Fair Isaac Corporation v. Federal Insurance Company

Background

Fair Isaac Corporation (FICO) owns the copyright in the Blaze Advisor software program. FICO licensed the software to an unincorporated division of Federal Insurance Company. FICO ended the license agreement in 2016, but Federal allegedly continued using the software. FICO then sued Federal for breach of contract and copyright infringement, seeking actual damages and disgorgement of profits allegedly attributable to the infringement.

Federal and ACE American Insurance Company jointly sought permission to file an amended answer adding a statute-of-limitations affirmative defense. On August 26, 2019, Magistrate Judge David T. Schultz granted the motion subject to conditions requiring Federal and ACE to provide additional discovery and deposition testimony concerning the new defense. FICO appealed that order to the district court.

Issues and standard of review

FICO argued that the magistrate judge misapplied the “good cause” requirement under Federal Rule of Civil Procedure 16 and failed to assess whether the proposed amendment would be futile under Rule 15. Because the challenged ruling concerned a nondispositive issue, the district court could modify or set aside the order only if it was clearly erroneous or contrary to law. “Clearly erroneous” means that the reviewing court has a firm conviction that a mistake was made.

Good cause

The court explained that when a party seeks to amend an answer after the scheduling-order deadline, it must first show good cause under Rule 16. The main consideration is the moving party’s diligence, followed ordinarily by consideration of prejudice to the opposing party.

The magistrate judge found that Federal and ACE had acted diligently. The complaint was ambiguous, and the defendants reasonably misunderstood FICO’s claims before later recognizing the need to plead a statute-of-limitations defense. They then promptly sought permission to amend. Although FICO correctly argued that information available earlier in a case ordinarily does not establish good cause, the defendants had provided a reasonable explanation for their earlier failure to assert the defense. The district court found no clear error and affirmed the Rule 16 analysis.

Futility

The court explained that after finding good cause under Rule 16, a court considers the Rule 15 standards for amendment. Those standards can include undue delay, bad faith, prejudice, or futility. An amendment should be rejected as futile on the merits only when it asserts a clearly frivolous claim or defense.

FICO argued that the magistrate judge had not considered futility. The district court disagreed. Although the magistrate judge did not use the word “futility” in the oral ruling, the judge had stated that the statute-of-limitations issue was closely connected to the merits and that denying the amendment on futility grounds would require a merits determination. The district court understood the ruling as rejecting the argument that the proposed defense was clearly frivolous. It found no clear error or legal error in that determination.

Disposition

Judge Wilhelmina M. Wright held that there was no basis to modify or set aside the August 26, 2019 order. The court affirmed that order, which granted Federal and ACE permission to file a joint amended answer subject to the specified discovery and deposition conditions. The order did not decide whether the statute-of-limitations defense ultimately succeeds.