Opposition Brief — MindGames, Inc. v. Western Publishing Co.
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No. 00-825
In The
Supreme Court of the United States
3
MINDGAMES, INC.,
Petitioner,
WESTERN PUBLISHING COMPANY, INC.,
Respondent.
¢
On Petition For Writ Of Certiorari
To The Court Of Appeals For The Seventh Circuit
¢
BRIEF IN OPPOSITION TO PETITION
FOR WRIT OF CERTIORARI
*
Rosert E. SHapiro*
WENp! E. SLOANE
RicHARD A. SALDINGER
HEATHER J. MACKLIN
BARACK FERRAZZANO KIRSCHBAUM
PERLMAN & NAGELBERG
333 West Wacker Drive
Suite 2700
Chicago, Illinois 60606
Tel: 312/984-3100
Fax: 312/984-3220
*Counsel of Record for Respondent
COCKLE LAW BRIEF PRINTING CO., (800) 225-6964
OR CALL COLLECT (402) 342-2831
QUESTIONS PRESENTED FOR REVIEW
1. Did the Seventh Circuit improperly deprive
MindGames of the opportunity to present evidence that
its lost profits claim was not unduly speculative by
affirming the dismissal of that lost profits claim on a
ground raised before the district court but not relied
upon by the district court?
2. In affirming the district court’s decision, did the
Seventh Circuit improperly rely on reasonable inferences
it made in Western’s, rather than MindGames’, favor?
ii
TABLE OF CONTENTS
Page
QUESTIONS PRESENTED FOR REVIEW ........... i
TABLE OF CONTENTS «<< .vacécds cdeceesenvsasess ii
TABLE OF AUTHORITIES .......cccccccssccsceccess iv
STATEMENT OF THE CASE... 2. cccscsecsiccnccses 1
A. Nature of the Case and Course of Proceedings
Below ......issss00ekeseageeeee see sen eee ween en 1
B. Statement of Fact. «i .ccsvanciciceucdteesesatss 3
1. Preliminary Statement... ......ccccscccesecs 3
2. The Development Of Clever Endeavor...... 4
3. The Parties Enter Into A License Agreement.. 5
SUMMARY OF ARGUMENT...............500ee ees 6
ARGUMENT. ........csccccscccsseseecsssessescseece 9
I. In Its Partial Summary Judgment Motion, West-
ern Raised Both The New Business Rule And
MindGames’ Inability To Prove Lost Profits With
Reasonable Certainty ...ccisccccsecsstscsccenss 9
A. Western Specifically Raised The “Reasonable
Certainty” Standard In Its Opening Brief In
Support Of Its Partial Summary Judgment
MOOR. .. 053: cencgecaaeeeeeseeuseeunaetuan 9
1. No history of past profits.............. 10
2. The uncertainty of the entertainment
ENGINES. is oa.cu scckebens Cenweteeecdenes 10
3. The requirement of proving damages
with reasonable certainty .............. 11
B. MindGames Attempted To Refute Western’s
Non-New Business Rule Arguments........ 12
iii
TABLE OF CONTENTS - Continued
Page
Il. MindGames’ Other Arguments In Support of Its
Peres MUON PIE on ooo snensceccacsdencdn 14
A. The Opinion Does Not Conflict With Celotex
os J. ari 15
B. It Is Irrelevant That The Basis For The Opin-
ion Was Not An “Issue” Presented By Either
MENT RE Cd eiiucciueiesscedeaiietainidews 20
C. MindGames Misapprehends The Opinion,
Western’s Burden And The Responsibilities
ie Wee SRINCD IIE oa ov kino noc nccece. 21
D. This Court Must Only Draw Reasonable
Inferences In MindGames’ Favor.......... 24
Ill. The Seventh Circuit correctly found that Mind-
Games cannot pass the “reasonable certainty”
TEEN OER UUR AG Gwin dG ua su bs Wo Vo 46s hob uno ks cn 27
iv
TABLE OF AUTHORITIES
Page
CAsES
AGF, Inc. v. Great Lakes Heat Treating Co., 555
8 & ge ee er orrr rrr err TT rr ore. 25
Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986) ..... 3
Barnes v. Arden Mayfair, Inc., 759 F.2d 676 (9th Cir.
3 TOTP ONe POT PITT EPEC TCT oP Ove TT Cron The 26, 27
Beem @. Becom, G57 US. TO CUO boc dsacisasveesas 16
Box v. A&P Tea Co., 772 F.2d 1372 (7th Cir. 1985)
Pe Mr ean ae MP emt dle mya i OEE GT 17, 18, 19, 20
Boxhorn’s Big Muskego Gun Club, Inc. v. Electrical
Workers Local 494, 798 F.2d 1016 (7th Cir. 1986) .... 25
Catrett v. Johns-Manville Sales Corporation, et al.,
Tome ae TR Re Bee oe ccecsannss 15, 16, 17
Celotex Corp. v. Catrett, 477 U.S. 317 (1986) ..15, 16, 22, 23
Eastman Kodak Company v. Image Technical Services,
ee., OG, SIR TIA GER CIs wo rh as sks cansccacs 27
First Indiana Bank v. Baker, 957 F.2d 506 (7th Cir.
Cs pe ree ee re te Oe hy pe ape eer 3
Flynn v. Sandahl, 58 F.3d 283 (7th Cir. 1995)...... 15, 72
Gentry v. Little Rock Road Machinery Co., 339
Dee Wk. GT FOE onda ond eckcasasbsccarssvecs 25
Hillside Enterprises v. Carlisle Corp., 69 F.3d 1410
Ce Kas i ene vewiinccionn cers i, 32 3 2
Information Communication Corporation v. Unisys
Corporation, 181 F.3d 629 (5th Cir. 1999)........... 29
Insolia v. Phillip Morris Incorporated, 216 F.3d 596
ee ge Le SAPS corer er rre ts free y oe ee ee 23
Vv
TABLE OF AUTHORITIES - Continued
Page
Jenkins v. Heintz, 124 F.3d 824 (7th Cir. 1997). 2.6205: 26
K & R, Inc. v. Crete Storage Corp., 231 N.W.2d 110
OD. BOT eis ch 51554. 25
_Kenford Co. v. County of Erie, 67 N.Y.2d 257, 493 :
NS.a0 208 (000)... Le 10, 12
Marvell Light & Ice Co. v. General Electric Co., 259
tte, Rin he sc, PETE TTT IOC MRT a sie 2
Miranda v. Wisconsin Power & Light Co., 91 F.3d
wank TOON SO TI eccciicdinacic ee 20
Noreuil v. Peabody Coal Co., 96 F.3d 254 (7th Cir. |
ae EE CREPE Fe pene PIS na alan 15
Proteus Books, Ltd. v. Cherry Lane Music Co., 873
Pia ee ee OC I i 10, 12
Schacht v. Wisconsin Dept. of Corrections, et al., 175
wae Gir. CC, TO a 26
Schweiker v. Hogan, 457 U.S. 569 Co, : ePmR eee ar aicoets 16
Shank, et al. v. Hague, Inc., 192 F.3d 675 (7th Cir.
ss PERCE eT ee Pee Ce er tie: a 26
Texas Instruments, Inc. v. Telestron Energy Manage-
ment, Inc., 877 S.W.2d 276 (Tex. cg | PEN Serna 29
Western Publishing Company, Inc. v. MindGames,
Inc., 944 F.Supp. 754 (E.D. Wis. SPEER dace ae 2
STATUTES AND RULES
United States Supreme Court Rule 10............... 21
vi
TABLE OF AUTHORITIES - Continued
Page
OTHER AUTHORITIES
Wright & Miller, Federal Practice and Procedure,
BIE (IDOE 66 iceccusescccresccnsvcccnnaesrateas 16
STATEMENT OF THE CASE
A. Nature of the Case and Course of Proceedings
Below.
This appeal arises from a dispute between Mind-
Games, Inc. (“MindGames”), the inventor of a new adult
board game called “Clever Endeavor,” and Western Pub-
lishing Company, Inc. (“Western”), the company given
the exclusive license to manufacture and market the game
(the “License”). MindGames claims it lost over $40 mil-
lion in future profits because of Western’s alleged
breaches of the License.
In its first partial summary judgment motion, West-
ern sought to dismiss MindGames’ $40 million lost profits
claim. Western first argued that Arkansas law, which
controlled the License, adheres to the “New Business
Rule,” which erects a per se ban precluding an
unestablished business from recovering lost profits and
precluding an established business from recovering lost
profits from a new product or venture. Western also
argued that, notwithstanding the New Business Rule,
MindGames’ lost profits claim should be dismissed
because, with no history of past profits, “MindGames
lacked a reasonable basis to demonstrate its alleged lost
profits with reasonable certainty.” (R. App. 20.)!
1 Western’s Memorandum in Support of its Motion for
Partial Summary Judgment, without exhibits, is submitted here
as part of Respondent’s Appendix (“R. App.”) at 1-17. Other
relevant documents and pleadings cited in this brief are also
included in the Respondent’s Appendix.
On October 11, 1996, the district court granted West-
ern’s motion and dismissed MindGames’ lost profits
claim. Relying on the Arkansas Supreme Court's decision
in Marvell Light & Ice Co. v. General Electric Co., 162 Ark.
467, 259 S.W. 741 (1924), Judge Warren held that Arkansas _
adheres to the New Business Rule as a “per se measure to
completely prevent the recovery of any profits.” Western
Publishing Company, Inc. v. MindGames, Inc., 944 F.Supp.
754, 757 (E.D. Wis. 1996). The district court found that the
undisputed facts demonstrated that MindGames was a
new business and Clever Endeavor was a new product. Id.
at 759-760. The district court did not address Western’s
alternative basis for dismissing MindGames’ lost profits
claim. Judge Warren subsequently denied MindGames’
Motion for Reconsideration.
In its second partial summary judgment motion,
Western sought to dismiss MindGames’ claim that West-
ern owed it approximately $1.2 million in unpaid renewal
fees to extend the License past its original term, which
expired on January 31, 1993. On February 25, 1998, Judge
Adelman granted Western’s second motion for partial
summary judgment.
MindGames appealed both the district court’s Octo-
ber 11, 1996 and February 25, 1998 decisions. On June 22,
2000, in a decision written by Chief Judge Posner, the
Seventh Circuit affirmed both the October 11, 1996 and
February 5, 1998 district court decisions (the “Opinion”).
(R. App. 21.) On July 6, 2000, MindGames filed a Petition
for Rehearing and Rehearing En Banc, challenging only
that portion of the Opinion affirming the dismissal of its
lost profits claim (i.e., the October 11, 1996 decision). In
its Petition for Rehearing, MindGames argued that the
Seventh Circuit misapprehended the record before the
district court and “overlooked” Western’s alleged failure
to raise the “reasonable certainty” argument upon which
the Seventh Circuit relied when it affirmed the district
court. (R. App. 45.) After expressly requesting Western to
respond to MindGames’ Petition for Rehearing, the Sev-
enth Circuit denied that petition. (R. App. 62.)
B. Statement of Facts.
1. Preliminary Statement.
MindGames’ presentation of the “facts” to this Court
is irrelevant, incomplete, and without a single record
citation. Although MindGames fails to cite to the source
of its “facts,” its statement derives almost exclusively
from the same self-serving affidavits of its president,
Larry Blackwell, that MindGames presented to the dis-
trict court and the Seventh Circuit. (MindGames’ App.
89-98; R. App. 63-98.) Although much of the Blackwell
affidavits is contradicted by documents in the record or
his sworn deposition testimony, Western need not detail
these inaccuracies. Most are irrelevant. “Only disputes
over the facts that might affect the outcome of the suit
under governing law will properly preclude the entry of
summary judgment.” Anderson v, Liberty Lobby, Inc., 477
U.S. 242, 248, 106 S.Ct. 2505 (1986); accord First Indiana
Bank v. Baker, 957 F.2d 506, 508 (7th Cir. 1992) (“Factual
disputes that are irrelevant or unnecessary will not be
counted.”).
The Seventh Circuit based its decision on an uncon-
troverted record created by the documents and sworn
deposition testimony. Western will set forth below these
undisputed material facts, which were presented to both
the district court and the Seventh Circuit.
2. The Development Of Clever Endeavor.
In March 1988, Blackwell formed MindGames to
develop and sell a new adult board game he invented
called “Clever Endeavor.” (R. App. 100.) Clever Endeavor
was MindGames’ first and only product. (R. App. 101.)
When he formed MindGames, Blackwell had no prior
experience in the game industry or the adult game mar-
ket. (R. App. 102, 107.) Blackwell believed that Clever
Endeavor would appeal to the same market and achieve
the same success as two other adult board games, Piction-
ary and Trivial Pursuit. (R. App. 103-105.) Blackwell had
no discussions with anyone in the game industry regard-
ing what features made Trivial Pursuit and Pictionary suc-
cessful games. (R. App. 106.)
—
In the spring of 1989, Blackwell decided to publish
Clever Endeavor. (R. App. 107.) From the spring of 1989
through the end of the year, MindGames marketed the
game itself, promoting it at certain events, advertising on
the radio and participating in cooperative advertising
with retailers. (R. App. 110-111.) During 1989, Mind-
Games sold approximately 30,000 games, but failed to
achieve a profit. (R. App. 109, 114-115.)
3. The Parties Enter Into A License Agree-
ment.
In December 1989, Blackwell met with two represen-
tatives from a game company called Games Gang, Inc.
(“Games Gang”), the current distributor of Pictionary. (R.
App. 112-113.) These discussions culminated in an exclu-
sive license agreement dated March 30, 1990 between
MindGames, as Licensor, and Western and Games Gang,
as Licensees, for the manufacture, marketing, promotion,
sale and distribution of Clever Endeavor (the “License”).
The License provides that it is governed in all respects by
Arkansas law. 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.
The initial term of the original license extended
through January 31, 1993. The License provided that it
would continue for an additional year (through January
31, 1994), only if the Licensees were not in breach and if
the Licensees paid MindGames a “Renewal Amount” of
$1.5 million (whether earned or unearned in royalties
during the initial term of the License) prior to January 31,
1993.
Although Clever Endeavor earned only approximately
$600,000 in royalties during the initial term of the License
(R. App. 75; see also Petition at 5.)? and Western did not
pay MindGames the balance of the Renewal Amount,
2 Citations to MindGames’ Petition for Writ of Certiorari
will appear as “Petition at ___.”
Western continued to act as the exclusive licensee of
Clever Endeavor from February 1993 through January 31,
1994, pursuant to an agreement the parties reached at the
February 1993 Toy Fair. (R. App. 117.) At the conclusion
of meetings held at the February 1994 Toy Fair, the parties
failed to agree on a future licensing arrangement. (R.
App. 120-122.)
SUMMARY OF ARGUMENT
Like most creators of a new product, Blackwell hoped
he had the next smash hit when he developed Clever
Endeavor and created MindGames to manufacture and
market it. After he negotiated an exclusive license agree-
ment with Western, he dreamed of millions of dollars in
royalties from future sales, and a long and profitable
license arrangement. When commercial success of Clever
Endeavor fell short of these fantasies, MindGames looked
for a scapegoat, attempting to achieve through litigation
what it could not achieve through business. Four times
MindGames has attempted to persuade the courts that it
is entitled to pursue a claim for $40 million in lost profits.
And four times, the courts have rejected its arguments.
Now, MindGames comes to the highest court in the land
and, incredibly, asks this Court to resuscitate its “pie-in-
the-sky” $40 million lost profits claim.
Confronted with no legitimate basis to challenge
Judge Posner’s decision, MindGames presents as the
basis for its Petition for Writ of Certiorari (the “Petition”)
an argument that is directly contradicted by the record
below. The heart of MindGames’ challenge to the Seventh
Circuit decision is its contention that the Seventh Circuit
affirmed the dismissal of the lost profits claim on a
zround never raised in the district court. MindGames
claims that Western never argued to the district court
that, notwithstanding the New Business Rule, Mind-
sames’ lost profits claims should be dismissed because
MindGames could not prove its alleged lost royalties
with any reasonable certainty. (Petition at 8-9.) Instead,
MindGames asserts that Western’s “sole attack on Mind-
sames’ claim for lost royalties was the New Business
Rule.” (Petition at 10.)
The premise of MindGames’ argument, however, is
simply unfounded. Western expressly raised, as an alter-
native argument, the very grounds upon which the Sev-
nth Circuit relied. What is most telling, and what
MindGames painstakingly avoids mentioning, is that the
arguments presented in its Petition are the very argu-
ments MindGames raised to the Seventh Circuit as the
grounds for Rehearing and Rehearing En Banc - the very
arguments the Seventh Circuit considered and rejected.
As Western previously demonstrated to the Seventh
circuit's satisfaction, in its Motion for Partial Summary
judgment, Western not only specifically raised the “rea-
sonable certainty” test as an alternative basis to dismiss
MindGames’ lost profits claim, but MindGames even
responded to this argument, offering two affidavits of its
principal in an effort to meet the reasonable certainty
standard.
Ultimately, the district court based its decision on a
strict application of the New Business Rule, and it was
from this ruling that MindGames appealed. The parties
therefore directed their briefing before the Seventh Cir-
cuit to the issue of whether under Arkansas law there is a
per se ban on allowing lost profits to a new business.
Nevertheless, Western again argued to the Seventh Cir-
cuit that “[e]ven if [the Seventh Circuit Court] were to
reject a strict application of the New Business Rule, [the
Seventh Circuit] should affirm the dismissal of Mind-
Games’ lost profits claim” because MindGames could not
prove damages with reasonabie certainty. (R. App.
124-126.) MindGames never responded to this argument,
as the Seventh Circuit recognized. (R. App. 36.)
Although rejecting the argument that Arkansas
would apply the New Business Rule, the Seventh Circuit
nevertheless upheld the dismissal of MindGames’ claims,
holding that under the “reasonable certainty” test, Mind-
Games failed to demonstrate that it could calculate its
alleged lost royalties to “even a rough approximation.”
(Id.)
Because MindGames’ only real objection to the Opin-
ion is that the basis for the Seventh Circuit’s ruling was
not encompassed within the record below - an objection
that Western previously demonstrated, and will again
demonstrate, to be untrue - MindGames’ Petition should
be denied.
ARGUMENT
I. In Its Partial Summary Judgment Motion, Western
Raised Both The New Business Rule And Mind-
Games’ Inability To Prove Lost Profits With Reason-
able Certainty.
Although rejecting the district court’s per se applica-
tion of the New Business Rule, the Seventh Circuit nev-
ertheless affirmed the dismissal of MindGames’ lost
profits claim, holding that no “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.” (R. App. 35.)
MindGames complains that it was never “called on to file
evidence from which a jury could reasonably determine
sales Clever Endeavor would have achieved” because
Western never argued uncertainty of lost sales before the
district court, and for this reason, it is entitled to this
Court’s review. (Petition at 9.) This is untrue.
A. Western Specifically Raised The “Reasonable
Certainty” Standard In Its Opening Brief In
Support Of Its Partial Summary Judgment
Motion.
From its initial brief in support of its motion for
partial summary judgment, Western put MindGames on
notice that Western believed MindGames’ claim for lost
profits failed even if the district court rejected a per se
application of the New Business Rule. Western raised a
number of challenges to MindGames’ lost profits claim
that were not dependent on the New Business Rule.
10
1, No history of past profits. In its opening
brief, Western expressly argued that “even if the [district
court] were to reject a strict application of the New Busi-
ness Rule, this [district court] should still grant Western’s
motion for summary judgment because MindGames has
no history of past profits.” (R. App. 19.) Western argued
that “MindGames lacked a reasonable basis to demon-
strate its alleged lost profits with any reasonable
certainty.” (R. App. 20.) Western cited to specific undis-
puted facts in the record, including MindGames’ failure
to earn any profit. (R. App. 2-6.) Western cited case law
where courts in jurisdictions rejecting the New Business
Rule nevertheless dismissed claims for lost profits where
the plaintiff had no history of lost profits. (R. App. 13-20.)
2. The uncertainty of the entertainment indus-
try. Western also argued to the district cour that, not-
withstanding the New Business Rule, MindGames’ claim
for lost profits fails because success of an entertainment
product, such as Clever Endeavor, is inherently uncertain,
remote and speculative. (Id.) In support of this argument,
Western cited to decisions arising in the entertainment
field where the courts did not strictly apply the New
Business Rule, but nevertheless found that the evidence
introduced by the plaintiffs was insufficient to support
any recovery for lost profits. (R. App. 14, citing Proteus
Books, Ltd. v. Cherry Lane Music Co., 873 F.2d 502 (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 impos-
sible to calculate) and Kenford Co. v. County of Erie, 67
N.Y.2d 257, 493 N.E.2d 234 (1986) (court found plaintiff’s
11
evidence of prospective profits of new stadium insuffi-
cient to support any recovery for lost profits); see also R.
App. 18-19, fn. 3.)
3. The requirement of proving damages with
reasonable certainty. In its opening brief, Western dis-
cussed at length the Eighth Circuit’s decision in Hillside
Enterprises v. Carlisle Corp., 69 F.3d 1410 (8th Cir. 1995), a
case also relied upon by the Seventh Circuit in its deci-
sion. (R. App. 17-18.) In Hillside, the Eighth Circuit, while
not adopting a per se bar to the admission of evidence
regarding lost profits by a new business, affirmed the
district court’s decision to exclude the plaintiff’s evidence
of its alleged future sales because the evidence plaintiff
wanted to introduce was too speculative. 69 F.3d at 1414.
In further support of its assertion that MindGames
could not meet the “reasonable certainty” standard, West-
ern argued that numerous factors other than Western’s
alleged breaches could have affected Clever Endeavor’s
sales, such as the play value of the game, the number of
similar adult board games in a competitive market and
the decision by Clever Endeavor’s inventor, Mr. Blackwell,
to reject television advertising in favor of radio advertis-
ing. (R. App. 14-16.) Western further demonstrated that
Mr. Blackwell himself conceded that the game industry is
especially susceptible to the unique tastes of the average
consumer and also admitted the inherent difficulties of
marketing a successful game. (R. App. 14.) Western prof-
fered these arguments to illustrate that whether by a
strict application of the New Business Rule or by the
inherent uncertainty of future sales by Clever Endeavor,
the only reasonable conclusion that could be drawn by
12
the district court is that MindGames’ lost profits claim
fails. :
B. MindGames Attempted To Refute Western’s
Non-New Business Rule Arguments.
Contrary to what MindGames would have the Court
believe today, MindGames knew from the beginning that
Western had challenged MindGames’ ability to demon-
strate its alleged lost royalties with any certainty. In its
brief filed in opposition to Western’s partial summary
judgment motion, MindGames conceded, “Western
argues, in effect, that no matter how badly it botched the
handling of Clever Endeavor, no matter how egregious its
failures under the contract, MindGames cannot claim
damages for lost royalties because ‘entertainment prod-
ucts’ are too speculative.” (R. App. 144.)
Having acknowledged that Western challenged its
right to lost profits on this alternative basis, MindGames
then raised both legal and factual arguments in response.
Although it made no attempt to challenge the Hillside
Enterprises decision, MindGames did attempt to distin-
guish the Proteus Books, Ltd. and Kenford Co. cases. (R.
App. 144.) Although it did not and could not challenge
the impact of its unprofitable track record, MindGames
challenged Western’s suggestion that factors other than
Western’s alleged breaches caused the less than stellar
sales of Clever Endeavor, and asserted that the fact that
Clever Endeavor “made it to the shelf” and “lasted more
than two years” somehow brings the success of Clever
Endeavor “out of the realm of speculation.” (R. App. 146.)
13
MindGames also attempted to introduce evidence to
support its claim that its damages could be proved with
reasonable certainty. MindGames submitted not one, but
two, affidavits from Mr. Blackwell, comprising forty-one
pages of Mr. Blackwell’s alleged personal knowledge of
facts relating to Clever Endeavor. (R. App. 63-98.) In these
affidavits, Mr. Blackwell, among other topics, described
the alleged contract breaches by Western and the alleged
damages suffered by MindGames as a result of those
breaches. (R. App. 72-77.) Mr. Blackwell even proffered a
basis by which the district court could estimate Mind-
Games’ alleged lost profits. (R. App. 77, 35.)
Having specifically responded to this argument at
the district court level, it is nothing short of astounding
that MindGames seeks the extraordinary relief of a hear-
ing before this Court by claiming that “MindGames was
never called on to file evidence from which a jury could
reasonably determine sales Clever Endeavor would likely
have achieved had Western performed.” (Petition at 9.)
3 The inherently speculative nature of MindGames’ lost
profits claim becomes even more evident in light of its repeated
assertion that it seeks approximately $40 million in lost profits —
an assertion that was raised even at the district court level. (R.
App. 7, 149-150.) If MindGames actually employed a
methodology to arrive at this astronomical number, one has to
assume that this methodology would have been included in the
voluminous affidavits submitted by Mr. Blackwell. However,
MindGames provided no such methodology. The only logical
inference is that its $40 million claim is based not in fact but in
its own pie-in-the-sky optimism that its game would have
enjoyed the same success as Trivial Pursuit and Pictionary — the
only exceptionally successful adult board games to emerge in
recent history from the plethora of games introduced each year.
14
While the district court ultimately granted Western's
motion for partial summary judgment based on a per se
application of the New Business Rule, it did so on a
record that contained Western’s alternative argument -
that MindGames’ lost profits claim was too speculative to
survive a motion for summary judgment even if Arkansas
did not adhere to the New Business Ruie. This record was
included in the record on appeal, on which the Seventh
Circuit based its decision. Because the basis for the Opin-
ion was expressly raised before the cistrict court, Mind-
Games’ Petition is without merit and should be
summarily dismissed.
I. MindGames’ Other Arguments In Support Of Its
Petition Similarly Fail.
Based on the demonstrably false assertion that West-
ern never raised the “speculation” issue before the dis-
trict court, MindGames argues: (1) the Opinion conflicts
with authority from this Court; (2) the Opinion is some-
how improper because the basis for the Seventh Circuit's
affirmance was not an “issue” presented by either party;
(3) MindGames’ due process rights have been violated;
and (4) the Seventh Circuit improperly drew controlling
inferences against MindGames. These arguments fare no
better than MindGames’ primary one, and further dem-
onstrate that MindGames’ Petition is wholly without
merit. y
15
A. The Opinion Does Not Conflict With Celotex
Or Its Progeny.
MindGames concedes, as it must, that the Seventh
Circuit has the power to affirm a district court’s decision
on alternative grounds as long as those alternative
grounds are supported by the record. (Petition at 16.) See
Flynn v. Sandahl, 58 F.3d 283, 289 (7th Cir. 1995). Nor does
MindGames dispute that the Seventh Circuit exercises
plenary review over a district court’s grant of summary
judgment, drawing its own conclusions of law and fact
from the record before it. Noreuil v. Peabody Coal Co., 96
F.3d 254, 257-258 (7th Cir. 1996).
While not challenging these standards, MindGames
argues that the Seventh Circuit’s decision conflicts with
this Court’s decision in Celotex Corp. v. Catrett, 477 U.S.
317 (1986), and for this reason the Court should grant the
Petition. MindGames argues that “while the Celotex court
ruled an evidentiary record is not always required of the
movant in order to call upon the nonmovant to present a
record demonstrating a material issue of fact, the court
held notice must at least be given of all issues on which
the nonmovant is being required to make an evidentiary
record.” (emphasis in original) (Petition at 16.) Relying on
this passage from Celotex, as well as Judge Bork’s dissent-
ing opinion in Catrett v. Johns-Manville Sales Corporation, et
al., 756 F.2d 181 (D.C. Cir. 1985), MindGames leaps to the
conclusion that it failed to receive sufficient notice of
Western’s “reasonable certainty” argument. (Petition at
17-18.)
16
First, MindGames’ summary of the Celotex ruling is
misleading at best. As aptly pointed out by one of the
leading treatises in this area, the Celotex court:
implicitly recognized [that] the power of the
[district] court to render summary judgment sua
sponte supports the conclusion that the moving
party on a summary judgment motion need not
produce evidence, but simply can argue that
there is an absence of evidence by which the
nonmovant can prove his case.
Wright & Miller, Federal Practice and Procedure, § 2720,
p- 345 (1998); 477 U.S. at 325-326. Thus, contrary to Mind-
Games’ bald summation, Celotex does not require that the
non-movant must receive “fair notice” of the evidentiary
record it is being called upon to meet.+
Second, Judge Bork’s dissenting opinion in Catrett has
no bearing on these proceedings, other than to confirm
that Western did not have the burden “to produce evi-
dence showing the absence of a genuine issue of material
fact.” 477 U.S. at 325. Neither the Court in Celotex nor
Judge Bork® in his dissent in the Catrett opinion,
4 Nor did the Court in Blum v. Bacon, 457 U.S. 132 (1982) or
Schweiker v. Hogan, 457 U.S. 569 (1982) address this issue or even
use the term “fair notice,” as MindGames would have the Court
believe. (Petition at 16.)
> Not surprisingly, Judge Bork’s dissenting opinion, which
MindGames relies upon so heavily, lends support to Western's
position. In his dissent, Judge Bork supported the district
court’s decision to grant summary judgment and emphasized
that a party’s failure to recognize that it was being called upon
to produce admissible evidence that would create a factual
dispute or seek more time to obtain such evidence does not
17
addressed, much less discussed, the issue here —- the
standard for determining whether the ground upon
which the appellate court relied was adequately pre-
sented to the district court so as to put the non-movant
on “notice” that it had to, if it could, submit evidence to
contest that ground. Indeed, the references to “notice” by
this Court and Judge Bork were given in the context of a
district court granting summary judgment sua sponte and,
therefore, are irrelevant to the issues raised in Mind-
Games’ Petition.
Third, as MindGames is well aware, Western has met
the applicable “notice” standard, which has been articu-
lated in Box v. A&P Tea Co., 772 F.2d 1372 (7th Cir. 1985).
In its Petition for Rehearing, MindGames argued that the
Opinion conflicted with the Seventh Circuit’s prior deci-
sion in Box. MindGames claimed that, under Box, the
appellate court cannot affirm a district court ruling unless
the grounds for that ruling were adequately presented in
the district court so that the non-movant had an oppor-
tunity to submit contrary evidence. (R. App. 50.) Relying
on Box, MindGames argued that the Opinion created a
conflict in the Seventh Circuit because the majority had
affirmed the district court on a ground not “adequately
presented” to the district court. (R. App. 50-51.)
preclude the court from granting summary judgment against
that party. Catrett, 756 F.2d at 191. Because, as discussed supra,
Western argued that MindGames could not demonstrate its lost
profits with reasonable certainty, Judge Bork would likely agree
with the Seventh Circuit’s decision and avoid “the judicial
impulse to save [MindGames’] case from what may have been
careless preparation.” Id.
18
It is not surprising that MindGames now abandons
- its reliance on Box. As Western pointed out in its response
to MindGames’ Petition for Rehearing, not only is Box
broader than MindGames suggested, but the Seventh Cir-
cuit Opinion here easily complies with the standard artic-
ulated in Box.
The Seventh Circuit in Box held that
“(this Court] can affirm a summary judgment on
any ground that finds support in the record, but
the ground must have been adequately pre-
sented in the trial court so that the non-moving
party had an opportunity to submit affidavits or
other evidence and contest the issue. Analo-
gously, we may affirm a summary judgment on
a ground not raised in the trial court if the
grounds asserted in the trial court necessarily
encompass the ground asserted on appeal.”
(emphasis added) Box, 772 F.2d at 1376.
_The record before the district court in Box provided
far less notice of the arguments upon which the appellate
court ultimately affirmed the dismissal of the plaintiff’s
claims. There, a former employee brought a sex discrimi-
nation action against her employer. The employer moved
for summary judgment on the grounds that (1) the
employee failed to raise a claim of sex discrimination in
her complaint to the Equal Employment Opportunity
Commission (“EEOC”) and (2) that all persons who
received the jobs the employee claimed she was denied
were female. The district court granted the employer’s
motion for summary judgment for both reasons, and the
employee appealed.
19
On appeal, the Seventh Circuit found that neither
ground relied upon by the district court justified sum-
mary judgment for the employer. The Seventh Circuit
found that the second ground was not well founded
because the employee had made the additional argument
to the district court that the employer discriminated
against her by not training her or promoting her to an
assistant manager position. Nevertheless, the Box court
affirmed the district court’s decision because, as pointed
out by the employer on appeal, the plaintiff never offered
any evidence that she had ever applied for the assistant
manager position, and, therefore, the employee could not
demonstrate a prima facie case of sex discrimination.
The employee contended that the Seventh Circuit
should not consider the merits of the argument that she
failed to apply for the assistant manager position because
the employer never made that argument before the dis-
trict court. The Box court disagreed. The Seventh Circuit
found that in the employer’s initial memorandum the
employer argued, in general, that the employee could not
show a prima facie case of sex discrimination. Id. Although
the argument relied upon by the court in Box was not
argued by the employer before the district court “as
elaborately” as the two arguments relied on by the dis-
trict court, the Seventh Circuit found that the argument
was encompassed in the record and could be considered on
appeal. Id.
Here, the ground relied upon by the Seventh Circuit
to affirm the district court’s decision, i.e., the “reasonably
certainty” argument or “speculation” issue, was certainly
encompassed within the record before the district court, in
much greater detail than the ground relied upon by the
Seventh Circuit in Box. Western expressly raised this
20
argument and challenged MindGames to put forth evi-
dence by which it could demonstrate its alleged lost
profits with reasonable certainty. As the Seventh Circuit
recognized, MindGames failed to submit such evidence.
Therefore, the Seventh Circuit’s decision is consistent
with the applicable standards for “notice” to a nonmov-
ing party set forth in Box and its progeny.
B. It Is Irrelevant That The Basis For The Opinion
Was Not An “Issue” Presented By Either Party.
MindGames also argues, with no legal support, that
because the issues presented for review to the Seventh
Circuit did not include the ground relied upon by the
Seventh Circuit, the “reasonable certainty” argument
could not have been raised below. (Petition at 13-14.) The
lack of authority for this proposition is not surprising
because such a rule would make no logical sense. Because
the district court relied on a per se application of the New
Business Rule, the statement of issues presented for
review necessarily related to the grounds relied upon by
the district court in its decision.
There is no rule mandating, or even suggesting, that
all possible grounds for affirming or reversing a district
court’s decision must be included within the statement of
issues presented to the Seventh Circuit. Nor could such a
rule exist. In reviewing a grant of summary judgment, the
appellate courts are to conduct a de novo review of the
proceedings and the record below. Miranda v. Wisconsin
Power & Light. Co., 91 F.3d 1011, 1014 (7th Cir. 1996).
Limiting the grounds upon which the appellate court
could affirm a summary judgment ruling to those stated
in the “Issues Presented” section of the briefs would
21
essentially preclude the appellate court from making a de
novo review of the record. |
MindGames, moreover, mistakenly claims that “the
majority then referred to an argument Western presented
to the court of appeals - not to the district court - and
concluded 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.’ ”
(Petition at 14.) As explained above, MindGames’ claim is
simply untrue.
_
C. MindGames Misapprehends The Opinion,
Western’s Burden And The Responsibilities Of
The District Court.
In a thinly-veiled attempt to satisfy the strict stan-
dards of Supreme Court Rule 10, MindGames expands
the Opinion beyond its limited holding and argues that
its due process rights have somehow been violated - all
in the hope that it will convince the Court that its case is
worthy of being heard. MindGames then proceeds to
impose burdens on both the district court and Western
that have no support whatsoever in the law.
MindGames would have this Court believe that the
ruling of the Seventh Circuit “puts summary judgment
nonmovants in an almost impossible position and forces
them to prove every element of their cases at the sum-
mary judgment stage lest the court of appeals dismiss for
lack of evidence on a ground not raised by the movant,
not ruled on by the district court and without the
responding party having been notified of the need to
produce evidence.” (Petition at 8.) MindGames’ assertion
is pure fiction.
as in IA A A. yen mm im
22
First, let there be no doubt, Western raised the “rea-
sonable certainty” argument in its initial motion for par-
tial summary judgment. Moreover, coritrary to the self-
serving excerpts MindGames quotes from its prior
response brief (Petition at 20), MindGames recognized
that Western was making this argument. (R. App. 144.) If
MindGames chose to “assume [that] defeating application
of the ‘new business’ rule defeated [Western’s motion for]
summary judgment,” it did so at its own risk. (Petition at
20.) Such an improper assumption on the part of Mind-
Games does not change the fact that Western raised the
“reasonable certainty” argument before the district court.
(Petition at 20.)
Second, the fact that the district court did not address
Western’s “reasonable certainty” argument is irrelevant.
It is well-settled that the Seventh Circuit can affirm a
district court’s decision on alternative grounds, not ruled
upon by the district court, as long as those alternative
grounds are supported by the record. Flynn, supra, 58 F.3d
at 289. Nothing in the Opinion is inconsistent with that
legal proposition.
Third, contrary to MindGames’ apparent belief, nei-
ther the district court nor Western had the burden of
“notifying” MindGames that it needed to produce evi-
dence to avert summary judgment on its lost profits
claim. (Petition at 8, 12, 19.) Indeed, Western’s only bur-
den, which it satisfied, was to identify through “plead-
ings, depositions, answers to interrogatories, and
admissions on file, together with the affidavits, if any,”
the absence of a genuine issue of materia) fact. Celotex,
477 U.S. at 323. Western was under no obligation to
“challenge MindGames to come forward with evidence of
\
23
lost future sales.” (Petition at 12.) Because the district
court did not bring this summary judgment motion sua
sponte, it also had no duty to notify MindGames that it
had to come forward with evidence of its alleged lost
profits damages. Celotex, 477 U.S. at 326. Rather, Mind-
Games had the burden of recognizing the arguments
raised by Western and submitting evidence, if possible,
sufficient to create an issue of fact. Insolia v. Philip Morris
Incorporated, 216 F.3d 596, 598-599 (7th Cir. 2000). Again,
nothing in the Opinion contradicts this well established
law or forces nonmovants to “prove” their case at the
summary judgment stage, as MindGames would have
this Court believe. (Petition at 8.)
Finally, MindGames cries that it was deprived of due
process and never got its day in court because it did not
have “fair notice that it was required to prove its lost
profits damages . . . at the summary judgment stage.”
(Petition at 19.) This argument fails because (1) Western’s
“reasonable certainty” argument was encompassed
within its motion for partial summary judgment and (2)
under no circumstances did MindGames have to prove its
damages. Rather, it had the burden of creating a genuine
issue of fact that it could demonstrate its lost profits with
reasonable certainty. MindGames conveniently ignores its
own burden and the fact that a party is not entitled to
their “day in court,” but must earn that day by demon-
strating the existence of a genuine issue of fact or law.
The Seventh Circuit correctly found that MindGames did
not satisfy its own burden and, therefore, was not entitled
to its “day in court” as a matter of law.
24
D. This Court Must Only Draw Reasonable Infer-
ences In MindGames’ Favor.
MindGames also argues, as it did in its Petition for
Rehearing, that the Seventh Circuit made unwarranted
inferences against it and overlooked evidence in the
record of Western’s wrongful conduct. (Petition at 10-11.)
MindGames’ arguments are factually and legally defi-
cient.
In arguing that the Seventh Circuit failed to draw
inferences in its favor, MindGames, again, improperly
takes liberties with the Opinion. MindGames argues that
the Seventh Circuit based its decision on two inferences it
made in favor of Western: (1) that Western did not market
Clever Endeavor more vigorously because it correctly
sensed that demand had “dried up” (Petition at 22); and
(2) MindGames’ failure to terminate the License after the
alleged breaches occurred and to seek distribution of the
game by other means is evidence of a lack of commercial
promise unrelated to Western’s conduct. (Petition at 24.)
MindGames’ argument is demonstrably untrue.
A fair reading of the Opinion demonstrates that the
Seventh Circuit based its ruling on undisputed facts,
including the fact that MindGames had no history of past
profits.
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
25
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 entrepre-
neur with a proven track record. (R. App. 33-34.)
The remaining portion of the Opinion is nothing
more than dicta. Indeed, immediately after speculating
that Western correctly sensed that the demand for Clever
Endeavor had “dried up,” the Seventh Circuit stated:
Even if that alternative is rejected, we do not see
how the number of copies that would have been
sold but for the alleged breach could be deter-
mined given the evidence presented in the sum-
mary judgment proceedings (a potentially
important qualification, of course); and so
MindGames’ proof of damages is indeed exces-
sively speculative. See, e.g., Gentry v. Little Rock
Road Machinery Co., 339 $.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 West-
ern would have had to sell more than 10 million
copies to generate the $40 million in lost roy-
alties that MindGames seeks to recover. Cf. Box-
horn’s Big Muskego Gun Club, Inc. v. Electrical
26
Workers Local 494, 798 F.2d 1016, 1023 (7th Cir.
1986). (R. App. 34-35.)
Moreover, even if the Seventh Circuit had based its
ruling, in part, on these inferences, MindGames’ argu-
ment still fails. Although the Seventh Circuit had to
“draw inferences in a light most favorable to the non-
moving party,” it was “not required to draw every con-
ceivable inference from the record — only those inferences
that are reasonable.” (emphasis added) Shank, et al. v.
Hague, Inc., 192 F.3d 675, 683 (7th Cir. 1999). A reasonable
inference “cannot be supported by only threadbare con-
clusory statements instead of significant probative evi-
dence.” Barnes v. Arden Mayfair, Inc., 759 F.2d 676, 680-81
(9th Cir. 1985).
In its initial brief before the district court, Western
challenged MindGames’ ability to prove it lost millions in
royalties as a result of Western’s conduct. The burden
_then shifted to MindGames to “move beyond the plead-
ings and to set forth specific facts from which it might be
reasonably inferred” that MindGames could satisfy this
burden of proof. See Jenkins v. Heintz, 124 F.3d 824, 831
(7th Cir. 1997) (affirming summary judgment in favor of
attorney and law firm where plaintiff failed to put forth
evidence from which one could reasonably infer that
defendants knew and intentionally made false represen-
tations). As the Seventh Circuit stated in Schacht v. Wis-
consin Dept. of Corrections, et al., 175 F.3d 497 (7th Cir.
1999), “[summary judgment] is the ‘put up or shut up’
moment in a lawsuit, when a party must show what
evidence it)has that would convince a trier of fact to
accept its version of events.” 175 F.2d at 504. As the
.
Seventh Circuit recognized, MindGames did not satisfy
its burden.
In its Petition, MindGames continues to refuse to
acknowledge its burden as a non-movant to submit evi-
dence from which a reasonable trier of fact could estimate
the lost royalties MindGames allegedly incurred as a
result of Western’s conduct. It asks the Court to find that
the district court and the Seventh Circuit had to draw
every conceivable inference in its favor, whether reason-
able or not, so that MindGames can someday get its case
in front of a jury. The law, however, prevents MindGames
from getting in front of a jury if it cannot submit evidence
that would bring its claim for $40 million out of the realm
of mere “speculation, conjecture or fantasy.” Barnes, 759
F.2d at 681.6
III. The Seventh Circuit correctly found that Mind-
Games cannot pass the “reasonable certainty” test.
MindGames would have this Court believe that if the
New Business Rule is no longer the law in Arkansas, it
€ MindGames’ citation to Eastman Kodak Company v. Image
Technical Services, Inc., et. al., 504 U.S. 451 (1992) does not change
the end result here. The Court’s holding in Eastman did not in
any way restrict the district court’s or Seventh Circuit's
discretion to draw only reasonable inferences in favor of the
non-moving party. Moreover, MindGames again miscites an
opinion from this Court. Nothing in Eastman indicates that
MindGames can pass the “reasonable certainty” test simply by
demonstrating that its claims are not “economically senseless.”
Indeed, MindGames has previously argued that the “reasonable
certainty” test is the applicable standard. (R. App. 152.)
28
necessarily gets a shot with a jury. That is not the case. As
Chief Judge Posner wrote on behalf of the Seventh Cir-
cuit, “abrogation of the ‘new business rule’ does not
produce a free-for all.” (R. App. 33.) The New Business
_ Rule is a formalization of a rule designed to ensure that
when the undisputed facts fall into a certain category, i.e.,
a new business with no history of past success, a party
cannot recover its lost profits regardless of the alleged
breaches. The “reasonable certainty” test, adopted by the
majority of states and by the Seventh Circuit here, stands
for essentially the same proposition of law. As the Sev-
enth Circuit recognized, there are certain situations
where a trier of fact cannot award any damages because
such an award would be too remote and speculative
based on the undisputed facts. Such a situation is present
here, and MindGames knows it.
The key facts are undisputed. Mr. Blackwell had no
track record in the adult board game industry when he
invented Clever Endeavor. MindGames failed to achieve a
profit prior to Western’s alleged breaches of the license
agreement. And, the consuming public, as Justice Posner
aptly stated, is “fickle.” (R. App. 34.) Both the Seventh
Circuit and the district court were presented with these
undisputed facts, as well as others. Both courts recog-
nized that, based on these undisputed facts, any estimate
of lost profits would be inherently speculative. In reach-
ing its decision, the district court relied on a strict appli-
cation of the New Business Rule. The Seventh Circuit,
while not adopting the New Business Rule, achieved the
same end result by finding that no evidence existed in the
29
record from which a reasonable trier of fact could esti-
mate the number of copies of Clever Endeavor that would
have been sold but for Western’s alleged breaches.
MindGames’ continued reliance on the success of
Trivial Pursuit and Pictionary illustrates the Seventh Cir-
cuit’s point. The fact that Western had marketed these
highly successful adult board games does not mean that
Western has the “Midas Touch” and every game it mar-
kets will turn to “gold.” If such an inference was reason-
able, as MindGames would have the Court believe, MGM
would be sued every time a film it produced did not
achieve the same success as “The Wizard Of Oz.” Mind-
Games’ and Mr. Blackwell’s history of success, or lack
thereof, in the adult board game industry are the key
considerations. Western's prior success with other games
is irrelevant. The Seventh Circuit’s decision recognized,
like other courts have in the past, that the undisputed
facts of record demonstrate that MindGames could never
pass the “reasonable certainty” test. See, ¢.g., Hillside
Enterprises, supra; Information Communication Corporation
v. Unisys Corporation, 181 F.3d 629 (5th Cir. 1999) (affirm-
ing district court’s decision to overturn jury's award of
lost profits where plaintiff was a new and improved
business, had no track record of successfully creating and
marketing new products and had no history of prof-
itability); Texas Instruments, Inc. v. Telestron Energy Man-
agement, Inc., 877 S.W.2d 276 (Tex. 1994) (plaintiff did not
pass “reasonable certainty” test and could not recover
lost profits where new and unique product at issue had
never been sold before and plaintiff never operated at a
profit.) ‘
ay
30
CONCLUSION
For all the foregoing reasons, this Court should deny
MindGames’ Petition in its entirety.
Dated: December 22, 2000
Respectfully submitted,
Rosert E. SHAPIRO*
WEND! E. SLOANE
—_—— RICHARD A. SALDINGER
HEATHER J. MACKLIN
BARACK FERRAZZANO KIRSCHBAUM
PERLMAN & NAGELBERG
333 West Wacker Drive
Suite 2700
Chicago, Illinois 60606
Tel: 312/984-3100
Fax: 312/984-3220
*Counsel of Record for Respondent
No. 00-825 |
4
Vv
In The
Supreme Court of the United States
¢
MINDGAMES, INC.,
Petitioner,
WESTERN PUBLISHING COMPANY, INC.,
Respondent.
+
On Petition For Writ Of Certiorari
To The Court Of Appeals
For The Seventh Circuit
¢
RESPONDENT’S APPENDIX TO BRIEF IN
OPPOSITION TO PETITION FOR WRIT OF -
CERTIORARI TO THE UNITED STATES COURT
OF APPEALS FOR THE SEVENTH CIRCUIT
¢
Rosert E. SHAPIRO*
WEND! E. SLOANE
RicHARD A. SALDINGER
HEATHER J. MACKLIN
BARACK FERRAZZANO KIRSCHBAUM
PERLMAN & NAGELBERG
333 West Wacker Drive
Suite 2700
Chicago, Illinois 60606
Tel: 312/984-3100
Fax: 312/984-3220 oid
*Counsel of Record for Respondent
EE oe ew oe — ae ers eee ee hhc eC lS eee ee le
TABLE OF CONTENTS
Page
Western Publishing Company, Inc.’s Memoran-
dum in Support of its Motion for Partial
Summary Judgment, file stamped May 20,
| OP ee Tey Trey ee rere ey re ee R. App. 1
June 22, 2000 Opinion of the United States Court
of Appeals for the Seventh Circuit....... R. App. 21
MindGames, Inc.’s Petition for Rehearing and
Rehearing En Banc, dated July 6, 2000...R. App. 40
Order of the United States Court of Appeals for
the Seventh Circuit denying Petition for Rehear-
ing and Rehearing En Banc, dated August 22,
PE REN ECAR NASA RHEE ASS he CR ES UE WAS Os R. App. 62
Affidavit of G. Lawrence Blackwell, III in Opposi-
tion to the Summary Judgment Motion of West-
ern Publishing Company, Inc., dated July 8,
FFE Sesh e gens deed h nee enn ddan sedeewans R. App. 63
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, dated Sep-
SO SUN tab nea havkwdndcipancis css R. App. 82
Excerpted pages from the Deposition of George
Lawrence Blackwell, III taken at the instance of
Western Publishing Company, Inc. on August
Bee ie bias cos hax dian ds Aen ad ew sania R. App. 99
1989 Income Statement of MindGames, Inc. .. R. App. 114
Excerpted pages from the Deposition of George
Lawrence Blackwell, III (resumed), taken on
RE Wy SOME cannes nccsasnkiecyatas: R. App. 116
il
TABLE OF CONTENTS - Continued
Page
Excerpted pages from the Deposition of George
Lawrence Blackwell, III taken on October 16,
ie OE eee Tee Te Pr rer kee R. App. 119
Excerpted pages from the Brief of Appellee West-
ern Publishing Company, Inc. to the United
States Court of Appeals for the Seventh Circuit,
Gated Fepreery Zi, TPF soos ccc eesscias R. App. 123
Memorandum of MindGames, Inc. In Opposition
to Motion for Summary Judgment of Western
Publishing Company, Inc., dated July 5,
WOOD siscctisesiascaienenea eee R. App. 127
Letter from E. Campion Kersten to Wendi Sloane
Weitman and Richard A. Saldinger, dated April
Bs TOR va. 0 cc ens nas eae eee R. App. 149
Excerpted pages from the Brief and Short Appen-
dix of Appellant MindGames, Inc. to the United
States Court of Appeals for the Seventh Circuit,
GOOOd FORUATY 22, T9GF nics cirsesaniancs R. App. 151
R. App. 1
UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF WISCONSIN
WESTERN PUBLISHING
COMPANY, INC.,
CIVIL NO. 94 C 0552
Plaintiff, Hon. Robert E. Warren
V.
MINDGAMES, INC., CIVIL NO. 94 C 0998
Defendant.
MINDGAMES, INC.,
Plaintiff,
(Filed May 20, 1996)
Vv.
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 Mind-
Games, Inc. (“MindGames”) and Western Publishing
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 iimited success to the erratic whims of
R. App. 2
the consumer and the game’s own shortcomings, Mind-
Games 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 still applies the “New Busi-
ness 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 pre-
cluded from recovering any anticipated lost profits. Con-
sequently, 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.
II. WESTERN’S PROPOSED FINDINGS OF FACT
A. The Parties.
1. 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.
2. MindGames, Inc. (“MindGames”) is a corporation
organized and existing under the laws of the State of
R. App. 3
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. Accord-
ingly, 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).
C. The Development of Clever Endeavor.
5. In March 1988, Larry Blackwell (“Blackwell”)
formed MindGames for the sole purpose of manufactur-
ing, marketing and selling a new adult board game he
invented called “Clever Endeavor.” (See p. 24 of the Depo-
sition of Larry Blackwell (“Blackwell Dep.”). Copies of
the relevant pages of Mr. Blackwell’s deposition tran-
script are attached hereto as Group Exhibit A). Clever
Endeavor was MindGames’ first and only product. (Black-
well 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
R. App. 4
would appeal to the same market and achieve the same
success as the two most successful adult board games of
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 Piction-
ary successful games. (Blackwell Dep. p. 82).
7. 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 pub-
lish 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 advertis-
ing with retailers. (Blackwell Dep. p. 172). MindGames,
however, did not use any type of television advertising to
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).
R. App. 5
D. The License Agreement.
10. In December 1989, Blackwell met with two rep-
resentatives from a game company called Games Gang,
Inc. (“Games Gang”), which was the current distributor
of Pictionary. (Blackwell Dep. pp. 192-193). These discus-
sions 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 West-
ern 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, 6).
13. The term of the original License extended
through January 31, 1993. (Exhibit C at { 2). The License
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
{ 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. (Exhibit C at { 2).
R. App. 6
14. On March 13, 1991, the parties amended the
License by allowing the Licensees to reduce the percent-
age of gross sales to be utilized for advertising and pro-
motion 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, West-
ern 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:
Clever Endeavor
Fiscal Year Units Sold
FY 1990 165,000
FY 1991 58,113
FY 1992 26,394
FY 1993 7,438
III. NATURE OF THE DISPUTE
MindGames alleges that Clever Endeavor was not suc-
cessful 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 reason-
able effort to market and sell Clever Endeavor” and 4)
R. App. 7
failing to provide the minimum 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.’
IV. ARGUMENT
A. The Standard For Granting Summary Judg-
ment.
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
1 MindGames also seeks $1.2 million for royalties allegedly
owed to renew the License for the period of February 1, 1993
through January 31, 1994 and for the period of February 1, 1994
through January 31, 1995.
R. App. 8
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-mov-
ing 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
respectfully requests that this Court grant it partial sum-
mary judgment, and find that MindGames is precluded
from seeking darnages 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 West-
ern or Games Gang breached any provision of the
License, MindGames is legally precluded from recovering
its lost profits.
1. 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
R. App. 9
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, 111 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 [sic] has changed its position on the recovery of
lost profits by a new business. Despite exhaustive
research, 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 Corp.
v. Third National Mortgage Co., 611 F.2d 969 (4th Cir. 1979),
the New Business Rule provides a “safegiard” 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 subse-
quent record of the business is admissible to
permit an intelligent and probable estimate of
R. App. 10
damages . . . But where a new business or enter-
prise 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 bargains, the status of the
market, and too many other contingencies to
furnish a safeguard in fixing the measure of
damages.”
(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 reaffirmed 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 (7th Cir.
1995) (Illinois law); Hillside Enterprises v. Carlisle Corp., 69
F.3d 1410, 1413-1415 (8th 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) (Vir-
ginia Law); In re Phoenix Restoration Specialists, Inc., 14
B.R. 115, 123-24 (Bkrptcy. Mass. 1981) (Massachusetts
law)
R. App. 11
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 West-
ern and Games Gang. Consequently, MindGames, as 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; how-
ever, MindGames did not decide to even market Clever
Endeavor until the spring of 1989, and it did not manufac-
ture 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 representa-
tives of Games Gang to discuss a joint venture. (See,
Blackwell Dep. pp. 192-193). These discussions culmi-
nated 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. McBraver v.
Teckla. Inc., 496 F2d 122 (5th 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
R. App. 12
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 specula-
tive to sustain an award of damages because plaintiff 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, there-
fore, 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 per-
manency 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
R. App. 13
Clever Endeavor, was not a “new” business. In his Septem-
ber 12, 1990 letter to Games Gang, Blackwell relayed his
concerns about the proposed television advertising cam-
paign for 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 prod-
ucts 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.
3. The success of a new product in the enter-
tainment industry is especially difficult to
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 tu predict
because an entertainment product, such as an adult board
game is subject to the most subjective and unpredictable
R. App. 14
critic — the public. See, Proteus Books Ltd. v. Cherry Lane
Music Co, 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;
e the economy at the time the product is intro-
duced to the market;
e the number of similar products in the mar-
ket; and
e 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
commentato: noted: “for every 1000 games that get
R. App. 15
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 indus-
try when he admitted that:
“[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 [Black-
well’s] business and leadership skills in a hostile
and unforgiving market.” (See, p. 7 of Mr. Black-
well’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 disap-
pointed that Clever Endeavor fell short of his lofty expecta-
tions.2 However, Clever Endeavor’s limited success can be
2 Mr. Blackwell’s credibility on the issue of Clever
Endeavor’s 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
R. App. 16
attributed to many factors independent of the alleged
manufacturing or advertising problems, including the fol-
lowing potential causes:
1. Clever Endeavor was one of the more expen-
sive adult games in the market (Blackwell
Dep. p. 98);
2. There were other similar adult board games q
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. 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 mar-
ketplace, 1990, was a “rotten” year for the 4
game 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
ony ban
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 cuccess.” (Emphasis added) (A copy of the September
7, 1990 letter is attached hereto as Exhibit M.)
R. App. 17
5. 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 enter-
tainment 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 suc-
cess MindGames now claims it expected.
The Eight Circuit Court’s opinion in Hillside Enter-
prises illustrates the rationale and application of the New
Business Rule in the entertainment/consumer product
industry. In Hillside Enterprises, a wine marketer (“Hill-
side”) sued a disposable wine manufacturer (“Carlisle”)
for breach of contract after the manufacturer failed to
properly manufacture and ship the required number of
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 ade-
quately 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
R. App. 18
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 Hill-
side’s one confirmed order for 30,000 glasses, which Hill-
side was unable to fulfill because of Carlisle’s breach. Id.
Unlike the plaintiff in Hillside Enterprises, Mind-
Games does not even allege that it lost profits as a result
of Western’s failure to fulfill a specific sales order or 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 possi-
bly 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.
3 As a result of the unpredictable nature of the
entertainment industry, it is not surprising that other parties
similarly situated to MindGames have also been unable to
recover the alleged lost profits of their new businesses. See, e.g.,
Proteus Books Ltd. 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
Sepethanaiidlahencea ade Pek —
R. App. 19
4. MinaGames 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 West-
ern’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, antici-
pated 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 prob-
lems developed with the product); Empire Shoe Company v.
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. County of Erie, supra.
R. App. 20
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.
V. CONCLUSION
For all the aforementioned reason, Western respect-
fully 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
/s/ Richard Saldinger
On 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 O. Riteris
MICHAEL, BEST & FRIEDRICH
100 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
(414) 271-6560
R. App. 21
United States Court of Appeals
For the Seventh Circuit
Chicago, Illinois 60604
JUDGMENT - WITH ORAL ARGUMENT
Date: June 22, 2000
BEFORE: Honorable RICHARD A. POSNER,
Chief Judge
Honorable THOMAS E. FAIRCHILD,
Circuit Judge
Honorable DIANE P. WOOD, Circuit Judge
No. 98-1879
WESTERN PUBLISHING COMPANY, INCORPORATED,
Plaintiff-Appellee
V.
MINDGAMES, INCORPORATED,
Defendant-Appellant
Appeal from the United States District Court
for the Eastern District of Wisconsin
No. 94 C 552, Lynn Adelman, Judge
The judgment of the District Court is AFFIRMED,
with costs, in accordance with the decision of this court
entered on this date.
(1061-110393)
R. App. 22
In the
United States Court of Appeals
for the Seventh Circuit
No. 98-1879
MinpGames, INc.,
Plaintiff-Appellant,
v.
WESTERN PusBLISHING CompPANy, 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.
Arcuep Aprit 17, 2000 -— Decipep June 22, 2000
Before Posner, Chief Judge, and Faircuttp 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,
“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,
R. App. 23
Western, a major marketer of games. Western had mar-
keted the very successful adult board games “Trivial Pur-
suit” 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 of
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 Mind-
Games $600,000 in royalties. After that, sales fell precipi-
tously ‘(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 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
R. App. 24
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 con-
tract is entitled to nominal damages, Mason v. Russen-
berger, 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 nomi-
nal 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 paying 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 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 condi-
tional on Western’s exercising its contractual right to
renew. A conditional right in a contract does not become
R. App. 25
an enforceable right until the condition occurs, Restate-
ment (Second) of Contracts § 225(1) (1981), unless noncom-
pliance with the condition is excused by agreement, Uebe
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; Restate-
ment, 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 MindGames to
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. Max-
imus, 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.
1995); Stuart Park Associates Limited Partnership v. Ameri-
tech Pension Trust, 51 F.3d 1319, 1328 (7th Cir. 1995) (Illi-
nois 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
f oer.
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R. App. 26 ‘
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 estab-
lished 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 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
R. App. 27
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 governs a controversy by
virtue of the applicable choice of law rule to be conclu-
sive 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 (5th Cir. 1997); New York Life Ins. Co. v. KN
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 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,
R. App. 28
pp. 126-50 (2d ed.1996). Law, Holmes said, in a controver-
sial 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 occa-
sional, 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, e.g., Central Telecommunications, Inc. v. TCI
Cablevision, Inc., 800 F.2d 711, 727-28 (8th Cir. 1986). The
Arkansas cases decided since Marvell that deal with dam-
ages issues exhibit a liberal approach to the estimation of
damages that is inconsistent 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 Transmis-
sion Systems v. Barclay, 662 S.W.2d 188, 192 (Ark. App.
R. App. 29
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, and it
seems to retain little vitality even in states like Virginia,
which 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); 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, albeit 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 follow it if the
eeillindinieanieeientiem antinori
R. App. 30
occasion for its supreme court to choose arose. The objec-
tion has to do with the difference between rule and stan-
dard 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 limit-
ing factual inquiry but the disadvantage of being inflex-
ible, even arbitrary, and thus overinclusive, or of being
underinclusive and thus opening up loopholes (or of
being both over- and underinclusive!). Standards are flex-
ible, 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 stan-
dards, or vice versa, though some judges are drawn to the
definiteness of rules and others to the flexibility of stan-
dards. But that is psychology; the important point is that
some activities are 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 Con-
cepts, 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
R. App. 31
damages generally. See, e.g., Jones Motor Co. v. Holtkamp,
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); Restate-
ment, 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 pub-
lisher for the publication of his book would not ordinarily
be regarded as being engaged in a “business,” or his
royalties 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
R. App. 32
would have no relation to its rationale, which is to pre-
vent 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 defi-
nition 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 deci-
sion costs and uncertainty brought about by avoiding a
speculative mire may have swamped the increased social
costs resulting from the systematically inadequate dam-
ages that a “new business” rule decrees. But today the
courts have become sufficiently sophisticated in analyz-
ing lost-earnings claims, and have accumulated sufficient
precedent on the standard of undue speculativeness in
damages awards, to make the balance of costs and bene-
fits 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
R. App. 33
invocation here. There is no authority for, and no com-
mon sense appeal to, such an extension.
But that leaves us with the question of undue spec-
ulation 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 consider-
ation of the damages claim not as a rule but as a factor in
applying the standard. Just as a start-up company should
not be permitted to obtain pie-in-the-sky damages upon
allegations that it was snuffed out before it could begin to
operate (untike 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 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 dis-
credited “new business” rule. What is important is that
SE ADO ORIN testis nM ae
R. App. 34
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 vigor-
ously 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 alleged breach could be determined given the evi-
dence 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.,
R. App. 35
supra, 555 N.E.2d at 640. Those proceedings were com-
pleted 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. MindGames 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 Local 494, 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 con-
duct.
Although Western in its brief in this court spent most
of its time misguidedly defending the “new business”
tule, clinging to Marvell 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
ABER SRNR OA hae oe
R. App. 36
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 argu-
ment 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 West-
ern’s argument compelling, and so the judgment in favor
of Western is
AFFIRMED.
FairRcHILD, Circuit Judge, dissenting in part.
I 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 M:nd-
Games’ 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.
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 roy-
alties arose from the sales of games manufactured, pro-
moted and sold by it, and whether MindGames showed a
profit, as well as MindGames’ lack of history, was wholly
R. App. 37
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’ com-
plaint alleged that a substantial number of games pro-
duced 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 Mind-
Games’ position that these failures caused loss of sales.
Western’s motion for partial summary judgment was
premised on the new business rule which Western per-
ceived as announced in Marvell, and the district court
granted the motion on that basis. If, as we all agree,
Marvell does not 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 dam-
ages 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
|
ON ne omen nN URAC oa wer marnent s vee
R. App. 38
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 [sic] 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 Mar-
vell, 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 entertain-
ment 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.
R. App. 39
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 applica-
tion 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 busi-
nesses in the entertainment industry are barred per se
from. claiming lost profits.” Again I do not think it is
appropriate to rely on waiver or forfeiture.
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
R. App. 40
UNITED STATES COURT OF APPEALS
FOR THE SEVENTH CIRCUIT
Appeal No. 98-1879
WESTERN PUBLISHING COMPANY, INC.,
Plaintiff-Appellee-Respondent,
v. No. 94-C-552
MINDGAMES, INC.,
Defendant-Appellant-Petitioner
MINDGAMES, INC.,
Plaintiff-Appellant-Petitioner,
V. No. 94-C-998
WESTERN PUBLISHING COMPANY, INC.,
Deferidant-Appellee-Respondent.
Appeal from the United States District Court
for the Eastern District of Wisconsin,
The Honorable Robert W. Warren, followed by
The Honorable Lynn S. Adelman, Presiding
PETITION FOR REHEARING AND REHEARING
EN BANC AND SUPPORTING APPENDIX
E. Campion Kersten
Matthew T. Fricker
Attorneys for the Appellant
R. App. 41
KERSTON & McKINNON, S.C.
231 West Wisconsin Avenue, Suite 1200
Milwaukee, Wisconsin 53203
Telephone: (414) 271-0054
Fax: (414) 271-7131
Appeal No. 98-1879
CORPORATE DISCLOSURE STATEMENT
Short Caption: MindGames, Inc.
v. Western Publishing Co., Inc.
The undersigned, counsel of record for the appellant,
MindGames, Inc., furnishes the following information in
compliance with Fed. R. App. P. 26.1.
1. The full name of the appellant: MindGames,
Inc.
2. Parent Corporation: None
3. Subsidiaries and Affiliates: None
4. The names of all law firms appearing for the
appelant in this action:
Kersten & McKinnon, S.C.
231 West Wisconsin Avenue
Suite 1200
Milwaukee, Wisconsin 53203
Dated: July 6, 2000
/s/ E. Campion Kersten
E. Campion Kersten
KERSTEN & McKINNON, S.C.
231 West Wisconsin Avenue
Suite 1200
Milwaukee, Wisconsin 53203
Telephone: (414) 271-0054
Fax: (414) 271-7131
R. App. 42
TABLE OF CONTENTS
TABLE OF AUTOR vikc cc tkkccosuscckceee ii
eo TEL Se er Dumee re teat ry Ter Sy. 1
Ape ....g oe ee eee 1
I. The Majority Misapprehended the District
Court Record When it Assumed Western
Argued MindGames Would Be Unable to Rea-
sonably Estimate Sales of Clever Endeavor Lost
Due to Western’s Breach .........cscccccceees 1
II. The Majority Decision Conflicts with Authority
From This Court Prohibiting Affirming Sum-
mary Judgment on a Ground Not Raised in the
Dinithct Cognit. ccc dveciesnexnpeeeramenees 5
III. MindGames Did Not Waive Its Right to Prove
Lows Of Fated PO ccc occu cincedesndnaenten 6
IV. The Majority Opinion Conflicts with Supreme
Court Summary Judgment Precedent by Improp-
erly Drawing Controlling Inferences Against
i errrrrrorra TTT or Tere or re 8
V. The Majority Opinion Wrongly Deprived Mind-
Games of the Chance to Recover Even Nominal
Damages and the Attorney Fees Recoverable
under Arkansas Law and by Contract Based on
a Misapprehension of MindGames’ Complaint
and Applicable Procedural Rules ............. 11
CRTC RATS 5 6.056 bs da vkadapeedns boca nelensanee 13
INDEX TO THE APPENDIX OF THE PETITIONER,
MINDGAMES, INC.
R. App. 43
TABLE OF AUTHORITIES
Cases
Anderson v. Chrysler Corp.,
ee EO OOD oo oc acescccecccse cs. 5
Anderson v. Liberty Lobby, Inc.,
es des bbvscscceces. 1, 9-11
Bombard v. Fort Wayne Newspapers, Inc.,
Rg | ee 9
Box v. A & P Tea Co.,
i De ee.) a 3
Celotex Corp. v. Catrell,
06 55k 5's aii'e'b » deiuow- c's wie ee 11
Dawson v. Temps Plus, Inc.,
i 12
Door Systems, Inc. v. Pro-Line Door Systems, Inc.,
co 9
English v. Cowell,
ve 13
Hannon v. Turnage,
892 F.2d 653 (7th Cir. 1990),
cert. den., 498 U.S. 821 (1990) .................0005. 4
Marsh & McLennan of Arkansas v. Herget,
Paw ave.ats 199 (ASK. 1995) .. 2.2... ccs c cece cen cse 12
Marvell Light & Ice Co. v. General Electric Co.,
a a 4
Matsushita Elec. Indus. Co. v. Zenith Radio Corp.,
ee Ss civ dss seas cecessce 10, 11
Medcom Holding Company v. Baxter Travenol Labora-
tories, Inc.,
es 8
R. App. 44
Meredith v. Allsteel, Inc.,
11 F.3d 1354 (7th Cir. 1994),
overruled on other grounds, Ahng v. Allsteel, Inc.,
96 FSG 20353 (Ur Cie. BG0G) oo oes cc cicsecccccetecwes 5
Tacket v. Delco Remy Div. of General Motors Corp.,
S37 P26 TAO (7G GM. TPE) ceca seenssssncsins 12
United States v. Jackson, :
Mae ES SRG C7 COE BND inc knees oe idee Fin daee
Wallace v. SMC Pneumatics, Inc.,
IGS PSG TIPE (7G CO, BGT) oc oc ccc sewasecasen 9
Western Publishing Co., Inc. v. MindGames, Inc.,
944 FSupp. 754 (6.0). Wis. 1996) ... 2... cacesecsn 3, 4
Statutes
OS. Cope, OU, WEE ack dad cssaccsacéedateindeaa 9
Pad. H. Asie. Fi CO) <i n e's acon ccs cases asacnanaeusan 6
Pen. E. Amie Fe Fes cies cds ncsksavecknccussanmapass a
Ped. BR. AGO. F. SP. cas cavieievseccsksscesssnenasawe’s 1
Ae Be SS Peer errr Tree eer er ere er errs 9
BAD. Wak. SCR Te SCRA? ov anno cb cdvcccvasces 3
Ark. Code Ann. § 16-22-308 (Repl. 1994)............ 12
&
Other Authorities -
James W. Moore, ET AL., Moore’s FEDERAL PRACTICE
© SO.Be Ot SO-Gis CO OM. FOr s obs da iecdntadinesnas 9
R. App. 45
PETITIONS
MindGames, Inc., petitions for rehearing pursuant to
Fed.R.App.P. 40 because the panel misapprehended the
record below and overlooked the failure of Western Pub-
lishing Company, Inc., to raise below the issue on which
the panel relied when it affirmed the district court’s grant
of summary judgment.
Alternatively, MindGames petitions for rehearing en
banc pursuant to Fed.R.App.P. 35 because the panel deci-
sion conflicts with this court’s decision in Box v. A & P Tea
Co., 772 F.2d 1372 (7th Cir. 1985), and its progeny, and the
Supreme Court’s decision in Anderson v. Liberty Lobby,
Inc., 477 U.S. 242 (1986), and its progeny, and consider-
ation by the full court is necessary to secure and maintain
uniformity of the court’s decisions.
These petitions address two aspects of the panel deci-
sion: first, affirmance of the district court on a ground not
raised in or considered by that court (that, on the record
presented, the lost future sales claimed by MindGames
are too speculative); second, that MindGames cannot
recover attorney fees allowed by Arkansas law in breach
of contract cases even when damages are limited to nomi-
nal damages because it did not expressly seek “nominal”
damages.
R. App. 46
ARGUMENT
1. The Majority Misapprehended the District Court
Record When it Assumed Western Argued Mind-
Games Would Be Unable to Reasonably Estimate
Sales of Clever Endeavor Lost Due to Western’s
Breach. -
The panel unanimously held the New Business Rule,
if still valid in Arkansas, would not apply to MindGames’
claims for lost royalties, rejecting Western’s invitation to
follow Marvell Light & Ice Co. v. General Electric Co., 259
S.W. 741 (Ark. 1924). Slip Op. at 10; Dissent, Slip Op. at
13.
Having rejected Western’s only attack on Mind-
Games’ claim for lost royalties, the majority nevertheless
affirmed dismissal of the claim on a ground not within
either party’s statement of issues here and never raised or
considered below: namely, that MindGames failed to
prove how many copies of Clever Endeavor Western would
have sold (on which MindGames, as licensor, would earn
royalties), absent breach.
[W]e do not see how the number of copies that
would have been sold but for the alleged breach
could be determined given the evidence pre-
sented in the summary judgment proceedings (a
potentially important qualification, of course);
and so MindGames’ proof of damages is inceed
excessively speculative. Those proceedings were
completed with no evidence having been pre-
sented from which a rational trier of fact could
conclude on this record that some specific quan-
tity, or for that matter some broad but bounded
range of alternative estimates, of copies of
R. App. 47
“Clever Endeavor” would have been sold had
Western honored the contract.
Slip Op. at 12 (emphasis in original; citations omitted).
This assumes Western raised below the issue whether
MindGames had evidence from which a jury could rea-
sonably estimate the quantity of games that would have
been sold had Western performed.
That assumption fundamentally misapprehends the
proceedings below. Western never argued uncertainty of
lost sales before the district court. Consequently, Mind-
Games was never called on to file evidence from which a
jury could reasonably determine sales Clever Endeavor
would likely have achieved had Western performed.
Western’s sole attack on MindGames’ claim for lost
royalties was the New Business Rule. The district court
saw that as the only issue before it: “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.” Western Publish-
ing Co., Inc. v. MindGames, Inc., 944 F. Supp. 754, 755 (E.D.
Wis. 1996).
Western’s summary judgment brief below contained
a single substantive argument: “The ‘New Business Rule’
Prevents MindGames From Recovering Any Lost Profits.”
P.App. at 7.1 Its proposed findings of fact, required by
1 Western’s Memorandum in Support of Its Motion for
Partial Summary Judgment, without exhibits, Dist. Ct. Docket
No. 48, is submitted here as Petitioner’s Appendix (“P.App.”)
Oe EA OE Ns Na a pum
R. App. 48
Local Rule § 6.05(a)(1), did not address whether lost
future sales were reasonably provable. Western’s only
proposed findings related to Clever Endeavor sales were
{ 9 (sales in the year before the license) and { 16 (sales
during the four years of the license), P.App. at 4, 6,
showing Clever Endeavor sales jumped from 30,000 in 1989
(the last pre-contract year) to 165,000 in 1990 (the first
contract year), reasonably implying that sales were trend-
ing up prior to Western’s breach. If Western had argued
that lost future sales could not be proved beyond specula-
tion, it then had the burden to propose “undisputed”
facts rebutting that inference.
The record made by MindGames below did include
evidence of specific contract breaches by Western from
which damages could readily be inferred, as well as a
variety of damage claims arising from the breaches.
Blackwell Summ.Judg.Aff. {YJ 26-27 and 31-35, App.
17-19, 20-22.2 But the lost sales record was never devel-
oped because the “speculation” issue was not raised.
Indeed, the district court brushed aside as “irrelevant” all
matters not directly relating to the single, legal issue
raised by Western — whether the New Business Rule
barred per se any attempt to establish lost profits. 944 F.
Supp. at 755, n.1.
Western’s reply brief below also dealt only with the
New Business Rule, P.App. 20, 21, 26 and 31, and its
1-17. Other documents filed in the district court and cited in this
brief are also included in the Petitioner’s Appendix.
2 Portions of the district court record previously submitted
to this court in the appellant’s appendix are cited as “App.”
i
R. App. 49
response to MindGames’ proposed findings of fact con-
firmed the motion was limited to the New Business Rule.
MindGames had proposed a finding relating to royalties
exceeding $30 million on Pictionary, a comparable adult
board game for which Western had served as licensee.
P.App. at 36. Western responded such a finding was
. irrelevant to Western’s motion for partial
summary judgment, which seeks a determina-
tion that MindGames cannot introduce evidence
of the profits it allegedly lost as a result of
Western’s alleged breach of the license agree-
ment. The alleged royalties that the licensor of
Pictoinary received are not relevant to the legal
issues raised in Western’s motion for partial
summary judgment.
P.App. at 37. If Western had argued to the district court
MindGames would be unable to prove lost sales and
resulting royalties absent a New Business Rule, certainly
the royalties of a comparable adult game would be rele-
vant. It was Western’s burden to make a prima facie case
for summary judgment on that issue but it did not
attempt to do so or even raise the issue. Hannon v. Turn-
age, 892 F.2d 653, 656 (7th Cir. 1990), cert. den., 498 U.S.
821 (1990).
The majority overlooked the limited scope of the
issue Western presented below. The single ground West-
ern asserted — the effect of the New Business Rule - did
not require MindGames to develop evidence on the issues
of breach and the volume of lost sales. Thus, the issue of
whether MindGames could present evidence from which
lost royalties could be estimated without excessive spec-
ulation was never presented to the court below.
R. App. 50
Il. The Majority Decision Conflicts with Authority
From This Court Prohibiting Affirming Summary
Judgment on a Ground Not Raised in the District
Court.
The majority stated, “[WJe may of course affirm an
award of summary judgment on any ground that has not
been forfeited or waived in the district court.” Slip op. at
13, citing United States v. Jackson, 207 F.3d 910, 917 (7th
Cir. 2000).
Such an affirmance is improper, however, where the
ground on which it relies was not raised in the district
court. Box v. A & P Tea Co., 772 F.2d 1372 (7th Cir. 1985):
“(WJe may affirm a summary judgment on any ground
that finds support in the record, but the ground must have
been adequately presented in the trial court so that the non-
moving party had an opportunity to submit affidavits or other
evidence and contest the issue.” 772 F.2d at 1376 (emphasis
supplied; citations omitted).
Western had the burden of demonstrating that it
presented the argument to the district court. It made no
attempt to do so. In Meredith v. Allsteel, Inc., 11 F.3d 1354
(7th Cir. 1994), overruled on other grounds, Ahng v. Allsteel,
Inc., 96 F.3d 1033 (7th Cir. 1996), the court explained that
a non-movant’s duty to respond is prescribed by the
issues raised by the movant: “ . if Allsteel never
asserted this ground before the trial court, we are unable
to grant summary judgment on the alternative basis.” Id.
at 1359, citing Box. “Because Allsteel did not make this
argument, the employees had no duty to respond to it by
building a factual record.” Id. See also, Andersen v. Chrysler
Corp., 99 F.3d 846, 855 n.5 (7th Cir. 1996).
R. App. 51
The majority opinion here directly conflicts with this
settled law by allowing this court to consider an alterna-
tive ground for affirmance regardless of whether it was
properly raised in the district court. The full court must
rehear this appeal to resolve the conflict the panel has
created.
III. MindGames Did No Waive Its Right to Prove Loss
of Future Profits.
As required by Fed.R.App.P. 28(b)(2), MindGames set
forth the issues presented for review in its main brief. The
releva:t issue was stated as follows:
Did the district court err in holding that, under
Arkansas law, the New Business Rule barred
MindGames’ claim for lost profits where the
profits consisted of royalties generated by its
experienced licensees and were determined by
sales, not profits?
OE SS SOI
MindGames’ appeal brief at 1. Western’s counter-state-
ment contained only one issue relevant to the proof of
lost profits:
Did the District Court err in holding that under
Arkansas law, the New Business Rule precluded
a licensor from recovering future profits it
allegedly lost as a result of the licersee’s alleged
breaches of a license agreement to manufacture
and distribute a new adult board game? i
Western’s appeal brief at 1. Thus, the basis for the major- )
ity’s affirmance was not given by either party as an issue
presented to this court. As shown above, that issue could
ON a we mie =
R. App. 52
not have been presented to this court because it had not
been raised below. ~
Apparently assuming (incorrectly) that Western had
raised the “speculation” issue below, the majority treated
it as fair game on appeal, emphasizing the absence of
evidence “from which a rational trier of fact could con-
clude 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. Slip Op. at 12 (emphasis in original). The
majority referred to an argument Western presented to
this Court - not the district court - and concluded 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.” Id. at 13. The
majority then faulted MindGames because, in its reply
brief, it “pointed to no evidence from which lost royalties
could be calculated to even a rough approximation.” Id.
MindGames, however, had never been called upon to
develop and file such evidence below and limited its
filings to the Blackwell affidavits because the issue uf uncer-
tain lost sales had not been raised. The dissent recognized
this.
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 oppor-
tunity to do so because of Western’s complete
reliance in its motion on the new business rule
R. App. 53
and Marvell, which, if applied, would prevent
proof of breach and causation of loss.
Dissent, Slip Op. at 15.
Western’s appeal brief did not squarely present the
issue, except obliquely in a factually unsupported refer-
ence to supposed difficulty of proving lost profits on
entertainment products, as a reason for not retreating
from the New Business Rule. See Western’s appeal brief at
30. MindGames did respond in its reply brief (at 5 and
15-16) to the point of Western’s references (an aspect of
its New Business Rule argument), and the bulk of Mind-
Games’ reply brief was, of course, addressed to the New
Business Rule argument generally. :
But it is manifestly unfair to hold, as the majority
did, that the en passant references to speculation in West-
ern’s appeal brief (a) in fact constituted an argument on
an issue Western had not even included in its statement
to this court of the issues presented, (b) should have been
read by MindGames as raising a separate issue Western
was precluded from raising because not presented below,
and (c) required MindGames to cite proof it had never
been called upon to file below.3
3 New Business Rule aside, the majority disregarded
Arkansas’s liberal damage rule permitting lost profit damages
in entertainment cases even where the claimant is
inexperienced. Finley v. North River Records, Inc., 148 F.3d 913,
918-19 (8th Cir. 1998) (allowing a fledgling music concert
promoter to recover lost future profits under Arkansas law
despite the absence of prior successes). The uncertainty
preventing recover of lost profits relates to the fact of damages,
not the amount. Jim Halsey Co. v. Bonar, 683 S.W.2d 898, 903 (Ark.
1985) (concert promoter could claim lost profits on future
RAS BME CR TAA IIE SE NAN ES SS
R. App. 54
The MindGames’ constitutional right to a jury trial
must not be rendered so fragile and evanescent as to be
taken away on such attenuated grounds. Waiver ordi-
narily means the conscious relinquishment of a known
right. Medcom Holding Company v. Baxter Travenol Laborato-
ries, Inc., 106 F.3d 1388, 1396 (7th Cir. 1997). On this
record, there was no waiver by MindGames. If any wav-
ier occurred here it was by Western, which for purposes
of the present appeal waived the issue of whether Mind-
Games had evidence from which a factfinder could make
a reasonable estimate of lost royalties, by not raising that
issue in the district court. On remand Western may be
permitted to raise that issue in a new summary judgment
motion; what controls here is that it was not raised in the
motion that is the subject of this appeal.
concerns despite no evidence of successful earlier promotions).
For purposes of the instant summary judgment motion the
“fact” of damage was not questioned and must be presumed.
Under such precedents, MindGames is entitled to file
evidence such as market studies and statistical analysis by
experts in game marketing, comparisons of sales results in
geographical »reas where appropriate promotions and
advertising 0: s were not used versus those where they were
used, projections of sales patterns established prior to the
breach, utilizing sales forecasts generated by Western, sales
performance by comparable products and correlation of sales to
advertising expenditures that were made and that should have
been made.
R. App. 55
IV. The Majority Opinion Conflicts with Supreme
Court Summary Judgment Precedent by Improp-
erly Drawing Controlling Inferences Against
MindGames.
The panel unanimously rejected the district court's
ground for granting summary judgment. In concluding it
could nevertheless affirm summary judgment the major-
ity drew inferences against MindGames, the nonmoving
party, and thus violated guidelines set by the Supreme
Court and reiterated by this court.
Anderson v. Liberty Lobby, Inc., mandates that “at the
summary judgment stage the judge’s function is not him-
self to weigh the evidence and determine the truth of the
matter but to determine whether there is a genuine issue
for trial,” 477 U.S. at 249, and that “evidence of the
nonmovant is to be believed, and all justifiable inferences
are to be drawn in his favor.” Id. at 255. Decisions from
this court reiterate that point, e.g. Bombard v. Fort Wayne
Newspapers, Inc., 92 F.3d 560, 562 (7th Cir. 1996).
Overuse 0. Fed.R.Civ.P. 56 is recognized by this court
as infringing upon Seventh Amendment rights and caus-
ing meritorious cases to be dismissed without benefit of
the record being developed at trial. This Court said in
Wallace v. SMC Pneumatics, Inc., 103 F.3d 1394, 1397 (7th
Cir. 1997):
The expanding federal caseload has contributed
to a drift in many areas of federal litigation
toward substituting summary judgment for
trial. The drift is understandable, given caseload
pressures that . . . sometimes make it difficult to
find time for civil trials in the busier federal
districts. but it must be resisted... . ”
'
SS PE NES a eT Se
eet
R. App. 56
(Citations omitted.) See also Door Systems, Inc. v. Pro-Line
Door Systems, Inc., 83 F.3d 169, 172 (7th Cir. 1996), and
James W. Moore, ET AL., Moore’s FEDERAL Practice § 56.50
at 56-313, -314 (3d ed. 1997).
The majority’s decision disregards such concerns. It
concluded without a trial, on a record limited to the New
Business Rule issue, that MindGames would not be able
to prove the volume of lost sales. In so doing, the major-
ity not only disregarded the limitations on the record
made below, but also indulged in at least two critical anti-
MindGames inferences.
First, after acknowledging more games possibly
could have been sold if properly marketed by Western,
the majority found “an equally if not more plausible
possibility is that the reason Western didn’t market the
game more vigorously was that it correctly (sic!) sensed
that demand had dried up.” Slip Op. at 11-12.
Anderson, 477 U.S. at 255, forbids preferring the nega-
tive inference over the one favoring MindGames. The
majority also begs the question of why demand “dried
up,” if that happened. A jury could infer either that
demand could aot be met and/or fell because of the
nature of the breaches described in {J 26 and 27 of the
Blackwell summary judgment affidavit (App. 17-19): con-
fusion and dissatisfaction among retailers and consumers
stemming from poorly printed and wrongly colored box
wraps, defective board pieces, missing components
(game rules, board pieces, venture cards), incorrectly cut
and duplicated clue cards, failure to deliver promised TV
R. App. 57
ads, an unauthorized price increase, late TV ad cam-
paigns, wrongly targeted radio ad campaigns, under-
spending on ads and other breaches. The majority also
overlooked that Western gave promotion and sale prefer-
ence to other games, very likely because they required it
to pay much lower royalties. App. 19 ({ 27j); App. 96
({ 5(u)). Western itself did not believe demand for Clever
Endeavor had dried up. Its 1991 annual report to stock-
holders stated that “Clever Endeavor . . . should enjoy
significant sales in the coming year.” See Blackwell Aff.
{ 20, App. 15.
The majority’s second unwarranted inference is that
MindGames’ failure to terminate its contract with West-
ern and seek distribution of “Clever Endeavor” by other
means” . . . is telling evidence of a lack of commercial
promise unrelated to Western’s conduct.” Slip. Op. at 12.
The majority overlooked evidence that Western destroyed
MindGames’ opportunity to seek other licensees by ille-
gally dumping many thousands of copies of the game at
less than 25% of its contractual wholesale price. See Black-
well Aff. ¥ 32 (App. 20-21) and Blackwell Supp. Aff.
{ 5(1) (App. 84).
Such oversights illustrate the hazard for the court
and the potential for injustice for the appellant when the
court goes outside the issues developed below and in the
appeal briefing to affirm.
Whether in the granting of summary judgment by a
district court or the affirming of summary judgment by
the court of appeals, judicial fact-finding and denying the
nonmovant the benefit of permissible inferences conflicts
with settled precedent from the Supreme Court and this
re ea ae
R. App. 58
court. The full court should grant review to preserve the
petitioner’s right to a jury trial and to remind lower
courts that the decisions in Celotex Corp. v. Catrell, 477
U.S. 317 (1986); Anderson, 477 U.S. at 242, and Matsushita
Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (1986),
should not be read as weakening the prohibition against
judicial factfinding.
V. The Majority Opinion Wrongly Deprived Mind-
Games of the Chance to Recover Even Nominal
Damages and the Attorney Fees Recoverable under
Arkansas Law and by Contract Based on a Misap-
prehension of MindGames’ Complaint and Applica-
ble Procedural Rules.
The majority erroneously denied MindGames’ statu-
tory opportunity for and contractual right to atforney
fees on the mistaken ground that “MindGames does not
seek [nominal damages]” and thereby “may have lost_a
chance to obtain significant attorney fees.” Slip Op. at 3.
Even if limited to nominal damages, were Mind-
Games to prevail in its breach of contract action it could
apply for an award of reasonable attorney fees pursuant
to Ark. Code Ann. § 16-22-308 (Repl. 1994) and Dawson v.
Temps Plus, Inc., 987 S.W.2d 722, 729 (Ark. 1999). Mind-
Games also has a right to recover all costs and reasonable
attorney fees upon proving breach by Western pursuant
to J 21 of the License Agreement. App. 64.
MindGames’ complaint seeks damages of $5 million
or as proved at trial, together with “attorney fees and all
R. App. 59
other proper relief.” PApp. at 43.4 Nominal damages
need not be specially pleaded. Tacket v. Delco Remy Div. of
General Motors Corp., 937 F.2d 1201, 1205 (7th Cir. 1991).
An inquiry as to nominal damages and attorney fees
would not even have begun until MindGames prevailed
at trial on the issue of breach. Marsh & McLennan v.
Herget, 900 S.W.2d 195, 197 (Ark. 1995). Such issues are
raised as supplemental collateral matters only after the
party seeking fees has “prevailed” in the main action. The
breaches of contract outlined in FI 26 and 27 of the
Blackwell summary judgment affidavit (App. 17-19) were
not reached below.
The court’s ruling also needlessly casts a res judicata
cloud over MindGames’ right to claim attorney fees and
other costs for work done on the lost royalties claim in
the context of prosecuting its breach of contract damage
claims other than those that were the subject of the two
motions for partial summary judgment. These other
claims were dismissed without prejudice to enable this
appeal to go forward (P.App. 46, { F) and may be recom-
menced within sixty days after this court’s decision pur-
suant to a tolling agreement.
* MindGames originally filed its complaint in the Eastern
District of Arkansas as Civil Action No. 94 290 and it was
transferred to the Eastern District of Wisconsin as Case No. 94-
CV-998. The complaint is a part of Docket No. 1 in Case No. 94-
CV-998.
° These claims are described in the Blackwell summary
judgment Aff. {] 31-34. App. 20-21.
R. App. 60
Western did not argue either here or below that
MindGames had waived or was disqualified from. claim-
ing nominal damages or attorney fees. This court's gratu-
itous ruling was based upon a misapprehension of
MindGames’ complaint, which pleaded the predicates for
nominal damages and specifically sought attorney fees,
and overlooked the fact that an application for nominal
damages and/or attorney fees would have been prema-
ture. The court’s language regarding nominal damages
and attorney fees should be withdrawn or changed and,
if not for any of the other reasons advanced in this
petition, the case should be remanded to the district court
for further proceedings regarding these issues.
CONCLUSION
We are aware of the odds against obtaining a rehear-
ing, especially en banc. We request them nevertheless in
reliance on this court’s “deeply embedded . . . concept of
fair play and substantial justice.” English v. Cowell, 10 F.3d
434, 437 (7th Cir. 1993). The right to a jury trial is seri-
ously compromised if a case like this can be thrown out
on grounds not properly raised below or here and with-
out giving MindGames a fair chance to develop and offer
proof of its damage claim.
Petitioner requests that the parts of the panel’s deci-
sion (a) affirming the judgment and holding that Mind-
Games’ claim for lost royalties is too speculative (Slip Op.
10-13) and (b) finding that MindGames has waived the
opportunity to obtain nominal damage and attorney fees
R. App. 61
(Slip Op. 2-3) be vacated and that this case be remanded
to the district court for further proceedings.
Respectfully submitted,
/s/ E. Campion Kersten
E. Campion Kersten
Matthew T. Fricker
Attorneys for the Petitioner,
MindGames, Inc.
CERTIFICATE OF SERVICE
I certify that on July 6, 2000, two copies of the forego-
ing petition for rehearing en banc and petitioner’s appen-
dix were served by overnight delivery upon Richard E.
Saldinger and Wendi Sloane, attorneys for Western Pub-
lishing Company, Inc., at their address of record.
/s/ E. Campion Kersten
E. Campion Kersten
KERSTEN & McKINNON, S.C.
231 West Wisconsin Avenue
Suite 1200 x
Milwaukee, WI 53203
Telephone: 414/271-0054
Fax: 414/271-7131
A caenrpen
Pe I I 2.7 Cte At TaN
ae a
R. App. 62
UNITED STATES COURT OF APPEALS
For the Seventh Circuit
Chicago, Illinois 60604
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
MinpGanes, INc., Appeal from the United
States District Court for the
Eastern District of Wisconsin.
° Nos. 94-C-552 & 94-C-998
WESTERN PUBLISHING
ComPANy, INC.,
Plaintiff-Appellant,
Lynn Adelman, Judge.
Defendant-Appellee.
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.
R. App. 63
UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF WISCONSIN
WESTERN PUBLISHING
COMPANY
Plaintiff,
vy. Case No. 94-C-552
MINDGAMES, INC.,
Defendant.
MINDGAMES, INC.,
Plaintiff,
v.
WESTERN PUBLISHING
COMPANY, INC.
Defendant.
Case No. 94-C-998
AFFIDAVIT OF G. LAWRENCE BLACKWELL, III
IN OPPOSITION TO THE SUMMARY
JUDGMENT MOTION OF WESTERN
PUBLISHING COMPANY, INC.
STATE OF CALIFORNIA _)
) SS.
SAN MATEO COUNTY )
G. Lawrence Blackwell, III, being first duly sworn on
oath deposes and says:
R. App. 64
1. I am the President and principal stockholder of
MindGames, Inc. I make this affidavit of my own knowl-
edge in opposition to the motion of Western Publishing
Company, Inc., for partial summary judgment.
2. My background and professional experience are
as follows. I have an undergraduate degree in business
management and recently received an MBA from the
Stanford Graduate School of Business. I have evaluated
marketing programs for a Wall Street firm for companies
seeking financing in the $2 million to $20 million range. I
have acquired substantial knowledge of the game busi-
ness through my own experience with Clever Endeavor
and other games in the United States and in certain
foreign markets. I have kept up with trade publications
related to games and game products and attended many
toy trade shows in the United States and abroad. I have
consulted and exchanged information with many people
involved in the game industry, including inventors, man-
ufacturers and marketers. I have licensed game products
nationally and internationally. For four years I have been
a speaker at the Game Inventors of America Conference. I
also conducted workshops at that conference for several
years.
3. I am the inventor of an adult board game called
Clever Endeavor. A patent was issued to me for the game
on March 12, 1991, Patent No. 4,998,735. A copy of the
patent is included in the appendix to this affidavit at
page 1 (“App. 1”). All documents in the appendix are
incorporated by reference in this affidavit.
R. App. 65
4. The patent application was filed on December 18,
1989 at the same time I assigned the patent rights to
MindGames, Inc. |
5. I obtained a trademark for Clever Endeavor in the
United States in 1990 and thereafter registered it in eleven
foreign countries. :
6. Pursuant to the assignment referred to above,
MindGames owns the rights to Clever Endeavor. All rights
of Western and/or Games Gang to the game under the
license agreement and the extensions of the license agree-
ment have expired. They claim no further rights in the
game.
MINDGAMES’ PRELICENSE SUCCESS-—
WITH CLEVER ENDEAVOR
7. MindGames was established to manufacture and
market Clever Endeavor and other games. MindGames did
in fact market Clever Endeavor from its introduction in
February 1989 until it signed the license agreement with
Western and Games Gang in March 1990. At the time the
license agreement was entered into, Clever Endeavor was
not a new and unproven product. It had been introduced
during the February 1989 American International Toy
Fair in New York, the largest and most important toy
trade show in North America and Asia. All major toy
buyers and thousands of smaller buyers saw the game at
both the 1989 and February 1990 Toy Fairs before it was
licensed.
8. MindGames began shipping Clever Endeavor in
September 1989. In its first 75 days on the market, Mind-
Games sold about 30,000 copies of Clever Endeavor,
R. App. 66
through more than 400 retailers, coast-to-coast. Western
and Games Gang were so interested in Clever Endeavor
that they handled the sales and exhibition of Clever
Endeavor at the February 1990 Toy Fair, more than a
month before entering into the license agreement. They
also sold and marketed the game themselves for more
than a month before the license agreement and directly
received orders for the game during that time. Western
and Games Gang had firsthand information and experi-
ence with the game at the time they entered into the
license agreement based on the foregoing and their own
due diligence investigation.
9. From the time of its introduction Clever Endeavor
obviously had tremendous appeal to retailers and con-
sumers. Prior to the license the press praised Clever
Endeavor and the game won most of the available awards,
including a Parents’ Choice Gold Award, an Addy
Award, an award from Mensa and inclusion in numerous
“top five” and “top ten” games lists in 1989. Among those
who wrote MindGames to say how much they appreci-
ated or enjoyed Clever Endeavor were O.J. Simpson (at a
less troubled time in his life), the movie actress Sally
Fields, the business magnate and former cowboy star
Gene Autry and President Bush. Western was made
aware of these matters during license negotiations.
10. Hundreds of Clever Endeavor game players
mailed in survey cards and provided positive feedback
on the game. Western was aware of these cards.
11. During the 1989 Christmas season many
retailers sold out of Clever Endeavor and reported to
R. App. 67
MindGames that the game was selling quicker than any
they had ever handled, including Trivial Pursuit.
THE ESTABLISHED SUCCESS OF WESTERN
PUBLISHING COMPANY AND THE GAMES
GANG, LTD., IN THE GAME BUSINESS
12. Iam familiar with the Annual Report issued by
Western Publishing Group, Inc., for the year ending Janu-
ary 28, 1989. On page 6 Western acknowledges that it is
printer, co-licensee and joint marketer (with Games Gang,
Ltd.) of Pictionary, “America’s best-selling board game for
the second consecutive year,” and had shipped over
7,000,000 copies of Pictionary. See, App. 10. .
13. On page 7 of the same report Western describes
itself as “the second largest game company in the United
States.” See App. 11.
14. On pages 16 and 17 of the same document West-
ern reports $551,358,000 in total sales. It further indicates
assets of $311,191,000 and liabilities of $138,426,000, pro-
ducing a net worth of $172,765,000. See, App. 12, 13.
15. During the negotiations for the March 1990
license agreement I was aware of Games Gang’s reputa-
tion as an experienced, highly successful marketer of
games. I knew, for example, that its sales people (operat-
ing under a different name at the time) had sold Trivial
Pursuit and that Western had printed it. I was also aware
that Games Gang and Western were the co-licensees for
Pictionary. The Games Gang people I negotiated with and
Games Gang sales personnel I spoke with at the 1990 Toy
Fair in New York confirmed Games Gang’s extensive and
successful background in marketing these and other
R. App. 68
games. I licensed Clever Endeavor to Games Gang and
Western because of their experience and success in the
game business and their extensive manufacturing and
sales capabilities.
16. I am familiar with the Form 10-K for the fiscal
year ending February 3, 1990 that Western filed with the
Securities and Exchange Commission. On page 4 Western
states, “Royalty rates paid by Western Publishing Com-
pany, Inc., generally range from 6% to 10% of the
invoiced price of the merchandise. .. . ” See, App. 14.
Western agreed to a 15% royalty for Clever Endeavor.
17. Attached hereto as App. 15, 16, 17 are pages 113,
114 and 145 of the deposition of Mark E. Hartelius, which
I attended. Mr. Hartelius was a senior director of game
and puzzle development at Western and became its vice
president for all product development (except publish-
ing). Mr. Hartelius negotiated approximately forty roy-
alty contracts while at Western. All. of them were at
royalty percentages below 8%.
WESTERN PUBLISHING COMPANY’S AND
GAMES GANG’S FORECASTS OF SUCCESS
FOR CLEVER ENDEAVOR
18. By the time of the license agreement negotia-
tions in late 1989 and early 1990 it was common knowl-
edge in the game industry that Trivial Pursuit had made
more than $75 million in royalties for its inventors and
that Pictionary had earned upwards of $30 million in
royalties. Representatives of Games Gang represented to
me at the 1990 Toy Fair in New York that based upon
their knowledge of the game and the market response to
R. App. 69
it as that time, they regarded Clever Endeavor as the “next
Pictionary” and “next Trivial Pursuit.”
19. The representatives of Western and Games Gang
with whom I negotiated the license agreement repeatedly
expressed their awareness of the fact that Clever Endeavor
was a game of proven appeal and destined for great
success. This is also reflected in the fact that the licease
agreement provides for royalty payments of 15% of sales.
The only other games I know of for which Western paid a
15% were Pictionary and Balderdash, both of which were
very successful, producing world-wide royalties in excess
of $10 million for Balderdash and $50 million for Piction-
ary. Most of Western’s license agreements with game
inventors call for royalty rates of 3% to 7%, according to
Western’s published data, see, {{ 16 and 17 above.
20. Page 18 of the appendix is from Western’s 1991
Annual Report. It acknowledges the decline in the
national economy but nevertheless states:
We also continued to improve our position in
the proprietary game segment with the success-
ful launch of several new juvenile and adult
board games .
... We are the printer, co-licensee and joint
ma
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