Legal View: Law firm hooked by software arbitration clause

By Pat Murphy

The Daily Record Newswire

Unwary consumers get snagged by arbitration clauses all the time.

But it's an eyebrow-raiser when a premiere Silicon Valley law firm gets dragged kicking and screaming into arbitration when its brand new office software suffers a meltdown.

Hopkins & Carley describes itself as Silicon Valley's "dominant" regional law firm.

When you're busy dominating everybody, you need things to run smoothly behind the scenes. You can't afford distractions like major problems with the new computer software you just purchased to keep your office running at peak efficiency.

Hopkins & Carley claims that the accounting and law practice management software that it purchased from Thomson Elite is a lemon.

In June 2006, H&C purchased Elite software and associated services from Thomson. While H&C was still in the process of implementing the Elite software, Thomson pitched its new 3E software product.

According to H&C, Thomson claimed that the 3E product was far superior and -- what was surely a deal maker -- Thomson said the law firm could switch to the new product at no additional cost.

This sounded good, so H&C executed a new customer agreement for the 3E software. Under the new contract, H&C also purchased Thomson's Client Relationship Management (CRM) product. Thomson allegedly promised that the CRM product could be easily integrated with the 3E product.

H&C soon would experience buyer's remorse.

According to the law firm, it immediately began to note various problems with its operations relating to the new software. And what Thomson first claimed were "minor bugs" turned out to be unfixable.

The law firm alleged that the 3E software had serious structural problems that made the product unusable.

So H&E went to court, suing Thomson for (1) fraudulent performance of contract; (2) fraudulent inducement of contract; (3) negligent misrepresentation; (4) breach of contract; (5) breach of express and implied warranty; and (6) rescission.

The gist of H&E's lawsuit was that Thomson pitched the 3E software as a finished product when it was allegedly still in development.

Thomson demanded that the matter be arbitrated under a clause in the purchase contract applying to "any dispute arising under the Agreement."

The bright minds at H&C argued that the lawsuit did not fall within the scope of the arbitration clause, in essence accusing Thomson of attempting to pull off a ''bait and switch."

This argument was carefully considered by U.S. District Lucy K. Koh for the Northern District of California.

After this careful consideration -- and perhaps mindful that here was a high-powered law firm that was trying to avoid an arbitration clause in a contract it had freely entered into -- Judge Koh decided that H&C didn't have a leg to stand on.

In entering an order compelling arbitration last week, the judge found that "the allegations supporting these claims require examination of Thomson's performance under the contract and reference to the promises made through the parties' contractual agreement."

By way of example, the judge observed that ''H&C's claims for fraudulent inducement and negligent misrepresentation are premised in part on claims that Thomson misrepresented and concealed its 'ability and intention to fulfill its obligations to H&C' and continued to misrepresent its ability to implement and fix the 3E product. ...

"Similarly, H&C's claim for rescission is premised on claims that Thomson misrepresented its ability to perform and provide services to implement the 3E and CRM products, and that 'H&C did not intend or agree to receive the products and services actually delivered.'"

The court reasoned these claims "thus require interpretation of the obligations Thomson owed H&C under the contract, the services Thomson agreed to perform under the contract, and the product and services H&C contracted to receive. They also require examination of Thomson's conduct in performing its obligations under the contract. ... [H]ere all of H&C's claims are inextricably bound up with questions of contract interpretation, performance, and breach." (Hopkins & Carley, ALC v. Thomson Elite)

Published: Tue, Apr 19, 2011