New York State Court of Claims

New York State Court of Claims

COMPUWARE v. THE STATE OF NEW YORK, #2002-001-123, Claim No. 102626, Motion No. M-62177


Synopsis


The Court grants the State's motion insofar as it seeks to dismiss claimant's second, third and fourth causes of action; and denies the State's motion insofar as it seeks to dismiss the first cause of action.

Case Information

UID:
2002-001-123
Claimant(s):
COMPUWARE CORPORATION The claim also names the "NEW YORK STATE DEPARTMENT OF CORRECTIONS, NEW YORK STATE OFFICE FOR TECHNOLOGY, AND AS YET UNIDENTIFIED ACCESSORS" as defendants. The Court of Claims has no jurisdiction to hear claims against defendants other than the State of New York and certain other entities specified by statute; therefore, the Court, sua sponte, has amended the caption to reflect the only proper defendant here, the State of New York (see, Court of Claims Act § 9).
Claimant short name:
COMPUWARE
Footnote (claimant name) :

Defendant(s):
THE STATE OF NEW YORK
Footnote (defendant name) :
The claim also names the "NEW YORK STATE DEPARTMENT OF CORRECTIONS, NEW YORK STATE OFFICE FOR TECHNOLOGY, AND AS YET UNIDENTIFIED ACCESSORS" as defendants. The Court of Claims has no jurisdiction to hear claims against defendants other than the State of New York and certain other entities specified by statute; therefore, the Court, sua sponte, has amended the caption to reflect the only proper defendant here, the State of New York (see, Court of Claims Act § 9).
Third-party claimant(s):

Third-party defendant(s):

Claim number(s):
102626
Motion number(s):
M-62177
Cross-motion number(s):

Judge:
SUSAN PHILLIPS READ
Claimant's attorney:
Shanley, Sweeney, Reilly & Allen, P.C.By: J. Michael Naughton, Esq., Of Counsel
Defendant's attorney:
Hon. Eliot Spitzer, NYS Attorney GeneralBy: Eidin Beirne, Esq., Assistant Attorney General, Of Counsel
Third-party defendant's attorney:

Signature date:
December 31, 2002
City:
Albany
Comments:

Official citation:

Appellate results:

See also (multicaptioned case)



Decision

The following papers were read and considered on defendant's motion to dismiss the claim pursuant to CPLR 3211which was treated as a motion for summary judgment pursuant to CPLR 3211 (c): Notice of Motion, dated and filed August 11, 2000; Affidavit of G. Ronald Courington, sworn to August 9 and filed August 11, 2000, with annexed Exhibit 1; Affidavit of Thomas F. Duffy, sworn to and filed August 11, 2000, with annexed Exhibits 2-3; Affidavit of Ann Brown, sworn to August 9 and filed August 11, 2000; Affidavit of Daniel Ryan, sworn to and filed August 11, 2000; Defendant's Memorandum of Law, dated and received August 11, 2000; Affidavit in Opposition of J. Michael Naughton, Esq., dated January 4 and filed January 8, 2001, with annexed Exhibits A-D; Affidavit of Michelle Peterson, sworn to January 5 and filed January 8, 2001; Affidavit of Ronald E. McNulty, sworn to January 5 and filed January 8, 2001; Affidavit of Donna M. Olson, sworn to January 4 and filed January 8, 2001; Memorandum of Law on Behalf of Compuware Corporation, dated January 4 and received January 8, 2001; Claimant's Appendix of Exhibits, undated and received January 8, 2001; Reply Memorandum of Law, dated and received January 19, 2001; Supplemental Affidavit of J. Michael Naughton, Esq., sworn to and filed January 10, 2002, with annexed Exhibits A-D; Supplemental Appendix of Exhibits, dated and received January 10, 2002 [Exhibits 1-34]; Claimant's Supplemental Memorandum of Law, dated January 9 and received January 10, 2002; Defendant's Supplemental Reply Memorandum of Law, dated and received January 24, 2002; Affidavit of Michael R. Simmonds, sworn to and filed January 24, 2002; Affidavit of Peter L. Poleto, Jr., sworn to January 23 and filed January 24, 2002; Reply Memorandum Submitted on behalf of Claimant, dated January 31 and received February 1, 2002; Reply Affidavit of J. Michael Naughton, Esq., sworn to January 31 and filed February 1, 2002; and the Claim, dated June 19 and filed June 20, 2000, with annexed Exhibits A-D.
  1. Background
  1. The Master Agreement

Claimant Compuware Corporation ("claimant") and defendant State of New York ("defendant" or "the State"), acting through the Office of General Services ("OGS"), entered into a computer software licensing agreement (the "Master Agreement") for a three-year term commencing upon its approval by the New York State Comptroller ("Comptroller"), which took place on January 22, 1998, with an option to renew for two additional one-year periods (Claim, dated June 19 and filed June 20, 2000, with annexed Exhibits A-D ["Claim"], ¶¶ 5-7; Claimant's Appendix of Exhibits, undated and received January 8, 2001 ["Claimant's App."], Exh. 1 ["Master Agreement with Compuware Corporation (New York State Comptroller's Contract Number PT00538)"], MA-1.0).[1] The Master Agreement sets forth the terms and conditions governing claimant's sale of listed software products and related services (i.e., maintenance, training and consulting, which are not relevant to this matter) to defendant.

The Master Agreement[2] provides for an Authorized User to acquire a 30-day Trial License[3] from claimant at no cost in order to install and test Software[4] prior to any licensure (MA-5.3). The Master Agreement defines "Authorized Users" in relevant part as "[a]ny agency

. . . authorized by law to purchase from OGS centralized commodities contracts" and "Agency or Agencies" to include "[a]ny governmental department, agency, board, commission, authority, public benefit corporation, office or institution of the State of New York, or the State of New York acting on behalf of one or more of the foregoing entities authorized under NYS law to participate in NYS centralized procurement contracts" (MA-3.0 [emphasis added]); therefore, the Master Agreement authorized both governmental departments, agencies, boards, commissions, authorities, public benefit corporations, offices or institutions of the State of New York or the State of New York, acting on behalf of one or more such entities, to acquire a Trial License.

Acceptance of Software was effective on the date at the end of the Trial License Period when the Licensee executed a Product Order, defined as "[t]he form set forth in Appendix B which must be issued by an Authorized User in order to make a binding acquisition or licensing of Product, documentation or services under this Master Agreement.[5] The Product Order shall set forth the product, license, or service and payment option(s) which apply to the order in accordance with the terms of this Master Agreement." The Master Agreement further defines a Licensee as "Authorized Users who [sic] acquire Licensed Software and/or documentation from [claimant] by means of the issuance of a Product Order in accordance with the terms and conditions of this Master Agreement" (MA-5.3). Accordingly, since a Licensee is by definition an Authorized User, which by definition includes an Agency, which by further definition includes both an individual governmental entity (i.e., a governmental department, agency, board, commission, authority, public benefit corporation, office or institution of the State of New York) and the State of New York, acting on behalf of one or more such entities, a Licensee under the Master Agreement might be either an individual governmental entity or the State of New York, acting on behalf of one or more such entities (id.).

If the Authorized User conversely decided not to accept the Software at the end of the Trial License Period, then the rejected Software was supposed to be returned to claimant. Moreover, "[f]ailure to provide written notice of acceptance or rejection by the end of the periods provided for under this section shall be deemed acceptance by [the Authorized User] as of the expiration of that period" (id.).[6]

Licensed Software Products were priced by the CPU ("Central Processing Unit") capacity where they were installed and executed, in accordance with an annually revised pricing schedule to which a discount was applied based on order volume (MA-4.1 [F], 6.2-6.3, 6.8, E, C). In general, the Licensee was required to pay these license fees within 30 days of its acceptance of the Licensed Product (MA-6.1; but see, MA-6.10 [A] ["Periodic payments for Software license fees shall be made net thirty [30] days after the start of the license period, or upon receipt of [claimant's] invoice, whichever is later"]). Delivery was to be made within 30 calendar days after claimant's receipt of a Purchase Order (MA-5.2).

The Master Agreement further provided that individual licenses would have "the specific duration as set forth in the individual license terms and conditions" (MA-1.0); and defined the term "License Effective Date" as "[t]he date specified by Licensee on the individual Purchase Order on which delivery of the licensed product and commencement of the License Term is to become effective. Where Licensed Software is subject to an Acceptance Period,[7] the effective date shall be deemed to be the date of successful completion of the acceptance testing period as confirmed in writing by Licensee" (MA-3.0).[8]
  1. The Enterprise Agreement
Shortly after the Master Agreement was executed, Office for Technology ("OFT") employees allegedly embarked upon discussions or negotiations with claimant related to the State's plan to consolidate its agencies' computer data processing centers incrementally into two "mega-centers" to be managed and operated by OFT (Claim, ¶¶ 12-14; see, Claimant's Appendix, Exh. 10 [OGS Press Release, dated January 2, 1998]). On September 30, 1999, Michael D. Horelick ("Horelick"), an OFT employee, signed an enterprise license agreement ("Enterprise Agreement") with claimant, which licensed OFT to use listed software at seven agency locations for a flat fee of $6,996,945 to be paid to claimant in three equal installments of $2,332,315, due on September 30 of the years 1999, 2000 and 2001 (Claim, ¶¶ 15, 17-19, Exh. D). On December 9, 1999, Horelick signed an addendum to the Enterprise Agreement, which required claimant to supply OFT with a non-computer dependent password for the listed software annually during the agreement's term (Claim, Exh. D).

According to claimant, "[f]rom approximately September 30, 1999 until on or about April 3, 2000, the OFT repeatedly requested Claimant to forebear the payment of the [$2,332,315] due under the Enterprise Agreement and the [$271,362] due from Corrections while the OFT was preoccupied with internal administrative matters and priorities, such as the State's Year 2000 compliance and contingency planning" (Claim, ¶ 20); however, in April 2000, OFT repudiated the Enterprise Agreement,[9] notifying claimant that Horelick, who was by that time no longer employed by the State,[10] had no authority to execute this contract, which the Comptroller had not approved as required by law (Claim, ¶¶ 21-22; Affidavit of Thomas F. Duffy, sworn to and filed August 11, 2000, ¶¶ 6-9). On April 19, 2000, claimant allegedly notified OFT that it would no longer "forebear payment of the $2,332,315 due on the Enterprise Agreement or the $271,362 due from [DOCS] under the Master Agreement" (Claim, ¶ 23).
  1. DOCS's purported product order
On June 30, 1999, the New York State Department of Correctional Services ("DOCS") allegedly ordered software (Abend-Aid XLS and CICS Abend-Aid/FX) from claimant pursuant to the Master Agreement, which was delivered and invoiced for $271,362 almost immediately (Claim, ¶¶ 8-10, Exh. B; Affidavit of Donna M. Olson, sworn to January 4 and filed January 8, 2001 ["Olson Aff."], ¶ 60). On April 3, 2000, OFT returned this software to claimant, advising that the signature of G. Ronald Courington ("Courington") on the product order form was a forgery; that Courington had no authority to enter into agreements on behalf of the State anyway; and that the software had never been installed (Claimant's Appendix, Exh. 13). OFT further informed claimant that the State was "investigating the incident surrounding the signature of the document" and would not "forward[] [the invoice] for processing and approval by the New York state control agencies" in light of the circumstances (id.; see also, Claim, ¶¶ 8, 22, 24-25; Affidavit of G. Ronald Courington, sworn to August 9 and filed August 11, 2000 ["Courington Aff."]).
  1. This Claim
    and the Motion for Summary Judgment
On June 20, 2000, claimant filed this claim against defendant, which is comprised of four causes of action. The first cause of action seeks payment of $271,362 for the software allegedly ordered by DOCS under the Master Agreement (Claim, ¶¶ 24-25); the second seeks payment of $2,332,315, the first installment allegedly due on September 30, 1999 under the terms of the Enterprise Agreement (Claim, ¶¶ 26-27); the third seeks damages in the amount of at least $10 million for an alleged breach of the Master Agreement caused by the State's consolidation of its data centers and the alleged resulting unauthorized use of claimant's software by various State agencies in contravention of the Master Agreement's pricing schedule and restrictions (Claim, ¶¶ 28-33); and the fourth seeks damages in the amount of at least $12 million for unjust enrichment and is contingently stated; that is, claimant argues that if the Court "determines that the . . . Enterprise Agreement is invalid, upon information and belief, the State, the OFT, and as yet unidentified accessors will be unjustly enriched in that they are deriving substantial benefits from continued and expanded use of and/or access to Claimant's proprietary software products without paying Claimant the fair and reasonable value of their use and/or access" (Claim, ¶ 35).

On August 11, 2000, the State responded by way of a pre-answer motion to dismiss pursuant to CPLR 3211 for failure to state a cause of action (see, CPLR 3211 [a] [7]) (Defendant's Memorandum of Law, dated and received August 11, 2000 ["Def. Mem. of Law"], at 4-7; Reply Memorandum of Law, dated and received January 19, 2001 ["Def. Reply Mem. of Law"], at 1-2). The State principally contends that the first cause of action should be dismissed because Courington's signature was forged, he was not authorized to sign the purchase order anyway and "the software was not installed or made operational and was returned to Claimant unused" (Def. Mem. of Law, at 7); the second cause of action should be dismissed because the Enterprise Agreement was never approved by the Comptroller as required by State Finance Law § 112 (2) (id., at 2-3); the third cause of action should be dismissed because the Enterprise Agreement cannot be tied to the Master Agreement (id., at 6); and the Comptroller's failure to approve the Enterprise Agreement precludes any cause of action applying the equitable doctrine of unjust enrichment (id., at 4-5).

In opposition to the State's motion, claimant urges its need to gather information uniquely within the knowledge and control of the State and its witnesses, mainly by way of examinations before trial (Affidavit in Opposition of J. Michael Naughton, Esq., dated January 4 and filed January 8, 2001 ["Naughton Aff."], ¶¶ 4-21). Claimant also argues that material issues of fact exist regarding the purported forgery and whether DOCS, in fact, used the software delivered as a result of the allegedly forged or unauthorized product order (Memorandum of Law on Behalf of Compuware Corporation, dated January 4 and received January 8, 2001 ["Compuware Mem. of Law"], at 7-10, 11-17); defendant's alleged breach of the Master Agreement on account of suspected unauthorized dissemination of claimant's software (id., at 10, 25-27); whether the Enterprise Agreement falls under the umbrella of the Master Agreement and so does not require the Comptroller's approval (id., at 17-20); whether the Enterprise Agreement was approved by the Comptroller (id., at 20-21); and claimant's ability to recover under an unjust enrichment or quantum meruit theory (id., at 10-11, 27-29).

By letter dated August 20, 2001, the Court notified the parties that it planned to treat the motion as one for summary judgment pursuant to CPLR 3211 [c]), and gave them each several months of additional time in which to complete their submissions. Claimant bolstered its response primarily by expanding upon its earlier argument that even if the Enterprise Agreement is void, the State is still liable for unauthorized dissemination of claimant's software under certain terms of paragraph four of the Master Agreement (Naughton Supp. Aff., ¶ 6; Claimant's App., Exh. 1, ¶ 4.1 [A], [D]). Claimant's submission also includes a Supplemental Appendix of Exhibits, which consists of documents obtained by way of FOIL requests from OFT and other State agencies, including interagency e-mail correspondence and a number of spreadsheet-like documents purportedly representing, among other things, vendor software usage by agency on certain dates (Supplemental Appendix of Exhibits, dated January 10 and received January 10, 2002 ["Claimant's Supp. App."]).
  1. Discussion
  1. Claimant's second cause of action (the Enterprise Agreement
    )
Claimant's second cause of action seeks payment of $2,332,315 allegedly due on September 30, 1999 as the first installment under the Enterprise Agreement (Claim, ¶¶ 26-27). As stated above, the State's position is that since the Comptroller never approved the Enterprise Agreement (see, Affidavit of Daniel Ryan, sworn to and filed August 11, 2000), the State cannot be liable upon it (Def. Mem. of Law, at 2-3).

State Finance Law § 112 at the time required the Comptroller to approve and file in his office any contract made by a State entity or officer exceeding $10,000 before it was executed or became effective (State Finance Law § 112 [2] [a]).[11] The statute's recognized purpose "is to protect the public from governmental misconduct and improvidence" (City of New York v State of New York, 87 NY2d 982, 985) and to insure that liabilities are not created for which there has been no appropriation (230 Park Ave. Assocs. v State of New York, 165 Misc 2d 920, 924). Any party contracting with the State is chargeable with knowledge of this requirement and is bound by it (see, Parsa v State of New York, 64 NY2d 143, 147; SHLP Assocs. v State of New York, 262 AD2d 548).

Consequently, those who fail to exercise diligence when contracting with the State do so at their own risk (see, Belmar Contracting Co., Inc. v State of New York, 233 NY 189, 194; Konski Engineers, P.C. v Levitt, 69 AD2d 940, 941, affd 49 NY2d 850, cert denied 449 US 840) because absent the Comptroller's approval and the proper filing of a contract exceeding the statutory amount, there is simply no contractual basis upon which a party may hold the State liable, even if the outcome of this strict rule produces a seemingly harsh result (see, e.g., Rosefsky v State of New York, 205 AD2d 120; Campbell v State of New York, 158 AD2d 937, lv denied 75 NY2d 710; Schenker v State of New York, 126 Misc 2d 1038).[12] A prudent contracting party's only option is to withhold goods and/or services until the agreement is, in fact, approved and filed by the Comptroller, as the statute requires (see, Parsa v State of New York, supra, at 147; Lachica v State of New York, 139 Misc 2d 772, 775).

Here, claimant has not raised an issue of fact, or even pleaded (Claim, ¶ 7), that the Comptroller approved the Enterprise Agreement: the "true copy" of the Enterprise Agreement annexed to the claim (see, CPLR 3014) does not evidence the Comptroller's approval (compare, Claim, ¶¶ 5, 17, Exhs. A [Master Agreement] and D [Enterprise Agreement]). Instead, claimant responds merely that on September 30, 1999 its employee, Olson, was told by OFT's employee, Horelick, that the Comptroller had approved the Enterprise Agreement (Olson Aff., ¶ 26). Presumably, claimant would have provided an executed copy of the Enterprise Agreement, with the Comptroller's signature, if such an approved contract, in fact, ever existed.

Claimant implicitly acknowledges this deficiency by attempting to incorporate the Enterprise Agreement into the valid Master Agreement (Compuware Mem. of Law, at 17-20). Based on the merger clause of the Master Agreement, however, such an alteration or modification would be invalid unless the purported alteration was "executed by authorized representatives of both parties . . . includ[ing] . . . the Commissioner of OGS, the Attorney General, and the Comptroller on behalf of the State of New York" (Claim, Exh. A, ¶ 16). This provision is in accord with the rule that requires independent Comptroller approval for any renewal, modification or alteration not specifically provided for in the original contract (see, 230 Park Ave. Assocs. v State of New York, 165 Misc 2d 920, 925, supra).

Even if the Enterprise Agreement could be construed as somehow falling under the Master Agreement's umbrella of authority, it created a liability against the State of well over $6,000,000 and would thus require separate Comptroller approval. The terms of the Enterprise Agreement constituted a significant alteration of the contractual relationship memorialized in the Master Agreement, which only contemplated discrete purchases by individual agencies to be paid for on an as purchased basis. Thus, the Comptroller's approval of the Enterprise Agreement would still be required notwithstanding his prior approval of the Master Agreement because the former substantially varied the terms of the latter, in effect creating an entirely new agreement (see, City of New York v State of New York, supra, at 986; Nevins Realty Corp. v State of New York, 240 AD2d 480; Edward C. Flaherty Corp. v State of New York, 102 Misc 2d 438, 441-442; Westgate North, Inc. v State Univ. of N.Y., 77 Misc 2d 611, affd 47 AD2d 1004, lv denied 36 NY2d 647; see also, 2 NYCRR 7.2; Becker v State of New York, 65 AD2d 65, affd 48 NY2d 867; Long Island R.R. v State of New York, 185 Misc 646).

Next, contrary to claimant's argument that an issue of fact exists regarding whether Horelick had apparent authority to execute the Enterprise Agreement and/or whether subsequent actions of the State ratified the otherwise invalid agreement (Compuware Mem. of Law, at pp. 21-25), these questions can be answered as a matter of law. "An agent's power to bind his [or her] principal is coextensive with the principal's grant of authority. One who deals with an agent does so at his [or her] peril, and must make the necessary effort to discover the actual scope of authority" (Ford v Unity Hosp., 32 NY2d 464, 472). Damages resulting from a third party's failure to ascertain the true scope of the purported agent's actual authority cannot automatically be remedied by resort to the doctrine of apparent authority without a factual showing that the third party "relied upon the misrepresentations of the agent because of some misleading conduct on the part of the principal--not the agent" (id. at 473; accord, Hallock v State of New York, 64 NY2d 224, 231).

Here, despite Olson's statement that claimant "was informed that an OFT Project Manager, Michael Horelick, was designated as the State official in charge of software procurement for the State's information technology consolidation" (Olson Aff., ¶ 13), there is no evidence of who, as a principal, allegedly informed claimant of this or that any such person possessed the requisite authority to bind the State to a contract. The remainder of Olson's affidavit makes clear that it was the actions and words of Horelick, the purported agent, upon which she relied. For example, Olson explains how Horelick told her that he was in charge of negotiating and developing the Enterprise Agreement (Olson Aff., ¶ 15), that he would handle finalization of the agreement (Olson Aff., ¶ 23), that OGS, the Attorney-General and the Comptroller had approved the Enterprise Agreement and, finally, that it had been fully executed by the State (Olson Aff., ¶¶ 24-26). Based on Horelick's representations, claimant delivered the software covered by the Enterprise Agreement and provided unrestricted passwords enabling State agencies to use the software on any computer (Claimant's Supplemental Memorandum of Law, dated January 9 and received January 10, 2002 ["Claimant's Supp. Mem. of Law"], at 3).

Moreover, claimant's resort to the doctrine of apparent authority to rescue the Enterprise Agreement suffers from an additional flaw. That is, claimant could rely upon the "appearance of authority only to the extent that such reliance [was] reasonable" (Hallock v State of New York, supra, at 231; see, Bruckner v Hartford Acc. and Indem. Co., 239 AD2d 806, 807, lv denied 90 NY2d 812). Given the fact that claimant must be held to know that where there is no Comptroller approval, there is no valid contract (see, State Finance Law § 112 [2]; Parsa v State of New York, 64 NY2d 143, supra; SHLP Assocs. v State of New York, 262 AD2d 548, supra), any reliance upon Horelick's, or any other entities', alleged assurances is per se unreasonable.

Finally, the State cannot be seen to have ratified the Enterprise Agreement by its subsequent conduct. The doctrine of ratification, like its relative estoppel, may not be utilized where, as here, its application would effectively prevent the government from "discharging its statutory duties"; i.e., compliance with State Finance Law § 112 (Matter of New York State Med. Transporters Assn. v Perales, 77 NY2d 126, 130; cf., Parsa v State of New York, supra, at 147 ["State's acceptance of benefits furnished under a contract made without [Comptroller approval] does not estop it from challenging the validity of the contract or from denying liability"]; Rosefsky v State of New York, 205 AD2d 120, 124, supra [same]).
  1. Claimant's fourth cause of action (unjust enrichment)
The Court of Appeals has held, as noted by claimant (Compuware Mem. of Law, at 27; Claimant's Supp. Mem. of Law, at 8), that an action for money had and received, an implied-in-law contract, will not be barred by State Finance Law § 112 when a claimant is seeking to recover wrongfully withheld funds and is not seeking to enforce an agreement (see, Parsa v State of New York, supra, at 149). That is not the case here, however.

The law recognizes two different types of implied contracts, those implied by the facts and those implied by the law. The former is implied from the facts and will be found when the consent of the parties may be fairly inferred from their conduct and the surrounding circumstances (see, Miller v Schloss, 218 NY 400, 406-407; Tjoa v Butterfield Mem. Hosp., 205 AD2d 526). The latter "is one imposed by law where there has been no agreement or expression of assent, by word or act, on the part of either party involved. The law creates it, regardless of the intention of the parties, to assure a just and equitable result" (Clark-Fitzpatrick v Long Is. R.R, 70 NY2d 382, 388-389, quoting Bradkin v Leverton, 26 NY2d 192, 196; see, Rosefsky v State of New York, 205 AD2d 120, supra at 123-124). Here, claimant's allegations regarding the intentions of the parties, the negotiation of the agreement, the reduction of the agreement to a writing--albeit unapproved by the Comptroller--and the subsequent performance clearly evidence a contract implied-in-fact. As such, "it is subject to the provisions of section 112 of the State Finance Law" (Parsa v State of New York, supra, at 148).

Accordingly, even if an implied-in-fact contract exists in the present case, the absence of the Comptroller's approval still operates as a bar to this cause of action (see, id., at 148; Nevins Realty Corp. v State of New York, 240 AD2d 480, supra; Campbell v State of New York, 158 Ad2d 937, supra; see also, Nuzzi v State of New York, Ct Cl, unreported decision filed Sept. 26, 2000, Collins, J., Motion Nos. M-61757, CM-62025 [holding that State Finance Law § 112 "will bar a recovery upon an implied contract theory if claimant is seeking to enforce a contract but upon terms other than those approved by the Comptroller"]). Any other rule would vitiate the statute's protective purpose (see, Parsa v State of New York, supra, at 147; see also, Gerzof v Sweeney, 22 NY2d 297, 304-305). Thus, as a matter of law, this portion of the claim fails.
  1. Claimant's first cause of action (the purported DOCS Product Order)
The purchase order in question (Claim, Exh. B) shows that the invoice contact person was Horelick, the former OFT employee. According to Olson, claimant's Account Manager, Horelick and an Assistant Director of Data Processing from the Department of Motor Vehicles (Mark Hafensteiner) advised her that DOCS needed the software by June 30, 1999 (Olson Aff., ¶¶ 58-59). Horelick also told Olson that Courington was authorized to sign the order on behalf of DOCS and, after telling Olson that he would personally present the order to Courington, Horelick returned it to Olson with Courington's purported signature (Olson Aff., ¶ 60). "Based upon . . . Horelick's representation, and his overall responsibility for the State's software procurement," Olson did not question the veracity of any of these representations (Olson Aff., ¶ 60).

Defendant has submitted affidavits to establish that Courington's signature on the purchase order was a forgery; that he was unauthorized to sign it anyway; that DOCS never used the software, which was returned to claimant on April 3, 2000; and that DOCS received no invoice from claimant for $271,362 in June or July of 1999 when it was allegedly sent. Specifically, Courington explains in his affidavit that he was unaware of the purchase order until March 2000 and that the signature purporting to be his is a forgery (Courington Aff., ¶¶ 5-6); and that he has never been authorized to sign contracts or purchase orders on behalf of DOCS (id., at ¶ 3). Although DOCS had the software, and "put it out to disc so that it might be reviewed . . . it was never made operational, even for test purposes (id., at ¶ 7), Courington concludes that "[a]t no time was [the software] installed, copied, or otherwise transferred," nor did he or any other representative of DOCS utilize it (id.; see also, Affidavit of Michael R. Simmonds, sworn to and filed January 24, 2002 [stating that as of January 12, 2000, DOCS had claimant's programs "in house but not installed" and that the installation process was never completed] and Claimant's Supp. App., Exh. 22).

Claimant sharply disputes this, pointing to certain FOIL documents, including a document (denominated "OFT 777") that appears to show agency computer configurations as of August 4, 1999 (Naughton Supp. Aff., ¶ 35; Claimant's Supp. App., Exh. 11). Listed under the DOCS category are Abend-Aid XLS and CICS Abend-Aid/FX, the same two programs listed on the June 30, 1999 product order form which, Simmonds avers, were never installed on DOCS' computers. Another spreadsheet-type FOIL document (denominated "OFT 2230-31") is an apparent attachment to e-mail correspondence between OFT employees dated January 19, 2000. Claimant argues that it shows that the subject software was installed in-house, presumably as of that date (Naughton Supp. Aff., ¶ 18; Claimant's Supp. App., Exh. 2).

Although, as previously noted, the doctrine of ratification is not available to breathe life into a cause of action premised on an illegal contract (see, Matter of New York State Med. Transporters Assn. v Perales, 77 NY2d 126, supra), a governmental entity "may ratify a contract made on its behalf which it has the authority to make even if the contract was initially invalid . . . because the [governmental] officer who purported to execute it did not have the requisite authority" (Imburgia v City of New Rochelle, 223 AD2d 44, 48, lv denied 88 NY2d 815; see, Seif v City of Long Beach, 286 NY 382, 386-387; City of New York v Heller, 127 Misc 2d 814, 817, affd 131 Misc 2d 485). Here, it is not the underlying contract (Master Agreement) that is in question, it is the purported purchase order made pursuant to that contract. A review of the actual order reveals that it is on the approved order form in compliance with the terms of the Master Agreement and references the Comptroller's contract number as also required by the contract (Claim, Exhs. A, ¶ 5.1 [A] [ii]; B).

Moreover, the defense that the purchase order was a forgery, or entered into by someone without the authority to execute purchase orders on behalf of DOCS is colored somewhat by the length of time that the State retained the software after it was delivered as well as by what appears to be an issue of fact raised by the FOIL documents regarding DOCS' possible use of the two computer programs.[13] Pursuant to the Uniform Commercial Code, which would appear to govern the sale of this computer software (see, e.g., Sabbeth Indus. v Innovative Computer Concepts, 247 AD2d 374; Communications Groups v Warner Communications, 138 Misc 2d 80, 83), upon the improper delivery of the goods the State should have rejected the software within a reasonable time afterwards and seasonably notified the seller (claimant) of its rejection (see, UCC 2-601; 2-602). Any acts taken on the part of defendant that were "inconsistent with the seller's ownership of the goods . . . including their retention without a seasonable notice of revocation of acceptance" could be deemed an acceptance under UCC 2-602 (Tobron Off. Furniture Corp. v King World Prods., 161 AD2d 355, 356).

No explanation is given as to why the software, which evidently was connected in some manner with year 2000 (Y2K) computer compliance (Olson Aff., ¶ 2; Claimant's Supp. Mem. of Law, at 3, n 2), was in the possession of either OFT or DOCS from July 1999 until April 2000. Accordingly, the Court cannot say as a matter of law that no issue of fact exists regarding whether and to what extent claimant's software was utilized by DOCS before it was belatedly rejected. While Courington maintains that he was unaware of the purchase order until March 2000, ratification can also be established by acquiescence and conduct on the part of the principal inconsistent with the rejection of the goods (see, generally, Seif v City of Long Beach, supra, at 386-387). The State's lengthy retention of the software combined with its possible use by DOCS suffices to create an issue of fact regarding whether defendant's subsequent conduct may be seen as a ratification of the allegedly unauthorized purchase order.

Since on this record the Court cannot determine if (1) DOCS used the software during the nine months that it was in its possession; and (2) whether such usage was condoned by defendant notwithstanding the flawed purchase order, the Court denies the State's motion to dismiss this cause of action.
  1. Claimant's third cause of action (alleged breach of the Master Agreement)
Claimant's third cause of action alleging unauthorized expanded use of its proprietary software is premised on an alleged breach of the Master Agreement (Claim, ¶¶ 28-33). The State appears to argue that the reference to the Master Agreement does not "imbue" the later Enterprise Agreement with the legitimacy it lacks and, as such, requires dismissal of this cause of action (Def. Mem. of Law, at 5-6).

Although not clearly stated in the claim, claimant's Memorandum of Law and counsel's supporting affidavit indicate that the third cause of action is, in essence, pleaded in the alternative (see, CPLR 3014): claimant argues that even if the Court finds that the Enterprise Agreement is unenforceable for failure to comply with State Finance Law § 112, defendant's alleged dissemination of claimant's software still violated provisions of the Master Agreement (Naughton Aff., ¶¶ 17-21; Compuware Mem. of Law, at 25-26). An affidavit offered in opposition to the State's motion amplifies the pleadings, explaining how the State's implementation of the consolidation plan purportedly expanded the use of the software in ways neither contemplated nor authorized by the Master Agreement (Olson Aff., ¶¶ 49-54). Claimant's argument, it appears, rests upon the premise that if the State cannot be held liable for the proliferation of claimant's software because of the parties' erroneous assumption that the fatally flawed Enterprise Agreement governed the contractual relationship, then the State's subsequently allegedly expanded use of claimant's software can be alternatively viewed as violating the terms of the Master Agreement and, thus, support a breach of contract action under it. For the reasons expressed below, the Court disagrees.

As already noted, the terms of the two agreements were substantially different: the Master Agreement provided that the State, on an agency-by-agency basis, would purchase claimant's software in discrete transactions; the Enterprise Agreement, however, provided that claimant's software would be used by many State agencies, through OFT, in exchange for a flat fee of $6,996,945 (Olson Aff., ¶¶ 12, 30; Claim, ¶¶ 17, 19, Exh. D). In fact, the Enterprise Agreement specifically purported to supersede all prior agreements relating to claimant's enterprise software (Claim, Exh. D) and explicitly "canceled and/or exchange[d]" the software licenses previously issued to DOCS, the State Department of Transportation, the New York State Higher Education Services Corporation, the Department of Motor Vehicles, the State Department of Health, the State Department of Labor and the New York Power Authority (Claim, Exh. D, Addendum A and Schedule One; Olson Aff., ¶ 27 [C]). In Olson's words, the "previous licenses acquired by these agencies were terminated and new licenses were provided for the entire package of software included in the Enterprise Agreement" (Olson Aff., ¶ 30). Accordingly, the software licenses the individual agencies had acquired pursuant to the Master Agreement were upgraded to allow the software to run on "large CPUs providing centralized information technology for 22 State agencies" (id.). In short, the expanded software usage provided by claimant to the State and now urged to support a breach-of-contract action under the Master Agreement, was occasioned by claimant's performance under the Enterprise Agreement. In essence, claimant is attempting to prosecute its third cause of action under the Master Agreement when the facts show it is, in fact, an action under the Enterprise Agreement "bootstrapped" to the only contract that can support a cause of action.

Claimant cites no authority to support its argument that performance under the second, unapproved contract may be compensated by the fortuity of having a prior, properly approved agreement in existence, which clearly had no bearing on the parties' subsequent conduct. Even though claimant's performance occurred while the Master Agreement was in existence,[14] the expanded State usage of claimant's software, and corresponding substantial fiscal obligation for that expanded usage, unquestionably arose out of the Enterprise Agreement which either by the terms of the Master Agreement itself (see, Claim, Exh. A, ¶ 16) or by application of State Finance Law § 112 required Comptroller approval. Under these circumstances the earlier Master Agreement cannot save claimant from the effects of State Finance Law § 112 (see, Rosefsky v State of New York, 205 AD2d 120, 124-125, supra).

More importantly, to fashion a breach of contract claim based on the terms of the Master Agreement premised on the software (and unrestricted passwords) provided under the auspices of the Enterprise Agreement would allow a circumvention of State Finance Law § 112 as surely as would any recovery based on an implied contract or unjust enrichment theory. In the end, neither claimant's dexterous arguments, nor the State's acceptance of the fruits of the flawed contract, nor a court's desire to "provide rough justice" can create a contractual liability where the result would invalidate the protective purpose underlying State Finance Law § 112 (see Parsa v State of New York, supra, at 147, quoting Lutzken v City of Rochester, 7 AD2d 498, 499).[15] Given this fundamental principal, neither the FOIL material (Supp. App. Exhs.) nor DOL's and NYSPA's attempts to purchase upgraded software licenses retroactively (from October 1999) in March 2000 (Claimant's Appendix, Exh. 12) creates a relevant issue of fact.[16] Accordingly, claimant's third cause of action is dismissed.
  1. Conclusion
For the reasons stated, the Court grants the State's motion insofar as it seeks to dismiss claimant's second, third and fourth causes of action; and denies the State's motion insofar as it seeks to dismiss the first cause of action.


December 31, 2002
Albany, New York

HON. SUSAN PHILLIPS READ
Judge of the Court of Claims




[1]The Master Agreement is also annexed to the claim as Exh. A, but this copy of it appears somewhat less complete than the copy included as Exh. 1 in Claimant's App. "MA" followed by a number and/or a letter refers respectively to the corresponding section or paragraph or to the corresponding appendix of the Master Agreement.
[2]The Master Agreement defines and uses terms in a sloppy-minded, convoluted and overlapping manner, as will appear in the discussion to follow. In addition, although the Master Agreement generally appears to capitalize defined terms when they are used in its text, some terms capitalized in the Master Agreement's text are not defined and, conversely, some terms defined in MA-3.0 (e.g., "Enterprise License" and "Site License") are nowhere to be found in the text. In this opinion, the Court capitalizes terms that are capitalized in the Master Agreement's text when discussing the particular provision in which these terms are used.
[3]The term "Trial License" refers to App. J of the Master Agreement, which is labeled "Software Trial Agreement."
[4]The term "Software" is not defined, but the terms "Software" and "Licensed Product" in MA-5.3 appear to be coextensive with the term "Licensed Software Products," defined in relevant part as "[s]oftware products offered by [claimant], as are now or hereafter enumerated in Appendix E, which are offered and delivered by [claimant] to End Users in accordance with the terms of this Master Agreement"; or the term "Product," defined as "Licensed Software Products of [claimant], and/or services offered by [claimant] pursuant to this Master Agreement (including maintenance, training and consulting services)" (MA-3.0). The term "End User" is defined as "[t]he individual entity who [sic] is directly executing the Licensed Software, using the documentation, or receiving services furnished by [claimant]" (id.). The word "entity" is undefined, but is the same word used in the definition for "Agency or Agencies" to refer to a governmental department, agency, board, commission, authority, public benefit corporation, office or institution of the State of New York.
[5]The definition of the term "Product Order" illustrates the redundancy and cross-referencing endemic to the Master Agreement. Specifically, this definition relates to the acquisition or licensing of "Product, documentation or services," but the definition for "Product" already includes "services" and "Documentation" (presumably the same as "documentation") is another separately defined term. The Master Agreement's provision governing acceptance (MA-5.3) uses the terms "Software," "Product" and "Licensed Product" interchangeably (see also, n 5, supra).
[6]Whether the word "section" refers to MA-5.0 or MA-5.3 is not clear, but the only time period provided for in either provision is the 30-day Trial License Period specified in MA-5.3 for evaluating Software prior to its acceptance, although Appendix J ("Software Trial License Agreement") seems to allow for an extension of this time period if the parties so agree (see, MA- J, C). This 30-day time period, or any other longer period that the parties might stipulate, presumably is the "Trial License Period" or "Trial License period" referred to in MA-5.3.
[7]The term "Acceptance Period" is undefined, and its relationship, if any, to the Trial License Period provided for in MA-5.3 (see, n 7, supra) is indeterminate.
[8]"License Effective Date" is another one of those terms that was defined in MA-3.0, but which the Court was unable to find anywhere in the text of the Master Agreement (see, e.g., n 3, supra).
[9]Claimant also indicates that the State returned the software delivered pursuant to the Enterprise Agreement on March 13, 2000 (Olson Aff., ¶ 48; Claimant's Supplemental Memorandum of Law, dated January 9 and received January 10, 2002 ["Claimant's Supp. Mem. of Law"], at 5).
[10]Horelick is apparently under investigation by the Office of Inspector General ("OIG") for purporting to commit OFT to a number of software contracts. Because of the pending OIG investigation, claimant's attempt to contact Horelick for purposes of providing an affidavit for this claim were rebuffed by his counsel (Reply Affidavit of J. Michael Naughton, Esq., sworn to January 31 and filed February 1, 2002, ¶ 6; Supplemental Affidavit of J. Michael Naughton, Esq., sworn to and filed January 10, 2002 ["Naughton Supp. Aff."], ¶¶ 26-27, Exh. C).
[11] The threshold amount triggering State Finance Law § 112 was raised to $15,000, effective July 1, 2000 (L 1999, ch 95, § 6).
[12]The occasional hardship caused by application of State Finance Law § 112 has been explained as justified " because contracting parties are better able to protect themselves from State Finance Law § 112 than the people would be to protect themselves without it" (Rosefsky v State of New York, supra, at 125).
[13]Given that no formal discovery has taken place on account of the State's motion, the two exhibits appear to sufficiently raise an issue of fact regarding whether and/or to what extent the software was utilized by DOCS notwithstanding its claim to the contrary (see generally, Friends of Animals v Associated Fur Mfrs., 46 NY2d 1065, 1067-68; Chrysler First Fin. Servs. Corp. of N. Y. v De Premis, 225 AD2d 1003, 1004 [rule regarding tendering proof in admissible form is more flexible for party opposing motion where a reasonable excuse to resort to such evidence exists]).
[14]The invalidity of the latter agreement is the sole reason the Master Agreement could still be considered "alive." If the Enterprise Agreement had complied with State Finance Law § 112, it would have effectively nullified the Master Agreement by operation of merger (see, Kindler v Newsweek, Inc., 277 AD2d 159) or as a "substituted contract" (Restatement [Second] of Contracts § 279, comment a).
[15]New York City, perhaps mindful of the potentially harsh results wrought by application of section 112, has enacted a procedure by which a contracting party who performs without the required City Comptroller approval may file a claim against the City when benefits have been received by the City under the illegal contract and it is determined that "it is equitable and proper that such a claim be paid in whole or part" (Administrative Code of the City of NY § 7-206). Unfortunately, for claimant, there is no comparable relief for those contracting with the State of New York.
[16]Whatever obligation the agencies may have thought to exist at the time the retroactive purchase orders were submitted or the various e-mails were transmitted regarding claimant's software (during the months after the complaint with OIG was filed regarding Horelick's software contracting without authorization), the law supporting strict application of State Finance Law § 112 renders the agencies' view of their contractual obligations irrelevant. The Court does not consider whether a moral or equitable obligation may have been recognized to exist, "[n]o legal obligation arose" (Sief v City of Long Beach, 286 NY 382, 389, supra).