United States: Non-Actionable Puffery Or Actionable Fraud: Part II Of Our Series On Oracle/Netsuite ERP Litigation

This blog post is the second in our series analyzing litigation that has been brought against NetSuite/Oracle relating to failed ERP installations, and how Oracle has defended those actions and sought to defeat them.  And armed with this knowledge, how you, the Oracle/NetSuite customer can try to best protect yourself when negotiating with Oracle.  In this post we refer to Oracle and NetSuite interchangeably.

In our first blog post we discussed the importance of getting very granular with Oracle concerning the representations Oracle makes to you, the potential customer, about the features and benefits of the ERP software.  And the key focus remains on the period of diligence before the license agreement is signed.  This is the period when Oracle is wooing the potential customer with statements about the power of its software and how the software can advance the business interests of the customer.  We explained how Oracle customers filing lawsuits against Oracle will often claim that Oracle overpromised and under-delivered and that such statements should allow the customer to rescind the Oracle license agreement for fraud in the inducement of the contract.  We explained how the Federal Rules of Civil Procedure require that litigants plead fraud with particularity in order for such claims to get past the pleading stage.   We also discussed why it is important to make an accurate and detailed account of the various representations made by Oracle/NetSuite.  However, even if you are a company that took good notes when meeting with Oracle and can tell a court the who, what, when, where, why and how of the alleged fraud, there is still another hurdle to overcome.  Courts do not consider mere "puffery" to be a fraud, and such statements cannot support the recission of a contract for fraud in the inducement or an affirmative fraud claim.

A good example is the Grouse River Outfitters. v. NetSuite case litigated in the Northern District of California.  Grouse River was a Canadian outdoors sporting goods supply company that entered into an agreement with NetSuite for use of NetSuite's ERP software to run its business.  The claims asserted in Grouse River's Second Amended Complaint ("SAC") included fraud and negligent misrepresentation, fraud in the inducement, violation of California's unfair competition law (Section 17200) and breach of contract.  Magistrate Judge Laurel Beeler of the Northern District of California described the basic allegations of the complaint as follows:

In 2012, Grouse River began searching for an "integrated software system" that would help its retail operations grow. Grouse River read (and later relied upon) false statements made in NetSuite's advertising material about its capabilities to implement software solutions. Grouse River later relied on express statements that NetSuite made that it could deliver a software system that would have the capability to meet Grouse River's requirements. The parties entered into a pair of written contracts in March 2014. The NetSuite system was not installed and operational by its original deadline of September 12, 2014. The system never met its promised capabilities. 

Under California law, the elements of fraud claim are: (1) a misrepresentation; (2) knowledge of falsity; (3) intent to defraud; (4) justifiable reliance; and (5) resulting damages. The same elements comprise a cause of action for negligent misrepresentation, except there is no requirement of intent to induce reliance.  Plaintiff must plead and prove that he or she actually relied on the misrepresentation for both causes of action.

NetSuite moved to dismiss the initial complaint for failure to plead fraud with the necessary particularity under Federal Rule of Civil Procedure 9(b).  The court granted the motion with leave to amend.  After this dismissal, Grouse amended its complaint, which was then the target of another attack by NetSuite.  In ruling on this second motion, the court found the fraud in the SAC was pled with sufficient particularity to defeat a motion to dismiss.  But NetSuite was persistent and moved to strike some of the allegations of the SAC, claiming among other things, that the representations were non-actionable puffery and could therefore not support a fraud-based claim. 

Judge Beeler in her order set forth the governing law on puffery.  According to the Court:

"Statements constituting mere "puffery" cannot support liability under a claim for fraud or negligent misrepresentation. "Puffery" has been described as making generalized or exaggerated statements such that a reasonable consumer would not interpret the statement as a factual claim upon which he or she could rely.  Ultimately, the difference between a statement of fact and mere puffery rests in the specificity or generality of the claim.  Advertising which merely states in general terms that one product is superior is not actionable.  However, misdescriptions of specific or absolute characteristics of a product are actionable. Whether an alleged misrepresentation is a non-actionable statement of puffery is a question of law." (Citations omitted)

The Judge went on to review each alleged fraudulent statement and to make a determination if it was fraud or mere puffery.  In explaining her analysis, the Judge Beeler reasoned that "[a] reasonable consumer would not interpret certain statements as a factual claim upon which he or she could rely."  Instead, the statements were generalized and did not concern specific aspects of the product, or how the product could meet the needs of the customer. According to Judge Beeler, examples of statements constituting non-actionable puffery include:
 
" "Every company wants to deliver the commerce experience that Apple delivers to customers—an experience that recognizes the customer regardless of channel or device, and efficiently delivers goods and services in world-class fashion, projecting a powerful brand message. NetSuite SuiteCommerce is architected to enable companies of all sizes to deliver this type of rich, touch-point agnostic experience to their customers." (SAC ¶ 15).

• 'World-class fashion," ''powerful brand messages," "rich, touch-point agnostic experience," "rich customer profiles," "personalized experience, anytime from. anywhere" are general, exaggerated assertions about characteristics of NetSuite's product which a reasonable consumer would not interpret as a factual claim upon which he or she could rely.'

" "As the No. 1 cloud business management suite, NetSuite meets the in-store retailing needs of multi-channel and multi-location retailers with a modern POS solution that enables retailers to streamline and accelerate the transaction process, while also delivering personalized customer service..." (SAC ¶ 29).

• Too general to be actionable fraud.

" "NetSuite further represented at the meeting that the SuiteCommerce software could and would provide Grouse River with an Ecommerce solution that makes it 'fast & easy to find products', and allow Grouse River's customers to shop efficiently through any touchpoint including social media and mobile devices." (SAC ¶ 71).

•  Too general to be actionable fraud. 

The following are a number of statements that the Judge found were not mere puffery, and were sufficient to support the fraud-based claims, and her reasons for finding them so.  She also points to portions in the statements that are non-actionable.  This does not mean that Grouse River won the case and proved fraud against Oracle. It only means that the allegations weren't stricken and the fraud-based claims could proceed to be litigated. 

"    "SuiteCommerce exposes native NetSuite commerce capabilities-including merchandising, pricing, promotions, payment processing, support management, and customer management-as services that can be leveraged by any presentation layer, while providing an integrated back-end business management system."

• "The statement is actionable in so far as it specifies capabilities of the program, including "merchandising, pricing, payment processing, support management, and customer management."  The remaining parts of the statement are non-actionable puffery."

"    "Whereas the industry standard is sub 2-second page load time, SuiteCommerce Experience offers sub-second page times by avoiding the redundant rendering and downloading associated with traditional presentation frameworks ... For example, promotions can be implemented once and enabled across online, telephone and in-store transactions to augment the core transactional capabilities, and customize the system to their exact requirements ... Multi-Channel Business Logic: Since SuiteCommerce offers a single back-end system for processing orders, managing inventory and generating offers, a business rule such as a maximum number of purchases on a sale item, can be implemented once and enforced across the website, in-store and via telesales."

• "Sub-second page times" is not puffery because it is a quantified assertion of the page-load time. The rest of the statement primarily describes specific aspects of the product: the ability to implement promotions across online, telephone and in­ store transactions; a system to process orders, manage inventory, and generate offers; the ability to set a maximum number of purchases on a sale item."

"    "With NetSuite, you get a 360-degree view of each customer so that you can deliver personalized service, build customer loyalty and provide a relevant, engaging shopping experience with your brand. See their purchase history and communications with your company and whether they interacted, with your brand online, at a brick- and mortar store location or with a sales representative. Provide personalized marketing to your customers based on their purchase history or demographics. Offer customers self-service options to view their online purchase history, reorder and find answers to their questions 24/7."

• "The following statements are specific aspects of the product: "See their purchase history and communications with your company and whether they interacted with your brand online, at a brick-and mortar store location or with a sales representative"; "Provide personalized marketing to your customers based on their purchase history or demographics;" ''Offer customers self-service options to view their online purchase history and reorder."  The remaining parts of the paragraph are non-actionable puffery."

"    "NetSuite enhances inventory visibility with tracking and control capabilities to manage every stage of the lifecycle and control costs....  Serialized inventory to track purchases and sales by assigning a serial number to each item.  Periodic inventory counts that automatically calculate on-hand items. Pick, pack and ship management for high-volume order processing environments."

• "The following statements describe specific aspects of the product: "Serialized inventory to track purchases and sales by assigning a serial number to each item"; ''Periodic inventory counts that automatically calculate on-hand items"; "Pick, pack and ship management for high-volume order processing." The reemaining parts of the paragraph are non-actionable puffery."

"    "In an e-mail immediately following [a phone call with G. Fallis] Mr. Waldron [of NetSuite] provided documentation representing that NetSuite could meet the vast majority of Grouse River's requirements and stating ''based on our conversation the stage of growth you are at now with Grouse River is typically when we see companies coming to NetSuite in hopes of gaining a platform that is more unified and able to scale to future growth aspirations and this is just what we provide."

• "The statement that NetSuite "could meet the vast majority of Grouse River's requirements" is a specific representation about the functionality of the product because it was made in the context of knowing what specific requirements Grouse River had asked for."

"    "In the same April 4 e-mail Mr. Waldron gave Mr. Fallis an estimate of rough project costs and represented that "recurring cost thereafter is extremely predictable (vs. the On Premise model) as NetSuite handles the upgrades for you with our enhancement updates (twice a year) that are included with your subscription."

• "These are specific characteristics of the product, to the extent that the statement asserts that NetSuite handles upgrades with enhancement updates (twice a year) that are included with the subscription.  The statement that "recurring costs thereafter is extremely predictable (vs. the On Premise model)" is puffery because it is a general statement about the superiority of the product."

The order contains additional analysis, and we include a PDF copy of the Order below in case our readers would like to delve further into these issues.

So, what are the lessons learned from this blog post?  First, advertising materials are only one source of possible false statements by NetSuite/Oracle.  If there are certain advertising statements that you are relying on in making your ERP purchase, print out or make a PDF of those materials and have your legal department save them.  You can also ask about the statements and get more details in follow-up meetings and conversations with Oracle/NetSuite. Second, statements made in meetings by NetSuite employees about the specific capabilities of the NetSuite software are critical.  That is why we recommend recording those statements, or seeing whether NetSuite will commit in writing to the specific qualities of the software, and how it will benefit your business.  Again, at least take detailed written notes of all meetings or conversations, and if you decide to make a recording of the meeting, you need to obtain whatever permissions are required under the applicable state law.  You must demand that the ERP contractor provide you with granular promises, and not sweeping but empty statements that are mere generalities.  And, if they won't provide such specific statements about the capabilities of their software, perhaps you should reconsider and go to another ERP provider instead.  Third, you need to provide all of these materials and develop a very detailed chronology of the NetSuite statements and the series of events to your attorney advising you on the matter.  Oracle/NetSuite is a rational beast and if you can show their in-house legal department in pre-litigation settlement discussions, why it behooves them to settle with you without the necessity of filing litigation, then you may be able to avoid a lawsuit all together. 

Our next blog post in this series will focus on two additional legal arguments that Oracle/NetSuite often makes to defeat fraud-based ERP related claims.   The first is that under California law, statements about future events are usually non-actionable, with limited exceptions.  The second is that the statements contained in the complaint are not alleged to be false.  We have some thoughts on these issues as well.

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.