Readers of this blog will remember that we have discussed previously a declaratory judgment lawsuit filed by Fairview Health Services against Quest Software, Inc. and Quest's affiliate One Identity LLC arising out of an audit by Quest.  Essentially Fairview contends that when it notified Quest that it was canceling maintenance & support, Quest immediately issued an audit notice and made multi-million non-compliance findings, which Fairview vigorously disputes.  Tactical Law has been monitoring the case and we now have a ruling by Judge Susan Nelson on Quest's Motion to Transfer Venue and Fairview's Motion to Dismiss Quest's Counterclaims.  Quest lost its motion to transfer venue but successfully defeated a motion to dismiss its contract and copyright based claims.

Motion to Transfer Venue

With regard to the venue motion, Quest essentially contended that because a 2013 license purchase of 2700 licenses (out of a total of 38,081 total licenses purchased) incorporated a new license agreement, that the 2013 license agreement governed and replaced the 2004 Software License Agreement ("SLA").  We have seen Quest make similar arguments before and we have pushed back on such assertions.  The 2013 Software Transaction Agreement ("STA") contained a dispute resolution clause making Texas the forum for resolution of disputes, and Quest sought to transfer the action there.

The Court denied the motion basically saying that based on the record as developed so far it did not appear that the 2013 STA governed, as many more licenses were purchased under other agreements.  The court teed up the positions of the parties as follows:

"The disputed forum-selection clause applies to "[a]ny action seeking enforcement of this Agreement or any provision hereof." (2013 STA § 17(a).) Fairview argues that its declaratory judgment action does not "seek[] enforcement of" the 2013 STA; indeed, Fairview maintains that the 2004 SLA, not the 2013 STA, governs the parties' licensing dispute. In response, Quest argues that the 2013 STA superseded the 2004 SLA, and that Quest's counterclaim for breach of the 2013 STA renders this action one "seeking enforcement of" the 2013 STA".

The court reasoned that to decide the issue, she must decide which of the agreements governed the dispute.  According to the court:

"In order to determine whether this is an "action seeking enforcement of" the 2013 STA, the Court must first examine the extent to which the 2013 STA governs the parties' relationship. Initially, Fairview purchased at least 18,101 Active Roles licenses pursuant to the 2004 SLA. (Am. Compl. ¶ 17.) These licenses were perpetual, unlike the annual maintenance services component of the transaction. (See 2004 SLA §§ 2, 10.) Quest argues that the 2004 SLA could not apply to Fairview's deployment of the Active Roles version 6.9 software, because that version did not exist in 2004. However, the 2004 SLA, by its plain terms, entitled Fairview to "new versions and releases of the Software" as part of the maintenance services component of the transaction—and Quest has admitted that proposition. (Id. § 10; Answer & Countercl. ¶ 19 ("[D]uring the maintenance period, maintained licensees are entitled to upgrade their licensed software to the most recent version that has been released at no additional cost.").)"

The court then examined the 2013 agreement and pointed out language that made it clear that the 2013 STA clearly applied to licenses that were purchased under that particular Ordering Document.  However, the court was unable to say that the STA superseded the earlier agreement.  According to the court:

"The Court finds that the 2015 quotations unambiguously bound Fairview to the 2013 STA with respect to the 2,700 licenses purchased in 2015, but did not supersede the 2004 SLA with respect to previously purchased licenses."

This is important as Quest argues during audits, just as it did here, that the click-through agreements that come with new purchases, annual maintenance & support or product updates somehow supersede and replace previous perpetual license agreements.  It is to Quest's advantage to do so, as with each passing year it makes its license agreements more favorable to Quest, and less favorable to the licensee.  But it is to your advantage the licensee, to keep the benefits of what you bought and paid for, in the past.  In fact, as we have noted previously, oftentimes the older perpetual agreement will contain language providing that the  agreement may not be amended unless in a writing signed by authorized representatives of both parties.  The court focused on this important point here.

"Finally, Quest argues that Fairview was required to review the 2013 STA and click "agree" while installing the Active Roles version 6.9 software update on its computer systems. But the 2004 SLA, by its terms, may not be "modified or amended except by a writing executed by a duly authorized representative of each party." (2004 SLA § 17(j).) The click-wrap agreement allegedly executed by Fairview has not been presented to the Court, and the limited record available at this stage does not establish that the agreement constitutes a "writing executed by a duly authorized representative" of Fairview. Accordingly, it is unclear whether the click-wrap agreement caused the 2013 STA to supersede the 2004 SLA with respect to the licenses purchased under the 2004 SLA. In sum, based on the limited record available at this stage of the proceedings, the Court can only conclude that the 2013 STA governs 2,700 of Fairview's 38,081 licenses. Because Fairview's declaratory judgment claims do not "seek[] enforcement of" the 2013 STA and Quest's counterclaims based on the 2013 STA pertain to such a small sliver of the dispute, the Court cannot yet say that this is an "action seeking enforcement of" the 2013 STA. Accordingly, the Court finds that the record at this stage does not support transfer, and denies Quest's motion."

The court also rejected Quest's argument that somehow by agreeing to maintenance & support agreements, that such agreements replaced prior perpetual license agreements.  According to the court:

"Quest also points to the 2017 purchase quotation and the 2018 Support Renewal Quotation. In the 2017 quotation, Fairview agreed that the "Maintenance Services for the One Identity Products set forth above," which included all 38,101 licenses, "will be provided by One Identity . . . pursuant to the terms and conditions of the [2013 Software Transaction Agreement]." (2017 Quotation at 3.) Thus, under the 2017 quotation, the maintenance services provided in 2017 were governed by the 2013 STA. But the parties' dispute revolves around the licenses granted in § 2 of the 2004 SLA and 2013 STA, and the true-up provisions found in § 15 and § 16 of those agreements—not the maintenance services provided for in § 10 of the agreements. Because the parties' dispute does not pertain to the maintenance services provided in 2017, the 2017 quotation does not entail that the 2013 STA's forum-selection clause applies to this action."

What is the lesson learned here?  If you are a company being audited by Quest look carefully at what Quest is alleging and look for arguments that newer agreements do not supersede or replace earlier agreements.  Expect that Quest will make these arguments and be prepared to combat them during negotiations.  

Fairview Motion to Dismiss

Breach of Contract Claim

Fairview also moved to dismiss Quest's claims for breach of contract and copyright infringement, which motion was denied.  With regard to the contract based claim, Fairview had moved to dismiss arguing that exceeding its allowed number of licenses did not constitute breach under the plain terms of the contract, as the contract contained a true-up provision, which provided: 

"If Customer's deployment of the Software . . . is found to be greater than its purchased entitlement to such Software, Customer will be invoiced for the over-deployed quantities at Dell's then current list price plus the applicable Maintenance Services and applicable over-deployment fees. (2013 STA § 15.)"

According to the court, "Fairview argues that because the agreement contemplated that Fairview might over-deploy the Active Roles software and provided a mechanism for compensating Quest in the event of such an over-deployment, over-deployment does not constitute a breach of the contract".

The court however, disagreed reasoning that the over deployment was not the only breach that Quest was alleging.  Instead, the court found that Quest had stated a breach of contract claim because it demanded payment, and Fairview did not pay the demand as required by the true-up clause.  

Copyright Claim

Fairview also argued that Quest could not state a copyright claim as the true-up provision was a covenant and not a condition and thus over deployment did not exceed the scope of the license.  Fairview relied on a ruling in Quest Software, Inc. v. DirecTV Operations, LLC to make this argument, where a California federal court had ruled against Quest.  However, in denying the motion, Judge Nelson reasoned that the provision at issue in DirectTV was different then the case at bar.  The court found that the contract at issue in DirectTV

"expressly gave the defendant the right to exceed the number of licenses granted in the contract. See id. at *8 ("Under the terms of the License Agreement, Defendant had the 'right to increase the aggregate number of CPU's . . . by up to 10% per product . . . at no additional fee.' Defendant could exceed this 10% threshold on the condition that it paid Plaintiff additional license fees."). By contrast, the 2013 STA granted Fairview a license only to "the quantities of each item of Software identified in the applicable Order." (2013 STA § 2(a).) While the true-up provision provided a remedy should Fairview be found to exceed that quantity, the true-up provision did not expressly give Fairview the right to do so. (See id. § 15.) Thus, Quest has plausibly alleged that by exceeding the numerical limitation on Fairview's licenses, Fairview exceeded the scope of its license".

We analyze this covenant vs. condition distinction in one of our  previous blog posts, for readers wanting a deeper understanding of the issue.

For Quest licensees, be prepared that Quest may claim that later click-through agreements superseded earlier perpetual license agreements.  Quest licensees should consider arguments that such agreements do not rise to the level of written amendments signed by authorized representatives of both parties.

Tactical Law will continue to monitor the case.  Check back for future updates.

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