If a company contracts to acquire software which it then licenses to a third party as a component of a lucrative service package, did it “sell” the software? In Value Health Solutions, Inc. v. Pharmaceutical Research Associates, Inc., 891 S.E.2d 100 (2023), the question before the North Carolina Supreme Court packed quite a punch where the defendant clinical research organization (CRO) entered an approximately $491 million, multi-year contract with a client that bundled a license of that software with its services. But the CRO claimed it didn’t re-sell the software, and thus owed nothing to the software’s creator which had contracted for a cut of such transactions.

Value Health and PRA contemplated a number of milestones in their agreement that would result in payments to Value Health pegged to achievement of specified amounts of “external sales” of the software by PRA. The agreement defined an external sale as:

“the sale of one or more licenses to [the software] by [PRA] or one of its Affiliates to a third party which is not (i) an Affiliate of [PRA] or (ii) using such license(s) in connection with providing services to [PRA] and/or any of its Affiliates.”

Id. at 108.  PRA then granted its client “the right to access and use” Value Health’s software, which PRA “used in supporting or providing” services.  Id. at 109.

The Business Court granted summary judgment to PRA on the “external sale” provision, but the Supreme Court held the trial court had “misconstrued the definition of the unambiguous contract term” when it gave “credence to defendants’ argument that there has been no ‘External Sale’ without a specific fee or payment attributable solely or separately to the license.” Id. at 118.

The Supreme Court discounted PRA’s apparent argument that “by simply bundling the transfer of the license as part of a service package and by not including an invoice line item of the license” it could avoid the transaction being characterized as an external sale. “This interpretation is unreasonable and produces an absurd result,” Justice Barringer wrote. Id. As the Court noted, “PRA transferred a license” to its client, which was neither an affiliate of PRA nor providing it a service. That, the Court held, “closely mirrors” the definition of an “external sale” contained in the Value Health-PRA contract. Id.

At trial, a PRA expert had testified that “software as a service is not always a license. Sometimes it’s just that you have access to use [it].” The Supreme Court accepted that to mean “a license did not necessarily have to be issued to provide this service” to PRA’s client, but

“Nevertheless, PRA issued a license to [its client] and called it a license in the [Master Services Agreement].”

Id. The Court remanded to the Business Court for determination of whether PRA’s client agreement “was drafted such that [the client] was required to pay consideration to acquire and use a license of [Value Health’s software].” The Court also noted the trial court may wish to permit additional discovery to allow Value Health to discern whether PRA entered other contracts that were, or amounted to, a “transfer of licenses.” Id. at 118-119.

Negligent Misrepresentation

The Supreme Court also formally resolved that a negligent misrepresentation claim is subject to N.C. R. Civ. P. Rule 9(b)’s requirement that it be plead with particularity. The Court agreed with a Middle District of North Carolina ruling that a negligent misrepresentation claim is “closely akin to fraud, differing primarily in the requisite state of mind of the purported actor.” Id. at 113 (quoting Dealers Supply Co., Inc. v. Cheil Indus., Inc., 348 F. Supp. 2d 579, 590 (M.D.N.C. 2004). The Supreme Court explained its adoption of particularized pleading under the same rationale of fraud claims because it allows “the defendant [to] understand the time, place, and content of the representation, the identity of the person making the representation, and how the plaintiff justifiably relied on that information.” Id. at 113-114. The Supreme Court observed that the Business Court has applied Rule 9(b) to negligent misrepresentation claims at least since 2015.       

Takeaways

• The Supreme Court emphasized the considerable latitude North Carolina affords parties “to enter into good and bad contracts, the law enforces them both.” But it gave considerable weight to the Value Health-PRA agreement containing specific exceptions to the “external sale” definition and noted the parties “could have contracted around the issue” presented here if that “was truly an intended part of the bargain.” Id. at 115, 118.

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