A former Cisco Systems Inc. partner is suing the vendor, accusing the company of poaching a multimillion-dollar IP telephony customer and turning the business over to AT&T despite the deal registration process.
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Infra-Comm Corp. of San Juan Capistrano, Calif., also claims that Cisco booted the silver-level value-added reseller (VAR) out of its channel partner program after Infra-Comm owners Luke and Lisa Hosinski filed suit in an Orange County, Calif., superior court in January 2007. The partner contract was terminated the following spring.
As a result, the Hosinskis claim that Cisco destroyed their company, causing them to lose 90% of their 40-plus customers who were dependent upon Cisco products and therefore could no longer be serviced by Infra-Comm.
"At the size of partner we are, we can't give attention to three vendors and three sets of engineers. You want to be the best and we felt the Cisco product was the best and I still believe that," said Luke Hosinski in a phone conversation Wednesday afternoon. "Every one of our customers had a Cisco foundation, so I am not going to go put a Nortel phone in now and a different brand of switch."
Infra-Comm had earned about $5 million annually before the business fell apart, according to Hosinski, who would not specify the amount of damages he is seeking. He said he has spent more than $500,000 on the case so far.
The court papers specify at least $500,000 in damages, although there is another amount that was unspecified and is "subject to proof."
Recently the judge in the case, Gregory H. Lewis, denied a motion by Cisco requesting a summary judgment -- or a decision without trial. So the trial is set to begin in September.
Judge Lewis won't be hearing all the complaints that Infra-Comm lodged. He denied a tort claim by Infra-Comm, which basically asserted that Cisco intentionally interfered in the relationship between Infra-Comm and the client -- a large real estate developer that remains unnamed. That claim implied that Cisco intentionally destroyed Infra-Comm's business, and could have resulted in a huge sum in damages.
However, the judge will hear a series of breach-of-contract complaints from Infra-Comm, including two that claim Cisco violated its deal registration contracts and another that says Cisco broke its channel partner agreement with Infra-Comm.
In a statement, Cisco said it could not comment on pending court cases, but added, "We are very pleased that the court granted our motion for a summary adjudication and dismissed the claim that we interfered with Infra-Comm's relationship with the customer, and we will defend the remaining allegation in Infra-Comm's complaints vigorously."
Cisco is "committed" to the success of its channel partners, which are responsible for 80% of the company's annual product and services revenue, according to the statement.
Sources inside Cisco who asked not to be named said the company will defend itself on a number of fronts, including that it lived up to the terms of the Opportunity Incentive Program (OIP), under which Infra-Comm registered the deal in question.
The same source noted that Cisco didn't release Infra-Comm from the partner program until six months after the company filed suit. By that time, the source said, Infra-Comm didn't seem to be focused on pursuing new business and was more intent on following through with the lawsuit. Cisco, the source said, treated the court claims as a "good faith" lawsuit.
In court papers, Infra-Comm claims it continued to pursue other sales and customers for Cisco but was terminated from the program anyway. Hosinski said Infra-Comm waited for Cisco to make good on its promises for a spell before filing suit.
The complaint filed by Infra-Comm details the timeline of the conflict. According to court documents, the company became a Cisco partner in 1999 -- which is also when Infra-Comm began selling hundreds of thousands of dollars in equipment to the customer in question. That customer would ultimately be worth around $5 million in sales to Cisco.
Infra-Comm registered the deal with Cisco in December 2005 for a six-month protection period. Infra-Comm understood this deal to provide exclusive and competitive pricing and prevent Cisco from passing it along to other partners, according to the papers.
In May 2006, Cisco told Infra-Comm the registration deal was set to expire, so Infra-Comm reregistered in June and Cisco responded positively, according to court papers. But in July, Infra-Comm found out by logging on to the Cisco website that the registration deal had been nixed. Not long after, Infra-Comm learned that AT&T had been invited to the table.
Infra-Comm renewed its channel partner agreement online in May 2007 and received an automatic email confirming the contract. Then the company received further notice in June that Cisco had terminated the relationship after all.
Cisco sources claim that the company lived up to its registration deal by providing fair pricing under the OIP agreement, and that ultimately the customer wanted a different partner than Infra-Comm, which is legal under the contract. That's when AT&T came into the picture.
The source said he was unsure how AT&T came into the deal and could have been contacted by the customer. Either way, the source said once a client wants a different partner, Cisco can't prevent that -- and that ultimately the vendor works to please the customer.
Ironically, the customer in question still uses Infra-Comm for support services, which is the only thing that "keeps the boat floating," according to Hosinski. The only business Infra-Comm has left is apparently providing support services to a few old clients.
According to partners interviewed for this story, the type of channel conflict exhibited here is common among smaller partners and their very large vendors -- including Cisco. In fact, Hosinski said if he had stayed quiet, he would still likely be a Cisco partner. Remaining quiet is what most small partners tend to do.
"I could have just been a good little boy and licked my wounds and started to work with my other customers," Hosinski said. "I nurtured this customer for many years and I had sold them millions of dollars worth of product."
"This is a dirty little problem in the partner/VAR world," another Cisco partner interviewed for this article said. "You hear these stories all the time, but most VARs don't go all the way to suing their partner."
This partner sidesteps the problem by avoiding huge deals. Smaller deals are much less likely to be poached, he said.
"Big deals are frankly not worth our effort. At the end of the day we don't make enough money off of them to deal with the risk and frustration," he said.
Another partner said account managers at companies like Cisco assume small companies can't take on the same level of service as a larger partner like AT&T. And they assume the big companies are going for volume and don't need the same kind of margins as smaller players. Cisco claims it has registration deals specifically so smaller players can get the same kind of pricing as larger companies, but the partner said that doesn't always work.
This partner approaches the market by only working with larger VARs on major deals so that his smaller company won't "get screwed time and time again."
In the end, Hosinski said Infra-Comm will not likely remain a VAR, though he has been in the business since he was selling 1200 bits per second modems.