Zenefits Files Motion to Dismiss Lawsuit Brought By ADP

July 7, 2015

Zenefits Logo

ADP’s Defamation-Related Claims are an Attempt to Silence and Block a Competitor

San Francisco, Calif. (July 7, 2015) — Zenefits, the leading HR automation software company, filed a motion in U.S. District Court for the Northern District of California last night calling on the court to strike and dismiss the frivolous defamation lawsuit brought in June by ADP, the 60-year old, Fortune 500 company that is the dominant payroll processing and HR services company.

Zenefits’ motion argues that ADP’s lawsuit is the move of an entrenched industry incumbent who, instead of competing in the marketplace, is resorting to frivolous litigation and spreading “fear, uncertainty, and doubt” in order to try to silence and stop a disruptive new competitor.

“When an old economy giant fails to innovate quickly enough, it has two choices,” the court filing says. “It can let the marketplace decide, or it can use outmoded and anti-competitive lock-in tactics to tie consumers to their data. This case is an example of the latter — when challenged by Zenefits, ADP’s Small Business Services division first blocked access to the data, and then when Zenefits brought that practice to light, ADP filed this suit to shut Zenefits up about it.”

Zenefits’ filing states that ADP is violating California’s “anti-SLAPP (Strategic Lawsuits Against Public Participation)” statute, a law that prevents large companies from using defamation lawsuits and costly litigation to silence criticism from smaller competitors and watchdog groups. Not only are comments by Zenefits and its CEO about ADP’s anti-competitive behavior protected by the First Amendment, they are also supported by the facts.

“This frivolous lawsuit is about one thing, and one thing only: ADP trying to stop us from telling Zenefits customers and the wider public that ADP willingly made the lives of small business customers harder by blocking them from using Zenefits as their payroll administrator — just to try to hurt a potential competitor,” said Parker Conrad, co-founder and CEO of Zenefits. “We have no issue competing with ADP. We do, however, have an issue with a Fortune 500 company using its army of lawyers to stop us from telling the truth to our customers, and fighting for their right to use whomever they want to help administer their payroll, benefits, and HR. We call on the court to quickly dismiss this frivolous lawsuit.”

TIMELINE

For two years, Zenefits had a complex but friendly relationship with ADP, competing in areas like HR and insurance benefits while cooperating with regard to payroll — a service Zenefits did not provide. Zenefits had a formal referral and revenue-sharing partnership agreement with ADP to resell ADP payroll, and ADP routinely embedded its sales representatives in Zenefits’ offices to sell Zenefits’ customers on using ADP. ADP was well aware that Zenefits’ customers were authorizing the company to use the same secure, client access portal that ADP provides for any third-party administrator.

In May 2015, ADP decided to change the nature of the relationship. During the last week of May 2015, Zenefits customers reported trouble syncing with ADP Run, ADP’s payroll product for the smallest small businesses. This was well before the “data spike” that ADP uses as its excuse, and the first clue to what ADP had planned.

On June 5, 2015, without warning to its clients or communication to Zenefits, ADP disabled all users with Zenefits administrator accounts for ADP RUN, locking out approximately 670 small businesses from services they were counting on to timely pay their employees. ADP first claimed this lockout was due to a spike in activity on their servers, and then it said it was due to security concerns.

During this time, ADP never contacted Zenefits about alleged security concerns. Only after repeated efforts by Zenefits to contact executives at ADP did they respond. ADP executives refused to share any proof of a security or server problem. Zenefits recommended the two companies’ technical teams speak. ADP refused, saying only “you’ll hear from our lawyers.”

After Zenefits emailed its affected clients about what happened and brought ADP’s anti-competitive behavior to the public’s attention, ADP first threatened — and then filed — a lawsuit in federal court on June 7, 2015. This goal of this litigation was to silence Zenefits from telling the public about ADP’s anti-competitive behavior.

The heart of ADP’s defamation claim is that they did not shut small business Zenefits users from ADP payroll for competitive reasons as Zenefits charged. Not only are comments from Zenefits and its leadership protected speech under the First Amendment, but — as today’s motion argues —they are also true.

In fact, the very same day that ADP filed its defamation lawsuit against Zenefits, an ADP Small Business Service Manager emailed a Zenefits client to discuss ADP’s impending launch of a new product designed to compete with Zenefits. The email reads:

“Hope all is doing well, we are coming out with a product to compete with Zenefits, a full service integrated online payroll and benefits solution. It’s called Opum, I have attached a copy of some information and screen shots of it. Take a look at it and let’s meet, it’s a free solution as well. Would be much easier to change benefits than payroll, get the best technology of both worlds. :)”

The email attached a brochure outlining services similar to that offered by Zenefits.

Today’s motion was filed in the case ADP v. YourPeople, Inc. DBA Zenefits Insurance Services and Parker Conrad, Case No. 4:15-cv-02560-JSW. After additional filings by both parties, there will be a hearing in court at a date to be set later.

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