Several years ago, a Canadian firearms and outdoor sporting
goods retailer called Grouse River Outfitters Ltd. ("Grouse
River") sued Oracle Corporation ("Oracle") in
federal court in the Northern District of California for fraud and
other claims arising out of a NetSuite cloud-based business
management software agreement and a related contract for
professional services to implement the software solution. Grouse
River argued that Oracle had completely failed to deliver the ERP
solution that it had promised.
Over the course of the litigation Oracle was able to knock out
several claims and to narrow the case, including whittling down the
number of allegedly fraudulent statements and arguing that most
were merely puffery. We have previously written here about Oracle's attack on the
fraud-based claims. For its part, Grouse River voluntarily
dismissed certain claims on the eve of trial.
The case went to trial in July of 2019 and after a 5-day jury trial
Oracle scored a complete defense verdict. Grouse River's sole
claim at trial was fraud in the inducement. Grouse River sought a
very large damages award against Oracle trying to put the blame for
the failure of its entire business on Oracle and arguing that its
business failed due to Oracle's inability to implement a
software solution that worked. The jury did not buy it. Instead,
Oracle skillfully blamed Grouse River and its management for its
own demise. Oracle also did a good job of blaming Grouse River for
not meeting its contractual obligations and was successfully able
to convince the jury that the functionality that Grouse River
claimed was promised was not included in the contract price and the
functionality scoped. We are reviewing the trial transcripts and
over the coming weeks will have interesting nuggets that
Oracle/NetSuite customers might find educational and enlightening
and helpful in their own interactions with Oracle.
Some of the testimony that I found particularly fascinating
involved how Oracle scopes and estimates the price of these
projects' pre-contract, and whether Oracle sells functionality
to its customers as currently existing, when in fact it is not.
Oracle customers are aware that Oracle absolutely forbids its
customers from recording the Zoom calls with the NetSuite sales
team prior to contract execution. It is our opinion that Oracle
does so because it does not want there to be a recording of what
its aggressive sales team is promising the prospective client that
Oracle can deliver. Based on publicly available filings against
Oracle there seems to often be a huge disconnect between what the
aggressive Oracle sales team promises and what the post contract
implementation team says that it can deliver. In reviewing the
various filings against Oracle including the Grouse River trial
transcript it appears that Oracle's sales team is accused of
representing that certain functionality is included in an existing
product when in fact the functionality does not currently exist.
Then after contract execution, Oracle apparently claims that what
it promised the customer pre-contract actually will require an
expensive change order to deliver as it is not included in the
Professional Services Scope of Work or detailed in the breakdown of
modules included on the Estimate Form.
During trial, Grouse River's lawyers discussed several internal
emails amongst the Oracle implementation team assigned to the
project that supports the allegation that Oracle sells it customers
a system with functionality that they say currently exists, when in
fact it does not exist. For example, one of Oracle employee when
discussing the customer loyalty functionality with regard to
NetSuite stated "[w]e sold this as though it already works to
Grouse River and we're going to use Grouse River to test
it." Meaning that they sold it as a functioning product, when
in reality they were going to use Grouse River as a guinea pig to
test the product. Another Oracle employee stated "[s]ales
really screwed us all when they sold POS (i.e. Point of Sale) for
firearms to have serial controls when POS does not have that
capability. We should all have walked away at that point." And
the Oracle project manager on the project said "[t]he product
was perceived by the customer as best in class omni-channel product
and it was FAR from it." In other words, sales represented the
omni-channel product as best in class in Canada when it was not.
Later another Oracle witness was forced to admit that although they
had an omni-channel product at the time, they did not have one that
worked in Canada, which had different requirements and regulations
than the U.S. And finally, from the Project Manager overseeing the
implementation, "I was given the poison chalice of Grouse
River with its first Canadian omni-channel deal with a third-rate
ERP consultancy team and with a customer that was promised so much
and then left to fight my own battles."
All of these internal communications become especially interesting
when viewed through the lens of the whistleblower complaint that
was filed by a NetSuite former employee, Mr. Tayo Daramola. We have
blogged previously on Mr. Daramola's
whistleblower complaint. According to this former Oracle-NetSuite
employee, Oracle through its NetSuite entity contacted universities
and colleges to sell them a campus store SaaS solution, which the
customer could then subscribe to. Daramola claimed that Oracle
would provide its customer with an al-a-carte Order Form including
certain NetSuite modules, which it claimed taken together would
deliver the functionality that had been promised. However,
according to the complaint, "unbeknown to the customer but
known to Oracle, was that the customer's menu of modules was
not able to accomplish the functionality expected by the customer
then, and it wouldn't be able to do that in the near future,
at least not without the customer paying hundred of thousands
of dollars more to help Oracle actually develop the functionality
it represented as then existing to that customer for that
customer." Daramola further explained that post sale this
lack of functionality caused Oracle to implement its second phase,
which was "to assess the "gap" between the
customer's anger regarding what they thought they bought,
verses what they received. Oracle would then sell additional
"modules" for additional money to its
"escalating" customers to fill the gap." Realizing
that what Oracle had done is sold functionality as presently
existing that actually did not exist, Daramola claims that the
Oracle-NetSuite employees would try stealthily to pro rata
"divide the cost of the necessary development among all of the
customers who had bought the represented functionality." And
this division of the costs would come from Oracle demanding the
execution of expensive change orders from its customers in order to
implement the functionality.
Mr. Daramola's allegations about Oracle selling a solution that
does not exist and then frantically seeking to fund its development
through customers in a similar industry that desire that
functionality seems plausible, given the various lawsuits brought
against Oracle/NetSuite. Consider for a moment the possibility that
Oracle wishes to develop a new functionality to buttress its retail
solution. Or Oracle wishes to grow its sales into a completely
separate country. Oracle could decide to target certain companies
in certain countries (like Grouse in Canada) and seek to entice
them into entering into a NetSuite agreement. The enticement could
come in the form of steep discounts. In the Grouse River case
Oracle employees testified that certain items were being provided
at a 90% discount. What if Oracle were offering huge discounts
upfront in order to beat its competitors and win the contract? Then
after it has had the customer sign on the dotted line, it tells the
customer that the functionality was out of scope and Oracle will
need a change order to provide it. In this way Oracle could inflate
the contract price and increase its profits, while still ensuring
that it got the gig.
A few lessons learned from the Grouse River trial for the
prospective Oracle customer to consider before signing the various
contractual documents, as well as during contract
performance:
- Although Oracle will not let the Oracle customer record the sales calls, designate one person to attend each of these calls and document everything that you the customer explain you want from the solution using detailed written notes. Include the names of all the attendees at the meeting and the time and date of the meeting. Likewise describe in great detail everything that the Oracle sales team says that they can provide. Make Oracle sales parse out exactly what functionality currently exists and what would be a customization and make sure the functionality you want is included. Oracle witnesses testified that they keep extensive notes of such pre-sales meetings. You need to keep your own detailed notes as well, or you will be at a distinct disadvantage.
- If there is some functionality that is absolutely critical to your business, make Oracle commit in writing that such functionality is included in the various items set forth in the Estimate Form. Oracle sales may be telling you that the functionality is included but when they tender the Estimate Form it is in NetSuite speak, which sets forth various NetSuite modules (for example NetSuite Suite Success Financial First Standard Cloud Services, NetSuite Suite Projects Cloud Service, etc.) Make them confirm in an email that the functionality you have been discussing and that Oracle has promised is included in that module. If they won't confirm, you should find another ERP software provider.
- If certain functionality is important directly ask the sales team if they have current customers that are using that functionality. If they say yes, ask them how many customers. Have sales confirm specifically if these customers are in your industry. Ask for multiple references and then call those references.
- Once the contract is signed and you are in the performance phase, any mention of a "change order" or "escalation" should put you on high alert. Document carefully what is said about the change order in any Zoom or in person meeting and make Oracle commit to everything in writing.
- Be absolutely sure you have the internal resources to devote to the project, because when things go south on the project Oracle will blame you the customer.
Check back periodically for additional blog posts about this interesting trial.
Tactical Law assists Oracle/NetSuite customers in resolving disputes they may have with Oracle arising out of NetSuite ERP SaaS cloud subscription services and related professional services agreements.
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.
