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eCommerce Industries, Inc. v. MWA Intelligence, Inc.

Court of Chancery of Delaware

September 30, 2013

eCOMMERCE INDUSTRIES, INC., OMD CORPORATION, LA CROSSE, MANAGEMENT SYSTEMS, INC., FMAUDIT, LLC, DIGITAL GATEWAY, INC., and TECH ANYWARE, LLC, Plaintiffs/Counterclaim-Defendants,
v.
MWA INTELLIGENCE, INC., Defendant/Counterclaimant.

Submitted: April 10, 2013.

Revised: October 4, 2013.

R. Judson Scaggs, Jr., Esq., Susan W. Waesco, Esq., Ryan D. Stottmann, Esq., Frank R. Martin, Esq., MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Attorneys for Plaintiffs/Counterclaim-Defendants eCommerce Industries, Inc., OMD Corporation, DGI Management Systems, Inc., FMAudit, LLC, and Digital Gateway, Inc.

Gregory E. Stuhlman, Esq., GREENBERG TRAURIG LLP, Wilmington, Delaware; Kurt A. Kappes, Esq. GREENBERG TRAURIG, LLP, Sacramento, California; Attorneys for Plaintiff/Counterclaim-Defendant Tech AnyWare, LLC.

Thomas G. Macauley, Esq., MACAULEY LLC, Wilmington, Delaware; Mark K. Slater, Esq., Elise Sara, Esq., Jonathan P. Hersey, Esq., SLATER HERSEY & LIEBERMAN LLP, San Rafael, California; Attorneys for Defendant/Counterclaimant MWA Intelligence, Inc.

OPINION

PARSONS, Vice Chancellor.

In this breach of contract action, one party to an exclusive marketing, license, and distribution agreement brings contract and tort claims against the other parties to that agreement and their affiliated companies. The licensee initially commenced litigation in California. The defendants named in that action, including the licensors, are the plaintiffs in this action. The plaintiffs brought suit in this Court seeking a declaratory judgment that the agreement properly was terminated, injunctive relief relating to the agreement's confidentiality and termination provisions, and an award of their attorneys' fees in prosecuting this action. The defendant-licensee in this action asserted counterclaims similar to those it brought initially in California, including claims for breach of contract, breach of the implied covenant of good faith and fair dealing, tortious interference with contract, and tortious interference with prospective economic advantage. The defendant seeks monetary damages and an award of its attorneys' fees.

This Opinion constitutes my post-trial findings of fact and conclusions of law on the plaintiffs' claims and the defendant's counterclaims. For the reasons that follow, I conclude that those plaintiffs who were parties to the exclusive marketing, license, and distribution agreement breached the non-compete provision of that agreement or, alternatively, the implied covenant of good faith and fair dealing. I also find that their parent and a sister company are liable in tort for tortious interference with contract, and that the sister company also is liable for interference with prospective economic advantage. The additional named plaintiffs, i.e., FMAudit and Tech AnyWare, are not liable in contract or tort. I award the defendant-licensee damages against the licensors, their parent, and a sister company, jointly and severally, in the amount of $190, 437.87 plus pre-judgment and post-judgment interest at the legal rate.

As to the plaintiffs' requests for declaratory and injunctive relief, I find that the agreement properly was terminated and I order the defendant to comply with the agreement's termination and confidentiality provisions. Because the plaintiffs and the defendant prevailed on significant portions of their claims and counterclaims, respectively, I deny the requests for attorneys' fees of both sides and require each side to bear their own fees and expenses.

I. BACKGROUND

A. The Parties

Plaintiff eCommerce Industries, Inc. ("ECI") is a Delaware corporation with its principal place of business in Forth Worth, Texas. ECI provides business management and e-commerce systems software for a number of industries, including the office equipment industry. ECI's clients include companies that manufacture, sell, and service office equipment such as photocopiers and printers.

ECI wholly owns three other plaintiffs in this action: OMD Corporation ("OMD"), a Missouri corporation; La Crosse Management Systems, Inc. ("La Crosse"), a Wisconsin corporation; and Digital Gateway, Inc. ("DGI"), a Utah corporation. Collectively, ECI, OMD, La Crosse, and DGI are referred to as the "ECI parties.-Plaintiff FMAudit, LLC ("FMAudit") is a Missouri limited liability company that sold substantially all of its assets to ECI in March 2011. FMAudit currently conducts no business. Plaintiff Tech AnyWare, LLC ("Tech AnyWare") is a Utah limited liability company.

The defendant is MWA Intelligence, Inc. ("MWA"), [1] a Delaware corporation with its principal place of business in Scottsdale, Arizona. MWA also participates in the office equipment industry. MWA provides software designed to allow businesses ranging from international office equipment dealers to local photocopy stores to serve their customers better and to manage both their businesses and mobile service fleets.

B. Facts

Two types of software important in the office equipment industry are relevant to this litigation: "backend" software and "frontend" software. Backend, or "Enterprise Resource Planning" ("ERP"), software helps a copier dealer manage the "backend" of its business such as inventory, accounts receivable, and accounts payable. The frontend software contains functionality that helps an office equipment business interact with its customers. One function of frontend software is to monitor a customer's machine usage, collecting data on such things as malfunctions or consumption of ink and paper; this is called "device management software." Another function of frontend software, called "remote service software, " is to assist service technicians in the field.

An office equipment dealer typically requires both frontend and backend software. A dealer's frontend system must integrate with its backend system. The parties to this litigation own the rights to various frontend and backend products. The chart below depicts the ownership structure of these products at the time this litigation began. The companies and products are discussed in detail infra in this Section.

FRONTEND

BACKEND/ERP

Company:

Device Management

Remote Service

ECI

FMAudit

OMD

SOTG (shelved)

Vision

La Crosse

Tech Raptor (shelved)

NextGen

DGI

Remote Tech (sold to Tech AnyWare)

e-automate8.0

Tech AnyWare

Remote Tech

MWA

IDM

IS

SAP

Business One

1. ECI acquires OMD and La Crosse

ECI acquired OMD in December 2006. Shortly thereafter, ECI pursued an acquisition of La Crosse. At a tradeshow in early 2007, ECI approached the president and 50 percent co-owner of La Crosse, John Brostrom, to inquire about purchasing the company.[2] Brostrom and his partner eventually agreed to the proposed transaction, and ECI acquired La Crosse in June 2007. Brostrom remained on as president of La Crosse after the acquisition.[3]

When ECI acquired La Crosse, it did not attempt to move OMD customers to the newer technology available from La Crosse. Rather, it operated the two companies in parallel. ECI wanted to provide its customers with options because different customers value different feature functionality and price ranges.[4]

2. The Exclusive Agreement between OMD, La Crosse, and MWA

OMD, La Crosse, and MWA entered into an Exclusive Marketing, License and Distribution Agreement on December 20, 2007 (the "Exclusive Agreement" or "Agreement"). By this time, OMD and La Crosse were wholly owned subsidiaries of ECI. ECI, however, is not a party to the Agreement.

In the Agreement, OMD and La Crosse granted to MWA a perpetual, irrevocable, worldwide, exclusive right to grant sublicenses and to market, provide, distribute, and license their frontend products, "Service-on-the-Go, " or "SOTG, " and "Tech-Raptor, " respectively (the "Licensed Software").[5] One purpose of the Agreement was to capitalize on MWA's frontend software, called "Intelligent Service" or "IS, " and OMD and La Crosse's backend software, "Vision" and "NextGen, " respectively. OMD's Vision backend system has been in the market for twenty to twenty-five years and is considered one of the most feature-rich platforms available.[6] La Crosse's NextGen backend system also has been in the market for a number of years. When La Crosse entered the market, its backend was a "next generation" product that offered the latest technology. One of the benefits of the La Crosse backend system is that it has an "open architecture" that allows users to integrate their applications into it[7]

a. Compatibility and on-going maintenance

Under the Agreement, OMD and La Crosse undertook not to "take any actions nor make any modifications to the Licensed Software or their respective software products that would prevent the Licensed Software from interoperating with their respective Backend Systems." [8] Notably, this compatibility provision applies only to actions that would prevent the Licensed Software from interoperating with the "Backend Systems." It does not mention MWA's frontend software IS in this context. The Agreement defines "Backend Systems" to include OMD and La Crosse's Vision and NextGen systems, "and all improvements, updates, upgrades, versions, releases and next generation products for all of the foregoing."[9] Although the parties agreed that OMD and La Crosse would not take action to prevent interoperation between the Licensed Software and the Backend Systems, the parties also agreed that OMD and La Crosse would have no on-going maintenance and support obligations. In that regard, Section 2.2.5 of the Agreement states:

From and after the Effective Date, neither OMD nor La Crosse nor any of their Affiliates shall have any obligation to support, maintain, enhance, develop or revise the Licensed Software. OMD and La Crosse shall not, and shall not authorize or assist any third party to, knowingly take or refrain from any action that will adversely affect compatibility of the Licensed Software with the Backend Systems, any ERP system owned or licensed by OMD or La Crosse, as the case may be, or any MWAi products or services.[10]

b. Right of first negotiation

In addition, the Agreement provides MWA with a right of first negotiation to negotiate an exclusive license in the event OMD or La Crosse acquired any ERP or backend system other than the Backend Systems:

If OMD or La Crosse licenses or otherwise acquires any other ERP or backend system other than the Backend Systems, OMD and La Crosse will promptly notify MWAi in writing and will offer MWAi a right of first refusal to negotiate an exclusive license to integrate and provide the Licensed Software or any other frontend system for use in connection with such ERP or backend system and the parties will negotiate the terms of such license, including without limitation applicable license fees, in good faith using all reasonable efforts for a period of one hundred twenty (120) days, which period may be extended upon mutual written agreement of the parties.[11]

Notably, this right of first negotiation provision arises only if OMD or La Crosse licenses or acquires another ERP or backend system. Unlike several other provisions, this one does not extend to actions by "Affiliates" of OMD and La Crosse.

c. Non-compete

Other key sections of the Agreement include the non-compete provisions. The non-compete provision governing OMD and La Crosse's actions provides:

During the Term, OMD and La Crosse each agree that it will not, and will cause its Affiliates not to, design, develop, market, license or distribute software or technology that competes with the Licensed Software in the Office Machines Industry anywhere in the world. Software or technology shall be deemed to compete with the Licensed Software if it (i) contains the same or substantially similar features and functionality as the Licensed Software and (ii) is intended for use by and is marketed, licensed or distributed to individuals or entities in the Office Machines Industry in the United States.[12]

A similar provision governs MWA's obligation not to compete with the Backend Systems.[13] That provision, however, includes the following additional sentence: "Notwithstanding the foregoing, nothing herein prohibits MWAi from making the Licensed Software or any other product or service compatible with any other ERP or backend system, provided that in doing so or as a result thereof MWAi does not compete with OMD or La Crosse in violation of this Section 2.1.5."[14]

d. Confidentiality and limitations on liability

The following provision of the Exclusive Agreement sets forth the parties' agreement as to confidentiality:

Neither party shall, without the prior written consent of the other party, disclose or use (except as expressly permitted by, or required to achieve the purposes of, this Agreement) the Confidential Information of the other party, during or at any time after the Term of this Agreement. Each party agrees that it will treat all Confidential Information of the other Party with the same degree of care as it accords to its own Confidential Information and each party represents that it exercises reasonable care to protect its own Confidential Information. The receiving party may disclose Confidential Information if required by a governmental agency, by operation of law, or if necessary in any proceeding to establish rights or obligations under this Agreement, provided that the receiving party gives the disclosing party reasonable prior written notice sufficient to permit the disclosing party an opportunity to contest such disclosure.[15]

"Confidential Information" is defined as follows:

"Confidential Information" means this Agreement, the Licensed Software, Customer Data and any other written or electronic information that is either (i) marked as confidential and/or proprietary, or which is accompanied by written notice that such information is confidential and/or proprietary, or (ii) not marked or accompanied by notice that it is confidential and/or proprietary but which, if disclosed to any third party, could reasonably and foreseeably cause competitive harm to the owner of such information. Confidential Information shall not include information which, as demonstrated by the receiving party, is: (i) publicly available, (ii) lawfully obtained by a party from third parties without restrictions on disclosure, or (iii) independently developed by a party without reference to or use of Confidential Information.[16]

MWA's senior managers all understood the Exclusive Agreement was confidential.[17]

As reflected in Section 6.3 of the Exclusive Agreement, the parties also agreed to limit their liability for breaches of the Agreement. Liability for two classes of violations, however, explicitly were excluded from the limitation: violations of intellectual property rights and breaches of Article V regarding confidentiality. The limitation of liability provision states in full:

Except for any party's violation of another party's intellectual property rights or a breach of any party of Article V (Confidentiality) of this Agreement, under no circumstances shall any party be liable to the other parties for any special, incidental, indirect, statutory or consequential damages (including lost revenue or profits) resulting from, arising out of, or related to its performance or failure to perform any of its obligations under, or breach of, this Agreement, whether or not a party has been advised, knew, or should have known, of the possibility of such damages. Except for each party's respective indemnification obligations for infringement set forth herein, a violation by any party of another party's intellectual property rights or a breach by any party of Article V (Confidentiality) of this Agreement, each party's maximum cumulative liability arising from or related to this Agreement for any cause whatsoever, regardless of the form of any claim or action, whether based in contract, tort or any legal theory, shall not exceed the aggregate fees paid by MWAi to OMD and La Crosse pursuant to this Agreement [i.e., $950, 000].[18]

3. Contemplated partnership among OMD, La Crosse, and MWA

By obtaining an exclusive license to the Licensed Software, MWA hoped to be able to shelve those products and attempt to sell only its IS frontend product to customers. Although MWA would continue to support customers using the Licensed Software, MWA would not actively sell SOTG or Tech-Raptor. In fact, OMD and La Crosse acknowledged in the Agreement that "MWAi has no obligation to market, license or distribute the Licensed Software and that MWAi may at any time transition End Users and other end users from the Licensed Software to MWAi's or a third party's products and/or services."[19] Of the 700 customers that used OMD and La Crosse frontend systems when the Agreement was executed in 2007, MWA succeeded in selling the IS product to only 70 of those customers.[20]

4. DGI competed in the market with ECI and MWA

DGI was a powerful competitor to both ECI and MWA. DGI sold an ERP system called "e-automate, " which competed with OMD's Vision and La Crosse's NextGen. DGI also sold a frontend product called "Remote Tech" that only integrated with e-automate.[21] Remote Tech competed with SOTG, Tech-Raptor, and MWA's IS, all of which apparently could be integrated with e-automate at one point.

Thus, e-automate and Remote Tech made up an "integrated offering" available from a single supplier, DGI. Following the Agreement, Vision or NextGen and IS, SOTG, or Tech-Raptor represented a second integrated offering available through the coordinated marketing efforts of MWA and OMD or La Crosse.

5. ECI reorganizes its leadership; relations with MWA deteriorate

In mid-2008, ECI underwent significant leadership changes. Around that time, Ron Books was ECI's president and COO; Laryssa Alexander was the president of OMD;[22] and Brostrom was the president of La Crosse. In January 2009, Books became ECI's CEO and he hired Trevor Gruenewald as COO.[23] As part of the leadership changes, Books terminated Brostrom as La Crosse's president. Alexander became president of La Crosse by the end of 2008.

In March 2009, Brostrom approached Mike Stramaglio, MWA's president and CEO, to ask for a job. MWA hired Brostrom as vice president of support and customer services.[24]

Books described the leadership changes in mid-2008 as an attempt by ECI to shift its short-term focus into a long-term strategy to build stronger partnerships with customers. ECI sought to overcome some negative customer responses to decisions made by prior management.[25] It adopted a customer-first attitude. OMD and La Crosse's partnership with MWA facilitated this goal by allowing the companies to offer their customers strong integration and complete, front-to-back solutions.[26] OMD, La Crosse, and MWA engaged in joint marketing campaigns, supported each other at trade shows, engaged in joint selling efforts, and worked together on customer issues.[27] ECI supported these marketing campaigns as the company offering the OMD and La Crosse backend solutions.

Eventually, however, the relationship deteriorated. From OMD and La Crosse's perspective, MWA was free-riding on their efforts.[28]Because of the Exclusive Agreement, OMD and La Crosse customers were required to use MWA's frontend product IS. In OMD and La Crosse's view, however, MWA failed to provide good customer service and support and did not offer competitive pricing. According to OMD and La Crosse representatives, their customers had to pay double or triple for MWA's IS platform than what those customers had been paying for SOTG or Tech-Raptor. Creating further problems, MWA fell behind in testing software updates and thereby delayed customer access to updated, enhanced software.[29]

The parties disagree as to how MWA handled these problems. OMD and La Crosse accuse MWA of "finger-pointing" rather than solving problems as they arose. MWA, on the other hand, denies those accusations. It recalls customer issues being handled together with the ECI team as a partnership. I find OMD and La Crosse's description of the situation to be more credible and reliable. In any event, these issues drove a wedge in the relationship among MWA, OMD, and La Crosse.

6. E-automate emerges as the dominant backend system

By early 2009, e-automate had begun to dominate Vision and NextGen in the market.[30] Customers who were frustrated with ECI based on prior price increases, for example, found e-automate to be an attractive alternative. DGI's products also were seen as more technologically advanced than OMD and La Crosse's ERPs, which were perceived as stagnant.[31] The newest version of e-automate made available during the time period relevant to this litigation is e-automate 8.0. The e-automate 8.0 release contains a ".net" software base, which, at the time of the parties' dispute, was the most technologically advanced offering in the market. This new version did not integrate with MWA's IS frontend. E-automate 8.0 and Remote Tech were better priced than offerings by OMD, La Crosse, and MWA.[32] Furthermore, DGI's CEO, Jim Phillips, was an aggressive and skilled marketer who successfully took many customers away from OMD and La Crosse.[33]

ECI ultimately decided to purchase DGI.[34] At first, Books explored ideas with Stramaglio on how to address the threat that DGI posed to both of their companies.[35]Thus, MWA knew that ECI was considering the acquisition of DGI and even supported the idea.[36] MWA itself had meetings with Phillips to discuss a relationship between MWA and DGI. At one meeting in 2010, Brostrom, MWA's COO, informed Phillips generally that MWA had paid approximately $1 million for the rights to OMD and La Crosse's frontend products and that those companies could not sell competing frontend products.[37] Eventually, however, it was ECI and DGI who entered confidential negotiations regarding a potential acquisition.[38]

7. ECI negotiates with Phillips and purchases DGI

Just as Phillips was an aggressive competitor in the marketplace, he was a forceful salesman in his negotiations with ECI to sell DGI. Phillips believed in the value of his company and in the value that an ECI–DGI combination would produce. He pushed hard to make the sale at a $32 million sales price, which he called a "32-Power Right, " using a football analogy.[39] In May 2011, as part of his sales pitch, Phillips sent Books an email with his "thoughts that may help [Books] in his preparation."[40] In keeping with the football theme, Phillips opened by telling Books that "the right play to call is 32 Power on NOW!"[41] As part of his plan, Phillips suggested that:

The MWA Killer should be articulated right out of the gate what our intentions [are]. We will integrate DGI's Remote Tech to OMD & LMS to get those revenues on D-Day or at least announce what we're doing so MWA can't counter with a long term contracting strategy. . . . We want to focus our attention on a blend of Giants and good mid size dealers so we can generate major new revenue by replacing not only OMD/LMS but also MWA and BEI. We can do between 100–150 per year based on the size mix. We can target these activities to maximize the roll-up. This will be fun.[42]

On August 9, 2011, ECI and DGI signed a letter of intent (the "LOI") for ECI to acquire DGI.[43] The LOI provided for a purchase price of $25 million and a potential earn-out for DGI shareholders, including Phillips, of $7 million.[44] Under the earn-out, DGI would receive $3.00 for every $1.00 of EBITDA earned by OMD, La Crosse, and DGI in calendar years 2011 and 2012 in excess of $12.75 million, up to a maximum payment of $7 million. The LOI also provided:

DGI's "Remote Tech" software products and the business, operational, development and sales/marketing aspects related thereto would be divested into a newly formed entity owned by the existing shareholders of DGI (or such other party as [mutually] agreed by DGI and ECI) and independently operated by them under a structure to be agreed to prior to Closing, subject to ECI's retention of a right of first refusal to acquire the "Remote Tech" business, shares and/or assets for a purchase price of $1.00 and such other terms and conditions as ECI may designate.[45]

On the last point quoted above, Books testified that similar $1 repurchase options were in the majority of ECI's LOIs.[46]

ECI also anticipated that its acquisition of DGI would lead to $1 million in cost synergies. ECI planned to remove duplicative functions like human resources and billing.[47] It also intended to eliminate duplicative development efforts on similar products. For example, before ECI acquired DGI, OMD was working on a major upgrade of its backend system from its legacy code base to .net, and from its older database to the newer database Sequel.[48] At the time of the acquisition, DGI was about to launch an upgrade to e-automate, e-automate 8.0, which contained the .net code base.[49]After ECI purchased e-automate, therefore, ECI had a .net offering and no longer needed the anticipated .net version of OMD's Vision. Consequently, OMD cancelled the development efforts to upgrade its backend to .net, which had required three to four employees' full-time effort.[50] ECI and OMD focused instead on enhancing OMD's current platform. Approximately twelve to fifteen employees were laid off after the acquisition, two or three of whom were developers.[51] ECI did not intend to shut down OMD and La Crosse and switch all of their customers to e-automate, at least not in the foreseeable future.[52] ECI remained committed to supporting customers who wanted to buy or continue using an OMD or La Crosse backend system.[53]

As part of its due diligence, ECI considered how to consummate the ECI–DGI deal without violating the Exclusive Agreement or any other agreements to which ECI, OMD, or La Crosse was a party.[54] Also during the leadup to the contemplated ECI–DGI transaction, Alexander emailed user manuals for SOTG and Tech-Raptor to DGI and copied ECI's general counsel, Gordon Kushner, on the exchange.[55] She informed DGI that the user manuals were confidential information of ECI and that she was disclosing the manuals subject to the terms of an April 13, 2011 Confidentiality and Non-Disclosure Agreement between DGI and ECI.

ECI and DGI consummated their transaction on September 15, 2011. DGI merged into a subsidiary of ECI created for the acquisition and DGI continued as the surviving corporation. The final consideration ECI agreed to pay to DGI conformed to what the parties had agreed to in the LOI: $25 million in cash and a potential $7 million earn-out.[56]

8. DGI sells Remote Tech to Tech AnyWare

ECI knew that it could not purchase DGI unless DGI divested itself of the Remote Tech product line. This is because OMD and La Crosse agreed in the Exclusive Agreement not to, and to cause their Affiliates not to, design, develop, market, license, or distribute a product that competes with the Licensed Software, i.e., SOTG and Tech-Raptor. As frontend remote service software, Remote Tech competes with the Licensed Software. To accomplish the divestment of Remote Tech, ECI and DGI identified DGI's outgoing president, James Davis, as a willing purchaser. Davis's interest, however, did not emerge until the day before the ECI–DGI transaction closed.

Davis began working at DGI in 2002 and was intimately familiar with Remote Tech. As a DGI executive, Davis participated in the process involved in selling the Remote Tech product line.[57] DGI first unsuccessfully attempted to sell Remote Tech to companies in the office equipment industry, namely, Net Endeavor and W/. In that context, on or about September 13, 2011, Davis prepared a rough draft business plan for the proposed sale of Remote Tech.[58] In these draft documents, DGI contemplated retaining 95% of Remote Tech's EBITDA after the sale. In the draft documents, Davis explained that "[d]ue to an existing agreement with [MWA], ECI cannot design, develop, market or distribute any product that competes with [IS], MWAi's remote technician management product."[59] On September 14, 2011, Davis came to the conclusion that he personally could purchase Remote Tech and take it forward.

Davis decided this was a valuable opportunity for him as "it's [not] every day you come across the opportunity for a seller-financed, zero down purchase of intellectual property and the opportunity to run a company."[60] The next day, Davis formed Tech AnyWare as a Utah LLC. Davis is the sole member of Tech AnyWare. Kushner, ECI's general counsel, wrote and filed Tech AnyWare's articles of organization. Kushner also drafted the three documents that memorialized the Remote Tech sale: the asset purchase agreement, a services agreement, and a right of first refusal.[61] Having reviewed those documents the previous night, Davis, through his new company Tech AnyWare, purchased Remote Tech on September 15, 2011.[62]

Under the terms of the agreements, Tech AnyWare purchased Remote Tech by agreeing to pay DGI 95% of the monthly EBITDA from Remote Tech in perpetuity. This obligation related to the EBITDA from the Remote Tech product only; it did not apply to earnings Tech AnyWare might achieve selling other products. DGI also retained a call right to repurchase Remote Tech for four times the trailing twelve months' EBITDA of Remote Tech, not including the 95% of EBITDA that Davis already had to pay as part of the purchase price.[63]

Davis manages Tech AnyWare independently. He does not report to ECI or DGI. Davis has hired four people since forming the company, and he determines the salary of Tech AnyWare's employees. Shortly after Tech AnyWare purchased Remote Tech, ECI representatives suggested that Davis hire a salesperson. Davis, however, declined to do so.[64] On behalf of Tech AnyWare, Davis has entered into over 100 agreements.[65] The company maintains its own bank account and pays its own taxes.[66] When Tech AnyWare purchased Remote Tech in September 2011, approximately 500 customers were using that product. Since then, Davis has added approximately 62 new customers.[67]

9. Transitioning Remote Tech from DGI to Tech AnyWare

For approximately two weeks after Tech AnyWare purchased Remote Tech, Davis kept his office at DGI.[68] When he relocated his office, Davis remained in the same building, which Phillips owned, but moved to a different floor.

Before DGI sold the Remote Tech product line to Tech AnyWare, DGI had a "try and buy" program in place to sell Remote Tech to e-automate users.[69] Under this program, a customer signed a sales order for Remote Tech, but was not required to pay upfront. The customer would receive an invoice at the end of a ninety-day trial period and could choose between buying the product at a discounted price or not buying it.[70]Tech AnyWare continued the program to the extent that it gave those customers who had signed sales orders while DGI owned Remote Tech the same choice to pay the discounted price or not buy, if the trial period ended when Tech AnyWare owned Remote Tech.[71] Davis took calls from customers calling about the program while he was on DGI's sales floor.[72] If such a customer elected not to be invoiced, Davis would try to address their concern and convince the customer to buy.

When DGI received requests from customers to purchase Remote Tech, DGI would forward those leads to Davis.[73] DGI informed its sales staff after the acquisition that they no longer could sell Remote Tech. One DGI representative informed a customer that DGI had divested Remote Tech because "ECI has a non-compete agreement with MWAi and cannot: 1) Design[, ] 2) Develop[, ] 3) Market[, or] 4) Distribute any product which would compete with the MWAi remote technician offerings."[74] When customers who were using an earlier version of e-automate than e-automate 8.0 asked DGI sales representatives about their options for remote capability, DGI informed them that they had two options: they could use Tech AnyWare's Remote Tech or MWA's IS.[75] When customers using e-automate 8.0 asked DGI about their options, DGI referred them to Tech AnyWare, because MWA's IS did not integrate with e-automate 8.0.[76]

DGI's position regarding integrating e-automate 8.0 with IS was, "[w]e don't have a contractual agreement to integrate with MWAi and don't want to!"[77] According to ECI and DGI, this decision simply reflected the reality that fewer than 10 of 1, 000 customers for earlier versions of e-automate used MWA.[78] With such a low demand, integrating e-automate 8.0 with MWA was not a priority for ECI or DGI. When MWA asked to integrate with e-automate 8.0, DGI did not say MWA could never integrate with e-automate 8.0, but MWA interpreted DGI's response to mean that the integration was not going to happen.[79] Books offered MWA the option of funding the effort to integrate IS with e-automate 8.0, or doing it after hours on MWA's own, rather than waiting for DGI to make it a priority.[80] But, nothing came of this offer.

When DGI recommended that one customer switch from MWA to Remote Tech, the customer inquired: "Can I ask why you didn't recommend just keeping MWA and use it with e-auto and not purchase Remote Tech until after my contract expired?"[81] Phillips replied, "[You're] going on 8.0[, ] the newest release that MWA doesn't integrate with. It's better integrated in every way and you'll save money year in and year out with Remote Tech."[82] Gordon Flesch, one of MWA's biggest clients, asked DGI in December 2011, "what is the normal process for MWA getting access to the [e-automate 8.0] updates?"[83] Although Gordon Flesch ultimately switched to Remote Tech, it informed MWA that it would have stayed with MWA if MWA had integrated with e-automate 8.0.[84]

Shortly after the ECI–DGI acquisition, a DGI sales representative sent a customer a quote for both e-automate and Remote Tech. Both quotes came from DGI, but they were sent as two separate documents: (1) a Remote Tech quote on Tech AnyWare's letterhead with Davis's phone number and email address as contact information; and (2) a quote for e-automate licenses on DGI letterhead with the DGI sales representative's contact information.[85] Phillips was included in this email exchange, but Davis was not. Several months later, in May 2012, a sales representative who marketed all of OMD, La Crosse, and DGI's products, referred a customer to Remote Tech. Instead of passing the sales lead to Davis, the representative himself simply organized a Remote Tech demo for the customer.[86]

10. Post-acquisition structure: the "OE Division"

After ECI purchased DGI in September 2011, DGI became a part of ECI's office equipment division (the "OE Division"). At this point, the OE Division consisted of DGI, OMD, and La Crosse. In the wake of the acquisition, ECI created a new branding strategy. ECI marketed the offerings of the three OE Division companies under the "DGI" brand as a division of "ECI Software Solutions."[87] Phillips became president of the OE Division, overseeing the day-to-day business of OMD, La Crosse, and DGI.[88]Alexander remained president of OMD and La Crosse. As OMD and La Crosse informed their customers: "While our parent company remains ECi Software Solutions, Digital Gateway will represent the office equipment division, which encompasses the OMD, La Crosse and e-automate solutions."[89]

In addition, OMD's business development manager, Craig Fitzpatrick, became a salesperson for OMD, La Crosse, and e-automate.[90] Fitzpatrick began reporting to DGI.[91]

11. ECI's Acquisition of FMAudit

In March 2011, six months before the DGI acquisition, ECI purcha sedsubstantially all of the assets of FMAudit. FMAudit produced a device management system.[92] Device management systems are considered frontend software, but they serve a different purpose than remote service solutions such as SOTG and Tech-Raptor. The FMAudit software did not include remote service functionality.[93]

12. The California Complaint

On April 12, 2012, MWA filed a complaint against ECI, OMD, La Crosse, DGI, and Tech AnyWare in a California state court (the "California Complaint"). The California Complaint quoted from the Exclusive Agreement between OMD, La Crosse, and MWA and included an unredacted copy of the Agreement as an exhibit. The California Complaint contained the following nine counts: (1) breach of contract against the "ECI Licensing Parties, " defined to include ECI, OMD, and La Crosse; (2) breach of the implied covenant of good faith and fair dealing against the ECI Licensing Parties; (3) specific performance and injunctive relief against DGI; (4) interference with contract against ECI; (5) interference with prospective economic advantage against ECI; (6) interference with contract against FMAudit; (7) interference with prospective economic advantage against FMAudit; (8) interference with contract against DGI and Tech AnyWare; and (9) interference with prospective economic advantage against DGI and Tech AnyWare.

MWA's Stramaglio indirectly caused a copy of the California Complaint, complete with an unredacted copy of the Agreement without its exhibits, to be sent to an industry media source, Frank Cannata, who publishes "LiveWire." Initially, Stramaglio, on behalf of MWA, denied under oath "directly or indirectly facilitating the distribution of the California Complaint to media sources within the industry, specifically to a media organization that distributes a publication titled 'LiveWire.'"[94] Plaintiffs ultimately learned, however, that it was MWA's attorney who sent a copy of the California Complaint and Agreement to Cannata.[95] At trial, Stramaglio admitted that he "requested [his] attorney to speak to Mr. Cannata and make a decision as to whether or not he should send the complaint."[96]

13. OMD and La Crosse purport to terminate the Exclusive Agreement

On April 26, 2012, OMD and La Crosse sent MWA written notices purporting to terminate the Agreement pursuant to Section 4.2.1 based on MWA's allegedly material breach of Section 5.1 regarding confidentiality.[97] Although MWA did not respond to the letters, [98] Stramaglio believed at the time that the Agreement had been terminated by OMD and La Crosse's letters.[99]

14. MWA partners with SAP

Its relationship with OMD and La Crosse having broken down, MWA sought alternatives. Just after learning that ECI acquired DGI in September 2011, MWA wanted to proceed quickly to develop a relationship with another company that produced an ERP.[100] SAP America, Inc. ("SAP") supplied a backend system called "Business One." By November 2011, MWA had identified SAP as a potential partner. On November 11, 2011, MWA and SAP entered into a non-disclosure agreement.[101] By June 2012, MWA had become a reseller for SAP's Business One, [102] and began marketing and distributing SAP's Business One ERP software system.[103] Business One competes with OMD and La Crosse's Vision and NextGen ERPs. In that regard, Stramaglio understood that, if the Exclusive Agreement remained in effect, by marketing SAP, MWA was violating Section 2.1.5 of that Agreement.[104]

On July 2, 2012, OMD and La Crosse sent alternative termination letters to MWA asserting that MWA's activities with SAP provided an independent basis for termination of the Agreement under Section 4.2.1.[105] MWA responded to these letters on July 13, 2012 and claimed that OMD and La Crosse continued to be obligated to perform under the Agreement and demanded that they comply with the Agreement.[106]

C. Procedural History

ECI and the other Plaintiffs filed a three-count complaint in this Court on April 30, 2012. Count I is for breach of contract; Count II seeks a declaratory judgment and specific performance of the Agreement's termination provision; and Count III seeks a declaratory judgment that Plaintiffs have not breached or tortiously interfered with the Agreement or with any prospective economic advantage of MWA. MWA filed its answer and counterclaim on August 1, 2012 (the "Counterclaim"). The eight-count Counterclaim asserts claims nearly identical to those in the California Complaint, except that it does not contain a count for specific performance and injunctive relief against DGI. The California action has been stayed pending the outcome of this litigation.

D. Parties' Contentions

Plaintiffs deny that ECI's acquisition of DGI violated the Exclusive Agreement among OMD, La Crosse, and MWA. They contend that the component of DGI that was problematic under the Exclusive Agreement—i.e., the Remote Tech product line— validly was sold to an independent third party. In that regard, Plaintiffs deny that Tech AnyWare is affiliated with OMD, La Crosse, DGI, or ECI and aver that it does not qualify as an "Affiliate" under the Exclusive Agreement.

For their part, Plaintiffs profess to have acted in strict compliance with the Exclusive Agreement, but claim MWA has disregarded its obligations thereunder. Plaintiffs contend that MWA materially breached the Exclusive Agreement by not honoring the confidentiality provision when MWA: (1) publicly disclosed material terms of the Agreement in the California Complaint; (2) attached the Agreement to the publicly available California Complaint; and (3) caused its attorneys to send a copy of the California Complaint and the Agreement to Cannata. Plaintiffs argue that MWA also breached the Agreement by ...


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