A growing list of technolgy vendor settlements should be a wake up call to tech vendors both large and small. For example, last month, HP resolved a legacy EDP lawsuit to the tune of $460 million. The facts of the case are not very complicated. A decade ago, British firm BSkyB retained EDS to provide a CRM system for BSkyB’s help centers. Two years later the contract was terminated and BSkyB completed the job using its own IT staff. It also filed an action against EDS for misrepresention regarding its capabilities. Although the initial contract included a liability clause that capped damages, the clause was ultimately rendered invalid due to fraud.
This past May, SAP and Waste Management announced the settlement of a lawsuit involving a failed ERM implementation. Waste Management sued SAP for fraud in March 2008 over an allegedly failed waste and recycling revenue management system. Waste Management allegedly sustained direct damages of over $100 million. SAP responded in its original Answer that Waste Management didn’t “timely and accurately define its business requirements” nor provide “sufficient, knowledgeable, decision-empowered users and managers” to work on the project. Much of Waste Management’s allegations turned on representations made by salespersons who were allegedly only concerned about licensing software that would create larger year-end bonuses. According to its revised complaint, if a newer version had been used, “the multi-million dollar sales price for the software could not be immediately recognized as revenue under the accounting rules for revenue recognition,” and those salespeople involved in the deal would not receive bonuses. According to its quarterly earnings filing regarding the reported settlement, Waste Management received “a one-time cash payment” in accordance with the settlement. The terms of the settlement were not disclosed.
The price of a tech suit goes down steeply after fraud charges are dismissed. For example, a lawsuit brought by a county government went from $10 million in alleged damages to an eventual settlement of $575,000 given there were only breach of contract claims remaining after the fraud claims were earlier dismissed from the action. Another action brought by yet another county government may not go as well for the tech vendor (Deloitte Consulting) given the fraud claims remain front and center throughout the complaint filed on May 28, 2010.
Claims are not only brought against tech vendors for millions of dollars. Last year, Epicor was sued after a client spent $244,656.42 on an ERP implementation. Again, the complaint sounded in contract breach but had negligent representation as well as fraud claims. Here’s a list of similar suits.
Moreover, tech vendors can include those who sell products such as iPhones rather than license software. Earlier this month, Apple was hit with numerous suits seeking damages arising from the fact the latest iPhone has significant reception issues depending on how the phone is held. Specifically, one suit accuses Apple of “general negligence, breach of warranty, deceptive trade practices, intentional misrepresentation, negligent misrepresentation, and fraud by concealment.”
For over twenty-five years, courts have allowed fraud claims to mingle with the negligence and breach of contract claims typically brought against technology vendors. It is so much easier to prove (as was done in the EDP suit) that someone lied when contracting as opposed to showing how a contracted for systems implementation was not technically performing as promised. Moreover, if fraud is proven, it will not only vitiate the limitation of liability and exclusion of consequential damages found in nearly all tech agreements, punitive damages may also become available. In other words, a fraud claim is the magic bullet used by most plaintiffs to go around iron-clad contracts and the bar against awarding punitive damages in a contract dispute.
To best combat fraud claims, there are certain things that a tech vendor should do before, during and after a contract is negotiated. For counsel on that front and for access to related risk management and contracting tools, please reach out.