Opinion
Civil Action No. 02-11135-RGS.
June 9, 2005
MEMORANDUM AND ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT
On June 6, 2002, Paul Cozza brought this action against Network Associates, Inc. (NAI), asserting breach of a settlement agreement, fraud, and various other state-law claims. Before the court are the parties' cross-motions for summary judgment.
Effective July 1, 2004, NAI changed its name to McAfee, Inc.
BACKGROUND
At issue is a technology invented by Cozza that increases the scanning speed of antiviral software. The technology detects extraneous matter in a computer file without having to open the file to examine its contents. In 1992, Cozza applied for two patents covering his "Scan Enhancement" invention. In 1993, he licensed the technology to Datawatch Corporation (Datawatch). Under the Antiviral Scan Enhancement License Agreement (License Agreement), Datawatch received the exclusive right to incorporate Scan Enhancement into "Virex," antiviral software designed to operate on a Macintosh (Apple) platform.
Between December 1995 and July 1997, Cozza was granted three different patents covering aspects of the technology.
Section 6.1 of the License Agreement governed the scope of the license. It granted Datawatch an exclusive worldwide license:
(a) to copy, use, modify and prepare derivative works of the Scan Enhancement, solely at [Datawatch's] place of business . . . and (b) to distribute the Scan Enhancement, integrated into Virex, directly to End Users for their own internal use or (c) to distribute the Scan Enhancement integrated into Virex to Resellers for distribution, directly or indirectly, to End Users. (Emphases added).
No right of license is granted under the Development License for the use or other utilization or distribution of the Scan Enhancement directly or indirectly, for any other purpose or for the benefit of any other person or entity.
Section 1.2(d) of the License Agreement defined "Scan Enhancement" as
that technology related to the improvement of computer virus detection software in which the LICENSOR [Cozza] has intellectual property rights and which the LICENSOR elects, in his sole discretion, to disclose to the LICENSEE [Datawatch] under this Agreement.
The term "Virex" is defined in Section 1.2(h) as encompassing
any and all antiviral software products, including the Virex Init, designed to operate under the Macintosh OS and owned, licensed, distributed or marketed by [Datawatch]. (Emphasis added).
After negotiating the terms of the License Agreement, Cozza and Datawatch entered confidentiality agreements as a prelude to Cozza's disclosure of the intellectual property aspects of Scan Enhancement. Once the agreements were in place, Cozza made a series of disclosures in a conference call with Datawatch engineers. He also provided Datawatch with documents detailing the secrets of his invention. Among these was the revelation that the technology worked as effectively with Windows-based operating systems as it did with the Macintosh system. That secret was also disclosed in Cozza's then-pending patent applications, which were among the proprietary documents provided to Datawatch. The application for the `769 patent, for example, while it used a Macintosh computer to illustrate the preferred embodiment of Cozza's invention, disclosed that "this process, which while described with reference to a Macintosh computer may be used with virtually any other computer. . . ." (NAI's Ex. 10, p. 7). In a similar vein, the application for the `815 patent stated that "while the invention has been described in connection with operation on an Apple Macintosh computer, the invention can be used with other computers even if such computers do not have separate resource and data forks." (NAI's Ex. 10, p. 11).
NAI "does not rebut" Cozza's facts relating to the disclosure, which it characterizes as "immaterial" and "not germane to the determination of the parties' motions." NAI's Statement of Material Facts as to Which There is a Genuine Issue, pp. 1-2.
Pursuant to the License Agreement, Cozza was entitled to a 2 percent royalty on sales of Virex software incorporating Scan Enhancement. On December 12, 1996, the term of the License Agreement was extended by the parties until December 31, 2001. (Extension Amendment, dated 12/12/96; NAI's Ex.15). In 1997, an entity known as Dr. Solomon's purchased certain of Datawatch's assets, including its rights to the exclusive use of Scan Enhancement. Cozza consented to an assignment of the license to Dr. Solomon's by executing a letter agreement on October 9, 1997 (Letter Agreement). The Letter Agreement provided that upon the closing of the sale to Dr. Solomon's,
the term "LICENSEE" (as such term is defined in the License Agreement) shall be deemed to be Dr. Solomon's, not Datawatch, and (ii) Dr. Solomon's agrees to assume all obligations and liabilities . . . and to be bound by the terms and conditions of the License Agreement.
The royalty rate was to be adjusted in the event of the entry of new competitors in the market or if there was a decrease in the scan enhancement measure of the technology.
Consistent with the original License Agreement, Cozza continued to receive royalties on Dr. Solomon's net revenues from the sales, distribution, and licensing of Virex software. However, a modification was made to the royalty structure to account for Dr. Solomon's method of selling site licenses. Because it was generally impossible to determine whether end users at these sites used Virex or other antiviral software, the parties agreed to base the site-related royalty owed to Cozza on an approximation of the Macintosh share of the computer market, which at that time was agreed to be 6.7 percent. In the event that the market share of Macintosh computers relative to Windows-based computers shifted, the parties had the option of renegotiating the percentage. (Letter Agreement, NAI's Ex. 18).
In 1998, NAI acquired Dr. Solomon's, and disputes over the payment of royalties to Cozza began. Cozza claimed that he was not receiving the full amount of royalties that were due under the License Agreement. He also raised a concern that NAI might have illegally incorporated Scan Enhancement into a non-Virex product, VirusScan for Macintosh. After a series of negotiations, in which the parties were represented by experienced counsel, Cozza and NAI entered into a Settlement Agreement. Cozza received a payment of $580,000 in exchange for, among other things, his agreement to release any potential claims of patent infringement involving VirusScan.
At the heart of this dispute is Section 4.b of the Settlement Agreement, which provides:
[e]xcept as set forth in Section 4.a above, the Licensee shall, upon the termination of the License Agreement [in December 2001], permanently remove all technology incorporating or making use of the Scan Enhancement from its products, and the products of its Affiliates, and Licensee and its Affiliates shall not use the Scan Enhancement at any time following such termination in any product unless otherwise expressly agreed in writing by the parties. (Emphases added).
It is undisputed that the definition of Scan Enhancement in Section 1.2(d) of the License Agreement was incorporated by reference into the 1999 Settlement Agreement. Pursuant to Section 4.c, Cozza retained a one-time right to demand
a copy (at no charge) of each anti-viral product then manufactured, sold or distributed by Licensee or its Affiliates for the purpose of confirming that the Scan Enhancement is not being used therein. (Emphasis added).
In addition, pursuant to Section 2, Cozza retained a right, for a period of three years following the termination of the License Agreement, to receive
one copy of each Virex product developed, sold or distributed by Licensee or its Affiliates, for the purpose of confirming that the Scan Enhancement is not being used therein. (Emphasis added).
The Settlement Agreement contained the following integration clause:
[t]his Settlement Agreement (including the Schedule [attached] hereto) and the License Agreement express the entire agreement of the parties to those agreements with respect to the matters addressed therein. No party is relying on any oral or written promises, inducements, representations, understandings, interpretations or agreements with respect to such matters other than those contained in this Settlement Agreement and the License Agreement.
In January of 2002, Cozza exercised his right to inspect NAI's products under Section 4.c of the Settlement Agreement. In response to Cozza's request, and after some discussion among counsel, NAI sent Cozza copies of its Macintosh and non-Macintosh antiviral products. Cozza determined that Virex 6.1 used Scan Enhancement in violation of the Settlement Agreement. This action followed.
DISCUSSION
The disagreement among the parties stems from their conflicting interpretations of the term "Scan Enhancement" as it is used throughout the Settlement Agreement, and of the meaning of the term "product" in Section 4.b of the Settlement Agreement. NAI offers three arguments in support of its motion for summary judgment. First, it argues that the term "Scan Enhancement" applies only to Macintosh-related antiviral software and does not include "products" intended for use on non-Macintosh platforms. Second, NAI argues that the definition of Scan Enhancement changed in October of 1997 when the underlying license was assigned to Dr. Solomon's. Finally, NAI argues that principles of contract interpretation render the Settlement Agreement unenforceable because of a lack of a "meeting of the minds." Cozza, for his part, seeks a declaration that the language in Section 4.b of the Settlement Agreement is unambiguous and enforceable against all of NAI's products (and those of its affiliates). In addition, Cozza seeks a determination that the "Scan Enhancement" technology referenced in Section 4.b of the Settlement Agreement is the same technology referred to in the 1993 License Agreement.
"[T]he actual meaning of a contractual provision which can reasonably accommodate two or more interpretations should be left to the jury. . . . But the question whether a provision can reasonably support a proffered interpretation is a legal one, to be decided by the court." Fleet National Bank v. Anchor Media Television, Inc., 45 F.3d 546, 556 (1st Cir. 1995). A contract is ambiguous only where "its terms are inconsistent on their face or where the phraseology can support reasonable differences of opinion as to the meaning of the words employed and obligations undertaken." Lohnes v. Level 3 Communications, Inc., 272 F.3d 49, 53 (1st Cir. 2001) (citations omitted). An ambiguity is not created merely because a dispute exists between the parties, each favoring an interpretation contrary to the other. Wyner v. North American Specialty Insurance Co., 78 F.3d 752, 756 (1st Cir. 1996). Nor does an ambiguity arise "merely because an imaginative reader devises a way to split hairs."Lexington Ins. Co. v. General Accident Ins. Co. of Am., 338 F.3d 42, 47 (1st Cir. 2003). "Agreements, especially commercial arrangements, are designed to make sense. If one reading produces a plausible result for which parties might be expected to bargain, that reading has a strong presumption in its favor as against another reading producing an unlikely result (e.g., windfall gains, conditions that cannot be satisfied, dubious incentives)." National Tax Inst., Inc. v. Topnotch at Stowe Resort and Spa, 388 F.3d 15, 19 (1st Cir. 2004).
There is simply nothing ambiguous about the Settlement Agreement. It is a well written, fully-integrated contract carefully molded on the contours of the 1993 License Agreement, which explicitly defined all essential terms while laying out the exact scope of the license and the parties' respective rights and obligations. "Scan Enhancement" is defined by reference to the License Agreement as that technology in which: (1) Cozza has intellectual property rights; and (2) which he elected to disclose to Datawatch. As the patent applications and Cozza's other disclosures made clear, Scan Enhancement worked with both Macintosh and non-Macintosh platforms. It follows that products using Scan Enhancement are covered by the Settlement Agreement whatever platform is involved. It is a basic tenet of contract interpretation that "where the wording of the contract is unambiguous, the contract must be enforced according to its terms." Pride Hyundai, Inc. v. Chrysler Financial Co., 369 F.3d 603, 616 (1st Cir. 2004), quoting Liberty Mut. Ins. Co. v. Gibbs, 773 F.2d 15, 17 (1st Cir. 1985).
As the contract is unambiguous, I have not considered the voluminous extrinsic evidence offered by NAI purporting to demonstrate Cozza's subjective beliefs and how they supposedly shaped the negotiations leading to the formation of the Settlement Agreement. "When a court looks to the words of a document to consider the meaning of those words in the context of the agreement, the search is for manifested meaning, not a privately held belief or intent of one party, not communicated to other parties of the bargain." Donoghue v. IBC USA, 70 F.3d 206, 212 (1st Cir. 1995) (citations omitted). While the "modern approach" allows a court to consult extrinsic evidence in interpreting even a seemingly unambiguous contract, it may not use that evidence "to vary or contradict its terms." Fleet National Bank v. HD Entertainment, Inc., 96 F.3d 532, 539 (1st Cir. 1996). "[P]arol evidence may not be used to `create ambiguity where none otherwise exists.'" Rey v. Lafferty, 990 F.2d 1379, 1385 (1st Cir. 1993), quoting Boston Car Co. v. Acura Auto. Div., American Honda Motor Co., Inc., 971 F.2d 811, 815 (1st Cir. 1992). Instead, "parties are bound by the plain terms of their contract," Hiller v. Submarine Signal Co., 325 Mass. 546, 550 (1950), whatever might have been their subjective contemplations. Blakeley v. Pilgrim Packing Co., 4 Mass. App. Ct. 19, 24, (1976).
NAI argues that because the technology was specifically licensed for integration into Virex, a Macintosh-based product, the License Agreement itself confirms the exclusivity of the Scan Enhancement/Virex/Macintosh relationship. NAI carries the same argument into the realm of the Settlement Agreement. According to NAI, because under the Settlement Agreement (1) royalty payments were based on Macintosh-related sales, (2) the release for non-payment ran only to sales of Macintosh software, and (3) the license granted to NAI permitted the use of Scan Enhancement only in Virex software, NAI's obligations with respect to Scan Enhancement technology are limited to Macintoshrelated products.
While the argument has a superficial plausibility, it does not hold up under close inspection. Carrying the argument to its logical conclusion, NAI would be able to freely appropriate Scan Enhancement so long as the technology was used in non-Virex, non-Macintosh products. This result would destroy any incentive for a patent holder to license protected property for a specified use, and the argument fails for that reason alone.
To give an overly simplified example: `A' patents a milking machine that doubles a cow's yield. `B' is granted a license to use the machine to milk its herd of Holstein cattle. Under NAI's analysis, `B' is free to use the patented invention without paying royalties to `A' so long as the cows milked are Jerseys and Guernseys, and not Holsteins.
NAI's argument that the term "product" as used in Section 4.b of the Settlement Agreement is inextricably linked to Virex software and the Macintosh platform is equally short of the mark. In NAI's view, "any product" does not literally mean any product, but rather a product that uses Scan Enhancement and is linked to a Macintosh operating system. The terms of the License Agreement simply do not support the argument. Section 4.b of the License Agreement required NAI to "permanently remove all technology incorporating or making use of the Scan Enhancement from its products, and the products of its Affiliates . . . [and prohibited NAI from using Scan Enhancement] at any time . . . in any product unless otherwise expressly agreed in writing by the parties." (Emphases added). Nothing in the License Agreement suggests that the term "product" was limited by the terms "Virex" or "Macintosh." In fact, the language of the Settlement Agreement's two inspection provisions demonstrates the contrary.
Under Section 4.c of the Settlement Agreement, Cozza was entitled to receive one month after the termination of the License Agreement, "each antiviral product" then sold by NAI "for the purpose of confirming Scan Enhancement is not being used therein." Under Section 2, Cozza retained for a period of three years a separate right to inspect "each Virex product" sold by NAI. (Emphasis added). The parties' insertion of the word "Virex" before "product" in this latter provision is persuasive evidence that in the remainder of the document the term "product" was meant to have a generic meaning. Section 4.b is thus unambiguous and enforceable against all of NAI's products, whether Macintosh-related or not.
NAI next argues that the definition of "Scan Enhancement" was materially altered upon the execution of the October 9, 1997 Letter Agreement assigning Datawatch's rights to Dr. Solomon's. NAI argues that by virtue of this "substitution" of licensees, the definition of Scan Enhancement changed to that technology in which (1) Cozza had intellectual property rights; and (2) which he elected to disclose to Dr. Solomon's (as the new licensee). The argument is dizzying in its defiance of logic as it is undisputed that Cozza did not disclose anything to Dr. Solomon's. If NAI's reasoning is followed, the Scan Enhancement technology vanished upon the assignment. If this were true, it is difficult to understand why the parties, and particularly NAI, would have felt a need to negotiate the Settlement Agreement. See Crowe v. Bolduc, 365 F.3d 86, 97 (1st Cir. 2004).
Finally, NAI contends that as a matter of law, Cozza is precluded from holding NAI to his interpretation of "Scan Enhancement" because NAI always understood Scan Enhancement to be limited to Macintosh products and never had reason to know that Cozza intended to give the term a broader meaning. According to NAI, under the canons of contract construction, Cozza is either bound by NAI's interpretation (if Cozza knew or should have known of NAI's misunderstanding), or must accept the fact that there was no meeting of the minds and therefore no binding agreement. NAI argues that the issue is not "about determining what Scan Enhancement was from the standpoint of disclosures and intellectual property rights," but rather what "the parties understood the term to mean when they used it in the Settlement Agreement."
The difficulty with NAI's argument is that Scan Enhancement was a term with a specific definition that was negotiated by the parties in concluding the Settlement Agreement. Thus, the meaning of "Scan Enhancement" was neither unknowable nor indefinite. It is true that "[a] contract may be held to be nonexistent for failure of mutual assent if the parties attach conflicting and irreconcilable meanings to a material term of the contract."Samuels v. Brooks, 25 Mass. App. Ct. 421, 428 (1988), citing the Restatement (Second) of Contracts, § 20 (1981). But, "the fact that an executed written contract contains within itself difficulties of construction about which the parties disagree does not enable a party to contend that the minds never met."Samuels, 25 Mass. App. Ct. at 428, quoting Bucciero v. Drinkwater, 13 Mass. App. Ct. 551, 554 (1982).
NAI's understanding (such as it was) that "Scan Enhancement" meant something other than what it was defined to be in the Settlement Agreement is more appropriately analyzed under the doctrine of mistake of fact. "If the language of a written instrument does not reflect the true intent of both parties, the mutual mistake is reformable. . . . The mistake must either be mutual or be made by one party and known to the other party."Polaroid Corp. v. The Travelers Indemnity Co., 414 Mass. 747, 756 (1993). Moreover, "[w]here there has been a mistake between the parties as to the subject matter of a contract, there has been no `meeting of the minds,' and the contract is voidable at the election of the party adversely affected." LaFleur v. C.C. Pierce Co., 398 Mass. 254, 257-258 (1986). Under § 154 of the Restatement (Second) of Contracts, in the event of mutual or unilateral mistake, a party bears the burden of the risk when:
(a) the risk is allocated to him by the agreement of the parties, or
(b) he is aware, at the time the contract is made, that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient.Davis v. Dawson, Inc., 15 F. Supp. 2d 64, 114 (D. Mass. 1998), citing the Restatement (Second) of Contracts § 154 (1981).See also Gloucester Landing Assocs. Ltd. P'Ship v. Gloucester Redevelopment Auth., 60 Mass. App. Ct. 403, 414 (2004).
There is no evidence that NAI conducted any inquiry into the disclosures made by Cozza to Datawatch, or if it did, that it was in any way misled by Cozza as to the content of what he disclosed. The failure to investigate the meaning of the term "Scan Enhancement" constitutes an assumption of the risk of mistake on NAI's part. "Ignorance through negligence does not relieve a party from his contractual obligations." Davis, 15 F. Supp. 2d 64 at 115 n. 161, quoting Century Plastic Corp. v. Tupper Corp., 333 Mass. 531, 536 (1956). NAI, by assuming Datawatch's and Dr. Solomon's obligations under the License Agreement, had a duty to determine precisely the technology for which it was granted a license. Even if NAI's claim that it misunderstood the definition of what constituted Scan Enhancement as the term was used in the Settlement Agreement is given credence, the misunderstanding is the product of NAI's own negligence, and does not provide a basis for avoiding NAI's contractual obligations.See Fay v. Aetna Life Ins. and Annuity Co., 307 F. Supp. 2d 284, 292 (D. Mass. 2004), citing Spritz v. Lishner, 335 Mass. 162, 164 (1969).
ORDER
For the foregoing reasons, NAI's motion for summary judgment isDENIED. Cozza's cross-motion for summary judgment is ALLOWED. NAI's motion to bifurcate is DENIED.
SO ORDERED.