The last month has been a blur of activity in Oracle Corp.‘s (NASDAQ: ORCL) corporate theft lawsuit against SAP AG (NYSE: SAP), which goes to trial in a California district court on Monday morning. SAP has conceded some misdeeds, Oracle has made a meal of it in the press, and HP has somehow been dragged into the kerfuffle. Here’s what you need to know to understand what’s going on with Oracle, SAP, HP and that now defunct company called TomorrowNow.
What’s this trial all about then?
It’s about a company SAP bought five years ago called TomorrowNow. It provided third-party maintenance and support services to PeopleSoft and JD Edwards customers.
Third-party maintenance and support. Apps vendors like Oracle and SAP charge about 20 per cent of their software license fees each year for services. That includes essentials like security patches and bug fixes, but also big upgrades to newer applications. Some customers don’t want the new applications, they’d rather stick with the software they have. So they go to a third-party provider that charges less than the big vendors and just takes care of the essentials.
Gotcha, so what did SAP do again?
It bought TomorrowNow just after Oracle finished its acquisitions of PeopleSoft and JD Edwards. Maintenance fees are a huge chunk of a software company’s profits, so providing low-cost services to Oracle customers could have been a good way for SAP to get at its main rival. It also hoped to switch some of those Oracle customers over to SAP applications instead.
How did that work out for it?
Terribly. TomorrowNow lost US$90 million while it was part of SAP. Worse, it looks like TomorrowNow was probably cheating like mad. Instead of going to Oracle’s support site and downloading only the patches and bug fixes its customers were entitled to, it downloaded all the Oracle software it could get its hands on. Oracle says TomorrowNow had a whole bank of servers skimming its computers automatically for Oracle software.
So what did Oracle do?
It did what any red-blooded American company would do and sued the pants off SAP. It eventually filed 10 claims including copyright infringement, breach of contract, unlawful computer access and unfair competition. It also says it found out that TomorrowNow was stealing whole Oracle applications as well as just bug fixes and support materials.
What does it want from SAP?
Moolah, lots of it. Oracle says it’s entitled to around US$2 billion in damages. A big chunk of that is for profits it says it would have made if SAP hadn’t used the TomorrowNow services to win away its customers.
What does SAP say?
It says that’s ridiculous. It argues that any PeopleSoft and JD Edwards customers who ditched Oracle around that time did so because they were worried about their vendor being acquired by Oracle, not because of TomorrowNow. It’s willing to pay Oracle some money but only tens of millions of dollars.
Is that what next week’s trial is about then?
Not so fast. A couple of months ago Oracle and SAP agreed to narrow the scope of the case. SAP said it would accept that TomorrowNow infringed Oracle’s copyrights if Oracle in return would forget the other nine charges and focus on damages instead.
That was jolly civilized.
Don’t be silly, they hate each other. But Oracle only has so much time at trial to convince a jury of its case. It’s better off focusing on a big charge that it thinks will give it a good pay off. Plus, SAP had already admitted that TomorrowNow made some “inappropriate downloads,” so it suited SAP as well to focus the case and basically argue about damages.
So does that mean SAP knew about all this illegal activity?
Not necessarily. SAP originally said its executives knew nothing about the illegal downloads and that it was all TomorrowNow. But Oracle said it has evidence SAP’s executives were aware of the illegal behavior. It wants to get SAP executives on the witness stand next week to ask a lot of awkward questions about it.
So is that what the trial is about — whether SAP knew about the illegal downloads?
Not so fast. On Thursday SAP made a surprise move and said it would no longer argue that its executives didn’t know what TomorrowNow was up to. If it doesn’t contest that issue of “contributory infringement,” the trial will basically be just about the damages.
Why on earth did it do that?
That’s hard to say. It could have been holding out for a settlement and realized it wasn’t going to get one. Or it could be it didn’t want its executives on the stand being asked lots of awkward questions by Oracle’s lawyers. They’re not a very pleasant bunch.
Well, what does SAP say? And by the way, what does HP have to do with all this?
Funny you should ask. SAP’s line is that Oracle is turning this whole trial into a media circus, so it made the concession in order to focus the trial and get it over with quickly. Oracle has been having a field day with this case in the press, and part of it has been aimed at HP and its new CEO, Leo Apotheker. He used to be a top executive at SAP so he’s among the executives Oracle’s lawyers want to grill on the stand.
Is he really involved in all this?
That depends whom you ask. Oracle says he’s relevant because he was president of operations at SAP when it bought TomorrowNow. HP and SAP say Larry Ellison is just obsessed with dragging Apotheker into the case to make HP look bad.
Why would he do that?
Bad blood. Oracle and HP can’t stand each other. It started when Oracle bought Sun and became a competitor to HP. Then Ellison called HP a bunch of idiots for sacking their last CEO, Mark Hurd. Then Oracle made Hurd one of its presidents. And then HP hired Apotheker — a former CEO at Oracle’s biggest software rival — and Ray Lane — another former Oracle executive — to run its company in place of Hurd. So things have become pretty personal. Surreal, you might say.
No kidding. How much do these people get paid to behave like this?
A lot, but that’s not the point.
So SAP agreed to drop the whole business of whether it knew about TomorrowNow to save Apotheker taking the stand?
Sort of. It also wants to spare its own executives. And it wants to get the trial over with ASAP, since Oracle keeps firing off press releases and legal filings where it calls SAP a bunch of crooks.
So we won’t see all these big CEOs on the stand next week?
We may. On Friday the judge accepted SAP’s request that it won’t contest that it contributed to the infringement (i.e. that its executives knew about it). That will make it harder for Oracle to drag all of SAP’s executives onto the stand. But the judge also said Oracle can present arguments about SAP’s role in all of this so long as it’s relevant to the question of damages. So Oracle will still call on SAP’s executives and the judge will decide whether each one is relevant enough to be allowed on the stand. Ellison’s likely to be in court also. For all his showmanship he seems genuinely angry that someone pilfered his software. He wants to get on the stand and tell the world about how they cheated his company.
He’s a bit of a blowhard isn’t he?
He certainly says what’s on his mind. He rides sailboats and appears in movies. But he’s also as sharp as a pin and apparently he’s pretty good at classical guitar too, so he’s not a total jock.
What about Leo?
I don’t think he’s a jock either.
I mean, will he be on the stand?
Probably not, he’s apparently on around the world trip.
Oracle says it can’t subpoena Apotheker to appear unless he’s present in California. And HP says he’s on a worldwide “listening tour” with its employees. He might not be back until the trial is over.
That sounds a bit convenient.
It does, but HP did say in a press release when it made him CEO that he’d kick the job off with this round-the-world jaunt.
Is it a coincidence Apotheker starts work at HP the same day the trial is due to start?
Looks like it. Ellison’s a powerful guy but even he probably couldn’t have arranged that one.
So one more time, what’s this trial about?
It’s mainly about how much damages SAP will have to pay, which means there will be testimony about how the software industry works and from damages experts. It will also touch a bit on how much SAP executives knew about this, so that’s where it could get interesting.
So the trial starts Monday?
Yep. Jury selection is on Monday, opening statements will probably happen the next day.
And why do I care about this again?
To be honest it may not affect you that much, but it sure makes for good sport. If you’re a shareholder in SAP or Oracle you might want to know how much money each of them stands to win or lose. If you’re an SAP customer you might want to know how virtuous the people who run that company are, although some of the executives have moved on by now anyway. And if you’re interested in third-party support services there might be some ramifications there. Some people say the problems SAP has had will put off other companies from getting into the business.