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Oracle America, Inc. v. Cedarcrestone, Inc.

United States District Court, N.D. California, San Francisco Division

April 3, 2013

ORACLE AMERICA, INC., a Delaware corporation, and ORACLE INTERNATIONAL CORPORATION, a California corporation, Plaintiffs,
v.
CEDARCRESTONE, INC., a Delaware corporation, Defendant

For Oracle America, Inc., a Delaware corporation, Oracle International Corporation, a California corporation, Plaintiffs, Counter-defendant,: Geoffrey M. Howard, LEAD ATTORNEY, Chad Russell, Frank Hinman, Bingham McCutchen LLP, San Francisco, CA; Bree Hann, Marjory Anne Gentry, Bingham McCutchen, San Francisco, CA; Deborah Kay Miller, Oracle Corporation, Redwood Shores, CA; Jennifer Wysong Gloss, Oracle Corporation, Redwood City, CA.

For Cedarcrestone, Inc, a Delaware corporation, Defendant: Daniel Edward Purcell, LEAD ATTORNEY, Andrew Frederick Dawson, Christa M. Anderson, Robert Addy Van Nest, Keker & Van Nest LLP, San Francisco, CA; Erin E. Meyer, Keker and Van Nest LLP, San Francisco, CA.

For Cedarcrestone, Inc, a Delaware corporation, Counter-claimant: Andrew Frederick Dawson, Robert Addy Van Nest, Keker & Van Nest LLP, San Francisco, CA; Erin E. Meyer, Keker and Van Nest LLP, San Francisco, CA.

For Cedarcrestone, Inc, a Delaware corporation, Counter-claimant: Daniel Edward Purcell, LEAD ATTORNEY, Christa M. Anderson, Robert Addy Van Nest, Keker & Van Nest LLP, San Francisco, CA.

For Oracle America, Inc., a Delaware corporation, Oracle International Corporation, a California corporation, Counter-defendant: Geoffrey M. Howard, LEAD ATTORNEY, Chad Russell, Bingham McCutchen LLP, San Francisco, CA; Deborah Kay Miller, Oracle Corporation, Redwood Shores, CA; Jennifer Wysong Gloss, Oracle Corporation, Redwood City, CA; Marjory Anne Gentry, Bingham McCutchen, San Francisco, CA.

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ORDER GRANTING MOTION TO DISMISS SECOND AND THIRD AMENDED COUNTERCLAIMS WITH LEAVE TO AMEND Re: Dkt. Nos. 38, 39

Nathanael M. Cousins, United States Magistrate Judge.

This lawsuit arises out of a dispute between plaintiffs Oracle America, Inc. and Oracle International Corporation and their long-time partner, CedarCrestone, Inc., concerning CedarCrestone's conduct in providing support services for Oracle's PeopleSoft-branded software. Oracle brought this action for copyright infringement, breach of contract, and related claims, asserting that CedarCrestone misappropriated Oracle's intellectual property. CedarCrestone counterclaims, alleging breach of contract and anticompetitive conduct by Oracle.

Before the Court is Oracle's motion to dismiss for failure to state a claim CedarCrestone's counterclaims for (2) unlawful tying under the Sherman Act, 15 U.S.C. § 1, and (3) unfair business practices. Having held oral argument on March 13, 2013, the Court hereby DISMISSES with leave to amend CedarCrestone's second and third counterclaims because CedarCrestone has failed to sufficiently allege the requisite market power in a relevant market.

I. BACKGROUND

A. The Parties

Oracle develops, owns, and licenses intellectual property, including intellectual

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property rights formerly held by certain PeopleSoft entities, and provides related services. Dkt. No. 36 ¶ ¶ 9-10. Until September 4, 2012, when Oracle purported to terminate the partnership, CedarCrestone was a licensed Oracle partner, and provided a broad variety of information technology services to Oracle licensees, primarily related to Enterprise Resource Planning (" ERP" ) software applications developed by Oracle. Dkt. No. 30 at 28 ¶ 5, 48 ¶ 54. Those services included consulting and advisory services related to PeopleSoft and Oracle E-Business Suites applications, hosting and management of PeopleSoft and E-Business Suites applications, and services related to tax and regulatory support for certain Oracle licensees. Id. at 2 ¶ 1.

B. CedarCrestone's Counterclaims

Oracle's complaint asserts that CedarCrestone used its partnership relationship to misappropriate Oracle's intellectual property by selling infringing, unauthorized software updates for Oracle's software. Dkt. No. 36 ¶ 1. In response, CedarCrestone initially counterclaimed against Oracle for (1) breach of contract, (2) intentional interference with prospective economic advantage, and (3) unfair business competition based on Oracle's alleged pretextual termination of the partnership agreement and a " sustained initiative to destroy competition in the downstream market for consulting, support, and implementation of Oracle software." See Dkt. No. 11 ¶ ¶ 53, 59, 62.

Oracle filed a motion to dismiss CedarCrestone's counterclaims for intentional interference with prospective economic advantage and unfair competition. Dkt. No. 12. The Court granted Oracle's motion to dismiss with leave to amend, finding that CedarCrestone had failed to plead an " independent wrong" required to state an intentional interference or unfair competition claim. Dkt. No. 28. The Court explained that the requisite wrongful conduct cannot be premised on Oracle's privileged litigation activities, or on the mere allegations of wrongful breach of contract, and that CedarCrestone had not adequately alleged a violation of antitrust laws or the " policy or spirit" of those laws. Id.

On January 4, 2013, CedarCrestone filed its First Amended Answer and Counterclaims, alleging a new claim for unlawful tying under the Sherman Act, 15 U.S.C. § 1, and repleading its unfair competition claim based on the unlawful tying allegations. Dkt. No. 30. CedarCrestone asserts that Oracle's termination of CedarCrestone's contracts and partnership status is " part of an unlawful and systematic attack on competition by third-party service providers like CedarCrestone, who for years have focused on assisting Oracle in the support and licensing of Oracle ERP software products." Id. at 26-27 ¶ ¶ 1-2. Specifically, CedarCrestone alleges that Oracle's anticompetitive conduct consists of unlawfully tying " the sale of updates to its proprietary ERP software--both formal, periodic releases of new versions of that software and patches and fixes to existing versions of that software--to the purchase of Oracle support and maintenance services." Id. at 37 ¶ 26. CedarCrestone further alleges that Oracle's unlawful tying violates section 1 of the Sherman Act, and also constitutes " unlawful, unfair, and/or fraudulent business acts and practices" prohibited by California Business & Professions Code section 17200. Id. at 56 ¶ ¶ 75-79.

Oracle now moves to dismiss CedarCrestone's antitrust and unfair competition claims on the basis that CedarCrestone has failed to allege facts showing Oracle's market power in a cognizable market. Dkt. No. 38. CedarCrestone opposes the motion, arguing that it has sufficiently alleged an aftermarket tying claim under

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Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451, 112 S.Ct. 2072, 119 L.Ed.2d 265 (1992).

C. CedarCrestone's Allegations of Unlawful Tying

1. The Relevant Markets

The essence of CedarCrestone's antitrust claim is its contention that " Oracle has unlawfully tied software upgrade licenses for Oracle ERP software such as PeopleSoft and E-Business suites (the tying product and market) to its own tax and regulatory support services (the tied product and market) by offering the two separate products exclusively to licensees as a 'Software Upgrade License and Support' package." Dkt. No. 30 at 51 ¶ 62. CedarCrestone alleges that when Oracle sells a license for ERP software, that license typically does not expire. Id. at 52 ¶ 65. However, simply purchasing a license to Oracle ERP software does not automatically entitle licensees to either the new versions of the software, or more modest bug fixes and patches. Id. at 52-53 ¶ 65. In order to obtain the upgrade license for new versions, Oracle licensees must purchase an annual contract for a " Software Upgrade License and Support" (" SULS" ) bundle. Id. at 53 ¶ 65. If a licensee does not purchase this annual contract, or allows the contract to lapse, the licensee cannot access new versions of Oracle ERP software without relicensing or paying for back-support plus a penalty. Id. at 53 ¶ 65, 42-43 ¶ ¶ 34-35.

The SULS bundle also includes tax and regulatory support for Oracle ERP software. Id. at 53 ¶ 66. CedarCrestone alleges that the ERP software upgrades and tax and regulatory support for Oracle's ERP software are separate products because they have distinct functions, and there is a separate demand and market for the two products. Id. at 51-52 ¶ ¶ 62-63. Oracle ERP software applications consist of proprietary Oracle code that runs on computers and provides complex functionality for managing administrative functions at large institutions. Id. Many of the processes performed by Oracle's ERP software (e.g. payroll) require licensees to be in compliance with tax and regulatory requirements that are ever-changing. Id. at 52 ¶ 64. A tax and regulatory update is a patch designed to work with the underlying software and ensure that the software code is using inputs reflecting the current state of tax and regulatory obligations. Id. at 52 ΒΆ 63. By contrast to the market for Oracle ERP software which is proprietary, the downstream market for tax and regulatory support on Oracle ERP software is not proprietary or ...


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