Opinion
No. C99-50 MJM.
January 3, 2001.
OPINION and ORDER INTRODUCTION
Plaintiffs Mineral Area Osteopathic Hospital, Inc., d\b\a Mineral Area Regional Medical Center ("Mineral Area"), Community Memorial Healthcare, Inc. ("Community Memorial"), and North Country Hospital, Inc., ("North Country") (hereinafter collectively referred to as "Plaintiffs") brought the present suit against Defendant, Keane, Inc., (Keane), for breach of warranty (Count I), breach of contract (Count II), and breach of implied covenant of good faith and fair dealing (Count III). (Doc. No. 1). Presently before the Court is Keane's motion for summary judgment, filed September 15, 2000, seeking to dismiss Plaintiffs' claims in their entirety. (Doc. No. 67). Plaintiffs submitted a brief in resistance on September 23, 2000, and Keane filed a reply brief on October 13, 2000. (Doc. Nos. 71 and 74). Both parties have filed statements of material fact in support of their positions. (Doc. Nos. 69 and 72).
Count IV of Plaintiffs' complaint is simply a prayer for injunctive and cont. . . .
. . . cont.
declaratory relief. Keane seeks to dismiss this Count for failure to state a specific cause of action upon which relief can be granted. The liberal rules of pleading construction simply require "a short and plain statement of the claim showing that the pleader is entitled to relief' and "a demand for judgment for the relief the pleader seeks." Fed.R.Civ.P. 8(a)(1). Reading the complaint in its entirety, it seems evident that Count IV, the prayer for relief, is premised on the three aforementioned counts. Therefore, Plaintiffs' failure to survive a motion for summary judgment on any of the first three counts would equally jeopardize the relief sought for those counts as it is stated in Count IV. Accordingly, the Court declines to apply Keane's rigid rule of pleading construction and instead will dismiss Count IV in the event Counts I, II, and III fail to survive summary judgment on the other grounds proposed in Keane's motion.
SUMMARY JUDGMENT STANDARD
"Under Rule 56(c), summary judgment is proper 'if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.'" Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986) (quoting Fed.R.Civ.Pro. 56); see also Krentz v. Robertson Fire Protection District, 228 F.3d 897, 902 (8th Cir. 2000).
A court considering a motion for summary judgment must view all the facts in the light most favorable to the nonmoving party and give the nonmoving party the benefit of all reasonable inferences that can be drawn from those facts. See Matshusita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986); Rabushka, ex rel. U.S. v. Crane Co., 122 F.3d 559, 562 (8th Cir. 1997) cert denied, 523 U.S. 1040 (1999). A court must not however, "weigh the evidence, make credibility determinations, or attempt to determine the truth of the matter" when evaluating a motion for summary judgment. Quick v. Donaldson Co., 90 F.3d 1372, 1376-77 (8th Cir. 1996) (citing Anderson v. Liberty Lobby Inc., 477 U.S. 242, 256 (1986). Instead, a court should simply determine whether there are genuine issues of material fact for trial. See id.; Johnson v. Enron Corp., 906 F.2d 1234, 1237 (8th Cir. 1990). "An issue of material fact is genuine if it has a real basis in the record." Hartnagel v. Norman, 953 F.2d 394 (8th Cir. 1992) (citing Matsushita, 475 U.S. at 586-87). As to whether a factual dispute is "material," the Supreme Court has explained, "[o]nly disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Anderson, 477 U.S. at 248; see also Hartnagel, 953 F.2d at 394.
When bringing a motion for summary judgment, "[p]rocedurally, the movant has the initial responsibility of informing the district court of the basis for its motion and identifying those portions of the record which show a lack of a genuine issue." Hartnagel, 953 F.2d at 394 (citing Celotex, 477 U.S. at 323). Once the moving party has carried its burden under Rule 56(c), the nonmoving party must do more than simply show there is "some metaphysical doubt as to the material facts." Matsushita, 475 U.S. at 586; see also Herring v. Canada Life Ins. Co., 207 F.3d 1026, 1029 (8th Cir. 2000). It must go beyond the pleadings, and by affidavits, or by the "depositions, answers to interrogatories, and admissions on file," designate specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e).
With these standards in mind, the Court remains cognizant "that summary judgment is a drastic remedy and must be exercised with extreme care to prevent taking genuine issues of fact away from juries." Wabun-Inini v. Sessions, 900 F.2d 1234, 1238 (8th Cir. 1990). Turning to the present case, the Court will now recite the facts in the light most favorable to the nonmoving party, the Plaintiffs, and draw all reasonable inferences in their favor to determine if there are genuine issues of material fact for trial.
STATEMENT OF FACTS
Reference is made herein to exhibits to the Affidavit of Robert A. Wallner, Esq., dated October 20, 2000 (cited as "PX ___"); exhibits to the Affidavit of Jamey L. Tesler, Esq., dated September 13, 2000, (cited as "DX ___"); and Plaintiffs' Statement of Facts Pursuant to Local Rule 56.1(a) (cited as "Pls. SOF").
Each of Plaintiffs' hospitals licensed a package of software applications, known as "MEDNET", from Source Data Systems ("SDS"), to use in carrying out the various administrative functions of their respective hospitals. (Pls. SOF ¶ 1). Keane acquired the rights and assets of MEDNET in its acquisition of SDS in November of 1995, and with them the responsibilities under Plaintiffs' licensing contracts. (Pls. SOF ¶ 2).
North Country licensed MEDNET from SDS on October 21, 1992. (DX 4). Community Memorial licensed MEDNET from SDS on August 24, 1990. (DX 4). Mineral Area licensed MEDNET from SDS on November 8, 1993. (DX 5).
As part of licensing MEDNET from Keane, each of the hospitals entered into an agreement called a "Standard Agreement." (Pls. SOF ¶ 36). The portions of the Standard Agreement at issue in the present dispute are paragraphs 4, 7, 10 and 16.
Paragraph 4 TERMS OF AGREEMENT, states:
a. HARDWARE, SOFTWARE, FORMS, INSTALLATION, CUSTOM PROGRAMMING SERVICES, DOCUMENTATION, AND SOFTWARE SUPPORT SERVICES: This Standard Agreement is in effect until terminated by mutual consent or as otherwise provided herein.
b. SOFTWARE SUPPORT SERVICES: The Support Agreements referred to in Paragraph 7 are automatically renewed annually on the anniversary of the System Implementation Date, unless cancelled by 90-day written notice by either party.
The notice requirement for North County was 360-days as opposed to the 90-days notice provision agreed upon by the remaining Plaintiffs. (Pls. SOF ¶ 39).
(Pls. SOF ¶ 38; DXs. 3, 4, and 5).
Paragraph 7 SUPPORT AGREEMENTS, states in relevant part:
a. . . .
SDS [Keane] agrees to make available System enhancements and updates that are released by SDS [Keane] to repair any coding problems within the supplied software and updates to improve System performance and/or capabilities.
. . . .
(Pls. SOF ¶ 43; DXs. 3, 4, and 5).
Paragraph 10 WARRANTY, states:
a. SDS [Keane] warrants during the term of the Support Agreements described in Paragraph 7 above, that the System will perform the functions described in the Systems User Manual, supplied with the System at the time of delivery (or before.)It is Customer's responsibility for choosing whether a particular product licensed from SDS is suitable for its needs or for its computer hardware.
b. SDS [KEANE] MAKES NO OTHER WARRANTY, EXPRESS OR IMPLIED AND THERE ARE EXPRESSLY EXCLUDED ALL WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. SDS [KEANE] SHALL HAVE NO LIABILITY WITH RESPECT TO ITS OBLIGATIONS UNDER THIS AGREEMENT FOR LOSS OF PROFITS, SPECIAL, CONSEQUENTIAL, EXEMPLARY, OR INCIDENTAL DAMAGES EVEN IF IT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. THE STATED EXPRESS WARRANTY IS IN LIEU OF ALL LIABILITIES OR OBLIGATIONS OF SDS [KEANE] FOR DAMAGES ARISING OUT OF OR IN CONNECTION WITH THE DELIVERY, USE, OR PERFORMANCE OF THE SYSTEM.
The language "or before" is found in the Standard Agreement for Mineral Area, but is not found either of the other Plaintiffs' Standard Agreements. (DXs 3, 4, and 5). The Court does not believe, nor do the parties suggest, this has any bearing on the outcome of this motion.
(Pls. SOF ¶ 37 and 41; DXs. 3, 4, and 5).
Paragraph 16 MISCELLANEOUS:
No action, regardless of form arising out of this Agreement may be brought by either party more than two (2) years after [sic] cause of action has arisen. . . . SDS's [Keane's] liability shall extend only to the System actually provided by SDS [Keane] to Customer.
Pls. SOF ¶ 44; DXs. 3, 4, and 5).
This suit centers around MEDNET's inability to process dates after the Year 2000 ("Y2K"), or in other words, the fact that MEDNET is not "Y2K compliant." (Pls. SOF ¶ 14-17). Rather than make MEDNET Y2K compliant, Keane decided to "sunset" the product — that is, cease selling it and terminate its support. (Pls. SOF ¶ 8). Keane maintains this decision was made because the system was aging and becoming technologically and functionally obsolete. (DX 2, pp. 53, 80-1; DX 6, pp. 102-03; DX 1, ¶ 9). Plaintiffs on the other hand contend that Keane's decision to sunset MEDNET was in an effort to "generate substantial sales of Threshold software as a replacement." (PX 7).
The parties dispute when precisely Keane announced to its customers that it planned to sunset MEDNET. In April of 1996, at a conference in Hilton Head, South Carolina, Douglass Easton of Community Memorial does recall the following representations were made by Keane:
[Keane] announced that they were not going to do any enhancements to the MEDNET system and that we would all be — how shall we say this? We will — the former MEDNET users would all be given a super deal on their flagship product to migrate over to their flagship product. We actually knew that before we went down there. That was one of the reasons we went down [to Hilton Head] was to see this product and go through the formalization of hearing it from Ray Paris.
(Pls. SOF ¶ 14; DX 7, pp. 58).
Keane did communicate to each Plaintiff hospital that because MEDNET was not Y2K compliant they would need to "migrate" to a new system. (Pls. SOF ¶ 17). Each Plaintiff understood that Keane's decision to sunset MEDNET meant that Keane would not make further enhancements to MEDNET, including enhancements to address MEDNET's Y2K noncompliance. (Pls. SOF ¶¶ 10 and 16).
North County knew by the end of 1995 that MEDNET was not Y2K compliant and that Keane's decision not to make further enhancements to the computer software meant that it would remain noncompliant. (Pls. SOF ¶ 19-20). On October 21, 1996, Keane sent North County a proposal for migrating the hospital from MEDNET to another system, Patcom. (Pls. SOF ¶ 21-22). North County also requested information from other vendors regarding a potential replacement system. (Pls. SOF ¶ 23).
At some time prior to October 29, 1998, North County notified Keane that it intended to switch to another system, but did not provide Keane with an exact termination date. (Pls. SOF ¶ 50). On October 29, 1998, Keane wrote to North County requesting that it confirm in writing the date it intended to terminate the system. (Pls. SOF ¶ 50). North County responded by letter on November 23, 1998, that it planned to be off MEDNET "between July 1st and October 1, 1999." (Pls. SOF ¶ 51). Keane then sent North County a termination letter dated December 30, 1998, cancelling the Annual Support System for MEDNET effective ninety (90) days from the date of that letter. (Pls. SOF ¶ 52).
By April 1996, Community Memorial learned that Keane was no longer going to support MEDNET. (Pls. SOF ¶ 24). Community Memorial understood that Keane was going to sunset MEDNET and that would be the end of their support of the software. (Pls. SOF ¶ 25). On December 30, 1998, Keane sent Community Memorial a letter cancelling the Annual Support System for MEDNET effective ninety (90) days from the date of that letter. (DX 18).
On January 18, 1996, Sue Johnson, formerly Keane's Manager of Customer Support, notified Mineral Area by letter that "[t]he decision has been made to stop further development of any of the SDS/Mednet products." (Pls. SOF ¶ 27). Upon receipt of the letter, Allan Sucharski, the hospital's chief information officer, underlined the above referenced sentence in the letter. (Pls. SOF ¶ 28). The letter also reflects Keane's belief that Mineral Area would benefit from converting to another system called "Threshold". (Pls. SOF ¶ 29; DX 13). On July 24, 1996, Keane prepared a plan and provided it to Mineral Area that detailed the migration from MEDNET to a new system. (Pls. SOF ¶ 30-31). In 1996, a Keane account representative, Georgi Ferrero, discussed this plan with a Mineral Area representative. (Pls. SOF ¶ 32). Also in 1996, Mineral Area had internal discussions about the need to migrate to another system. (Pls. SOF ¶ 34). By the time Mr. Lawson assumed the position as Mineral Area's New Director of Information Systems in December of 1997, the hospital was already aware that it needed to replace MEDNET because it was not Y2K compliant. (Pls. SOF ¶ 35).
On September 29, 1998, Mineral Area sent a letter notifying Keane that it would be "moving off of the KEANE MEDNET system" and migrating to CPSI system in April 1999. (Pls. SOF ¶ 47; DX 25). On November 17, 1998, Keane responded to Mineral Area that it "underst[oo]d that [Mineral Area] expect[ed] to discontinue all use of the MEDNET System as of April 1, 1999." (Pls. SOF ¶ 48; DX 28). On December 30, 1998, Keane also notified Mineral Area that it intended to cancel the Annual System Support and the cancellation would be effective ninety (90) days from the date of the letter. (Pls. SOF ¶ 49; DX 16).
In the meantime, Keane made MEDNET Y2K compliant for another of its client hospitals, Healthsouth Corporation, as early as June or July of 1998. (Pls. SOF ¶ 3.) In a memorandum entitled "HEALTHSOUTH/MEDNET YEAR 2000 COMPLIANCE" Keane repeatedly referred to the effort to make Healthsouth's MEDNET system Y2K compliant as an "enhancement." (PX 9). For instance, the memorandum states: "This enhancement (referring to modification of software to recognize eight position dates in the format 'MMDDYYYY') became available to users in Release 17 of the SOL Operating System." (PX 9). It also states: "The date related edits must be enhanced for Y2K compliance; each edit and its associated enhancements are described below." (PX 9). In the memorandum's conclusion Keane writes: "The enhancement allows Mednet to survive indefinitely into the next century." (PX 9). Keane's personnel referred to the modifications made to MEDNET in order to make it Y2K compliant for Healthsouth as "upgrades" (PX 1, pp. 5, 176-7; PX 8) and as "enhancements" (PX 2, p. 77).
Each hospital replaced MEDNET with another information system prior to January 1, 2000. (DX 1). Prior to the Plaintiffs' replacement of the software, Keane contends that there were no reported problems with the MEDNET software due to its inability to process dates passed the Year 2000, apart from one incident where Plaintiff Mineral Area needed to rewrite four checks. (DX, (Reply) 4 — 6). In their complaint, however, Plaintiffs allege that "the defect presently impairs the ability of the MEDNET system to perform any of its date-related functions described in the User Manual when post-1999 dates are entered. (Complaint ¶ 11). Those malfunctions have already begun to occur, the complaint states. (Complaint ¶ 11). For example, the complaint continues, the Year 2000 defect causes the MEDNET system presently to fail when users seek to perform certain critical functions described in the User Manual:
(a) One of the functions is the ability to schedule patients for admission dates and/or for medical procedures. The system presently will not accept dates after December 31, 1999, and fails if users attempt to enter those dates for these purposes.
(b) Another function is the ability to schedule hospital equipment maintenance. The system will not accept dates after December 31, 1999, for reparative or preventive maintenance, and it fails if users attempt to enter those dates for these purposes.
(c) Similarly, the system will not accept scheduling or hospital employee performance reviews for post-1999 dates."
(Complaint ¶ 11).
DISCUSSION
A. Timeliness of Plaintiffs' Complaint
Keane's first line of attack is premised on the timeliness of Plaintiffs' complaint. Keane maintains Plaintiffs' complaint is barred by the statute of limitations provision outlined in Paragraph 16 of the parties' mutually agreed upon Standard Agreement. It reads in part: "[n]o action, regardless of form arising out of this Agreement may be brought by either party more than two (2) years after [sic] cause of action has arisen . . ." Plaintiffs filed the present suit on March 31, 1999. Thus, if Plaintiffs' action began to accrue prior to March 31, 1997, Plaintiffs' suit would be time barred. Keane maintains that it did. Specifically, Keane argues that Plaintiffs' right to institute and maintain suit began to toll when Plaintiffs first learned of Keane's intention to sunset MEDNET which occurred, at the latest, in the last quarter of 1996.
Plaintiffs, in fact, concede that they knew by the end of 1996 that MEDNET was not Y2K compliant, that Keane's plan to sunset the software meant that Keane would not make MEDNET Y2K compliant, and Keane had represented to them that it was not going to support the software after the end of 1999. Nevertheless, Plaintiffs aver Keane's disclosure of its plan to sunset MEDNET constituted an "anticipatory breach" which did not toll the statute of limitations. Instead, Plaintiffs argue, the statute of limitations did not begin to run until their receipt of a December 1998 letter, in which Keane stated definitively its intention to terminate the Annual System Support contract for MEDNET.
The Court notes that Keane contends Plaintiffs actually knew in the last quarter of 1995 that Keane did not plan to enhance or support MEDNET after 1999. Plaintiffs dispute that they knew about Keane's intentions as early as 1995, but, as noted above, concede they knew about them by the end of 1996. Because the pivotal date with regards to Keane's argument is March 1997, the dispute between 1995 and 1996 is not "material" to the resolution of Keane's challenge based on the statute of limitations.
"'The general rule is that a cause of action accrues when the aggrieved party has a right to institute and maintain a suit.'" Diggan v. Cycle SAT, Inc., 576 N.W.2d 99, 102 (Iowa 1998) (quoting Sandbulte v. Farm Bureau Mut. Ins. Co., 343 N.W.2d 457, 462 (Iowa 1984)). "In the case of a contract dispute, that right accrues and the limitations period begins running upon breach of the contract." Id. (citing Brown v. Ellison, 304 N.W.2d 197, 200 (Iowa 1981)). With an anticipatory breach, as Plaintiffs contend exists here, "the nonbreaching party may consider the contract breached and sue immediately, or await the time of performance and then upon failure of performance hold the breaching party responsible for the consequences of nonperformance." Berryhill v. Hatt, 428 N.W.2d 647, 655-56 (Iowa 1988) (citing Glass v. Minnesota Protective Life Ins. Co., 314 N.W.2d 393, 396 (Iowa 1982) (finding "[w]hen anticipatory breach occurs, the other party has an immediate right of election either to continue to assert his strict contract rights or to accept the renunciation and sue upon that as a distinct cause of action") (internal quotations omitted)); see also Restatement (Second) of Contracts § 243 comment a (1981). "If no action is brought on the anticipatory breach, the statute of limitations does not begin to run until the actual breach occurs." Glass, 314 N.W.2d at 396 (citing Annon v. Lucas, 185 S.E.2d 343, 351 (1971)). Accordingly, the question for the Court becomes — did Keane's 1996 announcement of its intention to sunset MEDNET constitute an anticipatory breach or was it an actual breach which began to toll the statute of limitations?
Under Iowa law, "anticipatory breach requires a definite and unequivocal repudiation of the contract." Williams v. Clark, 417 N.W.2d 247, 250 (Iowa App. 1987) (quoting Lane v. Crescent Beach Lodge Resort, Inc., 199 N.W.2d 78, 82 (Iowa 1972)); see also Restatement (Second) of Contracts § 253, comment a (1981) (providing that, repudiation, sometimes called "anticipatory breach" means "a breach by anticipatory repudiation, because it occurs before there is any breach by non-performance"). Anticipatory breach "is committed before the time for performance and is the outcome of words or acts evincing an intention to refuse performance in the future." Id. (quoting Lane, 199 N.W.2d at 82); see also Iowa Code § 554.2610, comments, 1, 2.
Iowa Code § 554.2610. Anticipatory repudiation:
When either party repudiates the contract with respect to a performance not yet due the loss of which will substantially impair the value of the contract to the other, the aggrieved party may
a. for a commercially reasonable time await performance by the repudiating party; or
b. resort to any remedy for breach (section 554.2703 or 554.2711), even though the aggrieved party has notified the repudiating party that the aggrieved party would await the latter's performance and has urged retraction; and
c. in either case suspend the aggrieved party's own performance or proceed in accordance with the provisions of this Article on the seller's right to identify goods to the contract notwithstanding breach or to salvage unfinished goods.
In its original brief to the Court, Keane appears to characterize its actions as an anticipatory breach. See Keane, Inc.'s Memorandum in Support of its Motion for Summary Judgment, p. 12 (stating an anticipatory breach occurs "where one party announces an intention to breach the contract" and here the breach occurred "when Keane decided — and immediately and publicly disclosed — that it would not continue to enhance or support MEDNET"). In its reply brief, however, Keane makes no mention of the anticipatory nature of the breach and argues an alternative line of reasoning which presupposes the breach was not anticipatory. Plaintiffs, on the other hand, take for granted that Keane's announcement constitutes an anticipatory breach and argue simply the statute of limitations did not begin to toll until Keane sent a letter formally notifying them of their decision to sunset MEDNET.
Notwithstanding the parties' lack of emphasis on this issue, the Court is not entirely convinced Keane's announcement of its plan to sunset MEDNET constitutes a breach, as Keane appears to conclude, or even an anticipatory breach, as Plaintiffs conclude. Keane correctly points out that Plaintiffs' entire suit is premised on the notion that Keane breached the obligations under the contract, and an implied covenant of good faith and fair dealing when it " refus[ed] to fix the Year 2000 defect in the MEDNET software." See Complaint, ¶¶ 29, 33 and 38(a) (emphasis added). At first blush, the record seems to indicate that this refusal came sometime in 1996 when Keane made its MEDNET customers aware of its decision to sunset the product and not to make it Y2K compliant. However, after Keane made its MEDNET customers aware of this decision, Keane then made MEDNET Y2K compliant for one of its larger customers, Healthsouth, as late as June of 1998. In light of Keane's inconsistent stance, its representations about its plan to sunset the product do not appear to even rise to the level of an anticipatory breach, which occurs only when a party makes a clear and unequivocal statement of its intention to break the contract when its performance comes due, let alone an actual breach. See Lane, 199 N.W.2d at 82 (requiring an "unequivocal repudiation of the contract"). Put another way, Keane's representations were not "sufficiently positive to be reasonably understood as meaning that the breach will actually occur." Cf. 2 E. Allan Farnsworth, Farnsworth on Contracts § 8.21, p. 475 (1990); see also 17 Am.Jur.2d Contracts § 448, pp. 910-11 (anticipatory breach is committed before time for performance and "is the outcome of words or acts evincing an intention to refuse performance in the future"); Mobley v. New York Life Ins. Co., 295 U.S. 632, 638 (1935) (noting that repudiation by one party, to be sufficient to entitle the other to treat the contract as absolutely and finally broken, must at least amount to an unqualified refusal, or declaration of inability, substantially to perform according to the terms of his obligation).
In view of Keane's decision to continue its support for at least one of its customers, Keane's "sunset notification" to Plaintiffs can more aptly be describe as "'a negative attitude . . . which indicates more negotiations are sought or that the party may finally perform,'" rather than an actual breach of the contract or an anticipatory breach. Lane, 199 N.W.2d at 83 (quoting 17 Am.Jur.2d Contracts § 448, pg 912).
For these reasons, the Court finds Plaintiffs' suit was timely filed, and denies Keane's motion for summary judgment on statute of limitations grounds.
Because the facts underpinning Keane's statute of limitations challenge go largely undisputed, the Court can decide, as a matter of law, whether those facts give rise to a breach of contract or an anticipatory breach. See Thompson v. Eickman, 346 N.W.2d 5, 7 (Iowa 1984) (citing Montz v. Hill-Mont Land Co., 329 N.W.2d 657 (Iowa 1983)); see also Buckley v. Deegan, 57 N.W.2d 196, 197 (1953) (finding "the issue of the statute of limitations when directed solely to the allegations of the petition 'presents nothing but a question of law.'" (quoting Roth v. Headlee, 29 N.W.2d 923, 926 (Iowa 1947)).
B. Keane's Obligation to Remedy the Y2K defect Under the Support Agreement
As a second line of attack, Keane maintains that it is under no contractual obligation to "fix" the Y2K problem in MEDNET now that the contract has been terminated. Keane maintains that the language of Paragraphs 7 (the support agreement provision) and 10 (the warranty provision) read together, along Paragraph 4 (the notice of termination provision), relieves Keane of any "perpetual" contractual duty to make MEDNET Y2K compliant.
Keane's argument is premised largely on the language of Paragraph 4 which allows [t]he Support Agreements referred to in Paragraph 7" to be terminated "by 90-day written notice by either party." Keane contends that each Plaintiff received timely notice of termination and each contract is presently terminated and has been since March of 1999. Because the contracts are now terminated, Keane concludes, no liability under the contract can extend beyond the date of that termination and Plaintiffs' claims fail as a matter of law.
North Country Hospital entered into a contract with a 360-day notice provision.
Keane is correct that the support agreements were terminated in accordance with the notice requirements of the contract and they are no longer in effect. However, this does not dispose of the question of whether Plaintiffs can enforce the terms of the support agreement or the warranty after the termination of their contract for services they believe should have been rendered while the contract was in force.
This issue was faced by the court in Carder Buick-Olds Co. v. Reynolds Reynolds Co., Case No. 98-3338, slip op. (Common Pleas Ct., Montgomery County, Ohio Jan. 6, 2000). In denying defendant's motion for summary judgment, the Carder court rejected precisely the argument made by Keane in the present suit. That court held:
Defendant insists that it has a clear and unambiguous right to terminate the maintenance and support obligations under the contract with a 30 day notice to the customer. There is also no dispute that Defendant did in fact give a 30 day notice to Plaintiff, and in accordance with the terms of the contract, it did exercise its right to terminate. However, the issue under the Plaintiffs breach of contract causes of action is whether the Defendant had an obligation to fix the Y2K defect before the termination. The Plaintiff has established facts that the Defendant was aware of the Y2K defect in 1994, but took no steps to fix the defect before the maintenance services contract was terminated in 1998. Plaintiff has further provided evidence that the Defendant did fix the same problem in its ERA system, at no cost to its customers who also had similar maintenance contracts. These facts raise questions of fact which preclude summary judgment.
Slip op. at 3-4.
Like the defendant in Carder, Keane knew MEDNET was not Y2K compliant while the contract was in effect and Keane had the capability to make MEDNET Y2K compliant at the time the contract was in effect because it did so for one of its larger customers. This Court finds persuasive the analysis of the Carder court, and concludes that, in light of these facts, Keane's failure to make MEDNET Y2K compliant while the contract was in force would be actionable, regardless of whether the contract has since been terminated, if it was covered by the support agreement or the warranty. The question that remains, however, is whether MEDNET's inability to process dates after the Year 2000 was covered by the support agreement or the warranty. Thus, the Court will turn to that issue now, addressing Plaintiffs' claims brought pursuant to Paragraph 7 and 10 seriatim.
The Court notes that Keane's defense to these claims is premised, in part, on the notion that Paragraphs 7 and 10 should be read concomitant with the termination provision of Paragraph 4. Keane argues that the warranty provision of paragraph 10 covers the support agreement of paragraph 7, and paragraph 4, the termination provision, refers to paragraph 7. Read together, Keane explains, when it exercised its right under paragraph 4 to terminate the support agreement of paragraph 7, the warranty of paragraph 10 also was terminated. Contrary to Keane's assertions, the Court's decision to address whether MEDNET's Y2K noncompliance is covered by the contract does not contradict the plain language of the termination provision, or as Keane puts it, "render the notice provision of Paragraph 4 nonsensical." If Y2K compliance was covered by the contract when it was in force, requesting it after the contract is terminated does not constitute a perpetual" support agreement as Keane portends. It simply requires a party to carry out its obligations under the contract for which it was given consideration, in this case remuneration. Indeed, to hold otherwise would render the contractual obligations of paragraph 7 and 10 meaningless. The logical extension of Keane's argument would require Plaintiffs to continue to pay for the support agreement while the contract is in force, but Keane, by announcing its decision to terminate the support agreement, would no longer need to fulfill its obligations under the agreement. The question is not whether the contract was terminated, as Keane suggests; the question is whether Keane breached the contract while it was in force. One party's decision to terminate a contract does not render moot claims of breach for actions which occurred, or did not occur as in this case, prior to its termination.
1. Breach of Contract
Plaintiffs' breach of contract claim is premised on the language of Paragraph 7, the Support Agreement, which explains that Keane "agrees to make available System enhancements and updates that are released by SDS [Keane] to repair any coding problems within the supplied software and updates to improve System performance and/or capabilities." According to the plain language of this paragraph, in order for Y2K compliance to be covered by the contract it must be considered an 'enhancement or an update' to fix a 'coding problem,' or an 'update' 'to improve' 'performance and/or capabilities.' Keane claims Y2K compliance fits in neither category. This Court disagrees.
Keane maintains that it would be merely an assumption on the Court's part to conclude that reprogramming MEDNET to process dates after the Year 2000 is an enhancement or an update, and states quite plainly that MEDNET's inability to do so is not a 'coding problem.' However, Keane's own internal memo about MEDNET's inability to process these dates states otherwise. Specifically, a memorandum generated by Keane personnel entitled "Healthsouth/Mednet Year 2000 Compliance" refers to MEDNET's inability to process dates after the Year 2000 as a 'problem' and making MEDNET Y2K compliant as a 'solution' to that problem. (PX 9). The interoffice memo also consistently refers to the change as 'enhancement' to the software. (PX 9). Additionally, a vice president/general manager of Keane, Raymond Paris, testified making MEDNET Y2K compliant is considered an 'upgrade' (PX. 1 at 176-77) and Keane's customer support manager, Susan Johnson, testified it was considered an 'enhancement.' (PX 2 at 77).
This Court finds Plaintiffs have successfully generated an issue of material fact as to whether MEDNET's inability to process dates after the Year 2000 was covered by the language of the support agreement. Accordingly, Keane's motion to dismiss Plaintiffs' breach of contract claim is denied.
Keane also argues that Plaintiffs' inability to show they suffered damages — before the termination of the contract — is fatal to their breach of contract claim. Keane is correct that a showing of damages is a necessary element to one's claim of breach of contract. See Berryhill, 428 N.W.2d at 652. Keane appears to argue that Plaintiffs did not suffer damages at the time the contract was in force and therefore cannot recover damages sustained after the termination of the contract. Traditional contract damages are intended to place the injured party in the position that party would have occupied had there been performance." Id. (citing Metropolitan Transfer Station, Inc. v. Design Structures, Inc., 328 N.W.2d 532, 536 (Iowa App. 1982); DeWaay v. Muhr, 160 N.W.2d 454, 459 (Iowa 1968); and 22 Am.Jur.2d Damages §§ 26, 45 (1988)). Therefore, Plaintiffs' damages need only flow from the injury they suffered from MEDNET's inability to process dates after the Year 2000.
2. Breach of Warranty
Plaintiffs' breach of warranty claim is premised on the language of Paragraph 10 which states in part that Keane "warrants during the term of the Support Agreements described in Paragraph 7 above, that the System will perform the functions described in the Systems User Manual, supplied with the System at the time of delivery (or before)" For Plaintiffs to prevail on this claim, Plaintiffs must establish that MEDNET's inability to process dates after the Year 2000 interfered with the software's ability to perform the functions in the User Manual while the warranty was in effect. The warranty was only in effect during the term of the contract which terminated in March 1999. In their complaint Plaintiffs allege that MEDNET's Y2K "defect presently impairs the ability of the Mednet system to perform any of its date-related functions described in the User Manual when post-1999 dates are entered." See Complaint ¶ 11. The complaint then goes on to specify functions MEDNET is unable to perform. See Complaint ¶ 11(a)-(c). After a thorough review of the record, however, the Court has been unable to find any evidence to support these allegations. Plaintiffs must go beyond the pleadings and designate specific facts — by such methods as affidavits, depositions, answers to interrogatories, and admissions on file — that show that there is a genuine issue for trial. See Fed.R.Civ.P. 56(e); Celotex, 477 U.S. at 324. Plaintiffs' inability to create a genuine issue of material fact with regards to whether MEDNET's Y2K noncompliance affected the software's ability to carry out the functions detailed in the user manual is fatal to their claim of breach of warranty. For these reasons, Keane's motion for summary judgment on Plaintiffs' claim of breach of warranty is granted.
Plaintiff Mineral Area does provide evidence that on one occasion MEDNET's inability to process dates after the Year 2000 prevented Mineral Area from processing four checks and as a result, Mineral Area hand wrote each of the four checks. However, even drawing all inferences in the light most favorable to Plaintiffs, this incident is "merely colorable," and could not be considered "significantly probative" to stave off summary judgment on their claim of breach of warranty. See Anderson, 477 U.S. at 255. "Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Anderson, 477 U.S. at 248; Hartnagel, 953 F.2d at 394. This is not such a fact.
CONCLUSION
For the reasons stated herein, Keane's motion for summary judgment is granted on Plaintiffs' breach of warranty claim. In all other respects it is denied.
Keane moved for summary judgment as to all Plaintiffs' claims. However, in its moving papers, Keane's argument appears to center around Plaintiffs' claims of breach of contract and breach of warranty. The Court notes that the party moving for summary judgment bears the "initial responsibility of informing the district court of the basis for its motion and identifying those portions of the record which show lack of genuine issue." Celotex, 477 U.S. at 323. Keane has failed to state, with any specificity, its challenge to Plaintiffs' claim of breach of the implied covenant of good faith and fair dealing. To the extent Keane's challenges mirror those lodged against the claims of breach of contract and breach of warranty, the Court's analysis of those claims applies equally to Plaintiffs' claim of breach of the implied covenant of good faith and fair dealing.
ORDER
Accordingly, IT IS ORDERED:Defendant's Motion for Summary Judgment as to Count 1 is GRANTED. (Doc. No. 67)
Defendant's Motion for Summary Judgment as the remaining three counts is DENIED. (Doc. No. 67).