Software AG v. Consist Software Solutions, Inc. was litigation in the Southern District of New York about the end of a long distribution relationship. Software AG, Inc. and Software AG (together “SAG”) had since 1998 been bound to Consist, which distributed SAG products in a territory in South America, by an agreement that Consist said could be ended only for cause. SAG gave notice of termination in April 2006 with an effect date of 1 January 2008. After a bench trial in December 2007 the district court found for SAG on Consist’s contract claims and entered a permanent injunction; a separate preliminary injunction restrained Consist from pursuing actions in South America. On 27 March 2009 the Second Circuit affirmed both rulings in summary orders.[1][2]
Background
The Second Circuit described the 1998 agreement as a distribution agreement under which Consist sold SAG products and paid royalties linked to SAG’s United States sales.[1] Paragraph one provided for termination on 18 months’ notice before the end of an initial ten-year period, with automatic renewal for successive five-year periods. It did not say whether termination had to be for cause. Paragraph seven let a party terminate on notice of a material breach and 60 days to cure.[1] The court noted a 30-year distribution relationship between the parties.[1]
The dispute
SAG gave 18 months’ notice in April 2006. Consist’s chief executive voiced no protest at the time, and Consist’s salespeople told customers who asked that Consist would cease to be SAG’s exclusive distributor from 1 January 2008.[1] Consist later argued that paragraphs one and seven must be read together, so that any termination required a material breach left uncured for 60 days. Consist also filed actions in Brazil. The district court enjoined Consist from commencing or prosecuting actions in certain South American countries that sought to compel SAG to act under the 1998 agreement or that concerned trademarks on SAG products Consist had distributed, and required Consist to withdraw two Brazilian actions.[2] The first action was removed to federal court on 7 August 2007, and SAG filed its own action on 15 January 2008.[3][4]
Decision or outcome
Contract. After a bench trial the district court found the agreement ambiguous on whether paragraph one termination required cause, and resolved the ambiguity on extrinsic evidence. The Second Circuit agreed that Consist’s reading would make either the 18-month notice clause or the 60-day cure clause meaningless. It accepted the district court’s findings that the parties had never discussed linking the two clauses, that the chief executive’s contrary belief was “unilateral and unexpressed”, that he had accepted a non-perpetual term in exchange for other favourable terms, and that Consist’s reaction to the April 2006 notice was objective evidence of its understanding. The court noted that New York courts are reluctant to declare a perpetual licence in the absence of a clear provision. It affirmed the judgment of dismissal.[1]
Anti-suit injunction. The Second Circuit affirmed the preliminary anti-suit injunction under its China Trade test. It treated Consist’s challenge to that test as waived, and noted that the district court had found Consist and its counsel acted in bad faith by not alerting the court to the Brazilian actions. It declined to decide “the ultimate merits” on that appeal.[2]
The docket of the first action records the mandate of the Second Circuit affirming the judgment, issued on 17 April 2009, and the second action was terminated on 30 September 2009.[3][4]
Significance for software licensing and SAM practice
- Channel agreements are licences of commercial rights. The case concerned a distributor’s right to resell software, not an end-user licence. When a vendor ends or changes a channel relationship, the terms that govern termination decide what the distributor and its customers may expect, and customers of a distributor may be told when exclusivity ends.[1]
- Notice mechanics matter. The dispute turned on a notice period and a cure period in the same contract.[1]
- Forum. A US court restrained parallel litigation abroad over the same agreement.[2]
Lessons learned
- State how no-fault and for-cause termination clauses interact. The Second Circuit rejected a reading that would deprive one clause of meaning.[1]
- Do not rely on an agreement being perpetual unless it clearly says so. The court cited New York’s reluctance to declare a perpetual licence without a clear provision.[1]
- How a party acts after a termination notice is evidence. Consist’s silence and its salespeople’s statements to customers were treated as powerful objective evidence.[1]
- Parallel foreign suits can be enjoined. The anti-suit injunction was affirmed.[2]
Out of scope
This article relies on the Second Circuit’s summary orders and the docket entries. It does not cover the district court’s written opinion, the Lanham Act and tortious interference claims in detail, or any later dealings between the parties.