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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 nearly $240 million for a software/services deal gone badly.

How did this happen?

Well, let’s take a look at some beneficial tidbits for any company searching 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 makes use of the software; go figure that one out). Without going into a comprehensive factual analysis, Dillards believed the i2 software was not operating as promised and took it up with i2. Obviously, the parties could not work it out and the case eventually went to trial in Dallas, Texas in 2010. Long story short, i2 lost and consequently 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 occur when a limitation of liability contract was present, 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 may find that you committed fraud (yes the F word), which is what they identified in the Dillards vs. i2 case. What did not help (and I feel made all the difference), was the fact that i2 made the decision to agree 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 a whole lot worse! The company i2 also hired an MIT professor of Management (not quite sure why they had to do this) to carry out an evaluation of their company practices. This professor wrote a scathing document which stated that i2 was over committing and underperforming…see excerpt below.

2) If You Have a Problem, Solve It. Software is never perfect and free of flaws, but if you have a product issue (e.g. the software fails to work or your sales team has oversold the technology), fix it and make it right. Every software company I  am in contact with is aware of how to solve these types of difficulties, so do not overlook the value of relationships with your customers. I bet if i2 had provided Dillards its money back early on in the process, observed the case for what it was or in general handled the disagreement in a fair way, they would never be facing a $240 million dollar judgment. I am not trying to second guess this case with the advantage of hindsight, but I would not have advised going to trial exclusively based on this set of facts. 

So without going on forever regarding 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 normally work to safeguard you, but not necessarily against a finding of fraud as in this case (which you may not understand is a really high bar). Just a few ideas from an attorney who helps companies in search of growth capital prior to looking for their company exit strategy.

Jeremy Aber is a Senior Advisor to OpenView Venture Partners.

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