Integrated Dynamic Solutions, Inc. v. Vitavet Labs, Inc., B268311

CourtCalifornia Court of Appeals
Citation6 Cal.App.5th 1178,211 Cal.Rptr.3d 873
Decision Date22 December 2016
Docket NumberB268311
Parties INTEGRATED DYNAMIC SOLUTIONS, INC., et al., Plaintiffs and Appellants, v. VITAVET LABS, INC., Defendant and Respondent.

Westlake Legal Services, Paul S. Zimmerman for Plaintiffs and Appellants.

Buchalter Nemer, Oren Bitan, Los Angeles, for Defendant and Respondent.

HOFFSTADT, J.

A company hired a computer software consultant to create custom-built software, and the consultant delivered an unfinished version of the software and withheld the source code and technical specifications needed to finish it. The parties sued each other. The trial court issued a preliminary injunction that, among other things, ordered the software consultant to deliver the source code and technical specifications to the company. Does a preliminary injunction that alters the status quo constitute an impermissible final adjudication of the merits of the lawsuit? We conclude it does not, although such injunctions are reserved for "extreme cases" where the right to relief is "clearly established." (City of Corona v. AMG Outdoor Advertising, Inc. (2016) 244 Cal.App.4th 291, 299, 197 Cal.Rptr.3d 563 (City of Corona ).) Because this is one of those "extreme cases," we affirm the issuance of the injunction.

FACTS AND PROCEDURAL HISTORY
I. Facts

Defendant and cross-complainant VitaVet Labs, Inc. (VitaVet) is in the business of manufacturing and selling dietary supplements for pets. VitaVet sells its products using the name NuVet Labs, and most of its sales are over the phone or internet. By 2013, the computer system VitaVet used to run its business as well as its internet website was "antiquated" and "extremely slow." In late 2014 and early 2015, VitaVet hired plaintiff and cross-defendant Integrated Dynamic Solutions, Inc. (IDS) to "develop an entirely new and more efficient" software program for VitaVet that would increase the speed and efficiency of its online ordering, billing, payments, shipments and customer support.

To implement this arrangement, VitaVet and IDS signed two documents: (1) a consulting agreement setting forth the general terms of the parties' relationship; and (2) a statement of work specifically governing the software upgrade project.

In the consulting agreement, IDS promised to provide "technical consult[ing]" services to VitaVet as an independent contractor. Because those services were to be "specially ordered or commissioned by VitaVet," any software or other projects developed by IDS for VitaVet were to be "considered a work made for hire." IDS accordingly "agree[d]" that all of its "[w]ork, inventions, improvements, ideas, discoveries, trade secrets, trademarks, service marks, designs, processes, methods, products, software codes, works of authorship, compilations, collective works, derivative works, and reports made" were "VitaVet's sole and exclusive property" and, consistent with this agreement, "assign[ed]" its "right, title and interest" to those outputs to VitaVet. IDS also agreed to "protect and safeguard" any "confidential information" VitaVet provided and to "promptly return" all VitaVet "data, materials and other property ..., including ... all work/materials/artwork ... created by IDS " if either party terminated the agreement.

In the statement of work, VitaVet hired IDS to create a new software "application, database, and [source] code" for VitaVet's business to serve as (1) a customer interface for online purchases and account management, and (2) an employee interface to manage customer and distributor records, inventory and accounting. Because VitaVet's existing computer system was sorely outdated, VitaVet hired IDS to provide the upgraded system in 20 weeks, and the parties agreed upon a staged delivery and payment schedule: (1) VitaVet would pay $30,000 on or before January 15, 2015 (the date the contracts were signed); (2) VitaVet would pay $30,000 upon the "delivery ... and acceptance" of a "Technical Design Document," which IDS was to produce by February 20, 2015; (3) VitaVet would pay $30,000 on March 15, 2015; and (4) VitaVet would pay $80,000 upon the "delivery and acceptance of the completed application," which IDS was to produce by June 5, 2015. To emphasize that time was of the essence, VitaVet agreed to pay bonuses for early delivery, and IDS agreed to suffer monetary penalties for late delivery. IDS also agreed to deliver "[t]he application, database, and [source] code ... to VitaVet anytime during the project" upon written request.

The parties' performance did not go as planned. VitaVet made a timely payment of $30,000 in January 2015, but IDS did not deliver a Technical Design Document by February 20, 2015, or by March 15, 2015. VitaVet consequently withheld both the February and March payments. IDS delivered an "incomplete" version of the Technical Design Document that it acknowledged was still a "work in progress" on March 20, 2015; VitaVet thereafter paid the February and March installments and gave IDS feedback on the "rough" draft.

IDS eventually delivered a copy of the software itself on August 14, 2015, two and a half months after the June 5, 2015 deadline. The parties dispute whether the software was "finished," but do not appear to dispute that IDS refused to deliver the source code for the software, refused to return any of the confidential and proprietary information VitaVet let IDS use in developing the software, and never provided a final Technical Design Document. VitaVet did not make the final payment under the contract.

II. Procedural History

Three days after delivering the software, IDS sued VitaVet for (1) breach of contract, (2) reasonable value for services rendered, (3) conversion, (4) injunctive relief, and (5) declaratory relief. VitaVet cross-claimed against IDS for (1) breach of contract, (2) breach of the covenant of good faith and fair dealing, (3) unjust enrichment, (4) fraud, and (5) declaratory relief. In its cross-complaint, VitaVet sought damages, declaratory relief, and a permanent injunction ordering IDS to "immediately deliver" the software's "current source code" and current Technical Design Document, to "immediately return" all of VitaVet's "confidential ... information," and to "refrain from disclosing" or "making improper use" of any of VitaVet's confidential information.

A week after filing its cross-complaint, VitaVet sought a preliminary injunction. The trial court granted VitaVet's request, and preliminarily enjoined IDS from (1) "continuing to withhold from VitaVet the most current application, database, migration scripts, source code, and Technical Design Document for the software developed by IDS for VitaVet under the parties' ... contract"; and (2) "disclosing to third parties or otherwise making improper use of confidential VitaVet information in their possession." The injunction would not take effect until VitaVet posted a $73,750 bond, which was the remaining balance VitaVet owed under the contract (that is, the $80,000 final payment less the late delivery penalties).

In issuing the injunction, the court found that VitaVet was likely to prevail in its breach-of-contract cross-claim because IDS refused to deliver the most current source code and Technical Design Document, despite the fact that they "do[ ] not belong to [IDS]" under the parties' contracts. The court further found that the balance of interim harms favored VitaVet. Specifically, the court reasoned that VitaVet had made a "persuasive showing"—through the sworn declaration of its chief operating officer—that the failure to turn over the up-to-date source code and Technical Design Document would cause VitaVet "great harm" because the software IDS delivered could not be used without the source code and because, in the meantime, VitaVet's old software was getting slower and causing more and more problems. Conversely, the court reasoned that IDS would suffer "no harm whatsoever" from delivering the source code because it was of "no use" to IDS and because the bond obviated any danger of monetary loss. The court acknowledged that IDS's loss of exclusive possession of the source code might cause a "loss of ... negotiating position," but found such harm to be legally irrelevant.

VitaVet posted the required bond, and IDS filed this timely appeal.

DISCUSSION

IDS challenges the trial court's issuance of the preliminary injunction on two grounds: (1) it is not supported by substantial evidence under the traditional standards for issuing such injunctions; and (2) it amounts to a "de facto permanent injunction" because it changes the status quo and largely mirrors the terms of the permanent injunction VitaVet seeks in its cross-complaint. We conclude that both arguments lack merit.

I. Substantial Evidence Supports the Issuance of the Preliminary Injunction

A trial court may grant a preliminary injunction upon a showing that (1) the party seeking the injunction is likely to prevail on the merits at trial, and (2) the "interim harm" to that party if an injunction is denied is greater than "the [interim] harm the [opposing party] is likely to suffer if the ... injunction is issued." (SB Liberty, LLC v. Isla Verde Assn., Inc. (2013) 217 Cal.App.4th 272, 280, 158 Cal.Rptr.3d 105 (SB Liberty ); Code Civ. Proc., § 527, subd. (a).) These two showings operate on a sliding scale: "[T]he more likely it is that [the party seeking the injunction] will ultimately prevail, the less severe must be the harm that they allege will occur if the injunction does not issue." (King v. Meese (1987) 43 Cal.3d 1217, 1227, 240 Cal.Rptr. 829, 743 P.2d 889 (King ).)

Although preliminary injunctions are generally designed to " ‘preserve the status quo pending a determination on the merits of the action’ " (Law School Admission Council, Inc. v. State of California (2014) 222 Cal.App.4th 1265, 1280, 166 Cal.Rptr.3d 647 ), they are not so limited. A court also has the power to issue a preliminary injunction that ...

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