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By Pam Fulmer
The call usually starts the same way. A general counsel describes a software implementation that consumed two years and eight figures and never worked. Then, before we get to the facts, she says the thing that almost stopped her from calling at all: “But I’ve read our agreement. Damages are capped at twelve months of fees. Consequential damages are waived. There’s an integration clause. We’re stuck.” She has read the contract correctly. She has drawn the wrong conclusion from it. A liability cap allocates the risk of a deal that goes badly. It is not a license to lie about what you are selling. Under California law, the vendor’s own paper is frequently the weakest part of its defense once the sales cycle is examined — and the clauses that look like a wall are, in a fraud case, considerably closer to a fence. Under California law, a limitation-of-liability provision remains enforceable for an ordinary contract claim in many commercial settings. But it cannot be used to limit liability for an adequately pleaded, independently tortious fraud or other willful injury. The distinction is important—and fact intensive. Civil Code section 1668 reaches damage limitations for willful torts California Civil Code section 1668 makes contracts that directly or indirectly exempt a party from responsibility for its own fraud, willful injury to another’s person or property, or violation of law contrary to public policy. In New England Country Foods, LLC v. VanLaw Food Products, Inc., 17 Cal.5th 703 (2025), the California Supreme Court held that section 1668 invalidates contractual limitations on damages for willful injury; the statute is not confined to provisions that eliminate every possible remedy. The Court also rejected a rule turning enforceability on the commercial sophistication of the parties or their bargaining power. That holding has an essential limit. Section 1668 does not invalidate an agreed limitation for a pure breach of contract merely because the breach was deliberate, opportunistic, or economically harmful. The claimant must establish a tortious wrong that is independent of the contractual nonperformance and falls within the statute’s scope. VanLaw did not decide whether the pleaded tort claims in that case actually met that standard. Fraud must be more than a disappointed implementation The economic-loss rule and the independent-duty doctrine remain central. A customer cannot obtain uncapped tort remedies simply by relabeling a failure to perform as “fraud.” In Robinson Helicopter Co., Inc. v. Dana Corp., 34 Cal.4th 979 (2004), the Court allowed a fraud claim based on affirmative, knowingly false certificates of conformance that were separate from the defendant’s delivery of nonconforming goods. The decision is deliberately narrow; it does not make every false assurance of contractual performance actionable in tort. More recently, Rattagan v. Uber Technologies, Inc., 17 Cal.5th 1 (2024), held that fraudulent concealment during a contractual relationship may support a tort claim only when the claim’s elements can be established independently of the parties’ contractual rights and obligations and the conduct exposed the claimant to a risk of harm beyond the parties’ reasonable contemplation when they contracted. For a software dispute, the strongest fraud facts usually arise from the sales cycle: a statement of present capability, a concealed material limitation, manipulated proof-of-concept results, or a promise made without a present intent to perform. The facts must show not merely that the product failed, but that the vendor deceived the customer to obtain the deal or inflicted an independent tort in performing it. An integration clause does not bar proof of actual fraud—but reliance still matters An integration clause does not categorically exclude evidence offered to prove that an agreement was procured by fraud. In Riverisland Cold Storage, Inc. v. Fresno–Madera Production Credit Ass’n, 55 Cal.4th 1169 (2013), the California Supreme Court overruled the restrictive Pendergrass rule and reaffirmed that the fraud exception to the parol-evidence rule may permit evidence of fraudulent promises even when they conflict with the written agreement. That does not make every precontract statement actionable. The claimant must still plead and prove a material misrepresentation or concealment, scienter, intent to induce reliance, justifiable reliance, and resulting damage. A sophisticated buyer’s diligence, the contract’s express warnings or disclosures, and any specific non-reliance provision can materially affect the reliance analysis. Remedies require a claim-by-claim analysis A viable, independent fraud claim can materially alter the remedies analysis, but the available remedy depends on the transaction and the facts. • Compensatory damages. For fraud in the purchase, sale, or exchange of property, Civil Code section 3343 generally provides an out-of-pocket measure and specified additional damages. It is not the universal measure for every software-services fraud claim. Other fraud claims may invoke the general tort measure, and contract and tort damages cannot duplicate the same loss. • Punitive damages.Civil Code section 3294 permits exemplary damages for a noncontractual obligation upon clear and convincing proof of oppression, fraud, or malice. For a corporate defendant, the statute requires the requisite conduct, authorization, or ratification by an officer, director, or managing agent. • Rescission and restitution. A party whose consent was obtained through fraud may have a right to rescind under Civil Code section 1689(b)(1). Rescission is an election of remedy with procedural and restoration obligations; it is not automatically available simply because an implementation was unsuccessful. • Limitations. A California fraud claim is generally subject to the three-year period in Code of Civil Procedure section 338(d), which accrues on discovery of the facts constituting the fraud. Discovery is not an indefinite extension; a claimant’s actual or inquiry notice may be contested. What to do before signing the next document Preserve the sales cycle. Collect decks, RFP responses, proof-of-concept scripts and outputs, product demonstrations, emails, chat messages, recordings, calendar invitations, and relevant internal notes. Preserve the sources and metadata, not just selected excerpts. Assess new paper carefully. A renewal, change order, remediation plan, release, or settlement may affect claims and remedies. Review it before signing; do not assume it merely addresses operational issues. Build the fraud record promptly. Document who made each representation, their role and authority, the recipient, date, medium, precise substance, contemporaneous evidence of falsity, reliance, and resulting harm. California fraud must be pleaded with specificity. Lazar v. Superior Court, 12 Cal.4th 631 (1996), explains that a corporate fraud allegation ordinarily must identify the speakers, their authority, what they said or wrote, to whom, and when. The practical point A liability cap may determine the value of an ordinary contract dispute. It does not resolve whether the vendor made an independently actionable misrepresentation, concealed material facts in circumstances giving rise to a duty, or engaged in another willful tort. Those questions require a careful examination of the sales process, the contract language, the nature of the alleged wrong, and the damages actually caused.
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A Tactical Take on the gap between what’s promised and what’s signed
If your company is evaluating a new ERP system, the sales process can feel like the most attentive, professional courtship you’ve ever experienced. That’s by design. Understanding how the cycle actually works — and where the traps are — can save you from signing a contract that bears little resemblance to what you were sold. The Charm Offensive It usually starts with an impressive show of force. The vendor trots out a small army from their side to “learn your business.” There are discovery calls, scoping sessions, and workshops — a steady rhythm of Zoom, Teams, and in-person meetings, each one devoted to understanding how your operation runs. It looks like a serious commitment of resources, and it feels flattering. Woven through all of it is the language of collaboration. The sales team talks about wanting to partner with you, to be a long-term ally rather than just a vendor. It’s warm, it’s reassuring, and it’s meant to lower your guard. Here’s what to keep in mind: the people in those rooms are often genuinely eager but not always genuinely informed. An enthusiastic salesperson may know very little about the technical realities of the product, yet will confidently represent that the software can do everything your company needs. Enthusiasm is not the same as a commitment, and a friendly assurance is not the same as a specification. Everything is Oral — and That’s the Point Notice how much of the scoping conversation happens out loud and how little of it lands in writing. Promises about capabilities, custom workflows, integrations, and outcomes tend to be made verbally, across dozens of meetings, with very little committed to paper. That is not an accident. The fewer written representations there are, the smaller the paper trail — and the less the vendor can be held to later. The Pricing “Test” and the Expiring Discount Once you’re hooked, the pricing arrives. Treat the first number as what it is: a test of how much they can get. When you hesitate, the discounts appear — often steep ones — accompanied by urgency. You’ll be told the discount is expiring, that you need to sign now, and maybe that this is the best pricing the rep has ever seen. It usually isn’t. Manufactured urgency and “best I’ve ever seen” framing are standard closing tools, not reflections of a genuinely rare opportunity. A real deal is still a real deal next week. The Paperwork Switcheroo Once you agree to move forward, the paperwork comes over — frequently through DocuSign, ready for a quick signature. This is the moment to slow down, because this is where the gap opens up. The specifics you spent weeks scoping are often nowhere in the agreement. Instead of the tailored solution you discussed, you get a very general scope of work that promises little more than the vendor’s generic, off-the-shelf product. That’s because once you are in implementation and you ask why the software does not have the required functionality you discussed, the ERP vendor pulls out the contract and says it was never included. Then there’s the order form — often a mystery. It lists multiple modules that, the publisher assures you, will combine to deliver your solution. What’s frequently missing are the key pieces that actually make it work: connectors, integrations, and other essential components. They’re sometimes left out precisely because the sales team fears that including them — and their cost — will tank the deal. After signing, these reappear as change orders or as required add-on items, at an additional expense. The clause that erases every promise Buried in the contract is an integration clause (also called a “merger” or “entire agreement” clause). In plain terms, it states that the signed written contract is the complete and final agreement between the parties, and that it supersedes every prior discussion, representation, and promise made during the sales process. Read that again in light of everything above. All those oral assurances about what the software could do? Legally, they’re gone. If it isn’t in the written contract, you generally can’t rely on it. The integration clause is the mechanism that turns weeks of verbal promises into thin air the moment you sign. The Disappearing Act Then the deal closes, and the dynamic changes overnight. The attentive sales team is gone with the wind. In their place arrives the implementation team — and this is often the moment the customer starts learning that what was promised during the sales cycle cannot actually be done, at least not without more time, more modules and add-ons, and more money. What to Watch For
The sales cycle is engineered to feel like a partnership. The contract is what actually governs the relationship. Make sure the two agree before you sign. By Pam Fulmer
The email arrives on a Tuesday afternoon. It is polite. It is addressed to someone in procurement or IT who has never seen one before. It references a section number in an agreement signed years ago by people who no longer work at the company. It asks for a call to “discuss your licensing position” and requests that you run an attached script and return the output within thirty days. There is no dollar figure in it. That comes later — and by then, the number will have been built almost entirely out of information your own team handed over in the first week. This is the central and counterintuitive fact about software license audits: the most consequential decisions are made before anyone knows what is at stake. By the time a seven- or eight-figure demand arrives, the evidentiary record supporting it is already closed, and your company built most of it. The audit demand is not calculated from what you deployed. It is calculated from what you reported, measured the way the publisher's tools measure it. You are not being singled out Clients often assume an audit letter means the publisher suspects something. Usually it does not. Audits are a revenue channel, run on a schedule, and the volume is substantial. Flexera's 2026 State of ITAM Report, drawn from a survey of ITAM professionals conducted in early 2026, found that nearly half of organizations — 48 percent — received a software audit in the prior twelve months. Microsoft was the most frequently reported auditor at 64 percent of those audited, with Oracle close behind at 50 percent. Oracle's reported audit activity jumped roughly fourteen percentage points year over year. Adobe and VMware activity also rose. The cost side is where it stops being a compliance annoyance and becomes a balance-sheet event. Forty-four percent of organizations reported spending more than $1 million on software audits over a three-year period. In earlier Flexera data, the share of companies reporting audit costs above $10 million nearly doubled year over year, from 7 percent to 12 percent. Two conclusions follow. First, receiving a letter is not evidence that you did anything wrong. Second, the process that follows is expensive enough that it deserves the same seriousness as any other bet-the-budget dispute — from hour one. Hours 0 to 4: contain the response The single most damaging thing that happens in a software audit usually happens in the first afternoon, and it is almost always well-intentioned. A systems administrator receives the letter, wants to be helpful and cooperative, and replies directly to the auditor. In doing so, he or she confirms deployment figures from memory, describes the virtualization architecture, explains that a subsidiary has been using the software too, or apologizes for something. None of it is verified. All of it is admissible. All of it is now the publisher's baseline. What to do instead
Hours 4 to 24: preserve everything, change nothing Two instincts surface once the seriousness registers, and both are dangerous. The first is to clean up — uninstall software that may be over-deployed, decommission instances, tidy the environment before anyone looks. Do not. Depending on the contract and the circumstances, this can convert a commercial dispute into an allegation of spoliation or bad faith, and publishers have begun litigating precisely this point. In the Broadcom litigation now pending in the Northern District of California, the publisher's position is essentially that a customer cannot extinguish audit obligations by removing the software mid-review. Whatever the outcome, you do not want to be the test case. The second is to delete — to purge old email threads about license planning or the failed true-up conversation from two years ago. That is worse. What to do instead
Hours 24 to 48: read the contract, not the letter The audit letter describes what the publisher would like to happen. The contract describes what the publisher is entitled to make happen. In our experience these two documents diverge more often than they align, and the gap is where the leverage is. Working through the actual audit clause, ask:
Hours 48 to 72: build your own number first An audit is a valuation dispute conducted under the appearance of a factual inquiry. Whoever establishes the measurement framework first usually wins the argument that follows. Before responding substantively, and under privilege, develop an independent internal picture: what is actually deployed, what entitlements actually exist, and what the defensible license position looks like under a reasonable reading of the contract. This accomplishes three things. It tells your leadership the realistic range of exposure rather than the publisher's opening number. It surfaces the contractual ambiguities worth fighting over. And it means that when the publisher's figure arrives, you are comparing two analyses rather than reacting to one. Where the technical measurement is genuinely complex — virtualization, containerization, indirect or digital access, disaster-recovery environments, development and test instances — a licensing specialist working at counsel's direction is usually worth the cost several times over. The distinction matters: retained through counsel, that work carries a privilege argument. Retained directly, it generally does not. The five mistakes that cost the most money 1. Treating it as an IT problemAudits are contract disputes that happen to involve technology. Routing one to the infrastructure team because it mentions servers is how companies end up bound by admissions no lawyer ever reviewed. 2. Volunteering scopeAnswering questions that were not asked, disclosing affiliates the publisher had not identified, and describing environments outside the audited product family all expand the audit at your own expense. 3. Accepting the publisher's mathDeployment counts under contested interpretations — core-counting in virtualized environments, user definitions that sweep in service accounts, indirect access theories — are legal conclusions dressed as measurements. They can be contested. They frequently should be. 4. Negotiating on the publisher's clockAudit findings tend to arrive near a quarter or fiscal year end, accompanied by a deadline and a discount that expires. The urgency is manufactured, and the resolution offered is almost always a purchase rather than a settlement — the compliance gap is forgiven in exchange for a subscription commitment considerably larger than the gap. 5. Waiting to involve counsel until there is a demandBy then the record is fixed. Counsel engaged at the demand stage is negotiating over evidence the company created without advice. Counsel engaged at the letter stage is shaping what that evidence is. What resolution actually looks like Most audits do not end in litigation. They end in a negotiated commercial resolution, and the quality of that resolution depends almost entirely on the strength of the customer's independent position and its credible willingness to litigate if pushed. A well-defended audit typically produces some combination of a substantially reduced compliance figure, a release covering the audited period, an agreed and documented licensing interpretation going forward, amended audit provisions with tighter scope and notice requirements, and — where the publisher's conduct warrants it — a negotiated standstill on further audits for a defined period. What it does not produce is a rushed subscription commitment signed three days before the publisher's fiscal year closes. When you need litigation counsel and not just a licensing consultant Licensing consultants are valuable, and we work with them regularly. But certain features of an audit signal that the matter has already left the commercial track:
If an audit letter has arrived Our practice is devoted to software licensing and technology disputes — audit defense, over-deployment and indirect access claims, failed implementations, and litigation against major publishers. If your company has received an audit notice, or expects one, the most valuable conversation is the one that happens before the first substantive response goes out. This article is provided for general informational purposes and does not constitute legal advice or create an attorney-client relationship. |
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