Summary
granting summary judgment for a seller-licensor because the buyer failed to meet explicit conditions imposed in a software license agreement to receive limited warranty remedies
Summary of this case from Samia Companies LLC v. MRI Software LLCOpinion
Civil Action No. 02-11138-DPW.
December 29, 2004.
MEMORANDUM AND ORDER
Plaintiff Teragram Corporation ("Teragram") brings this action against defendant ScreamingMedia, Inc. ("ScreamingMedia") for breach of contract arising out of a software licensing agreement. ScreamingMedia counterclaims for breach of contract and misrepresentation. Both parties seek damages and declaratory judgments. Before me are Teragram's motion for summary judgment on all claims, ScreamingMedia's cross motion for summary judgment on all claims, Teragram's motion to strike portions of three affidavits, and Teragram's motion to amend its complaint.
I. BACKGROUND
On October 17, 2001, Teragram and ScreamingMedia entered into a License Agreement (the "Agreement") pursuant to which Teragram licensed software to ScreamingMedia. The Agreement referenced three software products (collectively, the "Software"): Entity Extraction, SDK and TLGREP entity compilers (the "Entity Extraction software"); Entity Extraction English Dictionaries and Grammars (the "English Dictionaries software"); and Summarization Engine with English Data (the "Summarization software").
The plaintiff refers to the Entity Extraction and English Dictionaries software collectively as the "Concept Extraction Software."
The Agreement was the culmination of discussions between the parties that began in June 2001. During the relevant time period, ScreamingMedia was "in the business of providing summarized textual content (e.g. news stories and headlines) to mobile phone users." The company had been employing several people to consolidate full-text news stories to the approximately 160 character length that can be displayed on mobile phone screens. To eliminate the cost of these human "editors," ScreamingMedia sought to automate the process by obtaining computer software that would summarize the full-length articles. ScreamingMedia also desired "entity extraction automation" whereby hyperlinks to stock market ticker symbols of companies mentioned in an article — each hyperlink leading to "detailed financial information" about the particular company — would be inserted into the text of the article.
In the course of investigating how to accomplish these goals, ScreamingMedia invited Teragram to participate in a competitive evaluation of the Software. Teragram agreed and on August 20, 2001 installed LINUX versions of the Summarization and Entity Extraction software on ScreamingMedia's computer server. At the conclusion of the competitive evaluation process, ScreamingMedia decided to license the Software from Teragram and the parties entered into the Agreement.
The term of the Agreement commenced on October 17, 2001, and was to "terminate as to each Teragram Product on the third anniversary of such Teragram Product's Delivery Date, unless earlier terminated in accordance with [Section 4 of the Agreement]." Under the pay schedule set forth in Exhibit A to the Agreement, ScreamingMedia was to pay Teragram a total of $59,944 in yearly fees for the Entity Extraction and English Dictionaries software, consisting of $50,800 in licensing fees and $9,144 in support fees. ScreamingMedia was also to pay Teragram a total of $36,816 for the yearly fees for the Summarization software, comprising $31,200 for the yearly licensing fee and $5,616 for the yearly support fee. The "Payment Due Date" for these fees was designated as "30 days following the Delivery Date of this software and on the anniversaries of the Delivery Date."
The exclusive remedy for a failure of the Software to perform as warranted was detailed in Section 7 of the Agreement, titled "Limited Warranty and Warranty Disclaimer." That section, set forth below in pertinent part, provided a limited warranty for a period of thirty days after delivery of the Software to the licensee (ScreamingMedia) and that:
Teragram warrants that the Teragram Products, for a period of thirty (30) days after delivery to Licensee, shall perform substantially in accordance with the Documentation. Licensee's exclusive remedy and Teragram's sole liability under this warranty shall be for Teragram to correct any material failure of the Teragram Products to perform as warranted, if such failure is reported to Teragram within the warranty period and Licensee, at Teragram's request, provides Teragram with sufficient information (which may include access to Licensee's computer system for use of Licensee's copy(ies) of the Teragram Products by Teragram) to reproduce the defect in question.
The next paragraph read in bold type that:
THE ABOVE ARE THE ONLY WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, THAT ARE MADE BY TERAGRAM AND TERAGRAM DISCLAIMS ALL OTHER WARRANTIES, INCLUDING BUT NOT LIMITED TO THE IMPLIED WARRANTIES OF MERCHANTABILITY, NONINFRINGEMENT, FITNESS FOR A PARTICULAR PURPOSE OR THAT THE OPERATION OF THE TERAGRAM PRODUCTS WILL BE UNINTERRUPTED OR ERROR-FREE. NO ORAL OR WRITTEN INFORMATION OR ADVICE GIVEN BY TERAGRAM, ITS AGENTS OR EMPLOYEES SHALL CREATE A WARRANTY OR IN ANY WAY INCREASE THE SCOPE OF THE WARRANTIES IN THIS AGREEMENT. SUCH WARRANTIES SHALL NOT BE DEEMED TO HAVE FAILED OF THEIR ESSENTIAL PURPOSE SO LONG AS TERAGRAM IS MAKING GOOD FAITH EFFORTS TO CORRECT DEFECTS OR FAILURES UNDER THE TERMS OF THE WARRANTY.
Section 9(a) of the Agreement, entitled "Limitation of Liability," prohibited the recovery of any indirect, special, punitive, consequential, or incidental damages:
REGARDLESS OF WHETHER ANY REMEDY SET FORTH IN THIS AGREEMENT FAILS OF ITS ESSENTIAL PURPOSE, IN NO EVENT WILL TERAGRAM OR ANYONE ELSE WHO HAS BEEN INVOLVED IN THE CREATION, PRODUCTION OR DELIVERY OF THE TERAGRAM PRODUCTS BE LIABLE FOR ANY INDIRECT, SPECIAL, PUNITIVE, CONSEQUENTIAL, OR INCIDENTAL DAMAGES (INCLUDING DAMAGES FOR LOSS OF BUSINESS PROFITS, BUSINESS INTERRUPTION, LOSS OF BUSINESS INFORMATION, AND THE LIKE) ARISING OUT OF THIS AGREEMENT OR THE USE OF OR INABILITY TO USE THE TERAGRAM PRODUCTS EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. IN NO CASE SHALL TERAGRAM'S AGGREGATE LIABILITY FOR ANY ONE MATTER ARISING OUT OF THE SUBJECT MATTER OF THIS AGREEMENT, WHETHER IN CONTRACT, TORT OR OTHERWISE, EXCEED THE AMOUNT ACTUALLY RECEIVED BY TERAGRAM FROM LICENSEE UNDER THIS AGREEMENT IN THE TWELVE (12) MONTHS PRECEDING THE OCCURRENCE OF SUCH MATTER, AND FOR ALL MATTERS, IN THE AGGREGATE, THE TOTAL AMOUNT ACTUALLY RECEIVED BY TERAGRAM FROM LICENSEE UNDER THIS AGREEMENT.
Teragram delivered a LINUX version of the Summarization software to ScreamingMedia on or about October 23, 2001. Teragram made subsequent deliveries of new releases of the Summarization software throughout November and into December 2001.
New releases were delivered on November 2, 6, 8, 9, and 27, 2001, and December 10, 2001.
On or about December 10, 2001, Teragram delivered LINUX versions of the Entity Extraction and English Dictionaries software to ScreamingMedia. On January 20, 2002, Teragram delivered a new LINUX version of the Entity Extraction software, and on January 21, 2002 provided a Windows-compatible version of this software.
Prior to the summary judgment hearing, ScreamingMedia stated alternately that Teragram provided the Windows version of the Entity Extraction software on January 20, 2002 and on January 21, 2002. In its Answer to the Amended Complaint, ScreamingMedia stated that the software was delivered "on or about January 20, 2002." During the summary judgment hearing and in filings submitted thereafter, however, ScreamingMedia definitively adopted the position that the Windows version of the software was delivered on January 21, 2002.
On February 20, 2002, Teragram received a letter from ScreamingMedia dated February 19, 2002 and sent via overnight mail alleging that Teragram was in material breach of the Agreement. In the letter, ScreamingMedia claimed that Teragram had "insisted, both in verbal communications between the parties as well as in its product literature that Teragram provided as part of the sale" that the Software would allow ScreamingMedia to "to have the ability to locate company names, names of executives, places and other entities (concepts) within textual documents," as well as "to discover associations such as `employer — position — employee' and many others, within the textual documents." ScreamingMedia went on to quote in the letter from two paragraphs in what it termed the "Teragram Concepts Extraction white paper supplied by Teragram to ScreamingMedia as part of the contract negotiation process":
`The Teragram Concept Extraction package has been designed to effectively address the problem of automatic concepts extraction by taking advantage of Teragram's proprietary linguistic tools that allow fast concept extraction and significant pre-processing and post-processing of text. The package comes with a set of preliminary modeled concepts and relations (refer to the `Teragram Concepts and Relations List' document).'
`The concepts extraction package is equipped with versatile, state-of-the-art methods, making it suitable for a variety of applications. The advanced linguistic tools and foundational algorithms give the user the technological edge, resulting in applications which are far superior to other approaches in the industry.'
As discussed below, the Teragram Concepts Extraction document and the Concept and Relation List were referenced in Section 7 of the Agreement: "Teragram warrants that the Teragram Products, for a period of thirty (30) days after delivery to Licensee, shall perform substantially in accordance with the Documentation." "Documentation" was defined in Section 1 of the Agreement as "the written documentation accompanying the Teragram Products provided to Licensee." Teragram did not object to the characterization of the Concept Extraction document and the Concept and Relation List as "Documentation" within the meaning of the Agreement.
ScreamingMedia then detailed specific concepts it alleged the Software was not extracting:
1. The supplied package does not extract the following concepts listed in the `Teragram Concept and Relation List':
ADDRESS, PHONE, URL, FILENAME, SSN, TICKER, EVENT, CONFERENCE, PRODUCT, COMPUTER, SOFTWARE
2. The supplied package shows very low extraction ratio (recall) of supplied `relationship' concepts:
COMPANY MERGER AQ, IPO, BANKRUPTCY, PRODUCT LAUNCH, ALLIANCES, STOCK SPLIT, MANAGEMENT EVENT and JOB POSITION.
3. The supplied package fails to extract COMPANY PRODUCT concept.
4. Recall and precision for the majority of the simple concepts listed in the `Teragram Concept and Relation List' are substantially lower than recall and precision demonstrated by leading concept extraction packages such as SRA NetOwl and BBN IdentiFinder.
ScreamingMedia wrote that in light of this asserted failure of the Software to operate "according to the specifications and promises made by Teragram," it was providing notice of its intention to terminate the Agreement "if the material breaches outlined herein have not been cured within the notice period."
By letter dated April 2, 2002, ScreamingMedia notified Teragram that on account of the failure by Teragram to respond to its previous letter of February 19, 2002 and to cure the material breaches referenced therein, it was terminating the Agreement pursuant to Section 4 of the Agreement.
Teragram did not respond to ScreamingMedia's February 19, 2002 letter until April 5, 2002. In a letter of that date, Teragram alleged that because of ScreamingMedia's failure to make payments, which were past due, it was ScreamingMedia — not Teragram — that was in material breach of the Agreement. Teragram wrote that, "[t]o the extent that a court might conclude that there was any warranty" on the software delivered to ScreamingMedia in January 2002, ScreamingMedia could not claim breach of warranty by relying on its letter dated February 19, 2002 because Teragram had not received the letter until February 20, 2002, which it claimed was at least one day after the thirty-day warranty period for the Entity Extraction software had expired.
II. DISCUSSION
A. Standard of Review
Summary judgment is appropriate when "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." Fed.R.Civ.P. 56(c); Hershey v. Donaldson, Lufkin Jenrette Sec. Corp., 317 F.3d 16, 19 (1st Cir. 2003). When deciding upon a motion for summary judgment, all facts are to be viewed, and all inferences drawn, in the light most favorable to the nonmoving party. Leahy v. Raytheon Co., 315 F.3d 11, 17 (1st Cir. 2002). On crossmotions for summary judgment, the court "must consider each motion separately, drawing inferences against each movant in turn." Id. at 17 n. 5 (internal quotations and citations omitted).
Under Massachusetts law, interpretation of a contract "is ordinarily a question for the court." Bank v. Int'l Bus. Machines Corp., 145 F.3d 420, 424 (1st Cir. 1998) (internal citations omitted). If a contract is unambiguous, "its interpretation is a question of law that is appropriate for a judge to decide on summary judgment." Seaco Ins. Co. v. Barbosa, 435 Mass. 772, 779 (2002); see Bank, 145 F.3d at 424. If the contract language is unambiguous, the court must construe it according to its plain meaning. If that plain meaning clearly favors one party, and there is no material factual dispute, summary judgment is appropriate. See Bank, 145 F.3d at 424.
Where a contract has terms that are "ambiguous, uncertain, or equivocal in meaning, the intent of the parties is a question of fact to be determined at trial," Seaco, 435 Mass. at 779, and "summary judgment is appropriate only if the extrinsic evidence presented about the parties' intended meaning is so one-sided that no reasonable person could decide to the contrary." Bank, 145 F.3d at 424 (internal citations omitted).
B. Breach of Contract
Teragram and ScreamingMedia each have brought a claim for breach of contract. Teragram contends that ScreamingMedia breached the Agreement by failing to pay the fees due under the Agreement. ScreamingMedia has countered that it was relieved of all payment obligations as a result of Teragram's failure to provide software in conformance with, and on-going support as required by, the terms of the Agreement. ScreamingMedia argues that because these failures by Teragram constituted a material breach of the Agreement, it was entitled to terminate the Agreement, which it did in a letter to Teragram dated April 2, 2002.
As noted above, this termination letter followed a letter dated February 19, 2002 in which ScreamingMedia, as required by the terms of the Agreement, provided notice to Teragram of the alleged breach of contract.
1. Teragram's Alleged Breach
I will begin with what precipitated ScreamingMedia's attempt to terminate the Agreement: Teragram's alleged material breach. A material breach of contract occurs when "there is a breach of an essential and inducing feature of the contract." Lease-It, Inc. v. Massachusetts Port Authority, 33 Mass. App. Ct. 391, 396 (1992) (internal citations omitted). Should Teragram have effected a material breach of the contract, ScreamingMedia would have been excused from further performance under the contract. "It is well-settled that an uncured, material breach by one party excuses the other party from further performance under the contract." O'Connell Mgmt. Co., Inc. v. Carlyle-XIII Managers, Inc., 765 F. Supp. 779, 783 (D. Mass. 1991).
ScreamingMedia argues that Teragram breached the Agreement in two ways, first by failing to provide software that complied with the requirements of the Agreement and then by failing to provide on-going technical support as also required by the Agreement. According to ScreamingMedia, the provision of specification-compliant software and on-going technical support each were "an essential and inducing feature of the contract" and the failure to provide each constituted a "substantial breach going to the root of the contract." See Lease-It, 33 Mass. App. Ct. at 396 (internal citations omitted).
Section 7 of the Agreement, which set forth the sole remedy available under the Agreement, required notice of breach within thirty days of the delivery of Software. Pursuant to the notice requirements set forth in Section 12(a) of the Agreement: "All notices shall be in writing and given by personal delivery, certified mail, return receipt requested, or by commercial overnight courier for next business day delivery, to the recipient's address set forth above. Notice shall be deemed given on the date of personal delivery, five (5) business day [sic] after mailing, or the next business day after delivery to such overnight courier."
ScreamingMedia previously argued that even if its February 19, 2002 letter was received by Teragram after the expiration of the warranty period provided for in the Agreement, the letter was "simply the culmination of a long running series of complaints made by ScreamingMedia to Teragram regarding the shortcomings of the Software." I disagree. Section 12(a) of the Agreement specified that all notices must be delivered by "personal delivery, certified mail, return receipt requested, or by commercial overnight courier." No provision was made for e-mail notification. Furthermore, pursuant to Exhibit B to the Agreement, problems with, or "BUGS" in, the Software were to be e-mailed or telephoned to Teragram. In light of the fact that these "BUGS" were to be reported to Teragram via e-mail, while official notice was to be hand-delivered or mailed, Teragram could only expect that e-mail correspondence regarding problems with the Software constituted notice of certain "BUGS" and not notice of breach of warranty.
Even were I to rely exclusively on the parties' e-mail correspondence, as ScreamingMedia urges me to do, the notice requirement would not be met. The e-mail correspondence in the record sent after January 20, 2002 does briefly discuss a problem with the slow download time of the Software, but in no way provides that there had been a "material failure" of the Software or that it was not performing "substantially in accordance with the Documentation" such that it could constitute effective notice under Section 7.
The latest date on which Teragram provided an updated version of the Summarization software to ScreamingMedia was December 10, 2001. Interpreting the Agreement in the fashion most favorable to ScreamingMedia — i.e., finding that the delivery of each new version of the Software to ScreamingMedia by Teragram set the warranty clock running anew — ScreamingMedia had until January 9, 2002, thirty days after the delivery date, to provide Teragram with notice of alleged breach. The parties do not dispute that ScreamingMedia did not provide notice of any alleged breach related to the Summarization software between December 10, 2001 and January 9, 2002 — the time period during which such notice would have to have been provided in order to be effective. Summary judgment, therefore, must enter against ScreamingMedia on its breach of contract claim with respect to the Summarization software.
The Entity Extraction software, however, is another matter. Teragram provided a revised version of the Entity Extraction software to ScreamingMedia on January 20, 2002 in LINUX-compatible form, and on January 21, 2002 in Windows-compatible form. Although Teragram did not receive notice of alleged breach from ScreamingMedia within thirty days of the LINUX delivery, it did receive notice of such a breach on February 20, 2002 — the thirtieth day after the Windows-compatible version was delivered. Thus, with respect to the Entity Extraction software, I find that ScreamingMedia did provide timely notice of breach.
Teragram claimed that it delivered the Windows-compatible version of the Entity Extraction software to ScreamingMedia only as a "courtesy," that the LINUX-compatible and Windows-compatible versions of the software were "functionally equivalent," and that the complaints raised by ScreamingMedia in its February 19, 2002 notice-of-breach letter related to the January 20, 2002 release of the Entity Extraction software "generally, not to the Windowscompatible copy specifically." Nevertheless, Teragram does not go so far as to argue that the Windows-compatible version was not covered by the Agreement. I find, therefore, that by sending notice of breach to Teragram within thirty days of delivery of the Windows-compatible version of the Entity Extraction software, ScreamingMedia satisfied the notice requirements of the Agreement with respect to the Entity Extraction software generally.
Factual disputes remain, however, regarding both whether the Entity Extraction components of the Software complied with the Agreement and also whether Teragram performed its ongoing support obligations under the Agreement with respect to this software. As a result, ScreamingMedia is not entitled to summary judgment on its breach of contract counterclaim regarding the Entity Extraction software.
Even assuming, arguendo, that Teragram breached the Agreement with respect to the Entity Extraction software, it is not clear that ScreamingMedia would be able to recover any damages from Teragram as a result of the breach. In its counterclaim, ScreamingMedia alleged that it suffered direct and consequential damages "in an amount to be determined at trial." But Section 9(a) of the Agreement provides that ScreamingMedia's exclusive remedy for any failure of the Software is the warranty obligation in Section 7 of the Agreement and also explicitly bars the recovery of consequential damages. Such limitation of liability provisions are not impermissible. See Canal Elec. Co. v. Westinghouse Elec. Co., 406 Mass. 369, 375 (1990) ("The limited remedy of repair and a consequential damages exclusion are two discrete ways of attempting to limit recovery for breach of warranty. . . . The former survives unless it fails of its essential purpose, while the latter is valid unless it is unconscionable.") (internal citations omitted). Furthermore, it is not clear that ScreamingMedia has sustained any actual damages. Even though ScreamingMedia requested a judgment ordering Teragram "to return to ScreamingMedia any and all payments made to Teragram, plus interest thereon," in an interrogatory response ScreamingMedia stated that it had not made any payments to Teragram for the Software.
For the reasons set forth more fully above, I will deny ScreamingMedia's cross-motion for summary judgment on its breach of contract counterclaim and grant Teragram's motion for summary judgment on the counterclaim, but only to the extent that it concerns the Summarization software.
2. ScreamingMedia's Breach
Next I turn to whether ScreamingMedia's failure to make payments due to Teragram constituted a material breach of the Agreement. ScreamingMedia does not contest that it withheld payment from Teragram, but argues that its actions constituted an immaterial breach, such that Teragram was not relieved of performing its support and maintenance obligations under the Agreement. Teragram counters that ScreamingMedia's failure to pay fees due under the Agreement was a material breach that excused Teragram from any such support obligations.
"When a party to an agreement commits an immaterial breach of that agreement, the injured party is entitled to bring an immediate action for damages; it may not stop performing its obligations under the agreement. [O]nly a material breach of a contract . . . justifies a party thereto in rescinding it."Lease-It, 33 Mass. App. Ct. at 396 (alterations in original) (internal citations omitted). Whether a breach is material or immaterial is normally a question for the jury. See id. However, "if the materiality question in a given case admits of only one reasonable answer (because the evidence on the point is either undisputed or sufficiently lopsided), then the court must intervene and address what is ordinarily a factual question as a question of law." Gibson v. City of Cranston, 37 F.3d 731, 736 (1st Cir. 1994); see also, Lease-It, 33 Mass. App. Ct. at 396 (finding that, based on the record before it, the appellate court could determine whether the breach was material or immaterial).
The plaintiff in Lease-It, d/b/a Ajax Rent-A-Car, Inc. ("Ajax"), entered into an agreement with the Massachusetts Port Authority ("Massport") to allow Ajax access to curbside space at Boston's Logan International Airport. After Massport announced its intention to erect certain barriers at the perimeter of the airport, Ajax brought suit for, inter alia, breach of contract and refused to pay Massport monthly concession and rental fees. Approximately six months later, Massport constructed a swinging gate allowing Ajax to carry on its business as before. Ajax then resumed paying the concession and rental fees. Massport subsequently filed a counterclaim in the lawsuit commenced by Ajax, seeking payment of the fees Ajax had previously refused to pay. Lease-It, 33 Mass. App. Ct. at 393.
A jury found that Massport had committed an immaterial breach by closing the street at issue and that Ajax had also committed a breach — the jury was not asked to determine whether it was material or immaterial — by refusing to pay the concession and rental fees. Id. at 394. The Appeals Court later concluded that because Ajax's "sole obligation" under the contract "was to pay concession and rental fees to Massport," Ajax had, "by refusing to pay the fees, committed a material breach of the agreement."Id. at 396.
A similar situation is presented here. The sole obligation of ScreamingMedia under the Agreement was to pay licensing and support fees to Teragram. ScreamingMedia refused to pay these fees and, by doing so, committed a material breach of the Agreement. Contrary to the contention of Teragram, however, ScreamingMedia is not liable to Teragram for three years' worth of licensing and support fees.
Section 4 of the Agreement provides that the Agreement could be terminated in the event of a material breach. Section 12(f) goes on to provide that: "[u]pon termination of this Agreement, all outstanding payment obligations and the following sections of this Agreement will survive: 1, 5, 7, 9, 11 and 12." While Section 6 of the Agreement did provide that the "Licensee agrees to pay the Support Fees, with respect to each Teragram Product for three (3) years, commencing on such Teragram Product's Delivery Date," this section was excluded by omission from the termination-survival provisions of Section 12(f). Moreover, the fees for the second and third years of licensing could hardly be "outstanding" at the time of ScreamingMedia's breach, which took place a mere three months into the first year of the Agreement. Finally, and as discussed above in greater detail, while there is no dispute that ScreamingMedia failed to provide notice of alleged breach by Teragram regarding the Summarization software, it did provide such notice regarding the Entity Extraction software. Therefore, I will grant Teragram's motion for summary judgment on the breach of contract claim, and conversely deny ScreamingMedia's cross motion for summary judgment denying the claim, but only to the extent that these motions concern the Summarization software. Accordingly, I will limit the damages due Teragram to the first year's licensing and support fees for the Summarization software, a total of $36,816.
As discussed in greater detail above, there remains a factual dispute over whether Teragram actually breached the Agreement with respect to the Entity Extraction software.
C. Misrepresentation
ScreamingMedia has counterclaimed for misrepresentation, alleging that Teragram "knowingly or negligently made misrepresentations" about the ability of the Software to extract particular "entities and relationships" from documents. ScreamingMedia claims that:
The Teragram computer software failed to operate in accordance with Teragram's written and verbal representations concerning its abilities and attributes. To wit [sic], Teragram represented to ScreamingMedia, inter alia, that the software, including but not limited to the Concept Extraction package, had the ability to identify entities and relationships in documents (e.g., individual's names [sic], company names, corporate alliances, etc.). Teragram represented that the software contained advanced linguistic tools, making it suitable for a variety of applications as well as foundational algorithms that were far superior to other approaches in the industry.
ScreamingMedia alleges that Teragram made these representations about the Software "in an effort to induce ScreamingMedia to enter into" the Agreement "when Teragram was aware that [the] software did not have the capabilities detailed in Teragram's representations and/or its documentation." Moreover, according to ScreamingMedia the Agreement itself provided that the Software "as delivered, was supposed to perform according [sic] the documentation and representations made by Teragram." ScreamingMedia further alleges that, as delivered, the Software:
performed wholly inadequately and generated an extraction ratio that was well below the representations made by Teragram to ScreamingMedia prior to entering into the software license agreement and certainly well below recall and precision ratios demonstrated by leading concept extraction packages in the industry. As a result, the software generated results that were in most cases of no practical value and certainly not in keeping with the representations made by Teragram. . . . The software delivered by Teragram on January 20, 2002 failed to contain several of the `predefined concepts' delineated in the software documentation and Teragram's representations.
To establish liability for misrepresentation, a plaintiff must prove all five elements of common law fraud: "(1) that the statement was knowingly false; (2) that [the defendants] made the false statement with the intent to deceive; (3) that the statement was material to the plaintiffs' decision to sign the contract; (4) that the plaintiffs reasonably relied on the statement; and (5) that the plaintiffs were injured as a result of their reliance." Kenda Corp., Inc. v. Pot O'Gold Money Leagues, Inc., 329 F.3d 216, 225 (1st Cir. 2003) (quotingTurner v. Johnson Johnson, 809 F.2d 90, 95 (1st Cir. 1986));see also Roadmaster Indus., Inc. v. Columbia Mfg. Co. Inc., 893 F. Supp. 1162, 1176 (D. Mass. 1995); Int'l Totalizing Sys., Inc. v. Pepsico, Inc., 29 Mass. App. Ct. 424, 431 (1990) (concerning decision to reject offer).
To prevail on a misrepresentation claim, the plaintiff need not prove that the defendant actually knew its statement was false:
In this Commonwealth it has been held in a long line of cases that the charge of fraudulent intent, in an action for deceit, may be maintained by proof of a statement made, as of the party's own knowledge, which is false, provided the thing stated is not merely a matter of opinion, estimate, or judgment, but is susceptible of actual knowledge; and in such case it is not necessary to make any further proof of an actual intent to deceive.Logan Equip. Corp. v. Simon Aerials, Inc., 736 F. Supp. 1188, 1199 (D. Mass. 1990) (quoting Nickerson v. Matco Tools Corp., 813 F.2d 529, 530 (1st Cir. 1987)); see also Roadmaster Indus., 893 F. Supp. at 1176.
As noted, the representation at issue needs to be one of fact and not merely opinion. See McEneaney v. Chestnut Hill Realty Corp., 38 Mass. App. Ct. 573, 575 (1995) ("The distinction between a statement of fact and a statement of opinion is often a difficult one to draw.") (citing Fogarty v. Van Loan, 344 Mass. 530, 532 (1962)). "A representation is one of opinion if it expresses only (a) the belief of the maker, without certainty, as to the existence of a fact; or (b) his judgment as to quality, value, authenticity, or other matters of judgment." McEneaney, 38 Mass. App. Ct. at 575 (quoting Restatement (Second) of Torts § 538A (1977)). A statement "that in form is one of opinion" may, however, be a statement of fact if the intended recipient could reasonably understand the statement "as implying that there are facts to justify the opinion or at least that there are no facts that are incompatible with it." McEneaney, 38 Mass. App. Ct. at 575 (citing Briggs v. Carol Cars, Inc., 407 Mass. 391, 396 (1990) (holding that dealer's representation that car was in "good condition" was statement of fact)). By contrast, a "statement which amounts to `nothing more than a kind of self-directed corporate puffery' is not actionable." Millen Indus., Inc. v. Flexo-Accessories Co., Inc., 5 F. Supp. 2d 72, 74 (D. Mass. 1998) (citing Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1218 (1st Cir. 1996)). Teragram argues that ScreamingMedia has failed to provide evidence of representations regarding the Software that conceivably could support its misrepresentation claim.
In support of the counterclaim, ScreamingMedia cites to the affidavit testimony of current ScreamingMedia employees Steven Spencer and William Staib, as well as former employee Oleg Semin. Steven Spencer, Executive Vice President of Pinnacor Inc., averred that:
Teragram has filed a motion to strike portions of the Spencer, Staib, and Semin affidavits on the grounds that the affiants did not possess the requisite personal knowledge "regarding certain representations allegedly made by Teragram." I have considered none of the objected—to passages in forming the conclusions expressed in this Memorandum. As discussed in greater detail infra in Section II.D.1, I will grant the motion to strike to the extent that these affidavits are not based on the personal knowledge of the affiants. See Fed.R.Civ.P. 56(e).
As noted supra, in 2002 ScreamingMedia changed its name to Pinnacor, Inc. In 2004, Pinnacor, Inc. merged with and into MarketWatch.com, Inc.
ScreamingMedia's software engineers performed exhaustive testing and attempted to fine-tune the Summarization software and achieved very disappointing results. Each and every time I reviewed the summarization results produced by the Teragram software, they were not commercially viable.
Executive Vice President of Technology at Pinnacor, Inc., William Staib, testified that:
ScreamingMedia also encountered difficulty with the Entity Extraction software after several versions were delivered by Teragram in December 2001 and January 2002. Specifically, ScreamingMedia was experiencing problems obtaining results from the Teragram solution consistent with example results provided by Teragram to ScreamingMedia in August 2001, prior to entering into the License Agreement. In fact, there were times when ScreamingMedia had difficult [sic] obtaining any results at all from the Entity Extraction software because the simple test application frequently crashed.
Finally, Oleg Semin, former Director of Content Infrastructure at ScreamingMedia, stated that:
In or about February 2002, while employed by ScreamingMedia, I conducted an evaluation of Teragram's Entity Extraction Software in which I compared the actual results produced by the Teragram software to a standard test set of data from an industry consortium. My evaluation that [sic] Teragram's software produced very poor results.
. . .
As a result of [testing conducted "on or about December 2002 and January 2003" on "more than 130,000 Reuter's news articles"], I was able to establish the following findings:
(a) The Software fails to extract majority of concepts listed in `Teragram Concepts and Relations List' document.
(b) In case of simplest concepts quality of extraction is on average twenty percent (20%) below quality of extraction demonstrated by the state-of-the-art packages in 1998.
(c) From a practical standpoint these results mean that a system utilizing the Software would produce erroneous results in up to twenty-six percent (26%) of cases (Location concept) while in many cases missing up to one hundred percent (100%) of relevant information.
To the extent that ScreamingMedia argues it relied upon statements by Teragram that its software was "superior" to other software in the industry, such statements constitute puffery and are not actionable. See Millen Indus., 5 F. Supp. 2d at 74 (citing Shaw v. Digital Equip. Corp., 82 F.2d 1194, 1218 (1st Cir. 1996)). But to the extent that ScreamingMedia argues it relied upon Teragram's statements regarding particular functionality of the Software, such statements might give rise to a cause of action and further analysis is required.
Teragram contends that because the Agreement is an integrated contract, ScreamingMedia may not bring an action for misrepresentation. See generally Agri-Mark, Inc. v. Niro, Inc., 233 F. Supp. 2d 200, 208 (D. Mass. 2002) (quoting Elias Bros. Restaurants, Inc. v. Acorn Enterprises, Inc., 831 F. Supp. 920, 927 (D. Mass. 1993)). On this particular point, Teragram's argument is unpersuasive, because "it is well settled in Massachusetts that `[a]n integration clause in a contract does not insulate automatically a party from liability where he induced another person to enter into a contract by misrepresentation.'" Kenda, 329 F.3d at 226 (quoting Starr v. Fordham, 420 Mass. 178, 188 (1995)).
Section 12(c) reads: "This Agreement constitutes the entire agreement and understanding of the parties with respect to the subject matter hereof and supersedes any prior or contemporaneous written or verbal communications or representations regarding its subject matter."
The paradigmatic Massachusetts case on fraud in the inducement vis-á-vis general disclaimers is Butler v. Prussian, 252 Mass. 265 (1925) (discussed in Bates v. Southgate, 308 Mass. 170 (1941)). In Butler, the plaintiff entered into a contract to purchase a truck from the defendant. Before the defendant-seller drafted the purchase contract, he showed the plaintiff the truck, which at that time was equipped with a new motor. The parties thereafter signed a contract for the truck and the defendant delivered it to the plaintiff. When the truck was delivered, however, it "did not contain the same motor as the truck shown [to the plaintiff], but instead an old and defective motor." Butler, 252 Mass. at 266.
The First Circuit has called Bates "the leading Massachusetts case" on the subject of fraud and the use of general disclaimers or integration clauses. See Turner v. Johnson Johnson, 809 F.2d 90, 95-96 (1st Cir. 1986).
In the contract the defendant drafted afer showing the plaintiff the truck, he "described by number and model the substituted parts" he had put in the truck after the showing and included text providing that:
Said car is leased as is and no reference, representation, contract, agreement, promise, undertaking or understanding whatsoever not contained therein shall be binding upon the lessor, or in any wise affect the validity of this contract or form any part thereof, but all statements made have been merged and set forth herein. I further agree that there are no collateral agreements nor understandings whatsoever modifying or affecting the terms of the within lease or any liabilities thereunder, and that there are no set-offs, counterclaims nor defenses thereto.Id., at 267-69.
The court in Butler found that parties "cannot by written words prevent the law from inquiry into, and granting redress for, fraud which enters into the very substance of the contract itself." Id. at 268. The court found that the actions of the defendant were "a plain fraud as to the essence of the contract. There is no rule of law which prevents recovery for that wrong."Id. at 269. The case at hand is distinguishable.
ScreamingMedia has not alleged that Teragram engaged in the sort of bait-and-switch perpetrated by the defendant in Butler. There is no indication that Teragram provided one version of the Software to ScreamingMedia during the investigation and evaluation process in the summer and fall of 2001 and then a different, less functional version of the Software after the parties entered into the Agreement in October 2001. It is undisputed that Teragram provided several revised versions of the Software to ScreamingMedia during the first three months of the Agreement in response to requests from ScreamingMedia for modifications, but there is no basis from which to draw the conclusion that these "new releases" were necessitated by anything other than the user customization process that is standard in the software industry. The record does not suggest that Teragram committed any "plain fraud as to the essence of the contract" by promising and demonstrating one product and then drafting a contract providing for and thereafter delivering a lesser one.
As noted above, an integration clause in a contract does not automatically innoculate a party from liability for fraudulent inducement. It is also well-established, however, that when a "contract was fully negotiated and voluntarily signed, [then] plaintiffs may not raise as fraudulent any prior oral assertion inconsistent with a contract provision that specifically addressed the particular point at issue." Starr, 420 Mass. at 188 (quoting Turner, 809 F.2d at 97). That is the case here.
By contrast, when a contract provision is not inconsistent with a prior representation relied upon by the plaintiff, a claim of misrepresentation may follow. See Starr, 420 Mass. at 188 (upholding finding of misrepresentation where "fully integrated" contract was "not clearly at variance with" prior representations regarding the same issue) (internal quotations omitted).
The statements upon which ScreamingMedia bases its misrepresentation claim — namely, prior oral assertions allegedly made by Teragram to ScreamingMedia regarding the capabilities of the Software — are inconsistent with the contract provisions that address the same point. Furthermore, ScreamingMedia has not made out a case of "plain fraud as to the essence of the contract" analogous to that inButler. The integration clause in the Agreement therefore controls and the misrepresentation claim by ScreamingMedia cannot stand. As a result, I will deny summary judgment for ScreamingMedia on its counterclaim for misrepresentation and grant Teragram's cross motion for summary judgment on the claim.
The Agreement does make reference, in Sections 1 and 7, to "Documentation," which is defined as "the written documentation accompanying the Teragram Products provided to Licensee." As Teragram argues, the Documentation was integrated into the Agreement: "Reference to the documentation in paragraphs 1 and 7 of the License Agreement effectively incorporates it as part of the Agreement and makes it an integral part" of the Agreement.See supra Section I. ScreamingMedia conceded during the June 25, 2003 summary judgment hearing that the Documentation did not include the prior oral assertions upon which it based its misrepresentation claim and that it had no other written documentation contemporaneous with the Agreement that included the alleged misrepresentations.
D. Other Motions
In addition to the motions for summary judgment filed by both parties, there are two other pending motions by Teragram, one to strike portions of the three affidavits submitted by ScreamingMedia in support of its Opposition and Cross-Motion for Summary Judgment and one to amend its complaint. I shall consider these motions in turn.
1. Motion to Strike
Teragram has moved to strike certain portions of the affidavits by Steven Spencer, William Staib, and Oleg Semin submitted by ScreamingMedia. Teragram made this motion on the grounds that the three affiants failed to claim, much less successfully to demonstrate, that they possessed personal knowledge with respect to allegations contained in their affidavits regarding representations made by Teragram. For the reasons set forth below, I will grant the motion.
Rule 56(e), which governs the admissibility of affidavits submitted in support of and in opposition to motions for summary judgment, provides that:
Supporting and opposing affidavits shall be made on personal knowledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify to the matters statement therein.Id. The First Circuit cautions that employing Rule 56(e) "requires a scalpel, not a butcher knife," and, accordingly, commends "a selective approach to [assessing the witness'] affidavit . . . disregard[ing] those parts of it that are inadmissible and credit[ing] the remaining portions." Perez v. Volvo Car Corp., 247 F.3d 303, 315 (1st Cir. 2001). When conducting this fine parsing of an affidavit, "personal knowledge is the touchstone," and such "requisite personal knowledge must concern facts as opposed to conclusions, assumptions, or surmise." Id. at 315-16. In distinguishing between facts and non-facts, the court is to bear in mind that "[m]ore often, facts are susceptible to objective verification. Conclusions, on the other hand, are empirically unverifiable in the usual case." The Dartmouth Review v. Dartmouth Coll., 889 F.2d 13, 16 (1st Cir. 1989).
Teragram correctly points out that none of the three affidavits contains a statement that it was made on the personal knowledge of the affiant. Such personal knowledge could be implied for testimony regarding actions taken or statements made by the affiant himself, but for testimony concerning third party conduct a more particularized showing is required. In order for the affidavit testimony of these witnesses regarding representations allegedly made by Teragram properly to be considered, some assurances of first-hand reportage — i.e., the "touchstone" of personal knowledge required by Rule 56(e) — is necessary. This requisite personal knowledge might have been demonstrated by statements about how the affiants became aware of the representations; and about when, where, and by whom the representations were made. The Spencer, Staib, and Semin affidavits offer no such details, nor even generalized statements of personal knowledge. Because the affidavits fail to satisfy the requirements of Rule 56(e), I will grant the motion by Teragram to strike those portions of the affidavits-specifically, Paragraph 7 of the Spencer Affidavit; Paragraphs 4, 6, and 7 of the Staib Affidavit; and Paragraph 5 of the Semin Affidavit — that concern representations allegedly made by Teragram. As noted above, see Note 9 supra, these portions of the affidavits were not considered when deciding upon ScreamingMedia's misrepresentation counterclaim.
2. Motion to Amend Complaint
Teragram has moved to amend its Complaint to include the second year's worth of the annual license and support fees provided for in the Agreement, payments that Teragram alleges became due and owing on December 10, 2002. Having found that ScreamingMedia effectively terminated the Agreement through its letters of February 19, 2002 and April 2, 2002, and also that all fees not due and owing at the time of the termination — i.e., the license and support fees for the second and third years of the Agreement — did not survive the termination of the Agreement, I will deny the motion to amend.
III. CONCLUSION
For the reasons set forth more fully above:
I hereby GRANT Teragram's motion for summary judgment on the breach of contract claim with respect to the Summarization software and DENY ScreamingMedia's cross motion for summary judgment on its parallel breach of contract counterclaim. Damages related thereto will be limited to the first year's licensing and support fees for the Summarization software, a total of $36,816;
I DENY Teragram's motion for summary judgment on the breach of contract claim with respect to the Entity Extraction software and also DENY ScreamingMedia's cross motion for summary judgment on its parallel breach of contract counterclaim;
I DENY ScreamingMedia's cross motion for summary judgment on its misrepresentation counterclaim and GRANT Teragram's motion for summary judgment on that counterclaim;
I GRANT Teragram's motion to strike the excerpted portions of the Spencer, Staib, and Semin affidavits; and
I DENY Teragram's motion to amend its complaint.
The parties shall file a joint statement on or before January 14, 2005 setting forth their positions regarding the steps necessary to reduce this case to judgment and the clerk shall thereafter set the matter down for a further scheduling conference.