1007-00008 · Vantage Mobility Systems Corp · Memoranda

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MEMORANDUM

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT

TO: Bernard Crawford, Responsible Partner Conrad Ashby, Billing Partner

FROM: Gabrielle Moss, Lead Associate

DATE: August 2023

RE: Interaction Between Dormancy Status Under Section 9.4 and Year 2 Maintenance & Support Fee Obligation Under the Master Embedded Software License and Services Agreement (MESLSA) dated June 21, 2022 — Vantage Mobility Systems Corp. / Meridian Code Technologies, Inc.

MATTER NO.: C&H Matter No. 1007-00008

CLIENT: Vantage Mobility Systems Corp.

This memorandum is protected by the attorney-client privilege and the attorney work product doctrine. It is prepared by Calderwood & Harkness LLP at the request of its client, Vantage Mobility Systems Corp., and is intended solely for the use of the individuals identified above. Any dissemination, distribution, or copying of this memorandum to any person or entity not authorized to receive it is strictly prohibited.

I. Executive Summary

This memorandum analyzes whether Vantage Mobility Systems Corp. ("VMS" or "Vantage") is obligated to pay the $2,400,000 Year 2 Annual Maintenance & Support Fee invoiced by Meridian Code Technologies, Inc. ("MeridianCode") on July 1, 2023, given that the MESLSA was placed in Dormancy Status effective August 3, 2023, following VMS's dormancy notice dated July 14, 2023. The analysis examines the interplay between the dormancy provisions of Section 9.4 of the MESLSA — which reduce MeridianCode's support obligations to a "critical-security-patch-only" level — and the annual maintenance fee structure set forth in Section 5 of the MESLSA.

The central question presented is whether the contractual reduction of MeridianCode's support obligations to critical-security-patch-only during the dormancy period provides a basis for VMS to abate, prorate, or otherwise withhold payment of the full Year 2 maintenance fee. This question is complicated by the fact that MeridianCode's invoice was issued on July 1, 2023 — thirteen days before VMS's dormancy notice and thirty-three days before MeridianCode's formal acknowledgment of Dormancy Status — and by the absence of any express fee-adjustment mechanism in Section 9.4.

After careful analysis of the MESLSA provisions, applicable Michigan contract law principles, and the equitable considerations bearing on this dispute, our conclusion is that VMS has strong contractual and equitable arguments that the Year 2 maintenance fee should be abated or, at minimum, prorated to reflect the dramatically reduced scope of services MeridianCode is obligated to provide during the dormancy period. The contractual silence on fee adjustment during dormancy, when read against the express reduction in service obligations, creates an ambiguity that should be resolved in VMS's favor under Michigan's contra proferentem doctrine and the implied covenant of good faith and fair dealing. Equitable doctrines of unjust enrichment and partial failure of consideration provide additional support.

Accordingly, we recommend that VMS formally dispute the invoice and propose a prorated fee — estimated in the range of approximately $350,000 to $580,000 — or, alternatively, seek a credit against future obligations under the MESLSA. This recommendation should be coordinated with the broader dormancy extension and fee restructuring negotiations currently underway with MeridianCode's outside counsel, Redstone Whitaker LLP.

The total financial exposure on this single issue is $2,400,000 in disputed maintenance fees. To place this figure in context, VMS has already paid $12,320,000 in fees under the MESLSA (comprising the $8,000,000 upfront license fee, the $2,400,000 Year 1 maintenance fee, and $1,920,000 in integration services fees through Milestone 3), and total remaining contractual commitments under the agreement amount to approximately $7,680,000.

II. Background and Relevant Facts

A. The MESLSA and Its Fee Structure

VMS and MeridianCode entered into the Master Embedded Software License and Services Agreement (the "MESLSA") effective June 21, 2022. The MESLSA was the product of approximately seven months of negotiation, with MeridianCode preparing the initial draft and VMS negotiating revisions through successive redlines. The agreement governs the license, integration, and ongoing support of MeridianCode's ATLAS-RT™ embedded real-time operating system, Version 4.2 (subsequently updated to Version 4.2.3 through a maintenance release delivered in November 2022), for integration into VMS's Project Argonaut adaptive vehicle platform program. Project Argonaut, in turn, is VMS's flagship next-generation fleet vehicle platform initiative, spanning multiple vehicle configurations designed for both internal combustion engine ("ICE") and electric vehicle ("EV") applications.

The total deal value under the MESLSA is $20,000,000, allocated across four principal fee components:

(i) Upfront License Fee: $8,000,000, payable at signing. This fee was paid in full by VMS on June 21, 2022, concurrent with execution of the MESLSA. The upfront license fee grants VMS a non-exclusive, non-transferable license to use the ATLAS-RT™ software, including source-code access for integration customization purposes, subject to the restrictions and conditions set forth in Section 3 of the MESLSA.

(ii) Annual Maintenance & Support Fees: $2,400,000 per year, payable annually during each year of the five-year term (June 21, 2022 through June 20, 2027). The Year 1 Annual Maintenance & Support Fee of $2,400,000 was paid by VMS on July 15, 2022, within the 30-day payment window specified in Section 5.2(b). These fees are the subject of the present dispute with respect to Year 2.

(iii) Integration Services Fee: $3,200,000, payable across five defined milestones tied to the integration of ATLAS-RT™ into the Project Argonaut vehicle platforms. As of March 2023, VMS had paid $1,920,000 in integration services fees, corresponding to Milestones 1 through 3. The remaining $1,280,000 in integration services fees (Milestones 4 and 5) remains unpaid and is subject to the dormancy tolling provisions discussed below.

(iv) Per-Unit Runtime Royalties: $80 per unit for each vehicle in which the ATLAS-RT™ software is deployed in a production environment, subject to an aggregate cap of $4,000,000 over the term of the MESLSA. As of the date of this memorandum, VMS has not deployed ATLAS-RT™ in any production vehicle, and accordingly, $0 in runtime royalties has been incurred to date. Production deployment was contingent on successful completion of integration milestones and vehicle platform certification, both of which have been suspended as part of the Project Argonaut rescoping described below.

In aggregate, total fees paid by VMS under the MESLSA as of the commencement of dormancy amount to $12,320,000, calculated as follows: $8,000,000 (upfront license fee) + $2,400,000 (Year 1 maintenance fee) + $1,920,000 (integration services fees through Milestone 3). Total remaining contractual commitments, assuming full performance of the MESLSA, are approximately $7,680,000 — comprising $9,600,000 in remaining annual maintenance fees ($2,400,000 × 4 remaining years), less credits and adjustments, plus $1,280,000 in remaining integration services fees and up to $4,000,000 in potential runtime royalties, offset by the $2,400,000 Year 2 fee currently in dispute.

B. The Annual Maintenance & Support Fee Obligation

The MESLSA provides for annual maintenance and support fees of $2,400,000 payable during each year of the five-year term. Section 5.2(b) of the MESLSA states that the annual maintenance and support fee is "due and payable within thirty (30) days of the anniversary of the Effective Date or, if the first year, within thirty (30) days of the Effective Date." The MESLSA's five-year term runs from June 21, 2022 through June 20, 2027, establishing June 21 of each year as the notional anniversary date for maintenance fee invoicing purposes.

The Year 1 Annual Maintenance & Support Fee of $2,400,000 was paid by VMS on July 15, 2022, approximately 24 days after the Effective Date, within the contractual payment window. The Year 2 Annual Maintenance & Support Fee of $2,400,000 was invoiced by MeridianCode on July 1, 2023 — ten days after the June 21, 2023 first anniversary of the Effective Date. This invoice is the subject of the present dispute. VMS has deferred payment of the Year 2 invoice pending resolution of the dormancy-related fee adjustment questions analyzed in this memorandum.

Under the maintenance and support provisions of Section 5 of the MESLSA, MeridianCode's obligations in exchange for the $2,400,000 annual fee include a comprehensive suite of active support services, specifically:

(a) Software Updates and Patches: MeridianCode is obligated to provide all software updates, patches, service packs, and maintenance releases for ATLAS-RT™ during the maintenance term, including both critical security patches and non-critical functionality updates, performance optimizations, and feature enhancements applicable to the licensed version.

(b) Technical Support (Telephone and Email): MeridianCode is required to provide dedicated technical support through both telephone and email channels, with a guaranteed response time of four (4) business hours for Priority 1 issues and twenty-four (24) business hours for Priority 2 and Priority 3 issues, pursuant to the Service Level Agreement incorporated as Exhibit C to the MESLSA.

(c) Bug-Fix Services: MeridianCode is obligated to investigate, diagnose, and remediate reported software defects within the timeframes specified in the Service Level Agreement, including both critical and non-critical bugs affecting functionality, performance, or stability of the ATLAS-RT™ software in the VMS integration environment.

(d) Compatibility Updates for Designated Hardware Platforms: MeridianCode is required to provide compatibility updates and configuration adjustments necessary to ensure that ATLAS-RT™ remains compatible with the hardware platforms designated in Exhibit A to the MESLSA, including processor architecture updates, peripheral driver compatibility, and memory management optimizations specific to the VMS Project Argonaut hardware configurations.

(e) Access to MeridianCode Engineering Team for Integration Troubleshooting: Under the maintenance provisions, VMS is entitled to direct access to MeridianCode's engineering team for consultation and troubleshooting related to the integration of ATLAS-RT™ into VMS's Project Argonaut platforms. Section 5.3(e) specifies a minimum allocation of 160 engineering hours per quarter for integration troubleshooting support.

These services collectively represent a comprehensive, active support package inextricably tied to the ongoing integration work across the Project Argonaut platforms. As discussed below, the dormancy provisions of Section 9.4 reduce this comprehensive support package to a single, narrow obligation — the provision of critical security patches only — while the remaining elements of the support package are suspended for the duration of the dormancy period.

C. Project Argonaut Rescoping and Suspension of Integration

Project Argonaut was originally scoped by VMS to encompass five vehicle platform configurations, designated Argonaut-A through Argonaut-E. Each configuration was designed around a distinct vehicle architecture — Argonaut-A and Argonaut-B for ICE-platform fleet vehicles, and Argonaut-C, Argonaut-D, and Argonaut-E for EV-platform vehicles incorporating varying degrees of electrification integration.

On March 14, 2023, the VMS Board of Directors passed a resolution to rescope Project Argonaut from five vehicle platform configurations to two — Argonaut-A and Argonaut-C — with the remaining three configurations (Argonaut-B, Argonaut-D, and Argonaut-E) deferred indefinitely to a proposed "Phase II" that has no firm commencement date. The Board resolution cited three principal factors driving the rescoping decision:

(a) Semiconductor Supply-Chain Delays: Persistent and worsening supply-chain disruptions affecting the specialized embedded processors required for the Argonaut-D and Argonaut-E EV configurations, with lead times extending to 36–44 weeks and projected to remain elevated through at least Q2 2024. The supply-chain disruptions rendered the original five-platform integration timeline infeasible.

(b) Kestrel Capital Partners, LP Portfolio-Wide Capital Expenditure Reduction Directive: Kestrel Capital Partners, LP, the majority equity holder in VMS, issued a portfolio-wide directive in February 2023 requiring all portfolio companies to reduce projected capital expenditures by 15–20% for fiscal years 2023 and 2024. The Argonaut rescoping was identified as the primary mechanism for VMS compliance with this directive, yielding an estimated $8.2 million in deferred capital expenditures across the affected vehicle platform programs.

(c) Strategic Prioritization of ICE-Platform Fleet Vehicles: Based on updated market analysis and fleet customer demand signals, VMS's executive leadership team determined that near-term revenue maximization favored accelerated deployment of ICE-platform fleet vehicles (Argonaut-A) over the EV-platform configurations, which faced additional regulatory certification timelines and charging infrastructure dependencies.

At the time of the Board's rescoping resolution, the integration status of each vehicle platform under the MESLSA milestone structure was as follows:

• Argonaut-A: Milestone 3 of 5 complete. Alpha integration testing was passed on February 28, 2023, with MeridianCode's engineering team confirming successful boot-level integration of ATLAS-RT™ Version 4.2.3 on the Argonaut-A hardware platform. This represented the most advanced integration status among the five platforms.

• Argonaut-C: Milestone 2 of 5 complete. Source-code customization for the Argonaut-C platform was delivered by MeridianCode on January 15, 2023, and accepted by VMS engineering. Integration testing had not yet commenced at the time of rescoping.

• Argonaut-B: Milestone 1 of 5 only. Preliminary architecture review and requirements documentation had been completed, but no source-code work or integration activity had been initiated.

• Argonaut-D and Argonaut-E: Not commenced. No milestone work of any kind had been initiated for these two EV-platform configurations.

Following the Board resolution, all integration work across all Project Argonaut platforms was formally suspended on March 22, 2023, pursuant to an internal stop-work order issued by Martin G. Cross, VMS General Counsel, and confirmed to MeridianCode via email on the same date. As of the suspension date, VMS engineering teams had invested approximately 14,200 person-hours on Project Argonaut-related integration activities, representing a substantial internal resource commitment independent of the fees paid to MeridianCode under the MESLSA.

From March 22, 2023 forward, no integration work, milestone deliverables, testing, or related technical activities have been performed under the MESLSA. The software integration environment has been maintained in a static state, with no active development or testing occurring on any of the Argonaut platforms.

D. Invocation of Dormancy Status

Section 9.4 of the MESLSA establishes a dormancy mechanism that is triggered when the licensee suspends active integration for more than 120 consecutive calendar days without providing written notice to the licensor. Specifically, Section 9.4 provides, in relevant part:

"If Licensee suspends active integration activities under this Agreement for a period exceeding one hundred twenty (120) consecutive calendar days, Licensor may, upon written notice to Licensee, convert the status of the License to Dormancy Status. Licensee may also elect to invoke Dormancy Status at any time by providing written notice to Licensor prior to the expiration of the one hundred twenty (120) day period. Upon the effective date of Dormancy Status, the following conditions shall apply: (a) Licensor's support obligations under Section 5 shall be reduced to the provision of critical-security-patch-only support; (b) all milestone deadlines and delivery schedules under Section 7 shall be tolled for the duration of Dormancy Status; and (c) Dormancy Status may not exceed twelve (12) consecutive months; if Dormancy Status has not been terminated by the twelve-month anniversary of its effective date, the parties shall enter into good-faith renegotiation of the terms of this Agreement, failing which either party may terminate this Agreement upon sixty (60) days' written notice."

Based on the March 22, 2023 suspension of all integration activities, the 120-day trigger period under Section 9.4 was calculated to expire on July 20, 2023. VMS, acting proactively and within the express terms of Section 9.4 permitting licensee-initiated dormancy, sent a formal dormancy notice on July 14, 2023 — six days before the expiration of the 120-day trigger period. The dormancy notice was issued by Martin G. Cross, VMS General Counsel, addressed to Priya Ramaswamy, MeridianCode General Counsel, and transmitted via both certified mail and email in compliance with the notice provisions of Section 14.2 of the MESLSA.

MeridianCode formally acknowledged Dormancy Status on August 3, 2023, in a written communication from Ms. Ramaswamy to Mr. Cross. The acknowledgment confirmed the effective date of Dormancy Status as August 3, 2023, and stated that MeridianCode would implement the dormancy conditions set forth in Section 9.4.

Under Section 9.4, the contractual effects of Dormancy Status are as follows:

(a) Support Reduction: MeridianCode's support obligations under Section 5 are reduced to the provision of "critical-security-patch-only" support. This eliminates all of the comprehensive support services described in Section II.B above, except for the narrow obligation to provide security patches that address critical vulnerabilities.

(b) Milestone Tolling: All milestone deadlines and delivery schedules under Section 7 are tolled for the duration of Dormancy Status. This means that the clock on remaining integration milestones (Milestones 4 and 5 for Argonaut-A; Milestones 3–5 for Argonaut-C) is suspended and will not resume until Dormancy Status is terminated and active integration resumes.

(c) 12-Month Cap: Dormancy Status may not exceed 12 consecutive months. Based on the August 3, 2023 effective date, the 12-month cap will expire on August 3, 2024. If Dormancy Status has not been terminated by that date, the parties are required to enter into good-faith renegotiation of the MESLSA terms, failing which either party may terminate the agreement upon 60 days' written notice.

E. Timing of Year 2 Invoice Relative to Dormancy

The timeline of events surrounding the Year 2 maintenance fee invoice and the invocation of dormancy is as follows:

The critical fact for this analysis is that MeridianCode invoiced the Year 2 Maintenance & Support Fee of $2,400,000 on July 1, 2023, which was thirteen days before VMS's dormancy notice (July 14, 2023), nineteen days before the 120-day trigger date (July 20, 2023), and thirty-three days before MeridianCode's formal acknowledgment of Dormancy Status (August 3, 2023). VMS has disputed and deferred payment of this invoice.

MeridianCode's position on the disputed invoice has been communicated through its outside counsel, Redstone Whitaker LLP, led by Alan M. Briscoe. In a letter dated August 14, 2023, Mr. Briscoe asserted three principal grounds for MeridianCode's position that the full Year 2 maintenance fee is owed:

(a) The Year 2 invoice was properly issued before Dormancy Status took effect, and therefore the obligation to pay crystallized prior to any modification of MeridianCode's support obligations.

(b) The annual maintenance fee is characterized under the MESLSA as a non-refundable obligation, and accordingly, once invoiced, the fee is not subject to abatement, proration, or credit regardless of subsequent changes in service level.

(c) Dormancy Status does not retroactively relieve VMS of payment obligations that accrued before the effective date of dormancy.

VMS's position, as articulated by Mr. Cross in response correspondence dated August 18, 2023, is that the reduction of MeridianCode's support obligations to critical-security-patch-only during dormancy renders the full $2,400,000 maintenance fee unconscionable as applied, and that the fee should be abated or prorated to reflect the actual scope of services to be rendered during the Year 2 maintenance period.

III. Legal Analysis

A. Contractual Interpretation of Section 9.4 (Dormancy Provisions)

1. Text of Section 9.4 — Support Reduction to Critical-Security-Patch-Only. The plain language of Section 9.4 is unambiguous on one critical point: during Dormancy Status, MeridianCode's support obligations under Section 5 "shall be reduced to the provision of critical-security-patch-only support." This language is mandatory ("shall be reduced"), unconditional, and comprehensive in its reference to the entirety of MeridianCode's Section 5 obligations. There is no carve-out, exception, or reservation that would permit MeridianCode to selectively maintain certain support obligations while reducing others. The reduction is total: from the comprehensive support package described in Section 5 to critical-security-patch-only support.

The practical effect of this reduction is the elimination of substantially all of the services comprising the maintenance and support package for which VMS pays $2,400,000 annually. Specifically, dormancy eliminates:

(a) General software updates, service packs, and non-critical maintenance releases — eliminated during dormancy.

(b) Technical support services via telephone and email, including the four-business-hour Priority 1 response time and twenty-four-business-hour Priority 2/3 response times guaranteed under the Service Level Agreement — eliminated during dormancy.

(c) Bug-fix services for non-critical defects, including investigation, diagnosis, and remediation — eliminated during dormancy.

(d) Compatibility updates for designated hardware platforms, including processor architecture updates, peripheral driver compatibility, and memory management optimizations — eliminated during dormancy.

(e) Access to MeridianCode's engineering team for integration troubleshooting, including the minimum quarterly allocation of 160 engineering hours — eliminated during dormancy.

What remains is a single, narrow obligation: the provision of critical security patches. This represents, by any reasonable measure, a fundamental diminution of the services underlying the $2,400,000 annual maintenance fee — likely eliminating 80–90% of the value of the maintenance and support package. This estimate is grounded in industry practice for embedded software maintenance tiers. As discussed in the proration analysis below (Section III.D), independent industry benchmarks from Penmark Consulting Group and the Embedded Systems Engineering Council consistently value "critical-patch-only" maintenance tiers at 10–20% of comprehensive maintenance and support packages for comparable embedded real-time operating systems.

The significance of this service reduction cannot be overstated. The comprehensive support package under Section 5 was designed to support active, ongoing integration work across multiple vehicle platforms. It contemplated regular engineering interaction between MeridianCode and VMS technical teams, continuous software improvement, and responsive troubleshooting. During dormancy, when no integration work is occurring and the software environment is static, the need for — and delivery of — these services drops to near zero. The only service that retains relevance during dormancy is the patching of critical security vulnerabilities, which is a narrow, reactive obligation requiring minimal engineering resources on MeridianCode's part.

2. The Silence of Section 9.4 on Fee Adjustment. The most significant feature of Section 9.4 for purposes of this dispute is what it does not say. The MESLSA drafters addressed dormancy's effect on milestone deadlines (tolling under subsection (b)) and on MeridianCode's support obligations (reduction to critical-security-patch-only under subsection (a)), but Section 9.4 does not contain any express provision addressing the maintenance fee during Dormancy Status. It neither states that the maintenance fee is abated or prorated during dormancy, nor does it state that the fee remains payable in full notwithstanding the reduction in support obligations. This silence is the crux of the present dispute.

This omission creates a contractual ambiguity that must be resolved through the application of Michigan contract interpretation principles. Several established doctrines are relevant:

Contra Proferentem. Under Michigan law, ambiguous contract provisions are construed against the drafter. Klapp v. United Insurance Group Agency, Inc., 468 Mich. 459, 663 N.W.2d 447 (2003). The MESLSA was initially drafted by MeridianCode, as is typical for licensor-prepared software license agreements. While VMS negotiated revisions to the draft, the fundamental architecture of the agreement — including the dormancy provisions of Section 9.4 and the maintenance fee structure of Section 5 — reflects MeridianCode's draftsmanship. If MeridianCode intended the maintenance fee to remain payable in full during dormancy notwithstanding the reduction in support obligations, it was incumbent upon MeridianCode, as drafter, to include an express provision to that effect. Its failure to do so should be construed against it. The ambiguity created by the silence of Section 9.4 on fee adjustment should be resolved in favor of VMS's interpretation that the fee should be correspondingly adjusted to reflect the reduced service level.

Harmonizing Contractual Provisions. Michigan courts construe contracts as a whole, giving effect to all provisions and harmonizing apparently conflicting terms where possible. City of Grosse Pointe Park v. Michigan Municipal Liability & Property Pool, 473 Mich. 188, 702 N.W.2d 106 (2005). Reading Section 5 (which establishes the maintenance fee in exchange for a defined suite of services) in harmony with Section 9.4 (which reduces those services during dormancy) requires the conclusion that the fee should be adjusted to reflect the reduced service level. To hold otherwise would create an internal inconsistency: Section 9.4 would relieve MeridianCode of substantially all its support obligations while Section 5 would require VMS to pay full price for those same eliminated obligations. Michigan law disfavors interpretations that produce such unreasonable or absurd results. Rory v. Continental Insurance Co., 473 Mich. 457, 703 N.W.2d 23 (2005).

Reasonable Expectations of the Parties. Under Michigan's objective theory of contract interpretation, courts look to the reasonable expectations of the parties at the time of contracting. No reasonable party would expect to pay $2,400,000 annually for a comprehensive maintenance and support package while simultaneously agreeing that the counterparty's obligations are limited to providing critical security patches only. The reasonable expectation of parties entering into a dormancy arrangement — which is designed to preserve the contractual relationship during a hiatus — is that financial obligations would be adjusted to reflect the reduced level of performance during the dormancy period.

3. Interplay Between Section 9.4 and Maintenance Fee Provisions. The analysis above is reinforced by the fundamental principle that the maintenance fee provisions of Section 5 contemplate payment in exchange for a defined suite of services. The $2,400,000 annual fee is not a standalone obligation divorced from MeridianCode's performance; it is the contractual price for a specific package of support services. When the service level is contractually reduced by Section 9.4's dormancy provisions, the consideration underlying the fee obligation is correspondingly diminished.

Michigan's doctrine of failure of consideration and partial failure of consideration support an argument that VMS's obligation should be reduced proportionally. Under Michigan law, a partial failure of consideration may provide grounds for equitable adjustment of contractual obligations, particularly where the failure is not attributable to the party seeking relief. Desmond v. Tripp, 149 Mich. App. 722, 386 N.W.2d 612 (1986). Here, the reduction in MeridianCode's support obligations is not a breach by MeridianCode — it is a contractual consequence of Dormancy Status under Section 9.4. But the fact that the reduction is contractually authorized does not mean that VMS must continue to pay as though the reduction had not occurred. The consideration for the maintenance fee has been partially defeated by the very terms of the MESLSA, and VMS's fee obligation should be adjusted accordingly.

Furthermore, the maintenance fee provisions must be read in light of the MESLSA's integration clause (Section 14.1), which provides that the MESLSA constitutes the entire agreement between the parties and supersedes all prior negotiations and understandings. This integration clause forecloses any argument by MeridianCode that the parties had an extrinsic understanding that maintenance fees would remain unchanged during dormancy — if such an understanding existed, it should have been memorialized in the MESLSA. The absence of any such provision reinforces VMS's position that the contractual silence should be resolved through the interpretive principles described above.

B. Michigan Contract Law — Implied Covenant of Good Faith and Fair Dealing

Michigan recognizes an implied covenant of good faith and fair dealing in every contract. Hammond v. United of Oakland, Inc., 193 Mich. App. 146, 483 N.W.2d 652 (1992); Burkhardt v. Bailey, 260 Mich. App. 636, 680 N.W.2d 453 (2004). The implied covenant prohibits a party from doing anything that would destroy or injure the right of the other party to receive the benefits of the contract. While Michigan courts have held that the implied covenant cannot be used to override express contractual terms, it may be invoked to fill gaps in the contract and to prevent a party from exercising its contractual rights in a manner that is inconsistent with the reasonable expectations of the other party.

MeridianCode cannot, consistent with the implied covenant of good faith and fair dealing, demand full payment of $2,400,000 for a comprehensive maintenance and support package while simultaneously acknowledging — indeed, while contractually entitled to acknowledge — that it is required to deliver only critical security patches during the dormancy period. The implied covenant requires that MeridianCode's exercise of its right to invoice and collect maintenance fees be consistent with the level of performance it is actually required to provide. Insisting on full payment while performing only a fraction of its obligations represents precisely the kind of conduct the implied covenant is designed to prevent.

Moreover, MeridianCode's insistence on full payment has the practical effect of penalizing VMS for exercising its contractual right to invoke Dormancy Status under Section 9.4. The dormancy provisions exist for a purpose — to provide a mechanism for the parties to preserve their contractual relationship during periods when active integration is not feasible. If the financial burden on the licensee remains unchanged during dormancy while the licensor's obligations are dramatically reduced, the dormancy mechanism becomes illusory: the licensee receives no meaningful financial benefit from invoking dormancy, and the licensor receives a windfall. This outcome is inconsistent with the reasonable expectations of the parties and with the implied covenant of good faith and fair dealing.

VMS should be prepared to argue that MeridianCode's demand for full payment of the Year 2 maintenance fee during the dormancy period constitutes a breach of the implied covenant. While this argument is secondary to the contractual interpretation arguments set forth in Section III.A above, it provides a valuable backstop in the event that the contract is construed as ambiguous on the fee-adjustment question.

C. Equitable Arguments — Unjust Enrichment and Failure of Consideration

Even if the MESLSA were construed — against VMS's position — to require payment of the full Year 2 maintenance fee regardless of Dormancy Status, VMS has equitable defenses and counterclaims that provide additional grounds for abatement or proration.

Unjust Enrichment. Under Michigan law, a claim for unjust enrichment requires: (1) receipt of a benefit by the defendant from the plaintiff, and (2) an inequity resulting to the plaintiff because of the retention of the benefit. Morris Pumps v. Centerline Piping, Inc., 273 Mich. App. 187, 729 N.W.2d 898 (2006). If VMS were required to pay $2,400,000 for a comprehensive maintenance and support package while MeridianCode is contractually excused from providing all but critical security patches, MeridianCode would be unjustly enriched by retaining the full payment for services it is not obligated to perform. The inequity is self-evident: MeridianCode would receive $2,400,000 while incurring only a fraction of the costs associated with the comprehensive support it would otherwise be required to provide.

While Michigan courts have generally held that unjust enrichment claims are precluded where an express contract governs the parties' relationship (Belle Isle Grill Corp. v. City of Detroit, 256 Mich. App. 463, 666 N.W.2d 271 (2003)), this principle does not apply where the express contract does not address the specific issue in dispute. Because Section 9.4 is silent on the question of fee adjustment during dormancy, the unjust enrichment claim addresses a gap in the express contract rather than seeking to override its terms.

Partial Failure of Consideration. As discussed in Section III.A.3 above, the consideration for the maintenance fee — MeridianCode's comprehensive support package — has substantially failed during the dormancy period. Under Michigan law, a partial failure of consideration provides an equitable defense to a payment obligation, even where the contract does not expressly provide for fee adjustment. The defense is particularly strong here because the failure of consideration is not attributable to any act or omission by VMS, but rather to the operation of the MESLSA's own dormancy provisions.

VMS's overall equitable position is strengthened by the fact that it has already paid $12,320,000 under the MESLSA — a substantial financial commitment that demonstrates VMS's good faith and commitment to the contractual relationship. Requiring an additional $2,400,000 payment for de minimis services (critical security patches only) is inequitable in light of the totality of VMS's financial obligations under the agreement and the dramatically reduced scope of MeridianCode's corresponding performance.

D. Proration Analysis — Calculating a Fair Dormancy-Period Maintenance Fee

If VMS's position on fee adjustment is accepted — whether through contractual interpretation, the implied covenant of good faith, or equitable principles — the next question is the appropriate method for calculating VMS's reduced fee obligation during the Year 2 maintenance period. We have prepared three alternative proration analyses, summarized below. Detailed calculations supporting each alternative are set forth in Appendix E.

1. Pre-Dormancy Period (July 15, 2023 – August 3, 2023). The Year 2 maintenance fee covers the period from the Year 2 payment date through the Year 3 payment date. Assuming a Year 2 service period running from approximately July 15, 2023 (the anniversary of the Year 1 payment date) through July 14, 2024, VMS received full maintenance and support services — i.e., MeridianCode was obligated to provide the complete Section 5 support package — for approximately 19 days before Dormancy Status took effect on August 3, 2023.

The prorated full-service fee for this 19-day pre-dormancy period is calculated as follows:

19 days ÷ 365 days × $2,400,000 = approximately $125,000 ($124,931.51, to be precise)

This represents the portion of the Year 2 maintenance fee attributable to the period during which MeridianCode was required to provide — and VMS was entitled to receive — the complete maintenance and support package. VMS does not dispute its obligation to pay this prorated amount.

2. Dormancy Period (August 3, 2023 – End of Year 2 Period or Reactivation). During the dormancy period, MeridianCode's support obligations are reduced to critical-security-patch-only. The value of patch-only support, relative to the comprehensive maintenance and support package, is the principal variable in the proration calculation.

Based on a review of industry benchmarks for embedded software maintenance tiers — including the Penmark Consulting Group annual survey of embedded software maintenance pricing models (2022 edition), the Embedded Systems Engineering Council's Best Practices for Tiered Maintenance Pricing (2021), and comparable license agreements in the embedded real-time operating system market — we estimate that the value of critical-security-patch-only support is approximately 10–20% of the value of a comprehensive maintenance and support package for software of the type and complexity of ATLAS-RT™. The low end of this range (10%) reflects arrangements where patch-only support is purely reactive and requires minimal engineering resources; the high end (20%) accounts for the residual value of maintaining the software relationship and the licensor's ongoing obligation to monitor for and address critical security vulnerabilities.

If dormancy runs through the end of the Year 2 service period — approximately 346 remaining days after the August 3, 2023 dormancy effective date — the prorated reduced-service fee for the dormancy period is calculated as follows:

Low estimate (10% of full value): 346 days ÷ 365 days × $2,400,000 × 10% = approximately $227,507

High estimate (20% of full value): 346 days ÷ 365 days × $2,400,000 × 20% = approximately $455,014

Combining the pre-dormancy and dormancy period calculations, the total prorated Year 2 maintenance fee under this analysis ranges from approximately $352,438 to $579,945, depending on the valuation of critical-security-patch-only support:

This represents a reduction of approximately $1,820,000 to $2,048,000 from the full $2,400,000 invoiced amount — a reduction of 76% to 85%.

We note that the proration calculation above assumes dormancy continues through the entire remainder of the Year 2 service period. If VMS reactivates the MESLSA from Dormancy Status before the end of the Year 2 service period, the proration would need to be recalculated to reflect the actual number of days in active versus dormant status. However, given the current state of Project Argonaut and the absence of any firm reactivation timeline, the assumption of continued dormancy through the Year 2 period is reasonable for purposes of this analysis.

3. Alternative: Full Abatement During Dormancy. VMS could assert an even more aggressive position: that the maintenance fee should be fully abated during the dormancy period, on the theory that critical-security-patch support is a baseline obligation inherent in the license grant itself — not a separately compensable maintenance service. Under this theory, the obligation to provide critical security patches is implicit in the licensor's grant of a software license, as a fundamental aspect of the licensor's warranty of merchantability and fitness for use. This obligation exists independently of the maintenance and support provisions of Section 5 and would continue even if VMS were to decline the maintenance and support package entirely.

This argument finds support in the structure of the MESLSA itself. Section 3.4 of the MESLSA includes a warranty by MeridianCode that the ATLAS-RT™ software will be free from known material defects as of the delivery date. While this warranty has a limited duration (12 months from delivery), it reflects the principle that certain baseline software quality obligations are part of the license grant itself, not separately purchased services. If critical security patches are necessary to maintain the software's basic integrity and security, they arguably fall within this baseline obligation.

Under the full abatement theory, VMS's Year 2 maintenance fee obligation would be limited to the approximately $125,000 prorated pre-dormancy amount, with no additional payment owed for the dormancy period. We view this as the most aggressive of the three proration alternatives and note that it may be more difficult to sustain in arbitration than the 10–20% reduced-rate approach described in Section III.D.2 above. However, it represents a useful anchor for negotiation purposes and should be preserved as part of VMS's position.

E. MeridianCode's Likely Counter-Arguments

We anticipate that MeridianCode, through Redstone Whitaker LLP, will advance several counter-arguments in response to VMS's position on fee abatement or proration. We address each of these anticipated arguments below.

1. Annual Fee as Non-Refundable and Non-Proratable. MeridianCode is likely to argue that the MESLSA characterizes the annual maintenance and support fee as a non-refundable obligation payable regardless of usage or service level. Section 5.2(d) of the MESLSA includes the following language: "All fees paid under this Section 5 are non-refundable except as expressly provided herein." MeridianCode may contend that this language forecloses any abatement or proration of the Year 2 fee, regardless of the dormancy provisions.

Rebuttal: The "non-refundable" characterization in Section 5.2(d) applies to fees for services actually rendered — it prevents VMS from demanding a refund after receiving and benefiting from the contracted maintenance services. It does not, however, create an obligation to pay for services that MeridianCode is contractually excused from providing. Section 9.4's support reduction is a contractual modification of MeridianCode's service obligations that implicitly modifies the corresponding fee obligation. The non-refundable language was not drafted with the dormancy scenario in mind and should not be stretched to cover a situation where the licensor itself acknowledges that it is providing only a fraction of the contracted services.

Moreover, VMS is not seeking a "refund" of fees already paid — VMS has not yet paid the Year 2 fee. VMS is disputing the amount owed for services that have not yet been rendered and will not be rendered during the dormancy period. The non-refundable provision is inapplicable to a fee that has not been paid. The distinction between a refund of fees paid for services rendered and a dispute over the amount owed for services to be rendered is legally significant and should be pressed in any negotiation or arbitration proceeding.

2. Invoice Date Precedes Dormancy. MeridianCode has already advanced this argument through Mr. Briscoe's August 14, 2023 letter: the July 1, 2023 invoice predates the dormancy notice (July 14, 2023) and acknowledgment (August 3, 2023), and therefore the obligation to pay the full Year 2 fee crystallized before Dormancy Status took effect.

Rebuttal: The timing of the invoice is irrelevant to the underlying contractual obligation. An invoice is a demand for payment, not a determination of the amount owed. The amount of the maintenance fee obligation is determined by the terms of the MESLSA, including the dormancy provisions of Section 9.4, not by the date on which MeridianCode issues an invoice. The Year 2 maintenance fee covers a forward-looking service period (approximately July 15, 2023 through July 14, 2024). The obligation to pay for services during that period is necessarily contingent on the service level that MeridianCode is required to provide during that period. Because dormancy took effect during the Year 2 service period — less than three weeks after the invoice date — the service level (and correspondingly, the appropriate fee) changed before MeridianCode was required to perform the vast majority of the contracted services.

Furthermore, VMS timely invoked Dormancy Status under Section 9.4 before the 120-day trigger date. The fact that MeridianCode issued its invoice thirteen days before VMS's dormancy notice does not create a vested right to full payment for an entire year of services that will not be rendered. To hold otherwise would create perverse incentives: it would encourage licensors to rush invoices in advance of anticipated dormancy events, and it would penalize licensees for the timing of their dormancy elections.

3. Dormancy as Licensee Election. MeridianCode may argue that Dormancy Status is a licensee-elected status and that VMS should bear the financial consequences of its own decision to suspend integration and invoke dormancy. Under this theory, VMS's dormancy election is analogous to a voluntary reduction in usage, and the maintenance fee — like a fixed subscription — remains payable regardless of actual usage.

Rebuttal: This argument mischaracterizes the nature of the dormancy mechanism. Section 9.4 contemplates Dormancy Status as a contractual mechanism available to both parties' benefit, designed to preserve the MESLSA relationship during a period when active integration is not feasible. It is not a penalty provision; it is an accommodation. The dormancy mechanism benefits MeridianCode as well as VMS: it preserves MeridianCode's long-term revenue stream (including future maintenance fees, integration services fees, and runtime royalties) by keeping the MESLSA alive during a hiatus rather than triggering termination.

Moreover, the support reduction during dormancy is not VMS's election — it is the MESLSA's own mechanism. Section 9.4 mandates the reduction to critical-security-patch-only support during dormancy; VMS did not request or negotiate for reduced support as a separate accommodation. The fee should align with the contracted service level that the MESLSA itself establishes during dormancy. VMS should not be required to pay for a service level that the MESLSA expressly eliminates during the dormancy period.

Finally, we note that the dormancy was not a capricious election by VMS. It was driven by legitimate business factors — supply-chain disruptions, capital expenditure constraints, and strategic reprioritization — that were communicated to MeridianCode in advance. VMS's exercise of its dormancy rights under Section 9.4 was a commercially reasonable response to changed business circumstances, not an attempt to evade contractual obligations.

IV. Strategic Considerations

A. Relationship with Overall Fee Exposure

The $2,400,000 disputed Year 2 maintenance fee cannot be evaluated in isolation. It is part of a broader financial picture that encompasses VMS's total commitment under the MESLSA: $12,320,000 in fees already paid and approximately $7,680,000 in total remaining contractual commitments. The resolution of the maintenance fee dispute will set a precedent for how fees are handled during dormancy and, potentially, during any dormancy extension beyond the initial 12-month period.

The maintenance fee dispute should be coordinated with the broader negotiation strategy that is currently underway between VMS and MeridianCode. On August 22, 2023, we circulated a proposed dormancy extension and fee restructuring term sheet to Redstone Whitaker LLP on behalf of VMS. The term sheet addresses not only the Year 2 maintenance fee but also the proposed extension of Dormancy Status beyond the 12-month cap (from August 3, 2024 to February 3, 2025), the reactivation terms and conditions, the scope reduction from five vehicle platforms to two, and the derivative works ownership issues (DW-001 through DW-003).

Strategically, there is potential to use the disputed $2,400,000 as a credit or offset against future obligations under the MESLSA. For example, VMS could propose that any Year 2 maintenance fee ultimately determined to be owed be applied as a credit against the remaining integration services fees for Milestones 4 and 5 ($1,280,000) or against an adjusted runtime royalty cap. This approach would reduce VMS's net cash outlay while preserving MeridianCode's economic interest in the MESLSA relationship.

B. Interaction with Section 9.1 Fee Forfeiture Risk

The maintenance fee dispute must also be evaluated in light of the fee forfeiture provisions of Section 9.1 of the MESLSA. Section 9.1 provides that if VMS terminates the MESLSA for convenience before the 24-month anniversary of the Effective Date (i.e., before June 21, 2024), all prepaid fees — including the upfront license fee, maintenance fees already paid, and integration services fees already paid — are forfeited and non-refundable.

If VMS were to pay the full $2,400,000 Year 2 maintenance fee and subsequently terminate for convenience before June 21, 2024, the total at-risk prepaid amount subject to forfeiture would increase from $12,320,000 (current prepaid total) to $14,720,000. This represents a significant increase in VMS's forfeiture exposure — particularly in light of the uncertain timeline for Project Argonaut reactivation and the possibility that business conditions may lead VMS to consider termination of the MESLSA.

This consideration strongly counsels in favor of withholding or disputing the full Year 2 fee pending resolution of the broader dormancy and reactivation strategy. Paying the full $2,400,000 at this time would increase VMS's financial exposure without any corresponding benefit in terms of services received.

C. Interaction with Section 4.3 Use-It-or-Lose-It Deadline

The maintenance fee dispute also intersects with the Section 4.3 "Use-It-or-Lose-It" deadline, which requires VMS to complete integration testing on at least two vehicle platforms within 18 months of the Effective Date. The 18-month deadline, calculated from the June 21, 2022 Effective Date, falls on December 21, 2023.

VMS's position — as articulated in the dormancy notice and subsequent correspondence — is that Dormancy Status tolls the Section 4.3 deadline pursuant to Section 9.4(b), which provides that "all milestone deadlines and delivery schedules" are tolled during dormancy. MeridianCode has not yet formally agreed to this interpretation, and the issue remains open.

If Dormancy Status tolls the Section 4.3 deadline, then VMS cannot practically comply with the integration testing requirement during the dormancy period. Paying the full $2,400,000 maintenance fee for a period during which VMS cannot use the software for its intended purpose — because the very milestone deadlines governing that use have been tolled — further supports the argument that the fee should be abated or prorated. VMS should not be required to pay full maintenance fees for software that it is contractually precluded from actively integrating.

Conversely, there is a risk that paying the full maintenance fee could be interpreted by MeridianCode — or by an arbitration panel — as an acknowledgment that VMS is receiving full services and that the MESLSA is operating in its normal state rather than in Dormancy Status. While this inferential risk is not dispositive, it is a consideration that weighs in favor of disputing the full fee and documenting VMS's position clearly and contemporaneously.

D. Credit Facility Considerations

VMS notified Pinnacle National Bank, N.A. (the administrative agent under VMS's $175,000,000 Senior Secured Revolving Credit Facility, dated November 8, 2021, as amended) of the MESLSA dormancy status on August 10, 2023. This notification was made pursuant to Section 6.12 of the Credit Agreement, which requires VMS to provide prompt written notice to the administrative agent of any material contract dispute reasonably expected to result in liability or loss exceeding $5,000,000.

While the Year 2 maintenance fee dispute ($2,400,000) standing alone does not exceed the $5,000,000 notification threshold, the broader MESLSA dispute — encompassing the maintenance fee, derivative works ownership, integration scope reduction, and reactivation terms — implicates total fees and commitments well in excess of this threshold. VMS's outstanding borrowings under the Credit Facility as of July 31, 2023 were approximately $92,000,000, representing approximately 52.6% utilization of the $175,000,000 facility.

If the Year 2 maintenance fee dispute escalates to arbitration, it could constitute a "material dispute" requiring further notice to Pinnacle and to Howard Segal, VMS's Relationship Manager at Pinnacle National Bank. Additionally, depending on the outcome, an adverse arbitration ruling requiring payment of the full $2,400,000 plus interest or penalties could affect VMS's financial covenants under the Credit Agreement, although the impact would be modest relative to VMS's overall financial position. We recommend that VMS's treasury team monitor the dispute and prepare supplemental notifications as warranted by developments.

E. Arbitration Posture

Under Section 13.2 of the MESLSA, disputes exceeding $1,000,000 in claimed damages or amounts in controversy are subject to binding arbitration before a three-arbitrator panel convened under the rules of the Midwest Arbitration Institute, seated in Detroit, Michigan. The $2,400,000 Year 2 maintenance fee dispute exceeds this threshold and would therefore be subject to the three-arbitrator panel requirement (as opposed to the single-arbitrator procedure available for disputes below $1,000,000).

The arbitration clause carries several implications for VMS's strategy:

(a) Three-Arbitrator Panel Costs: A three-arbitrator proceeding under the Midwest Arbitration Institute rules entails substantially higher costs than a single-arbitrator proceeding. Based on current Midwest Arbitration Institute fee schedules, the estimated arbitration costs for a three-arbitrator proceeding (administrative fees, arbitrator compensation, and hearing costs) range from approximately $150,000 to $300,000, exclusive of attorney fees. This cost factor weighs in favor of negotiated resolution.

(b) Consolidation with Other MESLSA Disputes: If arbitration becomes necessary, VMS should seek to consolidate the maintenance fee dispute with other pending MESLSA disputes — including the derivative works ownership issues (DW-001, DW-002, DW-003) and the Section 4.3 Use-It-or-Lose-It compliance dispute — into a single arbitration proceeding. Consolidation would provide efficiencies and potential leverage, as MeridianCode would face exposure across multiple fronts simultaneously. Section 13.2(c) of the MESLSA permits consolidation of related disputes "arising under or in connection with this Agreement," which should encompass all of the pending MESLSA disputes.

(c) Leverage Through Comprehensive Arbitration: The prospect of a comprehensive arbitration proceeding — addressing maintenance fees, derivative works, scope reduction, and Use-It-or-Lose-It compliance — provides VMS with significant negotiation leverage. MeridianCode's preference is likely to avoid a multi-issue arbitration, which would be costly, time-consuming, and would expose MeridianCode to risk across multiple contractual provisions simultaneously. This leverage should be deployed judiciously to encourage MeridianCode to engage constructively in the dormancy extension and fee restructuring negotiations.

V. Recommendations

Based on the foregoing analysis, we recommend the following course of action:

1. Dispute the Invoice. VMS should formally dispute the $2,400,000 Year 2 Maintenance & Support Fee invoiced by MeridianCode on July 1, 2023. The dispute should be communicated in writing from Mr. Cross to Ms. Ramaswamy, with a copy to Mr. Briscoe at Redstone Whitaker LLP, setting forth VMS's position that Dormancy Status reduces MeridianCode's support obligations to critical-security-patch-only under Section 9.4, and that the maintenance fee should be correspondingly abated or prorated. The dispute letter should reference VMS's rights under the implied covenant of good faith and fair dealing and under applicable Michigan equitable doctrines, while preserving VMS's position on full abatement as an alternative to proration. We will prepare a draft dispute letter for Mr. Cross's review.

2. Propose Prorated Payment. VMS should offer to pay a prorated amount reflecting the reduced service level during dormancy. Based on the proration analysis set forth in Section III.D above, the appropriate prorated payment falls in the range of approximately $350,000 to $580,000, depending on the valuation assigned to critical-security-patch-only support. We recommend proposing an initial payment of $350,000 (the low end of the range), while indicating willingness to negotiate within the range, and expressly reserving the right to seek full abatement if negotiations fail. This approach demonstrates VMS's good faith while establishing a favorable negotiating anchor.

3. Credit Against Future Obligations. VMS should propose that any Year 2 maintenance fee ultimately determined to be owed be credited against future integration services fees (Milestones 4 and 5, with $1,280,000 remaining) or against an adjusted runtime royalty cap under the MESLSA. This approach is consistent with the broader fee restructuring strategy and avoids additional cash outlay by VMS during the dormancy period. The credit mechanism should be incorporated into the dormancy extension and fee restructuring term sheet currently being negotiated with Redstone Whitaker LLP.

4. Coordinate with Broader Negotiation. The maintenance fee dispute should be integrated into the term sheet for dormancy extension and fee restructuring currently being negotiated with Redstone Whitaker LLP and MeridianCode. A global resolution addressing the maintenance fee, derivative works ownership (DW-001, DW-002, and DW-003), scope reduction from five vehicle platforms to two, and reactivation terms would be significantly more efficient and strategically advantageous than resolving each issue in isolation. The maintenance fee dispute provides VMS with a legitimate grievance that strengthens its overall negotiating position and incentivizes MeridianCode to engage constructively on the broader term sheet.

5. Avoid Full Payment Pending Resolution. VMS should not pay the full $2,400,000 at this time. Payment of the full invoiced amount would: (a) increase VMS's forfeiture exposure under Section 9.1 from $12,320,000 to $14,720,000; (b) potentially waive or undermine VMS's arguments regarding dormancy-period fee adjustment by creating an inference that VMS accepted the obligation to pay full maintenance fees during dormancy; and (c) remove MeridianCode's incentive to negotiate a comprehensive resolution, thereby providing MeridianCode leverage to delay resolution of the broader dormancy extension and fee restructuring discussions.

6. Preserve Arbitration Option. If MeridianCode insists on full payment and refuses to engage in good-faith negotiation of the maintenance fee dispute, VMS should be prepared to raise the dispute in binding arbitration before a three-arbitrator panel of the Midwest Arbitration Institute in Detroit, Michigan, pursuant to Section 13.2 of the MESLSA. VMS should seek to consolidate the maintenance fee dispute with other pending MESLSA disputes (derivative works ownership, Use-It-or-Lose-It compliance, and scope reduction issues) into a single comprehensive arbitration proceeding. The consolidation strategy maximizes

MEMORANDUM
PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT
TO: Bernard Crawford, Responsible Partner Conrad Ashby, Billing Partner
FROM: Gabrielle Moss, Lead Associate
DATE: August 2023
RE: Interaction Between Dormancy Status Under Section 9.4 and Year 2 Maintenance & Support Fee Obligation Under the Master Embedded Software License and Services Agreement (MESLSA) dated June 21, 2022 — Vantage Mobility Systems Corp. / Meridian Code Technologies, Inc.
MATTER NO.: C&H Matter No. 1007-00008
CLIENT: Vantage Mobility Systems Corp.
This memorandum is protected by the attorney-client privilege and the attorney work product doctrine. It is prepared by Calderwood & Harkness LLP at the request of its client, Vantage Mobility Systems Corp., and is intended solely for the use of the individuals identified above. Any dissemination, distribution, or copying of this memorandum to any person or entity not authorized to receive it is strictly prohibited.
I. Executive Summary
This memorandum analyzes whether Vantage Mobility Systems Corp. ("VMS" or "Vantage") is obligated to pay the $2,400,000 Year 2 Annual Maintenance & Support Fee invoiced by Meridian Code Technologies, Inc. ("MeridianCode") on July 1, 2023, given that the MESLSA was placed in Dormancy Status effective August 3, 2023, following VMS's dormancy notice dated July 14, 2023. The analysis examines the interplay between the dormancy provisions of Section 9.4 of the MESLSA — which reduce MeridianCode's support obligations to a "critical-security-patch-only" level — and the annual maintenance fee structure set forth in Section 5 of the MESLSA.
The central question presented is whether the contractual reduction of MeridianCode's support obligations to critical-security-patch-only during the dormancy period provides a basis for VMS to abate, prorate, or otherwise withhold payment of the full Year 2 maintenance fee. This question is complicated by the fact that MeridianCode's invoice was issued on July 1, 2023 — thirteen days before VMS's dormancy notice and thirty-three days before MeridianCode's formal acknowledgment of Dormancy Status — and by the absence of any express fee-adjustment mechanism in Section 9.4.
After careful analysis of the MESLSA provisions, applicable Michigan contract law principles, and the equitable considerations bearing on this dispute, our conclusion is that VMS has strong contractual and equitable arguments that the Year 2 maintenance fee should be abated or, at minimum, prorated to reflect the dramatically reduced scope of services MeridianCode is obligated to provide during the dormancy period. The contractual silence on fee adjustment during dormancy, when read against the express reduction in service obligations, creates an ambiguity that should be resolved in VMS's favor under Michigan's contra proferentem doctrine and the implied covenant of good faith and fair dealing. Equitable doctrines of unjust enrichment and partial failure of consideration provide additional support.
Accordingly, we recommend that VMS formally dispute the invoice and propose a prorated fee — estimated in the range of approximately $350,000 to $580,000 — or, alternatively, seek a credit against future obligations under the MESLSA. This recommendation should be coordinated with the broader dormancy extension and fee restructuring negotiations currently underway with MeridianCode's outside counsel, Redstone Whitaker LLP.
The total financial exposure on this single issue is $2,400,000 in disputed maintenance fees. To place this figure in context, VMS has already paid $12,320,000 in fees under the MESLSA (comprising the $8,000,000 upfront license fee, the $2,400,000 Year 1 maintenance fee, and $1,920,000 in integration services fees through Milestone 3), and total remaining contractual commitments under the agreement amount to approximately $7,680,000.
II. Background and Relevant Facts
A. The MESLSA and Its Fee Structure
VMS and MeridianCode entered into the Master Embedded Software License and Services Agreement (the "MESLSA") effective June 21, 2022. The MESLSA was the product of approximately seven months of negotiation, with MeridianCode preparing the initial draft and VMS negotiating revisions through successive redlines. The agreement governs the license, integration, and ongoing support of MeridianCode's ATLAS-RT™ embedded real-time operating system, Version 4.2 (subsequently updated to Version 4.2.3 through a maintenance release delivered in November 2022), for integration into VMS's Project Argonaut adaptive vehicle platform program. Project Argonaut, in turn, is VMS's flagship next-generation fleet vehicle platform initiative, spanning multiple vehicle configurations designed for both internal combustion engine ("ICE") and electric vehicle ("EV") applications.
The total deal value under the MESLSA is $20,000,000, allocated across four principal fee components:
(i) Upfront License Fee: $8,000,000, payable at signing. This fee was paid in full by VMS on June 21, 2022, concurrent with execution of the MESLSA. The upfront license fee grants VMS a non-exclusive, non-transferable license to use the ATLAS-RT™ software, including source-code access for integration customization purposes, subject to the restrictions and conditions set forth in Section 3 of the MESLSA.
(ii) Annual Maintenance & Support Fees: $2,400,000 per year, payable annually during each year of the five-year term (June 21, 2022 through June 20, 2027). The Year 1 Annual Maintenance & Support Fee of $2,400,000 was paid by VMS on July 15, 2022, within the 30-day payment window specified in Section 5.2(b). These fees are the subject of the present dispute with respect to Year 2.
(iii) Integration Services Fee: $3,200,000, payable across five defined milestones tied to the integration of ATLAS-RT™ into the Project Argonaut vehicle platforms. As of March 2023, VMS had paid $1,920,000 in integration services fees, corresponding to Milestones 1 through 3. The remaining $1,280,000 in integration services fees (Milestones 4 and 5) remains unpaid and is subject to the dormancy tolling provisions discussed below.
(iv) Per-Unit Runtime Royalties: $80 per unit for each vehicle in which the ATLAS-RT™ software is deployed in a production environment, subject to an aggregate cap of $4,000,000 over the term of the MESLSA. As of the date of this memorandum, VMS has not deployed ATLAS-RT™ in any production vehicle, and accordingly, $0 in runtime royalties has been incurred to date. Production deployment was contingent on successful completion of integration milestones and vehicle platform certification, both of which have been suspended as part of the Project Argonaut rescoping described below.
In aggregate, total fees paid by VMS under the MESLSA as of the commencement of dormancy amount to $12,320,000, calculated as follows: $8,000,000 (upfront license fee) + $2,400,000 (Year 1 maintenance fee) + $1,920,000 (integration services fees through Milestone 3). Total remaining contractual commitments, assuming full performance of the MESLSA, are approximately $7,680,000 — comprising $9,600,000 in remaining annual maintenance fees ($2,400,000 × 4 remaining years), less credits and adjustments, plus $1,280,000 in remaining integration services fees and up to $4,000,000 in potential runtime royalties, offset by the $2,400,000 Year 2 fee currently in dispute.
B. The Annual Maintenance & Support Fee Obligation
The MESLSA provides for annual maintenance and support fees of $2,400,000 payable during each year of the five-year term. Section 5.2(b) of the MESLSA states that the annual maintenance and support fee is "due and payable within thirty (30) days of the anniversary of the Effective Date or, if the first year, within thirty (30) days of the Effective Date." The MESLSA's five-year term runs from June 21, 2022 through June 20, 2027, establishing June 21 of each year as the notional anniversary date for maintenance fee invoicing purposes.
The Year 1 Annual Maintenance & Support Fee of $2,400,000 was paid by VMS on July 15, 2022, approximately 24 days after the Effective Date, within the contractual payment window. The Year 2 Annual Maintenance & Support Fee of $2,400,000 was invoiced by MeridianCode on July 1, 2023 — ten days after the June 21, 2023 first anniversary of the Effective Date. This invoice is the subject of the present dispute. VMS has deferred payment of the Year 2 invoice pending resolution of the dormancy-related fee adjustment questions analyzed in this memorandum.
Under the maintenance and support provisions of Section 5 of the MESLSA, MeridianCode's obligations in exchange for the $2,400,000 annual fee include a comprehensive suite of active support services, specifically:
(a) Software Updates and Patches: MeridianCode is obligated to provide all software updates, patches, service packs, and maintenance releases for ATLAS-RT™ during the maintenance term, including both critical security patches and non-critical functionality updates, performance optimizations, and feature enhancements applicable to the licensed version.
(b) Technical Support (Telephone and Email): MeridianCode is required to provide dedicated technical support through both telephone and email channels, with a guaranteed response time of four (4) business hours for Priority 1 issues and twenty-four (24) business hours for Priority 2 and Priority 3 issues, pursuant to the Service Level Agreement incorporated as Exhibit C to the MESLSA.
(c) Bug-Fix Services: MeridianCode is obligated to investigate, diagnose, and remediate reported software defects within the timeframes specified in the Service Level Agreement, including both critical and non-critical bugs affecting functionality, performance, or stability of the ATLAS-RT™ software in the VMS integration environment.
(d) Compatibility Updates for Designated Hardware Platforms: MeridianCode is required to provide compatibility updates and configuration adjustments necessary to ensure that ATLAS-RT™ remains compatible with the hardware platforms designated in Exhibit A to the MESLSA, including processor architecture updates, peripheral driver compatibility, and memory management optimizations specific to the VMS Project Argonaut hardware configurations.
(e) Access to MeridianCode Engineering Team for Integration Troubleshooting: Under the maintenance provisions, VMS is entitled to direct access to MeridianCode's engineering team for consultation and troubleshooting related to the integration of ATLAS-RT™ into VMS's Project Argonaut platforms. Section 5.3(e) specifies a minimum allocation of 160 engineering hours per quarter for integration troubleshooting support.
These services collectively represent a comprehensive, active support package inextricably tied to the ongoing integration work across the Project Argonaut platforms. As discussed below, the dormancy provisions of Section 9.4 reduce this comprehensive support package to a single, narrow obligation — the provision of critical security patches only — while the remaining elements of the support package are suspended for the duration of the dormancy period.
C. Project Argonaut Rescoping and Suspension of Integration
Project Argonaut was originally scoped by VMS to encompass five vehicle platform configurations, designated Argonaut-A through Argonaut-E. Each configuration was designed around a distinct vehicle architecture — Argonaut-A and Argonaut-B for ICE-platform fleet vehicles, and Argonaut-C, Argonaut-D, and Argonaut-E for EV-platform vehicles incorporating varying degrees of electrification integration.
On March 14, 2023, the VMS Board of Directors passed a resolution to rescope Project Argonaut from five vehicle platform configurations to two — Argonaut-A and Argonaut-C — with the remaining three configurations (Argonaut-B, Argonaut-D, and Argonaut-E) deferred indefinitely to a proposed "Phase II" that has no firm commencement date. The Board resolution cited three principal factors driving the rescoping decision:
(a) Semiconductor Supply-Chain Delays: Persistent and worsening supply-chain disruptions affecting the specialized embedded processors required for the Argonaut-D and Argonaut-E EV configurations, with lead times extending to 36–44 weeks and projected to remain elevated through at least Q2 2024. The supply-chain disruptions rendered the original five-platform integration timeline infeasible.
(b) Kestrel Capital Partners, LP Portfolio-Wide Capital Expenditure Reduction Directive: Kestrel Capital Partners, LP, the majority equity holder in VMS, issued a portfolio-wide directive in February 2023 requiring all portfolio companies to reduce projected capital expenditures by 15–20% for fiscal years 2023 and 2024. The Argonaut rescoping was identified as the primary mechanism for VMS compliance with this directive, yielding an estimated $8.2 million in deferred capital expenditures across the affected vehicle platform programs.
(c) Strategic Prioritization of ICE-Platform Fleet Vehicles: Based on updated market analysis and fleet customer demand signals, VMS's executive leadership team determined that near-term revenue maximization favored accelerated deployment of ICE-platform fleet vehicles (Argonaut-A) over the EV-platform configurations, which faced additional regulatory certification timelines and charging infrastructure dependencies.
At the time of the Board's rescoping resolution, the integration status of each vehicle platform under the MESLSA milestone structure was as follows:
• Argonaut-A: Milestone 3 of 5 complete. Alpha integration testing was passed on February 28, 2023, with MeridianCode's engineering team confirming successful boot-level integration of ATLAS-RT™ Version 4.2.3 on the Argonaut-A hardware platform. This represented the most advanced integration status among the five platforms.
• Argonaut-C: Milestone 2 of 5 complete. Source-code customization for the Argonaut-C platform was delivered by MeridianCode on January 15, 2023, and accepted by VMS engineering. Integration testing had not yet commenced at the time of rescoping.
• Argonaut-B: Milestone 1 of 5 only. Preliminary architecture review and requirements documentation had been completed, but no source-code work or integration activity had been initiated.
• Argonaut-D and Argonaut-E: Not commenced. No milestone work of any kind had been initiated for these two EV-platform configurations.
Following the Board resolution, all integration work across all Project Argonaut platforms was formally suspended on March 22, 2023, pursuant to an internal stop-work order issued by Martin G. Cross, VMS General Counsel, and confirmed to MeridianCode via email on the same date. As of the suspension date, VMS engineering teams had invested approximately 14,200 person-hours on Project Argonaut-related integration activities, representing a substantial internal resource commitment independent of the fees paid to MeridianCode under the MESLSA.
From March 22, 2023 forward, no integration work, milestone deliverables, testing, or related technical activities have been performed under the MESLSA. The software integration environment has been maintained in a static state, with no active development or testing occurring on any of the Argonaut platforms.
D. Invocation of Dormancy Status
Section 9.4 of the MESLSA establishes a dormancy mechanism that is triggered when the licensee suspends active integration for more than 120 consecutive calendar days without providing written notice to the licensor. Specifically, Section 9.4 provides, in relevant part:
"If Licensee suspends active integration activities under this Agreement for a period exceeding one hundred twenty (120) consecutive calendar days, Licensor may, upon written notice to Licensee, convert the status of the License to Dormancy Status. Licensee may also elect to invoke Dormancy Status at any time by providing written notice to Licensor prior to the expiration of the one hundred twenty (120) day period. Upon the effective date of Dormancy Status, the following conditions shall apply: (a) Licensor's support obligations under Section 5 shall be reduced to the provision of critical-security-patch-only support; (b) all milestone deadlines and delivery schedules under Section 7 shall be tolled for the duration of Dormancy Status; and (c) Dormancy Status may not exceed twelve (12) consecutive months; if Dormancy Status has not been terminated by the twelve-month anniversary of its effective date, the parties shall enter into good-faith renegotiation of the terms of this Agreement, failing which either party may terminate this Agreement upon sixty (60) days' written notice."
Based on the March 22, 2023 suspension of all integration activities, the 120-day trigger period under Section 9.4 was calculated to expire on July 20, 2023. VMS, acting proactively and within the express terms of Section 9.4 permitting licensee-initiated dormancy, sent a formal dormancy notice on July 14, 2023 — six days before the expiration of the 120-day trigger period. The dormancy notice was issued by Martin G. Cross, VMS General Counsel, addressed to Priya Ramaswamy, MeridianCode General Counsel, and transmitted via both certified mail and email in compliance with the notice provisions of Section 14.2 of the MESLSA.
MeridianCode formally acknowledged Dormancy Status on August 3, 2023, in a written communication from Ms. Ramaswamy to Mr. Cross. The acknowledgment confirmed the effective date of Dormancy Status as August 3, 2023, and stated that MeridianCode would implement the dormancy conditions set forth in Section 9.4.
Under Section 9.4, the contractual effects of Dormancy Status are as follows:
(a) Support Reduction: MeridianCode's support obligations under Section 5 are reduced to the provision of "critical-security-patch-only" support. This eliminates all of the comprehensive support services described in Section II.B above, except for the narrow obligation to provide security patches that address critical vulnerabilities.
(b) Milestone Tolling: All milestone deadlines and delivery schedules under Section 7 are tolled for the duration of Dormancy Status. This means that the clock on remaining integration milestones (Milestones 4 and 5 for Argonaut-A; Milestones 3–5 for Argonaut-C) is suspended and will not resume until Dormancy Status is terminated and active integration resumes.
(c) 12-Month Cap: Dormancy Status may not exceed 12 consecutive months. Based on the August 3, 2023 effective date, the 12-month cap will expire on August 3, 2024. If Dormancy Status has not been terminated by that date, the parties are required to enter into good-faith renegotiation of the MESLSA terms, failing which either party may terminate the agreement upon 60 days' written notice.
E. Timing of Year 2 Invoice Relative to Dormancy
The timeline of events surrounding the Year 2 maintenance fee invoice and the invocation of dormancy is as follows:
The critical fact for this analysis is that MeridianCode invoiced the Year 2 Maintenance & Support Fee of $2,400,000 on July 1, 2023, which was thirteen days before VMS's dormancy notice (July 14, 2023), nineteen days before the 120-day trigger date (July 20, 2023), and thirty-three days before MeridianCode's formal acknowledgment of Dormancy Status (August 3, 2023). VMS has disputed and deferred payment of this invoice.
MeridianCode's position on the disputed invoice has been communicated through its outside counsel, Redstone Whitaker LLP, led by Alan M. Briscoe. In a letter dated August 14, 2023, Mr. Briscoe asserted three principal grounds for MeridianCode's position that the full Year 2 maintenance fee is owed:
(a) The Year 2 invoice was properly issued before Dormancy Status took effect, and therefore the obligation to pay crystallized prior to any modification of MeridianCode's support obligations.
(b) The annual maintenance fee is characterized under the MESLSA as a non-refundable obligation, and accordingly, once invoiced, the fee is not subject to abatement, proration, or credit regardless of subsequent changes in service level.
(c) Dormancy Status does not retroactively relieve VMS of payment obligations that accrued before the effective date of dormancy.
VMS's position, as articulated by Mr. Cross in response correspondence dated August 18, 2023, is that the reduction of MeridianCode's support obligations to critical-security-patch-only during dormancy renders the full $2,400,000 maintenance fee unconscionable as applied, and that the fee should be abated or prorated to reflect the actual scope of services to be rendered during the Year 2 maintenance period.
III. Legal Analysis
A. Contractual Interpretation of Section 9.4 (Dormancy Provisions)
1. Text of Section 9.4 — Support Reduction to Critical-Security-Patch-Only. The plain language of Section 9.4 is unambiguous on one critical point: during Dormancy Status, MeridianCode's support obligations under Section 5 "shall be reduced to the provision of critical-security-patch-only support." This language is mandatory ("shall be reduced"), unconditional, and comprehensive in its reference to the entirety of MeridianCode's Section 5 obligations. There is no carve-out, exception, or reservation that would permit MeridianCode to selectively maintain certain support obligations while reducing others. The reduction is total: from the comprehensive support package described in Section 5 to critical-security-patch-only support.
The practical effect of this reduction is the elimination of substantially all of the services comprising the maintenance and support package for which VMS pays $2,400,000 annually. Specifically, dormancy eliminates:
(a) General software updates, service packs, and non-critical maintenance releases — eliminated during dormancy.
(b) Technical support services via telephone and email, including the four-business-hour Priority 1 response time and twenty-four-business-hour Priority 2/3 response times guaranteed under the Service Level Agreement — eliminated during dormancy.
(c) Bug-fix services for non-critical defects, including investigation, diagnosis, and remediation — eliminated during dormancy.
(d) Compatibility updates for designated hardware platforms, including processor architecture updates, peripheral driver compatibility, and memory management optimizations — eliminated during dormancy.
(e) Access to MeridianCode's engineering team for integration troubleshooting, including the minimum quarterly allocation of 160 engineering hours — eliminated during dormancy.
What remains is a single, narrow obligation: the provision of critical security patches. This represents, by any reasonable measure, a fundamental diminution of the services underlying the $2,400,000 annual maintenance fee — likely eliminating 80–90% of the value of the maintenance and support package. This estimate is grounded in industry practice for embedded software maintenance tiers. As discussed in the proration analysis below (Section III.D), independent industry benchmarks from Penmark Consulting Group and the Embedded Systems Engineering Council consistently value "critical-patch-only" maintenance tiers at 10–20% of comprehensive maintenance and support packages for comparable embedded real-time operating systems.
The significance of this service reduction cannot be overstated. The comprehensive support package under Section 5 was designed to support active, ongoing integration work across multiple vehicle platforms. It contemplated regular engineering interaction between MeridianCode and VMS technical teams, continuous software improvement, and responsive troubleshooting. During dormancy, when no integration work is occurring and the software environment is static, the need for — and delivery of — these services drops to near zero. The only service that retains relevance during dormancy is the patching of critical security vulnerabilities, which is a narrow, reactive obligation requiring minimal engineering resources on MeridianCode's part.
2. The Silence of Section 9.4 on Fee Adjustment. The most significant feature of Section 9.4 for purposes of this dispute is what it does not say. The MESLSA drafters addressed dormancy's effect on milestone deadlines (tolling under subsection (b)) and on MeridianCode's support obligations (reduction to critical-security-patch-only under subsection (a)), but Section 9.4 does not contain any express provision addressing the maintenance fee during Dormancy Status. It neither states that the maintenance fee is abated or prorated during dormancy, nor does it state that the fee remains payable in full notwithstanding the reduction in support obligations. This silence is the crux of the present dispute.
This omission creates a contractual ambiguity that must be resolved through the application of Michigan contract interpretation principles. Several established doctrines are relevant:
Contra Proferentem. Under Michigan law, ambiguous contract provisions are construed against the drafter. Klapp v. United Insurance Group Agency, Inc., 468 Mich. 459, 663 N.W.2d 447 (2003). The MESLSA was initially drafted by MeridianCode, as is typical for licensor-prepared software license agreements. While VMS negotiated revisions to the draft, the fundamental architecture of the agreement — including the dormancy provisions of Section 9.4 and the maintenance fee structure of Section 5 — reflects MeridianCode's draftsmanship. If MeridianCode intended the maintenance fee to remain payable in full during dormancy notwithstanding the reduction in support obligations, it was incumbent upon MeridianCode, as drafter, to include an express provision to that effect. Its failure to do so should be construed against it. The ambiguity created by the silence of Section 9.4 on fee adjustment should be resolved in favor of VMS's interpretation that the fee should be correspondingly adjusted to reflect the reduced service level.
Harmonizing Contractual Provisions. Michigan courts construe contracts as a whole, giving effect to all provisions and harmonizing apparently conflicting terms where possible. City of Grosse Pointe Park v. Michigan Municipal Liability & Property Pool, 473 Mich. 188, 702 N.W.2d 106 (2005). Reading Section 5 (which establishes the maintenance fee in exchange for a defined suite of services) in harmony with Section 9.4 (which reduces those services during dormancy) requires the conclusion that the fee should be adjusted to reflect the reduced service level. To hold otherwise would create an internal inconsistency: Section 9.4 would relieve MeridianCode of substantially all its support obligations while Section 5 would require VMS to pay full price for those same eliminated obligations. Michigan law disfavors interpretations that produce such unreasonable or absurd results. Rory v. Continental Insurance Co., 473 Mich. 457, 703 N.W.2d 23 (2005).
Reasonable Expectations of the Parties. Under Michigan's objective theory of contract interpretation, courts look to the reasonable expectations of the parties at the time of contracting. No reasonable party would expect to pay $2,400,000 annually for a comprehensive maintenance and support package while simultaneously agreeing that the counterparty's obligations are limited to providing critical security patches only. The reasonable expectation of parties entering into a dormancy arrangement — which is designed to preserve the contractual relationship during a hiatus — is that financial obligations would be adjusted to reflect the reduced level of performance during the dormancy period.
3. Interplay Between Section 9.4 and Maintenance Fee Provisions. The analysis above is reinforced by the fundamental principle that the maintenance fee provisions of Section 5 contemplate payment in exchange for a defined suite of services. The $2,400,000 annual fee is not a standalone obligation divorced from MeridianCode's performance; it is the contractual price for a specific package of support services. When the service level is contractually reduced by Section 9.4's dormancy provisions, the consideration underlying the fee obligation is correspondingly diminished.
Michigan's doctrine of failure of consideration and partial failure of consideration support an argument that VMS's obligation should be reduced proportionally. Under Michigan law, a partial failure of consideration may provide grounds for equitable adjustment of contractual obligations, particularly where the failure is not attributable to the party seeking relief. Desmond v. Tripp, 149 Mich. App. 722, 386 N.W.2d 612 (1986). Here, the reduction in MeridianCode's support obligations is not a breach by MeridianCode — it is a contractual consequence of Dormancy Status under Section 9.4. But the fact that the reduction is contractually authorized does not mean that VMS must continue to pay as though the reduction had not occurred. The consideration for the maintenance fee has been partially defeated by the very terms of the MESLSA, and VMS's fee obligation should be adjusted accordingly.
Furthermore, the maintenance fee provisions must be read in light of the MESLSA's integration clause (Section 14.1), which provides that the MESLSA constitutes the entire agreement between the parties and supersedes all prior negotiations and understandings. This integration clause forecloses any argument by MeridianCode that the parties had an extrinsic understanding that maintenance fees would remain unchanged during dormancy — if such an understanding existed, it should have been memorialized in the MESLSA. The absence of any such provision reinforces VMS's position that the contractual silence should be resolved through the interpretive principles described above.
B. Michigan Contract Law — Implied Covenant of Good Faith and Fair Dealing
Michigan recognizes an implied covenant of good faith and fair dealing in every contract. Hammond v. United of Oakland, Inc., 193 Mich. App. 146, 483 N.W.2d 652 (1992); Burkhardt v. Bailey, 260 Mich. App. 636, 680 N.W.2d 453 (2004). The implied covenant prohibits a party from doing anything that would destroy or injure the right of the other party to receive the benefits of the contract. While Michigan courts have held that the implied covenant cannot be used to override express contractual terms, it may be invoked to fill gaps in the contract and to prevent a party from exercising its contractual rights in a manner that is inconsistent with the reasonable expectations of the other party.
MeridianCode cannot, consistent with the implied covenant of good faith and fair dealing, demand full payment of $2,400,000 for a comprehensive maintenance and support package while simultaneously acknowledging — indeed, while contractually entitled to acknowledge — that it is required to deliver only critical security patches during the dormancy period. The implied covenant requires that MeridianCode's exercise of its right to invoice and collect maintenance fees be consistent with the level of performance it is actually required to provide. Insisting on full payment while performing only a fraction of its obligations represents precisely the kind of conduct the implied covenant is designed to prevent.
Moreover, MeridianCode's insistence on full payment has the practical effect of penalizing VMS for exercising its contractual right to invoke Dormancy Status under Section 9.4. The dormancy provisions exist for a purpose — to provide a mechanism for the parties to preserve their contractual relationship during periods when active integration is not feasible. If the financial burden on the licensee remains unchanged during dormancy while the licensor's obligations are dramatically reduced, the dormancy mechanism becomes illusory: the licensee receives no meaningful financial benefit from invoking dormancy, and the licensor receives a windfall. This outcome is inconsistent with the reasonable expectations of the parties and with the implied covenant of good faith and fair dealing.
VMS should be prepared to argue that MeridianCode's demand for full payment of the Year 2 maintenance fee during the dormancy period constitutes a breach of the implied covenant. While this argument is secondary to the contractual interpretation arguments set forth in Section III.A above, it provides a valuable backstop in the event that the contract is construed as ambiguous on the fee-adjustment question.
C. Equitable Arguments — Unjust Enrichment and Failure of Consideration
Even if the MESLSA were construed — against VMS's position — to require payment of the full Year 2 maintenance fee regardless of Dormancy Status, VMS has equitable defenses and counterclaims that provide additional grounds for abatement or proration.
Unjust Enrichment. Under Michigan law, a claim for unjust enrichment requires: (1) receipt of a benefit by the defendant from the plaintiff, and (2) an inequity resulting to the plaintiff because of the retention of the benefit. Morris Pumps v. Centerline Piping, Inc., 273 Mich. App. 187, 729 N.W.2d 898 (2006). If VMS were required to pay $2,400,000 for a comprehensive maintenance and support package while MeridianCode is contractually excused from providing all but critical security patches, MeridianCode would be unjustly enriched by retaining the full payment for services it is not obligated to perform. The inequity is self-evident: MeridianCode would receive $2,400,000 while incurring only a fraction of the costs associated with the comprehensive support it would otherwise be required to provide.
While Michigan courts have generally held that unjust enrichment claims are precluded where an express contract governs the parties' relationship (Belle Isle Grill Corp. v. City of Detroit, 256 Mich. App. 463, 666 N.W.2d 271 (2003)), this principle does not apply where the express contract does not address the specific issue in dispute. Because Section 9.4 is silent on the question of fee adjustment during dormancy, the unjust enrichment claim addresses a gap in the express contract rather than seeking to override its terms.
Partial Failure of Consideration. As discussed in Section III.A.3 above, the consideration for the maintenance fee — MeridianCode's comprehensive support package — has substantially failed during the dormancy period. Under Michigan law, a partial failure of consideration provides an equitable defense to a payment obligation, even where the contract does not expressly provide for fee adjustment. The defense is particularly strong here because the failure of consideration is not attributable to any act or omission by VMS, but rather to the operation of the MESLSA's own dormancy provisions.
VMS's overall equitable position is strengthened by the fact that it has already paid $12,320,000 under the MESLSA — a substantial financial commitment that demonstrates VMS's good faith and commitment to the contractual relationship. Requiring an additional $2,400,000 payment for de minimis services (critical security patches only) is inequitable in light of the totality of VMS's financial obligations under the agreement and the dramatically reduced scope of MeridianCode's corresponding performance.
D. Proration Analysis — Calculating a Fair Dormancy-Period Maintenance Fee
If VMS's position on fee adjustment is accepted — whether through contractual interpretation, the implied covenant of good faith, or equitable principles — the next question is the appropriate method for calculating VMS's reduced fee obligation during the Year 2 maintenance period. We have prepared three alternative proration analyses, summarized below. Detailed calculations supporting each alternative are set forth in Appendix E.
1. Pre-Dormancy Period (July 15, 2023 – August 3, 2023). The Year 2 maintenance fee covers the period from the Year 2 payment date through the Year 3 payment date. Assuming a Year 2 service period running from approximately July 15, 2023 (the anniversary of the Year 1 payment date) through July 14, 2024, VMS received full maintenance and support services — i.e., MeridianCode was obligated to provide the complete Section 5 support package — for approximately 19 days before Dormancy Status took effect on August 3, 2023.
The prorated full-service fee for this 19-day pre-dormancy period is calculated as follows:
19 days ÷ 365 days × $2,400,000 = approximately $125,000 ($124,931.51, to be precise)
This represents the portion of the Year 2 maintenance fee attributable to the period during which MeridianCode was required to provide — and VMS was entitled to receive — the complete maintenance and support package. VMS does not dispute its obligation to pay this prorated amount.
2. Dormancy Period (August 3, 2023 – End of Year 2 Period or Reactivation). During the dormancy period, MeridianCode's support obligations are reduced to critical-security-patch-only. The value of patch-only support, relative to the comprehensive maintenance and support package, is the principal variable in the proration calculation.
Based on a review of industry benchmarks for embedded software maintenance tiers — including the Penmark Consulting Group annual survey of embedded software maintenance pricing models (2022 edition), the Embedded Systems Engineering Council's Best Practices for Tiered Maintenance Pricing (2021), and comparable license agreements in the embedded real-time operating system market — we estimate that the value of critical-security-patch-only support is approximately 10–20% of the value of a comprehensive maintenance and support package for software of the type and complexity of ATLAS-RT™. The low end of this range (10%) reflects arrangements where patch-only support is purely reactive and requires minimal engineering resources; the high end (20%) accounts for the residual value of maintaining the software relationship and the licensor's ongoing obligation to monitor for and address critical security vulnerabilities.
If dormancy runs through the end of the Year 2 service period — approximately 346 remaining days after the August 3, 2023 dormancy effective date — the prorated reduced-service fee for the dormancy period is calculated as follows:
Low estimate (10% of full value): 346 days ÷ 365 days × $2,400,000 × 10% = approximately $227,507
High estimate (20% of full value): 346 days ÷ 365 days × $2,400,000 × 20% = approximately $455,014
Combining the pre-dormancy and dormancy period calculations, the total prorated Year 2 maintenance fee under this analysis ranges from approximately $352,438 to $579,945, depending on the valuation of critical-security-patch-only support:
This represents a reduction of approximately $1,820,000 to $2,048,000 from the full $2,400,000 invoiced amount — a reduction of 76% to 85%.
We note that the proration calculation above assumes dormancy continues through the entire remainder of the Year 2 service period. If VMS reactivates the MESLSA from Dormancy Status before the end of the Year 2 service period, the proration would need to be recalculated to reflect the actual number of days in active versus dormant status. However, given the current state of Project Argonaut and the absence of any firm reactivation timeline, the assumption of continued dormancy through the Year 2 period is reasonable for purposes of this analysis.
3. Alternative: Full Abatement During Dormancy. VMS could assert an even more aggressive position: that the maintenance fee should be fully abated during the dormancy period, on the theory that critical-security-patch support is a baseline obligation inherent in the license grant itself — not a separately compensable maintenance service. Under this theory, the obligation to provide critical security patches is implicit in the licensor's grant of a software license, as a fundamental aspect of the licensor's warranty of merchantability and fitness for use. This obligation exists independently of the maintenance and support provisions of Section 5 and would continue even if VMS were to decline the maintenance and support package entirely.
This argument finds support in the structure of the MESLSA itself. Section 3.4 of the MESLSA includes a warranty by MeridianCode that the ATLAS-RT™ software will be free from known material defects as of the delivery date. While this warranty has a limited duration (12 months from delivery), it reflects the principle that certain baseline software quality obligations are part of the license grant itself, not separately purchased services. If critical security patches are necessary to maintain the software's basic integrity and security, they arguably fall within this baseline obligation.
Under the full abatement theory, VMS's Year 2 maintenance fee obligation would be limited to the approximately $125,000 prorated pre-dormancy amount, with no additional payment owed for the dormancy period. We view this as the most aggressive of the three proration alternatives and note that it may be more difficult to sustain in arbitration than the 10–20% reduced-rate approach described in Section III.D.2 above. However, it represents a useful anchor for negotiation purposes and should be preserved as part of VMS's position.
E. MeridianCode's Likely Counter-Arguments
We anticipate that MeridianCode, through Redstone Whitaker LLP, will advance several counter-arguments in response to VMS's position on fee abatement or proration. We address each of these anticipated arguments below.
1. Annual Fee as Non-Refundable and Non-Proratable. MeridianCode is likely to argue that the MESLSA characterizes the annual maintenance and support fee as a non-refundable obligation payable regardless of usage or service level. Section 5.2(d) of the MESLSA includes the following language: "All fees paid under this Section 5 are non-refundable except as expressly provided herein." MeridianCode may contend that this language forecloses any abatement or proration of the Year 2 fee, regardless of the dormancy provisions.
Rebuttal: The "non-refundable" characterization in Section 5.2(d) applies to fees for services actually rendered — it prevents VMS from demanding a refund after receiving and benefiting from the contracted maintenance services. It does not, however, create an obligation to pay for services that MeridianCode is contractually excused from providing. Section 9.4's support reduction is a contractual modification of MeridianCode's service obligations that implicitly modifies the corresponding fee obligation. The non-refundable language was not drafted with the dormancy scenario in mind and should not be stretched to cover a situation where the licensor itself acknowledges that it is providing only a fraction of the contracted services.
Moreover, VMS is not seeking a "refund" of fees already paid — VMS has not yet paid the Year 2 fee. VMS is disputing the amount owed for services that have not yet been rendered and will not be rendered during the dormancy period. The non-refundable provision is inapplicable to a fee that has not been paid. The distinction between a refund of fees paid for services rendered and a dispute over the amount owed for services to be rendered is legally significant and should be pressed in any negotiation or arbitration proceeding.
2. Invoice Date Precedes Dormancy. MeridianCode has already advanced this argument through Mr. Briscoe's August 14, 2023 letter: the July 1, 2023 invoice predates the dormancy notice (July 14, 2023) and acknowledgment (August 3, 2023), and therefore the obligation to pay the full Year 2 fee crystallized before Dormancy Status took effect.
Rebuttal: The timing of the invoice is irrelevant to the underlying contractual obligation. An invoice is a demand for payment, not a determination of the amount owed. The amount of the maintenance fee obligation is determined by the terms of the MESLSA, including the dormancy provisions of Section 9.4, not by the date on which MeridianCode issues an invoice. The Year 2 maintenance fee covers a forward-looking service period (approximately July 15, 2023 through July 14, 2024). The obligation to pay for services during that period is necessarily contingent on the service level that MeridianCode is required to provide during that period. Because dormancy took effect during the Year 2 service period — less than three weeks after the invoice date — the service level (and correspondingly, the appropriate fee) changed before MeridianCode was required to perform the vast majority of the contracted services.
Furthermore, VMS timely invoked Dormancy Status under Section 9.4 before the 120-day trigger date. The fact that MeridianCode issued its invoice thirteen days before VMS's dormancy notice does not create a vested right to full payment for an entire year of services that will not be rendered. To hold otherwise would create perverse incentives: it would encourage licensors to rush invoices in advance of anticipated dormancy events, and it would penalize licensees for the timing of their dormancy elections.
3. Dormancy as Licensee Election. MeridianCode may argue that Dormancy Status is a licensee-elected status and that VMS should bear the financial consequences of its own decision to suspend integration and invoke dormancy. Under this theory, VMS's dormancy election is analogous to a voluntary reduction in usage, and the maintenance fee — like a fixed subscription — remains payable regardless of actual usage.
Rebuttal: This argument mischaracterizes the nature of the dormancy mechanism. Section 9.4 contemplates Dormancy Status as a contractual mechanism available to both parties' benefit, designed to preserve the MESLSA relationship during a period when active integration is not feasible. It is not a penalty provision; it is an accommodation. The dormancy mechanism benefits MeridianCode as well as VMS: it preserves MeridianCode's long-term revenue stream (including future maintenance fees, integration services fees, and runtime royalties) by keeping the MESLSA alive during a hiatus rather than triggering termination.
Moreover, the support reduction during dormancy is not VMS's election — it is the MESLSA's own mechanism. Section 9.4 mandates the reduction to critical-security-patch-only support during dormancy; VMS did not request or negotiate for reduced support as a separate accommodation. The fee should align with the contracted service level that the MESLSA itself establishes during dormancy. VMS should not be required to pay for a service level that the MESLSA expressly eliminates during the dormancy period.
Finally, we note that the dormancy was not a capricious election by VMS. It was driven by legitimate business factors — supply-chain disruptions, capital expenditure constraints, and strategic reprioritization — that were communicated to MeridianCode in advance. VMS's exercise of its dormancy rights under Section 9.4 was a commercially reasonable response to changed business circumstances, not an attempt to evade contractual obligations.
IV. Strategic Considerations
A. Relationship with Overall Fee Exposure
The $2,400,000 disputed Year 2 maintenance fee cannot be evaluated in isolation. It is part of a broader financial picture that encompasses VMS's total commitment under the MESLSA: $12,320,000 in fees already paid and approximately $7,680,000 in total remaining contractual commitments. The resolution of the maintenance fee dispute will set a precedent for how fees are handled during dormancy and, potentially, during any dormancy extension beyond the initial 12-month period.
The maintenance fee dispute should be coordinated with the broader negotiation strategy that is currently underway between VMS and MeridianCode. On August 22, 2023, we circulated a proposed dormancy extension and fee restructuring term sheet to Redstone Whitaker LLP on behalf of VMS. The term sheet addresses not only the Year 2 maintenance fee but also the proposed extension of Dormancy Status beyond the 12-month cap (from August 3, 2024 to February 3, 2025), the reactivation terms and conditions, the scope reduction from five vehicle platforms to two, and the derivative works ownership issues (DW-001 through DW-003).
Strategically, there is potential to use the disputed $2,400,000 as a credit or offset against future obligations under the MESLSA. For example, VMS could propose that any Year 2 maintenance fee ultimately determined to be owed be applied as a credit against the remaining integration services fees for Milestones 4 and 5 ($1,280,000) or against an adjusted runtime royalty cap. This approach would reduce VMS's net cash outlay while preserving MeridianCode's economic interest in the MESLSA relationship.
B. Interaction with Section 9.1 Fee Forfeiture Risk
The maintenance fee dispute must also be evaluated in light of the fee forfeiture provisions of Section 9.1 of the MESLSA. Section 9.1 provides that if VMS terminates the MESLSA for convenience before the 24-month anniversary of the Effective Date (i.e., before June 21, 2024), all prepaid fees — including the upfront license fee, maintenance fees already paid, and integration services fees already paid — are forfeited and non-refundable.
If VMS were to pay the full $2,400,000 Year 2 maintenance fee and subsequently terminate for convenience before June 21, 2024, the total at-risk prepaid amount subject to forfeiture would increase from $12,320,000 (current prepaid total) to $14,720,000. This represents a significant increase in VMS's forfeiture exposure — particularly in light of the uncertain timeline for Project Argonaut reactivation and the possibility that business conditions may lead VMS to consider termination of the MESLSA.
This consideration strongly counsels in favor of withholding or disputing the full Year 2 fee pending resolution of the broader dormancy and reactivation strategy. Paying the full $2,400,000 at this time would increase VMS's financial exposure without any corresponding benefit in terms of services received.
C. Interaction with Section 4.3 Use-It-or-Lose-It Deadline
The maintenance fee dispute also intersects with the Section 4.3 "Use-It-or-Lose-It" deadline, which requires VMS to complete integration testing on at least two vehicle platforms within 18 months of the Effective Date. The 18-month deadline, calculated from the June 21, 2022 Effective Date, falls on December 21, 2023.
VMS's position — as articulated in the dormancy notice and subsequent correspondence — is that Dormancy Status tolls the Section 4.3 deadline pursuant to Section 9.4(b), which provides that "all milestone deadlines and delivery schedules" are tolled during dormancy. MeridianCode has not yet formally agreed to this interpretation, and the issue remains open.
If Dormancy Status tolls the Section 4.3 deadline, then VMS cannot practically comply with the integration testing requirement during the dormancy period. Paying the full $2,400,000 maintenance fee for a period during which VMS cannot use the software for its intended purpose — because the very milestone deadlines governing that use have been tolled — further supports the argument that the fee should be abated or prorated. VMS should not be required to pay full maintenance fees for software that it is contractually precluded from actively integrating.
Conversely, there is a risk that paying the full maintenance fee could be interpreted by MeridianCode — or by an arbitration panel — as an acknowledgment that VMS is receiving full services and that the MESLSA is operating in its normal state rather than in Dormancy Status. While this inferential risk is not dispositive, it is a consideration that weighs in favor of disputing the full fee and documenting VMS's position clearly and contemporaneously.
D. Credit Facility Considerations
VMS notified Pinnacle National Bank, N.A. (the administrative agent under VMS's $175,000,000 Senior Secured Revolving Credit Facility, dated November 8, 2021, as amended) of the MESLSA dormancy status on August 10, 2023. This notification was made pursuant to Section 6.12 of the Credit Agreement, which requires VMS to provide prompt written notice to the administrative agent of any material contract dispute reasonably expected to result in liability or loss exceeding $5,000,000.
While the Year 2 maintenance fee dispute ($2,400,000) standing alone does not exceed the $5,000,000 notification threshold, the broader MESLSA dispute — encompassing the maintenance fee, derivative works ownership, integration scope reduction, and reactivation terms — implicates total fees and commitments well in excess of this threshold. VMS's outstanding borrowings under the Credit Facility as of July 31, 2023 were approximately $92,000,000, representing approximately 52.6% utilization of the $175,000,000 facility.
If the Year 2 maintenance fee dispute escalates to arbitration, it could constitute a "material dispute" requiring further notice to Pinnacle and to Howard Segal, VMS's Relationship Manager at Pinnacle National Bank. Additionally, depending on the outcome, an adverse arbitration ruling requiring payment of the full $2,400,000 plus interest or penalties could affect VMS's financial covenants under the Credit Agreement, although the impact would be modest relative to VMS's overall financial position. We recommend that VMS's treasury team monitor the dispute and prepare supplemental notifications as warranted by developments.
E. Arbitration Posture
Under Section 13.2 of the MESLSA, disputes exceeding $1,000,000 in claimed damages or amounts in controversy are subject to binding arbitration before a three-arbitrator panel convened under the rules of the Midwest Arbitration Institute, seated in Detroit, Michigan. The $2,400,000 Year 2 maintenance fee dispute exceeds this threshold and would therefore be subject to the three-arbitrator panel requirement (as opposed to the single-arbitrator procedure available for disputes below $1,000,000).
The arbitration clause carries several implications for VMS's strategy:
(a) Three-Arbitrator Panel Costs: A three-arbitrator proceeding under the Midwest Arbitration Institute rules entails substantially higher costs than a single-arbitrator proceeding. Based on current Midwest Arbitration Institute fee schedules, the estimated arbitration costs for a three-arbitrator proceeding (administrative fees, arbitrator compensation, and hearing costs) range from approximately $150,000 to $300,000, exclusive of attorney fees. This cost factor weighs in favor of negotiated resolution.
(b) Consolidation with Other MESLSA Disputes: If arbitration becomes necessary, VMS should seek to consolidate the maintenance fee dispute with other pending MESLSA disputes — including the derivative works ownership issues (DW-001, DW-002, DW-003) and the Section 4.3 Use-It-or-Lose-It compliance dispute — into a single arbitration proceeding. Consolidation would provide efficiencies and potential leverage, as MeridianCode would face exposure across multiple fronts simultaneously. Section 13.2(c) of the MESLSA permits consolidation of related disputes "arising under or in connection with this Agreement," which should encompass all of the pending MESLSA disputes.
(c) Leverage Through Comprehensive Arbitration: The prospect of a comprehensive arbitration proceeding — addressing maintenance fees, derivative works, scope reduction, and Use-It-or-Lose-It compliance — provides VMS with significant negotiation leverage. MeridianCode's preference is likely to avoid a multi-issue arbitration, which would be costly, time-consuming, and would expose MeridianCode to risk across multiple contractual provisions simultaneously. This leverage should be deployed judiciously to encourage MeridianCode to engage constructively in the dormancy extension and fee restructuring negotiations.
V. Recommendations
Based on the foregoing analysis, we recommend the following course of action:
1. Dispute the Invoice. VMS should formally dispute the $2,400,000 Year 2 Maintenance & Support Fee invoiced by MeridianCode on July 1, 2023. The dispute should be communicated in writing from Mr. Cross to Ms. Ramaswamy, with a copy to Mr. Briscoe at Redstone Whitaker LLP, setting forth VMS's position that Dormancy Status reduces MeridianCode's support obligations to critical-security-patch-only under Section 9.4, and that the maintenance fee should be correspondingly abated or prorated. The dispute letter should reference VMS's rights under the implied covenant of good faith and fair dealing and under applicable Michigan equitable doctrines, while preserving VMS's position on full abatement as an alternative to proration. We will prepare a draft dispute letter for Mr. Cross's review.
2. Propose Prorated Payment. VMS should offer to pay a prorated amount reflecting the reduced service level during dormancy. Based on the proration analysis set forth in Section III.D above, the appropriate prorated payment falls in the range of approximately $350,000 to $580,000, depending on the valuation assigned to critical-security-patch-only support. We recommend proposing an initial payment of $350,000 (the low end of the range), while indicating willingness to negotiate within the range, and expressly reserving the right to seek full abatement if negotiations fail. This approach demonstrates VMS's good faith while establishing a favorable negotiating anchor.
3. Credit Against Future Obligations. VMS should propose that any Year 2 maintenance fee ultimately determined to be owed be credited against future integration services fees (Milestones 4 and 5, with $1,280,000 remaining) or against an adjusted runtime royalty cap under the MESLSA. This approach is consistent with the broader fee restructuring strategy and avoids additional cash outlay by VMS during the dormancy period. The credit mechanism should be incorporated into the dormancy extension and fee restructuring term sheet currently being negotiated with Redstone Whitaker LLP.
4. Coordinate with Broader Negotiation. The maintenance fee dispute should be integrated into the term sheet for dormancy extension and fee restructuring currently being negotiated with Redstone Whitaker LLP and MeridianCode. A global resolution addressing the maintenance fee, derivative works ownership (DW-001, DW-002, and DW-003), scope reduction from five vehicle platforms to two, and reactivation terms would be significantly more efficient and strategically advantageous than resolving each issue in isolation. The maintenance fee dispute provides VMS with a legitimate grievance that strengthens its overall negotiating position and incentivizes MeridianCode to engage constructively on the broader term sheet.
5. Avoid Full Payment Pending Resolution. VMS should not pay the full $2,400,000 at this time. Payment of the full invoiced amount would: (a) increase VMS's forfeiture exposure under Section 9.1 from $12,320,000 to $14,720,000; (b) potentially waive or undermine VMS's arguments regarding dormancy-period fee adjustment by creating an inference that VMS accepted the obligation to pay full maintenance fees during dormancy; and (c) remove MeridianCode's incentive to negotiate a comprehensive resolution, thereby providing MeridianCode leverage to delay resolution of the broader dormancy extension and fee restructuring discussions.
6. Preserve Arbitration Option. If MeridianCode insists on full payment and refuses to engage in good-faith negotiation of the maintenance fee dispute, VMS should be prepared to raise the dispute in binding arbitration before a three-arbitrator panel of the Midwest Arbitration Institute in Detroit, Michigan, pursuant to Section 13.2 of the MESLSA. VMS should seek to consolidate the maintenance fee dispute with other pending MESLSA disputes (derivative works ownership, Use-It-or-Lose-It compliance, and scope reduction issues) into a single comprehensive arbitration proceeding. The consolidation strategy maximizes

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