Avaya Inc. v. Telecom Labs, Inc. was federal litigation in New Jersey over whether owners of Avaya telephone systems could let an independent service provider maintain them with Avaya’s licensed maintenance software. Avaya sued in June 2006, alleging trade-secret misappropriation, breach of contract, fraud, tortious interference, and violations of the Digital Millennium Copyright Act and the Lanham Act. The defendants were Telecom Labs, Inc. (TLI), its affiliates TeamTLI.com and Continuant, and their owners. TLI counterclaimed for antitrust violations.[1] In 2014 a jury found Avaya liable on two antitrust counterclaims and awarded US$20 million, which the court trebled to US$60 million. The final judgment was US$62,613,052.10.[1] On 30 September 2016 the Third Circuit vacated that judgment and remanded.[1] The case was dismissed with prejudice by stipulation in June 2018, with each party bearing its own fees and costs.[3][2]
Background
The products were Avaya’s private branch exchange (PBX) telephone systems and its predictive dialing system (PDS).[1] The court described how the PBX software was licensed. The systems shipped with many capabilities, and customers bought the right to use those they needed. One separately licensed set of features supported maintenance. Its on-demand maintenance commands (ODMCs) were reached through login credentials, and they worked only when Avaya had activated maintenance software permissions (MSPs) on the system.[1]
Customers had three authorized maintenance options: Avaya itself, an authorized Business Partner using a login called DADMIN, or self-maintenance. Before 2008, self-maintenance meant buying a licence for the MSPs. From its 2008 hardware release Avaya included MSPs in the base package, but made purchasers subject to stricter contractual restrictions against using independent service providers.[1] Avaya acknowledged that it had never given third parties the logins needed to use the ODMCs.[1] From 2008 its customer agreements included a licence restriction. Under it the customer agreed not to let any service provider or third party, other than Avaya’s resellers, execute software commands that facilitate maintenance or repair, except commands that work without MSPs.[1]
For PDS, Avaya put software patches on its website for all owners before October 2007. For systems sold after that date, patches required at least one year of Avaya software support.[1]
TLI was an Avaya Business Partner from 1996 until Avaya terminated the relationship in 2003. It then continued as an independent maintenance provider for Avaya equipment.[1]
The dispute
The parties told opposing stories. Avaya said TLI serviced PBXs with improperly obtained logins, gathered from co-opted Business Partners or from customers with MSP licences. It also said TLI disconnected systems from phone lines so that Avaya could not change passwords or deactivate the MSPs.[1] TLI said Avaya had sprung a retroactive policy against independent providers on customers already “locked in” to expensive systems. It also accused Avaya of sending customers “fear, uncertainty, and doubt” letters claiming that unauthorized access was unlawful.[1]
Central to Avaya’s case was what customers’ licence agreements allowed. Licences used from 1990 to 2003 granted a “personal, non-transferable and non-exclusive right to use” the software furnished under the agreement. In 2003 Avaya added a clause limiting availability of the software to employees, contractors or consultants with a need to know who were bound by the licence restrictions.[1] Mid-trial, the district court granted judgment as a matter of law against Avaya on all its affirmative claims. It ruled that the licence agreements of TLI’s 470 customers did not prohibit them from letting TLI access the maintenance commands. The jury was later instructed that none of TLI’s actions could be considered unlawful.[1]
The jury then found Avaya liable on two of eight antitrust counterclaims. One was attempted monopolization of the PBX maintenance market. The other was unlawfully tying PDS software patches to maintenance.[1] The court also issued an injunction requiring Avaya to let PBX customers give independent providers access to the ODMCs. The injunction was limited to PBXs sold before May 2008, because from then Avaya’s contracts clearly barred such use.[1]
Decision or outcome
Third Circuit, 2016
The Third Circuit held that the mid-trial judgment as a matter of law was erroneous for the four common-law claims Avaya appealed: tortious interference, unfair competition, fraud and breach of contract. It remanded them for trial.[1] On the contracts, it held that Avaya had offered enough evidence to create disputes of fact for the jury, not the court, to decide. The pre-2007 agreements left open whether they allowed customers to give independent providers access. For the post-2007 agreements, which “unambiguously barred giving such access”, it was disputed whether customers had actually entered into them.[1] Because Avaya’s antitrust defence relied on justifying its conduct as a response to TLI’s, the court held that the error also tainted the antitrust verdict. It vacated the judgment.[1]
On the antitrust claims themselves:[1]
| Claim | Holding |
|---|---|
| PBX attempted monopolization, systems sold after May 2008 | Reversed; judgment for Avaya. Customers were on clear notice in the sales contract that they could not use independent providers, so no aftermarket claim could lie |
| PBX attempted monopolization, systems sold before 2008 | Evidence sufficient for a verdict; vacated for a new trial because of the trial errors |
| PDS patch tying, systems sold before October 2007 | Reversed; patches were freely available on Avaya’s website, so there was no tie |
| PDS patch tying, systems sold after October 2007 | Reversed; the requirement to buy Avaya support to receive patches was clear at the time of sale in a competitive primary market |
| TLI’s cross-appeals | District court affirmed on all issues, including that Avaya’s lawsuit was protected by the Noerr-Pennington doctrine |
Judge Hardiman concurred in part and dissented in part.[1]
After remand
In January 2017 Avaya filed a suggestion of bankruptcy, and the district court stayed the case pending further order of the US Bankruptcy Court for the Southern District of New York.[2] On 28 June 2018 all parties stipulated to dismissal of the action with prejudice under Rule 41(a)(1)(A)(ii). Each party bore its own fees and costs, and the court entered the order the next day.[3][2] No settlement terms were published in the sources reviewed.
Significance for software licensing and SAM practice
- Maintenance rights are licence scope. The dispute turned on whether the customer’s licence to use software “furnished under this agreement” extended to maintenance permissions and to contractors acting for the customer. The Third Circuit held this was a factual question on the wording of each generation of agreement.[1] Avaya’s current Global Software License Terms state the point expressly. Only Avaya’s authorized maintenance providers and Channel Partners acting for the End User may run maintenance commands, and logins reserved for them may not be enabled.[4] See Avaya software license types and portability.
- Contract generations matter. The outcome differed for systems bought before and after the 2007 and 2008 contract changes.[1] A software asset manager assessing third-party support rights needs the agreement in force when each system was bought, not the current terms.
- Patches and support. The court treated the requirement to buy support to receive patches as lawful when disclosed at the time of sale in a competitive market.[1]
Lessons learned
- Whether a customer’s licence lets a third-party maintainer use licensed maintenance software is a question of contract wording and can be a jury question. The Third Circuit held that the district court erred in deciding it as a matter of law.[1]
- Clear restrictions in the sales contract at the time of purchase weigh heavily against aftermarket antitrust claims. The court entered judgment for Avaya for PBX systems sold after the May 2008 contract language.[1]
- Patches offered freely to all owners are not tied to maintenance; tying patches to paid support disclosed at the time of sale did not create liability. Both parts of the PDS tying verdict were reversed.[1]
Out of scope
This article does not cover the district court’s pre-trial rulings, the prejudgment interest award, Avaya’s 2017 bankruptcy beyond the stay, or other suits over Avaya’s maintenance policies.