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.
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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 out there?
-- 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 with your
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 firstname.lastname@example.org.