Unpublished Disposition, 865 F.2d 265 (9th Cir. 1988)

MEMORANDUM^* 

Defendant Respiratory Specialties appeals the district court's order entering judgment in the sum of $5,500 for plaintiff United Pulmonary Care. We reverse and remand.

FACTS

Defendant-appellant Respiratory Specialties, Inc. (RSI), is a Nevada-based provider of home oxygen. Plaintiff-appellee United Pulmonary Care, Inc. (UPC), is an Ohio-based provider of similar services. UPC developed a computerized billing system for use in its own business, and began licensing other entities to use its software. In January of 1983, RSI entered into a written contract whereby RSI agreed to pay $12,500 to UPC in exchange for a license to use UPC's system. The payments were to be made in three installments: $2,000 upon execution of the agreement; $5,000 upon the first invoicing; and $5,500 upon complete installation and operation.

The system was initially installed in January of 1983. RSI experienced problems with the system for a number of weeks. After a series of attempts to correct the problems over the telephone, UPC elected to send a programmer to RSI's offices to make the necessary corrections.

Defendant Cheryl Pennington, UPC's programmer, was sent to Reno to attempt to fix the system. She was unable to do so at that time. It became apparent that the system sold by UPC could not perform all of the functions which it was required to perform in order to comply with the terms of the contract.

In April of 1983, RSI hired Pennington as its own employee. While employed by RSI, Pennington set about creating a computerized billing system to meet RSI's needs. Eventually, Pennington was able to devise a new set of programs, based in part upon the software purchased from UPC, that performed the functions sought by RSI. In the meantime, RSI had not paid any part of the $10,500 balance owed to UPC on the contract.

Ultimately, UPC sued for the balance, and RSI counterclaimed for the return of the $2,000 which it had paid in January of 1983.¹  A bench trial was held, and the court found that: (1) the transaction was covered by the U.C.C.; (2) RSI, in accordance with applicable law, had accepted the goods supplied by UPC, and notified UPC that the goods were deficient and non-conforming; (3) the computer software was forty percent (40%) deficient and non-conforming, and RSI was therefore entitled to a forty percent reduction from the purchase price as damages. The latter conclusion was based upon a finding that sixty percent (60%) of the RSI system was substantially the same as the original system purchased from UPC. The remainder of the system had to be created through RSI's efforts because of the deficiencies in UPC's system. As a result, judgment was entered for the plaintiff for $5,500 (the amount owed on the contract after subtracting forty percent of the contract price as damages). RSI, believing it was entitled to a larger offset, filed a motion for reconsideration. That motion was denied. RSI timely appeals the judgment and the finding of fact upon which it was based.

DISCUSSION

The dispute in this case involves the trial court's Finding of Fact No. 17, which reads in relevant part as follows:

Two computer programming experts testified. They agreed that the computer system presently used by defendant was derived from the software supplied by plaintiff. Sample comparisons of the present system with the original system resulted in a conclusion that thirty (30) percent of the present system was the same as that sold by plaintiff, thirty (30) percent was the same with minor modifications, and the balance was new or substantially different. Accordingly, the court finds that the defendant's damages are forty (40) percent of the purchase price, to wit, Five Thousand Dollars ($5,000.00).

CR 39, at 5 (emphasis added).

According to RSI, the trial judge misinterpreted the expert testimony when he concluded that sixty percent of the current RSI program is substantially the same as the program originally provided by UPC. In RSI's view, the expert testimony supports a finding that, at most, ten percent of UPC's program was incorporated into RSI's current system. Because the judgment for UPC in the amount of $5,500 was based upon that sixty percent similarity finding, RSI argues that it should be reversed.

This court will not disturb an award of damages on appeal unless it is clearly unsupported by the evidence. Kern Oil Co. v. Tenneco Oil Co., 840 F.2d 730, 738 (9th Cir. 1988). After reviewing the expert testimony we must agree with RSI that the district court erred. There is no evidence in the record to support the finding that RSI's current system is sixty percent similar to that purchased from UPC. Therefore we reverse and remand for a redetermination of damages.

Two expert witnesses testified during the proceedings. Frank J. Buckley testified for UPC, and Ronald Kendall testified for RSI. Buckley and Kendall worked together at RSI's offices for eight hours comparing the degree of similarity between RSI's current system and UPC's system. Due to time limitations, the two experts engaged in a detailed comparison of only a fraction of the programs in each system. They testified that the programs chosen for detailed analysis were selected because they had the same name, indicating that they might be similar in structure and function. Buckley and Kendall also conducted spot check comparisons of other programs to ensure that programs with different names were not, in fact, similar.

In many respects, the testimony of the two experts was quite consistent. Both testified that the RSI system was derived, to some extent, from the UPC system. Both testified that approximately ten percent of the UPC system was retained in the RSI system. They differed somewhat as to various details of their analyses, and as to the qualitative importance of that ten percent overlap. However, we have discovered nothing in either expert's testimony to support the court's finding of sixty percent similarity between the two systems.

UPC's expert, Frank Buckley, testified that of 463 programs in UPC's system, he and Kendall reviewed fifty-five. In Buckley's view, these fifty-five programs were contained in identical (or only slightly modified) form in RSI's system. On this basis, he reached two conclusions: (1) approximately ten percent of the UPC system was the same as RSI's system; (2) RSI's system was derived from UPC's system.

Upon questioning from the court, Buckley testified that his ten percent similarity figure was based upon an examination of approximately ten percent of the programs of each system. These programs were selected for more detailed examination because they had similar names. They were compared in detail, and were found to be very similar, or slightly modified.

More important, Buckley further indicated that he and Kendall reviewed a sample of the remaining programs (the ones with different names), and determined that they were "entirely different." Reporter's Transcript (RT) at 14. This point (that the remaining programs in UPC's system were not similar to anything used by RSI) was reiterated in cross-examination.²  Based on this information, Buckley's overall conclusion was that the system of programs used by RSI was ten percent similar to that provided by UPC.

Buckley's other major conclusion was that UPC's system served as a basis for RSI's system. This conclusion appears to have been derived from Buckley's view that although only ten percent of the systems were similar, those similar programs represented the customer master file, which was of major importance to the overall system. However, he also noted that these programs were not themselves sufficient to allow the system to operate. Other than stating that ten percent of the programs contained in the two systems overlapped, Buckley did not attempt to quantify the overall importance to RSI's current system of the original UPC system.

RSI's expert, Ronald Kendall, testified that forty-six (46) of 465 programs on UPC's original system had the same name as programs on RSI's current system.³  These forty-six programs were examined in greater detail. Kendall testified that of these forty-six similarly named programs (about ten percent of the total), "thirty percent were the same, on thirty percent that were changed, with what I would call minor changes, thirty percent that had major changes." RT vol. II at 135. This analysis was repeated in cross-examination.

Kendall further indicated that he and Buckley had spot checked some unspecified number of the remaining 400 or so programs in each system, and that these remaining programs were not similar in any way. Summing up his testimony, he stated that "maybe ten percent of the original system [ ] was intact." Id. at 141. Thus, Kendall's testimony appears to support, at most, a finding of ten percent overlap between the two systems.

With respect to the qualitative similarity of the two systems, Kendall agreed that the RSI system was derived from the UPC system, but refused to speculate about the qualitative importance of the ten percent overlap.

Thus, he neither supported nor refuted Buckley's testimony on this point.

Kendall also testified that he compared the structures of the master files of the two systems. This was an alternative method of comparison, that " [did] not have anything to do with comparing the ... forty-six programs" that had the same name. Id. at 139.⁴  Kendall's testimony about his examination of the master files was as follows:

Well, we found a significant number [of files] that were new, and just looking at this and estimating, I would say it is maybe forty percent of the files were new, probably ten percent changes, maybe ten percent were the same and another perhaps five percent were not used. I hope nobody is adding that up, that probably didn't add up to 100 percent, but predominantly on this list, the checks are in the New column.

Id. at 137-38.

We reject the contention that this testimony supports a finding that RSI's current system is sixty percent similar to the one purchased from UPC. It is apparent from Kendall's own admission that his figures were not meant to represent a firm estimate of the overall percentages of file similarity. The statement that forty percent of the files were new (and the implication that sixty percent of the files were not) thus should not be taken literally. Moreover, in the same sentence, Kendall stated that only about ten percent of the files were the same. This supports RSI's contention that the systems were only ten percent similar, and is inconsistent with Finding of Fact No. 17, in which the court found that thirty percent of RSI's system was the same as that purchased from UPC, thirty percent was the same with minor modifications, and forty percent was new work. Third, Kendall expressly stated that the master files comparison was in accord with his findings of a ten percent overlap in program usage. The following testimony makes this clear:

Q. Is ... this [master files comparison] another way of comparing two programs?

A. Yes it is.

Q. Did this support what you felt after comparing the names of the programs?

A. It was consistent with the other findings. Really, we matched programs, we matched data structures, and the findings were consistent no matter which way we looked at the system.

Q. Did you arrive at a conclusion as to how similar these two systems were?

A. In my estimation it was maybe ten percent of the original system that was intact.

Id. at 140-41.

In short, we can find nothing in the testimony of either expert to support a finding that sixty percent of the original UPC system has been incorporated into the RSI system. The degree of similarity between the language used by the trial court in Finding of Fact No. 17 and the language used by Kendall (RT at 135) leads us to believe that an erroneous interpretation of Kendall's testimony was the source of Finding of Fact No. 17.⁵  The figures used by the court do not appear anywhere else in either Kendall's or Buckley's testimony.

Moreover, following the trial, the judge made the following statement:

If I decide the case on the evidence presently before the Court, I guess the only way I could apportion the damages for partial failure of consideration would be on a 10-percent/90-percent basis. I am not confident that would be particularly accurate. So it is the order of the Court that the parties will have twenty days in which to file supplemental briefs dealing with the possibility of the application of the Uniform Sales Act to this transaction.

RT vol. III at 69-70.

Although the parties did file supplemental briefs, it is not apparent that any particular interpretation of the Uniform Sales Act could affect the finding of percentage of similarity between the two systems. It is our opinion that the trial judge's initial view as to the apportionment of damages was more consistent with the evidence than that stated in Finding of Fact No. 17. Because the court's award of damages was based upon an erroneous interpretation of expert testimony regarding the degree of similarity between the two systems, it must be reversed.

UPC makes two arguments in support of the damages award. First, it argues that the error was harmless because RSI did not in fact prove that it was entitled to any offset in the contract price for damages suffered by receiving deficient goods. This argument is based on the view that the experts did not testify as to the damages suffered by RSI as a result of the UPC system's deficiency, but merely as to the degree of similarity between the systems.

UPC does not dispute the court's finding that RSI gave adequate notice that the goods were non-conforming, and that RSI was therefore entitled to offset the amount of its damages from the contract price. UPC merely asserts that RSI did not prove the amount of its damages. However, this ignores Kendall's testimony that the deficiency of UPC's system had to be remedied through an extensive amount of work by Cheryl Pennington. RT vol. II at 142-43. The trial court chose to measure the extent of that work by determining what percentage of RSI's system was "new." The court then subtracted from the purchase price a percentage equal to the percentage of new work done. Although there may have been other ways to compute RSI's damages, it cannot be said that the one chosen by the court was unreasonable. Given this method of fixing the amount of damages, RSI was harmed if an erroneous interpretation of the evidence resulted in a forty percent setoff rather than a higher setoff.

UPC's second contention is that other evidence in the record supports the award of damages. First, UPC notes Buckley's testimony that the ten percent program overlap may have represented a system similarity of qualitatively greater importance. Thus, UPC contends that there is evidence in the record to support a finding that more than ten percent of UPC's system survived. However, there is no evidence in any testimony suggesting that a ten percent overlap in the programming of the two systems represented a sixty percent similarity in the overall systems. More important, there is no reason to believe that this was the basis for the court's decision. If the court believed that the various qualitative factors supported a finding of sixty percent similarity, it is logical that it would have said so. Instead, the wording of the factual findings compels the conclusion that the court's figures were based upon a misunderstanding of Kendall's testimony.

Finally, UPC notes that RSI raised many of the arguments made on appeal in a motion for reconsideration that the court denied. If the judgment was actually based upon a misunderstanding, UPC argues, this would have become apparent to the judge and he could have modified his decision. The fact that he did not, UPC argues, supports the view that there were other grounds for the decision. However, the trial judge's order merely denied RSI's motion without explanation. Given no explanation at all for the thinking behind the apportionment of damages beyond what appears in Finding of Fact No. 17, this court must rely upon the language of the finding, and upon the recorded testimony. As previously noted, that testimony does not support the trial court's apportionment of damages. That award of damages is "clearly unsupported by the evidence," Kern Oil, 840 F.2d 730, and must be reversed.

Because the testimony of Buckley and Kendall diverges with respect to the qualitative importance of the overlapping programs, it is not possible for this court to say with certainty what the amount of damages should be. Therefore, this case is remanded for a redetermination of damages.

REVERSED and REMANDED.

BOOCHEVER, Circuit Judge, dissenting:

I believe that RSI failed to prove its damages. There was no showing of the difference in value of the system retained by RSI and the one for which it bargained. There was no expert testimony of the amount of damages attributable to the breach of contract.

The system for which RSI agreed to pay $12,500 was originally installed in January 1983. It worked well while Cheryl Pennington was present to supervise RSI's inexperienced employees. Numerous problems arose after she left. UPC sent Ms. Pennington from Ohio back to Reno for two weeks in February 1983, and, again, everything seemed to be working smoothly. Later it appeared that RSI wanted a system which would do more than the one used by UPC.

Subsequently, Ms. Pennington was employed by RSI and made changes to the system over an extended period of time. It was more than two years after the system was installed, and after extensive modifications that experts examined it. Rather than determining defects in the original system and the damages attributable to any failures in that system, RSI confined its proof to a comparison of the portion of the revised system that remained the same as the UPC system.

Moreover, aside from determining the number of programs that were similar, RSI's expert made no effort to qualify their importance. One program of a 100-program system could conceivably carry a substantial portion of the workload.

On the basis of the evidence presented if the trial judge had found that RSI failed to prove any damages I could not find that result clearly erroneous. It follows that I do not believe we should reverse the award of $5,500 even though we may differ with the court's method of arriving at that sum.

Findings of fact of the district court shall not be reversed unless clearly erroneous. Fed. R. Civ. P. 52(a). In reviewing a district court decision we may affirm on any ground finding support in the record. Dres v. Campoy, 784 F.2d 996, n. 4 (9th Cir. 1986) (citing Salmeron v. United States, 724 F.2d 1357, 1364 (9th Cir. 1983); Angle v. United States, 709 F.2d 570, 573 (9th Cir. 1983)). RSI had a full trial before an experienced trial judge. Both sides have now obviously incurred more costs and attorney's fees than are at stake in this case. No constitutional rights or significant principle is involved. Quite properly the appellant should have a substantial burden to reverse an award of this type.

I conclude that the trial court's award of damages was not clearly less than the evidence indicated.