What now for SAP?

The verdict is in, and it doesn't look good for SAP as it faces a $1.3 billion damages bill

Tags: CopyrightIntellectual PropertyOracle CorporationSAP
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What now for SAP?
By  Mark Sutton Published  November 24, 2010

The verdict is in, and it is not good news for SAP. The jury in the case filed by Oracle against SAP has found in Oracle's favour, and has hit SAP with a ruling for damages of $1.3 billion.

After less than a day of deliberation, the jury decided on the award, a record for a copyright case.

The question is now, what happens to SAP?

To recap, SAP purchased third-party support provider TomorrowNow, which offered services around support for PeopleSoft and JD Edwards. The purchase came just after Oracle completed its own acquisition of PeopleSoft and JD Edwards. SAP planned to use TomorrowNow to get customers of the two companies to use TomorrowNow's support services, to get them to start using other SAP software, and then to lure them away from Oracle and to bring them over to SAP ERP. SAP planned to make $900 million from this scheme over three years, and indeed, Oracle says it lost some 358 customers because of it, with 86 confirmed as moving to SAP.

That wasn't the problem, however. TomorrowNow as a third-party support provider was allowed to download Oracle fixes and patches on behalf of its customers - but only those fixes that the customer's own agreements with Oracle specified. Instead, TomorrowNow, was downloading any Oracle software it could get from its support servers, regardless of customer agreements. As Safra Catz, president of Oracle described it, the win represents the largest ever award for software piracy.

It emerged at the trial that SAP executives knew about TomorrowNow's practices when they bought the company, but apart from some legal manoeuvres to try to absolve SAP of legal responsibility, and an order to stop the illegal downloading, SAP did nothing to check that TomorrowNow had actually stopped the practice. It hadn't and it was another three years, when Oracle finally filed suit, before SAP put a stop to the downloading, and eventually wound up TomorrowNow.

While the trial process was relatively quick, mainly down to SAP admitting that the downloading had taken place, it didn't paint their executives in a very good light.

SAP executives appeared to claim that they did not know what TomorrowNow was doing, as it operated as a separate business unit. But after Oracle said it had evidence that SAP did know what was going on, the company backed down and said it would no longer contest the point.

Most spectacular of all were the actions of the top executives from both companies. Ex-SAP boss, Leo Apotheker, in charge at the time of the downloading, failed to take the stand, as he was not in California and could not be subpoenaed. He was on a world tour to meet the employees and customers of his new company HP, where he is CEO.

There's bad blood between Oracle, particularly CEO Larry Ellison and HP, and the situation wasn't helped after HP fired his friend Mark Hurd and replaced him with Apotheker earlier this year. Ellison has accused Apotheker of running an industrial espionage scheme to rip off Oracle, although no evidence was presented in court.

The verdict has raised the possibility of SAP coming under criminal investigation. The FBI was said to interested in the case, and there is already a Department of Justice investigation into TomorrowNow, with which SAP is said to be co-operating.

The reputations of the executives involved must surely come into question - at best they failed in their responsibility to ensure that TomorrowNow followed the instruction to stop illegal downloading, at worst, they allowed an illegal activity to be carried out.

The financial burden could also hit SAP hard. The company said that the $1.3 billion (plus $120 million for Oracle's legal fees) was ten times more than it had put aside for the case - its profit after tax was $1.84 billion for the first nine months of 2010.

SAP said it may appeal, and it could take many more years and legal wrangling to settle, but given that SAP has already admitted guilt, would it really want to risk another costly legal battle, and the possibility of more concrete evidence of wrongdoing by it executives coming to light? It may be financially punishing to settle now, but to continue to give your biggest competitor a stick to beat with you might be an even greater punishment in the long run.

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