Associated Mgmt. Servs., Inc. v. Ruff

• Decision Date: 24 July 2018
• Docket Number: DA 17-0102
• Citation: 2018 MT 182,424 P.3d 571,392 Mont. 139
• Parties: ASSOCIATED MANAGEMENT SERVICES, INC., a Montana Corporation, Plaintiff, Appellee and Cross-Appellant, v. Daniel R. RUFF and Ruff Software, Inc., a Montana Corporation, Defendants and Appellants.
• Court: Montana Supreme Court

392 Mont. 139

424 P.3d 571

2018 MT 182

ASSOCIATED MANAGEMENT SERVICES, INC., a Montana Corporation, Plaintiff, Appellee and Cross-Appellant,

v.Daniel R. RUFF and Ruff Software, Inc., a Montana Corporation, Defendants and Appellants.

DA 17-0102

Supreme Court of Montana.

Submitted on Briefs: December 20, 2017

Decided: July 24, 2018

Rehearing Denied: September 5, 2018

For Appellants: Jessica T. Fehr, Adam Tunning, Moulton Bellingham PC, Billings, Montana

For Appellee: T. Thomas Singer, Axilon Law Group, PLLC, Billings, Montana

Justice Dirk Sandefur delivered the Opinion of the Court.

¶1 Associated Management Services, Inc. (AMS) and Daniel R. Ruff and Ruff Software, Inc. (collectively Ruff) litigated numerous claims and counterclaims in the Montana Thirteenth Judicial District Court, Yellowstone County, over the parties’ relative rights regarding the web-based payroll processing software, TimeTracker, developed by Ruff and licensed to AMS. Ultimately, the District Court granted summary judgment to Ruff, declaring the parties’ 2008 licensing agreement valid and enforceable and effectively ruling that AMS had no right to TimeTracker other than as provided under the terms of the licensing agreement. Conversely, the court granted summary judgment to AMS on Ruff’s counterclaims (breach of the licensing agreement, tortious interference with third-party relations, conversion, misappropriation of intellectual property, violation of the Montana Uniform Trade Secrets Act (MUTSA),¹ and unjust enrichment). Ruff appeals the District Court’s judgments denying its second motion to compel discovery related to its counterclaims, granting summary judgment to AMS on those counterclaims, and denying Ruff’s motion for attorney fees as the prevailing party on AMS’s claims. AMS cross-appeals the court’s judgments adjudicating the validity of the 2008 licensing agreement.² We affirm.

ISSUES

¶2 We address the following restated issues on appeal:

1. Did the District Court erroneously grant summary judgment in favor of Ruff that the 2008 TimeTracker licensing agreement was valid and enforceable and that AMS had no right to TimeTracker other than as provided by the agreement?

2. Did the District Court erroneously grant summary judgment in favor of AMS on Ruff’s counterclaims?

3. Did the District Court abuse its discretion in denying Ruff’s second motion to compel discovery?

4. Did the District Court abuse its discretion in denying Ruff’s motion for attorney fees as the prevailing party on AMS’s claims?

BACKGROUND

¶3 AMS is a Montana business corporation engaged in the business of providing payroll and related business services to the members and affiliates of Associated Employers (AE). AE is a non-profit association of large regional employers and the parent company of AMS. From 1993-2011, Diane Ruff was the managing executive of AMS.³ During Diane’s tenure, AMS employed her son, Daniel R. Ruff, as a Support Services Specialist under one-year employment contracts. In pertinent part, Daniel’s successive employment contracts expressly provided that all "materials prepared by Ruff as part of his employment with AMS," including all "files concerning Ruff’s activities as Support Services Specialist," would "belong to and remain property of AMS." Inter alia , Daniel’s contract-specified duties included "[m]anag[ing] or facilitat[ing] the information technology function for the AMS server and clients"; maintaining AMS’s client-based payroll system; "understand[ing] and review[ing] payroll software and processes to determine and implement efficiencies"; and "other responsibilities as assigned and required."

¶4 In 2006, in response to a client’s interest, AMS offered to develop an Internet-based payroll time-tracking program with financial support from the interested client. When the client declined, Daniel proposed to Diane that AMS unilaterally develop the proposed software but Diane declined due to cost. Daniel then informally offered to develop the software at his own expense on the understanding that he would own the end product. Diane authorized him to proceed. At his own expense, Daniel retained the help of a former AMS consultant and proceeded with the project. Ultimately named TimeTracker, the finished product was a web-based program that allowed AMS clients to collect, maintain, and process payroll-related information and to integrate the client payroll information with other AMS-owned payroll software. Daniel installed and hosted TimeTracker on a Ruff-owned server located at AMS. Daniel spent over $20,000 of his own money in the development of TimeTracker.

¶5 In early 2007, as the development of TimeTracker progressed, Diane, acting in her capacity as the chief executive officer of AMS, e-mailed AMS counsel, Tim Filz, and instructed that "Dan needs to have an LLC set up for a web-based program he is developing." In accordance with Diane’s instruction, Filz subsequently chartered Ruff Software, Inc., with Daniel as the sole principal. Aside from this initial informal agreement between Diane and Daniel, no other agreement existed between Ruff and AMS during the development of TimeTracker from 2007 into 2008. However, on June 1, 2008, in advance of AMS’s online deployment of TimeTracker for client use, AMS (through Diane) and Ruff Software, Inc. (through Daniel) executed a written software licensing agreement, which was drafted by Filz pursuant to Diane’s prior instruction and which:

(1) described TimeTracker as "certain software developed by Ruff" including "updates and future revisions ... regardless of the form ... or trade name under which the software is marketed";

(2) provided that "[a]ll such proprietary software programs and related material, with a proprietary notice in human- or machine-readable form, are proprietary and confidential";⁴

(3) authorized "AMS to use and ... sublicense the TimeTracker Software" exclusively to AE members;

(4) provided that "Ruff shall retain all rights" in TimeTracker "not granted herein" including the right to license TimeTracker to other parties;

(5) required AMS to pay Ruff 90% "of all fees collected from" AE members "for [the] use of" TimeTracker;

(6) provided that "[t]he term of this license shall be perpetual and shall survive the termination of Dan Ruff’s employment with AMS," and that Ruff had the right to market TimeTracker directly to AE members in the event that AMS "quit promoting" it or "terminated its arrangements with" AE members; and

(7) included an express integration clause and provision for the prevailing party to recover reasonable attorney fees, costs, and other related expenses in the event of a breach of the agreement.

Pursuant to the agreement, AMS made TimeTracker available to its clients from the Ruff-owned server at AMS over Internet access provided by AMS. AMS maintained the Ruff server as required by the agreement but, at its discretion, did so through Daniel as part of his employment duties during his continuing tenure at AMS.

¶6 In simplified terms, TimeTracker, as installed on the Ruff server for use by AMS sublicensees, consisted of a functional component and a database component. Essentially the brain of the TimeTracker program, the functional component performed and produced desired end-user processing and output of end-user data, as inputted and stored in the database component. Daniel created the functional component through the use of Visual Basic Script (VBS), a standard alpha-numeric computer programming language,⁵ resulting in a complex set of coded alpha-numeric instructions constituting the source code for the functional component. Software developers generally do not include the alpha-numeric source code in or with an end-user program. Distinct from the alpha-numeric source code, the functional component of an installed end-user program generally consists of executable machine code. Machine code is a binary code set produced by processing the original alpha-numeric source code through a special computer program (compiler) which converts the source code into a binary code directly executable by computer processors (hardware).

¶7 Distinct from the functional component, the TimeTracker database component consisted of a relational database, which was composed of data structures (i.e. a table or sets of linked tables, with each table subdivided in matrix form into vertical columns (fields) and horizontal lines (records)) for structured storage of related information and, as referenced in this case, "stored procedures and triggers" that stored, retrieved, and processed data in and from the database as directed by the functional component. The "stored procedures and triggers" were essentially the programming interface between the functional component and the database data. Daniel created the TimeTracker data structures and associated "stored procedures and triggers" through the use of a Structured Query Language (SQL), a special alpha-numeric programming language used to create relational databases and provide the necessary interface operations between the functional component of a computer program and the database on which it operates. As installed on the Ruff server, the TimeTracker software consisted of the pre-compiled binary machine code constituting the functional component of the program and the uncompiled SQL source code (alpha-numeric code) constituting the TimeTracker database structures and associated database "procedures and triggers." Consequently, access to the installed and executable TimeTracker program on the Ruff server afforded access to the uncompiled alpha-numeric source code constituting the TimeTracker database component but not to the original source code for the functional component of the program.

¶8 Following execution of the 2008 license agreement, AMS began sublicensing TimeTracker for remote Internet use by its AE clients. Over the period of June 30, 2008, through December 15, 2015, AMS regularly paid Ruff 90% of the revenue generated on TimeTracker, totaling...