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Advent Systems Ltd. v. Unisys Corp.

filed: February 14, 1991.

ADVENT SYSTEMS LIMITED, APPELLANT IN NO. 90-1069
v.
UNISYS CORPORATION, APPELLANT IN NO. 90-1070



Appeal from the United States District Court for the Eastern District of Pennsylvania; D.C. No. 88-03100.

Stapleton, Cowen, and Weis, Circuit Judges.

Author: Weis

Opinion OF THE COURT

WEIS, Circuit Judge

In this diversity case we conclude that computer software is a good within the Uniform Commercial Code; in the circumstances here a non-exclusive requirements contract complies with the statute of frauds; and expert testimony on future lost profits based on prior projections is suspect when actual market performance data are available. Because the district court ruled that the Code did not apply, we will grant a new trial on a breach of contract claim. We also decide that a parent corporation is privileged in disrupting prospective contractual negotiations of its subsidiary with another party and therefore will affirm a judgment in favor of the defendant on a tortious interference count.

Plaintiff, Advent Systems Limited, is engaged primarily in the production of software for computers. As a result of its research and development efforts, by 1986 the company had developed an electronic document management system (EDMS), a process for transforming engineering drawings and similar documents into a computer data base.

Unisys Corporation manufactures a variety of computers. As a result of information gained by its wholly-owned United Kingdom subsidiary during 1986, Unisys decided to market the document management system in the United States. In June 1987 Advent and Unisys signed two documents, one labeled "Heads of Agreement" (in British parlance "an outline of agreement") and, the other "Distribution Agreement."

In these documents, Advent agreed to provide the software and hardware making up the document systems to be sold by Unisys in the United States. Advent was obligated to provide sales and marketing material and manpower as well as technical personnel to work with Unisys employees in building and installing the document systems. The agreement was to continue for two years, subject to automatic renewal or termination on notice.

During the summer of 1987, Unisys attempted to sell the document system to Arco, a large oil company, but was unsuccessful. Nevertheless, progress on the sales and training programs in the United States was satisfactory, and negotiations for a contract between Unisys (UK) and Advent were underway.

The relationship, however, soon came to an end. Unisys, in the throes of restructuring, decided it would be better served by developing its own document system and in December 1987 told Advent their arrangement had ended. Unisys also advised its UK subsidiary of those developments and, as a result, negotiations there were terminated.

Advent filed a complaint in the district court alleging, inter alia, breach of contract, fraud, and tortious interference with contractual relations. The district court ruled at pretrial that the Uniform Commercial Code did not apply because although goods were to be sold, the services aspect of the contract predominated.

A jury found for Unisys on the fraud count, but awarded damages to Advent in the sum of $4,550,000 on the breach of contract claim, and $4,350,000 on the count for wrongful interference with Unisys U.K. The district court granted judgment n.o.v. to defendant on the interference claim but did not disturb the verdict awarding damages for breach of contract.

On appeal Advent argues that the Distribution Agreement prohibited Unisys from pressuring its UK subsidiary to terminate negotiations on a corollary contract. Unisys contends that the relationship between it and Advent was one for the sale of goods and hence subject to the terms of statute of frauds in the Uniform Commercial Code. Because the agreements lacked an express provision on quantity, Unisys insists that the statute of frauds bans enforcement. In addition, Unisys contends that the evidence did not support the damage verdict.

I.

THE TORTIOUS INTERFERENCE COUNT

In granting judgment n.o.v. on the tortious interference claim, the district judge reasoned that Advent was required to prove that absent interference it would have achieved an advantageous contract and that Unisys' action was not privileged. Because the parent corporation had a financial interest in the U.K. subsidiary, the court concluded that Unisys had the right to protect its own long-range interests by discouraging its subsidiary from entering into a development contract with Advent for a competing system.

To prevail on a claim of intentional interference with prospective contractual relations under Pennsylvania law,*fn1 plaintiff must show the following: (1) a prospective contractual relationship; (2) a purpose or intent to harm plaintiff by preventing the relationship from occurring; (3) the absence of privilege or justification on the part of the defendant; and (4) occurrence of actual damage. Silver v. Mendel, 894 F.2d 598, 601-02 (3d Cir.), (citing Thompson Coal Co. v. Pike Coal Co., 488 Pa. 198, 412 A.2d 466, 471 (1979)), cert. denied, 496 U.S. 926, 110 S. Ct. 2620, 110 L. Ed. 2d 641 (1990).

When discussing interference with prospective contractual relations, the Pennsylvania Supreme Court has not adopted the language of the Restatement (Second) of Torts ยง 766B (1977) that favors an analysis of "proper" conduct rather than "privileged." See Glenn v. Point Park College, 441 Pa. 474, 272 A.2d 895 (1971). Thus, privilege is still a matter for consideration in cases of prospective contractual relations. Silver, 894 F.2d at 601.

Privilege is closely related to intent, id. at 603 n.7, and admits of no precise definition. When a defendant acts at least in part to protect some legitimate concern that conflicts with an interest of the plaintiff, a line must be drawn and the interests evaluated. Glenn, 441 Pa. 474, 272 A.2d at 899. The central inquiry in the evaluation is whether the interference is "sanctioned" by the "'rules of the game' which society has adopted [defining] socially acceptable conduct which the law regards was privileged." Id.

Green v. Interstate United Management Services Corp., 748 F.2d 827 (3d Cir. 1984), is an existing, rather than a prospective, contractual interference case but illustrates Pennsylvania law on the propriety of conduct by a parent corporation. There, defendant instructed its subsidiary not to sign a lease tendered by the plaintiff real estate broker after an appraiser had determined that the contract was a bad bargain. Basing our ruling on section 767 of the Restatement (Second) of Torts, which applied in that situation, we held the interference was proper because the defendant's motive was to prevent dissipation of its subsidiary's resources. "The social interests in protecting the freedom" of the defendant outweighed the plaintiff's "contractual interests." Id. at 831.

Here, although plaintiff claims interference with a prospective contractual relationship, we think a similar approach applies. We agree with the district court's reasoning that Unisys' interest in the financial stability of its subsidiary and the need to avoid a situation where the two would be working at cross-purposes justified the disruption of negotiations with Advent.

Nothing in the agreement between Advent and Unisys changed its relationships with its U.K. subsidiary, or purported to regulate that company's negotiations with Advent. That arrangements between Advent and Unisys U.K. were to be distinct from those with the parent in the United States is obvious in the fact that separate discussions were conducted in the United Kingdom.

Accordingly, the judgment n.o.v. in favor of the defendant on the tortious interference count will be affirmed.

II.

SOFTWARE AND THE UNIFORM COMMERCIAL CODE

The district court ruled that as a matter of law the arrangement between the two parties was not within the Uniform Commercial Code and, consequently, the statute of frauds was not applicable. As the district court appraised the transaction, provisions for services outweighed those for products and, consequently, the arrangement was not predominantly one for the sale of goods.

In the "Heads of Agreement" Advent and Unisys purported to enter into a "joint business collaboration." Advent was to modify its software and hardware interfaces to run initially on equipment not manufactured by Unisys but eventually on Unisys hardware. It was Advent's responsibility to purchase the necessary hardware. "In so far as Advent has successfully completed [some of the processing] of software and hardware interfaces," Unisys promised to reimburse Advent to the extent of $150,000 derived from a "surcharge" on products purchased.

Advent agreed to provide twelve man-weeks of marketing manpower, but with Unisys bearing certain expenses. Advent also undertook to furnish an experienced systems builder to work with Unisys personnel at Advent's prevailing rates, and to provide sales and support training for Unisys staff as well as its customers.

The Distribution Agreement begins with the statement, "Unisys desires to purchase, and Advent desires to sell, on a non-exclusive basis, certain of Advent hardware products and software licenses for resale worldwide." Following a heading "Subject Matter of Sales," appears this sentence, "(a) Advent agrees to sell hardware and license software to Unisys, and Unisys agrees to buy from Advent the products listed in Schedule A." Schedule A lists twenty products, such as computer cards, plotters, imagers, scanners and designer systems.

Advent was to invoice Unisys for each product purchased upon shipment, but to issue separate invoices for maintenance fees. The cost of the "support services" was set at 3% "per annum of the prevailing Advent user list price of each software module for which Unisys is receiving revenue from a customer." Services included field technical bulletins, enhancement and maintenance releases, telephone consultation, and software patches, among others. At no charge to Unisys, Advent was to provide publications such as installation manuals, servicing and adjustment manuals, diagnostic operation and test procedures, sales materials, product brochures and similar items. In turn, Unisys was to "employ resources in performing marketing efforts" and develop "the technical ability to be thoroughly familiar" with the products.

In support of the district court's ruling that the U.C.C. did not apply, Advent contends that the agreement's requirement of furnishing services did not come within the Code. Moreover, the argument continues, the "software" referred to in the agreement as a "product" was not a "good" ...


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