Adjustrite Systems, Inc. v. GAB Business Services, Inc.
| Decision Date | 29 May 1998 |
| Docket Number | No. 96-9715,No. 334,D,334,96-9715 |
| Citation | 145 F.3d 543 |
| Parties | ADJUSTRITE SYSTEMS, INC., Stuart J. Orr, and Lu Elliott, Plaintiffs-Appellants, v. GAB BUSINESS SERVICES, INC. and Intermodal Technical Systems, Inc., Defendants-Appellees. ocket |
| Court | U.S. Court of Appeals — Second Circuit |
Peter K. Ledwith, White, Quinlan, Staley & Ledwith, Garden City, NY, for Plaintiffs-Appellants.
Patrick W. Brophy, McMahon, Martine & Gallagher, William D. Gallagher, of counsel, New York, NY, for Defendants-Appellees.
Before: KEARSE and CABRANES, Circuit Judges, and CHIN, District Judge. *
In this case, the parties agreed to the transfer of some $1 million in assets and signed an informal two-page document to memorialize their agreement. The two-page document, however, provided for the execution of a "sales agreement contract" as well as other agreements. These additional agreements were never executed.
The issue thus presented is whether, by signing the two-page document, the parties entered into a binding contract or whether they merely signed an unenforceable agreement to agree. The district court held that the parties' preliminary agreement was an unenforceable agreement to agree and granted summary judgment in favor of defendants-appellees dismissing the complaint. We affirm.
The following facts are not in dispute. Plaintiffs-appellants Adjustrite Systems, Inc. ("Adjustrite"), Stuart J. Orr, and Lu Elliott (the "plaintiffs") are the developers of a computer software program for use by insurance companies and others in assessing the cost of repairs to damaged automobiles. The program relied on a database provided to Adjustrite by Motors Publishing Co. ("Motors") pursuant to a licensing agreement dated January 27, 1992.
Some three months after granting the license to Adjustrite, Motors entered into a licensing agreement with one of Adjustrite's competitors, CCC, for the use of the database. The CCC license agreement contained a restrictive covenant that limited Motors' ability to grant new licenses. Because the Adjustrite license preceded the CCC license agreement, however, Adjustrite retained full rights under its license agreement. The Adjustrite-Motors license was a year-to-year license and it was renewed in 1993 and 1994. According to Adjustrite, Motors represented that Adjustrite's license would be renewed as long as Adjustrite did not breach any of its obligations under the license agreement.
Defendants-appellees GAB Business Services, Inc. ("GAB") and its wholly-owned subsidiary, Intermodal Technical Systems, Inc. ("ITS"), purchased the computer program from Adjustrite and were pleased with it. In April 1994, GAB and ITS approached Adjustrite to discuss the possibility of a merger or acquisition. Negotiations ensued over the next few months, during the course of which GAB and ITS expressed their concern that Motors might not continue to renew Adjustrite's license because of the CCC license. Eventually, GAB and ITS asked Adjustrite to seek a long-term extension of its license agreement with Motors. They also inquired as to whether Adjustrite's license could be assigned to them directly.
On November 11, 1994, after further negotiations but before the issue of an extension of the Adjustrite-Motors license agreement could be resolved, ITS sent Adjustrite a two-page proposal, which was signed by its president and chief executive officer and which read in pertinent part as follows:
PROPOSAL FOR ASSET PURCHASE FROM ADJUSTRITE SYSTEMS, INC.
GAB desires to purchase certain assets of Adjustrite Systems, Inc., namely proprietary software for adjusting auto physical damage; the license to access the Motors Link Data Base; existing system sales contracts; the continuing professional services of Mr. Stu Orr and Mr. Lu Elliott; and full use of the Adjustrite name. No stock purchase will occur.
In consideration for the above assets and other considerations, GAB offers the following:
1. Nine Hundred Thousand Dollars ($900,000) cash with an immediate payment of Two Hundred Thousand Dollars ($200,000) based upon acceptance of this offer and a mutually signed letter of intent.
2. Seven Hundred Thousand Dollars ($700,000) will be paid upon the execution of a sales agreement contract.
3. Staff position contracts will be generated upon the execution of the sales agreement, which will provide five (5) years of employment for Mr. Stu Orr and Mr. Lu Elliott, said contracts to extend to December 31, 1999....
The proposal was signed by E. Matthew Marks, as "President and CEO" of ITS, under the words: "Offer made this 11th day of November, 1994." At some point, the reference in paragraph 1 to "$900,000" was changed by hand to "$950,000," with the change initialled by Orr and Marks. Orr signed for Adjustrite under the words "Accepted By." 1 The Agreement was not signed by Orr individually nor was it signed by Elliott at all. Shortly thereafter, Orr and Elliott began working directly for ITS and GAB.
Although the Agreement called for the execution of a letter of intent, a sales agreement, and two employment contracts, no additional documents were ever executed. Drafts of the sales agreement and two employment contracts were prepared but never finalized or signed. The draft sales agreement, which was entitled "Acquisition Agreement," contained provisions not contained in the Agreement. 2 For example, the draft sales agreement provided for a schedule of all "tangible assets" to be transferred as well as a schedule of all of Orr's and Adjustrite's "rights and interests in the copyrights, software, and tradenames" to be transferred. It provided for a closing date, a bill of sale, assignments, opinion letters, and other documentation. And it contained numerous representations and warranties as well as confidentiality and indemnification provisions. The draft employment contracts also contained provisions not covered in the Agreement, including: termination provisions; a limit on the total incentive compensation to be paid to Orr during the term of the contract; descriptions of the employee's duties and responsibilities; non-competition provisions; and proprietary information and confidentiality provisions.
In the weeks following execution of the Agreement, ITS and GAB again raised concerns about the Adjustrite-Motors license agreement and pressed the issue of whether GAB could enter into a licensing arrangement with Motors directly. Eventually, GAB and ITS asked Motors for a modification of the Adjustrite license agreement. Motors refused to consider any amendment, however, and on February 1, 1995 Adjustrite's license agreement expired and was not renewed by Motors.
In April 1995, GAB and ITS advised Adjustrite, Orr, and Elliott that they were withdrawing from the transaction. At that point, Orr and Elliott were fired.
Plaintiffs commenced this diversity action below against defendants on February 5, 1996. The complaint asserted three causes of action for damages for breach of contract, one on behalf of each of the three plaintiffs. In substance, the complaint alleged that the Agreement constituted a contract by which defendants were bound to purchase the assets of Adjustrite for $950,000 and to employ Orr and Elliott for five years each. The complaint alleged further that defendants had breached the Agreement. Defendants Defendants moved for summary judgment, on two grounds. First, they argued that the Agreement was unenforceable as a matter of law because it did not evidence an intent by the parties to be bound. Second, they argued as a factual matter that it was undisputed that Adjustrite was unable to perform its part of the bargain because the "most material part" of the consideration to be transferred to defendants--the Adjustrite-Motors license--had lapsed.
asserted two counterclaims against plaintiffs, for fraud and negligence.
Ruling from the bench, the district court granted the motion on the basis of defendants' first argument, not reaching the second argument. With respect to the first argument, Judge Brieant made the following observations:
[T]here is no question in my mind that when Mr. Marks signed [the Agreement] he thought he had a deal, that he wrote to his principals and told them so, and later, for reasons of their own, they became disenchanted with the idea that they bought these assets and they wished to seek through their lawyers a way to exit from their responsibilities....
. . . . .
... [But], regardless of what the [parties to the contract] think, if the contract is not adequate to satisfy the Statute of Frauds or if the contract is a mere agreement to agree, then it's not a contract no matter what the participant businessmen may have thought at the time.
Looking only at the four corners of the Agreement, the district court held that it was not a binding contract, but rather a mere agreement to agree. The court noted that the Agreement made specific reference to several additional agreements required for consummation of the deal, that these agreements had never been executed, and that many material terms had been left open. In light of these facts, the court concluded that despite the parties' subjective understanding that they had a contract, the Agreement did not evidence--objectively--an intent to be bound until all the parties' preliminary negotiations had been memorialized in a set of formal contracts. Because this set of formal contracts was never executed, the district court granted defendants' motion for summary judgment and dismissed the complaint. 3
This appeal followed.
In reviewing a district court's decision to grant summary judgment, our initial task is to determine whether the court below properly held that there were no genuine issues of material fact for trial. See Motor Vehicle Mfrs. Ass'n v. New York...
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