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November 5, 2010 6:52 PM

The SAP/Oracle War Is Getting Expensive

Posted by Brian Baxter

Soon after a copyright infringement trial between tech giant Oracle and German software maker SAP got underway in California earlier this week, news leaked of a deal agreed to by both sides that struck us as a bit unusual.

On Wednesday, Reuters reported that SAP agreed to pay $120 million to cover Oracle's legal fees in exchange for a promise that Oracle wouldn't press for punitive damages in the case. The matter stems from a suit filed by Oracle in March 2007 claiming that SAP had stolen software applications and support products through a subsidiary called TomorrowNow.

Trial in the three-year litigation battle began in U.S. district court in San Francisco on Monday. SAP claims that instead of the $2 billion in compensatory damages Oracle is seeking, it owes its Silicon Valley rival a fraction of that amount given TomorrowNow's actions. (Corporate Counsel, a sibling publication, has more on the dispute between both companies.)

Then there was the issue of punitive damages. Seeking to minimize the amount of collateral damage it might suffer at trial, SAP struck its deal, hoping to shield itself from even more liability.

While a copyright infringement case does not typically carry with it punitive damages, the Financial Times reports that SAP could have faced such a claim under other statutes that ban computer hacking. The $120 million payment by SAP was agreed to on Monday in a closed session before federal judge Phyllis Hamilton, the FT reported, citing one person close to the matter.

The docket in the case now states that the "additional trial stipulation and [proposed] order regarding claims for damages and attorneys fees" filed by SAP on Monday was made in error and the entry is now sealed. Of course, there's still that $120 million fee figure floating above the fray.

"The whole thing is weird, it seems like a way to package it for public consumption," says one prominent Silicon Valley IP partner at an Am Law 200 firm who has been following the case. "I've done some big cases that lasted three or four years and [the fees were] at $30-$40 million. It's almost inconceivable that [fees from a copyright case] would be at that level, it's a much less complicated matter."

Oracle does have some serious star power on its legal team. Boies, Schiller & Flexner's ubiquitous David Boies is leading a team from the firm representing Oracle at trial that includes litigation partners Steven Holtzman and Fred Norton, Jr.

Donn Pickett, cochair of the litigation department at Bingham McCutchen, is leading another legal team for Oracle that includes antitrust cochair Holly House and litigation partners Bree Hann and Zachary Alinder. Oracle's in-house legal team includes general counsel Dorian Daley and senior corporate counsel Jennifer Gloss.

The legions of lawyers--some of whom likely bill $1,000 per hour--aren't enough to convince IP observers that Boies and Bingham are generating such an unprecedented windfall in legal bills.

"There is an expectation that a successful plaintiff will receive some, if not all, of their attorneys' fees upon the conclusion of the case," says another Am Law 200 litigator familiar with high-profile IP issues. "If it's a case where liability has already been established or is likely to be established, it's extremely common for attorneys' fees to be baked in as part of the overall settlement. But it's unusual for those fees to be denominated as a separate element of consideration under a settlement agreement, so there must be something going on here."

Generally speaking, the lawyer says that two parties will negotiate an amount and add on a portion for attorneys' fees, but rarely will it be broken out into a separate component. "Maybe they want to establish some precedent, but I can't even think of a tax reason for why it would be important in this circumstance," the attorney adds.

A fee total of $120 million would certainly seem to be the extreme in any type of litigation. Former Brocade Communications CEO Gregory Reyes sued the company in September 2008, accusing his former employer of shutting off the cash flow to his lawyers at Skadden, Arps, Slate, Meagher & Flom. Brocade had paid more than $46 million in fees at the time. (Citing prosecutorial misconduct, the Ninth Circuit tossed Reyes's conviction on stock options backdating charges last year.)

AIG agreed to pay $150 million to cover certain legal fees and expenses incurred by former CEO Hank Greenberg--represented by Boies--after the end of their litigation battle in December 2009. Weil, Gotshal & Manges's legal bills in the Lehman Brothers bankruptcy--the largest in U.S. history and arguably its most labor-intensive from a legal perspective--reached $127 million that same month, a little more than a year after the investment bank filed for Chapter 11 protection.

The legal battle between SAP and Oracle is not even novel in the realm of IP litigation.

"For the most complex copyright cases, we're talking $3 [million] to upwards of $6 million [in fees]," says one of the IP partners. "For the most egregious cases that go all the way through, like the Bratz-Mattel case, that's like $12-15 million [in fees]. And that's an outlier. But $120 million is just idiocy, there's no way. There's something else going on there because that's off by orders of magnitude."

It's a thought seconded by the California partner, a veteran with more than a few IP wars under his belt.

"Whether it's for tax reasons or for bookkeeping purposes, there's some other explanation for this other than they're spending $120 million [in fees]," the lawyer says. "The fact that [SAP is] paying [Oracle's] legal fees is just a way to present this deal that they did."

Oracle spokeswoman Deborah Hellinger did not respond to a request for comment.

SAP is being represented in the case by Robert Mittelstaedt, partner-in-charge of Jones Day's San Francisco office. Mittelstaedt's team includes IP litigation partners T. Gregory Lanier, Jane Froyd, Jeffrey Butler, Jason McDonell, and Scott Cowan.

The two sides continue to argue over compensatory damages before Hamilton, who must still approve the $120 million payment agreed to by SAP earlier this week. Hamilton has denied SAP's request for a gag order on attorneys making public statements about the case outside of court.

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