Integrated Dynamic Solutions, Inc. v. VitaVet Labs, Inc. ( 2016 )


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  • Filed 12/22/16
    CERTIFIED FOR PUBLICATION
    IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
    SECOND APPELLATE DISTRICT
    DIVISION TWO
    INTEGRATED DYNAMIC                       B268311
    SOLUTIONS, INC., et al.,
    (Los Angeles County
    Plaintiffs and Appellants,        Super. Ct. No. LC103281)
    v.
    VITAVET LABS, INC.,
    Defendant and Respondent.
    APPEAL from an order of the Superior Court of Los
    Angeles County. Frank J. Johnson, Judge. Affirmed.
    Westlake Legal Services, Paul S. Zimmerman for Plaintiffs
    and Appellants.
    Buchalter Nemer, Oren Bitan for Defendant and
    Respondent.
    ******
    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 (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
    2
    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
    3
    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
    4
    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”—
    5
    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 (SB Liberty); Code Civ. Proc., § 527,
    6
    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 (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), they are not so
    limited. A court also has the power to issue a preliminary
    injunction that “„“mandates an affirmative act that changes the
    status quo”‟” (Oiye v. Fox (2012) 
    211 Cal. App. 4th 1036
    , 1047-
    1048), but should do so only in those “extreme cases where the
    right thereto is clearly established.” (City of 
    Corona, supra
    , 244
    Cal.App.4th at p. 299.) We ordinarily review a trial court‟s
    issuance of a preliminary injunction for an abuse of discretion
    (SB 
    Liberty, supra
    , 217 Cal.App.4th at pp. 280-281), but “more
    closely” “scrutinize” injunctions that “change[] the status quo”
    (Oiye, at pp. 1047-1048). In assessing the trial court‟s factual
    findings underlying a preliminary injunction, we apply the
    substantial evidence standard and view the evidence in the light
    most favorable to the court‟s ruling. (City of Corona, at pp. 298-
    299.)
    Although the status quo for these purposes can be easily
    defined as “„“„the last actual peaceable, uncontested status which
    preceded the pending controversy‟”‟” (14859 Moorpark
    Homeowner’s Assn. v. VRT Corp. (1998) 
    63 Cal. App. 4th 1396
    ,
    1408), determining whether a particular order alters the status
    quo can be more difficult. (See, e.g., Code Civ. Proc., § 916
    [automatic stay pending appeal turns on whether injunctive
    7
    order to be reviewed alters the status quo]; Kettenhofen
    v. Superior Court (1961) 
    55 Cal. 2d 189
    , 191 [so noting].) The
    injunction in this case alters the status quo insofar as it requires
    IDS to hand over the source code and other related documents to
    VitaVet.
    The trial court did not abuse it discretion in concluding
    that this is one of those “extreme cases” where VitaVet had a
    “clearly established” right to preliminary injunctive relief. To
    begin, VitaVet “clearly established” that it is likely to prevail on
    the merits of its breach-of-contract claim. To prevail on its claim,
    VitaVet must show (1) it had a contract with IDS, (2) VitaVet
    performed its contractual obligations or had a valid excuse for not
    doing so, (3) IDS breached the contract, and (4) VitaVet was
    consequently damaged. (Oasis West Realty, LLC v. Goldman
    (2011) 
    51 Cal. 4th 811
    , 821.) It is undisputed that VitaVet and
    IDS had a contract. More to the point, VitaVet established that
    the contract gave all ownership of IDS‟s work product to VitaVet,
    going so far as to empower VitaVet to obtain copies of that
    product whenever it wanted. IDS‟s refusal to hand over the
    source code breached these contractual provisions and damaged
    VitaVet‟s business operations. IDS responds that VitaVet cannot
    establish a likelihood of prevailing because VitaVet did not make
    all four contract payments even though IDS eventually delivered
    both the Technical Design Document and software; thus, IDS
    reasons, VitaVet did not perform its contractual obligations.
    IDS‟s argument overlooks that VitaVet‟s duty to pay was
    conditioned upon not only the “delivery” of the Technical Design
    Document and software, but also its “acceptance.” The Technical
    Design Document was admittedly a “work in progress,” and
    VitaVet attested—without contradiction—that the software was
    8
    inoperable without the source code IDS refused to provide.
    VitaVet never “accepted” these deliveries, and thus was not yet
    obligated to make the final payment.
    Further, the trial court did not err in concluding that the
    balance of interim harms “clearly established” VitaVet‟s
    entitlement to a preliminary injunction directing IDS to hand
    over the source code and Technical Design Document. Denying
    that injunctive relief would leave VitaVet unable to make use of
    the software IDS delivered in August 2015, forcing VitaVet to
    continue using its outdated and slow software, which was already
    causing “extreme employee inefficiency” and “significant business
    losses,” and was stymieing VitaVet‟s plans to expand its business.
    At the same time, granting that injunctive relief would cause IDS
    no harm because it was customized software IDS had developed
    for a specific customer and for which IDS itself had no use.
    Although IDS‟s counsel for the first time at the hearing suggested
    that IDS could “tweak[]” the software and sell it “to somebody
    else,” IDS submitted no evidence to support this suggestion.
    Further, requiring VitaVet to post a bond to cover any damages
    IDS might be owed under the contract further protected IDS
    against any monetary harm. To be sure, this injunction
    undeniably causes IDS to suffer some loss of bargaining position
    by precluding it from negotiating a larger settlement while
    holding the source code hostage. But, as the trial court properly
    noted, loss of negotiating position is a not a cognizable harm for
    these purposes.
    IDS asserts that this analysis is faulty because VitaVet‟s
    cross-complaint was not verified. This assertion lacks merit
    because a preliminary injunction must rest on either a verified
    pleading or “facts shown by affidavit.” (Code Civ. Proc., § 527,
    9
    subd. (c)(1).) Here, VitaVet‟s chief operating officer submitted a
    sworn affidavit. This suffices. IDS contends that the chief
    operating officer‟s affidavit was “conclusory,” but it was not: The
    officer spelled out specific instances of system slowdowns,
    customer complaints and loss of business due to VitaVet‟s
    inability to use the software it had commissioned from IDS. The
    cases IDS cites in support of its argument are distinguishable on
    their facts. (Cf. Levy v. City of Santa Monica (2004) 
    114 Cal. App. 4th 1252
    , 1257, 1259 [realtor‟s declaration as to “adverse
    effect on the marketability of [the] home” conclusory and
    inadequate to show damage]; Jewish Defense Organization, Inc.
    v. Superior Court (1999) 
    72 Cal. App. 4th 1045
    , 1055-1056
    [“conclusory and vague statements” insufficient proof of
    minimum contacts to establish personal jurisdiction].)
    II.    The Injunction is not a Final Adjudication on the
    Merits
    For decades now, our Supreme Court has consistently
    reaffirmed that “„[t]he granting or denial of a preliminary
    injunction does not amount to an adjudication of the ultimate
    rights in controversy.‟” (Continental Baking Co. v. Katz (1968)
    
    68 Cal. 2d 512
    , 528; 
    King, supra
    , 43 Cal.3d at p. 1227; Cohen
    v. Board of Supervisors (1985) 
    40 Cal. 3d 277
    , 286.) IDS
    nevertheless asserts that the preliminary injunction issued in
    this case does amount to a “de facto permanent injunction,” and
    offers three arguments in support of that assertion.
    First, IDS notes that the preliminary injunction in this case
    to some extent alters the status quo. This is true, and we have
    accordingly applied the greater appellate scrutiny demanded by
    the case law governing such preliminary injunctions. However,
    that case law necessarily rejects IDS‟s contention that any
    10
    preliminary injunction that alters the status quo constitutes an
    impermissible permanent injunction.
    Second, IDS observes that the relief afforded by the trial
    court‟s preliminary injunction largely mirrors the permanent
    injunctive relief VitaVet seeks. This is hardly surprising, as
    “„“[t]he scope of available preliminary relief is necessarily limited
    by the scope of the relief likely to be obtained at trial on the
    merits. [Citations.]”‟” (O’Connell v. Superior Court (2006) 
    141 Cal. App. 4th 1452
    , 1463.) The resulting overlap provides no cause
    for declaring a preliminary injunction invalid.
    Lastly, IDS decries that the trial court‟s preliminary
    injunction renders any subsequent trial a fait accompli, thereby
    denying IDS its due process rights by denying it a trial on the
    merits. We disagree. The preliminary injunction issued in this
    case does not deny IDS its right to trial for the simple reason that
    the injunction rests solely on the facts presented to the trial court
    at the time of its issuance; IDS‟s right to trial remains intact
    because “[a] full hearing at trial is still required to adjudicate the
    ultimate rights in controversy.” (IT Corp. v. County of Imperial
    (1983) 
    35 Cal. 3d 63
    , 75-76.) IDS cites Hunt v. Superior Court
    (1999) 
    21 Cal. 4th 984
    , 999, but the court in that case entered
    judgment following issuance of a preliminary injunction. The
    trial court in this case did no such thing.
    11
    DISPOSITION
    The order is affirmed. VitaVet is entitled to its costs on
    appeal.
    CERTIFIED FOR PUBLICATION.
    _______________________, J.
    HOFFSTADT
    We concur:
    _______________________, Acting P. J.
    ASHMANN-GERST
    _______________________, J.
    CHAVEZ
    12
    

Document Info

Docket Number: B268311

Judges: Hoffstadt, Ashmann-Gerst, Chavez

Filed Date: 12/22/2016

Precedential Status: Precedential

Modified Date: 11/3/2024