United States: Provisions To Watch Out For In Oracle's Cloud Agreements

We have previously reported on the Barrett Business Services v. Oracle America, Inc.  case pending in San Francisco Superior Court.  In Barrett, Oracle and KBACE (Oracle’s platinum implementation partner) are accused of over promising and failing to deliver a viable cloud-based system involving payroll and billing processing at the price point and within the time frame promised.  The original complaint alleged claims against Oracle for breach of contract, negligent misrepresentation and rescission related to Oracle’s Cloud Services Agreement, but the pleading did not include a fraud claim.  Oracle filed a demurrer on a number of grounds only a few of which we will discuss in this and future blog posts. 

Procedural Posture

For its part, Barrett Business Services, Inc. (“BBSI”) did not oppose the demurrer but instead filed an amended complaint, which cleaned up several of the issues that Oracle had raised in its demurrer, thereby mooting much of the demurrer. BBSI’s amended complaint (the “FAC”) added several new claims including ones for intentional misrepresentation (i.e. fraud) and negligence and sought rescission of the Oracle Cloud Services Agreement.  BBSI added additional detailed factual allegations pleading the fraud with specificity.  Rather than attacking the pleading again with a demurrer, Oracle apparently learned its lesson and answered instead.  Unfortunately for Oracle by attacking the complaint with a demurrer, Oracle educated its opponent.  Oracle’s demurrer is instructive and should be required reading for those companies thinking about entering into a cloud agreement with Oracle, as the demurrer provides a road map to especially problematic clauses that the customer may want to negotiate.

The FAC Added Key Facts and Claims Regarding Oracle’s Fraud in the Inducement

Oracle argued that the express provisions of the contract provided only that Oracle must (1) make the ordered services available; and (2) provide the cloud services as described in the Service Specifications.  Oracle contended that it fulfilled both of these promises. Oracle also argued that Barrett failed to allege that Oracle breached either of these provisions, and therefore had failed to state a contract claim.  Oracle’s goal was therefore to limit the focus to the four corners of its cloud agreement, and use the integration clause of the agreement to exclude evidence of the parties pre-contract negotiations and discussions.

For its part, by amending the Complaint to add the tort-based claims, BBSI was required to plead the alleged fraud with specificity including going into great detail about Oracle’s pre-contract representations concerning its cloud product. According to the FAC, it was during these meetings that BBSI explained what it was looking for and received multiple promises from Defendants that their proposed cloud solution could meet BBSI’s requirements.  According to the Complaint:

“Between June 2017 and February 2018, BBSI had several hours-long in-person meetings and telephonic conferences with Oracle and KBACE. At each of these meetings, BBSI took great pains to educate Oracle and KBACE as to the precise nature of its business operations, its peculiar needs and the business functions that informed BBSI's extensive list of requirements. In meticulously discussing its list of requirements with both Oracle and KBACE, BBSI underscored its need for ease and efficiency of user interface and processes relating to payroll, time entry, billing and taxes given its human resource and payroll management challenges and the fact that payroll was also its revenue source. At all of BBSI's discussions with Oracle and KBACE, BBSI's list of requirements remained unchanged.

At all of BBSI's discussions with Oracle and KBACE, BBSI's representatives also made clear that they were ignorant as to Oracle's HCM Cloud system or any other Oracle products or how they performed and were relying wholly on Oracle and KBACE to advise them as to the suitability and capabilities of the product or system vis-a-vis BBSI's requirements.”

BBSI, Oracle and/or KBACE met and/or telephonically conferred numerous times throughout 2017 and early 2018 including without limitation, on June 30, 2017; July 13 and 20, 2017; August 3, 10, 23 and 31, 2017; September 6, 13 and 28, 2017; October 2-4, 16, 20, 24 and 26, 2017; November 3 and 14, 2017; December 5, 2017 and February 9, 26-27, 2018 regarding Oracle's HCM Cloud and its implementation by KBACE. Moreover, Heather Gould ("Gould"), BBSI's Chief Strategy Officer, had weekly status calls with Bell, Oracle's Solutions Consultant. Throughout all these communications, BBSI remained consistent in its requirements. Oracle and KBACE, too, consistently reaffirmed the HCM Cloud system's suitability for BBSI, its capabilities relative to BBSI's requirements as well as KBACE's ability to successfully implement the system in conformity with BBSI's requirements for user interface, payroll, time entry, billing and taxes, among others.”

By amending the complaint to add the fraud in the inducement claim and more specific allegations of the actual fraud, BBSI significantly strengthened its complaint.  It also struck at the core of Oracle’s defense that the integration clause precludes the court from examining representations made by Oracle and KBACE during contract negotiations.  Under California law parol evidence is admissible to prove fraud in the inducement “even though the contract recites that all conditions and representations are embodied therein.”  Ron Greenspan Volkswagen, Inc. v. Ford Motor Land Dev. Corp., 32 Cal. App. 4th 985, 995 (1995).  Clearly Oracle hoped to hide behind the integration clause in the agreement, and sought to limit or completely exclude the evidence of Oracle’s alleged misrepresentations made during pre-contract negotiations.  It is unclear to this author why BBSI did not include these claims in the first instance. Perhaps BBSI felt uncomfortable accusing a large and well-known company like Oracle of fraud.  That was a mistake.  I am reminded of the old adage, never bring a knife to a gun fight.  That rings true in disputes and litigation with Oracle.  Customers having evidence of fraud in the inducement by Oracle should spell out that evidence upfront.  Otherwise Oracle will hit you hard and use its one sided contract against you.

Our next blog post will examine how Oracle is attempting to defeat BBSI's breach of contract claim,  by pointing to its disclaimer of certain warranties.  The case is Barrett Business Services, Inc. v. Oracle America, Inc., San Francisco Superior Court, Case Number CGC-19-572574.  A copy of Oracle's Demurrer can be downloaded here.

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