Golisano, Paychex subsidiary pay $32.2M toward lawsuit

Paychex Inc. chairman Thomas Golisano, a Paychex subsidiary and one other defendant last week paid $32.2 million to go toward settling a lawsuit accusing Paychex of unfair competition.

The March 18 payout came after a three-judge California appeals court panel unanimously affirmed on March 9 a lower court ruling that found Paychex guilty of using inside information and unfair tactics to undermine a competitor.

In the ruling, the Court of Appeal in the State of California panel rejected a claim by Golisano’s lawyers that a $10 million punitive-damages award against Golisano personally was excessive. 
In addition to falling well within legal standards, the $10 million award against Golisano was less than 1 percent of the value of his Paychex stock, the ruling notes.

The punitive damage award also included a $1 million award against Paychex and a $10,000 award against Walter Turek, a Paychex subsidiary’s president. Damages include a $15 million in compensatory damage award. Interest brought the total payout to $32.2 million. Pursuant to a court order in a related bankruptcy case, Paychex could have to shell out some $5.7 million more in interest.

The case traces to Paychex’s 1996 acquisition of payroll-processing software company. Brunskill Associates Inc. claimed in the lawsuit that Paychex’s Rapid Payroll Inc. subsidiary breached a contract inked with Rapid Payroll’s original owner when Rapid Payroll abruptly canceled Brunskill’s license to use Rapid Payroll’s software.

Brunskill is the last of 76 payroll-processing companies to settle Rapid Payroll license cancellation complaints. Amounts Paychex states in Securities and Exchange Commission filings that it set aside to pay legal costs in those cases total more than $75 million.

The appeals court’s Brunskill decision cites internal Paychex documents describing Paychex’s $22 million purchase of Olsen Computer Systems, which Paychex later renamed Rapid Payroll, as a move to use inside information to squeeze out competitors.

Points favoring an Olsen takeover cited in a 1996 memo to Golisano included “taking over the businesses of licensees who used the Olsen software (‘a great way to leverage acquisitions of their customers’); undermining competitors by learning inside information about their business operations (‘Gives us knowledge of where competitors might be more successful than we would like’); and stifling competition (‘Makes it more difficult for national competition to form’),” the appeals court ruling states.

Brunskill Associates’ attorney, Stephen Wald of Craig and McCauley PC in Boston, previously represented 20 other payroll firms in similar claims, winning verdicts against Paychex and Rapid Payroll in several cases.

Paychex’s cancellations of Brunskill and other licensees’ software agreements was “not an isolated incident of wrongdoing, but required extended deceitful conduct to keep licensees from converting to new software over the years. Appellants’ conduct was sufficiently reprehensible to justify the imposition of punitive damages,” the appellate panel concluded.

In a move that could have reduced or eliminated its exposure to court claims, Rapid Payroll filed a Chapter 11 petition in a Los Angeles Bankruptcy Court in 2006. After creditors, including Brunskill, filed Bankruptcy Court complaints against Rapid Payroll, the court ordered Paychex to make good on Rapid Payroll’s debts, including judgments won by firms with license cancellation claims.

Golisano chose to bankrupt Rapid Payroll when he ordered the Paychex subsidiary to cancel licensing agreements that had been bringing in $1 million a year, the appeals panel’s ruling states. 

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