Copart, Inc., vs. Sparta Consulting, Inc. – When Software Developer Intentionally Covers Up Shortcomings in Custom Software Project, Client May Invoke Unfair Competition Law to Recover Payments for Worthless Work product.

The following is a case update prepared by Professor Dan Schechter, Loyola Law School, Los Angeles, analyzing a recent decision of interest:

SUMMARY:

A district court in California has held that when a software developer intentionally covered up the shortcomings in its custom software project, its client could invoke California’s Unfair Competition Law to recover the payments it made to the developer for the worthless work product. [Copart, Inc., vs. Sparta Consulting, Inc., 2018 Westlaw 4293023 (E.D. Cal.).]

FACTS: A corporation in the automobile parts business hired a software firm to develop a business management system. Ultimately, the software project failed. The customer filed suit against the software developer, claiming fraud and seeking both damages and restitution. A jury returned a multimillion dollar verdict in favor of the customer. In the context of postjudgment motions, the software developer argued that the customer could not avail itself of California’s Unfair Competition Law (“UCL”), Cal. Bus. & Prof. Code § 17200 et seq.

REASONING: The trial court ruled in favor of the customer, holding that there was ample evidence supporting the jury’s finding that the software developer was fully aware that its work product was not adequate. There was extensive email traffic within the development firm concerning the ongoing problems with the software project. Despite its misgivings, the developer failed to disclose those facts to the customer. As a result of that nondisclosure, the customer continued making millions of dollars in progress payments to the developer, instead of terminating the contract for cause, thus justifying a remedy under the UCL.

AUTHOR’S COMMENT: The court’s reasoning is perfectly sound; but this is a very unusual application of the UCL. Most of the time, the UCL is invoked when a member of the public (often a consumer) is defrauded. Here, the UCL was applied in the context of a two-party dispute between two sophisticated players.

Is there a chance that the UCL and its remedies will be bootstrapped into ordinary breach of contract cases? Perhaps: when discovery reveals (as it did in this case) that the breaching party is aware of the imminent breach but yet continues to accept progress payments from the non-breaching party, a breach of contract may be transmuted into an actionable tort.

A cynic might say that anyone who enters into a contract with a software firm for the development of a custom system has assumed the risk of puffery and hidden glitches. However, I doubt that assumption of the risk is a defense to an intentional tort.

These materials were written by Dan Schechter, Professor Emeritus, Loyola Law School, Los Angeles, for his Commercial Finance Newsletter, published weekly on Westlaw. Westlaw holds the copyright on these materials and has permitted the Insolvency Law Committee to reprint them.