Reducing Risks Of Software Implementation Disputes During COVID-19

Fox Rothschild LLP

Fox Rothschild LLP

As COVID-19 continues to alter how business is done, companies are increasingly implementing new software to enhance their capabilities and increase efficiencies. Given the important role software plays in running everything from sales to billing to overall operations, the stakes are high when it comes to developing and implementing new business solutions. COVID-19 has only raised those stakes as companies shift to remote work and seek to limit technological disruptions in an already challenging business environment.

While software implementation often goes well, there is no shortage of litigation over software implementation gone wrong. These lawsuits commonly involve disagreements over how the software is supposed to work, who owns the software or who is responsible for the consequences of malfunctioning software or security vulnerabilities. 

Consider the allegations in Curtis v. Cerner Corporation, a case filed in U.S. District Court for the Southern District of Texas that reads like a software implementation horror story. A health care company wanted to install new software in connection with its opening of a new hospital. A software company offered the hospital a comprehensive suite of health care software designed to integrate billing and clinical operations. The software company recommended that the hospital engage a vendor to implement the software and tailor it to the hospital’s specific needs. The hospital executed two master services agreements, one with the software company and one with the software vendor. Almost immediately, the “wheels fell off” the software’s functionality and the vendor’s implementation. While the hospital expected implementation to take 10 months, the vendor started the process six months late, resulting in a “four-month frenzy.” Implementation stumbles resulted in the hospital paying over $13 million in additional costs, as it was effectively a hostage to the software company and the vendor. Ultimately, the software continued to malfunction resulting in closure of the facility and bankruptcy after the hospital incurred $82 million in insurance billing losses because of coding errors allegedly caused by the software.

While the allegations in this case represent a worst-case scenario, there are steps companies can take to minimize the risks of software implementation disputes, especially as businesses deal with other challenges wrought by COVID-19.

Properly Document the Software Agreement

Properly document the software agreement, both at the outset and during development and implementation. All too often, a software agreement does not properly document the parties’ mutual understanding of the goals and expected functionality of the software. This can lead to disputes over whether certain functionalities constitute “scope changes,” or whether they are included in the initial contract. If the parties’ goals and expected software functionality change over the course of the project, properly document those changes as they occur to minimize the risk of scope change disputes later. Companies contracting for software will also want to ensure that the contract provides for adequate remedies in the event of implementation delays or software malfunctions.

Know Your Rights to the Software

Make sure the software agreement clearly articulates who owns the rights to the software, as well as any software enhancements. This issue can be especially murky when software is being developed or customized using a customer’s confidential and proprietary methods to meet their specific needs. Where the agreement only grants a license to use the software, pay close attention to the terms of the license, including whether it can be revoked and how long the software company agrees to support the software with updates and other fixes.

Consider an Arbitration Clause

Consider including a mandatory arbitration clause in the software agreement. Arbitration lends itself well to resolving software disputes for several reasons. First, arbitration can be quicker and more efficient than litigation, especially now that COVID-19 has resulted in court backlogs and extended waits for jury trials. Second, arbitration allows the parties to select an arbitrator who is knowledgeable about software technology and able to dig into the often fact-intensive nature of a software implementation dispute. Third, arbitration is more private than litigation, which allows the parties to better protect confidential and proprietary information and keep allegations of software malfunctions and operational difficulties out of public view.

Select Outside Counsel Skilled in Resolving Software Implementation Disputes

Finally, when faced with a software implementation dispute, parties should engage outside counsel experienced in litigating such disputes and other complex business matters. An attorney who is well versed in the latest software technology will be able to cut through the technical jargon and break down complex issues for the factfinder. Bringing in outside counsel early can help the parties facilitate a quick resolution or best position the case for litigation or arbitration.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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