New Lawsuit Filed by Oracle Against Oracle Partner Network Customer Arising Out of Software Audit

By Pam Fulmer

Oracle America Inc. and Oracle International Corporation (collectively "Oracle") have filed a new lawsuit in the Northern District of California against their licensee NEC Corporation of America ("NECAM").   According to the Complaint, NECAM was a member of the Oracle Partner Network ("OPN") until Oracle terminated its licenses due to this dispute.  Oracle seeks at least $7 million in damages, as well as any profits made by NECAM through its use of the Oracle software and distribution of the Oracle software to NECAM's customers.  Oracle has asserted claims for breach of contract as well as copyright infringement and seeks treble damages as Oracle alleges that NECAM's copyright infringement was willful. Oracle also seeks an award of attorneys' fees and costs pursuant to the license agreement.

Oracle contends that NECAM has been a long standing partner of Oracle (15 years) and is therefore extremely familiar with the various contracts signed by Oracle partners, as well as with the approved distribution methods allowed depending on the type of license purchased.   According to the Complaint:

"As a long-time OPN member and Oracle licensee, NECAM was (and is) intimately
familiar with the Oracle PartnerNetwork and the different distribution methods Oracle offers to its OPN members – ESL [Embedded Software License], ASFU [Application Specific Full Use License], and Full Use. In the past fifteen years, NECAM has distributed licenses to Oracle software using all three distribution methods – ESL, ASFU, and Full Use – under the agreements set forth above.

Essentially Oracle asserts, among other things, that NECAM was using the Oracle software and allowing its customers to interact with the software, in a way that was not authorized by the applicable license agreement and distribution method, and that NECAM failed to pay all the license and support fees due Oracle.

Oracle issued an audit notice to NECAM in December of 2019 pursuant to the audit clause and delivered its Final Audit Report in October 2020. According to the Complaint, Oracle asked "NECAM to resolve the compliance findings within 30 days" and advised NECAM that it "needed to procure (pay for) additional ASFU and Full Use licenses for its prior distributions."  Oracle further advised NECAM that it had previously "failed to report (or had under-reported) certain distributions". Finally Oracle demanded that NECAM provide Oracle with additional information regarding its on-premise development environments to enable Oracle to determine the extent to which they exceeded NECAM’s rights." 

Oracle alleges that NECAM failed to respond and pay the licensing and support fees that Oracle contends were owed within 30 days of notification of the amounts owing.  As a result on January 19, 2021, Oracle sent a breach notice to NECAM.  Oracle contends that NECAM did not cure the breach, and as a result on March 5, 2021 Oracle sent a termination letter, notifying NECAM that Oracle was, by its letter, "terminating NECAM’s membership in the Oracle PartnerNetwork, the 2018 MDA, and all related ASFU distribution addenda and ESL distribution addenda."

According to the Complaint:

"NECAM breached its contracts with Oracle by its acts and omissions, including failing to
pay license and support fees owed to Oracle under the contracts and failing to provide information to Oracle as required by the contracts’ audit provisions. For example, NECAM breached the 2013 MDA, the 2013 ASFU Addendum, the 2018 MDA, and the ASFU Addenda by failing to report and pay license fees (and support fees) owed under the ASFU Addenda for distributions of its Integra-ID 5 application with the Oracle Database and the Database Options and Packs that were not permitted by NECAM’s ESL Addenda. As another example, NECAM breached the 2013 MDA and the 2016 Full Use Addendum by failing to report and pay license fees (and support fees) owed under the Full Use Distribution Addendum for distributions of the Oracle Database (and other Oracle software) to the Ohio State Police that were not permitted by NECAM’s ASFU addendum. And, as another example, NECAM breached its duty under the OPN Agreement and the 2018 MDA to cooperate with Oracle’s audit and provide reasonable assistance and access to information, by failing to provide Oracle with additional information regarding its on-premise development environments to enable Oracle to determine the extent to which they exceeded NECAM’s rights, as Oracle repeatedly requested."

A few observations about this case and other recent audit cases brought by Oracle that readers of our blog may find interesting:

• Oracle continues to retain The Norton Firm as its "go to" firm for software audit related cases.  Oracle has a long history with lawyers Fred Norton and Bree Hahn and we continue to expect to see them both prosecuting and defending cases on behalf of Oracle arising out of audits or failed ERP installations.  These two lawyers were part of the Oracle trial team that gave SAP and its counsel Jones Day a spanking in the Oracle vs. SAP case.
• Oracle does not tend to file cases unless it believes it will win.  This appears to be a case that Oracle is confident of winning.
• We are seeing more disputes arising between Oracle and companies in Oracle's partner network.  Such companies need to ensure that they understand their license agreement with Oracle and their contractual rights and responsibilities.  Oracle can and will shut your company down so the advice of experienced counsel with knowledge of how Oracle operates is critical to successfully navigating these disputes.
• Understanding the rights, responsibilities and differences between Embedded Software Licenses, Application Specific Full Use Licenses, and Full Use Licenses is absolutely critical for protecting your business and understanding your compliance position.
• Oracle customers must provide reasonable cooperation and assistance with the Oracle audit, but the audit cannot unreasonably interfere with the customer's normal business operations.  Know your rights under the audit clause.
• Not all information requested by Oracle may be relevant to the audit.  Oracle customers should understand where lines may be drawn.
• Although Oracle is suing out on audit cases more frequently recently, they do not appear to be basing such cases on attempting to enforce their expansive VMware virtualization non-contractual polices and arguments, but are focusing on other issues. 
• It is our opinion that Oracle may be using these recent lawsuits to send a message to Oracle customers that non-compliance with the 30-day notice period for paying fees for use in excess of licensed rights may cost the customer dearly, including the possibility of a license termination.  Understanding how this provision may work to your advantage is key.
• Although not raised in this case, Oracle appears to be laser focused on AWS customers who are using the RDS License Included Model, and looking for violations of the AWS Terms of Use, such as using the Oracle software for "rental, timesharing, subscription services, hosting, or outsourcing."  AWS Service Terms, 10.3 and 10.3.1.  This is the recent case filed by Oracle against Envisage, which we have blogged on.  We will have an update coming soon.

• Companies exploring using Oracle on AWS should obtain expert help to ensure that they understand the various licensing models, and that the model chosen fits their requirements and that they are license compliant.
• Recently Oracle is becoming more aggressive and filing more litigation arising out of software audits.  Litigation threats by Oracle should be taken seriously and dealt with appropriately.
• Oracle customers should retain expert help before they even get the audit notice, and should retain experienced legal counsel well in advance of receiving the final audit report.

The case is Oracle America, Inc. v. NEC Corporation of America, Case Number 3:21-cv-05270 (Northern District of California).  Tactical Law will continue to monitor the case.  Please check back for updates.