Degreed v. Viventis Search Asia CA1/2

Filed 3/24/23 Degreed v. Viventis Search Asia CA1/2
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or
ordered published for purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST APPELLATE DISTRICT
DIVISION TWO
DEGREED, INC.,
Plaintiff and Respondent,
A164640
v.
VIVENTIS SEARCH ASIA, INC., (San Francisco County
Super. Ct. No. CGC20584113)
Defendant and Appellant.
Viventis Search Asia, Inc. (Viventis) appeals after judgment was
entered against it for breaching the provision of a software distribution
contract requiring it to pay $1 million annually to the software’s developer.
Viventis contends the trial court erred in granting summary judgment for the
plaintiff on the contract claim, because the $1 million annual payment clause
of the parties’ contract is an unenforceable liquidated damages provision (Civ.
Code, § 1671) and an unenforceable “forfeiture” barred by Civil Code
section 3275. We disagree and affirm.
BACKGROUND
A.
Degreed, Inc. (Degreed), is a software company based in San Francisco,
California. In December 2017, it entered into a “Reseller Agreement”
(Agreement) with Viventis, a company based in the Philippines. The
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Agreement granted Viventis a license to distribute Degreed’s educational
software platform in the Philippines, Singapore, Malaysia and Indonesia.
Viventis’s financial obligations under the Agreement were structured
as the payment of “subscription fees” to Degreed, including a non-refundable
portion of them in advance. Section 3 of the Agreement (entitled “Fees and
Payments”) states in relevant part:
“3.1 Subscription Fees. [Viventis] is responsible for remitting all
Subscription Fees in the amounts set forth in Exhibit A for any licenses sold
to its Customers, regardless of its collections from the Customer. Degreed
may modify the Subscription Fees set forth in Exhibit A by providing
[Viventis] ninety (90) days advance written notice of such Subscription Fee
changes.
“3.2 Subscription Fee Prepayment. [Viventis] shall remit the
annual Subscription Fee Prepayment(s) set forth in Exhibit A on an annual
basis (each a ‘Subscription Fee Prepayment’). Such Subscription Fee
Prepayment(s) shall be applied toward any Subscription Fees owed to
Degreed during the applicable term as outlined in the Exhibit A. Except as
otherwise set forth herein, Subscription Fee Prepayments shall be non-
refundable.
“3.3 Annual Payments. Within ten (10) days from the end of each
calendar quarter, [Viventis] will submit a report to Degreed which details the
licenses to the Platform sold in the previous quarter including (a) the
Customer name and address; and (b) term of the license; and (c) the license
plan offered, pursuant to Exhibit A; and (d) the Subscription Fees owed to
Degreed. The Subscription Fees owed during a particular quarter shall be
applied against any unconsumed Subscription Fee Prepayment received by
Degreed during the applicable period defined in the Exhibit A. If the
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Subscription Fee Prepayment is consumed during an applicable period, then
following receipt of such report, Degreed will invoice [Viventis] in the total
amount of the Subscription Fees owed by [Viventis] which will be due and
payable by [Viventis] within net thirty (30) days from the date of invoice.
Subscription Fees are not refundable. Any overdue payments will bear
interest at the lower of a rate of one and a half percent (1.5%) per month, or
the highest amount allowed by law.”
Under Exhibit A of the Agreement, Viventis was required to pay
Degreed $1,000,000 annually (in quarterly installments) as a “Subscription
Fee Prepayment,” beginning on June 30, 2018. Exhibit A stated, further,
that “As each Subscription Fee Prepayment is received by Degreed, it may be
applied against licenses issued prior to the expiration of the [annual] Term.
Subscription Fee Prepayments that are not consumed on or before expiration
of the [annual] Term will be forfeited. Any Subscription Fees due in excess of
the Subscription Fee Prepayment will be paid as incurred in accordance with
the Agreement (each, an ‘Overage’).”
B.
About two and half years after the parties entered the Agreement,
Degreed initiated this suit alleging Viventis had failed to pay four quarterly
installments of the Subscription Fee Prepayments it owed Degreed during
the first two years of the Agreement, resulting in a $925,000 shortfall. It
pled claims for breach of contract, breach of the implied covenant of good
faith and fair dealing, and quantum meruit.
Subsequently, it moved for summary judgment seeking a ruling as a
matter of law that Viventis breached the contract by failing to make the
required payments. It asserted that if it obtained a judgment on its breach of
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contract claim then its alternative claims, pled in the alternative, could be
dismissed.
In opposing the motion, Viventis made a number of legal arguments,
but none are reprised here. Principally, it argued Degreed was owed nothing
because the contract required payment only for Viventis’s actual sales of
software licenses, and Degreed had been paid for those sales (and more). It
also argued that because the $1 million annual payments vastly exceeded the
amounts it owed Degreed for the actual software license sales Viventis had
generated and thereby resulted in a “huge overpayment,” the prepayment
provision was an unfair “penalty” that should be denied enforcement on
equitable grounds.1 Viventis asserted neither of the two issues raised here:
that the prepayment provision is a liquidated damages provision made
unenforceable by Civil Code section 1671, and/or is unenforceable under Civil
Code section 3275.
The trial court issued a tentative ruling denying the motion on the
ground that the “non-refundable prepayment is an unenforceable
penalty/forfeiture” barred by Civil Code section 1671, a legal issue it
acknowledged having raised on its own motion. After receiving supplemental
briefing on this issue from the parties, the trial court changed its mind and
ruled the prepayment clause is not a liquidated damages provision subject to
section 1671, but simply a prepayment provision which is fully enforceable.
It observed, “The Defendant may regret having entered into that agreement.
It obviously does. But I don’t believe that it is unlawful or unenforceable.” It
1 Citing no legal authority, Viventis asserted both that “its forfeiture
provision is highly inequitable” and that the provision was a “penalty clause
in disguise.” Citing Kay v. Kay (1961) 188 Cal.App.2d 214, it also argued that
“equity abhors a forfeiture.”
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entered a three-page written order granting the motion for summary
judgment explaining its legal reasoning. There followed a judgment in
Degreed’s favor which awarded $1,243,413.46 in damages for breach of
contract (including interest) and dismissed the two alternative claims.
Viventis then timely appealed.2
DISCUSSION
A plaintiff is entitled to summary judgment when it demonstrates there
is no triable issue as to any material fact and that it is entitled to a judgment
as a matter of law. (Code Civ. Proc., § 437c, subd. (c).) In moving for
summary judgment, the plaintiff’s initial burden does not require it to negate
affirmative defenses asserted by the defendant. (Oldcastle Precast, Inc. v.
Lumbermens Mutual Casualty Co. (2009) 170 Cal.App.4th 554, 564.) It must
prove only “each element of the cause of action entitling the party to
judgment on the cause of action.” (Code Civ. Proc., § 437c, subd. (p)(1).)
“Once the plaintiff . . . has met that burden, the burden shifts to the
defendant . . . to show that a triable issue of one or more material facts exists
as to the cause of action or a defense thereto.” (Ibid.)
We review the court’s order granting summary judgment de novo,
viewing the evidence in the light most favorable to the losing party. (Wiener
v. Southcoast Childcare Centers, Inc. (2004) 32 Cal.4th 1138, 1142.)
2 We previously requested, and received, supplemental briefing as to
whether the dismissal of the remaining claims defeated finality of the
judgment. Having considered the record and the parties’ arguments, we have
concluded it does not.
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I.
Civil Code Section 1671
As noted, Viventis argues the trial court erred in enforcing the
prepayment provision because it is unenforceable as a matter of law under
Civil Code section 1671. It also argues, in the alternative and at a minimum,
that genuine issues of material fact concerning the provision’s reasonableness
precluded summary judgment on this issue.
Civil Code section 1671 presumes the validity of liquidated damages
provisions in commercial contracts. It states in relevant part: “a provision in
a contract liquidating the damages for the breach of the contract is valid
unless the party seeking to invalidate the provision establishes that the
provision was unreasonable under the circumstances existing at the time the
contract was made.” (Civ. Code, § 1671, subd. (b).) By its terms, the statute
applies only to contractual provisions “liquidating the damages for the breach
of the contract.”
“ ‘A penalty provision operates to compel performance of an act
[citation] and usually becomes effective only in the event of default [citation]
upon which a forfeiture is compelled without regard to the damages
sustained by the party aggrieved by the breach [citation]. The characteristic
feature of a penalty is its lack of proportional relation to the damages which
may actually flow from failure to perform under a contract.’ ” (Ridgley v.
Topa Thrift & Loan Assn (1998) 17 Cal.4th 970, 977.) By contrast,
contractual charges that are imposed as “an agreed form of compensation”
rather than as a consequence of breach or default are not liquidated damages
provisions. (Id. at p. 979 [discussing prepayment charges]; accord, Blank v.
Borden (1974) 11 Cal.3d 963, 970 [section 1671 inapplicable because
contract’s terms “in no sense contemplate a ‘default’ or ‘breach’ of an
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obligation by the owner upon whose occurrence payment is to be made”].) In
particular, “[m]inimum payment clauses in contracts of sale or for services
have been held valid in contracts between parties, and such minimum
payments are not to be deemed as a provision for liquidated damages.”
(Payne v. Pathe Studios (1935) 6 Cal.App.2d 136, 141; see, e.g., A.B. Field &
Co. v. Haven (1918) 36 Cal.App. 669, 672 [contract guaranteeing minimum
annual compensation for buying and packing fruit].) Put simply, a liquidated
damages provision is one that “appl[ies] only in case of a breach of a
contract.” (Payne, at p. 141.)
In assessing whether a clause functions this way, we must “look[] to the
substance rather than the form of the disputed provision.” (Ridgley v. Topa
Thrift & Loan Assn., supra, 17 Cal.4th at p. 979.) Here, both parties agree
that, in substance, the prepayment clause requires Viventis to pay Degreed a
minimum of $1 million annually, without regard to the number of software
licenses it sells. That requirement is not conditioned upon Viventis
breaching another provision of the contract, and Viventis does not argue that
it is. This is a not a liquidated damages provision. This would be self-evident
had the contract been drafted in a way that said directly, with no
circumlocution, that Viventis agreed to pay Degreed, in return for the right to
distribute the software, the greater of (a) $1 million annually or (b) X dollars
for every license sold annually to end-users.
In short, the parties freely bargained for a mutual exchange of benefits.
Viventis received a license that enabled it to commercially exploit Degreed’s
software in the specified Southeast Asian region (the parties disagree as to
whether the right was nonexclusive, but that is immaterial). And in return,
Degreed received a promise of compensation that included a $1 million
annual minimum guarantee.
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At oral argument, counsel for Viventis argued that the nature and
potential extent of the Southeastern Asian market for Degreed’s software was
unknown at the time the parties entered into the agreement. Based on the
four corners of the agreement, however, it is apparent that Viventis was
effectively agreeing to take on the risk associated with developing that
market. In hindsight, the contractual payment structure turned out to be a
bad bargain for Viventis. But it is not a liquidated damages clause for breach
of the Agreement. It is therefore unnecessary to consider the parties’
arguments concerning its “reasonableness.” (See Graylee v. Castro (2020)
52 Cal.App.5th 1107, 1114 [“Before performing any analysis under
section 1671, subdivision (b), we must first determine whether the stipulation
contains a liquidated damages clause”].) Civil Code section 1671 is
inapplicable.
II.
Civil Code Section 3275
For similar reasons, we reject Viventis’s new argument, made for the
first time on appeal, that Civil Code section 3275 bars enforcement of the
prepayment provision.
In the first place, Viventis did not even mention this statute below and
thus the theory has been forfeited. (Cf. Dacey v. Taraday (2011)
196 Cal.App.4th 962, 978 [statutory defense to breach of contract claim
“mentioned” in summary judgment papers in connection with another
defense but “not presented as an independent defense” held “not sufficiently
preserved for appeal”].)
Moreover, it is without merit. Civil Code section 3275 states:
“Whenever, by the terms of an obligation, a party thereto incurs a forfeiture,
or a loss in the nature of a forfeiture, by reason of his failure to comply with
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its provisions, he may be relieved therefrom, upon making full compensation
to the other party, except in case of a grossly negligent, willful, or fraudulent
breach of duty.” (Italics added.) Because the contract does not impose the
prepayment requirements in the event of a default or breach, section 3275
does not apply. (Cf. Lazzareschi Inv. Co. v. San Francisco Fed. Sav. & Loan
Assn. (1971) 22 Cal.App.3d 303, 307 [affirming summary judgment for
plaintiff in action by defendant challenging prepayment penalty, rejecting
defense under Civil Code section 3275 because case did not involve penalty
for default on contract but option for early performance].) Viventis
acknowledges that, in this respect, the applicable test for section 3275 is
identical to that for section 1671.
DISPOSITION
The judgment is affirmed. Respondent shall recover its costs.
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STEWART, P.J.
We concur.
MILLER, J.
MARKMAN, J.*
Degreed, Inc. v. Viventis Search Asia, Inc. (A164640)
*Judge of the Alameda Superior Court assigned by the Chief Justice
pursuant to article VI, section 6 of the California Constitution.
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