It’s probably fair to say that there are thousands of software license and development agreements entered into every business day in the U.S. Only a very small number result in a lawsuit, and an even smaller number end up with a jury verdict and ruling under 93A by a Massachusetts trial judge. So, when a case does go the distance, it’s worth paying attention.
The recent decision by Massachusetts Superior Court Judge Leila R. Kern in Perfectyourself.com v. Accusoft Corporation discusses the evidence in a jury trial that resulted in a more than $400,000 verdict against Accusoft. In Massachusetts the trial judge, not the jury, decides claims under M.G.L. c. 93A, Massachusetts’ “little FTC Act.” Depending on the violation, Chapter 93A allows the judge to award double or treble damages and attorney’s fees to the prevailing plaintiff. The Accusoft decision is the trial judge’s discussion and analysis of the evidence that the jury heard for purposes of her analysis and decision under 93A.
The evidence at trial is a common story, although it rarely leads to a jury trial and judgment. Accusoft contracted with Perfectyourself.com to develop a software application. Accusoft represented that it had much of the underlying technology already in place, a claim that the jury and judge found to be untrue. After Accusoft was unable to deliver an acceptable prototype to Perfectyourself a standoff developed – “pay us” – “we’ll pay you when you deliver” – “no, you pay us first, then we’ll deliver”. Eventually Perfectyourself filed suit.
Massachusetts General Laws c. 93A makes unlawful all “unfair or deceptive acts or practices in the conduct of any trade or commerce.” The trial judge held that 93A could be violated even if there was no “intent to deceive,” and even if the defendant didn’t know that the representation was false, so long as the misrepresentation was “reasonably capable of ascertainment.” This conduct qualifies as a “negligent misrepresentation” and is a violation of 93A.
The judge did not find Accusoft’s violation to be “willful and knowing,” and therefore declined to impose multiple damages (93A allows for two or three times actual damages, at the discretion of the trial judge, based on her evaluation of the severity of the defendant’s conduct). She did, however, award Perfectyourself its reasonable attorneys fees, as the statute required her to do once a violation was found.
The moral of the story? The sales staff of a software company has to be careful not to overstate the facts when making a sale to a potential customer. The temptation to do so can be great in a competitive situation where commissions for the salesperson is on the line. Sometimes the sentiment is “sell today, worry about delivering tomorrow.”
A client might ask, “is there any way that this kind of a situation can be avoided by using the typical contractual disclaimers and limitations and liability? With one exception the answer is no, there is no contractual “silver bullet” that will insulate a software vendor from liability under all circumstances. It’s well-established law in Massachusetts that integration and non-reliance clauses are no a defense to fraud, although they may be grounds to avoid a claim of negligent misrepresentation of the sort found in the Accusoft case. However, it is exceedingly difficult to defend a claim of outright, knowing fraud by relying on contract limitations.
The one exception is this: if the signed contract addresses a specific element of performance, the customer cannot claim fraud based on a pre-contract representation with respect to that element. Some examples:
- If the contract states that the software development project will be completed in stages with specific dates assigned, a claim of fraud based on different pre-contract promised dates will not succeed.
- If the contract states that the software will operate at certain speeds (a common issue in software deals), a claim that the salesman made different pre-contract representations will not stand.
The rationale behind this distinction is that integration and non-reliance provisions are boilerplate, and contracting parties generally don’t pay much attention to them – in fact, they are often thown in at the last minute, and not negotiated at all. However, if the contract addresses a specific, material aspect of the project, such as completion dates and performance metrics, the customer is presumed to have read these terms, and cannot reasonably claim to rely on prior represenations that conflict with the express terms of contract.
- The “mother of all software breach/fraud cases” in Massachusetts is VMark Software, Inc. v. EMC Corp., 37 Mass.App.Ct. 610 (1994)
- The leading case for the proposition that a party may not base a claim of fraud on oral representations that are directly at odds with the contract provision is Turner v. Johnson & Johnson, 809 F.2d 90, 95 (1st Cir. 1986).