Broad Interpretation of “With Respect to Any Software” in Retention Holdback Agreements to Include Hardware Sales with Integrated IP

Introduction

James Bailey v. Tektronix Inc. (3d Cir. May 8, 2025) addresses a contract-interpretation dispute arising from a merger and related holdback agreement. James Bailey, founder and owner of Initial State Technologies (IST), sold his cloud-integration technology company to Tektronix under a “Merger Agreement” and a companion “Retention Holdback Agreement.” The Holdback Agreement promised up to $800,000 if Bailey (1) remained employed through December 31, 2020, and (2) generated certain “revenue” tied to IST’s intellectual property during 2020. Tektronix conceded that Bailey had met the time requirement and had driven revenue in excess of the stated threshold, but refused to pay the full holdback on the ground that “revenue” should be limited to direct software licenses or subscriptions, not hardware sales (oscilloscopes) into which Bailey’s code was integrated. The District Court awarded Bailey the full $800,000, and Tektronix appealed.

Summary of the Judgment

The Third Circuit affirmed. Applying Delaware’s objective-theory rule of contract interpretation, the court held that the phrase “with respect to any software that contains any of the intellectual property owned by [IST]” was ambiguous with respect to the scope of covered sales. The words “with respect to any” were expansive, and the parties had chosen not to restrict “software” revenue to standalone licenses or subscriptions. Under the plain-meaning and avoidance-of-surplusage doctrines, the term reasonably encompassed revenue from oscilloscope hardware incorporating the Marshall Module (Bailey’s Python-written software component that linked to IST’s cloud services). Extrinsic evidence (negotiation history, product integration facts, and post-closing development activities) further confirmed that the only objectively reasonable interpretation was to include hardware sales with integrated IST IP. Accordingly, Bailey was entitled to the full holdback payment.

Analysis

Precedents Cited

The court relied primarily on well-established Delaware contract rules:

Objective Theory of Contracts: Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153 (Del. 2010), holding that contract terms are interpreted as they would be understood by a reasonable third party.
Plain-Meaning Doctrine: Osborn, 991 A.2d at 1159–60, confirming that clear and unambiguous terms control without judicial rewriting.
Ambiguity Standard: VLIW Tech., LLC v. Hewlett-Packard Co., 840 A.2d 606 (Del. 2003), and Vanderbilt Income & Growth Assocs. v. Arvida/JMB Managers, 691 A.2d 609 (Del. 1996), defining ambiguity as reasonable susceptibility to different interpretations.
Contextual-Reading Rule: In re Shorenstein Hays-Nederlander Theatres LLC Appeals, 213 A.3d 39 (Del. 2019), requiring that every term be given effect to avoid surplusage.
Recent Clarification: Terrell v. Kiromatic Biopharma, Inc., 2025 WL 249073 (Del. Jan. 21, 2025), reaffirming Delaware’s objective approach and plain-meaning emphasis.

Legal Reasoning

The court’s reasoning proceeded in two main steps:

Textual Analysis: The disputed phrase—“revenue . . . generated during 2020 by any member of [Tektronix] or with respect to any software that contains any of the [IST] IP”—was dissected. “With respect to” means “insofar as concerns,” and “any” signals unrestricted scope. Viewed together, the language reasonably covers revenue from devices whose embedded software “concerns” IST IP, not just standalone software licenses.
Extrinsic Evidence: The contract negotiations, executive testimony, the development of the “Marshall Module,” and post-closing business reality all confirmed that the parties intended to reward Bailey for integrating IST IP into Tektronix’s oscilloscopes. Tektronix never insisted on excluding hardware revenue, used expansive terms (“any software”), and witnessed a doubling of oscilloscope revenue after integration. No post-closing or pre-closing communications limited “software” revenue to direct‐sale formats.

The combination of an expansive textual reading and supportive extrinsic context left no room for Tektronix’s narrower interpretation. The District Court’s factual findings were reviewed for clear error and its legal conclusions de novo; both passed muster.

Impact

The decision carries important lessons for contract drafters and litigators in technology and merger contexts:

Precision in Definitions: Parties should explicitly define “software revenue” or “product revenue” to include or exclude hardware-embedded software.
Words Matter: Inclusionary phrases like “with respect to any” are given full effect; they expand coverage unless countermanded by other clauses.
Role of Extrinsic Evidence: Even clear‐looking terms can be illuminated by negotiation history, product road-maps, and actual performance metrics.
Negotiation Conduct: Silence on limiting language may be interpreted as acceptance of broad contract scope.

Complex Concepts Simplified

Holdback Agreement: A post-closing mechanism by which a portion of purchase price is deferred and conditioned on post-closing performance or milestones.
Objective Theory of Contracts: Courts interpret written agreements by asking how a reasonable person would understand the words, not by subjective intent.
Ambiguity vs. Unambiguous Terms: A contract term is ambiguous if it reasonably supports more than one interpretation; unambiguous terms get enforced as written.
Extrinsic Evidence: Facts outside the four corners of the document—such as negotiation exchanges and course of performance—used to resolve ambiguities.
Marshall Module: A Python-based software component developed by Bailey post-closing, embedded in Tektronix oscilloscopes to enable cloud connectivity via IST’s IP.

Conclusion

James Bailey v. Tektronix underscores the power of plain-meaning analysis and the risks of drafting or interpreting restrictive definitions without explicit language. By upholding a broad reading of “with respect to any software,” the Third Circuit affirmed that contract drafters must choose their words carefully and that courts will give full effect to inclusionary phrases unless the agreement clearly indicates otherwise. This ruling will guide future disputes over holdbacks, earn-outs, and M&A purchase price adjustments, especially in technology transactions where software and hardware often blend.