Course No. 9200-704 (and 804)-801
ID No. 16545
MW 3:00 - 4:30 p.m.
Room 231D (IP Alcove)
|Copyright © 2000, 2002, 2003, 2006, 2008 Jay Dratler, Jr. For permission, see CMI.|
University Computing Company v. Lykes-Youngstown Corp.504 F.2d 518, 183 U.S.P.Q. (BNA) 705 (5th Cir. 1974)
Before Brown, Chief Judge, Tuttle, Circuit Judge, and Young, District Judge.
[*526] Tuttle, Circuit Judge:
[University Computing Company (UCC), a Texas software corporation, formed a corporate joint venture with Lykes-Youngstown Corp. (LYC), called Lykes-University Computing Company (Lykes/UCC), to market computer services in the southeastern United States. UCC funded the joint venture's start-up in the amount of $66,647.45 and was to sell it computer hardware and software and receive 10% of gross disbursements as a management fee. The joint venture hired several UCC employees, including defendant Oliver Shinn, who became President of Lykes/UCC.
Each of the joint venturers had the right to appoint two directors of the joint venture, but there was no provision to avoid deadlock, which in fact occurred. A meeting on September 30, 1969, failed to resolve the deadlock and produced dispute whether the joint venture had been dissolved and what compensation, if any, was due UCC.
On October 7, 1969, LYC formed Lykes-Youngstown Computer Services Corp. (LYCSC) as a wholly owned subsidiary of LYC, hired Oliver Shinn as its president and had it take over all property formerly owned by Lykes/UCC. UCC did not authorize these actions and claimed it wasn't aware of them until a story appeared in the Wall Street Journal on October 14, 1969. In meetings between Shinn and LYC executives between July 1 and September 30, while Shinn was still a Vice President of UCC, he made it clear that he was there solely on his own behalf and felt no loyalty to his employer, UCC.]
Among the computer systems Lykes/UCC was to market was a retail inventory control system owned by UCC called "AIMES III." (Automated Inventory Management Evaluation System). This system was designed to maintain information on inventory in [*529] retail department stores.(1) UCC had previously sold the system to Leonard's Department Store in Fort Worth, Texas, subject to a restrictive use agreement which limited Leonard's to private and confidential use of the system. Leonard's paid $41,700 for the rights to restricted use of AIMES III. Lykes/UCC was to offer this system, as well as several others designed and owned by UCC, to customers in the southeast. The joint venture agreement provided for discount sales of these systems to Lykes/UCC at no more than 20% of UCC's development costs.
Following the incorporation of LYCSC (the newly created subsidiary of LYC), the new corporation proceeded to offer AIMES III to customers. Rather than purchase unrestricted rights to the system from UCC, LYCSC elected to steal the system from Leonard's. In December, 1969, LYCSC bribed an employee of Leonard's for $2500 to deliver a suitcase filled with computer tapes and other materials to an employee of LYCSC. In February, 1970, this same Leonard's employee was paid to fly to Atlanta from Dallas with additional tapes and documents once the materials originally obtained were found to be insufficient to run the system. With the new materials and the help of the Leonard's employee in installing the system in the LYCSC in-house computer, LYCSC was able to run the system in its entirety.(2)
After receiving these materials in December, LYCSC attempted to market the AIMES III system. This marketing effort continued until April of the following year. Salesman for LYCSC made offers to department stores in Atlanta, New Orleans and Tampa, Florida. In addition the system was offered to another computer services firm in Atlanta. While none of these offers was accepted, in several cases detailed sales presentations were made by sales representatives of LYCSC. A brochure was printed by LYCSC to assist the sales effort.(3)
[In the district court, the jury awarded:
[The court affirmed the rulings that the Joint Venture Agreement was enforceable and had been breached.]
We finally come to the question of damages. * * *
We note there can be no doubt that LYCSC, LYC's subsidiary, appropriated the joint venture's property and business. In our view, once the jury found LYC breached the agreement with UCC, it was wholly justified in assessing damages in addition to the $66,647.45 which UCC had expended on behalf of Lykes/UCC before LYC's breach. At trial UCC proved a variety of damages, including loss of the 10% management fee to October 1, 1970; loss of the 5% management fee for the period thereafter; loss of profits on sales and leases of hardware to Lykes/UCC as provided in the agreement; and finally loss of the opportunity to begin operations in the southeast with the guaranteed flow of revenues from the Lykes subsidiaries obliged to purchase computer services from the new corporation.(4) Together, the amount of damages subject to proof at trial on Count 1 totalled well in excess of two million dollars. We find the jury verdict of $172,000 was supported by the record.
The defendants admit that LYCSC paid one Ron Clinton, an employee of Leonard's Department Store in Fort [*534] Worth, Texas, $2500 to induce him to steal Leonard's copy of the AIMES III system and deliver the tapes and documents comprising that system to an LYCSC employee. The defendants do not now claim that this conduct was lawful or even defensible.
The defendants do not challenge the finding of the jury that they acted in concert. If the jury finding of misappropriation of AIMES III is thus upheld, all three defendants properly share liability.
A trade secret is protected against illegal appropriation and commercial use by a competitor. The development of this area of the law has been progressive, and most jurisdictions have developed similar standards. What Georgia law exists in this area seems to follow the Restatement, Torts § 757 [(19390. We so held in Water Services, Inc. v. Tesco Chemicals, Inc., 410 F.2d 163 (5th Cir. 1969).
While the defendants in this action have deprecated the value of AIMES III and made an effort at [*535] trial to challenge its uniqueness, they do not appeal the finding of the jury that AIMES III was a trade secret within the meaning of the § 757. Certainly it was undisputed that UCC viewed the system as a valuable and unique property, and used great caution in attempting to preserve its confidentiality. LYCSC itself described the system to one potential customer as ". . . the finest automated merchandising system available today," and proceeded to offer it to that customer for $45,000. Evidence was adduced at trial that AIMES III had unique capabilities and features which made it a valuable competitive product. The jury could properly find that the AIMES III computer system owned by UCC was a trade secret. The jury further could find that LYCSC's appropriation of the system was unlawful and a knowing violation of Leonard's restrictive use agreement with UCC. The requirements for liability under § 757 were satisfied in this case.
Once having determined that the jury finding that AIMES III was a trade secret wrongfully appropriated by the defendants was proper, the problem remains as to what is the appropriate measure of damages. It seems generally accepted that the proper measure of damages in the case of a trade secret appropriation is to be determined by reference to the analogous line of cases involving patent infringement, just as patent infringement cases are used by analogy to determine the damages for copyright infringement. The case law is thus plentiful, but the standard for measuring damages which emerges is very flexible.
In some instances courts have attempted to measure the loss suffered by the plaintiff. While as a conceptual matter this seems to be a proper approach, in most cases the defendant has utilized the secret to his advantage with no obvious effect on the plaintiff save for the relative differences in their subsequent competitive positions. Largely as a result of this practical dilemma, normally the value of the secret to the plaintiff is an appropriate measure of damages only when the defendant has in some way destroyed the value of the secret. The most obvious way this is done is through publication, so that no secret remains.(5) Where the plaintiff retains the use of the secret, as here, and where there has been no effective disclosure of the secret through publication(6) the total value of the secret to the plaintiff is an inappropriate measure. [*536] Further, unless some specific injury to the plaintiff can be establishedsuch as lost salesthe loss to the plaintiff is not a particularly helpful approach in assessing damages.
The second approach is to measure the value of the secret to the defendant. This is usually the accepted approach where the secret has not been destroyed and where the plaintiff is unable to prove specific injury. In the case before us, then, the appropriate measure of damages, by analogy to patent infringement, is not what plaintiff lost, but rather the benefits, profits, or advantages gained by the defendant in the use of the trade secret. The cases reveal, however, many variations in the way this benefit to the defendant can be measured.
Normally only the defendant's actual profits can be used as a measure of damages in cases where profits can be proved, and the defendant is normally not assessed damages on wholly speculative expectations of profits. Sheldon v. Metro-Goldwyn Pictures Corp., 309 U.S. 390, 60 S.Ct. 681, 84 L.Ed. 825 (1939). Had the defendants here been able to sell the AIMES III system at a profit, our task would be simplified.(7) Because the defendants failed in their marketing efforts, no actual profits exist by which to value the worth to the defendants of what they misappropriated. However, the Supreme Court has held in a patent case that the lack of actual profits does not insulate the defendants from being obliged to pay for what they have wrongfully obtained in the mistaken belief their theft would benefit them. In re Cawood Patent, 94 U.S. 695, 24 L. Ed. 238 (1877).(8)
The rationale for this seems clearly to be that the risk of defendants' venture, using the misappropriated secret, should not be placed on the injured plaintiff, but rather the defendants must bear the risk of failure themselves. Accordingly the law looks to the time at which the misappropriation occurred to determine what the value of the misappropriated secret would be to a defendant who believes he can utilize it to his advantage, provided he does in fact put the idea to a commercial use.
This second technique frequently entails using what is called the "reasonable royalty" standard: while the parties to this action agree this is the appropriate standard, they are unable to agree on what the measure entails. Originally this measure was intended to deal with the situation where the misappropriated idea is used either to improve the defendant's manufacturing process, or is used as part of a larger manufactured product. In the early case of Egry Register Co. v. Standard Register Co., 23 F.2d 438 (6th Cir. 1928), a patent infringement [*537] case, the defendant manufactured and sold cash registers which in part used a device developed by the plaintiff to roll paper through the machine. The trial court had awarded the plaintiff the total profits the defendant had made on all sales of the machines using this device. The Sixth Circuit Court of Appeals held this measure of damages was inequitable, because the device was only a part of the larger product sold by the defendant. Because no actual apportionment of profits based on what percentage of the success of the marketing of the machines was due to the plaintiff's device could be shown, the court held the proper measure of damages would be a reasonable royalty on defendant's sales, thereby creating an apportionment of profits based on an approximation of the actual value of the infringed device to the defendant.
The Court explained its new measure in this way:
The language of the Egry decision has been often quoted, but the type of measure used by the Court, based on actual sales, has taken many different forms.(9) As the term is presently understood, the "reasonable royalty" measure of damages is taken to mean more than simply a percentage of actual profits. The measure now, very simply, means the actual value of what has been appropriated. When this is not subject to exact measurement, a reasonable estimate of value is used. Many different factors are now considered in arriving at the "reasonable royalty" in any given case:
One other important variation on this "reasonable royalty" standard is the standard of comparison method, which also attempts to measure the value to the defendant of what he appropriated. As the Court in International Industries, Inc. v. Warren Petroleum Corp., 248 F.2d 696, 699 (3d Cir. 1957) explained this method, relating it to the facts of the case in which the defendant had misappropriated a method of converting dry cargo vessels into ones equipped to transport liquefied petroleum gas, and had actually used the technique to convert one vessel:
In certain cases, where the trade secret was used by the defendant in a limited number of situations, where the plaintiff was not in direct competition with the defendant, where the development of the secret did not require substantial improvements in existing trade practices but rather merely refined the existing practices, and where the defendant's use of the plaintiff's trade secret has ceased, such a limited measure might be appropriate. In the type of case which we now consider, when the parties were potentially in direct competition and the course of conduct of the defendant extended over a period of time and included a number of different uses of the plaintiff's trade secret, and where the process of developing a computer system was very difficult and required substantial technical and theoretical advances, we believe a broader measure of damages is needed.
This broader measure should take into consideration development costs, but as only one of a number of different factors. We believe this type of measure is appropriate despite the fact that the inclusion of other factors means the final damage figure "need not be as precise as if the actual development costs for the trade secret were itself the measure of damages." Forest Laboratories, Inc. v. Pillsbury Co., 452 F.2d 621, 628 (7th Cir. 1971).
Our review of the case law leads us to the conclusion that every case requires a flexible and imaginative approach to the problem of damages. We agree with the Court of Appeals for the Sixth Circuit that "each case is controlled by its own peculiar facts and circumstances," Enterprise Manufacturing Co. v. Shakespeare Co., 141 F.2d 916, 920 (6th Cir. 1944), and accordingly we believe that the cases reveal that most courts adjust the measure of damages to accord with the commercial setting of the injury, the likely future consequences of the misappropriation, and the nature and extent of the use the defendant put the trade secret to after misappropriation. Naturally in some cases the damages will be subject to exact measurement, either because the parties had previously agreed on a licensing price . . ., or because some industry [*539] standard provides a clear measure.(10) Where the damages are uncertain, however, we do not feel that that uncertainty should preclude recovery; the plaintiff should be afforded every opportunity to prove damages once the misappropriation is shown.
Certain standards do emerge from the cases. The defendant must have actually put the trade secret to some commercial use. The law governing protection of trade secrets essentially is designed to regulate unfair business competition, and is not a substitute for criminal laws against theft or other civil remedies for conversion. If the defendant enjoyed actual profits, a type of restitutionary remedy can be afforded the plaintiffeither recovering the full total of defendant's profits or some apportioned amount designed to correspond to the actual contribution the plaintiff's trade secret made to the defendant's commercial success. Because the primary concern in most cases is to measure the value to the defendant of what he actually obtained from the plaintiff, the proper measure is to calculate what the parties would have agreed to as a fair price for licensing the defendant to put the trade secret to the use the defendant intended at the time the misappropriation took place.
In calculating what a fair licensing price would have been had the parties agreed, the trier of fact should consider such factors as the resulting and foreseeable changes in the parties' competitive posture; the prices past purchasers or licensees may have paid; the total value of the secret to the plaintiff, including the plaintiff's development costs and the importance of the secret to the plaintiff's business; the nature and extent of the use the defendant intended for the secret; and finally whatever other unique factors in the particular case which might have affected the parties' agreement, such as the ready availability of alternative processes.
The district court charged the jury that the following factors should be considered by them in arriving at the proper damages for the defendants' misappropriation of AIMES III: (1) the development costs incurred by the plaintiff; (2) the fees paid by customers of the plaintiff who utilized the system on a service bureau basis; (3) the prices at which the system was leased or sold by the plaintiff for restrictive use; (4) the sale price placed on the system by the defendants; and (5) expert testimony as to what would constitute a reasonable royalty for the rights to unrestricted use of the system. We believe that these factors were proper to be considered by the jury.
The defendants challenge the trial court's charging the jury that they were to find the "reasonable value" of the computer system, arguing that the phrase "reasonable value" is an improper measure of damages, and that the proper measure can only be "reasonable royalty." In our view, the trial court's charge was proper. Naturally we read the charge in its entirety, and we do not believe that the trial court's charge in any way confused the jury as to what damages they were entitled to find. Defendants argue that the word "value" necessarily means the entire value of the system, or, in other words, the value of the system to the plaintiff, a measure they argue is appropriate only in cases where the secret has been totally destroyed. We believe the meaningful [*540] question is not whether the word "value" was used, but whether the jury was properly charged, as they were here, that they could assess damages only for the actual use of the AIMES III system in an amount which would fairly approximate the price the parties would have come to, had the defendant been licensed to use the system as it did.
The court properly concluded its instructions on Count 3 by charging the jury:
The defendants' position is quite simply that there was no evidence they ever "used" the system, as required by the law on misappropriation of trade secrets, and that accordingly the trial court erred in denying their motion for a directed verdict on Count 3. The defendants place considerable emphasis on the fact that, in their view, the plaintiff lost nothing. They point to the plaintiff's failure to prove lost profits as grounds for dismissal of plaintiff's claim for damages. In our view the established rule is that the plaintiff is not required to prove lost profits; rather it need only prove misappropriation of its valuable trade secret and prove that it was put to some commercial use.
Superficially the defendants' argument that they did not "use" the AIMES III system seems supported by the cases. Almost without exception prior trade secret cases involved a device or process which was used by the defendant to improve his manufacturing process. Either the idea was some new way to improve manufacturing, or some new device which improved a larger manufactured product. Obviously when a trade secret is "used" in such cases, the use is manifest and extensive. Here the use by the very nature of the misappropriated secret is more subtle. The computer system had value in that it could be sold to customers for their internal use, or it could be used by its owner on a service bureau basis if the owner chose to lease time on its computer to outside clients, and permitted the clients to use the programs. Further, [*541] the system had a value in that it represented a technical achievement, some new method of accomplishing the ordering of data to produce useful business reports. Testimony at trial indicated experts in the field of computer technology could be assisted in their experimental work by viewing the systems of others. Given these facts concerning the utility of the AIMES III system, in our view three separate sets of facts establish a pattern of use of the system by the defendants which warrants damages for use of the system as if the defendants had been licensed to use it without restrictions.
Because of the earnestness with which this issue is argued by the parties, we feel it is necessary to discuss it in some detail.
First, it is clear that the defendants offered the system to potential buyers. They represented they held rights to the system which entitled them to sell the system to others. In some cases the defendants represented the system to be of their own design, designating the system under the initials MIMIC. In other cases the defendants acknowledged the UCC role in developing the system, but asserted rights to it. We believe this was a "use" which satisfied the requirements of the law on misappropriation of trade secrets.
Defendants claimed that computer service organizations frequently offered systems they did not own. Plaintiff's witnesses who had expertise in the field denied that this was true; defendants produced no examples of marketing campaigns of the type they conducted for systems the seller did not own. While it was shown that occasionally firms would sell systems they were in the process of developing (as indeed UCC had sold the AIMES III system to Leonard's before the research had been completed) clearly this is not the same thing as selling the system another owned. The only other instance of the marketing campaign preceding the seller's obtaining rights to the system was when the owner of the system had explicitly solicited such a campaign. We further believe the jury could find that LYCSC was attempting to sell a system it believed it had in its possession (i.e., the system it had misappropriated) rather than a system it believed it could purchase from UCC. The relations between UCC and the LYC subsidiary grew progressively more strained following what the jury found to have been LYC's breach of the joint venture agreement in October, 1969. The jury could reasonably infer that UCC was unwilling to deal with LYCSC and that LYCSC had no reason to believe that it would be able to purchase a copy of the AIMES III system from UCC after December, 1969; the defendants offered no evidence that they attempted to revive negotiations for purchases of software from UCC during 1970, despite the fact their marketing efforts continued unabated.
Finally, we find it difficult to ignore the fact that in February, months after all negotiations for the purchase of AIMES III ceased, LYCSC was still anxious to obtain the entire system and used Ron Clinton to obtain additional tapes and materials. We accept the jury's finding that LYCSC intended to sell the system it had misappropriated.
* * * [I]t seems clear that any misappropriation, followed by an exercise of control and dominion such as an attempted sale (in which lay the principal value the system held for LYCSC), must constitute a commercial use for which damages can be awarded.
Second, LYCSC displayed the component programs and listings of AIMES III to Hugh Cort of Technical Resources, Inc. Once again such conduct indicates a continuing use in that the defendants viewed the system as something they could handle as they wished, without regard to the interest they knew UCC had in maintaining its confidentiality. The admitted secrets of AIMES III lie in its ability to generate specific reports and in its novel use of certain types of numbers placed on the inventory items (the so-called AIMES numbers) which are used to accomplish the compilation of inventory data. There is evidence in the record which indicates that any expert in computer software who observes the Cobol listings, the reports generated, and the details of the programs of a system of a competitor will gain a commercial advantage from that information. LYCSC thus took upon itself the authority to display all this information to such an expert, knowing that he could potentially use that information to the competitive disadvantage of UCC. We view this as a clear commercial use of the system–but one which has a second facet as well.
LYCSC displayed the various reports, listings and programs described above in the hopes of interesting Technical Resources in jointly developing a type of control system called RANFILE which they believed Technical Resources to be developing. AIMES III thus served the commercial interests of LYCSC and the other defendants in that it was used to prove LYCSC's technical expertise inasmuch as the AIMES III system was represented as being of LYCSC's design and invention.
Finally, there is some evidence that LYCSC had installed the AIMES III system on a service bureau basis. What this would mean is that LYCSC would be equipped to lease time on its in-house equipment and its clients could use the AIMES III system. The evidence of this is indirect, the unobjected to hearsay account of one Herbert Martenson who told of a LYCSC's salesman's claim that this was true. There was, further, clear and undisputed testimony that LYCSC had run the entire system to generate a complete set of Cobol listings after Clinton had delivered the additional tapes to LYCSC in February, 1970. We believe there is evidence from which the jury could reasonably infer that LYCSC had used the system on its computer, and that this constituted a commercial use.
Taken together, these three patterns of usage lead us to the conclusion that the jury could, indeed, find that LYCSC and, through it, the other two defendants, used the AIMES III system as if it had been theirs to do with as they pleased. They ran the tapes, they compiled the listings, they generated several reports, they exposed the secrets of the system to a competitor. In short, they acted as if they owned unrestricted rights to the system. No other pattern of licensing was shown by the defendants which would permit them the complete freedom they had in using the system as they chose. The defendants offered no evidence that under past industry practice the type of agreement the parties would most likely have reached would be some form of royalty on sales, thereby sanctioning this type of unrestricted use by the fictional licensee. We are unprepared to hold that because UCC had in the past refused to sell its rights to the AIMES III system to a competitor, and thus was unable to show past transactions to show how an agreement of this sort would have been reached, it should accordingly be denied damages.[*543] In our view it is precisely in cases where the plaintiff had previously attempted to maintain the complete confidentiality of its trade secret that the lack of evidence of prior industry practice should not unreasonably limit the plaintiff's ability to prove its damages.
The defendants challenge the method by which UCC proved damages at trial. The only evidence introduced by either side on the question of damages for the AIMES III misappropriation was the expert testimony of one Stan Josephson, who estimated the value of a sale of unrestricted rights to AIMES III at $220,000. Defendants challenge both the expert qualifications of this witness and the legal sufficiency of his testimony. We deal with the first of these issues quickly.
The trial court has substantial discretion over the admission of evidence, and this includes the admission of expert testimony. . . . In the absence of obvious error we will not disturb the ruling of the trial court. We find no error in permitting Josephson to testify as an expert. He was UCC Vice President of Technical Services. He testified he was responsible for developing software systems, pricing them for marketing, and then assisting as technical expert at sales presentations. He testified in pricing a software system he took into account such factors as development costs, the longterm potential for the system and UCC's sales objectives, as well as such extrinsic factors as the current market for such systems. We find Josephson was properly permitted to testify as to the value placed on the sale of unrestricted rights to the AIMES III system by UCC.
The second challenge to Josephson's testimony involves this colloquy from the record during Josephson's cross-examination:
In part our decision to sustain the jury verdict, which was heavily dependent [*544]on the Josephson testimony in view of the fact they assessed damages of $220,000, the precise estimate he had testified to, is based on our view that the jury was properly instructed in the law governing damages. The verdict of a jury properly instructed in the law clearly resolves ambiguities of this sort in testimony, and the jury had been fully instructed in the willing buyer-willing seller test.
But secondly we believe the ambiguity created by cross-examination was more apparent than real. Naturally, we read Mr. Josephson's testimony in its entirety and we do not find the above-quoted passage so inconsistent with his otherwise legally accurate description of how to calculate the value of unrestricted rights to AIMES III as to justify the jury verdict based on that testimony. Certainly estimating sales price as a function of costs is unexceptionable, and Josephson in our view had the expertise to opine that the proper way to calculate value is to multiply costs by a multiple of 2 1/2.
What the disputed passage amounts to is Josephson's reluctance to claim that the figure he set as the proper sales price was necessarily that which a buyer would agree to. We can understand why he would demur from confidently asserting this is what the parties would agree to, for he had no prior transaction upon which to base his opinion. We believe it wasn't improper for UCC to prove its best estimate of the proper sales price, in part taking into consideration its policy of normally not offering its systems to potential competitors. While a certain amount of speculation is involved in this highly theoretical reconstruction of a sale which never took place, the aggrieved plaintiff must be permitted to present its best evidence on damages and not be foreclosed from seeking damages it deserves due to difficulty in measurement.
While we do not dispute the proper standard to be the "willing buyer-willing seller" test, we do not think a reconstruction of the agreement these two reasonable parties would arrive at can be taken too far. Nor do we feel that a witness as to value must cast his answers in the precise language that the Court uses in charging the jury. Both sides in such a hypothetical transaction have interests they wish to protect; such interests affect the price at which they are prepared to buy or selland in cases such as this one, the law is far more concerned with the rights and interests of the aggrieved plaintiff than in the interests of the defendants which they would have tried to protect had they dealt openly with the plaintiff from the beginning. As the Court in the Egry Register case acknowledged, the hypothetical agreement "must be modified by the commercial situation" and where the "willing seller" would have been unwilling to sell but for the theft of his secret, the Court reconstructing the agreement should consider the reasons the seller is unprepared to sell, and take into account such factors as the possible decline in the seller's future competitive posture.
This interest the holder of a trade secret has in retaining his rights to his secret is not a trivial one, and one which we do not intend to minimize. Courts should be reluctant to penalize an aggrieved plaintiff by too unrealistic and sterile a requirement of proving that the defendant would have agreed to the price the plaintiff thinks is fair. As in Forest Laboratories, Inc. v. Formulations, Inc., 320 F. Supp. 211, 213 (E.D.Wis.1970), affirmed in part, reversed in part on other grounds, 452 F.2d 621 (7th Cir. 1971) where the president of the plaintiff company was permitted to testify as to what price would have been required for the plaintiff to willingly agree to sell its patented secret, we believe a consideration of plaintiff's interest in protecting its future competitive position is proper, and some consideration must be given to the price at which the seller would be "willing" to deal. In affirming the trial court's assessment of damages in the Forest Laboratories [*545] case, the Seventh Circuit expressly acknowledged that consideration of such factors as plaintiff's future ability to stay in business is proper. We fully agree with this approach.
The proper method of fleshing out the dimensions of this hypothetical sale is by cross-examination and rebuttal testimony. The plaintiff fulfills its burden of proving damages by showing the misappropriation, the subsequent commercial use, and introduces evidence by which the jury can value the rights the defendant has obtained. This UCC did; the defendants introduced no evidence on the question of the value of unrestricted rights to AIMES III. The defendants chose to leave Josephson's testimony unchallenged as to how his estimate of value was arrived at, save for their belief his admission he couldn't guarantee a willing buyer would accept the $220,000 figure necessarily destroyed the value of all his testimony.
Because we read the record as presenting a valid issue of damages to the jury, with sufficient evidence by the plaintiff to permit the jury to value the system at $220,000, we cannot now decide that the $220,000 verdict was clearly excessive as defendants argue.
The defendants also attack the basis for Josephson's calculation of total development costclaiming such factors as marketing expenses and the plaintiff's royalty agreement with the original developer of the system should not have been included as development costs. We believe these were questions for the jury; the defendants did not choose to cross-examine Josephson extensively on this point, nor did they present rebuttal evidence to dispute his inclusion of these amounts. The jury was not obliged to accept Josephson's figures, but we hold they could reasonably do so.
The defendants next argue that permitting Josephson to testify as to the unaccepted offer UCC made to Honeywell for the sale of rights to unrestricted use of the AIMES III system was manifest error requiring reversal. It is clear that as a general rule, unaccepted offers are improper evidence by which to estimate value. Typically this problem will arise in condemnation proceedings where an expert witness estimates value by using sales of adjoining property, and occasionally uses unexercised options to purchase adjoining property. A second frequent problem occurs when the owner of the condemned property attempts to use past offers he has received to prove the value of the property.
The clearest statement of the rationale for excluding this evidence appears in Sharp v. United States, 191 U.S. 341, 348-349, 24 S.Ct. 114, 115, 48 L.Ed. 211 (1903):
Thus, while the rule is well entrenched in the case law, it is designed to serve specific purposes and we do not believe is meant to be enforced mechanically or without regard to the reasons for its existence. In the past where the offer was part of a continuing series of negotiations leading to ultimate agreement, it was held to be admissible. Where the offer was introduced for a purpose other than to prove value, it was held to be admissible. Where the offer was such a trivial part of the evidence offered as to be harmless, this Court has recognized the rule of Sharp v. United States is not to be automatically applied. -
In sum, we find the admission of testimony concerning UCC's past offer to Honeywell of unrestricted rights to the AIMES III system of $220,000 to have been properly admitted. The past offer wasn't hearsay, for Josephson had personally been involved in the Honeywell transaction. Josephson was an expert and the rule against admitting proof of anonymous offers from unqualified third parties is clearly inapplicable to the facts of this case. Finally the figure of $220,000 was subject to full cross-examination. The defendants could explore with Josephson what factors he considered, what factors he ignored, how development costs were calculated, and finally how he arrived at the multiple of 2 1/2 times development costs. We conclude they suffered no prejudice from the admission of evidence on the Honeywell offer.
There is a second, equally compelling, reason to uphold the admission of the evidence. The issue of the Honeywell offer was first raised on cross-examination of Josephson by the defendants. Josephson was asked whether UCC had ever offered unrestricted rights to anyone in the past, but was not asked what the offer actually was. We believe in the interests of elementary fairness the plaintiff had the right to then complete the account of the transaction which the defendants began. Had the jury only heard that an offer had been made to Honeywell, but did not learn of the amount, their likely reaction would be that UCC was concealing the facts of the Honeywell transaction because they had offered the AIMES III system for substantially less than $220,000. This untrue inference was properly rebutted.
Under Ga.Code Ann. § 20-1404, attorney's fees may be awarded "if the defendant has acted in bad faith, or has been stubbornly litigious, or has caused the plaintiff unnecessary trouble and expense . . . ." The bad faith referred to has been consistently held by Georgia courts to refer to the conduct of the defendant in his dealings with the plaintiff out of which the suit arose, rather than the defendant's conduct in defending the suit.
The defendant LYC challenges the jury finding of bad faith in connection with Count 1. We find this to be without merit. There was sufficient evidence of secret meetings, confidential cost studies and the like, to permit the jury to find bad faith in LYC's dealings with UCC.
However, the Georgia courts have placed a gloss on the requirements of § 20-1404adding to them the further requirement that in order for a plaintiff to be entitled to attorney's fees the jury must award the plaintiff substantially what he has requested in damages.[*549] * * *
The plaintiff UCC did not recover substantially all that it sought in damages in Count 1. The amended complaint requested damages of three million dollars; the plaintiff put on proof of damages in excess of two million dollars at trial–yet recovered only $172,000. In our view this amount is so substantially less than the amount requested that the verdict for attorney's fees cannot stand, as it clearly amounts to a punitive measure which the Georgia cases expressly state § 20-1404 will not permit.
We cannot stop here, however, for we further find that the trial court erroneously charged the jury on assessing attorney's fees, and accordingly that issue must be retried.
* * * The jury was improperly denied the opportunity to apportion attorney's fees among the different counts and different defendants according to the proportion of total counsel time and effort which was devoted to each of the three substantive areas of the law suit, the joint venture breach, the AIMES III misappropriation and the violation of Shinn's non-competition agreement. The fact that the plaintiff's counsel refused to attempt to apportion his time in this manner, claiming the three were entwined, in no way concludes the matter. The jury heard the full case presented, and the jury would have known what percentage of the case was devoted to which substantive cause of action.
The jury should have been instructed to assess each count separatelyevaluating each under the standards set out in § 20-1404 to determine whether attorney's fees should be awarded, and then determining whether to award fees for each area. While the trial court properly was concerned lest the plaintiff receive three times the fees it had proven, we do not believe the proper method of handling this potential problem is to take the matter from the jury entirely.
It is to be particularly noted that not all defendants were joined in all the counts. By charging the jury as the trial court did, the court may well have induced the jury to deliver one verdict of attorney's fees, against only one defendant, for possibly the entire amount which the jury felt the plaintiff's counsel should receive for the case–despite the fact that the jury found against the plaintiff on the non-competition agreement count, and we now hold found damages in an inadequate amount under the joint venture agreement count to support an award of attorney's fees.
We believe there was sufficient evidence in the record to sustain a jury finding of bad faith in the defendants' [*550] misappropriation of AIMES III, and thus we believe the issue of attorney's fees must be remanded for a new trial. Naturally because we do not disturb the original jury's findings as to liability and damages, only the AIMES III count can be the basis for attorney's fees, and the jury should be so instructed. The damages the jury assessed on the AIMES III count are, we believe, sufficient to support an award of attorney's fees. In evaluating what proportion of counsel's services related to the AIMES III count, we believe it is proper to apportion counsel's efforts into the three substantive areas of the lawsuit, rather than by count. Thus the jury, if it wishes to award attorney's fees, should consider what proportion of counsel's time was devoted to the preparation of Counts 3, 4, 5 and 7, all of which relate to AIMES III, and it may properly award attorney's fees on Count 3 for the total time involved in preparing and trying the AIMES III claims.
The case is affirmed in part, reversed in part and remanded for further proceedings not inconsistent with this opinion.
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2. [court's footnote 6] By running
the programs, LYCSC compiled a complete set of Cobol listings for the
system. These listings, using a type of computer language designed
to correspond to common business English, showed the various data the
system could generate.
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3. [court's footnote 7] The system
was offered both as "AIMES III" and as "MIMIC" (Maximum Information Through
Merchandising Inventory Control), a system represented as having been
developed by LYCSC. Rich's Department Store in Atlanta was offered
MIMIC for $45,000; Colony Shops in Tampa was offered AIMES III for $42,000;
and Technical Resources, a computer consulting firm, was offered MIMIC
for restricted use only for $30,000. The brochure identified the
MIMIC system as being a retail merchandising inventory control system
owned by LYCSC. LYCSC also occasionally used UCC sales literature
after removing the UCC logo from the corner of the printed publications.
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4. [court's footnote 17] UCC took the
position at trial that it was entitled to the value of the potentially
successful business Lykes/UCC was to enjoy had it been under efficient
management. The measure employed by UCC was to value the worth of
Lykes/UCC were it to be purchased by a third party. Because UCC
had in the past purchased a number of service centers which had on-going
accounts, thereby building its business by acquisition, UCC executives
testified that the value placed on a functioning service center by a willing
purchaser was one to two times its gross annual revenues. Using
this measure, UCC placed a total value of 1 or 2 million dollars on the
business opportunity LYC appropriated.
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5. [court's footnote 26] See, e.g.,
Precision Plating v. Martin Marietta, 435 F.2d 1262 (5th Cir. 1970),
cert. denied, 404 U.S. 1002, 92 S.Ct. 571, 30 L.Ed.2d 556 (1971)
where public disclosure of a process was held to constitute a complete
destruction of the value of the trade secret.
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6. [court's footnote 27] Defendants
disclosed the complete system to one Hugh Cort of Technical Resources,
Inc., unaware that Cort had been retained by UCC to discover whether LYCSC
had in fact stolen the AIMES system. Cort had pledged to retain
that information he discovered in confidence. Thus while the defendants'
disclosure of the system to him in our view constitutes a "use" of the
system, . . . this use did not amount to a form of public disclosure which
destroyed the value of the secret to the plaintiff.
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7. [court's footnote 28] See, e.g.,
Westinghouse Electric and Manufacturing Co. v. Wagner Electric and
Manufacturing Co., 225 U.S. 604, 32 S.Ct. 691, 56 L.Ed. 1222 where
the Court put the burden of proving factors other than the infringed patent
caused the profits on the infringer once the plaintiff patentee proved
profits were made. See also Carter Products, Inc. v. Colgate-Palmolive
Co., 214 F. Supp. 383 (D.Md.1963) which awarded plaintiff the profits
defendant made by using one of plaintiff's trade secrets.
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As presently understood in patent law, a reasonable royalty is simply that amount which the trier of facts estimates a person desiring to use a patent right would be willing to pay for its use and a patent owner desiring to license the patent would be willing to accept.
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10. [court's footnote 32] See, e.g.,
Carter Products, Inc. v. Colgate-Palmolive Co., 214 F. Supp. 383
(D.Md.1963) where evidence of other royalty rates for use of other of
plaintiff's patented processes was held to have been properly considered
by the Master, but did not amount to evidence of an established industry
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