Developing software in-house can be highly beneficial. An in-house software team is well aware of the company policies and brand guidelines and can tailor the software creation process and rollout to better comport with company priorities and synergistic aims. Moreover, since developers are closely monitored by management—at least relative to most off-site developers—the company can catch inefficiencies at the outset and in turn mitigate an inability to meet often strict development timelines. Conversely, in-house development is inhibited by the need to hire employees with selective expertise, which can be a lengthy process if nothing else because of negotiations and bureaucratic red tape seemingly endemic to larger businesses. In addition, training in-house employees on a single project involves imparting customized skills and knowledge not easily transferable to other software products. Outsourcing is prevalent for a reason.

One other obvious pitfall to contracting with an external software provider is an increased penchant for disputes to be resolved in litigation. This outcome is particularly prevalent when contractual realities conflict with rapidly evolving business priorities. For example, the Delaware Chancery Court (the court perhaps most associated with corporate governance and shareholder litigation), turned to a contract dispute with respect to if and when a software licensee can terminate a license for externally-provided software upon development of its in-house software. In Silver Mgmt. Grp. v. AdvisorEngine, C.A. No. 2018-0421-KSJM, 2019 WL 125553 (Del. Ch. March 18, 2019), the court dealt with a software license dispute that concerned both the payment and term provisions. It found for the licensor on the term issue and the licensee on the fee issue.

Facts and Procedural Background

In 2014, plaintiff Silver Management Group (Silver) hired defendant AdvisorEngine to develop back-office software in support of AdvisorEngine's planned wealth management platform (the Software). A year later, the Software went live and Silver and AdvisorEngine's predecessor-in-interest (Vanare) subsequently executed a license wherein Silver granted AdvisorEngine access to the Software for a seven-year term (collectively with its amendments and schedules, the License). The License obligated AdvisorEngine to pay a monthly fee, which was calculated as a percentage of gross revenue derived from sales from the Software and other software products sold on the Advisor Engine platform. The fee was not contingent on AdvisorEngine's use of the Software, but rather subject to the monthly minimum and maximums of use of the Software by AdvisorEngine's customers.

In December 2017, AdvisorEngine acquired an additional software product that was marketed and distributed as a facet of a “unified” software system that included AdvisorEngine's suite of software products, including Silver's Software. Silver demanded that the payments from sales of the new software products be included in the calculation of Silver's monthly fee under the License. AdvisorEngine declined. By May 2018, AdvisorEngine had created a replacement for the Software. Even though the Software arguably became duplicative of AdvisorEngine's software, AdvisorEngine could not terminate the seven-year term of the License absent a material breach by Silver. In what the court described as “opportunistic”, AdvisorEngine terminated the License on the grounds that Silver's complaint about the License fee apportionment constituted a material breach. AdvisorEngine in turn purported to terminate the License on this basis and ceased using the Software.

The instant lawsuit followed. Silver brought six causes of action, including that AdvisorEngine breached the License by failing to recalculate the fees in the aftermath of its incorporation of the Software into a bundled software product it sold. AdvisorEngine counterclaimed that, inter alia, the entirety of its licensing fees was predicated on the use of the Software. Since it ceased using the Software in July 2018, AdvisorEngine argued it no longer owed fees to Silver under the License, notwithstanding the seven-year term. Silver responded with a request for a declaratory judgment that AdvisorEngine's termination of the License was invalid. The parties cross-moved for summary judgment on Silver's breach of contract claim and AdvisorEngine moved for summary judgment on this counterclaim.

Legal Analysis and Conclusions

Applying New York law to its substantive analysis, the court granted AdvisorEngine's motion for summary judgment. Silver cited two provisions of the License de facto requiring the calculation of its fees thereunder to encompass fees derived from the sale of the broader software suite. First, Silver noted that its fees comprised a percentage of the revenue from the “Vanare Platform Services.” As noted above, Vanare is the predecessor-in-interest to AdvisorEngine. The License defined “Vanare Platform Services” as the “wealth management platform and related technology and business operations services of Vanare and its wholly owned subsidiary, NestEgg Wealth, Inc.”

Silver argued that the Software constituted a product “related” to Vanare's “wealth management platform.” The court rejected this argument on grounds that the subordinate clause ending the definition, “of Vanare and its wholly-owned subsidiary, NestEgg Wealth, Inc.,” modified the immediately preceding phrase “related technology and business operations services.” The modification meant that, pursuant to the plain language of the License, the “related technology” must be of “Vanare” to be compensable under the License. Among other reasons, the court concluded that the Software could not be “related technology” because the use of the phrase “and its wholly owned subsidiary, NestEgg Wealth, Inc.” would be superfluous if Vanare as defined in the License was meant to include all of its wholly-owned subsidiaries. Superfluity in contract interpretation inasmuch as courts are to deploy “longstanding principles of contract interpretation [that] give effect to every term[.]” For these reasons, the court granted AdvisorEngine's motion for summary judgment that it did not breach the License by failing to increase its fees to account for the creation of its proprietary software.

However, the court denied AdvisorEngine's motion for summary judgment on its counterclaim concerning its payment obligations. AdvisorEngine argued that it did not breach the License by ceasing to use the Software (and thus pay any License fees) because its payment obligations hinged on its use of the Software. AdvisorEngine ceased use of the Software in June 2018 once it created its internal substitute. The court held that “AdvisorEngine's argument finds no support in the [License].” The fees owed to Silver did not rely on AdvisorEngine's use of the Software, so its cessation of use was of no matter. Instead, the termination provisions were operative and in effect until validly terminated. AdvisorEngine had not validly terminated the License by “unilaterally determin[ing] to cease use of Silver's [Software].” The court denied AdvisorEngine's motion for summary judgment on this counterclaim.

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).