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11/2/2010
09:50 PM
Fritz Nelson
Fritz Nelson
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Oracle v SAP Trial Begins With Bang

Opening arguments and Oracle's first witnesses took the spotlight Tuesday in a battle that will ultimately determine the damages SAP should pay Oracle for TomorrowNow's copyrights infringement. The attorneys came out swinging.

On day two of Oracle v SAP, it became clear that Oracle plans to use the public trial to expel every last drop of vengeance it feels about how SAP blessed (perhaps more) TomorrowNow's inexplicably greedy copyright infringement practices, while SAP would love nothing better than to pay Oracle and have it all go away. This day's fireworks included Oracle introducing damning video testimony from TomorrowNow's senior automation developer, SAP saying Oracle's damage claims were "based on fantasy," the judge instructing the jury not to tweet, and the combatants ripping through two Oracle witnesses who explained the intricacies of software maintenance fees and the wonderfulness of the Oracle "stack."

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

Oracle's dainty co-President and CFO Safra Katz sat poised and quiet in the front row, in stark contrast to the abundant thrum of Oracle's team of attorneys, while SAP's dapper CEO Bill McDermott tried to portray a calm concern, and talked jovially with reporters while the court was momentarily sealed -- about SAP's earnings, about the Giant's winning the World Series and the sunny day. But it was all cloudy in the courtroom. Geoffrey Howard (Bingham McCutchen LLP, representing Oracle) and Robert Mittelstaedt (Jones Day, representing SAP) provided opening arguments, which consumed most of the morning. Each legal team slowly, and sometimes condescendingly walked the jury through key battle points, each painting the opposite edges of what a possible monetary judgement should be.

SAP has already owned up to its liability. The case is no longer about what went wrong, and yet Oracle feels compelled to expose the extent to which a host of parties that include SAP board members and HP's new CEO were allegedly engaged in seedy practices.

However, this case will come down to one simple jury judgement: how much SAP owes Oracle for copyright infringement. If SAP did itself any favors today, it was very clear about putting the boundaries around what it thinks it owes Oracle, emphasizing at every turn its responsibility and willingness to account for its mistakes (even once calling some of the evidence Oracle presented as "bad stuff"), and putting a price tag on it all. Its price tag is confined to the facts that fit in SAP's favor, of course, and the defendant still hasn't explained why TomorrowNow would have needed millions of support documents, given its fairly marginal list of customers at the time.

Specifically, SAP said that 358 PeopleSoft customers became TomorrowNow customers, and they have determined that 200 of those wouldn't have abandoned Oracle were it not for TomorrowNow. It puts the damage for this at $32m. Oracle's accountants believe the number of lost customers to be 270, said Mittelstaedt. Further, SAP said that 86 of those 358 became SAP customers, but almost all of those would have left Oracle anyway; it will provide some sort of evidence to that effect. There isn't enough evidence to determine whether two of those 86 would have left, SAP said, so it is willing to pay for them; it estimates $4m for this portion. Grand total: About $40m.

And yet at some point between Monday night and Tuesday morning, the parties agreed that SAP would pay Oracle legal fees to the tune of $120m in return for limiting further damages (and hence the trial) to copyright infringement. That is, no punitive damages. The judge sealed the courtroom before the proceedings began, ostensibly to discuss this agreement (reported here), which had been removed from any recorded court filings.

It's difficult to assess the outcome of that agreement, especially since Oracle's counsel hammered home how bad the bad guys were, and tossed around some spectacular numbers. For example, it pointed to an SAP memo from then-executive Shai Agassi that ventured a desire to knock Oracle's share price down 10 percent. Since Oracle's valuation at the time was about $70b, that made SAP's damage mission at $7b, Howard concluded. Although Oracle may not reasonably think it will get anything close to that, it seems pretty focused on putting a hard dollar value on the actual documents taken. Howard said that at any point SAP could have negotiated the value of the licenses, but failed to do so. Now Oracle will attempt to force the matter.

In SAP's wrap-up of its opening statement, Mittelstaedt said that the parties, given their competitiveness, never would have done so. In fact, he called Oracle's assertions "speculative," an issue which Oracle counsel took issue with to end the day's court proceedings, much to the consternation of Judge Phyllis Hamilton. SAP co-CEO Bill McDermott told a gathering of reporters outside the courtroom that SAP had taken responsibility and that it is "prepared to remedy" the situation. "We just want it to be fair," he added.

Mittelstaedt said that even if the parties had agreed to place a value on the licenses, SAP would have insisted on the potential value of those licenses (what he called "running royalty"), rather than the actual value. Howard was so eager to blast away at this, he didn't even let his first witness, Oracle's Buffy Ranson, finish introducing herself before asking whether she'd ever let a customer pay for its software after determining how much it was going to use it. Or, as Oracle's next witness put it: if someone took four loaves of bread and only used one, you wouldn't charge him for one loaf, you'd charge him for all four.

Ransom, a 17-year Oracle veteran (by way of JD Edwards), runs global customer support. Ransom meticulously explained how maintenance fees work, what they comprise, and why they're so expensive. In November 2006 she ran a report on a software fix that was targeted at a small handful of customers and found a hefty number of downloads. Upon further investigation, she found false phone numbers and e-mail addresses, along with concocted user names like TomNow and Tom2.

Ransom also demonstrated how TomorrowNow's infamous Titan, an automated software tool, searched through support documents using a process that continuously answered "No" when asked if the document solved a particular problem, leading it to the next set of documents, and so on until it had successfully downloaded thousands of support files. Ransom said these processes were triggered sometimes in as little as subseconds apart.

SAP's defense team sent attorney Scott Cowen to cross-examine Ransom. In some of the only real action of the day, he quizzed her about the customer stability during PeopleSoft's acquisition of JD Edwards, and then during Oracle's purchase of PeopleSoft, setting the stage for SAP's claim that customers were going to leave anyway. Cowen methodically got Ransom to say that she hadn't done an analysis to understand why Oracle customers had switched to SAP, and to admit that TomorrowNow wasn't the only third-party game in town. Ransom tried her best to hold to the Oracle line, but feebly tried to evade a question by asking Cowen to clarify what he meant by third party support.

Next up was Edward Skrevin, another long-time Oracle-ite (since 1986), and now its Chief Corporate Architect. One of his main tasks, at least as it relates to the trial, is internal security. He spoke mostly about the cost of developing software and the importance of customers during the ongoing evolution of complex enterprise application software. In explaining the value of Oracle's software, Skrevin used National Marrow Donor, with 8 million donor records sitting in an Oracle database, as an example; Oracle the benevolent.

Finally, Oracle played the beginning of a deposition from TomorrowNow's Senior Automation Developer, John Ritchie. In what we've seen so far, Ritchie admits to being hired to write what he thought would be a lightweight webscraper, which instead turned out to pull down documents (TomorrowNow exec Greg Nelson called them "artifacts") systematically. Nelson told him not to put anything in writing, and when Ritchie expressed concerns (in his estimation, dozens of times) he was silenced and ignored. Ritchie's testimony will continue when the trial picks back up on Thursday.

Still expected this week: Oracle's former president Charles Phillips, Safra Katz and possibly Larry Ellison.

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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