Advent Systems Ltd. v. Unisys Corp.
925 F.2d 670 (1991)
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Rule of Law:
Computer software is a 'good' within the meaning of the Uniform Commercial Code (UCC). A non-exclusive requirements contract that does not state a specific quantity can satisfy the UCC's statute of frauds, as the parties' obligation to perform in good faith provides a basis for enforcement.
Facts:
- Advent Systems Limited (Advent), a British company, developed an electronic document management system (EDMS), a type of computer software.
- Unisys Corporation (Unisys), a computer manufacturer, decided to market Advent's EDMS in the United States.
- In June 1987, Advent and Unisys executed a 'Distribution Agreement' for a two-year term, under which Advent would provide the EDMS software and related hardware to Unisys for resale.
- The agreement also obligated Advent to provide marketing materials, technical personnel, and training to support Unisys's sales efforts.
- While the parties were performing under the agreement, Advent was also negotiating a separate contract with Unisys's wholly-owned U.K. subsidiary.
- In December 1987, Unisys underwent a corporate restructuring and decided to develop its own EDMS instead of marketing Advent's product.
- Unisys unilaterally terminated its arrangement with Advent.
- Unisys also informed its U.K. subsidiary of the termination, causing the subsidiary to end its separate negotiations with Advent.
Procedural Posture:
- Advent Systems Limited sued Unisys Corporation in U.S. District Court for breach of contract and tortious interference with contractual relations.
- The district court ruled pretrial that the Uniform Commercial Code did not apply to the agreement.
- A jury returned a verdict for Advent on the breach of contract claim for $4,550,000 and the tortious interference claim for $4,350,000.
- The district court granted Unisys's motion for judgment notwithstanding the verdict (JNOV) on the tortious interference claim, setting aside that award.
- The district court denied Unisys's motion for JNOV on the breach of contract claim, upholding that verdict.
- Unisys appealed the breach of contract judgment and Advent appealed the JNOV on the tortious interference claim to the U.S. Court of Appeals for the Third Circuit.
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Issue:
Does the Uniform Commercial Code apply to a contract for the sale of computer software, and if so, does a non-exclusive distribution agreement that lacks a specific quantity term satisfy the UCC's statute of frauds?
Opinions:
Majority - Weis, Circuit Judge.
Yes. The Uniform Commercial Code applies because computer software is a 'good,' and the non-exclusive distribution agreement satisfies the statute of frauds because the parties' good faith obligations provide a basis for determining quantity, similar to a requirements contract. The court first determined that computer software is a 'good' under the UCC. Although it is the product of an intellectual process, once it is embodied in a tangible medium like a disk, it becomes a movable and merchantable commodity. Applying the predominant purpose test to this mixed goods-and-services contract, the court found that the essence of the agreement was the transfer of 'products,' with the service components being incidental. Second, the court held that the agreement satisfied the statute of frauds despite lacking a specific quantity term. It extended the reasoning that allows exclusive requirements contracts to satisfy the statute of frauds to this non-exclusive arrangement. The court reasoned that the detailed writings showed a clear intent to contract and that the parties' implied duty of good faith performance under the UCC prevents the contract from being illusory and provides a basis for enforcement. A rigid application of the quantity requirement would defeat the UCC's purpose of conforming law to commercial reality. The court also affirmed the dismissal of the tortious interference claim, holding that Unisys, as a parent corporation, was privileged to interfere with its subsidiary's prospective contracts to protect its own legitimate financial and strategic interests.
Analysis:
This is a landmark decision that established computer software as a 'good' under UCC Article 2 in the influential Third Circuit. This classification subjected a vast and growing area of commerce to a uniform body of law governing warranties, remedies, and other contractual issues, providing clarity and predictability for the software industry. The court's flexible interpretation of the statute of frauds' quantity requirement for a non-exclusive distribution contract also holds significant precedential value. It signals a judicial willingness to look past rigid formal requirements to enforce agreements that reflect legitimate business practices, relying on the UCC's overarching duty of good faith as a basis for enforcement.
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