Peoplesoft U.S.A., Inc. v. Softeck, Inc.

Citations: 227 F. Supp. 2d 1116; 2002 U.S. Dist. LEXIS 21381; 2002 WL 31424588Docket: C-01-2817 PJH

Court: District Court, N.D. California; September 19, 2002; Federal District Court

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Plaintiff PeopleSoft U.S.A. Inc. filed a breach of contract suit against defendant Softek, Inc. after Softek returned software that had been shipped under a Software License and Services Agreement due to its customer, Policia de Puerto Rico, deciding not to use it. The agreement stipulated that Softek would pay noncancellable and nonrefundable fees, including a $150,000 license fee. Softek acknowledged a partial payment of $87,931.63 for training expenses but contested the license fee. PeopleSoft sought summary judgment, asserting no disputed facts regarding the existence of the contract, its performance, Softek's non-performance, and the resulting damages. Softek raised 17 affirmative defenses, including frustration of purpose and failure of consideration, arguing that these defenses presented triable issues. The court, led by Judge Hamilton, determined that summary judgment was warranted as the facts were undisputed, and there were no genuine issues concerning material facts, allowing judgment as a matter of law under Federal Rule of Civil Procedure 56.

The court must view evidence favorably towards the nonmoving party and cannot weigh it. A party seeking summary judgment must initially demonstrate the basis for the motion and identify evidence showing no genuine issue of material fact exists. If the moving party will bear the burden of proof at trial, it must affirmatively show that no reasonable fact-finder could rule against it. Conversely, if the nonmoving party will bear that burden, the moving party can succeed by highlighting the absence of evidence supporting the nonmoving party's case. If the moving party meets its burden, the opposing party must present specific facts indicating a genuine issue for trial.

In the case at hand, PeopleSoft seeks summary judgment on its breach of contract claim, asserting established elements of the contract, its own performance, Softek's nonperformance, and incurred damages. Softek acknowledges the existence of the contract and its own nonperformance but argues that disputed material facts regarding its affirmative defenses prevent summary judgment. Specifically, Softek contends it should be released from its obligation to pay because its sublicensee, Policia, chose not to proceed with the software purchase.

Softek claims that the contract's purpose was for it to obtain software for Policia, and since Policia's decision not to purchase frustrated this purpose, performance became impracticable. Although payment was still technically possible, Softek argues that the value of performance was lost due to the changed circumstances. Softek compares this situation to cases where unforeseen events, such as a fire, hinder contractual fulfillment. However, PeopleSoft counters that the frustration of purpose defense is unavailable since Softek assumed the risk of Policia's nonperformance and its inaction to enforce remedies contributed to the current predicament.

Payment obligations in the contract are noncancellable and nonrefundable, with specific exceptions for tax obligations. Neither party is liable for failures due to uncontrollable circumstances, and Softek is responsible for payments to PeopleSoft, including on behalf of Policia de Puerto Rico. PeopleSoft argues that Softek agreed to pay for software and services regardless of external events, noting Softek's decision not to enforce its agreement with Policia to maintain a business relationship. 

The doctrines of impossibility and frustration of purpose, though related, differ; frustration does not equate to impossibility. Performance is not impossible if one party has fulfilled their obligations and the other merely needs to pay. Softek claims performance is impracticable due to frustration of purpose, which requires showing that an unanticipated event destroyed the contract's value. 

To establish commercial frustration, three criteria must be met: 1) both parties must recognize that the contract's basic purpose has been undermined; 2) the frustrating event must have been unforeseeable; and 3) the value of counterperformance must be substantially diminished. The contract's purpose was to license software to Softek for Policia's use, not for Softek's own benefit.

PeopleSoft argues that Softek assumed the risk of Policia's potential nonpayment for software, as evidenced by the contract's terms stating that payment obligations are noncancellable and nonrefundable, and that Softek guaranteed payment on behalf of itself and Policia. Softek counters that it could not have foreseen Policia's failure to implement the software or the Puerto Rican Treasury Department's subsequent decision affecting Policia’s use of the software. The court concludes that the contract language clearly assigns the risk of Policia's noncooperation to Softek, preventing Softek from claiming defenses like frustration or impracticability.

On the issue of unconscionability, PeopleSoft asserts that Softek cannot prove the contract is unconscionable, which requires both substantive and procedural components. The procedural aspect examines factors of oppression and surprise, while the substantive aspect considers whether the risk allocation is unreasonable. The court finds no evidence of either component, noting that both parties are sophisticated entities that negotiated the contract, and the risk allocation, although one-sided, is not unreasonable.

Regarding mitigation of damages, Softek claims a triable issue exists about whether PeopleSoft mitigated its damages by selling the unopened software. However, the court determines that PeopleSoft is not required to mitigate damages in this case, as it seeks to enforce a contractual payment term. Remaining defenses raised by Softek either fall under the frustration/impracticability claim or lack sufficient support. Ultimately, the court grants PeopleSoft's motion for summary judgment, concluding the case and any pending motions.