Justmed, Inc. v. Byce

Filing 155

MEMORANDUM DECISION & ORDER JustMed, Inc. shall recover money damages in the amount of $41,250.00, punitive damages of $5,000, and costs of $2,283.14 against Michael Byce on its conversion (Count II) and breach of warranty (Count III) causes of action for a total of $48,533.14. The Amended Judgment and Permanent Injunction (Dkt. 118 ) shall remain in full force and effect against Michael Byce. Signed by Judge Mikel H. Williams. (caused to be mailed to non Registered Participants at the addresses listed on the Notice of Electronic Filing (NEF) by (ja)

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF IDAHO

JUSTMED, INC.,
Case No. 1:05-cv-00333-MHW
Plaintiff,
MEMORANDUM DECISION AND
ORDER

v.
MICHAEL BYCE,
Defendant.

INTRODUCTION
On August 29, 2007, following a bench trial, the Court entered an Order against
Michael Byce (“Byce”) in favor of JustMed, Inc. (“JustMed”) finding that the weight of
the evidence supported a finding that Byce was liable on JustMed’s claims of
misappropriation of a trade secret (Count I), conversion (Count II), and breach of
fiduciary duty (Count III), and found punitive damages were warranted. Mem. Dec. and
Order (“Mem. Dec.”), Dkt. 86. The Court dismissed JustMed’s claim of tortious
interference with a prospective economic advantage (Count IV) on the grounds that
JustMed had not demonstrated a valid economic expectancy. Id. The Court also found in

MEMORANDUM DECISION AND ORDER - 1

favor of JustMed on Byce’s counterclaim for declaratory relief under the Federal
Copyright Act dismissing it with prejudice. Id.
On September 6, 2007, the Court entered Judgment against Byce for money
damages in the amount of $41,250, left open the amount of punitive damages pending
post-trial motions, and entered a permanent injunction against Byce that will be described
below. Judgment, Dkt. 87. On January 11, 2008, the Court entered an Amended
Judgment and Permanent Injunction. Amended Judgment, Dkt. 118. The Amended
Judgment provided for money damages of $41, 250, punitive damages of $5,000, and
costs of $2,283.14 for a total judgment of $48,533.14. Byce appealed. However, he did
not appeal the Court’s findings that he was liable for conversion and for breach of
fiduciary duty or the imposition of punitive damages.
On April 5, 2010, the Ninth Circuit reversed the Court’s determination that Byce
misappropriated a trade secret and remanded the case for this Court to “determine
whether and in what amount JustMed can recover damages on the conversion or breach of
fiduciary duty claims and whether an injunction to prevent future misappropriation is
warranted.” See JustMed, Inc. v. Byce, 600 F.3d 1118, 1131 (9th Cir. 2010). It remanded
the damages issue because the Court had tied its damages finding to the trade secrets
count and had not conducted a damages analysis under the conversion and breach of
fiduciary duty counts.
On October 5, 2012, following failed settlement negotiations, the Court granted
Byce’s Motion to Vacate Judgments (Dkt. 130) pending briefing by the parties on the
MEMORANDUM DECISION AND ORDER - 2

issues to be resolved on remand. Order, Dkt. 144. Later the same day, JustMed filed a
Notice of Bankruptcy Petition by Byce. Dkt. 145. Accordingly, in light of the
Bankruptcy Code’s automatic stay, 11 U.S.C. § 362, the Court withdrew its October 5,
2012 Order vacating the judgments, effectively reinstating the Amended Judgment
entered on January 11, 2008.
On May 15, 2012, the United States Bankruptcy Court for the District of Idaho
entered an Amended Order Suspending Proceedings in a pending adversary proceeding in
Byce’s bankruptcy case. See In Re Michael Leonard Byce, et al., Debtors, Dkt. 43,
United States Bankruptcy Court for the District of Idaho, Case No. 10-02978-TLM, Adv.
No. 10-06097-TLM attached to JustMed’s Motion for Status Conference. Dkt. 147. The
adversary proceeding was suspended to allow the Court to conclude the current litigation
on remand. The Court invited simultaneous briefing on the remand issues, held a hearing
on October 1, 2012, and is now prepared to enter its decision.
FACTUAL BACKGROUND
This action arises out of a dispute regarding the software used in a digital audio
larynx device called “JusTalk” which was being developed by Joel Just (“Just”) and Byce
over a period of years starting in 1994. They formed a corporation to market the product.
Just and his wife owned a majority of the shares of the corporation, and Byce and others
owned a minority interest. Jerome Liebler (“Liebler”) began working on the device in
2003 as an employee of JustMed. Just and Liebler developed a hardware prototype,
wrote assembly language source code, and eventually developed JusTalk. They
MEMORANDUM DECISION AND ORDER - 3

demonstrated the product at an International Association of Laryngectomees conference
in Anaheim, California, in the summer of 2004, where at least one speech pathologist was
impressed with the device.
In September of 2004, Byce replaced Liebler on the source code project working
on it full time. Eventually, when it appeared that the JusTalk device might be
marketable, issues arose as to the ownership of the software. In the spring of 2005,
JustMed began advertising the device to the laryngectomee community claiming that a
new version of the software was imminent. JustMed then became involved in discussions
with ATOS, a Swedish corporation that was considering a possible merger with or buyout of JustMed. Byce became concerned that he would not be adequately compensated
for his work. Therefore, on June 13, 2005, he removed the JusTalk software from
JustMed’s computer systems. Just was unaware Byce had done so until he was
attempting to demonstrate the device for ATOS.
In response to a state court temporary restraining order (“TRO”), Byce turned over
the source code to JustMed. However, he withheld some of his programmer’s notes from
the code. Therefore, Just engaged Liebler to help him re-develop the code for upcoming
trade shows and presentations. It was not completed in time for this engagements.
Negotiations with ATOS ended, and a distributor backed out of selling JustMed products.
It took Just and Liebler three months to re-create the code. The amount of their salaries
for those three months totaled $41,250 – the amount that formed the basis for the Court’s
award of damages.
MEMORANDUM DECISION AND ORDER - 4

Byce had also retained JusTalk units and other JustMed hardware which was not
turned over to JustMed until the third day of trial.
ANALYSIS
1.

Post-Trial Findings
On the conversion issue, the Court found that Byce committed acts of conversion

by deleting software owned by JustMed and retaining the hardware until the third day of
trial notwithstanding the fact that he believed he was the true owner of the software or
that he retained possession of the hardware for the purpose of preserving evidence. Mem.
Dec. at 20-21. The Court also found that as a director of the corporation, Byce owed a
fiduciary duty to JustMed which he breached by changing the copyright on the source
code from JustMed to his name and by deleting the source code to use as leverage in
negotiating for more shares in the company and to sabotage the potential sale to or merger
with ATOS. Mem. Dec. at 21-23. the Court found that such action was neither in good
faith nor in the best interests of JustMed, especially given the timing of the deletion. Id.
The Ninth Circuit did not disturb those findings. Rather, it reversed and remanded for a
determination of the appropriate damages.
In making its findings on the liability issues, the Court noted that Byce was “a less
than credible witness.” Mem. Dec. at 18. In making its findings on the punitive damages
issue, the Court specifically held that Byce acted willfully and maliciously by (1)
changing the copyright from JustMed’s name to his and never discussing the change with
anyone else in the company; (2) deleting the source code from JustMed computers in the
MEMORANDUM DECISION AND ORDER - 5

middle of the night only days before an important demonstration and meeting with a
potential investor and not informing Just; (3) upon Just’s detection of the deletion,
claiming that he had deleted it for “revision control,” something he had never done
before; (4) and deleting the programmer’s notes from the source code before turning it
over to JustMed pursuant to the TRO. Mem. Dec. at 24. See also Order at 7-8, Dkt. 111.
The Court reaffirms those prior findings.
2.

Conversion
The oft-cited Idaho Supreme Court case on the measure of damages in caversion

cases, Peasley Transfer & Storage Co. v. Smith, 132 Idaho 732, 979 P.2d 605 (1999), is
relied on by both parties but interpreted differently.
In Peasley, the court stated that the “proper measure of damages for wrongful
taking or detention of personalty is the reasonable value of its use during the detention
period.” Id., 132 Idaho at 742, 979 P.2d at 615 (citations omitted). However, in cases
where an owner retakes the subject property, in addition to the value of its use during the
detention period, the owner may recover damages based on its value at the time of the
conversion less its value when returned. Id. (citations omitted).
In arguing against damages on the conversion count, Byce focuses on the “value at
the time of conversion” element. He claims that because most of the Byce code was
returned, JustMed’s claim for damages is limited to the value of the Byce code at the time
Byce deleted it less the value of the source code that JustMed created to replace it or the
reasonable value of its use during the detention period. Def.’s Br. at 8. He further argues
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that JustMed’s claim for damages should fail because JustMed did not offer any evidence
that the Byce code had a value that could be quantified and because testimony at trial
established that the source code was of no value to JustMed at the time of the conversion.
JustMed, on the other hand, notes Peasley’s other statement regarding damages for
conversion: “As a general rule, reasonable and necessary expenses incurred in recovering
the property are a proper element of damages in a conversion action.” Peasley, 132 Idaho
at 743, 979 P.2d 616 (citing 89 C.J.S. Trover and Conversion § 174 (1955)). JustMed
further notes that the Idaho Supreme Court has allowed in a conversion action actual
damages, consequential damages in the form of economic losses, and punitive damages.
Pl.’s Br. at 14 (citing Luzar v. Western Surety Co., 107 Idaho 693, 692 P.2d 337 (Idaho
1984)). Finally, JustMed cites general principles of tort damages as including the cost of
repair or replacement in the case of injury to personal property.
The Court need look no further than the conversion cases themselves to find that
an owner of converted property can recover, depending on the facts of each case, the
difference between the value of the property at the time it was converted and the time it
was returned, the value of its use during the detention period, consequential damages,
reasonable and necessary expenses incurred in recovering the property, and punitive
damages.
Peasley and Luzar are consistent with long-held common law principles of
conversion damages that owners are to be compensated for actual losses incurred as a
result of a wrongful taking. 18 Am. Jur. 2d, Conversion § 116. Although the usual
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measure of damages is based on the market value at the time of the conversion, there are
other measures of damages recoverable depending on the circumstances of the case. Id.
More specifically,
[r]ules relating to the measure of damages for conversion are
flexible and can be modified in the interest of fairness. Thus,
damages for conversion may include other losses or expenses
necessary to compensate the plaintiff for all actual losses or
injuries sustained as a natural and proximate result of the
defendant’s wrong.
Id.
That market value for software in development is difficult to establish should not
preclude recovery of damages. In cases where the converted property has no “readily
ascertainable fair market value, the measure of damages is the actual value of the
property to the owner at the time of the loss. Henson v. Reddin, 358 S.W.3d 428, 436
(Tex. App. 2012). (citations omitted) (emphasis added). In such cases, the purchase price
is probative of actual value and the measure of damages is the price less items such as
wear and tear or depreciation. Id. Obviously, that alternative measure of damages is not
workable in the case of software.
This can be stated another way: “Absence of a market value for personal property
converted . . . will not restrict the owner thereof to nominal damages . . . but the courts
will have recourse to some other rational method of ascertaining the value of the property
from such elements as are attainable.” W. E. Shipley, Annotation, Measure of Damages
for Conversion or Loss of, Damage to, Personal Property Having No Market Value, 12

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A.L.R. 2d 901 (1950), § 2 (citations omitted). In keeping with the flexible approach to
damages and the goal of allowing an owner more than nominal damages in a conversion
action, “various elements” may be considered in determining actual value or value to the
owner. See generally, id. One common alternative measure of damages is the cost of
replacement, “since the object of the award of damages is to compensate the plaintiff.
Where the property is such that reproduction or replacement is possible, it has been said
that reproduction cost is the measure of damages.” Id. at § 1(a).
Most analogous to the conversion of the software present in the instant case is the
conversion and destruction of a manuscript of which the author had not made a copy.
There the Seventh Circuit held that “an author may prove nonmarket damages for the
tortious destruction of a manuscript.” See Taliferro v. Augle, 757 F.2d 157, 161 (7th Cir.
1985) (citations omitted) (emphasis added). The court noted that an example of
nonmarket damages is “proof of the cost in time or materials of reconstructing [the
manuscript].” Id. at 162. Indeed, several cases have held that the cost of replacement or
reproduction can constitute the measure of damages for conversion and can be based
either upon an actual cash outlay or the value of the labor and materials to replace the
property. See generally, 12 A.L.R2d 902 § 5(a) (citations omitted).
As stated above, Byce contends that Just had not proven that the source code had
any value because he testified that the Byce code never worked and was essentially of no
use to JustMed. Def.’s Br. at 8. He therefore argues that JustMed is not entitled to
damages at all. The Court finds that Byce reads both Peasley and Just’s testimony too
MEMORANDUM DECISION AND ORDER - 9

narrowly and ignores the common law measure of damages in conversion cases.
The excerpts of Just’s testimony must be considered in the context of the entire
testimony and in the context of the lawsuit itself. The Byce code obviously had some
value or JustMed would not have incurred the expense of suing to recover the code, and
Byce would not have withheld it as leverage for increased compensation and to sabotage
the potential sale of the company. Furthermore, Just did not testify that it did not work at
all. It functioned on the JusTalk device, but never functioned reliably on a
laryngectomee. Just thought the “tonal qualities” Byce was working on were positive.
Prior to the conversion, there is no indication that Just was planning to do anything other
than allow Byce to continue to perfect the Byce code during which time Just would
market the product and attend trade shows. As stated above, establishing a market value
is difficult. Therefore, JustMed is entitled to recover the actual value of the Byce code to
the company. Again, that is difficult to quantify. Accordingly, the cost of rebuilding the
source code is a logical way to determine damages.
Peasley does not preclude this measure of damages. It does indeed stand for the
proposition that the measure of damages in conversion actions is the value of the property
at the time of the conversion. However, it does not state that it is the exclusive measure
of damages and does not reject any other measure of damages. Indeed, as stated above,
the Idaho Supreme Court has allowed actual, consequential, and punitive damages even
where the converted property had a clearly defined value. See Luzar, supra (addressing
damages in the context of unlawfully retained certificates of deposit used as collateral).
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As the trier of fact, the Court can draw reasonable inferences from the evidence.
Had Byce not removed the software, all indications are that Just and Liebler would not
have become involved again in the software development. Because Byce removed it,
however, and then returned it without the program notes, it was reasonable for Just and
Liebler to start over using the code with which they were familiar rather than trying to
perfect one on which only Byce had worked. They established to the Court’s satisfaction
at trial that the cost to do so was $41,250. Byce did not challenge that amount on appeal.
Accordingly, the Court finds that JustMed is entitled to damages on $41,250 on the
conversion count.
3.

Breach of Fiduciary Duty
JustMed contends that the damages incurred as a result of the conversion are the

same damages incurred as a result of the breach of fiduciary duty, including damages for
the loss of personal property, lost rents, extra expenses, and payments for repair or
replacement. Pl.’s Br. at 15. Byce contends that a director who breaches his fiduciary
duty is entitled only to any profit received as a result of his breach that would have
otherwise accrued to the corporation. Def.’s Br. at 10. He concludes that because the
evidence established that the source code had no value and the Court had found that
JustMed’s claim of damages for economic loss or missed opportunity were too
speculative, JustMed cannot recover damages for breach of fiduciary duty.
Byce relies on the Steelman case on the damages issue. In Steelman, the court
stated, “The usual measure of damages in an action for breach of fiduciary duty by a
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corporate director is the profit which the director received and which the corporation was
deprived of by the transaction.” Steelman v. Mallory, 110 Idaho 510, 514, 716 P.2d 1282,
1286 (Idaho 1986) (citations omitted).
Once again, Byce reads the case law too narrowly. Notably, the court in Steelman
also stated, “By this opinion, we do not mean to imply that the foregoing is the only
method of proving damages. . . .” Id. (limiting the ruling to the facts of the case). Byce
did not receive any profit as a result of his breach. Therefore, damages must be
measured in another way.
In Idaho, “[t]he measure of damages in an action for breach of fiduciary duty is the
same as the measure of damages in an action for breach of trust.” Pickering v. El Jay
Equipment Co, Inc., 108 Idaho 512, 517, 700 P.2d 134, 139 (Idaho App. 1985) (citing
Hudson v. American Founders Life Insurance Company of Denver, 151 Colo. 54, 61, 377
P.2d 391, 395 (1963)). See also Bogert, The Law of Trusts and Trustees § 481.1
(Corporate Fiduciary Relationships). The Hudson case from Colorado relied on the
Restatement (Second) of Trusts § 205 which stated that:
If the trustee commits a breach of trust, he is chargeable with
(a) any loss or depreciation in value of the trust
estate resulting from the breach of trust; or
(b) any profit made by him through the breach
of trust; or
(c) any profit which would have accrued to the
trust estate if there had been no breach of trust.

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Restatement (Second) of Trusts § 205 (1959).
That section of the Restatement of Trusts has since been updated and revised as
follows:
A trustee who commits a breach of trust is chargeable with
(a) the amount required to restore the values of
the trust estate and trust distributions to what
they would have been if the portion of the trust
affected by the breach had been properly
administered; or
(b) the amount of any benefit to the trustee
personally as a result of the breach.
Restatement (Third) of Trusts § 100 (2012).

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According to the commentary to the Third Restatement of Trusts, the primary
objectives of the rule regarding damages upon breach of trust are to make the trust and the
beneficiaries whole and to insure that the trustee does not personally benefit from the
breach. Id. cmt. a. Punitive damages may be awarded against the trustee if he “has acted
maliciously, in bad faith, or in a fraudulent, particularly reckless, or self-serving manner.”
Id. cmt. d. Analogously, a corporation would be entitled to recover an amount that would
make the corporation whole. It follows, then, that to make JustMed whole, Byce must
“restore” the amount the corporation was required to expend to replace the source code –
the amount it would not have had to expend had Byce not removed the source code.
JustMed cited Garnett v. Transamerica Ins. Services, 118 Idaho 769, 800 P.2d 656
(Idaho 1990) as an example of the Idaho Supreme Court awarding damages for loss of
personal property, lost rents, and extra expenses for causes of action including breach of
fiduciary duty. Pl.’s Br. at 15. Garnett did involve a breach of fiduciary duty claim, but
the damages were actually awarded on the breach of contract and breach of good faith
and fair dealing claims. However, the Court sees no reason the Idaho Supreme Court
would not allow those types of damages on a breach of fiduciary duty claim as well given
the similarity to the breach of good faith and fair dealing claim. Accordingly, following
the same general analysis of the appropriate measure of damages under the conversion
claim, the Court finds that JustMed is entitled to damages of $41,250 on the breach of
fiduciary duty count.

MEMORANDUM DECISION AND ORDER - 14

4.

Punitive Damages
As shown above, punitive damages are recoverable under both the conversion and

breach of fiduciary duty counts. Furthermore, Byce does not dispute the award of
punitive damages. Def.’s Br. at 11. Accordingly, the Court finds that the punitive
damages award of $5,000 shall stand.
5.

Permanent Injunction
JustMed believes the Court should again impose a permanent injunction enjoining

Byce from using JustMed’s software in the future given that he has a demonstrated
propensity to take “aggressive actions” in violation of JustMed’s rights. Pl.’s Br. at 19.
Byce does not address the issue in his brief.
The Court finds that reimposition or continuation of the previously ordered
permanent injunction enjoining Byce from any use of the source code designated as Nice
5d and versions A 1 through B 5, or any derivative of the same, is warranted given that
JustMed is the owner of the source code at issue and given the prior conversion of the
source code.
6.

Judgment
JustMed requests that the Court enter a supplemental order to its Memorandum

Decision stating that the compensatory and punitive damages found there were also
proximately caused by Byce’s acts of conversion and breach of fiduciary duty thereby
preserving the existing Amended Judgment. Pl.’s Br. at 19. The Court is unclear of the
reasoning behind his request. Defendant, on the other hand, believes that the existing
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judgment must be formally vacated. Def.’s Br. at 11.
Given that JustMed may lose some lien priority if the Court were to vacate the
Amended Judgment, and given that the Amended Judgment contains the same damages
awards as the Court would impose in a Second Amended Judgment if it were to vacate
the Amended Judgment, the Court finds that it will consider this a supplemental order to
the prior Memorandum Decision (Dkt. 86) in order to protect JustMed’s creditor’s rights.
In addition, it will not vacate the Amended Judgment.
ORDER
IT IS ORDERED:
1.

JustMed, Inc. shall recover money damages in the amount of $41,250.00,
punitive damages of $5,000, and costs of $2,283.14 against Michael Byce
on its conversion (Count II) and breach of warranty (Count III) causes of
action for a total of $48,533.14.

2.

The Amended Judgment and Permanent Injunction (Dkt. 118) shall remain
in full force and effect against Michael Byce.
DATED: November 7, 2012

Honorable Mikel H. Williams
United States Magistrate Judge

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