Our decades of representing clients in major commercial disputes taught us that risk is the companion of fortune. Indeed, the path to good fortune is paved with an understanding of the risks met along the way.
That axiom is especially true when managing an Oracle license portfolio, where the greatest risk faced by our clients is ending up in litigation against Oracle. Beeman & Muchmore fully understands this existential risk for our licensee clients, which is why we have remained vigilant in monitoring Oracle’s litigation profile.
It’s been a few months since we updated our clients and friends on Oracle’s courtroom adventures, so let’s welcome summer by dedicating some much-needed attention to what is happening on the litigation front. This week, we will address the Oracle Securities Litigation, and next, we’ll discuss the NEC Corporation and Envisage matters.
In the interim, never hesitate to reach out to us with questions or comments, and we sincerely hope that a summer without the risks of litigation is on your horizon.
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It has been almost 3 years since we first weighed in on the Oracle Securities Litigation, a shareholder derivative class action against Oracle that is predicated on many of the auditing and licensing tactics that we have been aware of for years. Importantly, while the allegations in this complaint concern harm to Oracle shareholders, they are still highly relevant to all Oracle licensees dealing with Oracle’s predatory licensing and auditing tactics. Along with any matter that impacts strategic thinking for our Oracle licensee clients and colleagues, we remain committed to following this litigation closely.
And, somewhat unexpectedly, we write to report that the matter continues barreling down the tracks. On May 9, 2022, Judge Freeman, U.S. District Court Judge for the Northern District of California, issued an order titled “Order Granting Lead Plaintiff Union Asset Management Holding AG’ Motion for Class Certification.” [DKT 122.] (Note that, while the case is styled as City of Sunrise Firefighters’ Pension Fund, et al. v. Oracle Corporation, et al., class counsel substituted City of Sunrise Firefighters’ Pension Fund with Union Asset Management Holding AG as the named plaintiff.)
In the wake of this good news, it is a fine time for us to revisit this important matter.
Recall that the amended and operative complaint contained incendiary whistleblower allegations that detailed Oracle’s practice of leveraging costly and unfair software licensing audits in order to sell unwanted Oracle cloud licenses. Garnering much attention, the complaint contains quotes from nine unnamed former Oracle employees who have allegedly confirmed that Oracle audits were initiated and carried out with the sole intent of increasing sales of Oracle cloud products. Internally identified as the “ABC” methodology, the complaint averred the following:
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.
At the heart of the lawsuit are claims that Oracle’s investors were misled about the nature of these cloud product sales, with Oracle’s leaders “attributing its cloud sales success to sustainable business practices when in fact it was the result of tactics that produced only short-term revenue boosts.” It names both Safra Catz, Oracle’s billionaire CEO, and Oracle’s billionaire chairman Larry Ellison, among others, as defendants. As Judge Freeman summarized in her most recent order:
In the Second Amended Complaint, Union alleged violations of (1) SEC Rule 10b-5 and (2) § 20(a) of the Exchange Act on the basis that Oracle and its management allegedly misrepresented the company’s cloud business. Union alleged that Oracle and its management publicly touted its cloud products and cloud-related revenue growth even though its products were deficient and sales of its cloud products were driven by aggressive sales tactics like product bundles and threats to audit existing clients that brought only short-term revenue. [Dkt 122, 2:18-23]
After witnessing what we thought were ominous indicators at early hearings, we predicted that Judge Freeman would not give the plaintiffs the opportunity to develop their case and stated that “we are not optimistic and anticipate an Oracle win on its motion to dismiss.” Our prognosis was wrong. On March 22, 2021, Judge Freeman issued a 54-page opinion granting in part and denying in part Oracle’s Motion to Dismiss, with Oracle successful in reducing the scope but unable to fully block the case. As the court summarized in the most recent order:
The Court allowed Union to proceed on a “narrow omission theory of securities fraud” based on Oracle’s affirmative representations about cloud growth deceleration and the drivers of cloud growth. See id. at 35 36. The Court made clear that this theory was not based on Oracle’s standalone duty to disclose its allegedly coercive sales tactics. See id. at 36. Rather, Union could proceed on a theory that in representing that the cloud growth and cloud growth deceleration were the result of circumstances other than Oracle’s allegedly coercive sales tactics, Oracle “affirmatively create[d] an impression of a state of affairs that differs in a material way from the one that actually exist[ed].” (Citation omitted.) [Dkt 122, 3:11-18.]
“Narrow theory of recovery” or not, the matter was ripe for discovery.
The next hurdle for the class was to survive class certification – a daunting undertaking by any measure. On October 8, 2021, class counsel filed a motion for certification, complete with voluminous exhibits. [Dkt. 107.] As a testament to the gravity of successfully obtaining class certification, a four-month briefing schedule was put in place with responses due by December 9, 2021, and replies due by February 9, 2022. [Id.] While Oracle only launched a specific challenge against a single element – predominance – the Court was nonetheless obligated to make its own determination that the party seeking certification met its affirmative burden of meeting each element. [Dkt 122, 4:9-13.]
Specifically, Oracle argued that the class’s retained expert – Dr. David Tabak – did not disclose any damages model, much less one sufficient to meet the requisite disclosures. Plaintiffs argued that the damages model was sufficient and that Oracle’s demands for specificity were premature.
Again thwarting our expectations, Judge Freeman preliminarily approved the damages model proposed by the plaintiffs and ruled that all requirements for class certification had been met, thereby granting the motion for class certification.
What Does it All Mean for the Oracle Licensee?
A few observations and predictions:
- It is unlikely that Oracle is done with issues surrounding class sufficiency. There are indications that Oracle’s strategy was to lay in the weeds to see whether the Court would reject the motion for class certification on its own. By so doing, Oracle could keep its powder dry and not appear to be burdening the court with a future motion. Specifically, the opinion noted that “Oracle indicates that it may file a motion for decertification at a later stage as to the adequacy and typicality requirements of Rule 23(a) based on Union’s recent document production.” (Citation omitted.) [Dkt 122, p. 3, fn 2.] It seems highly likely that as discovery progresses, Oracle will believe that it has little to lose and will aggressively move to decertify the class.
- Judge Freeman couldn’t help but take a swipe at the plaintiffs’ case. While the court found Dr. Tabak’s damages-related disclosures “sufficient,” it did so “despite his deposition testimony.” [Dkt 122, p. 16:27-28.) Perhaps tellingly, Judge Freeman stated that certain of “Dr. Tabak’s statements are likely not what Union wanted to hear from its expert.” (Id. at 16:13-14.) While this is a materially inconsequential statement, Oracle may see it as a tip of the judge’s hand and feel emboldened to file future dispositive motions regarding adequacy of the damage model.
- Discovery marches on. It is a given that discovery typically occurs outside the public eye, and in this matter, there is a robust Protective Order in place. Nonetheless, the moving papers give ample indication that discovery has been proceeding. It has been our speculation that discovery slowed during the class certification process. If this is correct, we can anticipate that discovery will resume in full force.
- The chilling effect of the litigation on Oracle’s cloud tactics (if any) will continue. As we have previously stated, it is our impression that the pendency of this matter has chilled Oracle’s leveraging of inflated audit results to push cloud credits. The longer this matter is pending, the longer this chilling effect (if any) will occur.
- Oracle does not want a resolution on the merits. Though it is always in the process of diversifying the arrows in its audit quiver, there is no doubt that a negative ruling on the veracity of the allegations in the complaint would have a seismic impact on the utility of Oracle’s aggressive audits. Expect Oracle to erect every procedural barrier it can think of to throw this matter off its tracks.
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As always, we will monitor this matter carefully and keep our clients and friends posted.
Published on 5/20/2022