Epazz, Inc. v. Nat'l Quality Assurance U.S.

EPAZZ, INC., Plaintiff, JADIAN, INC., Plaintiff-Appellant, v. NATIONAL QUALITY ASSURANCE USA, INC., Defendant-Appellee, WILLIAM A. ALLISON; JOSEPH J. NAGEL, Defendants.

No. 20-1552

United States Court of Appeals, Sixth Circuit

August 26, 2021

NOT RECOMMENDED FOR PUBLICATION

ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF MICHIGAN

Before: BOGGS, MOORE, and LARSEN, Circuit Judges.

LARSEN, CIRCUIT JUDGE

This is a messy business dispute between National Quality Assurance USA, Inc. (NQA) and Jadian, Inc. (Jadian). Jadian's predecessor, Jadian Enterprises (Enterprises), owned a software package called Enterprise Quality Manager (EQM). For years, Enterprises licensed this program to NQA. The software was uniquely prone to bugs, crashes, and technical failures. But Enterprises was able to provide intensive and persistent technical support to keep things afloat. And so Enterprises and NQA developed a solid, working relationship.

Then Jadian entered the picture. It bought out Enterprises' assets and quickly displayed its incapacity to provide meaningful support for EQM. Dissatisfied with the new regime NQA withheld payment until Jadian showed that it could meet its contractual support obligations. In response, Jadian refused to provide any support until NQA paid up in full. The parties found themselves in a standoff, and the relationship quickly crumbled.

Three years later, Jadian brought this action against NQA, alleging breach of contract and trade-secret misappropriation, among other claims. NQA denied liability and counterclaimed, also alleging breach of contract. The district court granted summary judgment for NQA on Jadian's trade-secret claims. And, following a bench trial, the court found in NQA's favor on all of the contract claims. For the reasons stated below, we AFFIRM the district court's judgment.

I.

A.

NQA provides, among other services, quality and environment-management-system registration and certification services for its clients. As a key part of this operation, it has long used EQM, a software package formerly owned by Enterprises. "The EQM software enables NQA to manage compliance electronically; conduct audits and inspections fulfill work orders and deliver invoices; monitor licensing, certifications and permits; and check compliance enforcement." NQA's auditor manager, Peter Theobald, explained that EQM was a "critical application" for his company. But despite its importance, EQM "was not a stable platform" and "needed constant maintenance and support."

Even though NQA and Enterprises had to communicate almost daily to work out the inevitable and incessant issues with EQM, their "relationship was very solid and very trusting." Two of Enterprises' software developers-Joseph Nagel and Bill Allison-were primarily responsible for providing the critical support to NQA. Enterprises' Chief Technology Officer, Guy Metz, would also provide some "high-level" support "[o]n occasion."

Nevertheless, Enterprises was a "relatively small company compared to NQA" and had only a handful of employees. So, due to the "mission-critical" nature of the EQM software, NQA needed some assurance in the event Enterprises "couldn't perform" or "keep up" with the service levels NQA demanded. It needed the ability to keep the train rolling so to speak-"to maintain the software program and make modifications or changes to that program as needed." Jadian, Inc. v. Nat'l Quality Assurance USA, Inc., No. 1:17-cv-907, 2020 WL 3071756, at *2 (W.D. Mich. June 10, 2020).

To that end, the parties executed an Escrow Agreement in late 2008 with Iron Mountain Intellectual Property Management, Inc. (Iron Mountain). The idea was simple enough. Enterprises would periodically deliver its EQM source code to Iron Mountain. And, in turn, NQA would pay Iron Mountain to retain the source code, keep it safe, and release it to NQA if Enterprises: (1) "breach[ed] . . . the license agreement or other agreement" between it and NQA "regulating the use of [EQM]," (2) failed "to function as a going concern or to operate in the ordinary course," or (3) went bankrupt. Following any of these triggering conditions, NQA had the right to submit a "Work Request" to Iron Mountain. If Enterprises did not respond within ten days after Iron Mountain mailed the Work Request to the address on file, Iron Mountain would release the code, and NQA would receive "the right . . . to use the Deposit Material for the sole purpose of continuing the benefits afforded to [it] by the License Agreement."

For the next few years, things proceeded well enough. And in January 2012, Enterprises and NQA entered into a Master Subscription Agreement (MSA). That agreement required NQA to pay Enterprises quarterly subscription fees. And based on the formula in the MSA, those fees ranged from $45, 000 per year in 2012 to $50, 000 per year in 2014. It is undisputed that NQA paid all of its subscription fees through June 30, 2014.

In exchange for these fees, Enterprises had to do more than just allow NQA to use the EQM software. As relevant here, the MSA required Enterprises to: (1) provide "basic support" for EQM, (2) "use commercially reasonable efforts to make [EQM] available 24 hours a day, 7 days a week," and (3) "use all reasonable commercial endeavors to correct any critical nonconformance promptly, or provide [NQA] with an alternative means of accomplishing the desired performance."

Alongside the MSA arrangement, Enterprises also agreed to develop three special software projects for NQA. NQA fully paid for each of the projects (for a total of $58, 350) in advance. But Enterprises had not delivered on any of them by May 2014.

B.

May 2014 was when things started to go south-and quickly. That's when Enterprises sold all of its assets and customer contracts to Jadian, a wholly-owned subsidiary of Epazz, Inc. At the time, NQA was Enterprises' largest and "single most important customer," accounting for approximately forty percent of its annual revenues. Id. at *5. But in the words of Enterprises' President Jerry Norris, Jadian did not have a "solid" transition plan to "somehow replicate the magic that was happening between [Enterprises] and [its] customers." The district court put it more bluntly: Jadian "totally fumbled the handoff."

Prior to the closing on May 9, Jadian was aware that NQA was Enterprises' largest client and revenue source. Yet Jadian did not contact NQA prior to the close. Nor did it request that Enterprises introduce Jadian to NQA after the sale. For its part, Enterprises informed Jadian that Allison and Nagel provided EQM support for NQA. But Jadian did not hire either developer "even though they were critical to the day-to-day operation of the software and management of the relationship." Id. Jadian waited until the day before closing to even speak with Nagel and Allison, neither of whom provided any training to Jadian's employees concerning the EQM software.

Without Allison or Nagel onboard, Jadian "had no workable transition plan to shift support operations from Enterprises to Jadian." Id. Instead, Jadian hired Guy Metz for six months and paid Jerry Norris as a contractor for a short time. Neither could "do the work of Allison or Nagel, but they were supposed to train Jadian's own developers, located overseas, on managing and developing the EQM software." Id. Norris testified that Jadian's support team in Afghanistan was not "effective," and its members "would change quickly and often." Even Epazz's President, Shaun Passley, tacitly admitted that the support team was "unfamiliar[]" with the EQM software and "didn't know how to fix it" at the time of the transition; the team would need additional time to figure it out.

That was a major problem for NQA. Theobald testified that he and his team had serious concerns as to whether they would still "be able to maintain this mission-critical application" and whether they would "have that level of interaction" and ongoing support that was necessary to sustain EQM. On May 12, Theobald communicated NQA's "level of uncertainty" and "serious concern" to Jadian and asked that it "provide as a matter of urgency some documentation detailing what the transition process is for ongoing support of the EQM system." He also asked for a "go forward plan" on the projects. Clearly frazzled, Theobald sent a follow-up email later that day pleading for answers. Karen Griggs-who "assisted in the management of" Enterprises but was not a software developer-was brought on as a consultant for Jadian and responded that Jadian was "looking into issues you raised and creating a plan to discuss with you / your team." Theobald wasn't comforted in the slightest; in his view, "there should have been a plan already."

"The inadequacy of Jadian's transition plan was made clear two days later ...." Id. At *6. One of the functions of the EQM software was to send invoices to NQA's clients. But on May 14, NQA reported to Jadian that approximately 1, 000 of its invoices were not emailed to clients. This was a "significant problem" for NQA, because it affected "a million and a half or a million plus dollars' worth" of cash flow, "a huge amount of money to a small company." Accordingly, Theobald called Karen Griggs, and NQA's accounting manager emailed Griggs saying that NQA "need[ed] this issue resolved IMMEDIATELY." Griggs forwarded the message to Metz and the support team, explaining that it was an "emergency situation" that was "a VERY high priority for our customer NQA." Late that afternoon, Griggs responded to NQA that "the support team is working on your issue currently with the goal of having it resolved today."

But Jadian "was unable to provide a fix by the end of the day, or indeed the next day." Id. On ...