SAN FRANCISCO (CN) - A federal judge ruled that Marin County can go forward with a fraud case over software made by a German company that was installed by Deloitte Consulting, the same consultant developing software for California's courts.
Marin says payroll software from German company SAP was defective and Deloitte bungled the $11 million installation. The result, says the county, was a software mess that put the county in worse shape than it had been with its antiquated payroll system.
"The county was saddled with a costly computer system far worse than the legacy systems it was intended to replace," says the complaint.
Separately, Deloitte is developing case management software for California's courts in a project that makes the Marin deal look tiny. Court administrators have already spent $500 million on Deloitte-made software that contains more lines of code than a Boeing airliner and is expected to cost the public another $1.4 billion.
Deloitte is also defending another case brought by jeans maker Levis Strauss over software that, according to its complaint, "delivered ruin." That case is pending in San Francisco Superior Court.
While Marin County's claims against Deloitte have been sent to a referee based on a contract clause, the claims against installer Deloitte and software maker SAP remain inextricably intertwined.
"Marin alleges that Deloitte and SAP joined in an enterprise with the aim of securing contracts with public sector entities," wrote U.S. District Court Judge Susan Illston in last week's ruling.
"Marin alleges that the enterprise benefitted from the racketeering scheme - even though defendants knew Deloitte was not able to competently implement the software - because the enterprise intended to use Marin as a reference for other public entities," wrote Illston.
Marin also claimed that if successful, the two companies would get more projects with public entities, and if not, they would still earn fees by trying to salvage their failure. Marin is represented by Mark Ressler with Kasowitz Benson in New York and Marin county counsel Patrick Faulkner.
On the other side of the case, SAP, represented by Jennifer Briggs Fisher with Duane Morris, argued that the county's theory was implausible because it would make no economic sense for SAP to pursue a project with a partner who would jeopardize its ability to bring in new clients.
In an earlier memorandum, Geoffrey Holtz with the firm of Bingham McCutchen argued on Deloitte's behalf that the county was in essence having a case of buyer's remorse. "When Deloitte Consulting completed its work in 2007, the system worked as specified," wrote Holtz.
The two big defendants in the case are Deloitte Consulting and SAP America Inc., which represents Systeme, Anwendungen und Produkte in der Datenverarbeitung, or Systems, Applications and Products in Data Processing -- SAP for short.
SAP was formed in the late 1970s by five former IBM engineers in Mannheim. The now-enormous company grew out of Xerox's near-sighted effort to get out of the computer industry, trading its business system to IBM for a credit of $80,000. IBM then gave the system to the five Mannheim engineers in trade for founding stock in their company.
In her 25-page ruling, Illston said the German company's American arm must now answer claims that it helped defraud a California county.
The claim of aiding and abetting fraud involves Marin County employee and former project manager Ernest Culver who signed off on payments to Deloitte while knowing that the software was defective, according to the county's complaint. He received free meals and failed to disclose that he was in talks with SAP higher-ups about working for them, according to the allegations.
The judge said the county's allegations do allow for the inference that the project manager was being influenced.
"The allegations made in the complaint permit the inference -- at this juncture -- that SAP held out discussions of future employment with SAP while encouraging Culver to seek additional consulting funds for SAP, which presumably would not have been awarded had the full scope of the problems on the Project been known to the Board of Supervisors," wrote Illston in last week's ruling.
Marin County also adequately alleged that Culver committed a breach of loyalty, said the judge.
"Culver notes that in California, merely seeking other job opportunities, even with a competitor, does not constitute a breach of the duty of loyalty to one's employer. Here, however, the allegations are not simply that Culver was seeking other employment opportunities, but that he improperly signed off on deliverables and took other inappropriate actions because of the meals and potential employment opportunities being explored," wrote Illston.
"These allegations sufficiently allege a breach of the duty of loyalty."
However, a host of additional claims did not make the cut.
Illston tossed claims for mail, wire fraud and racketeering.
Marin had argued that a series of positive statements made by Deloitte in its bid for the job were fraudulent. Deloitte said it is "uniquely qualified," has a "seasoned team," has "deep bench strength" and is "absolutely committed to the success of this project."
But the judge found that those statements fall into an old American tradition of salesmanship called "puffery," empty statements generally taken for the little they are worth.
"The Court finds that the representations are highly subjective, generalized statements of the superiority of Deloitte's qualifications made in a sales context," ruled the judge. "As such, they are 'puffery' and not quantifiable, actionable misstatements that can form the basis of a mail fraud claim."