Opinion ID: 2061872
Heading Depth: 1
Heading Rank: 2

Heading: The Report of the Second Damage Master.

Text: The judge's order of reference to the second damage master instructed the master: (1) To find the extent of the use made by the defendants of the trade secret (Foster Miller Report); (2) To find the amount of profits made by the defendants on the sale of units incorporating the trade secret; and (3) To find the amount of the plaintiffs' loss of profits due to the defendants' sales of such dispensers to plaintiffs' customers to the extent such loss exceeds the defendants' profits on these same sales. This order of reference is consistent with our traditional principles of damage assessment in cases involving business torts. [12] The second damage master made specific findings with regard to each of the three issues which the judge had instructed him to examine. First, the second damage master addressed the extent to which the trade secrets had been used by the defendants. He found that each visual display beverage dispenser unit sold by the corporate defendant from 1963 to September 30, 1975 (the accounting period) incorporated the trade secrets contained in the Foster-Miller report. [13] The second damage master also found that during the accounting period the defendants sold 27,110 dispensers with gross sales of $6,322,357.18. Second, the master computed the net profits of the defendants during the accounting period from sales incorporating the trade secrets. Since all the sales of the defendants incorporated the trade secrets, the second damage master computed the total net profits of the defendants. [14] He found that the records submitted by the corporate defendent showed total net profits of $67,604.80 during the accounting period. [15] He rejected a claim by the defendants that $15,422.20 in losses incurred during two of the years of the accounting period should be deducted from their total net profits. He also disallowed certain other deductions claimed by the defendants and added them to the defendants' net profits: (a) $105,553.17 in legal fees and expenses in defending this action. (b) $19,759.61 in Federal income taxes paid by the corporate defendant during the accounting period. (c) $21,578.29 in Massachusetts excise taxes paid by the corporate defendant during the accounting period. (d) $18,698.03 in bad debts incurred on sales by the corporate defendant during the accounting period. (e) $681,575.80 in salaries and consultant's fees paid to the individual defendants by the corporate defendant during the accounting period. (f) $22,508.40 for Key Life insurance premiums paid by the corporate defendant on the lives of the individual defendants during the accounting period. (g) $17,110.52 for group insurance coverage on the lives of the individual defendants at various times during the accounting period. The net profits of the defendants as recomputed by the second damage master totaled $954,388.62 during the accounting period. Finally, the second damage master considered the question of the lost profits of the plaintiffs to the extent that they exceeded the profits of the defendants. The plaintiffs claimed that their profits on the sales made by the corporate defendant to the plaintiffs' customers would have totaled nearly $1,500,000 more than Crathco made on the same sales during the accounting period. The master rejected this claim, finding the plaintiffs' evidence on this aspect of damages conjectural, speculative and theoretically unsound. The second damage master also found that the individual defendants had made no profits as such. Therefore, he found in favor of the individual defendants. Both the plaintiffs and the defendants filed objections to the second master's report. On September 23, 1977, the judge modified and then adopted the report of the second damage master. See Mass. R. Civ. P. 53(e)(2). He accompanied his order with a comprehensive, well reasoned memorandum of decision. The judge allowed the defendants' deductions for bad debts and for salaries and consultant's fees paid to the individual defendants. The judge then computed the total of the defendants' net profits at $282,100.83. [16] The judge further modified the second damage master's finding that the plaintiffs' lost profits could not be computed. He concluded that the second damage master's subsidiary findings were sufficient on their face to allow him to find that the plaintiffs' lost profits totaled $257,068. Finally, the judge rejected the second damage master's finding in favor of the individual defendants as precluded by our holding in Jet Spray Cooler, Inc. v. Crampton, supra at 844. He held the individual defendants jointly and severally liable with the corporate defendant. Because the plaintiffs' lost profits were a lesser amount than the defendants' profits as computed by the judge, he awarded damages to the plaintiffs in the amount of the defendants' net profits. Both the plaintiffs and the defendants appeal from certain of the judge's modifications of the second damage master's report. 1. Bad Debts. The judge allowed as a deduction from gross profits all bad debts incurred by the defendants on sales of the infringing products. See Nelson v. J.H. Winchell & Co., 203 Mass. 75, 91 (1909). The plaintiffs urge us to adopt the approach taken by the Supreme Court of Colorado, expressed in Hyman & Co. v. Velsicol Corp., 123 Colo. 563, 633 (1951), that bad debts may not be deducted from gross profits because a defendant should assume the risk of his extension of credit. This we decline to do. An accounting of the defendants' profits is designed to strip them of their impermissible gains. Where a defendant has suffered bad debts resulting from sales of products which he has manufactured, the defendant has incurred manufacturing expenses and has reaped no profits. He should not be required to pay over as profits funds never received. See Nelson v. J.H. Winchell & Co., supra . 2. Salaries and Consultant's Fees Paid to Individual Defendants. The plaintiffs also appeal from the judge's modification of the second damage master's report which allowed the defendants to deduct from their gross profits all salaries and consultant's fees paid to the individual defendants by the corporate defendant. The plaintiffs emphasize that the salaries and fees in question were paid to individuals who were defendants in this action. Therefore, the plaintiffs argue that the master properly refused to deduct their salaries and fees from the gross profits of the corporate defendant. [17] We think that the judge correctly allowed the defendants to deduct the salaries and fees in question from gross profits on the basis of the judge's conclusion that there are no findings that the salaries or consultant's fees were excessive or a disguised distribution of earnings or that the corporate defendant to whom the services were rendered was a sham. The question whether corporate officers are named as individual defendants should not determine whether their salaries may be deducted from a corporate defendant's profits. The determinative question should be whether their salaries and fees are reasonable in light of their positions as officers of the corporation engaged in the conduct of the business and in the production of profits. John B. Stetson Co. v. Stephen L. Stetson Co., 58 F. Supp. 586, 592 (S.D.N.Y. 1944). See Clair v. Kastar, Inc., 70 F. Supp. 484, 487-488 (S.D.N.Y. 1946). Since the judge found that the salaries paid to the individual defendants were reasonable in light of their positions in the corporation, he properly allowed their salaries and fees to be deducted from the gross profits of the corporate defendant. 3. Computation of Plaintiffs' Lost Profits. The second damage master declined to make a finding of the amount of the plaintiffs' lost profits. He concluded that any figure which he arrived at would be too speculative. The judge, however, modified the second damage master's report and computed the plaintiffs' lost profits at $257,068. To reach this result, the judge relied on the second damage master's subsidiary findings that the defendants had sold dispensers to over sixty of the plaintiffs' customers; that had the defendants sold no dispensers, it was reasonably possible that the plaintiffs would have made the sales to these same customers; that the defendants' sales to these customers totaled $2,856,311.41, and that during the accounting period the plaintiffs' net profits before taxes averaged nine per cent of gross sales. The judge multiplied the total of the defendants' sales to the plaintiffs' customers ($2,856,311.41) by the plaintiffs' profit margin (nine per cent). He concluded that the resulting total of $257,068 was a sufficient approximation of the plaintiffs' loss of profits. The defendants' objection to the judge's computation of the plaintiffs' lost profits rests solely on the defendants' contention that there is no evidence that the plaintiffs would have had the same volume of sales as the defendants. However, [t]here is nothing unreasonable, in our view, in the judge's taking the gross tainted sales of [the defendants] as not exceeding the sales of which [the plaintiffs were] capable.... National Merchandising Corp. v. Leyden, 370 Mass. 425, 431 (1976). The second damage master's subsidiary findings provided sufficient information concerning both the defendants' sales to the plaintiffs' customers and the plaintiffs' established earnings records to allow the judge to compute the plaintiffs' lost profits. Matsushita Elec. Corp. of America v. Sonus Corp, 362 Mass. 246, 264 (1972), quoting from Rombola v. Cosindas, 351 Mass. 382, 385 (1966). However, where the master reports his subsidiary findings, we, like the judge below, may draw our own inferences and come to our own conclusions from the master's subsidiary findings. Corrigan v. O'Brien, 353 Mass. 341, 346 (1967). See Peters v. Wallach, 366 Mass. 622, 626 (1975). See generally J.W. Smith & H.B. Zobel, Rules Practice § 53.11 (1977). In this action, the second damage master's subsidiary findings also reveal that during the accounting period the plaintiffs never marketed a product incorporating the recommendations contained in the Foster-Miller report. [18] The master further found that the Crathco dispenser offered serious competition to the Jet Spray dispenser because it was superior to the dispensers produced by other manufacturers and also that Crathco's dispenser was comparable to Jet's particularly since it contained the improvements recommended in the Foster-Miller Report. In light of these findings, we cannot determine whether the plaintiffs' lost profits in this action were due to the defendants' sales of products utilizing the trade secrets, or whether the plaintiffs' lost profits were due to the plaintiffs' own business decision to refrain from marketing products containing the information in the report. See supra at 173 & n. 12. Here, the uncertainty in the assessment of damages arises not from any action of the defendants, but from the inaction of the plaintiffs. Compare National Merchandising Corp. v. Leyden, supra at 430. Therefore, we conclude that the plaintiffs have not proved their lost profits due to the defendants' sales to the plaintiffs' customers with sufficient certainty to allow the plaintiffs to recover damages based on lost profits. 4. Joint and Several Liability of the Individual Defendants. The judge modified the second damage master's report to hold the individual defendants jointly and severally liable with the corporate defendant. To reach this result, he relied on Jet Spray Cooler, Inc. v. Crampton, supra , where we held that [t]he joint involvement of the corporate defendant and the [individual] defendants ... in utilizing the secrets of the Foster-Miller report ... require[s] that the damages, if any, shall be assessed against all of them. Id. at 844. Our resolution of this issue in 1972 is dispositive of the question of the liability of the individual defendants. The individual defendants actively participated in the misappropriation of the plaintiffs' trade secrets. They may not insulate themselves from the consequences of their actions by choosing the corporate form by which to market their products. Accord, Donsco, Inc. v. Casper Corp., 587 F.2d 602, 605-606 (3d Cir.1978); Clark v. Bunker, 453 F.2d 1006, 1010-1011 (9th Cir.1972).