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 to help 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.
The lawyer for Plaintiff Sunrise Firefighters was on the hot seat for most of the hearing on Oracle’s Motion to Dismiss the Amended Consolidated Class Action Complaint. Judge Freeman appeared skeptical that Plaintiffs have met their pleading burden. Although the Judge acknowledged that Plaintiff had worked hard to revise the Complaint and that some of the revisions were satisfactory, the Court still had some major problems that may result in her ruling to dismiss the lawsuit. There was much back and forth on fine points of securities law, which we won’t go into here. Instead, I will focus on what readers of our blog might find interesting.
The Judge seemed to accept that Plaintiffs have established that up to 90% of cloud sales were “engineered sales”. However, the Judge said that Plaintiff had failed to establish how much of the engineered sales were a result of discounts, which she had no issue with, or Audit, Bargain, Close (“ABC”) sales tactics, which were more problematic. Readers of the business press know that Oracle is notorious in the enterprise software market for its prevalent use of predatory audit tactics against its customers to sell software. Although it is true that Oracle has the absolute right to audit its customers, most Oracle audit clauses provide that the audit cannot unreasonably interfere with the customer’s normal business operations. It seems very disruptive to a company’s normal business operations to be subject to an invasive, time consuming and oppressive audit where Oracle comes up with a huge compliance gap not grounded in the contract to force its customers into a cloud purchase, which the customer neither needs nor wants, in order to get out from under the audit.
The Oracle defense lawyer argued that if these ABC tactics were so prevalent, why was Plaintiff unable to find a customer that suffered such ABC tactics during the class period to share their experiences in the Amended Complaint? In my opinion, there are several reasons that Oracle customers who have been subjected to predatory audits may not be willing to come forward now. First, is the fear factor. These companies are afraid that if they volunteer information now Oracle will hit them even harder in future audits. Second, who wants to voluntarily get into an expensive war with Oracle now if their audit has been resolved and is behind them? What the courts also need to understand is that many companies have spent years investing in their Oracle infrastructure. Should Oracle retaliate against them by threatening or issuing breach or termination notices if they refuse to buy cloud, their entire business operation would be at risk. Most companies simply won’t risk it, and in my opinion Oracle knows that and that is why Oracle has been successful at using oppressive audits to drive unwanted purchases of cloud during the class period.
Plaintiffs’ attorney argued that although they didn’t include any Oracle customers in the Amended Complaint, they did include several consultants who were unanimous in saying that such ABC engineered deals were ubiquitous in the industry. Oracle’s lawyer asserted that such statements constituted layer upon layer of inadmissible hearsay. That may be, but it seem so apparent that an entire Oracle consulting industry has been built around Oracle’s predatory audits. Where you see smoke there is likely fire.
Judge Freeman noted that her biggest concern with the Complaint was that Plaintiff has not made the required scienter showing for each individual Defendant. In other words, Plaintiffs had not connected the allegations of falsity to the statements made and the speakers making the statements showing that the speakers knew the statements were false when they were made. Plaintiff pointed out that they had provided a detailed chart with the statements of each individual Defendant and why it was false when made. The Judge noted that she would continue to study the chart but that the key false statements needed to be set forth in the Complaint. The Judge asserted that the Ninth Circuit requires that a litigant must lineup the false statements with the knowledge of the speaker at the time the statement was made and Plaintiff had failed to do so.
At the end of the hearing the Judge noted that she was taking the case under advisement and that she was not issuing a tentative ruling. She did listen carefully to Plaintiffs’ scienter arguments and agreed to take another look at them. She noted that these securities class action cases are a big responsibility for a Judge at this stage of the proceedings. She closed by saying the Ninth Circuit does not shy away from long orders, and it will take her a while to rule. If I were a betting person I would put my money on Oracle winning. That is unfortunate as these types of oppressive audits will only end when software publishers are held to account. If you are a company that is currently suffering through an Oracle software audit, or were forced into an unwanted cloud purchase, you may want to consult with us about potential legal strategies for fighting back.
The case is Sunrise Firefighters v. Oracle, et. al. Check Tactical Law Group’s Oracle Blog for further updates.