E360 Insight, Inc. v. Spamhaus Project

In the

United States Court of Appeals

For the Seventh Circuit

Nos. 10-3538 & 10-3539

E360 INSIGHT, INC ., et al.,

Plaintiffs-Appellees/

Cross-Appellants,

v.

T HE S PAMHAUS P ROJECT,

Defendant-Appellant/

Cross-Appellee.

Appeals from the United States District Court

for the Northern District of Illinois, Eastern Division.

No. 06-cv-03958—Charles P. Kocoras, Judge.

A RGUED JUNE 8, 2011—D ECIDED S EPTEMBER 2, 2011

Before P OSNER, K ANNE, and H AMILTON, Circuit Judges.

H AMILTON, Circuit Judge. The last time plaintiff e360

Insight, Inc. came before this court, we affirmed the dis-

trict court’s entry of default judgment against de-

fendant The Spamhaus Project. All that remained was

for e360 to make a reasonable showing of its damages.

2 Nos. 10-3538 & 10-3539

After a bench trial on the issue, the district court

awarded e360 a mere $27,002, a far cry from the millions

of dollars that e360 sought. Both parties have appealed.

We conclude that the district court properly struck most

of e360’s damages evidence, either as an appropriate

discovery sanction or for proper procedural reasons,

and we reject e360’s challenges to the judgment. We also

agree with Spamhaus that the evidence failed to sup-

port the modest award of $27,000 in actual damages

because e360 based its damage calculations on lost reve-

nues rather than lost profits. We vacate and remand

with instructions to enter judgment for e360 in the

nominal amount of three dollars.

I. Factual and Procedural Background

Defendant Spamhaus is a non-profit company

organized under the laws of the United Kingdom and

dedicated to identifying and blocking “spam,” or un-

wanted bulk email. e360 Insight, Inc. v. The Spamhaus

Project, 500 F.3d 594, 595 (7th Cir. 2007). Spamhaus main-

tains a list of internet protocol (IP) addresses of verified

spam distributors, which internet service providers (ISPs)

use to prevent emails originating from those addresses

from reaching their intended recipients.

Plaintiff e360 is a now-defunct internet marketing

company that was operated out of Wheeling, Illinois by co-

plaintiff David Linhardt. (For simplicity’s sake, we refer

to e360 and Linhardt collectively as “e360.”) e360 uses

email to market products on behalf of other businesses,

who pay e360 for this service. Spamhaus added e360 to

Nos. 10-3538 & 10-3539 3

its list of known spammers, and e360 sued Spamhaus in

an Illinois state court for tortious interference with con-

tractual relations, tortious interference with prospective

economic advantage, and defamation. Spamhaus re-

moved the action to federal court on the basis of diversity

of citizenship. Spamhaus asserted a lack of personal

jurisdiction, but for reasons that remain unclear, later

withdrew its answer and informed the district court that

it would no longer defend against e360’s suit. The

district court granted a default judgment against

Spamhaus and, relying on Linhardt’s affidavit, awarded

e360 $11,715,000 in damages.

Spamhaus then reversed course and decided that it

did in fact want to defend itself. It moved to set aside the

default under Federal Rule of Civil Procedure 60(b)(4),

challenging the damages award and again asserting a

lack of personal jurisdiction.1 The district court denied

that motion. On appeal, we affirmed the default judg-

ment but concluded that Linhardt’s “conclusory state-

ment of the lost value of his business . . . alone cannot

provide the requisite ‘reasonable certainty’ for a

damages award without the necessity of a hearing.” 500

1

Spamhaus argued that its ability to assert a lack of personal

jurisdiction in a Rule 60(b) motion had nothing to do

with whether its attorney appeared or not. See e360 Insight,

500 F.3d at 597. As we recently explained, the exact opposite

is true — this is a “pivotal question” when a defendant asserts

a lack of personal jurisdiction in a Rule 60(b) motion. Philos

Technologies, Inc. v. Philos & D, Inc., 645 F.3d 851, 857 (7th

Cir. 2011).

4 Nos. 10-3538 & 10-3539

F.3d at 603. We vacated the damages award and

remanded this matter for “a more extensive inquiry

into the damages to which e360 is entitled.” Id.

Following a bench trial on remand, the court awarded

a total of $27,002 on e360’s three claims — $27,000 for the

claim of tortious interference with contractual relations,

and nominal damages of one dollar each for its claims

of defamation and tortious interference with prospec-

tive economic advantage. e360 Insight, LLC v. The

Spamhaus Project, 2010 WL 2403054 (N.D. Ill. June 11, 2010).

Spamhaus appealed that award, and e360 has cross-

appealed.

II. Analysis

Both sides challenge the district court’s determination

of damages — e360 says that the district court’s damages

award was too low, and Spamhaus says the award was

too high. e360 also argues that the district court com-

mitted reversible errors by: (1) imposing discovery sanc-

tions limiting e360’s damages and striking the bulk of

its witnesses; (2) denying e360’s pre-trial motion to com-

pel Spamhaus’s interrogatory responses; (3) excluding

one of e360’s key trial exhibits on procedural grounds;

and (4) rejecting Linhardt’s damages testimony. Because

these latter arguments bear directly on the district

court’s damages award, we address first those argu-

ments in the cross-appeal before turning to Spamhaus’s

challenge to the $27,000 award.

Nos. 10-3538 & 10-3539 5

A. Discovery Sanctions

e360’s first complaint concerns the district court’s

discovery sanctions striking a number of e360’s witnesses

and limiting its damages. Spamhaus moved for sanctions

against e360 for “persistent discovery defaults.” Linhardt

had repeatedly failed to appear for his deposition, and

e360 had given unresponsive answers to interrogatories.

On July 30, 2008, the district court granted Spamhaus’s

motion in part and ordered e360 to pay monetary sanc-

tions, to complete Linhardt’s deposition by September 30,

2008, and to answer all outstanding interrogatories

by August 13, 2008. The court also ordered: “No new

discovery may be propounded by either party.”2

The court-ordered deadline for answering the interroga-

tories passed without response by e360. On August 28,

2008, Spamhaus moved for dismissal as a sanction

for e360’s failure to comply with the July order. In sup-

port, Spamhaus noted e360’s previous failures to

comply with its discovery obligations over the course of

the litigation, failures that had already resulted in the

entry of two separate orders compelling discovery from

e360. In response, e360 blamed its lawyers. It claimed

that the interrogatory responses were the responsibility

of a lawyer who had left its attorneys’ firm shortly after

the July order was entered. Because e360’s other at-

2

The district court’s July 30, 2008, order plays a central role in

our resolution of the issues in this appeal and is hereafter

referred to as the “July order.” The court later ordered that

the limited remaining discovery allowed by its July order

be completed by December 2, 2008.

6 Nos. 10-3538 & 10-3539

torneys were in trial until after those responses were

due, e360 said, they first learned of this problem when

they received Spamhaus’s motion to dismiss, after which

they immediately served new interrogatory responses.

At a hearing on the motion to dismiss, Spamhaus in-

formed the district court that many of e360’s new re-

sponses were still defective because they simply referred

to documents in which substantive answers might be

found, in violation of the district court’s previous in-

structions to the contrary.3 Rather than dismiss the case

immediately, the district court gave e360 another oppor-

tunity to supplement its prior response to Spamhaus’s

motion to dismiss and to explain why dismissal was not

appropriate. With that supplemental response, e360

submitted amended interrogatory responses. e360 also

claimed that it was the only party prejudiced by the

complained-of delay (the theory was that any delay by

e360 only “kept [it] from proving up [its own] damages”),

noted that the dispute “has only been going on for at

most eight months,” and, in a remarkable display of

chutzpah, complained that Spamhaus had failed to

warn e360 before filing its motion to dismiss.

In reply, Spamhaus pointed out that e360’s amended

interrogatory responses identified sixteen new witnesses

on e360’s costs, revenues, profits, lost profits, and valua-

3

The district court had previously instructed e360 that it could

no longer provide such answers under Fed. R. Civ. P. 33(d),

which e360 had “overused” in an apparent attempt to

avoid providing meaningful responses to Spamhaus’s inter-

rogatories.

Nos. 10-3538 & 10-3539 7

tion. e360 had previously said that only Linhardt would

provide such testimony because he was the only person

with knowledge of these matters. Spamhaus also pointed

out that e360’s amended responses increased its damage

estimate from the $11.7 million initially requested to a

whopping $135 million. To address these eleventh-hour

disclosures, Spamhaus said, it would be necessary to “re-

open[ ] all discovery in this case,” despite the fact

that discovery had been closed by the court’s July order.

The district court denied Spamhaus’s motion to

dismiss but imposed other serious sanctions instead.

In particular, the district court struck: (a) all six-

teen witnesses disclosed for the first time in e360’s

amended interrogatory responses; and (b) any damage

amounts stated in those responses in excess of the

earlier $11.7 million estimate.

Federal Rule of Civil Procedure 37(b)(2)(A) grants

the district courts the power to impose appropriate sanc-

tions for violations of discovery orders. We review

those sanctions for an abuse of discretion, recognizing

that the district courts have “wide latitude in fashioning

appropriate sanctions.” Johnson v. Kakvand, 192 F.3d 656,

661 (7th Cir. 1999). Under this standard, we will affirm

any sanctions that were reasonable under the circum-

stances, even if we might have resolved the matter differ-

ently in the first instance. Id., citing Williams v. Chicago

Board of Education, 155 F.3d 853, 857 (7th Cir. 1998).

On appeal, e360 argues that the sanctions were inap-

propriate because its failure to comply with the district

court’s July order was the result of inadvertence rather

than willfulness, bad faith, or fault. This argument is

8 Nos. 10-3538 & 10-3539

wholly misplaced. For starters, a showing of willfulness,

bad faith, or fault is necessary only when dismissal or

default is imposed as a discovery sanction. Maynard v.

Nygren, 332 F.3d 462, 467 (7th Cir. 2003) (noting that bad

faith, willfulness, or fault is required only “when dis-

missals are used specifically as a discovery sanction”);

see Societe Internationale Pour Participations Industrielles

et Commerciales, S.A. v. Rogers, 357 U.S. 197, 212 (1958)

(noting that “serious constitutional questions” compel

conclusion that dismissal may not be imposed as a dis-

covery sanction absent a showing of willfulness, bad

faith, or fault); National Hockey League v. Metropolitan

Hockey Club, Inc., 427 U.S. 639, 640 (1976) (per curiam);

see also Newman v. Metropolitan Pier & Exposition

Authority, 962 F.2d 589, 591 (7th Cir. 1992) (“If the failure

is inadvertent, isolated, no worse than careless, and not

a cause of serious inconvenience either to the adverse

party or to the judge or to any third parties, dismissal

(if the failure is by the plaintiff) or default (if by the

defendant) would be an excessively severe sanction.”).

e360’s failure to comply with the district court’s July

order was a sufficient basis to impose sanctions under

Rule 37(b)(2)(A); see also Societe Internationale, 357 U.S. at

208 (“Whatever its reasons, petitioner did not comply

with the production order. Such reasons . . . can hardly

affect the fact of noncompliance and are relevant only

to the path which the District Court might follow in

dealing with petitioner’s failure to comply.”). e360’s

culpability for that failure “determines only which sanc-

tions the court should impose and not whether any sanc-

tions are appropriate at all.” Tamari v. Bache & Co. (Lebanon)

Nos. 10-3538 & 10-3539 9

S.A.L., 729 F.2d 469, 473 (7th Cir. 1984), citing Societe

Internationale, 357 U.S. at 208. e360’s failure to comply

with the district court’s order was the result of at least

negligence, which is a degree of fault sufficient for im-

posing sanctions. Tamari, 729 F.2d at 474.

e360 compounds this error by keeping a narrow focus

on only its failure to comply with the district court’s July

order. To justify its failure, e360 repeats the arguments

it presented to the district court: blaming its former

attorneys and Spamhaus. While there is no substance

to those arguments on their own merits, the more funda-

mental problem is that we review a sanction not in iso-

lation but in light of “the entire procedural history of

the case.” Long v. Steepro, 213 F.3d 983, 986 (7th Cir.

2000); see Salgado v. General Motors Corp., 150 F.3d 735, 740

(7th Cir. 1998) (explaining that a sanction “must be one

that a reasonable jurist, apprised of all the circumstances,

would have chosen as proportionate to the infraction”).

In other words, we weigh not only the straw that

finally broke the camel’s back, but all the straws that

the recalcitrant party piled on over the course of

the lawsuit. See Patterson v. Coca-Cola Bottling Co.,

852 F.2d 280, 284 (7th Cir. 1988) (affirming sanction

of dismissal, noting that the record was “replete with

delays, non-responses to court orders, and missed dead-

lines”). Thus, it is of little consequence whether, as e360

argues is the case here, the conduct that finally drew the

district court’s ire can be explained away as a simple

negligent mistake. A district court may conclude that

one more supposed miscommunication is just another

example of a party’s demonstrated inability to take his

10 Nos. 10-3538 & 10-3539

discovery obligations seriously. See Newman, 962 F.2d at

591 (“as soon as a pattern of noncompliance with the

court’s discovery orders emerges, the judge is entitled

to act with swift decision”).

In this case, the district court acted reasonably — and

with more restraint than necessary — by imposing severe

sanctions short of dismissal. By the time Spamhaus filed

its motion to dismiss, Linhardt had repeatedly failed to

appear for his scheduled deposition, the district court

had twice found it necessary to order e360 to comply

with its discovery obligations, and e360 had failed

to comply with the court’s clear order compelling dis-

covery.

Even more troubling are e360’s supplemental inter-

rogatory responses. When e360 submitted those re-

sponses, it implied that its amendments were meant

only to rectify defects in its previous responses. In actual-

ity, however, e360 had drastically amended its previous

responses. It added sixteen new witnesses, and it in-

creased its damages estimate by a full order of magnitude.

Even setting aside e360’s previous discovery delays,

these changes provided powerful evidence that e360

was not engaging in the discovery process in good faith.

There is no way that e360 could have believed in good

faith that its last-minute disclosure of so many new

witnesses and a radically inflated damages estimate

was even remotely appropriate, especially as part of its

belated effort to comply with a court order compelling

discovery. We cannot believe that e360 first learned of

all this information in the two weeks between its initial,

Nos. 10-3538 & 10-3539 11

late, and inadequate responses to Spamhaus’s interroga-

tories on August 29, 2008, and its amended responses

on September 12, 2008. All indications are that this

late disclosure was meant to prolong discovery and

inflict additional costs on Spamhaus by forcing it to

request additional time to depose those witnesses and

learn the details of the inflated new damage estimate.

e360 only reinforces this suspicion by arguing to us

that its failure to comply with the district court’s

July order “could have been remedied by allowing

Spamhaus to conduct any [additional] discovery it felt

necessary.”

With this track record, no reasonable person could

conclude that the district court’s sanctions were too

severe. See Johnson, 192 F.3d at 661; see also Johnson v. J.B.

Hunt Transport, Inc., 280 F.3d 1125, 1132 (7th Cir. 2002)

(affirming imposition of harsh sanctions in similar cir-

cumstances). The stricken witnesses and new damage

calculation were disclosed to Spamhaus inexcusably

late, and they were provided under circumstances

that seriously call e360’s good faith into doubt. The

district court could have simply dismissed the case as a

sanction for the failure to comply with orders and its

bad faith misuse of the discovery process. See Maynard,

332 F.3d at 467. Instead, the court generously allowed

e360 a chance to prove its damages using the informa-

tion it had disclosed in a timely manner. In so doing, the

district court imposed a punishment that was not exces-

sive, see Crown Life Ins. Co. v. Craig, 995 F.2d 1376, 1382

(7th Cir. 1993) (requiring that sanctions “be propor-

tionate to the circumstances surrounding the failure[s] to

12 Nos. 10-3538 & 10-3539

comply with discovery”), and at the same time avoided

the serious prejudice that Spamhaus would have

suffered if it had been forced to conduct additional dis-

covery to address e360’s late disclosure of so much new

information. The district court exercised its discretion

with considerable restraint. We affirm the sanction in

its entirety.

B. e360’s Motion to Compel

Having said that, it is more than a little ironic that e360’s

next argument concerns the district court’s refusal to

compel Spamhaus to respond to some of e360’s own

discovery requests. In October 2008, after sanctions were

imposed on e360, e360 moved to compel Spamhaus to

answer a number of pending interrogatories. e360 had

requested that Spamhaus: (1) identify the individuals

involved in the Spamhaus decision to list e360’s IP ad-

dresses on its list of known spammers; (2) identify all

Spamhaus employees and volunteers and provide their

job functions, salary, and other compensation; and

(3) identify where “data and other assets are stored.” The

district court denied this motion because its July order

had informed the parties that “the only discovery

left would be the depositions of [Linhardt] and [e360’s]

30(b)(6) representative.”

We review the district court’s denial of e360’s motion

to compel for an abuse of discretion. Packman v. Chicago

Tribune Co., 267 F.3d 628, 646 (7th Cir. 2001). Generally

speaking, a district court’s decision will be considered

unreasonable if it was lacking a basis in law or fact,

Nos. 10-3538 & 10-3539 13

such that it “clearly appears arbitrary.” Walker v.

Sheahan, 526 F.3d 973, 978 (7th Cir. 2008), citing Reynolds

v. Jamison, 488 F.3d 756, 761 (7th Cir. 2007). Even if

the district court’s decision was unreasonable, how-

ever, we will not grant any relief “absent a clear

showing that the denial of discovery resulted in actual

and substantial prejudice.” Searls v. Glasser, 64 F.3d

1061, 1068 (7th Cir. 1995). Here, e360 argues that these

standards were met because the July order said only

that, aside from the depositions of Linhardt and

e360’s corporate representative, “No new discovery may

be propounded by either party.” The denied motion

to compel was not “new” discovery, e360 says, but

merely a “request to compel previously propounded

[discovery] requests.”

Even if we treated the July order as ambiguous, e360

was playing with fire by waiting three months to file its

motion to compel. And even if we were to assume that

the district court misinterpreted its own order and erred

by treating e360’s motion to compel as “new discovery”

forbidden by its July order, which we doubt, we see

no basis for finding that e360 suffered “actual and sub-

stantial prejudice” from the denial of that motion.

See Searls, 64 F.3d at 1068.

First, Spamhaus employees’ salaries and compensation

were clearly irrelevant to the amount of e360’s damages.

The mere location of Spamhaus’s “data and other assets”

would say nothing about any losses e360 suffered. The

district court’s July order certainly would have pre-

vented e360 from conducting any follow-up discovery

based on the answers.

14 Nos. 10-3538 & 10-3539

The remaining information e360 sought — the identities

of Spamhaus employees and the individuals who were

involved in placing e360’s IP addresses on the list of

spammers — primarily concerned Spamhaus’s liability,

which had already been established by the default judg-

ment. e360 claims that it was prejudiced because these

employees might have known who used Spamhaus’s list

of known spammers or how many of e360’s emails were

blocked as a result. We see little reason to think that

Spamhaus employees would have such knowledge,

however. Spamhaus itself did not actually block any

email. It merely provided a list of IP addresses that ISPs

in turn used to block emails originating from those ad-

dresses. As Spamhaus explained in its interrogatory

responses, it provided its list of known spammers for

free on the Internet, without collecting names or other

information about the individuals who viewed that list.

It seems most unlikely, then, that any Spamhaus em-

ployees would have any meaningful knowledge about

who actually used its list or exactly how many of plain-

tiff’s emails were blocked by users of that list. The spec-

ulative possibility that some Spamhaus employees might

have possessed such information does not rise to the

level of “actual and substantial prejudice” required

under our case law. Searls, 64 F.3d at 1068.4

4

e360 also argues that it was prejudiced not just by the denial

of its motion to compel responses to these interrogatories, but

also by the denial of any opportunity to follow up on that

information, such as by deposing any employees named in

(continued...)

Nos. 10-3538 & 10-3539 15

C. Plaintiffs’ Exhibit 5(a)

e360 next challenges the district court’s exclusion of

Plaintiffs’ Exhibit 5(a) from evidence. Well before trial,

e360 submitted its Exhibit 5, a spreadsheet prepared by

Linhardt detailing the losses e360 claimed to have suf-

fered because Spamhaus placed e360 on its list of known

spammers. In Exhibit 5, Linhardt had estimated that

e360 had decreased in value by $135,173,577 as a result

of the outgoing emails he believed had been blocked

because e360 was placed on that list. The week before

trial, however, e360 submitted Exhibit 5(a) with a new

“supplemental damage analysis” in which Linhardt

revised that estimate to $122,271,346.

Spamhaus moved to strike Exhibit 5(a) on the ground

that it contained a “wholly new, previously undisclosed

damages calculation.” e360 claimed that it had dis-

covered a mathematical error in one of the calculations

in Exhibit 5. The district court heard arguments shortly

before trial, but declined to make a definitive ruling on

the motion to strike. Instead, the court allowed e360

to offer the exhibit at trial and deferred its ruling on

admissibility until afterward, believing it would “be a

little more attuned to the essence of the claimed mistake”

after hearing the parties’ testimony.

After trial, the district court granted Spamhaus’s

motion and struck Exhibit 5(a) for both procedural and

substantive reasons. e360 Insight, 2010 WL 2403054 at *2.

4

(...continued)

Spamhaus’s responses. This option was foreclosed by the

district court’s July order forbidding such “new discovery.”

16 Nos. 10-3538 & 10-3539

Procedurally, the district court explained, e360 had sub-

mitted Exhibit 5(a) “well after the discovery cutoff

date” set in the court’s July order and had offered that

exhibit as support for a damages estimate “exceeding

the limit of damages set . . . as a sanction for [e360’s]

multiple breaches of [its] discovery obligations.” Id.

Substantively, the court concluded that Exhibit 5(a)

was inadmissible under Federal Rule of Evidence 702

because Linhardt, who prepared the exhibit, lacked

“expertise necessary to establish the foundational

basis for admissibility, and no scientific or other reliable

principles or methods were used in the exhibit’s prepara-

tion.” Id.

We review the district court’s decision to exclude

Exhibit 5(a) for an abuse of discretion. Maher v. City of

Chicago, 547 F.3d 817, 823 (7th Cir. 2008), citing Griffin v.

Foley, 542 F.3d 209, 217 (7th Cir. 2008). Here, e360

argues that the district court abused its discretion

because Exhibit 5(a) did not contain “new evidence”

forbidden by the July order. Rather, e360 says, the new

exhibit merely contained “a correction to a math-

ematical calculation and did not disclose any new evi-

dence, methodology[,] or calculation.” True or not, the

district court did not abuse its discretion by rejecting

the new exhibit. It was disclosed long after the time

for disclosure of exhibits, and it was clearly an attempt

to evade the district court’s proper discovery sanction

limiting the damages e360 could seek.5

5

Because the district court did not abuse its discretion by

(continued...)

Nos. 10-3538 & 10-3539 17

D. Linhardt’s Trial Testimony

e360 next complains of the district court’s treatment

of Linhardt’s damages testimony. At trial, Linhardt

testified that he had estimated e360’s damages by cal-

culating the average amount of revenue it would have

received for each email sent and multiplying that by

the number of emails he believed were blocked by ISPs

using the Spamhaus list of known spammers. Linhardt

was e360’s primary witness and the only witness to

testify to damages.

After trial, the district court excluded the vast majority

of Linhardt’s testimony on the grounds that he had at-

tempted to provide expert testimony on matters “beyond

the scope of his . . . business knowledge.” e360 Insight,

2010 WL 2403054 at *3. (We discuss the one significant

exception below in Part E.) The district court noted

that Linhardt was not qualified by knowledge, skill,

experience, training, or education to testify as an expert

regarding the valuation of his business or his business’s

lost profits.

Even if Linhardt had been qualified to offer testimony

on these matters, the district court explained, his testi-

mony was inherently unreliable. This fact, the court said,

“is unmistakably demonstrated by the profound differ-

ences in claimed damages proffered at various points

5

(...continued)

excluding Exhibit 5(a) based on the timing of its disclosure

and the effort to avoid the sanctions order, we do not

address the application of Rule 702 to the exhibit.

18 Nos. 10-3538 & 10-3539

during these proceedings.” Id. “At the time of the

default judgment, the damages claimed were $11,715,000.

During discovery, Exhibit 5 was proffered reflecting

damages of $135,173,577. At trial, proffered Exhibit 5(a)

showed damages of $122,271,346. During final argu-

ment, the claimed amount was $30,000,000.” Id. at *4.

Even if those wild swings were set aside, the district

court said, “it strains credulity that a company that

made only a fraction of the profits Linhardt asks for

over the course of its five-year lifespan would have gar-

nered profits in the amounts Linhardt set out in his

testimony or documentary evidence.” Id. at *3. Because

of these “systemic problems,” the district court con-

cluded that Linhardt’s damages testimony was not

reliable. Id. at *4.6

On appeal, e360 contends that the district court erred

because it required Linhardt’s testimony to meet the

expert witness standards of Federal Rule of Evidence

702, which allows only qualified experts to testify re-

garding “scientific, technical, or other specialized knowl-

edge.” e360’s argument misses the point. The district

court gave Linhardt’s testimony no weight because he

was not credible.

We see no basis for doubting the district court’s credi-

bility finding. See, e.g., Anderson v. City of Bessemer City,

6

The district court also noted a number of “individual deficien-

cies” in Linhardt’s testimony, e360 Insight, 2010 WL 2403054

at *4-*7, but we need not address the parties’ arguments

regarding those deficiencies. We find an ample independent

basis to uphold the court’s assessment of Linhardt’s credibility.

Nos. 10-3538 & 10-3539 19

470 U.S. 564, 575 (1985) (noting that “only the trial judge

can be aware of the variations in demeanor and

tone of voice that bear so heavily on the listener’s under-

standing of and belief in what is said”). We need not

determine whether Linhardt should have been treated

as an expert or a lay opinion witness.

E. The $27,000 Damage Award — Profits v. Revenue

As we have explained, the vast majority of e360’s evi-

dence was (1) stricken in its entirety as a discovery sanc-

tion; (2) excluded because it was disclosed long after

the close of discovery; or (3) rejected on credibility

grounds. The district court’s treatment of this evi-

dence was entirely proper. All that remains is the lone

category of evidence on which the district court rested

its damage award of $27,000.

The district court concluded that Linhardt had

“provide[d] some reliable information” regarding e360’s

contracts with three customers. e360 Insight, 2010 WL

2403054 at *7. During the time that those companies dealt

with e360, they collectively paid e360 approximately

$27,000 per month for the services it performed. Id. As

a result of Spamhaus’s actions, the district court found,

e360 lost its contracts with these customers.

The district court did not believe, however, Linhardt’s

claim that these contracts would have remained in effect

for an additional four years if not for Spamhaus’s con-

duct. Linhardt had admitted that “long-term agreements

with customers were not the norm in the industry,” the

court explained, and had given no reason to believe

20 Nos. 10-3538 & 10-3539

that these contracts were an exception to that general

rule. Id. at *8. Despite its refusal to award four years of

damages on these three contracts, the court believed

that e360’s relationships with these customers “were not

in danger of ending prior to Spamhaus’s actions,”

making it “more likely than not that they would have

continued to do business with e360 for one additional

month beyond the end of the relationships precipitated

by Spamhaus.” Id. For this reason, the district court

awarded $27,000 on the claim that Spamhaus inter-

fered with e360’s existing contracts, “the amount

of the payments [it] would have received for one

additional month’s worth of work for each of these cus-

tomers.” Id.

On appeal, Spamhaus argues that the district court’s

damage award was excessive because it was in the

amount of e360’s gross revenue rather than its profit. As

Spamhaus correctly observes, gross revenue is generally

not an appropriate measure of damages because

revenue is calculated without regard to the costs the

plaintiff incurred in the course of making that revenue.

See Taylor v. Meirick, 712 F.2d 1112, 1121 (7th Cir. 1983) (“a

loss of revenue is not the same thing as a loss of profits.

If you sell less of your product you will have lower

costs, and the cost savings is a gain that must be offset

against the loss of revenues in computing lost profit.”).7

7

This rule does not apply to costs that would have been

incurred regardless of whether or not the plaintiff engaged

(continued...)

Nos. 10-3538 & 10-3539 21

Our jurisdiction in this matter is based on diversity

of citizenship between e360 and Spamhaus, and

Illinois law controls the proper measure of damages. See

Europlast, Ltd. v. Oak Switch Systems, Inc., 10 F.3d 1266,

1276 (7th Cir. 1993); Muller v. Groban, 346 F.2d 263, 265 (7th

Cir. 1965); Weakley v. Fischbach & Moore, Inc., 515 F.2d

1260, 1267 (5th Cir. 1975). On this question of state law,

our review of those legal standards is de novo, though

we review the district court’s application of the legal

standard to the facts only for clear error. Shirley v.

Russell, 69 F.3d 839, 841-42 (7th Cir. 1995).

e360 defends the use of gross revenue on the theory

that its revenue was all profit “because the e-mail

messages had already been sent to the intended recipi-

ents.” Although the “infrastructure costs” of transmitting

an email were already incurred by the time of its trans-

mission, regardless of whether the email was ever

received, Lindhardt admitted that e360 still had to

pay additional royalty fees whenever its emails gen-

erated revenue. These fees and e360’s failure to account

for them in its damages calculation doom the damages

award. See Taylor, 712 F.2d at 1121 (“When a plaintiff

contends that lost sales revenue would have been

all profit, the contention is sufficiently improbable to

7

(...continued)

in the profit-making activity at issue. See Taylor, 712 F.2d at 1121

(“Costs that would be incurred anyway should not

be subtracted, because by definition they cannot be avoided

by curtailing the profit-making activity.”).

22 Nos. 10-3538 & 10-3539

require him to come forward with substantiating evi-

dence. . . .”). Because e360 failed to offer any evidence

that would have allowed the district court to determine

what portion of its $27,000 lost gross revenue would

have been profit, the district court’s award in that

amount was based on an error of law. Without evidence

that might answer the critical question, “we cannot

uphold the award of damages in this amount or even

impose a remittitur.” Id. We must instead vacate the

modest damages award.8

III. Conclusion

By failing to comply with its basic discovery obliga-

tions, a party can snatch defeat from the jaws of certain

victory. After our earlier remand, all e360 needed to do

was provide a reasonable estimate of the harm it

suffered from Spamhaus’s conduct. Rather than do

so, however, e360 engaged in a pattern of delay that ulti-

mately cost it the testimony of all but one witness with

any personal knowledge of its damages. That lone

witness lost all credibility when he painted a wildly

unrealistic picture of e360’s losses. Having squandered

8

e360 also argues that the uncertainty inherent in any pre-

diction of a plaintiff’s future lost profits should excuse its

own and the district court’s failure to identify what portion of

e360’s revenue was actually profit. While the law does not

require precision in damages estimates, it requires a reason-

able basis for estimating lost profits rather than lost revenue.

See Taylor, 712 F.2d at 1121.

Nos. 10-3538 & 10-3539 23

its opportunity to present its case, e360 must content

itself with nominal damages on each of its claims, and

nothing more. We VACATE the judgment of the district

court and REMAND this matter with instructions to enter

judgment for the plaintiffs in the amount of three dollars.

9-2-11