The following is excerpted from a June 21, 2011 press release from Zacks Equity Research published by PR Newswire:
Last year, Oracle Corp (Nasdaq: ORCL) filed a lawsuit against Google Inc (Nasdaq: GOOG) claiming damages for patent and copyright infringements. However, the case, to be heard in November this year, has recaptured headlines because of Oracle's filing, which stated that the claim is for billions of dollars.
Since its acquisition of Sun Microsystems early last year, Oracle has repeatedly stated that it intended to monetize the assets it had acquired. Oracle made no secret of the fact that Sun's crown jewel was its Java programming language and computing platform. Therefore, it was always expected that Oracle would go after revenue that Sun had apparently left on the table.
While the suit is for seven patent infringements and a copyright violation, the main conflict (and potential revenue earner for Oracle) is regarding Google's Dalvik process virtualization machine ("VM"), which was developed using Java and serves as the backbone of the Android operating system.
A process VM imparts neutrality to the programming environment, such that an application can run inside any OS and on any hardware. Google has licensed the technology under the Apache License, which is a free license allowing the licensee to create both proprietary, and free and open source software based on the platform. Therefore, it is not surprising that Google has called Oracle's lawsuit "baseless".
However, Oracle appears to have grounds for the case because prior to its acquisition of Sun, the latter had opposed Apache's Harmony project, which was an attempt to create an Apache-licensable Java-based runtime module, including class libraries and associated tools. And this is the technology that Google used in Dalvik/Android. Therefore, it could be that the technology that Google licensed for free was not actually licensable.
Since Sun released most of Java's code as open-source software in 2006, it is unclear whether the technology used by Apache and Google was in fact open-source. If it was, then Sun's opposition would reflect a change of heart on its part, which would render Oracle's claim non-actionable.
However, it could very well be that Sun had not released the code that was used and since its finances did not permit the company to go to court against Google, it sought help from a larger company with both cash and experience in legal matters. And this is where Oracle came into the picture.
The stakes are high for both companies. If Google is able to defend itself successfully, the company would get off with legal hassles and expenses alone. However, if it goes in Oracle's favor (chances are it will, since Oracle no doubt considered the matter before it acquired Sun), then Oracle would be in on a considerable amount of cash.
We doubt that Oracle would take Android off the market, or stop its development. We think the company would rather pick up damages, as well as licensing fees on Android devices sold, which means a strong play in the mobile segment (Android is the hottest-selling mobile OS in the U.S. and expanding globally) and wherever else Android is used in future.
The Zacks Rank on Oracle is #2, implying a short-term Buy recommendation, while that on Google shares is #4, implying a short-term Sell recommendation.