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Court of Appeals for the Seventh Circuit • 1999

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

168 F.3d 1020 | 1999 U.S. App. LEXIS 2666 | 1999 WL 80753

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Takeaway

In short, this case holds that a consultant may advise a client to end a contract within the scope of the engagement, but loses the privilege of honest advice when the evidence supports a finding that the advice was dishonestly shaped for the consultant's own gain.

Background

SNE, a window manufacturer, contracted with J.D. Edwards to supply software for SNE's "Primary Business System" project. The project was intended to streamline SNE's operations and provide the necessary computer support. SNE had rejected a competing package, BPCS, in part because BPCS lacked a configurator needed for SNE's custom-manufacturing operations.

After SNE became a division of a corporation headed by Gary Massel, Massel asked Randy Podany, a Mercer consultant, to perform a quick "sniff test" of the project for a $10,000 fee. Podany advised Massel that SNE's plan to reengineer its business while installing software in parallel was unsound and recommended stopping installation of J.D. Edwards's software. Massel later directed SNE personnel to obtain Podany's approval for all computer-related purchases, and Podany ordered SNE's implementation executive to stop paying J.D. Edwards.

Podany then steered SNE toward BPCS, despite his limited familiarity with J.D. Edwards's software and BPCS's lack of a configurator. The evidence permitted an inference that he arranged the process to ensure BPCS's selection so that he could obtain a lucrative job with SNE's parent company and procure further work for Mercer. BPCS was never successfully installed.

J.D. Edwards sued Podany and Mercer in federal diversity court under Illinois law for intentionally inducing SNE's breach of contract. A jury awarded J.D. Edwards $2.3 million. The defendants appealed, arguing that the consultant's privilege, which protects good-faith advice within the scope of a consultant's engagement, required judgment in their favor.

Issues

Issue #1

Whether Podany's advice to halt installation of J.D. Edwards's software, and his later stop-payment orders, fell outside the scope of the consulting engagement and therefore outside the consultant's privilege.

Holding

No. The challenged advice and orders fell within the express or implied scope of Podany's engagement.

Reasoning

Illinois recognizes a qualified privilege for consultants who give honest advice to their clients, even when the advice causes harm to a third party through a contractual breach. The privilege is limited, however, to advice that is within the scope of the consultant's engagement and is given in good faith for the client's benefit.

Podany was retained to conduct a rapid business-level review of SNE's project. His criticism of "reengineering in parallel" concerned a systems concept within that assignment. Because his view was that SNE should first define its business needs and only then install software, his recommendation to stop installing J.D. Edwards's software logically followed from his authorized assessment.

The court declined to define the scope of a consulting engagement so narrowly that a consultant could not identify and address a related problem within his competence. Just as a surgeon may appropriately address a significant condition discovered during an authorized procedure, a consultant ordinarily may alert the client to a related problem and recommend a solution, even if the solution affects an existing contract.

Podany's instruction to stop paying J.D. Edwards went beyond the original brief, but Massel had expanded the engagement by requiring approval from Podany for all computer-related purchases. That directive brought the stop-payment orders within the implied scope of Podany's enlarged authority.

Issue #2

Whether sufficient evidence supported the jury's finding that Podany and Mercer forfeited the consultant's privilege by acting in bad faith.

Holding

Yes. A reasonable jury could find that Podany acted to advance his own and Mercer's interests rather than to provide honest advice for SNE's benefit.

Reasoning

A consultant does not lose the privilege merely because his advice proves negligent, poorly informed, or mistaken. The privilege is lost when the consultant uses the engagement to injure another party solely for personal gain or other improper motives, without honestly seeking to benefit the client.

The evidence allowed the jury to infer that Podany knew little about J.D. Edwards's software, was familiar only with BPCS, and manipulated the selection process so that BPCS would be chosen without a fair comparison. Although he justified BPCS by pointing to another division's financial reporting, he did not meaningfully account for BPCS's lack of the configurator that SNE had considered essential.

The jury could also view as incriminating that Podany rejected J.D. Edwards's system because it was being implemented in parallel with SNE's needs assessment, but then caused SNE to implement BPCS on the same parallel basis. Evidence that he misstated the relative cost of the products and dismissed J.D. Edwards's software in crude terms without adequate knowledge further supported an inference of pretext rather than honest professional judgment.

Podany obtained a highly paid position with SNE's parent company after steering SNE away from J.D. Edwards, and Mercer received substantial additional business from SNE while Podany worked there. These facts did not establish bad faith merely because Podany and Mercer sought profit, but they supported the jury's conclusion that the advice was deliberately distorted to enrich them rather than to serve SNE.

Podany denied an ulterior motive, but the jury was entitled to disbelieve him after his credibility was impeached. His unpersuasive denial, combined with the circumstantial evidence of a rigged comparison and personal financial benefit, was enough to permit the jury to reject the privilege. Mercer and Podany were treated alike because Podany acted to further Mercer's interests as well as his own, making Mercer answerable for his intentional tort under respondeat superior.