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

-2- 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,

-3- 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.

-4- In a published ruling on the motions for injunctive

relief, AccuSoft Corp. v. Palo,

(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

-5- 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

-6- 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.

-7- 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.

-8- 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.

-9- 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.”).

-10- 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,

(1st Cir.

1983) (as modified on denial of rehearing and rehearing en banc

Aug. 26, 1983);5 see also Langton v. Johnson,

, 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

-11- (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.,

(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.,

(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.,

(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.”

-12- 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

-13- 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

-14- continue in effect under

(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.”

(e). Nothing in Snowbound’s appeal suggests that Snowbound disputes the applicability of this statute or the import of its application.

-15- 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

-16- expect a fairly literal interpretation of the bargain that was

struck and approved by the court.” Jewett,

.

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.,

(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.”

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

-17- 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.,

(1st Cir. 1988) (quoting RCI Northeast Serv. Div.,

) (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

-18- 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

-19- 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.

-20- 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

-21- 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.

-22- 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.

-23- 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.,

(Mass. 1976) (quoting

Uproar Co. v. Nat'l Broadcasting Co.,

(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,

(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,

(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,

(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

(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,

(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.

. In

particular, “greater deference is owed to the trial court in

public law litigation than in purely private litigation.”

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.”

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.”

A complainant “must prove civil

-31- contempt by clear and convincing evidence.” Id.; accord Gemco

LatinoAmerica, Inc. v. Seiko Time Corp.,

(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.,

; see also

(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,

(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.,

, 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,

. 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,

(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,

.

-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,

(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,

; Fashion House,

.

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.,

(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.

-50- 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,

. 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.

-51- 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

-52- 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,

(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

-53- 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,

(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

-54- feature of the contract.” Lease-It, Inc. v. Mass. Port Auth.,

(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

-55- 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.”

-56- source as the precedent regarding rescission. See Lease-It,

Inc.,

(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.

-57- occurrence.” Restatement (Second) of Contracts, § 246; see also

Flanders,

(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,

(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

-58- 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.”

-59- 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,

(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

-60- 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,

(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,

(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,

, 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).

-61- 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,

(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

-62- 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

-63- 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,

(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.,

(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.”

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.

-64- 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

-65- 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

-66- 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.,

.

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

-67- 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.

-68- 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

-69- 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,

(1st Cir. 1993) (citing to cases indicating that the award

of zero or merely nominal damages may not convey prevailing-

party status).

-70- 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,

, 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

-71- 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,

(D. Mass. 1998); see also United States v. Western States

-72- Mech. Contractors, Inc.,

(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,

(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,

(“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,

-73-

(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,

(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,

(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,

(same); Taupa Lithuanian Fed. Credit Union v. Bajercius,

(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,

. This standard has been employed to

-74- 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.,

, 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.

-75- 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.

-76- 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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