Opinion
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
APPEAL from a judgment of the Superior Court of San Diego County Super. Ct. No. GIC874631, John S. Meyer, Judge.
McINTYRE, J.
Jonathan Nissanoff, M.D., appeals a judgment entered after the superior court granted summary judgment on his breach of contract claim against Philip Balikian, M.D., based in part on the finding that the contract's liquidated damages provision was unenforceable. He contends that the superior court applied an erroneous standard in concluding that the liquidated damages provision was invalid. We disagree and affirm the judgment.
FACTUAL AND PROCEDURAL BACKGROUND
In 2005, Balikian, an orthopedic surgeon from Kentucky, decided to relocate to San Diego and began to look for professional business opportunities here. As part of his search, Balikian contacted Renisant, a Chicago-based medical practice brokerage firm, which ultimately informed him about the possible availability of an unspecified orthopedic practice (Nissanoff's) in Poway. In connection with those discussions, Renisant required Balikian to sign an agreement that prohibited him from disclosing confidential information he received from it and from opening up a competing practice and specified that "in the event of [his] failure to perform any obligation or duty" under the agreement, he would be liable for $300,000, which was 10 percent of the proposed sale price for the business. Balikian read the agreement, but the parties never discussed the liquidated damage provision. Nissanoff subsequently declined to enter into a relationship with Renisant, so Balikian did not receive any further information about the practice and the discussions between Balikian and Renisant terminated.
Balikian independently saw a listing for the sale of a San Diego practice (again Nissanoff's) on the American Academy for Orthopedic Surgeons website and contacted Nissanoff directly about a possible purchase. Before providing Balikian with any detailed information about his practice, Nissanoff had Balikian sign a modified version of the Renisant confidentiality agreement; it provided in relevant part:
"2. Restrictions on Use of Confidential Information. [Balikian] hereby agrees that the Confidential Information provided to [him] by [Nissanoff] will be used by [him] solely for the purpose of entering into a business relationship with [Nissanoff]. [Balikian] acknowledges that it shall be a breach of this Section 2 if, within one (1) year from the date of this Agreement, [he] opens up or invests in a practice that competes with [Nissanoff] in the delivery of orthop[]edic surgery and related clinical services that is located within a twenty-five (25) mile radius of [Nissanoff's] existing office. . . . In [t]he event that this is violated, then [Balikian] agrees to pay li[q]uidated damages of $300,000 to [Nissanoff] within one week of viol[]ation with a penalty of $1[,]000 per day thereafter.
"3. Nondisclosure of Relationship [or] Possible Transaction. [Balikian] agrees that, without the prior written consent of [Nissanoff], [he] will not disclose to any person or entity the fact that Confidential Information has been made available hereunder, that discussions or negotiations are taking place concerning a possible transaction involving the parties hereto, or otherwise disclose any of the terms, conditions or other facts with respect hereto, including, but not limited to, the status hereof."
After meeting with Nissanoff and receiving information about Nissanoff's practice, Balikian decided that he was not interested in pursuing its purchase.
Balikian continued his search and ultimately interviewed for an orthopedic surgery position at the Center for Health Care (the Center) in Rancho Bernardo. Balikian spoke to Dr. Brad Cohen, a physician at the Center, about the nature of the Center's practice; during one of their conversations, Cohen asked if Balikian had explored other options in San Diego and Balikian responded that he had interviewed with Nissanoff.
Nissanoff thereafter had a conversation with Cohen in which Cohen asked if he was planning to leave San Diego; Nissanoff denied that he was. Upon further discussion, Nissanoff concluded that Balikian had breached the confidentiality agreement by talking to Cohen. Within days, he sent Balikian an E-mail accusing Balikian of breaching the agreement, demanding that Balikian provide him with a $300,000 cashier's check within the next seven days and threatening that, if Balikian failed to do so, the $1,000 per day penalty would begin to accrue. Balikian responded that he had not breached the agreement and refused to make any payment to Nissanoff.
In October 2006, Balikian accepted the orthopedic position at the Center and Nissanoff filed this action against him for breach of contract. The complaint alleged that Balikian had (1) disclosed to third parties that Nissanoff was seeking to sell his San Diego practice and (2) successfully solicited a business prospect he found out about from Nissanoff and set up a competing practice within 25 miles of Nissanoff's primary place of business. The complaint alleged that Nissanoff suffered a loss of business referrals and business growth opportunities as a result of Balikian's wrongful conduct.
Balikian filed a motion for summary judgment, arguing that (1) there was no evidence he had told Cohen that Nissanoff was selling his practice; (2) the liquidated damages provision of the contract applied only to the noncompetition clause of the agreement and was inapplicable to the nondisclosure prohibition; (3) the liquidated damages provision was invalid and unenforceable because the amount of damages specified therein (a) bore no reasonable relationship to any actual damages Nissanoff would have suffered as a result of a breach of the noncompetition clause and (b) provided for the same penalty regardless of the nature of the breach; (4) the noncompetition clause was also invalid; (5) there was no evidence that he breached the noncompetition clause; and (6) Nissanoff was relying exclusively on the liquidated damages provision because he had no actual damages as a result of the alleged breaches.
Nissanoff opposed the motion for summary judgment, contending in part that (1) Balikian had accepted the $300,000 liquidated damage amount in his dealings with Renisant; (2) this was a classic situation for use of a liquidated damage clause because actual damages from a breach would be difficult to calculate with precision; and (3) the use of a single damage amount was appropriate because any breach of the agreement would "have the same net effect" of diminishing the referral base of his practice. In support thereof, Nissanoff provided a declaration from a real estate broker who specialized in the marketing of medical practices that nondisclosure and noncompetition agreements were "frequently employed" in connection with the possible sale of such a practice. The broker also opined that "such disclosure or competition can easily impact a medical specialty practice[,] although the variables are many and hard to calculate with any precision but may foreseeably exceed ten percent of the market value of a medical practice" and that "because of this . . . liquidated damage clauses are often employed in a nondisclosure agreement." (Italics added.)
The superior court granted Balikian's motion for summary judgment, on two grounds. First, it ruled that the noncompetition provision in section 2 of the agreement was invalid pursuant to Business and Professions Code section 16600 (a ruling that Nissanoff does not challenge on appeal. Second, it concluded that the liquidated damages clause of that same section of the agreement was "unreasonable under the circumstances existing at the time the contract was made" and thus was unenforceable pursuant to Civil Code section 1671, subdivision (b). In that regard, the court cited to the absence of any evidence that (1) prior to Balikian's execution of the agreement, the parties had endeavored to ascertain what damages Nissanoff might suffer as a result of a breach of the agreement and (2) the liquidated damage amount bore any relationship (much less a reasonable one) to the range of actual damages that the parties might have anticipated would flow from a breach of the agreement. Finally, the court concluded that because the liquidated damage clause was invalid and Nissanoff had presented no evidence of his actual damages, Balikian had established the propriety of summary judgment. It entered judgment in Balikian's favor and awarded him $76,848 in attorney fees. Nissanoff appeals.
DISCUSSION
1. Liquidated Damages
To avoid uncertainty and the cost of litigation arising out of a breach of contract, the contracting parties rely on a liquidated damages clause to preset the measure of damages for breach. (Allen v. Smith (2002) 94 Cal.App.4th 1270, 1278.) Except in limited circumstances not present here, such a clause is valid and enforceable unless the party who later seeks to invalidate it establishes that it was "unreasonable under the circumstances existing at the time the contract was made." (Civ. Code, § 1671, subd. (b) (section 1671(b).)
A liquidated damages provision is unreasonable if the preset damage amount bears no reasonable relationship to the range of actual damages the parties could have contemplated at the time of contracting and thus does not represent a reasonable endeavor by the parties to estimate a fair average compensation for any loss that may be sustained. (Ridgley v. Topa Thrift & Loan Assn. (1998) 17 Cal.4th 970, 977.) "In the absence of such relationship, a contractual clause purporting to predetermine damages 'must be construed as a penalty'" and cannot provide the basis on which the plaintiff may avoid having to establish his actual damages in order to recover. (Ibid.; Poseidon Development, Inc. v. Woodland Lane Estates, LLC (2007) 152 Cal.App.4th 1106, 1115.)
2. Standard of Review
Whether a liquidated damage provision is valid or instead constitutes an unenforceable penalty presents a question of law, subject to our de novo review. (Harbor Island Holdings v. Kim (2003) 107 Cal.App.4th 790, 794.)
3. Analysis
A. The Applicable Standards
As a preliminary matter, Nissanoff takes issue with the standards set forth in section 1 above, contending that they do not govern the application of section 1671(b). This contention, however, is without merit. (See Ridgley v. Topa Thrift & Loan Assn., supra, 17 Cal.4th at pp. 973-974, 977, 979 [determining, based on the application of those standards, that the prepayment charge provision of a loan agreement constituted an unenforceable penalty in accordance with section 1671(b)]; also Law Rev. Com. com., 9 West's Ann. Civ. Code, foll. § 1671, p. 498.)
B. The Scope of the Liquidated Damage Clause's Application
Balikian responds that the liquidated damage provision was only applicable to violations of the noncompetition clause, not to violations of the nondisclosure clause, and that accordingly, the superior court's unchallenged finding that the noncompetition clause itself was invalid obviates the basis for any appeal by Nissanoff. However, the language of the agreement, which specified that the liquidated damage provision would apply "in the event that this is violated" (italics added) is ambiguous because it is not readily apparent whether "this" referred to the preceding sentence (the noncompetition clause), the entire section in which it was placed (which also prohibited Balikian from using confidential information for any purpose other than entering into a business relationship with Nissanoff) or the entire agreement.
Notwithstanding this ambiguity, however, Balikian is correct that the only way that Nissanoff's appeal can succeed is if we assume that the liquidated damage clause applied not only to breaches of the noncompetition clause, but also to breaches of the nondisclosure clause. Thus, for the purposes of our present analysis, we will assume, without deciding, that the liquidated damage clause applied to both types of violations.
C. The Court's Application of the Standards regarding the Enforceability of a Liquidated Damage Provision
Nissanoff alternatively argues that even if the standards set forth above govern the analysis of the issue here, the superior court nonetheless misapplied section 1671(b) because it improperly placed the burden on him to establish that the liquidated damage provision was reasonable rather than requiring Balikian to establish that the clause was unreasonable. (See also Code Civ. Proc., § 437c, subd. (o)(2).) We disagree.
In its ruling on the motion for summary judgment, the court cited Balikian's declaration that there was never any discussion between him and Nissanoff regarding the potential damages that might arise from a breach of the agreement or regarding the reasonableness of the liquidated damage amount and Nissanoff's own deposition testimony wherein he essentially admitted that no such conversation occurred. The court noted Nissanoff's declaration stating that the terms of the liquidated damage provision "were discussed at length" before Balikian signed the agreement, but correctly observed that that declaration was contradicted by Nissanoff's prior deposition testimony; based on its observation, the court properly disregarded the declaration and concluded that there was no evidence of such a discussion between the parties. (Benavidez v. San Jose Police Dept. (1999) 71 Cal.App.4th 853, 860 [recognizing that a party cannot create a triable issue of fact by a declaration that is contradicted by his prior discovery responses].) The court also rejected Nissanoff's completely unsubstantiated contention that Balikian had discussed and accepted the $300,000 liquidated damage amount in conversations with Renisant.
In addition to finding there was no evidence of an endeavor by either or both of the parties to identify the liquidated damage amount necessary to reasonably compensate Nissanoff for damages resulting from a breach of the agreement, the court also accepted Balikian's argument that the specified damage amount, on its face, did not bear any rational relationship to the range of possible actual damages that could have been anticipated to result from a breach of the confidentiality agreement. Given the assumption that the liquidated damage clause had to apply to both nondisclosure violations and noncompetition violations, we agree that the provisions of the agreement, standing alone, were sufficient to meet Balikian's burden of proof and shift the burden to Nissanoff to submit evidence creating a triable issue of fact as to the reasonableness of the clause (or as to his actual damages) was proper. (See Smith v. Royal Mfg. Co. (1960) 185 Cal.App.2d 315, 324 [finding that a liquidated damage clause's imposition of a fixed amount for any of several breaches of a contract that have varying degrees of severity itself permits a conclusion that the clause is a penalty].)
(Notably, the agreement itself identified that the $1,000 per day portion of the liquidated damage clause was a "penalty." Nissanoff has made no attempt, on appeal or in the proceedings below, to even argue that this was reasonable. Perhaps recognizing the difficulty of his position, Nissanoff purports, in his reply brief, to abandon any argument that that provision was enforceable and argues that we should deem that provision severable from the $300,000 portion of the liquidated damage clause. Nissanoff's argument provides too little and comes too late. (See Scott v. CIBA Vision Corp. (1995) 38 Cal.App.4th 307, 322.) Further, even if it is legally proper to parse the liquidated damage provision in this way, its inclusion provides evidence that the liquidated damage provision as a whole was punitive rather than intended to provide Nissanoff with reasonable compensation for a breach of the agreement.)
Because Nissanoff did not submit any evidence to create such a triable issue of material fact on these matters, the court's decision granting summary judgment in Balikian's favor was proper.
DISPOSITION
The judgment is affirmed. Balikian is awarded his costs of appeal.
WE CONCUR: HUFFMAN, Acting P. J., HALLER, J.