By Pam Fulmer
Readers of this blog know that our firm is engaged every day in advising governmental entities and companies of all sizes how to successfully defend against aggressive enterprise software audits where software publishers often seek to unfairly inflate their audit findings by conducting predatory audits. Unfortunately, these audits are only on the rise, as enterprise software companies seek to maximize revenue, by often taking baseless legal positions not grounded in the contract, or even surreptitiously trying to switch out the old contract for a newer, more favorable one without proper notice. We advise our clients to stand firmly against capitulating to such tactics, because by giving in rather than fighting back, companies only find themselves victimized again a few years down the road. Rather than buying peace by making a large software purchase, many of the most notorious of these predatory software publishers will only view the company as an easy target in a future audit and strike again.
A recent lawsuit filed in Utah state court against Quest Software, Inc. (“Quest”), an enterprise software company that we have dealt with often and that is notorious for conducting predatory audits, illustrates the point. On September 18, 2023, HealthEquity, Inc. (“HealthEquity”), a business services company designated by the IRS as a health savings trustee for health savings accounts for individuals and businesses, filed a complaint against Quest seeking various declaratory relief and asserting a claim against Quest for breach of the implied covenant of good faith and fair dealing. In its lawsuit, HealthEquity tells the story of its recently acquired subsidiary, WageWorks which underwent a Quest audit in 2019. The Complaint alleges that WageWorks recognized that it did not have ideal controls in place to monitor usage of the Quest software. So rather than defend the audit aggressively, WageWorks made a large license purchase and in subsequent discussions with Quest asked for Quest’s advice as to what controls to put in place to ensure future compliance. The Complaint alleges that WageWorks and later HEI followed that advice and created a tracking system for Toad software access and “complied with those instructions to tightly control the number of employees who could access the Toad software products.” The Complaint goes on to allege that:
“This level of control was accomplished with the use of assigned serial keys provided to WageWorks by Quest for each seat license it purchased. Despite doing as Quest instructed just a few years prior, HealthEquity was being told in 2023 that licenses were required for every employee who could potentially access any server or individual device on which the software products were installed, regardless of whether those individuals could, or did, actually access and utilize the Toad software itself. This was contradictory to the direction previously provided by Quest, and contrary to the governing contractual terms.” Comp. ¶ 9.
Companies that have suffered through a Quest audit will recognize this argument immediately. Quest, and other companies such as Oracle when making its VMware argument, appear to be executing on strategies to attempt to charge companies a licensing fee even when the software is not being used. According to the Complaint:
“HealthEquity soon discovered that Quest’s audit processes were intentionally designed to include numerous individuals in its audit numbers who should not have been included as requiring licenses under the terms of the parties’ agreements. Specifically, HealthEquity’s audit report included any users who could access the servers on which the software was installed, rather than the users who could actually access and utilize the software products themselves. This over-inclusion resulted in the grossly inflated numbers in Quest’s “Reconciliation Summary.”” Compl ¶35.
Upon information and belief, Quest’s audit practices and interpretation of contract terms to its customers have been intentionally designed for the bad faith purpose of over-estimating the extent of the customer’s deployment and license requirements. This provides the basis for Quest to make an inflated demand for payment of over-deployment fees contrary to the terms of the parties’ agreements. Quest then leverages these inflated audit results to push its customers to purchase additional licenses and extend the terms of their licensing relationship with Quest for an additional period of years.” Compl. ¶36.
HealthEquity then alleges that although the Quest software contains tools that can confirm that no usage occurred, Quest ignores these tools because it prefers to use the inflated amounts as leverage to obtain the highest settlement possible.
In the case of Quest, this strategy is helped along by the fact that almost every year Quest changes the language of its standard licensing agreement, known as the Software Transaction Agreement (“STA”). These changes make the agreement more favorable to Quest and seek to take away rights from its licensees. In addition, Quest customers with older license agreements such as the one at issue in this lawsuit, govern the perpetual licenses purchased and contain clauses that say that no amendment to the agreement can occur without a writing signed by both parties. Nonetheless, and in contravention of its older agreements, Quest takes the position that by downloading updated versions of the software the customer is agreeing to the acceptance of the more recent STA, such as the 2018 STA promoted by Quest in this lawsuit. Compl. ¶39. This is problematic as later versions of the STA change key terms such as the choice of law and dispute resolution clauses. They also include language that allows Quest to charge the current list price for alleged over usage rather than the formerly negotiated price, and also includes penalties such as back maintenance & support and interest.
Based on these and other contradictions in the various agreements, HealthEquity has sought declaratory relief. This is a good thing as it would be really helpful to have a court weigh in and hopefully put an end to some of these predatory tactics. In addition to the declaratory relief, HealthEquity has asserted a claim for breach of the implied covenant of good faith and fair dealing. In that regard, the Complaint has the following to say:
“Quest violated this covenant by, among other things, providing instruction to HealthEquity as to how its license requirement would be calculated, how its compliance with license entitlement could be controlled, and the effects of installing Toad software products on a shared server in its environment. Quest then later asserted HealthEquity had violated its license agreements and was out of compliance with its license entitlement despite the fact that HealthEquity had closely followed Quest’s former guidance and tightly controlled access to the software products in its environment.
Quest has harmed HealthEquity by intentionally, and with bad faith, using a so-called audit to wrongly accuse HealthEquity of software over-deployment in an attempt to coerce HealthEquity into paying significant sums of money to Quest to which Quest is not entitled. Quest’s bad faith and unfair dealing have forced HealthEquity to expend significant sums of money to defend against Quest’s illegitimate audit claims.
Demonstrating its bad faith and unfair dealing, upon information and belief, Quest, as a matter of company policy and business strategy uses its audit group primarily to drive significant additional and undeserved revenue for Quest, not to ensure customer license compliance. Quest has executed this wrongful policy and strategy against HealthEquity.
Quest did not comply with its obligation to act in good faith and to deal fairly with HealthEquity, and to act consistently with HealthEquity’s justified expectations arising from the parties’ agreements and prior dealings.
Quest has failed to deal fairly and honestly with HealthEquity and has intentionally or purposefully destroyed and injured HealthEquity’s right to receive the fruits of its license purchases. For example, Quest’s actions, as alleged herein, have injured HealthEquity’s right to use its licenses within the terms of the parties’ agreements for the agreed upon purchase price.” Compl. ¶¶ 90-94.
In our view, the fact that this case needed to be filed shows how badly some enterprise software companies have run amuck with their audit abuses and unfair trade practices, and hiding the ball concerning various contractual provisions in undisclosed and hidden agreements. They are literally turning the entire law of contract on its head. Once upon a time, two companies would sit down at arm’s length and negotiate a deal and then they would document the deal in a writing. During the negotiation process risk would be accessed and allocated through price and other contractual means. Everything was above board, and the parties were rational actors knowing what they were getting in their bargained for exchange. That is the entire theory on which contract law is based. Our entire commercial system rests on this foundation. However, recently some enterprise software companies are turning this entire regimen on its head. Apparently, Quest tries to replace legacy agreements by surreptitiously slipping in new agreements with maintenance & support updates. Updates that are often performed by low-level employees who have no idea that Quest or another software company is going to claim that the agreement accompanying the maintenance & support update is the new governing agreement. Agreements that never reach the legal department and that the lawyers working for the company don’t even know exist until it is presented in the audit as a basis for a multi-million-dollar non-compliance claim. There is no fair notice here. Switching out choice of law, venue, audit clauses at will without sitting down and even notifying true decision-makers at the company that if they update their software they are agreeing to an entire new contract is not the way that contract law is supposed to work. Courts should put a stop to it and not let these abuses continue. We hope that HealthEquity wins its case.
Tactical Law will continue to monitor the progress of the lawsuit and provide updates periodically. The case is HealthEquity Inc. v. Quest Software Inc., Case Number 230906993 venued in the Salt Lake District, State of Utah.
Oracle Scores Major Win Against Rimini Street and Obtains Permanent Injunction and Dismissal of Rimini's Case
On July 24, 2023 in a major win for Oracle, Chief Judge Miranda Du of the District of Nevada entered a 197 page bench order that gives Oracle a sweeping victory in the case that Rimini Street brought against Oracle requesting a declaration that Rimini did not infringe Oracle's copyrights and seeking other relief. The Court dismissed Rimini's case, and found for Oracle on its counterclaim.
In conjunction with her bench order, Judge Du entered judgment for Oracle and issued a permanent injunction against Rimini Street finding that Oracle "mostly prevailed" and that Rimini Street won only as to non-infringement involving some EBS support processes. In addition to finding copyright infringement by Rimini, the court found for Oracle on Oracle's Lanham Act and DMCA claims.
The permanent injunction entered by the Court provides that "Rimini may not copy, distribute, prepare derivative works from, or use any PeopleSoft software (or any portion thereof) or documentation (or any portion thereof) from any PeopleSoft software environment that Rimini reproduced or used as part of its Environments 2.0 (also referred to as Process 2.0) migration, including the PeopleSoft software environments listed in P-9008, and any subsequent copies of those environments." Rimini was also prohibited from copying, distributing or preparing derivative works involving other updates, tools and files.
On Oracle's Lanham Act claims Rimini was enjoined from making certain advertising claims and ordered to issue a corrective press release. According to the injunction:
“This press release is ordered by the Court in the Oracle v. Rimini litigation to provide customers and prospective customers of Rimini Street with information about false and misleading statements that Rimini Street has made in its advertisements and marketing campaigns.
The press release must further state: “The following statements were made by
Rimini in advertisements and marketing campaigns and were found by the Court to be
false and misleading:
1. United States District Judge Larry R. Hicks’ rulings in the Oracle I litigation
related to processes or software that were not in use at Rimini between
February 2014 and January 2020.
2. Rimini did not copy or share Oracle software between clients between
February 2014 and January 2020.
3. Security professionals have found that traditional vendor security patching
models are outdated and provide ineffective security protection.
4. Oracle’s CPUs provide little to no value to customers and are no longer
5. Oracle’s CPUs are unnecessary to be secure.
6. It is not risky to switch to Rimini and forego receiving CPUs from Oracle.
7. Once an Oracle ERP platform is stable, there is no real need for additional
patches from Oracle.
8. If you are operating a stable version of an Oracle application platform,
especially with customizations, you probably cannot apply or do not even
need the latest patches.
9. Virtual patching can serve as a replacement for Oracle patching.
10. Virtual patching can be more comprehensive, more effective, faster, safer,
and easier to apply than traditional Oracle patching.
11. Rimini offers “holistic security” solutions for Oracle software for enterprises.
12. Rimini Security Support Services helps clients proactively maintain a more
secure application compared to Oracle’s support program which offers only
software package-centric fixes.
13. Rimini provides more security as compared to Oracle
14. Rimini’s Global Security Services can pinpoint and circumvent
vulnerabilities months and even years before they are discovered and
addressed by the software vendor.
15. There are no similarities between TomorrowNow and Rimini other than the
fact that they both have provided third-party maintenance.”
Rimini Street has appealed the Judgment, the Permanent Injunction, the Bench Order and all other previous orders to the Ninth Circuit.
Tactical Law is in the process of analyzing the lengthy opinion to determine what if any impact it will have on companies relying on Rimini Street for maintenance & support of PeopleSoft software. Please check back for further updates.
ERP Customer Sues Oracle for Fraud and Other Torts Arising Out of Failed NetSuite SuiteSuccess Cloud Implementation
June 19, 2023. Tactical Law Group LLP filed a lawsuit Friday on behalf of our client River Supply, Inc. ("RSI") against Oracle America, Inc. and NetSuite, Inc. (collectively "Oracle") and certain of Oracle's third-party business partners arising out of a failed SuiteSuccess ERP implementation and Oracle cloud subscription. The lawsuit filed in federal court in the Northern District of California asserts claims for fraud in the inducement and other related torts and unfair business practices.
The Complaint alleges that Oracle targets small and medium size businesses such as RSI using predatory, unfair, and unlawful business practices. These allegations relate to Oracle's Suite Success cloud offering where Oracle allegedly misrepresents the capabilities of its existing software solution and the amount of time required to go live in order to lure potential customers into contracting with Oracle. RSI also claims that Oracle competes unfairly by offering steep discounts so as beat its competition, all the while intending to inflate the contract price through expensive change orders.
RSI claims that Oracle deployed an aggressive sales team pre-contract who made misrepresentations to RSI by promising that Oracle had an existing software solution, which would meet all of RSI’s requirements with only minor customizations and that could go live quickly, when in fact they did not. RSI also alleges that Oracle promised that the contract price was fixed priced and “all in” and there would be no price increases. These representations too turned out to be false. RSI alleges that the Oracle team knew these representations were false when they made them, but made them anyway in order to induce RSI to enter into the contract. RSI seeks to rescind the contracts for fraud in the inducement and to get its money back, as well as other damages caused by Oracle’s improper conduct.
The Complaint further details that Oracle provides contract documents for execution that are presented in a deceptive and confusing way so that the customer is unaware of entire contracts as well as key contract terms that are one sided and benefit Oracle to the detriment of the Oracle customer. These terms (contained in a Subscription Services Agreement) are presented in a disguised hyperlink on the Estimate Form. That link, which is not highlighted or underlined does not link directly to the Subscription Services Agreement, but instead the Oracle customer is forced to search the Oracle website through several different and confusing webpages to locate the applicable contract. As a result, the Complaint alleges that RSI did not assent to the Subscription Services Agreement, as it did not even know of its existence. RSI further alleges that the manner in which Oracle presents the contract documents to its SuiteSuccess customers is deceptive and unfair and constitutes an unfair trade practice in violation of California Business & Professions Code Section 17200. RSI alleges that Oracle has deployed this unfair trade practice widely against many American small and medium size businesses, which have been damaged by Oracle’s deceptive presentation of the agreements and other improper conduct.
At the end of the day and after paying Oracle and its partners a great deal of money and investing significant internal resources in the project, RSI has no working ERP solution. As a result of Oracle’s conduct, RSI alleges that it has suffered damages and seeks to hold Oracle to account for its failures, misrepresentations and other misconduct.
RSI also alleges that the same wrongful acts and unfair trade practices that were deployed against RSI have been deployed against many American small and medium businesses who have entered into almost identical agreements with Oracle for its ERP related products. In fact, these very practices have been detailed and exposed in a separate whistle-blower lawsuit filed by a former Oracle employee, Mr. Tayo Daramola, which we have previously blogged about. A copy of Mr. Daramola's Complaint is attached as Exhibit 1 to RSI's Complaint. RSI seeks restitution of the monies paid, damages (including treble and punitive damages) and other relief.
The lawsuit is River Supply, Inc. v. Oracle America, Inc., NetSuite Inc. et. al., Case No. 3:23-civ-02981(LB). A copy of RSI’s Complaint can be found here.
By Pam Fulmer
On January 23, 2023 Oracle changed how it licenses Java SE moving away from named user plus and processor metrics and instead transitioning to an employee metric based on the total number of full and part time employees and contractors of a company. You can read more about the changes here. For many companies the prices for licensing Java exploded with the new metric as all employees need to be licensed rather than just the ones using Java.
We have received reports that for many months prior to the price change the Oracle Java sales team had been reaching out aggressively to companies about licensing Java. As part of Oracle’s approach, the Java team requested detailed information about a company’s IT environment, including its virtual environment. Reportedly Oracle sales sought information about servers, even ones that were not running Java and where no Java software was installed. Many companies innocently provided the information not understanding that Oracle likely did not have a legal or contractual basis to demand such information. We have discussed this previously here. Often companies would seek to place an order for the number of Java licenses they believed that they needed based on where Java software was installed and/or running. But in some cases, the Oracle sales team apparently refused to provide an Ordering Document for the requested licenses, if the Oracle customer refused to capitulate to Oracle’s inflated licensing demands. In our opinion, Oracle may have run into some headwinds when demanding information about the entire virtual environment even where no Oracle software was installed from at least some of its targets. Perhaps that is what ultimately triggered Oracle to change its licensing to the employee metric so that it could claim exorbitant licensing fees without all of the complexities around Oracle’s non-contractual arguments around the use of VMware. We just can’t be sure.
But for those customers who wanted to purchase the Java licenses and Oracle declined to sell the licenses unless the company provided the confidential information that Oracle demanded or paid the higher (and baseless) licensing fee demands, what about them? Oracle essentially forced these companies into being non-compliant when it refused to sell the requested licenses. In our opinion, Oracle should have sold the licenses and if it really believed that the company was inadequately licensed, it could have issued an audit notice and made its formal audit findings. Then the Oracle customer would have had the protections of the Oracle audit clause and would have had an orderly process for pushing back on Oracle’s assertions and demonstrating that the customer was actually compliant. Importantly, the Oracle customer also would have only needed to purchase licenses for its actual usage of Java, and not for its entire employee population. But that is not what Oracle did in some cases. We believe Oracle's actions may have damaged these companies, which are now faced with licensing Java on a total employee basis, which can be very expensive. Additionally, where Java SE is important to the business of the company, Oracle's actions may have caused uncertainty and cast a cloud over the business.
If you are a company that was approached by the Oracle Java sales team and Oracle requested information about your IT environment even where no Java software was installed and/or running, we would like to talk to you. If you purchased Java licenses not based on where the software was installed and/or running but were instead misled by Oracle’s assertions and believe that you paid more than was required, we would like to talk to you as well. Finally, if Oracle refused to sell you Java licenses that you requested, and now you are facing either actual or potential demands by Oracle to license all of your employees and contractors we would also like to discuss your situation.
We advise companies on licensing Java and in related disputes with Oracle concerning the licensing of Java, including disputes arising out of Java software audits.
By Pam Fulmer
Several years ago, a Canadian firearms and outdoor sporting goods retailer called Grouse River Outfitters Ltd. (“Grouse River”) sued Oracle Corporation (“Oracle”) in federal court in the Northern District of California for fraud and other claims arising out of a NetSuite cloud-based business management software agreement and a related contract for professional services to implement the software solution. Grouse River argued that Oracle had completely failed to deliver the ERP solution that it had promised.
Over the course of the litigation Oracle was able to knock out several claims and to narrow the case, including whittling down the number of allegedly fraudulent statements and arguing that most were merely puffery. We have previously written here about Oracle’s attack on the fraud-based claims. For its part, Grouse River voluntarily dismissed certain claims on the eve of trial.
The case went to trial in July of 2019 and after a 5-day jury trial Oracle scored a complete defense verdict. Grouse River’s sole claim at trial was fraud in the inducement. Grouse River sought a very large damages award against Oracle trying to put the blame for the failure of its entire business on Oracle and arguing that its business failed due to Oracle’s inability to implement a software solution that worked. The jury did not buy it. Instead, Oracle skillfully blamed Grouse River and its management for its own demise. Oracle also did a good job of blaming Grouse River for not meeting its contractual obligations and was successfully able to convince the jury that the functionality that Grouse River claimed was promised was not included in the contract price and the functionality scoped. We are reviewing the trial transcripts and over the coming weeks will have interesting nuggets that Oracle/NetSuite customers might find educational and enlightening and helpful in their own interactions with Oracle.
Some of the testimony that I found particularly fascinating involved how Oracle scopes and estimates the price of these projects’ pre-contract, and whether Oracle sells functionality to its customers as currently existing, when in fact it is not. Oracle customers are aware that Oracle absolutely forbids its customers from recording the Zoom calls with the NetSuite sales team prior to contract execution. It is our opinion that Oracle does so because it does not want there to be a recording of what its aggressive sales team is promising the prospective client that Oracle can deliver. Based on publicly available filings against Oracle there seems to often be a huge disconnect between what the aggressive Oracle sales team promises and what the post contract implementation team says that it can deliver. In reviewing the various filings against Oracle including the Grouse River trial transcript it appears that Oracle’s sales team is accused of representing that certain functionality is included in an existing product when in fact the functionality does not currently exist. Then after contract execution, Oracle apparently claims that what it promised the customer pre-contract actually will require an expensive change order to deliver as it is not included in the Professional Services Scope of Work or detailed in the breakdown of modules included on the Estimate Form.
During trial, Grouse River’s lawyers discussed several internal emails amongst the Oracle implementation team assigned to the project that supports the allegation that Oracle sells it customers a system with functionality that they say currently exists, when in fact it does not exist. For example, one of Oracle employee when discussing the customer loyalty functionality with regard to NetSuite stated “[w]e sold this as though it already works to Grouse River and we’re going to use Grouse River to test it.” Meaning that they sold it as a functioning product, when in reality they were going to use Grouse River as a guinea pig to test the product. Another Oracle employee stated “[s]ales really screwed us all when they sold POS (i.e. Point of Sale) for firearms to have serial controls when POS does not have that capability. We should all have walked away at that point.” And the Oracle project manager on the project said “[t]he product was perceived by the customer as best in class omni-channel product and it was FAR from it.” In other words, sales represented the omni-channel product as best in class in Canada when it was not. Later another Oracle witness was forced to admit that although they had an omni-channel product at the time, they did not have one that worked in Canada, which had different requirements and regulations than the U.S. And finally, from the Project Manager overseeing the implementation, “I was given the poison chalice of Grouse River with its first Canadian omni-channel deal with a third-rate ERP consultancy team and with a customer that was promised so much and then left to fight my own battles.”
All of these internal communications become especially interesting when viewed through the lens of the whistleblower complaint that was filed by a NetSuite former employee, Mr. Tayo Daramola. We have blogged previously on Mr. Daramola’s whistleblower complaint. According to this former Oracle-NetSuite employee, Oracle through its NetSuite entity contacted universities and colleges to sell them a campus store SaaS solution, which the customer could then subscribe to. Daramola claimed that Oracle would provide its customer with an al-a-carte Order Form including certain NetSuite modules, which it claimed taken together would deliver the functionality that had been promised. However, according to the complaint, “unbeknown to the customer but known to Oracle, was that the customer’s menu of modules was not able to accomplish the functionality expected by the customer then, and it wouldn’t be able to do that in the near future, at least not without the customer paying hundred of thousands of dollars more to help Oracle actually develop the functionality it represented as then existing to that customer for that customer.” Daramola further explained that post sale this lack of functionality caused Oracle to implement its second phase, which was “to assess the “gap” between the customer’s anger regarding what they thought they bought, verses what they received. Oracle would then sell additional “modules” for additional money to its “escalating” customers to fill the gap.” Realizing that what Oracle had done is sold functionality as presently existing that actually did not exist, Daramola claims that the Oracle-NetSuite employees would try stealthily to pro rata “divide the cost of the necessary development among all of the customers who had bought the represented functionality.” And this division of the costs would come from Oracle demanding the execution of expensive change orders from its customers in order to implement the functionality.
Mr. Daramola’s allegations about Oracle selling a solution that does not exist and then frantically seeking to fund its development through customers in a similar industry that desire that functionality seems plausible, given the various lawsuits brought against Oracle/NetSuite. Consider for a moment the possibility that Oracle wishes to develop a new functionality to buttress its retail solution. Or Oracle wishes to grow its sales into a completely separate country. Oracle could decide to target certain companies in certain countries (like Grouse in Canada) and seek to entice them into entering into a NetSuite agreement. The enticement could come in the form of steep discounts. In the Grouse River case Oracle employees testified that certain items were being provided at a 90% discount. What if Oracle were offering huge discounts upfront in order to beat its competitors and win the contract? Then after it has had the customer sign on the dotted line, it tells the customer that the functionality was out of scope and Oracle will need a change order to provide it. In this way Oracle could inflate the contract price and increase its profits, while still ensuring that it got the gig.
A few lessons learned from the Grouse River trial for the prospective Oracle customer to consider before signing the various contractual documents, as well as during contract performance:
Check back periodically for additional blog posts about this interesting trial.
Tactical Law assists Oracle/NetSuite customers in resolving disputes they may have with Oracle arising out of NetSuite ERP SaaS cloud subscription services and related professional services agreements.
Civil Litigants Meeting Certain Requirements May Bring Suit For Theft of Money or Property Under California Penal Code Section 496 Potentially Leading to the Award of Treble Damages and Attorneys' Fees
By Pam Fulmer
Customers of Oracle who believe they have been victimized by predatory software audits, VMware overreaches or NetSuite SuiteSuccess failures may have a new tool in their toolbox to combat Oracle and certain of its alleged unfair trade practices. A recent ruling by the California Supreme Court makes it clear that civil litigants in certain cases involving a theft of money or property may be able to sue Oracle under California Penal Code 496. Successful litigants bringing claims under the statute are entitled to treble damages and an award of attorneys’ fees. It is a powerful potential weapon that should be assessed by every company contemplating suing Oracle for damages caused by predatory audits or failed ERP implementations.
In Siry Inv. v. Farkhondehpour, 13 Cal.5th 333 (2022), a case involving the fraudulent diversion of partnership funds, the California Supreme Court definitively ruled that treble damages and attorneys’ fees can be awarded pursuant to California Penal Code section 496(c) in theft-related business tort cases. The ruling can apply to a broad range of business disputes but would require a knowing violation. The Court held that “section 496(c) is unambiguous” and a plaintiff “may recover treble damages and attorney’s fees under section 496(c) when property has been obtained in any manner constituting theft. … The unambiguous relevant language covers fraudulent diversion of partnership funds.” The Supreme Court cautioned that “not all commercial or consumer disputes alleging that a defendant obtained money or property through fraud, misrepresentation, or breach of a contractual promise will amount to a theft. To prove theft, a plaintiff must establish criminal intent on the part of the defendant beyond mere proof of nonperformance or actual falsity. . . . This requirement prevents ordinary commercial defaults from being transformed into a theft.” Siry, 13 Cal. 5th at 361-362.
As a result, “innocent” or “inadvertent” misrepresentations or unfulfilled promises would not qualify as theft under Section 496. It is very interesting to consider in the Oracle audit context what actions potentially could be considered “theft” under the statute? For example, if you are a business that suffered through a predatory audit by Oracle and paid money or entered into an expensive ULA based on Oracle’s non-contractual VMware argument, could that qualify as a theft under the statute? Perhaps, but the claim has not yet been tested in a court of law in a case involving an Oracle software audit. But certainly, companies in disputes with Oracle arising out of software audits should seriously consider the claim in evaluating their legal strategies. The fact that Oracle has never to our knowledge sued any company who refused to pay on Oracle’s expansive and we believe non-contractual interpretation for what it means for Oracle software to be “installed and/or running” in a VMware environment could indicate that Oracle does not believe that its legal argument is sound and that it would prevail in court. The fact that Oracle appears to have quickly settled the Mars v. Oracle lawsuit, the only case to date challenging Oracle’s interpretation of the meaning of the processor definition and how it relates to virtualization technology, may be another indicator that Oracle does not think much of the strength of its legal argument. Nonetheless, Oracle continues to raise such arguments routinely during its software audits. Unfortunately, some companies may be misled into believing such arguments and may be paying large settlements involving the use of VMware in order to get out from under the audit.
Likewise, Oracle/NetSuite SuiteSuccess customers may very well want to consider such claims in disputes with Oracle arising out of failed cloud ERP subscriptions and implementations, where a plaintiff was fraudulently induced by Oracle into entering into the contract. In fact, even before the California Supreme Court decided Siry, the Ninth Circuit reversed a ruling dismissing such a claim in the Grouse River v. Oracle case, which involved NetSuite’s SuiteCommerce product. The Ninth Circuit in remanding the case to the Northern District for a new trial reasoned that:
"[T]he elements required to show a violation of section 496(a) are simply that (i) property was stolen or obtained in a manner constituting theft, (ii) the defendant knew the property was so stolen or obtained, and (iii) the defendant received or had possession of the stolen property." Switzer v. Wood, 35 Cal. App. 5th 116, 247 Cal. Rptr. 3d 114, 121 (Ct. App. 2019). Here, because the district court held that Grouse River had adequately pleaded its fraud claims, it follows that Grouse River adequately pleaded theft by false pretense (which satisfies the first element of a § 496 violation) because the elements of a civil fraud claim closely track those of theft by false pretense. [. . . ] In addition, because theft by false pretense is a specific-intent crime and requires that the perpetrator have acted "knowingly and designedly," see Cal. Penal Code § 532(a), Grouse River also adequately pleaded the second element required to show a violation of § 496, see Switzer, 247 Cal. Rptr. 3d at 121. Finally, because it is not disputed that Grouse River paid Oracle for the software, the third required element is also met.” Grouse River Outfitters, Ltd. v. Oracle Corp., 848 F. App'x 238, 242-43 (9th Cir. 2021).
If you are a company that contracted with Oracle for its SuiteSuccess solution and believe that you were sold a bill of goods by Oracle, a claim under California Penal Code Section 496 should be evaluated. Success in litigating such a claim could lead to an award of treble damages and attorneys’ fees and costs against Oracle should you prevail.
We advise companies under audit by Oracle and Oracle/NetSuite SuiteSuccess customers who are dissatisfied with Oracle’s performance and believe they have been defrauded.
NetSuite SuiteSuccess Customers May Have Defenses to Lawsuits Brought by Third Party Banks to Enforce OCC Assignments
By Pam Fulmer
This blog has extensively covered licensing and related disputes between Oracle/NetSuite and its customers. Recently, Tactical Law Group has increasingly received inquiries from dissatisfied Oracle customers concerning the financing of their NetSuite SuiteSuccess ERP deals through the Oracle Credit Corporation (“OCC”), an Oracle subsidiary, and Oracle’s practice of assigning such financing agreements to third party lending institutions. As part of their sales pitch, Oracle offers financing for its ERP solutions through OCC, which then turns around and quickly assigns the right to receive payments to a third party. Insulated by onerous and possibly unconscionable language in the financing contract, these assignees often assert that they are due payment on the contract, even when Oracle’s proposed ERP solution has been a total failure and has never gone live. Readers of our blog are acquainted with Barrett Business Services, Inc. (“BBSI”) and its dispute both with Oracle, and with Key Equipment Finance (“KEF”), which raised such issues. But other lending institutions such as Banc of America Leasing & Capital LLC have aggressively filed lawsuits against multiple Oracle customers who have been damaged by failed NetSuite ERP implementations, as well.
The facts follow a familiar pattern. American company enters into a cloud and professional services agreement with Oracle/NetSuite for its SuiteSuccess ERP product. Oracle promises that their solution can be delivered quickly and can go live within months with only a few minor customizations and at a fixed price. In good faith the customer signs contracts with Oracle, believing the representations. Quickly it becomes apparent that the Oracle team is over their heads and can’t make good on its promises without significant price increases through expensive change orders, and with a longer timeline to go live. Often the Oracle team is comprised mostly of consultants or employees located outside of the U.S. resulting in a communication nightmare. The Oracle customer begins to believe that it has been sold a bill of goods by Oracle. When the Oracle/NetSuite customer pushes back demanding that Oracle fix the problems or agree to cancel the contract and provide a refund, Oracle presents them with a Subscription Services Agreement (“SSA”), which the Oracle customer didn’t even know existed, as it had not been presented with conspicuous notice by Oracle during pre-contract discussions or contract execution, but was instead in a disguised hyperlink on the Oracle Estimate Form. Oracle then relies on a clause in the SSA, which purports to relieve Oracle of any responsibility for providing a functioning ERP software product. The Oracle customer stops payment on the failed solution, which has never gone live. The next thing they know they receive a notice of default from the assignee of OCC (a separate third party lending company such as Banc of America Leasing or Wells Fargo) threatening to sue on the financing arrangement. If they don’t pay, then often they get hit with a lawsuit from the financing company for breach of contract.
In the BBSI case, Oracle and its third-party implementation partners promised to deliver an ERP solution to help BBSI manage its complex operations. Months after the ink was dry, and long past the scheduled launch date, it became clear that there was no ERP solution for BBSI, unless of course it wanted to pay almost $30 million more in changer orders than the original agreement contemplated. Citing Oracle’s breach, BBSI halted payment and brought suit in San Francisco Superior Court, for among other things, negligent misrepresentation, fraud, and breach of contract.
KEF soon joined the litigation, claiming that it was due payment under the contract regardless of any claims BBSI had against Oracle. BBSI cross-complained saying that it should not have to pay OCC and its assignee KEF because of Oracle’s fraud and failure to perform. KEF demurred, claiming that as a holder in due course under California law “come hell or high water” BBSI would still need to pay. KEF situated this argument under California’s Commercial Code sections 9403 and 3305. These laws essentially prevent a debtor from bringing a claim against an assignee that it might have against an assignor except for a couple of very narrow exceptions. In support of its motion, KEF relied on Wells Fargo Bank Minnesota, N.A. v. B.C.B.U., the leading case in this area. 143 Cal.App.4th 493 (2006).
In that case, at the direction of its counterparty, B.C.B.U. pre-signed an equipment lease agreement before negotiations on the agreement had concluded. The counterparty promptly assigned the lease to Wells Fargo, but the original agreement subsequently fell through and was never executed. Two years later, Wells Fargo sued B.C.B.U. to collect on the assigned lease. The court found that “under section 9403 (and 3305), the only defenses against an assignee who takes for value, in good faith, without notice of a property or possessory right to the property in question, and without notice of certain claims and defenses in recoupment, are…infancy, duress, lack of legal capacity, ‘illegality of the transaction which, under other law, nullifies the obligation of the obligor,’ fraud in the inducement, and discharge in insolvency proceedings.” Id. at 504. Thus, even though the original contract was never performed, because Wells Fargo was a “holder in due course” and had no reason to know that there was no underlying performance, its assignment was enforceable.
Crucially, KEF and Wells Fargo relied on the California Commercial Code, but this statutory scheme generally only applies to the sale or lease of physical goods – the lease at issue in Wells Fargo was for office computers. While BBSI seemed to acquiesce to KEF’s reliance on the commercial code, there is a growing body of case law indicating that the kinds of ERP solutions that Oracle offers fall outside its purview. In fact, in Kentwool Company v. Netsuite, Inc., the federal court in the Northern District of California found that Netsuite’s (an Oracle subsidiary) ERP solution was not subject to the commercial code because “the predominant purpose of the contract [was] the provision of services.” 2015 WL 693552. This is important because if companies in this kind of situation are able to maneuver out from under the weight of the commercial code, regular common law defenses like failure of mutual assent and unconscionability are no longer statutorily barred and may become available as against a third-party assignee in order to halt payments on the contract. This could be especially true where the third-party financing institution such as Banc of America Leasing, has brought multiple lawsuits on these OCC assignments’ and presumably has knowledge that the customer in each one stopped paying because the system never worked, making it harder to claim a complete lack of knowledge about Oracle’s performance failures.
BBSI, KEF, and Oracle eventually settled the dispute on legal turf that was unfavorable to BBSI. While the Commercial Code provides some remedies to a client as against the service provider that are not available at common law, like implied warranty claims, the loss of those claims are probably less painful than the ongoing obligation to pay an assignee for services not rendered, and a failed ERP implementation that never worked.
Tactical Law attorneys assist our clients in the negotiation and documentation of ERP and related agreements, and in resolving disputes with Oracle and other ERP providers arising out of such implementations. If you have such a dispute, we may be able to help.
By Pam Fulmer
For the last several years we have observed a huge uptick in activity by Oracle Sales Teams concerning the licensing of Java SE. As we have watched how Oracle has approached its customers concerning licensing Java, at times it felt like Oracle was making it up as they went along. Now with one fell swoop Oracle has completely changed the rules and the pricing around licensing Java by changing its Oracle Java SE Universal Subscription Global Price List. The changes virtually eliminate the processor metric in most instances (it appears a company would need more than 50,000 Processors, not counting desktops, on which Java is installed and/or running to license by processor) and instead have changed the metric from "Named User Plus" to "Employee". Now companies licensing Java must count “all of Your full-time, part-time, temporary employees”, AND “all of the full-time employees, part-time employees, and temporary employees of your agents, contractors, outsourcers, and consultants that support Your internal business operations.” This means all of these people must be counted for licensing purposes even if they are not using Java software. The result is potentially a massive price increase for those companies using Java SE. The change will especially negatively impact large companies with numerous employees, but it will also have a big effect on medium sized companies as well.
For example, as one well known Oracle expert consulting firm has noted, under the new rules a medium sized company with a small Java footprint could see their annual Java cost increase by up to 1,452%. According to House of Brick, a company with 250 employees with 20 Desktop Users and 8 Java installed processors would pay $2900 annually under the old model and $45,000 a year under Oracle's new model. The potential impact on Oracle customers is staggering.
The new rules also seem to be a fertile ground for licensing disputes as companies scramble to figure out "all of the full-time employees, part-time employees and temporary employees of your agents, contractors, outsourcers and consultants who support your internal business operations". And of course, Oracle will no doubt attempt to sow more confusion and chaos where companies are using VMware virtualization software.
On January 24, 2023 Oracle provided a further update on licensing Java SE. Specifically under a section on its website for Frequently Asked Questions ("FAQ") about Java SE, Oracle says the following: "Customers of the legacy Java SE Subscription products continue to receive all the original benefits and may renew under their existing terms and metrics." So it appears that existing Java customers can keep their current agreements, but it is not clear how Oracle will decide to handle any additional purchases.
Tactical Law is reviewing Oracle's recent changes and analyzing how it will impact our clients. But one thing is for sure--Oracle has ramped up the audits and we predict that Java will be a huge part of Oracle's audit activity in 2023 and beyond.
By: Pam Fulmer of Tactical Law Group and Ryan Triplette of Coalition for Fair Software Licensing
Software is inherently technical, but its licensing terms do not have to be. On the contrary, it is a best practice for licensing agreements to be clearly written and easy for customers to understand. That is why the first principle of the Principles of Fair Software Licensing is that “Licensing Terms Should Be Clear and Intelligible.”
Unclear Licensing Terms Leave Customers Confused and Vulnerable
When licensing terms are not clearly written, customers in the cloud and on-premises are left vulnerable to hidden clauses, stealth or soft audits, and other predatory behaviors.
Difficult to find or decipher licensing terms are more common than one might think. The Coalition for Fair Software Licensinghas heard from customers experiencing issues with contract clauses that are not readily apparent or easy to understand. Customers who, despite doing the necessary due diligence prior to signing, are not aware of some of the most important clauses until a problem arises. Given the fact that the only recourse these customers have had to date has been either to purchase products that they do not need or manage litigation, we feel it is important to shine a light on some of these terms
For example, Oracle customers who finance their cloud purchases through Oracle Credit Corporation (“OCC”) may not be aware that the standard financing contract allows Oracle to assign the financing agreement to third-party banks. These customers - generally small and medium sized businesses, including retailers and franchisees - have been surprised to learn that the third-party banks expect to be paid in full on the loan “come hell or high water” even if Oracle itself has completely failed to deliver a working ERP solution. Recently, these banks have filed waves of lawsuits against Oracle customers involving such OCC assignments. Judge Leighton of the Western District of Washington presiding over one such lawsuit 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 [its licensee] 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 [licensee’s] rights to the cloud services if it fails to pay but denies the [licensee] 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)."
The Coalition has also heard from customers struggling to understand the terms and scope of use of the licenses purchased from legacy providers. This includes customers who are seeking to ensure that they are in compliance with their contractual terms, only to be surprised to learn just what that entails. World-renowned analyst Gartner reported that, “[t]here are also restrictions with the use of Microsoft licensing on Azure itself that are often not communicated to customers. For example, customers are not told about restrictive rules under Azure Hybrid Use Benefits in Azure multi-tenant environments.” The company’s most recent licensing changes have created new layers of complexity for providers and customers alike, with new – but unclear and uncertain – limitations. Many customers have also experienced unexpected costs and extended terms with their licensing terms. Even as customers struggle to understand what this most recent round of changes mean to them, another set potentially sit on the horizon.
While these are known and well documented issues that customers are experiencing with their contracts, it is worth noting a few others that have not received much coverage to date.
Such is the case of some SAP customers seeking to purchase additional product seats to account for new employees and ensure compliance with existing contracts. What they think will be a (relatively) simple process quickly becomes an opportunity for SAP to force them to re-up the entirety of the underlying contract for an extended term. These customers are finding themselves in a Catch-22 position: either remain in compliance but locked in to a longer term relationship with SAP, limiting their ability to choose alternative vendors that better meet their needs in the future, or risk repercussions for operating out of compliance with their contract.
What makes this so interesting - if not disconcerting - is that it is occurring just as many customers are having to navigate increased maintenance fees for their products at the very time they are being forced to evaluate their long term relationship with SAP. It is important to understand these issues as backdrop to recent calls by user groups for SAP, “to offer transparent, flexible and scalable cloud agreements with the corresponding metrics, as well as binding statements and roadmaps for product strategies for cloud and on-premise solutions.”
One final issue that the Coalition has heard from a number of experts raise in recent weeks is another potential round of changes to Microsoft’s Licensing Mobility program that would preclude customers from any avenue of utilizing their licenses on Listed Providers. It is worth noting that the companies included as Listed Providers just happen to be Microsoft’s most significant competitors - but does not provide any clarity as to the reasoning for their inclusion or whether other providers will be included in the future.
That Microsoft includes itself as a Listed Provider does not level the playing field. Indeed, the Azure Hybrid Benefit essentially exempts Microsoft and its customers from any of the Listed Provider restrictions, as long as those customers use Azure. While it is hard to speak to contractual changes that are, at this point, purely conjectural in nature, the current and potential ramifications for customers already managing the impact of the changes made to the integral software’s licensing terms to date highlights the importance and need for clarity and predictability both for existing and future contracts.
Straightforward Licensing Terms Help to Support All Customers, Especially Small and Medium-Sized Businesses
Having clear and intelligible licensing terms empowers customers. This is especially true for smaller businesses that have limited budgets for digital transformation strategies and do not have the means to wage massive legal battles.
The threat of expensive and resource-consuming litigation with legacy software providers causes fear among even the most well-financed enterprise customers. Unfortunately, most customers capitulate to unreasonable demands from these providers and end up paying more money than what is owed. Many customers will even agree to purchase products that they do not need to avoid legal action.
Small businesses are particularly vulnerable due to reliance on software providers and often narrow budget margins. For example, Oracle uses its non-contractual partitioning policies during audits to gin up large “shock numbers” for alleged non-compliance involving the customer’s use of VMWare virtualization software, which findings it presents to its customer in final audit reports. Then Oracle magnanimously agrees to waive the audit penalties based on a provision that is not even in the contract, provided that the customer agrees to enter into a new Unlimited License Agreement (“ULA”) with its pernicious total support stream obligation. The customer then pays more money for software that it doesn’t need or want with expensive continuing maintenance and support obligations, just to resolve an audit based upon inflated audit findings. Such predatory audit practices are detailed extensively in the First Amended Complaint in the Sunrise Firefighters securities class action lawsuit in the Northern District of California.
This is why the Coalition formed – to provide power in knowledge and numbers and advocate for commonsense best practices that put customers, including small businesses, first.
Software Providers Should Adopt the Principles of Fair Software Licensing
Ensuring that licensing terms are clear and intelligible is not just common sense, but imperative at a time when customers need maximum contractual clarity and cloud flexibility to manage the budgetary crunch of the recent economic downturn. However, they are not nearly as common as they should be. Customers should be able to easily access and understand their licensing terms upfront and be able to easily determine their licensing costs and obligations. They should not be forced to click through a series of hyperlinks to just understand simple obligations - let alone critical terms related to payment for non-service, compliance implications, and mobility. It is critical for software providers to stand with their customers and adopt the Principles of Fair Software Licensing, which will encourage other software providers to follow suit.
NetSuite SuiteSuccess Not Always So Sweet or Such a Success: Five Action Items for Prospective NetSuite Customers to Take Pre-Contract to Protect Your Legal Rights
By Pam Fulmer
On its website NetSuite, Inc. (“NetSuite), which is now owned by Oracle, touts that its “NetSuite SuiteSuccess is a total solution designed to manage all aspects of a business in a single system” and that “preconfigured, fixed-fee solutions allow customers to go live quickly, in a predicable time frame — and on budget.” Many NetSuite customers enter into the subscription and professional services agreements with NetSuite believing that they have a fixed price contract, which will not require much of an investment of time or energy on their end to get up and running. They are wowed by the slick pre-sales presentations and demos, and don’t understand that often the solution that is being touted in these discussions is not the base product, but instead is a solution with all the bells and whistles that may cost significantly more than what is being quoted. The fact is that the more a prospective customer wants to customize the software to fit its business, the more it will cost and the more time and effort it will take to implement, along with an increased chance of failure.
Oracle appears to be targeting small and medium size businesses with their SuiteSuccess offering. The Oracle/NetSuite sales team talks a good game, and the prospective customer is led to believe that the solution can be implemented quickly and within the fixed price fee quoted. Once the customer signs on the dotted line, often it is presented during contract performance with multiple change orders, which increase the total contract price and delays the ultimate “go live” date. Some customers end up giving up and wanting to terminate the contract and get a refund of monies paid to date. But given the terms of the standard contract, it is not so easy to get out of it and get a refund of fees paid.
So, what steps can companies considering contracting with Oracle take pre-contract to attempt to mitigate the risk in case a dispute with Oracle arises?
We hope potential NetSuite customers find this blog post useful. Tactical Law attorneys are experienced with Oracle/NetSuite agreements and assist companies to resolve their disputes with Oracle.
By Tactical Law Attorneys and From Time to Time Their Guests