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.
Pamela K. Fulmer
Software companies who use aggressive software audits to increase revenues often threaten their customers with lawsuits for copyright infringement and breach of contract, as leverage in order to try to drive sales of additional software products. In fact, we have seen software companies like Quest Software file lawsuits against their customers for copyright infringement arising out of an audit, when in reality their only claim is one for breach of contract. How do you know if the licensor of your software can sue you for copyright infringement for your alleged over-deployment of software? It basically comes down to whether the license provides a remedy for over-deployment such as paying additional fees should an audit uncover excess use. If it does, the clause is viewed by courts as a covenant and not a condition, the breach of which gives rise to only a contract claim. In California, as in other states, conditions are not favored and a court will construe a clause as a covenant and not a condition unless the clear and unambiguous language of the contract requires it to do otherwise.
When a copyright owner grants a nonexclusive license to use its copyrighted material, it generally waives its right to sue the licensee for copyright infringement and can sue only for breach of contract. A licensor may sue for copyright infringement only when the licensee acts outside the scope of the license. Courts refer to contractual terms that limit a license's scope as "conditions," the breach of which constitute copyright infringement. MDY Indust. LLC., v. Blizzard Entm’t Inc., 629 F.3d 928, 939 (9thCir. 2010). Courts refer to all other license terms as "covenants," the breach of which are actionable only under contract law. Id. See, e.g., BroadVision, Inc. v. Medical Protective Co., 2010 WL 5158129 (S.D.N.Y. Nov. 23, 2010) (applying California law to find that the license provisions permitting excess use of software in exchange for additional fees are covenants, not conditions.) The distinction between a “condition” and a “covenant” is determined under the law of the state that governs the license agreements. Most Oracle licenses in the United States and older Quest licenses are governed by California law. Under California law a license provision that permits additional use or over-deployment, but requires that a licensee pay for that additional use, is a covenant rather than a condition. See, e.g., Actuate Corp. v. Fid. Nat'l Info. Servs., Inc., No. C 14-02274 RS, 2014 WL 4182093, at *3 (N.D. Cal. Aug. 22, 2014) (dismissing copyright infringement claim because alleged additional use violated covenant rather than condition).
A case involving Quest Software is instructive. In Quest Software, Inc. v. DirecTV Operations, LLC , 2011 WL 4500922 (C.D. Cal. 2011) the district court specifically found that a clause, which provided a “true-up” mechanism in the event of excess use, i.e. over-deployment, constituted a covenant and not a condition. In support of his ruling granting summary judgment to the licensee and dismissing the copyright claim, Judge Guilford reasoned that “the over-deployment and true-up provisions in the License Agreement permit [DirectTV] to use Foglight on additional CPUs for an extra fee. These provisions are properly described as covenants because they do not concern the scope of the license, only the number of CPUs the license covers.” In other words, the contract specifically contemplates that excess use may occur, and in that situation the remedy is payment for the additional licenses.
Given the law, why do licensors often decide to include a copyright claim in their complaint? Several potential reasons come to mind. First, inclusion of the federal question allows the licensor to file its lawsuit in federal court. Otherwise a licensor would be limited to filing for breach of contract in state court unless diversity existed or it had another federal claim. Second, the copyright owner can recover actual damages such as its lost profits, or even the profits of the infringer on a copyright claim, making it more attractive than regular contract damages. Third, for licensors where actual damages are hard to prove, statutory damages are available. Fourth, damages may be enhanced if a court finds willful infringement. Finally, reasonable attorneys’ fees and costs may also be awarded to the successful licensor if they prevail on their copyright claim. This is helpful in situations where the license agreement does not have an attorneys' fees provision.
If your license has not been terminated and contains a clause that provides for a “true up” payment in the event of an over-deployment, the licensor’s sole remedy is likely a claim for breach of contract and not copyright infringement, at least under California law. Push back against licensor assertions to the contrary.
Pamela K. Fulmer
In a hard hitting opposition brief to Oracle’s motion to dismiss, lead Plaintiff Union Asset Management Holding AG shreds many of Oracle’s arguments and again reasserts the myriad of specific facts that were pled to support Plaintiff’s contention that Oracle used coercive audit tactics to improperly drive sales of cloud revenue, which it then misleadingly reported to investors and the public.
Correctly pointing out that at this juncture of the litigation Plaintiff does not have access to Oracle books and records so that it is not required to “plead the precise amount of overall revenue affected by Oracle’s improper sales tactics”, Plaintiff nonetheless asserts that “the Complaint’s detailed allegations give rise to the inference that the artificial sales were material in scope.” As we have pointed out in previous blog posts, if Plaintiff can get past the pleading stage and into discovery, it may well learn from Oracle’s own documents that Oracle revenue generated from these predatory audit tactics was very substantial indeed.
Plaintiff argues that Oracle misled investors about the driver of cloud sales growth and that it was the abusive audit tactics that were driving cloud sales, rather than Oracle having a superior cloud product. Plaintiff also contends that Oracle misled investors about the sales growth being sustainable, when Oracle knew very well from its own people that it was not. Finally, Plaintiff once again presents a strong argument as to how it has adequately alleged scienter on the part of Oracle’s senior management to deceive the public concerning the strength of Oracle’s cloud sales. Writing that “[s]cienter is “a mental state that not only covers intent to deceive, manipulate, or defraud, but also deliberate recklessness,” Plaintiff sets out a litany of allegations that present a strong inference that senior management knew and most likely approved of the use of Oracle compliance audits to drive cloud deals.
If you believe your company has been forced into an unwanted cloud purchase arising out of an Oracle audit, you may have legal remedies. Please contact firstname.lastname@example.org if you would like to discuss your potential legal options.
Tactical Law Group LLP is continuing to monitor the litigation. Check back here for periodic updates.
You may read Plaintiff’s opposition to Oracle's motion to dismiss here by clicking below.
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