Avoiding and, If Necessary, Defending Information ...€¦ · 2016: Average annualized contract...

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Avoiding and, If Necessary, Defending Information

Technology Disputes

Seminar Topic: This material provides an in-depth examination of the use of

information technology. Providers – whether it be for computer hardware,

infrastructure, software on cloud-based services – has become ubiquitous. With

that has come an ever increasing number of disputes relating to the provision of

theses services and products. In this presentation, you will learn where the pain

points are in theses business relationships, and how to avoid them – whether you

are a provider, purchaser or both.

This material is intended to be a guide in general and is not legal advice. If you

have any specific question regarding the state of the law in any particular

jurisdiction, we recommend that you seek legal guidance relating to your particular

fact situation.

The course materials will provide the attendee with the knowledge and tools

necessary to identify the current legal trends with respect to these issues. The

course materials are designed to provide the attendee with current law, impending

issues and future trends that can be applied in practical situations.

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Disclaimer: The views expressed herein are not a legal opinion. Every fact situation is different and the reader is encouraged to seek legal advice for their particular situation.

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About the Author and Presenter

Reena R. Bajowala

Reena R. Bajowala is a partner in the firm’s Complex Commercial Litigation Practice and a member of the Information Technology Disputes, Class Action and Labor and Employment practice groups. She is an experienced trial attorney who defends online and brick-and-mortar retailers, manufacturers, technology companies, automotive industry clients and government defense contractors in technology outsourcing, consumer and employment disputes.

Ms. Bajowala regularly counsels and defends sellers and buyers of Information Technology (IT) services with respect to their rights under contract, tort and copyright law. Ms. Bajowala also advises clients regarding trade secret, privacy and trademark law. In addition, Ms. Bajowala assists clients with evaluating business decisions relating to call centers and data centers around the globe.

In addition, Ms. Bajowala regularly counsels and defends employers and service providers in federal actions involving the FLSA and ERISA. She is adept at dealing with the intricacies of class, collective and plan-wide litigation, including issues arising from the Class Action Fairness Act, Multi-District Litigation and hybrid action procedures. She also defends companies in consumer fraud and deceptive practice litigation and investigations.

Ms. Bajowala is active in several organizations that foster diversity and access to justice, including board leadership with the Public Interest Law Initiative, the Albany Park Theater Project and the Chicago Volunteer Legal Services Foundation. In 2005, she founded the Origins Fellowship Program at the University of Michigan Law School, through which the Asian Pacific American Law Student Association has awarded almost $100,000 in funds to over 25 law students working to advance the public interest.



She founded the firm’s Mother’s Circle of the Women’s Forum and also serves on the Women’s Forum Steering Committee, the Diversity & Inclusion Committee and the Transgender Inclusion Working Group. She previously served as co-chair of the firm’s Asian Forum and on the firm’s Hiring Committee and the firm’s Pro Bono Committee.

Author’s Email Address: [email protected]

Author’s Website: https://jenner.com/

Author’s Mailing Address: Jenner & Block LLP

353 N. Clark

Chicago, IL 60654

Author’s Phone Number: (312) 840-7277



Table of Contents

Contents

Table of Contents ............................................................................................ 5 Timed Agenda: ............................................................................................ 6

Avoiding and, If Necessary, Defending Information Technology Disputes ..... 8 Overview ................................................................................................. 8

What is IT Outsourcing? .............................................................................. 8 What is IT Outsourcing? .......................................................................... 8 Substantial Growth in IT Outsourcing ..................................................... 8 Failure is Common .................................................................................. 9 Key Concepts .......................................................................................... 9

Why IT Relationships Fail ............................................................................ 9 Common Problems ................................................................................. 9 Responses to Problems ......................................................................... 10

Avoiding Disputes ...................................................................................... 10 Relationship Management ................................................................... 10 Communication .................................................................................... 10 Role of Exit Planning ............................................................................. 11 Key Aspects of Relationship .................................................................. 11

When Litigation Enters the Picture ........................................................... 11 When Litigation Enters The Picture ...................................................... 11 Logistical Issues ..................................................................................... 11 Cost-Benefit Analysis ............................................................................ 11 Contractual Analysis ............................................................................. 12

Commonly Litigated Issues ....................................................................... 12 Litigated Issues...................................................................................... 12 Performance Issues ............................................................................... 12 Litigated Issues Transformation ........................................................... 13 Litigated Issues – Service Problems ...................................................... 13 Litigated Issues - Billing Disputes .......................................................... 13 Termination .......................................................................................... 14 Damages Issues ..................................................................................... 14 When to Seek Injunctive Relief ............................................................. 15 When Will Injunctive Relief Be Granted? ............................................. 15

Summary ................................................................................................... 16



Timed Agenda:

Time Description

00:00:00 Program Start

00:00:20 Introduction

00:00:52 Avoiding and, If Necessary, Defending Information Technology Disputes

00:01:22 What is IT Outsourcing?

00:03:06 Substantial Growth in IT Outsourcing

00:04:55 Failure is Common

00:05:33 Key Concepts

00:09:48 Why IT Relationships Fail

00:10:00 Common Problems

00:10:40 Responses to Problems

00:11:27 Avoiding Disputes

00:11:30 Relationship Management

00:15:20 Communication

00:17:41 Role of Exit Planning

00:19:20 Key Aspects of Relationship

00:21:00 When Litigation Enters the Picture

00:21:42 Logistical Issues

00:24:20 Cost-Benefit Analysis

00:26:58 Contractual Analysis

00:30:39 Commonly Litigated Issues

00:31:18 Litigated Issues Transformation

00:34:53 Litigated Issues – Service Problems

00:38:56 Litigated Issues - Billing Disputes

00:44:08 Termination



00:49:35 Damages Issues

01:01:00 When to Seek Injunctive Relief

01:04:19 When Will Injunctive Relief Be Granted?

01:06:14 Summary

01:06:35 Program End



Avoiding and, If Necessary, Defending Information Technology Disputes

Overview

▪ What is IT Outsourcing? ▪ Understanding Why Outsourcings Fail ▪ Avoiding/Fixing Troubled Relationships ▪ When Litigation Enters The Picture

What is IT Outsourcing?

What is IT Outsourcing?

▪ “Outsourcing” is the use of a third party to perform services necessary to a company’s operations.

▪ IT or “information technology” refers to the use of a physical device, infrastructure or process to create, process, store, secure or exchange electronic data.

▪ IT outsourcing can help businesses reduce costs, innovate, increase efficiency and take advantage of external expertise and support.

▪ IT vendors provide various services, including o Information management o Data processing and storage o Infrastructure and software development o Maintenance and support

Substantial Growth in IT Outsourcing

▪ 1989: First major IT outsourcing deal between Eastman Kodak and IBM ▪ 1994: Global IT outsourcing market reaches $50 billion ▪ 2011: Global IT market grows to nearly $250 billion in total revenue ▪ 2016: Average annualized contract value increases 86% from $23.4

million in 2014 to $43.5 million in 2016 ▪ 2017: 94% of organizations use IT outsourcing ▪ Next 5 Years: 38% of CIOs believe cloud will have the greatest positive

impact on their business over next 5

Sources: Kevin Campbell, “A New Value Proposition,” Outlook (Oct. 2009); Richard Hoffman & Paul McDougall, “2012 State of IT Outsourcing” InformationWeek Reports (Sept. 2012); KPMG, “Global IT-BPO Outsourcing Deals Analysis” KPMG.com (Feb. 2016); KPMG, State of the outsourcing, shared



services, and operations industry 2017, KPMGinstitutes.com (Apr. 2017); InteropITX & InformationWeek, 2017 State of the IT Industry Report

Failure is Common

▪ Estimates are that between 40% and 70% of outsourcing relationships fail.

▪ 99% of European IT leaders surveyed said they would like to renegotiate or retender an outsourcing deal.

Sources: Stephanie Overby, What is Outsourcing? Definitions, Best Practices, Challenges and Advice, CIO.com (Nov. 6, 2017); Derek du Preez, IT Leaders Need to Fix In-House Operations Before Pressuring Outsourcers on Cost, Computer World UK (May 16, 2013).

Key Concepts

▪ Contract terms o MSA (Master Services Agreement) o SOW (Statements of Work) o SLA (Service Level Agreements)

▪ Cloud computing o “As a service” IT solutions (SaaS, PaaS, IaaS, DRaas, etc.) o SaaS Applications

▪ ERP (Enterprise Resource Planning) ▪ CRM (Customer Relationship Management)

Why IT Relationships Fail

Common Problems

▪ Gartner report identifying problems with IT contracts o 19% - parties had different understandings of the contract’s

intent o 11% - problems with the transition process o 15% - incorrect/inadequate service levels o 15% - strained relationships

Source: David Ackerman & William Maurer, How to Make Bad Outsourcing Deals Better, Gartner (Mar. 20, 2012).



Responses to Problems

▪ 21% of entities in a recent Deloitte survey had terminated their IT vendor in the past year.

o 13% terminated for cause o 8% termination for convenience

▪ 49% restructured an IT deal ▪ Other responses:

o 68% escalated to leadership o 40% increased governance o 35% increased competition o 22% applied penalties

Source: Deloitte’s 2016 Global Outsourcing Survey (May 2016)

Avoiding Disputes

Relationship Management

▪ Perform periodic health checks, which help to reveal issues in time to fix them

▪ Ensure that reporting on key performance metrics is being maintained and preserved

▪ Maintain an updated: o description of services being delivered o list of assets and third party managed relationships o list of provider dedicated and key resources o set of application code and architecture diagrams

▪ Understand the end game on both sides

Communication

▪ Often it is not the service or billing issues themselves, but the lack of adequate communication regarding the issues that results in the loss of trust

▪ Incorporate a procedure which alerts the client when certain tasks are delayed – do not leave executive dashboard indicators green

▪ Ensure information about client’s other major IT projects (if any) that are interdependent on this deal are communicated clearly and understood on all sides

▪ The invoice is a regular, underutilized communication opportunity



Role of Exit Planning

▪ Remember the old adage: o Expect the best, plan for the worst

▪ When done right, exit thinking will help maintain a healthy relationship and will not be perceived as a lack of commitment to the current solution

▪ Keep a log of all communications regarding disputes ▪ Involve in-house legal counsel (and outside counsel) EARLY on

Key Aspects of Relationship

▪ Important for both sides to understand why a client might terminate an outsourcing agreement.

▪ They typically evaluate: 1. Vendor Performance 2. Costs Incurred/Credited 3. Relationship Between the Parties

When Litigation Enters the Picture

When Litigation Enters The Picture

▪ Despite best efforts, there are circumstances where litigation enters the picture

▪ When it does, you will need to assess: o Logistical Issues o Cost-Benefit Analysis o Contractual Considerations

Logistical Issues

▪ Staffing o Will you have to appoint a new team to manage the

transition? Or rely upon existing team to fill both roles? ▪ License considerations

o Is there a license which grants the client the right to sublicense use of software to a third party (provided it is exclusively for the benefit of the client)?

▪ Data migration o Who owns the data and what is due to the client?

Cost-Benefit Analysis

▪ Interdependencies with other projects



▪ Ongoing relationship ▪ Internal disruption ▪ Customer disruption and potential loss of revenue

Contractual Analysis

▪ Legal Cause for Termination o Termination rights o Who can terminate and for what reasons? o What are the costs of termination? o Evaluation of service level provisions

▪ Notice and Dispute Resolution Procedures o What notice is required? o What relief can you seek? What relief can be sought against

you? o What forum?

▪ Transition Services o What transition support services are required under the

agreement? For how long? How are they priced? ▪ Indemnification Provisions

o Scope? Any third parties? ▪ Penalties and Damages

o Is there a hold-back provision? o Is there a limitation on liability that disclaims certain types

of damages (indirect, consequential)? Is there a liability cap? Is there a carve out to the indemnification provision?

Commonly Litigated Issues

Litigated Issues

▪ Performance Issues o Transition/Transformation o Significant Performance Failures

▪ Billing Disputes ▪ Type of Termination

Performance Issues

▪ “Transformation” problems ▪ Significant performance failures



Litigated Issues Transformation

▪ What is “transformation”? o The process of fundamentally transforming a company’s IT

infrastructure from its existing state to another state ▪ Failed or delayed transformations often lead to disputes about

whether fundamental goal of agreement was met o Indiana v. IBM Corp., No. 49D10-1005-PL-021451 (Marion

Sup. Ct. 2012) o Carlson v. IBM Corp., 2014 WL 3700894 (D. Minn. July 25,

2014)

Litigated Issues – Service Problems

▪ Disputes arise alleging a vendor’s failure to meet a key metric. o Hamilton Mortg. Co. v. Telesphere Networks, Ltd., 2008 WL

4132339 (Ariz. Ct. App. 2008) o Hawaiian Tele. Co. v. Microform Data Sys., Inc, 829 F. 2d 919

(9th Cir. 1987) ▪ Claims may be lodged that a vendor failed to comply with a “best

efforts” provision. o TMG Kreations, LLC v. Seltzer, 771 F.3d 1006 (7th Cir. 2014)

Litigated Issues - Billing Disputes

▪ IT contracts often provide for billing systems that require detailed calculations or data held by one party to set the fee owed

▪ Types of billing disagreements o Vendor is perceived to over bill, bill at the wrong price, or

bill for services not delivered o Vendor is perceived to fail to accurately bill the use of

defined pricing metrics o Disagreement as to whether billing procedures were

followed o Disagreement as to whether services are “in scope” vs. “out

of scope” o Whether a “hold back” was justified, or a breach of contract

▪ Contract claims can arise from uncertainty in pricing terms o Coghlan v. Beck, 2013 IL App (1st) 120891, N.E. 2d 132

▪ Misrepresentation Claims o Hamilton Cnty. Emergency Commc’ns Dist. v. Orbacom

Comm’cns Integrator Corp., 2006 WL 120157 (E.D. Tenn. 2006)



Termination

▪ Most significant and commonly litigated issue ▪ Was termination for “cause” or for “convenience”?

o Carlson v. IBM Corp., No. 10-cv-3410, 2014 WL 3700894 (D. Minn. July 25, 2014) (convenience)

o Tektel, Inc. v. United States, 116 Fed. Cl. 612 (2013) (convenience)

o Riviera Fin. Of Tex., Inc. v. Capgemini US, LLC, 511 F. App’x 92 (2d Cir. 2013) (for cause)

▪ Fact-intensive inquiry o Peoples Bank of the South v. Fiserv Sols, Inc., 2015 WL

3465922 (M.D. Tenn. June 1, 2015) (partial SJ on some issues; SJ denied on others)

▪ Return of data o Global Fitness Holdings, LLC v. Federal Recovery Acceptance,

Inc., 127 F. Supp. 3d 1176 (D. Utah 2015)

Damages Issues

▪ Damages limitations: Direct v. Consequential Damages o But…..”lost profits” may fit into either category o Design Partners, Inc. v. Five Star Electric Corp., 2017 WL

818364 (E.D.N.Y. Mar 1, 2017) (citing Biotronik A.G. v. Conor Medsystems Ireland, 2014 WL 1237154 (N.Y. Mar. 27, 2017))

▪ Damages caps o May depend on the type of claim: BSkyB Ltd. v. EDS, [2010]

EWHC 86 (TCC) o Clarity of provisions, economic loss doctrine: Xat.com Ltd.

V. Hosting Services, Inc., 2017 WL 449652 (D. Utah Feb. 2, 2017)

▪ Damages for bespoke solutions o Tektel, Inc. v. United States, 116 Fed. Cl. 612 (2013)

▪ Were damages mitigated? o Role of voluntary payment of liquidated damages.

▪ Indiana v. IBM Corp., No. 49D10-1005-PL-021451 (Marion Sup. Ct. 2012)

o Role of service credits ▪ Carlson v. IBM Corp., 2014 WL 3700894 (D. Minn.

July 25, 2014)



When to Seek Injunctive Relief

▪ High burden: o A temporary restraining order/preliminary injunction is an

extraordinary and drastic remedy, which should not be granted unless the movant carries the burden of persuasion by a clear showing

▪ Factors: o Likelihood of success on the merits o No adequate remedy at law o Immediate irreparable injury will occur

▪ Contractual basis for injunctive relief: o Is injunctive relief allowed under the contract? Under what

circumstances? o Declaratory Judgment Act: that certain fees need to/need

not be paid, that the termination was properly for cause, that a party did not breach

▪ Injunctive relief might be rooted in a variety of extra-contractual claims including:

o Fraud o Misappropriation of Trade Secrets o Tortious Interference with Prospective Economic Damage o Negligence o Computer Fraud and Abuse Act

▪ A common reason for vendors to seek injunctive relief: when a client shares licensed, trade secret or confidential information it obtained from vendor with third parties.

o Capgemini Financial Services USA, Inc. v. Infosys Ltd., 2014 WL 340206 (N.D. Ill. Jan. 30, 2014)

o ASI Business Solutions, Inc. v. Otsuka Am Pharm., Inc., ___ F. Supp. 3d __ (E.D. Penn. Feb. 10, 2017)

When Will Injunctive Relief Be Granted?

▪ A common reason for clients to seek injunctive relief: when they seek to force the vendor to continue working.

▪ Injunctive relief may be denied if it would force the parties to continue working together where the relationship has broken down and continued cooperation appears unworkable.

o Vertex Data Sci. Ltd. v. Powergen Retail Ltd., (2006) EW8C 1340 (COMM)

▪ To protect the rights of third parties or the public.



o Detroit Med. Ctr. v. GEAC Comp. Sys., Inc., 103 F. Supp. 2d 1019 (E.D. Mich. 2000)

Summary

▪ IT outsourcing arrangements are ubiquitous, and valued for their ability to lower costs, increase efficiencies, and place specialized job functions with experts – freeing up a client’s business to focus on core strategy

▪ Such arrangements can become troubled for various reasons ▪ Regular monitoring and communication can help avoid disputes. ▪ If a dispute arises, it is critical to analyze viable legal options and

logistical challenges to: o Reduce financial exposure o Minimize organizational disruption


Avoiding and, If Necessary, Defending Information ...€¦ · 2016: Average annualized contract...

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