• August 22, 2013

Update #2 (8/22/2013): I’d like to make a suggestion….of bankruptcy?  The language of the attached notice called, “Suggestion of Bankruptcy,” is slightly archaic but the phenomenon of a litigant’s bankruptcy and the resulting automatic stay is unfortunately very up-to-date and common.

One hopes that Plaintiff Scicom’s outside counsel for the case it brought in U.S. District Court (D. Minn.) (the Twin Cities powerhouse, Fredrikson & Byron (“F&B”)) was on the inside when it comes to being informed about their client’s financial situation so it could take steps to protect itself.  Otherwise, it could find itself a disappointed creditor to its own client or, perhaps, subject to a “claw back action” within the Scicom bankruptcy proceeding.  F&B’s been there done that.  F&B had to cough up $13.5 million to the trustee in a clawback in the Petters bankruptcy last year.  On the bright side, it is certain that the Scicom bankruptcy and any risk posed by it is relatively miniscule.

Update (2/27/2013): Our original post, below, highlighted a risk of “cloud computing” that some might not fully appreciate, which we called “hostage taking.”  Plaintiff Scicom’s complaint seemed to suggest that defendant Actuate was able to insinuate its software system into the deep tissue of Scicom’s business and, after being embedded like a parasite, the “cloud computing supplier” could exploit its position and “hold up” Scicom for more money.

Believe it or not, Actuate does not see it that way.  Actuate’s response to the complaint (and its accompanying counterclaim) portrays a far more prosaic commercial dispute.  From Actuate’s perspective, Scicom contracted for a certain number of licenses but, when audited, Actuate discovered that Scicom had installed the software on far more “CPU’s” than it had been paying for…

On the surface, this dispute might seem quickly resolved by a close, careful, good faith reading of the parties’ contract and a straightforward investigation into Scicom’s use of the Actuate product.  But let’s say that the contract is unclear.  How much should it cost in time and attorneys’ fees to home in on the question and get an answer that the parties will accept (voluntarily or otherwise)?  And how much will it cost? Time will tell.

Original Post (11/13/2012):  As individuals and businesses consider whether they should outsource computing needs (data storage, software, and so on) “to the cloud” (that is, to third party vendors with remote data storage and their own sophisticated software systems), many are reluctant because they feel their data is more secure when it is in their own control.

To others, this is as if one hoards one’s money under the bed or in the closet rather than depositing it in a bank out of concern about bank robbers.  Most of us, however, have long ago concluded that our money is more secure in a bank than a laundry bag in the rafters.  And your data is probably safer with companies whose very existence depends on data security as opposed to your hard drive or server, which is considerably more vulnerable to theft, loss, or destruction.

But there is another angle to the risk of cloud computing.

Hostage taking.

That is, what is to keep a company from whom your company purchases data storage or some sophisticated on-line “software as a service” from either hiking up prices stratospherically when your business is dependent on the service or, heaven forbid, cutting you off?

Making matters worse, for many smaller businesses who do not have in-house lawyers, in-house risk management, and other safe-guards, “clickwrap agreements” are a fleeting formality without significance until, that is, something goes terribly wrong and then the “agreement” is dusted off and, to no one’s surprise, it includes provisions that are hugely favorable to the vendor.

This risk appears to have materialized, at least according to Minnesota-based Scicom in its lawsuit against Actuate (complaint is here).  According to Scicom (see complaint at Para. 28), this could be Actuate’s “modus operandi” or business model.

In the end, this kind of vulnerability is remedied through contractual safeguards or market forces.  But this risk is probably considerably more real and potentially troubling for businesses — dependent on others in the market for their infrastructure’s basic operations — than data security, which seems to get more widespread attention.

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