Ok, I thought that title would grab your interest. Well, not long ago a court case surfaced where the software company lost big time and owes the customer nearly $240 million for a software/services deal gone badly.

How did this happen?

Well, let’s take a look at some useful tidbits for any company searching for growth equity or a venture capital investment. 

First things first…the case: Dillards (the customer) sued i2 (later acquired by JDA Software) over a failed software and services implementation (even though Dillards still utilizes the software; go figure that one out). Without laboring over a detailed factual analysis, Dillards believed the i2 software was not operating as promised and took it up with i2. Obviously, the parties could not work it out and the case eventually went to trial in Dallas, Texas in 2010. Long story short, i2 lost and Dillards won an approximately $246 million judgment on a $10 million software and services order (yep, 24 times the volume of the sale).  So how did this come about when a contract with a limitation of liability existed, and i2 hired lawyers to represent them on the contract? Let’s dig a little deeper and see what we can learn from a case like this. 

1) Don’t Over commit and Underperform. You almost certainly understood this already, but if you over commit and underperform in a big way, a court could find that you are guilty of fraud (yes the F word), which is what they found in the Dillards vs. i2 case. What did not help (and I think made all the difference), was the fact that i2 had agreed to a consent decree with the SEC stating that it had exaggerated the function of its products to its customers and also overstated its revenue. But it gets even worse! The company i2 also hired an MIT professor of Management (not quite sure why they had to do this) to execute an evaluation of their company practices. This professor compiled a scathing document which stated that i2 was over committing and underperforming…see excerpt below.

2) If You Have a Problem, Solve It. Software is never perfect and totally free of flaws, but if you possess a product dilemma (e.g. the software fails to work or your sales team has oversold the technology), fix it and make it correct. Every software company I make contact with understands how to solve these kinds of complications, so don’t overlook the value of relationships with your customers. I bet if i2 had provided Dillards its money back in the beginning of the process, witnessed the case for what it was or in general dealt with the disagreement in a fair way, they would never be facing a $240 million dollar judgment. I am not trying to second guess this case with the advantage of hindsight, but I would not have encouraged going to trial solely based on this set of facts. 

So without going on eternally concerning this subject, my goal is not to scare you, but rather to inspire you to make sure you control your sales teams, and people at your company don’t think you can/should commit to things that don’t exist (even in the intangible world of software). Oh yea, those limitation of liabilities normally work to protect you, but not necessarily against a finding of fraud as in this case (which you may not notice is a really high bar). Just a few ideas from an attorney who helps companies looking for growth capital prior to looking for their company exit strategy.

Jeremy Aber is a Senior Advisor to OpenView Venture Partners.