J.D. Edwards & Company v. Randy Podany and Mercer Management Consulting, Inc.
1999 WL 80753, 168 F.3d 1020, 1999 U.S. App. LEXIS 2666 (1999)
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Rule of Law:
The 'consultant's privilege,' which protects advisors from liability for inducing a breach of contract, is a qualified privilege that applies only when the advice is given within the scope of the consultant’s engagement and is provided honestly and in good faith, not solely for the consultant's personal benefit.
Facts:
- SNE, a window manufacturer, hired J.D. Edwards & Company to supply software for its 'Primary Business System' (PBS) project, having previously rejected BPCS software due to its lack of a 'configurator' program.
- Following an SNE reorganization, Gary Massel, heading one of SNE's divisions, hired Randy Podany, an employee of Mercer Management Consulting, Inc., for a brief 'sniff test' review of the PBS project.
- After one day, Podany advised Massel that SNE's 'reengineering in parallel' approach and J.D. Edwards' leading role were unsound, and also suggested halting the installation of J.D. Edwards' software.
- Massel subsequently expanded Podany's authority, instructing all company personnel to have computer-related purchases approved by Podany, thereby enlarging Podany’s engagement scope.
- Podany then ordered an SNE executive to stop making payments to J.D. Edwards, an action found to be within his expanded authority.
- Podany, primarily familiar with BPCS, maneuvered to replace J.D. Edwards' software with BPCS, despite knowing it lacked the configurator that SNE had deemed essential.
- Podany arranged the software selection to favor BPCS without fair comparison, misrepresented costs, and made derogatory remarks about J.D. Edwards' software without sufficient knowledge.
- Podany's motive for these actions was to secure a lucrative job for himself as director of information services with SNE's parent company and procure further engagements for Mercer Management Consulting, Inc., resulting in BPCS ultimately failing to be successfully installed at SNE.
Procedural Posture:
- J.D. Edwards & Company initiated a diversity lawsuit in federal district court against Randy Podany and Mercer Management Consulting, Inc., alleging they committed the tort of deliberately inducing SNE to breach its contract.
- The district court jury returned a verdict in favor of J.D. Edwards & Company, awarding $2.3 million in damages.
- Randy Podany and Mercer Management Consulting, Inc. (appellants) appealed the jury's verdict to the U.S. Court of Appeals for the Seventh Circuit, arguing there was insufficient evidence to justify the jury's rejection of their 'consultant's privilege' defense.
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Issue:
Is a consultant, who advises a client to breach a contract, entitled to the 'consultant's privilege' defense against a claim of inducing breach of contract, when the advice was allegedly given in bad faith and for the consultant's personal gain rather than the client's benefit?
Opinions:
Majority - Posner, Chief Judge
No, a consultant is not entitled to the 'consultant's privilege' defense when their advice to breach a contract is given in bad faith and for their personal gain rather than the client's benefit. The court affirmed the jury's finding that the defendants, Randy Podany and Mercer Management Consulting, Inc., were liable for inducing breach of contract because Podany acted in bad faith. The consultant's privilege protects advisors who offer good-faith advice within the scope of their engagement without fear of liability. However, this privilege is qualified, not absolute. It is forfeited if the consultant acts solely to benefit themselves (or out of malice) rather than for the client's benefit, or if the advice falls outside the scope of their engagement. While the court found that Podany's advice to halt software installation and stop payments fell within the (expanded) scope of his engagement, a reasonable jury could conclude he acted in bad faith. Evidence showed Podany knew little about J.D. Edwards' software but was familiar with BPCS, which he pushed despite its lack of a crucial 'configurator' that SNE required. He rigged the software selection process, misrepresented costs, and made derogatory remarks about J.D. Edwards' software without sufficient knowledge. Crucially, his motive was to secure a lucrative job with SNE's parent company and generate further business for Mercer. The court emphasized that while mistakes do not void the privilege, acting solely for self-enrichment by rendering dishonest advice does. The jury's assessment of Podany's lack of credibility, combined with circumstantial evidence, justified the finding of bad faith.
Analysis:
This case significantly clarifies the limits of the 'consultant's privilege,' establishing that it is not a shield for self-serving or dishonest advice. It emphasizes that while consultants are encouraged to give frank advice, their counsel must genuinely aim to benefit the client, not merely enrich the consultant at the expense of a third party. Future cases will likely scrutinize the consultant's motives and the factual basis of their advice when this privilege is asserted, making it harder for consultants to avoid liability if their recommendations are demonstrably biased or made without sufficient diligence, especially when evidence of personal gain is involved.
