As per the recent verdict given by a federal judge, Oracle Corp. (ORCL) will receive $272.0 million as compensation from its German software rival SAP AG (SAP). The federal judge turned down the $1.3 billion verdict given by the jury in a patent infringement case between the two software giants.
The judge termed the jury award as “grossly excessive”, and ascertained that Oracle’s damages were not more than $272.0 million. However, if Oracle does not accept the compensation amount, the company has the option of asking for a fresh trial. Alternatively, it can challenge the federal judge’s verdict.
Oracle’s court battle against SAP resulted in one of the biggest awards of all time in a patent violation lawsuit. In November 2010, the jury awarded Oracle $1.3 billion as compensation when TomorrowNow, a subsidiary of SAP admitted the wrongful download of millions of Oracle files.
The Jury’s verdict was based on the amount SAP would have had to pay for rights to the software and licensing negotiations with Oracle. SAP protested against the compensatory amount and said that the fine should be no more than $40 million, and it had set aside only $160 million as compensation.
SAP appealed against the jury's verdict and questioned the damage calculation methodology as Oracle would never have sold SAP rights to the software. According to SAP, the damage award should have been based on profit that Oracle lost as a result of the infringement. The federal judge agreed with SAP’s argument and granted its motion for a new trial to set damages in the event Oracle rejects the proposed $272.0 million award.
Oracle has criticised the ruling and said that the company will take every possible action to pursue the full damages. On the other hand, SAP welcomed the ruling and stated that it expects a quicker settlement of the case going forward.
Although the reduced compensation is a setback for Oracle, we believe a prolonged legal fight will further dent its sizeable cash balance going forward. Oracle is also fighting a legal battle against Hewlett-Packard Company (HPQ) over its decision to stop developing new versions of its software for high-end servers that use Intel Corp.'s (INTC) Itanium chips.
Recommendation
Oracle and SAP are the two most prominent vendors in the software industry. Analysts believe SAP is gaining momentum in the software market due to its innovative strategies and huge investment. On the other hand, Oracle is currently focusing on hardware offerings, which will likely enhance IT management, vendor consolidation and cost reduction.
Despite their fierce competition and the legal battles, SAP and Oracle have agreed to back each other’s new product lines. Oracle has paved the way for SAP customers to integrate SAP Hana with Oracle databases running SAP apps, whereas SAP has recently certified Oracle Exadata to run SAP apps. These steps are essential for both the companies as customers are seeking interoperability between the systems.
In this scenario, it will be interesting to see who gains market share in this fiercely competitive industry going forward.
We maintain our Outperform rating on Oracle over the long term (6-12 months). We believe that Oracle will continue to benefit from its dominant position in the database management and software market. However, the company remains entangled in a number of lawsuits, which will are an overhang on the stock in the near term.
Currently, Oracle has a Zacks #4 Rank, which implies a Sell rating in the near term.
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