Richard Raysman and Peter Brown

When the provisions of a contract are unambiguous, a court will enforce the contract as written, without citation to any extrinsic evidence—such as deposition testimony as to what the parties intended the provisions to signify. When the provisions of a contract are ambiguous, a court has multiple interpretation and construction options. Generally, a contract with ambiguous terms will be construed against the drafter. However, in most jurisdictions, this rule applies when one of the parties is in a “superior bargaining position.” A “superior bargaining provision” can be evidenced in multiple ways, including if the party has greater experience or is the only party represented by counsel. The more common scenario is that contract parties have roughly equal bargaining and each have attorneys. If an ambiguous contract results from this arrangement, a court can look outside the four corners of the agreement to extrinsic evidence, though the court is not per se required to do so.

A federal court decision in Kentucky is one of the latest cases where a court had to interpret a contract with potential ambiguities, notwithstanding the reputed sophistication of the contracting parties and their counsel. See Humana v. Cave Consulting Grp., No. 3:13-cv-759-DJH-RSE, 2018 WL 4492477 (W.D. Ky. Sept. 19, 2018).  This case concerned a license for medical-related software which, unsurprisingly, was replete with technical terms that referenced, inter alia, the software's “Interface Reports,” and what entailed a “Client Data” and a “Client Database” as referenced in the license. The scope of the license's definition of “Confidential Information” was also primarily at issue.

After plaintiff sought a declaratory judgment that it no longer owed fees under the license because, as required by the license, it destroyed “Confidential Information,” both parties moved for summary judgment based on differing interpretations of multiple provisions of the license. The court denied both motions on this count, each on grounds that the technical terms at issue in the case were ambiguous, as a reasonable interpretation could render the terms either superfluous or unclear. As discussed in detail below, the Humana case is yet another example of the pitfalls intrinsic to drafting a software license, irrespective of the supposed sophistication and experience of the contracting parties.

Facts and Procedural History

Plaintiff Humana licensed from defendant Cave Consulting Group (CCG) software called “Marketbasket System,” a type of software that measures doctor efficiency. Pursuant to a master license, Humana paid monthly fees and ultimately renewed the license until December 2012. As required upon termination of the license, Humana certified to CCG that it destroyed all of CCG's confidential information. Humana attached a spreadsheet listing the destroyed documents, which was not all-encompassing.

CCG continued to invoice Humana on grounds that Humana failed to destroy all data generated by the “Marketbasket System” software, including what CCG considered “Interface Reports” as defined in the license. CCG claimed that the “Interface Reports” constituted “Confidential Information,” which must be destroyed under the license as the intellectual property of CCG. Humana admitted to keeping the data at issue, but claimed that the license did not mandate destruction of this retained information because it encompassed files in the “Client Database”, of which Humana maintained ownership. Humana also claimed to never having used the “Interface Reports” element of the “Marketbasket System” software.

Humana filed the instant action seeking a declaratory judgment that it incurred no further liability under the license. CCG counterclaimed, alleging breach of contract, conversion and unjust enrichment. CCG sought specific performance of the license. During discovery, Humana moved to compel responses to its document requests that it believed would illuminate the intended meaning of the term “Interface Reports.” The magistrate judge denied Humana's motion to the extent the motion sought to manufacture an ambiguity in the license through extrinsic evidence by seeking documents unrelated to the license. The district court denied Humana's objection to the magistrate judge's ruling.

Both parties then moved for summary judgment as to whether Humana breached the license.

Legal Analysis and Conclusions

First, CCG argued that the magistrate judge's ruling on Humana's motion to compel found that the license unambiguously defined “Interface Reports” to include the outputs of the “Marketbasket System” software, which constitutes intellectual property that Humana was obligated to destroy. Specifically, CCG claimed that the portion of the magistrate judge's opinion which concluded that the “term 'Interface Reports' appears to include any presentation of information generated by CCG's interface software … Such Interface Reports are directly included within the contract definition of 'intellectual property,' which is itself included within the contractual definition of 'confidential information.'”

The district court disagreed. It held that the “purported finding of unambiguity” in the magistrate judge's ruling was “not necessary to [the] ruling, nor is it dispositive here.” Rather, the magistrate judge's ruling hinged on an argument that Humana did not make. To wit, because Humana failed to argue that the license's definition of “Interface Reports” was ambiguous, it therefore failed to prove that “extrinsic evidence concerning the term's meaning was potentially relevant and discoverable” (emphasis added). Accordingly, the magistrate judge's ruling “had no preclusive effect” at this stage of the proceedings.

The court then held that “Interface Reports” was ambiguous as used in the license. Irrespective of CCG's insistence that the files preserved by Humana constituted “Interface Reports,” the court held that “it is not clear from the [license] what Interface Reports are, much less that they encompass the data at issue here.” Under the license, “Interface Reports” were “generated by CCG's interface software” However, “interface software” went undefined, and CCG's indirect efforts to define the term rendered it synonymous with the “Marketbasket System” software, and thus superfluous in contravention of Kentucky contract law, or unclear when placed in the context of seemingly related definitions in the license.

The court also denied Humana's motion for summary judgment on the breach of contract claim. It held that it was “not likewise apparent” that the files Humana retained were part of the “Client Database,” and therefore did not need to be destroyed. Under the license, “Client Database” is defined as “Client Data … processed, integrated, and organized by the Marketbasket System.” According to Humana, “Client Database” therefore includes the data at issue in this case, which “Humana generated by processing its Client Data through components of the Marketbasket software.”

The court rejected this argument for the same reason as it did with respect to CCG—it created superfluity between terms in the license. Specifically, equating “Client Database” with “output files” renders one of the terms redundant. Moreover, although the term “Client Database” implied that the files contained therein belonged to Humana, the license did not explicitly state as such. The court likewise rejected Humana's purported extrinsic evidence, which was based on the depositions of CCG executives. The depositions of CCG's executives could not resolve the ambiguities of the definition of “Client Database” because CCG's corporate representative gave a virtually identical definition for the term “Interface Reports.”

Given the ambiguity of the license, the court held that the jury must ascertain the parties' intentions and determine whether Humana breached the license. The court denied each party's motion for summary judgment on the declaratory judgment claim.

Richard Raysman is a partner at Holland & Knight and 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).