Richard Raysman and Peter Brown

Setting realistic timelines for development and sale is integral to any successful software-related agreement, whether it be a licensing agreement, services agreement, consulting agreement, or otherwise. It is understandable that deadlines will change and costs will increase, particularly in an ever-changing technological environment. For that reason (among others), statements of work and iterative deliverables are often part and parcel of a software development agreement.

However, as a federal court in Texas recently decided, the progress (or lack thereof) concerning a software development agreement cannot be obscured by allegedly fraudulent statements, nor can breach be excused simply because the developer encounters what it claims as unforeseen technological hurdles. See Polar Pro Filters v. Frogslayer, No. 19-1706 (S.D. Tex. Oct. 22, 2019).

This column focuses on the split result reached by the court inasmuch as the court denied the software developer's motion to dismiss the software provider's breach of contract claim and denied in part the provider's fraud claims.

Facts and Procedural History

As alleged by its complaint, plaintiff Polar Pro Filters creates and sells software for devices, including drones and smartphones. In August 2017, Polar Pro contacted defendant Frogslayer, a software developer, to explore the joint creation of a video editing program. Frogslayer represented to Polar Pro that it had expertise in video editing and other media-specific businesses.

In October 2017, the parties executed a Software Consulting Agreement (the agreement) wherein Frogslayer would provide Polar Pro "consulting and software development services described in Statements of Work" and an agreed-upon "Roadmap." Frogslayer named the software "The Ripper" and submitted that the project would encompass roughly eight months of work and incur costs of approximately $250,000. In June 2018, Frogslayer informed Polar Pro that "version one of The Ripper project was not close to working," notwithstanding that $235,000 of the estimated costs had been paid. To that end, FrogSlayer's CEO admitted that "hard facts" about the project had not been initially "presented" and, as such, he issued a formal apology. Polar Pro agreed to pay then roughly $100,000 in prospective costs necessary to complete "The Ripper."

After further haggling over the benchmark and functionality of Frogslayer's software, in February 2019, Frogslayer ceased work on the project. allegedly based on Polar Pro's failure to pay the supplemental costs negotiated in June 2018. Moreover, Frogslayer indicated that, to finish the software, it would incur an additional $200,000 to $400,000 in costs and spend six to nine months of work. In turn, Polar Pro alleged that this refusal to continue work contradicted Frogslayer's communications in June 2018 that Frogslayer would absorb the costs of the continued development of the software.

Polar Pro also alleged that the demo of "The Ripper" failed to provide "nearly every element in the 'in scope' section of the Roadmap and also fails to provide most of the features in the 'maybe in scope' section of the Roadmap." Moreover, Polar Pro alleged that the demo "has no commercial value and there is no market in which Polar Pro can sell a defective software to recoup any cost."

Accordingly, Polar Pro sued Frogslayer for, among other causes of action, breach of the agreement, fraud, and breaches of the Texas State Deceptive Trade Practices Act. The fraud causes of action pertained both to Frogslayer's ability to meet the specifications under the agreement and the Roadmap, and the representations of Frogslayer's CEO at the time of the initial issues with development of the software. Frogslayer moved to dismiss for failure to state a claim of breach of contract, and that Polar Pro did not meet the heightened pleading standards for fraud under the Federal Rules of Civil Procedure.

Legal Analysis and Conclusions

Assuming the facts in Polar Pro's complaint as true, and viewing in the light most favorable to Polar Pro, the court denied Frogslayer's motion to dismiss Polar Pro's breach of contract claim. Specifically, Polar Pro satisfied all four elements for breach of contract under Texas law. First, the parties did not dispute that the agreement was a valid contract. Second, Polar Pro performed its obligations under the agreement by paying the cost estimate and additional roughly $100,000 payment. Third, Frogslayer breached the agreement because it did not produce a program to the specifications set forth in the agreement. Finally, this failure caused Polar Pro harm because it could not market or distribute any software from Frogslayer, irrespective of the time spent and cost expended. In denying the motion to dismiss the breach of contract claim, the court rejected Frogslayer's specific argument that Polar Pro changed the agreement's scope by asking for benchmarks to which "The Ripper" could be compared, as the court concluded this did not relieve Frogslayer of its obligations to perform under the agreement.

Concerning the fraud-based claims, Polar Pro must fulfill Federal Rule of Civil Procedure 9(b), which requires allegations that "state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally." The court concluded that Polar Pro satisfied Rule 9(b), at least at the motion to dismiss stage, when it alleged as fraudulent the June 2018 comments by the CEO of Frogslayer that "hard facts not presented" to Polar Pro, and that Frogslayer would need more time and money to complete the project as "currently envisioned." Specifically, the CEO's claim in June 2018 that Frogslayer would complete the Project, provided that it received additional capital from Polar Pro, was sufficient to state a claim for fraud, irrespective of whether or not the CEO had "not presented" a set of "hard facts."

On the other hand, the court granted the motion to dismiss Polar Pro's fraud claim based on alleged fraud and misrepresentations by Frogslayer around the time of the execution of the agreement and concerning Frogslayer's capabilities to perform the technical tasks specified in the agreement. The court held that Polar Pro did not identify the "who, what, when, where, and how" of the fraudulent statements around the time of the execution of the agreement, as Polar Pro did not identify "who made the alleged statements [and] how it was communicated."

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).