Implied “Transition Period” in Software Licenses? Don’t Count on It.

Here in Nashville1, we have what might be called a so-so mass transit system. To be fair, Nashville’s layout isn’t very conducive to mass transit. It’s fairly spread out, the roads tend to meander, there are multiple commercial centers, those commercial centers aren’t always very easy to get to, and residential and commercial growth patterns have been in flux.

May 2, 2010, Nashville, Tennessee. That's downtown in the distance. The MTA depot would actually be fairly close by, probably completely under water.

May 2, 2010, Nashville, Tennessee. That’s downtown in the distance. The MTA depot would actually be fairly close by, probably completely under water.

Still, Nashville has a bus system, the Nashville Metropolitan Transit Authority, which everyone calls the “MTA.” As you might expect, one of MTA’s goals is to make sure the buses run on time, which requires making sure the drivers are there to drive the buses, the correct buses are dispatched on the correct routes. It also involves monitoring how long the buses take between major stops. In 2007, MTA wanted a better system for communications, dispatching and tracking. It contracted with ACS Transport Solutions2 for this. ACS agreed to sell, install and configure all of the necessary equipment. This equipment required enterprise-level software to run it, and ACS also agreed to license the software to MTA.3

For some reason, the software license was in an entirely separate contract called a “License Agreement.” Only, it wasn’t really an agreement, since all it did was grant a license from ACS to MTA. For it to be an agreement, some benefit needed to flow back to ACS, but the only benefit ACS was to receive—several large piles of money—was found only in the main agreement.

My World Is a Flood

ACS was about 75% done installing and configuring the equipment when the big 2010 flood hit. You’d be surprised how much valuable equipment—computer servers, generators, pipe organs—is stored in basements. If those basements were within about six or seven blocks of the Cumberland—which would include about half of downtown—they got flooded.4 Alas, MTA’s offices were right by the river, and much of the equipment ACS had installed was destroyed.

The flood couldn’t have come a a worse time for ACS and MTA.5 Typical of such contracts, ACS got paid when it met certain milestones. ACS had already met—and received payment for—most of them. With so much equipment destroyed, ACS no longer qualified for many of the milestones it had met.6 MTA didn’t demand a refund, but it regarded ACS as out of compliance with the main contract. ACS felt that it wasn’t really its fault that it was out of compliance.

A flood is something that in the old days you’d call an “act of God,” i.e., something that’s really big and unexpected that interferes with one’s performance of a contract. The more correct term for these events is “force majeure.” Most contracts have a provision dealing with this, to protect the performing party from events well beyond its control.

And the main contract had a force majeure provision, but it didn’t really solve ACS’s problem. The way this provision worked is that it absolved ACS of liability caused by the flood—that’s good—but it didn’t absolve ACS of the responsibility of performing. Here’s the key sentence:

The Contract shall not be revoked or either party penalized for such noncompliance, provided that the Party who invokes the Force Majeure takes reasonable and diligent steps to bring itself back into compliance with this Contract and to comply as soon as possible under the circumstances without unduly endangering the health, safety, and integrity of the Party’s employees or … of the public, public property, or private property.

So, if ACS wants to keep the contract alive, it needs to do some serious catch-up. Replace all the damaged equipment, get it running again, then get back to doing the stuff it was going to do. And until it got back to that point, it wasn’t going to be seeing any more money.

But MTA’s situation wasn’t much better. It had paid for 75% of a system, only to see it reduced to a great deal less, which meant it wouldn’t have a complete system for a long, long time. Heck, by that time, the technology would be obsolete.

Normally, in a situation like this, the parties would compromise. But, again, the flood came at an awkward time.7 It was not economical for ACS to continue work under these conditions, and it wasn’t economical for MTA to pay ACS enough to make it economical for ACS. Meanwhile, MTA’s stakeholders—i.e., taxpayers and riders—were wondering where all the promised whizz-bang technology was. The result was that ACS continued to work on the project for a while, as the parties negotiated—then MTA abruptly terminated the contracts and kicked ACS’s employees out.

Rash: Acting Without Due Consideration or Thought

In hindsight, this might have been rash. You see, MTA was still using the undamaged parts of the system ACS built and wasn’t really in a position to stop using it. And MTA needed the system software to do so. In terminating the contracts, the MTA also terminated the software license.8 And MTA didn’t have a substitute system ready to go. In fact, it didn’t have one even remotely ready to go.

A license to “use” software is really a copyright license to make reproductions of software. For software to work, it must be copied into a computer’s memory, and courts have held (and Congress probably intended) that doing so infringed the copyright in the software. When the software is enterprise-level (i.e., it runs an entire system), and that system is critical to a company’s mission, you can appreciate how much leverage this gives the software publisher. If your license gets yanked, your business gets yanked.

ACS sued. Twice. If MTA was no longer licensed to use the software, it was an infringer. It had no express license because it had foolishly terminated it. It was now facing two lawsuits from ACS: one in state court for breach of the contracts and one in federal court for copyright infringement.9 What to do?

Would You Like Some Implied License to Go with Your Express License?

MTA hit upon a solution that doesn’t make that much sense to me, but the judge is going along with for the time being. MTA argued that, while it might have voluntarily terminated the license, it had an implied license to continue using the software during a “transition period,” until it could get replacement software up and running.

Implied licenses do arise with some frequency in the software context, but not like this. Usually what happens is that the user pays a developer for to create the software but fails to obtain the copyright to the software. Most people don’t realize that the copyright such a case would remain with the developer, even though the user “paid” for it. If a dispute arises later, the developer might try to use this oversight against the user: “Ha! I still own the copyright, and so you’re an infringer! Maybe you should pay me extra!” Courts see this as manifestly unjust, so they conclude that, although the user didn’t get the copyright, the user obviously paid money for something. And that something is a right to use the software—i.e., a license—or else the whole deal would be meaningless.

But that’s not what happened here. In this case, the parties entered into lengthy, complex contracts. Under the terms of those contracts, there was no “transition period” if the contract terminated10 And, yet, the court went along. Why?

When Quinn the Lawyer Gets Here, Everyone Will Jump for Joy

The court was persuaded by the 1998 decision out of the Eastern District of Michigan, Quinn v. City of Detroit. In that case, a lawyer, Quinn, working for Detroit’s legal department created a database program on his own time, and installed it on Detroit’s computers, without telling anyone. The other lawyers loved it and used it heavily. Detroit began to think it owned the program, which bothered Quinn. Because everyone involved were lawyers but otherwise ignorant about copyright law, a dispute arose which erupted in a Very Bad Way. Quinn kept demanding that the city pay him a license fee, and the city kept threatening to fire him for insubordination when he tried to re-assert control over the software. Eventually, the city hired a software consultant to develop its own version of the program. That done, the city transferred the data from Quinn’s program to the new program.

The court held that, by installing the database program on the city computers himself, then letting other lawyers use the program, Quinn gave the city an implied license to use the software. That license lasted at least long enough for the city to transfer the data to the new program.

Although the court didn’t quite put it this way, the court was concerned that Quinn had given himself too much leverage. The city didn’t ask him to install his program, but it had come to rely on it. In fact, the law department wouldn’t function very well if it were suddenly turned off. It was fundamentally unfair for Quinn to hold that kind of power over the Detroit’s law department. At a minimum, he had to give Detroit an opportunity to transition to another program.11

Transition Lost in the Transmission (TVC One Five)

The court here read Quinn rather differently. It read Quinn to stand for the proposition that a licensee always gets a transition period after a software license terminated, so long as it is reasonable. This doesn’t make sense for a few reasons. First, it misses the fairness angle in *Quinn*: the developer shouldn’t be rewarded for thrusting his own software on the user, then threatening to pull the software when the user has become reliant on the software. That’s not how business should be done. Second, implied licenses arise from the parties’ intent, as expressed by their words and conduct. Here, the intent is clear because it was set out in contracts. And that intent is: termination means the end. Otherwise, why have written contracts?12

Still, the court doesn’t foresee a great result for MTA. It questioned whether two years is a “reasonable” time period, though it decided that a jury should determine that (reasonableness being a class jury question). If ACS somehow ends up losing, I’d expect the Sixth Circuit to reverse.

Oh, the other case? MTA won that one, which means that it didn’t breach the main agreement. That doesn’t help as much as you might expect because the termination provision doesn’t care why MTA terminated the contracts. Once the contract terminated, for whatever reason, the license terminated.

The Least Bad Result

And, yet, MTA is still looking at paying some damages for copyright infringement. I earnestly hope those damages will be small relative to the amounts paid under the contract. All ACS is really entitled to is a reasonable royalty. Under the main contract, after ACS completed its work, MTA was still to pay ACS about $100,000 or so a year to “maintain” the software. Since maintenance includes some work by ACS, the royalty would have to be less than the maintenance fee, and perhaps a lot less. Since it apparently has been two years since the license was terminated, I’d say we should be looking at about $100,000 in damages, plus-or-minus $50,000 depending on whose expert is better. All things considered, that’s actually not a bad result for MTA.

Could MTA have completely avoided all this? I don’t think it was ever going to avoid a lawsuit. It didn’t have to terminate the contracts, but the alternative wasn’t great either. If it felt ACS was in material breach (i.e., a breach that goes to the heart of the contract), which is what a jury has already, it could just have suspended its performance, i.e., stopped paying13 and stopped providing facilities for ACS’s employees. ACS probably would’ve sued anyway—with the same result, presumably—but at least MTA wouldn’t have terminated the software license.

Once Every 1000 Years

The only thing that could have prevented this lawsuit is some spectacular contract drafting. On ACS’s side14, a more flexible force majeure provision that made MTA partially responsible for damaged equipment and lost time. On MTA’s side, an option to license the software separately from the main contract if ACS ever becomes unable or unwilling to “maintain” the software. But then, that flood was (we’re told) a once-in–1000-years event.

Thanks for reading!