# Opposition Brief — MindGames, Inc. v. Western Publishing Co. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386014_1378%3A3 ## Record - **Collection:** Supreme Court brief - **Document type:** Opposition Brief - **Published:** January 1, 2001 - **Citation:** 531 U.S. 1126 ## Text 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 « 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. fees hh Pe a eae A EN CE ES RS TG LO AA LAS APE E SEIN ET WS S * . ORR A LEI: ee ET Bite ei tS Pe OEE YBN tO a OREN! RAT nie? 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) © [172] arrangement with Games Gang and Western? A We sold it nationally but just had concentrations. I would say ~ I don’t know. I know we had concentrations in Chicago and Minneapolis. I know we probably had concentrations in ten other areas, not to the extent of those two but concentrations, and I don’t really know - | just don’t recall the other areas at this point. R. App. 110 Q List for me the various promotional or advertis- ing or marketing techniques that Mindgames used up until the time of its license arrangement with Games Gang and Western. A Okay. Advertising, we provided co-op advertis- ing to the retailers. We did some radio advertising. I can’t recall offhand any other advertising. Promotion wise we tried attending-events, having a bar night where a deejay would talk about Clever Endeavor. I think those - some of these things can be effective, but the PR firm did things in such an expensive way that it was rendered in my opinion ineffective. I’m sorry. Q Were there any other promotional activities that Mindgames engaged in other than attending events and the bar night? [173] A I’m sure there are. Q Did you attend trade shows? A We attended trade shows. Q Was that something you had put in the category of a promotional activity? A No. Q Why not? A Because that’s selling to the trade. Promotional activity is normally considered selling to consumers. Q There are other promotional activities that you can recall? A None, no. R. App. 111 Q Turning back to the advertising that Clever Endeavor - excuse me, Mind Games [sic] engaged in Prior to the license agreement, you testified that there were some radio ads. Where were the radio ads played? A Chicago and Minneapolis, St. Paul. Or Min- neapolis. I don’t know what reach they had in St. Paul. Q What radio stations in Chicago? A WGN. One other, geez. It was kind of a top 40 format. 1 don’t remember what the call letters are. * + * [192] introducing the game to the market. There was no previous demand for the market. We hadn’t developed a lot of demand in advance purposefully, so we weren't missing opportunities. There was no opportunity lost. There was no opportunity to disappoint consumers. Q When you say you had not created an expectation for the game on purpose, what do you mean? A Well, there’s no point in creating demand for - in my opinion if it’s a brand new product which would be different from, say, Windows 95. Everybody understands that Windows 95 is, how it’s used, I mean, within context. They understand it’s an improved version of Windows 5.1, so there’s benefit from Microsoft creating advanced demand. From our standpoint promoting Clever Endeavor is advance when people don’t know what it is did not make sense. Q Now, you testified that Steve Peek contacted Games Gang to take a look at it from a manufacturing standpoint. R. App. 112 A Um-hm. Q Who at Games Gang did he contact? A Idon’t really know. I met with Ralph Donnelly, but whether he contacted Ralph Donnelly I’m not [193] sure. Q Did you meet with Ralph Donnelly at the 1990 Toy Fair or before that? A Before. I want to say mid-December of ’89. Q Where did that meeting take place? A_ in his office in New York. Q Was that your first contact with either Western or the Games Gang concerning Clever Endeavor? A It was my first contact. Who else was at the meeting? I believe Mary Mellor was. Anyone else? (Witness shakes head.) I’m sorry, you have to answer audibly. I’m sorry, I’m thinking. Not that I recall. How long did the meeting last? eer oOo Fr | FF Between an hour, hour and a half, I don’t recall. Q Had you heard of Games Gang prior to your meeting Mr. Donnelly and Mary Mellor? A Yes, I had. R. App. 113 Q How had you heard of them? A I knew it was a distributor for Pictionary. Q How did the meeting get set up? Did Games Gang contact you or did Steve Peek set it up? A I think Steve Peek set it up. * * * “BEST AVAILABLE COPY. (acess st Entre: ‘ , R. App. 114 BV e cocklrcsmee® ot eee ee s _ eum Bel Feud tu 12/31/07 fs -f a eee aah —— ES aE ey ee ee ey a Pape ire aN *1's rrre | a ) vT * 7490 Saapvling Enwvenve 16,533.96 a vat 7900 Salaries - Ollicers 00 js F640 Satertwe—Adeainiverstive bGribtt? a's i | 7920 Contract Labor Expense 3,912.41 “¢ % 7580 Insurance - Groupe Medical Eup. .00 i“ L2S60 Las—aRace.—Cae-Lisbilit, fae 1214-00. —*.,. fq 200 Organization Costs .00 se "17610 Depreciation - Mach. & Eaule. 3,195.89 wt 2a o £-fin~ ~oo + be, o 2a '. Depreciation - Other — f ae *" Interest Eapense 2,623.02 oe t as ae 77810 t0006—=—63104—1_bn01+0Sancentse 00 se 7820 Tases - Payroll Expense 5,146.64 onal 7630 Tanes ~- State Incose Enpense ‘ .00 if L > te 384L9—— —— + Fewes—— Federset—tneene Snvense | +80 ; 7850 3 a 2 ae oe Y .- Tanes;- Other 154.17 ‘ ache . * te gy CT Se TOTAL EXPENSES ¢ ; $721,534.31 ‘ a a ; ail 4 NET PROFIT (LOSS) ($206,222.26) wf . . . —eS : 2 MANS Am eis “ ey ae . v e * H perms . Y aye "ee * ene t%.* oom * * Qs e. . ‘3 +e R. App. 116 [524] UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF WISCONSIN WESTERN PUBLISHING COMPANY, INC., Plaintiff, sos No. 94-C-552 MINDGAMES, INC., Defendant. MINDGAMES, INC., Plaintiff, No. 94-C-998 VS. WESTERN PUBLISHING COMPANY, INC., ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) Defendant. ) October 17, 1995 9:45 a.m. The deposition of GEORGE LAWRENCE BLACK- WELL, III, resumed pursuant to adjournment at Suite 2700, 333 West Wacher Drive, Chicago, Illinois. * * * [600] during this period? A I knew that they were selling “Clever Endeavor”. Q Did you have any other licensees to sell “Clever Endeavor” from February 1, 1993 through January 31, 1994? R. App. 117 A Not in the US. Q Did you seek any other distributors to sell “Clever Endeavor” in the United States between February 1, 1993 and January 31, 1994? A_ I believe I've already answered that. Q And your answer was no, correct? MR. KERSTEN: Well, I believe it was. THE WITNESS: I believe it was. Pardon me. I believe | answered that I did seek or talk to - I’m sorry, I'm a year behind, or ahead, whichever. BY MS. WEITMAN: Q Right. I'm talking about the February, 1993 to January 31, 1994 time period. A I think that is correct. Q You did not seek other distributors, correct? A That's my recollection at this time. Q So it was your understanding that Western was the exclusive licensee to manufacture and distribute “Clever Endeavor” from February 1, 1993 through [601] January 31, 1994, correct? MR. KERSTEN: Objection. Calls for a legal con- clusion. Answer subject to the objection. THE WITNESS: Not using legal terms, yeah. Yes. R. App. 118 BY MS. WEITMAN: Q Now, for the period of February, 1993 through January, 1994 - A I'm sorry, would you give me the dates again? Q Yes. From the period February, 1993 through the end of January, 1994 - _ A Okay. Q - Western sent MindGames monthly royalty checks, correct? A As far as I recall, yes. Q Now, except for the check for January, 1994, which was received in February, 1994, MindGames accepted and cashed the royalty checks received for this period, correct? A_ I don’t recall. Q Do you have any recollection of not cashing any of the royalty checks that were sent to you for the period covering February, 1993 through the end of January, 1994? A_ No, I have no such recollection at this time. Have R. App. 119 [304] IN THE UNITED STATES DISTRICT COURT EASTERN DISTRICT OF WISCONSIN WESTERN PUBLISHING COMPANY, INC., Plaintiff, -Vs- Case No. 94-C-552 MINDGAMES, INC., Defendant. VOLUME IiIl CONSOLIDATED CASES MINDGAMES, INC., Plaintiff, -vs- Case No. 94-C-998 WESTERN PUBLISHING COMPANY, INC., Defendant. The resumed deposition of GEORGE LAWRENCE BLACKWELL, III, called for examination, taken pursuant to the applicable Rules pertaining to the taking of deposi- tions, taken before MARCY REITER, a Notary Public within and for the County of Cook, State of Illinois, and a Certified Shorthand Reporter of said state, CSR No. 84-1890, at Suite 2700, 333 West Wacker Drive, Chicago, Illinois, on the 16th day of October, A.D. 1995, at 10:55 a.m. R. App. 120 * * * [511] concerned that Western had legal counsel present and you did not? A. No, I did not. Q. Did you have any understanding as to - A. Excuse me, I did not tell any of them at that meeting that I was concerned about that. Q. Did you have any understanding as to why Dale Gordon was present? A. At that time, no. Q. Had you met Dale Gordon previously? A. Not that I recall. I may have said hello to him earlier in the day. I don’t remember. I don’t recall having any discussions with him. Q. After you responded that you wanted to under- stand Western’s entire position before signing the 1993 letter agreement, what did Western say? A. John Pohl - some how the conversation got on to whether or not they wanted to license the game for ’94 or the year beginning February 1st, 1994. John Pohl said he had talked to his salespeople and he was not confident that they would sell enough games, that they would — or they [512] could justify paying a minimum royalty of - a minimum advanced royalty of 27,500. Q. Did Mr. - - R. App. 121 A. I’m sorry. And therefore it did not make sense for them to do that. Q. When you say “to do thai,” what do you mean? A. Meaning commit to an advanced minimum roy- alty of 27,500 for that year. Q. Was there any discussion about the $300,000 roy- alty figure? A. No, there was not. ©. When Mr. Pohl made these comments, how did you — did anybody else from Western say anything else? A. Not that I recall. Q. How did you respond? A. Well, I responded by telling him that I was there to discuss a two-year extension if they had an interest and was asking for advanced minimum royalty of $55,000, but obviously that was a moot point since they didn’t think they could justify the twenty-seven five for the one year. [513] Q. How did Western respond? A. They agreed. Q. What else was discussed? I didn’t mean to cut you off. Did you have more of your answer? A. No, that’s fine. Well, they agreed that it was a moot point. Q. Was anything else discussed in the meeting? A. R. App. 122 Dale Gordon said they were prepared to offer the games, their inventory of Clever Endeavor games at their manufacturing cost. They thought, they weren’t abso- lutely sure. Q. A. Q. A. Offer them to you? Correct. How did you respond? I asked how many games they were talking about and asked what their manufacturing price was or manufacturing cost. I should say. Q. How did Western respond to that? A. They weren’t really sure what their manufactur- ing cost was and there was some discussion about it, but their best estimate was 4.50 to 4.75 a game, and I think they told me their R. App. 123 UNITED STATES COURT OF APPEALS FOR THE SEVENTH CIRCUIT Appeal No. 98-1879 WESTERN PUBLISHING COMPANY, INC., Plaintiff-Appellee, v. No. 94-C-552 MINDGAMES, INC., Defendant-Appellant. MINDGAMES, INC., Plaintiff-Appellant, v. No. 94-C-998 WESTERN PUBLISHING COMPANY, INC., Defendant-Appellee. 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 BRIEF OF APPELLEE WESTERN PUBLISHING COMPANY, INC. Wendi E. Sloane* Joshua Gimbel Richard A. Saldinger* Michael, Best & Friedrich Barack Ferrazzano 100 East Wisconsin Avenue Kirschbaum Perlman Suite 3300 & Nagelberg Milwaukee, Wisconsin 333 West Wacker Drive 53202-4108 Suite 2700 Chicago, Illinois 60606 *Counsel of Record Dated: February 22, 1999 R. App. 124 ORAL ARGUMENT REQUESTED * * * difficulty in determining the amount of lost profits precluded franchisor’s recovery of damages for lost future royalties).® E. The Fact That Clever Endeavor Had No History Of Profits and That Clever Endeavor Is An Entertainment Product Further Supports The Dismissal of MindGames’ Lost Profits Claim. 1. Even in jurisdictions rejecting the New Business Rule, lost profits are precluded where there is no history of profits. Even if the Court were to reject a strict application of the New Business Rule, this Court should affirm the dismissal of MindGames’ lost profits claim because MindGames has no history of past profits. 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 - MindGames failed to achieve any profit in 1988 or 1989. (App. 118-121.) Without any evidence of past profits, anticipated profits © MindGames’ attempt to analogize the undisputed facts here with the farmer who leases drilling rights to Standard Oil demonstrates the absurdity of its argument. (MindGames Br. 21.) A new, unique adult board game, unlike oil, has no preexisting market value. MindGames’ analogy is similar to the fact pattern in Milex, where the products’ fungability made the New Business Rule inapplicable. MindGames’ claim for lost profits is more analogous to a movie screenwriter suing MGM for lost profits because his screenplay was not as successful as MGM's most recent blockbuster. R. App. 125 generally are precluded as a matter of law, regardless of whether the damaged party is a new business. Without such evidence of past profits, MindGames has no reliable basis to demonstrate its alleged lost profits with any reasonable certainty. See Rich v. Eastman Kodak Company, 583 F.2d 435, 437 (8th Cir. 1978) (no recovery for anticipated profits because plaintiff was not profitable before problems developed with the product); Empire Shoe Company v. Nico Industries, Inc., 197 Ga. App. 411, 414, 398 S.E.2d 440, 443 (1990) (granting defendant summary judgment dismissing plaintiff’s lost profits claim because plaintiff could not produce any evidence regarding past net profits). 2. The success of a new product in the entertainment industry is especially difficult to predict. 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 this is not the circumstance where Arkansas courts would begin to do so. As Judge Warren noted, it is particularly appropriate to apply the New Business Rule in the entertainment/consumer product industry. (App. 7-8.) In this field, the chances of success are next to impossible to predict because an entertainment product, such as an adult board game, is subject to the most subjective and unpredictable critic - the public. When confronted with a claim for lost profits in the entertainment industry, other courts have recognized the | R. App. 126 inherently speculative nature of such a damage claim.” For example, in Hillside Enterprises v. Carlisle Corp., 69 F.3d 1410 (8th Cir. 1995), a wine marketer (“Hillside”) brought a breach of contract action after the manufacturer (“Carlisle”) failed to manufacture 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 * * + ”7 As a result of the unpredictable nature of the entertainment industry, parties similarly situated to MindGames have failed to recover the alleged lost profits of their new businesses. See, e.g., Handi Caddy, Inc. v. American Home Products Corp., 557 F.2d 136 (8th Cir. 1977) (in breach of contract action against distributor for failing to advertise plaintiff’s new product on pizza packaging, court reversed jury’s award of damages to plaintiff for alleged lost profits because evidence of lost sales too speculative); Murray, etc. et. al. v. Hadid, et. al., 238 Va. 722, 385 S.E.2d 898 (1989) (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). Proteus Books Ltd. v. Cherry Lane Music Co., 873 F.2d 502, 510 (2nd Cir. 1989) (affirming district court’s vacating of a jury award for lost profits because, inter alia, inherent uncertainties of predicting profits in the entertainment industry made prospective sales of book publisher difficult, if not impossible, to calculate). R. App. 127 UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF WISCONSIN WESTERN PUBLISHING COMPANY, INC., Plaintiff, V. Case No. 94-C-552 MINDGAMES, INC., Defendant. MINDGAMES, INC., Plaintiff, V. Case No. 94-C-998 WESTERN PUBLISHING COMPANY, INC., Defendant. MEMORANDUM OF MINDGAMES, INC., IN OPPOSITION TO MOTION FOR SUMMARY JUDGMENT OF WESTERN PUBLISHING COMPANY, INC. INTRODUCTION AND SUMMARY The motion of Western Publishing Company, Inc. (“Western”) for summary judgment must be denied because it is based on a false analysis of the nature of one of MindGames’ damage claims and a misapplication of the “new business rule.” R. App. 128 Western asserts that MindGames, as a “new busi- ness,” is not entitled to seek damages for loss of future profits because the “new business rule,” which Western believes applies, precludes such a claim. Western’s motion has no merit. The “new business rule” does not apply because neither Western nor its co- licensee, Games Gang, Ltd. (“Games Gang”), which had full responsibility for the manufacture and sale of Clever Endeavor, was a new business and because MindGames does not seek damages for lost profits. The damage claim at issue on this motion is for lost royalties, not lost profits. Under { 4 of the license agreement (App. 28)! MindGames was to receive a base royalty of 13.5% of net sales on the first 300,000 units of Clever Endeavor and 15% on all net sales over 300,000 units. “Net sales” is defined in { 4 to mean gross invoiced sales price less specified invoice allowances, taxes, returns and bad debts. The profitability of MindGames, Western and Games Gang does not affect the royalty payments in any way. Even if this were the kind of case to which the “new business rule” might apply, and Arkansas court would not apply it and neither should this court. It is important to keep the point of Western’s sum- mary judgment motion in sharp focus. It is that the new business rule prevents MindGames from proving “lost profits” as a matter of law. Western argues, in other word, that Arkansas law does not allow MindGames even to 1 “App.” references are to the appendix to the accompanying affidavit of G. Lawrence Blackwell, III. “Aff.” means the Blackwell affidavit itself. R. App. 129 attempt to prove the fact and/or the amount of its dam- age simply because MindGames itself is a new business. Western spends considerable effort (Br. at 9-12, 16-17) attempting to show that MindGames is a new business and had no history of profits. Assuming arguendo that is true, it has no relevance whatever to MindGames’ dam- age claims. As a licensor, MindGames’ royalty income depended on the efforts of the licensees, Western and Games Gang, neither of which was a new business. On the contrary, they had long experience and great success in the licensing, making and selling of games. Western held itself out as the second largest player in the game business. See, Aff. { 13. Games Gang had been largely responsible for two very successful adult games: Trivial Pursuit, which had earned its inventors $75 million or more in royalties, and Pictionary, which had brought its inventors $30 million or more by the time MindGames licensed Clever Endeavor. Western and Game Gang were co-licensees of Pictionary. Clever Endeavor was not a “new product” in any relevant sense. By the time of the license agreement it had been on the market for about a year and had enjoyed a high degree of success during the seven months Mind- Games was shipping it, especially considering the limited manufacturing and marketing capability of MindGames at the time. Then Clever Endeavor was licensed to Western and Games Gang in March 1990 and continuing until June 1994, a period of over four years. The damage claim at issue on this motion alleges lost royalties over the entire period of the license. R. App. 130 Under the applicable law cited later in this brief it is MindGames’ obligation to prove its damages to a reason- able certainty. MindGames acknowledges its obligation to establish its claims by appropriate evidence beyond the boundary of speculation and guesswork and looks for- ward to the opportunity to do so. Meanwhile, Western has not proposed a single fact or offered any evidence beyond the mere unsupported opinions of its lawyers establishing that, as a matter of law, MindGames will be unable to fulfill its burden. On this motion we are not arguing the sufficiency proof, but whether MindGames has the right to present proof. Clearly it has the right, which requires denial of the motion for summary judg- ment. STATEMENT OF FACTS The facts that should be considered on this motion are set forth in {J 1 through 35 of the accompanying affidavit of G. Lawrence Blackwell, III. Rather than sub- stantially repeat them here, the reader is invited to read that part of the affidavit at this point. é Regarding facts contained in Western’s brief, we are obliged to point out that Western’s citations to Mr. Black- well’s deposition sometimes do not support the state- ments they are offered to prove, as follows: Page of Brief 3 ae Reference to LB Deposition 24 79-81 82 160-65 172 174-75 169 R. App. 131 Incorrect Characterization That Blackwell formed Mind- Games solely to develop Clever Endeavor That Blackwell believed Clever Endeavor would achieve the same success as Pictionary and Trivial Pursuit That when he formed his belief about the potential of Clever Endeavor he had not discussed success features of Pictionary and Trivial Pursuit with industry peo- ple That all focus group testing was among friends or relatives or only at their homes That prelicense marketing of Clever Endeavor was limited to event promotions, radio ads and co-op advertising That MindGames did not use TV ads only because the cost was not justified That MindGames had no profit for the year 1989 despite selling 30,000 games R. App. 132 MINDGAMES’ RESPONSE TO FINDINGS OF FACT PROPOSED BY WESTERN MindGames disagrees with findings of fact 2 through 16 proposed by Western. The specific disputes and the evidentiary materials which support the claim that a dis- pute exists are set forth in {{ 36 through 49 of the Blackwell affidavit, which are incorporated by reference here. PROPOSED FINDINGS OF FACT OF MINDGAMES, INC. Pursuant to Local Rule 6.05(b) (2), MindGames pro- poses the following factual propositions which it deems to be relevant to the motion for summary judgment. 1. At the time MindGames licensed Clever Endeavor, the Games Gang, Ltd. (“Games Gang”) was a well-estab- lished, experienced and successful marketer of adult board games and other products. Aff. { 15. 2. At the times MindGames licensed Clever | Endeavor, Western Publishing Company, Inc. (“Western”) was a well-established, experienced and successful manu- facturer and marketer of adult board games and other products. Aff. {¥ 12-13. 3. Prior to obtaining the Clever Endeavor license Games Gang and Western had been co-licensees for a successful adult game known as Pictionary. Aff. {{ 12, 15. 4. The licensor(s) of Pictionary had received roy- alties in excess of $30 million by the time Clever Endeavor was licensed in March 1990. Aff. | 18. R. App. 133 5. At the time Clever Endeavor was licensed in March 1990 Western was aware that the licensors of Trivial Pur- suit had received royalties on that game that probably exceeded $75 million. Aff. { 18. 6. The royalties payable to MindGames under the Clever Endeavor license agreement were unaffected by and unrelated to the profitability or unprofitability of the business operations of MindGames prior to the effective date of the license. Aff. ¥ 23. 7. The royalties payable to MindGames under the Clever Endeavor license agreement were unaffected by and unrelated to the profitability or unprofitability of the business operations of MindGames following the effec- tive date of the license. Aff. ¥ 23. 8. The royalties payable to MindGames under the Clever Endeavor license agreement were unaffected by and unrelated to the length of time MindGames was in busi- ness prior to the license agreement. Aff. { 23. 9. The royalties payable to MindGames under the © Clever Endeavor license agreement were unaffected by and unrelated to the length of time MindGames was in busi- ness after the effective date of the license agreement. Aff. { 23. 10. Western was a licensee of a board game known as Balderdash. Aff. { 20. 11. Western agreed to pay royalties to the licen- sor(s) of Balderdash of 15% of sales as defined in the Balderdash license agreement. Aff. { 19. R. App. 134 12. Western paid royalties to the licensor(s) of Pic- tionary of 15% of sales as defined in the Pictionary license agreement. Aff. J 19. ARGUMENT I. LEGAL STANDARDS ON MOTION FOR SUM- MARY JUDGMENT Western’s brief (at 7) correctly states the legal stan- dards to be applied by the court on a motion for sum- mary judgment under Fed. R. Civ. P. 56(c): (1) Summary may not be granted unless there is no genuine issue of material fact and the moving party is entitled to judg- ment as a matter of law; (2) The moving party has the burden to prove there is no genuine issue of material fact - Donovan v. City of Milwaukee, 845 F. Supp. 1312, 1313 (E.D. Wis. 1992); (3) The Court must view the record in the light most favorable to the nonmoving party and must draw all inferences in favor of that party - Kendrick v. East Delavan Baptist Church, 886 F. Supp. 1465, 1471 (E.D. Wis. 1995); Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). Il. THE NEW BUSINESS RULE DOES NOT APPLY TO THIS KIND OF CASE. EVEN IF IT DID, AN ARKANSAS COURT WOULD NOT APPLY IT. Western seeks to bar a significant element of Mind- Games’ damages by invoking an outdated and disappear- ing doctrine known as the “new business rule.” Under that rule a business which has no operating history can never recover loss of profits because they are supposedly AOE NIM SONA gern . . . . fee el Mee nt we : R. App. 135 speculative and incapable of being determined with the necessary degree of certainty. See, generally 1 Dunn, Recovery of Damages for Lost Pfofits (4th ed.) § 4.1 (1992). Dunn describes this as the “older rule” followed by “a diminishing number of states.” Id. at 277. Under the “modern rule.” says Dunn (id. § 4.2- at 280), a new busi- ness may recover such damages as it can prove with reasonable certainty, stating: Most recent cases reject the once generally accepted rule that lost profits damages for a new business are not recoverable. The development of the law has been to find damages for lost profits of an unestablished business recoverable when they can be adequately proved with rea- sonable certainty. The earlier cases are either ignored or rationalized as having been based on a finding that on those particular facts the evi- dence was- inadequate as a matter of law to support a judgment for the plaintiff. What was once a rule of law has been converted into a rule of evidence. Western relies on Marvell Light & Ice Co. v. General Electric Co., 259 S.W. 741 (Ark. 1924), a case decided long before anyone connected with this litigation was born. No Arkansas case has applied the new business rule before or since. In Marvell the defendant’s counterclaim sought lost profit damages for the late delivery of ice- making machinery. Defendant did not allege any prior involvement in the ice-making business. The court held (at 741) the counterclaim stated no cause of action because it failed to allege or permit an inference the manufacture and sale of ice b [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386014_1378%3A3. Public record. Not legal advice.