Judge agrees damages model in Oracle cloud class-action

Link between compliance and sales appeared to boost cloud performance in case disputed by Big Red

A US class-action case claiming Oracle falsely inflated its cloud revenue by threatening customers with audits is set to continue after a federal judge approved the damages model proposed by the plaintiffs.

United States District Judge Beth Labson Freeman has certified an "out of pocket" approach to determining damages incurred by investors as a result of Oracle's alleged false statements about its cloud revenue. Oracle has consistently insisted the case – which dates back to 2018 – has no merit.

Oracle had argued that the City of Sunrise Firefighters' Pension Fund, which is bringing the case, had failed to meet the requirements to disclose its damages model.

Expert witness David Tabak has now produced a class-wide "out of pocket" damages model tied to omission-based price inflation that sets out the principle for calculating damages.

The judge ruled [PDF] the approach met all requirements for class certification and granted the case to continue.

Last year Oracle failed to block the case, but succeeded in reducing its scope. The judge said the plaintiffs had succeeded in arguing a narrow omission theory of securities fraud, based on Oracle's prior statements explaining why its cloud growth was slowing down.

The plaintiffs seek to represent a group of investors who bought shares in Oracle between 15 March 2017 and 19 June 2018. The lawsuit claims Oracle misled its investors about the sales of its cloud products by threatening customers with expensive software licensing audits unless they agreed to use Oracle's cloud software. The suit also alleges that Oracle offered customers large discounts for on-premises products if they accepted short-term cloud contracts they didn't want and were unlikely to use.

Oracle has contested this point, saying that sales from the deals were real and accurately represented.

A confidential witnesses statement produced last year by the pension fund's legal team [PDF] alleged at least 80 percent of Middle East and Africa cloud revenue was generated by "inserting cloud into compliance-based deals." It was "crystal clear these [sales] are fake" because "none of these deals are renewed," one of the witnesses was quoted as saying.

According to the statement, he and other members of Oracle sales teams discussed their "audit-driven cloud deals." Meanwhile, prepared sales strategy slides "would very clearly say" that Oracle's License Management Services division was engaged in "compliance deals."

He said "executives were instructed to offer customers a 90 percent discount on on-premises licenses if they purchased $300,000 worth of cloud subscriptions" and "assure the customer that they did not need to use the product, and that the purchase of cloud products was merely a necessary condition to unlocking the on-premises discount."

Judge Freeman previously noted in a 2021 order that "Oracle does not have an independent duty to disclose its sales tactics." ®

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