Publications

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On 23 November, the federal jury in the Oracle vs. SAP case awarded Oracle $1.3 billion (yes, with a "B") in damages for copyright infringement by SAP's TomorrowNow subidiary. This massive award demonstrates once again the critical nature of "due diligence" in merger transactions. SAP admitted to copyright infringement, so the amount of the damages was the only issue. SAP had suggested $40,000,000 and Oracle demanded $1.65 billion. Recently, Reuters reported that SAP had agreed to pay Oracle $120,000,000 for Oracle's agreement not to seek punitive damages, (for transparency purposes, we do work for Oracle but were not involved in this litigation).

The challenges of "due diligence" in mergers is discussed in a 2004 Harvard Business Review article "The Secrets of Great Due Diligence". As the article notes: 

Deal making is glamorous; due diligence is not. That simple statement goes a long way toward explaining why so many companies have made so many acquisitions that have produced so little value. Although big companies often make a show of carefully analyzing the size and scope of a deal in question—assembling large teams and spending pots of money—the fact is, the momentum of the transaction is hard to resist once senior management has the target in its sights. Due diligence all too often becomes an exercise in verifying the target's financial statements rather than conducting a fair analysis of the deal's strategic logic and the acquirer's ability to realize value from it. Seldom does the process lead managers to kill potential acquisitions, even when the deals are deeply flawed. [...]

The nature of TomorrowNow's business should have required extra care because TomorrowNow provided third party "maintenance services" for Oracle software. These services are fraught with risk: such companies are strongly tempted to use the software and tools of the company for whose products they are providing maintenance and particular care must be taken to ensure that they resist that temptation.

With the increase in mergers and acquisitions, this case stands as a warning of the importance of careful intellectual property due diligence. The lessons for acquiring companies are:

1. Intellectual property due diligence is now of greater importance;
2. Copyright liability may be as high as patent liability;
3. Take particular care with business models based on third party intellectual property rights;
4. Determine how third party software use (both open source and commercial) is managed (the answer "ad hoc" is not a good one);
5. Be prepared to walk away if the problem is significant or fix it prior to closing.

The lessons for companies being acquired are:

1. Review your intellectual property ownership as well as use of third party intellectual property rights because acquiring companies are going to be much more attentive to these issues.
2. Fix any issues that you identify prior to entering merger discussions: many problems can be fixed given enough time, but you won't have time once you start the merger process.
3. Adopt a policy on the use of third party software (including both open source and commercial) to avoid these problems and because acquirors (and your customers) will be asking about it.