VAR Sues Cisco Claiming Contract Breaches

Cisco's channel partner loyalty is being questioned in a lawsuit under which a long-term Cisco Silver-level solution provider is suing the company for allegedly breaching the terms of its deal-registration program.

The solution provider, Infra-Comm, San Juan Capistrano, Calif., is suing Cisco Systems, San Jose, Calif., regarding Cisco's handling of a particular Infra-Comm customer whose contract was eventually passed to AT&T despite what Infra-Comm says was its long-term development of the opportunity and registering of the deal with Cisco.

Luke Hosinski, president of Infra-Comm, said he hopes that other partners become more aware of what he said are the possible dangers of working with Cisco, including not reading the fine print in Cisco's Indirect Channel Partner Agreement (ICPA).

The customer in question, an Orange County, Calif.-based real-estate development company, was not named by either Infra-Comm or Cisco, and its name was redacted to "The Customer" in court documents examined by ChannelWeb. The lawsuit was filed Jan. 18, 2007, in Superior Court of Calif., in Santa Ana, Orange County.

The case has roots going back to 1999, when Infra-Comm first signed Cisco's ICPA and provided a quote for the customer's first Cisco products.

Since then, that customer became a major customer of both Cisco and Infra-Comm, purchasing more than $650,000 in Cisco ISR 2811 routers with Power-over-Ethernet (PoE) ports in its first move to replace its traditional telephone system with IP telephony equipment.

By this point, Infra-Comm had built its business around Cisco's IP telephony product line.

It had several clients in the $400 million-plus revenue range with multiple offices for which it deployed Cisco IP telephony projects with all the related infrastructure including security and Cisco Unity e-mail services, Hosinski said.

"We did the implementations, testing and tuning," he said. "Our customers had from a dozen IP phones to several hundreds of IP phones per site."

That experience was recognized by Cisco, which gave Infra-Comm the West Coast Commercial Ops Top Channel Partner "Trail Blazer" award in 2005 and certified Infra-Comm as a Silver-level partner in early 2007.

Infra-Comm nourished the Cisco relationship with that particular customer for a couple of years with a beta project, initial infrastructure deployment, and even helping move 300 servers on a weekend, Hosinski said.

Because of that relationship and Infra-Comm's expertise, the customer decided to implement a Cisco IP telephony project that included 1,200 IP telephony handsets along with related servers, PoE switches, management, and power supplies at the corporate headquarters in the first phase of a two-part project. The second phase was slated to include an additional 1,200 handsets and related infrastructure for the customer's branch offices, Hosinski said.

In mid-2005, Infra-Comm applied for an opportunity registration under Cisco's Opportunity Incentive Program (OIP) system for a deal with the customer worth potentially $3 million, Hosinski said. That registration was approved in January 2006, giving Infra-Comm a six-month window under which it could pursue the deal with the customer armed with special exclusive pricing from Cisco, he said.

Infra-Comm also recommended an item it could not provide, Cisco Advanced Services. CAS is not sold through the channel and has no separate product SKU, Hosinski said.

However, based on Infra-Comm's relationship with Cisco, Hosinski said he didn't hesitate to give that recommendation. "We look at the big picture with our customers," he said.

Therefore, the customer issued a purchase order directly to Cisco for a one-time deal for CAS in the third quarter of 2005.

And that is where the trouble began, Hosinski said.

Next: The Infra-Comm/Cisco Relationship Goes South

"I think that this is the moment when we lost our customer as an asset," he said. "I believe in Cisco. But at this point, Cisco thought they owned the account."

It wasn't apparent at first, Hosinski said. In fact, he said that Infra-Comm worked hand-in-hand with CAS for about six months. "It was a partnership," he said. "We were listed in their documents. I had trust in them, and believed in the partnership."

The customer liked the Infra-Comm/Cisco AS design and did due diligence with other potential suppliers, and it signed with CAS, which was perfectly OK with Hosinski.

However, what happened next was the kind of story a fiction writer would have trouble imagining, Hosinski said.

The customer is very smart, and had a major concern with what the industry calls the "Katz clause," he said.

Named after Ronald A. Katz, whose company Ronald A. Katz Technology Licensing (RAKTL) has initiated claims for thousands of patent violations, a "Katz clause" is a clause in a contract under which a vendor provides indemnity to a customer in cases of intellectual property infringements, Hosinski said.

"I'd never heard of this," he said. "But the client had. They wanted protection in case they got a Katz letter. They wanted a Katz clause that Cisco would indemnify them against method patent infringements, because Katz goes after the users."

While there has never been a Katz claim against Cisco that Infra-Comm could find, Hosinski said Cisco shuttled the whole deal to AT&T, despite Infra-Comm's having registered the deal with an OIP agreement.

This was done without Infra-Comm's knowledge, Hosinski said. Cisco sent Infra-Comm's entire bill of materials (BOM), including the "Infra-Comm Service" prices clearly marked, to AT&T, in April 2006, he said. Two months later, AT&T received a purchase order from the customer for phase one of the IP telephony project, including infrastructure, 1,200 handsets, CallManager software and more, he said.

However, he said his company didn't know about the fact that the entire order was given to AT&T with the same pricing that Infra-Comm had quoted until July. "It wasn't until the hardware arrived at the customer site that I knew the deal was dead," he said. "I then found out that we didn't get the deal. AT&T got it with the same price as ours, to the penny."

Not only did AT&T get the deal with a price and BOM that looked almost exactly like Infra-Comm's, it was done before Infra-Comm's six-month OIP with Cisco on the deal expired, Hosinski said.

Cisco gave Infra-Comm the standard two-week warning that the OIP would expire, Hosinski said. However, instead of being sent to Infra-Comm on June 27, 2006, the normal time a two-week warning would have been sent, it was sent on May 28, 2006. No one could explain why that notice was sent early, he said.

Infra-Comm requested a six-month extension anyway, and was told by a Cisco representative on June 6 that the extension would be "taken care of" that week, he said.

However, on July 27 of that year, Infra-Comm logged onto the Cisco deal-registration Web site where it learned that its OIP had been deemed "expired" by Cisco. In July, products related to the order started arriving at the customer site, and Infra-Comm was surprised when its engineers received an inventory list from the customer listing AT&T as the seller of the products.

Infra-Comm continued to receive orders from the customer for other products, and in late 2006 was doing the implementation for the order in question, Hosinski said. "We did the implementation," he said. "AT&T never implemented anything. We got paid for our services. AT&T also had our services pricing."

In January 2007, Infra-Comm filed a complaint against Cisco charging that it breached its OIP agreement. However, it continued to sell Cisco products and register deals with the vendor. Other than the OIP issue, everything continued as before, with Cisco recognizing Infra-Comm with an award for customer satisfaction excellence in January and elevating it to Silver partner status in February.

In late May, Infra-Comm filed its annual renewal of Cisco's ICPA, and received an e-mail from Cisco congratulating it that the renewal was complete. The steps and response were similar to those since the first ICPA was signed in 1999, Hosinski said.

Next: Infra-Comm Gets More Bad News

However, on May 30, 2007, Cisco sent a letter to Infra-Comm advising that, because of the lawsuit, it would not renew the ICPA. Infra-Comm responded that it had already been renewed. Cisco said the renewal was automated and not valid, and on June 2 it terminated Infra-Comm's partner status under a clause in the ICPA that allows the vendor to terminate the ICPA "for convenience" within 30 days of renewal.

At the time of the ICPA cancellation, Infra-Comm had more than a dozen deals under OIP agreements with other customers that the solution provider could not pursue further, Hosinski said. It could, and did, follow up on other customer orders via Cisco distributors that didn't realize until late summer 2007 that Infra-Comm no longer was authorized as a partner.

By Hosinski's count, Cisco breached contracts with his company on three occasions: the first was breaching the OIP it had with Infra-Comm by letting AT&T take the deal; the second was terminating the other OIPs Infra-Comm had with signed with Cisco; the third was the cancellation of the ICPA.

Infra-Comm continued to work with the customer in question to implement the first and second phases of the Cisco IP telephony project despite the issues it had with Cisco until May of this year, Hosinski said.

Cisco declined to respond to questions about its relationship with Infra-Comm.

However, an industry source close to Cisco said one has to consider the possibility that it was the customer, not Cisco, who decided to go with AT&T and who passed details about the deal to AT&T.

That source also noted that deal-registration agreements do not grant an exclusive relationship between a customer and a solution provider. Instead, it guarantees that the signing partner gets exclusive discounts. Infra-Comm was a Premier or a Silver partner, whereas AT&T is a Gold partner, which could give it better pricing than Infra-Comm could get even with an OIP incentive.

Hosinski said he doesn't believe that the customer told AT&T the details of the deal. He said he has e-mails that came up through the discovery process that show that Cisco passed the Infra-Comm information to AT&T.

Regardless of how the lawsuit plays out, Infra-Comm is no longer the company it once was. From a peak of 12 employees and two offices, the company is now down to four employees and is run from home, Hosinski said.

The lawsuit is more than one company's fight against a large company like Cisco, Hosinski said.

"It's been a long road and a costly road," he said. "Other partners have had these same experiences. I feel like I need to stay in this for the other partners. We need to determine what OIPs and ICPAs mean. The only place where this can be determined is in the courts. It's a point of law."

Hosinski said he cannot walk away from this now. "If I walk away from this, someone else will have to start from square one," he said. "I feel there's a lot at stake, not just between myself and Cisco, but for the thousands of partners that engage with them."

As a result of this lawsuit, Cisco will be in the interesting position of having to argue about the value of solution provider partnerships, Hosinski said.

"Cisco's experts and our experts will have to value how Cisco values a Cisco Silver partnership," he said. "This is about partnership. We thought we were a real partner of Cisco. But Cisco now says we're not."

The lawsuit, now scheduled to go to court on Sept. 22, is a process that Infra-Comm is resolved to carry through, Hosinski said.

"My perspective from Cisco is, if they win, big deal," he said. "If they win, they lose. They can say, yeah, we crushed old Infra-Comm. But every partner should take notice of this. Maybe this could have been cleared up behind the curtains. But it wasn't. This is everything I have. I have nothing to lose. But I also think about other partners, and how it might affect them. Right now, I feel like Rocky going up against Apollo Creed."