Oracle-HP settlement lacks freedom-of-action clause, leads to $3 billion verdict

Background: HP filed a lawsuit against its former CEO, Mark Hurd, who had just joined Oracle after resigning from HP at the request of HP’s board of directors. HP, Hurd, and Oracle settled the lawsuit fairly quickly; paragraph 1 of the settlement agreement stated the following:

“Reaffirmation of the Oracle-HP Partnership. Oracle and HP reaffirm their commitment to their longstanding strategic relationship and their mutual desire to continue to support their mutual customers. Oracle will continue to offer its product suite on HP platforms, and HP will continue to support Oracle products (including Oracle Enterprise Linux and Oracle VM) on its hardware in a manner consistent with that partnership as it existed prior to Oracle’s hiring of Hurd.”

Hewlett-Packard Co. v. Oracle Corp., No. H044371, slip op. at 11 (Cal. App. June 14, 2021) (emphasis added).

But: Six months after the Hurd lawsuit settlement, Oracle announced that it would discontinue developing new releases of its products for HP’s Itanium servers. Oracle’s stated reason was that the Intel-HP microprocessor on which the server was based was reaching the end of its life. Industry observers noted that Microsoft had recently made a similar move, and also conjectured that Oracle’s decision could hurt HP.

And then: HP filed another lawsuit against Oracle, alleging that Oracle’s announcement was a breach of the Hurd lawsuit’s settlement agreement. A California trial judge agreed with HP’s interpretation of the “reaffirmation” clause quoted above; a jury awarded HP just over $3 billion for breach of contract.

Now: This week, in a 94-page opinion affirming the judgment below, an appeals court held:

Simply put, the reaffirmation clause creates an obligation to continue with an expressly identified course of dealing (offering and supporting Oracle’s products on HP’s existing platforms as long as they are sold by HP) no different from the course of dealing that had defined their strategic partnership for years prior to Oracle’s hiring of Hurd.

Id., slip op. at 44 (emphasis added).

For various reasons that I won’t go into here, it seems to me that on the merits, Oracle had the better argument. (Not least: It’s standard contract law that a contract of indefinite duration can be terminated at will by either party, as long as the terminating party gives reasonable advance notice; the appeals court gave merely a passing nod to that principle, see id. at 32, without providing even close to a satisfying explanation why the principle didn’t apply.)

Drafting lesson: With 20-20 hindsight, Oracle would have been well-served to include a pro forma clause — akin to a “management rights” clause in a collective-bargaining agreement between a company and a union — to the effect that Oracle retained the right to make business decisions in its discretion.