JULIE A. ROBINSON, District Judge.
This is a dispute between Plaintiff Vehicle Market Research, Inc. ("VMR") and Defendant Mitchell International, Inc. ("Mitchell") over whether Mitchell owes VMR royalties under a software development contract. VMR brings claims against Mitchell for breach of contract and breach of the covenant of good faith and fair dealing under California law; Defendant denies that it breached the contract and violated the implied covenant of good faith and fair dealing and seeks a declaratory judgment. The parties originally filed cross-motions for summary judgment in 2012.
The parties participated in a pretrial conference with Magistrate Judge Rushfelt on February 2, 2015, and a Revised Pretrial Order was entered.
Summary judgment is appropriate if the moving party demonstrates that there is no genuine dispute as to any material fact and that it is entitled to judgment as a matter of law.
The moving party initially must show the absence of a genuine issue of material fact and entitlement to judgment as a matter of law.
Once the movant has met this initial burden, the burden shifts to the nonmoving party to "set forth specific facts showing that there is a genuine issue for trial."
The facts "must be identified by reference to an affidavit, a deposition transcript, or a specific exhibit incorporated therein."
"Where, as here, the parties file cross motions for summary judgment, [the Court is] entitled to assume that no evidence needs to be considered other than that filed by the parties, but summary judgment is nevertheless inappropriate if disputes remain as to material facts."
Finally, summary judgment is not a "disfavored procedural shortcut;" on the contrary, it is an important procedure "designed to secure the just, speedy and inexpensive determination of every action."
The following facts are either uncontroverted or stipulated to in the Revised Pretrial Order.
Mitchell provides information, workflow, and performance management solutions to improve business processes for insurance companies and collision repair facilities. At one time, it claimed to serve over 30,000 collision repair facilities, independent adjusters, and other repair chain participants and 250 insurance companies, including many of the nation's top carriers.
A total loss product is a product that assists automobile insurers in providing a fair market value for a vehicle that has been declared a total loss, i.e. a vehicle that will cost more to repair than its value at the time of the accident. In 1996, while an employee at Mitchell, John "Pete" Tagliapietra proposed a total loss system for the company that would be based on Auto Trader publications. Mitchell declined to use Tagliapietra's total loss concept, but informed him that he was free to "pursue an Internet solution utilizing Auto Trader information on a regional basis so long as it does not interfere with your operational duties at Mitchell."
VMR, a Kansas corporation incorporated by Tagliapietra in 1997, developed its Total Loss Settlement System ("TLSS") prototype and presented it to Mitchell. Mitchell hired Robert Douglas, a former Mitchell employee, to conduct market research analysis. He was tasked with developing "a corporate strategy (both short and long term) for the Total Loss (`real steel') market."
On March 20, 1998, VMR and Mitchell executed a Computer Programming and System Integration Services Agreement (the "Agreement"). The Agreement was signed by Paul Rose, Executive Vice President and CFO of Mitchell, James Lindner, President and CEO of Mitchell, and David T. Duensing, M.D., President of VMR. Linder testified in his deposition that he does not recall who at Mitchell helped negotiate and draft the Agreement, but believes one of the corporate attorneys would have drafted it. Dean Ricciarduli, who was in senior project management at Mitchell at the time, testified that he was responsible for crafting the Agreement; Linder does not believe that Ricciarduli was a "creator" of the document.
The following are key provisions of the Agreement.
Paragraph 1 of the Agreement provides for the scope of work to be performed:
The Schedule A Overview provides: "VMR in conjunction with DAIS Incorporated ("Dais") acting as a MITCHELL approved independent contractor agrees to design, develop, maintain and support the Total Loss Settlement System (TLSS Product) based upon the VMR prototype system and MITCHELL/VMR product specifications."
Paragraphs 6.0, 6.1, 8.0 and 8.1 deal with ownership and use restrictions:
The Exit Clause in Paragraph 29 of the Agreement provides that "Where MITCHELL terminates this Agreement as provided in this Paragraph, MITCHELL shall relinquish its ownership interest in the Work Product (but not Confidential Information), if any, to the date of termination, and VMR may freely use the Work Product (but not the Confidential Information) in the operation of its business."
Schedule A provides for payment by Mitchell to VMR under the Agreement, including a royalty on "Eligible Revenue until a maximum cumulative total of $3,500,000 is paid out based upon the following royalty rate." "Eligible Revenue" is defined in Schedule A as
Schedule A further provides that "[i]n no event will the transaction royalty paid to VMR be less than $1.00 per transaction. MITCHELL shall make all royalty payments hereunder on a monthly basis in accordance with its standard financial and accounts payable policies." In 2002, the parties executed an Amendment to the Agreement, increasing the maximum cumulative royalty payment to $4,500,000.
VMR developed TLSS into a prototype and a total loss product, the iNTOTAL product, which were both delivered to Mitchell. Dais developed the source code for the TLSS product. In 1999 or 2000, the completed TLSS product was released and marketed under the trade name iNTOTAL. Mitchell paid VMR royalties based on revenue obtained from the use of the iNTOTAL product. Tagliapietra resigned from his senior executive position at Mitchell in March 2000.
In early 2000, Mitchell became unhappy with the quality of the software development performed by Dais for the source code of the TLSS product, but did not file a complaint or discrepancy report—a procedure provided for in the Agreement for complaining about software problems. In September 2000, Mitchell employees believed iNTOTAL was not viable because "the values created are not reflective of the market." It is controverted whether this problem was due to the product, or to the acquisition of outside data by Mitchell. From 2003, until it was taken off the market, iNTOTAL "required human intervention with every claim."
Mitchell began developing its own total loss product in 2003 and by October 2005, Mitchell released the product to the market under the name Total Loss Valuation ("TLV"). Mitchell subsequently changed the name of TLV to WorkCenter Total Loss™ (hereinafter "TLV"). Tamara Sharpe was a Product Manager on the Total Loss development team in 2004. She testified that "[t]he TLV was a new product that was designed and developed to meet the market needs in overcoming the deficiencies that were found to be in the iNTOTAL product."
Mitchell hired the software development company Infogain to help develop TLV. Infogain is a services company, so it does not have any specialized knowledge regarding the industries for which it creates software. Infogain relied on Mitchell to explain the purpose and nature of the product and to explain the industry. It is undisputed that TLV and iNTOTAL were different products that were written in different code languages. There was no literal copying of the VMR-developed source code into TLV. But several Mitchell employees recall that iNTOTAL was reviewed by the Mitchell developers and by Infogain in order to understand the ideas behind what a total loss system should entail, and to be able to write requirements and specifications for the TLV product.
In 2011, Infogain included on its website a document entitled "White Paper SOA in Insurance Industry,"
Rakesh Verma works for Infogain as an Engagement Director. He helped work on the Mitchell TLV project and was Mitchell's primary point of contact with Infogain and the offshore resources. Verma defined "re-architecturing" as changing software code from one language to another, and later testified that it refers to changing a product from one language to another but keeping the same design and workflow. In 2004, the only Mitchell product Verma was working on was the TLV product.
Lindner testified that he gave a directive not to use the iNTOTAL product in developing TLV and that Infogain employees should not have been shown any part of the iNTOTAL product, including the TLSS prototype, in relation to their work developing TLV. He testified that his business ethics dictated that this was the right thing to do, and that "the TLSS Product had failed us, and so we needed to start something completely from scratch. I had made a mistake. I chose the wrong alternative, and now I had to pay the piper, developing a product from scratch."
At some point in 2005, Mitchell stopped selling the iNTOTAL product and stopped paying royalties altogether to VMR. Mitchell never notified VMR that it was terminating the 1998 Agreement pursuant to the Exit Clause and never did return VMR's prototype or work product.
VMR claims that Mitchell breached the Agreement by failing to pay VMR royalties on its new TLV product. VMR does not allege that Mitchell copied or stole the TLSS product itself, but instead contends that Mitchell utilized the TLSS "concepts" in developing TLV by referencing iNTOTAL and by "re-architecturing" the source code. It argues further that Mitchell breached the contract by failing to return VMR's work product as required under the Exit Clause. Mitchell denies that it copied the TLSS source code, that the Agreement required it to pay royalties on the use of "concepts," that such concepts were unique, or that the concepts belong to VMR under the language of the Agreement. Mitchell further argues that there is a genuine issue of material fact about whether the concepts were incorporated into Mitchell's TLV.
The parties agree that California law governs VMR's claims in this case based on Section 24 of the Agreement. The elements for a claim of breach of contract under California law are: (1) the existence of a contract; (2) the plaintiff's performance or excuse for nonperformance; (3) breach; and (4) damages caused by the breach.
Under California law, contract interpretation must "give effect to the mutual intention of the parties as it existed at the time of contracting, so far as the same is ascertainable and lawful."
The parties dispute whether the Agreement requires Mitchell to pay royalties for its use of the TLSS concepts. VMR contends that the parties negotiated and agreed that VMR would retain rights to "TLSS concepts incorporated in the prototype and iNTOTAL product." In support of this contention, VMR relies on paragraph 8.1 of the Agreement, and on the testimony of Mitchell employees that paragraph 8.1 was negotiated so that VMR would retain any and all rights to the TLSS concepts licensed by Mitchell and would thus be paid royalties if those concepts were later used by Mitchell in a new product. VMR also points to a version of Mitchell's Product Development Plan ("PDP") for TLV to show that it intended to pay VMR royalties on the TLV product. Mitchell contends that Schedule A does not support VMR's interpretation, and that the Court should not admit extrinsic evidence to supplement the plain terms of the contract.
The first step under California law is determining "whether the disputed language is `reasonably susceptible' to the interpretation urged by the party. If it is not, the case is over."
There is no provision for royalties in paragraph 8.1 of the contract. But the rules of contract interpretation dictate that the contract must be read as a whole "so as to give effect to every part, if reasonably practicable, each clause helping to interpret the other."
Pre-Existing Materials for which VMR retained a property interest clearly included any "concepts" that VMR used in or applied to the development of its "TLSS Product." Although there is no explicit provision for royalties to be paid on the use of Pre-Existing Materials, VMR suggests that they are part of the "TLSS Product," so that if revenue is derived from their use, VMR would be entitled to royalties on that revenue. TLSS Product is referred to in other sections of the Agreement as well, in sections 6.0, 6.1, and 8.1, however it is not explicitly defined. In contrast, Pre-existing Materials is defined in section 8.1, after providing that VMR retains right, title and interest in the Pre-Existing Materials. The contract then states: "VMR hereby grants MITCHELL an exclusive right and license to modify, adapt, reproduce, use, and distribute the Pre-Existing Materials
VMR argues that extrinsic evidence should therefore be admitted to further explain the intent behind section 8.1. As set forth above, extrinsic evidence is only admissible to aid the Court in contract interpretation if the parties dispute the meaning of contractual language, and the disputed language is "reasonably susceptible" to the interpretation urged by VMR.
Provisionally considering VMR's extrinsic evidence, the Court finds that the evidence is relevant to prove a meaning to which the language of the contract is reasonably susceptible. As an initial matter, the evidence is entirely inconsistent as to who was involved in the contract negotiations on each side. Dean Ricciarduli, who was in senior management at Mitchell at the time, testified that he was responsible for crafting the Agreement along with Douglas for Mitchell, and that they primarily negotiated with Dayle Phillips for VMR. Phillips denies any role in the contract formation. Lindner does not believe that Ricciarduli was a "creator" of the document; he does not recall who at Mitchell helped negotiate and draft the Agreement, but believes one of the corporate attorneys would have drafted it. Douglas testified that he helped Ricciarduli negotiate the agreement on behalf of Mitchell, and that he worked with Duensing and Tagliapietra at VMR. He claims to have been instrumental in structuring the deal. Lindner, a signatory of the contract, expressly denies that Douglas, as an independent contractor, would have been involved in the contract negotiation. Douglas was asked, "with respect to understanding what the parties, VMR and Mitchell, intended when they entered into the contract, the people we'd need to talk to would be Mr. Duensing for VMR and Mr. Rose and Mr. Lindner for Mitchell. Correct?"
In addition, Lindner vehemently disputes Ricciarduli and Douglas's interpretation of paragraph 8.1. Lindner testified that he understood the royalty provision of the contract to apply to revenue derived from the iNTOTAL product only, which he considered synonymous with the TLSS product for purposes of the 1998 Agreement. He did not understand the contract to require royalty payments for Mitchell's use of concepts, or any other Pre-Existing Materials, except as part of the iNTOTAL Product. He testified that he would not have signed the contract had such a provision been included.
Ricciarduli testified that VMR insisted on adding paragraph 8.1 to the Agreement as an assurance that Mitchell could not take VMR's product "move on, develop their own product, take this product in-house and develop it." When asked if this meant that a royalty must be paid on such concepts, Ricciarduli admitted: "That's a tough question. And I understand the nature of where you're going. And I like both companies. Both are great folks. But my belief would be that they would have continued to pay on past iNTOTAL based on the ideas and concepts that Pete and his team brought to the table."
As set forth above, the extrinsic testimonial evidence presents a clear dispute about whether royalties are due under the contract for the use of Pre-Existing Materials. Given the failure of the contract to specifically define TLSS Product, and the ambiguous language in paragraph 8.1 regarding whether Pre-Existing Materials are included in the definition of TLSS Product, the Court finds that it is reasonably susceptible to the interpretation urged by VMR—that Eligible Revenue includes revenue derived from any Pre-Existing Materials that were used in or applied to the TLSS Product. Thus, the testimonial extrinsic evidence submitted by VMR is admitted for purposes of contract interpretation under California law.
VMR also presents extrinsic evidence as to the subsequent conduct of the parties that supports its contract interpretation. In 2003, Mitchell authored a Product Development Plan, which contained financial forecasts for its proposed TLV product in 2004, 2005, and 2006, based on pro forma estimates ("Pro Formas"). These Pro Formas include a fixed cost assumption of $1.00 per claim royalty to VMR, and VMR points to witness testimony that Mitchell assumed it would pay a royalty to VMR for revenue derived from its new product. VMR argues that this evidence of the subsequent conduct of the parties shows that Mitchell understood a royalty payment would be required on the sale of both iNTOTAL and its own total loss product.
Mitchell points out that Ricciarduli testified that the Pro Forma document covered both iNTOTAL and TLV; Mitchell therefore argues that the line item of variable expenses relied on by VMR could indicate an assumption of royalties by Mitchell on the continued sale of the iNTOTAL product. But this argument goes to the weight of the evidence and not to its admissibility to prove contractual intent. A reasonable jury could conclude from this evidence that Mitchell's subsequent conduct supports VMR's interpretation of the contract—the line item in the exhibit lacks any detail. Moreover, when Ricciarduli testified about the exhibit during his deposition, he testified that he was responsible for the TLV Pro Formas and that he understood that the royalties were added on that product. He also testified that Lindner was aware of and had read the PDP.
Mitchell raises an authentication objection, arguing that this exhibit is not the final version of the PDP because it does not contain a Mitchell executive's signature.
In sum, the Court finds that the contract is reasonably susceptible to VMR's interpretation that Mitchell was required to pay royalties to VMR under the contract for use of Pre-Existing Materials, which include concepts that VMR used in or applied to the development of the TLSS Product. As such, the Court admits extrinsic evidence about the parties intent to consider in conjunction with the language of the contract. Moreover, the Court finds that the language of paragraph 8.1 and Schedule A, when considered along with the extrinsic evidence, could be reasonably interpreted to mean that the TLSS Product includes VMR's Pre-Existing Materials as defined in paragraph 8.1. Nonetheless, the Court cannot find that the extrinsic evidence commands this interpretation. Instead, the Court finds that the issue largely turns on the credibility of the extrinsic evidence and thus presents a genuine issue of material fact about the parties' intent at the time of contracting—whether the parties intended for the Pre-Existing Materials provision to further define TLSS Product and thus subject revenue derived from Mitchell's use of such materials to royalty payments is a question for the fact finder.
In addition to its "concepts" theory of breach, VMR contends that Mitchell breached the contract by failing to relinquish its ownership interests in the "Work Product" generated by VMR, as required under the contract upon termination. It is undisputed that Mitchell never terminated the Agreement and Mitchell argues on summary judgment that it was not required to terminate. Indeed, the contract provides for a five-year term and states that it "will be automatically renewed each year on the anniversary date," provided that notice of intent not to renew is submitted within 30 days of the renewal date.
While the Court cannot find from the uncontroverted facts that Mitchell breached the Exit Clause of the Agreement as a matter of law, it does find that this provision of the contract creates further ambiguity as to the meaning of paragraph 8.1. Despite the automatic renewal and exit clause provisions, paragraph 8.1 contemplates the following scenarios for completion of the contract: "upon completion of all payments due, termination, cancellation, or expiration of this Agreement, but subject to the provisions of Paragraph 28 hereof, VMR shall immediately turn over all items (including the TLSS Product, Work Product or work in process) in its possession which were prepared pursuant to this Agreement or made available to VMR. ..." Perhaps the renewal provision that allows for a thirty-day notice not to renew is considered "cancellation," under the contract, but other than in paragraph 8.1, the contract makes no explicit reference to cancellation or expiration.
For the reasons explained above, the Court finds that while the contract can be reasonably interpreted to require a royalty payment to VMR for the use of TLSS Pre-Existing Materials, including concepts, it does not command that result. A genuine issue of material fact exists through the extrinsic evidence regarding the parties' intent in negotiating paragraph 8.1. Therefore, the Court must next turn to Mitchell's argument on summary judgment that there is no evidence upon which a reasonable jury could conclude that it used VMR's Pre-Existing Materials in developing its TLV Product.
Mitchell next argues that VMR's concepts were not innovative or groundbreaking, apparently in an attempt to rebut certain representations VMR made in its Complaint about the uniqueness and novelty of its concepts. Mitchell also references seven concepts that Tagliapietra identified in his deposition as being incorporated into the TLV product and points to evidence, primarily Larry C. Nilson's expert report, supporting its position that these concepts were not new, or novel in the insurance industry. VMR is correct that the novelty or uniqueness of the concepts alleged to have been incorporated into the TLV product, standing alone, is not dictate whether Mitchell breached the contract. But if the jury determines that the contract requires royalties for use of the Pre-Existing Materials, it will be required to examine the definition of that term, which includes the word "concepts," and determine whether Mitchell used those Pre-Existing Materials in developing its TLV product. Certainly, whether the concepts at issue had been used by other companies, or were standard concepts, is relevant to determining whether it was part of VMR's Pre-Existing Materials used to develop the TLSS Product.
The summary judgment record presents a genuine issue of material fact about whether VMR's Pre-Existing Materials were used to develop the TLV Product. VMR points to the deposition testimony of former Mitchell employees who worked on the TLV development and discussed looking at VMR materials, and utilizing certain "concepts." VMR also points to the Infogain white paper, arguing that Infogain "re-architectured" its iNTOTAL product in order to create the TLV product. Viewing this evidence in the light most favorable to VMR, a reasonable jury could determine that Mitchell used certain Pre-Existing Materials that belong to VMR, such as the display of information, the type of database, by allowing Infogain to reference the iNTOTAL Product as it developed the TLV Product. To the contrary, Mitchell has come forward with evidence that the "concepts" identified by VMR were not proprietary, but were instead high-level concepts that were standard in all work loss products. It also points to other portions of the same witnesses' deposition testimony to argue that while Infogain looked at the iNTOTAL Product to educate itself about the idea of a total loss system, it did not use any of VMR's Pre-Existing Materials in order to develop the TLV Product; instead it helped Mitchell develop an entirely new product from scratch. Given this highly controverted evidence, the Court finds there to be a genuine issue of material fact about whether Mitchell used the VMR concepts in developing the TLV Product. Thus, both parties' summary judgment motions must be denied on the breach of contract claim.
VMR claims that Mitchell violated the implied duty of good faith and fair dealing when it allowed the TLV developers to use and review TLSS concepts in building its new product. It points to Lindner's deposition testimony about how it would violate his own standard of business ethics for his developers to use the iNTOTAL product to develop Mitchell's new TLV product. Under California law, a covenant of good faith and fair dealing is implied in every contract, and "exists merely to prevent one party from unfairly frustrating the other party's right to receive the benefits of the agreement actually made."
VMR contends that the appropriate standard is whether the breaching party violated "accepted notions of business ethics." For this proposition, VMR cites to the California Supreme Court's decision in Freeman & Mills, Inc. v. Belcher Oil Co.
More recent California decisions have made clear that "`[t]he implied covenant of good faith and fair dealing is limited to assuring compliance with the express terms of the contract, and cannot be extended to create obligations not contemplated by the contract.'"
VMR also relies on licensing case law to support its generalized "business ethics" standard for good faith and fair dealing claims. But Professor Nimmer states that the implied covenant "does not alter express contract terms or provide additional terms for the agreement."
As Professor Nimmer acknowledges, SAS did not involve a distribution license, like the license at issue in this case. Nor does the SAS decision expand the scope of the duty of good faith and fair dealing in the licensing context beyond the general principles announced by the courts of California. It recognizes that the duty is implied in every contract, and that it seeks to prohibit the parties from doing anything that would "have the effect of destroying or injuring the right of the other party to receive the fruits of the contract."
VMR contends that its theory of recovery for breach of the implied covenant is based upon ¶¶ 6.0 and 8.1 of the Agreement and "arises from Mitchell's admitted standard of business ethics, i.e., not to use VMR's property (the concepts, Work Product, or iNTOTAL) in a subsequent total loss product without paying royalties."
As already discussed on the breach of contract claim, paragraph 8.1 in conjunction with Schedule A may have required Mitchell to pay VMR for any revenue derived from the use of its Pre-Existing Materials. The parties have presented conflicting evidence as to their legitimate expectations for the Pre-Existing Materials after the contract either expired or was terminated. A reasonable jury could conclude from VMR's evidence that Mitchell injured VMR's ability to receive the fruits of the contract—i.e. royalties—by using its Pre-Existing Materials to develop its own product and by failing to return VMR's work product. On the other hand, a reasonable jury could conclude from the evidence that Mitchell did not use VMR's Pre-Existing Materials if it finds that the contract was not intended to provide for royalties on Pre-Existing Materials, or if it finds that VMR had no legitimate expectation of royalty payments on the TLV product for the concepts that were used by Mitchell. As such, a genuine issue of material fact exists as to this claim and the Court must deny both motions for summary judgment.
