How to Get Sued over your EULA, and Lose!

Ok, I thought that title would grab your attention. Well, recently a court case surfaced where the software company lost big time and owes the customer around $240 million for a software/services deal gone badly.

How does this happen?

Well, let’s take a look at some helpful tidbits for any company looking for growth equity or a venture capital investment. 

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; go figure that one out). Without going into a detailed factual analysis, 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 an approximately $246 million judgment on a $10 million software and services order (yep, 24 times the amount of the sale). So how did this happen when a contract with a limitation of liability existed, and i2 had attorneys representing them on the contract? Let’s dig a little deeper and see what we can learn from a case like this. 

1) Don’t Over commit and Underperform. You probably knew this already, but if you over commit and underperform 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 made all the difference), 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 and was overstating its revenue. But it gets worse! The company i2 even hired an MIT professor of Management (not quite sure why they had to do this) to perform an assessment of their business practices. This professor wrote a scathing report stating in part that i2 was over committing and underperforming…see excerpt below.

 

2) If You Have a Problem, Solve It. Software is not perfect and free of flaws, but if you have a product problem (e.g. the software is not working or your sales team has oversold the technology), fix it and make it right. Every software company I make contact with knows how to solve these types of problems, so don’t forget the importance of relationships with your customers. I bet if i2 had given Dillards its money back early on in the process, seen the case for what it was or in general handled the disagreement in a fair way, they would not be facing a $240 million dollar judgment. I am not trying to second guess this case with the benefit of hindsight, but I would not have recommended going to trial on this set of facts. 

So without going on forever about this subject, my goal is not to scare you, but rather to inspire you to make sure you control your sales teams, and people at your company don’t think you can/should commit to things that don’t exist (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 a really high bar). Just a few thoughts from an attorney who helps companies seeking growth capital prior to looking for their company exit strategy.

www.zdnet.com/blog/btl/dillards-wins-246-million-in-damages-vs-jda-i2/35888