Opinion
No. 03 Civ. 8978 (MGC).
December 22, 2004
O'Melveny Myers LLP, Attorneys for Plaintiff-Counterclaim Defendant, The Upper Deck Company, LLC, New York, NY, Dale M. Cendali, Daniel L. Cantor, Claudia E. Ray.
Paul, Weiss, Rifkind, Wharton Garrison LLP, Attorneys for Defendant-Counterclaim Plaintiff, BreaKey International, BV, New York, NY, Mark H. Alcott, Eric Twiste, Nili T. Moghaddam, Jason Sonoda.
OPINION
This case arises from a dispute between The Upper Deck Company, LLC ("Upper Deck") and BreaKey International, BV ("BreaKey") concerning the parties' rights and obligations under an agreement to license a toy and related online game. BreaKey has moved for summary judgment dismissing the claims in Upper Deck's Third Amended Complaint and granting certain of its own counterclaims. At oral argument on November 18, 2004 and November 30, 2004, BreaKey's motion was granted in part and denied in part, and decision was reserved on Upper Deck's claim that BreaKey breached the license agreement by "failing to provide fully-functional web site infrastructure and software that could simultaneously support thousands of customers in different languages from different countries." Third Amended Compl. ¶ 21. For the reasons that follow, BreaKey's motion for summary judgment dismissing this claim is now denied.
BACKGROUND
BreaKey is a small Dutch company that developed a toy and related online game called "BreaKey". The toy is a collectible plastic key that is produced in different colors and features various characters on its stem. To play the manual game, two players interlock and turn their keys until one player wins by breaking off the internal chamber of the other player's key. The winner receives the losing player's key. Users play the online game by challenging opponents to "BreaKey battles." The winner of these battles earns points and qualifies to receive prizes.
Upper Deck is a Delaware limited liability company in Carlsbad, California, which markets and sells sports memorabilia and collectible items worldwide. In July 2002, Ken Ross, acting as an intermediary, contacted Richard McWilliam, then Chief Executive Officer of Upper Deck, about the BreaKey product and sent McWilliam samples of the BreaKey toy. Soon thereafter on July 31, 2002, McWilliam sent Ross a term sheet for a proposed "BreaKey Distribution/License Agreement." On September 5, 2002, McWilliam submitted to Ross a revised term sheet, the general terms of which BreaKey accepted. The parties ultimately executed a formal letter agreement entitled "BreaKey License Agreement" (the "Agreement"), dated "as of November 15, 2002." McWilliam signed the Agreement on behalf of Upper Deck.
The Agreement granted to Upper Deck the non-exclusive right to manufacture and the exclusive license "to use, copy, promote, distribute, market and sell" the BreaKey product throughout most of the world for a term of two years commencing upon execution. The Agreement also granted to Upper Deck the right to create "a website and/or web pages" for use in connection with the online BreaKey game:
Licensor hereby grants Upper Deck the right during the Term to create (i) a website and/or (ii) web pages embodying the Trademarks which may be part of, or connected to, the Upper Deck website located at Upperdeck.com (the "UD/BreaKey Site"), and to perform, copy, display and operate such UD/BreaKey Site solely in connection with the use by consumers of Licensor's internet version of the Product, provided that any and all material aspects of the UD/BreaKey Site shall be subject to the prior written approval of Licensor, which shall not be unreasonably withheld. In connection with the foregoing, Licensor shall provide Upper Deck, at Licensor's cost therefor, with copies of software and/or other material available as of the date hereof (e.g., source code or such other digitized assets necessary to enable consumers to use the Product on the UD/BreaKey Site in the same manner as the Product is currently operated on the BreaKey.nl site (the "Licensor Site")).
Agreement ¶ 1(b). Among other things, Upper Deck agreed to pay BreaKey a $5 million "nonreturnable Minimum Guarantee," an advance chargeable against royalties earned for sales of the BreaKey product, payable in two equal installments — $2.5 million upon execution of the Agreement and $2.5 million at the commencement of the second term year on November 15, 2003.
Upper Deck made the first $2.5 million payment to BreaKey in November 2002. In December 2002, pursuant to Paragraph 1(b) of the Agreement, BreaKey provided Upper Deck with the source code necessary to operate the game engine on the BreaKey.nl site, BreaKey's Dutch website. According to Upper Deck, however, by early 2003, tests revealed "significant unforeseen problems" with the game engine software. Specifically, it did not support the large volume of concurrent users and did not have the multilingual capabilities that Upper Deck claims BreaKey represented it did, and that Upper Deck required in order to operate its international website as contemplated under the Agreement. In other words, the website was not "turnkey" or immediately usable as BreaKey allegedly represented it would be during the negotiation of the Agreement. According to Upper Deck, it was forced to re-design the website, which consequently delayed the distribution of the BreaKey product.
McWilliam testified at his deposition that he informed BreaKey representatives when he met with them in Amsterdam in May 2003 that there were significant issues with the game engine, but that Upper Deck would continue to do its best to make the product successful and that "there is going to have to be an adjustment to the contract." Although Upper Deck proposed an amendment to the Agreement that would extend the license and distribution dates, BreaKey demanded that the $5 million minimum guarantee payment be increased accordingly. Ultimately, no extension was agreed to in writing. It is undisputed that Upper Deck's distribution of the BreaKey product was limited and fell short of what was contemplated under the Agreement.
Upper Deck filed this action on November 13, 2003, two days before its obligation to make the second $2.5 million payment came due. BreaKey asserted counterclaims. Although Upper Deck's original Complaint alleged breach of contract, Upper Deck did not claim that the alleged deficiencies in the website infrastructure constituted a breach of the Agreement until amending its Complaint for the second time in June 2004. The Third Amended Complaint, under consideration here, alleges that BreaKey breached the Agreement by "failing to provide fully-functional web site infrastructure and software that could simultaneously support thousands of customers in different languages from different countries." Third Amended Compl. ¶ 21.
The parties subsequently agreed to terminate the contract in a stipulation signed and so-ordered on April 19, 2004.
BreaKey has moved for summary judgment dismissing this claim, arguing that its only obligation with respect to the website is set forth in Paragraph 1(b) of the Agreement:
[BreaKey] shall provide Upper Deck, at [BreaKey]'s cost therefor, with copies of software and/or other material available as of the date hereof (e.g., source code or such other digitized assets necessary to enable consumers to use the Product on the UD/BreaKey Site in the same manner as the Product is currently operated on the BreaKey.nl site (the "Licensor Site")).
According to BreaKey, this language merely required it to provide materials necessary for Upper Deck to create a website functionally similar to BreaKey's Dutch website that existed "as of the date hereof," that is, as of November 15, 2002. The plain and unambiguous terms of the Agreement, BreaKey argues, did not require it to provide a website that "could simultaneously support thousands of customers in different languages from different countries."
Upper Deck initially responded with the argument that BreaKey breached the Agreement's implied warranties of merchantability and fitness for a particular purpose under Article 2 of the New York Uniform Commercial Code. It was not until the second hearing on BreaKey's motion that Upper Deck first articulated the alternative argument that BreaKey's failure to provide a "turnkey" website violated the express terms of Paragraph 1(b). Upper Deck now contends that Paragraph 1(b) required BreaKey to provide not just the source code for BreaKey's own Dutch website, but the materials necessary to enable consumers around the world to play the game on Upper Deck's website. Counsel for Upper Deck explained the claim as follows:
This argument was rejected in open court because the Agreement is not a contract for the sale of goods, but a two year license for the manufacture and distribution of a product for which BreaKey had applied for a United States patent.
Our position . . . is that we thought we were getting a turnkey product, that we were going to get this, we were going to be able to have consumers in the United States be able to play the game, that they were going to be able to get this and play the game. And they weren't able to play the game. The consumers were not able to use the product in the same manner as the product is currently operated on the BreaKey site.
This could have been written to say we will provide you with the software for the BreaKey Netherlands site. It could have just said that, end of sentence and that's that, but it didn't say that. What it went on to say was what was the purpose, what was the intent to enable consumers to use the product, and we believe that they have violated that express provision of the contract and that there's ample evidence in the record and in our brief with regard to — with regard to the fact that we thought we were getting a turnkey product that would work and it did not. And that's our position.
Corrected Transcript of November 30, 2004 Hearing at 4-5. Upper Deck now urges that the language in the illustrative parenthetical — "e.g., source code or such other digitized assets necessary to enable consumers to use the Product on the UD/BreaKey Site in the same manner as the Product is currently operated on the BreaKey.nl site" — is ambiguous. Accordingly, Upper Deck argues that extrinsic evidence, such as deposition testimony from its witnesses who negotiated the Agreement, should be considered in construing the meaning of this provision.
DISCUSSION
A motion for summary judgment shall be granted if the court determines "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." Fed.R.Civ.P. 56(c). See also Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). A genuine issue of material fact exists when the evidence is such that a reasonable finder of fact could return a verdict for the nonmoving party.Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986);Richardson v. Coughlin, 763 F. Supp. 1228, 1234 (S.D.N.Y. 1991). In deciding whether a genuine issue exists, the court must "examine the evidence in the light most favorable to the party opposing the motion, and resolve ambiguities and draw reasonable inferences against the moving party." In re Chateaugay Corp., 10 F.3d 944, 957 (2d Cir. 1993).
Where, as here, there is a dispute over the proper construction of a contract, summary judgment may be granted if the contract language is unambiguous and conveys a definite meaning. Seiden Assocs., Inc. v. ANC Holdings, Inc., 959 F.2d 425, 428 (2d Cir. 1992). If, however, "the language is susceptible to different reasonable interpretations, and `where there is relevant extrinsic evidence of the parties' actual intent,' then the contract's meaning becomes an issue of fact precluding summary judgment." Sayers v. Rochester Tel. Corp. Supplemental Mgmt. Pension Plan, 7 F.3d 1091, 1094 (2d Cir. 1993) (quotingSeiden, 959 F.2d at 428). Under New York law, which governs the Agreement, whether contract language is plain or ambiguous is a question of law for the court. Id. (citing W.W.W. Assocs. v. Giancontieri, 77 N.Y.2d 157, 162, 565 N.Y.S.2d 440, 566 N.E.2d 639 (1990)).
An examination of the entire Agreement shows that the language in Paragraph 1(b) — "e.g., source code or such other digitized assets necessary to enable consumers to use the Product on the UD/BreaKey Site in the same manner as the Product is currently operated on the BreaKey.nl site" — is ambiguous in that it is susceptible of more than one reasonable interpretation, including the two urged here. Furthermore, the evidence that has been proffered shows that the intention of the parties with respect to the condition of the website at the time of its delivery by BreaKey is a genuine issue of disputed fact.
CONCLUSION
For the foregoing reasons, BreaKey's motion for summary judgment is denied.
SO ORDERED.