Aithent, Inc. v. The National Association of Insurance Commissioners was a lawsuit in the United States District Court for the Western District of Missouri, filed in February 2011. Aithent, a software developer, had granted the National Association of Insurance Commissioners (NAIC) an exclusive licence to its web-based licensing platform LEO, which the NAIC used as the foundation of its State Based Systems (SBS), a back-office system offered to state insurance departments. Aithent sued over unpaid royalties and over what it said was the NAIC’s failure to market SBS and its suppression of LEO as a competitor.[1] On 24 May 2013 the court ruled on cross-motions for summary judgment. It held that the royalty clause did not reach transactions processed through other NAIC systems, but it left the claims about marketing effort, fee reductions and unfair competition for trial.[1] The court entered an order of dismissal on 9 July 2013.[2]
Background
On 15 July 2002 Aithent and the NAIC signed a licence agreement under which Aithent exclusively licensed LEO to the NAIC within the insurance sector, solely for developing, running and maintaining SBS. The NAIC would own SBS and any modifications to it, while Aithent kept ownership of LEO. In return the NAIC would pay a royalty of 50 percent of the net revenue it or its affiliate, the National Insurance Producer Registry (NIPR), received for listed “Electronic Transactions” such as non-resident and resident licensing, renewals and continuing education transactions. The royalty ran for five years from each state’s first implementation of a transaction, and the NAIC was to make reasonable efforts to market SBS. The NAIC could set fees, but a listed transaction fee could not be cut by more than 15 percent in a calendar year without agreement. The agreement was governed by New York law.[1]
The NAIC also ran two other systems that handled insurance transactions: SERFF, an electronic rate and form filing system, and Gateway, a front-end system run by NIPR that sends producer licensing transactions to any state back-office system. LEO was never used in either. By 2008 the NAIC faced competition from a rival back-office product, Sircon, which 18 states already used, and by the time of the ruling 25 state insurance departments had licensed SBS.[1]
The dispute
Aithent claimed five things: that the NAIC owed royalties on revenue from Gateway and SERFF transactions, which it said fell within the broad definition of “SBS”; that the NAIC failed to market SBS; that it cut transaction fees by more than the permitted 15 percent; that it misappropriated LEO for use in Gateway; and that it entered the licence in order to remove LEO from the market so that it would not compete with the NAIC’s own products. The NAIC argued that the licence covered only transactions processed in SBS back-office systems for states that had signed SBS licences.[1]
Decision or outcome
- Royalties (Count I). The court held that “SBS” meant a web-based system owned by the NAIC and developed using LEO, and did not include Gateway or SERFF. Rate and form transactions were not listed transactions, and Gateway transactions processed in other back-office systems were not processed in, through, within or using SBS. The NAIC’s motion on this count was granted and Aithent’s was denied.[1]
- Marketing (Count II). The NAIC had to market SBS reasonably as a back-office system, but was not required to build it as a front-end system like Gateway. There were fact issues on whether it did so; the record showed it spent about USD 8,800 on marketing between 2002 and 2004, and claims for failures before 14 February 2006 were time-barred. Both sides’ motions were denied.[1]
- Fee reductions (Count III). The 15 percent cap applied only to transactions processed in, within, through or using SBS. A fee cut of more than 46 percent for Sircon transactions was therefore not a breach, because Sircon was not an SBS system. Other alleged cuts on SBS transactions remained a fact question.[1]
- Misappropriation and unfair competition. The parties agreed that LEO had not been used in Gateway, so that part of the claim failed. The claim that the NAIC took the exclusive licence to keep LEO from competing, which Aithent pleaded as unfair competition under New York law, survived and was held not to be time-barred because the alleged conduct continued over the ten-year licence.[1]
A separate order of 25 February 2013 had granted the NAIC summary judgment on a fourth count.[1] After a final pretrial conference in May 2013 and a settlement conference set for 5 June 2013, the court entered an order of dismissal on 9 July 2013. The docket entry is text-only and gives no reason.[2]
Significance for software licensing and SAM practice
This is a district court ruling on New York contract law and is not binding precedent. Although the licensee was an association of insurance regulators and not a typical enterprise buyer, the dispute shows how revenue-sharing and exclusive licences are decided on their defined terms:
- Defined system and defined transactions. The royalty was tied to a defined system and a defined list of transactions. Revenue from adjacent systems that the licensee owned and ran was outside the royalty, even though both served the same market.[1]
- Effort clauses. A promise of “reasonable efforts to market” was enforceable enough to survive summary judgment, and spending records were part of the evidence.[1]
- Exclusivity. An exclusive licence held by a party with competing products can itself be the subject of a claim.[1]
For another dispute between a software developer and an insurer licensee see Fair Isaac v. Federal Insurance. For the wider picture see software licensing litigation.
Lessons learned
- In a revenue-sharing licence, the definitions of the licensed system and of the transactions that earn royalties decide the case, so list every product and channel that should be covered. The court read “SBS” to exclude Gateway and SERFF.[1]
- A licensee that agrees to “reasonable efforts to market” may be tested on how much it actually spent and did; keep records of marketing effort. The court looked at marketing spend year by year.[1]
- A fee-reduction cap that applies only to transactions processed “in, through, within or using” the licensed system does not stop the licensee reducing fees on competing systems. The Sircon reduction was outside the cap.[1]
- An exclusive licence to a body that also sells competing systems can raise an unfair competition claim if the licensee is said to have taken the product off the market. That claim survived summary judgment.[1]