Case of the Day: Microsoft v. Weidmann Electrical Technology

The case of the day is Microsoft Corp. v. Weidmann Electrical Technology, Inc. (D. Vt. 2016). Weidmann was a Vermont corporation with offices in St. Johnsbury. Its corporate parent was WICOR Holding AG, a Swiss company that, with its subsidiaries, is a multi-national manufacturer of medical equipment. Weidmann had a licensing agreement with Microsoft that allowed it to use multiple copies of Microsoft software and to report the number of copies in use to Microsoft. The number reported would be the basis for the royalties due under the license. The agreement gave Microsoft the right to verify compliance at its own expense using a third-party accountant. Weidmann was required to “promptly provide the accountant with any information it reasonably requests in furtherance of the verification.” Suffice it to say Microsoft wanted to do an audit, which was to take place in Switzerland and was dissatisfied with Weidmann’s cooperation. It sued, seeking specific performance.

Weidmann’s notable argument was that a court-ordered audit in Switzerland, without the permission of the Swiss government or compliance with the Hague Evidence Convention, would violate the Swiss blocking statute. Weidmann proposed a voluntary audit, not ordered by the court, the results of which would remain in Switzerland (the results could be communicated orally to Microsoft’s lawyers). The parties failed to agree on this proposal.

The court found, for reasons I won’t discuss, that Microsoft had shown that Weidmann had breached the contract. The interesting discussion had to do with the remedy. In general, as a matter of state law, the court held that specific performance was the appropriate remedy, because damages were not an adequate remedy in the circumstances (since the amount of damages could not be determined without an audit).

The court rejected the idea that the Hague Evidence Convention could solve the blocking statute problem. The Convention is a mechanism for obtaining evidence in a lawsuit. The audit is a contractual right—indeed, the right that the lawsuit seeks to vindicate. So it turned to the question whether ordering the audit to go forward would violate the blocking statute. There were competing expert affidavits. The point of contention was whether the court-ordered audit would constitute the exercise of public authority on Swiss territory, or whether it would be regarded as a private act. The court decided that the audit “likely” would not violate the statute. I’m not really qualified to comment on the question of Swiss law, beyond saying that the court’s opinion seems reasonable but that I think the question could have come out the other way.

If I had been the judge, I might have approached the question differently, from the perspective of cost and risk. Who is taking the risk of violating Article 271 of the Swiss Criminal Code here? The law provides:

Any person who carries out activities on behalf of a foreign state on Swiss territory without lawful authority, where such activities are the responsibility of a public authority or public official,

any person who carries out such activities for a foreign party or organisation,

any person who encourages such activities,

is liable to a custodial sentence not exceeding three years or to a monetary penalty, or in serious cases to a custodial sentence of not less than one year

In the first instance, it seems to me it’s Microsoft and its auditors, not Weidmann, that is carrying out potentially impermissible activities in Switzerland. Perhaps Weidmann (or the Swiss parent at any rate) is also potentially liable for permitting or encouraging the audit. But in any event Microsoft bears risk, and it says it has no concern. This is not a case where a Swiss defendant is being ordered to produce materials in discovery; it’s a case where a US plaintiff is coming to Switzerland and obtaining evidence from the Swiss company. So why should the court be too concerned about the Article 271 issue? Another perspective: the parties agreed in their contract to the audit procedure. So if there is some question about whether the audit would violate Swiss law, shouldn’t Weidmann bear the cost and the risk of the uncertainty?

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