Actonet, Ltd. v. Allou Health & Beauty Care

• Decision Date: 13 December 1999
• Docket Number: No. 99-1855,99-1855
• Parties: (8th Cir. 2000) ACTONET, LTD., APPELLEE, v. ALLOU HEALTH & BEAUTY CARE, DOING BUSINESS AS THE FRAGRANCE COUNTER, INC., APPELLANT. Submitted:
• Court: U.S. Court of Appeals — Eighth Circuit

Page 836

219 F.3d 836 (8th Cir. 2000)

ACTONET, LTD., APPELLEE, v. ALLOU HEALTH & BEAUTY CARE, DOING BUSINESS AS THE FRAGRANCE COUNTER, INC., APPELLANT.

No. 99-1855

UNITED STATES COURT OF APPEALS FOR THE EIGHTH CIRCUIT

Submitted: December 13, 1999

Filed: August 1, 2000

Rehearing Denied Aug. 30, 2000

Appeal from the United States District Court for the District of Nebraska

[Copyrighted Material Omitted] Before Wollman, Chief Judge, McMILLIAN, Circuit Judge, and Battey, ¹ District Judge.

McMILLIAN, Circuit Judge.

Allou Health & Beauty Care, Inc. d/b/a The Fragrance Counter (Allou Health) appeals from a final judgment entered in the United States District Court for the District of Nebraska upon a jury verdict awarding ACTONet Ltd. (ACTONet) $193,831.01 for contract damages. See ACTONet, Ltd. v. Allou Health & Beauty Care, Inc., d/b/a The Fragrance Counter, No. 4-98CV3008 (D. Neb. Mar. 3, 1999) For reversal, Allou Health argues that: (1) the district court erred in holding that parol evidence was admissible to explain the contract at issue, (2) evidence admitted was hearsay and should have been excluded, (3) the award of damages was excessive, not foreseeable and constituted a penalty, and (4) an exhibit not listed in the pre-trial order was improperly admitted into evidence. For the reasons discussed below, we reverse the judgment of the district court and remand for further proceedings consistent with this opinion.

Jurisdiction was proper in the district court based on 28 U.S.C. 1332 (diversity jurisdiction). Jurisdiction is proper in this court based upon 28 U.S.C. 1291. The notices of appeal were timely filed pursuant to Fed. R. App. P. 4(a).

BACKGROUND

ACTONet, headquartered in Lincoln, Nebraska, is a developer of websites where customers can purchase products over the Internet. In September 1996, Eli Katz, vice president of Allou Health, commenced discussions with Ronald Brown, president of ACTONet, regarding the development of a website for the sale of men's and women's fragrances, which site was named The Fragrance Counter. At the time discussions commenced between ACTONet and Allou Health, Allou Health had a website on America On-Line for which it was paying twelve percent of revenue.

ACTONet's Brown sent a letter, dated October 16, 1996, to Allou Health's Katz, setting forth proposed elements of an agreement under which ACTONet would develop a website and provide Internet services for The Fragrance Counter. See Trial Exhibit 1. In this letter Brown stated that ACTONet's proposal "will be based on a partnership. [ACTONet] will provide the server space, T-1 access, and the Web site for The Fragrance Counter. [Allou Health] will have no initial site development expenses but will be charged twelve percent of [its] gross sales." Brown also stated in this letter that he "would like to enter into a three year contract if possible," and that "[Allou Health] must be happy with the site and its functionality for the contract to be valid." Following the receipt of this letter, Katz e-mailed Brown requesting a written contract. Brown responded by sending ACTONet's preprinted Internet sales agreement to Allou Health. The agreement, which was in triplicate with white, yellow and pink copies, was unsigned by ACTONet. ² Under the heading "description," the proposed agreement incorporated the above quoted language of the October 16, 1996, letter, except for did the language stating that Allou Health "must be happy with the site and its functionality for the contract to be valid." Trial Exhibits 2A and 2B. The "description" stated in relevant part that:

To sum it up, your [Allou Health] staff will keep the site current by uploading changes in text and images, and we [ACTONet ] will supply the engine, templates, the shopping cart, the secure server, Internet access, and advice on using the system. This arrangement will cost your company 12% of gross sales generated by Compuserve and Prodigy which will cost The Fragrance Counter 4% of gross sales. ACTONet would prefer to enter into a three year contract if possible. Trial Exhibits 2A and 2B.

Below the "description," the form agreement stated that, "[t]he following terms and conditions supersede and take precedence over the above description." Paragraph 16 of these terms provided:

The client shall pay ACTONet for its direct costs of production, art, artwork, mailing, packaging, shipping, taxes and duties, Federal Express charges, facsimile charges, and telephone calls incurred by ACTONet in connection with the performance of this agreement. The client shall pay all of ACTONet's costs for any necessary traveling done on behalf of the client. Trial Exhibits 2A and 2B.

Paragraph 19 of the contract provided:

In the event that the client, after having approved any planned Internet services cancels all or any part thereof, the client shall pay for all costs incurred therefrom to the date of cancellation and any unavoidable costs incurred thereafter, including any noncancellable commitments, and ACTONet shall receive its gross profits, net profit, or loss of profits, as the case may be, on all such costs incurred. Trial Exhibits 2A and 2B.

Paragraph 25 of the contract provided that, "[t]he agreement may be terminated by either party on at least sixty (60) days prior written notice to the other party." Paragraph 26 stated, "[t]his agreement contains the entire understanding between the parties, cannot be changed or terminated orally and shall be construed in accordance with the laws of the State of Nebraska ... ." Trial Exhibits 2A and 2B.

Allou Health's Senior Vice President and Chief Financial Officer, David Shamilzedeh, reviewed the agreement, deleted paragraph 16 in its entirety by drawing a line through it, and wrote "see front" next to this deletion. He also inserted by asterisk the words "gross sales less returns and allowances" so that the second sentence of the "description" stated that," The Fragrance Counter will have no initial site development expenses but will be charged twelve percent of their gross sales less returns and allowances." Shamilzedeh signed the agreement on November 27, 1996, and returned it to ACTONet's Brown, who signed it as modified by Shamilzedeh, on December 2, 1996.

ACTONet's construction of The Fragrance Counter website began in the early summer of 1997, and the website became operational on August 7, 1997. Allou Health maintains that it was dissatisfied with the services provided by ACTONet because the site evidenced a lack of creativity, the design work took longer than expected, and the website did not function at times. Allou Health further maintains that, in September 1997, ACTONet switched servers during business hours without notifying Allou Health and that as a result of this switch, which took place during a public relations media blitz for the website, the site went down with no back-up. To the contrary, ACTONet contends that, after the website went online, it generated sales and received a good review in Web Magazine, an Internet public information source that reviews websites. See Trial Exhibit 15.

Sometime after the website became operational, but prior to September 19, 1997, Allou Health retained Organic Online, also known as Organic.com (Organic), to promote the website for The Fragrance Counter. In view of previously unanticipated advertising expenses incurred as a result of Organic's promotion of the website, Allou Health sought to renegotiate its agreement with ACTONet. As a result of retaining Organic, Allou Health's Katz called ACTONet's Brown and attempted to renegotiate their agreement. In a letter written by ACTONet's general counsel to Allou Health, dated September 19, 1997, ACTONet stated that, in response to Allou Health's informing ACTONet that it wished to renegotiate the parties' contract, ACTONet was "willing to consider amending the terms if [it would be] able to recoup the costs incurred by [ACTONet] and [its] potential lost profits." Trial Exhibit 5. The letter stated that ACTONet incurred $22,093 in expenses to develop the website and that its lost profits over a sixty day promotion period were $7,200. The ACTONet letter further stated that lost profits were computed by estimating twelve per cent of sixty day's revenue if the site were promoted. Allou Health's Shamilzadeh subsequently sent ACTONet a termination letter dated September 29, 1997, stating that Allou Health was giving the sixty day notice required by the parties' agreement. See Trial Exhibit 7.

In the written agreement between Allou Health and Organic, which agreement was not executed until December 5, 1997, Allou Health committed to paying Organic for production and planning, in addition to commission and $2,000,000 for advertising. ³ Organic implemented a website for The Fragrance Counter subsequent to ACTONet's voluntarily transferring the domain of the website on December 26, 1997. ACTONet asserts that, in September 1997, Organic began visiting its website for The Fragrance Counter and copied its "HTLM" computer code. ⁴ ACTONet further asserts that Organic visited ACTONet's website for The Fragrance Counter "hundreds of times, compiling forty-four pages of reports of their visits," and that it would have not been possible for Organic to design and implement a website as quickly as it did without using ACTONet's HTLM computer code. Brief for Appellee at 8-9.

ACTONet sought recovery in the District of Nebraska from Allou Health for an alleged breach of the agreement for development of a website for The Fragrance Counter. ⁵ In its Answer, Allou Health affirmatively alleged that the written contract provided for termination by either party on sixty days notice and that it had effectively terminated the contract in accordance with the agreement's provisions. Allou Health further affirmatively alleged that ACTONet failed to completely create the website within a satisfactory time frame and that ACTONet failed to mitigate its...