Court Opinion

ID: 2776532
Source: CourtListenerOpinion
Date Created: 2015-02-04 20:01:00.393507+00
Date Added: 2024-06-11T10:52:23.023294
License: Public Domain

UNPUBLISHED

                  UNITED STATES COURT OF APPEALS
                      FOR THE FOURTH CIRCUIT

                             No. 13-2274

NORTH CAROLINA FARM BUREAU MUTUAL INSURANCE CO.,

                Plaintiff – Appellee,

           v.

CLEAR TECHNOLOGY, INC.; VERSATA ENTERPRISES, INC.,

                Defendants – Appellants.

Appeal from the United States District Court for the Eastern
District of North Carolina, at Raleigh.   Terrence W. Boyle,
District Judge. (5:12-cv-00111-BO)

Argued:   October 28, 2014                 Decided:   February 4, 2015

Before TRAXLER, Chief Judge, DIAZ, Circuit Judge, and DAVIS,
Senior Circuit Judge.

Vacated and remanded by unpublished opinion.    Judge Diaz wrote
the opinion, in which Chief Judge Traxler and Senior Judge Davis
joined.

ARGUED: Matthew Nis Leerberg, SMITH MOORE LEATHERWOOD LLP,
Raleigh, North Carolina, for Appellants. Walter E. Brock, Jr.,
YOUNG, MOORE & HENDERSON, PA, Raleigh, North Carolina, for
Appellee.     ON   BRIEF:  Bradley   M. Risinger, SMITH  MOORE
LEATHERWOOD LLP, Raleigh, North Carolina, for Appellants.
Robert Cowan deRosset, IV, YOUNG, MOORE & HENDERSON, PA,
Raleigh, North Carolina, for Appellee.
Unpublished opinions are not binding precedent in this circuit.

                                2
DIAZ, Circuit Judge:

        This appeal arises out of a dispute over the provisions of

a software licensing contract between North Carolina Farm Bureau

Insurance        Company       (“NCFB”)          and     software      company    Clear

Technology, Inc. (“Clear Tech”).                   The parties disagree over the

meaning of a $20,000 monthly fee term in an order form, which

led to the filing of this lawsuit.                      Both parties filed motions

for   summary     judgment      and    the       district     court    granted   NCFB’s

motion, finding that no reasonable jury could find that Clear

Tech’s    interpretation        of    the    fee       term   was   what   the   parties

intended.       We disagree and therefore vacate the district court’s

grant of summary judgment and remand for trial.

                                            I.

      In March 2003, NCFB and Clear Tech entered into a software

license and maintenance agreement (the “Master Agreement”) under

which    NCFB    was     to   use   Clear    Tech’s       Tranzax     software   in   its

insurance       policy    processing        business.         The   Master    Agreement

specified that NCFB would pay a $75,000 license fee to use the

software, along with a $20,000 annual maintenance fee.                             Under

the terms of the Master Agreement, the NCFB could decline to pay

the     annual    maintenance         fee,       thereby      forgoing     maintenance,

software updates, and support services.

                                             3
     By entering into the Master Agreement, NCFB was granted a

“perpetual,   nonexclusive,   nontransferable         right     to    use   the

Tranzax   software . . . in   accordance      with    and   subject    to   the

terms and conditions of [the] Agreement.”            J.A. 55.    The parties

agreed that if NCFB breached the Agreement, Clear Tech could

cancel it and NCFB would be required to stop using the software.

The parties also agreed that NCFB might order additional modules

of the software for other areas of its business, and that the

terms of future orders would be subject to and incorporated into

the Master Agreement.

     In August 2004, the parties executed three new order forms,

through   which   NCFB   purchased       additional    units     of    Tranzax

software for its Policy Processing and Underwriting businesses,

as well as a Developer Version License for Tranzax.              At issue in

this case is Order No. 2, which we reproduce in full below.

                                     4
      In Order No. 2, NCFB contracted to use the Tranzax software

in   its   underwriting   business.       Unlike   the   Master   Agreement,

                                      5
which explicitly incorporates a separate annual maintenance fee,

Order No. 2 does not include such a fee.                 Rather, maintenance is

listed as “Included” in the middle column of the order form.                        On

the far left side of the order form, two fees are listed under

the heading “License Fee”: $300,000 on invoice, and $20,000 per

month in advance (on invoice).

      Order   No.   2    was    signed   by    Clear    Tech’s    Chief       Financial

Officer Chris Kendall and NCFB’s Senior Executive Linda Squires

(after   review     by   NCFB’s      counsel).         NCFB    paid     the   $300,000

license fee, began using Tranzax software in its underwriting

business, and started making recurring payments of $20,000 per

month.

      In 2008, Versata Enterprises, Inc. acquired Clear Tech.                       In

the years following the acquisition, NCFB became dissatisfied

with the service and support it was receiving from Clear Tech.

Specifically, Clear Tech stopped providing support for an older

version of the Tranzax software used heavily by NCFB, and NCFB

was   redirected    from       its   primary   support        contact    to    overseas

support services.        In response to NCFB’s complaints, Clear Tech

sent NCFB a new maintenance and support proposal in April 2011.

NCFB, however, rejected it.

      After   receiving        its   annual    service    and     support      renewal

notice from Clear Tech on June 15, 2011, NCFB informed Clear

Tech that NCFB did not wish to continue receiving maintenance

                                          6
and would allow its service and support contract to expire on

August 13, 2011.       Clear Tech in turn told NCFB that failure to

continue to pay the $20,000 “monthly license fees” under Order

No.   2   would   constitute      a     material   breach      of   the   parties’

agreement, resulting in revocation of NCFB’s license to use the

software.    NCFB responded that it did not intend to stop using

the Tranzax software and that it viewed the $20,000 monthly fee

as one for optional maintenance, rather than a fee to maintain

the license.      Clear Tech confirmed that it saw Order No. 2

differently, viewing the $20,000 fee as a monthly license fee.

NCFB allowed its service and support contract to lapse on August

13, 2011, but it continued to pay the $20,000 monthly fee (under

protest) in order to keep using Clear Tech’s software in its

underwriting business.

      NCFB filed suit in state court, seeking (1) a declaratory

judgment    allowing   it   to    continue      using    the   Tranzax    software

without paying the $20,000 monthly fee, and (2) the return of

all payments made under protest.              Clear Tech removed the case to

the district court and filed an answer and counterclaim, seeking

a   declaratory   judgment       that    the   $20,000    monthly     fee    was   a

mandatory license fee.

      On cross-motions for summary judgment, the district court

granted NCFB’s motion and denied Clear Tech’s motion.                       Finding

that the interplay between Order No. 2 and the Master Agreement

                                          7
was ambiguous, the district court considered extrinsic evidence

of   the   parties’    original      intent,   including   emails    and   the

testimony of the signatories to Order No. 2.                The court held

that because extrinsic evidence conclusively demonstrated that

NCFB had “no obligation to continue paying $20,000 per month in

order to preserve its license,” J.A. 690, summary judgment in

favor of NCFB was proper.         This appeal followed.

                                     II.

     We    address    two   issues    on    appeal.    First,   we   consider

whether the district court erred in finding that the terms of

Order No. 2 are ambiguous, and therefore in admitting extrinsic

evidence of the parties’ intent.            Second, if the district court

properly admitted extrinsic evidence, we must decide whether it

erred in concluding that NCFB’s interpretation of Order No. 2 is

correct as a matter of law.          The ambiguity of a contract and the

district court’s grant of summary judgment are each questions of

law that we review de novo.            Moore Bros. Co. v. Brown & Root,

Inc., 207 F.3d 717, 726 (4th Cir. 2000); Pleasant Valley Hosp.,

Inc. v. Shalala, 32 F.3d 67, 69 (4th Cir. 1994).

                                      A.

     The Master Agreement specifies, and the parties agree, that

Colorado    substantive     law    governs     this   contractual    dispute.

Under Colorado law, the goal of contract interpretation is to

                                        8
give effect to the parties’ intention, as determined “primarily

from the language of the instrument itself.”                     USI Props. E.,

Inc.    v.    Simpson,    938   P.2d    168,    173   (Colo.   1997).   Colorado

courts interpret contract terms not in isolation, but by reading

them as a whole and attempting “to harmonize and to give effect

to all provisions so that none will be rendered meaningless.”

Fed. Deposit Ins. Corp. v. Fisher, 292 P.3d 934, 937 (Colo.

2013) (internal quotation mark omitted).                    Initial review of a

contract is typically limited to the document itself; only if

that    examination       reveals      that    the    contractual   language   is

ambiguous will Colorado courts refer to extrinsic evidence to

help glean the parties’ intent.               Simpson, 938 P.2d at 173.

       The mere existence of a disagreement between two parties

does not in itself create an ambiguity.                  Rather, a contract is

ambiguous only when its language is “fairly susceptible to more

than    one     interpretation.”          Fibreglas     Fabricators,    Inc.   v.

Kylberg, 799 P.2d 371, 374 (Colo. 1990).                 In determining whether

a   contract      is     ambiguous,     Colorado      law   instructs   that   we

initially assume the generally accepted meaning of the terms

used.        Cheyenne Mtn. Sch. Dist. No. 12 v. Thompson, 861 P.2d

711, 715 (Colo. 1993).

       Unlike many jurisdictions, Colorado does not apply a strict

“four corners” rule to the initial determination of ambiguity.

See Ad Two, Inc. v. City & Cnty. of Denver ex rel. Manager of

                                          9
Aviation, 9 P.3d 373, 380 (Colo. 2000) (Hobbs, J., dissenting)

(observing that “a steadily increasing number of courts have

disavowed    the   plain    meaning   rule    and     have   recognized    the

necessity of viewing extrinsic evidence,” and stating that “[i]n

Colorado,    we    have    adopted    this    more    flexible    approach”)

(internal quotation marks omitted).             Under Colorado law, the

court may conditionally admit evidence “bearing upon the meaning

of written terms, such as evidence of local usage and of the

circumstances surrounding the making of the contract” to help

determine   whether   the   contractual      language   is   susceptible    to

more than one meaning.        Thompson, 861 P.2d at 715.           But “the

court may not consider the parties’ own extrinsic expressions of

intent.”    Id. (internal quotation mark omitted).

    In this case, the district court found that, although the

disputed $20,000 fee is conspicuously listed under the heading

“License Fee” in Order No. 2, its meaning is ambiguous because

“it is not clear, when looking at Order No. 2 and the Master

Agreement together, whether the monthly $20,000 fee is meant to

be a recurring license fee, or a fee for maintenance and support

services” that NCFB was free to decline.             J.A. 686.   In reaching

this conclusion, the district court conditionally considered a

                                      10
                                                                            1
number of emails exchanged between the parties in mid-2011.

The district court observed that in those emails, there appeared

to   be   some    confusion    regarding   the    significance    of   NCFB’s

decision   to    discontinue    its   service    and   support   relationship

with Clear Tech.       For example, in one message, Clear Tech told

NCFB that if it stopped paying the $20,000 fee, NCFB would be

required to “immediately cease use of the . . . software,” J.A.

158, while in a subsequent email it merely warned NCFB that it

would     be     “operating    [the    software]       in   an   unsupported

environment,” J.A. 178.

     Although the emails suggest the possibility of confusion

between the parties, they do not, standing alone, demand the

conclusion that the written terms of Order No. 2 are ambiguous. 2

Nonetheless, we agree with the district court that the $20,000

     1
        Because contemporaneous emails are evidence of “the
circumstances surrounding the making of the contract” and are
not post hoc expressions of the parties’ intent, the district
court properly considered them in making the initial ambiguity
determination. Thompson, 861 P.2d at 715.
     2
        It appears that NCFB may have combined its annual
maintenance   payment  under   the   Master   Agreement with  a
consolidated payment of the entire year’s $20,000 monthly fees
under Order No. 2.    If so, Clear Tech’s inconsistent messages
may be explained by the fact that some of the emails
(specifically those referring to operating in an unsupported
environment) refer to NCFB’s decision to stop paying the annual
maintenance fee under the Master Agreement, while others (those
directing NCFB to discontinue use of the software) refer to the
discontinuation of the $20,000 monthly fee payment under Order
No. 2 that Clear Tech maintains was for the license.

                                      11
monthly     fee       in     Order     No.    2     is    ambiguous     when       viewed    in

conjunction with the Master Agreement and in the context of the

emails exchanged between the parties at the time the agreement

was formed.

        Viewed        in     isolation,           Order     No.     2     is       relatively

straightforward.             The $20,000 fee is conspicuously placed under

the    heading        “License       Fee,”    which       divides   the      fee    into    two

components: a one-time $300,000 payment and a $20,000 monthly

payment to be paid in advance on invoice.                           The word “Included”

appears     under          the    heading     “Annual       Maintenance        Fee,”    which

suggests that the $20,000 fee is not an annual maintenance fee.

However, because Order No. 2, “is subject to and incorporates”

the    terms     of    the       Master     Agreement,      we    may   not     view   it   in

isolation and instead must construe it with reference to the

Master Agreement.

        The Master Agreement makes no mention of recurring license

fees.     Instead, it refers exclusively to “the License Fee,” J.A.

55 (emphasis added), and it does not appear that Clear Tech

charged a monthly license fee for any other product purchased by

NCFB.     The agreement provides that “Annual Maintenance Fees will

be    invoiced    yearly,”           id.,    but    says    nothing     of     invoices     for

recurring license fees.                Thus, only two categories of fees were

explicitly contemplated at the time the parties executed the

                                               12
Master   Agreement:    (1)    one-time       license    fees,      and    (2)     annual

maintenance fees.

     However,    the   Master      Agreement    also     provides        that     NCFB’s

license to use Tranzax will be “perpetual . . . subject to the

terms and conditions of [the] Agreement.”                    Id.         The disputed

term in this case appears on its face to be a recurring license

fee, and it therefore does not fit neatly into either of the fee

categories set out in the Master Agreement.                  Although the Master

Agreement makes clear that “the agreement” between the parties

includes “any subsequent order form,” J.A. 54, the inconsistency

between the fees described in the Master Agreement and those

contained   in   Order       No.    2   renders        the   $20,000        fee    term

susceptible to more than one interpretation.

     The ambiguity as to this term is compounded by an email

sent by Clear Tech immediately before the parties signed Order

No. 2.   In July 2004, Clear Tech’s Chief Executive Officer John

Kendall wrote the following to NCFB’s Linda Squires summarizing

Order No. 2:

     License Fees: We agreed that we will structure a
     License Agreement based on each area that Tranzax will
     be deployed as a specific“module” [sic]. So for
     example we will charge $300k, plus $20k per month (for
     maintenance) for the License to use Tranzax in the
     Underwriting area/s at NCFB.

J.A. 87 (emphasis added).          Clear Tech’s characterization in this

email of the $20,000 monthly fee as both “for maintenance” and

                                        13
“for   the    License”      further      supports    the     conclusion     that    the

$20,000 fee term in Order No. 2 is ambiguous.

                                         B.

       Because the terms of Order No. 2 are ambiguous, we (like

the district court) may consider extrinsic evidence bearing on

the parties’ mutual intent at the time they entered into the

contract.         Thompson, 861 P.2d at 715.              And because Clear Tech

drafted the Master Agreement and Order No. 2, we construe those

documents against Clear Tech.              Id. at 716.

       The district court found that because Clear Tech “offered

no material evidence” to dispute NCFB’s interpretation of the

$20,000 fee, there was no genuine issue of material of fact

surrounding       the   meaning     of   the    $20,000    fee    term    and    summary

judgment in favor of NCFB was appropriate.                 We disagree.

       To    be    sure,   the    record       contains    considerable         evidence

supporting NCFB’s view that the parties intended the $20,000

monthly fee to be for maintenance and not for the license.                            As

previously discussed, the Master Agreement does not contemplate

any monthly license fees.             The only recurring fees found in the

Master      Agreement      are    annual       maintenance       fees,    which    were

optional and not linked in any way to NCFB’s licenses to use the

software.         In    addition,    Clear      Tech’s    then-CEO       John    Kendall

described the $20,000 fee as “for maintenance” in his email to

Linda Squires as the two were discussing Order No. 2.

                                           14
       The    deposition        testimony        of    John    and    Chris        Kendall   and

Linda Squires also weighs in favor of NCFB’s interpretation of

Order No. 2.           Although John Kendall mentioned both the $300,000

fee and the recurring $20,000 fee when asked “what the license

fee    was,”      he    then    clarified        that    the     $20,000      fee     was    for

maintenance and support and was not a license fee.                                   J.A. 257.

When asked what portion of the $20,000 fee was for the license

(as    opposed         to      maintenance        and        support),       Chris     Kendall

testified, “My recollection is zero.”                           J.A. 268.            And Linda

Squires      stated      that       it   was    “clearly       communicated”         that    the

$20,000 fee was for maintenance.                     J.A. 284.

       However, the record also contains evidence from which a

reasonable        jury      could    side      with    Clear    Tech.         For    one,    the

placement of the $20,000 monthly fee under the heading “License

Fee” (and the notation that Annual Maintenance was “Included”)

on the parties’ contract, which was reviewed by NCFB’s counsel

before       it   was       executed,       weighs      in    favor     of    Clear     Tech’s

interpretation.             A jury might also conclude that John Kendall’s

July   2004       email      listing      the    $20,000       monthly       fee    under    the

heading “License Fees” (plural) and describing the fee as “for

the License” indicates that it was intended to be a mandatory

license fee.

       Clear Tech also introduced uncontroverted testimony from an

expert       on    software         contracts,        who      opined    that        mandatory

                                                15
recurring license fees (even in conjunction with up front, one-

time license fees) are typical in the industry and are often

structured       to    include      maintenance.        He     also    contrasted      the

“perpetual” license in the parties’ Master Agreement with an

“irrevocable” license, and clarified that the former is subject

to the terms and conditions of the parties’ agreement, which

included NCFB’s continued payment of license fees.                       J.A. 436. 3

     Clear       Tech’s      argument        finds     further     support       in     the

testimony    of       its   then-Vice      President     of    Sales    and    Marketing

Geoff Smyth, who stated that in 2004, Clear Tech “was actively

seeking to increase the amount of recurring license revenue it

received    as    opposed      to    the     amount    of     recurring    maintenance

revenue it received.”            J.A. 635.        According to Smyth, Clear Tech

sought to accomplish this by “negotiat[ing] agreements with its

customers    whereby        customers      licensed     Clear’s       technology      on   a

subscription          basis”     with        maintenance       “included        in     the

subscription license price.”               Id.      A jury might choose to credit

Smyth’s testimony over that of John and Chris Kendall, who no

longer   worked       for   Clear     Tech    and    were    testifying       over    eight

years after Order No. 2 was signed.

     3
        In   contrast,   Clear   Tech’s  expert   explained,  an
“irrevocable” license “continue[s] forever no matter what--even
if the licensee breaches the license agreement."        J.A. 436
(emphasis added and internal quotation marks omitted).

                                             16
     Indeed, nothing in the Master Agreement precludes a finding

that, for purposes of Order No. 2, NCFB agreed to pay a monthly

license      fee   that    also    included        non-cancellable          maintenance.

Although the Master Agreement permits NCFB to opt out of the

"Annual   Maintenance        Fee,"    it    does    not   bar    the    parties       from

contracting for a mandatory monthly fee, whether for the license

or for maintenance.          Thus, even if NCFB were able to demonstrate

that the $20,000 monthly fee was intended to cover maintenance,

it would not necessarily follow that it was optional.                             We also

note that the first Order No. 2 invoice that Clear Tech sent to

NCFB,   which      NCFB    paid,   lists    the     $20,000     fee    as    a    “Monthly

License and Maintenance Fee.”                   J.A. 291.        In light of this

evidence,     a    reasonable      jury    could    conclude     that       the    $20,000

monthly fee was intended to be a mandatory recurring license or

maintenance fee.

        In    sum,    on    this   record,      the   district        court      erred   in

deciding that there was no genuine issue for trial.

                                      III.

     For the foregoing reasons, we vacate the district court’s

order granting NCFB’s motion for summary judgment and remand

this case for trial.

                                                              VACATED AND REMANDED

                                           17