Contract analysis

From: Aaron Liu <aliu@calderwoodharkness.com> To: Bernard Crawford <bcrawford@calderwoodharkness.com> Cc: Gabrielle Moss <gmoss@calderwoodharkness.com> Date: Fri, 08 Sep 2023 10:47:00 -0000 Subject: Research Summary — Comparable RTOS Licensing Disputes (VMS/MeridianCode; Matter No. 1007-00008)

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Per your request, I've completed my initial research survey on comparable disputes involving automotive embedded RTOS licensing. This summary is organized around the three principal areas most relevant to VMS's position under the Master Embedded Software License and Services Agreement dated June 21, 2022 (the "MESLSA"): (1) dormancy/suspension provisions and fee forfeiture; (2) "use-it-or-lose-it" milestone provision

The short version is that the comparable authority is generally supportive of VMS's positions, though the derivative works question will turn heavily on the technical characterization from Hargrove. Details below.

**I. Dormancy / Suspension Provisions and Fee Forfeiture**

As a threshold matter, dormancy clauses in enterprise embedded-software licenses are relatively uncommon — they appear more frequently in long-term SaaS and platform licensing arrangements. That said, I identified several analogous disputes from the automotive and industrial embedded software sectors that are instructive.

*A. Dormancy Tolling of Milestone Deadlines*

The most directly analogous authority I found is *Crestline Automotive Systems v. Veridian Software Corp.*, Midwest Regional Arbitration Panel, Award No. MRA-2019-0347 (2019). In *Crestline*, an automotive licensee suspended integration of an embedded operating system due to a program rescoping tied to a change in OEM platform requirements. The panel held that the licensee's invocation of a contractual dormancy provi

One distinguishing factor worth noting: in *Crestline*, the licensee sent its dormancy notice approximately six weeks before the suspension period began, providing the licensor with substantial lead time. VMS sent its dormancy notice on July 14, 2023 — six days before the 120-day trigger date of July 20, 2023. That notice is still timely under Section 9.4's 10-business-day requirement, but the earlier notice in *Cres

On the fee forfeiture question, I identified *Northland Fleet Technologies, Inc. v. Arcadian Embedded Solutions, LLC*, No. 1:19-cv-00842 (W.D. Mich. 2020), a federal district court decision applying Michigan law. The court addressed a termination-for-convenience clause with fee-forfeiture provisions in a commercial fleet software licensing agreement. The court held that forfeiture of prepaid fees substantially exceed

This is helpful for VMS. Forfeiture of $12,320,000 in prepaid fees — comprising the $8,000,000 upfront license fee, $2,400,000 in Year 1 maintenance and support, and $1,920,000 in integration services fees for Milestones 1–3 — would be disproportionate to MeridianCode's actual damages if VMS terminated prior to the June 21, 2024 24-month anniversary under Section 9.1. VMS has already received and utilized significant

*C. Maintenance Fee Abatement During Dormancy*

On the disputed $2,400,000 Year 2 Maintenance & Support Fee invoiced by MeridianCode on July 1, 2023, I found useful support in Harland & Meyers, *Technology Licensing Disputes* (3d ed. 2021), particularly §§ 8.14–8.17. The treatise discusses the well-established principle that maintenance and support fees should be proportional to the level of support actually provided. Where a dormancy clause reduces the licensor's

The argument here is straightforward: MeridianCode cannot simultaneously acknowledge that its support obligations are reduced to critical-security-patch-only during dormancy and also demand full-rate maintenance fees as if it were providing comprehensive support.

**II. "Use-It-or-Lose-It" Clauses — Section 4.3**

Section 4.3 requires VMS to commence integration testing on at least 2 platforms within 18 months of the June 21, 2022 Effective Date — i.e., by December 21, 2023.

As things stand, Argonaut-A reached Milestone 3 (alpha integration testing passed February 28, 2023), which clearly constitutes "commencement of integration testing" for that platform. The question is Argonaut-C. Argonaut-C reached Milestone 2 (source-code customization delivered January 15, 2023), but integration testing is a subsequent milestone phase. Whether Milestone 2 constitutes "commencement of integration te

*B. Analogous Authority on "Commence Integration" Language*

I identified *Reliant Powertrain Corp. v. Sentinel Code Systems, Inc.*, No. 341892 (Mich. Ct. App. 2018), where a Michigan appellate court interpreted a similar "commence integration" requirement in an embedded software license for powertrain control modules. The court adopted a broad reading, holding that preparatory customization work constituting a necessary predicate to integration testing satisfied the "commence

This is helpful for VMS, but I want to flag a concern: the language in Section 4.3 is more specific than the clause at issue in *Reliant*. Section 4.3 says "commence integration testing," not simply "commence integration" or "commence deployment activities." MeridianCode will argue the narrower phrase requires actual testing, not merely preparatory customization. I think this argument has some traction.

*C. The Stronger Argument: Dormancy Tolling*

In my view, the stronger argument is that dormancy under Section 9.4 tolls all milestone deadlines, including the Section 4.3 deadline. The *Crestline* award discussed above supports this position directly. If dormancy tolls the December 21, 2023 deadline, VMS gains additional runway equal to the duration of the dormancy period. Upon reactivation, VMS would have time to advance Argonaut-C to Milestone 3 (or beyond) a

**III. Derivative Works Ownership — DW-001, DW-002, DW-003**

This is the most complex and fact-dependent issue. The three disputed derivative works modules comprise approximately 47,000 lines of code, with an estimated value of $1,800,000–$2,500,000 per Dr. Samuel Beecroft's assessment at Hargrove Technical Consulting.

Under Section 7.2 of the MESLSA, modifications, adaptations, or extensions to ATLAS-RT source code created by VMS engineers become jointly owned, with MeridianCode retaining a perpetual, royalty-free license to such derivative works. VMS's position is that DW-001, DW-002, and DW-003 are VMS-originated works — independently authored by VMS engineers — that should be solely owned by VMS and fall outside Section 7.2's j

*B. Federal Copyright Principles and Michigan Law*

Michigan follows general federal copyright principles for software. Under 17 U.S.C. § 101, joint authorship requires that (1) each author's contribution be independently copyrightable, and (2) the authors intend to create a joint work at the time of creation. VMS may argue that its engineers' contributions were independently created, were not derivative of ATLAS-RT source code, and that VMS engineers did not intend j

The most relevant case I found is *Trident Mobility Solutions, Inc. v. Oakhurst Technologies Corp.*, No. 2:20-cv-01156 (E.D. Mich. 2021). The court examined a joint-ownership clause in an embedded software license for autonomous vehicle sensor systems — factually quite close to our situation. The court held that the contractual definition of "Derivative Work" controlled over the copyright statute's definition, but cr

This is potentially quite favorable for VMS — if we can demonstrate, through Dr. Beecroft's technical analysis, that DW-001, DW-002, and DW-003 interface with ATLAS-RT but do not modify its underlying source code.

I expect MeridianCode, through Redstone Whitaker, will argue that the contractual definition of "Derivative Work" in Exhibit C is broad enough to capture any code that builds upon or extends ATLAS-RT functionality, regardless of whether the underlying source code was directly modified. The Exhibit C definition does use the phrase "extensions of functionality," which is broader than "modifications to source code." If

Bottom line: Dr. Beecroft's technical assessment will be critical. We need his analysis to clearly characterize whether VMS's modules modify or extend ATLAS-RT's source code and functionality, or whether they are independent works that merely interface with ATLAS-RT through published APIs or standard communication protocols. I'd recommend we coordinate with Hargrove on the specific questions we need addressed.

**IV. Antitrust Considerations (Cross-Reference)**

I am separately preparing the antitrust considerations memorandum regarding MeridianCode's market position in automotive RTOS licensing (Nasdaq: MCDT; approximately $310 million FY2022 revenue; approximately 1,400 employees). I wanted to flag the connection here: if MeridianCode's derivative works claims or restrictive license provisions (particularly Section 7.2's joint-ownership provision and Section 11.3's non-com

A brief procedural note: the MESLSA requires binding arbitration under the rules of the Midwest Arbitration Institute, seated in Detroit, MI, with a 3-arbitrator panel for disputes exceeding $1,000,000. All of the disputes at issue — fee forfeiture ($12,320,000), the Year 2 maintenance fee ($2,400,000), and derivative works ownership ($1,800,000–$2,500,000 estimated value) — individually or collectively exceed that t

Worth noting: published MAI awards, including *Crestline*, suggest the forum tends to enforce contractual dormancy provisions according to their terms and is generally receptive to tolling arguments where the licensee acted in good faith and provided timely notice. That bodes well for VMS, assuming we can demonstrate the bona fides of the dormancy invocation.

The comparable authority generally supports VMS's positions on three key fronts:

1. **Dormancy tolling:** Strong support for the argument that Section 9.4 dormancy tolls the Section 4.3 "use-it-or-lose-it" deadline and other milestone deadlines. *Crestline* is directly on point, and the MAI forum appears sympathetic to these arguments.

2. **Fee forfeiture as penalty:** Reasonable support under Michigan law for arguing that forfeiture of $12,320,000 in prepaid fees is an unenforceable penalty, particularly given VMS's substantial performance through Milestone 3 on Argonaut-A and Milestone 2 on Argonaut-C, and the approximately 14,200 engineering hours VMS has invested in the integration program to date. *Northland Fleet* provides the analytical fram

3. **Derivative works ownership:** The outcome will likely turn on the technical characterization of DW-001, DW-002, and DW-003 — specifically, whether they modify or extend ATLAS-RT source code/functionality, or independently interface with it. *Trident Mobility Solutions* is favorable if we can establish the latter. Dr. Beecroft's assessment from Hargrove will be dispositive on this point.

One broader caveat: Michigan law is somewhat underdeveloped on embedded-software-specific licensing disputes. There is no directly controlling Michigan Supreme Court or Sixth Circuit authority on several of these issues. The analogous federal district court decisions and arbitration awards I've cited will carry significant persuasive weight, but we should be candid with the client that we're working in a space withou

I'm happy to prepare a more formal memorandum on any of these areas if you'd like to share the analysis with Martin Cross or the broader VMS team. I can also compile the cited authorities into a research binder for the matter file. Just let me know how you'd like to proceed.

Aaron Liu Associate Calderwood & Harkness LLP 600 Renaissance Center, Suite 3200 Detroit, MI 48243 T: (313) 441-7829 E: aliu@calderwoodharkness.com

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