Yield Dynamics, Inc. v. Tea Systems Corp.

• Decision Date: 23 August 2007
• Docket Number: No. H029604.,H029604.
• Citation: 66 Cal.Rptr.3d 1,154 Cal.App.4th 547
• Court: California Court of Appeals Court of Appeals
• Parties: YIELD DYNAMICS, INC., Plaintiff and Appellant, v. TEA SYSTEMS CORPORATION, et al., Defendants and Respondents.

66 Cal.Rptr.3d 1

154 Cal.App.4th 547

YIELD DYNAMICS, INC., Plaintiff and Appellant, v. TEA SYSTEMS CORPORATION, et al., Defendants and Respondents.

No. H029604.

Court of Appeal, Sixth District.

August 23, 2007.

As Modified on Denial of Rehearing September 21, 2007.

Russo & Hale, Jack Russo, Michael V. Risch, Palo Alto, for Plaintiff and Appellant Yield Dynamics, Inc.

Ackerman & Kevorkian, Michael G. Ackerman, Kevin B. Kevorkian, Santa Clara,

for Defendant and Respondent TEA Systems Corporation, et al.

RUSHING, P.J.

Plaintiff Yield Dynamics, Inc. (Yield) brought this action against a former employee, Terrence Zavecz, two business entities of which he is a principal, and others, alleging among other things that Zavecz breached a contract to convey certain computer code to Yield and not to compete with it, and that he and other defendants misappropriated certain trade secrets by using some of the code to create competing products. After a nonjury trial, the court entered judgment for the defendants, finding among other things that Yield had failed to establish that the code constituted a trade secret. On appeal Yield mounts a broad attack on the judgment and associated orders.

We detect no error, and will affirm the judgment.

BACKGROUND

I. History¹

All of the parties are involved in developing or marketing software products designed to facilitate the fabrication (manufacture) of microchips (integrated circuits). According to Jonathan Buckheit, Yield's founder and chief executive officer, Yield develops and markets software for "yield enhancement," i.e., monitoring and controlling the fabrication process so as to increase the proportion of microchips that perform satisfactorily.² Essentially this involves monitoring the fabrication process in order to detect, analyze, and correct manufacturing errors.

Defendant Zavecz is the founder and, as relevant here, sole employee of defendant TEA Systems Corporation (TEA). He developed two software applications, OASnt and FPAex, which he marketed to microchip manufacturers. These products were designed to facilitate the analysis of lithography data, i.e., measurements of the photolithographic stage of fabrication, in which an image of the circuit is imprinted onto a silicon wafer by the projection of light through a reticle, which is an optical mask somewhat analogous to a photographic slide.³

The events leading to this lawsuit commenced while Zavecz was developing a more highly automated lithography product named MAPA.⁴ Buckheit testified that Zavecz sought assistance in developing MAPA so that he could fulfill an existing contract-with National Semiconductor, a microchip manufacturer. This evolved into a written agreement in May 1999 (the asset agreement) under which Zavecz and his wife, as president and shareholders of TEA, sold to Yield TEA's interest in OASnt, FPAex, MAPA, and "[a]ll of Seller's software ... relating in any way" to these products. In exchange TEA received forgiveness of $73,457.15 in debt plus 100,000 shares of Yield common stock.⁵ The agreement also contemplated that Yield would employ Zavecz as Vice President of Lithography Applications at a base salary of $100,000 per year, with stock options and commissions. The agreement included a covenant by Mr. and Mrs. Zavecz not to compete for three years from its effective date.

Zavecz commenced employment with Yield in June 1999. This apparently entailed his coming to California while leaving his family behind at their Pennsylvania home. In connection with his employment he executed two additional agreements. An "Employee Inventions and Proprietary Rights Assignment Agreement" (the invention agreement) provided that Zavecz would not disclose certain of Yield's information, which was deemed confidential; that inventions made by him in the course of his employment belonged to Yield; that he would disclose and assign any such inventions to Yield; and that inventions made within a year after his separation of employment would be presumed to have been conceived during employment, and thus the property of Yield. A "Confidentiality Agreement" reiterated his duty not to disclose Yield's "Confidential Information" as there defined.

In mid-2000 Zavecz threatened to resign and proposed, among several alternatives, "unwindfing]" the parties' existing agreements. He was invited instead to develop a business plan under which Yield would open an engineering office in Pennsylvania. He developed such a proposal, but Buckheit did not approve of it because it would create a separate division under Zavecz's semi-autonomous control. Buckheit made a counterproposal which Zavecz refused, again offering to "unwind the deal."

In late 2000, Yield undertook to convert OASnt and FPAex from the RPL programming language, in which they had been written, into the C programming language.⁶ This became necessary, Buckheit testified, because after Yield added some automation routines to OASnt and installed the resulting product for a client, the software exhibited "glitches that we literally could not fix" due to "a bug in the RPL programming language itself." Yield decided to convert the entire product from RPL to C "in order to be able to fix the bug and save the customer." Buckheit asked Zavecz to assist in this project, but Zavecz said that "[i]t was not one of his priorities" and that he expected it to be addressed by his separate division, for which he was then "making plans." Buckheit reminded Zavecz that his plan for a separate division had been disapproved, though Zavecz remained free to appeal that decision to the Yield board of directors. Zavecz never did so.

In December 2000, Zavecz went to Pennsylvania. In late January, 2001, after he refused a directive to return to California, Yield terminated his employment. In April 2001, Yield filed an action in Pennsylvania to accelerate and collect upon a promissory note reflecting a loan of $50,000 it had made to Zavecz. In August 2003 Yield brought an action on the note in California. This produced a stipulated judgment in Yield's favor. Disputes over execution of the judgment generated two appeals to this court. (Yield Dynamics, Inc. v. Zavecz (Dec. 21, 2005, H028585), 2005 WL 3485660 [nonpub. opn.]; Yield Dynamics, Inc. v. Zavecz (Dec. 21, 2005, H028146), 2005 WL 3485656 [nonpub. opn].) Their substance need not concern us here.

Meanwhile, sometime in 2001, but after the termination of Zavecz's employment, Buckheit learned that Zavecz was proposing to make a presentation at the conference of a professional organization identified at trial as SPIE, which according to one of the Pennsylvania decisions in a related case stands for Society of Photolithographic Instrumentation Engineers. Zavecz apparently intended to include in the presentation "screen shot[s]," or images of a computer display, that Buckheit believed were "directly taken from [Yield] marketing presentations...." The convention hosts acceded to Yield's demands that these materials be removed from the presentation and returned to it.

In February 2003, Buckheit learned that Zavecz had developed a new product, Weir, which Buckheit considered similar to the products he had sold to Yield under the asset purchase agreement. In July 2003, Yield brought this action against TEA, Zavecz, and five other defendants, including Sub-Lambda Systems, Inc. (Sub-Lambda), another entity apparently founded by Zavecz. In August 2003 Zavecz petitioned to compel arbitration, pursuant to an arbitration clause in the employment agreement, of so much of the dispute as concerned that agreement. In the course of the ensuing arbitration, Buckheit saw slides from which he concluded that Zavecz had conducted a professional presentation using screen shots "that had been generated by the OASnt software and were labeled as OASnt" but "were now being generated by ... Weir."

In April 2005, Yield filed its first amended complaint setting forth seven causes of action: (1) misappropriation of trade secrets, including source code, by Zavecz and other defendants; (2) breach of the asset agreement by Zavecz and TEA, in that they failed to turn over all intellectual property transferred under the agreement, attempted to sell competing software, and created and sold software based on intellectual property sold to Yield under the agreement; (3) breach by Zavecz of the invention and confidentiality agreements, in that he failed to return confidential materials upon termination of his employment, and used and disclosed confidential information after termination; (4) fraud by Zavecz and TEA in the inception of the asset agreement, in that they entered into that agreement without intending to perform their obligations under it; (5) breach by Zavecz of his fiduciary duties as an employee, apparently based on the foregoing misconduct; (6) declaratory relief with respect to the dispute between the parties; and (7) unfair competition by Zavecz in violation of Business and Professions Code sections 17200 et sequitur, in that he taught a course using "screenshots" of products sold to Yield and developed by it, while representing them as products of TEA.⁷

In the period 1999-2001, Yield offered OASnt, FPAex, and MAPA for sale, as well as its own preexisting product, Genesis. In 2001 or 2002, it stopped offering FPAex as a stand-alone product. By 2004 it was no longer offering OASnt for sale by itself. However MAPA had been integrated into a new product, EnTune.⁸ As of 2004 Yield was offering EnTune for sale to a number of companies. As of trial no copies of that product had sold.

II. Trial Proceedings

Early in trial Yield settled with four defendants whom it had accused of helping Zavecz, TEA, and Sub-Lambda Systems to misappropriate trade secrets. Later Yield withdrew its declaratory relief claim and dismissed with prejudice its claim for breach of fiduciary duty. The case proceeded against Zavecz, TEA and Sub-Lambda on theories of misappropriation of...