SCRATCH DJ GAME v. CALIFORNIA STUDIOS INC

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Court of Appeal, Second District, California.

SCRATCH DJ GAME, Plaintiff and Respondent, v. CALIFORNIA 7 STUDIOS, INC. Defendant and Appellant.

B216183

Decided: February 18, 2010

Liner Grode Stein Yankelevitz Sunshine Regenstreif & Taylor, Stanton L. Stein, Miles J. Feldman, Robert M. Shore, Daniel A. Fiore and Maribeth Annaguey for Defendant and Appellant. Duffy & Sweeney, Stacey P. Nakasian, Byron L. McMasters;  Fenwick & West, Rodger R. Cole and Ilana S. Rubel for Plaintiff and Respondent.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

I. INTRODUCTION

This case arises out of a failed video game development arrangement pursuant to which defendant, California 7 Studios, Inc., was developing a game for plaintiff, Scratch DJ Game. Defendant appeals from a May 12, 2009 preliminary injunction.   The trial court ordered defendant to turn over to plaintiff all of its work product including source code.   The work product contained defendant's pre-existing tools and technology.   We affirm.

II. BACKGROUND

Plaintiff's predecessor in interest, Genius Products LLC, hired defendant to develop a disc jockey video game for the PlayStation 3 and Xbox 360 game consoles.   The parties entered into a February 26, 2008 Developer Agreement.   But on April 3, 2009, Genius Products, LLC, plaintiff's predecessor, terminated the parties' contract.   Genius Products LLC and Numark Industries, which had designed certain features of the game, entered into a joint venture-Scratch DJ-to complete development of the game.   On April 14, 2009, plaintiff filed this action alleging contract and implied covenant breach.   On plaintiff's application, the trial court issued a temporary restraining order followed by a preliminary injunction.   Defendant appeals from the preliminary injunction.

III. DISCUSSION

A. Standard of Review

Our Supreme Court set forth the standard of review on appeal from an order granting a preliminary injunction in Hunt v. Superior Court (1999) 21 Cal.4th 984, 999, as follows:  “The appellate standard for reviewing preliminary injunctions is well established.   In deciding whether to issue a preliminary injunction, a trial court weighs two interrelated factors:  the likelihood the moving party ultimately will prevail on the merits, and the relative interim harm to the parties from the issuance or nonissuance of the injunction.  (Butt v. State of California [ (1992) ] 4 Cal.4th [668,] 677-678.)  ‘Generally, the ruling on an application for a preliminary injunction rests in the sound discretion of the trial court.   The exercise of that discretion will not be disturbed on appeal absent a showing that it has been abused.  [Citations.]’  (Cohen v. Board of Supervisors [ (1985) ] 40 Cal.3d at [277,] 286.)  ‘A trial court may not grant a preliminary injunction, regardless of the balance of interim harm, unless there is some possibility that the plaintiff would ultimately prevail on the merits of the claim.   [Citation.]’  (Butt v. State of California, supra, 4 Cal.4th at p. 678.)”   The Supreme Court has further held, “Discretion is abused in the legal sense ‘whenever it may be fairly said that in its exercise the court in a given case exceeded the bounds of reason or contravened the uncontradicted evidence.’   [Citations.]”  (Continental Baking Co. v. Katz (1968) 68 Cal.2d 512, 527;  accord, IT Corp. v. County of Imperial (1983) 35 Cal.3d 63, 69;  City of Los Altos v. Barnes (1992) 3 Cal.App.4th 1193, 1199.)   The burden is on the party challenging the injunction to establish the trial court clearly abused its discretion.  (IT Corp. v. County of Imperial, supra, 35 Cal.3d at p. 69;  TSMC North America v. Semiconductor Mfg. Intern.   Corp. (2008) 161 Cal.App.4th 581, 588;  Shoemaker v. County of Los Angeles (1995) 37 Cal.App.4th 618, 624;  City of Los Altos v. Barnes, supra, 3 Cal.App.4th at p. 1199.)

With respect to underlying questions of law or fact, however, our Supreme Court has held:  “Of course, questions underlying the preliminary injunction are reviewed under the appropriate standard of review.   Thus, for example, issues of fact are subject to review under the substantial evidence standard․  [Citation.]”  (People ex rel. Gallo v. Acuna (1997) 14 Cal.4th 1090, 1136-1137.)   As explained in San Diego Gas & Elec. Co. v. San Diego Congress of Racial Equality (1966) 241 Cal.App.2d 405, 407:  “The classic rule that if any substantial evidence supports the finding of the trial court as to an issue of fact a reviewing court may not substitute its own evaluation of the evidence, applies to an appeal from a preliminary injunction.   A reviewing court may reverse only if an abuse of discretion is shown;  and it follows that if substantial evidence supports the order there is no abuse of discretion.   (Union Interchange, Inc. v. Savage [ (1959) ] 52 Cal.2d 601, 606.)”   (Accord, Huong Que, Inc. v. Luu (2007) 150 Cal.App.4th 400, 409;  Shoemaker v. County of Los Angeles, supra, 37 Cal.App.4th at p. 625.)   The Court of Appeal has explained:  “Where the evidence before the trial court was in conflict, we do not reweigh it or determine the credibility of witnesses on appeal.  ‘[T]he trial court is the judge of the credibility of the affidavits filed in support of the application for preliminary injunction and it is that court's province to resolve conflicts.’  [Citation.]  Our task is to ensure that the trial court's factual determinations, whether express or implied, are supported by substantial evidence.  [Citation.]”  (Shoemaker v. County of Los Angeles, supra, 37 Cal.App.4th at p. 625.)   It is well settled that on appeal from an order granting a preliminary injunction on conflicting evidence, we view the facts in the light most favorable to the plaintiff.  (People v. iMERGENT, Inc. (2009) 170 Cal.App.4th 333, 341-342;  Shoemaker v. County of Los Angeles, supra, 37 Cal.App.4th at p. 625;  Hilb, Rogal & Hamilton Ins. Services v. Robb (1995) 33 Cal.App.4th 1812, 1820;  Volpicelli v. Jared Sydney Torrance Memorial Hosp. (1980) 109 Cal.App.3d 242, 247;  American Academy of Pediatrics v. Van de Kamp (1989) 214 Cal.App.3d 831, 838;  People v. Mobile Magic Sales, Inc. (1979) 96 Cal.App.3d 1, 5, fn. 1;  San Diego Gas & Elec. Co. v. San Diego Congress of Racial Equality, supra, 241 Cal.App.2d at p. 407;  Metro-Goldwyn-Mayer, Inc. v. Lee (1963) 212 Cal.App.2d 23, 27-28.)

A mandatory injunction, as here, is only granted in an extreme case.   (Hagen v. Beth (1897) 118 Cal. 330, 331;  Slatkin v. White (2002) 102 Cal.App.4th 963, 972;  Shoemaker v. County of Los Angeles, supra, 37 Cal.App.4th at p. 625.)   The Supreme Court has held, “[T]he granting of a mandatory injunction [as here] pending the trial, and before the rights of the parties in the subject matter which the injunction is designed to affect have been definitively ascertained by the [trial court], is not permitted except in an extreme case where the right thereto is clearly established and it appears that irreparable injury will flow from its refusal.  [Citations.]”  (Hagen v. Beth, supra, 118 Cal. at p. 331;  accord, Davenport v. Blue Cross of California (1997) 52 Cal.App.4th 435, 446.)

It bears emphasis that a ruling on a preliminary injunction request is not a final determination of the controversy and neither the trial nor the appellate court undertakes a final adjudication of the lawsuit.  (Hunt v. Superior Court, supra, 21 Cal.4th at p. 999;  People ex rel. Gallo v. Acuna, supra, 14 Cal.4th at p. 1109;  Butt v. State of California, supra, 4 Cal.4th at p. 678, fn. 8;  Cohen v. Board of Supervisors, supra, 40 Cal.3d at p. 286;  Continental Baking Co. v. Katz, supra, 68 Cal.2d at p. 528.)   Our Supreme Court has emphasized:  “[A]lthough we will not ordinarily disturb the trial court's ruling absent a showing of abuse, an order granting or denying interlocutory relief reflects nothing more than the superior court's evaluation of the controversy on the record before it at the time of its ruling;  it is not an adjudication of the ultimate merits of the dispute.  [Citations.]”  (People ex rel. Gallo v. Acuna, supra, 14 Cal.4th at p. 1109.)

B. Application To The Present Case

1. Likelihood Of Prevailing On The Merits

Defendant conceded in the trial court that if it was in material breach of the parties' contract, it would be required to turn over its work product including source code.   The trial court found it was likely plaintiff ultimately would prevail on the claim defendant was in material breach of the agreement for failure to meet contractual development milestones.   Substantial evidence supported that conclusion.

On or about February 26, 2008, the parties entered into a Developer Agreement.   The Developer Agreement set forth a series of 17 milestones-dates by which certain work product was to be delivered to Genius Products LLC-and associated payments to defendant.   The milestones commenced on February 1, 2008, and ended with final asset delivery due May 1, 2009.   According to Michael Rubinelli, a Genius Products LLC vice president, the game was expected to be the first disc jockey based video game on the market, ahead of its competitors.   To that end, in paragraph 2.3 of the Developer Agreement, defendant expressly acknowledged, “[T]he successful completion of each Milestone in accordance with the Milestone schedule ․ is critical to the commercial viability of the Game.” Moreover, under paragraph 11.2 of the Developer Agreement, defendant's failure to meet the milestone schedule was a material breach of the agreement, “A material breach may include, but is not limited to, Developer's failure to finish and deliver any milestone in accordance with the Milestone schedule․”  And a material breach of the agreement gave rise to certain rights in Genius Products LLC, now plaintiff.   Pursuant to paragraph 11.4 of the Developer Agreement:  “In addition to Publisher's other rights and remedies, in the event Publisher terminates the Agreement as a result of a material breach of this Agreement by Developer, Publisher may elect[,] in its sole discretion, to (i) retain all rights licensed and/or granted to it hereunder in connection with Developer's Tools and Technology and (ii) take over the development of the Game. Publisher shall provide Developer with written notice of Publisher's election to take over development of the Game and within five (5) days of receipt of such notice, Developer shall deliver to Publisher all source materials, including source code, for the Game and provide Publisher with reasonable assistance in completing development of the Game. Publisher may provide Developer's Tools and Technology to a third party developer for completion of the Game pursuant to Publisher's direction, control, and approval and reasonable and appropriate written confidentiality restrictions.”   On April 10, 2009, plaintiff's lawyers notified defendant's counsel in writing a material breach had occurred.   Plaintiff's lawyers asserted defendant had breached the agreement by failing to meet the milestone schedule.   Plaintiff's lawyers also notified defendant that Genius Products LLC elected to take over development of the game.   Plaintiff demanded that defendant turn over its entire work product.

Defendant complied in part but refused to turn over, among other things, the game engine source code it claimed was part of its pre-existing tools and technology.   Defendant provided the game engine in object code rather than source code.   In the trial court, defendant's technical director, Paul Haban, explained:  “Source code is simply a human-readable language for giving instructions to a computer.   In other words, all software written by human beings is born as source code.   Because computers can process only binary language (0s and 1s) rather than human-readable languages, source code cannot be used by a computer until and unless it has been ‘compiled’ into binary ‘object code.’  [¶] [ ] Since object code cannot be read by human beings, proprietary software typically is distributed to users in that form in order to protect trade secrets embodied in the software.”   There was evidence defendant had fallen behind the development schedule by September 2008, six months after the parties entered into the Developer Agreement.   There was also evidence defendant did not meet any milestones after December 1, 2008.   There was no evidence the milestone due dates were ever amended in writing as required under paragraph 15.4 of the Developer Agreement, “Except as otherwise provided in this Agreement, Exhibits, and/or the Appendices, this Agreement ․ can be modified, amended, or any provision waived only by a written instrument signed by an authorized officer of Publisher and by an authorized representative of Developer.”   This was substantial evidence supporting the trial court's conclusion it was likely plaintiff would ultimately prevail on its material breach claim.   Moreover, the trial court did not abuse its discretion in impliedly finding this was an extreme case where the right to the injunction was clearly established and irreparable harm would result from its refusal.

Defendant argues it was unable to meet its contractual obligations because the staff of Genius Products LLC failed to timely deliver hardware, tools and music and to obtain approval from the manufacturers of the game platforms.   The evidence before the trial court was conflicting.   Defendant's chief executive officer, Lewis Peterson, said that in September 2008 the parties began discussing a revised milestone schedule.   According to Mr. Peterson the revisions were necessitated because of the failure to “deliver key development hardware and other materials critical to the [g]ame's development in a timely fashion” to his company.   Defendant's vice president of production, Michael Fletcher, similarly declared his company was entitled to receive game platform development and test kits from Genius Products LLC in April and July 2008.   But, Mr. Fletcher declared, the hardware was not obtained until August 1, 2008, which caused “substantial delay” in the development process.   Mr. Fletcher further averred plaintiff's predecessor, Genius Products LLC, delivered only half the promised music for the game.   By contrast, Genius Products LLC's senior vice president for game development, Mr. Rubinelli, agreed that some delay had been encountered in obtaining the hardware.   But Mr. Rubinelli denied the delay affected the game's development:  “At no time in the course of the discussions ․ did [defendant] ask for more time or indicate that any extension of the development schedule was required.   In fact, at that point [defendant] was on track with the development schedule․”  Mr. Rubinelli also stated:  “For the most part [defendant] had a steady stream of music around which it could implement․  [Defendant] never mentioned to me that the completion date was being held up by its not having additional music to work with.”

The trial court was not required to credit defendant's evidence.   The trial court noted, for example, “The statement in the Declaration of Michael Fletcher ․ that he ‘learned’ that the failure to obtain platform approval meant that [plaintiff] could not purchase the necessary hardware and deliver it to [defendant] is not evidence.”   Further, with respect to the approvals by the game platform manufacturers, the trial court found there was no evidence establishing the lack of approval had anything to do with defendant's obligation to develop the game:  “If there was no approval for the platform, the Game would never be sold, would never be played, and [plaintiff] would lose its investment.   But it has nothing to do with [defendant's] obligation to create the Game as a work for hire.”  (Fn.omitted.)  We cannot reweigh the evidence.  (Union Interchange, Inc. v. Savage, supra, 52 Cal.2d at p. 606;  Huong Que, Inc. v. Luu, supra,150 Cal.App.4th at p. 409;  Shoemaker v. County of Los Angeles, supra, 37 Cal.App.4th at p. 625.)

2. Relative Interim Harm

Defendant contends the trial court abused its discretion in resolving the relative interim harm issue.   The trial court found:  the hardship to plaintiff absent an injunction would outweigh any harm to defendant;  and permitting another developer access to defendant's trade secret source code would not cause defendant irreversible damage.   We find substantial evidence supported the trial court's conclusions;  hence, there was no abuse of discretion.   Genius Products LLC had paid defendant more than $6 million to develop the game, which was more than the total development fee specified in the Developer Agreement.   It was undisputed that without the engine source code, plaintiff could not compile a working version of the game and further develop it;  rather it would take plaintiff “additional years” to complete the project.   In the meantime, potential competitors of plaintiff would be marketing their own disc jockey based games.   Moreover, defendant had by contract granted Genius Products LLC, now plaintiff, a license for its pre-existing tools and technology.   And defendant had agreed that in the event it materially breached the Developer Agreement it would turn over its source code and assist plaintiff to complete development of the game.   And the parties agreed that plaintiff could provide defendant's tools and technology to another developer for game completion subject to “reasonable and appropriate written confidentiality restrictions.”   Under these circumstances, the trial court could reasonably conclude the relative interim harm experienced by plaintiff warranted issuance of the preliminary injunction.

3. The Undertaking

Defendant contends it was foreclosed from using the procedures for seeking an increase in the bond amount (Code Civ. Proc., § 995.910 et seq.) because the trial court “prejudged” the matter.   This contention is without merit.   Article 9 of the Code of Civil Procedure governs objections to bonds.   (Code Civ. Proc., § 995.910.) A party can object to a bond by noticed motion.  (Code Civ. Proc. § 995.930.) Defendant does not contend it filed or attempted to file such a motion.   At the hearing in the trial court, the following transpired:  “The Court:  ․ [¶] I'm going to arbitrarily pick a bond amount.   It may go down;  it may never go up.  [¶] Two million dollars․  [¶] [Plaintiff's counsel, Stacy Nakasian]:  Yes, Your Honor.  [¶] The Court:  Post it by Tuesday ․ [¶] You may still provide me with evidence ․ as to why it should be less.   But it won't go up.   Two million dollars.   If you don't give me evidence it will remain two million.  [¶] [Defendant's counsel, Stanton L. Stein]:  If I give you evidence that it ought to be substantially more, Your Honor, you are not going to consider it?  [¶] The Court:  No. Look, bond amounts are somewhat arbitrary, I concede that.   But I just don't see-the license couldn't possible cost a million dollars.”   While the trial court's comments suggest it was not disposed to increase the bond, those statements did not prevent defendant from filing a statutory motion.   Had the trial court denied a motion to increase the bond amount, defendant would be in a position to object.   Instead, defendant has forfeited the issue by failing to file a timely motion under Code of Civil Procedure sections 995.910 et seq.  (Code Civ. Proc., § 995.930, subd. (c).)

IV. DISPOSITION

The May 12, 2009 preliminary injunction order is affirmed.   Plaintiff, Scratch DJ Game, is to recover its costs on appeal from defendant, California 7 Studios, Inc.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

I concur:

MOSK, J., Dissenting

I dissent.

The issue here is whether at the preliminary injunction stage, the trial court has erred in requiring defendant California 7 Studio, Inc. to deliver to plaintiff, Scratch DJ its source code as to “Preexisting Tools and Technology” or “core engine” and certain other documentation relating to the development of the disco game that defendant had agreed to provide to plaintiff.   Although defendant has sought to reverse the preliminary injunction in connection with the temporary restraining order, it apparently has already turned over to plaintiff most of the other “Work Product” referred to in the agreement.   Defendant also challenges the amount of the bond.

The trial court recognized in its order that “[a] mandatory injunction-one that mandates a party to affirmatively act, carries a heavy burden:  ‘[t]he granting of a mandatory injunction pending trial is not permitted except in extreme cases where the right thereto is clearly established.’  (Teachers Ins. & Annuity Assn. v. Furlotti (1999) 70 Cal.App.4th 1487, 1493.)”   Moreover, on appeal, “we scrutinize [a mandatory injunction] even more closely for abuse of discretion.”  (Board of Supervisors v. McMahon (1990) 219 Cal.App.3d 286, 295;  see Davenport v. Blue Cross of California (1997) 52 Cal.App.4th 435, 446.)

The trial court's decision was based on termination of the agreement by plaintiff for cause, with that cause being a material breach of the agreement by defendant.   Although there are other contentions, defendant's principal argument is that because plaintiff did not complete delivery of the music, defendant could not meet the “Milestone” delivery requirements.   The trial court and plaintiff contend that a “steady stream” of music was supplied to defendant, and there was no complaint or indication that the disco game was being delayed due to a lack of music.

Defendant, on the other hand, points out in a declaration from one of its officers that plaintiff was “to start delivering music and songs for the Game in or about July 2008 and complete delivery on or about January 15, 2009.[¶]  The January 15, 2009 deadline was subsequently extended by the parties to March 16, 2009 and each subsequent milestone deadline would be extended as well.  [¶] To date, [defendant] has received approximately half of the promised deliverables and as late as April 14, 2009 was still attempting to deliver music.”   Had there been some dispute over the timely delivery of materials for milestones, defendant had to provide notice and a cure period to plaintiff under section 2.3 of the agreement, but it did not.

According to defendant, plaintiff was required by the agreement to provide to defendant for incorporation into the game the “Licensed Content,” which included the music. (§ 2.8.1) Thus, section 1.2(k) refers to music as being the subject of “Licensed Content.”  (Yet paragraph 1.1 provides that the “Services” required of defendant includes “music.”)   The trial court did not dispute that plaintiff had an obligation to deliver the music to defendant.

The various delivery requirements for milestones-Alpha, Beta and GMC versions of the game-contemplate delivery of the game with music.  (See 1.2(a)(b).)  The trial court simply said that defendant “provides no explanation as to how the late delivery of music delayed its meeting of Milestones.”   The trial court observed that defendant did not provide any evidence of a “linkage between what it complained about and its failure to meet the deadline schedule.”   But it seems intuitive that in order to deliver a “complete” music disc jockey game (§ 1.2(a)), defendant must have all the necessary music.   I suppose one could theorize that defendant could have supplied the game with the music it had.   But there is no evidence to support this theory.   Presumably, the disco game when delivered should contain all the music that plaintiff intends for it to have-not just a portion of the music.   Thus, the issue is whether the delay in supplying the music excuses defendant's inability to meet the “Milestone” delivery deadlines.   Based on the state of the evidence of this issue of excuse, I do not believe there is adequate evidence to support the conclusion that plaintiff “has established ․ a probability of success” under the standards applicable to a mandatory preliminary injunction.

With regard to irreparable harm, plaintiff conceded that its goal of having the game be the first one of its kind on the market and in time for the holiday season had already been “severely jeopardized.”   Plaintiff's representative acknowledged, “Even if we were to get the Work Product tomorrow [on April 15, 2009] there is no assurance that we can meet the planned release date.”   He went on, “[i]f we have to wait two or three weeks [from April 14, 2009] to received [sic ] the assets and turn them over to another developer, the release of the Game in time for the 2009 holiday sales season might not be possible.”   The preliminary injunction was issued on May 12, 2009, almost a month after these dire predictions.   A preliminary injunction should issue only if it will serve to prevent damage to a party-not if that party cannot assure the trial court that the preliminary injunction will not prevent the projected harm.   Here, plaintiff gave no such assurance.

There also is no indication of why plaintiff could not estimate its damages.   Those damages could be calculated by using the return on comparable games that were first on the market.   Any delay in getting that game on the market would be the loss of sales.   There is no showing that such a loss could not be demonstrated so as to establish an inadequate remedy at law-a prerequisite for equitable relief.

Defendant, on the other hand, would under the injunction, have to turn over a portion of its source code-Preexisting Tools and Technology-that it uses for other product development.   And this material would likely end up being accessible to a competitor.   Offsetting this consequence is that defendant seems to acknowledge that it delivers the source code for its Tools and Technology to the publishers upon completing the game development.   So, that material cannot be so highly confidential.   Admittedly, defendant asserts it turns over the materials to publishers with a confidentiality clause so that competing developers do not have access to the materials.   Thus, as to weighing the adverse effects of an injunction on defendant against the harm to plaintiff if there were no injunction may not be a conclusive basis for reversing the preliminary injunction.   But, I believe the other factors I discussed do require such a reversal of a mandatory injunction.

As to the bond amount, I do not see that the defendant forfeited any challenge to the amount of the bond-which the trial court said was “arbitrary”-when the trial court specifically said it would not consider any evidence that the bond amount should be higher.   It may well be that the cost of the development of the source code for its preexisting Tools and Technology is not the proper measure of damages to defendant if it is made available to others.   And perhaps defendant should have put on its evidence on this issue in its papers filed in opposition to the injunction.   But once the trial court said it was picking an “arbitrary” number, defendant should have been given the opportunity to convince the trial court not to use an arbitrary figure.   I would prefer that the matter be remanded for further consideration of the bond amount, but do not conclude that the trial court abused its discretion in connection with the bond.

The trial court did an admirable job in its review of the complicated material and its consideration of all of the ramifications, some of which may involve the underlying competition between two significant entities.   Nevertheless, based on the record, because of the standards applicable to mandatory injunctions, I would reverse the preliminary injunction on the basis that plaintiff has not established at this stage the probability of success at trial, the inadequacy of a remedy at law, nor that the injunction will prevent the anticipated harm.   I do not believe this is an “extreme” case in which the right to a mandatory preliminary injunction “is clearly established.”   (Teachers Insurance and Annuity Association v. Furlotti, supra, 70 Cal.App.4th at p. 1493.)

MOSK, J.

ARMSTRONG, J.

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