6/12/15
By Brad Hayes
In case you’re unaware, Zenefits, the HR Software/Quasi Insurance Broker, which claims to be the fastest growing SaaS company ever, that has on multiple occasions been the subject of controversy in the past, and which recently closed a $500 Million Dollar Round of funding, at a valuation of $4.5 Billion, is currently facing its greatest threat yet. Namely, a lawsuit filed in federal court by the largest payroll processing company, ADP for defamation.
How did Zenefits end up in this not so envious position? Well if you ask Zenefits, it is simply because they’re growing so quickly, and consequently seem to have become a major threat to ADP, the largest payroll processing company in the US. This is despite the fact that Zenefits doesn’t do anything with payroll processing and sort of competes with ADP on the insurance side, but not really. Parker Conrad has gone so far as to tell the press that he feels that when ADP heard about how the company had raised $500 Million in its latest round of funding, that it was an “Oh shit” moment for ADP.
If you ask ADP, or just read their lawsuit, it is simply because a fast moving start-up was putting their network which serves hundreds of thousands of clients at risk. Zenefits didn’t allow enough time for ADP to respond, and then lunched a malicious media campaign to impugn ADP’s reputation with their customers and the public in general.
After reading various zenefits news reports, blog posts on Zenefits own site, a Change.org petition that Zenefits launched asking for the company to “Stop Hurting Small Business”, the ADP lawsuit document, and the supposed communication from Zenefits CEO, Parker Conrad to the CEO of ADP, Carlos Rodriguez, it seems that Zenefits acted too quickly, rallied social and news media behind it, and is now going to have a very difficult time convincing a jury that it was righteous in doing so.
What Caused ADP To Cut Off Zenefits?
According to ADP, Zenefits was in effect hammering away at their servers with requests for client information, approximately 850 clients that ADP and Zenefits have in common. Zenefits didn’t have access to, or hasn’t made an effort to get access to, it remains to be seen, the ADP official API and or technical structure that allows Zenefits to pull this client data in a true collaborative way.
Essentially the way it works, is that Zenefits customers provide the company with access to their ADP accounts login information. Zenefits then uses that access to login, scrape the client information data and then update their own records within their own system. It’s a work around essentially.
There’s a reason that companies create official API’s, because at large scale, collecting vast amounts data can be incredibly stressful and resource intensive on servers. According to the ADP lawsuit, this is what triggered them to have no choice but to block Zenefits access, so that they could no longer be able to access all of this shared client data at one time.
Additionally, according to the lawsuit filed by ADP, there has been concern about the manner in which Zenefits has been collecting sensitive data (such as socials security numbers) of shared clients. Often large companies might become aware of how another company is collecting information, but ultimately choose to ignore those facts until it becomes a problem. Keep in mind that the shared Zenefits/ADP clients represent 10% of Zenefits total customer base, and 0.25% (.25 of one percent) of ADP’s. Again we don’t know enough details, so while it’s easy to speculate that ADP might have ignored Zenefits methods until recently, until it hit a tipping point, that point be when Zenefits accounted for more than 25% of their servers traffic, despite only sharing 850 customers. That said, we don’t know all of the facts and it could be something entirely different.
When Fast Moving “Unicorns” Don’t Play Well With Older Companies
One of the things that seems obvious after reviewing all of this, is that the way in which “new technology companies” vs “older established companies” operate is dramatically different. That isn’t exactly a new concept, in fact it’s cliched and anything but a misnomer. Quite honestly for Zenefits to expect that ADP, the largest player in the payroll space to dedicate resources immediately to address Zenefits needs, it’s a bit of a stretch.
We can only speculate on a lot of this, but what might have been a better course of action for Zenefits, would have been to begin the process of collecting ADP data in such a manner where it doesn’t create resource strain on ADP’s servers.
In Zenefits defense, it is entirely possible that ADP has been intentionally moving slowly, not necessarily wanting to get around to providing Zenefits with better access in an expedited manner, say through some official API.
Zenefits, and its outspoken CEO Parker Conrad, has gotten a bit of a reputation for being sharp elbowed. To say that his personality and by proxy Zenefits is combative and aggressive is an under-statement.
Aside from the fund-raising and one minor new product launch, the majority of the time when Zenefits has been in the news, it hasn’t been for good reasons. Recently it made headlines when battling with insurance regulators in Utah. Then it had a bit of a PR snafu when Parker Conrad publicly rescinded a job offer to a prospective engineer who posted a question asking his peers if he should take the job with Zenefits, or the job with Uber, another SV “disruptor”.
The biggest and best news that Zenefits has made, really ever, because you can argue that their valuation and fund-raising could be their ultimate un-doing, is the addition of David Sacks, former CEO and founder of Yammer. He’s also a member of the “PayPal maffia” and a respected poker payer and movie producer.
Parker Conrad Allegedly Concedes That He Might Have Overreacted
Before the lawsuit was filed, according to a story by Julie Bort of Business Insider, Parker Conrad reached out to the CEO of ADP via email seeking to smooth things out, and restore what relationship opportunities might have been possible.
Unfortunately it seems that what ADP’s CEO wanted, was for Zenefits to retract everything that they had published with respect to why Zenefits had been cut off from access in the first place. From ADP’s perspective it was for security reasons, and to ensure that Zenefits system for syncing/scraping data didn’t place ADP’s servers and ultimately service, being provided to hundreds of thousands of customers, at risk.
Here’s the communication that Parker sent to ADP’s CEO.
From: Parker Conrad
Sent: Friday, June 05, 2015 8:36 PM
To: Rodriguez, Carlos (CORP)
Subject: Fwd: URGENT – Zenefits & ADP
Hey Carlos,
Sorry about this. I’m a bit new to all of this as you may have heard, and perhaps reacted a bit too quickly when we heard we were getting shut down. I asked the team to take a really aggressive stance. If this is a misunderstanding and we moved too quickly on this, gosh I feel terrible about that.
[Investor] tells me he just gave you a call, and said he knows you well from his time as a board member at [REDACTED].
Not sure if it’s too late for this, but if it were possible for something good to come of this: We’ve always viewed ADP as a really important potential partner for Zenefits, and if you were open to it, I’d sure like the chance to meet with you personally & tell you a bit about what we do.
We are nowhere near ADP’s scale of course, but we send out a fair amount of payroll business — we set up ~ 50 companies with new payroll every week (always to 3rd-parties like ADP, paychex, intuit — we don’t do payroll ourselves). We’d sure like to find a way to send a good chunk of that business to ADP and move forward from this whole thing on a more positive note.
I can meet you this week or next at your offices in New Jersey, if that works for you.
/prc
There are a couple things that are interesting in this email. For one, it seems as if ADP’s CEO is not really aware of who Parker is, nor what it is that Zenefits does. In fact, it seems as if Zenefits is doing far less business than what would be expected based on press reports. This kind of contradicts what Parker has been saying in Zenefits defense in their portrayal of the David VS Goliath chain of events. Parker also notes in the email that Zenefits has always thought of ADP as a “potential partner”, there’s a key distinction there.
The other important point, is that Parker is doing a complete 180 on his prior stance of going so far as offering to move away these 850 shared customers over to Intuit and other payroll service providers, and offering to pay $1,000 to any of the companies who are will do so. Keep in mind that Parker’s reaction brought him not only to the point where he decided to make all of this which should have been handled privately, public, but that he literally created a Change.org campaign asking for supporters to provide signatures urging ADP to petition for ADP to work with Zenefits.
Zenefits Can’t Be At War With Everyone All At The Same Time
It’s difficult to not have some respect for a company who has the “stones” it takes to take on two old stogy industries, HR software, and health insurance, with reckless abandon in the manner in which it seems Zenefits is always doing.
That said, it is becoming almost akin to a scene in the movie Dazed and Confused, where a pacifist protagonist imagines himself beating up a bully, only to be championed and celebrated by his friends. Except like in real life, unfortunately what ends up happening is that the bully kicks his ass, because he’s clearly not prepared for the fight, nor does he have the experience of fighting someone. The reality of real life, and the consequences of physically engaging with the bully unfortunately leaves the former pacifist battered and bruised, and ultimately questioning why he turned his back on his ideals in the first place. He didn’t have to re-engage with the bully, but he did so out of spite and a thirst for revenge.
Zenefits despite having raised more than $500 Million in funding, simply does not have the ability to take on all of these battles, nor should it. This type of behavior is only going to make large companies whom Zenefits needs to work with, cautious about partnering with them at all.
Is ADP Really Launching A Competing HR Product To Compete With Zenefits?
This question has been at the heart of much of the media attention that’s mostly called into question ADP motives. Was it really trying to cut Zenefits off at the knees with it’s shared customers only to then roll out its own competing service.
According to Zenefits, that’s what ADP intends to do. They are basing this on an email that they received, presumably from a shared client that is coming from an ADP employee that states that ADP is launching a free product called Opum.
First and foremost, ADP denies this and seems willing to do so in court. One of the complaints in that suit is that Zenefits is spreading false information about ADP.
Here’s where Zenefits smoking gun, the ADP email above, doesn’t seem so, uh, smokey. ADP is requesting a jury trial, and by default the bias will be with any jury made up of average everyday people, with Zenefits. David vs Goliath and all that, it seems unlikely that ADP would pursue a trial if it were in fact all using this as a means to hobble Zenefits and take away their ability to operate as a business giving away HR software.
Another point, is that in the email that Zenefits claims it received, there’s some mention of screen shots of the software and additional information. If there’s ever a smoking gun and or arsenal to help prove Zenefits side of the story, that’s it. So why hasn’t Zenefits posted that information?
Lastly, the so called forthcoming product is allegedly called Opum. According to ADP, the email came from a misinformed ADP employee who wasn’t aware that United Health has a product that doesn’t do anything related to what Zenefits does, but is actually called Optum.
It’s entirely possible that the email containing this misinformation that was sent, was expected to reach Zenefits and cause an uproar. Zenefits isn’t exactly viewed in such a positive light on the individual agent level, again in large part to Parker Conrads bombastic personality. After all, this is the guy who took the stage at Techcrunch Disrupt, before the company had gotten anywhere and declared that it was bad news bears if you were an insurance broker, because Zenefits was going to “Drink your milkshake”.
One less speculative point, is that no one, be it United Health, nor ADP has filed any trademark application on Opum, which is standard operating procedure.
When Unicorns Get Too Drunk On Their Own Koolaide
Just because Zenefits is facing down the most dominant player in HR, who has more than $2 Billion in cash sitting in the bank, and far more ability to battle things out in court, it doesn’t mean that they can’t recover from this fiasco. Parker Conrad however might have to make a major adjustment to the way he operates as a CEO immediately, or it doesn’t seem likely that he’ll continue to hold that position for long.
That is one massive downside to taking on more than $500 Million dollars in OPM, also known as “other peoples money”. There’s an expectation to lead, and doing so without causing massive damage along the way, and spending massive amounts of OPM on lawsuits. Electing to spend nearly $1 million in OPM to shift business away from an absolutely necessary partner, whilst simultaneously incinerating a bridge with millions of dollars on it, is very bad management. Parker’s email to ADP’s CEO seems to point out that Parker might have overreacted.
Many executives within the industry would agree that taking the fight public, in such a dramatic and spectacular fashion is just about the worst thing that Zenefits could have done. There’s also the obvious fact that ADP is not in business to work with Zenefits, the company has been around some nearly 60 years prior to Zenefits founding.
ADP does work with other companies who do precisely what it is that Zenefits does, but those companies comply with all of the security and technical requirement standards that ADP has in place. Zenefits might think that they’re over-reaching and unnecessary, but these days many multi-billion dollar corporations have been hacked, and it ultimately costs them tens, if not hundreds of millions of dollars when it does, so naturally it is a very sensitive time in the industry, and no one wants to cut corners on security. Ask any computer security expert, and they will definitely agree that the method in which Zenefits is accessing ADP’s data is not the most secure way to do this.
Is Parker Conrado Going On An Aggressive Media Blitz To Get Ahead Of Any Backlash?
The media spectacle has now become something that’s referenced in the ADP lawsuit. In recent days Parker Conrad, the Zenefits CEO, has amped up the PR campaign, even going so far as to go on to CNBC to effectively double down on his positing that ADP is treating Zenefits, and small businesses unfairly. Even comparing a phone conversation he had with ADP’s CEO to a showdown with the fictional character “Dirty Harry”. Is this really how the CEO of a multi-billion company should be conducting business? Are using these kind of childish analogies to describe a private conversation between two professionals what you might expect of Bill Gates and Warren Buffett?
Can Parker Conrad Recover From This Misstep?
While hard charging, game changing CEO’s unafraid of challenging the Taxi industry like Uber’s Travis Kalanick might be celebrated in Silicon Valley, that without question is the entirely wrong approach for the HR and health insurance industry.
Taxi conglomerates are not made up of $40 Billion, $60 Billion and $110 Billion market cap companies. The HR and health insurance landscape absolutely is, it’s littered with them, and these aren’t the people you want to screw with a smear campaign. Some guy running a $100 million taxi business isn’t going to spend $20 million taking you to court, instead he might make some veiled threat against your life. The companies that Zenefits now finds themselves both needing to work with, and in some cases compete with, they aren’t going to make threats on a persons life either. Will they absolutely try to destroy Zenefits through all legal channels should it continue to operate like an impatient, petulant teenager? Zenefits can bet their sweet “$4.5 Billion unicorn ass” they will.
Hubris isn’t appreciated, respected or rewarded by the CEO’s running these kind of companies. Humility and having the ability to understand that these are in fact evolving and slowly changing industries is, not by choice but by default. That is what is going to allow Zenefits to continue to operate and scale, setting realistic expectations for adaptation by incumbents.
If you’re so inclined, you can read the full ADP lawsuit that was filed below, it’s painting a very different picture than what has been portrayed and reported by the media thus far. Hopefully for the upwards of 1,300 people Zenefits plans on employing, and the hundreds it does already, this latest misstep isn’t a fatal one.
ADP Zenefits Lawsuit
Case4:15-cv-02560-DMR Document1 Filed06/09/15 Page1 of 16
1 MORGAN, LEWIS & BOCKIUS LLP Robert A. Lewis (SBN 83630)
2 robert.lewis@morganlewis.com Frank Kennamer (SBN 157844)
3 frank.kennamer@morganlewis.com Geoffrey T. Holtz (SBN 191370)
4 geoffrey.holtz@morganlewis.com Kristen A. Palumbo (SBN 215857)
5 kristen.palumbo@morganlewis.com One Market, Spear Street Tower
6 San Francisco, CA 94105 Telephone: 415-442-1000
7 Facsimile: 415-442-1001
8
Attorneys for Plaintiff 9 ADP , LLC
UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA
ADP, LLC, a Delaware limited liability company;
Plaintiff, v.
YOURPEOPLE, INC., a Delaware corporation d/b/a/ Zenefits Insurance Services, and PARKER CONRAD, an individual,
Defendants.
No.
COMPLAINT FOR DAMAGES AND INJUNCTIVE RELIEF FOR:
(1) DEFAMATION;
(2) INTENTIONAL INTERFERENCE WITH PROSPECTIVE ECONOMIC RELATIONS;
(3) UNFAIR COMPETITION;
(4) FALSE ADVERTISING;
(5) LANHAM ACT VIOLATION
DEMAND FOR JURY TRIAL
COMPLAINT FOR DAMAGES AND INJUNCTIVE RELIEF
1 2 3 4 5 6 7 8 9
Plaintiff ADP, LLC (“ADP” or “Plaintiff”) for its Complaint against Defendants YourPeople, Inc., dba Zenefits Insurance Services (“Zenefits”) and Parker Conrad (“Conrad”), an individual (together, “Defendants”), alleges as follows:
I. INTRODUCTION
1. Plaintiff ADP brings this lawsuit to seek redress for Defendants’ defamatory and unlawful conduct to publicly and falsely malign ADP.
2. For over 60 years, ADP has succeeded in establishing a reputation for client service excellence that places as paramount the client’s interest and that rests on the foundation that “integrity is everything.” Unfairly attacking ADP’s core values of client service and integrity, Zenefits cavalierly launched a campaign to falsely accuse ADP, without basis, of unethical and anticompetitive behavior. Among other false accusations, Zenefits alleged that ADP intentionally sought to cause harm to ADP’s clients solely to gain an unfair competitive advantage against Zenefits.
3. As set forth in this Complaint, ADP has sought to protect the interests of its clients, in contrast and in response to the irresponsible actions of Zenefits that potentially jeopardize the continuity of service and security protections that ADP’s clients rightfully expect of ADP.
II. THE PARTIES
4. Plaintiff ADP is a Delaware LLC with its principal place of business in Roseland, New Jersey, duly authorized to do business in the State of California.
5. Defendant Zenefits is a Delaware corporation with its headquarters and principal place of business in San Francisco, California.
6. Zenefits is subject to personal jurisdiction in California because it is subject to general jurisdiction in this forum. Zenefits is headquartered in San Francisco, California, and its contacts with the state are substantial, continuous and systematic. In addition, Zenefits is subject to specific jurisdiction here because it has committed wrongful intentional
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1 2 3 4 5 6 7 8 9
acts in this state, expressly aimed at ADP, and caused harm that it knew or should have known was likely to be suffered by ADP.
7. Defendant Conrad is the co-founder and CEO of Zenefits. He is a resident of the San Francisco Bay Area and is thereby subject to personal jurisdiction in the state of California.
8. At all material times, through his ownership interest in Zenefits and his role as CEO and President, Conrad had both the right and the authority to control, and had a direct financial interest in, the actions of the corporation.
III. JURISDICTION
9. ADP’s fifth cause of action arises under the Lanham Act, 15 U.S.C. §§ 1114 & 1125. Accordingly, this Court has subject matter jurisdiction over this action pursuant to 28 U.S.C. § 1331 and 28 U.S.C. § 1338.
10. This Court has supplemental subject matter jurisdiction over the pendant state law claims under 28 U.S.C. § 1367, because these claims are so related to ADP’s claims under federal law that they form part of the same case or controversy and derive from a common nucleus of operative facts.
IV . VENUE
11. Venue in this District is appropriate because Defendants are based here and committed a substantial amount of the wrongful acts here, and Defendants caused harm to ADP that it knew or should have known was likely to be suffered by ADP in this District. As a result, venue in this District is appropriate under 28 U.S.C. § 1400(a).
V. INTRADISTRICT ASSIGNMENT
12. Assignment to the San Francisco Division is proper because a substantial part of the events or omissions which give rise to the claims occurred in this county.
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VI. FACTUAL ALLEGATIONS
A. ADP’s Services and Its RUN System
13. ADP since 1949 has provided payroll services to companies of all sizes and in all industries. ADP currently has more than 625,000 human capital management clients in more than 100 countries, including clients who choose ADP to provide their payroll services.
14. One of the payroll services offered by ADP is RUN Powered by ADP® (RUN), a proven small business payroll solution developed through ADP’s experience and knowledge gained from years of working with nearly 400,000 small businesses. RUN permits a small business to conduct its payroll operations from anywhere via a web browser, mobile app or even via telephone. It permits the employees of the ADP customer business 24-hour, seven- days-a-week access to their pay statements from virtually any leading mobile device. RUN is also fully integrated with other available ADP small business services, including certain retirement plans, time and attendance solutions, health and benefits solutions, workers’ compensation premium payment plans and human resource tools.
15. ADP maintains the sensitive payroll data of its customers’ employees, such as social security numbers and tax information, on secure servers. RUN uses leading, industry-recognized security safeguards to help protect company and employee information from loss, misuse, unauthorized access or tampering.
B. Zenefits’ Services and Misrepresentations About Integration with ADP
16. Zenefits is a company that sells human resources management services to customers in competition with some of the services offered by ADP. Zenefits does not provide payroll services like those provided by ADP.
17. Approximately 850 Zenefits human resources customers are also ADP payroll service customers. On its website, Zenefits’ advertising offers its customers the ability to “[m]anage all your HR – online, in one place.” For customers that “[a]lready have payroll,
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1 benefits, or other HR systems,” Zenefits claims to offer potential customers the ability to
2 “[c]onnect them with Zenefits in seconds.” ADP is listed as one of the payroll services that
3 Zenefits can “connect with in seconds.” Additionally, on its “payroll-services” page, Zenefits
4 uses ADP’s logo and states: “Zenefits works with all top payroll providers, so there’s no need to
5 switch from your favorite system.” On its “payroll outsourcing” page, under the heading
6 “Simplify your payroll,” Zenefits says: “Easy admin. Built-in compliance. Instant updates. All
7 integrated with your favorite platforms.” On its “payroll quotes” page, under the heading “Get
8 quotes from top payroll providers,” Zenefits uses ADP’s logo and says: “When it comes to
9 payroll, Zenefits works with the best –ADP, …. Updating information in Zenefits keeps it
10 current in your payroll system, too…”
11 18. Zenefits’ statements as to integration with ADP are false and misleading,
12 since Zenefits’ system is not integrated with ADP’s RUN, and ADP has never authorized
13 Zenefits to unilaterally use automated systems, without appropriate operational and security
14 reviews by ADP, to access ADP’s systems.
15 19. Zenefits’ system is not integrated with ADP RUN through any ADP
16 application programming interface (“API”) and does not otherwise interact or sync with ADP
17 RUN in any manner that ADP has reviewed, authorized or approved.
18 20. Demonstrating that Zenefits’ system is not integrated with ADP RUN (and
19 certainly not through any ADP API), commencing as early as March, 2015, Zenefits has sought
20 to gain access to and unilaterally scrape client information from ADP RUN, by convincing ADP
21 clients to grant Zenefits administrative credentials to the client’s ADP RUN account. Zenefits
22 asked ADP clients to set up Zenefits as a payroll admin user for the client’s RUN account.
23 Zenefits also asked the ADP client to take a screenshot of the temporary username/password
24 screen for the account and email it to a Zenefits email. Once Zenefits has gained such admin
25 level access to a client’s ADP RUN account, Zenefits uses a screen crawl application to copy
26
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1 information from ADP RUN to upload into the Zenefits system, as well as to make changes
2 directly into ADP RUN, including through an API.
3 21. At no time did Zenefits reach out to ADP to discuss Zenefits’ specific
4 methodology for accessing and then copying information from ADP RUN, or to implement any
5 alternative, reasonable process for Zenefits to integrate with ADP RUN, including through an
6 API, as ADP has done with other third parties.
7 22. In May 2015, ADP’s SBS business unit identified potential concerns with
8 Zenefits’ unilateral method for scraping information from ADP RUN screens. ADP identified
9 several potential concerns with Zenefits’ approach, including clients granting Zenefits admin
10 user credentials to allow Zenefits access to the clients’ employee and company data in a manner
11 that may not meet ADP’s security standards, and allowing Zenefits to make changes requiring a
12 payroll admin level access. Based on these concerns, ADP’s SBS business unit determined that
13 it could not grant admin access to new Zenefits users until an appropriate third party security
14 review was completed.
15 23. For mutual clients who had already provided Zenefits with admin level
16 access to the client’s ADP RUN account, ADP prepared a communication to such clients to
17 identify several key concerns. First, ADP explained that Zenefits currently does not actively
18 integrate with ADP RUN and instead utilizes automated technology to update its systems with
19 the client’s payroll information. ADP also advised clients that, with changes in ADP’s latest
20 release of ADP RUN, updates may be required by Zenefits to ensure that the client’s payroll
21 information is copied accurately. ADP further advised that, based on ADP’s third-party
22 integration standards, ADP intended to conduct a security review of all Zenefits processes and
23 user requests. Finally, ADP outlined the potential risks with granting any third party admin
24 access to the client’s ADP RUN account, and explained that since ADP did not have access to
25 the data Zenefits used, ADP was unable to verify the accuracy of the client’s information, which
26 was particularly critical after ADP’s May 2015 ADP RUN release. Accordingly, ADP suggested5
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1 to these clients that they closely review the information updated by Zenefits after their RUN
2 accounts were upgraded. ADP did not make any statement about any consideration to cut off the
3 existing Zenefits admin logins. On Wednesday, June 3, 2015, ADP pre-loaded this
4 communication into ADP’s client email communication tool, for automated issuance on Friday,
5 June 5, 2015. On Friday, June 5, 2015, ADP’s communication tool issued the client
6 communication regarding Zenefits’ use of admin user accounts.
7 8 9
C. Zenefits’ Unauthorized Automated Requests on ADP’s System Requires ADP to Reject Those Requests
24. Starting in or about March 2015, ADP began to experience significant and
10 sudden increases in remote access requests into its ADP RUN. From March through May 2015,
11 when such spikes in remote access requests occurred, ADP was required to take measures to
12 prevent disruption of service. During this time frame, ADP did not identify Zenefits as a source
13 of these spikes or potential service disruptions, although ADP has since determined that Zenefits’
14 automated activity caused these spikes. From June 3 to June 4, ADP again experienced peaks in
15 ADP RUN system demands and, after investigation, ADP identified Zenefits as the source.
16 Based on the nature and timing of the voluminous requests into ADP RUN, Zenefits’ database
17 requests overloaded one of ADP’s RUN database clusters and created a serious risk of significant
18 disruption of service in the particular RUN database cluster affected by Zenefits’ automated
19 scraping of data.
20 25. As a result, on June 4, ADP found it necessary to block Zenefits’
21 unauthorized method of extracting data from ADP RUN. At points during these two days,
22 despite serving less than one quarter of one percent of the clients on the ADP system, Zenefits
23 became responsible for up to 25% of the total user traffic.
24 26. If ADP had not acted to block Zenefits’ activity accessing ADP RUN, the
25 server disruption Zenefits was causing could have resulted in a disruption that would have
26 adversely impacted approximately 84,000 ADP clients whose data was housed in that ADP RUN
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1 database cluster. Had ADP not acted, the impact to the particular server cluster could also have
2 spilled over to affect the broader RUN system, impacting potentially more than 400,000 ADP
3 RUN clients.
4 27. ADP did not take these actions to protect the ADP RUN system simply
5 because Zenefits caused the issue. ADP similarly would have blocked the access of any
6 organization or individual who caused the same or similar conditions as Zenefits.
7 28. The data that Zenefits accessed in this manner included sensitive data of
8 customers’ employees, such as payroll and withholding amounts, employee bank information,
9 and retirement and health insurance deductions. ADP’s investigation also revealed that Zenefits’
10 actions worked to un-mask highly confidential client employee information, such as Social
11 Security Number data. Given that Zenefits is not an ADP RUN integration partner, ADP has not
12 assessed Zenefits’ information security, privacy or third-party risk programs that ADP requires
13 for automated access and integration into ADP platforms, and ADP has not tested, validated or
14 approved the access by Zenefits to protected and regulated data.
15 29. On information and belief, Zenefits’ actions and storage of information
16 from ADP’s RUN system were done without the knowledge of some or all of Zenefits’ clients or
17 such clients’ employees, and/or based on an incorrect belief by Zenefits’ clients or such clients’
18 employees that Zenefits’ system was actively integrated with ADP RUN, with ADP’s approval
19 or authorization.
20 21 22
23 manipulative and malicious public relations campaign, ignoring its own conduct, to defame ADP
24 and drive away ADP’s clients. Zenefits’ initial wrongful act was to email a letter from its CEO,
25 Parker Conrad, to the mutual clients of ADP and Zenefits. This letter contains numerous false
26 statements intended to harm ADP, including the following.7
COMPLAINT FOR DAMAGES AND INJUNCTIVE RELIEF
D. Zenefits Defames ADP and Interferes With ADP’s Relationships With Its Customers
30. At approximately 2:15 PDT on June 5, Zenefits commenced a
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1 31. The June 5 letter falsely stated to clients that ADP took the protective
2 measures to block Zenefits’ automated scraping of data from ADP RUN to protect the continuing
3 service “without your permission.” This statement was false, as ADP’s agreements with its
4 customers expressly give ADP the right to take such protective measures to protect continuity of
5 service and sensitive employee data.
6 32. The June 5 letter falsely claimed that ADP systematically deactivated
7 Zenefits’ admin user access to ADP’s RUN payroll system because “ADP believes it can one
8 day build software to compete with Zenefits, and in the meantime they would like to do anything
9 they can to impede Zenefits.” No factual basis exists for this claim.
10 33. The June 5 letter also falsely dismissed ADP’s security reasons as “clearly
11 not true,” implying that ADP lied about the basis for its actions as pretext for, as Conrad
12 characterized, ADP’s “unethical” behavior. These statements are false, since ADP’s statement
13 about security concerns in the communication that ADP sent to clients who gave Zenefits admin
14 user access was not related to the specific protective measure that ADP took on June 4, 2015.
15 Indeed, nothing in ADP’s June 5 client communication indicated that ADP would completely
16 block the Zenefits admin user access. In fact, ADP took the preventive measures to protect all of
17 ADP’s RUN clients from Zenefits’ careless and unauthorized automated processes by which
18 millions of data requests flooded ADP’s systems and potentially put at risk the continuity of the
19 operation of ADP’s system.
20 34. The June 5 letter falsely claimed that ADP’s security concerns with
21 Zenefits’ access must be untrue because ADP allows other third parties, such as a bookkeeper or
22 accounting firm, to access client accounts on RUN to service mutual clients, stating that “[w]hat
23 Zenefits does is no different.” This statement is false. It failed to explain to Zenefits’ clients that
24 what Zenefits does is materially different, and that when other third parties such as bookkeepers
25 access ADP client accounts, all client data remains within ADP’s secure systems. Moreover,
26 unlike a bookkeeper, Zenefits’ purported “integration” with ADP’s RUN system is an automated8
COMPLAINT FOR DAMAGES AND INJUNCTIVE RELIEF
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1 script that simply scrapes client data from RUN, that Zenefits then inputs in some fashion into
2 Zenefits’ own systems, which raises potential security and operational concerns.
3 35. The June 5 letter falsely claimed that “Zenefits is still completely
4 compatible with ADP payroll.”
5 36. The June 5 letter also attempted to interfere with ADP’s relationships with
6 its customers. The June 5 letter contained an offer from Zenefits to pay its customers to switch
7 to another payroll provider. The June 5 letter stated, “In addition, if you’re interested in
8 switching from ADP payroll to Intuit Payroll, we’re paying customers $1,000 and helping them
9 to make the switch. We’ll include instructions for this in our follow up communication.”
10 37. Zenefits’ subsequent wrongful act was to start a sham online “petition” to
11 further damage ADP’s reputation and continue to hide the truth about Zenefits’ actions. The
12 June 5 letter referenced and included a link to a “petition” on the website change.org. The
13 “petition” is a marketing ploy designed to shift blame away from Zenefits, defame ADP and turn
14 ADP’s customers against it. This “petition” contains numerous false statements intended to
15 harm ADP, including the following.
16 38. The “petition” asserts that ADP “has cut thousands of their small business
17 customers off from using Zenefits to automate their time-consuming payroll administration
18 work. ADP did so without permission from these small businesses, and also without notifying
19 Zenefits, who has partnered with ADP amicably since we were founded.” This statement is false
20 because ADP’s agreements with its customers expressly give ADP the right to take such
21 protective measures to protect continuity of service and sensitive employee data. It is also
22 misleading because ADP has never “partnered” with Zenefits in connection with Zenefits’
23 purported integration with ADP RUN.
24 39. The “petition” asserts that ADP wants “to do anything they can to slow us
25 down” and that “ADP is using its size and power to block small businesses from using Zenefits
26 today so that they can get a leg up on the competition tomorrow.” This statement is false9
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Case4:15-cv-02560-DMR Document1 Filed06/09/15 Page11 of 16
1 because ADP took the preventive measures to protect all of ADP’s RUN clients from Zenefits’
2 careless and unauthorized automated processes by which significant data requests flooded ADP’s
3 systems and put employee data potentially at risk. Moreover, ADP’s protective measures did not
4 “block” any business from using Zenefits in any manner.
5 40. The “petition” asserts that because of ADP’s measures, “an ADP client
6 can set up anyone in the world to administer their payroll – except those with a Zenefits email
7 account.” This statement is false because ADP’s protective measures did not prevent any ADP
8 payroll customer from administering its payroll in any manner.
9 41. The “petition” claims that ADP’s protective measures were “unethical”
10 and “anti-competitive.” But ADP’s measures, undertaken consistent with its contracts with its
11 customers, were neither “unethical” nor “anti-competitive” but were taken solely to protect
12 ADP’s RUN clients from Zenefits’ careless and unauthorized automated processes that put
13 ADP’s systems and employee data at risk.
14 42. Zenefits’ sham online “petition” gathered 571 “signatures” of current or
15 potential ADP customers and individuals, and Zenefits’ false statements engendered at least 60
16 comments supportive of Zenefits and/or disparaging towards ADP from individuals and current
17 or potential ADP customers, including, upon information and belief, comments from individuals
18 employed by Zenefits.
19 43. The “petition” and some of the negative comments have also been more
20 broadly distributed through other social media channels, including via Twitter and Facebook.
21 This has, in turn, generated an increasing volume of discussion on blogs and digital media
22 forums that have perpetuated Zenefits’ false accusations against ADP and generated further
23 negative attacks on ADP’s reputation, all premised on the false and misleading statements made
24 by Defendants. For example, one blog posted an article entitled “ADP intentionally broke its
25 Zenefits integration,” which generated further commentary on the blog. The petition has also
26
10
COMPLAINT FOR DAMAGES AND INJUNCTIVE RELIEF
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generated attention from mainstream news outlets, potentially significantly exacerbating the harm Zenefits has caused ADP.
44. The defamatory email Conrad sent to mutual ADP and Zenefits clients, linking to Zenefits’ defamatory “petition,” has also created negative reaction from some of ADP’s clients. For example, in response to Conrad’s email, one client advised ADP that it was considering switching from ADP to Intuit, citing to Mr. Conrad’s email.
45. As a result of Zenefits’ false and defamatory statements, ADP has been forced to incur costs to attempt to correct the false statements with its customers and the marketplace, has suffered injury to its reputation and has been informed by customers that they are switching payroll providers on the basis of Zenefits’ statements.
First Claim for Relief Defamation (against Zenefits and Conrad)
Case4:15-cv-02560-DMR Document1 Filed06/09/15 Page12 of 16
46.
paragraphs of this Complaint as though fully set forth herein.
ADP incorporates by reference each of the allegations in the preceding
47. Defendants made false public statements on both the internet and in communications to customers of ADP, Zenefits and the general public.
48. Defendants’ false statements were defamatory because they harm ADP’s reputation in the marketplace.
49. Defendants’ false statements about ADP were not privileged.
50. Defendants’ false and defamatory statements have a natural tendency to injure ADP and caused damages to ADP by harming its reputation in the marketplace and by causing potential customers and other businesses to terminate and/or avoid business relationships with ADP .
51. In making the false statements, Defendants acted with fraud, malice and oppression, entitling ADP to an award of punitive damages.
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Second Claim for Relief
Intentional Interference with Prospective Economic Relations (against Zenefits)
Case4:15-cv-02560-DMR Document1 Filed06/09/15 Page13 of 16
52. paragraphs of this 53. relationships with
ADP incorporates by reference each of the allegations in the preceding Complaint as though fully set forth herein.
ADP has an expectancy in continuing advantageous economic current and prospective purchasers of ADP’s services.
These relationships contained the probability of future economic benefit to
Zenefits was aware of these economic relationships.
ADP .
54.
55.
Zenefits intended to interfere with these relationships, and Zenefits knew
56.
disruption was substantially certain to result from its conduct.
57. Zenefits’ conduct was wrongful by a measure beyond the fact of the interference itself.
58. As a result of Zenefits’ wrongful acts, the above-described relationships have been actually disrupted.
59. As a direct and proximate result of Zenefits’ actions, ADP has suffered economic harm.
60. Zenefits’ actions are likely to recur and will cause ADP irreparable injury for which there is no adequate remedy at law.
61. Zenefits’ interference was willful and in conscious disregard of ADP’s rights. Zenefits acted with fraud, malice and oppression, entitling ADP to an award of punitive damages.
Third Claim for Relief
Unfair Competition (Cal. Bus. & Prof. Code § 17200) (against Zenefits)
62. ADP incorporates by reference each of the allegations in the above paragraphs of this Complaint as though fully set forth herein.
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63. Defendants have engaged and continue to engage in unlawful, unfair, and fraudulent business acts or practices, as described above.
64. Defendants’ unlawful, unfair, and fraudulent acts were committed in the course of Defendants’ business activities, many of those activities in competition with ADP.
65. As a result of Defendants’ ongoing unlawful, unfair, and fraudulent acts, Defendants caused ADP to suffer harm in the marketplace and caused Defendants to unfairly gain customers and goodwill in the marketplace.
66. ADP seeks an injunction and restitution.
Fourth Claim for Relief
False Advertising (Cal. Bus. & Prof. Code § 17500) (against Zenefits)
67. ADP incorporates by reference each of the allegations in the above paragraphs of this Complaint as though fully set forth herein.
68. Defendants have engaged in and continue to promulgate statements in marketing and advertising publications to its customers that are untrue and misleading.
69. Defendants knew, or by the exercise of reasonable care should have known, that the statements were untrue and misleading.
70. As a result of Defendants’ ongoing false advertising, Defendants caused ADP to suffer harm in the marketplace and caused Defendants to unfairly gain customers and goodwill in the marketplace.
71. ADP seeks an injunction and restitution.
Fifth Claim for Relief
Violation of Lanham Act (15 U.S.C. § 1051 et seq.) (against Zenefits)
72. ADP incorporates by reference each of the allegations in the preceding paragraphs of this Complaint as though fully set forth herein.
73. Defendants made false statements of fact in commercial advertisements about its own products and about ADP’s products.
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1 2 3 4 5 6 7 8 9
74. The statements actually deceived or have the tendency to deceive a substantial segment of their audience.
75. The deception is material, in that it is likely to influence the purchasing decisions of ADP’s and Defendants’ customers.
Case4:15-cv-02560-DMR Document1 Filed06/09/15 Page15 of 16
76. 77.
Defendants caused their false statements to enter interstate commerce. ADP has been or is likely to be injured as a result of the false statements.
Prayer for Relief
WHEREFORE, ADP respectfully requests that the Court enter judgment on its behalf adjudging and decreeing:
trial;
A. That ADP recover damages in an amount to be determined at trial;
B. That ADP be awarded punitive damages in an amount to be determined at
C. That ADP be awarded injunctive relief as requested;
D. That ADP be awarded restitution of all ill-gotten gains unjustly obtained and retained by Defendant Zenefits through the acts complained of here;
E. That ADP is entitled to pre-judgment and post-judgment interest on the damages awarded;
F. That ADP is entitled to recover its costs of this suit, including reasonable attorneys’ fees; and
G. That ADP is entitled to receive such other or further relief as the Court deems just and proper.
DATED: June 9, 2015
Morgan, Lewis & Bockius LLP
By:
/s/ Robert A. Lewis
Robert A. Lewis Attorneys for Plaintiff ADP, LLC
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2
3
4
5
6 7 8 9
DEMAND FOR JURY TRIAL
Case4:15-cv-02560-DMR Document1 Filed06/09/15 Page16 of 16
In accordance with Fed. R. Civ. P. 38(b), Plaintiff ADP, LLC demands a trial by jury on all issues triable by a jury.
DATED: June 9, 2015
Morgan, Lewis & Bockius LLP
By:
/s/ Robert A. Lewis
Robert A. Lewis Attorneys for Plaintiff ADP, LLC
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COMPLAINT FOR DAMAGES AND INJUNCTIVE RELIEF
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