Richard Raysman and Peter Brown

Ambiguity surrounding the termination provision of a software license is a frequent source of dispute. Imprecise wording, particularly with respect to the damages amount due upon breach, can often precipitate costly litigation centered on the interpretation of a mere handful of words in a license.

The U.S. District Court for the Southern District of New York recently dealt with a dispute of this nature. In DRL Software Solutions v. JourneyPure, No. 17-cv-9125(DLC) (S.D.N.Y. Dec. 6, 2018), the court decided partial summary judgment motions from each party, one of which centered on the licensor's motion claiming that the termination provision of the software license required the licensee to pay fees throughout the term of the agreement, irrespective of the license's termination nearly a year and a half prior. Specifically, the competing interpretation of “all amounts due” under a license in the event of a breach was at issue. As discussed below, the court decided the motion on grounds familiar to any commercial court—the ambiguity (or lack thereof)—of the provision. While interesting for practitioners, requiring the court to decide a summary judgment motion on these grounds is an evergreen issue for litigants that invariably increases costs and in fact, can often negate any benefits previously derived from the underlying license.

Facts and Procedural Background

Plaintiff DRL Software Solutions (DRL) licenses a software platform (the Software) intended for use by patients and service providers located at rehabilitation centers. Defendant JourneyPure provides “addiction, substance abuse and behavioral health services” at rehabilitation centers. In 2014, DRL and Defendant JourneyPure entered into a contract wherein DRL would provide JourneyPure with its software platform (the License).

The License required DRL to pay an initial operations fee and then a variable monthly fee tied to how many JourneyPure clients used the Software that month. The License also required JourneyPure to warrant that it would not, inter alia, attempt to gain “unauthorized access” nor “modify, copy, create derivative works based on the Software … nor reverse engineer the Software.” Finally, the termination clause required JourneyPure, upon termination for “any reason”, to “immediately pay DRL all amounts due to DRL under [the License].” In conjunction with JourneyPure executing a software subscription agreement with a third-party, the parties amended the License to extend the termination date to Oct. 31, 2017.

In 2016, JourneyPure hired a consultant to create an “addiction recovery software program” to be branded as JourneyPure's software. In conjunction with this project, the consultant accessed the Software, though he claimed he accessed it once and for “probably 45 seconds.” Ultimately, JourneyPure created its own software. A few months later, JourneyPure terminated the License. DRL sent invoices for several months after receiving the termination notice. According to JourneyPure, it paid all amounts owed to DRL up and until the date of termination.

In November 2017, DRL filed a complaint against JourneyPure alleging, inter alia, breach of contract. DRL also brought multiple tort claims, some of which were dismissed in early 2018 and will not be discussed in this column.

Both parties later filed motions for partial summary judgment on the contract claim.

Legal Analysis and Conclusion

The License required application of New York law, which holds that summary judgment is “appropriate when the record taken as a whole could not lead a rational trier of fact to find for the non-moving party.” Smith v. Cnty. of Suffolk, 776 F.3d 114, 121 (2d Cir. 2015) (citation omitted). If the terms of the contract are ambiguous, the court may not determine summary judgment as a matter of law.

DRL's Motion. DRL moved for partial summary judgment on grounds that JourneyPure failed to pay the outstanding fees due through Oct. 31, 2017, the term of the amended License. As noted above, the relevant termination provision of the License obligated JourneyPure, upon termination, to “immediately pay DRL all amounts due to DRL.” The License did not define “amounts due.”

The court found this provision ambiguous and denied DRL's motion, as it concluded that “amounts due” could reasonably be read to refer to either the amounts due at the time of JourneyPure's termination notice in 2016, or the amended end date of the License of Oct. 31, 2017.

JourneyPure's Motion. JourneyPure moved for summary judgment on DRL's claims that it breached the License by giving the third-party consultant unauthorized access to the Software and that JourneyPure's software was illegally derived from the Software. JourneyPure primarily argued that the 45 second access to the Software by the consultant meant that DRL could not show that any damages resulting from the breach, and thus DRL's contract claims failed as a matter of law. DRL countered that summary judgment should nonetheless be denied since a reasonable factfinder could conclude that the consultant's 45 second access to the Software was sufficient to “gain proprietary knowledge.”

Citing DRL's lack of supporting evidence, the court disagreed and granted JourneyPure's motion on this ground, as the “theoretical possibility that this brief access could have resulted in damages is insufficient to defeat summary judgment.”

The court also granted JourneyPure's motion on grounds that DRL failed to present sufficient evidence that JourneyPure's resulting software violated the License as an impermissible derivate work. The court credited the testimony of the JourneyPure's consultant in which he asserted that he created the software “from scratch” and that JourneyPure did not ask him to “emulate” the Software. DRL argued that the “veracity” of the consultant's testimony must be evaluated by a factfinder. The court disagreed and described DRL's argument as presenting no evidence to rebut the consultant's testimony. Consequently, DRL had not created a genuine dispute as to whether JourneyPure's software was derivate of the Software. The court granted JourneyPure's motion for partial summary judgment on this ground as well.

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).