07 Oct What Happens When a Joint Venture To Develop Software Goes …
Like others, a joint venture to develop software is fraught with potential conflict. Particularly relevant to these joint ventures is the difficulty in foreseeing the ability of one party to furnish the technological expertise represented in the halcyon days when the parties execute the agreement and anticipate a generally smooth process. In addition, another pitfall of software-related joint ventures is the tendency of unforeseeable technological advances that moots the original purpose of the agreement because of the newfound obsolescence of the proposed software. Finally, in a highly technical joint venture, allocation of responsibility, particularly when the terms of the agreement are ambiguous, is rife with a potential dispute given that parties’ do not necessarily want to expend the time and funds on responsibilities that could shift the burden to that party.
The parties to a joint venture to develop virtual reality software in the education space recently found themselves in litigation concerning these issues. See Workplace Techs. Research v. Project Mgmt. Inst., No. 18cv1927JM (MSB), 2019 WL 3804019 (S.D. Cal. Aug. 13, 2019). In this case, the dispute arose over multiple software development agreements, including an agreement that derived from a purported failure to create software required by the initial agreement. After granting the defendant’s motion to dismiss for failure to state a claim, the court reached a different conclusion when reviewing the next iteration of the complaint in part because the plaintiff could show alleged specific breaches by the defendant that pertained to technological requirements arguably unassigned to either party. This is emblematic of a software-related joint venture.
This column focuses on this case, and specifically the breach of contract claims pertaining to both agreements.
Facts and Procedural History
Plaintiff Workplace Technologies Research (WTR) creates educational virtual reality-based software. Defendant Project Management Institute (PMI) is an association for the “project management profession” that, among other things, develops project management products. In 2013, WTR solicited PMI for a letter of recommendation for a grant request that WTR intended to submit to the National Science Foundation (NSF). Specifically, WTR sought funding for the development of its “accelerated learning” software wherein users would participate in a virtual world that would ultimately build users’ project management skills.
PMI conditioned its issuance of a letter of recommendation to the NSF on WTR ultimately executing a software development and purchase contract with PMI. NSF ultimately invested in the project, subject to a matching contribution from PMI.
In September 2015, the parties executed a Software Technology Development and Purchase Agreement (as amended, the Development Agreement). In essence, the Development Agreement required PMI to pay up to $4 million in return for the joint development of the virtual reality software (the Software). The development of the Software would progress in stages.
The joint venture encountered obstacles immediately. According to WTR’s operative complaint, “PMI personnel to the joint project were new to the technology at issue and unfamiliar with the respective responsibilities of the parties.” This purportedly caused “significant” development delays and caused the unanticipated financing by WTR of third-party licenses to support the “scaling, maintenance and positioning” of the underlying enterprise system of PMI that was necessary to support the Software.
Ultimately, WTR alleged that PMI prevented the development of the fifth stage of the Software. After allegedly failing to perform its obligations under the Development Agreement, in order to move forward with development, PMI demanded a study to determine whether the Software would be marketable. In late-2016, the parties amended the Development Agreement to stipulate that if PMI rejected the Software, the parties would execute a “Services Agreement” in lieu of monetary payment to WTR. Roughly a month later, PMI rejected the as-developed Software, but would retain its ownership interest in any subsequent Software.
Consequently, the parties executed a putative “Services Agreement” confirming the parties’ agreement to perform a pilot study of the economic feasibility of the Software (the Services Agreement). The pilot study stipulated that, if the Software was marketable, PMI would “accelerate development of the [Software] toward completion.”
WTR alleged that the Services Agreement required PMI to “recruit a diverse range of organizations for the pilot program” and “complete the coding for the new ‘Agile’ version of the [S]oftware.” In 2018, PMI suggested that it would not complete any form of the Software contemplate by the Development Agreement. A few months later, WTR filed a notice of termination of the Development Agreement and commenced the instant action. The court dismissed the First Amended Complaint (the FAC) for failure to state a claim, but granted WTR leave to amend.
The operative Second Amended Complaint alleged various tort and contract-based causes of action, including breach of contract, breach of the implied covenant of good faith and fraud. This column focuses on the breach of contract claim.
Legal Analysis and Conclusions
WTR averred breaches of both the Development Agreement and Services Agreement. First, according to WTR, PMI allegedly breached the Development Agreement by, inter alia, failing to perform its duties under the “Development Plan” (as defined therein). The court agreed that these specific allegations could survive a motion to dismiss. Contrasting to bare, conclusory allegations in the FAC, the court cited the specificity of WTR’s allegations that PMI allegedly breach “36 duties assigned to PMI by the Development Plan.” Critical to this holding was that WTR set forth the alleged breaches to a corresponding section in the Development Agreement.
Notably, the court rejected PMI’s defense that the Development Agreement “explicitly states that … PMI and [WTR] agreed to ‘work together in a joint effort to accomplish the tasks and objectives set forth in the Development…