Hewlett-Packard Co. v. Oracle Corp.

Decision Date14 June 2021
Docket NumberH044371
CourtCalifornia Court of Appeals Court of Appeals
Parties HEWLETT-PACKARD COMPANY, Plaintiff and Appellant, v. ORACLE CORPORATION, Defendant and Appellant.

Counsel for Plaintiffs/Appellants Hewlett-Packard Company: Theodore J. Boutrous, Jr., Jeffrey T. Thomas, Samuel G. Liversidge, Rodney J. Stone, Brandon J. Stoker, Gibson, Dunn & Crutcher, Robert S. Frank, Jr., Choate, Hall & Stewart LLP

Counsel for Defendants/Appellants Oracle Corporation: Margaret M. Crignon, Anne M. Grignon, Grignon Law Firm, Dorian Daley, Deborah K. Miller, Peggy Bruggman, Oracle Corporation, Fred Norton, Bree Hann, The Norton Law Firm PC, Sadik Huseny, Sarah M. Ray, Latham & Watkins LLP, Steven A. Ellenberg, Ellenberg & Hull, William A. Isaacson, Karen L. Dunn, Boies, Schiller & Flexner LLP

Danner, J. Hewlett-Packard Company (HP) and Oracle Corporation (Oracle) are large technology companies with a long history of partnership. In 2010, after decades of cooperation in selling their hardware and software, HP and Oracle plunged into a disagreement over Oracle's decision to hire HP's former CEO. In an attempt to repair this public quarrel and reaffirm their strategic alliance, the companies negotiated a confidential settlement agreement. Far from resolving the controversy, it has led to years of litigation, including this appeal.

The settlement agreement contains a short paragraph, described by the parties as "the reaffirmation clause," stating each company's commitment to their strategic relationship and support of their shared customer base. Six months after signing the settlement agreement, Oracle announced it would discontinue software development on one of HP's server platforms. The present dispute centers on whether Oracle's actions violated the reaffirmation clause and, if so, the appropriate basis for any resulting damages award.

In the first phase of a bifurcated trial, the trial court construed the reaffirmation clause in the settlement agreement and found that it requires Oracle to continue to offer its product suite on certain HP server platforms until HP discontinues their sale. Following that decision, Oracle announced it would appeal the trial court's ruling and resume development of its software on HP's server platforms. In the second phase of trial, a jury found that Oracle had breached both the express terms of the settlement agreement with HP and the implied covenant of good faith and fair dealing; it awarded HP $3.014 billion in damages. Following the jury verdict, the trial court denied HP's request for prejudgment interest under Civil Code section 3287.

Oracle has appealed the judgment, and HP has filed a cross-appeal. In its appeal, Oracle raises the following issues: (1) whether the reaffirmation clause creates a binding obligation for Oracle to continue to offer its software product suite on certain HP server platforms; (2) whether the evidence of Oracle's conduct supports HP's claims for breach of contract and breach of the implied covenant of good faith and fair dealing, or whether HP's contract claim is properly characterized as a claim for anticipatory breach, in which case HP waived its right to damages by accepting performance; and (3) whether HP's $3.014 billion damages award penalized Oracle's exercise of its constitutionally protected right to appeal prior trial court rulings and was based upon an impermissibly speculative damages model. In its cross-appeal, HP contends the trial court erroneously denied its request for limited prejudgment interest under Civil Code section 3287.

For the reasons set out below, we affirm the judgment. Specifically, we conclude that the reaffirmation clause requires Oracle to continue to offer its product suite on certain HP server platforms, and the trial court did not err in submitting to the jury the breach of contract and implied covenant claims. On the subject of damages, we reject Oracle's argument that the judgment must be reversed based on violations of its constitutional right to petition and because HP's expert's testimony on damages was impermissibly speculative under California law and should have been excluded. Finally, we decide HP has not shown an abuse of discretion in the trial court's denial of prejudgment interest.

A. Factual Background

To help explain our conclusions in these appeals, we set out in some detail the factual background of the relationship between HP and Oracle, their products, and the events leading up to the relevant dispute.1

1. HP's Itanium Servers and Strategic Relationship with Oracle

A server is a computer system that performs tasks too big or complex for a personal computer or notebook. HP is a computer technology company that in 2010 manufactured, among other products, computer servers. HP's high-end "Itanium" servers (hereafter Itanium or Itanium servers) are the technology at the center of these appeals. Oracle is a technology company that develops software for business clients and, in the relevant time period, was a significant supplier of software for the high-end server market, including for HP's Itanium servers.

Itanium servers run on HP's proprietary Unix ("HP-UX") operating system and use the Itanium microprocessor, which HP jointly developed with Intel Corporation. The hardware and operating system together form the server "platform." The platform is fitted with software; together they comprise the "technology stack"—essentially "layers" of hardware and software that work together to deliver an integrated product to HP's customers.

Database software constitutes an essential layer in the technology stack. Oracle is a major provider of database software for the high-end server market. Over 80 percent of HP's Itanium systems use Oracle's database software. Oracle also provides "middleware" software, which sits between the database software and the software applications.

"Porting" is the process of taking software that has been written on one operating system and processor architecture—like Oracle's database, middleware, and software applications—and making it available on another system, like HP's Itanium platform. The porting process is most involved when software must be configured and tested to work with a new server platform, requiring a significant investment of time and resources, especially by the software provider. The process continues even after software is established on a platform, as software vendors constantly prepare new software releases, which need to be tested and tuned to work on the platform.

HP started to sell Itanium in 2002. In 2005, the CEOs of HP, Oracle, and Intel jointly launched Itanium on a larger scale. HP and Oracle worked together to port Oracle's database and middleware products to Itanium and did so without any contract or payment to Oracle. HP and Oracle each bore the costs associated with the work it had done. Similarly, HP and Oracle did not sign a contract or make payments when Oracle ported subsequent releases of database or middleware software to Itanium. HP later contracted to pay Oracle up to $10.3 million to port one of its application software products, the E-Business Suite, to Itanium. HP provided similar funding, under contract, to Oracle to port a few other application products to Itanium. However, most of Oracle's porting work to Itanium—about 99 percent—happened without any contract or payments between HP and Oracle.

Once Oracle ports to a platform, it typically guarantees ongoing support under its lifetime support policy to Oracle's customers on that platform. A variety of technological, market, and cost factors thus influence the decision to port to a platform. The decision is a discretionary one based on business objectives and made directly by Oracle's CEO. Only a "small percentage" of Oracle's porting decisions are governed by contract. Oracle may stop porting to a platform either because the hardware vendor is moving customers to a new platform, or because Oracle has decided not to develop new releases for the platform even though the hardware vendor continues to market and sell it. The only example offered at trial of Oracle choosing to stop developing software for a platform still being sold was for IBM's Power processor running on Linux. It offered no such examples involving HP.

The Itanium product line was highly profitable for HP, generating over $2 billion in annual profits in 2010. According to Ann Livermore,2 who at the time was the senior vice-president of HP's enterprise business, Itanium was not HP's biggest business "but in many ways it was [HP's] most important business from a customer perspective, because ... customers were running such important applications, and [HP] had a lot of really big customers who used those products."

Oracle's decision to port its software to Itanium benefitted both Oracle and HP. Oracle was able to deploy its software on HP's platform, selling database, middleware, and some application products, while HP had "the leading software products" available on its servers and could provide customers with an integrated and functional solution. Marketing material from 2009 designed for use with customers touted the "HP and Oracle Global Alliance" based on "[o]ver 25 years of collaborative partnership," "[m]ore than 140,000 joint customers," and "[m]ore than $6 billion" in annual revenue generated by the joint business. It described HP's and Oracle's joint support of solutions and summarized each company's substantial market share in the other's products: 41 percent of Oracle's database customers used HP systems, and 84 percent of Itanium servers ran Oracle's database software.

Oracle ported its software to HP server platforms other than Itanium, including to HP's platforms that preceded Itanium. For example, when HP stopped selling its PA-RISC servers in December 2008, Oracle continued to port to PA-RISC after that date. These actions enabled Oracle to continue...

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