Ajaxo Inc. v. E*Trade Financial Corp.

Ajaxo Inc. v. E*Trade Financial Corp., 187 Cal.App.4th 1295 (2010), is the second appeal on a dispute dated back to 1999. During the original 2000 case, defendant E*Trade, an online financial services company, was found liable for maliciously and willfully misappropriating trade secrets pertaining to wireless stock trading technology acquired from the plaintiff, Ajaxo. Under the Uniform Trade Secrets Act E*Trade was required under a mutually signed Non-disclosure agreement (NDA) to keep Ajaxo's trade secrets confidential. After a jury trial in 2003, E*Trade was fined $1.3 million to be paid to Ajaxo for the misappropriation and breach of NDA. The court denied Ajaxo's request for additional damages. All parties appealed. In 2005 the California courts of appeal affirmed the original ruling but remanded the case back to the trial court to determine additional damages. A jury verdict in 2008 rejected claims raised and demands for royalty damages from Ajaxo. In trade secret cases it is common for a plaintiff to seek royalty damages when they are unable to show an actual loss or that the defendant received some inequitable benefit from the misappropriation. In this case the court refused to allow evidence of royalty damages, claiming there were no net damages. Ajaxo appealed. In 2010 the California courts of appeal once again remanded the case back to the trial court reasoning that in such cases an exact quantitative measure of wrongful enrichment damages incurred by the plaintiff might not be sufficient to reject the claim of reasonable royalties based damages

Introduction E*Trade, an online financial services company, was found liable for misappropriation of trade secrets pertaining to Wireless stock trading technology that it had acquired from software company Ajaxo. Initially awarded $1.3 million, Ajaxo requested additional damages. The trial court denied the request because Ajaxo was unable to show that it had suffered any lost profits from the misappropriation or that E*Trade had received any inequitable benefit. The appeals court asserted that the decision was an error, and that Ajaxo would be allowed to present evidence of royalty damages.

Legal proceedings On October 27, 2000, a complaint was filed in one of the California superior courts, the Superior Court for the State of California, County of Santa Clara, entitled,

Ajaxo claimed for damages and non-monetary compensation for the E*Trade's alleged breach of an NDA with Ajaxo in regards to a wireless stock trading technology offered to E*Trade by Ajaxo. Ajaxo also claimed for damages and other relief against both E*Trade and Everypath, Inc., for their alleged misappropriation of its trade secrets on wireless stock trading technology. After a jury trial, a judgment was entered in 2003 in favor of Ajaxo against E*Trade for $1.3 million for violation of the mutual non-disclosure agreement signed between Ajaxo and E*Trade.

The issue was that even though the jury also found in favor of Ajaxo on its misappropriation of trade secrets claim against E*Trade and Everypath, the trial court subsequently denied Ajaxo's requests for additional damages and relief on basis of these claims. This resulted in all parties appealing the decision, and on December 21, 2005, the California Court of Appeal affirmed the above-described award against E*Trade for violation of the NDA but remanded the case to the trial court for determining the additional damages that Ajaxo could be entitled to as a result of the jury's previous finding in favor of Ajaxo on its claims against E*Trade and Everypath. After the Court of Appeal's ruling, defendant Everypath terminated its operations in January, 2006. As a result, the defendant Everypath was no longer involved in defending the case against it. Although E*Trade paid Ajaxo the full amount due on the judgment against it as directed by the Court of Appeal, this case was remanded back to the trial court, and on May 30, 2008, a jury came up with a verdict in favor of E*TRADE thus resulting in denial of all claims raised and demands for damages against E*Trade by Ajaxo. After the trial court ruled its judgement in favor of E*Trade, on September 5, 2008, Ajaxo filed post trial motions asking the trial court to consider a new trial and nullify its judgment in favor of E*Trade. The trial court ordered rejection of Ajaxo's motions on November 4, 2008.

Background Facts

The events began unfolding in September 1999, when E*Trade, an online financial services based corporation, signed a Non-Disclosure Agreement (NDA) with Ajaxo, Inc. The terms of this NDA stated the level of details up to which E*Trade required to maintain confidential information it received pertaining to Ajaxo's Wireless stock-trading software. E*Trade was in need of this wireless technology, since at that time its clients could trade stocks using the internet but could not use wireless handheld devices for that purpose. E*Trade was in pursuit of a company to team up with in order to develop a wireless stock trading technology. Ajaxo offered to license its product to E*Trade for $860,000, to which E*Trade made an opposite offer. However, E*Trade rescinded its offer, explaining the small size of Ajaxo as a limiting point for it to come into partnership with E*Trade.

Eventually, E*Trade selected Everypath Inc. (Everypath) in December 1999, to be its wireless vendor. The strange thing is that E*Trade made that agreement even though Everypath did not at that time have a proper wireless product to serve its purpose. A series of events followed this agreement. In the next couple of months, Everypath managed to raise sufficient venture capital funds to further develop the wireless technology as needed by E*Trade for its purposes of developing a platform of Wireless stock trading. Finally, E*Trade and Everypath signed a service provider agreement in March 2000, according to which Everypath was supposed to lease its wireless trading technology to E*Trade.

Further digging into the matter during the first trial provided ample proof for asserting that E*Trade was indeed connected to Everypath, both financially and through its personnel. Everypath had received its series funding from Arrowpath Ventures LLC, a venture capital fund that was managed by its ex-employees of E*Trade. E*Trade's funds comprised 25 percent of the capital in Arrow Ventures's VC fund. This gave E*Trade a financial stake in Everypath indirectly.

However, Ajaxo soon formulated its suspicion that E*Trade had been principally involved in development of Everypath's wireless trading technology. Ajaxo attributed this development to be facilitated by E*Trade's misappropriation of its trade secrets, which Ajaxo had disclosed to E*Trade under the initial mutually signed NDA. Ajaxo further assumed that Everypath utilized this knowledge of the illegitimate source of the information to develop the wireless stock trading technology, which it eventually leased to E*Trade.

Procedure

Ajaxo filed a lawsuit against both E*Trade and Everypath. Ajaxo claimed a cause of action for breach of contract against E*Trade and a California Uniform Trade Secrets Act, CUTSA, cause of action against both of the defendants. Prior to the first trial, Ajaxo formulated a plan to showcase both its actual losses and defendants' wrongful enrichment arising from the misappropriation of its trade secret wireless trading technology. Ajaxo had proposed to introduce an expert witness, Walter Bratic, who was ready to testify and assessed the loss of Ajaxo's profits close to almost $39 million. Ajaxo had to withdraw the expert after E*Trade filed to exclude the expert's testimony before the trial court. During that trial, Ajaxo based its loss case mainly upon wrongful enrichment valuation.

The first trial in the trial court culminated in allowing E*Trade's and Everypath's motion to a little extent for nonsuit on the CUTSA cause of action. They explained that Ajaxo had not produced sufficient proof of damages for misappropriation (as measured by E*Trade's wrongful enrichment). The trial court allowed the jury to evaluate liability under the CUTSA, recognizing that Ajaxo might be entitled to reasonable royalties if defendants were in fact involved in misappropriation of plaintiff's trade secrets pertaining to its wireless technology. The jury eventually found that E*Trade had indeed breached the NDA and it awarded Ajaxo nearly $1.3 million for that claim. The jury also validated that both defendants had with complete intent wrongfully misappropriated the trade secrets, but it did not award any monetary compensation as it was not a part of the plaintiff's claims.

In its first appeal, Ajaxo asserted that the trial court had committed a mistake by separating the damages issue from the jury. The court agreed to this argument. Ajaxo had based its contract cause of action upon the same facts it had used to prove the misappropriation claim earlier. Ajaxo argued that the 2 causes of action shared mutual issues. The other issue was that the only theory of recovery Ajaxo had pursued on its claim for violation of the mutual NDA was that of wrongful enrichment. The same proof Ajaxo had presented to prove its cumulative losses would have been sufficient to verify unjust enrichment due to E*Trade's misappropriation. There was also more than sufficient proof upon which the jury could have found Everypath to have been unjustly enriched either through its valuation based on the VC funds it acquired eventually or through the customer base it would build after development of that technology. Hence, Ajaxo came to a conclusion that the trial court had committed an error in deducing insufficient proof of its wrongful enrichment resulting from the breach of NDA and pushed forward for a new trial based on that fact.

Appeal

E*Trade's Issues on Appeal

E*Trade raised 3 objections to the appeal. These 3 issues in order are denial of fair trial to Ajaxo, rejection of Ajaxo's motion of judgement against the ruled decision, and allowing Ajaxo to be the "prevailing party" under Civil Code section 1717.

Ajaxo's Issues on Appeal

On the other hand, Ajaxo raised five matters on appeal. In the first case, Ajaxo claims that the court committed a mistake by allowing the defendants' motion for nonsuit on damages resulting from their misappropriation of Ajaxo's trade secret technology. In the second case, the court committed a mistake by allowing the defendants' motion for nonsuit on Ajaxo's claim for a fair royalty due to wrongful enrichment. In the third case, Ajaxo was denied extra compensation due to damages because of a mistake committed by the court in allowing the defendants' non-suit on damages. In the fourth case, there was an error committed by the trial court in rejecting injunctive relief to Ajaxo. In the last case, Ajaxo claimed that the court had committed an error by not asking the defendants to compensate for the attorney fees involved in pre-trial work.

Everypath's Issues on Appeal

Depending upon whether the court found any validity in Ajaxo's claims, Everypath brought forward the following issues. In the first case, Everypath claimed that the court had committed a mistake by rejecting its motion for summary judgment notwithstanding the verdict on the jury's findings that Everypath had purposefully misappropriated Ajaxo's wireless stock trading technology trade secrets and had completely authorized that malicious misappropriation. In the second case, Everypath claimed on the basis of court's judgments procedure that it was denied a fair trial.

Verdict

Trial Court