A U.S. District Court in Oakland has ordered SAP to pay out $1.3 billion in damages to Oracle for copyright infringement. It is thought to be one of the largest ever awards for copyright – SAP which previously admitted its wrongdoing was hoping for a settlement in the region of $40 million. But apart from the jaw-dropping sums involved the case has wider implications on the software industry.
The lawsuit has its origins in the acquisition by SAP of a small business, (now defunct) called TomorrowNow which was set up to provide third party maintenance and support. More specifically it turns out that TomorrowNow offered these services to the customers of the companies that Oracle acquired (Siebel, PeopleSoft and JD Edwards) and created a sales campaign called "Safe Passage" to persuade customers to switch to SAP, but in the process downloaded thousands of copies of unauthorised software and documentation from Oracle.
Oracle was startled by the brazenness of the affair and the apparent involvement of senior SAP management. Larry Ellison, Oracle’s colourful founder and one of the richest men in the United States testified that SAP could have captured 20 to 30 percent of Oracle's clients, although only 358 defected. He added that the thousands of unauthorized copies of Oracle software that TomorrowNow had downloaded would have been worth $4 billion in license fees.
So what lessons can be learned from this sordid affair? The first is of course that very high damages can arise from very small transactions. SAP is believed to have paid around $10m for TomorrowNow which pales into insignificance against the $1.3bn damages. It is every compliance officer’s nightmare which explains the growing popularity of GRC, Governance, Risk and Compliance software. Ironically, products which both Oracle and SAP sell.
Reputational risk is a concern but these things are usually short lived in the memories of customers. For example, BP will surely recover its reputation over oil spills and Toyota will regain its composure after product recalls. SAP will suffer jibes in the short term and its reputation will be dented but not irreparably. Furthermore, it did come clean fairly quickly admitting that mistakes were made and seeking a reasonable financial settlement with Oracle. SAP’s management team will be shaken by the size of the settlement and has already said that it will pursue other options to reduce the size of Oracle’s award.
The financial impact is steep but SAP can withstand the shock, especially as there are doubts whether it will eventually end up paying so much. The share price may take an initial knock but, as tends to happen, may settle down as the financial implications work their way through and the markets come to terms with the fact that this will still drag on for years.
No the impact of this award is more subtle. It has upsides and potentially serious downsides. The upside of the case is that it re-establishes the right of a software house to earn maintenance revenues without unfair competition from rivals.
Companies which invest heavily in research and development to create innovative products, or simply acquire other good products and companies have a right to protect their future revenue streams. Maintenance revenues are part of the reward for taking the initial investment risk as well as providing continuous support and upgrades. One can argue that annual maintenance is sometimes pitched to high, especially in the case of ageing software that has seen better days and is unlikely to be developed further. But there is also some unfairness in third party companies saying we will carry out maintenance for half the price of the software author – denying the latter its most profitable years.
So the implications of this case will ripple through the mushrooming third part support industry. Lawyers will today be pouring over the methodologies, products and intellectual property being used by these companies to support their customers and it may change practices currently employed.
Finally some lawyers have expressed concerns that the case may stifle innovation especially where companies develop very similar products – but starting at different positions. Perhaps this concern is overstated. There was nothing in the case which appeared to discourage fair competition but in the internet age, when everyone feels that they can help themselves to anything for free, it is good to see that the courts are willing to redress the balance.
