Elation Systems, Inc. v. Fenn Bridge LLC ( 2021 )

Filed 11/22/21
CERTIFIED FOR PARTIAL PUBLICATION *
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST APPELLATE DISTRICT
DIVISION THREE
ELATION SYSTEMS, INC.,
Plaintiff and Appellant, A159749, A160823
v.
FENN BRIDGE LLC, et al., (Alameda County
Defendants and Respondents. Super. Ct. No. RG15758321)
Plaintiff Elation Systems, Inc. (Elation) sued defendants Fenn Bridge
LLC (Fenn Bridge) and Tiebiao “Joe” Shi (Shi) on multiple causes of action,
including (1) breach of a nondisclosure agreement (NDA) (against Shi only)
entered during the course of Shi’s prior employment with Elation; and
(2) breach of a confidential settlement agreement and mutual release
(Settlement Agreement) (against both defendants) entered to resolve a prior
action between the parties. In turn, defendants filed a cross-complaint that
included a cause of action for Elation’s breach of the Settlement Agreement.
During trial, Elation admitted to liability and stipulated to $10,000 in
liquidated damages on the cross-claim for breach of the Settlement
Agreement. At trial, the jury found that Shi had breached the NDA and
harmed Elation, and awarded Elation $10,000 in damages. The jury also
* Pursuant to California Rules of Court, rules 8.1105(b) and 8.1110, this
opinion is certified for publication with the exception of parts B, C, and D of
the Factual and Procedural Background and part A.2 and all of part B of the
Discussion.
found that defendants had breached the Settlement Agreement, but that
Elation had suffered no harm. Following the jury verdict, Elation filed a
motion that included a request for entry of a permanent injunction against
defendants.
Defendants then filed a motion for judgment notwithstanding the
verdict (JNOV), challenging (1) the jury’s finding on harm and award of
damages for the NDA claim; and (2) the jury’s finding of breach on the
Settlement Agreement claim. The trial court granted the JNOV motion and
denied Elation’s motion for injunctive relief. Defendants subsequently filed a
motion for attorney fees pursuant to Civil Code section 1717. 1 The court
entered judgment awarding defendants $700,000 in attorney fees.
In this consolidated appeal, Elation challenges (1) the JNOV order; and
(2) the judgment awarding attorney fees to defendants. In the published
portion of this opinion, we conclude the trial court should have awarded
Elation nominal damages on its NDA claim, as defendants’ JNOV motion did
not challenge the jury’s finding that Shi breached the NDA. In the
unpublished portion, we conclude that substantial evidence did not support
the jury’s finding in Elation’s favor on its Settlement Agreement claim, and
that section 1717 applies to the claims and cross-claims on the Settlement
Agreement, but does not apply to Elation’s NDA claim.
Accordingly, we affirm the order granting JNOV as to Elation’s
Settlement Agreement claim but reverse the order granting JNOV as to
Elation’s NDA claim. We also vacate the award of attorney fees. The matter
is remanded to the trial court for further proceedings.
1 Further statutory references are to the Civil Code.
2
FACTUAL AND PROCEDURAL BACKGROUND 2
Shi is a software developer who was employed at Elation from 2005 to
2011. His duties included building its “Labor Compliance Program” (LCP)
software during the early stages and adding new features as its client base
expanded. According to Elation, LCP software helps to automate reporting,
monitoring, and compliance with federal and state-specific prevailing wage
laws for public works projects.
A. Nondisclosure and Confidentiality Agreement
As part of his employment at Elation, Shi signed a NDA. Under
paragraph 3 of the NDA, Shi agreed “to hold all Confidential Information in
strict confidence and secrecy and not to disclose to others or to use” the
information, and to make “no copies of Confidential Information” except upon
Elation’s written authorization. Paragraph 5 of the NDA provided that all
copies of such information must be returned upon Elation’s request. The
NDA also provided: “The parties acknowledge and agree that a breach of the
provisions of Paragraphs 3 and 5 of this agreement would cause the other
party to suffer irreparable damage and could not be adequately remedied by
an action of law. Accordingly, the parties agree that either party shall have
the right to seek specific performance of the provisions in Paragraph 3 to
enjoin a breach or attempted breach of the provision thereof, such right being
in addition to all other rights and remedies that are available to the parties
at law, in equity, or otherwise.” The NDA did not contain an attorney fee
provision.
2 We focus our attention on the evidence and factual background
relevant to Elation’s claims regarding the sufficiency of evidence on its breach
of contract claims and the award of attorney fees.
3
In April 2011, Shi left his employment at Elation and formed a
business entity called Efen Bridge.
B. Prior Action, Settlement Agreement, and Stipulated
Injunction
In August 2011, Elation sued Shi and Efen Bridge (Alameda County
Super. Ct. case no. RG11593133), alleging that Efen Bridge was attempting
to market software products that were substantially similar, if not identical,
to those that were developed, marketed, and sold by Elation. It also alleged
that before leaving Elation, Shi replicated its source code on his company-
issued laptop and then transferred it using a “Universal Serial Bus” (USB)
drive and/or a file transfer protocol program.
Shortly thereafter, the parties entered into the Settlement Agreement
to resolve the lawsuit. The Settlement Agreement set forth a three-part
process for inspection of Efen Bridge’s LCP. First, Elation would review Efen
Bridge’s LCP as it existed at the time of settlement. If Elation identified any
of its alleged trade secrets or confidential information, Efen Bridge could not
use that LCP but could create a new LCP from scratch. The Settlement
Agreement specified: “It shall not constitute a breach of this agreement if as
a result of this inspection process Elation contends that Defendants’ LCP
includes any of Elation’s alleged source code or confidential and proprietary
trade secrets or business information.” Instead, Elation would keep a copy of
Efen Bridge’s original LCP on a USB drive, and Efen Bridge and Shi would
be required to “delete or destroy all copies” of its original LCP within one day
after the inspection.
Second, Elation would be permitted to re-inspect Efen Bridge’s LCP
once it was completed “to the level of” the original version. Third, upon Efen
Bridge’s notice of its first sale of the new LCP product to a customer, Elation
would be permitted to compare “Defendants’ then-working LCP product with
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the archived product stored in confidence with Elation’s attorney” on the USB
drive. The Settlement Agreement again specified: “It shall not constitute a
breach of this agreement if as a result of this inspection process Elation
contends that Defendants’ LCP includes any of Elation’s alleged source code
or confidential and proprietary trade secrets or business information.” Efen
Bridge and Shi were required to “delete or destroy” any confidential
information or code obtained from Elation by September 26, 2011.
The Settlement Agreement also provided: “Unless otherwise
specifically provided for herein, each Party shall be solely responsible for its
own costs and legal expenses in connection with the Lawsuit, and any costs
or claimed damages allegedly incurred in connection with the transactions
and occurrences that are the subject of the Lawsuit, including without
limitation any costs or claimed damages incurred before or after
commencement of the Lawsuit. Each party shall be solely responsible for its
own costs and legal expenses incurred in connection with the dismissal of the
Lawsuit, and the negotiation, execution and performance of this Settlement
Agreement.”
The Settlement Agreement stated that it “constitutes the entire
agreement of the Parties with respect to the subject matters referred to
herein” and “supersedes” prior agreements, “all of which have become merged
and finally integrated into this Settlement Agreement; provided, however,
that this Settlement Agreement does not supersede the terms of the
Nondisclosure and Confidentiality Agreement, dated November 2, 2005,
between Plaintiff and Defendant Shi, a copy of which is appended hereto as
Exhibit C.” (Emphasis in original.) It also included a mutual release
provision, which discharged “Defendants’ predecessors, successors,
5
assigns . . . from claims . . . arising out of or relating to the transactions or
occurrences alleged in the Lawsuit[.]”
Finally, the Settlement Agreement provided that Efen Bridge and Shi
would stipulate to the entry of an injunction “held by counsel for Elation and
not filed unless and until there is a default in the obligations” outlined in the
Settlement Agreement. The stipulated judgment and injunction (Stipulated
Injunction) was attached as Exhibit B to the Settlement Agreement and
provided that Efen Bridge and Shi would be enjoined from keeping, using,
disclosing, or misappropriating Elation’s alleged trade secrets. It also
provided that Efen Bridge and Shi would be enjoined from keeping, using,
disclosing, or misappropriating Elation’s alleged confidential and proprietary
information “in breach of Defendant Shi’s Nondisclosure and Confidentiality
Agreement, dated November 2, 2005.”
Unlike the NDA and the Settlement Agreement proper, the Stipulated
Injunction contained a provision for attorney fee shifting. Specifically, the
Stipulated Injunction provided that upon default of their obligations,
“Defendants agree to pay Elation all costs, including without limitation
attorneys’ fees, incurred by Elation in connection with entry and enforcement
of this Stipulated Injunction, including without limitation all costs, attorneys’
fees and expenses incurred by Elation in connection with any bankruptcy,
reorganization, arrangement or other similar proceedings involving
Defendant Shi or Efen Bridge which may in any way affect the exercise by
Elation of its rights and remedies hereunder. Any and all costs and
attorneys’ fees incurred by Elation in any action undertaken to obtain relief
from the stay of bankruptcy statutes are specifically included in those costs
and expenses to be paid by Defendant Shi or Efen Bridge pursuant hereto.”
6
C. Complaint and Cross-Complaint in This Action
Several years after the Settlement Agreement was executed, Elation
sued Shi and Fenn Bridge, a successor entity to Efen Bridge. Elation’s
operative complaint asserted four causes of action: (1) breach of the NDA
(against Shi only); (2) breach of the Settlement Agreement; (3) violation of the
California Uniform Trade Secrets Act (against Fenn Bridge only) (§ 3426, et
seq.); and (4) declaratory relief. The Settlement Agreement, including its
exhibits, was attached to the complaint.
Elation alleged that in October 2011, it conducted the first inspection
contemplated by the Settlement Agreement and identified instances where
Shi had copied Elation’s software. Accordingly, Fenn Bridge and Shi were
obligated to destroy any and all copies of their original LCP and start again
from scratch. Upon notice that Fenn Bridge had rebuilt its LCP, however,
Elation declined its option to conduct the second inspection. Then, in
January 2015, Fenn Bridge provided notice of its first customer sale,
triggering the option for Elation to conduct the third inspection. The parties,
however, disagreed about what was required for this inspection: Fenn Bridge
stated it would provide a copy of its LCP on a laptop, but Elation wanted “an
actual working version of its product that is being implemented with a
customer.”
On the breach of contract and misappropriation claims, Elation alleged
that Shi and Fenn Bridge had retained and used Elation’s confidential
information in violation of the NDA and Settlement Agreement, which Fenn
Bridge then used to market an LCP system. It alleged: “Unless and until it
is enjoined and restrained by order of this Court, Defendant Fenn Bridge will
continue its wrongful conduct in using or disclosing Elation’s trade secrets.
Unless and until enjoined, the Defendant’s wrongful conduct will cause great
7
and irreparable injury to Plaintiff and its business in that it will lose
customers to Defendant.”
Elation also alleged that Shi and Fenn Bridge had breached the
Settlement Agreement by refusing to allow the third inspection of its LCP
product “actually sold to a customer and as being implemented by a
customer.” Elation sought a “judicial determination of its rights and duties”
under the Settlement Agreement, specifically that it was “entitled to inspect
a working copy of Fenn Bridge’s LCP product that was actually sold to and as
it is being implemented by a customer.”
Fenn Bridge and Shi subsequently filed a cross-complaint against
Elation. The operative cross-complaint asserted three causes of action:
(1) breach of the Settlement Agreement; (2) fraud—failure to disclose lost
evidence; and (3) fraud—false promise. Each of the claims was based on the
allegation that Elation had lost “evidence key to performance of the
inspection—the USB drive containing the archived copy of the original Fenn
Bridge software.” It also alleged that Elation had insisted on access to Fenn
Bridge’s customer information for the third inspection, but was not entitled to
such access under the terms of the Settlement Agreement.
The cross-claim for fraud based on failure to disclose was dismissed on
summary judgment. The remaining claims and cross-claims proceeded to
trial.
D. Trial
At trial, Elation’s president was asked what he hoped to achieve out of
the second lawsuit against Shi and Fenn Bridge. He responded: “Stop it.
That’s all. Stop it. Make sure you’re not using our trade secrets. Because it’s
a Settlement Agreement. It’s a signed contract. And all the terms and
8
conditions needs [sic] to be followed through. And just make sure we enforce
that.”
Elation’s former counsel, who had negotiated the Settlement
Agreement, was asked what had been important to Elation to achieve from
the Settlement Agreement. He responded: “Well, it was important to get
Efen Bridge and Joe Shi to stop using the trade secrets. And for Elation to be
able to assure itself down the road that, if Efen Bridge developed another
labor compliance program, developed more software that it wanted to sell,
that Elation would be given the right to inspect that software to see if it still
included any of Elation’s secrets.” An email from Shi’s former counsel to
Elation’s former counsel was admitted into evidence, which attached a
redlined draft of the Settlement Agreement. The email stated that Shi’s
former counsel had made revisions “just to make it clear that the purpose of
the agreement is to allow Elation to inspect Efen’s current LCP (paragraph 1)
and later versions of its LCP (paragraphs 4 and 6), so that Efen can create a
new LCP which does not contain Elation’s alleged trade secrets.” The redline
added the provisions to the Settlement Agreement that “[i]t shall not
constitute a breach of this agreement if Elation contends that Defendants’
LCP includes any of Elation’s alleged source code or confidential and
proprietary trade secrets or business information.”
Elation’s former counsel also testified that the USB drive containing
the archived copy of Efen Bridge’s original LCP had been lost when he
“moved offices from One Lombard to 555 Montgomery.” A letter dated
December 19, 2014 and signed by Elation’s former counsel was admitted into
evidence. The letterhead reflected the 555 Montgomery address.
Elation’s expert witness testified that he conducted a comparison of
Elation’s LCP system with Fenn Bridge’s source code produced in the
9
litigation. He concluded that several of Elation’s trade secrets had been
misappropriated, and that 30-31 database tables in Fenn Bridge’s code
appeared to be “derived from the Elation tables,” with similar misspellings
and use of “awkward” field names that indicated copying.
Shi testified there were 353 tables in his database. He stated it was
“possible” that certain tables matched with Elation tables because he created
Elation’s tables when he worked there, and because both systems used
standardized forms from government agencies.
Shi also testified regarding various government contracts that Elation
had when he worked there, including a contract with the City of Richmond.
The parties stipulated to the following facts: in 2013, Anovo Systems, LLC
won a bid to provide the City of Richmond with labor compliance software
and services. Elation had also bid on the project. Anovo Systems, LLC did
not use Fenn Bridge or Shi’s software in the initial bid, but subsequently
entered into contracts with Fenn Bridge to carry out the project and used its
software for the project starting in 2015. By 2018, Anovo Systems, LLC had
paid Fenn Bridge $82,433.35 for work done on the City of Richmond project.
During trial, Elation admitted to liability on the cross-claim for breach
of the Settlement Agreement based on its loss of the USB drive, and
stipulated to $10,000 in liquidated damages. At the end of trial, the trial
court granted Elation’s motion for nonsuit on the cross-claim for fraud based
on false promise.
In its closing argument, Elation described what it was seeking in the
case as “modest.” Elation’s counsel explained: “The most important part of
what we are seeking here is a judgment that Joe Shi had breached the
settlement agreement so that we can seek an injunction with the court to
stop it, to stop him from using our trade secrets.”
10
Counsel then reviewed the elements for Elation’s two contract claims.
On the NDA claim, counsel argued that Shi had breached the contract
because “he disclosed and used Elation’s confidential information” and that
Elation was entitled to damages because “but for Joe Shi’s breach of the
nondisclosure agreement and use of our confidential information, Elation
would have received the profits on the Richmond project that Joe did.” On
the Settlement Agreement claim, counsel noted that the verdict form asked
the jury to decide whether Fenn Bridge and Shi had breached the contract
because (1) they did something that the contract prohibited them from doing;
or (2) they failed to do something that the contract required them to do.
Counsel stated: “I guess you could really answer this either way. He failed
to delete this code. He prohibited from using (sic) our confidential
information. And it required him to submit to the inspection procedure. So
he both failed to do something and did something he wasn’t supposed to do.”
Counsel stated that Elation was seeking $40,000 for breach of the Settlement
Agreement, “one for each trade secret misappropriated and the $10,000 per
violation. That’s all we’re seeking here.” He continued: “The most important
thing is that we stop him. We are not seeking obscene amounts of money.”
E. Verdict
On Elation’s NDA claim, the jury returned a verdict that Shi had
breached the contract and harmed Elation, but initially awarded zero
damages. After receiving additional instructions on damages, including an
instruction on nominal damages, the jury awarded Elation $10,000. On
Elation’s Settlement Agreement claim, the jury found that defendants had
each breached one obligation under the Settlement Agreement by failing to
do something it was required to do, but also found that Elation was not
harmed by their breaches. The verdict form also included a supplemental
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question: “Is the act by Tiebiao Shi that you find to have been a breach of the
2005 contract [i.e., the NDA] the same act by Tiebiao Shi that you find to
have been a breach of the 2011 contract [i.e., the Settlement Agreement]?”
The jury answered, “No.”
On the trade secrets claim, the jury did not reach the question of
misappropriation because it found that Fenn Bridge was a successor in
interest to Efen Bridge. 3
F. Posttrial Motions
Following the jury verdict, Elation filed a motion for permanent
injunctive and other relief. Elation argued that the conditions for entry of the
parties’ Stipulated Injunction, which had been attached to the Settlement
Agreement, were met because the jury had determined that Shi violated his
NDA obligations and both defendants defaulted on their Settlement
Agreement obligations. Based on the evidence at trial, Elation also argued
that Fenn Bridge and Shi still possessed Elation’s confidential information,
and thus “[n]othing short of injunctive relief can protect Elation’s interest.”
Fenn Bridge and Shi then filed a JNOV motion challenging (1) the
jury’s findings of harm and damages on Elation’s NDA claim; and (2) the
jury’s finding of breach on Elation’s Settlement Agreement claim. The trial
court granted the JNOV motion, and accordingly denied Elation’s permanent
injunction motion. On the NDA claim, the court found there was no evidence
showing that, “if not for Defendant’s misappropriation, Plaintiff would have
3 Elation’s operative complaint asserted four causes of action: (1) breach
of the NDA (against Shi only); (2) breach of the Settlement Agreement
(against Shi and Fenn Bridge, a successor entity to Efen Bridge); (3) violation
of the California Uniform Trade Secrets Act (against Fenn Bridge only)
(§ 3426, et seq.); and (4) declaratory relief. As a successor in interest, Fenn
Bridge was covered by the mutual release in the Settlement Agreement.
12
been awarded any contract or made any additional profits. Contrary to
Plaintiff’s argument in opposition, a jury finding that the City of Richmond
would have continued to use Plaintiff’s software would rest on nothing but
speculation.” It also found there was no evidence supporting the $10,000
damages award. On the Settlement Agreement claim, the court found that
Elation had “stipulated to its own prior breach” consisting of Elation’s loss of
the USB drive containing Efen Bridge’s original LCP, which was the
“exclusive version against which Defendants’ code could be compared for any
future claims of misappropriation” and that “[t]he promise to maintain the
USB drive was a material term of the 2011 settlement—without the drive,
the parties’ agreed regime for adjudicating future claims of misappropriation
became impossible.”
Fenn Bridge and Shi subsequently filed a motion for $718,778.85 in
attorney fees pursuant to section 1717 and the attorney fee provision in the
Stipulated Injunction. The court determined that Fenn Bridge and Shi were
the prevailing parties on both the complaint and the cross-complaint, and
that section 1717 was applicable as the fees “were incurred in defending
against Elation’s attempt to enforce the stipulated judgment which was part
of the 2011 settlement agreement.” Finding that “[a]ll causes of action in the
complaint were in actuality different legal theories directed to Elation’s
singular request to enforce the settlement agreement,” the court entered
judgment awarding Fenn Bridge and Shi $700,000 in attorney fees.
DISCUSSION
A. JNOV
A motion for JNOV “may be granted only if it appears from the
evidence, viewed in the light most favorable to the party securing the verdict,
that there is no substantial evidence in support.” (Sweatman v. Department
13
of Veterans Affairs (2001) 25 Cal.4th 62, 68.) “ ‘Substantial evidence means
such evidence as a reasonable fact trier might accept as adequate to support
a conclusion; evidence which has ponderable legal significance, which is
reasonable in nature, credible and of solid value.’ ” (Jimenez v. Pacific
Western Construction Co. (1986) 185 Cal.App.3d 102, 111–112.) In deciding
whether to grant the motion, the trial court does not weigh the evidence or
assess witness credibility. (Hansen v. Sunnyside Products, Inc. (1997) 55
Cal.App.4th 1497, 1510.) “On appeal, we determine de novo whether there is
substantial evidence to support the verdict and whether the moving party is
entitled to judgment in its favor as a matter of law.” (Paykar Construction,
Inc. v. Spilat Construction Corp. (2001) 92 Cal.App.4th 488, 494.)
Here, Elation argues that the trial court improperly granted JNOV on
its two contractual claims—breach of the NDA and breach of the Settlement
Agreement. We address each claim in turn.
1. Breach of the NDA
Elation argues the trial court erred in granting JNOV as to its claim for
breach of the NDA for two reasons. First, Elation contends the jury’s finding
on harm and award of damages were supported by substantial evidence that
Elation “would have retained or regained the contract with the City of
Richmond but for Appellee Shi’s breach of his 2005 Nondisclosure
Agreement.” We are not persuaded.
“Lost profits to an established business may be recovered if their extent
and occurrence can be ascertained with reasonable certainty; once their
existence has been so established, recovery will not be denied because the
amount cannot be shown with mathematical precision.” (Berge v.
International Harvester Co. (1983) 142 Cal.App.3d 152, 161–162.) In this
regard, the plaintiff must demonstrate “a reasonable probability that profits
14
would have been earned except for the defendant’s conduct” and “has the
burden to produce the best evidence available in the circumstances to
attempt to establish a claim for loss of profits.” (S.C. Anderson, Inc. v. Bank
of America (1994) 24 Cal.App.4th 529, 536 (S.C. Anderson).)
To establish its claim for lost profits, Elation relied on the parties’
stipulation that in 2013, Anovo Systems, LLC (Anovo) won a bid to provide
the City of Richmond with software and services; that Elation had also bid on
the project; that Anovo did not use defendants’ software in the initial bid, but
subsequently entered into contracts with Fenn Bridge to use its software for
the project starting in 2015; and that by 2018, Anovo had paid Fenn Bridge
$82,433.35 for work done on the project. Notwithstanding these stipulated
facts, Elation failed to present evidence demonstrating that “except for” Shi’s
breach of the NDA, Elation would have received profits from the City of
Richmond project. (S.C. Anderson, supra, 24 Cal.App.4th at p. 536; see also
Brandon & Tibbs v. George Kevorkian Accountancy Corp. (199) 226
Cal.App.3d 442, 457 [“The only prerequisite to recovery of lost profits is
proximate causation: the lost profits must be the natural and direct
consequences of the breach”].)
Significantly, Anovo won the initial bid for the project without Fenn
Bridge or Shi’s software. While Anovo eventually used the Fenn Bridge
software for the project, there was no evidence showing that Anovo would
have been unable to continue servicing the project without Elation’s
confidential information purportedly contained in the software. Moreover,
there was no evidence that Elation would have “regained” the City contract
had Anovo been unable to perform. Although “anticipated profits dependent
upon future events are allowed where their nature and occurrence can be
shown by evidence of reasonable reliability” (Grupe v. Glick (1945) 26 Cal.2d
15680, 693), the evidence that Elation did some unidentified prior work for the
City and had bid on the project did not demonstrate with “reasonable
reliability” that the City would have gone back to Elation to complete the
project. (Ibid.) In sum, there was insufficient evidence to support the jury’s
finding on harm. 4
Second, Elation contends that even if the jury’s findings on harm and
damages were not supported by substantial evidence, the jury’s finding on
breach—which defendants did not challenge in their JNOV motion—entitled
Elation to nominal damages. Indeed, Elation raised the prospect of nominal
damages when the jury returned its initial verdict finding breach but
awarding zero damages. The trial court then instructed the jury on nominal
damages.
We agree the trial court should have awarded nominal damages in light
of the jury’s unchallenged finding of breach. Section 3360 provides: “When a
breach of duty has caused no appreciable detriment to the party affected, he
may yet recover nominal damages.” California courts have applied section
3360 to conclude that “[a] plaintiff is entitled to recover nominal damages for
the breach of a contract, despite inability to show that actual damage was
inflicted upon him.” (Sweet v. Johnson (1959) 169 Cal.App.2d 630, 632
(Sweet).) Nominal damages may be properly awarded for the violation of a
contractual right because “failure to perform a contractual duty is, in itself, a
legal wrong that is fully distinct from the actual damages.” (Ibid.)
In arguing to the contrary, defendants rely on federal cases concluding
that breach of contract claims are not actionable in California without a
showing of appreciable and actual damage. In particular, they cite Ruiz v.
4 Given our conclusion, we need not address the claimed propriety of the
jury’s $10,000 damages award based on its finding of harm.
16
Gap, Inc. (9th Cir. 2010) 380 Fed.Appx. 689, 692 (Ruiz), which in turn relied
on Aguilera v. Pirelli Armstrong Tire Corp. (9th Cir. 2000) 223 F.3d 1010(Aguilera). These federal authorities are not controlling (see Carter v.
California Dept. of Veterans Affairs (2006) 38 Cal.4th 914, 930, fn. 8), and for
the reasons below they do not alter our conclusion.
In Ruiz, supra, 380 Fed.Appx. 689, the plaintiff argued that the district
court erred in granting summary judgment on his breach of contract claim for
failure to show actual and appreciable damage. (Id. at p. 691.) While
referring to Sweet, supra, 169 Cal.App.2d 630, and acknowledging its holding
that “nominal damages are presumed as a matter of law to stem merely from
the breach of a contract,” the Ninth Circuit ultimately concluded it was
bound by Aguilera’s holding to the contrary. (Ruiz, at p. 692.)
In Aguilera, supra, 223 F.3d 1010, the plaintiffs claimed they were
actually damaged by the defendants’ breach of certain employment contracts
and were injured by “ ‘fear of future layoff.’ ” (Id. at pp. 1014–1015.)
Aguilera concluded the plaintiffs had not shown they suffered a legally
cognizable harm (id. at p. 1015) and affirmed the district court’s grant of
summary judgment (id. at p. 1020). In determining that “[u]nder California
law, a breach of contract claim requires a showing of appreciable and actual
damage,” Aguilera relied on two California decisions: Buttram v. Owens–
Corning Fiberglas Corp. (1997) 16 Cal.4th 520 (Buttram) and Patent
Scaffolding Co. v. William Simpson Const. Co. (1967) 256 Cal.App.2d 506,
511 (Patent Scaffolding). (Aguilera, at p. 1015.) But neither Buttram nor
Patent Scaffolding supports Aguilera’s conclusion on the point.
Significantly, Buttram involved a tort action where the defendant
sought to limit its liability under certain tort reform measures after the
plaintiff had won a products liability judgment for exposure to the
17
defendant’s asbestos-containing products. (Buttram, supra, 16 Cal.4th at
p. 524.) In concluding that the applicability of the reform measures depended
on the accrual date of the plaintiff’s cause of action for damages arising from
a latent and progressive disease, Buttram observed that “[i]n California,
harm or injury to the plaintiff is an essential element of a ripe cause of action
in negligence or strict liability.” (Id. at p. 531, fn. 4.) Inasmuch as Buttram
was clearly articulating settled principles of actionable harm in the tort
context (see Budd v. Nixen (1971) 6 Cal.3d 195, 200), the decision provides no
meaningful support for Aguilera’s understanding and purported application
of California contract law. (See Aguilera, supra, 223 F.3d at p. 1015.) As
explained, breach of a contractual duty “is, in itself, a legal wrong that is fully
distinct from the actual damages” and nominal damages may be recoverable
for such breach. (Sweet, supra, 169 Cal.App.2d at p. 632; § 3360.)
Aguilera’s reliance on Patent Scaffolding does not fare materially
better. Patent Scaffolding was a subrogation case in which three insurers
compensated their insured subcontractor for a construction site fire loss and
thereafter brought a breach of contract claim in the subcontractor’s name
against the general contractor. (Patent Scaffolding, supra, 256 Cal.App.2d at
pp. 507–508.) As relevant here, Patent Scaffolding focused on the
circumstances that the subcontractor had been fully compensated for its fire
loss and that any payment of insurance premiums was not incurred as a
result of the breach. (Id. at p. 511.) Because the subcontractor “suffered no
uncompensated detriment caused by [the general contractor’s] breach of
contract” and could not have successfully sued the general contractor, the
court concluded the insurers’ breach of contract claim was not actionable.
(Ibid.)
18
Notably, neither Aguilera nor Patent Scaffolding considered the
availability of nominal damages in the absence of actual damage. Rather,
Aguilera examined the requisite showing for actual damages with respect to
determining breach, while Patent Scaffolding examined the requisite causal
connection between breach and actual damages. (Aguilera, supra, 223 F.3d
at p. 1015; Patent Scaffolding, supra, 256 Cal.App.2d at p. 511.) Accordingly,
we follow California law as provided in section 3360 and Sweet, supra, 169
Cal.App.2d 630, and do not find Aguilera or Ruiz persuasive on the point.
Moreover, we conclude that the failure to award nominal damages here
is sufficient grounds for reversal of the judgment. Such an error is reversible
where nominal damages would provide an “absolute entitlement to costs” or
“determine some question of permanent right.” (Staples v. Hoefke (1987) 189
Cal.App.3d 1397, 1406.) Here, Elation concedes that a nominal damages
award would only give rise to a discretionary award of costs. (Code Civ. Proc.
§§ 1032, subd. (a)(4) & 1033, subd. (a).) But the nominal damages award,
coupled with the jury’s finding on breach of the NDA, could affect Elation’s
rights under the NDA to equitable relief. As detailed above, the NDA
provided that “either party shall have the right to seek specific performance
of the provisions in Paragraph 3 to enjoin a breach or attempted breach of the
provision thereof, such right being in addition to all other rights and
remedies that are available to the parties at law, in equity, or otherwise.”
In sum, we conclude that the trial court erred in granting JNOV on
Elation’s NDA claim. While the court correctly concluded that substantial
evidence did not support the jury’s finding of harm or $10,000 in damages for
that harm, it should have awarded Elation nominal damages on this cause of
action. We thus reverse the JNOV order as to Elation’s cause of action
against Shi for breach of the NDA. Given our conclusion, we also grant
19
Elation’s request for remand to reconsider its motion for permanent
injunctive and other relief.
2. Breach of Settlement Agreement
Elation argues the trial court erred in granting JNOV on its Settlement
Agreement claim because substantial evidence supported the jury’s liability
finding. The verdict form did not ask the jury to identify the specific breach
giving rise to its finding of liability. Elation claims, however, that substantial
evidence supports the finding under any of the three possible theories of
breach: (1) failure to delete or destroy Elation’s confidential information and
code by September 26, 2011; (2) failure to delete or destroy defendants’
original LCP within one day after the first inspection; and (3) failure to
submit to the third inspection.
As to the first two theories on failure to delete or destroy, Elation
contends that these theories support the jury’s finding because its loss of the
USB drive was not material to these breaches and its claim as to these
breaches could be adjudicated without the USB drive. We are not persuaded.
As a preliminary matter, we reject Elation’s argument that the trial court
improperly usurped the role of the jury in finding that the loss of the USB
drive was material. “Normally the question of whether a breach of an
obligation is a material breach, so as to excuse performance by the other
party, is a question of fact,” but “ ‘if reasonable minds cannot differ on the
issue of materiality, the issue may be resolved as a matter of law.’ ” (Brown
v. Grimes (2011) 192 Cal.App.4th 265, 277–278.) Here, the jury was not
asked to make any finding of materiality as to Elation’s breach.
Nevertheless, we conclude the trial court’s finding on materiality was proper
because reasonable minds could not differ on the issue. (Brown v. Grimes,
supra, 192 Cal.App.4th at p. 278.)
20
The Settlement Agreement created an iterative process by which
defendants could develop new versions of their LCP that did not contain any
of Elation’s code. Evidence and testimony from counsel who negotiated the
Settlement Agreement confirmed that was the agreement’s purpose.
Specifically, the agreement defined a method for determining whether
defendants had made a new version free of Elation’s code, i.e., by
“compar[ing] Defendants’ then-working LCP product with the archived
product stored in confidence with Elation’s attorney[.]”
In order to allow for defendants to continue rebuilding their LCP, the
Settlement Agreement explicitly precluded liability for breach during that
process: “It shall not constitute a breach of this agreement if as a result of
this inspection process Elation contends that Defendants’ LCP includes any
of Elation’s alleged source code or confidential and proprietary trade secrets
or business information.” Defendants’ obligations to delete or destroy code
fell within this iterative process and its related protections against breach
while the process was still underway. Moreover, Elation was unable to
independently prove any breach of these obligations. Instead, Elation asked
the jury to infer such breaches based on evidence of the very fact that was to
be determined exclusively by the inspection process: defendants’ continued
use of Elation code in their LCP.
Elation did not dispute it had lost the USB drive, thus breaching its
obligation under the Settlement Agreement to hold the drive in confidence.
“[A] ‘material breach’ is a failure to do something that is so fundamental to a
contract that the failure to perform that obligation defeats the essential
purpose of the contract or makes it impossible for the other party to perform
under the contract.” (23 Williston on Contracts (4th ed. 1990 & 2021 supp.) §
63:3.) Elation’s loss of the drive was material because it rendered the
21
completion of the inspection process, as specifically set forth in the
Settlement Agreement, impossible.
Nor are we persuaded that Elation was able to present evidence of
these breaches through its expert testimony comparing Elation’s LCP with
Fenn Bridge’s litigation produced source code. As the trial court explained,
the original code archived on the USB drive was the “exclusive version”
against which defendants’ subsequent LCP could be compared. Elation’s
ability to conduct some sort of a code comparison under a different process
not contemplated by the Settlement Agreement may have helped to establish
its claim for breach of the NDA but did not absolve its breach of the
Settlement Agreement.
As to the third theory, Elation contends defendants’ failure to submit to
the third inspection also supports the jury’s finding because there is
substantial evidence the failure occurred before Elation lost the USB drive.
We disagree. Here, the evidence showed that Fenn Bridge provided notice of
its first customer sale on January 6, 2015, which triggered the option for
Elation to conduct the third inspection. Elation’s former counsel testified
that the USB drive had been lost when he “moved offices from One Lombard
to 555 Montgomery.” A letter dated December 19, 2014 and signed by
Elation’s former counsel included the new 555 Montgomery address. The
only reasonable conclusion to be drawn from this evidence was that Elation
lost the USB drive before Fenn Bridge and Shi were obligated to submit to
the third inspection. 5 We similarly reject Elation’s claims that the loss of the
5 Elation argues that Fenn Bridge and Shi provided notice of its first sale
“[o]n or about December 19, 2014.” As a preliminary matter, the evidence
shows that Elation explicitly rejected an attempt to provide notice on that
date, and instead accepted the notice provided on January 6, 2015.
22
drive was not material to this alleged breach because, as described above, the
Settlement Agreement provided that the USB drive was the exclusive means
for comparison of defendants’ new LCP at the third inspection.
In sum, we conclude the trial court did not err in granting JNOV on
Elation’s cause of action for breach of the Settlement Agreement.
B. Attorney Fees Award
Elation argues the trial court erred in awarding attorney fees to Fenn
Bridge and Shi because the requirements for section 1717, allowing the one-
way attorney fee provision in the Stipulated Injunction to be applied
reciprocally to Fenn Bridge and Shi, were not met here. Elation additionally
argues that even if the requirements were met, the claims in this action do
not fall within the scope of the attorney fee provision. In any event, Elation
contends, section 1717 does not apply to certain claims between the parties,
and so those fees should have been apportioned out of the award. We address
each argument in turn.
1. Section 1717
Elation contends the attorney fees award must be reversed because the
requirements of section 1717 were not met.
“ ‘On review of an award of attorney fees after trial, the normal
standard of review is abuse of discretion. However, de novo review of such a
trial court order is warranted where the determination of whether the
criteria for an award of attorney fees and costs in this context have been
satisfied amounts to statutory construction and a question of law.’ ”
(Connerly v. State Personnel Bd. (2006) 37 Cal.4th 1169, 1175.) As we must
Regardless, even if notice was provided on December 19, 2014, the letterhead
from Elation’s counsel shows he had already moved offices by that date.
23
decide whether section 1717’s requirements were satisfied here, our review is
de novo.
Section 1717, subdivision (a), provides: “In any action on a contract,
where the contract specifically provides that attorney’s fees and costs, which
are incurred to enforce that contract, shall be awarded either to one of the
parties or to the prevailing party, then the party who is determined to be the
party prevailing on the contract, whether he or she is the party specified in
the contract or not, shall be entitled to reasonable attorney’s fees in addition
to other costs.” This statute has been interpreted to ensure “full mutuality of
remedy” for attorney fee claims, meaning that a party is entitled to fees
“ ‘even when the party prevails on grounds the contract is inapplicable,
invalid, unenforceable or nonexistent, if the other party would have been
entitled to attorney’s fees had it prevailed.’ ” (Hsu v. Abbara (1995) 9 Cal.4th
863, 870.)
Section 1717 sets forth three requirements for its application: (1) the
contract must “specifically provide[]” for attorney fees incurred to enforce
that contract; (2) the action must be “on” the contract; and (3) there must be a
“prevailing party” on the contract. (§ 1717, subd. (a).) Here, Elation
challenges only the second requirement, i.e., whether the action is “on” the
contract. Elation presents two arguments as to why the requirement is not
met here.
First, Elation contends that its action was not “on” the Stipulated
Injunction because its two contractual claims—breach of the NDA and breach
of the Settlement Agreement—did not seek to enforce the Stipulated
Injunction. For the purposes of section 1717, a cause of action is “on a
contract” if it “ ‘involves’ ” the contract, in the sense that it “arises out of, is
based upon, or relates to an agreement by seeking to define or interpret its
24
terms or to determine or enforce a party’s rights or duties under the
agreement.” (Douglas E. Barnhart, Inc. v. CMC Fabricators, Inc. (2012) 211
Cal.App.4th 230, 242 (Barnhart).)
We agree with Elation that its NDA claim was not “on” a contract that
provided for fees because it sought to enforce Elation’s rights under the NDA
for injunctive relief. The NDA did not contain an attorney fee provision, and
the Settlement Agreement was explicit that it “does not supersede the terms
of the Nondisclosure and Confidentiality Agreement.”
We reach a different conclusion, however, regarding Elation’s
Settlement Agreement claim. Elation argues the fee provision in the
Stipulated Injunction does not apply to this claim because the Stipulated
Injunction was a “separate” document that should not have been construed as
“part of” the Settlement Agreement. We disagree. “In determining whether
a contract contains an applicable attorney fees provision, courts have
‘construe[d] together several documents concerning the same subject and
made as part of the same transaction [citations] even though the documents
were not executed contemporaneously [citation] and do not refer to each
other.’ ” (Mountain Air Enterprises, LLC v. Sundowner Towers, 3 Cal.5th
744, 759 (Mountain Air).) As section 1642 provides: “Several contracts
relating to the same matters, between the same parties, and made as parts of
substantially one transaction, are to be taken together.”
Here, the Settlement Agreement and Stipulated Injunction were
executed contemporaneously as part of the same transaction to resolve the
original lawsuit. The Settlement Agreement not only attached the Stipulated
Injunction as an exhibit, but explicitly incorporated its terms, i.e., Fenn
Bridge and Shi agreed to stipulate to the entry of the Stipulated Injunction
upon “default [in the] obligations” of the Settlement Agreement. The
25
Stipulated Injunction similarly provided that its entry was based on “that
certain contemporaneously executed” Settlement Agreement. Given this
language and structure, the trial court properly construed the Stipulated
Injunction as “part of” the Settlement Agreement in determining the
applicability of section 1717. Accordingly, Elation’s Settlement Agreement
claim was “on” the contract for the purposes of section 1717.
In sum, the trial court did not err in determining that the requirements
of section 1717 were met and the attorney fee provision in the Stipulated
Injunction could be applied reciprocally to Fenn Bridge and Shi.
2. Scope of the Attorney Fee Provision
Elation argues next that, even if the section 1717 requirements were
met, its Settlement Agreement claim does not fall within the scope of the
attorney fee provision in the Stipulated Injunction. 6 We review the issue de
novo. (Barnhart, supra, 211 Cal.App.4th at p. 237 [“ ‘On appeal this court
reviews a determination of the legal basis for an award of attorney fees de
novo as a question of law’ ”].)
The Stipulated Injunction provides for recovery of attorney fees
incurred “ ‘in connection with entry and enforcement of’ ” its terms. Relying
on Mountain Air, supra, 3 Cal.5th 744, Elation argues its Settlement
Agreement claim is not covered by the plain language of that provision. In
6 Despite our conclusion that the trial court properly construed the
Stipulated Injunction as part of the Settlement Agreement, we agree with
Elation that we still must decide whether its Settlement Agreement claim
falls within the scope of the attorney fee provision. Section 1717, subdivision
(a), requires an attorney fee provision to “be construed as applying to the
entire contract, unless each party was represented by counsel in the
negotiation and execution of the contract, and the fact of that representation
is specified in the contract.” (Emphasis added.) That rule does not apply
here, as the parties were represented by counsel and that representation was
recited in the Settlement Agreement.
26
Mountain Air, the seller in a real estate purchase transaction sued the buyers
for breach of a repurchase agreement. (Id. at pp. 748–749.) The buyers
asserted an affirmative defense of novation, arguing that the repurchase
agreement had been superseded by the parties’ option agreement, which
provided for attorney fees incurred “ ‘because of an alleged dispute, breach,
default, or misrepresentation in connection with any provision of this
Agreement.’ ” (Id. at p. 749.) Mountain Air looked at the meaning of the
relevant phrases, and explained that the phrase “in connection with” was
broad. (Id. at p. 758.) It then turned to the facts of the case, noting that the
action was not “ ‘brought for the enforcement’ of the option agreement”
because the agreement created only an option, not an obligation, for the
buyers to repurchase the property. (Id. at pp. 757–758.) It concluded,
however, that the action “necessarily implicated” the option agreement
because the parties were forced to litigate the question of which agreement
was controlling, and thus the action was brought “ ‘because of an alleged
dispute . . . in connection with’ the option agreement.” (Id. at pp. 758–759.)
Finally, Mountain Air instructed that “if the facts in future cases warrant it,
courts ‘should consider the pleaded theories of recovery, the theories asserted
and the evidence produced at trial, if any, and also any additional evidence
submitted on the motion in order to identify the legal basis of the prevailing
party’s recovery.’ ” (Id. at pp. 760–761.)
Unlike the situation in Mountain Air, the facts of this case and the
theories asserted at trial demonstrate that Elation brought its Settlement
Agreement claim for the purpose of entering the Stipulated Injunction.
Elation’s president testified that he wanted the lawsuit to “stop” Fenn Bridge
and Shi and “make sure” they were not using Elation’s trade secrets.
Elation’s counsel reiterated that the “most important” purpose of the action
27
was for “judgment that Joe Shi had breached the settlement agreement so
that we can seek an injunction with the court to stop it, to stop him from
using our trade secrets.” Indeed, that is exactly what Elation sought once it
had obtained the jury verdict: It filed a motion for entry of the Stipulated
Injunction. Accordingly, we conclude that Elation’s Settlement Agreement
claim was brought “in connection with entry and enforcement of” the
Stipulated Injunction.
Elation’s remaining arguments do not alter our conclusion. Elation
suggests that the additional phrases in the attorney fee provision related to
bankruptcy reflect an intent to limit fees only for “narrow and specific
activities surrounding the injunction.” We disagree, as the language provides
for fees “in connection with entry and enforcement of this Stipulated
Injunction, including without limitation all costs, attorneys’ fees and
expenses incurred by Elation in connection with any bankruptcy,
reorganization, arrangement or other similar proceedings involving
Defendant Shi or Efen Bridge which may in any way affect the exercise by
Elation of its rights and remedies hereunder.” (Emphasis added.) This
phrasing reinforces applicability of the attorney fee provision here, as Elation
brought the claim to exercise its rights and remedies under the Stipulated
Injunction. (See Jones v. Union Bank of California (2005) 127 Cal.App.4th
542, 544 [explaining that provisions for attorney fees “in connection with”
property and in proceedings “ ‘that in any way affect the exercise by Lender
of its rights and remedies hereunder’ ” were relatively broad and “enforceable
according to their terms”].)
Elation also argues that its Settlement Agreement claim is more
properly considered within the provision that requires each party bear their
own fees “incurred in connection with the dismissal of the Lawsuit, and the
28
negotiation, execution and performance of this Settlement Agreement.”
Specifically, Elation relies on the term “performance” to contend that this
provision covers its “allegation of breach (i.e. non-performance)” of the
Settlement Agreement. Considering the full text of the provision, as well as
“ ‘the circumstances under which [the Settlement Agreement] was made and
the matter to which it relates,’ ” we decline to adopt such an interpretation.
(Mountain Air, supra, 3 Cal.5th at p. 752.) Here, the Settlement Agreement
contemplated the performance of various obligations by the parties, including
not only those related to the inspection process but also the provision of
certain certifications and the payment of fees by Fenn Bridge and Shi before
the closing date. The term “performance” is included with other terms
related to the closing of the Settlement Agreement, including its “negotiation”
and “execution” as well as the resulting dismissal of the lawsuit. There is
nothing to indicate that the parties intended the term to cover a claim to
establish defaults by Fenn Bridge and Shi, particularly given the parties’
assent to the Stipulated Injunction and its provision for attorney fees.
In sum, we conclude that Elation’s Settlement Agreement claim fell
within the scope of the attorney fee provision in the Stipulated Injunction.
3. Apportionment
Finally, Elation argues that even if Fenn Bridge and Shi were entitled
to fees as the prevailing party on the Settlement Agreement claim and cross-
claim, the trial court should have apportioned out fees for the other claims.
“If an action asserts both contract and tort or other noncontract claims,
section 1717 applies only to attorney fees incurred to litigate the contract
claims.” (Santisas v. Goodin (1998) 17 Cal.4th 599, 615.) Accordingly, once a
trial court determines that a party is entitled to attorney fees, it may
apportion fees incurred in the litigation between (1) the claims on the
29
contract providing for attorney fees and (2) the other claims. Apportionment
“rests within the court’s sound discretion.” (Carver v. Chevron U.S.A., Inc.
(2004) 119 Cal.App.4th 498, 505.)
Given our conclusion that section 1717 applies only to the Settlement
Agreement claim and cross-claim, as well as our reversal of the JNOV order
on Elation’s NDA claim and remand for the trial court’s reconsideration of
Elation’s motion for permanent injunctive and other relief, we also remand
for reconsideration of whether and to what extent fees should be apportioned.
DISPOSITION
The order granting JNOV is reversed as to Elation’s cause of action for
breach of the NDA, but affirmed as to Elation’s cause of action for breach of
the Settlement Agreement. We vacate the judgment insofar as it (1) ordered
that Elation recover nothing on its cause of action for breach of the NDA;
(2) entered judgment in favor of Fenn Bridge and Tiebiao Shi on Elation’s
cause of action for breach of the NDA; (3) deemed Fenn Bridge and Tiebiao
Shi as the prevailing parties under section 1717 beyond the claim and cross-
claim for breach of the Settlement Agreement; and (4) awarded Fenn Bridge
and Tiebiao Shi $700,000 in attorney fees. The judgment is otherwise
affirmed.
On remand, the trial court should conduct other proceedings consistent
with the opinion, including but not limited to: (1) reconsideration of Elation’s
motion for permanent injunctive and other relief; and (2) reconsideration of
whether and to what extent fees should be apportioned. Any subsequent
entry of judgment shall include an award of nominal damages to Elation on
its cause of action for breach of the NDA.
The parties shall bear their own costs on appeal. (Cal. Rules of Court,
rule 8.278(a)(5).)
30
_________________________
Fujisaki, J.
WE CONCUR:
_________________________
Tucher, P. J.
_________________________
Chou, J. *
A159749, A160823/Elation Systems, Inc. v. Fenn Bridge
*Judge of the Superior Court of San Mateo County, assigned by the Chief
Justice pursuant to article VI, section 6 of the California Constitution.
31
Elation Systems, Inc. v. Fenn Bridge LLC, et al.
(A159749, A160823)
Trial Court: Alameda County
Trial Judge: Hon. Frank Roesch
Attorneys:
Putterman Yu, Philip J. Wang and Traci M. Keith for
Plaintiff and Appellant.
Vasquez Benisek & Lindgren, Richard C. Vasquez and
Jeffrey T. Lindgren for Defendants and Respondents.
32