After a two week trial on May 13, 2019, a federal jury in the District of Maryland rejected the arguments of Micro Focus (U.S.), Inc. (“Micro”) that its licensee Express Scripts, Inc. (“Express”), a pharmacy benefits manager, had purchased desktop and not concurrent licenses under a software license agreement. The software at issue—Rumba--provides users a Windows environment in which to access and use information from a broad range of host systems including IBM mainframes. The result was a complete and total defense victory for Micro’s enterprise software customer Express.
Although there was a time when Micro was a kinder, gentler software company, Express alleged that after Micro’s 2014 merger with Attachmate, it adopted that companies brass knuckle audit tactics to extract additional licensing fees from Micro customers.
Micro brought suit against Express in 2016 after Express refused to pay Micro $23 million for alleged software overdeployment, which Micro claimed it discovered during a 2015 software audit. For its part, Express claimed that it was in compliance with the terms of the contract and did not owe Micro additional licensing fees at the then standard list price, as Micro contended.
At trial the dispute centered around what exactly constituted the contract and what type of licenses had actually been purchased in 2010. Express contended that the only commercially reasonable interpretation was that the license at issue granted 10,000 concurrent user licenses of Rumba for Citrix. For its part, Micro claimed the license provided 10,000 workstation or desktop licenses instead, and was not user based. The parties also vehemently disagreed about what constituted the operative contract. Express argued that the Product Order and email extending the offer formed the operative contract, while Micro argued that the Product Order incorporated a click-wrap End User License Agreement (“EULA”) under its “Terms and Conditions” and that the EULA applied. Micro argued that Express once again ratified the EULA when its employees accepted the EULA click wrap agreement upon installation.
Both parties brought summary judgment motions prior to trial. In denying parts of those motions and sending the remaining claims to the jury, the court observed that “as the parties are painfully aware, the EULA and Product Order, read together, are ambiguous as to what specific kind of license Express sold to Micro. The Product Order is to purchase a license for “10,000 authorized users.” The EULA, however, nowhere defines the term “authorized user” and instead with respect to Rumba software, offers seven separate licensing options.” The court went on to find that “what the parties meant by “authorized user” is indeed ambiguous.”
According to the court, “[w]here a contract is ambiguous, a finder of fact may consider extrinsic evidence “which sheds light on the intentions of the parties at the time of the execution of the contract.” The court found that “[t]he cardinal rule of contract interpretation is to give effect to the parties’ intentions” and that extrinsic evidence may include the “negotiations of the parties, the circumstances surrounding execution of the contract, the parties’ own construction of the contract and the conduct of the parties .”
Although the focus is usually on what is the intent at the time of contracting, the court reasoned that “[b]ecause the respective parties’ course of performance is relevant to interpreting ambiguous contract terms, the Court will consider the 2013 and 2015 record evidence in determining whether summary judgment is appropriate.” Such evidence included (1) that Express’ own IT employees interpreted the contract in a manner which was consistent with a workstation license; (2) Express staff admitted internally to being over-deployed and sought strategies to “track how many people need licensing for these applications”; and (3) Express personnel also privately admitted in September of 2013 to be “technically out of compliance with our current licensing model of giving everyone or [sic] Level 1 Citrix access for Rumba.”. The court then went on to rule that “[b]ecause a rational trier of fact could rely on such evidence to find in Micro’s favor, the meaning of 10,000 authorized user licenses must be resolved at trial.”
The case offers a cautionary tale for Oracle licensees. If a court were to construe the “installed and/or running” language of the processor definition as somehow ambiguous (which we disagree with), evidence of the course of conduct of the parties could potentially be introduced at trial to show what the parties believed the language meant. It is important that Oracle licensees not do anything that buys into Oracle’s expansive and non-contractual definition of “installed”, even if to do so may seem at first beneficial (for example in certifying off Oracle’s Unlimited License Agreement (“ULA”).
Another important lesson. Don’t let your employees blindly accept Oracle’s extra contractual assertions by adopting these interpretations and memorializing them in writing in your internal discussions. At trial counsel for Express had to deal with multiple email communications where employees who were not involved in the negotiation or execution of the agreement were purporting to agree with the party line being pushed by Micro about the type of licenses that had been purchased in 2010. However, these employees lacked personal knowledge and were just plain wrong. Instead, they were listening to Micro’s assertions and parroting those assertions back to each other.
The court also declined to find on summary judgment that the contract was one of adhesion and rejected the licensee’s argument that if the contract was ambiguous, it should be interpreted against Micro, who drafted the contract. Instead the court found that Express was a large sophisticated business, (which outpaced Micro in size and sophistication), and had ample opportunity to negotiate the license agreement and make changes. Therefore on summary judgment it declined to apply the doctrine of contra proferentem (the basic principle of contract law that, in construing the language of a contract, ambiguities are resolved against the drafter of the instrument), since the court found that genuine issues of material fact remained, and the construction of the ambiguous terms was left to the jury. And of course the jury ended up construing the ambiguous terms against Micro and finding that the interpretation offered by Express was the most reasonable.
One final fun fact—Express was represented by Morgan Lewis who represented Oracle in the Mars v. Oracle litigation.
The case is Micro Focus (U.S.), Inc. v. Express Scripts, Inc., Civil Action No. PX-16-0971, United States District Court, District of Maryland.
Oracle Claims Customer is "Solely" Responsible for Determining if Oracle Cloud Services Meet Customer's Technical, Business, and Regulatory Requirements
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.
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.
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.
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.
In a hard hitting opposition brief to Oracle’s motion to dismiss, lead Plaintiff Union Asset Management Holding AG shreds many of Oracle’s arguments and again reasserts the myriad of specific facts that were pled to support Plaintiff’s contention that Oracle used coercive audit tactics to improperly drive sales of cloud revenue, which it then misleadingly reported to investors and the public.
Correctly pointing out that at this juncture of the litigation Plaintiff does not have access to Oracle books and records so that it is not required to “plead the precise amount of overall revenue affected by Oracle’s improper sales tactics”, Plaintiff nonetheless asserts that “the Complaint’s detailed allegations give rise to the inference that the artificial sales were material in scope.” As we have pointed out in previous blog posts, if Plaintiff can get past the pleading stage and into discovery, it may well learn from Oracle’s own documents that Oracle revenue generated from these predatory audit tactics was very substantial indeed.
Plaintiff argues that Oracle misled investors about the driver of cloud sales growth and that it was the abusive audit tactics that were driving cloud sales, rather than Oracle having a superior cloud product. Plaintiff also contends that Oracle misled investors about the sales growth being sustainable, when Oracle knew very well from its own people that it was not. Finally, Plaintiff once again presents a strong argument as to how it has adequately alleged scienter on the part of Oracle’s senior management to deceive the public concerning the strength of Oracle’s cloud sales. Writing that “[s]cienter is “a mental state that not only covers intent to deceive, manipulate, or defraud, but also deliberate recklessness,” Plaintiff sets out a litany of allegations that present a strong inference that senior management knew and most likely approved of the use of Oracle compliance audits to drive cloud deals.
If you believe your company has been forced into an unwanted cloud purchase arising out of an Oracle audit, you may have legal remedies. Please contact firstname.lastname@example.org if you would like to discuss your potential legal options.
Tactical Law Group LLP is continuing to monitor the litigation. Check back here for periodic updates.
You may read Plaintiff’s opposition to Oracle's motion to dismiss here by clicking below.
Shareholder's' Derivative Lawsuit Claims Oracle Management Knew of Predatory Audit Tactics and Misled Public
In a shareholder’s derivative lawsuit filed on May 6, 2019 in the Northern District of California, the City of Providence has accused the top echelons of Oracle’s management and its board of directors, of making materially false and misleading statements about the growth of Oracle’s cloud business and the simultaneous repurchase of common stock at inflated values. The verified 110-page complaint filed by the Cotchett, Pitre & McCarthy law firm, relies heavily on a March 8th Consolidated Class Action Complaint filed in the In Re Oracle Corporation Securities Litigation, and sets out in meticulous detail the alleged misconduct relating to Oracle’s abuse of its audit rights and Oracle’s use of predatory audit tactics. Essentially the Complaint alleges that Oracle License Management Services (“LMS”) improperly used software audits against Oracle customers to come up with bogus audit findings, which Oracle Sales could then leverage to force customers into Oracle cloud purchases. Oracle management in turn would tout these sales to shareholders and the public, without disclosing that in many instances the Oracle customers never wanted or needed the products, but only bought them to get out from under the audit findings. The Complaint alleges that the purpose of this elaborate scheme was to provide Oracle management with ammunition so that it could falsely claim that Oracle cloud sales were experiencing phenomenal growth thereby misleading the market.
The Complaint pleads specific facts, which will be familiar to many Oracle customers who have experienced an Oracle audit. According to the complaint, in the typical “Audit, Bargain, Close” or “ABC deal”, Oracle’s LMS “would audit an existing on-premises client for violations of the software license and present the client with a hefty bill – say, $10 million. Oracle sales would then intervene, offering to reduce the penalties significantly – by, for instance, $4 million – if the customer purchased $2 million in cloud subscriptions. These customers, who neither wanted nor needed the cloud products, “purchased” a cloud subscription simply to save money on audit penalties, and, of course, almost never renewed those subscriptions. The Officer Defendants caused Oracle to misleadingly report these sham “sales” as cloud revenue, highlighting them as evidence of explosive business growth, when, in fact, they were nothing of the sort”.
Oracle customers who have undergone audit may also be able to relate to the following allegations:
“To start, Oracle installed its main on-premises products with extra options and management packs enabled by default, but did not inform its customers that these features had been installed and must be disabled in order to avoid license overages. Once a customer fell into this trap, Oracle’s sales and LMS teams worked in a highly coordinated fashion to audit the client for its license violations and push cloud products”.
The complaint devotes a whopping 44 pages to setting out statements made by various high-level officers and directors of Oracle, which the complaint contends shows that Oracle management knew of and encouraged these improper practices and intentionally misled the public by repeatedly claiming that the growth in cloud sales was due to legitimate business factors and not fueled by improper audit and sales tactics.
If you believe your company has been forced into an unwanted cloud purchase arising out of an Oracle audit, you may have legal remedies. If you are currently under audit, and have been pressured to buy cloud, you may have legal options. Please contact email@example.com if you would like to discuss your possible claims.
Tactical Law Group LLP is continuing to monitor the litigation. Check back here for periodic updates. The case is City of Providence v. Lawrence Ellison, et. al., Case Number 5:19-cv-02448-NMC.
You may read City of Providence’s Complaint by clicking below.
Oracle Corporation and six current and former officers or directors of Oracle moved on April 19, 2019 to dismiss the class action securities Complaint filed by Plaintiff Sunrise Fire Fighters in the Northern District of California. Essentially that Complaint alleges that Oracle and its management intentionally and misleadingly reported cloud revenues and growth and expressed optimism for future growth, without disclosing to the public that Oracle’s financial results and growing cloud sales were not the result of its superior product, but instead a result of abusive software audits of Oracle customers and improper sales tactics arising out of those audits. Plaintiff brought suit on behalf of all persons who purchased Oracle securities between March 15, 2017, and June 19, 2018.
Oracle seeks to dismiss the Complaint arguing that Plaintiff has failed to provide concrete evidence of Oracle’s audit abuses during the relevant class period. According to Oracle’s motion, “Plaintiff provides no details regarding the number of audits conducted or whether the audits materially affected Oracle’s revenue in any quarter. Plaintiff also claims that Oracle pushed so- called “attached” deals, essentially providing on-premise customers a “sharp discount” if they agreed to try Cloud products.” According to Oracle, “Plaintiff contends that these alleged practices were “improper,” but cites no law, accounting rule, or policy that precludes a company from encouraging its existing customers to try new products.”
Oracle’s attempt to portray its abusive audit tactics, which have been widely reported in the business press as well as in several public lawsuits, as simply gentle encouragement by Oracle to its customers to try new products is ludicrous. Many Oracle customers who have undergone an Oracle audit might vehemently disagree with Oracle’s benign characterization of the audit process. And if this securities class action case proceeds past the pleading phase and into discovery, Plaintiff may well discover evidence within Oracle’s own files of massive and systematic abuses by Oracle of its audit rights.
Oracle also argues in its motion that “it is not improper to use aggressive tactics to sell products” and that “Oracle’s software license contracts gave it the right to audit its customers’ compliance with the license and impose fees if it found violations.” Similarly, Oracle contends that it was “Oracle’s right to forgo collecting those fees in exchange for customers agreeing to try Oracle’s Cloud products.” But what if evidence exists that demonstrates that certain of those violations claimed by Oracle were bogus and not grounded in the contract? What if Plaintiff can find evidence that Oracle knew that its claimed deficiencies lacked contractual merit, but they claimed them anyway in order to inflate the alleged licensing deficiency and use it as leverage to drive more sales of Oracle cloud and other software products? And if it is true that Oracle does not need to resort to “scare tactics” to sell its cloud products as Oracle claims, then why is the business press replete with instances of Oracle customers complaining about Oracle’s predatory audit practices?
Oracle license agreements usually provide that Oracle audits cannot unreasonably interfere with the normal business operations of Oracle customers. Was it an unreasonable interference for Oracle to demand hundreds of thousands of documents from Mars Corporation, including information about servers where Oracle software was not installed and/or running? Was it an unreasonable interference for Oracle to then threaten to terminate the license thereby forcing Mars to incur the costs of filing a lawsuit for declaratory relief seeking a court determination that it was not in breach of the license? What if it were to be discovered that Oracle has a standard business practice of issuing Final Audit Reports, which routinely contain alleged compliance gaps not grounded in the contract in order to come up with a “shock number” to gain negotiating leverage over Oracle customers?
In the Sunrise suit, Oracle contends that “Plaintiff has not shown anything improper about upselling and cross-selling or offering discounts, incentives, and audit accommodations. Nor has Plaintiff shown that Oracle’s opinion was subjectively disbelieved, objectively false, or lacking any reasonable basis” and that “at most, Plaintiff’s allegations show “isolated instances” of the alleged conduct “rather than widespread deception, which would be necessary to establish fraudulent intent or reckless ignorance.”
It will be interesting to see whether Plaintiff can get past the pleading stage and into discovery. To the extent evidence of widespread and systematic deception exists, it would be contained in documents at Oracle, which Plaintiff has not yet been able to access. One fertile area that Plaintiff might want to focus on to prove Oracle’s “widespread” and “intentional” deception in Oracle audits is Oracle’s assertions around VMware and the “installed and/or running” language of the license agreement. It is our opinion that should Plaintiff focus on this area it may likely find evidence in Oracle’s files that Oracle routinely includes large compliance gaps in its Final Audit Reports based on its VMware assertions. Yet although such findings may be commonplace we are aware of no instances where Oracle has sought to enforce its view in a court of law, although Oracle has relied on its dubious interpretation to threaten license terminations as the Mars v. Oracle case proves. And as we know, Oracle settled the Mars case quickly and well before a court could rule on the issue.
Plaintiff in the Sunrise case should seek discovery of Oracle audits where VMware assertions were included in the Final Audit Report and resolution of the audit involved large discounts, in part, based on the purchase of cloud credits. Such discovery may lead to evidence that Oracle’s audit tactics are part of a “widespread deception” and do not reflect simply “isolated incidents” but rather are intentional and perhaps ratified by the highest echelons of Oracle’s management.
Oracle customers under audit would be wise to document in written communications to Oracle instances where they believe that Oracle’s actions are abusive and not grounded in the contract.
If you believe your company has been forced into an unwanted cloud purchase arising out an Oracle audit, you may have legal remedies. Please contact firstname.lastname@example.org if you would like to discuss your potential legal options.
Tactical Law Group LLP is continuing to monitor the litigation. Check back here for periodic updates.
You may read Oracle's motion to dismiss here by clicking below.
Claiming total success in the litigation, Hewlett Packard Enterprise Company (“HPE”) is seeking an award of almost $18 million in attorneys’ fees against Oracle. Oracle sued HPE in 2016 alleging claims for indirect (vicarious and contributory) and direct copyright infringement, intentional interference with contract, intentional interference with prospective economic relations, and unfair competition. These claims stemmed from Oracle’s allegations that HPE offered illegal updates to customers of Oracle's Solaris operating system as part of a scheme concocted by another company, Terix Computer Co. Inc.
Judge Tigar of the Northern District of California granted HPE’s motion for summary judgment on all claims while denying Oracle’s motion. As the prevailing party in the copyright infringement case, HPE contends that it is entitled to an award of fees. HPE argues that “[g]iven HPE’s complete success in the case, Oracle’s unreasonable and aggressive approach in the litigation, and the need to compensate HPE and to deter Oracle, the Court should grant HPE’s motion and award HPE the reasonable fees it requests.” HPE claims that “Oracle’s litigation tactics also at times crossed the line from zealous to inappropriately hostile and aggressive” pointing to Judge Laporte’s admonishment of “Oracle for its failure to adhere to the Northern District of California’s ‘Guidelines for Professional Conduct’”. According to Judge Laporte:
"The Court is very disappointed by the extreme, unnecessary, overheated rhetoric employed primarily by Oracle, such as its opening salvo—“Time and time again, HPE and its counsel have shown that there is no game they will not play in the pursuit of misperceived litigation advantage ...”—which is followed by phrases such as “blatant gamesmanship,” “knowingly misrepresenting facts in an attempt to slander,” “empty accusations,” “supposed grievances,” “Nonsense” and the like."
HPE’s fee motion also accuses Oracle of being a “serial plaintiff” and an “aggressive litigant that consistently seeks to run its competitors out of the market.” HPE is also seeking attorneys’ fees on the defense of the state law claims arguing that Oracle’s copyright claims and state court claims were intertwined and arose out of a “common core of facts” or “out of the same course of conduct”. According to the motion, “HPE’s counsel spent 25,758.80 hours and incurred nearly $20 million in fees litigating this case to a complete victory, and here seeks $17,879,638.03. This amount reflects a self-imposed haircut, a reasonable number of hours for a case of this complexity, and reasonable hourly rates.”
We will continue to monitor the case, which is Oracle America, Inc. v. Hewlett Packard Enterprise Company, CASE NO. 3:16-cv-01393-JST in the Northern District of California. Check back here for updates. See below if you would like to download the motion.
Oracle has again suffered a legal setback, this time at the Ninth Circuit. In an unpublished opinion issued yesterday, a panel made up of Justices Schroeder, Rawlinson and Lasnik, affirmed a ruling by District Court Judge Laporte, which granted a former Oracle employee, Marcella Johnson’s motion to compel arbitration. Johnson sued Oracle in February 2017 in federal court on behalf of a proposed class of sales employees in a dispute about how Oracle pays its sales team commissions. Johnson claimed that Oracle changed its commission policies resulting in “clawbacks” of previously paid amounts, and that such clawbacks are illegal under California employment law.
Johnson eventually dropped her suit in federal court and filed a class arbitration in San Francisco before JAMS, after Oracle produced an employment agreement with an arbitration provision. However, although employers usually prefer arbitration, Oracle declined to pay its portion of the arbitration fees, instead contending that Johnson had petitioned for arbitration under a provision that had been superseded by a later agreement that explicitly blocked classwide treatment of claims in arbitration. Johnson then moved to compel arbitration, claiming that the arbitrator could decide which arbitration agreement governed. Oracle argued that the decision on which agreement governed was for the district court and not the arbitrator to decide.
The Ninth Circuit rejected Oracle’s argument finding that the agreements provided for either the applicability of the Federal Arbitration Act (“FAA”) or Judicial Arbitration and Mediation Services (“JAMS”) rules. The court reasoned that “[u]nder those rules, issues concerning arbitrability can be delegated to the arbitrator so long as the delegation is clear,” which it found to be so in the Oracle contracts.
Since the case will now be in private arbitration and not a public court of law, Tactical Law will be unable to monitor the case. That is regretful as it would be interesting to learn more about Oracle’s strong-arm tactics with its own sales people. Companies undergoing Oracle audits know how aggressive Oracle sales can be in pushing expensive audit resolution proposals. It is no wonder given the immense pressure that Oracle apparently imposes on its sales team to meet high Oracle sales goals. If you are a company undergoing an Oracle audit, seek experienced legal counsel knowledgeable about California law to assist you in successfully navigating the audit and defeating aggressive Oracle sales tactics.
Third party software services maintenance provider, Rimini Street, scored a victory today before the U.S. Supreme Court against its arch nemesis Oracle. A unanimous Supreme Court, in an opinion written by Justice Kavanaugh, has reversed the Ninth Circuit by ruling that the phrase “full costs” as used in the Copyright Act means only the 6 categories of costs authorized in the general federal costs statute, as codified at Sections 1821 and 1920 of Title 28. Oracle had argued that the word “full” before the word “costs” meant that a court in awarding litigation expenses in a copyright case could award expenses beyond the ones mentioned in Sections 1821 and 1920, such as the costs of electronic discovery, expert witnesses and jury consultants. In rejecting that argument, Justice Kavanaugh reasoned that “[t]he adjective “full” in §505 [of the Copyright Act] therefore does not alter the meaning of the word “costs.” Rather, “full costs” are all the “costs” otherwise available under law. The word “full” operates in the phrase “full costs” just as it operates in other common phrases: A “full moon” means the moon, not Mars. A “full breakfast” means breakfast, not lunch. A “full season ticket plan” means tickets, not hot dogs. So too, the term “full costs” means costs, not other expenses.”
The case is Rimini Street Inc. et al. v. Oracle USA Inc., case number 17-1625, at the Supreme Court of the United States.
Pam Fulmer of Tactical Law