Update: SAP penalty in Oracle suit excessive, analysts say

Computerworld - Analysts are expressing surprise at Wednesday's federal verdict requiring that SAP pay Oracle $1.4 billion in damages for the theft of intellectual property.

Oracle has said the award is the largest ever to be assessed against any company in a software privacy case. Even so, it is considerably less than the $4 billion that Oracle claimed SAP owed it for pirating its software. SAP argued that it should be held liable for only about $40 million.

The decision by the jury in federal court in Oakland, California yesterday came after less than a day of deliberations and will likely be appealed by SAP. In a statement after the verdict, SAP expressed disappointment at the size of the damages and said that it would "pursue all options" to reduce the damages.

Oracle's lawsuit against SAP is related to the actions of a now defunct SAP subsidiary called TomorrowNow, which provided third-party support services to Oracle customers at about 50% of the cost that the vendor charged for it.

In August, SAP agreed to assume liability for the copyright theft claims made against it by Oracle. And last month SAP admited that some of its executives may have known about the illegal activities.

Given those admissions, the verdict in the case was a foregone conclusion.

Even so, the size of the award is surprising given the small size of TomorrowNow's operations, said Forrester Research analyst Paul Hamerman.

"The business that they were in was to fix glitches in software and make some compliance updates," Hamerman said. "They weren't trying to resell any of the software that they were downloading."

Hamerman suggested that the jury should have based its decision on the amount of damages on the size of TomorrowNow's maintenance contracts, he said.

TomorrowNow had between 300 to 400 clients each of which was charged roughly 50% of what Oracle would have charged in maintenance fees, he said. So calculating the potential revenue that Oracle lost should have been fairly simple, he said.

"The lost revenue to Oracle was the maintenance business that went to TomorrowNow," Hamerman said. "The pricing scheme was simple. Whatever you paid to Oracle, they would do it for half."

The size of the verdict puts SAP in an awkward spot, Hamerman said.

While the company is anxious to avoid further embarrassment and put the whole case behind it, the sheer size of the fine against it, will force an appeal and prolong the case, he said.

The case also should serve as a warning to other third-party maintenance businesses "to to be very respectful of IP," Hamerman said.

Frank Scavo, manging partner of the IT consulting firm Strativa, expressed surprise at the jury decision, and said the damages appear to be "out of proportion" for the damages suffered by Oracle.

"The jury used a fair-market value approach to assessing damages, which was consistent with their instructions," Scavo said. "But to value those licenses at full-list price would appear to me to be excessive."

Scavo added: "No one pays list price."

He said the broader issue here is what the decision means for the third-party support industry. "Some of us have been advocating for software customers' rights to receive legitimate third-party support, as a counterweight to the OEM's ability to charge unreasonable fees for maintenance."

Jaikumar Vijayan covers data security and privacy issues, financial services security and e-voting for Computerworld. Follow Jaikumar on Twitter at @jaivijayan, or subscribe to Jaikumar's RSS feed . His e-mail address is jvijayan@computerworld.com.

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