Basis Technology Corp. v. Amazon.Com, Inc.

Citation71 Mass. App. Ct. 29,878 N.E.2d 952
Decision Date07 January 2008
Docket NumberNo. 06-P-1048.,06-P-1048.
PartiesBASIS TECHNOLOGY CORPORATION v. AMAZON.COM, INC.
CourtAppeals Court of Massachusetts

Present: LENK, GREEN, & SIKORA, JJ.

SIKORA, J.

The issue of this appeal is the enforceability of a disputed midtrial settlement agreement. After three days of evidence in a jury-waived trial in the Superior Court, the plaintiff Basis Technology Corporation (Basis), and the defendant, Amazon.com, Inc. (Amazon), appeared to agree upon settlement terms by an exchange of electronic mail messages (e-mails) between counsel. On the morning of the fourth day they reported the apparent settlement orally and on the record to the trial judge. Trial ceased. The court entered an order of dismissal nisi. The order directed the parties to file an agreement for judgment or stipulation of dismissal within thirty days. Then they encountered disagreement, engaged in communications, received an extension, and reached an impasse. Basis moved to enforce the settlement agreement; Amazon opposed. By affidavit and exhibit material the parties submitted to the trial judge their e-mail exchange and much of their recorded nisi period communications. After hearing, the trial judge ruled the e-mail settlement terms to be a valid and binding agreement. She entered judgment in favor of Basis for specific enforcement of the settlement terms. The judge deleted one term and made minor changes to others. Amazon has appealed.

Background. 1. The parties' business relationship. The procedural history and the following facts emerge from the record and from the parties' briefs as undisputed. Basis creates software and provides related technical services for its use. Amazon sells books and other products through computerized marketing. Both companies are incorporated in the State of Delaware. The public document recording incorporation there is entitled the "Certificate of Incorporation."

In September of 1999, the companies entered into a "Services Agreement." Under its terms Basis was to render technical services enabling Amazon to create an electronic commerce system in Japan for the sale of books and other products. Amazon thereafter introduced a Japanese language Web site to serve Japan and Japanese-speaking consumers everywhere. The services agreement identified certain "business consulting" services (such as research and the composition of a business plan; establishment of a headquarters and distribution and customer service centers in Japan; the identification of local legal and taxation requirements; and the creation of a Japanese verification database) as "out-of-scope" services to be covered by separately negotiated contracts.

In addition, on December 29, 1999, Basis and Amazon entered into a "Series A Preferred Stock Purchase Agreement" (1999 stock purchase agreement). Under its terms Amazon purchased 1,654,412 shares of Basis Series A preferred stock for the price of $2.72 per share and acquired a seat on Basis's board of directors. Under the 1999 stock purchase agreement, Amazon acquired also the right to convert its preferred stock into common stock by use of a conversion ratio of one-to-one.

The 1999 stock purchase agreement provided Amazon with certain antidilution rights, set out in detail in Basis's certificate of incorporation. The antidilution provision would activate if Basis were to issue new common or preferred stock without consideration or for a price below the amount paid by Amazon. Amazon had the right to recalculate the conversion ratio according to a fixed formula factoring into account the price Amazon had initially paid for the preferred stock (or the last price Amazon had paid for preferred stock), the price paid for the newly issued stock shares, and the number of shares outstanding prior to and subsequent to the issuance of the new shares. This adaptive formula operated to maintain the original percentage of Amazon's ownership of Series A preferred shares.1

In April of 2001, Amazon consented to an amendment to Basis's certificate of incorporation. The amendment enabled a recapitalization of Basis. It revised Amazon's "conversion price" to $1.36 per share of Series A preferred stock and thereby made its conversion ratio two-to-one (i.e., two common shares for every one share of Series A preferred stock). The amendment retained the antidilution formula for adjustment of the conversion ratio in the event of an issuance of stock at a price below Amazon's conversion price.

In March of 2004, Basis undertook a further amendment of its certificate of incorporation by issuance of 466,827 shares of Series B preferred stock to a company known as In-Q-Tel at a stated price of $1.39 per share. The 2004 amendment left unchanged the antidilution formula. The issuance of the Series B stock to In-Q-Tel accompanied the contractual licensing of Basis software to In-Q-Tel as a customer. The parties describe In-Q-Tel as the venture capital arm of the Central Intelligence Agency.

On March 8, 2004, the corporate secretary of Basis distributed to all preferred shareholders a memorandum describing the terms of the issuance to In-Q-Tel. The memorandum included copies of the enabling vote of the board of directors and of the proposed conforming amendments to the certificate of incorporation. It is undisputed that Amazon received notice of the March, 2004, amendment, but did not give its consent.2

2. Litigation and report of settlement. Meanwhile, in May of 2003, Basis began the underlying action against Amazon in the Superior Court upon claims of breach of fiduciary duty, quantum meruit, and G.L. c. 93A violations for nonpayment for "out of scope" work. The case advanced through discovery to a jury-waived trial beginning on March 21, 2005.

On the evening of March 23, after the third day of evidence and after settlement discussions, Basis counsel sent an e-mail with the following text to Amazon counsel:3

"From: [Basis counsel]

Sent: Wednesday, March 23, 2005 10:37 PM

To: [Amazon counsel]

Cc: []

Subject: Basis v. Amazon — Settlement Terms

"[Amazon counsel] — This e-mail confirms the essential business terms of the settlement between our respective clients. . . . Basis and Amazon agree that they promptly will take all reasonable steps to memorialize in a written agreement, to be signed by individuals authorized by each party, the terms set forth below, as well as such other terms that are reasonably necessary to make these terms effective.

"Those terms are as follows:

"1. Amazon shall pay to Basis, within a period of days after execution of a settlement agreement, the sum of $275,000 (U.S.).

"2. Amazon shall exercise its conversion rights, and in so doing shall convert all Basis Series A Preferred Shares to Common Shares, pursuant to the terms and conditions set forth in the Series A Preferred Stock Purchase Agreement dated as of December 29, 1999.

"3. Amazon shall relinquish all rights held as a holder of Preferred Shares, including but not limited to the right to designate a member of the Basis Board of Directors.

"4. Basis shall be permitted to resume use of the Amazon name and logo on its website and in its printed marketing material, in the manner and degree in which Basis has been making such use up until recently taking steps to remove references to Amazon from the Basis website (the agreement will spell this out to everyone's satisfaction).

"5. Amazon agrees that Basis shall be removed from any and all `do not use' lists or `blacklists,' again on terms and conditions to be spelled out in more detail in the settlement agreement.

"6. Amazon and Basis will exchange comprehensive releases, which will include all claims that were brought, or that could have been brought, or that have been threatened to be brought, by either party against the other. Once again, the settlement agreement will provide further clarity on this point. "[Amazon counsel], please contact me first thing tomorrow morning if this e-mail does not accurately summarize the settlement terms reached earlier this evening.

"See you tomorrow morning when we report this matter settled to the Court."

At 7:26 A.M. on March 24, Amazon counsel sent an e-mail with a one-word reply: "correct." Later in the morning, in open court and on the record, both counsel reported the result of a settlement without specification of the terms. The judge ended the trial and entered the nisi order.

3. Posttrial communications. On March 25, Amazon's counsel sent a facsimile of the first draft of a settlement agreement to Basis's counsel. The draft comported with all the terms of the e-mail exchange, and added some implementing and boilerplate terms (renunciation of any admission of wrongdoing or liability; confidentiality for the terms; confirmation of the authority of the persons executing the settlement agreement to bind the parties; severability; modification by writing only; and willingness to execute any additional documents necessary for implementation).

On March 28 and 29, respectively, Basis counsel returned proposed revised drafts. They contained the original e-mail terms, the implementing terms, and two additional proposals: that Amazon provide written consent to the March, 2004, stock issuance to In-Q-Tel; and that Amazon consent to an upcoming further issuance of stock to In-Q-Tel in 2005. On March 31, Amazon expressed an interest in deleting the second paragraph of the original e-mail proposal, which called for Amazon to convert its Series A preferred shares to common shares. On that same day, Basis counsel sent an e-mail to Amazon counsel, stating, inter alia, that the stock conversion term "must remain a feature of the deal, for the reasons you and I have discussed." Amazon counsel then replied, "[W]hat would...

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