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July 10, 2017

Legal Update
Andrew R. Levin

First Circuit upholds chapter 93A punitive-damages verdict in dispute over the negotiation of a commercial contract between software developers

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The First Circuit’s recent decision in Full Spectrum Software, Inc. v. Forte Automation Systems, Inc., 858 F.3d 666 (June 2, 2017) addressed two important issues for parties engaged in the negotiation of commercial contracts in Massachusetts. The court upheld a jury verdict awarding nearly $500,000 in actual and punitive damages under Massachusetts General Laws chapter 93A against a software-development company in what began as a billing dispute with another developer. In affirming the verdict, the First Circuit held that even in dealings between such sophisticated business entities, the defendant was properly found liable for acting unfairly or deceptively, in violation of chapter 93A, when it “strung along” the other party by delaying the signing of a contract. The court also held that the trial judge properly permitted a jury to decide the defendant’s liability under chapter 93A, notwithstanding the defendant’s objection and uncertainty as to whether a plaintiff has a constitutional right to a jury trial of such a claim.

Forte Automation Systems, Inc. (“Forte”) entered into a contract to engineer specialized software for a proton radiation therapy station in a cancer treatment hospital.  Forte then entered into subcontract with Medical Instruments Co. dba Civco Medical Solutions (“Civco”), which in turn entered into a subcontract with Full Spectrum Software, Inc. (“Full Spectrum”) for software development services.  Civco later pulled out of the project and informed Full Spectrum that it should bill all further work directly to Forte.  After Full Spectrum and Forte entered into a Consulting Services Agreement,  Full Spectrum then sent Forte a Work Order, which contained the details of the Full Spectrum’s work on the project, and requested that Forte sign it.  Despite Full Spectrum’s repeated requests that Forte sign the Work Order, Forte refused to do so.  The dispute arose when Forte refused to pay for the software development work that Full Spectrum had completed at Forte’s direction while the parties negotiated the terms of their commercial agreement after Civco pulled out of the project.

Full Spectrum sued Forte in federal court in Massachusetts and asserted claims for breach of implied contract and violation of chapter 93A.  Prior to trial, Full Spectrum moved that the chapter 93A claim be submitted to a binding jury, or in the alternative, for an advisory jury, to which Forte objected.  The district court allowed Full Spectrum’s motion and submitted the chapter 93A claim to a binding jury.  The jury returned a verdict in Full Spectrum’s favor, awarding $133,053.75 in actual damages, and $350,000 in punitive damages based on a violation of chapter 93A.

On appeal, Forte raised two issues:  (1) whether the evidence was sufficient to support the jury’s verdict and (2) whether the trial court’s decision to submit the chapter 93A claim to a binding jury was improper.

In finding that there was sufficient record evidence to support the jury’s finding that Forte violated chapter 93A, the First Circuit focused on contention that Forte had violated chapter 93A by intentionally “stringing along” to Forte’s benefit and Full Spectrum’s detriment by leading Full Spectrum to believe that Forte would sign Full Spectrum’s work order so that Full Spectrum would continue its work and then attempting to leverage Full Spectrum’s financial exposure for the work that it had already done to obtain terms that were more favorable than the work order.  The First Circuit held, consistent with Massachusetts precedent, that such conduct, even in dealings between sophisticated parties, may violate chapter 93A.

In this respect, the court’s decision should act as a reminder to parties engaged in the negotiation of commercial contracts in Massachusetts of the real potential for exposure under chapter 93A even when dealing with others presumably “inured to the rough and tumble of the world of commerce.”

The Full Spectrum decision is also important because the First Circuit held that, pursuant to the Seventh Amendment, and under the particular facts of the case, the parties were entitled to a jury trial on the plaintiff’s chapter 93A claim even though the jury claim is “with respect to a state created right when the state statute or state constitution would preclude a jury trial in state court”.  While the holding, as the First Circuit acknowledged in its decision, was based upon the particular facts of the case and the arguments of the parties and is likely to be revisited, for now the decision certainly raises the possibility that federal court litigants may be entitled to a jury trial on their chapter 93A claims.  This is certainly a consideration in deciding whether to proceed in federal court or state court as the Supreme Judicial Court has previously held that there is no right to a jury trial for a chapter 93A claim in Massachusetts state courts under the Massachusetts constitution.