E-Alert Case Updates

United States District Court for the District of Delaware Denies Software Company’s Motion to Dismiss After Fraudulently Inducing and Misrepresenting Software to Purchaser

Livery Coach Solutions, LLC v. Music Express/East, Inc.
Civ. No. 16-143 LPS (March 29, 2017) United States District Court for the District of Delaware
by Julia L. Houp, Law Clerk
Semmes, Bowen & Semmes (www.semmes.com)

Available at: http://www.ded.uscourts.gov/sites/default/files/opinions/lps/2017/march/16-143.pdf

Music Express supplies chauffeured ground transportation, providing more than 600 rides on a daily basis. Livery develops software solutions for the limousine industry, such as limousine reservation, billing, and dispatch management software. Livery offers two versions of its software—the older “Classic” version and the newer “.Net” version.

Music Express and Livery began conversations about Livery’s software in February 2015. The parties met often to discuss Music Express’ software needs and to view demonstrations of Livery’s software. During the meetings, the parties discussed the differences between Livery’s two software versions, which Livery claimed was “primarily aesthetic.” During one software demonstration, Livery told Music Express it was being shown the .Net version, but Music Express maintained it was actually shown the older Classic version. Livery promised Music Express that it would receive both versions and that it would be able to take the software “live” by September 1, 2015. Livery also gave Music Express a list of companies that were supposedly using Livery’s software and encouraged Music Express to check those references.

On June 16, 2015, the parties entered into an End User Software License Agreement and Software Maintenance Agreement (“Agreement”). Livery delivered the software in August 2015, but Music Express claimed that (1) it only received the .Net version, not the Classic version, which it had relied upon in entering the Agreement, and (2) the .Net version was an untested beta version of the software, containing programming bugs, and not operable as a commercially viable solution. Music Express argued that Livery continuously misrepresented the software capability at their meetings leading up to the Agreement.

Ultimately, Music Express claimed that Livery pulled a “bait and switch’ by showing them the Classic version, misrepresenting its capabilities, and eventually delivered the unworkable .Net version. Music Express was unable to take the software “live” until September 6, 2015, and even when it did, the program operated too slowly and experienced numerous issues, requiring 110 revisions between September 2015 and February 2016. These defects resulted in (1) broken customer invoices; (2) broken credit card files; and (3) missing invoices altogether, which damaged Music Express’ customers’ confidence and goodwill. Further, Livery never provided ample technical support because Livery support teams were “too busy re-writing the software for the .Net platform.” Subsequently, Music Express requested the Classic version—which it believed it had originally contracted to receive—but Livery refused to provide it, claiming that the two versions were “foundationally incompatible” and could not be switched.

In February 2016, Music Express informed Livery that it was terminating the Agreement, effectively immediately, and that the Agreement was not valid because it had been improperly obtained. Music Express made only two payments before terminating the Agreement, leading Livery to sue for breach of contract, and Music Express to countersue.

Music Express alleged fraudulent inducement and negligent misrepresentation based on Livery’s various representations leading up to the Agreement that Livery knew were false, and that Music Express reasonably relied upon in executing the Agreement. Livery asserted that both claims were barred by the “gist of the action” doctrine and the economic loss rule.

The gist of the action doctrine precludes tort suits for mere contractual breaches, requiring a plaintiff to point to independent events giving rise to the tort. Frank C. Pollara Group, LLC v. Ocean View Inv. Holding, LLC, 784 F.3d 177, 186 (3d Cir. 2015). The doctrine requires that “the wrong ascribed to defendant must be the gist of the action, the contract being collateral.” Pediatrix Screening, Inc. v. TeleChem Intern., Inc., 602 F.3d 541, 548 (2010). Livery argued that the dispute between the parties is a breach of contract at its core, amounting to “nothing more than a simple dispute between a seller and [a] disappointed customer.”

The United States District Court for the District of Delaware found that Music Express’ claims of fraudulent inducement and negligent misrepresentation and not barred, per se, by the gist of the action doctrine. However, the court reviewed each claim of misrepresentation individually, and found that two may support a valid tort claims. Those claims of misrepresentation are that: (1) Music Express would receive the Classic version of the software; and (2) several other companies were operating on the very same Livery software that Music Express would receive.

The court held that Music Express stated a plausible claim that, in making such misrepresentations, Livery violated a societal duty not to make false statements and defraud others. Thus, Livery’s conduct in making these misrepresentations is separate and distinct from the conduct that allegedly caused the breach. Therefore, claims based on these misrepresentations are not barred by the gist of the action doctrine.

The court also found that application of the economic loss doctrine lead to the same conclusion. There are exceptions to the economic loss rule, including claims of fraud and other intentional torts. Courts applying such an exception have found that it requires the showing of two elements: (1) the plaintiff must show that the defendant supplied information to the plaintiff for use in business transaction with third parties; and (2) the defendant must be in the business to supply such information. See Christiana Marine Servs. Corp. v. Texaco Fuel and Marine Mktg. Inc., 2002 WL 1334360 (Del. Super. Ct. June 13, 2002).

Livery argued that Music Express’ losses “are purely economic,” but Music Express responded that the economic loss rule “does not preclude tort claims directed at breaches of non-contractual duties.” The court agreed that Music Express’ claims of fraudulent inducement and negligent misrepresentation both fall within the exception to the economic loss rule. Therefore, they are not precluded.

Additionally, Music Express sufficiently proved that Livery supplied information to it for use in business transaction with third parties. Music Express also sufficiently proved that Livery was in the business of providing software solutions for limousine companies. Thus, in the business of supplying information about the software, Music Express contracted to use in dealings with its clients. As a result, the court denied Livery’s motion to dismiss, finding that Music Express’ fraudulent inducement and negligent misrepresentation claims were not precluded on the basis of the gist of the action doctrine or economic loss rule.