Sometime today, Oracle and Rimini Street will lock horns in the Las Vegas District Court in what promises to be one of the most important legal battles fought between two software companies. At stake is the future of enterprise software support conducted by third parties and the ever rising cost of keeping systems compliant for national, state and international regulation purposes.
The short form of the argument goes like this. In January 2010, Oracle sued Rimini Street (from S1 filed in 2014)
alleging that certain of our processes violate Oracle’s license agreements and that we have committed acts of copyright infringement and violated other federal and state laws. Oracle alleged that its license agreements restrict licensees’ rights to provide third parties with copies of Oracle software and restrict where a customer physically may install the software. Oracle alleges that, in the course of providing our services, we violated such license agreements and illegally downloaded software and support materials without authorization. Oracle further alleges that we damaged its computer systems in the course of downloading materials for our clients. Oracle filed a second amended complaint in June 2011.
As is often the case in US litigation of this kind, plaintiffs make copious use of colorful language that to the non-US reader sounds more like a criminal indictment than a civil suit. Throughout, the litigation, Oracle has painted Rimini Street and its CEO Seth Ravin as intellectual property thieves.
In March 2010, Rimini Street hit back with a suit of its own claiming:
…copyright misuse, defamation, disparagement, trade libel, and unfair competition.
It was clear from day one that neither side was going to give quarter and while the case carries substantial potential reparations and penalties in Oracle’s favor, Rimini Street claims this has never been about software theft, licensing or other related topics.
Your maintenance dollars at stake
Many of us who have advisory roles to buyers believe the Oracle and Rimini Street case is pivotal to the future of the maintenance and support segment of the enterprise software market. If Rimini Street prevails, we anticipate the development of a vibrant industry with many new players coming to market. Some will come from left field, others will come from established brands we all know well. We cannot predict the impact on software authors but would be surprised if financial analysts do not start to take notice and question the predictability of future revenue streams.
The stakes are high for both sides of the industry, not just Oracle, which along with SAP, Microsoft, IBM and other large software vendors, derive significant amounts of highly profitable revenue from support and maintenance services. Rimini Street was founded on the belief that a lower cost, higher quality service is needed in the packaged enterprise software market. To that extent, the company is highly vocal about providing support for Oracle and Oracle acquired software such as PeopleSoft, Siebel and JD Edwards at 50% of the fees charged by Oracle.
That price point is something the established brands cannot live with and especially when coupled to a service excellence model that is an order of magnitude better than the other guys. It destroys their market position in a heartbeat. So regardless of how you view this, whether as a mouse challenging an elephant, David v Goliath or some other metaphor it doesn’t matter. The case is important because it represents one of the major disruptive forces impacting the maintenance segment.
Frank Scavo’s view from the beginning was:
Many of us have been hoping for a vigorous response by Rimini Street and it appears this is what Rimini Street is doing. As I’ve pointed out in the past, this case is going to bring increased legal scrutiny of Oracle and other major software providers in terms of how they lock in customers to their maintenance and support programs. Oracle runs a risk in filing this lawsuit. If Oracle does not prevail against Rimini Street, the case will strongly establish the legal basis for the third-party support industry.
As a guide to the scale of business, Rimini Street’s S1 filing shows revenue of $43.8 million in the nine months to 30th September 2013. Rimini Street reported revenue of $86.7 million for the year ended 31st December, 2014. Six months revenue to 30th June 2015 was $53.7 million. We can project forward and assume a full year result for fiscal 2015 of something around $120 million in revenue. That represents something around $240 million in revenue that has attrited from Oracle and SAP, of which we believe around 70% comes from former Oracle maintained customers.
It is Rimini Street’s firm belief that Oracle is trying to kill off a competitor, using language in its licensing agreements and supporting documentation to support a narrow interpretation of key aspects in the case.
Oracle for its part has endeavored to narrow the scope of the upcoming trial by getting the judge to rule on certain key aspects. So far, Oracle has been successful in persuading the presiding judge that Rimini Street did infringe Oracle’s copyright in some of the representative cases put forward by Oracle. However, as I noted in February 2014:
This remains a highly complex case where nothing is certain except for the fact that nothing in this case prevents customers from seeking the services of third party maintenance providers.
RiminiStreet is right to raise the point about wide-scale industry implications. However, we will not know how this plays out until the case comes to trial – probably some time in 2015.
What’s the problem? Software contract negotiation and upkeep with terms is a highly technical and difficult area for many buyers. Provisions that are designed to protect software authors’ intellectual property have been developed over many years but are almost always a minefield for the unwary. This is not specific to Oracle. As I implied above, other large vendors are equally efficient at ensuring they get paid for what they provide.
The real problem comes down to what the buyer thinks they are getting, what the industry at large believes to be de facto practices and what the contracts say. Like it or not, it is the contract that prevails but even then, how that contract is interpreted is critical to understanding the outcomes.
The difficulty for Rimini Street is that a significant proportion of its customers are long time customers of the original software author with contracts that pre-date modern practices around such topics as outsourcing, remote hosting and third-party support. It is these ‘steady state’ customers who see the value in moving to providers like Rimini Street. Older contracts often restrict rights to copy, and it is a lack of clarifying language for the modern environment where Rimini Street has fallen foul with the judge’s ruling.
There is another side to this. If Rimini Street is indeed infringing per the judge’s ruling, then it is safe to assume that any third party provider is likely in the same boat for at least a portion of its client portfolio. This includes Oracle subsidiaries that provide support for other third parties.
This problem arises because, in the representative cases, Rimini Street talked about copying for the purpose of development and testing for maintenance tasks. It is not possible to develop and test without making copies of the software. Otherwise, the service provider would run the risk of unintentionally introducing problems into production environments. That is a no-no and so copying for “dev and test” has become an established practice across the entire industry. The current ruling cuts across that, rendering obsolete the perceived wisdom about what is fair and reasonable.
Based on the current rulings, Oracle has a clear path to painting Rimini Street as a bad actor against a competitor that has publicly stated it has no problem with third party providers. This is because the judge’s ruling has become the current, effective law in the matter of copying software. From what we understand, this ruling is capable of a challenge but that is for a future time.
We shall be keeping a close watch on this trial, which we are led to believe will run for three to four weeks. We have little doubt that testimony will be vigorously challenged on both sides. The trial outcome is too important to ignore because the ramifications are not restricted to the litigants in this matter. The outcome affects everyone who pays maintenance and support to a software author and the software authors themselves.
Image credit: Justice statue with blue sky and white clouds © davis – Fotolia.com
Disclosure: SAP, Oracle, and Rimini Street are premier partners at the time of writing.