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SOFTEL, INC. v. DRAGON MED. & SCI. COMMUNS. LTD.

July 7, 1995

SOFTEL, INC., Plaintiff, against DRAGON MEDICAL AND SCIENTIFIC COMMUNICATIONS LTD., DRAGON MEDICAL AND SCIENTIFIC COMMUNICATIONS, INC., JOHN R. DARSEE, H. EUGENE HODGE, NINA ROMANOFF, HOFFMAN LAROCHE, INC. PFIZER, INC., and PFIZER PHARMACEUTICALS, INC., Defendants.


The opinion of the court was delivered by: MIRIAM GOLDMAN CEDARBAUM

 CEDARBAUM, J.

 Softel, Inc. ("Softel"), a company that develops and sells computer graphics products, sues Dragon Medical and Scientific Communications, Inc. ("Dragon") and some of Dragon's employees for copyright and trademark infringement, misuse of trade secrets and unfair competition. *fn1" From April 23, 1991 to May 13, 1991, Judge Cannella held a bench trial limited to liability issues, in which he found defendants Dragon and John Darsee *fn2" liable for copyright infringement and misuse of trade secrets, and found that the misuse of trade secrets was willful and in bad faith, entitling plaintiff to punitive damages. See Softel, Inc. v. Dragon Medical & Scientific Communications, Inc., 1992 U.S. Dist. LEXIS 9502, No. 87 Civ. 0167 (JMC), 1992 WL 168190 (S.D.N.Y. June 29, 1992) [hereinafter "Softel I"]. Familiarity is assumed with Judge Cannella's decision which is the law of this case.

 From May 8, 1995 to May 11, 1995, I held a bench trial to determine the amount of damages for which defendants are liable. After examining the documents, observing the demeanor of the witnesses, and considering the plausibility and credibility of their testimony, I make the following findings of fact and conclusions of law.

 Findings of Fact

 The Parties

 1. Plaintiff Softel is a New Hampshire corporation engaged in the business of developing and selling computer graphics products to users of IBM compatible computers. Paul Fiondella is the president and sole shareholder of Softel. (Softel I, Findings of Fact ("F.F.") P 1.)

 2. Defendant Dragon was a New Jersey corporation engaged in the business of designing interactive computer programs to present medical and scientific information until it ceased doing business on January 31, 1992. (See Softel I, F.F. P 2; Tr. at 380.)

 3. Defendant John R. Darsee was a medical writer for Dragon and the director of its interactive department. (Softel I, F.F. P 6.)

 Background Facts Regarding Liability

 4. In November 1984, Darsee purchased Videogram 2.0, a "paint-and-draw" computer graphics program, from Softel. (Softel I, F.F. II 15, 17, 21.) Videogram 2.0 did not enable the user to incorporate images drawn with it into software the user was writing. (Softel I, F.F. P 17.)

 5. In January 1985 through June 1985, Dragon hired Fiondella to write code that would display graphics images created in Videogram 2.0 in several of Dragon's interactive programs. (the "image retrieval routines") (Softel I, F.F. PP 26-66, 75.)

 6. Fiondella never gave Dragon the source code he had written. Rather he gave Dragon only the "executable" object code. (Softel I, F.F. PP 28, 44, 51, 60, 75.)

 7. Darsee somehow gained access to Softel's source code and used the code to retrieve and display graphics images in two Dragon interactive programs, Hairy Cell Roche and Low Back Pain. (Softel I, F.F. PP 62, 65, 70.)

 8. On May 22, 1986, plaintiff sought to register a copyright for certain computer code (the "Copyright Collection"). Plaintiff sought to register the following: (1) a program entitled "SHOWPIX.bas," which includes code similar to that of certain image retrieval routines; (2) a collection of object code routines called "8068/8 Support Routines," which includes the five assembly code routines used to retrieve and display videogram images; and (3) source code for one of the projects plaintiff did for Dragon. Plaintiff was granted a Certificate of Copyright, Registration No. TXu 236 931, for the Copyright Collection, effective May 22, 1986. (Softel I, F.F. P 77; Plaintiff's Liability Trial Exhibit ("PLX") 34.)

 9. In 1988, Dragon utilized a different paint-and-draw program (called "Dr. Halo") instead of plaintiff's Videogram software in producing several interactive programs. (Softel I, F.F. PP 101-103.) Because the images used in those programs were stored in a different format for use with a different type of graphics card, those programs did not use the image retrieval routines. (Softel I, F.F. P 103.) The programs Dragon produced in 1988 were not in any way derived from Softel's copyrighted work. (Softel I, F.F. P 115.)

 Plaintiff's Lost Profits due to Defendants' Use of Image Retrieval Routines

 10. Defendants presented evidence that plaintiff charged a license fee of $ 2,000 for the use of the image retrieval routines in another program and that plaintiff offered Dragon a contract, which Dragon refused, pursuant to which Dragon would have paid plaintiff $ 3,500 per computer program to license code previously developed by plaintiff. (Tr. at 292-99; PLX 63, 66.)

 11. Evidence was also presented that Dragon paid license fees on two occasions to Media Cybernetics for the use of code similar to that of the image retrieval routines in connection with images created in the Dr. Halo paint-and-draw program. (Tr. at 598-606.) In 1987, Dragon paid Media Cybernetics $ 10,000 for a license to use code that retrieved graphics images in ten Dragon software packages. (Plaintiff's Damage Trial Exhibit ("PDX") D-18.) In 1989, Dragon paid Media Cybernetics $ 8,200 for a license to use such code in an unlimited number of programs. (Tr. at 598.)

 13. Based on the evidence presented at trial, I find that plaintiff's lost profits are $ 7,000, that is, the amount plaintiff would have charged defendants under its proposed agreement for the use of the image retrieval routines in two programs. Although a source code license fee might have been considerably higher, I find that it is unlikely that Dragon would have paid such a high fee considering the availability of other programs which performed the same functions as the Videogram image retrieval routines. (See Defendants' Damage Trial Exhibits ("DDX") AT & AU; Tr. at 587-615.) Dragon used plaintiff's source code only to produce the Hairy Cell and Low Back Pain programs. It did not use the source code for any other purpose. Essentially, the value to Dragon of the use of plaintiff's code was the saving of the license fee it would have paid to plaintiff for the use of the image retrieval routines.

 Dragon's Profits from Programs Utilizing Infringing/Misappropriated Code

 14. Dragon's gross revenue from the Hairy Cell Roche program was $ 92,500. (DDX A; PDX D-2.) Dragon's gross revenue from the Low Back Pain program was $ 85,415.32. (DDX B; PDX D-2.)

 15. Dragon incurred direct costs of $ 39,108.96 for the production of the Hairy Cell Roche program and $ 32,630.36 for the production of the Low Back Pain program. (DDX A & B.) *fn3" These costs included expenses for video copying and editing, audio recording, equipment rental, freelance graphic artists, a background music composer and actors. (Tr. at 391-93.)

 16. In addition to out-of-pocket expenses, Dragon incurred direct labor costs of $ 31,001.00, indirect labor costs of $ 261.07 and overhead expenses of $ 11,616.00 in connection with the production of Hairy Cell Roche, and direct labor costs of $ 7,156.38, indirect labor costs of $ 1,112.27 and overhead expenses of $ 2,968.05 in connection with Low Back Pain. (PDX D2.) Direct labor was computed on an employee-by-employee basis as an allocation of each employee's salary based on hours worked on a project as a percentage of his or her total hours worked on all projects. (Tr. at 394.) Indirect labor costs were computed by allocating year-end employee bonuses based upon the direct labor allocation. (Id.) Overhead expenses were also allocated to each project based on the direct labor expended on that project. (Id.) Overhead expenses included only the portion of rent, maintenance and utilities associated with production and did not include the portion of those expenses associated with administration. (Tr. at 395-96.)

 17. Dragon also received $ 31,800.02 in revenues by providing "exhibit support" when the Hairy Cell program was shown at some exhibitions. (PDX D-2; Tr. at 400.) The expenses associated with the exhibit support were $ 25,676.17 in direct costs, $ 1,402.89 in direct labor, $ 251.76 in indirect labor and $ 769.88 in overhead. (PDX D-2.)

 18. The computer code of Softel's image retrieval routines comprises a relatively small portion of the total number of lines and memory (measured in bytes) in the Hairy Cell and Low Back Pain programs. Softel's code comprises 15.8% of the lines and 6.1% of the bytes in the Low Back Pain program and comprises 7.8% of the bytes in the Hairy Cell program. *fn4" (Tr. at 566, 571, 577-78; DDX AP-1, AP-2, AR.) If one considers only the portions of Softel's code actually called and used in the program, those percentages are further reduced. (Tr. at 571, 576-77; DDX AP-1, AP-2, AR.)

 19. In determining the portion of profits attributable to the image retrieval routines, it is necessary to examine not only the quantity of the infringed code in relation to the entire program, but also the qualitative importance of that code. See Computer Assocs. Int'l, Inc. v. Altai, Inc., 775 F. Supp. 544, 571-72 (E.D.N.Y. 1991), aff'd in part, vacated in part, 982 F.2d 693 (2d Cir. 1992). Although defendants presented evidence that plaintiff's image retrieval routines comprised only a small part of the Hairy Cell Roche and ...


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