lawsuit

Menasha wins SAP sales tax lawsuit

Menasha, a packaging company in Wisconsin, installed SAP R/3 in 1995. Some media reports estimate that the project cost roughly $23 million, including $5 million for a license, and over $16 million in expenses incurred as a result of paying SAP, Deloitte, and other consultants to modify the R/3 system; documents filed with the Wisconsin Court of Appeals indicate that the total cost was over $46 million. Whatever the case, Menasha reportedly made 3,000 changes to the SAP software after purchase.

Menasha paid Wisconsin over $342,000 in sales tax for the SAP transaction but argued that, because the system was so heavily modified, sales tax was not in fact owed on it (state tax codes typically levy tax on out-of-the-box software purchased by businesses, which is counted as tangible property under the law, but not on customized software). After thirteen years of litigation, the Wisconsin Supreme Court agreed with Menasha and ruled that the state could not collect sales tax on customized software. This has profound implications for Wisconsin, which will now have to pay back $265 million to businesses who have paid such sales tax over the years. SAP and other enterprise applications customers in Wisconsin who have modified their systems should anticipate receiving these sales tax refunds soon. The ruling brings Wisconsin into line with other states whose tax codes forbid taxation of modified software.

One pertinent question raised by the ruling is why sales tax is collected on enterprise software at all. True enterprise software is always modified, and not in any trivial way; as in Menasha’s case, it is the rule rather than the exception for consultants, integrators, and other providers of value-added services to modify enterprise software for business use. Logically, then, enterprise software should only be taxed as tangible property when such value-added services providers are not present and the software is truly out-of-the-box.

The ruling in Menasha’s case should encourage all U.S.-based SAP, Oracle, and other enterprise applications users to aggressively challenge their state department of revenue’s procedures. Under the letter of the law, there is no such thing as non-modified enterprise software, so why not attempt to recoup all sales taxes paid on such software?

Demir Barlas, Site Editor

Oracle-SAP lawsuit update: Why Oracle won’t get its $1b

Oracle wants as much as $1 billion from SAP for SAP subsidiary TomorrowNow’s alleged theft of Oracle support documents and other illegally downloaded intellectual property (IP). As the legal clash nears — it’ll be 2010 before you know it — Oracle and SAP’s lawyers are pushing hard to frame the narrative that the courts will hear. Now that Oracle has finally put the question of damages on the table, it will have uphill work claiming $1b. After all, it hasn’t been claimed — yet — that SAP made off with the secret formula to Coca-Cola.

That’s not to say that Oracle has no case, or that its complaints aren’t meritorious, but $1b is a lot of money (although, admittedly, much less than it used to be). Oracle’s lawyers are taking a fascinating approach to make the argument for such large damages. Oracle’s latest joint discovery filing claims that this case is not merely about illegal downloads but about “the rules of fair play” between the two companies. Violating these rules clearly sounds more egregious than making off with some support documents. Furthermore, Oracle wants to draw the tenuous link between a violation of these rules of fair play and the success of SAP’s Fair Passage program, in which customers of PeopleSoft (the enterprise applications company for which Oracle launched a successful hostile takeover bid three years ago) were encouraged to come to SAP instead of waiting to see how they would be treated after Oracle acquired PeopleSoft.

Oracle wants SAP to disclose information on how important TomorrowNow was to the acquisition of (roughly 800) Safe Passage customers. The insinuation is that TomorrowNow was a strong factor in the loss of all of these customers, many of whom were concerned that Oracle would not provide adequate support for, and/or development of, PeopleSoft products after the takeover. Once TomorrowNow drove a wedge between Oracle and its prospective PeopleSoft customers, SAP was more able to convert many of these customers to its own products.

Of course, the trick here will be to demonstrate that TomorrowNow’s illegal downloads, rather than the fear and uncertainty circulating within the PeopleSoft and J.D. Edwards customer bases three years ago, were responsible for the success of Safe Passage. SAP’s lawyers should be able to create reasonable doubt around this connection. Most Safe Passage customers were trying to escape to a stable, supported platform; how many of them were merely choosing between support organizations? TomorrowNow was always a stepping stone; sure, it got SAP into a lot of deals, but there would have been a “safe passage” movement even if SAP hadn’t pushed for one.

Finally, the whole question of fair play is a hypocritical one for Oracle to raise. Was it fair for Oracle to begin a hostile takeover of PeopleSoft hours after PeopleSoft acquired J.D. Edwards? Is it fair for SAP to use its vast size and influence to get into no-bid deals? Balzac famously claimed that behind every great fortune is a crime, and, at its highest levels, the enterprise applications business is just as dirty as any other high-stakes industry. TomorrowNow may indeed have broken the law, and should be punished if this is the case, but $1b is ridiculous and, more importantly, legally unsupportable. Oracle’s fair play argument, and the logical elision by which TomorrowNow is tied to Safe Passage, just won’t cut it.

Demir Barlas, Site Editor

i2 wins $83 million settlement from SAP

SAP is paying fellow enterprise applications company i2 $83.3 million to settle a patent dispute. In 2006, i2 had accused SAP of infringing on seven i2 patents, including patents for “an extensible model network representation system for process planning” as well as a “method for managing available to promised product (ATP).”

Earlier this month, JMP Securities analyst Patrick Walravens had predicted that damages could have been as high as $500 million, so perhaps SAP got the best of the settlement. While the full terms of the settlement were not disclosed, the companies have agreed to dismiss pending legal actions and to cross-license the patents in question.

In an indication of how far the company has fallen since its glory days a decade ago, AP described i2 as an “inventory management software company.” i2 is in fact a supply chain software company, although the business media appears to have forgotten.

With the patent issue out of the way, it is time for someone — meaning, effectively, either Oracle or SAP — to buy i2. Supply chain management long ago ceased to be a popular standalone domain, and is increasingly dominated by the two enterprise applications giants, who can bundle the functionality in an integrated suite. The other option for i2 would be to liquidate its assets.

Someone associated with i2 is no doubt anxious to get the ball rolling, judging by the rapid acceptance of what could be a lowball settlement. Whatever happens, get ready to say goodbye to a company that, not so long ago, was an analyst and investor darling while SAP was accused of being a dinosaur. Sadly, the Dallas-area i2 is doomed to being remembered for being chewed out by Nike CEO Phil Knight (”This is what we get for our $400 million?”), but its wealth of supply chain IP is still a valuable asset.

Demir Barlas, Site Editor

Léo Apotheker: A dissenting view

By now, SAP’s co-CEO — and soon-to-be sole CEO — Léo Apotheker has been welcomed into his new role by a host of journalists, analysts, and even the French government, which made the former SAP sales head a Knight of the Legion of Honor (whose value is surely diluted by the fact that it has also been awarded to Celine Dion). The conventional wisdom holds that, because SAP has been led by a succession of German engineers who gave the company a decidedly technical face, the time was right for a change of blood. Indeed, that was the thinking that saw Shai Agassi, who was about as foreign to SAP culture and history as anyone could be, almost become CEO.

Sure, Agassi was technologically educated and inclined, but he was also a sales person at heart. Sales, however, isn’t necessarily the best domain from which to choose a software company CEO. Sales people tend to stretch reality in order to close deals, which may be a desirable trait in the CEO of a young company looking to get on a map, but not necessarily a desirable trait for building long-term shareholder value in a mature company.

Waste Management, the company that is suing SAP for $100 million, noted in its complaint that Shai Agassi was present at a meetings on June 17, 2005 at SAP global headquarters, and at least one blogger has already wondered whether Agassi was behind what Waste Management alleges were inflated promises about SAP’s functionality. This year, at Sapphire, Apotheker presided over a carnivalesque atmosphere on the main stage, including a Harley and a Coke truck, that I thought recklessly associated the reliable SAP brand with dot-com era hi-jinks. You had to go to a special session afterwards (attended by about thirty people) to get the serious version of the Apotheker talk about SAP’s ecosystem innovation.

SAP is accused of being boring and predictable, but it’s the horse at the head of the enterprise software market. Changing jockeys in this situation doesn’t make sense, just as the decision to elevate Agassi to co-CEO didn’t make sense. That kind of corporate thinking betrays a slippery understanding of risk management principles. Today, as SAP faces various lawsuits and a deepening perception of being difficult and costly to implement, the voice of sales is just what the market doesn’t want to hear. Rather, it’s the voice of engineering — speaking the language of design, project management, strategic discipline, and process change — that can, and should, guide potential SAP customers through the minefield of problems that stand between a purchase decision and a successful implementation.

I don’t think that Apotheker is that voice.

Comments?

Demir Barlas, Site Editor

SAP fails to settle with Oracle

SAP and Oracle, embroiled in a bitter battle over SAP-owned TomorrowNow’s unit’s illegal downloading of Oracle support materials and other information (like software code), have failed to settle their dispute in a May 29 mediation session. This means that SAP and Oracle will continue on their course towards violent litigation over this matter.

According to SAP co-CEO Henning Kagermann, the case isn’t expected to open until early 2010. That means at least another year and a half of bad publicity for SAP, and the possibility of bigger embarrassments in court. It seems worthwhile to ask why SAP doesn’t try to settle before then, if only in the interest of quashing the publicity. SAP has already prepared 10 million Euros for the legal struggle, and even one lost contract because of this lawsuit could mean another 15-20 million Euros that SAP gets to keep in its pocket.

While we’re on the subject of SAP’s legal issues, investment writer Dennis Byron caught an interesting fact about Waste Management, the company that claims SAP sold it software that didn’t work. In its last 10-Q, Waste Management noted that, “If we decide to abandon the SAP software, the abandonment would result in a charge of between 45 and 55 million dollars.” That vitiates Waste Management’s claim that the SAP software it bought simply didn’t work.

Demir Barlas, Site Editor

TomorrowNow lawsuit update

There’s a new development afoot in the SAP-Oracle dustup over TomorrowNow–the filing of a joint Case Management Conference (CMC) Statement that stakes out SAP and Oracle’s positions in advance of the Case Management Conference that will take place on April 24, 2008, with Judge Phyllis J. Hamilton presiding.

The CMC Statement is notable for setting out Oracle’s case against Tomorrow now in a fair amount of detail. Here are excerpts from the most damning accusations:

“Defendants [SAP] have a dedicated bank of 20 “download servers” to accomplish the unauthorized taking and infringing conduct…”

“Defendants compiled a master download library of Oracle-based Software and Support Materials that exceeds five terabytes in size – so large that Defendants could not produce it for over six months…”

“Defendants have approximately 3,000 copies of Oracle software applications on their systems, each one of which may additionally have included within it illegally downloaded Software and Support Materials…”

“Virtually every one of the almost 200 TN employees had some involvement in TN’s illegal activity. Documents produced by Defendants suggest that SAP AG and SAP America employees and managers had involvement in or knowledge of TN’s infringing conduct.”

SAP won’t admit that any overt illegality took place, preferring to put the emphasis on what it considers Oracle’s misguided use of the legal process: “Oracle insists on overly broad, unnecessary discovery into what TN accessed as part of providing third party support; it should be compelled to explain how TN’s support of its former customers harmed Oracle, and to permit immediate discovery into that elusive claim.”

Whatever the case, the TomorrowNow acquisition continues to be a headache for SAP, which is unable to find a buyer for the company and has spent a lot of money on the Oracle lawsuit.

For more context, check out today’s SearchSAP story on the CMC.

Demir Barlas, Site Editor

More TomrorowNow trouble

SAP’s bid to keep what it called “highly confidential” information pertaining to the Oracle lawsuit over TomorrowNow has been blocked in a California courthouse. Of course, there’s no telling just what that information is, but it might reveal strategic insights into TomorrowNow’s operations and/or intellectual property. Coming just after the news that Rimini Street won’t buy TomorrowNow, this latest twist is another headache for SAP, which may well be wishing it had never bought TomorrowNow in the first place.

It’s easy to forget that the idea of third-party ERP service was very hot in 2005. However, the fate of TomorrowNow indicates the potential for litigation that can arise when one company services another company’s product. Support and service offer big profit margins, and it’s no secret that enterprise applications companies will work hard to keep these functions close to the vest. In any case, given that SAP and Oracle have tens of thousands of customers, but only a few hundred opt for third-party support, it doesn’t seem to be a very viable domain in the first place.

Demir Barlas, Site Editor

Waste Management versus SAP: Allegations and details

Waste Management is suing SAP for over $100 million in damages alleged to arise from SAP’s “fraud” in misrepresenting its waste management software to the company. Those interested in learning more about the lawsuit can download the entire brief here: Waste Management versus SAP. If you lack the time to peruse this 52-page document, here are the key allegations:

“…SAP fraudulently induced Waste Management to license an ‘United States applicable’ Waste and Recycling Software solution”

“This software was represented to be a ‘waste industry standard solution with no customization required.’”

“SAP further represented that the Software was an ‘integrated end-to-end solution.’”

“Unknown to Waste Management, this ‘United States’ version of the Waste and Recycling Software was undeveloped, untested, and defective.”

“SAP knew that it had competition from other companies in landing Waste Management as a client, and it was keenly aware that Waste Management’s preferred solution was a proven, ‘out-o-f-the-box’ product that could be rapidly installed.”

“…the software modules used by SAP in its ‘United States’ version of the Waste and Recycling software had never been used together before and had never been tested in an actual productive business environment.”

“[SAP's] pre-contract demonstrations were in fact nothing more than fake, mock-up simulations that did not use the software ultimately licensed to Waste Management.”

“SAP repeatedly stated that the capabilities and functionality of the software were exactly as appeared in the demonstration.”

“…the SAP implementation team had never before worked with the software SAP licensed to Waste Management.”

“…the software…was nothing more than beta software–i.e., software still in development and utterly incapable of running the operations of an American waste and recycling company.”

“The installed software failed to contain basic functionality that had been represented to Waste Management and was unable to run Waste Management’s most basic revenue management operation. Instead of making Waste Management aware of these known software problems, SAP attempted to re-program the core software code during the implementation process.”

“SAP purportedly utilized its knowledge of Waste Management’s business, gained in part through its employment of a former Waste Management controller [Dean Elger], to develop the software.”

“Based on SAP’s specific representations concerning the purported capabilities of its Software, the Business Case generated net annual benefits to Waste Management of between $106 million and $220 million per year.”

“[SAP represented] that it would implement the Software at Waste Management on a company-wide basis within 18 months, or by December 31, 2007.”

“Waste Management justifiably relied on SAP’s misrepresentations in agreeing to change orders and paying SAP additional fees to have SAP attempt to provide the very functionality that SAP had represented, during its sales campaign, was contained in its purportedly ‘out-of-the-box’ solution. Through its deceptive change order scheme, SAP improperly recovered its internal costs incurred in software development work that was supposed to have been its responsibility.”

“…the downporting and core code modifications have radically altered the Waste and Recycling Software licensed by Waste Management, to the point where that Software is incompatible for routine future upgrades.”

Details about this lawsuit were sketchy at first, but it’s clear from this document that Waste Management has very specific allegations to make. Furthermore, Waste Management keeps making the tantalizing claim that SAP’s own “internal documents” admit to these allegations. Now the justice system can sort it out.

Demir Barlas, Site Editor

SAP sued by Waste Management

Waste Management, which spent $100 million on SAP software and characterized the project as a “complete failure” in a lawsuit filed March 20, is out for blood. The company seeks damages, including punitive damages, from SAP, whose Waste and Recycling Software software was excoriated by Waste Management in the text of the lawsuit. In part, the lawsuit alleges that, “Unknown to Waste Management, this ‘United States’ version of the Waste and Recycling Software was undeveloped, untested and defective.”

Waste Management came to SAP via the “Safe Passage” program that was supposed to entice PeopleSoft users to SAP during Oracle’s drawn-out bid for PeopleSoft. At the time, Waste Management was a company in crisis. SEC Administrative Proceeding No. 3-10513 had found the following: “As early as 1988, members of Andersen’s audit engagement tram recognized that Waste Management employed ‘aggressive’ accounting practices to enhance its earnings.” In the brouhaha that followed, Waste Management’s board fired the company’s management.

Waste Management’s executive suite attained their current positions in 2004. As such, it seems that the company had a lot on its plate at once: overcoming an crisis, appointing new leadership, and launching a major ERP project.

This is not to say that Waste Management’s lawsuit is mistaken. No one can know for sure until after the wheels of justice turn. However, as it is, something seems lost in the telling. How could a company spend $100 million on software that is “undeveloped, untested and defective”? More pertinently, how could these facts about the software be “unknown” to management? ERP implementations can take years, and are accompanied by rigorous testing and planning. If SAP’s software is indeed a “complete failure,” Waste Management’s executives might well have been asleep at the wheel; no one should pay $100 million and wait two years to find out they’ve bought a defective product. If SAP’s software turns out not to have been to blame, Waste Management will still have done damage to SAP’s share price and reputation — for how long, no one can tell.

Demir Barlas, Site Editor