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The Wirtschafter Law Reporter

Vol. I, Q4

Below please find the first edition of The Wirtschafter Law Reporter (“WLR”), a quarterly publication of Nathan D. Wirtschafter Corp.

Thank you and have a happy New Year,

Litigator’s Corner:
Michael Clayton and Confidentiality Agreements.

WLR recently saw “Michael Clayton,” a thriller about a legal fixer in a white-shoe law firm. George Clooney plays Clayton, a fixer who gets in over his head, but then saves the day.

In one scene, Clayton is asked to sign a confidentiality agreement, also known as a non-disclosure agreement, or simply, NDA. These agreements are intended to keep confidential information exactly that: confidential.

Breaching an NDA can be expensive. In Ajaxo, Inc. v. E*Trade Group, Inc. (2005) 135 Cal. App.4th 21, 37 Cal. Rptr.3d 221, after E*Trade breach an NDA, the jury awarded $1.29 million in damages.

Here is the contractual language from the NDA quoted by the court in Ajaxo:

“The Receiving Party acknowledges and agrees that due to the unique nature of the Disclosing Party's Proprietary Information, there can be no adequate remedy at law for any breach of its obligations hereunder, that any such breach or any unauthorized use or release of any Proprietary Information will allow Receiving Party or third parties to unfairly compete with the Disclosing Party resulting in irreparable harm to the Disclosing Party....”

Many principals and companies sign NDA’s routinely, without even reviewing the terms or considering their options. But NDA’s can be used by competitors to learn confidential information under the guise of a potential agreement.

This nightmare scenario came true in Jasmine Networks Inc. v. Marvell Semiconductor (2004) 117 Cal. App.4th 794, 12 Cal. Rptr. 3d 123.*

In that case, both Jasmine and Marvell were in the business of making telecommunications chips. Marvell, the larger company, offered to buy a portion of Jasmine, along with some of its engineers. Jasmine required that Marvell sign an NDA to prevent Marvell from obtaining Jasmine’s trade secrets and intellectual property for free.

Marvell had other ideas. Its plan—allegedly—was to obtain the trade secrets without paying for them, and to obtain the identities of Jasmine’s top engineers.

To obtain the information about the engineers, two Marvel corporate officers and their in-house counsel called Jasmine and left a message with Jasmine’s director of human relations. But Marvell’s bad guys forgot to hang up the phone. Their subsequent conversation was recorded on voice mail: Jasmine’s voice mail. Two of the many priceless recorded comments were:

“Sehat doesn't go to jail. Manual [Alba] [Marvell's vice president of business development] might go to jail; Manuel [Abel] gets a black eye.”

Clearly, Jasmine caught a lucky break. Armed with evidence of a crime in progress, it was able to obtain an injunction against Marvell. Some victims do not get so lucky.

* (It should also be noted that the Jasmine case was appealed to the California Supreme Court, which granted review, but the parties then resolved their case. So the above-entitled opinion was vacated and cannot be cited except with those caveats.)

Drafting Tip:
Damage Limitations Clauses May Not Be Enforceable.

In J.C. Gury Co. v. Nippon Carbide Industries (USA) Inc. (2007) 152 Cal. App.4th 1300, 62 Cal. Rptr. 3d 118, an arbitrator found that the following damages limitation clause was unenforceable on grounds of unequal bargaining power:

“NIPPON CARBIDE INDUSTRIES (USA) INC. ‘Seller’ warrants its products to be free from defects in materials and workmanship in accordance with its published express warranty for each individual product. Buyer's sole remedy for failure of products to conform to said warranty is the replacement of the defective products, provided Buyer complies with the procedure and requirements as specifically set forth in the published express warranty. [¶] ... [¶] THIS WARRANTY IS IN PLACE OF AND LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WARRANTIES OF MERCHANTABILITY AND FITNESS FOR PARTICULAR PURPOSE AND OF ANY OTHER OBLIGATIONS OF SELLER, WHICH WARRANTIES AND OTHER OBLIGATIONS ARE SPECIFICALLY DISCLAIMED. SELLER SHALL NOT BE LIABLE FOR ANY LOSS, DAMAGE, OR INJURIES, DIRECT OR INDIRECT, CONSEQUENTIAL OR INCIDENTAL, ARISING FROM THE USE OR INABILITY TO USE SAID PRODUCTS OR DEFECTIVE PRODUCTS.”

Bottom line: damage limitations, even if entered into between two corporations, may not be upheld.

Recent Cases:
Trial Court Ordered Payment of Air Travel from Israel and Per Diem Expenses as Condition of Deposition.

In Michaely v. Michaely (2007) 150 Cal. App.4th 802, 59 Cal. Rptr. 3d 56, as a condition of allowing a deposition to go forward, the trial court ordered Wife to pay Husband’s air fare from Israel and $200 per day in per diem expenses in a $21 million divorce proceeding. Despite the fact Husband had moved to Israel after the action had been filed, Wife was still required to pay an international air fare and a per diem for the (second) deposition.

Fun Stuff:
California Choice-of-Law Analysis Updated in Recent Case.

In Castro v. Budget Rent-A-Car System, Inc. (2007) 154 Cal. App.4th 1162, 65 Cal. Rptr.3d 430, a California resident was injured in a traffic accident in Alabama. The truck which hit the California resident had been rented from Budget Rent-A-Car.

There were three possible choices of law, and in this case, the choice mattered. Under Alabama law, Budget had no “permissive use” liability whatsoever. Under California law, Budget had limited permissive use liability. Under Federal law, Budget was a “motor carrier” with financial responsibility for the accident.

The Court determined that Federal law did not apply because on a factual basis, Budget simply did not qualify as a “motor carrier.” Instead, Budget was legitimately acting as a lessor of vehicles, for which there was no liability.

As between Alabama and California law, the Court applied the so-called “governmental interest analysis,” under which the court examines each state’s government interests or purposes to determine if an actual conflict exists. If there is a conflict, the Court analyzes each State’s respective interests to see which would be “more severely impaired” if that jurisdiction’s law were not applied.

Since there was a conflict, the Court found that Alabama had the stronger governmental interest because the accident took place in Alabama. In addition, Alabama had an interest in its citizens not being subject to the laws of other states, which like California’s law, expanded liability. While Californians had an interest in the protection offered by its law system, only some protection was offered here, and California’s interest does not expand beyond the borders of the State. California residents also assume some risks when they travel to foreign jurisdictions.