Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-5_03-cv-02232/USCOURTS-cand-5_03-cv-02232-6/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1332 Diversity-Breach of Contract

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28 This disposition is not designated for publication and may not be cited. 1

Case No. C 03-02232 JF (RS)

ORDER GRANTING PARTIAL MOTION TO DISMISS WITHOUT LEAVE TO AMEND

(JFLC1)

**E-Filed 1/26/2007**

NOT FOR CITATION

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

SYSTEMS AMERICA, INC., et al.,

 Plaintiffs,

 v.

ROCKWELL SOFTWARE, INC., et al.,

 Defendants.

Case Number C 03-02232 JF (RS)

ORDER GRANTING PARTIAL 1

MOTION TO DISMISS WITHOUT

LEAVE TO AMEND

[re: docket no. 87]

ROCKWELL AUTOMATION, INC.,

 Third Party Plaintiff,

 v.

VERSANT CORPORATION,

 Third Party Defendant.

Third party defendant Versant Corporation (“Versant”) moves to dismiss the second and

third claims for relief contained in the First Amended Third Party Complaint (“FATPC”) filed by

third party plaintiff Rockwell Automation, Inc. (“Rockwell Automation”). For the reasons

discussed below, the motion will be granted without leave to amend.

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 Rockwell Automation alleges that Rockwell Software merged into it on September 13, 2

2005, and that it is the successor in rights and remedies stemming from the SDA.

 Rockwell Automation pleads the second and third causes of action “[p]ursuant to

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California Commercial Code § 2312, N.Y. U.C.C. 2-312, or other applicable law.” The New

York and California code sections are identical. The parties have not cited and the Court has not

found authority indicating that the case law of the highest New York and California courts differ

with regard to the question posed by the instant motion. The parties agree that the Court need not

determine at this time which law applies and the Court concludes that it need not do so.

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Case No. C 03-02232 JF (RS)

ORDER GRANTING PARTIAL MOTION TO DISMISS WITHOUT LEAVE TO AMEND

(JFLC1)

I. BACKGROUND

1. Procedural Background

Plaintiffs Systems America, Inc. and Systems America (I) Pvt. Ltd. (collectively “Systems

America”) filed the original complaint in this action on May 13, 2003, alleging breach of

contract, breach of the covenant of good faith and fair dealing, and misappropriation of trade

secrets. On June 26, 2006, Rockwell Software Inc. (“Rockwell Software”) answered the

complaint. On the same date, Rockwell Automation filed a third party complaint (“TPC”)

against Versant. The TPC asserted one claim for breach of contract. Rockwell Automation

alleged that Rockwell Software entered into a Software Development Agreement with Versant

dated May 9, 2003 (“SDA”), under which Versant was to develop certain software for Rockwell

Software. Rockwell Automation alleged that the SDA included a warranty by Versant that its

2

services would not violate or infringe upon the rights of third parties, and that Versant violated

this warranty by developing software using trade secrets and confidential information belonging

to Systems America.

 On October 12, 2006, Rockwell Automation filed the FATPC. The FATPC asserts three

claims for relief: (1) breach of contract; (2) breach of warranty of the SDA; and (3) breach of

warranty of the RSSQL offshore development proposal (“Proposal”). Versant contends that the

second and third claim are not cognizable because the FATPC asserts no basis by which Versant

could be obligated under the implied warranty provisions of the Uniform Commercial Code

(“UCC”), including California Commercial Code Section 2312 or New York Uniform

Commercial Code Section 2-312. Versant argues that the UCC does not apply because both 3

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 The Proposal is provided as Exhibit A to the FATPC. 4

 Rockwell Automation alleges that Versant acquired Mokume in October or November 5

2002. Systems America alleges that Mokume was formed by a group of its former employees

who had committed the alleged theft of source code which has given rise to this action.

 The SDA is provided as Ex. B to the FATPC. 6

3

Case No. C 03-02232 JF (RS)

ORDER GRANTING PARTIAL MOTION TO DISMISS WITHOUT LEAVE TO AMEND

(JFLC1)

agreements at issue address custom software development and thus are contracts for services

rather than for the sale of goods. Rockwell Automation opposes the motion, arguing that the

contracts at issue are governed by the UCC because they are contracts for the sale of goods. The

Court heard oral argument on January 19, 2007. 

2. Agreements at Issue in the Instant Motion

a. The Proposal

The Proposal, entered in to by Rockwell Software and Mokume Software, Inc. 4

(“Mokume”) on January 25, 2002, contemplates “development outsourcing.” Under the 5

Proposal, “Rockwell will define the requirements (code development and changes), deliverables

from Mokume Software, resources requirements and time line in a ‘Statement of Work’ (SOW)

document.” Proposal ¶ 5.2. The Proposal has only vague terms, as befits a preliminary

document. However, the existing terms indicate that it is an agreement relating to the

development of software. The Proposal does not define the specific work to be performed by

Mokume, but refers to it generally as “development.” The Proposal does not include the SOW,

but describes a “Typical SOW” as containing elements which confirm that the Proposal

contemplates development. See Proposal ¶ 5.2. The Proposal refers to Appendix 1 for the scope

of the SOW, but this Appendix is blank.

b. The SDA

The SDA entered into by Rockwell Software and Versant on May 9, 2003, recites the 6

following:

A. Rockwell has developed the software (RSSQL) designed to help better

manage manufacturing processes by integrating the valuable data in shop floor

control systems with enterprise IT and other manufacturing applications.

B. Versant is willing to extend the capabilities of the currently developed RSSql

SAP Server by providing a “XML Enterprise Server” for such integration in

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Case No. C 03-02232 JF (RS)

ORDER GRANTING PARTIAL MOTION TO DISMISS WITHOUT LEAVE TO AMEND

(JFLC1)

accordance with the Requirements and on the terms and conditions set forth

herein.

SDA Recitals A-B. The SDA contemplates that Versant will “develop the Software in

accordance with the Requirements” articulated therein. SDA ¶ 2.1. The Requirement Statement

recites the fact that “Versant has agreed to develop and deliver a ‘XML Enterprise Server’ and a

SAP Enterprise Server for integrating Rockwell’s RSSql product with XML and SAP based

clients/data sources.” SDA Ex. A. Specific requirements include those listed under the heading

“RSSql XML Enterprise Server Objectives”:

Versant to provide RSSql development support by building a RSSql XML

Enterprise Server:

1. Support XML interchange between RSSql data points and any other XML

based application/data source.

2. Support RSSql interfaces with SAP via the SAP web services initiative, SAP

R/3 release 4.6C and higher.

3. Support RSSql interfaces with SAP IDoc & Functional Modules for SAP R/3

releases 3.1h through 4.5B.

4. Support MSMQ messaging.

SDA Ex. A. 

The SDA provides that “Rockwell shall have the right to inspect and test the Software

when received to determine whether they conform to the Requirements.” SDA ¶ 2.4. Under the

SDA, “[t]he parties will jointly develop a ‘go-to-market’ strategy which may include

development of marketing material, hosting seminars, participation in trade shows, customer

road shows, and targeted mailings,” SDA ¶ 3.1, and “[e]ach party will market and sell the

Software under their own brands and box wraps respectively.” SDA ¶ 3.2. The SDA includes

the “additional responsibilities of Versant” that it “install and customize the Software at the

facilities of Rockwell’s clients” at agreed-upon rates, SDA ¶ 4.1, that it “provide upgrades to the

Software,” SDA ¶ 4.2, and that it “provide maintenance to Rockwell and Rockwell’s clients” at

agreed-upon rates. SDA ¶ 4.3. The SDA provides that “the Software shall be owned exclusively

by Versant.” SDA ¶ 6.1. Both Rockwell Software and Versant have “the worldwide right to

license and install, and distribute the Software through supporting channels.” SDA ¶ 6.2. The

SDA governs the payment of license revenues, with Versant receiving, for example, sixty percent

of net revenue in the first three years from the initial product release date or the term of the SDA. 

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Case No. C 03-02232 JF (RS)

ORDER GRANTING PARTIAL MOTION TO DISMISS WITHOUT LEAVE TO AMEND

(JFLC1)

SDA ¶ 7.2. The SDA provides that Versant will deposit the source code of the software with a

designated escrow agent for access by Rockwell Software. SDA ¶ 6.4. The SDA does not

include a provision requiring Versant to produce a large number of copies of the Software

developed under the SDA or to deliver a large number of copies to Rockwell Software. 

II. LEGAL STANDARD

1. Motion to Dismiss

For the purpose of a motion to dismiss, the plaintiff’s allegations are taken as true, and

the Court must construe the complaint in the light most favorable to the plaintiff. Jenkins v.

McKeithen, 395 U.S. 411, 421 (1969). Leave to amend must be granted unless it is clear that the

complaint’s deficiencies cannot be cured by amendment. Lucas v. Department of Corrections,

66 F.3d 245, 248 (9th Cir. 1995). When amendment would be futile, however, dismissal may be

ordered with prejudice. Dumas v. Kipp, 90 F.3d 386, 393 (9th Cir. 1996). 

On a motion to dismiss, the Court’s review is limited to the face of the complaint and

matters judicially noticeable. North Star International v. Arizona Corporation Commission, 720

F.2d 578, 581 (9th Cir. 1983); MGIC Indemnity Corp. v. Weisman, 803 F.2d 500, 504 (9th Cir.

1986); Beliveau v. Caras, 873 F.Supp. 1393, 1395 (C.D. Cal. 1995). However, under the

“incorporation by reference” doctrine, the Court also may consider documents which are

referenced extensively in the complaint and which are accepted by all parties as authentic, which

are not physically attached to the complaint. In re Silicon Graphics, Inc. Securities Litigation,

183 F.3d 970 (9th Cir. 1999).

2. Scope of the UCC

The UCC applies to “transactions in goods.” Cal. Comm. Code § 2102. “Goods” are

defined in the Code as “all things (including specially manufactured goods) which are movable at

the time of identification to the contract for sale.” Cal. Comm. Code § 2105. When a contract

involves both goods and services, the Court should look to the essence of the agreement,

Filmservice Laboratories, Inc. v. Harvey Bernhard Enterprises, Inc., 208 Cal.App.3d 1297, 1305

(1989); RRX Industries, Inc. v. Lab-Con, Inc., 772 F.2d 543, 546 (9th Cir. 1985), and determine

“whether [its] predominant factor, [its] thrust, [its] purpose, reasonably stated, is the rendition of

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28 Rockwell Automation does not attempt to distinguish Pearl Investments, which is cited 7

by Versant in its motion. Neither party cites Architectronics.

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Case No. C 03-02232 JF (RS)

ORDER GRANTING PARTIAL MOTION TO DISMISS WITHOUT LEAVE TO AMEND

(JFLC1)

service, with goods incidentally involved . . . or is a transaction of sale, with labor incidentally

involved.” United States ex rel. Bartec Industries, Inc. v. United Pacific Co., 976 F.2d 1274,

1277 (9th Cir. 1992). “The issue of mixed or hybrid goods and services often arises in the

context of transactions involving software.” TK Power, Inc. v. Textron, Inc., 433 F.Supp.2d

1058, 1061-62 (N.D.Cal. 2006). “Because software packages vary depending on the needs of the

individual consumer, [the Ninth Circuit] appl[ies] a case-by-case analysis.” RRX Industries, 772

F.2d at 546. 

III. DISCUSSION

1. Second Claim for Relief: Breach of Warranty of the SDA

Multiple courts have considered how to treat software contracts under the UCC, but there

is no authority from the highest courts of California or New York or from the Ninth Circuit that

controls the instant dispute. Another court in this district recently concluded that a contract that

provided for the development of a prototype was a contract for services, noting that the losing

party had “not cited a single case in which a prototype or model for development purposes has

been deemed ‘goods’ for purposes of applying the UCC.” TK Power, 433 F.Supp.2d at 1062. 

That court also held that any portion of the contract that involved services was severable and that

the UCC would not apply to that portion of the contract. Id. at 1063-64. The facts of the instant

case differ from those of TK Power, however. The SDA contemplates not the creation of a

prototype or model for development purposes, but rather the development of a final product for

reproduction and distribution to Rockwell Software’s customers. Accordingly, the Court has

reviewed cases from other districts to inform its analysis. 

The two cases most factually similar to the instant case are Pearl Investments, LLC v.

Standard I/O, Inc., 257 F.Supp. 2d 326, 353 (D.Me. 2003) and Architectronics, Inc. v. Control

Systems, Inc., 935 F.Supp. 425, 432 (S.D.N.Y. 1998). In Pearl Investments, the parties agreed

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that the developing party would “create [the] software from scratch (concept to realization) for

which it would be paid on a time and materials basis. Pearl Investments, 257 F.Supp.2d at 353. 

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28 The SDA also provides for a maintenance and service contract that falls outside the 8

scope of the UCC.

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Case No. C 03-02232 JF (RS)

ORDER GRANTING PARTIAL MOTION TO DISMISS WITHOUT LEAVE TO AMEND

(JFLC1)

The court concluded that “for purposes of applicability of the UCC, development of a software

system from scratch primarily constitutes a service.” Id. Architectronics involved two licenses,

of which the primary one allowed the licensee to mass-market the prototype developed by the

licensor. The court concluded that because the parties bargained for the right to mass-market the

product, “not for the right to install single copies of the [software] onto their own PCs,” the

predominant feature of the transaction was a transfer of intellectual property rights, not a sale. 

Architectronics, 935 F.Supp. at 432. See also Multi-Tech Systems, Inc. v. Floreat, Inc., 2002 WL

432016 (D.Minn. 2002) (unpublished) (following Architectronics in holding that “[c]ontribution

of knowledge and expertise to the development of a product is not ‘goods’ within the meaning of

the UCC”). 

This Court concludes that, as in Architectronics and Pearl Investments, the SDA is not

governed by the UCC. The essence or thrust of the SDA is Versant’s development of software

from scratch and the granting of a license to Rockwell Software. The SDA does not call for 8

Versant to sell a slightly modified version of existing software to Rockwell Software. Instead,

under the SDA, Versant must develop new software to supplement existing Rockwell Software

software. The SDA then calls for Versant to provide the source code to an escrow agent, not to

give a certain number of physical copies directly to Rockwell Software. Importantly, the SDA

provides that Versant retains all ownership rights to the software. The SDA may have been

formed with the ultimate purpose of creating software that Rockwell Software could sell as

goods to its customers, but that purpose does not transform a development contract into a

contract for a sale of goods. The analogy, proposed at oral argument by Rockwell Software, of

the sale of a Windows CD at Best Buy is not appropriate for the transaction contemplated by the

SDA. The essence of a license for the mass-produced Windows is different from the essence of a

license of software developed from scratch to the requirements of the licensee. The Court is not

willing to adopt what would likely amount to a per se rule that software development contracts

are governed by the UCC. Instead, the Court has undertaken the case-by-case analysis required

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 Rockwell Automation points out that the Seventh Circuit states that its opinion is 9

consistent with the weight of authority. Opposition 3 (citing Dharma, 148 F.3d 654). However,

since the Dharma opinion is distinguishable, a finding that the UCC is inapplicable to the instant

case is not contrary to this weight of authority. Moreover, even if Dharma were not

distinguishable, the decisions in Pearl Investments and Architectronics would indicate a shift in

the weight of authority.

 Unisys includes a broad discussion of the law of software and the UCC. This 10

discussion is mostly dicta, as the court decides the question on the basis that the contract’s main

objective was to transfer products, Unisys, 925 F.2d at 676, not on the basis of a broad rule

regarding the application of the UCC to software and software development contracts.

Rockwell Automation cites Unisys, 925 F.2d at 675 for the analogy that “when a

professor delivers a lecture, it is not a good, but, when transcribed as a book, it becomes a good.” 

However, the Court concludes that in the instant case, providing the new, custom software to the

escrow agent is analogous not to the mass-produced book, but rather to the lecture and the

preparatory work that the professor presumably performed. See also Architectronics, 935

F.Supp. at 432 n.5 (describing the more analogous hypothetical situation where a publisher

commissions a novel, and finding such a situation a contract for services).

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Case No. C 03-02232 JF (RS)

ORDER GRANTING PARTIAL MOTION TO DISMISS WITHOUT LEAVE TO AMEND

(JFLC1)

by the Ninth Circuit and concludes that the SDA is not a contract for the sale of goods, but rather

is a transaction for services and for the transfer of intellectual property rights. 

The cases cited by Rockwell Automation are distinguishable and not controlling. Unlike

the instant case, which involves the development of new software, Micro Data Base Systems,

Inc. v. Dharma Systems, Inc., 148 F.3d 649 (7th Cir. 1998) involved a transaction where the

customization of the software was only a small part of the transaction. See id. at 655 (comparing

the case to a situation where the plaintiff bought a car from the defendant for $20,000, which

included $1,000 for customization). Advent Systems Ltd. v. Unisys Corp, 925 F.2d 670 (3d Cir. 9

1994) also involved a contract that contemplated limited customization of existing software and

the sale of twenty different types of hardware. See id. at 674. Comshare, Inc. v. United States,

10

27 F.3d 1142 (6th Cir. 1994) includes only a passing discussion of software and the UCC. See

id. at 1145 fn.2. RRX Industries Inc. v. Lab-Con, Inc., 772 F.2d 543 (9th Cir. 1985) involved the

installation of a preexisting software system with minimal service. Triangle Underwriters, Inc.

v. Honeywell, Inc., 604 F.2d 737, 742-43 (2d. Cir. 1979) pertained to the sale of hardware

systems, not the development of software.

Colonial Life Insurance Co. v. Electronic Data Systems Corp., 817 F.Supp. 235 (D.N.H.

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Case No. C 03-02232 JF (RS)

ORDER GRANTING PARTIAL MOTION TO DISMISS WITHOUT LEAVE TO AMEND

(JFLC1)

1993) involved an agreement in which “[the defendant] was to spend four years developing and

customizing its Insurance Machine for [the plaintiff]. At the end of this term [the plaintiff] was

to receive a license to use the system.” Id. at 239. The court concluded that the “essence of the

contract was to license [the plaintiff] to use a computer software product,” id., and that such a

contract was a contract for goods within the meaning of the UCC. Id. However, Colonial Life is

distinguishable from Architectronics and the instant case because that case involved the licensing

and installation of software onto the licensee’s own machines for its own use, not the grant of a

license to reproduce the software and sell it to customers. Such a transaction indeed is more

analogous to the sale of a license to a Windows user by Best Buy than to the complicated

licensing and royalty agreement entered into by the parties to the instant dispute. To the extent

that the instant case and Architectronics are not distinguishable from Colonial Life, the Court

reaches the same result as the Architectronics court because the essence of the SDA was the

application of Versant’s skill and expertise to the software challenges facing Rockwell Software,

not the sale of goods.

Accordingly, the Court will dismiss the second claim for relief. Rockwell Automation

stated at oral argument that the applicability of the UCC to the SDA turned on the Court’s

interpretation of the terms of the SDA and that it cannot allege any further terms or facts that

would impact the applicability of the UCC. Accordingly, the Court concludes that amendment of

the second cause of action would be futile.

2. Third Claim for Relief: Breach of Warranty of the Proposal

 The parties agreed at oral argument that the UCC applies either to both the Proposal and

the SDA or to neither. Because it concludes that the UCC does not apply to the SDA, the Court

also concludes that the UCC does not apply to the Proposal, and it will dismiss the third claim for

relief without leave to amend.

IV. ORDER

Good cause therefore appearing, IT IS HEREBY ORDERED that the partial motion to

dismiss the second and third causes of action in the First Amended Third Party Complaint is

GRANTED without leave to amend.

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Case No. C 03-02232 JF (RS)

ORDER GRANTING PARTIAL MOTION TO DISMISS WITHOUT LEAVE TO AMEND

(JFLC1)

DATED: January 26, 2007.

 

JEREMY FOGEL

United States District Judge

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Case No. C 03-02232 JF (RS)

ORDER GRANTING PARTIAL MOTION TO DISMISS WITHOUT LEAVE TO AMEND

(JFLC1)

This Order has been served upon the following persons:

Alexander L. Brainerd alexander.brainerd@hellerehrman.com,

robin.ramirez@hellerehrman.com;

katherine.coleman@hellerehrman.com 

Rodger R. Cole rcole@fenwick.com, vpieretti@fenwick.com 

Kimberly K. Dodd kdodd@foley.com, rbarcena@foley.com 

Daniel L. Feder danfeder@pacbell.net 

Nancy J. Geenen ngeenen@foleylaw.com, rbarcena@foleylaw.com 

Annette L. Hurst annette.hurst@hellerehrman.com, mawilliams@hewm.com 

Christopher A. Keele cakeele@stoel.com, gsbeasley@stoel.com 

Rachael Gayza Samberg rsamberg@fenwick.com, jwebb@fenwick.com 

William M. Sloan , Esq wmsloan@stoel.com, 

Colbern C. Stuart , III cole.stuart@hellerehrman.com, liz.hoke@hellerehrman.com 

Notice will be delivered by other means to:

Christopher G. Hanewicz 

Heller Ehrman LLP

One East Main Street

Suite 201

Madison, WI 53703-5118

Leslie Harvey 

Heller Ehrman LLP

333 Bush Street

San Francisco, CA 94104

Molly A. Terwilliger

Heller Ehrman LLP

701 Fifth Avenue

Suite 6100

Seattle, WA 98104-7098

Case 5:03-cv-02232-JF Document 98 Filed 01/26/07 Page 11 of 11