Opinion
Case No. 3:03CV7183
April 16, 2004
ORDER
This is a suit between the manufacturer of software, Exact Software of North America (formerly known as Macola, Inc.) ("Exact" or "Exact/Macola"), and a distributor (also described as a "reseller") of the software, Infocon Systems, Inc. ("Infocon"). Plaintiff Exact filed this suit, seeking to collect monies allegedly due on Infocon's account, in the Marion County, Ohio, Court of Common Pleas. Due to the diversity of the parties, Infocon removed the suit to this court.
Infocon filed a counterclaim, which, as amended, alleges three causes of action: 1) breach of contract; 2) fraud; and 3) tortious interference with contractual relationships. Pending is counterclaim defendant Exact's motion to dismiss the counterclaims. For the reasons that follow, that motion will be denied.
In its memorandum in opposition to the pending motion to dismiss the counterclaim, Infocon suggests that it can recover on the basis of promissory estoppel and/or negligent misrepresentation. Its counterclaim fails, however, to plead such claims. Its contentions about such putative claims shall, accordingly, be disregarded. If it desires to seek leave to amend its counter-complaint to state such claims, a motion to amend shall be filed on or before April 30, 2004; counterclaim defendant's opposition, if any, to said motion shall be filed on or before May 5, 2004; reply to be filed by May 14, 2004.
BACKGROUND
Exact, a Dutch company, purchased Macola, a software producer based in Marion, Ohio, in February, 2001. At the time of plaintiff's purchase of Macola, Macola and Infocon had a contractual relationship, embodied in a "Macola Software Reseller Object Agreement" ("Object Agreement"), dated June 29 and 30, 1998, and related documents. (Doc. 40 exh. D). Prior to that agreement, Macola and Infocon had entered into a "Support Subscription Service Agreement" ("Service Agreement") dated December 30, 1998. (Doc. 40 exh. A).
The 1998 Object Agreement contained an integration clause, which, inter alia, stated that the Object Agreement "replaces and supercedes all prior agreements" and "is the complete and exclusive statement of the agreement between the parties." (Doc. 40 exh. D, at § 11.11).
In addition, the Object Agreement states that it cannot be modified except in writing: "No modification, addition to or waiver of any rights, obligation, or default shall be effective unless in writing and signed by the party against whom such is sought to be enforced." ( Id. at § 11.9).
According to the complaint, the software produced by Macola contained a "compiler" supplied to Macola through a licensing understanding by a third party, which retained proprietary rights in the compiler. The compiler was a critical component; without it, the software cannot be updated (i.e., altered to fix problems) or upgraded (i.e, issued in new versions).
Infocon describes the difference between an upgrade and an update as follows: "An update is noted by a numeric change on the right side of the versions [sic] decimal (ie. 7.0 to 7.5), whereas an upgrade is noted on the left side of the decimal (ie. 7.6100 to 8.0)." (Doc. 37, at 6, ¶ 31).
At the time the parties entered into the 1998 Object Agreement, Macola periodically sold updates and upgrades to its distributors, including Infocon. Those distributors would resell the Macola software (and updates and upgrades) to their own customers, described as "end users."
In May, 1999, Macola informed its distributors that it would no longer sell updates and upgrades separately. Instead, after software had been purchased, end users would pay an annual maintenance fee to the distributors, who would deduct a commission, and remit the balance to Macola. Those maintenance fees would automatically entitle the end users to updates and upgrades, as well as basic support services. This program, referred to as the "Evergreen Program," applied to prior and subsequent purchasers of Macola software. By means of this program, Macola and its distributors would be guaranteed a steady revenue stream, instead of the less even flow that resulted from distribution of updates and upgrades in a more random fashion. (Doc. 40 exh. B, F, G).
The record does not contain a signed written agreement between the parties relating to the Evergreen Program. Nonetheless, Infocon collected maintenance subscriptions from its customers, and made payments to Macola for those subscriptions, in reliance on the oral agreements it alleges the parties made pursuant to the Evergreen Program model.
When it announced the Evergreen Program in 1999, Macola also stated that it would be releasing an upgrade, Progressive Version 8. At the time of Exact's purchase of Macola in 2001, Infocon understood that delivery of Version 8 would occur in 2001. This understanding was confirmed when Infocon received an announcement about Exact's acquisition of Macola, which referenced "the upcoming delivery of Macola's Version 8." (Doc. 40 exh. H, at 2). Further confirmation resulted from a display of Version 8 at a 2001 distributors' conference.
Despite these representations, Exact notified officers of Macola during the conference that Version 8 would not be released. Within a year of Exact's acquisition of Macola, this decision led to termination of executives and engineers who had been working on Version 8 for Macola.
When Infocon inquired during a distributors' conference in 2001 about rumors that Version 8 would not be issued, Macola stated that it would be issuing a better product than Version 8 by September of that year. Concurrently, a Macola executive told the distributors that he had seen Exact's commitment to get the product out by September, 2001, and the distributors could take his word on it. Another Macola official acknowledged to an official from Infocon that he understood that Infocon would "starve" without the promised upgrade.
In view of these reassurances, Infocon continued to forward subscription fees that it was collecting from its customers under the Evergreen Program. In addition, Infocon invested in facilities and other resources to be able to provide services to its customers following release of Version 8.
Despite these representations, Exact had not renewed the license agreement with the third party that had the proprietary rights to the compiler software. Without the ability to use that compiler, Exact could not issue updates or upgrades, such as Version 8.
Nonetheless, when representatives of Infocon met with Exact executives in Delf, Holland, in September, 2001. they were assured that Version 8 was already installed at Macola, and was available as "Macola ES." The Exact representative also stated that if Macola ES did not work by the end of the year, policy would be changed and Exact would ship another usable, sellable product to Infocon by December. In light of these assurances, Infocon continued to forward payments for subscriptions to Exact.
Though Exact used the terms Version 8 and Macola ES interchangeably, the Macola ES software used a different compiler. In any event, an update — not an upgrade — was finally issued on September 30, 2002. Another update, issued in January, 2003, was incompatible with systems running prior versions of Macola software, which used the original compiler, and Exact notified Infocon not to install that update shortly after its delivery.
Throughout this period, Infocon continued to forward the subscription fees to Exact. In December, 2002. Infocon notified Exact that it would no longer make those payments in view of Exact's failure to provide the services on which those payments were premised. Thereafter, Exact notified Infocon that its "reseller agreement" (i.e., Object Agreement) was terminated.
On October 13, 2003, Exact notified Infocon's customers that Infocon no longer represented Exact's products or services. The customers were given the names of local representatives in the customers' areas, and notified that their accounts would be switched to those representatives unless "confirmation" was received from the customers by October 31, 2003.
Exact filed this suit to recover about $120,000 in subscription fees collected by Infocon, but not forwarded by it to Exact.
Infocon's counterclaim asserts three causes of action: 1) breach of contract; 2) fraud; and 3) tortious interference with contractual relations. In its motion to dismiss, Exact argues: 1) no breach of the Object Agreement occurred, as all actions it undertook were authorized by the contract, and the Evergreen Agreement did not and could not (because not in writing) alter or amend the terms of the Object Agreement; 2) Infocon cannot maintain a fraud claim because statements about future events (such as release of future upgrades) are not actionable; and 3) Exact cannot be held liable for actions that it took pursuant to the Object Agreement (i.e., terminating Infocon for nonpayment of monies due).
STANDARD OF REVIEW
When ruling on a Rule 12(b)(6) motion to dismiss for failure to state a claim upon which relief can be granted, the court reads the complaint in the light most favorable to the complaining party, and all of the complaining party's factual allegations are accepted as true. Dugan v. Brooks, 818 F.2d 513, 516 (6th Cir. 1987). The court's task is to determine not whether the complaining party will prevail on its claims but whether it is entitled to offer evidence to support those claims. Scheuer v. Rhodes, 416 U.S. 232, 236(1974). Dismissal is appropriate only if it appears beyond doubt that the complaining party can prove no set of facts in support of the claims that would entitle him or her to relief. Pfennig v. Household Credit Servs., 295 F.3d 522, 525-26 (6th Cir. 2002) (citing Bibbo v. Dean Witter Reynolds, Inc., 151 F.3d 559, 561 (6th Cir. 1998)).
DISCUSSION A. Breach of Contract Counterclaim
The June 29, 1998 Object Agreement between the parties states: "No modification, addition to or waiver of any rights, obligation or default shall be effective unless in writing and signed by the party against whom such is sought to be enforced." (Doc. 40 exh. D, at § 11.9).
Exact claims that this provision nullifies Infocon's arguments that the "Evergreen Program" created a new relationship between them for service to and support of Infocon's customers using Exact's software program. The parties disagree as to whether the Evergreen Program and its accompanying terms are a modification to the Object Agreement, in which Macola/Exact agreed to provide "support and updates or upgrades to the Licensed Software which may become available from Macola under the terms and conditions of Macola's [Service Agreement]." ( Id. at § 5.1).
Infocon alleges that the Evergreen model was a contractual arrangement separate from the Object Agreement "whereby in exchange for the receipt of annual `subscription' monies from Infocon, Macola could no longer `elect to furnish' updates and upgrades, but must furnish updates and upgrades to Infocon." (Doc. 37, at 20, ¶ 119). For this service, Infocon (and its customers) "agreed to pre-pay Macola/Exact for `maintenance' in one-year subscriptions. In turn, Macola agreed to furnish quarterly updates and available upgrades during the one-year subscription." ( Id. at ¶ 121; see also doc. 40 exh. F, G).
In ruling on the instant motion to dismiss, the court accepts Infocon's allegations regarding the formation and terms of the alleged agreement as true. It appears that Infocon ultimately is alleging that the Evergreen model initiated a new Service Agreement. The 1998 Object Agreement between the parties indicates that Exact/Macola had an obligation to provide support pursuant to the terms of the Service Agreement. That statement leaves open the possibility (and, indeed, seems to expect) that the Service Agreement can be altered by the parties.
The signed 1988 Service Agreement and the unsigned 1998 Service Agreement appear to reflect the terms of the agreement between the parties regarding support services, updates, and upgrades to Macola software. These terms comprise the core of Infocon's breach of contract allegations. The unsigned 1998 Service Agreement, issued either prior to or contemporaneously with the 1998 Object Agreement, altered Macola's provision of support services into a yearly subscription fee service. The alleged Evergreen Program, according to Infocon, again altered that agreement between the parties, expanding the yearly subscription fee agreement to include upgrades and updates. It appears from the record that the Service Agreement, not the Object Agreement, governed the fees to be paid to Exact in return for support services. Thus, Exact's assumption that Infocon alleges a modification to the Object Agreement is incorrect; the allegations are most applicable to the Service Agreement.
Infocon has alleged that Exact/Macola suggested and implemented the new Evergreen Program in early 1999, almost one year after the implementation of the Object Agreement. If Infocon were to provide evidence of its allegations regarding the terms of that agreement, and a jury were to believe that evidence, they could find that Exact offered, and Infocon accepted, a new contract governing the support and maintenance services Exact would provide to Infocon and its customers. Moreover, if Infocon provides evidence of its allegations that it paid subscription fees to Exact/Macola and Exact, in turn, promised to provide support and maintenance services, a jury could find that each party offered consideration for the new agreement.
Exact's argument that the Object Agreement could only be modified through a writing, however, applies equally to the alleged modification of the Service Agreement. The December 30, 1988 Service Agreement (the only signed Service Agreement in the record), like the Object Agreement, contains a provision requiring all modifications, additions, or waivers to be in writing and signed by the party against whom they are to be enforced. (Doc. 40 exh. A, at § 9.1).
This fact, however, is not fatal to Infocon's claim for breach of contract. It does not appear that this provision was enforced by either party even prior to the alleged implementation of the Evergreen Agreement. Infocon has alleged that the unsigned 1998 Service Agreement was in force in 1999 when the Evergreen Program was introduced. Thus, if Infocon's allegations are true, Exact/Macola appears to have waived its right to enforce the Service Agreement's contractual provision requiring modifications to be in writing and signed by the party against whom enforcement is sought. See Mark-It Place Foods, Inc. v. New Plan Excel Realty Trust, Inc., 156 Ohio App.3d 65, 92-93 (2004) (explaining that waiver is the voluntary relinquishment of a known right and describing different types of waiver in contract law, including the requirement that waiver of contractual rights typically requires consideration); see also Ohio Rev. Code § 1302.12(D) (adopts the Uniform Commercial Code's prohibition on oral modifications to contracts for the sale of goods that require modifications to be in writing; subsection (D) provides an exception to this rule if waived). If Infocon's allegations are true, Exact/Macola acted upon, and benefitted from, the terms of the 1998 Service Agreement and the Evergreen Agreement. If so, Exact can hardly complain about Infocon's assertion of reciprocal rights under the Evergreen Agreement.
Exact points to O.R.C. § 1302.12(B) as support for its argument that Infocon may not present evidence of the alleged oral modification to the Service Agreement. It is important to note, however, that O.R.C. § 1302.12 is a Uniform Commercial Code ("UCC") provision meant to apply to contracts for the sales of goods. The case Exact cites, ePresence, Inc. v. Evolve Software, Inc., 190 F. Supp.2d 159 (D. Mass. 2002), involved a suit by a business consumer against a software company from which the consumer had purchased thousands of dollars of software. The instant Object Agreement and Service Agreement are contracts establishing the right to resell Exact/Macola software, not contracts for the sale of goods. Thus, the UCC provision does not dictate the outcome in the instant case, though it provides some context and guidance.
Exact also cites this court's order in Gomez v. Huntington Trust Co., 129 F. Supp.2d 1116 (N.D. Ohio 2000) for the proposition that "[s]ubsequent acts and oral agreements may not . . . modify the terms of a contract if the contract specifically states that a writing is necessary." Id. at 1127. That holding, however, is premised on the holding in Morrison v. Devore Trucking, Inc., 68 Ohio App.2d 140, 143 (1980). The holding in Mormon is based on O.R.C. § 1302.12. The holding in Gomez, therefore, like that in ePresence, is not binding precedent for the instant case.
Moreover, several courts have held that an oral modification of a written contract can be enforceable notwithstanding a provision in the contract requiring modifications to be in writing where, as alleged here, the parties have engaged in a course of conduct in conformance with the oral modification and where the party seeking to enforce the oral modification would suffer injury if the modification were deemed invalid. Lincoln Elec. Co. v. St. Paul Fire and Marine Ins. Co., 210 F.3d 672, 687 (6th Cir. 2000) ("[C]ourse of conduct can be considered in certain respects notwithstanding a `written changes only' contractual provision, because the series of acts in question are evaluated only as evidence regarding a continuity of the purpose captured by the original contractual terms at the time of formation."); Smaldino v. Larsick, 90 Ohio App.3d 691, 698 (1993) ("A gratuitous oral agreement to modify a prior contract is binding if it is acted upon by the parties and if refusal to enforce the modification would result in a fraud or injury to the promisee.") (citing Restatement (Second) of Contracts § 241 (1981)); 200 W. Apartments v. Foreman, No. 66107, 1994 WL 505271, at *2 (Ohio App. 1994) (noting that even contracts that are required by the statute of frauds to be in writing can be modified orally when "the parties to the written agreement act upon the terms of the oral agreement") (citing Nonamaker v. Amos, 73 Ohio St. 163 (1905); 51 O. Jur.3d Statute of Frauds § 108).
In the instant case, Infocon has alleged that both it and Exact agreed to implement the Evergreen Program and acted in conformance with this agreement. Infocon has provided some evidence of the terms of that agreement, and alleges that Exact has breached its obligations under that agreement. Infocon is entitled to develop evidence to prove these allegations. In addition, Infocon's allegations that the Object Agreement required Exact/Macola to continue to use the same compiler in its subsequent software, which Exact disputes, are issues of contract interpretation inappropriate for the instant motion to dismiss. Thus, Exact's motion to dismiss the breach of contract counterclaim shall be denied.
B. Fraud Counterclaim
Under Ohio law, a complaint for fraud must include the following five elements:
1) a false representation;
2) knowledge by the person making the representation that it is false;
3) intent by the person making the representation to induce the other to rely on the representation;
4) rightful reliance by the other to his detriment; and
5) an injury as a result of the reliance.
Johnson's Janitorial Service v. Alltel Corp., 92 Ohio App.3d 327, 329 (1993). Infocon alleges that Exact made knowingly false and material representations to it regarding the release and availability of upgrades and updates to its software, causing Infocon to suffer injuries when it relied on such representations. Exact argues, first, that Infocon's allegation may not proceed because it arises from contractual obligations and may not be pursued via a tort action. The case Exact relies on, Battista v. Lebanon Trotting Ass'n., 538 F.2d 111 (6th Cir. 1976), addresses whether there is a tort for maliciously breaching a contract, and holds that there is no tort for maliciously breaching a duty arising under a contract. Exact argues that Infocon's allegations, though presented in the complaint as fraud allegations, arise from obligations that are governed by the Object Agreement.
Infocon's complaint, however, alleges that Exact made specific promises about the status of Version 8/Macola ES, that those promises were false, and that Exact made those promises to induce Infocon to continue to forward subscription payments in accordance with the alleged Evergreen Agreement. Although the Object Agreement and the alleged Evergreen Agreement generally govern provision of upgrades and updates to Infocon, the alleged promise that a certain program had already been installed and would be available gives rise to a duty outside of Exact's general contractual obligations to provide support for its software and, as Infocon alleges, generally to provide updates and upgrades pursuant to the Evergreen Agreement. As the Sixth Circuit explained, "[t]he tort liability of parties to a contract arises from the breach of some positive legal duty imposed by law because of the relationship of the parties, rather than from a mere omission to perform a contract obligation." Battista, 538 F.2d at 117. Accordingly, I hold that Infocon has properly stated a tort claim.
Additionally, Exact argues that Infocon's allegations are not actionable in tort because the alleged false representations referred to future events (i.e., "this product will be available in the future"), which are not actionable in a fraud claim. At least one of Infocon's allegations, however, refers to Version 8's the current status. Infocon alleges that an Exact representative, at a meeting in Delf, Holland, promised Infocon's representatives that Version 8/Macola ES was "already installed at Macola in Ohio and further stated that if Macola ES didn't work by December of that year, he would change policy and ship another usable and sellable product to Infocon by December." (Doc. 37, at 16, ¶ 96). The promise that the software had already been installed, which appears to be a central representation upon which Infocon bases its fraud claim, refers to a current fact, not a future event.
Exact does not challenge the other elements of Infocon's fraud claim. In any event, Infocon has alleged that the Exact knew its representations were false, Exact intended to induce Infocon's reliance on those false representations, Infocon did, in fact, rely on those representations, and Infocon suffered injuries as a result. Thus, Exact's motion to dismiss the fraud claim shall be denied.
C. Tortious Interference with Contractual Relations Counterclaim
In Ohio, the elements of a claim for tortious interference with contract are: 1) the existence of a contract; 2) the wrongdoer's knowledge of the contract; 3) the wrongdoer's intentional procurement of the breach; 4) a lack of justification; and 5) resulting damages. Fred Siegel Co., L.P.A. v. Arter Hadden, 85 Ohio St.3d 171, 176 (1999).
Infocon alleges that Exact committed this tort when it terminated the Object Agreement, contacted Infocon's customers, told them that Infocon was no longer an authorized reseller of Exact/Macola products, and told them to switch their contracts to another authorized Exact reseller. Exact argues that it was justified in terminating the Object Agreement and contacting Infocon's customers because Infocon had an outstanding balance due for over 120 days in violation of § 10.3(f) of the Object Agreement.
In response, Infocon argues that Exact's assertions are based on facts outside the record and that Infocon terminated its maintenance payments under the Evergreen Agreement because Exact had failed to provide the service it was obligated to provide under that agreement. Essentially, Infocon argues that Exact breached their agreement first and cannot now claim justification in later terminating the breached agreement. Whether Exact's termination of the Object Agreement and whether Infocon's termination of maintenance payments under the terms of the alleged Evergreen Agreement were justified are factual determinations inappropriate to consider in the instant motion to dismiss. Although, as Exact points out, Infocon admitted in its complaint that it ceased making payments to Exact in December, 2002, Infocon also alleges that its payments complied with the Evergreen Agreement and the alleged new Service Agreement it created. According to Infocon's allegations, the Evergreen Agreement governed Infocon's obligation to pay a subscription or maintenance fee, not the Object Agreement alone. Thus, it is not apparent, as Exact alleges, that Infocon's allegedly unpaid monies were properly owed to Exact so that it could invoke § 10.3(f) of the Object Agreement. To resolve these issues, the parties must submit evidence on the record to establish their obligations to each other and any breaches thereof.
As a result, the court is left only with the facts that Infocon has alleged: that it had contracts with its customers, that Exact knew of those contracts, and that Exact unjustifiably contacted those customers with the intent to lure their business away from Infocon, thereby damaging Infocon's business. The fact that Infocon has not yet presented evidence that Exact lacked justification for its actions does not matter at this point. These allegations are sufficient to state a claim for tortious interference with contract, and Exact's motion to dismiss must be denied.
CONCLUSION
In light of the foregoing, it is ORDERED THAT
1) Plaintiff/counterclaim defendant Exact's motion to dismiss be, and hereby is, denied as to each of defendant/counterclaim plaintiff Infocon's counterclaims; and 2) If defendant/counterclaim plaintiff Infocon desires to seek leave to amend its counter-complaint, a motion to amend shall be filed on or before April 30, 2004; plaintiff/counterclaim defendant's opposition, if any, shall be filed on or before May 5, 2004; reply to be filed by May 14, 2004.
So ordered.