The Devil Is In The Details: Oracle/NetSuite ERP Related Disputes

In February 2020, Elkay Plastics Company, Inc. ("Elkay") sued Oracle and NetSuite in San Francisco Superior Court in a lawsuit arising out of a failied ERP cloud contract.
United States Corporate/Commercial Law
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In February 2020, Elkay Plastics Company, Inc. ("Elkay") sued Oracle and NetSuite in San Francisco Superior Court in a lawsuit arising out of a failied ERP cloud contract. Elkay asserted a myriad of claims against Oracle/Netsuite, including fraud in the inducement, fraudulent and negligent misrepresentation, unfair competition under California Business & Professions Code Section 17200, breach of contract, breach of the implied covenant of good faith and fair dealing, breach of express warranty and unjust enrichment. Importantly, Elkay financed the ERP system through a financing contract with Oracle's financing arm, Oracle Credit Corporation ("OCC").

What did Elkay Allege?

In its Complaint, Elkay alleged that Oracle/NetSuite promised that they could implement a working ERP system to replace Elkay's legacy system within 10 months at a cost of $2.027 million. Elkay alleged that rather than implement the ERP system within the cost and timeframe promised, Oracle began recommending additional customizations and functionality to the tune of almost an additional $1 million. At the time of filing the Complaint, Elkay alleged that it had paid Oracle $1.282 million, and still owed Oracle an additional $1.645 million for a product that "does not perform to industry standards, does not address Elkay's core business processes, and does not meet the specific pre and post agreement representations of NetSuite and Oracle regarding performance and functionality." When Oracle failed to address and fix the problems, Elkay discontinued payments.

Risks of Financing Through Oracle Credit Corporation

We have previously reported that Oracle likes to have OCC assign these financing contracts to third party banks or financing companies shortly after the ERP cloud subscription agreement is executed. Although Oracle has over promised and under delivered, under California law these third-party banks have made arguments that they accepted the assignment from OCC as an innocent holder in due course, and no matter that the software doesn't work, "come hell or high water" the Oracle customer must pay up.

In this particular action, OCC assigned the agreement to SG Equipment Finance USA Group ("SGEF"), in accordance with Oracle's OCC playbook. SGEF made a payment demand and when Elkay declined to make payment due to the defects in the software, SGEF notified the company that it was in default and could no longer use the cloud services. However, in a deviation from its normal playbook, Oracle and OCC then accepted the assignment back and notified Elkay that notwithstanding the defaults, they would grant Elkay 10 days to cure the defaults and make payment and that they would reinstate the OCC contracts and the rights to use the Cloud Services in the meantime.

Oracle Goes on Offensive with Cross-Complaint

Because Elkay declined to pay, Oracle and OCC filed a cross-complaint in the action alleging that Elkay was in default of the financing agreement and owed additional monies and the full contract price as well as other damages. In its cross-complaint, Oracle also took the position that Elkay's assertions that the processing time for sales transactions did not meet its requirements, was a bogus excuse for non-payment, which had never been raised in pre-contract discussions and was only a recently trumped up excuse to get out of the contract. Instead, Oracle contended that it had substantially delivered what was required of it under the Statement of Work, and therefore was not in breach of the subscription agreement.

The litigation then proceeded to move forward at a snail's pace with a dizzying number of pro hac vice applications filed by counsel for Elkay. The parties agreed to mediate the dispute and to engage in limited pre-mediation discovery. After squabbling back and forth for a while, the parties apparently engaged in a mediation, which must have resolved the case, as the parties agreed to dismiss the entire action.

Lessons Learned

The case is instructive to the extent that Oracle/NetSuite filed a cross-claim against its customer for breach of contract, unjust enrichment, quantum meruit, account stated and declaratory relief and seeking to enforce the financing agreement with OCC. Oracle also sought recovery of its attorneys' fees under the OCC agreement for enforcement of that contract. The Elkay case is also different from other Oracle related ERP litigation, since Oracle took the financing agreement back from the financing company that accepted the assignment. We can't say with certainty why Oracle did so, but we do know that the optics of these OCC assignments are terrible and have been viewed unfavorably by at least one federal court. It also provided Oracle with the opportunity to control the litigation and mount an effective defense through the weapon of the affirmative lawsuit against the Oracle customer. ERP customers have been countersued by ERP software publishers such as Oracle, as well as ERP implementation partners, and should recognize that in certain circumstances this is a risk. These countersuits often allege that the management of the ERP customer made mistakes and did not effectively manage the project or didn't understand their own business, or that management's requirements changed over time and were out of scope of the agreement.

The fact that an ERP customer such as Elkay could pay millions of dollars for an ERP system that apparently failed to meet the basic requirements of the business, and then get hit with such an aggressive cross-claim should be a warning to all companies contemplating entering into similar ERP agreements with Oracle/NetSuite or other ERP providers. The negotiation of the language of the ERP related agreements and the specifics of ERP implementation requirements must be a key focus of the ERP customer. Companies acquiring ERP systems need to carefully think through their requirements for the project and have a strong internal team to help manage the process. And companies contracting with Oracle/NetSuite may want to think through the potential implications of obtaining financing through OCC, and how that could create unanticipated risks down the road.

Oracle Accused by Former Employee of Selling ERP Systems to Oracle/NetSuite ERP Customers That Did Not Exist

Oracle/NetSuite related ERP litigation cases are also interesting when viewed through the prism of the Daramola v. Oracle America case. Daramola was an Oracle Canada employee who lived and worked in Montreal, Canada and served as an Oracle project manager for Oracle's Campus Bookstore customers. In his Complaint, he detailed an alleged Oracle business practice of intentionally misrepresenting to Oracle's University customers that the company had a fully developed, integrated system for an online campus bookstore that could be customized and would be ready to "go live" quickly. However, according to the Complaint, no such integrated system existed, and Oracle instead would extract payments from university customers, then stall while continuing to receive payment without delivering a working ERP product. The facts pleaded in the 2022 amended complaint further highlight an alleged pattern and practice under which Oracle promised to customize a non-existent but purportedly integrated cloud system for university clients then used escalation teams to hold off customers who were making subscription payments for the product and receiving nothing in return. According to the Complaint, Project managers, like Daramola, and "escalation teams" were directed to further mislead customers about the lack of development for the system the customer had supposedly acquired, by for example, blaming delivery delays on the customers "unforeseen customization requests," extracting change orders for such "customizations," then requiring customers to pay more while buying Oracle more time to deliver a functioning ERP product.

Eventually after three pleading attempts, the Darmola case was dismissed because the Northern District of California essentially found that the claims did not relate to California and could not be asserted by litigants living outside the U.S. against a California company that was separate from its Canadian sister company. The court reasoned that Plaintiff worked for a Canadian subsidiary of Oracle in Canada, and had not established legal theories to support a claim against Oracle America, Inc. directly here in California. Darmola recently appealed the case to the Ninth Circuit. We will be watching to see what happens. It seems a shame as it has been our experience that the mother Oracle ship in Redwood City appears to be running the show even outside of the United States.

However, if the allegations in Daramola are true, we would suspect that these types of predatory practices are not simply limited to university related ERP customers of Oracle/NetSuite. And having reviewed complaints filed in the Elkay, Barrett Business Services, Morse Communications, WG America Company and other lawsuits against Oracle/NetSuite we certainly see striking similarities and patterns. According to these lawsuits, Oracle/NetSuite represents that they have a fully integrated and developed solution for the particular customer in the particular industry and they will only need to tweak the software and can go live quickly. But the reality appears much different. Instead of getting the solution that was promised, ERP customers get hit with multiple change orders, demands for additional customization and escalating costs and increased delays. In short, not what they thought they had bargained for.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

The Devil Is In The Details: Oracle/NetSuite ERP Related Disputes

United States Corporate/Commercial Law
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