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Gateway Systems, Inc. and Gateway Web Services, Inc v. Chesapeake Systems Solutions

June 6, 2011

GATEWAY SYSTEMS, INC. AND GATEWAY WEB SERVICES, INC., PLAINTIFFS,
v.
CHESAPEAKE SYSTEMS SOLUTIONS, INC.,
DEFENDANT.



The opinion of the court was delivered by: Elaine E. Bucklo United States District Judge

MEMORANDUM OPINION AND ORDER

On April 14, 2010, plaintiff Gateway Systems, Inc., initiated this litigation against Chesapeake Systems Solutions, seeking declaratory, injunctive, and, in the alternative, other relief for alleged breaches of the parties' software license agreement.*fn1

Gateway has since amended its complaint, and now operative is its second amended complaint, which names Gateway Web Services as an additional plaintiff, as well as G Treasury SS as a third-party defendant.*fn2 Now before me are cross-motions for partial summary judgment, which seek resolution of the following issues: 1) whether Gateway breached the parties' agreement when it purported to terminate the contract without providing Chesapeake notice of any alleged breach and opportunity to cure; 2) whether Chesapeake is entitled to, and Gateway must provide, the source code version of the software, license keys, the license key "generator," and all modules, enhancements, and updates to the software, and whether Gateway breached the agreement by failing to provide these items; 3) whether Chesapeake underreported or underpaid license fees owed to Gateway by excluding certain categories of fees Chesapeake received from its software customers when calculating Gateway's royalty payments; 4) whether Chesapeake materially breached the contract by licensing the software outside the United States; and 5)whether Gateway solicited Chesapeake's customers in violation of the contract's non-solicitation provisions.

In addition, Chesapeake seeks summary judgment that: 1) the "best efforts" clause of the parties' agreement is unenforceable, or, alternatively, that even if it is enforceable, Gateway cannot show that Chesapeake breached that provision; 2) Gateway cannot prevail on its claims that Chesapeake failed to provide first-line customer support, failed to properly install the software, or failed to refer customers to Gateway pursuant to Section 4.7 of the 2003 Agreement; and 3) Chesapeake did not anticipatorily repudiate the contract. Gateway, for its part, seeks summary judgment that:

1) Chesapeake has not paid licensing fees that have been due since the beginning of 2010; and 2) Chesapeake is not entitled to damages in the claimed amount of $19,000,000, which includes damages for lost profits or consequential damages.

I.

The history leading up to the current dispute is fraught with more than the usual intrigue---much of which is the subject of ongoing litigation in state court, and need not be recounted here--as well as a good dose of animosity. Gateway is the developer and owner of treasury management software that Chesapeake distributes and markets pursuant to the parties' agreement.*fn3 Gateway also markets this software itself, and Chesapeake, for its part, also develops and markets its own software. The parties' agreement grants Chesapeake a non-exclusive right to license Gateway's software in the United States and Canada.

Chesapeake's customers of the Gateway software come in two varieties: "installed" clients, who access the software from an application installed on the clients' own computers, and "hosted" (also referred to as "ASP" or "web-based") clients, who access the software remotely via the Internet. Chesapeake typically provides and maintains the necessary hardware for its "hosted" clients, and also provides internet connectivity so that these clients can access the software. A number of Chesapeake's "hosted" clients license the Gateway software through Bank of America, which itself licenses it from Chesapeake.

At some point in the parties' relationship, Gateway became dissatisfied with Chesapeake's performance. According to Gateway, its president, Orazio Pater, discussed perceived shortcomings in Chesapeake's performance in November of 2009 and provided Chesapeake with a list of "action items" at that time. Chesapeake acknowledges the "action items" list but disputes that Gateway expressed its position that Chesapeake was in breach of the parties' agreement at that time.

Then, in March of 2010, the parties' relationship apparently took an abrupt turn for the worse. After several unsuccessful attempts to obtain the "source code version" of the software, Chesapeake gave Gateway written notice, on March 29, 2010, that Gateway was in material breach of the parties' agreement for failing to provide the source code. Then, on April 14, 2010, Gateway's counsel filed the present lawsuit and also sent two letters to Chesapeake, each of which alleged various breaches of the parties' agreement. One of these letters purported to terminate the parties' agreement immediately based on Chesapeake's alleged failure to use its "best efforts" to market the Gateway software as required by Section 3.3 of the agreement---a breach of which Chesapeake had been on notice, Gateway claimed, since November of 2009. The other letter stated, among other things, that Chesapeake's president, Peter Vogelberger, had threatened to use the source code to "sink" Gateway. The letter opined that for this reason, among others, any duty Gateway ever had to provide Chesapeake with the source code was extinguished. Gateway then sent another letter on May 14, 2010, claiming that Chesapeake had not cured the breaches identified in the letters of April 14, 2010, and again declaring the agreement terminated. Meanwhile, on May 5, 2010, Chesapeake sought a preliminary injunction ordering Gateway to provide Chesapeake with the source code version of the software and the "license key generator" to enable Chesapeake's clients to continue using the software, and enjoining Gateway from soliciting Chesapeake's customers. I granted that motion in most material respects. See Gateway Systems, Inc. v. Chesapeake Systems, No. 10 C 2276, 2010 WL 3714588, at *1 (N.D. Ill. Sept. 14, 2010).*fn4

II.

Because whether Gateway properly terminated the parties' agreement is a threshold question to resolving many of the issues presented for summary judgment, that is where I begin my inquiry. I conclude that Chesapeake is entitled to summary judgment on this issue.

Gateway argues that it properly terminated the agreement in accordance with its provisions, and, specifically, that Gateway was not required to provide Chesapeake with notice of an alleged breach and an opportunity to cure before terminating the contract. This argument relies on an untenable interpretation of Section 9.2. That section, which falls under the heading "Term and Termination," reads, in its entirety:

In addition, if either party defaults in the performance of any material provision of this Agreement, the non-defaulting party may give written notice to the defaulting party that if the default is not cured within thirty (30) days, the Agreement shall automatically terminate at the end of such period; if the party receiving such notice fails to timely make such cure, this Agreement shall terminate in accordance with such notice.

The "in addition" indicates that Section 9.2 expands upon the immediately preceding Section 9.1. Section 9.1 establishes that the initial term of the agreement is four years, and that the agreement will renew automatically on an annual basis thereafter unless one of the parties provides written notice, prior to the end of the then-current term, of its intent not to renew.*fn5 The import of Section 9.2, then, is to establish a procedure for terminating the agreement mid-term on the ground of breach, which the parties may invoke rather than waiting until the end of the term to exercise the non-renewal option of Section 9.1. Read in this light, it is clear that the "may" of Section 9.2 signifies the existence of an alternative to non-renewal in the context of breach. It does not mean, as Gateway argues, that the notice-and-cure procedure established in that section is optional.

Nor is recourse to Section 9.2 itself optional. Gateway argues that Section 12.2 establishes an "alternative" termination procedure that does not require the opportunity to cure, and that Gateway properly elected to terminate the agreement under this procedure, rather than to invoke Section 9.2. But the interpretation of Section 12.2 as an "alternative" to Section 9.2 is without support in the text of the agreement. Section 12.2 governs dispute resolution, and it does not address, or even contain the word, "termination." Indeed, the progressive dispute resolution procedure set forth in Section 12.2, which contemplates a written exchange between the parties, then mediation, and ultimately litigation to resolve their differences, provides a detailed framework for resolving disputes short of termination, in a manner that enables the contract to remain in effect. Gateway cannot avoid the notice and cure requirements of the contract's explicit termination provisions on the theory that a separate provision that does not explicitly address termination somehow implicitly establishes an "alternative" termination procedure to one that does. In short, Gateway was required to provide Chesapeake with notice and the opportunity to cure any alleged breach before terminating the contract on the basis of that breach. Because the record demonstrates conclusively that it did not do so, and notwithstanding Gateway's histrionic assertions of Chesapeake's bad faith,*fn6 Chesapeake is entitled to summary judgment that Gateway's termination was improper.

Nor does the record support Gateway's claim that Chesapeake breached the contract's "best efforts" clause---the breach Gateway originally claimed justified its termination.*fn7 Amended Section 3.3 provides, "Chesapeake agrees to use commercially reasonable best efforts throughout the term of this Agreement to promote, market and distribute the Gateway Software either directly or through Resellers to End Users." Chesapeake asserts that this clause is unenforceable, but I need not decide the issue because even assuming that it is enforceable, Gateway has not demonstrated that it could persuade a reasonable jury that Chesapeake breached it. Gateway relies entirely on Chesapeake's loss of business (the magnitude of which Chesapeake disputes), Chesapeake's alleged failure to win new business, and Chesapeake's putative incompetence in demonstrating, installing, and supporting the software. But Gateway offers neither argument nor authority to explain how these shortcomings prove that Chesapeake failed to use its "best efforts" to promote and market the software.

Moreover, even assuming Gateway's theory had legs conceptually, the factual support for it is simply too scant to survive summary judgment. Questioned about the basis for Gateway's claim, Oracio Pater, Gateway's Rule 30(b)(6) witness, cited non-specific customer feedback (about which Mr. Pater admitted to having no detailed, personal knowledge) that Chesapeake's demonstration of the software was "somewhat confused amongst the other Chesapeake products," and equally vague feedback from Chesapeake personnel that they were "not totally comfortable with the capabilities of the system and in their abilities to present the best features of it." Pater Dep., Chesapeake's SOF, Exh. 17 at 152:20-24, 153:9-15. Mr. Pater then conceded that Gateway's claim was otherwise rooted in "only ...


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