Statements About Future Events and Fraud: Part IV of Our Series on Fraud and Breach of Contract Litigation Related to Failed ERP Installations Involving Oracle/NetSuite
By Pam Fulmer and Sara Schlesinger*
This blog post is a continuation of our series on fraud and breach of contract claims that have been brought against Oracle or NetSuite for failed Enterprise Resource Planning (ERP) installations and various defenses Oracle/NetSuite have used to attempt to defeat these claims. Previous blog posts focused on the importance of pleading fraud with particularity, the difference between fraud and non-actionable puffery, and considering the economic loss rule when pleading fraud alongside breach of contract.
Another important consideration when pleading fraud related to a failed ERP installation is the general rule that predictions and opinions about future events are not actionable as fraud. ERP providers may use this rule to argue for the dismissal of fraud claims which are based on statements that the provider “could” or “would” deliver a functional product, a product that meets the client’s business needs, or a product by a certain date.
Cognizant Worldwide Ltd. v. Barrett Business Services is instructive as an example of the right way to plead fraud based on allegations of broken promises relating to a failed Oracle ERP agreement. Barrett Business Services (“BBSI”) is a professional employer organization (“PEO”) that helps small and medium-sized companies manage human resource functions, provide employee benefits, process payroll, and more. When BBSI sought to update their human resources and payroll system, they at varying times entered into contracts related to the implementation of Oracle’s HCM cloud product with Oracle, and Oracle’s partners KBACE and Cognizant (KBACE’s parent company). BBSI alleged that it only entered into the implementation contracts based upon assurances by KBACE and Oracle that the cloud product would meet and be configured to BBSI’s specific business requirements. BBSI further asserted that Oracle held KBACE out as a company certified and experienced in implementing Oracle’s HCM cloud product, during pre-contract negotiations, including for businesses such as BBSI. Oracle’s touting of KBACE’s capabilities was a major reason why BBSI entered into the contract with KBACE.
After entering into the relevant agreements for the Oracle HCM cloud implementation project, BBSI learned that the cloud product was ill suited to its business needs. KBACE subsequently delivered a revised implementation proposal to BBSI with a price tag of over $30 million. Our readers should be aware that these type of cost overruns and requests for expensive change orders are common areas giving rise to disputes that often lead to litigation in the ERP contract context. BBSI then informed Oracle and KBACE that it was rescinding the relevant contracts and ceasing further payments. When Cognizant sued BBSI for nonpayment, BBSI counterclaimed for negligent misrepresentation, innocent misrepresentation, intentional misrepresentation, and other tort and breach of contract claims. Cognizant moved to dismiss the misrepresentation claims, arguing that any alleged misrepresentations were nonactionable statements about future events as they pertained to whether the HCM cloud “would” or “could” meet certain expectations, such as implementation within a certain timeframe and price range. However, the court denied the motion to dismiss the claims finding that BBSI sufficiently alleged that Cognizant and KBACE misrepresented past or existing facts. Namely, the court agreed that BBSI had adequately alleged that Cognizant and KBACE overstated their experience with implementing cloud products and especially implementing cloud products for a company like BBSI. However, the court noted that some of the other alleged misrepresentations might be nonactionable opinions about Cognizant’s future performance.
Cognizant v. Barrett demonstrates the importance of pleading past and existing material facts alongside promises of future performance when asserting fraud and misrepresentation claims. It also demonstrates the importance of pinning ERP providers down in pre-contract negotiations concerning exactly what they are promising that they can deliver, and what specific experience they have to deliver on that promise. Aggrieved ERP customers who claim fraud after being misled about an installers future performance would benefit from including misrepresentations that the installer made regarding their relevant past or current experience, if such facts exist.
As a final note, it is also true that a statement about a future act that is made with the knowledge or intention that the act won’t occur, is a statement of material fact that is sufficient to support a fraud claim (as highlighted in Chase Manhattan v. Perla) against an ERP provider or implementation partner. As such, even if past or present facts were not represented during discussions that preceded contracting, a company can still have an actionable claim based on misrepresentations about performance if the ERP provider either knew they would not perform or did not intend to perform when they made the promise. However, uncovering such evidence prior to fact discovery, may be difficult, and may need to be raised down the road through an amendment to the licensee’s complaint or counterclaim.
Tactical Law attorneys assist our clients in the negotiation and documentation of ERP and related agreements. If you are embroiled in an ERP related dispute involving Oracle or other ERP software publishers or ERP implementation companies we can help.
* Sara Schlesinger is a rising 2L law student at Northwestern University School of Law and is a 2022 summer law clerk for Tactical Law Group LLP.
By Tactical Law Attorneys and From Time to Time Their Guests