UNIVERSITY COMPUTING COMPANY, Plain tiff-Appellee-Cross-Appellant, v.

LYKES-YOUNGSTOWN CORPORATION, Lykes-Youngstown Computer Services Corp., and Oliver F. Shinn, Defendants-Appellants-Cross-Appellees. No. 73-2688.

United States Court of Appeals, Fifth Circuit. Nov. 15, 1974. Rehearing and Rehearing En Bane Denied Dec. 17, 1974.

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Charles F. Clark, Ted R. Manry, III, Tampa, Fla., R. Byron Attridge, Atlanta, Ga., for defendants-appellants-crossappellees.

Hugh M. Dorsey, Jr., W. Lyman Dillon, Atlanta, Ga., for plaintiff-appelleecross-appellant.

Before BROWN, Chief Judge, TUTTLE, Circuit Judge, and YOUNG, District Judge.

TUTTLE, Circuit Judge:

I. FACTS This case involves three separate claims for damages arising out of a complicated series of transactions between four corporations and a number of their executive officers. The trial lasted three weeks and the record is correspondingly lengthy and complex. We begin by briefly summarizing the critical facts.

A. Joint Venture Agreement Between UCC and LYC. University Computing Company (UCC), a Texas corporation, and LykesYoungstown Corp. (LYC), a Delaware corporation, entered into a written agreement on July 1, 1969 to create jointly a new corporation, to be called Lykes-University Computing Company (Lykes/UCC), which was to offer com-

puter services^{Footnote 1} in the southeastern United States. This enterprise was a new venture for LYC, which is a large diversified holding company active in insurance, shipping and other manufacturing enterprises. UCC was active in other parts of the country, particularly in the southwest, offering essentially the same services as Lykos/UCC was to offer. The joint venture was designed to open new markets for the sale of UCC's computer systems.-As part of their agreement and pursuant to it, UCC funded early operations of the new corporation, including payrolls, equipment purchases and other expenses. These expenditures totalled ;i $G6,647.45.

Several UCC employees were hired by the new corporation, ineluding defendant Oliver Shinn who became President of Lykcs/UCC. ^{Footnote 4}

joint venture agreement provided UCC was to sell computer "hardware" (i. e., computer equipment) and "software" to the new corporation. UCC was further to receive 10% of the gross disbursements of the new corporation for the first year for "management services." LYC agreed to have its various con52 trolled subsidiaries (with the exception of Youngstown Sheet and Tube Co.) purchase computer services from the new corporation. The agreement did not set forth in any greater detail the manner in which the corporation was to be managed, or by whom.

The new corporation, Lykes/UCC, was chartered in Delaware, and its articles of incorporation provided for a Board of Directors to be composed of four individuals, who then had the option of electing a fifth. This was pursuant to the terms of the joint venture agreement which provided that UCC and LYC would each select two members of the Board of Directors of Lykes/UCC.

By October, 1969, before either party had contributed capital and before stock had been issued, the two original memThe bers of the joint venture came to disagree over the day-to-day management of Lykes/UCC The original intent of the parties is now in dispute, with UCC pointing to the fee for "management services" and other terms of the contract as evidence that it was intended to make operational management decisions, while LYC pointis to the terms of

the contract, provisions of the Delaware Corporation Act and other extrinsic evidence to support its claim that the new corporation was to be wholly independent.

The parties aired their disagreements at a meeting held on September 30, 1969. The outcome of this meeting is now also in dispute. LYC claims UCC agreed to make a final decision, prior to October 7, about remaining in the joint venture and that in a telephone conversation on October 6 both sides agreed to terminate the joint venture. UCC claims the matter was left open at the meeting and thereafter, and that while both sides understood UCC would likely wish to withdraw, the terms of that withdrawal and the amount of compensation for initial expenditures and loss of prospective profits were left unsettled.

On October 7, 1969, a fourth corporation, Lykes-Youngstown Computer Services Corp. (LYCSC) was formed as a wholly owned subsidiary of LYC. Oliver Shinn became President of this corporation; all property formerly owned by Lykes/UCC was taken over by LYCSC, and the new subsidiary of LYC proceeded to enter into the business planned for Lykes/UCC. UCC had no part in the decision to create this fourth corporation, and UCC now claims it wasn't aware of the existence of LYCSC until a atory on it appeared in the Wall Street Journal on October 14, 1969. It is undisputed that UCC did not authorize the creation of the new corporation, nor did UCC authorize the seizure of all Lykes/UCC's property.

While a draft of a rescission and termination agreement was prepared by UCC following the October 6 telephone conversation, and a copy was sent to LYC for its consideration, it is undisputed that the terms of UCC's withdrawal were unsettled and the parties remained in substantial disagreement over the amount of compensation UCC was to receive. The draft agreement was not signed.

During the period between July 1 and September 30, while the disagreement over the management of Lykes/UCC was developing, Oliver Shinn met twice with executive officers of LYC. UCC claims to have been unaware that these meetings were taking place. In any event, it is undisputed that UCC certainly was unaware of the matters discussed at these meetings. Among these topics discussed were the desirability of Lykes/UCC being independent of UCC and LYC, the burden of paying the 10% management fee owed UCC under the joint venture agreement, and the fact that Shinn was confident the UCC name was unlikely to further sales efforts in the southeast where UCC was virtually unknown. Although one of the meetings Shinn had with LYC executives took place when he was still a Vice President of UCC, Shinn made it clear at the beginning of the meeting that he was there solely on his own behalf, and he felt no loyalty to his employer, UCC.

In preparation for the September 30 meeting between UCC and LYC, Shinn prepared a report which he made available only to LYC on a confidential basis. In that report Shinn demonstrated that for $688,000 LYC could fund a wholly owned subsidiary which would have substantially the same chances for success as the joint venture corporation, to which LYC had committed $500,000 for only half ownership. These secret meetings and the confidential Shinn memo were the primary evidence of LYC bad faith in terminating the joint venture agreement introduced at trial.

B. Misappropriation of AIMES III By LYCSC.

Among the computer systems Lykes/UCC was to market was a retail inventory control system owned by UCC called "AIMES III." (Automated Inventory Management Evaluation System). This system was designed to maintain information on inventory in

Cite us .-><>. F.20. 51S (1!>74) retail department stores. ^{Footnote 5}

UCC had previously sold the system to Leonard's Department Store in Fort Worth, Texas, subject to a restrictive use agreement which limited Leonard's to private and confidential use of the system. Leonard's paid $41,700 for the rights to restricted use of AIMES III. Lykes/UCC was to offer this system, as well as several others designed and owned by UCC, to customers in the southeast. The joint venture agreement provided for discount sales of these systems to Lykes/UCC at no more than 209£ of UCC's development costs.

Following the incorporation of LYCSC (the newly created subsidiary of LYC), the new corporation proceeded to offer AIMES III to customers. Rather than purchase unrestricted rights to the system from UCC, LYCSC elected to steal the system from Leonard's. In December, 1969, LYCSC bribed an employee of Leonard's for $2500 to deliver a suitcase filled with computer tapes and other materials to an employee of LYCSC. In February, 1970, this same Leonard's employee was paid to fly to Atlanta from Dallas with additional tapes and documents once the materials originally obtained were found to be insufficient to run the system. With the new materials and the help of the Leonard's employee in installing the system in the LYCSC in-house computer, LYCSC was able to run the system in its entirety. ^{Footnote 6}

After receiving these materials in December. LYCSC attempted to market the AIMES III system. This marketing effort continued until April of the following year. Salesmen for LYCSC made offers to department stores in Atlanta, New Orleans and Tampa, Florida. In addition the system was offered to another computer services firm in Atlanta. While none of these offers was accepted, in several cases detailed sales presentations were made by sales representatives of LYCSC. A brochure was printed by LYCSC' to assist the sales effort."

C. Judgment in District Court.

UCC brought this suit against LYC, LYCSC and Oliver Shinn claiming damages under seven Counts. Counts 1 and 2 were combined at trial into a single count against LYC for breach of the joint venture agreement. Count 3 charged a conspiracy among the three defendants to misappropriate UCC's trade secret, AIMES III; Count 4 charged a conspiracy among the three defendants to convert unlawfully AIMES III; Count 5 charged a conspiracy among the three defendants to infringe UCC's common law copyright in AIMES III; Count 6 charged a conspiracy among the three defendants to vio-

late Oliver Shinn's non-competition agreement with UCC; and finally Count 7 charged a conspiracy among the three defendants to induce a breach of the restrictive use agreement between Leonard's and UCC. Plaintiff conceded at trial Counts 3, 4, 5 and 7 all involved essentially the same damages for the misappropriation of the AIMES III system. The district court granted a directed verdict for defendants on Counts 5 and 7. The remaining counts went to the jury, which returned verdicts against the plaintiff on Counts 4 and 6, against defendant LYC on Count 1 and against all three defendants on Count 3. The jury awarded $172,000 against LYC for its breach of the joint venture agreement (Counts 1 and 2) ; $220,000 against all three defendants for misappropriation of UCC's trade secret, AIMES III (Count 3) ; and finally the jury awarded $100,000 in attorneys' fees against LYC on Count 1.

Defendants bring this appeal attacking these verdicts on a number of different grounds. Plaintiff cross-appeals the directed verdict on Count 7, and the verdicts on Counts 4 and 6. We affirm the judgment of the court below on the jury verdict on Count 1 against defendant LYC, and on Count 3 against defendants LYC, LYCSC and Oliver Shinn. We affirm judgment on the jury verdict on Counts 4 and 6 against plaintiff UCC and affirm the directed verdict against plaintiff UCC on Count 7. We reverse and remand for a new trial on the issue of attorneys' fees.

II. BREACH OF THE JOINT VENTURE AGREEMENT BY LYC.

A. Enforceability of the Joint Venture Agreement.

The jury found that LYC breached its July 1 joint venture agreement with UCC by unilaterally terminating the joint venture corporation and appropriating the property and assets of the joint venture corporation for its own use. The defendant first challenges the validity of the July 1 agreement which it was found to have breached. LYC and UCC subsequent to July 1 were unable to agree as to how the agreement allocated management control. UCC claimed the right to make day-to-day operational decisions about such matters as employment, equipment acquisitions, and the like, while LYC claimed Lykes/UCC was intended to be independent of both the members of the joint venture and its President, Oliver Shinn, was to have a free hand in managing the new corporation. LYC's argument is that to the extent the joint venture agreement failed to settle this important question it was deficient.

Under Georgia law * when the parties fail to agree on some element of a contract which affects the operation of the agreement in some extensive and important way, such a defect cannot subsequently be cured, and the contract is void for indefiniteness. We believe the testimony presented a jury question as to whether the parties agreed over operational control, and whether their July agreement can be so construed. The question whether there was a meeting of the minds of the two parties is essentially a factual one, and this would determine whether the agreement was enforceable. The problem here really is not that the parties had failed to consider and agree on some vital element of the contract, rather it is the parties' dispute as to what their original agreement was.

The record amply supports the jury finding that the contract was enforceable. The written agreement's references to accounting and management services might on its face be ambiguous, ^{Footnote 9} but there was sufficient pa-

rol evidence for the terms to be understood by the jury as indicating the parties' intent that UCC exercise day-to-day operational supervision over the affairs of the new corporation. Further, the conduct of Oliver Shinn subsequent to his taking the position of President of Lykes/UCC supports this jury finding. Shinn used normal UCC procedures and accounting forms in requesting authorization for purchases, and sought UCC approval of his hiring guidelines. These actions are inconsistent with LYC's claim that he had always been meant to function independently of UCC. Until shortly before the ultimate rift between the parties, when he did in fact begin to act independently...thereby necessitating the September 30 meeting'Shinn performed essentially as a subordinate of UCC's President of the Data Link Division, Karl Young. Young was asked to approve all expenditures, down to so trivial an expenditure as moving expenses for a particular employee of Lykes/UCC. There was sufficient evidence that this pattern of conduct was what the parties intended that the jury could conclude the contract was complete and enforceable.

While LYC executives vigorously denied that they had ever agreed to this at trial, UCC executives just as vigorously testified that they had. On this type of factual dispute, concerning primarily the credibility of the witnesses, we are bound by the jury's findings. Boeing Co. v. Shipman,  411 F.2d 365 (5th Cir. 1969) (en bane).

The defendant next argues that if the UCC view of its asserted authority under the joint venture agreement to make operational decisions is accepted as being what the parties intended, the contract is nonetheless void under Delaware law as an illegal delegation of managerial authority."» We believe Delaware law is inapplicable to the type of delegation of authority involved in this case.

Title 8 of the Delaware Corporation Law, § 141 (a) provides that the "business and affairs of every corporation organized under this chapter shall be managed by a board of directors .." " There is substantial case law limiting the power of a board of directors to delegate this ultimate vi authority and in any case where a lawful delegation of managerial authority is made, such a delegation must be made through the Certificate of 1:! Incorporation.

No such express provision was made in the Certificate of Incorporation of Lykes/UCC, nor was Lykes/UCC incorporated as a closely held corporation which under Delaware

l4 law is permitted greater flexibility in delegating the authority of the board of directors than are all other corporations. We recognize that under Delaware law a board of directors cannot be ousted from ultimate managerial responsibility, but we do not believe that was what was agreed to here.

Rather, in our view, the joint venture agreement was intended to permit the board of directors of Lykes/UCC the type of ultimate decision-making responsibility called for by the Delaware Corporation Law, but intended day-to-day decisions normally left to the executive officers of a corporation to be left to UCC. Karl Young, at the time of the joint venture President of UCC's Data Link Division, testified at trial that the relationship of the President of Lykes/UCC to UCC was to be that of a Vice President of a data link region' with line responsibility for some decisions, but ultimately under the authority of the President of the Data Link Division. Young testified that "there was two levels of management involved here" distinguishing the type of authority the board of directors was to have from the type of authority UCC was to have: ¦"¦ . . . one level of management which I refer to as the day-to-day management, would be directed to data-link and to me. . . . Obviously there is another level of management. . . . And this is the Board level which is a far-reaching and investors' type of participation and concern. The Board would meet occasionally or rarely, maybe two, three times a year. And they would be concerned with whether or not we acquired another company or whether or not we made some great investment or far-reaching type of thing.

It seems clear to us that UCC was demanding something less than complete managerial control.

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Surely no one disputes the fact that executive officers who manage a corporation possess managerial authority which in one sense is delegated by the board of directors, but which no one would claim was affected by the rule against complete abrogation of board of directors' responsibility. Similarly here, while in one sense UCC's responsibility for making operational decisions is a delegation of authority by the board of directors, we do not believe that Delaware restrictions on delegation of ultimate managerial responsibility are applicable to the authority UCC claimed under the joint venture agreement.

B. Challenges to Jury's Finding LYC Breached the Joint Venture Agreement.

We conclude that there was more than adequate evidence for the jury to find that LYC breached the joint venture agreement with UCC. LYC could be found to have done this by unilaterally terminating Lykes/UCC, the joint venture corporation, and substituting in its place LYCSC, a wholly owned subsidiary which thereupon seized all the assets of Lykes/UCC and entered into the business planned for the joint venture. LYC's defense came down to its claim that UCC unilaterally withdrew from the venture after orally rescinding the agreement over the telephone. The pivotal conversation in LYC's account of events leading up to the dissolution of Lykes/UCC was one between Frank Nemcc, then President of LYC, and Karl Young, then President of the Data Link Division of UCC, on October 6. Both men testified at trial, and both recounted substantially different accounts of the conversation'Nemec testifying that Young unconditionally withdraw on behalf of UCC, and Young denying any statement indicating UCC's intention to withdraw until the terms of withdrawal could be negotiated. This factual contro-

versy clearly comes down to the credibility of the two witnesses. We find no reason to upset the jury's finding that Young did not withdraw from the venture and that UCC's intention to withdraw was conditioned upon the two sides coming to terms over the amount of compensation UCC was to receive.

The evidence the jury received was conflicting, In addition to the direct conflict between Nemec's and Young's versions of the October 6 telephone conversation, there were a number of documents which each side used to support its claim. The documentary evidence was ambiguous, and thus while we don't find any of the evidence offered conclusive on this question, we are satisfied that the jury's decision that UCC did not unilaterally withdraw is permissible in light of all the evidence, and that in unilaterally terminating the joint venture on October 7 LYC breached its agreement with UCC.

C. Damayex for Breach of the Joint Venture Agreement. We finally come to the question of damages. In attacking the verdict of $172,000, LYC claims that there was no substantial evidence to support UCC's claim that in breaching the joint venture agreement LYC appropriated assets and business opportunities belonging to the joint venture without UCC's knowledge or consent. In part this raises again the question of mutual termination of the agreement which we have previously discussed.

We note there can be no doubt that LYCSC, LYC's subsidiary, appropriated the joint venture's property and business. In our view, once the jury found LYC breached the agreement with UCC, it was wholly justified in assessing damages in addition to the $66,647.45 which UCC had expended on behalf of LYKES/UCC before LYC's breach.¹" At trial UCC proved a variety of damages, including loss of the 10% management fee to October 1, 1970; loss of the 5% management fee for the period thereafter; loss of profits on sales and leases of hardware to Lykes/UCC as provided in the agreement ; and finally loss of the opportunity to begin operations in the southeast with the guaranteed flow of revenues from the Lykes subsidiaries obliged to purchase computer services from the new corporation. ^{Footnote 17}

Together, the amount of damages subject to proof at trial on Count 1 totalled well in excess of two million dollars. We find the jury verdict of $172,000 was supported by the record. ^{Footnote 18}

III. MISAPPROPRIATION OF UCC'S TRADE SECRET, AIMES III, BY LYC, LYCSC, AND OLIVER SHINN.

The defendants admit that LYCSC paid one Ron Clinton, an employee of Leonard's Department Store in Fort

Worth, Texas, $2500 to induce him to steal Leonard's copy of the ATMES III system and deliver the tapes and documents comprising that system to an LYCSC employee. The defendants do not now claim that this conduct was lawful or even defensible.

The defendants do not challenge the finding of the jury that they acted in concert. If the jury finding of misappropriation of AIMES III is thus upheld, all three defendants properly share liability.

A. Legal Standards on Protection of Trade Secrets A trade secret is protected against illegal appropriation and commercial use by a competitor. The development of this area of the law has been progressive, and most jurisdictions have developed similar standards. ^{Footnote 19}

What Georgia law exists in this area seems to follow the Restatement, Torts § 757."° We so held in Water Services, Inc. v. Tesco Chemicals, Inc.,  410 F.2d 163 (5th Cir. 1969).-'

Under the Restatement § 757 formulation, a trade secret is defined s as: ~ "Any formula, pattern, device or compilation of information which is used on one's business and which gives him an opportunity to obtain an advantage over competitors who do not know or use it." In large measure the requirements simply are that "the parties view the process or device as a secret and that the secret be revealed in confidence . . ." Water Services, supra, 410 F.2d at 172. Liability attaches under the Restatement if one "who discloses or uses another's trade secrets without a privilege to do so . (a) . . . discovered the secret by improper means or (b) his disclosure or use constitutes a breach of confidence reposed in him by the (owner of the secret) in disclosing the secret to him, or (c) he learned from a third person with notice of the facts that it was a secret and that the third person's disclosure of it was otherwise a breach of his duty to the (owner of the secret) ..."

Unlike a patent which is totally protected for the period of time for which it is granted, the protection afforded a trade secret is limited'for it is protected only so long as competitors fail to duplicate it by legitimate, independent research. Water Services, supra.*³

While the defendants in this action have deprecated the value of s4 AIMES III and made an effort at

UNIVERSITY COMPUTING CO. v trial to challenge its uniqueness, they do not appeal the finding of the jury that AIMES III was a trade secret within the meaning of the § 757. Certainly it was undisputed that UCC viewed the system as a valuable and unique property, and used great caution in attempting to preserve its confidentiality. LYCSC itself described the system to one potential customer as ". . . the finest automated merchandising system available today," and proceeded to offer it to that customer for $45,000. Evidence was adduced at trial that AIMES III had unique capabilities and features which make it a valuable competitive product. ^{Footnote 25}

The jury could properly find that the AIMES III computer system owned by UCC was a trade secret. The jury further could find that LYCSC's appropriation of the system was unlawful and a knowing- violation of Leonard's restrictive use agreement with UCC. The requirements for liability under § 757 were satisfied in this case.

Once having determined that the jury finding that AIMES III was a trade secret wrongfully appropriated by the defendants was proper, the problem remains as to what is the appropriate measure of damages. It seems generally accepted that "the proper measure of damages in the case of a trade secret appropriation is to be determined by referLYKES-YOUNGSTOWN" CORP.

53 5 (1 518 (1974) ence to the analogous line of cases involving patent infringement, just as patent infringement cases are used by analogy to determine the damages for copyright infringement." International Industries, Inc. v. Warren Petroleum Corp.,  248 F.2d 696, 699 (3d Cir. 1957). The case law is thus plentiful, but the standard for measuring damages which emerges is very flexible.

In some instances courts have attempted to measure the loss suffered by the plaintiff. While as a conceptual matter this seems to be a proper approach, in most cases the defendant has utilized the secret to his advantage with no obvious effect on the plaintiff save for the relative differences in their subsequent competitive positions. Largely as a result of this practical dilemma, normally the value of the secret to the plaintiff is an appropriate measure of damages only when the defendant has in some way destroyed the value of the secret. The most obvious way this is done is through publication, so that no secret remains.

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Where the plaintiff retains the use of the secret, as here, and where there has been no effective disclosure of the secret through publication 7 the total value of the secret to the plaintiff is an inappropriate measure.

Further, unless some specific injury to the plaintiff can be established 'such as lost sales'the loss to the plaintiff is not a particularly helpful approach in assessing damages.

The second approach is to measure the value of the secret to the defendant. This is usually the accepted approach where the secret has not been destroyed and where the plaintiff is unable to prove specific injury. In the case before us, then, the "appropriate measui'e of damages, by analogy to patent infringement, is not what plaintiff lost, but rather the benefits, profits, or advantages gained by the defendant in the use of the trade secret." International Industries, Inc. v. Warren Petroleum, supra, 248 F.2d at 699. The cases reveal, however, many variations in the way this benefit to the defendant can be measured.

Normally only the defendant's actual profits can be used as a measure of damages in cases where profits can be proved, and the defendant is normally not assessed damages on wholly speculative expectations of profits. Sheldon v. Metro-Goldwyn Pictures Corp.,  309 U.S. 390, 60 S.Ct. 681, 84 L.Ed. 825 (1939). Had the defendants here been able to sell the AIMES III system at a profit, our task would be simplified.8 the defendants failed in their marketing efforts, no actual profits exist by which to value the worth to the defendants of what they misappropriated. However, the Supreme Court has held in a patent case that the lack of actual profits does not insulate the defendants from being obliged to pay for what they have wrongfully obtained in the mistaken belief their theft would benefit them. In re Cawood Patent,  94 U.S. 695, 24 L.Ed.

2! 238 (1877). >

The rationale for this seems clearly to be that the risk of defendants' venture, using the misappropriated secret, should not be placed on the injured plaintiff, but rather the defendants must bear the risk of failure themselves.

Accordingly the law looks to the time at which the misappropriation occurred to determine what the value of the misappropriated secret would be to a defendant who believes he can utilize it to his advantage, provided he does in fact put the idea to a commercial use. ^{Footnote 30}

This second technique frequently entails using what is called the "reasonable royalty" standard: while the parties to this action agree this is the appropriate standard, they are unable to agree on what the measure entails. Originally this measure was intended to deal with the situation where the misappropriated idea is used either to improve the defendant's manufacturing process, or is Because used as part of a larger manufactured product. In the early case of Egry Register Co. v. Standard Register Co., 23 F.2d 438 (6th Cir. 1928), a patent in-

fringement case, the defendant manufactured and sold cash registers which in part used a device developed by the plaintiff to roll paper through the machine. The trial court had awarded the plaintiff the total profits the defendant had made on all sales of the machines using this device. The Sixth Circuit Court of Appeals held this measure of damages was inequitable, because the device was only a part of the larger product sold by the defendant. Because no actual apportionment of profits based on what percentage of the success of the marketing of the machines was due to the plaintiff's device could be shown, the court held the proper measure of damages would be a reasonable royalty on defendant's sales, thereby creating an apportionment of profits based on an approximation of the actual value of the infringed device to the defendant.

The Court explained its new measure in this way: "To adopt a reasonable royalty as the measure of damages is to adopt and interpret, as well as may be, the fiction that a license was to be granted at the time of beginning the infringement, and then to determine what the license price should have been. In effect, the court assumes the existence ab initio of, and declares the equitable terms of, a supposititious license, and does this mine pro tune; it creates and applies retrospectively a compulsory license, ¦. . . " The Court further held the proper standard would be a willing buyer-willing seller test: " . . . the primary inquiry . . . is what the parties would have agreed upon, if both were reasonably trying to reach agreement." Egry Register, supra, at 443.

The language of the Egry decision has been often quoted, but the type of measure used by the Court, based on actual sales, has taken many different forms. ^{Footnote 31}

As the term is presently understood, the "reasonable royalty" measure of damages is taken to mean more than simply a percentage of actual profits. The measure now, very simply, means "[t]he actual value of what has been appropriated." Vitro Corporation of America v. Hall Chemical Co.,  292 F.2d 678, 683 (6th Cir. 1961). When this is not subject to exact measurement, a reasonable estimate of value is used. Many different factors are now considered in arriving at the "i-easonable royalty" in any given case: "As pointed out in many cases in a case where no established royalty is shown it is for the Court to determine a reasonable royalty which represents the value of that which has been wrongfully taken by the infringe!¹ , . . it is sufficient to point out that in making such determination many factors were taken into consideration . . .. In fact, the reasonable royalty was based upon the advantages which would have

accrued to (the infringer) had it negotiated a license . . . " Union Carbide Corp. v. Graver Tank and Manufacturing Co.,  282 F.2d 653, 674675 (7th Cir. 1960), cert, denied, 365 U. S. 812, 81 S.Ct. 692, 5 L.Ed.2d 691 (1961).

One other important variation on this "reasonable royalty" standard is the standard of comparison method, which also attempts to measure the value to the defendant of what he appropriated. As the Court in International Industries, Inc. v. Warren Petroleum Corp.,  248 F.2d 696, 699 (3d Cir. 1957) explained this method, relating it to the facts of the case in which the defendant had misappropriated a method of converting dry cargo vessels into ones equipped to transport liquefied petroleum gas, and had actually used the technique to convert one vessel: "This method contemplates the comparison of the cost of transportation by means of the use of the trade secret with a method of accomplishing the same result which would have been open to defendant had he not appropriated the trade secret."

Occasionally this has been taken to mean the difference in costs to the defendant of developing the trade secret on his own, using the actual development costs of the plaintiff as the complete measure of damages. Servo Corp. v. General Electric Co.,  342 F.2d 993 (4th Cir. 1965), cert, denied, 383 U.S. 934, 86 S.Ct. 1061, 15 L.Ed.2d 851 (1936). This measure of damages simply uses the plaintiff's actual costs, and in our view is frequently inadequate in that it fails to take into account the commercial context in which the misappropriation occurred.

In certain cases, where the trade secret was used by the defendant in a limited number of situations, where the plaintiff was not in direct competition with the defendant, where the development of the secret did not require substantial improvements in existing trade practices but rather merely refined the existing practices, and where the defendant's use of the plaintiff's trade secret has ceased, such a limited measure might be appropriate. In the type of case which we now consider, when the parties were potentially in direct competition and the course of conduct of the defendant extended over a period of time and included a number of different uses of the plaintiff's trade secret, and where the process of developing a computer system was very difficult and required substantial technical and theoretical advances, we believe a broader measure of damages is needed.

This broader measure should take into consideration development costs, but as only one of a number of different factors. We believe this type of measure is appropriate despite the fact that the inclusion of other factors means the final damage figure "need not be as precise as if the actual development costs for the trade secret were itself the measure of damages." Forest Laboratories, Inc. v. Pillsbury Co.,  452 F.2d 621, 628 (7th Cir. 1971).

Our review of the caselaw leads us to the conclusion that every case requires a flexible and imaginative approach to the problem of damages. We agree with the Court of Appeals for the Sixth Circuit that "each case is controlled by its own peculiar facts and circumstances," Enterprise Manufacturing Co. v. Shakespeare Co., 141 F.2d 916, 920 (6th Cir. 1944), and accordingly we believe that the cases reveal that most courts adjust the measure of damages to accord with the commercial setting of the injury, the likely future consequences of the misappropriation, and the nature and extent of the use the defendant put the trade secret to after misappropriation. Naturally in some cases the damages will be subject to exact measurement, either because the parties had previously agreed on a licensing price as in Vitro Corp. v. Hall Chemical Co., supra, or because some industry

standard provides a clear measure.

38 Where the damages are uncertain, however, we do not feel that that uncertainty should preclude recovery; the plaintiff should be afforded every opportunity to prove damages once the misappropriation is shown.

Certain standards do emerge from the cases. The defendant must have actually put the trade secret to some commercial use. The law governing protection of trade secrets essentially is designed to regulate unfair business competition, and is not a substitute for criminal laws against theft or other civil remedies for conversion. ^{Footnote 33}

the defendant enjoyed actual profits, a type of restitutionary remedy can be afforded the plaintiff'either recovering the full total of defendant's profits or some apportioned amount designed to correspond to the actual contribution the plaintiff's trade secret made to the defendant's commercial success. Because the primary concern in most cases is to measure the value to the defendant of what he actually obtained from the plaintiff, the proper measure is to calculate what the parties would have agreed to as a fair price for licensing the defendant to put the trade secret to the use the defendant intended at the time the misappropriation took place.

In calculating what a fair licensing price would have been had the parties agreed, the trier of fact should consider such factors as the resulting and foreseeable changes in the parties' competitive posture; the prices past purchasers or licensees may have paid; the total value of the secret to the plaintiff, including the plaintiff's development costs and the importance of the secret to the plaintiff's business; the nature and extent of the use the defendant intended for the secret; and finally whatever other unique factors in the particular case which might have affected the parties' agreement, such as the ready availability of alternative processes. Hughes Tool Co. v. G. W. Murphy Industries, Inc.,  491 F.2d 923, 931 (5th Cir. 1973).

B. Challenges to Jury Instructions on Measuring Damages,

The district court charged the jury that the following factors should be considered by them in arriving at the proper damages for the defendants' misappropriation of AIMES III: (1) the development costs incurred by the plainIf tiff; (2) the fees paid by customers of the plaintiff who utilized the system on a service bureau basis; (3) the prices at which the system was leased or sold by the plaintiff for restrictive use; (4) the sale price placed on the system by the defendants; and (5) expert testimony as to what would constitute a reasonable royalty for the rights to unrestricted use of the system. We believe that these factors were proper to be considered by the jury.

The defendants challenge the trial court's charging the jury that they were to find the "reasonable value" of the computer system, arguing that the phrase "reasonable value" is an improper measure of damages, and that the proper measure can only be "reasonable royalty." In our view, the trial court's charge was proper. Naturally we read the charge in its entirety, and we do not believe that the trial court's charge in any way confused the jury as to what damages they were entitled to find. Defendants argue that the word "value" necessarily means the entire value of the system, or, in other words, the value of the system to the plaintiff, a measure they argue is appropriate only in cases where the secret has been totally destroyed. We believe the meaningful

504 question is not whether the word "value" was used, but whether the jury was properly charged, as they were here, that they could assess damages only for the actual use of the AIMES III system in an amount which would fairly approximate the price the parties would have come to, had the defendant been licensed to use the system as it did.

The court properly concluded its instructions on Count 3 by charging the jury: "[i]f you should further determine that (the plaintiff, UCC) has sustained any damages, it will be your responsibility to determine from all the evidence in the case what amount would be paid as a reasonable royalty for the unrestricted use of said computer program by a buyer willing, but not compelled to buy, to a seller willing, but not compelled, to sell." This was an accurate statement of the law.

C. Challenges to Jury's Finding Defendants Put AIMES III to a Commercial Use.

The defendants' position is quite simply that there was no evidence they ever "used" the system, as required by the law on misappropriation of trade secrets, and that accordingly the trial court erred in denying their motion for a directed verdict on Count 3. The defendants place considerable emphasis on the fact that, in their view, the plaintiff lost nothing. They point to the plaintiff's failure to prove lost profits as grounds for dismissal of plaintiff's claim for damages. In our view the established rule is that the plaintiff is not required to prove lost profits; rather it need only prove misappropriation of its valuable trade secret and prove that it was put to some commercial use.

The defendants claim that their inability to market the AIMES III system should insulate them from liability. While the defendants may be technically liable to the plaintiff under the formulation of § 757 of the Restatement of Torts due to the way they obtained the AIMES III system, they argue damages can be assessed against them only for a limited percentage of actual profits. We reject this view.

While the cases use the term "reasonable royalty" to describe the method of calculating damages, we do not believe the word "royalty" has the talismanic quality the defendants ascribe to it. While in certain cases the reasonable royalty would be a percentage of profits on actual sales, we do not accept the view that this need be the measure in all cases.

Rather the measure should correspond to the nature of the use. In cases where the trade secret was used to improve manufacturing, and subsequently manufactured items were sold at a profit, 84 it would seem natural and equitable to measure damages based on those sales. But when, as here, the trade secret itself was what was to be sold'unlike any of the other cases we have discussed'we do not believe the same measure should apply.

Superficially the defendants' argument that they did not "use" the AIMES III system seems supported by the cases. Almost without exception prior trade secret cases involved a device or process which was used by the defendant to improve his manufacturing process. Either the idea was some new way to improve manufacturing, or some new device which improved a larger manufactured product. Obviously when a trade secret is "used" in such cases, the use is manifest and extensive. Here the use by the very nature of the misappropriated secret is more subtle. The computer system had value in that it could be sold to customers for their internal us«e, or it could be used by its owner on a service bureau basis if the owner chose to lease time on its computer to outside clients, and permitted the clients to use the programs. Fur-

UNIVERSITY COMPUTING CO. v.

C.iti.asoWF.:. ther, the system had a value in that it represented a technical achievement, some new method of accomplishing the ordering of data to produce useful business reports. Testimony at trial indicated experts in the field of computer technology could be assisted in their experimental work by viewing the systems of others. Given these facts concerning the utility of the AIMES III system, in our view three separate sets of facts established a pattern of use of the system by the defendants which warrants damages for use of the system as if the defendants had been licensed to use it without restrictions.

Because of the earnestness with which this issue is argued by the parties, we feel it is necessary to discuss it in some detail.

First, it is clear that the defendants offered the system to potential buyers. They represented they held rights to the system which entitled them to sell the system to others. In some cases the defendants represented the system to be of their own design, designating the system under the initials MIMIC. In other cases the defendants acknowledged the UCC role in developing the system, but asserted rights to it. We believe this was a "use" which satisfied the requirements of the law on misappropriation of trade secrets.

Defendants claimed that computer service organizations frequently offered systems they did not own. Plaintiff's witnesses who had expertise in the field denied that this was true; defendants produced no examples of marketing campaigns of the type they conducted for systems the seller did not own. While it was shown that occasionally firms would sell systems they were in the process of developing (as indeed UCC had sold the AIMES III system to Leonard's before the research had been completed) clearly this is not the same thing as selling the system another owned. The only other instance of the marketing campaign preceding the sellLYKES-YOUNGSTOWN CORP.

54 1 1 5J.S (1&74) er's obtaining rights to the system was when the owner of the system had explicitly solicited such a campaign. We further believe the jury could find that LYCSC was attempting to sell a system it believed it had in its possession (i. e., the system it had misappropriated) rather than a system it believed it could purchase from UCC. The relations between UCC and the LYC subsidiary grew progressively more strained following what the jury found to have been LYC's breach of the joint venture agreement in October, 1969. The jury could reasonably infer that UCC was unwilling to deal with LYCSC and that LYCSC had no reason to believe that it would be able to purchase a copy of the AIMES III system from UCC after December, 1969; the defendants offered no evidence that they attempted to revive negotiations for purchases of software from UCC during 1970, despite the fact their marketing efforts continued unabated.

Finally, we find it difficult to ignore the fact that in February, months after all negotiations for the purchase of AIMES III ceased, LYCSC was still anxious to obtain the entire system and used Ron Clinton to obtain additional tapes and materials. We accept the jury's finding that LYCSC intended to sell the system it had misappropriated.

While defendants presented testimony at trial attempting to show that LYCSC arranged to steal the system only to guarantee that upon later purchasing the system from UCC they could be assured they received a current copy of the system, this testimony was thoroughly discredited by the fact that undisputed evidence at trial proved that the negotiations with UCC over the purchase of AIMES III ended prior to January, 1970, and that despite this fact LYCSC obtained additional AIMES III materials from Clinton in February, subsequently ran the system in their computer in February, compiled a complete Cobol listing for the system, and continued to offer the system to poten-

tial customers until April, 1970. The jury could reasonably reject this defense.

Once having determined this, it seems clear that any misappropriation, followed by an exercise of control and dominion such as an attempted sale (in which lay the principal value the system held for LYCSC), must constitute a commercial use for which damages can be awarded.

Second, LYCSC displayed the component programs and listings of AIMES III to Hugh Cort of Technical Resources, Inc. Once again such conduct indicates a continuing use in that the defendants viewed the system as something they could handle as they wished, without regard to the interest they knew UCC had in maintaining its confidentiality. The admitted secrets of AIMES III lie in its ability to generate specific reports and in its novel use of certain types of numbers placed on the inventory items (the so-called AIMES numbers) which are used to accomplish the compilation of inventory data. There is evidence in the record which indicates that any expert in computer software who observes the Cobol listings, the reports generated, and the details of the programs of a system of a competitor will gain a commercial advantage from that information. LYCSC thus took upon itself the authority to display all this information to such an expert, knowing that he could potentially use that information to the competitive disadvantage of UCC. We view this as a clear commercial use of the system'but one which has a second facet as well.

LYCSC displayed the various reports, listing's and programs described above in the hopes of interesting Technical Resources in jointly developing a type of control system called RANFILE which they believed Technical Resources to be developing. AIMES III thus served the commercial interests of LYCSC and the other defendants in that it was used to prove LYCSC's technical expertise inasmuch as the AIMES III system was represented as being of LYCSC's design and invention.

Finally, there is some evidence that LYCSC had installed the AIMES III system on a service bureau basis. What this would mean is that LYCSC would be equipped to lease time on its in-house equipment and its clients could use the AIMES III system. The evidence of this is indirect, the unobjected to hearsay account of one Herbert Martenson who told of a LYCSC's salesman's claim that this was true. There was, further, clear and undisputed testimony that LYCSC had run the entire system to generate a complete set of Cobol listings after Clinton had delivered the additional tapes to LYCSC in February, 1970. We believe there is evidence from which the jury could reasonably infer that LYCSC had used the system on its computer, and that this constituted a commercial use.

Taken together, these three patterns of usage lead us to the conclusion that the jury could, indeed, find that LYCSC and, through it, the other two defendants, used the AIMES III system as if it had been theirs to do with as they pleased. They ran the tapes, they compiled the listings, they generated several reports, they exposed the secrets of the system to a competitor. In short, they acted as if they owned unrestricted rights to the system. No other pattern of licensing was shown by the defendants which would permit them the complete freedom they had in using the system as they chose. The defendants offered no evidence that under past industry practice the type of agreement the parties would most likely have reached would be some form of royalty on sales, thereby sanctioning this type of unrestricted use by the fictional licensee. We are unprepared to hold that because UCC had in the past refused to sell its rights to the AIMES III system to a competitor, and thus was unable to show past transactions to show how an agreement of this sort would have been reached, it should accordingly be denied damages.

UNIVEESITY COMPUTING CO.

Cite us r>
D. Challenges to Admission of Evidence on Value of AIMES III The defendants challenge the method by which UCC proved damages at trial. The only evidence introduced by either side on the question of damages for the AIMES III misappropriation was the expert testimony of one Stan Josephson, who estimated the value of a sale of unrestricted rights to AIMES III at $220,000. Defendants challenge both the expert qualifications of this witness and the legal sufficiency of his testimony. We deal with the first of these issues quickly.

The trial court has substantial discretion over the admission of evidence, Reuter v. Eastern Air Lines,  226 F.2d 443 (5th Cir. 1955) and this includes the admission of expert testimony. Salem v. U. S. Lines Co.,  370 U.S. 31, 82 S.Ct. 1119, 8 L.Ed.2d 313 (1962). In the absence of obvious error we will not disturb the ruling of the trial court. We find no error in permitting Josephson to testify as an expert. He was UCC Vice President of Technical Services. He testified he was responsible for developing software systems, pricing them for marketing, and then assisting as technical expert at sales presentations. He testified in pricing a software system he took into account such factors as development costs, the longterm potential for the system and UCC's sales objectives, as well as such extrinsic factors as the current market for such systems. We find Josephson was properly permitted to testify as to the value placed on the sale of unrestricted rights to the AIMES III system by UCC.

The second challenge to Josephson's testimony involves this colloquy v. LYKES-YOUNGSTOWN CORP. from the record during Josephson's cross-examination: Q: Now, of course, you understand Mr. Josephson, I take it, that value'when you give an opinion on value, you are talking about what someone is willing to pay. Is that correct? A: Oh, I wouldn't categorize it as that narrow.

Q: You wouldn't? A: No. Value I don't think is what someone else will pay.

Q: What' A: As you stated, I don't believe that value is strictly what someone else is willing to pay.

Q: Well, when you are talking about value here what were you talking about ? A: I'm talking about many things, the val