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 Low Back Pain programs, that evidence is not wholly determinative of the contribution the image retrieval routines made to the program.
20. Because the routines made it possible to show quickly graphics images on the screen, they were an integral part of the Hairy Cell Roche and Low Back Pain interactive computer programs. (Tr. at 28-29, 156, 490-91.)
21. Dragon's sales of these programs are attributable not only to the use of the graphics images, but also to the overall design and the subject matter of the presentation, which were developed entirely by Dragon. (Tr. at 349, 446-47, 450-51, 493-96.) In addition, some of the images used in Hairy Cell were brought up to the screen from videodisc, and some graphics images used in Low Back Pain were in Dr. Halo format. (Tr. at 445-46, 455-56; DDX M.) The display of these images did not employ the image retrieval routines. (Tr. at 450, 455-56, 492.)
22. Taking all of these factors into account, I find that 50 percent of Dragon's profits from the Hairy Cell and Low Back Pain programs are attributable to plaintiff's image retrieval routines.
Dragon's Financial Condition
23. In the fiscal year ending January 31, 1987, Dragon's Net Income was $ 58,798. (DDX J.)
24. Dragon ceased doing business on January 31, 1992 after its board of directors decided to dissolve the company. (Tr. at 380; PDX D-4.)
25. As of May 10, 1995, Dragon had collected all debts owed to it, and had outstanding expenses of $ 550 per three-month period and deferred compensation owed to Darsee and Eugene Hodge, Dragon's president. (Tr. at 405-06, 411.)
26. As of May 10, 1995, Dragon had two bank accounts with a combined balance of $ 16,187.26. (Tr. at 406-07; DDX AX & AY.)
Darsee's Financial Condition
27. Dragon paid Darsee $ 69,249.98 in salary and bonus in 1986 and $ 72,000 in 1987.
28. Darsee is currently employed by Scientific Information Systems ("SIS"), a company that designs and produces programs that communicate product information or education. (Tr. at 478-80.) The shares of SIS are owned by Darsee's wife, his oldest daughter, and one other person. (Tr. at 486.)
29. In 1993, SIS paid a salary of $ 20,500 to Darsee and a salary of $ 83,000 to Darsee's wife. (DDX Y-9.) In 1993, Darsee was also paid $ 70,250 by Cypress Scientific Pres., Inc. and his wife was paid $ 61,745 by Hackensack Medical Center. (Id.) Darsee has not yet filed an income tax return for 1994. (Tr. at 479; DDX Y-10.)
30. Darsee's assets are the following: a checking account with a balance of between $ 4,000 and $ 6,000, a term life insurance policy, a retirement account worth approximately $ 31,000, and a joint tenancy interest in the house that his wife bought in 1985. (Tr. at 479.) The house was valued at $ 248,000 in 1991, and was subject to mortgages totalling $ 169,841 as of June, 1993. (Tr. at 476-77.) Darsee was made a joint tenant in 1989 when he and his wife decided to refinance their mortgage and the bank conditioned the refinancing upon the deed being in both of their names. (Tr. at 475.)
31. Darsee's mortgage payments are approximately $ 2,000 per month. (Tr. at 480.) Monthly payments on his car lease are $ 300. (Tr. at 481.) Darsee and his wife provide for three children, aged 23, 16 and 6. (Tr. at 471-72.) This year they paid the costs of their oldest child's master degree in education at Fordham University, which amounted to $ 19,000, and leased a car for her commute to and from school. (Tr. at 481.) Darsee's 16-year-old child has Down's Syndrome, and Darsee and his wife incur additional expenses associated with that child's special health and educational needs. (Tr. at 482-85.)
32. Darsee does not have any indemnification agreement with Dragon. (Tr. at 433.)
Conclusions of Law
1. Section 504(b) of the Copyright Act provides:
Actual Damages and Profits. -- The copyright owner is entitled to recover the actual damages suffered by him or her as a result of the infringement, and any profits of the infringer that are attributable to the infringement and not taken into account in computing the actual damages. In establishing the infringer's profits, the copyright owner is required to present proof only of the infringer's gross revenue, and the infringer is required to prove his or her deductible expenses and the elements of profit attributable to factors other than the copyrighted work.
2. Plaintiff argues that its actual damages are its costs of developing the image retrieval routines. The only case plaintiff cites in support of the proposition that development costs are an appropriate measure of copyright damages is Harris Market Research v. Marshall Marketing and Communications, Inc., 948 F.2d 1518, 1524 (10th Cir. 1991). In that case, the Tenth Circuit held that it was not reversible error for the trial court to have admitted evidence on plaintiff's development costs where the court gave a jury instruction, to which defendant did not object, that copyright infringement damages may include plaintiff's unrecovered costs. That case is not persuasive authority for the thesis that the plaintiff in this case is entitled to its development costs as part of its actual damages.
3. Although there may be situations in which it is appropriate for a plaintiff who is successful on a copyright infringement claim to recover development costs as part of its actual damages, the facts of this case do not present such a situation. Defendants' use of plaintiff's copyrighted computer code did not prevent plaintiff from profiting from use of the code except to the limited extent of preventing plaintiff from receiving license fees from Dragon. (See Softel I, Conclusions of Law ("C.L.") P 21.) In fact, plaintiff used some of the code contained in the image retrieval routines in other programs it sold. (Tr. at 172-75.) Therefore, plaintiff's costs in developing the image retrieval routines cannot be considered an "unrecovered cost." Plaintiff did not present evidence that any of the image retrieval routines was developed specifically for Dragon and was not marketable to others.
4. Plaintiff's actual damages from the copyright infringement are the profits it lost as a result of defendants' infringement. In this case, plaintiff's losses are measured by the royalty payments it would have received from defendants for the use of the source code for the image retrieval routines, or $ 7,000. See Findings of Fact P 13, supra.
5. In addition to lost profits, plaintiff is entitled to recover defendants' profits earned as a result of the infringement.
6. Plaintiff urges that because Judge Cannella determined that the infringement was willful, defendants should not be able to deduct any expenses in calculating profits. Plaintiff's view is supported by neither a plain reading of the Copyright Act nor decisions in this Circuit. See Sheldon v. Metro-Goldwyn Pictures Corp., 106 F.2d 45 (2d Cir. 1939), aff'd, 309 U.S. 390, 84 L. Ed. 825, 60 S. Ct. 681 (1940); Warner Bros., Inc. v. Gay Toys, Inc., 598 F. Supp. 424 (S.D.N.Y. 1984); RSO Records, Inc. v. Peri, 596 F. Supp. 849 (S.D.N.Y. 1984).
7. Courts have allowed the deduction of a variety of expenses, including an allocation of fixed cost overhead expenses associated with the production of an infringing product. See In Design v. K-Mart Apparel Corp., 13 F.3d 559, 565-66 (2d Cir. 1994); Sheldon, 106 F.2d at 54; Warner Bros. 598 F. Supp. at 428-29. Plaintiff did not challenge the validity or method of computation of any of Dragon's claimed expenses. (See Tr. at 389.) Therefore, because defendants have offered a fair and reasonable formula for determining allocation of fixed costs such as overhead and salaries, they are entitled to the deduction of the amounts claimed as expenses from gross revenues in computing profits under Section 504(b).
8. Plaintiff correctly notes that an increase in defendants' good will resulting from their infringement may be considered a "profit" for which the plaintiff is entitled to damages under Section 504(b). See Business Trends Analysts. Inc. v. Freedonia Group, Inc., 887 F.2d 399, 404 (2d Cir. 1989). However, plaintiff did not present evidence supporting its contention that defendants' good will was enhanced as a result of their infringement of plaintiff's image retrieval routines. Darsee testified at trial that he had not shown the Hairy Cell program to any prospective clients. (Tr. at 502.) Although Darsee did show the Hairy Cell program at a meeting of the International Interactive Computer Society in November 1986 (Softel I, F.F. P 72), plaintiff did not present any evidence that Dragon obtained new customers or increased its good will with existing customers as a result of that demonstration. (See also Softel I, F.F. P 98.)
Trade Secret Damages
9. Damages for misappropriation of a trade secret may be measured by either plaintiff's losses or the profits or other benefits gained by defendants through the use of the trade secret. See A.F.A. Tours, Inc. v. Whitchurch, 937 F.2d 82, 87 (2d Cir. 1991); Timely Prods. Corp. v. Arron, 523 F.2d 288, 304 (2d Cir. 1975); A.H. Emery Co. v. Marcan Prods. Corp., 268 F. Supp. 289, 302 (S.D.N.Y. 1967), aff'd, 389 F.2d 11 (2d Cir.), cert. denied 393 U.S. 835, 21 L. Ed. 2d 106, 89 S. Ct. 109 (1968); Ewen v. Gerofsky, 86 Misc. 2d 913, 382 N.Y.S.2d 651, 655 (Sup. Ct. N.Y. Cty. 1976); 3 Roger M. Milgram, Milgram on Trade Secrets § 15.02[c] (1994).
10. Another method of computing damages for trade secret misappropriation is the assessment of a reasonable royalty for the use of the trade secret. See University Computing Co. v. Lykes--Youngstown Corp., 504 F.2d 518, 536 (5th Cir. 1974); Vitro Corp. v. Hall Chemical Co., 292 F.2d 678, 681-83 (6th Cir. 1961); 3 Milgram on Trade Secrets § 15.02[e]. Both plaintiff and defendants suggest in their pre-trial briefs that a "reasonable royalty" or license fee determination might be an appropriate measure of damages. (See Plaintiff's Trial Mem. on Damages, at 18-19; Defendant's Mem. in Opp. to Plaintiff's Mot. for Summ. J., at 17.)
11. Plaintiff contends that the measure of damages should be the costs of developing the program times a multiplier which takes into account the probable return on the investment in product development. Plaintiff cites University Computing in support of its method of computation. In University Computing, however, the court did not apply such a measure. It did discuss the various methods of measuring damages for trade secret misappropriation and noted that development costs are a factor to be considered in determining what would have been a reasonable royalty for the use of a misappropriated trade secret. University Computing, 504 F.2d at 538. The court noted that the application of the "reasonable royalty" measure of damages in lieu of the usual approach of measuring damages by defendants' profits was appropriate where defendants made no profits from the misappropriation. Id. at 536. If defendants had made a profit, the court indicated that it would have measured damages by the profits gained by defendants through the use of plaintiff's trade secret. Id.
12. The appropriate measure to use in computing trade secret damages in this case is the amount of defendants' profits.
13. In computing defendants' profits from the trade secret misappropriation, defendants are entitled to set off the costs associated with the production of the product that incorporates the misappropriated trade secret. See Elnicky Enterprises v. Spotlight Presents, Inc., 213 U.S.P.Q. 855, 863 (S.D.N.Y. 1981), accounting settled, 213 U.S.P.Q. 955 (S.D.N.Y. 1982); David Fox & Sons, Inc. v. King Poultry Co., 30 A.D.2d 789, 292 N.Y.S.2d 21, 23 (1st Dep't 1968) (unfair competition).
14. In measuring defendants' profits, it is also appropriate to apportion damages based on the role plaintiff's trade secret played in the commercial success of defendants' product. See University Computing, 504 F.2d at 539.
15. Plaintiff argues that it should be awarded damages based on the competitive advantage gained by Dragon in being able to market its interactive programs with graphics displays earlier than competitors. Although such gains could be brought into the calculation of damages, plaintiff did not prove that Dragon gained any time advantage over competitors. Dragon's expert on computer graphics programs testified that other graphics software was available at the time that Dragon developed the Hairy Cell and Low Back Pain programs which allowed users to incorporate images made with a paint-and-draw program into the users' own programs. (Tr. at 583-609.) Plaintiff did not proffer any contradictory testimony as to the availability of programs with functionality similar to that of the Videogram image retrieval routines.
16. Therefore, the compensatory damages based on defendants' profits earned from the misappropriation of plaintiff's trade secret are the same amount as those awarded for defendants' profits gained from copyright infringement.
17. Because defendants' profits from copyright infringement and trade secret misappropriation are coextensive in this case, plaintiff is entitled to only one recovery of defendants' profits. See Computer Assocs. Int'l, Inc. v. Altai, Inc., 982 F.2d 693, 720 (2d Cir. 1992).
18. Prejudgment interest with respect to the trade secret misappropriation claim is determined by New York law. N.Y. Civ. Prac. L. & R. § 5001(a) provides:
Interest shall be recovered upon a sum awarded . . . because of an act or omission depriving or otherwise interfering with title to, or possession or enjoyment of, property, except that in an action of equitable nature, interest and the rate and date from which it shall be computed shall be in the court's discretion.
19. Plaintiff and defendants agree that trade secret misappropriation is "an act . . . interfering with title to, or possession or enjoyment of, property," and, is therefore, within Section 5001(a). (See Defendants' Post-Trial Proposed Findings of Fact and Conclusions of Law Regarding Damages P 163; Plaintiff's Trial Mem. on Damages, at 28.)
20. Defendants argue that because disgorgement of profits is an equitable remedy, the court has discretion whether to award prejudgment interest. However, where "the cause of action and damages requested are essentially legal in nature, . . . the court must apply the statutory rate of interest." Action S.A. v. Marc Rich & Co., 951 F.2d 504, 508-09 (2d Cir. 1991). Because plaintiff's claim for damages for trade secret misappropriation is essentially legal in nature, prejudgment interest on the trade secret damages must be awarded pursuant to Section 5001(a). Even if the claim were held to be equitable, I would exercise my discretion to grant prejudgment interest in this case.
21. The issue of the permissibility of prejudgment interest under the current Copyright Act, which neither expressly allows nor prohibits such an award, is unresolved in the Second Circuit. In Design v. K-Mart Apparel Corp., 13 F.3d 559, 569 (2d Cir. 1994). If such an award is permitted, the award of prejudgment interest is discretionary. Id.
22. In the exercise of my discretion, I award plaintiff prejudgment interest on the lost profits portion of the copyright infringement damages because prejudgment interest on lost profits compensates plaintiff for loss of the use of those funds. See United States Naval Inst. v. Charter Communications, Inc., 1990 U.S. Dist. LEXIS 8897, 17 U.S.P.Q.2D (BNA) 1063, 1067 (S.D.N.Y. 1990) (awarding prejudgment interest on portion of award representing plaintiff's lost profits, but not on portion of award representing defendant's profits from infringement), aff'd in part, rev'd in part, 936 F.2d 692 (2d Cir. 1991); see also Bourne Co. v. Walt Disney Co., 1994 U.S. Dist. LEXIS 7783, 31 U.S.P.Q.2D (BNA) 1858, 1860-61 (S.D.N.Y. 1994) (awarding prejudgment interest on stipulated damages settlement).
23. N.Y. Civ. Prac. L. & R. § 5001(b) provides:
Interest shall be computed from the earliest ascertainable date the cause of action existed, except that interest upon damages incurred thereafter shall be computed from the date incurred. Where such damages were incurred at various times, interest shall be computed upon each item from the date it was incurred or upon all of the damages from a single reasonable intermediate date.