Judge Rules Cisco Reseller Agreement 'Unconscionable'

The ruling came as the jury trial between Cisco and one of its solution providers winds down in preparation for going to the jury for a decision, possibly as early as Friday.

Infra-Comm, a San Juan Capistrano, Calif.-based solution provider, alleges Cisco breached its Indirect Channel Partner Agreement (ICPA) and the terms of its deal registration program by passing a potential large deal with the Irvine Company, a property development company, to AT&T. Networking and IP telephony vendor Cisco, in return, is accusing Infra-Comm of harming Cisco's business and misusing its brand name.

"Unconscionable" is used in contract law to refer to a contract or parts of a contract which are unfair to one party in the contract. For instance, it could refer to one party taking advantage of its bargaining position over another party.

The question of unconscionability is typically decided by a judge, not a jury, and damages are not awarded.

Judge Gregory H. Lewis, presiding over the trial being held in the California Superior Court in Santa Ana, Calif., on Tuesday ruled that several parts of Cisco's ICPA are unconscionable in part because Infra-Comm did not have the ability to negotiate the terms of the agreement during the renewal process.

"The provisions are clearly one-sided and severely limit plaintiff's recovery," Judge Lewis said in a transcript of Tuesday's proceedings.

Judge Lewis found three provisions of Cisco's ICPA unconscionable.

The first is term of the contract.

With Cisco's ICPA, a yearly reminder is sent to a solution provider that the one-year contract is about to expire, giving the solution provider an opportunity to renew. However, renewing consists of clicking a button on a website to renew the contract without an opportunity to negotiate the terms of the contract.

"The heart of this issue is whether plaintiff had the ability to negotiate," Judge Lewis said. "Given the 'click to accept' nature of the contract, the court finds that plaintiff had met its burden, its initial burden, that it had no ability to negotiate the terms."

Judge Lewis said he finds a large degree of procedural unconscionability in the contract "given the huge disparity in bargaining power and the absence of any evidence from defendant that it has ever negotiated any of its ICPA contracts with any of its thousands of resellers. That one of its witnesses says at trial that it could have done so appears to the court not to be credible."

The second provision the judge found unconscionable is termination. Judge Lewis said that Infra-Comm had shown that Cisco expects reseller relationships to be long-term, with returns expected for six years.

However, Judge Lewis said, Cisco required resellers to contract for only one year with Cisco having an "absolute right of termination for no reason with only a month's notice, and that at the beginning of each year, it could terminate without notice."

Judge Lewis cited evidence that Infra-Comm lost 90 percent of its business as well as 10 registered deals totaling over $2 million on which it was working at the time Cisco terminated the ICPA.

While Cisco argued that Infra-Comm had the same rights to terminate its ICPA, Judge Lewis said that Cisco could easily find other reseller or sell its products directly while Infra-Comm lost 90 percent of its business because of the termination.

Furthermore, Judge Lewis said, Cisco's claims that it needs the termination clauses to prevent itself from being forced to enter a contract with anyone who clicks on its website. "But this justification doesn't apply to a reseller it has contracted with since 1999," he said.

As a result, Judge Lewis said, it is possible to limit the applicability of the termination provision. "The Court would therefore rule this a one-year provision and the right to terminate without cause within 30 days are limited to new resellers, and that the right to terminate with 30 days notice provision is limited to terminations for cause," he said.

The third provision found unconscionable is damage limitations.

Judge Lewis said that Cisco's ICPA provision limiting damages to what a reseller pays Cisco over the course of three months for services and products, while possibly applicable to a new reseller relationship, cannot be justified for a relationship that had existed since 1999.

Cisco also said that damages should be limited to an amount commensurate with the volume of business it did with a particular reseller, but Judge Lewis said the Court cannot rewrite the contract between the two.

Brian Daucher, a lawyer representing Infra-Comm, told ChannelWeb that the ruling of unconscionability is a win in general for solution providers.

The ruling could act as a precedent, as it is now a matter of public record regardless of how the trial eventually turns out, Daucher said.

"If a reseller is injured, it shouldn't have to fear suing," he said.

Daucher said that while Judge Lewis made it clear that his ruling only impacts the trial between Cisco and Infra-Comm, any reseller can rely on the opinion as a precedent.

"This ruling is a matter of public record now," he said. "It's not going away. It's something that will never go away."

While the jury will take the ruling into consideration during its deliberation, Cisco could eventually appeal the ruling, Daucher said. "But this is a judge's discretion," he said. "It is entitled to deference on appeal. I don't think Cisco will be successful in attacking the findings of unconscionability on appeal. ... Cisco will probably have to rewrite its contract."

Kristin Carvell, a Cisco spokesperson, said in an emailed statement: "We respectfully disagree with the ruling. The provision in question is common in our industry and has been included in our contracts, without issue, for years.

"We will continue to vigorously defend against Infra-Comm's allegations. With more than 80% of our annual product and services revenue being sold by our channel partners, we are committed to their success and are proud of our award-winning channel programs," Carvell said.