Jury Awards $6.4M in Damages against Payroll Service Provider

Last week, a Los Angeles Superior Court jury returned a verdict for $6.4 million in favor of a Texas firm called The Payroll Partnership LP and two of its sister companies against Rapid Payroll, Inc., a wholly owned subsidiary of Paychex, Inc., the nation's #2 payroll processing firm.

The jury found Paychex subsidiary Rapid Payroll liable for breaching software licensing agreements related to a personal computer based payroll processing system called "Rapid Pay."

The lawyer for The Payroll Partnership LP, Stephen Wald of the Boston law firm Craig and Macauley, stated, "We are delighted with the verdict, both for the three family owned businesses that will benefit directly and for the other Rapid Pay licensees who were closely watching this case. The verdict supports what we have contended all along: that the plaintiffs were significantly wronged. We believe the future verdicts will be consistent with the findings of this jury."

In all, more than 25 Rapid Pay licensees have brought actions against Paychex, Rapid Payroll, and, in some cases, two Paychex officers related to the Rapid Pay software. Mr. Wald represents The Payroll Partnership LP and 19 other plaintiffs currently pursuing claims against Paychex, Rapid Payroll, Paychex CEO Thomas Golisano, and Senior Vice President Walter Turek.

Certain of the cases charge fraud, seek punitive damages, and also seek the source code for Rapid Pay. The Paychex division called Major Market Services uses a version of the software that Paychex markets as "Preview."

The Payroll Partnership matter was the first of these cases to go to trial. The trial of the next case, brought by Accuchex Corp. of Novato, California, is scheduled to begin in the Los Angeles Superior Court on August 23, 2004. Accuchex is seeking damages in excess of $15 million. Cases in the U.S. District Court in Los Angeles are scheduled to go to trial beginning in January 2005.

All 20 of these family owned, independent payroll processing companies that are sharing counsel had licensing agreements with Rapid Payroll that expressly provide the license could not be canceled unless the licensee consents or breaches the agreement. The licenses also required Rapid Payroll to maintain, service, and update the software. In August 2001, all Rapid Pay licensees received letters from Mr. Turek, who is both the President of the Paychex subsidiary and a Senior Vice President at Paychex, that stated, "As of August 30, 2002, RPI will no longer license the Software for Use. All support and maintenance ... will cease as of 5:00 p.m. on August 30, 2002." In July 2002, the U.S. District Court in Los Angeles issued a preliminary injunction that prohibited Paychex and its Rapid Payroll subsidiary from terminating the licenses and required them to continue to support and maintain Rapid Pay.

Most of the plaintiffs acquired the first version of the "Rapid Pay" payroll processing software licenses from Olsen Computer Services, Inc. (OCS). These small payroll companies built their businesses around the software, which requires frequent updating to comply with tax laws and other operational changes. Paychex acquired OCS in late 1996 and operates it as a wholly-owned subsidiary under the name of Rapid Payroll, Inc.

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