Bustamante v. Intuit, Inc.

Filed 7/10/06

CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SIXTH APPELLATE DISTRICT

Story continue from Part I………..

In Tinker's April 12 e-mail he set forth the "mutual understanding" of the parties by acknowledging that they were "working together on a deal for Mexico." This communication does not permit a reasonable inference that Intuit intended at that point to be bound to help Bustamante establish the new business. Intuit made it clear, and Bustamante agreed, that the business would not be started without an initial investment of $2-3 million, most of which they contemplated obtaining from venture capitalists or private investors.[1] Accordingly, both understood that they could not (or would not) "form and launch" Intuit Mexico without first securing minimum financial commitments from third parties. Those commitments in turn required the parties to execute contracts with investors. Thus, even if we agreed with Bustamante that he and Intuit could bind each other without first defining the precise terms of the third-party contracts, there is no basis for inferring a promise by Intuit to support the project without having those contracts in place.[2] Whether viewed as an essential term of the parties' contract or a condition precedent to performance, the requirement of funding cannot be discounted as nonessential.[3]

The alleged agreement cannot withstand scrutiny even if it is considered as a composite of specific terms. First, rather than being definite, all of the following terms--which Bustamante represents as material-- were actually unsettled both before and after the alleged commitment by Intuit: the form and amount of Bustamante's compensation; the extent, duration, and nature of his management role, if any; the amount of Intuit's royalty; the equity percentage held by him, "the management team," Intuit, and outside investors; and the liquidity path for both Bustamante and investors. Exhibit 35 itself makes it clear that the parties' relationship was still a subject of discussion on April 12: Tinker prefaced this e-mail by noting that it was a summary of what he and Bustamante had "discussed" and asking Bustamante and Grafil to "review and if there are any issues, feel free to edit/comment." On the subjects of salary and management Bustamante remained "very flexible" and "open to all possibilities." The royalty term was not clarified until August 2002--and even then it was incomplete[4]-- and the parties never decided how the liquidity path would be implemented. On the questions regarding management, Bustamante testified that he would have been satisfied with any scenario suggested to him as long as it "made economic sense" to him.

Second, the specific terms Bustamante contends were part of his contract with Intuit pertain to--and thus assume the existence of-- a three-way relationship between Bustamante, Intuit, and investors. Without venture capitalists or private investors to help fund the business, the details of the operations were at most hypothetical scenarios. Not only did the parties contemplate further discussions between them, but both recognized that finalization of their relationship required input from the investors. According to Bustamante's deposition, the plans outlined on April 12 in Exhibit 35 remained subject to negotiation with the investors--i.e., the business plan, the amount of investment, the percentage of the venture capitalist's ownership,[5] "buy-out rights, liquidity, whatever the venture capitalist felt [it was] important to negotiate." (Italics added.) If the venture capitalists or Intuit decided that a $240,000 salary was unacceptable, it could be adjusted to as little as "$60,000 or 2 % of sales," and Tinker suggested that this detail, like the details of the royalty rate, could "be left open until all players have an opportunity to review and decide." Indeed, the flexibility Bustamante demonstrated with regard to management, salary, and ownership implies that his own commitment to launch Intuit Mexico was dependent in part on his agreeing to the conditions proposed or approved by the investors.

Thus, obtaining contractual business relationships with third parties was an essential condition that both parties understood was necessary in order to complete the negotiations and create a binding business relationship.[6] There could be no launch of Intuit Mexico without its formation, no formation without funding, and no funding without a commitment from venture capitalists or private investors. The failure of the parties' money-raising efforts meant that they were unable to create a working relationship with each other, and consequently, no obligation arose or could arise to "form and launch" the company on any terms, general or specific.

Bustamante points to California cases in which contracts to launch companies were deemed sufficiently certain to be enforceable. Those cases are distinguishable. In Holmes v. Lerner (1999) 74 Cal.App.4th 442, both parties clearly intended to proceed with the partnership. The plan to start a cosmetics company did not depend on obtaining financing, as Lerner had secured financing from the venture capital partnership of which she and her husband were limited partners. The company was eventually incorporated and the business became operational, but Holmes was deprived of a significant ownership interest and ultimately was asked to leave. The court upheld the jury verdict for Holmes on multiple causes of action, including breach of contract against Lerner. Construing the applicable provisions of the Uniform Partnership Act (Corp. Code, §§ 16100, et. seq.), the appellate court held that "parties who expressly agree to associate as co-owners with the intent to carry on a business for profit, have established a partnership. Once the elements of that definition are established, other provisions of the UPA and the conduct of the parties supply the details of the agreement." (Id. at p. 457.) Implied in the parties' agreement to operate the cosmetics company together was "an understanding to share in profits and losses as any business owners would." (Ibid.) The agreement was not too indefinite to be enforced, the court added, because both parties had manifested their mutual intent to take Holmes's idea and make it concrete by forming a company and engaging in the business together. (Id. at pp. 458-459.) Together with this agreement, the subsequent acts of the parties as they worked out the details provided sufficient certainty to determine the existence of a breach and a remedy. (Id. at p. 459.)

In this case, by contrast, the parties always understood that it would not be possible to "form and launch" Intuit Mexico without significant third-party involvement in the enterprise. Clearly there was no expression of mutual consent to create a company without investor financing, which in turn could not be obtained without first ironing out the details of the contemplated network of relationships. Because essential terms were only sketched out, with their final form to be agreed upon in the future (and contingent upon third-party approval), the parties had at best an "agreement to agree," which is unenforceable under California law. "[T]here is no contract where the objective manifestations of intent demonstrate that the parties chose not to bind themselves until a subsequent agreement [was] made." (Rennick v. O.P.T.I.O.N. Care, Inc. (9th Cir. 1996) 77 F.3d 309, 316; see also Beck v. American Health Group Internat. Inc. (1989) 211 Cal.App.3d 1555, 1562-1563 [letter manifested intent not to be bound until formal contract was written].) "Preliminary negotiations or [agreements] for future negotiations are not the functional equivalent of a valid, subsisting agreement. 'A manifestation of willingness to enter into a bargain is not an offer if the person to whom it is addressed knows or has reason to know that the person making it does not intend to conclude a bargain until he has made a further manifestation of assent.' (Rest.2d Contracts, § 26, p. 75.)" (Kruse v. Bank of America (1988) 202 Cal.App.3d 38, 59; but see Copeland v. Baskin Robbins U.S.A. (2002) 96 Cal.App.4th 1251, 1255 [recognizing cause of action for breach of agreement to negotiate in good faith] [7] and Boyd v. Bevilacqua (1966) 247 Cal.App.2d 272, 287 [tort action permitted where joint venture agreement was sufficiently definite, as joint venture could be created with little formality and less definiteness in its details].)

Lamle v. Mattel, Inc. (2005) 394 F.3d 1355 also does not help Bustamante. At issue was a license for a board game. After agreeing on many of the terms at a meeting, Mattel asked Lamle to draft a formal document memorializing the deal, and it promised to sign a formal written contract by a certain date several months later. The majority of the federal appellate court panel held that a triable issue of fact existed as to whether the parties considered the meeting to have resulted in an oral contract or only a preliminary stage of negotiations regarding terms that were subject to approval and interest from distributors. In this case, however, Bustamante offered no evidence suggesting a factual dispute. Unlike Lamle, where the evidence of intent not to be bound was derived from only an affidavit from Mattel's vice president, here the parties' discussions about their intended relationship were recorded in various e-mail communications. This correspondence, together with the parties' declarations, was sufficient to permit the determination of whether a contract was formed as a matter of law.

Bustamante's reliance on Okun v. Morton (1988) 203 Cal.App.3d 805 is similarly misplaced. In that case the defendant promised the plaintiff an opportunity to participate in all future business opportunities utilizing the Hard Rock name in consideration of the plaintiff's initial investment of $100,000 in the Hard Rock Café Corporation (HRC). The paragraph at issue in the parties' agreement allowed them to "exploit" each opportunity "in a manner mutually agreeable in the same ratio [in] which we currently hold stock in HRC." (Id. at p. 812.) Considered together with properly admitted parol evidence, this provision was not fatally uncertain, the court held, because the parties had established the basic structure of their future undertakings, including financing, ownership, and operations. (Id. at p. 818.)

We must conclude that the undisputed facts here show no meeting of the minds as to the essential structure and operation of the alleged joint venture, even if there was agreement on some of the terms. "[T]he failure to reach a meeting of the minds on all material points prevents the formation of a contract even though the parties have orally agreed upon some of the terms, or have taken some action related to the contract." (Banner Entertainment, Inc. v. Superior Court (Alchemy Filmworks, Inc.) (1998) 62 Cal.App.4th 348, 359.) The evidence supplied in the moving and opposing papers establish that material terms remained uncertain well beyond the time the contract was alleged to have come into existence. Tinker's expectation was that Intuit would "do [its] homework" before entering into a business relationship with Bustamante. He described the investor-funding commitment as a "critical" term, without which Intuit could not "do a deal" with Bustamante in Mexico. As late as November 2002 Bustamante and Tinker had not yet made clear the amount of money Bustamante needed to raise, and well into December they were still discussing the form and amount of compensation Bustamante would receive.[8] Even though a joint venture can be created with little formality, here the undisputed facts set forth in the moving and opposing papers provided no "basis for determining the existence of a breach and for giving an appropriate remedy." (Rest. 2d Contracts, § 33, subd. (2).) None of the evidence Bustamante points to raises a triable question of material fact on this issue. Accordingly, Intuit was entitled to adjudication on the contract cause of action.

In light of this conclusion, it is unnecessary to reach the question of whether a triable factual issue exists as to whether the parties always contemplated that their final agreement would be in writing. We also need not decide whether the alleged agreement could not be performed within one year and therefore violated the Statute of Frauds (Civ. Code, § 1624). As to the second cause of action for wrongful dissociation, it is premised on the existence of a joint venture or partnership; as none was created, the trial court properly adjudicated this cause of action in Intuit's favor. Finally, the propriety of the costs award is moot, as Bustamante does not challenge this order if the grant of summary judgment is upheld.

Disposition

The judgment is affirmed.

______________________________

ELIA, J.

WE CONCUR:

_____________________________

RUSHING, P. J.

_____________________________

MIHARA, J.

Trial Court: Santa Clara County Superior Court

Trial Judge: Hon. Jamie Jacobs-May

Attorneys for Plaintiff,

Cross-Defendant and Appellant: Sonnett & Assoc. and

Anthony E. Sonnett and

Trevor J. Ingold

Godwin Gruber, LLP and

David W. Holman,

Michael K. Hurst and

Hilaree A. Casada

Attorneys for Defendant,

Cross-Complainant and

Respondent: Fenwick & West, LLP and

Rodger R. Cole,

Laurence F. Pulgram and

Rachael G. Samberg

Bustamante v. Intuit, Inc.

H028630

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Analysis and review provided by Poway Real Estate Attorney.

[1] None of the capital was to have been contributed by Intuit.

[2] In his deposition Bustamante testified, "Intuit and I agreed to form this company, and what I mean by 'forming the company,' we agreed to take the product to Mexico, and we agreed that we would do it with somebody else's money. [¶] But at the end of the day the agreement was to take the products to Mexico after Intuit had had a period to validate what they were doing, validate the market, what would be the hurdle to raise money, as well as myself [sic]. . . . "

Bustamante attempted to explain the parties' expectations in the event that the fundraising effort proved unsuccessful: They "would have had to have the flexibility to make this thing happen" -- that is, "either Intuit would have had to agree to do it with less money [or] I would have had to agree, to continue raising the money for a longer period of time." According to Bustamante, the parties had "clearly agreed" to "deal with each other in good faith" in addressing any problems that arose, in order to meet their obligation to form the company. Instead, however, Intuit decided to "terminate" him without attempting to resolve the funding deficiency.

[3] According to Bustamante, the parties' agreement included a commitment to "look at alternative strategies" in the event that venture capitalists declined the investment opportunity. This assumption is derived from a statement by Tinker on July 1 completing his outline of the steps to be taken in Phase II. The third step, in Tinker's view, was to "[d]etermine whether we can secure the funding that is necessary with enough resources to achieve our objectives in Mexico. If you cannot secure funding we will need to look at alternative strategies." This suggestion did not alter the parties' mutual understanding that there could be no company in Mexico without an initial third-party funding commitment.

[4] On August 1, 2002, the parties exchanged e-mail regarding several unsettled matters. They cleared up a miscommunication about the 20-percent royalty, confirming that it was a percentage of sales, not operating expenses. Tinker advised Bustamante that the royalty was not expected to be reduced to 12 percent with higher sales, adding, "We may talk later about tiering royalty rate with higher sales, but it is too early for these discussions."

[5] In responding to Intuit's statement of undisputed facts, Bustamante did not contest the veracity of Intuit's assertion "that venture capitalist investors would negotiate the terms of their investment, including the amount of investment and percentage ownership interest, and that the amount that the venture capitalists would receive in ownership for the dollars that they invested was something that needed to be negotiated." Bustamante's only objection was that these terms were the subject of the anticipated third-party contracts, which were separate from – and therefore "not material or relevant to--" the issues concerning the agreement he had with Intuit.

[6] In his deposition Bustamante conceded that the "agreement with Intuit on which [he was] suing in this action was an agreement that the parties would seek capital, including using a number of possible strategies, and with Bustamante taking the lead in contacting potential investors" with Intuit's help.

[7] Bustamante pleaded (and argued) that the parties had a valid contract to form Intuit Mexico, not a contract to negotiate a future business relationship.

[8] On November 22, 2002, Bustamante unsuccessfully tried to convince Tinker that $1 million was a sufficient amount with which to begin selling the product because the resulting momentum would attract more money. On November 25, 2002, Bustamante asked Tinker for a "clear definition from Intuit in what is the minimum amount of money that I need to raise." The following day Tinker suggested that if only $2 million could be raised, then Intuit would have to consider deferring its royalty and Bustamante to "substantially reduce/defer [his] compensation as well."