The warranty is among the most essential terms of a software license, as the provision often concerns the functionality and capability of the software. In essence, this is the promise of the licensor as to what the software will or will not do. Many warranties are the subject of concerted negotiations, but often the parties revert to boilerplate as part of a general tendency to forget the importance of the provision in favor of business terms such as price and product line. A licensor typically seeks to limit what it promises, while a licensee regularly seeks to establish that the licensor possesses good and marketable title in the software, that the software will function, and that the software is without any code susceptible to viruses.

These priorities often conflict, and particularly when warranty provisions are negotiated in a cursory fashion and memorialized with the bare minimum of relevant language. As one of the latest examples, on July 30, 2018, the U.S. District Court for the District of Minnesota issued its opinion in Prairie River Home Care v. Procura, holding that the software licensee's claims for breach of contract and breach of warranty could survive a motion to dismiss, while the rescission claims could not. 2018 WL 3621208 (D. Minn.).

First, the express terms of the license's warranty granted the licensee “on-premise” support, which the licensor allegedly failed to provide. Second, the court held that it could not decide as a matter of law whether the 90-day notice period of the warranty, which started as of the execution of the license, was not unconscionable. After all, the warranty would have been nonexistent since it did not cover a period of time when the software did function. Rather, the court held that whether the notice provision in the warranty was unconscionable was a question of fact to be determined in the future.

This column explains these holdings, as well as the other claims on licensor's motion to dismiss, some of which went in its favor.

Facts and Procedural History

In 2015, plaintiff Prairie River Home Care, Inc., a home health care provider, signed a master software license and support agreement (the “license”) with defendant Procura, LLC. Procura's software provided Prairie River with “enhanced documentation capabilities” via Procura's agency-management software package for health-care providers. “Software” is defined in relevant part in the license as “the software in object form…including related documentation.” “Documentation” in turn encompassed “user guides, operating manuals, education materials, product descriptions, technical manuals…and other information relating to the software.” Procura also agreed to provide support in the event of “an inability of the software to perform…in accordance with its related documentation.”

Prairie River purchased the software for an “on-premise” installation. The license included certain damage limitations, including a disclaimer of consequential and incidental damages, and was governed by Illinois law. However, the license did include a 90-day warranty provision commencing from the effective date of the license: Sept. 30, 2015. The warranty provision required Prairie River to notify Procura of its invocation of the warranty within the 90-day period.

Implementation was undertaken by Procura and a related company. Prairie River believed that the software would go live in February 2016—as claimed by Procura. According to the court, “[t]he transition did not go smoothly” and ultimately the software didn't become operational until June 2016. After the software went live, Prairie River alleged that it did not work as promised in the accompanying documentation. Prairie River could not bill patients, which purportedly moved it to the precipice of bankruptcy. Prairie River claimed to have paid $800,000 in out of pocket expenses as a result of this failure—exclusive of lost profits, lost personnel and lost opportunities.

After fruitless negotiations between the parties, Prairie River abandoned the software in February 2017. In November 2017, it filed suit in Minnesota state court. Procura removed to federal court. Prairie River brought causes of action for, inter alia, breach of contract, rescission, and fraudulent inducement. With respect to the breach of contract claim, Prairie River sought consequential damages on grounds that Procura's “willful misconduct” sanctioned recovery of this nature, irrespective of the disclaimer in the license. Procura moved to dismiss under Rule 12(b)(6). Prairie River's claims for breach of contract, breach of warranty, rescission and consequential damages are examined herein.

Legal Analysis, Conclusions

Applying Article 2 of the Illinois Uniform Commercial Code, Transactions in Goods, the court held that Prairie River had stated a claim for breach of the license. Prairie River alleged that Procura breached the license by failing to provide: (1) software as described in the license; and (2) technical support to remedy identified software issues.

Crediting Prairie River's multiple references to Procura's software deficiencies and Procura's apparent unwillingness to provide software support, the court held that Prairie River adequately pleaded a claim for breach of the license and accordingly denied Procura's motion to dismiss. The court also did not dismiss Prairie River's claim for breach of warranty for two reasons. First, the court held that the warranty provision of the license did apply to the sale of the software because the software was, as noted above, an “on-premise” acquisition covered by the express terms of the warranty provision. Second, the court held that Prairie River had stated a claim that the 90-day notification requirement in the warranty was unconscionable. Prairie River alleged that the notification requirement is unconscionable because the software was not installed until June 2016, far more than 90 days from the beginning of the warranty period as of the effective date of the license on Sept. 30, 2015.

Procura countered that the provision could not be unconscionable as a matter of law because both it and Prairie River are sophisticated entities. Acknowledging this general precept, the court nonetheless denied Procura's motion on grounds that the warranty provision could be unconscionable given the appearance of a relative disparity in bargaining power between Prairie River and Procura. The court did separately reject Prairie River's related claim for implied warranty of merchantability.

Conversely, the court granted Procura's motion to dismiss with respect to Prairie River's claim for rescission based on mutual mistake because Prairie River had not sufficiently alleged a mutual misunderstanding between the parties about the terms of the license. In order to plead a claim for rescission under Illinois laws, Prairie River had to show that: (1) both parties were mistaken regarding a material feature of the contract; (2) this matter is of such grave consequence that enforcement of the contract would be unconscionable; (3) the plaintiff's mistake occurred despite the exercise of reasonable care; and (4) the other party can be placed in the status quo.” (citation omitted).

Prairie River claimed that the mutual mistake was the functioning of the software. The court characterized this “mutual mistake” as another way of saying that “the software did not work.” Consequently, this allegation was insufficient to support a claim for rescission since it did not evidence a mutual mistake, but instead pertained to the Illinois Court of Appeals' observation that “the fact that the goods are better or worse than supposed or possess different qualities not affecting identity will ordinarily be immaterial” to a rescission claim.

Procura likewise succeeded in dismissing Prairie River's request for consequential damages arising from Procura's breach of the license. The court granted the motion for two reasons. First, the court held that Procura's alleged willful misconduct could not precipitate an award of consequential damages, because the doctrine was not recognized under Illinois law. Prairie River's briefs had only cited New York law. Accordingly, “[a]bsent any relevant authority,” the court concluded that Prairie River could not recover consequential damages purportedly attributable to Procura's willful misconduct.

Second, the court granted the motion because Prairie River could not show that the disclaimer of consequential damages in the license was unconscionable. Prairie River's complaint only alleged consequential damages resulting from willful misconduct, which the court did not view to be a separate theory from Prairie River's theory of consequential damages based solely on willful misconduct, which it had already rejected.

Richard Raysman is a partner at Holland & Knight. Peter Brown is the principal at Peter Brown & Associates. They are co-authors of “Computer Law: Drafting and Negotiating Forms and Agreements” (Law Journal Press).