Communications Groups, Inc. v. Warner Communications, Inc.

• Decision Date: 28 March 1988
• Citation: 138 Misc.2d 80,527 N.Y.S.2d 341
• Parties: , 6 UCC Rep.Serv.2d 636 COMMUNICATIONS GROUPS, INC. a/k/a CGI, Plaintiff, v. WARNER COMMUNICATIONS INC., Defendant.
• Court: New York City Court

Page 341

527 N.Y.S.2d 341

138 Misc.2d 80, 6 UCC Rep.Serv.2d 636

COMMUNICATIONS GROUPS, INC. a/k/a CGI, Plaintiff, v. WARNER COMMUNICATIONS INC., Defendant.

Civil Court of the City of New York,

New York County, Special Term,

Part 1.

March 28, 1988.

Danziger, Banger, Klipstein, Goldsmith, Greenwald & Weiss, New York City, for plaintiff.

Morrison & Foerster, New York City, for defendant.

LEONARD N. COHEN, Judge.

Plaintiff Communications Groups Inc. ("CGI") moves to dismiss defendant Warner Communications Inc.'s ("Warner") first through third counterclaims which are identical to defendant's second through fourth affirmative defenses, respectively, pursuant to CPLR 3211(a)(1), (a)(7) and (b).

This action arises out of an alleged breach of a written agreement dated July 18, 1986 for the licensing, installation and servicing of a certain computer software package (the "Agreement"). Subsequently, the parties entered into two subcontracts for additional software and related hardware. As per the Agreement, defendant paid 50% of the amount due upon signing the Agreement. The remaining 50% was to be paid upon installation of the software. It is undisputed that defendant has not paid this remaining amount due under the Agreement.

The complaint, dated October 23, 1987, sets forth three causes of action for breach of contract to recover payment in the total amount of $16,650.00 still due and owing from defendant to plaintiff. Defendant does not dispute nonpayment, but defendant's Answer asserts four affirmative defenses and three counterclaims: the second affirmative defense/first counterclaim (first counterclaim) claims breach of an implied warranty of fitness of the computer software for defendant's specified known purposes; the third affirmative defense/second counterclaim (second counterclaim) claims breach of an express and/or implied warranty of merchantability of the software system and the good working order of its system and repair services; and the fourth affirmative defense/third counterclaim (third counterclaim) claims breach of contract in failing to provide support services to keep the system operational and in good working order.

As to the first and second counterclaims alleging implied warranties of merchantability and fitness for a specified known business purpose, the movant, CGI, contends that the Agreement provided for a software system or package which was neither for a tangible and movable product or goods nor a transaction for a sale or lease of either services or goods. Rather, CGI claims the Agreement was a license for computer software as an intangible service for limited use by defendant of "copyrightable information" and for the acquisition of the "abstract right" only "to listen" as with music on a record or disk. As a consequence, CGI argues that since implied warranties of fitness for a particular purpose or merchantability are remedies exclusively for contracts of the sale of goods and because the Agreement herein is not such a transaction of goods, the implied warranty counterclaims lack merit and cannot be maintained either under common law or under the Uniform Commercial Code (UCC).

Moreover, movant contends that even if the contract was for a sale of goods or a lease of goods, the contract, by its terms, provides for an express disclaimer of any implied warranties of fitness and merchantability. Therefore, movant urges that the first two counterclaims should be dismissed on this ground.

As for the third counterclaim, movant characterizes this claim as a breach of express warranties of the good working order and adequate support services of the computer software. Movant contends that such express warranties are lacking under the terms of the Agreement. Movant argues that any prior or subsequent oral promises or warranties which may have been made by movant cannot be considered part of the Agreement based on the parol evidence rules under common law and the UCC. Therefore, movant contends that the third counterclaim also lacks merit and fails to state a cause of action and should be dismissed.

The threshold issue presented is whether the software computer package or system provided for under the Agreement involved a transaction of "goods" as defined under UCC 2-105(1) to mean "all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale ..."

A review of the Agreement, the sole documentary and evidentiary matter submitted on these motion papers, shows that the computer software referred to therein is not defined. Nor have either of the parties in their motion papers articulated the precise form of the instant software. Software, however, is a widely used term and has several meanings. See University Computing Co. v. Lykes-Youngstown Corp., 504 F.2d 518, 527 (5th Cir.1974) (software includes programs and computer language listings); Law Research Services, Inc. v. General Automation Inc., 494 F.2d 202, 204 n. 3 (2nd Cir.1974) (software includes magnetic cards or paper cards programmed to instruct the computer); Com-Share Inc. v. Computer Complex Inc., 338 F.Supp. 1229 (E.D.Mich.1971) (software refers to programs used in the computer); see generally, Note, Computer Programs As Goods Under The UCC, 77 Mich.L.Rev. 1149 (1979).

Regardless of the software's specific form or use, it seems clear that computer software, generally, is considered by the courts to be a tangible, and movable item, not merely an intangible idea or thought and therefore qualifies as a "good" under Article 2 of the UCC. RRX Industries Inc. v. Lab-Con Inc., 772 F.2d 543 (9th Cir.1985); Chatlos Systems Inc. v. National Cash Register Corp., 479 F.Supp. 738 (D.N.J.1979) aff'd 670 F.2d 1304 (3rd Cir.1982); Triangle Underwriters Inc. v. Honeywell Inc., 457 F.Supp. 765 (E.D.N.Y.1978), affd. in part, rev'd in part and remanded on other grounds, 604 F.2d 737 (2d Cir.1979); see also Note, op. cit. 77 Mich.L.Rev. 1149. Moreover, UCC Sec. 1-102 provides that the Act shall be liberally construed and applied to promote its underlying purposes and policies.

Here, the Agreement clearly provides, in part, for the installation by CGI of its specially designed software equipment for defendant's particular telephone and computer system, needs and purposes. This equipment is expressly listed on schedules annexed and made a part of the Agreement. Said schedules clearly reflect installation by CGI of identifiable and movable equipment such as recording, accounting and traffic analysis and optimizations, modules, buffer, directories and an operational user guide and other items. A review of the counterclaim allegations shows that a software computer system and equipment were designed for defendant's special and unique known needs to store data relating to thousands of defendant's monthly telephone calls and to process and print this data on defendant's main computer frame so that defendant's operations would prove more time and labor efficient. Although the ideas and concepts of the CGI designed software system remained its intellectual and copyrightable property under the Agreement, the court finds in the context of the case law and the UCC that the contract terms clearly provided for a transaction of computer software equipment involving movable, tangible and identifiable products or goods and not solely intangible ideas and services and, in fact, such goods were installed by CGI for defendant's special purposes. Therefore, the first and second counterclaims are not dismissable on the ground of an exclusive contractual intangible services transaction as urged by movant.

The next issue raised by movant is that the contractual transaction failed to constitute either a sale or lease but merely was a license to use and service the software, therefore precluding defendant from relying on the common law or the UCC implied warranties of merchantability (UCC Sec. 2-314) and fitness for a particular known purpose (UCC 2-315).

The court finds that the Agreement clearly constituted a lease for the use of CGI's goods despite the terms expressed therein of a "license to use" CGI "proprietary" software for the payment of a one-time perpetual license fee in accordance with attached pricing schedules. The Agreement, although labelled a license agreement, is clearly analogous to a lease for chattels or goods. The movant has not addressed nor presented a distinction, factually or legally, between a license to use goods from an ordinary lease to use goods. Plaintiff's argument is based on an alleged contractual license to provide intangible services which, as hereinabove, the court rejects. Therefore, the court finds the Agreement clearly is a lease for the use of plaintiff's goods, despite the contractual label of a "license".

The law is clear that common law rights exist to state a cause of action or counterclaim for breach of implied warranties of merchantability and/or fitness for a particular known purpose involving the lease of chattels or goods without reliance on the UCC. Industralease Automated & Scientific Equipment Corp. v. R.M.E. Enterprises, Inc., 58 A.D.2d 482, 396 N.Y.S.2d 427 (2nd Dept.1977); Atlantic Tug & Equipment Co. v. S & L Paving Corp., 40 A.D.2d 589, 334 N.Y.S.2d 532 (4th Dept.197...