By: Arthur S. Beeman, Joel T. Muchmore, and Molly A. Jones
October 19, 2019
Enterprise Resource Planning (ERP) software is the integrated management of core business processes: the artificial intelligence that organizations use to collect, store, manage, and interpret data from a multitude of business activities. And, as we discussed in a previous alert, ERP software is increasingly prevalent, with some studies reporting that 81 percent of organizations have either installed or are in the process of installing an ERP system.
Likewise, failed (or failing) installations are increasing. Market studies show that 26 percent of installations were judged by the licensee as a “failure,” 46 percent of licensees were “very dissatisfied” with their ERP vendor, and 74 percent of installations exceeded the project budget. Bearing in mind these alarming statistics, we cautioned that it is incumbent on in-house counsel to anticipate potential installation problems in order to make a record to secure their company’s right to demand remedial repair efforts and/or seek recovery of lost fees and other damages.
Now, in the wake of a recent class action filing against Revlon, Inc., companies should also be aware of potential legal action under the securities laws from troubled ERP installations. In May 2019, a plaintiffs’ firm filed a class-action lawsuit against Revlon alleging violations of federal securities law in connection with a failed ERP installation at Revlon by SAP. Within the span of a few weeks, at least four separate law firms announced the Revlon class action, soliciting additional plaintiffs for the matter. With this clear sign that the plaintiffs’ bar is looking for an entry point to seek damages caused by failed or failing ERP installations, in-house counsel should consider steps to protect their companies while installing ERP systems.
THE REVLON CLASS ACTIONS
According to the allegations in the complaint, Revlon made false and misleading statements in its public filing by failing to disclose that it failed to create measures to monitor its ERP system and failed to design, implement, and operate process-level controls on its ERP system. The complaint also alleges that SAP’s failed installation resulted in Revlon’s inability to fulfill approximately $64M in product shipments, an additional $53.6M of incremental remedial charges, and, ultimately, a drop of over 6% in the value of Revlon shares. Plaintiffs allege these failures violate §§ 10(b) and 20(a) of the Securities and Exchange Act and Rule 10b-5 promulgated there under by the U.S. Securities and Exchange Commission.
This litigation is still in its infancy. No dispositive motions have been filed, and plaintiffs’ counsel has not yet moved to certify the class.
TIPS FOR IN-HOUSE COUNSEL FACING A DIFFICULT ERP INSTALLATION
This litigation could signify the emergence of yet another sizeable threat to ERP installations. Accordingly, in-house counsel monitoring tricky installations may want to keep the following in mind:
- Consider Disclosure Requirements. Section 302 of the Sarbanes-Oxley Act requires that companies attest to the accuracy of financial reporting, disclose any material changes to their internal controls over financial reporting, and disclose all fraud. Counsel should watch the Revlon class actions and others for guidance on the application of those requirements to ERP installations.
- Protect the Record. The Revlon class action suggests that the best practices for companies adversely affected by failed ERP installations may be to protect the record for potential litigation and to perfect any claims against the at-fault installation vendor. Already good advice for restitution purposes and damages, it may also serve as a viable defense against class action claims by aggrieved investors.
- Retain Litigation Counsel Early. Naturally, protecting your company may not necessitate actually filing an action against your ERP vendor. However, throughout the course of a troubled installation, there are multiple points during which an otherwise viable claim can be inadvertently compromised. Early retention of counsel experienced with ERP software and installations can best protect your company.
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We will keep you updated on developments as this case unfolds.
Molly Jones is Counsel at Crowell & Moring, LLP.