Cisco VAR case signals changes to come

Published: November 3rd, 2008

Cisco Systems (NASDAQ: CSCO) lost a court case last week that signals changes to come in its relationship with resellers that could make it more difficult and potentially more expensive for smaller businesses to buy Cisco products.

Judge Gregory Lewis of the Superior Court of California in Orange County ruled that Cisco breached its contract with Infra-Comm, a reseller, and the jury awarded Infra-Comm nearly US$6.4 million in damages.

The judge also ruled that certain provisions of Cisco’s contract with Infra-Comm, which is the standard contract that Cisco uses with all resellers, were “unconscionable” and thus unenforceable.

Infra-Comm’s lawyers argued that this was an important case that would show Cisco resellers whether or not they could look to the courts to help settle disputes with the networking giant. “If Cisco is permitted to enforce the terms, termination, and damage limitation provisions in this case, a case closely watched by the reseller community, resellers will rightly fear the total destruction of their business in the event they have a dispute with Cisco,” they wrote in a brief.

At the heart of the lawsuit was a situation where Infra-Comm said it worked hard to win a contract to sell Cisco gear to The Irvine Company. Infra-Comm alleged that Cisco ultimately handed over the deal that Infra-Comm developed to AT&T, allowing AT&T to sell the equipment to The Irvine Company. When Infra-Comm cried foul, Cisco terminated its reseller agreement, according to Infra-Comm.

Cisco says it acted during the situation with Infra-Comm “with the best interest of the end-user customer in mind. Ultimately, the end-user customer decided which solution provider to work with when deploying their Cisco solution. While we respect the jury’s verdict, we disagree with it and are considering all options including an appeal,” Cisco said in a statement.

In a media interview, a Cisco executive said that the company doesn’t believe the case has any implications for the contracts it has with other resellers.

However, the suit “portends the shape of things to come for Cisco,” said Zeus Kerravala, an analyst with Yankee Group. Because the breadth of Cisco’s product portfolio has grown so large, Cisco has been trying to encourage smaller value added resellers to specialize in certain areas, rather than try to sell all products, Kerravala said. “Not all VARs mind,” he said. But some are used to being a one-stop shop for their customers and they don’t want to specialize.

Infra-Comm alleges that Cisco said it was too small to handle the deal with The Irvine Company.

Large enterprise users of Cisco gear may not notice these changes in the reseller environment but smaller companies that tend to do business with smaller regional VARs might, Kerravala said. If VARs end up being forced to specialize in certain products, those smaller businesses might have to buy some products from larger VARs and that might mean higher prices for the end users, he said.

In addition, some of the larger VARs like Hewlett-Packard and EDS aren’t designed to or particularly interested in catering to smaller businesses, Kerravala said, which could make buying more difficult for those smaller businesses.