Xerox defends itself against EDS suit

In 1994, computer services giant EDS inked a $3.2 billion, ten-year outsourcing deal with Xerox. At the time, the high-profile contract was considered a landmark global deal in the emerging outsourcing market and the largest commercial agreement of its kind.

Now, the two companies are embroiled in a contract dispute that EDS says has cost the company millions and dampened its fourth-quarter results.

Copier and document processing company Xerox said late yesterday it was "disappointed" Electronic Data Systems filed a lawsuit over a contract dispute, and vowed to aggressively defend itself.

"Our position in the matter is fully justifiable and defensible," said Xerox spokesman Jeff Simek, adding that the dispute over part of a computer systems and services contract was long standing.

"We're disappointed at the regrettable action EDS has taken and we intend to aggressively defend our position in the lawsuit," Simek said.

In a conference call with reporters yesterday, executives of Plano, Texas-based EDS, the world's number two supplier of computer services, said the company had filed the suit yesterday in New York State Court. The complaint alleges that Stamford, Connecticut-based Xerox failed to pay for certain infrastructure services, though EDS did not specify what damages the company is seeking. The lawsuit involves just part of the contract, under which EDS continues to work.

"We've taken an action that for us was very difficult to do," Myrna Vance, vice president of investor relations, told reporters. "We filed suit today against Xerox. This was not done lightly."

Under the 1994 contract, EDS took over management of all Xerox data processing, telecommunications, and computer network services, as well as applications management. About 1,700 Xerox employees and contractors transferred to EDS. The contract entailed managing Xerox's IT systems in the United States, the United Kingdom, and Brazil.

In 1997, Xerox expanded its relationship with EDS, asking the company to revamp its global billing system, as well as marketing, finance, and service order systems.

Xerox has also relied on EDS to help the company with global Year 2000 compliance. Last August, EDS signed a Year 2000 agreement with Xerox-Germany providing Xerox with the option to call upon EDS for last-minute backup if the company has Year 2000 compliance troubles in their factories.

And last November, EDS also announced the company was working with Xerox and PNC Bank to create an electronic trading community for its suppliers, distributors, and their customers using the company's new Web-based services.

EDS yesterday would not say which part of its ten-year agreement with Xerox is in dispute, but Vance said the value of the claim is more than the $200 million write-up the company reported in its fourth-quarter earnings. EDS's fourth-quarter revenue, announced yesterday, increased 9 percent to $4.6 billion, compared with $4.2 billion a year ago. But the company said quarterly revenue was cut by $200 million as a result of a write-down accounting for both Xerox and an unrelated lawsuit.

EDS said talks over negotiations with Xerox broke down in December after a year of talks failed to settle the dispute.

Vance said EDS was taking the action because "we believe it is the best thing to do to protect our shareholders."

The action was the first major lawsuit EDS has filed against a customer since 1992, when it sued the state of Florida. That dispute went to arbitration and was settled in favor of EDS in 1996, officials said.

Reuters contributed to this report.