Perhaps your company decides that it needs to add an enterprise resource planning ("ERP") system or to replace its existing system and contacts Oracle to learn about Oracle's capabilities and product offerings. Or maybe Oracle has proactively reached out to you to sell its software and services. In some instances, customers contend in public court filings that they have found themselves out-of-pocket or owing significant amounts of money to Oracle or its assignees with little or nothing to show for it.
In Elkay Plastics Co., Inc. ("Elkay") v. Netsuite Inc., Oracle America, Inc., et al., San Francisco County Superior Court, Case No. CGC-20-583152, Elkay, a supplier of flexible packaging for the food service, healthcare and industrial markets with multiple service and distribution centers in the United States concluded that its legacy ERP system was no longer suited for its business needs. As a result, it issued a Request for Information to a number of software vendors, including to NetSuite, which is a wholly owned subsidiary of Oracle. (Joint Case Management Statement filed Aug. 28, 2020 at page 3, lines 7-16). Based on representations made by Oracle as to the suitability of the NetSuite software, purported skill and experience of Oracle employees and contractors and a promised high level of performance, Elkay executed a contract in May 2018 for the implementation and use of the NetSuite software. Id. at page 3, lines 20-23. According to Elkay:
"NetSuite and Oracle attempted to implement their software. The implementation was an unmitigated failure. Processing speeds and latency times for all transactions that were input into the ERP software varied between 4.1 and 30.35 seconds, with the NetSuite server taking up to 29 seconds. By way of comparison, Elkay's 1995 legacy ERP software system's processing times were approximately 2 seconds." Id. at page 3, lines 24-28.
"NetSuite and Oracle urged Elkay to implement additional functionality and customizations in order to resolve the processing speeds, including purchasing additional software functionality and making at least 20 additional customizations to the software—all at Elkay's expense. . . . However, despite paying for the performance profile and implementing NetSuite and Oracle's recommendations, transactions speeds failed to materially improve." Id. at page 4, lines 4-10.
In the end, Elkay reported paying NetSuite and Oracle approximately $1,282,401 and being obligated to pay an additional $1,645,897 through March 1, 2023 for an ERP system that did not perform according to industry standards, address Elkay's core business processes or meet NetSuite and Oracle's performance and functionality representations. Id. at page 4, lines 13-18.
Elkay's experience is not dissimilar from what has been alleged in other recent lawsuits, including Barrett Business Services, Inc. ("BBSI") v. Oracle America, Inc., et al., San Francisco County Superior Court, Case No. CGC-19-572474 and Banc of America Leasing & Capital, LLC ("BALC") v. Janco Foods, Inc. ("Janco"), et al., United States District Court, N.D. CA, Case No. 3:20-cv-05152 LB.
In the BBSI case, Plaintiff alleges that Oracle solicited BBSI, a professional employer organization ("PEO") to sell its ERP software product, and once Oracle gained a foothold at BBSI, Oracle and its implementation partner began aggressively pushing the HCM Cloud, misrepresenting its capabilities and fitness for BBSI's business model, severely downplaying the system's limitations and the level of customization required and the exorbitant cost and time to do so, and inflating its integration partner's experience and expertise in configuring and customizing HCM Cloud for a PEO. (BBSI's Memorandum of Points and Authorities in Opposition to Oracle's Motion for Summary Adjudication, page 1, lines 6-8 and 10-16). According to BBSI, only after it signed a $15 million licensing deal with Oracle and a $429,268 Statement of Work with Oracle's integration partner did BBSI discover that the HCM Cloud was riddled with design, functionality, interface, integration and performance gaps and that its out-of-the box capabilities would not meet BBSI's needs as a PEO. Bridging some of the gaps would take over two years and customization work costing $33 million rather than the $5.9 million originally quoted. Id. at page 1, lines 17-23. BBSI's lawsuit seeks over $12 million in direct and consequential compensatory damages from Oracle and its integration partner for what BBSI says are useless products and services. Id. at page 2, line 11; and Complaint, ¶47. BBSI is also litigating against Key Equipment Finance ("KEF"), the entity to whom Oracle's financing arm, Oracle Credit Corporation ("OCC") assigned BBSI's financing contract. KEF contends that, even if Oracle failed to deliver the required functionality, "come hell or high water" BBSI must pay KEF for the entire amount of the assignment. At least one court in Washington state has expressed its view that such a scheme by Oracle and OCC may not be enforceable, as such a contract would be illusory and lack consideration. See Oracle Customers Beware of Potential Legal Risks of Financing ERP Deals Through Oracle Credit Corporation, Tactical Law Oracle Blog (Sept. 7, 2020), https://www.tacticallawgroup.com/oracle-software-audit-blog/oracle-customers-beware-of-potential-legal-risks-of-financing-erp-deals-through-oracle-credit-corporation.
Likewise, in the Janco case, in addition to battling Oracle, Janco is also being forced to litigate against BALC, the assignee of a financing contract assigned to it by OCC. Janco is a food service company, distributing food products and equipment to restaurants in the Houston area. (Complaint, ¶1). Janco too alleges that it was approached by Oracle, which represented that it could develop software, customized to meet Janco's needs for a flat fee, which could "go live" within 100 days. Id., ¶¶1-2, 15-16, 26. The commissioned work was financed through a Payment Plan Agreement ("PPA") with Oracle's financing arm, OCC, just like in the BBSI case. Shortly thereafter, OCC assigned its rights to payment to BALC. (Joint Case Management Statement and Rule 26(f) Report filed Oct. 22, 2020 at page 2, line 25 – page 3, line 6). After nearly two years, Janco claims that Oracle never delivered a working product and says that it has been told by an Oracle employee that the system "will likely never work notwithstanding Oracle's attempt to extract . . . an additional $40,000 to $50,000 for further 'customization' that Oracle was required to perform as part of the agreements with Janco." Id. at page 3, lines 24-28. Nonetheless, Janco may still be on the hook to BALC for a sizeable sum. BALC contends that any alleged misrepresentations by Oracle do not invalidate the finance contract, that the subject PPA which Janco entered into with OCC contains a valid and enforceable California Commercial Code section 9403 waiver of claims and defenses against any assignee of OCC, and that Janco's only recourse is against Oracle. Id. at page 5, lines 10-15.
What lesson can be taken away from these cases? Companies considering entering into an ERP contract with Oracle should carefully review the proposed warranties and limitations of liability provisions and negotiate appropriate changes. Also, consider including specific deliverables in the contract with a definitive timeline for implementation and remedies benefiting your company if Oracle does not meet its commitments. For companies considering financing through OCC, think carefully before agreeing to any clause that would allow Oracle to assign the contract at its convenience but still require that your company remain on the hook for the full value of the assignment, even if Oracle has completely failed to deliver what it promised.
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