Although the complaint in Mars vs. Oracle only contained one claim for declaratory relief, Mars likely had its own breach of contract claims, which it could have asserted against Oracle if the litigation had continued. Oracle audit customers need to remember that audit and termination clauses, even in a contract drafted by one of the parties, usually imposes obligations on both the licensor/drafter of the agreement and its licensee. That is certainly the case with the Oracle licenses that we have reviewed. As a result, Oracle licensees should understand their legal rights and obligations under audit and termination provisions so that they can best protect themselves during an Oracle audit, and hold Oracle to account for Oracle’s own breaches or other wrongful conduct.
The audit clause at issue in the Mars case is instructive: "Oracle may, at its expense, audit Client's use of the Programs. Any such audit shall be conducted during regular business hours at Client's facilities and shall not unreasonably interfere with Client's business activities. If an audit reveals that Client has underpaid fees to Oracle, Client shall be invoiced for such underpaid fees based on the corporate discount (such as a Project User Agreement) in place between Client and Oracle in effect at the time the audit is completed. Audits shall be conducted no more than once annually." (emphasis added)
Even though the focus of the audit clause is on use of Oracle software, Oracle sought information about servers where no Oracle software was installed. According to the public facing documents filed in conjunction with Mars’ motion for preliminary injunction, Oracle demanded that scripts be run, and data be provided about where Oracle software might be “available for use” at some future time. Oracle LMS also admitted in writing that it was seeking information about servers not running Oracle when it contended that given Mars’ usage of VMware 5.1 and higher, “all additional servers and/or clusters not running oracle must be licensed”. We have seen Oracle make similar demands of other Oracle customers.
Mars pushed back on Oracle’s demand for this information writing in a letter that the “contract defines the scope of Oracle’s audit rights” as being limited to Mars’ “use” of the Oracle software. With regard to Oracle’s demand for information about Mars’ servers running VMware, Mars stated that “[s]ervers and clusters that do not run Oracle are not probative of Mars’ use of Oracle software and are outside the scope of Oracle’s audit rights.”
Although Mars cooperated with the audit providing Oracle with over 233,000 pages of documents, it declined to provide Oracle with information about servers where no Oracle software was installed. Despite the audit clause clearly stating that Oracle’s audit rights extended only to Mars’ use of the Oracle software, Oracle embarked on a risky strategy by issuing breach notices that threatened to terminate the license agreement in 30-days if Mars did not capitulate to Oracle’s demands for information about servers not running Oracle software.
Importantly, like other Oracle licenses, the Mars’ license agreement did not give Oracle the unfettered right to terminate the agreement. Instead Oracle could only terminate the license if Mars was in material breach of the contract, after receiving 30-days written notice of the breach and an opportunity to cure. As Mars alleged in its Complaint, there was no breach as Mars had fully cooperated with the audit. Instead, Mars claimed that Oracle breached the agreement by issuing the notice of termination and refusing to withdraw it.
A court could find that Oracle’s audit tactics, including the issuance of multiple breach notices with threats of license termination to extract information to which it was not entitled (and the eventual license termination upon the expiration of the 30-days), had breached the termination provision and caused significant disruption to Mars’ normal business operations. In fact, not only did Mars need to deploy scarce internal IT resources to respond to the audit, but it had to spend money on hiring consultants and lawyers to push back on Oracle’s audit assertions. Ultimately, Mars prepared and filed its Complaint and Preliminary Injunction Motion, which resulted in further damage to Mars, as it defended its right to continue to license the software.
If you are involved in an Oracle audit and Oracle is making similar arguments or demanding information about servers where no Oracle software is installed and/or running, seek competent California legal counsel to advise you of your contractual rights.
We have included for the convenience of our readers a PDF copy of some of the key correspondence between Mars and Oracle that we discuss above.
Pam Fulmer of Tactical Law