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ACI Worldwide Corp. v. Churchill Lane Associates, LLC

United States Court of Appeals, Eighth Circuit

January 27, 2017

ACI Worldwide Corporation Plaintiff- Appellee
v.
Churchill Lane Associates, LLC Defendant-Appellant

          Submitted: December 9, 2016

         Appeal from United States District Court for the District of Nebraska - Omaha

          Before COLLOTON, BEAM, and GRUENDER, Circuit Judges.

          GRUENDER, Circuit Judge.

         ACI Worldwide Corporation ("ACI") brought this action seeking a declaratory judgment that it validly amended and terminated a Licensing Agreement, thus ending ACI's obligation to make royalty payments to Churchill Lane Associates, LLC ("Churchill"). Churchill counterclaimed for breach of contract, the district court granted summary judgment in favor of ACI, and Churchill now appeals. We reverse in part, affirm in part, and remand for proceedings not inconsistent with this opinion.

         I. BACKGROUND

         Nestor, Inc. ("Nestor") developed a suite of credit card fraud detection software products called Proactive Risk Management ("PRISM"). In February 2001, Nestor entered into a Licensing Agreement with ACI. The Licensing Agreement allowed ACI to use, modify, enhance, market, sub-license, maintain, and support portions of PRISM ("licensed software technology"). ACI used the licensed software technology to develop new software programs ("new technology"), which ACI licensed to its customers. Per the Licensing Agreement, Nestor owned any new technology developed by ACI. In addition, ACI agreed to pay Nestor periodic royalties, which consisted of fifteen percent of the fees paid by ACI's customers to use the new technology.

         The Licensing Agreement is governed by New York law. Section 9.2 of the Licensing Agreement ("termination provision") states that the Licensing Agreement can be terminated unilaterally by one party if the other party becomes insolvent, transfers all of its assets, or otherwise ceases to conduct business. Section 9.3 ("post-termination royalties provision") states that, even after termination, "ACI shall remain liable to Nestor for royalties" with respect to "any sublicenses granted by ACI prior to termination." Section 11.9 ("amendment provision") states that "this Agreement may be amended only by the consent of both parties."

         In 2002, Nestor faced financial difficulties and sought to sell its rights to the royalties. For that reason, Nestor and ACI executed Amendment 2 to the License Agreement, which states that "ACI hereby consents to the assignment by Nestor to a third party of the Royalties due Nestor under the Agreement." In order to purchase the rights to the royalties, several Nestor investors formed the entity known as Churchill. Although ACI also was interested in acquiring the rights to the royalties, Churchill outbid ACI. As a result, Nestor and Churchill executed an agreement entitled Assignment of Royalty Stream in which Nestor irrevocably assigned to Churchill the future royalties due to Nestor under the Licensing Agreement in exchange for $3.1 million. Nestor and Churchill also entered into a Servicing Agreement in which Nestor promised not to modify or terminate the Licensing Agreement without Churchill's consent. ACI received notice of the assignment and began remitting the royalties directly to Churchill.

         In 2007, ACI, Nestor, and Churchill executed Amendment 4 to the Licensing Agreement. This amendment served three purposes: establishing foreign currency exchange rates for the royalties; applying Section 3.3 of the License Agreement to Churchill so that ACI would be required to provide Churchill with copies of the software agreements relating to the royalty payments; and requiring Churchill to sign ACI's standard Nondisclosure Agreement. Amendment 4 stated that it was entered into by all three "parties" and that "all terms and conditions set forth in the License Agreement shall remain in full force and effect and shall continue to apply to this Amendment."

         In 2008, Nestor and ACI executed Amendment 5 in which Nestor assigned and transferred all of its rights in the new technology to ACI in exchange for $500, 000. Notwithstanding this transfer, Amendment 5 clarified that Nestor had "irrevocably" assigned all of its rights in the royalties to Churchill and that "Nestor no longer has any right, title or interest of any nature whatsoever in and to such royalties."

         In 2009, Nestor became insolvent and went into receivership. A receiver appointed by the Rhode Island Superior Court sold all of Nestor's rights in the Licensing Agreement and the licensed software technology to American Traffic Solutions ("ATS"). The Asset Purchase Agreement stated that the assets were being sold "free and clear of all Liens." Churchill received notice of this sale and did not object. After the sale, ACI continued to pay royalties to Churchill. ACI also engaged in discussions with Churchill about acquiring the rights to the royalties, but Churchill declined ACI's offers.

         Unable to acquire the rights to the royalties from Churchill, ACI instead purchased from ATS all of Nestor's remaining rights, title, and interest in the licensed software technology and the Licensing Agreement on July 20, 2014. The following day, ACI unilaterally executed a Termination of License Agreement declaring that "Licensor and Licensee hereby terminate the License Agreement as of the Effective Date and agree that all provisions of the License Agreement that were designated to survive termination are likewise terminated as of the Effective Date."[1] Several weeks later, ACI sent Churchill a letter stating that "the license agreement, including the royalty obligations assigned to Churchill Lanes, is no longer in effect." ACI also enclosed a check representing the "full and final payment" for the balance of royalties due. Churchill did not consent to the termination, and it informed ACI that it believed it was still entitled to further royalties.

         On October 20, 2014, ACI filed this diversity action in federal court, seeking a declaratory judgment that it validly terminated the Licensing Agreement and that it owed no further royalties to Churchill. Churchill responded that ACI could not amend or terminate the Licensing Agreement without Churchill's consent because Churchill was a party to the Licensing Agreement, and even if Churchill was not a party, it was at least a third-party beneficiary. Churchill also counterclaimed for royalties due under the Licensing Agreement. Churchill filed a motion for partial summary judgment, and ACI filed a motion for summary judgment.

          The district court denied Churchill's motion and granted summary judgment in favor of ACI. The court held that, due to the terms of Amendment 4, which was signed by all three parties, Churchill was "a party to the agreement in some capacity." ACI Worldwide Corp. v. Churchill Lane Assoc., LLC, No. 8:14CV249, 2016 WL 5107137, at *7 (D. Neb. Mar. 9, 2016). Nevertheless, the court held that Churchill had only those rights intended by Amendment 4, which did not include retroactively making Churchill a full party to the Licensing Agreement or the amendment provision specifically. Id. On that basis, the court held that "Churchill's permission was not needed to amend the Licensing Agreement." Id. Thus, the court concluded that ACI "validly amended the Licensing Agreement, eliminating the obligation to pay post-termination Royalties on sublicenses." Id. at *8. The court further held that ACI validly terminated the Licensing Agreement pursuant to the termination provision because Nestor had become insolvent. Id. at *9-10. Churchill now appeals.

         II. DISCUSSION

         Churchill argues that (1) ACI's amendment of the Licensing Agreement to eliminate the post-termination royalties provision is invalid, and (2) ACI's termination of the Licensing Agreement is invalid. If ACI's amendment is invalid, then ACI will continue to owe Churchill royalties on any sublicenses granted before the alleged termination date of July 21, 2014. If ACI's termination also is invalid, ACI will continue to owe royalties on any sublicenses it has granted since the alleged termination date and that it will grant in the future. We review de novo the grant of summary judgment for ACI, viewing the facts in the light most favorable to Churchill. See McPherson v. O'Reilly Auto., Inc., 491 F.3d 726, 730 (8th Cir. 2007).

         A. Amendment of the Licensing Agreement

         ACI responds that its amendment of the Licensing Agreement to eliminate the post-termination royalties provision was valid for several reasons. First, ACI contends that Churchill possessed only the limited rights identified in Amendment 4, which did not include making Churchill a full party to the entire Licensing Agreement such that any future amendments would require its consent. Second, ACI contends that Churchill is not entitled to the protections of a third-party beneficiary or assignee because Churchill had only the rights specified in Amendment 4 and because any remaining rights were extinguished by the receivership sale of Nestor's assets to ATS. Third, ACI contends that even if Churchill retains any rights, those rights ...


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