Ajaxo, Inc. v. E*Trade Fin. Corp.

• Decision Date: 23 April 2020
• Docket Number: H042999,H043530
• Court: California Court of Appeals Court of Appeals
• Parties: AJAXO, INC., Plaintiff and Appellant, v. E*TRADE FINANCIAL CORPORATION, Defendant and Respondent. Ajaxo, Inc., Plaintiff and Appellant, v. E*Trade Group, Inc., Defendant and Respondent.

48 Cal.App.5th 129

261 Cal.Rptr.3d 583

AJAXO, INC., Plaintiff and Appellant,

v.E*TRADE FINANCIAL CORPORATION, Defendant and Respondent.

Ajaxo, Inc., Plaintiff and Appellant,

v.E*Trade Group, Inc., Defendant and Respondent.

H042999

H043530

Court of Appeal, Sixth District, California.

Filed April 23, 2020

Counsel for Plaintiff/Appellant: Martin APC, Kevin R. Martin

Counsel for Defendant/Respondent: Morgan, Lewis & Bockius, Joseph E. Floren, Christopher J. Banks, Deborah E. Quick

Premo, J.

I. FACTUAL AND PROCEDURAL BACKGROUND...591

A. Underlying Dispute, Jury Trial (2003) and First Appeal...591

B. Jury Trial on Misappropriation Damages (2008) and Second Appeal...593

C. Reasonable Royalty Trial (2012-2015) and Present Appeal...595

1. Royalty Trial, Phase I...596

2. Royalty Trial, Phase II...599

a. Ajaxo's Royalty Models and Koo's Expert Testimony...599

b. E*Trade's Experts Reject Imposition of Any Royalty...601

3. Closing Briefs and E*Trade's Motion to Strike...603

4. Trial Court's Statement of Decision...604

D. Ajaxo's Motion for a New Trial...605

E. Ajaxo's Motion to Strike Costs...606

II. DISCUSSION...607

A. Framework to Assess a Reasonable Royalty Under the CUTSA...607

B. T he Appellate Burden in a Failure-of-Proof Case...609

C. It Was Within the Trial Court's Discretion To Deny Ajaxo a Royalty...610

1. The Award of a Reasonable Royalty Pursuant to Civil Code Section 3426.3, subdivision (b) Is Discretionary...610

2. Ajaxo Fails to Accurately Portray the Record Evidence...611

3. The Available Evidence Did Not Compel a Reasonable Royalty Award...612

a. The Trial Court Did Not Abuse its Discretion in Deeming the Alleged Spoliation of Evidence and the Apportionment of Actual Trade Secret Value Relevant to Any Reasonable Royalty Award...613

b. The Trial Court Did Not Abuse its Discretion in Refusing to Assess a Royalty Based on the Available Evidence...618

c. The Trial Court Did Not Abuse its Discretion in Rejecting a Reasonable Royalty Based on the Value-Added Developer Distribution Model...619

d. The Trial Court Did Not Abuse its Discretion in Excluding Expert Testimony on Royalty Theories That Were Not Timely Disclosed...624

e. Summary...627

D. The Trial Court Did Not Err In Denying Ajaxo a New Trial...629

a. The Court Did Not Err in Applying the Georgia-Pacific Factors...629

b. The Court Did Not Err by Awarding Inadequate Damages...633

c. Summary...636

E. The Trial Court Did Not Err in its Prevailing Party Determination and Costs Award...636

III. DISPOSITION...642

A jury in 2003 found defendant E*Trade Financial Corp. (E*Trade) liable for trade secret misappropriation and for breach of a mutual nondisclosure agreement with plaintiff Ajaxo, Inc. (Ajaxo). The jury awarded damages only on the breach of contract cause of action after the trial court granted a nonsuit on the issue of damages for trade secret misappropriation. An appeal before this court led to a remand for a second trial on damages for the misappropriation. The jury in that 2008 trial found no net damages for unjust enrichment and awarded nothing to Ajaxo. The trial court then denied Ajaxo's request to seek a reasonable royalty under the California Uniform Trade Secret Act ( Civ. Code, §§ 3426 - 3426.11 (CUTSA) ).¹ A second appeal followed, and this court reversed. We held that the trial court had the discretion to award payment of a reasonable royalty pursuant to section 3426.3, subdivision (b), which states that "[i]f neither damages nor unjust enrichment caused by misappropriation are provable, the court may order payment of a reasonable royalty ...." We remanded the matter for the trial court to exercise its discretion under the statute. The trial court held a bench trial on remand to determine whether Ajaxo was entitled to a reasonable royalty and in what amount, if any. It ultimately declined to award any royalty to Ajaxo. It entered judgment for E*Trade and awarded E*Trade its costs as the prevailing party in the action.

On appeal, Ajaxo challenges the trial court's failure to award it a reasonable royalty for E*Trade's willful and malicious trade secret misappropriation. Ajaxo also challenges the denial of its motion for a new trial and the award of costs in favor of E*Trade. Among the issues raised, we decide whether the trial court abused its discretion by declining to award any reasonable royalty despite the available evidence from which a reasonable royalty theoretically might have been derived. We consider the court's findings on the evidence, its application of apportionment principles from patent law, its exclusion of expert testimony and analysis of Ajaxo's royalty model, and its treatment of what are commonly called the " Georgia-Pacific factors" for determining a royalty rate in intellectual property disputes. (See Georgia-Pacific Corp. v. United States Plywood Corp. (S.D.N.Y. 1970) 318 F.Supp. 1116 ( Georgia-Pacific ).)

We also decide whether the trial court erred in its prevailing party determination and costs award, an issue that requires us to reconcile the meaning of a "prevailing party ... in any action or proceeding" ( Code Civ. Proc., § 1032, subd. (b) ) with the practical effect of Ajaxo having already obtained full satisfaction of what became a separate, final judgment in its favor following the remittitur in 2006 from the first appeal, including costs awarded at that time.

We conclude as to the reasonable royalty that the trial court did not abuse its discretion in denying a royalty under the CUTSA based upon Ajaxo's failure to carry its burden of proof and to support its royalty theories with credible, reliable, non-speculative evidence. As to the other issues raised on appeal, we find no reversible error and will affirm the judgment and the award of costs in favor of E*Trade.

I. FACTUAL AND PROCEDURAL BACKGROUND

An extensive recitation of the facts and history of the case may be found in this court's prior decisions, Ajaxo Inc. v. E*Trade Group Inc. (2005) 135 Cal.App.4th 21, 37 Cal.Rptr.3d 221 ( Ajaxo I ) and Ajaxo Inc. v. E*Trade Financial Corp. (2010) 187 Cal.App.4th 1295, 115 Cal.Rptr.3d 168 ( Ajaxo II ). We summarize what is necessary for an understanding of the issues on appeal.

A. Underlying Dispute, Jury Trial (2003), and First Appeal

The dispute arose in 1999 when Ajaxo offered to license its software to E*Trade. ( Ajaxo II, supra , 187 Cal.App.4th at p. 1300, 115 Cal.Rptr.3d 168.) E*Trade, an internet-based financial services company, wanted its clients to be able to access their online stock trading accounts using what at the time were new web-enabled wireless phones. ( Ibid. ) E*Trade was looking to partner with a company that could provide the wireless stock trading capability. ( Ibid. ) Ajaxo's founder, Sing Koo,² had developed a sophisticated technology for wireless transactions called " ‘Wirelessproxy XO’ " that among other things supported Internet-based stock trading using wireless devices. ( Ajaxo I, supra , 135 Cal.App.4th at p. 27, 37 Cal.Rptr.3d 221.)

In September 1999, E*Trade and Ajaxo entered a mutual nondisclosure agreement agreeing to protect and hold confidential each other's proprietary information. ( Ajaxo I, supra , 135 Cal.App.4th at pp. 27-28, 37 Cal.Rptr.3d 221.) Ajaxo proceeded with several technology demonstrations. ( Id. at pp. 28-31, 37 Cal.Rptr.3d 221.) E*Trade inquired whether Ajaxo was seeking a " ‘venture partner.’ " ( Id. at p. 30, 37 Cal.Rptr.3d 221.) Ajaxo was not, but it proposed terms to license Wirelessproxy XO to E*Trade for $860,000. ( Ibid. ) E*Trade communicated that it was working on a counter proposal, and Koo continued responding to requests for detailed technical information. ( Id. at pp. 30-31, 37 Cal.Rptr.3d 221.) In late October 1999, E*Trade made a counter offer of $200,000 with an option for an additional $200,000 per " ‘device platform,’ " which Koo understood as referring to the type of wireless device on which the software would be designed to run. ( Id. at p. 32 & fn. 14, 37 Cal.Rptr.3d 221.) E*Trade withdrew its counter offer shortly after, stating among other reasons that Ajaxo was too small to be an E*Trade partner. ( Id. at p. 32, 37 Cal.Rptr.3d 221.)

The next month, E*Trade selected Everypath, Inc. (Everypath), as its wireless vendor. ( Ajaxo I, supra , 135 Cal.App.4th at p. 33, 37 Cal.Rptr.3d 221.) Everypath did not have a suitable wireless product at the time, but within a few months had raised venture capital to finance development of the solution that E*Trade wanted. ( Ajaxo II, supra , 187 Cal.App.4th at p. 1300, 115 Cal.Rptr.3d 168.) In March 2000, E*Trade and Everypath entered into a service provider agreement for Everypath to develop and implement E*Trade's wireless trading capability. ( Ibid. ) E*Trade paid Everypath $40,000 for its product ( Ajaxo I, supra , at p. 33, 37 Cal.Rptr.3d 221 ) and agreed to pay an additional $30,000 monthly service fee for up to 4,000 concurrent data users.

Ajaxo sued E*Trade and Everypath in October 2000. ( Ajaxo I, supra , 135 Cal.App.4th at p. 40, 37 Cal.Rptr.3d 221.) The operative complaint alleged misappropriation of trade secrets by both defendants and sought compensatory damages for lost profits, as well as unjust enrichment damages and reasonable royalties pursuant to section 3426.3 of the CUTSA. ( Ajaxo I, supra , at p. 40, 37 Cal.Rptr.3d 221.) It also alleged breach of the nondisclosure agreement by E*Trade and sought compensatory damages. ( Ibid. )

The case was tried to a jury in 2003. ( Ajaxo I, supra , 135 Cal.App.4th at p. 25, 37 Cal.Rptr.3d 221.) The evidence showed that E*Trade helped to finance Everypath through an investment arm, that key employees were in contact with Everypath while E*Trade was evaluating Ajaxo's technology, and that a senior E*Trade engineer in technical discussions with Ajaxo left E*Trade and joined Everypath around that time. ( Id. at pp. 33, 34, 36, 37 Cal.Rptr.3d 221.) Ajaxo's expert witness testified in the first trial that Everypath's technology processes were " ‘almost identical to’ " Ajaxo's processes ( ...