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WEINREICH v. SANDHAUS

April 28, 1994

STEPHEN WEINREICH, Plaintiff,
v.
RICHARD SANDHAUS, a/k/a DICK SANDHAUS and SCIENCE FACTION CORPORATION and DICK SANDHAUS PRODUCTIONS, INC., Defendants.



The opinion of the court was delivered by: ROBERT W. SWEET

 Sweet, D.J.

 This action by plaintiff Stephen Weinreich ("Weinreich") against defendants Richard Sandhaus ("Sandhaus"), Science Faction Corporation ("SFC") and Dick Sandhaus Productions, Inc. ("DSPI") (collectively the "Defendants") was tried before the Court for ten days, from January 5 to January 18, 1994. Upon all prior proceedings, the findings of fact and the conclusions of law, judgment will be entered on the complaint in the amount of $ 55,687.07 with interest and costs.

 Prior Proceedings

 Weinreich commenced this action by the filing of a complaint on May 23, 1983 that alleged damages arising out of the collaboration of the parties on certain laser light show systems. Issue was joined and discovery proceeded.

 On July 24, 1989, the Honorable Charles E. Stewart of this Court dismissed Science Faction Systems from this action. In addition, Judge Stewart granted the Defendants' motion for summary judgment dismissing Weinreich's first, second and third causes of action, which alleged a joint venture between the parties. Defendants' motion for summary judgment on the fourth and fifth causes of action, alleging quantum meruit and breach of contract respectively, was denied. On February 6, 1991, Judge Stewart adopted Magistrate Judge Naomi Reice Buchwald's Report and Recommendation that the Defendants' renewed motion for summary judgment on the fourth and fifth causes of action be denied. The action was assigned to this Court on December 22, 1993.

 During the course of the trial in January 1994, twelve witnesses testified, two witnesses' deposition testimony were admitted in lieu of their trial testimony and numerous exhibits were admitted. Final submissions were completed on April 22, 1994, at which time the action was deemed submitted. The following constitutes the findings of fact and conclusions of law, as required by Fed. R. Civ. P. 52(a).

 Findings of Fact

 Weinreich is a citizen of the State of New Jersey with a high school degree who has worked on various electro-mechanical design projects. Sandhaus is a resident of New York. SFC and DSPI *fn3" are both New York corporations engaged in various aspects of the entertainment business. Sandhaus is the sole shareholder and director of SFC and DSPI; he is also an officer, and has often been the only one. Sandhaus completely controls both SFC and DSPI.

 In 1977, at the request of the rock band Foreigner, Sandhaus evaluated approximately eight entities in the United States and Europe that were creating laser light show systems. He concluded that those entities were not responsible and advised Foreigner not to deal with them. At about the same time, Dolgoff Holophase, Inc. -- an entity that Sandhaus had an interest in -- agreed to produce a laser light show system for Foreigner's 1977 tour. Sandhaus first met Weinreich through Dolgoff Holophase, and they and Michael Metz, an engineer and designer, worked together to produce this system. Because of its size, the system was known as the Elephant system. It was exhibited to Foreigner, but for a variety of reasons was not used during the 1977 tour.

 Although Sandhaus was "personally humiliated" by the failure of the Elephant system, in late 1977 he approached Weinreich and Metz about working on another laser light show system for Foreigner's upcoming 1978 tour. This system became known as the Silver system. Weinreich was the principal mechanical designer for the laser projector; the electronic controls were manufactured by an independent contractor, 2005 A.D.

 Prior to April 1978, Sandhaus, Metz and Weinreich had several conversations about establishing a company to produce laser light show systems. The proposed company never came to fruition, and as a result Weinreich prepared a letter (the "1978 Letter") to govern his relationship with Sandhaus. The 1978 Letter was addressed to Sandhaus at DSPI, and provided:

 
This will confirm our intention that all design work done by Stephen Weinreich for the laser light show currently in production is for the consideration of a 33 1/3 % interest in the net profit earned by sale or rental of this or similar or derivative systems at prices and conditions mutually agreeable to Sandhaus and Weinreich, such agreement not to be unreasonably withheld. Any funds drawn by Stephen Weinreich and charged against this project (other than expense reimbursements) will be considered as drawings on profits. This letter is not intended to be a complete agreement, but is to express the general intent of both parties and is to govern in this matter until such an agreement is executed. Your signature below indicates your agreement with these terms. Ex. 1.

 The phrase in the 1978 Letter, "the laser light show currently in production," referred to the Silver system. On May 1, 1978, Sandhaus signed the 1978 Letter in his capacity as an officer of DSPI. *fn4"

 In May 1978, the Silver system was completed and demonstrated to Foreigner. The demonstration was not successful, and the Silver system was not used on the Foreigner tour.

 In June 1978, Sandhaus formed a second company, SFC. DSPI *fn5" and SFC shared common office space, but had separate bank accounts and ledgers, and filed separate tax forms. Neither DSPI nor SFC displayed any independent business discretion. For instance, in August 1978, Sandhaus wrote a letter on behalf of SFC on DSPI stationery. Similarly, SFC's advertising literature indicated that it was "an affiliate of DSPI." Moreover, at trial Sandhaus illustrated the interconnectedness of the Defendants and his domination of both entities. *fn6"

 The same month that it was formed, SFC acquired the Silver system from DSPI. Although Defendants cite to an SFC ledger entry that shows that DSPI was paid $ 9,000.00, the transaction was accomplished without any papers. While the SFC ledger does indicate that the $ 9,000.00 entry was for capital equipment, it does not specifically identify the Silver system as the product that was purchased. In contrast, more detailed notes existed for all other entries on that page of the ledger. Moreover, Defendants do not dispute Weinreich's contention that the DSPI revenue ledger for that time was never produced. Sandhaus also claimed that as a result of the Silver sale, DSPI was credited for certain rent payments and other expenses. However, Defendants fail to cite any ledger entries in support of their contention.

 Despite the problems with the Elephant and Silver systems, in the summer of 1978 Weinreich, Metz and Sandhaus started work on yet another system, the 2000 system. The components of the 2000 system were substantially the same as those in the Silver system, except for the following improvements: fast, closed loop galvanometer scanners; a black housing structure that tilted by manipulating devices outside the structure; rotary proportional solenoids; bathroom glass effects selected with a rotatable turret; and a computer controller system. Moreover, the basic optical path geometry of the Silver system was followed in the 2000 system.

 Both the Silver and 2000 systems had a basic design function that was described by O'Brien:

 
The [Silver] and 2000 . . . have fixed pairs of galvanometers. Each pair has a moving mirror on each galvo to steer the beam in each of two dimensions, up-down and left-right, but the galvos do not themselves move on their mountings. . . . the projection angle [of the two systems are] limited to only what the galvos can themselves alone produce, except when some auxiliary large external mirrors were employed to further direct the image. Ex. AF, at P 11.

 The first 2000 was delivered to the Xenon disco in the fall of 1978. By June 1979, there were approximately twelve 2000 systems in production. *fn7" In September 1979, Weinreich stopped working for the Defendants. Thereafter, SFC continued to rent and sell 2000 systems. Additional features for the 2000 system were also created.

 In 1981, SFC put on a laser light show at the Empire State Building that involved a 2000 system that primarily projected vertically, as opposed to horizontally. An external motor driven mirror device was attached to the 2000 housing, thereby permitting the beam to scan nearly 360 degrees. However, continuous 360 degree rotations were not possible because the system's wires would get tangled as it turned. In addition, as the system moved over 360 degrees, the images it projected would end up being upside-down.

 Sandhaus maintained contemporaneous ledgers of revenues and disbursements for SFC. *fn8" However, Sandhaus did not allocate revenues and disbursements among the SFC products until 1990, well after the initiation of this action. According to his allocations, for the period 1978 to 1981, total income for the 2000 system was $ 1,664,818.28, and total costs were $ 1,734,216.56, leaving a negative balance of $ 69,398.28. Weinreich adopted the income and cost figures for the 1978 to 1981 period as starting points, but urged corrections to support his damage claim.

 An appropriate percentage of various overhead items that can be allocated to the 2000 systems is 66.95 percent, since this was the percentage of SFC's payroll that was allocated to that product. Based on this percentage, the following should be subtracted from the total cost of producing the 2000 system: (1) $ 26,384.61, representing the over-allocation of SFC tax penalties and interest that Sandhaus charged the 2000 system, (2) $ 43,590.86 in payroll taxes, representing an over-allocation of payroll taxes to the 2000 system, (3) $ 49,636.88 for an over-allocation of rent charged to the 2000 system, *fn9" (4) $ 24,575.70 for expenses that Sandhaus allocated to the 2000 system that SFC had already received as a credit in litigation with the rock band Kiss, and (5) $ 15,861.97 for over-allocations to the 2000 system of expenses that are generally not specific to any one product, including accounting services, insurance expenses, miscellaneous office expenses and a rent security deposit. In sum, the total over-allocation for the 2000 system from 1978 to 1981 was $ 160,050.02. *fn10"

 The 2000 system income should also be increased by $ 3,410.00 for payments SFC received from the Xenon disco of $ 2,260.00 in sales tax income and $ 1,150.00 for a plexiglass case. *fn11"

 SFC continued to rent and sell the 2000 until the summer of 1982. For the first five months of 1982, SFC received rental and sales income for 2000 systems totalling $ 82,875.00.

 Beginning in 1981, SFC began to develop the 360 system, which was a significant departure from the Silver and 2000 systems. The 360 system could project a figure over 360 degrees without the image rotation problem associated with the Empire State Building project. As explained by O'Brien:

 
Unlike the [Silver or 2000 systems], which use one or several parallel pairs of fixed galvos for simultaneous projection from a stationary projector box, the new 360 series uses only one pair of galvos mounted in an elaborately articulated assembly. The galvos rotate in tilt motion as a pair together on a subassembly. In addition, this entire subassembly, rotates 360 degrees on the pan axis, hence the name 360 series. This technique enables coverage with an image on an entire hemisphere and slightly more, without external mirrors for projection to any part of this hemisphere. Ex. AF, at P 12.

 Consequently, the 360 system was, according to its designer, Stephen Schultz, a "fundamentally new approach, not a slight extension" of the Empire State Building project. Tr. 500. Indeed, Weinreich's expert, Leo Beiser, admitted that the design change in the 360 system was a "fundamental one."

 The 360 system was first used at the Knoxville Worlds Fair, which began in May 1982. At that time, three of the four then existing 360 systems were used in Knoxville. The fourth was used for a July 4th show at New York Harbor. Thereafter, except as noted below, SFC used the 360 systems for its future rentals and sales; it no longer used systems similar or derivative of the Silver or 2000 systems.

 The indoor show at the Knoxville Worlds Fair used a system that was one-quarter derived from the 2000 system. O'Brien stated that the amount of derivation for this system was "probably less than half but more than a trivial portion." As noted, the Knoxville show also used three 360 systems outdoors. The total rental for all systems was $ 410,000.00. The evidence also shows that a system similar to the Knoxville ...


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