By Pam Fulmer
Oracle America, Inc. and Oracle International Corporation (collectively “Oracle”) recently sued health information technology solutions company, Perry Johnson & Associates, Inc. (“PJA”) for copyright infringement in the Northern District of California. Oracle contends that PJA has infringed Oracle’s copyrights on, among other things, its Enterprise Edition Database (“EED”) and Real Application Cluster (“RAC”) software. Specifically, Oracle alleges that PJA provided hosting services to third parties without a license from Oracle for Oracle Database. Oracle also contends that “PJA’s software architecture – including the number of sockets – exceeds the scope of any license that PJA may have". In addition to damages of over $3.2 million in unpaid licensing and support fees, Oracle is seeking injunctive relief, impounding of unlicensed copies of the software, an accounting, statutory damages, attorneys’ fees and interest. Oracle also seeks enhanced damages claiming that PJA’s infringement was willful.
The case involves a type of Oracle license known as an embedded software license. According to Oracle:
Interestingly enough, Oracle has not sued Arrendale Associates, Inc. (“Arrendale”) but pleads on information and belief that Arrendale has complied with its own license obligations to Oracle. Otherwise Arrendale might also be a target of Oracle’s lawsuit. According to the Complaint:
It appears that Oracle contacted PJA directly to attempt to ascertain how PJA was using the Arrendale software. It is unclear from the Complaint if these actions were taken pursuant to a formal Oracle audit of Arrendale or of Arrendale’s customer. Oracle may have asked Arrendale to audit its customer PJA or requested that Arrendale assign its audit rights to Oracle. Oracle embedded license agreements publicly available online do provide for audits of Oracle customers, and also contain provisions whereby Oracle may request assignment of its customers’ rights to audit the ultimate end-user. We just don’t know based on the facts as pled in the Complaint. But it is interesting that Oracle makes no mention of any audit. Could it be that with the Sunrise Firefighters Motion to Dismiss still pending, Oracle wants to ensure that no public filings raise any issues that could negatively impact the legal positions Oracle is asserting in that litigation with regard to how it audits it customers or end-users? The Complaint continues without providing details around any audit, almost as if PJA voluntarily provided information to Oracle:
Oracle has targeted PJA for the alleged unlicensed hosting. Tactical Law has noticed an uptick in the number of hosting issues that it is seeing Oracle raise in software audits of Oracle customers, and this trend is something we are watching.
Oracle may also be asserting some type of claim relating to PJA’s use of VMware. According to the Complaint:
If VMware is involved, PJA may want to aggressively pursue discovery from Oracle regarding Oracle’s stance on VMware in software audits, which often is a key factor leading to Oracle’s initial “shock and awe” number in its audit findings. It could also be relevant to any unclean hands defense against Oracle.
The case had initially been assigned to Magistrate Judge Sallie Kim, but on May 12, 2020 Oracle filed a pleading declining to have the case heard by a Magistrate Judge. The case was reassigned to Judge Chesney who has now recused herself from the case. Counsel for PJA recently made an appearance, and the case is in the process of being assigned to a new Article III Judge.
Tactical Law will continue to monitor the litigation and will report back with periodic updates. The case is Oracle America, Inc. et. al. vs. Perry Johnson & Associates Inc. (Northern District of California Case Number 3:20cv 2984).
By Anne-Marie Eileraas
Companies based outside California may be reluctant to accept California as the governing law for their contracts. While some companies base their view on first-hand experiences, others cite media reports and surveys placing California in the bottom ranks of states’ legal and regulatory environments. For example, in late 2019, the U.S. Chamber Institute for Legal Reform published results of its latest survey of how participating U.S. business executives view the states’ legal environments, specifically regarding litigation and liability. California, along with Illinois and several southeastern states, fell in the bottom 10 states.
Whatever one’s view of such surveys, what’s clear is that polls tend to home in on a narrow range of issues: the perceived fairness of consumer/class action litigation and “hometown” jury verdicts. They don’t shed much light on the typical economic issues that arise in business-to-business contracts. Is California substantive law unfavorable for companies who contract under it?
Part 1 of this blog post will touch on California legal issues relevant to business contracts; more specifically, technology agreements for services, XaaS/cloud agreements, and software licenses. (This article does not address agreements with individuals, such as for personal or consulting services, which are subject to very different considerations under California law.) Part 2, coming soon, will discuss California venue for business litigation.
Choice-of-law clauses under California law
If a contract properly specifies California governing law and venue, most likely a court will enforce it. There is a strong policy favoring enforcement of contractual choice-of-law provisions in California. Many California-based companies, such as Oracle, Cisco, VMWare, and Palo Alto Networks, routinely use California choice of law provisions in their contracts.
In California, the court (not a jury) decides issues of contract interpretation and the application of contract defenses, such as force majeure. That may be of comfort to contracting parties, since pretrial jury waivers are unlawful in California. California courts strive to give effect to the mutual intent of the parties at the time of contracting. However, if the language of a contract is ambiguous in light of all the circumstances, a court will consider extrinsic evidence relevant to prove a particular meaning.
Legal issues that may favor customers
Not surprisingly given courts’ latitude to interpret contracts, California contracts law has pros and cons for companies purchasing software or services, and the following issues under California law, on balance, could be helpful and protective of their interests.
• Good faith and “best efforts” in California contracts
Under California law, an implied covenant of good faith and fair dealing protects the express promises in a contract and prevents one party from exercising its discretion to deny the other party the benefits of the contract. Unlike in some states, the implied covenant is not absolute; California permits parties to contract out of it with express provisions, such as a right to terminate in a party’s sole discretion.
The implied good-faith covenant can be helpful to customers in scenarios where, as a practical matter, some terms cannot be finalized until a future time, when the contract is in effect. While an “agreement to agree” is not enforceable, an agreement to negotiate in good faith can be enforced and can permit a party to recover damages.
Also helpful to a customer of technology services, California courts interpret “efforts” clauses to require more of a party than just acting good faith. A provider contracting to use its “best efforts” to perform a service must use the diligence that a reasonable person would exercise under the circumstances. It’s not enough for a vendor to say “I tried…”
• Availability of damages and failure of exclusive remedies
A well-drafted liquidated damages clause can reduce uncertainty of remedies if the other party does not perform. Liquidated damages clauses are presumed valid in California, with the burden of proof on the party seeking to invalidate a clause to show that it was unreasonable under the circumstances existing at the time of the contract.
California law protects an aggrieved party’s right to get a fair remedy when the other party breaches a contract, despite language in the contract excluding or limiting recovery. California Commercial Code §2719 provides, “Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this code.” The commentary to §2719 notes “it is of the very essence of a sales contract that at least minimum adequate remedies be available. If the parties intend to conclude a contract for sale within this Article they must accept the legal consequence that there must be at least a fair quantum of remedy for breach of the obligations or duties outlined in the contract.”
Note the commercial code applies to sales of goods, which can include software under a case-by-case analysis of whether the essence of the transaction is for goods or services. The commercial code provides for specified remedies, but courts have also relied on it to invalidate exclusions of consequential damages. For instance, in RRX Indus. v. Lab-Con, Inc., 772 F.2d 543 (9th Cir. 1985), the court interpreting California law invalidated a consequential-damages waiver in a software agreement after the vendor’s “repair” remedy failed of its essential purpose.
• Force majeure clauses
California courts do not enforce force majeure clauses literally. California cases have equated force majeure clauses to the common-law doctrine of impossibility, and courts will read certain common-law elements of a force majeure defense into contract terms. Most notably, a force majeure event must be beyond the reasonable control of the party seeking to be excused; and the incident must truly impose extreme and unreasonable difficulty, rather than merely render performance harder or more costly (including consideration of the party’s reasonable efforts to mitigate). Courts will consider the context and determine whether a party’s obligations should be delayed or completely terminated, in whole or in part.
Additionally, force majeure clauses must be drafted with particularity to overcome the presumption that only events unforeseeable at the time of contract will be excused. Mere “boilerplate” clauses will not excuse a party from performing if the event claimed as a force majeure was reasonably foreseeable.
Parties have significant freedom to draft express contractual indemnity clauses under California law. Courts will enforce a properly drafted indemnity covering a party’s negligence, including negligent misrepresentations and non-disclosure of material facts. However, outside of the insurance context, if a party “seeks to be indemnified for its own active negligence, or regardless of the indemnitor's fault, the contractual language on the point ‘must be particularly clear and explicit and will be construed strictly against the indemnitee.’” Prince v. Pacific Gas & Electric Co., 45 Cal. 4th 1151 (Cal. 2009). It is against public policy for an agreement to indemnify a party from knowingly unlawful future acts. Cal. Civ. Code §2774.
California has adopted statutory rules for interpreting indemnity provisions that apply unless expressly overridden by the parties. Those rules require, among other things, that the indemnifying party must defend indemnified claims upon the request of an indemnified party. Cal. Civ. Code §2778.
With attentive drafting, customers can protect their interests under California law by including indemnity provisions tailored to manage the risks of the technology they are buying.
• No one-sided provisions for recovery of attorneys’ fees
California generally follows the “American rule” for attorneys’ fees, meaning that each party to a dispute must pay its own legal fees. However, California’s civil code overrides unilateral attorneys’ fees provisions in a contract. If a contract has a term awarding attorneys’ fees to only the seller in the event of a dispute, that provision will be interpreted to award attorneys’ fees to whichever party prevails in a claim for breach of contract. Cal. Civ. Code §1717. This can protect customers contracting under one-sided vendor forms.
Scenarios where California law may not be as customer-friendly
Companies should investigate how California law applies to their specific industries or to particular kinds of contracts. For instance, because California law in general is more protective of individuals (especially employees), customers should understand the implications for any business contracts involving individual services under California law. Companies should be especially cautious when retaining independent contractors or attempting to include non-solicitation and non-compete clauses in their agreements.
The content of this blog is intended to convey general information about legal issues that may be of interest to our readers. This information is not intended to, and does not, constitute legal advice, nor is it intended to create an attorney-client relationship. Tactical Law does not sponsor, endorse, verify, or warrant the accuracy of the information found at external sites or subsequent links.
By Pamela K. Fulmer
As discussed in our previous blogpost, in Rimini I Oracle sued Rimini Street (“Rimini”) in the District Court of Nevada asserting a number of claims including copyright infringement. The court found on summary judgment that the process to provide maintenance services that Rimini used prior to 2014 exceeded the scope of Rimini’s customers’ licenses. The case then went to trial and Rimini lost to Oracle, although the jury did not find that Rimini was a willful copyright infringer. The district court issued an injunction, which was largely affirmed by the Ninth Circuit. Here’s how Rimini described the Rimini I litigation in a recent legal filing.
Rimini sued Oracle in a separate lawsuit in the District of Nevada seeking a declaration from the court that the new Process 2.0 Rimini instituted to provide support & maintenance did not violate Oracle’s licenses. Recently Oracle has attempted to claim in the Rimini I case that Process 2.0 also constitutes copyright infringement and is seeking to hold Rimini in contempt by claiming that Process 2.0 also violates the injunction. Rimini has filed a motion to preclude Oracle from litigating issues involving Process 2.0 in the Rimini I litigation. Instead, Rimini claims that such issues are rightfully decided only in the Rimini II litigation and were not actually litigated in Rimini I. According to a recent Rimini filing:
On May 2, 2017 Rimini filed its Third Amended Complaint in the Rimini II litigation seeking declaratory relief of non-infringement, non-hacking and copyright misuse by Oracle and asserting additional claims against Oracle for intentional interference with contract and prospective economic advantage, violation of the Nevada Deceptive Practices Act and California Business & Professions Code Section 17200 and Lanham Act unfair competition. Presently both parties have brought motions for summary judgment or partial summary judgement, which are pending before the Court.
Existing Rimini customers or Oracle customers thinking of moving to Rimini will find some of the allegations of the Third Amended Complaint quite interesting. For example, Rimini contends that:
In addition to using its audit powers to allegedly harass Rimini customers, Rimini also claims that Oracle seeks to create FUD (fear, uncertainty and doubt) in Oracle customers and to disrupt those customer relationships with Rimini. According to the Third Amended Complaint:
Rimini claims that Oracle’s intentional interference with Rimini’s customers has actually disrupted those relationships, even causing some clients to terminate their maintenance & support agreements or at least decide not to expand their relationships with Rimini:
Oracle customers considering moving their maintenance & support to Rimini should consider strategies for mitigating the risk of support disruptions when negotiating any new maintenance & support agreement. If Rimini’s pleading is correct about Oracle’s tactics and we assume that it is, Oracle customers should also be prepared to receive nasty grams or other communications from Oracle, which seek to create fear, uncertainty and doubt in the heart of the Oracle customer.
For its part, Rimini disagrees with Oracle’s assertions, claiming that its customers have authorized Rimini to access the site and no Oracle authorization is needed. According to a recent Rimini filing:
If Oracle wins this argument, Oracle customers who use Rimini for support may face significant risk and could be forced to return to Oracle for support. That of course could be a nightmare scenario as clients returning to Oracle may encounter steep price increases for annual maintenance & support under Oracle’s existing policies.
Pamela K. Fulmer
Tactical Law will continue to monitor the litigation. Please check back for periodic updates.
By Pamela K. Fulmer
On April 8, 2020 Tuscany Suites, LLC (“Tuscany”) sued Oracle America, Inc. and its subsidiary Micros Fidelio Worldwide LLC (collectively “Oracle”), in San Francisco Superior Court alleging a single claim for breach of contract. Tuscany runs the Tuscany Hotel and Casino in Las Vegas, Nevada. The lawsuit alleges that Oracle made promises about the capabilities of its hardware and software including that it had a leading integrated management program for hospitality users such as Tuscany but that it failed to deliver on these promises. According to the Complaint:
This is yet another example of a dissatisfied customer suing Oracle for over promising and under delivering. Another unhappy customer, Barrett Business Services is also currently suing Oracle for breach of contract and related torts in San Francisco Superior Court. Oracle had demurred to Barrett’s initial complaint, arguing in part that the plaintiff had failed to plead what specific provisions of the contract Oracle had allegedly violated, and relying on its disclaimer of warranties and the contract’s integration clause to attack Barrett’s contract claim. We would not be surprised to see Oracle attack Tuscany’s complaint via demurrer on the same grounds. In the Barrett case, the Plaintiff filed an amended Complaint, which added claims for intentional misrepresentation and other detailed factual allegations, which made its pleading less susceptible to a successful demurrer. Perhaps Tuscany will do so here as well.
Tuscany alleges that:
Tuscany claims that Oracle’s various breaches have caused it damages of at least $3,000,000. Tuscany contends that Oracle’s breaches have resulted in chaos for Tuscany, which has lost substantial business and good will as a result of Oracle’s alleged failure to perform. According to the Complaint:
Tactical Law will continue to monitor the case and bring you any updates. The case is Tuscany Suites, LLC v. Oracle America, Inc., San Francisco Superior Court Case Number CGC-20-584091.
By Pamela K. Fulmer
Many Oracle customers are aware that Oracle makes huge profits off the maintenance & support fees that Oracle charges its customers each year. In fact, it is one of Oracle’s biggest profit centers. Many Oracle customers also complain that the support is not really worth the price, and they look for alternatives that may be more cost effective. One alternative is third party maintenance & support provider Rimini Street. For 10 years Oracle and Rimini Street have been battling it out in the courts, and the litigation is still ongoing. In fact, Rimini and Oracle continue to spar in the federal district court in Nevada in two separate actions, which are both hotly contested. Many Oracle customers have heard vaguely about the litigation and some think that the litigation is over. That is not the case.
In Oracle USA., Inc. v. Rimini Street, Inc., case no. 2:10-cv-0106-LRH-PAL ("Rimini I"), Oracle brought several claims against Rimini Street and its founder Seth Ravin for copyright infringement and other business torts based on (1) the process Rimini Street used to provide software maintenance and support services to customers who had licensed Oracle software, and (2) the manner in which Rimini Street accessed and preserved copies of Oracle's copyrighted software source code. Ultimately Oracle won that case and the court awarded Oracle damages and issued an injunction against Rimini, which was largely affirmed by the Ninth Circuit. Now Oracle and Rimini are back in the district court, litigating over whether Rimini has violated the injunction. Rimini denies that it has violated the injunction and contends instead that Oracle is attempting to actually broaden the injunction to include issues that were not actually litigated and resolved in the Rimini I case. For months the parties have been engaged in discovery and the court recently extended the schedule due to the impact of the Coronavirus. Currently the court has set May 27, 2020 as the due date for any motion by Oracle to show cause why Rimini Street should not be held in contempt for its alleged violation of the injunction.
Although Rimini Street denies that it is violating the injunction, here is what Rimini Street has to say in a recent public securities filing about the risk to its business that could potentially be caused should Oracle pursue the order to show cause:
“Oracle may file contempt proceedings against us at any time to attempt to enforce its interpretation of the injunction or if it has reason to believe we are not in compliance with express terms of the injunction. Such contempt proceeding or any judicial finding of contempt could result in a material adverse effect on our business and financial condition, the pendency of the injunction alone could dissuade clients from purchasing or continuing to purchase our services.” Rimini Street, Form 10K, March 16, 2020
In addition to the weapon of litigation, Oracle continues to attack Rimini Street and has devoted part of its website to convincing Oracle customers that Rimini Street cannot offer the level of maintenance & support and security that Oracle offers and that Rimini cannot be trusted. Other industry commentators have analyzed Oracle’s assertions concerning the alleged inadequacy of Rimini support and have come to a different conclusion.
Regardless, Oracle customers considering a move to Rimini Street may want to consider hiring experienced outside counsel to advise on potential risk mitigation strategies in the event that Rimini is held in contempt or found to have violated the injunction.
In an upcoming blog post we will focus on the Rimini II litigation, and Rimini’s assertions that Oracle has sought to disrupt its business relationship with its customers and has audited customers who have dropped Oracle maintenance & support and moved to Rimini Street.
ITAM survey uncovers more damning evidence of Oracle's predatory audit practices designed to drive Oracle cloud sales.
By Pamela K. Fulmer
The ITAM Review recently published the results of its December 2019 survey of Oracle customers, asking for their first-hand experiences and whether Oracle employed predatory software audit practices to coerce Oracle customers to buy Oracle cloud products. According to the ITAM Review “the information gathered validates the case against Oracle suggesting they used improper tactics to falsify the success of their cloud products”. ITAM asked its readers whether (1) they had ever experienced Oracle using software audits to coerce customers into buying cloud products; and (2) whether Oracle ever offer discounts on on-premises software products in exchange for a cloud purchase that the customer did not need or want. The answers given by Oracle audit customers are a resounding yes. Here are the key take-aways from the customer survey:
• Anecdotes collected from ITAM Review readers “provide damning evidence of Oracle artificially inflating their cloud sales through dodgy deals and spurious audit tactics”.
• Oracle routinely used software audits or the threat of audits to force Oracle customers to buy Oracle cloud.
• Oracle customers rarely if ever used the cloud products they were forced to purchase.
• Oracle used the threat of audits on ULA customers to attempt to force these customers to renew the ULA rather than certifying off.
• Customers believe Oracle Sales pushed cloud products because Oracle management financially incentivized them to do so.
• Many customers buying Oracle cloud to avoid or resolve an audit never used the product and cancelled after one year.
• ITAM concluded that “[i]nformation in our survey, from ITAM practitioners around the world, provides damning evidence to support Oracle artificially inflating cloud numbers to impress shareholders”.
Plaintiffs in the Sunrise Firefighters class action filed in the Northern District of California have until February 17, 2020 to file an amended Complaint. It will be interesting to see whether Plaintiffs include in their amended pleading more specific anecdotes from Oracle customers like the ones detailed in the ITAM Review.
Oracle customers who are under audit or under threat of audit should consider the following actions:
• Resist Oracle’s demands to have endless meetings and conference calls and instead keep everything in writing. You can better protect yourself from Oracle’s overreaches if you make Oracle commit to its positions in writing, and can use this record against them when negotiating your audit or other resolution.
• Capitulating to Oracle’s threats may get you out of your audit sooner but may hurt you in the long run as Oracle may consider you an easy target for future forced sales and more software audits.
• Limit the information provided to Oracle to only what is contractually necessary and no more than that. Providing voluminous information to Oracle that is not contractually required, will not get you out of the audit sooner but will only result in the demand for increased licensing fees from Oracle and a negative impact to your negotiating position.
• Keep your IT staff under tight control and prohibit them from socializing and sharing information about your IT environment with Oracle Sales. Less information is better and Oracle Sales will use these lunches and entertainment opportunities to extract information from your IT team, which will later be used against you.
• Review your Oracle contracts carefully and ensure you have assignment rights before acquiring other companies, and assess your risk of non-compliance if you do not. Oracle appears to monitor the business news relating to its customers and an acquisition often may trigger an audit.
• Share any audit notice or inquiries from Oracle immediately with your in-house legal department and keep your in-house lawyers in the audit loop. IT and procurement professionals should always involve their legal teams at the earliest opportunity.
• Whether you have in-house counsel or not, you should retain outside legal counsel experienced in Oracle’s software audits at the earliest opportunity to help guide your response strategy.
Tactical Law Group will continue to monitor the Sunrise Firefighters case. Please check back with this blog for periodic updates on that litigation.
New Lawsuit By Former Employee Alleges Oracle Defrauded Customers by Selling Software Solutions That Did Not Exist
Pamela K. Fulmer
In a new lawsuit filed in the Northern District of California, former Oracle employee Tayo Daramola alleges that he was retaliated against and later fired by Oracle when he refused to capitulate to Oracle management's demands to misrepresent the status of delivery and functionality of Oracle cloud products. Essentially Plaintiff contends that Oracle routinely sold customers cloud products that were not fully developed or functionality that did not exist, and that Oracle attempted to enlist Plaintiff in the scheme. Plaintiff asserts claims under various Whistleblower statutes, RICO, and under California law for wrongful termination and retaliation.
Daramola alleges that he was an Oracle America employee through subsidiaries NetSuite and Oracle Canada and was employed from November 2016 through October 2017. Followers of this blog know that Oracle has been accused by other former employees of sharp audit and sales tactics during this time period designed to falsely inflate sales of Oracle cloud products in order to artifically boost Oracle's stock prices. We also have reported on other lawsuits against Oracle, which allege that Oracle misrepresented the functionality of certain software solutions in order to close the sale.
Plaintiff alleges in this action that Oracle intentionally attempted to implement a "project management" strategy to buy Oracle more time to actually implement the promised software solution, all the while keeping the customer in the dark. According to the Complaint:
Plaintiff contends that when he would not go along with or engage in a cover-up of the fraud, he was retaliated against by his supervisors and ultimately let go. According to the Complaint, part of the cover-up was to actually accuse the Oracle customer of dropping the ball or not delivering on its "homework", in order to divert attention from Oracle's own failures and related misrepresentations.
Tactical Law will continue to monitor the case, so please check back here for future updates. The case is Daramola v. Oracle America, Inc., Case 3:19-cv-07910, Northern District of California. Please feel free to contact us to discuss your potential options if you have experienced similar problems or believe that Oracle has failed to deliver on its promises.
By Pamela K. Fulmer
After a two week trial on May 13, 2019, a federal jury in the District of Maryland rejected the arguments of Micro Focus (U.S.), Inc. (“Micro”) that its licensee Express Scripts, Inc. (“Express”), a pharmacy benefits manager, had purchased desktop and not concurrent licenses under a software license agreement. The software at issue—Rumba--provides users a Windows environment in which to access and use information from a broad range of host systems including IBM mainframes. The result was a complete and total defense victory for Micro’s enterprise software customer Express.
Although there was a time when Micro was a kinder, gentler software company, Express alleged that after Micro’s 2014 merger with Attachmate, it adopted that companies brass knuckle audit tactics to extract additional licensing fees from Micro customers.
Micro brought suit against Express in 2016 after Express refused to pay Micro $23 million for alleged software overdeployment, which Micro claimed it discovered during a 2015 software audit. For its part, Express claimed that it was in compliance with the terms of the contract and did not owe Micro additional licensing fees at the then standard list price, as Micro contended.
At trial the dispute centered around what exactly constituted the contract and what type of licenses had actually been purchased in 2010. Express contended that the only commercially reasonable interpretation was that the license at issue granted 10,000 concurrent user licenses of Rumba for Citrix. For its part, Micro claimed the license provided 10,000 workstation or desktop licenses instead, and was not user based. The parties also vehemently disagreed about what constituted the operative contract. Express argued that the Product Order and email extending the offer formed the operative contract, while Micro argued that the Product Order incorporated a click-wrap End User License Agreement (“EULA”) under its “Terms and Conditions” and that the EULA applied. Micro argued that Express once again ratified the EULA when its employees accepted the EULA click wrap agreement upon installation.
Both parties brought summary judgment motions prior to trial. In denying parts of those motions and sending the remaining claims to the jury, the court observed that “as the parties are painfully aware, the EULA and Product Order, read together, are ambiguous as to what specific kind of license Express sold to Micro. The Product Order is to purchase a license for “10,000 authorized users.” The EULA, however, nowhere defines the term “authorized user” and instead with respect to Rumba software, offers seven separate licensing options.” The court went on to find that “what the parties meant by “authorized user” is indeed ambiguous.”
According to the court, “[w]here a contract is ambiguous, a finder of fact may consider extrinsic evidence “which sheds light on the intentions of the parties at the time of the execution of the contract.” The court found that “[t]he cardinal rule of contract interpretation is to give effect to the parties’ intentions” and that extrinsic evidence may include the “negotiations of the parties, the circumstances surrounding execution of the contract, the parties’ own construction of the contract and the conduct of the parties .”
Although the focus is usually on what is the intent at the time of contracting, the court reasoned that “[b]ecause the respective parties’ course of performance is relevant to interpreting ambiguous contract terms, the Court will consider the 2013 and 2015 record evidence in determining whether summary judgment is appropriate.” Such evidence included (1) that Express’ own IT employees interpreted the contract in a manner which was consistent with a workstation license; (2) Express staff admitted internally to being over-deployed and sought strategies to “track how many people need licensing for these applications”; and (3) Express personnel also privately admitted in September of 2013 to be “technically out of compliance with our current licensing model of giving everyone or [sic] Level 1 Citrix access for Rumba.”. The court then went on to rule that “[b]ecause a rational trier of fact could rely on such evidence to find in Micro’s favor, the meaning of 10,000 authorized user licenses must be resolved at trial.”
The case offers a cautionary tale for Oracle licensees. If a court were to construe the “installed and/or running” language of the processor definition as somehow ambiguous (which we disagree with), evidence of the course of conduct of the parties could potentially be introduced at trial to show what the parties believed the language meant. It is important that Oracle licensees not do anything that buys into Oracle’s expansive and non-contractual definition of “installed”, even if to do so may seem at first beneficial (for example in certifying off Oracle’s Unlimited License Agreement (“ULA”).
Another important lesson. Don’t let your employees blindly accept Oracle’s extra contractual assertions by adopting these interpretations and memorializing them in writing in your internal discussions. At trial counsel for Express had to deal with multiple email communications where employees who were not involved in the negotiation or execution of the agreement were purporting to agree with the party line being pushed by Micro about the type of licenses that had been purchased in 2010. However, these employees lacked personal knowledge and were just plain wrong. Instead, they were listening to Micro’s assertions and parroting those assertions back to each other.
The court also declined to find on summary judgment that the contract was one of adhesion and rejected the licensee’s argument that if the contract was ambiguous, it should be interpreted against Micro, who drafted the contract. Instead the court found that Express was a large sophisticated business, (which outpaced Micro in size and sophistication), and had ample opportunity to negotiate the license agreement and make changes. Therefore on summary judgment it declined to apply the doctrine of contra proferentem (the basic principle of contract law that, in construing the language of a contract, ambiguities are resolved against the drafter of the instrument), since the court found that genuine issues of material fact remained, and the construction of the ambiguous terms was left to the jury. And of course the jury ended up construing the ambiguous terms against Micro and finding that the interpretation offered by Express was the most reasonable.
One final fun fact—Express was represented by Morgan Lewis who represented Oracle in the Mars v. Oracle litigation.
The case is Micro Focus (U.S.), Inc. v. Express Scripts, Inc., Civil Action No. PX-16-0971, United States District Court, District of Maryland.
Oracle Claims Customer is "Solely" Responsible for Determining if Oracle Cloud Services Meet Customer's Technical, Business, and Regulatory Requirements
By Pamela K. Fulmer
Oracle further argued in its demurrer in the Barrett Business Services, Inc. v. Oracle America, Inc. case that it expressly disclaimed that its services would meet the customer’s requirements or expectations and that it was not liable for any issues related to “performance, operation or security of the services that arise from your content”. Oracle also relied in its demurrer on the language in the contract which put the responsibility “solely” on BBSI for determining if the cloud services purchased met its “technical, business or regulatory requirements.” Oracle contended that it performed the services using commercially reasonable skill and care as described in its Service Specifications, and therefore was not in breach.
Clearly Oracle customers contemplating Oracle cloud should seek to negotiate these provisions, as California courts will enforce warranty disclaimers unless they are unconscionable. A & M Produce Co. v. FMC Corp., 135 Cal. App. 3d 473, 484 (1982). Given the facts alleged in BBSI’s First Amended Complaint (“FAC”), BBSI will likely argue (in addition to its other arguments) that Oracle’s warranty disclaimer is unconscionable. In A&M Produce the court in finding a warranty disclaimer unconscionable reasoned that “the evidence establishes that A & M had no previous experience with weight-sizing machines and was forced to rely on the expertise of FMC in recommending the necessary equipment. FMC was abundantly aware of this fact. The jury here necessarily found that FMC either expressly or impliedly guaranteed a performance level which the machine was unable to meet. Especially where an inexperienced buyer is concerned, the seller's performance representations are absolutely necessary to allow the buyer to make an intelligent choice among the competitive options available. A seller's attempt, through the use of a disclaimer, to prevent the buyer from reasonably relying on such representations calls into question the commercial reasonableness of the agreement and may well be substantively unconscionable. The trial court's conclusion to that effect is amply supported by the record before us.” A & M Produce Co. v. FMC Corp., 135 Cal. App. 3d 473, 492 (1982).
Here BBSI appears to be setting up a similar argument, as well as setting up the reliance element of its fraud claim. According to the FAC, “[a]t all of BBSI's discussions with Oracle and KBACE, BBSI's representatives also made clear that they were ignorant as to Oracle's HCM Cloud system or any other Oracle products or how they performed and were relying wholly on Oracle and KBACE to advise them as to the suitability and capabilities of the product or system vis-a-vis BBSI's requirements.” In addition, the FAC recites that “Oracle and KBACE, too, consistently reaffirmed the HCM Cloud system's suitability for BBSI, its capabilities relative to BBSI's requirements as well as KBACE's ability to successfully implement the system in conformity with BBSI's requirements for user interface, payroll, time entry, billing and taxes, among others.” Companies negotiating Cloud Agreements with Oracle should be aware that if something goes wrong with the implementation, despite Oracle’s representations to the contrary, Oracle will likely invoke the contractual language that puts it “solely” on the customer to determine if the cloud services purchased meet the customer’s “technical, business or regulatory requirements.” Oracle will rely on such language to attempt to defeat your claim, and indeed in Barrett, Oracle has asserted defenses including ones for failure to state a claim, intervening or superseding acts of third parties, no duty, assumption of the risk, contractual limitation of liability, and the parol evidence rule.
Although not raised in the Barrett case, another problematic provision that prospective Oracle cloud customers should be aware of, involves Oracle’s disclaimers pertaining to third party content or services. Unlike many other cloud providers like AWS and Azure, Oracle rents data centers from other companies and does not own the data centers. And in its disclaimer of warranties Oracle has the following language: “WE ARE NOT RESPONSIBLE FOR ANY ISSUES RELATED TO THE PERFORMANCE, OPERATION OR SECURITY OF THE SERVICES THAT ARISE FROM YOUR CONTENT OR THIRD PARTY CONTENT OR SERVICES PROVIDED BY THIRD PARTIES.” Moreover, at least one of Oracle’s cloud service level agreements provides that “[t]he Service commitment does not apply to any unavailability of the applicable Oracle Cloud Infrastructure Service… that result from… third party equipment, software or other technology (other than third party equipment within Oracle’s direct control).” Reading these two clauses together gives Oracle the ability to point the finger at third parties and say that they own the hardware in the data centers and not Oracle, and that you therefore have no direct claim against Oracle for any disruption in Oracle’s cloud.
According to other publicly filed lawsuits, Oracle Sales has been known for pushing cloud, even where Oracle’s on-premises software might be a better solution for the customer. Oracle is accused of doing so, as it seeks to catch up with AWS, Azure, and other market leaders. The Barrett FAC actually notes that Oracle probably could have delivered the product that BBSI was seeking had it simply sold Oracle on-premises software rather than cloud. Oracle customers contemplating moving to the cloud should get Oracle to commit in writing to exactly what it is delivering. If Oracle will not do so, perhaps the customer should explore other options.
Tactical Law will continue to monitor the case. Check back for further updates.
Pamela K. Fulmer
We have previously reported on the Barrett Business Services v. Oracle America, Inc. case pending in San Francisco Superior Court. In Barrett, Oracle and KBACE (Oracle’s platinum implementation partner) are accused of over promising and failing to deliver a viable cloud-based system involving payroll and billing processing at the price point and within the time frame promised. The original complaint alleged claims against Oracle for breach of contract, negligent misrepresentation and rescission related to Oracle’s Cloud Services Agreement, but the pleading did not include a fraud claim. Oracle filed a demurrer on a number of grounds only a few of which we will discuss in this and future blog posts.
For its part, Barrett Business Services, Inc. (“BBSI”) did not oppose the demurrer but instead filed an amended complaint, which cleaned up several of the issues that Oracle had raised in its demurrer, thereby mooting much of the demurrer. BBSI’s amended complaint (the “FAC”) added several new claims including ones for intentional misrepresentation (i.e. fraud) and negligence and sought rescission of the Oracle Cloud Services Agreement. BBSI added additional detailed factual allegations pleading the fraud with specificity. Rather than attacking the pleading again with a demurrer, Oracle apparently learned its lesson and answered instead. Unfortunately for Oracle by attacking the complaint with a demurrer, Oracle educated its opponent. Oracle’s demurrer is instructive and should be required reading for those companies thinking about entering into a cloud agreement with Oracle, as the demurrer provides a road map to especially problematic clauses that the customer may want to negotiate.
The FAC Added Key Facts and Claims Regarding Oracle’s Fraud in the Inducement
Oracle argued that the express provisions of the contract provided only that Oracle must (1) make the ordered services available; and (2) provide the cloud services as described in the Service Specifications. Oracle contended that it fulfilled both of these promises. Oracle also argued that Barrett failed to allege that Oracle breached either of these provisions, and therefore had failed to state a contract claim. Oracle’s goal was therefore to limit the focus to the four corners of its cloud agreement, and use the integration clause of the agreement to exclude evidence of the parties pre-contract negotiations and discussions.
For its part, by amending the Complaint to add the tort-based claims, BBSI was required to plead the alleged fraud with specificity including going into great detail about Oracle’s pre-contract representations concerning its cloud product. According to the FAC, it was during these meetings that BBSI explained what it was looking for and received multiple promises from Defendants that their proposed cloud solution could meet BBSI’s requirements. According to the Complaint:
“Between June 2017 and February 2018, BBSI had several hours-long in-person meetings and telephonic conferences with Oracle and KBACE. At each of these meetings, BBSI took great pains to educate Oracle and KBACE as to the precise nature of its business operations, its peculiar needs and the business functions that informed BBSI's extensive list of requirements. In meticulously discussing its list of requirements with both Oracle and KBACE, BBSI underscored its need for ease and efficiency of user interface and processes relating to payroll, time entry, billing and taxes given its human resource and payroll management challenges and the fact that payroll was also its revenue source. At all of BBSI's discussions with Oracle and KBACE, BBSI's list of requirements remained unchanged.
At all of BBSI's discussions with Oracle and KBACE, BBSI's representatives also made clear that they were ignorant as to Oracle's HCM Cloud system or any other Oracle products or how they performed and were relying wholly on Oracle and KBACE to advise them as to the suitability and capabilities of the product or system vis-a-vis BBSI's requirements.”
BBSI, Oracle and/or KBACE met and/or telephonically conferred numerous times throughout 2017 and early 2018 including without limitation, on June 30, 2017; July 13 and 20, 2017; August 3, 10, 23 and 31, 2017; September 6, 13 and 28, 2017; October 2-4, 16, 20, 24 and 26, 2017; November 3 and 14, 2017; December 5, 2017 and February 9, 26-27, 2018 regarding Oracle's HCM Cloud and its implementation by KBACE. Moreover, Heather Gould ("Gould"), BBSI's Chief Strategy Officer, had weekly status calls with Bell, Oracle's Solutions Consultant. Throughout all these communications, BBSI remained consistent in its requirements. Oracle and KBACE, too, consistently reaffirmed the HCM Cloud system's suitability for BBSI, its capabilities relative to BBSI's requirements as well as KBACE's ability to successfully implement the system in conformity with BBSI's requirements for user interface, payroll, time entry, billing and taxes, among others.”
By amending the complaint to add the fraud in the inducement claim and more specific allegations of the actual fraud, BBSI significantly strengthened its complaint. It also struck at the core of Oracle’s defense that the integration clause precludes the court from examining representations made by Oracle and KBACE during contract negotiations. Under California law parol evidence is admissible to prove fraud in the inducement “even though the contract recites that all conditions and representations are embodied therein.” Ron Greenspan Volkswagen, Inc. v. Ford Motor Land Dev. Corp., 32 Cal. App. 4th 985, 995 (1995). Clearly Oracle hoped to hide behind the integration clause in the agreement, and sought to limit or completely exclude the evidence of Oracle’s alleged misrepresentations made during pre-contract negotiations. It is unclear to this author why BBSI did not include these claims in the first instance. Perhaps BBSI felt uncomfortable accusing a large and well-known company like Oracle of fraud. That was a mistake. I am reminded of the old adage, never bring a knife to a gun fight. That rings true in disputes and litigation with Oracle. Customers having evidence of fraud in the inducement by Oracle should spell out that evidence upfront. Otherwise Oracle will hit you hard and use its one sided contract against you.
Our next blog post will examine how Oracle is attempting to defeat BBSI's breach of contract claim, by pointing to its disclaimer of certain warranties. The case is Barrett Business Services, Inc. v. Oracle America, Inc., San Francisco Superior Court, Case Number CGC-19-572574. A copy of Oracle's Demurrer can be downloaded here.
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