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Xat.com Ltd. v. Hosting Services Inc.

United States District Court, D. Utah, Northern Division

March 27, 2018

XAT.COM LIMITED, Plaintiff,
v.
HOSTING SERVICES, INC. aka 100TB.COM, Defendant.

          MEMORANDUM DECISION AND ORDER

          PAUL M. WARNER JUDGE

         All parties in this case have consented to Chief Magistrate Judge Paul M. Warner conducting all proceedings, including entry of final judgment, with appeal to the United States Court of Appeals for the Tenth Circuit.[1] See 28 U.S.C. § 636(c); Fed.R.Civ.P. 73. Before the court is Defendant Hosting Services, Inc. aka 100TB.com's (“100TB”) motion for summary judgment.[2] 100TB seeks either full or partial summary judgment on Plaintiff Xat.com Limited's (“Xat”) remaining claims for breach of contract and equitable indemnification.

         On January 9, 2018, the court held oral argument on the motion.[3] At the hearing, Xat was represented by Romaine C. Marshall. 100TB was represented by Paul G. Karlsgodt and Patricia W. Christensen. After hearing the arguments of counsel, the court took the motion under advisement. Now being fully advised, the court renders the instant Memorandum Decision and ORDER.

         BACKGROUND

         This action is based upon a contract between Xat and 100TB, the Master Services Agreement (“MSA”), which the parties executed on October 13, 2008. Xat is a social networking website that allows users to exchange instant messages. 100TB provides web server hosting services. In 2008, Xat utilized 100TB to host Xat's servers. While Xat's complaint is vague about what 100TB's hosting services entail, it appears that 100TB's hosting services involve 100TB ensuring the physical security and stability of Xat's servers as well as protecting Xat's servers from digital invasion from unauthorized third parties.

         In 2015, Xat alleges that 100TB allowed an unauthorized third party to access Xat's servers. Xat claims that over a ten-month period, Xat repeatedly warned 100TB that an unauthorized third party was attempting to gain access to Xat's servers through “social engineering.” Xat asserts that in response to those repeated warnings, 100TB assured Xat that access to its servers would be denied and suggested that Xat take certain steps to further secure its servers. Xat contends that while it complied with 100TB's instructions, 100TB nevertheless granted a third party unauthorized access to Xat's servers.

         Specifically, Xat alleges that on November 4, 2015, an unknown third party was granted access to Xat's servers. The third party allegedly damaged and disabled Xat's servers and stole Xat's proprietary software, including Xat's main database. Xat contends that, subsequently, it requested that 100TB secure and power down Xat's servers until it could contain the intrusion. Xat alleges that 100TB did not power down at least three of Xat's servers, did not turn on 100TB's two-factor authentication, and failed to back up the data on Xat's servers.

         On November 8, 2015, Xat contends that 100TB again granted a third party access to Xat's servers. Xat alleges that, during this second incident, the third party accessed Xat's proprietary log files, databases, source code, and software, and erased system log files from Xat's s er v e r.

         RELEVANT UNDISPUTED FACTS

         The following undisputed facts apply to the court's analysis of Xat's breach of contract claim. Paragraph 11 of the MSA (“Paragraph 11”) provides certain limitations on recoverable damages in the event of a breach (“Damages Limitations”):

NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS MSA, IN NO EVENT WILL [100TB] BE LIABLE TO [Xat] OR ANY THIRD PARTY MAKING A CLAIM BASED ON OUR PROVIDING THE SERVICES TO [Xat] FOR (I) LOST PROFITS; (II) LOSS OF BUSINESS; (III) LOSS OF REVENUES; (IV) LOSS OF DATA OR INTERRUPTION OR CORRUPTION OF DATA; (V) ANY CONSEQUENTIAL OR INDIRECT DAMAGES; OR (VI) ANY INCIDENTAL, SPECIAL, RELIANCE, EXEMPLARY OR PUNITIVE DAMAGES (IF APPLICABLE) . . . .[4]

         Paragraph 11 also provides a cap on recoverable damages (“Damages Cap”) by providing that 100TB's “MAXIMUM LIABILITY SHALL BE ONE (1) MONTH'S FEES (OR THE EQUIVALENT THEREOF) ACTUALLY RECEIVED BY [100TB] DURING THE MONTH PRIOR TO [Xat's] CLAIM.”[5] Paragraph 11 further provides that if it “IS PROHIBITED BY THE LAW GOVERNING THIS MSA, [100TB's] LIABILITY SHALL BE LIMITED TO THE EXTENT ALLOWED BY LAW.”[6]

         Paragraph 17 of the MSA contains a severability clause (“Severability Clause”), which in relevant part provides:

Should a particular provision be held to be illegal or unenforceable in any jurisdiction, that provision shall be effective to the extent of such illegality or unenforceability, without invalidating the remaining provisions, and the provision at issue shall be restated to reflect the original intentions of the parties, to the greatest extent possible, and in accordance with the law. . . .[7]

         Turning to the undisputed facts relevant to Xat's equitable indemnification claim, Paragraph 9 of the MSA (“Paragraph 9.a”) provides, in relevant part:

[100TB agrees] to indemnify, defend and hold [Xat], [ Xat's] employees, directors and officers . . . from any and all third party actions, liability, damages, costs and expenses (including, but not limited to, those attorneys' fees and expenses charged to [100TB]) arising from, or relating to, personal injury or property damage resulting solely from our gross negligence or willful misconduct . . . .[8]

         The parties do not dispute that Xat has not been named as a defendant in a lawsuit or incurred costs defending any lawsuits against Xat as a result of the alleged unauthorized third-party access to Xat's servers.[9] At the same time, the parties do not dispute that, as a result of the alleged unauthorized third-party access to Xat's servers, Xat has been required by regulatory and policy authorities to produce certain information and incurred expenses in cooperating with the police and regulatory authorities.[10] The parties also do not dispute that Xat's claimed damages include costs associated with reporting the alleged unauthorized third-party access to the appropriate authorities.[11]

         Finally, the MSA provides a choice-of-law provision providing that the “MSA will be construed and controlled by the laws of the State of Utah.”[12]

         RELEVANT PROCEDURAL BACKGROUND

         On June 28, 2016, Xat filed the instant lawsuit asserting claims against 100TB for gross negligence, breach of the MSA, unjust enrichment, and equitable indemnification.[13] In response to Xat's complaint, 100TB filed a motion to dismiss pursuant to Rule 12(b)(1) and Rule 12(b)(6) of the Federal Rules of Civil Procedure.[14] The same day it filed its motion to dismiss, 100TB filed a notice of offer of judgment for $2715.95, which constitutes one month worth of fees paid by Xat to 100TB during the month prior to Plaintiff's complaint, consistent with Paragraph 11.[15] 100TB also filed a motion to deposit that amount in the court registry, [16] which the court granted.[17]

         On February 2, 2017, the court issued a Memorandum Decision and Order (“Order”) granting in part and denying in part 100TB's motion to dismiss.[18] The court granted the motion with respect to Xat's gross negligence and unjust enrichment claims, but denied it with respect to Xat's claims for breach of contract and equitable indemnification.[19] While the court dismissed Xat's gross negligence tort claim, the court also made clear that “nothing in [the Order] would prevent Xat from seeking recovery for 100TB's alleged gross negligence in contract.”[20]

         In addressing Xat's breach of contract claim, the court concluded in the Order, with respect to Paragraph 11, that “[a]t best, it is ambiguous.”[21] The court further determined that Paragraph 11 “limits 100TB's liability to a ridiculously nominal sum” and that “[c]onceivably, limiting 100TB's liability to a trivial sum is just window dressing for eliminating liability altogether.”[22] Finally, the court concluded that “Paragraph 11 could be interpreted as a limitation of liability provision that allows 100TB to engage in grossly negligent or willful conduct while leaving Xat with nominal retribution” and noted that “[s]uch liability waivers are generally unenforceable.”[23]

         In considering Xat's equitable contribution claim, the court concluded that Paragraph 9.a “is broadly written to encompass indemnification for ‘any and all third party actions.'”[24] The court also determined that “[t]here is nothing in the MSA that excludes government ...


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