SMMHC Incorporated v. Aprima Medical Software Incorporated

Filing 21

ORDER, Defendant Aprima Medical Software, Inc.'s Motion to Abate, or in the Alternative, Motion to Dismiss or Transfer 9 is denied, except that the parties will be required to arbitrate their dispute; the Clerk shall enter judgment (1) orderin g Defendant Aprima Medical Software, Inc., and Plaintiff SMMHC, Inc., d/b/a Mountain Health & Wellness to arbitrate the disputes raised in this action in accordance with the terms of the License Agreement (Doc. 9, Exh. A-1 at 5, 21), and (2) dismissing this action without prejudice; the Clerk shall terminate this case. Signed by Judge Neil V Wake on 3/14/14. (REW)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE DISTRICT OF ARIZONA

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SMMHC Inc., d/b/a Mountain Health &
Wellness,

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Plaintiff,

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No. CV-13-02160-PHX-NVW
ORDER

v.
Aprima Medical Software, Inc.,
Defendant.

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Before the Court is Defendant Aprima Medical Software, Inc.’s Motion to Abate,

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or in the Alternative, Motion to Dismiss or Transfer (Doc. 9), the Response (Doc. 14),

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and the Reply (Doc. 15). The Motion also seeks to compel arbitration of Plaintiff’s

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claims. For the following reasons, the Motion (Doc. 9) will be denied, except that the

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parties will be required to submit their disputes in this action to arbitration in accordance

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with the terms of their agreement.

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I.

FACTS

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In December 2010, Plaintiff SMMHC, Inc., d/b/a Mountain Health & Wellness

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entered into a Software License Agreement (“License Agreement”) with Aprima Medical

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Software, Inc., to license Aprima’s Patient Relationship Manager (“PRM”) software for

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Mountain Health’s behavioral healthcare services. Although the Patient Relationship

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Manager was primarily used by general medicine providers, the parties believed the

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program could also be useful for a behavioral health provider. The License Agreement

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provided for installation, training, and maintenance of software that streamlined patient

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management by performing functions related to “charting, coding, billing and

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documentation.” (Doc. 9, Exh. A-1 at p. 1). The arbitration clause contained within the

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License Agreement provides, “Any controversy or claim arising out of or relating to the

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contract, or breach thereof, shall be finally settled by binding arbitration administered by

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the American Arbitration Administration . . . .”

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On June 17, 2011, the parties entered into a new agreement, the Final

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Development Agreement (“Development Agreement”), wherein Aprima contracted to

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work with Mountain Health to develop enhancements to its “PRM2011” software product

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that would serve the needs of behavioral health practices. (Doc. 9, Exh. A-3 at p. 1).

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Mountain Health wanted the software enhancements to generate the specific records,

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reports, coding, billing, and receivables required for Mountain Heath to be reimbursed by

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its third party payers. Mountain Health continued licensing the Patient Relationship

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Manager software under the License Agreement after the Development Agreement was

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executed.

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The Development Agreement provided that Mountain Health would pay $250,000

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during the development period and an additional $50,000 upon acceptance of the product.

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(Doc. 9, Exh. A-3 at p. 1). Aprima would maintain ownership of the final work product

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but, for a period of five years from the date of acceptance, Aprima would pay Mountain

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Health “a 25% commission on any net software license fees generated from future

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behavioral health customers sold and installed in Arizona and 12.5% commission for net

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software licenses fees generated from future behavioral health customers elsewhere in the

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United States.” (Doc. 9, Exh. A-3 at p. 2). The Development Agreement does not

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contain an arbitration clause and does not mention, refer to, or in any way incorporate the

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terms of the License Agreement.

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Over the next two years, the parties’ working relationship unraveled. On July 1,

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2013, Mountain Health mailed a demand letter and draft complaint to Aprima. The

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demand and draft complaint asserted claims for breach of contract under the

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Development Agreement (but none under the License Agreement), and under the Texas

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Deceptive Trade Practices Act. A consumer seeking damages under the Deceptive Trade

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Practices Act must give written notice sixty days in advance of filing suit. Tex. Bus. &

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Com. Code Ann. § 17.505. The notice must include the nature of the complaint and

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projected damages. Id.

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Aprima’s counsel responded by requesting a time to discuss the dispute in August

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2013. Because Mountain Health’s counsel was on vacation, a call could not be set until

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September 4, 2013. In that call, Aprima offered to draft a position statement outlining its

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understanding of the facts surrounding the dispute. The parties then set another call for

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September 17, 2013, to discuss Aprima’s position. Aprima sent its position statement to

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Mountain Health on September 9, 2013.

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The second call took place as agreed at 11:00 a.m., September 17, 2013.

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Mountain Health disagreed with Aprima’s position statement but presented Aprima with

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a proposed settlement amount. Aprima’s counsel said he did not believe the company

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could or would settle for the proposed amount but advised Mountain Health that he

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would present the demand, since up to that point in time, Aprima had not considered any

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specific amount. The meeting ended, and a few hours later Aprima filed with the

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American Arbitration Association in Dallas, Texas, a demand for arbitration of claims

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under the License Agreement, though Mountain Health had made no claims under the

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License Agreement. At the same time, it also filed a complaint in the United States

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District Court for the Northern District of Texas to compel arbitration of Mountain

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Health’s claims under the Development Agreement or, in the alternative, for declaratory

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judgment that Aprima has no liability on those claims.

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arbitration provision in the License Agreement encompasses the claims under the later

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Development Agreement.

Aprima contends that the

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The next day, September 18, Aprima notified Mountain Health that it rejected the

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settlement offer and had already filed suit the day before. Mountain Health then filed this

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action on its claims under the Development Agreement that same day, September 18,

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2013, one day after Aprima had filed its Texas case. Mountain Health unsuccessfully

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challenged personal jurisdiction in the Northern District of Texas. Aprima’s Motion

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seeks to abate or dismiss Mountain Health’s action in this Court, or in the alternative, to

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transfer it to the Northern District of Texas. (Doc. 9.) Aprima also moves to compel

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arbitration of Mountain Health’s claims under the Development Agreement, the claims

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asserted in this action.

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II.

MOTION TO TRANSFER VENUE UNDER 28 U.S.C. § 1404

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Aprima argues this case should be transferred to the Northern District of Texas.

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The federal venue statute provides, “For the convenience of parties and witnesses, in the

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interest of justice, a district court may transfer any civil action to any other district or

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division where it might have been brought. . . .” 28 U.S.C. § 1404(a). On a motion to

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transfer venue, “a court must balance the preference accorded plaintiff’s choice of forum

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with the burden of litigating in an inconvenient forum. The defendant must make a

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strong showing of inconvenience to warrant upsetting the plaintiff’s choice of forum.”

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Decker Coal Co. v. Commonwealth Edison Co., 805 F.2d 834, 843 (9th Cir. 1986).

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Private factors are considered, such as “‘relative ease of access to sources of proof;

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availability of compulsory process for attendance of unwilling, and the cost of obtaining

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attendance of willing, witnesses; . . . and all other practical problems that make trial of a

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case easy, expeditious and inexpensive.’”

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330 U.S. 501, 508 (1947) (discussing forum non conveniens)). Public factors are also

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weighed, such as “‘the administrative difficulties flowing from court congestion; the local

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interest in having localized controversies decided at home; the interest in having the trial

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of a diversity case in a forum that is at home with the law that must govern the action; the

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avoidance of unnecessary problems in conflict of laws, or in the application of foreign

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law; and the unfairness of burdening citizens in an unrelated forum with jury duty.’” Id.

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(quoting Piper Aircraft v. Reyno, 454 U.S. 235, 241 n.6 (1981)).

Id. (quoting Gulf Oil Corp. v. Gilbert,

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Aprima argues that because it is based in Texas, manages only a small sales force

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in Arizona, and has many of its key witnesses in Texas, the balance of convenience

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weighs heavily in its favor. These factors do not sharply favor Aprima, or favor it at all.

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Mountain Health is an Arizona corporation that does business only in Arizona. All of its

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witnesses reside in Arizona, and some of Aprima’s witnesses are in Arizona. Mountain

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Health’s only connection with Texas is the software it commissioned from Aprima and a

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trip made by some employees to be trained by Aprima. The contract was to write

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software specifically for Mountain Health’s use in Arizona. If breached, it was breached

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in Arizona. These private factors favor Mountain Health, not Aprima.

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The public considerations do not favor Aprima. Statistical averages of case times

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in the District of Arizona and the Northern District of Texas do not differ significantly

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and are less important than data for the specific division of each court. Litigation in this

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Court will not delay anyone. The undersigned judge concludes 89.5% of civil cases

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within twelve months of filing. Arizona’s interest in adjudicating claims against persons

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doing business with Arizona residents in Arizona is stronger, not weaker, than Texas’s

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interest in providing a local forum against out-of-state customers. The parties could have

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contracted for an exclusive venue but did not. The Development Contract has a Texas

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choice of law provision, but there is no suggestion that relevant Texas contract law

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differs from Arizona law or contract law generally or that any difference would present

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any difficulty. Weighing the factors, it is clear that a transfer to Texas would not reduce

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inconvenience, but shift it and to some extent increase it. Aprima falls far short of

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overcoming Mountain Health’s choice of forum. Indeed, the balance of considerations

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strongly favors resolution of this dispute in Arizona. Aprima’s Motion to transfer this

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action to the Northern District of Texas will be denied.

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III.

MOTION TO ABATE

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Aprima also argues this action should be abated in favor of the action it filed in the

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Northern District of Texas because it filed its action first. Mountain Health counters that

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Aprima only filed first by bad faith means and Arizona is the more appropriate forum in

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any event. Both cases involve the same parties and the same claims.

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When cases involving the same parties and issues are filed in different federal

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courts, the “first to file” rule gives the second district court the “discretion to transfer,

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stay, or dismiss the second case in the interest of efficiency and judicial economy.”

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Cedars-Sinai Med. Center v. Shalala, 125 F.3d 765, 769 (9th Cir. 1997). The first to file

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rule “is not a rigid or inflexible rule to be mechanically applied, but rather is to be applied

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with a view to the dictates of sound judicial administration.” Id. Bad faith or forum

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shopping strips the first-filed case of its usual priority. Alltrade, Inc. v. Uniweld Prods.,

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Inc., 946 F.2d 622, 628 (9th Cir. 1991).

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Aprima got a one-day jump on Mountain Health’s Arizona action only by

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requesting negotiation for two and a half months after receiving Mountain Health’s draft

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complaint. Aprima’s bad faith is apparent in filing suit before ending the negotiation it

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requested. Aprima’s contention that, though Mountain Health had to wait 60 days to sue

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under the Texas Deceptive Trade Practices Act, Aprima could sue any time, does not

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override its disingenuous act of not disclosing its plan to sue first while engaging in

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negotiations.

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Agreement claims and amended 60 days later to add the Deceptive Trade Practices Act

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claims. Aprima’s contention also breaks faith with the purpose of the Deceptive Trade

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Practices Act’s notice period to discourage litigation and encourage settlement. It is not

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an opportunity to forum shop before the plaintiff can file suit. Richardson v. Foster &

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Sear, L.L.P., 257 S.W.3d 782, 784 (Tex. App. 2008). By the time Mountain Health

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presented its settlement offer, the Deceptive Trade Practices Act’s 60 day notice period

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had run. But Aprima continued to engage in settlement talks and asked for time to

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respond to the settlement offer, when it only wanted time to drive to court. If Aprima had

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substituted candor for disingenuousness, Mountain Health’s complaint of July 1, 2013,

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could have been filed any time in the preceding two and a half months and would have

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been filed first.

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Mountain Health could have sued immediately on its Development

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The rule of thumb of first to file carries little weight when one party beats another

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by filing in bad faith or for forum shopping. See, e.g., Inherent.com v. Martindale-

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Hubbell, 420 F. Supp. 2d 1093, 1099-1100 (N.D. Ca. 2006) (holding the first to file rule

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did not apply when the defendant had preemptively filed suit in another jurisdiction

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instead of responding to the plaintiff’s settlement offer). Moreover, the reasons discussed

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for not transferring venue also count against the request to abate. Arizona is the more

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appropriate forum for this case, and Aprima’s motion to abate will be denied.

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IV.

MOTION TO COMPEL ARBITRATION

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Aprima further moves to compel arbitration of the claims in this case under the

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Federal Arbitration Act. (It also calls this dismissal for improper venue pursuant to

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Federal Rule of Civil Procedure 12(b)(3), but venue is plainly proper here.

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28 U.S.C. § 1391(b)(2)). Though Mountain Health has asserted no claims under the

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License Agreement, Aprima commenced arbitration in Texas on the License Agreement.

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That arbitration proceeding is not involved in this motion to compel arbitration. Here,

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Aprima asserts that the License Agreement and Development Agreement are so

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interrelated that the binding arbitration clause contained in the License Agreement covers

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disputes arising out of the Development Agreement. Mountain Health counters that the

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Development Agreement contains no arbitration clause, and the parties are not required

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to arbitrate any disputes arising out of it.

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Aprima argues the License Agreement’s arbitration clause is broad enough to

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reach the Development Agreement because it covers “[a]ny controversy or claim arising

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out of or relating to” the License Agreement. (Doc. 9, Exh. A-1 at 5, ¶ 21). Although

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arbitration is favored by federal law, the parties must agree to it. AT&T Tech., Inc. v.

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Comm’n. Workers, 475 U.S. 643, 648 (1986); see 9 U.S.C. § 3. “Determining whether

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the parties agreed to arbitrate the dispute in question involves two considerations:

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(1) whether a valid agreement to arbitrate between the parties exists; and (2) whether the

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dispute in question falls within the scope of the arbitration agreement.”

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Exploration & Prod. Co. v. Ramco Energy Ltd., 139 F.3d 1061, 1065 (5th Cir. 1998).

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Pennzoil

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The question of whether parties agreed to arbitrate a matter is decided by applying the

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relevant state law principles that govern the interpretation of contracts. First Options of

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Chi., Inc. v. Kaplan, 514 U.S. 938, 944 (1995).

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Mountain Health admits the License Agreement’s arbitration clause is valid and

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applies to disputes over the License Agreement. It only challenges whether disputes

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arising under the Development Agreement fall within its scope. Arbitration clauses

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encompassing disputes “arising out of or relating to” a contract are considered broad. See

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Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 397-98 (1967) (holding

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that a clause requiring arbitration of “[a]ny controversy or claim arising out of or relating

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to this Agreement” was “broad”).

They generally “embrace all disputes between the

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parties having a significant relationship to the contract regardless of the label attached to

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the dispute.” Pennzoil Exploration & Prod. Co., 139 F.3d at 1067. Close scrutiny of the

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content and context of both contracts is needed to determine whether disputes that “arise

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out of or relate to” one contract covers disputes under a separate and later contract. The

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following factors suggest an arbitration clause in one contract also governs another

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contract:

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 If “the legal claim underlying the dispute could not be maintained without

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reference to the contract” containing the arbitration clause. Tittle v. Enron Corp., 463

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F.3d 410, 422 (5th Cir. 2006).

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 If both contracts “cover the same subject matter and are integrally related.”

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David L. Threlkeld & Co., Inc. v. Metallgesellschaft Ltd. (London), 923 F.2d 245, 252

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(2d Cir. 1991) (finding that an agreement to value forward contracts arose out of or

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related to an agreement to purchase and sell forward contracts and was subject to the

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purchase and sell agreement’s arbitration clause).

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 If the contract with the arbitration clause explicitly supersedes all prior agreements

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in an ongoing relationship between parties. See Pennzoil Exploration & Prod. Co.,

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139 F.3d at 1067-69 (5th Cir. 1998) (holding that an earlier agreement was subject to

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arbitration under a later-executed agreement’s arbitration clause because the later

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agreement, although not addressing the exact issues of the earlier agreement, expressly

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superseded all prior arrangements between the parties)

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 If the two contracts are simultaneously executed. See Kirby Highland Lakes

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Surgery Ctr., L.L.P. v. Kirby, 183 S.W.3d 891, 894 (Tex. App. 2006) (holding that the

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parties must arbitrate a dispute over a Purchase and Sale Agreement when the parties’

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“Partnership Agreement contains a broad arbitration clause extending to disputes ‘related

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to’ that agreement; that agreement and the Purchase and Sale Agreement were executed

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at the same time as parts of a single transaction; and the Partnership Agreement was

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essential to the overall transaction”).

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 If one contract anticipates the execution of the other. See Personal Sec. & Safety

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Sys. Inc. v. Motorola, Inc, 297 F.3d 388, 393 (5th Cir. 2002) (finding that although two

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agreements governed different facets of the parties’ relationship, because they

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represented key elements of the parties’ relationship and each contract anticipated the

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execution of the other, one contract was subject to arbitration under the other contract’s

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arbitration clause).

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 If the relationship between the contracts is “clear and direct.” Pervel Indus., Inc.

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v. T M Wallcovering, Inc., 871 F.2d 7, 9 (2d Cir. 1989) (holding that when a contract for

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purchase and sale of item led to an exclusive distribution contract, the “relationship

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between the contract of purchase and the exclusive distributorship which it created [was]

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clear and direct,” meaning the arbitration clause in the purchase and sale contract also

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applied to disputes under the distributorship contract).

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In contrast, the following factors suggest a dispute over a separate contract does
not “arise out of or relate to” a different contract with an arbitration clause:

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 If the suit could be maintained without reference to the contract containing the

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arbitration clause. See Dr. Kenneth Ford v. NYLCare Health Plans of Gulf Coast, Inc.,

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141 F.3d 243, 251-52 (5th Cir. 1998) (holding a physician was not required to arbitrate a

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false advertising suit against his health maintenance organization when none of the

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elements of the false advertising suit depended on the agreement between them).

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 If both contracts relate to the same general line of business, but it is clear that the

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contract without the arbitration clause is separate and distinct from the first. See Necchi

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S.p.A. v. Necchi Sewing Machine Sales Corp., 348 F.2d 693, 698 (2d Cir. 1965) 383 U.S.

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909 (1966) (finding that an earlier licensing agreement remained “distinct and separate”

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from the subsequent distribution contract containing an arbitration clause).

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 If the parties assume roles so distinct in each contract that the claims asserted

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against a party in a role assumed under one contract do not bear a significant relationship

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to the role assumed in the other contract. Wachovia Bank, Nat. Ass’n v. Schmidt, 445

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F.3d 762, 767-78 (4th Cir. 2006) (holding that a dispute arising from a financial

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advisement agreement with a bank was not related to a loan agreement with the same

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bank, even though the loan money was invested by the financial adviser).

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Some of the factors cut against compelled arbitration in this case. The purpose of

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the License Agreement was to provide Mountain Health with ready-made software to

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streamline “charting, coding, billing and documentation” in its behavioral health practice.

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(Doc. 9, Exh. A-1 at 1). After using the software for a period of time, Mountain Health

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concluded that, in its current state, the software could not handle all of Mountain Health’s

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billing and documenting needs. Aprima knew of no product on the market that could

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meet Mountain Health’s exact needs, so it was decided the parties would work together to

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develop add-ons that would allow the software to better serve behavioral health

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practitioners. To that end, the parties entered into the Development Agreement to jointly

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develop “enhancements” to the software.

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In the Development Agreement the parties took on a new relationship with

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obligations distinct from those imposed by the License Agreement. Under the License

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Agreement, Aprima was to provide stock software, along with the attendant training and

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technical support. Under the Development Agreement, Aprima was required to develop

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new pieces of the software, work with Mountain Health to perfect them, and eventually

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share the profits from the sale of the new behavioral software package. In this action,

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Mountain Health is suing Aprima for failing to uphold its obligations as a developer,

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obligations which were separate and distinct from Aprima’s obligations as a licensor.

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The Development Agreement, however, is closely related to the License

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Agreement. It contemplates developing add-ons to the software licensed under that

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Agreement and arises out of the same general relationship between the parties. It states

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that Mountain Health “will serve as a release candidate for the version of Aprima that

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includes Behavioral Health . . . .” (Id. at 2). The enhancements created under the

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Development Agreement could not have been used without a license to Aprima’s basic

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medical records software, making it impossible for Mountain Health to work on the

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enhancements without operating under the License Agreement.

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The Development Agreement also lacks the typical clauses of a stand-alone

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contract. It is only two pages and covers only the type of enhancements, development

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schedule, amount to be paid, and royalties on future sales. (Doc. 9, Exh. A-3). A natural

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reading of the short agreement is that it was meant to supplement the License Agreement.

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This favors granting arbitration. See David L. Threlkeld & Co., Inc., 923 F.2d at 252

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(holding that an arbitration clause in one contract encompasses a subsequently executed

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contract when the contracts “cover the same subject matter and are integrally related”).

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Moreover, Mountain Health’s Complaint alleges that “Aprima falsely represented

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to [Mountain Health] that Aprima’s medical software, with its behavioral health

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enhancements, would meet [Mountain Health]’s contract requirements in accordance

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with the attachments to the Development Agreement.”

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Health’s goal in entering into the Development Agreement was to develop a product that,

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when combined with the License Agreement software, would meet its business goals.

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The two contracts are related. Although the case presents a close question, the factors tip

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toward the conclusion that the parties’ dispute over the Development Agreement “arises

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out of or relates to” the License Agreement. In determining whether a dispute must be

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arbitrated, “due regard must be given to the federal policy favoring arbitration, and

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ambiguities as to the scope of the arbitration clause itself resolved in favor of arbitration.”

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(Doc. 1, ¶ 39).

Mountain

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Volt Info. Sciences, Inc. v. Bd. of Trustees of Leland Stanford Junior Univ., 489 U.S. 468,

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475-76 (1989).

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B.

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Since this is a close question, the Court will give the parties an immediate right to

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appeal by entering a final judgment compelling arbitration and dismissing this action

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without prejudice. 9 U.S.C. § 16(a)(3) (permitting an appeal from “a final decision with

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respect to an arbitration”); see Green Tree Financial Corp.-Ala. v. Randolph, 531 U.S.

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79, 86-89 (2000) (holding that an order directing arbitration and dismissing all claims

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was a “final decision with respect to an arbitration within the meaning of

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Final Appealable Order

9 U.S.C. § 16(a)(3), and an appeal may be taken”).

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IT IS THEREFORE ORDERED that Defendant Aprima Medical Software, Inc.’s

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Motion to Abate, or in the Alternative, Motion to Dismiss or Transfer (Doc. 9) is denied,

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except that the parties will be required to arbitrate their dispute.

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IT IS FURTHER ORDERED that the Clerk shall enter judgment (1) ordering

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Defendant Aprima Medical Software, Inc., and Plaintiff SMMHC, Inc., d/b/a Mountain

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Health & Wellness to arbitrate the disputes raised in this action in accordance with the

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terms of the License Agreement (Doc. 9, Exh. A-1 at 5, ¶ 21), and (2) dismissing this

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action without prejudice. The Clerk shall terminate this case.

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Dated this 14th day of March, 2014.

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