Ajaxo Inc. v. E*Trade Group, Inc.

Decision Date21 December 2005
Docket NumberNo. H027383.,No. H026757.,H026757.,H027383.
Citation37 Cal.Rptr.3d 221,135 Cal.App.4th 21
CourtCalifornia Court of Appeals Court of Appeals
PartiesAJAXO INC., Plaintiff and Appellant, v. E*TRADE GROUP, INC., et al., Defendants and Appellants.

Ropers, Majeski, Kohn & Bentley and Susan H. Handelman, Redwood City, for Plaintiff and Appellant.

Steefel, Levitt & Weiss and Michael J. Lawson, Mark Fogelman, Joseph E. Floren, Brian T. Hafter, San Francisco and Rebecca M. Hoberg, for Defendant and Appellant E*Trade Group, Inc.

Pillsbury Winthrop and William F. Abrams, Palo Alto, Kevin M. Fong, San Francisco and Jason McDonell, for Defendant and Appellant Everypath, Inc.



Following a seven-week trial, on April 22, 2003, a jury found that E*Trade Group Inc. (E*Trade) had breached a mutual non-disclosure agreement it had with Ajaxo Inc. (Ajaxo) by disclosing protected information to Everypath Inc. (Everypath).1 The jury assessed $1.29 million in damages against E*Trade for breach of the non-disclosure agreement.

In addition, the jury found that Ajaxo was the owner or licensee of a trade secret. The jury found that E*Trade disclosed that trade secret to Everypath without Ajaxo's consent, and that E*Trade knew or had reason to know that E*Trade's knowledge of the trade secret was acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use. The jury determined that Ajaxo proved by clear and convincing evidence that E*Trade acted willfully and maliciously in misappropriating Ajaxo's trade secret.

As to Everypath, the jury found that Ajaxo proved that Everypath acquired and used Ajaxo's trade secret without Ajaxo's express or implied consent. Furthermore, the jury found that Ajaxo proved that Everypath knew or had reason to know that Everypath's knowledge of the trade secret derived from or through a person who owed a duty to Ajaxo to maintain its secrecy. Moreover, the jury found that Ajaxo proved by clear and convincing evidence that Everypath acted willfully and maliciously in misappropriating Ajaxo's trade secret.

Issues on Appeal
E*Trade's Issues on Appeal

E*Trade raises three issues on appeal. First, E*Trade contends that some of the court's evidentiary rulings deprived E*Trade of its right to a fair trial. Second, the court erred in denying E*Trade's motion for judgment notwithstanding the verdict. Finally, the court abused its discretion in finding that Ajaxo was the "prevailing party" under Civil Code section 1717.

Ajaxo's Issues on Appeal

Ajaxo raises five issues on appeal. First, Ajaxo contends that the court erred in granting E*Trade's and Everypath's motion for nonsuit on damages for E*Trade's and Everypath's misappropriation of Ajaxo's trade secret. Second, the court erred in granting E*Trade's and Everypath's motion for nonsuit on Ajaxo's claim for a reasonable royalty. Third, the court's erroneous grant of nonsuit on damages deprived Ajaxo of an award of exemplary damages. Fourth, the trial court erred in denying Ajaxo injunctive relief. Finally, the court erred in failing to award attorney fees for pre-trial work.

Everypath's Issues on Appeal

Assuming that this court finds merit in any of Ajaxo's contentions on appeal, Everypath raises the following issues. First, Everypath contends that the court erred in denying its motion for judgment notwithstanding the verdict (JNOV) on the jury's findings that Everypath had willfully and maliciously misappropriated Ajaxo's trade secret and that Everypath authorized or ratified the willful and malicious misappropriation of Ajaxo's trade secret. Second, Everypath contends that the court's evidentiary rulings denied Everypath its right to a fair trial.2

We find merit in Ajaxo's first issue on appeal. Accordingly, we reverse and remand this case to the lower court for a new trial on damages for E*Trade and Everypath's misappropriation of Ajaxo's trade secret.

We set forth in detail the evidence adduced in the trial.

Facts and Trial Testimony
Ajaxo and E*Trade

The name "Ajaxo" stands for "Advanced Java Architecture for Extensible Objects." Sing Koo formed Ajaxo to market a sophisticated stock trading technology called "Wirelessproxy XO," the development of which was completed by April 1999. Ultimately, among other things, Koo's Wirelessproxy XO technology allowed its users to buy and sell stock over the Internet using wireless devices, including the new Web-enabled wireless phones.

In 1999, Ajaxo was a small six-person company headed by its sole shareholder and investor, Koo. Koo's wife, Connie Chun, was Ajaxo's Director of Marketing. As such, she managed the marketing side of the business.

In early September 1999, Chun sent a marketing email to E*Trade. She received a reply from Dan Baca, a senior engineer at E*Trade, on September 10, 1999. Jerry Gramaglia, Chief Marketing Officer at E*Trade, had asked Baca to find a wireless system to allow E*Trade to participate in the Sprint Internet phone launch. Baca testified that E*Trade wanted to be competitive in "the wireless space" and provide wireless access and trading. Baca emphasized to Ajaxo that E*Trade needed to "beta test"3 wireless stock trading on Sprint phones using hand-held device mark-up language (HDML)4 by October 15, 1999.

On the same day as Baca contacted Chun, E*Trade provided Ajaxo a mutual non-disclosure agreement (NDA). Under the terms of the NDA, Ajaxo and E*Trade promised to take all precautions to protect the other's "proprietary information" and hold it confidential. The NDA defined "proprietary information" as "including, without limitation, trade secrets, patents, patent applications, copyrights, know-how, processes, ideas, inventions (whether patentable or not), formulas, computer programs, databases, technical drawings, designs, algorithms, technology, circuits, layouts, designs, interfaces, materials, schematics, names and expertise of employees and consultants, any other technical, business, financial, customer and product development plans, supplier information, forecasts, strategies and other confidential information ...."

The NDA described the penalties for breach of the agreement. In addition, it required immediate notification if one party believed the other might have released proprietary information. Chun signed the NDA on September 10, 1999, and faxed it to E*Trade the same day.5 Thereafter, Baca sent two pages of functional specifications to Chun detailing E*Trade's wireless trading requirements. Chun reviewed the specifications and called Baca. Baca wanted to know if Ajaxo could meet the October 15 deadline for beta testing. Chun told Baca that she thought they could, but would let him know after she had spoken to the "technical side."

In response to Baca's request for a technical paper, Chun sent E*Trade a "white paper" overview of the Wirelessproxy XO technology. Over the weekend of September 11-12, 1999, Koo built a prototype application specifically for E*Trade using the Wirelessproxy XO technology "to deliver a look and feel according to [E*Trade's] functional specification." On Sunday, September 12, Chun informed Baca by email that they were ready to demonstrate their technology.

The next day, Koo and Chun met with Baca and others at E*Trade. Koo was told that a few people wanted to view the demonstration. Accordingly, rather than using a wireless phone, Koo used a phone emulator6 on a notebook computer to show the operation of his technology. Koo explained that this was because the screen is bigger than a phone screen.

Koo had a personal E*Trade account. Thus, he used his own E*Trade user identification number and his personal E*Trade password to access E*Trade's Web site in the demonstration. Then, Koo entered a personal identification number (PIN code) to access the Ajaxo computer through which the Wirelessproxy XO technology works. Koo utilized the PIN code to protect the Ajaxo system from unauthorized access.

After Koo and Chun demonstrated that they could complete a stock trade, they logged off and allowed some of the E*Trade personnel to enter their own E*Trade accounts. When it came to entering the Ajaxo PIN code, the E*Trade personnel were not allowed to enter it. Koo entered the code.7 After Koo entered the Ajaxo PIN code, E*Trade personnel entered the E*Trade Web site wirelessly through Ajaxo's technology. Chun described the E*Trade personnel as excited at seeing the Ajaxo demonstration.

The E*Trade engineers asked numerous questions. Koo explained to the E*Trade group that his special type of wireless proxy server operates between the E*Trade Web site and the wireless gateway (the server for the wireless device). Using drawings and diagrams, Koo explained how the technology worked and answered many questions from the E*Trade engineers. Koo testified that a proxy server is nothing new, but his proxy is a "superproxy." Koo used an analogy to describe in general terms the function served by his superproxy. He analogized it to comparison-shopping where one sees a product and wants three price quotes. Using one hand-held device, his system can go to three Web sites, obtain three price quotes, extract data from complicated screens with pictures and graphics, and deliver three quotes to the small mobile device. Thus, Koo explained that his Wirelessproxy XO established "sessions" with servers and delivered select bits of information to small screens.

As Koo explained his technology, he answered E*Trade's more probing questions about such things as "buffering the cookie" and "how to sustain the session." He explained "initialization" and "destruction of a session." The E*Trade engineers asked about Koo's operating platform, the use of different languages, load balancing, number of transactions and other matters. Koo explained the software and its object-oriented architecture.

During the meeting, Pamela Kramer complained that the log-on procedure was cumbersome and asked Koo to develop a log-on system using four digits....

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