Cacique, Inc. v. Robert Reiser & Co., Inc.

• Citation: 169 F.3d 619
• Decision Date: 02 March 1999
• Docket Number: No. 98-55967,98-55967
• Parties: , 99 Cal. Daily Op. Serv. 1554, 1999 Daily Journal D.A.R. 2001 CACIQUE, INC., a California Corporation, Plaintiff-Appellee, v. ROBERT REISER & COMPANY, INC., a Massachusetts Corporation, Defendant-Appellant. Juan Marquez; Marquez Brothers International, Inc., Third Parties-Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 619

169 F.3d 619

49 U.S.P.Q.2d 1997, 99 Cal. Daily Op. Serv. 1554,

1999 Daily Journal D.A.R. 2001

CACIQUE, INC., a California Corporation, Plaintiff-Appellee, v. ROBERT REISER & COMPANY, INC., a Massachusetts Corporation,

Defendant-Appellant.

Juan Marquez; Marquez Brothers International, Inc., Third

Parties-Appellants.

No. 98-55967.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Jan. 7, 1999.

Decided March 2, 1999.

Andrew Z. Schwartz, Claire Laporte, Vickie L. Henry, Foley, Hoag & Eliot, Boston, Massachusetts, Mark H. Epstein, Munger Tolles & Olson, Los Angeles, California, for the defendant-appellant.

Robert Broadbelt, Allan Browne, Browne & Woods, Beverly Hills, California, for the plaintiff-appellee.

Robert C. Danneskiold, Ferrari, Olsen, Ottoboni & Bebb, San Jose, California, David I. Gindler, Irell & Manella LLP, Los Angeles, California, for the third-party-appellants.

Appeal from the United States District Court for the Central District of California; Harry L. Hupp, District Judge, Presiding. D.C. No. CV-96-00188-HLH.

Before: LAY, ^* GOODWIN, and SCHROEDER, Circuit Judges.

GOODWIN, Circuit Judge:

This interlocutory appeal from a civil contempt order tests the ability of a plaintiff to discover a competitor's financial data in an action against a third party for allegedly furnishing the plaintiff's trade secret to the competitor. This action is brought against only the party that allegedly disclosed the trade secret, not the competitor who has been held in contempt. The theory of the complaint apparently is that California's version of the Uniform Trade Secrets Act ("UTSA") authorizes a plaintiff to sue the party who leaked the trade secrets to an unauthorized user for a reasonable royalty based on the earnings of the unauthorized user. It is argued that the financial data is relevant to a determination of the reasonable royalty.

Under the plain language of the California statute and California case law, we hold that a trade secret plaintiff can recover a reasonable royalty only when both actual damages and unjust enrichment are unprovable. Because unjust enrichment is provable in this case, it was error to hold the non-party competitor in contempt for refusing to disclose its sales information to the plaintiff.

I. Procedural Background

Cacique is a leading producer of queso fresco, a fresh, uncultured Hispanic cheese. ¹ Cacique's "Ranchero" brand is the largest selling fixed-weight cheese in Southern California, outselling even Kraft American singles. Cacique's major competitor in the Hispanic cheese market is Marquez Brothers International. Both Cacique and Marquez use "Vemag" brand continuous vacuum extruders sold by Robert Reiser, a vendor of food processing equipment.

Cacique brought a diversity action against Reiser under California's Uniform Trade Secrets Act (Cal. Civ.Code § 3426), common law unfair competition, and statutory unfair competition (Cal. Bus. & Prof.Code §§ 17200 et seq.). Cacique claims to have designed modifications to the Vemag extruder that allow queso fresco to be efficiently formed, portioned, and cut into identical-weight cakes. Cacique argues that the efficient production of identical-weight cakes of queso fresco is of significant advantage in the Hispanic cheese market and that the modifications thus constitute a valuable trade secret. Cacique alleges that after it provided Reiser with access to the trade secret, Reiser sold Vemag equipment embodying the trade secret to Marquez. Reiser's primary defense is that the modifications do not constitute a trade secret. We need not reach, and at this time have no opinion on, the merits of that question.

Reiser has estimated that its profits from the sale of the allegedly infringing Vemag extruders totaled only $20,000-$30,000. Cacique believes, however, that Marquez has been able to increase its cheese production by 50% as a result of Reiser's misappropriation. ² Not surprisingly, Cacique is not satisfied with Reiser's unjust enrichment as its measure of damages. Instead of unjust enrichment, Cacique is seeking a reasonable royalty from Reiser--a reasonable royalty based not on Reiser's limited sales of the infringing equipment, but based on the cheese produced by Reiser's customers, i.e., Cacique's competitors, using the specially modified food extruders. In effect, Cacique is demanding that Reiser compensate it for the profits Cacique's competitors have reaped, presumably at Cacique's expense, as a result of Reiser's misappropriation. ³

In pursuit of its theory of damages, Cacique sought discovery from Marquez, a non-party witness, regarding Marquez' queso fresco pricing, sales volume, and revenue. Cacique argued that the sales information would help the trier of fact assess the impact of the modified Vemag vacuum extruders on Marquez' profitability and, consequently, the reasonable royalty to which Cacique is entitled. Marquez moved for a protective order prohibiting discovery of the confidential sales information on two grounds. First, the sales information Cacique sought is itself a highly confidential trade secret that Marquez is loathe to share with its arch rival. Second, Marquez argued that the sales information was not relevant to an issue in the case because § 3426.3 does not entitle Cacique to a reasonable royalty measure of damages. ⁴ On this latter ground, Reiser filed a motion in limine to exclude the Marquez sales information at trial.

The court rejected Marquez' and Reiser's arguments of irrelevance and accepted Cacique's argument that a reasonable royalty might be the appropriate measure of its damages. Conceding its unfamiliarity with California trade secrets law, the district court stated that an unjust enrichment measure of damages would inadequately compensate Cacique for the misappropriation and analogized to patent law where reasonable royalties are a common measure of damages. The district court thus held that the Marquez sales information was relevant to an issue in the case. The district court responded to Cacique's confidentiality concerns by imposing an "attorney's eyes only" protective order on the sales information.

In order to appeal the district court's ruling, Marquez refused to comply with the subpoena. The district court held Marquez and Juan Marquez, an employee of Marquez, in contempt. The district court awarded $4400 in attorney's fees but stayed payment pending appeal. Due to the pendency of this appeal, the district court ordered the trial bifurcated into liability and damages phases. The district court decided that the Marquez sales information was not relevant to liability, so the liability phase could proceed despite this appeal. The damages phase will not proceed until this court rules on the duty of Marquez to supply the requested financial data.

In this appeal, Marquez and Reiser argue that district court erred because, as a matter of state law, Cacique is not entitled to a royalty and therefore the Marquez sales information is not relevant to an issue in the case. Alternatively, appellants argue that the district court should have prohibited discovery of the sales information because it is, itself, a valuable trade secret belonging to Cacique's chief competitor and a non-party. See F.R.C.P. Rule 26(c)(7). We do not reach this latter issue because we hold that the sales information is not relevant to an issue in the case.

II. Jurisdiction and Standard of Review

We have jurisdiction over this interlocutory appeal even though piecemeal appeals are rarely entertained. A contempt order and imposition of sanctions on a non-party for failure to obey a discovery order or subpoena is a final order for purposes of 28 U.S.C. § 1291. See In re Subpoena Served on Cal. Pub. Util. Comm., 813 F.2d 1473, 1476 (9th Cir.1987).

The issues raised in this appeal are primarily questions of law reviewed de novo. Though contempt orders and the imposition of sanctions are reviewed for an abuse of discretion, see Hook v. Arizona Dep't of Corrections, 107 F.3d 1397, 1403 (9th Cir.), cert. denied, --- U.S. ----, 118 S.Ct. 171, 139 L.Ed.2d 114 (1997), appellants do not directly challenge the contempt order. Instead, appellants challenge the underlying decision to enforce Cacique's discovery request. If the order disobeyed is vacated then the "contempt order naturally falls." Thomassen v. United States, 835 F.2d 727, 732 (9th Cir.1987).

Discovery decisions are also ordinarily reviewed for an abuse of discretion. See Zimmerman v. Bishop, 25 F.3d 784, 789 (9th Cir.), cert. denied, 513 U.S. 1043, 115 S.Ct. 637, 130 L.Ed.2d 543 (1994). But whether there is an issue to which the information sought is relevant is a question of state law, and the district court's conclusions of state law are reviewed de novo as questions of law. See Gibson v. County of Riverside, 132 F.3d 1311, 1312 (9th Cir.1997). Enforcing a discovery request for irrelevant information is a per se abuse of discretion. See Epstein v. MCA, 54 F.3d 1422 (9th Cir.1995). On either ground, error of law or abuse of discretion, such an order must be vacated.

III. The Protective Order

The district court's grant of a protective order does not absolve Cacique from showing that the information sought is relevant. A protective order's "purpose ... is to prevent harm by limiting disclosure of relevant and necessary information." Sega Enterprises v. Accolade, Inc., 977 F.2d 1510, 1532 (9th Cir.1992) quoting Micro Motion, Inc. v. Kane Steel Co., Inc., 894 F.2d 1318, 1325 (Fed.Cir.1990) (emphasis added). Because Cacique is unable to establish the relevance of the information sought, we reverse the district court's decision to enforce Cacique's discovery request.

IV. Reasonable Royalty Under California UTSA § 3426.3(b)

Cacique's primary argument for discovery of the Marquez sales information is its relevance to Cacique's claim for a reasonable royalty. California law is clear, however. Cacique is entitled to a...