658 F.3d 637 (7th Cir. 2011), 10-3538, e360 Insight, Inc. v. The Spamhaus Project

Docket Nº:10-3538, 10-3539.
Citation:658 F.3d 637
Opinion Judge:HAMILTON, Circuit Judge.
Party Name:e360 INSIGHT, INC., et al., Plaintiffs-Appellees/Cross-Appellants, v. The SPAMHAUS PROJECT, Defendant-Appellant/Cross-Appellee.
Attorney:Joseph L. Kish (argued), Bartley J. Loethen, Attorneys, Synergy Law Group, Chicago, IL, for Plaintiffs-Appellees/Cross-Appellants. Craig C. Martin (argued), Attorney, Jenner & Block LLP, Chicago, IL, for Defendant-Appellant/Cross-Appellee.
Judge Panel:Before POSNER, KANNE, and HAMILTON, Circuit Judges.
Case Date:September 02, 2011
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit

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658 F.3d 637 (7th Cir. 2011)

e360 INSIGHT, INC., et al., Plaintiffs-Appellees/Cross-Appellants,


The SPAMHAUS PROJECT, Defendant-Appellant/Cross-Appellee.

Nos. 10-3538, 10-3539.

United States Court of Appeals, Seventh Circuit.

September 2, 2011

Argued June 8, 2011.

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[Copyrighted Material Omitted]

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Joseph L. Kish (argued), Bartley J. Loethen, Attorneys, Synergy Law Group, Chicago, IL, for Plaintiffs-Appellees/Cross-Appellants.

Craig C. Martin (argued), Attorney, Jenner & Block LLP, Chicago, IL, for Defendant-Appellant/Cross-Appellee.

Before POSNER, KANNE, and HAMILTON, Circuit Judges.

HAMILTON, Circuit Judge.

The last time plaintiff e360 Insight, Inc. came before this court, we affirmed the district court's entry of default judgment against defendant The Spamhaus Project. All that remained was for e360 to make a reasonable showing of its damages. After a bench trial on the issue, the district court awarded e360 a mere $27,002, a far cry from the millions of dollars that e360 sought. Both parties have appealed. We conclude that the district court properly struck most of e360's damages evidence, either as an appropriate discovery sanction or for proper procedural reasons, and we reject e360's challenges to the judgment.

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We also agree with Spamhaus that the evidence failed to support the modest award of $27,000 in actual damages because e360 based its damage calculations on lost revenues rather than lost profits. We vacate and remand with instructions to enter judgment for e360 in the nominal amount of three dollars.

I. Factual and Procedural Background

Defendant Spamhaus is a non-profit company organized under the laws of the United Kingdom and dedicated to identifying and blocking " spam," or unwanted bulk email. e360 Insight v. The Spamhaus Project, 500 F.3d 594, 595 (7th Cir.2007). Spamhaus maintains a list of internet protocol (IP) addresses of verified spam distributors, which internet service providers (ISPs) use to prevent emails originating from those addresses from reaching their intended recipients.

Plaintiff e360 is a now-defunct internet marketing company that was operated out of Wheeling, Illinois by co-plaintiff David Linhardt. (For simplicity's sake, we refer to e360 and Linhardt collectively as " e360." ) e360 uses email to market products on behalf of other businesses, who pay e360 for this service. Spamhaus added e360 to its list of known spammers, and e360 sued Spamhaus in an Illinois state court for tortious interference with contractual relations, tortious interference with prospective economic advantage, and defamation. Spamhaus removed the action to federal court on the basis of diversity of citizenship. Spamhaus asserted a lack of personal jurisdiction, but for reasons that remain unclear, later withdrew its answer and informed the district court that it would no longer defend against e360's suit. The district court granted a default judgment against Spamhaus and, relying on Linhardt's affidavit, awarded e360 $11,715,000 in damages.

Spamhaus then reversed course and decided that it did in fact want to defend itself. It moved to set aside the default under Federal Rule of Civil Procedure 60(b)(4), challenging the damages award and again asserting a lack of personal jurisdiction.1 The district court denied that motion. On appeal, we affirmed the default judgment but concluded that Linhardt's " conclusory statement of the lost value of his business ... alone cannot provide the requisite ‘ reasonable certainty’ for a damages award without the necessity of a hearing." 500 F.3d at 603. We vacated the damages award and remanded this matter for " a more extensive inquiry into the damages to which e360 is entitled." Id.

Following a bench trial on remand, the court awarded a total of $27,002 on e360's three claims— $27,000 for the claim of tortious interference with contractual relations, and nominal damages of one dollar each for its claims of defamation and tortious interference with prospective economic advantage. e360 Insight, LLC v. The Spamhaus Project, 2010 WL 2403054 (N.D.Ill. June 11, 2010). Spamhaus appealed that award, and e360 has cross-appealed.

II. Analysis

Both sides challenge the district court's determination of damages— e360 says that the district court's damages award was too low, and Spamhaus says the award was too high. e360 also argues that the district

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court committed reversible errors by: (1) imposing discovery sanctions limiting e360's damages and striking the bulk of its witnesses; (2) denying e360's pre-trial motion to compel Spamhaus's interrogatory responses; (3) excluding one of e360's key trial exhibits on procedural grounds; and (4) rejecting Linhardt's damages testimony. Because these latter arguments bear directly on the district court's damages award, we address first those arguments in the cross-appeal before turning to Spamhaus's challenge to the $27,000 award.

A. Discovery Sanctions

e360's first complaint concerns the district court's discovery sanctions striking a number of e360's witnesses and limiting its damages. Spamhaus moved for sanctions against e360 for " persistent discovery defaults." Linhardt had repeatedly failed to appear for his deposition, and e360 had given unresponsive answers to interrogatories. On July 30, 2008, the district court granted Spamhaus's motion in part and ordered e360 to pay monetary sanctions, to complete Linhardt's deposition by September 30, 2008, and to answer all outstanding interrogatories by August 13, 2008. The court also ordered: " No new discovery may be propounded by either party." 2

The court-ordered deadline for answering the interrogatories passed without response by e360. On August 28, 2008, Spamhaus moved for dismissal as a sanction for e360's failure to comply with the July order. In support, Spamhaus noted e360's previous failures to comply with its discovery obligations over the course of the litigation, failures that had already resulted in the entry of two separate orders compelling discovery from e360. In response, e360 blamed its lawyers. It claimed that the interrogatory responses were the responsibility of a lawyer who had left its attorneys' firm shortly after the July order was entered. Because e360's other attorneys were in trial until after those responses were due, e360 said, they first learned of this problem when they received Spamhaus's motion to dismiss, after which they immediately served new interrogatory responses.

At a hearing on the motion to dismiss, Spamhaus informed the district court that many of e360's new responses were still defective because they simply referred to documents in which substantive answers might be found, in violation of the district court's previous instructions to the contrary.3 Rather than dismiss the case immediately, the district court gave e360 another opportunity to supplement its prior response to Spamhaus's motion to dismiss and to explain why dismissal was not appropriate. With that supplemental response, e360 submitted amended interrogatory responses. e360 also claimed that it was the only party prejudiced by the complained-of delay (the theory was that any delay by e360 only " kept [it] from proving up [its own] damages" ), noted that the dispute " has only been going on for at most eight months," and, in a remarkable display of chutzpah, complained that Spamhaus had failed to warn e360 before filing its motion to dismiss.

In reply, Spamhaus pointed out that e360's amended interrogatory responses identified sixteen new witnesses on e360's

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costs, revenues, profits, lost profits, and valuation. e360 had previously said that only Linhardt would provide such testimony because he was the only person with knowledge of these matters. Spamhaus also pointed out that e360's amended responses increased its damage estimate from the $11.7 million initially requested to a whopping $135 million. To address these eleventh-hour disclosures, Spamhaus said, it would be necessary to " reopen[ ] all discovery in this case," despite the fact that discovery had been closed by the court's July order.

The district court denied Spamhaus's motion to dismiss but imposed other serious sanctions instead. In particular, the district court struck: (a) all sixteen witnesses disclosed for the first time in e360's amended interrogatory responses; and (b) any damage amounts stated in those responses in excess of the earlier $11.7 million estimate.

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