Court Rules Sunrise Firefighters’ Securities Fraud Lawsuit Allowed to Proceed Against Oracle and its Senior Management
By Pam Fulmer
Oracle and its senior management suffered a significant loss in federal court yesterday involving Oracle’s Audit, Bargain, Close (“ABC”) predatory sales and audit tactics. In a sweeping 54 page opinion, Judge Freeman of the Northern District of California has granted in part and denied in part Oracle’s motion to dismiss a class action securities fraud lawsuit, which alleged that Oracle used predatory software audits to drive sales of its cloud products, and then omitted to tell the public about all the potential reasons for Oracle’s increasing and later decreasing cloud sales. The Plaintiff will be allowed to pursue only its omission based securities fraud claims against Oracle and senior management Larry Ellison, Mark Hurd, Safra Catz, and Ken Bond. All other securities fraud theories alleged in the SAC were dismissed. Defendants Thomas Kurian and Steve Miranda were dismissed from the lawsuit with prejudice. The remaining Defendants have 30 days to file an Answer to the Second Amended Complaint (“SAC”).
Judge Freeman's Order sets out the background facts alleged in the SAC.
“Oracle allegedly employed a strategy called “Audit, Bargain, Close,” also referred to as “ABC.” SAC ¶¶ 16, 95-128. Under this strategy, Oracle would install its software on on-premise client ecosystems “with a variety of preferences automatically enabled that, unbeknownst to the customer, caused the customer to arguably—and unknowingly—exceed the limits of its license.” Id. ¶ 16. The company would then initiate an audit of an on-premises customer for violations of its on-premises software license. Id. When it found violations, Oracle would “threaten to impose extremely large penalties” that it would abate only if “the customer agreed to accept a short-term cloud subscription.” Id. The SAC alleges that customers “neither desired nor intended to use” the cloud products but purchased them to avoid the hefty penalties. Id. ¶¶ 16, 151-198. Second, Oracle allegedly engaged in a tactic known as “attached deal[s].” Id. ¶¶ 17, 129-150. Oracle offered its customers “a significant discount” on its on-premises products, provided the customer also agreed to receive a short-term cloud subscription – “even though the customer neither wanted nor intended to use the attached cloud product.” Id. ¶ 17. The SAC alleges that the attached deals thus served to disguise legacy on-premise revenue as cloud revenue. Id. ¶¶ 129-150.
Starting in 2014, “market participants voiced early concerns that Oracle and its auditing department should not attempt to extract ‘cloud’ revenues through their audits of its licensees’ ‘on- premises’ software licenses.” SAC ¶¶ 51, 54-60, 62, 64. Oracle executives, however, denied that the company was misusing its audit process to gin up purported cloud sales, id. ¶¶ 61, 63, 64, instead tracing sales successes to Oracle’s superior cloud products and business practices, id. ¶¶ 66-71. Oracle’s stock price rose almost 24% between 2017 and 2018 as investors and analysts celebrated the strength of Oracle’s cloud business. Id. ¶¶ 72-73. The representations of Oracle executives stood in stark contrast to reality according to the SAC, id. ¶¶ 74-94, as Oracle’s cloud products were “deeply flawed,” limiting customer’ ability to use the products effectively and forcing the company to lean on financially engineered deals, id. ¶ 74, 95.”
Oracle customers reading this description may recognize this familiar pattern, as many customers around the world have complained in the business press and otherwise that they have been subjected to these predatory ABC audits and forced to buy Oracle cloud software to resolve the audit.
Only the Omission Based Securities Fraud Theory Survived Oracle’s Motion to Dismiss
Although Judge Freeman found that in many instances Plaintiff failed to set forth facts that would support many of its securities claims, the Court focused on Oracle’s representations to investors about the reasons for its increasing and later decreasing cloud sales. Unlike the First Amended Complaint (“FAC”), the Court found that Plaintiff had plausibly pleaded facts in the SAC establishing an omission based fraud theory under Section 10 of the Securities Act. According to the Court:
“Plaintiff also contends that Defendants misleadingly attributed Oracle’s cloud revenue growth to the quality and competitiveness of its cloud offering, while failing to disclose that engineered deals were a material driver of those results. See SAC ¶ 267, 358, 361, 418, 424; see also Opp. at 10-11. As the Court explained in its prior order: [O]nce Defendants made statements about the drivers of Cloud revenue growth, the investors would have been interested to know that “a material driver” of Cloud Sales was Oracle’s Sales Practices. MTD Order at 25. However, the Court ultimately found that Plaintiff failed to establish the materiality of Oracle’s Sales Practices. Id.
The SAC has overcome this hurdle. Plaintiff has provided additional allegations from the CWs (“Confidential Witnesses”) along with new allegations from industry members that establish the materiality of revenue generated through Sales Practices. See Order at 27-30 ( “CW Allegations” and “Industry Member Allegations”). Oracle does not have an independent duty to disclose its sales tactics; nevertheless, once Defendants made statements about the drivers of cloud revenue growth, investors would have been interested to know that Oracle’s allegedly coercive sales practices were “a material driver” of cloud sales.”
In other words, the Court is saying that Oracle was touting its growing sales of cloud products in the marketplace as being due to customers' finding that the Oracle software was a quality product, which could go toe to toe with AWS and other competitors. Once Oracle started making statements to the public as to why sales of Oracle cloud were increasing, they owed investors a duty to disclose that Oracle’s use of hard ball audit tactics may also have been a material driver of increased cloud sales. By omitting to do so, Plaintiff has stated a plausible securities fraud claim that Oracle may have violated the securities laws by omission.
Once Oracle’s sales of Oracle cloud began to decrease, Oracle also had a duty to disclose other reasons why those sales were slowing, including the decreasing success of their predatory audit tactics. According to the Court:
“The Court, again, emphasizes that Oracle does not have a stand-alone duty to disclose its sales practices. However, as with Defendants’ statements about drivers of cloud growth, once Defendants made statements about the reasons underpinning cloud growth deceleration, investors would have been interested to know that the dwindling efficacy of Oracle’s sales practices had a material impact on this decline. (citation omitted) At this stage, the allegations relating to cloud growth deceleration are adequate to state an omission-based claim under Section 10.
Plaintiff has successfully pled a narrow omission theory of securities fraud. This theory centers on Defendants’ statements about Oracle’s cloud growth deceleration and the drivers of cloud growth. Statements at FAC ¶¶ 363, 367, 390, 404, 416, 418, 422, 424, 433, 434, 443, 446, and 453 support this theory. The Court emphasizes that this theory is not based on a stand-alone duty to disclose allegedly coercive sales tactics; rather, Oracle’s affirmative representations about cloud growth deceleration and drivers of cloud growth “affirmatively create[d] an impression of a state of affairs that differs in a material way from the one that actually exist[ed].” Brody, 280 F.3d at 1006. This is particularly true during a Class Period where the nascent cloud market exploded and Oracle competitors enjoyed robust growth. With the exception of this theory and associated statements, the Court DISMISSES the SAC.”
Importantly the Court rejected Oracle’s arguments that Plaintiff had not pled facts sufficient to state a claim that Oracle and its top management had the requisite scienter needed to hold them liable under the securities laws. According to the Court, “[a] defendant is liable for making false statements under Section 10(b) and Rule 10b-5 when he acts with scienter, a “mental state that not only covers intent to deceive, manipulate, or defraud, but also deliberate recklessness. (citation omitted) [D]eliberate recklessness is ‘an extreme departure from the standards of ordinary care ... which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it.’” (citation omitted). As such, “[f]acts showing mere recklessness or a motive to commit fraud and opportunity to do so provide some reasonable inference of intent, but are not sufficient to establish a strong inference of deliberate recklessness.” In other words, this is a very hard pleading standard to meet. Judge Freeman recognized that the Plaintiffs “must “plead with particularity facts that give rise to a ‘strong’—i.e., a powerful or cogent—inference.” Id. at 323. In evaluating whether a complaint satisfies the “strong inference” requirement, courts must consider the allegations and other relevant material holistically, not “scrutinized in isolation.”
Applying this law to the facts, the Court found that the facts alleged in the SAC “give rise to a strong inference of scienter with regard to Hurd, Catz, Ellison, Bond, and Oracle”, but that Plaintiff’s allegations against Kurian and Miranda, fell short of meeting this standard. According to the Court:
“Plaintiff’s core claim is that Oracle knowingly foisted inferior cloud products on unwilling customers by threatening license audits that could produce penalties in excess of the price of the cloud products. While Oracle earned real revenue from these sales, unused and non-renewed one year cloud subscriptions dwindled over time as Oracle exhausted the list of customers it was able to strong-arm. When questioned why Oracle’s cloud sales rates skyrocketed at first and later slowed, Defendants affirmatively and falsely attributed Oracle’s success and subsequent slowed sales rates to false reasons, masking the material impact of engineered sales on cloud growth.”
In the end Judge Freeman found Plaintiff’s “overall fraud theory alleged in the SAC plausible, cogent and compelling.”
The Court went on to examine the statements and other allegations concerning the scienter of Ellison, Hurd, Catz and Bond. The Court analyzed each of these allegations and then stood back and looked at them holistically. Here’s what she had to say:
“As the Court detailed above, multiple kinds of evidence individually support a finding of, at the very least, deliberate recklessness as to Hurd, Catz, Ellison, and Bond. (citation omitted) A holistic review of the evidence confirms this conclusion. Although not every kind of evidence individually supports a finding of scienter, Plaintiff’s factual and CW allegations against Hurd, Catz, Ellison, and Bond are highly compelling. And while the core operations doctrine rarely succeeds, here it adds modestly to support the evidence supplied by the CWs given the centrality of engineered sales to Oracle’s bottom line and allegations of Hurd, Catz, Ellison, and Bond’s roles in the company and involvement in cloud sales. When viewed holistically, even Plaintiff’s compensation structure and stock sales allegations have some teeth to them. In sum, the inference that Hurd, Catz, Ellison, and Bond were deliberately reckless as to the truth of their public statements is “at least as compelling as any opposing inference.”
As our readers will see, it was a bad day in Court for Oracle and the top echelons of Oracle's management. It will be very interesting to see if the case settles now that Sunrise Firefighter’s have survived the motion to dismiss. Often these type of securities class action cases do settle quickly, when they are not dismissed at the pleading stage. If the case does continue, Tactical Law will bring you periodic updates about anything we find interesting in the public filings.
Oracle customers who have experienced a predatory ABC audit by Oracle may have remedies if they were forced by Oracle to purchase cloud software to resolve an audit. We would be happy to discuss your potential legal options and possible remedies.
The case is City of Sunrise Firefighters Pension Fund v. Oracle, et. al., Northern District of California, (Case No. 18-cv-04844-BLF)
By Pam Fulmer
Readers of this blog will remember that we have discussed previously a declaratory judgment lawsuit filed by Fairview Health Services against Quest Software, Inc. and Quest’s affiliate One Identity LLC arising out of an audit by Quest. Essentially Fairview contends that when it notified Quest that it was canceling maintenance & support, Quest immediately issued an audit notice and made multi-million non-compliance findings, which Fairview vigorously disputes. Tactical Law has been monitoring the case and we now have a ruling by Judge Susan Nelson on Quest’s Motion to Transfer Venue and Fairview’s Motion to Dismiss Quest’s Counterclaims. Quest lost its motion to transfer venue but successfully defeated a motion to dismiss its contract and copyright based claims.
Quest Motion to Transfer Venue
With regard to the venue motion, Quest essentially contended that because a 2013 license purchase of 2700 licenses (out of a total of 38,081 total licenses purchased) incorporated a new license agreement, that the 2013 license agreement governed and replaced the 2004 Software License Agreement (“SLA”). We have seen Quest make similar arguments before and we have pushed back on such assertions. The 2013 Software Transaction Agreement (“STA”) contained a dispute resolution clause making Texas the forum for resolution of disputes, and Quest sought to transfer the action there.
The Court denied the motion basically saying that based on the record as developed so far it did not appear that the 2013 STA governed, as many more licenses were purchased under other agreements. The court teed up the positions of the parties as follows:
“The disputed forum-selection clause applies to “[a]ny action seeking enforcement of this Agreement or any provision hereof.” (2013 STA § 17(a).) Fairview argues that its declaratory judgment action does not “seek enforcement of” the 2013 STA; indeed, Fairview maintains that the 2004 SLA, not the 2013 STA, governs the parties’ licensing dispute. In response, Quest argues that the 2013 STA superseded the 2004 SLA, and that Quest’s counterclaim for breach of the 2013 STA renders this action one “seeking enforcement of” the 2013 STA”.
The court reasoned that to decide the issue, she must decide which of the agreements governed the dispute. According to the court:
“In order to determine whether this is an “action seeking enforcement of” the 2013 STA, the Court must first examine the extent to which the 2013 STA governs the parties’ relationship. Initially, Fairview purchased at least 18,101 Active Roles licenses pursuant to the 2004 SLA. (Am. Compl. ¶ 17.) These licenses were perpetual, unlike the annual maintenance services component of the transaction. (See 2004 SLA §§ 2, 10.) Quest argues that the 2004 SLA could not apply to Fairview’s deployment of the Active Roles version 6.9 software, because that version did not exist in 2004. However, the 2004 SLA, by its plain terms, entitled Fairview to “new versions and releases of the Software” as part of the maintenance services component of the transaction—and Quest has admitted that proposition. (Id. § 10; Answer & Countercl. ¶ 19 (“[D]uring the maintenance period, maintained licensees are entitled to upgrade their licensed software to the most recent version that has been released at no additional cost.”).)”
The court then examined the 2013 agreement and pointed out language that made it clear that the 2013 STA clearly applied to licenses that were purchased under that particular Ordering Document. However, the court was unable to say that the STA superseded the earlier agreement. According to the court:
“The Court finds that the 2015 quotations unambiguously bound Fairview to the 2013 STA with respect to the 2,700 licenses purchased in 2015, but did not supersede the 2004 SLA with respect to previously purchased licenses.”
This is important as Quest argues during audits, just as it did here, that the click-through agreements that come with new purchases, annual maintenance & support or product updates somehow supersede and replace previous perpetual license agreements. It is to Quest’s advantage to do so, as with each passing year it makes its license agreements more favorable to Quest, and less favorable to the licensee. But it is to your advantage the licensee, to keep the benefits of what you bought and paid for, in the past. In fact, as we have noted previously, oftentimes the older perpetual agreement will contain language providing that the agreement may not be amended unless in a writing signed by authorized representatives of both parties. The court focused on this important point here.
“Finally, Quest argues that Fairview was required to review the 2013 STA and click “agree” while installing the Active Roles version 6.9 software update on its computer systems. But the 2004 SLA, by its terms, may not be “modified or amended except by a writing executed by a duly authorized representative of each party.” (2004 SLA § 17(j).) The click-wrap agreement allegedly executed by Fairview has not been presented to the Court, and the limited record available at this stage does not establish that the agreement constitutes a “writing executed by a duly authorized representative” of Fairview. Accordingly, it is unclear whether the click-wrap agreement caused the 2013 STA to supersede the 2004 SLA with respect to the licenses purchased under the 2004 SLA. In sum, based on the limited record available at this stage of the proceedings, the Court can only conclude that the 2013 STA governs 2,700 of Fairview’s 38,081 licenses. Because Fairview’s declaratory judgment claims do not “seek enforcement of” the 2013 STA and Quest’s counterclaims based on the 2013 STA pertain to such a small sliver of the dispute, the Court cannot yet say that this is an “action seeking enforcement of” the 2013 STA. Accordingly, the Court finds that the record at this stage does not support transfer, and denies Quest’s motion.”
The court also rejected Quest’s argument that somehow by agreeing to maintenance & support agreements, that such agreements replaced prior perpetual license agreements. According to the court:
“Quest also points to the 2017 purchase quotation and the 2018 Support Renewal Quotation. In the 2017 quotation, Fairview agreed that the “Maintenance Services for the One Identity Products set forth above,” which included all 38,101 licenses, “will be provided by One Identity . . . pursuant to the terms and conditions of the [2013 Software Transaction Agreement].” (2017 Quotation at 3.) Thus, under the 2017 quotation, the maintenance services provided in 2017 were governed by the 2013 STA. But the parties’ dispute revolves around the licenses granted in § 2 of the 2004 SLA and 2013 STA, and the true-up provisions found in § 15 and § 16 of those agreements—not the maintenance services provided for in § 10 of the agreements. Because the parties’ dispute does not pertain to the maintenance services provided in 2017, the 2017 quotation does not entail that the 2013 STA’s forum-selection clause applies to this action.”
What is the lesson learned here? If you are a company being audited by Quest look carefully at what Quest is alleging and look for arguments that newer agreements do not supersede or replace earlier agreements. Expect that Quest will make these arguments and be prepared to combat them during negotiations.
Fairview Motion to Dismiss
Breach of Contract Claim
Fairview also moved to dismiss Quest’s claims for breach of contract and copyright infringement, which motion was denied. With regard to the contract based claim, Fairview had moved to dismiss arguing that exceeding its allowed number of licenses did not constitute breach under the plain terms of the contract, as the contract contained a true-up provision, which provided:
“If Customer’s deployment of the Software . . . is found to be greater than its purchased entitlement to such Software, Customer will be invoiced for the over-deployed quantities at Dell’s then current list price plus the applicable Maintenance Services and applicable over-deployment fees. (2013 STA § 15.)”
According to the court, “Fairview argues that because the agreement contemplated that Fairview might over-deploy the Active Roles software and provided a mechanism for compensating Quest in the event of such an over-deployment, over-deployment does not constitute a breach of the contract”.
The court however, disagreed reasoning that the over deployment was not the only breach that Quest was alleging. Instead, the court found that Quest had stated a breach of contract claim because it demanded payment, and Fairview did not pay the demand as required by the true-up clause.
Fairview also argued that Quest could not state a copyright claim as the true-up provision was a covenant and not a condition and thus over deployment did not exceed the scope of the license. Fairview relied on a ruling in Quest Software, Inc. v. DirecTV Operations, LLC to make this argument, where a California federal court had ruled against Quest. However, in denying the motion, Judge Nelson reasoned that the provision at issue in DirectTV was different then the case at bar. The court found that the contract at issue in DirectTV:
“expressly gave the defendant the right to exceed the number of licenses granted in the contract. See id. at *8 (“Under the terms of the License Agreement, Defendant had the ‘right to increase the aggregate number of CPU’s . . . by up to 10% per product . . . at no additional fee.’ Defendant could exceed this 10% threshold on the condition that it paid Plaintiff additional license fees.”). By contrast, the 2013 STA granted Fairview a license only to “the quantities of each item of Software identified in the applicable Order.” (2013 STA § 2(a).) While the true-up provision provided a remedy should Fairview be found to exceed that quantity, the true-up provision did not expressly give Fairview the right to do so. (See id. § 15.) Thus, Quest has plausibly alleged that by exceeding the numerical limitation on Fairview’s licenses, Fairview exceeded the scope of its license”.
We analyze this covenant vs. condition distinction in one of our previous blog posts, for readers wanting a deeper understanding of the issue.
For Quest licensees, be prepared that Quest may claim that later click-through agreements superseded earlier perpetual license agreements. Quest licensees should consider arguments that such agreements do not rise to the level of written amendments signed by authorized representatives of both parties.
Tactical Law will continue to monitor the case. Check back for future updates.
Thinking Of Going With An Oracle ERP System? Multiple Lawsuits Allege That Oracle Overpromises, Underdelivers And Leaves Customers With A Big Bill To Boot
By Dee Ware
Perhaps your company decides that it needs to add an enterprise resource planning (“ERP”) system or to replace its existing system and contacts Oracle to learn about Oracle’s capabilities and product offerings. Or maybe Oracle has proactively reached out to you to sell its software and services. In some instances, customers contend in public court filings that they have found themselves out-of-pocket or owing significant amounts of money to Oracle or its assignees with little or nothing to show for it.
In Elkay Plastics Co., Inc. (“Elkay”) v. Netsuite Inc., Oracle America, Inc., et al., San Francisco County Superior Court, Case No. CGC-20-583152, Elkay, a supplier of flexible packaging for the food service, healthcare and industrial markets with multiple service and distribution centers in the United States concluded that its legacy ERP system was no longer suited for its business needs. As a result, it issued a Request for Information to a number of software vendors, including to NetSuite, which is a wholly owned subsidiary of Oracle. (Joint Case Management Statement filed Aug. 28, 2020 at page 3, lines 7-16). Based on representations made by Oracle as to the suitability of the NetSuite software, purported skill and experience of Oracle employees and contractors and a promised high level of performance, Elkay executed a contract in May 2018 for the implementation and use of the NetSuite software. Id. at page 3, lines 20-23. According to Elkay:
“NetSuite and Oracle attempted to implement their software. The implementation was an unmitigated failure. Processing speeds and latency times for all transactions that were input into the ERP software varied between 4.1 and 30.35 seconds, with the NetSuite server taking up to 29 seconds. By way of comparison, Elkay’s 1995 legacy ERP software system’s processing times were approximately 2 seconds.” Id. at page 3, lines 24-28.
“NetSuite and Oracle urged Elkay to implement additional functionality and customizations in order to resolve the processing speeds, including purchasing additional software functionality and making at least 20 additional customizations to the software—all at Elkay’s expense. . . . However, despite paying for the performance profile and implementing NetSuite and Oracle’s recommendations, transactions speeds failed to materially improve.” Id. at page 4, lines 4-10.
In the end, Elkay reported paying NetSuite and Oracle approximately $1,282,401 and being obligated to pay an additional $1,645,897 through March 1, 2023 for an ERP system that did not perform according to industry standards, address Elkay’s core business processes or meet NetSuite and Oracle’s performance and functionality representations. Id. at page 4, lines 13-18.
Elkay’s experience is not dissimilar from what has been alleged in other recent lawsuits, including Barrett Business Services, Inc. (“BBSI”) v. Oracle America, Inc., et al., San Francisco County Superior Court, Case No. CGC-19-572474 and Banc of America Leasing & Capital, LLC (“BALC”) v. Janco Foods, Inc. (“Janco”), et al., United States District Court, N.D. CA, Case No. 3:20-cv-05152 LB.
In the BBSI case, Plaintiff alleges that Oracle solicited BBSI, a professional employer organization (“PEO”) to sell its ERP software product, and once Oracle gained a foothold at BBSI, Oracle and its implementation partner began aggressively pushing the HCM Cloud, misrepresenting its capabilities and fitness for BBSI’s business model, severely downplaying the system’s limitations and the level of customization required and the exorbitant cost and time to do so, and inflating its integration partner’s experience and expertise in configuring and customizing HCM Cloud for a PEO. (BBSI’s Memorandum of Points and Authorities in Opposition to Oracle’s Motion for Summary Adjudication, page 1, lines 6-8 and 10-16). According to BBSI, only after it signed a $15 million licensing deal with Oracle and a $429,268 Statement of Work with Oracle’s integration partner did BBSI discover that the HCM Cloud was riddled with design, functionality, interface, integration and performance gaps and that its out-of-the box capabilities would not meet BBSI’s needs as a PEO. Bridging some of the gaps would take over two years and customization work costing $33 million rather than the $5.9 million originally quoted. Id. at page 1, lines 17-23. BBSI’s lawsuit seeks over $12 million in direct and consequential compensatory damages from Oracle and its integration partner for what BBSI says are useless products and services. Id. at page 2, line 11; and Complaint, ¶47. BBSI is also litigating against Key Equipment Finance (“KEF”), the entity to whom Oracle’s financing arm, Oracle Credit Corporation (“OCC”) assigned BBSI’s financing contract. KEF contends that, even if Oracle failed to deliver the required functionality, “come hell or high water” BBSI must pay KEF for the entire amount of the assignment. At least one court in Washington state has expressed its view that such a scheme by Oracle and OCC may not be enforceable, as such a contract would be illusory and lack consideration. See Oracle Customers Beware of Potential Legal Risks of Financing ERP Deals Through Oracle Credit Corporation, Tactical Law Oracle Blog (Sept. 7, 2020), https://www.tacticallawgroup.com/oracle-software-audit-blog/oracle-customers-beware-of-potential-legal-risks-of-financing-erp-deals-through-oracle-credit-corporation.
Likewise, in the Janco case, in addition to battling Oracle, Janco is also being forced to litigate against BALC, the assignee of a financing contract assigned to it by OCC. Janco is a food service company, distributing food products and equipment to restaurants in the Houston area. (Complaint, ¶1). Janco too alleges that it was approached by Oracle, which represented that it could develop software, customized to meet Janco’s needs for a flat fee, which could “go live” within 100 days. Id., ¶¶1-2, 15-16, 26. The commissioned work was financed through a Payment Plan Agreement (“PPA”) with Oracle’s financing arm, OCC, just like in the BBSI case. Shortly thereafter, OCC assigned its rights to payment to BALC. (Joint Case Management Statement and Rule 26(f) Report filed Oct. 22, 2020 at page 2, line 25 – page 3, line 6). After nearly two years, Janco claims that Oracle never delivered a working product and says that it has been told by an Oracle employee that the system “will likely never work notwithstanding Oracle’s attempt to extract . . . an additional $40,000 to $50,000 for further ’customization‘ that Oracle was required to perform as part of the agreements with Janco.” Id. at page 3, lines 24-28. Nonetheless, Janco may still be on the hook to BALC for a sizeable sum. BALC contends that any alleged misrepresentations by Oracle do not invalidate the finance contract, that the subject PPA which Janco entered into with OCC contains a valid and enforceable California Commercial Code section 9403 waiver of claims and defenses against any assignee of OCC, and that Janco’s only recourse is against Oracle. Id. at page 5, lines 10-15.
What lesson can be taken away from these cases? Companies considering entering into an ERP contract with Oracle should carefully review the proposed warranties and limitations of liability provisions and negotiate appropriate changes. Also, consider including specific deliverables in the contract with a definitive timeline for implementation and remedies benefiting your company if Oracle does not meet its commitments. For companies considering financing through OCC, think carefully before agreeing to any clause that would allow Oracle to assign the contract at its convenience but still require that your company remain on the hook for the full value of the assignment, even if Oracle has completely failed to deliver what it promised.
By Pam Fulmer
Many Oracle customers understand that Oracle is not their friend and Oracle has been accused by many of using hard ball audit tactics (if not downright fraud) against Oracle customers to boost sales of Oracle cloud and other software. Oracle’s notoriety for conducting predatory audits of its customers continues to grow and Oracle customers should be on high alert as we wait for a decision by the U.S. Supreme Court in the Google vs. Oracle case. In fact, we at Tactical Law are seeing an uptick in companies complaining of being contacted by Oracle about Java. Although we are not aware of Oracle conducting formal audits of its customers relating to Java, Oracle has been probing with sales and other teams to informally obtain information about the customer’s usage of Java. Don’t fall for this Oracle trap. Instead, take action now to identify any potential issues with your use of Java, and protect yourself from what we believe will be a new wave of Oracle audits of Java in the months to come.
What is Oracle doing now? From what we can tell Oracle has been assembling a team of, for the most part, recent college graduates with little prior job experience to speak of, to begin informally reaching out to Oracle customer’s concerning the customer’s use of Java. Do not pick up the phone or respond to any emails from the Oracle Java team unless you receive a formal audit notice. Also resist any questions concerning Java and your VMware environment from these informal Oracle probes. Cooperation now with these fishing expeditions will only get you in trouble, as Oracle appears to be attempting to assert its non-contractual view of what it means to “use” Oracle software as it pertains to processor based licensing and VMware environments.
Why are Oracle customers at risk as it pertains to their use of Java? In April of 2019 Oracle changed how it was licensing Java. As one Oracle expert consultant has explained:
“In the past, both OpenJDK and Oracle JDK were licensed under the same Binary Code License, which included a combination of both free and paid commercial terms. However, starting with Java 11 […], Oracle changed to using the “GNU General Public License v2, with the Classpath Exception (GPLv2+CPE)” license for OpenJDK and a commercial license (Java SE Subscription or Java SE Desktop Subscription) for Oracle JDK.” House of Brick Blog Post.
The Oracle Technology Network License Agreement for Oracle Java SE is a click-through agreement that you must agree to in order to download Java SE . Importantly we advise that companies ensure that their IT Departments have directives in place making clear that not all employees have authority to agree to such click-through agreements, and prohibiting them from doing so without the authorization of management after careful consideration of the potential risks.
The SE license provides that:
Oracle is willing to authorize Your access to software associated with this License Agreement (“Agreement”) only upon the condition that You accept that this Agreement governs Your use of the software. By selecting the "Accept License Agreement" button or box (or the equivalent) or installing or using the Programs, You indicate Your acceptance of this Agreement and Your agreement, as an authorized representative of Your company or organization (if being acquired for use by an entity) or as an individual, to comply with the license terms that apply to the software that You wish to download and access. If You are not willing to be bound by this Agreement, do not select the “Accept License Agreement” button or box (or the equivalent) and do not download or access the software.
We have seen examples where unauthorized employees have downloaded software and agreed to terms such as those in the Oracle Java SE license. Although perhaps there are legal arguments that those employees were not authorized to download the software, and therefore the company is not bound, it is better to not need to climb that hill in the first place.
What are the risks of agreeing to the Java SE license? Execution of this license by companies who are not thinking through the potential liability issues raise significant areas of risk. For example, the license provides that:
“License Rights and Restrictions Oracle grants You a nonexclusive, nontransferable, limited license to use the Programs, subject to the restrictions stated in this Agreement and Program Documentation, only for:
(i) Personal Use,
(ii) Development Use,
(iii) Oracle Approved Product Use, and/or
(iv) Oracle Cloud Infrastructure Use.
You may allow Your Contractor(s) to use the Programs, provided they are acting on Your behalf to exercise license rights granted in this Agreement and further provided that You are responsible for their compliance with this Agreement in such use. You will have a written agreement with Your Contractor(s) that strictly limits their right to use the Programs and that otherwise protects Oracle's intellectual property rights to the same extent as this Agreement. You may make copies of the Programs to the extent reasonably necessary to exercise the license rights granted in this Agreement.”
So say a company uses the Java SE in development. The license agreement provides that right.
“Development Use” is defined as “Your internal use of the Programs to develop, test, prototype and demonstrate Your Applications. For purposes of clarity, the “to develop” grant includes using the Programs to run profilers, debuggers and Integrated Development Environments (IDE Tools) where the primary purpose of the IDE Tools is profiling, debugging and source code editing Applications.”
However, should the company then begin using the software in production, the company would then be outside the scope of the licensed use. The Java SE license also contains an audit clause allowing Oracle to audit the companies use of the programs. As a result, once the software is used in production it is incumbent on the company to obtain a proper license. We will discuss more about this issue below.
Another potential pitfall is what constitutes “Oracle Approved Product Use”. According to the license:
“Oracle Approved Product Use” refers to Your internal use of the Programs only to run: (a) the product(s) identified as Schedule A Products at https://java.com/oaa; and/or (b) software Applications developed using the products identified as Schedule B Products at java.com/oaa by an Oracle authorized licensee of such Schedule B Products. If You are unsure whether the Application You intend to run using the Programs is developed using a Schedule B Product, please contact your Application provider.”
What does this mean? Certain types of Oracle products are included in the Oracle approved use and certain third party products may be as well. So companies should ensure that the Oracle products that they are using are included and that other applications the company is using are as well. The Java SE license provides that any other uses not specified require another license. According to the license agreement:
“[a]ll rights not expressly granted in this Agreement are reserved by Oracle. If You want to use the Programs for any purpose other than as expressly permitted under this Agreement, You must obtain from Oracle or an Oracle reseller a valid Program license under a separate agreement permitting such use.”
What happens if a company needs to obtain a Java license for commercial use? Companies who need to obtain a license for commercial use will enter into an Ordering Document with Oracle to purchase an annual subscription for Java. That Ordering Document will also require that the customer execute an Oracle Master Agreement (“OMA”). In the licensing definitions included in the OMA or Ordering Document, the customer will find the definition of what constitutes “use” as it pertains to the processor metric. This then is where Oracle will attempt to put into play its extra-contractual assertions of what it means for Oracle software to be “installed and/or running” In other words Oracle’s “prospective use” argument and its strained (and in our opinion incorrect) interpretation of what it means for Oracle software to be “installed and/or running”. Clients running VMware can expect that Oracle will likely allege large compliance gaps for use of Java in VMware environments given Oracle’s past audit track record. So be prepared.
How can a company protect itself now and prepare for the inevitable Oracle audit? Companies should take steps now to see seek legal and technical advice concerning what are the best practices for staying compliant and mitigating the risks associated with use of Java and its implications for future Oracle audits. Now is the time for companies to retain expert consultants who can analyze the company’s IT environment and identify what applications are Oracle approved products, etc. Such experts can also advise if there are ways to use OpenJDK instead of Oracle JDK, the commercial version, which can save on licensing costs and mitigate risks.
What is the lesson learned from this blog post? Companies should not respond to Oracle’s attempts at soft audits of its usage of Java. Ignore these overtures and instead take steps to understand your legal rights and your compliance position. It is much better to go to Oracle and put in your order for exactly what licenses you need to be compliant rather than allowing Oracle to come in and poke around in your environment and then serve up a large non-compliance bill.
By Pam Fulmer
Companies suffering through an Oracle software audit are doubtless familiar with Oracle’s overreaches involving an Oracle customer’s use of VMware virtualization software. We have discussed in previous blog posts Oracle’s notorious “Audit Bargain Close” (“ABC”) tactic, and how Oracle uses non-contractual policies to attempt to broaden its contractual rights and claim a huge “shock number” for non-compliance, which it then attempts to leverage against the customer in audit resolution negotiations. We advise our clients to fight against such predatory tactics and to push back hard on all Oracle’s arguments not grounded in the actual contract.
Oracle licensees must pay Oracle a licensing fee when they use the Oracle software. With regard to the processor metric, use is defined by the Oracle license as where the Oracle software is "installed and/or running." Despite this clear and unambiguous language, rather than running audit tools that can detect where Oracle software is installed and/or running in the VMware environment, Oracle's scripts instead grab information and count up servers in the entire VMware cluster. Again this ignores where the Oracle software is actually being used, instead focusing on where it might possibly be used at some speculative date in the future. This is how Oracle calculates its huge "shock number", which it then asserts as the compliance gap seeking to negotiate from there. However, with regard to processors, Oracle has been using the same definition of use since about 2000, well before the advent of widely accepted virtualization technology. And although it has amended its processor definition to include cores, Oracle never amended its processor definition to include speculative future use in a virtualized environment, instead sticking to its definition of use as where Oracle software is "installed and/or running."
A relatively recent lawsuit by health system provider Fairview Healthcare ("Fairview") filed in federal court in Minnesota accuses Quest Software of employing similar improper audit tactics. Fairview accuses Quest of using audit tools "intentionally designed for the bad faith purpose of over-estimating the extent of Fairview’s (and potentially other licensees’) deployment of licensed software, providing a claimed basis for Quest to make an inflated demand for payment of over-deployment fees contrary to the terms of the parties’ agreements." Fairview also alleges in the Complaint that "Quest has become infamous in the software industry for its use of improper audit tactics to pressure its customers to pay inappropriate “over- deployment fees” or to purchase unnecessary additional software licenses and maintenance services—all to increase its revenue without providing any additional services or products."
The Quest license requires that the licensee pay a fee for the use of the Quest software. Fairview contends that the definition of enabled user account similarly anticipates that a license is required for accounts which “use” or are “managed by” the software. However, Fairview claims that the "audit report included any accounts which potentially could interact with the software, without regard to whether those accounts had actually used or interacted with the Active Roles software" resulting in grossly inflated numbers in Quest’s “Reconciliation Summary.” According to Fairview "under Quest’s interpretation of the enabled user account definition, any account in a domain which might potentially be touched by the Active Roles software at some point in the future must be included for purposes of counting over-deployed licenses. This interpretation is illogical and unsupportable."
Our readers will see that both Oracle and Quest are ignoring the plain language of the contract and attempting to claim licensing fees for use that has not actually occurred. Such efforts by software publishers should be strongly resisted by licensees under audit, and licensees should explore whether they have their own claims for unfair trade practices or other causes of action when such predatory tactics are employed.
Fairview also has filed for declaratory relief concerning the identification of the actual governing contract and the interpretation of relevant provisions. We have also seen Quest claim that early licenses granting perpetual licenses were amended by click to agree agreements accompanying updates. Early Quest licenses provided for perpetual licenses and could not be amended unless by a writing signed by both parties. According to the Fairview Complaint the terms of the 2004 SLA explicitly state that the agreement, under which Fairview did purchase licenses, may not be, “modified or amended except by a writing executed by a duly authorized representative of each party" and that "no other act, document, usage or custom shall be deemed to amend or modify this Agreement." Despite this clear and unambiguous language, Fairview claims that Quest is contending that "when Quest made the most recent update of the Active Roles software available to Fairview in 2016, as it was required to do by virtue of Fairview’s purchased licenses, Fairview agreed to the terms contained in the 2015 Software Transaction Agreement (“2015 STA”), a “click-to-accept license agreement” that accompanied the installation of that update (version 6.9) on Fairview’s system."
Over the years Quest has been bought and sold multiple times. We have reviewed many of these licenses and almost every year Quest seems to have amended them to make the terms more favorable to Quest and less favorable to licensees without any additional consideration or true notice to the licensee of the material changes being made to the license. The changes included revisions to important clauses such as governing law and forum selection clauses. These material changes were included in click to accept agreements, associated with annual updates that had already been bought and paid for. We hope that Fairview prevails in its argument that such click to agree agreements executed by low level employees without proper notice of material changes, do not amend the agreements as they do not constitute "a writing executed by a duly authorized representative of both parties."
We wish Fairview well in its fight against Quest's predatory audit tactics. We will continue to monitor the case so check back for periodic updates. The case is Fairview Health Services, Inc. v. Quest Software Inc. and One Identity LLC, Case No. 0:20-cv-01326-SRN-LIB (District of Minnesota).
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.
Thryv, Inc. Hits Micro Focus With Texas DJ and Breach of Contract Action over ULA Type Certification
By Pam Fulmer
Those readers who follow the software industry and our blog know that Micro Focus has areputation for its brass knuckles audit tactics deployed against its customers to increase revenues. On a new twist to the Micro Focus audit playbook, Plaintiff Thryv, Inc. ("Thryv") alleges in a new suit that Micro Focus has breached the parties' license agreement and seeks a declaration from the Texas court that it owns certain perpetual licenses arising out of an unlimited license agreement certification process. According to the Complaint Thryv seeks a declaratory judgement "finding that Micro Focus has conveyed perpetual licenses to Thryv under the Agreement consistent with the certification it provided in July 2016, and that Thryv has no further payment obligations under the Agreement." Oracle customers certifying off Unlimited License Agreements ("ULA") may also find this case instructive.
Thryv is a "print and digital marketing company that delivers cloud-based business
software on a subscription basis as well as a host of marketing products to over 400,000 small businesses in the United States." Thryv contends that in late 2014 it "requested a proposal from Micro Focus to supply software for a specific project known as kGen/Monarch." Not knowing the exact configurations for the system, Micro Focus "proposed a "Volume License Addendum (“VLA”), whereby Thryv would be licensed to deploy and use an unlimited amount of specific types of Micro Focus software for a specified period of time." The parties agreed that at the end of the time frame "Thryv was to certify the deployment of the software and Micro Focus would then grant a perpetual license for the actual quantities of software deployed at that time (the “Certification Date”)."
Thryv contends that as the Certification Date approached, and as the contract was vague as to what information would be required, it requested a certification template from Micro Focus. After some delays Micro Focus provided such a template. Thryv claims that "the template was vague and requested information that was not required by the Agreement," and that "Micro Focus did not provide any other information to Thryv on how to complete the certification." The request for information not required by the Agreement is something we see frequently in Oracle ULA certifications. According to the Complaint, "Thryv timely and accurately listed all user counts and core counts that were deployed as of the Certification Date and provided the required certification under the Agreement to Micro Focus. Micro Focus acknowledged receipt of the certification document and indicated in writing that it would contact Thryv when the certification had been reviewed, if it had any questions. Micro Focus did not verify the certification as required by the Agreement. In fact, Micro Focus never contacted Thryv regarding the certification." Thryv alleges that under the Agreement the number of core and user counts specified by Thryv "as of the Certification Date became the maximum entitlement under the perpetual license going forward." Again this is very similar to an Oracle ULA certification.
Thryv contends that in November of 2018, over two years after it completed the certification form, Micro Focus commenced an audit. The Complaint alleges that only In mid-2020, nearly eighteen months after the audit began, "Micro Focus for the first time provided documentation indicating that it had not granted license entitlements for all items listed in the certification." Now Micro Focus claims that it disagrees with Thryv's interpretation of the certification requirements under the contract with Thryv's claimed license entitlement, and that Thryv owes it millions of dollars in licensing fees and back support. Specifically Thryv seeks a "declaratory judgment finding that Micro Focus has conveyed perpetual licenses to Thryv under the Agreement consistent with the certification Thryv provided in July 2016, and that Thryv has no further payment obligations under the Agreement." Thryv also seeks damages of between $200,000 to $1 million, dollars and the recovery of its attorneys' fees pursuant to the license agreement and Texas law.
Certainly a bad fact for Micro Focus is that it never responded to the Certification and apparently gave no indication to Thryv that it did not agree with the user and core count that Thryv had provided, and did not follow-up with any questions concerning the certification. Thryv will no doubt argue that Micro Focus is estopped from changing position now and that it has an express or at least an implied license to use the software given the conduct of Micro Focus.
This is a cautionary tale that American businesses using enterprise software should take note of. Customers certifying off unlimited license agreements involving Oracle, Micro Focus or other software vendors should consider retaining experienced legal counsel to advise them on what the contract requires, and potential risks and how to mitigate those risks involved in the certification process.
Tactical Law will be monitoring the case for further developments. Check our blog for periodic updates about the case. The case is Thryv, Inc. Vs. Micro Focus (Us), Inc., TX District & County - Tarrant District (141st District Court), Case No. 141-319074.
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