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11/5/2010
10:46 PM
Fritz Nelson
Fritz Nelson
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SAP CFO Werner Brandt Baffles Oracle As Trial Girds for Ellison

The Oracle-SAP trial continues to plod along. Key witnesses on Friday included SAP CFO and board member Werner Brandt, who threw a few surprises Oracle's way. More fireworks are expected Monday when Larry Ellison takes the stand.

The Oracle SAP trial continued Friday without quite as much fanfare, as lower-profile witnesses took the stand to explore two key points: the value of Oracle's software to SAP, and the extent to which SAP executives -- especially its board -- took action to stop TomorrowNow's copyright violations. Testimony from SAP CFO and board member Werner Brandt concerning his assumptions going into the TomorrowNow acquisition and about SAP's liability surprised Oracle counsel, who also still can't seem to find former board member, and now-HP CEO Leo Apotheker to serve him a subpoena. Oracle CEO Larry Ellison will testify first thing Monday morning.

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

David Boies, Oracle's high-profile attorney, questioned Brandt in a marathon session made even more torturous by language barriers (Brandt is German, and spoke mostly through a translator). Brandt's testimony confirmed that SAP's board knew of the copyright infringements during the TomorrowNow acquisition and assumed the risk anyway. Brandt, and presumably other board members, took this risk because of steps put in place to mitigate those risks. One of those was a liability shield -- a frequent practice that keeps an acquired company as a separate subsidiary.

However, SAP counsel broke new ground, producing a document proving that other steps were taken as well -- steps communicated on January 15, 2005, just a few days before SAP announced the TomorrowNow deal. The document, admitted into evidence over the objections of Oracle's attorneys, has yet to be seen by the jury; an SAP spokesperson was not prepared to discuss what the document entailed.

Brandt also explained that SAP told TomorrowNow to stop its shady practices. However, he was unable to recall under Boies' meticulous and exhaustive questioning whether that was actually communicated to TomorrowNow in writing, or whether new operating procedures for TomorrowNow were ever formally presented to SAP's board. Brandt also said he assumed that after the directive was given, someone would be checking to ensure TomorrowNow was in compliance, but he never followed up. Brandt testified that he later learned TomorrowNow had continued its practice despite this directive only after Oracle filed a lawsuit.

Brandt was stubborn in refusing to admit that SAP was liable for TomorrowNow's practices; this point has already been stipulated by SAP, and although Brandt is largely SAP's internal point man for this trial, he claimed that he was unable to make sense of the legalities surrounding SAP's contributory liability in the case. In his view, SAP had taken more than enough steps to correct the problem, and yet its subsidiary continued its wrongful practices unabated. Read: Not our fault. The exasperated Boies was left to scratch his head.

Because of Brandt's refusal to accept SAP's liability, he was loathe to engage in any hypothetical thinking about what SAP and Oracle would have agreed to in a negotiation for Oracle software licenses. Brandt said that had he known TomorrowNow was getting Oracle's code illegally, he would have rejected the acquisition, or told them to stop (which he claims SAP did). That hypothetical negotiation -- between Oracle and SAP -- is one of the critical factors being used to determine damages, and it assumes each side would have known each others' state of affairs; for example how SAP was projecting its growth potential with TomorrowNow siphoning PeopleSoft customers, or how seriously Oracle viewed the TomorrowNow threat.

Boies hammered on one SAP presentation bullet point that Oracle counsel continues to parade in front of every SAP witness -- that one of the main business goals of the TomorrowNow purchase was to "disrupt Oracle's ability to pay for the acquisition [or PeopleSoft] out of cash flow." By crippling Oracle's maintenance business, in other words, it would have to dip into other company capital -- presumably its Research & Development budget -- in order to pay for the deal. Again, Oracle is persuading the jury that SAP's state of mind was to damage Oracle's future, especially its $11.1b purchase of PeopleSoft, and that Oracle would have entered a license negotiation with that in its mind at the bargaining table.

All of this was particularly troubling for Oracle. After the jury was dismissed, Donn Picket, one of Oracle's attorneys, complained to Judge Shirley Hamilton that the only board member to appear live in court had just told the jury that SAP was not liable. Judge Hamilton replied: "It's just one witness." Oracle's Boies did manage to cast a pretty big shadow of doubt on Brandt's testimony, demonstrating that he and the board had approved the TomorrowNow deal before the newly-revealed "mitigation steps" document was circulated.

Brandt insisted that formal board approval didn't happen until later, despite documentation that shows otherwise. That documentation was an e-mail SAP's James Mackey sent to various board members, stating that the board had agreed to acquire TomorrowNow at a January 13 meeting in Miami. Mackey reported to Brandt. Brandt replied: "I did not participate in that board meeting. There was no board meeting at which all members of the board participated." At least not until January 19, according to Brandt. That's the date he says SAP's board formally approved the deal.

SAP counsel also produced a TomorrowNow valuation chart; until now, the only projections we've seen from SAP have been charts that Brandt relegated to "marketing plans," in which he said he never put much faith. Those plans showed projected growth of nearly $900m over three years, which Oracle's former President Charles Phillips characterized as having a value that was a multiple of that figure; in other words: "billions." The chart, which was difficult to read and was only displayed briefly, showed $12m in sales for 2007. However, Oracle's legal team pointed out that this was a document prepared by TomorrowNow.

Let the wrangling begin.

Brandt was practically vivacious compared with another SAP board member, Gerd Oswald. Oswald had absolutely no recollection of anything of substance -- no conversations, no e-mails, no directives. So far, Oswald and Brandt have made SAP's board look either like a bunch of amnesiacs or highly dysfunctional. Their integrity has certainly been questioned along the way, and undoubtedly Oracle's feisty CEO will take no prisoners on this point Monday.

Oracle also called on Richard Allison, Oracle's senior vice president in charge of global practices; that means he handles customer contracts and license terms for Oracle, reporting directly into co-President Safra Katz. Allison pointed out one particularly notable license detail, at least as far as this trial is concerned. The license gives Oracle's customer "the limited right to use the program . . . solely for . . . internal business operations."

Allison also worked with Oracle's "damage expert," Paul Meyer, to determine a price tag to place on Oracle database licenses that TomorrowNow allegedly pilfered (but he did not reveal a price tag on other infringed applications). Meyer and Allison pegged the number of licenses at somewhere north of 150, and the price tag at $55m. An enterprise edition license for an Oracle database runs about $40,000.

Although the final days of this trial (closing statements are now scheduled for November 23) will feature damage experts spewing an array of numbers sure to baffle the jury, if not themselves, those conversations will become the most crucial part of the trial.

There were other witnesses, namely TomorrowNow's former CIO Greg Nelson (no relation), and John Blaugh, who oversaw TomorrowNow's PeopleSoft environment. The former talked primarily about his requests for Oracle database licenses, although it is still unclear why those requests -- approved, according to internal e-mail, by Mark White, who served as Executive Chairman for TomorrowNow -- never came to fruition. Blaugh was responsible for all of the copies of PeopleSoft that TomorrowNow kept locally, which is one of the points of contention in the trial (Oracle argues that there is no reason a third party would need physical copies of a customers' software; former SAP executive Shai Agassi testified that it's common industry practice). Blaugh said he mentioned the need to acquire an Oracle database license as well.

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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