Payroll services giant ADP yesterday agreed to drop its defamation lawsuit against Zenefits, giving the HR startup company a big win in a months-long dispute fought in the public eye. Experts say advisers and other industry stakeholders feeling heat from similar market disruptors should heed the win as a ‘shot across the bow’ — a warning to remain flexible.

The dispute between the two companies ignited in June when ADP disabled Zenefits’ access to its systems for shared clients citing “data security concerns.” Zenefits publicly decried the move, calling it “an anti-competitive fear tactic” and ADP fired back with an anti-defamation lawsuit accusing the HR tech firm of conducting “a manipulative and malicious public relations campaign, ignoring its own conduct, to defame ADP and drive away ADP clients.”

Zenefits’ subsequent motion to dismiss the anti-defamation lawsuit, characterized the quarrel as one between an old-school industry incumbent and innovative new kid on the block.

“When an old economy giant fails to innovate quickly enough, it has two choices,” the Zenefits court filing said. “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.”

At a Sept. 24 motions hearing, U.S. District Court Judge Vince Chhabria called into doubt any merit for a defamation lawsuit ADP may have, saying, “The primary question in this case is whether the lawsuit will die a slow death or a fast death … it seems clear to me that ADP has no claim for defamation.”

Yesterday, in the U.S. District Court for the Northern District of California, ADP agreed to drop its lawsuit against Zenefits as part of a larger settlement between the two parties at a settlement conference ordered by Judge Chhabria, according to a spokesman for Zenefits.

See also: Zenefits, ADP dispute heats up with defamation lawsuit

Whether Zenefits is truly an innovator or actually poses any threat to ADP remains a topic of debate among industry stakeholders, but experts say advisers, brokers, consultants, or other vendors feeling threatened by the startup should evaluate the disruption the company has created, why it feels threatened, and be willing to take action to combat it.

“You see this happen from time to time with innovation, and it’s only going to happen more as traditional, embedded solutions — often with high cost structures — find themselves competing with upstart companies that don’t have as much to lose, don’t have as much investment and don’t have a large book of business to disrupt. So they can move faster and maybe have a point solution that is very effective that would be hard for a larger company to innovate because they risk some kind of impact on the rest of their business. This happens in every industry. Now we’re seeing it in ours,” says Steve Blumenfield, senior consultant for health and group benefits at Towers Watson.

In general, he says, “The big established carriers and vendors need to read this type of thing as a shot across the bow. This is the way the game is going to be played. They’re going to have to be willing to do this. They’re going to have to be willing to disrupt their cash cows in order to play in new spaces or somebody else is going to eat their lunch.”

“I think this is a short-term win for Zenefits in the sense that they were able to beat the ‘big bad payroll company’ in a public forum,” says Joe Markland, president of HR Technology Advisors.

Still, he questions the innovativeness of Zenefits’ technology solution and its ability to disrupt ADP’s business, but cautions advisers that the company does continue to disrupt their market.

“I think that ADP and 50 other firms have technology that is far superior to what Zenefits is delivering at this time,” Markland says. “They have disrupted the benefits brokerage business. They have not yet disrupted the human capital management business in any significant way. So this does not signal that Zenefits has proven they can disrupt ADP. They can annoy ADP from a pure market perception, but they have not disrupted ADP business in any significant way. They are not technology innovators, so this can’t be a win for innovators. It is a win for a good marketing firm. And they will continue to win against benefits brokers, who they really are disrupting.”

As part of the settlement, Zenefits says, ADP agreed to drop the lawsuit and the court dismissed it with prejudice. ADP and Zenefits also agreed to drop any legal claims against each other and the parties made a joint statement on the record in which ADP confirmed that it has withdrawn its lawsuit and that it has no reason to believe Zenefits has any problem with the security of its software, and Zenefits confirmed that it has no reason to believe that ADP is unethical nor any reason to dispute ADP’s integrity.

Dick Wolfe, a spokesman for ADP, says the payroll giant and Zenefits “have reached a joint settlement that allows both companies to put this matter behind us. ADP continues to believe we took appropriate action to protect clients and the systems they rely on. ADP has a well-earned reputation in the marketplace for its ethical business practices, and, as an organization, values integrity immensely. We believe this settlement sets the record straight in this regard." 

At the core of the dispute, he says, “were accusations that questioned our ethics and integrity. These are meaningful values to ADP and core to our culture. All we have ever wanted was for Zenefits to retract the baseless public statements they made. We withdrew the lawsuit after Zenefits satisfied that demand.”

Adds Parker Conrad, co-founder and CEO of Zenefits, “While we are gratified by this legal victory, we are more pleased that we now can move forward and focus on serving our small business customers. At times, this may mean competing with ADP, and at times, it may mean working with ADP. In either case, we at Zenefits are committed to making the hard work of administering HR as effortless and painless as possible.”

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