The Agreement

Congratulations! You’ve just entered into an agreement to settle your trade secret misappropriation case.

Defendants will pay you money damages, and agree that you may move the court for fees and costs under Civil Code section 3426.4, based upon their alleged willful and malicious misappropriation. Defendants reserve the right to oppose and to tax your costs. Under the agreement, the trial court is to retain jurisdiction over the case to enforce the settlement agreement. You and defendants then dismiss the action, noting “Plaintiff to separately seek recovery of fees and costs, subject to opposition.”

You may now proceed to seek an award of attorney’s fees and costs from the trial court, right?

Agreement? What Agreement?

This was the situation presented in the recent case of Khavarian Enterprises, Inc. v. Commline, Inc., et al. (May 14, 2013) (Case No. B243467). After entering into this agreement, plaintiff moved for attorney’s fees and costs. It also submitted evidence that defendants’ misappropriation was willful and malicious. Defendants filed an opposition and a motion to strike the memorandum of costs.

At the hearing, the trial court refused to consider plaintiff’s motion. The court held that the settlement of the case effectively barred plaintiff from seeking attorney’s fees and costs, thereby nullifying that part of the settlement agreement. The court rejected the notion that, under these circumstances, it could or should review the record to make a finding as to whether defendants’ misappropriation was willful and malicious.

Even with plaintiff’s monetary recovery and the language of the agreement, the court found that plaintiff was not the prevailing party under the provision of California Code of Civil Procedure section 1032(a)(4) defining “prevailing party” as “the party with a net monetary recovery, [or] a defendant in whose favor dismissal is entered.”

Despite having entered into the agreement, defendants argued that the provision was unenforceable because there was no authority or procedure for plaintiff to settle a case under Civil Code section 3426.4, and then ask the court to make a finding of willful and malicious misappropriation.

The court denied plaintiff’s motion for fees and granted defendants’ motion to strike.

Oh, That Agreement . . .

The Second District Court of Appeal reversed.

The Court ruled that the parties’ settlement agreement was legally permissible and required the trial court to exercise its discretion to determine whether plaintiff is the prevailing party and, if so, whether defendants’ acts of misappropriation were willful and malicious, thereby justifying an award of attorney’s fees and costs under Civil Code section 3426.4.

The Court observed that in determining which side was the prevailing party, the parties were not bound by the definition relied upon by the trial court. Instead, under Code of Civil Procedure section 1032(c), in crafting a settlement, parties may agree to standards and procedures to which they wish to adhere regarding recovery of attorney fees and costs — which the Court of Appeal pointed out is exactly what the parties in this case did.

The Court added that there is nothing that legally proscribes a plaintiff, who voluntarily dismisses its case after obtaining a net monetary recovery through settlement, from being the prevailing party. Indeed, the Court pointed out that the language in the agreement, authorizing plaintiff to apply to the court for an award of attorney’s fees and costs, after dismissing the action, could only mean that the parties agreed that plaintiff was the sole potential prevailing party.

The Court went on to find that the only reasonable interpretation of this language in the settlement agreement was that the parties had agreed to submit to a procedure by which the court would use its discretion to determine whether plaintiff was the prevailing party, and if so, whether defendants committed willful and malicious misappropriation. It added that this approach is neither unlawful nor procedurally impossible; and a contrary interpretation would render that portion of the agreement “empty” and “ineffectual.”

Thus, under these circumstances, a trial court may be required to act as fact finder on a post-settlement motion for attorney’s fees. Here, because the dismissal was an action in compliance with and required by the stipulated settlement, it did not deprive the court of jurisdiction to consider the fee and cost motions that were specifically contemplated by the settlement agreement. In fact, the language of the agreement obligated it to do so, even if it meant that the trial court would have to engage in considerable fact finding to make such determinations.


This decision is likely to pave the way for more parties to include provisions in settlement agreements calling for post-settlement determinations by courts as to the right of one side to recover attorney’s fees, not just in the trade secret misappropriation context, but in other areas as well.