Opinion
G055737 G055776 G056512 G056723
10-17-2019
APPLIED GENERAL AGENCY, INC., Plaintiff and Respondent, v. GREENLEAF FINANCIAL AND INSURANCE SERVICES, INC., et al., Defendants and Appellants. APPLIED GENERAL AGENCY, INC., Plaintiff and Respondent, v. LUCAS JAY JOHNSON, Defendant and Appellant. APPLIED GENERAL AGENCY, INC., Plaintiff and Respondent, v. GREENLEAF FINANCIAL AND INSURANCE SERVICES, INC., et al., Defendants and Appellants; LUCAS JAY JOHNSON, Defendant and Respondent. APPLIED GENERAL AGENCY, INC. Plaintiff and Respondent, v. LUCAS JAY JOHNSON Defendant and Appellant.
Kring & Chung, Scott M. Bonesteel; Greines, Martin, Stein & Richland, Robert A. Olson and Edward L. Xanders for Defendants and Appellants Greenleaf Financial and Insurance Services, Inc. and Christopher Adam Mulder. Knypstra Hermes, Bradley P. Knypstra and Grant Hermes for Defendant, Appellant and Respondent Lucas Jay Johnson. Call & Jensen, David R. Sugden, Scott Hatch and L. Lisa Sandoval for Plaintiff and Respondent Applied General Agency, Inc.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Super Ct. No. 30-2009-00312847) OPINION Appeals from judgments and order of the Superior Court of Orange County, David R. Chaffee, Judge. Affirmed in part, reversed in part, and modified. Kring & Chung, Scott M. Bonesteel; Greines, Martin, Stein & Richland, Robert A. Olson and Edward L. Xanders for Defendants and Appellants Greenleaf Financial and Insurance Services, Inc. and Christopher Adam Mulder. Knypstra Hermes, Bradley P. Knypstra and Grant Hermes for Defendant, Appellant and Respondent Lucas Jay Johnson. Call & Jensen, David R. Sugden, Scott Hatch and L. Lisa Sandoval for Plaintiff and Respondent Applied General Agency, Inc.
INTRODUCTION
Greenleaf Financial and Insurance Services, Inc. (Greenleaf), and its owner, Christopher Mulder, have appealed from a judgment after a jury verdict and from an attorney fee award in favor of respondent Applied General Agency, Inc. (Applied General). Lucas Johnson has separately appealed from the same judgment and award. The appeals have been consolidated.
Greenleaf's name is spelled "Green Leaf" in its briefing and intermittently in the record. It was named as a defendant in the first amended complaint as "Greenleaf Financial and Insurance Services, Inc.," so we have employed that spelling of its name in the opinion.
Applied General accused Greenleaf, Mulder, and Johnson of misappropriating its trade secrets: specifically, confidential information Applied General uses to sell Medicare insurance to senior citizens. Johnson was an Applied General employee who quit and took a job with Greenleaf. He took confidential information from Applied General's secured database and gave it to Greenleaf.
The jury found that all three defendants had willfully and maliciously misappropriated Applied General's trade secrets and that Greenleaf and Johnson, but not Mulder, had been unjustly enriched as a result. The jury also found that Johnson had breached his duty of loyalty to Applied General and that Greenleaf and Mulder had aided and abetted him in doing so. Finally, the jury found that appellants had harmed Applied General by negligently interfering with its prospective economic relations with customers, potential customers, brokers, and agents. The jury made no monetary awards except for the two unjust enrichment awards against Greenleaf and Johnson.
The trial court entered a joint and several judgment against all three defendants for the total amount of the two unjust enrichment awards. After a hearing, the court awarded Applied General $1,100,000 in attorney fees jointly against Mulder and Greenleaf and $100,000 in fees against Johnson. The court awarded no exemplary damages.
Johnson has identified two issues on appeal. First, he argues that a joint and several judgment should not have been entered against him. The judgment should have been only for the amount by which the jury found he was unjustly enriched. He also appeals from the attorney fee order on several grounds, arguing the amount should have been either much lower or nothing at all.
With respect to Johnson, we affirm in part and reverse in part. We agree the judgment against him should have been for the same amount by which the jury found he had been unjustly enriched. He does not have to disgorge money he never obtained. We affirm the attorney fee order. The court acted within its discretion in assessing less than 10 percent of Applied General's reasonable fees against the person who willfully and maliciously stole its trade secrets.
Mulder's first issue on appeal is the same as Johnson's: the judgment should not be joint and several. The jury found that the misappropriation had not justly enriched Mulder at all. Like Johnson, Mulder cannot be made to disgorge money he never obtained, so that portion of the judgment is also reversed.
Mulder also argues he should not be jointly responsible with Greenleaf for Applied General's attorney fees because he was not unjustly enriched. But a statutory criterion for attorney fees is willful and malicious misappropriation, which the jury found with respect to Mulder. The fact he was unable to make the misappropriation pay off does not exempt him from a fee award.
Greenleaf's issues on appeal are by far the most ambitious. It contends the jury's decision it had misappropriated Applied General's trade secrets was wrong as was the unjust enrichment award against it. In other words, no substantial evidence supported either conclusion.
We do not reweigh evidence. Substantial evidence supports the jury's decision regarding the nature of the information misappropriated from Applied General and the amount by which the jury found Greenleaf was unjustly enriched. We therefore affirm the judgment against Greenleaf.
FACTS
Applied General, founded in 1993, contracts with health care insurance companies to support independent insurance agents who represent those companies. Applied General does not sell policies directly to consumers. Instead, under contracts with carriers, it performs administrative and marketing services for the field agents authorized to sell the carriers' policies. The company focuses on Medicare plans: mainly Medicare advantage programs and Medicare supplement insurance.
The agents are not Applied General employees.
People with Medicare policies are permitted to change their plans during an open enrollment period beginning each year in October. At this time, insurance agents swing into action to sell their policies. In marketing Medicare insurance policies, Applied General is prohibited by law from cold-calling potential customers or making in-person solicitations. Instead it relies on television and radio commercials and direct mailing. The potential customers are given an 800 number to call or a reply card to fill out. Only after a consumer has taken the initiative may an agent make contact to pitch a policy.
The insureds are allowed to change plans because the insurers can change their plans each year. The changes may render a policy less attractive to a particular insured and prompt him or her to go with a different plan.
Applied General stores this information - consumer responses to the commercials and direct mailings - in its GAIN computer system, a program developed by Applied General employees. These responses generate "leads," that is, names and phone numbers of people who have expressed an interest in a Medicare plan. Agents contracted with Applied General have access to these leads; the agents can contact these consumers to try to sell them a policy. A successful sale is recorded in the GAIN system, as is information concerning the agents themselves such as their contracts with Applied General and their compensation.
Johnson became an Applied General employee in 2004. He became a sales representative in 2008; in this position, he was in charge of servicing field agents, supporting them with Applied General's administrative services. As a sales representative, he had wide access to the GAIN computer system - wider than that of the contracted agents.
Johnson met Mulder in the fall of 2008 at an insurance carrier training session for agents. Mulder was an agent working with Applied General at the time.
In early 2009, Johnson and Mulder began discussing developing their own agency. While still employed by Applied General, Johnson performed a number of tasks to benefit the new agency, which would become Greenleaf.
Johnson resigned from Applied General on September 4, 2009, with the intention of going into business with Mulder. Shortly thereafter, he tried to log into Applied General's computer system remotely, using his user name and password. This was not successful, but Johnson successfully logged into the system several times using the user name and password of an Applied General employee that he knew. He took information from the databases for Greenleaf's use, including Applied General's broker, customer, and other confidential information.
Johnson ultimately became an independent agent.
Applied General sued appellants in October 2009. The first amended complaint, the operative pleading, was filed in January 2012.
In June 2016, pursuant to a report and recommendation of the discovery referee, the court entered an order imposing the following issue and evidence sanctions:
"Issue Sanction No. 1: When Johnson was employed by [Applied General], Johnson, with the assistance and approval of Greenleaf and Mulder, took and used [Applied General's] broker, customer, and other confidential information for Greenleaf's use.
"Issue Sanction No. 2: From September 11-16, 2009, Johnson, with the assistance and approval of Greenleaf and Mulder, remotely and repeatedly accessed [Applied General's] computer databases and took the information therein for Greenleaf s use.
"Evidence Sanction No. 1: When Johnson was employed by [Applied General], Johnson, with the assistance and approval of Greenleaf and Mulder, took and used [Applied General's] broker, customer, and other confidential information for Greenleaf s use.
"Evidence Sanction No. 2: From September 11-16, 2009, Johnson, with the assistance and approval of Greenleaf and Mulder, remotely and repeatedly accessed [Applied General's] computer databases and took the information therein for Greenleaf s use."
As a result of these sanctions, appellants were precluded from arguing or introducing evidence at trial that Johnson had not taken and used Applied General's broker, customer and other confidential information for Greenleaf's use or that Johnson had not remotely accessed Applied General's computer databases for Greenleaf's use.
The case was tried to a jury in July 2017, and the jury rendered the following special verdict: The information in Applied General's computer system was a trade secret; acquiring and using it unjustly enriched the defendants. Defendants' acquisition and use of Applied General's trade secrets were willful and malicious. The defendants damaged Applied General by negligently interfering with the prospective economic relations with customers, potential customers, brokers and/or agents. Johnson breached his duty of loyalty to Applied General and harmed it. Greenleaf and Mulder abetted Johnson in his breach, but did not harm Applied General by so doing.
As for remedies, the jury awarded Applied General nothing for lost profits and $1,026,144 for unjust enrichment against Greenleaf only. It found that Johnson was unjustly enriched in the amount of $2,287. It found that Mulder was unjustly enriched, but awarded no dollars for his unjust enrichment. It awarded no additional amounts for unjust enrichment for negligent interference or for breach of Johnson's duty of loyalty.
The portion of the verdict form dealing with remedies other than those for misappropriation read, in pertinent part, "If you answered Yes to any of questions . . . 21 [negligent interference], 23 [breach of duty of loyalty] . . , what do you find to be the total amount, in dollars, that Defendants were unjustly enriched as a result of damages to [Applied General] for which you answered 'Yes' to those questions? Do not include any damages you have already included in your response to [the questions concerning remedies for misappropriation of trade secrets]."
The jury responded, "[N]o dollars." Having given this answer, the jury did not answer a question about apportioning responsibility among Johnson, Mulder/Greenleaf, and "other(s)" for additional money for the other torts.
The court entered a joint and several judgment against Greenleaf, Mulder, and Johnson for $1,028,431, the sum of the two awards against Greenleaf and Johnson. After a hearing on attorney fees, the court awarded fees payable to Applied General jointly and severally by Greenleaf and Mulder in the amount of $1,100,000 and fees in the amount of $100,000 payable by Johnson.
Applied General also got costs in the amount of $109,759 from Greenleaf and Mulder and $12,195 from Johnson.
Greenleaf and Mulder filed notices of appeal from the judgment and from the amended judgment, which included the attorney fee award. Johnson filed separate notices of appeal from the judgment and the attorney fee order. The appeals have been consolidated for briefing, argument, and decision.
DISCUSSION
I. Johnson's Appeal
Johnson has raised two issues on appeal. First, he argues the judgment should not be joint and several because the jury found him to be unjustly enriched only in the amount of $2,287. A joint and several judgment makes him liable for the total amount by which Greenleaf was unjustly enriched even though the jury allocated a separate amount to Greenleaf. Second, the attorney fee award ($100,000) lacked a legal basis and was excessive in light of Applied General's small recovery against him.
A. Joint and Several Liability
"An individual is required to make restitution if he or she is unjustly enriched at the expense of another. [Citations.] A person is enriched if the person receives a benefit at another's expense. [Citation.] Benefit means any type of advantage. [Citations.] [¶] The fact that one person benefits another is not, by itself, sufficient to require restitution. The person receiving the benefit is required to make restitution only if the circumstances are such that, as between the two individuals, it is unjust for the person to retain it. [Citation.]" (First Nationwide Savings v. Perry (1992) 11 Cal.App.4th 1657, 1662-1663.)
"Typically, the defendant's benefit and the plaintiff's loss are the same, and restitution requires the defendant to restore the plaintiff to his or her original position. [Citations.] The principle of unjust enrichment, however, is broader than mere 'restoration' of what the plaintiff lost. Many instances of 'liability based on unjust enrichment . . . do not involve the restoration of anything the claimant previously possessed . . . includ[ing] cases involving the disgorgement of profits . . . wrongfully obtained . . . .' [Citation.] '[T]he public policy of this state does not permit one to "take advantage of his own wrong"' regardless of whether the other party suffers actual damage. [Citation.] Where 'a benefit has been received by the defendant but the plaintiff has not suffered a corresponding loss or, in some cases, any loss, but nevertheless the enrichment of the defendant would be unjust . . . the defendant may be under a duty to give to the plaintiff the amount by which [the defendant] has been enriched.' [Citation.]" [¶] . . . [¶] . . . The emphasis is on the wrongdoer's enrichment, not the victim's loss. In particular, a person acting in conscious disregard of the rights of others should be required to disgorge all profit because disgorgement both benefits the injured parties and deters the perpetrator from committing the same unlawful actions again. . . ." (County of San Bernardino v. Walsh (2007) 158 Cal.App.4th 533, 542 (Walsh).)
"'The object of the disgorgement remedy - to eliminate the possibility of profit from conscious wrongdoing - is one of the cornerstones of the law of restitution and unjust enrichment,' and '[t]he profit for which the wrongdoer is liable by the rule of §51(4) is the net increase in the assets of the wrongdoer, to the extent that this increase in attributable to the underlying wrong.' (Quoting Restatement 3d Restitution and Unjust Enrichment.)" (American Master Lease LLC v. Idanta Partners, Ltd. (2014) 225 Cal.App.4th 1451, 1486 (American Master Lease).)
Restatement Third Restitution and Unjust Enrichment section 51(4) provides: "Unless the rule of subsection (2) imposes a greater liability, the unjust enrichment of a conscious wrongdoer, or of a defaulting fiduciary without regard to notice or fault, is the net profit attributable to the underlying wrong. The object of restitution in such cases is to eliminate profit from wrongdoing while avoiding, so far as possible, the imposition of a penalty. Restitution remedies that pursue this object are often called 'disgorgement' or 'accounting.'"
In this case, the jury found that Johnson's wrongdoing enriched him in the amount of $2,287. This is "the net profit attributable to the underlying wrong." He therefore cannot be required to "disgorge" more than that to Applied General. The entire amount of a joint and several judgment, however, would be potentially collectable from him. (See Evangelatos v. Superior Court (1988) 44 Cal.3d 1188, 1196-1197.)
Applied General cites two California cases it asserts support joint and several liability for unjust enrichment: American Master Lease, supra, and Walsh, supra. Neither does.
In American Master Lease, the defendants/appellants were a father and son (the Dunns), the Dunn Family Trust, and a venture capital firm founded and managed by the father. The father was the sole trustee of the trust, which held the bulk of his assets. (American Master Lease, supra, 225 Cal.App.4th at pp. 1458, 1460.) As far as the opinion reveals, the defendants were considered as a unit throughout both the trial and the appeal, and nothing in the opinion indicates the jury's award against them distinguished between them. (Id. at pp. 1470-1471.) The reviewing court never discussed the propriety of joint and several liability versus individual liability for each defendant, and a case is not authority for a proposition it does not consider. (See, e.g., California Building Industry Assn. v. State Water Resources Control Bd. (2018) 4 Cal.5th 1032, 1043.)
Walsh concerned civil liability for a scheme whereby two people convicted of bribing a San Bernardino County official and the official himself were all ordered to disgorge the profits of the scheme, consisting of the official's salary, the bribes, some associated kickbacks, and consulting fees paid to one of the bribers. The defendants were found liable for breaching a fiduciary duty (the official), inducing a breach of fiduciary duty (the bribers), and fraud. (Walsh, supra, 158 Cal.App.4th at p. 540.) Following the Restatement of Restitution, the court held that "[a]ctive participants in the breach of fiduciary duty by another are accountable for all advantages they gained thereby and are liable to the beneficiary of the duty without reference to the amount of the fruits of the fraudulent transaction he personally obtains." (Id. at p. 543.)
Walsh is therefore a case involving fiduciaries. The Restatement is hard on defaulting fiduciaries. It imposes disgorgement on a "conscious wrongdoer" only if he or she has knowledge of the underlying wrong or disregards a known risk to the claimant. A defaulting fiduciary, however, is liable "without regard to notice or fault." (Rest.3d, Restitution, § 51(3) & (4).) In this case, by contrast, none of the defendants was an Applied General fiduciary.
Applied General also cites several Ninth Circuit cases in which joint and several liability was imposed for securities violations. As one court explained, "[T]he district court has broad discretion in subjecting the offending parties on a joint-and-several basis to the disgorgement order. [Citation.] Imposing the burden upon the defendant of proving the propriety of the apportionment of the disgorgement amount in securities cases is appropriate and reasonable. Although in some cases, a court may be able easily to identify the recipient of ill-gotten profits and apportionment is practical, that is not usually the case. Generally, apportionment is difficult or even practically impossible because defendants have engaged in complex and heavily disguised transactions. [Citation.] Very often defendants move funds through various accounts to avoid detection, use several nominees to hold securities or improperly deprived profits, or intentionally fail to keep accurate records and refuse to cooperate with investigators in identifying the illegal profits. Hence, 'the risk of uncertainty should fall on the wrongdoer whose illegal conduct created that uncertainty.' [Citation.]" (SEC v. Hughes Capital Corp. (3d Cir. 1997) 124 F.3d 449, 455 (Hughes).)
In this case, however, the jury apportioned the amount by which defendants were unjustly enriched between Johnson and Greenleaf. None of the Hughes difficulties with apportioning illegal profits among securities law violators, which support joint and several liability, is present here.
Applied General argues the jury's unjust enrichment award was actually a global one for misappropriation of trade secrets, negligent interference, and breach of the duty of loyalty. Because the jury did not award additional damages for interference and breach even though it found damage (for interference) and harm (for breach), it must have meant the unjust enrichment award to cover all three causes of action.
This argument requires a strained interpretation of the special verdict. The dollar amounts for unjust enrichment awarded against Johnson and Greenleaf were clearly for misappropriation of trade secrets. The jury's decision not to award additional dollars for interference and breach simply reflects the failure to provide proof of these extra damages. Applied General's damages expert concentrated on misappropriation and did not present any evidence of extra losses for interference and breach.
Question 27(a) stated, "If you answered Yes to Question 3, go to Question 27. If you answered no to Question 3, go to Question 34." Question 3 stated, "Was Defendants' acquisition and use of [Applied General's] Trade Secrets a substantial factor in causing [Applied General] to lose profits or in causing unjust enrichment of Defendants?" Questions 27 through 33 dealt with remedies for misappropriation. Question 34 dealt with the remedies for the other torts, such as interference and breach, involved in the trial.
The trial court seemed to believe that Johnson would not actually have to pay the bulk of the judgment, apparently on the blood-from-a-stone theory that he did not have the wherewithal to pay $1 million, so Applied General would have to collect from Greenleaf if it was going to collect at all. "Time will tell."
But while time is telling, Johnson could have a judgment for more than a million dollars recorded against him, at the very least playing havoc with his credit. (See Code Civ. Proc., §§ 674 [recording abstract of judgment], 683.010 [judgment enforceable on entry]; 697.310 [abstract of judgment creates lien on real property] 683.020 [judgment good for 10 years].) And Applied General's suggestion that Johnson and Greenleaf could involve themselves in an indemnity lawsuit merely multiplies legal proceedings to no purpose. The jury found that Johnson had unjustly enriched himself by a minimal amount, and that is the amount for which he is accountable to Applied General.
B. Attorney Fees
Applied General moved for a "staggering" amount of attorney fees - $3.6 million - consisting of $2.4 million billed fees and a 1.5 multiplier. The trial court prepared a lengthy and meticulous order explaining why Applied General was not going to get anything close to that amount.
The court calculated the base amount by multiplying the blended billing rate ($265 for attorneys and paralegals) by the number of hours billed (7,000), giving a total of $1.85 million. The court then noted that the discovery referee had already awarded Applied General $160,164 in sanctions. Although counsel represented that the hours reflecting that amount had been removed from the bills, the court astutely pointed out that it had no information about the number of hours Applied General had claimed for discovery misuse, but the referee had rejected as unreasonable. Lacking this information and given the general tenor of the fee motion, the court decided the extra amount requested from the referee was probably double what he had actually awarded and subtracted $320,000 from the base amount. The final, "lodestar," amount was $1.53 million.
The court declined to apply the multiplier requested by Applied General. Instead it applied a negative multiplier because (1) Applied General filed its fee motion late, and the court could easily have declined to hear it at all; (2) the hours were excessive; and (3) Applied General was not damaged by defendants' conduct, but rather obtained relief by disgorgement, which might be deemed a windfall. The court further considered the effect on Johnson's financial condition of a "ruinously" large fee award. The total fees awarded were $1.2 million, of which $1.1 million was allocated to Greenleaf and Mulder and $100,000 to Johnson.
The court noted that some billers logged several full-time months per year, suggesting that they had been "taking [their] time" about performing their tasks.
"[T]he dollar amount assigned represented the success had by defendants in using the trade secret, NOT the loss suffered by the plaintiffs in having to unwittingly share that trade secret. A plaintiff could sit and do nothing and still earn a disgorgement award, which some might describe as a fortunate windfall." Of course, a plaintiff could not sit and do nothing indefinitely. A three-year limitations period applies to a trade secret claim, and the period begins when the first use of the secret is discovered. Continuous use does not extend the period. (See Cadence Design Systems, Inc. v. Avant! Corp. (2002) 29 Cal.4th 215, 222-223; Civ. Code, § 3426.6.)
Civil Code section 3426.4 provides in pertinent part, "If . . . willful and malicious misappropriation exists, the court may award reasonable attorney's fees and costs to the prevailing party." The jury found that Johnson's misappropriation was willful and malicious.
All further statutory references are to the Civil Code unless otherwise indicated.
Johnson proffers several arguments as to why either no fees should have been awarded or the amount should have been much smaller. The arguments break down into two categories: the award had no legal basis, and the award was too high. We review the legal basis for an attorney fee award de novo. We review the amount of a fee award for abuse of discretion. (Mountain Air Enterprises, LLC v. Sundowner Towers, LLC (2017) 3 Cal.5th 744, 751 (Mountain Air).)
Under the American rule, each party is responsible for its own attorney fees, regardless of outcome. (Mountain Air, supra, 3 Cal.5th at p. 751.) When the Legislature makes a change in that rule - when a statute provides fees to a prevailing defendant (see, e.g., Code Civ. Proc., § 425.16, subd. (c)(1)) or any prevailing party (see, e.g., § 3344, subd. (a)) - some policy reason mandates the change.
According to the commissioners' comment, the attorney fee provision in section 3426.4, was patterned on 35 U.S.C. section 285, part of federal patent law. The purpose of the federal statute is, according to one case, "to give the court power to throw the burden of unnecessary and vexatious litigation on the shoulders of those who are responsible for it." (Colgate-Palmolive Co. v. Carter Prods. (4th Cir. 1956) 230 F.2d 855, 866 (Colgate-Palmolive).) To that end, both plaintiffs and defendants may be liable for fees - plaintiffs for instituting trade secret litigation in bad faith and defendants for willful and malicious misappropriation.
Title 35 United States Code section 285 provides, "The court in exceptional cases may award reasonable attorney fees to the prevailing party."
Section 3426.3, subdivision (c), again following patent law, allows a court to award exemplary damages of up to twice the damages, unjust enrichment, or royalty award in the cases of willful and malicious misappropriation. No exemplary damages were awarded in this case.
1. Legal basis for fees - de novo review
Johnson argues that fees are not authorized because it is not possible to tell whether the jury awarded $2,278 for misappropriation of trade secrets, breach of the duty of loyalty, or negligent interference with contract. As discussed above, the special verdict does not support this interpretation. The jury verdict is very clear that the dollar award was for unjust enrichment, one of the possible remedies for misappropriation of trade secrets. (§ 3426.3, subd. (a).) The jury separately awarded "no dollars" in damages for breach of the duty of loyalty and for negligent interference with prospective economic relations.
Johnson also argues Applied General's case against him could have been brought in small claims court, considering the small amount of the unjust enrichment award so Applied General is not entitled to attorney fees. The premise of this argument is incorrect. One of the remedies Applied General sought was injunctive relief. Courts of limited jurisdiction cannot issue permanent injunctions. (Code Civ. Proc., § 580, subd. (b)(2)). And, of course, Applied General was seeking damages far in excess of the maximum allowed for small claims. (Code Civ. Proc., § 85, subd. (a).) The fact it did not get them against Johnson is of nugatory import.
Johnson bases this argument in a remark in the minute order: "Even in small claims court the case against Johnson would have been small," alluding to the dollar amount of the unjust enrichment award. The court did not say Applied General should have sued Johnson in small claims court.
2. Prevailing party and amount of fees - abuse of discretion review
Johnson argues Applied General was not the prevailing party and the amount of the fees was excessive, claims we review for abuse of discretion. (Yield Dynamics, Inc. v. TEA Systems Corp. (2007) 154 Cal.App.4th 547, 577 ["A request for an award of attorney fees is entrusted to the trial court's discretion and will not be overturned in the absence of a manifest abuse of discretion, a prejudicial error of law, or necessary findings not supported by substantial evidence."].) He contends that Applied General should have obtained no fees at all against him because it obtained an award of only $2,287 after asking for $1.2 million in damages. It therefore did not obtain its litigation objectives and was not the prevailing party as to him. He also argues he was mainly on the sidelines in this clash of titans, while Applied General and Greenleaf ran up huge legal bills. Greenleaf's defense, moreover, was funded by an insurance company, while Johnson had to pay his lawyers out of his own pocket. Even if the trial court was justified in awarding some fees, it should have awarded only an amount proportional to the two unjust enrichment awards, that is, $2,264, which is .22 percent of $1.2 million. Finally, Johnson argues that the court failed to take into account the effect an award of $100,000 would have on his financial condition.
Johnson supports this statement by a citation to Applied General's closing argument where it asked for $1.2 million for a total unjust enrichment award. Johnson cited nothing in the record to the effect that Applied General sought a $1.2 million award against him individually.
This insurance-funded defense was not free; Greenleaf presumably paid premiums for its insurance. Furthermore, Greenleaf may have to reimburse the insurer for the cost of defense.
Unless a statute defines "prevailing party" - as does, for example, Code of Civil Procedure section 1032, subdivision (a)(4) - courts use a "practical approach" to determine whether a party qualifies as a prevailing party for attorney fee purposes. A trial court considers several factors to make this determination, including whether a party realized its litigation objectives. (Olive v. General Nutrition Centers, Inc. (2018) 30 Cal.App.5th 804, 824.) We review the trial court's factual determination of prevailing party status for abuse of discretion. (Id. at p. 826.) When neither party obtains an unqualified win, we reverse only when the court's ruling exceeds the bounds of reason and causes a miscarriage of justice. (Id. at p. 827.)
Section 3425.4, the trade secret attorney fee statute, is not, however, a "prevailing party" statute. Instead, it authorizes, but does not require, an award of attorney fees for four kinds of bad conduct: (1) a bad-faith misappropriation claim; (2) a bad-faith motion to terminate an injunction; (3) a bad-faith opposition to a motion to terminate an injunction; and (4) willful and malicious misappropriation. The focus here is on conduct, not on the degree to which a party "prevailed," that is, got what it asked for. This focus supports the statutory purpose for awarding fees: "to throw the burden of unnecessary and vexatious litigation on the shoulders of those who are responsible for it." (Colgate-Palmolive Co, supra, 230 F.2d at p. 866.) Under this statute, it would be possible to assess fees against both sides; the plaintiff could oppose a motion to terminate an injunction in bad faith, and the defendant could be liable for willful and malicious misappropriation. This could not happen under a prevailing party statute. Moreover, in the absence of one of the specified kinds of bad conduct, no one would be eligible for attorney fees in a trade secret action, regardless of who prevailed.
In this case, Applied General convinced the jury that Johnson had misappropriated its trade secrets willfully and maliciously. The statute allows attorney fees for this kind of bad conduct. Johnson, along with his cohorts, was responsible for the litigation. An award of fees fulfills the statutory purpose, regardless of how much Applied General extracted from Johnson.
Johnson also argues that the battles between Applied General and Greenleaf accounted for most of Applied General's fees and that Greenleaf had insurance company funding, while Johnson had to pay his own way. As an example, Johnson cites a passage in Applied General's motion for attorney fees to the effect that a motion for summary judgment made by Mulder and Greenleaf ran up the fees unnecessarily.
According to the register of actions, only Mulder and Greenleaf made the summary judgment motion. The register of actions does not include a motion from Johnson. Nothing in the record suggests that Johnson was involved in the briefing for this motion, so it provides no support for his argument.
Johnson was separately represented throughout the case. If he was on the sidelines for these battles, his attorneys would have had little or no involvement with them and done minimal billing. Johnson presented no evidence of significant legal expenses he incurred by being dragged into some pretrial dispute that had nothing to do with him individually.
Contrary to Johnson's assertion, the trial court did consider the financial impact of the attorney fee award on him. That is why it assessed less than 10 percent of the total fees against him. Johnson submitted no evidence of his financial condition to support an argument that the amount actually imposed would be "ruinous."
The trial court also apportioned 10 percent of the litigation costs against Johnson, in recognition of the small amount of the unjust enrichment award against him.
Johnson focuses on the small amount of the unjust enrichment award and ignores other aspects of his conduct. That is wholly understandable, but the statute focuses not on the amount of harm he caused but on whether his actions were willful and malicious. Johnson was the chief actor in the misappropriation drama. He was the one who accessed Applied General's secured database and handed the confidential information over to Greenleaf. The jury also found he had breached his duty of loyalty, a breach that no doubt figured into the jury's assessment of malice. His actions were largely responsible for Greenleaf's ability to unjustly enrich itself by more than a million dollars. His failure to profit handsomely himself from his wrongdoing does not make the wrongdoing any less malicious. A robber who holds up a store on a day when there happens to be a small amount of cash in the till can hardly plead the poor return on his crime as lessening the offense. (See Vacco Industries, Inc. v. Van Den Berg (1992) 5 Cal.App.4th 34, 55 ["That the compensatory damages from defendants' willful and malicious misappropriation were not substantial may only reflect that they had not yet been successful in financially injuring the plaintiffs and that the injunctive relief, interposed to prevent such harm, was the most significant relief which the plaintiffs sought or obtained."].)
One purpose of an attorney fee award is to reimburse a party for the reasonable legal expenses incurred because it had to engage in court process to protect its rights. Another purpose is to deter people who might in the future be inclined to violate someone's rights. (Cf. SASCO v. Rosendin Electric, Inc. (2012) 207 Cal.App.4th 837, 845.) Applied General apparently did not distinguish between fees incurred in going after Greenleaf and Mulder and fees incurred in going after Johnson - it is hard to see how it could have - so the trial court had to make an allocation. It did.
The fee award against Johnson was approximately 10 percent of the fee award against Greenleaf. The trial court cut the amount Applied General requested by two-thirds, using its wealth of experience not only with litigation in general but also with the course of this specific case. We review the amount of an attorney fee award for abuse of discretion, and we cannot say that the court abused its discretion by allocating 10 percent of the legal fees to the person who set the whole process in motion.
II. Greenleaf/Mulder Appeal
A. Mulder Appeal
1. Joint and several liability
The analysis that applies to Mulder is pretty much the same as the one we have applied to Johnson. Unjust enrichment is by nature an individual remedy: a person cannot disgorge something he never had. The jury decided that misappropriating Applied General's trade secrets did not unjustly enrich Mulder personally, only his corporation. Therefore no unjust enrichment judgment should have been entered against him. This portion of the judgment and the amended judgment is reversed.
The jury was not asked to and did not make an alter ego finding.
2. Attorney fees
The attorney fee order awards Applied General fees in the amount of $1.1 million jointly against Mulder and Greenleaf. Mulder argues he should not be responsible at all for attorney fees because Applied General did not obtain a monetary award against him. Like Johnson, Mulder bases his argument on the amount of the award and overlooks the rest of the jury's findings. As with Johnson, the question is not how much Applied General recovered from him but rather whether he engaged in the specific conduct that evokes an attorney fee award.
The jury found that Mulder and Greenleaf misappropriated trade secrets willfully and maliciously, the statutory criteria for awarding attorney fees. He aided and abetted Johnson's breach of his duty of loyalty to Applied General, a clear indication of willful and malicious behavior.
Mulder has cited no authority for the argument he should not be liable for fees as a matter of law, and we cannot say the trial court abused its discretion by making him jointly liable with Greenleaf for the fees. We affirm this portion of the amended judgment.
B. Greenleaf Appeal
Greenleaf asks us to reverse the judgment against it for two main reasons. First, the misappropriated broker and customer names were not trade secrets. Second, the unjust enrichment calculation Applied General presented at trial is wrong. In other words, Greenleaf asks us to retry the case and reweigh the evidence.
The record does not include a motion for judgment notwithstanding the verdict by Greenleaf. While it is not necessary to make such a motion in order to raise an issue on appeal (see Sweatman v. Department of Veterans Affairs (2001) 25 Cal.4th 62, 68), we consider the absence of such a motion significant.
"'When a trial court's factual determination is attacked on the ground that there is no substantial evidence to sustain it, the power of an appellate court begins and ends with the determination as to whether, on the entire record, there is substantial evidence, contradicted or uncontradicted, which will support the determination, and when two or more inferences can reasonably be deduced from the facts, a reviewing court is without power to substitute its deductions for those of the trial court. If such substantial evidence be found, it is of no consequence that the trial court believing other evidence, or drawing other reasonable inferences, might have reached a contrary conclusion.' [Citation.] The substantial evidence standard of review is applicable to appeals from both jury and nonjury trials." (Jameson v. Five Feet Restaurant, Inc. (2003) 107 Cal.App.4th 138, 143; see Wilson v. County of Orange (2009) 169 Cal.App.4th 1185, 1188 [party basing claim on insufficient evidence assumes daunting burden].)
In addition, when a party bases an appeal on insufficient evidence, we resolve all conflicts favorably to the prevailing party and accord the prevailing party the benefit of all reasonable inferences. (Scott v. Pacific Gas & Electric Co. (1995) 11 Cal.4th 454, 465.)
1. Trade Secrets
Greenleaf disputes the jury's finding that the information in Applied General's computer system was a trade secret. It maintains that broker and customer names are not trade secrets; they are, or can be, "generally known" in the Medicare insurance business.
Section 3426.1, subdivision (d), provides: "'Trade secret' means information, including a formula, pattern, compilation, program, device, method, technique, or process, that: [¶] (1) Derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and [¶] (2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy."
The jury received two instructions relevant to this issue: CACI No. 4401 and CACI No. 4402. When filled out for trial, CACI No. 4401 read, "[Applied General] claims that Defendants misappropriated their trade secrets. To succeed on this claim, [Applied General] must prove all of the following: [¶] 1. That [Applied General] owned the following: [¶] a. Leads Database: a database containing information regarding potential and actual purchasers of insurance; [¶] b. Broker/Agent Database: a database containing information regarding all brokers and agents under contract with [Applied General] to sell life, accident and health care insurance and more particularly senior 'advantage' health care insurance. [¶] 2. That this information constitutes trade secrets at the time of the misappropriation; [¶] 3. That Defendants improperly acquired, used, or disclosed the trade secrets; [¶] 4. That [Applied General] was harmed and/or Defendants were unjustly enriched; and [¶] 5. That Defendants' acquisition, use, and /or disclosure was a substantial factor in causing [Applied General's] harm or causing Defendants to be unjustly enriched." CACI No. 4402 read, "To prove that the customer, lead and agent/broker information were trade secrets, [Applied General] must prove all of the following: [¶] 1. That the information was secret; [¶] 2. That the information had actual or potential independent economic value because it was secret; and [¶] 3. That [Applied General] made reasonable efforts to keep the information secret."
The jury specifically found that "the information contained in the [Applied General] computer/GAIN system [was] a Trade Secret at the time it was accessed and used by Defendants." Greenleaf now argues that the broker and customer information it, along with Mulder and Johnson, misappropriated did not meet the first requirement of a trade secret. It was not information that was not generally known to other insurance agencies.
Applied General presented evidence that the GAIN computer system Johnson hacked into contained more than just names of brokers and customers. Patrick Rodriguez, Applied General's founder, called the information in the computer system "the life blood of our company." He explained that, with respect to customers, the system contains information such as the type of plan they have, their physician, their eligibility, and the agent's notes about why they preferred one plan over another. With respect to agents, the system includes not only their names but also their commissions, their book of business, their level of production.
The jury also heard Greenleaf's evidence and argument that broker and customer names were not secret and that anyone could go out and acquire leads (consumers who had expressed an interest in a Medicare plan) without misappropriating trade secrets. The jury plainly credited Applied General's evidence that Greenleaf had misappropriated more than just names.
Greenleaf argues that because the Applied General computer system did not record what a hacker had seen, only that the system had been hacked, there was no evidence that trade secrets, as opposed to merely confidential information, had been acquired. But the jury was entitled to infer that Johnson went to the trouble of hacking into Applied General's system, under a false user name and password, to obtain more than a list of names. The information stored in the system allowed Greenleaf to tell which agents would be worth enticing to leave Applied General and which leads could be most profitably approached by the new agency. The jury could reasonably infer that this information was what Johnson was after, not names he could get off the internet or out of the phone book. We cannot gainsay that inference.
The evidence and issue sanctions both referred to "confidential information."
2. Amount of unjust enrichment award
Greenleaf's criticism of the amount of the unjust enrichments award takes several forms. First, it argues, in essence, that most or all of the names should not have been on the matching lists that Applied General's expert used to make his calculations and even if the names matched, there was no evidence that the matching indicated wrongdoing. Agents can move around, as can customers. Next, it argues that the "unjust enrichment period," September 2009 to early 2016, was too long. Greenleaf asserts that the calculations failed to take certain types of evidence into account. Finally, Greenleaf argues that the unjust enrichment calculation failed to include its expenses and therefore the judgment must be reversed.
As with the arguments about the existence of trade secrets, all of these arguments either were or could have been placed before the jury. If the jury did hear them, it obviously found Applied General's evidence and arguments more persuasive. If Greenleaf has just thought of them now, it is too late.
Applied General's damages expert, Kenneth Rugeti, explained how he arrived at his unjust enrichment figure. He matched the names of agents in the Applied General database before the last day Johnson accessed Applied General's computer system in September 2009 with the names of agents who contracted with Greenleaf. There were 32 such agents. He also matched the names of "leads," which he defined as both leads (people who had expressed an interest in a being contacted by an agent) and members (customers who had bought policies). He identified approximately 1,000 matching leads.
Rugeti then calculated the net commission that Greenleaf was paid by subtracting the amount Greenleaf paid the agents from the amount the carriers paid Greenleaf between September 2009 and early 2016. He performed that same operation for the leads for the same period. Mulder testified Greenleaf had spent $181,000 on marketing, leads, and expense reimbursement during that period of time. The jury's unjust enrichment award against Greenleaf was $1,026,144, which was the difference between Rugeti's net commission amount ($1,207,144) and Mulder's expenses amount ($181,000.)
The sale of a policy results in a commission for both the independent agent and the supporting agency such as Applied General. Frequently the carrier pays the agency the entire amount, and the agency pays the agent his or her share. This is one of the administrative functions performed by Applied General.
There was a gap of three months in the information about its finances provided by Greenleaf. Rugeti had a spreadsheet that went from September 2009 to September 2011. Starting in January 2012, Greenleaf gave him 22,000 files that he had to search through in order to determine the commission information he was seeking.
Regarding unjust enrichment, the jury was instructed, "Defendants were unjustly enriched if their misappropriation of [Applied General's] trade secrets caused them to receive a benefit that they otherwise would not have achieved. [¶] To decide the amount of any unjust enrichment, first determine the value of the benefit that would not have been achieved except for Defendants' misappropriation. Then subtract from that amount Defendants' reasonable expenses. [¶] In calculating the amount of any unjust enrichment, do not take into account any amount that you included in determining any amount of damages for [Applied General's] actual loss. Greenleaf argues it was Applied General's responsibility to present evidence of expenses other than net commissions and this lack of evidence requires reversal of the judgment.
The Restatement Third of Unfair Competition states, "Relief measured by defendant's gain. The traditional form of restitutionary relief in an action for the appropriation of a trade secret is an accounting of the defendant's profits on sales attributable to the use of the trade secret. The general rules governing accountings of profits are applicable in trade secret actions. The plaintiff is entitled to recover the defendant's net profits. The plaintiff has the burden of establishing the defendant's sales; the defendant has the burden of establishing any portion of the sales not attributable to the trade secret and any expenses to be deducted in determining net profits." (Rest.3d, Unfair Competition, § 45, com. f.)
The Restatement Third of Restitution and Unjust Enrichment states, "Burdens of proof become relevant whenever the fact to be determined - here, the net profit attributable to the underlying wrong - cannot be established with certainty. A traditional formula . . . states that the claimant has the burden of proving revenues and the defendant has the burden of proving deductions. This Restatement adopts a more modern and generally useful rule that the claimant has the burden of producing evidence from which the court may make at least a reasonable approximation of the defendant's unjust enrichment. If the claimant has done this much, the defendant is then free (there is no need to speak of "burden shifting") to introduce evidence tending to show that the true extent of unjust enrichment is something less. . . . [¶] . . . [T]he claimant's burden of proof, so described, is ordinarily met as soon as the claimant presents a coherent theory of recovery in unjust enrichment. The claimant's case is not merely that the defendant has committed a wrong to the claimant, but that the wrong has proximately resulted in an unjust gain to the defendant. Allegations that the defendant is a wrongdoer, and that the defendant's business is profitable, do not state a claim in unjust enrichment. By contrast, a claimant who is prepared to show a causal connection between defendant's wrongdoing and a measurable increase in the defendant's net assets will satisfy the burden of proof as ordinarily understood." (Rest.3d, Restitution, § 51, com. i.)
The cases Greenleaf cites to support its argument do not. Each of them involves calculating a plaintiff's profits as a measure of its damages for a breach or other tort. In Kids' Universe v. In2Labs (2002) 95 Cal.App.4th 870, the issue the court was addressing was how to calculate damages for an unestablished business that has been tortiously prevented from becoming established. "[L]ost prospective net profits may be recovered if the evidence shows, with reasonable certainty, both their occurrence and extent. [Citation.] It is enough to demonstrate a reasonable probability that profits would have been earned except for defendant's conduct." (Id. at p. 884.) The court then defined lost profits and discussed the ways in which an unestablished business could prove them. (Ibid.) In American Fire Etc. Service v. Williams (1959) 171 Cal.App.2d 397 (American Fire), the only evidence the plaintiff produced relating to damages was the gross amount it lost per year when the defendants violated an injunction. The plaintiff put on no evidence of its yearly costs and thus failed to prove its damages. (Id. at pp. 403-404.) Jozovich v. Central California Berry Growers Assn. (1960) 183 Cal.App.2d 216, followed American Fire, supra, in holding that a cross-complainant with a breach of contract claim must prove net loss of profits in order to recover. (Jozovich v. Central California Berry Growers Assn., supra, at pp. 229-230.)
In this case, Applied General did not attempt to prove its lost profits. Instead, it relied on a theory of unjust enrichment. Unlike lost profits, where the information necessary to calculate them is in the plaintiff's hands, unjust enrichment necessitates extracting the necessary information from the defendant. We infer from the appointment of a discovery referee, the imposition of $160,000 in monetary sanctions, and the referee's resort to issue and evidence sanctions against the defendants that the course of pretrial discovery in this case did not run smooth.
Applied General presented the jury with evidence of Greenleaf's sales, a "measureable increase in Greenleaf's net assets" attributable to the misappropriation of trade secrets, and a "reasonable approximation" of Greenleaf's unjust enrichment. (Rest.3d, Restitution, § 51, com. i.) This includes the length of time during which the misappropriation occurred. The propriety of attributing the increase in assets to the matching agents and leads was also before the jury. Greenleaf was free to, and did, present evidence and argue that not all the brokers and leads upon which Rugeti based his calculations were in the Greenleaf fold because of misappropriation. Greenleaf was free to criticize Rugeti's calculations - to point out where specifically he had gone wrong - during cross-examination. Greenleaf was free to, and did, present evidence of its expenses, which the jury appears to have taken into account. Greenleaf was free to present evidence at trial of additional expenses for which it claimed a deduction, but did not. Greenleaf could have called its own forensic accountant to rebut Rugeti's testimony, but chose not to do so. The jury made its decision based on all of the evidence it had, and, as substantial evidence supports it, we must defer to this decision.
Counsel for Mulder and Johnson did their best to convince the jury the misappropriation was in the nature of a boyish prank by two youthful but misguided tyros. Mulder's counsel called his client "probably stupid"; Johnson's counsel referred to him as an "idiot" and told the jury "he did a lot of stupid things when he was 26 years old." The jury took a different view of their conduct and, based on the evidence before it, decided what the consequences should be. The trial court did the same. Sufficient evidence supports the jury's decision, and we cannot find an abuse of discretion. The judgment against Greenleaf is affirmed.
DISPOSITION
The judgment of October 16, 2017, and the amended judgment of August 22, 2018, are modified as follows: Paragraph 1 is stricken and the following paragraph is substituted:
1. That, as damages for Defendants Greenleaf Financial and Insurance Services, Inc., Christopher Mulder, and Lucas Johnson's Misappropriation of Trade Secrets and Negligent Interference with Prospective Economic Relations, as well as Lucas Johnson's Breach of his Duty of Loyalty, Applied General Agency, Inc., shall recover from Greenleaf Financial and Insurance Services, Inc., the sum of $1,026,144 and from Lucas Johnson the sum of $2,287 with interest thereon at the rate of seven percent (7%) per annum from the date of the verdict (July 27, 2017) through the date of entry of this Judgment (October 16, 2017), and at the rate of ten percent (10%) per annum from October 17, 2017, until paid.
In all other respects, the judgment, the amended judgment, and the attorney fee order are affirmed. The parties are to bear their own costs on appeal.
BEDSWORTH, ACTING P. J. WE CONCUR: ARONSON, J. GOETHALS, J.