How to Get Sued Over Your Software EULA/SaaS Contract, and Lose!
Ok as a EULA Attorney I thought that would grab your attention. Well, there is a recent court case you should be aware of where the software company lost big time (over its Software EULA (applies to SAAS Contracts too)), and now owes the customer around $240 million for a software/services deal gone bad.
How does this happen? Well, let’s take a look as there are some tidbits for every software or SAAS company.
First things first, the case: Dillards (the customer) sued i2 (later acquired by JDA Software) over a failed software and services implementation (even though Dillards still uses the software; figure that one out). Without going through a long detailed overview of the case, Dillards believed the i2 software was not working as promised and took it up with i2. Obviously, the parties could not work it out, and the case went to trial in Dallas, Texas in 2010. Long story short, i2 lost and Dillards won around a $246 million judgment on around a $10 million software and services order (yep, 24 times the amount of the sale). So how does this happen, as there was a contract with a limitation of liability, and i2 had attorneys working on the contract. Let’s dig a little deeper and see what you can learn from a case like this.
1) Don’t Overcommit and Underperform. You probably knew this already, but if you do it in a big way a court could find that you committed fraud (yes the F word), which is what they found in the Dillards vs. i2 case. What did not help–and I think swayed the jury–was the fact that i2 had agreed to a consent decree with the SEC stating that it had exaggerated the functionality of its products to its customers. But it gets worse! i2 even hired a MIT professor of Management (not quite sure why they had to do this) to perform an assessment of their business practices, as apparently something was not working right. This professor wrote a scathing report stating–in part–that i2 was over-commiting and under-performing…see excerpts below.
2) If You Have a Problem, Solve It Through Negotiation. Look software is not perfect and free of flaws (and customers know this), but if you have a product problem (e.g. the software is not working as it should or your sales team has oversold the technology), then fix it/make it right (free software, credit, extension, refund etc.). Every software company I have come into contact with knows how to solve these type of problems, and doesn’t forget the importance of the relationship with the customer. I bet if i2 had given Dillards its money back early on in the process, seen the case for what it is, and handled the disagreement in some fair way, they would not be facing a $240 million dollar judgment. I realize it may seem like I am second guessing i2 with the benefit of hindsight, but come on if you have a consent decree and a report from a MIT professor about your problems, then maybe you should not be going to trial.
So without going on forever on this, my goal is not to scare you, but rather to inspire you make sure you control your sales teams, and make sure people at your company don’t think that you can/should commit to things that you cannot do . . . even in the intangible world of software. Oh yea, those limitation of liabilities usually work to protect you, but not necessarily against a finding of fraud as in this case (which you may not realize, is an extremely high burden for the plaintiff to prove). Just a few thoughts from a software attorney, as this is something you should be aware of, even though it is really (actually extremely) rare.
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Legal Disclaimer:
This is for informational and educational purposes only, and does not constitute legal advice. Contact your attorney for legal advice, which should be provided after review of the facts and applicable law.