Oracle Corporation et al v. SAP AG et al

Filing 1059

RESPONSE (re 1051 MOTION to Stay Defendants' Motion For Stay of Execution of Judgment Through Appeal and Approval of Proposed Security Pursuant to FRCP 62 ) filed byOracle International Corporation. (Attachments: # 1 Proposed Order)(Alinder, Zachary) (Filed on 4/13/2011)

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

BINGHAM MCCUTCHEN LLP
DONN P. PICKETT (SBN 72257)
GEOFFREY M. HOWARD (SBN 157468)
HOLLY A. HOUSE (SBN 136045)
ZACHARY J. ALINDER (SBN 209009)
BREE HANN (SBN 215695)
Three Embarcadero Center
San Francisco, CA 94111-4067
Telephone: [phone]
Facsimile: 415.393.2286
[e-mail]
[e-mail]
[e-mail]
[e-mail]
[e-mail]
BOIES, SCHILLER & FLEXNER LLP
DAVID BOIES (Admitted Pro Hac Vice)
333 Main Street
Armonk, NY 10504
Telephone:
[phone]
Facsimile:
[phone]
[e-mail]
STEVEN C. HOLTZMAN (SBN 144177)
FRED NORTON (SBN 224725)
1999 Harrison St., Suite 900
Oakland, CA 94612
Telephone:
[phone]
Facsimile:
[phone]
[e-mail]
[e-mail]
DORIAN DALEY (SBN 129049)
JENNIFER GLOSS (SBN 154227)
500 Oracle Parkway, M/S 5op7
Redwood City, CA 94070
Telephone: [phone]
Facsimile: 650.506.7144
[e-mail]
[e-mail]
Attorneys for Plaintiffs Oracle USA, Inc., et al.
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
OAKLAND DIVISION
ORACLE USA, INC., et al.,
No. 07-CV-01658 PJH (EDL)
ORACLE’S OPPOSITION TO SAP’S MOTION
Plaintiffs,
FOR STAY OF JUDGMENT THROUGH
v.
APPEAL AND APPROVAL OF PROPOSED
SECURITY PURSUANT TO FRCP 62
SAP AG, et al.,
Date: May 4, 2011
Defendants.
Time: 9:00 a.m.
Place: 3rd Floor, Courtroom 3
Judge: Hon. Phyllis J. Hamilton
Case No. 07-CV-01658 PJH (EDL)

ORACLE’S OPPOSITION TO SAP’S MOTION FOR STAY AND APPROVAL OF SECURITY

TABLE OF CONTENTS

1

Page(s)

2
3
4
5
6

I.
II.
III.
IV.
V.

7
8
9
10
11
12
13
14
15

VI.
VII.

INTRODUCTION ............................................................................................................. 1
FACTUAL BACKGROUND ............................................................................................ 2
LEGAL STANDARD FOR ALTERNATIVE FORM OF SECURITY ........................... 3
AS SAP CONCEDES, IT CAN EASILY OBTAIN A BOND ......................................... 4
SAP’S PROPOSED ESCROW AGREEMENT BENEFITS SAP BUT EXPOSES
ORACLE TO RISK AND UNCERTAINTY .................................................................... 7
A.
The Proposed Escrow Agreement Would Expose Oracle To Tax Risks ............... 7
1.
To Set Up A Large Tax Deduction, SAP Claims That The
Proposed Escrow Qualifies As A QSF....................................................... 7
2.
There Are Serious Questions About Whether The Proposed
Escrow Qualifies As A QSF ...................................................................... 8
3.
SAP’s Deduction Of Amounts Transferred To The Proposed
Escrow Would Conflict With Oracle’s Reporting And Would
Create Tax Risk For Oracle ....................................................................... 9
4.
SAP Refused To Indemnify Oracle For These Tax Risks ....................... 11
B.
Oracle Should Not Have To Indemnify SAP’s Escrow Agent ............................ 11
THE COURT SHOULD NOT ORDER THE PARTIES INTO A COMPLEX
CONTRACTUAL RELATIONSHIP .............................................................................. 12
CONCLUSION ................................................................................................................ 14

16
17
18
19
20
21
22
23
24
25
26
27
28
i

Case No. 07-CV-01658 PJH (EDL)

ORACLE’S OPPOSITION TO SAP’S MOTION FOR STAY AND APPROVAL OF SECURITY

1

TABLE OF AUTHORITIES

2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17

Page(s)
FEDERAL CASES
Bolt v. Merrimack Pharms. Inc.,
No. S-04-0893 WBS, 2005 U.S. Dist. LEXIS 46591 (E.D. Cal. Sept. 20, 2005) .............. 5, 6
Crowley v. Chait,
No. 85-2441, 2005 U.S. Dist. LEXIS 40830 (D.N.J. Sept. 23, 2005) ................................ 5, 6
Fed. Prescription Serv., Inc. v. Am. Pharm. Ass’n,
636 F.2d 755 (D.C. Cir. 1980) ................................................................................................ 3
Flora v. United States,
362 U.S. 145 (1960) .............................................................................................................. 11
Funai Elec. Co., Ltd. v. Daewood Elecs. Corp.,
No. C-04-01830 JSC, 2009 U.S. Dist. LEXIS 35371 (N.D. Cal. Apr. 9. 2009)........... 3, 4, 12
Headlands Reserve, LLC v. Ctr. for Nat’l Lands Mgmt.,
523 F. Supp. 2d 1113 (C.D. Cal. 2007) .................................................................................. 4
Honolulu Waterfront Ltd. P’ship v. Aloha Tower Dev. Corp.,
692 F. Supp. 1230 (D. Haw. 1988), aff’d, 891 F.2d 295 (9th Cir. 1989) ............................. 13
Hynix Semiconductor, Inc. v. Rambus, Inc.,
No. C-00-20905 RMW, 2010 U.S. Dist. LEXIS 97751 (N.D. Cal. Sept. 17, 2010) .............. 4
Indeck Energy Servs., Inc. v. Comm’r,
85 T.C.M. (CCH) 1128 (2003) ............................................................................................. 10

18
19
20
21
22

Int’l Telemeter, Corp. v. Hamlin Int’l Corp.,
754 F.2d 1492 (9th Cir. 1985)........................................................................................... 4, 12
Poplar Grove Planting & Refining Co., Inc. v. Bache Halsey Stuart, Inc.,
600 F.2d 1189 (5th Cir. 1979)............................................................................................. 4, 5
Sibia Neurosciences, Inc. v. Cadus Pharm. Corp.,
No. 96-1231-IEG (POR), 1999 WL 33554683 (S.D. Cal. Mar. 10, 1999)........................... 13

23
24
25
26
27

Stockton Exec. Limousine Charter Serv., Inc. v. Union Pac. R.R.,
No. S-04-1999-LKK, 2006 WL 769623 (E.D. Cal. 2006)...................................................... 4
Townsend v. Holman Consulting Corp.,
929 F.2d 1358 (9th Cir. 1990)............................................................................................... 12
United States v. Kurtz,
528 F. Supp. 1113 (E.D. Pa. 1981) ......................................................................................... 5

28
ii

Case No. 07-CV-01658 PJH (EDL)

ORACLE’S OPPOSITION TO SAP’S MOTION FOR STAY AND APPROVAL OF SECURITY

TABLE OF AUTHORITIES
(continued)

1

Page(s)

2

FEDERAL STATUTES

3

I.R.C. § 11(b)(1)(D) .................................................................................................................... 10

4
5
6

I.R.C. § 468B ................................................................................................................................ 8
STATE STATUTES
Cal. Rev. & Tax Code § 23151(f)(2) .......................................................................................... 10

7

RULES
8
9
10
11

Fed. R. Civ. P. 62 ...................................................................................................................... 1, 3
Fed. R. Evid. 602 .......................................................................................................................... 5
REGULATIONS

12

Treasury Regulations § 1.461-1(a)............................................................................................ 7, 9

13

Treasury Regulations § 1.468B-1 ............................................................................................. 7, 8

14

Treasury Regulations § 1.468B-9 ................................................................................................. 8

15

OTHER AUTHORITIES

16

Int. Rev. Man. 36.2.6.2.3 ............................................................................................................ 10

17

Julie A. Roin, Unmasking the “Matching Principle” in Tax Law, 79 Va. L. Rev. 813 (1993).... 9

18
19
20
21
22
23
24
25
26
27
28
iii

Case No. 07-CV-01658 PJH (EDL)

ORACLE’S OPPOSITION TO SAP’S MOTION FOR STAY AND APPROVAL OF SECURITY

1

I.

INTRODUCTION

2

SAP finishes its Motion where it should have started – by conceding that it could

3

finalize a bond in just 14 days. Rather than just do that, as directed under Federal Rule of Civil

4

Procedure 62, SAP asks this Court to order Oracle into a complex escrow contract (the

5

“Proposed Escrow Agreement,” attached as Exhibit 1 to the Lanier Declaration, Dkt. No. 1052).

6

Due to the significance and complexity of SAP’s request, Oracle has spent over 100 attorney

7

hours in the past three months attempting in good faith to negotiate an escrow agreement that

8

would not leave Oracle worse off than if SAP simply posted a bond. The Proposed Escrow

9

Agreement, which SAP significantly modified even on the date that it filed this Motion, does just

10

that. It would allow SAP to reap significant financial benefits by avoiding bond fees while

11

simultaneously claiming a huge current tax deduction. At the same time, it potentially would

12

trigger significant adverse income tax consequences for Oracle. Although Oracle has spent

13

months negotiating with SAP, Oracle objects to the Proposed Escrow Agreement because it

14

would expose Oracle to far more risk and uncertainty than a bond ever would.

15

The Court should deny the Motion for at least three reasons.

16

First, SAP has not shown it is impossible or impracticable for it to post a full

17

supersedeas bond. This is the legal test SAP must meet but its motion makes no mention of it,

18

perhaps because SAP admits that it could post a full bond within 14 days. The expense and

19

inconvenience that SAP speculates it “might” incur primarily arise from obligations SAP

20

assumed after it knew it would need to provide this security and, in any event, do not make a

21

bond impossible or impracticable to obtain.

22

Second, SAP has not shown that the Proposed Escrow Agreement would

23

safeguard Oracle’s interests, another legal requirement. The Proposed Escrow Agreement

24

instead subjects Oracle to potential tax risks and uncertain indemnification liability. Now,

25

because Oracle will not assume those risks voluntarily, SAP asks the Court to impose them.

26

Doing so would prejudice Oracle and only safeguard SAP’s interests by providing the

27

convenience and financial benefit SAP identifies. That result would turn the law on its head.

28

Third, SAP asks the Court to do something that a Court cannot – force a party to
1

Case No. 07-CV-01658 PJH (EDL)

ORACLE’S OPPOSITION TO SAP’S MOTION FOR STAY AND APPROVAL OF SECURITY

1

enter into a highly complex contract with the other side. The gravity of what SAP asks this

2

Court to do cannot be overstated, as it concerns the investment, control, disbursement, and tax

3

treatment of over $1.3 billion in escrow funds.

4

The Court should deny SAP’s Motion. The Court should order SAP to obtain a

5

supersedeas bond in the agreed initial amount of $1,325,033,547 within 14 days of the Court’s

6

Order, with further instructions for the bonding company to provide a quarterly report to the

7

Parties and increase the bond amount as needed to cover post-judgment interest accrued in the

8

future.

9

II.

10

FACTUAL BACKGROUND
At SAP’s request, the Parties began negotiations over an alternative form of

11

security on December 17, 2010. See Alinder Declaration in Support of Oracle’s Opposition

12

(“Alinder Decl.”), Ex. A. SAP proposed an escrow agreement. See id. Oracle agreed to meet

13

and confer in an attempt to negotiate an escrow agreement that would provide adequate security

14

for the judgment but did not subject Oracle to any additional risk, costs or uncertainty. See id., ¶

15

2. By the time the Court entered judgment on February 3, 2011, the Parties had devoted

16

considerable time to the negotiations and would devote more. See id., ¶ 3.

17

To facilitate discussions, Oracle agreed to extend the stay on execution of the

18

judgment three times (and offered a fourth, unaccepted extension before SAP filed this Motion).

19

See id. To date, Oracle has devoted well over 100 attorney hours negotiating the terms of an

20

acceptable escrow agreement. See id. The Parties first exchanged approximately five drafts of a

21

proposed escrow term sheet, followed by exchange of at least ten drafts related to the Proposed

22

Escrow Agreement itself, about which the Parties held at least five telephonic meet and confers

23

and exchanged dozens of emails. See id., ¶ 4. During these negotiations, when Oracle asked

24

why SAP preferred the escrow, SAP only cited “convenience,” “cost” and “internal

25

administrative reasons.” See id., ¶ 4 & Ex. B. SAP never explained or revealed that it had

26

entered into the third party agreements (in one case two days before initially proposing an

27

escrow) which it now says “might” make the bond inconvenient or expensive. See Declaration

28

of Michael Junge in Support of SAP’s Motion for Stay, Dkt. No. 1054 (“Junge Decl.”), ¶¶ 2
Case No. 07-CV-01658 PJH (EDL)
2
ORACLE’S OPPOSITION TO SAP’S MOTION FOR STAY AND APPROVAL OF SECURITY

1

(revealing December 15, 2010 credit facility, entered two days prior to first contacting Oracle

2

about the proposed escrow) & 3-6. At no time did SAP state it would take only 14 days to obtain

3

the bond. See Alinder Decl., ¶ 5.
On March 24, 2011, both sides needed to obtain final client approval on the

4
5

overall escrow agreement and one principal item remained in dispute between counsel: Oracle

6

did not agree to indemnify SAP’s Escrow Agent (an obligation Oracle would not have with a

7

bond). See id., ¶ 6. 1
That same morning, SAP informed Oracle that it had also decided to change the

8
9

tax reporting section in the Proposed Escrow Agreement back to language that the Parties had

10

abandoned a week earlier, purporting to treat the escrow as a “qualified settlement fund”

11

(“QSF”) under U.S. Treasury Regulations. 2 See id. Earlier, SAP had agreed to “give up” this

12

tax language to “alleviate Oracle’s concern regarding the tax implications of a QSF and its

13

request for a tax indemnity.” See id., Ex. C. SAP explained this filing-day change, stating that

14

the “proposals discussed have been and are subject to client approval,” and that SAP “believe[d]

15

this is the most appropriate form of security for both parties under all of the circumstances.” See

16

id., ¶ 7 & Exs. D & E. SAP rejected Oracle’s offer for a further extension of the filing deadline

17

to allow time to resolve the outstanding issues, and filed this Motion pursuant to Federal Rule of

18

Civil Procedure 62, Dkt. No. 1051 (the “Motion”). See id.

19

III.

LEGAL STANDARD FOR ALTERNATIVE FORM OF SECURITY
“Because the stay operates for the appellant’s benefit and deprives the appellee of

20
21

the immediate benefits of his judgment, a full supersedeas bond should be the requirement in

22

normal circumstances . . . .” Fed. Prescription Serv., Inc. v. Am. Pharm. Ass’n, 636 F.2d 755,

23

760 (D.C. Cir. 1980) (emphasis supplied). “The general rule is for the district court to set a

24
1

25

The proposed tax reporting and tax indemnity language also was subject to client approval. See
Alinder Decl., ¶ 6.

26

2

27

The tax implications of treatment as a qualified settlement fund are discussed in detail in
Section V.A. below.

28
3

Case No. 07-CV-01658 PJH (EDL)

ORACLE’S OPPOSITION TO SAP’S MOTION FOR STAY AND APPROVAL OF SECURITY

1

supersedeas bond in the full amount of the judgment plus interests, costs, and damages for

2

delay.” Funai Elec. Co., Ltd. v. Daewood Elecs. Corp., No. C-04-01830 JSC, 2009 U.S. Dist.

3

LEXIS 35371, at *3 (N.D. Cal. Apr. 9. 2009) (citation omitted). SAP must “objectively

4

demonstrate” why the Court should “depart from the usual requirement of a full security

5

supersedeas bond,” and that its Proposed Escrow Agreement meets the requirements for alternate

6

forms of security under Federal law. Poplar Grove Planting & Refining Co., Inc. v. Bache

7

Halsey Stuart, Inc., 600 F.2d 1189, 1191 (5th Cir. 1979).
Courts only accept “an alternate form of security . . . where two conditions are

8
9

met: (1) it is impossible or impracticable for the party to post the supersedeas bond, and (2) the

10

proposed alternative is adequate to safeguard the interests of the other party.” Hynix

11

Semiconductor, Inc. v. Rambus, Inc., No. C-00-20905 RMW, 2010 U.S. Dist. LEXIS 97751, at

12

*12 (N.D. Cal. Sept. 17, 2010) (citing Olympia Equip. Leasing Co. v. Western Union Tel., 786

13

F.2d 794, 796 (7th Cir. 1986)).

14

Courts generally accept an escrow arrangement as an alternative form of security

15

only when the parties have agreed to the escrow terms. See, e.g., Funai, 2009 U.S. Dist. LEXIS

16

35371, at *5 (ordering a supersedeas bond for 125% of the judgment amount, even though

17

plaintiff did not object to escrow, but leaving open option of escrow “if the parties can reach

18

agreement as to the terms.”); Int’l Telemeter, Corp. v. Hamlin Int’l Corp., 754 F.2d 1492 (9th

19

Cir. 1985) (“The escrow account was only court ordered pursuant to stipulation of the parties.”)

20

(emphasis supplied). This makes sense. Courts do not make contracts for parties, and certainly

21

not complex escrow agreements like the one SAP proposes. See, e.g., Headlands Reserve, LLC

22

v. Ctr. for Nat’l Lands Mgmt., 523 F. Supp. 2d 1113, 1123 (C.D. Cal. 2007) (“Courts do not

23

make contracts for the parties.”) (citation omitted); Stockton Exec. Limousine Charter Serv., Inc.

24

v. Union Pac. R.R., No. S-04-1999-LKK, 2006 WL 769623, at *6 (E.D. Cal. 2006) (“[A] court

25

does not have the power to create for the parties a contract which they did not make . . . .”)

26

(citation omitted).

27

IV.

28

AS SAP CONCEDES, IT CAN EASILY OBTAIN A BOND
An alternative security “is appropriate only where it is impossible or
Case No. 07-CV-01658 PJH (EDL)
4
ORACLE’S OPPOSITION TO SAP’S MOTION FOR STAY AND APPROVAL OF SECURITY

1

impracticable for the party to post a bond.” Hynix Semiconductor, 2010 U.S. Dist. LEXIS

2

97751, at *12 (emphasis supplied). The “desire to avoid incurring the expense of giving a

3

supersedeas bond” is not sufficient to meet the standard for impracticability. Crowley v. Chait,

4

No. 85-2441, 2005 U.S. Dist. LEXIS 40830, at *4-5 (D.N.J. Sept. 23, 2005); United States v.

5

Kurtz, 528 F. Supp. 1113, 1115 (E.D. Pa. 1981) (requiring showing of “extraordinary

6

circumstances” for approval of security other than a bond). SAP’s Declarations demonstrate that

7

SAP has failed to prove impracticability under these standards.
SAP’s Corporate Risk Manager avers that a bond would cost more than an escrow

8
9

arrangement. See Declaration of Marcin Plonka in Support of SAP’s Motion to Stay, Dkt. No.

10

1053 (“Plonka Decl.”), ¶ 5 (“It would save Defendants millions of dollars if they could secure

11

the judgment in this case through an escrow agreement as opposed to a supersedeas bond.”).

12

However, posting a full bond rather than paying the judgment is a “privilege” to the judgment

13

debtor; the Federal Rules contemplate those expenses. Poplar Grove, 600 F.2d at 1191. The

14

fact that the judgment is large, requiring a large bond, does not make the bond impracticable to

15

obtain. See, e.g., Bolt v. Merrimack Pharms. Inc., No. S-04-0893 WBS, 2005 U.S. Dist. LEXIS

16

46591, *12 (E.D. Cal. Sept. 20, 2005) (bond not impracticable where defendant claims “financial

17

hardship,” but not that it would cause defendant to “face bankruptcy” or “jeopardize[] its other

18

creditors”).
SAP’s General Counsel says that over the past year, including after the jury

19
20

verdict in this matter, SAP voluntarily entered into credit facilities and other financial

21

arrangements, which “might” restrict SAP’s ability to obtain a bond. Junge Decl., ¶ 6. 3 Despite

22

the passage of time and the significant efforts expended in meet and confer, Mr. Junge admits

23

that SAP never has confirmed that its creditors would object to a bond or what amount, if any,

24
3

25
26
27

Oracle objects to paragraphs 3-4 and 6 of the Junge Declaration as improper speculation and
lacking foundation. Fed. R. Evid. 602. The Junge Declaration does not establish any basis for
statements about what bond issuers “would require” or any basis for his statement that a bond
“might cause [SAP’s] creditors to seek additional concessions from Defendants, such as a fee for
the consent, a requirement that the current secured creditors be provided in rem security, an
increased interest rate, or other fees.” Junge Decl., ¶¶ 3-4 and 6.

28
5

Case No. 07-CV-01658 PJH (EDL)

ORACLE’S OPPOSITION TO SAP’S MOTION FOR STAY AND APPROVAL OF SECURITY

1

they would request to receive their consent. See id. He even concedes that “SAP AG might be

2

able to secure the agreement of the creditors . . . allowing Defendants to” post a bond. Id.

3

Despite these predicted (but unsupported) hurdles, Mr. Plonka confirms that SAP

4

can get the bond in short order: “I estimate that the administrative process of obtaining the bond

5

could take 14 days after the Court’s order is entered.” Plonka Decl., ¶ 6; Motion at 8:17-20.

6

Nothing in these declarations demonstrates impossibility or impracticability.
Further, even if Mr. Junge’s speculation about inconvenience and expense turned

7
8

out to be correct, the cost imposed by creditors under agreements entered by SAP with full

9

knowledge of their consequences cannot justify the alternate security. See Crowley, 2005 U.S.

10

Dist. LEXIS 40830, at *4-5; Bolt, 2005 U.S. Dist. LEXIS 46591, at *12. Any restrictions

11

imposed by SAP’s credit facilities are a problem entirely of SAP’s making. SAP entered these

12

credit agreements over the past year, including one after the jury verdict and just two days before

13

SAP first proposed using an escrow agreement to Oracle. See Junge Decl., ¶ 2; see Alinder

14

Decl., Ex. A. SAP knew before entering these agreements that it either already owed well over

15

$1 billion in damages to Oracle (in the case of the RCF facility) or, at the very least, that it could

16

very well owe substantially more than the $40 million it claimed to owe Oracle at trial (in the

17

case of the Sybase facility and the USPP). See Junge Decl., ¶ 2. In addition, if SAP’s credit

18

arrangements require creditor consent to approve a bond, surely the creditors also had to consent

19

to the additional credit facilities SAP entered last year. See id. Thus, SAP asks this Court to treat

20

the minor inconvenience it would suffer in seeking further agreement from these creditors as

21

“impracticability,” even though SAP must also have sought their consent for other recent

22

“financial indebtedness” when it suited SAP’s own needs. See Junge Decl., ¶¶ 2-6. 4 SAP’s

23
24
25
26
27

4

Mr. Junge also claims that the bond issuer “would also require as a condition of issuing a bond
that SAP AG or its affiliates post cash collateral or other in rem security, or agree in the future to
post cash collateral or other in rem security.” Junge Decl., ¶ 4. However, he then states that only
the “in rem security” not the “cash collateral” would be prohibited as “financial indebtedness”
under its credit facilities. Id. Thus, SAP concedes that it can meet the demands of the bond
issuers and stay within the terms of these credit facilities by posting cash collateral.

28
6

Case No. 07-CV-01658 PJH (EDL)

ORACLE’S OPPOSITION TO SAP’S MOTION FOR STAY AND APPROVAL OF SECURITY

1

evidence fails to establish any cost or difficulty with certainty, and falls far short of

2

demonstrating impossibility or impracticability.

3

V.

4

SAP’S PROPOSED ESCROW AGREEMENT BENEFITS SAP BUT
EXPOSES ORACLE TO RISK AND UNCERTAINTY
SAP’s Proposed Escrow Agreement also fails the second prong of the test for

5
6

alternative forms of security. First, SAP’s apparent intention to claim a tax deduction at the time

7

of its transfer to the escrow exposes Oracle to a risk that the IRS could assess against Oracle, for

8

the same period, a potentially large tax liability. Second, the Proposed Escrow Agreement would

9

expose Oracle to cost of defense and indemnification liability. Neither risk would exist if SAP

10

posted a bond.

11

A.

The Proposed Escrow Agreement Would Expose Oracle To Tax
Risks

12

1.
13

To Set Up A Large Tax Deduction, SAP Claims That The
Proposed Escrow Qualifies As A QSF

SAP “plan[s]” to have the proposed escrow treated as a QSF so that SAP can take

14
15

advantage of “certain Congressionally-mandated tax benefits.” Motion at 5-6. The tax rules

16

governing QSFs are set out in Treasury Regulations §§ 1.468B-1 through 1.468B-5, 5 and the

17

only material benefit for a transferor under those rules is that the transfer is deemed to constitute

18

“economic performance.” Treas. Reg. § 1.468B-3(c)(1). Economic performance is one of the

19

criteria that SAP would need to meet in order to claim a tax deduction related to its liability to

20

Oracle. Treas. Reg. § 1.461-1(a)(2)(i).
Thus, SAP intends to seek QSF treatment so that it can take a tax deduction worth

21
22

hundreds of millions of dollars that SAP could not claim if it simply posted a bond. As

23

explained below, by claiming that deduction, SAP would expose Oracle to a significant tax risk,

24
25
26
27

5

References to “Treasury Regulations” or “Treas. Reg.” are to Title 26 of the Code of Federal
Regulations. References to the “Code” or “I.R.C.” are to the Internal Revenue Code of 1986, as
amended, Title 26 of the United States Code. Except as otherwise specified, “Section”
references are to sections of the Code.

28
7

Case No. 07-CV-01658 PJH (EDL)

ORACLE’S OPPOSITION TO SAP’S MOTION FOR STAY AND APPROVAL OF SECURITY

1

even though SAP concedes (see Motion at 6-7) that Oracle should not be liable for any current

2

tax.
2.

3

There Are Serious Questions About Whether The Proposed
Escrow Qualifies As A QSF

4

Pursuant to Code Section 468B and the applicable Treasury Regulations, a QSF is

5

only one of several possible classifications for an escrow. As the name suggests, the regulations

6

governing “qualified settlement funds” were designed to deal with settlements. QSF status is

7

reserved for funds that are “established to resolve or satisfy one or more” claims for legal

8

liability. 6 Treas. Reg. § 1.468B-1(c)(2) (emphasis supplied). Escrows that provide a security

9

arrangement with respect to disputed funds or property may be classified instead as “disputed

10

ownership” accounts pursuant to Treasury Regulations Section 1.468B-9. 7 Unlike contributions

11

to a QSF, contributions to a “disputed ownership” account are deductible, if at all, only when

12

they are paid out to another claimant. See Treas. Reg. § 1.468B-9(e)(2)(i) (transfer from

13

disputed ownership account treated as transfer from transferor to claimant for purpose of

14

determining timing of deduction).
SAP has not agreed to any settlement of Oracle’s claims. To the contrary, SAP

15
16

continues – through post-trial motions, including this Motion to stay the judgment through its

17

planned appeal – to contest this Court’s judgment against it on those claims. Accordingly,

18

SAP’s transfer to an escrow may not be seen to “resolve or satisfy” any of Oracle’s claims.
Since the Proposed Escrow Agreement would simply provide security for SAP’s

19
20

potential liability to Oracle, and would not resolve or satisfy that liability, there are serious

21

questions as to whether it constitutes a QSF. For example, if the IRS views the escrow as a

22

“disputed ownership fund,” SAP’s transfer to the escrow would not entitle SAP to the $1.3

23
6

24
25
26
27

Although the regulations do not include a general definition of the term “resolve or satisfy,”
they provide that, in the case of a liability to provide services or property, the liability must be
“extinguished by a transfer or transfers to the fund, account or trust.” Treas. Reg. § 1.468B1(f)(1).
7

A disputed ownership account is any court-supervised “escrow account, trust, or
fund . . . established to hold money or property subject to conflicting claims of ownership” that is
not a QSF. Treas. Reg. § 1.468B-9(b)(1).

28
8

Case No. 07-CV-01658 PJH (EDL)

ORACLE’S OPPOSITION TO SAP’S MOTION FOR STAY AND APPROVAL OF SECURITY

1

billion tax deduction that SAP is proposing to claim.

2

3.

3

SAP’s Deduction Of Amounts Transferred To The Proposed
Escrow Would Conflict With Oracle’s Reporting And Would
Create Tax Risk For Oracle

It is a general principle of tax law – notwithstanding some exceptions not relevant

4
5

here – that where a liability gives rise to a deduction for one taxpayer and income for another,

6

the deduction should not be available to one before the income is included by the other. See

7

generally Julie A. Roin, Unmasking the “Matching Principle” in Tax Law, 79 Va. L. Rev. 813

8

(1993). In its Motion, SAP describes the “all events” test for the accrual of income to an obligee.

9

Motion at 6 (citing Treas. Reg. § 1.451-1(a), along with two Revenue Rulings applying the test

10

in situations not involving an escrow account). What SAP fails to mention is that the exact same

11

test – with one additional criterion – governs the accrual of deductions by the obligor. A

12

deduction generally is taken into account “in the taxable year in which all the events have

13

occurred that establish the fact of the liability, the amount of the liability can be determined with

14

reasonable accuracy, and economic performance has occurred with respect to the liability.”

15

Treas. Reg. § 1.461-1(a)(2)(i). 8
Thus, in order to claim a deduction for its $1.3 billion transfer to the proposed

16
17

escrow, SAP will need to claim that “all events” have occurred to establish its liability to Oracle

18

in that amount. 9 That creates a potential conflict. It is not clear how SAP could claim – as it

19

does at pages 6-7 of the Motion – that the escrow deposit “will not” constitute income to Oracle

20

because SAP’s liability will not be fixed under the “all events” test, when at the same time SAP

21

anticipates a tax deduction, the availability of which seems to turn on a conflicting resolution of

22
23
24
25

8

The first two criteria, “all the events have occurred” and “the amount ... can be determined with
reasonable accuracy,” are materially identical to the test for accruing income under Treas. Reg.
§ 1.461-1(a)(2)(i). The third criterion, “economic performance,” would be satisfied only if the
escrow constitutes a QSF, which is uncertain for the reasons discussed above.
9

26
27

By themselves, the QSF rules – even if they did apply to the escrow – would do no more than
permit SAP to satisfy the economic performance portion of the test for deductibility. The QSF
rules do not have any bearing on whether or when the “all events” test is satisfied.

28
9

Case No. 07-CV-01658 PJH (EDL)

ORACLE’S OPPOSITION TO SAP’S MOTION FOR STAY AND APPROVAL OF SECURITY

1

the same legal test.
Even if the Proposed Escrow Agreement would not “cause any adverse tax

2
3

consequences” for Oracle as SAP argues, inconsistent tax treatment like this still creates risk. 10

4

Motion at 6. When two parties take conflicting positions as to the treatment of a particular tax

5

item, as SAP proposes that it and Oracle would do with respect to SAP’s escrow payment, the

6

IRS is permitted to, and frequently does, pursue tax assessments against both parties on a

7

protective basis. See, e.g., Indeck Energy Servs., Inc. v. Comm’r, 85 T.C.M. (CCH) 1128, 1134

8

& n.6 (2003) (IRS proposed inconsistent protective assessments against two parties to a litigation

9

settlement who had reported inconsistent tax treatment of settlement proceeds); Int. Rev. Man.

10

36.2.6.2.3 (listing, among other things, “[d]isputes over the year in which an item should be

11

taxed” as situations that may require protective appeals by IRS). This practice prevents the IRS

12

from being “whipsawed” if the period allowed for making an assessment against one taxpayer

13

expires while the IRS is litigating (and ultimately loses) a case against the other taxpayer. See

14

Indeck Energy, 85 T.C.M. (CCH) at 1134.
Oracle would suffer severe consequences if the IRS or a state taxing authority

15
16

proposed a protective assessment against Oracle in connection with SAP’s escrow deposit. At

17

the current maximum federal corporate income tax rate of 35%, the tax liability associated with

18

the proposed $1,325,033,547 payment could be $463,761,741. Using California’s corporate

19

income tax rate of 8.84%, the state income tax liability (even after accounting for federal tax

20

benefit) could add another $76,136,428. 11 Oracle also would expend significant resources just to

21
10

22
23

Though the risk may be small that the IRS would view the Proposed Escrow Agreement as
failing to meet the QSF requirements, when multiplied by the potential tax liability, it is not a
risk that Oracle should have to take.
11

24
25
26
27

The federal and California tax rates cited are set forth in Code § 11(b)(1)(D) and Cal. Rev. &
Tax Code § 23151(f)(2). The figures for potential tax liability are simply the product of those
rates and the initial amount that the Parties agreed SAP should transfer pursuant to the Proposed
Escrow Agreement (but, in the case of the state tax, the nominal rate of 8.84% is first multiplied
by 65% to account for the fact that the state tax would itself give rise to a federal deduction at a
35% rate). Oracle provides these figures for explanatory purposes only, and does not contend
these figures accurately represent the actual tax that would be owed by either Oracle or SAP.

28
10

Case No. 07-CV-01658 PJH (EDL)

ORACLE’S OPPOSITION TO SAP’S MOTION FOR STAY AND APPROVAL OF SECURITY

1

contest a liability of that magnitude. Even then, depending on the forum in which it chose to

2

contest such an assessment, Oracle could be required to pay the tax, plus accrued interest, prior

3

to disputing the liability. See, e.g., Flora v. United States, 362 U.S. 145 (1960) (tax must be paid

4

in full before suing for refund in District Court).

5

4.

6

During meet and confer, Oracle identified the tax risk arising from SAP’s

SAP Refused To Indemnify Oracle For These Tax Risks

7

proposed treatment of the escrow as a QSF. See Alinder Decl., ¶ 6 & Ex. C. Oracle proposed

8

that SAP either (a) indemnify Oracle against any adverse tax consequences that would arise from

9

SAP’s escrow proposal, or (b) draft the escrow agreement in a manner that would not create

10

these tax risks for Oracle (nor the corresponding tax benefit to SAP). See id. Although SAP

11

initially agreed to modify the language based on these concerns, it changed its mind on the day it

12

filed its motion and rejected both proposals. See id., ¶¶ 6-7 & Exs. C-E.
This is SAP’s Proposed Escrow Agreement, for SAP’s benefit. SAP has the

13
14

burden to show that it safeguards Oracle’s interests. Oracle should not bear any additional risk

15

in this situation, let alone the half billion dollar tax risk that SAP would have this Court impose

16

on Oracle. If SAP truly believed that no tax risk existed, SAP would have agreed to indemnify

17

Oracle. Because the risk does exist, the Court should deny the Motion.

18

B.

Oracle Should Not Have To Indemnify SAP’s Escrow Agent
SAP’s Proposed Escrow Agreement also requires Oracle to indemnify SAP’s

19
20

Escrow Agent for what SAP calls “defined losses to the agent caused solely by Plaintiffs’

21

conduct.” Motion at 7-8. SAP argues that it is unfair to put such risks on the Escrow Agent. See

22

id. Perhaps that is true (although the Escrow Agent would certainly benefit from this

23

arrangement as well). But even if the Escrow Agent should not have to bear these risks, SAP

24

should, by indemnifying its Escrow Agent for all losses that arise from SAP’s Proposed Escrow

25

Agreement.

26

SAP’s argument also fails for three additional reasons.

27

First, SAP’s claim that Oracle could “harm the escrow agent with impunity” is

28

illogical. Motion at 7-8. Oracle has no reason or desire to “harm the escrow agent,” but the fact
Case No. 07-CV-01658 PJH (EDL)
11
ORACLE’S OPPOSITION TO SAP’S MOTION FOR STAY AND APPROVAL OF SECURITY

1

that SAP raises this prospect does give Oracle pause about entering this contract with SAP.
Second, in the Proposed Escrow Agreement, SAP defines “losses” to the Escrow

2
3

Agent as “any and all losses, damages, claims, liabilities, penalties, judgments, settlements,

4

litigation, investigations, costs or expenses (including, without limitation, the fees and expenses

5

of outside counsel and experts and their staffs and all expense of document location, duplication

6

and shipment.” See Lanier Decl., Ex. 1 (Proposed Escrow Agreement) at Section 8. Calling

7

these losses “defined” in this Motion does not make them so; the language provides no limit or

8

boundary to the exposure SAP would have Oracle undertake. See id.; Motion at 7-8.
Third, even if SAP appropriately defined the scope of the indemnity, Oracle

9
10

would still have to litigate against SAP to determine whether losses were “solely” attributable to

11

Oracle’s conduct or not. See Lanier Decl., Ex. 1 (Proposed Escrow Agreement) at Section 8.

12

Oracle should not – and will not – accept uncertain litigation risks and costs resulting solely from

13

SAP’s desire to use an escrow agreement here, rather than a bond.

14

VI.

15

THE COURT SHOULD NOT ORDER THE PARTIES INTO A
COMPLEX CONTRACTUAL RELATIONSHIP
SAP’s Motion and this Opposition establish one thing for certain. There is no

16
17

“agreement” here. As the caselaw, including that cited by SAP, confirms, agreement on the

18

terms of the escrow is a fundamental pre-condition to the Court ordering the relief that SAP

19

seeks in its Motion. See Motion at 3, 8; Int’l Telemeter, Corp., 754 F.2d at 1495 (“The escrow

20

account was only court ordered pursuant to stipulation of the parties.”) (emphasis supplied); see

21

also Funai, 2009 U.S. Dist. Lexis 35371, at *5-6 (ordering that 125% bond be posted, or that

22

same amount may be deposited in escrow “if the parties can reach agreement as to the terms of

23

the escrow.”) (emphasis supplied). 12

24
25
26
27

12

The Townsend case cited by SAP does not address alternative forms of security other than
noting that a motion to stay was not sanctionable, because a court “may permit” a form of
security other than a bond. See Motion at 3; Townsend v. Holman Consulting Corp., 929 F.2d
1358, 1367 (9th Cir. 1990).

28
12

Case No. 07-CV-01658 PJH (EDL)

ORACLE’S OPPOSITION TO SAP’S MOTION FOR STAY AND APPROVAL OF SECURITY

Meanwhile, SAP does not appear remotely to appreciate the gravity of what it

1
2

requests – that this Court order Oracle to agree to 15 pages of highly complex escrow terms

3

proposed by SAP that would govern the investment, control, distribution, and tax treatment of

4

over $1.3 billion. SAP cites no case where a court has ordered a party to enter an escrow

5

agreement, much less under the circumstances SAP proposes. Oracle is aware of none. The

6

order SAP seeks, while inventive, has no legal support. See Honolulu Waterfront Ltd. P’ship v.

7

Aloha Tower Dev. Corp., 692 F. Supp. 1230, 1235 (D. Haw. 1988), aff’d, 891 F.2d 295 (9th Cir.

8

1989) (“[W]hile the power of the court to fashion in appropriate cases an equitable remedy is

9

great, it does not encompass a right to make an agreement for the parties.”) (citation omitted).
Given the significant efforts already expended by the Parties in a good faith

10
11

attempt to reach an agreement and the serious remaining risks and uncertainties described above,

12

it would be futile to order that the Parties resume their negotiations. See id. at 1235 (finding it

13

“futile” to order the parties to negotiate agreement without the “power to order them to

14

agree.”). 13 Indeed, the failure of the escrow negotiations to date proves that these Parties would

15

both be better off not entering into a complex escrow agreement with each other. The Court

16

should order SAP to post a full bond, so that the Parties and the Court can focus on the post-trial

17

and appellate issues that remain.

18

///

19

///

20

///

21

///

22

///

23

///

24
13

25
26
27

Should the Court consider such relief though, given the significant time and expense Oracle
has incurred to date, the Court should order SAP to pay half of Oracle’s past and future legal fees
expended in negotiating the terms of SAP’s Escrow Agreement. See, e.g., Sibia Neurosciences,
Inc. v. Cadus Pharm. Corp., No. 96-1231-IEG (POR), 1999 WL 33554683 (S.D. Cal. Mar. 10,
1999), at *5 (requiring defendant to pay half of plaintiff’s legal fees in negotiating escrow
agreement in addition to conditioning approval on the parties actually reaching an agreement).

28
13

Case No. 07-CV-01658 PJH (EDL)

ORACLE’S OPPOSITION TO SAP’S MOTION FOR STAY AND APPROVAL OF SECURITY

1
2

VII.

CONCLUSION
For the foregoing reasons, the Court should deny SAP’s Motion for Stay and

3

Approval of Security, and order SAP to obtain a supersedeas bond in the agreed initial amount of

4

$1,325,033,547 within 14 days of the Court’s Order, with further instructions for the bonding

5

company to provide a quarterly report to the Parties and increase the bond amount as needed to

6

cover post-judgment interest accrued in the future.

7

DATED: April 13, 2011
8

Bingham McCutchen LLP
9
10
11

By:

/s/ Zachary J. Alinder
Zachary J. Alinder
Attorneys for Plaintiffs
Oracle USA, Inc., et al.

12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
14

Case No. 07-CV-01658 PJH (EDL)

ORACLE’S OPPOSITION TO SAP’S MOTION FOR STAY AND APPROVAL OF SECURITY