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UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
PRAIRIE RIVER HOME CARE, INC.
Civil No. 17-5121 (JRT/HB)
Plaintiff,
v.
MEMORANDUM OPINION
AND ORDER
PROCURA, LLC
a/k/a Complia Health
Defendant.
Jade Bailey Jorgenson and Pamela Abbate-Dattilo, FREDRIKSON &
BYRON, PA, 200 South Sixth Street, Suite 4000, Minneapolis, MN 55402,
for plaintiff.
Hillard M. Sterling, WINGET SPADAFORA SCHWARTZBERG LLP,
135 South LaSalle Street, Suite 1921, Chicago, IL 60603; Klay C. Ahrens,
HELLMUTH & JOHNSON PLLC, 8050 West 78th Street, Edina, MN
55439, for defendant.
Plaintiff Prairie River Home Care, Inc. (“Prairie River”), brings this fraud and
contract action against Defendant Procura, LLC, arising from the sale of software. Procura
moves to dismiss Prairie River’s Amended Complaint in its entirety. The Court will
conclude that Prairie River has sufficiently stated claims for fraudulent inducement, breach
of contract, and breach of express warranty. However, the Court will dismiss Prairie
River’s claims for breach of implied warranty of merchantability, rescission, and
consequential damages. Accordingly, the Court will grant in part and deny in part
Procura’s motion.
BACKGROUND
FACTUAL BACKGROUND
The following recitation of facts is based on the allegations contained in Prairie
River’s Amended Complaint. (Am. Compl. (“Compl.”), Dec. 13, 2017, Docket No. 23.)
A. Sale of the Software
Prairie River is a Medicare-certified, home health care provider in the state of
Minnesota. (Id. ¶¶ 1, 5-8.) Procura designed and developed the Procura Software Program
(the “Software”) – an agency-management software package for health-care providers. (Id.
¶¶ 9-12.) The Software provides clinical, mobile, operational, financial, and resource-
management tools for health-care providers working with elderly and disabled populations.
(Id. ¶ 10.)
In May 2015, Prairie River contacted Procura about its Software because Prairie
River was looking for new software with enhanced documentation capabilities. (Id. ¶¶ 12-
13.) Between June and October 2015, Procura demonstrated its Software for Prairie River
on a number of occasions. (Id. ¶ 14.) During these demonstrations, Procura made
numerous representations about the Software’s capabilities. (Id. ¶¶ 15-18.) Prairie River
informed Procura that it needed the Software to “go live” no later than January or February
2016. (Id. ¶ 20.) Procura led Prairie River to believe that this deadline was feasible and
that Procura had transitioned “tons” of Riversoft clients to Procura’s Software. (Id. ¶¶ 20-
21.)
In September 2015, Procura sent representatives to Prairie River’s corporate office
to negotiate the Software sale. (Id. ¶ 24.) Prairie River insisted on having more time to
consider the deal. (Id.) However, Procura informed Prairie River that it was important for
the parties to complete the sale before the end of Procura’s third quarter so that Procura
could report the sale on its financial statements. (Id. ¶¶ 24-25.) Prairie River and Procura
entered into a Master Software License and Support Agreement (the “Agreement”) on
September 30, 2015. (Id. ¶ 26; Aff. of Klay C. Ahrens ¶ 2, Ex. A (“Agreement”) at 15,
Dec. 27, 2017, Docket No. 30.)
B. The Agreement
Prairie River purchased a perpetual enterprise license of the Software for “on-
premise” installation. (Agreement at 13.) This “Perpetual License Term” grants Prairie
River “a perpetual, non-exclusive, non-transferable right and license to access and use the
Software and any Work Product to which the Software relates.” (Id. at 3.) The Agreement
defines “Software” as “the software, in object code form, identified in the Software Order,
including related Documentation, Enhancements, Modifications, Upgrades, and Embedded
Software.” (Id. at 2.) “Documentation” means “the user guides, operating manuals,
educational materials, product descriptions and specifications, technical manuals,
supporting materials, and other information relating to the Software.” (Id. at 1.)
For Software “acquired by Customer as an ‘on-premise’ software product,” the
Agreement’s Warranty Provision warrants that, “during the ninety (90) day period
commencing on the Effective Date [i.e., September 30, 2015]: (a) the Software will be
capable of functioning substantially in accordance with its applicable Documentation.” (Id.
at 8.) To invoke the warranty, Prairie River was required to “notif[y Procura] of the specific
non-conformance within the ninety (90) day period referred to” in the Warranty Provision.
(Id.) The Agreement excludes all other warranties – express or implied – and states that
the Software is provided on an “AS IS” basis. (Id. at 9.)
Procura also agreed to provide Prairie River with “Software Problem and Hardware
support.” (Id. at 6.) Upon confirmation of a “software problem” (defined as “an inability
of the Software to perform, in all material respects, in accordance with its related
Documentation”), Procura agreed to “make reasonable efforts to correct the matter.” (Id.
at 2, 6.)
The Agreement contains a number of limitations of liability and damages, including
a disclaimer of consequential and incidental damages. (Id. at 9.) The Agreement also
limits Procura’s liability to the amount of fees actually paid to Procura in the 12-month
period before initiation of the claim. (Id.)
Finally, the Agreement contains an integration clause, which states that the final
agreement constitutes “the final and complete expression” of the agreed-to terms and
“supersedes all prior proposals, understandings and negotiations between the Parties,
whether written or not.” (Id. at 11.) The Agreement is governed by Illinois law. (Id.)
C. Implementation
Implementation, training, and configuration of the Software were undertaken by
Procura and an associate company, Salo Solutions, Inc. (“Salo”). (Compl. ¶ 33.) The
transition did not go smoothly.
Prairie River anticipated that the Software would go live in January or February
2016 – as it had been assured by Procura. (Id. ¶¶ 20, 40.) Around November 2015, Procura
delivered a database to Prairie River but the database was not functional because it was
missing key features necessary to bill Medicare or Medicaid. (Id. ¶¶ 37-38.) In November
2015, Salo informed Prairie River that it was impossible for the Software to go live by
January or February 2016 and that it took other customers one year to complete the
implementation phase. (Id. ¶ 40.) The Software finally went live on June 1, 2016. (Id.
¶ 41.)
After the Software went live, it failed to function in accordance with its
documentation. (Id. ¶¶ 43-88). Prairie River notified Procura about these problems but
Procura failed to remedy the defects. (See, e.g., id. ¶¶ 42, 47-48, 89-102.) Moreover,
Prairie River discovered that Procura had made misleading or false statements about the
functionalities of the Software during the sales process. (See, e.g., id. at pp. 32-33). The
defects in the Software hindered Prairie River’s ability to bill patients, pushing it to the
edge of bankruptcy. (Id. ¶¶ 90-91, 102.) Prairie River paid over $800,000 in out-of-pocket
expenses as a result of the Software’s failure – not including lost profits, lost personnel,
and lost business opportunities. (Id. at 102.)
In November 2016, Prairie River Chief Information Officer Austin Figge sent an
email to Procura asking for assistance. (Id. ¶ 91.) In February 2017, Prairie River and
Procura met to discuss the situation, and Procura promised to propose a plan to correct the
Software’s deficiencies by February 20. (Id. ¶ 95.) Procura never sent Prairie River a plan.
(Id. ¶¶ 96-99.) On March 1, 2017, Prairie River decided to abandon the Software. (Id. ¶¶
100-101.)
PROCEDURAL BACKGROUND
Prairie River filed this action in state court on October 18, 2017. (Notice of
Removal ¶ 3, Ex. A, Nov. 15, 2017, Docket No. 1.) Procura removed the case to federal
court. (Notice of Removal ¶ 11.) Prairie River filed an Amended Complaint on December
13, 2017. (Compl.) Prairie River pleads claims of breach of contract, (id. ¶¶ 106-23);
breach of warranty, (id. ¶¶ 124-34); rescission, (id. ¶¶ 134-41); and fraudulent inducement
(id. at pp. 31-33.) With respect to the breach-of-contract claim, Prairie River requests
consequential damages, arguing that Procura’s willful misconduct permits recovery
notwithstanding the Agreement’s disclaimer of consequential damages. (Id. ¶ 122.)
Procura’s Motion to Dismiss is now before the Court. (Mot. to Dismiss, Dec. 27,
2017, Docket No. 27.)
DISCUSSION
STANDARD OF REVIEW
In reviewing a Rule 12(b)(6) motion, the Court considers all facts alleged in the
complaint as true to determine whether it states a “claim to relief that is plausible on its
face.” Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 594 (8th Cir. 2009) (quoting
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). “A claim has facial plausibility when the
plaintiff pleads factual content that allows the court to draw the reasonable inference that
the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678. “Where a
complaint pleads facts that are ‘merely consistent with’ a defendant’s liability, it ‘stops
short of the line between possibility and plausibility[,]’” and therefore must be dismissed.
Id. (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 557 (2007)). Although the Court
accepts the complaint’s factual allegations as true, it is “not bound to accept as true a legal
conclusion couched as a factual allegation.” Id. (quoting Twombly, 550 U.S. at 555).
Therefore, to survive a motion to dismiss, a complaint must provide more than “‘labels and
conclusions’ or ‘a formulaic recitation of the elements of a cause of action.’” Id. (quoting
Twombly, 550 U.S. at 555.)
I. FRAUDULENT INDUCEMENT
Procura moves to dismiss Prairie River’s fraudulent-inducement claim, arguing that
(1) Prairie River failed to plead fraud with particularity as required by Federal Rule of Civil
Procedure 9(b); (2) Prairie River cannot maintain both fraudulent-inducement and breach-
of-contract claims; (3) Prairie River’s allegations defeat its fraudulent-inducement claim,
and (4) the false statements alleged by Prairie River were statements of future events or
opinions.
Under Illinois law, fraudulent inducement is a form of common-law fraud. Avon
Hardware Co. v. Ace Hardware Corp., 998 N.E.2d 1281, 1287 (Ill. App. Ct. 2013). In
order to plead a claim of fraudulent inducement, a plaintiff must allege “(1) a false
statement of material fact; (2) knowledge or belief by the defendant that the statement was
false; (3) an intention to induce the plaintiff to act; (4) reasonable reliance upon the truth
of the statement by the plaintiff; and (5) damage to the plaintiff resulting from this
reliance.” Id.
The Court will deny Procura’s Motion to Dismiss with respect to Prairie River’s
fraudulent-inducement claim.
A. Pleading Requirements
The Court must decide whether Prairie River pleads fraud with sufficient
particularity. The Court will conclude that Prairie River has met the pleading requirements
of Federal Rule of Civil Procedure 9(b).
“In alleging fraud or mistake, a party must state with particularity the circumstances
constituting fraud or mistake.” Fed. R. Civ. P. 9(b). Allegations of fraud must include
“such matters as the time, place and contents of false representations, as well as the identity
of the person making the misrepresentations and what was obtained or given up thereby. . . .
[C]onclusory allegations that a defendant’s conduct was fraudulent and deceptive are not
sufficient to satisfy the rule.” Parnes v. Gateway 2000, Inc., 122 F.3d 539, 550 (8th Cir.
1997) (alterations in original) (quoting Commercial Prop. Inv’rs., Inc. v. Quality Inns Int’l,
Inc., 61 F.3d 639, 644 (8th Cir. 1995)). However, Rule 9(b) does not require the plaintiff
to “allege specific details of every alleged fraudulent claim forming the basis of [the]
complaint.” United States ex rel. Joshi v. St. Luke’s Hosp., Inc., 441 F.3d 552, 557 (8th Cir.
2006). Instead, the plaintiff must simply show “representative examples” of the alleged
fraudulent conduct. Id. As a general matter, the “who, what, when, where, and how” of
any fraud claim must be pleaded in detail. Parnes, 122 F.3d at 550 (quoting DiLeo v. Ernst
& Young, 901 F.2d 624, 627 (7th Cir. 1990)).
Prairie River’s Complaint satisfies the requirements of Rule 9(b). Prairie River
alleges that “Procura representatives” made false and misleading statements “during the
sale process.” (Compl. at p. 32.) Other allegations establish that this “sales process”
occurred during demonstrations and meetings between May and October 2015. (Id. ¶¶ 12-
14, 19.) Prairie River describes the alleged fraudulent statements in detail:
• Procura falsely represented that Procura had other clients in Minnesota billing
similar services as Prairie River. (Id. at p. 32.)
• Procura misrepresented the Software’s ability to handle Prairie River’s billing
needs. (Id.) Specifically, Procura assured Prairie River that the Software could bill
in units. (Id. ¶ 67.) Procura provided materials stating that the Software “make[s]
sure your billing is accurate and timely, and that “[b]illing and collection have never
been easier.” (Id. ¶ 17 (alterations in original).) The Software did not meet these
requirements. (Id. ¶¶ 69-75.)
• Procura misrepresented the Software’s ability to handle Prairie River’s
documentation needs. (Id. at p. 32.) Procura assured Prairie River that the Software
had compression capabilities to handle the size of Procura’s database. (Id. ¶ 18.)
Defects in the Software caused Procura’s documents to disappear. (Id. ¶¶ 46-53.)
• Procura misrepresented that the Software had all the financial-management tools
and could perform the same functions as the products being sold by Salo. (Id. at
p. 32.) Procura told Prairie River that Salo’s tools were outdated and that Procura
had added the necessary components to the Software. (Id. ¶ 63.) Procura had not
implemented Salo’s tools into the Software, and the Software did not function
without them. (Id. ¶ 64.)
• Procura falsely stated that the Software’s Pathways feature was being used by
similar organizations. (Id. ¶ 56; id. at p. 32.)
• Procura omitted the fact that its only other former Riversoft client had been stuck in
implementation for over a year. (Id. at p. 32.) During the sales process, Procura
claimed it had transitioned “tons” of clients from Riversoft and that the transition
went smoothly. (Id. ¶ 21.) Salo informed Prairie River that the other customer had
been transitioning from Riversoft for a year. (Id. ¶ 40.)
• Procura misrepresented that a go-live date of January or February 2016 was feasible.
(Id. at p. 33; id. ¶ 20.) In November 2015, Salo informed Prairie River that this
deadline was “actually laughable.” (Id. ¶ 40.) The Software did not go live until
June 1, 2016. (Id. ¶ 41.)
Prairie River alleges that Procura knew that it provided Prairie River with false
information, and Prairie River relied on Procura’s expertise in deciding to purchase the
Software. (Id. ¶¶ 120-21.) Prairie River alleges that Procura made these false statements
to induce Procura to purchase the Software despite its defects and limitations because
Procura needed to report the sale on its financial statements. (Id. ¶¶ 24-25, 119).
In sum, Prairie River alleges with a high degree of detail that Procura representatives
knowingly made fraudulent statements about the Software’s functionality between May
and October 2015 during the sales process. Prairie River has alleged the “who, what, when,
where, and how” of its fraud claim with sufficient particularity. Parnes, 122 F.3d at 550.
The Complaint provides Procura with extensive information to ascertain the allegations
made against it. The Court concludes that Prairie River has satisfied the pleading
requirements of Federal Rule of Civil Procedure 9(b).
B. Inconsistent Theories of Liability
The Court must decide whether Prairie River can maintain claims for both
fraudulent inducement and breach of contract. Under Illinois law, “failure to perform a
contractual promise, even when the promise is made with an intent not to perform[,] does
not constitute common law fraud.” Nat’l Wrecking Co. v. Midwest Terminal Corp., 601
N.E.2d 999, 1007 (Ill. App. Ct. 1992). Essentially, a party cannot recover in tort for what
is essentially a breach of contract. See Masters v. Cent. Ill. Elec. & Gas. Co., 129 N.E.2d
586, 597 (Ill. App. Ct. 1995). However, an exception exists “where the plaintiff is
fraudulently induced to enter into the contract in the first place” because fraudulent
inducement vitiates the making of the contract itself. Johnson v. George J. Ball, Inc., 617
N.E.2d 1355, 1361 (Ill. App. Ct. 1993). Prairie River alleges that Procura made false
statements during the sales process to induce Prairie River to purchase the Software.
(Compl. at pp. 32-33.) Accordingly, the Court concludes that Prairie River’s fraud claim
falls within the inducement exception and, therefore, Prairie River may maintain both its
fraudulent-inducement claim and breach-of-contract claim.
C. Inconsistent Facts
The Court must decide whether Prairie River’s allegations negated its claim of
fraudulent inducement by pleading inconsistent factual statements in the Complaint. The
Court will conclude that Prairie River has permissibly pleaded alternative theories of fact.
In order to plead fraudulent inducement, Prairie River must allege that Procura
knowingly made a false statement. Avon Hardware Co., 998 N.E.2d at 1287. In its count
of fraudulent inducement, Prairie River alleges that Procura made knowingly false and
misleading statements by falsely representing “the Software’s capabilities in the United
States and in Minnesota.” (Id. p. 32.) This allegation clearly alleges Procura’s fraudulent
intent. In contrast, in its count of rescission, Prairie River alleges that “all parties to the
Agreement reasonably but wrongly believed that Procura’s Software was capable of
substantially functioning within the Minnesota and U.S. regulatory requirements
applicable to Prairie River’s business.” (Compl. ¶ 137.) This allegation certainly suggests
that Procura did not know that its statements about the Software’s capabilities were false.
Procura is correct that the allegations are inconsistent.
However, these inconsistent allegations are not fatal to Prairie River’s fraudulent-
inducement claim. In effect, Prairie River pleads alternative theories of fact.1 Under the
Federal Rules of Civil Procedure, “a claimant may plead inconsistent facts in support of
alternative theories of recovery.” Babcock & Wilcox Co. v. Parsons Corp., 430 F.2d 531,
536 (8th Cir. 1970). Rule 8(d)(3) explicitly permits a party to “state as many separate claims
or defenses as it has, regardless of consistency.” Although Prairie River’s rescission claim
and fraudulent-inducement claim – and the underlying factual allegations supporting each
1 The Court acknowledges that Prairie River incorporated all previous allegations of its
Complaint in its count for fraudulent inducement. (See Compl. at p. 31.) Taken literally, this
would mean that Prairie River is alleging both that (1) Procura reasonably but wrongfully believed
the Software met regulatory requirements and (2) Procura knew that the Software did not met
regulatory requirements. The contradiction is so clear that any reasonable individual would
understand Prairie River to be pleading in the alternative. The incorporation of the rescission
allegations into the fraudulent-inducement allegations is surely the result of imprecise drafting.
The Court will construe the allegations as pleading in the alternative.
– are inconsistent, the Court concludes that Prairie River is free to plead facts in the
alternative to support each claim.
D. Fraudulent Statements
The Court must decide whether Prairie River has stated a claim for fraudulent
inducement. Procura argues that Prairie River has not alleged any false statements because
the alleged statements relate to future events or opinions. The Court will conclude that
Prairie River has alleged at least some statements that are not statements of future events
or opinions.
In order to plead fraudulent inducement, Prairie River must allege a false statement
of material fact. Avon Hardware Co., 99 N.E.2d at 1287. “Statements regarding future
events or circumstances are not a basis for fraud. Such statements are regarded as mere
expressions of opinion or mere promises or conjectures upon which the other party has no
right to rely.” Madison Assocs. v. Bass, 511 N.E.2d 690, 699 (Ill. App. Ct. 1987) (citations
omitted). However, there is an exception to this general rule “where the false statements
were part of a fraudulent scheme.” Id. at 699-700.
The Complaint alleges that Procura made false statements about existing
characteristics of the Software and Procura’s current customers. For example, Procura
represented that the Software was capable of servicing Prairie River’s Medicare-certified
business, but the Software was missing components required to service Medicare and
Medicaid clients. (Compl. ¶¶ 15, 23, 38.) Procura represented that it had incorporated
Salo’s tools into the Software, but Salo’s tools had not been incorporated into the Software.
(Id. ¶¶ 63-64.) Procura represented that it had clients in Minnesota with similar billing
services as Prairie River, but Procura had no such clients. (Id. at 32.) These alleged
statements are not statements about future events or mere opinions. During the sales
process, Procura would have known whether it had customers similar to Prairie River and
whether the Software contained certain features, such as Salo’s tools. In short, Procura
would have known the veracity of these statements at the time of the sale. Prairie River
has pleaded false statements of material fact.
At this stage, the Court need not parse every allegation to determine whether it
constitutes a false statement. It is sufficient that some of the false statements alleged do
not concern future events or opinions. And some statements – even if they concern future
events – may fall within the exception for false statements made as part of a fraudulent
scheme. Madison Assocs., 511 N.E.2d at 699-700. Accordingly, the Court concludes that
Prairie River has sufficiently alleged that Procura knowingly made false statements.
Having examined all of Procura’s arguments, the Court will deny Procura’s Motion
to Dismiss with respect to Prairie River’s fraudulent-inducement claim.
CONTRACTUAL CLAIMS
Prairie River pleads a number of contractual claims, including (1) breach of
contract, (2) breach of express warranty, and (3) rescission. Prairie River also requests
consequential damages stemming from its breach-of-contract claim. Procura moves to
dismiss all of Prairie River’s contract claims. The Court will grant in part and deny in part
Procura’s Motion to Dismiss with respect to Prairie River’s contract claims.
A. Applicability of the UCC
As a threshold issue, the Court must decide whether Article 2 of the Uniform
Commercial Code (“UCC”) applies to the Agreement. The Court will conclude that the
Agreement is a contract for the sale of goods to which Article 2 of the UCC applies.
Article 2 of the UCC applies to “transactions in goods.” 810 Ill. Comp. Stat. 5/2-
102. Under Illinois law, whether a sale of software constitutes a “transactions in goods”
depends on various considerations. Dealer Mgmt. Sys., Inc. v. Design Auto. Grp., Inc., 822
N.E.2d 556, 560-62 (Ill. App. Ct. 2005); see Newcourt Fin. USA, Inc. v. FT Mortg. Cos.,
161 F. Supp. 2d 894, 896-97 (N.D. Ill. 2001).
One consideration is the rights conferred to the purchaser by the Agreement. “[A]
transaction that nominally involves a mere license to use software will be considered a sale
under the UCC if it ‘involves a single payment giving the buyer an unlimited period in
which it has a right to possession.’” Dealer Mgmt., 822 N.E.2d at 561 (quoting SoftMan
Prods. Co., LLC v. Adobe Sys. Inc., 171 F. Supp. 2d 1075, 1086 (C.D. Cal. 2001)).
Another consideration is whether the components of the software package were
developed from scratch. Id. Off-the-rack software is almost always a good. Customization
or modification of a standard software product is generally considered the manufacture of
a good rather than a service. Id. (citing Micro Data Base Sys., Inc. v. Dharma Sys., Inc.,
148 F.3d 649, 654 (7th Cir. 1998)).
Additionally, contracts for the sale of software often include provisions of services,
such as training and technical support. “Where there is a mixed contract for goods and
services, there is a ‘transaction in goods’ only if the contract is predominantly for goods
and incidentally for services.” Brandt v. Bos. Sci. Corp., 792 N.E.2d 296, 299 (Ill. 2004).
Article 2 applies to sales of software where the ancillary services offered are similar to
those generally accompanying sales of computer systems, such as installation, training, and
technical support. Dealer Mgmt., 822 N.E.2d at 561.
Here, the Agreement is the sale of software that has been customized for Prairie
River’s business. First, Prairie River purchased a perpetual enterprise license, meaning
that Prairie River has a non-transferable right and license to perpetually access and use the
Software. (Agreement at 3, 13); see also Dealer Mgmt., 822 N.E.2d at 561. Second, the
Complaint and the Agreement suggest that the Software is a standard Procura product.
(Compl. ¶¶ 12-18; Agreement at 3.) Customization of the Software is considered the
manufacture of the Software in this case. Dealer Mgmt., 822 N.E.2d at 561. Third, the
ancillary services provided in the Agreement are the sorts of services – installation,
training, and technical support – expected to accompany a sale of software. (Agreement at
5-7); see also Dealer Mgmt., 822 N.E.2d at 561. Accordingly, the Court concludes that
the Agreement governs a sale of goods subject to Article 2 of the UCC.
B. Breach of Contract
The Court must decide whether Prairie River has stated a claim for breach of
contract. The Court will conclude that Prairie River has stated such a claim.
In order to plead a claim of breach of contract, a plaintiff must allege “the existence
of the contract purportedly breached by the defendant, the plaintiff’s performance of all
contractual conditions required of him, the fact of the defendant’s alleged breach, and the
existence of damages as a consequence.” Wait v. First Midwest Bank/Danville, 491 N.E.2d
796, 799 (Ill. App. Ct. 1986).
The parties do not dispute that the Agreement constitutes a contract. Under the
Agreement, Procura granted Prairie River a right to access and use the Software in
consideration for payment by Prairie River. (Agreement at 3.) The Agreement defines
“Software” as “the software, in object form, identified in the Software Order, including
related Documentation, Enhancements, Modifications, Upgrade, and Embedded
Software.” (Id. at 2.) The Agreement defines “Documentation” as “the user guides,
operating manuals, education materials, product descriptions and specifications, technical
manuals, supporting materials, and other information relating to the Software.”
(Agreement at 1.) Procura also agreed to provide Prairie River with “Software Problem
and Hardware support.” (Id. at 6.) Upon confirmation of a “software problem” (defined
as “an inability of the Software to perform, in all material respects, in accordance with its
related Documentation”), Procura agreed to “make reasonable efforts to correct the
matter.” (Id. at 2, 6.)
Prairie River alleges that it paid Procura almost $600,000 for the Software and
support. (Compl. ¶¶ 102-03, 119.) However, Prairie River alleges that Procura failed to
provide it with the Software contracted for because the Software did not comport with the
Agreement. (Compl. ¶ 111.) The Complaint describes numerous ways in which the
Software did not comport with the Agreement. (Compl. ¶ 112.) The Complaint also
alleges that Procura failed to provide technical support to correct the identified software
problems. (Compl. ¶¶ 114-17; Agreement at 5-7.) Prairie River alleges that it was
damaged by Procura’s breach. (Compl. ¶ 123.)
Prairie River adequately pleads a breach-of-contract claim. See Wait, 491 N.E.2d
at 799. The Court will deny Procura’s Motion to Dismiss with respect to Prairie River’s
breach-of-contract claim.
C. Breach of Warranty
The Court must decide whether Prairie River has stated a claim for breach of
warranty. The Court will conclude that the Warranty Provision applies to the sale of the
Software and that Prairie River has stated a claim that the Warranty Provision’s 90-day
notification requirement is unconscionable. However, the Court will dismiss any claim for
breach of the implied warranty of merchantability as insufficiently pleaded.
The Warranty Provision states: “For Software acquired by Customer as an ‘on-
premise’ software product (for installation on a Customer’s Server), during the ninety (90)
day period commencing on the Effective Date: (a) the Software will be capable of
functioning substantially in accordance with its applicable Documentation. . . .”
(Agreement at 8.) As a condition for invoking the warranty, the customer is required to
“notif[y] [Procura] of the specific non-conformance within the ninety (90) day period
referred to therein.” (Id.) Procura would then either modify the Software to conform to
the customer’s needs, provide a reasonable workaround solution, or terminate the
Agreement and return the license fees, less a reasonable amount for prior use. (Agreement
at 9.)
1. Applicability of the Warranty Provision
The Court must decide whether the Warranty Provision applies to the sale of
Software to Prairie River. The Court will conclude that the Warranty Provision applies to
this sale.
The Agreement contains two alternative warranties. (Agreement at 8.) Which
warranty applies depends on how the customer acquires the Software: (1) as a SaaS
offering, or (2) as an “on-premise” Software product. (Id.) The method of acquisition is
the condition precedent for the Warranty Provision. Prairie River acquired the Software
as “on-premise” product and, therefore, this Warranty Provision applies to the sale of
Software here. (Id. at 13.) The “on-premise” Warranty Provision specifies that it applies
“during the ninety (90) day period commencing on the Effective Date.” (Id. at 8) This is
the duration of the warranty. For this 90-day period, Procura warrants that “the Software
will be capable of functioning substantially in accordance with its applicable
Documentation.” This is the warranty.
To the extent that Procura might be arguing that the duration of the warranty is part
of the condition precedent, the Court finds this argument unpersuasive. The condition
precedent and the duration of the warranty are separated by a comma: “For Software
acquired by Customer as an ‘on-premise’ software product (for installation on a
Customer’s Server), during the ninety (90) day period commencing on the Effective
Date: . . .” (Id. at 8.) With the comma, the plain language of the Warranty Provision
forecloses this reading by separating the condition precedent and the duration of the
warranty. Moreover, this reading would create an unbalanced result whereby Procura
could delay giving the customer access to the Software solely to circumvent the
applicability of the Warranty Provision.
Accordingly, because Prairie River acquired the Software as an “on-premise”
Software product, the Warranty Provision applies to the sale in this case.
2. Unconscionability of the 90-Day Notification Requirement
The Court must decide whether Prairie River has stated a claim that the 90-day
notification requirement of the Warranty Provision is unconscionable. The Court will
conclude that Prairie River has stated such a claim.
In order to benefit from the Warranty Provision, Prairie River was required to notify
Procura “of the specific non-conformance within the ninety (90) day period” commencing
on the Effective Date. (Agreement at 8.) Procura argues that the duration of the Warranty
Provision elapsed before Prairie River notified it of the defects. There is no dispute that
Prairie River did not notify Procura of the non-conformities until after the 90-day period.
However, Prairie River alleges that the notification requirement is unconscionable because
the Software was not installed until after the 90 days had lapsed.
If a court finds that a provision of a contract is unconscionable, the court “may so
limit the application of any unconscionable claim as to avoid any unconscionable result.”
810 Ill. Comp. Stat. 5/2-302(1). “Substantive unconscionability concerns the actual terms
of the contract and examines the relative fairness of the obligations assumed. Indicative of
substantive unconscionability are contract terms so one-sided as to oppress or unfairly
surprise an innocent party, an overall imbalance in the obligations and rights imposed by
the bargain, and significant cost-price disparity.” Kinkel v. Cingular Wireless LLC, 857
N.E.2d 250, 267 (Ill. 2006) (citation omitted) (quoting Maxwell v. Fidelity Fin. Servs., Inc.,
907 P.2d 51, 58 (Ariz. 1995)). “When a party alleges unconscionability, “the parties shall
be afforded a reasonable opportunity to present evidence as to its commercial setting,
purpose and effect to aid the court in making the determination.” 810 Ill. Comp. Stat. 5/2-
302(2).
Prairie River alleges that the purpose of the Warranty Provision was “to allow
Prairie River a 90-day window to evaluate the Software and its functioning capabilities and
notify Procura of any deficiencies.” (Compl. ¶ 129.) Prairie River alleges that the
notification requirement of the Warranty Provision is unconscionable because it rewards
Procura for failing to deliver the Software until after the duration of the warranty had
lapsed. Prairie River has alleged an imbalance of obligations because it was only possible
for Prairie River to notify Procura about the Software’s non-conformities within the 90-
day period if Procura provided Prairie River the Software during that timeframe.
Procura argues that there can be no unconscionability as a matter of law because
both Prairie River and Procura are sophisticated entities. Agreements reached by
sophisticated entities are rarely unconscionable. See R.O.W. Window Co. v. Allmetal, Inc.,
856 N.E.2d 55, 60 (Ill. App. Ct. 2006) (“The Courts are less reluctant to hold businessmen
to the terms of contracts to which they have entered than consumers dealing with skilled
corporate sellers.”) But “the mere fact that both parties are businessmen [does not] justify
the utilization of unfair surprise to the detriment of one of the parties.” Kinkel, 857 N.E.2d
at 264 (quoting Frank’s Maint. & Eng’g, Inc. v. C.A. Roberts Co., 408 N.E.2d 403, 410
(Ill. App. Ct. 1980)). Prairie River alleges a disparity in the sophistication and bargaining
power of the parties, (Compl. ¶ 8), and, therefore, the Court cannot conclude that the
notification requirement was not unconscionable as a matter of law. Whether the
notification requirement is in fact unconscionable is a factual determination best left for a
later date. See 810 Ill. Comp. Stat. 5/2-302(2).
The Court will therefore deny Procura’s Motion to Dismiss with respect to Prairie
River’s breach-of-warranty claim.
3. Implied Warranty of Merchantability
At oral argument, Prairie River suggested that it was also claiming a breach of the
implied warranty of merchantability. The Court must decide whether Prairie River has
stated a claim under the implied warranty of merchantability.
Under Section 2-314 of the UCC, “[u]nless excluded or modified (Section 2-316),
a warranty that the goods shall be merchantable is implied in a contract for their sale if the
seller is a merchant with respect to goods of that kind.” 810 Ill. Comp. Stat. 5/2-314(1).
The phrase “as is” disclaims the implied warranty of merchantability unless “circumstances
indicate otherwise.” 810 Ill. Comp. Stat. 5/2-316(3)(a).
Prairie River neither cites the relevant statutory provisions nor references the
implied warranty of merchantability by name in the Complaint or its briefing. In the
Complaint, Prairie River only pleads a breach of express warranty. (Compl. ¶¶ 126-27
(quoting the Warranty Provision and stating that Procura “breached this warranty.”
(emphasis added)). In its brief, Prairie River explicitly stated that it pleaded breach of
express warranty. Prairie River did not make clear that it was raising such a claim until
oral argument. Therefore, Prairie River has not stated a claim for breach of the implied
warranty of merchantability.
Accordingly, the Court will grant Procura’s Motion to Dismiss to the extent that
Prairie River is claiming breach of the implied warranty of merchantability.
D. Rescission
The Court must decide whether Prairie River has stated a claim for rescission based
on mutual mistake. The Court will conclude that Prairie River has not stated such a claim
because Prairie River has not alleged that the parties had a mutual misunderstanding about
the terms of the Agreement.
In order to plead a claim of rescission, a plaintiff must allege that “(1) both parties
were mistaken regarding a material feature of the contract; (2) this matter is of such grave
consequence that enforcement of the contract would be unconscionable; (3) the plaintiff’s
mistake occurred despite the exercise of reasonable care; and (4) the other party can be
placed in the status quo.” Stewart v. Thrasher, 610 N.E.2d 799, 805 (Ill. App. Ct. 1993).
“In order to be material, the condition must be essential to one of the parties and must be
mutually agreed upon and understood by the parties.” Id. However, “a contract . . . cannot
be avoided or disregarded by one of the parties to it because he discover[s] that the contract
is less profitable to him than he anticipated when he entered to it.” Diedrich v. N. Ill. Pub.
Co., 350 N.E.2d 857, 857-58 (Ill. App. Ct. 1976). The Illinois Court of Appeals has
adopted Williston’s statement of this rule:
[T]he fact that the goods are better or worse than supposed or
possess different qualities not affecting identity will ordinarily
be immaterial and the same principle is applicable to other
contracts than those of purchase and sale where the nature or
quality of some object is involved.
Id. at 858 (13 Williston on Contracts § 1569 (3d ed. 1959)).
Prairie River alleges that “all parties to the Agreement reasonably but wrongly
believed that Procura’s Software was capable of substantially functioning within the
Minnesota and U.S. regulatory requirements” and that “the Software was capable of
meeting the needs of Prairie River’s home health care business.” (Compl. ¶ 137.) Prairie
River explains in its Memorandum of Law that, “[u]pon implementation of Procura’s
Software into Prairie River’s business, it became clear that the Software was not capable
of substantially functioning in accordance with Prairie River’s representations and
demonstrations on which Prairie River relied.” (Mem. Opp. at 30-31, Jan. 17, 2018, Docket
No. 37.) In sum, Prairie River alleges that the Software did not work. See Diedrich, 350
N.E.2d at 858. Prairie River does not allege a mutual mistake about a particular term of
the Agreement. These allegations alone cannot support a claim of rescission. Id.
Accordingly, the Court will grant Procura’s Motion to Dismiss with respect to the
claim of rescission.
E. Consequential Damages
The Court must decide whether Prairie River may recover indirect or consequential
damages resulting from Procura’s alleged breach of contract. The Agreement disclaims
Procura’s liability for consequential and incidental damages. (Agreement at 9.) Prairie
River makes two arguments as to why the Court should not enforce the disclaimer: (1)
Procura’s willful misconduct and (2) unconscionability of the disclaimer provision. The
Court will grant Procura’s Motion to Dismiss with respect to Prairie River’s request for
consequential, indirect, and incidental damages.
1. Willful Misconduct
The Court must decide whether Prairie River may recover consequential damages
as a result of Procura’s alleged willful misconduct. Prairie River alleges that, “[a]s a result
of Procura’s willful misconduct, Prairie River is entitled to recover all of its damages
caused by Procura’s breaches of the Agreement, including lost profits, irrespective of any
language in the Agreement purporting to limit Procura’s liability for damages.” (Compl.
¶ 122.) Prairie River cites a number of cases that have held that willful misconduct may
render a disclaimer of consequential damages unenforceable. However, every case cited
by Prairie River applies New York law. Conk v. Richards & O’Neil, LLP, 77 F. Supp. 2d
956, 965-66 (S.D. Ind. 1999); TGB, Inc. v. Bendis, 845 F. Supp. 1459, 1461 (D. Kan. 1994);
Laudisio v. Amoco Oil Co., 437 N.Y.S.2d 502 (N.Y. Sup. Ct. 1981); Graphic Scanning
Corp. v. Citibank, N.A., 116 A.D.2d 22, 26 (N.Y. App. Div. 1986); Kalisch-Jarcho Inc. v.
City of New York, 448 N.E.2d 413 (N.Y. 1983).
Prairie River has not cited – and the Court has not found – any applicable authority
to suggest that this rule applies under Illinois law. Prairie River quotes a single line from
Sorkin v. Blackman, Kallick & Co., Ltd., to support its arguments that Illinois courts have
adopted this rule. 540 N.E.2d 999, 1003 (1989) (“Willful and wanton misconduct affects
the amount of damages in a breach of contract action and is not a separate tort.”). Sorkin
is inapposite. Sorkin concerned whether a plaintiff could obtain punitive damages in a
contract case where the breach also constituted a separate tort. Id. at 1004. Sorkin did not
address whether a willful breach of a contract renders an exclusion of consequential
damages unenforceable.
Absent any relevant authority, the Court concludes that Prairie River cannot recover
consequential damages for Procura’s alleged willful misconduct.
2. Unconscionability
The Court must decide whether Prairie River has stated a claim of unconscionability
with respect to the provision excluding consequential damages. “Consequential damages
may be limited or excluded unless the limitation or exclusion is unconscionable.” 810 Ill.
Comp. Stat. 5/2-719(3). Although Prairie River suggested at oral argument that it was
arguing such a theory, the Complaint does not allege that the disclaimer of consequential
damages is unconscionable. The Complaint only alleges that consequential damages
should be awarded because of willful misconduct. (Compl. ¶ 122.) Prairie River clearly
envisions willful misconduct and unconscionability as separate theories. The Court
concludes that Prairie River has not stated a claim of unconscionability with respect to the
exclusion of consequential damages.
Accordingly, the Court will grant Procura’s Motion to Dismiss with respect to
Prairie River’s claim for consequential damages.
ORDER
Based on the foregoing, and all the files, records, and proceedings herein, IT IS
HEREBY ORDERED that:
1. Procura’s Motion to Dismiss Plaintiff’s Amended Complaint [Docket No.
27] is GRANTED in part and DENIED in part;
2. Prairie River’s claim for breach of the implied warranty of merchantability
is DISMISSED without prejudice;
3. Prairie River’s claim for rescission is DISMISSED without prejudice; and
4. Prairie River’s claim for consequential damages is DISMISSED without
prejudice.
DATED: July 30, 2018 _________s/John R. Tunheim______
at Minneapolis, Minnesota. JOHN R. TUNHEIM
Chief Judge
United States District Court