Recent Developments In
Computer Performance Litigation
A Quarterly Column Written By Steven Brower
For the Computer Litigation Journal
American Bar Association
Section of Litigation
Committee on Computer Litigation

[Since 2000, when I became Editor-in-Chief of the Journal, I no longer wrote this column
- however, this page continues to get a large number of hits and remains for historical purposes]

September, 1999
Steven Brower - Associate Editor


Summary Judgment For Defendant On Statute Of Limitations For Breach Of Warranty

   Plaintiff, in about 1992, bought software and hardware, along with installation, training and support from defendant.  The system provided central reservations for two hotels owned by the plaintiff.  In 1998 the plaintiff filed suit because the software was not Year 2000 complaint, and would fail to operate correctly in the future.

   The question presented on this motion was whether the purchase was one for "goods" or "services."  Applying the Michigan "predominant factor test" the court finds [as has almost every other court] that this is a purchase of goods, and not a purchase of services.  "In the case at bar, plaintiffs were attempting to acquire a ‘good', specifically a reservation system for their two hotel properties."  Therefore, the UCC statute of limitations (four years from the time of tender) applies and the complaint is time- barred.

   The court (Dalhmann v. Sulcus Hospitality Technologies, 1999 U.S.Dist. LEXIS 10149 (ED Mich. 6/17/99)) also considered plaintiffs argument that the doctrine of "fraudulent concealment" will toll the running of the four-year statute.  However, the court finds that the acts must be of an affirmative character and there was no evidence here of any affirmative statements regarding Year 2000 compliance.

Vendor Loses Counterclaims On Summary Judgment

   This case has what appears to be a common fact pattern.  The vendor, eager to get new business, agrees to prepare custom software for a fixed price.  Somewhere in the course of the project it becomes obvious that it was a mistake financially and because the customer has expectations which exceed the budget.  The customer and the vendor sue each other.  Years later they learn that litigation is a poor substitute for a better business deal up front.

   In Scheduled Airlines Traffic Offices, Inc. v. Objective, Inc., 1999 U.S.App. LEXIS 13124 (4th Cir., June 14, 1999) the plaintiff wanted a custom software system for travel management services in the private sector.  The defendant agreed to a fixed price of $900,000. A contract was signed in May, 1994, which granted to the customer (plaintiff) all of the "proprietary rights in and to the Software System", including the right to use, reproduce, prepare derivative works, etc.  In July, 1994 the customer requested a simulation, for marketing purposes, for an additional $200,000.

   The system (two different components) was not ready by January, 1995.  The defendant continued until May 31, 1995.  According to the court:

 [Defendant] tested the software components in May, 1995 and uncovered significant problems that made the software inoperable.  Despite the problems, [defendant's] management directed its employees to stop programming and vacate the project as of May 31, 1995.  At the time of [defendant's] departure from the project, the Eagleware System was incomplete, and no programming work had ever been done on the Navigator System.  [Defendant] had, however, received full payment from [plaintiff].


Plaintiff never used the programming done by defendant.  Instead, the plaintiff's staff programmed the system itself.

   Before and during the trial the judge struck all of the defendant's counterclaims.  Plaintiff then prevailed on breach of contract, and damages were fixed by the jury at $1.00.

   Here, the vendor appealed dismissal of its Counterclaims.  The Court of Appeals first affirmed that the vendor could not sue for loss of profits because, under Virginia law, a loss of anticipated profits from an unestablished business cannot be a proper measure of damages.  Objective argued that it had produced other custom software previously.  However, since their president testified that "the type of technology . . . had never been done before" the court found that the bar to proof of uncertain damages still applied.

   The vendor had also sued for fraud.  However, the Court held that those claims failed largely because of the integrated contract, or because the alleged fraudulent statements were contrary to the express terms of the written contract.  The vendor tried to avoid that bar by arguing that there was fraud in the inducement when the customer said that they had a limited budget.  The Court noted:

 Informed of certain budgetary constraints, [vendor] was free to accept or decline the project based on its own ability to produce the desired product.  It opted to accept the project and proposed terms that included a low, fixed price for its services.


   Other portions of the decision are specific to the facts of the case.  But this is one of those cases that should be reviewed by anyone involved in the drafting of pleadings for software performance cases.

Pleading Scope Of License Case Against VAR

   Plaintiff bought software through a Value Added Reseller (defendant) in 1996.  The software allowed a maximum of 10 concurrent users.  Plaintiff claims that defendant represented that a 10 user license would be sufficient.

   Sometime in 1997 the defendant informed the plaintiff that the software manufacturer claimed that a 10 user license was insufficient for a production environment, so that additional license fees were owed (about $600,000).

   Here (MSX International v. Uniscan, 1999 U.S. Dist. LEXIS 11097 (ED MI, May 18, 1999)) the court was reviewing the sufficiency of the pleading as between the customer and the VAR.

   The customer alleged that there had been fraud by the representation that a 10 user license would be adequate.  The court found that the pleading did not provide sufficient specificity under FRCP 9(b) and granted leave to amend.

   The customer also alleged breach of contract.  The term "concurrent user" was not defined in the contract.  The customer contended that it referred to concurrent users of the licensed software.  The vendor was apparently contending that it meant concurrent users of the computer system, even if they are not accessing the licensed software.  The court found the pleading of a dispute was adequate.

   Finally, the court granted the motion to dismiss as to the claim for indemnity against the VAR.  Under Michigan law there can be no claim for implied contractual indemnity if the party seeking indemnity was actively negligent.  The court here found that the pleading by the software manufacturer against the customer alleged such active negligence, so there could be no claim for implied contractual indemnity.

Injunction Issued As Sanction For Violation Of Non-Destruction Order

   On June 7, 1999, the court granted an Ex Parte Motion for an Order Preserving Evidence.  A copy of the order was sent to the defendant by overnight mail and was received by him no later than June 8, 1999.  Between June 8 and June 13 approximately 1520 pages of information were deleted from the defendants laptop.  He claims that all of the relevant information was first copied to another computer and then printed, on the advice of his counsel.  On June 13,  his computer was "defragged".  However, less than 1520 pages of information have been turned over to the plaintiff.

   Under those facts, the court found (MPCT Solutions Corp. v. Methe, 1999 U.S. Dist. LEXIS 10703 (ND Il., July 2, 1999) that there had been a violation of the Preservation Order.

   The underlying dispute related to a former employee, defendant, allegedly taking information to a new employer.  The non-compete agreement only prohibited him from selling of competitive products and services to his former customers.  As a sanction for violation of the Order the court issued a preliminary injunction which was intended to be broader than the terms of the agreement,  prohibiting "contacting or servicing the MPCT clients that are the subject of the pending preliminary injunction motions."

Attempted Destruction Of Data, In Violation Of Court Order, Which Fails, Results Only In Monetary Sanction

   Defendant was an employee of LEXIS-NEXIS.  He had signed a noncompete/nondisclosure agreement.  He went to work for a direct competitor while telling everyone at LEXIS that he was going into the landscaping business.  Before his departure he copied an extensive amount of proprietary documents to a ZIP disk, and later copied them onto a laptop from his new employer.

   The court issued a TRO requiring that "Beer shall deliver to LEXIS-NEXIS the copy of the ACT! database that he made and shall retain no copy."  The court further indicated, on the record, that Beer was to return all documents.

   Instead of complying with the order, Beer tried to recreate the ACT! database as it existed at the time he left LEXIS.  He put that information on a disk, along with 37 e-mails, and gave it to his counsel.  He then deleted the actual ACT! database from his laptop.  The laptop was subsequently examined by forensic experts working for LEXIS.  They discovered hundreds of previously undisclosed documents, which had not been destroyed, including some which were allegedly highly confidential.

   The court found that evidentiary sanctions were inappropriate because, at least based on what was present, it was not clear that anything of value to the case had actually been destroyed.  However, there had been a clear violation of the TRO so that monetary sanctions, in an amount to be determined in the future, were appropriate.

Judge Refuses To Issue Ex Parte TRO Authorizing Search Of Computers

   In Adobe Systems, Inc., Lotus Development Corp., Microsoft Corp., Symantec Corp. v. South Sun Products, Inc., 1999 U.S. Dist. LEXIS 11034 (SD CA, July 20, 1999) the plaintiffs alleged copyright infringement.  Prior to service of suit, and without any notice to the defendants, plaintiffs presented an ex parte application for a civil TRO (FRCP 65(b)) authorizing a search and seizure by the U.S. Marshalls.  [This is not an unusual request in these cases.]

   The District Judge here wrote a lengthy opinion in which he denied the request of plaintiffs on several grounds.  For example, the court indicated that the defendant here is in the jewelry business and is not accused of running an elaborate software piracy ring.  Looking to a decision in the Sixth Circuit, the court cited language indicating that it is not sufficient to assert that the adverse party would dispose of evidence if given notice.  Rather:

 Plaintiffs must show that defendants would have disregarded a direct court order and disposed of the goods within the time it would take for a hearing.  The applicant must support such assertions by showing that the adverse party has a history of disposing of evidence or violating court orders or that persons similar to the adverse party have such a history.

The court noted that parties can always allege that evidence "might" disappear.  Such a standard would result in a flood of similar applications.

   Here, the plaintiffs had a declaration indicating that the owner of the business, prior to an inspection by the fire marshal, directed employees to move some boxes away from a particular area, and then to return those boxes after the inspection.  The Court found such evidence to be unpersuasive, noting that most people change their behavior in the face of governmental authority (slowing down their vehicle when they see a law enforcement vehicle).

   Significantly, the court also rejected the application on "technical" grounds.  That is, the court said that even if the users tried to delete the allegedly illegal copies, there would still be signs (subdirectories, registry keys, system files, etc.) from which the prior installation could be detected.  Further, the court found that there were other means to obtain such evidence, such as the deposition of employees who were alleged to have used the software.

Customers Of ISP's Have No Reasonable Expectation Of Privacy - Evidence Obtained Under An Illegal Warrant Is Not Barred By The  Fourth Amendment

   I don't practice criminal law.  But this decision struck me as very odd.

   The defendant in this federal criminal action (US v. Hambrick, 1999 U.S. Dist. LEXIS 10384 (WD VA, July 7, 1999)) was accused of chat room activity in which he solicited a "14 year-old" (actually a police officer) to engage in sex.

   The police officer, from Keene, New Hampshire, served a state subpoena on Mindspring in Georgia to obtain the name, address, etc. related to use of the defendant's screen name.  Mindspring complied, as a result of which the defendant was identified.

   Defendant brought a motion to suppress both the records from Mindspring and materials seized from his home, since the search warrant for his home was based upon information obtained from Mindspring.

   Regarding the validity of the warrant the court noted:

 A justice of the peace, Richard R. Richards, signed the New Hampshire state subpoena.  Mr. Richards is not only a New Hampshire justice of the peace, but he is also a detective in the Keene Police Department, Investigation Division.  Mr. Richards did not issue the subpoena pursuant to a matter pending before himself, any other judicial officer, or a grand jury.  At the hearing on the defendant's motion, the government conceded the invalidity of the warrant.

   Because the invalid warrant was directed to Mindspring, and not to defendant, the court indicated that since Katz v. US "the Fourth Amendment applies only where: (1) the citizen has manifested a subject expectation of privacy, and (2) the expectation is one that society accepts as ‘objectively reasonable.'"

   The court noted that the Electronic Communications Privacy Act "legislatively resolves" this inquiry. The court found that ISP's are "free to turn stored data and transactional records over to nongovernmental entities".  Where information is given to a governmental entity without proper authority the sole remedy is for damages.  "Despite its concern for privacy, Congress did not provide for suppression where a party obtains stored data or transactional records in violation of the Act."

   The court found that there was no "reasonably objective" expectation of privacy because, under the ECPA, ISP's can disclose information to anyone other than a governmental entity.

   The inquiry then turned to whether society was willing to recognize his subjective expectation of privacy.  The court found he did not for a number of reasons, including the following:

 - Mindspring employees had access to the information in the normal course of it's business.

 - Nothing in the record showed a restrictive agreement, between defendant and Mindspring.

 - "It is apparently common for ISPs to provide certain information that [defendant] alleges to be private to marketing firms and other organizations interested in soliciting business from Internet users."

 - The potential for civil liability, where information is given to governmental entities without a warrant, court order or subpoena is "a powerful deterrent protecting privacy."  [NOTE: But not if the governmental entity, such as the one in this case, just creates an invalid warrant.]

   Therefore, the court refused to suppress the evidence.

June, 1999
Steven Brower - Associate Editor


Integrated Contracts Bar Claims For Misrepresentation

 "The only universal consequence of a legally binding promise is that the law makes the promisor pay damages if the promised event does not come to pass."  -- Oliver Wendell Holmes, The Common Law 236 Howe ed. 1963

    So begins the opinion in Bell Sports, Inc. v. System Software Associates, Inc., 1999 U.S. Dist. LEXIS 6091 (USDC ED.NY. April 23, 1999).

    The customer formed a team to write an RFP in 1993.  The vendor responded indicating that "the current release of the existing software had that specific function" in about 80% of the instances requested.  In April, 1994 the parties entered into a license for Version 4.x, along with a side letter indicating that the limitations of liability and disclaimer of warranties would not apply "in the case of gross negligence, willful misconduct, or intentional breach of contract on the part of [vendor]."

    During implementation there were allegations that other material deficiencies were noted.  In 1995 the customer merged with Bell Sports.  At that time Ernst & Young was engaged to study the selection of suitable software for the merged entity.  A new set of responses were obtained to the RFP.  The newly merged entities decided to upgrade to version 5.x.  However, based on suggestions from the vendor, the upgrade was delayed until version 6.x.

    Well, you can guess the story.  They started to install Version 6.0 in May, 1996 and decided that it was lacking in four key elements -- "order entry functions, warehouse management, accounting and tracking of imports -- all of which had been clearly set forth in Bell's questions, to which [the vendor] had responded" in the affirmative.

    However, under New York law, the court found that these alleged misrepresentations were not actionable:

    "While there does seem to be some precedent for Bell's proposition that a promise made with the undisclosed intention of not performing may constitute a fraudulent misrepresentation [citation] ‘most courts that have subsequently considered the issue have held that a contract claim cannot be converted into a fraud claim by the addition of an allegation that the promisor intended not to perform when he made the promise.'"


    The court found that the fraud claims here were barred, as a matter of law, because they were "the very essence of the various agreements" between the parties, and in no way collateral thereto.

If You Want To Sue For Alleged Misrepresentations, Make Them Part Of The Contract

    From 1992 to 1994 the plaintiff purchased specialized (printing) computer hardware and software from the defendant.  Plaintiff claims that they were continuously assured that defendant intended to include postscript capability in the future.  Then, in 1996, the defendant indicated that they would be exiting the market and providing no further upgrades.

    However, those assurances were never placed in any of the agreements.  Plaintiff opposed summary judgment by producing evidence of the non-contractual statements along with evidence that the defendants had never even budgeted for adding the postscript capabilities.

    The court (Vision Graphics, Inc. v. E.I. Du Pont de Nemours & Co., 1999 U.S. Dist. LEXIS 3720 (D. Mass. March 25, 1999)) first held that the contractual choice of law (Delaware) would be applied to the contract causes of action.  The court then ruled:

    Given the applicable law, and this explicit language [in the integration clause], plaintiff's attempt to enforce the alleged oral agreements regarding postscriptability through a claim for breach of contract is doomed. . . It simply cannot be fairly argued that the question of future support and enhancement of the system being purchased, or particularly its postscriptability, was not within the "subject matter" of the written contracts.

    Nor could the plaintiff sustain a claim based on the implied warranty of merchantability, which requires that there be a defect at the time of delivery, which was clearly not alleged here.

    However, applying Massachusetts law to the tort claims for Intentional and Negligent Misrepresentation, the court held that the very same alleged oral statements could be actionable, and denied the motion for summary judgment as to those claims.

A Stock Sale Is Not An Asset Sale, So No Implied Warranties On Software Obtained By That Means

    Plaintiff entered into a Stock Purchase Agreement with defendant to acquire a software company.  Plaintiff then claimed that there had been misrepresentations and breaches of warranty in relation to the software which was acquired.  (One of several allegations was that the medical software package was not Year 2000 compliant.)

    In Sunquest Information Systems, Inc. v. Dean Witter Reynolds, Inc., 1999 U.S. Dist. LEXIS 3539 (USDC WD.PA. March 24, 1999) the court found that the largest hurdle faced by the plaintiff was the integration clause in the 39 page Stock Purchase Agreement.

    However, the court also specifically rejected the argument that there had been a sale of goods with implied warranties:

    Defendant argues that "the transaction between Compucare and Sunquest was a sale of stock, not a sale of Antrim's assets, and, therefore, no warranties were created regarding Antrim's assets, other than those specifically set forth in the Stock Purchase Agreement.  I agree with defendant.

    Thus, the only warranties were those expressly set forth in the Stock Purchase Agreement.

    Plaintiff also argued that it should be allowed to plead fraud for breach of duties originating in the contract.  The court rejected that argument saying "a plaintiff cannot assert a fraud or negligent misrepresentation claim when the theory is ‘merely another way of stating its breach of contract claim,' or when its success ‘would be wholly dependent upon the terms of the contracts . . ."

Consultant Can Be Liable For Inducing Breach of Contract

    A company had a contract to sell computer services.  A consultant was later engaged by the customer to review the system and to offer advice.  The consultant advised the customer not to proceed with the software system and the jury awarded $2.3 million in damages against the consultant.  That verdict was sustained on appeal in J.D. Edwards & Company v. Randy Podany, 168 F.3d 1020 (7thCir. February 22, 1999).

    The issue before the Court of Appeals was whether the "consultant's privilege" (the privilege to "offer good-faith advice to a client without fear of liability should the client act on that advice to the harm of a third person") should have barred liability.

    The court mentioned two components.  First, the advice needs to be within the scope of the engagement.  The court found that in this case that aspect was sufficiently demonstrated by the consultant.  Second, the advice must be honest, i.e. - he can't hurt other people for his own benefit.  Here, the court of appeals found that a jury could reasonably find that the defendant failed that aspect of the test.

    The client (not a party to this suit) was a manufacturer.  They had already rejected a competing software package, BCPS, because it lacked a "configurator" which facilitates custom manufacturing.  Due to a corporate reorganization, defendant Podany was brought in for a "sniff test" of the Edwards software implementation, even though he had no knowledge of the Edwards software.  He was critical, he advised his client that they should stop installing the software and he advised his client that they should not make further payments to Powers.  The Court provided some important guideposts for this type of litigation:

 If [the consultant] was simply a fool, and got [his client] to replace J.D. Edwards' software with BPCS because he ignorantly believed that the latter really was superior for [his client's] needs even though it lacked a configurator, he and his employer would be sheltered from liability by the consultant's privilege

     . . . In pointing to [the consultant's] motives, we do not make the mistake of confusing bad faith with greed.  A consultant might be a consultant purely for the money, but as long as he made his money by offering honest advice within the scope of his employment, his private motive would be irrelevant.

    However, in this case, there were some troubling facts.  For example, the consultant got himself a lucrative job (18 months for $370,000) as director of information services, using the only software he knew, BCPS.  Or, rather, trying to use BCPS.  In fact, BCPS was a flop because, in part, it didn't have a configurator, the original reason that the client had selected the J.D. Edwards software.

Fraud In The Inducement Does Not Always Avoid Parol Evidence Rule

    In Paragon Networks v. Macola, Inc., 1999 Ohio App. LEXIS 2091 (CA Oh. April 28, 1999) the plaintiffs (Year 2000 Class Action) were facing a "shrink-wrap" license agreement which disclaimed warranties.  The plaintiffs tried to allege fraud in the inducement in order to introduce pre-contract representations upon which they claimed to have relied in purchasing the software.

    The court rejected that argument saying that fraud in the inducement must be premised on matters extrinsic to the written contract.  Quoting an earlier case the court noted:

    A person of ordinary mind cannot say he was misled into signing a paper which was different from what he intended to sign when he could have known the truth by merely looking when he signed * * * If this were permitted, contracts would not be worth the paper on which they are written.  If a person can read and is not prevented from reading what he signs, he alone is responsible for his omission to read what he signs.


A Leasing Company Loses

    In a "not designated for publication" case (General Electric Capital Corp. v. McKiever, 1999 Ark. App. LEXIS 101 (Ark. February 17, 1999)) the court affirmed a trail court decision finding that a computer system lease contract was unconscionable and against public policy.

    The defendant doctor had leased a computer system for his medical practice.  After making 63 monthly payments he stopped when "he found that the computer system was not fit for its intended purpose".  (NOTE: That was more than five years).

    The trial court found an agency relationship between the vendor and the lessor and therefore rescinded the contract.

    The Court of Appeals affirmed.  The print size and color of the disclaimer were the same as the rest of the document.  Further, there was no evidence presented that "there were other leasing companies readily available to finance a computer system for appellee at the time he signed the leasing contract" so the trial court could have determined that the contract was unconscionable due to gross inequality of bargaining power.

Did Copying And Selling The Software Breach The License?

    The specific case is too fact specific for discussion here.  But if you have a case involving restricted rights to modify and/or market software you will probably want to review EPL, Inc. v. USA Federal Credit Union, 1999 U.S. Appl LEXIS 8227 (11th Cir. April 29, 1999).  You will also want to review this case if you have a summary judgment dispute over whether the failure to make a disputed payment constitutes grounds for termination of the license agreement.

February, 1999
Steven Brower - Associate Editor


Shrink-Wrap Type Licensing Is Valid

 In M.A. Mortenson v. Timberline Software, 1999 Was. App. LEXIS 185 (Wash. App., February 1, 1999) the plaintiff had obtained software, from the defendant, for use in submission of construction bids.  The plaintiff claimed that they submitted a bid on a project which was $2 million lower than it should have been, due to a bug in the software.  Discovery showed that the vendor was aware of this bug, although the vendor's internal memo said "given the unusual criteria for this problem, it does not appear to be a major problem."

 The license agreement had a limitation of remedies which purported to exclude this type of damages.  The software diskettes were shipped in sealed envelopes with the full text of the license on the outside.  It was also printed inside the user manuals and the opening screen made reference to the license agreement.  Plaintiff contended (disputed) that they never saw the license agreement because the software was installed by a reseller.

 The Washington Court of Appeals, citing ProCD, noted that "transactions in which the exchange of money precedes the communication of detailed terms are common."  Plaintiff here argued that it was not bound by the license agreement.  The Court noted:

 [Plaintiff's] arguments ignore the commercial realities of software sales. . . [Plaintiff] licensed other software packages, the licenses of which were similar to [defendant's] in that they came with the software, disclaimed warranties, limited remedies, and included choice of law and forum selection clauses.  Reasonable minds could not differ concerning a corporation's understanding that use of software is governed by licenses containing multiple terms.


 The Court then found that the limitation of liabilities was not unconscionable under the circumstances.

Choice Of Law And Venue Is Against Public Policy In Montana

 Plaintiff, a Montana company, filed suit against defendant, a provider of hardware, software and support services from California.  Defendant moved for arbitration, in California, pursuant to contractual terms purporting to require such result.  The motion was granted by the trial court.

 On appeal to the Montana Supreme Court (there is no intermediate court of appeal in Montana) the court found that the requirement to arbitrate was valid, but that such arbitration must occur in Montana, not California.  (Keystone, Inc. v. Triad Systems Corp., 1998 Mont. LEXIS 323 (Mont., December 30, 1998).

 The court first found that the parties choice of law provision was invalid because, pursuant to the Restatement Second of Conflict of Laws, "application of the law of the chosen state [California] would be contrary to a fundamental public policy of a state [Montana] which has a materially greater interest than the chosen state in the determination of the particular issue . . ."  Montana has a public policy (statutory) invalidating forum selection clauses that would require Montana residents to litigate outside of the state of Montana, unless there is a written waiver on the advice of counsel.  The Court also found that this Montana policy does not conflict with the Federal Arbitration Act, so it is not preempted.

 PRACTICE NOTE:  First, as is obvious from this decision, even if you insert a choice of law and choice of venue provision, it may not work.  Second, there are still some jurisdictions where removal to federal court might be a good strategic option.

An Injunction Will Not Issue In Favor Of A Party Who Is Unlikely To Prevail, Especially Where The Party Has Resorted To Self-Help

 Defendant sells medical software.  The software incorporates a database licensed from the plaintiff.  The contract has a "most favored nations" clause (defendant won't pay more than any similar reseller) but it does not guarantee a specific price.  Payment is based on "tokens" (stickers) which defendant purchases from plaintiff, and which are, in turn, required to be affixed to each copy of the software.  The "tokens" include "network", "single user", and "upgrade", with descending prices.  Upgrade was only for a customer which had previously purchased a full license.

 Plaintiff sued, apparently for unpaid license fees, in 1996.  In late 1997 plaintiff gave notice that the license would be terminated unless defendant cured the following alleged breaches: 1) Although plaintiff had raised the price of the software, defendant refused to pay any amount greater than was originally set in 1993; 2) Defendant had distributed some software to new customers using upgrade tokens (depriving plaintiff of the proper revenue); and 3) Although the license agreement only covered DOS and Windows, defendant had incorporated the database into OS/2 software.

 You might think that number 3 (use on an additional operating system) appears relatively trivial, even if you were told that the parties tried, but failed to reach an agreement on OS/2.  However, the Court noted:

 [Defendant] contends that a license should be implied from the parties' course of dealing, but even if this is so [defendant] faces a formidable obstacle: it shipped the finished software to its customers without tokens of any kind - indeed without approaching [plaintiff] to purchase tokens - yet denied to [plaintiff] that it was shipping an OS/2 version.  Now [defendant] concedes that it should have paid for the software.

 Defendant requested an injunction against termination from the district court, arguing that it would take them a year to incorporate a new database so that termination would put defendant out of business.  The district court denied the injunction ruling that defendant is unlikely to prevail on the merits.  Defendant appealed that denial as reported in Micro Data Base v. Nellcor Puritan Bennett, 1999 U.S. App. LEXIS 892 (7th Cir., January 25, 1999).

 Defendant argued that "its injury from termination is so great that it is entitled to interim relief even if it is likely to lose in the end."  Interestingly, there is actually law in the 7th Circuit which would support this argument under some circumstances.  However, the Court of Appeals was unable to garner any sympathy for this defendant.  It noted that after the termination, defendant continued to use the plaintiff's software.  And it continued after the judge denied the injunction.  And it continued a year later, at the time of the oral argument.  Thus, there was no irreparable harm, or, as stated by the Court:

 By ignoring the district court's denial, Nellcor has effectively announced a heads-I-win-tails-you-lose posture: it is going to distribute MEBS's software no matter what happens in court.  We are not about to compel a district court to lend aid to a litigant that seeks judicial assistance while evincing unwillingness to respect an adverse decision.

 The Court noted that the parties had "negotiated and paid" for a contract in which termination was effective in 45 days, not after years of litigation.  In a final comment the court noted:

 Contracts serve commerce best when their terms are enforced rather than twisted after the fact.  Nellcor made a business deal that allowed termination for cause on short notice, and it must live with that choice.


Computer Software Can Constitute The Unauthorized Practice Of Law

 The sale of software (Quicken Family Lawyer) can constitute the unauthorized practice of law in Texas.  In Unauthorized Practice of Law Committee v. Parsons Technology, 1999 U.S. Dist. LEXIS 813 (N.D. TX, January 22, 1999) the Court granted summary judgment in favor of the plaintiff which argued that QFL is a "cyber-lawyer".

 The product materials, quoted extensively by the court, make reference to being "valid in 49 states", and being "developed and reviewed by expert attorneys" and mentions that the user will "answer a few questions to determine which estate planning and health care documents best meet [the user's ] needs."  The disclaimer indicating that you might want to consult with a lawyer appears only on the first use of the product, does not appear on the marketing materials, and can be located only by selecting "disclaimers" from the help menu.

 Although it has a "high-tech" gloss, the decision actually refers back to a 1969 Texas decision (Palmer) which held that the sale of will forms containing blanks, to be filled in by the user, along with instructions, constituted the unauthorized practice of law.  And in 1985 the Texas Supreme Court had indicated that the mere advising of a person as to whether or not to file a form requires legal skill and knowledge, therefore constituting the practice of law.  The Court found that QFL goes beyond merely instructing how to fill in a blank form, and the Court will therefore enjoin the sale of QFL in Texas.

Does The Limitation Of Damages Provision Bar Suit For The Payments Due Under The Contract?

 FTD entered into a contract with Sungard for "backup" computer services.  The initial three year term was subject to automatic renewal, for another three years, in the absence of notice given six months before expiration of the initial term.  FTD does not contend that it gave timely notice of termination, but it has refused to make any additional payments.

 Sungard sued for three years of unpaid monthly payments.  FTD brought a motion to dismiss based on a provision of the contract which provides that each party will be liable only for "direct damages", not for loss of profits or other consequential damages.

 The Court in Sungard Recovery Services v. Florists Transworld Delivery, (January 22, 1999) held that the usage of the phrase "direct damages" might have been intended to include breach of contract damages, so the motion to dismiss was denied.

 NOTE:  Here is a drafting "tip".  Don't draft language which allows a court to say there is ambiguity about whether or not your client is allowed to sue for payment of the amounts due from the customer.

Another Arbitration Clause Is Enforced

 Plaintiff LDS, a software company, licensed warehouse software to defendant Metro Canada.  The parties entered into a Software License Agreement and a Maintenance Agreement.  The License Agreement, drafted by LDS, included a broad arbitration clause.

 Plaintiff sued for copyright infringement and breach of contract.  Defendant moved to enforce the arbitration agreement.

 One argument by LDS was that the arbitration clause no longer applied because LDS had terminated the agreement.  The Court (LDS v. Metro Canada, 1998 U.S. Dist. LEXIS 19478 (D. Kan., November 24, 1998)).  The Court said:

 The court is equally unpersuaded with LDS' argument that the arbitration clause should not be enforced because LDS terminated the License Agreement.  LDS provides absolutely no authority for its propositions that termination of the License Agreement "thereby terminated the arbitration provision as well," and that "the arbitration provision only governs controversies that occurred during the effective dates of the License Agreement."

This conclusion was bolstered by reference to a recent decision from the 10th Circuit holding that the arbitration provision is presumed to survive expiration of the contract unless there is evidence that the parties intended to override this presumption.

 The Court also rejected a number of other attacks by the plaintiff.  The Court specifically decided that claims of copyright infringement can be subject to contractual arbitration.

Economic Loss Rule Bars Claim For Negligence

 In Eizen Fineburg & McCarthy v. Catalink Direct, 1998 U.S. Dist. LEXIS 19486 (E.D. PA, December 11, 1998) the defendant had agreed to upgrade the computer system of the plaintiff.  The Court noted that "A party cannot recover in negligence merely for failed commercial expectations that can be recovered in a contract action."  Here, in dismissing the claim for negligence, the Court noted: "There are no allegations in Count I that the Defendants inflicted harm beyond the Plaintiff's disappointed expectations and dissatisfaction with performance of the contract.  This is a case of failed commercial expectations, and therefore, the Plaintiff's recovery is in contract, not tort."

Software Engineer Can Be Guilty Of Insider Trading

 In SEC v. Soroosh, 1998 U.S. App. LEXIS 32651 (9th Cir. unpublished, December 24, 1998) the defendant, a software engineer, was appealing his civil conviction  of insider trading.  Defendant was accused of trading based on non-public negative information regarding an upcoming product release by his employer.

 One argument he submitted was that the information was not material.  But the Court noted that the product under review was 1/3 of the total revenue of the company and that the stock price dropped from $24.50 per share to $15.75 per share when the information became public, which seemed to indicate the information was, in fact, material.  The Court also noted his borrowing money from his family and opening a new brokerage account using false information as being inconsistent with a subjective belief of innocence.

 He was required to disgorge $506,000 of profits plus a $160,000 civil penalty.

December, 1998
 Steven Brower - Associate Editor


Everything Goes Wrong With A Complex System - Acceptance Can Be Revoked Even After Extended Use

 Everyone who practices in this area should consider having their clients read Novacore Technologies v. GST Communications Corporation, 1998 U.S. Dist LEXIS 14063 (USDC Mass. 9/2/98).  The judge describes, in great detail, the course of dealing between the parties.  The ultimate result is that the custom programmer (Novacore) owes $122,000, plus attorney's fees, to its customer, GST, for breach of contract.  "I find no bad faith on the part of either party" says the Judge.

 The owner of the customer (GST) is described, by the court, as "a 43 year-old self-described ‘bottom line' international businessman, with an attitude.  He is ‘intense,' ‘demanding,' and ‘very difficult to deal with.'"

 The customer business involved international callback, a system by which international telephone customers call the system, the system calls them back at the lower U.S. rates, and the system also dials the destination call at the lower U.S. rates.  The computer technology in place was a patchwork of multiple technologies, performing overlapping functions.

 After months of negotiations between the principals, work began in February, 1995 and a 14 page contract was entered into between the consultant (Novacore) and the customer (GST) in March, 1995.  Novacore agreed to improve certain aspects of the international callback telephone system (including use of debit- cards), along with billing software.  The total cost of the project was about $200,000.  The customer (GST) was responsible for providing the hardware.

 The principal on behalf of Novacore retained overall responsibility for testing.  But he delegated the telephone software to a programmer who was "new to telephone callback technology and [who] had never written a telephone switching application prior to the GST project."  He delegated the billing application to another company.  And he persuaded the client to hire someone who could program in MicroSoft Access, since the billing database would require that expertise.

 Then, when testing began, things got messy.  Novacore was unable to demonstrate the system to representatives of GST.  Novacore claimed it was because they needed to have all 12 PC's from GST.  But GST needed some of those PC's to continue operation of its business.  Further, in mid-April, the night before the proposed installation, the parties first realized that there were substantial discrepancies between what was being provided, and what was being requested.  And, over the next few days, attempts at installation showed that they system would crash with anything more than a minimal number of telephone calls.

 What did the evidence show at trial?  That the system, in many aspects, didn't yet work.  "[The Novacore principal] acknowledged, however, that disconnections, or ‘cut offs' were ‘a significant functional issue' and that the debit card software ‘needed reworking.'  For example, unbeknownst to [GST] at the time, the debit card application was not yet programmed to handle ‘real time' billing of debit cards, a feature necessary for the proper running of the billing software.  Moreover, while testing was done on real data from the GST data base for international callback and toll free access clients, live traffic was not successfully carried over from the NACT system."

 The situation on the billing software wasn't much better.  The Novacore principal said he felt it was ready, but the subcontractor on that portion had written a letter saying that there had been no testing of the billing software.  When it was finally installed it couldn't handle the volume of live traffic.  "Moreover, the printing of bills for one country would take hours at a time, and a ‘little red box' would appear on the screen which said ‘please do not use the system because bills are being printed.'  Each time the box appeared, customer service personnel could not add clients, make changes or remove clients from the system."

 This is just the beginning of a long, complicated course of dealing. But, as you can imagine, it appears that the system never really worked.  In August, 1995, Novacore (the consultant) sued for unpaid amounts allegedly owing.  Two months later, during an audit of the billings on the "debit card" usage, it was determined that GST had lost about $150,000 due to the failure of the Novacore system to prevent "free" usage by debit cards which were over their credit limit.

 The primary legal issue before the court was whether there had been "acceptance", under the UCC, due to the extended period of continued use by GST.  The court cited a number of cases which have allowed greater latitude to purchasers of complex computer systems.  Citing a prior Massachusetts decision the court noted:

 This flexible approach in the hi tech area makes sense because "[a] common but foreseeable frustration of modern life [is] the failure of new computer hardware or software to work properly."


Here, the court found that there was acceptance.  However, the court also found effective revocation of acceptance.  And, pursuant to the agreement, upon termination Novacore was required to return any monies received, plus interest and attorney's fees.  The court held that consequential damages were barred by the limitation of liabilities provision and there was no fraud.

Failure of Essential Purpose and Limitation of Liabilities

 In Global Link Communications v. Homisco, 1998 U.S. Dist. LEXIS 17454 (ND Il. 10/27/98) the plaintiff sought only consequential damages and the defendant brought a motion to dismiss based on the written contract which purported to exclude consequential damages.  The court denied the motion.

 Defendant began work, under an oral agreement, to provide software and hardware support for plaintiff's debit card telephone business.  [Seems to be a difficult market - see the preceding case report involving some of the same issues.]  That system didn't work so they entered into a written contract for an Upgraded System.  According to the complaint, that one didn't work either.  As a result, plaintiff, in order to meet its obligations to Southwestern Bell, was required to purchase an alternative system for about $2 million more.

 The parties agreed that the UCC applied to this transaction.  The contract contained an express waiver of consequential damages.  However, the plaintiff asserted that the "repair or replace" warranty had failed of its essential purpose, and that they can therefore obtain consequential damages.

 The federal court noted that Illinois had not yet clearly resolved this issue, but it felt that 7th Circuit precedent made clear that this issue must be determined on a "case by case" basis.  Specifically, if the warranty is actually determined to have failed of its essential purpose, the Court must determine what the parties intended regarding consequential damages.  The Court noted that other jurisdictions use an unconscionability analysis but it felt that such analysis was contrary to 7th Circuit precedent.

Venue Selection Clause Can Prevent Federal Diversity Jurisdiction

 The Software Licensing Agreement provided that ". . . said action shall be venued in the County of Ramsey, State of Minnesota."  However, plaintiff attempted to bring the suit in Federal District Court in Kansas.

 In Double A Home Care, Inc. v. Epsilon Systems, Inc., 15 F.Supp. 2d 1114 (USDC Kansas 8/7/98) the court first determined that such clause was specific enough to be a "true" forum selection clause.

 Perhaps of more interest (it was to me), the court found that such clause required venue in the state court in Minnesota.  This was based, in part, on a recent 10th Circuit decision which upheld remand and imposition of sanctions against a party which had attempted to remove a case to federal court, even though the removal was in the correct venue, where the venue clause referred to a "county" rather than a "district".

 The requirement that venue be in the state court also meant that "convenience of the parties", under 1404(a), could not be considered.  Thus, the Kansas federal court simply dismissed the action.

Year 2000 Securities Fraud

 Another section of this Journal now covers Year 2000 cases.  But, in searching Lexis, I was able to find only two actual decisions mentioning Year 2000, and both were securities fraud cases which haven't otherwise been mentioned.

 In USA v. Shkolir, 17 F.Supp. 2d 263 (SDNY 8/24/98), the defendant, a cabinetmaker with no computer experience, persuaded over 40 people to "invest" $360,000 in his Year 2000 remediation company, which was nothing more than a mail box and an answering service.  He was convicted of securities fraud, mail fraud and wire fraud.

 In In re Credit Suisse First Boston Corp. Securities Litigation, 1998 U.S. Dist. LEXIS 16560 (SDNY 10/20/98) the court denied a motion to dismiss a class action.  The allegation is that CSFBC held a "short" position in two Year 2000 remediation companies, Viasoft and Data Dimensions.  The company then released "trading notes" with a "target price" for the stocks which was less than 20% of the current market price and a comment that "the software companies highlighted in this report can not fix the problem and have no possibility of earning close to what the market capitalization indicates."  Defendants, on this motion to dismiss, raised a number of arguments, all of which were rejected at this stage in the proceedings.

September, 1998
Steven Brower - Associate Editor


WOW! Was This A Slow Quarter

 As previously noted, preparation of this column involves quarterly review of over 500 possible cases (based on a Lexis search), from which the potentially worthwhile cases are selected.  This quarter there were few interesting cases, and many of those involved subject matter covered by other sections of this Journal (such as Intellectual Property and Internet).  Further, many of the cases which did belong to the subject matter of this column were totally unremarkable.  Thus, we have a very short section in this issue.

Trial Report

 A former chairperson of this committee, G. Donovan Conwell, Jr. has submitted the following report from one of his trials.  (NOTE: You don't need to be a former chairperson.  We welcome all submissions of articles and case reports).

 "We represented a retail furniture chain in North Carolina, Tucker Furniture Companies, against a retail software company known as Tyler Business Systems.  The jury found that Tyler committed fraud in its sale of its computer system, and we obtained a verdict of almost $2 million.

 Tyler misrepresented whether it had a product that automated the processing of bookkeeping and financial information for multiple corporations with different fiscal year ends and that allowed management to view the inventory for multiple corporations at the same time.  The compensatory damage award consisted primarily of lost profits.  We used computer technology during the trial to present the case to the jury.  This included displaying exhibits on computer terminals and highlighting them interactively and using Power Point to explain certain complexities of the case."

Parties Must Generally Comply With Provisions Of Contracts Which They Have Negotiated, Even The Nit-Picky Provisions

 Plaintiff entered into a contract to provide Human Resources software and an optional payroll interface to defendant for use in the management of defendant's casinos.  The software was delivered to the defendant and the defendant began to use the software.

 Defendant did not attempt to rescind or terminate the contract until about five months later.  The Agreement provided that "acceptance of the basic system shall be deemed to have taken place five days after installation, unless licensee notifies PDS in writing that the system is materially defective and/or inoperable on licensee's computer."  Defendant, opposing summary judgment, attempted to argue that the provision was unfair because it gave such a brief period for notice.

 However, the court (Personnel Data Systems v. Grand Casinos, 1998 U.S. Dist. LEXIS 11587 (E.D. PA, 7/30/98)) noted that "the contract is replete with handwritten alterations [defendant's] representatives made to [plaintiff's] standard form contract."  Indeed, the court indicated that the five-day provision was a bargained for term.  The court "cannot rewrite the terms of the agreement to conform to a party's preferred state of affairs."

 Further, the court noted that the notice, given by the defendant, failed to comply with the "Notice" provision of the agreement.  Citing a state court decision the court noted that "In Pennsylvania, conditions precedent to a contract termination must be strictly fulfilled."  Thus, oral notice, even in a formal meeting, was "insufficient as a matter of law."  However, plaintiff's motion for summary judgment was denied because there was a question of fact whether the notices, which were not sufficient (or timely) to constitute notice of termination, might still constitute a demand for adequate assurance under the UCC.

 Defendant also made an argument that there was a breach of the implied warranty of fitness for a particular purpose.  The Court first found that such implied warranties had been waived.  Moreover, one of the elements is that the seller knows of the buyer's particular purpose at the time of purchase and knows the buyer is relying upon the seller.  Here, the License agreement stated that defendant assumed "sole responsibility for (a) the selection of the System to achieve Licensee's intended results, (b) its use, and (c) the results obtained therefrom."

No Negligent Misrepresentation Where The Problem Arises From A Latent Defect

 Certain computerized typesetting equipment failed to operate properly.  The buyer's expert testified that the system would have been adequate but for a defect in the specific unit sold  to buyer.  Under those circumstances the court (General Electric Capital v. Rauch, 970 S.W.2d 348 (C.A. MO., 5/19/98)) held that there could be no award for negligent misrepresentation because the seller was not negligent in his statements that this type of unit would be adequate to support the business of buyer.  (Although this was a lease transaction, the court specifically held that it was, for the purpose of legal analysis, a UCC Article 2 "Sales" transaction.)

 This case also involved an express warranty in the form of a letter which stated, in part:

. . . in the event we cannot make the [equipment] perform as we represented it, we will pick up the equipment and continue to make your . . . lease payments in a timely manner.

Although this letter left the seller liable for the lease payments, the court held that this language was sufficient to constitute an exclusion of consequential damages.

July, 1998
Steven Brower - Associate Editor


Court Cannot Order The Production Of Source Code Without Sufficient Evidentiary Determination

 Plaintiff computer programmer was a former employee of defendant.  Plaintiff alleged that he was fraudulently induced into his employment by representations that defendant owned certain software which it had actually misappropriated from a third party.  Plaintiff sought to obtain all source code, owned by defendant, in order to prove his claim.

 The parties agreed that the source code was a trade secret.  Prior Florida decisions had held that a court can require discovery of trade secret materials where there was "reasonable necessity" for the materials.  The trial court heard the argument of counsel, acknowledged that it was not familiar with the technical issues, but ordered production of the material.

 The Court of Appeals (Beck v. Dumas, 1998 Fla.App. LEXIS 3635, (4/8/98)) quashed the order of the trial court because compliance would constitute a material injury which cannot be remedied on appeal.  The court said:

 The broad judicial discretion which the trial court enjoys in ruling on discovery matters of this type cannot properly be exercised in a vacuum or on a mere whim.  The court needs sufficient insight into the relevant factors which must be weighed before deciding the competing interests of the respective parties.  Conceivably, on a matter with which the court is familiar and which is not the subject of a genuine factual dispute, argument of counsel might well suffice.  But here the matters were of a highly technical nature, and the court candidly acknowledged its lack of familiarity with the requested materials.  Under the circumstances, and given the inherent nature of advocacy, the court needed more than the argument of Dumas' counsel that the "needed" the materials upon which to base its decision to override Computel's statutory privilege against disclosure.


Plaintiff Software Subcontractor Prevails On Breach Of Contract, But Makes A Mistake From "Overpleading"

 Defendant had a contract to install a computer-aided dispatch system for the emergency services in Denver.  Plaintiff was a subcontractor for some of the hardware and software which would be integrated into the system.

 Plaintiff timely, and correctly, developed and delivered the hardware and software.  At one point Denver requested modifications which were beyond the scope of the contract, and indicated that Denver would not be willing to pay for those additional modifications.  Plaintiff did them anyway, and they worked.

 Meanwhile, defendant had an [allegedly] undisclosed contract dispute with Denver.  When plaintiff submitted a progress payment invoice it was returned by defendant saying only that the project was "currently in abeyance due to contractual differences between" defendant and Denver.  However, defendant subsequently billed Denver for that progress payment.

 The court, after a two day trial, found in favor of the plaintiff subcontractor for about $100,000 plus interest (Rocky Mountain Microsystems v. Public Safety Systems, 989 F.Supp. 1352, (Dist. CO., 1/13/98).

 However, plaintiff had also included a claim for quantum meruit, for the additional modification which was performed, at the request of Denver, with an express understanding that there would be no additional payment.  Thus, the court held in favor of defendant on that count, and indicated that defendant would be entitled to its attorney's fees on that count.

Contractual Forum-Selection Must Be Part Of A Valid Contract And Is Not Jurisdictional

 Plaintiff software provider (Evolution Online Systems, a New York corporation) and defendant customer (Koninklijke, a Netherlands company) had exchanged draft contracts.  Both parties versions had a forum-selection clause for dispute resolution in the Netherlands.  Apparently because of other differences, the parties never executed a written contract.  But Koninklijke paid Evoluion over $400,000 before terminating the arrangement.

 Evolution filed suit in New York for breach of contract, copyright infringement and quantum meruit.  The district court granted a motion to dismiss finding that the parties had agreed to a mandatory forum-selection clause for the Netherlands.

 The Second Circuit vacated and remanded (Evolution Online Systems, 1998 U.S.App. LEXIS 10478, (2nd Cir. 5/27/98).  The court agreed that, under New York contract law, the parties can enter into an oral contract even though they contemplate later memorializing their agreement in writing.  However, they felt that the district court had erred by a binding forum-selection clause, without first determining whether there was an overall contract, of which the forum-selection clause would be just one of the terms:

 To answer the latter question, a court applies the analysis provided by Winston [cite].  The Winston analysis requires a court to consider several factors: (1) whether the parties have expressly reserved the right not to be bound without a written contract; (2) whether there has been partial performance of the contract; (3) whether the parties have agreed to all of the terms of the alleged contract; and (4) whether the alleged agreement is the type that is usually committed to writing.

 Moreover, even if there is a mandatory forum-selection clause, it does not deprive the court of jurisdiction.  Rather, the court is required to determine whether the party resisting the enforcement of the clause has shown the clause to be unreasonable or unfair under the circumstances.

 CAUTION: Normally, under Gulf Oil, a court considering forum non conveniens must give strong deference to the plaintiff's choice of forum, especially where the plaintiff resides in the forum.  But where the parties have exchanged proposed drafts of an agreement with a forum-selection clause, even where the clause is not included in the final agreement, plaintiff's presumption is eliminated.

Contractual Choice Of Law Clause Does Not Reach Tort Claims

 In Sunbelt Veterinary v. International Business Systems, 985 F.Supp. 1352 (MD. AL, 12/9/97) the plaintiff purchased software from the defendant.  Defendant was a California corporation and the contract stated that "This Agreement shall be governed by and construed under the laws of the State of California, without reference to principles of conflict of laws."

 Plaintiff did not sue for breach of contract, but sued only for various torts, including negligence and wantonness in the hardware recommendations; suppression regarding software defects; fraud, etc.  The court noted that Alabama conflict of laws rules must be applied to determine the scope of the contractual choice of law provision.

 Because the clause was limited to the contractual relationship, and did not say "any and all claims arising out of the relationship between the parties", the court held that Alabama law, and not California law, would apply to the tort claims.

Breach Of Warranty - Consequential Damage Bar Is Valid

 Compulit, whose principal business is providing computer- assisted litigation support to large law firms engaged in complex litigation, purchased two scanner systems from defendants.  The contract was the standard form provided by the seller.  Compulit claimed that the scanners failed to work and defendants sought summary judgment on a number of issues.

 The Court (Compulit v. Banctec, 1998 U.S.Dist. LEXIS 7876 (WD MI, 1/16/98)) noted that the scanners had been used for about eight months.  Compulit originally contended that the scanners never worked.  However, on this summary judgment motion, the court found that they had been used to scan 1.8 million documents.  Thus, the court dismissed the claim for breach of contract, noting that "the more accurate characterization of Compulit's claim is that the scanners did not live up to Defendants' performance representations -- a breach of warranty claim."

 As to breach of warranty, the court found that the defendant manufacturer had warranted only that the scanner would "be free from defect in material and workmanship" during the first 90 days.  Defendants argued that plaintiff must prove the specific defect.  The court held that plaintiff, which did not participate in the design or manufacture of the product, would not be required to show the cause of the defect.  It need only show that the scanner did not operate in the manner which it should have operated in the absence of a defect.  That lead to an interesting back door to evidence which the court had previously held to be barred by the integrated written agreement:

 Statements in brochures and specifications, while not independently actionable as express warranties, may provide evidence of how a defect-free scanner should operate.

 Defendants also asked the court to enforce the contractual exclusion of consequential damages.  The court found that the parties were of equal bargaining power, and found that the alleged default was not so total and fundamental as to require the consequential damage limitation be expunged.

 As a footnote, there is an interesting issue on damages which may remain to be resolved (due to a question about whether the contract, containing the bar on consequential damages, applies to a second scanner).  That is, plaintiff increased their claim for consequential damages from $400,000 to $17,000,000 the day after the close of discovery.  Defendants complain that plaintiffs have never provided any proof of consequential damages.  The issue relates to the fact that the business of Compulit was complex litigation.  Thus, the court remanded discovery issues, relating to attorney-client privilege and work-product, to a magistrate for an in camera review.  The court has deferred ruling on the argument regarding a failure to disclose proof of consequential damages until after the in camera review is completed.

No Insurance Coverage For Suit Related To Competing Software Product

 Michael Ross developed a software program which allowed the user to add "stamps" ("copy", "draft", etc.) to WordPerfect documents.  He marketed that product to WordPerfect users, including advertising in the WordPerfect magazine.  Sometime later WordPerfect (then owned by Novell) purchased an add-on program which performed a similar function.  Ross sent various complaints to WordPerfect and litigation resulted.  Ross claimed fraud, breach of contract, unfair competition, interference with prospective economic advantage, etc.  Novell eventually paid Ross $28,500 in settlement and incurred attorney fees of about $103,000.

 Novell had tendered defense of the action to Federal Insurance under a Commercial General Liability policy and Federal denied a duty to defend.  The district court granted summary judgment, in favor of the insurer, because it found no causal relationship between the alleged injuries and advertising activities.

 On appeal the court noted that there was a two-step analysis.  First, there needed to be an allegation of a predicate offense, as defined in the policy.   Second, there must be a causal relationship between the alleged offense and advertising activities by the insured.

 Here, the parties agreed that the only potential offense was "misappropriation of . . . style of doing business."  (The precise meaning of that phrase has troubled a number of courts).  The court here (Novell v. Federal Ins. Co., 1998 U.S.App. LEXIS 7402 (10thCir. 4/14/98) found that the phrase required either misappropriation of trade dress or misappropriation of the comprehensive manner of doing business.  The court indicated that neither applied to the underlying allegations by Ross against WordPerfect.

 Moreover, the court held that there was no evidence of any such conduct being performed in the course of advertising by Novell/WordPerfect.  The court specifically noted that plaintiff could have purchase other coverage, which might have been applicable, such as "errors and omissions liability", "directors and officer liability", "completed operations and product liability" and/or other coverages.

Licensing Disputes - Don't Give The Software Until They Sign The License

 The appeal in Micro Data Base Systems v. Dharma Systems, 1998 U.S.App. LEXIS 10725, (7th Cir. 5/29/98) examines a number of legal issues, involved in computer contracting, arising under New Hampshire law.  (You may not be surprised to learn that, on several issues, there were no reported New Hampshire cases.)  The case involved a sub-contractor which prepared software for distribution to a third-party.  Although the primary contractor was paid the by the third-party, the primary contractor failed to convey that payment to the sub-contractor.  The primary contractor had also failed to sign the license agreement proposed by the sub-contractor notwithstanding promising to do so on several occasions.

 One of the issues considered by the court was conflict of laws.  The Court stated that where the parties are in different states, and the contract is made by an exchange of letters and other communications, the contract has "no site".  But since it was performed entirely in New Hampshire, that is the state whose law the parties would expect to apply to their dealings.  If the parties intended a different result they should have included a choice of law provision in their contract.

 The court also considered whether a contract for custom software, including extensive modifications, is a "good" (rather than a service) such that the transaction was governed by the UCC.  Consistent with most courts which have considered this issue, the court held that the transaction would be covered by the UCC.  The fact that part of the contract was for custom programming, a service, did not change the character of the transaction, since the services were to complete the "manufacture" of the "good" (the software).

 Other issues considered by the court included whether there had been acceptance; the amount of damages which were proper for violation of the Uniform Trade Secrets Act; and the legal standard for the award of punitive damages under the UTSA.

April, 1998
Steven Brower - Associate Editor


No Arbitration Required Under "Narrow" Arbitration Clause

The last issue of this Journal reported on a decision by the 7th Circuit in Bradford-Scott Data Corp. v. Physician Computer Network, Inc., where the court of appeal issued a stay pending appeal of the district court's denial of a motion to compel arbitration.

Four months later the court issued its opinion on the merits (1988 U.S. App. LEXIS 2663 (7th Cir. 2/19/98) affirming the district court's denial of arbitration.

The 1993 Master License Agreement, between the software vendor and its distributor, had an arbitration clause which was limited to payment disputes, but no payment disputes were at issue in the instant litigation. A 1988 agreement, which was still in effect, had a broad arbitration clause. But the 1993 agreement specified that, in the event of conflict, the terms of the 1993 agreement would control. And the plaintiff was alleging only breaches of the 1993 agreement.

Thus, the court of appeals found that the narrow terms of the 1993 agreement were controlling. "This is a just result because [defendant] itself rejected a broader arbitration clause and proposed the limited one contained in the 1993 Agreement."

Don't Give Your Employees Computers, Which Were Previously Used By The Personnel Department, Until You Clean The Hard Disk

The holding isn't unusual, but the facts show poor planning. An employee of Monsanto (Kempcke) was assigned a personal computer which was previously used by a high-ranking Human Resources officer. However, no one had removed old documents from the disk drive.

Kempcke had previously received a performance review which indicated that his work was "well above" expectations. While deleting old files from the computer he found a memo which:

organized the fifty-nine managers into four categories, "must keep", "want to keep", "close calls" and "remove from position." Kempcke was listed in a subpart of the "close calls" category labeled "probably will not make it." All fifteen managers in this subcategory and the "remove from position" category were at least forty years old. The Plan noted that five of the nine employees recommended for outplacement, including Kempcke, would likely "make age an issue" if this action was taken.


Kempcke complained to his supervisor that this document reflected age discrimination. The supervisor demanded return of the document. Kempcke told him to talk to his attorney. Kempcke was fired for insubordination for refusal to return the document.

The Eighth Circuit (Kempcke v. Monsanto, 132 F.3d 442 (8th Cir. 1/6/98)) held that the document, discovered on a computer which was assigned to him, was like a document left on the photocopy machine or misdirected to the wrong person. That is, it wasn't stolen, and because he handled it correctly (gave it to his attorney for possible ADEA legal action) his refusal to return the document was protected activity.

Bad Contracts On Big Deals

Plaintiff agreed to buy $6 million of laptop computers from the defendant. They did a deal, they amended the deal, and they had numerous problems. The details of the transaction are complex and case specific (Datatrend v. Jabil Circuits, 1997 U.S. Dist. LEXIS 22024 (Mass. 12/22/97). But the court's observations are good reminders of the value of some pre-litigation legal services:

This is a case study of the perils that await business persons who enter into substantial commercial transactions on the basis of hastily-prepared contracts. . . Although the January 20, 1995 contract and the April 24, 1995 memorandum are perhaps best described as black holes of ambiguity, both internally and in relationship to one another, both parties now contend in cross motions for partial summary judgments that they are crystal clear and dispositive (in their respective favor, of course) of all of Datatrend's contract and warranty claims. In this respect, both parties are clearly mistaken.

Computer Services Do Not Support A "Malpractice" Cause Of Action

In St. Barnabas Hospital v. Sentient Systems, 1998 U.S. Dist. LEXIS 51, (SDNY 1/8/98) the court granted a motion to dismiss the negligence cause of action, against a provider of computer services. The court found that "the type of services rendered by Sentinent have not achieved the status of licensed professionals."

Settlement Demands Can Start Time For Removal (And Your Judge Will Be Reading Them, In Detail)

A state court complaint is filed and served in a software litigation. There are no specific facts about the amount of damages sought other than a general statement that they meet the jurisdictional minimum ($10,000) of the particular court. So, the complaint is not subject to removal because of the requirement that there be at least $75,000 in controversy.

The plaintiff subsequently sends a letter, to counsel for the defendant, setting forth the basis for a settlement demand. Defendant sees that the demand is in excess of $75,000 and sends discovery to confirm that fact. Within 30 days of receiving the discovery responses, defendant removes the case to federal court.

The court here (Golden Apple Management v. GEAC Computers, 1998 U.S. Dist. LEXIS 225 (M.D. Ala. 1/13/98)) recognized that there is a split of authority on this subject, but remanded the case finding that the removal request was untimely, having been filed more than 30 days after receipt of the settlement demand.

Moreover, this is not a "bright line" test. The court must examine the settlement demand on a case by case basis to distinguish between those settlement demands which "offer an honest assessment of damages and those that are mere posturing".

NOTE: I am not always sure, at the outset of a case, which demands from opposing counsel are an honest assessments of damages versus those which are mere posturing (although I would probably ascribe a high percentage to mere posturing). And if you file a petition for removal after getting a settlement demand are you "representing" to the court that you think the demand is "an honest assessment of damage"?

Problems With Computers Continue To Plague Employment Litigation

Based on a review of Lexis cases referring to computers (about 900 over the last three months for this summary), there are an increasing percentage which involve employment litigation. The employers claim that the employees lack the ability to learn to operate computers which are integral to their job functions. The employees claim that they were discriminated against because they received less training than other employees. Or they contend that their problems are due to a disability which the employer failed to reasonably accommodate.

January, 1998
Steven Brower - Associate Editor


Duty To Exploit Technology Under An Exclusive Agreement And The Effect Of A Whereas Clause

In early 1991 the plaintiff company, Trecom, entered into a contract with defendant Prasad, one of its employees, for the exclusive rights to certain computer software. The compensation to the employee was $100 plus 15% of future sales, to a maximum of $6 million. The company made a number of efforts to exploit the software, but by late 1992, or early 1993, it decided not to invest further effort. Defendant admitted that Trecom offered to return all rights and title to him although it is not clear whether that offer was actually consumated.

Prasad worked for Trecom for three more years, without mentioning the software, until he was terminated in November, 1995. Shortly thereafter his attorney contacted Trecom regarding the contract. In the course of negotiations Trecom sued Prasad for misrepresentations underlying the original agreement, and Prasad counterclaimed for breach. Trecom moved for summary judgment to dismiss the counterclaim, which motion was discussed by the court in Trecom Business Systems v. Prasad, 1997 U.S. Dist. LEXIS 16475 (D. NJ., 10/6/97).

One allegation in the counterclaim was breach of the "Whereas" clause, which indicated that Trecom would modify and enhance the software. However, the court cited two decisions of the Second Circuit for the proposition that "A recital of intent in a 'whereas' clause cannot create any right beyond those established by the operative terms of the contract." Here, the intent expressed in the "whereas" clause found no support within the terms of the agreement, so summary judgment was granted.

The second allegation was that Trecom, notwithstanding any express term requiring that it improve or market the software, has an implied duty to make a good faith and reasonably diligent effort to perfect and market the software. The Court noted that such a duty has been held to exist in the context of exclusive licensing agreements and assignments of patent rights. After discussing such cases the Court noted:

Fairness and equity require this Court to impose this implied duty in order to ensure that there is mutuality of obligation and that the assignee receives the benefit of his bargain. "It would be unfair to place the productiveness of the licensed [assigned] property solely within the control of the licensee [assignee], thereby putting the licensor [assignor] at his mercy, without imposing an obligation to exploit upon the licensee [assignee]."


The court then proceeded to examine whether Trecom had made a good faith effort. While noting that such matters are normally not proper for summary judgment the Court noted that, in this matter, there was no evidence submitted by the counterclaimant to dispute the evidence, offered by Trecom, that it had invested considerable effort and expense.

The actual decision dealt with a number of other items, and provided a much more substantial explanation. The outcome was the granting of a summary judgment dismissing the counterclaim.

Computer Is A "Tool Of The Trade" For A Lawyer Under Bankruptcy Exemption Law

The Bankruptcy court (In re David A. Siegel, 1997 Bankr. LEXIS 1938 (USBC WD,TN 10/27/97) made a detailed examination of the law allowing an exemption for "tools of the trade". The Court recognized that some earlier decisions had held that an attorney could not exempt a computer under that provision, and others had held such exemption proper. The Court here, over a number of arguments by the trustee, held that the debtor had satisfactorily demonstrated that a computer is "reasonably necessary to the performance of his occupation as lawyer."

Upgrades, Contract Interpretation And Government Contracting

Two companies, who were competing bidders on a government hardware and software contract, resolved a bid dispute by agreeing to split the contract between them. Zenith Data Systems, the winner of the contract, provided the hardware, and EDS would provide the software.

The agreement between the parties included a statement that "EDS will assume all of the obligations of ZDS with respect to such application software to the same extent as if EDS were the contractor under the [government] contract."

A problem arose when the Air Force claimed that Office 95 was a required "free" upgrade under the contract. EDS claimed that a collateral letter to EDS from Microsoft, which was incorporated into the contract between EDS and ZDS, "exempted these specific applications from its general duty to supply upgrades gratis."

Because Zenith was the prime contractor, and did not want to risk a default under the contract, Zenith purchased the upgrade and then brought suit against EDS. Zenith prevailed at trial and EDS appealed.

The details of the contractual language are beyond the scope of this summary. However, the unpublished opinion of the Court of Appeals (Zenith Data Systems v. Electronic Data Systems, 1997 U.S. App. LEXIS 34237, (4th Cir. 12/8/97) affirmed the judgment. The Court of Appeals found that the district court had evaluated a large quantity of extrinsic evidence to determine the intent of the parties. Having reviewed that evidence the court found that the trial court properly applied the rule that "collateral writings incorporated by reference are to be construed as part of the contract only for 'the purpose and extent indicated.'"

October, 1997
Steven Brower - Associate Editor


District Court Is Required To Stay Proceedings Pending Interlocutory Appeal Of Denial Of Arbitration

In Bradford-Scott Data Corp. v. Physician Computer Network, Inc., 1997 U.S. App. LEXIS 28471 (7th Cir, Oct. 14, 1997) the plaintiff had entered into a VAR agreement and a Master License Agreement for a software package from VERSYSS. VERSYSS was later purchased by PCN and the plaintiff filed suit alleging breaches resulting from competition between the licensed product and a competitive product offered by PCN.

Both agreements contained arbitration clauses. However, the district court refused to order arbitration, finding that the alleged breaches would fall solely within the Master License Agreement. While the VAR agreement had a broad arbitration clause, the arbitration clause in the Master License Agreement applied only to payment disputes.

Defendants filed an appeal pursuant to 9 USC § 16(a)(1)(A) which permits an appeal from any order "refusing a stay of any action under section 3 of this title." The district court refused a stay of discovery and trial pending appeal.

The Court of Appeals then criticized the Judge and all of the parties:

The district judge's only reason -- that he need not stay proceedings pending appeal, because he had not entered an appealable order -- is untenable. The judge did not mention § 16(a)(1)(A) . . . For their part, the parties have approached the issue as if appellants were seeking a stay of an injunction, rather than a delay in proceedings.


The court pointed out that obtaining a stay of an injunction would require a showing of irreparable harm, and then pointed out why it would order a stay of proceedings pending the appeal:


Judged by [the standard for stay of an injunction], appellants' request would fail at the outset, for the costs of litigation are not irreparable injury. We approach the subject from a different perspective, however, asking not whether appellants have shown a powerful reason why the district court must halt proceedings, but whether there is any good reason why the district court may carry on once an appeal has been filed.


With that perspective, the court found that the appellants were entitled to a stay of proceedings pending resolution of the appeal.

Consequential Damages - Loss Of Profits

An unpublished appellate decision (Hertz Corporation v. Gaddis-Walker Electric, 1997 U.S. App. LEXIS 27138 (10th Cir. Oct. 2, 1997) reviews a jury award of about $1.1 million in loss of profit damages.

Hertz intended to turn off its reservation computer for eight hours for expansion work. An employee of the defendant apparently miswired some electrical circuits. Later, when the computer was restarted, it would not function properly. Unisys found six damaged circuit boards which were replaced and the computer resumed operation almost one day later than scheduled.

Two CPA's described the methodology they used (sales ratio) to calculate the loss of profits. The Hertz experts failed to deduct marginal and overhead costs from the lost profit estimate, which he admitted could have reduced the estimate of damages. However, the expert claimed that such an omission was offset by several lost revenue items he didn't calculate.

The court concluded it was the duty of the jury to either reject the damage theory or to reduce the amount of damages. "This court has held it proper to allow expert testimony based upon incomplete information provided the inadequacies are known to the defendant in order to thoroughly cross-examine the witness."

Purchase Order For Software Requires Purchase Of 5,000 Units Of Software, Not Option

Trippe Manufacturing makes UPS equipment. They had purchased, from Powercard, the software to interface between the UPS and the computer.

In May, 1995 Microsoft announced Windows 95. Trippe began negotiations with Powercard for Win 95 compatible software, since the existing version was only for DOS and Windows 3.1. Trippe first issued a purchase order, reflecting only the agreed engineering fee, which was rejected by Powercard. The Powercard employee testified that he rejected the purchase order because it did not reflect the parties agreement that Trippe would be required to purchase 5,000 units of the software once it was developed. A second purchase order was they issued reflecting the engineering charge, a quantity of 5,000, and a statement about an option to buy 20,000 copies.

When the software was ready (after some delay), Powercard shipped 5,000 diskettes to Trippe. Trippe tried to return the software (they had located another supplier in the interim), Powersoft wouldn't agree, and Trippe filed suit for declaratory relief.

Trippe contended, based on language in the purchase order, that they never actually agreed to buy 5,000 copies, that they just had an option to buy 20,000 copies. However, even though the former Trippe employee who had been involved in the negotiations was available, the court noted "[he] was, inexplicably, not called to testify". The only percipient witness was the negotiator for Powercard, who testified that there was an obligation, not an option, to buy 5,000 copies. The court accepted that evidence.

The court also noted that since Trippe had drafted the ambiguous purchase order, the ambiguity would have been construed against them in any case.

Government Computer Contract Void Because It Has A Term In Excess Of One Year

The Georgia constitution requires voter approval before incurring any "new debt". This results in a requirement that no contract can extend beyond the current fiscal year, with certain limited exceptions. One such exception requires that the contract contain language allowing the contract to be terminated at the end of each fiscal year, without penalty.

In Wasilkoff v. Douglas County, 227 Ga.App. 232 (July 10, 1997), a Georgia county had entered into a computer contract. It later refused to pay saying that the vendor had failed to support or repair the computer. The Georgia Court of Appeals held that the contract under consideration, which provided for automatic renewal in the absence of 30 days advance notice, was void as a matter of law, since it failed to meet the requirements for a multi-year contract.

July, 1997
Steven Brower - Associate Editor


This was perhaps the most uneventful quarter I can recall during the time I have prepared this section of the Journal. There were almost no cases of significance.

Summary Judgment Isn't Simple In New York

The court in U.S. Metalsource v. W&B Assoc & IBM, 1997 U.S. Dist LEXIS 4182 (S.D.N.Y., April 3, 1997) issued a massive opinion on the defendants' request for summary judgment. The factual section of the opinion is worthy of review as a "textbook" case of a software project gone awry, in which W&B (software developer) and IBM (hardware provider) were working closely.

However, there are only a few unique aspects of the legal discussion.

The court first discussed the motion for summary judgment of defendant W&B. The contract had a "repair or replace" limitation. But the plaintiff argued that "repair or replace" only came into effect if there was migration of the software from the old platform to the new platform. That is, plaintiff argued that "repair or replace" only applied if there was software to be "repaired." Since the defendant never completed the migration from the old platform to the new platform, plaintiff argued that this clause never came into effect. The court found that this constitutes a genuine issue of material fact, and denied the motion on that aspect.

There was also a limitation of damages provision. However, that provision included an introductory statement explaining that the program would be under the "exclusive control" of the customer. This allowed the plaintiff to argue that the limitation of damages provision was not intended to apply until after the software had been fully delivered, so that it was under the "exclusive control" of the plaintiff. Thus, defendants were unable to get summary judgment on this issue.

Negligent Misrepresentation Doesn't Work In Illinois

This Journal previously discussed (Vol. IV, No. 7) a motion to dismiss in Budget Rent A Car v. Genesys Software. Now, Budget has filed a First Amended Complaint, and Genesys sought summary judgment on certain counts. Now (1997 U.S. Dist LEXIS 5279 (N.D.Ill., April 17, 1997) the court has ruled upon a motion for summary judgment under the First Amended Complaint.

Budget, after a series of meetings and proposals, selected Genesys to provide software to support its human resources function. Problems arose shortly after installation. Budget claims that Genesys misrepresented the capabilities of its system in pre-contract responses and meetings.

Genesys argued here that the integration clause prevents the introduction of pre-contract representations. However, "the mere presence of an integration clause does not except this case from the doctrine that 'parol evidence is always admissible to prove a fraud' antecedent to the contract." Thus, the court denied summary judgment on most of the claims, because there was a question of fact regarding certain representations allegedly made by Genesys.

However, the court did grant summary judgment on the count for negligent misrepresentation, finding that under Illinois law, negligent misrepresentation is limited to situations in which the defendant is in the business of supplying information and the defendant must provide such information for the guidance of plaintiff in its business with third parties. The court found that neither of those circumstances existed here.

Federal Copyright Law Does Not Preempt State Criminal Conviction For Destruction Of Data Using "Timebomb"

In Corcoran v. Sullivan, 1997 U.S. App. LEXIS 8843 (7th Cir., 4/28/97) the Court of Appeals denied a habeus petition by a state prisoner who claimed his crime was privileged under Federal copyright law.

Corcoran was a computer programmer who was worried about getting paid. So he included a "timebomb" in the program which would destroy the computer program and all of the customer's data. The timebomb was triggered, as planned, and he was convicted under a state law which criminalizes the willful destruction of computer data. It was conceded that Corcoran held the copyright in the program itself, so he tried to argue that he was privileged, under the copyright law, to destroy his programs.

The Court of Appeals, finding that they did have habeus jurisdiction, rejected his arguments, pointing out that, at a minimum, he did not have the right to destroy the non-copyrighted data.

April, 1997
Steven Brower - Associate Editor


Terms Of Contract Need Not Be Agreed To At Time Of Purchase If There Is A Right To Rescind The Purchase

The last issue of this Journal talked about the class certification in Hill v. Gateway 2000. However, the Court of Appeals (Hill v. Gateway 2000, 1997 U.S.App. LEXIS 176 (7th Cir., 1/6/97) has now held that the dispute is subject to an Arbitration Clause contained in terms and conditions which were contained in the shipping box (an extension of the "shrink-wrap" decision in ProCD).

Plaintiffs placed a telephone order for a computer from Gateway 2000. When the box arrived it contained the computer, certain software and accessories, and a statement of terms and conditions, which had not previously been presented to the Hills, and which claimed to be effective unless they returned the computer, within 30 days, for a full refund. One of those terms was an Arbitration clause. The Hills retained the computer and later filed suit based on certain alleged misrepresentations about the computer system.

Gateway asked the trial court to enforce the arbitration provision, the judge refused, and Gateway filed this appeal. The Court of Appeals first noted that the "Federal Arbitration Act is inconsistent with any requirement that an arbitration clause be prominent". The court then referenced its own decision in ProCD and a decision of the Supreme Court in Carnival Cruise lines as examples of commercial transactions in which people pay and the terms follow later. The court noted:

"Plaintiffs ask us to limit ProCD to software, but where's the sense in that? ProCD is about the law of contract, not the law of software."


The court notes that if Gateway 2000 insisted on reading the full terms and conditions over the phone, at the time the order is placed "the droning voice would anesthetize rather than enlighten many potential buyers." The court also noted that the consumer had the right, under the Magnuson-Moss Warranty Act, to inspect the terms and conditions in advance, upon request.

Exclusive Remedies Provision Bars Suit For Damages

Defendant Riverside Publishing entered into a contract to distribute the software of plaintiff CogniTest. Riverside terminated the contract and CogniTest sued for $30 million for "lost profits." The trial court dismissed the complaint based on a limitation of damages in the contract.

The judgment of dismissal was affirmed by the court in Cognitest Corp. v. Riverside Publishing, 1997 U.S.App. LEXIS 2803 (7th Cir., 2/18/97). The court noted that the parties had negotiated for 10 months prior to entering into the written contract. Riverside was obligated to use "reasonable commercial efforts to achieve maximum sales" of the software. However, it also had the right to terminate the contract, prior to initial publication, if it determined "in its reasonable business judgment" that market conditions were not appropriate.

Four weeks prior to the convention, at which the initial launch was scheduled, Riverside notified CogniTest of its decision to terminate the agreement. CogniTest claims it had already expended $870,000, of which Riverside had advanced $160,000. CogniTest argued that the decision was not "reasonable", as required by the contract.

However, the contract appears to have specifically contemplated such a situation. One clause provided that if the Agreement was terminated by Riverside, prior to Initial Publication, and such termination was not due to any breach by CogniTest, then CogniTest was entitled to retain any advances. In fact, CogniTest had received and retained the $160,000 advance. In addition, there was a limitation of remedies which provided that neither party would be responsible, among others, for "lost profits."

The contract provided for the application of Illinois law, which had adopted the UCC rule allowing limitation of consequential damages unless the limitation is unconscionable, which was not alleged here. Moreover, the Court found that the right to retain advances, which were tied to development milestones, constituted a minimum adequate remedy. Finally, against a challenge that the $870,000 expended by CogniTest constituted direct damages, and not consequential damages, the court found that the limited remedy of retaining advances was intended to be exclusive in these circumstances.

Limitation Of Damages And Integration Clause Is Ineffective Where The Written Agreement Was Never *Technically* Executed

Here is an interesting lesson for those who draft contracts, intending to protect their clients.

In Infocomp v. Electra Products, 103 F.3d 267 (3rd Cir., 1/13/97) the plaintiff had purchased an imagesetting system and subsequently sued for damages based on the failure of the system to perform adequately. InfoComp (the customer) had signed a written contract which contained a limitation of damages clause and an integration clause. The trial court held that such clauses precluded the suit for damages.

The Court of Appeals reversed and remanded the case for trial: 1) without any limitation on damages; and 2) without any limitation on the ability of InfoComp to introduce oral representations outside the written contract.

Why? Because the contract said: "This Purchase Agreement shall not be deemed accepted by [seller] until an authorized officer or manager of [seller] has signed the Purchase Agreement. No other act or writing by an agent, officer, or manager of [seller] shall cause this Purchase Agreement to be a valid, effective or binding contract on [seller]." Since the seller was unable to show that a copy had been signed, and since Pennsylvania law sanctioned such a clause, the written agreement never went into effect, and the seller was unable to benefit from the limitations.

No Liability For Failure To Investigate Qualifications Of Software Consultant

Plaintiff alleged that IBM was negligent for permitting a computer consultant to become IBM's "Business Partner" on a computer system project. The court in Casalino Interior Demolition v. Custom Design Data, 1997 N.Y.App.Div. LEXIS 682 (N.Y.App.Div., 1/27/97) said:

"Since there is no tort of 'computer consulting malpractice' in this state there cannot be liability for any negligence in investigating the qualifications of any entity alleged to be negligent in providing such services."


Contempt Found Where Defendant Tries To Comply Only With The Literal Words Of The Injunction

Airgas obtained the right to use certain software, for its welding business, from Equinox, pursuant to a License Agreement and a Services Agreement. The agreements prohibited copying of the software except for internal use on a single designated computer. There was also a prohibition against hiring each others employees until six months after the termination of the Services Agreement.

Prior to the termination of the Services Agreement, Airgas hired two Equinox employees, and made a copy of the software to allow one of the employees to make modifications away from the office. Equinox objected, and filed suit. Airgas dismissed the two former Equinox employees, giving them six months severance.

A few weeks later the court enjoined Airgas "from making copies of the [software] for use in the support and operations of its [business] without the consent of Equinox," and ordered Airgas to "surrender all unauthorized copies which remain in its possession." Further, the court enjoined Airgas "from hiring [the former Equinox employees] for the purpose of providing support services for the [software] until six months after termination of its Services Agreement with Equinox." Airgas has filed an appeal to the Third Circuit.

The day after the injunction hearing, Airgas hired a consulting firm to provide support for the Equinox software, and terminated the Services Agreement with Equinox effective a month later. The first consulting firm, with the permission of Airgas: 1) telephoned one of the former Equinox employees to ask about the location of certain files he worked on before the injunction was issued; 2) copied ten modules of the Equinox software for testing at its own location. A different consulting firm was hired about four months later to perform "migration" of the Equinox software from System/36 to AS/400 format. The second consulting firm hired the two former Equinox employees to work on the project. Airgas also supplied a copy of the Equinox software to the second consultant.

Equinox claimed several violations of the Injunction. Airgas claims that it complied with the literal words of the injunction. The court in Equinox Software v. Airgas, 1997 U.S.Dist. LEXIS 119 (1/8/97) cited cases for the general proposition that you look to the thrust of the order, not just the literal words.

Airgas argued, for example, that the injunction against hiring of the former Equinox employees only applied "for the purpose of providing support services" for the software. Airgas says that they were hired, by the consultant, to assist with a "migration" of the software, not "support" of the software. Airgas argued that a "migration" is not a "support service" but an "enhancement." In support of that position it pointed to the License Agreement, which defined support services as consultation and training. But the court looked to the Services Agreement (which was the basis for the injunction), which defined the services to be provided as "installation, modification, enhancement and use" of the software. Thus, the court found a violation of the injunction.

Regarding copying, Airgas claimed it didn't make a copy, it merely "regenerated" a licensed copy for the consultant (i.e. - it took a licensed copy from its computer, deleted that copy, and created that "same" licensed copy on the consultant's computer). The court again referred to the license agreement, which only allowed licensed copies to be used on a single designated CPU.

The court also noted, as significant, the fact that counsel for Airgas had asked for informal rulings from the Court about hypothetical situations, the court had invited a motion for clarification, and none was filed. "Having foregone the opportunity to dispel the perceived ambiguity, Airgas must now bear the cost of the infraction."

Venue Selection Clause, In "Shrink-Wrap" License, Has No Effect Where Parties Prior Agreement Did Not Allow Unsigned Modifications

The parties entered into a software license agreement in May, 1991. The agreement includes an integration clause and a "no-modification-except-in-writing" clause. There is no forum selection clause in the license. When litigation ensues, the seller claims that the court should enforce the forum selection clause in its "shrink-wrap" license.

The court in Morgan Laboratories v. Micro Data Base, 1997 U.S. Dist. LEXIS 1193 (N.D. CA., 2/22/97) holds that "Although shrinkwrap licenses may, in some cases, be enforceable [ProCD 86 F.3d at 1450-53], they do not trump explicit prior agreements where those agreements contain integration clauses and 'no-modification-unless-in-writing' clauses."

Who Says You Can't Hide A Big Fraud?

It is sometimes amazing to read about a big fraud, and the people involved. I think it is good practice to recognize that once in a while there really is something wrong.

Miniscribe was once a major manufacturer of hard disk drives, until it filed for bankruptcy. The instant case (USA v. Wiles & Schleibaum, 102 F.2d 1043 (10th. Cir., 12/10/96) involves the appeal, from their criminal convictions, of two senior executives; the former Chairman/CEO and the former CFO/Vice-President. The overall problem was that for over two years the publicly traded company had a huge "inventory hole" which they managed to conceal.

The legal issues are not within the scope of this column. However, three factual issues are good practice reminders:

First, during one of the early audits management inflated the actual inventory, to cover the "hole." The court noted: "To hide the false count from the auditors, [two employees] broke into the auditors' work trunks at Miniscribe after business hours and altered the test count to match the inflated inventory count."

Second, later in the course of events, having decided to write off the "inventory hole" over the next six quarters, they needed another method to "temporarily" fool the auditors. Picture this scene, and the number of people who were involved both inside the company, and at customers:

In mid-December, 1987, Miniscribe's management, with [the Chairman/CEO's] approval and [the CFO's] assistance, engaged in an extensive cover-up which included recording the shipment of bricks as in-transit inventory. To implement the plan, Miniscribe employees first rented an empty warehouse in Boulder, Colorado, and procured ten, forty-eight foot exclusive-use trailers. They then purchased 26,000 bricks from the Colorado Brick Company.

On Saturday, December 18, 1997, [the CFO and other senior employees] gathered at the warehouse. [The CEO] did not attend. From early morning until late afternoon, those present loaded the bricks onto pallets, shrink wrapped the pallets, and boxed them. The weight of each brick pallet approximated the weight of a pallet of disk drives. The brick pallets were then loaded onto the trailers and taken to a farm in Larimer County, Colorado.

Miniscribe's books, however, showed the bricks as in-transit inventory worth approximately $4,000,000. Employees at two of Miniscribe's buyers, CompuAdd and CalAbco, had agreed to refuse fictitious inventory shipments from Miniscribe . . .

Finally, even outside board members are not immune from the financial pressures:

Miniscribe's board of directors convened in Colorado on December 1, 1988. [The Chairman/CEO] suggested to [outside] board member William Hambrecht of Hambrecht & Quist, whom [the Chairman/CEO] had informed of the inventory hole in January 1988 that Miniscribe report a $40,000,000 loss in the fourth quarter of 1988. Hambrecht rejected the idea, suggesting that such a report would force Miniscribe's entire board of directors to resign. Instead, Miniscribe reported a $14,000,000 loss for the final quarter of 1988.

Jurisdiction Established By An Intent To Use The Internet

It is my impression that the concept of jurisdiction and venue are being expanded by use of the Internet.

As an example, for the purposes of establishing "interstate commerce" jurisdiction, under a Federal Child Pornography statute, where no interstate transportation had yet actually occurred, it is necessary to show that the defendant intended to transport the depictions in interstate commerce.

The court in USA v. Carroll, 1997 U.S.App. LEXIS 1804 (1st Cir., 2/3/97) found that there was sufficient evidence to sustain jurisdiction. The defendant told the victim that he was going to scan the images and put them on the Internet. (It is already established that placing pictures on the Internet is tantamount to moving them across state lines.) And "the record suggests [] that the appellant and his friend had in the past attempted to scan pornographic images into [his friend's] computer, thus permitting the jury to infer that the two men knew how to circulate photographs on the Internet . . ."

NOTE: Would the evidence of intent to use the Internet, and therefore jurisdiction, be lacking if the defendant hadn't previously tried to use a scanner? Were the Judges implying that most people can't learn to use a scanner within an hour of opening the box?

Calculating Royalties: Does "Maintenance" Include Upgrade And How Do You Compute Net Revenue on Bundled Software?

UDM sold certain software technology to Sterling Software, in return for specified royalties on net revenues. The contract said that "maintenance fees" (not defined in the Agreement) were to be excluded from net revenues. Sterling provided upgrades of the product, to its customers, under maintenance contracts. UDM claimed the right to royalties on such upgrades.

The trial court granted summary judgment in favor of Sterling. The Court of Appeal, in UDM Technology v. Sterling Software, 1997 Ga.App. LEXIS 195 (C.A. GA., 2/17/97), said that the issue was the intention of the parties to the contract. The evidence which had been submitted by Sterling was not conclusive, and showed only that there are different understandings about the scope of "maintenance" in the industry. As such, it is an issue which must be submitted to the jury.

The trial court had also accepted Sterling's method of calculating royalties on "site" licenses in which the UDM product was packaged with other software products. Sterling surveyed customers, 18 months after they purchased the package, and paid royalties based on the percentage of actual use. (UDM's suggestion had been that they were entitled to the royalty rate on the entire package of software, not just the portion which incorporated their technology).

Once again the Court of Appeals reversed, noting that the court is required to ascertain the intent of the parties, not an evaluation of a fair settlement. Because there was insufficient evidence to resolve the ambiguity as a matter of law, the issue must be presented to the jury.

Recission Cannot Be Awarded Without Proof Of Ability To Restore Status Quo (i.e. - Value of Computer Equipment)

In Braner USA Inc. v. CM Technologies, 1996 Ill.App. LEXIS 971 (Ill.App., 12/20/96) plaintiff purchased a computer system (hardware and software) from defendant. The Agreement specifically provided that the software would interface with plaintiff's existing data and bill of materials which was stored in Autocad.

Three months into the job the defendant determined that they would be unable to use the data in its existing format. Plaintiff, contending that it would require 16,000 hours (eight person years) to convert the data to the format requested by defendant, claimed the right to terminate the Agreement.

The one count complaint did not seek rescission. However, at close of trial, the court determined that rescission was the proper remedy. The order of recission required the defendant to refund the $60,000 purchase price and required the plaintiff to return the computer system.

However, the Court of Appeals reversed and remanded, finding that there was insufficient evidence to support an award of rescission. For example, there was no evidence of the current condition of the computer equipment, no evidence of the value of the services provided by the defendant prior to rescission, and no evidence of the value of beneficial use obtained by the plaintiff.

Court Must Make Summary Determination Whether Dispute Is Subject To Arbitration

The parties entered into a sale/leaseback agreement for $185 million of computer equipment. A $4 million dispute arose over the amount payable upon early termination by Comdisco. More than two years after the dispute arose the parties entered into an Arbitration Agreement. New claims were subsequently asserted which raised the amount of the dispute to $18 million potentially payable by Comdisco.

Comdisco then filed a complaint for declaratory relief to have the Arbitration Agreement declared void on several grounds, including fraud in the inducement. The defendants, in turn, moved to compel arbitration. The trial court denied the motion to compel arbitration.

The court in Comdisco v. Dun & Bradstreet, 1996 Ill.App. LEXIS 946 (Ill. App., 1/29/97) noted that Section 2(a) of the Uniform Arbitration Act, the applicable state law in Illinois, is similar to section four of the Federal Arbitration Act, which states "If the making of the arbitration agreement . . . be in issue, the court shall proceed summarily to the trial thereof."

The Appellate Court held that it was error for the trial court to deny the motion for arbitration, without first holding a summary proceeding (a trial without pleadings or jury) on the arbitrability of the matter.

Case Update: Attorney's Fees For Out-of-State Attorneys In California

The last issue of this Journal included a summary of Birbrower, Montalbano v. Superior Court, 49 Cal.App.4th 801 (Sept. 25, 1996), in which the California Court of Appeals decided that New York attorneys, handling an arbitration in California, for a California computer company, could not sue for fees, because they were not licensed to practice law in California. The California Supreme Court has now agreed to review that decision. As such, pursuant to California law, the prior decision may not be cited as authority.

Employment Discrimination Based On Computer Training

There continue to be a substantial number of cases in which the failure to provide sufficient computer training and/or special computers to support disabilities are alleged to be the basis of claims for discrimination in employment.

Preparing This Summary Of Cases - Any Suggestions?

The preparation of this column, four times a year, is a real pleasure because it requires me to read all of the recent computer decisions in the United States. To the extent anyone is interested, the process includes the following: perform a Lexis search in the Mega (combined Federal and state cases); review (online) about 640 cases to determine which might be significant; print all, or a portion, of about 80 cases; discard those which belong in another section of the Journal (Intellectual Property, etc.); discard those which are not significant; write a digest on about 15-20 of the cases.

Comments from the members are always welcome (it proves that someone is reading!). Specifically, please let us know: 1) if you have a suggestion to improve the case summaries; 2) if you have an idea for a feature article you would like to write.

January, 1997
Steven Brower - Associate Editor


Class Action Allowed For Substitution Of Inferior Components In Computers

A large PC manufacturer (Gateway 2000) advertised a computer system with certain components. The computers, as shipped, did not contain all of those components. The court indicated that the cost to upgrade the system, as delivered, to the system as advertised, might be as much as $1,000. The manufacturer, when contacted by individual consumers, offered the option of a cash-back discount, or the right to return the system for a full refund.

Gateway claimed that a class was improper because of varying facts between the class members. For example, some customers bought the system without seeing the advertisement. Others had accepted the cash-back discount.

In Hill v. Gateway 2000, 1996 U.S. Dist. LEXIS 16581, (USDC ND. IL., November 7, 1996) the court found that the 9,331 systems sold were more than enough to satisfy the numerosity of class members. Indeed, the court approved a sub-class of Illinois residents, which was estimated to be about 180 customers. The court also found that there were common questions of law and fact.

One of the big arguments was over typicality, since Gateway argued that the level of reliance, if any, varied substantially among the class. The court noted that reliance was not relevant to many of the causes of action, including those for breach of contract, RICO, and under the Illinois and South Dakota Consumer Fraud Acts. However, reliance was necessary for the UCC claims, so no class was certified as to those causes of action.

Some of the most colorful language was in relation to the assertion, by Gateway, that many of the consumers received the computer they wanted and were not defrauded.

Gateway bases this assertion on the fact that "many customers have used their PC satisfyingly without ever voicing a complaint. ." The Hills' assert that Gateway's argument reflects "pure chutzpa." The court shares the Hills' sentiment but chooses to express it in less colorful language. Obviously, a person will not realize a fraud has occurred if the fraud is well-executed. Assuming the plaintiffs' allegations are true (as the court must in a motion to certify a class), the lack of response by most customers only shows the success of Gateway's alleged fraud.


The court distinguished other cases in which some consumers received non-defective goods, because the allegation here was that every customer failed to receive the promised configuration.

Finally, Gateway argued accord and satisfaction as to those customers who accepted a cash-back refund. However, under Illinois law there must be both an intent to compromise a claim and the execution of an agreement. No such evidence was before the court.

Statute Of Limitations Not Extended By Ongoing Delivery Of Software Or Representations Of Continuing Efforts To Repair

Bankruptcy courts are often (in my opinion) overly solicitous to the debtor. However, a carefully reasoned opinion, contrary to the interests of the debtor, was issued in the matter of In re: Dynaco Corp v. KLA Instruments, 200 Bankr. 750 (Bk. N.H., August 30, 1996).

The Defendant delivered a computerized machine on March 30, 1989. The debtor/plaintiff filed bankruptcy on July 23, 1993, more than four years after delivery. This adversary proceeding was filed eighteen months later. (Under §108, the time for filing any adversary proceeding is extended by two years following the bankruptcy filing.)

The defendant argued that all relevant statutes of limitation had expired prior to the filing of the bankruptcy, based on the date of delivery and plaintiff's specific allegations that the machine, as delivered, did not meet the contractual requirements. The plaintiff argued that it relied on representations that the machine would be fixed, and upon the "replace or repair" warranty, and continued to accept new versions of the operating software, so that the statute of limitations should be calculated from October, 1990, the date on which the plaintiff finally decided that the machine was never going to work as promised, or at least from April, 1990, when the defendant ceased further efforts to modify the software.

The court found that the few cases which support tolling for "attempts to repair" are "few in number, not persuasive in their reasoning, and except for one are distinguishable." Further, the court found that equitable considerations would not weigh in favor of the plaintiff. First, there were still three years remaining, even after April, 1990, in which plaintiff could have brought suit, without any tolling. Second, the court found that notwithstanding the two year extension of time to bring suit under the bankruptcy rules, the trustee was still under a duty to act diligently, once he has knowledge. Third, the court rejected an argument that "delivery", under the UCC, did not occur until all software modifications were provided:

I conclude that N.H. [UCC 2-725] should be construed to mean the physical delivery of the machine in question on the premises of the buyer, with acceptance by the buyer and payment therefor, regardless of any software components that may require further on-site activity by the seller. Any other rule would open up the statute of limitations to uncertainty relating to months and perhaps years of ongoing activity with regard to the software and could in many situations render the statute of limitations provision a nullity.


Competition Between Prospective Vendors Is Not Actionable As Interference With Prospective Contract

DP-Tek and NCR were in competition to provide POS hardware in a 3-sided procurement (POS hardware, POS software, In-store processor) by Venture. The detailed facts and analysis are stated in DP-Tek v. AT&T Global Information Solutions, 1996 U.S. App. LEXIS 29574 (10th Cir., November 14, 1996). In brief, DP-Tek alleged that it had been harmed by NCR learning its confidential prices, seeing its prototype, and other acts, all of which the Court of Appeals found were acts within the scope of competition, and most of which were done by the customer (i.e. - Venture showed the prototype to NCR). A quote summarizes the holding here:

In short, it is no tort to beat a business rival to prospective customers. Thus, in the absence of prohibition by statute, illegitimate means, or some other unlawful element, a defendant seeking to increase his own business may cut rates or prices, allow discounts or rebates, enter into secret negotiations behind the plaintiff's back, refuse to deal with him or threaten to discharge employees who do, or even refuse to deal with third parties unless they cease dealing with the plaintiff, all without incurring liability.

Court Orders Vendor To Provide Service After Expiration Of Warranty

A bankruptcy debtor had an AT&T switch. AT&T refused to provide service, even if the debtor promised payment in advance. The debtor sought a mandatory injunction, which was granted by the bankruptcy court. In re: The Aimtree Company v. AT&T, 1996 U.S. Dist. LEXIS 16643 (USDC Kan., October 8, 1996) was a review by the district court.

An AT&T engineer admitted that the backup tapes and tone board were in need of replacement. The court found that it is impossible to determine when the operating system might crash, but it could be at any time. Without the backup tapes the debtor would suffer a loss of revenue. Further, the prejudice on AT&T was minimal, since the debtor had agreed to pay for goods and services, in advance.

AT&T argued that the warranties on the software and hardware had expired. The court agreed, but found that the duties arose from the "implicit terms and conditions of the contract", which remained in effect.

It was also argued that plaintiff was unlikely to prevail due to unclean hands. The court implicitly acknowledged that the offer of proof might lead to the conclusion that the debtor would have been unable to obtain a pre-petition injunction. However, "courts have held consistently that 'the 'unclean hands' of a pre-petition debtor are not imputed to a debtor-in-possession or trustee.' Thus, the mandatory injunction, requiring AT&T to provide goods and services, at the same price charged to any other customer without a warranty agreement, was issued.

Arbitration Clauses Do Not Apply To Parent Corporation

Two decisions from the same court find that the parent corporation of a vendor cannot benefit from a contractual arbitration clause.

Ceska Sporitelna ("CS") was the largest savings bank in the Czech Republic. CS alleged that it sought modern banking computers, and received various presentations from Unisys. In reliance on those alleged representations it paid $450,000 to a Unisys subsidiary, Unisys World Trade, for various services in preparation for delivery of the system. Then, in June of 1992, CS agreed to pay about $90 million to a second subsidiary, Unisys International Services, BV to actually deliver the system.

In September, 1993, CS advised the Chairman and CEO of Unisys that the system was not working properly. They received assurances that Unisys knew the nature of the fault, and were working on a remedy. In January, 1994, there was a meeting at Unisys headquarters, at which time Unisys guaranteed in writing that it was a Unisys project and that Unisys "would guarantee that the problems were solved and that CS was satisfied with the System." In early 1995, after deciding the System was never going to work, CS terminated its relationship with Unisys.

In Ceska Sporitelna v. Unisys Corp., 1996 U.S. Dist. LEXIS 15435 (E.D. PA, October 10, 1996) the court considered a Petition to Compel Arbitration. Unisys claimed that it was entitled to arbitration pursuant to a 1994 agreement between CS and the wholly-owned Unisys BV subsidiary. After a review of other decisions, the court found that Unisys was not a signatory to the agreement, and therefore could not compel arbitration.

Further, upon consideration of a motion to dismiss, the court found that: 1) the subsidiaries were not necessary parties; 2) the integration clause in the agreement with the subsidiary did not apply to Unisys; 3) since Unisys was sued 30 miles from its headquarters the court would not grant a motion based on forum non conveniens.

Using the same logic, but a different factual situation, the court came to a slightly different result in Leopold v. Delphi Internet Services, 1996 U.S. Dist. LEXIS 16056 (E.D. PA, October 24, 1996). Plaintiff had been doing business with defendant Delphi, which promised to upgrade its internet service to include a GUI. Delphi was acquired by defendant News America. Plaintiff alleged that the GUI representations were false, and that News America subsequently directed its subsidiary, Delphi, to discontinue business with plaintiff.

On the Petition to Compel Arbitration, after discussing the same authority as the Unisys decision, the court found that News America, the parent corporation, was not entitled to arbitration, because the allegations in the suit were not based on agency. However, because Delphi was entitled to arbitration the court ordered that portion of the case to arbitration, with the remainder of the case stayed pending completion of the arbitration.

Vendor Must Provide Source Code To Customer Under A Warranty Not To Interfere With Any Other Data Processing

An unpublished decision (Central On Line Data Systems v. Filenet Corp., 1996 U.S. App. LEXIS 25261, (6th Cir, August 23, 1996) affirmed a permanent injunction pursuant to which the vendor was required to provide source code to its former customer, in addition to the $500,000 awarded by the jury.

COLDS was the data processing unit for a trucking company. It stored and processed thousands of billing documents each day. In 1989 it entered into a contract with Filenet for a computer imaging system. The contract had exceptionally broad warranties and representations. COLDS used the system for about four years before replacing it with another system.

The main dispute related to whether Filenet was required to "satisfy" COLDS subjective requirements, or merely to comply with the contractual specifications. COLDS asked for about $16 million, and Filenet counterclaimed for a balance due of about $1 million, plus $500,000 in interest. COLDS experts testified that they could not convert the Filenet images to the new system without source code, and that it would cost about $500,000 to do the conversion.

The jury awarded only the $500,000 for conversion to COLDS, and $1 million to Filenet. The jury found that COLDS had breached the contract with Filenet, but also found that Filenet was obligated to provide source code to COLDS. The court offset the $1 million against the $500,000 for a net verdict of $500,000 in favor of Filenet. The court of appeals affirmed the actions of the court, including a summary judgment on the issue of fraud, the exclusion as hearsay of a report from a non-testifying expert, and other issues.

However, the source code ruling was what I found most interesting:

FileNet warranted that any termination or cancellation of the contract by COLDS would "not cause any interference with any other data processing and imaging services offered or not by FileNet, affiliates and/or competitors." There is evidence that, without the source code, COLDS cannot utilize any of the FileNet images it acquired over a four-year period, which certainly would constitute an "interference" with their data processing.


Therefore, the court affirmed an injunction that FileNet provide the source code, even though the terms of the Source Code Escrow provision of the contract were not implicated.

No Summary Judgment On Breach Of Contract Related To Oral Price Change

This Journal has previously discussed PC Com v. Proteon

Briefly, PC Com was an OEM reseller of LAN products manufactured by Proteon. A written contract included the price, minimum purchase requirements, etc. However, PC Com alleges that shortly after inception of the contract, Proteon orally lowered the purchase price. Several purchase orders confirm sales at the lower price. However, in June, 1994 a dispute arose when Proteon advised PC Com that it would no longer honor purchase orders at the lower price. PC Com sued for breach of contract and tortious interference against an employee of Proteon. Proteon counterclaimed for over $340,000 of previously shipped product.

The parties now seek partial summary judgment (PC Com v. Proteon, 1996 U.S. Dist. LEXIS 17083 (USDC SDNY, November 15, 1996)). The court, finding that the contract was one for goods, applied Massachusetts (contractual choice of law provision) UCC principles.

Summarizing its conclusion (each issue was discussed in detail) regarding modification of the pricing, the court stated:

In light of the explicit language of the contract preventing oral modification or waiver without a writing, the statute of frauds, PC Com's failure to produce a writing that clearly satisfies these requirements, the equitable nature of the doctrine of waiver, the possibility that the June communication effectively terminated any waiver, and PC Com's failure to show either a material change of position of that Proteon's withdrawal of the waiver caused an injustice, we cannot find, as a matter of law, that the Agreement was validly modified.


The court also discussed a cross-motion, by Proteon, to strike consequential damages on the basis of a limitation of liability provision in the contract. The court found that if there had been a modification in the contract, and if Proteon had breached the contract by failing to honor the modified price, the only remedy available to PC Com would be cover. The issue was whether cover was an adequate remedy. The court indicated that it was unable to find sufficient case authority on this subject. It therefore denied summary judgment, finding:

Another fact intensive issues, the custom and practice in the industry regarding liability clauses, may be relevant to the question of whether cover was an adequate remedy here.

NOTE: Who would like to define "the industry" as it applies to this situation? Who would like to suggest how you find clear evidence on this subject?

New York Attorney, Representing California Computer User Against California Computer Vendor, In AAA Arbitration, Cannot Use California Courts To Collect Fee

In Birbrower, Montalbano v. Superior Court, 49 Cal.App.4th 801 (Sept. 25, 1996) New York attorneys (none licensed in California) represented a California computer user against Tandem Computers, a Delaware corporation with a principal place of business in California. The contract between the parties called for disputes to be resolved before the AAA, in California, under California law.

The attorneys had many contacts in California including meeting with their client, filing a demand for arbitration with the AAA, holding settlement meetings with representatives of Tandem, commenting on settlement drafts and advising their client not to settle. The clients knew that the attorneys were not licensed in California.

The client subsequently sued the attorneys, in California, for malpractice. The attorneys filed a cross-complaint for unpaid fees. The trial court granted summary adjudication against the attorneys on the basis that they could not collect, under a retainer agreement, to the extent that they practiced law in California without being licensed to do so. (A cause of action based on quantum meruit, and another for fraud (based on the client's knowledge that the attorneys were not licensed), was allowed to remain.)

The Court of Appeals affirmed, referencing an ALR annotation (11 A.L.R.3d 907) which states "an attorney who is not admitted to practice in the state where he performs services is not entitled to recover compensation for such services even though he is admitted to practice in another state."

There were two possible exceptions which didn't help the attorneys here, but are worthy of note for those of us who handle litigation in other states. First, several cases have allowed attorneys to recover their fees where the case was in federal courts, under a supremacy analysis. Second, if the attorneys had associated with locally licensed attorneys the fees would have been recoverable.

Computer Records Are Hearsay, Subject To Business Records Exception, But Not A Business Record When The Information Comes From Customers

In a criminal prosecution for credit card fraud the government offered computerized records from banks regarding customers' statements that their credit cards had been stolen. The Court of Appeals (United States v. Ismoila, 1996 U.S. App. LEXIS 29626, (5th Cir., November 13, 1996) held that such evidence was double hearsay. As to the first level of hearsay, the bank employee putting the information into the computer, an exception could be properly found as a business record. However, because the customers who were making the report were not acting in the regular course of business ("it is not the regular course of business for credit cardholders to fill out affidavits or otherwise give information to their banks regarding stolen credit card") the evidence was inadmissible hearsay.

Saving Obtained From Electronic Research Must Be Justified

In reviewing a cost bill, which included computerized research (in this case under the Criminal Justice Act, but it seems to be a good practice tip) the court (USA v. Hamilton, 1996 U.S. Dist. LEXIS 16166, (USDC Kan., October 8, 1996) required that counsel submit a declaration with a brief statement regarding the issues researched, and an estimate of the time that would have been required to do the research manually.