Integrated Dynamic Solutions, Inc. v. VitaVet Labs, Inc.

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
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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
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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
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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”—
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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,
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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
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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
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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,
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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
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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.
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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
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