For our first post digging deeper into the public record of Mars vs. Oracle, we are going to start with some relatively low-hanging fruit – Oracle’s contractual right to unilaterally terminate software licenses.
On the one hand, the fact that the potential of license termination waits in the wings through the course of a software audit should be no surprise. Any business that licenses software (which is pretty much all of them by now) is all but guaranteed to have a bilateral termination provision in their licensing agreement. The problem comes from the inherent disparity in what that bilateral right means to the different parties. For the licensor, termination means interruption of a single revenue stream. Conversely, for the licensee, termination can mean grinding all business operations to an utter standstill.
Consider the following sequence of events that we have seen unfold countless times:
The paradox reveals itself immediately. The more Oracle or any software vendor is successful – i.e., ingratiates itself into a client’s normal business operations – the more vulnerable the licensee becomes to audit demands. The more vulnerable the licensee, the fewer options it has when confronted with auditing tactics that it considers extra-contractual or unfair.
Back to Mars vs. Oracle. As shown in the complaint, pursuant to Section 4.3 of Mars’ controlling agreement, Oracle was contractually permitted to terminate the “Agreement or any license upon written notice if [Mars] materially breaches [the] Agreement and fails to correct the breach within thirty (30) days following receipt of written notice specifying the breach.” (Complaint, ¶ 49.) Pursuant to Section 4.5, if terminated, Mars must: “(a) cease using the applicable programs, and (b) certify to Oracle within one month after expiration or termination that Mars has destroyed or has returned to Oracle the Programs and all copies.” (Complaint, ¶ 52.)
No court order or other judicial process is required first, such as a factual finding by a judge or jury. As such, nothing stops Oracle from simply issuing a notice of termination and forcing the licensee to scramble in fear of losing the right to use its core software deployments. Even worse, with regard to instances where a licensee is on Oracle’s cloud, Oracle can flip the proverbial switch and literally shut down the software engine behind a licensee’s business operations. If a licensee believes that the vendor terminated the agreement in breach of the agreement, its remedy is limited to seeking damages after the fact or--as in the case with Mars--seek a preliminary injunction.
The public papers in Mars vs. Oracle paint a vivid picture of the power of the threat of termination. The extent to which Oracle software was essential to that organization was shown on pages 1-2 of Mars’ publicly-filed Motion for Preliminary Injunction:
After 20 years of licensing software from Oracle, Mars now relies on licensed Oracle software to support approximately 75-80% of its information technology infrastructure – particularly its most critical processes covering manufacturing and procurement, sales and distribution, finance and human resource areas. Were Oracle to terminate the Agreement and Mars to lose its licenses, in a matter of days, Mars would suffer an almost complete paralysis of its worldwide day-to-day operations, leaving over 75,000 Mars employees at a standstill.
The impact of switching vendors? According to pages 2-3 of its publicly-filed Motion for Preliminary Injunction, it would take months for Mars to replace the Oracle systems:
To the extent an alternative, suitable database software product is available, Mars would suffer from a protracted disruption to operations while interviewing, selecting, customizing, testing, integrating, and implementing a new software product. [Citation omitted.] Mars currently runs over 1000 databases using Oracle and migrating away from Oracle to another database software would require months of effort. [Citation omitted.]
In the Mars vs Oracle matter, Mars countered the threat of termination by going to court to protect itself and, to date, it is the only Oracle licensee that has filed a public suit under the threat of termination. The question remains: out of Oracle’s hundreds of thousands of licensees, how many were too daunted by the considerable time and expense of undertaking court action and acceded to demands they otherwise believed to be unreasonable?
It is revealing to contrast the software audit/license termination process with the mechanics of a suit for patent litigation. In the latter, the patent holder protects its IP interests by leveraging the court system and seeking an injunction to prevent use of the allegedly infringing technology. In a software audit proceeding, the balance shifts. The IP holder can, for all practical purposes, enjoin use first, forcing the licensee to go to court and/or while negotiating with the proverbial gun to its head.
And as we have noted before (see p. 24), private equity firms are circling around legacy software license agreements as an investment opportunity. We are aware of at least one venture capital group that has purchased software vendors and is enforcing extant licensing contracts in audit shakedowns that resemble the patent troll suits of the recent past. While we have argued here and here that litigation is ineffective, inefficient and fast becoming an anachronism, it cannot be denied that the same industry trends disfavoring litigation are favoring this new breed of licensing trolls.
Someday soon, we will write more about the industry shift from patent trolls to license trolls. In the interim, if you have a story to share, please do. Silence benefits the trolls, not the licensees.
Published on 9/11/2020
Software licensors are known for vague contracts—they’ve made a business of it.
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