Court: District Court, D. Massachusetts; May 3, 2013; Federal District Court
Plaintiff Christopher Rottner, representing a proposed class, alleges that AVG Technologies USA Inc., AVG Technologies CZ, S.R.O., and Auslogics Software Pty Ltd. misrepresented the effectiveness of their AVG PC TuneUp software, leading consumers to purchase a product that failed to perform as advertised. Rottner claims that after experiencing performance issues with his computer, he was drawn to a free trial of PC TuneUp, which promised various enhancements, including improved speed and error resolution. Following the trial, he purchased the full version, but his computer continued to exhibit problems despite following the software's recommendations. After contacting AVG for assistance, an update exacerbated the issues, ultimately causing his computer to freeze and necessitating a complete reformat of his hard drive, resulting in the loss of personal files. AVG US and AVG CZ have moved to dismiss Rottner's Second Amended Complaint under Federal Rule of Civil Procedure 12(b)(6), arguing that he has failed to state a claim upon which relief can be granted.
Rottner claims that the defendants misrepresented the capabilities of PC TuneUp to persuade consumers to buy the software. A computer forensics expert hired by Rottner found that the trial version of PC TuneUp falsely indicated numerous issues on a tested PC, exaggerated error counts, labeled all problems as severe, and suggested that only the full version could effectively resolve them. Rottner brings six legal claims against the AVG defendants: breach of express warranty, breach of implied warranty of merchantability, fraudulent inducement, breach of contract, breach of the implied covenant of good faith and fair dealing, and unjust enrichment. The AVG defendants seek to dismiss these claims under Rule 12(b)(6) for failing to state a claim. To withstand such a motion, allegations must present a “plausible entitlement to relief,” moving beyond mere conclusory statements.
A key legal issue is which state's law governs the case, with defendants arguing for Delaware law based on a choice-of-law clause in the End User License Agreement (EULA), while Rottner contends that this choice contradicts Massachusetts public policy. Federal courts, in diversity actions, apply the forum state's choice-of-law rules, which in this case is Massachusetts. Although Massachusetts generally respects parties' choices, it may disregard such provisions if they conflict with a fundamental state policy where Massachusetts has a significant interest. Rottner argues that the EULA's disclaimer of implied warranties undermines Massachusetts's consumer protection laws, which prohibit sellers from disclaiming these warranties in consumer contracts.
Delaware law allows for the disclaimer of implied warranties, provided the language explicitly mentions "merchantability" and is conspicuous if in writing. An effective disclaimer may simply state that "There are no warranties which extend beyond the description on the face hereof." Rottner argues that applying Delaware law contradicts Massachusetts public policy, noting Massachusetts' greater interest due to AVG US's headquarters. However, this argument misinterprets the public policy exception, which compares the law of the chosen state to the law of the applicable state absent a contractual choice, which defendants assert is California.
Massachusetts utilizes a "functional" choice-of-law analysis per the Restatement (Second) of Conflict of Laws, considering the state with the most significant relationship to the transaction and parties. Relevant factors include the places of contracting, negotiation, performance, and the parties' domiciles. This analysis indicates that Massachusetts would apply California law, as Rottner, a California resident, purchased the license in California, and the contract was formed with AVG CZ, a Czech entity, not AVG US. Rottner has not connected AVG US's actions to his purchase decision.
Rottner's expectation of a U.S.-based website does not impact the legal analysis, as the End User License Agreement (EULA) identifies AVG CZ as the contractual partner. While California may have a stronger interest than Delaware regarding Rottner’s claims about PC TuneUp, both states' laws align on the validity of disclaimers for implied warranties. California law allows for the exclusion of implied warranties under similar conditions to Delaware law, requiring conspicuous language that explicitly mentions merchantability or fitness. Massachusetts choice-of-law principles affirm that Delaware law applies in this case, as it does not conflict with fundamental policies of Massachusetts.
AVG US seeks dismissal of Rottner's claims because it neither sold PC TuneUp nor was a party to the EULA, leading to the conclusion that all contract-based claims against AVG US fail. The EULA's terms fully define AVG CZ’s relationship with Rottner, rendering the unjust enrichment claim invalid as well. The fraudulent inducement claim also fails, as the allegedly misleading statements originated from AVG CZ, not AVG US.
Rottner argues that AVG US reviewed marketing materials and was involved in the 'Privacy Policy' and licensing agreements, asserting that AVG US and AVG CZ should be treated as alter egos due to shared ownership and management. However, these claims lack merit. Rottner fails to demonstrate a direct link between AVG US’s materials review and his purchase decision. The alter ego theory, under Delaware law, requires an exceptional case to disregard corporate separateness, which Rottner does not establish. Thus, AVG US maintains its corporate shield, and the claims against it do not succeed.
A court may consider several specific factors when deciding whether to disregard the corporate form, including: the adequacy of the company's capitalization, its solvency, adherence to corporate formalities, potential siphoning of funds by the dominant shareholder, and whether the company functions merely as a facade for the dominant shareholder. In the case at hand, Rottner failed to substantiate his claim that AVG US operated as a facade for AVG CZ or that basic corporate formalities were neglected. Furthermore, Rottner did not demonstrate any fraud, injustice, or inequity related to the corporate structure that is distinct from the allegations in his complaint, such as breach of contract or patent infringement. The court noted that any perceived inequity regarding the difficulty of collecting a judgment against foreign corporations is not sufficient for piercing the corporate veil. Consequently, claims against AVG US are to be dismissed.
Regarding claims against AVG CZ, the defendants argued that Rottner's claims for breach of express and implied warranties under Article 2 of the Uniform Commercial Code (UCC) were not applicable, as software is not considered a "good" under Delaware law. They referenced two cases: Neilson, which held that a lease including software could be classified as a sale of goods, and Wharton, which determined that customized software was a service, not goods. Rottner argued that the sale of a software package in his case differs from those involving services or intellectual property. While Delaware courts have not definitively ruled on this distinction, many courts across the nation have treated the sale of software packages as sales of goods for UCC purposes, supported by various case law and academic commentary.
Rottner's position is favored in the legal dispute regarding software classification under the Uniform Commercial Code (UCC). Software can be categorized as either goods or services based on specific case circumstances. Delaware applies a "predominance" test to classify contracts accordingly. The relevant case, Neilson, involved a contract for both hardware and software, making it distinguishable from Rottner's situation. Unlike Wharton, which involved custom software tailored to a client’s needs, PC TuneUp is identified as standardized software available to the general public, resembling the sale of tangible goods.
Rottner's ability to download PC TuneUp after a one-time payment signifies that its sale aligns more with goods than services, thus UCC warranty provisions apply. However, defendants argue Rottner has not substantiated a breach of express warranties, as he does not claim defects in the delivery medium and fails to identify applicable specifications for PC TuneUp's performance. Additionally, Rottner did not provide adequate pre-suit notice of any alleged defects, as required by Delaware law.
Despite Rottner's acknowledgment that the delivery medium posed no issues, he contends the EULA’s specification language is vague, suggesting that advertising claims should serve as the applicable standards. This perspective aligns with Delaware's support for a broad interpretation of express warranties. Courts typically uphold that a seller’s descriptive claims create warranties that cannot be negated by general disclaimers. The precedent in Bell Sports reinforces this notion, indicating that promotional claims regarding product functionality could constitute separate express warranties, irrespective of disclaimers within the EULA.
The court addresses several key issues regarding Rottner's claims against AVG related to the PC TuneUp software. Rottner alleges reliance on express warranties made by the software, which contradict the End User License Agreement (EULA) that disavows prior representations. The court finds that the issue of whether Rottner's notice to AVG regarding software defects was reasonable is a factual question inappropriate for resolution at the motion to dismiss stage. Rottner contacted AVG about the software's nonfunctionality nine months post-purchase, and whether this notice was timely is left for later consideration.
While the EULA effectively disclaims implied warranties of merchantability and fitness, as it meets Delaware law requirements for conspicuous disclaimers, Rottner's claims for breach of implied warranty will be dismissed. Furthermore, concerning Rottner's claim of fraudulent inducement, the court determines he has met the heightened pleading requirements of Rule 9(b). He sufficiently identifies specific misrepresentations from AVG's website regarding the software’s capabilities and supports his claims with expert testimony indicating the software's ineffectiveness. The court concludes that Rottner adequately alleges AVG's knowledge of the false marketing claims and intent to induce purchases, allowing this fraud claim to proceed.
Overall, AVG US’s motion to dismiss is granted, while AVG CZ’s motion is granted regarding the breach of implied warranties but denied for other counts. Additionally, Rottner has replaced Dale Theis as the lead plaintiff, and a separate unjust enrichment claim against Auslogics is noted.
The EULA establishes that disputes are to be resolved in Delaware courts, although the parties have waived this jurisdictional provision while retaining the right to contest other EULA provisions. Rottner's selection of Massachusetts as a litigation forum does not impact the choice-of-law analysis, as forum selection could lead to improper forum shopping. Additionally, Rottner has failed to demonstrate any advantage AVG US gained from his purchase of PC TuneUp, which is essential for an unjust enrichment claim. The relevance of the Privacy Policy to Rottner's claims remains unclear. With Delaware law confirmed as applicable, Massachusetts law claims will be treated as equivalent Delaware claims. AVG CZ references a case indicating that common law, rather than the UCC, is applicable to software licenses, noting that the current case does not involve intellectual property transfer. The EULA explicitly disclaims warranties beyond those stated and includes an integration clause negating prior representations. Rottner has adequately alleged breach of contract and implied covenant claims, making his unjust enrichment claim unnecessary. He contends AVG CZ should have been aware of PC TuneUp's defects due to its industry experience, and he asserts that some claims are scientifically implausible. AVG CZ contends that many allegations of fraudulent intent pertain to software design attributed to Auslogics, thus distancing itself from those claims. However, AVG CZ acknowledged during oral arguments that any intermediary seller bears a duty to avoid making false representations about its products.
