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Time Systems International Co., Inc. v. Datamatics Management Services, Inc.

A-6225-07T1 (N.J. Super. App. Div. 2009) (Unpublished)

CONTRACTS; INTERPRETATION — Where terms in a contract such as one party’s “clients” or “customers” are not defined, the Court may look at how the parties actually utilize those terms in their day-to-day dealings and also look at the parties’ intentions when entering into the contract in the first place.

A software distributor entered into a series of agreements with the developer and licensor of a software program. The developer agreed that it would not sell the program to the distributor’s clients so long as such customers were not also existing customers of the developer. The distributor then sold a software system to the one of its proprietary customers for use at one of its New Jersey plants. The developer subsequently sold its software system to affiliates of the distributor’s New Jersey customer at locations throughout the country. The distributor sued the developer. All claims were settled except for the distributor’s claims that the developer had breached the distribution agreements and tortiously interfered with its prospective economic advantage by selling the software to companies affiliated with its proprietary customer.

The Chancery Court found that the developer was in breach of contract, holding that when the distributor sold the software to its client for use at an affiliate’s plant, all companies affiliated with the client became the distributor’s customers and the developer was barred from selling to any of these entities. It also determined that the developer had interfered with the distributor’s efforts to obtain economic benefits from its relationship with its customer and that such actions were intentional, willful, and without justification or excuse. It further found that the developer’s breach of the agreements and its tortious interference with the distributor’s prospective economic advantage caused the distributor to lose sales that it would have otherwise made as the only available channel for the purchase of the software by the affiliates of this customer. Lastly, it found that had the developer not sold the software to the affiliates, it was reasonably probable that the distributor would have received the economic benefit of those sales.

The software developer appealed, and the Appellate Division reversed. First, the Court was convinced that the evidence presented to the lower court did not support a finding that the distributor had a reasonable expectation of prospective economic advantage derived from future sales of the software to the client’s affiliates. It its judgment, the contracts did not give rise to any such expectation. Thus, it dismissed the distributor’s claim of tortious interference with prospective economic advantage. It noted that the agreements precluded the software developer from selling the software or its related services to any of the distributor’s “clients” or “customers” for specified periods of time. These terms, however, were not defined in the agreements. It also held that the record did not support the lower court’s assumption that all companies affiliated with the client were the distributor’s “clients” or “customers.” The Court held that the fact that the distributor made virtually no effort to sell the software to any facilities of its client other than at the New Jersey location demonstrated that the distributor viewed only the New Jersey plant as its “client” or “customer” and that the limitations in the contract on the software developer’s sales were intended to protect the distributor’s contact with the client at the New Jersey location only. Further, the Court ruled that it was unreasonable to conclude that if the distributor successfully installed the system in the New Jersey plant, the client would be inclined to make future purchases of the system from them, especially in light of the fact that the distributor lack of effort to sell the system to the affiliates elsewhere.

At trial, the distributor acknowledged that its sales efforts were focused on the New York metropolitan area. It also conceded that no one from the client’s office ever told him that it would purchase the software for its other facilities. The distributor’s representative admitted that the New Jersey facility was not a “pilot program” for future sales to the company at other locations. Finally, the Court noted that the distributor did not present testimony from anyone associated with the client to show that it had a reasonable expectation of future sales of the system to the client’s affiliates. Accordingly, the Court concluded that the distributor failed to establish that it had a reasonable expectation of additional sales of the system to the client or its affiliates. Second, the Court agreed with the developer that the lower court erred by finding that the developer breached its contract and in awarding damages. The Court was convinced that, even if the contracts were interpreted to preclude the software developer from making sales to the affiliates of the distributor’s client, the distributor did not present sufficient evidence to show that it sustained damages as a result of such sales. It held that the record indicated that the affiliates purchased the software because of the software developer’s marketing efforts. Further, it found that, the affiliates had numerous options for this type of software. Moreover, it believed that there was insufficient evidence for the lower court’s finding that the damages claimed here were within the contemplation of the parties when they entered into the distribution agreements. It noted that the evidence did not support an inference that the parties understood that the developer would be obligated to compensate the distributor for selling its products to the client where, as here, the distributor failed to prove that the client would have purchased the software from the distributor if it could not purchase the system directly from the software developer. Accordingly, even if it assumed that the developer breached the contracts, the Court believed that the damages awarded for lost profits by the lower court were not the reasonably certain consequence of the breach.

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