Oracle Sues NEC, a Long Time Oracle Partner (the Risks of Working with Oracle)

Earlier this year, Oracle filed yet another lawsuit against one of their customers. (Seems like an interesting way to treat your clients, but we will save that for another day.) This time Oracle has NEC in the crosshairs. NEC has responded to Oracle’s lawsuit and is countersuing Oracle. Grab the popcorn.

In their response, NEC has offered several affirmative defenses against Oracle’s claims. One of these defenses is fraud. Yes, fraud! NEC claims that “The conduct of Oracle … demonstrates that Oracle procured through fraud NECAM’s agreement to use and distribute Oracle’s software” NEC’s filing provides several paragraphs detailing Oracle’s alleged fraud. In summary, NEC claims:

“Aware of NECAM’s intended use of the Oracle software, Oracle granted NECAM a license knowing that the restrictions present in the embedded license type selected by Oracle would not permit NECAM to use the Oracle software as it intended. In other words, Oracle promised to authorize NECAM’s use of the Oracle software without ever intending to honor that promise.”

We have to remember that parties to a lawsuit can claim almost anything they want. It doesn’t mean these claims are true. Remember, innocent until proven guilty. Even for Oracle. Now Oracle has had an opportunity to respond to NEC’s claims of fraud. And what do you think they said? Probably not what you think.

The interesting thing here is that Oracle, in their response to NEC, never actually denies they committed the alleged actions outlined by NEC. Rather, Oracle argues a legal technicality. Oracle claims that NEC did not meet the technical legal requirements to show fraud. Specifically, Oracle claims:

“NECAM does not allege who (which person at Oracle) made the alleged misrepresentation, where it was made, when it was made, how it was communicated (whether in writing, orally in person, orally in a telephone call, etc), or specifically what the words of the alleged misrepresentation were.”

Guess what? Oracle won this argument! The judge ruled in Oracle’s favor here and dismissed NEC’s affirmative defense of fraudulent inducement by Oracle. I don’t think, however, that we’ve heard the last of NEC in this case. In fact, the judge’s ruling specifically allows NEC to amend their response and refile it. According to Oracle, NEC must meet the following burden:

“The requirement of specificity in a fraud action against a corporation requires the plaintiff to allege the names of the persons who made the allegedly fraudulent representations, their authority to speak, to whom they spoke, what they said or wrote, and when it was said or written.”

Expect NEC to amend and refile their affirmative defenses and counterclaims. NEC is not backing down.

In these types of filings, Oracle does not have to profess its innocence, they merely have to find legal loopholes and trip up their opponents. That’s exactly what they did here. That being said, if I was writing Oracle’s response, I would have a line in there that says, “Oracle did not commit fraud and does not engage in fraudulent activity!”

In a previous lawsuit, Oracle has not denied certain hard-nosed sales behavior. Rather than denying their behavior, Oracle claimed that their tactics do not rise to the level of fraud or illegality. Is that really the level of behavior that we think is acceptable? Is the argument that “it’s not illegal” good enough? Should we expect more from the technology companies we rely on for our critical infrastructure? Stay tuned for updates!

Background on Oracle vs NEC

Before we get into the background on the latest and greatest Oracle lawsuit, where Oracle sues NEC, let me say three things. First, NEC is not a Palisade Compliance client. Second, if they had been our client, they would not be getting sued by Oracle. Third, if they want to be our client, we would be happy to help them.

Having said all that, this lawsuit is a case study in:

  • The risks of being an Oracle partner
  • The monetary and compliance risks of using Oracle software
  • The lengths to which Oracle will go to enforce their rules; and
  • How not to handle Oracle!

I’ll hit on all these topics plus give some guidance on what Oracle partners (and customers) can do to protect themselves from Oracle.

How the lawsuit began

On July 8, 2021 Oracle filed a lawsuit against NEC looking for both monetary damages as well as additional information, so Oracle can add damages on top of the $7 million in damages they are claiming. We put Oracle’s filing here in case you want to read it for yourself.

I’ll sum up the filing for you. NEC was an Oracle partner and they were allowed to distribute Oracle software to other companies provided they a) distributed in accordance with their rights and obligations under their contracts, and b) pay Oracle enough money. Point “b” is especially important here. Obviously, Oracle claims that NEC did not distribute the Oracle products properly and did not pay Oracle enough money.

Because this is Oracle licensing there is another aspect of this lawsuit. Oracle also claims that NEC is improperly using the Oracle software internally. This is the part that trips up Oracle partners all the time. If you’re an Oracle partner you can generally use Oracle software free of charge to develop the solutions that you sell to your customers. However, everything changes once the solution goes into production and the partner starts selling to their customers.

What being an Oracle partner costs

Oracle’s partner agreements do not allow a partner to run Oracle software internally to support the partner’s clients. Partners who are supporting active customers must purchase additional licenses from Oracle for that purpose. In effect, a partner can use Oracle’s software at no charge to develop a solution, but once that solution goes into production, and the partner goes from developing to supporting customers, then the partner must buy more Oracle licenses and pay for them.

If you think that’s bad, then wait for this next part. In the lawsuit, Oracle claims that NEC has not given it the information needed to truly put a dollar amount on the damages associated with NEC’s usage of Oracle software to support NEC’s customers. (I know, that was a packed sentence!) Here’s my guess: NEC hasn’t given that information because the software is running in a big old VMware cluster and Oracle would try to apply non-contractual “policies” and hit NEC with a huge penalty. Again, that’s just a guess. If I’m wrong, I owe someone a beer.

Oracle sues NEC, and the Nuclear Option

In their lawsuit, Oracle also claims that NEC has been a partner for 15 years and is “intimately” aware of the rules. I would disagree with that completely. This partner licensing tripwire has been there for years. I know, because we have successfully helped several Oracle partners through this Oracle licensing nightmare. Oracle makes a lot of money auditing their partners and they must know it’s difficult to understand and comply with all the rules.

In the complaint, Oracle mentions 14 separate contracts NEC has signed with Oracle. Do you really think anyone at NEC had an intimate knowledge of all 14 agreements to ensure compliance? Do you really think anyone at Oracle, before the lawsuit was filed, had an intimate knowledge of all the agreements NEC and Oracle signed? The reality is that companies (Oracle and their customers) often sign these agreements in vacuums and only look at them when there is a problem.

Another thing we see here is Oracle’s use of the “Nuclear Option.” We’ve come across this before, in connection with another lawsuit. It was Mars (assisted by Palisade Compliance) suing Oracle.

The Nuclear Option is when Oracle terminates a company’s agreements so that company has no more licenses. The NEC situation seems to be a twist on the Nuclear Option in that Oracle appears to have terminated NEC’s right to distribute licenses and use them for development. There is no evidence Oracle terminated all NEC’s internal Oracle licensing.

Even though this a smaller termination, it does have a huge impact on NEC’s operations. Not only can NEC no longer distribute Oracle software, NEC can no longer support their customers. (Of course Oracle is arguing that NEC was never allowed to do that!)

Four takeaways from this lawsuit

There are several lessons learned here:

First, being an Oracle partner (and customer) can open you up to lawsuits, audits, and other pressure from Oracle. However you work with Oracle, you must be careful, and you must be in compliance with your contracts.

Second, virtualization is still a huge problem for Oracle customers when it comes to licensing. It doesn’t have to be a problem, but if not handled correctly, it will be.

Third, every Oracle customer (and partner) needs independent expertise to manage their Oracle usage, compliance, and relationship with Oracle. NEC is a huge organization with very smart people, and they still find themselves in this precarious position with Oracle. Now, we have not seen NEC’s response on this. I’ll look forward to reporting on that when it’s available. I’m sure they will deny everything and fight, until they settle.

Fourth, Palisade Compliance is the leading expert empowering our clients to keep control of Oracle. We are the leaders because our clients don’t get sued by Oracle. Our clients stay in control, stay in compliance, reduce financial risks, and chart their own technology path whether that is moving towards Oracle or away from Oracle.

Picture of Craig Guarente
Craig Guarente
Craig is the President and Founder of Palisade Compliance, which he founded in 2011. Before 2011, Craig worked at Oracle for 16 years where he was the Global Vice President of Contracts, Business Practices, and Migrations. He was also the Global Process Owner for Oracle’s audit teams (LMS), a member of Oracle’s CIO advisory board, and on the Oracle User Group’s contract and licensing advisory board. Craig is now the leading expert on Oracle licensing, is quoted in dozens of publications, and assists with many high-profile Oracle disputes.