How Oracle May Try to Use a Software Audit to Expand its Contractual Rights

By Pam Fulmer

Oracle licensees are advised to zealously guard their contractual rights and avoid ceding ground to Oracle based on overreaching software audit demands.  Oracle is a master at playing the long game and has been known to use its audit findings as leverage to extract contractual concessions from its licensees, which Oracle can later exploit in subsequent audits.  

For example, we know that Oracle has for years taken a very expansive view of the “installed and/or running” language of the processor definition in its Oracle license agreements.  As a reminder, Oracle uses this language to claim that it entitled to a licensing fee for all processors where the Oracle binaries could be installed in the future, even though they are not presently installed.  This is Oracle's "available for use" argument.  Oracle cites to its Partitioning and other policies to support this argument, which policies are not expressly incorporated into the fully integrated Oracle license agreement, and thus are barred by the integration clause.  We also know that Oracle routinely asserts this argument in audits where its customers use VMware virtualization software.  And we also know that Oracle has never sued any of its customers to seek to enforce such an extra-contractual interpretation. In fact, the only case that squarely raised this issue was Mars. v. Oracle, which was a case brought by global confectioner Mars seeking declaratory relief from the San Francisco Superior Court that Oracle’s legal argument around VMware and the “installed and/or running” language of the processor definition was not supported by the contract.  And we know that Oracle resolved the case very quickly, perhaps to avoid the necessity of publicly going on the record with this argument in an opposition to the preliminary injunction motion brought by Mars.

Still some customers will pay Oracle these prospective licensing fees or capitulate to Oracle’s other demands such as providing diagrams of their IT environment solely to get out from under the audit.  But such concessions could have major repercussions down the road and may later be used by Oracle against the unsuspecting customer in a future audit.  

For example, Oracle has been known to reduce its monetary demands provided the customer sign a document that includes what has been called by some a “Declaration of Non-Migration”.  The purpose of this Declaration appears to be to make Oracle’s expansive definition of the “installed/and or running” language of the processor definition contractual.  Usually, this type of demand is coupled with a request that the Oracle licensee provide a diagram of its virtual environment showing the architecture of such environment.  Oracle has included language in the Declaration of Non-Migration that should the customer change the configuration of its environment, it must go back to Oracle and obtain the required licenses.  

How could Oracle use this language against you the Oracle customer?  Well first of all Oracle could claim that the Declaration and the fact that the Oracle customer signed it shows that the licensee agrees with Oracle’s expansive interpretation of the “installed and/or running” definition.  Otherwise, why would the Oracle customer sign such a document and agree to go back to Oracle for licenses if it changes its environment?  And why would any Oracle customer in its right mind agree to go back and give Oracle a heads up when it changes its environment?  Such a notification could lead Oracle to issue a new audit notice and open an entire new can of worms.  In essence, Oracle could argue that the customer amended the contract by executing the Declaration and providing the diagram.

Oracle could also argue that the Declaration shows a course of performance or dealing, where the Oracle licensee and Oracle recognized that no changes could be made to the environment, unless the customer purchases additional licenses from Oracle.  So, Oracle gives the customer a break in one audit, in order to extract a concession (execution of the Declaration of Non-Migrations and production of the diagram) that Oracle uses in a future audit against the customer.  

Oracle licensees who provide such diagrams and agree to similar language in order to close out the audit, may give Oracle powerful weapons to use against the Oracle customer in future audits. In addition, the concession could lead to expensive and spiraling costs should the Oracle customer wish to expand its virtual environment in the future.  In our view, such attempts by Oracle to use audits to extract contractual concessions should be vigorously opposed by Oracle customers during the audit.  We can help with that.  And if the customer has already signed the Declaration, we have assisted Oracle licensees to develop strategies to push back on these limitations.

Importantly we have warned our readers that Oracle is conducting soft audits of its customers use of Java, and Oracle is applying its expansive and non-contractual processor definition to try to ring the bell on a big non-compliance gap for Java.  Such soft audits and non-contractual claims involving Java should also be resisted for all the reasons we discuss above and in our previous blog post.

Oracle audits are complex and confusing.  Tactical Law attorneys assist clients under audit, or who are about to be audited, understand their contractual rights and manage the risk inherent in an Oracle enterprise software audit.