Trademark Research Corp. v. Maxwell Online, Inc.

• Decision Date: 18 May 1993
• Docket Number: Nos. 92-7839,1077,D,92-7869,Nos. 1076,s. 1076,s. 92-7839
• Citation: 995 F.2d 326
• Parties: 37 Fed. R. Evid. Serv. 845 TRADEMARK RESEARCH CORPORATION, Plaintiff-Appellee-Cross-Appellant, v. MAXWELL ONLINE, INC., Defendant-Appellant-Cross-Appellee. ocket
• Court: U.S. Court of Appeals — Second Circuit

Page 326

995 F.2d 326

37 Fed. R. Evid. Serv. 845

TRADEMARK RESEARCH CORPORATION, Plaintiff-Appellee-Cross-Appellant, v. MAXWELL ONLINE, INC., Defendant-Appellant-Cross-Appellee.

Nos. 1076, 1077, Docket Nos. 92-7839, 92-7869.

United States Court of Appeals Second Circuit.

Argued March 4, 1993.

Decided May 18, 1993.

Lawrence O. Kamin, New York City (James D. Goldsmith, Laura U. Brett, Willkie Farr & Gallagher, New York City, of counsel), for defendant-appellant-cross-appellee.

George F. Pappas, Washington, DC, (James R. Myers, Gary M. Hnath, Venable, Baetjer, Howard & Civiletti, Washington, DC, and Gerald J. Fields, Raymond J. Soffientini, Battle Fowler, New York City, of counsel), for plaintiff-appellee-cross-appellant.

Before NEWMAN, PIERCE and JACOBS, Circuit Judges.

JACOBS, Circuit Judge:

Defendant Maxwell Online, Inc. ("Maxwell Online") appeals from a July 13, 1992 judgment entered on a jury verdict in the Southern District of New York (Lee, Magistrate Judge ), finding it liable for breaching a contract to design and input a trademark database and search system for plaintiff Trademark Research Corporation ("TRC"). TRC had sought $4,477,141 in damages for lost profits from the sale of a computer product known as CD-ROM, $3,106,756 in damages for lost profits from in-house trademark searches, $4,319,559 in damages for "wasted expenses," and punitive damages. Maxwell Online moved for a directed verdict with respect to, inter alia, each of TRC's four categories of damages. The trial court dismissed the claim for lost profits from CD-ROM sales and the claim for punitive damages. The jury awarded TRC $1,000,000 for lost profits from in-house searches and $2,711,728 for wasted expenses. The jury found for TRC on Maxwell Online's counterclaim for unpaid bills. The trial court denied Maxwell Online's motion for judgment n.o.v.

Maxwell Online contends that the trial court erred in failing to grant Maxwell Online judgment as a matter of law on TRC's claim for lost profits from in-house trademark searches and for wasted expenses incurred as consequential damages. Alternatively, Maxwell Online seeks a new trial on the issue of damages, arguing that the trial court erred in (1) refusing to allow Maxwell Online's expert witness to critique certain elements of the damage calculations proffered by TRC's expert; (2) refusing to qualify a Maxwell Online witness as an expert on database design; (3) sustaining objections to three hypothetical questions posed on cross-examination to TRC's expert; (4) refusing to instruct the jury that TRC was required to prove its consequential damages with "reasonable certainty"; and (5) denying a new damages trial to redress improper comments by TRC's counsel during summation. Maxwell Online also argues that it is entitled to a new trial on the claim and counterclaim because the trial court committed reversible error in its jury instructions on the issue of liability for breach of contract.

TRC cross-appeals from the judgment insofar as the trial court dismissed TRC's claim for lost profits from the sale of CD-ROMs--a new computer product marketed by TRC that was made possible by the trademark database and search system. TRC also contends that the district court erred in denying its request for prejudgment interest.

We reverse the judgment insofar as it awards damages for TRC's lost profits. We find there was insufficient evidence to support particular elements of the damages award for wasted expenses, but affirm the award for such expenses because it is within the maximum range the jury could properly have awarded. We affirm in all of the numerous other respects.

I. BACKGROUND

TRC has been in the business of producing trademark search reports since 1949. Formerly known as Trademark Services Corporation, TRC is an indirect subsidiary of Commerce Clearing House, Inc. ("CCH"), a conglomerate of businesses providing law-related services and products. The trademark search market has been dominated by a handful of firms, one of which, Thomson & Thomson, has enjoyed a 75 percent market share in recent years. Customers use trademark search reports to compare proposed trademarks with previously registered trademarks in order to identify any potential for confusion that may affect approval of the new mark by the United States Patent and Trademark Office. Accuracy and thoroughness are essential attributes of trademark search reports because the launching of a new trademark usually entails a large investment.

Prior to 1992, TRC catalogued its trademark information on five million three-by-five-inch index cards and conducted in-house trademark searches by manual review of those files. In the mid-1980s, some of TRC's competitors computerized their trademark files and search process. Computerized search systems, while not necessarily more accurate than manual searches, are more efficient, produce more attractive search reports, and enable search firms to market direct access to their trademark databases. TRC continued using its manual system and began losing market share and money.

In 1985, TRC hired BRS Information Technologies ("BRS") to create a prototype of an automated trademark database and search system. BRS later became a division of Maxwell Online. BRS completed that project in 1987 and was paid approximately $150,000. Although TRC was satisfied with the prototype, it apparently was not ready at that time to take the next step of converting from a manual to a computerized search system. In December 1987, CCH asked one of its executives, Donald Borgese, to take over as president of TRC and to evaluate TRC's business prospects in view of its eroding market share. Among the options considered was going out of business. Mr. Borgese concluded that TRC could survive if it automated, and that it should hire BRS to accomplish this goal because of TRC's satisfactory experience with BRS in developing a prototype.

In 1988, TRC and BRS began negotiating for a full-scale database. By August 1988, BRS started work on the database and later that month issued a proposal to TRC setting forth, among other things, a timetable for completion of the database and a fee schedule. On September 14, 1988, the parties signed a Declaration of Intent (the "Declaration") which states in its entirety:

Trademark Service Corporation (TSC) and BRS Information Technologies agree to proceed with the creation of the Trademark Database.

The preliminary proposal discussed today will be further refined and expanded, but database loading and programming activities will commence on September 15, 1988.

The parties agree to reconvene in early October, 1988, to finalize the agreement and sign a contract.

Until then, BRS will bill TSC monthly on a time and costs basis. The storage, load and update fees will be as stated in the preliminary proposal.

The Declaration is the only executed writing governing the parties' agreement.

The parties attempted to draft the full-dress contract contemplated by their Declaration. BRS submitted drafts to TRC in November 1988 and in the middle of 1989. No final contract was executed, in part because the drafts mistakenly assigned to BRS database-related tasks that TRC had already contracted out to other vendors.

Shortly after the Declaration of Intent was signed, BRS learned that it was to be acquired by Maxwell Communication (Delaware), Inc. ("Maxwell Communication"). On November 23, 1988, Maxwell Communication entered into a Purchase Agreement with the entity that then owned BRS. The acquisition was consummated in January 1989. After a series of corporate mergers and name changes, BRS emerged as a division of a Maxwell Communication affiliate called Maxwell Online. For convenience, the parties have referred to the acquiring entity as Maxwell Online.

The record reflects that BRS was aware that time was of the essence in completing the database project, that BRS told TRC that the database and search system would be available for demonstration at the April 1989 annual meeting of the United States Trademark Association ("USTA"), and that Maxwell Online was made aware of this urgency. TRC contends that its contract with BRS required the delivery of a fully operational database no later than January 1990, but that, as a result of Maxwell Online's breach, delivery of an operational system was delayed until January 1992.

BRS's main business had been the design of databases and corresponding "search and retrieval" software, and the provision of access to such databases through online text retrieval services. Its new corporate parent, Maxwell Online, was in a different business: putting databases online. As a result of personnel changes following Maxwell Online's takeover, BRS lost several executives and other employees who had been working on the TRC database project. Delays accumulated, and many of the items that were delivered were faulty. TRC protested, and Maxwell Online repeatedly assured TRC that the database would be completed on time. Nevertheless, the database was not sufficiently developed to be shown at the April 1989 USTA meeting, or at the USTA's April meeting the following year.

This commercial atmosphere generated billing disputes. Pursuant to the Declaration of Intent, Maxwell Online was supposed to bill TRC on a "time and costs" basis. TRC paid bills rendered through May 1989, totaling approximately $161,000. Maxwell Online did not get around to submitting another bill until November 1989. Upon receipt of the November 1989 bill, and every bill thereafter, TRC requested data to substantiate what it saw as exorbitant and erroneous charges. Maxwell Online concedes that its November 1989 statement reflected double billing and that there were some discrepancies in some other bills as well. Maxwell Online never explained its bills to TRC's satisfaction, and TRC made no further payments. At the time of trial, Maxwell Online sought approximately $400,000 on its counterclaim for...