knowledge & insights

Mars v. Oracle: Not the Only Complaint Against Oracle That Put Its Auditing and Licensing Practices at Risk of Exposure

As we have stated many times, Mars v. Oracle was the first—and to date the only—public complaint filed on behalf of an Oracle licensee attempting to curb Oracle’s aggressive licensing and auditing tactics.  As the first public complaint, Mars v. Oracle brought much-needed public attention to Oracle’s deeply unpopular audit script and helped scores of licensees understand that they were not alone in their bewildering struggles with Oracle. However, as we approach the five-year anniversary of our filing the complaint, it is important to point out that Mars v. Oracle is not the only important lawsuit filed against Oracle that put at risk exposing the systemic nature of the software giant’s abusive auditing and licensing tactics.

As we have blogged about previously, there is an important securities litigation styled as City of Sunrise Firefighters’ Pension Fund, et al. v. Oracle Corporation, et al. (In re Oracle Corporation Securities Litigation), Case No. 18-cv-04844 (N.D. Cal. 2018) that is currently pending in the Northern District of California before the Hon. Beth Larson Freeman in the Northern District of California. The majority of the facts alleged by the named plaintiff are based on whistleblower allegations and are detailed, specific and, in our opinion, nothing short of incendiary.

However, despite the precision with which the complaint was pled, the Plaintiff is struggling with pre-discovery motion practice. In our opinion, these struggles are caused in no small part by Oracle’s Teflon-like resistance to public scrutiny that is likely an extension of its historically business-facing model and its public campaigns to discredit its consumer-facing competitors (such as Amazon, Facebook and Google). Put simply, anyone who has not dealt with Oracle is unlikely to have an opinion on Oracle. And, as anyone who follows the plaintiff’s bar can attest, successful litigation follows public opinion just as much as anything else (see, e.g., tobacco and breast implant class action litigation).

There is a currently pending motion to dismiss set for hearing on September 24, 2020. Because this matter is of great interest to Oracle licensees, we will attend this hearing in order to keep our clients and colleagues up to date.

A Brief Summary of the In re Oracle Corporation Securities Litigation. 

The first two paragraphs of the complaint summarize the matter nicely and address topics that should be familiar to anyone who has followed our writing on Oracle and its tenuous relationship to the cloud.

1. Prior to the Class Period, Larry Ellison, Oracle’s founder and strategic visionary, made a critical blunder by underestimating a fundamental shift in database technology that had serious implications for Oracle’s revenue growth. By the time senior management recognized this tactical error, Oracle was years behind its competitors in creating and selling the new technology, causing its revenues to stagnate. In an effort to compensate for the weakness in its inferior product offerings and make up for market share it was losing, Oracle resorted to systematically coercing and bribing its existing customers into making so-called “purchases” of its flawed new product line. Throughout the Class Period, Defendants concealed these Company-wide sales tactics from investors and made a host of statements representing that Oracle had successfully created a thriving business in this critical new market. Defendants attributed Oracle’s successful transformation to supposedly legitimate factors, such as the purported superiority of Oracle’s products and sales teams, while rebuffing any questions about whether Oracle engaged in improper sales tactics to boost its new revenue stream.

2. The truth, however, eventually emerged. By the end of the Class Period, customers were refusing to renew the short-term subscriptions that had been pushed on them under duress, and other customers were resisting the Company’s strong-arm tactics. Oracle’s sales growth declined precipitously, revealing to the market that the Company’s purported transformation was not true. The Company’s stock price plummeted. Shortly thereafter, senior management announced that they would no longer disclose critical information regarding Oracle’s faltering new business, causing the stock price to decline sharply again.

Similarly, the “improper sales tactics” that Plaintiffs refer to should be strikingly familiar to many, if not most, Oracle licensees. Though the details alleged by the whistleblower have an alarming amount of specificity, Oracle’s tactics are alleged two-fold: (1) Audit, Bargain, Close; and (2) so-called “attached deals.”

“Audit, Bargain, Close” was alleged as follows:

16. First, Oracle employed a strategy called “Audit, Bargain, Close,” or “ABC,” to coerce cloud sales during the Class Period. Oracle would install its on-premises software in the clients’ ecosystem 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. After the customer fell into this trap, Oracle would audit the on-premises customer for violations of its on-premises software license. When it found violations, Oracle would threaten to impose extremely large penalties. Oracle would then offer to reduce or eliminate those penalties if the customer agreed to accept a short-term cloud subscription that the customer neither desired nor intended to use.

“Attached deals” were alleged as follows:

17. Second, Oracle employed a tactic known as the “attached deal.” When negotiating the sale of on-premises software, Oracle would offer the customer a significant discount on the on-premises products that the customer wanted and needed, so long as the customer agreed to receive a short-term cloud subscription – even though the customer neither wanted nor intended to use the attached cloud product.

We have observed these precise tactics on numerous occasions. In fact, we wrote about them in the fall of 2019:

Oracle has begun to wield its aggressive licensing audits to thrust its cloud services onto its current licensees. The company’s use of license audits to drive revenues and coerce the renewal of licenses for its legacy products is nothing new. Its well-honed auditing machine was built to find steep licensing shortfalls in nearly all circumstances. Either because unlicensed features and products are inadvertently installed or because creative accounting yields elevated counts of processor “installation,” an Oracle audit almost guarantees that the licensee will face an imposing reconciliation demand. Once a licensee falls into this trap, Oracle offers to make the purported breach notice “go away” by proposing a “business resolution,” which unfailingly entails adding Oracle cloud credits or other services to the license.

While that is a sufficient summary, the specificity of the whistleblower allegations are well worth reading in all of their breathtaking detail.

Upcoming Motion Practice.

As stated above, Oracle currently has a pending motion to dismiss that will be heard on September 24, 2020. In sum, Oracle alleges that: (1) plaintiff fails to allege a materials false or misleading statement; and (2) Plaintiff fails to plead a “strong inference” that any defendant intended to deceive investors.

These arguments do not differ materially from those Oracle successfully made with regard to Plaintiff’s First Amended complaint. Further, we attended the October 17, 2019, hearing on Oracle’s motion to dismiss and were somewhat surprised at what we perceived as Judge Freeman’s overwhelming proclivity to defer to Oracle and casually dismiss Plaintiff’s allegations (regarding Oracle tactics that we had personally witnessed) as improbable or aberrational. While Judge Freeman did grant leave to amend back in October of last year, she also intimated that she thought it unlikely that it would be possible to amend the complaint sufficient to withstand a motion to dismiss.

We Will Keep You Posted.

Hopefully the additional allegations will be sufficient to withstand what we interpreted as an unwillingness on the part of Judge Freeman to believe allegations that we at Beeman & Muchmore know to be true. The impact that this matter would have in curbing Oracle’s abusive licensing tactics cannot be overstated. Because what we know to be true is bad enough, it is difficult to imagine what discovery into the facts behind these well-pled allegations would reveal. In a benign world, it would perhaps be enough to finally affix a brighter public spotlight on the peculiarly well-known (yet well-guarded secret) secret of Oracle’s predatory licensing.

Stay tuned, we will write about the hearing shortly.

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