Opinion
Civ. No. 04-2922 (RHK/JSM).
April 28, 2005
Joseph W. Anthony, Norman J. Baer, and Court J. Anderson, Anthony Ostlund Baer, PA, Minneapolis, Minnesota, for Plaintiff.
Laurence S. Shtasel, James T. Smith, and Brian S. Paszamant, Blank Rome LLP, Philadelphia, Pennsylvania, and Joanne H. Turner, Denis E. Grande, and Erin A. Shields, Mackall Crounse Moore, PLC, Minneapolis, Minnesota, for Defendant.
MEMORANDUM OPINION AND ORDER
Introduction
This case arises out of a contract dispute. Plaintiff Piper Jaffray Company ("Piper Jaffray") and Defendant SunGard Systems International, Inc. ("SunGard") executed an agreement whereby SunGard would license computer software and provide related services to Piper Jaffray. Because the software never performed as expected, Piper Jaffray has sued SunGard seeking, among other things, direct, consequential, and incidental damages. This Court previously granted SunGard's motion to dismiss Piper Jaffray's claims for consequential and incidental damages based upon a contractual waiver. Now before the Court is SunGard's Motion for Partial Summary Judgment on Piper Jaffray's claims for direct damages in excess of an alleged contractual cap. For the reasons set forth below, the Court will grant SunGard's Motion.
This Motion was argued at the William Mitchell College of Law in St. Paul, Minnesota. The Court again expresses its appreciation to the school for hosting the hearing and to counsel for their participation.
Background
For the purposes of SunGard's Motion, the Court will view the facts in the light most favorable to the non-movant, Piper Jaffray.
In March 2001, the parties executed a Software License Agreement (the "Agreement"). Two provisions are pertinent to the pending Motion. The first is Section 6.1, under which SunGard warranted that Global Trader would perform as described but that its only obligation under the warranty would be to use all commercially reasonable efforts to solve reported software defects (the "Warranty"):
6.1. Performance. SunGard warrants to Customer that the Software, as and when delivered to Customer by SunGard and when properly used for the purpose and in the manner specifically authorized by this Agreement, will perform as described in the Documentation in all material respects. SunGard's only obligation under this warranty is to comply with the provisions of Section 3.1 with respect to any material failure to perform as described in the Documentation. Prior to the date upon which Customer uses the Software in a production environment, with respect to each instance in which the Software does not perform as described in the Documentation in all material respects, SunGard will have ninety (90) days from the date that such failure to perform is reported to SunGard to remedy such failure. The Warranty set forth in this Section 6.1 shall terminate 90 days after the date upon which Customer uses the Software in a production environment.
Section 3.1(b) provides that SunGard will utilize "all commercially reasonable efforts in solving" any reported software defects.
The Agreement's second pertinent provision is Section 6.10, under which neither party's total liability under the Agreement could exceed the initial licence fee actually paid by Piper Jaffray (the "Damages Cap"):
6.10. Limitations. . . . WITH RESPECT TO EACH SOFTWARE SCHEDULE NEITHER PARTY'S TOTAL LIABILITY UNDER THIS AGREEMENT SHALL UNDER ANY CIRCUMSTANCES EXCEED THE INITIAL LICENSE FEES ACTUALLY PAID BY CUSTOMER TO SUNGARD UNDER THIS AGREEMENT WITH RESPECT TO SUCH SOFTWARE SCHEDULE.
The Agreement is fully integrated and cannot be modified except in a writing signed by both parties. (See Agreement §§ 10.6, 10.8.) The parties also agreed that the Agreement's terms and conditions were the result of negotiations between them. (Id. § 10.12.) Although not memorialized in the Agreement, Piper Jaffray contends that it agreed to the Damages Cap in return for the Warranty. (See Herbeck Aff. ¶ 5.)
Upon execution of the Agreement, the parties agreed that by September 2001 Global Trader would be installed with agreed-upon specifications and functionality. As September 2001 approached, however, the software did not perform as required, and the parties extended the installation deadline to October 2001. By late 2001, the software still did not meet Piper Jaffray's needs.
In March 2002, Piper Jaffray terminated the Agreement and commenced litigation in Minnesota state court. (Baer Aff. Ex. 2; Am. Compl. ¶ 20.) In September 2002, after subsequent mediated negotiations, the parties executed an Addendum to the Agreement by which Piper Jaffray agreed to dismiss the state court action without prejudice and SunGard agreed to provide a defined "Production Ready Version" of Global Trader by January 2003. (Addendum §§ 1, 12.) Other than the express modifications contained in the Addendum, the Agreement, including the Warranty and the Damages Cap, remained in full force and effect. (Id. § 13.)
By January 2003, SunGard had not delivered a Production Ready Version of Global Trader. (Erickson Aff. ¶ 4.) In Spring 2003, SunGard's project manager disclosed to Piper Jaffray that Global Trader would not function as required. (Id. ¶ 5.) SunGard proposed to meet its obligations with an Internet version of Global Trader called eGT. (Id. ¶ 6.) In September 2003, Piper Jaffray tested eGT, but it failed to operate as specified. (Id. ¶ 7.) In October 2003, Piper Jaffray had Global Trader and eGT installed, but neither met its agreed-upon functionality. (Id. ¶ 8; Fredericks Aff. ¶¶ 2-3.) SunGard has since been unable to cure the defects in its software. (Fredericks Aff. ¶¶ 3-6.)
In May 2004, Piper Jaffray commenced this action in Minnesota state court, which SunGard removed to this Court. Piper Jaffray asserts three claims: (1) breach of the Addendum; (2) breach of the Agreement; and (3) conversion. (Am. Compl. ¶¶ 42-66.) In its breach of contract claims, Piper Jaffray seeks direct, incidental, and consequential damages. (Id. at p. 16.)
In June 2004, SunGard moved to dismiss Piper Jaffray's claims for incidental and consequential damages, arguing that Piper Jaffray had expressly waived recovery of such damages under section 6.11 of the Agreement. Section 6.11 provides, in pertinent part,
6.11. Consequential Damage Exclusion. . . . UNDER NO CIRCUMSTANCES SHALL EITHER PARTY BE LIABLE TO THE OTHER OR ANY OTHER PERSON FOR ANY INCIDENTAL, INDIRECT, CONSEQUENTIAL, SPECIAL, OR PUNITIVE DAMAGES OF ANY KIND OR NATURE, INCLUDING, SUCH DAMAGES ARISING FROM ANY BREACH OF THIS AGREEMENT OR ANY TERMINATION OF THIS AGREEMENT, WHETHER SUCH LIABILITY IS ASSERTED ON THE BASIS OF CONTRACT, TORT (INCLUDING NEGLIGENCE OR STRICT LIABILITY), OR OTHERWISE, WHETHER OR NOT FORESEEABLE, EVEN IF THE PARTY HAS BEEN ADVISED OR WAS AWARE OF THE POSSIBILITY OF SUCH LOSS OR DAMAGES.
In a Memorandum Opinion and Order, this Court determined that the consequential and incidental damages waiver was valid and enforceable. (See Doc. No. 23.) Relying on the text of § 2719 of Pennsylvania's Uniform Commercial Code, the official comments thereto, and the current trend in the law, this Court rejected Piper Jaffray's argument that the failure of the Warranty effectively voided the consequential and incidental damages waiver. (Id.) This Court also held that the waiver was not unconscionable. (Id.)
In its previous motion, SunGard also sought to dismiss Piper Jaffray's claims for direct damages in excess of the initial license fee paid, arguing that the Damages Cap precluded recovery of such damages. This Court left that issue "for another day," but not before expressing "some reservations . . . as to whether Piper Jaffray can recover damages in excess of the cap." (Id.) That other day has arrived. Relying upon the Damages Cap, SunGard has moved for partial summary judgment on Piper Jaffray's claims of direct damages to the extent that such damages exceed the initial license fee paid.
The parties dispute the amount of the license fee paid by Piper Jaffray. (Compare Jeffers Aff. ¶ 3 ($2.975 million),with Mocal Aff. ¶ 2 ($3.35 million).) The parties agree that this factual dispute cannot be decided on the current Motion. (Mem. in Opp'n at 3 n. 1; Reply Mem. in Supp. at 6 n. 5.)
Standard of Review
Summary judgment is proper if, drawing all reasonable inferences favorable to the nonmoving party, there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-50 (1986). The moving party bears the burden of showing that the material facts in the case are undisputed. See Celotex, 477 U.S. at 322; Mems v. City of St. Paul, Dep't of Fire Safety Servs., 224 F.3d 735, 738 (8th Cir. 2000). The court must view the evidence, and the inferences that may be reasonably drawn from it, in the light most favorable to the nonmoving party. See Graves v. Arkansas Dep't of Fin. Admin., 229 F.3d 721, 723 (8th Cir. 2000);Calvit v. Minneapolis Pub. Schs., 122 F.3d 1112, 1116 (8th Cir. 1997). The nonmoving party may not rest on mere allegations or denials, but must show through the presentation of admissible evidence that specific facts exist creating a genuine issue for trial.See Anderson, 477 U.S. at 256; Krenik v. County of Le Sueur, 47 F.3d 953, 957 (8th Cir. 1995).Analysis
SunGard contends that Piper Jaffray's claims for direct damages in excess of the license fee paid must be dismissed based upon the Damages Cap. (Mem. in Supp. at 2.) The Damages Cap, found in Section 6.10 of the Agreement, provides in pertinent part:
6.10. Limitations. . . . WITH RESPECT TO EACH SOFTWARE SCHEDULE NEITHER PARTY'S TOTAL LIABILITY UNDER THIS AGREEMENT SHALL UNDER ANY CIRCUMSTANCES EXCEED THE INITIAL LICENSE FEES ACTUALLY PAID BY CUSTOMER TO SUNGARD UNDER THIS AGREEMENT WITH RESPECT TO SUCH SOFTWARE SCHEDULE.
Piper Jaffray responds that the Damages Cap is unenforceable under § 2719 of Pennsylvania's UCC because the Warranty has failed of its essential purpose, which then entitles it to all the remedies available under the UCC — including direct damages without limitation. (See Mem. in Opp'n at 1-2, 7, 13.)
Before more fully addressing the arguments, it is first necessary to lay out the statutory groundwork. Both parties agree that Pennsylvania law applies (see Agreement § 10.16) and the Court will assume that Pennsylvania's UCC governs. Section 2719 of the UCC contains three subsections, but only subsections (a) and (b) are at issue here. Subsection (a) provides that an agreement may contain remedies in addition to or in substitution for those contained in the UCC. See 13 Pa. Cons. Stat. Ann. § 2719(a). It also provides that an agreement may limit or alter the measure of damages recoverable by, for example, limiting the buyer's remedy to return of the goods and repayment of the price or to repair and replacement of nonconforming goods. See id. Under Pennsylvania law, provisions limiting damages in commercial settings are generally enforced. Borden, Inc. v. Advent Ink Co., 701 A.2d 255, 262 (Pa.Super.Ct. 1997).
Subsection (b) provides that where circumstances cause an exclusive or limited remedy to "fail of its essential purpose, remedy may be had as provided" under the UCC. See 13 Pa. Cons. Stat. Ann. § 2719(b). Generally, a remedy fails of its essential purpose in situations where the exclusive remedy involves replacement or repair of defective goods and the seller, because of negligence in repair or because the goods are beyond repair, is unable to put the goods in warranted condition. See New York State Elec. Gas Corp. v. Westinghouse Elec. Corp., 564 A.2d 919, 929 (Pa.Super.Ct. 1989) (citing James J. White Robert S. Summers, Uniform Commercial Code at 269 (2d ed. 1980)).
The full text of 13 Pa. Cons. Stat. Ann. § 2719 provides:
(a) General rule. — Subject to the provisions of subsections (b) and (c) and of section 2718 (relating to liquidation or limitation of damages; deposits):
(1) The agreement may provide for remedies in addition to or in substitution for those provided in this division and may limit or alter the measure of damages recoverable under this division, as by limiting the remedies of the buyer to return of the goods and repayment of the price or to repair and replacement of nonconforming goods or parts.
(2) Resort to a remedy as provided is optional unless the remedy is expressly agreed to be exclusive, in which case it is the sole remedy.
(b) Exclusive remedy failing in purpose. — Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this title.
(c) Limitation of consequential damages. — Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not.
The official comments to the UCC explain the principles behind § 2719:
Under this section parties are left free to shape their remedies to their particular requirements and reasonable agreements limiting or modifying remedies are to be given effect.
However, it is of the very essence of a sales contract that at least minimum adequate remedies be available. If the parties intend to conclude a contract for sale within this Article they must accept the legal consequence that there be at least a fair quantum of remedy for breach of the obligations or duties outlined in the contract. Thus any clause purporting to modify or limit the remedial provisions of this Article in an unconscionable manner is subject to deletion and in that event the remedies made available by this Article are applicable as if the stricken clause had never existed. Similarly, under subsection [b], where an apparently fair and reasonable clause because of circumstances fails in its purpose or operates to deprive either party of the substantial value of the bargain, it must give way to the general remedy provisions of this Article.13 Pa. Cons. Stat. Ann. § 2719, cmt. 1. Three general principles emerge from this comment: (1) parties are free to shape their remedies and reasonable agreements are enforceable, but at least "minimum adequate remedies" or "a fair quantum of remedy" must be available to compensate for a breach; (2) a clause modifying or limiting remedies is unenforceable if unconscionable; and (3) even "an apparently fair and reasonable" clause is unenforceable if it fails of its essential purpose.
Against this backdrop, Piper Jaffray argues that the Warranty is a limited or exclusive remedy that has failed of its essential purpose because SunGard has been unable to put Global Trader in the warranted condition. (See Mem in Opp'n at 11-12.) For the purposes of this Motion, the Court will assume that this is true. Piper Jaffray further argues that because the Warranty has failed of its essential purpose, it is entitled under subsection (b) to all remedies provided by the UCC — including direct damages without limitation. (See id. at 7, 13.) In other words, Piper Jaffray contends that the failure of the Warranty effectively voids the Damages Cap. (See id. at 11, 13.) SunGard replies that the Warranty and the Damages Cap are two separate and distinct provisions, and that the Damages Cap is enforceable even if the Warranty fails of its essential purpose. (See Mem. in Supp. at 13-16; Reply Mem. at 1-8.)
Upon consideration of the language of the Agreement, the statutory text, the official comments thereto, and persuasive case law, this Court concludes that the Damages Cap is enforceable even if the Warranty has failed. First, there is no support in the Agreement itself for Piper Jaffray's contention that the failure of the Warranty voids the Damages Cap. The Warranty and the Damages Cap are two separate provisions and neither mentions the other or conditions its operation upon the operation of the other. (Compare Agreement § 6.1, with Agreement § 6.10.) Piper Jaffray asserts that the Warranty and Damages Cap are "inextricably intertwined" and that "SunGard lost the ability to enforce [the] cap when it caused the limited remedy of repair to fail." (Mem. in Opp'n at 11, 13.) But the Agreement is unambiguous — nothing in the Agreement's language indicates that the Warranty and the Damages Cap are intertwined. Had the parties intended otherwise, they could have easily said so either initially in the Agreement or certainly later in the Addendum (which was negotiated after Global Trader's problems had surfaced and litigation had begun in state court).
The Supreme Court of Pennsylvania has not addressed the issue presented in this Motion, so this Court must predict how that Court would rule if presented with the question. See Robertson v. Allied Signal, Inc., 914 F.2d 360, 378 (3d Cir. 1990).
Perhaps recognizing the clarity of the Agreement, Piper Jaffray submits the affidavit of its former Chief Technology Officer, who states that Piper Jaffray only agreed to the Damages Cap in return for the Warranty. (See Herbeck Aff. ¶ 5; Mem. in Opp'n at 11.) The Chief Technology Officer's statement, however, is inadmissible parol evidence. The parol evidence rule set forth in § 2202 of Pennsylvania's UCC provides that written contractual terms may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement. 13 Pa. Cons. Stat. Ann. § 2202. This section permits oral evidence of consistent additional terms to explain or supplement a contract, but only where the written terms were not intended as a complete and exclusive statement of the contract. Id.; see North Penn Oil Tire Co. v. Phillips Petroleum Co., 358 F. Supp. 908, 920 (E.D. Pa. 1973). Here, parol evidence is offered not as a consistent explanation or supplement, but to make the operation of the Damages Cap conditioned upon the success of the Warranty. And even if the parol evidence could somehow be considered as a consistent explanation or supplement, such terms cannot be added because the Agreement was intended to be the complete and exclusive statement of the contract. (See Agreement § 10.6)
The full text of 13 Pa. Cons. Stat. Ann. § 2202 provides:
Terms with respect to which the confirmatory memoranda of the parties agree or which are otherwise set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be explained or supplemented:
(1) by course of dealing or usage of trade (section 1205) or by course of performance (section 2208); and
(2) by evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement.
Second, there is no support in the text of § 2719 or its official comments for the argument that the failure of an exclusive or limited remedy voids an authorized damages limitation. Subsection (a) provides two mechanisms by which parties can shape their agreement. Parties may "[1] provide forremedies in addition to or in substitution for those provided in this division and may limit or alter the measure ofdamages recoverable under this division." 13 Pa. Cons. Stat. Ann. § 2719(a) (alterations and emphasis added). By joining the two mechanisms with the conjunction "and" the text indicates that they are separate concepts that may be used alone or in combination. There is no indication that when both mechanisms are used the operation of a damages limitation is automatically conditioned upon the success of a substituted remedy.
Relying heavily on the "remedy may be had" clause of subsection (b), Piper Jaffray contends that when a limited or exclusive remedy fails of its essential purpose, "the damaged party is entitled to all remedies available under the UCC," including "direct damages, without limitation." (Mem. in Opp'n at 12-13.) The Court disagrees. Subsection (b) provides that "[w]here circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this title." 13 Pa. Cons. Stat. Ann. § 2719(b). The "remedy may be had" phrase must be viewed in its fullest sense. See id. § 1102 and cmt 1. On its face, the phrase refers to the entire UCC, including subsection (a), which provides that damages may be limited or altered. Therefore, a "remedy may be had" under subsection (b), but only to the extent that damages have not been otherwise limited under subsection (a).
This conclusion is buttressed by the official comments to the UCC. Comment 1 explains that under subsection (b) "where an apparently fair and reasonable clause because of circumstances fails in its purpose . . . it must give way to the general remedy provisions of" the UCC. Id. § 2719, cmt. 1 (emphasis added). The references to "its" and "it" is significant. "[I]t" is singular and refers back to the "clause [that] fails in its purpose." Read properly, the comment explains that when an exclusive or limited remedy fails of its essential purpose, that specific remedy must be voided. The Comment does not say, as Piper Jaffray contends, that when an exclusive or limited remedy fails of its essential purpose, all other substitute remedies or damages limitations must also be voided.
In a footnote, Piper Jaffray argues that the Damages Cap itself has failed of its essential purpose and that it can seek damages in excess of the initial licence fee on that ground. (See Mem. in Opp'n at 16 n. 7.) But the Damages Cap has not failed of its essential purpose, which is to limit damages to the amount of the initial license fees paid. (See Agreement § 6.10.) As observed in a similar case: "[The] limitation clause does not fail of its essential purpose because . . . the clause does exactly what it was designed to do: limit the buyer's remedy to the purchase price of the product." Jim Dan, Inc. v. O.M. Scott Sons Co., 785 F. Supp. 1196, 1199-1200 (W.D. Pa. 1992).
Third, the purposes underlying the statute would not be fulfilled if the failure of the Warranty voided the Damages Cap. Under § 2719, parties are free to shape their remedies to suit their particular needs. See 13 Pa. Cons. Stat. Ann. § 2719, cmt. 1. Reasonable agreements limiting or modifying remedies are to be given effect. Id. As the Third Circuit has recognized, "[l]imitation of liability clauses are a way of allocating unknown or undeterminable risks . . . and are a fact of everyday business and commercial life." Valhal Corp. v. Sullivan Assocs., Inc., 44 F.3d 195, 204 (3d Cir. 1995) (citing Pennsylvania cases).
Here, the parties shaped their remedies by negotiating a Warranty and a separate Damages Cap. They allocated unknown or undeterminable risks, and there is no argument that either provision is unconscionable. Furthermore, the remedy under the Agreement — damages up to the amount of the license fee paid — provides the "minimum adequate remed[y]" or "fair quantum of remedy" required by the UCC. See, e.g., Ritche Enter. v. Honeywell Bull, Inc., 730 F. Supp. 1041, 1049-50 (D. Kan. 1990) (finding clause limiting recovery of actual damages to the purchase price "the type of a backup remedy which courts have upheld as a minimum adequate remedy"); Computerized Radiological Servs., Inc. v. Syntex Corp., 595 F. Supp. 1495, 1510 (E.D.N.Y. 1984), aff'd in part and rev'd in non-relevant part, 786 F.2d 72 (2d Cir. 1986) (finding clause limiting the plaintiff's recovery to the price paid "affords plaintiff the adequate remedy required by the Code"). Moreover, the Damages Cap benefits both parties; Piper Jaffray's liability for breach is also capped at the amount of the license fee paid. (See Agreement § 6.10.)
Had Piper Jaffray made such an argument, it would not be successful. "A contractual provision is unconscionable if: 1) one of the parties had no meaningful choice with respect to the provision, and 2) the provision unreasonably favors the other party." Borden, 701 A.2d at 264 (citing cases). Here, both parties had a meaningful choice (see Agreement § 10.12) and neither provision unreasonably favors one side over the other.
Finally, persuasive case law supports this Court's conclusion that the failure of an exclusive or limited remedy does not void a damages limitation. For example, in Computerized Radiological Services, the parties contracted for the sale of a CAT Scan machine. Id. at 1509. The contract contained both a warranty that limited the defendant's liability to repair and replacement of the machine and a damages cap that limited the defendant's liability to the amount paid by the plaintiff. Id. Assuming that the warranty had failed of its essential purpose, the court held that "[e]ven though an exclusive remedy is stricken because it fails of its essential purpose, that does not mean that all limitations must be stricken." Id. at 1510. Thus, the court upheld the damages cap. Id.
Piper Jaffray relies on Caudill Seed Warehouse Co. v. Prophet 21, Inc., 123 F. Supp. 2d 826 (E.D. Pa. 2000) andAmsan, LLC v. Prophet 21, Inc., 2001 WL 1231819 (E.D. Pa. Oct. 15, 2001). But its reliance is misplaced, as neither case addressed whether the failure of a limited or exclusive remedy effectively voids a separate damages cap. Rather, each case held that the failure of an exclusive or limited remedy voided a consequential damages waiver. To the extent that the reasoning of those cases applies to the instant issue, this Court finds those cases unpersuasive.
In sum, this Court concludes that the Damages Cap is valid and enforceable even if the Warranty to repair Global Trader has failed of its essential purpose. Accordingly, under the Damages Cap, SunGard's total liability may not exceed the initial license fees actually paid by Piper Jaffray as provided in Section 6.10 of the Agreement.
Conclusion
Based on the foregoing, and all of the files, records, and proceedings herein, IT IS ORDERED that Defendant SunGard Systems International Inc.'s Motion for Partial Summary Judgment (Doc. No. 35) is GRANTED and Plaintiff Piper Jaffray Company is precluded from recovering direct damages in excess of the initial license fee actually paid for any claims asserted in this action.