Com-Tech Associates v. Computer Associates Intern.
| Decision Date | 31 December 1990 |
| Docket Number | No. CV-87-3355 (ADS).,CV-87-3355 (ADS). |
| Parties | COM-TECH ASSOCIATES, a Connecticut Limited Partnership, by all its Limited Partners, and Martin Warshauer, Philip K. Hills, Jr., Norman J. Peer, Renato Valente, Robert Haskell, John Sommers, Frederic S. Elliot and Edwin Lichtig, Individually, Plaintiffs, v. COMPUTER ASSOCIATES INTERNATIONAL, INC., Charles B. Wang, Anthony W. Wang, Arnold S. Mazur, Abraham Poznanski and Peter Schwartz, Defendants. |
| Court | U.S. District Court — Eastern District of New York |
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Meister Leventhal & Slade by Jeffrey C. Slade, Alan Vinegrad, Laura F. Dukess, New York City, for plaintiffs.
Berlack, Israels & Liberman Co-counsel for Defendants by Martin S. Siegel, Melissa M. Johnson, New York City, Riker, Danzig, Scherer & Hyland by Benjamin P. Michel, Janet F. Moss, Morristown, N.J., for defendants.
Before the Court at this time is the culmination of a series of motions made by the parties, all of which center around a dispute over the development, ownership and marketing of a computer tape management system for IBM Model 360 and 370 computers. Although the factual morass involving computer technology make this contentious litigation even more complex, the motions presented may be reduced to three categories: (1) the defendants' motions to compel arbitration, for judgment on the pleadings on the RICO claims, to dismiss the state-law claims, to strike the allegations in the complaint for punitive damages and for summary judgment based on the statute of limitations; (2) the plaintiffs' motion for partial summary judgment on the fourteenth claim for relief; and, (3) the defendants' appeal of the Magistrate's order on a discovery ruling.
The following background facts are relevant to all motions pending before the Court, and are necessary for a general understanding of the relationship of the parties and the events that led to the commencement of this lawsuit.
Plaintiff Com-Tech Associates is a limited partnership organized under the laws of Connecticut, comprised of the individual plaintiffs as limited partners (collectively referred to as "COM-TECH"). The general partner of COM-TECH is Com-Tech, Inc., a wholly owned corporate subsidiary of the defendant Computer Associates International, Inc. COM-TECH was formed in 1978 in order to provide funding from investors—the individual plaintiffs—for the development, ownership and marketing of a computer software program known as "CA-DYNAM/T-OS".
The defendant Computer Associates International, Inc. ("COMPUTER ASSOCIATES"), is a Delaware corporation with its principal place of business in Garden City, New York. Formerly known as Trans-American Computer Associates, Inc. ("TRANS-AMERICAN"), it obtained its present name in 1980 when it acquired substantially all of the assets of its parent company Computer Associates International, Ltd. ("CA LTD."), a Swiss corporation. As stated above, COMPUTER ASSOCIATES' wholly owned subsidiary, Com-Tech, Inc., is the general partner in the plaintiff COM-TECH partnership.
The CA-DYNAM/T-OS is a computer tape management program which allows computer users of the "OS" and "OS/VS" operating system to efficiently manage and maintain security and control over all computer data tapes operating on IBM Model 360 and 370 computers.
When COM-TECH was initially formed in 1978, the individual plaintiff limited partners contributed 99% of the capital, namely, the sum of $212,500, toward the development of the program. The limited partners also obligated themselves in promissory notes to pay an additional $212,500 over the next four years for development, for a total investment of $425,000. These limited partners, in turn, were to collectively receive 99% of the interest in any income realized by COM-TECH from the marketing, licensing, use or maintenance of the CA-DYNAM/T-OS program. Com-Tech, Inc., the general partner, retained the remaining 1% interest.
On October 30, 1978, the date the COM-TECH partnership was formed, COM-TECH and CA LTD.—that is, COMPUTER ASSOCIATES' former parent corporation —entered into a System Development Agreement ("System Agreement"), whereby CA LTD. was to use its "best efforts" to develop and deliver the completed CA-DYNAM/T-OS program to COM-TECH by December 31, 1978.
In addition, on that same date, COM-TECH and TRANS-AMERICAN (now COMPUTER ASSOCIATES),1 entered into a Marketing Agreement which provided that COM-TECH was to own the CA-DYNAM/T-OS program once it was developed and turned over by CA LTD. In addition, the Agreement provided that TRANS-AMERICAN was granted the exclusive right to distribute the program world-wide and was required to use its "best efforts" to market the program. TRANS-AMERICAN was also required to pay COM-TECH royalties from payments received through the licensing or maintenance of the program through 1998 as follows:
17% ..........until the partnership was
paid $215,000 in royalties
15% ..........after the initial payment
of $215,000, and until
June 30, 1984
2% ...........until December 31, 1988
and
1% ...........until December 31, 1998
By the express terms of the Agreement, TRANS-AMERICAN could not share in these royalties, but was permitted to retain all receipts other than royalty payments.
CA LTD. did not complete the development of the CA-DYNAM/T-OS program in 1978 as required by the System Agreement and, accordingly, marketing by TRANS-AMERICAN also did not commence. In late 1979, the defendants urged the COM-TECH limited partners to acquiesce in an extension of time within which COMPUTER ASSOCIATES (i.e., CA LTD. and TRANS-AMERICAN), was required to develop and market the CA-DYNAM/T-OS program. COM-TECH agreed to a modification of the Marketing Agreement sometime in 1980 ("1980 Modification Agreement"). The 1980 Modification Agreement included a new method of calculating royalties due to COM-TECH, which was allegedly more favorable to COMPUTER ASSOCIATES than the earlier Marketing Agreement.
COM-TECH alleges that these changes in the Marketing Agreement which resulted in the 1980 Modification Agreement were fraudulently induced based on the defendants' misrepresentations as to the developments in the computer industry at that time, and of the slow development of the CA-DYNAM/T-OS program. COM-TECH also alleges that from about 1982 to the present, COMPUTER ASSOCIATES willfully underreported, or intentionally failed to report, the actual receipts from the marketing and licensing of the CA-DYNAM/T-OS program. According to COM-TECH, both the fraudulent inducement to enter into the 1980 Modification Agreement and the willful, gross underreporting and misrepresentations of the actual receipts, constitute an overall scheme to defraud COM-TECH out of millions of dollars in royalties owed to it.
On September 30, 1987, COM-TECH and its limited partners commenced this action alleging that COMPUTER ASSOCIATES engaged in a scheme to defraud COM-TECH by unlawfully converting royalty payment receipts. COM-TECH alleges it was defrauded by COMPUTER ASSOCIATES in primarily two ways: (1) COMPUTER ASSOCIATES intentionally misrepresented certain computer developments in the industry in order to induce the limited partners of COM-TECH to make the initial investment and the subsequent 1980 Modification Agreement; and, (2) COMPUTER ASSOCIATES issued fraudulent reports as to the marketing of the CA-DYNAM/T-OS program, by knowingly omitting more than $5 million in receipts, thus depriving the COM-TECH partnership of royalty income in the amount of approximately $1.5 million for a period of five years. COM-TECH is seeking to recover treble damages from COMPUTER ASSOCIATES based upon violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-1968, as well as common-law fraud, breach of fiduciary duty and breach of contract. COM-TECH also seeks punitive damages and attorneys' fees.
As stated at the outset, before the Court at this time are the following three sets of motions: (1) the motions of the defendants to compel arbitration, for judgment on the pleadings on the RICO claims, to dismiss the state-law claims, to strike the allegations in the complaint for punitive damages and for summary judgment based on the statute of limitations; (2) the motion of the plaintiffs for partial summary judgment on the fourteenth claim for relief; and, (3) the defendants' appeal from Magistrate David F. Jordan's order with regard to discovery matters. Each of these motions is discussed separately below, seriatim.
(1) COMPUTER ASSOCIATES' MOTIONS
Defendant COMPUTER ASSOCIATES makes the following motions, each of which is discussed separately below: (a) motion to compel arbitration; (b) motion for judgment on the pleadings under Fed.R.Civ.P. 12(c) on claims one, two and three; (c) motion to dismiss claims four through fourteen under Fed.R.Civ.P. 12(h)(3) for lack of subject matter jurisdiction; (d) motion to strike the allegations of punitive damages pursuant to Fed.R.Civ.P. 12(f); (e) motion for summary judgment pursuant to Fed.R. Civ.P. 56(b) and (c), for summary judgment on claims one through four, and six through thirteen, based upon the statute of limitations.
COMPUTER ASSOCIATES alleges that this entire dispute is subject to mandatory arbitration in accordance with the arbitration clause contained in COM-TECH's Partnership Agreement. Although this dispute arises specifically with regard to the Marketing Agreement which does not contain an arbitration clause, the defendants allege that the Marketing Agreement is an integral part of the Partnership Agreement and, therefore, that arbitration clause applies to all disputes that arise with regard to the provisions of the Marketing Agreement as well.
COM-TECH opposes...
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