Hodell-Natco v. SAP is a case brought in November 2008 in the Northern District of Ohio by Hodell-Natco Industries, a wholesaler of fasteners and chain products, over an ERP project built on SAP Business One. Hodell said it was sold user licences, 80 in December 2004 and 40 more in December 2005, for software that SAP and its channel partners had described as able to support hundreds of users, when it could not reasonably support Hodell’s 120. The defendants were SAP America, SAP AG and two of SAP’s channel partners, LSi-Lowery Systems and The IBIS Group.[2][4]
It is not an audit case. It is a customer-side dispute about what a licence for a stated number of users was sold as being able to do, and about who is responsible for a reseller’s statements. The court described it as arising from “an allegedly failed implementation of Enterprise Resource Planning (ERP) software called Business One”.[5] The allegations below are Hodell’s, as recorded in the court’s rulings.
Background
In 2003 Hodell looked for software to provide integrated financial and sales management for about 80 existing users plus growth, and told vendors so. SAP marketed Business One through channel partners. Materials sent to Hodell included an SAP Business One Brief saying the software helps businesses “from those with 10 to several hundred employees”, and a white paper stating that it supports “an unlimited number of simultaneous user transactions”.[1][4]
On 20 December 2004 Hodell signed a Development Agreement with LSi and IBIS and ordered 80 Business One user licences for USD 300,000, with the partners to build add-ons. On 23 December 2005 it signed a License Agreement with SAP America for 40 more user licences. According to SAP, that agreement gave a performance warranty, disclaimed earlier representations and implied warranties, and limited SAP’s liability.[4]
The dispute
The system went live in March 2007 and, Hodell said, responded so slowly that its sales staff could not answer customer calls; it was “limping along” for two years and was then replaced, at a cost Hodell put at over a million dollars.[4] Hodell alleged that SAP knew by December 2004 that the software could not reasonably support more than 30 users, and cited a 2007 email from an LSi executive that the number most often quoted for users had been 250 or more but Hodell “was pushing the upper limit with 120”.[2] In discovery the court also noted a 2007 statement by the product’s lead developer that someone had sold to the wrong customer, with 120 users “way above any sane” sweet spot for the product.[4]
Even the licence count was in issue. SAP said it sold only 80 licences; the court, drawing inferences for Hodell, presumed 120 from an invoice, internal emails and testimony.[3]
Decision or outcome
Motion to dismiss (2010 and 2011). The magistrate judge recommended, and on 2 June 2011 the district judge ordered, that the breach of contract claim on the Development Agreement be dismissed as to both SAP defendants, because they were not parties and agency and third-party-beneficiary theories were not adequately pleaded; that the claim on the License Agreement be dismissed as to SAP AG, because the agreement was expressly with SAP America; and that the negligence claim be dismissed under Ohio’s economic loss rule. The fraud, fraudulent inducement and negligent misrepresentation claims were allowed to proceed.[1][2]
Summary judgment (2013 and 2014). The magistrate judge recommended on 13 June 2013 that SAP’s motion for summary judgment be denied, finding that whether Hodell reasonably relied on the statements was a question for the trier of fact.[3] On 31 March 2014 the district judge adopted the recommendation. She held that SAP’s marketing literature, and statements by its alleged partners for which SAP could be liable under agency theories, were enough for a jury; that the fraud claims rested on a duty separate from the License Agreement, which was silent on how many users the software could handle; and that SAP’s argument that Hodell had “run its business” on the software from 2007 to 2009 was contradicted by the evidence of poor performance.[4]
Trial. An order of 26 January 2015 on a motion about SAP’s expert states that trial was scheduled for 23 February 2015, and that the pending claims were fraud, fraudulent inducement and negligent misrepresentation against all defendants, breach of contract against SAP America and breach of warranty against LSi and IBIS.[5] The records read for this article do not include the result.
Significance for software licensing and SAM practice
The rulings are about pre-contract statements rather than the licence text, but they show how a licence count and a vendor’s published sizing claims can become the central evidence when an ERP deployment underperforms. They also show that a software publisher’s contract liability can be confined to the entity named in the licence agreement and to the agreement it signed, while claims about what its marketing and partners said are treated separately.[2][4] Because the rulings are pre-trial, they do not decide whether Business One could support Hodell’s users.
Lessons learned
- Ask for capacity in the contract. The License Agreement was silent on the number of users the software could handle, which is why the claim rested on marketing statements and not on a contract term.[4]
- Know who you are contracting with. The Development Agreement was with the resellers and the License Agreement with SAP America, and the contract claims against SAP failed or narrowed accordingly.[2]
- Keep the licence record straight. The count of purchased licences (80 or 120) had to be reconstructed from an invoice and emails, so keep order forms and proof of delivery.[3]
- Test at your own scale before go-live. The parties ran live stress tests on Hodell’s data and agreed the system was ready; the dispute then turned on performance in production.[4]