff had failed to establish how much of the engineered sales were a result of discounts, which she had no issue with, or Audit, Bargain, Close ("ABC") sales tactics, which were more problematic. Readers of the business press know that Oracle is notorious in the enterprise software market for its prevalent use of predatory audit tactics against its customers to sell software. Although it is true that Oracle has the absolute right to audit its customers, most Oracle audit clauses provide that the audit cannot unreasonably interfere with the customer's normal business operations. It seems very disruptive to a company's normal business operations to be subject to an invasive, time consuming and oppressive audit where Oracle comes up with a huge compliance gap not grounded in the contract to force its customers into a cloud purchase, which the customer neither needs nor wants, in order to get out from under the audit.
The Oracle defense lawyer argued that if these ABC tactics were so prevalent, why was Plaintiff unable to find a customer that suffered such ABC tactics during the class period to share their experiences in the Amended Complaint? In my opinion, there are several reasons that Oracle customers who have been subjected to predatory audits may not be willing to come forward now. First, is the fear factor. These companies are afraid that if they volunteer information now Oracle will hit them even harder in future audits. Second, who wants to voluntarily get into an expensive war with Oracle now if their audit has been resolved and is behind them? What the courts also need to understand is that many companies have spent years investing in their Oracle infrastructure. Should Oracle retaliate against them by threatening or issuing breach or termination notices if they refuse to buy cloud, their entire business operation would be at risk. Most companies simply won't risk it, and in my opinion Oracle knows that and that is why Oracle has been successful at using oppressive audits to drive unwanted purchases of cloud during the class period.
Plaintiffs' attorney argued that although they didn't include any Oracle customers in the Amended Complaint, they did include several consultants who were unanimous in saying that such ABC engineered deals were ubiquitous in the industry. Oracle's lawyer asserted that such statements constituted layer upon layer of inadmissible hearsay. That may be, but it seem so apparent that an entire Oracle consulting industry has been built around Oracle's predatory audits. Where you see smoke there is likely fire.
Judge Freeman noted that her biggest concern with the Complaint was that Plaintiff has not made the required scienter showing for each individual Defendant. In other words, Plaintiffs had not connected the allegations of falsity to the statements made and the speakers making the statements showing that the speakers knew the statements were false when they were made. Plaintiff pointed out that they had provided a detailed chart with the statements of each individual Defendant and why it was false when made. The Judge noted that she would continue to study the chart but that the key false statements needed to be set forth in the Complaint. The Judge asserted that the Ninth Circuit requires that a litigant must lineup the false statements with the knowledge of the speaker at the time the statement was made and Plaintiff had failed to do so.
At the end of the hearing the Judge noted that she was taking the case under advisement and that she was not issuing a tentative ruling. She did listen carefully to Plaintiffs' scienter arguments and agreed to take another look at them. She noted that these securities class action cases are a big responsibility for a Judge at this stage of the proceedings. She closed by saying the Ninth Circuit does not shy away from long orders, and it will take her a while to rule. If I were a betting person I would put my money on Oracle winning. That is unfortunate as these types of oppressive audits will only end when software publishers are held to account. If you are a company that is currently suffering through an Oracle software audit, or were forced into an unwanted cloud purchase, you may want to consult with us about potential legal strategies for fighting back.
The case is Sunrise Firefighters v. Oracle, et. al. Check back for further updates.
By Pam Fulmer
Judge Hicks granted in part and denied in part Oracle's motion for partial summary judgment on cross use and derivative works. Here Oracle sought partial summary judgment on its first cause of action, copyright infringement, on Rimini’s second affirmative defense (express license) and seventh affirmative defense (fair use), and on Rimini’s first cause of action for declaratory relief. In ruling on this motion, Judge Hicks focused on two specific clients of Oracle, Campbell Soup and City of Eugene, and their Peoplesoft software.
The court concluded that Oracle had established its prima facie case of copyright infringement as it relates to the Campbell Soup environment. According to the Court:
The court next examined whether Rimini had a valid express license defense as it related to making RAM copies of the Oracle software in order to provide support to Campbell Soup. Essentially Rimini as the third party support provider steps into the shoes of Campbell Soup the licensee. But one major requirement of the license is that the updates, fixes and modifications must be for Campbell Soup's "internal information processing". And that is where Rimini hung itself.
Rimini “prototyped” or developed its Patient Protection and Affordable Care Act (“PPACA”) Phase 1 update HCM104286 in Campbell Soup’s environment. But it turned out that Campbell Soup had rejected the update and didn't want to use it. So the court reasoned that if Campbell Soup didn't want the update it could not have been developed for Campbell's internal information processing, and Rimini's use was outside the scope of the license.
Accordingly the Court rejected Rimini's express license defense regarding making RAM copies in this environment.
Express License: Cross Use
The court next examined whether Rimini's use of the HCM104286 update developed in Campbell's development environment was improperly delivered to another Rimini client, Toll Brothers.
Although Rimini argued that the use of of the update created in the Campbell environment and used with another client was only at best a breach of contract and not a copyright infringement, the court rejected that argument. Instead the court found that “internal data processing operations” is a copyright-enforceable condition rather than a contractual covenant and was therefore a copyright infringement because it was outside of the scope of the license. Thus rather than being limited to contract damages, Oracle will be able to realize the full benefits of copyright law at trial.
City of Eugene
Express License: Derivative Works
Oracle argues that Rimini infringed on its exclusive right to create derivative works when
Rimini developed the PPACA Phase 3 update HCM104288. Oracle argued that not only was the individual update a derivative work, but the update as applied to City of Eugene’s environment was also a derivative work. Rimini contended that while the update combined with the development environment may have been a derivative work, the update itself was not and that the development and testing was expressly licensed.
The court rejected Rimini's argument finding that the update was a derivative work and that by using it in City of Eugene's environment as a prototype for other clients, Rimini committed a copyright infringement as the use did not relate to City of Eugene's internal data processing operations. The court expressly rejected Rimini's "know-how" argument.
The court further found that Rimini's cross use of the update developed in the City of Eugene environment also violated the prohibition in the license on no distribution or sale of modifications to the software.
The court again found the "no marketing or sale" provision was a condition and not a covenant making Rimini's use a copyright violation.
Finally, the court rejected Rimini's fair use defense. Weighing each of the four fair use factors, the court found that they were either neutral or weighed in favor of Oracle.
Tactical Law will provide further updates on the court's ruling as they become available.
By: Pam Fulmer
In a 94-page opinion, Nevada Federal District Court Judge Larry Hicks handed Oracle a huge win against arch rival Rimini Street. There are lots of interesting points in the Order that will continue to provide fodder for future blog posts, and I am not intending to cover everything here today. This post will focus on Oracle's "win" involving its cease & desist letter to Rimini barring Rimini from accessing the Oracle support website in order to download patches and updates on behalf of Oracle customers. But first we will describe what has been decided in the motion generally, before we focus in on the legality of Oracle's cease & desist letter.
Both Oracle and Rimini had brought cross-motions for partial summary judgment and the Judge sided with Oracle most of the time giving Oracle key wins on certain claims against Rimini and eliminating certain key Rimini defenses. Oracle filed 5 motions for partial summary judgment and Rimini filed two motions. Both of Rimini's motions were denied. Oracle won its first summary judgment on its cease & desist letter to Rimini outright, and the 4 other motions were both granted and denied in part. This litigation has been extremely hard fought. As the Judge pointed out in his Order, "[this is a massive lawsuit which follows a prior massive lawsuit. Over sixty attorneys have been admitted to represent the two sides in this case alone, approximately thirty for each side, and for the pending seven motions, the briefings exceed 2,800 pages and the supporting exhibits, declarations, and appendices exceed 43,000 pages." It is easy to understand why the motions have been submitted and pending for some time given the scope of what the Judge needed to consider to rule on the motions.
The Judge frames the central issue in the case as follows:
Another key issue in the case concerns a cease & desist letter that Oracle sent to Rimini demanding that Rimini stop downloading updates and patches on behalf of fully licensed Rimini customers. Here is what the Judge had to say on this point:
The court relied on this language and the Facebook case to rule that permission by the Oracle licensee alone was not sufficient to guarantee Rimini's ability to access Oracle's support website. Rimini must also have Oracle's permission for access.
The court also granted Oracle summary judgment on Rimini's claim for intentional interference with contractual relations, but only as it relates to Oracle's cease & desist letter denying access to the Oracle support website. Oracle did not move for summary judgment on Rimini's request for declaratory relief that Oracle interfered with contractual relations by (1) making misrepresentations to Oracle customers that Rimini was acting illegally providing the support in order to try to strong arm the customer into returning to Oracle; and (2) using selective audits to harass Oracle customers who moved their support requirements to Rimini. Those claims for declaratory relief are still alive and have not been adjudicated.
Essentially the Court found that Oracle had an absolute right to deny Rimini access to the support site and thus could not be liable for intentionally interfering with Rimini's contractual relations with its customers.
The court also granted summary judgment on Rimini's Section 17200 claims as they relate to the cease & desist letter under both the unfair and unlawful prongs. Thus that claim is now gone.
Tactical Law will continue to parse this very interesting opinion. Check back for further updates.
Oracle Customers Beware of Potential Legal Risks of Financing ERP Deals Through Oracle Credit Corporation
Readers of our blog know that we are following a very interesting case in San Francisco Superior Court where Barrett Business Services, Inc. (“BBSI”) has sued Oracle for fraud, breach of contract and related claims arising out of a failed ERP installation. One aspect of the case that we have really not blogged on concerns the side litigation involving Key Equipment Finance (“KEF”), arising out of the financing of the ERP deal. Although KEF first brought its Complaint in federal court in Washington, the court there granted BBSI’s motion to dismiss on forum non conveniens grounds and KEF refiled in the San Francisco action involving BBSI and Oracle. When BBSI cross-complained saying that it should not need to pay OCC and its assignee KEF on the financing contract due to Oracle’s fraud and failure to perform, KEF attacked BBSI’s cross-complaint by filing a demurrer (similar to a motion to dismiss in federal court). KEF essentially claimed that as a holder in due course of the assignment, under California law "come hell or high water" BBSI would still need to pay the debt. Last week Judge Ulmer of San Francisco Superior Court overruled the demurrer saying that KEF’s status as a holder in due course under California law is a question of fact that could not be decided on demurrer. According to Judge Ulmer’s Order:
The dispute between KEF and BBSI arose as follows. The ERP contract between BBSI and Oracle was originally financed through an Oracle subsidiary called Oracle Credit Corporation (“OCC”). Sometime after OCC agreed to finance the ERP installation, OCC assigned its rights to receive payment to Key Equipment Finance (“KEF”). Eventually BBSI ceased paying on the financing deal when Oracle failed to deliver the functioning system on time and at the price that it had promised, and KEF brought suit against BBSI to collect the debt arguing that as a holder in due course, BBSI had no right to discontinue payments under the financing contract, even though Oracle did not meet its obligations under the ERP contract. According to KEF’s Complaint:
“Rather than paying out-of-pocket, BBSI opted to finance the purchase of the Oracle America software through a contemporaneous, but separately contracted, payment plan offered by Oracle Credit (the “Payment Plan Agreement” and “Payment Schedule”). As noted in the Ordering Document at Paragraph 18, BBSI was not obliged to sign the Payment Plan Agreement and Payment Schedule; but if it did, the payment terms of the Payment Plan Agreement and Payment Schedule would control. In turn, long before any dispute arose between BBSI and Oracle America, in April 2018, Oracle Credit assigned its rights to the Payment Plan Agreement and Payment Schedule to KEF. The Payment Plan Agreement and Payment Schedule are governed by California law.”
OCC’s assignment of its rights to KEF was not unusual, and OCC seems to be assigning quite a few of these financing deals to third party banking entities. In fact, we have noticed several other assignees of OCC bringing suit recently to collect payments relating to similar financing contracts put together by Oracle and its financing arm, OCC, relating to other Oracle ERP customers. These include several recent suits brought by Banc of America Leasing here in the Bay Area, where we expect that Oracle customers will make similar arguments claiming that they should not have to continue to pay where Oracle either failed to deliver or fraudulently induced the customer into entering into the ERP contract.
Oracle customers who have financed Oracle ERP or other software purchases including Oracle cloud through Oracle’s OCC subsidiary should take note. BBSI’s opposition to KEF’s demurrer does not paint a pretty picture of what Oracle was up to.
“Oracle sought to insulate itself from liability for its misrepresentations through onerous contractual provisions heavily weighted in its favor and then to sever BBSI’s monetary obligations from Oracle’s performance by causing Oracle Credit to assign the subscription agreement to KEF on April 20, 2018.
It was not until June 2018, after Oracle had firmly locked BBSI into a multi-year, multi- million subscription agreement for the HCM Cloud and an implementation agreement with Cognizant, that it was finally disclosed to BBSI that the HCM Cloud was actually riddled with massive design, functionality, interface, integration and performance gaps; that in order to bridge these yawning gaps, customization and implementation would cost $33 million instead of the $5.41 million quoted and that it would take not 1 year but over 2 years to do so.”
Similarly Judge Leighton of the Western District of Washington where KEF had originally filed suit also appeared to recognize the inequities inherent in the Oracle financing deal. In fact in his Order dismissing KEF’s complaint on forum non conveniens grounds, Judge Leighton noted that the arrangement most likely failed for lack of consideration. According to the court:
“[t]his clever arrangement seems designed to subdivide the payment and performance aspects of Oracle’s agreement with Barrett into different contracts, thus ensuring payment even if Oracle fails to deliver the promised services. The result is a disturbingly imbalanced transaction that preserves OCC’s ability to terminate Barrett’s rights to the cloud services if it fails to pay but denies Barrett the same opportunity to avoid payment if Oracle breaches. Unfortunately for Oracle, such an arrangement would likely be illusory or lacking in consideration. See 1 WILLISTON ON CONTRACTS § 4:27 (4th ed.) (contracts are illusory where one party can decide for themselves the nature and extent of performance).” Key Equipment Finance v. Barrett Business Services, Inc., NO. 3:19-cv-05122-RBL, 2019 WL 2491893, (W.D of Washington June 14 2019).”
We were pleased to see that BBSI’s cross-complaint against KEF will go forward, and at least so far Oracle’s “clever arrangement” designed to guarantee payment even where it failed to deliver what it promised, may yet be reviewed by a court.
We will continue to monitor the case, which is Barrett Business Services, Inc. v. Oracle America, Inc. and Cognizant, San Francisco Superior Court, CGC-19-572474 and related cross-claims.
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