Why is SAP accepting TomorrowNow liability at this time?

SAP's sudden move to deflate the TomorrowNow case brought by Oracle presents many interesting questions. Here's my take on what's happening.

I don't know whether I am surprised or not. Larry Dignan reports that SAP has accepted liability for TomorrowNow's 'mistakes' in the lawsuit brought by Oracle where it claimed TomorrowNow had infringed Oracle copyright. The introduction to the court filing (PDF download) makes clear SAP's logic:

Since March 2007, an evolving roster of Plaintiffs has filed five complaints, each more colorful than the last. Plaintiffs contend that TomorrowNow cut too many corners in providing a lower-cost alternative to Plaintiffs’ expensive software maintenance, by improperly downloading and copying software and support materials. Plaintiffs leap from that contention to billions in damages based on an alleged sinister plot by SAP.

As always, the truth is less exciting than the pleadings. SAP bought TomorrowNow for $10 million to provide a choice to customers frightened by Oracle’s acquisition of PeopleSoft and J.D. Edwards. TomorrowNow served only a tiny fraction of Plaintiffs’ customers—customers who were already going to drop Plaintiffs’ support and whom Oracle’s own executives dismissed as “unprofitable laggards.” TomorrowNow never made a profit, and, despite some initial optimism, no customers chose to purchase SAP software because of TomorrowNow.

From the beginning of this case, SAP has acknowledged that there were mistakes in TomorrowNow’s service operations and acted responsibly to address the situation. SAP changed management at TomorrowNow. It directed a revision of TomorrowNow’s service procedures. And, after it could assure that TomorrowNow’s customers were protected, SAP shut down TomorrowNow’s operations rather than let them distract from efforts to resolve this dispute.

Years of litigation have made a few things clear: although TomorrowNow did make mistakes in its operations, Plaintiffs’ damage claims are vastly exaggerated, and Plaintiffs have no interest in resolving this case. Someone will have to take a major step, or this case will never end.

That “someone” is SAP. SAP recognizes not only that TomorrowNow made mistakes but that Plaintiffs are entitled to compensation, for which SAP will accept ultimate financial responsibility. That compensation must be based in reality and the law, however. SAP’s proposal to streamline this case for trial, outlined below, will allow the Court and the parties to focus on what matters most—a fair resolution of this case.

It is rare for this type of case to reach trial. As papers are filed back and forth, issues become hideously complex and the prospect of a fair settlement diminishes. This is because in cases that have gone to trial, juries of lay people have a tough time understanding the complexities of copyright law. Then there's the appeals process which can drag litigation on for years. It doesn't go un-noticed for example that Salesforce.com has just reached a settlement with Microsoft in a patent infrigingement case. Other reasons can include the potential for highly damaging material to come out in open court that exposes some of the seedier practices that are commonplace in enterprise sales.

Past discussions with colleagues suggest SAP's contention that Oracle does not wish to settle the case is on the money. Some have suggested that Oracle has taken a position that would be untenable because it was so obviously spiteful. As defendant, SAP has no choice but to respond but I am still left wondering why, at this late stage, it has chosen to take this approach. SAP's internal legal team are no slouches.

In an email response from SAP to my question: 'Why the sudden change of heart?' the company responded: "It's not a change of heart... SAP's approach today is the same approach we've taken all along.  By accepting responsibility for TomorrowNow's actions, we can hopefully focus on the right things during the trial in November.  We acknowledged three years ago that TomorrowNow made mistakes, and we took action to address Oracle's concerns, including shutting down the company two years ago."

My assessment is this is but a demonstration that SAP is continuing with the post-Apotheker clean up. It's another problem that every now and again becomes a headline. By taking this action, SAP is attempting to deflate the litigious balloon and get on with the job of making sales without requiring executive distraction.

Everyone wants to know the likely impact on Oracle's case against RiminiStreet. In conversations I've had with Seth Ravin, that company's CEO, I get the impression of a management prepared to dig in for the long haul. He told me that while confident of success, win or lose, he is determined to find a way to help customers reduce their maintenance spend with Oracle and SAP. Both Oracle and SAP are dependent on maintenance earnings to bolster profitability. In the long haul, there are huge amounts at stake.

Regular readers will be aware that along with colleagues Vinnie Mirchandani, Ray Wang and Frank Scavo, we have been highly critical about both companies' insistence on maintaining a monolithic approach to maintenance costs at levels we believe are both unfair and unsustainable. In another part of the filing, you could be forgiven for thinking that Oracle takes a cynical view of its customers:

Plaintiffs bristle at the notion that customers may wish to lower their support fees and forego the right to future software upgrades. A senior Oracle executive wrote:

Let the bastards dream of reducing their maintenance fees. I just finished telling Toyota that we’re not going to reduce their bill. Not only that, but they need to buy more software from us!

Defs.’ Dep. Ex. 373.

In the meantime, Oracle has substantial legal problems of its own. According to Bloomberg, Oracle:

...may face total damages of $1 billion in a U.S. Justice Department lawsuit claiming it overcharged the government, legal experts said.

Oracle induced the General Services Administration to buy $1.08 billion in software from 1998 to 2006 by falsely promising the same discounts offered to favored commercial customers, the U.S. claimed in a complaint filed July 29 in federal court in Alexandra, Virginia. Oracle instead gave companies discounts of as much as 92 percent, while the government’s cuts ranged from 25 to 40 percent, the U.S. said.

“It looks to me like this could be a $1 billion verdict after trebling,” Frederick M. Morgan Jr., an attorney at Morgan Verkamp LLC in Cincinnati who isn’t involved in the case, said in an interview.

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