Richard Raysman and Peter Brown

Oral modifications, or other informal changes to contracts, are disfavored. If nothing else, oral modifications are rarely enforced because to do so negates the concept in contract law that a writing should encompass the entirety of the parties' agreement. The “entire agreement” concept is designed to, among other things, streamline post-contractual developments by largely precluding repeated and inefficient disputes (even if minor) over informal interactions between the parties that may implicate the written terms of the agreement.

In a recent decision in Louisiana, one party learned that reliance on oral modifications to a written agreement can successfully be opposed by an adversary citing to the plain, unambiguous terms of a contract. In Medtron Software Intelligence Corp. v. Metairie Gastroenterology APMC, —So.—, NO. 2018 CA 1427, 2019 WL 2317627 (La. Ct. App. May 31, 2019), a Louisiana appellate court upheld a bench trial's ruling that a licensee could not pre-emptively cancel a software license based on the licensor's failure to recognize the contents of an oral modification to the agreement, even if the licensor had honored such terms in practice in prior years. The court reached this conclusion because the plain terms of the agreement stated that, even if the licensor had waived certain rights in the past, it did not forfeit the prospective right to invoke this right.

This column summarizes the facts and procedural history of the case, including the trial court ruling, and sets out in detail the legal analysis and conclusions that led to the appeals court upholding the ruling in the licensor's favor.

Facts and Procedural History

Plaintiff Medtron Software Intelligence Corporation (Medtron) and Defendant Metairie Gastroenterology, APMC (MG), executed a remote computing service agreement (the agreement), wherein MG licensed remote use of Medtron's medical practice management software (the software) for use in MG's gastroenterology practice. The agreement had an initial term of three years and provided automatic renewals unless either party provided its notice of intent not to renew within 90 days of the expiration of the current term. The fee schedule in the agreement tied to three authorized users permitted to use the software at 10 computer workstations. Additional users or permitted workstations required written consent by Medtron.

The agreement did not include a provision governing the removal of authorized users or workstations. As a courtesy, Medtron consented to multiple requests by MG to remove authorized users or reduce the workstations. To process the removal of an authorized user, Medtron's staff would complete a change request form, to be ultimately approved by either Medtron's CEO or COO. The parties did not sign any formal, written amendments to the agreement reflecting the removals and readjustments. Medtron typically approved requests for removal of authorized users from the agreement in the event that MG represented that the users no longer worked at MG.

In 2014, MG requested the removal of two doctors from the agreement, even though the doctors would not be leaving MG's practice. Medtron declined to do so. In 2015, MG requested the removal of another doctor. Medtron again declined, for the same reason. Medtron did consent to MG's request to remove two doctors from the agreement because they were leaving MG's practice.

In each instance, MG requested removal of the doctors from the agreement because MG did not plan to use the software any longer. Nonetheless, Medtron insisted on enforcing the agreement for the duration of the current term, which concluded at the end of February 2017. In September 2015, MG sent a cancellation notice, claiming that it was cancelling the agreement, effective at the end of October 2015. In so doing, MG did not cite any provision of the agreement, nor any other authority, permitting it to send the termination notice. After paying the August and September invoices, MG allegedly considered the agreement terminated, though it continued to use the software remotely through the end of June 2016.

In response, in February 2016, Medtron put MG in default in accordance with the termination provision of the agreement. Medtron then exercised its option to accelerate the balance due on the agreement. In the same month, Medtron sent a demand letter for the entire amount then owed under the agreement, together with interest, fees and costs.

MG refused. Consequently, in April 2016, Medtron sued MG for breach of the agreement. MG denied the breach and filed what amounted to a counterclaim, alleging that Medtron had overcharged MG for an unknown period of time for an “excessive” number of workstations, even after the corresponding authorized user had been removed from the agreement. The grounds for MG's counterclaim were principally that Medtron continued to charge MG for the authorized users long after these users should have been removed from the agreement. These users were the doctors that Medtron had refused to remove from the agreement because the doctors were not leaving MG's practice.

Legal Analysis and Conclusions

A bench trial was held on Medtron's allegations of breach and MG's counterclaim. The trial court found that the agreement had not been terminated, as: (1) Medtron did not consent to MG's purported early termination; and (2) all remaining users and workstations had not been removed from the agreement, notwithstanding MG's allegations. The trial court also concluded that MG did not meet its burden of proof that it had been overcharged. Accordingly, the trial court dismissed the counterclaim with prejudice, and entered judgment against MG.

MG appealed, contending that the trial court: (1) mistakenly evaluated the procedures for adding and subtracting authorized users and workstations to and from the agreement; (2) reached the incorrect conclusion that Medtron did not overcharge MG; and (3) wrongly determined that the notice of cancellation did not effectively terminate the agreement.

First, MG argued that the mutually-executed change request forms mooted the need to execute a written amendment to the agreement to formalize that certain authorized users had been removed from the agreement. The appeals court disagreed. In crediting the testimony of the Medtron employees that change request forms merely constituted a checklist setting forth the details of the requested change, the court held that a written amendment to the agreement was required to add or remove users. Moreover, that the agreement had been previously amended “once or twice” to remove or add users without a written amendment was immaterial, as the agreement allowed Medtron to invoke its rights to require a written amendment, even though it had not previously done so.

Second, MG argued that the trial court erred in finding that the September 2015 cancellation notice was insufficient to remove all remaining workstations from the agreement and effectively terminate the agreement. Again, the appeals court disagreed. It invoked the provision in the agreement that allowed Medtron to enforce the agreement even if it had declined to enforce certain rights on previous occasions. Consequently, MG could not terminate the agreement by unilaterally referring to workstations that were not reflected in a formal amendment to the agreement, as Medtron had not waived the right to require a formal writing to be referenced in MG's purported termination notice.

Finally, the appeals court rejected MG's argument that Medtron overcharged MG by charging them for users “who had been removed….” The appeals court held that Medtron could not have overcharged MG under the agreement for these users, as they had never been validly removed from the scope of the Agreement in the first place.

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).