The following is a case update written by the Hon. Meredith A. Jury (United States Bankruptcy Judge, C.D. Cal. Ret.), analyzing a recent decision of interest:
Agreeing with its sister circuits in a case of first impression, the Ninth Circuit Court of Appeals held that the terms of a contract alone cannot require a court to grant equitable relief where there is an adequate monetary remedy at law. Barranco v. 3D Systems Corporation, 2020 WL 1179728 (9th Cir. 3/12/20).
To view the full opinion, click here.
Barranco owned several 3D printing businesses and two websites (the Domains) which brokered the manufacture of 3D printed parts. He sold the Domains to 3D Systems pursuant to a Purchase and Sale Agreement (PSA). Under the PSA, Barranco granted 3D certain rights in the Domains in exchange for (1) $250,000 cash, (2) royalty payments based on sales generated by the Domains, and (3) a right to exercise a buyout which would terminate the royalty payments and grant entitlement to a lump sum based on the average royalty generated by the Domains. The PSA also had a covenant not to compete (CNTC), forbidding Barranco from working for or having any role or interest in a business that competed with 3D or developing a competing product. As part of this covenant, the parties agreed that a violation of the restriction would “result in irreparable injury to 3D Systems for which damages will not be an adequate remedy” and the agreement called for an “equitable accounting of earnings, profits and other benefits arising from such violation.”
Dissatisfied with his royalty earnings, Barranco sued 3D for breach of contract and breach of the covenant of good faith and fair dealing. 3D counterclaimed, alleging that Barranco breached the CNTC by developing a competing technology. At the close of evidence in a jury trial on the complaint and counterclaim, Barranco moved for judgment as a matter of law on the counterclaim, asserting that 3D had not presented any evidence of damages. 3D responded that under the PSA it was entitled to an equitable accounting, not damages. The district court agreed, denying the motion. The jury returned a verdict for 3D on the complaint, denying relief, and on the counterclaim, insofar as it found Barranco liable for breaching the CNTC. The district court then conducted a bench trial on the equitable accounting, which resulted in a judgment for disgorgement by Barranco of the $500,000 he had been paid under the PSA.
Barranco appealed and the 9th Circuit reversed the monetary award and judgment.
The district court gave two reasons for concluding that 3D had a right to an equitable accounting: First, it invoked an exception to the general rule that a court may exercise equitable jurisdiction only when legal remedies are inadequate. The exception applies only when the plaintiff can show the accounts between the parties are so complicated that only a court of equity can unravel them. Second, it concluded that the PSA gave 3D a right to an equitable accounting.
The Circuit Court gave short shrift to the first ground. Since 3D had presented no evidence at all on damages in the jury trial, it certainly had not made the requisite showing of complexity or given any reason the jury was unable to award damages. Moreover, the court had found “no evidence that Barranco obtained earnings, profits, or other benefits” attributable to the violations of the CNTC in the bench trial and instead used an unjust enrichment theory to order the disgorgement. There was no complexity of accounts to warrant application of the exception.
The Circuit Court then turned to the agreed terms of the PSA, which recited that any injury would be irreparable and would result in the right to equitable relief, and held that the terms of a contract alone cannot require a court to grant equitable relief. With no significant analysis, it followed decisions from the Second, Tenth and D.C. Circuit Courts which reject the concept that parties have a right to agree in a contract to an equitable remedy when resolving a breach of contract claim. It reversed the award based on that holding.
I find the lack of analysis by the Ninth Circuit disappointing when it is ruling on an issue of first impression. It is even more puzzling when the court recognizes that the applicable state law, Hawaii, sometimes allows parties to call for equitable relief in their contracts, yet it rejects that those rights apply here. I further contrast this case with two from the Texas Supreme Court which I have recently reviewed (prior, Energy Transfer Partners, L.P. v. Enterprise Prods. Partners, L.P., 2020 WL 622763 (Tex. 1/31/29), and today Chalker Energy Partners III, LLC v. Le Norman Operating LLC, 202 WL 976930 (Tex. 2/28/20)), which both strongly uphold the freedom of parties to set the terms of their contracts. Left to speculate about the difference, I believe it demonstrates the natural inclination of courts to define their own jurisdiction rather than allowing parties to do so. Here we are dealing with a limitation on a court’s power developed by case law over centuries. We all learned in law school, by reading cases from as early as the 1800’s, that equitable relief is inappropriate when there is an adequate remedy at law. The Circuit Court here relied on that maxim to limit the right of parties to say otherwise.
These materials were authored by the Hon. Meredith A. Jury (United States Bankruptcy Judge, C.D. Cal. Ret.), a member of the ad hoc group, with editorial contributions by Monique Jewett-Brewster, an attorney with Hopkins & Carley, ALC, a member of the ad hoc group and 2018-19 Chair of the CLA Business Law Section. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.