International Billing Services, Inc. v. Emigh

• Decision Date: 17 November 2000
• Docket Number: No. C028706.,C028706.
• Citation: 84 Cal.App.4th 1175,101 Cal.Rptr.2d 532
• Court: California Court of Appeals Court of Appeals
• Parties: INTERNATIONAL BILLING SERVICES, INC., Plaintiff, Cross-Defendant and Appellant, v. Jon EMIGH et al., Defendants, Cross-Complainants and Respondents.

101 Cal.Rptr.2d 532

84 Cal.App.4th 1175

INTERNATIONAL BILLING SERVICES, INC., Plaintiff, Cross-Defendant and Appellant, v. Jon EMIGH et al., Defendants, Cross-Complainants and Respondents.

No. C028706.

Court of Appeal, Third District.

November 17, 2000.

Certified for Partial Publication.^*

Orrick, Herrington & Sutcliffe, Norman C. Hile, Kim J. Mueller and Margaret Carew Toledo, Sacramento, for Plaintiff Cross-Defendant and Appellant.

Boutin, Dentino, Gibson, DiGiusto & Hodell, Chris Gibson and Ned M. Gelhaar, Sacramento, for Defendants, Cross-Complainants and Respondents.

MORRISON, J.

In a prior unpublished decision we upheld a judgment in favor of six defendants of liability based on a claimed breach of trade secrecy. (International Billing Services, Inc. v. North American Capital (Aug. 25, 1999, C027450).) Three defendants, Emigh, Porter and Qutub (the Engineers) were formerly employed by plaintiff, International Billing Services, Inc. (IBS) and had signed confidentiality agreements in connection with their employment. In postjudgment proceedings, the trial court awarded the Engineers attorney fees. IBS appeals, contesting the award on several grounds. We shall affirm.

In the published portion of this opinion, we conclude, contrary to some cases, that a party's claim of entitlement to attorney fees based on a breach of contract containing a fees provision judicially estops that party from contending the provision does not authorize an award of attorney fees. We also conclude the Engineers are entitled to fees from IBS even though the Engineers' fees were actually paid by a third party during the litigation.

FACTUAL AND PROCEDURAL BACKGROUND

IBS processes confidential information provided by customers, for use in preparing billing statements. IBS also develops technology for use in processing billing statements. The Engineers worked on various aspects of IBS's technology. A key machine used in the business is the inserter, or envelope-stuffer. IBS developed a set of modifications to a standard inserter, the Phillipsburg, which it uses in its own mail processing facility. IBS did not market its technology.

The Engineers left IBS and reorganized into an existing company, North American Capital (NAC), run by Norman Banks (Banks) and partly owned by Pacific First Equity (PFE). Within a short time they developed a set of Phillipsburg modifications they called the "Pinnacle," which they marketed.

IBS sued the Engineers, as well as Banks, PFE and NAC, alleging the Pinnacle encompassed proprietary technology.

The relevant complaint employs the disfavored shotgun (or "chain letter") style of pleading, wherein each claim for relief incorporates by reference all preceding paragraphs, which often masks the true causes of action. (See Kelly v. General Telephone Co. (1982) 136 Cal.App.3d 278, 285, 186 Cal.Rptr. 184.) The complaint sets forth several legal theories or claims, as follows:

(1) Misappropriation of trade secrets, against all defendants;

(2) Unfair competition, based on the alleged misappropriation, against all defendants;

(3) Breach of the confidentiality agreements, against the Engineers, consisting of disclosure and improper use of "confidential and proprietary information;"

(4) Interference with contractual relations against NAC and Banks, by their alleged inducement of the disclosure of trade secrets by the Engineers (5) Interference with prospective advantage, against all defendants, based on misappropriation of trade secrets and pursuit of plaintiffs "existing or prospective competitors;" and (6) Breach of the fiduciary duty by the Engineers to keep trade secrets.

IBS sought an injunction and included in its prayer a request for "attorneys" fees incurred in this action and all other costs of the action.

Attached to the complaint are copies of the "Confidential Information and Invention Agreement," signed by the Engineers while employed by IBS. It is a concise document, slightly over one page long. It has two parts, "Confidential Information" and "Inventions." The main heading under "Confidential Information" states in capital letters, "You promise company that you will protect company's and its customers' confidential information in accordance with this agreement." The last paragraph states "After You cease to be an employee of Company, regardless of the reason for the ending of employment, You agree to hold all Confidential Information in trust and confidence for Company and not to use such Confidential Information other than for the benefit of Company. Except as authorized in writing by an officer of Company, You agree not to disclose or divulge any Confidential Information, by publication or otherwise, to any person or entity. You promise to reimburse Company for any legal fees, liability, or loss which Company incurs as a result of any unauthorized disclosure or use of Confidential Information by You." For convenience we refer to this as the "fees provision," although whether it is a fee provision is contested. The "Inventions" portion of the agreement does not contain a similar provision.

The defendants other than PFE cross complained for declaratory relief. Both sides sought fees. IBS urged the trial court to award it fees, either for malicious misappropriation (see Civ.Code, § 3426.1) or by virtue of the contractual fees provision, arguing as follows: "Regardless of whether this Court finds defendants' misappropriation to be `willful and malicious,' if the Court finds that [the Engineers] breached the confidential information agreements, then IBS is entitled to attorney's fees. The agreement provides: "You promise to reimburse Company for any legal fees, liability, or loss which Company incurs as a result of any unauthorized disclosure or use of Confidential Information by You.' Exhibits 3-7 (emphasis added)."

After defendants prevailed at the sixweek trial, the Engineers moved for an award of attorney's fees. In part, the Engineers urged IBS was estopped to deny the supposed effect of the fees provision.

The motion for fees contained declarations describing the fees, including a declaration by a shareholder of McDonough, Holland & Allen, attesting to the reasonableness of the fees, and declarations by each of the Engineers.

IBS opposed the motion on many grounds, including the following grounds pursued on appeal:

(1) The contract did not provide for a fees award;

(2) The Engineers did not pay any fees to the Boutin firm, which handled the trade secrets litigation;

(3) Fees paid to Lothrop & West, patent attorneys, were not paid by the Engineers, who had no obligation to pay these fees;

(4) Some of the fees requested were for work "outside the scope of the lawsuit," meaning patent work and negotiations with Bell & Howell about buying technology;

(5) Some of the fees were for noncontract claims;

(6) Some of the fees were for "services rendered" to non-Engineer defendants.

In support of its opposition, IBS showed the fees were paid by NAC, under written "Terms of Engagement" with the Boutin firm, stating "Each of you is ultimately responsible for payment of our fees. However, we will send our bills to North American Capital, which will have the responsibility to pay our bills." The engagement letter was signed by the Engineers and by Banks, individually and as CEO of NAC and of PFE. In discovery, the Engineers had produced promissory notes of NAC, supported by personal guaranties by the Engineers and others.

In reply, the Engineers urged that because the fees provision was ambiguous, it should be construed against the drafter, IBS. IBS was not entitled to avoid the fees provision simply because the company the Engineers now worked for actually paid the fees, and the Engineers claimed they "fully intend to reimburse NAC with the attorney's fees they are awarded [citation] and might be subject to an equitable subrogation claim by NAC if they did not." The Engineers each provided a declaration of his intention to use any fee award to pay NAC. They urged there was no basis for apportionment among the counts or parties.

At oral argument in the trial court, IBS conceded it had drafted the contract and ambiguities could properly be read against it, but urged the language of Civil Code section 1717 (section 1717) controlled. IBS urged "unless this provision comes within the specific language that is required by 1717, it does not satisfy the attorney's fees part." The Engineers urged IBS's request for fees acted not only as an estoppel, but also evidenced the understanding of the parties to the contract. The trial court awarded fees of $513,224.30. IBS timely filed its notice of appeal.

DISCUSSION

I

Parties may agree by contract for the payment of attorney fees in actions relating to the contract. To avoid the perceived unfairness of one-sided attorneys fee provisions, the Legislature enacted Civil Code section 1717, which provides if a contract gives one party the right to recover attorney fees in an action arising out of the contract, the other party, upon prevailing, is entitled to fees.

Section 1717, subdivision (a) provides in relevant part: "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." Further, to avoid cases where a fees provision may be limited to the portion of a contract which only one side is likely to litigate, section 1717, subdivision (a) also provides: "Where a contract provides for attorney's fees, as set forth above, that provision shall be construed as applying to the entire contract, unless each party was represented by counsel in the negotiation and execution of...