J.D. Edwards & Company v. Randy Podany and Mercer Management Consulting, Inc.

Citations: 168 F.3d 1020; 1999 U.S. App. LEXIS 2666; 1999 WL 80753Docket: 98-2486

Court: Court of Appeals for the Seventh Circuit; February 22, 1999; Federal Appellate Court

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A company (J.D. Edwards) sued a consulting firm (Mercer Management Consulting, Inc.) and a former employee for inducing a breach of contract after the buyer of computer services terminated the agreement based on the consulting firm's advice. The suit, governed by Illinois law, revolves around the tort of intentionally inducing a breach of contract, which allows for remedies beyond simply suing the breaching party. The court noted that while this tort can appear redundant, it serves a purpose when the breaching party is insolvent or when the third party could have mitigated the breach at a lower cost. The plaintiff successfully established a prima facie case, and the key issue was whether the jury was justified in rejecting the "consultant's privilege," which protects advisors who provide honest and good-faith advice from liability if that advice leads to harm for third parties. The jury awarded the plaintiff $2.3 million in damages.

The consultant's privilege in defamation law allows for a defense against claims of defamatory statements if such statements are made in good faith and within the scope of the consultant's engagement. This privilege is not absolute; it is a qualified privilege similar to qualified immunity. 

The privilege is limited in two primary ways: 

1. **Scope of Engagement**: The consultant's advice must pertain to the area for which they were hired. For example, if a consultant advises a client on a telephone system but suggests terminating a franchisee unrelated to that engagement, the privilege does not apply in a suit brought by the franchisee for interference with contract. 

2. **Good Faith Requirement**: The consultant must provide honest advice. If a consultant acts solely to harm others or for personal gain, rather than in the client's interest, they forfeit the privilege. Instances where a consultant causes a client to breach a contract for selfish reasons could lead to liability for inducing that breach.

Both limitations—scope and good faith—are contested in this case, with the defendants asserting insufficient evidence to reject the privilege. However, the argument is countered by reviewing the facts favorably for the plaintiff, who prevailed in the district court.

SNE, a window manufacturer, contracted J.D. Edwards Company for software to enhance its business operations via a project named PBS. SNE rejected another software option, BPCS, due to its lack of a "configurator" for custom manufacturing. During the PBS implementation, SNE underwent reorganization, becoming one of three divisions under Gary Massel's leadership. Massel engaged Randy Podany from Mercer Management Consulting for a brief review of PBS, known as a "sniff test," for a fee of $10,000. After a day of consultations, Podany advised Massel that SNE’s strategy of "reengineering in parallel"—concurrently defining business needs and acquiring technical support—was flawed. Although Podany was not a software expert and had not been hired to critique the J.D. Edwards contract, his insights fell within the scope of his engagement as they related to business consulting. Podany further recommended halting the installation of J.D. Edwards' software, a suggestion challenged by the plaintiff as exceeding his engagement. The court disagreed, asserting that if the reengineering approach was faulty, advising a halt was within the consultant's purview and aligned with client expectations. Additionally, Podany instructed SNE to stop payments to J.D. Edwards, a directive that exceeded his initial engagement but was justified as Massel had expanded Podany's role to oversee all computer-related purchases.

Defendants' claim of consultant's privilege is challenged by evidence suggesting Podany acted in bad faith. Although he was primarily familiar with BPCS software, he sought to replace J.D. Edwards' software with BPCS despite its lack of a desired configurator. Podany justified this choice by highlighting one division's success with BPCS, but he failed to consider the significant drawback for SNE. His actions were motivated by a desire to secure a high-paying job with SNE's parent company and to benefit Mercer, from which he secured additional contracts. During his tenure at SNE, Podany earned $370,000 while Mercer billed $1.6 million, yet BPCS ultimately failed to install successfully due to its configurator deficiency. If Podany had acted out of ignorance, the consultant's privilege would protect him and Mercer. However, if his intent was self-serving, the privilege is forfeited, making Mercer liable for Podany's actions under respondeat superior. The document clarifies that motives of greed do not equate to bad faith; rather, the loss of privilege occurs when a consultant offers dishonest advice or exceeds engagement terms.

Podany's credibility was undermined, allowing the jury to find evidence of bad faith, similar to how pretext operates in discrimination cases. Simply disbelieving the defendant is insufficient for a plaintiff's victory; there must be additional evidence of liability. In this instance, the jury had several factors to consider, such as Podany's rejection of the reengineering concept while simultaneously approving BPCS installation based on flawed justifications. His claims about BPCS's success were deemed inadequate because it lacked essential features identified by SNE. Additionally, Podany misrepresented the costs of the software options and disparaged J.D. Edwards without sufficient knowledge. Although these actions could be interpreted as innocent errors, their frequency and severity raise suspicions. The defendants' attempts to prove innocence did not succeed, providing enough grounds for the jury to reject the defense of privilege. The jury's decision, while not guaranteed to be correct, was reasonable enough to be upheld. The ruling is affirmed.