NetSuite SuiteSuccess Not Always So Sweet or Such a Success: Five Action Items for Prospective NetSuite Customers to Take Pre-Contract to Protect Your Legal Rights
By Pam Fulmer
On its website NetSuite, Inc. (“NetSuite), which is now owned by Oracle, touts that its “NetSuite SuiteSuccess is a total solution designed to manage all aspects of a business in a single system” and that “preconfigured, fixed-fee solutions allow customers to go live quickly, in a predicable time frame — and on budget.” Many NetSuite customers enter into the subscription and professional services agreements with NetSuite believing that they have a fixed price contract, which will not require much of an investment of time or energy on their end to get up and running. They are wowed by the slick pre-sales presentations and demos, and don’t understand that often the solution that is being touted in these discussions is not the base product, but instead is a solution with all the bells and whistles that may cost significantly more than what is being quoted. The fact is that the more a prospective customer wants to customize the software to fit its business, the more it will cost and the more time and effort it will take to implement, along with an increased chance of failure.
Oracle appears to be targeting small and medium size businesses with their SuiteSuccess offering. The Oracle/NetSuite sales team talks a good game, and the prospective customer is led to believe that the solution can be implemented quickly and within the fixed price fee quoted. Once the customer signs on the dotted line, often it is presented during contract performance with multiple change orders, which increase the total contract price and delays the ultimate “go live” date. Some customers end up giving up and wanting to terminate the contract and get a refund of monies paid to date. But given the terms of the standard contract, it is not so easy to get out of it and get a refund of fees paid.
So, what steps can companies considering contracting with Oracle take pre-contract to attempt to mitigate the risk in case a dispute with Oracle arises?
We hope potential NetSuite customers find this blog post useful. Tactical Law attorneys are experienced with Oracle/NetSuite agreements and assist companies to resolve their disputes with Oracle.
Lower Court Instructed to Look at Actual Usage in Determining Damages Award in Software Licensing Case
In a software licensing case out of the Court of Federal Claims, Senior Judge Edward J. Damich in Bitmanagement Software GMBH v. The United States followed the direction of the Federal Circuit to look at “actual usage” of Plaintiff’s software, and not the cost of a seat license for each installation when awarding damages. In so doing, the Court rejected Bitmanagement’s arguments that it was entitled to over $155,400,000 in damages and awarded $154,400 in total damages instead. The court found that 635 users actually used the software and that a hypothetical negotiation would have set the royalty rate at $200.00 per user. The court then subtracted the number of licenses in the Navy’s entitlement and found that the Navy was 597 users short and awarded damages thereon.
The facts of the case were very interesting. The software was licensed by the Naval Facilities Engineering Command (“NAVFAC”) from a third-party reseller of Bitmanagement called Planet 9 Studios, Inc. (“Planet 9”) and involved “BS Contact Geo” software. The software enables the visualization of geographic information in third-party hardware and software products and renders realistic terrain and city models and allows a user to position virtual objects using geographic coordinates. Bitmanagement primarily licenses its software via "PC" or "seat" licenses, which allow one installation of the software onto one computer per license. Each copy of the BS Contact Geo software includes both a desktop executable file ("EXE version") and a web browser plugin file ("OCX version"). The EXE component launches the software as a standalone application whereas the OCX component launches the software within a web browser.
After using the software for a while, the Navy determined that it wanted to put the software on its Intranet instead of loading it on individual computers and wanted more of a “floating license” model. NAVFAC explained to Planet 9 who then explained to Bitmanagement that Bitmanagement's default licensing scheme was incompatible with the Navy's secure intranet because the Navy could not approve BS Contact Geo if, as was Bitmanagement's normal practice, the end user would be required to contact Bitmanagement for a license key in order to use the program on a particular computer. Bitmanagement responded that it was "open for any licensing scheme that suits the US Navy better" and was "willing to do [its] utmost to enable [another] licensing functionality, if requested." NAVFAC explained that it needed a copy of BS Contact Geo that included the license key and that was not PC-specific because the Navy did not know "what machine(s) the application will be tested on." NAVFAC also noted that the Navy anticipated needing "an initial 15 licenses, with a potential for as many as 100 or more licenses later on." In response, Bitmanagement, through intermediary Planet 9, provided BS Contact Geo to the Navy with two licensing keys that were not PC specific. Also in May 2007, at the Navy's request, Bitmanagement provided the Navy with a "silent installer for BS Contact Geo intended for bulk installations," which, Planet 9 explained to Bitmanagement, was "helpful for an administrator to do installations on a large scale even on remote computers connected via intranet or internet." See Bitmanagement Software GMBH v. United States, 989 F.3d 938, 942 (Fed. Cir. 2021)
NAVFAC then engaged in discussions about this new licensing model through Planet 9 who interfaced with Bitmanagement. Bitmanagement was open to this licensing model and the three companies engaged in detailed discussions. NAVFAC explained that it had an existing floating license server tracking application, Flexera, that could be used to track BS Contact Geo with no alterations to the program and that Flexera is a server-based program used to limit the number of simultaneous users of a "Flexera enabled"—or "FlexWrapped"—software based on the number of available licenses. When a user opens a FlexWrapped program, the program alerts the Flexera tracking server that the program is in use. The FlexWrapped program sends a similar alert when the program is no longer in use. The Flexera license manager thus theoretically limits the number of users of FlexWrapped software to the number of licenses that a user owns. Ultimately it was agreed that NAVFAC could use the floating model, but needed to use Flexera, which would control the number of users ensuring that at no time could more users use the software than NAVFAC had licenses for. The agreement was never completely documented in one license agreement signed by all parties. However, the parties’ course of conduct demonstrated that all understood the terms of the agreement. Unfortunately for NAVFAC, it did not ultimately use the Flexera software as it had promised Bitmanagement it would do.
In July of 2016 Bitmanagement copyrighted the most recent version of its software and sued the government shortly thereafter. After a six-day bench trial from April 22-29, 2019, the Claims Court held that the government was not liable for copyright infringement. Specifically, the Claims Court found: (1) Bitmanagement made a prima facie case of copyright infringement; and (2) no express agreement granted the Navy a license to install BS Contact Geo on all of the Navy's computers; but (3) the Navy had met its burden to show that Bitmanagement authorized the Navy to copy BS Contact Geo version 8.001 across the Navy's NMCI network of computers finding an implied license. Bitmanagement Software GMBH v. United States, 989 F.3d 938, 945 (Fed. Cir. 2021). Bitmanagement Software GMBH v. United States, 989 F.3d 938, 945 (Fed. Cir. 2021).
Bitmanagement appealed the judgment and the Federal Circuit agreed with the lower court that there was an implied license, but that the implied license required as a condition precedent the implementation of the Flexera software. When NAVFAC did not meet the condition, it could not claim the protection of the implied license and thereby committed copyright infringement. The Federal Circuit remanded for the purpose of determining damages.
In its opinion the Federal Circuit reasoned that
“[b]ecause Bitmanagement's action is against the government, it is entitled only to "reasonable and entire compensation as damages . . ., including the minimum statutory damages as set forth in section 504(c) of title 17, United States Code." 28 U.S.C. § 1498(b). This amount may not include non-compensatory or punitive damages. Gaylord v. United States, 678 F.3d 1339, 1343 (Fed. Cir. 2012) ("Gaylord I"). Contrary to Bitmanagement's argument, it is not entitled to recover the cost of a seat license for each installation. If Bitmanagement chooses not to pursue statutory damages, the proper measure of damages shall be determined by the Navy's actual usage of BS Contact Geo in excess of the limited usage contemplated by the parties' implied license. That analysis should take the form of a hypothetical negotiation. See Gaylord v. United States, 777 F.3d 1363, 1368-72 (Fed. Cir. 2015).” Bitmanagement Software GMBH v. United States, 989 F.3d 938, 951 n.5 (Fed. Cir. 2021)
Upon remand and using a hypothetical negotiation, Judge Damich rejected Bitmanagement’s damages claim for $155,400,000 and awarded damages on the basis of NAVFAC’s actual usage for a total of $154,400.
Ultimately the court followed the appellate court’s instruction to look at “actual usage” and rejected Plaintiff’s argument that “use” is equivalent “to the number that were copied onto Navy computers and accessed as well as those that were downloaded and available for use”. Rather than using Plaintiff’s number of 600,000 copies made, the lower court on remand found a total of 635 actual users. After subtracting the 38 existing Navy licenses, the court found a royalty base of 597 unique unlicensed users. An amount well short of Bitmanagement’s proposed number.
The case is Bitmanagement Software, GMBH v. The United States, Case No. 16-840C-EJD (Court of Federal Claims).
By Tactical Law Attorneys and From Time to Time Their Guests