Contract Law: Check the Fine Print on Partner Agreements

Solution providers that want to do business with vendors typically have to sign a contract binding them to certain rules and regulations. In return, they receive special pricing and benefits from the vendor. While not always a true partnership, it’s the basic principle of the channel that works well … sometimes.

A groundbreaking lawsuit last year brought—and won—against Cisco Systems by solution provider Infra-Comm alleging breach of contract may level the playing field between vendors and their partners. In the wake of the lawsuit, many vendors are recrafting their partner agreements and terms of service—mostly in their favor—to guard against a repeat of what happened between Cisco and Infra-Comm.

Infra-Comm, a San Juan Capistrano, Calif., reseller, filed suit against Cisco last year alleging the networking vendor violated its contract with Infra-Comm by passing a lead to AT&T and bypassing Infra-Comm. Such actions were in violation of both Cisco’s partner agreement and its deal registration program, the suit alleged.

Cisco has long been accused of using heavy-handed tactics, such as ganging up on solution providers that don’t lead with their products. The Infra-Comm lawsuit, however, was the first high-profile challenge of Cisco’s partner management practices.

The judge and jury agreed, and awarded Infra-Comm $6.4 million in damages. Cisco settled with Infra-Comm for $5.5 million and agreed not to appeal the original decision.

Judge Gregory Lewis, who presided over the trial, noted that three clauses in Cisco’s partner agreement were unconscionable, or unfair to one of the parties in the contract. Those clauses were the damage limitation listed in the contract, the non-negotiable term of the contract imposed by Cisco, and Cisco’s right to terminate the contract without cause.

Such a ruling could have an enormous impact on how contracts are written moving forward, to the detriment of solution providers, said Tiffani Bova, vice president of research for Indirect Channel Programs and Sales Strategies at Gartner.

“That decision probably will not benefit the relationship between channel chiefs and their internal legal departments,” she said. “Having been a past channel chief, I can tell you that negotiating between the spirit of a relationship and a partnership agreement with the legal department is a challenge. This ruling will make it more difficult, and that will roll downhill.”

Cisco, for its part, also believes the suit won’t impact the rules of engagement for channel partners of any company.

“We do not believe this ruling has broader implications on agreements with channel partners for Cisco or the broader industry.  By their very nature, breach-of-contract cases are fact-based and specific.  This case involved one contract and one reseller,” the company said in a statement. “As a channel-centric company we are always looking for ways to strengthen our partner relationships. We are continually adjusting our channel programs and initiatives based on partner feedback, and we will continue to do so moving forward. With more than 80 percent of our business going through the channel we have never been more committed to our partners.”

Nevertheless, sources say several vendors are reviewing their standard partner agreements in the wake of the Cisco judgment to ensure contracts do not expose the vendor to undue liability or risk exposure. As one vendor told Channel Insider, “No one wants a repeat of what happened to Cisco, and our contracts are heavily weighted in our favor.”

Steve Tepedino, president and CEO of Channel Savvy, a channel-focused management consulting firm in Scottsdale, Ariz., said partners shouldn’t have to take their vendors to court to get fair treatment.

“Vendors, VARs and distributors all have a vested interest in making the channel work.  This route to market is interdependent, and everyone’s goals matter,” he said. “It’s a sad day for our entire industry when contract disputes go to the court system for resolution. Communication, partnership and respect need to live within our own channel ecosystem.”

Evan Leonard, president and co-founder of Chips Computer Consulting, of Syosset, N.Y., believes vendors, for the most part, play fair with their solution provider partners.

“I know there have been times when stipulations in the contract haven’t been fair, but we’ve worked with vendors to come up with language to satisfy both parties,” he said. “The smaller vendors that are working on the SMB level are more flexible on the terms of the agreement, commissions, etc., but when we’re dealing with bigger vendors it’s not as easy to work with them.

“Usually we sign the contract, put it away and never reference it again,” he said.

Leonard added that contracts normally aren’t the source of channel conflict.

“The only time we perceive an issue is if they change their reseller model midstream, and the change isn’t good for the channel. Then absolutely that is grounds to renegotiate our contract,” he said.