Jury Decides: SAP To Pay Oracle $1.3 Billion

Nov 23, 2010 (04:11 PM EST)

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Three years of legal due diligence, packed into three weeks of trial, and finally we have a verdict after less than a day of jury deliberation: SAP owes Oracle $1.3 billion for copyright infringement in a landmark judgment that will likely drag on through appeals. But this case promises to reach further -- into the tenuous world of third-party support, into law school classrooms for decades to come, and quite possibly into a world of shareholder lawsuits and justice department investigation.

After watching almost every minute of this trial unfold, it was impossible to predict such an outcome, which intellectual property consultant Sam Wiley called "the largest ever" copyright infringement award. Third-party software support provider TomorrowNow, which SAP acquired at the beginning of 2005, downloaded millions of Oracle files, including software, source code and support materials. SAP knew about it before the acquisition, and the practice continued long after, until Oracle filed suit in 2007. The acquisition of TomorrowNow took place just as Oracle was completing its hostile takeover of PeopleSoft (which included JD Edwards).

SAP claimed to have put out an edict to stop the illegal downloading. During the trial, some SAP executives said that they had assumed this put a stop to the practice, but nobody ever followed up, at least according to their testimony. SAP admitted liability, copping to contributory liability just days before the trial began; this form of liability meant that SAP wasn't just taking accountability for TomorrowNow's actions, but included its own negligence in the matter.

The jury had to decide between two methods of determining damages. First, a hypothetical negotiation that would have taken place on the day SAP acquired TomorrowNow, with both sides having full knowledge of each others' intentions. Oracle, then, would have known that SAP's business assumptions included a three-year plan to entice PeopleSoft and JD Edwards customers to TomorrowNow support, get them to purchase other SAP software (like NetWeaver), and then convert them to SAP ERP and other enterprise applications. SAP planned to make almost $900 million over three years through this plan, called Safe Passage.

SAP executives called those assumptions "marketing plans" in an attempt to downplay them (during the trial, both sides displayed the $900 million document countless times, and it became known as The Zieman Document, for its creator, SAP services chief, Thomas Zieman). Instead, SAP wanted the jury to consider a "lost profits" scenario, whereby its damage expert calculated the money Oracle lost in customer conversions, and the profit SAP accrued through its use of Oracle's software. Both sides agreed that 358 customers left Oracle through Safe Passage, and 86 of them became SAP customers. From there, the sides disagreed about pretty much every customer's reason for leaving Oracle.

Oracle's hypothetical negotiation numbers totaled "at least" $1.66 billion; that number had been limited by Judge Phyllis Hamilton during the course of the trial. Oracle's damage expert also calculated a lost profits number of $409 million. SAP's damage expert put the number at about $40 million. Obviously, the final jury verdict was much closer to Oracle's number -- perhaps not a surprise to some, given the excessiveness of the infringement.

In an official statement, Oracle President Safra Catz said: "For more than three years, SAP stole thousands of copies of Oracle software and then resold that software and related services to Oracle's own customers. Right before the trial began, SAP admitted its guilt and liability; then the trial made it clear that SAPs most senior executives were aware of the illegal activity from the very beginning. As a result, a United States Federal Court has ordered SAP to pay Oracle $1.3 billion. This is the largest amount ever awarded for software piracy."

William Wohl, VP of SAP Global Communications also responded to the verdict: "We are, of course, disappointed by this verdict and will pursue all available options, including post-trial motions and appeal if necessary. This will unfortunately be a prolonged process and we continue to hope that the matter can be resolved appropriately without more years of litigation. The mark of a leading company is the way it handles its mistakes. As stated in court, we regret the actions of TomorrowNow, we have accepted liability, and have been willing to fairly compensate Oracle. Throughout this matter, our customers, employees and partners have stood by us and, for that, we are grateful. Our focus now is looking forward, helping our customers be best run businesses, and extending our legacy of industry leadership well into the future. We thank the jury for its diligent service through this lengthy trial and the Court for its supervision of this complex case."

Experts I spoke with believe that there will be a complicated series of motions and appeals that will extend this case indefinitely. Judges are also known to lower awards that they deem excessive; Judge Hamilton has not indicated yet whether she will do that, and it seems unlikely.

There will be some long-lasting outcomes.

First, it will create some concern for customers of both companies regarding third-party support. As I wrote about here, Oracle and SAP both prohibit anyone except authorized customers from downloading software and support material. With another Oracle lawsuit hovering over third-party support provider Rimini Street, which has said it believes it has the right to download software on behalf of its customers, we're sure to get more clarity, but the case against SAP hasn't clarified the issue, and the Rimini Street trial is potentially years away; Rimini Street has countersued Oracle for restricting trade. Companies like Accenture and IBM also provide forms of third-party support. Some customers opt for self support.

Second, SAP will struggle to come out of this scenario in tact. It certainly hadn't accounted for a damage award of this size, and had already agreed to pay Oracle's legal fees to the tune of $120 million. While it is a growing and profitable company, $1.3 billion is big no matter how lofty your profits or prospects. However Jason Maynard, a Wells Fargo analyst, noted in an advisory that the ruling "shouldn't have material impact on the company's acquisition plans." SAP had "$2.8 billion Euro on its balance sheet" and "recently completed a $500 million private placement on October 15," the advisory said.

Shareholders may also ask how the company could have proceeded with a deal like TomorrowNow knowing the risks; and how top management could have turned a blind eye (at best), or encouraged the practice (at worst). SAP has a dynamic, polished new co-CEO in Bill McDermott, and he's already made a tremendous impact, but this is a challenge on the grandest of scales.

Third, Oracle is a machine on a mission. With the departure of one of its most successful executives, Charles Phillips, it turned around and plucked Mark Hurd, who turned HP's fortunes around practically overnight. But among all of them, including Mark Benioff, now with, the diminutive Safra Catz perhaps stands tallest. She was a major force in this trial, and despite her limited public exposure, is a major force at Oracle. She, along with IBM's Steve Mills, may be two of the most unsung software executives the industry has ever seen. Both are capable of serving at the helm of large companies.

At the trial, Oracle had a soundbite factory in Catz, who in her final testimony as a rebuttal witness said, in response to SAP's defense that it only paid $10 million for TomorrowNow: "It's like I bought a $15 crowbar, then I break into a house and clean it out. What I pay for the crowbar is irrelevant." She also compared it to Warner Brothers taking Disney's entire library, charging $2 for each movie and then proposing to pay back merely what it took in. "It's the value of what they took," she said, "not what they made."

When talking about SAP's claims that its assumptions were just wild guesses, not business plans, Catz said: "Assumptions are really what you believe are the important drivers of what you think will happen . . . I have whole presentations where the most important things are the assumptions . . . it's where the real management work is done." When asked if you can go back and change those assumptions, she replied: "No, not at the job where I work."

Fourth, while HP and SAP have painted Oracle's pursuit of Leo Apotheker as villainous, the new HP chief does have some explaining to do, as he was, allegedly, deeply involved in TomorrowNow's business. While Oracle's decision not to show Apotheker's deposition was clearly a ploy, as was its continued proclamations about his hiding, an appeal is likely to cast a longer shadow over his tenure than HP would like. As Oracle continues to play its Sun Microsystems card, a damaged HP would surely help its ever-growing fortunes.

Finally, this case is sure to be studied in law schools for decades. Not only is this the largest copyright infringement award ever granted, but it relied mostly on patent case law as precedent -- most notably Georgia Pacific v. United States Plywood (1970) and "book of wisdom" from Sinclair Refining v Jenkins Petroleum (1933).

Following is some recommended reading.

Oracle v. SAP: Daytime Drama

SAP Admitting Infringement In Oracle Case

Oracle v. SAP Trial Begins With Bang

Oracle V. SAP: Courtroom Diary

Oracle-SAP Trial: Phillips Says SAP Owes 'Billions,' Oracle Can't Find Apotheker

SAP CFO Werner Brandt Baffles Oracle As Trial Girds for Ellison

Oracle CEO Ellison Demands $4 Billion In Damages From SAP

Oracle V. SAP: Writing Is On The Wall

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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