Few people take exception with the principle that in a civil society there should be equity under the law, but, when cases are brought to trial, numerous elements of play can put that concept at risk of violation. This is why the appellate process and the mechanism to update and improve the law are mainstays in maintaining a civil and just society.
There is a silent crisis, however, that has been growing in recent years in the technology industry that disproportionately affects small and mid-sized tech firms. It is in the rise of lawsuits with grossly high punitive damages reaching multiple millions of dollars, and in some cases, with awards greater than the net value of the tech firms named in the complaint. Invariably these suits are based on plaintiffs alleging fraud rather than a breach of contract.
While wrongdoing and malfeasance are valid grounds for filing a suit, excessive punitive damages have broad consequences on innovation, which can have a snowball effect on job creation and the health of state and national economies. The appellate process can redress technical and legal questions raised by such judgments, but it is often insufficient to redeem lingering negative effects on the reputation, performance, and even the viability of defendant firms. Immediate and significant tort reform is imperative.
Technology is advancing and changing on a daily basis. In fact, the U.S. Patent and Trade Office issued an all-time high of more than 215,000 utility patents in 2010, up 31 percent from 2009, which would be the most significant annual increase on record.
Most technology deployments are complex and require a deep level of expertise to truly understand the mechanisms underlying the solution. Few people, including senior management and end users, have more than a basic understanding of those mechanics. This can immediately create problems with legal complaints issued against technology firms, especially when it goes to trial. Not only is there often a lack of complete understanding about the technology in question from the plaintiff's side, those who make judgments in the case are also not typically technology experts. Matters can become especially complicated when the case involves "beta" software - software not yet generally available to everyone.
Technology, even from the most conscientious companies, can be subject to problems and sometimes failure. But, even in situations that should more rightfully be a breach of contract, advice is often given to allege fraud. Charges of fraud open the door to large punitive damages which, in turn, can lead to higher remunerative fees.
Here are two examples of lawsuits that produced onerous punitive awards in the last year. Last June, a Texas circuit court ruled in favor of Dillard's, asserting that i2 Technologies had defrauded the Arkansas-based national department store chain. i2 is a supply chain planning and execution software company that had been acquired by Arizona-based JDA Software. Though Dillard's software and services contract was less than $10m, the jury awarded punitive damages of $246m.
In December last year, Ross Systems, an Atlanta-based subsidiary of a Chinese software company, lost a suit alleging fraud brought by Sunshine Mills, a Red-Bay, Alabama-based dog food manufacturer. Sunshine Mills had knowingly licensed a beta version of the Ross ERP system in 2005, and had been using it for approximately three years before filing suit. The jury awarded $61m, of which $45m dollars was in punitive damages, a judgment greater than the net worth of Ross, which was valued at $58m about the time of the judgment. The Ross case also highlights the limited burden of proof sometimes needed in fraud cases as the decision in this case was based largely on a single PowerPoint slide, commonly used in many technology sales presentations, on the costs savings another Ross customer was realizing.
Appealing onerous punitive awards, like the Ross case, does not necessarily bring relief. In the case of Ross, it has to pay a 12-percent post-judgment interest on the penalty while the case is being appealed.
Jim Shepherd is a long-time industry analyst, now with Gartner Inc., one of the world's premier technology advisory firms. Shepherd has tracked the enterprise resource planning industry for decades. In Gartner's "First Thing Monday" newsletter on February 21, 2011, he wrote that, "I would never suggest that ERP implementations are easy, or that ERP vendors don't frequently overpromise and under deliver, but the vast majority of ERP implementations do not 'fail' by any conventional definition of the term." He further states that "Much of the noise about 'ERP failures' involves the fact that the software doesn't live up to a salesperson's claims. Grow up, people!" he declares. "Stop acting shocked."
The impact of tech companies paying out such large amounts of money creates a ripple effect on the economy and innovation. Not only are companies slapped with these large punitive awards forced to look at ways to cut back on costs-like trimming jobs or reducing investment in research and development, other companies may limit their own innovation by sticking to "safe" technology advancements or investing large amounts of money in legal protection to help prevent lawsuits against their own firms. Less innovation can mean fewer jobs and a loss of revenue at both the state and federal level.
To combat this challenge, our court system needs serious and immediate tort reform. The reform should, at minimum, establish national standards for:
• Immediate and fair judicial review beyond that by the sitting trial judge
• Automatic review of excessive awards
• Reform of post-judicial interest rates to tie it to the federal bond rate
• Limited cap on punitive damages
In Europe, plaintiffs who bring frivolous suits risk being assessed court costs. Here in Georgia, punitive damages paid the plaintiff are capped at $1m; anything more goes to the state (and is beyond the calculation of plaintiff attorney fees).
Innovative technology has been the growth engine for the U.S. and for many state economies for over 30 years. Tech firms need to be held accountable, but they also need to be assured that they can do what they do best - innovate, create jobs, and support state and national economic growth. The need for national tort reform is dire - and efforts should be made to achieve it now.
Source: Technology Association of Georgia
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