DIGITECH COMPUTER v. TRANS-CARE, INC. (May 20, 2011)

When Trans-Care, a medical transportation company, decided to update its software, it approached Digitech. Digitech's first proposal contained a “satisfaction guarantee” – a provision that allowed Trans-Care to walk away from the contract in the first 90 days without paying any licensing fees. Several months later, after much negotiation, Digitech submitted a final agreement, which Trans-Care signed. The final agreement did not include the guarantee, although Trans-Care return the signed agreement with its own purchase order that purported to incorporate earlier proposals and promises. The final agreement also provided that: a) monthly licensing payments began 90 days after installation, b) Digitech could suspend services if payments became 60 days delinquent, c) Digitech could recover attorney's fees incurred in collecting unpaid balances, and d) both parties had to provide notice and an opportunity to cure prior to termination. Digitech completed the software installation on January 1, 2007. Trans-Care experienced substantial problems with the software and gave notice on March 1 that it invoking the 90-day guarantee. Digitech refused to honor the notice and eventually locked the system on April 3 for Trans-Care's payment delinquency. Digitech brought suit for breach of contract -- Trans-Care counterclaimed for fraud. Magistrate Judge Hussmann (S.D. Ind.) granted summary judgment to Digitech on the fraud claim and, at trial, found for Digitech also on its breach of contract claim. The court awarded damages based in part on its view that the contract had 33 months remaining. It also awarded Digitech its attorneys' fees for prosecuting the breach of contract case, but not for defending the counterclaim. Both sides appeal.

In their opinion, Judges Wood, Williams, and Tinder affirmed in part and vacated and remanded in part. The Court first affirmed the dismissal of Trans-Care's claim that Digitech committed fraud when it refused to honor the 90-day provision. The Court focused on the negotiation history. It pointed out that the provision existed in early draft proposals but dropped out during negotiations. The fact that it did not even appear in the final agreement was enough for the Court to conclude there was no fraud. The Court turned to Digitech's breach of contract claim. It concluded that Trans-Care breached the contract when it attempted to walk away from the deal without providing notice and an opportunity to cure. The Court rejected the notion that Trans-Care’s purchase order brought the guarantee back into the contract. The Court did part ways with the magistrate judge on damages, however. The magistrate judge calculated damages based on the remaining contractual term. But the Court noted that Digitech chose to terminate the contract on April 3. Since Trans-Care's licensing fee obligation did not begin until the 90-day period expired on March 31, Digitech is only entitled to licensing fees for the three days in April. With respect to attorneys' fees, the Court agreed that Digitech was not entitled to its fees for defending against the counterclaim since those fees were not incurred in connection with collecting an unpaid balance. Finally, the Court noted that the amount of fees awarded on the breach of contract claim should be reassessed in light of its significant reduction in damages.