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Ajaxo Inc. v. E*Trade Financial Corp.

August 30, 2010

AJAXO INC., PLAINTIFF AND APPELLANT,
v.
E*TRADE FINANCIAL CORPORATION, DEFENDANT AND RESPONDENT.



(Santa Clara County Super. Ct. No. CV793529). Trial Judge: Hon. Joseph H. Huber.

The opinion of the court was delivered by: Premo, J.

CERTIFIED FOR PUBLICATION

Plaintiff Ajaxo Inc. (Ajaxo), sued defendant E*Trade Financial Corporation (E*Trade) for misappropriation of trade secrets under the California Uniform Trade Secret Act (Civ. Code, §§ 3426-3426.11 (CUTSA)).*fn1 E*Trade's liability was established in a prior trial where a jury determined that E*Trade had willfully and maliciously misappropriated Ajaxo's trade secrets. (See Ajaxo Inc. v. E*Trade Group Inc. (2005) 135 Cal.App.4th 21, 26 (Ajaxo I).) This matter comes to us following the second trial in which the single factual dispute before the jury was the extent to which E*Trade had been unjustly enriched by its misappropriation.

Under the CUTSA, Ajaxo was entitled to recover damages for its actual loss caused by the misappropriation and also for E*Trade's unjust enrichment not taken into account in computing Ajaxo's actual loss. (§ 3426.3, subd. (a).) If neither actual loss nor unjust enrichment were "provable," the trial court had discretion to order E*Trade to pay Ajaxo a reasonable royalty. (§ 3426.3, subd. (b).)*fn2 Electing to pursue damages measured only by E*Trade's unjust enrichment, Ajaxo submitted evidence intending to show that E*Trade had been enriched by more than $300 million. The jury rejected the evidence, accepting instead E*Trade's data, which showed that E*Trade had lost over $2 million. That is, E*Trade's net "enrichment" was less than zero. But when Ajaxo asked the trial court to award reasonable royalties, the court rejected the request, concluding that unjust enrichment was "provable," there was just "no net amount in terms of actual damages." Ajaxo argues on appeal that this was error. We agree.

The jury verdict demonstrates that E*Trade lost money; it was not enriched by its misappropriation of Ajaxo's trade secrets. Unjust enrichment may have been theoretically "provable" since there was evidence that could have supported a monetary award, but in the end it was not proved. Section 3426.3, subdivision (b) does not impose a theoretical or speculative standard of provability. The standard is factual. A measure of damages may not be provable for lack of sufficient evidence. Or it may not be proved, as happened here, where the jury concludes that the defendant did not profit from its wrongdoing. Either way, it is not provable for purposes of section 3426.3, subdivision (b).

Ajaxo raises several additional arguments pertaining to the trial court's pretrial rulings. We reject each of those. We shall reverse the judgment and remand the matter for further proceedings as described below.

I. Factual Background*fn3

In September 1999, E*Trade, an internet-based financial services company, entered into a nondisclosure agreement (NDA) with Ajaxo by which E*Trade agreed to maintain the confidence of information it received while evaluating Ajaxo's wireless stock-trading software. (Ajaxo I, supra, 135 Cal.App.4th at p. 27.) At the time, E*Trade clients could trade stocks via the internet but could not use wireless handheld devices to do so. E*Trade was looking for a partner with which it could develop a wireless stock trading capability. (Id. at p. 35.) Ajaxo offered to license its product to E*Trade for $860,000. (Id. at p. 30.) E*Trade made a counter offer but ultimately withdrew it, claiming that Ajaxo was too small to be an E*Trade partner. (Id. at p. 32.)

In December 1999, E*Trade selected Everypath Inc. (Everypath), as its wireless vendor, even though Everypath did not then have a suitable wireless product. Within a couple of months, however, Everypath raised sufficient venture capital to finance its development of the wireless technology E*Trade was looking for. In March 2000, E*Trade and Everypath entered into a service provider agreement pursuant to which Everypath was to provide E*Trade with wireless trading capability. (Ajaxo I, supra, 135 Cal.App.4th at p. 33.)

Evidence produced at the first trial showed that E*Trade was connected to Everypath both financially and through its personnel. Everypath had obtained funding from a venture capital fund managed by Arrowpath Ventures LLC, which employed former E*Trade employees. In addition, E*Trade had contributed 25 percent of the capital in the venture capital fund, giving E*Trade an indirect financial stake in Everypath. (Ajaxo I, supra, 135 Cal.App.4th at p. 34.)

Ajaxo soon suspected that Everypath's development of the wireless trading technology had been facilitated by E*Trade's misappropriation of trade secrets that Ajaxo had communicated to E*Trade under the NDA. Ajaxo believed that E*Trade had disclosed the trade secrets to Everypath and that Everypath, with knowledge of the illegitimate source of the information, used them to develop the technology it sold back to E*Trade.

II. Procedural Background

Ajaxo sued both E*Trade and Everypath, alleging a cause of action for breach of contract against E*Trade and a CUTSA cause of action against both defendants. (Ajaxo I, supra, 135 Cal.App.4th at p. 40.) Prior to the first trial, Ajaxo intended to put on evidence of both its actual losses and defendants' unjust enrichment resulting from the misappropriation. Ajaxo had retained an expert witness who was prepared to testify that Ajaxo's lost profits amounted to more than $39 million. (Id. at p. 59.) Ajaxo withdrew the expert after E*Trade moved to exclude the expert's testimony but before the trial court ruled upon E*Trade's motion. At trial, Ajaxo relied solely upon an unjust enrichment measure of damages.

At the close of Ajaxo's case in chief in the first trial, the trial court partially granted defendants' motion for non-suit on the CUTSA cause of action, holding that Ajaxo had not submitted sufficient evidence of damages for misappropriation (as measured by E*Trade's unjust enrichment). The court did allow the jury to determine liability under the CUTSA, recognizing that Ajaxo might be entitled to reasonable royalties if defendants had indeed misappropriated the trade secrets. (Ajaxo I, supra, 135 Cal.App.4th at p. 40.) The jury found that E*Trade had breached the NDA and awarded Ajaxo $1.29 million for that claim.*fn4 (Ibid.) The jury also found that both defendants had willfully and maliciously misappropriated the trade secrets but it did not make a monetary award because it had not been asked to do so. (Id. at pp. 25-26.)

In its first appeal, Ajaxo argued that the trial court had erred by taking the damages issue from the jury. This court agreed. We noted that Ajaxo had based its contract cause of action upon the same facts it used to prove the misappropriation claim; the two causes of action were "inextricably linked." (Ajaxo I, supra, 135 Cal.App.4th at p. 63.) Further, the only theory of recovery Ajaxo had pursued on its claim for breach of contract was the theory of unjust enrichment. The same evidence Ajaxo had presented to prove its contract damages would have been sufficient to prove unjust enrichment resulting from E*Trade's misappropriation. There was also evidence upon which the jury could have found Everypath to have been unjustly enriched. (Id. at p. 64.) Ajaxo I concluded, therefore, that the trial court had erred in finding insufficient evidence of defendants' unjust enrichment resulting from the misappropriation and remanded for a new trial on that issue. (Ibid.) The $1.29 million judgment in favor of Ajaxo on the contract cause of action was unaffected by our decision in Ajaxo I.

III. The Second Trial

By the time of the second trial, Everypath was out of business and had made an assignment for the benefit of its creditors. Everypath turned out to be "a complete write-off, go to zero, complete loss." The trial court bifurcated the case against Everypath so that the matter proceeded against E*Trade only. In other pretrial rulings the trial court excluded evidence pertaining to the financing of Everypath and any evidence relating to the supposed joint liability of E*Trade and Everypath. The court also refused to admit copies of E*Trade's 10-K statements filed with the Securities and Exchange Commission.*fn5 We shall describe these rulings in more detail in the discussion below.

At trial, Ajaxo's evidence of E*Trade's unjust enrichment included evidence of the price at which it had offered to license its product and the price E*Trade suggested in response. It also included the testimony of Ajaxo's expert, Walter Bratic, who opined that E*Trade's misappropriation was responsible for 25 percent of the profit generated by all E*Trade clients who opened accounts from September 1999 through December 2002, the period of time during which E*Trade had presumably been using the misappropriated trade secrets. Bratic assumed that because wireless trading was one of the four primary business strategies E*Trade had identified in its 10-K filings, one fourth of all new accounts opened during the relevant time period had been opened because E*Trade was able to offer wireless trading. One fourth of the profit generated from all new accounts opened during the pertinent time period was about $301 million. Bratic did not consider E*Trade's actual profits from wireless trading or the fact that no more than one half of 1 percent of E*Trade clients ever traded on wireless devices. At the close of Ajaxo's case in chief, E*Trade moved for non-suit. The trial court denied the motion, concluding that there was enough evidence "to go to the jury" on the issue of E*Trade's unjust enrichment.

E*Trade then produced evidence to show that its wireless trading strategy had been less successful than anticipated. The market for wireless trading peaked in March 2000 and declined from there. Joseph Raymond, an E*Trade employee, prepared a summary of revenue and expenses related to wireless trading for the period during which E*Trade had been using the misappropriated trade secrets. The summary (exhibit 233) showed that E*Trade's wireless trading expenses--wireless transactional costs, team costs (labor devoted to the wireless project), and monthly service provider fees paid to Everypath, exceeded wireless trading commissions every quarter, resulting in a loss of about $2.5 million. Relying upon E*Trade's quarterly financial statements, Everypath invoices, and team costs listed in exhibit 233, E*Trade's expert Terry Lloyd opined that E*Trade had lost approximately $2.4 million. An alternate calculation resulted in a net loss of about $1.8 million. Wireless trading "didn't pan out."

The jury was instructed that the amount of E*Trade's unjust enrichment was "the value of E*Trade's benefit that would not have been achieved except for its misappropriation" less "the amount [of] E*Trade's reasonable expenses . . . ." The jury found that the value of the benefit conferred upon E*Trade by the misappropriation was $3,990,852 and that E*Trade's reasonable expenses were $6,411,761, resulting in a net loss of approximately $2.4 million.

Following the verdict, Ajaxo asked the trial court to make an award of reasonable royalties under section 3426.3, subdivision (b), which, as we noted above, permits such an award if neither actual loss nor unjust enrichment is "provable." E*Trade opposed the request, arguing that both actual losses and unjust enrichment were provable because there was evidence in the record to support either measure of damages. The trial court found that unjust enrichment was provable because the jury "found that Ajaxo had proven unjust enrichment damages against E*Trade with no net amount in terms of actual damages." Based upon this finding, the trial court denied Ajaxo's request for reasonable royalties and did not reach the question whether actual losses were ...


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