Bigfoot Ventures v. NextEngine
Filed 12/11/13 Bigfoot Ventures v. NextEngine
CA2/7
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 This opinion has not been certified for
publication or ordered published for purposes of rule 8.1115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
SECOND
APPELLATE DISTRICT
DIVISION
SEVEN
BIGFOOT VENTURES, LTD.,
Plaintiff and Appellant,
v.
NEXTENGINE, INC.,
Defendant and Respondent.
B242559
(Los Angeles
County
Super. Ct.
No. BC427246)
APPEAL from
a judgment of the Superior Court
of
County, Debre K. Weintraub, Judge. Affirmed.
Davis
Law and Thomas P. Davis; Clearspire Law Company, William D. Hagedorn, and Emily
E. Terrell for Plaintiff and Appellant.
Rohde
& Victoroff and Stephen F. Rohde for Defendant and Respondent.
_______________________
Appellant
Bigfoot Ventures, Ltd. appeals from the judgment entered in favor of respondent
NextEngine, Inc. following a jury trial on Bigfoot’s claims for breach of
contract and NextEngine’s cross-claims for breach
of contract, breach of the implied covenant of good faith and fair dealing,
and violations of the California Uniform Commercial Code (UCC). On appeal, Bigfoot argues that the evidence at
trial was insufficient to support the jury’s special verdict findings in favor
of NextEngine and that NextEngine’s defenses and cross-claims fail as a
must be reversed because the jury’s special verdict findings were inconsistent
and contradictory. For the reasons set
forth below, we reject Bigfoot’s arguments and affirm the judgment in NextEngine’s
favor.
I.
The Complaint and Cross-Complaint
Bigfoot is a private
venture capital company based in Hong Kong whose sole
principal is Michael Gleissner. NextEngine
is a private technology company based in Los Angeles
whose founder and chief executive officer is Mark Knighton. In December 2009, Bigfoot filed this action
against NextEngine, alleging causes of action for breach of a 2008 promissory
note and breach of a 2008 mutual release agreement. In response, NextEngine filed a cross-complaint
against Bigfoot, alleging causes of action for breach of a 2009 oral agreement,
breach of the implied covenant of good faith and fair dealing, failure to
preserve collateral in violation of the UCC, and improper disposition of
collateral in violation of the UCC. The parties’
legal claims were tried to a jury in October 2011.
II.
The 2008 Loan Agreement
Founded in 2000, NextEngine is a
small start-up company that designs and manufactures three-dimensional laser
scanners. NextEngine’s two largest
shareholders are Knighton and Gleissner, who have a long-standing business
relationship. In addition to making a significant
capital investment in NextEngine, Gleissner’s venture capital company, Bigfoot,
made a series of loans to NextEngine between 2002 and 2005. The loans were memorialized by the parties in
a 2005 secured promissory note, which was later replaced by a 2007 secured
promissory note.
In 2008, after the 2007 note became
due and NextEngine was unable to pay it, Gleissner and Knighton agreed to
restructure the loan and to replace the 2007 note with a new secured promissory
note reflecting the terms of the restructured loan. On June 2, 2008, the parties entered into six
written agreements pertaining to the restructured loan: (1) the 2008 Secured Promissory Note, (2) the
Mutual Release Agreement, (3) the Assignment and License Agreement, (4) the
Share Mortgage Agreement, (5) the Shareholders Agreement, and (6) the Pledge
Agreement (collectively, the “2008 Loan Agreementâ€). Each of the six agreements that comprised the
2008 Loan Agreement included a provision that the agreement could not be
altered or amended except by a written document signed by the parties. During the negotiation and drafting of the
2008 Loan Agreement, Bigfoot was represented by its in-house counsel, Jeffrey
Berkman, and NextEngine was represented by its outside corporate counsel, Mark
Seneca.
Under the 2008 Secured Promissory
Note, the principal amount of the restructured loan was 5,535,376 euros. Interest accrued on the principal amount at a
rate of 12 percent during the term of the loan.
The entire principal and accrued interest were due and payable upon
written demand by Bigfoot at any time after June 2, 2009, and had to be repaid in full by NextEngine within
10 calendar days of the written demand. If
any portion of the principal or accrued interest was not paid in full within 10
calendar days of Bigfoot’s written demand, NextEngine was required to pay
interest on the unpaid amount on a monthly basis at a default rate of 15
percent (the “monthly interest paymentâ€).
NextEngine’s failure to make any payment of principal or interest when
due within 5 business days after the applicable due date would constitute an
event of default. Upon the occurrence of
an event of default, the entire unpaid principal and interest would become
immediately due and payable. As a
covenant for the promises made in the 2008 Secured Promissory Note, the parties
agreed to concurrently enter into the Mutual Release Agreement and the Assignment
and License Agreement.
Under the Mutual Release Agreement,
NextEngine agreed to make certain royalty payments to Bigfoot as additional
consideration for the restructured loan.
For so long as the 2008 Secured Promissory Note remained outstanding, NextEngine
agreed to pay Bigfoot a quarterly fee based on the number of scanners that NextEngine
sold during such quarterly period (the “quarterly fee paymentâ€). Each quarterly fee payment was due within 30
days after the end of each calendar quarter, with the first payment due on
October 30, 2008. NextEngine’s failure
to make any quarterly fee payment when due also would constitute an event of
default under the 2008 Secured Promissory Note.
As defined in the 2008 Secured
Promissory Note, the collateral for the restructured loan was the intellectual
property rights held by NextPat Ltd., a Hong Kong company that was formed by
Bigfoot and NextEngine solely for the purpose of holding that collateral. Under the Assignment and License Agreement,
NextEngine assigned to NextPat all of its rights, title, and interest in
NextEngine’s intellectual property, including its patents, copyrights,
trademarks, and trade secrets, and NextPat granted to NextEngine an exclusive perpetual
license to use the intellectual property rights. Notwithstanding an event of default under the
restructured loan, the license would remain irrevocable for so long as NextEngine
paid in full to Bigfoot (i) each monthly interest payment that was due by the
end of each calendar month pursuant to the 2008 Secured Promissory Note and
(ii) each quarterly fee payment that was due pursuant to the Mutual
Release Agreement. For so long as the
license remained irrevocable, NextPat agreed to retain all of the intellectual
property rights assigned by NextEngine, and to defer any sale, solicitation for
sale, or other disposition or encumbrance of the intellectual property
rights. In the event the license became
revocable, NextPat could terminate the license upon written notice to
NextEngine.
The 2008 Secured Promissory Note
was secured by the Share Mortgage Agreement and by a life insurance policy
owned by NextEngine and assigned to Bigfoot pursuant to the Pledge Agreement. Under the Share Mortgage Agreement, NextPat had
100 shares of authorized capital of which 51 shares were issued to Bigfoot and
49 shares were issued to NextEngine. As
security for the restructured loan, NextEngine agreed to deposit with Bigfoot the
share certificates evidencing its 49 shares in NextPat. Upon the occurrence of an event of default
under the loan, NextEngine’s 49 shares in NextPat automatically would transfer
to Bigfoot. However, notwithstanding an
event of default, for so long as NextEngine paid in full to Bigfoot (i) each
monthly interest payment that was due by the end of each calendar month
pursuant to the 2008 Secured Promissory Note and (ii) each quarterly fee
payment that was due pursuant to the Mutual Release Agreement, Bigfoot agreed not
to sell, solicit for sale, transfer, dispose of, or otherwise encumber any of
the shares in NextPat or any of the intellectual property rights held by
NextPat. If all payments due under the
restructured loan were fully paid by NextEngine, Bigfoot would transfer the 49 mortgaged
shares in NextPat back to NextEngine.
However, if an event of default continued to occur and NextEngine failed
to make any monthly interest payment or any quarterly fee payment when due,
Bigfoot could thereafter solicit for sale and sell any part of the NextPat
shares or any part of the intellectual property rights.
Under the
Shareholders Agreement, if Bigfoot intended to sell any part of the
intellectual property rights through a public auction, Bigfoot was required to
notify NextEngine of such auction and allow NextEngine a reasonable opportunity
to purchase the intellectual property rights at a higher bid. If Bigfoot intended to sell any part of the
NextPat shares or the intellectual property rights through a private sale,
Bigfoot was required to notify NextEngine of such pending sale and allow
NextEngine five business days after receipt of the notice to offer a higher
bid. In the event of a permitted sale of
any of the NextPat shares or the intellectual property rights, the proceeds
from the sale would be applied towards the satisfaction of the 2008 Secured
Promissory Note without prejudice to Bigfoot’s right to sue for any remaining deficiency.
III.
January 2009 Oral Agreement to Suspend the
Quarterly Fee Payments
NextEngine
made the first quarterly fee payment that was due under the Mutual Release Agreement. In November 2008, after Knighton expressed to
Gleissner that it would be difficult for NextEngine to make its future quarterly
fee payments given the global economic crisis, the parties began discussing
alternative payment options for NextEngine to meet its royalty obligations. In January 2009, Bigfoot sent NextEngine a written
notice that its second quarterly fee payment was due. According to Knighton, he and Gleissner
thereafter reached an oral agreement to suspend the quarterly fee payments during
the term of the restructured loan and to make those payments due at the same
time that the 2008 Secured Promissory Note became due. Following that oral agreement, Bigfoot did
not send NextEngine any additional notices requesting payment of the quarterly
fees and NextEngine did not make any further quarterly fee payments under
the Mutual Release Agreement.
IV.
May 2009 Oral Agreement to Restructure the 2008 Loan
Agreement
During the fall
of 2008, Knighton approached Gleissner about the possibility of restructuring
the existing loan because of concerns about the impact of the global economic
crisis on NextEngine’s business. The
parties engaged in a series of discussions about NextEngine’s proposal to
extend the maturity date on the 2008 promissory note in exchange for additional
consideration to Bigfoot. According to
Knighton, in May 2009, he and Gleissner reached an oral agreement to restructure
the loan. Under the oral agreement, the
maturity date on the 2008 promissory note would be extended to a “monetizationâ€
event for NextEngine, such as a sale, acquisition, or public stock offering of
the company. As consideration for
extending the maturity date, Gleissner would receive an additional equity
interest in NextEngine through a stock restructuring and a new rights
offering. On May 12, 2009, Knighton and
Gleissner shook hands on the oral agreement during a meeting at the airport. They also agreed to memorialize the terms of
their handshake deal in a written agreement to be prepared by their attorneys,
but with an understanding that it might take several months to finalize a written
agreement given the complexity of the restructured deal.
V.
July 8, 2009 Demand for Repayment of the Loan
On July 8, 2009, Bigfoot sent NextEngine
a written demand for payment of the outstanding principal and accrued interest that
were due under the 2008 Secured Promissory Note. After receiving the written demand, Knighton had
a telephone conversation with Bigfoot’s counsel, Berkman, who described the
demand as a formality while the parties were finalizing their agreement to
restructure the loan. Berkman stated
that Bigfoot wanted the security of a demand for repayment while the parties
worked out the details of the restructuring plan. Over the next few weeks, the parties exchanged
several e‑mails about the status of the loan. Gleissner expressed concern that the existing
loan was due and he had yet to receive any details about the restructured loan. Knighton reassured Gleissner that the parties
were making progress on the restructuring plan and the details of the plan would
be forthcoming. NextEngine did not make
any payment of principal or interest under the 2008 Secured Promissory Note at
any time after Bigfoot’s written demand.
In early
October 2009, Knighton and Gleissner exchanged additional e-mail correspondence
about the status of the loan. Gleissner
complained that he still had not received a concrete restructuring proposal,
and that NextEngine had defaulted on the loan and had not made any of the
required monthly interest payments. On
October 14, 2009, Knighton sent Gleissner a detailed restructuring plan that
included, among other terms, a three-year extension of the maturity date on the
2008 promissory note. Gleissner rejected
the restructuring plan sent by Knighton and stated that he was not amendable to
any proposal that extended the maturity date beyond a 12-month period. The parties’ efforts to further negotiate a
restructuring of the loan were unsuccessful, and they ultimately did not
execute any written agreement revising or replacing the 2008 Loan
Agreement.
VI.
November 13, 2009 Final Notice of Default
On November 13, 2009, Bigfoot sent
NextEngine a final notice of default under the 2008 Secured Promissory
Note. In the notice, Bigfoot stated that
a public auction of the intellectual property owned by NextPat and licensed to
NextEngine was scheduled for December 3, 2009, and that NextEngine had to pay
the entire principal and interest that were due under the note to avoid the
auction. Bigfoot also requested a list
of suggested bidders and NextEngine’s shareholders so that they could be
notified of the scheduled auction and be offered an opportunity to participate
in the bidding process. In a written
response, NextEngine indicated that the contemplated sale of the intellectual
property of NextPat was not in the best interests of NextEngine and its shareholders,
and that NextEngine remained committed to working with Bigfoot to structure a
mutually agreeable solution. NextEngine
did not provide the requested list of shareholders or potential bidders.
In November
2009, prior to the auction, Knighton and Gleissner discussed a possible
forbearance by Bigfoot in exchange for NextEngine’s payment of the interest due
under the 2008 Secured Promissory Note.
Gleissner indicated that he would consider granting a grace period on
the loan if NextEngine paid the total amount of interest that had accrued under
the note to date. In response to Knighton’s
request for details on the proposal, Gleissner explained that he was not
willing to extend the maturity date on the note, but might defer collection
efforts if NextEngine paid one-half of the total accrued interest immediately
and the other half by January 2010. NextEngine
did not accept that proposal and did not make any payment of interest under the
note. At trial, Knighton claimed that
Gleissner’s request for payment of the total interest accrued since the
inception of the note, rather than the monthly interest payments, failed to
comply with the terms of the 2008 Loan Agreement.
VII.
December 3, 2009 Public Auction of the
Intellectual Property
On December 3, 2009, Bigfoot held a
public auction of the intellectual property owned by NextPat and licensed to
NextEngine. Prior to the auction,
Bigfoot did not advertise the sale on any preexisting websites that specialized
in intellectual property auctions and did not use the services of a commercial
brokerage firm to solicit bids. Instead,
Bigfoot created its own website at www.nextengineauction.com to promote the auction
and used Gleissner’s personal real estate attorney to conduct it. Bigfoot received a single bid of $375,000 for
all of NextPat’s intellectual property from a friend and business associate of
Gleissner, but did not accept that bid or sell any part of the intellectual
property rights.
Prior to
holding the December 3, 2009 public auction, Bigfoot did not take any action to
terminate the license held by NextEngine in the intellectual property
rights. Following the auction, on
December 17, 2009, Bigfoot sent NextEngine a letter stating that NextPat had
the right to terminate the license because NextEngine had defaulted under the
2008 Secured Promissory Note and had not made any of the monthly interest
payments or quarterly fee payments that were due. The letter further stated that,
notwithstanding NextPat’s right to terminate the license, NextPat would allow
the license to continue provided that NextEngine agreed to transfer to Bigfoot
on a weekly basis all payments received in connection with the sale of its
scanners; otherwise, the license would be terminated effective December 22,
2009. NextEngine did not accept Bigfoot’s
payment proposal nor did it discontinue its use of the intellectual property
following its receipt of the termination letter. At trial, both Knighton and NextEngine’s
counsel testified that Bigfoot’s actions in conducting an auction of the
intellectual property prior to terminating the license did not comply with the
terms of the 2008 Loan Agreement.
VIII.
March 2010 Abandonment of Patents
In mid-December 2009, Bigfoot
requested that NextEngine execute a series of documents formally transferring
NextEngine’s 49 shares in NextPat to Bigfoot pursuant to the 2008 Loan
Agreement. Bigfoot’s counsel, Berkman,
explained to Knighton that the transfer of the NextPat shares had occurred
automatically upon NextEngine’s default, but Bigfoot nevertheless needed the
transfer documents for an annual tax filing in Hong Kong. After conferring with counsel, Knighton
agreed to sign the requested documents because he believed that any transfer of
the NextPat shares to Bigfoot would not affect NextEngine’s underlying license
rights in the intellectual property. On
December 17, 2009, NextEngine returned the executed documents transferring its
49 percent ownership interest in NextPat to Bigfoot.
In January 2010, Knighton and
Berkman exchanged a series of e-mails concerning legal services that needed to
be performed to maintain certain patents owned by NextPat. Berkman consented to NextEngine’s patent counsel
performing the necessary work on those patents and to Bigfoot paying the
associated legal costs. In February
2010, Knighton informed Berkman that
additional patents needed to be maintained, but NextEngine’s patent firm could
not perform such work without a conflict of interest waiver from all
parties. On February 11, 2010, Berkman
executed a conflict of interest waiver on behalf of Bigfoot and NextPat, which
expressly provided that the patent firm solely represented NextEngine in
connection with its prosecution and maintenance of the intellectual property rights
and did not represent either Bigfoot or NextPat. According to Knighton, Bigfoot also orally
represented to NextEngine that it wanted to maintain the intellectual property
of NextPat and would pay the associated costs and fees incurred by NextEngine’s
patent firm.
In or about March 2010,
NextEngine’s patent counsel advised Berkman that there were two patents that
would be deemed abandoned if NextPat did not timely confirm its agreement to pay
the costs associated with maintaining those patents. After some delay, Berkman responded that
NextPat would not agree to pay any legal expenses related to its patents
without a direct client engagement with the patent firm, and that absent such
engagement, NextEngine was solely responsible for either paying the expenses or
allowing the patents to lapse. Shortly
thereafter, two of the patents owned by NextPat were deemed abandoned based on
the failure to timely take action to maintain them.
In July 2010,
NextEngine’s patent counsel sent Bigfoot a list of upcoming patent deadlines
and associated legal costs and asked Bigfoot to confirm whether it would pay
for such work. In response, Gleissner
stated that the patent firm’s client was NextEngine and that any payment for
services was exclusively a matter between NextEngine and the firm. After Bigfoot refused to pay any of the legal
expenses associated with maintaining NextPat’s intellectual property,
NextEngine began to pay such expenses directly while the parties litigated
their dispute.
IX.
Evidence on Damages
On behalf of Bigfoot, economist
Nisha Marie Mody offered expert testimony on the value of NextEngine’s 49
percent interest in NextPat as of the default date of July 24, 2009. After considering different methods of
valuation, Mody based her valuation of the intellectual property held by
NextPat on the single bid of $375,000 that was made at the December 2009
auction, and assumed that such bid, if accepted, would have yielded a maximum
rate of return of 50 percent to the purchaser.
Using this market-based approach to valuation, Mody opined that the
total value of the intellectual property held by NextPat as of the default date
was $562,000 and that NextEngine’s 49 percent interest in such intellectual property
was $275,625.
On behalf of NextEngine, accountant
Barbara Luna testified as an expert on commercial reasonableness and damages under
the UCC. Luna opined that Bigfoot would
not have acted in a commercially reasonable manner if it had represented to
NextEngine that it would pay the costs associated with maintaining the
intellectual property in its custody and then allowed certain patents to be
lost by refusing to honor its commitment.
Luna also opined that Bigfoot would not have conducted a commercially
reasonable auction of the intellectual property if it created its own website
to advertise the sale rather than using established auction websites and then
solicited a single bid from friend and former business partner of
Gleissner. While Luna admitted that she
was not asked to perform a valuation of the intellectual property, she
testified that the valuation rendered by Bigfoot’s expert was too low given the
amount in royalties that Bigfoot was charging NextEngine to license the
intellectual property exclusively.
Luna further testified that
Bigfoot’s actions in declaring NextEngine in default, asserting control over
the intellectual property, and then pursuing a major litigation concerning the
loan had caused damages to NextEngine by substantially decreasing the stock value
of the company. Based on the number of outstanding
shares, Luna opined that NextEngine’s total stock value was at least $112,197,000
and that Bigfoot’s bad faith actions would have caused a 20 percent reduction
in the company’s stock price, resulting in damages of $22,439,000.
At trial,
Knighton testified that NextEngine never made any payment of principal or
interest under the 2008 Secured Promissory Note and made only one quarterly fee
payment under the Mutual Release Agreement.
Knighton also acknowledged in his trial testimony that Bigfoot was “due
whatever the agreements say, whatever it accumulates to.†As of the start of the October 2011 trial,
the total amount of principal and interest that had accrued under the 2008
Secured Promissory Note was approximately $11.5 million, and the total amount of
quarterly fee payments that had accrued under the Mutual Release Agreement was
approximately $992,550.
X.
The Jury’s Special Verdict
At the close of the evidence, the
parties submitted to the jury a special verdict form consisting of 47
questions. The first 22 questions
addressed Bigfoot’s claims against NextEngine for breach of the 2008 Secured
Promissory Note and breach of the Mutual Release Agreement. The remaining 25 questions addressed
NextEngine’s claims against Bigfoot for breach of the May 2009 oral agreement,
breach of the implied covenant of good faith and fair dealing, failure to
preserve collateral, and improper disposition of collateral.
On Bigfoot’s claim for breach of
the 2008 Secured Promissory Note, Question 2 on the special verdict form asked
the jury if Bigfoot did all, or substantially all, of the significant things
that the 2008 Secured Promissory Note required it to do. The jury answered “No†to Question 2. Based on that answer, the jury was instructed
not to respond to any further questions on the essential elements of Bigfoot’s
claim for breach of the promissory note or to determine the amount due under
the note.
On Bigfoot’s claim for breach of
the Mutual Release Agreement, Question 14 on the special verdict form
asked the jury if Bigfoot freely and knowingly gave up its right to require
NextEngine to pay quarterly fee payments under the Mutual Release
Agreement. The jury answered “Yes†to Question
14. Based on that answer, the jury was
not asked to determine the amount of Bigfoot’s damages under the Mutual Release
Agreement.
Questions 19 through 21 on the
special verdict form asked the jury to determine and value the collateral that
NextEngine pledged as security under the 2008 Secured Promissory Note. The jury answered that the collateral was the
intellectual property rights and that the value of the collateral was
$12,555,846.
title="">[1] Question
22 asked the jury to determine the amount of Bigfoot’s damages under the 2008
Secured Promissory Note by calculating the difference between the amount due
under the note and the value of the collateral.
However, because the jury was not asked to determine the amount due
under the note based on its response to Question 2, it calculated Bigfoot’s
damages under the 2008 Secured Promissory Note as a negative value of “($12,555,846).â€
On NextEngine’s claim for breach of
the May 2009 oral agreement, Question 30 on the special verdict form asked the
jury if the contract terms were clear enough so that NextEngine and Bigfoot
could understand what each was required to do.
The jury answered “No†to Question 30.
Based on that answer, the jury was instructed not to respond to any
further questions on NextEngine’s claims for breach of the oral agreement and
breach of the implied covenant of good faith and fair dealing.
On NextEngine’s claim for failure
to preserve collateral, the jury found that Bigfoot was in possession or
control of the collateral pledged by NextEngine as security under the 2008
Secured Promissory Note, that Bigfoot did not use reasonable care in the
custody and preservation of the collateral, and that NextEngine was harmed by
Bigfoot’s failure to use reasonable care.
On NextEngine’s claim for improper disposition of collateral, the jury
further found that Bigfoot had attempted to sell or otherwise dispose of the
collateral, that Bigfoot’s collection and handling of the collateral was not
done in a commercially reasonable manner, and that NextEngine was harmed by
Bigfoot’s conduct. Question 43 on the
special verdict form asked the jury to determine NextEngine’s damages on the
failure to preserve collateral claim.
The jury found that NextEngine had a loss of collateral of $6,000 and
other damages of $4.5 million for total damages of $4,506,000.
XI.
The Post-Trial Motions and Judgment
Following the jury’s special
verdict, Bigfoot filed a motion for a new trial, a motion for judgment
notwithstanding the verdict, and a motion to conform the verdict to juror
intent. In support of its post-trial
motions, Bigfoot submitted declarations from nine of the 12 jurors, each of
whom stated that he or she had voted to award Bigfoot damages of $12,555,846
and NextEngine damages of $4,506,000 in the final jury vote. Each of the nine jurors also stated that the
special verdict form did not appear to include a space for the jury to enter
the net award for Bigfoot and that the jurors all voiced their assumption that
the trial judge would calculate the net award based on their findings. At the hearing on the post-trial motions, the
trial court struck the juror declarations in their entirety under Evidence Code
section 1150 and denied each of Bigfoot’s motions.
On May 22,
2012, the trial court entered a judgment in favor of NextEngine and ordered
that Bigfoot recover nothing from NextEngine and that NextEngine recover the sum
of $4,506,000 from Bigfoot. Following
the entry of the judgment, Bigfoot filed a timely notice of appeal.
DISCUSSION
I.
Sufficiency of the Evidence Supporting the
Special Verdict
On appeal,
Bigfoot challenges the sufficiency of the evidence supporting the jury’s
special verdict findings in favor of NextEngine. “When a party contends insufficient evidence
supports a jury verdict, we apply the substantial evidence standard of review.
[Citation.]†(Wilson v. County of Orange (2009) 169 Cal.App.4th 1185, 1188.) “We must ‘view the evidence in the light most
favorable to the prevailing party, giving it the benefit of every
reasonable inference and resolving all conflicts in its favor. . . .’
[Citation.]†(Ibid.) “‘[N]either conflicts
in the evidence nor ‘“testimony which is subject to justifiable suspicion . . .
justif[ies] the reversal of a judgment, for it is the exclusive province of the
[jury] to determine the credibility of a witness and the truth or falsity of
the facts upon which a determination depends.’†[Citations.]’ [Citation.]â€
(Lenk v. Total‑Western, Inc.
(2001) 89 Cal.App.4th 959, 968.)
Therefore, “‘when a [verdict] is attacked as being
unsupported, the power of the appellate court begins and ends with a determination
as to whether there is any substantial evidence, contradicted or
uncontradicted, which will support the [verdict]. When two or more inferences can be reasonably
deduced from the facts, the reviewing court is without power to substitute its
deductions for those of the [jury].’†(
Court (1995) 9 Cal.4th 559, 571.)
A.
Bigfoot’s Claims Against NextEngine
Bigfoot
asserted two causes of action against NextEngine: (1) breach of the 2008 Secured Promissory
Note, and (2) breach of the Mutual Release Agreement. The jury found in favor of NextEngine on each
of these claims. Bigfoot argues that the
jury’s findings were not supported by substantial evidence because the
undisputed evidence at trial established that Bigfoot fully performed under
each agreement by making a loan to NextEngine, that NextEngine breached each
agreement by failing to make the payments that were required by the agreements,
and that Bigfoot never waived its right to receive such payments under the terms
of the agreements.
1.
Breach of the 2008 Secured Promissory Note
On Bigfoot’s claim for breach of
the 2008 Secured Promissory Note, in response to Question 2 on the special
verdict form, the jury found that Bigfoot did not do all, or substantially all,
of the significant things that the note required it to do. Based on the express terms of the 2008 Loan
Agreement, as well as the testimony at trial, the jury’s finding on this claim was
supported by substantial evidence.
As a covenant for the promises made
in the 2008 Secured Promissory Note, the parties agreed to concurrently enter
into the Assignment and License Agreement. Under the Assignment and License Agreement,
NextEngine was granted an exclusive and perpetual license to use the
intellectual property rights owned by NextPat.
Although the license became revocable upon NextEngine’s failure to make either
the monthly interest payments required by the 2008 Secured Promissory Note or
the quarterly fee payments required by the Mutual Release Agreement, the
license did not automatically terminate.
Rather, the Assignment and License Agreement expressly provided that
“[i]n the event the license becomes revocable, NextPat may, upon written notice
to NextEngine, terminate the license . . . .â€
Therefore, until NextPat took action to terminate the license by
providing written notice to NextEngine, NextEngine retained its exclusive and
perpetual license to use the intellectual property rights. Because NextEngine’s license remained
exclusive for so long as it was not terminated, neither NextPat nor Bigfoot
could sell, offer to sell, or otherwise dispose of or encumber any of the
intellectual property rights licensed to NextEngine prior to terminating the
license.
The evidence
at trial established that, on December 3, 2009, prior to terminating the
license, Bigfoot conducted a public auction of all of the intellectual property
owned by NextPat. Although the auction ultimately
did not result in a sale of any part of the intellectual property or shares of
NextPat, Bigfoot did take action to advertise the sale and solicited bids in
connection with the sale while NextEngine continued to hold its exclusive and
perpetual license to use the intellectual property. Based on such evidence, the jury reasonably
could have found that, by failing to terminate the license prior to conducting
a public auction of the intellectual property licensed to NextEngine, Bigfoot
did not do all of the significant things that the 2008 Secured Promissory Note
required it to do.
title="">[2]
2.
Breach of the Mutual Release Agreement
On Bigfoot’s claim for breach of
the Mutual Release Agreement, in response to Question 14 on the special verdict
form, the jury found that Bigfoot freely and knowingly gave up its right to
require NextEngine to pay quarterly fee payments under the Mutual Release
Agreement. Bigfoot contends that the
evidence was insufficient to support a finding of waiver because the Mutual
Release Agreement expressly provided that its terms could not be modified,
amended, or altered in any way except by written agreement signed by the
parties. This claim lacks merit.
The modification of a
Code section 1698, which provides: “(a)
A contract in writing may be modified by a contract in writing. [¶] (b) A
contract in writing may be modified by an oral agreement to the extent that the
oral agreement is executed by the parties. [¶] (c) Unless the contract
otherwise expressly provides, a contract in writing may be modified by an oral
agreement supported by new consideration. . . . [¶] (d) Nothing in this section
precludes in an appropriate case the application of rules of law concerning
estoppel, oral novation and substitution of a new agreement, rescission of a
written contract by an oral agreement, waiver of a provision of a written
contract, or oral independent collateral contracts.â€
Accordingly, notwithstanding a
provision in a written contract that precludes oral modification, the parties
may, by their words or conduct, waive contractual
rights. (Galdjie v. Darwish (2003) 113 Cal.App.4th 1331, 1339 [“[l]ike any
other contractual terms, timeliness provisions are subject to waiver by the
party for whose benefit they are madeâ€]; Biren
v. Equality Emergency Medical Group, Inc. (2002) 102 Cal.App.4th 125, 141
[“‘the parties may, by their conduct, waive [a no oral modification] provision’
where evidence shows that was their intentâ€].)
“‘[T]he pivotal issue in a claim of waiver is the intention of the party
who allegedly relinquished the known legal right.’ [Citation.]â€
(Old Republic Ins. Co. v. FSR
Brokerage, Inc. (2000) 80 Cal.App.4th 666, 678.) “‘The waiver may be either express, based on
the words of the waiving party, or implied, based on conduct indicating an
intent to relinquish the right. [Citation.]’
[Citation.] Thus, ‘“California courts will find waiver
when a party intentionally relinquishes a right or when that party’s acts are
so inconsistent with an intent to enforce the right as to induce a reasonable
belief that such right has been relinquished.†[Citation.]’ [Citation.]â€
(Ibid.)
Based on
Knighton’s testimony about a January 2009 oral agreement to suspend the quarterly
fee payments owed under the Mutual Release Agreement, the jury’s finding of
waiver was supported by substantial evidence.
Specifically, Knighton testified that, following NextEngine’s first
quarterly fee payment, the parties orally agreed to “capitalize†all future
quarterly fee payments and to make such payments due when the 2008 Secured
Promissory Note became due. Knighton
further testified that, following such oral agreement, Bigfoot ceased its prior
practice of sending notices to NextEngine requesting payment of the quarterly
fees and NextEngine ceased making any quarterly fee payments under the Mutual
Release Agreement. From such evidence,
the jury reasonably could have found that Bigfoot intentionally relinquished
its right to receive the quarterly fees under the payment schedule set forth in
the Mutual Release Agreement when by, both its words and conduct, Bigfoot agreed
to suspend such payments until the 2008 promissory note became due.
3.
Bigfoot’s Damages
Although the jury found in favor of
NextEngine on each of Bigfoot’s breach of contract claims, the special verdict
form nevertheless asked the jury to determine the value of the collateral that
NextEngine pledged as security under the 2008 Secured Promissory Note. The jury found that the collateral was the
intellectual property rights and that the value of such collateral was
$12,555,846. Bigfoot claims that the
evidence was insufficient to support the jury’s valuation finding because the only
evidence offered at trial as to the value of the collateral was the testimony
of its expert, Mody, who valued the intellectual property at $562,500. However, the value of the collateral was only
relevant to the verdict if the jury had awarded Bigfoot damages for breach of
the 2008 Secured Promissory Note, in which case NextEngine could have sought a
set-off equal to the value of collateral that secured the note. Because the jury did not award any damages to
Bigfoot on its breach of the promissory note claim, the jury’s finding as to
the value of the collateral did not have any impact on the judgment.
In challenging
the sufficiency of the evidence supporting the jury’s findings on each of its breach
of contract claims, Bigfoot also cites to the nine juror declarations that it
submitted with its post-trial motions, each of which stated that the jury
intended to award Bigfoot damages of $12,555,846 and NextEngine damages of $4,506,000. However, in denying Bigfoot’s post-trial motions,
the trial court ruled that the declarations were inadmissible under Evidence
Code section 1150, and Bigfoot does not challenge the trial court’s evidentiary
ruling on appeal. Even assuming the
declarations were admissible, none of them stated that the jurors incorrectly
answered any question on the verdict form by checking “Yes†when they meant
“No,†or vice versa. Instead, based on
the jury’s answers to Question 2 (whether Bigfoot did the significant things it
was required to do under the 2008 Secured Promissory Note) and Question 14
(whether Bigfoot waived its right to receive quarterly fee payments under the
Mutual Release Agreement), the jury found that Bigfoot had failed to establish
the essential elements of each breach of contract claim alleged against
NextEngine. Therefore, even if the jury
had intended to award a certain amount of damages to Bigfoot, its special
verdict findings on Questions 2 and 14, which, as discussed above, were supported
by substantial evidence, precluded Bigfoot from recovering any damages under
its claims as a matter of law.
B.
NextEngine’s Claims Against Bigfoot
NextEngine asserted four causes of
action against Bigfoot: (1) breach of a
May 2009 oral agreement, (2) breach of the implied covenant of good faith and
fair dealing, (3) failure to preserve collateral in violation of the UCC, and
(4) improper disposition of collateral in violation of the UCC. The jury found in favor in of NextEngine on
the claims for failure to preserve collateral and improper disposition of
collateral. Bigfoot argues that there
was insufficient evidence to support jury’s findings on each of these claims
because the evidence at trial established that Bigfoot did not have possession
or control of the intellectual property, which instead was controlled
exclusively by NextEngine pursuant to its license. Bigfoot also asserts that each of these
claims fails as a matter of law because neither the UCC nor the parties’
contract imposed a legal duty of care on Bigfoot with respect to its handling
of the intellectual property rights.
Under Division
9 of the UCC, following a default by the debtor, “[a] secured party in
possession of collateral or control of collateral . . . has the rights and duties provided in Section
9207.†(Cal. U. Com. Code, § 9601, subd.
(b).)
shall use reasonable care in the custody and preservation of collateral in the
secured party’s possession.†(§ 9207,
subd. (a).) Sections 9609 and 9610 provide
that, after default, a secured party may “[t]ake possession of the collateralâ€
and “may sell, lease, license, or otherwise dispose of any or all of the
collateral,†subject to the requirement that “every aspect of a disposition of
collateral, including the method, manner, time, place, and other terms, must be
commercially reasonable.†(§§ 9609,
subd. (a), 9610, subds. (a), (b).) Under
section 9625, a secured party generally “is liable for damages in the amount of
any loss caused by a failure to comply with this division,†including sections
9207, 9609, and 9610. (§ 9625, subd.
(b).)
1.
Failure to Preserve Collateral
On NextEngine’s claim against
Bigfoot for failure to preserve collateral, the jury found that Bigfoot was in
possession or control of the collateral pledged by NextEngine as security under
the 2008 Secured Promissory Note, that Bigfoot did not use reasonable care in
the custody and preservation of the collateral, and that NextEngine was harmed
by Bigfoot’s failure to use reasonable care.
Bigfoot contends that the evidence was insufficient to support the
jury’s finding that it was in possession or control of the intellectual
property rights because such rights had been exclusively licensed to
NextEngine. Although it is true that
NextEngine retained an exclusive license to use the intellectual property
notwithstanding an event of default, the jury reasonably could have found that
Bigfoot took affirmative steps to exercise control over the intellectual
property following NextEngine’s default on the loan. In particular, the evidence showed that,
after sending NextEngine a final notice of default, Bigfoot conducted a public
auction of the intellectual property owned by NextPat and licensed to
NextEngine. Following the auction,
Bigfoot sent NextEngine a letter stating that NextPat intended to terminate the
license unless NextEngine agreed to make certain weekly payments to Bigfoot. While it appears that NextEngine continued
using the intellectual property after rejecting Bigfoot’s proposal, the license
remained subject to the termination rights held by NextPat, which, as of the
default date, was under the sole ownership of Bigfoot.
Bigfoot also claims
that, as a matter of law, the jury could not have found that NextEngine was
harmed by Bigfoot’s failure to preserve the collateral because Bigfoot had no
legal duty to maintain the intellectual property while it was being licensed to
NextEngine. However, because there was
substantial evidence to support the finding that Bigfoot asserted control over
the intellectual property following NextEngine’s default, it had a duty to use
reasonable care to preserve such collateral under section 9207. The jury heard evidence that Bigfoot
initially agreed to pay the legal costs associated with maintaining the patents
that were owned by NextPat and licensed to NextEngine, and accordingly executed
a conflict of interest waiver to allow NextEngine’s patent counsel to perform
the necessary legal work. The jury also
heard evidence that, shortly before two patents were set to lapse, Bigfoot abruptly
reneged on its agreement and refused to pay any of the costs required to maintain
them, resulting in the loss of both patents.
Based on that evidence, the jury
reasonably could have found that Bigfoot breached its duty of care to preserve
the collateral under the UCC and caused harm to NextEngine.
2.
Improper Disposition of Collateral
On NextEngine’s claim against
Bigfoot for improper disposition of collateral, the jury found that
Bigfoot was in possession or control of the collateral pledged by NextEngine as
security under the 2008 Secured Promissory Note, that Bigfoot attempted to sell
or otherwise dispose of the collateral, that Bigfoot’s collection and handling
of the collateral was not done in a commercially reasonable manner, and that
NextEngine was harmed by Bigfoot’s conduct. Bigfoot asserts that, as a matter of law, it
could not have breached any duty related to its attempted sale of the
intellectual property because it was permitted by both the UCC and the parties’
contract to dispose of the collateral once NextEngine failed to make the
payments due under the loan.
However, as
previously discussed, Bigfoot’s right to sell, offer to sell, or otherwise
dispose of the intellectual property owned by NextPat was subject to the
exclusive license held by NextEngine. Bigfoot’s
actions in conducting a public auction of the intellectual property while
NextEngine continued to hold an exclusive license for such use did not comply
with the terms of the parties’ agreement.
Additionally, there was evidence that Bigfoot failed to conduct the auction
in a commercially reasonable manner when it created its own website to promote
the sale rather than advertise it on established auction websites, and used
Gleissner’s personal real estate attorney to solicit bids for the auction rather
than engage a commercial brokerage firm.
There was also evidence that Bigfoot’s actions in asserting control over
the intellectual property caused damage to NextEngine’s stock value. Based on this record, the jury’s findings
that Bigfoot did not act in a commercially reasonable manner in its attempted
sale of the collateral were supported by substantial evidence.
II.
Alleged Inconsistencies in the Special Verdict
Bigfoot also argues that the
judgment must be reversed because the jury’s special verdict findings were inconsistent
and contradictory. “A special verdict is
inconsistent if there is no possibility of reconciling its findings with each other. [Citation.]
If a verdict appears inconsistent, a party adversely affected should
request clarification, and the court should send the jury out again to resolve
the inconsistency. [Citations.] If no party requests clarification or an
inconsistency remains after the jury returns, the trial court must interpret
the verdict in light of the jury instructions and the evidence and attempt to
resolve any inconsistency. [Citations.]†(Singh
v. Southland Stone, U.S.A., Inc. (2010) 186 Cal.App.4th 338, 357-358, fn.
omitted.) Where a verdict is fatally
inconsistent, no objection is required in the trial court to preserve the issue
for review on appeal. (
517, 530.)
An appellate
court reviews a special verdict de novo to determine whether its findings are
inconsistent. (Singh v. Southland Stone, U.S.A., Inc., supra, 186 Cal.App.4th at p. 358; Zagami, Inc. v. James A. Crone, Inc. (2008) 160 Cal.App.4th 1083,
1092.) “A court reviewing a special
verdict does not infer findings in favor of the prevailing party [citation],
and there is no presumption in favor of upholding a special verdict when the
inconsistency is between two questions in a special verdict. [Citation.]
‘Where there is an inconsistency between or among answers within a
special verdict, both or all the questions are equally against the law.’ [Citations.]â€
(Zagami, Inc. v. James A. Crone,
Inc., supra, at p. 1092.) “The proper remedy for an inconsistent
special verdict is a new trial. [Citation.]†(Singh
v. Southland Stone, U.S.A., Inc., supra,
at p. 358.)
A.
Bigfoot’s Breach of the Promissory Note Claim vs.
NextEngine’s Breach of the Oral Agreement Claim
Bigfoot contends that the jury’s
special verdict finding that there was no oral agreement to modify the 2008
Secured Promissory Note is inconsistent with its finding that no amount was due
under the note. According to Bigfoot,
NextEngine’s assertion that Bigfoot was not entitled to recover any money under
the 2008 Secured Promissory Note was entirely predicated on its argument that
the 2008 note had been revised by a 2009 oral agreement to extend the maturity
date on the note, and thus, NextEngine was not in default when it failed to pay
the note following Bigfoot’s demand.
Bigfoot reasons that the jury’s finding that the parties did not orally
agree to extend the maturity date on the note could only mean that NextEngine
was in default and that Bigfoot was owed the full amount of principal and
interest due under the note.
The jury’s
findings on the parties’ respective breach of contract claims did not result in
an inconsistent verdict. On NextEngine’s
claim for breach of the 2009 oral agreement, the jury found that the parties
did not enter into an enforceable oral agreement to replace or revise the 2008
Secured Promissory Note because the contract terms were not clear enough for
the parties to understand what each was required to do. Based on that finding, Bigfoot’s loan to
NextEngine was governed by the terms of the 2008 promissory note. On Bigfoot’s claim for breach of the 2008
promissory note, the jury found that Bigfoot was not entitled to recover
damages for breach of the note because Bigfoot did not do all, or substantially
all, of the significant things that the note required it to do. As previously discussed, this finding was
supported by substantial evidence that Bigfoot did not terminate NextEngine’s
exclusive license to use the intellectual property prior to auctioning the
property, as required by the terms of the note.
Because the jury found that Bigfoot failed to perform all of its
obligations under the 2008 promissory note, the jury never reached the question
of whether NextEngine defaulted under the note by failing to repay the
loan. Accordingly, there was no
inconsistency in the jury’s responses because its finding that the parties did
not modify the 2008 promissory note by a subsequent oral agreement was
independent of its finding that Bigfoot did not comply with the terms set forth
in the written agreement.
B.
The Value of the Collateral vs. Damages for the
Failure to Preserve the Collateral
Bigfoot next asserts that the
jury’s finding that the value of the collateral securing the loan was $12,555,846
contradicted its finding that Bigfoot’s failure to preserve such collateral
caused NextEngine damages of $4,506,000.
In particular, Bigfoot argues that, to the extent its alleged
mishandling of the intellectual property resulted in a loss of $4,506,000 to
NextEngine, the value of the intellectual property should have been equal to the
amount of such loss, rather than the amount sought by Bigfoot as damages for
its breach of contract claims. However,
as NextEngine correctly points out, the value of the collateral securing a loan
is not an award of damages for a violation of the UCC.
Under section
9625 of the UCC, a debtor generally may recover damages for any loss caused by
a secured party’s non-compliance with any of the provisions of Division 9,
including the provisions governing the secured party’s duty to use reasonable
care in the collection, preservation, and disposition of the collateral. (§ 9625, subds. (b), (c).) A loss caused by a failure to comply with these
provisions “may include loss resulting from the debtor’s inability to obtain,
or increased costs of, alternative financing.â€
(§ 9265, subd. (b).) In determining
NextEngine’s damages on its failure to preserve collateral claim, the jury was
not asked to assess the value of the collateral securing the promissory note. Rather, the jury was asked to assess the
amount of loss suffered by NextEngine as a result of Bigfoot’s failure to use
reasonable care in its handling of the collateral. As discussed, there was evidence that Bigfoot
did not use reasonable care to preserve two of the patents that were licensed
to NextEngine, which resulted in both patents being lost. There was also evidence that Bigfoot’s efforts
to assert control over the intellectual property created a cloud over
NextEngine’s right to continue using the intellectual property to develop and
sell its products, which in turn led to a diminution in the stock value of the
company. The jury’s finding as to the
damages caused by Bigfoot’s mishandling of the intellectual property was therefore
separate and distinct from its finding as to the value of the intellectual
property pledged as security for the loan.
C.
Damages for Breach of the 2008 Promissory Note
vs. Damages for the Failure to Preserve the Collateral
Bigfoot also claims that there was a
fatal inconsistency between the jury’s finding that Bigfoot was not entitled to
recover damages for breach of the 2008 Secured Promissory Note and its finding
that NextEngine was entitled to recover damages for Bigfoot’s failure to
preserve the collateral that secured the note.
In support of this claim, Bigfoot points to section 9625, subdivision
(d), which provides that a debtor whose deficiency is eliminated or reduced under
section 9626 may not recover damages for non-compliance with the UCC provisions
governing the collection, enforcement, disposition, or acceptance of the
collateral. Bigfoot reasons that,
because NextEngine’s deficiency under the 2008 promissory note was eliminated
by the jury’s finding that Bigfoot was due nothing under the note, NextEngine could
not recover any additional damages based on Bigfoot’s failure to exercise
reasonable care in its handling of the collateral.
Contrary to Bigfoot’s claim,
however, the jury’s special verdict findings did not eliminate any alleged
deficiency under section 9626. Section
9626 provides that, where a secured party in a commercial transaction sues to
recover a deficiency but fails to prove that it complied with the UCC
provisions relating to collection, enforcement, disposition, or acceptance of
the collateral, the secured party is limited to recovering the difference
between the amount of the secured obligation and the greater of the actual
proceeds of the disposition or the proceeds that would have been realized had
the secured party complied with the relevant UCC provisions. (§ 9626, subd. (a)(3).) The statute further provides that, unless the
secured party proves that the amount of proceeds that would have been realized
is less than the amount of the secured obligation, the secured party may not
recover any deficiency. (§ 9626, subd.
(a)(4).) In this case, however, Bigfoot
did not sell or otherwise dispose of the collateral securing the loan and the
jury did not make any award reducing or eliminating any deficiency owed by
NextEngine. Indeed, because the jury
found that Bigfoot did not perform all of its obligations under the terms of the
2008 promissory note, it made no further findings regarding Bigfoot’s right to
recover any amount due under the note.
In particular, the jury never reached the special verdict questions
regarding whether NextEngine had performed all of its obligations, and if not, what
amount of outstanding principal and interest were due and owing to Bigfoot.
At the heart
of the parties’ arguments on appeal is a dispute about the impact of the jury’s
special verdict findings on NextEngine’s payment obligations under the 2008
Loan Agreement. Bigfoot argues that the
jury’s verdict effectively precludes it from ever recovering from NextEngine
the amount that indisputably is due under the terms of the 2008 promissory note. NextEngine, on the other hand, asserts that
the jury’s verdict does not limit Bigfoot’s right to repayment of the loan
because the jury made no finding as to the amount due under the note; it merely
found that Bigfoot was not entitled to recover damages based on an alleged breach
of the note by NextEngine. We agree with
NextEngine that the jury’s special verdict findings did not have the effect of eliminating
NextEngine’s payment obligations under the 2008 Secured Promissory Note. As NextEngine has conceded on appeal, the
jury’s verdict did not change the amounts due under the note or otherwise alter
NextEngine’s obligation to pay the note according to its terms. Bigfoot accordingly is not precluded from seeking
to enforce its right to recover the payments owed by NextEngine under the 2008
Loan Agreement, provided however, that any future enforcement action taken by
Bigfoot must comply with the terms of the parties’ agreement and the relevant
provisions of the UCC.
name="_ftnref5" title="">[5]
The judgment is affirmed. NextEngine shall recover its costs on appeal.
ZELON,
J.
We concur:
PERLUSS, P.
J.
WOODS, J.
name="_ftn1" title="">[1] The
jury’s valuation of the collateral equaled the total amount of principal and
interest due under the 2008 Secured Promissory Note, plus the total amount of
quarterly fee payments due under the Mutual Release Agreement, as of the date
the verdict was rendered.
name="_ftn2" title="">[2] At
trial, NextEngine claimed that Bigfoot also failed to perform its obligations
under the 2008 Secured Promissory Note in November 2009 when Gleissner
conditioned Bigfoot’s forbearance on NextEngine’s payment of the total amount
of interest accrued under the note rather than the monthly interest
payments. Because Bigfoot’s failure to
terminate the license prior to conducting an auction of the intellectual
property provided sufficient evidence to support the jury’s findings with
respect to the breach of the promissory note claim, we need not consider this
issue.
