Enterprise Software Customer Wins Jury Verdict Against Micro Focus Arising Out of Software Audit
By Pamela K. Fulmer
After a two week trial on May 13, 2019, a federal jury in the District of Maryland rejected the arguments of Micro Focus (U.S.), Inc. (“Micro”) that its licensee Express Scripts, Inc. (“Express”), a pharmacy benefits manager, had purchased desktop and not concurrent licenses under a software license agreement. The software at issue—Rumba--provides users a Windows environment in which to access and use information from a broad range of host systems including IBM mainframes. The result was a complete and total defense victory for Micro’s enterprise software customer Express.
Although there was a time when Micro was a kinder, gentler software company, Express alleged that after Micro’s 2014 merger with Attachmate, it adopted that companies brass knuckle audit tactics to extract additional licensing fees from Micro customers.
Micro brought suit against Express in 2016 after Express refused to pay Micro $23 million for alleged software overdeployment, which Micro claimed it discovered during a 2015 software audit. For its part, Express claimed that it was in compliance with the terms of the contract and did not owe Micro additional licensing fees at the then standard list price, as Micro contended.
At trial the dispute centered around what exactly constituted the contract and what type of licenses had actually been purchased in 2010. Express contended that the only commercially reasonable interpretation was that the license at issue granted 10,000 concurrent user licenses of Rumba for Citrix. For its part, Micro claimed the license provided 10,000 workstation or desktop licenses instead, and was not user based. The parties also vehemently disagreed about what constituted the operative contract. Express argued that the Product Order and email extending the offer formed the operative contract, while Micro argued that the Product Order incorporated a click-wrap End User License Agreement (“EULA”) under its “Terms and Conditions” and that the EULA applied. Micro argued that Express once again ratified the EULA when its employees accepted the EULA click wrap agreement upon installation.
Both parties brought summary judgment motions prior to trial. In denying parts of those motions and sending the remaining claims to the jury, the court observed that “as the parties are painfully aware, the EULA and Product Order, read together, are ambiguous as to what specific kind of license Express sold to Micro. The Product Order is to purchase a license for “10,000 authorized users.” The EULA, however, nowhere defines the term “authorized user” and instead with respect to Rumba software, offers seven separate licensing options.” The court went on to find that “what the parties meant by “authorized user” is indeed ambiguous.”
According to the court, “[w]here a contract is ambiguous, a finder of fact may consider extrinsic evidence “which sheds light on the intentions of the parties at the time of the execution of the contract.” The court found that “[t]he cardinal rule of contract interpretation is to give effect to the parties’ intentions” and that extrinsic evidence may include the “negotiations of the parties, the circumstances surrounding execution of the contract, the parties’ own construction of the contract and the conduct of the parties .”
Although the focus is usually on what is the intent at the time of contracting, the court reasoned that “[b]ecause the respective parties’ course of performance is relevant to interpreting ambiguous contract terms, the Court will consider the 2013 and 2015 record evidence in determining whether summary judgment is appropriate.” Such evidence included (1) that Express’ own IT employees interpreted the contract in a manner which was consistent with a workstation license; (2) Express staff admitted internally to being over-deployed and sought strategies to “track how many people need licensing for these applications”; and (3) Express personnel also privately admitted in September of 2013 to be “technically out of compliance with our current licensing model of giving everyone or [sic] Level 1 Citrix access for Rumba.”. The court then went on to rule that “[b]ecause a rational trier of fact could rely on such evidence to find in Micro’s favor, the meaning of 10,000 authorized user licenses must be resolved at trial.”
The case offers a cautionary tale for Oracle licensees. If a court were to construe the “installed and/or running” language of the processor definition as somehow ambiguous (which we disagree with), evidence of the course of conduct of the parties could potentially be introduced at trial to show what the parties believed the language meant. It is important that Oracle licensees not do anything that buys into Oracle’s expansive and non-contractual definition of “installed”, even if to do so may seem at first beneficial (for example in certifying off Oracle’s Unlimited License Agreement (“ULA”).
Another important lesson. Don’t let your employees blindly accept Oracle’s extra contractual assertions by adopting these interpretations and memorializing them in writing in your internal discussions. At trial counsel for Express had to deal with multiple email communications where employees who were not involved in the negotiation or execution of the agreement were purporting to agree with the party line being pushed by Micro about the type of licenses that had been purchased in 2010. However, these employees lacked personal knowledge and were just plain wrong. Instead, they were listening to Micro’s assertions and parroting those assertions back to each other.
The court also declined to find on summary judgment that the contract was one of adhesion and rejected the licensee’s argument that if the contract was ambiguous, it should be interpreted against Micro, who drafted the contract. Instead the court found that Express was a large sophisticated business, (which outpaced Micro in size and sophistication), and had ample opportunity to negotiate the license agreement and make changes. Therefore on summary judgment it declined to apply the doctrine of contra proferentem (the basic principle of contract law that, in construing the language of a contract, ambiguities are resolved against the drafter of the instrument), since the court found that genuine issues of material fact remained, and the construction of the ambiguous terms was left to the jury. And of course the jury ended up construing the ambiguous terms against Micro and finding that the interpretation offered by Express was the most reasonable.
One final fun fact—Express was represented by Morgan Lewis who represented Oracle in the Mars v. Oracle litigation.
The case is Micro Focus (U.S.), Inc. v. Express Scripts, Inc., Civil Action No. PX-16-0971, United States District Court, District of Maryland.
By Tactical Law Attorneys and From Time to Time Their Guests