Los Angeles Superior Court Rejects Defense Request To Limit Liability For $6.4 Million Jury Award Against Paychex Subsidiary
Los Angeles Superior Court Rejects Defense Request To
Limit Liability For $6.4 Million Jury Award Against Paychex
LOS ANGELES--(BUSINESS WIRE)--Aug. 11, 2004--On August 9, 2004, the Los Angeles Superior
Court rejected arguments by the defense to limit the liability for a $6.4 million jury award in favor of
a Texas firm called The Payroll Partnership LP and two of its sister companies against Rapid Payroll,
Inc., a wholly owned subsidiary of Paychex, Inc. (NASDAQ:PAYX).
Paychex is the nation's #2 payroll processing firm. On June 18, 2004, after a six-week trial, a Los
Angeles jury returned a verdict for $6.4 million against Rapid Payroll, Inc. The jury found Paychex
subsidiary Rapid Payroll liable for breaching software licensing agreements related to a personal
computer based payroll processing system called "Rapid Pay."
The lawyer for The Payroll Partnership LP, Stephen Wald of the Boston law firm Craig and
Macauley, stated, "We have been arguing for some time that Paychex's subsidiary can not refuse to
honor contracts and then hide behind a 'limitation' clause in the same contracts it wants to ignore.
The Superior Court has now confirmed it agrees with us." Until this ruling, Paychex and its
subsidiary had asserted their liability was limited to the amount of fees paid under the license
agreements. According to Paychex's SEC disclosures, the total fees paid by licensees were
approximately $5.8 million for all of the pending actions.
Mr. Wald represents The Payroll Partnership LP and 19 other plaintiffs currently pursuing claims
against Paychex, Rapid Payroll, Paychex CEO Thomas Golisano, and Senior Vice President Walter
Turek. In all, more than 25 Rapid Pay licensees brought actions against Paychex, Rapid Payroll, and,
in some cases, two Paychex officers related to the Rapid Pay software. At least one new case has
been brought against Paychex and it subsidiary since the jury verdict.
The Payroll Partnership matter was the first of these cases to go to trial. The trial of the next case,
brought by Accuchex Corp. of Novato, California, is now scheduled to begin in the same Los Angeles
Superior Court on September 14, 2004. Accuchex is seeking damages in excess of $15 million. Cases
in the U.S. District Court in Los Angeles are scheduled to go to trial beginning in January 2005.
All 20 of these family owned, independent payroll processing companies that are sharing counsel
had licensing agreements with Rapid Payroll that expressly provide the license could not be
canceled unless the licensee consents or breaches the agreement. The licenses also required Rapid
Payroll to maintain, service, and update the software. In August 2001, Rapid Payroll informed
seventy-six licensees that it intended to stop supporting the software. The Rapid Pay licensees
received letters from Walter Turek, who is both President of the Paychex subsidiary and a Senior
Vice President at Paychex, that stated, "As of August 30, 2002, RPI will no longer license the
Software for Use. All support and maintenance ... will cease as of 5:00 p.m. on August 30, 2002." In
July 2002, the U.S. District Court in Los Angeles issued a preliminary injunction that prohibited
Paychex and its Rapid Payroll subsidiary from terminating the licenses and required them to
continue to support and maintain Rapid Pay.
Certain of the cases charge fraud, seek punitive damages, and also seek the source code for Rapid
Pay. The Paychex division called Major Market Services uses a version of the software that Paychex
Most of the plaintiffs acquired the first version of the "Rapid Pay" payroll processing software
licenses from Olsen Computer Services, Inc. (OCS). These small payroll companies built their
businesses around the software, which requires frequent updating to comply with tax laws and other
operational changes. Paychex acquired OCS in late 1996 and operates it as a wholly-owned
subsidiary under the name of Rapid Payroll, Inc.