Richard Raysman and Peter Brown

The set of processes collectively deemed software implementation generally refers to a systematically structured approach to enterprise software that serves to integrate effectively a software-based component or service into an organizational workflow. Software implementation works best when, among other things, the process is refined and analyzed from the kick-off, the software configuration reflects each stage of the training and development process, and going live adequately deploys resources and assigns attentive on-site user support. Pitfalls resulting from a faulty software implementation process include the absence of leadership or management from the company, a lack of definition of the business process, and a poor communication infrastructure.

As with any software agreement, true and enforceable representations in software implementation agreements concerning the location and functionality of the software are integral to the success of the project. Arguably failing to adhere totally to these representations was the subject of a recent decision in federal court in the Eastern District of California. In Copart v. Sparta Consulting, in a case plaintiff’s attorneys labeled as sui generis, a jury awarded plaintiff nearly $25 million, less a $5 million offset given defendant’s success on one counterclaim, for defendant’s breach of agreements and statements of work that collectively amounted to a software implementation arrangement.

Facts and Procedural History

Plaintiff/counter-defendant Copart, Inc. hired defendant/counter-claimant Sparta Consulting, Inc. to design, implement and construct Copart’s online vehicle auction software. On Oct. 6, 2011, Copart and Sparta signed an Implementation Services agreement, with an accompanying Design Project Statement of Work (as amended in 2013, the agreement). In 2012, the parties signed a related Statement of Work and Realization Project. The agreement required Sparta to complete a series of milestones. Copart paid Sparta roughly $5 million for completion of the first four milestones. Copart later accepted Sparta’s deliverables to satisfy milestones 5-7.

Acceptance aside, Copart subsequently claimed that Sparta outsourced some of its obligations under the agreement to “incompetent” consultants employed by its India-based parent company KPIT Technologies. Consequently, the resulting product was a “disaster” that never went live, allegedly causing Copart more than $50 million in damages and lost profits. Copart also alleged that “KPIT and Sparta admitted [in internal emails] that the KPIT consultants’ unfamiliarity with the system doomed the project.”

On Sept. 17, 2013, Copart terminated its agreements with Sparta for convenience and requested that Sparta submit an invoice for work performed to date. Sparta sought payment for $12 million in fees, which constituted a substantial remainder of fees then outstanding. Copart rejected this fee request as an “unreasonable” position. According to Copart, these performance failures did not become apparent until mid-2013.

Litigation ensued. Copart brought claims for, inter alia, fraud and fraudulent concealment against Sparta, and professional negligence against Sparta and KPIT. Sparta brought claims against Copart for, inter alia, breach of the implied covenant of good faith and fair dealing. Both parties moved for summary-judgment.

District Court Opinions

On Sep. 26, 2017, the District Court issued a 29-page opinion, with varying results for the parties. See Copart, Inc. v. Sparta Consulting, Inc., 277 F. Supp. 3d 1127 (E.D. Cal.). Notably, the court held that Copart, by accepting the deliverables in milestones 1-4, waived any right to sue for defects within the deliverables. The agreement gave Copart a 10-day window to review compliance of the deliverable with the milestone criteria. The agreement also specified that if the milestone satisfied all applicable criteria, Copart would provide written confirmation of acceptance to Sparta. Copart provided written confirmation that it accepted the deliverable from Sparta for each milestone.

Copart’s fraud, fraudulent concealment and professional negligence claims survived summary judgment, as did Sparta’s claim for breach of the implied covenant of good faith and fair dealing. These fraud-based claims survived summary judgment because certain representations, namely that, notwithstanding evidence to the contrary, Sparta assured Copart during the design phase that it would ensure 100 percent system functionality, could be actionable because Sparta’s internal correspondence indicated its belief to the contrary.

Copart’s professional negligence claim also made it through summary judgment on grounds that Sparta may have failed to work pursuant to, employ, and utilize an accepted standard skill in designing, testing and building the software. The same claim survived summary judgment against KPIT due to conflicting evidence concerning KPIT’s involvement in the alleged professional negligence. Specifically, the court credited evidence that a Sparta employee had emailed to a KPIT consultant the login credentials to certain aspects of the software and requested confirmation of receipt of the consultant’s copying efforts. Moreover, at least one KPIT employee had logged “thousands of hours” apparently working at least in part on the projected governed by the agreement and attendant statements of work.

As developments in the case later indicated, Sparta’s claim for breach of the implied covenant of good faith and fair dealing also survived summary judgment, though the claim went unaddressed in the 2017 district court opinion.

Copart moved for reconsideration on the court’s interpretation in the 2017 opinion of an element of a fraudulent misrepresentation claim under California law. On Feb. 21, 2018, the court denied the motion on grounds that its interpretation of this element did not constitute clear error. See Copart v. Sparta Consulting, 2018 WL 1014617, at *1. On April 19, 2018, the court denied a motion by Sparta and KPIT to bifurcate the trial, and a jury trial commenced on April 23. See Dkt. 394.

Trial

The trial lasted 19 days and the jury issued its verdict on May 22, 2018. See Copart v. Sparta Consulting, No. 2:14-cv-00046-KJM-CKD (Dkt. 497). Copart prevailed on (1) its fraudulent concealment claim against Sparta, for which the jury awarded damages of $4.69 million; and (2) its professional negligence claim against Sparta and KPIT (as Sparta’s alter ego/parent company), for which the jury awarded damages of $20 million. The jury rejected Copart’s fraud, fraudulent inducement and statutory computer fraud actions. Sparta won on its claim against Copart for breaching the implied covenant of good faith and fair dealing with respect to the agreement, for which the jury awarded $4.88 million.

Notwithstanding the clear disparity in damages award, both parties claimed victory. Copart’s lawyer claimed that “[t]o our knowledge, this is the first instance in which a software implementation consultation has found to be professionally negligent.” As detailed further in a Law360 article, Sparta’s attorneys heralded the $5 million verdict and noted that the jury found in Copart’s favor on only 2 of its 14 causes of action. Sparta’s attorneys also claimed to be “exploring all challenges to the verdict.”

Richard Raysman is a partner at Holland & Knight. Peter Brown is the principal at Peter Brown & Associates. They are co-authors of “Computer Law: Drafting and Negotiating Forms and agreements” (Law Journal Press).