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In a recent landmark judgment, a US court pronounced Cisco guilty of breaching its reseller agreement and the deal registration program, and ordered the networking vendor to pay $6 million in damages to one of its partners, Infra-Comm.
What’s also significant is that the court termed parts of Cisco’s reseller agreement as unconscionable—a legal term used to describe contracts that are unfair to one party.
The verdict was the outcome of a lawsuit filed by Infra-Comm, one of Cisco’s silver partners, which accused Cisco of breaching its Indirect Channel Partner Agreement and the terms of its deal registration program when it passed on a potential large deal with a real estate company to another Cisco partner, AT&T.
According to Infra-Comm, Cisco passed the customer to AT&T despite its long-term efforts in developing the opportunity, and even after registering the deal with the vendor. In its lawsuit, Infra-Comm said it had registered the said deal under Cisco’s deal registration program, which was supposed to ensure that other solutions providers could not take that deal with the same discount offered under the program.
Hailing the judgment, Brian Daucher, attorney for Infra-Comm said, “I think it sends a signal that vendors should be sure that their agreements are reasonable. Companies should respect the contributions made by their smaller partners. Companies that get out ahead of this issue will reap rewards, while those that lag will pay a price.”
Daucher added, “I don’t think anyone has ever told Cisco no. Cisco has a remarkable track record of success; everyone knows that they have great products. But Cisco Legal has got to learn when to temper some of that with a more practical approach. We all expect people to honor contracts and to be fair. I do think courts will feel more empowered to level the playing field where there are signs of unequal bargaining power and one-sided results.”
Despite the negative verdict, Cisco is defiant. “We have always worked very hard to find a healthy balance between serving and supporting the needs of our partners and customers. In this particular case, the customer ultimately decided which solution provider to work with when deploying their Cisco solution, and we did our best to support the decision. While we respect the jury’s verdict, we disagree with it and are considering all options including an appeal,” said Bill Friedman, senior corporate counsel for Cisco.
Continued Friedman, “We do not believe this ruling has broader implications for Cisco’s agreements with partners. No precedent was set with this ruling because the facts are specific only to this case. By their very nature, breach-of-contract cases are fact-based and specific. This case involved one contract and one reseller. Our standard contract terms were designed to drive efficiency and make it easier for partners to do business with us, and vice versa. We have made many changes and improvements to these terms in the past based on partner and customer feedback, and we will continue to do so moving forward.”
Partners in the US are rejoicing at the verdict since they believe that such a legal precedent may compel many vendors to review and reword their partner agreements to make them more equitable. One solutions provider, who responded to the CRN report under the moniker ‘Britvar,’ said that the inability to re-negotiate can set the wrong tone for the relationship and leave partners frustrated at the take-it-or-leave-it attitude, especially with larger vendors. “The judge in this case was absolutely correct to point out that VARs who demonstrate success and loyalty over several years should be treated differently from the new VARs, and he nicely underlined the cynicism toward the channel that surely exists at Cisco,” ‘Britvar’ wrote.
Another solutions provider with the nickname ‘Daniel Duffy’ wrote, “Nice to see the judge call a spade...a spade. Now we’ll have to see if all the other 800-pound gorillas in our industry start rethinking their partner agreements.”
However, most partners on the CRN blog said that Cisco is not the only vendor to have such one-sided agreements—it’s an industry-wide issue.
The Indian channel responds
Considering that most top vendors who operate in India are US-based multinationals, CRN set out to get partners’ reactions on the judgment and whether it would have any impact on the Indian channel. More importantly, CRN wanted to know if local partners have had issues with reseller agreements, and if they have ever thought of taking a legal approach to the matter.
“To be honest, I have not read any of the partner agreements I have signed with vendors so far. There is no need to because even if you had any issues with the agreement there is no way vendors are going to change it,” says Sudhir Kothari, CEO of Kolkata-based systems integrator Embee Software.
He continues, “[To believe that] a certain lawsuit in the US will compel vendors here to change the terms of their reseller agreements is just too far-fetched. And even if vendors hypothetically did so, they will find a loophole to get away from honoring their commitments to partners.”
Intriguingly, nearly all 20 partners CRN spoke to while doing this story said that they neither had the time nor the inclination to decipher the text of their legal agreements with vendors. “Have you ever seen those agreements?” asks Saket Kapur, CEO of Green Vision IT, a Delhi-based solutions provider. “They run into pages, especially the legal contracts of MNC vendors. Reading them and trying to figure out the legal impact of each clause could take you days. Who has the time? If you get it vetted by a legal advisor he will never allow you to sign it as these agreements are totally one-sided.”
Swimming against the tide, Allied Digital is one company that does religiously read their reseller agreements. Affirms Prakash Shah, the company’s CFO, “Being a listed company, it becomes imperative for us to understand the material impact on our future business of any agreement we sign. In a couple of instances, our legal team had issues with certain clauses that we found objectionable
in the contract, and we asked the vendor to change them. While one vendor did oblige, the other vendor said that making the suggested changes would take a couple of months because it needed approval from their US legal team. Finally, we had no option but to sign the original contract, otherwise it would have delayed the partnership.”
Does it matter?
Interestingly, while most partners believe that vendor-partner agreements should be equitable, and should also take the partner interest into account, there is an underlying skepticism if that would make life better for them.
“Surely, the vendor-partner agreement ought to be mutually beneficial, and should provide the partner an equal status in business relations. But for that to happen the channel will have to unite to demand it,” opines Kothari.
But will a more equitable contract change relationships on the ground? T G Ramesh, director, Precision Infomatics, doesn’t believe it will. “The reseller contracts signed between vendors and their partners have no meaning in day-to-day business. It’s just a symbolic document, it doesn’t affect the way business is done. Even vendors never refer to it in cases of conflict. There have been issues regarding deal registration, employee poaching, ORC, direct selling, etc, but in most cases they are resolved by sitting and discussing it across the table, so the question of taking legal course is never on the minds of either side.”
What also makes these agreements irrelevant in the Indian context is the country’s legal system. The Cisco-Infra-Comm lawsuit in the US got a verdict within two weeks from the time the hearing on the case began.
“That will never happen in India,” points out Kapur. “Such a case would have dragged on for years here.
Our laws pertaining to business contracts are so archaic, from pre-Independence days, that they may not be able to address issues like the one between Cisco and Infra-Comm. In India these issues can be resolved through out-of-court arbitration.”
Making agreements equitable
In spite of the cynicism of the channel with regard to vendor agreements, they do have a wish-list that, if incorporated in the partnership contracts, will make them fair. What ticks off many partners is that vendors change contracts from partner to partner. Larger partners get better terms than smaller ones. “For instance, the agreements that vendors have with tier-1 systems integrators include non-poaching agreements, but that isn’t there in the contracts signed with us. There shouldn’t be such double standards,” complains Kothari of Embee.
Suresh Pansari, MD of Rashi Peripherals, gives another example. “Many vendors give better terms on price protection and credit to large format retailers (LFRs) than they do to their own distributors—who probably do more business for the vendors than the LFRs. The reason is that the owners of the LFRs are bigger than us, and they demand such terms or refuse to sign with the vendors.”
Pricing parity between different partners is another issue that the channel believes should find a place in the contract. Umang Mehta, CEO of distributor Roop Technologies, feels that there should be a fair and standard pricing clause included in the vendor-partner contract, something that is possible if there is the intent. “Several IT distributors who supply products to Reliance Digital and Croma know that these companies have a stringent pricing clause in their contracts. This clause states that the supplier cannot sell the same product at a lower price to any other reseller for same volume. If they can do it for these large companies, they can very well do it for other partners,” comments Mehta.
Conclusion
While there is much debate on the relevance of reseller agreements, most partners believe that a fair and equitable partnership is in the interests of all parties. If and when that happens, the word ‘partner’—which vendors use to describe their authorized resellers—would finally acquire some real meaning. |