By: Aoyu Bai
A look at the people behind Oracle’s lawsuit against SAP
On November 1, 2010, IT giants Oracle Corporation and SAP AG began their long awaited trial. So far, it has delivered all the drama it promised. The dispute began back in 2005, when SAP acquired TomorrowNow, a company that provided cheap third-party support and maintenance services for applications created by PeopleSoft, the human resources management systems provider. Earlier during the year, Oracle acquired PeopleSoft. At the heart of the dispute lies the claim that TomorrowNow’s software maintenance unit illegally downloaded more than 9 million software, source codes, and support files without the proper licenses from Oracle’s customer-support websites used to support PeopleSoft customers. Oracle alleges that TomorrowNow used a bot called Titan to enter Oracle servers, and that it even crashed servers on some occasions due to the sheer volume of download.
SAP shut the offending unit down in 2008 and is now accepting full responsibility for its actions. However, Oracle is seeking much more, including lost business due to SAP’s unfair advantage gained after the infringement, compensation for the copyright infringement itself, and expenses SAP would have incurred had it legitimately developed its own programs. Since SAP already admitted the charges, the trial will decide the financial compensation SAP must pay to Oracle. While SAP values the payments at up to $40 million, Oracle claims entitlements of at least $2.3 billion in compensation. Despite the publicity, shares of SAP and Oracle performed relatively well lately, as if the trial did not matter.
In the world of perpetual lawsuits that is the technology industry, most legal battles are brushed aside by the press after a few days. What sets this dispute apart is the drama surrounding the rivalry of Oracle against Hewlett-Packard and SAP.
In 2009, Oracle started to compete with HP in the hardware business by purchasing Sun Microsystems. In August of 2010, Mark Hurd, HP’s CEO, stepped down amidst findings that he had a relationship with Jodie Fisher, a female marketing contractor who received several payments expensed inappropriately by the company. Hurd is a close friend of Larry Ellison, the CEO of Oracle, who called HP’s actions against Hurd “the worst personnel decision since the idiots on the Apple board fired Steve Jobs many years ago.”
Almost immediately, Oracle hired Mark Hurd to use his expertise in its competition against IBM and HP. Hurd’s separation did not include a non-compete provision, which would have prevented Hurd from joining a competitor but would be extremely difficult to enforce in California’s pro-labour courts. Thus HP sued Hurd, claiming that he would exploit his knowledge of HP’s trade secrets to give Oracle an unfair advantage. Throughout August, HP’s share price declined as a result of both losing Hurd and having a competitor attain such an asset.
Larry Ellison, the Oracle CEO, is quite a character himself, judging by his comments about Hurd’s removal. In 2000, Ray Lane, the President and Chief Operating Officer of Oracle, departed the company after months of deteriorating personal relationships with Ellison. He was soon picked up by HP as Chairman. HP also hired Léo Apotheker as its CEO, amidst very public objections from Ellison. And that is the final piece of the puzzle that ties HP into the Oracle-SAP lawsuit: Apotheker was the CEO of SAP when the downloads happened. The stage was set, with HP and SAP teaming up against Oracle.
To demonstrate just how personally everyone is taking this, Ellison essentially dared Apotheker to testify on behalf of charges that he personally directed the software downloads from Oracle, a charge Apotheker naturally denies. SAP’s defense includes the assertion that Apotheker was not aware of the illegal infringements and moved to cease them upon discovery. At the same time, HP claimed that Oracle is trying to harass Apotheker with affairs of the lawsuit to interfere with his new position. HP previously refused a subpoena calling for Apotheker to testify. As the law specifies, Apotheker, who lives in Paris, cannot be forced to testify in person as long as he stays outside of 100 miles of the courthouse in Oakland, California.
Ellison has issued several harsh statements; among the ones to receive the most publicity include his calling Lane’s assertion that Apotheker did not know about the downloads “an absurd lie.” In the same statement, he boldly proclaimed, “That's the new HP Way with Ray in charge and Leo on the run. It's time to change the HP tagline from 'Invent' to 'Steal'."
Apotheker will testify in the trial, though it is unclear as of now if he will answer Ellison’s dare to appear personally in court. Ellison also testified under oath, giving SAP an opportunity to cross-examine the man who attacked it so viciously over the past weeks. On November 8, Ellison raised the stakes by claiming that SAP owes Oracle $4 billion, twice as much as what Oracle claimed before. Though he did not provide any hard evidence to back up his claims, this type of rhetoric already fulfills some of the promises of drama the case has built up.
From an investor’s perspective, the lawsuit is more theatrics than substance. Both SAP AG and Oracle are still strong firms with healthy profits. In October, SAP reported an increase in Q3 profits due to increasing demand. It is unlikely, due to the lack of evidence from Oracle, that SAP will pay anything in the billions. As a profitable and growing firm, SAP can sustain the compensations it currently expects to pay. At the end of the day, when the dust settles, both parties are likely to walk away relatively unscathed.
The technology industry is already prone to murky lawsuits due to vague copyright laws and inevitable similarities between the technologies of competitors, as demonstrated by the plethora of lawsuits in the Smartphone industry. In those cases, it is very difficult to prove whether infringement occurred or not, and thus lawsuits drag on while legal fees dent tech firms’ margins. As the economy improves and acquisitions increase, these firms will no doubt encroach upon each other’s familiar territories just as Oracle encroached upon HP’s dominance in hardware by purchasing Sun Microsystems.
However, the case of Oracle USA, Inc., et al. v. SAP AG, et al., introduced elements of personal grudges, an unnecessary distraction in an already significant lawsuit. HP and Oracle were close partners months ago, before the whole fiasco, but they will no doubt have trouble cooperating in the future due to the lack of synergy between the management teams. Oracle and SAP are used to earning billions in revenue each year, so any settlement in the millions that SAP is willing to pay will be a relatively small sum for these giants. But the feelings of victory and joy of humiliating a rival under the gaze of the financial world is more likely the main prize the two parties covet. The verbal sparring and political gesturing by the companies certainly generated plenty of publicity and raised the stakes beyond financial transactions. A CEO’s most valuable asset is credibility, and some, if not all, are about to lose theirs. As IT firms that pride themselves on increasing productivity for their clients, their management is certainly not as productive as they want their clients to be.
Disclosure: No positions