United States: Potentially Unconscionable Warranty Precludes Licensor's Motion To Dismiss

Richard Raysman is a partner and Elliot Magruder is an attorney in Holland & Knight's New York office

The warranty is among the most essential terms of a software license, as the provision often concerns the functionality and capability of the software. Many warranties are the subject of concerted negotiations, but often the parties revert to boilerplate. A licensor typically seeks to limit what it warrants, while a licensee seeks to establish that the licensor possesses good and marketable title in the software and that the software will function.

These priorities often conflict, and particularly when warranty provisions are quickly negotiated and formalized in brief and vague terms. On July 30, 2018, the United States District Court for the District of Minnesota issued its opinion in Prairie River Home Care, Inc. v. Procura, LLC, holding that the software licensee's claims for breach of contract and breach of warranty could survive a motion to dismiss, while the rescission claims could not. 2018 WL 3621208 (D. Minn.). First, the express terms of the license's warranty granted the licensee "on-premise" support, which the licensor failed to provide. Second, the court held that it could not decide as a matter of law whether the 90 day notice period of the warranty, which started as of the execution of the license, was not unconscionable. After all, the warranty would be illusory since it did not cover a period of time when the software functioned. The court held that a determination as to whether the notice provision was unconscionable was a question of fact that could not be decided at this stage of the proceedings.

Facts and Procedural History

In 2015, Plaintiff Prairie River Home Care, Inc. (Prairie River) executed a Master Software License and Support Agreement (the License) with Defendant Procura, LLC (Procura). The software provided Prairie River with "enhanced documentation capabilities" via Procura's agency-management software. "Software" is defined in relevant part in the License as "the software in object form ... including related Documentation." "Documentation" was defined as "user guides, operating manuals, education materials, product descriptions, technical manuals ... and other information relating to the Software." Procura claimed to provide support in the event of "an inability of the Software to perform ... in accordance with its related Documentation."

Prairie River purchased the software for an "on-premise" installation. The License included certain damage limitations, including a disclaimer of consequential and incidental damages, and was governed by Illinois law. The License included a 90-day warranty provision that began from the effective date of Sept. 30, 2015.

Procura claimed that the software would become operative in Feb. 2016. According to the court, "[t]he transition did not go smoothly" and the software did not "go live" until June 2016. Prairie River alleged that it did not work as promised in the accompanying documentation. Prairie River claimed $800,000 in out of pocket expenses as a result of this failure – exclusive of lost profits, lost opportunities and other damages. Prairie River abandoned the software in Feb. 2017 and filed suit alleging, inter alia, breach of contract, rescission and fraudulent inducement. Procura moved to dismiss under Rule 12(b)(6).

Legal Analysis and Conclusions

First, crediting Prairie River's references to Procura's problems with the software and an apparent unwillingness to provide support, the court held that Prairie River adequately pleaded a claim for breach of the License and accordingly denied Procura's motion to dismiss.

The Court also declined to dismiss Prairie River's claim for breach of warranty because: (1) the warranty provision of the License applied to the software because the software was an "on-premise" acquisition covered by the express terms of the warranty.

Second, the court held that Prairie River stated a claim that the 90-day notification requirement in the warranty was unconscionable because the software was not installed until June 2016, far after the 90 days from the effective date of the License, and thus the warranty period, on Sept. 30, 2015. Procura countered that the provision could not be unconscionable as a matter of law because both it and Prairie River are sophisticated entities. The court rejected this argument and denied Procura's motion to dismiss on grounds that the warranty provision could be unconscionable given the appearance of a relative disparity in bargaining power between the parties.

The court did grant Procura's motion to dismiss with respect to the rescission claim based on mutual mistake because Prairie River had not sufficiently alleged a mutual misunderstanding between the parties about the terms of the License. Prairie River claimed that the mutual mistake was the functioning of the software, which the Court characterized merely as another way of claiming that "the Software did not work." Consequently, this allegation did not evidence a mutual mistake, but was encompassed by the Illinois Court of Appeals' observation that "the fact that the goods are better or worse than supposed or possess different qualities not affecting identity will ordinarily be immaterial" to a rescission claim.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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