Appendix — MindGames, Inc. v. Western Publishing Co.

(2)mmsre oa

00-825 NOV 20200

In the

Supreme Court of the United States

OCTOBER TERM 2000

MINDGAMES, INC.

Petitioner,

V.

WESTERN PUBLISHING COMPANY, INC.

Respondent.

APPENDIX TO

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF

APPEALS FOR THE SEVENTH CIRCUIT

E. CAMPION KERSTEN

Attorneys for Petitioner

Of Counsel:

KERSTEN & MCKINNON, S.C.

231 West Wisconsin Avenue

Milwaukee, Wisconsin 53203

Telephone: (414) 271-0054

TABLE OF CONTENTS

Opinion of the Seventh Circuit affirming the

cv riacaneti on « EOP ECO ee or er ne: App. 1

Decision and Order of the District Court

granting summary judgment............... App.

Order of the Seventh Circuit denying

DI 5S he ik es ck App.

Western Publishing Company, Inc.’s Memorandum _

in Support of its Motion for Partial Summary

MUN Fe sb ee os App.

Western Publishing Company, Inc.’s Reply

Brief in Support of its Motion for Partial Summary

ME fxn 4 ee es App.

Excerpts from the Affidavit of G. Lawrence

Blackwell, III, in Opposition to the Summary

Judgment Motion of Western Publishing

WEI 8 65 ho a eos cc App.

Excerpts from the Supplemental Affidavit of

G. Lawrence Blackwell, III ............... App.

Excerpts from MindGames district court

memorandum opposing summary judgment... . . App.

40

. 42

44

66

89

97

99

App. 1

In the

United States Court of Appeals

For the Seventh Circuit

No. 98-1879

MINDGAMES, INC.

Plaintiff-Appellant,

V.

WESTERN PUBLISHING COMPANY, INC.,

Defendant-Appellee.

Appeal from the United States District Court

for the Eastern District of Wisconsin.

Nos. 94 C 552, 94 C 998 -- Lynn S. Adelman, Judge

ARGUED APRIL 17, 2000--DECIDED JUNE 22, 2000

PETITION FOR REHEARING DENIED AUGUST 22, 2000

Before POSNER, Chief Judge, and FAIRCHILD and

DIANE P. Woop, Circuit Judges.

POSNER, Chief Judge. This is a diversity suit for

breach of contract, governed by Arkansas law because of a

choice of law provision in the contract. The plaintiff,

MindGames, was formed in March of 1988 by Larry

Blackwell to manufacture and sell an adult board game,

App. 2

"Clever Endeavor," that he had invented. The first games

were shipped in the fall of 1989 and by the end of the year, 75

days later, 30,000 had been sold. In March of 1990,

MindGames licensed the game to the defendant, Western, a

major marketer of games. Western had marketed the very

successful adult board games “Trivial Pursuit" and

"Pictionary" and thought "Clever Endeavor" might be as

successful. The license contract, on which this suit is

premised, required Western to pay MindGames a 15 percent

royalty on all games sold. The contract was by its terms to

remain in effect until the end of January 1993, or for another

year if before then Western paid MindGames at least $1.5

million in the form of royalties due under the contract or

otherwise, and for subsequent years as well if Western paid an

annual renewal fee of $300,000.

During the first year of the contract, Western sold

165,000 copies of "Clever Endeavor" and paid MindGames

$600,000 in royalties. After that, sales fell precipitously

(though we’re not told by how much) but the parties continued

under the contract through January 31, 1994, though Western

did not pay the $900,000 ($1.5 million minus $600,000) that

the contract would have required it to pay in order to be

entitled to extend the contract for a year after its expiration.

In February of 1994 the parties finally parted. Later that year

MindGames brought this suit, which seeks $900,000, plus lost

royalties of some $40 million that MindGames claims it would

have earned had not Western failed to carry out the

promotional obligations that the contract imposed on it, plus

$300,000 on the theory that Western renewed the contract for

App. 3

a third year, beginning in February of 1994; Western sold off

its remaining inventory of "Clever Endeavor" in that year.

The district court granted summary judgment for

Western, holding that the contract did not entitle MindGames

to a renewal fee and that Arkansas's "new business" rule

barred any recovery of lost profits. 944 F. Supp. 754 (E.D.

Wis. 1996); 995 F. Supp. 949 (E.D Wis. 1998). Although

the victim of a breach of contract is entitled to nominal

damages, Mason v. Russenberger, 542 S.W.2d 745 (Ark.

1976); Movitz v. First Nat. Bank of Chicago, 148 F.3d 760,

765 (7th Cir. 1998); E. Allan Farnsworth, Contracts § 12.8,

p. 784 (3d ed. 1999), Mind Games does not seek them; and so

if it is not entitled to either type of substantial damages that it

seeks, judgment was correctly entered for Western. By not

seeking nominal damages, incidentally, MindGames may have

lost a chance to obtain significant attorneys' fees, to which

Arkansas law entitles a prevailing party in a breach of contract

case. See Dawson v. Temps Plus, Inc., 987 S. W.2d 722, 729

(Ark. 1999).

The rejection of MindGames' claim to the renewal fee

for the second year (and a fortiori the third) was Clearly

correct. The contract conditioned Western's right to renew

the contract for a second year on its pay.1g a renewal fee of

$1.5 million (minus royalties already paid); it was silent on

the terms of a renewal adopted by a new agreement of the

parties rather than by the exercise of an option granted by the

original contract. If MindGames hadn't wanted to renew the

contract and Western had insisted, then Western would have

had to pay the fee. But if Western did not invoke a

App. 4

contractual right to renew, if instead the parties entered into

a new agreement to renew the contract, then MindGames had

no right to the renewal fee fixed in the contract; that right was

conditional on Western's exercising its contractual right to

renew. A conditional right in a contract does not become an

enforceable right until the condition occurs, Restatement

(Second) of Contracts § 225(1) (1981), unless noncompliance

with the condition is excused by agreement, UVebe v. Bowman,

420 S.W.2d 889 (Ark. 1967); Normand v. Orkin

Exterminating Co., 193 F.3d 908,912 (7th Cir. 1999), or by

operation of law, Farnsworth, supra § 8.3, p. 526, as where

the other party to the contract wrongfully prevents the

condition from occurring, id., §8.6, pp. 544-45; Restatement,

supra, § 225, comment b, which is not alleged, for Western

had no duty to exercise its right of renewal. The condition

that would have entitled MindGamc: .o demand a renewal fee

thus did not occur here; Western did not invoke its contractual

right to extend the contract; after January 31,1993, the parties

were operating under a new contract.

The more difficult issue is MindGames' right to

recover lost profits for Western's alleged breach of its duty to

promote "Clever Endeavor." A minority of states have or

purport to have a rule barring a new business, as distinct from

an established one, from obtaining damages for lost profits as

a result of a tort or a breach of contract. E.g., Lockheed

Information Management Systems Co. v. Maximus, Inc., 524

S.E.2d 420, 429-30 (Va. 2000); Bell Atlantic Network

Services, Inc. v. P.M. Video Corp., 730 A.2d 406, 419-20

(N.J. Super. 1999); Interstate Development Services of Lake

Park, Georgia, Inc. v. Patel, 463 S.E.2d 516 (Ga. App.

App. 5

1995); Stuart Park Associates Limited Partnership v.

Ameritech Pension Trust, 51 F.3d 1319, 1328 (7th Cir. 1995)

(Illinois law); Bernadette J. Bollas, Note, "The New Business

Rule and the Denial of Lost Profits," 48 Ohio St. L.J. 855,

859 & n. 32 (1987). The rule of Hadley v. Baxendale, 9 Ex.

341, 156 Eng. Rep. 145 (1854), often prevents the victim of

a breach of contract from obtaining lost profits, but that rule

is not invoked here. Neither the "new business" rule nor the

rule of Hadley v. Baxendale stands for the general proposition

that lost profits are never a recoverable item of damages in a

tort or breach of contract case.

Arkansas is said to be one of the "new business" rule

states on the strength of a case decided by the state's supreme

court many years ago. The appellants in Marvell Light & Ice

Co. v. General Electric Co., 259 S.W. 741 (Ark. 1924),

sought to recover the profits that they claimed to have lost as

a result of a five and a half month delay in the delivery of

icemaking machinery; the delay, the appellants claimed, had

forced them to delay putting their ice factory into operation.

The court concluded, however, that because there was no

indication "that the manufacture and sale of ice by appellants

was an established business so that proof of the amount lost on

account of the delay. . . might be made with reasonable

certainty," "the anticipated profits of the new business are too

remote, speculative, and uncertain to support a judgment for

their loss." It quoted an earlier decision in which another

court had said that "he who is prevented from embarking in

[sic -- must mean ‘on'] a new business can recover no profits,

because there are no provable data of past business from

which the fact that anticipated profits would have been

App. 6

realized can be legally deduced." Central Coal & Coke Co.

v. Hartman, 111 Fed. 96, 99 (8th Cir. 1901). That quotation

is taken to have made Arkansas a “new business" state,

although the rest of the Marvell opinion indicates that the

court was concerned that the anticipated profits of the

particular new business at issue, rather than of every new .

business, were too speculative to support an award of

damages. On its facts, moreover, Marvell was a classic

Hadley v. Baxendale type of case -- in fact virtually a rerun of

Hadley, except that the appellants alleged that they had

notified the seller of the icemaking machinery of the damages

that they would suffer if delivery was delayed, and the seller

had agreed to be liable for those damages. The decision is

puzzling in light of that allegation; it is doubly puzzling

because, assuming that by the time of the trial the ice factory

was up and running, it should not have been difficult to

compute the damages that the appellants had lost by virtue of

the five and a half month delay in placing the factory in

operation. Presumably it would have had five and a half

months of additional profits.

Marvell has never been overruled; and federal courts

ordinarily take a nonoverruled decision of the highest court of

the state whose law goverrs a controversy by virtue of the

applicable choice of law rule to be conclusive on the law of

the state. E.g., Milwaukee Metropolitan Sewerage District v.

Fidelity & Deposit Co., 56 F.3d 821, 823 (7th Cir. 1995);

C & B Sales & Service, Inc. v. McDonald, 111 F.3d 27,29

n.1 (Sth Cir. 1997); New York Life Ins. Co. v. K N Energy,

Inc., 80 F.3d 405,409 (10th Cir. 1996). But this is a matter

of practice or presumption, not of rule. The rule is that in a

App. 7

case in federal court in which state law provides the rule of

decision, the federal court must predict how the state's highest

court would decide the case, and decide it the same way.

Treco, Inc. v. Land of Lincoln Savings & Loan, 749 F.2d 374,

377 (7th Cir. 1984); New Hampshire Ins. Co. v. Vieira, 930

F.2d 696, 701 (9th Cir. 1991); 19 Charles Alan Wright,

Arthur R. Miller & Edward H. Cooper, Federal Practice and

Procedure § 4507, pp. 126-50 (2d ed. 1996). Law, Holmes

said, in a controversial definition that is, however, a pretty

good summary of how courts apply the law of other

jurisdictions, is just a prediction of what the courts of that

jurisdiction would do with the case if they got their hands on

it. Oliver Wendell Holmes, "The Path of the Law ," 10 Harv.

L. Rev. 457, 461 (1897). Since state courts like federal courts

do occasionally overrule their decisions, there will be

occasional, though rare, instances in which the best prediction

of what the state's highest court will do is that it will not

follow its previous decision. See, e.g., Burgess v. Lowery,

201 F.3d 942, 948 (7th Cir. 2000); Treco, Inc. v. Land of

Lincoln Savings & Loan, supra, 749 F.2d at 377: Lightning

Lube, Inc. v. Witco Corp., 4 F.3d 1153,1176 (3d Cir. 1993);

19 Wright, Miller & Cooper, supra, § 4507, pp. 141-49.

That is the best prediction in this case. Marvell was

decided more than three quarters of a century ago, and the

"new business" rule which it has been thought to have

announced has not been mentioned in a published Arkansas

case since. The opinion doesn't make a lot of sense on its

facts, as we have seen, and the Eighth Circuit case on which

it relied has long been superseded in that circuit. see, ¢.g.,

Central Telecom, munications, Inc. v. TCI Cablevision, Inc.,

App. 8

800 F.2d 711, 727-28 (8th Cir. 1986). The Arkansas cases

decided since Marvell that deal with damages issues exhibit a

liberal approach to the estimation of damages that is in-

consistent with a flat rule denying damages for lost profits to

all businesses that are not well established. Jim Halsey Co. v.

Bonar, 683 S.W.2d 898, 902-03 (Ark. 1985); Tremco, Inc. v.

Valley Aluminum Products Corp., 831 S.W.2d 156, 158 (Ark.

App. 1992); Ozark Gas Transmission Systems v. Barclay, 662

S.W.2d 188, 192 (Ark. App. 1983); J.W. Looney, "The 'New

Business Rule' and Breach of Contract Claims for Lost

Profits: Playing Mindgames with Arkansas Law," 1997 Ark.

L. Notes 43, 46-47. The Ozark decision, for example,

allowed an orchard farmer to recover for the damages to a

new orchard. The "new business" rule has, moreover, been

abandoned in most states that once followed it, e.g., Beverly

Hills Concepts, Inc. v. Schatz & Schatz, Ribicoff & Kotkin,

717 A.2d 724, 733-35 (Conn. 1998); AGF, Inc. v. Great

Lakes Heat Treating Co., 555 N.E.2d 634, 637-39 (Ohio

1990); No Ka Oi Corp. v. National 60 Minute Tune, Inc., 863

P.2d 79, 81-82 (Wash. App. 1993); Orchid Software, Inc. v.

Prentice-Hall, Inc., 804 S.W.2d 208, 210-11 (Tex. App.

1991); Beck v. Clarkson, 387 S.E.2d 681, 683-84 (S.C. App.

1989); see also McNamara v. Wilmington Mall Realty Corp,

466 S.E.2d 324, 330 (N.C. App. 1996); International

Telepassport Corp. v. USFI, Inc., 89 F.3d 82, 85-86 (2d Cir.

1996) (per curiam) (New York law); Restatement, supra, §

352, comment b, 27d it seems to retain little vitality even in

states like Virginia, hich purport to employ the hard-core per

se approach. See Commercial Business Systems, Inc. v.

Bellsouth Services, Inc., 453 S.E.2d 261, 268-69 (Va. 1995);

App. 9

see generally Eljer Mfg., Inc. v. Kowin Development Corp.,

14 F.3d 1250, 1256 (7th Cir. 1994).

Western tries to distinguish Ozark by pointing to the

fact that the plaintiff there was an established orchard farmer,

aibeit the particular orchard represented a new venture for

him. This effort to distinguish that case brings into view the

primary objection to the "new business" rule, an objection of

such force as to explain its decline and make it unlikely that

Arkansas would fol!ow it if the occasion for its supreme court

to choose arose. The objection has to do with the difference

between rule and standard as methods of legal governance.

A rule singles out one or a few: facts and makes it or them

conclusive of legal liability; a standard permits consideration

of all or at least most facts that are relevant to the standard's

rationale. A speed limit is a rule; negligence is a standard.

Rules have the advantage of being definite and of limiting

factual in -uiry but the disadvantage of being inflexible, even

arbitrary, and thus overinclusive, or of being underinclusive

and thus opening up loopholes (or of being both over and

underinclusive!). Standards are flexible, but vague and open-

ended; they make business planning difficult, invite the

sometimes unpredictable exercise of judicial discretion, and

are more costly to adjudicate -- and yet when based on lay

intuition they may actually be more intelligible, and thus in a

sense Clearer and more precise, to the persons whose behavior

they seek to guide than rules would be. No sensible person

supposes that rules are always superior to standards, or vice

versa, though some judges are drawn to the definiteness of

rules and others to the flexibility of standards. But that is

psychology; the important point is that some activities are

App. 10

better governed by rules, others by standards. States that have

rejected the "new business" rule are content to control the

award of damages for lost profits by means of a standard --

damages may not be awarded on the basis of wild conjecture,

they must be proved to a reasonable certainty, e.g., Beverly

Hills Concepts, Inc. v. Schatz & Schatz, Ribicoff & Kotkin,

supra, 717 A.2d at 733-34; AGF, Inc. v. Great Lakes Heat

Treating Co., supra, 555 N .E.2d at 638-39, that is applicable

to proof of damages generally. See, e.g., Jones Motor Co. v.

Holtkilmp, Liese, Beckemeier & Childress, P.C., 197 F.3d

1190, 1194-95 (7th Cir. 1999), and cases cited there; Ashland

Management Inc. v. Janien, 624 N.E.2d 1007, 1010 (N.Y.

1993); Restatement, supra, § 352. The "new business" rule is

an attempt now widely regarded as failed to control the award

of such damages by means of a rule.

The rule doesn't work because it manages to be at once

vague and arbitrary. One reason is that the facts that it makes

determinative, "new," "business," and "profits," are not facts,

but rather are the conclusions of a reasoning process that is

based on the rationale for the rule and that as a result turns the

rule into an implicit standard. What, for example, is a "new"

business? What, for that matter, is a "business"? And are

royalties what the rule means by "profits"? MindGames was

formed more than a year before it signed the license

agreement with Western, and it sold 30,000 games in the six

months between the first sales and the signing of the contract.

MindGames' only "business," moreover, was the licensing of

intellectual property. An author who signs a contract with a

publisher for the publication of his book would not ordinarily

be regarded as being engaged in a "business," or his royalties

App. 11

or advance described as "profits." He would be surprised to

learn that if he sued for unpaid royalties he could not get them

because his was a "new business." Suppose a first-time author

sued a publisher for an accounting, and the only issue was

how many copies the publisher had sold. Under the "new

business" rule as construed by Western, the author could not

recover his lost royalties even though there was no uncertainty

about what he had lost. So construed and applied, the rule

would have no relation to its rationale, which is to prevent the

award of speculative damages.

Western goes even further, arguing that even if it,

Western, a well-established firm, were the plaintiff, it could

not recover its lost profits because the sale of "Clever

Endeavor" was a new business. On this construal of the rule,

"business" does not mean the enterprise; it means any business

activity. So Western's sale of a new game is a new business,

yet we know from the Ozark decision that an orchard farmer's

operation of a new orchard is an old business.

The rule could be made sensible by appropriate

definition of its terms, but we find it hard to see what would

be gained, given the existence of the serviceable and familiar

standard of excessive speculativeness. The rule may have

made sense at one time; the reduction in decision costs and

uncertainty brought about by avoiding a speculative mire may

have swamped the increased social costs resulting from the

Systematically inadequate damages that a "new business" rule

decrees. But today the courts have become sufficiently

sophisticated in analyzing lost-earnings claims, and have

accumulated sufficient precedent on the standard of undue

App. 12

speculativeness in damages awards, to make the balance of

costs and benefits tip against the rule. In any event we are far

in this case, in logic as well as time, from the ice factory

whose opening was delayed by the General Electric Company.

We greatly doubt that there is a "new business" rule in the

common law of Arkansas today, but if there is it surely does

not extend so far beyond the facts of the only case in which

the rule was ever invoked to justify its invocation here. There

is no authority for, and no common sense appeal to, such an

extension.

But that leaves us with the question of undue

speculation in estimating damages. Abrogation of the "new

business" rule does not produce a free-for-all. What makes

MindGames' claim of lost royalties indeed dubious is not any

"new business" rule but the fact that the success of a board

game, like that of a book or movie, is so uncertain. Here

newness enters into judicial consideration of the damages

claim not as a rule but as a factor in applying the standard.

Just as a start-up company sould not be permitted to obtain

pie-in-the-sky damages upon allegations that it was snuffed out

before it could begin to operate (unlike the ice factory in

Marvell, which did begin production, albeit a little later than

planned), capitalizing fantasized earnings into a huge present

value sought as damages, so a novice writer should not be

permitted to obtain damages from his publisher on the premise

that but for the latter's laxity he would have had a bestseller,

when only a tiny fraction of new books achieve that success.

Damages must be proved, and not just dreamed, though "some

degree of speculation is permissible in computing damages,

because reasonable doubts as to remedy ought to be resolved

App. 13

against the wrongdoer." Jones Motor Co. v. Holtkamp, Liese,

Beckemeier & Childress, P.C., supra, 197 F.3d at 1194; see

Restatement, supra, § 352, comment a.

This is not to suggest that damages for lost earnings on

intellectual property can never be recovered; that

"entertainment damages" are not recoverable in breach of :

contract cases. That would just be a variant of the discredited

“new business" rule. What is important is that Blackwell had

no track record when he created "Clever Endeavor." He

could not point to other games that he had invented and that

had sold well. He was not in the position of the bestselling

author who can prove from his past success that his new book,

which the defendant failed to promote, would have been likely

-- Not certain, of course -- to have enjoyed a success

comparable to that of the average of his previous books if only

it had been promoted as promised. That would be like a case

of a new business launched by an entrepreneur with a proven

track record.

In the precontract sales period and the first year of the

contract a total of 195,000 copies of "Clever Endeavor" were

sold; then sales fizzled. The public is fickle. It is possible

that if Western had marketed the game more vigorously, more

would have been sold, but an equally if not more plausible

possibility is that the reason that Western didn't market the

game more vigorously was that it correctly sensed that

demand had dried up.

Even if that alternative is rejected, we do not see how

the number of copies that would have been sold but for the

App. 14

alleged breach could be determined given the evidence

presented in the summary judgment proceedings (a potentially

important qualification, of course); and so MindGames' proof

of damages is indeed excessively speculative. See, e.g.,

Gentry v. Little Rock Road Machinery Co., 339 S.W.2d 101,

104 (Ark. 1960); Hillside Enterprises v. Carlisle Corp., 69

F.3d 1410, 1414 (8th Cir. 1995); K & R, Inc. v. Crete

Storage Corp., 231 N.W.2d 110, 115 (Neb. 1975); see also

AGF, Inc. v. Great Lakes Heat Treating Co., supra, 555

N.E.2d at 640. Those proceedings were completed with no

evidence having been presented from which a rational trier of

fact could conclude on this record that some specific quantity,

or for that matter some broad but bounded range of alternative

estimates, of copies of "Clever Endeavor" would have been

sold had Western honored the contract. Mind Games obtained

$600,000 in royalties on sales of 165,000 copies of the game,

implying that Western would have had to sell more than 10

million copies to generate the $40 million in lost royalties that

MindGames seeks to recover. Cf. Boxhorn's Big Muskego

Gun Club, Inc. v. Electrical Workers Local494, 798 F.2d

1016, 1023 (7th Cir. 1986).

When the breach occurred, MindGames should have

terminated the contract and sought distribution by other

means. See Farnsworth, supra, § 12.12, pp. 806-08. The

fact that it did not do so -- that so far as appears it has made

no effort to market "Clever Endeavor" since the market for

the game collapsed in 1991 -- is telling evidence of a lack of

commercial promise unrelated to Western's conduct.

App. 15

Although Western in its brief in this court spent most

of its time misguidedly defending the "new business" rule,

clinging to Marveil for dear life (a case seemingly on point,

however vulnerable, is a security blanket that no lawyer feels

comfortable without), it did argue that in any event

MindGames' claim for lost royalties was too speculative to

ground an award of damages for that loss. The argument was

brief but not so brief as to fail to put MindGames on notice of

a possible alternative ground for upholding the district court's

judgment; we may of course affirm an award of summary

judgment on any ground that has not been forfeited or waived

in the district court. United States v. Jackson, 207 F.3d 910,

917 (7th Cir. 2000). MindGames did not respond to the

argument in its reply brief. It pointed to no evidence from

which lost royalties could be calculated to even a rough

approximation. We find its silence eloquent and Western's

argument compelling, and so the judgment in favor of Western

is

AFFIRMED.

FAIRCHILD, Circuit judge, dissenting in part. |

agree that (1) MindGames' claim for a renewal fee for the

year following the initial term of the Licensing Agreement

was properly dismissed, and (2) we are not bound by Marvell

Light & Ice Co. v. General Electric Co., 259 S.W. 741 (Ark.

1924) to affirm the dismissal of MindGames' claim for loss of

royalties caused by breach of contract. I do, however,

respectfully disagree with the conclusion that, as a matter of

law, that claim is too speculative to support an award of

damages.

App. 16

This was never a claim in which MindGames sought to

recover lost profits from the operation of a business. The

damages sought would be measured by the royalties which

Western would have been obliged to pay on sales which did

not occur because of Western's alleged failure to perform its

contract. Western's obligation to pay royalties arose from the

sales of games manufactured, promoted and sold by it, and

whether MindGames showed a profit, as well as MindGames’

lack of history, was wholly irrelevant. The ultimate questions

would be whether there was a breach by Western and whether

the breach caused a loss of sales.

Sales did not meet expectations. In the period from

March 30, 1990 to January 31,1991, 165,000 games were

sold; in the year ending January 31, 1992, 58,113; in the year

ending January 31, 1993, 26,394; and in the year after the

initial term, 7,438. The sales in the initial term totaled

approximately $4,000,000 and royalties $600,000. Soon after

January 31, 1993, Western was sufficiently interested in

continuing as licensee to agree to pay a minimum royalty of

$27,500 for the coming year. MindGames’ complaint alleged

that a substantial number of games produced by Western failed

to meet quality standards; Western failed to promote and make

reasonable efforts to sell; and its efforts did not meet standards

under the agreement or those recognized in the industry. It is

MindGames’ position that these failures caused loss of sales.

Western's motion for partial summary judgment was

premised on the new business rule which Western perceived

as announced in Marvell, and the district court granted the

motion on that basis. If, as we all agree, Marvell does not

App. 17

control this case, then the applicable Arkansas doctrine is that

MindGames is entitled to recover any royalties on sales which

MindGames can prove to a reasonable certainty would have

been made had Western carried out the contract. The rule that

damages which are uncertain cannot be recovered does not

apply to uncertainty as to the value of the benefits to be

derived, but to uncertainty as to whether any benefit would be

derived at all. Jim Halsey Co., Inc. v. Bonar, 284 Ark. 461,

467-68 (Ark. 1985); Crow v. Russell, 226 Ark. 121, 123

(Ark. 1956).

In my opinion we cannot say on this record, as a

matter of law, that MindGames can not prove to a reasonable

certainty that Western's failures to perform, if proved, caused

a loss of sales.

I would not hold that MindGames has waived or

forfeited its opportunity to produce evidence of damages. It

is true that in responding to Western's motion for partial

summary judgment MindGames did not provide evidentiary

material tending to show the breaches by Western nor that

such breaches caused a loss of sales. This should not be

deemed a waiver or forfeiture of an opportunity to do so

because of Western's complete reliance in its motion on the

new business rule and Marvell, which, if applied, would

prevent proof of breach and causation of loss. Western's

motion did not reach the issue of breach, and establishing

damages would require MindGames to prove that the breach

occurred and caused loss of sales. Although Western, in its

memorandum in support of its motion did include a section

making the point that the success of a new product in the

App. 18

entertainment industry is especially difficult to predict, it used

that point to support an argument that the new business rule

was particularly appropriate in this case, and that the Arkansas

Supreme Court would be unlikely to retreat from the new

business rule under circumstances like these. Western did not

squarely assert, as an alternative ground, that MindGames

could not prove to a reasonable certainty that any breach by

Western caused loss of sales. Rather, Western urged that the

district court should strictly apply the new business rule.

In this court, Western again relied on Marvell and the

new business rule, also arguing, as it had in the district court,

that this type of case, involving a new product in the

entertainment industry, is not one where the Arkansas

Supreme Court would retreat from its application of the new

business rule. Although at pages 30-32 of its brief it asserted

the inherently speculative nature of a claim for lost profits in

_ the entertainment industry, and cited cases, it failed squarely

to assert, as an alternative ground, that its alleged failures to

perform, if proved, could not have been proved to a

reasonable certainty to have caused lost sales. On page 5 of

its reply brief, MindGames referred to pages 29-32 of

Western's brief, and challenged as contrary to Arkansas law

“non-Arkansas cases [cited by Western] in arguing that

businesses in the entertainment industry are barred perse from’ |

claimmg lost profits." Again I do not think it is appropriate

to rely on waiver or forfeiture.

App. 19

I would remand for further proceedings on this part of

MindGames' complaint.

A true Copy:

Teste:

Clerk of the United States Court of

Appeals for the Seventh Circuit

App. 20

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF WISCONSIN

WESTERN PUBLISHING COMPANY, INC.

Plaintiff,

vs. Case Number: 94-C-552

MINDGAMES, INC.,

Defendant.

Consolidated With

MINDGAMES, INC.,

Plaintiff,

vs. Case Number: 94-C-998

WESTERN PUBLISHING COMPANY, INC.,

Defendant.

DECISION AND ORDER

App. 21

Before the Court is Western Publishing Company,

Inc.'s ("Western") Motion for Partial Summary Judgment and

Motion to Strike. For the following reasons, the Court holds

that MindGames, Inc. ("MindGames") is hereby prevented

from recovering damages for expected lost profits from a

licensing agreement with Western under Arkansas law.

Therefore, Western's Motion for Partial Summary Judgment

is GRANTED and Motion to Strike is DENIED.

I. BACKGROUND

This litigation results from a disputed licensing

agreement between MindGames, the licensor, and Western the

licensee. MindGames seeks lost profits and compensatory

damages from an alleged breach of the licensing agreement.

Western now files a motion for partial summary judgment,

seeking to prevent MindGames, as a matter of law, from

recovering lost anticipated profits stemming from the alleged

breach.

In March 1988, G. Lawrence Blackwell, III formed

MindGames to promote and sell a new board game he had

created called Clever Endeavor. Mr. Blackwell believed that

Clever Endeavor would reach the popularity achieved by

games such as Pictionary and Trivial Pursuit. After selling

30,000 copies of the game in 1989, Mr. Blackwell decided to

enter into a licensing agreement with Western and Games

Gang, Inc. ("Games Gang"). Under the terms of the

agreement, Western and Games Gang planned to market,

manufacture, promote, distribute and sell Clever Endeavor.

Blackwell and MindGames would receive royalties on the

number of games sold. Net sales for Clever Endeavor in

App. 22

1990, the first year of the agreement, totalled 165,000, but fell

off dramatically starting in 1991, until late 1993 when

Western drastically reduced prices to eliminate excess stock of

the game.

In 1994, MindGames brought suit for breach of the

marketing agreement. Among other damages, MindGames

seeks $40 million as lost profits that they believe the game

_would have realized had it been marketed correctly. Western

now brings a motion for partial summary judgment on the

issue of the lost profits. Western claims that the "New

Business Rule," which prevents new and unestablished

business ventures from collecting lost profits as damages in

breach of contract or tort cases, guides this case as a matter of

law, and mandates partial summary judgment in Western's

favor. The Court now addresses Western's motion.’

‘Western has also filed a Motion to Strike the affidavit of Mr.

Blackwell. Motions to strike are generally disfavored and information

“will not be stricken unless it is evident that it has no bearing upon of the

subject matter oi the litigation." Securities and Exchange Commission v.

Jos. Schlitz Brewing Co., 452 F. Supp. 824, 833,(E.D. Wis. 1978)

(quoting Van Dyke Ford, Inc. v. Ford Motor Co., 399 F. Supp. 277 (E.D.

Wis. 1975). Both parties have submitted information that is irrelevant on

the legal issue before the Court: whether Arkansas law allows a new

business to recover lost profits. Nonetheless, the Court having considered

the affidavit of Mr. Blackwell, concludes for the reasons that follow that

there are no disputed issues of material fact precluding awarding partial

summary judgment to Western. Therefore, Western's Motion to Strike is

DENIED. -

App. 23

II. LEGAL STANDARD

Summary judgment is no longer disfavored under the

Federal Rules of Civil Procedure. See Celotex Corp. v.

Catrett, 477 U.S. 317, 327 (1986) ("Summary judgment

procedure is properly regarded as an integral part of the

Federal Rules as a whole which are designed to ‘secure the

just, speedy and inexpensive determination of every action.’").

Federal Rule of Civil Procedure 56 requires a District Court

to grant summary judgment "if the pleadings, depositions,

answers to interrogatories, and admissions on file, together

with the affidavits, if any, show that there is no genuine issue

as to any material fact and that the moving party is entitled to

judgment as a matter of law." Fed. R. Civ. P. 56(c). The

mere existence of some factual dispute does not defeat a

summary judgment motion; "the requirement is that there is a

genuine issue of material fact." Anderson v. Liberty Lobby,

Inc., 477 U.S. 242, 248 (1986). Fora dispute to be genuine,

the evidence must be such that a "reasonable jury could return

a verdict for the nonmoving party." Id. For the fact to be

material, it must relate to a disputed matter that "might affect

the outcome of the suit." Id.

The party moving for summary judgment bears the

initial burden of showing that there are no material facts in -

dispute and that judgment should be entered in its favor.

Hannon v. Turnage, 892 F.2d 653, 656 (7th Cir. 1990), cert.

denied, 498 U.S. 821 (1990). A defendant moving for

summary judgment may satisfy this initial burden by pointing

to a plaintiff's failure to introduce sufficient evidence to

support each essential element of the cause of action alleged.

Anderson, 477 U.S. at 256; Celotex, 477 U.S. at 323-24. A

App. 24

party opposing a properly supported summary judgment

motion "may not rest upon mere allegations or denials," but

rather must introduce affidavits or other evidence to "set forth

specific facts showing that there is a genuine issue for trial."

Fed. R.-Civ. P. 56(e). See also Celotex, 477 U.S. at 322-23;

Becker v. Tenenbaum-Hill Assoc., Inc., 914 F.2d 107, 110

(7th Cir. 1990). "If the adverse party does not so respond,

summary judgment, if appropriate, shall be entered against the

adverse party." Fed. R. Civ. P. 56(e).

In evaluating a motion for summary judgment, the

Court must draw all inferences in a light most favorable to the

non-moving party. Matsushita Elec. Indus. Co. v. Zenith

Radio Corp., 475 U.S. 574 (1986); Johnson v. Pelker, 891

F.2d 136, 138 (7th Cir. 1989). "However, we are not

required to draw every conceivable inference from the record

-- only those inferences that are reasonable." Bank Leumi Le-

Israel, B.M. v. Lee, 928 F.2d 232, 236 (7th Cir. 1991)

(citations omitted. )

Il. ANALYSIS

A. The New Business Rule as Valid Law

In general, when any business tries to recover lost

profits in a breach of contract action, it must prove that the

profits would have occurred with "reasonable certainty" but

for the actions of the party in breach. American Fidelity Fire

Ins. Co. v. Kennedy Bros. Constr., Inc., 282 Ark. 545, 670

S.W.2d 798 (1984). When the company seeking damages is

a new business, the burden of proof to establish "reasonable

certainty" rises considerably. Some states completely prevent

the recovery of any profits in a new business situation. This

App. 25

prevention of recovery is referred to as the "New Business

Rule," currently under dispute in the litigation before this

Court.

The Eighth Circuit in Hillsi terprises v. is]

Corp., 69 F.3d 1410 (8th Cir. 1995) (wine marketer sued

disposable wine glass manufacturer for lost profits after

manufacture: failed to ship specifically ordered number of

glasses that marketer was to use in "wine-in-a-glass" venture)

cites Ferrell Constr. Co. v. Russell Creek Coal Co., 645 P.2d

1005, 1009-10 (Okla. 1982) as an example that would satisfy

this newer, higher burden of proof of lost profits. The

Hillside court notes that the plaintiffs, in Ferrell were coal

mining for a finite amount of steef when the breach of contract

occurred. The amount of steel limited the profits that the

plaintiff should have achieved, making the profits easily

discernible and relatively certain. Hillside, 69 F.3d at 1414.

Had such a definite order not been present, the plaintiff would

not have satisfied its requisite burden of certainty.

Many states adhere to the above-described approach

when determining whether to award lost profits for a new

business. States in the Eighth Circuit, like Missouri (Handi

Caddy, Inc. v. American Home Products Corp., 557 F.2d 136

(8th Cir. 1977)) and Iowa (Harsha v. State Sav. Bank, 346

N.W.2d 791 (Iowa 1984)) recognize that the enforcement of

any type of "New Business Rule" lies in the uncertainty of

proving profits. With ample evidence of certainty, those

States will allow evidence of lost profits to factor into the

determination of damages awards. Minnesota takes the most

liberal approach to this concept. Minnesota law (La Societe

Immobiliere y. Minneapolis Community Dev. Agency, 827 F.

App. 26

Supp. 1431 (D.Minn. 1993) rev’d on other grounds, 44 F.3d

629 (8th Cir. 1994) and Leoni v. Bemis Co., 255 N.W.2d 824

(Minn. 1977)) emphasizes the lack of a per se rule in favor of

preventing new businesses from collecting anticipated profits.

The state willingly allows evidence of lost profits into court,

and, according to Olson v. Rugloski, 277 N.W.2d 385, 388

(Minn. 1979), requires the plaintiff to prove only reasonable

certainty, not absolute certainty, to recover lost profits. Other

states, such as Ohio and Michigan, have abandoned the per se

"New Business Rule" in favor of a slightly more liberal

approach that allows the party seeking damages an opportunity

to prove those damages. See Fera v. Village Plaza, Inc., 242

N.W.2d 372, 376 (Mich. 1976); AGF, Inc. v. Great Lake

Heat Treating Co., 555 N.E.2d 634, 638-39 (Ohio 1990).

At the minimum, even states that have now abandoned

a per se approach to the "New Business Rule" will require

plaintiffs to prove, with the certainty seen in Hillside, that the

profits in question would have occurred before they may

recover. The higher burden of proof is considered a rigorous

standard of certainty to meet. The Southern District of New

York, a state that allows recovery for lost profits in certain

cases, gives the most succinct reason for making recovery of

lost profits of a new business venture extremely difficult to

achieve. The New York court, stated:

The prospective profits of a new business or

enterprise are regarded as being too remote,

contingent, and speculative to meet the legal

standard of reasonable certainty in determining

the elements of recoverable damages in an

action for breach of contract or for a tort.

App. 27

International Minerals and Resourc Inc. v. , 761 F.

Supp. 1068, 1079 (S.D.N.Y. 1991) (quoting 36 N.Y.Jur.2d

Damages § 110, at 193-94 (1984)), vacated on other grounds,

--- F.3d ---, 1996 WL 506612 (2d Cir. Sept. 6, 1996).

In addition, this dispute arises out of the entertainment

industry which further reduces the certainty of MindGames'

profits, making it more difficult to justify an award of lost

profits. Even in states which do not adopt the strict

application of the "New Business Rule," such as New York,

the influence of the entertainment industry does not go

unnoticed. In Kenford Co. v. County of Erie, 493 N.E.2d

234, 236 (N.Y. 1986), the New York Court of Appeals, in

upholding the Superior Court's remittitur of a jury award for

lost profits, noted the difficulty in establishing reasonable

certainty for a new business. The court also found that the

nature of the dispute (claiming lost profits from what would

have been a sports stadium) increased uncertainty, stating,

"New York has long recognized the inherent uncertainties of

predicting profits in the entertainment field in general." Id.

The Second Circuit echoed the Kenford decision in Proteus

Books Ltd. v. Cherry Lane Music, 873 F.2d 502 (2d Cir.

1989). The court quoted Kenford’s assessment of the

entertainment industry's effect on the uncertainty of profits in

its case dealing with a book publishing dispute. Proteus, 873

F.2d at 510.

As noted earlier, some states still accept the "New

Business Rule" as a per se measure to completely prevent the

recovery of any profits. See Stuart Park Associates Limited

Partnership v. Ameritech Pension Trust, 51 F.3d 1319, 1328

(7th Cir. 1995) (Illinois law); Springwill Dispensers, Inc. v.

App. 28

Hall.China Co., 419 S.E.2d 112 (Ga. App. 1992) (Georgia

law); Murray v. Hadid, 385 S.E.2d 898, 905 (Va. 1989)

(Virginia law). Arkansas, the state whose law guides this

case, still views the "New Business Rule" as a per se rule

prohibiting the recovery of lost profits in a new business

venture.

Based on its limited amount of case law, the state of

Arkansas follows the "New Business Rule" strictly in

preventing any recovery of lost profits. In Marvell Light &

Ice Co. v. General Electric Co., 162 Ark. 467, 259 S.W. 741

(1924), the only Arkansas case addressing the "New Business

Rule," General Electric brought suit against Marvell Light to

recover over $700 for machinery sold to Marvell Light for

assistance in constructing an ice plant. Marvell Light

counterclaimed for profits lost during General Electric's

delayed delivery of machinery. In sustaining General

Electric's demurrer to the counterclaim, the Supreme Court of

Arkansas stated, "anticipated profits of the new business are

too remote, speculative, and uncertain to support a judgment

for their loss." Marvell Light, 259 SW. at 741.

MindGames claims that Marvell Light is no longer

good law because it is "a seventy-two-year-old procrustean

case" that has not been followed since its outcome, and it has

been eroded away by more recent Arkansas cases. Although

Marvell Light has not been cited, it has not been overruled,

and therefore, it remains good law. In addition, none of the

cases cited by MindGames for its legal proposition involve a

new business. According to MindGames, 555 omy ag v.

Leming, 45 S.W.2d 18 (Ark. 1932); als

Bonar, 683 S.W.2d 898 (Ark, 1985); Tremco, Inc. v. Valley

7 App. 29

Aluminum Products Corp., 831 S.W.2d 156 (Ark. App.

1992); and Union National Bank of Little R *k v. Mosbacher,

933 F.2d 1440 (8th Cir. 1991), cert. denied, 502 U.S. 1031

(1992), all supposedly erode the Arkansas Supreme Court's

decision in Marvell Light. However, the parties seeking

damages in these above-cited cases are established businesses,

and consequently, their influence in the case herein is

minimal. For example, in Union National Bank, the Eighth

Circuit acknowledged that courts can award lost profits to

businesses that prove those profits would have occurred with

"reasonable certainty." Union National Bank, 933 F.2d at

1444. However, Union National Bank involved a furniture

company that had been in existence for over forty years at the

time it filed suit. Certainly, the business in Unior National

Bank did not qualify as a "new business" subject to Marvell

Light’s rule.

Also, MindGames relies on | Dunn, Recovery of

Damages for Lost Profits § 4.1 (4th ed. 1992) to argue that

the "New Business Rule" is an “older rule" followed by a

“diminishing number of states." (MindGames’ Response at p.

8.) First, and foremost, a treatise, regardless of its persuasive

value, is not law. Second, MindGames neglects to point out

that Dunn expressly includes Arkansas as one of those

“diminishing number" of states that still follow the "New

Business Rule" and gives no indication that Arkansas will

overrule their current position.

Decisions from the Seventh Circuit and Eastern

District of Wisconsin detail how tederal courts interpret state

law and give further reasons for following Marvell Light.

The Eastern District of Wisconsin, adhering to the seminal

App. 30

decision of Erie R.R. v. Tompkins, 304 U.S. 64 (1938), states

that."[fjederal courts in diversity actions are bound to accept ~

the interpretations of state law by the state's highest court ....

The Court's responsibility is to apply the relevant state law as

it presently exists." Jaeger v. Raymark Industries, Inc., 610

F. Supp. 784, 787-88 (E.D. Wis. 1985); Midwest Helicopters

Airways v. Sikorsky Aircraft, 849 F. Supp. 666, 668 (E.D.

Wis.), aff'd, 42 F.3d 1391 (7th Cir. 1994). The Seventh

Circuit reinforces this approach regarding the interpretation of

state law by federal courts. See Kutsugeras v. Avco Corp.,

973 F.2d 1341 (7th Cir. 1992) ("Under principles of Erie v.

Tompkins [Citation omitted], a federal court must apply the

state law as declared by the highest state court or otherwise by

the intermediate appellate court of the state."). These

principles clearly apply in this case where the parties brought

suit solely pursuant to diversity jurisdiction. See Shaw v.

Republic Drill Corp., 810 F.2d 149,.150 (7th Cir. 1987)

("{W]e have already indicated our unwillingness to speculate

on any trends in state law. [Citation omitted.] This policy

applies special force to a plaintiff in a diversity case who has

chosen to litigate his state law claim in federal court."); Afram

Export Corp. v. Metallurgiki Halyps, S.A., 772 F.2d 1358,

1370 (7th Cir. 1985) ("A party who wants a court to adopt an

innovative rule of state law should litigate in state court.

Federal judges are disinclined to make bold departures in

areas of law that we have no responsibility for developing.").

MindGames suggests that we use the Third Circuit as

a guide for how federal courts change state law. In In re

Merritt Logan, Inc., 901 F.2d 349 (3d Cir. 1990), the Third

Circuit considered then-current New Jersey law which

App. 31

embraced a per se application of the "New Business Rule."

The Court, in recognizing the recent trend of New Jersey

Cases and cases nationwide, overruled the old "New Business

Rule" cases in favor of the modern approach to damages

: involving lost profits. Merritt Logan, 901 F.2d at 357.

However, two distinctions prevent the Court in the

case herein from adopting the Third Circuit's approach to

deciding the case. First, in Merritt Logan, New Jersey case

law preceding the Merritt Logan decision had indicated an

inkling to abandon the "New Business Rule." No recent

Arkansas case has shown that Arkansas appears willing to

discard the "New Business Rule." As previously discussed,

all cases cited by MindGames involved established business

gaining an opportunity to show damages. Second, the

approach of the circuit courts vary in this field. The Third

Circuit interpreted its role as “predict[ing] whether the New

Jersey Supreme Court would follow the rule against giving a

new business damages for lost profits if it were now presented

with that issue in the context of this case." Id. Clearly, the

Seventh Circuit does not use the same standard as the Third

Circuit when interpreting state law. For the Court to do so in

this case would result in a direct contradiction of controlling

earlier cited Seventh Circuit law. In sum, the Court has no

responsibility to expand or alter existing Arkansas state law.

Finally, in reference to the validity of the "New

Business Rule," the Court notes a Seventh Circuit case cited

by Western. In arguing against MindGames proposition that

this Court follow others across the country and abandon the

per se application of the "New Business Rule," Western

points out the Seventh Circuit's attitude towards such judicial

App. 32

activity: “Given that Florida law governs this case, the

authorities from other jurisdictions cited and argued by the

sag [citations omitted] are only indirectly relevant. Gust

K. Newberg Constr. Co. v. E.H. Crump & Co., 818 F.2d

1363, 1368 n.7 (7th Cir. 1987). In conclusion, the decision

in Marvell Light is the controlling law of Arkansas. For the

case herein, Arkansas law governs, and Arkansas law accepts

the "New Business Rule" per se.

B. Application of the "New Business Rule"

The Texas Court of Civil Appeals best describes what

most courts look for as they distinguish between new and

established businesses for purposes of applying the "New

Business Rule." In Atomic Fuel Extraction Corp. v_Slick,

386 S.W.2d 1-80, 189 (Tex.Ct.Civ.App. 1964), the court

stated:

An established business should be one that is in

actual operation long enough to give it

permanency and recognition. It should be one

that has earned a profit which can be

reasonably ascertained and approximated. . .

Proof of an operation of a business at a loss

fails to meet the test.

The courts have used the duration of the business’ existence

and its record of profits to determine whether a corporation

qualifies as a new business. See Delahanty v. First

Pennsylvania Bank N.A., 464 A.2d 1243, 1261 (Pa. Super.

Ct. 1983) (seven months of operation not enough of a record

of profitability to sustain an award of damages for anticipated

profits; the court hints that two years may have been enough);

App. 33

McBrayer v. Teckla, Inc., 496 F. 2d 1 22 (Sth Cir. 1974) ~

(plaintiff not entitled to lost profits because he was only in

operation for a little over nine months and had not achieved a

profit in that time); Vv

Music, 873 F.2d 502 (2d Cir. 1989) (company with two years

of existence, but poor sales, still qualifies as a new business).

It appears that Clever Endeavor and MindGames both

Satisfy the two elements of the new business test. The

licensing agreement that brought the parties in this suit

together consummated in March of 1990. MindGames had

been incorporated since March of 1988, and did not produce

a product until 1989. The company decided to market the

game (its sole product) in the spring of 1989, but it did not

reach the market until September, 1989. (See Blackwell Dep.

at pp. 24, 107, 168-69.) All told, Clever Endeavor was on the

market for approximately six months before the licensing

agreement began. Additionally, in those six months,

MindGames did not turn a profit. (See Western's Brief in

Support of its Motion for Partial Summary Judgment, Exh.

B and G.) Because Clever Endeavor did not have an

established record of profitability, and because it had such a

Short lifespan, it qualifies as a new business, subject to the

application of the "New Business Rule."

dl indGames’ ents Against Using the

“New Business Rule"

MindGames opposes the use of this rule because it

believes Clever Endeavor had an established track record;

because neither Western nor Games Gang was a new business:

and because MindGames' royalties were pure profits.

App. 34

MindGames' first argument has already been

dismissed; as to the other two, they shall likewise be rejected.

Whether Western or Games Gang qualifies as a new business

is irrelevant in this case. When a court looks to award lost

profits in any situation, it measures lost profits by the past

profits of the party seeking the damages -- not the party that

caused the damages. Every case cited by the Court supports

this proposition. Similarly, in determining whether to apply

the "New Business Rule," the court looks to the party seeking

the profits to see whether or not that party is a new business.

As the Supreme Court of Arkansas noted in Marvell Light,

"He who is prevented from embarking in a new business can

recover no profits because there are no provable data of past

business from which the fact that anticipated profits would

have been realized can be legally deduced." Marvell Light

259 S.W. at 741 (quoting Central Coal and Coke Co. v.

Hartman, 111 Fed. 96, 49 C.C.A. 244) (emphasis added).

As a side note, the "New Business Rule" applies to

new products sold by an existing business. See Stuart Park

Associates, Ltd. v. Ameritech Pension Trust, 846 F. Supp.

701 (N.D. Ill. 1994), aff'd, 51 F.3d 1319, 1328 (7th Cir.

1995) (Illinois law - "New Business Rule” state) (plaintiffs

success with other apartment buildings did not yield damages

for lost profits in a similar, but different real estate venture);

Pennsylvania State Shopping Plazas, Inc. v. Olive 120 S.E.2d

372 (Va. 1961) (plaintiff had operated 14 service stations

successfully, but opening a new one still constituted a new

business). Clever Endeavor remained on the market for only

six months prior to the licensing agreement, clearly making it

a new product. Therefore, even if the Court would accept

App. 35

MindGames' suggestion that the Court Should measure the

"New Business Rule" by Western -and Games Gang,

established businesses, the rule still applies in this case.

MindGames attempts to use a technicality to avoid the

application of the "New Business Rule" to this case. The

"New Business Rule" applies to parties seeking lost profits;

MindGames claims it seeks lost royalties, rather than profits,

and therefore, the "New Business Rule" does not apply to this

Case.

The Court sees this attempt by MindGames as a futile

effort to avoid Arkansas case law. In MindGames’ complaint,

the company states that " [t]he breaches of the agreement by

Western and Games Gang, Ltd. have caused substantial

damages, both present and future, to MindGames, including

loss of profits and interference with MindGames' business

relations." (MindGames Complaint at 48.) In addition, in a

February, 1996 letter from MindGames' counsel to Western's

counsel, MindGames classified the damages sought as "lost

future profits." (See Western's Reply Brief, Exh. D.) It

appears that MindGames chose to make the distinction

between profits and royalties only after realizing the strength

of Western's "New Business Rule" defense.

Also, MindGames uses Corbin's definition of profits

to attempt to prove the difference between profits. and

royalties. See 5 Corbin On Contracts § 1022, at 135-36

(1964) (profit is the full value of performance minus the cost

of performance; MindGames argues that no cost of

performance was taken away from the royalties, meaning it

could not have been Profits). In doing so, MindGames

App. 36

neglects Black's Law Dictionary's definition of royalties: a

"share of product or profit reserved by owner for permitting

another to use the property." Black's Law Dictionary 1330

(6th ed. 1990).

Moreover, MindGames neglects persuasive case law in

this area. Generally, the courts have treated lost royalties in

the same manner as lost profits in damages claims. See

Oral-X Corp. v. Farnam Companies, Inc., 931 F.2d 667, 670

(10th Cir. 1991) (reversing district court's refusal to award

damages for royalties as lost profits); In re Mid-America

Corp., 159 B.R. 48, 55 (M.D. Fla. 1993) (the speculative

nature of determining lost profits precluded franchisor's

recovery of damages for lost royalties).

In sum, the Court sees the difference between profits

and royalties as a de minimis one. The important issue is that

MindGames seeks the recovery of a form of compensation; for

these purposes, no difference exists between royalties and

profits. ;

D. Whether Granting Partial ary Judgment

to Western is Apnropriate.

Whether the court decides to grant summary judgment

on this matter depends on whether any genuine issue of

material fact related to the controlling, substantive law of the

case remains to be disputed at trial. Kendrick v. East Delavan

Baptist Church, 886 F. Supp. 1465 (E.D. Wis. 1994)

(Warren, J.). If the court determines that either the movant

established uncontroverted facts entitling it to summary

judgment or demonstrated that the non-moving party has failed

to make a sufficient showing on an essential element of the

App. 37

case, then a grant of summary judgment is proper. Donovan

v. City of Milwaukee, 845 F. Supp. 1312 (E.D. Wis. 1992)

(Reynolds, J.), aff'd, 17 F.3d 944 (7" Cir. 1994),

Because the Court accepts current Arkansas law as

controlling, no issue of material fact regarding lost anticipated

profits remains. In addition, the Court finds that MindGames

has failed to meet its obligation to make a sufficient showing

on any essential element relating to the attempt to seek lost

profits. The law of Marvell Light remains valid, and under

Seventh Circuit precedent, the Court must follow it.

Therefore, summary judgment as a matter of law is proper in

this case.

Furthermore, granting summary judgment on the issue

of the "New Business Rule" is not uncommon and lends

Support to the Court's decision. Although most "New

Business Rule" cases arise out of a court of appeals

overturning the trial court's award for lost anticipated profits,

occasionaily the matter is dismissed at sumMary judgment. In

Rich v. Eastman Kodak, 583 F.2d 435, 437 (8th Cir. 1978),

the Eighth Circuit upheld the Eastern District of Missouri's

grant of summary judgment in a case where lost profits could

not be claimed because the party seeking the recovery had no

history of Profitability by which to measure anticipated

profits. The Eighth Circuit also upheld the Southern District

of Iowa's grant of summary judgment in United States v.

Dura-Lux International C .» 329 F.2d 659 (8th Cir. 1976).

In Dura-Lux, the defendant counterclaimed against the United

States for lost profits. The court granted the United States'

motion for Summary judgment on the basis that the profits

were unduly speculative since the business was "an untried

App. 38 .

enterprise with no history of profitability." Dura-Lux, 529

F.2d at 663.

Finally, a summary judgment dismissal of a claim for

anticipated profits is not unheard of within this jurisdiction.

In Autotrol Corp. v. Continental Water Sys. Corp., 694 F.

Supp. 603 (E.D. Wis. 1988) (Gordon, J.), a case strikingly

similar to the case at hand, Judge Gordon granted summary

judgmeni in a case applying Texas law. Texas law strictly

embraces the "New Business Rule" (See Atomic Fuel

Extraction, supra), and Judge Gordon agreed with the

defendants' claim in Autotrol that the plaintiff could not

recover profits as a matter of law. Autotrol, 694 F. Supp. at

605. Because Arkansas strictly follows the "New Business

Rule," no reason exists why the Court cannot follow the

precedent of this District and grant summary judgment in

favor of Western.

IV. CONCLUSION

Based on the foregoing discussion, the Court holds that

the application »f Arkansas law to the undisputed facts of this

case establishes that MindGames cannot, as a matter of law,

recover its lost profits from anticipated sales of Clever

Endeavor.

THEREFORE, IT IS HEREBY ORDERED:

1 . Western Publishing Company, Inc.'s Motion for

Partial Summary Judgment is GRANTED.

ei Western Publishing Company, Inc.'s Motion to

Strike is DENIED. :

App. 39

3. The Court has scheduled a conference call for

9:30 a.m., Monday, October 28, 1996 to address further

Scheduling of this case. _ Counsel for Western Publishing

Company, Inc. is to initiate the call.

SO ORDERED this 11th day of October, 1996, at

Milwaukee, Wisconsin.

Robert W. Warren

United States District Judge

App. 40

In the

United States Court of Appeals

For the Seventh Circuit

August 22, 2000

Before

Hon. Thomas E. Fairchild, Circuit Judge

Hon. Richard A. Posner, Circuit Judge

Hon. Diane P. Wood, Circuit Judge

No. 98-1879

MINDGAMES, INC.

Plaintiff-Appellant,

Vv.

WESTERN PUBLISHING COMPANY, INC.,

Defendant-Appellee.

Appeal from the United States District Court

for the Eastern District of Wisconsin.

Nos. 94 C 552, 94 C 998 -- Lynn S. Adelman, Judge

App. 41

ORDER

On July 6, 2000, plaintiff-appellant filed a petition

for rehearing and petition for rehearing en banc and on

August 8, 2000 defendant-appellee filed an answer with

appendix. A majority of the judges on the original panel

have voted to deny the petition. None of the active judges

has requested a vote on the petition for rehearing en banc.

The petition is therefore DENIED.

Hon. Thomas E. Fairchild voted to grant the petition for

rehearing

App. 42

United States District Court

Eastern District of Wisconsin

JUDGMENT IN A CIVIL CASE

WESTERN PUBLISHING COMPANY, INC. —

Plaintiff,

VS. Case Number: 94-C-552

MINDGAMES, INC.,

Defendant.

MINDGAMES, INC.,

Plaintiff, = -

VS. Case Number: 94-C-998 |

WESTERN PUBLISHING COMPANY, INC.,

Defendant.

Decision by the Court. This action came to

trial or hearing before the Court. The issues |

have been tried or heard and a decision has |

been rendered.

App. 43

IT IS ORDERED AND ADJUDGED that all claims

of the plaintiff, MindGames, Inc., in Case No. 94-C-998

other than those dismissed pursuant to the summary

judgment decisions and orders entered herein on October

11, 1996 and February 25, 1998 are hereby dismissed

without prejudice and without costs.

March 20, 1998

SOFRON B. NEDILSKY

Clerk

App. 44

United States District Court

Eastern District of Wisconsin

WESTERN PUBLISHING COMPANY, INC.

Plaintiff,

VS. Case Number: 94-C-552

MINDGAMES, INC.,

Defendant.

MINDGAMES, INC.,

_-~Pilaintiff,

VS. Case Number: 94-C-998

WESTERN PUBLISHING COMPANY, INC.,

Defendant.

WESTERN PUBLISHING COMPANY, INC.’S

MEMORANDUM IN SUPPORT OF ITS MOTION

FOR PARTIAL SUMMARY JUDGMENT

I. INTRODUCTION

The driving force behind this dispute between

MindGames, Inc. ("MindGames") and Western Publishing

Bea

App. 45

Company, Inc. ("Western") is MindGames’ belief that

Western’s alleged breach of the Parties’ license agreement

prevented MindGames’ new adult board game called

“Clever Endeavor” from achieving the same success as two

of the most successful adult board games of all time,

Pictionary and Trivial Pursuit. Rather than attributing

Clever Endeavor's limited success to the erratic whims of

the consumer and the game's own shortcomings,

MindGames is determined to place the blame on Western --

the exclusive licensee of Clever Endeavor for almost its

entire shelf life. In so doing, MindGames seeks over $40

million dollars in damages for profits it allegedly lost due to

Western's breach of the license agreement. However,

MindGames cannot, as a matter of law, recover its alleged

lost profits because Arkansas stil] applies the "New

Business Rule," which prevents the recovery of any lost

profits for a new product, such as Clever Endeavor. The

inherent difficulties of predicting the success of a product in

the entertainment and leisure industry further dictate the

Strict application of the New Business Rule.

Moreover, MindGames' failure to show any history

of profitability before its license agreement with Western,

Provides a second reason that MindGames is legally

precluded from recovering any anticipated lost profits.

Consequently, Western respectfully requests that this Court

grant it partial summary judgment on the portion of

MindGames' claim which seeks damages for its alleged lost

profits.

App. 46

Il. WESTERN'S PROPOSED FINDINGS OF FACT

A. The Parties.

l. Western Publishing Company, Inc.

(“Western”) is a corporation organized and existing under

the laWs of the State of Wisconsin, with its principal place

of business located at 1220 Mound Avenue, Racine,

Wisconsin.

4 MindGames, Inc. (“MindGames”) is a

corporation organized and existing under the laws of the

State of Arkansas, with its principal place of business

located at 2720 West 28th Street; Pine Bluff, Arkansas.

B. Jurisdiction and Venue.

3. Western and MindGames are citizens of

different states and the matter in controversy involves a sum

in excess of $50,000, exclusive of interest and costs.

Accordingly, this Court has jurisdiction over this action

pursuant to 28 U.S.C. §1332(a).

4. Western has its principal place of business in

the Eastern District of Wisconsin, and the causes of action

asserted in this lawsuit arose in this District. Venue is

therefore proper in this District pursuant to 28 U.S.C.

§1391 (a).

od The Development of Clever Endeavor.

i In March 1988, Larry Blackwell

(“Blackwell”) formed MindGames for the sole purpose of

manufacturing, marketing and selling a new adult board

game he invented called Clever Endeavor. (See p. 24 of the

App. 47

Deposition of Larry Blackwell ("Blackwell Dep."). Copies

of the relevant pages of Mr. Blackwell's deposition

transcript are attached hereto as Group Exhibit A). Clever

Endeavor was MindGames’ first and only product.

(Blackwell Dep. p. 34).

6. At the time Blackwell formed MindGames,

he had no prior experience in the game industry or the adult

game market in particular. (Blackwell Dep. pp. 46, 84).

Nevertheless, Blackwell believed that Clever Endeavor

would appeal to the same market and achieve the same

success as the two most successful adult board gamesof- -

their time, Pictionary and Trivial Pursuit. (Blackwell Dep.

pp. 79-81). Blackwell formed this belief without having

any discussions with anyone in the game industry regarding

what features made Trivial Pursuit and Pictionary

successful games. (Blackwell Dep. p. 82).

FA Prior to its initial distribution of the game in

September 1989, MindGames conducted some minimal test

marketing of Clever Endeavor, such as playing the

prototype of Clever Endeavor with focus play groups out of

Blackwell's parents’ and friends’ homes. (Blackwell Dep.

pp. 160-165).

8. In the spring of 1989, Blackwell decided to

publish Clever Endeavor. (Blackwell Dep. p. 107). From

the spring of 1989 through the end of the year, MindGames

marketed the game itself by promoting it at certain events

and through radio advertising and cooperative advertising

with retailers. (Blackwell Dep. p. 172). MindGames,

however, did not use any type of television advertising to

App. 48

promote Clever Endeavor because Blackwell did not believe

that the cost for such advertising justified the expense.

(Blackwell Dep. pp. 174-175).

9. During 1989, MindGames sold

approximately 30,000 games, but failed to achieve a profit

for that year. Blackwell Dep. pp. 169; See, the 1989

Income Statement for MindGames, a copy of which is

attached hereto as Exhibit B).

D. The License Agreement.

10. In December 1989, Blackwell met with two

representatives from a game company called Games Gang,

~ Inc. (“Games Gang”), which was the current distributor of

Pictionary. (Blackwell Dep. pp. 192-193). These

discussions culminated on March 30, 1990 when

MindGames, as Licensor, entered into an exclusive license

agreement with Western and Games Gang, as Licensees, for

the manufacture, marketing, promotion, sale and

distribution of the Clever Endeavor game (the “License”).

(A copy of the License is attached hereto as Exhibit C).

11. The License is governed in all respects by the

laws of the State of Arkansas. (Exhibit C at { 20).

12. The License, among other things, required

Western and Games Gang to pay MindGames royalties

based on the number of games sold and to provide a

minimum amount of advertising support to Clever

Endeavor. (Exhibit C at 4 4, 6).

13. — The term of the original License extended

through January 31, 1993. (Exhibit C at 4 2). The License

App. 49

provided that, if the Licensees were not in breach, the

License would continue until January 31, 1994 in the event

that the Licensees paid MindGames at $1.5 million (whether

earned or unearned in royalties during the term of the

License) prior to January 31, 1993. (Exhibit C at q 2). For

any renewal term beginning on or after January 31, 1994,

the Licensees were required to pay MindGames $300,000,

less royalties earned between January 31, 1993 and January

31, 1994. (ExhibitC at ] 2).

14. On March 13, 1991, the parties amended the

License by allowing the Licensees to reduce the percentage

of gross sales to be utilized for advertising and promotion in

order to "keep the cost of the game down." A copy of the

March 13, 1991 letter agreement amending the License (the

"1991 Amendment") is attached hereto as Exhibit D.

15. With the written consent of MindGames,

Western assumed the duties and obligations of the other

licensee, Games Gang, under the License, pursuant to a

sublicense agreement dated February 3, 1992. Western

served as the exclusive licensee of Clever Endeavor through

January 31, 1994.

16. The net sales of Clever Endeavor during the

original term of the License were as follows:

App. 50

Clever Endeavor

Fiscal Year Units Sold

FY 1990 165,000

FY 1991 58,113

FY 1992 26,394

FY 1993 7,438

II]. NATURE OF THE DISPUTE

MindGames alleges that Clever Endeavor was not

successful because Western breached the License by, inter

alia, 1) failing to pay MindGames the minimum royalties

necessary to renew the License, 2) failing to properly

manufacture and distribute Clever Endeavor, 3) failing to

“diligently and actively promote and make every reasonable

effort to market and sell Clever Endeavor” and 4) failing to

provide the amount of advertising support required under

the License. (See, MindGames' Complaint, a copy of

which is attached hereto as Exhibit E). As a result of the

alleged breach of the License by Western, MindGames

seeks damages against Western in excess of $40 million

dollars. (See the April 25, 1995 letter from MindGames'

attorney, a copy of which is attached hereto as Exhibit F).

MindGames bases almost the entire amount of its damage

claim on the profits it allegedly lost due to Western's

alleged breach of the License. '

'MindGames also seeks $1.2 million for royalties allegedly owed to

renew the License for the period of February 1, 1993 through January 31,

(continued...)

APieh dom Wt bs at are

App. 51

IV. ARGUMENT

A. The Standard For Granting Summary

Judgment.

Rule 56(c) of the Federal Rules of Civil Procedure

deems summary judgment appropriate "if the pleadings,

depositions, answers to interrogatories, and admissions on

file, together with the affidavits, if any, show that there is

no genuine issue as to any material fact and that the moving

party is entitled to judgment as a matter of law." Kendrick

v. East Delavan Baptist Church, 886 F. Supp. 1465, 1471

(E.D. Wisc. 1995) (Warren, J .) citing Celotex Corp. v.

Catrett, 477 U.S. 317, 322, 106.S. Ct. 2505, 2510 (1986):

see, Donovan v. City of Milwaukee, 845 F. Supp. 1312,

1313 (E.D. Wisc. 1992) (Reynolds, J.). The presence of a

genuine issue of material fact is to be determined by the

substantive law controlling that case or issue. Kendrick, 886

F. Supp. at 1471. Although some facts may be in dispute,

entry of summary judgment is in order if the movant either

establishes uncontroverted facts entitling it to summary

judgment or demonstrates that the non-moving party has

failed to make a sufficient showing on an essential element

of its case with respect to which it will bear the burden of

proof at trial. Donovan, 845 F. Supp. at 1314.

The application of Arkansas law to the undisputed

facts of this case establishes that MindGames cannot, as a

matter of law, recover its lost profits. Therefore, Western

'(...continued)

1994 and for the period of February 1, 1994 through January 31, 1995.

App. 52

respectfully requests that this Court grant it partial summary

judgment, and find that MindGames is precluded from

seeking damages for its alleged lost profits.

B. The "New Business Rule" Prevents

MindGames From Recovering Any Lost

Profits.

Western emphatically denies that it breached any of

the terms of the License. However, even assuming

arguendo that MindGames could demonstrate that Western

or Games Gang breached any provision of the License,

MindGames is legally precluded from recovering its lost

profits.

l. Arkansas follows the “New Business Rule.”

As a new business, MindGames is barred under

Arkansas law from introducing any evidence regarding its

lost profits. Arkansas follows the “New Business Rule,”

which holds that a new or unestablished business is

precluded, as a matter of law, from recovering lost profits.

Marvell Light & Ice Co. v. General Electric Co., 162 Ark.

467, 259 S.W. 741 (1924). The Arkansas Supreme Court

reasoned that '[t]he anticipated profits of a new business are

too remote, speculative and uncertain to support a judgment

for their loss." 259 S.W. at 741. Accord Central Coal &

Coke Co. v. Hartman. 1 1 1 F. 96, 98 (8th Cir. 1901).

Although the Supreme Court of Arkansas has not

addressed this issue since it decided Marvell Light in 1924,

there is no reason to believe that the Arkansas Supreme

Court's has changed its position on the recovery of lost

profits by a new business. Despite exhaustive research,

eS eT ET

‘wae rE

aan se

PLN Nl AM PY TATE. ia LAAN aes Cee!

App. 53

Western has failed to discover a single Arkansas case

considering evidence of lost products for a new business

after the Marvell Light decision This dearth of authority

Supports the proposition that Arkansas courts continue to

adhere firmly to Marvell Light.

Nor is there any reason to believe that the Arkansas

courts would deviate from the Marvel Light decision now.

The rationale supporting the Arkansas Supreme Court's

ruling continues to remain as persuasive today as it did in

1924. As the Fourth Circuit explained in Coastland Co

v. Third National Mortgage, Co., 611 F.2d 969 (4th Cir.

1979), the New Business Rule provides a "safeguard"

against an unsubstantiated award of damages for lost profits:

"If an established business, with an

established earning capacity, is interrupted

and there is no other practical way to

estimate the damages thereby caused,

evidence of the prior and subsequent record

of the business is admissible to permit an

intelligent and probable estimate of

damages... But where a new business or

enterprise is involved, the rule is not

applicable for the reason that such a business

is a speculative venture, the successful

operating of which depends upon future bar-

gains, the status of the market, and too many

other contingencies to furnish a Safeguard in

fixing the measure of damages." __

App. 54

(Emphasis added). Coastland Corp., 611 F.2d at 977. In

fact, the New Business Rule actually serves to encourage

new businesses. Fear of exposure to a damages claim

arising from an inventor's own expectation of his product's

potential for success would chill companies like Western

from seeking to promote new products.

It is therefore not surprising that a number of courts have

recently affirmed the New Business Rule, and refused to

consider evidence of lost profits for a new business. See,

e.g. Stuart Park Associates Limited Partnership v.

Ameritech Pension Trust, 51 F.3d 1319, 1328 (7" Cir.

1995) (Illinois law); Hillside Enterprises v. Carlisle Corp.,

69 F.3d 1410, 1413-1415 (8" Cir. 1995) (Oklahoma law);

Springwill Dispensers, Inc. v. Hall China Company, 204

Ga. App. 245, 419 S.E.2d 112 (1992) (Georgia law);

Center Ridge Ganley, Inc. v. Stinn, 71 Ohio App. 3d

514,594 N.E.2d 1064, 1070 (1991) (Ohio law);

International Minerals and Resources, Inc. v. Pappas, 761

F. Supp. 1069, 1079 (S.D.N.Y. 1991) (New York law);

Murray, etc., et al. v. Hadid, et al., 238 Va. 722, 385

S.E.2d 898, 905 (1989) (Virginia Law); In re Phoenix

Restoration Specialists, Inc., 14 B.R. 115, 123-24 (Bkrptcy.

Mass. 1981) (Massachusetts law).

2. Clever Endeavor was a new venture or a

new business.

Although MindGames incorporated in March 1988,

MindGames was clearly a new business in March of 1990

when it executed the License and joined forces with

Western and Games Gang. Consequently, MindGames, as

TR tee RS I oleh Wealth et C00 seta alld &

Riba, (NA a (is

App. 55

a “new business," is subject to the repercussions of the New

Business Rule.

Blackwell asserts that he envisioned Clever

Endeavor when he incorporated MindGames in March

1988; however, MindGames did not decide to even market

Clever Endeavor until the spring of 1989, and it did not

manufacture and distribute the first wave of Clever

Endeavor games until September 1989. (See Blackwell Dep.

pp. 24, 107, 168-169). Four months after MindGames

began to distribute Clever Endeavor, Blackwell met with

representatives of Games Gang to discuss a joint venture.

(See, Blackwell Dep. pp. 192-193). These discussions

culminated in the execution of the License in March 1990.

In total, MindGames marketed and sold Clever Endeavor

itself for less than a year before it joined forces with

Western and Games Gang, and it failed to achieve any

profit during that period of time. (See Exhibit B; see also

MindGames' 1988 income statement, a copy of which is

attached hereto as Exhibit G).

Under these circumstances, MindGames is clearly a

“new” business as a matter of law. See, e.g. McBrayer v.

Teckla, Inc., 496 F.2d 122 (Sth Cir. 1974) (plaintiff not

entitled to lost profits in his breach of contract claim

because he was only in operation for 9 and a half months

prior to the contract and failed to achieve a profit during

that time); Delhanty, et al. v. First Pennsylvania Bank,

N.A., 318 Pa. Super. 90, 464 A.2d 1243 (1983) (court

held that plaintiff company’s anticipated profits were too

speculative to sustain an award of damages because plaintiff

App. 56

had only been in operation for seven months and had no

record of profitability).

MindGames may argue that it was an “established”

business at the time it executed the License, and, therefore,

it is not subject to the New Business Rule. However, such

an assertion would be in vain.

MindGames had barely introduced Clever Endeavor

to the public before it executed the License and permitted

Western and Games Gang to exclusively manufacture,

market, sell and distribute Clever Endeavor. Moreover,

MindGames operated only at a loss prior to joining forces

with Western and Games Gang. .(See, Exhibits B and G).

These traits are not characteristic of an "established"

business.

"An established business should be one that

is in actual operation long enough to give it

permanency and recognition. It should be

one that has earned a profit which can

reasonably be ascertained and approximated

... Proof of an operation of a business at a

loss fails to meet this test."

McBrayer, 496 F.2d at 128, quoting Atomic Fuel

Extraction Corporation v. Slick, 386 S.W.2d 180, 189

(Tex. Ct. Civ. App. 1964).

Additionally, Blackwell's own admissions contradict

any claim that MindGames, whose sole product was Clever

Endeavor, was not a “new” business. In his September 12,

1990 letter to Games Gang, Blackwell relayed his concerns

about the proposed television advertising campaign for

eS ee See) ee ee

A A A, tie Nl elt

App. 57

Clever Endeavor. Significantly, one of the reasons he

rejected the proposed commercial had to do with his

classification of Clever Endeavor as a new product:

"Furthermore, new products don't benefit

from short duration commercials in the same

way as older, more established products do.

New products need longer duration

commercials in order to gain the same

consumer response."

(Emphasis added) (A copy of Blackwell's September 12,

1990 letter to Games Gang is attached hereto as Exhibit H).

Clearly, Blackwell himself still considered Clever Endeavor

to be a new product six months after the parties executed

the License. Consequently, MindGames will not be able to

avoid the New Business Rule's preclusive effect on its

attempt to recover its alleged lost profits.

pA The success of a new product in the

entertainment industry is especially difficult

lo predict.

Even if the Court were to question whether the

Arkansas Supreme Court would retreat from its across the

board application of the New Business Rule, there can be no

doubt that such a retreat would not be warranted here. It is

particularly appropriate to apply this rule in the

entertainment/consumer product industry where the chances

of success are next to impossible to predict because an

entertainment product, such as an adult board game, is

subject to the most subjective and unpredictable critic - the

public. See, Proteus Books Ltd. v. Cherry Lane Music Co,

App. 58

873 F.2d 502, 510 (2nd Cir. 1989) (affirming district

court's decision to vacate jury's damages award because,

inter alia, inherent uncertainties of predicting profits in the

entertainment industry made prospective sales of book

publisher difficult, if not impossible, to calculate); Kenford

Co. v. County of Erie, 67 N.Y.2d 257, 493 N.E.2d 234,

236 (1986) (court found plaintiff's evidence of prospective

profits of new stadium insufficient to support any recovery

for lost profits).

Among numerous other factors, the success of a

product in the entertainment industry is contingent on many

subjective factors including:

e the play value or enjoyment one obtains from

the product;

° the economy at the time the product is

introduced to the market;

° the number of similar products in the market;

° the cost of the product itself.

Mr. Blackwell himself has conceded that the game

industry is especially susceptible to the unique tastes of the

average Consumer and unanticipated oscillations in the

marketplace. In his October 18, 1990 letter to Greta Perry

of the Gazette Newspapers in New York, Blackwell

attached Ms. Perry's recent article on the game industry and

praised Ms. Perry's "keen analysis" of what makes a game

successful. (A copy of Blackwell's October 18, 1990 letter

and the attached article by Ms. Perry is attached hereto as

Exhibit I). In Ms. Perry's article, one industry

App. 59

commentator noted: “For every 1000 games that get

invented, five make it to the shelf and maybe one of two get

a second year.” (Emphasis added) (See, Exhibit I). Later,

in his application to Harvard Business School in 1994,

Blackwell himself acknowledged the difficulty of marketing

a successful game in the entertainment industry when he

admitted that:

arctan. yt A One eR Act ik ae at said

ti trate ah

“[building a successful game company and

licensing their first product] is a popular and

powerful dream, but unfortunately, too few

actually succeed. When one recalls the more

publicized failures of product introductions

by established corporations, I [Blackwell]

believe [MindGames’] accomplishment

becomes more substantial. The experience

proved my [Blackwell's] business and

leadership skills in a hostile and unforgiving

market.” (See, p. 7 of Mr. Blackwell's

application to Harvard Business School, a

copy of which is attached hereto as Exhibit

J.)

Despite these long odds, Blackwell thought that

Clever Endeavor would be the “next Trivial Pursuit or

Pictionary, (See, Exhibit F), and he was apparently

disappointed that Clever Endeavor fell short of his lofty

expectations.*> However, Clever Endeavor's limited success

2Mr. Blackwell's credibility on the issue of Clever Endeavor’s

(continued...)

App. 60

can be attributed to many factors independent of the alleged

manufacturing or advertising problems, including the

following potential causes:

l. Clever Endeavor was one of the more

expensive adult games in the market

(Blackwell Dep. p. 98);

2. There were other similar adult board

games on the market, including

Anybody's Guess, which were similar

to Clever Endeavor (Blackwell Dep.

pp. 423-433);

3. Despite Western's advice, Blackwell

rejected television advertising in favor

of radio advertising (Blackwell Dep.

: *(...continued)

purported lack of success is questionable at best. Contrary to the

allegations in MindGames' complaint, Mr. Blackwell repeatedly touted the

“success” of Clever Endeavor. For example, in his applications to

Harvard and Stanford business schools, Blackwell claims that Clever

Endeavor was the “most successful, independently published game in the

[adult game] industry for the four years following its introduction” and the

“most successful game introduced by an independent game publisher in

the past five years.” (See, Exhibit J at p. 7; see also Mr. Blackwell's

application to Stanford Business School, a copy of which is attached

hereto as Exhibit K, and Mr. Blackwell's June 6, 1994 letter to the

Harvard Business School, a copy of which is attached hereto as Exhibit

L.) Moreover, in his September 7, 1990 letter to Games Gang, Blackwell

states: “Thanks for your terrific support. You're the reason for Clever

Endeavor's success. (Emphasis added) (A copy of the September 7, 1990

letter is attached hereto as Exhibit M.)

~en inal

App. 61

pp. 361, 369-370, 378, 386-392; see

also Blackwell's September 12, 1990

letter to Dave Gillies at Games Gang

regarding the effectiveness of radio

advertising, a copy of which was

previously attached hereto as Exhibit

H);

4. Clever Endeavor's first full year in

the marketplace, 1990, was a "rotten"

year for the industry as a whole (See,

Blackwell's January 9, 1991 letter to

Mary Mellor at Games Gang, a copy

of which is attached hereto as Exhibit

N); and

1 The play value of the game itself,

which may not have appealed to

consumers to the degree Mr.

Blackwell hoped.

The aforementioned facts are just a few of the many

reasons that Clever Endeavor did not become the next

Trivial Pursuit or Pictionary. It is the nature of the

entertainment industry itself, as well as common sense,

which necessarily dictate that one cannot point to a single

factor which caused Clever Endeavor to fail to achieve the

success MindGames now claims it expected.

The Eight Circuit Court's opinion in Hillside

Enterprises illustrates the rationale and application of the

New Business Rule in the entertainment/consumer product

industry. In Hillside Enterprises, a wine marketer

App. 62

("Hillside") sued a disposable wine manufacturer

("Carlisle") for breach of contract after the manufacturer

failed to properly manufacture and ship the required number

ot Hillside’s new product -- disposable plastic wine glasses

with fliptop lids. Hillside alleged that it could not fill its

first, and only, large order for 30,000 glasses, and that its

“wine-in-a-glass” venture lost substantial profits and ceased

operations as a result of Carlisle's failure to adequately

manufacture the new product.

At trial, Hillside attempted to introduce evidence of

its future sales from wine glasses which had not yet been

ordered. The district court, however, refused to admit this

evidence because it was too speculative, and Hillside

appealed. On appeal, the Eight Circuit Court affirmed the

district court's ruling, and expressly noted that lost profits

are highly speculative and are generally not allowed as

damages where a new business or product are at issue.

Hillside Enterprises, 69 F.3d at 1414. Moreover, the court

found that Hillside's product could have failed for reasons

independent of the problems with the glasses, such as the

cost of the product or consumers’ failure to find the

convenience of packaged wine more important than the

price and quality of the wine. Id. For these reasons, the

appellate court upheld the district court's decision to only

allow evidence of lost profits from Hillside's one confirmed

order for 30,000 glasses, which Hillside was unable to

fulfill because of Carlisle's breach. Id.

Unlike the plaintiff in Hillside Enterprises,

MindGames does not even allege that it lost profits as a

result of Western's failure to fulfill a specific sales order or

App. 63

that Western otherwise failed to pay MindGames its

royalties for Clever Endeavor games previously sold by

Western. Rather, MindGames only seeks profits from the

uncertain or future sales of Clever Endeavor which it

allegedly lost due to Western's breach of the License.

Without being able to determine the "cause," MindGames

cannot possibly be able to demonstrate the “effect” (i.e.

lost profits) with any reasonable certainty. Consequently,

this Court should strictly apply the New Business Rule, as

the Supreme Court of Arkansas did in Marvell Light & Ice

Co., and prohibit MindGames' recovery of all its alleged

lost profits as a matter of law.’

*AS a result of the unpredictable nature of the entertainment industry,

it 1S NOt surprising that other parties similarly situated to MindGames have

also been unable to recover the alleged lost profits of their new

businesses. See, ¢.g., Proteus Books Lid. v, Cherry Lane Music Co.,

supra; National Controls v. National Semiconductor, 833 F. 2d 491 (3rd

Cir. 1987) (buyer of microprocessor units failed to sustain burden of

proving under Pennsylvania law that seller's breaches were proximate

Cause of buyer's alleged loss of profits on sale of telephones to third

party, and, therefore, buyer not entitled to damages for lost profits):

Handi Caddy, Inc. v. American Home Products Corp... 557 F.2d 136 (8th

Cir. 1977) (8th Circuit Court reduced jury's damages award for lost

profits because evidence in action to recover for breach of contract to

advertise new product on pizza packages failed to support recovery of lost

profits awarded by jury.); Murray, etc. et. al v. Hadid, et. al., supra

(affirming trial court's decision to set aside jury's award of lost profits

because evidence of new enterprise's lost profits depended upon too many

contingencies to safeguard an estimate of damages); Kenford Co., Inc. v.

App. 64

4. MindGames has no history of past profits.

Even if the Court were to reject a strict application

of the New Business Rule, this Court should still grant

Western's motion for partial summary judgment because

MindGames has no history of past profits.

In addition to the inherent difficulties of predicting

the success of a new entertainment product, MindGames

faces the additional burden of demonstrating its alleged lost

profits without any prior history of profitability. It is

undisputed that MindGames will not be able to introduce

evidence of its profits prior to the alleged breach of the

License committed by Western because MindGames failed

to achieve any profit in 1988 or 1989. (See, Exhibits B and

G). Without any evidence of past profits, anticipated profits

often cannot be recovered regardless of whether the

damaged party was a new business. See, Rich v. Eastman

Kodak Company, 583 F.2d 435, 437 (8th Cir. 1978) -

(plaintiff company unable to recover its anticipated profits

because it was not making a profit before problems

developed with the product); Empire Shoe Company v.

Nico Industries, Inc., 197 Ga. App. 411, 414, 398 S.E.2d

440, 443 (1990) (granting defendant summary judgment on

the issue of lost profits because plaintiff could not produce

any evidence regarding past net profits); see also Keener v.

Sizzler Family Steak Houses, 597 F.2d 453, 459 (Sth Cir.

1979). Consequently, without such evidence of past profits,

MindGames will lack a reliable basis to demonstrate its

alleged lost profits with any reasonable certainty.

ae ARS li De 2 ad O\

App. 65

V. CONCLUSION

For all the aforementioned reasons, Western

respectfully requests that this Court grant its motion for

partial summary judgment and find that MindGames cannot

recover its alleged lost profits as a matter of law.

Dated: May 17, 1996

Richard A. Saldinger

One Of The Attorneys For

Western Publishing Company, Inc.

Of Counsel:

Wendi Sloane Weitman

Richard A. Saldinger

BARACK, FERRAZZANO, KIRSCHBAUM

& PERLMAN

333 West Wacker Drive

Suite 2700

Chicago, Illinois 60606

(312) 984-3100

Andrew 0. Riteris

MICHAEL, BEST & FRIEDRICH

100 East Wisconsin Avenue

Milwaukee, Wisconsin 53202

(414) 271-6560

App. 66

United States District Court

Eastern District of Wisconsin

WESTERN PUBLISHING COMPANY, INC.

Plaintiff,

VS. Case Number: 94-C-552

MINDGAMES, INC.,

Defendant.

MINDGAMES, INC.,

Plaintiff,

VS. Case Number: 94-C-998

WESTERN PUBLISHING COMPANY, INC.,

Defendant.

WESTERN PUBLISHING COMPANY, INC.’S

REPLY BRIEF IN SUPPORT OF ITS

MOTION FOR PARTIAL SUMMARY JUDGMENT

Dated: August 8, 1996

App. 67

Wendi Sloane Weitman

One of the Attorneys for

Western Publishing Company, Inc.

Wendi Sloane Weitman

Richard A. Saldinger

BARACK, FERRAZZANO, KIRSCHBAUM

& PERLMAN

333 West Wacker Drive

Suite 2700

Chicago, Illinois 60606

(312) 984-3100

Joshua L. Gimbel

MICHAEL, BEST & FRIEDRICH

100 East Wisconsin Avenue

Milwaukee, Wisconsin 53202

(414) 271-6560

INTRODUCTION

The response of MindGames, Inc. ("MindGames")

to the motion for partial summary judgment filed by

Western Publishing Company, Inc. ("Western")', is legally

‘Subsequent to the filing of this Motion for Partial Summary Judgment

(continued...)

App. 68

and factually deficient MindGames fails to invoke a single

case decided under Arkansas law which even criticizes --

much less rejects or overrules -- Marvell Light & Ice Co. v.

General Electric Co., 259 S.W. 741 (Ark. 1924). Unable

to argue that Arkansas iaw no longer employs the New

Business Rule, MindGames is left to contend that this Court

should modify Arkansas law by refusing to follow the

Marvell Light decision. Instead, MindGames asks this

Court to follow the trend in certain other jurisdictions to

allow a new business to introduce evidence of its alleged

lost profits. This argument contravenes the Seventh Circuit

requirement that federal courts in diversity cases follow

State law as it currently exists, rather than modifying state

law, or predicting a change.

Implicitly recognizing the weakness of its argument,

MindGames claims that even if the Court finds that the New

Business Rule is viable, the Rule does not apply here

because the licensors are not a new business. However,

MindGames -- the party seeking lost profits -- is a new

business, a fact that MindGames only halfheartedly

challenges. Equally untenable is MindGames’ contention

that the New Business Rule does not apply because

MindGames seeks lost "royalties," not lost "profits." The

'(...continued)

Western's corporate name has changed from Western Publishing

Company, Inc. to Golden Books Publishing Company, Inc. However, to

avoid unnecessary confusion, Plaintiff will continue to refer to itself as

Western for purposes of this motion.

App. 69

case law unequivocally establishes that lost royalties are a

form of lost profits.

MindGames' response is equally deficient in its

failure to meet its burden to come forward with affirmative

evidence to rebut the facts Western offers in support of its

motion. Even if this Court were to consider the conclusory

and self-serving affidavit submitted by G. Lawrence

Blackwell III (MindGames' principal), there are no disputed

issues of material fact. The evidence Western submitted

remains unrebutted. Controlling Arkansas law squarely

supports Western's motion. Therefore, this Court should

grant Western's motion for partial summary judgment and

bar MindGames from seeking to recover any lost profits.

ARGUMENT

A. MindGames Has Failed To Meet Its Burden To

Oppose Western's Motion.

At the outset, it is important to note one of the

overriding defects in MindGames' response - its failure to

meet its burden to come forward with affirmative evidence

to counter Western's motion. This Court has repeatedly

explained the burden of proof imposed on a party opposing

summary judgment:

The moving party has the initial burden of

demonstrating that it is entitled to summary

judgment as a matter of law. [Citations

omitted). Once this burden is met, the non-

moving party must "go beyond the

pleadings" and designate specific facts to

support or defend each element of the cause

App. 70

of action, showing that there is a genuine

issue for trial. [Citations omitted]. Neither

party may rest on mere allegations or denials

in the pleadings, /citations omitted, and both

parties must produce proper documentary

evidence to support their contention.

[Citations omitted].

Lisbon Square v. United States, 856 F. Supp. 482, 488

(E.D. Wis. 1994); accord Criticare Systems, Inc. v. Nellcor

Inc., 856 F. Supp. 495, 503 (E.D. Wis. 1994); Flavel v.

Svedala Industries, Inc., 868 F. Supp. 1422, 1456 (E.D.

Wis. 1994).

Despite these admonitions, MindGames fails to

submit any documentary evidence to support its contentions.

Instead, MindGames relies solely on the conclusory

statements in the Affidavit of G. Lawrence Blackwell III

(the "Blackwell Affidavit").? This is clearly insufficient.

"Self-serving affidavits without factual support will not

defeat a motion for summary judgment [citation omitted].

[A] plaintiff's speculation is not a sufficient defense to a

summary judgment motion." Slowiak v. Land O'Lakes,

Inc., 987 F.2d 1293 (7th Cir. 1993) (affirming summary

judgment dismissing the plaintiff's antitrust claim because

the record showed that the plaintiff failed to show injury

required for standing.)

*Simultaneously herewith, Western has filed a motion to strike the

Blackwell Affidavit

App. 71

B. MindGames Cannot Refute That Marvell Light Is

The Controlling Precedent Under Arkansas Law.

The Arkansas supreme court decision in Marvell

Light & Ice Co. v. General Electric Co., 259 §.W. 74]

(Ark. 1924), supplies the legal basis for Western's motion

for partial summary judgment to preclude MindGames from

introducing evidence of lost profits. As Western explained

in its opening brief, Marvell Light established Arkansas as a

jurisdiction that followed the New Business Rule.

MindGames’ response tacitly concedes that Marvell

Light remains the controlling authority under Arkansas law.

MindGames fails to cite a single decision under Arkansas

law that criticizes or overrules the Marvell Light opinion.

Instead, MindGames argues that this Court should decline to

follow Marvell Light because, at age 72, the decision is

"procrustean," "outdated" and no longer followed in a

majority of jurisdictions, making it unlikely that an

Arkansas court would apply the New Business Rule today.

(MindGames' Br. at 13.) This argument is not only

unfounded, it is contrary to the well established rules of

construction that courts are required to follow in diversity

cases such as this.*

*Not only does MindGames implicitly disparage all older decisions, it

Suggests that, contrary to stare decisis, courts revisit rules based on older

case law.

App. 72

i No Arkansas decision represents a

departure from Marvell Light.

It is curious that Dunn is one of the primary

authorities upon which MindGames relies for the

proposition that it is unlikely that an Arkansas court today

would follow Marvell Light (MindGames' Br. at 8, 10.)

Dunn expressly includes Arkansas as one of the

"diminishing number of states that still follow the new-

business rule." 1 Dunn, Recovery of Damages for Lost

Profits (4th Ed.) Section 4.1 (1992) at 277-78. Dunn makes

no suggestion that Arkansas will deviate from Marvell Light

and reject the New Business Rule. /d.

Nevertheless, MindGames contends that because

more recent Arkansas decisions suggest a more liberal

standard for proof of damages, these cases portend a

rejection of Marvell Light. (MindGames' Br. at 12.) None

of the cases MindGames cites support this proposition. For

example, MindGames concedes that 555 Incorporated v.

Leming, 45 S.W.2d 18 (Ark. 1932), did not involve a new

business. (MindGames' Br. at 12.)* That case stands only

for the black letter proposition that lost profits must be

proved with reasonable certainty.

Similarly, each of the other Arkansas cases upon

which MindGames relies involved an established business

rather than a new business. In Jim Halsey Co., Inc. v.

“Once again, it is curious that MindGames characters the 1924 Marvell

Light decision as “procrustean" and outdated, but relies upon 555

Incorporated, decided only eight years later.

App. 73

Bonar, 683 S.W.2d 898 (Ark. 1985), the court confronted

the issue of whether the plaintiff submitted adequate proof

of the amount of lost profits, not whether lost profits were

legally available. The plaintiff was established in his field,

not in a new business. Therefore, the case cannot be read

as a departure from Marvell Light. Similarly, both Tremco,

Inv. v. Valley Aluminum Products Corp., 831 S.W.2d 156 -

(Ark. App. 1992), and Union National Bank of Little Rock

v. Mosbacher, 933 F.2d 1440 (8th Cir. 1991), considered

whether an established business -- not a new business -- was

entitled to recover lost profits.

MindGames also suggests that First Service Corp. v.

Schumacher, 702 S.W.2d 412 (Ark. 1985), represents a

departure from, the New Business Rule. This is a

mischaracterization of the decision. The issue posed in

Schumacher was whether plaintiff submitted sufficient

evidence so that lost profits could be proved with reasonable

certainty. The plaintiff was an established developer of

residential subdivisions, not a new business. The contract

between the parties specified that it was "to cover all

remaining lots" in the subdivision. /d. at 414. At the time

of the alleged breach, the plaintiff had already sold some of

the homes in this development, and there were 134

remaining lots to be sold. Therefore, whether the New

Business Rule precluded evidence of lost profits was not at

issue. In holding that the plaintiff submitted adequate

evidence of lost profits, the court found that the sale of

other homes in the development provided a basis on which

to calculate the potential profits on the sales of the _

remaining 134 lots. These facts are very different from the

App. 74

situation presented here. Clever Endeavor is the first and

only game MindGames offered. (Blackwell Dep. 34.)°

Blackwell testified that in his opinion MindGames was

“unique” and differentiated from all games on the market

(Blackwell Dep. 93, 104.)

2. Under the controlling rules of

construction, this Court is required to

follow Arkansas law in its current

State rather than to predict how

Arkansas court might decide the issue

in the future.

MindGames argues that, even if Marvell Light is still

good law, this Court should nonetheless decline to follow it

and instead follow the “majority” rule of allowing a new

business to introduce evidence of lost profits. (MindGames'

Br. at 10-11.) As both the Seventh Circuit and the

Wisconsin District Court have recognized, Erie R.R. v.

Thompkins, 304 U.S. 64, 58 S. Ct. 817 (1938), prohibits a

federal court from modifying state law:

Under principles of Erie v. Thompk!ns

[citation omitted], a federal court must apply

the state law as declared by the highest state

court or otherwise by the intermediate

appellate court of the state.

*Relevant excerpts of the Blackwell Deposition are attached hereto as

Group Exhibit A.

aa

App. 75

Kutsugeras v. Avco Corp., 973 F.2d 1341, 1346 (7th Cir.

1992); accord, Jaeger v. Raymark Industries, Inc., 610 F.

Supp. 784, 785-6 (E.D. Wisc. 1985) ("Federal courts in

diversity actions are bound to accept the interpretations of

state law by the state's highest court... . The Court's

responsibility is to apply the relevant state law as it

presently exists."); Midwest Helicopters Airways v. Sikorsky

Aircraft, 849 F. Supp. 666, 668 (E.D. Wisc. 1994) (same).

These principles apply with even more force here

because MindGames elected to file its complaint against

Western in federal court under principles of diversity

jurisdiction:

In the context of pendent state law Claims, we

have already indicated out unwillingness to

speculate on any trends in state law. [Citation

omitted. ] This policy applies special force to

a plaintiff in a diversity case who has chosen

to litigate his state law claim in federal court.

We write only to emphasize our policy will

continue to be one that requires plaintiffs

desirous of succeeding on novel state law

Claims to present those claims initially in

State court.

Shaw v. Republic Drill Corp., 810 F.2d 149,150 (7th Cir.

1987).

This Court has previously rejected a similar request

to expand or reconsider state law in a diversity case. In

Afram Export Corp. v. Metallurgiki Halyps, S.A., 772 F.2d

1358, 1370 (7th Cir. 1985), the plaintiff sought to recover

App. 76

as incidental damages interest it had to pay on a business

loan. In affirming this Court's dismissal of this damage

claim, the Seventh Circuit stated:

We point out that [plaintiff] chose to bring

this lawsuit in federal court (under diversity

jurisdiction) rather than in a Wisconsin state

court as it could have done. A party who

wants a court to adopt an innovative rule of

state law should litigate in state court.

Federal judges are disinclined to make bold

departures in areas of law that we have no

responsibility for developing .... But

certainly when a resident does invoke the

diversity jurisdiction, and perhaps in any

case, he cannot expect to receive a very

sympathetic hearing for his argument that the

federal court should adopt an innovative

interpretation of state law.

The issue presented in Afram is precisely the issue presented

here, and this Court should again refuse the plaintiffs

invitation to change state law.

MindGames' reliance on Jn re Merritt Logan, Inc.,

901 F.2d 349 (3rd Cir. 1990), does not change this result.

Not only is Merritt Logan factually distinguishable, the

approach taken by the Third Circuit conflicts with how the

Seventh Circuit applies state law in diversity cases. Merritt

Logan confronted the question of whether a new business

could recover lost profits under New Jersey law. The Third

Circuit acknowledged that existing New Jersey case law

EE

App. 77

followed the New Business Rule, and that the New Jersey

‘Supreme court had not recently considered the issue. The

Third Circuit interpreted its role as to "predict whether the

New Jersey Supreme Ccurt would follow the rule against

giving a new business damages for lost profits if it were

now presented with that issue in the context of this case."

901 F.2d at 357. Of course, this statement is directly

contrary to the standard in the Seventh Circuit (See, pp. 5-

6, supra.)

Moreover, even if the standard in the Seventh

Circuit were not inconsistent with that taken in Merritt

Logan, Merritt Logan would still not support MindGames'

argument because there is a significant factual difference

between that case and this one. In Merritt Logan, the Third

Circuit noted that there was a recent decision by the New

Jersey District court permitting a new business to recover

lost profits. 901 F.2d at 357. There is no such decision by

any court applying Arkansas law.

3, It Is Irrelevant That Jurisdictions

Other than Arkansas Have Rejected

The New Business Rule.

MindGames also argues that this Court should

anticipate the Arkansas supreme court's rejection of the

New Business Rule because other states have recently

reconsidered the issue and abandoned the Rule. Once

again, MindGames advances a rule of construction that the

Seventh Circuit rejects:

Given that Florida law governs this case, the

authorities form other jurisdictions cited and

App. 78

argued by the parties [citations omitted] are

only indirectly relevant.

Gust K. Newberg Construction Co. v. E.B. Crump & Co.,

818 F.2d 1363, 1368 n .7 (7" Cir. 1987). Therefore, it is

irrelevant that Michigan and Ohio may have abandoned the

New Business Rule. (MindGames' Br. at 14-15.)

Moreover, as Western pointed out in its initial brief, while

some courts have rejected the New Business Rule, other

jurisdictions have recently reaffirmed their commitment to

follow the New Business Rule. (Western Br. at 9.)

el MindGames Cannot Escape The New Business Rule

By Arguing That It Does.Not Apply To The Facts

Presented Here.

MindGames tries to avoid the application of the New

Business Rule by arguing that, even if this Court does = -

follow Marvell Light, that case does not apply to the facts

presented here. None of the distinctions MindGames tries

to draw can save its claim for lost profits.

l. The Sale of Clever Endeavor Under

The License Agreement Is A New

Business.

First, MindGames contends that the New Business

Rule does not apply because "Western and Games Gang are

established businesses." (MindGames' Br. at 1-2, 9.) This

argument misses the point. The New Business Rule

examines whether the entity seeking to recover lost profits

is a new business. (See, e.g., Hillside Enterprises v.

Carlisle Corp., 69 F.3d 1410 (8th Cir. 1995) (holding that

the plaintiff could not recover lost profits allegedly caused

App. 79

by the defendant's improper manufacture of its product,

which the plaintiff claimed left him unable to fill future

orders). Here, it is MindGames -- not Western or Games

Gang -- which seeks to recover lost profits. Accordingly,

the New Business Rule will apply if MindGames - or a

venture comprised of MindGames, Western and Games

Gang -- is a new business.

Whether viewed alone or in context with Western

and Games Gang, MindGames must be classified as a new

business. MindGames cannot and does not seriously

challenge Western's claim that it is a new business,

contesting neither the legal nor the factual support Western

invokes. (See Western Br. at 9-12.) It is not surprising that

MindGames chooses to ignore this evidence, since it

difficult to imagine how MindGames could counter it. ~

MindGames wisely does not even suggest that the sale of

Clever Endeavor under the License Agreement is not a new

business.

Instead, MindGames argues that Clever Endeavor

Was not a new product "in any relevant sense" because prior

to the License Agreement, "it had been on the market for

about a year and had enjoyed a high degree of success

during the seven months that MindGames was shipping it.”

(MindGames’ Br. at 3.) These statements are inaccurate:

a MindGames sold Clever Endeavor from

September 1989 until early 1990. (Blackwell

Dep. at 170.) This is at most a five month

period.

App. 80

& Prior to MindGames' commencement of sales

in September 1989, MindGames projected it

would sell 50,000 games in 1989. (Blackwell

Dep. at 105.) In fact, MindGames sold only

30,000. (Blackwell Dep. 169.) It is not

surprising that both Blackwell and

MindGames' marketing manager Leslie Cox

May characterized MindGames' sales prior to

the License Agreement as only

"satisfactory." (Blackwell Dep. 190; May

Dep. 43.)°

e MindGames failed to earn any profit on

Clever Endeavor sales prior to the

commencement of the License Agreement.

(App. Exhs. B and G.)

Even if these statements were true, they are irrelevant. As

Western pointed out in its initial brief, courts have found

businesses with an operating history of seven months or

more to be subject to the New Business Rule. (Western Br.

at 10.) MindGames does not address this case law.

2 The New Business Rule Applies To A

New Product Sold By An Existing

Business.

MindGames argues that, even if Clever Endeavor is

deemed to be a new product, the New Business Rule still

°The relevant excerpts of the deposition of Leslie Cox May ("May

Dep.”) are attached hereto as Exhibit B.

App. 81

does not apply because it is inapplicable to new products

sold by an existing business. Even if this Court were

persuaded that MindGames had produced evidence that

Clever Endeavor was sold by an existing business, none of

the cases MindGames cites draw a distinction between a

new business and a new product sold by an established

business. In John D. Copanos & Sons, Inc. v. McDade

Rigging and Steel Erection Co., 403 A.2d 402 (Md. App.

1979), the court observed that the Maryland supreme court

had not laid down a "flat rule" that a new business cannot

recover lost profits. The court found it questionable

whether the business at issue (the encapsulating process of

penicillin) was even a new business, since the plaintiff had

produced penicillin in other forms for years. In contrast

here, not only has the Arkansas supreme court laid down a

flat rule prohibiting a new business from recovering lost

profits, neither MindGames nor Blackwell had any

experience in the game industry prior to developing Cleaver

Endeaver. (Blackwell Dep. 46.)

MindGames fares no better in relying on Care

Travel Co. v. Pan American World Airways, Inc., 944 F.2d

983 (2nd Cir. 1991. There, the plaintiff alleged that the

defendant breached the agency agreement by allowing

others to sell tickets for the London - Katachi, Pakistan -

Bombay route. The court found that the travel agency at

issue was not a new venture because (1) the principals had

Significant prior experience, not only with the travel

industry in general, but with the route at issue in particular;

(2) the plaintiff was selected to act as defendant’s general

service agent due to the prior experience of the principals;

App. 82

and (3) the plaintiff submitted evidence of prior sales for the

routes at issue. Here, in contrast, Blackwell had no prior

experience in the game industry and Clever Endeavor was a

new game.

Finally, MindGames invokes Milex Products v. Alra

Laboratories, Inc., 237 111. App. 3d 177, 603 N.E.2d

1226 (1992), where the court awarded lost profits to a new

manufacturer of a fungible drug that its competitors had

been manufacturing for years. The basis for this ruling was

the fact that "while the product is a new one, the evidence

showed it to have an established market." Id at 1237. A

subsequent Seventh Circuit decision not only reaffirmed the

New Business Rule under Illinois law, it distinguished

Milex because "the plaintiff could estimate its lost profits by

using the pre-breach profit history of its competitors" who

sold a fungible drug. Stuart Park Associates, Lid v.

Ameritech Pension Trust, 846 F. Supp. 701, aff'd 51 F.3d

1319, 1328 (7th Cir. 1995).

Once again, not only do the facts presented here

differ significantly from those in Milex, the Milex opinion

actually cuts against MindGames' argument. The product at

issue in Milex was not innovative but rather had the same

active ingredients and worked as well as the innovator's

products (i.e., it was essentially a generic form of the

original drug). In contrast, MindGames itself admits that

Clever Endeavor was unique, not fungible.

* Q: Did you think any games were similar

to yours?

iii

App. 83

A: No. In my opinion ours was

differentiated from other games. (Blackwell

Dep. 93.)

e Blackwell prepared his 1989 sales projections

on orders received at the 1989 Toy Fair and

Clever Endeavor's reception in the

marketplace, not on the sales history of any

other game. (Blackwell Dep. 105.)

* Blackwell "think[s] every game is unique."

(Blackwell Dep. 134)

MindGames not only invokes inapposite authority, it

neglects to mention that the Seventh Circuit found a

venture's past successes with a different product in the same

business did not render the New Business Rule inapplicable:

Summit argues vehemently that its successes

with other apartment buildings should be

considered as probative of [the profits that

the proposed apartment complex would

yield.] However, these are different pieces of

real estate from different markets - not

providing a self-evident basis for

generalization.

Stuart Park, supra,. 51 F.3d at 1328. Although Stuart Park

was decided under Illinois law, Illinois (like Arkansas)

adheres to the New Business Rule.

1. Lost Royalties Are Lost Profits.

MindGames tries to elude the grasp of the New

| Business Rule by claiming that it is not asserting a claim for

App. 84

lost profits. (MindGames' Br. at 2, 9-10.) This argument is

simply disingenuous. MindGames' complaint states a claim

for lost profits:

The breaches of the agreement by Western

and Games Gang, Ltd. have caused

substantial damages, both present and future,

to MindGames, including loss of profits and

interference with MindGames’ business

relations.

(MindGames Cpt. at { 8, attached hereto as Exhibit C.)

Consistent with its complaint, MindGames’ counsel recently

characterized the damages MindGames seeks from lost

future sales as lost profits:

As to MindGames' claim for up to $40

million in lost future profits based on

Western’s and Games Gang's mishandling of

Clever Endeavor, you will say we will not be

able to seek such damages because Arkansas

is a "New Business Rule” state. (See,

February 22, 1996 letter from Camp Kersten

to Wendi Sloane Weitman, attached hereto as-

Exhibit D.)

Even without its admissions to the contrary

MindGames' attempt to create a distinction between

"profits" and "royalties" would still be unsuccessful.

MindGames invokes the Black's Law Dictionary definition

of "profit" to support its claim that royalty income is not

profit. (MindGames' Br. at 10). However, MindGames

neglected to cite the Black Law Dictionary definition of

App. 85

“royalty,” which demonstrates the speciousness of

MindGames' argument:

Royalty is share of product or profit reserved

by owner for permitting another to use the

property. In its broadest aspect, it is share of

profit reserved by owner for permitting

another the use of property. (Emphasis

added)

It is not surprising that MindGames cites no decision that

draws a distinction between profits and royalties. The

courts treat a claim for lost royalties as a claim for lost

profits. See, eg., Oral-X Corp. y. Farnam Companies,

Inc., 931 F.2d 667, 670 (10" Cir. 1991) (reversing the

district court's refusal to award damages for royalties as lost

profits); Jn re Mid-America Corp., 159 B.R. 48, 55 (M.D.

Fla. 1993) (holding that the speculative nature and difficulty

in determining the amount of lost profits precluded

franchisor's recovery of damages for lost future royalties).

Blackwell's own deposition testimony also

contradicts the claim that MindGames did not equate

royalties with profit. During questioning concerning sales

of the Clever Endeavor in Europe by foreign licensees,

Blackwell described his expectations for the foreign

versions of Clever Endeavor:

That we would make a profit, because |

wanted to make sure they [the licensees]

made a profit and we would get a continuing

royalty income... . It was incremental

income. There was very little cost income

App. 86

from our standpoint -- additional cost, I

should say.

(Blackwell Dep. 51.) This testimony makes clear that, until

he became aware of the New Business Rule, Blackwell

himself considered royalty income to constitute profit to

MindGames regardless of whether MindGames itself was

incurring any costs of operation.

A. The Facts That Clever Endeavor Had No

History of Profits And That Clever Endeavor

Js An Entertainment Product Constitute

Additional Reasons For This Court To

Adhere To The New Business Rule.

In its initial brief, Western submitted legal and

factual support for the argument that because MindGames

had no profits prior to the License Agreement, it cannot

obtain alleged lost future profits. In response, MindGames

cannot and does not dispute that it earned no profits

whatsoever prior to the License Agreement. Nor does it

address the legal authority Western cites in support of this

position. (See Western Br. at 16-17.)

Instead, MindGames takes issue with the proposition

that the success of a new entertainment product is especially

difficult to predict. MindGames misconstrues rather than

refutes Western's argument. MindGames characterizes

Western's argument as standing for the proposition that a

plaintiff can never recover lost profits in the entertainment

business. (MindGames' Br. at 16.) Yet this is not the

argument Western advances. Rather in its initial brief,

Western argued that, even if this Court were inclined to

App. 87

retreat from Marvell Light, the facts of this case present a

particularly inappropriate context in which to do so, given

the capriciousness of the entertainment industry. (See

Western Br. at 12.) MindGames now appears to take issue

with the proposition that the success of entertainment

products is particularly difficult to predict. MindGames

fails to defend its position with either appropriate factual or

legal support.

Ironically, MindGames first chastises Western for

failing to produce "a shred of evidentiary support for its

argument" (MindGames’ Br. at 16.) In fact, Western cited

both documentary and testimonial support for this argument

(See Western Br. at 13-14, Appendix; Exh. A, H, I, J, N.)

MindGames then insinuates that Western's legal

authority does not support its argument. (MindGames Br.

16-18). MindGames tries to distinguish only three of the

cases Western cites. Each of these cases -- Proteus Books

Lid v. Cherry Lane Music Co., 873 F.2d 502 (2nd Cir.

1989) (New York law), Kenford Co. v. County of Erie, 67

N.Y.2d, 493 N.E.2d 234 (1986) (New York law), and

Haddi Caddy, Inc. v. American Home Products. Corp.,

557 F.2d 136 (8th Cir. 1977) (Missouri law) -- was decided

in a jurisdiction that does not follow the New Business

Rule. Western relies on these cases not for the proposition

that the New Business Rule applies but instead for the

premise that even in states rejecting the New Business Rule,

it is difficult to prove lost profits in the entertainment

“industry. In each case, the court rejected the lost profits

claims because of the speculative nature of the entertainment

industry. Significantly, MindGames simply ignores the

App. 88

Hillside Enterprises decision, discussed at length in

Western's brief. (Western Br. at 14-15.)

Finally, MindGames misplaces its reliance on Jim

Halsey Co. v. Bonar, supra. As discussed above, that case

involved a preexisting business (a concert promoter), who

presented evidence of his reputation, and ticket sales based

on an average vacancy rate. These facts are very different

from trying to predict the sales of a new adult board game,

which its own inventor characterizes as “unique,” by a

company where that game was its "first and only product.

(Blackwell Dep. 34,134.)

CONCLUSION

For the reasons cited in its initial brief and herein,

Western respectfully requests that this Court grant its

motion for partial summary judgment and find that

MindGames cannot recover its alleged lost profits as a

matter of law.

App. 89

EXCERPTS from

UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF WISCONSIN

WESTERN PUBLISHING COMPANY, INC.,

Plaintiff,

v. Case No. 94-C-552

MINDGAMES, INC.,

Defendant.

MINDGAMES, INC.,

Plaintiff,

v. Case No. 94-C-998

WESTERN PUBLISHING COMPANY, INC.,

Defendant.

AFFIDAVIT OF G. LAWRENCE BLACKWELL, III,

IN OPPOSITION TO THE SUMMARY

JUDGMENT MOTION OF WESTERN

PUBLISHING COMPANY, INC.

CONTRACT BREACHES BY WESTERN

AND GAMES GANG

App. 90

26. | Western breached q 8 of the license agreement

(App. 32-33) in the area of its manufacturing responsibilities,

including the following:

a. Western negligently printed 50,000

boxes in an incorrect color with poorly

printed box wraps. It nevertheless

insisted on selling them because of tight

schedules. The unappealing boxes

caused confusion and dissatisfaction

among retailers and consumers in

Clever Endeavor's start-up year.

b. Western knowingly sold Clever

Endeavor games with defective

board pieces it had purchased at

a 50% discount without timely

~ disclosing to MindGames either

the defects or the discount.

This also proved very damaging

to Clever Endeavor in its

critical start-up year.

C. Western sold numerous games

with missing components, such

as game rules, board pieces and

venture cards, and with

incorrectly cut and duplicated

clue cards.

27. Western and Games Gang committed numerous

breaches of the license agreement with respect to their

promotion, sales and marketing obligations which proved fatal

OO

App. 91

for Clever Endeavor. In October 1990, Clever Endeavor's

mass market launch season, Games Gang fired its chief

executive officer and president, its chief financial officer and

its vice president of marketing and did not replace them. Its

only remaining executives had no significant marketing )

experience. It appeared to me that Western took no steps to

rectify the effects of these events on Clever Endeavor. The

known breaches of contract and performance warranties in the

area of marketing on the part of Western and Games Gang

include the following:

a. Unknown to MindGames, in

May 1990 Games Gang

proposed lowering its sales

force's commissions on Clever

Endeavor, reducing their

incentive.

b. Without MindGames' consent

and without adequate funds,

Games Gang promised retailers

television ads. Retailers

ordered in reliance on this.

Games Gang then reneged,

causing retailers to cancel

orders in large numbers.

c. Without obtaining MindGames'

required consent, retailers were

notified on December 31, 1990

of a price increase of nearly

17%. A “correction letter"

App. 92

cancelling the increase was not

sent until three months later.

Games Gang ran _ Clever

Endeavor ads for the critical

mass market introductory

Christmas season of 1990 late.

This caused retailers to panic

and seek to escape from an

Over-inventory position. The

late advertising also greatly

reduced reorders.

Radio ad campaigns in

important markets like Chicago

and Minneapolis were poorly

handled. Ads ran too long and

became stale and were not as

represented.

Ad funds were wasted by

running ad campaigns on

wrongly-targeted radio stations

(as if advertising a rock-related

product on an "elevator music"

station).

Games Gang permitted the

public relations firm it selected

to fail to perform promised

public relations activities.

In 1990, 1993 and 1994

Western and Games Gang failed

App. 93

to spend the minimum amount

for advertising required by the

license agreement.

1. In 1991, 1992 and 1993

Western ignored MindGames'

requests for information on

planning and execution of ad

| campaigns. -

j. Western repeatedly gave

preference over Clever

Endeavor in manufacturing and

distribution to its other games.

This also occurred with respect

to derivative Clever Endeavor

products such as a _ second

edition and a children's edition.

MindGames believes this was

due to the higher royalties

payable on Clever Endeavor.

MINDGAMES' DAMAGE CLAIMS

28. 1 am informed that Western's summary

judgment motion attempts to bar MindGames, Inc., from

seeking "lost profits" on the ground that Arkansas law does

not permit a "new business" to recover "lost profits."

MindGames does not claim "lost profits" in this case but

rather claims loss of royalties (and other damages) based upon

the failure of Western and its co-licensee, Games Gang, to

fulfill their obligations under the license agreement.

App. 94

MindGames' damage claims at the present time are set forth

below.

29. | MindGames' first claim for royalties is based

upon the fact that Western continued to manufacture and sell

Clever Endeavor throughout 1993, after the initial three-year

term of the license. MindGames believes that Western

became obligated under the license agreement to pay

MindGames the difference between $1.5 million and the

royalties actually paid during the first three years by so doing.

Despite Western's recent invention, there was no agreement

to the contrary and MindGames relied on the 1990 agreement.

Western has paid royalties to date of approximately $535,000

for that period. It therefore still owes MindGames

approximately $965,000, plus interest. MindGames has never

waived its claim to these royalties.

30. | MindGames' second claim for royalties is based

upon the fact that Western continued to manufacture and sell

Clever Endeavor through June of 1994, after the first one-year

license extension period. By selling the game through a

second extension period Western became obligated to pay

MindGames additional royalties on sales during the first one-

year extension. Western has paid only part of this obligation

and owes MindGames the balance, plus interest. Sales made

by Western subsequent to January 31, 1994 were not pursuant

to a permitted liquidation. Further, most unit sales for the

year ending January 31, 1995 occurred after any such

liquidation period would have expired. MindGames has not

waived its claim to these royalties.

App. 95

31. | MindGames' third claim for royalties is based

upon the fact that Western sold about 61,000 copies of Clever

Endeavor in June 1994. The royalties payable to MindGames

on these sales have not all been paid. The balance is owed to

MindGames, plus interest.

32. | MindGames' fourth damage claim is based

upon the fact that Western breached its obligation to obtain

MindGames' consent to sell games for less than $16.95 per

game when it liquidated many thousands of copies of the game

at $4. MindGames did not consent and would not have

consented to such a liquidation because of its destructive

effect. This liquidation destroyed Clever Endeavor as a

commercially viable game and any possibility of licensing it

to another business was substantially impaired.

33. |MindGames further claims damages for

Western's failure to disclose material facts regarding

Western's assumption of Games Gang's contractual

obligations. As required by the license agreement, Western

obtained MindGames' permission to assume all of Games

Gang's obligations and benefits under the license agreement

in 1992. Western failed to disclose, however, that it had to

give up a substantial percentage of commissions to Games

Gang on all future sales. This seriously impaired Western's

incentive to aggressively market Clever Endeavor. Western

and Games Gang had already expressed to me their concern

about "low profits." Had MindGames known the assumption

agreement would reduce the profitability of Clever Endeavor

for Western, MindGames would not have consented to those

terms.

App. 96

34. | MindGames also claims damages based upon

Western's failure to spend required amounts on advertising

and promotion. It owes MindGames 50% of all such unspent

_funds. The amount of this claim is undetermined at this time,

pending further discovery.

35. | MindGames' largest damage claim (the only

one addressed by Western's motion for summary judgment) is

based upon the multiple breaches of contract by Western and

Games Gang in manufacturing and marketing Clever Endeavor

referred to above, the effect of which was to destroy the value

of the game in the marketplace and to prevent it from reaching

even a fraction of the potential that was widely recognized for

it when the license agreement was entered into. The

accumulation of breaches by Western and Games Gang made

it impossible for Clever Endeavor to reach more than a small

fraction of the royalty income it had been well on its way

toward generating. MindGames' damages for this element are

substantial and depend on how closely the jury believes Clever

Endeavor would have approached the royalty levels of

Pictionary and Trivial Pursuit had it been handled as the

licensing agreement required.

App. 97

EXCERPTS from

UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF WISCONSIN

WESTERN PUBLISHING COMPANY, INC..,

Plaintiff,

Vv. Case No. 94-C-552

MINDGAMES, INC.,

Defendant.

- MINDGAMES, INC.,

Plaintiff,

V. | Case No. 94-C-998

WESTERN PUBLISHING COMPANY, INC.,

Defendant.

SUPPLEMENTAL AFFIDAVIT OF G. LAWRENCE

BLACKWELL, III, IN OPPOSITION TO (1) NEW

ISSUES RAISED IN WESTERN’S SUMMARY

JUDGMENT REPLY BRIEF, (2) WESTERN’S

RESPONSES TO MINDGAMES’ PROPOSED

FINDINGS OF FACT AND (3) WESTERN’S MOTION

TO STRIKE SUMMARY JUDGMENT AFFIDAVIT

(b)

App. 98

¢ 24. Based upon my personal observation and

experience as president of MindGames, I know that an

estimate of sales will provide an accurate estimate of

MindGames' damages because MindGames received

royalties based upon sales at virtually no cost to itself.

As a businessman, I am aware that sales predictions

can be made based upon reasonable supporting

evidence. I know that Western made sales predictions

for Clever Endeavor on which it based its game

inventory buildup for supplying the market and

avoiding product shortages. Western undoubtedly

made such sales predictions for its games every year

since at least 1990. WP-1604 (App. 1) shows that in

or before April of 1991 Western and Games Gang

made sales predictions for their jointly handled games

for fiscal 1993. Furthermore, WP-2040 (App. 4)

shows that Western predicted its profit on Clever

Endeavor. Western has not provided unredacted

copies and supporting detail for either its own or

Games Gang's forecast of Clever Endeavor profits

after it licensed the game, but WP-1793 and 1794

(App. 6 and 7) indicate the forecasts were made.

App. 99

Excerpts from

MEMORANDUM OF MINDGAMES, INC.,

IN OPPOSITION TO MOTION FOR SUMMARY

JUDGMENT OF WESTERN PUBLISHING

COMPANY, INC.

It is important to keep the point of Western's summary

. Judgment motion in sharp focus. It is that the new business

rule prevents MindGames from proving "lost Profits" as a

matter of law. Western argues, in other words, that Arkansas

law does not allow MindGames even to attempt to prove the

fact and/or the amount Of its damage simply because

MindGames itself is a new business. (From p. 2.)

* * KX kK &

Under the applicable law cited later in this brief jt is

MindGames' obligation to prove its damages to a reasonable

certainty. MindGames acknowledges its obligation to

establish its claims by appropriate evidence beyond the

boundary of speculation and guesswork and looks forward to

the opportunity to do so. Meanwhile, Western has not

Proposed a single fact or offered any evidence beyond the

mere unsupported opinions of its lawyers establishing that, as

4 matter of law, MindGames will be unable to fulfill its

burden. On this motion We are not arguing the Sufficiency

proof, but whether MindGames has the right to present proof.

Clearly it has that right, which requires denial of the motion

for summary judgment. (From pp.3-4.)