Assume Contracts Mean What They Say—But Only if You Can Tell What They’re Saying
Last time, I warned about the dangers of “integrated” contracts, how they will sometimes vary from your expectation of what you agreed to, and how you’re in trouble when you try enforce what you thought you agreed to. A contract is “integrated” if it’s in writing and it contains a clause saying that the writing is all there is to the contract. The danger is, if you thought you agreed to something important to you but it’s not in the writing, then it’s not in the contract. This is so even if there is something else in writing showing the parties agreed to that thing. The integrated nature of the contract means you can’t even look outside the writing for what’s in the contract. This can be a nasty surprise.
But all this assumes one important thing: that you can tell what the writing means. If a contractual term at issue is ambiguous—i.e., there are more than one reasonable interpretations—then you can look to outside evidence to help fix the term’s meaning. You still can’t use outside evidence to add or alter terms.
The Tennessee Supreme Court’s recent opinion in Individual Healthcare Specialists v. BlueCross BlueShield of Tennessee (which I discussed last time) works hard to make this distinction. In that case, the defendant terminated its commission-based agency contract and tried to justify cutting off post-termination commission payments to the plaintiff by arguing that the plaintiff was no longer “entitled” to the payments when the contract once the contract terminated. Does “entitled” mean a right vested when the plaintiff made the sale, or is it something determined every time a commission payment was due? If it’s the former, then the right to the payments survives the contract. If it’s the latter, then it doesn’t. The court held it meant the former, not only because the latter was circular (why even use “entitled”?) and baldly unfair22But, hey, fairness has nothing to do with it., but because the pre-contract negotiations addressed this very issue and the parties clearly meant entitlement to commissions to extend beyond termination (because the alternative would clearly be stupid). The outside evidence clarified a term; it didn’t add, modify or remove a term.
Since lawyers are usually involved in any written agreement of importance to one party or the other, you might guess that this isn’t usually a problem. The art of drafting contracts, after all, is all about being clear, usually as the expense of being pretty or easy to read.
If you’re making that assumption, you’re kind but perhaps a little optimistic. When contracts are the subject of protracted negotiations and multiple drafts, ambiguities and contradictions can creep in, especially under time pressure. Sometimes ambiguities are baked in. There wasn’t time or will to define everything precisely, or resolving an ambiguity would just create a new issue that would need to be negotiated (the functional equivalent of kicking something down the road, and hoping it doesn’t come up later).
And, sometimes, ambiguities are utterly inexplicable. The recent decision out of the U.S. District Court for Maryland, Micro Focus v. Express Scripts, is a case on point.
Our EULA Recognizes Seven Types of Licenses, But We Agreed to a Non-existent Eighth Type
Micro Focus provides emulation software, which Express Scripts had been licensing for some time. When a competitor made an aggressive offer to replace Micro Focus’ software, Micro Focus made an even more aggressive counter-offer by email: $250,000 for “up to but not exceed 10,000 … site license for the benefit of Express Scripts users.” Micro Focus followed up this offer with a more formal “Product Order,” specifying a “10,000 Authorized User License,” subject to Micro Focus’ standard EULA23“End User License Agreement.” When Express Scripts accepted (and paid, I assume), Micro Focus sent the software over for Express Scripts to install. Before any Express Scripts user could install the software, he or she had to agree to that standard EULA.
Ah, the EULA. The EULA was designed to deal with many different licensing situations. The idea was that the product order would specify which type of license, then the part of the EULA pertinent to that type of license would apply. Unfortunately, there wasn’t anything in the EULA about “authorized user licenses.” There was something in the EULA about “workstation licenses,” which permitted making a copy of the software onto a particular computer and—this is important—forbade installing the software on any computer that multiple users could access. (because that would be cheating). And there was something in the EULA about a “concurrent user license,” which limited the number of users who could be using the software at the same time.
It doesn’t appear that Express Scripts installed the software on that many computers. Instead, it placed on a central server that users could access remotely. In theory, every single Express Scripts employee could access the Micro Focus software—that’s over 30,000—but only about 5,000 had been given the credentials necessary to actually access it. Needless to say, EULA didn’t say anything about this type of licensing. But at least a few folks at Express Scripts were worried they were out of compliance.
Let’s Sue Our Customer
For some reason, Micro Focus decided to audit Express Scripts (probably a contractual right in the EULA). When it found out that every Express Scripts employee had theoretical access to the software, Micro Focus took the position that a “user” was anyone who could access the software.
Micro Focus then decided to sue its customer for breach of contract24And for copyright infringement, but let’s not speak of what happened to that claim. It isn’t pretty.. Why would you do that? I have to assume that the relationship broke down somewhere. All the same, are you more inclined or less inclined to buy Micro Focus’ software knowing that it has sued one of its best customers?
Express Scripts moved for summary judgment25A motion you file before trial that asks the judge to issue a judgment without the benefit of a trial. The idea is that a trial isn’t necessary to find one way or the other on a claim. You can only win summary judgment if there the evidence points only one way on each fact that you need to win., on the theory that “authorized user license” meant a “concurrent user license,” not a “desktop license,” under the EULA. The court denied the motion. This isn’t to say Express Scripts lost the case, only that a trial would be necessary to figure out what “authorized user license” means.
The court started by finding that “authorized user license” was ambiguous. That’s pretty obvious. That meant the court could examine evidence from outside the written contract26By the way, the “written contract” here is the Product Order plus the EULA. to see if it was so one-sided that there was only way to resolve the ambiguity. But the court found that the outside evidence pointed in both directions. On the one hand, Express Scripts entered into the contract assuming it could do what it ended up doing. On the other hand, the “product keys” necessary to install the software were supposed to work under the “workstation” model (and yet they somehow worked under the central server model?).
Worse, after the contract had formed, Express Scripts’ own employees started to worry they were out of compliance. Now, you might think this evidence would be irrelevant, because it arose after the contract was formed, so it could shed no light on what the parties meant at the time they formed the contract. But the court’s attitude was that this evidence was grist for the ambiguity-resolving mill. It’s up to the jury to determine whether this evidence tells them anything useful and how much weight (if any) to give it. After all, how employees interpret a contract after formation might give a clue what other employees thought about the contract before formation. Then again, they might not.
Entangled in a Quantum State
What’s amazing is that the parties even got to this point. $250,000 is a lot of money. 10,000 is a lot of licenses. The parties are big and sophisticated. The scope of a license is probably its most essential term. Yet, no one could be bothered to define “authorized user license”?
Here’s the craziest thing. Neither party knows what the license covers. They didn’t know then; they still don’t know. There are two radically different interpretations, which lead to radically different consequences. They won’t know what their own contract means until a jury tells them. It’s like the parties interpretations are in quantum superposition, and jury is the observer collapsing the wave-function.
If someone had defined this crucial term competently, then this lawsuit doesn’t even get filed. Heck, it might not even have developed into much of a dispute. A well-drafted contract is useful not only lawsuits, but as a resource that the parties can refer to when tensions get high. A well-drafted contract will explain clearly (if not felicitously) whether the party has a leg to stand on or whether it needs to throw in the towel.
But an ambiguous contract allows each party to interpret the key terms the way they want. Even if the ambiguity can be resolved with outside evidence (unlike in Micro Focus), neither side is going to dig up the outside evidence necessary to make the determination, assuming it even has access to all the necessary evidence. They continue to fight over the quantum contract until the wave-function collapses.
Process, Process, Process
Ambiguities in negotiated27As opposed to contracts of adhesion, like the EULA you click every time you upgrade your iOS. contracts are inevitable, but some ambiguities are unforgivable. It’s worth examining how these two sophisticated parties ended up in a quantum contract, how the crucial term “authorized user license” was left undefined. The key mistake was the Product Order. The Micro Focus employee used a term that wasn’t used in the EULA, which was carefully drafted to handle multiple different types of licenses, just not whatever “authorized user license” was.28Could the EULA have been drafted with a default or catch-all provision that covered any license that didn’t fall into the specific categories of licenses? Would that even be desirable? If you’re in the business of licensing your stuff, then you need to train your salespeople to understand the different types of licenses and use the correct language in their offers.
Express Scripts, for its part, was less able to avoid the catastrophe, but was actually more motivated to detect problems before entering into the contract. Staying within the scope of a software license is crucial for the licensee. Straying beyond the scope is copyright infringement, not merely breach of contract. But licensees don’t deal in software as part of their business, so they spot problems less easily. It seems a bit much to have a copyright lawyer on speed dial every time you enter into a software license. The best you can do is to train those in charge of software procurement about how software licenses work and their typical pitfalls.
Thanks for reading!