Novell, Inc. v. The Canopy Group, Inc., Case No. 20030211-CA.

• Decision Date: 13 May 2004
• Docket Number: Case No. 20030211-CA.
• Citation: 2004 UT App 162,92 P.3d 768
• Parties: Novell, Inc., a Delaware corporation, Plaintiff and Appellee, v. The Canopy Group, Inc., a Utah corporation, Defendant and Appellant.
• Court: Utah Court of Appeals

2004 UT App 162

92 P.3d 768

Novell, Inc., a Delaware corporation, Plaintiff and Appellee, v. The Canopy Group, Inc., a Utah corporation, Defendant and Appellant.

Case No. 20030211-CA.

Utah Court of Appeals.

Filed May 13, 2004.

Robert L. Jeffs, Provo, and Ralph H. Palumbo, Philip S. McCune, Lynn M. Engel, and Lawrence C. Locker, Seattle, Washington, for Appellant.

John P. Mullen, Thomas R. Karrenberg, Scott A. Call, and Jon V. Harper, Salt Lake City, for Appellee.

Before Judges Jackson, Orme, and Thorne.

OPINION

JACKSON, Judge:

¶1 The Canopy Group, Inc. (Canopy), a Utah corporation, appeals the district court's grant of summary judgment to Novell, Inc. (Novell), a Delaware corporation, and the district court's denial of Canopy's motion for summary judgment. We affirm.

BACKGROUND

¶2 This is a breach of contract action. Novell owned the source code for DR DOS, a computer operating system that was the target of anticompetitive practices by Microsoft in the early 1990s. Novell's board of directors worried that, if they brought suit against Microsoft in a private antitrust action, Microsoft would retaliate with further unfair practices that could neutralize the value of any antitrust recovery. At the same time, however, Novell's board of directors recognized that Novell's shareholders would not permit Novell to simply walk away from such a significant cause of action and potential recovery.

¶3 Accordingly, Novell entered into negotiations with Caldera, Inc., the predecessor in interest to Canopy, to sell DR DOS to Canopy.¹ The main purposes of this sale were to obligate Canopy to bring suit against Microsoft, to allow Novell to share in the recovery, and at the same time to obfuscate Novell's role in the action against Microsoft. Novell insisted that its role be completely undetectable to avoid retaliation from Microsoft.

¶4 To accomplish this, Novell and Canopy executed two separate documents: the first was a contract of sale, obligating Canopy to pay $400,000 for rights to the source code; the second was a temporary license obligating Canopy to pay $600,000 in license fees and "royalties." The royalties included provisions for payment to Novell of a percentage of any recoveries from lawsuits. The negotiations between the parties were very prolonged, and the parties considered a wide variety of proposed royalty bases.

¶5 Upon execution of the final documents, Canopy initiated suit against Microsoft. The dispute was settled by Microsoft's payment of an undisclosed sum of money to Canopy. Before Canopy paid Novell its percentage, Canopy deducted attorney fees, court costs, and other litigation expenses, applying Novell's percentage against the balance. Novell initiated suit for breach of contract, claiming the two documents that constituted the contract made no allowance for the deductions Canopy made. Canopy counterclaimed for declaratory relief, asserting the existence of an oral agreement permitting deduction of attorney fees, costs, and expenses from the settlement with Microsoft before calculating Novell's share.

¶6 The district court first considered a motion for partial summary judgment by Novell to dismiss Canopy's counterclaim based on a contemporaneous oral agreement regarding the calculation of Novell's royalty base. The district court determined that the written contracts together constituted an integration. It therefore granted Novell's motion. The district court then considered Novell's motion for complete summary judgment. To counter that motion, Canopy argued that the terms of the royalty base, as contained in the written agreements, were ambiguous, and that a genuine issue of material fact therefore existed. The district court determined as a matter of law, however, that the terms were not ambiguous, and that Novell was entitled to judgment. It therefore entered summary judgment against Canopy, and denied Canopy's motion for summary judgment. Canopy appeals.

ISSUE AND STANDARD OF REVIEW

¶7 Canopy challenges the district court's grant of summary judgment to Novell, and the denial of Canopy's motion for summary judgment.(²)

We review the district court's summary judgment ruling for correctness, granting no deference to its legal conclusions. In reviewing a summary judgment decision pursuant to Rule 56(c) of the Utah Rules of Civil Procedure, we consider whether the trial court correctly concluded that no genuine issue of material fact exists and whether it correctly applied the law.

Woodbury Amsource, Inc. v. Salt Lake County, 2003 UT 28,¶4, 73 P.3d 362; see also Utah R. Civ. P. 56(c).

ANALYSIS

¶8 Canopy made two basic arguments for the existence of a genuine issue of material fact. First, it argued that the written contracts were not intended by the parties to be an integration of all their agreements. It claims that the parties entered into an oral agreement regarding the royalty base and that the parties did not intend the final writings to supercede the oral agreement. In its first summary judgment ruling, the district court determined that the contract was in fact integrated, and that no such oral agreement existed. Second, Canopy argues that, even if the contract was integrated, the contract's term defining Novell's percentage of the Microsoft recovery is ambiguous. In its second summary judgment ruling, the district court ruled the term is not ambiguous, and therefore denied the admission of extrinsic evidence to interpret the term.

I. Integration

¶9 Canopy argues the parties had entered into contemporaneous oral agreements not embodied in the final written contracts. For example, neither of the writings contained an explanation of Canopy's obligation to pursue an antitrust suit against Microsoft, but Novell does not dispute that that obligation is at the center of the parties' agreement. Likewise, Canopy asserts the parties agreed that it would deduct attorney fees, costs and expenses incurred in the Microsoft litigation before calculating Novell's percentage of the recovery. Canopy maintains that, because the parties did not intend the writings to supercede the contemporaneous oral agreements, the district court erred in ruling that the writings constituted the final and complete embodiment of the agreement between the parties. At the least, Canopy argues, a genuine issue of material fact exists regarding whether the parties in fact agreed to allow the deductions from the Microsoft recovery.

¶10 The parol evidence rule "operates in the absence of fraud to exclude [prior and] contemporaneous conversations, statements, or representations offered for the purpose of varying or adding to the terms of an integrated contract." Union Bank v. Swenson, 707 P.2d 663, 665 (Utah 1985) (emphasis omitted). "An agreement is integrated where the parties thereto adopt a writing or writings as the final and complete expression of the agreement." Eie v. St. Benedict's Hosp., 638 P.2d 1190, 1194 (Utah 1981) (quotations and citation omitted).

¶11 The parol evidence rule, as applied to integrated contracts, is a substantive rule of contract construction, rather than a rule of evidence. See 6 Arthur Linton Corbin, Corbin on Contracts § 573 at 72 (interim ed. 2002). Parol evidence is not so much inadmissible to vary the terms of an integrated writing as it is irrelevant, because "the later agreement discharges the antecedent ones in so far as it contradicts or is inconsistent with the earlier ones." Id. at 82.

"[A] court must first determine whether the writing was intended by the parties to be an integration. In resolving this preliminary question of fact, parol evidence, indeed any relevant evidence, is admissible." However, to preserve the integrity of written contracts, we apply" a rebuttable presumption that a writing which on its face appears to be an integrated agreement is what it appears to be."

Smith v. D.A. Osguthorpe, 2002 UT App 361,¶18, 58 P.3d 854 (alteration and emphasis in original) (citations omitted); see also Terry's Sales, Inc. v. Vander Veur II, 618 P.2d 29, 32 (Utah 1980) ("Where parties have various claims and obligations to each other, and have had a discussion about resolving their disputes which results in a written agreement signed by them, it is generally to be assumed that their disputes were merged into the written agreement.").

¶12 Canopy produced a great deal of evidence to establish that the written agreements do not contain all the terms to which the parties agreed, such as Canopy's obligation to sue Microsoft. It argues further that the agreements themselves purposely obfuscated Novell's entitlement to a recovery from Microsoft by dealing with Novell's entitlement in very broad, general terms.

¶13 Canopy's evidence and arguments, however, do not negate Canopy's concession that it entered into written agreements that provide for the payment of royalties by Canopy to Novell. Canopy's evidence clearly shows the parties participated in prolonged negotiations to settle their disagreements regarding the deductions and Novell's overall percentage. Canopy's evidence may or may not establish the existence of a prior agreement.

¶14 However, Canopy has not rebutted the presumption of integration. Absent a showing to the contrary, we "assume[] that their disputes were merged into the written agreement." Id. at 32. In other words, regardless of whether the parties may have had preliminary agreements about a given subject during the course of negotiations, we will assume that a writing dealing with the same subject was intended by the parties to supercede any prior or contemporaneous agreements. See id.; see also Smith, 2002 UT App 361 at ¶18. Canopy's arguments and evidence regarding the apparently laborious and convoluted nature of the parties' negotiations are therefore entirely irrelevant to rebut the presumption that the parties intended to replace their prior agreements with a new agreement in the form of the final writings. See id. (applying the presumption of...