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Step-Saver Data Systems, Inc. v. Wyse Technology

filed: August 27, 1990; As Amended. As Corrected October 31, 1990.

STEP-SAVER DATA SYSTEMS, INC., APPELLANT
v.
WYSE TECHNOLOGY, THE SOFTWARE LINK, INC.



On Appeal From the United States District Court for the Eastern District of Pennsylvania; D.C. Civil No. 88-7961.

Sloviter, Becker and Stapleton, Circuit Judges.

Author: Becker

Opinion OF THE COURT

BECKER, Circuit Judge.

This appeal arises from an action brought in the district court for the Eastern District of Pennsylvania by appellant, Step-Saver Data Systems, Inc. ("Step-Saver"), a vendor of packaged computer systems, against its hardware and software suppliers, defendants Wyse Technology ("Wyse") and The Software Link ("TSL"). Step-Saver sought a declaratory judgment that the defendants are liable if certain collateral actions filed by Step-Saver's customers establish defects in the products sold by defendants to Step-Saver, and after adaptation by Step-Saver, by Step-Saver to its customers. Step-Saver also sought consequential damages stemming from costs that Step-Saver incurred as a result of the allegedly defective products in an effort to satisfy its customers and retain its goodwill. Acting on defendants' motions for judgment on the pleadings, the district court dismissed Step-Saver's complaint as unripe. We agree with the district court that the declaratory judgment action was unripe, and we will affirm on that point. We do not agree with the district court that Step-Saver's direct (consequential) damages claim was unripe, and we will reverse that dismissal and remand for further proceedings.

I. FACTS AND PROCEDURAL HISTORY*fn1

Step-Saver, which is incorporated in Pennsylvania, was in the business of selling packaged computer systems to doctors, lawyers and other professionals. Originally a marketer of "single-user" computer systems, Step-Saver sought to expand the capability of its systems by marketing a multi-user computer system that would allow its customers' personnel to share information, access programs, and files. After seeing various advertisements in trade journals, Step-Saver contacted defendant TSL, a Georgia corporation with its principal place of business in Georgia, and negotiated to purchase a multi-user system known as the "Multi-Link Advanced" program. Step-Saver also contacted defendant Wyse, a Virginia corporation with its principal place of business in California, and negotiated to purchase Wyse computer terminals. TSL and Wyse warranted that the Multi-User Advanced system was compatible with the Wyse terminals. Both TSL and Wyse knew of Step-Saver's intention to incorporate the various products for resale as a multi-user computer system.

In late 1986, Step-Saver began selling the Wyse/TSL systems to law firms and medical offices in New York, New Jersey and Pennsylvania. Deliveries commenced in early 1987. Shortly thereafter, Step-Saver began to receive complaints from its customers, including claims that the basic typing and printing mechanisms did not work correctly and that the systems were "locking up." Step-Saver investigated these claims, substituted equipment at its own expense, and notified both defendants of the reported problems.

Defendants assured Step-Saver that any problem would be corrected in existing equipment and future sales. However, defendants did not supply any new equipment and, despite Step-Saver's attempts to rectify the situation, the goods continued to malfunction. At the time this suit was filed, twelve different lawsuits had been filed against Step-Saver by customers dissatisfied with the computer system they had bought from Step-Saver. Of these twelve customer suits, six are in the New York state courts, four are in the New Jersey state courts, one is in a Pennsylvania state court, and one was filed in the United States District Court for the Southern District of New York. Step-Saver attempted to join Wyse and TSL as third party defendants in all of these actions. In at least one of them, Green Zinner, P.C. v. Step-Saver Data Systems, Inc., filed in the Southern District of New York, the court dismissed the complaint as to TSL for lack of personal jurisdiction.*fn2

Shortly thereafter, Step-Saver filed the instant action in the Eastern District of Pennsylvania, and filed a petition for bankruptcy under Chapter 11 in the bankruptcy court of that district. The bankruptcy action automatically stayed all of the pending lawsuits, but Step-Saver secured relief from the automatic stay to proceed with this action in the district court.

Step-Saver's complaint, entitled "Complaint for Declaratory Judgment,"*fn3 seeks a declaratory judgment that defendants are responsible for any liability that Step-Saver may have to its customers as a result of the customer suits. It also alleges that Step-Saver incurred over $75,000 in direct damages as a result of the products' defects. Framing the issue as one solely for a "declaratory judgment in which [Step-Saver] demand[ed] contribution and indemnification from the defendants," the court found the action to be at odds with the purposes of the Declaratory Judgment Act and dismissed it. The court also stated in its opinion that a continuation of the litigation would unnecessarily interfere with the business of other state and federal courts.

On appeal, Step-Saver contends that the district court ignored its direct damages claim, and that the ripeness determination failed to recognize the substantive right to indemnification embodied in the Uniform Commercial Code ("U.C.C."). Defendants respond that the basic problem with both of Step-Saver's claims is that Step-Saver has not, and will not, incur any compensable loss until the underlying customer suits are adjudicated. Because the focus of the district court's opinion was on the viability of the declaratory judgment action, we address that issue first.*fn4

II. THE DECLARATORY JUDGMENT

A. Is The Case Ripe?

As many commentators have noted, it is difficult to define the contours of the ripeness doctrine with precision.*fn5 The task is even more problematic when defining ripeness in the context of declaratory judgment actions, for two reasons. First, there is the considerable amount of discretion built into the Declaratory Judgment Act itself.*fn6 Even when declaratory actions are ripe, the Act only gives a court the power to make a declaration regarding "the rights and other legal relations of any interested party seeking such declaration," 28 U.S.C. § 2201; it does not require that the court exercise that power. Second, declaratory judgments are issued before "accomplished" injury can be established, see E. Borchard, Declaratory Judgments 29 (1941), and this ex ante determination of rights exists in some tension with traditional notions of ripeness. Nonetheless, because the Constitution prohibits federal courts from deciding issues in which there is no "case[]" or "controversy," U.S. Const. art. III, § 2, declaratory judgments can be issued only when there is "an actual controversy," 28 U.S.C. § 2201. The discretionary power to determine the rights of parties before injury has actually happened cannot be exercised unless there is a legitimate dispute between the parties.

The Supreme Court observed in Maryland Casualty Co. v. Pacific Coal & Oil Co., 312 U.S. 270, 273, 61 S. Ct. 510, 512, 85 L. Ed. 826 (1941):

The difference between an abstract question and a "controversy" contemplated by the Declaratory Judgment Act is necessarily one of degree, and it would be difficult, if it would be possible, to fashion a precise test for determining in every case whether there is such a controversy. Basically, the question in each case is whether the facts alleged, under all the circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.

Justice Murphy was, in large part, expanding on the dictates of the Supreme Court just four years earlier in Aetna Life Insurance Co. v. Haworth, 300 U.S. 227, 240-41, 57 S. Ct. 461, 464, 81 L. Ed. 617 (1937):

The controversy must be definite and concrete, touching the legal relations of parties having adverse legal interests. . . . It must be a real and substantial controversy admitting of specific relief through a decree of a conclusive character, as distinguished from an ...


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