Neither Beeman & Muchmore, LLP nor LicenseFortress, LLC is, or has been, involved in the Oracle v. Envisage or the Oracle v. NEC matter in any capacity. All information contained herein has been taken from the public record.
Last month, we shared Part 1 of a 2-part series on Oracle’s involvement in litigation which began with an update on the Oracle Securities Litigation, a shareholder derivative class action against Oracle that we followed for the past three years. Our blog post titled “Oracle Litigation Update Pt. I: The (Not So) Little Lawsuit that Could (a.k.a., the Oracle Securities Litigation)” can be read here.
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In August of 2021, we wrote about the pair of lawsuits Oracle had recently filed against two of its database licensees: Oracle v. Envisage and Oracle v. NEC Corporation of America. Oracle filed suit against Envisage first, which marked the first time in memory that Oracle filed a complaint against a licensee in a public litigation. Shortly thereafter, Oracle filed suit against NEC Corporation, actively demonstrating that Envisage was not a fluke. Naturally, these anomalous – yet clearly synchronous – filings caught our immediate attention. Was Oracle in the early stages of a litigation campaign?
It goes without saying that Oracle’s apparent new-found proclivity for suing its licensees should be of great concern to all Oracle customers. After all, navigating an Oracle audit (or any other licensing skirmish) is nothing if not risk assessment and management. Understanding whether Oracle has an increasingly sensitive litigation trigger is crucial to managing that risk.
Now, nearly a year later, both the Envisage and NEC Corporation matters have settled, and Oracle does not seem to have any pending public litigation against its licensees. What is an Oracle licensee to make of Oracle’s brief foray into litigating against its customers? In this blog post, we provide a brief recap of both matters and conclude with a few observations and recommendations for Oracle licensees.
On May 11, 2021, The Norton Law Firm filed a complaint on behalf of Oracle in the Northern District of California against Envisage Technologies – an Oracle Database licensee – for copyright infringement.
Interestingly, the complaint did not allege that an audit was pending nor contain a cause of action for breach of contract. Oracle did allege that Envisage had ceased communications entirely, which every licensee should know is the single worst thing to do when interfacing with Oracle. And finally, the alleged infringing deployments were through Amazon Web Services (“AWS”), which as far as Oracle’s auditing rights are concerned, is an entirely different beast. Envisage retained Goodwin Proctor to defend it and assert a counterclaim.
A mere two months after filing, on August 11, 2021, the parties submitted a “Notice of Conditional Settlement; Joint Stipulation and [Proposed] Order to Vacate Case Deadlines.” [Docket No. 23.] The preamble of this filing stated that the parties “have agreed to settle the above-captioned matter, subject to the completion of certain conditions” which were “to be completed within 10 days of the filing of this notice and stipulation.” The next day, Chief Magistrate Judge Joseph C. Spero signed the stipulation and continued the CMC to September 17, 2021. [Docket No. 24.] On August 23, 2021, Judge Spero signed a stipulation for dismissal of the matter. [Docket No. 25.]
Considered alone, there were certain indications that the short-lived Envisage matter was an anomaly. Namely, there was no audit pending, the licensee had terminated communication and, finally, the deployments were through AWS. Further, there were indications that Envisage itself wasn’t overly concerned that the matter would escalate. For example, though it did hire Goodwin Proctor, it did not “lawyer up” with an appearance by multiple attorneys (a single attorney appeared and was listed on the masthead of the answer).
However, the subsequent filing of suit against NEC Corporation dispelled any notion that the Envisage matter could be trivialized.
On July 8, 2021, The Norton Law Firm filed a complaint on behalf of Oracle against database licensee NEC Corporation of America, the US subsidiary of a multinational information technology and electronics company and a Platinum Partner in the Oracle PartnerNetwork. As with the Envisage matter, it was filed in the Northern District of California.
Oracle’s Complaint. Claiming that NEC’s use of Oracle’s software exceeded the terms of their license agreement, Oracle was looking for at least $7 million in damages as well as more information from NEC regarding their use of software to support its customers. Even beyond license fees, Oracle alleged that the profits made by NEC through its use of copyrighted software in supporting NEC customers could also be ripe for recovery.
NEC’s Counterclaim. On September 1, 2021, NEC filed an answer and counterclaim. [Docket No. 23.] Among other things, NEC alleged that Oracle had approved the subject Oracle deployment prior to the audit.
But, in its hefty 65 page filing, NEC didn’t stop there. Teeing up its counterclaims, NEC alleged –on behalf of itself and other Oracle licensees – that Oracle incentivizes its salespeople to intentionally sell OPN members the wrong licenses for their use and deployment. With licensees intentionally under-licensed and vulnerable, alleged NEC, Oracle had postured itself to audit the licensee years later and reap penalties while coercing the licensee to make additional license purchases for a premium.
NEC asserted several counterclaims, including Intentional Misrepresentation and/or False Promise, Copyright Misuse, and California Business & Professions Code 17200.
Oracle’s Motion to Dismiss. On September 28, 2021, Oracle filed a motion to dismiss certain of the counterclaims pursuant to Rules 12(B)(6) and strike certain affirmative defenses pursuant to Rule 12F. [Docket No. 28.] Specifically, Oracle argued that certain claims and defenses fail for lack of specificity – they don’t “identify who made the alleged misrepresentation, and when, where, and how it was made, and further fails to allege any plausible justifiable reliance. (Motion to Dismiss, Pg. 1:18-25.) Oracle further argued that, as a matter of law, NEC could not be justified in its reliance on any Oracle representations if the very language of the licensing agreement is contrary to the alleged misrepresentations. (Motion to Dismiss, Pg. 4:1-6:8.)
The Ruling on the Motion to Dismiss. On October 28, 2021, Judge Charles R. Bryer heard oral arguments on Oracle’s Motion to Dismiss. The next day, on October 29, 2021, he issued an order granting in full Oracle’s motion with leave to amend [Docket No 34.] The court allowed leave to amend and otherwise ordered that NEC must answer in 30 days from the date of the order.
Judge Bryer’s order regarding NEC’s fraud allegations can be broken into two deficiencies in NEC’s counter-complaint: “NECAM fails to state a claim because it pleads neither the misrepresentation nor justifiable reliance with particularity.” (Order, 5:21-22.)
Failure to plead misrepresentation. Regarding misrepresentation, Judge Bryer singled out the fact that NEC included no details about “the who, what, when, where, and how of the misconduct charged” and that “of Oracle’s alleged statements and actions, none were false or fraudulent.” In fact, taking issue with NEC’s allegations, Judge Bryer noted that “NECAM alleges fraud only by insinuation,” singling out NEC’s statements that it “has little doubt” based on “circumstantial evidence” that someone at Oracle perpetuated fraud. Somewhat wryly, Judge Bryer stated, “Though NECAM may have ‘little doubt’, federal courts require more.” (Order, 6:12-16.)
Failure to plead justifiable reliance. With regard to justifiable reliance, the court noted that NEC was a “relatively sophisticated party” that had not only used Oracle’s agreements in the past but had also distributed Oracle products pursuant to a broader distribution agreement. (Order, 6:17-7:4.) Based on this, the Court concluded that “(a)t least without alleging far more facts, it is questionable why NECAM would reasonably believe that Integra-ID 5 could be distributed on Oracle’s most restrictive license.” (Order, 6:21-23.)
NEC Corporation Tries Again. On November 29, 2021, NEC filed a follow-up answer and counterclaim and, on December 20, 2021, Oracle once again filed a motion to dismiss. [Docket Nos. 37 and 44.] On January 10, 2022, NEC filed its opposition to the motion to dismiss. [Docket No. 45.]
The Matter is Stayed. On January 14, 2022, before Oracle filed a reply, the parties stipulated to staying the matter pending settlement negotiations and filed a proposed order staying the matter. [Docket No. 46.] On January 18, 2022, Judge Bryer signed the proposed order, and on February 28, 2022, Oracle filed a stipulation and proposed order dismissing the matter with prejudice. [Docket Nos. 48 and 49.] On March 1, 2022, Judge Bryer entered the order, closing the matter. [Docket No. 50.]
Litigation is possible both in and out of the audit context. It is likely not a coincidence that the Envisage and NEC Corporation matters make a complementary pair: a licensee defendant without an audit pending and one already enmeshed in a contentious audit. Oracle’s message to the market is unmistakable: every single Oracle inquiry has the potential to ripen into litigation.
Despite its litigious nature, Oracle chooses its litigation carefully. Recent setbacks at the Supreme Court aside, Oracle has a remarkable track record with the IP litigations it initiates. Additionally, with as many licensees that it subjects to its unpopular audit script, there could be numerous licensees vulnerable to a suit by Oracle.
Don’t be an easy litigation target. While litigation avoidance is more an art than a science, there absolutely are measures that you can take to minimize the chance that Oracle will single out your company for future litigation.
For example, with every exchange, ensure that you are creating a strong record for your company. Provide punctual responses to legitimate inquiries, carefully analyze your company’s contractual obligations and provide strong and reasonable grounds for the information you decline to provide.
To aid in this process, we recommend involving knowledgeable and experienced legal counsel early in the process. Oracle knows how to set traps early in the audit/inquiry process, appearing calculated to lead to haphazard preliminary decisions that force an unfortunate choice – capitulating to Oracle’s unreasonable demands or risking becoming Oracle’s next litigation target. Navigating these waters is possible, but it requires experience, knowledge and discipline.
Virtualization and Oracle’s Extra Contractual Policy Statements are Not (Yet) an Issue. Likely by design, neither complaint mentioned Oracle’s VMware policy nor put at issue Oracle’s reliance on extra-contractual policy statements. The absence of these issues suggests that Oracle is tightly controlling its message to avoid these hot-button issues, at least in its initial forays into litigation.
That said, now that Oracle has its feet wet and has successfully filed and closed two matters, it may become bolder and attempt to create a record that would aid in its long-term audit script.
Future role for The Norton Law Firm? Both complaints were filed by The Norton Law Firm, an Oakland boutique firm that was founded in 2017 by two Boies, Schiller & Flexner LLP partners who were members of Oracle’s trial team in the Oracle v. SAP matter. The firm’s website is permeated with Oracle’s presence, and it has steadily been adding litigation attorneys over the last couple of years.
Which leads us to ask – is The Norton Law Firm preparing to file more litigation against licensees on Oracle's behalf?
Litigating against Oracle is incredibly costly and incredibly risky. In this day and age, litigation is almost guaranteed to be an expensive proposition. And nowhere is this truer than with regards to Oracle. Seemingly at home in the quagmire of litigation, Oracle is often seen balancing multiple costly and time-consuming matters at a time. Do not take on Oracle unless you are committed to the same.
Remember, Oracle is defending and/or asserting components of its very business model; the licensee is not. For years, we have commented on the imbalance of incentives in a dispute between Oracle and a licensee. For Oracle, collecting fees and fixing license terms is, quite literally, the core of its business. For the licensee, any dispute is a distraction from the normal business operations of the company. Further, Oracle has a vested interest in flexing its litigation might to send an intimidating message to the market. Conversely, an Oracle licensee arguably has a much less developed interest in pursuing a protracted litigation against Oracle.
Always consider this imbalance in incentives before taking on Oracle.
Matters of proof and recovery can be extraordinarily difficult in software licensing disputes. Oracle licensees often approach us in the early stages of audits, expressing outrage that Oracle was alleging deficiencies in an environment that they swear Oracle had blessed. And time and time again, the licensee came to find that Oracle’s statements either failed to materialize as remembered, and/or its IT configurations drifted out of precise compliance.
Of further concern, inconsistencies that are part and parcel of an informal licensing dispute can become devastating when embroiled in a litigation. As Oracle pointed out in its Motion to Dismiss, certain aspects of NEC’s hardline stance in its counterclaim appear to assume both: (1) that it is improperly licensed; and (2) that it relied on Oracle representations that are contradicted by the language of the contracts. At minimum, by taking its hardline stance, NEC risked the ability to simply demonstrate that it is licensed correctly.
With Oracle’s painstakingly crafted warranty disclaimers and limitations of liability, it becomes distressingly clear that Oracle has spent decades constructing methods and manners in which to protect itself from the risks of litigation.
Intimidating the intimidator: NEC’s high stakes gamble. It is difficult for us to imagine that NEC wished to spend the next several years and potentially millions of dollars attempting to prove a pattern and practice of Oracle fraudulently selling OPN members the wrong licenses in order to collect extensive audit fees “down the road”. That leaves the outside observer to speculate that NEC hoped to make this litigation too contentious for Oracle to commit to in the long term.
Considering all we know about Oracle’s scorched earth litigation tactics, is this a risk that you would be willing to take on behalf of your company?
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Free from the incentives of BigLaw that can pit the interests of counsel against its clients, Beeman & Muchmore has successfully made litigation avoidance a core founding principle. We have created a firm in which we can serve our passion in assisting clients in the most proactive way possible, all while choosing the path of less risk, less expense and less waste.
If your company finds itself involved in a software license dispute that appears to be spiraling out of control, let us offer our guiding hand and legal counsel committed to de-escalation.
Published 6/21/2022
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