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Associated Management Services, Inc. v. Ruff

Supreme Court of Montana

July 24, 2018

ASSOCIATED MANAGEMENT SERVICES, INC., a Montana Corporation, Plaintiff, Appellee and Cross-Appellant,
v.
DANIEL R. RUFF and RUFF SOFTWARE, INC., a Montana Corporation, Defendants and Appellants.

          Submitted on Briefs: December 20, 2017

          APPEAL FROM District Court of the Thirteenth Judicial District, In and For the County of Yellowstone, Cause No. DV 15-0523 Honorable Ingrid G. Gustafson, Presiding Judge.

          For Appellants: Jessica T. Fehr, Adam Tunning, Moulton Bellingham PC, Billings, Montana.

          For Appellee: T. Thomas Singer, Axilon Law Group, PLLC, Billings, Montana.

          OPINION

          DIRK M. SANDEFUR JUDGE.

         ¶1 Associated Management Services, Inc. (AMS) and Daniel R. Ruff and Ruff Software, Inc. (collectively Ruff) litigated numerous claims and counterclaims in the Montana Thirteenth Judicial District Court, Yellowstone County, over the parties' relative rights regarding the web-based payroll processing software, TimeTracker, developed by Ruff and licensed to AMS. Ultimately, the District Court granted summary judgment to Ruff, declaring the parties' 2008 licensing agreement valid and enforceable and effectively ruling that AMS had no right to TimeTracker other than as provided under the terms of the licensing agreement. Conversely, the court granted summary judgment to AMS on Ruff's counterclaims (breach of the licensing agreement, tortious interference with third-party relations, conversion, misappropriation of intellectual property, violation of the Montana Uniform Trade Secrets Act (MUTSA), [1] and unjust enrichment). Ruff appeals the District Court's judgments denying its second motion to compel discovery related to its counterclaims, granting summary judgment to AMS on those counterclaims, and denying Ruff's motion for attorney fees as the prevailing party on AMS's claims. AMS cross-appeals the court's judgments adjudicating the validity of the 2008 licensing agreement.[2]We affirm.

         ISSUES

         ¶2 We address the following restated issues on appeal:

1. Did the District Court erroneously grant summary judgment in favor of Ruff that the 2008 TimeTracker licensing agreement was valid and enforceable and that AMS had no right to TimeTracker other than as provided by the agreement?
2. Did the District Court erroneously grant summary judgment in favor of AMS on Ruff's counterclaims?
3. Did the District Court abuse its discretion in denying Ruff's second motion to compel discovery?
4. Did the District Court abuse its discretion in denying Ruff's motion for attorney fees as the prevailing party on AMS's claims?

         BACKGROUND

         ¶3 AMS is a Montana business corporation engaged in the business of providing payroll and related business services to the members and affiliates of Associated Employers (AE). AE is a non-profit association of large regional employers and the parent company of AMS. From 1993-2011, Diane Ruff was the managing executive of AMS.[3]During Diane's tenure, AMS employed her son, Daniel R. Ruff, as a Support Services Specialist under one-year employment contracts. In pertinent part, Daniel's successive employment contracts expressly provided that all "materials prepared by Ruff as part of his employment with AMS," including all "files concerning Ruff's activities as Support Services Specialist," would "belong to and remain property of AMS." Inter alia, Daniel's contract-specified duties included "[m]anag[ing] or facilitat[ing] the information technology function for the AMS server and clients"; maintaining AMS's client-based payroll system; "understand[ing] and review[ing] payroll software and processes to determine and implement efficiencies"; and "other responsibilities as assigned and required."

         ¶4 In 2006, in response to a client's interest, AMS offered to develop an Internet-based payroll time-tracking program with financial support from the interested client. When the client declined, Daniel proposed to Diane that AMS unilaterally develop the proposed software but Diane declined due to cost. Daniel then informally offered to develop the software at his own expense on the understanding that he would own the end product. Diane authorized him to proceed. At his own expense, Daniel retained the help of a former AMS consultant and proceeded with the project. Ultimately named TimeTracker, the finished product was a web-based program that allowed AMS clients to collect, maintain, and process payroll-related information and to integrate the client payroll information with other AMS-owned payroll software. Daniel installed and hosted TimeTracker on a Ruff-owned server located at AMS. Daniel spent over $20, 000 of his own money in the development of TimeTracker.

         ¶5 In early 2007, as the development of TimeTracker progressed, Diane, acting in her capacity as the chief executive officer of AMS, e-mailed AMS counsel, Tim Filz, and instructed that "Dan needs to have an LLC set up for a web-based program he is developing." In accordance with Diane's instruction, Filz subsequently chartered Ruff Software, Inc., with Daniel as the sole principal. Aside from this initial informal agreement between Diane and Daniel, no other agreement existed between Ruff and AMS during the development of TimeTracker from 2007 into 2008. However, on June 1, 2008, in advance of AMS's online deployment of TimeTracker for client use, AMS (through Diane) and Ruff Software, Inc. (through Daniel) executed a written software licensing agreement, which was drafted by Filz pursuant to Diane's prior instruction and which:

(1) described TimeTracker as "certain software developed by Ruff" including "updates and future revisions . . . regardless of the form . . . or trade name under which the software is marketed";
(2) provided that "[a]ll such proprietary software programs and related material, with a proprietary notice in human- or machine-readable form, are proprietary and confidential";[4]
(3) authorized "AMS to use and . . . sublicense the TimeTracker Software" exclusively to AE members;
(4) provided that "Ruff shall retain all rights" in TimeTracker "not granted herein" including the right to license TimeTracker to other parties;
(5) required AMS to pay Ruff 90% "of all fees collected from" AE members "for [the] use of" TimeTracker;
(6) provided that "[t]he term of this license shall be perpetual and shall survive the termination of Dan Ruff's employment with AMS," and that Ruff had the right to market TimeTracker directly to AE members in the event that AMS "quit promoting" it or "terminated its arrangements with" AE members; and
(7) included an express integration clause and provision for the prevailing party to recover reasonable attorney fees, costs, and other related expenses in the event of a breach of the agreement.

         Pursuant to the agreement, AMS made TimeTracker available to its clients from the Ruff-owned server at AMS over Internet access provided by AMS. AMS maintained the Ruff server as required by the agreement but, at its discretion, did so through Daniel as part of his employment duties during his continuing tenure at AMS.

         ¶6 In simplified terms, TimeTracker, as installed on the Ruff server for use by AMS sublicensees, consisted of a functional component and a database component. Essentially the brain of the TimeTracker program, the functional component performed and produced desired end-user processing and output of end-user data, as inputted and stored in the database component. Daniel created the functional component through the use of Visual Basic Script (VBS), a standard alpha-numeric computer programming language, [5] resulting in a complex set of coded alpha-numeric instructions constituting the source code for the functional component. Software developers generally do not include the alpha-numeric source code in or with an end-user program. Distinct from the alpha-numeric source code, the functional component of an installed end-user program generally consists of executable machine code. Machine code is a binary code set produced by processing the original alpha-numeric source code through a special computer program (compiler) which converts the source code into a binary code directly executable by computer processors (hardware).

         ¶7 Distinct from the functional component, the TimeTracker database component consisted of a relational database, which was composed of data structures (i.e. a table or sets of linked tables, with each table subdivided in matrix form into vertical columns (fields) and horizontal lines (records)) for structured storage of related information and, as referenced in this case, "stored procedures and triggers" that stored, retrieved, and processed data in and from the database as directed by the functional component. The "stored procedures and triggers" were essentially the programming interface between the functional component and the database data. Daniel created the TimeTracker data structures and associated "stored procedures and triggers" through the use of a Structured Query Language (SQL), a special alpha-numeric programming language used to create relational databases and provide the necessary interface operations between the functional component of a computer program and the database on which it operates. As installed on the Ruff server, the TimeTracker software consisted of the pre-compiled binary machine code constituting the functional component of the program and the uncompiled SQL source code (alpha-numeric code) constituting the TimeTracker database structures and associated database "procedures and triggers." Consequently, access to the installed and executable TimeTracker program on the Ruff server afforded access to the uncompiled alpha-numeric source code constituting the TimeTracker database component but not to the original source code for the functional component of the program.

         ¶8 Following execution of the 2008 license agreement, AMS began sublicensing TimeTracker for remote Internet use by its AE clients. Over the period of June 30, 2008, through December 15, 2015, AMS regularly paid Ruff 90% of the revenue generated on TimeTracker, totaling $83, 641.73, in accordance with the licensing agreement. While the AMS board of directors apparently did not have formal notice of the licensing agreement until early 2013 when first referenced in management financial reports to the board after Diane left the company, AMS board meeting minutes manifest that its new executive director, Greg Roadifer, specifically raised concerns about the agreement to the board on April 23, 2013. The meeting minutes further indicate that the board directed Roadifer to "talk to Dan about AMS purchasing the TimeTracker system for a fair price and then Dan's wage could also be adjusted upward to reflect this."

         ¶9 After unfruitful discussions regarding the sale of TimeTracker in 2013, the issue returned to the fore in 2014 when Roadifer issued a memo criticizing Daniel for maintaining exclusive knowledge and control of the TimeTracker system, not acting professionally, and not being a "team player." The memo ultimately encouraged Daniel to leave the company to avoid "this awkward place you are in." In response, Daniel gave immediate notice of intent to leave AMS, which he did in September of 2014. In advance of leaving, Daniel provided AMS (through Roadifer) the credentials (user name and password) for administrative access to the Ruff server and TimeTracker. After leaving AMS, Daniel continued to provide consulting services to AMS to facilitate AMS's continued use and sublicensing of TimeTracker to AMS clients under the 2008 licensing agreement.

         ¶10 On March 26, 2015, six months after Daniel left the company, AMS (through Roadifer) e-mailed Ruff and again inquired if Ruff would "consider selling" TimeTracker to AMS. Referencing AMS's intent to "develop a new small business [Human Resource Information System] for [its] Members," Roadifer explained that "we need to be able to modify, change, and adapt the TimeTracker program and system to work with our new HRIS web-based software." In conjunction with the anticipated purchase of AMS's own server and new router to host its current and future web-based software, Roadifer further advised that "[w]e would like to consider moving [the Ruff] server" to the new AMS router for "more flexibility and fail-safe protection." By e-mail response dated March 30, 2015, Daniel stated his plan to market TimeTracker "outside of AMS" unless AMS accepted his offer to buy "the website, source code, hardware, and everything that is TimeTracker" for $120, 000.

         ¶11 On April 19, 2015, upon authorization of the AMS board, Roadifer e-mailed Daniel and, in reference to AMS's plan to "build" its own "HRIS system" and AMS's stated need to revise "the current TimeTracker . . . to work with the new HRIS," counteroffered to buy TimeTracker and the Ruff server for $60, 000. Roadifer explained that "[w]e would originally use the source code but would eventually transition away to a newer web technology with our new HRIS." On April 23, 2015, Ruff responded with its own counteroffer setting forth three different options under which AMS could either: (1) buy TimeTracker for $120, 000 (as originally offered by Ruff); (2) buy TimeTracker for $60, 000 (as originally counteroffered by AMS) plus $3, 000 per month until AMS developed its own software with similar function; or (3) pay nothing, terminate the 2008 licensing agreement, and Ruff would then provide TimeTracker directly to AMS's clients. Ruff's April 23, 2015 e-mail further advised AMS that, "[r]egardless of the option chosen," Ruff would "no longer offer consulting services for the AMS payroll system effective June 1, 2015."

         ¶12 Without response to the Ruff counteroffer, and unknown to Ruff, AMS immediately made several unsuccessful attempts to access the Ruff server at AMS to copy the installed TimeTracker program for installation on an AMS-owned server for uninterrupted use by AMS's AE clients under the 2008 licensing agreement. With the assistance of a third-party computer consultant, AMS was ultimately able to access the Ruff server without Daniel's knowledge and copy the installed TimeTracker program for installation on the AMS server. On April 24, 2015, Roadifer e-mailed AMS's lead software developer, James Collins, and requested a meeting to discuss AMS's contemplated development of an AMS-owned replacement for TimeTracker. AMS separately e-mailed Collins the credentials (user name and password) for administrative access to TimeTracker as previously installed on the Ruff server.

         ¶13 In consultation with Roadifer and other AMS personnel, Collins subsequently developed AMS's own payroll software system known as SlatePay. Like TimeTracker, SlatePay consisted of a functional component, initially coded in a standard alpha-numeric computer programming language, and a database component, consisting of a database and related programming interface controlled by the functional component. However, unlike TimeTracker, AMS created the SlatePay database component (database and programming interface) through the use of NoSQL, a special alpha-numeric programming language used to create and interface with non-relational databases. Unlike the relational database used in TimeTracker, a NoSQL database stores data in a less-structured, non-tabular form. To the end-user, programs based on SQL and NoSQL databases can have similar appearance and function based on entirely different internal database architecture and structure.[6] With access to the uncompiled source code for TimeTracker's database component (TimeTracker's SQL-based database and "stored procedures and triggers"), Collins extracted AMS's client data from the TimeTracker database and converted it for input into SlatePay's NoSQL database.[7]

         ¶14 Upon obtaining an installation copy of TimeTracker (functional and database components) from the Ruff server, re-installing TimeTracker on the AMS server, and embarking on development of the competing SlatePay program, AMS preemptively filed suit against Ruff in the Montana Thirteenth Judicial District Court. Based on its interpretation of Ruff's three-option counteroffer, AMS's original complaint alleged anticipatory breach of the 2008 licensing agreement by Ruff and sought declaratory judgment to preserve AMS's rights under the agreement. AMS alleged that Ruff planned to deny AMS access to TimeTracker and then market it directly to AMS's clients unless AMS paid a "stated sum." Consequently, AMS further requested preliminary and permanent injunctive relief enjoining Ruff from interfering with AMS's right to use TimeTracker under the 2008 agreement.

         ¶15 Following a record stipulation for dissolution of an ex parte temporary restraining order and unsuccessful mediation, Ruff filed an answer denying all of AMS's original complaint allegations and asserting various affirmative defenses and counterclaims, including breach of the 2008 licensing agreement, tortious interference with third-party relations, conversion, misappropriation of intellectual property, MUTSA violation, and unjust enrichment. Ruff's answer described TimeTracker as a "website [that] consists of several components," including compiled machine code (functional component) residing on the Ruff server at AMS together with SQL-based source code constituting the database component of the program. Ruff further sought declaratory judgment adjudicating the validity and enforceability of the 2008 licensing agreement and an injunction enjoining AMS from sharing or modifying the TimeTracker software, using TimeTracker in the development of AMS's own payroll-processing software, and requiring AMS to grant Ruff access to the Ruff server at the AMS facility. AMS subsequently filed an amended complaint asserting for the first time that AMS "owned" TimeTracker and that the 2008 licensing agreement was invalid as an unauthorized corporate act. In response, Ruff asserted additional counterclaims that AMS materially breached the licensing agreement and violated MUTSA by allowing unauthorized third-party access to the Ruff server to copy the installed TimeTracker software for use by AMS in developing its SlatePay software.

         ¶16 A central basis for Ruff's theft-based counterclaims (i.e. conversion, misappropriation of intellectual property, and MUTSA violation) and related discovery requests were two e-mails Daniel unexpectedly received in June 2015 from "slatepayroll.com" and addressed to him at "AE Widgets." Recognizing the name "AE Widgets" as part of a fictitious data set he created in 2007 for use in the development and testing of TimeTracker, Daniel first suspected that AMS was using TimeTracker to aid in the development of what became its competing SlatePay software. Based on that suspicion, Ruff subsequently propounded various discovery requests for production of specified documents including but not limited to all internal AMS e-mail communications regarding the development of SlatePay.

         ¶17 On October 2015, Ruff moved for summary judgment on the validity of the 2008 licensing agreement and AMS's claimed ownership of TimeTracker. Following the appearance of new counsel for AMS, [8] the District Court granted Ruff's motion, ruling that the 2008 licensing agreement was a valid and enforceable contract executed within the actual or ostensible authority of AMS's corporate agent, Diane Ruff, and in any event subsequently ratified by AMS board acknowledgment and performance. The court accordingly dismissed AMS's competing declaratory judgment claims, thereby effectively ruling that AMS had no right to TimeTracker other than as provided by the licensing agreement.

         ¶18 On March 22, 2016, in the wake of AMS's boilerplate responses to Ruff's requests for production (e.g. not relevant, privileged, or not likely to lead to discovery of relevant evidence), Ruff filed a motion to compel more particular AMS responses related to the development of SlatePay including, inter alia, any and all internal AMS e-mails from April 2015 through June 2015 containing the words "TimeTracker," "SlatePay," or various iterations thereof. Ruff also moved for compelled production of SlatePay design and data-structure documentation, lists of SlatePay data field names, SlatePay source code, and any other technical information or related correspondence potentially probative of AMS's alleged use of TimeTracker code or features in the development of SlatePay. On June 1, 2016, the District Court partially granted Ruff's motion to compel, ordering production of a limited scope of internal AMS correspondence and e-mail communications, but held Ruff's request for production of the SlatePay source code in abeyance pending hearing.[9]

         ¶19 At hearing on June 13, 2016, Daniel conceded that, contrary to his earlier discovery requests, he did not need access to the SlatePay source code to assess whether AMS had converted or incorporated portions of TimeTracker into SlatePay. Moreover, AMS presented testimony from in-house software developer James Collins that, though he designed SlatePay to access the SQL-based TimeTracker database component to convert the stored AMS client data from the SQL format used by TimeTracker to the NoSQL format used by SlatePay, he had not otherwise examined or considered the TimeTracker source code in the development of SlatePay. Daniel testified that he was unable to rebut Collins's testimony because AMS had failed to provide the previously requested internal e-mails and because Ruff's retained expert was unavailable for the June 13th hearing. Based on Daniel's concession and Collins's unrebutted testimony, the District Court denied the balance of Ruff's motion to compel and allowed AMS to go forward with the development and marketing of SlatePay.

         ¶20 Following the June 13th hearing and prior to responding to AMS's pending motion for summary judgment on Ruff's counterclaims, Ruff moved for a continuance pursuant to M. R. Civ. P. 56(f) for additional time to: (1) obtain production of the AMS correspondence and internal e-mails compelled under the District Court's June 1st order; (2) depose Collins and other AMS personnel; and (3) allow Ruff's retained software expert to analyze the information obtained. The court granted Ruff's motion and ordered AMS to file a written certification of compliance with the June 1st order.

         ¶21 On August 24, 2016, Ruff filed a response to AMS's motion for partial summary judgment on the Ruff counterclaims. Two days later, in dispute of AMS's August 22nd certification of compliance with the June 1st discovery order, Ruff filed a second motion to compel additional production from AMS on the assertion that the "central issue at the heart of the litigation remains in dispute" due to AMS's failure to respond to previously propounded discovery requests, thereby preventing Ruff's expert from evaluating "whether and to what extent AMS leveraged TimeTracker in the creation of SlatePay." Ruff characterized AMS's response to the District Court's June 1st discovery order as a "2, 000-page document dump" of "purportedly responsive materials" that "were largely irrelevant" and which "clearly omitted certain" previously requested documents such as internal AMS communications related to TimeTracker and the development of SlatePay between April and June 2015.

         ¶22 On September 26, 2016, the District Court conducted a hearing on Ruff's second motion to compel, the parties' cross-motions for summary judgment on Ruff's counterclaims, and a new Ruff motion for leave to assert additional counterclaims (bad faith and abuse of process). On October 12, 2016, with rulings on those matters still pending following the September 26th hearing, Ruff deposed AMS's lead software designer James Collins. Two days later, Ruff filed a supplement to its second motion to compel asserting that Collins' deposition testimony disclosed for the first time the existence and substance of previously requested, but yet unproduced, e-mails from AMS executive director Roadifer to Collins in 2015 regarding AMS's intent to develop what became SlatePay, as well as a separate AMS e-mail transmittal to Collins of the credentials for administrative access to TimeTracker. Collins' deposition testimony further revealed that he had also exchanged a number of other previously requested, but as yet unproduced, e-mails with AMS information technology supervisor, Tracy Roadifer, about the development of SlatePay. Ruff further informed the District Court that Collins testified that he could easily create a previously requested list of SlatePay functions and features, user interfaces, and sample data.

         ¶23 On October 24, 2016, the District Court issued a written order denying Ruff's second motion to compel, denying its motion for leave to add additional counterclaims, and granting summary judgment on both parties' motions, thereby dismissing all remaining AMS claims against Ruff and all Ruff counterclaims against AMS. The District Court further ruled that neither party was entitled to attorney fees on the ground that neither had proven a breach of the 2008 licensing agreement by the other and thus neither was the prevailing party "[i]n the event of a breach" within the meaning of the contract attorney fees provision.

         ¶24 On November 7, 2016, Ruff filed a motion for contract attorney fees as the prevailing party in the dispute over the validity and enforceability of the 2008 licensing agreement or, alternatively, pursuant to § 27-8-313, MCA (discretionary attorney fees on successful declaratory judgment). Pursuant to M. R. Civ. P. 60(b), Ruff filed a separate motion requesting that the District Court set aside its grant of summary judgment to AMS on the Ruff counterclaims and related denial of Ruff's motion to add additional counterclaims. Ruff again asserted that Collins' deposition testimony revealed that AMS failed to produce previously requested internal AMS communications vital to his counterclaims. Ruff asserted that the Collins' deposition testimony confirmed Ruff's suspicions that AMS had accessed the TimeTracker database and converted its data for use in SlatePay. The District Court denied Ruff's Rule 60(b) motion on the ground that, in light of the existing facts of record, Collins' deposition testimony revealed no new information that was either relevant or reasonably likely to lead to the discovery of relevant information. The court further denied Ruff's motion for attorney fees. Ruff appeals and AMS cross-appeals.

         STANDARDS OF REVIEW

         ¶25 This Court reviews a district court's grant or denial of summary judgment and related conclusions of law de novo for correctness. Bitterrooters for Planning, Inc. v. Mont. Dep't of Envtl. Quality, 2017 MT 222, ¶ 15, 388 Mont. 453, 401 P.3d 712; McClue v. Safeco Ins. Co. of Illinois, 2015 MT 222, ¶ 8, 380 Mont. 204, 354 P.3d 604. We review a district court's discretionary rulings on discovery matters for an abuse of discretion. Jacobsen v. Allstate Ins. Co., 2009 MT 248, ¶ 53, 351 Mont. 464, 215 P.3d 649.

         DISCUSSION

         ¶26 1. Did the District Court erroneously grant summary judgment in favor of Ruff that the 2008 TimeTracker licensing agreement was valid and enforceable and that AMS had no right to TimeTracker other than as provided by the agreement?

         ¶27 The District Court granted summary judgment to Ruff that the 2008 licensing agreement was a valid and enforceable contract executed within the actual or ostensible authority of AMS's corporate agent Diane Ruff and subsequently ratified by AMS board acknowledgment and performance. The court accordingly dismissed AMS's competing declaratory judgment claims, thereby effectively ruling that AMS had no right to TimeTracker other than as provided by the licensing agreement. AMS asserts that the District Court erred because Daniel created TimeTracker within the scope of his AMS employment and that the agreement was thus void due to lack of consideration. AMS alternatively ...


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