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HP-Oracle Itanium Chip Trial May Turn on Hurd’s Exit Terms

Hewlett-Packard Co. (HPQ)’s lawsuit to force Oracle Corp. to continue making software for its servers may turn on two sentences of the computer-maker’s separation agreement with former Chief Executive Officer Mark Hurd.

Oracle, six months after Hurd became its co-president in 2010, said it would stop developing software for Intel Corp. (INTC)’s Itanium chip, a component of high-end Hewlett-Packard servers. Hewlett-Packard, in a trial that started today in state court in San Jose, California, accuses Oracle of violating a portion of Hurd’s agreement describing a “reaffirmation of the Oracle-HP partnership.”

Hewlett-Packard, the world’s largest personal-computer maker, seeks a court order requiring Oracle to continue developing software for its servers and about $500 million in damages, according to a person familiar with the matter.

Without such an order, Hewlett-Packard estimates it should be awarded more than $4 billion in damages, based on an extrapolation to 2020 that accounts for projected losses, said the person, who didn’t want to be identified because the court document containing the damages request is confidential.

“The basic issue to be tried is whether Oracle breached its obligation” under the two sentence-paragraph in the Hurd settlement “to continue to offer its product suite on Hewlett- Packard’s server platforms,” Palo Alto, California-based Hewlett-Packard said in court filings.

The Itanium chip is a niche technology different from the Intel Xeon chips used in most computer servers. Sales of Hewlett-Packard’s Itanium-based Integrity and Superdome machines, which the company describes as “business critical systems,” have been declining since Oracle made its March 2011 announcement that it would stop developing software for Itanium.

Same Turf

The trial comes after the two companies started competing on the same turf. While Redwood City, California-based Oracle was once almost exclusively a software maker, and Hewlett- Packard mainly a manufacturer of hardware, Oracle’s 2010 acquisition of Sun Microsystems made it a competitor of Hewlett- Packard’s in the market for computer servers. Oracle, the largest database-software maker, said in court filings that the intensifying competition in that area was a cause of the dispute.

Relations between the companies further soured after Hewlett-Packard’s August 2010 ouster of Hurd following an investigation that found his expense reports concealed a personal relationship with a marketing contractor. One month after his forced resignation, Hurd was hired by Oracle CEO Larry Ellison.

First Phase

In the first phase of the trial, which is scheduled to last about three weeks, Superior Court Judge James Kleinberg must determine whether Oracle is contractually obligated to continue developing software for Hewlett-Packard’s Itanium-based servers. If so, a jury would determine in a second phase whether Oracle broke the contract and what if any damages should be awarded.

Hurd’s settlement and release agreement includes this paragraph: “Oracle and Hewlett-Packard 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 Hewlett-Packard platforms, and Hewlett-Packard 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.”

Stanford Law School Professor George Triantis said that paragraph doesn’t amount to a “new legal obligation.”

‘Implied Obligations’

“It is pretty clear that it’s a reaffirmation of the partnership that existed prior to Oracle’s hiring of Hurd, rather than the creation of something new,” Triantis said in an interview. “You have to look whether there was a legal obligation that existed before the settlement -- and there might well be that.”

Under California law in particular, it’s possible to read “implied obligations” in such relationships, Triantis said. While the legal obligation claimed by Hewlett-Packard may not be spelled out in detail, “that doesn’t mean you couldn’t find it in the interaction between the parties before the settlement agreement,” he said.

The second trial phase, which is scheduled to conclude by July 27, may cover Oracle’s claim that Intel “really wanted to kill” the Itanium chip, which was on “life support.” Oracle accuses Hewlett-Packard of engaging in a “campaign of secrecy and deception” and “pay-off” to Intel to induce it to continue making the chips. While Intel isn’t a defendant in the case, CEO Paul Otellini may be called as a witness if the trial goes to a second phase, according to court filings.

‘Public Blame’

Oracle said the two-sentence paragraph of Hurd’s settlement agreement doesn’t give Hewlett-Packard any rights to continued software development, guaranteed pricing, or “any such rights that existed in the Oracle-HP ‘partnership’ before the Hurd agreement was signed,” Oracle said in its cross-complaint.

Hewlett-Packard’s complaint is “designed to give the impression of a contract where none existed,” and was “an escalation in the ongoing campaign to deflect attention from HP’s years-long Itanium fraud and to pin the public blame for its unraveling squarely on Oracle,” according to an Oracle court filing.

In its counterclaims, the database maker seeks a court order barring Hewlett-Packard from making false statements about Oracle’s business practices and commitment to customers, and unspecified damages.

Hurd a Witness

Hurd may be called as a witness by both sides. Hewlett- Packard said in court filings it will call him to testify about Oracle’s conduct “prior to and after its Itanium announcement.” Oracle said it will call him to testify about “the Oracle-HP relationship prior and subsequent to” his separation agreement. Oracle also said Ellison may be called as a witness.

Deborah Hellinger, a spokeswoman for Oracle, declined to comment on today’s trial. Chuck Mulloy, a spokesman for Santa Clara, California-based Intel, also declined to comment.

“We look forward to trial, where the details of Oracle’s deliberate, anticustomer business strategy to drive hardware sales from Itanium to inferior Sun servers will be revealed,” Michael Thacker, a spokesman for Hewlett-Packard, said in an e- mail.

Itanium Sales

Because chips rely on software programs that are written specifically for them, the absence of Oracle’s industry-leading database software from the Itanium platform makes it less useful to customers. Sales of Itanium hardware dropped 23 percent to $421 million in Hewlett-Packard’s fiscal second quarter ended April 30. The computer maker also gets a revenue stream for services related to these systems.

Hewlett-Packard said in November it’s developing a new computer system called Odyssey that would run Xeon and Itanium blade servers side by side in the same chassis and offer customers a path for moving their software off Itanium chips.

For Oracle this year, even as software sales rebounded, hardware sales fell in fiscal third-quarter profit reported in March as the company sacrificed volume for higher margin products. Oracle also has been emphasizing sales of large systems for data processing at the expense of Sun’s less expensive gear. Hardware systems sales declined 16 percent to $869 million, though analysts were projecting an 11 percent drop.

Ellison told analysts in March that next year, Oracle’s “hardware business should be a growth story.”

The competition playing out in the technology market will be highlighted at trial, according to court filings.

“Since the Sun acquisition closed, Oracle and HP have routinely competed against each other in the sale of computer server systems, and in that setting have appropriately not acted as partners in any sense of the term,” Oracle said in court papers.

The case is Hewlett-Packard Co. v. Oracle Corp. (ORCL), 11- cv-203163, California Superior Court, Santa Clara County.

To contact the reporters on this story: Joel Rosenblatt in San Francisco at jrosenblatt@bloomberg.net; Aaron Ricadela in San Francisco at aricadela@bloomberg.net

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net; Tom Giles at tgiles5@bloomberg.net

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