Pam Fulmer, Partner, Tactical Law Group
This is a guest blog post written by Pam Fulmer, a partner at Tactical Law Group LLP based in San Francisco. House of Brick has partnered with Pam and her firm many times in helping customers with the sometimes difficult task of defending themselves in audit and/or license negotiation situations with Oracle. This blog originally appeared at https://www.tacticallawgroup.com/oracle-blog.
Oracle Corporation and six current and former officers or directors of Oracle moved on April 19, 2019 to dismiss the class action securities Complaint filed by Plaintiff Sunrise Fire Fighters in the Northern District of California. Essentially that Complaint alleges that Oracle and its management intentionally and misleadingly reported cloud revenues and growth and expressed optimism for future growth, without disclosing to the public that Oracle’s financial results and growing cloud sales were not the result of its superior product, but instead a result of abusive software audits of Oracle customers and improper sales tactics arising out of those audits. Plaintiff brought suit on behalf of all persons who purchased Oracle securities between March 15, 2017, and June 19, 2018.
Oracle seeks to dismiss the Complaint arguing that Plaintiff has failed to provide concrete evidence of Oracle’s audit abuses during the relevant class period. According to Oracle’s motion, “Plaintiff provides no details regarding the number of audits conducted or whether the audits materially affected Oracle’s revenue in any quarter. Plaintiff also claims that Oracle pushed so-called “attached” deals, essentially providing on-premise customers a “sharp discount” if they agreed to try Cloud products.” According to Oracle, “Plaintiff contends that these alleged practices were “improper,” but cites no law, accounting rule, or policy that precludes a company from encouraging its existing customers to try new products.”
Oracle’s attempt to portray its abusive audit tactics, which have been widely reported in the business press as well as in several public lawsuits, as simply gentle encouragement by Oracle to its customers to try new products is ludicrous. Many Oracle customers who have undergone an Oracle audit might vehemently disagree with Oracle’s benign characterization of the audit process. And if this securities class action case proceeds past the pleading phase and into discovery, Plaintiff may well discover evidence within Oracle’s own files of massive and systematic abuses by Oracle of its audit rights.
Oracle also argues in its motion that “it is not improper to use aggressive tactics to sell products” and that “Oracle’s software license contracts gave it the right to audit its customers’ compliance with the license and impose fees if it found violations.” Similarly, Oracle contends that it was “Oracle’s right to forgo collecting those fees in exchange for customers agreeing to try Oracle’s Cloud products.” But what if evidence exists that demonstrates that certain of those violations claimed by Oracle were bogus and not grounded in the contract? What if Plaintiff can find evidence that Oracle knew that its claimed deficiencies lacked contractual merit, but they claimed them anyway in order to inflate the alleged licensing deficiency and use it as leverage to drive more sales of Oracle cloud and other software products? And if it is true that Oracle does not need to resort to “scare tactics” to sell its cloud products as Oracle claims, then why is the business press replete with instances of Oracle customers complaining about Oracle’s predatory audit practices?
Oracle license agreements usually provide that Oracle audits cannot unreasonably interfere with the normal business operations of Oracle customers. Was it an unreasonable interference for Oracle to demand hundreds of thousands of documents from Mars Corporation, including information about servers where Oracle software was not installed and/or running? Was it an unreasonable interference for Oracle to then threaten to terminate the license thereby forcing Mars to incur the costs of filing a lawsuit for declaratory relief seeking a court determination that it was not in breach of the license? What if it were to be discovered that Oracle has a standard business practice of issuing Final Audit Reports, which routinely contain alleged compliance gaps not grounded in the contract in order to come up with a “shock number” to gain negotiating leverage over Oracle customers?
In the Sunrise suit, Oracle contends that “Plaintiff has not shown anything improper about upselling and cross-selling or offering discounts, incentives, and audit accommodations. Nor has Plaintiff shown that Oracle’s opinion was “subjectively disbelieved, objectively false, or lacking any reasonable basis” and that “at most, Plaintiff’s allegations show “isolated instances” of the alleged conduct “rather than widespread deception, which would be necessary to establish fraudulent intent or reckless ignorance.”
It will be interesting to see whether Plaintiff can get past the pleading stage and into discovery. To the extent evidence of widespread and systematic deception exists, it would be contained in documents at Oracle, which Plaintiff has not yet been able to access. One fertile area that Plaintiff might want to focus on to prove Oracle’s “widespread” and “intentional” deception in Oracle audits is Oracle’s assertions around VMware and the “installed and/or running” language of the license agreement. It is our opinion that should Plaintiff focus on this area, it may likely find evidence in Oracle’s files that Oracle routinely includes large compliance gaps in its Final Audit Reports based on its VMware assertions. Yet although such findings may be commonplace, we are aware of no instances where Oracle has sought to enforce its view in a court of law, although Oracle has relied on its dubious interpretation to threaten license terminations as the Mars v. Oracle case proves. And as we know, Oracle settled the Mars case quickly and well before a court could rule on the issue.
Plaintiff in the Sunrise case should seek discovery of Oracle audits where VMware assertions were included in the Final Audit Report and resolution of the audit involved large discounts, in part, based on the purchase of cloud credits. Such discovery may lead to evidence that Oracle’s audit tactics are part of a “widespread deception” and do not reflect simply “isolated incidents”, but rather are intentional and perhaps ratified by the highest echelons of Oracle’s management.
Oracle customers under audit would be wise to document, in written communications to Oracle, instances where they believe that Oracle’s actions are abusive and not grounded in the contract.
If you believe your company has been forced into an unwanted cloud purchase arising out an Oracle audit, you may have legal remedies. Please contact email@example.com if you would like to discuss your potential legal options.
Tactical Law Group LLP is continuing to monitor the litigation. Check our blog for periodic updates.
You may read Oracle’s motion to dismiss here by clicking here.