By Pam Fulmer
We are going to focus a few blog posts on Oracle and its subsidiary NetSuite, Inc. (“NetSuite”) and some of the litigation that has been brought against these two companies by their unhappy customers. NetSuite was one of the first cloud-based companies in the market, and Oracle acquired the company in 2016.
NetSuite started out focusing on financial and accounting systems, then it branched out into Enterprise Resource Planning (“ERP”) and Customer Resource Management (“CRM”) software and eCommerce. NetSuite provides its customers with a subscription-based service and essentially claims that its customers can manage all their key financial and business processes in one solution. NetSuite claims that it is the #1 Cloud ERP Business Software Solution and according to its website that:
“NetSuite ERP is an all-in-one cloud business management solution that helps organizations operate more effectively by automating core processes and providing real-time visibility into operational and financial performance. With a single, integrated suite of applications for managing accounting, order processing, inventory management, production, supply chain and warehouse operations, NetSuite ERP gives companies clear visibility into their data and tighter control over their businesses.”
NetSuite customers have filed lawsuits against the company often alleging that NetSuite over promises and under delivers. Even before Oracle acquired NetSuite, the company had already been sued by customers claiming that NetSuite failed to deliver a functioning ERP product. In 2014 the Kentwool Company filed suit in South Carolina against NetSuite asserting claims for breach of contract, breach of express and implied warranties, fraud, fraud in the inducement, negligent misrepresentation and breach of South Carolina’s unfair business practices act, among other claims. Kentwool sought to rescind the contract based on fraud in the inducement. NetSuite moved to transfer the case to the Northern District of California due to the venue provision in the Netscape agreement. That motion was granted and the case was transferred to Judge Jon Tigar in the Northern District.
According to the Complaint, NetSuite represented that it would integrate all of Kentwool’s “manufacturing, inventory, purchasing, financial, sales and shipping processes” and that the software would include certain advanced features and that any implementation problems would be fixed by NetSuite. Kentwool also contended that NetSuite knew that its software could not do these things when it wrongfully induced Kentwool to enter into the contract. Plaintiffs in other lawsuits filed against NetSuite and Oracle arising out of failed ERP implementations have made similar allegations. We will get into some of those other cases in future blog posts. But for now, we want to focus on some of NetSuite’s key defenses, and common mistakes that NetSuite customers make when asserting fraud-based claims.
NetSuite contracts contain integration clauses. In the subscription agreement at issue in the Kentwool case, that clause provided that:
“This Agreement, including all exhibits and/or Estimate/OrderForms, shall constitute the entire understanding between Customer and NetSuite and is intended to be the final and entire expression of their agreement. The parties expressly disclaim any reliance on any and all prior discussions, emails, RFP’s and/or agreements between the parties. There are no other verbal agreements, representations, warranties[,] undertakings or other agreements between the parties.”
NetSuite, invoking the parol evidence rule, argued that this clause precluded Kentwool from introducing any evidence that varied, altered or added any terms that were not part of the integrated contract, such as representations made by NetSuite during pre-contractual sales and negotiation discussions. The court rejected those arguments and found that the parol evidence rule did not bar such evidence, because the Plaintiff asserted fraud-based claims, including fraud in the inducement and sought to rescind the contract. Having passed this first hurdle, Kentwool ran into another legal buzz saw—the failure to plead fraud with particularity.
Federal Rule of Civil Procedure (“FRCP”) 9(b) requires a heightened pleading standard for pleading fraud claims. To satisfy FRCP 9(b), a litigant must identify the who, what, when, where, and how of the alleged fraud such that defendants have notice of the particular misconduct alleged and can defend against it. What does this mean in practice? It means that NetSuite customers who claim fraud must get really specific. Was the fraudulent statement made in a phone call, an email or in a meeting? If the fraudulent claim was made in a meeting or on a call, courts will want to know the date of the meeting, and even the time. Where was the meeting? Who was at the meeting and who from NetSuite made the exact statement at isssue? What was the exact statement? Why was the statement false? All too often litigants are unable to make such a detailed showing because they fail to make an adequate record when they are engaged in pre-contractual discussions with Oracle/NetSuite. And that is a huge mistake.
It is an understatement to say that much can go wrong in the implementation of an ERP contract. So, Oracle/NetSuite customers must go into negotiations prepared to make the licensor get really granular on exactly what they are promising. Every time you have a meeting with or get on a phone call with NetSuite pre-contract, you would be well advised to take detailed notes of the meeting, including the date and time, and who attended. Save any emails. You also need to include the exact representations of NetSuite on which you are relying and the identity of the person who made the representation. Press NetSuite for specific information. Ask them to detail the existing capabilities of their software, and what capabilities they will need to customize for you. Write it all down, and send records of these communications to your legal department for safekeeping and use in the event of a dispute down the road. Be proactive.
The Kentwool court found the following allegations contained in the Complaint insufficient to plead fraud with the required particularity, and dismissed those causes of action with leave to amend:
“Prior to Kentwool entering into the Agreement with NetSuite, NetSuite represented to Kentwool that the Software would integrate the management of Kentwool’s manufacturing, inventory, purchasing, financial, sales and shipping processes, specifically including providing visibility and management of blended products through the manufacturing process. NetSuite further represented to Kentwool that the Software functionality would include, among others, advanced financials, item management, production planning, manufacturing control, cost control, lot and serial control, multi-division/multi-site solutions, and order management. During the implementation process NetSuite represented to Kentwool that it would, and did, correct the problems experienced by Plaintiff so that the Software would perform as originally represented to Kentwool. NetSuite also represented to Kentwool that complete implementation would be achieved on or around October 1, 2013.”
This example shows how detailed and granular any fraud-based claims must be pled to survive a motion to dismiss. So, give your lawyers the tools they need in case of any dispute down the line. Make a detailed record of what your needs are, and what NetSuite/Oracle promised it could do. If you can get NetSuite to set forth in writing what they are agreeing to deliver, do so. If they won’t put it in writing, then you need to record it yourself by taking good notes. For Zoom or Teams meetings you can ask NetSuite if you can record the conversation. It is doubtful that they will agree, but it never hurts to ask. If you do decide to record, you need to ensure that you are complying with the applicable law relating to the proper notice required for the recordation of conversations and meetings, in your particular jurisdiction.
Once you successfully can provide the granular details of what was promised, you will have another hurdle to overcome. Was it an actual misrepresentation of fact or mere puffery, which is not actionable? We will discuss hurdle number 2 in our next blog post, and what constitutes a material misrepresentation of fact in the context of a NetSuite related lawsuit. We will provide a few concrete examples, which a judge found to be mere non-actionable puffery, and not a false statement of fact. We think you will find this context very helpful in preparing to negotiate your ERP license agreement.
Tactical Law is an IP and litigation boutique law firm located in the San Francisco Bay area. We assist our clients to negotiate and document ERP and other licensing agreements. We also assist our clients in resolving disputes that might arise during ERP implementation, or if informal resolution is impossible, we assist our clients to litigate such disputes in courtrooms and in arbitration forums around the nation.
By Tactical Law Attorneys and From Time to Time Their Guests