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Oracle v. NEC Corporation: Important Considerations for Oracle Licensees

Neither Beeman & Muchmore, LLP nor LicenseFortress, LLC is, or has been, involved in either the Envisage matter or the NEC matter in any capacity. All information regarding both matters has been taken from the public record.

Back in August, we wrote about the pair of lawsuits Oracle filed against two of its database licensees this summer: Oracle v. Envisage and Oracle v. NEC Corporation of America. Because Oracle had not sued a licensee in recent memory, the quick succession of these filings put us on high alert that Oracle may be changing its litigation strategy. The fact that both matters were filed in the Northern District of California and are being litigated by The Norton Law Firm, an Oakland boutique helmed by a member of Oracle’s litigation team in the Oracle v. SAP, suggested to us that in fact Oracle may be at the early stages of a litigation campaign.

Now that a couple of months have passed, it is interesting to note that the two matters are already taking wildly different paths. The first filed matter — Oracle v. Envisage — appears to be on the brink of settling. As such, aside from the complaint and answer (and the filings announcing a tentative settlement), there is no material activity and no substantive motion practice. Conversely, the NEC matter is giving signs of ramping up, with the parties exchanging aggressive allegations that may ultimately steer the matter into a prolonged and significantly more contentious direction. What should Oracle licensees make of this?

As a general matter, we cannot stress enough that Oracle suing its licensees should be of significant concern to every company that relies on Oracle software, whether currently under audit or not. Perhaps now more than ever, it is incumbent on every Oracle licensee to scrutinize its deployments and carefully consider its interactions with Oracle to minimize the possibility of becoming a target. And, as the divergent paths of the two currently pending matters may emphasize, the same measures that potentially stave off litigation may also better position a licensee to diffuse litigation once filed.

Anyone who has been embroiled in a contentious Oracle audit knows that software licensing disputes are inherently fraught with high emotions that can polarize the parties and cause disputes to quickly escalate. As the software licensing community watches the NEC matter teeter on the brink of combustion, you should consider if your company is sufficiently protecting itself from becoming a target and positioning itself to respond in a collected manner if it does.

What is happening in Oracle v. NEC Corporation?

NEC Corporation of America, the US subsidiary of a multinational information technology and electronics company, is a Platinum Partner in the Oracle PartnerNetwork. Claiming that NEC’s use of Oracle’s software exceeded the terms of their license agreement, Oracle is 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 alleges 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.] Weighing in at a hefty 65 pages, NEC’s pleading pulls no punches. Among other things, NEC alleges that Oracle had approved the subject Oracle deployment prior to the audit:

Reduced to its core, Oracle’s claim is that NECAM should have distributed Oracle software under the less restrictive ASFU license, instead of the more restrictive Embedded license. However, it is the Embedded license type that Oracle recommended when the parties first engaged in their business discussions around NECAM’s plans for its Integra ID solution, and when Oracle was pitching for NECAM’s business. In short, Oracle is alleging non-compliance based on the types of activities that NECAM told Oracle it intended to engage in before the parties entered into the Embedded license.

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Oracle is seeking to penalize NECAM and has terminated its licenses based on the very conduct that Oracle knew of and specifically approved prior to the parties entering into the contract.

(Answer, Docket No. 23, 27:10-14; 28:2-4.)

But NEC doesn’t stop there. Teeing up its counterclaims, NEC alleges – 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, Oracle has postured itself to audit the licensee years later and reap penalties while coercing the licensee to make additional license purchases for a premium. From NEC’s Answer:

In addition, and on information and belief, Oracle intentionally created these incentives to push clients toward the most restrictive Embedded license (even though an ASFU license would theoretically generate higher revenues at the time of license execution) in order to collect penalties for violations of the license restrictions and coerce additional purchases of services, subscriptions, or licenses arising out of Oracle’s predatory audits. On information and belief, Oracle Sales intentionally pushed NECAM towards the most restrictive Embedded license with the expectation that NECAM would violate the restrictions of the license, which would provide Oracle with a basis to demand payments of list prices to resolve the audit, or face license termination. On further information and belief, NECAM does not believe that it is the only customer that Oracle has treated this way. On information and belief, Oracle routinely induces companies to adopt the Embedded license with the expectation that it can subsequently allege non-compliance with the restrictions during a future software audit to maximize its profits.

(Answer, Docket No. 23, 30:16-27.) NEC’s allegations not only specify that this is intentional on Oracle’s part, but that Oracle patiently forgoes short term income to later reap “huge” returns in audits:

Oracle is adept at playing the long game with its audits. On information and belief, Oracle will lay the trap for the licensee knowing full well that it won’t reap the benefits until further down the road during the next audit. On information and belief, that is why Oracle incentivizes the sale of the most restrictive licenses. Oracle is happy to forgo the extra income now, to reap a huge windfall down the road.

(Answer, Docket No. 23, Pg. 35 Fn. 1; Pg. 49 Fn 2.)

NEC asserts 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 28.) Specifically, Oracle argues 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 argues 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.) As Oracle stated:

NECAM cannot plausibly allege justifiable reliance on a misrepresentation about what the contract allows, when NECAM also alleges it signed the actual contract itself and reasonably should have (and is presumed to have) read the contract before signing it.

(Motion to Dismiss, Pg. 6:5-8.)

Hon. Charles R. Bryer (brother of Supreme Court Justice Stephen Bryer) will hear oral arguments on October 28, 2021.

Our Observations and Considerations

Bearing in mind that all we know about this matter is from the public record, it is difficult for us to understand why NEC is taking such a contentious path.

Some of our concerns:

Litigating against Oracle is incredibly costly and incredibly risky. In today’s legal climate, litigation is almost guaranteed to be an expensive proposition. And nowhere is this more true than with regard to Oracle. Seemingly at home rooted in the quagmire of litigation, Oracle is often seen balancing multiple costly and time-consuming matters at a time. Over the last decade, Oracle barely seemed to break a sweat while simultaneously litigating against Rimini Street (since 2010), against Google (between 2010 and 2021), and against SAP (between 2007 and 2014). It is also worth noting that, with the exception of a last minute reversal by the United States Supreme Court in Google v. Oracle (deserved, in our opinion), Oracle was hugely successful in the above matters, recovering over $100 million from Rimini Street and $356.7 million from SAP (after an initial jury verdict for $1.3 billion).

Nor does Oracle reserve its tough litigation might for competitors. When the State of Oregon went after Oracle in an attempt to recover over $6 billion in connection with a disastrous failed ERP installation, the state filed an extremely aggressive complaint, found itself fending off multiple counter suits and, ultimately, spent over $30 million in legal fees before agreeing to a settlement that included only $25 million in cash (notably less than the legal spend itself). Defending the choice to settle, the Oregon Governor cited to an anticipated $1.5 million a month legal spend at trial as a deciding factor in agreeing to the unpopular settlement.  

In litigation, Oracle is defending and/or asserting 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 which is, in all probability, only one of many vendors that it licenses from.  

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 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 may be risking the ability to simply demonstrate that it is licensed correctly.

Adding to this 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 wishes 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 hopes to make this litigation too contentious for Oracle and to, in essence, intimidate the software giant into a quick settlement.

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?

Mitigating the Risk of Oracle Suing You

One of the founding principles of Beeman & Muchmore is litigation avoidance. As we state on our webage, “Time is the most important currency in the life of a business, and nothing quite depletes that resource like litigation.” It is crucial to remember that litigants today can spend years deeply mired in document production, deposition preparation and discovery disputes, which are all bad enough without even considering the gripping uncertainty (not to mention expense) of a trial itself.

Bearing this in mind, what can you do to best avoid litigation with Oracle?

Be Proactive. Know your position, and stay ahead of the game. You will be in compliance if you know your position ahead of time and rectify any problems. Your goal is to avoid being put into the position of NEEDING to give anything to Oracle. If your ducks are in a row, you will be prepared in case Oracle comes knocking. And we can help with that.

Ideally, any Oracle customer would utilize independent expertise to assist with their Oracle software license management. This should cover everything from ensuring compliance to communicating with Oracle.

Cooperate with Oracle. Per your Oracle agreement, you are required to provide “reasonable assistance and access to information” during an audit. Not cooperating can aggravate the situation, cause legal disputes or even the worst-case scenario outlined below: the cancellation of your license agreement. Delaying it is ok. Dismissing it is not.

Do Not Overshare. You will need to be responsive, of course, to an audit letter. But it is of utmost importance to not share more information than has been requested. Anything that is shared should be first double-checked to ensure that there is not a compliance issue which would require resolution. Protect yourself, and bring in expert assistance to assist with any analysis and interpretation of what you find.

If Oracle Audits You, Get Help. Do NOT try to go it alone. Before doing anything, be sure to get counsel if you were not proactive and Oracle is in fact auditing you. You want experience on your side to navigate these uncharted waters. With complicated and often overlapping license agreements coupled with virtualization, there is nothing straightforward about being an Oracle customer these days.

Do Not Put Your Business at Risk. Following the recommendations that we have outlined above will help you avoid any worst-case scenarios. If Oracle is auditing you and you don’t agree to their terms, they can terminate your agreements. This would be incredibly detrimental to your business, potentially grinding your operations to a halt. For example, Oracle terminated NEC’s partner agreements. Again, you need seasoned help to find your way through an Oracle audit.

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We have been considered leaders for years in the field of software licensing audit disputes and have published and spoken extensively regarding our insights and experiences. In addition, our partner in many client engagements, LicenseFortress, has decades of experience specializing in Oracle technologies.

Published on 9/30/2021

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