SAP: We Crossed The Line, But Not As Far As Oracle Claims

In A Software Industry whipped into an acquisition frenzy, SAP has been a model of caution. So it's ironic that SAP is blaming an out-of-control acquisition--its TomorrowNow subsidiary--for getting the company into trouble with serial acquirer Oracle.

In its July 2 response to a lawsuit filed in March in which Oracle alleges "corporate theft on a grand scale," SAP admits that TomorrowNow employees downloaded some Oracle documents on behalf of customers that didn't have rights to those documents. But SAP denies that it used those downloads to create an illegal library of Oracle software code.

The distinction is important. If Oracle can show that its intellectual property made its way into SAP products as a result of the downloads, it has a case for getting a chunk of SAP's revenue or a court injunction stopping SAP from selling certain products. The suit, pending in U.S. District Court in San Francisco, will hinge on whether SAP can claim that TomorrowNow is a separate entity that acted on its own. "It will be incumbent on Oracle to prove, to support some of their claims, that the documents TomorrowNow had access to were actually shared with other corporate entities," says Erik Phelps, an attorney with Michael Best & Friedrich LLP.

The U.S. Justice Department has requested that SAP and TomorrowNow provide certain internal documents. "Anything criminal on the part of SAP found by Justice would be a very scary result," Phelps says.

In a conference call last week, SAP CEO Henning Kagermann insisted that customers aren't buying Oracle's tawdry characterization of events. "From customers and user groups, there is no reaction," Kagermann said. "They trust in the reputation of SAP." The inappropriate downloads, he added, were "done by employees of TomorrowNow."

TomorrowNow, which SAP acquired in 2005, provides low-cost support and consulting services to users of Oracle's PeopleSoft and JD Edwards applications. In its suit, Oracle alleges that SAP employees pretended to be Oracle customers to log on to its Web site and copy proprietary technical and customer-support data. Oracle claims that SAP gathered the documentation to undercut the prices Oracle charges for support and ultimately shift those customers to SAP products. In its lawsuit, Oracle also says it's concerned that SAP is using Oracle code to improve its own software products.

SAP has made no secret of its ambition to convert Oracle customers. In the 2005 press release in which it announced the TomorrowNow deal, SAP also unveiled the Safe Passage program, offering Oracle's PeopleSoft, JD Edwards, and other customers a migration path to SAP software given "the uncertainties arising out of the acquisition of those software brands."

SAP now admits that TomorrowNow employees downloaded thousands of documents that customers weren't licensed to have, but it says those documents never made it beyond TomorrowNow's gated systems. By saying the documents were obtained "on behalf" of customers, SAP seems to be building a case that they weren't used for its competitive purposes. Still, SAP hasn't explained how TomorrowNow used those documents. Besides promising to make sure employees follow company policies, the only formal action SAP has taken was to last week appoint Mark White, chief operating officer of SAP Americas, as executive chairman of TomorrowNow. Andrew Nelson, CEO of TomorrowNow, now reports to White.

SAP and Oracle are scheduled to have their first meeting with a judge about the case on Sept. 4. Kagermann didn't rule out a settlement, but it's hard to imagine that Oracle will be muffled anytime soon. Expect to see a full electronic discovery of documents and e-mails--and more posturing in the market.