CIVIL NO.
97-4562(JBS)
United States District Court, D. New Jersey
Data Systems Analysts, Inc. v. the Netplex Group, Inc.
Decided Aug 2, 2000
CIVIL NO. 97-4562(JBS).
August 2, 2000.
MEMORANDUM OPINION
SIMANDLE, District Judge.
This matter comes before the Court on plaintiff's
motion for partial summary judgment as against
the defendants' second counterclaim, pursuant to
Rule 56(c), Fed.R.Civ.P.1 With this counterclaim,
defendants have asserted that plaintiff is liable for
breach of its duties under a primary agreement
signed July 11, 1995, in which the parties agreed
to use their "best efforts" to negotiate a secondary
agreement — a software development contract —
within 15 days. The parties did not negotiate the
anticipated agreement within 15 days. Defendants
contend that this failure to reach an agreement is
due to the plaintiff's failure to use its best efforts to
negotiate.
1 The present Opinion does not address or
affect the parties' cross-motions for
summary judgment filed June 23, 2000.
(Docket Entry Nos. 60 61.)
Plaintiff's present motion calls upon the Court to
decide whether an agreement between the parties
to use their "best efforts" to reach within 15 days a
further agreement concerning the development of
so-called "enhanced software" is enforceable
where the development agreement contains only a
sparse description of the subject of the proposed
negotiation.2 For reasons discussed herein, the
Court finds that although the parties did agree to
negotiate, this agreement is unenforceable because
it is impossible to predict the probable outcome of
future negotiations, had they occurred.
Accordingly, plaintiff's summary judgment motion
will be granted, and defendants' second
counterclaim will be dismissed.
2 Although defendants' brief characterizes
the second counterclaim as stating a claim
for breach of the development agreement
itself ( see Def. Br. at 6), the Court finds
that the wording of defendants' second
counterclaim ("[plaintiff] breached its
obligations by its failure and refusal to take
any steps to negotiate the Development
Agreement") clearly states a claim for
failure to negotiate a development
agreement.
BACKGROUND
This diverse contract and copyright infringement
case arises from a dispute over a software
purchase and licensing agreement negotiated
between Data Systems Analysts, Inc. ("DSA"), a
software development firm, and CompLink, now
known as The NetPlex Group ("NetPlex"). In the
early 1990s, DSA began a working relationship
with, Technology Development Systems, Inc.
("TDS"), which subsequently was acquired by
CompLink in December of 1993. Due to a reverse
merger between CompLink and NetPlex in June
1996, TDS then became a subsidiary of NetPlex.
On July 11, 1995, DSA purchased from
CompLink all rights, title and interest in the
copyright known as "NetSwitch", a
communications software package having remote
access, store-and-forward and disparate e-mail
capability, "together with all documentation,
1
Data Systems Analysts, Inc. v. the Netplex Group, Inc.
revisions, trade secrets, works in progress, support
software, software tools and all rights associated
therewith" for the sum of $500,000.00 (See DSA-
CompLink July 1995 Agreement (hereinafter the
"Prime Agreement") at 1 and 5, Pl. Ex. A.)
In the Prime Agreement, CompLink and TDS
were "granted back" a limited license to use the
NetSwitch software and documentation in future
third party transactions. (Id. at ¶ 1.4.) This license
was governed by provisions within the Prime
Agreement limiting the modification and use of
the software, and provided that CompLink would
pay DSA 10% of the gross licensing fees received
from the sale or installation of the software. (Id. at
¶ 5.4.)
Once the Prime Agreement was executed, the
NetSwitch software was transferred by CompLink
to DSA, with the understanding DSA would
thereafter begin an analysis of the software under
the thirty-day "Acceptance Testing Period",
defined in Article V of the Prime Agreement.
Apparently, this period was intended for DSA to
test NetSwitch to see if it conformed to the
specifications in the Prime Agreement. During this
period, CompLink was to provide support for
DSA. (Id. at 9-10.) According to the Prime
Agreement, if DSA found non-conformities in the
software during this period, CompLink would
assist in their correction. (Id. at ¶¶ 5.2 and 5.3.)
Plaintiff filed suit in this Court in 1997, alleging
that beginning in August 1995, one month after
entering into the Prime Agreement, TDS began
modifying DSA-owned software and licensing it
to customers without notifying or compensating
DSA. DSA alleges that TDS renamed the
NetSwitch program "WorldLink", but that the
WorldLink program was essentially made up of
DSA's NetSwitch source code. DSA alleges that in
December 1996, NetPlex sold the TDS WorldLink
asset, with all its unauthorized enhancements and
modifications to DSA's copyrighted code, to
XcelleNet for $3,000,000.00. Plaintiff alleges that
NetPlex's CEO, Gene Zaino, attempted to work
CIVIL NO. 97-4562(JBS) (D.N.J. Aug. 2, 2000)
out an eleventh hour purchase of DSA's rights in
the software being delivered to XcelleNet, but
ultimately chose to retain the entire $3 million
paid for the so-called WorldLink software. (Pl. Br.
at 4.) Plaintiff alleges that the above detailed
conduct constitutes, inter alia, copyright
infringement, breach of contract, and fraud. (See
Am. Compl. ¶¶ 29-45.)
In response to DSA's lawsuit, defendants filed two
contract counterclaims, the second of which
asserts that DSA breached its obligations under
the Prime Agreement when it failed to use its best
efforts to negotiate a subsequent development
agreement. (Answer Counterclaim II at ¶¶ 57-59.)
This counterclaim is based on the parties'
agreement to try to reach a secondary agreement
within 15 days, whereby DSA would pay
CompLink up to $300,000.00 for helping to
develop NetSwitch into an "Enhanced Software
Product". DSA was to be the sole owner of this
new software product.3 (Prime Agreement at 1-2.)
Notably, neither the purpose nor the capabilities of
the anticipated enhanced software are described in
the Prime Agreement.
3 This article provided, in relevant part, that
[w]ithin 15 days of the effective
date of this Agreement, the
parties will use their best efforts
to negotiate and enter into
Development Agreement for the
development of the Enhanced
Software, involving expected fees
of up to $300,000.00. Nothing in
this paragraph shall abrogate or
otherwise invalidate any other
provision of this Agreement.
(Prime Agreement ¶ 8.1.)
According to the defendants, once the NetSwitch
software had been transferred to DSA, and the
parties had entered into the 30 day testing period
described above, DSA inappropriately expanded
the scope of the assistance it required of
CompLink. CompLink's CEO became convinced
2
Data Systems Analysts, Inc. v. the Netplex Group, Inc.
that the assistance demanded during this period
was really consulting work compensable under the
then-unwritten Enhanced Software Development
Agreement rather than generalized troubleshooting
as provided for in the Prime Agreement.
Defendants theorize that DSA was attempting to
disingenuously extend the testing period so that it
could receive at no cost consulting services that it
would have to pay for after the finalization of the
Enhanced Software Development agreement
detailed above. (Dep. of CompLink CEO Gene
Zaino at 331-335, Def. Ex. A.)
DISCUSSION
A. Summary Judgment Standard
The standard for granting summary judgment is a
stringent one. A court may grant summary
judgment only when the materials of record "show
that there is no genuine issue as to any material
fact and that the moving party is entitled to
judgment as a matter of law." Fed.R.Civ.P. 56(c).
In deciding whether there is a disputed issue of
material fact the court must view the evidence in
favor of the non-moving party by extending any
reasonable favorable inference to that party. See
Aman v. Cort Furniture Rental Corp., 85 F.3d
1074, 1080-81 (3d Cir. 1996); Kowalski v. L F
Prods., 82 F.3d 1283, 1288 (3d Cir. 1996); Meyer
v. Riegel Prods. Corp., 720 F.2d 303, 307 n. 2 (3d
Cir. 1983), cert. denied, 465 U.S. 1091 (1984).
The threshold inquiry is whether there are "any
genuine factual issues that properly can be
resolved only by a finder of fact because they may
reasonably be resolved in favor of either party."
Anderson v. Liberty Lobby, Inc., 477 U.S. 242,
250 (1986).
Supreme Court decisions mandate that: "[w]hen
the nonmoving party bears the burden of
persuasion at trial, the moving party may meet its
burden on summary judgment by showing that the
nonmoving party's evidence is insufficient to carry
its burden of persuasion at trial." Brewer v.
Quaker State Oil Refining Corp., 72 F.3d 326,
329-330 (3d Cir. 1995) (citing Celotex Corp. v.
CIVIL NO. 97-4562(JBS) (D.N.J. Aug. 2, 2000)
Catrett, 477 U.S. 317, 322-23 (1987)). However,
"the nonmoving party creates a genuine issue of
material fact if it provides sufficient evidence to
allow a reasonable jury to find for him at trial."
Brewer, 72 F.3d at 330 (citing Anderson, 477 U.S.
at 248). Once the moving party has carried its
burden of establishing the absence of a genuine
issue of material fact, "its opponent must do more
than simply show that there is some metaphysical
doubt as to material facts."Matsushita Elec. Indus.
Co. v. Zenith Radio Corp., 475 U.S. 574, 586
(1986). Thus, if the non-movant's evidence is
merely "colorable" or is "not significantly
probative," the court may grant summary
judgment.Anderson, 477 U.S. at 249-50.
B. The Parties' Agreement to Negotiate
Plaintiff argues that defendants' second
counterclaim should be dismissed because (1) the
parties' agreement to negotiate is unenforceable,
and (2) even assuming that the clause is
enforceable, defendants have failed to present any
evidence that DSA failed to use its best efforts to
negotiate a software development agreement.
Because the Court now finds that the agreement to
negotiate lacks sufficient detail to be enforceable,
the Court does not reach plaintiff's second
argument.
The Court first considers whether the best efforts
clause here is enforceable as a matter of law. As
detailed above, paragraph 8.1 of the Prime
Agreement described the parties' agreement that
they would use their best efforts to negotiate a
subsequent contract. Specifically, the Prime
Agreement provides that the parties would use
their best efforts to within 15 days reach an
agreement concerning the development of so-
called "enhanced software". Enhanced software is
defined in the Prime Agreement as "computer
programs" which have been "upgraded" and
"enhanced" pursuant to the fulfillment of the
development agreement. (Prime Agreement at 3,
Pl. Ex. A.)
3
Data Systems Analysts, Inc. v. the Netplex Group, Inc.
Plaintiff argues that the issue here is cut and dried:
paragraph 8.1 was only an agreement to negotiate,
and agreements to negotiate are not enforceable as
a matter of contract and public policy. (Pl. Br. at 6
(citing Honolulu Waterfront Limited Partnership v.
Aloha Tower Development Corp., 692 F. Supp.
1230, 1235 (D. Ha. 1998) ("the overwhelming
weight of authority holds that courts will not
enforce an agreement to negotiate").) Defendants
counter that paragraph 8.1 is still binding even it
does not explicitly describe the goals of the future
negotiation. (Def. Br. at 6-7 (citing Berg Agency
v. Sleepworld-Willingboro, Inc., 136 N.J. Super.
369, 376-377 (App.Div. 197 5.))
Turning to discuss whether the instant agreement
to negotiate an enhanced software development
agreement is enforceable,4 the Court first
considers the Third Circuit's holding that such
agreements are enforceable under Pennsylvania
law, albeit under certain limited circumstances. In
Channel Home Centers, the parties had executed a
detailed letter of intent to enter into a contract for
the lease of certain commercial property. Channel
Home Centers v. Grossman, 795 F.2d 291 (3d Cir.
1986) (Becker, J.). The letter contained an
unequivocal promise to withdraw the property
from the rental market so that the parties could
negotiate the lease. Id. at 300. The property owner
breached his promise to negotiate a lease, and the
prospective lessor sued. Id. at 296. Now-Chief
Judge Becker began by noting that, under
Pennsylvania law, evidence of preliminary
negotiations, or an agreement to enter into a
binding contract in the future, does not alone
constitute a contract.Id. at 298. Nevertheless, the
court held that the parties' detailed letter of intent
"had sufficient specificity to make it an
enforceable contract". Id. at 300. Under
Pennsylvania law, therefore, the determination of
whether an agreement to negotiate is actionable is
a fact-sensitive one, and the court must examine
whether the preliminary agreement contained
enough detail to show an intent to be bound by the
agreement to negotiate in good faith. See USA
CIVIL NO. 97-4562(JBS) (D.N.J. Aug. 2, 2000)
Machinery Corp. v. CSC, Ltd., 184 F.3d 257, 264
(3d Cir. 1999) (distinguishing Channel Home
Centers, supra.) While the Supreme Court of New
Jersey has not yet directly addressed the issue of
whether an promise to use best efforts to negotiate
is enforceable, this Court is satisfied that it would
follow the reasoning of the Channel Home Centers
court, and hold that, given the right circumstances,
an agreement to negotiate is enforceable so long as
the parties have clearly defined the goals of the
negotiation and evinced an intent to be bound by
their promise.
4 As a preliminary matter, the Court finds
that the parties' use of the phrase "best
efforts" is meaningful. The Third Circuit
recently has defined best efforts to mean
something other than the generalized duty
to negotiate in good faith: "The duty of best
efforts `has diligence as its essence' and is
`more exacting' than the usual contractual
duty of good faith." National Payment
Data Systems, Inc. v. Meridian Bank , 212
F.3d 849, 854 (3d Cir. 2000) (citing 2 E.
Allan Farnsworth, Farnsworth on
Contracts , 383-84 (2d ed. 1998)). Thus,
the parties' use of the phrase "best efforts"
can be interpreted to mean that they agreed
to use "good faith plus diligence" in
negotiating the enhanced software
development agreement.
In this case, a review of paragraph 8.1 shows that
it is too indefinite to be enforceable. While it may
be presumed from the context of the agreement
that the proposed enhanced software would be an
improved commercial version of the NetSwitch
software that DSA was purchasing from
CompLink, the Prime Agreement does not provide
any further description of the enhanced software.
The Prime Agreement does not describe the
purpose of designing the proposed enhanced
software, nor does paragraph 8.1 describe the
anticipated capabilities, performance features,
appearance or retail cost of such computer
programs. Additionally, the cost of developing the
4
Data Systems Analysts, Inc. v. the Netplex Group, Inc. CIVIL NO. 97-4562(JBS) (D.N.J. Aug. 2, 2000)

enhanced software was left unclear, with agreement to negotiate expressed in paragraph 8.1
paragraph 8.1 providing only that CompLink is devoid of the factual detail necessary to show
would be paid fees up to $300,000.00. that the parties understood the parameters of the
enhanced software, and because of the paragraph's
The Court finds that paragraph 8.1 by its own
open-ended financial terms, the parties' agreement
terms is incomplete; it provides that the parties'
to negotiate a putative software development
would try to reach an subsequent agreement to
agreement is unenforceable.
develop improved software, the capabilities of
which would be defined by the subsequent CONCLUSION
agreement. Because the exact nature of the
For the reasons discussed above, plaintiff's motion
enhanced software is not defined within the Prime
for partial summary judgment will be granted, and
Agreement, its physical design, as well as the
defendants' second counterclaim will be
financial terms of its development, had yet to be
dismissed. The accompanying Order is entered.
negotiated at the time the parties signed the Prime
Agreement. Because of the inchoate nature of the ORDER
parties' promise to negotiate, the Court is unable to
THIS MATTER having come before the Court on
determine what the result would have been had the
plaintiff's motion for partial summary judgment as
parties engaged in negotiation. Furthermore, the
against defendants' second counterclaim pursuant
Court would be unable to fashion a remedy for
to Rule 56, Fed.R.Civ.P. (Docket Entry No. 57),
violation of this agreement, because the value and
and the Court having considered the parties'
cost of developing the software was left open.
submissions;
In sum, the Court finds that the terms of paragraph
IT IS this day of August, 2000
8.1 do not show that the parties intended to be
bound without a further manifestation of assent. ORDERED that plaintiff's motion be, and
Simply because the parties stated a willingness to hereby is GRANTED ; and it is further
enter into a future bargain, this does not mean that
ORDERED that defendants' second
the parties intended to be bound without additional
counterclaim be, and hereby is,
detail conclude the negotiation. See Restatement
DISMISSED .
(Second) Contracts § 26. This is not a case like
Channel Home Centers where the outcome of the
future negotiation was predictable, the probable
outcome reduced to a letter of intent, and the
damages clearly ascertainable. Here, because the