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Newsroom - August 2018

Client Alert: Jury Verdict for Software Vendor Demonstrates Importance of Negotiating SaaS Agreements

By: David B. Darden, Partner
August 2018

A jury in the United States District Court for the Northern District of Georgia awarded more than $11 million to a software vendor in a case that should alarm businesses who are failing to seriously negotiate their software-as-a-service (SaaS) agreements. Pruitt Health, Inc., a major regional health provider in the southeast, subscribed to Caradigm's "Intelligence Platform" cloud-based service with the goal of aggregating patient data from multiple platforms. Pruitt signed Caradigm's form agreements almost unchanged.

Early in the implementation, during a testing phase, Pruitt became dissatisfied with the performance of Caradigm's platform and its failure rate at certain measured tasks. Pruitt then attempted to terminate the 5-year subscription. Caradigm insisted that the contract could not be terminated and sued Pruitt.

In 2017, the judge ruled that the vendor's deal documents (a "Cloud Service Agreement," an "Order," and a "Statement of Work") simply did not permit the customer to terminate the subscription without identifying a material breach by the vendor and going through a lengthy opportunity-to-cure process. As the customer had done neither, the judge found liability as a matter of law, leaving damages to a jury. On July 27, 2018, a jury returned a verdict awarding $5.1 million for breach of contract, $3.7 million in interest, and $2.3 million in attorney fees to the vendor. (See this link).

What lessons should health providers and other large users of SaaS services draw from this case? First, they should seriously negotiate their SaaS agreements. In this case, it appears the agreement was simply the vendor’s standard form contract, with only one revision requested by the customer (related to the confidentiality of patient records). Not surprisingly, the vendor's form contract did not provide easy exits for a dissatisfied customer, and it appears the customer gave little thought to how they would have to deal with their vendor if things went poorly. This is a common scenario, but can be guarded against with a little up-front negotiation; some advocacy for better termination rights might have saved the customer millions of dollars.

Second, if customers do find themselves in a dispute with a software vendor, it should immediately be elevated to the attention of in-house and/or outside counsel. The initial attempts by the vendor to terminate the agreement were made by IT and supply chain leaders. While their efforts appear reasonable from a business perspective, they did not follow the formalities prescribed by the vendor's form contract. The customer's counsel later tried to salvage the situation, but by then the suit had been filed and the damage done.

In short, SaaS agreements for critical systems and/or involving large amounts of money need to be taken as seriously as other complex business deals. Leaving the negotiation of these agreements, or the handling of disputes involving them, to technically-trained IT personnel is unfair to those personnel. Properly negotiating and managing large SaaS agreements requires a combination of technical, business, and legal skills, and a team working together to apply those different skills on behalf of the customer. Failure to do so can be extremely costly, as this verdict illustrates.

For more information or questions about negotiating a SaaS agreement or resolving a SaaS dispute, contact David Darden at (404) 420-5566.



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