Technology Contracting for Transit Projects (2017)

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24 For example, “[p]roviders’ exclusion of liability, partic- ularly for outages and data loss, [are] generally the biggest issue for users. Providers try to exclude liabil- ity altogether, or restrict liability as much as possible, because they provide commoditized services.”323 Although unlimited liability for smaller providers presumably is unrealistic, even providers willing to agree to unlimited liability may not be sufficiently creditworthy to absorb large losses.324 Users with bargaining power may be able to obtain “unlimited liability for defined types of breach or loss, notably breach of confidentiality, privacy or data protection laws, or breach of regulatory or secu- rity requirements such as breaches giving rise to regulatory fines.”325 The more common approach is to place a cap on liability, “sometimes with different caps for different types of losses, and often limited by reference to amounts paid by the user in total or over a period like a year, such as 100% or 125% of six months’ fees.”326 Nevertheless, some users in the United States still refuse to contract with providers that attempt to limit or exclude liability.327 A CSP should agree to indemnify a transit agency if data are lost or destroyed because of a CSP’s breach of contract, negligence, data breach, and/or violation of applicable law.328 The definition of a material breach in an agreement should include a security breach.329 An agreement should define what is an actual or suspected data breach330 and specify when and how an agency will be informed of an actual or suspected data breach.331 Although CSPs may attempt to limit their liability,332 an agreement should authorize a transit agency to recover damages for a CSP’s breach of contract, negligence, data breach, and/or violation of applicable law.333 If a CSP agreement limits a CSP’s liability to “direct damages,” the term should be defined. A CSP may attempt to limit its damages to a multiple of the monthly payment for services under the agreement and impose a cap on its damages, neither of which may be acceptable to a transit agency.334 Because a contract may limit a CSP’s responsibil- ity to indemnify a transit agency solely to claims for infringement of a third party’s IP rights, it is recom- mended that a CSP contract stipulate that a transit agency will be indemnified for other claims, includ- ing “violations of law…gross negligence, theft, fraud or other intentional misconduct, and…property damage,” including a loss of data.335 VII. LIMITATIONS ON LIABILITY, INDEMNIFICATION, AND REPRESENTATIONS AND WARRANTIES A. Limitations on Liability Although liability issues usually concern a licen- sor’s liability, a transit agency as a licensee will want to limit its liability as well.336 There may be statu- tory remedies that should or should not be excluded by the parties’ technology agreement; however, state statutes, such as the UCC, replace common law only when that is the legislature’s clear intention.337 In any case, from a licensee’s perspective, an “agree- ment’s liability structure should reflect the entire relationship of the parties as well as all sums paid by the licensee to the licensor.”338 As would be expected, the courts have had to construe clauses in technology agreements that limit a party’s liability. In IHR Sec., LLC v. Innova- tive Bus. Software, Inc.,339 IHR Security, LLC (IHR) and Innovative Business Software, Inc. (IBS) entered into a data duplication agreement and a software license agreement. Because accounting software did not function as promised, IHR refused to pay IBS’s invoices under both agreements. After IBS brought an action for breach of the agreements, IHR asserted that its liability was capped at $5,000 because of a limitation of liability clause in the license agreement. A Texas appeals court affirmed a trial court’s decision that granted IBS’s motion 323 Hon, Millard, & Walden, supra note 289, at 94 (foot- notes omitted). 324 Id. at 96. 325 Id. at 94–95 (footnotes omitted). 326 Id. (footnotes omitted). 327 Id. at 94. 328 Foster, supra note 275, at 26. 329 Bloomberg, supra note 263, at 3. 330 Id. at 2. 331 Id. at 1. 332 Foster, supra note 275, at 26. 333 Id. 334 Bloomberg, supra note 263, at 2. 335 Id. at 2–3. 336 Classen 4th ed., supra note 195, at 100. 337 Johnson, supra note 173, at 573. 338 Id. at 98. See also, Matt Karlyn, Taking a Closer Look at the Limitation of Liability Clause, tecH target (Feb. 2007), http://searchcio.techtarget.com/magazineContent/Taking- a-Closer-Look-at-the-Limitation-of-Liability-Clause (last accessed Feb. 24, 2017); Matt Karlyn, How to Scope the Liability Clause in your Software License Agreement, comPuter weekLy (April 4, 2008), http://www.computer weekly.com/news/2240022055/How-to-scope-the-liability- clause-in-your-software-license-agreement (last accessed Feb. 24, 2017); and Evan Brown, Limitation of Liability Clause in Software License Agreement did not Excuse Customer from Paying Fees, http://blog.internetcases. com/2014/05/07/limitation-of-liability-clause-in-software- license-agreement-did-excuse-customer-from-paying-fees/ (last accessed Feb. 24, 2017). 339 441 S.W.3d 474 (Tex. App. 2014).

25 for summary judgment and awarded the company a judgment for over $52,000. The thirty-page license agreement concluded in paragraph 8.6 with a sentence stating: “NOTWITHSTANDING ANYTHING TO THE CONTRARY, THE TOTAL DOLLAR LIABILITY OF EITHER PARTY UNDER THIS AGREEMENT OR OTHERWISE SHALL BE LIMITED TO U.S. $5,000.”340 IHR argued that the sentence meant that “its liability under the entire license agreement, including its obligation to pay for the goods and services provided by IHR, is capped at a maximum of $5,000.”341 The court held, however, that the limitation did not purport to limit IHR’s liability in the event it breaches the License Agreement by refusing to pay for goods and services provided by IBS.… To construe Paragraph 8.6 in the manner asserted by IHR would render meaningless all of the other provisions regarding fees and payment by IHR for goods and services rendered by IBS.342 A New Jersey court narrowly construed a limita- tion on liability clause in Marbro, Inc. v. Borough of Tinton Falls.343 A third party defendant, Fellows, Read & Associates (FRA), sought to enforce a liabil- ity limitation in an engineering services contract against the Borough of Tinton Falls (Borough). A New Jersey court agreed that the courts in New Jersey traditionally have upheld contractual limita- tions of liability.344 Nevertheless, the court held that the clause did not shield FRA from all potential liability for professional negligence. The liability cap of $32,500 was a sum that equaled FRA’s total fee for services under the contract.345 The court held that FRA would still be concerned about the conse- quences if it committed a breach of its contractual obligations because the amount of the cap was not a “minimal” one.346 Thirty-seven agencies responding to the survey reported that they obtained the contractual clauses that they wanted in their technology agreements on limitations on liability.347 B. Indemnification An indemnification clause is needed to require a licensor to defend a transit agency and to indemnify and hold it harmless for claims except those that the parties agreed to exclude.348 As for a licensee’s indemnification of a licensor, an agreement should be clear that a licensor is not to be indemnified for its own negligence: “The licensor controls its own actions not the licensee[;] thus, the licensee cannot be expected to insure the actions of the licensor.”349 The courts have had to construe technology agree- ments’ provisions for indemnification.350 The case of Eurofins Pharma US Holdings v. BioAlliance Pharma SA351 illustrates the importance of a party’s full disclosure of all material facts before another party agrees to an indemnification clause or agree- ment. Eurofins Pharma US Holdings concerned a transfer agreement between Eurofins Pharma US Holdings (EPUSH) and Viralliance Inc. (VI) (collec- tively the Eurofins Group) and BioAlliance Pharma SA (BioAlliance) and Viralliance SAS (Viralliance; collectively the BioAlliance Group) to transfer IP from the BioAlliance Group to VI to commercialize IP in the U.S. market.352 The transfer agreement stated that the IP did not infringe the rights of any third party and that there was no fact that could have a material adverse effect either on the VI company or the IP that had not been disclosed previ- ously in writing by the BioAlliance Group.353 However, the record showed that Avenard, a director of VI and the former president and chief executive officer of BioAlliance, knew that Advanced Biological Laboratories (ABL) had alleged that BioAlliance had infringed two ABL patents.354 Under the transfer agreement, Eurofins Group had assumed the indemnity obligations to Specialty Labs that were formerly assumed by the BioAlliance Group. The Third Circuit held, first, that under applicable Delaware law, a director’s fiduciary duty includes a duty to disclose.355 Second, the court held 340 Id. at 478, 479. 341 Id. at 479. 342 Id. at 479–80. 343 297 N.J. Super. 411, 688 A.2d 159 (1996). 344 Id., 297 N.J. Super. at 417, 688 A.2d at 162 (citing Tessler and Son, Inc. v. Sonitrol Security Systems, 203 N.J. Super. 477, 497 A.2d 530 (N.J. App. 1985) and Mid- land Carpet Corp. v. Franklin Assoc. Properties, 90 N.J. Super. 42, 216 A.2d 231 (N.Y. App. 1966). 345 Id., 297 N.J. Super. at 418, 688 A.2d at 162. 346 Id. 347 See Appendix C, transit agencies’ responses to ques- tion 14(a). Four agencies said that they had been unable to secure the clauses that they wanted. Id. One agency did not respond to the question. Id. 348 See Classen 5th ed., supra note 257, at 89. 349 Id. at 93. 350 Five Star Electric Corp. v. Federal Ins. Co., Case No. 602781/07, 2014 N.Y. Misc. LEXIS 2147, at *1, 2 (N.Y Sup. Ct., N.Y. County, May 6, 2014) (denying motion to dismiss two sureties’ claim for implied indemnity arising out of an MTA contract), aff ’d in part, mod. in part, summary judg- ment denied, 2015 N.Y. App. Div. LEXIS 3241, at *1 (N.Y. App. Div., 1st Dep’t, Apr. 21, 2015). 351 623 F.3d 147 (3d Cir. 2010). 352 Id. at 151. 353 Id. at 152 (citation omitted). 354 Id. at 153. 355 Id. at 158.

26 that Avenard’s failure to disclose the alleged patent infringement claim serve[d] BioAlliance Group’s interest in avoiding its indem- nity obligations to Specialty Labs, because BioAlliance Group knew that ABL had told it (BioAlliance Group) that Specialty Labs’ use of the IP violated ABL’s patents. It follows that Avenard, the co-founder and chief operating officer of BioAlliance, could have derived personal benefit from shifting the indemnification responsibility from BioAl- liance Group to Eurofins Group.356 The Third Circuit reversed the district court’s ruling dismissing the breach of fiduciary duty claim against Avenard.357 Thirty-six transit agencies responding to the survey stated that they were able to include indem- nification clauses that they wanted in their tech- nology contracts.358 C. Representations and Warranties A licensor may be expected to provide various warranties, such as to protect a licensee for a licen- sor’s misrepresentation of or failure to disclose a material fact.359 Because a general warranty of func- tion, that is, that the software will “work” is not sufficient,360 a “licensee should insist that a licensor warrant that the software is fit for a particular purpose.”361 Moreover, because technology systems have become more interconnected to enable them to transfer or exchange data, a transit agency may insist that its agreement include a warranty that technology being acquired will interface with a tran- sit agency’s older and/or proprietary technology.362 Technology developers or vendors may include provisions, for example, in a supplementary contract document, on the reverse side of an invoice in small print, or in an accompanying file or document that precludes prior representations or warranties from being part of the parties’ agreement. As discussed in part IV.B.5, representations prior to contract forma- tion, if not actionable as contract claims, possibly may be actionable as tort or statutory claims. Transit agencies will want to be careful to preserve any pre- contractual representations and/or warranties that resulted in an agreement and/or that are part of an agreement. Transit agencies should be wary of any later invoices, amendments, or other contract docu- ments or files that attempt to exclude a developer’s or vendor’s representations or warranties. Neverthe- less, because of the economic loss doctrine, unless a transit agency’s tort or statutory claim comes within one of the exceptions discussed in part IV.B.5, the agency may be unable to bring or join tort or other claims for anything other than for breach of contract. The Digitech Computer, Inc. v. Trans-Care, Inc.363 case illustrates the importance of verifying that a final agreement contains the parties’ intended terms and conditions, including any representations and warranties that were part of the bargain. Digitech Computer, Inc. (Digitech) executed a software licens- ing agreement with Trans-Care, Inc. (Trans-Care). Although the initial proposal had included a require- ment for a 90-day satisfaction guarantee, Digitech did not include the guarantee in the agreement it sent to Trans-Care that the latter executed. When Digitech sued for breach of contract, Trans-Care counterclaimed for fraud on the basis that Digitech had misrepresented that the contract included a 90-day satisfaction guarantee.364 Nevertheless, applying Indiana law, the court held that Digitech had not agreed that Trans-Care had “an unqualified right to walk away after 90 days.”365 In Pinellas Suncoast Transit Auth. v. Mincom, Inc.,366 the Pinellas Suncoast Transit Authority (PSTA) entered into a contract with Mincom, Inc. (Mincom) for an integrated financial, administra- tive, transportation, and maintenance information system. PSTA brought claims against Mincom for breach of contract, breach of implied warranty, negli- gent misrepresentation, fraudulent inducement, and violation of the Florida Deceptive and Unfair Trade Practices Act. Although a federal court in Florida dismissed most of the claims, the court did not dismiss PSTA’s claim for breach of express warranty.367 Because PSTA’s allegation that Mincom failed to repair defective software was an issue of material fact, the court held that a dismissal of the breach of warranty claim would be inappropriate.368 In International Data Products Corp. v. United States,369 the Air Force terminated a contract for convenience with International Data Products Corp. (IDP) after IDP lost its status as a small entity under section 8(a) of the Small Business Act. The Federal Circuit held that the government’s termina- tion for convenience did not terminate IDP’s obliga- tions to provide warranty and upgrade services at no cost to the Air Force, because the services were 363 646 F.3d 413 (7th Cir. 2011). 364 Id. at 416. 365 Id. 366 2007 U.S. Dist. LEXIS 30018, at *1, 2 (M. D. Fl. 2007). 367 Id. at *8, 10, 15. 368 Id. at *10. 369 492 F.3d 1317 (Fed. Cir. 2007). 356 Id. at 159. 357 Id. 358 See Appendix C, transit agencies’ responses to ques- tion 14(b). Four agencies stated that they had not. Id. Two agencies did not respond to the question. Id. 359 Classen 5th ed., supra note 257, at 76. 360 Tollen, supra note 26, at 92. 361 Classen 5th ed., supra note 257, at 77. 362 APTA Report, supra note 1, at 1.