Exceptions to the Software License Agreement Arbitration Clause

The United States Court of Appeals for the Seventh Circuit upheld a district court ruling denying a defendant’s motion to enforce an arbitration clause in a software license agreement that employee of the defendant had concluded by using a false company name under the direction of the defendant. CCC smart floors. Inc. v. Tractable Inc., Case No. 19-1997 (7th Cir. June 6, 2022) (Easterbrook, Brennan, St. Eve, JJ.)

CCC Intelligent Solutions and Tractable are competitors that provide customers, including insurance companies, with cost estimates to repair damaged cars and trucks. Both companies provide software that applies algorithms to data generated by body shops and other repair centers. CCC provides the software to customers under the terms of a license agreement. The license prohibits disassembling the software code or incorporating it into other software, prohibits assignment of the license without CCC’s consent, and includes a statement that the customer is not acting as an agent of a third. The license also includes an arbitration clause. A Tractable employee licensed the software from CCC under a fake trade name, “JA Appraisal”, using a fake mailing address and a fake email address. The employee gave the software to Tractable, which disassembled the software and incorporated CCC’s proprietary algorithms into its own product. CCC became aware of Tractable’s misuse of its software and filed a lawsuit in the district court.

Tractable filed for arbitration under the terms of the agreement, arguing that JA Appraisal was its agent and therefore Tractable was a party to the license agreement. The district court denied Tractable’s motion. The district court found that a reasonable jury could conclude that CCC did not intend to license Tractable and that CCC could have reasonably believed that it was doing business with JA Appraisal based on the representations of JA Appraisal and non-assignment provisions of the agreement. Tractable appealed.

The Seventh Circuit considered whether Tractable was a party to the contract. The Court first assessed whether it was common knowledge that Tractable carried on business as JA Appraisal. The Court concluded (and Tractable’s attorney admitted) that it was not possible for CCC to discover that Tractable was using that name. Tractable, based on a comment to § 163 of the Restatement of Contracts, argued that § 163 provides that a party’s acceptance of a contract is not effective if it was induced by a misrepresentation of an essential clause of the contract by the other party. The quoted commentary provides an exception to this rule, stating that “the mere fact that one party is deceived as to the identity of the other party” does not place a case under the auspices of § 163 “unless it is not ‘affects the very nature of the case’. Contract.”

The Seventh Circuit dismissed Tractable’s reliance on the comment. The Court concluded that the identity of JA Appraisal affected the very nature of the contract and therefore the exception mentioned in the commentary did not apply. The Court explained that the exception to Article 163 covers situations where a party does not know “the whole truth” about his trading partner. The Court pointed out that such a situation did not exist here because CCC did not know that Tractable would be its business partner, especially since Tractable had told its employee to pose as a small independent appraiser. The Court explained that the laws governing this litigation are so simple that the courts of Illinois have not revisited them for more than 80 years. The court concluded that “Tractable is not a party to this contract, so it cannot seek arbitration.”

© 2022 McDermott Will & EmeryNational Law Review, Volume XII, Number 167