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Opinions – U.S. District Court, Maryland: 4/11/11

Contract Law

Breach of warranty

BOTTOM LINE: Where written contracts included a warranty to provide good-faith repair services, defendant’s motion to dismiss a breach of express warranty count was denied.

CASE: Baney Corporation v. Agilysys NV, LCC, Civil Action No. 10–cv–00683–AW (decided March 28, 2011) (Judge Williams). RecordFax No. 11-0328-40, 26 pages.

FACTS: Baney Corporation owns and operates hotels at 17 different locations. In 2005, Agilysys NV, LLC (Agilysys), through its corporate predecessor, offered to provide Baney with a computerized property-management system capable of servicing a multi-property client. In 2006, Baney contracted with Agilysys to license the V1Net Property Management System (V1Net System) at two of Baney’s 17 hotel locations (Contract 1). In February 2007, Baney signed a second contract that extended the V1Net System to all of Baney’s other hotel locations (Contract 2).

In March, 2010, Baney sued Agilysys, seeking recovery in contract and tort. Baney alleged that the V1Net System never functioned properly and that the version of the V1Net System installed at its hotel locations was actually a “beta test version” of the program, not a finished product, and that Agilysys concealed this fact from Baney. Although Agilysys promised to fix the bugs and improve the speed of the V1Net System, Baney claimed that Agilysys never undertook serious efforts to repair the program.

Agilysys moved to dismiss under FRCP 12(b)(6) and 12(d). Baney subsequently amended the complaint and Agilysys renewed its motion to dismiss.

The district court granted in part and denied in part Agilysys’s motion to dismiss.

LAW: Both contracts here were governed by the Maryland Uniform Computer Information Transactions Act (MUCITA). See CL §22–101. Maryland follows the objective theory of contract interpretation, which means that the court must “determine from the language of the agreement itself what a reasonable person in the position of the parties would have meant at the time it was effectuated.” Gen. Motors Acceptance Corp. v. Daniels, 492 A.2d 1306, 1310 (Md.1985).

Both of the contracts contained several warranty disclaimer provisions, which indicated that Agilysys’ only warranties are those expressly mentioned in the text of the agreement. The contracts expressly state that there are no implied warranties of merchantability or fitness for a particular purpose.

In order to overcome these restrictive disclaimers, Baney contended that Contract 2 never became an enforceable contract and, in lieu of the unenforceable written agreement, the Parties formed a contract through performance. However, not only was there no evidence in the Parties’ performance that they intended to depart from the terms of the written contract, but there was considerable evidence that they intended performance to be governed by that agreement.

It was undisputed that both parties signed Contract 1 (thus making it a fully enforceable contract), and the terms of Contract 1 are virtually identical to those of Contract 2. In fact, Contract 2 is merely an expansion of the initial contract from two hotel locations to the remaining 15. Furthermore, it was undisputed that Baney signed Contract 2. (The only dispute was whether Agilysys signed.) At no time subsequent to signing Contract 2 did Baney express doubts about the validity of the agreement it signed or indicate that a different contractual arrangement applies to the hotel locations covered by Contract 2. Finally, Contract 2 stated that “[a]cceptance by Purchaser of any LICENSED PROGRAM from Agilysys shall be deemed conclusive evidence of Purchaser’s agreement that the license for such LICENSED PROGRAM is governed by this Agreement.” Baney did not dispute that it accepted the installation of V1 technology at the hotel locations described in Contract 2. Baney’s acceptance is “conclusive evidence” that the contract thereby formed is governed by the terms of Contract 2.

Thus, the court gave force to the warranty disclaimers in both contracts and dismissed those counts which alleged express and implied warranties that were not mentioned in the written contracts.

The contracts did contain a paragraph entitled “Warranty,” under which the contracts created a warranty on the part of V1 to “correct documented program errors.” The newer statutory definition of warranty contained in the MUCITA includes not only “affirmation[s] of fact,” but also “promise[s] made by the licensor to its licensee … which relates to the [software] and becomes part of the basis of the bargain.” MUCITA §22–402(a)(1). The obligation to correct documented program errors is a “promise” by Agilysys relating to the software. Thus, it was a warranty under the MUCITA.

However, Agilysys did not guarantee that the repair services will always be successful. Instead, the obligation to repair is qualified by the disclaimer that “V1 does not guarantee … that any or all errors will be corrected.”

There is a reasonable way to reconcile the warranty and the disclaimer. The warranty is best interpreted as a promise by V1 to provide services that represent a good-faith effort to correct documented program errors. This reading would give force to the warranty by requiring Agilysys to make a good-faith effort to fix program errors. However, it would also acknowledge the disclaimer by defining Agilysys’s obligation in relation to the required quantum of effort (i.e., a good-faith effort), not a particular result.

Given that the contracts included a warranty to provide good-faith repair services to correct documented program errors, the amended complaint alleged sufficient facts relating to breach of warranty to survive a motion to dismiss.

Agilysys’ promise to “correct documented program errors” is not merely a warranty; it was also Agilysys’s “sole liability” and Baney’s “sole remedy.” Under MUCITA §22–803(a), parties are permitted to contractually define the remedies for breach of contract, even to the point of eliminating judicial remedies and creating an “exclusive … sole remedy.” However, “if performance of an exclusive or limited remedy causes the remedy to fail of its essential purpose, the aggrieved party may pursue other remedies under this title.” §22–803(b).

The official comments to the UCITA indicate that, for contracts in which the sole remedy involves a right of repair, “the agreed remedy contemplates a functioning product. Non-performance of the remedy leaves the licensee without what it bargained for under the contract, a functioning product.” NAT’L CONF. OF COMM’RS ON UNIFORM STATE LAWS, UCITA §803 Cmt. 5(a).

Given the nature of the warranty provisions at issue in this case, the sole-remedy analysis hinged on many of the same under-explored facts as the breach-of-warranty analysis. Baney should be afforded the opportunity to seek discovery to determine whether the sole remedy failed of its essential purpose. See Riegel Power Corp. v. Voith Hydro, 888 F.2d 1043 (4th Cir.1989).

The contracts also contained a number of provisions that restricted the type and amount of damages that could be recovered in the event of breach. They both specifically disclaimed Agilysys’s liability for “lost profits” and for “special, indirect, or consequential damages.” The contracts also specified that Agilysys’s liability “shall not exceed the charges paid by Purchaser … for the particular LICENSED PROGRAM involved.”

Under MUCITA §22–803(c), the failure of an “exclusive … remedy makes a term disclaiming or limiting consequential or incidental damages unenforceable unless the agreement expressly makes the disclaimer or limitation independent of the agreed remedy.” The comments to the rule clarify that the UCITA “rejects cases under Article 2 of the [UCC] which hold that the two types of terms are presumed independent. A consequential damage limit fails if performance of the limited remedy fails unless the agreement makes the consequential damages limit expressly independent of the other limited remedy.” NAT’L CONF. OF COMM’RS ON UNIFORM STATE LAWS, UCITA § 803 Cmt. 5(b).

Agilysys could not identify any language in the contract that “expressly makes the disclaimer or limitation independent of the agreed remedy.” MUCITA §22–803(c). Because the provisions are mutually dependent, and because the court already held that summary judgment was premature as to the alleged failure of the sole remedy, summary judgment as to the damage-limitation provisions of the contracts was likewise denied.

In addition to damages, Baney sought rescission of the contract. Rescission is a “purely equitable remedy” that aims to restore contracting parties to the position they were in prior to entering the contract. Contract Materials Processing, Inc. v. KataLeuna GmbH Catalysts, 303 F.Supp.2d 612, 654 (D.Md.2003).

Rescission may be granted for a variety of reasons, only one of which Baney invoked: material breach. See, e.g., Plitt v. McMillan, 223 A.2d 772, 774 (Md.1996). However, even when a material breach has occurred, rescission is generally appropriate only when “the party exercising a right to rescind notif[ies] the other party and demonstrate[s] an unconditional willingness to return to the other party both the consideration that was given and any benefits received.” Cutler v. Sugarman Org., Ltd., 596 A.2d 105, 111 (Md.Ct.Spec.App.1991).

The amended complaint alleged that “Baney notified Agilysys as soon as it determined that it would be necessary to completely replace the V1Net Property Management System at all of its hotels, and that it would not treat the contract as a continuing obligation.” This supported the conclusion that Baney provided reasonably prompt notice to Agilysys of its intention to rescind the contract.

Further, although Baney was unwilling to destroy or return the software program, see Cutler, 596 A.2d at 111, in situations where the facts suggest that it would be most equitable to allow rescission despite the impossibility or undesirability of complete restoration, “the modern tendency is to allow the relief.” Funger v. Mayor & Council of Town of Somerset, 223 A.2d 168, 173 (Md.1966).

It was too early in the litigation to balance the equities and determine whether Baney was justified in delaying the return of Agilysys’s software. Thus, Agilysys’ motion as to recission was denied and Baney was permitted to seek discovery relevant to its rescission claim.

COMMENTARY: In order to recover damages for fraud, Baney had to prove: “(1) that the defendant made a false representation to the plaintiff, (2) that its falsity was either known to the defendant or that the representation was made with reckless indifference as to its truth, (3) that the misrepresentation was made for the purpose of defrauding the plaintiff, (4) that the plaintiff relied on the misrepresentation and had the right to rely on it, and (5) that the plaintiff suffered compensable injury resulting from the misrepresentation.” Nails v. S & R, Inc., 639 A.2d 660, 668 (Md.1994).

Recovery under a negligent-misrepresentation theory requires proof of a similar set of elements: “(1) the defendant, owing a duty of care to the plaintiff, negligently asserts a false statement; (2) the defendant intends that his statement will be acted upon by the plaintiff; (3) the defendant has knowledge that the plaintiff will probably rely on the statement, which, if erroneous, will cause loss or injury; (4) the plaintiff, justifiably, takes action in reliance on the statement; and (5) the plaintiff suffers damage proximately caused by the defendant’s negligence.” Martens Chevrolet, Inc. v. Seney, 439 A.2d 534, 539 (Md.1982).

Maryland law distinguishes between statements that relate to material facts — which may give rise to cognizable claims, and vague generalities, statements of opinion, or puffery — which are deemed non-cognizable. See, e.g., McGraw v. Loyola Ford, Inc., 723 A.2d 502, 512–13 (Md.Ct.Spec.App.1999).

Agilysys’ statement that the program would be “easy to use and perfect for a multi-property environment,” is too much like an opinion to constitute a misstatement of fact, and it is too vague to justify reliance. Maryland courts have frequently rejected fraud claims based on strikingly similar statements. See Milkton v. French, 150 A. 28 (Md.1930).

The same reasoning applied to Agilysys’s alleged statement that the program would be “perfect” and “easy to use.” The statement is mere puffery or sales talk, which cannot give rise to fraud liability.

Similarly, Baney could not make out a fraud claim based on the allegation that Agilysys negligently or intentionally concealed the fact that the software was a “beta test version” rather than a complete product. Nowhere did Baney identify the aspects of the program that are incomplete or articulate a legal basis for why Agilysys was under a duty to disclose the allegedly deficient features of software.

Thus, Baney’s fraud and negligent-misrepresentation claims were dismissed.

PRACTICE TIPS: A preliminary injunction should be issued under FRCP 65(a) when a party establishes: “[1] that he is likely to succeed on the merits, [2] that he is likely to suffer irreparable harm in the absence of preliminary relief, [3] that the balance of equities tips in his favor, and [4] that an injunction is in the public interest.” Winter v. Natural Res. Def. Council, Inc., 129 S.Ct. 365, 374 (2008).

Immigration Law

Nonimmigrant status

BOTTOM LINE: Because the United States Citizenship and Immigration Services’ decision regarding alien eligibility for change in status was erroneous, the court possessed jurisdiction to remand the case.

CASE: Youssefi v. Renaud, Civil Action No. 10-cv-00428-AW (decided March 11, 2011) (Judge Williams). RecordFax No. 11-0311-41, 14 pages.

FACTS: Narges Youssefi, an Iranian national, entered the United States on June 28, 2007, with her husband and son, as B-2 nonimmigrant visitors with permission to remain until December 27, 2007. They were granted an extension to remain as B-2 nonimmigrant visitors until June 27, 2008. Subsequently, Ms. Youssefi was contacted by her employer in Iran, who requested that she remain in the United States and enroll in school to improve her English-language skills.

Thereafter, Ms. Youssefi applied to Kaplan Test Prep to take English classes. She then acquired a Form I-20, a Student and Exchange Visitor Information System, which is required to obtain student status. With advice from the International Student Advisor at Kaplan, Ms. Youssefi selected a start date of November 3, 2008 for the classes, and entered it on the Form I-20. She then filed a Form I-539 application to change her nonimmigrant status from B-2 visitor to F-1 student on June 25, 2008. Her husband and son applied for F-2 status so they could remain with her, but not attend school.

The United States Citizenship and Immigration Services (USCIS) denied Ms. Youssefi’s Form I-539 application, saying that she was ineligible for a change in nonimmigrant status because she had not maintained her current nonimmigrant status up to thirty days prior to the start of classes.

Ms. Youssefi filed two motions to reopen and reconsider the denial of the Form I-539 application, which were denied. She then filed a complaint in the district court, seeking declaratory, injunctive, mandamus, and appropriate relief for USCIS’s denial of the Form I-539 application. The USCIS moved to dismiss the complaint for lack of subject matter jurisdiction, for failure to state a claim, or, in the alternative, for summary judgment.

The district court granted the motion to dismiss in part and denied it in part.

LAW: Federal courts are courts of limited jurisdiction, meaning that they do not have the authority to issue determinations as to all categories of cases without constitutional or congressional approval. Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994). The party asserting that the court has jurisdiction carries the burden of establishing subject matter jurisdiction. Lovern v. Edwards, 190 F.3d 648, 654 (4th Cir.1999).

When a court is tasked with reviewing an agency’s construction of the statute which it administers, it must accord deference to the agency’s reasonable interpretations. See Chevron, USA, Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842 (1984). However, Chevron deference applies only when an agency’s interpretation is the product of a formal agency process, such as notice-and-comment rulemaking. United States v. Mead Corp., 533 U.S. 218, 229 (2001).

Agency interpretations that are conducted within less formal contexts are entitled to a lower level of deference, “but only to the extent that [they] have the power to persuade.” See Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944). In order to determine whether an interpretation arrived at in a less formal manner has the power to persuade, courts look to many factors, including the level of technicality involved, whether the subject matter falls within an area of agency expertise, and whether an agency’s decision was well-reasoned. See, e.g., Aluminum Co. v. Cent. Lincoln Util. Dist., 467 U.S. 380, 390 (1984).

The Immigration Nationality Act (INA) specifically divests courts of the jurisdiction to review the discretionary determinations of the USCIS. Under the INA, the decision whether or not to grant a petition for adjustment of nonimmigrant status is expressly committed to the discretion of the Secretary of Homeland Security, who “may, under such conditions as he may prescribe, authorize a change from any nonimmigrant classification to any other nonimmigrant classification,” provided that the alien is “lawfully admitted to the United States” and is “continuing to maintain” his or her nonimmigrant status. 8 U.S.C. §1258(a).

Section 1252(a)(2)(B) provides: “Notwithstanding any other provision of law … no court shall have jurisdiction to review … (ii) any other decision or action of the Attorney General or the Secretary of Homeland Security the authority for which is specified under this subchapter to be in the discretion of the Attorney General or the Secretary of Homeland Security.”

The subchapter referred to is Subchapter II of Chapter 12 of Title 8, which encompasses §1258(a), the provision mentioned above that grants the Secretary of Homeland Security the discretion to adjudicate a change of nonimmigrant status.

Thus, the court lacked jurisdiction to review all discretionary components of the USCIS’s decision to deny Ms. Youssefi’s change-of-status application.

However, §1252(a)(2)(B) does not bar the court from reviewing any non-discretionary dimensions of the USCIS’s determination. “[P]ure questions of law [that do] not touch upon decisions that are under the discretion” of the Attorney General or Secretary of Homeland Security are left to the courts. I.N.S. v. St. Cyr, 533 U.S. 289, 305 (2001).

Judicial review is “limited to reviewing whether [the Plaintiff] is legally eligible to be considered for discretionary relief, specifically, an adjustment of status. We would not review the Director’s exercise of his discretion whether to adjust [Plaintiff’s] status.” Igwebuike v. Caterisano, 230 Fed. Appx. 278, 282-83 (4th Cir.2007).

Consequently, the court had jurisdiction to review the USCIS’s determination that Youssefi was statutorily ineligible to be considered for a change of status. If the court concludes that the agency’s decision regarding eligibility is erroneous, the court possesses jurisdiction to remand the case to USCIS, ordering the agency to re-evaluate Ms. Youssefi’s change-of-status application in accordance with the appropriate eligibility principles.

However, §1252(a)(2)(B) does not authorize the court to dictate how the agency ought to exercise its discretion. Thus, the court lacked jurisdiction to entertain remedies that would supplant the USCIS’s discretion, such as a writ of mandamus ordering the agency to grant a change of status.

COMMENTARY: The federal regulation corresponding to 8 U.S.C. §1258(a) provides that a nonimmigrant alien “who is continuing to maintain his or her nonimmigrant status, may apply to have his or her nonimmigrant classification changed to any nonimmigrant classification.” 8 C.F.R. §248.1(a). Furthermore, “a change of status may not be approved for an alien who failed to maintain the previously accorded status or whose status expired before the application or petition was filed, except that failure to file before the period of previously authorized status expired may be excused in the discretion of the Service.” 8 C.F.R. §248.1(b).

The USCIS interprets the statute and regulation as meaning that applicants seeking an adjustment of nonimmigrant status from B-2 to F-1 must maintain active B-2 status up to thirty days before their school program start date, and not just until their change-of-status applications are filed with the agency.

The agency’s review of Ms. Youssefi’s change-of-status application did not involve notice-and-comment procedures or the trial-type procedures that are characteristic of formal agency adjudication. Thus, the agency’s interpretation was only accorded the low level of deference that is given to the informal interpretive decisions of low-level agency officials. See Skidmore, 323 U.S. at 140.

Without the benefit of heightened deference, the agency’s interpretation of §248.1 is simply not convincing. See Tomeh v. U.S. Dep’t. of Homeland Sec., 321 Fed. Appx. 620 (9th Cir.2009). The underlying statute, 8 U.S.C. §1258, is ambiguous. It implies that the USCIS may not grant a change of status to someone who has failed to “maintain” his or her nonimmigrant status, but it does not define what it means to “maintain” status. Under the plain language of the regulation, an applicant may be eligible for a change of status even if she failed to file before her previously authorized status expired. The ultimate decision of whether to excuse the applicant’s lapse lies within “the discretion” of the USCIS. See 8 C.F.R. §248.1(b).

Ms. Youssefi’s situation — filing her application while her B-2 status was still valid, yet subsequently allowing it to expire while her application was being considered by the agency — is not specifically addressed by the language of the regulation. However, if the failure to file before expiration of status can be excused within the discretion of the service, as stated in the regulation, then it is only logical that filing within status (and later falling out of status) must be excusable.

Thus, the Secretary of Homeland Security has discretion, in appropriate cases, to excuse change-of-status applicants who file while their prior status is valid, but subsequently fall out of status.

Accordingly, the case was remanded to USCIS to exercise its discretion in deciding whether to grant Ms. Youssefi’s application for a change in status.