Accusoft Corporation v. Palo

United States Court of Appeals
For the First Circuit
Nos. 99-1710, 99-1711
ACCUSOFT CORPORATION,
Plaintiff, Appellant\Cross-Appellee,
v.
JAMES L. PALO; SIMON WEICZNER;
INDIVIDUALLY AND D/B/A SNOWBOUND SOFTWARE,
Defendants, Appellees\Cross-Appellants.
APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Nathaniel M. Gorton, U.S. District Judge]
Before
Selya, Circuit Judge,
Bownes, Senior Circuit Judge,
and Stahl, Circuit Judge.
Barry A. Bachrach and Louis M. Ciavarra, with whom Bowditch
& Dewey, LLP, was on brief for appellant.
Richard C. Heidlage, with whom Prince, Lobel & Tye, LLP,
William S. Strong, and Kotin, Crabtree & Strong, LLP, were on
brief for appellees.
January 19, 2001
STAHL, Circuit Judge. Plaintiff-appellant AccuSoft
Corporation (“AccuSoft”) and Defendants-appellees James Palo,
Simon Wieczner and Snowbound Software appeal from the district
court's rulings on cross-petitions for civil contempt arising
out of alleged breaches of a 1996 settlement agreement
establishing their respective rights in a piece of computer
software. The district court, adopting the conclusions of a
special master, agreed with AccuSoft that the Defendants
breached the settlement agreement, awarding AccuSoft $149,000 in
attorneys' fees, but no damages, while finding in Defendants'
favor with respect to $178,000 in unpaid royalties they claimed
were owed under the agreement. For the reasons discussed below,
we affirm in part and reverse in part.
I.
Plaintiff AccuSoft is a corporation engaged in the
image processing software business. Defendants Palo and
Wieczner are former associates of AccuSoft and the current
owners of Snowbound Software (“Snowbound”), a corporation that
competes with AccuSoft in the image processing software market.
The events relevant to this appeal began in 1992 when Palo, a
software designer and developer, was engaged by AccuSoft to
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develop a library or toolkit of software routines for
manipulating computer images. Pursuant to a contract with
AccuSoft, Palo agreed to provide the software product to
AccuSoft, along with an exclusive right to distribute it for one
year, in return for a percentage of the sales revenue. AccuSoft
and Palo subsequently extended this agreement and made it
automatically renewable for additional one-year periods.
The software developed by Palo was brought to market
by AccuSoft in 1992 as the Image Format Library (“IFL”) and
became AccuSoft's principal product. In 1993, Wieczner was
hired by AccuSoft to direct the sales and marketing program for
the IFL. AccuSoft's and Wieczner's efforts to market the IFL
were apparently successful; by 1995, the IFL had a significant
share of the relevant market and produced gross revenues
totaling $3.2 million.
Despite this success, AccuSoft's relationship with Palo
and Wieczner began to deteriorate during 1995. By January 1996,
both Palo and Wieczner had terminated their association with
AccuSoft. Subsequently, Palo notified AccuSoft of his intent to
end his licensing agreement with AccuSoft, effective January 31,
1996. On January 22, 1996, Palo registered a copyright for the
IFL in his name with the United States Copyright Office.
Shortly thereafter, Palo and Wieczner founded their own company,
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Snowbound Software, and offered for sale a product called the
RasterMaster Library which, they acknowledge, was essentially
the same as the version of IFL then being marketed by AccuSoft.
In February 1996, AccuSoft also registered a copyright for the
IFL software.1
On March 5, 1996, AccuSoft filed a complaint in the
United States District Court for the District of Massachusetts
against Palo, Wieczner and Snowbound alleging, inter alia,
copyright infringement, breach of contract and misappropriation
of proprietary information. The same day, Palo also filed a
complaint in the United States District Court for the District
of Massachusetts against AccuSoft and Scott Warner, AccuSoft's
president and founder, asserting similar claims. Each party
subsequently moved for a preliminary injunction prohibiting the
other from using or selling the disputed software and from
making public statements concerning their ownership of the IFL.
The two actions were consolidated before Judge Gorton on April
24, 1996.
1 The fact that both parties were able to register
copyrights in the IFL software -- an element of the background
which we draw from Judge Gorton's opinion -- strikes us as
unusual and we find nothing in the record of the present case to
explain how this occurred. However, it does not appear to bear
directly on the issues presented by these appeals.
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In a published ruling on the motions for injunctive
relief, AccuSoft Corp. v. Palo, 923 F. Supp. 290 (D. Mass.
1996), the district court concluded that Palo was likely to
succeed on his claim that he was the author of most or all of
the code contained in the IFL, and thus the rightful copyright
owner. However, Judge Gorton found that AccuSoft would likely
succeed in demonstrating that the agreement between AccuSoft and
Palo transferred to AccuSoft an exclusive right to distribute
products derived from the codes and that this right could be
terminated only by mutual consent of the parties. Based on
these findings, Judge Gorton issued a preliminary injunction
which effectively prohibited either company from distributing
its product and barred all parties from making public statements
concerning ownership of the software until the trial on the
merits.
It was in this context that the parties, on the eve of
trial, signed a confidential agreement settling the case. The
agreement was filed under seal and was approved and incorporated
into an order of the district court dated June 7, 1996. The
agreement sought to establish the respective rights of the
parties in the IFL code, providing generally for a transfer of
those rights to Palo/Snowbound but allowing AccuSoft to continue
to license the IFL through August 31, 1996 at specified royalty
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rates. During this transitional period, it was AccuSoft's
intent to finish developing and begin marketing a replacement
product, dubbed “ImageGear,” which was not based on the IFL
code. The settlement agreement also set forth detailed
requirements concerning the public statements that could be made
by the parties with respect to ownership of the IFL, established
certain requirements for record-keeping, and allowed Palo access
to AccuSoft's records for the purpose of conducting audits to
determine whether appropriate royalty payments were being paid.
Pursuant to the order, the court retained jurisdiction to
enforce the agreement's terms.
Less than two months later, on July 30, 1996, AccuSoft
filed a motion for contempt in the district court, alleging
numerous violations of the settlement agreement's public
disclosure and confidentiality provisions by Palo, Wieczner and
Snowbound (referred to hereafter collectively as “Snowbound”).
As relief for Snowbound's alleged contempt, AccuSoft sought an
order directing Snowbound to comply with the agreement, a
determination that AccuSoft was excused from making future
royalty payments under the agreement as a result of Snowbound's
breach, and an unspecified monetary penalty. Snowbound
subsequently filed a cross-motion for contempt, alleging non-
payment of royalties due under the agreement, violations of the
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agreement's public disclosure provisions, and non-compliance
with the agreement's requirements regarding record-keeping and
the form of licenses that AccuSoft could issue.
By order of reference dated August 16, 1996, Judge
Gorton referred the contempt motions and “related motions”
arising out of the same dispute to special master Michael
Keating. Nearly two years of proceedings before the master
ensued, during which the master held evidentiary hearings,
arranged for an outside audit of AccuSoft's books by Richard L.
Eisner & Co., LLP (“Eisner”)2 to determine AccuSoft's compliance
with royalty obligations, and responded to a steady stream of
interlocutory motions emanating from both parties.
The master's conclusions concerning the matters
referred to him were subsequently set forth in a series of
memoranda. The first such memorandum concerned the dispute over
royalties owed by AccuSoft to Snowbound for licensing of the
IFL, referred to by the parties as the “audit phase” of the
case. Based on testimony from the parties and from the master's
2 Prior to the master's involvement, Palo engaged Newburg
& Company, LLP (“Newburg”) to conduct an audit pursuant to the
settlement agreement. According to Snowbound, Newburg had
significant difficulty obtaining the information it sought from
AccuSoft, although a report summarizing Newburg's findings was
completed and submitted to Snowbound in November, 1996.
AccuSoft apparently disputed the conclusions of the Newburg
audit.
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independent auditor, the master concluded that Accusoft had
failed in a number of instances to pay royalties owed under the
agreement, by a total amount later determined to be $178,000,
exclusive of interest.3 At the same time, the master concluded
that the terms of the settlement agreement precluded Snowbound
from collecting other royalty sums it believed it was owed.
The remaining substantive allegations in the contempt
petitions were disposed of in a second memorandum. Here, the
master rejected all of Snowbound's allegations of contemptuous
conduct by AccuSoft, generally finding that although AccuSoft
had at times engaged in “sharp practices” in an effort to
maximize its benefits under the settlement agreement, its
actions were not prohibited by the agreement with sufficient
specificity to support a finding of civil contempt. By
contrast, the master found that many public statements made by
Snowbound in the period immediately following settlement were
sufficiently clear violations of the agreement's terms to
constitute contempt. Nonetheless, the master declined to
provide the relief AccuSoft requested, finding: (1) that
AccuSoft had adduced no grounds justifying rescission of the
agreement or otherwise excusing AccuSoft from its obligation to
3 The master calculated the interest, as of May 31, 1998,
to be approximately $40,000.
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pay royalties after the date of Snowbound’s breaches of the
agreement; and (2) that AccuSoft had not demonstrated that it
suffered monetary damages as a result of Snowbound's breaches.
Finally, the master issued several brief memoranda
concerning the allocation of the audit costs and attorneys' fees
and related litigation costs. All costs of the audit ($25,000)
were charged to AccuSoft, pursuant to the settlement agreement
itself, which established a sliding scale for apportioning audit
costs based on the degree of underpayment identified. However,
AccuSoft was awarded in excess of $149,000 in attorneys' fees
(plus an unspecified amount of interest) under a provision of
the agreement the master interpreted as allowing a party proving
breach to recover its fees for prosecuting a contempt motion,
even if no substantive damages were recovered.
The master's final submission to the district court,
which included all of the above memoranda, was made on October
5, 1998. On April 5, 1999, following a further round of motions
by the parties challenging various of the conclusions contained
in the master's consolidated report, Judge Gorton adopted the
report in full. These appeals followed.
II.
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On appeal, the parties challenge aspects of the
master's conclusions4 with respect to each of the three classes
of issues that the master addressed: royalties; contempt; and
allocation of attorneys' fees and costs. AccuSoft also
challenges an interlocutory ruling of the master limiting the
scope of discovery during hearings on the contempt issue. In
the interest of consistency, we follow the master's categorical
division of the issues, discussing the interlocutory ruling as
part of our review of the master's disposition of the parties'
substantive allegations of contempt. Within categories, we
order the subjects with an eye toward clear exposition of the
issues and logical development of our conclusions.
A. Royalties Owed to Snowbound
Both parties ask us to revisit the master's assessment
of the royalties owed by AccuSoft to Snowbound under the
settlement agreement. Snowbound asserts two claims of error:
(1) that the master misinterpreted relevant contract language in
deciding that AccuSoft was entitled to retain the entirety of
licensing fees it received after August 31, 1996, pursuant to
4 In the analysis that follows, we refer to the
conclusions below as those of the master. Because the master's
conclusions were adopted without exception by the district
court, they are equivalent to rulings of the district court
itself for purposes of our review. See Fed. R. Civ. P. 52(a)
(“The findings of a master, to the extent a court adopts them,
shall be considered as the findings of the court.”).
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pre-existing agreements with America OnLine (“AOL”) and Lexis-
Nexis; and (2) that the master improperly allowed AccuSoft to
pay royalties on only a portion of the income received from
licenses that included both the IFL and AccuSoft's replacement
product, ImageGear. AccuSoft, for its part, asks us to reverse
the master's decision to award to Snowbound all revenues
received after August 31, 1996 pursuant to an agreement with
Lifeboat Japan, Inc. on the ground that this conclusion is
unsupported by either the settlement agreement or applicable
law.
Our consideration of the foregoing matters is governed
by familiar standards of review. To the extent that the
questions presented turn on the language of the settlement
agreement or other contracts, we have considerable freedom to
draw our own conclusions, guided by the language of the
agreement, the circumstances of its formation and its purposes
-- “in brief, by the usual considerations of contract
interpretation.” AMF v. Jewett, 711 F.2d 1096, 1102 (1st Cir.
1983) (as modified on denial of rehearing and rehearing en banc
Aug. 26, 1983);5 see also Langton v. Johnson, 928 F.2d 1206, 1220
5 To the extent that we rely on legal principles from a
specific jurisdiction in interpreting the settlement agreement,
we follow the parties in applying the law of Massachusetts. We
note that the applicability of Massachusetts law is not a given
in this case, since the agreement includes no choice of law
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(1st Cir. 1991) (noting that interpretation of a settlement
agreement between private parties “is akin to a contractual
interpretation, and is thus largely a conclusion of law”); cf.
Fashion House, Inc. v. K Mart Corp., 892 F.2d 1076, 1083 (1st
Cir. 1989) (“Contract interpretation presents, in the first
instance, a question of law, and is therefore the court's
responsibility.”). However, we will not disturb the master's
factual findings unless they are clearly erroneous. Fed. R.
Civ. P. 52(a).6 Included in the latter category are factual
findings concerning the intent of the parties where contract
language is ambiguous. RCI Northeast Serv. Div. v. Boston
Edison Co., 822 F.2d 199, 202 (1st Cir. 1987) (district court's
findings concerning intent based on examination of dealings of
parties were “sufficiently factbound to fit comfortably” within
the scope of Fed. R. Civ. P. 52(a)).
provision and, once incorporated as a court order in a federal
court, is arguably subject to interpretation under federal law.
However, given the parties' apparent consensus that the law of
Massachusetts applies, we need not resolve that question here.
See, e.g., Borden v. Paul Revere Life Ins. Co., 935 F.2d 370,
375 (1st Cir. 1991) (noting that parties are bound by plausible
choices of law made in proceedings below).
6 Although the clearly erroneous standard would apply to
factual findings in any event, we note that Paragraph 15 of the
settlement agreement, which requires disputes over royalties to
be referred to a master for resolution, specifically states that
“[t]he findings of facts [sic] of the Master shall be final
unless clearly erroneous.”
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1. Income from AOL and Lexis-Nexis
In April 1994, AccuSoft entered into an agreement with
AOL to license the IFL software for distribution as a component
of AOL's software products. This agreement was amended by the
parties in July 1995. The amendment provided that AOL's license
would run for a period of one year from the amendment's
effective date (July 1, 1995), and, thereafter, would renew for
additional one-year periods automatically, at specified royalty
rates, unless terminated by the parties. AOL continued to make
payments, and neither party moved to terminate the agreement,
with the result that the license continued in effect after
August 31, 1996. During the “audit phase” of this case, both
Snowbound and AccuSoft asserted that the revenue stream issuing
from this agreement after August 31, 1996, belonged to it under
the settlement agreement.
In February 1995, AccuSoft entered into a licensing
agreement with Lexis-Nexis which permitted Lexis-Nexis to
“distribute, lease and market” the IFL as a component of the
programs used to access Lexis-Nexis' services. An addendum to
the agreement, signed the same day, specified that the agreement
would initially terminate in December 1995, but that Lexis-Nexis
could, at its option, extend the agreement for a second and then
a third year by paying stated amounts before the end of each
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prior year. It also provided that Lexis-Nexis could, by paying
an additional amount before the end of the second year, convert
the license to a “perpetual, fully paid-up license” effective
January 1, 1998. In January 1997, Lexis-Nexis paid AccuSoft
$35,000, representing the $25,000 annual renewal for the 1997
calendar year and the $10,000 specified for converting the
license to a perpetual license. Both AccuSoft and Snowbound
argued before the master that this income belonged to it under
the settlement agreement.
In his memorandum, the master ruled that AccuSoft was
entitled to retain the entirety of both the AOL revenue stream
and the Lexis-Nexis payments, because the settlement agreement
did not affect the continuation of licensing agreements already
in effect on June 5, 1996 -- when the settlement agreement was
signed -- nor did it provide for royalties to be paid on such
licenses. The master noted that nothing in the settlement
agreement expressly addressed the continuation of existing
licenses. He also found nothing in the agreement to implicitly
require their termination or transfer to Snowbound. Although
the settlement agreement clearly did transfer AccuSoft's
copyright in the IFL to Snowbound, the master accepted
AccuSoft's contention that a non-exclusive license issued by
AccuSoft before the settlement agreement was signed would
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continue in effect under 17 U.S.C. § 204(e).7 The master also
agreed with AccuSoft that the language accomplishing the
transfer of copyright did not transfer AccuSoft's collateral
contractual rights in existing IFL licensing agreements,
including the right to receive payment under such agreements.
Turning to the AOL and Lexis-Nexis licensing
agreements, the master found in each case that the agreements
constituted continuing licenses, rejecting Snowbound's argument
that the renewal of the licenses was tantamount to issuance of
a “new” license after August 31, 1996. The master interpreted
the AOL agreement to create, in effect, a perpetual license,
conditioned only on payment, that would continue “unless and
until an affirmative act is done by either AccuSoft or AOL which
breaks the continuity of the license.” Similarly, the Lexis-
Nexis agreement “continue[d] in effect from the date of the
Addendum . . . without a new grant or extension of rights.” On
this basis, the master ruled that AccuSoft could retain any and
all revenues resulting from annual renewals of the AOL agreement
7 This section provides, in pertinent part, that “a
nonexclusive license, whether recorded or not, prevails over a
conflicting transfer of copyright if the license is evidenced by
a written instrument signed by the owner of the rights licensed
. . . and . . . the license was taken before execution of the
transfer.” 17 U.S.C. § 204(e). Nothing in Snowbound’s appeal
suggests that Snowbound disputes the applicability of this
statute or the import of its application.
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after August 31, 1996, as well as the entirety of the January
1997 payment from Lexis-Nexis.
On appeal, Snowbound's principal contention is that the
master improperly interpreted the settlement agreement.
Snowbound admits that there is a “lack of pertinent language” in
the settlement agreement, but argues that “the entire tenor of
the Settlement Agreement is that after August 31, 1996, AccuSoft
was to have no further dealings of any kind with the IFL”
(emphasis added). Snowbound also notes that the settlement
agreement provided for royalty payments to be made to Snowbound,
and that AccuSoft had paid royalties to Palo on IFL sales even
before the settlement agreement was signed. Given this
“historical and contractual context,” Snowbound argues, it
“makes no sense . . . to infer that Palo intended AccuSoft to
keep the entirety of [the income from AOL and Lexis-Nexis].”
Taking a different tack, Snowbound also argues that the AOL
agreement, at least, is not properly viewed as a continuing
license, because its terms allow AccuSoft to terminate upon 120
days notice for any reason.
We are not persuaded to adopt the interpretation of the
settlement agreement that Snowbound proposes. As we have
previously stated, when sophisticated business entities enter
into a settlement agreement, they “rely upon and have a right to
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expect a fairly literal interpretation of the bargain that was
struck and approved by the court.” Jewett, 711 F.2d at 1101.
We have also made clear that we do not consider it our place to
“rewrite contracts freely entered into between sophisticated
business entities.” Mathewson Corp. v. Allied Marine Indus.,
Inc., 827 F.2d 850, 855 (1st Cir. 1987). Here, it is undisputed
that the parties are business entities of reasonable
sophistication who drafted a settlement agreement with the
extensive participation of attorneys on both sides. It is also
undisputed that the settlement agreement does not, by its terms,
either terminate pre-existing licenses issued by AccuSoft or
transfer collateral contractual benefits resulting from existing
licensing agreements to Snowbound. Under such circumstances, we
consider it “far wiser for a court to honor the parties' words
than to imply other and further promises out of thin air.” Id.
We are particularly loath to do so given the conclusory
arguments advanced by Snowbound in favor of its interpretation.
We do not consider it obvious that the master's decision is
contrary to the “entire tenor” of the agreement, and Snowbound
provides nothing beyond its bare assertion to convince us
otherwise. While Snowbound's contention that it “makes no
sense” to infer that Palo/Snowbound intended that these revenues
should pass to AccuSoft royalty-free strikes us as plausible, it
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is also irrelevant to our analysis. Whether or not Snowbound
anticipated this result (and we acknowledge the possibility that
Snowbound simply did not consider what would happen to
continuing agreements), it is not our role “to accomplish by
judicial fiat what a party neglected to achieve contractually.”
Northern Heel Corp. v. Compo Indus., Inc., 851 F.2d 456, 466
(1st Cir. 1988) (quoting RCI Northeast Serv. Div., 822 F.2d at
204) (internal punctuation omitted). Furthermore, we note the
master's finding that Palo knew of at least the AOL licensing
agreement during settlement negotiations, which Snowbound does
not dispute. Under such circumstances, Snowbound took the risk
that its unspoken understanding was incorrect and thus was not
entitled to rest on this unilateral belief that future rights
associated with the AOL agreement were comprehended in the
language of the settlement agreement.
Finally, we find no merit in Snowbound's argument that
the AOL license renewal constituted a “new” license simply
because it was subject to termination at either party's
discretion. We do not agree that the fact that AccuSoft could
have terminated its agreement with AOL, but did not, amounts to
the same thing as the affirmative grant of a new license. As
previously noted, the settlement agreement did not oblige
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AccuSoft to terminate the license; AccuSoft therefore did not
violate the agreement by taking no action.
For the foregoing reasons, we affirm the master's
decision with respect to the revenues received under the AOL and
Lexis-Nexis licensing agreements.
2. Allocation of Split Licenses
In June and July 1996, AccuSoft entered into licensing
agreements with Aimtech Corporation (“Aimtech”), NetObjects,
Inc. (“NetObjects”), and Caere Corporation (“Caere”)
(collectively “licensees”), granting the recipients the right to
distribute, as part of their software products, both the IFL and
AccuSoft's successor product, ImageGear. Each agreement
included a provision allocating the licensing fee between the
two products. The provision stated that the portion of the fee
associated with the IFL license was based on specified estimates
(these estimates apparently came from the customers) concerning
the number of copies of the IFL that would be sold. The
remainder of the licensing fee was for an unlimited license to
use ImageGear.
At the hearing before the master, Snowbound argued
that, although the agreements recited this allocation of the
licensing fees between the two products, other language in the
agreements suggested that the licensees were not obligated to
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limit their IFL sales to the levels on which the fee allocation
was based.8 The NetObjects agreement, for example, stated that
“[t]his is a fully paid up license fee and no additional fees
are due from Customer during the term of this Agreement,” and
also provided that “[t]he fees under this agreement are not
returnable.” Snowbound contended that this language, and
similar language in the other agreements, suggested that the
licensees effectively obtained unlimited licenses to the IFL and
were not bound by the allocations. Snowbound also asserted that
it was not clear that the licensees had ever in fact switched to
using ImageGear. On the basis of these arguments, Snowbound
claimed the entirety of the licensing fee from each agreement.
AccuSoft, for its part, contended that the license allocations
were intended to be enforceable and presented testimony of its
officers stating that they believed the allocations were
enforceable when they signed the agreements.
In his memorandum, the master rejected Snowbound's
position with minimal analysis, stating, without elaboration,
that “in the absence of language in the Settlement Agreement
that addresses this issue . . . Palo has not established a right
8 Snowbound also argues that these licensing agreements
violated provisions of the settlement agreement prescribing the
form of licenses AccuSoft could issue and therefore constituted
contempt of the court's order. We review this assertion in Part
B.1.b, infra.
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to claim all of the income in these distribution licenses as
[income subject to the settlement agreement's royalty
provisions].” The master then directed AccuSoft to pay
royalties based on the portion of the license fees allocated to
the IFL in each agreement. On appeal, Snowbound presses its
point that this conclusion is incorrect “because there was no
evidence in the record that the licensees ever used any product
other than the IFL, or ever restrained their use of the IFL to
the numbers stated in the nominal 'allocations.'”
Although the master's decision is short on detailed
analysis, we believe that his conclusion concerning the
royalties owed by AccuSoft withstands Snowbound's challenges.
In so deciding, we need not, and do not, decide the questions of
interpretation pressed by Snowbound. Even assuming arguendo
that Snowbound is right that the allocations contained in the
licenses were not enforceable, we conclude that Snowbound would
not be entitled to additional royalties unless the licensees
actually sold more products containing the IFL than were set
forth in the allocations. As Snowbound itself argues, the
settlement agreement included as Exhibit B a per-copy price list
intended to govern AccuSoft's sales of the IFL through August
31, 1996. Our review of the three agreements indicates that the
portion of the licensing fee allocated to the IFL in each
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agreement accurately incorporates the applicable per-copy price.
If that allocation were honored, we find nothing in the
settlement agreement to suggest that Snowbound is entitled to
any more than the appropriate royalty on the allocation amount,
which is precisely what the master ordered.9
Snowbound points to no evidence in the record that
demonstrates that the allocations were not honored. In its
brief, Snowbound attempts to place the burden on AccuSoft on
this point, claiming that there is “no evidence in the record”
that the licensees kept to the allocation limits. However, it
was plainly Snowbound's burden to introduce evidence indicating
that the allocation limits were exceeded.10 Absent such
evidence, the master was under no obligation to disregard the
numbers contained in the agreements in determining the amount of
royalties due Snowbound. We therefore affirm.
3. Income from Lifeboat Japan
9 Although Snowbound makes much of the fact that one or
more of the licensees never switched to ImageGear, that fact, by
itself, is irrelevant to whether Snowbound was appropriately
paid for IFL sales. Aimtech, NetObjects, and Caere were
entitled to make whatever use they wished, including no use at
all, of the ImageGear license they purchased simultaneously with
their IFL license.
10 Indeed, from our review of the record, it appears that
Snowbound requested, and was granted, the right to conduct
discovery into the question of how the licensees viewed their
obligations under the licensing agreements. We find no evidence
that Snowbound did so, nor any explanation for why it did not.
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From October 1995 until at least February 1997,
Lifeboat Japan Inc. (“Lifeboat”) paid licensing fees to AccuSoft
under an agreement which permitted Lifeboat to sell copies of
the IFL in the Japanese market in return for a percentage of the
income on those sales.11 The agreement between AccuSoft and
Lifeboat, as initially executed by the parties, ran through July
1996. However, in April 1996, after AccuSoft and Snowbound had
filed suit against each other and shortly before Judge Gorton
issued his injunction, AccuSoft extended the arrangement to July
1997. The extension of the Lifeboat agreement never was
revealed to Snowbound during the settlement negotiations that
followed. Indeed, AccuSoft did not acknowledge until March 1997
that sales by Lifeboat continued past August 31, 1996, having
earlier represented to the master's auditor that Lifeboat's
sales terminated by the cutoff date.
The issue before us centers on the disposition of
revenues resulting from Lifeboat's sales of the IFL after August
31, 1996. In the proceedings below, AccuSoft argued that it was
11 AccuSoft appears to dispute, to some degree, the
characterization of Lifeboat as a “reseller,” and points to
statements in the record to the effect that Lifeboat actually
sold its own product incorporating the IFL. Nothing identified
by AccuSoft is adequate to cause us to disturb the master’s
factual finding that Lifeboat is properly characterized as a
reseller and we adopt that characterization in the analysis that
follows.
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entitled to the entirety of this income, advancing the same
argument that it made, successfully, with respect to income
resulting from the AOL and Lexis-Nexis licensing agreements
after the cutoff. See supra. In the case of Lifeboat, however,
the master reached a different result. The master found that
AccuSoft's conduct surrounding the Lifeboat extension --
principally, AccuSoft's failure to reveal its existence to
Snowbound -- violated an implied duty of good faith and fair
dealing imposed on AccuSoft as a party to the settlement
agreement.12 In support of this conclusion the master noted that
the extension was executed “at a time when Palo was challenging
AccuSoft's rights in court.” In addition, the master pointed
out that Lifeboat's ability as a reseller to continue to
12 In the interest of completeness, we note that the
master’s report appears to advance a second argument for
allocating the Lifeboat revenues to Snowbound; an argument that
Snowbound briefly references on appeal. The master begins from
the fact that, in his interpretation, the settlement agreement
transferred all of AccuSoft’s ownership interest in the IFL to
Snowbound. From that, the master reasons that AccuSoft’s
activities with respect to the IFL must be limited to those
actions expressly “given back” under the settlement agreement.
We find little support for this argument in the settlement
agreement. Indeed, as discussed in Part II.B.2.c of this
opinion, we believe that the settlement agreement did not
transfer “ownership” of the IFL to Snowbound. In addition, we
find it difficult to square this analysis with the master’s
allocation of the AOL and Lexis-Nexis revenues to AccuSoft –
outcomes that were plainly not provided for in the settlement
agreement. For both reasons, we reject this as an alternative
ground supporting the master’s conclusion.
-24-
distribute the IFL as a stand-alone product “absolutely
contradict[ed]” the “express intention” of the settlement
agreement that “all distribution [of the IFL] by or through
AccuSoft will cease on August 31, 1996.” Because of this
violation of the duty of good faith and fair dealing, the master
concluded that AccuSoft should not be allowed to retain the
Lifeboat income, and determined that the entirety of the income
resulting from sales after August 31, 1996, must be paid to
Palo.
On appeal, AccuSoft argues that the master erroneously
used the duty of good faith and fair dealing to create
obligations that exist nowhere in the agreement between the
parties. While sympathetic to the master's frustration with
AccuSoft's lack of candor, we must agree. The implied covenant
of good faith and fair dealing between parties to a contract
provides that “neither party shall do anything that will have
the effect of destroying or injuring the right of the other
party to receive the fruits of the contract.” Druker v. Roland
Wm. Jutras Assoc., 348 N.E.2d 763, 765 (Mass. 1976) (quoting
Uproar Co. v. Nat'l Broadcasting Co., 81 F.2d 373, 377 (1st Cir.
1936)). It is implicit in that definition, and made explicit in
our precedent, that the prohibition contained in the covenant
applies only to conduct during performance of the contract, not
-25-
to conduct occurring prior to the contract's existence, such as
conduct affecting contract negotiations. E.g., FDIC v. LeBlanc,
85 F.3d 815, 822 (1st Cir. 1996); see also Restatement (Second)
of the Law of Contracts § 205, cmt. c (noting that bad faith in
contract negotiations is not reached by the implied duty of good
faith and fair dealing, but instead by concepts such as fraud in
the inducement or absence of agreement). Equally clear from
this definition is that the requirement of good-faith
performance ultimately is circumscribed by the obligations --
the contractual “fruits” -- actually contained in the agreement.
See LeBlanc, 85 F.3d at 822 (holding that an obligation to
negotiate subsequent agreements in good faith would not be
imputed under the implied duty of good faith and fair dealing
where the original agreement included no such requirement).
The master's application of the duty of good faith and
fair dealing cannot be squared with the above principles. As
AccuSoft notes, the master's opinion acknowledges that the
settlement agreement simply does not address the continuation of
pre-existing agreements. To the extent this is an accurate
interpretation of the contract, we do not see how good faith
performance could nonetheless require AccuSoft to surrender the
income on certain such agreements.
-26-
We need not, however, decide this question of
contractual interpretation as the master's rationale fails on a
narrower ground. It is undisputed that AccuSoft's extension of
the Lifeboat agreement occurred before the settlement agreement
was signed. Therefore, neither execution of the extension nor
AccuSoft's silence about it while negotiating the settlement
agreement can form the basis for a violation of the duty of good
faith and fair dealing. No one has suggested that AccuSoft's
mere continued silence after the settlement agreement was signed
constituted a violation of the duty.13 Since we find no evidence
identified in the record on which a violation of the covenant of
good faith and fair dealing could rest, the master's conclusion
cannot be supported on the legal grounds offered.
In its motion papers, Snowbound proposes an alternative
ground for affirming the master's conclusion which we believe
merits a response.14 Snowbound contends that AccuSoft's
13 We find nothing in the settlement agreement that would
require AccuSoft to disclose the existence of the extension.
Furthermore, we do not see how disclosure after the settlement
agreement was signed could have in any way affected Snowbound's
ability to obtain the fruits of the agreement. The terms of the
settlement agreement, including its failure to adequately
address pre-existing agreements like Lifeboat's, were at that
point fixed.
14 Yet another contention, raised by Snowbound's counsel
at oral argument, is that Snowbound might be entitled to
royalties on the Lifeboat agreement pursuant to a pre-existing
royalty agreement between the present parties. Given that
-27-
nondisclosure of the Lifeboat extension violated a warranty
provision of the Assignment of Copyright, which stated, in
pertinent part:
AccuSoft represents and warrants to the best
of its knowledge, that it has made no
transfer, assignment, or license (other than
non-exclusive licenses in the ordinary
course of business) with respect to the
Software or any part thereof . . . .
In Snowbound's view, AccuSoft's “premature extension of
Lifeboat's distributorship, made days before an anticipated
ruling from the court that could have terminated AccuSoft's
right to sell the IFL for good,” cannot be considered to be a
license entered into “in the ordinary course of business.” As
a result, AccuSoft was in breach of the warranty from the moment
it was signed.
Although Snowbound's argument is facially credible,
Snowbound fails to identify record evidence adequate for us to
find that AccuSoft's extension of the Lifeboat agreement was not
executed in the “ordinary course of business.” The
determination of what is or is not comprehended in the phrase
“ordinary course of business” is necessarily fact-specific,
involving consideration of all the circumstances of the conduct
Paragraph 18 of the settlement agreement specifically provides
that it will “supersede all prior agreements between the parties
and each and every term thereof,” this argument is unavailing.
-28-
or transaction at issue. See Demoulas v. Demoulas Super
Markets, 677 N.E.2d 159, 202 (Mass. 1996) (concluding, in the
context of a contempt action, that whether a transaction
occurred in the ordinary course of business is a question of
fact; the court looks to the prior course of dealings between
the parties involved and the circumstances of the transaction to
determine whether the transaction was part of the defendant's
“normal, day-to-day business operations”). In this
determination, the timing of the Lifeboat extension is relevant,
see id. (noting that the timing of a transaction is one of the
factors to be considered), but we do not believe that, standing
alone, it is sufficient to convince us that AccuSoft violated
the commitment contained in its warranty. Since Snowbound has
pointed to no other record evidence supporting its position, we
cannot affirm the master's conclusion on this basis.
In light of the preceding, we hold that the master's
allocation of the entirety of the Lifeboat revenues to Palo must
be vacated. In so doing, however, we acknowledge that this
determination does not fully resolve the rights of the parties
in regard to this revenue. Given the timing of the Lifeboat
extension, it seems possible that AccuSoft would nonetheless owe
-29-
some portion of these revenues to Snowbound as royalties.15 This
issue was not briefed on appeal and we do not believe that the
record provides an adequate basis for us to decide how the
settlement agreement's royalty provisions might apply. We
therefore remand to the district court for a determination of
what, if any, royalties are due Palo on the Lifeboat revenues.
15 Indeed, it appears from the record that AccuSoft itself
took this position at one point in the proceedings before the
master. The master rejected the argument at that point because
he considered AccuSoft to have no rights in regard to the
income.
-30-
B. Rulings on Allegations of Contempt
Both AccuSoft and Snowbound dispute aspects of the
master's memorandum disposing of their allegations of contempt.
In assessing these claims of error, we employ the aforementioned
standards of review with respect to the master's factual
findings and his interpretation of the settlement agreement's
terms. With respect to the master's ultimate findings on
contempt, however, we review only for abuse of discretion.
E.g., Project B.A.S.I.C. v. Kemp, 947 F.2d 11, 15-16 (1st Cir.
1991). In the context of contempt rulings, we have said, the
abuse of discretion standard “will be administered flexibly,”
depending on the circumstances of the case. Id. at 16. In
particular, “greater deference is owed to the trial court in
public law litigation than in purely private litigation.” Id.
We also have stated that, in recognition of the fact that the
contempt power is a “potent weapon,” our review will proceed
more searchingly when we confront a finding of contempt than
when we consider a decision “exonerating a putative contemnor.”
Id.
Our assessment of the master's deployment of the
contempt power also incorporates various prudential principles
we have adopted in recognition of the contempt power's “virility
and damage potential.” Id. A complainant “must prove civil
-31-
contempt by clear and convincing evidence.” Id.; accord Gemco
LatinoAmerica, Inc. v. Seiko Time Corp., 61 F.3d 94, 98 (1st
Cir. 1995). In addition, contempt may only be established if
the order allegedly violated is “clear and unambiguous.”
Project B.A.S.I.C., 947 F.2d at 16; see also id. at 17 (stating
that “the party enjoined must be able to ascertain from the four
corners of the order precisely what acts are forbidden”).
“[C]ourts are to construe ambiguities and omissions in consent
decrees as redounding to the benefit of the person charged with
contempt.” Gilday v. Dubois, 124 F.3d 277, 282 (1st Cir. 1997)
(internal citations and punctuation omitted).
Finally, we bear in mind that, while good-faith efforts
alone do not insulate a defendant in a contempt action, see Star
Fin. Servs. Inc. v. AASTAR Mortg. Corp., 89 F.3d 5, 10 (1st Cir.
1996) (“An act does not cease to be a violation of law and of a
decree merely because it may have been done innocently.”), our
precedent permits a finding of contempt to be averted where
diligent efforts result in substantial compliance with the
underlying order. Langton, 928 F.2d at 1220. The determination
of whether substantial compliance has been achieved will “depend
on the circumstances of each case, including the nature of the
interest at stake and the degree to which noncompliance affects
that interest.” Fortin v. Comm'r of Mass. Dept. of Pub.
-32-
Welfare, 692 F.2d 790, 795 (1st Cir. 1982). For this reason, a
court may decline to find a party in contempt despite the
failure to achieve “letter perfect compliance” with the order at
issue. Langton, 928 F.2d at 1222.
-33-
1. Snowbound's Claims of Error
Having failed to convince the master to find AccuSoft
in contempt of any aspect of the settlement agreement,16
Snowbound, on appeal, reasserts its arguments for several such
claims. With but one exception, we find no reason to disturb
the master's conclusions as adopted by the district court.
a. Failure to Find that AccuSoft's Nonpayment of
Royalties and Improper Accounting Practices
Constituted Contempt
In the proceedings below, Snowbound sought to hold
AccuSoft in contempt for its nonpayment of royalties due under
the settlement agreement and what Snowbound deemed to be
fraudulent accounting practices surrounding AccuSoft's IFL
sales. As previously indicated, the master found that AccuSoft
had, in several instances, failed to pay royalties owed under
the settlement agreement.17 The master also found that AccuSoft
had engaged in certain “sharp practices,” such as initiating
16 Here, and in the discussion that follows, we
occasionally use the phrase “contempt of the settlement
agreement.” This phrase is employed in the interest of brevity
as shorthand for “contempt of the court order incorporating the
settlement agreement.”
17 The total amount of unpaid royalties (less the
royalties on improper “returns” discussed below) was later
calculated to be approximately $145,000. Of this, almost
$122,000 reflected the master's allocation of revenues from the
Lifeboat licensing agreement, an allocation which we have
concluded must be vacated.
-34-
exchanges of the IFL for AccuSoft's replacement product,
ImageGear, then seeking to claim a credit for such exchanges as
“returns” under Paragraph 1 of the settlement agreement.18
Finally, the master found evidence that AccuSoft had been less
than forthcoming in responding to the audit that Snowbound had
initiated pursuant to Paragraph 5 of the settlement agreement.
Ultimately, however, the master concluded that
Snowbound had failed to produce “clear and convincing evidence”
that AccuSoft’s actions constituted contempt. The master
grounded his decision principally on language in paragraph 15 of
the settlement agreement, which states:
In the event that there is a dispute
concerning the amount of AccuSoft's Software
Gross Billings19 as provided for herein, the
Court shall appoint a Master pursuant to
Fed. R. Civ. P. 53. The findings of facts
[sic] of the Master shall be final unless
clearly erroneous. The compensation for
said Master shall be split equally between
the parties.
The master interpreted this language to create an alternative
dispute resolution process for addressing any “allegations of
18 AccuSoft deducted $135,023 in “returns” from the
royalty base under this provision, none of which the master
found to be properly deductible. The master ultimately found
that this resulted in AccuSoft failing to pay $33,481 in
royalties due under the agreement.
19 The term “Software Gross Billings” is used to identify
the revenue base on which royalty amounts are calculated.
-35-
non-payment or improper accounting” that might arise when the
agreement was implemented. Because the parties had provided
this process, the master reasoned, nonpayment or improper
calculation of royalties would not become contempt of the
settlement agreement “until and unless either party disregarded
the Master's findings and order.”
The master acknowledged that certain conduct attributed
to AccuSoft by Snowbound, including intentional falsification of
records to conceal IFL sales, would independently violate the
settlement agreement and therefore provide a basis for contempt.
However, he found that the evidence introduced by Snowbound with
respect to these activities, including evidence regarding the
improper “returns” of IFL and inconsistencies in the recording
of certain sales, did not constitute the “clear and convincing
evidence” of a violation of a specific requirement of the
settlement agreement necessary to support a finding of contempt.
The master noted that his independent auditor did not find
evidence that AccuSoft had engaged in “purposeful falsification”
of the records. Furthermore, the master found that, in many
cases, the position AccuSoft took to justify its actions “was
not without support in the Settlement Agreement,” even if the
master ultimately determined that AccuSoft’s approach to the
calculation of royalties was not correct.
-36-
On appeal, Snowbound argues that the master was wrong
to conclude that the dispute resolution process insulated
AccuSoft from the contempt sanction unless AccuSoft failed to
pay royalties after the master had issued his ruling. Snowbound
contends that reading the settlement agreement this way
effectively nullifies the payment deadlines contained in
Paragraph 5 of the agreement, as AccuSoft could avoid payment
“with impunity” until the master had finally determined the
issue. According to Snowbound's interpretation, the dispute
resolution provision did not relieve AccuSoft of the obligation
to pay royalties on the deadlines but merely provided, in
advance, for the mechanism that would be used to determine
whether a breach of the agreement had occurred.
Snowbound's argument is not without some force and we
concede uncertainty as to whether the provision for resolution
of disputes by a master should be read to foreclose all contempt
actions grounded in “non-payment and improper accounting.”
Nonetheless, bearing in mind the cautionary principles guiding
exercise of the contempt sanction -- particularly the
requirement that contempt requires the violation of “an
unambiguous consent decree that left no reasonable doubt as to
what behavior was to be expected,” Gilday, 124 F.3d at 282
(internal quotation marks omitted) -- we are not prepared to say
-37-
that the master's failure to find AccuSoft in contempt for these
actions was an abuse of discretion.
Snowbound also presses again its claim that AccuSoft
should be found in contempt because it engaged in deliberate
falsifications of records and purposefully frustrated
Snowbound’s audit in order to avoid paying royalties owed under
the settlement agreement. However, Snowbound adduces no
evidence that compels us to believe that the master's findings
to the contrary on this point are clearly erroneous. To the
contrary, the master's position is amply supported by record
evidence. We therefore affirm.
b. Failure to Find that the AccuSoft's Allocated
Licenses for IFL and ImageGear Constituted
Contempt
We have previously discussed Snowbound's contention
that the master improperly calculated royalties due on certain
licensing agreements which purported to convey licenses to both
the IFL and AccuSoft's replacement product, ImageGear. In
addition, Snowbound has asserted that issuance of these licenses
constituted contempt of Paragraph 5 of the settlement agreement,
which states:
All distribution licenses will be at
standard published rates in effect prior to
May, 1996, a list of which is attached
hereto as Exhibit B. If AccuSoft wishes to
issue any distribution license on terms not
listed on Exhibit B, it will submit those
-38-
terms . . . to Palo for his written approval
. . . .
In the proceedings below, Snowbound argued that the allocated
licenses were effectively unlimited licenses because they did
not create an enforceable limitation on the number of copies of
IFL that could be sold. As such, they did not conform to the
price schedule contained in Exhibit B, which established fixed
prices for stated numbers of copies.
Nothing in the master's memorandum on the contempt
issues directly addresses Snowbound's arguments concerning the
allocated licenses, although the master's determination that the
allocations were a valid basis for calculating royalties
arguably does so by implication. On appeal, Snowbound presses
its claim that “issuing a license without a clear and
enforceable legal limitation on the licensee's use of the IFL–a
limitation to standard amounts for standard prices--was a
material breach of the agreement” and thus grounds for finding
AccuSoft in contempt.
Although the master’s failure to address this issue in
straightforward terms is unfortunate, we do not find that a
remand on this issue is required. The argument Snowbound makes
on appeal is premised solely on language contained in the
licensing agreements, which, it claims, conflicts with the
requirements imposed by the settlement agreement. Snowbound
-39-
does not refer us to any factual information in the record
bearing on this issue, and, indeed, we find no indication that
any factual information was developed which might shed light on
this claim, even though Snowbound was given permission to do so.
As previously noted, the interpretation of settlement agreements
and contracts, where no recourse to negotiating history or other
extrinsic factors is required, is a question of law. Langton,
928 F.2d at 1220; Fashion House, 892 F.2d at 1083.
Having reviewed the relevant agreements, we conclude
that Snowbound has not demonstrated that AccuSoft committed a
breach of the settlement agreement for which it should be held
in contempt. First, and despite Snowbound's protestations, it
is not self-evident that the settlement agreement requires that
licenses issued by AccuSoft contain a “clear and enforceable
limitation” on the number of copies that can be sold. We agree
that the settlement agreement language, reasonably read, would
prohibit issuance of a license that stated a per-copy price for
the IFL that was inconsistent with the “published rates”
contained in Exhibit B. 20 We would also accept, for present
purposes, that a license that unambiguously conveyed an
unlimited license for a fixed price would not be “at” the
20 As noted in our previous discussion of the allocated
licenses, our review indicates that the per-copy prices recited
in the three licenses are consistent those set out in Exhibit B.
-40-
Exhibit B rates. It is by no means obvious, however, that a
license that stated a proper per-copy price would violate the
settlement agreement simply because it proved to be
unenforceable in certain respects. Nor do we consider it clear
that the licenses at issue actually permitted the licensees to
sell more copies of the IFL than stated in the allocations.
Certain language, such as that stating the licenses are “fully
paid up,” arguably supports Snowbound’s proposed interpretation.
At the same time, we find arguable merit in AccuSoft’s response
that this language referred only to the ImageGear license. As
previously noted, Snowbound has not introduced extrinsic
evidence supporting its interpretation of the agreement.
Given the cautionary principles governing our use of
the contempt sanction, we consider the unresolved ambiguities in
the relevant agreements fatal to Snowbound's claim. Although
the interpretations Snowbound advances are not illogical, they
fall well short of constituting proof, by clear and convincing
evidence, that AccuSoft violated the settlement agreement by
issuing the licenses in question.
c. Failure to Find AccuSoft in Contempt Because it
did Not Maintain Records of IFL Sales Using
Sequential Serial Numbers
As a third ground for contempt, Snowbound alleges that
AccuSoft failed to maintain its records of IFL sales as required
-41-
by the last section of Paragraph 5 of the settlement agreement,
which states:
Each AccuSoft sale or license pursuant to
this Paragraph will be identified by a
serial number, issued sequentially beginning
with the number 276745. AccuSoft will keep
a list of each sale by serial number, which
list will be made available to Palo's
independent accountant . . . .
This argument was raised below by Snowbound, but, like
Snowbound's contention that the allocated licenses constituted
contempt, was not directly addressed by the master in his
memorandum disposing of the contempt allegations. On appeal,
Snowbound asks us to rectify the omission, pointing to language
in one of the master's memoranda on audit costs which, it
argues, constitutes a factual finding that no such records were
kept. Because it considers the settlement agreement unambiguous
as to this requirement, Snowbound contends that this finding
obligates us to conclude, as a matter of law, that AccuSoft was
in contempt.
Given the heavy burden of proof our precedent places
on a party alleging contempt, we do not agree that the current
record provides an adequate basis for resolving the issue in
Snowbound's favor. The language to which Snowbound refers,
although it does state that AccuSoft “failed to maintain” the
sequential list of IFL sales required by the settlement
-42-
agreement, appears in a discussion of the allocation of audit
costs, contained in a memorandum issued after the master had
ruled on the parties' contempt allegations. It is not clear
that the master intended the statement to stand as a formal
finding of fact, and there is certainly no suggestion in the
record that it was meant to carry the weight Snowbound would
have it bear. Nor can we consider the matter free from dispute,
as AccuSoft points to several exhibits appearing to show that
sequential serial numbers, meeting the requirements of the
settlement agreement, were used for at least some IFL sales.
Under the circumstances, the master's brief statement does not
constitute proof, by clear and convincing evidence, of contempt.
At the same time, however, we conclude that we cannot
resolve this matter in AccuSoft's favor either. The master's
statement at a minimum indicates that he harbored some doubt
about AccuSoft's compliance with this requirement. On the basis
of the current record, we cannot foreclose the possibility that
the master, once he squarely confronts the issue, might find
that AccuSoft's failure to comply fully constitutes contempt.
While we see comparatively little chance that such contempt, if
proven, could be linked to any significant damages -- or
attorneys' fees, given our interpretation of the fee-shifting
-43-
provision contained in the agreement -- we leave those
determinations to the district court on remand.
d. Failure to Find AccuSoft in Contempt on the
Basis of Written and Oral Statements
Snowbound's final claim of error with respect to the
master's contempt rulings is that the master improperly failed
to find AccuSoft in contempt for various statements that it made
to third parties both orally and in writing. In the proceedings
below, Snowbound argued that AccuSoft made numerous statements
that violated Paragraph 9 of the settlement agreement, which
states, in pertinent part, that:
AccuSoft will not hereafter represent
explicitly or in substance to anyone that
its forthcoming new image software toolkit .
. . ”ImageGear,” is based upon or derived
from the Image Format Library.”
As examples, Snowbound pointed to the fact that AccuSoft's
advertising materials referred to ImageGear as “Version 6.0"
(the most recent version of the IFL was 5.0) and as the “new
version of the AccuSoft Image Format Library.” Similarly,
AccuSoft's web page claimed that ImageGear “takes [AccuSoft's]
existing Image Format Library product to a new level by adding
new features, functions, flexibility and performance.”
Snowbound alleged that AccuSoft salespeople had similarly
exceeded the limits of Paragraph 9 by, for example, stating in
written communications with customers that “we are no longer
-44-
selling the Image Format Library version 5.0 . . . we are
selling the 6.0 version called ImageGear.”
While the master agreed that the statements identified
by Snowbound suggested a “relationship” between the IFL and
ImageGear, he interpreted Paragraph 9 to prohibit a narrower
class of statements: those that “convey the . . . suggestion
that ImageGear contains the same computer code as the IFL.” The
master found that the statements attributed to AccuSoft did not
contain that suggestion. The master also considered affidavits
from the counsel who negotiated the settlement agreement. These
affidavits, he found, showed considerable difference of opinion
as to what the parties intended Paragraph 9 to cover. In view
of both the narrow construction he applied to the language and
the ambiguity he detected in the parties' intent, he found that
contempt had not been proven.
Snowbound also asserted that AccuSoft had made
statements concerning its (and Snowbound's) ability to
distribute, maintain and support the Image Format Library that
impermissibly deviated from a “script” of approved statements
contained in Paragraph 13 of the settlement agreement.
Snowbound pointed to an e-mail from AccuSoft, issued days after
the settlement agreement was signed, stating that AccuSoft had
“full rights to market, sell, distribute, maintain and support
-45-
the Image Format Library.” Snowbound further noted that
AccuSoft continued to refer to the IFL as the “AccuSoft Image
Format Library,” even after August 31, 1996, when its right to
distribute the software had terminated. Finally, Snowbound
asserted that AccuSoft told certain customers who inquired about
the IFL after August 31, 1996 that “[n]o one has rights to
distribute the IFL,” that “[t]he Image Format Library is no
longer available from anywhere,” or even that “Snowbound does
not have the right to sell any licensing for the Image Format
Library.”
Here, again, the master found that the statements
complained of had not clearly been demonstrated to violate the
requirements of the settlement agreement. The master noted that
Paragraph 13, by its terms, only restricted the substance of
“statements by either party to the public concerning the
ownership of the Software” (emphasis added). It therefore was
not clear that Paragraph 13 covered AccuSoft's statements
concerning who could sell or distribute the IFL. Furthermore,
the master found some merit in AccuSoft's contention that the
settlement agreement, although it transferred the IFL software
to Palo, did not clearly convey to Palo or Snowbound any rights
to the product named the Image Format Library. As such,
AccuSoft's statement to its clients that the Image Format
-46-
Library was “not available from anywhere” was in some sense true
-- although less than forthcoming -- after August 31, 1996,
given that the only product then available using the IFL code
was the one called RasterMaster.
The master apparently found AccuSoft's statement that
it had “full rights” to the IFL to be the closest case, given
his conclusion that the settlement agreement actually placed
significant limits on AccuSoft's ability to continue
distributing the IFL, including the requirement that such
distribution cease entirely after August 31, 1996. Nonetheless,
the master found that, from a purchaser's perspective, AccuSoft
effectively had the “full rights” claimed at the time the
statement was made. Moreover, he found that the statement was
not “so much at variance” with the scripted statement --
AccuSoft was permitted to say that “AccuSoft will continue to
distribute the AccuSoft Image Format Library” -- as to
constitute contempt.
On appeal, Snowbound argues that the master's
conclusions with respect to these alleged violations must be
reversed because the master misinterpreted the requirements of
the settlement agreement and the import of AccuSoft's
statements. Although we acknowledge that the interpretations
proposed by Snowbound, at least in certain instances, are
-47-
plausible, we do not believe Snowbound has met the heavy burden
of demonstrating that the master abused his discretion by
concluding otherwise.
With respect to the violations of Paragraph 9, we
concede that the use of “Version 6.0" to describe ImageGear,
taken in isolation, implies a relationship between it and
Version 5.0 of the IFL that could include reliance on the same
or similar underlying code. However, other statements in the
advertisements and AccuSoft’s web page quite clearly undercut
that suggestion. For example, the first sentence of the
advertisement text states: “AccuSoft Corporation announces a
totally new product, ImageGear, the next generation in imaging
technology” (emphasis added). Similarly, the web site states:
“It's not a new version of an old product . . . it's new from
the ground up, designed to the most current coding, quality and
performance standards” (emphasis added). Given this, we see no
reason to disturb the master's conclusion that these statements,
taken as a whole, did not improperly suggest that ImageGear was
“based on or derived from” the code contained in the IFL.
The written communications with customers, which
include no such clarifying language, present a perceptibly
closer case and, were we deciding this issue in the first
instance, we are not certain that our conclusion with respect to
-48-
these statements would be the same as the master’s. However, we
do not find the master’s conclusions so clearly wrong as to
require us to find an abuse of discretion. The question of what
AccuSoft’s statements implied, in the context in which they were
made, strikes us as one which the master was plainly in a
superior position to answer. So too, we note that the master’s
inquiry into the negotiating history of the parties on the
relevant language of Paragraph 9 led him to believe that the
question of what was prohibited was not entirely understood by
the parties. Under the circumstances, we are not convinced that
the master’s conclusion constitutes reversible error.
We are similarly unpersuaded that reversal of the
master’s conclusions regarding alleged violations of Paragraph
13 is justified. We agree with the master that the settlement
agreement’s scripts, which, by their terms, extend only to
statements concerning the “ownership” of the software, are not
unambiguously applicable to the statements AccuSoft made
concerning rights to market and distribute the software. It
also seems to us to stretch the scripts too far to assume that
they would prohibit AccuSoft from making potentially accurate
negative statements concerning Snowbound's distribution of the
IFL when such statements did not conflict with those that the
settlement agreement permitted.
-49-
Turning finally to AccuSoft's statement that it had
“full rights to market, sell, distribute, maintain and support
the Image Format Library,” we again conclude that the master's
conclusion should be affirmed, although, in this case, we rely
on a different ground than did the master. See Ross-Simons of
Warwick, Inc. v. Baccarat, Inc., 217 F.3d 8, 10-11 (1st Cir.
2000) (holding that the appellate court is “not bound by the
trial court's rationale, but may affirm [the trial court's]
judgment for any valid reason that finds support in the
record”). In our view, there is no doubt that AccuSoft's
statement ultimately implies a claim regarding “ownership” of
the IFL, and therefore is governed by Paragraph 13 of the
settlement agreement. Equally clear, as the master found (and
the scripts and the settlement agreement confirm) is that
AccuSoft had, and could properly claim, only more limited rights
in the software. The “full” rights to which AccuSoft sought to
lay claim were transferred to Snowbound, and, in fact, Snowbound
was specifically allowed to claim such full rights in the code
underlying the IFL (and RasterMaster) by section b of Paragraph
13 of the settlement agreement. Given this, to the extent that
the master's opinion rests on a finding that AccuSoft's
statement did not conflict with the settlement agreement, we
must disagree.
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At the same time, we think that this comparatively
minor departure from the settlement agreement's requirements
does not, by itself, require a finding of civil contempt. As we
have noted, “letter perfect compliance” with a court's order is
not required -- only substantial compliance. Langton, 928 F.2d
at 1222. While AccuSoft doubtless tried to portray its position
following execution of the settlement agreement in a favorable
light, most of its statements -- particularly those disseminated
to the public generally -- were adequately qualified to avoid
conflict with the settlement agreement's terms. We do not
consider this single improper statement, contained in an e-mail
between AccuSoft and one of its resellers, so significant as to
require a finding that AccuSoft was not in substantial
compliance with the relevant provisions of the settlement
agreement. We therefore affirm the master's conclusion.
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2. AccuSoft’s Claims of Error
In the proceedings below, the master found in
AccuSoft’s favor with respect to a number of its allegations of
contemptuous conduct by Snowbound. In particular, the master
found that several widely-disseminated statements by Snowbound
violated the requirements of Paragraph 13 of the settlement
agreement. These included statements issued almost immediately
after the litigation, asserting that Snowbound had “won” the
litigation and had “accomplished what it wanted” in the
settlement agreement. Snowbound also was found to have violated
the settlement agreement by using the words “AccuSoft” and
“Image Format Library” in its advertisements, by revealing
confidential terms of the settlement agreement to clients, and
by failing to delete references to “Accu” or “AccuSoft” in
products it distributed after the settlement agreement was
signed.
However, the master ultimately rejected the relief
sought by AccuSoft with respect to these breaches of the
agreement. The master declined AccuSoft’s request that it be
excused from performance of its obligations under the agreement
(principally payment of royalties) from the date of Snowbound’s
breach. The master also found that AccuSoft had failed to
introduce evidence linking the proven breaches of the agreement
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with any damages it had suffered. On appeal AccuSoft challenges
these conclusions, as well as rulings by the master limiting the
scope of discovery with respect to damages. AccuSoft also
argues that the master should have separately found Snowbound in
contempt for licensing the IFL under that name, as opposed to
under its own brand name, RasterMaster.
a. Rejection of Request for Rescission of
Settlement Agreement/Relief from Judgment
In its initial motion for contempt, AccuSoft requested
that it:
be excused from making any and all further
payments to Defendants . . . as a result of
their wilful and deliberate breach of the
bargained for exchange of payments for
confidentiality and protection of AccuSoft’s
goodwill embodied in the Settlement
Agreement.
In an amended motion, submitted in September 1996, AccuSoft
reframed this argument more broadly as a request for relief from
judgment pursuant to Fed. R. Civ. P. 60(b)(6) and for rescission
of the settlement agreement in its entirety. Citing our
decision in United States v. Baus, 834 F.2d 1114 (1st Cir.
1981), AccuSoft argued that Snowbound’s contempt justified the
master in “relieving AccuSoft of the terms of the Judgment and
Settlement Agreement.” AccuSoft's rescission request, fleshed
out in a “post-trial” brief submitted at the close of the
hearings before the master, sought an order that would “rescind
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the Settlement Agreement and require the parties to return all
consideration received, thereby returning them to the status quo
that existed prior to the entry of the Settlement Agreement.”
As grounds for both forms of relief, AccuSoft argued that: (1)
Snowbound had failed to honor “material and essential” terms of
the settlement agreement; (2) AccuSoft's actual damages were
“difficult or impossible to determine”; and (3) there was “no
meeting of the minds and therefore no valid contract.”
In his memorandum, the master rejected AccuSoft's claim
for relief on two grounds. First, noting AccuSoft's delay in
asserting its rescission claim until after the settlement
agreement's August 31, 1996 cutoff had passed, the master found
that AccuSoft's conduct constituted an election to continue to
operate under the contract, thus precluding rescission. Canada-
Atlantic & Plant S.S. Co., Ltd. v. Flanders, 165 F. 321, 323
(1st Cir. 1908). Furthermore, even if AccuSoft had not waived
its right to such relief, the master found that Snowbound’s
breaches of the settlement agreement were not “sufficiently
material” to justify rescission of the contract or to excuse
AccuSoft from its obligation to perform. Although the master
acknowledged that the confidentiality provisions of the
settlement agreement were “important” to the parties, the master
held that they did not constitute an “essential and inducing
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feature of the contract.” Lease-It, Inc. v. Mass. Port Auth.,
600 N.E.2d 599, 602 (Mass. App. Ct. 1992) (discussing the
standard of materiality for excusing a non-breaching party from
performance). To the contrary, he concluded, “the most
important features of the Settlement Agreement were those which
permitted the parties to continue in business by releasing their
claims to the other's software.”
On appeal, AccuSoft's principal claim of error concerns
the master's conclusion that Snowbound's breaches of the
settlement agreement were not material. Accusoft contends that
the master failed to appreciate that the confidentiality
provisions were essential to the agreement because, in the small
market the parties were competing in, revelations concerning the
outcome of the litigation could severely impair AccuSoft's
ability to continue to do business and to transition its current
customers to the ImageGear software. In fact, AccuSoft argued,
those provisions were the most important to AccuSoft because
they protected its goodwill. Notably, and without explanation,
AccuSoft does not address the master's alternative holding that
AccuSoft is barred from relief by an implicit election to
continue under the contract.
As we proceed to the merits of AccuSoft's appeal on
this issue, we first address the fact that, on appeal, AccuSoft
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once again appears to recast the nature of the relief it seeks.
AccuSoft's most recent complaint, as well as its argument before
the master (and, subsequently, before Judge Gorton), asked for
complete rescission of the settlement agreement and, by
implication, complete relief from judgment pursuant to Rule
60(b)(6). In the briefs submitted to this court, however,
AccuSoft reverts to the version of this count contained in the
initial complaint, asking simply to be excused from paying
royalties from the date that Snowbound first breached the
agreement by announcing that it had “won” the litigation.21
AccuSoft also fails to press any specific argument for relief
based on Rule 60(b)(6), although it could be concluded that
AccuSoft's continuing references to our decision in Baus are
intended to do so by implication.
The significance of this shift in tactics is unclear.
Arguably, although Snowbound has not so contended, AccuSoft's
request on appeal for a more limited remedy is subject to
dismissal because it was not properly raised in the forum below.
However, Massachusetts caselaw is not entirely clear on whether
the line of precedent excusing a party from performance based on
another party's breach may be viewed as deriving from the same
21 Indeed, in its reply brief in this Court, AccuSoft
states baldly it is “not seeking to rescind the Settlement
Agreement.”
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source as the precedent regarding rescission. See Lease-It,
Inc., 600 N.E.2d at 601-02 (discussing the right to cease
performance while referencing authority concerning rescission).
If Massachusetts law would treat the difference as going to the
extent, rather than the nature, of the relief, AccuSoft could be
found to have adequately preserved its position. Because it
does not affect the result we reach, we accept arguendo that the
relief requested on appeal is properly before us and,
furthermore, that an argument under Rule 60(b)(6) is also
properly preserved.
Turning to the substance of AccuSoft's appeal, we
affirm the master's conclusion on the ground that AccuSoft, by
electing to continue accepting benefits under the agreement, has
lost any right it may have had to be excused from performance as
a result of Snowbound's contempt.22 It is well established that
conduct indicating a willingness to continue to honor a
contract, despite knowledge that the other party has failed to
perform, “operates as a promise to perform in spite of that non-
22 In so holding, we specifically do not decide whether
the master was right to conclude that Snowbound's violations of
the settlement agreement were not “sufficiently material” to
justify rescission or to excuse AccuSoft from its duty to
perform. Indeed, we find significant merit in AccuSoft's
contention that the confidentiality requirements and related
provisions related to publicity were critical components of the
settlement agreement from AccuSoft's perspective.
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occurrence.” Restatement (Second) of Contracts, § 246; see also
Flanders, 165 F. at 321 (1st Cir. 1908) (holding that a breach
by one party gives the other the right of election to continue
under the contract or to sue for rescission); accord Apex Pool
Equip. Corp. v. Lee, 419 F.2d 556, 561 (2d Cir. 1969) (“[T]he
power to terminate a continuing contract because of a particular
breach of that contract is a power of election.”). Here,
AccuSoft plainly knew of Snowbound's breaches of the agreement
within a short time of when they occurred, and, indeed, soon
filed its first motion for contempt. Yet AccuSoft continued to
accept the benefits of the settlement agreement and to act as if
it were still in effect. It was not until several months later
-- after August 31, 1996 -- that AccuSoft filed an amended
pleading that made clear it sought rescission of the entire
agreement. In the interim, AccuSoft availed itself of the
ability to license the IFL in return for royalty payments, as
well as the ability to sell ImageGear free from infringement
claims. Indeed, by the time AccuSoft asserted its rescission
claim, it had obtained all the benefits from the settlement
agreement that it could. Under the circumstances, we agree with
the master that AccuSoft was not entitled to cancel -- largely
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retroactively -- its obligation to pay royalties.23 We therefore
affirm the master's conclusion.
b. Conclusion that AccuSoft Failed to Introduce
Adequate Evidence of Damages
In addition to rejecting AccuSoft's rescission claim,
the master rejected AccuSoft's contention that it was entitled
to be compensated for Snowbound's contempt with money damages.
The master acknowledged that AccuSoft had introduced evidence
showing that many of its customers from 1995 did not continue as
customers in 1996 or later, and that many of those same
customers had become customers of Snowbound. The master also
conceded that Accusoft had not reached its projected levels of
growth in 1996 and beyond. However, the master found that
AccuSoft had failed to introduce “any evidence that these events
occurred because Snowbound breached the Settlement Agreement”
(emphasis added).
To the contrary, the master noted that the testimony
suggested a number of reasons, unrelated to the alleged breaches
23 We acknowledge that nothing in our limited precedent
concerning the circumstances under which relief from judgment
pursuant to Rule 60(b)(6) will be granted specifically
incorporates a parallel principle that a party may “elect” to
accept non-performance of a settlement agreement, nor do we
intend to establish such a general principle here. However, we
do find that, on the facts presented here, AccuSoft has not
presented any “reason justifying relief from the operation of
judgment.”
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of the agreement, that could explain these occurrences. It was
apparent that many of AccuSoft's customers knew of the legal
dispute between AccuSoft and the founders of Snowbound, and that
some number also understood that the disputes concerned rights
to the code contained in the IFL. AccuSoft's operations were
also disrupted by the injunction entered by the court shortly
before the infringement trial was to begin. Finally, AccuSoft
faced, beginning in early 1996, a new and combative competitor
(Snowbound), aggressively courting the same customers in a small
niche market, and at a time when AccuSoft was having difficulty
completing and marketing its own new product.
On appeal, AccuSoft argues first that the master
applied the “wrong legal standard” in determining the
sufficiency of AccuSoft's evidence of damages. Specifically,
AccuSoft contends that the master ignored precedent indicating
that damages can be recovered even where the amount of damages
suffered cannot be calculated with certainty. See, e.g., Nat'l
Merchandising Corp. v. Leyden, 348 N.E.2d 771, 774 (Mass. 1976)
(noting, with respect to a claim for damages for interference
with contractual relations, that “an element of uncertainty in
the assessment of damages is not a bar to their recovery”).
While the cases AccuSoft cites appear to be good law, AccuSoft's
argument ultimately is irrelevant to the issue on appeal. We do
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not read the master's conclusion to be that AccuSoft
inadequately identified the amount of damages, but rather that
AccuSoft could not demonstrate that any damages suffered were
caused by breaches of the settlement agreement. Such proof of
a causal nexus between Snowbound's breaches and the damages
AccuSoft suffered is clearly required by Paragraph 16 of the
settlement agreement 24 as well as by settled precedent. See
Burke v. Guiney, 700 F.2d 767, 770 (1st Cir. 1983) (“In addition
to presenting clear and convincing evidence that a court order
has been violated, a party seeking monetary damages in civil
contempt . . . must show that he has suffered damage as a
result of the violation”) (emphasis added); see also In re Kave,
760 F.2d 343, 351 (1st Cir. 1985) (explaining that compensatory
damages for contempt are intended to “make whole the aggrieved
party for damages caused by the contemnor's conduct”) (emphasis
added); Town of Manchester v. Dept. of Envtl. Quality Eng'g, 409
N.E.2d 176, 182 (Mass. 1980) (“Where a fine is imposed in a
civil contempt proceeding it must not exceed the actual loss to
the complainant caused by the contemnor's violation of the order
. . . .”) (emphasis added).
24 The relevant portion of Paragraph 16 states that “[i]f
any party should breach any term of this Agreement, the other
party will be entitled . . . to an award of its actual damages
sustained by reason of such breach . . .” (emphasis added).
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In the alternative, AccuSoft argues that it did offer
evidence demonstrating that it suffered damages as a result of
Snowbound's violations of the settlement agreement. However,
based on the record evidence AccuSoft identifies in its motion
papers, we are not persuaded to reverse the master's conclusion
to the contrary. As we have previously stated, in evaluating a
challenge to the award of damages, “we rely heavily on the
judgment of the trial court, who has had the benefit of hearing
all of the evidence.” Clark v. Taylor, 710 F.2d 4, 13 (1st Cir.
1983). The evidence AccuSoft points to, at best, demonstrates
that Snowbound made statements to current customers of AccuSoft,
regarding the IFL, that violated the settlement agreement; that
Snowbound was aware when doing so that such statements could
affect AccuSoft's ability to sell the IFL to its customers; and
that some of those customers later became customers of
Snowbound. Nothing AccuSoft identifies in the record moves
beyond mere circumstantial evidence to directly connect
Snowbound's actions with specific lost customers. While such
circumstantial evidence of causation may, in certain instances,
be adequate, AccuSoft has given us no reason to believe that the
master erred in concluding otherwise in this case.
As a final argument on this point, AccuSoft contends
that the master committed reversible error by limiting discovery
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with respect to damages. AccuSoft states that discovery was
limited to communications between Snowbound and former AccuSoft
customers. AccuSoft was not allowed to investigate what
statements were made to other Snowbound customers who may have
considered purchasing AccuSoft's product but were unduly
influenced by the improper communications. AccuSoft also argues
that it should have been allowed to investigate Snowbound's
financial condition. With this information, AccuSoft contends,
it could have developed the necessary evidence concerning its
damages.
The master, in his memorandum, noted that AccuSoft had
failed, on the basis of the discovery it was allowed, to produce
any evidence that would lead him to believe that further
discovery was justified. AccuSoft was not able to point to any
of its own communications with customers suggesting that they
had information relevant to whether Snowbound's conduct caused
AccuSoft's damages. Nor had the limited discovery of customers
who had switched from AccuSoft to Snowbound suggested that such
information would be revealed through additional discovery. The
master acknowledged that, given the “substantial difficulties in
getting third-parties to permit themselves to become involved in
this kind of dispute,” it was not fair to “infer that such
information would not be helpful to Accusoft.” On the other
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hand, he concluded that he could not simply “assume . . . that
AccuSoft's loss of revenues or Snowbound's receipt of revenues
are the result of the improper conduct by Snowbound” (emphasis
in original).
Here too, precedent suggests a highly deferential
standard of review. During the performance of his duties, a
master is “functionally indistinguishable from . . . a trial
judge.” Jenkins v. Sterlacci, 849 F.2d 627, 634 (D.C. Cir.
1988). Trial judges “enjoy broad discretion in the handling of
interstitial matters, such as the management of pretrial
discovery.” FDIC v. Ogden Corp., 202 F.3d 454, 460 (1st Cir.
2000). While such decisions are not immune from review, they
will only be reversed “upon a clear showing of manifest
injustice, that is, where the lower court's discovery order was
plainly wrong and resulted in substantial prejudice to the
aggrieved party.” Id. AccuSoft has identified no facts or
precedent that convince us that the master was “plainly wrong”
in limiting discovery as he did. To the contrary, it appears to
us that the master's decision to disallow further discovery was
firmly grounded in his factual findings, which AccuSoft does not
meaningfully dispute. We therefore affirm.
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c. Finding that Settlement Agreement Transferred
“Ownership” of the IFL to Snowbound
In the proceedings below, AccuSoft alleged, and the
master found, that Snowbound had offered to sell or renew
licenses for the IFL and, in at least a few instances, actually
sold or renewed such licenses. AccuSoft argued that this
violated the settlement agreement because, although the
agreement transferred to Palo AccuSoft's rights in the
underlying code, it did not transfer any rights in the product
named the Image Format Library. The master rejected AccuSoft's
contention, noting that, in his view, the settlement agreement
should be interpreted as transferring “all of AccuSoft's
interest in the IFL” to Palo. He also indicated that the lack
of clarity in the settlement agreement concerning the interest
that was transferred to Palo precluded finding of contempt in
any event.
On appeal, AccuSoft renews its argument that the master
erroneously interpreted the agreement and that only ownership of
the underlying code was transferred to Snowbound. AccuSoft
notes that the language of the Assignment of Copyright, which
states that AccuSoft will transfer “all of its right, title, and
interest in and to all computer programs or other software that
have at any time to date been sold under the name 'AccuSoft
Image Format Library,'” does not expressly transfer ownership of
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the IFL name, or any IFL documentation, or customer contacts or
goodwill associated with the IFL. AccuSoft also points out that
the settlement agreement strictly limits what Snowbound could
say concerning ownership of the IFL, and specifically prohibits
Snowbound from “trading in any manner upon the goodwill attached
to the name 'AccuSoft.'” Finally, AccuSoft identifies record
evidence suggesting that Palo and Wieczner were not particularly
concerned with gaining the ability to sell the IFL code qua IFL
(rather than under the name RasterMaster) when they were
negotiating the settlement agreement.
As a matter of contractual interpretation, we find
significant merit in AccuSoft's argument. We do not read the
agreement to unambiguously transfer to Palo ownership of the IFL
product, as opposed to its underlying code. Further, we find
that AccuSoft makes a compelling case that other provisions --
such as those concerning publicity and the protection of
AccuSoft's goodwill -- suggest that the parties did not intend
that Snowbound would license the IFL. In this context we note
that the settlement agreement's express statement that Snowbound
could publicize its ability to “support” the IFL after August
31, 1996, may also be read to imply that Snowbound could not
publicize its ability to take other actions with respect to the
IFL. These provisions, taken together, lead us to believe that
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Snowbound was not authorized by the settlement agreement to sell
the product under the IFL name.
We are less certain that AccuSoft has advanced
compelling grounds to reverse the master's conclusion that
Snowbound's actions did not constitute civil contempt. First,
as the master's opinion makes clear, the language of the
settlement agreement is not unambiguous on this issue. While we
feel that the better reading favors AccuSoft's position, we do
not believe that the interpretation argued by Snowbound and
adopted by the master is entirely without foundation. The lack
of a clear directive counsels against a finding of contempt.
See, e.g., Project B.A.S.I.C., 947 F.2d at 16.
In addition, we have some doubt whether, from a
substantive point of view, anything turns on the prohibition
AccuSoft would impose. It seems evident that the settlement
agreement would, at least after August 31, 1996, allow Snowbound
to tell customers who inquired that it was supporting the IFL
and also selling the RasterMaster product, which used the same
code as the IFL. We note also that the master found -- and we
have affirmed -- that it was permissible to state, after August
31, 1996, that no one was actually selling the IFL anymore.
Given Snowbound's evident ability to license the IFL code, to
state that such code was formerly contained in the IFL but now
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contained in RasterMaster, and to indicate that the IFL qua IFL
was no longer available, Snowbound could only be found to have
breached the agreement to the extent that licensing the IFL
without such explanation improperly traded on goodwill
associated with that name. In this context, it is noteworthy
that the master already considered, and found contemptuous,
Snowbound's use of the term IFL in advertisements and
Snowbound's use of references to “AccuSoft”
or “Accu” in products it sold, but found no damages associated
with these breaches.25
Although the above suggests to us that AccuSoft may
have difficulty proving contempt, or proving that any damages
resulted from such contempt, we believe a remand is necessary to
determine whether the factual record may support such a finding
if the interpretation of the settlement agreement set out above
is applied. As but one reason for so doing, we note that it is
not at all clear, from the record evidence identified by the
parties, when Snowbound licensed the IFL. With the record
before us, we cannot conclusively resolve this issue and
therefore leave it to the district court to determine.
25 We also consider it significant that the settlement
agreement expressly did not seek to regulate the parties' oral
statements, further limiting the conduct surrounding the sales
of IFL that could be considered grounds for a finding of
contempt.
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C. Attorneys' Fees and Related Costs; Costs of Audit
Finally, the parties appeal aspects of the master's
rulings with respect to costs of the master's audit and the
award of attorneys' fees and related litigation costs.
1. Costs of Audit
In its motion papers, AccuSoft argues that, if its
appeals concerning the royalties owed to Snowbound are
successful, the award of audit costs to Snowbound may need to be
revisited. In charging the entirety of the audit to AccuSoft in
his decision below, the master relied on Paragraph 6 of the
settlement agreement which states, in relation to the audit,
that:
If the audit discloses that any amount due
was underreported or underpaid by more than
5%, AccuSoft will reimburse Palo for one-
half of the cost of the audit. If the audit
discloses that any amount due was
underreported by more than 10%, AccuSoft
will reimburse Palo for the entire cost of
the audit.
Because we hold that the master's award of the Lifeboat revenues
to Snowbound must be vacated -- an award which constituted the
majority of the amount unpaid by AccuSoft – this calculation may
indeed change on remand. We therefore direct the court below to
review this question again after the remanded issues are
resolved.
2. Attorneys' Fees and Related Costs
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Paragraph 16 of the settlement agreement provides, in
relevant part, that:
If any party should breach any term of this
Agreement, the other party will be entitled
to move for contempt of the Order, to an
award of its actual damages sustained by
reason of such breach, and to recover its
reasonable attorneys' fees and costs
incurred in such proceedings . . . .
In his memorandum, the master concluded that the phrase “in such
proceedings” must be read as limited to that process in which a
party “move[s] for contempt of the Order” to remedy the other
party's breach, and, therefore, that the provision only allowed
for recovery by a plaintiff in a contempt action. He also found
that, by its terms, the provision required that a breach of the
agreement be proved before fees could be awarded. However, the
master found nothing in the language to limit a party who
alleged multiple counts of contempt to obtaining attorneys' fees
associated with its “successful” contempt claims. Nor did he
view the language as requiring the party to meet the definition
of a “prevailing party” as it is used in statutory fee-shifting
provisions; a definition which typically requires that some
damages be proven. Cf. PH Group, Ltd. v. Birch, 985 F.2d 649,
652 (1st Cir. 1993) (citing to cases indicating that the award
of zero or merely nominal damages may not convey prevailing-
party status).
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Based on this interpretation, the master found that
AccuSoft was entitled to recover the reasonable fees it incurred
in prosecuting its motion for contempt against Snowbound. In
calculating the fees, the master employed the lodestar time and
rate analysis. See Tennessee Gas Pipeline Co. v. 104 Acres of
Land, 32 F.3d 632, 634 (1st Cir. 1994) (noting our preference
for the lodestar time and rate method “if an alternative method
is not expressly dictated by applicable law”). Following
several rounds of submissions from AccuSoft, the master
determined that $135,102 in attorneys' fees and $14,143 in
related costs (travel costs, constable fees, etc.) were properly
attributable to AccuSoft's prosecution of its contempt action
and thus recoverable. Because the master found that Snowbound
had not succeeded in proving that AccuSoft was in contempt of
any aspect of the settlement agreement, Snowbound was awarded no
fees.
On appeal, both parties challenge the master's
interpretation of the settlement agreement language. AccuSoft
argues that it should be allowed to recover the entirety of its
attorneys' fees and costs, including those expended in
successfully defending itself against Snowbound's contempt
allegations. Snowbound, in turn, argues that AccuSoft is
entitled to recover none of its fees and costs, because, in
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determining the “reasonableness” of the fee award, the master
should have considered AccuSoft's failure to obtain any of the
relief it sought. Snowbound also argues that, because the
master should have found AccuSoft to have breached the
agreement, Snowbound should have received an award of attorneys'
fees.
We see no reason to disturb the master's conclusion
that, under the terms of the settlement agreement, a party may
recover fees for prosecuting a contempt action but may not
recover fees incurred in defending against a claim of contempt.
The language of the settlement agreement supports this
interpretation and AccuSoft has provided no precedent or
extrinsic evidence that casts any doubt on its correctness. On
the other hand, we find merit in Snowbound's contention that the
master should have given consideration to AccuSoft's success (or
lack thereof) in determining the amount of fees it could
recover.
In doing so we acknowledge that, when a contractual fee
provision is included by the parties, the question of what fees
are owed “is ultimately one of contract interpretation,” and our
primary obligation is simply to honor the agreement struck by
the parties. MIF Realty, L.P. v. Fineberg, 989 F. Supp. 400,
402 (D. Mass. 1998); see also United States v. Western States
-72-
Mech. Contractors, Inc., 834 F.2d 1533, 1548 (10th Cir. 1987)
(noting that “where contracting parties have agreed that a
breaching party will be liable for attorneys' fees, the purpose
of the award [of such fees] is to give the parties the benefit
of that bargain, and the court's responsibility is to enforce
that bargain”). We are also aware of precedent suggesting that
the court's discretion in awarding fees is more limited where
the parties have specifically agreed that fees will be paid
under certain circumstances. See Cable Marine v. M/V Trust, 632
F.2d 1344, 1345 (5th Cir. 1980) (“Where attorney's fees are
provided by contract, a trial court does not possess the same
degree of equitable discretion to deny such fees as it has
applying a statute providing for a discretionary award.”);
Western States, 834 F.2d at 1548 (“Normally, where the court is
merely enforcing a contractual provision authorizing attorney's
fees, the fees are routinely awarded . . . .”).
Nonetheless, we find nothing in precedent to suggest
that the master could properly exclude consideration of
AccuSoft's overall success as a factor in determining the
appropriateness of its fee award. To the contrary,
Massachusetts law suggests that success is a factor that must be
considered when fixing the fees to be awarded pursuant to a
contractual provision. In First Nat'l Bank of Boston v. Brink,
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361 N.E.2d 406, 410-11 (Mass. 1977), for example, the Supreme
Judicial Court of Massachusetts specifically approved the trial
court's application, in determining a fee award pursuant to a
contractual provision, of the factors set forth in Cummings v.
Nat'l Shawmut Bank, 188 N.E. 489, 492 (Mass. 1934). These
factors include “the ability and reputation of the attorney, the
demand for his services by others, the amount and importance of
the matter involved, the time spent, the prices usually charged
for similar services by other attorneys in the same
neighborhood, the amount of money or the value of the property
affected by controversy, and the results secured.” Cummings,
188 N.E. at 492 (emphasis added). Other opinions applying
Massachusetts law appear to reach a similar result. See, e.g.,
Northern Heel, 951 F.2d at 476-77 (discussing application of
Cummings factors in determining reasonableness of fees awarded
under contractual provision); MIF Realty, 989 F. Supp. at 402
(same); Taupa Lithuanian Fed. Credit Union v. Bajercius, 1997
Mass. App. Div. 31, 32 (same). Furthermore, even where courts
have adopted a comparatively narrow view of their discretion
where contractual provisions are concerned, they have recognized
the ability to “adjust or even deny a contractual award of fees
if such an award would be inequitable or unreasonable.” Western
States, 834 F.2d at 1548. This standard has been employed to
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deny the award of fees pursuant to contract when the party has
met with scant success in its action. See Rent It Co. v. Aetna
Cas. & Sur. Co., 988 F.2d 88, 91 (10th Cir. 1993) (holding that
the lower court acted within its discretion in denying as
“inequitable and unreasonable” any award of fees “[g]iven the
more than eight-to-one ratio of damages sought to damages
recovered”).
In light of this, we believe that the contractual
provision at issue here is appropriately interpreted to require
consideration of all relevant factors, including the results
obtained by the parties, in determining the reasonableness of
the fees requested. On remand, the district court, or the
master, if the order of reference is renewed, should include
these considerations in determining whether the fee awards are
appropriate in light of the reasoning set forth in this opinion
and the proceedings on remand. We realize that, as the master
noted below, it may not be possible or appropriate to
distinguish the fees associated with successful and unsuccessful
claims. We also do not mean to suggest that AccuSoft’s failure
to obtain damages or other requested relief is necessarily fatal
to its claim for attorneys' fees. Ultimately, the determination
of what fees are properly awarded under this standard lies
within the sound discretion of the finder of fact.
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As a final point, we note that AccuSoft has requested
that it be awarded its fees for these appeals pursuant to
Paragraph 16 of the settlement agreement. Whether, or under
what circumstances, fees should be awarded for appellate
advocacy pursuant to a contractual agreement “is one largely of
judicial discretion, since the provision or stipulations
involved usually do not contain explicit reference to fees on
appeal.” Robert L. Rossi, Attorney's Fees 492 (1995). Because
the question of attorneys' fees will be revisited on remand in
any event, and should properly be evaluated in light of the
district court's final conclusions on remand regarding aspects
of the substantive relief awarded the parties, we instruct
AccuSoft and Snowbound to make their case for the fees
associated with these appeals at that time.
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IV.
Our conclusions may be summarized as follows. With
respect to the allocation of the Lifeboat revenues, the decision
of the master is vacated and the matter is remanded for a
determination of what royalties, if any, are owed to Snowbound
on this income. In addition, the master's conclusion that
Snowbound's sales of the IFL did not constitute contempt is
vacated and the matter remanded for further proceedings
consistent with Part II.B.2.c of this opinion. On remand, we
further direct that the district court address the issue of
whether AccuSoft may have been in contempt for failing to
maintain sequential serial numbers of its IFL sales, an issue
that was not fully resolved below. Finally, we direct that, on
remand, the awards of audit costs and attorneys' fees be
reconsidered in view of the standards discussed in Part II.C of
this opinion and changes in the substantive relief obtained by
the parties on remand. In all other respects, we affirm the
judgment of the district court.
It is so ordered. No costs.
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