Cytodyn of New Mexico, Inc. v. Amerimmune Pharmaceuticals, Inc.

California Court of Appeal
72 Cal. Rptr. 3d 600, 160 Cal. App. 4th 288, 2008 Cal. App. LEXIS 243 (2008)

ELI5:

Rule of Law:

Attorney fees under the Uniform Trade Secrets Act (UTSA) are recoverable only if a claim of misappropriation of trade secrets (not patents or trademarks) is made in bad faith or willful misappropriation exists, and contractual attorney fee clauses are strictly interpreted and apply only to parties to the agreement.

Facts:

Allen D. Allen, president and CEO of CytoDyn of New Mexico, Inc. (CytoDyn), invented a class of monoclonal antibodies for treating HIV and owned a portfolio of related patents.
In 1995, CytoDyn obtained a registered United States trademark on the brand name “Cytolin” and spent almost $900,000 to develop and test manufacturing materials and methods for it.
In August 1998, Allen and CytoDyn transferred their rights in the “Technology” (defined to include patents, know-how, and trade secrets) to Three R Associates, Inc.
Three R Associates formed Amerimmune Pharmaceuticals, Inc. (Amerimmune) and licensed the Technology and patent rights to Amerimmune.
Disputes led Three R Associates to assign all its rights back to CytoDyn, making CytoDyn the licensor to Amerimmune.
CytoDyn and Allen then entered into a conditional licensing agreement (CLA) with Amerimmune, licensing CytoDyn’s trademarks (Marks) and Technology to Amerimmune.
Further disputes arose, with CytoDyn claiming Amerimmune materially breached the CLA, which CytoDyn believed entitled it to terminate the agreement and required Amerimmune to return the Technology and Marks.
Defendant Parrish, on behalf of Amerimmune, signed a promissory note to Maya LLC (alleged to be an alter ego of Amerimmune’s CEO), granting Maya LLC a security interest in Amerimmune’s assets.

Procedural Posture:

On February 11, 2003, CytoDyn of New Mexico, Inc. (CytoDyn) filed a lawsuit against Amerimmune Pharmaceuticals, Inc. and several of its officers or directors.
Amerimmune Pharmaceuticals, Inc. was dismissed from the case a few months later after it filed a bankruptcy petition.
In December 2003, an amendment to the complaint was filed adding Maya LLC as a Doe defendant.
On March 23, 2004, CytoDyn filed a first amended complaint, naming CytoDyn as the properly-substituted plaintiff and asserting causes of action for inducement of breach of contract, unfair business competition, fraud, and unjust enrichment.
CytoDyn's complaint erroneously requested exemplary damages under Civil Code section 3426.3(c) of the Uniform Trade Secrets Act (UTSA).
Defendants filed a motion to strike CytoDyn’s claim for damages under Civil Code section 3426.3, arguing the alleged facts did not support a trade secret misappropriation claim.
On June 21, 2004, the trial court granted the portion of defendants' motion to strike the UTSA damage claim.
In July 2004, the trial court sustained defendants' demurrers to CytoDyn's causes of action for unfair business competition, inducement of breach of contract, and fraud without leave to amend.
On November 9, 2004, the trial court granted defendants' motion for summary judgment on the unjust enrichment claim, noting CytoDyn failed to submit admissible evidence.
Defendants then sought attorney fees of $147,708.75 under Civil Code section 3426.4 (UTSA) and, alternatively, under various contractual agreements.
The trial court granted defendants' motion for fees, finding them recoverable under section 3426.4 for bad faith misappropriation claims and alternatively under the Conditional Licensing Agreement (CLA).
An order was entered granting fees totaling $151,451.44.
CytoDyn filed a timely appeal of the order awarding attorney fees.

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Issue:

Did the trial court err in awarding attorney fees under the Uniform Trade Secrets Act (UTSA) or pursuant to contractual indemnification/attorney fee clauses, when the plaintiff's complaint primarily alleged misappropriation of patents and trademarks, and the defendants were not parties to the relevant agreements?

Opinions:

Majority - Rubin, J.

No, the trial court erred in awarding attorney fees under both the Uniform Trade Secrets Act (UTSA) and the contractual provisions. The UTSA (Civil Code § 3426.4) specifically authorizes attorney fees for claims of misappropriation of trade secrets made in bad faith, or for willful and malicious misappropriation of trade secrets. However, a trade secret is defined as information deriving economic value from not being generally known and subject to reasonable secrecy efforts. CytoDyn's complaint, despite ambiguously referencing 'technology' (which contractually included 'trade secrets') and seeking UTSA damages, did not actually plead a prima facie case for misappropriation of a trade secret. Instead, the factual allegations overwhelmingly focused on the misappropriation of its patents and trademarks, which are distinct forms of intellectual property not covered by the UTSA. The court emphasized that the factual allegations, not the prayer for relief or broad contractual definitions, control the nature of the claim. Because patents and trademarks are not trade secrets, the UTSA's attorney fee provision was inapplicable. Furthermore, the trial court erred in finding fees recoverable under the Conditional Licensing Agreement (CLA). The CLA contained an indemnification clause, not an attorney fees clause, and its indemnification provisions for claims or lawsuits did not apply to the circumstances of this litigation (i.e., no breach by CytoDyn or third-party infringement claims). Other agreements mentioned in the complaint were also held inapplicable because the defendants were not parties to those agreements, and their specific attorney fee clauses (e.g., related to arbitration) were not triggered in this case. Finally, the court rejected the argument for reciprocity under Civil Code § 1717, as CytoDyn would not have been entitled to fees under these agreements even if it had prevailed, given that the defendants were not parties.

Analysis:

This case significantly clarifies the strict application of the Uniform Trade Secrets Act (UTSA) concerning attorney fee awards in California. It establishes that merely invoking the UTSA in a prayer for relief or broadly defining 'technology' in underlying contracts to include 'trade secrets' is insufficient to trigger UTSA remedies if the complaint's substantive allegations pertain to patents or trademarks. The decision reinforces that courts will look to the actual factual basis of the claim to determine if it falls within the statute's scope, even when bad faith is alleged. Furthermore, it underscores the necessity of precise drafting and careful interpretation of contractual attorney fee and indemnification clauses, emphasizing that such provisions are narrowly construed and generally apply only to direct parties to the agreement.

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