Oracle v. SAP Copyright Case – Still on Trial, But What are the Lessons?

John R. Harris
Partner, Technology/IP Group

Although the jury is still out on the Oracle v. SAP copyright infringement litigation ongoing now in California, it is not too early to assess the potential fallout for the computer industry.  This fallout may have long lasting implications for M&A transactions involving technology companies, for valuation of software products and services, for third party software support and add-on businesses, for corporate board governance and due diligence, and for strategic customer acquisition – which are all beyond the seemingly simple notion of copyright infringement that triggered the case.

On the surface, the lawsuit started as a somewhat straightforward copyright infringement case resulting from actions of the company TomorrowNow, which was acquired by SAP in 2005.  TomorrowNow admittedly downloaded copyrighted software and support manuals and documentation from Oracle sites, without authorization from Oracle.  SAP had initiated the acquisition ostensibly to gain access to a customer base and products that would allow it to compete against Oracle in certain ERP product areas. The TomorrowNow operating unit has since been shuttered by SAP.

Commentators attending the trial are providing their half-way assessments in various technology industry publications like InformationWeek:
http://www.informationweek.com/story/showArticle.jhtml?articleID=228200936

Some of the potential implications include the following:

• One of the fundamental unanswered questions in the case is this – what did SAP executives know about TomorrowNow’s infringing activities prior to the acquisition, and when did they know it? SAP has attempted to minimize the damage from this by admitting that TomorrowNow unlawfully downloaded certain Oracle materials. Will the admission of wrongdoing early on help SAP avoid major damages?
• It is difficult for an acquiring company to really know what actions a target company like TomorrowNow might have taken in their business operations prior to the due diligence inspection. It is also difficult to anticipate the competitive reaction from a determined and customer-protective competitor like Oracle.
• Another question that will not be answered (because of the liability admission) is whether downloading software from Oracle’s website actually constitutes copyright infringement at all. TomorrowNow certainly downloaded millions of files, thousands of them actual copies of software. Third party software support companies may think this is permissible under product licenses and copyright law – and it may well be. Third party support companies and add-on makers will not get a meaningful answer from this case.
• Acquisitions can cost far more than one might think if IP rights infringement occur.  The TomorrowNow acquisition was only $10 million – the damages from this case will greatly exceed this.  SAP has agreed to pay at least $120 million to pay Oracle’s lawyers alone.  The overall damages could cost SAP in the billions if Oracle’s damages experts are to be believed.
• Corporate boards considering acquisitions are at risk by rosy projections of revenue enhancements from the acquisition.  SAP emails suggested that the board anticipated $900 million in future revenues from support work and cross-selling to result from the TomorrowNow acquisition.  The actual benefit to SAP was vastly less than this, but the $900 million number of “prospective” benefit was thrown around at trial by Oracle’s lawyers as a measure of the value to SAP.
• The differences between damages projections by the experts in the case is $1.66 billion according to Oracle’s experts and $40 million (not including attorney fees) for SAP’s experts. Larry Ellison’s claims of damages (certainly not a disinterested “expert” opinion) was $4 billion.   It is hard to understand from afar how there can be such a huge disparity in potential damages – which highlights the risks from even simple infringements.
• Oracle’s damages expert has asserted that the law of damages calculations from certain patent cases can properly be used to calculate “lost profits” damages in this copyright case.   The damages and valuation computations from the experts in this case may be informing IP damages computations for years to come.
• Testimony by high ranking and assertive CEOs can be risky – SAP’s CEO Werner Brandt reportedly offended the judge by suggesting on the stand that SAP (which had previously admitted liability for TomorrowNow’s infringement) did not itself infringe and was thus not liable.    The irritated judge rebuked the SAP trial team on the spot.
• Third party software support companies have to be ever mindful of  license compliance when supporting products such as those of SAP and Oracle. SAP’s policies supposedly require any third-party support company to access SAP software on the customer’s premises, or remotely through something like a Citrix environment, or through another form of remote control – but not store any SAP materials on the third party’s computers.. Oracle reportedly has similar policies.
• Software maintenance is big business and critical to enterprise vendors like SAP, Oracle, IBM, HP and others – and these companies want to protect that business.  One former TomorrowNow executive, who is still in the software support business after exiting TomorrowNow, believes that the Oracle lawsuit is essentially a competitive strike against anyone who might threaten Oracle’s software support business for its own products.  Will software support businesses (and those who provide third party add-ons for major products like Oracle and SAP) face increased infringement threats from the major product vendors?