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CONOPCO, INC. v. MCCREADIE

July 12, 1993

CONOPCO, INC., Plaintiff,
v.
JOHN T. McCREADIE, an individual as a representative of a class comprised of all partners in the general partnership doing business as Ernst & Young, Defendants.



The opinion of the court was delivered by: MARYANNE TRUMP BARRY

BARRY, District Judge

 I. Introduction

 Plaintiff, Conopco, Inc., has sued the partners of Ernst & Young ("E&Y") *fn1" alleging breach of contract, professional negligence and malpractice, and breach of the implied warranty of fitness for use under the Uniform Commercial Code ("UCC") in connection with a computer management consulting agreement between Faberge, Inc. ("Faberge") and E&Y, which agreement was subsequently assigned by Faberge to Conopco's parent, Unilever United States, Inc. ("Unilever"). E&Y now moves for summary judgment on all three counts of the complaint. For the reasons which follow, E&Y's motion will be granted in part and denied in part.

 II. Factual Background

 This action revolves around the computer support systems of the Elizabeth Arden Company ("Arden"). Arden is in the business of manufacturing, distributing, and selling cosmetics and fragrances under various names in the United States and Europe. At all relevant times, Arden maintained manufacturing or distribution facilities in the United States, England, and Italy and had affiliates with offices in Austria, France, the United Kingdom, Switzerland, and Germany. Arden's sales personnel took orders for Arden cosmetics and fragrances, typically for different quantities of various items, which were entered in a computer system. The orders were transmitted to a distribution center, where the products ordered were packed for shipment. At the distribution center, the computer system generated invoices and shipping documents for orders. In addition, Arden used the computer system for generating customer invoices, monitoring the receipt of payments from customers, and maintaining inventory levels. The various systems in use throughout Arden in both the United States and Europe totalled over 150.

 In December, 1987, Faberge acquired Arden from Eli Lilly and Company ("Lilly"). In connection with the sale of Arden, Faberge and Lilly entered into an agreement under which Lilly would continue to provide Arden with computer services for eighteen months after the sale, until June 22, 1989, at which point Arden would have to "migrate" off Lilly's system. In anticipation of the Arden acquisition and the date by which Arden would have to be off the Lilly computer system, Faberge retained E&Y in September, 1987 to conduct a strategic assessment of the options open to Arden with respect to its computer system.

 A. Assessment

 The terms of the initial engagement of E&Y were set forth in a letter dated September 8, 1987. The letter, sent by E&Y to James E. Treanor, Director of Corporate Services at Arden, and Charles W. Callahan, Director of Management Information Systems ("MIS") Worldwide, at Faberge, began "This letter will confirm our understanding of the management consulting services you requested to assist [Arden] in the migration of information services from [Lilly]." Affirmation of Herbert J. Sue, dated April 27, 1992 (hereinafter "Sue Aff."), Exh. 3 at 1. It further stated that

 
Ernst & Whinney will act as Arden's Project Manager for the migration project. In this capacity, we will serve as facilitators and implementors of the recommended information systems strategy, and work with Arden, Faberge, and Lilly personnel world-wide to accomplish the migration effort with maximum speed, technical accuracy and minimal disruption to Arden.

 Id. at 3. *fn2" In addition, the letter laid out a five-stage process according to which the project would proceed. Stages I and II, Situation Assessment and Strategy Development, were expected to be completed within four calendar months of the date of the letter. A new letter agreement was to be submitted before Stages III, IV, and V, Migration Activity, Custom/Package Implementation, and Long-Range Planning, respectively, would begin.

 In a graphic which listed seven potential problems associated with the Arden computer systems project, the risk associated with the completely new systems option rated an "H" (High) for five of the seven possible pitfalls: disruption to the business - quality of system support; disruption to the business - loss of system features; conversion of Faberge system may not be complete within 16 months; converted unique applications (Demo) may not be ready in 16 months; and technical staffing will not be accomplished in required time frame. Sue Aff., Exh. 4. By comparison, the third-party service bureau option was deemed highly risky with respect to only one problem: ability to contain costs. Id. With respect to the new systems option, Conopco further points to an E&Y document dated January, 1987 which states as a key strategy issue "Time required to implement a consolidated Arden/Faberge systems environment will exceed 18 month Lilly service agreement." Haveles Aff., Exh. 41.

 Faberge's chairman, Daniel Manella, rejected outright E&Y's recommendation at the February 4, 1988 meeting that a third-party service bureau be used while new systems were developed and implemented because the cost of that alternative was too high. Several weeks after that presentation, following another meeting between E&Y and Faberge management at which E&Y presented another analysis of the third-party service bureau and new systems options, Faberge elected to follow the lower cost, higher risk alternative of developing and implementing new systems at Arden prior to the June, 1989 cutoff. Significantly, the parties differ in their characterizations of how this decision was reached.

 Conopco claims that E&Y, having had its initial recommendation rejected, did a complete about face and recommended the option which called for the development of new computer systems at Arden before the Lilly cutoff date. As evidence of this, Conopco points to a document entitled "Arden MIS Proposal" submitted by E&Y to Faberge management. This report sets forth the three available options and discusses the costs and benefits associated with each. The report then makes a recommendation:

 
In evaluating systems migration alternatives, we looked at issues of risk and cost. The risks are primarily focused on the amount of time available to implement new systems and the potential for business disruption in an extended Lilly service relationship. The alternatives that offer substantial risk reduction (third party alternative) by providing early exit from Lilly demonstrate that the cost to migrate these risks is substantial. However, we believe that several factors work to offset them particularly the assumption that there is a reasonably good fit between Arden's systems needs and Faberge's existing ASI computer systems. Accordingly, we recommend that a least cost, higher risk approach be followed in the systems migration from Lilly.

 Sue Aff., Exh. 6 at EY16.

 E&Y, on the other hand, contends that Faberge reached the decision to develop and implement new systems at Arden prior to the Lilly cutoff date on its own. E&Y cites the deposition testimony of Patrick DeMartino, Faberge's Director of Management Information Systems for the United States, as support for that contention. DeMartino testified that following Manella's February 4, 1988 rejection of the third-party service bureau approach advocated by E&Y and supported by DeMartino's superior, Charles Callahan, he and Callahan decided that the new systems option should be followed and implemented by using American Software, Inc. ("ASI") software for the manufacturing and distribution systems in the United States and Europe as well as for the financial systems in the United States and the United Kingdom. This decision was based largely on the fact that Faberge had recently implemented new systems for its own business using ASI software and its personnel, therefore, had experience and familiarity with it.

 B. Implementation

 The parties do not dispute that Faberge made the decision to use ASI software in the new Arden systems. The deposition testimony of both Callahan and DeMartino of Faberge indicates that Faberge's senior management felt comfortable with ASI software because of the company's previous experience with it and because Faberge had applied it to a reasonably related business, i.e. cosmetics and health and beauty aids. E&Y was not asked to and did not perform any studies to test the validity of Faberge's assumption that ASI software systems would fit the business needs of Arden. Faberge thereafter acquired approximately twenty different software modules from ASI for use at Arden.

 With respect to the computer hardware, E&Y recommended an IBM 4381 computer for Arden. E&Y did not perform any review as to whether that machine had enough processing power to handle the throughput demands of the Arden system, and Faberge relied on its experience in connection with the updating of its own computers to judge how powerful a processor was needed. Further complicating the estimation of Arden's power needs was the fact that the conversion was being done from the Lilly system to a totally new and different system. The computer hardware lease agreements were structured to permit flexibility to upgrade the system if necessary.

 In May, 1988, E&Y sent Faberge a second engagement letter. This letter set forth several projects which E&Y was to perform, including the objective, scope, approach, "deliverables," timing, and estimated fees for each. The tasks outlined in this letter were (1) Export Systems Project - U.S. (design and implement a uniform system to support Arden's export business with direct interface with the ASI software to be used for manufacturing and distribution); (2) Demonstration Systems Project (implement a system to process payments to Arden employees who demonstrate products to customers in department stores); (3) Sales Reporting Project - U.S. (design a method to use Faberge's existing sales analysis and reporting systems to provide Arden sales analysis information); (4) European Manufacturing/Order Processing Systems Project (replace the manufacturing, order processing, and distribution systems for Arden and Faberge sites in Europe); (5) Sales Reporting Project - Europe (implement a new sales reporting system to support Arden and Faberge businesses in Europe); (6) Environmental Design - Europe (design, construction management, and hardware installation for new data centers in Europe); (7) Telecommunications Assistance (design and implement data communications networks in the U.S. and Europe); (8) Staffing - Europe (identify position descriptions, develop a staffing plan, and assist in hiring personnel for the data center); and (9) Project Coordination - Europe (provide overall project control for E&Y and local resources throughout Europe). Sue Aff., Exh. 9.

 It is undisputed that E&Y was requested to and did work beyond the scope of the projects identified in the May, 1988 letter. There is no writing evidencing such an agreement, but both parties recognize that additional work was done. Conopco asserts that the parties reached an oral agreement in August, 1988. The scope of E&Y's responsibilities in its expanded role is hotly disputed by the parties. Conopco maintains that E&Y agreed in August, 1988 to assume overall responsibility for the delivery of a completed computer system to Faberge, while E&Y maintains that it was merely given additional work on a "per diem" basis.

 E&Y was also assigned the task of conducting prototype studies for the United States and Europe. This consisted of meeting with the systems' users and identifying their needs, comparing these requirements to the functionality provided by the ASI software, identifying the shortfalls, if any, of the ASI software and the modifications necessary to fit Arden's needs, and prioritizing the necessary modifications. The modifications were divided into three categories based on their priority: those that had to be done before "implementation" (the migration from the Lilly systems)("Release 0"), those that could be done after implementation ("Release 1"), and those that were not essential but would be "nice to have" ("Release 2"). Although Faberge knew prior to the prototype studies that some modifications to the ASI software would be necessary in certain areas, the exact nature and extent of the modifications were not known until after the prototype studies were completed. Faberge's Callahan testified at his deposition that the prototype studies were beyond the range of skills of Faberge's MIS personnel and that, therefore, this was an area in which E&Y's professional expertise was sought.

 The parties also differ substantially in their characterizations of E&Y's responsibility with respect to project management. Conopco contends that E&Y was responsible for the entire Arden computer system as the project manager in both the United States and Europe. E&Y, on the other hand, claims that it was not asked to and did not ever assume complete responsibility for the design, development, and implementation of all new systems. Rather, it asserts that its personnel were used only on an "as needed" basis and that, at most, it served in a "coordinator/advisory capacity." According to E&Y, project management control for the systems implementation remained with Callahan in both the United States and Europe and also with DeMartino in the United States.

 As evidence of its role, E&Y points out that various activities related to the implementation of new systems at Arden were performed by Faberge and Arden MIS personnel, Arden users, ASI consultants, and other third-party contractors--in other words, by parties other than E&Y. With respect to Faberge and Arden MIS personnel, these activities included installation and modification of the order processing software of ASI and the ship verification function of the order processing software. E&Y also claims that, with respect to Europe, the MIS staffs of Faberge and Arden, and not E&Y, were responsible for the interfaces between the ASI system in North Acton, England and Arden's European affiliates, two sales reporting systems called "CARE" and "AMIS," and an order entry system to process "MSI" orders (orders transmitted from hand held terminals) from the Arden affiliate in France. E&Y also points out that Faberge and Arden MIS personnel had responsibility for maintaining the computer hardware and computer operations support. Similarly, E&Y notes that ASI was responsible for providing training on certain systems to Arden personnel, integration testing for the general ledger system, and certain modifications of the customer order processing and other software modules.

 Conopco counters E&Y's characterization of its role in the Arden project with evidence that E&Y had supervisory authority over at least a substantial number of people, including contract programmers, working on various portions of the project. In addition to citing the deposition testimony of Faberge's Callahan, Conopco notes that the personnel evaluations of several E&Y employees who worked on the project indicate that E&Y employees' responsibilities included managing and coordinating both "client" (Faberge and Arden) and ASI personnel. In addition, Conopco points out that E&Y personnel had software modification responsibilities in the areas of order processing, manufacturing, accounting, inventory, and sales forecasting. Further, E&Y employees had at least some joint responsibility with Arden employees for the "tuning" of the computer hardware and the stabilization of the data center. Finally, as evidence of the "pervasive control" exercised by E&Y, Conopco notes that E&Y's Bryan Kornreich, not Faberge or Arden personnel, wrote a status report of the implementation project as of March 15, 1989.

 C. Problems with the Arden System

 Lilly ceased providing computer services to Arden in the United States on June 1, 1989. The services from Lilly to Arden in Europe were terminated on July 3, 1989, except for the computer systems support for Arden's financial applications, which continued until July 22, 1989. Accordingly, the new Arden systems were activated in the United States on or about June 1, 1989 and in Europe on or about July 3, 1989. Conopco asserts that a host of problems ensued attributable to E&Y's substandard performance, problems ranging from system errors resulting in inventory and order processing difficulties to an inability to maintain or perform proper financial control and planning.

 Most basic among Conopco's complaints is that the systems' response times were unacceptably slow, particularly in the areas of order entry and inventory. The response time between entering information and the completion of processing so that the next order could be entered ranged anywhere from a "routine" but intermittent few minutes to as long as half an hour, when, according to one witness, three or four seconds would ordinarily be considered acceptable.

 Another problem alleged by Conopco is that the system was unable to complete its "batch" processing. Batch processing, the method by which the computer system would process, sort, and store information inputted during the day, was to be performed each night as to the information received during the preceding day. According to Conopco, the system encountered excessively long batch cycles, causing it to be unavailable during part of the day, thereby decreasing the amount of work that could be done on it during the day. As a result of both slow response times and excessive batch processing time, Conopco claims, Arden was unable to fill or ship orders in a timely manner, causing invoices to back ...


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