Superior Court of Massachusetts, Suffolk, Business Litigation Session
(with first initial, no space for Sullivan, Dorsey, and
Walsh):Salinger, Kenneth W., J.
MEMORANDUM AND ORDER DENYING PLAINTIFFâS MOTION FOR
RECONSIDERATION OF AN ORDER BARRING CERTAIN EXPERT TESTIMONY
Kenneth W. Salinger Justice of the Superior Court
Governo Law Firm, LLC is suing six of its former partners and
their new law firm, CMBG3 Law, LLC. It claims that the
individual defendants took copies of proprietary databases
owned by the Governo Firm. Defendants contend that these
materials belong to clients who transferred their legal
representation to the new firm.
Court recently barred proposed expert damages testimony
offered by the Governo Firm about an allegedly reasonable
royalty for the disputed materials. It did so because both
sides agreed that Defendants have made profits since they
left the Governo Firm and started their own law firm. Under
Massachusetts law, "the âreasonable royaltyâ measure of
damages is only appropriate where the defendant has made no
actual profits and the plaintiff is unable to prove a
specific loss." Curtiss-Wright Corp. v. Edel-Brown
Tool & Die Co., 381 Mass. 1, 11 n.9 (1980), quoting
Jet Spray Cooler, Inc. v. Crampton, 377 Mass. 159,
171 n.10 (1979) ("Jet Spray II ").
Plaintiff seeks reconsideration of that ruling on the ground
that the money earned by the Individual Defendants since
leaving was treated as salaries and thus as expenses on the
books of CMBG3, rather than as an allocation of profits, and
that CMBG3âs income statements therefore show total net
losses since 2016.
Court will DENY the motion for reconsideration because it
improperly asks the Court to look at the reported profit or
loss of CMBG3 in isolation, without considering whether
Defendants as a whole have made money since leaving and
starting their own law firm. The Court cannot ignore the
economic realities of a law firm that is structured as a
limited liability company and functions as a partnership.
the purposes of determining whether Defendants made actual
profits during the relevant period, in order to apply
Curtis-Wright and Jet Spray II, it cannot
matter whether the earnings that CMBG3 passed through to its
members (i.e., the Individual Defendants) was characterized
on the law firmâs books as profits or salaries. Either way
the Defendants earned money and their law firm was profitable
over the relevant time period. Therefore, the Governo Firm
may not seek a reasonable royalty as damages.
Plaintiff argues that CMBG3 itself did not make any profits
since the Individual Defendants left the Governo Firm. It
points out that CMBG3âs own income statements show losses in
some years and profits in others, and that the sum of those
annual bottom lines shows that CMBG3 has incurred a total net
loss of over $100,000 through March 31, 2019.
problem with this argument is that it ignores the very
substantial salaries that the Individual Defendants have been
paying themselves. The Governo Firm concedes in its motion
for reconsideration that if CMBG3 had characterized the money
it paid to the Individual Defendants as distributions of
profit, rather than treated as salaries and thus expenses on
the law firmâs books, then CMBG3 would have reported total
net profits over the same period.
the total amount of salaries CMBG3 paid out, and assuming
that most of those amounts were distributed to the Individual
Defendants rather than paid to employees, it appears that
Defendantsâ new firm has been quite profitable to date. That
reality does not change merely because CMBG3 paid out its
positive earnings to its members as salaries rather than as
distributions of profit. Indeed, Plaintiff characterizes this
as "an accounting issue."
Governo Firm has not shown that it makes any sense to
consider the bottom lines of CMBG3âs income statements in
isolation, and to ignore the salaries earned by the
Individual Defendants, in calculating whether Defendants
earned a profit since leaving the Governo Firm.
economic reality is that CMBG3, LLC cannot earn profits or
suffer losses that are not shared with its members, i.e., the
Individual Defendants. Under Massachusetts tax law, an LLC
with two or more members is treated as a partnership unless
the LLC elects to be taxed as a corporation. See 830 C.M.R. Â§
63.30.3, Â¶3; G.L.c. 63, Â§ 30, Â¶16; G.L.c. 62, Â§ 1(p);
Pogorelc v. Commissioner of Revenue, Docket No C
328710, 2018 WL 5098822, at *3-*4 (Mass.App. Tax Bd. Oct. 4,
2018). This means that such an LLC is treated as a
pass-through entity, no income is taxed at the corporate
level, and all income, losses, deductions, and credits must
be allocated to and treated as if realized directly by the
LLCâs members. Id., Â¶3(e); 830 C.M.R. Â§ 62.5A.1,
Â¶(3)(b).1; G.L.c. 62, Â§ Â§ 1(p) & 17. Consistent with these
tax rules, the new information submitted by Plaintiff shows
that CMBG3 allocated and paid out its positive earnings to
the Individual Defendants in the form of salaries.
sum, the Governo Firm has not shown that there is any reason
for the Court to reconsider its prior ruling ...