Infra-Comm v. Cisco: Win Sets Precedent for Other Partner Suits

The indirect channel at last has legal precedent for fighting back, and prevailing, when suppliers terminate them “without cause.” Orange County-based VAR Infra-Comm Corp. set the standard in October when it won a $6.3 million judgment from Cisco Systems Inc. (CSCO) Industry experts predict the case will force vendors to reword their partner contracts to reflect more parity; yet, they also expect suppliers to scrutinize potential partners much more closely.

That’s because the judge deemed several clauses in Cisco’s reseller agreement “unconscionable,” legalese for elements that are unfair to one party. Such conditions have prompted a number of similar partner complaints to PHONE+ over the years, but resulted in few, if any, notable lawsuits. When it comes down to decision-making time, resellers and agents often have feared to act because they couldn’t risk losing the contract with the supplier – be it service provider or equipment maker.

Infra-Comm, though, took that chance. And even though it lost its Cisco relationship, the verdict it secured stands to help fellow partners in disputes with big companies, said John Grady, a research analyst for IDC’s hardware channels unit.

“I’ve already spoken to a couple of vendors looking at their partner agreements to see if they have language in there that caused the ruling by the judge,” he said.

However, Grady doesn’t expect the decision to “open the floodgates” of litigation. Why? With this case on the books, suppliers will grow even more cautious about signing potential partners, Grady said. Resellers and agents can’t sue without expecting prospective vendors to question their motives. In fact, Grady said another vendor told him that if a VAR who’d sued a supplier came to his company asking to join the program, “they’d have to really look at the situation. It would be a determining factor as to whether the vendor wanted to partner with them.”

To be sure, the court victory for Infra-Comm, once one of Cisco’s top VARs, comes at a staggering financial and emotional price. Infra-Comm’s business model, its entire future, is in question. The coffers are drained of money and customers aren’t jumping out of the woodwork.

The problems started when Cisco backed out of an Infra-Comm-secured deal ultimately worth about $9 million. Cisco then turned around and gave the sale to AT&T Inc. (T). So, in January 2007, Infra-Comm sued Cisco, its main equipment supplier, for breach of contract. Six months later, Cisco cut off Infra-Comm as a reseller.

With the loss of its key vendor, Infra-Comm has closed its New Jersey and San Juan Capistrano, Calif., offices and moved into the Hosinskis’ home. Another Infra-Comm customer recently canceled its services. Indeed, Infra-Comm is re-thinking its structure because, without Cisco as a supplier, there is no other marquee vendor. Lisa Hosinski said the VAR is focusing on monitoring and professional services while “we’re in the process of exploring other opportunities and trying to decide which way we want to go.”

Luke Hosinski wasn’t available for an interview. However, he told the Orange County Register after the jury handed down its verdict that his company “is toast.” He said he was considering handing Infra-Comm over to a senior engineer before heading into the nonprofit field.

Whatever happens to Infra-Comm, indirect channel partners at least have case law “that can be quoted and used” to their benefit, said Lisa Hosinski. She warned any partner thinking of taking up such a David v. Goliath case to really think through the matter first.

“If you have never been in a lawsuit, it’s all-consuming,” she said. “You’re trying to finance [the suit] as well as trying to keep doing what you’re doing.”

Whether there’s another chapter in this saga depends on Cisco. The San Jose, Calif.-headquartered networking giant said in a prepared statement in October it was mulling “all options, including an appeal.” If the verdict goes to an appellate court and is sustained, that will count as one more victory in the drawn-out legal process, Lisa Hosinski said. But an appeal will mean even more money and time spent, she added.

Still, Lisa Hosinski said, there’s a big takeaway for the indirect channel: This is a very important decision and it will become even more important if it withstands an appeal.

Grady said much the same.

“I think what might be the legacy, if you will, of this decision, is at the very least, vendors reviewing their universal agreements and making them more balanced, providing more for the partner, making them a little bit more fair, to make sure situations like this don’t come up,” he said.

Infra-Comm’s lawyer didn’t respond to interview requests, nor did a channel-focused law group in Washington, D.C.