Oracle v. SAP: Daytime Drama

Oct 29, 2010 (09:10 AM EDT)

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If Oracle's lawsuit against SAP, as the company outlines in the first sentence of its trial brief, is about SAP's "deliberate scheme to 'inflict pain' on Oracle through knowingly illegal conduct," then this trial, set to begin Nov. 1 in Oakland, Calif., is Oracle's deliberate scheme to inflict pain on SAP.

The crux of the suit is pretty simple: TomorrowNow, a company that provided cut-rate support for PeopleSoft (hence, Oracle) applications, infringed on Oracle copyrights by illegally downloading a massive volume of files that included software, source code, and support documentation. SAP acquired TomorrowNow in 2005 and the practice continued. SAP has admitted liability, both on the part of TomorrowNow and, just recently, SAP for allowing the perpetuation of the practice. The trial ultimately will determine the damages to award Oracle.

Oracle's retribution for sins committed and confessed to could put a serious financial hurt on SAP, but it will also surely serve as a warning sign to the likes of Rimini Street and Google, whose distant trials with Oracle still loom. Even Hewlett-Packard, whose incoming CEO, former SAP CEO Leo Apotheker, starts ominously on Nov. 1, will donate a pound of flesh.

Jury selection is due to start at U.S. District Court on Monday (the judge rejected Oracle's request for a delay), with opening statements from both sides likely to come Tuesday. After that will come Oracle's first witness -- most likely the company's chief architect, Edward Screven, who is also in charge of security technology. The witness roster is an A-list of technology titans: The first week should see Oracle CEO Larry Ellison, former Oracle President Charles Phillips, and SAP CFO Werner Brandt. Apotheker is also expected to testify in the first week, but it isn't clear whether he will be deposed via video, show up in person, or wear a Halloween disguise. The second week will likely feature Oracle President Safra Katz and SAP attorneys. We're likely also to see SAP's current co-CEO, Bill McDermott, former CEO Henning Kagermann. and CFO Werner Brandt.

Oracle is building its case around two crucial items. First is the extent to which SAP is liable, not because it bought a company (TomorrowNow) that clearly appropriated Oracle intellectual property, indicating "vicarious" liability, which SAP has copped to; but because it possibly acquired TomorrowNow with knowledge of its illicit practices. Oracle also claims that SAP allowed, even encouraged, the practices (liability for "contributory infringement"), perhaps with the explicit knowledge, agreement, or guidance of then-CEO Apotheker -- as Ellison has taken pains to point out lately.

Until Oct. 28, SAP had taken great care to talk only about TomorrowNow's liability, raising Oracle's cackles. It's possible that Oracle will point to a liability shield SAP created when it acquired TomorrowNow -- something Oracle believes SAP did to protect itself from exactly what's happening now. In other words, the liability shield could be evidence that SAP was quite aware of TomorrowNow's transgressions.

SAP acquired TomorrowNow immediately after Oracle purchased PeopleSoft (for $11.1 billion). This was January 2005, and back then, companies like TomorrowNow were emerging to service companies that didn't want to pay hefty annual fees (as much as 23%) for maintenance and perpetual software upgrade rights. Critics of these fees have cast them as soft extortion, while Oracle and SAP have been quick to note all the critical services they provide customers in exchange for those fees.

Most customers that turned to companies like TomorrowNow weren't interested in constantly upgrading their software. Depending on who you listen to, those customers were either making calculated business decisions or putting their critical applications in jeopardy. Either way, their defection represented a threat to the fat, repeatable profit margins of Oracle and other enterprise application vendors.

The trial could reveal internal documents that show Oracle executives downplaying the importance of the customers who chose to go the third-party route. Yet one industry observer with knowledge of the proceedings points out that shifting support to a third-party vendor is a pretty clear signal of "an intent to change the nature of a relationship." Oracle had reason to worry.

SAP's plan was to make TomorrowNow part of its "Safe Passage" program, whereby wary PeopleSoft (and JD Edwards) customers and later Siebel customers could find "comfort" by switching to SAP. In its trial brief, SAP says customers were given a 75% credit for the cost of a PeopleSoft license, and the option to have TomorrowNow provide support services. None of this is disputed. The question about what SAP knew, and when, is where Oracle's witnesses and attorneys will prepare some body bags.

At the time, according to SAP's trial brief, Oracle was making plans for its Fusion integrated-application suite, and strongly hinting that all Oracle application customers, no matter the origin, would eventually be moved to that platform. Some of this is clearly SAP stage-setting: If people were bound to leave Oracle anyway, then how can Oracle prove that SAP did anything -- legally or not -- to get them to embrace SAP? In fact, any departure from PeopleSoft might just be all Oracle's fault, goes the veiled logic. SAP says that about 800 customers took advantage of the Safe Passage program, but it also says that of the 358 TomorrowNow customers, only 86 of them ever purchased SAP products and services.

Financial Damages

The question about how much financial damage any of SAP's illegal activity caused Oracle is really what the trial proceedings will attempt to decide. Oracle is claiming damages based not on actual customers lost, but on the value of the software misappropriated. Oracle's trial brief puts the "fair market value" of stolen software at $2 billion. Other aspects of Oracle's case take the number higher.

Meanwhile, a reading of SAP's trial brief puts their damage estimates at anywhere from zero to tens of millions of dollars. It rebuts nearly every monetary claim. For example, SAP says that nary a customer chose SAP because of TomorrowNow; and TomorrowNow never earned a profit (precisely, it lost $90 million while part of SAP, according to the trial documents). In other words, no harm, no foul.

Oracle's trial brief points to internal SAP statements about the potential SAP business growth resulting from the purchase of TomorrowNow. SAP allegedly forecast $897 million in benefits to its business just between 2005 and 2007, as it aimed to lure almost 5,000 PeopleSoft customers, or nearly half of those Oracle had just acquired in the PeopleSoft deal. But SAP claims that "at no time prior to the launch of Safe Passage did SAP ever quantify the extent to which TomorrowNow itself would cause sales of SAP software that SAP would not otherwise have made."

SAP's brief claims that Oracle's internal statements reveal that it didn't see the possibility of customers switching either. In fact, SAP claims, the 86 TomorrowNow customers that switched to SAP from PeopleSoft, and the 800 or so customers that took advantage of Safe Passage (most of which, SAP claims, didn't buy TomorrowNow support), all did so based on the merits of SAP software alone, and not because of TomorrowNow's support. SAP portrays its purchase of TomorrowNow as a complete failure.

This fun little dance sidesteps the fact that the end goal for SAP was to establish a relationship with Oracle customers, not so much to hook them on TomorrowNow services. The trial could come down to placing a value on those 86 customers; Oracle must prove a linkage. The trial briefs show that each side has its own interpretation of why customers switch. This is a big deal; after all, the cost of ripping out and switching platforms isn't one that CIOs take lightly. The associated risks are extremely high.

While Oracle wants damages tied to the value of stolen software, SAP wants to limit the damages to lost maintenance sales from customers that chose support from TomorrowNow. SAP's brief displays a belief that Oracle needs to show actual and provable damages from copyright infringement (for example, the value of the infringed software to SAP and/or TomorrowNow).

SAP's brief demonstrates it will rebut every monetary claim, but it pegs the infringement loss at no more than $40 million, while it says Oracle pegs it somewhere between $91 million and $318 million. SAP says that most of these customers would have used some third-party support service anyway -- again, no harm, no foul. But even if Oracle wouldn't have directly profited (the point SAP is trying to make), SAP and TomorrowNow actually did.

SAP seems to believe that Oracle is basing its $2 billion damage figure on its desire to exact some of the PeopleSoft purchase price out of SAP, and the claim that SAP would have gone on to acquire thousands of PeopleSoft customers rather than the 86 that SAP cites.

Inflicting Pain

While the trial is about assigning monetary damages -- and Oracle is clearly after what it thinks is its fair share -- the real damage Oracle wants to inflict is public humiliation on its most hated rival.

In recent days, Larry Ellison, perhaps wanting to make the trial begin a little sooner and last a little longer, has also verbally sparred with HP, practically daring the company to let new CEO Apotheker into the country (he lives in Paris) to take the witness stand, and calling HP Chairman and former Oracle President Ray Lane a liar for having said that Apotheker didn't know anything about TomorrowNow's practices. Ellison even said the HP tagline should change from "Invent" to "Steal." Oracle may not go with the "liar liar, pants on fire" tactic in court, but it sure is getting uncomfortable.

The federal judge in this case, Phyllis Hamilton, said in a partial summary judgment there wasn't enough evidence to implicate SAP and its executives for contributory liability. The jury is to decide. But SAP sucked the drama from the story on Oct. 28, owning up to contributory liability. This admission won't change much about the damages Oracle is seeking, but it sure puts the possible payout on the high end.

Meanwhile, the U.S. Department of Justice will be watching closely. It was practically a given that TomorrowNow employees would be investigated, but if SAP continued and even encouraged illegal practices after it learned of them, the DoJ is likely to climb higher up the ladder. If Apotheker answers Ellison's dare, which is likely, the drama will mount; for HP too.

Oracle's trial brief claims that before buying TomorrowNow, SAP had a former PeopleSoft executive under its employ, John Zepecki, look into TomorrowNow's practices, and it alleges that SAP knew that TomorrowNow's use of Oracle software was "outside the contractual use rights." And yet SAP proceeded with the deal.

Oracle says its forensics expert discovered that TomorrowNow had collected more than 9 million Oracle files (software, support material, etc.) using a bot-like program called Titan. This program allegedly logged into Oracle's servers using customer credentials and scraped support material like a famished vacuum cleaner, using a series of processes that maximized the amount of data it could be exposed to. The amount of Oracle server activity, the brief says, was huge, practically bordering on denial of service attack volumes. In fact, according to Oracle, it sometimes crashed Oracle servers.

In one tersely worded passage in its trial brief, Oracle reveals one of several tactics it will take to try to convince a jury what it couldn't with Judge Hamilton:

"SAP defends itself now by claiming that by March 2005 -- it cannot say precisely when -- the SAP board supposedly issued what SAP now calls a 'directive' to SAP TN to remove all infringing copies of Oracle copyrighted works from SAP TN's servers. No actual record of that Directive exists. No board minutes or resolutions contain any such Directive. No memos summarize its terms. No emails confirm its existence. Board members who supposedly issued the Directive -- including board members directly involved in overseeing SAP TN -- have no recollection of it."

After Oracle sued, the brief says, SAP didn't stop its practices for an entire year. SAP waited, its own brief claims, to make sure customers were protected first; then it shut down TomorrowNow. What it was protecting the customers from is unclear.

There will be some talk about statutes of limitation and laches, the implication being that Oracle knew what TomorrowNow was doing, maybe even long before SAP's purchase of the company, and chose to take action only to damage a rival. Oracle says it didn't find out about TomorrowNow's practices until November 2006, but if these Titan bots were so powerful and disruptive, how could that be? SAP is also claiming in its brief that for the first two years of this case, Oracle was fine with limiting the damages to lost support sales.

Surely, Oracle can change its mind, even if only for vindictive purposes.

Ellison is a man hell-bent on competing in court and in the press as hard as he competes for customers. Legions of customers snatch up his company's software, and almost as many legions curse him (mostly under their breath) for charging hefty maintenance fees. He also happens to be filthy rich. Sympathy, in other words, isn't his ally.

Some version of the truth could be.


Global CIO: In Larry Ellison's Legal Battle With SAP, HP Is Collateral Damage

Global CIO: In Oracle Trial, HP Might Pay Higher Price Than SAP

Global CIO: Larry Ellison Will Be Crucial Witness At Oracle-SAP Trial

Global CIO: Larry Ellison And HP CEO: Courtroom Showdown Looming

Global CIO: An Open Letter To HP Chairman Ray Lane

Global CIO: Are HP And SAP Perfect Match Or Train Wreck?

Global CIO: An Open Letter To HP CEO Leo Apotheker

Global CIO: SAP's Sweeping Turnaround: Exclusive Co-CEO Interview

Global CIO: HP's $130-Billion Gamble

Global CIO: Larry Ellison Puts HP In Crosshairs Via Slap At New CEO

Global CIO: HP CEO Apotheker Has Deep Expertise But Checkered History

Global CIO: An Open Letter To SAP Chairman Hasso Plattner

Global CIO: Oracle's Success Breeds Fear And Loathing At The New York Times

Global CIO: An Open Letter To HP CEO Leo Apotheker

Global CIO: SAP Stunner: ERP Deal Boosts Customer Profit $100M Per Year

Global CIO: The CEO Of The Year Is SAP's Bill McDermott

Fritz Nelson is the editorial director for InformationWeek and the Executive Producer of TechWebTV. Fritz writes about startups and established companies alike, but likes to exploit multiple forms of media into his writing.

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