Judge Gregory H. Lewis ruled Tuesday that Cisco's termination rules, immunity to liability and non-negotiable contracts are "unconscionable" and severely oppressive.
Cisco responded to the ruling with a written statement.
"We respectfully disagree with the ruling. The provision in question is common in our industry and has been included in our contracts, without issue, for years," the statement said. "We will continue to vigorously defend against Infra-Comm's allegations. With more than 80% of our annual product and services revenue being sold by our channel partners, we are committed to their success and are proud of our award-winning channel programs." Sources close to Cisco called Tuesday's ruling was a "minor bump" in the road.
Infra-Comm is charging that after it filed a deal registration for a $5 million IP telephony customer, Cisco gave that customer to AT&T Business for the same pricing it had guaranteed Infra-Comm. Then, when Infra-Comm filed suit, Cisco kicked the VAR out of the channel program, even though it had other Cisco deals pending. Infra-Comm also claims it lost 90% of its $5-million-per-year reseller business because Cisco unfairly terminated its channel membership.
Judge Lewis is expected to rule in the overall case at the end of this week, but Tuesday he took issue with Cisco's channel partner contracts, making a few major points in his ruling. The judge agreed with Infra-Comm that it is "oppressive" for Cisco's channel contracts to be non-negotiable. He wrote that the contract is offered on a "take-it-or-leave it basis," and that although Cisco said in court it "wouldn't be opposed to negotiation," the vendor had no history of actually negotiating with any of its 30,000-plus resellers. When partners re-sign their contracts each year electronically, Cisco enables them only to click a box accepting all terms of the contract.
The judge also took issue with Cisco's right to sign partners for only one year at a time. He pointed to Infra-Comm's claims that it had 10 Cisco deals worth $2 million in the pipe, beyond the deal in question, and the company could have seen returns for six more years if it hadn't been cut from the program.
Lewis also blasted Cisco's right to terminate partners at will or "for convenience." Cisco's contract says it can terminate partners at will in the first 30 days after signing and any time after that with a month's notice. Cisco claimed in its brief that it needed these termination clauses for "quality control" in the channel. But the judge disagreed, saying that terminating partners with actual cause would be fairer to the channel and still enable Cisco to weed out bad members.
Finally, Lewis agreed with Infra-Comm that Cisco's immunity to damages in partner relationships is oppressive. When a Cisco-reseller partnership ends, the channel stands to lose far more than Cisco, since the networking giant controls so much of the market and has unfair bargaining power, he wrote.
Cisco has maintained that it broke no contractual rules in its dealings with Infra-Comm and that Infra-Comm's former customer chose to go with another partner. Cisco's opposing filing said it was unfair for Infra-Comm to retroactively change a contract they knowingly entered. Cisco said that Infra-Comm had counsel and was savvy enough to know what it was getting into when signing the contract.
VARs are eagerly awaiting the outcome of the trial, since struggles like the one highlighted in the Infra-Comm-Cisco lawsuit and not uncommon in the channel.
"There is an unwritten statement in the VAR world that if a vendor sees you as too small, they'll cut you out of the deal. But most of the smaller VARs aren't going to sue, because there is always some contractual loophole to get vendors out of trouble," one partner said, on condition of anonymity.