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Creatier vs. Bates

Conversion; Constructive Fraud; Misappropriation of Trade Secrets; Violation of Cal. Code § 17200; Breach of Fiduciary Duty; Breach of Contracts

Creatier Interactive, LLC v. Daniel Bates; Avant Interactive, Inc. et al.
Superior Court of the State of California, County of Los Angeles, Case No.BC311213

Counsel for Plaintiff: Katten Muchin Rosenman
Expert for Plaintiff: Marc S. Margulis, C.F.A., A.S.A., M.B.A
Creative Frontier was formed on February 3, 2001 as a California corporation by Mark Gottwald and Daniel Bates for the purpose of developing and exploiting a suite of software programs designed and written to enable interaction between a viewer and a video by linking dynamic objects in the video to external sources of commercial and educational information in either a one-screen (ITV) or a two-screen (ETV) viewing environment.

This dispute arose after Bates, Plaintiff’s former President and CEO, allegedly misappropriated and converted Plaintiff’s trade secrets, including patent-pending software designs and source code, and other confidential business information to begin a competing business with the financing and complicity of other defendants.

On August 7, 2002, Bates forced Creative Frontier into an involuntary Chapter 7 bankruptcy filing, the assets of which were acquired by Plaintiff with funds from Gottwald.  Plaintiff next alleged that, on or about December 20, 2002, Bates and other defendants formed Avant Interactive to further develop, market and, ultimately, sell Plaintiff’s interactive television technology under a new brand name.

A “trade secret” is information that (i) derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

California’s Uniform Trade Secrets Act (Civ. Code § 3426 et seq.) provides, upon proof of misappropriation, various remedies to plaintiffs, including injunctive relief, damages (both lost profits damages and unjust enrichment), royalties, punitive damages and attorney fees.  However, a “reasonable royalty is reserved for those instances where the court finds that neither actual damages to the holder of the trade secret nor unjust enrichment to the user is provable.” (Morlife, Inc. v. Perry, 56 Cal. App. 4th 1514, 1529 (1997))

On behalf of Plaintiff, Mr. Margulis presented multiple measures of Plaintiff’s future lost profits damages and of defendants’ future unjust enrichment, in addition to reasonable royalties, each by a different methodology or based on different facts in evidence.

Both Creative Frontier and defendant Avant Interactive could be characterized as “unestablished” businesses, with no histories of revenues or profits upon which to base a forecast of future revenues and profits.  A review of applicable case law revealed, in part, the following:

  • “Damages for loss of profits may be denied to an unestablished or new business as being too uncertain and speculative if they cannot be calculated with reasonable certainty.”  (Maggio, Inc. v. United Farm Workers of America, 227 Cal. App. 3rd 847 (1991))
  • “Although plaintiff was only obligated to demonstrate its loss with reasonable certainty, it was required to present the best evidence of damages of which the nature of the case was capable.”  (S.C. Anderson, Inc. v. Bank of America, 24 Cal. App. 4th 529 (1994))
  • “When the tortfeasor has prevented the beginning of a new business, all factors relevant to the likelihood of the success or lack of success of the business…that are reasonably provable are to be considered in establishing damages, including general business conditions and the degree of success of similar enterprises.”  (Kids’ Universe v. IN2LABS, 95 Cal. App. 4th 870 (2002))

Mammoth Advisors began with a search of publicly traded companies operating in six relevant industry sectors.  This effort yielded 560 possible “yardstick” or comparable companies.  Based on descriptions of each, 10 companies were identified as primary comparables and 83 as secondary comparables.  Next, Mammoth Advisors identified an additional 12 comparable companies that had been acquired between 2002 and 2006.  Other comparable companies were identified through interviews and discovery documents.  From various analyses performed on the information obtained through these procedures, Mammoth Advisors produced 10 distinct measures of lost profits and unjust enrichment, plus a reasonable royalty rate, and Mr. Margulis testified at deposition.

The parties subsequently entered into a confidential settlement agreement.