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Justmed, Inc v. Michael Byce

November 7, 2012

JUSTMED, INC., PLAINTIFF,
v.
MICHAEL BYCE, DEFENDANT.



The opinion of the court was delivered by: Honorable Mikel H. Williams United States Magistrate Judge

MEMORANDUM DECISION AND ORDER

INTRODUCTION

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

On September 6, 2007, the Court entered Judgment against Byce for money damages in the amount of $41,250, left open the amount of punitive damages pending post-trial motions, and entered a permanent injunction against Byce that will be described below. Judgment, Dkt. 87. On January 11, 2008, the Court entered an Amended Judgment and Permanent Injunction. Amended Judgment, Dkt. 118. The Amended Judgment provided for money damages of $41, 250, punitive damages of $5,000, and costs of $2,283.14 for a total judgment of $48,533.14. Byce appealed. However, he did not appeal the Court's findings that he was liable for conversion and for breach of fiduciary duty or the imposition of punitive damages.

On April 5, 2010, the Ninth Circuit reversed the Court's determination that Byce misappropriated a trade secret and remanded the case for this Court to "determine whether and in what amount JustMed can recover damages on the conversion or breach of fiduciary duty claims and whether an injunction to prevent future misappropriation is warranted." See JustMed, Inc. v. Byce, 600 F.3d 1118, 1131 (9th Cir. 2010). It remanded the damages issue because the Court had tied its damages finding to the trade secrets count and had not conducted a damages analysis under the conversion and breach of fiduciary duty counts.

On October 5, 2012, following failed settlement negotiations, the Court granted Byce's Motion to Vacate Judgments (Dkt. 130) pending briefing by the parties on the issues to be resolved on remand. Order, Dkt. 144. Later the same day, JustMed filed a Notice of Bankruptcy Petition by Byce. Dkt. 145. Accordingly, in light of the Bankruptcy Code's automatic stay, 11 U.S.C. § 362, the Court withdrew its October 5, 2012 Order vacating the judgments, effectively reinstating the Amended Judgment entered on January 11, 2008.

On May 15, 2012, the United States Bankruptcy Court for the District of Idaho entered an Amended Order Suspending Proceedings in a pending adversary proceeding in Byce's bankruptcy case. See In Re Michael Leonard Byce, et al., Debtors, Dkt. 43, United States Bankruptcy Court for the District of Idaho, Case No. 10-02978-TLM, Adv. No. 10-06097-TLM attached to JustMed's Motion for Status Conference. Dkt. 147. The adversary proceeding was suspended to allow the Court to conclude the current litigation on remand. The Court invited simultaneous briefing on the remand issues, held a hearing on October 1, 2012, and is now prepared to enter its decision.

FACTUAL BACKGROUND

This action arises out of a dispute regarding the software used in a digital audio larynx device called "JusTalk" which was being developed by Joel Just ("Just") and Byce over a period of years starting in 1994. They formed a corporation to market the product. Just and his wife owned a majority of the shares of the corporation, and Byce and others owned a minority interest. Jerome Liebler ("Liebler") began working on the device in 2003 as an employee of JustMed. Just and Liebler developed a hardware prototype, wrote assembly language source code, and eventually developed JusTalk. They demonstrated the product at an International Association of Laryngectomees conference in Anaheim, California, in the summer of 2004, where at least one speech pathologist was impressed with the device.

In September of 2004, Byce replaced Liebler on the source code project working on it full time. Eventually, when it appeared that the JusTalk device might be marketable, issues arose as to the ownership of the software. In the spring of 2005, JustMed began advertising the device to the laryngectomee community claiming that a new version of the software was imminent. JustMed then became involved in discussions with ATOS, a Swedish corporation that was considering a possible merger with or buyout of JustMed. Byce became concerned that he would not be adequately compensated for his work. Therefore, on June 13, 2005, he removed the JusTalk software from JustMed's computer systems. Just was unaware Byce had done so until he was attempting to demonstrate the device for ATOS.

In response to a state court temporary restraining order ("TRO"), Byce turned over the source code to JustMed. However, he withheld some of his programmer's notes from the code. Therefore, Just engaged Liebler to help him re-develop the code for upcoming trade shows and presentations. It was not completed in time for this engagements. Negotiations with ATOS ended, and a distributor backed out of selling JustMed products. It took Just and Liebler three months to re-create the code. The amount of their salaries for those three months totaled $41,250 -- the amount that formed the basis for the Court's award of damages.

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

ANALYSIS

1. Post-Trial Findings

On the conversion issue, the Court found that Byce committed acts of conversion by deleting software owned by JustMed and retaining the hardware until the third day of trial notwithstanding the fact that he believed he was the true owner of the software or that he retained possession of the hardware for the purpose of preserving evidence. Mem. Dec. at 20-21. The Court also found that as a director of the corporation, Byce owed a fiduciary duty to JustMed which he breached by changing the copyright on the source code from JustMed to his name and by deleting the source code to use as leverage in negotiating for more shares in the company and to sabotage the potential sale to or merger with ATOS. Mem. Dec. at 21-23. the Court found that such action was neither in good faith nor in the best interests of JustMed, especially given the timing of the deletion. Id. The Ninth Circuit did not disturb those findings. Rather, it reversed and remanded for a determination of the appropriate damages.

In making its findings on the liability issues, the Court noted that Byce was "a less than credible witness." Mem. Dec. at 18. In making its findings on the punitive damages issue, the Court specifically held that Byce acted willfully and maliciously by (1) changing the copyright from JustMed's name to his and never discussing the change with anyone else in the company; (2) deleting the source code from JustMed computers in the middle of the night only days before an important demonstration and meeting with a potential investor and not informing Just; (3) upon Just's detection of the deletion, claiming that he had deleted it for "revision control," something he had never done before; (4) and deleting the ...


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