Appendix — Softel, Inc. v. Dragon Medical & Scientific Communications, Inc.

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Supreme Court, U.S.

FILED

97 999 DrC 151997

No.

OFFICE OF THE CLERK

IN THE

Supreme Court Of The United States

OCTOBER TERM, 1997

SOFTEL, INC.,

Petitioner.

DRAGON MEDICAL AND SCIENTIFIC COMMINCATIONS, INC..:

DRAGON GROUP LTD..,

also known as Dragon Medical and Scientific Communications,

Ltd.; JOHN R. DARSEE, H. EUGENE HODGE. NINA

ROMANOFF,

Respondents.

ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE SECOND CIRCUIT

APPENDIX TO PETITION FOR A WRIT OF CERTIORARI

CHARLA R. BIKMAN

Counsel for Petitioner

25 Maple Lane

East Hampton, N.Y. 11937

(516) 324-1306

35 vp

TABLE OF CONTENTS

Memorandum and Order - Hon. John M. Cannella —_

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Memorandum and Order - Miriam Goldman Cedarbaum

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Memorandum and Order - Miriam Goldman Cedarbaum

GOR CREE FE, Ti acnnescrccccccsesccscccccccsesccceccccecesens 59

Decison of the United States Court of Appeals

for the Second Circuit dated July 9, 1997 .................. 63

Order denying Motion for Rehearing ................:cccceee 88

2 | & , CESSES Eenne Ue ern ere 89

f° . < eRe rec reeemneos sever 93

Be A I a iiiticicccdiinenstnctnsreccosmnvmnmnenenatinnnmesyncees 34

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CE ii dirensntssasinccetsemsssinunernieesencinonensstion 95

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Excerpts from Transcript of Liability Trial,

April 23, 1991 to May 13, 19914 .......... cece ceeseeeeeneees 98

Excerpts from Transcript of Damages Trial,

May 8, 1995 to May 11, 1995 .............ccceeeeeeeeeeteees 120

Plaintiff's Exhibit 122 - Liability Trial Excerpt of

Affidavit of Aaron Grosky - First Expert Report ....... 127

Plaintiff's Exhibit D-10 - Damages Trial ....................... 129

Plaintiff's Exhibit 130A - Liability Trial

Excerpt of Hearing before the Task

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NITED SlATES DISTRICT COURT

OUTHERN DISTRICT OF NEW YORK

SOFTEL, INC., “

Plaintiff,

-against-

MEMORANDUM

DRAGON MEDICAL AND SCIENTIFIC AND ORDER

COMM NICAT NS. INC.,

DRAGON ROUP LTD.. a/k/a DRAGON _ 87 Civ. 0167 (JMC)

MEDICAL AND SCIENTIFIC

COMM NIGATIONS LTD.

JOHN R. DARSEE. H. EUGENE-HODGE,

and NINA ROMANOFF,

Defendants.

CANNELLA, D.J.:

After a bench trial on plaintiff's claims, the Court finds in favor of

plaintiff with respect to its first and fifth claims for relief stated in the

Amended Complaint to the extent these claims are based on the

Hairy Cell Roche and Low Back Pain programs. The Court further

finds that plaintiff is entitled to recover punitive damages with

respect to its fifth claim for relief. Plaintiff's claim for attomey’s fees,

statutory damages and punitive damages with respect to its claim

under its first claim for relief is denied. Plaintiff's second, third,

fourth and sixth claims for relief are dismissed. Plaintiff's motion for

further discovery with respect to the programs Advanced Cardiology

Lab, Expert Consultations, Unasyn Oral Followup and Benign

Prostatic Hypertrophy is denied

BACKGROUND

This action was tried by the Court without a jury on April 23, 1991

through May 9, 1991. Trial of the action was bifurcated and the

instant trial was solely on the issues of liability and intent. Having

heard and carefully considered all of the- evidence in this matter,

the Court makes the following findings of fact and conclusions of

law pursuant to Rule 52(a) of the Federal Rules of Civil Procedure.

FINDINGS OF FACT

The Parties

} 1. Plaintiff, Softel, Inc. ["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 the |

corporation.

2. Defendant Dragon Medical and Scientific Communications,

Inc. [‘Dragon") is a New Jersey corporation engaged in the business

of designing communications programs to present medical and

scientific information. The programs are typically designed for

pharmaceutical companies who use them to familiarize physicians

with their products.

3.Dragon Group Ltd. a/k/a Dragon Medical and Scientific

Communications Ltd. ("Dragon-U.K.") is a holding company based

in London, England and has majority control of Dragon. The Court

denied plaintiffs motion to add Dragon-U.K. to the action, by

Memorandum and Order dated April 6, 1988. See Softel v. Dragon,

87 Civ. 0167 (JMC) (S.D.N.Y. Apr. 6, 1988).

4. Defendant H. Eugene Hodge founded Dragon and is its

president and a shareholder.

5. Defendant Nina Romanoff is a Dragon employee who

produces the film and videotape used in the computer programs.

6. Defendant John R. Darsee is a medical writer for Dragon

and the director of its interactive department.

7. At the conclusion of plaintiffs case, the Court granted

defendants’ motion for judgment as a matter of law under Rule |

50(a) of the Federal Rules of Civil Procedure with respect to |

defendants Hodge and Romanoff, but denied the motion with |

respect to defendant Darsee.

Nature of Computer Software

8. Plaintiff wrote computer code for computer programs

produced by Dragon. Plaintiff now asserts claims under federal

alleged improper use of plaintiffs code in subsequent interactive

programs.

9. The programs in issue are interactive programs designed

to operate on personal computers. In an interactive program the

user controls the direction of the computer program. A personal

computer ["PC") consists of both hardware and software. The

hardware includes the central processing unit, which controls the

computer's functions; the internal memory; input devices such as a

keyboard, mouse or touchscreen; output devices, such as a display

screen and printer; and storage devices such as hard and floppy

ae tne tem — —

disc drives. See Lotus Dev. Corp. V. Paperback Software Int'l, 740

F. Supp. 37, 43 (D._ Mass. 1990).

10. Software includes computer programs. There are

numerous computer programming languages. Computers operate

by executing instructions composed of binary digits of "zeros" and

“ones”. A sequence of binary instructions is known as “machine

language” or “object code." Computer programmers, however,

generally write programs in “source code" or "assembly language"

in which they replace binary digits with meaningful letters. A

program written in source code must also be used with another

program, called a “compiler” or "interpreter," which translates the

source code into binary instructions which the computer can

miiese es oe Daniel J. Fetterman, The Scope Of Copynant

v, Symposium Number 36, 1, 7-8 (1990)

(hereinafter ; Benin at Gooialens Protections, Similarly, assembly

language must be translated into machine language through the

use of an "assembler" program. The compiling or assembling

process results in “object code” which can be used as 2 library or

“object module.” See Lotus, 740 F. Supp. at 44.

11. “Linking” is the process of combining all of the parts of the

computer program into the “executable” code which runs -the

program.

12. Data is a collection of information, which is used by the

computer program. It is generally formatted into files, which are

stored on either the hard disc of the PC or on a floppy diskette.

Data can include text and pictures.

13. Paint-and-draw computer programs enable the user to

create graphic images on a computer screen. In this case, Dragon

used paint-and-draw computer programs to create graphic images.

14. Graphic images drawn with a computer paint-and-draw

program can be stored as data and used in another computer

program, if that computer program has the ability to retrieve and

display the images.

Fiondella's Devel + of Vig

15. In January 1983, Fiondella developed a computer

graphics program for Softel known as Videogram 1.0. The paint

and-draw program was developed for use on a PC that was

equipped with a Plantronics board. A Plantronics board is a color

graphics card which expanded the range of colors on a PC from

four to sixteen.

16. Videogram 1.0 allowed the user to create graphic images

using a keyboard as the input device. The user could store the

image in the computer's memory for later use.

17. In 1983, Fiondella began working on a new product, called

Videogram 2.0, which enabled the user to create graphic images

using a pen and tablet as the input device. Videogram 2.0 did not

permit the user to incorporate images drawn with it into software it

was writing. Softel later produced a utility program that performed

this function.

18. Plaintiff obtained a Certificate of Registration of Copyright

for Videogram 2.0, No. TX 2-045-304 on April 29, 1983. This

19. In 1984, Fiondella began working on Videogram 3.0, an

updated version of Videogram 2.0, to take advantage of IBM's

Enhanced Graphics Adaptor ("EGA card"], which had greater

Capabilities than the Plantronics board. Softel released Videogram

3.0 in the Fall of 1985.

- ‘s Initial Contacts with Softel

20. In 1984, Pfizer Laboratories ["Pfizer") hired Dragon to

produce a program which later became known as Heartlab. The

program was based on the results of recent coronary research.

21. In November 1984, Darsee learned of the Videogram

product in an IBM catalogue. He called Fiondella to find out

whether Darsee could create bar charts using Videogram. Fiondelia

recommended that Darsee purchase Videogram 2.0. Darsee

purchased Videogram 2.0, but was unable to obtain a Plantronics

graphic card which was needed to operate Videogram 2.0. Softel

sold Darsee a Plantronics card and Fiondella delivered it to Darsee

in December 1984 at Dragon's place of business.

22. Fiondella delivered the Plantronics card personally in

order to determine whether there were any business opportunities

for his company at Dragon. In particular, he thought that Dragon

might be interested in acting as a distributor for Softel products.

23. Fiondella and Darsee dispute the substance of their

conversation during their initial meeting. Fiondella testified that

Darsee told him that Dragon expected to produce a series of

interactive videodisc projects. Fiondella stated that he informed

Darsee that Softel could create an “authoring language” that would

enable Dragon to produce interactive computer programs simply by

preparing graphic and text files, and any videodisc presentations.

He told Darsee that the authoring language would be comprised of

simple English language words in a text file. He further testified that

he explained to Darsee that the advantage of an authoring

language was that it could be used in subsequent projects without

re-writing the computer code. According to Fiondella, Darsee

showed great interest in his suggestions and the parties discussed

forming a joint venture to market such an authoring language.

Darsee denied discussing whether Dragon would be interested in

Softel's production of an authoring language or the formation of any

joint venture.

24. The Court finds Fiondella's testimony on this issue

credible. Fiondella was an aggressive small businessman who was

actively looking for business opportunities for his company Softel.

It is not surprising that upon learning the Dragon had been hired to

produce several interactive projects, he told Darsee that he could

write computer code in a manner that would make it easier for

Dragon to produce the interactive programs. This is the first time

that Fiondella met Darsee and it is clear that he was interested in

marketing his capabilities in the hope that Dragon would hire him.

25. Darsee asked Fiondella to produce a simulation of a

beating heart for inclusion in the Heartiab project.

The Azactam Program

26. In January 1985, E.R. Squibb & Sons, Inc. hired Dragon

to create an interactive videotape program to train its

pharmaceutical sales representatives about a new antibiotic called

Azactam. The program became known as Azactam.

27. Chris Bazelgette, an employee of Dragon U.K., wrote the

computer code for the program pursuant to Darsee’s instructions.

Since Dragon intended to use graphic images created with

Videogram 2.0 in Azactam, Dragon hired Fiondella to write code

that would display graphic images created by Videogram in

Azactam | (the "image retrieval routines”).

28. Fiondella agreed to write the code, but he did not provide

Dragon with the source code for retrieving and displaying

Videogram created graphic images. instead, he insisted that

Bazelgette provide him with Bazelgette’s source code. Fiondella

then integrated the two codes to produce the "executable"--the code

in its final form.

29. Bazelgette's source code shows the use of external

command files and text files. Fiondella asserts that it was his

decision to use extemal command files and text files in the Azactam

project, and not Darsee's or Bazeigette’s. Fiondella's claim is wholly

unsupported. There is no basis for inferring that Darsee instructed

Bazelgette how to write the computer code based on an informal

conversation he had with Fiondella over a year ago. Rather, the

evidence shows that despite his initial conversation with Fiondella,

Darsee was interested in Fiondella's work and ideas for one limited

purpose--to enable Dragon to retrieve and display Videogram

created images.

30. Softel charged Dragon a fee for his services in writing the

code to retrieve the Videogram created images which was fully paid.

31. Fiondella embedded a copyright notice in Softel's portion

of the Azactam source code and in the executable delivered to

Dragon.

The Melanoma Program

32. In October 1984, before Dragon became acquainted with

the Videogram program, Dragon and Roche Laboratories ("Roche")

tentatively agreed that Dragon would develop at least three

videodisc programs called Melanoma, Kaposi Sarcoma ("Kaposi"]

and Hairy Cell Leukemia.

33. Darsee prepared a proposal containing a broad outline for

the videodisc series and submitted it to Roche on November 15,

1984 (the "November 15 proposal]. The proposed program

simulated a doctor's work-up of a patient suffering from a suspected

cancer. The proposal suggested that the physician user be able to

control the course of the program with a touchscreen, rather than

utilize a rigid predetermined structure. Darsee suggested that the

program comprise several levels of information which the physician-

user could travel between. He also planned © place different

categories of information on each level.

34. Roche approved Dragon's proposal in December 1984.

35. Darsee then met with Dr. Kirkwood, the medical consultant

on the project. After speaking with Dr. Kirkwood, he began

preparing a detailed design document for the program [the

"Melanoma Design Document’.

36. The Melanoma Design Document explains that the

program consists of a hierarchical series of menus from which the

physician-user can make simulated medical decisions in the workup

of one of four patients. The Melanoma Design Document provides

an example of the program flow and drawings of the proposed

menus. First, after selecting a patient, the user is presented with a

touchscreen menu entitied "Hospital Rounds” which contains

categories relating to the evaluation of the patient such as history,

physical examination, x-rays, and other diagnostic choices. If

“history” is selected, then the history sub-menu is generated, which

contains categories relating to the patient's past, present, and family

history, as well as other categories conceming a patient's

background. A video segment or text screen discusses the selected

topic. The user then returns to the history sub-menu to make

another choice, or the user may retum to the Hospital Rounds menu

to make another selection.

37. Darsee completed the Melanoma Design Document on

March 4, 1985, and sent it to Roche for its approval on this date.

Roche approved the melanoma Design Document on or about

March 10-12. Fiondella never saw the Melanoma Design Document

while Darsee was preparing it and he did not help Darsee write the

document.

38. Fiondella claims that it was his idea to structure the

program using hierarchical menus. In support of his assertion, he

testified that during the initial production meeting with regard to the

Melanoma project he suggested that the program use hierarchical

menus and external files. He further testified that after the

production meeting he spoke to Darsee in greater detail about the

design of menus and choices. Fiondella also testified that Hugh

Osbome, a videodisc consultant was present at the meeting and

that he also made suggestions conceming the structure of the

program. Thus, Fiondella postulates that the production meeting

occurred before Darsee submitted the Melanoma Design Document

to Roche and that Darsee adopted Fiondella's idea to design the

program using a hierarchical system of menus.

39. There is insufficient evidence to support Fiondella’s claim

that it was Fiondella's idea to use a system of menus and choices

in the Melanoma Design Document and not Darsee's. It is

undisputed that Darsee prepared the initial November 15 proposal.

Both the preliminary proposal and the Melanoma Design Document

describe the conceptual framework of the program as comprising

several levels. In both proposals, the user controls the flow of the

program and has the ability to move from one level to another. The

main difference between the two proposals is that the Melanoma

Design Document is much more detailed than the original proposal

and it contains the substantive medical information in each choice

on each menu. While the Melanoma Design Document uses

different terminology than the original proposal to refer to different

levels and categories of information, the concepts contained in both

documents are the same. Fiondelia's testimony is the only evidence

that Dragon or Darsee was interested in Fiondella’s expertise

outside of his ability to write specific portions of computer code. If

Darsee was interested in Fiondella’s suggestions insofar as they

related to the overall structure and design of the program, it stands

to reason that Darsee would have arranged formal meetings with

Fiondella. According to Fiondella's testimony, however, Fiondella

made his suggestions spontaneously during a preliminary

production meeting. Moreover, the Melanoma Design Document is

a highly detailed document and it is unlikely that Darsee would have

been able to utilize Fiondella's ideas without any further discussion

with him. The Court finds that Fiondella's claim that he was

responsible for the incorporation of menus in the Melanoma Design

Document is purely speculative.

40. The Melanoma project utilized a touchscreen, graphic

designs and a video presentation. Dragon engaged Fiondelia to

write computer code which controlled the operation of the

touchscreen and videodisc player.

41. Dragon provided Fiondella with manuals from the

hardware manufacturer to help Fiondella write the code necessary

to operate the videodisc player and touchscreen. Fiondella wrote

this code in modules. A module is a relatively short sequence of

instructions which performs a specific subtask in the computer

eee See Note, ey yyy eee

- 88 Mich, L. Rev. 866, 871 (1990) [hereinafter

42. Dragon also retained Fiondelia to write computer code to

retrieve and display graphic images drawn by Dragon artists with

Videogram 2.0.

43. Several other persons worked on the project. Nina

Romanoff was responsible for the videotape segments; graphic

artists were responsible for creating graphics and medical

illustrations; and Darsee was responsible for writing the medical text

for the program. Darsee was also the project manager.

44. Softel billed Dragon for Fiondella's work on a per diem

basis. When Fiondella finished his work, he gave Dragon the

computer code in its executable form, and did not deliver his source

code for the program.

45. Softel did not deliver a license for the program and the

invoices do not make any reference to a license with respect to

further use of Softel's computer code. Softel, however, imbedded

a copyright notice into the code of the program.

46. The Melanoma program was completed in May 1985.

The K iP

47. The Kaposi program was the second videodisc project in

the Roche Cancer Management series. Like Melanoma, Kaposi

was an interactive program with videodisc segments. It also utilized

the same hardware as Melanoma, and it incorporated graphic

images drawn with Videogram 2.0. The program was also designed

to simulate a physician's work-up of a patient.

48. Kaposi was completed in June 1985. Fiondella used

computer code he had written in connection with Melanoma for the

operation of the touchscreen, the videodisc player, and to retrieve

and display Videogram images in Kaposi.

49. Darsee discussed programming issues with F iondelia in

connection with his work in both Melanoma and Kaposi. Some of

Darsee's suggestions were technical and concemed changes in the

flow and operation of the program.

50. Fiondella wrote the Kaposi code making use of (1) an

external file structure; (2) English language commands; (3)

functional modules, particularly with respect to operating the

hardware; and (4) a hierarchical series of menus and a

touchscreen.

51. When Fiondella finished his work, he delivered the

computer code in its executable form to Dragon, and retained the

source code. He did not deliver a license, nor did he refer to a

license on any of his invoices. However, he imbedded a license into

the computer code.

June 12 Meeting

52. On June 12, 1985, Fiondella met with Hodge to discuss a

proposed contract between Fiondella and Dragon. The proposed

contract set forth Softel’s fees for computer code written by Softel

in future videodisc projects produced by Dragon. The proposed

agreement also contained a provision that Softel retained ownership

of any computer programs delivered under the agreement.

53. Hodge did not discuss any of the specific provisions

contained in Fiondella's proposed contract with Fiondella. He

thought that Fiondella's proposal was premature and he chose not

to undertake any serious consideration of the proposed contract at

this time.

Access to Computer Code

54. At about the time that Kaposi was completed, Dragon

sought Fiondella's assistance with respect to another program it

was working on, called Sorbinil. Dragon had hired a free-lance

computer programmer, Nixy Kontemporur, to write the computer

code for the Sorbinil project. Dragon, however, intended to use

graphic images drawn with Videogram 2.0 in the program.

Consequently, Dragon hired Fiondella to integrate the computer

routines needed to retrieve and display ideogram images into the

Sorbinil code.

55. To integrate the routines, Fiondella took the image

retrieval routines and a library of assembly language routines, which

he kept on a transfer disc, to a computer located in the back room

of Dragon's premises. He transferred the. code into a special

directory on the hard disc of Dragon's computer. He then took a

disc from Kontemporur and copied it onto another directory on the

hard drive. He linked the two codes together to produce the

executable code which he turned over to Kontemporur. When he

was finished, he deleted all of the files from the hard drive.

56. On June 10, Softel sent Dragon an invoice which referred

to a license for Fiondella's work. The invoice stated in pertinent part

Certain proprietary software routines developed by Softei

Inc. have been included in the Sorbinil application

developed for Dragon by a third party. The inclusion of

Softel Is routines for use in this single application is .

authorized upon payment of the licensing fee below. It is

understood by Dragon that any subsequent use of these

routines in other applications by Dragon or its clients and

or the sale or resale of the Sorbinil application by Dragon

or its clients to other parties will involve an additional

usage fee. |

Plaintiff's Exhibit 63

57. Several problems with the computer program arose as the

deadline for the completion of the Sorbinil project drew near. On :

June 12, 1985, Hodge called Fiondella and asked him to reintegrate |

the graphic image retrieval routines. Fiondella was out of town, but :

his friend Nicholas Lorimer agreed to help him. Lorimer went to |

Dragon's premises and Fiondella explained to him the process of

integrating Softel code with the Sorbinil code over the phone.

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58. The problems with the computer program continued,

however, and Fiondella went to Dragon's premises when he

retumed to New York on June 17. Fiondella and Kontemporur

became engaged in an heated argument over whose code was

causing the problems with the program. Fiondella testified that

Kontemporur asked Fiondella to tum his Softel code over to

Kontemporur so that Kontemporur could re-integrate the routines

without asking for Fiondella assistance. Fiondella testified that

when he refused to give his code to Kontemporur, Kontemporur

permission. Fiondelia quite agitated over Kontemporur's

threat to obtain his code. Hodge was present during the

confrontation. He decided that Fiondella had behaved

unprofessionaily during the vociferous exchange with Kontemporur

and that Fiondella could no longer work at Dragon.

59. Defendants argue that Kontemporur's statement that he

had the ability to retrieve Softel's code be stricken as hearsay. At

trial, the statement was received into evidence under Rule

801(d)(2)(D) of the Federal Rules of Evidence, subject to a

demonstration that Kontemporur was Dragon's agent. It is

undisputed that Dragon hired Kontemporur to work on the Sorbinil

project on a free-lance basis and that Kontemporur's statement was

made while he was working on Sorbinil. To complete the Sorbinil

of his employment. Defendants’ contention that Kontemporur was

unauthorized to make the statement is unavailing. The Advisory

Committee Notes to Rule 801(d) (2) (D) make clear that it is

unnecessary to show that the declarant was authorized to make the

statement. Given that Kontemporur's statement was made in the

scope of his employment and in furtherance of his employment, the

Court finds that the statement is admissible under Rule 801(d) (2)

(D) of the Federal Rules of Evidence.

60. Fiondella eventually succeeded in linking the final

executable Sorbinil code with his code. He completed his work at

approximately 1:00 a.m. on June 18, 1985. He testified that before

he left Dragon's premises he erased all of his source code from

Dragon's computer.

61.Darsee was in Stockholm, Sweden, during the dispute

between Kontemporur and Fiondella.

62.When Darsee retumed from Sweden he gained access to

All

the source code that Fiondella used in Sorbinil. The code he found

had also been used in Kaposi.

63. Darsee claims that he found the code inadvertently.

Darsee testified that the computer which Fiondella had been using

in connection with the Sorbinil project had “crashed.” He stated that

he inspected the computer and found a problem with the hard disk

of the computer. He determined that the hard disk had to be sent

out of the office for repairs. Darsee testified that he copied all of the

files that were presently on the hard drive onto floppy diskettes to

preserve them. When the hard disc was returned to Dragon's

premises, Darsee testified that he transferred the files from the

floppy diskettes back onto the hard drive of the computer. in doing

so, he examined the directories of the files on the floppy diskettes.

He stated that he discovered the source code for the Kaposi

program as well as certain object modules containing the library of

assembly language routines. He denied using any utility program

which would permit him to gain access to files that had been

previously erased.

64. In support of its contention that Darsee inadvertently

discovered Softel’s code, defendants suggest that Lorimer could

have left the Softel code on the hard drive of the computer when he

was linking the two codes.

65. Darsee’s explanation as to how he obtained plaintiff's

code cannot be reconciled with the other credible evidence. While

itis possible that Lorimer accidentally left the code on defendants’

computer, defendants ignore that Fiondella subsequently worked on

the program. Fiondella testified that he erased the code when he

completed the Sorbinil program early on June 18 and his erasure

would have erased any code that Lorimer accidentally left on the

computer. Given the protective measures that Fiondella took to

keep his code from defendants, it is highly implausible that

Fiondella forgot to erase the code from the hard drive of Dragon's

computer. In addition, Fiondella's testimony on this issue was

particularly compelling and believable. On the other hand, Darsee's

explanation appeared manufactured. Moreover, the evidence that

Nixy Kontemporur could retrieve the routines by deleting Fiondella's

erasures indicates that Dragon had the means of obtaining plaintiff's

code. In sum, the Court finds that the weight of the credible

evidence indicates that Dragon deliberately gained access to

plaintiff's code.

66. After Fiondella finished working on Sorbinil, Darsee made

certain corrections to the program at the request of Rob Johnston,

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the project manager for Sorbinil. The Court finds that there is

insufficient evidence to support plaintiff's claim that Darsee deleted

the copyright notice that Fiondella had placed in the Sorbinil code.

gation Programs: Hairy Cell Roche. Back-paiN o Mesivch

A. Hairy Cell Roche

67. On or about June 27, 1985, Dragon agreed to produce the

third videodisc program in the Roche Cancer Management series,

entitled Hairy Cell Leukemia. Roche requested that Dragon

produce two versions of the project-one called Hairy Cell U.S.,

which was to be used with United States hardware, and the other

called Hairy Cell Europe, which was to be used with European

hardware. Dragon submitted a design proposal to Roche which

was approved in October 1985. Thereafter, Dragon submitted a

detailed outline of the program. 68. In January 1986, before the

program was finalized, Roche asked Dragon to prepare a program

for preliminary review in Zurich, Switzerland. Dragon decided to

present a version of Hairy Cell U.S. because Roche had United

States equipment in Zurich at this time. After he presented the

program, Darsee received suggested modifications to the program.

69. Darsee then compiled a new version of Hairy Cail U. S.

which incorporated some of the changes suggested at the Zurich

meeting. Darsee transmitted this version of the program to

representatives of Roche's European subsidiaries at their request

on March 10, 1986. This program is known as "Hairy Cell Roche."

Darsee testified that he did not retain the source code for Hairy Cell

Roche because Dragon considered it an interim program.

70. Darsee admitted that he used the code he obtained from

Dragon's computer to retrieve and display graphic images in Hairy

Cell Roche.

71. After Hairy Cell Roche was delivered, Darsee testified that

he made several more changes to the program. He testified that he

changed the storage of the graphic files from a compressed format

to an uncompressed format. By changing the storage of the

graphic files, Darsee was able to use BLOAD, a command in Basic

language, to retrieve and display Videogram created images on a

computer with a Plantronics board. Thus, the latest version of Hairy

Cell U.S. does not contain any of Fiondella’s image retrieval

routines. This version was delivered to Roche in June 1986.

72. Dragon's claim that the June 1986 version of Hairy Cell

U.S. was the final version of the program is against the weight of

the evidence. Plaintiff introduced evidence that at an International

Al3

m2 eee

Interactive Communications Society (“IICS"] meeting on November

12, 1986 in New York, Darsee demonstrated Hairy Cell Roche-—the

version which Dragon distributed on March 10, 1986. Plaintiff aiso

introduced into evidence a letter which Dragon sent to Roche’s

offices in New Jersey which indicated that the Hairy Cell Roche

program was the completed version of the program. in light of the

evidence, the Court finds that the Hairy Cell Roche program, which

was delivered on March 10, 1986, was the final version of the Hairy

Cell program intended for use with United States hardware.

73. Hairy Cell Europe does not contain any of piaintiff's image

retrieval routines. Due to changes in the hardware, Darsee

converted the graphic images used in Hairy Cell Roche to the "Halo"

format. Halo is a commercial programming environment, including

@ paint-and-draw program, with many commands relating to control

of the graphic screen. In the Halo format, the command GREAD

performs the function of displaying a graphic image on the screen.

B. Low Back Pain

74. In March 1986, Pfizer engaged Dragon to produce a

program entitied “Low Back Pain.” The program was completed on

May 23, 1986. The program contained several program modules,

one of which was the Backpain Expert Module. This program allows

the user to select different patient characteristics from a series of

menus. The program then compares the selected characteristics

with possible ailments and provides a statistical analysis of the

relative likelihood that the patient is suffering from each possible

diagnosis. Both Low Back Pain and the Backpain Expert Module

use graphic images drawn with Videogram 2.0. Since the graphic

images were in the compressed format, code was needed to

decompress and display the images on the screen. As with Hairy

Cell Roche, Darsee used Softel's image retrieval routines to

accomplish this task.

C. Heartlab

75. Dragon produced an interactive program called Heartiab

for Pfizer on March 2, 1986. Darsee wrote all of the computer code

for Heartiab, except for the code which govemed the animation of

a beating heart and the image retrieval routines. In May 1985,

Darsee had asked Fiondella to insert into Darsee's code the

routines for displaying Videogram images and to insert a routine for

simulation of a beating heart. Fiondella inserted these routines and

delivered the computer code to Dragon in executable form.

Fiondella was paid for this work.

Al4

76. in September 1985, Darsee asked Fiondella to modify the

animation routines so that the heart would beat more rapidly.

Fiondella told Darsee that he was too busy to work on the project

and suggested that Darsee do it himself. Darsee made the

changes using the image retrieval routines which he had obtained

from Dragon's computer.

77. 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 (4 pages) (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 (61 pages); and (3) source code for the Kaposi computer

program (36 pages). Plaintiff was granted a Certificate of

Collection, effective May 22, 1986.

LN A RY FE CE st 4 CARI

78. Defendants admit that the image retrieval routines were

used in Hairy Cell Roche, Low Back Pain and Heartlab.

Defendants’ expert, John Cain, 1 confirmed that these programs

utilized these routines.

| A. Paintbox

i 79. In late 1985, Darsee began working on a computer

graphics paint-and-draw program, known as Paintbox, which

: contained additional features that were unavailable from Videogram

2.0. The program was to be made available to graphic artists

; working for Dragon and was not intended for commercial

distribution.

80. Paintbox evolved over time. The earliest versions of

Paintbox included the image retrieval routines used to retrieve

Videogram 2.0 images. Thereafter, Darsee made changes to the

: program and in its final form Paintbox no longer incorporated the

; image retrieval routines.

| 81. In 1986, Darsee contacted the Kurta Corporation ("Kurta’),

because he was interested in obtaining one or two drawing tablets

at a reduced price for use with Paintbox by Dragon artists. Darsee

Al15

ean veers rec

testified that as Dragon was not a typical end user of the product,

he inquired whether he could obtain the products at a reduced

price. Darsee testified that he was told to write a’ letter to the

company describing Dragon's business.

82. The letter which Dragon sent to Kurta stated in pertinent

part as follows:

If the kind of work we are doing is of interest to you,

particularly with respect to some kind of co-marketing

strategy, it might be worthwhile for us to meet with you and

demonstrate these programs. This could happen either in

New York, Phoenix, or at some meeting where both

companies might be present.

83. In his letter, Darsee described the Hairy Cell Roche and

Low Back Pain programs and stated that these programs “could be

priced high enough to make money.”

84. Darsee denied that he attempted to sell Paintbox to Kurta

and to co-market the product. Darsee testified that he used the

term “co-market’ because he believed this was the term that Kurta

used when referring to a company that was entitled to a discount.

85. Darsee's claim that he was not seeking any type of co-

marketing relationship with Kurta is unbelievable. His letter plainly

discusses a co-marketing relationship with Kurta and there is no

evidence to support his claim that the term "co-marketing” had any

meaning other-than its plain meaning. Darsee's claim that the he

was merely seeking a price discount from Kurta is completely belied

by his own letter. In any event, Kurta never entered into

negotiations with Dragon conceming Paintbox or any other Dragon

program.

86. Fiondella testified that at the time Dragon was negotiating

with Kurta, Fiondella was also negotiating with Kurta to co-market

the newest version of Softel’s Videogram software. Plaintiff asserts

that Dragon's letter to Kurta ended the Kurta Softel negotiations

because Kurta did not want to become involved in litigation. No

evidence was introduced to support plaintiff's claim.

B. Body Demo

87. Body Demo is a computer program consisting of a

collection of graphic images of the human anatomy created for

intemai use to assist Dragon's artists. Dragon compiled the images

in Body Demo from prior interactive projects it had produced in

order to create a graphic library of the human body's organ

Al6

systems. Many of the images were drawn using Videogram 2.0.

88. Body Dero was never distributed outside of Dragon.

Dragon Expert Systems

89. The Expert Module is one of the five modules constituting

the Hairy Cell Roche program. It is present in Hairy Cell Roche,

Hairy Cell Europe, and in the Expert Module of Low Back Pain. The

Expert Module instructs the user to select various patient

characteristics on several different menus. Each menu in the

Expert Module contains a selection entitled "How Close to

Diagnosis." This selection compares all of the characteristics

selected with a list of weighted characteristics for each type of

leukemia, and through the use of bar charts depicts the relative

probability that the patient is suffering from each particular strain of

leukemia.

90. Darsee wrote the computer code for these routines using

a programming device known as a two-dimensional array. Kaposi

does not utilize this feature.

91. Fiondella testified that he did not write the computer code

for these routines and admitted that there was no code similar to

these routines in Kaposi.

92. Darsee exhibited the Hairy Cell Roche Expert Module at

a forum of lICS on November 12, 1986 in New York. six companies,

including Dragon, made presentations at the forum. There were, at

most, 15-20 people present during Darsee's presentation.

93. During his presentation, Darsee explained how the Expert

Module worked and described the process by which the program

matched the disease characteristics selected by the user with the

list of weighted characteristics of the subject diseases. Darsee did

not mention Fiondella or Softel in connection with the program.

94. None of the persons present at the meeting requested

that Dragon create a similar expert system for them or expressed an

interest in obtaining a license for use of Dragon's computer code for

this program.

95.In the Fall of 1985, Dragon began using the name “Dragon

Expert Systems" as a marketing device to bring attention to its

capabilities in the field of interactive technology. The term was

intended to refer to Dragon's ability to create expert systems, but

was not intended to limit its capabilities to this area.

96. Dragon sponsored a hospitality suite at a conference of

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the American Association of Family Practitioners on October 911 in

Anaheim, California. in connection with its presentation, Hodge

sent letters to prospective clients which described Dragon Expert

Systems as follows:

Recently, as a result of Dragon's application of medical-

marketing communication skills in the field of interactive

technologies, we have expanded--and can now offer a

specialized service known as DRAGON EXPERT SYSTEMS.

EXPERT SYSTEMS is a group of physicians, artists whose

medium is computer-generated imaging, and computer

programmers, who use the interactive technologies as

educational and marketing tools.

Plaintiff's Exhibit 160.

97. In a November 1, 1985 press release Dragon again

described Dragon Expert Systems as a group of "physicians,

computer graphic artists and programmers, who use interactive

technologies as educational and marketing tools." The press

announcement also stated that "computer technology, presentation

video/graphics, and solid, well-researched information are the

foundations of our work."

98. No evidence was presented to show that Dragon obtained

any sales or business leads from either the conference or the press

release.

99. On January 2, 1986, in connection with an upcoming

presentation to J.C. Penny, Nina Romanoff stated that Dragon

would be demonstrating the kind of “innovative, interactive

programming that Dragon Expert Systems is currently designing

and producing."

100. On January 4, 1986, Dragon submitted a proposal for an

interactive educational program to Bames-Hind. Dragon

represented that the computer program codes and routines were its

own property and granted Barnes-Hind a license for use in the

Bames-Hind Interactive Education program.

Post-Litigation P

101. In 1988, Dragon produced the following programs: (1)

Unasyn for Pfizer, (2) Hospital Microbiologist's Computer Module-An

Interactive Program in Support of Unasyn IM/IV ("Micro"] for Pfizer,

(3) OB/GYN for Pfizer; (4) Managed Health Care for CIBA-Geigy;

and (5) Heart Command for Smith Kline French [collectively, the

“post-litigation programs".

A18

102. Each of these programs utilize either the EGA or VGA

graphics cards, which are more advanced than the Plantronics

graphics card. The EGA and VGA graphics cards have the

capability of displaying graphic images of photographic quality.

103. Videogram 2.0 had been designed for use with a

Plantronics graphics card. As a result of Dragon's decision to use

the EGA or VGA graphics card, Dragon no longer used images

drawn with Videogram 2.0. Thus, there was no need for the image

retrieval routines or related assembly language routines. Instead,

in the post-litigation programs the graphics files are stored in the

Halo format, and are retrieved and displayed using the standard

Halo GREAD command.

104. Dragon also eliminated the use of videodiscs in its

interactive presentation. There was, therefore, no need for the

routines which controlled and operated the videodisc player.

405. Unlike Heartlab, Hairy Cell Roche and Low Back Pain

which were written in Basic programming language, the post-

litigation programs are written in QuickBASIC, which is an advanced

406.There is no literal similarity between the code contained

in the Copyright Collection and the post-litigation programs.

Non-Literal Similarity between ht Collect the Post-Litigation Programs and the

107. Plaintiff contends that in the Melanoma and Kaposi

programs, Fiondella made several programming decisions which he

included in the Copyright Collection. Plaintiff argues that these

elements constitute the structure, sequence and organization of his

copyrighted work and that Dragon's post-litigation programs are

infringing because they contain these elements. The elements

which plaintiff claims are entitled to copyright protection are the use

of the following:

(1) an external file structure;

(2) English language commands;

(3) functional modules, specifically including those to operate

the hardware; and

(4) a hierarchical series of menus with a touchscreen.

Al9

1. Extemal Files

108. Cain's undisputed testimony established that the use of

external data files for, inter alia, picture files and text files is a

common feature in interactive computer programs. In these types

of programs there is generally an extensive amount of information

to be organized and extemal files are the most practical method of

storing the data.

109. The Court finds Darsee's testimony that he learned of

the use of external files when he worked with Chris Bazelgette on

the Azactam project credible. The code prepared by Bazelgette for

Azactam shows the use of an external file structure.

2. English Language Commands

110. Cain's unrebutted testimony also established that writing

a computer program using English-language commands was

common, as it was easier than using other symbols. In response to

plaintiff's inference at trial that the insertion of a space between

letters was unique, Cain testified that while this was less common

he had seen code written in this manner. The court finds Cain's

testimony in this regard credible.

3. Functional Modules

111. Fiondella. testified that a distinctive feature of Melanoma

and Kaposi was that these programs were constructed in modules

around particular functions. The Court, however, agrees with Cain's

credible testimony that the organization of code into modules

relating to particular functions is a common programming technique.

Cain testified that the functional modules which plaintiff

claimed were an element of the structure and organization of

Kaposi were related to the hardware-j,e., the videodisc player, and

the touchscreen. Cain examined sample computer code provided

by the manufacturers of the videodisc controller and touchscreen

and found that like the computer code in Melanoma and Kaposi, the

sample code was also organized into modules relating to particular

videodisc and touchscreen functions.

4. Hierarchy of Menus and Touchscreen

112. As to the use of a hierarchy of menus and a

. touchscreen, Cain's testimony established that a touchscreen is a

user-friendly input device commonly used in interactive programs.

He also testified that the use of menus was also a user-friendly

device commonly used in conjunction with a touchscreen. He

further stated that the use of a hierarchy of menus in an interactive

A20

program, implemented with a touchscreen is pervasive.

113. Fiondella testified that Dragon copied Softel’s method

and manner by which the computer receives, assembles, retrieves

and communicates data. Cain testified that when a touchscreen. is

used a certain code is necessary to get a touchpoint, to interpret the

touchpoint as a command and to execute the command. Based on

Cain's expert testimony, the Court finds that Dragon did not copy

the method used in Kaposi to operate the touchscreen.

5. Differences in Computer Code

114. Plaintiff's claim that Cain admitted that all of the post-

litigation programs evolved from Softel’s computer code in the

Kaposi program is unsupported by the trial record. To the contrary,

Cain's detailed testimony established that the post litigation

programs were significantly different from Kaposi in the following

respects: (1) code; (2) command sets and processing of commands;

(3) internal file structure; (4) processing of files; (5) command file

interaction structure; and (6) organization of and relationship

between modules of code.

415. Based on a thorough analysis of the computer code in

plaintiff's copyrighted work and defendants’ post-litigation programs,

Cain concluded that in his expert opinion defendants’ programs and

plaintiff's copyrighted work did not have the same structure. The

Court found Cain to be an extremely knowledgeable and credible

witness, and based on his expert opinion the Court finds that the

post-litigation programs were not in any way derived from plaintiff's

copyrighted work.

CONCLUSIONS OF LAW

t Cocmaetnaeld )

1. To prevail on a claim of copyright infringement, the plaintiff

must show that he owns a valid copyright and that defendants

impermissibly copied his copyrighted work. See Weissman v.

Freeman, 868 F.2d 1313, 1318 (2d Cir.), cert. denied, 493 U.S. 883

(1989); Novelty Textile Mills, Inc. v. Joan Fabrics Corp., 558 F.2d

1090, 1092 (2d Cir. 1977). In this case, plaintiff asserts two types

of infringement. The first claim concems the programs Hairy Cell

Roche, Low Back Pain, and Heartlab. Plaintiff claims that these

programs copy the literal computer code contained in the Copyright

Collection. The second claim addresses the post-litigation

programs. Plaintiff asserts that the post-litigation programs copy the

"structure and organization" of the Kaposi computer program.

A21

A. Joint Author

2. Defendants first contend that the Darsee is a joint author of

the Kaposi program. in the altemative, defendants argue that

Darsee is a joint author of the source code for Kaposi.

by Nina Romanoff and computer code written by Fiondelia. Since

Fiondella knew of the contributions others were making to the

Kaposi program, defendants argue that under Edward B. Marks

See id. at 267. The Second Circuit hold that since both persons

knew that their individual efforts were being combined to produce

one single work, the parties intended to create a joint work. See id.

5. Defendants’ reliance on Marks is misplaced. From the

outset of his dealings with Dragon, Fiondelia consistently refused to

turn over his source code to Dragon. In light of his conduct, it is

unreasonable to infer that Fiondella intended his work to merge into

to establish that Fiondella intended his contribution at the time i

was created “to become part of a unitary work to which another will

make or already has made a contribution.” Weissman, 868 F.2d at

6. Defendants next argue that given Darsee's contributions to

the computer code, the computer code itself is a joint work.

Contrary to defendants’ contention, the Melanoma Design

Document fails to indicate that Darsee contributed to the writing of

A22

Pe ae ee -

Ce Te ten Cine! pict

document is insufficient to render him a joint author of the computer

code.

7. Darsee's notes also fail to indicate a level of participation

sufficient to render Darsee a contributor to the computer code. The

notes merely contain Darsee's suggestions or they bring certain

errors to Fiondella's attention. In Whelan Assocs. v. Jasiow Dental

Lab., 609 F. Supp. 1307, 1318-19 (E.D. Pa. 1985), affd, 797 F.2d

1222 (3d Cir. 1986), cert, denied, 479 U.S. 1031 (1987), the district

court rejected a claim of joint authorship under similar

circumstances. in Whelan, defendant argued that he was a co-

author of computer code written by plaintiff because he conceived

the idea of developing the particular computer program, he

explained to plaintiff what the computer program was supposed to

do, and he helped the plaintiff design the language and format of

some of the screens which would appear as part of the computer

program. The district court found defendant's claim unpersuasive

given that it was plaintiff's “expertise and creativeness that designed

the methods by which raw information would be stored, held in

memory, collated, assembled, updated, incorporated and added to

the visual screens or included in print-outs, subject to recall." |d. at

1318.

The court compared defendant's contribution to that of an

owner who explains to an architect the type and functions of a

building the architect is to design for the owner. See id. at 1319. In

this situation, the owner is not a co-author of the drawings

regardiess of the extent of the owner's participation in offering ideas

and setting limitations. See id. Similarly, where the owner of a

computer program advises the computer programmer what he

wants the computer program to accomplish, the computer

programmer is the sole author of the source and object code and

the design of the system. See id. at 1318; S.O.S., Inc. v. Payday,

inc., 886 F.2d 1081, 1086-87 (9th Cir. 1989).

8. In this case, the overwhelming majority of the computer

code was written by Fiondella. Any actual programming decisions

Darsee may have made as evidenced by his notes are minimal in

relation to the extensive programming completed by Fiondella.

Although Darsee determined the flow of the program, “[t]Jo be an

author, one must supply more than mere direction or ideas: one

must ‘translate [ ] an idea into a fixed, tangible expression entitled

to copyright protection." S$.0.S., 886 F.2d at 1087 (quoting

Community for Creative Non-Violence v. Reid, 490 U.S. 730, 757)).

Given that Darsee did no more than advise Fiondella of the tasks

that the program was to accomplish, defendants’ claim of joint

A23

-——~—— — — ———

10. Defendants argue that its copying of plaintiff's image

retrieval routines in Hairy Cell Roche and Low Back Pain did not

violate federal copyright law because (1) the image retrieval

routines are not entitled to copyright protection; and (2) its use of

the image retrieval routines constituted a fair use.

merge and there is no copyrightable material." M. Kramer Mfg. Co.

v. Andrews, 783 F.2d 421, 436 (4th Cir. 1986). Thus, with respect

to computer programs the issue is whether a particular idea is

capable of being expressed in a different way. See Apple

Computer, Inc. v. Franklin Computer Corp. 714 F.2d 1240, 1253 (3d

Cir. 1983). If other programmers independently can create a

program which performs the same function using a different

expression then the program in issue is the expression of an idea

and is copyrightable. See id.

12. Defendants argue that the graphic image retrieval routines

which Fiondelia wrote to retrieve and display images created by

13. Defendants’ argument ignores Darsee’s testimony that he

used the BLOAD function in Basic language in Hairy Cell U.S. to

retrieve and display Videogram 2.0 created images on a Plantronics

A24

graphics card. No evidence was presented which would indicate

that Darsee had any difficulty in finding another means of retrieving

and displaying Videogram 2.0 created images. Rather, his

testimony indicated that the BLOAD function was readily available

to him. The only difference between the two methods of image

retrieval and display is that to use BLOAD Darsee stored the

Videogram images in an uncompressed format. This difference is

insignificant since both BLOAD and plaintiff's image retrieval

routines permit the display of Videogram 2.0 images on a

Plantronics graphics card. Thus, the Court finds that the image

retrieval routines do not merge into the expression of the idea and,

hence, are entitled to copyright protection.

2. Fair Use

14. Defendants next argue that their use of plaintiffs image

retrieval routines was a “fair use” under the Copyright Act. Fair use

is an affirmative defense to a claim of copyright infringement. The

fair use doctrine is an “equitable rule of reason.” Sony Corp. of

America v. Universal City Studios, 464 U.S. 417, 448 (1984). The

purpose of the doctrine is to "balance[] the exclusive right of

of information affecting areas of universal concer, such as art,

science, and industry.” Weissman, 868 F.2d at 1323 (quoting

Wainwright Secs. inc. v. Wail Street Transcript Corp., 558 F.2d 91,

94 (2d Cir. 1977), cert denied, 434 U.S. 1014 (1978)). Section 107

of the Copyright Act codifies the “fair use” doctrine. The section

articulates four non-exclusive factors which are to be considered in

deciding whether a particular use is fair.

(1) the purpose and character of the use, including whether

such use is of a commercial nature or is for nonprofit

educational purposes;

(2) the nature of the copyrighted work:

(3) the amount and substantiality of the portion used in

relation to.the copyrighted work as a whole; and

(4) the effect of the use upon the potential market for or value

of the copyrighted work.

17 U.S.C. § 107 (1988).

15. In this Circuit, “bad faith by the user of the copyrighted

material [that] suggests unfaimess," Maxtone-Graham v. Burtchaell,

803 F.2d 1253, 1264 (2d Cir. 1986), cert. denied, 481 U.S. 659

(1987), is another relevant consideration in the fair use analysis.

A25

See New Era Publications Int'l v. Carol Publishing Group, 904 F.2d

152, 160 (2d Cir.) , cert. denied, 111 S. Ct. 297 (1990). In

Weissman, the Second Circuit noted that "to make use of another's

in good faith." Weissman, 868 Fd. at 1313.

a. The Purpose and Character of the Use

16. In examining this factor, section 107 directs the court to

consider “whether the use is of a commercial nature or is for

nonprofit educational purposes.” Although the commercial use of

copyrighted material weighs against a finding of fair use, it is not

conclusive in the fair use inquiry. See Maxtone-Graham, 803 F.2d

at 1262. It is undisputed that Dragon used plaintiff's image retrieval

routines in programs which Dragon produced for pharmaceutical

companies for profit. Since the programs were produced solely for

profit, the first factor weighs against a finding of fair use.

b. The Nature of the Copyrighted Work

17. The nature of the work favors a finding of fair use, when

the copyrighted work is factual rather than creative. See Diamond

v. Am-Law Corp., 745 F.2d 142 (2d Cir. 1984). This factor

recognizes that because “the risk of restraining the free flow of

information is more significant with informational work, the scope of

permissible fair use is greater." Consumers Union of U.S.., Inc. v.

General Signal Corp., 724 F.2d 1044, 1049 (2d Cir. 1983), cert.

denied, 469 U.S. 823 (1984).

The image retrieval routines performed the specific function

of retrieving and displaying graphic images created with Videogram

2.0. Since the computer code Fiondella wrote performed a

necessary utilitarian function this factor weighs in favor of a finding

of fair use.

c. The/ : and Substantiality of the Portion Used

18. The third factor requires the Court to consider both "the

amount and substantiality of the portion used in relation to the

copyrighted work, not to the allegedly infringing work. See New Era

Publications, 904 F.2d at 158. A finding of fair use has been made

even where an entire copyrighted work has been utilized, see Sony

Corp. of America v. Universal City Studios, 464 U.S. 417 (1984) and

rejected when a fraction of the copyrighted work was utilized.

However, where the “heart” of the work is copied, this factor

generally weighs against a finding of fair use. See Harper & Row,

Publishers, Inc. v. Nation Enters., 471 U.S. 539, 565 (1985). Thus,

the court must balance both the quantitative and qualitative aspects

A26

of this component.

49. The image retrieval routines used by Dragon are only a

small percentage of the Copyright Collection. The use, however, is

qualitatively unfair. The:image ‘itrieval routines are a key part of

the Copyright Collection that perform a valuable function. If the

qualitatively important. See Pacific & Southem, Inc.

y. Duncan, 744 F.2d 1490, 1497 (lith Cir. 1984), cert. denied, 105

S. Ct 1867 (1985). The significance of the routines is

demonstrated by the value they have apart from the Copyright

Collection. Such routines are sold on the market as a supplement

specifically to write computer code which would enable Dragon to

incorporate Videogram 2.0 graphic images into its software

programs. This also indicates that the market value of the routines

is separate and apart from, the remainder of the Copyright

Collection. Given that the routines have a separate marketability,

this factor weighs against a finding of fair use.

d. Effect-on the Market

20. The final factor is the “effect of the use upon the potential

market for or value of the copyrighted work.” 17 U.S.C. § 107(4)

(1988). The factor “is undoubtedly the single most important

element of fair use.” Hamper & Row, 471 U.S. at 566.

that plaintiff lost potential customers as a result of defendants’ use

of its image retrieval routines. Rather, the evidence shows that with

the advent of the EGA card in 1985, Fiondella concentrated on

developing Videogram 3.0 which was capable of creating images

that could be displayed on an EGA card and abandoned his efforts

to market Videogram 2.0. Plaintiff's allegation that Dragon interfered

with plaintiff's business opportunity with Kurta is without merit as

plaintiff was marketing Videogram 3.0 which did not utilize

Videogram 2.0 images. There is also no evidence to support

plaintiff's claim that defendants’ incorporation of plaintiff's image

retrieval routines into its programs discouraged others from hiring

Fiondella to obtain its image retrieval routines. Given the lack of

evidence that Dragon's use of plaintiff's image retrieval routines

would affect the potential market for the copyrighted work, this

A27

factor weighs heavily in favor of fair use. See Maxtone-Graham, 803

F.2d at 1264.

22. The factual nature of the image retrieval routines together

with the lack of effect on the market for the routines is balanced

against the commercial nature of defendants’ use of significant

aspects of plaintiff's copyrighted work.

23. Turing to the issue of bad faith, Darsee admitted that

when he saw plaintiff's image retrieval routines on the computer he

Saw plaintiff Is copyright notice. The notice, however, did not

dissuade him from using the routines in other Dragon projects.

Darsee's justification for using Fiondelia's computer code is

not credible. Fiondelia agreed to remove his copyright notice from

the Azactam project only to accommodate Darsee and Dragon's

client. There is utterly no basis for believing that Fiondella’s assent

included a waiver of his rights in the computer code.

Darsee's explanation is also unbelievable given the

extraordinary lengths Fiondella went to protect the privacy of his

were problems in integrating the code. Indeed, Fiondella became

quite agitated and upset over Nixy Kontemporur’s threat to obtain

Fiondella's code when Fiondella refused to tum his code over to

Dragon.

Finally, there is no reasonable basis for Darsee’s belief that

Dragon's payment for Fiondella's work authorized him to utilize

Fiondella's code in other projects. The copyright notice that plaintiff

sent to Dragon with respect to the Sorbinil project explicitly stated

that Dragon did not have a license to use Softel’s routines in any

other programs for any other client. For the above reasons, the

Court finds that Darsee did not act in good faith when he utilized

plaintiff's image retrieval routines.

24. In this case, defendants’ lack of good faith in utilizing the

routines tips the balance of the factors against a finding of fair use.

Accordingly, plaintiff is entitled to recover on its claim of copyright

A28

iia

infringement with respect to defendants’ literal copying of plaintiff's

image retrieval routines in the programs Hairy Cell Roche and Low

Back Pain.

C. The Post-Litigation P - Non-Literal Similarit

25. Plaintiffs second copyright infringement claim asserts that

defendants’ post-litigation programs copy the structure, sequence

and organization of plaintiff's copyrighted work. The four elements

which plaintiff claims defendants impermissibly copied are:

(1) the use of extemal files;

(2) the use of English language commands;

(3) the organization of the code into functional modules; and

(4) the use of hierarchical menus with a touchscreen.

Plaintiff argues that the above elements comprise an “authoring

language which is protectable expression under the Third Circuit's

decision in Whelan Assocs. v. Jasiow Dental Lab., 797 F.2d 1222

(3d Cir. 1986), cert, denied, 439 U.S. 1031 (1987).

26. It is well established that the literal elements of a computer

program, ie., the source and object code, are copyrightable. See.

e.g.., Apple Computer v. Franklin Computer, 714 F.2d 1240, 1249

(3d Cir. 1988), cert, denied, 464 U.S. 1033 (1984). The Second

Circuit recently joined other courts which have held that copyright

protection extends to the nonliteral elements of a computer

program. See Computer Associates Int'l, Inc. v. Altai, Inc., slip op.

91-7893, 91-7935 (2d Cir. June 1992). Courts, however, have

differed with respect to the scope of such copyright protection. In

Whelan, the Third Circuit found that "the purpose or function of a

utilitarian work would be the work's idea, and everything that is not

necessary to that purpose or function would be part of the

expression of the idea.” Whelan, 797 F.2d at 1236. Plaintiff argues

that because defendants could have produced an interactive

program which conveys medical information without using

hierarchical menus, functional modules, extemal files, or English

language commands, these elements are not necessary to the

expression of the idea and, therefore, are entitled to copyright

protection.

27. Judge Pratt, sitting by designation, rejected the Whelan

rule in Computer Assocs. Intl, Inc. v. Altai, Inc., 775 F. Supp. 544

(E.D.N.Y. 1991), aff'd, slip op. 91-7893, 91-7935 (2d Cir. June

1992). Judge Pratt observed that the major flaw of the Whelan test

was that it broadly defined the purpose of the program. Thus, he

A29

rejected the Whelan rule because it "assumes that only one ‘idea”

in copyright law terms, underlies any computer program, and that

once a separable idea can be identified, everything else must be

expression.” Id. at 559 (quoting 3 Nimmer on Copyright 13.03 [F], at

13-62.34). Judge Pratt decided that the better method for

distinguishing idea from expression was Judge Hand's abstractions

test which traditionally has been applied to literary works. The

abstractions test is as follows:

Upon any work. . . a great number of patterns of increasing

generality will fit equally well, as more and more of the incident

is left out. The last may perhaps be no more than the most

general statement of what the (work] is about and at times

might consist only of its title; but there is a point in this series

of abstractions where they are no longer protected, since

otherwise the [author) could prevent the use of his “ideas” to

which, apart from their expressions, his property is never

extended.

Nichols v. Universal Pictures Corp., 45 F.2d 119, 121 (2d Cir. 1930),

cert. denied, 282 U.S. 902 (1931). Judge Pratt explained that with

respect to computer software, the different increasing levels of

abstraction are from object code, to source code, to parameter lists,

to services required, to general outline. See Computer Assocs., 775

F. Supp. at 560.

27. In affirming Judge Pratt's decision, the Second Circuit set

forth a three part test for distinguishing between unprotected idea

and protected expression, based on the abstractions test advocated

by Judge Pratt. See Computer Associates, slip op. at 30. First, using

the abstractions test the court is directed to examine the allegedly

copied program's structure and isolate each level of abstraction. See

id. at 31. Second, the court is to examine the "structural components

at each level of abstraction to determine whether their particular

inclusion at that level was “idea” or was dictated by considerations

of efficiency, so as to be necessarily incidental to that idea; required

by factors external to the program itself; or taken from the public

domain." Id. These components are filtered out of the analysis as

they are non-protectable expression. See id. Third, the court must

compare the elements which are left with the structure of the

allegedly infringing program to determine whether there is substantial

similarity between the two works. See id.

While not extolling the same three part test, several courts and

commentators have found that elements in computer software

programs that are the most efficient means of accomplishing a task

A30

or are standard in the industry are not protected by copyright. See

Atari v. North Am. Philips Consumer Elecs. Corp.; 672 F.2d 607

(7th Cir.), cert. denied, 459 U.S. 880 (1982) ; Lotus Dev. v.

Paperback Software Inti 1, 740 F. Supp. 37 (D. Mass. 1990);

Telemarketing Resources v. Symantec Corp., 12 U.S.P.Q.2d (BNA)

S. Menell, An Analysis of the

ent, Computer

60 U. Cin. L.

28. In this case, plaintiff claims that there is substantial

similarity between its copyrighted work and defendants’ post-litigation

programs at the highest level of abstraction. Plaintiff states that the

ultimate function of its program is to “direct the coordinated

functioning of computers, computer screens, and video disks in order

to produce an educational presentation with which human beings

can interact by use of a touch screen." Plaintiff's Trial Memorandum,

87 Civ. 0167 (JMC), at 37 (S.D.N.Y. Apr. 22, 1991). Plaintiff claims

that the programs are substantially similar because defendant's post-

litigation programs contain (1) the use of a hierarchy of menus, (2)

functional modules, (3) external files, and (4) English language

commands. Defendants argue that these elements are entitled to

29. Tuming first to defendants’ use of hierarchical menus,

plaintiff does not claim that the menus in the Copyright Collection

and in defendants’ post-litigation programs are substantially similar.

Plaintiff Is claim is significantly broader. Softel merely argues that

both programs utilize menus. The expert testimony established that

the use of hierarchical menus, which contains a series of choices,

and a touchscreen is common. It is one of the most efficient and

user-friendly interfaces. In Computer Associates, the Second Circuit

specifically observed that “(efficiency is an industry wide goal” in

support of its conclusion that evidence of similarly efficient structure

is not a factor in the substantial similarity analysis. See Computer

Assocs., slip op. at 33.

One court which refused to extend copyright protection to the idea

of using menus explained as follows:

A31

[T]he idea at issue, the Process or manner of navigating

intemally on any specific screen displays likewise is limited in

the number of ways it may be simply achieved to facilitate user

comfort. To give the plaintiff copyright protection for this

aspect of its screen displays, would come dangerously close

to allowing it to monopolize a significant portion of the easy-to-

use intemal navigational conventions for computers.

Manufacturers Technologies, Inc. v. Cams, Inc., 706 F. Supp. 984,

995 (D. Conn. 1989); » 12 U.S.P.Q.2d

at 1996. The Second Circuit expressly approved of the reasoning

slip op. at 35. Given that the

use of hierarchical menus and a touchscreen is necessary for an

effective and efficient interactive program, the Court finds that the

mere use of these elements is not copyrightable.

30. The use of functional modules is also not entitled to

commonly write code in modules which perform each necessary

to other modules." Note, at

871. Thus, the Court finds that plaintiff's use of functional modules

is also not entitied to Copyright protection.

the Second Circuit observed that there are

many elements which are dictated by either “(1) the mechanical

specifications of the computer on which a particular program is

intended to run; (2) compatibility requirements of other programs with

ich ‘

computer industry.” Id. at 36. Such elements are not entitled to

32. Finally, Cain's testimony established that the use of English

language commands was logical, pervasive, and the most effective

A32

way that the programmer can keep track of the available commands.

Consequently, this element is not entitled to copyright protection.

33. Since each of the elements which plaintiff claims are

entitied to copyright protection are filtered out at the second step of

the Second Circuit's analysis set forth in Computer Associates, it is

unnecessary for the Court to proceed to the third part of the analysis.

34. Softel does not dispute Cain's testimony that the four

alleged copyrightable elements are either common, pervasive,

obvious and/or essential to an efficient interactive computer software

program. Plaintiff's contention is merely that the elements are not

strictly necessary to an interactive program and, therefore, they are

protectable expression. In light of the Second Circuit's recent

decision in Computer Associates, however, it is now settled law in

this Circuit that expression which is standard or the most efficient

means of accomplishing a task merges with the idea and is not

entitied to copyright protection. In sum, even at the broadest level

of abstraction, all of the elements which plaintiff claims are

protectable are not entitled to copyright protection as they

are merely stock elements which are commonly used or mandated

by efficiency considerations. Accordingly, plaintiffs claim of

without merit.

ll. Section 43(a) of the Lanham Act

35. In its amended complaint, plaintiff alleges that defendants

violated section 43(a) of the Lanham Act, 15 U.S.C. S 1125(a) by

misrepresenting the authorship of the Hairy Cell Expert Module

during Darsee’s presentation at the IICS on November 12, 1986.

During trial, plaintiff alleged that defendants wrote several

communications which violated section 43(a) of the Lanham Act in

that they failed to attribute authorship to Fiondella.”

36. Section 43 (a) of the Lanham Act proscribes “both express

and implied false representations made in connection with the sale

of goods and renders the maker of such representations liable to

those damaged by the representations.” Consumers Union, 724 F.2d

at 1051; see 15 U.S.C. § 1125(a) (1988). To prevail on a

misrepresentation claim under section 43 (a) of the Lanham Act, "a

plaintiff must prove that the defendant misrepresented an ‘inherent

quality or characteristic’ of the defendant's product.” National Ass'n

of Pharmaceutical Mfrs., Inc. v. Ayerst Labs., 850 Fd. 904, 917 (2d

Cir. 1988).

37. With respect to Darsee's presentation of the Hairy Cell

A33

Expert Module at the lICS meeting the evidence established that

Darsee wrote the computer code for the Expert Module. Fiondella

admitted that he did not write this computer code. Cain's testimony

confirmed that none of the code in Kaposi was similar to the code

that performed the essential operations of the Hairy Cell Expert

Module.

38. Since it is undisputed that Darsee wrote the code which

performs the essential operations of the Hairy Cell Expert Module,

defendants did not make any misrepresentations conceming the

“inherent quality or characteristics" of its products.°

39. The letters which plaintiff alleges violate section 43(a) of

the Lanham Act state that Dragon has a division entitied Dragon

Expert Systems which is a group of physicians, computer graphic

artists and programmers, and that Dragon Expert Systems is capable

of creating interactive programming. See Findings of Fact, at 1 95-

97, 99, 100. Plaintiff claims that the letters are false and misleading

because they fail to state that Paul Fiondella is responsible for

Dragon's present ability to produce interactive programs. Plaintiff

also alleges that the letters created consumer confusion as to the

true authorship of the computer program and deprived Softel of

possible business.

40. Even assuming the truth of plaintiffs claim that it is

responsible for Dragon's present capabilities, Dragon's statements

in the letters are true representations. The letters merely state that

Dragon has the present ability to produce interactive computer

programs. They do not make any claim as to how Dragon gained the

ability to produce such programs. Contrary to plaintiff's contention,

the Lanham Act does not impose an obligation upon Dragon to give

plaintiff recognition for its work in prior projects. Thus, plaintiff's

claim that given Fiondella's contributions, Dragon was obligated to

give credit to Fiondelia is wholly without merit. Accordingly, plaintiff's

claim under the Lanham Act is dismissed.

lll. State Law Claims

A. Trade Secret

41. To prevail on a trade secret claim, plaintiff must

demonstrate that (1) it possessed a trade secret, and (2) defendant

is using that trade secret in breach of an agreement, confidence, or

duty, or as a result of discovery by improper means." Rapco Foam,

Inc. v. Scientific Applications, Inc., 479 F. Supp. 1027, 1029

(S.D.N.Y. 1979). A trade secret "may consist of any formula,

pattern, device or compilation of information which is used in one's

A34

business, and which gives him an opportunity to obtain an advantage

over competitors who do not know or use it. I" Integrated Cash Mgt.

Servs., Inc. v. Digital Transactions, inc., 920 F.2d 171, 173 (2d Cir.

1990) (quoting Restatement of Torts § 757, comment b). In

determining whether a trade secret exists, New York courts consider

the following:

(1) the extent to which the information is known outside of his

business;

(2) the extent to which it is known by employees and others

involved in his business;

(3) the extent of measures taken by him to guard the secrecy

of the information;

(4) the value of the information to him and to his competitors;

(5) the amount of effort or money expended by him in

developing the information;

(6) the ease or difficulty with which the information could be

properly acquired or duplicated by others.

id. The most meaningful consideration is “whether the information

was secret.” Lehman v. Dow Jones & Co., inc., 783 F.2d 285, 298

(2d Cir. 1986).

42. Plaintiff claims that both the image retrieval routines as well

as the structure, sequence and organization of its code constitutes

a trade secret. The structure, sequence and organization of plaintiff

is code is clearly not a protectable trade secret. Fiondella freely

discussed his use of menus, English language commands, functional

established that these elements were not novel or original. See.

e.g, Ferber v. Sterndent Corp., 51 N.Y.2d 782, 783-84, 412 N.E.2d

1311, 1311, 433 N.Y.S.2d 85, 85 (1980).

43. The evidence clearly established that the image retrieval

routines are a protectable trade secret. Defendants’ sole contention

that Fiondella failed to maintain the secrecy of the routines is without

merit. Fiondella consistently refused to give the routines to Dragon

and he provided Dragon only with the finished executable code

which contained the routines.

44. The evidence also established that defendants used

plaintiffs trade secret after discovery by improper means.

Defendants’ improper use of the routines where plaintiff took steps

to safeguard the secrecy of the routines, creates liability for use of

A35

a trade secret. See Defiance Button Mach. Co. v. C & C Metal

Prods., 759 F. 2d 1053, 1063-64 (2d Cir. 1985) . Thus, the Court

finds in favor of plaintiff with respect to its trade secret claim.‘

B. Unfair C tition & Mi iation: P ption

45. Softel claims that defendants unfairly competed with Softe!

by falsely claiming that Dragon's products were produced by Dragon

and failing to attribute authorship to Softel. Defendants contend that

plaintiff's unfair competition claim is preempted by federal copyright

law.

46. Section 301 of the Copyright Act, 17 U.S.C. 301 (1988)

sets forth the following two conditions which must be satisfied for

preemption of a right under state law: "(1) the work in which the right

is asserted must be fixed in tangible form and come within the

subject matter of copyright as specified in § 102, and (2) the right

must be equivalent to any of the rights specified in § 106. 11

Baltimore Orioles v. Major League Baseball Players Ass'n, 805 F.2d

663, 674 (7th Cir. 1986), cert denied 480 U.S. 941 (1987);

Universal City Studios, inc. v. T-Shirt Gallery Ltd., 634 F. Supp.

1468, 1474-75 (S.D.N.Y. 1986).

47. it is undisputed that the first condition for preemption is

satisfied since computer programs are copyrightable and plaintiff's

48. As to the second condition for preemption, a state law right

is equivalent if under state law the act of reproduction, performance,

distribution or display will in itself infringe the state created right. See

Mayer v. Josiah Wedgwood & Sons, Ltd., 301 F. Supp. 1523, 1535

(S.D.N.Y. 1985) ; accord Baltimore Orioles, 805 F.2d at 678 n.26. A

state law claim is not preempted, however, if certain additional

elements are required to constitute the state cause of action. See

id.. The “extra element” must be “one which changes the nature of

the action so that it is qualitatively different from a copyright

infringement claim. Elements such as awareness or intent, which

alter the action’s scope but not its nature, will not save it from

preemption under S 301." Mayer, 601 F. Supp. at 1535 (emphasis

in original).

49. it is well established that plaintiff's unfair competition claim

is preempted by federal copyright law to the extent that it seeks

protection against copying of plaintiff's work. See Walker v. Time Life

Films, inc., 784 F.2d 44, 53 (2d Cir. 1986); Wamer Bros. v. American

Broadcasting Cos., 720 F.2d 231, 247 (2d Cir. 1983). Thus,

plaintiff's unfair competition claim is preempted insofar as plaintiff's

A36

claim is based on defendants’ copying of plaintiff's work.

50. However, an unfair competition claim which alleges a tort

of reverse passing off is not preempted by state law. See Wamer

Bros., 720 F.2d at 247. In this case, plaintiff's unfair competition

claim is based on the tort of reverse passing off as plaintiff claims

that the defendants falsely claimed that its products were their own

and failed to attribute authorship to Softel. The Court finds that

plaintiff's claim of unfair competition fails on its merits for the same

reasons plaintiff's claim under section 43(a) of the Lanham Act failed.

authoring against the preservation of the freedom to imitate.” Nash

v. CBS, Inc., 704 F. Supp. 823, 834 (N.D. Ill. 1989), affd, 899 F.2d

1557 (7th Cir. 1990).

53. Plaintiff's second argument is that its misappropriation

claim falls within the "hot news” exception recognized in the House

Judiciary Committee Report on the 1976 Amendments to the

Act. The House Report states that “state law should have

(quoting H. Report No. 1476, reprinted at 17 U.S.C.A. 301). As an

example of hot news, the House Report referred to the

misappropriation claim asserted in International News Serv. v.

Associated Press, 248 U.S. 215 (1918). In Intemational News.

defendant intercepted the lines of another wire service and reported

in the House Report, plaintiff's claim does not involve reproduction

55. Another issue in the trial of this action is whether

defendants willfully violated plaintiff's rights. The Court finds that

Darsee intentionally gained access to plaintiffs image retrieval

routines. See infra Findings of Fact, at 65. Darsee's testimony that

he thought he was entitied to use the code, despite the copyright

notice he saw in the code is similarly not worthy of belief. See infra

Conclusions of Law, at 20. Accordingly, the Court finds that

defendants acted willfully in utilizing plaintiffs image retrieval

routines.

V. Damages

56. The issue of intent is relevant with respect to plaintiff's

Claim that it is entitied to punitive damages and attomey's fees. This

is one of the issues stated in the joint pre-trial order. See Pre-Trial

Order, 87 Civ. 0167 (JMC), at 14 (S.D.N.Y. Mar. 6, 1990).

A. Federal Copyright Law

57. Turning first to plaintiff's claim of copyright infringement,

wrarrealeran Bete Bm Pe ghee A oy Roe tmpe

statutory damages instead of actual damages and profits. See 17 U.

S. C. Sec. 504 (c) (1) (1988) . In addition, the court has discretion to

these damages, however, ‘is prohibited by section 412 where

A38

(1) any infringement of copyright in an unpublished work

commenced before the effective date of its registration; or

(2) any infringement of copyright commenced after first

publication of the work and before the effective date of its

registration, unless such registration is made within three

months after the first publication of the work.

17 U.S.C. § 412 (1988). Thus, to obtain statutory damages or

attomey's fees the copyright owner must have registered the

Communication Corp. v. Network Prods., Inc., 902 F.2d 829, 851

(11th Cir. 1990); Evans Newton, Inc. v. Chicago Sys. Software, 793

F.2d 889, 897 (7th Cir.), cert. denied, 479 U.S. 949 (1986); Eden

Toys, inc. v. Florelee Undergarment Co., 697 F.2d 27, 33 (2d Cir.

1982).

58. In this case, plaintiff's copyrighted work was first published

in the Melanoma program in May 1985. it was again published in its

present form in the Kaposi program in June 1985. Plaintiff's work

infringement occurred after the effective date of registration. See

Singh v. Famous Overseas, inc., 680 F. Supp. 533, 536 (S.D.N.Y.

1988). ° Thus, the Court finds that plaintiff may not recover statutory

damages or attorney's fees. Plaintiff is also not entitied to punitive

damages with respect to its copyright claim. See Oboler v. Goldin,

714 F.2d 211, 213 (2d Cir. 1983).

B. Trade Secret

Smith v. Lightning Bolt Productions, inc., 861 F.2d 363, 371 (2d Cir.

1988) (quoting Borkowski v. Borkowski, 39 N.Y.2d 982, 983, 355

N.E.2d 287, 287, 387 N.Y.S.2d 233, 233 (1976). The evidence

eel

System, Inc., 503 F. Supp. 1137, 1155 (S.D.N.Y. 1980), aff'd, 672

F.2d 1095 (2d Cir.), cert. denied 459 U.S. 826 (1982).

60. Each of defendants’ justifications for using plaintiff's image

retrieval routines is not credible. Defendants’ claim that they

believed they were entitied to use the code because they had paid

for it is unbelievable in light of plaintiff's insertion of a copyright

notice in the code and the Sorbinil invoice which limited used of the

code to the Sorbinil project. Dragon's belief that it could utilize

plaintiff's code because it believed that Fiondelia was its employee

is also unpersuasive given that Fiondella repeatedly refused to

provide Dragon with his code. Finally, defendants’ claim that they

believed in good faith that the computer code was a joint work under

the Copyright Act is similarly unpersuasive given Fiondella's efforts

to maintain the secrecy of his code.

Accordingly, the Court finds that defendants acted willfully and

in bad faith, thereby entitling plaintiff to punitive damages with

respect to its trade secret claim.

CONCLUSION

After a bench trial on plaintiff's claims, the Court finds in favor

of plaintiff with respect to its first and fifth claims for relief in the

Amended Complaint to the extent these claims are based on the

Hairy Cell Roche and Low Back Pain programs. The Court further

finds that plaintiff may recover punitive damages under its state law

Claim stated in its fifth claim for relief. Plaintiff's claim for attorney's

fees, statutory damages and punitive damages with respect to its

Claim under its first claim for relief is denied. Plaintiff's second, third,

fourth, and sixth ’ claims for relief are dismissed. Plaintiff's motion

for further discovery with respect to the programs Advanced

Cardiology Lab, Expert Consultations, Unasyn Oral Followup and

Benign Prostatic Hypertrophy is denied.

if the parties are able to agree, they shaii submit to the Court

the amount of plaintiff's damages. If the parties are unable to agree,

they are directed to submit to the Court a joint pre-trial order

conceming the damages phase of this trial no later than July 24,

1992.

SO ORDERED.

/s/

JORN W. CANNELTA

United States District Judge

Dated: New York, New York

A40

June 29, 1992

FOOTNOTES

4. The court found Cain to be qualified as an expert to analyze the

graphic image retrieval routines and structure and logic of the alleged

infringing programs. Plaintiff was preciuded from offering an expert

at trial. See Memorandum and order, 87 Civ. 0167 (JMC) (S.D.N.Y.

Oct. 23, 1990). Paul Fiondella testified in great length conceming

highly technical computer programming issues and Cain stated that

in his opinion he believed that Fiondelia testified almost entirely as

an expert. See Trial Transcript at 1636.

2. At trial, the Court granted plaintiff's motion to conform its pleading

to the proof.

3. To the extent that plaintiff's claim is that the Hairy Cell Expert

Module utilizes plaintiffs image retrieval routines, assuming

arquendo that they were used, Dragon's failure to credit Fiondella

with authorship of the image retrieval routines does not violate

section 43(a) of the Lanham Act. The image retrieval routines, if

utilized, are de minimis when considered in light of the purpose and

value of the Expert System.

4.Alth defendants do not contend that plaintiffs trade secret

claim is preempted, the Court notes that such an argument would be

unavailing. Since plaintiff established at trial that defendants used

plaintiff's image retrieval routines as a result of wrongful acquisition,

the trade secret claim is not preempted by federal copyright law. See

entitled to attomey’s fees is within he scope of the joint pre-trial order

as an entitlement to attomey’s fees is based on defendants’ intent.

fees under the Copyright Act. in its motion for leave to amend its

complaint to add a claim under section 43(a) of the Lanham Act,

plaintiff stated that “[bjecause defendants’ infringement commenced

prior to registration of plaintiff's copyright, plaintiff is not entitled to

attomey's fees under the Copyright Act of 1976. See Plaintiff's Reply

A4l

Seaenentientiateeietii

Memorandum in Support of its Motion to Amend the Compiaint

(S.D.N.Y. July 20, 1987).

7. At trial, plaintiff consented to dismissal of its sixth claim for reief.

A42

NITED STATES Di 1 RI CT COURT

UTHERN DISTRICT OF NEW YORK

SOFTEL, INC.,

DRAGON MEDICAL AND SCIENTIFIC

NICAT! N TD., DRAGON

C N

DARSEE. H. H. EUGENE HODGE. NINA

PFIZER, | NC

BHARMAC and Pel INC...

Defendants.

APPEARANCES:

oo & & SEYMOUR

oS Wet ard Pind Street Room 2102

New York, New York 10036

By: | Whitney North Seymour, Jr., Esq.

Esq.

Craig A. Landy,

CHARLA R. BIKMAN, Esq.

Atomey for Plai

105 Que ne Street, Suite 46C

York, New York 10007

O13) 346-9774

STROOCK & STROOCK & LAVAN

Attorneys for eenearas

7 Hanover Squa

New York, New York 10004-2594

By: Bruce H. Schneider, Esq.

Gordon Kessler, Esq.

52 Vanderbilt Avenue

New York, New York 10017

By: William A. Rome, Esq.

A43

een

Ce REE

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. ' 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 ? liable for copyright

infringement and misuse of trade secrets, and found that the misuse

of trade secrets was willful and in bad faith, vines gemaehaplag

punitive damages. See S: ik : i

Communications, Inc., No. 87 Civ. 0167 (JMC), 1992 WL 168190

(S.D.N.Y. June 29, 1992) [hereinafter |'Softel |"). Familiarity is

assumed with Judge Cannelia's decision which is the law of this

case.

From May 8, 1995 to May 11, 1995, | 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, | make the following findings of fact and conclusions of

law.

Find) f 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 |, Findings of Fact

(“F.F.”) Par. 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 |, F.F. Par. 2; Tr. at 380.)

3. Defendant John R. Darsee was a medical writer for Dragon

and the director of its interactive department. (Softel.1, F.F. 1 Par. 6.)

* Although Dragon Medical and Scientific Communications, Ltd. is named as a

party in the caption, no entity has ever existed under that name.

Judge Cannella granted judgment as a matter of law to defendants Hodge and

Romanoff at the conclusion of plaintiffs case. The Pfizer defendants and

defendant Hoffman LaRoche settied with plaintiff before trial.

A44

ib APRS ES SALONS CANT

“12114

4. In November 1984, Darsee purchased Videogram 2.0, a

“paint-and-draw" computer graphics program, from Softel. (Softel 1.

F.F. Pars. 15, 17, 21.) Videogram 2.0 did not enable the user to

incorporate images drawn with it into software the user was

writing.(Softel |, F.F. Par. 17)

5. in January 1985 through June 1985, Dragon hired

Fiondella towrite code that would display graphics images created in

Videogram 2.0 in several of Dragon's interactive programs. (the

"image retrieval routines”) (Softel |, F.F. Pars. 26-66, 75.)

6. Fiondella never gave Dragon the source code he had

written. Rather he gave Dragon only the "executable" object code.

(Softel |, F.F. Pars. 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 |, F.F. Pars. 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

Plaintiff's Liability Trial Exhibit (“PLX”) 34.)

9. In 1988, Dragon utilized a different paint-anddraw program

(called “Dr. Halo”) instead of plaintiffs Videogram software in

producing several interactive programs. (Softei |, F.F. Pars. 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. Par.

103.) The programs Dragon produced in 1988 were not in any way

derived from Softel”s copyrighted work. (Softel |, F.F. Par. 115.)

, n :

s' Use of image Reirieval

10. Defendants presented evidence that plaintiff charged a

license fee of $2,000 for the use of the image retrieval routines in

A45

- 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 plait (Tr. at 292-99; PLX 63, 66.)

11. Evidence was also presented that Dragon paid license

fees on two occasions to Media Cybemetics 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 Cybemetics $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 Cybemetics $8,200 for a license to use such

code in an unlimited number of programs. (Tr. at 598.)

12. Evidence was presented at trial that a license for the use

of source code may be substantially more expensive than a license

for the use of the executable code. For example, plaintiff's expert

testified that he obtained a license to use the source code of the

UNIX operating system for $43,000, but an executable copy of the

software was available for $600. (Tr. at 60.) This license did not allow

the user to incorporate the UNIX software into its own products. (Tr.

at 61.) No evidence was presented as to how much a source code

license would cost for a program that performed functions similar to

those of the image retrieval routines.

13. Based on the evidence presented at trial, | 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, | 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

OR ee eee ee ee

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. (DX | B; PDX D-

A46

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. ) 3 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.)

46. 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 iabor 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 D-2.) 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

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

3 PDX D-2 lists the direct costs for the Low Back Pain program as $33,472.36.

Because defendants have the burden of showing the costs that should be taken

into account in assessing damages, see C.L. Par. 1 infra, | will use the lesser

amount shown in DDX B.

A47

tie tniaiaaial

bytes in the Hairy Cell program. ‘ (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.

Inti'1. Inc, v. Altai, inc., 775 F. Supp. 544, 571-72 (E.D.N.Y. 1991),

affd in part. vacated in part, 982 F.2d 693 (2d Cir. 1992). Although

defendants presented evidence that plaintiffs image retrieval

routines comprised only a smail 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, | 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.

; 's Financial Condit

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.)

‘Defendants’ expert was unable to determine the percentage of lines of Softel

code in the Hairy Cell program because he did not have the source code to

that program. (Tr. at 575.)

A48

25. As of May 10, 1995, Dragon had collected ali 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 (‘ISIS"), 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 totaling $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.)

A49

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

ae measure of sense damages is Harris Market

1518, 1524 (10th Cir. 1991). r= that case, the Tenth Circuit held that

it was not reversible error for the trial court to have admitted

evidence on plaintiffs development costs where the court gave a jury

instruction, to which defendant did not object, that copyright

infringement damages may include plaintiffs 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

plaintiffs 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 |, Conclusions of Law (“C.L.”) Par. 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. Plaintiffs actual damages from the copyright infringement

A50

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 Par. 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. Plaintiffs view is

supported by neither a plain reading of the ‘Copyright Act nor

decisions in this Circuit. See

Corp., 106 F.2d 45 (2d Cir. 1939), affd, 309 U.S. 390 (1940);

Warner Bros., Inc. v. Gav 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 Com., 13 F.3d 559, 565-66 (2d Cir. 1994);

Sheldon, 106 F.2d at 54; Wamer 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

|, F.F. Par. 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 |, F.F.

A51

Par. 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.

, 268 F. Supp. 289, 302 (S.D.N.Y.

1967), affd, 389 F.2d 11 (2d Cir.), cert. denied 393 U.S. 835 (1968);

Ewen vy. 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 Sec.

15.02[3][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. iversi

Youngstown Corp,, 504 F.2d 518, 536 (5th Cir. 1974); Vitro Com. y.

Hall Chemical Co., 292 F.2d 678, 681-83 (6th Cir. 1961); 3 Milgram

on Trade Secrets Sec. 15.02[3)[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 retum 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. |d.

12. The appropriate measure to use in computing trade

A52

sa teint te, WA NCR te eset ety ection nD Abie

wi alba Aca GR dl! Plain iA lei sites ima MGB 4 $d det eit

secret damages in this case is the amount of defendants’ profits. °

13. In computing defendants’ profits from the trade secret

misappropriation, defendants are entitied to set off the costs

associated with the production of the product that incorporates the

misappropriated trade secret. See Elnicky Enterprises y, 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.

, 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 user. 2 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

* This measure results in a larger recovery for plaintiff than the reasonable

royalty method since that measure would be essentially the same as the lost

profits measure conducted for the copyright infringement damages. At any

rate, the measure used makes little difference, since plaintiff cannot receive

a double recovery when the damages are coextensive. See Computer Assocs.

Int'l. Inc. v. Altai, Inc., 982 F.2d 693, 720 (2d Cir. 1992).

A53

Computer Assocs. Int'l, Inc, v. Altai, Inc., 982 F.2d 693, 720 (2d Cir.

1992).

Prejudgment interest

18. Prejudgment interest with respect to the trade secret

misappropriation claim is determined by New York law. N.Y.Civ.

Prac. L. & R. Sec. 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 Par. 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 “(t]he 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, | 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).

lf such an award is permitted, the award of prejudgment interest is

discretionary. |d.

22. In the exercise of my discretion, | 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., 17 U.S.P.Q.2d

1063, 1067 (S.D.N.Y. 1990) (awarding prejudgment interest on

A54

are as

portion of award representing plaintiff's lost profits, but not on portion

of award representing defendant's profits from infringement), aff'd in

oe eae 936 F.2d 692 (2d Cir. 1991); see also Bourne Co.

v. Walt Disney Co., 31 U.S.P.Q.2d 1858, 1860-61 (S.D.N.Y. 1994)

(awarding prejudgment interest on stipulated damages settlement).

23. N.Y. Civ. Prac. L. & R. Sec. 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.

24. A claim exists for trade secret misappropriation when (1)

defendants possessed a trade secret, and (2) defendants used that

trade secret in breach of an agreement. confidence, duty, or as a

result of discovery by improper means. (Softel |, C.L. Par. 41.)

25. Plaintiff urges that interest should be computed from the

date upon which Darsee first gained access to the source code of

the image retrieval routines. However, the cause of action did not

exist until defendants both possessed the code and used it.

Therefore, interest should be computed from the dates upon which

plaintiff's code was incorporated into defendants’ programs. Because

neither side presented evidence as to when Darsee incorporated

plaintiff's code, the earliest ascertainable dates of the existence of

the cause of action are the dates upon which the programs were

completed. The Hairy Cell program was completed on March 10,

1986, and the Low Back Pain program was completed on May 23,

1986. (Softel |, F.F. Pars. 72, 74.) Therefore, interest on damages

arising from the Hairy Cell program should be computed from March

10, 1986 and interest on damages arising from the Low Back Pain

program should be computed from May 23, 1986. For ease of

calculation, all damages will be calculated from April 14, 1986, the

midpoint between these two dates. See N.Y. Civ. Prac. L. &R.

Sec. 5001(b); Computer Assocs,, 775 F. Supp. at 572.

26. The annual rate of interest on the compensatory

damages for trade secret misappropriation is nine percent. See N.Y.

Civ. Prac. L. & R. Sec. 5004.

27. There is no federal statutory rate for prejudgment interest.

Federal courts have applied various rates of prejudgment interest on

federal claims. See Hollie v. Korean Air Lines Co., 834 F. Supp. 65,

A55

69 (S.D.N.Y. 1993) (citing decisions in which various rates have been

applied). The rate applied should be calculated to compensate the

plaintiff for the loss of use of the funds during the time in question.

See Diduck v. Kaszycki & Sons Contractors, Inc., 974 F.2d 270, 286

(2d Cir. 1992) (prejudgment interest on ERISA award should reflect

what plan would have eamed if it had had the funds it lost due to

breach of fiduciary duty); In the Matter of complaint of Connecticut

Nat'l Bank, 928 F.2d 39, 47 (2d Cir. 1991) (in determining

prejudgment interest rate on award under Death on the High Seas

Act, district court should consider inflation and interest rate plaintiff

would have received on relatively risk free investments); E.E.0.C. v.

County of Erie, 751 F.2d 79, 82 (2d Cir. 1984) (prejudgment interest

on award under Fair Labor Standards Act and Equal Pay Act at

adjusted prime rate upheld as proper exercise of discretion where

such rate "has been adopted as a good indicator of the value of the

use of money”). The appropriate rate to be applied to the damages

for copyright infringement is the average 52-week Treasury bill rate

compounded annually. See Hollie, 834 F. Supp. at 71; see also

Boume Co. y. Walt Disney Co., 31 U.S.P.Q.2d 1858, 1861 (S.D.N_Y.

1994).

28. Although the trade secret misappropriation compensatory

damages overlap with the portion of the copyright infringement

damages which represent defendants’ lost profits, plaintiff is entitled

to only one payment of prejudgment interest on each part of the

compensatory damages award. Therefore, plaintiff is entitled to

prejudgment interest calculated at the rate of nine percent on the

trade secret misappropriation damages (defendants’ profits) and

prejudgment interest calculated at the annual average 52-week T-bill

rate on the copyright infringement damages which do not overlap

with the trade secret misappropriation damages (plaintiffs lost

profits).

Punitive D

29. Judge Cannelia found that defendants’ conduct was

willful and in bad faith to such a degree that plaintiff was entitled to

receive punitive damages. (Softel |, C.L. Pars. 59-60.)

30. There is no formula by which the finder of fact must

determine punitive damages. Yokley v. Henry-Clark Assocs.,

__Misc.2d __, 624 N.Y.S.2d 341, 343 (Civ. Ct. Kings Cty. 1995);

Deborah S. v. Dioro, 153 MiSC.2d 708, 583 N.Y.S.2d 872, 875 (Civ.

Ct. N.Y. Cty. 1992); N.Y. P.J.I. 2:278. The amount fixed need bear

no particular relationship to the amount awarded as compensatory

damages. Hartford Accident and indemnity Co. vy. Villacre of

A56

SS en ee Gee Oe OE hee eae ne eee

+o gel R SAELw A S

, 48 N.Y.2d 218, 422 N.Y.S.2d 47, 53 n.15, 397 N.E.2d

737 (1979); Yokley, 624 N.Y.S.2d at 343; N.Y. P.J.1. 2:278.

31. However, punitive damages should bear a reasonable

relationship to the wrong committed. See Chiystun v. Kent, 185

A.D.2d 525, 586 N.Y.S.2d 410, 412 (3d Dep't 1992); Manolas vy. 303

West 42nd Street Enterprises, 173 A.D.2d 316, 569 N.Y.S.2d 701,

702 (1st Dep't) (setting aside jury award of punitive damages that

was 80 times that awarded for compensatory damages), a2yeal

denied, 78 N.Y.2d 864, 578 N.Y.S.2d 879, 586 N.E.2d 62 (1991);

Yokley, 624 N.Y.S.2d at 343 (reducing jury's award of punitive

damages against landlord where award exceeded value of building

and “vastly exceed[ed] any benefit the defendant could possibly

have derived from its wrongful conduct”).

32. Because the object of punitive damages is to punish the

defendant, it is appropriate for the trier of fact to consider the

defendant's financial circumstances in determining the amount of

punitive damages. Rupert v. Sellers, 48 A-D-2d 265, 368 N.Y.S.2d

904, 913 (4th Dep't 1975); Chilvers V. New York Magazine Co., 114

Misc.2d 996, 453 N.Y.S.2d 153, 154 (Sup. Ct. N.Y. Cty. 1982); see

also ffartford Accident & Indemnity, 422 N.Y.S.2d at 53 (noting that

allowing insurance coverage for punitive damage awards would

conflict with “the rule permitting the jury to consider defendant's

financial standing in fixing the amount of punitive damages").

33. Plaintiff urged at trial that although it might be appropriate

to consider an individual's financial circumstances in assessing

punitive damages, it would not be appropriate to consider a

corporate defendant's financial situation. (Tr. at 373-74.) Plaintiff's

position is not supported by the decisions of the courts of New York.

see Thoreson vy. Renthouse Intl. Lid, 149 Misc.2d 150, 563

N.Y.S.2d 968, 976-77 (Sup. Ct. N.Y. Cty. 1990), affd as modified,

179 A.D.2d 29, 583 N.Y.S.2d 213 (1st Dep't), aff'd, 80 N.Y.2d 490,

591 N.Y.S.2d 978, 606 N.E.2d 1369 (1992); Keefe v. Gimbel’s, 124

Misc.2d 658, 478 N.Y.S.2d 745, 750 (Civ. Ct. N.Y. Cty. 1984);

Chilvers, 453 N.Y.S.2d at 154.

34. Plaintiff also argued at trial that plaintiff's attorneys’ fees

should be taken into account in fixing the amount of punitive

damages. in its post-trial brief, plaintiff cites Jeffries Avion v.

Gallagher, 149 Misc.2d 552, 567 N.Y.S.2d 339, 339-40 (Sup. Ct.

N.Y. Cty. 1991) as authority for its position. That case heid that it

was appropriate for the trier of fact to consider attorneys’ fees in

connection with a determination of punitive damages in cases where

malice has been proved.

A57

Jeffries, 567 N.Y.S.2d at 339-40.

35. However, consideration of attorneys’ fees requires

evidence of actual attomeys'’ fees. Although plaintiff presented

evidence that his attomeys spent time valued at over $700,000 (PDX

D-13 & D-14), no evidence was presented to show the actual

attorneys’ fees incurred by plaintiff. In fact, plaintiff's counsel

admitted at trial that the exhibits regarding attomeys' fees did not

represent attomeys’ fees either billed to or paid by plaintiff. (Tr. at

333)

36. Based on the evidence presented at trial, punitive

damages of $100,000 are assessed against defendant Darsee and

$150,000 against defendant Dragon.

Conciusi

For the foregoing reasons, plaintiff is awarded compensatory

damages of $34,880.28 on its copyright infringement claim and

$27,880.28 trade secret misappropriation claims. Because the trade

secret damages overlap with the portion of the copyright damages

representing defendants’ lost profits, the total amount awarded is

$34,880.28. Plaintiff will also receive prejudgment interest at the

rateof nine percent per year on the trade secret misappropriation

damages, and prejudgment interest at the average annual rate of 52-

week treasury bills on the remaining $7,000 of damages.

Prejudgment interest shall be calculated from April 14, 1986. Plaintiff

is also awarded punitive damages of $100,000 against Darsee and

$150,000 against Dragon for willful trade secret misappropriation.

The foregoing shall constitute my findings of fact and

conclusions of law pursuant to Fed. R. Civ. P. 52(a). Plaintiff shall

settle judgment on two days notice.

SO ORDERED:

Dated: New York, New York

July 7, 1995

/S/ MIRIAM GOLDMAN CEDARBAUM

United States District Judge

A58

RADAR A A RE ASI Gory FU hatin end Bea sla laa tana GS, nese ae aa ion. >

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

SOFTEL, INC.,

Plaintiff, Ns

- against - AND OR

D SCIENTIFIC

D. DRAGON

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Defendants.

APPEARANCES:

BROWN & SEYMOUR

atiomey for Plaintiff

25 West 43rd Street, Room 2102

New York, New York 10036

By: | Whitney North Seymour, Jr., Esq

Craig A. 7 Esq.

Peter James Clines, Esq.

CHARLA R. BIKMAN, Esq.

Attomey for Plaintiff —

105 Duane Street, Suite 46C

New York, New York 10007

(212) 346-9774

STROOCK & STROOCK & LAVAN

Attorneys for Defendants

7 Hanover Square

New York, New York 10004-2594

By: Bruce H. Schneider, Esq.

Gordon Kessler, Esq.

JAFFE & ASHER

Attorneys for Defendants

52 Vanderbilt Avenue

New York, New York 10017

By: William A. Rome, Esq.

A59

CEDARBAUM, J.

Defendants have moved for reconsideration of my

Memorandum Opinion and Order dated July 7, 1995. They argue

that defendant Darsee should not be held jointly liable for the profits

earned by defendant Dragon from the use of plaintiff's computer

code. Defendants also contend that the punitive damage awards

against them are excessive based on the evidence presented at trial,

and should be reduced. For the reasons discussed below,

defendants’ motion is granted in part and denied in part.

loint Liability for D 's Profit

Defendants argue that Darsee should not be held liable for

Dragon's profits because disgorgement of profits is available only as

against the defendant who eamed the profits. Defendants correctly

point out that the general rule under copyright law is that liability for

illegal profit is several and not joint--that is, “one defendant is not

liable for the profit of another." MCA, Inc. v. Wilson, 677 F.2d 180,

186 (2d Cir. 1981) (1909 Act); see also Abeshouse vy, Ultragraphics,

Inc., 754 F.2d 467, 472 (2d Cir. 1985) (applying MCA in case under

the 1976 Act). However, there may be an exception to this general

rule “where the infringement was not innocent.” Abeshouse, 754

F.2d at 472; Harris v, Miller, 50 U.S.P.Q. 625 (S.D.M.Y. 1941); 3 M.

Cannella's findings in the liability trial justify this exception.

Furthermore, under the law of New York (and of other

jurisdictions) an employee may be held jointly liable for the profits

earned by the employer as a result of the employee's

misappropriation of a trade secret. See

, 23 Misc.2d 671, 192 N.Y.S.2d 102, 123

(Sup. Ct. Westchester Cty. 1959), affd, 15 A.D.2d 960, 226

N. Micro 1021 (2d Dep't 1962); see — ng TT

Sea : see , 401 F.

Supp. 1102, 1120 (E.D. Mich. 1975). Because the trade secret’

damages are coextensive with defendants’ profits from copyright

infringement, it is appropriate to apply New York law regarding trade

secret misappropriation, and to hold Darsee and Dragon jointly liable

for Dragon's profits from the trade secret misappropriation.

Punitive D

Darsee argues that the punitive damage award assessed

against him is excessive in light of the evidence presented at trial.

Darsee relies on Vasbinder yv. Scott, 976 F.2d 118, 121 (2d Cir.

1992), for the proposition that the award of punitive damages against

A60

him should not exceed ten percent of his net worth. Darsee's

reliance on Vasbinder is misplaced for several reasons. First,

Vasbinder awarded punitive damages under a federal civil rights

statute, while the punitive damages in this case are awarded

pursuant to New York common law. Second, Vasbinder did not hold

that a punitive damages award could not exceed ten percent of net

worth. Rather, it held that the punitive damage awards against

defendants who were near retirement age were excessive in light of

the dramatic reduction in retirement income caused by the punitive

damage awards. Darsee is not close to retirement age — he is 47

years old. (Tr. at 471.) Plaintiff points out that under N.Y. Civ. Prac.

L. & R. § 5231(b), a judgment creditor may obtain execution against

only ten percent of a debtor's annual income. The rule adequately

addresses the concem of the Second Circuit that the punitive

damage award should not “result in the financial ruin of the

defendant.” Vasbinder, 976 F.2d at 121.

Finally, Darsee's argument that the punitive damage award

against him is a disproportionately large percentage of his net worth

presupposes that | credit his trial testimony regarding his income and

assets. At trial, | asked Darsee whether he was a shareholder of

Scientific Information Systems (“SIS"), the company by which he is

now employed, and he answered, “No.” (Tr. at 480.) On cross

examination, plaintiffs counsel asked Darsee who owned the shares

of SIS, and he replied that the shares were owned by his wife, his

23-year-old daughter and one other person. (Tr. at 486.) Although

defendants’ counsel argued that Darsee's answer to my question

was “truthful, although perhaps too literal," (Tr. of Oral Arg., July 21,

1995, at 14), | find that Darsee's answer to my question evidenced

his intent to obscure his true financial situation from the court. The

evidence at trial showed that Darsee has taken other steps to

attempt to insulate himself and misrepresent his true income. For

example, in 1993, SIS paid him a salary of $20,500 and paid his wife

a salary of $83,000. Darsee admitted at trial that he had spent more

time working for SIS than had his wife. (Tr. at 487.) Because Darsee

was not forthcoming about his financial situation, | do not credit his

testimony, and base the award of punitive damages on an estimate

of his income and assets that takes into account his attempt to

conceal his true financial situation.

Dragon argues that the punitive damage award against it is

excessive in light of the evidence presented at trial that its only

remaining assets are bank accounts valued at $16,187.26.

“[T]he purpose of punitive damages is to punish the

defendant and to deter him and others from similar conduct in the

A61

future._Vasbinder, 976 F.2d at 121. Accordingly, a punitive damage

award should not be so high as to result in a defendant's financial

ruin. Id. The defendant bears "the burden of showing [its] modest

means -- facts peculiarly within its power -— if (it] wants this

considered in mitigation of damages.” Zarcone y. Perry, 572 F.2d 52,

56 (2d Cir. 1978); see also Ostanzo Commerzanstalt v, Telewide

, 608 F. Supp. 1359, (S.D.N.Y. 1985), affd in part, rev'd

in part, 794 F.2d 763 (2d Cir. 1986); Keen vy. Keen, 113 A.D.2d 964,

493 N.Y.S.2d 636, 638 (3d Dep't 1985).

No evidence was presented by Cragon of the value of

Dragon's assets prior to dissolution. The evidence regarding the

current value of Dragon's bank accounts does not shed light on the

value of any assets of Dragon that may have been transferred to

Dragon's parent upon Dragon's voluntary dissolution. As discussed

above, the evidence presented by Darsee regarding his net worth

was not credible. Therefore, it is extremely difficult to determine the

appropriate punitive damage awards in this case.

However, upon further reflection on the evidence presented

at trial and on the principles enunciated in Vasbinder, | find that the

punitive damage awards against Darsee and Dragon are excessive

because they are greater than necessary to serve the purpose of

deterrence. Therefore, | reduce the award against Darsee to

$35,000 and the award against Dragon to $50,000.

Conclusion

For the foregoing reasons, defendants’ motion for

reconsideration is granted in part and Genied in part. Plaintiff shall

settie judgment on two days notice.

SO ORDERED.

Dated New York, New York

October 13,1995

/s/

United ot District Judge

A62

UNITED ESTATES ESuE URT OF AEPEALS

FOR THE SE CIRCUI

No. 59-August Term, 1996

(Argued: September 12, 7996 Decided: July 9, 1997)

Docket No. 95-9151

SOFTEL, INC.., eS,

Plaintiff-Appellant,

DRAGON MEDICAL AND SCIENTIFIC COMMUNICATIONS, INC.;

DRAGON GROUP LTD., also known as Dragon Medical and

Scientific Communications, Ltd.; JOHN R. DARSEE; H. EUGENE

HODGE; NINA ROMANOFF,

Defendants-Appellees.

Before:

MINER, ALTIMARI, and PARKER,

Circuit Judges.

Appeal from judgment of the United States District Court for

the Southem District of New York (John M. Cannella, Judge), in a

computer program copyright infringement, misappropriation of trade

secrets, and Lanham Act violation suit, wherein Judge Cannella pre-

Cluded plaintiff's use of certain expert testimony and, in a bench trial,

found for plaintiff on some of its claims and against it on others.

Appeal also from separate damages award before Miriam G.

Cedarbaum, Judge.

We affirm in part, and vacate and remand in part.

CHARLA R. BIKMAN, New York, NY, for Plaintiff-Appelilant.

BRUCE H. SCHNEIDER, New York, NY (Gordon M. Kessler,

Stroock & Stroock & Lavan, New York, NY, William A. Rome, Jaffe

and Asher, New York, NY, of counsel), for Defendants-Appellees

Dragon Medical & Scientific Communications, Inc., John R. Darsee

and H. Eugene Hodge.

A63

PARKER, Circuit Judge:

Softel, Inc.; a computer software company, brought this

action against Dragon Medical and Scientific Communications, Inc.

("Dragon"), its parent Dragon Grouo, Ltd., and several of its

employees (collectively “the defendants") claiming that the

defendants had infringed copyrights Softel held in several of its

computer programs, and had misappropriated trade secrets

contained within the computer code. Softel also alleged that the

defendants were guilty of "reverse palming off" under § 43(a) of the

Lanham Act, 15 U.S.C. § 1125(a), and that the defendant

corporation's president was vicariously and contributorily liable for

damages. In a bench trial, the district court (John M. Cannella,

Judge) found the defendants liable on some of plaintiff's copyright

infringement and trade secret claims, but not on others, and rejected

plaintiffs claims based on the Lanham Act and vicarious or

contributory liability. In a separate proceeding, the court (Miriam G.

Cedarbaum, Judge) awarded damages accordingly. We affirm in

part and, because the district court's findings and holdings do not

address all of plaintiff's claims, vacate and remand in part.

|. BACKGROUND

Softel is a small New Hampshire corporation engaged in the

business of creating and selling computer graphics products. Paul

Fiondella is its president and sole shareholder. Dragon is a New

Jersey corporation engaged in the business of designing

communications programs relating to medical and scientific

information. H. Eugene Hodge is Dragon's president and a

shareholder of Dragon; Nina Romanoff is a Dragon employee who

produced various films and videotapes for Dragon; John R. Darsee

is a medical writer and computer programmer for Dragon. See Softel,

Inc. v. Dragon Med. & Scientific Communications, Inc., No. 87 Civ.

0167, 1992 WL 168190, at F.F. pars. 1-6 ' (S.D.N.Y. June 30, 1992)

(“Softel I").

In January 1993, [sic] Fiondella developed Videogram |.0, a

“paint-and-draw" computer graphics program.” Later in 1983,

Fiondella developed an improved version of this program, Videogram

2.0. In 1984, Pfizer Laboratories hired Dragon to produce a program

‘Where the district court has numbered its findings of fact ("F.F.") and conclusions

of law ("C.L."), we will cite to those numbered findings or conclusions

2 “Paint and draw’ programs enable the computer user to create graphic images

on a computer screen. See Sofe/ // at F.F. at par. 13.

A64

which later became known as Heartlab. Darsee saw an

advertisement for Videogram 2.0, and called Fiondella with some

questions regarding its capabilities. Dragon employee Darsee pur-

chased the software, and some hardware, from Fiondella. Fiondella

delivered the goods personally to Dragon's place of business in New

York, so that he could explore any potential business opportunities

for his company at Dragon. Fiondella and Darsee discussed forming

a joint venture to create an “authoring language” and Darsee asked

Flondelila to create a simulation of a beating heart for the Heartlab

project.

In January 1985, E.R. Squibb & Sons, Inc. hired Dragon to

create an interactive videotape program for training purposes. This

project was called Azactam. Dragon hired Fiondella to write

computer code for this project. Fiondella was careful not to provide

his source code * to Dragon and imbedded a copyright notice in Sof-

tel's portion of the source code and in the executable ‘ delivered to

Dragon.

Dragon had also contracted to produce videodisc programs

wit’. Roche Laboratories. These would come to be known as

Melanoma, Kaposi's Sarcoma ("Kaposi"), and Hairy Cell Leukemia.

Dragon engaged Fiondella-to write code to control the operation of

the touchscreen and videodisc player in the program Melanoma, and

to retrieve and display graphic images produced by Dragon artists.

Fiondella wrote this code in a modular * style. He also used a

manual produced by the hardware manufacturer to interface the

hardware and software properly. He billed Dragon on a per diem

basis, delivered only the executable version of his program, and

imbedded a copyright notice in the executable.

Fiondella also worked on Kaposi, using code that was similar

to that used in Melanoma. He employed several design techniques

* Source code is a series of instructions written in a computer language such as

COBOL, BASIC, or FORTRAN. See Computer Assocs. inti, inc. v. Altai, Inc., 982

F.2d 693, 698 (2d Cit. 1992)

* The "executable" is the version of the program that actually runs on the computer.

See Softel |i at F.F. Par. 11. it comprises linked modules of object code. See id.

“Object code” is a machine-readable binary translation of source code. See Afai,

982 F.2d at 698. A “compiler pro-ram translates source code into object code.

See id.

° “Modules,” or “subroutines,” are discrete portions of a program that perform

“subtasks." See Altai, 982 F.2d at 697

A65

in writing the Kaposi code, including, among others, the use of

external files, English language commands, modular structure, and

a hierarchical series of menus and a touchscreen. This program also

was delivered in executable form only, and with an imbedded

At about the time that Kaposi was finished, Dragon hired

Fiondella to work on a project called Sorbinil. Fiondella wrote code

for this project and submitted an executable to Dragon. However, as

the deadline for the project approached, problems developed with

the program. Dragon called Fiondella to ask him to come to

Dragon's office in New York and fix the program, but Fiondella was

out of town. A friend of Fiondella’s went to Dragon's office instead,

and managed to fix the immediate problem by following Fiondella’s

instructions over the telephone.

Unfortunately, additional problems arose. Fiondella himself

went to Dragon's premises on June 17, 1985. Fiondella and one of

Dragon's freelance computer programmers entered into a heated

argument over whose code was causing the problem. The freelance

programmer demanded that Fiondella turn over his code, so that the

programmer could examine it himself. When Fiondella refused, the

programmer stated that he had the ability to get Fiondella’s code off

Dragon's computers anyway, because he could “unerase” the code

that Fiondella had put on the computers during his visits there and

(seemingly) erased upon leaving. Fiondella became enraged.

Dragon's president, Hodge, was present at the altercation and

decided that because Fiondella had acted unprofessionally, he could

no longer work for Dragon. Fiondella successfully fixed the problems

with the software shortly after that.

Defendant Darsee then gained access to the code that

Fiondella had put on Dragon's computers and seemingly erased.

In June 1985, [sic] Dragon produced the third videodisc

program for Roche, Hairy Cell Leukemia. Roche wanted two

versions: Hairy Cell U.S. and Hairy Cell Europe. Dragon produced

an interim version called Hairy Cell Roche for distribution to Roche's

European subsidiaries, but did not keep a copy because Dragon

considered it to be an interim program.

In 1986, Dragon made a program for Pfizer called Low Back

Pain. This program included the Backpain Expert Module. Shortly

thereafter, Dragon produced a program called Heartiab for Pfizer.

Darsee wrote the code for this program, except for the animation and

image retrieval routines, which were Fiondella's. Fiondella was paid

for this code.

A66

$$$

So tnt Aes

Defendants admit that Hairy Cell Roche, Low Back Pain, and

Heartilab used Fiondelia's image retrieval routines.

Late in 1985, Darsee began to develop a paint-anddraw

program called Paintbox. The early version of this software included

Fiondella’s image retrieval routines. Darsee sent a letter to the Kurta

Corporation suggesting that Dragon and Kurta co-marketing some

of the programs Dragon had developed, including Paintbox. Nothing

came of this suggestion.

About this time, Dragon began to market itself as having a

division called Dragon Expert Systems that specialized in interactive

technology. Dragon sponsored a hospitality suite at a conference of

the American Association of Family Practitioners on October 9-11,

1985. It solicited interest in this presentation by sending letters to

prospective clients and issuing a press release describing itself as a

group of physicians and artists capable of producing computer

images. No evidence was adduced showing that any sales resulted

from this presentation.

registration for a package of programs that included the following: (1)

@ program written in BASIC entitled "SHOWPIX.bas," which is an

image retrieval routine; (2) a collection of object code routines called

"8068/8 Support Routines," which included assembly code routines

used to retrieve and display images; and (3) the source code for the

Kaposi program.

In November 1986, Darsee exhibited the program Hairy Cell

Roche at a meeting of the Intemational Interactive Communications

Society. He did not credit Fiondella or Softel for any of the code

contained therein. The presentation did not produce any business.

In early 1987, Softel filed this suit alleging, inter alia, that the

defendants had infringed copyrights Softel held in its programs, had

misappropriated trade secrets in the code, and had violated § 43(a)

of the Lanham Act.

In 1988, after the commencement of this litigation, Dragon

made the following programs, which Softei claims are also infringing:

Unasyn, Micro, OB/GYN, Managed Health Care, Heart Command

(collectively, the "post-litigation programs"). These programs are

written in a different computer language than Fiondella's original

code, and are designed to work with different hardware.

During discovery, Softel attempted to change its outside trial

A67

expert witness, ° but the new expert was unable to meet a discovery

deadline imposed by Magistrate Judge Nina Gershon. Magistrate

Judge Gershon forbade Softel to rely at trial on any outside expert

other than its original one. The district court affirmed this preclusion

order. See Softel, inc. v. Dragon Med. & Scientific Communications,

Inc., No. 87 Civ. 0167, 1990 WL 164859, at *8 (S.D.N.Y. Oct. 24,

1990) (“Softe/ F). The case then went to a bench trial before Judge

Cannella in late April and early May 1991. The Judge found, inter

alia, that the defendants’ pre-litigation programs infringed Softel's

programs, and that the defendants had misappropriated the trade

secrets contained within Softel's image retrieval routines. There is

no appeal from those findings or the damages ultimately assessed

in connection with them. However, the judge rejected Softel's claims

of infringement in the post-litigation programs, as well as its Lanham

Act and trade secret claims. See Softe/ ii. Several years later, the

issue of damages was tried before the Hon. Miriam G. Cedarbaum,

who awarded Softel $34,880.28 compensatory damages on its

well as $100,000 punitive damages against Darsee and $150,000

punitive damages against Dragon for willful trade secret

misappropriation. See Softel, inc. v. Dragon Med. & Scientific

Communications, Inc., 891 F. Supp. 935, 946 (S.D.N.Y. 1995)

(“Softel liI"). Judge Cedarbaum subsequently reduced the punitive

damages awards to $35,000 ageinst Darsee and $50,000 against

Dragon. See Softel, inc. v. Dragon Med. & Scientific Communi-

cations Inc., No. 87 Civ. 0167, 1995 WL 606307, at *2 (S.D.N.Y. Oct.

16, 1995). Softel appeals the trial court's preclusion of its trial expert

and the rejection of its copyright infringement claims relating to the

post-litigation programs. It also appeals the dismissal of its Lanham

Act and trade secret claims (including the damages calculation under

the latter) and the court's rejection of its claim that Hodge was

vicariously or contributorily liable for infringement. We affirm the trial

court's rulings, except that we remand the case for further con-

sideration of Softel's claims that Dragon's post-litigation programs

infringed the copyrightable structure of Softel's programs, and that

the post-litigation programs misappropriated trade secrets in Softel's

programs.

ll. DISCUSSION

A. Preclusion of Softel’s Expert

In December 1989, Magistrate Judge Gershon set adiscovery

® Fiondella also presented expert testimony for the plaintiff at trial.

A68

cutoff date of January 30, 1990. At a pretrial conference on

December 6, 1989, Softel advised Magistrate Judge Gershon that it

was substituting a new expert, Dr. Thomas A. DeFanti, for its former

expert, Aaron Grosky. Magistrate Judge Gershon agreed to allow

Softel to serve a report by its new expert, but said that the new

expert's report must be submitted by December 22, so that Dragon

would have time to respond before the deadline. Softe/ / at *2.

Softel also announced that its first expert, Grosky, refused to return

the diskettes that contained the programs at issue in the litigation,

because of a fee dispute. Apparently, Softel had not made

duplicates of the diskettes before giving them to Grosky. Dragon

agreed to duplicate the disks it had, and delivered 175 disks to Softel

a few days later, on December | 1, and a few remaining diskettes a

week later, on December 18, three days before the discovery cutoff

deadline. On December 21 (the day before the deadline), Softel

asked that the date be extended, as DeFanti needed more time to

review the materials. On January 8, 1990, Magistrate Judge

Gershon refused to extend the deadline, holding that Softel had

produced no justified explanation. On January 12, Magistrate Judge

Gershon explained this preclusion order as disallowing Softel from

presenting at trial the testimony of any expert witness from outside

the company except that of the expert originally designated, i.e.,

Grosky. Softel objected to these rulings pursuant to Fed. R. Civ. P.

72(a) but Judge Cannella upheld both rulings. See id. At trial, Judge

Cannella also rejected Softel's attempt to have DeFanti's report

introduced as rebuttal evidence, stating that the tenor of his first

order had been that Grosky would be the only outside expert witness

for Softel, and that this order included Softel's rebuttal case. Softel

challenges these rulings as abuses of discretion on the part of the

district court.

We review the district court's order for abuse of discretion.

See Update Art, inc. v. Modiin Publ'g, Ltd., 843 F.2d 67, 71-72 (2d

Cir. 1988). In determining whether a district court has exceeded its

discretion, we consider the following factors: (1) the party's

explanation for the failure to comply with the discovery order, (2) the

importance of the testimony of the precluded witness; (3) the

prejudice suffered by the opposing party as a result of having to

prepare to meet the new testimony; and (4) the possibility of a

continuance. See Outley v. City of New York, 837 F.2d 587, 590-91

(2d Cir. 1988).

With respect to the first Outley factor, we note that Softel was

allowed to change its expert roughly sixty days before the discovery

deadline on the condition that the new expert file his report roughly

A69

a month later, i.e. by December 22. Softel’s explanation for its failure

to comply with this deadline was that DeFanti did not have enough

time to conduct his inquiry because he did not have access to the

relevant diskettes until shortly before the deadline. This explanation

is inadequate. Softel could have provided its new expert with

additional time in a variety of ways: it could have retrieved its

diskettes from Grosky by paying him the disputed fee and then suing

for the alleged overcharge, it could have made copies of the

diskettes before giving them to Grosky, or, most obviously, it could

have notified the court and the defendant of the fee dispute several

months earlier than it did. Dragon cannot be charged with the

burden of producing the diskettes from which DeFanti was to work:

it gave additional copies of these disks to Softel as an

accommodation.

Softel directs our attention to Potlatch Corp. v. United States,

679 F.2d 153 (9th Cir. 1982). In that case, which involved a

complicated tax dispute, the government advised the court when it

was first setting discovery deadlines that it had not yet hired an

expert, and that all of the experts it had interviewed had estimated

that work on the project would take six months. See id. at 154. The

court set a deadline of six months later. When the government failed

to meet this deadline, the district court excluded the experts’

testimony. The Ninth Circuit reversed, taking into account the

following facts: the district court's deadline could reasonably have

been construed by the government to have been a precatory one;

government attorneys must endure considerable red tape in order to

hire an expert; the government did not control the experts; and,

finally, the taxpayer delayed also. See id. at 155-56. We believe

Potlatch is distinguishable on these facts. In this case, the deadline

was Clearly not precatory, Softel did not have to deal with

governmental red tape to hire its witness, and, perhaps most

importantly, the district court was not notified that the expert would

not be able to comply with the deadline until the day before the

deadiine itself-a far cry from the situation in Potlatch where the

government notified the court at the initial status conference.

Discovery in this case began in early 1987 and ended in January

1990: Softel does not claim that an expert could not have completed

the required analysis within that time. Instead, it claims that the time

it was granted after it decided to change experts late in the period,

and after it had (not irretrievably) lost its only copy of the relevant

materials to its first expert, was inadequate for it to alter or bolster

portions of discovery that had already taken place. On these facts,

Potlatch avails them naught.

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The second Outley factor-the importance of the testimony of

the precluded witness-cuts in favor of Softel, but only slightly. While

it is of course important to have an expert in a technical trial such as

this, Softel did have another expert it could, and did, use: Softel's

president, Fiondella. Softel was denied the opportunity to bolster

Fiondella's testimony with DeFanti's, but this prejudice is slight when

compared with, for example, that suffered by the plaintiff in Outley,

whose only corroborating fact witnesses had been excluded in a trial

in which credibility was the crucial issue. See Outley, 837 F.2d at

59091. Moreover, Softel was given an opportunity to enter both of

Grosky's reports into evidence, but apparently chose not to do so.

Under these circumstances, the prejudice resulting from the

preciusion of DeFanti was slight, and hardly "tantamount to a

dismissal," as Softel claims.

The third Outley factor is the prejudice suffered by the

opposing party as a result of having to prepare to meet the new

testimony. In Outley, this burden was slight. There, the plaintiff

alleged police misconduct, and sought to put on two eyewitnesses.

This Court noted that “a brief interview would have allowed the

(defendant] to probe the ability of the witnesses to observe, to find

out why [the witnesses] were on the street, and to uncover

weaknesses or conflicts in their testimony.” /d. at 591. We also

specifically noted that "the testimony [of the witnesses] was not the

technical or specialized evidence given by an expert witness.” /d.

Here, the excluded testimony was expert testimony. Moreover, the

parameters of the dispute in a highly technical case such as this are

largely defined by expert testimony. Therefore, any differences

between DeFanti's testimony and Grosky’s would have redrawn the

boundaries of the case and almost certainly have prejudiced

Dragon's ability to meet Softel's attack. Because Dragon would have

been forced, at a very late date in the discovery process, to

accommodate potentially significant shifts in the theories being

offered against it, this factor cuts in favor of Dragon.

The final Outley factor is the availability of a continuance.

Here, no trial date had been set, and a continuance was available.

However, expeditious management of discovery schedules is

especially important in cases of this nature because they require

extensive expert involvement over lengthy periods of time.

Therefore, the burden on the trial court of granting a continuance is

greater than in some other cases. Softel points to the fact that this

case did not go to trial for many months after the preciusion order as

evidence of the propriety of a continuance. This of course is 20/20

hindsight. Had the court granted a continuance for Softel, it probably

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would have had to grant additional time for Dragon to respond.

When trial courts permit deadline slippage of this sort, trials cannot

be scheduled when they ought to be, resulting in the backup of other

cases and eventual scheduling chaos as a series of bottlenecks

builds. Additionally, the enormous length of every step of the

proceedings in this case militated against any more continuances.

Denial of a continuance in the circumstances was certainly within the

sound discretion of the trial judge.

The first, third, and fourth Outley factors cut against Softel;

the second cuts

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