Richard Raysman and Peter Brown

Typically used to guard against defaults on loans, an acceleration clause allows a non-breaching party, in the event of default, to require payment of the entire amounts outstanding under the agreement. In the software contracts context, acceleration clauses are regular, including but not limited to, standard licenses, joint venture agreements, development agreements and vendor agreements.

Though drafted to protect the licensor, an election of remedies pursuant to an acceleration clause recently doomed a licensor's claim for an alleged breach of a software agreement by the successor licensee. See IT Portfolio v. Facsimile Commc'ns Indus., 2019 WL 2498371 (S.D.N.Y. May 31, 2019). The same election also precluded an unjust enrichment claim against the successor. This column focuses on the unintended consequences of accelerating payments under a software license, even if the clause appears to result in more immediate payment from the breaching party.

Facts and Procedural History

In 2009, Plaintiff IT Portfolio (Portfolio) executed a Software Development and Assignment Agreement (the Agreement) with NER Data Products (NER), the predecessor in interest to Defendants Facsimile Communications Industries (Facsimile) and Atlantic Technologies Integrators (Atlantic, and together with Facsimile, Defendants). The Agreement covered software for design and integration of the software.

In 2014, NER defaulted on its payment obligations to Portfolio, which invoked the acceleration clause in the Agreement and in so doing, notified NER that Portfolio's obligations under the Agreement terminated at that time. The clause also entitled Portfolio to a percentage of sales of the Software for three years. Notably, the acceleration clause required NER to make the payments “after termination” (emphasis added). NER did not pay the continuing payments owed under the acceleration clause. Colorado law governed any disputes arising from the Agreement.

In 2015, Portfolio sued NER in Colorado for the amounts owed under the Agreement (the Colorado Action). After Defendants purchased from NER the software applicable to the dispute under the Agreement, Portfolio added Defendants to the Colorado Action. In 2018, the court in the Colorado Action dismissed all claims against the Defendants for lack of personal jurisdiction.

In December 2018, Portfolio filed the instant action against Defendants, alleging breach of the Agreement, implied contract and unjust enrichment. Defendants moved to dismiss under Fed. R. Civ. P. 12(b)(6) for failure to state a claim, or in the alternative, under Rule 12(b)(7), for failure to join a necessary party—NER.

Legal Analysis and Conclusions

The court granted Defendants motion to dismiss on all counts. In granting the motion to dismiss the breach of the contract claim vis-à-vis the Agreement, the court held that NER's refusal to render payment under the Agreement did not apply since Portfolio invoked the acceleration clause at the time of breach in 2014. Under Colorado law, as such, the “plain meaning” of the termination provision in the Agreement did not cover simply Portfolio's remedies for discontinuance of the services by NER, but the termination of the totality of the Agreement. In fact, the Agreement barred Portfolio's triggering the acceleration clause without terminating the Agreement, not just the discontinuance of services.

The court likewise reject Portfolio's breach of implied contract claim against Facsimile only. Portfolio argued that Facsimile knew about the Agreement prior to purchasing the software from NER, and that the Agreement stipulated that any purchaser of the software from NER must pay the acceleration payments to Portfolio. Again, Portfolio's election to invoke the acceleration of remedies clause in 2014 defeated it's claim against Facsimile, which purchased the software from NER in 2015. As such, the acceleration clause terminated the Agreement a year prior to the sale to Facsimile, thereby divesting the latter of any obligations under the Agreement. Moreover, Portfolio's claim failed because the Agreement, which was an express contract, prevailed over any purported implied contract between Portfolio and Facsimile. Even under the motion to dismiss standard, which construes inferences in the plaintiff's favor, Portfolio failed to “allege any facts to support its existence of an implied contract with Facsimile.”

Finally, the court dismissed Portfolio's unjust enrichment claim against Facsimile. Portfolio argued that Facsimile was unjustly enriched by purchasing the software from NER because Facsimile retained ownership of the software, even though it knew about the Agreement, which Portfolio had invoked to accelerate payments resulting from NER's 2014 breach. The court dismissed the claim because an unjust enrichment claim is predicated on an express contract “the subject of the alleged obligation to pay.” Facsimile's purported obligation to pay Portfolio for NER's breach of the accelerated payments due upon breach of the Agreement ceased, due to the plain language of the Agreement which terminated upon Portfolio's election to invoke the acceleration clause.

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).