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Interpreting California and New York Law, Court of Chancery Resolves Complicated Contractual Dispute Between Two Large Software Companies

By Francis G. X. Pileggi, Esq.

In an opinion spanning over 120 pages (and 299 footnotes), the Court of Chancery in CA Inc. v. Ingres Corp., No. 4300-VCS (Del. Ch. Dec. 7, 2009), read opinion here, applied California and New York law to resolve a complicated contract dispute between two large software companies, CA, Inc. ('CA') and Ingres Corp. ('Ingres'), which CA spun off several years ago. Given the length and the detailed analysis pertaining to California and New York law (and not Delaware law), the following summary very briefly touches upon the highlights of the decision.

Kevin Brady, a highly regarded Delaware litigator, prepared this synopsis.

Background

CA and Ingres are in the enterprise information technology software industry. Enterprise software is employed by large complex organizations to serve as the infrastructure of its business operation. Given the importance and complexity underlying these systems, it is costly to switch software and, as a result, companies tend to develop long term relationships with their providers. However, these long term relationships can cause problems in divestitures as contractual obligations tend to survive divested units or product lines.

In this case, CA negotiated the obligations that Ingres would have to continue to provide CA's customers with access, support, and improvements to the Ingres products they had been using when those products were owned by CA. In fact, CA's divestiture negotiations with Ingres required Ingres to provide updates to CA's database software and other products that were divested to Ingres.

Not surprisingly, economic interests between CA and Ingres diverged after the divestiture. Disputes arose about what Ingres' obligations to CA were for maintenance and support. In an attempt to resolve certain disagreements over Ingres' obligations, the parties entered into an additional contract (the 'Reseller Agreement') that allowed CA to purchase licenses for the latest Ingres products, which CA could then pass on to its customers. Unfortunately, this contract only added to the complexity of the contractual disputes between the parties.

Ingres' Obligations Under the Contracts

The first key dispute between the parties centered around the relatedness of the various contracts in question. The Court addressed three issues. First, pursuant to the divestiture agreement, was Ingres obligated to provide software, maintenance, and support to CA free of charge? The Court held that Ingres was in fact obligated to provide CA's legacy customers with the latest version of its software for free as part of its maintenance and support obligations. Second, did the Reseller Agreement supersede the divestiture agreement? The Court held that the Reseller Agreement superseded the divestiture agreement as to the terms under which Ingres must provide the latest version of its software. Third, can Ingress enforce the Reseller Agreement despite a breach in a separate agreement? The Court held that Ingres cannot hold CA responsible in damages for the brief period a third party used the new version of the software because that entity's use of the software directly resulted from breaches by Ingres.

CA's Alleged Improper Use of Software

The second key dispute involved Ingres' allegations that CA was improperly using Ingres' software in CA's own software product. The Court held that CA had a contractual right to use Ingres' software as it did. Accordingly, CA did not need to compensate Ingres for CA's use.

Attorneys' Fees and Forum Selection Clause

In addition, with respect to a dispute regarding one third-party's order for certain software, the Court found that CA was entitled to attorneys' fees related to that dispute. However, with respect to a claim regarding another third-party's use of the software, the Court declined to award attorneys' fees to either party because each party prevailed on some of the substantive issues underlying that claim. Finally, with respect to a parallel California action, the Court enjoined that action in order to enforce the parties' forum selection choice to adjudicate disputes relating to certain agreements either in Delaware or New York.
 

Full post as published by Delaware Corporate and Commercial Litigation Blog on December 10, 2009 (boomark / email).