Law and disorder

Name calling and legal imbroglios between vendors and customers are not new to the IT industry. A new wave of litigation against e-business service providers, however, may illustrate a penchant to make promises that they can't keep.
Written by Laton McCartney, Contributor

If the producers of "court tv" or the "Judge Judy" show ever run short of material, they can always turn to the e-business arena. In recent months, e-services consulting and development firms have been flooded with lawsuits, threats of litigation, and arbitration hearings with bitter clients. The nasty disputes could provide thousands of hours of gavel-pounding TV programming.

Among the disputants are some of the most prominent service providers in the dot-com marketplace. Examples of some recent scrapes:

  • In late September, Atlanta-based e-business client Realcheck Solutions sued Internet solutions provider Rare Medium Inc. in the U.S. District Court for the Northern District of Georgia.
  • Razorfish was sued by IAM.com, an online talent agent, charging the consultancy with shoddy workmanship in developing its Web site. Razorfish responded with a countersuit, claiming IAM.com failed to pay its bills.
  • MarchFirst has come under attack from one of its clients, Televisa, the world's largest Spanish language broadcaster. Late last month, Televisa officials announced they were "very disappointed" with the design of an Internet portal by MarchFirst but have declined to say if they would bring suit.
  • And, in one of the most bitter disputes, Cysive, a builder of custom e-business solutions, announced in July that it was firing its biggest client, Corpay, a supplier of accounting outsource services, for not paying its bills. Corpay countered by asserting Cysive had failed to deliver either the Web-enabled systems or the B2B e-commerce capabilities it had promised. This ugly battle is headed for arbitration. Some observers believe that what we have seen in the past few months is simply the top of the pile, particularly because many dot-com service vendors are retrenching and cutting back on resources—and on client support. "I think you'll see a lot more suits in the next few months," claims an Atlanta lawyer who is representing one of the parties currently in litigation over an e-biz solutions implementation. "Yes, the number of these suits is definitely on the rise," agrees John Wurzler, CEO of Wurzler Underwriting Managers Inc. in Okemos, Mich. "There will be some huge jury awards here, and what's unexpected is that service providers are turning around and filing suits against their customers, as well." What's behind this rash of litigation? More importantly—from an e-business solutions provider's viewpoint—what can you do to ensure you don't become a target yourself?

Haste Makes Waste Certainly, name calling and legal imbroglios between vendors and customers are not new to the IT industry. Systems integrators, outsourcing service providers, and software and hardware vendors are commonly sued over claims of faulty products, cost overruns and the like. In the ERP arena in particular, legal dust ups between vendors and clients are commonplace. Remember FoxMeyer's $500 million lawsuit against Andersen Consulting? Or W.L. Gore's suit against both PeopleSoft and Deloitte & Touche over a failed ERP project?

Implementation delays and product dissatisfaction are still sources of contention. American Management Systems just settled lawsuits brought by the state of Mississippi over a major systems-integration contract. Only weeks ago, First National Bank of Chester County, Pa., sued Ceridian Corp., a Philadelphia-based solutions provider, for installing an allegedly faulty payroll system.

This new wave of litigation against e-business service providers, however, differs significantly from the more traditional client-vendor lawsuits.

"There's a big difference," says Alex Zabrowsky, a Chicago lawyer who represents a number of IT consultancies. "In the last 18 months or so, we've seen a fly-by-the-seat-of-your-pants attitude develop in the way e-consultancies respond to dot-com [clients]. The attitude with many of these people is, 'there are no rules any more.' Unfortunately, that kind of thinking can present legal problems down the road."

"You could see this coming," adds Dan Mummery, a partner in the New York law firm of Milbank, Tweed, Hadley & McCloy. "Clients were rushing into signing up engagements [with e-solutions providers] in order to gain a place in the market, or to secure financing or launch an IPO."

Eager for this wealth of new dot-com business, e-solutions providers in many instances were making promises they could not keep—i.e., complete, enterprisewide e-business functionality within months, with full scalability. Many of these consultancies seemed to be pulling solutions out of a hat. And the technology they were trying to implement was often more complex and not as fully developed as traditional IT solutions.

"These [e-business] solutions have a lot more moving parts," notes Mummery. "And the technology is less clear-cut. It's grayer; nothing's black and white."

Also, Mummery notes, e-services installations come with a lot of "TBDs"—to be determined—because the parties involved are not always sure what the variables are going to be. As a result, there's plenty of room for disagreement when the service provider hits a few major unexpected contingencies that can derail or slow down the project.

Worst-Case Scenarios These suits present a window into the kinds of things that can go awry between an e-services provider and a client. For instance, in its complaint against Razorfish, IAM.com notes that it hired the Web-site developer in November 1999 to provide services "of the most critical nature" to IAM.com's business. The plaintiff states that Razorfish originally agreed to provide a number of deliverables in connection with the site, including design specification, client-side code development and development of buy-side tools.

Five months later, IAM.com notified Razorfish in writing that it was terminating its contract due to Razorfish's "material breaches." According to the IAM.com filing, Razorfish delivered "wholly inadequate deliverables and services." Razorfish's design of the interface for IAM.com's buy-side tool was unusable, the complaint alleges; the vendor missed virtually all of its deadlines; users were unable to readily identify, use and navigate the site; and AOL 4.0 users were unable to access the site at all. IAM.com is seeking substantial damages and since has brought in Interbind, another developer, to assist in reworking the site.

Soon after IAM.com filed suit on July 13. Razorfish countered with litigation of its own, seeking more than $500,000 in back payments, plus interest, attorney fees and litigation costs, as well as an injunction to prevent IAM.com from operating its site. In its complaint, Razorfish argues that IAM.com never indicated it was displeased with its work and suggests that the start-up's financial troubles—in May, its CEO left and IAM.com cut a quarter of its staff—were behind IAM.com's attempt to avoid paying for services it already had accepted.

The Cysive-Corpay dispute, meanwhile, bears certain similarities to the IAM.com/Razorfish battle. In 1999, Corpay was looking for an e-solutions provider to take on a two-piece development project that entailed Web-enabling Corpay's systems and developing its B2B e-commerce system. Corpay looked at a number of providers, including Scient, Perot Systems and EDS, but chose Cysive, in part based on cost estimates and a near-term projected completion date.

By August of this year, Corpay claimed that costs had more than doubled and the project was nowhere near finished. The customer asserts, among other things, that Cysive didn't really have an effective methodology in place and moved some key people, including the original project manager, off the job. Corpay executives met with Cysive to let the company know that it would not pay out any additional fees on a time-and-materials basis, which was the basis for the original agreement; it also planned to bring in a Big Five consulting firm to evaluate Cysive's methodologies; and while it would continue to pay Cysive for its B2B development efforts, those payments would only be upon completion of specific milestones.

Cysive's response caught Corpay—and apparently some of Cysive's investors—by surprise. On Aug. 23, Cysive announced in a press release that it had fired Corpay as a client and would take the necessary legal steps to recover the amount Corpay owed under the contract and to protect its intellectual property, as well.

At the time, Corpay was Cysive's biggest client, generating about 15 percent of the Reston, Va.-based firm's revenue. In Q3 alone, Cysive expected to drop about $5 million in revenue from the lost Corpay business, and, as a result, Cysive's stock fell precipitously. Asked why it decided to take such a seemingly drastic step, a Cysive spokesperson would only say, "We decided to cut them loose."

Assigning Blame, Minimizing Risk Ultimately, a jury—or in the Corpay-Cysive case, an arbitrator—will determine which party is at fault in these suits and countersuits. In hindsight, however, it's clear that these confrontations were inflamed by certain measures taken by the participants and perhaps could have been avoided altogether.

As an example, Mummery questions whether it's advisable for a solutions provider to fire a client, apparently as a preemptive strike in a legal battle. "That's the nuclear scenario," Mummery says, noting that once the bomb has been dropped, there's little or no room for compromise or further discussion.

One of the major bones of contention in the Razorfish v. IAM.com case is a clause in Razorfish's form agreement that specifies the client has only five business days to accept or reject deliverables. IAM.com claims the clause is "unconscionable and unenforceable," and says it was unable to discover de fects within the five-day period. But didn't the company's management and lawyers review this clause before signing on with Razorfish?

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