Oracle Corporation Is On the Wrong End of a $5.5 Billion Obamacare Fiasco

After filing a lawsuit against the state of Oregon following the botched Obamacare website, the tech giant is now on the receiving end.

Aug 30, 2014 at 11:00AM

Looking back, it was probably inevitable that the state of Oregon and Oracle (NYSE:ORCL) would go to court to resolve their long-running dispute over the state's health insurance website. The two sides tried to play nice for months after it had become clear the partnership would not lead to a fully functioning website to enroll Oregonians in Obamacare. But now, the gloves have come off.

Oregon Gov. John Kitzhaber recently insisted that Oracle "missed deadlines" in developing the website, delivered a product that had "many bugs in the system that still remain to be fixed," and that Oracle's work was "regularly incomplete, routinely late and below industry standards." If those sound like fighting words, they are.

He said, she said
Oracle was hired about three years ago as the lead contractor for Oregon's health exchange website, and the two sides got along famously for the first couple years. However, when there was no doubt the exchange would not be operable in time to enroll in Obamacare by the federal due date, the knives came out.

Even though the company did not deliver a workable health exchange solution, Oregon paid Oracle more than $240 million over the course of the now-terminated contract. Now, though, the state has filed a $5.5 billion lawsuit in an effort to make sure taxpayers aren't left holding the bag. As Oregon Attorney General Ellen Rosenblum, put it, "Over the course of our investigation, it became abundantly clear that Oracle repeatedly lied and defrauded the state."

Oracle claims Oregon still owes it about $23 million, which is why earlier this month the company filed a pre-emptive, breach of contract lawsuit, citing Kitzhaber's "smear campaign" and blaming the state's poor project management for the disastrous Cover Oregon website. Which, as it happens, never did work. After months of back and forth between Oracle and Oregon, the state was forced to fall back on plan B: use the federal exchange to enroll citizens in Obamacare.

In its lawsuit, Oracle claimed an independent review of the Cover Oregon fiasco by First Data "attributed a large part of the problems to Cover Oregon's mismanagement of the project." In response to Oregon's $5.5 billion civil suit, Oracle once again didn't mince words: "The lawsuit filed today against Oracle by the Attorney General of Oregon is a desperate attempt to deflect blame from Cover Oregon and the Governor for their failures to manage a complex IT project."

Too bad, really
No one knows how and when the legal battle with the state of Oregon will be resolved, which is too bad for Oracle fans. Though its stock price has remained relatively flat in recent months, there have been some positive signs that CEO Larry Ellison and team are making strides in their efforts to transition Oracle's business to new markets, including cloud solutions. Though lagging behind industry stalwart Microsoft (NASDAQ:MSFT), Oracle took a big step last year in becoming the second-leading software vendor in the world.

At least part of last quarter's slight increase in Oracle's total revenue can be attributed to growth in cloud revenue; that's a good sign, to be sure. Whether or not Oracle's claim that it has become the second-largest cloud software as a service provider is legit, it has certainly seen growth in this key market. Microsoft's $4.4 billion annual cloud run rate still easily outdistances Oracle, but shifting the business focus of a company Oracle's size isn't done overnight. (Of course, the same could be said of Microsoft).

Final Foolish thoughts
According to the court documents filed by the Oregon AG, Oracle cost the state over $420 million, including costs to other vendors. How Oregon arrived at its mammoth $5.5 billion civil lawsuit is anyone's guess, but it certainly raised the bar. Oregon is also asking the court to prohibit Oracle from working with any state agencies in the future.

This isn't the first lawsuit claiming misdeeds and shoddy work by Oracle. A few years ago, right around the time Oregon was hiring Oracle as its lead tech adviser, the company was forced to pay almost $200 million for "defrauding" the U.S. government. It's not likely Oracle will be on the hook for $5.5 billion in this case, regardless of its culpability for the Oregon Obamacare mess. But as more specifics are uncovered and the respective lawsuits run their course, how receptive will other governments and large, private entities be to hiring Oracle?

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Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple, Microsoft, and Oracle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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