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TomorrowNow's Closure May Not Cure SAP's Pain

SAP's planned closure of its TomorrowNow unit by Oct. 31 may not do much to help it stave off the damage stemming from Oracle's $1 billion lawsuit.

For one thing, the move may not prevent Oracle (NASDAQ: ORCL) from pressing on with its suit, over what it claims is "corporate theft on a grand scale." Additionally, the Department of Justice (DoJ) may be signaling its plans to file criminal charges against SAP (NYSE: SAP), one expert said.

Oracle's suit charges that employees at SAP's maintenance and support unit TomorrowNow illicitly download proprietary software and confidential materials from its support systems.

TomorrowNow provides service and support for PeopleSoft applications. SAP, which acquired the firm in early 2005, aimed to use it to undercut Oracle's potentially lucrative business in providing its own support for PeopleSoft, which Oracle itself had purchased just weeks earlier.

Now, SAP may be facing more than simply Oracle.

So far, the DoJ's involvement in the case far has been limited to requesting documents on the charges from both SAP and Oracle. But those actions could lead to a criminal prosecution, Scott Christie, a former federal prosecutor, told InternetNews.com.

The DoJ typically does not get involved in lawsuits between two large companies, considering it a poor way to spend taxpayer money, said Christie, a partner at legal firm McCarter & English specializing in intellectual property and IT.

But "its involvement here makes me think that someone has a strong interest in the case, whether in Washington or in the local U.S. Attorney's office," he said.

The DoJ began looking into the case in July of last year.

At about the same time, SAP CEO Henning Kagermann admitted that TomorrowNow engaged in "inappropriate downloads." The admission came four months after Oracle first filed suit against SAP and TomorrowNow.

In its filings, Oracle said that TomorrowNow, which was founded by two former PeopleSoft executives in 2000 to offer inexpensive, third-party support for PeopleSoft applications, had downloaded "thousands of proprietary copyrighted products using the log-in credentials of Oracle customers with expired or soon-to-be-expired support rights," including Honeywell and Merck.

According to SAP, the DoJ asked it and TomorrowNow to provide documents relating to the unauthorized downloads. Both companies complied with the request, SAP has said.

Kagermann also said at the time that most of the 150 complaints in the Oracle lawsuit were unfounded, adding that SAP has no access to documents downloaded by TomorrowNow because there is a firewall between the two companies' computer systems.

Transitions at TomorrowNow

In July, SAP responded to the events by appointing SAP America's chief operating officer, Mark White, as TomorrowNow's executive chairman, in charge of managing its operations. TomorrowNow CEO Andrew Nelson later left the company along with other members of its senior management.

According to SAP spokesperson Saswato Das, the company had aimed to sell off TomorrowNow late last year, but the lawsuit killed those plans.

"We had some potential buyers interested but we realized that this would be a very complex transaction for the buyer and the seller, and as a consequence, we decided to wind down operations as of Oct. 31," Das told InternetNews.com.

[cob:Pull_Quote]Closing down TomorrowNow was also purely a decision relating to the unit's business, he added -- not about the legal case.

But Christie thinks the closure of TomorrowNow was a strategic move because it limits damages on a forward-going basis.

The move will let SAP "stop the accruing of any damages from the point it divests itself of TomorrowNow," he said.

SAP's earlier attempt to get rid of TomorrowNow may also be part of a plan to forestall a criminal prosecution, Christie said. If SAP shuts down TomorrowNow and Oracle is then motivated to mediate and resolve the lawsuit, the Department of Justice may just drop the case, he explained.

However, Christie doubts that the shutdown of TomorrowNow will truly help to stave off or end Oracle's lawsuit.

"SAP has admitted at least in part that there were some inappropriate downloads of proprietary information, and Oracle seems to be in a good position in the lawsuit to recover some damages for past conduct," he said.

Oracle declined comment on the issue.

If the lawsuit goes ahead, Christie said the chances of a criminal prosecution are strong. "There's a perception that there's going to be evidence of the theft of intellectual property, or that other criminal charges could be brought," he said.

Christie added that the situation looks worse for SAP since Oracle is also providing information to the DoJ.

"You have the aggrieved party providing information the Department would otherwise have to spend time and money on to discover," he said. Oracle seems to be presenting the Department the case on a silver platter."

It's unclear whether the closure of TomorrowNow may strengthen SAP's pleas for a mediated settlement. SAP asked for mediation last year, and a judge ruled in January that the case go to mediation.

Still, the chances of any mediation or settlement are slim, Christie said.

[cob:Special_Report]"There is no requirement of mediation, and Oracle could continue to pursue the lawsuit because it will weaken and embarrass SAP even if it may be economically advantageous to Oracle to pursue mediation," Christie said.

The next step in this process is a settlement conference on Oct. 6. If that fails to reach a conclusion, there will be a trial, the date for which has been moved down from 2009 to 2010.

Even aside from confronting Oracle in court, SAP may face another obstacle in the form of TomorrowNow's customers.

While SAP has said it would help transition them back to Oracle or to third-party support providers, there's no reason they won't file suit against TomorrowNow and even SAP, Christie said.

Selling off TomorrowNow would help solve the problem; while customers could still sue SAP, its legal defense "could be easier because its consistent position would be it didn't know what was going on, and to the extent there was no contrary evidence, they could raise that defense in any customer lawsuits," Christie said.

Oracle may fund the lawsuits to cause more harm to SAP, Christie said.

"I can see that happening," he added.