APACHETA CORPORATION v. LINCARE, INC.

Filing 40

MEMORANDUM AND OPINION. SIGNED BY HONORABLE BERLE M. SCHILLER ON 11/30/17. 11/30/17 ENTERED & E-MAILED.(fdc)

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
APACHETA CORP.,
Plaintiff.
v.
LINCARE, INC.,
Defendant.

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CIVIL ACTION

No. 16-2030

MEMORANDUM
Schiller, J.

November 30, 2017

Apacheta Corp. and Lincare, Inc., entered into a contract under which Apacheta agreed to
develop software for Lincare. The parties spent nearly a year on the software development
process, which was delayed due to leadership changes at Lincare and discussions between the
parties regarding Lincare’s dissatisfaction with the software. Lincare, however, ultimately
terminated the contract. Apacheta then sued for breach of contract, claiming in part that Lincare
had violated the contract’s right-to-cure provision. Before the Court are the parties’ crossmotions for summary judgment. Because genuine issues of material fact remain, both motions
are denied.

I.

BACKGROUND
A.

The Agreement

Apacheta, a software development company, entered into a contract with Lincare, a home
medical equipment provider, to develop software to manage Lincare’s delivery system.
(Apacheta’s Stmt. of Undisputed Facts ¶¶ 1–3.) Lincare expected the software to allow it to
move from a paper-based delivery system to a digital, tablet-based system, with features such as
electronic forms and delivery route management. (Lincare’s Stmt. of Undisputed Facts ¶ 5.)

The parties signed a written agreement with an integration provision. (Compl. Ex. 1
[Agreement] at 3.) The Agreement included a software development phase and a software
licensing phase. In the software development phase, the parties would work together to
determine Lincare’s software needs and Apacheta would design and develop the software
according to those needs. (Lincare’s Stmt. of Undisputed Facts ¶¶ 18–20.) During this phase,
Lincare would pay Apacheta a daily fee. (Id. ¶ 19; Agreement at 8–9.) After the software was
completed and accepted by Lincare, the Agreement would move into the software licensing
phase, in which Lincare would pay an annual software licensing and maintenance fee for the use
and upkeep of the software. (Id.) The initial term of the Agreement was three years, although it
would renew annually thereafter until Lincare notified Apacheta of its intent to terminate.
(Agreement at 3.)
The Agreement included a “Statement of Work” (SOW), which outlined the framework
for the software Apacheta agreed to produce. (Agreement at 13.) The SOW, in turn, contained a
“Scope of Work” section, which provided a bulleted list of features to be included in the
software, discussed further below. (Id.) The SOW also laid out the process by which Apacheta
and Lincare were to work together to develop the software. (Id.)
The Agreement also contained a right-to-cure provision. The provision required, in part,
that if one party breached the Agreement, the other party could terminate the Agreement only
after giving the breaching party an opportunity to remedy the breach:
If either Party breaches any term of this Agreement, the other Party may terminate
this Agreement following thirty (30) days’ written notice to the breaching Party
specifying any such breach unless, within the period of such notice, all breaches
specified therein are remedied.
(Agreement at 3.)

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B.

The Course of the Relationship

The parties began work on the software development process in January 2015. (Lincare’s
Stmt. of Undisputed Facts ¶ 56.) While the Agreement did not establish fixed deadlines, the
parties anticipated that the software would be completed within a year. (Apacheta’s Br. in Supp.
of Mot. for Summ. J. at 2.) However, the project fell behind schedule as Lincare dealt with
leadership changes. (Id.) Lincare also began raising concerns about the software’s specifications
and ability to fulfill its needs. (Lincare’s Stmt. of Undisputed Facts ¶¶ 68–85.) The parties
discussed these concerns on multiple occasions. (Id.) Lincare was especially concerned with the
proposed software’s lack of certain features including “directory integration” and “route
optimization” (the “Disputed Features”), which it claims were vital components of its desired
software. (See Lincare’s Stmt. of Disputed Facts ¶ 34.) Apacheta maintains that the Disputed
Features were not required under the contract. (Apacheta’s Br. in Opp’n to Lincare’s Mot. for
Summ. J. at 8.)
In October 2015, in an effort to keep the project moving forward, Apacheta sent Lincare
a set of functional specifications that purported to lay out the final scope of the software.
(Lincare’s Stmt. of Undisputed Facts ¶ 87.) After some back and forth on the specifications,
which did not include the Disputed Features, Apacheta also sent a set of proposed “acceptance
criteria” that was required by the contract to be used to evaluate the software. (Id. ¶ 112.)
Still unsatisfied with the software, Lincare rejected the proposed acceptance criteria in an
email on December 3, 2015. (Id. ¶ 135.) Lincare’s email also reiterated its concerns about the
absence of the Disputed Features in the proposed software. (Id.) Following this email, the project
remained in limbo for several weeks. Finally, on February 1, 2016, Lincare terminated the
Agreement. (Apacheta’s Stmt. of Undisputed Facts ¶ 73.)

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Apacheta then sued Lincare for breach of contract. Among other things, Apacheta claims
that Lincare’s termination breached the contract’s right-to-cure provision, because Lincare did
not provide Apacheta notice of a breach or an opportunity to cure any breach. Apacheta also
seeks partial summary judgment as to damages in the amount of $2,250,000, based on the cost of
the software licensing fee over a three-year period.

II.

STANDARD OF REVIEW
Summary judgment is appropriate when the admissible evidence fails to demonstrate a

genuine dispute of material fact and the moving party is entitled to judgment as a matter of law.
Fed. R. Civ. P. 56(a); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247–48 (1986). When the
movant does not bear the burden of persuasion at trial, it may meet its burden on summary
judgment by showing that the nonmoving party’s evidence is insufficient to carry its burden of
persuasion. Celotex Corp. v. Catrett, 477 U.S. 317, 323–24 (1986).
Thereafter, the nonmoving party demonstrates a genuine issue of material fact if it
provides evidence sufficient to allow a reasonable finder of fact to find in its favor at trial.
Anderson, 477 U.S. at 248. In reviewing the record, “a court must view the facts in the light most
favorable to the nonmoving party and draw all inferences in that party’s favor.” Armbruster v.
Unisys Corp., 32 F.3d 768, 777 (3d Cir. 1994). The court may not, however, make credibility
determinations or weigh the evidence in considering motions for summary judgment. Reeves v.
Sanderson Plumbing Prods., 530 U.S. 133, 150 (2000). The same standards apply when
considering cross-motions for summary judgment. Appelmans v. City of Phila., 826 F.2d 214,
216 (3d Cir. 1987).

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III.

DISCUSSION
When interpreting a contract under Pennsylvania law 1, courts first determine whether the

contract is clear or ambiguous. Pac. Empl’rs Ins. Co. v. Glob. Reins. Corp. of Am., 693 F.3d 417,
426 (3d Cir. 2012). If the contract is clear, the court must apply its plain meaning. Id. However,
if the contract is ambiguous, its meaning becomes a question of fact and may preclude summary
judgment. Id. “A contract is ambiguous if it is reasonably susceptible of different constructions
and capable of being understood in more than one sense.” Hutchison v. Sunbeam Coal Corp.,
519 A.2d 385, 390 (Pa. 1986). There are two kinds of ambiguity, patent and latent. Duquesne
Light Co. v. Westinghouse Elec. Corp., 66 F.3d 604, 613 (3d Cir. 1995). A patent ambiguity is
one that appears on the face of the instrument, whereas “a latent ambiguity arises from
extraneous or collateral facts which make the meaning of a written agreement uncertain although
the language thereof, on its face, appears clear and unambiguous.” Id. at 613–14.
In determining whether a contract is ambiguous, the court is not confined to the text of
the contract, but should also consider “the context in which the agreement arose.” Steuart v.
McChesney, 444 A.2d 659, 662 (Pa. 1982). The court may consider extrinsic evidence such as
“the structure of the contract, the bargaining history, and the conduct of the parties that reflects
their understanding of the contract’s meaning.” Teamsters Indus. Emps. Welfare Fund v. RollsRoyce Motor Cars, Inc., 989 F.2d 132, 135 (3d Cir. 1993). An integration provision does not
prevent the use of extrinsic evidence in the case of an ambiguity. Mellon Bank, N.A. v. Aetna
Bus. Credit, Inc., 619 F.2d 1001, 1010 n.9 (3d Cir. 1980).

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The Agreement contains a choice of law clause selecting Pennsylvania law. (Agreement at 7.)
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Here, ambiguities in the contract preclude summary judgment. The contract is unclear as
to whether Apacheta was required to provide the Disputed Features. It is also unclear what
damages Apacheta would be entitled to if Lincare did, in fact, breach the contract.
A.

The Right-to-Cure Provision and Apacheta’s Contractual Obligations

As noted above, the contract contains a right-to-cure provision, which Apacheta claims
Lincare breached by terminating the contract without providing Apacheta notice of a breach and
thirty days to cure any alleged breach. Pennsylvania law allows a party to ignore a right-to-cure
provision only if “there is a material breach of the contract so serious it goes directly to the heart
and essence of the contract, rendering the breach incurable.” LJL Transp., Inc. v. Pilot Air
Freight Corp., 962 A.2d 639, 641 (Pa. 2009). In LJL Transportation, the court found that pretermination notice would have been “a useless gesture” because the breach could “not reasonably
be cured,” and therefore held that such notice was not required. Id. at 652. Here, because of
ambiguities in the contract, there are factual questions as to whether there was a breach that
might allow Lincare to similarly ignore the right-to-cure provision.
Lincare argues that it was entitled to ignore the right-to-cure provision because Apacheta
failed to satisfy the “heart and essence of the Agreement,” in that it was unable to provide the
Disputed Features in the software, which were essential to Lincare’s anticipated digital delivery
management system. (Lincare’s Br. in Supp. of Mot. for Summ. J. at 23.) According to Lincare,
Apacheta’s “admi[ssion] that it did not have the capability to integrate with Lincare’s Active
Directory” made it clear that it would not be able to cure the breach. (Lincare’s Br. in Opp’n to
Apacheta’s Mot. for Summ. J. at 19.) Thus, pre-termination notice would have been a “useless
gesture.” LJL Transp., 962 A.2d at 652.

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In response, Apacheta claims that the Agreement did not require the Disputed Features.
(Apacheta’s Br. in Opp’n to Lincare’s Mot. for Summ. J. at 8.) It notes that the Scope of Work
section of the contract does not include any reference to such features. It also points to
depositions of its employees that suggest those employees did not interpret the contract to require
these features as part of the software.
However, Lincare expresses a different understanding of the contract, one in which the
software’s “technical aspects” were to be worked out during the course of the software
development phase. (Lincare’s Stmt. of Disputed Facts ¶ 5.) Lincare suggests that the Agreement
was analogous to a “design and build” contract, in which the written agreement provides an
overarching framework for the project, with the details to be filled in by the parties as the project
progresses. (Lincare’s Br. in Supp. of Mot. for Summ. J. at 20–21 (citing Armour & Co. v. Scott,
360 F. Supp. 319 (W.D. Pa. 1972)).) Thus, according to Lincare, even though the Disputed
Features were not specified in the text of the contract, they were nevertheless details of the
software that the parties expected to fill in. Indeed, Lincare argues that these details were vital
technical aspects of its proposed delivery management software—the “heart and essence” of the
contract.
The Agreement itself provides little in the way of details regarding the software’s
components. The Scope of Work section gives only a bulleted list of general software features,
such as “Trip/Stop management including dynamic updates,” “Pick-up, delivery, and exchange
workflow,” and “Dispatch and assignment of orders.” (Agreement at 13.) The Disputed Features
do not appear in this list. However, because the contract does not define or elaborate on the
features that are in the list, it is unclear whether the Disputed Features were not included because

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they were not intended to be a part of the product or whether they were, as Lincare argues,
details that fell under the broad features in the list.
When considered alongside the text of the Agreement, the extrinsic evidence establishes
that the Agreement is ambiguous with regard to the presence of the Disputed Features in the
software. For instance, the depositions from key employees at each company display divergent
understandings of the contract. At her deposition, Cora Forgeng, Apacheta’s Project Manager,
addressed the fact that one of the Disputed Features—directory integration—was not listed
among the features in the Scope of Work. According to Forgeng, “[a]ctive directory is wholly
outside the scope of this. It definitely is a separate project.” (Lincare’s Mot. for Summ. J. Ex. D
[Forgeng Dep.] at 24.) However, Linda Reid, Lincare’s Head of Application Technology,
expressed an understanding in her deposition that the Disputed Features did, in fact, fall within
the scope of the items listed in the Scope of Work. (Lincare’s Mot. for Summ. J. Ex. A [Reid
Dep.] at 40.) Reid suggested that the features listed in the Scope of Work “are high-level
groups,” and that, for instance, route optimization “falls into a lot of those areas.” (Id.)
The parties’ conduct during the course of the relationship also suggests that the
Agreement is ambiguous. On one hand, Lincare notes that its employees had a number of
discussions with Apacheta’s staff regarding the directory integration and route optimization
features. (Lincare’s Br. in Supp. of Mot. for Summ. J. at 21.) For instance, Lincare
representatives discussed their concerns about directory integration at a meeting with Apacheta
representatives in July 2015. (Lincare’s Stmt. of Undisputed Facts ¶ 71.) Apacheta’s CEO,
Gregg Timmons, said of the discussions that “there wasn’t anything that was horribly out of
scope that I saw.” (Lincare’s Mot. for Summ. J. Ex. B [Timmons Dep.] at 35.) Timmons went on
to say that “[t]here may have been some items that . . . eventually . . . manifested themselves [as]

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being out of scope and we had to create a [project change request] on.” (Id.) This suggests there
was some gray area as to which features fell inside or outside the scope of the project.
On the other hand, Apacheta points to an email from Cora Forgeng to Lincare employees
explaining that Lincare was required to submit a “project change request” 2 to expand the scope
of the Agreement if it wanted to include the directory integration feature in the software, again
raising the possibility that the Disputed Features were not included in the Agreement.
(Apacheta’s Br. in Opp’n to Lincare’s Mot. for Summ. J. at 8; Forgeng Dep. at 24.)
Taken together, the contract’s lack of definition of the software components and the
extrinsic evidence indicate that the contract is ambiguous as to whether Apacheta was required to
provide the Disputed Features. Thus, the Court must deny both summary judgment motions. See
Pac. Empl’rs, 693 F.3d at 426 (noting that ambiguous contracts are interpreted by the factfinder).
A factual determination as to whether the Disputed Features were a part of the contract is
necessary for the Court’s evaluation of Lincare’s argument that Apacheta committed a breach
sufficient to waive the right-to-cure provision.
B.

Damages

Even if Apacheta could show that Lincare breached the Agreement as a matter of law,
there are ambiguities in the contract that would preclude summary judgment as to damages. The
contract provides for an annual software licensing fee of $750,000. (Agreement at 8.) However,
the contract is unclear as to when the full software licensing fee becomes due and how much the
fee is.

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The Agreement provides as follows: “Any change of scope will be identified and mutually
agreed upon in writing by the Parties (a “Project Change Request”). Upon execution of a Project
Change Request by both Parties, such Project Change Request shall become a constituent part of
the applicable SOW.”
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First, the contract does not establish a deadline for completion of the software and
Lincare’s acceptance of it. Thus, given the significant delays the project faced, there are factual
questions as to when in the contract’s three year life the software would have been completed
and the software licensing fee triggered.
Second, the contract is patently ambiguous as to the amount due in licensing fees in the
first year of acceptance. The contract provides for a prorated licensing fee during the first year of
acceptance, presumably because the parties anticipated that Apacheta would present a completed
software program to Lincare within a year of the contract’s signing. The contract provides that
$250,000 would be due on the date of Lincare’s acceptance of the software. In addition, two
subsequent payments of “$TBD” were to be due on certain other dates, with the amounts of such
payments “[p]rorated from Acceptance Date.” (Agreement at 9.) These terms are ambiguous
because nothing in the contract explains how the payment amounts were to be determined. Thus,
even if the Court were to find Lincare liable for breach of contract, factual questions would
remain as to damages.

IV.

CONCLUSION
Because there are genuine issues of material fact in the case as to both Lincare’s potential

liability and damages, the cross-motions for summary judgment are denied. An Order consistent
with this Memorandum will be docketed separately.

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