By Pam Fulmer
This blog post is the second in our series analyzing litigation that has been brought against NetSuite/Oracle relating to failed ERP installations, and how Oracle has defended those actions and sought to defeat them. And armed with this knowledge, how you, the Oracle/NetSuite customer can try to best protect yourself when negotiating with Oracle. In this post we refer to Oracle and NetSuite interchangeably.
In our first blog post we discussed the importance of getting very granular with Oracle concerning the representations Oracle makes to you, the potential customer, about the features and benefits of the ERP software. And the key focus remains on the period of diligence before the license agreement is signed. This is the period when Oracle is wooing the potential customer with statements about the power of its software and how the software can advance the business interests of the customer. We explained how Oracle customers filing lawsuits against Oracle will often claim that Oracle overpromised and under-delivered and that such statements should allow the customer to rescind the Oracle license agreement for fraud in the inducement of the contract. We explained how the Federal Rules of Civil Procedure require that litigants plead fraud with particularity in order for such claims to get past the pleading stage. We also discussed why it is important to make an accurate and detailed account of the various representations made by Oracle/NetSuite. However, even if you are a company that took good notes when meeting with Oracle and can tell a court the who, what, when, where, why and how of the alleged fraud, there is still another hurdle to overcome. Courts do not consider mere “puffery” to be a fraud, and such statements cannot support the recission of a contract for fraud in the inducement or an affirmative fraud claim.
A good example is the Grouse River Outfitters. v. NetSuite case litigated in the Northern District of California. Grouse River was a Canadian outdoors sporting goods supply company that entered into an agreement with NetSuite for use of NetSuite’s ERP software to run its business. The claims asserted in Grouse River’s Second Amended Complaint (“SAC”) included fraud and negligent misrepresentation, fraud in the inducement, violation of California’s unfair competition law (Section 17200) and breach of contract. Magistrate Judge Laurel Beeler of the Northern District of California described the basic allegations of the complaint as follows:
In 2012, Grouse River began searching for an “integrated software system” that would help its retail operations grow. Grouse River read (and later relied upon) false statements made in NetSuite’s advertising material about its capabilities to implement software solutions. Grouse River later relied on express statements that NetSuite made that it could deliver a software system that would have the capability to meet Grouse River’s requirements. The parties entered into a pair of written contracts in March 2014. The NetSuite system was not installed and operational by its original deadline of September 12, 2014. The system never met its promised capabilities.
Under California law, the elements of fraud claim are: (1) a misrepresentation; (2) knowledge of falsity; (3) intent to defraud; (4) justifiable reliance; and (5) resulting damages. The same elements comprise a cause of action for negligent misrepresentation, except there is no requirement of intent to induce reliance. Plaintiff must plead and prove that he or she actually relied on the misrepresentation for both causes of action.
NetSuite moved to dismiss the initial complaint for failure to plead fraud with the necessary particularity under Federal Rule of Civil Procedure 9(b). The court granted the motion with leave to amend. After this dismissal, Grouse amended its complaint, which was then the target of another attack by NetSuite. In ruling on this second motion, the court found the fraud in the SAC was pled with sufficient particularity to defeat a motion to dismiss. But NetSuite was persistent and moved to strike some of the allegations of the SAC, claiming among other things, that the representations were non-actionable puffery and could therefore not support a fraud-based claim.
Judge Beeler in her order set forth the governing law on puffery. According to the Court:
“Statements constituting mere “puffery” cannot support liability under a claim for fraud or negligent misrepresentation. “Puffery” has been described as making generalized or exaggerated statements such that a reasonable consumer would not interpret the statement as a factual claim upon which he or she could rely. Ultimately, the difference between a statement of fact and mere puffery rests in the specificity or generality of the claim. Advertising which merely states in general terms that one product is superior is not actionable. However, misdescriptions of specific or absolute characteristics of a product are actionable. Whether an alleged misrepresentation is a non-actionable statement of puffery is a question of law.” (Citations omitted)
The Judge went on to review each alleged fraudulent statement and to make a determination if it was fraud or mere puffery. In explaining her analysis, the Judge Beeler reasoned that “[a] reasonable consumer would not interpret certain statements as a factual claim upon which he or she could rely.” Instead, the statements were generalized and did not concern specific aspects of the product, or how the product could meet the needs of the customer. According to Judge Beeler, examples of statements constituting non-actionable puffery include:
• “Every company wants to deliver the commerce experience that Apple delivers to customers—an experience that recognizes the customer regardless of channel or device, and efficiently delivers goods and services in world-class fashion, projecting a powerful brand message. NetSuite SuiteCommerce is architected to enable companies of all sizes to deliver this type of rich, touch-point agnostic experience to their customers.” (SAC ¶ 15).
• “SuiteCommerce exposes native NetSuite commerce capabilities-including merchandising, pricing, promotions, payment processing, support management, and customer management-as services that can be leveraged by any presentation layer, while providing an integrated back-end business management system.”
The order contains additional analysis, and we include a PDF copy of the Order below in case our readers would like to delve further into these issues.
So, what are the lessons learned from this blog post? First, advertising materials are only one source of possible false statements by NetSuite/Oracle. If there are certain advertising statements that you are relying on in making your ERP purchase, print out or make a PDF of those materials and have your legal department save them. You can also ask about the statements and get more details in follow-up meetings and conversations with Oracle/NetSuite. Second, statements made in meetings by NetSuite employees about the specific capabilities of the NetSuite software are critical. That is why we recommend recording those statements, or seeing whether NetSuite will commit in writing to the specific qualities of the software, and how it will benefit your business. Again, at least take detailed written notes of all meetings or conversations, and if you decide to make a recording of the meeting, you need to obtain whatever permissions are required under the applicable state law. You must demand that the ERP contractor provide you with granular promises, and not sweeping but empty statements that are mere generalities. And, if they won’t provide such specific statements about the capabilities of their software, perhaps you should reconsider and go to another ERP provider instead. Third, you need to provide all of these materials and develop a very detailed chronology of the NetSuite statements and the series of events to your attorney advising you on the matter. Oracle/NetSuite is a rational beast and if you can show their in-house legal department in pre-litigation settlement discussions, why it behooves them to settle with you without the necessity of filing litigation, then you may be able to avoid a lawsuit all together.
Our next blog post in this series will focus on two additional legal arguments that Oracle/NetSuite often makes to defeat fraud-based ERP related claims. The first is that under California law, statements about future events are usually non-actionable, with limited exceptions. The second is that the statements contained in the complaint are not alleged to be false. We have some thoughts on these issues as well.
Tactical Law Group LLP is an IP and litigation boutique law firm located in the San Francisco Bay area. We assist clients to negotiate ERP agreements and advise clients on the best strategies for resolving disputes, including prosecuting litigation where appropriate, involving failed ERP implementations.
By Pam Fulmer and David Woodard
Oracle announced on Sept 14, 2021 that Java 17 and future versions of Java are now free again. In this blog, Pam Fulmer, Partner at Tactical Law Group, and David Woodard, Executive License Consultant at OpsCompass/House of Brick, discuss the technical and legal implications of this announcement.
[David]: This announcement often gets misinterpreted as “all Java is now free again”, which is definitely not the case. You need to understand the technical and contractual aspects of this announcement to see if, and how, you may be able to use Java 17+ at no cost.
[Pam]: The announcement indicates that Java 17 and later are free under the new "Oracle No-Fee Terms and Conditions" (NFTC) license which allows for “running the Program for Your own personal use or internal business operations".
However, the first paragraph of that agreement states:
Your use of this Program is governed by the No-Fee Terms and Conditions set forth below, unless you have received this Program (alone or as part of another Oracle product) under an Oracle license agreement (including but not limited to the Oracle Master Agreement), in which case your use of this Program is governed solely by such license agreement with Oracle.
Thus, according to its terms, the NFTC would not apply if an Oracle customer already has an Oracle Master Agreement (“OMA”) in place, which contains a Java subscription. This might lead Oracle customers who already have an OMA with a Java subscription to consider terminating the OMA if they want to use the “free” version of Java 17. That of course requires a review of the termination provision of the OMA. Paragraph 6 of the General Terms of the OMA governs termination as it pertains to Oracle programs. However, the clause does not provide for a termination for convenience, for either of the contracting parties. Instead, only a termination for cause due to a material breach that is not cured within 30-days is included in the provision. Therefore, Oracle customers who try to terminate their OMA in order to get the “free” Java 17 may well face pushback from Oracle. However, there may be potential arguments under California law that Oracle customers may be able to use should Oracle claim that the agreement cannot be terminated except for cause.
[David]: If you cannot use Java 17 for free because you have an existing OMA, you appear to have two choices: 1) continue to pay for a Java subscription and use Java 17 under that OMA, or 2) attempt to terminate your OMA, which might give rise to a dispute with Oracle. However, assuming that Oracle would not claim an Oracle customer is in breach for terminating the OMA, the Oracle customer would still need to upgrade all current paid subscription versions of Java to Java 17 to use Java 17 for free.
The older versions/updates of Java that did not require a subscription would continue to be free for the Oracle customer to use. But, versions/updates that are currently obtained under the OMA subscription would need to be upgraded to Java 17 to eliminate the subscription and to use Java for free. This could be quite an undertaking from a technical perspective, with possible code changes, and extensive regression testing. In this case “free” may have a significant cost for you.
A Long Term Support (LTS) version of a product has a specified period of time where it will be supported by the vendor. Thus, customers know that by using an LTS version, they will not be surprised by support ending abruptly at the vendor’s whim. Usually, the support periods for LTS versions will overlap, which gives the customer time to upgrade from one supported version to another.
Oracle has updated the release cadence for Long Term Support (LTS) versions of Java to every two years, and the odd numbered versions (17,19, etc) will be the LTS versions. Updates for a given LTS release will be available until one year after the next LTS release date thus giving customers one year of overlap to get upgraded to the next LTS version. Oracle will continue updating some older LTS releases, but you will need to get a subscription to use those updates. The even numbered versions will only be supported for a short time, and often are used by customers to try out new features in non-production environments
[Pam]: Oracle updated the Java Frequently Asked Questions (“FAQ”) to state:
Oracle will use the NFTC for JDK 17 and later releases. LTS releases, such as JDK 17, will receive updates under this license for one year after the release of the subsequent LTS. After the free use license period, Oracle intends to use the OTN License, the same currently used for Java 8 and 11 LTS releases, for subsequent updates.
So, if you are still running an older version of Java 17, for example, that falls under the Oracle Technology Network License Agreement for Oracle Java SE, it does not allow for production use of Java. If you wanted to keep using that older version, or want to update it if Oracle releases new updates for that version, you will need a subscription.
(This appears to mean, per the NFTC first paragraph, that Oracle customers would need a subscription for all Java versions, even newer versions like 19, 20, 21, etc., which would normally be free)
[David]: So, if you find yourself unable to upgrade off of Java 17 (or later as newer LTS’s roll out), then you are looking at now having to get a Java subscription for your entire Java estate once again. So, the decision to move into the free Java NFTC ecosystem should include a realistic assessment of your team’s capabilities to get upgraded to the newer Java version in a timely manner and stay updated.
Conclusion: Unless Oracle comes out and states that you can have free Java 17+ and older subscriptions under an OMA and the new NFTC in use at the same time, the first paragraph of the brand new NFTC would seems to indicate otherwise.
By Pam Fulmer
We are going to focus a few blog posts on Oracle and its subsidiary NetSuite, Inc. (“NetSuite”) and some of the litigation that has been brought against these two companies by their unhappy customers. NetSuite was one of the first cloud-based companies in the market, and Oracle acquired the company in 2016.
NetSuite started out focusing on financial and accounting systems, then it branched out into Enterprise Resource Planning (“ERP”) and Customer Resource Management (“CRM”) software and eCommerce. NetSuite provides its customers with a subscription-based service and essentially claims that its customers can manage all their key financial and business processes in one solution. NetSuite claims that it is the #1 Cloud ERP Business Software Solution and according to its website that:
“NetSuite ERP is an all-in-one cloud business management solution that helps organizations operate more effectively by automating core processes and providing real-time visibility into operational and financial performance. With a single, integrated suite of applications for managing accounting, order processing, inventory management, production, supply chain and warehouse operations, NetSuite ERP gives companies clear visibility into their data and tighter control over their businesses.”
NetSuite customers have filed lawsuits against the company often alleging that NetSuite over promises and under delivers. Even before Oracle acquired NetSuite, the company had already been sued by customers claiming that NetSuite failed to deliver a functioning ERP product. In 2014 the Kentwool Company filed suit in South Carolina against NetSuite asserting claims for breach of contract, breach of express and implied warranties, fraud, fraud in the inducement, negligent misrepresentation and breach of South Carolina’s unfair business practices act, among other claims. Kentwool sought to rescind the contract based on fraud in the inducement. NetSuite moved to transfer the case to the Northern District of California due to the venue provision in the Netscape agreement. That motion was granted and the case was transferred to Judge Jon Tigar in the Northern District.
According to the Complaint, NetSuite represented that it would integrate all of Kentwool’s “manufacturing, inventory, purchasing, financial, sales and shipping processes” and that the software would include certain advanced features and that any implementation problems would be fixed by NetSuite. Kentwool also contended that NetSuite knew that its software could not do these things when it wrongfully induced Kentwool to enter into the contract. Plaintiffs in other lawsuits filed against NetSuite and Oracle arising out of failed ERP implementations have made similar allegations. We will get into some of those other cases in future blog posts. But for now, we want to focus on some of NetSuite’s key defenses, and common mistakes that NetSuite customers make when asserting fraud-based claims.
NetSuite contracts contain integration clauses. In the subscription agreement at issue in the Kentwool case, that clause provided that:
“This Agreement, including all exhibits and/or Estimate/OrderForms, shall constitute the entire understanding between Customer and NetSuite and is intended to be the final and entire expression of their agreement. The parties expressly disclaim any reliance on any and all prior discussions, emails, RFP’s and/or agreements between the parties. There are no other verbal agreements, representations, warranties[,] undertakings or other agreements between the parties.”
NetSuite, invoking the parol evidence rule, argued that this clause precluded Kentwool from introducing any evidence that varied, altered or added any terms that were not part of the integrated contract, such as representations made by NetSuite during pre-contractual sales and negotiation discussions. The court rejected those arguments and found that the parol evidence rule did not bar such evidence, because the Plaintiff asserted fraud-based claims, including fraud in the inducement and sought to rescind the contract. Having passed this first hurdle, Kentwool ran into another legal buzz saw—the failure to plead fraud with particularity.
Federal Rule of Civil Procedure (“FRCP”) 9(b) requires a heightened pleading standard for pleading fraud claims. To satisfy FRCP 9(b), a litigant must identify the who, what, when, where, and how of the alleged fraud such that defendants have notice of the particular misconduct alleged and can defend against it. What does this mean in practice? It means that NetSuite customers who claim fraud must get really specific. Was the fraudulent statement made in a phone call, an email or in a meeting? If the fraudulent claim was made in a meeting or on a call, courts will want to know the date of the meeting, and even the time. Where was the meeting? Who was at the meeting and who from NetSuite made the exact statement at isssue? What was the exact statement? Why was the statement false? All too often litigants are unable to make such a detailed showing because they fail to make an adequate record when they are engaged in pre-contractual discussions with Oracle/NetSuite. And that is a huge mistake.
It is an understatement to say that much can go wrong in the implementation of an ERP contract. So, Oracle/NetSuite customers must go into negotiations prepared to make the licensor get really granular on exactly what they are promising. Every time you have a meeting with or get on a phone call with NetSuite pre-contract, you would be well advised to take detailed notes of the meeting, including the date and time, and who attended. Save any emails. You also need to include the exact representations of NetSuite on which you are relying and the identity of the person who made the representation. Press NetSuite for specific information. Ask them to detail the existing capabilities of their software, and what capabilities they will need to customize for you. Write it all down, and send records of these communications to your legal department for safekeeping and use in the event of a dispute down the road. Be proactive.
The Kentwool court found the following allegations contained in the Complaint insufficient to plead fraud with the required particularity, and dismissed those causes of action with leave to amend:
“Prior to Kentwool entering into the Agreement with NetSuite, NetSuite represented to Kentwool that the Software would integrate the management of Kentwool’s manufacturing, inventory, purchasing, financial, sales and shipping processes, specifically including providing visibility and management of blended products through the manufacturing process. NetSuite further represented to Kentwool that the Software functionality would include, among others, advanced financials, item management, production planning, manufacturing control, cost control, lot and serial control, multi-division/multi-site solutions, and order management. During the implementation process NetSuite represented to Kentwool that it would, and did, correct the problems experienced by Plaintiff so that the Software would perform as originally represented to Kentwool. NetSuite also represented to Kentwool that complete implementation would be achieved on or around October 1, 2013.”
This example shows how detailed and granular any fraud-based claims must be pled to survive a motion to dismiss. So, give your lawyers the tools they need in case of any dispute down the line. Make a detailed record of what your needs are, and what NetSuite/Oracle promised it could do. If you can get NetSuite to set forth in writing what they are agreeing to deliver, do so. If they won’t put it in writing, then you need to record it yourself by taking good notes. For Zoom or Teams meetings you can ask NetSuite if you can record the conversation. It is doubtful that they will agree, but it never hurts to ask. If you do decide to record, you need to ensure that you are complying with the applicable law relating to the proper notice required for the recordation of conversations and meetings, in your particular jurisdiction.
Once you successfully can provide the granular details of what was promised, you will have another hurdle to overcome. Was it an actual misrepresentation of fact or mere puffery, which is not actionable? We will discuss hurdle number 2 in our next blog post, and what constitutes a material misrepresentation of fact in the context of a NetSuite related lawsuit. We will provide a few concrete examples, which a judge found to be mere non-actionable puffery, and not a false statement of fact. We think you will find this context very helpful in preparing to negotiate your ERP license agreement.
Tactical Law is an IP and litigation boutique law firm located in the San Francisco Bay area. We assist our clients to negotiate and document ERP and other licensing agreements. We also assist our clients in resolving disputes that might arise during ERP implementation, or if informal resolution is impossible, we assist our clients to litigate such disputes in courtrooms and in arbitration forums around the nation.
By Pam Fulmer
In December of 2021, Oracle announced its acquisition of healthcare giant, Cerner Corporation. The acquisition is Oracle’s largest to date, and will provide a big boost to Oracle in the healthcare and specifically the Electronic Medical Records (“EMR”) market once the deal closes, most likely in 2022. Current Cerner customers are well advised to break out their Cerner license agreements and take steps now to analyze how Oracle may bring its aggressive software audit playbook to the interpretation of Cerner contracts.
According to press reports, Cerner will apparently remain a free-standing business unit within Oracle, but it would not be a surprise to anyone if Oracle’s notorious audit arm LMS (now known as GLAS) becomes involved in software audits of Cerner customers. As Oracle seeks to grow its cloud business, it is our opinion that Oracle may seek to use aggressive software audits to get Cerner customers out of Cerner paper and into Oracle agreements, such as Oracle’s Unlimited License Agreements with its pernicious annual maintenance & support obligations that can never be reduced. We also anticipate that Oracle may use software audits to push Cerner customers to the Oracle cloud, as it seeks to catch up with AWS and other cloud providers.
Current Cerner customers should consider seeking the help of legal counsel and technical experts familiar with Oracle’s audit playbook, to ensure that they are compliant with their existing license agreements. Even if Cerner licensees believe that they are compliant, they would be well served to seek professional advice as to how Oracle might interpret certain Cerner contractual provisions, and begin developing strategies to mitigate such assertions.
Cerner customers have some lead time now, which they should use to prepare their software audit defenses, well before the inevitable Oracle audit notice is issued.
Tactical Law is a boutique law firm located in the San Francisco Bay Area. We are very familiar with Oracle's aggressive software audit tactics, and we assist our clients in pushing back on overreaching Oracle audit assertions.
By Pam Fulmer
Oracle has had a busy 2021 in the federal court system suing customers and third parties for copyright infringement relating to software audits, attacking maintenance & support competitors such as Rimini Street, and defending itself and its subsidiary NetSuite for several failed ERP installations. Tactical Law will discuss here what happened with Oracle licensee related litigation in 2021.
Alleged Hosting and Embedded License Violations and Audit Related Cases
Within the last two years Oracle has filed 3 cases for copyright infringement in the Northern District of California that also raised claims of license violations involving hosting or embedded Oracle software licenses.
Oracle America, Inc. vs. Envisage Technologies, LLC
Oracle sued Envisage on May 11, 2021 for copyright infringement. Oracle contended that Envisage had not bought enough licenses from Oracle to cover its use of Oracle database software for cloud hosting of its Acadis Readiness Suite on Amazon’s RDS platform. Oracle used public facing documents found on Envisage’s own website along with documents that may have been posted by governmental entities or acquired under the Freedom of Information Act, to claim that Envisage’s use of Oracle database software was well in excess of the number of licenses it had purchased from Oracle. The Complaint brought by The Norton Firm, alleged that Envisage’s infringement was willful and sought at lease $3 million in damages. Oracle claimed in the Complaint that Envisage declined to engage in discussions, most likely in our opinion, because Envisage’s contract was with AWS under the RDS license included model and not Oracle. We noted at the time of filing that we believed that Oracle is investing significant resources to investigate AWS customers using both the RDS license included and bring your own license models. Envisage hit back with its own counterclaim seeking declaratory relief for non-copyright infringement and unjust enrichment. The case settled and a dismissal was filed on August 23, 2021, only a little over three months after the filing of the initial lawsuit. The lesson learned is that companies contracting with AWS but still using Oracle software, cannot escape the possibility of audit demands or lawsuits by Oracle involving Oracle Database and other software. Importantly, Envisage claimed that AWS represented that Envisage could use Oracle software to host and would still be compliant using the RDS license included model. We don’t know what representations were actually made, but we do not recommend relying on AWS representations alone as to whether you are compliant. Another lesson learned—look out if you are a company that embeds Oracle solutions in your product. Oracle may be embarking on a strategy of going after you. Time will tell.
Oracle America, Inc. v. Perry Johnson & Associates, Inc.
Although filed in 2020, we included this case as it also involves hosting and we may be seeing a possible pattern involving hosting or embedded licenses. On behalf of Oracle, The Norton Law Firm filed suit for copyright infringement on April 30, 2020. The lawsuit involved an Oracle embedded license. Oracle contended that Perry Johnson & Associates, Inc. (“PJA”) infringed Oracle’s copyrights on, among other things, its Enterprise Edition Database (“EED”) and Real Application Cluster (“RAC”) software. Specifically, Oracle alleged that PJA provided hosting services to third parties without a license from Oracle for Oracle Database. Oracle also contended that “PJA’s software architecture – including the number of sockets – exceeds the scope of any license that PJA may have". PJA licensed its software from an Oracle customer, Arrendale Associates, Inc. (“Arrendale”), which actually contracted directly with Oracle for the embedded license. But rather than sue its direct licensee, Oracle opted to sue Arrendale’s customer, PJA. Oracle may have contacted PJA directly to attempt to ascertain how PJA was using the Arrendale software. 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. The parties jointly dismissed the case on June 30, 2020. The joint dismissal does not mention any settlement, but it is likely in our opinion that a settlement was reached to resolve the matter. Even companies that have not contracted directly with Oracle are not immune to lawsuits brought by Oracle to enforce their copyrights.
Another Oracle Case Involving Embedded Software Licenses and Oracle Audits
In 2021 Oracle also filed suit in the Northern District of California in another case involving an embedded Oracle software license. Because Tactical Law is representing the Oracle licensee in that matter, we cannot comment on the litigation.
Sunrise Firefighters Securities Class Action
This case was filed in 2018 and is currently undergoing class certification briefing and the class certification motion is set to be heard in March 2022. Oracle attacked the Complaint with two motions to dismiss, but the court found that Plaintiffs had succeeded in asserting a securities fraud claim by omission. The court reasoned that “[o]nce Oracle started making statements to the public as to why sales of Oracle cloud were increasing, they owed investors a duty to disclose that Oracle’s use of hard ball audit tactics may also have been a material driver of increased cloud sales. By omitting to do so, Plaintiff has stated a plausible securities fraud claim that Oracle may have violated the securities laws by omission. For other blog posts about this interesting case, please see here and here.
Failed Oracle/NetSuite ERP Installation Related Lawsuits
Oracle also had a busy year defending several lawsuits involving failed ERP installations. Many of these lawsuits also involved claims stemming out of financing arrangements through Oracle Credit Corporation (“OCC”). Oracle and its subsidiary OCC have been accused by multiple litigants of concocting a scheme whereby Oracle misrepresented the capabilities of its software and failed to meet its contractual obligations, but assigned the financing agreements to third party banks before Oracle’s breaches and misrepresentations became apparent to its customers. The result of the assignment was that several of these financing companies brought suit against Oracle customers seeking to collect on these assignments despite the fact that the Oracle software did not work for its intended use. These third-party banks filing suit alleged that under California law “come hell or high water” the Oracle licensee needed to pay the third-party bank all of the monies owed under the financing agreement, even though the software never worked. One court in Washington state, without deciding the issue, opined that such an arrangement could cause the Oracle license to be invalid. According to the court: “[t]his clever arrangement seems designed to subdivide the payment and performance aspects of Oracle’s agreement […] 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 [the Oracle licensee’s] rights to the cloud services if it fails to pay but denies [the Oracle 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).” Several cases involving these issues are detailed below.
Morse Communications, Inc. v. Oracle & NetSuite
On July 13, 2021, Morse Communications, Inc. (“MCI”) brought suit against Oracle and its subsidiary NetSuite, in the Northern District of California alleging claims for breach of contract, fraud and unfair business practices. MCI entered into a Software as a Service (“SaaS”) subscription agreement with Oracle/NetSuite for among other things, payroll related services. MCI alleged that Oracle had agreed that it need not pay any platform fees until after the “go live” date. MCI also claimed that Oracle represented that its software had all of the capabilities that Plaintiff was seeking, including the critical payroll services. As part of the transaction, MCI entered into a financing agreement with Oracle’s credit arm known as OCC. MCI alleged in its pleading that Oracle’s software never functioned as promised and that Oracle was never able to fix the many problems inherent in the software. According to the Complaint, “Plaintiff regularly requested updates, attended trainings, and made best efforts to work with Defendants in order to satisfy their needs and the Agreement. Plaintiff’s requests and efforts were consistently met with vague responses, unnecessary repeated trainings, missed deadlines, ignored concerns, missing products, and custom development charges due to missing functionality and modules.” The Complaint also alleged that “[t]hroughout Plaintiff’s discussions with Defendants, Defendants’ team frequently indicated that they were unfamiliar with Plaintiff’s project and their own products. Defendants’ team rarely answered Plaintiff’s direct questions about Defendants’ products or next steps, rather they repeatedly stated they “would circle back” or “take note of that issue”. After entering into the contract with Oracle, OCC assigned the financing agreement to Banc of America Credit, which likely threatened to sue MCI for not making payments, even though MCI claimed that the software never worked. Plaintiff dismissed the lawsuit without prejudice on September 13, 2021, prior to Oracle entering an appearance in the lawsuit, probably due to a settlement.
Barrett Business Services v. Oracle
Tactical Law has previously blogged on this very interesting Oracle cloud case here and here and will not reiterate those same details. Instead, a few observations. This lawsuit which was filed in January of 2019 by Barrett Business Services, Inc. (“BBSI”) in San Francisco Superior Court was finally dismissed with prejudice on October 20, 2021, pursuant to a settlement. The case was aggressively litigated by all sides, including the finance company that had received an assignment of the OCC financing agreement. Oracle eventually moved to bifurcate and to try the equitable claims for recission to the court first. The Judge denied Oracle’s motion without prejudice ruling that the San Francisco Superior Court usually leaves decisions about bifurcation to the trial court. Oracle also moved for summary judgment on BBSI’s breach of contract and negligence claims. Companies considering entering into an ERP agreement with Oracle will find Oracle’s arguments instructive. In seeking dismissal of BBSI’s breach of contract claim, Oracle argued that all warranties were disclaimed except (1) that Oracle will make available all of the cloud services ordered by BBSI; and (2) Oracle will provide the cloud services in the manner described in the Service Specifications. Oracle argued that it expressly did not warrant that the cloud services would work in the manner that BBSI required or expected. In short Oracle is arguing that it couldn’t have breached the contract by failing to deliver a workable system because no clause in the contract required that it do so. “Here, and as is plain, BBSI cannot establish that Oracle breached any CSA provision by purportedly failing to deliver to BBSI a “workable integrated ERP solution that could be configured to BBSI’s requirements,” as there simply is no such provision in the CSA.” And to make a finer point on the issue, Oracle argued that Section 17.5 of the cloud agreement states: “[p]rior to entering into an order governed by this Agreement, You are solely responsible for determining whether the Services meet Your technical, business or regulatory requirements” and that the contract’s “express terms thus also affirmatively, and exclusively, place upon BBSI the sole responsibility for determining whether the services it was deciding to purchase would meet its ‘requirements’”. Seems preposterous does it not that Oracle would make such an argument, let alone win the argument? But that is exactly what Oracle did, and the San Francisco Superior court ruled in Oracle’s favor dismissing the contract claim finding that although BBSI alleged that Oracle breached the contract by failing to provide a workable ERP solution configured to BBSI’s requirements, the contract contained no such provision. However, despite this loss, BBSI still retained its fraud in the inducement claim. Two lessons can be drawn from this ruling. First, companies considering entering into a contract with Oracle should think long and hard before agreeing to such a provision, and failing to include more granular requirements for Oracle’s performance. Two, when pleading a breach of contract claim think very carefully about what express and implied claims to include in the complaint, because on summary adjudication a litigant cannot bring up new theories that are not alleged in the Complaint.
Advance Lifts v. Oracle/Netsuite and Banc of America Leasing
This is another lawsuit alleging a failed ERP implementation by Oracle/NetSuite, and includes an OCC assignment of the financing agreement to Banc of America Leasing. The lawsuit was filed in the Northern District of California on June 8, 2021. Here is the now familiar story told by the Complaint:
“In or about late October 2019, Advance Lifts purchased software from Oracle to update its computer system and entered into agreements relating thereto with Oracle. On Oracle’s recommendation of Folio3 as its preferred implementation consultant for Oracle’s NetSuite software, Advance Lifts hired Folio3 to customize the software for Advance Lifts’ system. Oracle assigned its right to payment from Advance Lifts to Banc of America. Unbeknownst to Advance Lifts, Oracle’s system was missing a key component to fulfill Advance Lifts’ requirements. Despite this, Oracle’s representative concealed this material fact from Advance Lifts. As set forth herein, Oracle and Folio3 breached their agreements with Advance Lifts due to the wholesale failure of the software and customizations to function. Accordingly, Advance Lifts terminated the agreement with Oracle. Advance Lifts notified Banc of America that the agreement with Oracle terminated, and thus, no further payments were due from Advance Lifts. Despite the clear breaches of contract, fraud and termination, Oracle and Banc of America have refused to acknowledge the termination of the agreements.”
Advance Lifts announced a global settlement on August 24, 2021. However, prior to the announcement of the settlement, Banc of America Leasing filed an Answer and Counterclaim against Advance Lifts. The counterclaim alleged that Banc of America Leasing was a holder in due course of the assignment of the financing agreement signed between Advance Lifts and OCC, and that Advance Lifts owed it at least $342,000 in principal plus unpaid interest. Banc of America Leasing has filed similar lawsuits against other Oracle customers including Zama & Zama and Janco Foods, Inc.
Daramola v. Oracle
This lawsuit filed in December 2019 by an Oracle former employee alleges that that Oracle's subsidiary NetSuite concocted a fraudulent scheme to sell SaaS software that didn't actually exist. When Oracle and NetSuite failed to deliver what had been promised to their customers, Oracle and NetSuite claimed that the problems were not the fault of the software but were instead caused by new customizations demanded by the customer. Oracle used these purported demands to justify pricey change orders to extract additional licensing fees. Plaintiff former employee alleges that his role was to make the customer believe, falsely, that the customer’s promised “go live” date would not happen yet again because the customer’s requested “customizations” would require more services from Oracle, and/or more modules, and/or both to be made functional as the customer desired. And that none of this was the fault of NetSuite/Oracle. This case is especially interesting in light of the lawsuits discussed above, where Oracle licensees repeatedly make claims that Oracle promised that its NetSuite or Cloud software had functionality that actually did not exist.
Other Miscellaneous Lawsuits
Hewlett Packard Company v. Oracle Corporation
HP’s $3 billion judgment was affirmed in June of 2021 by a California appellate court. The court found that Oracle had breached a settlement agreement with HP to the tune of $3 billion when it found that Oracle breached its promise to support software on HP's Itanium server. According to the paragraph at issue in the settlement agreement:
"Oracle and HP reaffirm their commitment to their longstanding strategic relationship and their mutual desire to continue to support their mutual customers. Oracle will continue to offer its product suite on HP platforms, and HP will continue to support Oracle products (including Oracle Enterprise Linux and Oracle VM) on its hardware in a manner consistent with that partnership as it existed prior to Oracle's hiring of [Mark] Hurd."
Shortly after the agreement was signed, Oracle announced it was discontinuing all software development on the Intel Itanium microprocessor. HP reacted by filing suit against Oracle and ultimately won a jury verdict for breach of contract and breach of the implied covenant of good faith and fair dealing. Rejecting an argument by Oracle that the paragraph was only aspirational and not binding, the court found that the language was mandatory and created an obligation for Oracle to continue to support the HP software product.
Rimini Street v. Oracle
This past year saw the continuation of the epic war between maintenance & support competitor Rimini Street and Oracle. Oracle has trained its significant firepower on Rimini since 2011 but the parties are still locked in litigation and Rimini has not abandoned the field. Earlier this year, the Nevada federal district court issued an Order to Show Cause (“OSC”) why Rimini Street should not be held in contempt for violating the injunction entered against it in Rimini I. The parties recently participated in a multi-day evidentiary hearing and are currently awaiting the Court’s ruling. The court in the Rimini II case has signaled that it might set a trial date for summer of 2022. Rimini is seeking a declaration by the Court that Rimini’s process 2.0 does not violate the injunction. Oracle has argued essentially that it is impermissible cross use for Rimini developers to use know how and knowledge obtained when working for one client to speed up the work process it does for another client. The court has indicated that this seems a bit of a stretch. One interesting issue that has not been decided by the court is whether the facilities restriction in some Oracle license agreements (PeopleSoft) may apply to environments in the cloud, and whether a customer exercises sufficient control over the cloud environment so as not to be in violation of the facilities restriction. The court expressly found that it has not been adjudicated whether a client’s own computer systems would include its cloud-based servers. This particular issue may also have repercussions outside the Oracle licensing space and may impact customers of other software vendors.
Oracle v. Google
So much has been written about this lawsuit that we do not have anything more to add.
We hope that you found this blog post interesting. Tactical Law will continue blogging about Oracle related litigation, and advising clients on successful strategies for mitigating the risks inherent in Oracle licensing. Contact us if Oracle has been knocking at your door and you want to discuss your legal options.
By Pam Fulmer
Envisage Technologies, LLC (“Envisage”) has filed a counterclaim against Defendants Oracle America, Inc., and Oracle International Corporation (collectively, “Oracle”) requesting declaratory relief of no copyright infringement and asserting a second claim for unjust enrichment due to payments made to Amazon Web Services (“AWS”) under the RDS "License Included" model. Tactical Law has previously blogged on this case brought by Oracle, which Oracle contends involves hosting.
According to the counterclaim, Envisage’s legacy product was an on-premises version where Envisage customers hosted and maintained the Acadis software product on their own hardware. Under this model Envisage customers were responsible for acquiring their own licenses to the Oracle software. However, in 2019 Envisage opted to change this model in favor of cloud-based software hosted on Envisage’s own hardware. To support the cloud-based hosting of Acadis, Envisage turned to Amazon’s Relational Database Service (“Amazon RDS”) offered by AWS.
Envisage alleges that it chose to go with the RDS “License Included” model due to representations made by AWS that the model would work for its Acadis service offering. Envisage pleads that it “relied in good faith on representations made by AWS regarding the scope of the license to Oracle Database provided under AWS’s “License Included” service model for Amazon RDS for Oracle.” Envisage also asserts that in meetings in 2019 and 2020 with representatives of AWS, Envisage explained the technical details of its Acadis offering and further relied on AWS representations that it could cost effectively leverage the RDS “License Included” model for Envisage’s intended use of the software. Envisage also asserts that Oracle authorized AWS to act on Oracle's behalf under the “License Included” model, and presumably either did or should have approved the representations being made by AWS to its customers concerning the permissible uses of the Oracle software. Envisage seeks a declaration that it is not infringing Oracle’s copyrights and that it was authorized to use the Oracle software for hosting when it went with the RDS "License Included" model. Envisage also asserts a claim for unjust enrichment against Oracle, to the extent that Oracle has already been compensated by AWS for Envisage’s use of the software.
But here is the rub. The AWS Service Terms at Section 10.3.1 provide that the RDS "License Included" customer cannot “use the Oracle Software for rental, timesharing, subscription services, hosting, or outsourcing”. And it appears from the face of the counterclaim that this is exactly what Envisage has done.
What does this all mean for AWS and Oracle customers? It means that licensing Oracle through AWS is complicated and should be done very carefully. Both the technical and legal issues need to be thoroughly vetted before significant investments are made. Also, Oracle appears to be actively looking for AWS “License Included” customers who may be non-compliant with the AWS Terms of Service, and reaching out to them directly demanding payment. Clearly that is what Oracle has done in this lawsuit. Oracle also appears to be demanding information from AWS customers as if it had an audit clause to rely upon. But AWS "License Included" customers do not have a contract directly with Oracle, which is most likely why many of these customers are resisting Oracle’s demands for information. Instead, their contract is with AWS, and the AWS agreements do not have an audit clause. For its part, Oracle may be relying on the AWS Service Terms that provide “[n]otwithstanding anything to the contrary elsewhere in the Agreement, Oracle is an intended third-party beneficiary of the Agreement, but solely with respect to this Section 10.3.1 of these Service Terms.” However, it should be noted that AWS Service Term 10.4 relating to Microsoft software on AWS, specifically provides that “Microsoft is an intended third-party beneficiary of this Section 10.4, with the right to enforce its provisions.” Why the difference and can this be leveraged by AWS customers when Oracle comes knocking?
In short, Envisage has quite the mess on its hands. A high-profile lawsuit by Oracle seeking damages of at least $3 million and perhaps an expensive arbitration with AWS either pending or about to be filed. Meanwhile, Envisage’s entire business model may be up in the air and the legal fees doubtless keep racking up. All of this trauma and expense could have been and should have been avoided upfront with a little planning and investment by Envisage. Other AWS RDS customers should take note and be careful to avoid falling into the hosting trap. And for those AWS customers who believe that by using the RDS License Included model, they can avoid dealing with Oracle all together, these recent lawsuits by Oracle prove otherwise.
The case is Oracle America, Inc. et al v. Envisage Technologies, LLC., Case No. 3:21-cv-03540, Northern District of California. We will continue to monitor the case. Check back for updates.
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:
By Pam Fulmer
Readers of this blog will remember that I previously posted on the shocking case brought by whistleblower Paul Cimino against IBM arising out of a predatory software audit conducted by IBM of the Internal Revenue Service ("IRS"). Although Cimino worked for IBM he was apparently so horrified by IBM's complete fabrication of non-compliance findings in order to force the IRS into a new and more expensive ($265 million to be exact) license agreement that he blew the whistle and filed a claim under the federal False Claims Act ("FCA"). You can read our previous blog post here. The district court dismissed the key fraudulent inducement claim finding that it was not credible that the IRS would enter into a new and more expensive contract with IBM just to get out from under substantial audit penalties. The D.C. Circuit Court of Appeal disagreed and found that Mr. Cimino had plausibly alleged that "but for" the fraudulent audit, the IRS would never had entered into the new license agreement. The court remanded the case back to the trial court for further proceedings. This is a big win for Cimino and although decided under the FCA, can be instructive for all those companies out there who have suffered through predatory audits by major software publishers.
The Court explained the case as follows:
"This qui tam action began when Paul Cimino filed a complaint alleging that IBM violated the FCA. As a former senior sales representative for IBM, Cimino helped sell software to the IRS. Based on knowledge acquired on the job, Cimino alleged that IBM fraudulently induced the IRS to enter a $265 million license agreement for “unwanted, unneeded” software.
Faced with the possibility of losing significant revenue, IBM allegedly devised a scheme to pressure the IRS into another long-term deal. IBM planned to conduct a “friendly” audit, anticipating that the IRS was overusing the software and therefore would owe a significant amount in compliance penalties. IBM would then leverage the penalties by offering to waive them in exchange for a new agreement.
IBM retained Deloitte LLP to perform the audit. Contrary to IBM’s expectations, Deloitte’s initial audit showed the IRS was not significantly overusing the licenses and owed only $500,000 in compliance penalties—a relatively small amount for a contract of this size. IBM never released these audit results to the IRS. Instead, IBM worked with Deloitte to manipulate the results. For example, IBM counted licenses on discontinued servers as in constant use, even though they were never used. Deloitte first presented the number of overused licenses from this manipulated audit to Adam Kravitz at the IRS. Cimino alleged that “Kravitz rejected the audit findings because, in his words, ‘IBM cannot substantiate that the IRS is out of compliance.’” IBM then manipulated the audit again to show an outstanding $292 million in compliance penalties. IBM shared this number with the IRS, despite the fact that one IBM employee considered the number “ridiculous,” and another “was ‘not comfortable representing’ that number to the IRS.”
As we have warned before, avoid "friendly" software audits by software publishers as there is nothing friendly about them. If Oracle or IBM or whatever software company wants to conduct an audit, then they should issue a formal audit notice and do so. These "friendly" audits are often nothing more than fishing expeditions where the sales team hopes to turn non-compliance findings into a big payday and a big contract. Licensees should stand on their contractual rights and not fall into these traps.
Another interesting aspect of the case is how IBM allegedly was attempting to charge the IRS by claiming licensing fees for non-use of the IBM software. The court pointed to allegations that IBM claimed fees for discontinued servers for constant use even though they were never used. We see similar attempts by Oracle and others to charge customers a licensing fee on servers where no Oracle software is being used, such as in the case of Oracle's expansive VMware assertions, which involve non-contractual and non-binding policies. Customers under audit should carefully review license agreements and challenge during audit resolution negotiations policies that are not expressly incorporated into the contract. Careful attention should be paid to assertions that payment must be made for non-use by the customer of the auditing company's software, or for potential future use that has not yet occurred.
We were pleased to see that the appellate court reversed the lower court's dismissal and is allowing this whistleblower suit to proceed past the pleading stage. Only when predatory software vendors are held to account by the courts will such behavior end. Tactical Law will continue to monitor the case. Please check back here for periodic updates.
By: Pam Fulmer
Oracle America, Inc. and Oracle International Corporation (collectively “Oracle”) have filed a new lawsuit for copyright infringement against Oracle customer Envisage Technologies, LLC (“Envisage”) in the Northern District of California. The case was brought by the Norton Law Firm, a boutique law firm in Oakland, California, whose lawyers have a long history of representing Oracle in its IP litigation cases, including in Oracle’s cases against SAP, Google and Rimini Street to name just a few. Readers of this blog will remember that the Norton Firm represented Oracle in the short lived Oracle v. Perry Johnson & Associates litigation, which was dismissed by Oracle a little less than two months after it was filed, likely in this author’s view due to a settlement. Like this new case, Perry also involved hosting, which is an area that seems to be getting lots of attention from Oracle lately, and the Norton Firm appears to be Oracle’s “go to” firm for litigation on hosting related issues.
Oracle essentially contends that Envisage has not bought enough licenses from Oracle to cover its use of Oracle database software that it uses for cloud hosting of its Acadis Readiness Suite on Amazon’s RDS platform. According to the Complaint, “Envisage develops software directed to the needs of public safety leaders. Its Acadis Readiness Suite software is advertised as providing software solutions for training, compliance, internal affairs case management, professional development, legal defensibility, and public accountability.” Oracle uses public facing documents found on Envisage’s own website along with documents that may have been posted by governmental entities or acquired under the Freedom of Information Act, which Oracle contends show that Envisage’s use of Oracle database software is well in excess of the number of licenses it has purchased from Oracle. Oracle claims that Envisage’s infringement is willful and seeks at lease $3 million in damages.
For example, Oracle pleads on information and belief that Envisage obtains “subscription revenue from its customers” and that to provide the software and services that it advertises, “Envisage is running Oracle Database on eight or more processors as an Amazon RDS customer.” Oracle claims that it contacted Envisage in March of 2021 to engage in discussions about properly licensing the Oracle software, and that Envisage initially agreed to enter into discussions, but later changed its mind. According to the Complaint:
“Because Envisage has refused to engage in discussions, Oracle does not yet know the
details of Envisage’s software architecture. On information and belief, given the magnitude of its customer base and the hosting services it provides through Amazon RDS, Envisage’s use of the Oracle Database exceeds the scope of the license that Envisage purchased in 2006 to use Database SE1, a license planned for use for one account as a pilot. On information and belief, the scope and nature of Envisage’s use requires a license for at least Oracle Database SE2 and, more likely, for Oracle Database EE. Envisage, however, never obtained a license or authorization from Oracle directly or indirectly to use either Oracle Database SE2 or EE. Upon information and belief, Envisage’s 2006 Database SE1 license does not authorize its current use of Oracle Database through Amazon RDS.”
It appears from Oracle activity that we are seeing that Oracle may be investing significant resources in investigating both Oracle customers that use the AWS Bring Your Own License model for using Oracle software as well as the AWS License Included model, and that these hosting issues will continue to attract Oracle’s attention and perhaps spawn further lawsuits.
If you have been approached by Oracle about a hosting issue on Amazon RDS and Oracle is requesting information about your usage, you need to proceed with caution and have a game plan in place. Or if you are thinking about using Amazon RDS to host your application, make sure that you understand the potential licensing traps. Tactical Law advises companies on these and similar issues and can help.
The case is Oracle America, Inc. et al v. Envisage Technologies, LLC., Case No. 3:21-cv-03540, Northern District of California. We will continue to monitor the case. Check back for updates.
Court Rules Sunrise Firefighters’ Securities Fraud Lawsuit Allowed to Proceed Against Oracle and its Senior Management
By Pam Fulmer
Oracle and its senior management suffered a significant loss in federal court yesterday involving Oracle’s Audit, Bargain, Close (“ABC”) predatory sales and audit tactics. In a sweeping 54 page opinion, Judge Freeman of the Northern District of California has granted in part and denied in part Oracle’s motion to dismiss a class action securities fraud lawsuit, which alleged that Oracle used predatory software audits to drive sales of its cloud products, and then omitted to tell the public about all the potential reasons for Oracle’s increasing and later decreasing cloud sales. The Plaintiff will be allowed to pursue only its omission based securities fraud claims against Oracle and senior management Larry Ellison, Mark Hurd, Safra Catz, and Ken Bond. All other securities fraud theories alleged in the SAC were dismissed. Defendants Thomas Kurian and Steve Miranda were dismissed from the lawsuit with prejudice. The remaining Defendants have 30 days to file an Answer to the Second Amended Complaint (“SAC”).
Judge Freeman's Order sets out the background facts alleged in the SAC.
“Oracle allegedly employed a strategy called “Audit, Bargain, Close,” also referred to as “ABC.” SAC ¶¶ 16, 95-128. Under this strategy, Oracle would install its software on on-premise client ecosystems “with a variety of preferences automatically enabled that, unbeknownst to the customer, caused the customer to arguably—and unknowingly—exceed the limits of its license.” Id. ¶ 16. The company would then initiate an audit of an on-premises customer for violations of its on-premises software license. Id. When it found violations, Oracle would “threaten to impose extremely large penalties” that it would abate only if “the customer agreed to accept a short-term cloud subscription.” Id. The SAC alleges that customers “neither desired nor intended to use” the cloud products but purchased them to avoid the hefty penalties. Id. ¶¶ 16, 151-198. Second, Oracle allegedly engaged in a tactic known as “attached deal[s].” Id. ¶¶ 17, 129-150. Oracle offered its customers “a significant discount” on its on-premises products, provided the customer also agreed to receive a short-term cloud subscription – “even though the customer neither wanted nor intended to use the attached cloud product.” Id. ¶ 17. The SAC alleges that the attached deals thus served to disguise legacy on-premise revenue as cloud revenue. Id. ¶¶ 129-150.
Starting in 2014, “market participants voiced early concerns that Oracle and its auditing department should not attempt to extract ‘cloud’ revenues through their audits of its licensees’ ‘on- premises’ software licenses.” SAC ¶¶ 51, 54-60, 62, 64. Oracle executives, however, denied that the company was misusing its audit process to gin up purported cloud sales, id. ¶¶ 61, 63, 64, instead tracing sales successes to Oracle’s superior cloud products and business practices, id. ¶¶ 66-71. Oracle’s stock price rose almost 24% between 2017 and 2018 as investors and analysts celebrated the strength of Oracle’s cloud business. Id. ¶¶ 72-73. The representations of Oracle executives stood in stark contrast to reality according to the SAC, id. ¶¶ 74-94, as Oracle’s cloud products were “deeply flawed,” limiting customer’ ability to use the products effectively and forcing the company to lean on financially engineered deals, id. ¶ 74, 95.”
Oracle customers reading this description may recognize this familiar pattern, as many customers around the world have complained in the business press and otherwise that they have been subjected to these predatory ABC audits and forced to buy Oracle cloud software to resolve the audit.
Only the Omission Based Securities Fraud Theory Survived Oracle’s Motion to Dismiss
Although Judge Freeman found that in many instances Plaintiff failed to set forth facts that would support many of its securities claims, the Court focused on Oracle’s representations to investors about the reasons for its increasing and later decreasing cloud sales. Unlike the First Amended Complaint (“FAC”), the Court found that Plaintiff had plausibly pleaded facts in the SAC establishing an omission based fraud theory under Section 10 of the Securities Act. According to the Court:
“Plaintiff also contends that Defendants misleadingly attributed Oracle’s cloud revenue growth to the quality and competitiveness of its cloud offering, while failing to disclose that engineered deals were a material driver of those results. See SAC ¶ 267, 358, 361, 418, 424; see also Opp. at 10-11. As the Court explained in its prior order: [O]nce Defendants made statements about the drivers of Cloud revenue growth, the investors would have been interested to know that “a material driver” of Cloud Sales was Oracle’s Sales Practices. MTD Order at 25. However, the Court ultimately found that Plaintiff failed to establish the materiality of Oracle’s Sales Practices. Id.
The SAC has overcome this hurdle. Plaintiff has provided additional allegations from the CWs (“Confidential Witnesses”) along with new allegations from industry members that establish the materiality of revenue generated through Sales Practices. See Order at 27-30 ( “CW Allegations” and “Industry Member Allegations”). Oracle does not have an independent duty to disclose its sales tactics; nevertheless, once Defendants made statements about the drivers of cloud revenue growth, investors would have been interested to know that Oracle’s allegedly coercive sales practices were “a material driver” of cloud sales.”
In other words, the Court is saying that Oracle was touting its growing sales of cloud products in the marketplace as being due to customers' finding that the Oracle software was a quality product, which could go toe to toe with AWS and other competitors. Once Oracle started making statements to the public as to why sales of Oracle cloud were increasing, they owed investors a duty to disclose that Oracle’s use of hard ball audit tactics may also have been a material driver of increased cloud sales. By omitting to do so, Plaintiff has stated a plausible securities fraud claim that Oracle may have violated the securities laws by omission.
Once Oracle’s sales of Oracle cloud began to decrease, Oracle also had a duty to disclose other reasons why those sales were slowing, including the decreasing success of their predatory audit tactics. According to the Court:
“The Court, again, emphasizes that Oracle does not have a stand-alone duty to disclose its sales practices. However, as with Defendants’ statements about drivers of cloud growth, once Defendants made statements about the reasons underpinning cloud growth deceleration, investors would have been interested to know that the dwindling efficacy of Oracle’s sales practices had a material impact on this decline. (citation omitted) At this stage, the allegations relating to cloud growth deceleration are adequate to state an omission-based claim under Section 10.
Plaintiff has successfully pled a narrow omission theory of securities fraud. This theory centers on Defendants’ statements about Oracle’s cloud growth deceleration and the drivers of cloud growth. Statements at FAC ¶¶ 363, 367, 390, 404, 416, 418, 422, 424, 433, 434, 443, 446, and 453 support this theory. The Court emphasizes that this theory is not based on a stand-alone duty to disclose allegedly coercive sales tactics; rather, Oracle’s affirmative representations about cloud growth deceleration and drivers of cloud growth “affirmatively create[d] an impression of a state of affairs that differs in a material way from the one that actually exist[ed].” Brody, 280 F.3d at 1006. This is particularly true during a Class Period where the nascent cloud market exploded and Oracle competitors enjoyed robust growth. With the exception of this theory and associated statements, the Court DISMISSES the SAC.”
Importantly the Court rejected Oracle’s arguments that Plaintiff had not pled facts sufficient to state a claim that Oracle and its top management had the requisite scienter needed to hold them liable under the securities laws. According to the Court, “[a] defendant is liable for making false statements under Section 10(b) and Rule 10b-5 when he acts with scienter, a “mental state that not only covers intent to deceive, manipulate, or defraud, but also deliberate recklessness. (citation omitted) [D]eliberate recklessness is ‘an extreme departure from the standards of ordinary care ... which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it.’” (citation omitted). As such, “[f]acts showing mere recklessness or a motive to commit fraud and opportunity to do so provide some reasonable inference of intent, but are not sufficient to establish a strong inference of deliberate recklessness.” In other words, this is a very hard pleading standard to meet. Judge Freeman recognized that the Plaintiffs “must “plead with particularity facts that give rise to a ‘strong’—i.e., a powerful or cogent—inference.” Id. at 323. In evaluating whether a complaint satisfies the “strong inference” requirement, courts must consider the allegations and other relevant material holistically, not “scrutinized in isolation.”
Applying this law to the facts, the Court found that the facts alleged in the SAC “give rise to a strong inference of scienter with regard to Hurd, Catz, Ellison, Bond, and Oracle”, but that Plaintiff’s allegations against Kurian and Miranda, fell short of meeting this standard. According to the Court:
“Plaintiff’s core claim is that Oracle knowingly foisted inferior cloud products on unwilling customers by threatening license audits that could produce penalties in excess of the price of the cloud products. While Oracle earned real revenue from these sales, unused and non-renewed one year cloud subscriptions dwindled over time as Oracle exhausted the list of customers it was able to strong-arm. When questioned why Oracle’s cloud sales rates skyrocketed at first and later slowed, Defendants affirmatively and falsely attributed Oracle’s success and subsequent slowed sales rates to false reasons, masking the material impact of engineered sales on cloud growth.”
In the end Judge Freeman found Plaintiff’s “overall fraud theory alleged in the SAC plausible, cogent and compelling.”
The Court went on to examine the statements and other allegations concerning the scienter of Ellison, Hurd, Catz and Bond. The Court analyzed each of these allegations and then stood back and looked at them holistically. Here’s what she had to say:
“As the Court detailed above, multiple kinds of evidence individually support a finding of, at the very least, deliberate recklessness as to Hurd, Catz, Ellison, and Bond. (citation omitted) A holistic review of the evidence confirms this conclusion. Although not every kind of evidence individually supports a finding of scienter, Plaintiff’s factual and CW allegations against Hurd, Catz, Ellison, and Bond are highly compelling. And while the core operations doctrine rarely succeeds, here it adds modestly to support the evidence supplied by the CWs given the centrality of engineered sales to Oracle’s bottom line and allegations of Hurd, Catz, Ellison, and Bond’s roles in the company and involvement in cloud sales. When viewed holistically, even Plaintiff’s compensation structure and stock sales allegations have some teeth to them. In sum, the inference that Hurd, Catz, Ellison, and Bond were deliberately reckless as to the truth of their public statements is “at least as compelling as any opposing inference.”
As our readers will see, it was a bad day in Court for Oracle and the top echelons of Oracle's management. It will be very interesting to see if the case settles now that Sunrise Firefighter’s have survived the motion to dismiss. Often these type of securities class action cases do settle quickly, when they are not dismissed at the pleading stage. If the case does continue, Tactical Law will bring you periodic updates about anything we find interesting in the public filings.
Oracle customers who have experienced a predatory ABC audit by Oracle may have remedies if they were forced by Oracle to purchase cloud software to resolve an audit. We would be happy to discuss your potential legal options and possible remedies.
The case is City of Sunrise Firefighters Pension Fund v. Oracle, et. al., Northern District of California, (Case No. 18-cv-04844-BLF)
By Tactical Law Attorneys and From Time to Time Their Guests