Western Pub. Co., Inc. v. Mindgames, Inc.

Decision Date11 October 1996
Docket NumberNo. 94-C-552.,No. 94-C-998.,94-C-552.,94-C-998.
Citation944 F.Supp. 754
PartiesWESTERN PUBLISHING COMPANY, INC., Plaintiff, v. MINDGAMES, INC., Defendant. MINDGAMES, INC., Plaintiff, v. WESTERN PUBLISHING COMPANY, INC., Defendant.
CourtU.S. District Court — Eastern District of Wisconsin

Wendi Sloane Weitman, Richard A. Saldinger, Barack, Ferrazzano, Kirschbaum & Perlman, Chicago, IL, and Joshua L. Gimbel, Michael, Best & Friedrich, Milwaukee, WI, for Plaintiff.

E. Campion Kersten, Kersten & McKinnon, Milwaukee, WI, for Defendant.

DECISION AND ORDER

WARREN, District Judge.

Before the Court is Western Publishing Company, Inc.'s ("Western") Motion for Partial Summary Judgment and Motion to Strike. For the following reasons, the Court holds that MindGames, Inc. ("MindGames") is hereby prevented from recovering damages for expected lost profits from a licensing agreement with Western under Arkansas law. Therefore, Western's Motion for Partial Summary Judgment is GRANTED and Motion to Strike is DENIED.

I. BACKGROUND

This litigation results from a disputed licensing agreement between MindGames, the licensor, and Western, the licensee. MindGames seeks lost profits and compensatory damages from an alleged breach of the licensing agreement. Western now files a motion for partial summary judgment, seeking to prevent MindGames, as a matter of law, from recovering lost anticipated profits stemming from the alleged breach.

In March 1988, G. Lawrence Blackwell, III formed MindGames to promote and sell a new board game he had created called Clever Endeavor. Mr. Blackwell believed that Clever Endeavor would reach the popularity achieved by games such as Pictionary and Trivial Pursuit. After selling 30,000 copies of the game in 1989, Mr. Blackwell decided to enter into a licensing agreement with Western and Games Gang, Inc. ("Games Gang"). Under the terms of the agreement, Western and Games Gang planned to market, manufacture, promote, distribute and sell Clever Endeavor. Blackwell and MindGames would receive royalties on the number of games sold. Net sales for Clever Endeavor in 1990, the first year of the agreement, totalled 165,000, but fell off dramatically starting in 1991, until late 1993 when Western drastically reduced prices to eliminate excess stock of the game.

In 1994, MindGames brought suit for breach of the marketing agreement. Among other damages, MindGames seeks $40 million as lost profits that they believe the game would have realized had it been marketed correctly. Western now brings a motion for partial summary judgment on the issue of the lost profits. Western claims that the "New Business Rule," which prevents new and unestablished business ventures from collecting lost profits as damages in breach of contract or tort cases, guides this case as a matter of law, and mandates partial summary judgment in Western's favor. The Court now addresses Western's motion.1

II. LEGAL STANDARD

Summary judgment is no longer disfavored under the Federal Rules of Civil Procedure. See Celotex Corp. v. Catrett, 477 U.S. 317, 327, 106 S.Ct. 2548, 2554-55, 91 L.Ed.2d 265 (1986) ("Summary judgment procedure is properly regarded as an integral part of the Federal Rules as a whole which are designed to `secure the just, speedy and inexpensive determination of every action.'"). Federal Rule of Civil Procedure 56 requires a District Court to grant summary judgment "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). The mere existence of some factual dispute does not defeat a summary judgment motion; "the requirement is that there is a genuine issue of material fact." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986). For a dispute to be genuine, the evidence must be such that a "reasonable jury could return a verdict for the nonmoving party." Id. For the fact to be material, it must relate to a disputed matter that "might affect the outcome of the suit." Id.

The party moving for summary judgment bears the initial burden of showing that there are no material facts in dispute and that judgment should be entered in its favor. Hannon v. Turnage, 892 F.2d 653, 656 (7th Cir.1990), cert. denied, 498 U.S. 821, 111 S.Ct. 69, 112 L.Ed.2d 43 (1990). A defendant moving for summary judgment may satisfy this initial burden by pointing to a plaintiff's failure to introduce sufficient evidence to support each essential element of the cause of action alleged. Anderson, 477 U.S. at 256, 106 S.Ct. at 2514; Celotex, 477 U.S. at 323-24, 106 S.Ct. at 2552-53. A party opposing a properly supported summary judgment motion "may not rest upon mere allegations or denials," but rather must introduce affidavits or other evidence to "set forth specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e). See also Celotex, 477 U.S. at 322-23, 106 S.Ct. at 2552; Becker v. Tenenbaum-Hill Assoc., Inc., 914 F.2d 107, 110 (7th Cir.1990). "If the adverse party does not so respond, summary judgment, if appropriate, shall be entered against the adverse party." Fed.R.Civ.P. 56(e).

In evaluating a motion for summary judgment, the Court must draw all inferences in a light most favorable to the non-moving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986); Johnson v. Pelker, 891 F.2d 136, 138 (7th Cir.1989). "However, we are not required to draw every conceivable inference from the record — only those inferences that are reasonable." Bank Leumi Le-Israel, B.M. v. Lee, 928 F.2d 232, 236 (7th Cir.1991) (citations omitted.)

III. ANALYSIS
A. The New Business Rule as Valid Law

In general, when any business tries to recover lost profits in a breach of contract action, it must prove that the profits would have occurred with "reasonable certainty" but for the actions of the party in breach. American Fidelity Fire Ins. Co. v. Kennedy Bros. Constr. Inc., 282 Ark. 545, 670 S.W.2d 798 (1984). When the company seeking damages is a new business, the burden of proof to establish "reasonable certainty" rises considerably. Some states completely prevent the recovery of any profits in a new business situation. This prevention of recovery is referred to as the "New Business Rule," currently under dispute in the litigation before this Court.

The Eighth Circuit in Hillside Enterprises v. Carlisle Corp., 69 F.3d 1410 (8th Cir.1995) (wine marketer sued disposable wine glass manufacturer for lost profits after manufacturer failed to ship specifically ordered number of glasses that marketer was to use in "wine-in-a-glass" venture) cites Ferrell Constr. Co. v. Russell Creek Coal Co., 645 P.2d 1005, 1009-10 (Okla.1982) as an example that would satisfy this newer, higher burden of proof of lost profits. The Hillside court notes that the plaintiffs, in Ferrell, were coal mining for a finite amount of steel when the breach of contract occurred. The amount of steel limited the profits that the plaintiff should have achieved, making the profits easily discernible and relatively certain. Hillside, 69 F.3d at 1414. Had such a definite order not been present, the plaintiff would not have satisfied its requisite burden of certainty.

Many states adhere to the above-described approach when determining whether to award lost profits for a new business. States in the Eighth Circuit, like Missouri (Handi Caddy, Inc. v. American Home Products Corp., 557 F.2d 136 (8th Cir.1977)) and Iowa (Harsha v. State Sav. Bank, 346 N.W.2d 791 (Iowa 1984)) recognize that the enforcement of any type of "New Business Rule" lies in the uncertainty of proving profits. With ample evidence of certainty, those states will allow evidence of lost profits to factor into the determination of damages awards. Minnesota takes the most liberal approach to this concept. Minnesota law (La Societe Generale Immobiliere v. Minneapolis Community Dev. Agency, 827 F.Supp. 1431 (D.Minn.1993) rev'd on other grounds, 44 F.3d 629 (8th Cir.1994) and Leoni v. Bemis Co., 255 N.W.2d 824 (Minn.1977)) emphasizes the lack of a per se rule in favor of preventing new businesses from collecting anticipated profits. The state willingly allows evidence of lost profits into court, and, according to Olson v. Rugloski, 277 N.W.2d 385, 388 (Minn.1979), requires the plaintiff to prove only reasonable certainty, not absolute certainty, to recover lost profits. Other states, such as Ohio and Michigan, have abandoned the per se "New Business Rule" in favor of a slightly more liberal approach that allows the party seeking damages an opportunity to prove those damages. See Fera v. Village Plaza, Inc., 396 Mich. 639, 242 N.W.2d 372, 376 (1976); AGF, Inc. v. Great Lakes Heat Treating Co., 51 Ohio St.3d 177, 555 N.E.2d 634, 638-39 (1990).

At the minimum, even states that have now abandoned a per se approach to the "New Business Rule" will require plaintiffs to prove, with the certainty seen in Hillside, that the profits in question would have occurred before they may recover. The higher burden of proof is considered a rigorous standard of certainty to meet. The Southern District of New York, a state that allows recovery for lost profits in certain cases, gives the most succinct reason for making recovery of lost profits of a new business venture extremely difficult to achieve. The New York court, stated:

The prospective profits of a new business or enterprise are regarded as being too remote, contingent, and speculative to meet the legal standard of reasonable certainty in determining the elements of recoverable damages in an action for breach of contract or for a tort.

International Minerals and Resources, Inc. v. Pappas, 761 F.Supp. 1068, 1079 (S.D.N.Y. 1991) (quoting 36 N.Y.Jur.2d Damages § 110, at 193-94 (1984)), vacated on other...

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