Delta Air Lines ($DAL) has initiated legal claims against cybersecurity firm CrowdStrike ($CRWD), alleging "gross negligence" and "willful misconduct" related to a significant global tech outage that occurred in July. This incident has proven to be quite disruptive, with Delta estimating the financial repercussions of the outage to be substantial.
According to a recent client note from Wedbush Securities, the burden of proof on Delta's claims could be quite challenging. Wedbush analysts noted that establishing evidence of gross negligence and willful misconduct is a high bar, referencing consultations with various legal experts. In a letter dated July 29, Michael Carlinsky, legal counsel representing CrowdStrike, addressed David Boies, who is advocating for Delta.
Carlinsky pointed out that CrowdStrike's potential liability in this matter is contractually limited to a figure in the low single-digit millions. However, in a letter sent on Thursday, Boies contested this limitation, arguing that the contractual language does not cap liability or damages arising from accusations of gross negligence or willful misconduct. The potential legal battle centers around the outage that took place on July 19, primarily caused by an update deployed by CrowdStrike for its Falcon sensors on Microsoft ($MSFT) Windows systems.
This incident not only affected Delta but also had wide-ranging effects across several industries, including banking and healthcare. Delta reported significant operational disruption, resulting in approximately 7,000 flight cancellations over a span of five days. The airline disclosed in a Thursday filing with the Securities and Exchange Commission (SEC) that it anticipates a direct revenue loss of around $380 million due to the tech failure, primarily from refund requests linked to the canceled flights. In addition to the refund losses, Delta expects non-fuel operational expenses related to the recovery efforts to amount to approximately $170 million.
There is, however, a silver lining regarding fuel costs; they are projected to be around $50 million lower due to the cancellations. Nevertheless, the airline acknowledges that this incident could impact its annual capacity growth during the September quarter by about 1.5 percentage points. In the SEC filing, Delta's Chief Executive Officer Ed Bastian reaffirmed the company's commitment to pursuing legal actions against both CrowdStrike and Microsoft, seeking damages that exceed $500 million.
As of now, neither CrowdStrike nor Microsoft has provided remarks in response to inquiries made by MT Newswires regarding this unfolding situation. Market sentiments around these developments remain cautious, particularly with Wedbush maintaining an outperform rating for CrowdStrike's stock, projecting a 12-month price target of $315 in light of the ongoing litigation and its implications for the company's operations. As the situation progresses, investors and industry watchers are keenly observing the outcomes of this legal confrontation and its consequential impacts on the stakeholders involved..