9/25/2011

By Christopher J. Kim, J.D. Candidate

German software company SAP AG, the global market leader in business software, has agreed to pay over $20 million in fines to settle a criminal case brought by the U.S. Department of Justice against its defunct Texas subsidiary, TomorrowNow. On September 14, SAP executive Mark White pled guilty on behalf of TomorrowNow to charges of criminal copyright infringement against SAP’s chief competitor, Oracle.[1]

The case, tried in the U.S. District Court for the Northern District of California, is the culmination of the DOJ’s four-year investigation into TomorrowNow’s large-scale theft of Oracle software. Between 2005 and 2007, TomorrowNow employees secretly accessed Oracle’s customer support portal using login information taken from legitimate clients. Once inside, the employees made thousands of copies of Oracle’s programs. TomorrowNow used the stolen software to provide low-cost maintenance services for businesses familiar with Oracle’s products.[2] The DOJ charged TomorrowNow with eleven counts of unauthorized access to a protected computer with intent to defraud[3] and one count of copyright infringement.[4]

Throughout the trial, SAP characterized TomorrowNow’s criminal acts as the independent misdeeds of a rogue subsidiary. However, Oracle claims that the thefts were authorized by SAP executives as part of a broader scheme to poach customers and avoid license payments.[5] Oracle offered expert testimony stating that SAP was liable for up to $1.7 billion in damages.[6]

According to the terms of the plea agreement, SAP will pay $20,004,800 in fines and submit to three years of corporate probation. However, the parent company will not be named as a defendant in the criminal charges—a fact which SAP is quick to point out in its public statements regarding the settlement.[7] SAP has also agreed to cooperate with any criminal investigations of employees related to the theft, although it is unclear at this point whether the DOJ intends to prosecute on an individual basis.[8]

Assistant U.S. Attorney Kyle Waldinger said that the size of the penalty “reflects the seriousness of the conduct, especially in light of the size of TomorrowNow [and] the revenues it earned.”[9] However, SAP stated at trial that TomorrowNow had never turned a profit throughout its existence as a subsidiary operation. SAP also argued that Oracle seriously exaggerated the extent of damages incurred, maintaining that Oracle lost only about $19.3 million in profits from the theft.[10]

The settlement comes as a welcome respite for Oracle, which is currently embroiled in a separate legal controversy with Google over alleged patent violations of Sun Microsystems’ Java platform. A U.S. magistrate ordered representatives of both companies to meet throughout late September to try and settle their differences, but a full-blown trial seems probable given the nature of the controversy.[11] Oracle’s longstanding conflicts with SAP pose a serious drain on the company’s legal resources, which they must conserve in the event of an equally protracted battle with industry heavy-hitter Google.

Standing alone, the case is unusual simply due to the rarity of criminal copyright prosecutions against large corporations. Most federal criminal copyright investigations involve counterfeiting rings and wholesale bootlegging operations.[12] However, this prosecution occurred within the broader context of a simultaneous civil suit between Oracle and SAP on the same issue.[13] In the corresponding civil case, also tried in the California’s Northern District, the jury recently awarded a massive $1.3 billion in damages to Oracle for the theft.[14] Judge Phyllis Hamilton threw out the award as “grossly excessive,” instead giving Oracle the choice of a maximum $247 million or a new trial.[15] Oracle intends to contest Judge Hamilton’s order on appeal. If Oracle’s appeal succeeds, the sum will stand among the highest awards ever ever granted in federal court for software piracy.[16]

Given the high profile and enormous financial stakes of the civil case, it is remarkable that the DOJ decided to pursue their investigation and prosecution with such persistence. The $20 million fine seems light in comparison to the potential $1.3 billion or $272 million liability that SAP faces in the civil trial. In fact, prosecutors specifically referenced the magnitude of the impending civil restitution as a factor in calculating an appropriate criminal penalty.[17] Federal authorities only started to look into SAP’s activities after Oracle filed their original civil complaint, and charged TomorrowNow years after the other suit’s commencement.[18]

It is possible that the DOJ wanted to hit SAP with a fine just in case they won or minimized the losses from the civil proceeding. However, it seems more likely that the government initiated prosecution in order to emphasize the criminality of TomorrowNow’s conduct. Given the relative infrequency of criminal copyright cases, this situation provided an opportunity for federal authorities to mark this brand of software theft as an unmistakable felony. The adverse public relations effect of a criminal conviction explains why SAP was so anxious to limit all formal charges to their subsidiary in the plea agreement. This express criminal sanction may act as a deterrent against corporate piracy by other players in the industry.

Both the civil and criminal trials have been marked by episodes of personal acrimony, fueled by the intense head-to-head competition between SAP and Oracle in the worldwide business software market. Last fall, Oracle CEO Larry Ellison made headlines when he publicly taunted former SAP executive Léo Apotheker for dodging a summons in the civil suit.[19] While Oracle did not send a representative to the September 14 hearing in the criminal trial, it released a brief statement celebrating that SAP “finally pleaded guilty in federal court to criminal charges for its illegal scheme.”[20]

Regardless of the outcome in the civil trial, TomorrowNow undoubtedly represents a disastrous investment for SAP. The $20 million fine alone is twice the sum SAP paid to acquire the company in 2005.[21] Today, TomorrowNow exists only as a small ten-person office whose main purpose is to maintain the computer files relevant to the ongoing litigation.[22]