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Shema Kolainu-Hear Our Voices v. Providersoft

May 21, 2010


The opinion of the court was delivered by: Trager, J


Shema-Kolainu-Hear Our Voices ("SK-HOV" or "plaintiff") brings this action against ProviderSoft, LLC ("ProviderSoft" or "defendant") for damages surrounding a software licensing contract between the two organizations. Although SK-HOV does not assert a direct breach of contract claim, it argues that the contract as written should be held unconscionable and that ProviderSoft fraudulently obtained its participation in the agreement. SK-HOV's complaint asserts claims of: (1) breach of implied warranty of merchantability, implied warranty of fitness for a particular purpose and express warranty; (2) violation of New York General Business Law § 349; (3) strict product liability; (4) gross negligence; (5) negligence and (6) fraud in the inducement. Jurisdiction is premised on diversity under 28 U.S.C. § 1332.

Defendant has moved to dismiss all of plaintiff's claims pursuant to Federal Rule of Civil Procedure 12(b)(6). For the reasons stated below, defendant's motion is granted in part and denied in part.



The following facts are taken from the complaint and, for the purposes of this motion, are presumed to be true. SK-HOV is a New York educational, not-for-profit corporation that provides therapeutic services to children suffering from autism spectrum disorders and other disabilities. Compl. ¶ 4. SK-HOV works primarily with clients obtained under the auspices of programs run by the City of New York ("the City"), in particular the City's Early Intervention Program ("EI"). Id. at ¶ 8. EI has "highly detailed and specific requirements" for its billing system, including the designation of some services that must be billed on-line through a company chosen by the City, and other services that must be billed in paper format. Id. At the time of the underlying dispute, the City used the company Covansys for its on-line billing. Id.

Beginning in the summer of 2007, plaintiff sought a new computer software and billing system that could help it comply with the complicated billing requirements of EI in "an accurate and complete manner," and could also perform other "critical functions," including keeping track of plaintiff's clientele, the amounts billed for services and payments rendered by the City. Id. at ¶ 9.

In its search for a new software provider, SK-HOV encountered Providersoft, a New Jersey limited liability company that creates and licenses software systems. Id. at ¶ 5. Providersoft maintains a website where it advertises its "Providersoft EI" system, which is marketed to EI agencies -- such as SK-HOV -- as providing "state of the art Covansys Interface for EI Billing." Id. at ¶ 10 and Ex. A. The website explains that Providersoft EI will "[a]llow your organization to empower your contract or employee service providers to reach a previously unimaginable level of organization, compliance and commitment to your clients and company." Id. at ¶ 11 and Ex. B.

SK-HOV representatives met with Providersoft representatives on several occasions, beginning in August 2007, to discuss whether Providersoft EI might fit SK-HOV's software needs. Id. at ¶ 12. At these meetings, Providersoft representative Mark Shaw ("Shaw") made several statements to SKHOV about the capabilities of Providersoft EI, including that the software would be "100% compliant with EI regulations regarding double billing" and that the software offered billing protections that would not allow SK-HOV to overbill inadvertently. Id.

Plaintiff alleges that, relying upon Shaw's representations, it entered into a licensing agreement with defendant on October 16, 2007, wherein plaintiff agreed to pay a monthly fee in exchange for the use of defendant's EI software (the "contract"). Id. at ¶ 13 and Ex. C. The contract, effective December 1, 2007, included the following disclaimer of warranty:


Id. at Ex. C § 7.2.

Unfortunately, defendant's software did not prove to be satisfactory for SK-HOV's needs. SK-HOV alleges numerous flaws in Providersoft EI, including electronic billing of some services required by EI to be billed in paper form, erroneous data management, false reports of bills having been submitted, double billing for some services and several other problems tracking services and making payments. Compl. ¶ 14. Plaintiff also more generally claims that the system lacked reasonable basic functions. Id. These alleged defects resulted in significant financial harm to plaintiff. Id. at ¶ 15. EI requires that all bills be submitted within ninety days of services; thus, many bills that were submitted late due to the alleged flaws in defendant's software were denied as untimely. Id. Moreover, some improper billings resulted in overpayment to plaintiff, "potentially exposing plaintiff to delisting from the EI program or worse legal consequences." Id. Furthermore, these mistakes required hiring additional employees as well as enlisting plaintiff's regular employees to expend "thousands of hours" to correct the errors. Id. Plaintiff repeatedly notified defendant of these averred defects but defendant took no action and denied that there were any errors in its software, instead alleging that any errors were due to bad data entry or the inexperience of plaintiff's employees. Id. at ¶ 16.

It is unclear how long plaintiff continued to use defendant's software or whether the relationship between the parties has now ended. The contract provided an initial term of thirty-six months commencing in December 2007, which would make the agreement still effective unless terminated by one of the parties. See id. at Ex. C § 6.1. The contract did permit termination by SK-HOV in the event of a breach by ProviderSoft after providing notice and opportunity to cure. Id. § 12.1. However, there is no mention in any of the papers of whether SK- HOV ever attempted to exercise this right, and SK-HOV is not now claiming breach of contract.

Instead, SK-HOV is proceeding against ProviderSoft under a number of alternative theories. First, SK-HOV claims breach of implied warranty of merchantability, implied warranty of fitness for a particular purpose and express warranty. Next, it asserts a claim that ProviderSoft's behavior violates New York's Deceptive Acts and Trade Practices Law, N.Y. Gen. Bus. Law § 349. Finally, SK-HOV asserts tort claims of strict product liability, gross negligence, negligence and fraud in the inducement. Defendant has moved to dismiss all of these claims for failure to state a claim under Fed. R. Civ. P. 12(b)(6). For the reasons explained below, defendant's motion is denied with respect to plaintiff's claim of fraudulent inducement, but granted with respect to the remainder of plaintiff's claims.



Governing Standards and Law When considering a motion to dismiss under Rule 12(b)(6), allegations in the complaint are accepted as true and all reasonable inferences are drawn in the plaintiff's favor. Holmes v. Grubman, 568 F.3d 329, 335 (2d Cir. 2009). To survive a motion to dismiss, a plaintiff must allege "enough facts to state a claim to relief that is plausible on its face." Twombly v. Bell Atl. Corp., 550 U.S. 544, 570 (2007). Although normally only a "short and plain statement" of a plaintiff's claim for relief is required under the Federal Rules of Civil Procedure, there is a heightened pleading requirement for claims of fraud. See Fed. R. Civ. P. 8(a), 9(b). Rule 9(b) requires that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity."

Both parties appear to agree that this software licensing agreement should be categorized as a "good" and thereby governed by Article 2 of New York's Uniform Commercial Code ("U.C.C.").*fn1

See N.Y. U.C.C. § 2-102 (McKinney's 2010) (Article 2 applies to "transactions in goods"). Case law confirms that this is acceptable practice, although not a firmly established conclusion. See Arbitron, Inc. v. Tralyn Broad., Inc., 400 F.3d 130, 138 & n.2 (2d Cir. 2005) ("It is not clear whether, under New York law, a license agreement [for data or software]... constitutes a contract for the sale of goods, or is otherwise governed by the U.C.C."); Schroders, Inc. v. Hogan Sys., Inc., 137 Misc.2d 738, 741, 522 N.Y.S.2d 404, 406 (Sup. Ct. N.Y. County 1987) (finding that software licensing agreement fell "within the purview of Article 2 of the Uniform Commercial Code"); Commc'ns Groups, Inc. v. Warner Commc'ns, Inc., 138 Misc. 2d 80, 81-84, 527 N.Y.S.2d 341, 343-45 (N.Y.C. Civ. Ct. 1988) ("[I]t seems clear that computer software, generally, is considered by the courts to be a tangible, and movable item, not merely an intangible idea or thought and therefore qualifies as a 'good' under Article 2 of the UCC."); cf. Richard A. Rosenblatt & Co., Inc. v. Davidge Data Sys. Corp., 295 A.D.2d 168, 168, 743 N.Y.S.2d 471, 472 (1st Dep't 2002) (finding contract for computer hardware and software user rights to be a contract for the sale of goods). Accordingly, plaintiff's warranty claims will be evaluated under U.C.C. Article 2.


Breach of Warranty Defendant first argues that all of plaintiff's breach of warranty claims must be dismissed because the contract contains an explicit disclaimer of all warranties. SK-HOV does not directly challenge the existence or scope of this disclaimer, but instead argues that the terms of the contract are unconscionable, such that ...

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