Advanced Technology Associates, Inc. v. Seligman

39 F.Supp.2d 1311

ADVANCED TECHNOLOGY ASSOCIATES, INC., Plaintiff, v. Timothy J. SELIGMAN, Thomas D. Perrie, and Tele-Systems, Inc., Defendants.

No. CIV. A. 97-2374-GTV.

United States District Court, D. Kansas.

February 12, 1999.

Robert M. Pitkin, Levy & Craig, P.C., Kansas City, MO, for Advanced Technology Associates, Inc., plaintiff.

Stanley D. Davis, Patricia A. Konopka, Stinson, Mag & Fizzell, P.C., Kansas City, MO, J. Alexander Porter, Atlanta, GA, for Timothy J. Seligman, Thomas D. Perrie, Tele-Systems, Inc., defendants.

MEMORANDUM AND ORDER

VANBEBBER, District Judge.

Plaintiff brought this diversity action seeking damages resulting from defendants' alleged breach of a software license agreement, an account settlement agreement, and a service agreement. Because many of plaintiff's claims were subject to arbitration under the terms of the parties' contractual agreements, the court stayed the case pending arbitration. The arbitration process is now complete. The case is before the court on plaintiff's motion to vacate and/or modify the arbitration award (Doc. 40) and defendants' motion to confirm the arbitration award (Doc. 31). For the reasons explained in this memorandum and order, the court affirms the arbitration award, grants defendants' motion, and denies plaintiff's motion.

I. FACTUAL BACKGROUND

Defendants Timothy J. Seligman and Thomas D. Perrie comprise the board of directors of defendant Tele-Systems, Inc., the owner and developer of computer software called "Unigate." On April 20, 1995, the parties entered into a written Systems Sales Agreement and a separate written Service Agreement. The purpose of the Systems Sales Agreement was to grant plaintiff the exclusive right to market defendants' Unigate systems and other systems subject to the agreement. The Service Agreement required defendants to operate and manage a Unigate "service bureau."

According to plaintiff, defendants never set up, operated, or managed a service bureau as required by the Service Agreement. As a result, plaintiff incurred significant debts and expenses. Although defendants owed plaintiff a substantial amount of money for their breach of the Service Agreement, plaintiff agreed to restructure the parties' business arrangement. On February 28, 1997, the parties executed a written Account Settlement Agreement. Under the terms of this agreement, the prior Service Agreement and Systems Sales Agreement were canceled and the parties mutually exchanged releases regarding prior claims and liabilities.

The Account Settlement Agreement executed by the parties was expressly contingent upon "the signing of a Software License Agreement ... and is null and void if the Software License Agreement is not signed by both parties." Accordingly, the parties simultaneously executed a Software License Agreement. Under the Software License Agreement, defendants were obligated to provide plaintiff with the following: (1) an exclusive license to sublicense the object code form of all licensed programs including Unigate; (2) a nonexclusive license to use the Source Code programs; and (3) a non-exclusive license to use various support materials in connection with the licensed programs. In turn, plaintiff was obligated by the agreement to make "Minimum Development Payments" to defendant in the amount of $30,000.00 per month.

Shortly thereafter, a dispute arose between the parties over the terms of the Software License Agreement. Plaintiff alleges that defendants failed to provide the source code, and defendants allege nonpayment of the "Minimum Development Payments". On June 19, 1997, defendants sent plaintiff a demand for arbitration pursuant to paragraph 16 of the Software License Agreement. Paragraph 16 provides, in pertinent part:

16. ARBITRATION. All disputes which arise under or in connection with this Agreement shall be resolved by arbitration under the Commercial Arbitration Rules of the American Arbitration Association ("AAA") then pertaining.... Any arbitration hereunder shall be held at the Atlanta, Georgia office of the AAA unless the parties agree otherwise. The subject matter of this agreement concerns interstate commerce within the meaning of the Federal Arbitration Act and arbitration hereunder shall be subject to the provision of the Federal Arbitration Act and discovery may be had under the Federal Rules of Civil Procedure.

In spite of this provision, on July 7, 1997, plaintiff filed in the District Court of Johnson County, Kansas, a "Petition for Recission of Contracts, Damages, Foreclosure of Security Interest in Personal Property, Restraining Order and Temporary Injunction, and Appointment of Receiver and Alternately, for Specific Performance and Damages." Specifically, plaintiff asserted the following claims:

Count I: Recission of the Software License Agreement and Account Settlement Agreement because of fraudulent misrepresentations of fact by defendants.

Count II: Recission of the Software License Agreement and Account Settlement

Agreement because of delay in defendants' performance.

Count III: Breach of the Service Agreement by defendants.

Count IV: Foreclosure of defendants' security interest in Unigate (based on defendants' breach of the Service Agreement).

Count V: Restraining order and temporary injunction concerning Unigate (based on defendants' breach of the Service Agreement).

Count VI: Appointment of a receiver to preserve and manage the Unigate object code and source code (based on defendants' breach of the Service Agreement).

Count VII: Specific performance of the Software License Agreement.

Count VIII: Damages for breach of the Software License Agreement.

Defendants removed the action to this court and subsequently filed a motion to stay the action pending arbitration. In deciding this motion, the court concluded that the arbitration agreement's "arise under or in connection with" language governed only the issues of recission and breach of the Software License Agreement (Counts I, II, VII, and VIII). It did not govern Counts I and II, as they related to the Account Settlement Agreement, or Count III and its corresponding remedy counts — Counts IV, V, and VI. Accordingly, the court granted defendants' motion to stay and ordered that the issues of recission and breach of the Software License Agreement be submitted to arbitration. The court further ordered that judicial resolution of Counts I and II, as they related to the Account Settlement Agreement, and Count III was stayed pending arbitration.

Prior to the court's issuance of the above-mentioned order, the parties commenced arbitration proceedings. On July 29, 1997, the American Arbitration Association in Atlanta, Georgia administratively appointed William D. Friend as an arbitrator and asked the parties to submit any objections to this appointment. Receiving no objections, Mr. Friend's appointment was confirmed.

On September 27, 1997, plaintiff filed a counterclaim in the arbitration proceeding stating, in pertinent part, as follows:

TSI and ATA entered into a certain Software License Agreement (the "Agreement") effective January 1, 1997. TSI was obligated under the Agreement, among other things, to provide ATA with working source code for its Unigate software. TSI has failed and refused to so provide ATA with source code for Unigate. First and foremost, ATA requests recission of the Agreement (and the accompanying Account Settlement Agreement) based on: (a) fraud by TSI ...; and (b) TSI's nonperformance of the Agreement ....

Plaintiff and defendants also submitted briefs to the arbitrator setting forth their respective contentions.

On January 12, 1998, an arbitration hearing was conducted in the Charlotte, North Carolina offices of the AAA before Mr. Friend as arbitrator. As required by the parties' Software License Agreement, the arbitration was conducted pursuant to the Commercial Arbitration Rules of the AAA. On February 10, 1998, the arbitrator issued his findings and award.

According to the arbitration award, the case turned on a cental question: "At the time TSI failed to comply with ATA's demand for Unigate Source Code, was ATA in material breach of the Software License Agreement by virtue of its failure to pay Minimum Development Payments?" The arbitrator concluded that plaintiff materially breached the Software License Agreement when it failed to make the required Minimum Development Payments. For this same reason, the arbitrator found that defendants were legally excused from performing under the Software License Agreement and that defendants lawfully terminated plaintiff's license in the Unigate source code and object code in December 1997. As a result of this ruling, the arbitrator ordered the following award:

(1) ATA shall pay to TSI the sum of $80,520.00 for damages within thirty (30) days from the date of this Award;

(2) In favor of TSI and against ATA for attor ney's fees in the amount of $52,282.72.¹

(3) All counterclaims brought by ATA against TSI are denied, including but not limited to ATA's prayer for recission of the Software License Agreement and the Account Settlement Agreement.

(4) ATA is ordered to comply with Section 4.4 of the Software License Agreement within (30) days following the date of this award by returning to TSI (F.O.B. TSI's office), the original and all copies, in whole or in part, in any form, of all Licensed Programs and Licensed Materials (as such terms are defined in the Software License Agreement) in ATA's custody, possession or control.

(5) The compensation and expenses of the arbitrator totaling four thousand five hundred dollars ($4,500.00) shall be borne equally by the Parties.

(6) The administrative fees and expenses of the American Arbitration Association totaling three thousand one hundred twenty five dollars ($3,125.00) shall be borne equally by the Parties. Therefore, TSI shall pay to ATA the sum of two hundred fifty dollars ($250.00) for that portion of its share of...