SAP admits 'inappropriate downloads' from Oracle

Downloads of Oracle files by SAP subsidiary "unacceptable," CEO Kagermann declares. Justice Department also investigating.

SAP has acknowledged in a court filing that its TomorrowNow subsidiary engaged in "inappropriate downloads" of Oracle's proprietary fixes and support documents.

SAP, a German-based enterprise software applications giant, also noted in its filing late Monday that the U.S. Justice Department has requested documents from the company and Texas-based TomorrowNow. SAP said it is cooperating.

The company made the filing in response to a lawsuit that rival Oracle filed in March. In the suit, Oracle alleged that third-party support company TomorrowNow engaged in more than 10,000 illicit downloads, in which it accessed more information than it was entitled to receive when acting on behalf of its customers who were using Oracle applications. Oracle said that, in some cases, TomorrowNow downloaded materials unrelated to the type of software that a particular TomorrowNow customer was running and, in other cases, presented Oracle support materials as its own.

SAP issued an apology and said it has taken action to resolve the issue.

"Even a single inappropriate download is unacceptable from my perspective. We regret very much that this occurred," Henning Kagermann, SAP's chief executive, said in a statement. "When I learned what happened, I promptly took action to strengthen operational oversight at TomorrowNow while assuring that we maintain excellent service for TomorrowNow's customers going forward."

SAP appointed SAP America Chief Operating Officer Mark White as TomorrowNow's executive chairman to manage the company's operations and compliance programs. Andrew Nelson, TomorrowNow's chief executive, will report to White.

"We have no evidence that Andrew was aware of these inappropriate downloads," Kagermann said in an analyst and press conference call Tuesday morning. The internal investigation is continuing.

"I told my people to do as much as possible," Kagermann said. "It's important to get entire clarity (of the situation)." SAP said that existing and new policies will be enforced at TomorrowNow, and that it will renew training for employees.

The company also noted that SAP and SAP America did not have access to Oracle's intellectual property via TomorrowNow, because its subsidiary operates on a separate system and the information is not shared.

"We don't think a jury is likely to think much of the argument that the activity was confined to a subsidiary--and that as a result SAP should be less culpable," Pat Walravens, an analyst with JMP Securities, said in a research note. "SAP argues that this conduct is not the same as 'corporate theft'--again, we think a jury might think the TomorrowNow conduct seems very much like corporate theft."

Walravens noted that the SAP-TomorrowNow debacle will be a "net positive" for Oracle, which generates $10 billion a year in support and maintenance fees.

One analyst noted that while SAP has a reputation of being a credible company, it will have to work hard to reassure customers.

"It's up to SAP to make sure that customers feel that doing business with them is not a mistake," said Peter Kuper, a Morgan Stanley analyst. "If they can't assure them, there could be a backlash, but this is not a catastrophic event that they can't recover from."

Oracle, in response, said its lawsuit provided the means to explore the extent of the issue.

"SAP CEO Henning Kagermann has now admitted to the repeated and illegal downloading of Oracle's intellectual property. Oracle filed suit to discover the magnitude of the illegal downloads and fully understand how SAP used Oracle's intellectual property in its business," Geoff Howard, Oracle's outside counsel, said in a statement.

Oracle and SAP are fierce competitors in the applications market, as well as in the lucrative support and maintenance arena.

SAP acquired TomorrowNow in 2005, shortly after Oracle acquired PeopleSoft and J.D. Edwards. TomorrowNow provides third-party maintenance and support to PeopleSoft and J.D. Edwards customers.

SAP and TomorrowNow launched a major marketing campaign to woo away Oracle customers, soon after its rival completed its major acquisition.

Honeywell and Merck, for example, signed up for TomorrowNow's services. But, according to SAP's court filing, TomorrowNow used customers' Oracle licenses and passwords to download materials unrelated to the licenses they held, unbeknownst to those customers.

SAP also admitted in its court filing that portions of TomorrowNow's PeopleSoft Daylight Saving Time offering is "substantially similar and in some instances identical" to Oracle's DST offering.

"Defendants further aver that while (TomorrowNow) TN referred to Oracle's 'DST Solution' during the course of researching and preparing TN's PeopleSoft Daylight Savings Time solution, TN also conducted its own independent research," according to the filing.

The PeopleSoft Daylight Saving Time solution features written materials on how to address daylight saving time when using PeopleSoft applications. TomorrowNow plans to discontinue the use of the materials where it is found to be similar or identical to Oracle's DST.

SAP and Oracle will have a case management hearing September 4 in the U.S. District Court for Northern California.

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