Internet Brands Inc et al v. UltimateCoupons.com LLC et al

Filing 96

MINUTES (IN CHAMBERS) ORDER RE: INTERPRETATION OF NON-COMPETE AND EARN OUT PAYMENT COVENANTS by Judge Christina A. Snyder: At the 5/20/2013, pretrial conference, the Court requested briefing from both parties as to whether defendants and counterclaim ants' alleged breach of the "non-compete" provision in the parties' agreement excused defendants' breach of the obligation to pay the Year Three earn out payment. After considering the briefs both parties submitted to the Cou rt addressing this issue 92 , 93 , the Court concludes as follows. Upon further consideration, as with the question of materiality, the Court cannot determine as a matter of law whether the parties intended for their respective covenants at issue in this litigation to be independent or dependent. Because the Court cannot determine whether the respective promises are dependent or independent, this issue must also be resolved at trial. Court Reporter: Not Present. (gk)

UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Case No.

CV11-5358-CAS (CWx)

Title

INTERNET BRANDS, INC. V. ULTIMATECOUPONS.COM, LLC, ET
AL.

Present: The Honorable

Date

May 23, 2013

CHRISTINA A. SNYDER

Catherine Jeang
Deputy Clerk

Not present
Court Reporter / Recorder

N/A
Tape No.

Attorneys Present for Plaintiffs:

Attorneys Present for Defendants

Not present

Not present

Proceedings:

(In Chambers:) ORDER RE: INTERPRETATION OF NONCOMPETE AND EARN OUT PAYMENT COVENANTS

At the May 20, 2013, pretrial conference, the Court requested briefing from both
parties as to whether defendants and counterclaimants’ alleged breach of the “noncompete” provision in the parties’ agreement excused defendants’ breach of the
obligation to pay the Year Three earn out payment. The Court did not rule on this issue
in its order granting in part and denying in part the parties’ cross-motions for summary
judgment. After considering the briefs both parties submitted to the Court addressing this
issue, Dkt. Nos. 92, 93, the Court concludes as follows.
The Asset Purchase and Sale Agreement (“APA”) sets forth the relevant provisions
pertaining to the sale of the UltimateCoupons site. See Dkt. No. 46-1. Section 1.3 of the
APA, entitled “Purchase Consideration,” provides for initial payment for the website in
the amount of $7,604,000. In addition, the APA provides for three “earn out” payments
based on the website’s net revenue for each period beginning May 1 until April 30 in the
years 2008–09, 2009–10, and 2010–11. These three payments were due on June 14,
2009, 2010, and 2011, respectively.
Article IV of the APA contains the “Covenants of Seller and Owners” of the
Ultimatecoupons.com website. The non-competition covenant states that defendants
shall not engage in a Competitive Business Activity . . . without Internet Brands [sic]
prior written consent” for three years after the closing of the deal. The term “Competitive
Business Activity” is further defined in the parties’ agreement as “engaging in, or
managing or directing persons engaged in any business in competition with the Websites
or their business as the Websites are currently designed and configured . . . .” Further,
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Case No.

CV11-5358-CAS (CWx)

Date

May 23, 2013

Title

INTERNET BRANDS, INC. V. ULTIMATECOUPONS.COM, LLC, ET
AL.

defendants acknowledged that their agreement to the non-compete provision was
“necessary to preserve the value of the Websites and their business for Internet Brands
following the Closing,” and that “the limitations of time, geography, and scope of activity
agreed to in this Agreement are reasonable” for a number of reasons. The parties do not
direct the Court to any other sections of the agreement that are relevant to the instant
issue.
The Court finds that there remains a disputed issue of fact as to whether
defendants’ alleged breach of the covenant not to compete or solicit discharged plaintiff
from its duty to make the third earn out payment. First, under California law, “[w]hen a
party’s failure to perform a contractual obligation constitutes a material breach of the
contract, the other party may be discharged from its duty to perform under the contract.”
Brown v. Grimes, 192 Cal. App. 4th 265, 277 (2011) (citing 1 Witkin, Summary of Cal.
Law, Contracts §§ 813, 814, p. 906 (10th ed. 2005)). The breach by one party must be
material to excuse the other party’s performance; not just any breach will do.1
This question—whether a breach of an obligation is a material breach, so as to
excuse performance by the other party—is generally a question of fact. Id. (collecting
sources). Only where “reasonable minds cannot differ on the issue of materiality” may
the question be resolved as a matter of law. Id. at 278 (quotations omitted). “Whether a
partial breach of a contract is material depends on the importance or seriousness thereof
and the probability of the injured party getting substantial performance.” Id. Factors to
consider include: “(1) the extent of the actual performance or preparation; (2) the good
faith, or lack thereof, of the defaulting party; (3) the hardship, if any, resulting to the
defaulting party; and (4) the adequacy of damages to compensate the other party for the
default.” California Jury Instructions–Civil, BAJI No. 10.82, p. 685 (Spring 2010 ed.)
(citing 1 Witkin, Summary of California Law, Contracts §§ 813, 814 (10th ed. 2005)).
Even “[a] material breach of one aspect of a contract generally constitutes a material
breach of the whole contract.” Brown, 192 Cal. App. 4th at 278 (quoting 23 Williston on
Contracts § 63:3, p. 440 (4th ed. 2002)). Here, because the parties have yet to address

1

Of course, if defendants’ purported breach did not occur at the outset of year
three, plaintiff may have an obligation to pay that portion of the earn out payment which
had already accrued.
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Case No.

CV11-5358-CAS (CWx)

Date

May 23, 2013

Title

INTERNET BRANDS, INC. V. ULTIMATECOUPONS.COM, LLC, ET
AL.

whether defendants’ alleged breach of the non-compete provision is material or not, when
viewed in light of the contract as a whole, there remains a disputed issue of fact to be
addressed at trial.
Second, even where there has been a material breach by one party, the other party’s
performance will not be excused if the parties’ respective promises or covenants are
independent of one another. As with the determination of materiality, “whether a
promise is an independent covenant, so that breach of that promise by one party does not
excuse performance by the other party, is based on the intention of the parties as deduced
from the agreement.” Id. at 279. Covenants are deemed dependent “where performance
by one party is in exchange for performance by the other, and the duties are to be
performed or can be performed at the same time . . . .” 1 Witkin, supra, § 809. On the
other hand, “[w]here the promises are to be performed at different times, they are
generally deemed independent covenants . . . .” Id. § 810.
Upon further consideration, as with the question of materiality, the Court cannot
determine as a matter of law whether the parties intended for their respective covenants at
issue in this litigation to be independent or dependent. See Brown, 192 Cal. App. 4th at
279 (finding that the trial court properly treated the issue as “a question of fact” where it
was ambiguous whether covenants were dependent or independent); Rubin v. Fuchs, 1
Cal. 3d 50, 54 (1969) (holding that “whenever possible the courts will construe promises
in a bilateral contract as mutually dependent and concurrent”). As plaintiff notes, the
non-compete provision is coextensive in time with the earn out provisions—both
obligations expire three years after the agreement was executed. This supports a finding
of dependence. However, these covenants otherwise concern wholly separate subject
matter, and thus the parties may well have intended for these covenants to be independent
obligations. Because the Court cannot determine whether the respective promises are
dependent or independent, this issue must also be resolved at trial.
IT IS SO ORDERED.
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Initials of Preparer

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CMJ

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