U.S. v. Oracle Corp.

• Decision Date: 09 September 2004
• Docket Number: No. C 04-0807 VRW.,C 04-0807 VRW.
• Citation: 331 F.Supp.2d 1098
• Parties: UNITED STATES of America, et al, Plaintiffs, v. ORACLE CORPORATION, Defendant.
• Court: U.S. District Court — Northern District of California

331 F.Supp.2d 1098

UNITED STATES of America, et al, Plaintiffs, v. ORACLE CORPORATION, Defendant.

No. C 04-0807 VRW.

United States District Court, N.D. California.

September 9, 2004.

COPYRIGHT MATERIAL OMITTED

Claude F. Scott, Jr., Conrad John Smucker, J. Bruce McDonald, N. Scott Sacks, Assistant Chief, Washington, DC, Pamela P. Cole, Phillip R. Malone, Phillip H. Warren, San Francisco, CA, R. Hewitt Pate, Renata B. Hesse, Washington, DC, Chad S. Hummel, Manatt Phelps & Phillips LLP, Los Angeles, CA, Kyle David Andeer, San Francisco, CA, Greg Abbott, Barry R. McBee, Austin, TX, Edward D. Burbach, Kim Van Winkle, Mark Bernard Tobey, Austin, TX, Mark J. Bennett, Honolulu, HI, Ellen S. Cooper, Alan Michael Barr, Gary Honick, J. Joseph Curran, Jr., John Robert Tennis, Baltimore, MD, Timothy E. Moran, Boston, MA, Kristen Marie Olsen, St. Paul, MN, Jay L. Himes, New York City, Todd A. Sattler, Bismarck, ND, Arnold B. Feigin, Clare E. Kindall, Darren P. Cunningham, Steven M. Rutstein, Hartford, CT, Beth Ann Finnerty, Jennifer Lynne Edwards, Mitchell Lee Gentile, Columbus, OH, for Plaintiffs.

Gregory Lindstrom, Latham & Watkins LLP, J. Thomas Rosch, Latham & Watkins LLP, San Francisco, CA, Michele M. Pyle, Latham & Watkins LLP, New York City, Christopher S. Yates, Daniel M. Wall, Latham & Watkins LLP, San Francisco, CA, Joshua N. Holian, Latham & Watkins, San Francisco, CA, for Defendant.

FINDINGS OF FACT, CONCLUSIONS OF LAW AND ORDER THEREON

WALKER, Chief Judge.

The government, acting through the Department of Justice, Antitrust Division, and the states of Connecticut, Hawaii, Maryland, Massachusetts, Michigan, Minnesota, New York, North Dakota, Ohio and Texas, First Amended Complaint (FAC) (Doc. # 125) ¶ 3 at 5-6, seek to enjoin Oracle Corporation from acquiring, directly or indirectly, the whole or any part of the stock of PeopleSoft, Inc. Plaintiffs allege that the acquisition would violate section 7 of the Clayton Act, 15 USC § 18. Both companies are publicly traded and headquartered in this district. Jt. Stip Fact (Doc. # 218) at 1-2. The court has subject matter jurisdiction under 15 USC § 25 and 28 USC §§ 1331, 1337(a) and 1345. There is no dispute about the court's personal jurisdiction over the defendant.

Oracle initiated its tender offer for the shares of PeopleSoft on June 6, 2003. Jt. Stip of Fact (Doc. # 128) at 2; Ex. P2040. Plaintiffs brought suit on February 26, 2004. Compl. (Doc. # 1). The case was tried to the court on June 7-10, 14-18, 21-25, 28-30 and July 1, 2004, with closing arguments on July 20, 2004, and further evidentiary proceedings on August 13, 2004. Based on the evidence presented and the applicable law, the court concludes that plaintiffs have failed to carry the burden of proof entitling them to relief and, therefore, orders that judgment be entered for defendant and against plaintiffs.

INTRODUCTORY FINDINGS: INDUSTRY OVERVIEW

Products at Issue

Of the many types of computer software, such as operating system software, database software, integration software (sometimes called "middleware" in software parlance) and utilities software, this case involves only one — application software. And within this type, the present case deals with only applications that automate the overall business data processing of business and similar entities; these applications are called "enterprise application software" (EAS). Jt. Definitions (Doc. # 332) at 6. There are three main kinds of EAS. Plaintiffs single out one.

Some EAS programs are mass market PC-based applications of fairly limited "functionality" (meaning capability). Id. (Doc. # 332) at 5. See Daniel E. O'Leary, Enterprise Resource Planning Systems at 19 (Cambridge, 2000). Other EAS programs are developed by or for a specific enterprise and its particular needs; most large organizations had such specially designed EAS (called "legacy software") prior to the advent of the products in suit. Plaintiffs focus their claims on the third, intermediate category of EAS — enterprise resource planning (ERP) system software. Jt. Sub. Definitions (Doc. # 332) at 6. ERP is packaged software that integrates most of an entity's data across all or most of the entity's activities. See O'Leary, Enterprise Resource Planning Systems at 27-38. Oracle and PeopleSoft develop, produce, market and service ERP software.

These copyrighted software programs are licensed ("sold" is the term applied to these license transactions) to end users along with a continued right to use license which usually includes maintenance or upgrades of the software. To the customer, the fees to license and maintain ERP software are generally a small part, 10 to 15 percent, of the total cost of the installation and maintenance of an ERP system. Tr. at 133:12-15 (Hatfield); 655:2-4 (Maxwell); 1385:6-11 (Gorriz). An ERP installation, because of its complexity, usually requires substantial and expensive personnel training, consulting and other services to integrate the program into the customer's pre-existing or "legacy" software. Jt. Sub. Definitions (Doc. # 332) at 6. See also O'Leary, Enterprise Resource Planning Systems at 19. ERP software vendors often provide some of those services, but they are typically also performed and augmented by the customer's own staff, obtained from providers other than ERP vendors or both.

Many ERP programs were developed to address the needs of particular industries, such as banking and finance, insurance, engineering, construction, healthcare, government, legal and so forth (in industry lingo, these are called "verticals"). See Martin Campbell-Kelly, From Airline Reservations to Sonic the Hedgehog, at 169-73 (MIT, 2003). Vertical-specific ERP programs, although well suited to the needs of firms engaged in a particular industry, often are not well suited to the needs of firms in other verticals. An enterprise that relies on vertical-specific ERP software products, but whose operations embrace more than one vertical faces the task of integrating the programs. The largest and most complex organizations face particular difficulty. "[O]nly custom-written software or carefully tailored and integrated cross-industry packages [can] handle larger firms' historically idiosyncratic accounting systems and diverse overseas operations." Id. at 172.

ERP programs have been developed to handle the full range of an enterprise's activities; these include human relations management (HRM), financial management systems (FMS), customer relations management (CRM), supply chain management (SCM), Product Life Cycle Management, Business Intelligence (BI), among many others. These are called "pillars." Although ERP encompasses many pillars, see Ex. D5572, plaintiffs assert claims with respect to only two pillars, HRM and FMS. FAC (Doc. # 125) ¶ 23 at 12-13.

Within these two pillars, plaintiffs further limit their claims to only those HRM and FMS products able to meet the needs of large and complex enterprises with "high functional needs." Id. at ¶ 14 at 9. Plaintiffs label HRM and FMS products capable of meeting these high function needs "high function HRM software" and "high function FMS software," respectively. Id. ¶ 23(a)-(b) at 12-13. ERP pillars incapable of meeting these high function needs are called "mid-market" software by plaintiffs. Id. ¶ 13 at 9.

"High function software" is a term adopted by plaintiffs to describe what they contend is the separate and distinct line of commerce in which they contend competition would be lessened by the proposed acquisition. Id. at ¶ 23 at 13-14. Plaintiffs apply the term "high function" to both HRM and FMS. "High function software," as defined by plaintiffs, has no recognized meaning in the industry. See Tr. at 349:7-10 (Bergquist); 2298:6-20 (Elzinga).

Rather, industry participants and software vendors use the terms "enterprise" software, "up-market" software and "Tier One" software to denote ERP that is capable of executing a wide array of business processes at a superior level of performance. See Tr. at 274:24-275:7 (Bergquist); Tr. at 1771:5-1772:1 (Wilmington); Tr. at 1554:25-1555:7 (Wolfe); Tr. at 2180:22-2181:5 (Iansiti). Software vendors use these terms to focus sales and marketing initiatives. Tr. 2816:6-2818:8 (Knowles) (testifying that SAP divided mid-market and large enterprise at $1.5 billion based on SAP's sales resources and estimated amount of IT "spend" available from those customers).

Each ERP pillar consists of "modules" that automate particular processes or functions. HRM and FMS software each consists of numerous modules. Exs. P3010, P3011. Tr. at 268:8-269:11, 270:5-271:12 (Bergquist). HRM modules include such functions as payroll, benefits, sales incentives, time management and many others. Ex. P3010. FMS modules include such functions as general ledger, accounts receivable, accounts payable, asset management and many others. Ex. P3011.

"Core" HRM modules are those specific ERP modules that individually or collectively automate payroll, employee tracking and benefits administration. Core FMS modules are those ERP modules that individually or collectively track general ledger, accounts receivable, accounts payable and cash and asset management business processes. Core FMS and HRM modules are offered by all the ERP vendors that have HRM and FMS offerings. Ex. P3179 (Ciandrini 1/16/04 Dep) at Tr. 256:2-257:10. Large enterprise customers rarely, if ever, buy core HRM or FMS modules in isolation. Tr. at 3461:14-23 (Catz). Customarily, FMS and HRM software are purchased in bundles with other products. Tr. at 3807:21-3808:1 (Hausman). See also Tr. at 3813:12-13 (Hausman). Customers purchase a cluster of products such as Oracle's E-Business Suite that provide the customer with a "stack" of software and technology, which may include core HRM or FMS applications, add-on modules, "customer-facing" business applications such as CRM software, and the infrastructure components (application servers and database)...