Micro Data Base Systems, Inc., Cross-Appellee v. Dharma Systems, Inc.
148 F.3d 649, 46 U.S.P.Q. 2d (BNA) 1922, 35 U.C.C. Rep. Serv. 2d (West) 747 (1998)
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Rule of Law:
A contract for the development and sale of custom software is governed by the Uniform Commercial Code (UCC) if the sale of the final product as a good is the predominant purpose of the transaction. Under the UCC, a buyer's designated agent accepts goods by committing an act inconsistent with the seller's ownership, such as reselling the goods, despite having reported minor defects.
Facts:
- Unisys Government Systems, Inc. contracted with MDBS (Micro Data Base Systems, Inc.) to provide a software system for a bid on an IRS project.
- MDBS then subcontracted with Dharma Systems, Inc. for Dharma to adapt its proprietary software into a new product, 'RDMS Emulation,' for a total price of $250,000, with the final $25,000 installment due upon 'Acceptance by Unisys.'
- In November 1994, Dharma delivered a 'beta version' of the software on tape to MDBS, who forwarded it to Unisys. Unisys did not report any defects at this time.
- Over ten months later, after Unisys won the IRS contract, it requested the final software on disks. Dharma provided them only after MDBS promised in writing not to distribute them without Dharma's consent.
- MDBS subsequently distributed six copies of the software to Unisys without Dharma's consent.
- Two weeks after receiving the disks, Unisys reported nine minor defects in the software to MDBS.
- Despite the reported defects, Unisys delivered five copies of the software to the IRS and made its final payment to MDBS, which included prepaid royalties and the final $25,000 installment intended for Dharma.
- MDBS kept the final $25,000 payment instead of remitting it to Dharma.
Procedural Posture:
- MDBS sued Dharma in federal district court (a court of first instance) for restitution of payments made under their contract.
- Dharma counterclaimed for breach of contract for the unpaid final installment and for damages from trade secret misappropriation.
- The district court ruled that New Hampshire law and the UCC governed the dispute.
- The district court granted summary judgment to Dharma on the breach of contract claim, awarding it $25,000.
- Following a trial on the trade secret claim, a jury awarded Dharma $76,867.50 in compensatory damages.
- The district court denied Dharma's request for punitive damages as a matter of law.
- MDBS, as appellant, appealed the judgment against it, and Dharma, as cross-appellant, appealed the denial of punitive damages to the U.S. Court of Appeals for the Seventh Circuit.
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Issue:
Does a buyer's delegate accept custom software under the Uniform Commercial Code by reselling it to an end-user, thereby triggering the final payment obligation, even though it had reported defects in the software after a lengthy inspection period?
Opinions:
Majority - Posner
Yes. A buyer's delegate accepts goods under the UCC when its actions are inconsistent with the seller's ownership. The contract for custom software was a sale of goods governed by the UCC because the sale of the finished product predominated over the services used to create it. Although Unisys reported minor defects, its subsequent action of selling the software to the IRS was an act inconsistent with Dharma's ownership. This conduct constituted acceptance under UCC § 2-606(1)(c), triggering MDBS's contractual duty to make the final payment to Dharma.
Analysis:
This decision confirms that the UCC's 'predominant purpose' test applies to hybrid contracts for custom software, generally classifying them as sales of goods. It clarifies that under UCC § 2-606, acceptance can be implied by conduct, such as reselling a product, which overrides a simultaneous or subsequent complaint about defects. The case also notably expands the scope of damages for trade secret misappropriation to include foreseeable consequential damages, like the loss of future business relationships soured by the defendant's misconduct.
