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Silver Management Group, Inc. v. Advisorengine Inc.

Court of Chancery of Delaware

March 18, 2019

SILVER MANAGEMENT GROUP, INC., Plaintiff,
v.
ADVISORENGINE INC., Defendant.

          Submitted Date: December 18, 2018

          Raymond J. DiCamillo, Jeffrey L. Moyer, Nicole K. Pedi, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Attorneys for Plaintiff Silver Management Group, Inc.

          David J. Teklits, Coleen W. Hill, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Gene W. Lee, PERKINS COIE LLP, New York, New York; Attorneys for Defendant AdvisorEngine Inc.

          MEMORANDUM OPINION

          McCORMICK, V.C.

         In 2014, AdvisorEngine Inc. ("AdvisorEngine") retained Silver Management Group, Inc. ("Silver") to develop backend software to power AdvisorEngine's then-planned wealth-management platform. In 2015, after the platform went live, the parties entered into agreements granting AdvisorEngine the right to license Silver's software for a seven-year term. The agreements required AdvisorEngine to pay a monthly license fee. The fee amount was a percentage of gross revenue derived from sales of the suite of software products sold on AdvisorEngine's wealth-management platform. In December 2017, AdvisorEngine acquired a new software product. That product was advertised and sold as part of a "unified" system with AdvisorEngine's suite of software products. Silver demanded that fees generated from the sales of the new software product be included in the gross revenues used to calculate Silver's monthly license fee. AdvisorEngine refused.

         Meanwhile, in October 2016, Silver's lead software developer accepted a position working for AdvisorEngine. By May 2018, AdvisorEngine had created a replacement for Silver's backend software. AdvisorEngine, however, was only permitted to terminate the licensing agreements before the seven-year term expired if Silver materially breached the agreements. Opportunistically, AdvisorEngine took the position that Silver's dispute concerning the license fee calculation constituted a material breach, purported to terminate the agreements on this basis, and ceased using Silver's software. This lawsuit ensued.

         Silver asserts six causes of action, and AdvisorEngine asserts two counterclaims. The parties cross-moved for partial summary judgment on five of the eight total claims. AdvisorEngine is entitled to summary judgment on Count I, which concerns the calculation of Silver's license fee. The plain language of the licensing agreement does not entitle Silver to fees derived from revenues generated by the newly acquired software product. Silver prevails the parties' claims concerning whether AdvisorEngine remains obligated under the agreements. Silver's motion on Count VI is granted-AdvisorEngine's written termination was ineffective because merely disputing the terms of the licensing agreement did not constitute a material breach. AdvisorEngine's motion on Counterclaim II is denied-AdvisorEngine's unilateral decision to cease using Silver's software did not end AdvisorEngine's obligation to pay license fees under the plain language of the licensing agreements.

         The remaining claims turn on factual questions unsuited for summary judgment. Through Count II, Silver seeks to enforce contractual rights to information. Through Count IV, Silver contends that AdvisorEngine breached non-solicitation provisions of the licensing agreements by employing Silver's software developer. The record before the Court is limited. The parties have not produced documents or taken depositions. To resolve the inherently factual issues raised in Counts II and IV, further development of the record is desirable.

         I. BACKGROUND

         The facts are drawn from the materials presented in support of the parties' cross motions for summary judgment.

         A. The Agreements

         AdvisorEngine was formed to develop and provide a wealth management platform to third-party financial advisors and their clients.[1] In early 2014, AdvisorEngine's corporate predecessor, Vanare LLC ("Vanare"), retained Silver to code the backend software for AdvisorEngine's planned wealth management platform.[2] The initial version of this software went live in August 2014.[3]

         On July 16, 2015, the parties entered into a Master Agreement back-dated to have an effective date of March 1, 2014.[4] Also on July 16, 2015, the parties entered into Schedule #3, which incorporates the terms and conditions of the Master Agreement and has an effective date of March 1, 2014.[5] The Master Agreement and Schedule #3 (the "Agreements") granted to Vanare the right to license Silver's software.[6]

         A. The License Fee Dispute

         The Agreements require AdvisorEngine to pay monthly license fees for Silver's software. Fees paid to Silver are to be based on a percentage of the gross fees AdvisorEngine charges its customers for "Vanare Platform Services," subject to monthly minimums and maximums.[7] The Master Agreement defines "Vanare Platform Services" as "the wealth management platform and related technology and business operations services of Vanare and its wholly-owned subsidiary, NestEgg Wealth, Inc."[8]

         1. The parties dispute the basis for calculating Silver's license fee.

         In December 2017, AdvisorEngine acquired a company called CRM Software Inc., which does business as "Junxure," and which provides customer relationship management software to financial advisors.[9] Junxure software has generated significant fees for AdvisorEngine, Silver says.[10]

         Silver argues that the Junxure software is part of the Vanare Platform Services.[11] Silver contends that public disclosures made by AdvisorEngine reveal that Junxure operates as part of a "unified" platform of "related" platform of software.[12]

         AdvisorEngine did not include fees from the Junxure software in the gross fees used to calculate Silver's monthly license fee.[13] The gross fees AdvisorEngine used to generate Silver's monthly license fee declined from $91, 879 for July of 2015 to $37, 164 for January of 2018.[14] The monthly license fees paid to Silver reduced proportionately.

         2. Silver demands information from AdvisorEngine concerning the fee dispute.

         On February 16, 2018, Silver requested client billing data and financial statements from AdvisorEngine.[15] Silver's stated purpose for the information was to invoice AdvisorEngine for the January 2018 period.[16] As part of this request, Silver sought Junxure client billing information.[17] AdvisorEngine denied Silver's request on February 28, 2018, stating that Silver is not entitled to licensing fees related to Junxure revenue.[18]

         On March 13, 2018, Silver initiated the dispute resolution process set forth in the Master Agreement.[19] The parties exchanged further communications and met in person but failed to resolve their disputes.[20] The contractually-mandated dispute resolution period ended after sixty days in May 2018.[21]

         3. AdvisorEngine purports to terminate the Agreements based on Silver's demands concerning the fee calculation.

         In a May 14, 2018 letter, AdvisorEngine terminated the Agreements for cause effective July 13, 2018.[22] As "cause," AdvisorEngine cited Silver's demands that AdvisorEngine include fees generated from Junxure software when calculating Silver's licensing fees.[23] Silver disputes that the May 14, 2018 letter was effective in terminating the Agreements.

         B. The Non-Solicitation Dispute

         The Master Agreement prohibits the parties from soliciting each other's employees without prior written consent.[24] Patrick Arnold was Silver's lead software developer when Silver developed AdvisorEngine's wealth management software.[25] In January 2016, Arnold and AdvisorEngine's CEO discussed Arnold's desire to leave Silver.[26] Later, they met several times to discuss opportunities for Arnold at AdvisorEngine.[27] In October 2016, Arnold resigned from Silver and started working for AdvisorEngine.[28] In 2017, AdvisorEngine began developing software to replace the Silver backend software.[29] AdvisorEngine alleges that it began developing its own backend software "long before hiring Patrick Arnold, and AdvisorEngine has not used any of Silver's confidential information in developing its own backend software."[30]

         AdvisorEngine has represented that it ceased using Silver's software and started using the replacement software in July 2018.[31] Silver disputes this fact.[32]

         C. The Litigation

         Silver commenced this litigation on June 8, 2018.[33] The Verified Complaint asserts six causes of action.[34] The first five claims assert that AdvisorEngine breached the Agreements by failing to pay Silver appropriate license fees (Count I);[35] refusing to provide Silver customer billing data (Count II);[36] misusing Silver's confidential information and reverse-engineering Silver's licensed software (Count III);[37] soliciting Arnold in breach of the non-solicitation provision (Count IV);[38] and exceeding the scope of use of Silver's software license (Count V).[39] Additionally, Silver seeks a declaration that AdvisorEngine's termination was ineffective (Count VI).[40]

         On September 11, 2018, AdvisorEngine answered and asserted two counterclaims.[41] Counterclaim I seeks a declaration that Silver breached the Agreements by failing to provide software that meets industry standards.[42]Counterclaim II seeks a declaration that AdvisorEngine's obligation to pay license fees ceased in July 2018, when AdvisorEngine stopped using Silver's software.[43]

         II. ANALYSIS

         Silver has moved for summary judgment on Silver's Counts I, II, and VI.[44] AdvisorEngine has moved for summary judgment on Silver's Counts I and IV and AdvisorEngine's Counterclaim II.[45] The motions collectively seek resolution of Silver's Counts I, II, IV and VI, and AdvisorEngine's Counterclaim II.

         Under Court of Chancery Rule 56, summary judgment "shall be rendered forthwith" if "there is no genuine issue as to any material fact and . . . the moving party is entitled to a judgment as a matter of law."[46] "[T]he court must view the evidence in the light most favorable to the non-moving party."[47] "Any application for such a judgment must be denied if there is any reasonable hypothesis by which the opposing party may recover, or if there is a dispute as to a material fact or the inferences to be drawn therefrom."[48]

         "There is no 'right' to a summary judgment."[49] When confronted with a Rule 56 motion, the court may, in its discretion, deny summary judgment if it decides upon a preliminary examination of the facts presented that it is desirable to inquire into and develop the facts more thoroughly at trial in order to clarify the law or its application.[50]

         A. The License Fee Dispute 1. Silver's Count I

         Silver's Count I claims that AdvisorEngine breached the Agreements by failing to include fees from the Junxure software when calculating Silver's monthly licensing fee.[51] Silver and AdvisorEngine cross-move for summary judgment on this Count, each arguing that the Agreements' plain and unambiguous meaning resolves in their favor.[52]

         New York law governs this analysis under the Master Agreement's choice of law provision.[53] "In interpreting contract language, New York contract law instructs courts ordinarily to give the words and phrases employed their plain and commonly-accepted meanings."[54] "If the contract is capable of only one reasonable interpretation, i.e., is unambiguous," then the courts will "give effect to the contract as written."[55] "Where the language is free from ambiguity, its meaning may be determined as a matter of law on the basis of the writing alone without resort to extrinsic evidence."[56]

         Two provisions of the Agreements bear on Count I: Section 2.a of exhibit A to Schedule #3, which sets forth the license fee payment obligations, [57] and Section 1.2 of the Master Agreement, which defines "Vanare Platform Services."[58]

         Section 2.a requires that AdvisorEngine calculate Silver's license fees as follows: "The Monthly license fees for the Licensed Software shall be twelve percent (12%) of the gross fees . . . charged by Vanare to its customers for Vanare Platform Services . . ., subject to a monthly maximum of $250, 000.00 and [certain monthly minimums]."[59]

         Section 1.2 defines Vanare Platform Services as "the wealth management platform and related technology and business operations services of Vanare and its wholly-owned subsidiary, NestEgg Wealth, Inc."[60]

         Silver argues that the Junxure software falls within the definition of Vanare Platform Services because it is a "related technology" of the "wealth management platform."[61] Silver contends that the definition of Vanare Platform Services extends to all technologies "related" to Vanare's wealth-management platform.[62] But the subordinate clause ending Section 1.2, "of Vanare and its wholly-owned subsidiary, NestEgg Wealth, Inc.," modifies the immediately preceding phrase, "related technology and business operations services."[63] Therefore, under the plain language of Section 1.2, a "related technology" must be "of Vanare" to qualify as a Vanare Platform Service.[64]

         "[O]f Vanare" does not include Junxure software for three reasons. First, the phrase "its wholly-owned subsidiary, NestEgg Wealth, Inc." would be unnecessary and superfluous if the phrase "of Vanare" by itself included all Vanare wholly-owned subsidiaries.[65] Superfluous contractual language is to be avoided under New York law, where "longstanding principles of contract interpretation requi[re] courts to give effect to every term[.]"[66] Next, under the canon that the expression of one thing implies the exclusion of the other, [67] the specific inclusion NestEgg Wealth, Inc. should be interpreted to exclude other AdvisorEngine subsidiaries.[68] Finally, "[a]bsent explicit language demonstrating the parties' intent to bind future affiliates of the contracting parties," New York courts will deem a contract to exclude obligations of future affiliates.[69] By analogy, if the sophisticated parties to the Agreements intended to base license fees on future affiliates' gross revenues, they would have done so expressly.[70]

         For these reasons, the language "of Vanare and its wholly-owned subsidiary NestEgg Wealth, Inc." does not include later-acquired, wholly-owned subsidiaries, such as Junxure. Fees generated from the Junxure software, therefore, are not included in the gross fees used to calculate Silver's license fee under Section 2.a.

         2. Silver's Count II

         Silver moves for summary judgment on Count II, which seeks to compel AdvisorEngine to provide categories of client billing information, including Junxure client billing data. Silver bases Count II on Sections 11.1 and 5.6 of the Master Agreement.

         Silver is not entitled to the client billing information under Section 11.1 of the Master Agreement governing "Confidential Information."[71] Section 11.1 does not affirmatively require the parties to share information. Rather, it governs what confidentiality protections the parties must afford information after receipt.

         It is unclear based on the record before the Court whether Silver is entitled to any relief under Section 5.6. That section provides: "In the event of a good faith dispute with regard to one or more item(s) appearing on an invoice, Vanare shall notify Silver promptly after receipt of the invoice with reasonable detail as to the nature of the dispute . . . ."[72] If Silver seeks through Count II Junxure billing only as AdvisorEngine contends, then Silver's request is denied based on the Court's ruling on Count I. But it ...


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