Strategic CIO // IT Strategy
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11/4/2010
07:59 PM
Fritz Nelson
Fritz Nelson
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Oracle-SAP Trial: Phillips Says SAP Owes "Billions," Oracle Can't Find Apotheker

In another day in court for Oracle and SAP, Oracle pushes its lofty damage desires even higher, the lawyers and witnesses do battle, and still nobody can find HP's CEO, a key figure in the proceedings. Still to come: Larry Ellison.

The Oracle-SAP trial continued to grow testy Thursday. Oracle's legal team said it has been unable to find a witness they'd like to subpoena -- one Leo Apotheker, who seems to have vanished despite having started his new job this week as CEO of one of the biggest technology providers in the world (HP). Meanwhile another newly-minted CEO, Charles Phillips, formerly co-President of Oracle, now CEO of Infor, flew in from Atlanta to provide testimony that finally began to hint at the damages Oracle is seeking.

If that weren't enough, the legal teams from both sides bickered openly about the amount of "context" Oracle should be allowed to reveal, debating one potentially damaging exhibit in particular--a document both sides clearly believe will also start to put a vast dollar figure on the award the jury is expected to decide.

(For an explanation of the trial, read this preview.)

SAP has already admitted liability, the result of TomorrowNow's excessive stockpiling of millions of Oracle files before, during and after SAP's purchase of the company in early 2005. The trial is now about the damages SAP will pay. Those damages will play out around the amount of money Oracle and SAP would have hypothetically agreed upon if they'd negotiated for the Oracle licenses at the time of the TomorrowNow acquisition. But that's where it gets interesting.

The court is using the precedent of Georgia Pacific v. United States Plywood (1970), which established a series of factors for determining royalties in an infringement suit. One of the main factors at issue is that the amount awarded would be what the two sides "would have agreed upon at the time the infringement began if they had reasonably and voluntarily tried to reach an agreement." The precedent also holds that the hypothetical negotiation would rely on both sides knowing exactly what each side was planning and thinking at that time.

Turns out, Oracle and SAP have spent the past three years gathering each others' thoughts, through e-mails and memos and board presentations. And it seems they'll spend the next few weeks summarizing the pertinent parts for the jury. Thursday's arguments, mostly from SAP's counsel, were about how much of this is really needed. Judge Shirley Hamilton noted that she'd already agreed on this, pointing out to Oracle: "At some point it becomes cumulative." She let Oracle press on, but we're likely to revisit this point daily.

There was one particular SAP board document at play here, and it turns out that late Wednesday night -- perhaps even in the wee hours of Thursday morning -- SAP's attorneys raised a formal objection to it. That document was a financial projection of what SAP thought it could achieve by turning PeopleSoft maintenance customers into TomorrowNow maintenance customers, and subsequently into more lucrative SAP application customers. The graphic depicted growth in maintenance revenue, cross-sell revenue, and "up-switch" revenue (the conversion), for a total of approximately $900m in upside revenue over three years. A far cry from the $40m number SAP threw around in its opening statement.

Of course, acquisitive companies regularly put together optimistic projections to bolster their desires to complete a deal (although a $900m growth rate on a $10m deal is stretching things, to put it mildly; so much for those conservative Germans), but Oracle is using these projections to establish how SAP might have valued its licenses at a time when the negotiation for them would have taken place.

SAP counsel also lodged a complaint about how Oracle had not stated a damage figure in its opening statement. The judge, perplexed about the necessity of the complaint, simply moved to bring in the jury, but the answer to counsel's complaint started revealing itself when Charles Phillips took the stand. The reed-thin former Oracle titan said that after paying $11.1b for PeopleSoft -- a figure he asserted surpassed any similar deal in the software industry, and one achieved in a variety of nasty legal battles with PeopleSoft shareholders -- he would have negotiated fiercely if faced with providing Oracle licenses to a company whose application software business was many times the size of Oracle's, and who would now be competing with him on several fronts.

Moreover, had he known the volume of Oracle documentation and code TomorrowNow had accumulated, he would have negotiated for even more. When presented with SAP's business case for $900m in growth, Phillips said: "that's a big number. If that's the impact, you'd pay multiples to get that." Meaning he would expect SAP, at license negotiation time, to pay a multiple of $900m to achieve that level of growth, especially since that growth would presumably continue past 2007. Factoring in the same scenarios for Oracle's acquisition of Siebel (and TomorrowNow's infringement of those copyrights as well), the figure goes even higher. "The number," Phillips said, "would have a 'b" on it. Billions."

The rest of the day's proceedings saw a host of other witnesses, from SAP service VP Thomas Zieman, who helped create the $900m slide scenario, to former SAP executive Shai Agassi, whose video deposition depicted him as dismissive and annoyed; the attorney had to ask him to put down his BlackBerry and answer questions.

John Zepecki, the former Peoplesoft employee, and now SAP exec, also took the stand. Zepecki had warned SAP's board about the precariousness of TomorrowNow's access to Oracle's software. Zepecki's testimony was especially tiresome, because he was questioned by the meticulous David Boies, notorious for his prosecution of Microsoft on behalf of the US Justice Department. Zepecki, for his part, sparred with Boies by wrapping just about every answer in a thin cocoon of deniability, while Boies slowly wore away at Zepecki, who, when he finally walked off the witness stand exhaled deeply.

All that Boies really established was that Zepecki knew something, sent the proper warning signals, and washed his hands of any responsibility. Worse, SAP board member Gerhard Oswald, in another tiring video deposition, claimed to either not remember a damn thing, or demonstrated that he didn't really pay much attention during board presentations. And for this, SAP pays Oswald a generous $5m, not including stock incentives.

One last, curious thing . . . In Thomas Zieman's video deposition he is asked a question at the bitter end -- a question about Seth Ravin leaving SAP (he was a TomorrowNow executive, and also has a history with PeopleSoft); only the question was heard, and not the answer. One might view this as a video editing oversight, but this high-powered and bountiful legal team leaves little to oversight. It's no coincidence that Seth Ravin went on to start and helm Rimini Street, another third-party software maintenance provider; and one also currently in litigation with Oracle.

Fritz Nelson is the editorial director for InformationWeek and the Executive Producer of TechWebTV. Fritz writes about startups and established companies alike, but likes to exploit multiple forms of media into his writing.

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