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Oracle v. SAP: Daytime Drama

Part 1 – Trial Preview: A trial nearly four years in the making is finally upon us. Oracle and SAP counsel will put on a dramatic show thanks to star witnesses, a trail of illegal activity, and accusations of misconduct at the highest levels.

If Oracle's lawsuit against SAP, as the company outlines in the first sentence of its trial brief, is about SAP's "deliberate scheme to 'inflict pain' on Oracle through knowingly illegal conduct," then this trial, set to begin Nov. 1 in Oakland, Calif., is Oracle's deliberate scheme to inflict pain on SAP.

The crux of the suit is pretty simple: TomorrowNow, a company that provided cut-rate support for PeopleSoft (hence, Oracle) applications, infringed on Oracle copyrights by illegally downloading a massive volume of files that included software, source code, and support documentation. SAP acquired TomorrowNow in 2005 and the practice continued. SAP has admitted liability, both on the part of TomorrowNow and, just recently, SAP for allowing the perpetuation of the practice. The trial ultimately will determine the damages to award Oracle.

Oracle's retribution for sins committed and confessed to could put a serious financial hurt on SAP, but it will also surely serve as a warning sign to the likes of Rimini Street and Google, whose distant trials with Oracle still loom. Even Hewlett-Packard, whose incoming CEO, former SAP CEO Leo Apotheker, starts ominously on Nov. 1, will donate a pound of flesh.

Jury selection is due to start at U.S. District Court on Monday (the judge rejected Oracle's request for a delay), with opening statements from both sides likely to come Tuesday. After that will come Oracle's first witness -- most likely the company's chief architect, Edward Screven, who is also in charge of security technology. The witness roster is an A-list of technology titans: The first week should see Oracle CEO Larry Ellison, former Oracle President Charles Phillips, and SAP CFO Werner Brandt. Apotheker is also expected to testify in the first week, but it isn't clear whether he will be deposed via video, show up in person, or wear a Halloween disguise. The second week will likely feature Oracle President Safra Katz and SAP attorneys. We're likely also to see SAP's current co-CEO, Bill McDermott, former CEO Henning Kagermann. and CFO Werner Brandt.

Oracle is building its case around two crucial items. First is the extent to which SAP is liable, not because it bought a company (TomorrowNow) that clearly appropriated Oracle intellectual property, indicating "vicarious" liability, which SAP has copped to; but because it possibly acquired TomorrowNow with knowledge of its illicit practices. Oracle also claims that SAP allowed, even encouraged, the practices (liability for "contributory infringement"), perhaps with the explicit knowledge, agreement, or guidance of then-CEO Apotheker -- as Ellison has taken pains to point out lately.

Until Oct. 28, SAP had taken great care to talk only about TomorrowNow's liability, raising Oracle's cackles. It's possible that Oracle will point to a liability shield SAP created when it acquired TomorrowNow -- something Oracle believes SAP did to protect itself from exactly what's happening now. In other words, the liability shield could be evidence that SAP was quite aware of TomorrowNow's transgressions.

SAP acquired TomorrowNow immediately after Oracle purchased PeopleSoft (for $11.1 billion). This was January 2005, and back then, companies like TomorrowNow were emerging to service companies that didn't want to pay hefty annual fees (as much as 23%) for maintenance and perpetual software upgrade rights. Critics of these fees have cast them as soft extortion, while Oracle and SAP have been quick to note all the critical services they provide customers in exchange for those fees.

Most customers that turned to companies like TomorrowNow weren't interested in constantly upgrading their software. Depending on who you listen to, those customers were either making calculated business decisions or putting their critical applications in jeopardy. Either way, their defection represented a threat to the fat, repeatable profit margins of Oracle and other enterprise application vendors.

The trial could reveal internal documents that show Oracle executives downplaying the importance of the customers who chose to go the third-party route. Yet one industry observer with knowledge of the proceedings points out that shifting support to a third-party vendor is a pretty clear signal of "an intent to change the nature of a relationship." Oracle had reason to worry.

SAP's plan was to make TomorrowNow part of its "Safe Passage" program, whereby wary PeopleSoft (and JD Edwards) customers and later Siebel customers could find "comfort" by switching to SAP. In its trial brief, SAP says customers were given a 75% credit for the cost of a PeopleSoft license, and the option to have TomorrowNow provide support services. None of this is disputed. The question about what SAP knew, and when, is where Oracle's witnesses and attorneys will prepare some body bags.

At the time, according to SAP's trial brief, Oracle was making plans for its Fusion integrated-application suite, and strongly hinting that all Oracle application customers, no matter the origin, would eventually be moved to that platform. Some of this is clearly SAP stage-setting: If people were bound to leave Oracle anyway, then how can Oracle prove that SAP did anything -- legally or not -- to get them to embrace SAP? In fact, any departure from PeopleSoft might just be all Oracle's fault, goes the veiled logic. SAP says that about 800 customers took advantage of the Safe Passage program, but it also says that of the 358 TomorrowNow customers, only 86 of them ever purchased SAP products and services.

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