By Pam Fulmer of Fulmer Ware LLP and Dave Welch of House of Brick Technologies
Fulmer Ware LLP and House of Brick work together frequently to defend customers when they are facing software audits from Oracle Corporation. We have learned much about the process, and while we cannot share confidential information, we do feel that it would be a benefit to publicly discuss some of the things that we think you should consider when preparing for, and defending yourself against an Oracle audit.
Because most of our work with customers starts with a conversation, we thought it would be best to present this information in the form of a Q&A.
Q: What is the most important thing that customers can do before an audit, or when they get an audit notice?
Pam: I think that it is important for the client to have a strong knowledge of their Oracle documents. This could include the license agreement(s), ordering documents and any emails or other correspondence that they may have had with Oracle employees. These are key documents and should be kept in one central repository, with your legal counsel able to access them easily. At Fulmer Ware, we also recommend that if you have actually gone through an Oracle audit previously, that you keep those prior audit records. They may come in handy in the future.
Dave: House of Brick consultants are not attorneys, and while we have success partnering with law firms such as Fulmer Ware, we think it is important for customers to seek legal counsel early. Even if a client has inside counsel, we also recommend that audit customers consider retaining qualified outside legal counsel who have had experience with advising clients in navigating these Oracle audits. This is not because Oracle audits frequently turn litigious. Quite the contrary, Oracle rarely proceeds to legal action to resolve an audit. Having experienced legal advisors will simply help you avoid risky pitfalls that every Oracle audit customer seems to encounter.
Q: Is it better for IT Management to engage in numerous calls and meetings with Oracle to avoid miscommunication in an audit?
Pam: No, not in my experience. Some Oracle customers might think that documenting communications in email or other writings sends a signal to Oracle that you do not trust them and that is not the way to act towards a valued business partner. Oracle customers should remember that audits have legal consequences, and that discussions may turn adversarial over the course of the audit process. It has been my experience in advising Oracle audit clients that it is important to make and keep a written record of the things you are doing in the audit. If you happen to be in a meeting or call with Oracle, you want to take careful and thorough notes. In reliance on these client-taken notes, I have been able to go back to Oracle and say on such and such a date, you made this commitment to my client, and Oracle has indeed agreed to honor that commitment. Keep copies of any voice mail messages either Oracle Sales or LMS leave as these might be important as well. Oftentimes by the time I am retained, the client has had a difficult experience with the audit process, so they want some help in handling further communications. When we work with House of Brick, we are able to develop an effective technical and legal communication strategy that includes providing draft correspondence that the client can review and provide to Oracle.
Q: Is there an advantage to having multiple points of contact with Oracle during an audit?
Dave: No, not typically. During an audit, we have seen that it is usually best to limit the number of people on your team interacting with Oracle. This can help avoid a scenario where a team member inadvertently provides information to Oracle that is outside of what is contractually required, and which then might be used to allege inaccurate compliance gaps.
Q: How does making a written record actually help a customer who is undergoing an Oracle audit? Could this backfire?
Pam: What we have found in our experience with many clients is that often while trying to be collaborative and helpful, these clients might fall into the trap of making statements that may seem apologetic or worse, even agreeing with an allegation that they did something wrong without first investigating the facts. Customers should not be discouraged from keeping a written record of your actions. It could be very important to you down the road, if Oracle makes accusations that your company might not be complying with the audit provision of the license agreement.
Q: Will maximum cooperation with Oracle actually help us get out of the audit with a better deal?
Dave: Not necessarily. During these audits, Oracle may ask for a lot of information, only some of which they are likely entitled to receive according to the contract. When considering these requests, you should ask yourself, “Is the requested information actually related to my use of the Oracle programs?” Again, an experienced, qualified third party can help you understand what is and what is not appropriate to share.
Oracle is entitled to know where you are using its software. But that does not entitle Oracle to probe into other areas of your IT environment where Oracle software is not in use. We have seen that oversharing of information with Oracle may lead to inflated claims of non-compliance. It may also lead to additional unnecessary efforts to eliminate those claims.
Along these lines, we recommend that customers that are considering certifying off of an Unlimited License Agreement (ULA) also get qualified help to determine what the limits of Oracle’s ULA Certification involvement are and what information you are required to share.
Q: How might we be caught off guard?
Dave: Oracle license agreements are complex, and Oracle can take advantage of that complexity as a tactic to extract maximum concessions from the customer. That is why it is critically important to understand the contract, and stand confidently on your contractual rights. If Oracle reports a compliance figure that is shockingly high, we recommend that customers take the time to assess their findings for accuracy. House of Brick and Fulmer Ware regularly assist companies with dissecting Oracle’s compliance assertions and understanding what, if any, is the true compliance gap.
Pam: One of the things we have observed is that Oracle early in the audit will demand information from the customer very quickly. People that are not used to these audits and these tactics unfortunately find themselves saying, “Oh, I apologize for the delay.” Most Oracle contracts that we review state that Oracle must give a 45-day written notice before the audit even starts. We recommend that you take every bit of that time to prepare your company for the actual audit. As we have discussed, you want to be careful in your communications with Oracle to not admit or imply that you have done something wrong when in fact you have not.
Q: Are there key take-aways from the Mars case that Oracle customers should be aware of?
Pam: Mars is the well-known candy company, which several years ago was undergoing an Oracle audit. From the public filings in the lawsuit we know that Oracle demanded a massive amount of information, much of which Mars contended Oracle was not entitled to receive. Oracle threatened Mars with a license termination, and to protect itself Mars filed a lawsuit in San Francisco Superior Court for declaratory and injunctive relief. It is clear from the public court filings that Mars did an excellent job of making its record as it responded to the audit, which helped it immensely in setting forth a strong legal position in its lawsuit. When you read the court filings you can see for yourself where Oracle Legal started trying to discourage Mars from making their record by saying in effect, “Let’s not write these lengthy letters back and forth,” and “Let’s not waste time setting up these legal positions.” You do not have to give into that kind of pressure. In the unlikely event that litigation is ever filed, the back and forth between Oracle and you the customer will be key in the Court’s eventual ruling. Setting yourself up to win by carefully making your record is critically important in dealing successfully with Oracle.
Q: Is it better to give Oracle everything that they ask for with the audit sooner rather than later?
Dave: You should really accept that these audits are a marathon, and not a sprint. While it is natural to want to be done with the audit quickly, that may actually set you up for sharing too much information, and ultimately paying too much and giving up your contractual rights. Do not be intimidated by a Power Point or a nice slide from Oracle that has dates on it and interaction obligations that may appear professional and reasonable to you. If you convey that you are growing weary of the audit, and just want it to end, that gives Oracle leverage to just press harder. Take your time and be deliberate. Think through each move like you would a game of chess, while validating your actions against your contractual obligations.
Pam: I agree with Dave. Clients sometimes ask me when the audit will be over. I caution them that this is a long game. If you try to rush the audit Oracle may sense that and hang tough on their assertions. You want to show that you can hang tough as well. If you have based your usage and audit responses on your contract, then good things come to those with the patience to wait.
Q: Is it better to deal with anyone at Oracle rather than the attorneys in the Oracle Legal Department?
Pam: I often see Oracle LMS threatening customers with escalation to Oracle Legal if the customer does not agree to Oracle’s non-contractual demands. The insinuation is that escalation to Oracle Legal is something that should be intimidating, and that the customer should avoid at all costs. If you are confident of your contractual position, then I would urge companies that are undergoing Oracle audits to not be afraid of this escalation to Oracle Legal. Escalation may even be the fastest way to an audit resolution. If you have made your record, by the time it gets escalated to Oracle Legal, you have actually documented that you have cooperated and that you believe that there have been certain inaccuracies and perhaps overreaches made by the Oracle audit team. So, it has been my experience that escalating to Oracle Legal may actually be the best strategy to get you on that path to resolution. If you are prepared, then there is no need to be afraid of that, but actually embrace it.
Q: What law applies to most Oracle license agreements in the U.S.? In the event of litigation, where would a lawsuit be filed?
Pam: Most Oracle agreements in the U.S. specify that California law applies and that in the event of litigation, the lawsuit is to be filed in certain venues in the San Francisco Bay Area. Fulmer Ware lawyers have been practicing California contract and copyright law in the Bay Area for years, and we are very familiar with the law and with state and federal courts in the area.
Q: What about companies that have resolved audits, either by purchasing something they did not want such as cloud credits, or by amending their contracts in an unfavorable way?
Dave: We frequently see Oracle propose audit close amendment language that would establish restrictive technical or architectural boundaries. The problem is that if those boundaries are ever crossed, the new architecture may become subject to new licensing obligations that were not in the customer’s original license agreement with Oracle. This situation is something House of Brick routinely helps customers avoid.
Pam: If you have been audited by Oracle and have purchased additional software, paid money, or amended your contract based upon Oracle’s assertions around VMware or other issues, you may have legal options to recoup some of those costs and/or reverse the amendment language.
Q: When do you think Oracle audit customers are most at risk?
Pam: I think they are most at risk when they wait for the audit report to be issued before actually considering their contractual rights, and even retaining counsel to validate their position. Many times, this is because they have not had adequate controls over the flow of information, and did not fully understand their contractual rights and the limits of the audit.
Q: I have a good relationship with my Oracle Sales rep. I would rather deal with that person than an auditor.
Dave: Based on what we have seen with regard to Oracle’s behavior during audits, it is our opinion that Oracle LMS and Sales may actually be collaborating with the intent to generate product or cloud services sales opportunities . We believe that Oracle’s typical practice of claiming an outsized compliance gap in the audit is intended to intimidate customers into looking for any opportunity to reduce that number. The LMS team then refers the customer to the sales team who encourages the customer to make an additional purchase to conclude the audit. In our experience, in most instances these purchases are unnecessary or overstated for establishing actual license compliance. Customers should be confident in encouraging Oracle to complete the audit based on actual contract terms. Do not allow Oracle to scare you with a number that may be inaccurate, and agree to a purchase simply to conclude the audit.
Dave: House of Brick has encountered organizations that attempt to spend their way into audit avoidance. While audit avoidance may be achieved in this manner, if you manage your licenses appropriately, audits are not something to be feared. I believe that concluding an audit while standing on strong contractual footing can be a badge of honor. It may be an indication that Oracle believes they are not getting enough revenue from you. The objective during an audit is to minimize customer effort, consulting expense, and outside legal fees. Your objective should not be to attempt to abbreviate the calendar time required to stand firm on your positions.
Pam: The key to successfully exiting an Oracle audit without overpaying is understanding your Oracle license agreement(s) and the scope of your contractual rights. I have assisted multiple clients to successfully navigate their Oracle audit. You do not need to be afraid of an Oracle audit, but do be prepared. Oracle customers receiving an audit notice letter should not try to wing it, or to go it alone. Instead, it pays to seek out experienced legal and technical advice.
Pam Fulmer is a partner and co-founder at Fulmer Ware LLP, an IP and commercial litigation boutique located in San Francisco, California. Pam is admitted to practice law in California and has over 27 years of experience litigating all types of intellectual property and commercial disputes in California and across the United States. In addition to her litigation practice, Pam has a great deal of experience defending audits by software companies including Oracle Corporation, and has dealt with various issues involving Oracle software such as VMware virtualization, ULA Certifications, as well as hosting and related alleged areas of under-licensing. She has worked with her clients to develop strategies to mitigate these positions and to push back successfully on the audit findings.
Dave Welch is House of Brick Technologies’ CTO, Chief Evangelist and a co-founder. He is one of the Oracle license leads within House of Brick Technologies. Dave has participated in the optimization of hundreds of millions of dollars of hardware and software, especially related to Oracle licenses. His background is that of Oracle database administrator. Dave delivered the world’s first VMware session on an Oracle topic in 2007 and has spoken annually at VMworld ever since. Dave has a Business Management Bachelor of Science degree from Brigham Young University with a finance emphasis and minors in accounting and economics.
VMware Virtualization and the Oracle Audit: What Every Oracle Customer Needs to Know About the "Installed and/or Running" Language of the Processor Definition
From public documents, we know that the standard Oracle License and Services Agreement (“OLSA”) and the newer Oracle Master Agreement (“OMA”) typically provide Oracle with the right to audit the use of Oracle software by its customers, provided that the audit does not unreasonably interfere with the customer’s normal business operations. The contract allows Oracle to, in effect, take a snapshot of a customer’s Oracle software usage at a certain point in time, but it does not allow Oracle to go rummaging around and looking through other customer systems and data, which have no relation to Oracle software. Under the OLSA, customers pay Oracle a licensing fee only on those processors where Oracle software is used; i.e. where it is “installed” or is “running”. Although the OLSA does not entitle Oracle to audit servers not running Oracle, in the last few years Oracle has sought to stretch the “installed and/or running” language of the processor definition when a customer is running a software product by VMware, which allows customers to run multiple “virtual servers” on one physical server. Oracle claims that all servers running the VMware software require an Oracle license even when there is no Oracle software installed on them.
For example, in Fall 2015, Oracle threatened to terminate a license agreement that it had with global confectioner, Mars Corporation. Mars and Oracle battled it out for months via email during the audit over the meaning of the “installed and/or running” language of the processor definition, until Oracle finally pulled out the big guns and threatened to terminate the license. Mars responded by filing a lawsuit for injunctive and declaratory relief in San Francisco County Superior Court. The case did not last long, but it resulted in a treasure trove of Oracle-related documents coming into the public domain.
In correspondence, Oracle took the position that Mars needed to purchase licenses for all servers running VMware, even where the Oracle software was not “installed” or “running”. A letter from Chad Russell, Senior Counsel in Oracle’s Legal Department, is instructive. According to Mr. Russell, “Oracle programs are installed on any processors where the programs are available for use. Third party VMware technology specifically is designed for the purpose of allowing live migration of programs to all processors across the entire environment. Thus, Oracle Enterprise Edition is installed and available for use on all processors in a V-Center.” Exhibit 11 to Declaration of Eloise Backer, Mars v. Oracle, San Francisco Superior Court, Case No. CGC-15 -548606. Essentially, Oracle took the position that the mere fact that Oracle software might possibly be installed and run on one of these processors at some indeterminate time in the future, constituted a use of Oracle software and a licensing event for which Mars would need to pay a royalty at the time of the audit. Would a California court construe the mere possibility of a future event that may never occur as an actual “use” of Oracle software so as to trigger a royalty obligation? We think it highly unlikely. Moreover, Oracle may think it highly unlikely as well, which is why, to our knowledge, Oracle has never filed a lawsuit against any customer based upon its expansive interpretation of the “installed and/or running” language.
Based on the public correspondence filed in the Mars case, it appears that Oracle was unable to point to any actual contractual support in the OLSA for its novel definition of “installed” or what it means to “use” Oracle software. And, after defending multiple software audits on behalf of Oracle customers, we too are unaware of any language in the OLSA, which would support Oracle’s position. In fact, just the opposite is true. The fully integrated agreement does not contain contractual language or incorporate other documents or URLs, related to use of a product like VMware, upon which to base such an assertion. Further, to the extent Oracle is using its limited audit rights to gain access to confidential customer information about servers where no Oracle software is installed and/or running, a California court could find that such actions constitute a breach of the audit clause, as well as an unfair trade practice under California law. This is especially true if Oracle attempts to use the improperly obtained information to threaten license termination in order to pressure its customers to buy cloud credits or other Oracle software. And to the extent that Oracle succeeds in using its expansive interpretation of the “installed and/or running” language to move its customers out of VMware, Oracle customers may have a claim against Oracle for intentional interference with contract and other related torts.
California Civil Code Section 1638 provides that "the language of a contract is to govern its interpretation, if the language is clear and explicit, and does not involve an absurdity." See also People ex rel. Lockyer v. R.J. Reynolds Tobacco Co. (2003) 107 Cal. App. 4th 516, 525. Oracle's interpretation of the “installed and/or running” language cannot be deemed either clear or explicit and, in fact, is absurd. Indeed, just reading Mr. Russell’s lengthy and labored three sentence explanation of what it means to be “installed” shows the fatal flaw with this argument. Oracle, as the drafter of the OLSA, had the opportunity and burden to specifically define "installed" if it wanted to interpret it in this manner and not in its usual sense as “installed” is used in the software industry. It did not do so. Under California Civil Code Section 1644, "[t]he words of a contract are to be understood in their ordinary and popular sense, rather than according to their strict legal meaning; unless used by the parties in a technical sense, or unless a special meaning is given to them by usage, in which case the latter must be followed." Id. at 525-26.
Even if a court were to find the language ambiguous, California law requires that ambiguities be interpreted against the drafter of the contract, which is Oracle. See Cal. Civ. Code §1654 (contract should be interpreted most strongly against the drafting party); see also San Pasqual Band of Mission Indians v. State of Cal. (2015) 241 Cal. App. 4th 746, 761-62 (“In cases of uncertainty . . . the language of a contract should be interpreted most strongly against the party who caused the uncertainty to exist.” ). Finally, Oracle’s position that its programs are installed on any processors where the programs are available for use, if accepted, would lead to an absurd result, as it would require Oracle customers to pay a license fee for a speculative future event that may never happen. The license grant covers a customer’s actual use of the software, and not a potential use in the future.
Under California Civil Code Section 1636, "a contract must be so interpreted as to give effect to the mutual intention of the parties as it existed at the time of contracting;" see also DVD Copy Control Ass'n, Inc. v. Kaleidescape, Inc. (2009) 176 Cal. App. 4th 697, 712 (“interpretation of the License Agreement is guided by the principle that it “must be so interpreted as to give effect to the mutual intention of the parties as it existed at the time of contracting, so far as the same is ascertainable and lawful.”). Indeed, most likely Mars (and we suspect other Oracle customers) would have never entered into the license agreement, if it had known of Oracle's overbroad interpretation of "installed" and what Oracle contends it means in the context of VMware virtualization. Although Oracle’s “installed and/or running” language has been in place since the early 2000s, in 2009 when Mars and Oracle entered into their licensing agreement, the present VMware virtualization technology was not in widespread use by customers with their Oracle database, meaning Oracle’s novel interpretation of “installed” could not possibly have been mutually intended by the parties.
If your company has been notified of an Oracle audit, or you are under audit now, do not delay before seeking experienced legal counsel to assist you. Likewise if you have been audited by Oracle and have purchased additional software or paid money based upon Oracle’s assertions around VMware, you may have legal options to recoup some of those costs. In any event, do not go up against Oracle without knowing your legal rights. What you do not know, could and will most assuredly, hurt you.
With the November 8, 2016 passage of Proposition 64 known as the Control, Regulate and Tax Adult Use of Marijuana Act (referred to hereafter as “Prop 64”), it is time for many homeowners associations (HOAs) and residential landlords to take a fresh look at smoking restrictions put in place to address secondhand smoke and odor concerns in Declarations of Covenants, Conditions and Restrictions (CC&Rs) and leases, respectively, to ensure compliance with Prop 64 and local regulations and to minimize the risk of nuisance claims.
Prop 64 is a multifaceted and lengthy Act, but here are a couple of key provisions for HOAs and residential landlords to pay special attention to:
Fulmer Ware LLP is a San Francisco based law firm. Our lawyers have experience litigating and advising on all types of real estate, construction and commercial matters from the negotiation and preparation of documents, risk management, pre-litigation counseling, alternative dispute resolution and all phases of litigation from insurance tenders to trials and appeals.
Lawyers at Fulmer Ware LLP have litigated all types of breach of contract cases over the years. One area of a contract that is ripe for dispute involves “efforts” clauses. These clauses can be found in license agreements and almost any kind of commercial contracts. This blog post offers practical advice on how in-house counsel and business people can draft these clauses to mitigate the risk of disputes later on.
WHAT IS AN EFFORTS CLAUSE?
Efforts clauses require a party to a contract to commit to use a certain level of effort to achieve a stated goal. Such clauses include “best efforts”, “reasonable efforts” and “commercially reasonable efforts”. Some attorneys view these clauses to require different levels of effort, e.g., “best efforts” being the most exacting standard, followed by “reasonable efforts” and then “commercially reasonable efforts” being the least demanding of all. Case law and the UCC, however, do not support such a hierarchy. In fact, there are no universally accepted standards or definitions for these terms.
THE LAW CAN DIFFER DRASTICALLY BY STATE
Courts in New York have treated “best efforts” and “reasonable efforts” interchangeably. These courts have found that such efforts (1) impose an obligation to act with good faith in light of one's own capabilities; (2) give promising parties the right to give reasonable consideration to their own interests; and (3) permit promising parties to rely on their good faith business judgment. (See Soroof Trading Dev. Co. v. GE Fuel Cell Sys. LLC, 842 F. Supp. 2d 502, 511 (S.D.N.Y. 2012); Bd. of Managers of Chocolate Factory Condo v. Chocolate Partners, LLC, 992 N.Y.S. 2d 157 (N.Y. Sup. Ct. 2014)). Other New York courts have found a hierarchy with best efforts being the most exacting standard. See In re Chateaugay Corp., 198 B.R. 848, 854 (S.D.N.Y. 1996).
California courts on the other hand have found that a promise to use best efforts creates a more exacting standard than a promise to use good faith. California Pines Prop. Owners Ass'n v. Pedotti, (2012) 206 Cal. App. 4th 384, 394-95. The California Pines court found that best efforts requires diligence within the bounds of reasonableness, which leaves the hierarchy between best efforts and reasonable efforts unclear. According to the court, “we do not agree that a promise to use best efforts creates an obligation equivalent to a fiduciary duty. Instead, we agree with the courts from other jurisdictions that when a contract does not define the phrase ‘best efforts,’ the promisor must use the diligence of a reasonable person under comparable circumstances. Diligence is certainly required, but the obligation is framed within the bounds of reasonableness.” Likewise, in Delaware, a US District Court has similarly found that a best efforts clause requires the promising party to undertake its contractual obligations diligently and with reasonable effort. Crum & Crum Enter., Inc., v. NDC California, L.P., No. 09-145, 2010 WL 4668456 (D. Del. Nov. 3, 2010). Whatever standard a court may use, it is a fact-intensive inquiry.
PRACTICAL ADVICE AND TIPS
So how can in-house counsel protect their client when utilizing such clauses? Here are a few ideas to consider.
Define the Term in the Contract
One way to avoid a fight over efforts clauses is to specifically define and set forth what level of effort is required in the contract. A court interpreting such a provision will look first to the contract and how the parties chose to define the efforts clause. Work hard to eliminate any ambiguity in the definition, which would allow a court to look outside the four corners of the agreement. Be careful not to guarantee an outcome in the definition; yet, don’t make the definition so specific that you unnecessarily limit your client.
Consider Including Carve-Outs
Another strategy is to consider including carve-outs where the efforts term is undefined or broad. Such carve-outs describe the kind of efforts that the promising party is not obligated to take. Carve-outs can provide that the promising party is not required to (1) spend a specified dollar amount where the dollar amount is not already included in the contract; (2) engage in conduct that would have a materially adverse effect on the promising party; (3) take any action that would cause the promising party to incur costs or suffer any other detriment that is out of reasonable proportion to its benefits under the agreement; (4) take any action that would subject it to liabilities; (5) disregard its own business strategy and economic interests; (6) take illegal actions or (7) take any action that would harm its existence or solvency.
Use Effort Terms Consistently
The parties should take great pains to use the terms consistently throughout a contract. If the contract includes definitions of efforts terms, the parties should use the terms only according to their defined meanings. Failure to use terms consistently will create confusion and suggest that the parties themselves do not value the differences between the terms, which only invites the court to substitute its own interpretation for that of the parties
Use Objective Criteria
Parties to a contract should consider using objective criteria to provide standards against which efforts can be measured. One such criteria is to provide a timeframe such as “promptly”, or in the “most expeditious matter practicable” or within a specific number of days or weeks or a specified term. The parties can also include a triggering event at which point best efforts are triggered, or when a certain quantity or production level is met.
Consider Making the Conduct an Obligation Instead of Subject to an Efforts Provision
If you get to the point in your contract negotiation where you have defined what the effort would be with specificity, set the carve-outs and used objective criteria to define the standard, consider forgoing the efforts clause and instead making the conduct an express obligation under the agreement.
Fulmer Ware LLP is a San Francisco based law firm. Our lawyers have experience litigating and advising on all type of contract matters, including matters involving interpretation of “efforts clauses”.
On May 11, 2016 President Obama signed into law the Defend Trade Secrets Act (“DTSA”), which went into effect immediately. The Act creates a federal cause of action for trade secret misappropriation, which is meant to supplement and not preempt state trade secret law.
The DTSA provides litigants with a number of remedies including ex-parte seizure orders , damages for actual loss and unjust enrichment, or instead of damages, a reasonable royalty for unauthorized use or disclosure. Exemplary damages for willful or malicious misappropriation can also be awarded as well attorneys’ fees and injunctive relief.
Whistleblower Protections Require Immediate Action
Importantly, the Act contains new whistleblower provisions that require companies to take immediate action to be able to take advantage of the Act. Employees, independent contractors and consultants who disclose trade secrets are protected from prosecution if the disclosure was made to report or investigate an alleged violation of law. If the employee’s disclosure of highly sensitive company information is made in confidence to "a Federal, State, or local government official…or to an attorney…solely for the purpose of reporting or investigating a suspected violation of the law" or as part of a legal proceeding, then that disclosure cannot form the basis for a misappropriation claim against the employee. This safe harbor extends immunity to both state and federal trade secret claims.
What You Must Do.
Employers must include notice of this immunity in any agreements entered into or amended on or after May 12, 2016 with employees, contractors or consultants that govern the use of confidential or trade secret information. Failure to include the notice would preclude the employer from being awarded attorneys’ fees or exemplary damages in any lawsuit against the employee. The notice requirement applies to all employee proprietary information and invention agreements, nondisclosure and contractor and consulting agreements with individuals. At Fulmer Ware LLP we advise our clients on how to comply with the notice requirement and other steps to protect their valuable trade secrets.
Pam Fulmer is a member of the Standing Committee on Trade Secrets of the Intellectual Property Owner’s Association. The Committee supported the passage of the Defend Trade Secrets Act.
Over the years we have advised numerous clients on contract issues and handled many breach of contract cases in the courts and in arbitral forums around the country. Often, we see many of the same issues arise time and again. One area that is ripe for dispute involves the termination provision of a contract. What looks crystal clear on the first read often ends up being more complicated.
Extreme care must be taken when terminating a contract, and the business person or in-house lawyer responsible for the termination needs to ensure that he or she complies with the requirements of the termination provision exactly. Otherwise, the termination may be ineffective and lead to expensive and time consuming litigation, and the terminating party may find itself in breach.
Many of the cases that we have litigated contain language requiring 30-days’ notice and an opportunity to cure before the contract may be terminated. Read these provisions very carefully and follow them exactly, if you want to perfect your right to terminate.
I remember very clearly litigating a multi-million dollar breach of contract case in an arbitration. The other side claimed that a letter they had sent my client was a cure notice, and I argued that it was not. The arbitrator, a former California appellate justice, glowered at my opponent and in a booming voice dismissed the notion that the letter was a cure notice. He said something to this effect: “Counsel, this is not a cure notice. A cure notice is plainly labeled as such in the Re line of the document. It cites to the relevant provision, and is delivered in accordance with the notice provision of the contract. It specifically identifies the provisions of the contract, which have been breached, and for which a cure must be effectuated. It provides a date certain when the cure must be made, or else risk termination of the contract.” We won a $33 million-dollar arbitration award for our client, and were also awarded attorneys’ fees in that case. Sweating the details does matter.
Another error that seems to occur frequently is failure by the party terminating the contract to comply with the notice provision of the agreement. Most termination clauses require written notice of the breach and the opportunity to cure, but they may not specifically reference the notice provision, which appears elsewhere in the contract and/or relevant statutory provisions. As a result, many people overlook the manner by which notice must be given. It is very important before sending the cure notice or the termination letter to check and see if the contract contains such a notice provision or if there is an applicable statutory requirement. If there is, make sure that you comply fully, and do not take any short cuts.
Today, most parties to a contract communicate via email. However, notice provisions may be copied from older contracts and require personal delivery or via overnight or certified mail. Same for statutory requirements. Make sure that you are sending the correspondence to the designated persons at the designated address using the proper method of delivery, and if there are time limits or other procedural requirements in the termination provision, be sure to comply with these as well.
If you are considering terminating a contract, or if your company receives a cure or termination notice, Fulmer Ware LLP is here to help and to guide you through the process.
When responding to any software audit, companies must look to the terms of the license agreement that governs the relationship between the parties. As a threshold matter, it is vitally important to keep all of the actual contractual documents and Order forms together in one place for ease of reference. Also emails and other written communications between the licensor’s audit team and the business being audited should be retained as well. Often what we have found is that the licensor’s audit team tends to correspond in emails and other writings with our clients who are being audited. The licensor is making a written record and demanding documents and other information, and may be doing so in a way so as to cast the company being audited in a negative light in the event of later litigation.
We have also found that although the licensor’s audit teams tend to rely on writings as they attempt to make a record of non-cooperation by the licensee, the licensor’s sales teams, which the licensor may be concurrently deploying will often use the phone and leave voicemail messages, so as not to create a paper trail, which can later be used against the licensor. We recommend that such voicemail messages be transcribed, and if possible an audio recording of the voicemail preserved for use as evidence later on should litigation be initiated.
For example, in the first public filing against Oracle Corporation relating to the VMware virtualization issue in the Mars vs. Oracle case, Mars was able to make use of the written record to support its position that Oracle was in breach of the license agreement by exceeding its audit rights. Care must be taken in any discussions with the licensor, to view every communication to the licensor, with a lens as to how a Judge or jury might view the communication in the event of litigation.
We know from the public filings in the Mars vs. Oracle lawsuit that the contract at issue in that case had a choice of law provision selecting California law, and that the venue selected was San Francisco. As a result, when choosing counsel, companies may want to consider retaining lawyers who are familiar with relevant law and with the local courts and jury pool, in the venue specified in the operative license agreement. We are California lawyers who have been practicing California law in the venue for almost 25 years.
The public filings in the Mars vs. Oracle case also demonstrate how a licensor may attempt to use its audit rights to obtain documents and other information that it might not be entitled to under the license agreement. Licensees may want to weigh whether and to what extent to grant the licensor access to their confidential and proprietary information. Such issues need to be explored very carefully, as the technical and legal teams work closely together to prepare their response strategy.
Over the last year, the media has reported an uptick in compliance audits by Oracle Corporation for its enterprise software customers. See articles here and here. Clients are seeking our guidance on how to deal with these audits and want to understand their legal options.
The story is a familiar one. A company’s IT manager receives a notice from Oracle that the company has been selected for an audit. Oracle seeks commencement of an audit quickly and asks for large amounts of information from the client. The information sought may go well beyond the technology actually licensed from Oracle and may involve third party vendors such as VMware or others. The company protests about the wide-ranging scope of the audit, and Oracle personnel may contend that the company is trying to hide its non-compliance with the license by refusing to cooperate. The rhetoric increases, more documents are demanded, additional forms must be filled out and then the final audit report is issued. The number that Oracle contends represents the amount of the overage may be staggering to the company, and for some companies, simply impossible to pay. Almost concurrently with the issuance of the audit report, Oracle sales representatives are reaching out and leaving messages that they have other, less costly solutions. All the company needs to do is buy more Oracle products. While the company is frantically trying to figure out its options, it receives a 30-day notice of breach letter that the license will, or may, be terminated if the company does not have a plan in place for compliance by the end of the 30-day period.
This is a scenario that is happening to an increasing number of companies. If you are a big company and think Oracle would never do this to you because you are an important customer, do not be complacent. According to reports in the media, Oracle likes to target companies that are large and have used its software widely because it knows how difficult it would be to switch enterprise software mid-stream. If you think you are too small to be targeted for an audit, do not be too sure either. According to the business press, Oracle appears to be pursuing this strategy to increase its cloud-based sales involving companies of all sizes.
So, what should IT professionals do if they receive such an audit letter from Oracle? If your company has a legal department, you should report the issue to your in-house counsel immediately. If you do not have a legal department, you should retain outside counsel to assist you with your response to the audit. Oracle salespeople and audit personnel are aggressive in their pursuit of higher margins and sales. Licensees often need professional legal help to balance the ongoing dialogue and gain leverage in the negotiation by understanding their true legal rights, rather than accepting what is being represented by Oracle’s sales and audit teams.
Our lawyers have advised clients on how to best position themselves for a favorable outcome after an Oracle audit. We have implemented legal strategies that have resolved the situation, without the necessity for lengthy and protracted litigation. We also have advised clients on how to respond to audits initiated by other software providers such as Autodesk and others. Our team is experienced in these situations and here to help, if you find yourself subject to a software audit.