El Segundo’s DAZ Systems Inc. has parlayed an obscure niche – reselling software from Oracle Corp. – into big success, with more than 375 employees in some 15 states and India.
But now the company, which has sold and implemented software for growing companies like denim maker True Religion Apparel Inc. and frozen-food manufacturer Amy’s Kitchen Inc., is facing a colossal legal challenge. A Temecula food distributor says DAZ botched a software upgrade, resulting in $280 million in lost sales. The unhappy client, Southwest Traders Inc., has launched a legal battle seeking to recover those alleged losses and damages.
“It didn’t function,” said James O’Callahan, an attorney at Girardi Keese representing Southwest Traders. “They’ve suffered substantial losses and had to lay people off. They have to rebuild the business.”
DAZ has had other issues with former clients. It is fighting another lawsuit by Chippewa Falls, Wis., apparel retailer Mason Cos. Inc., which alleges substandard software implementation. In 2011, it settled a lawsuit filed by a division of Philadelphia services company Aramark Corp. for software problems.
The company declined to comment on the matters.
DAZ, which has been recognized by Oracle as one of the top global resellers of the company’s software to medium-size and small businesses, claims to have serviced more than 400 clients. The company, founded in 1995, charges millions of dollars to implement software that helps streamline supply chains and manage product deliveries. Its clients are often growing companies that need new software to accommodate more business. The process takes months and thousands of man hours.
Keith M. Gregory, an attorney at Snell & Wilmer LLP who reviewed the Southwest Traders case for the Business Journal, said it can be difficult to prove what is or isn’t adequate with highly technical work. He also noted that one possible defense could lie in the contract’s language.
“If DAZ completely fulfilled the contract, it would make it more difficult for the plaintiff to prove the amount of damages it is claiming,” he said.
In 2008, Southwest Traders was a growing company, with nearly 600 employees and annual sales of $453 million. It said it had been profitable and had grown every year since 1977. The company, which distributes smoothie ingredients, ice cream and yogurt to restaurants, had been running on a computer system purchased in the 1990s. It decided to buy software that could handle future growth as well as better manage distribution and warehouses.
According to the Superior Court lawsuit of Southwest Traders, software giant Oracle expressed interest in a contract with Southwest Traders, but said Southwest Traders would need to hire DAZ to implement the software. Southwest Traders agreed in late 2009 to pay DAZ $1.3 million for the installation of a new system by November 2010.
But the new system was a disaster, Southwest alleges. It crashed several times in its first month of operation, nearly bringing the company’s distribution system to a complete stop. In the following months, orders were late, incomplete, mislabeled and sometimes could only be made over the phone; warehouse inventory levels were not maintained; and customers were unable to monitor their inventories.
In court filings, Southwest Traders said it sustained six straight months of losses from November 2010 through April 2011.
The company said it lost contracts with several of its biggest clients, including Starbucks, Popeye’s, Cinnabon and Red Mango. The value of those lost contracts totaled $13 million in 2011 and an additional $116 million last year. The unreliable computer system, the company argues, has caused it to lose out on contracts it might otherwise have secured. As a result, it expects to not get contracts worth $233 million this year and has been forced to lay off about one-quarter of its workforce, according to O’Callahan.
“The whole delivery system was key to their progress and survival,” he said.
Southwest Traders further claims in court documents that it paid an additional $1 million to DAZ and $500,000 to outside vendors to fix the problems. But the problems were so widespread that it ultimately switched back to its old computer system, which it is still using today.
An added wrinkle to the case is the involvement of Girardi Keese, a firm known for its representation of individuals in tort claims against businesses. Plaintiff’s firms like Girardi Keese are becoming increasingly involved in business litigation.
O’Callahan said he was representing Southwest Traders on a contingency basis, but declined to say what his percentage of any winnings would be. According to him, as cases become more costly to litigate, more businesses are looking to his firm to handle their legal battles to avoid fronting the cost.
His firm isn’t alone. L.A. plaintiff’s attorney Michael Alder, known for handling personal injury cases, won a $33 million verdict in 2011 against Pentel of America Ltd. for intellectual property theft on behalf of an El Segundo ad agency.
Gregory said the fact that the lawsuit is being filed by a plaintiff’s firm like Girardi Keese changes the dynamics for DAZ.
“If I was representing the defendants in this case and I saw the firm that filed this lawsuit, I would tell the client that the plaintiffs aren’t afraid to go to trial,” he said. “It could cause the defendants to know they’re going to be looking at spending a lot of money in defending themselves in this case.”
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