ERP buyer alleges supplier fraud - a similar case to BSkyB v HP?

A pet foods company in the US has alleged that its ERP supplier fraudulently misrepresented the capabilities of its software. The ERP buyer, Sunshine Mills, has been awarded $61m [£39m] - which is about 260 times the cost of the original ERP...

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A pet foods company in the US has alleged that its ERP supplier fraudulently misrepresented the capabilities of its software. The ERP buyer, Sunshine Mills, has been awarded $61m [£39m] - which is about 260 times the cost of the original ERP licence.

The case has similarities with one in the UK between BSkyB and EDS (now HP) in which the supplier was found by a High Court judge to have fraudulently misrepresented its capabilities. 

That legal dispute cost HP £318m plus its own legal fees of about £40m - many times the original contract value of about £50m.    

After the settlement between HP and SkyB,  David McIlwaine, an IT law expert at Pinsent Masons, which publishes the Out-law.com newsletter, said  

"Payment of £318m in the context of an IT development contract worth £50m and which contained a limitation of liability cap set at £30m is a very painful reminder to HP and other businesses that the law of misrepresentation is alive and that senior management need to have processes in place in order that they can take immediate action if there is any suggestion of fraudulent practices during the sales process or otherwise."

Now, within the completely different legal jurisdiction of a county court in Alabama, US, a jury has ordered ERP supplier Ross Systems, a part of CDC Software, Atlanta, to pay $61.4m in damages to Sunshine Mills.

The verdict came at the end of a three-week trial in which jurors heard Sunshine Mills' President Alan Bostick claim that Ross's software had failed to deliver promised benefits and cost millions in lost sales and repairs.

The verdict requires Ross to pay $16.4m [£10.4m] in compensation and $45m [£28.6m] in punitive damages.

Sherri Rodriguez, president of Ross Systems, says the company will appeal. She told Computerworld: "A lot of the claims are erroneous. We most definitely deny any allegations of fraud ... We have treated [Sunshine Mills] fairly in trying to solve any problems and we continue to support them."

The project began in 2005 when Sunshine hired Ross to replace its IBM AS/400-based back-end systems with a more integrated ERP suite.

In pitching for the project, Ross executives misrepresented the capabilities of their software, said Danny McDowell one of the lawyers who represented Sunshine. Ross claimed that its software would help Sunshine cut warehousing and distribution costs by up to 50% and eliminate product waste, said McDowell.

"It was a sale based on deception," he said. "The software did not do what it was represented to do." Demonstrations of the software made it appear that it fitted Sunshine's needs, he said. Days after the software was implemented, it started wreaking havoc. Wrong products were shipped to customers. The system failed to generate invoices for shipped orders, said Sunshine's lawyers.  

"Ross kept telling Sunshine that they were the only customers in the world that had these problems," said McDowell. 

Ross's counter-arguments

Ross denies Sunshine's allegations and plans to appeal the verdict. It says that:

€¢Sunshine Mills acquired the Ross ERP beta system in 2005 and used the product for years before filing a lawsuit
€¢The Ross ERP system continues to be used by Sunshine Mills 
€¢Sunshine Mills has recently bought services from Ross Systems to help them in their operations
€¢The software at issue is being used successfully by many of Ross’ national and global customers, and has been for years. 

“This is a sad day for the software industry,” said Sherri Rodriguez, president of Ross Systems. “These types of unfair judgments make it more and more challenging for software companies to operate."

Kenneth Thompson, general counsel of Ross Systems, said: "We feel that the jury’s award is contrary to the evidence and is excessive, especially since our enterprise license agreement with Sunshine Mills amounted to only about $235,000 [£149,000]. 

"We plan to appeal and pursue every avenue available to us to overturn the verdict and to minimise, to the fullest extent possible, the amount of damages for which the company may ultimately be responsible. We are confident that justice will be served.” 

Similar writs have been filed in recent years over failed ERP projects. Earlier this year, California's Marin County sued Deloitte Consulting LLP for $30m [£19m]. It accused Deloitte of misrepresenting its skills and capabilities when originally pitching for the project in 2004.

Two months earlier SAP and one of its customers, Waste Management quietly settled for an undisclosed amount. 

Waste Management had earlier sued SAP for fraud after incurring what it said were significant damages from a $100m ERP project that it said had turned out to be a complete disaster.

**

Thank you to Michael Krigsman [@mkrigsman] and Simon Griffiths [@simon_g] whose tweets alerted me to the US case  

Links:


Jury verdict against Ross - Ross statement


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