Tag Archives: exclusive distributor agreement

Software distributor agreement violated New York’s Rule Against Perpetuities

McAllister Software Systems, Inc. v. Henry Schein, Inc., No. 06-0093, 2008 WL 922328 (E.D. Mo. April 2, 2008)

This case came out about three months ago, and I should have blogged about it then but it slipped by. It’s a quirky holding, what with the Rule Against Perpetuities, so it’s worth going back to pick it up. As it turns out, the Rule comes into play in real life, not just on the bar exam or in first year of law school Property class.

In 1990, McAllister and Schein entered into an Exclusive Distributor Agreement (EDA) whereby Schein would have the exclusive right to promote and sell veterinary management software. In 2006, McAllister sued, asking the court to declare the EDA void ab initio (from its creation), claiming that terms of the EDA violated New York’s Rule Against Perpetuities. (The EDA provided that New York law would apply).

McAllister moved for summary judgment on its claim, and the court granted the motion. And now for the legalese, because I know that’s the real reason you’re here.

The New York Estate Powers and Trust Law at Article 9, Section 1.1 prohibits the suspension of the absolute power of alienation of any present or future estate for a period beyond lives in being at the creation of the estate plus twenty-one years. Although usually thought of as a real property question, under New York law, the Rule applies to personal property as well. Yawn.

The court found that two provisions of the EDA violated the Rule because they permanently restrained McAllister from freely selling the software and developing and marketing new software in the same market space.

One provision provided that

Schein shall have the right to be the exclusive distributor of any other software designed for the Market that [McAllister Software] produces, develops, or acquires the rights to, hereafter.

Another provision stated that

McAllister Software will keep and maintain a current version of the Software’s source code and supporting documentation (“Escrow Materials”) in escrow with its attorney or a professional computer software escrow agent (“Escrowee”) …If [McAllister Software] fails to support the Software to the reasonable satisfaction of Schein and Schein’s customers or if [McAllister Software] ceases to do business, Schein shall have the right to immediately obtain the source code from the Escrowee, and [McAllister Software], by its execution hereof, hereby authorizes Escrowee to release the source code to Schein only under said circumstances.

Both the parties were corporations so there were no “measuring lives” to use for purposes of the Rule Against Perpetuities calculation. So the court simply considered whether the power of alienation was suspended for at least 21 years. This situation fit the bill, so the EDA was void.