Simulados Software, Ltd. v. Photon Infotech Private, Ltd.
2014 WL 1728705, 83 U.C.C. Rep. Serv. 2d (West) 528, 40 F.Supp.3d 1191 (2014)
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Rule of Law:
A contract for the custom modification of a pre-existing software program is predominantly a contract for services, not for the sale of goods, and is therefore governed by common law rather than the Uniform Commercial Code (UCC). A choice-of-law provision in a contract is enforceable if one of the parties has a significant business office in the chosen state, establishing a substantial relationship.
Facts:
- Simulados Software, Ltd. ('Simulados'), a Texas company, developed a Windows-based test preparation software called Certify Teacher.
- Simulados sought to create a version of its software compatible with Apple Macintosh ('Mac') computers and to develop an accompanying web application.
- In early 2009, Photon Infotech Private, Ltd. ('Photon') contacted Simulados and represented its ability to perform the necessary software development work.
- On March 31, 2009, the parties entered into a contract requiring Photon to migrate existing source code, customize the software for Mac, and create a web application by a September 17, 2009 deadline.
- The contract included a clause specifying that California law would govern the agreement.
- Photon failed to deliver a complete, workable product by the deadline.
- By September 2009, Simulados's testing revealed 8 critical issues and 38 low-level defects in the product Photon provided.
- Despite Simulados granting a new deadline in May 2010, Photon never delivered a fully functioning web application or Mac-compatible product as required by the contract.
Procedural Posture:
- Simulados Software, Ltd. filed a complaint against Photon Infotech Private, Ltd. in the U.S. District Court for the Southern District of Texas (court of first instance) on May 11, 2012.
- The case was transferred to the U.S. District Court for the Northern District of California on August 20, 2012, based on the contract's choice-of-forum clause.
- Simulados filed an Amended Complaint on December 11, 2012.
- On December 24, 2012, Photon filed a Motion to Dismiss the Amended Complaint, which is the subject of this opinion.
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Issue:
Does a contract for the modification and development of a company's pre-existing software to make it compatible with a different operating system constitute a contract for the sale of 'goods' under the Uniform Commercial Code (UCC)?
Opinions:
Majority - Edward J. Davila
No, a contract to modify existing software in this manner is a contract for services, not goods, so the UCC does not apply. The court applied the 'predominant factor test,' which looks to the 'essence of the agreement' to determine if it is primarily for goods or services. While mass-produced software is often considered a 'good,' this contract was for Photon's services, skill, and knowledge to customize Simulados’s existing product. Simulados was not purchasing software from Photon; it was purchasing the service of modification. Therefore, the transaction is governed by common law, and Simulados's claims under the UCC are dismissed. The court also upheld the contract's California choice-of-law provision, dismissing the Texas Deceptive Trade Practices Act (DTPA) claim. Applying the Restatement (Second) of Conflict of Laws § 187, the court found that Photon’s North American headquarters in San Jose, California, established a 'substantial relationship' with the state, making the choice of California law enforceable.
Analysis:
This decision reinforces the critical distinction between software as a 'good' versus software development as a 'service' under the UCC. By applying the predominant factor test, the court clarifies that contracts centered on a developer's skill, knowledge, and labor to create or modify code for a specific client are likely service contracts. This classification has significant implications, as it removes the dispute from the UCC's framework, affecting available remedies, implied warranties (like merchantability and fitness for a particular purpose), and the statute of limitations. The ruling provides a clear precedent for how courts should analyze hybrid software agreements, distinguishing the purchase of a product from the procurement of technical expertise.
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