Dear Legal Line,
Can a telecom billing service hold client data and account information
captive for non-payment, or is there something that requires them
to this information respect it as proprietary?
Here’s my dilemma: I contracted a company to outsource all
my billing to prepaid distributors and postpaid clients and they
never delivered what they promised. Their service, supposedly, was
to install a billing platform on our VoIP soft switch and compile
all our billing that would be sent to us for directly billing our
clients on a weekly or monthly basis. The problem was they had errors
on their side due to software conflicts and a lot of internal administrative
confusion resolving them. Since I was getting billing reports very
late and losing money, I fired them. They told me if I did not immediately
pay them the full amount of the contract, they were entitled to
keep all data and information of ours in their system, as it was
a part of their work (and proprietary rights) under the contract.
However if I paid them this full amount of the contract, they would
return all my data.
I re-read the contract and it states: “Client agrees that
monthly or weekly reports or account statements may be withheld
by the Company should Client fail to pay any outstanding balance
demanded by the Company under this Agreement. Such reports and statements
will be remitted to Client subject to full payment to the Company
or by written consent or agreement of the Company.” I don’t
think this is a correct interpretation of the contract. I don’t
care about their screwed-up reports I just want my data back so
I can hire someone else and bill my clients.
Do you know of any cases like mine or is there some court ruling
on a company’s rights to client data and account information
-- Data Held Hostage
I strongly encourage you to seek legal counsel to immediately evaluate
your option to file a breach of contract claim along with a preliminary
injunction to disgorge the data from the Billing Provider. These
types of issues are based in large part on contract law and claims,
and a full reading of the contract by an attorney is necessary to
determine any and all possible limitations or constraints in litigation.
Jurisdiction of litigation is a prime example. These types of issues
also require fast action so that you can begin the billing process
again — ergo the injunction is important. So, please meet
attorney as soon as possible, or immediately, so that you don’t
lose time. This being said, let’s focus on your questions,
to which I will respond to in two parts.
PART 1. WHOSE DATA IS IT ANYWAY?
If I am correct, what is at odds here is only the return of your
“raw data”, and not any compiled work such as reports
or account statements. I am assuming (as you did not specify in
your email) that this includes client names, contact information,
internal account information, records of calls made and time used,
termination destinations, your rates, your surcharges, your FET
and USF allocations, and the taxes or fess you otherwise charge
for that particular client’s usage. Since the Billing Provider’s
platform was attached to your VoIP switch, depending on the architecture
of your soft switch, you may actually have some, if not all of the
raw data, available to you in a variety of formats. (You may want
to check this out first, because it may be important in the future.)
Even if the data is extractable, it may not be compiled into a unified
or usable format in order to complete your current billing cycle,
leaving you with added costs related to the data recovery process.
This is where your request for the return of data is critical and
their response telling of what may come next.
It appears that the Billing Provider is trying to claim a lien-hold
interest of some sort over the data: by means of a chattel lien,
mechanics lien or a general lien. These types of liens are generally
defined by state statutes as to the classes of persons entitled
to the lien, and, application and scope of lien. In a nutshell,
a chattel, mechanic or general lien is a statutory claim against
the owner of property, either real or movable, by a statutory class
of laborers or professionals that perform work for the improvement
of that property.
Classic cases of these liens are commonly found in construction
cases wherein a laborer or tradesman files a claim directly against
the property on the public record. The laborer or tradesman thereby
perfects his lien holder’s interest for payment on the property.
In this case, however, it appears that the Billing Provider did
no such process; otherwise you would have been provided a Notice
of it. Also, I have not seen any state statutes that create a particular
lien interest in billing information, or information related to
telecommunication traffic or regulatory records. So in terms of
case law on point, there is very little. This brings us to the question
whether their current claim to withholding the data is “off-the-contract”
or within the scope of the contract.
This company simply demanded an acceleration of full contract payment
or threatened to withhold your data when you gave notice of termination
for breach. While a preemptively clever maneuver for negotiating
out of an anticipated breach of contract lawsuit, I agree with you
that it is a stretch on the interpretation of the clause in relation
to your raw data. In the end, the interpretation of this is something
best reserved for a judge to rule upon and best placed before the
courts immediately. However, from the language of the contract you
provided, the class of information that they have entitlement to
withhold is weekly or monthly reports and account statements generated
through their efforts — and no more. Extending this to all
data, including raw data, is where I believe they have overstepped
the line. It is very likely that the information they are withholding
may even constitute as a trade secret depending on how you use it
and how they dispose of it if you refuse to pay.
Both of these questions can more effectively be answered when you
sit down with your local counsel to evaluate your case in light
of the contract.
Some contracts attempt to create rights by agreement of the parties
- such as a Chattel lien. The caveat for the other side in this
type of a drafting maneuver is that if the clause is found invalid,
damages or the need for equitable remedies kick in retroactively
in some instances. It really just depends on the clause and the
facts of the situation. It this case we are really dealing with
intangible property, raw electronic data, and not something tangible
like Chattel. The legal definition of Chattel is an article of personal
property, not real property, which is movable such as goods. Does
raw electronic data qualify as Chattel? That’s a good question.
Although arguable, my review of case law indicates that raw data
has never been affirmatively settled by the courts to consistently
vest a lien holder’s interest as Chattel. In general, if there
is nothing that vest them to an entitlement to the data, your right
to its return is clear. In light of the information possibly constituting
a trade secret or at least a protected class of proprietary information
of your company, I think that you likely have a strong claim for
demanding return of it and disgorging them of it via injunction
if they refuse.
PART 2. DISGORGING THEM OF YOUR RAW DATA.
Something of particular concern to present to your local counsel
is injunctive relief. While most hear of injunctions in relation
to TROs (temporary restraining orders), there is a class of injunctions
called Preliminary Injunctions that are injunctions filed in tandem
with a lawsuit. In this case it sounds as if your termination of
their services was based upon a breach on their part, so you probably
already have a potential lawsuit for damages resulting from their
performance. The key issue here boils down to two specific elements
of all injunctions which are “irreparable harm” and
“no adequate remedy at law”. The gist of these elements
together is that the injunction is necessary because there is no
money damages that the court can award you that would place you
in the position you were in prior to the actions of the Billing
Provider withholding your data, and that, but for the injunction
preventing it, you will be harmed. For most injunctions, this is
a big hurtle because it evokes the courts ability to act in equity
of the parties, not just money damages. If the facts do not support
these elements, the court cannot grant the injunction and it is
denied - “no ticket, no laundry” so to speak.
In your case, the recovery of raw data from the soft switch may
become a critical issue. If you can recover your raw data, it is
arguable that the “irreparable harm” and “no adequate
remedy at law” elements cannot be met because you can pay
someone to recover the data now and sue the Billing Provider later
for the cost of the recovery as money damages. Then again, if for
some reason you cannot recover anything without their assistance
or activity, then an injunction may be in order. Bring all these
issues to the attention of your local counsel because they can make
the difference when disgorging data from another company. Also be
aware of any venue or jurisdiction clauses. If your home jurisdiction
is California, and venue and jurisdiction per the contract are in
Texas, any attempt to disgorge the Billing Provider must be where
the contract dictates — in this case Texas.
The exception would be if the Billing Provider has a certificate
of authority to do business in your home jurisdiction. Why...because
they have voluntarily entered your jurisdiction for all legal purposes.
This is important in determining whether the court entertaining
the injunction has jurisdiction over it or not. Again, a very good
topic to discuss with your attorney prior to the lawsuit.
Good Luck & Success in the Industry!
•• Ed Maldonado is a Partner of Maldonado & Glenn.
He can be reached at email@example.com.