Hodell-Natco Indus., Inc. v. SAP Am., Inc.
| Decision Date | 31 March 2014 |
| Docket Number | Case No. 1:08–cv–02755. |
| Citation | 13 F.Supp.3d 786 |
| Parties | HODELL–NATCO INDUSTRIES, INC., Plaintiff, v. SAP AMERICA, INC., et al., Defendants. |
| Court | U.S. District Court — Northern District of Ohio |
James F. Koehler, P. Wesley Lambert, Timothy John Fitzgerald, Koehler Neal, Cleveland, OH, for Plaintiff.
Charles W. Zepp, Hugh E. McKay, Leo M. Spellacy, Jr., Porter, Wright, Morris & Arthur, Cleveland, OH, Gregory J. Star, Joseph M. Kelleher, Macavan A. Baird, Michael John Miller, Thomas S. Downie, Drinker Biddle & Reath, Philadelphia, PA, Rafael P. McLaughlin, Roy A. Hulme, Reminger & Reminger, Cleveland, OH, for Defendants.
This matter comes before the Court on defendants SAP and SAP AG's (collectively, “SAP”) objections to United States Magistrate Judge Greg White's recommendation that SAP's motion for summary judgment be denied. (Doc. 187). Also before the Court are defendants LSi–Lowery Systems, Inc. and the IBIS Group, Inc.'s (collectively “LSi–IBIS”) objections to the Magistrate Judge's recommendation that LSi–IBIS's motion for summary judgment be granted in part and denied in part. (Doc. 188). The plaintiff Hodell–Natco Industries, Inc. (“Hodell”) has responded to both sets of objections. (Doc. 190, 191). For the reasons that follow, the Court will overrule the objections and accept the Magistrate Judge's recommendations. Thus, SAP's motion for summary judgment will be denied, and LSi/IBIS's motion will be granted in part and denied in part.
This Court makes “a de novo determination of those portions of the report or specified proposed findings or recommendations to which objection is made and may accept, reject, or modify, in whole or in part, the findings or recommendations made by the Magistrate Judge.” Local Rule 72.3(b). The failure by either party to file specific objections constitutes a waiver of the right to appeal the Magistrate Judge's recommendations. Thomas v. Arn, 474 U.S. 140, 155, 106 S.Ct. 466, 88 L.Ed.2d 435 (1985) ; Howard v. Sec'y of Health & Human Servs., 932 F.2d 505, 508–09 (6th Cir.1991). As such, except where clearly erroneous, any finding or recommendation of the Magistrate Judge to which the parties do not timely object is accepted by this Court.
Plaintiff Hodell is a wholesaler of fastener and chain products. (Doc. 26, ¶ 9). Prior to the events of this suit, Hodell had been using a software product called FACTS in combination with two add-on software products, In–Flight and Radio Beacon. These software products provided invoicing, billing, and accounting functions for Hodell's business. (Doc. 105–9, p. 28; Doc. 105–7, 14–20; Doc. 105–38, pp. 10–12). Defendant IBIS was providing software support to Hodell in relation to the FACTS system. In 2003, Hodell considered replacing FACTS with a newer, scalable product that would provide it integrated financial and sales management capabilities. (Doc. 110–4, p. 7, 8). It was important to Hodell that the software be capable of accommodating its eighty then-existing users, with room for growth up to three-hundred users. (Doc. 26, ¶ 34; Doc. 110–4, p. 7).
In early 2003, Hodell's CEO Otto Reidl attended a conference in Cleveland, Ohio, where he learned about software called Business One. (Doc. 105–37, p. 11). The software was developed by defendant SAP AG, and it is distributed and licensed by defendant SAP America. At that time, non-party American Express was a Channel Partner1 of SAP. Following the conference, American Express contacted Hodell with an offer to sell Business One. (Doc. 105–37, p. 11). Hodell was provided with marketing materials about Business One, which included:
On 20 October 2003, Mr. Reidl participated in an online webinar about Business One presented by SAP and American Express. (Doc. 105–37, p. 30). Mr. Reidl in turn discussed the product with Dale Van Leeuwen of Defendant IBIS. (Doc. 105–7, pp. 14–15). Mr. Van Leeuwen was intrigued and he contacted Dan Lowery of Defendant LSi–Lowery. (Doc. 105–7, pp. 15–16). Both Van Leeuwen and Lowery were looking for the next technology beyond FACTS, and because Business One looked like a promising option within their market, they discussed joining forces and becoming an SAP Channel Partner. (Doc. 105–7, pp. 13–16, 17). According to Mr. Van Leeuwen, he met with SAP personnel to determine whether Business One would be a good fit for Hodell. (Doc. 105–7, pp. 16–17, 18–20, 38–40). At some point thereafter, Van Leeuwen and Lowery became Channel Partners of SAP to sell and develop add-ons to Business One. (Doc. 105–9, pp. 5–7).
On 3 December 2003, Mr. Reidl participated in a phone conference with American Express, Mr. Van Leeuwen, and Mr. Lowery. (Doc. 155–82, pp. 7–8). According to Mr. Reidl, during this conference he was assured that Business One would support up to 500 users. (Doc. 155–82, p. 8). It was Mr. Reidl's belief that both American Express and Mr. Van Leeuwen were representing SAP. (Doc. 155–82, p. 8). Hodell contends that throughout 2004, it received additional assurances from SAP, through its Channel Partners, that Business One would support Hodell's needs. (See Doc. 155, pp. 9–10). Based on these assurances, Hodell decided to replace FACTS with Business One. However, Hodell was also aware from the start that for Business One to fulfill all its needs, two add-ons were required. (Doc. 110–3, p. 16(160)). Hodell planned to use the add-ons it was already using with the FACTS based system, namely, Radio Beacon for warehousing functions and In–Flight for inventory management functions. These add-ons were to be coded from scratch in order to work with Business One. (Doc. 105–9, pp. 4–5). SAP authorized LSi/IBIS to develop them for use with Business One. (Doc. 105–9, pp. 14–16).
On 20 December 2004, Hodell and LSi/IBIS executed a Development Agreement, which called for Hodell to order eighty user licenses of SAP's Business One software at a cost of $300,000. (Doc. 26, ¶¶ 30–32). The agreement also called for LSi/IBIS to develop the software add-ons, eventually known as In–Flight Enterprise, for Business One. (Doc. 26, ¶ 75). The development period lasted over two years, during which time the code was written and the software was tested. On 23 December 2005, Hodell entered into a second agreement-the License Agreement-pursuant to which it agreed to purchase an additional 40 user licenses from IBIS. (Doc. 26, ¶ 46). According to SAP, the License Agreement provided a performance warranty to Hodell; disclaimed all prior representations and implied warranties; and limited SAP's liability in the event the software did not meet the performance warranty. (Doc. 110–1, p. 12).
During this time, multiple “live stress tests
” were performed on the software as it was being developed. (Doc. 105–36, pp. 9–15; Doc. 105–35, pp. 3–7). The stress tests
were performed on Hodell's computers, using Hodell's data, in the manner that Hodell would run its day-to-day business. (Id. ). By early 2007, LSi/IBIS and Hodell agreed that the software was testing well enough that it was ready to “go live.” (Doc. 105–37, p. 42; Doc. 105–39, pp. 3–5). The program went live in March 2007, but problems were immediately apparent. According to Hodell, “[t]he system responded so slowly that Hodell–Natco's sales force was unable to reasonably respond to customer inquiries by telephone.” (Doc. 26, ¶ 49). The system suffered from numerous other issues, including In–Flight disconnect errors; data synchronization errors between Business One and Radio Beacon; ongoing discrepancies between package-on-hand and warehouse-on-hand figures, among others. (Id. ). According to Hodell, the software never performed adequately and after two years of “limping along,” they scrapped it. (Doc. 110–4, p. 10 (sub 147)). Hodell maintains that it spent over a million dollars for replacement software.
On 21 November 2008, Hodell brought this lawsuit, and on 22 April 2009, it filed a five count Amended Complaint against SAP America, Inc, SAP AG, LSi–Lowery Systems, Inc., and the IBIS Group. (Doc. 26). Hodell brings claims of (1) Fraudulent Inducement; (2) Fraud; (3) Breach of Contract; (4) Negligence; and (5) Negligent Misrepresentation. On 18 May 2009, LSi and IBIS filed a joint answer.2 (Doc. 30). Hodell claims that Business One never functioned as promised; that the software was sold on the false premise that it could support its growing user requirements; and that the defendants knew this premise to be false.
On 1 June 2009, the SAP defendants filed a motion to dismiss the Amended Complaint. (Doc. 36). Hodell filed a brief in opposition (Doc. 40), and SAP filed a reply. (Doc. 41). On 8 July 2010, the motion was referred to United States Magistrate Judge Greg White for a report and a recommended decision. (Doc. 46). After hearing oral arguments, the Magistrate Judge issued a Report and Recommendation advising that the motion should be granted in part and denied in part. (Doc. 50). Specifically, it was recommended that the negligence claim and the breach of contract claim, as it related to the Development Agreement, be dismissed as to both SAP defendants. It was recommended that the breach of contract claim, in relation to the License Agreement, be dismissed as to SAP AG only. It was further recommended that the motion be...
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