MindGames v. Western Publishing Co.

Decision Date22 June 2000
Docket NumberNo. 98-1879,98-1879
Citation218 F.3d 652
Parties(7th Cir. 2000) MindGames, Inc., Plaintiff-Appellant, v. Western Publishing Company, Inc., Defendant-Appellee
CourtU.S. Court of Appeals — Seventh Circuit

Appeal from the United States District Court for the Eastern District of Wisconsin. Nos. 94-C-552, 94-C-998--Lynn S. Adelman, Judge.

Before Posner, Chief Judge, and Fairchild and Diane P. Wood, 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, Western, a major marketer of games. Western had marketed the very successful adult board games "Trivial Pursuit" 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 MindGames $600,000 in royalties. After that, sales fell precipitously (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 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 contract is entitled to nominal damages, Mason v. Russenberger, 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 sec. 12.8, p. 784 (3d ed. 1999), MindGames 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 nominal 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 conditional on Western's exercising its contractual right to renew. A conditional right in a contract does not become an enforceable right until the condition occurs, Restatement (Second) of Contracts sec. 225(1) (1981), unless noncompliance 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 sec. 8.3, p. 526, as where the other party to the contract wrongfully prevents the condition from occurring, id., sec. 8.6, pp. 544-45; Restatement, supra, sec. 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. Maximus, 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. Ameritech Pension Trust, 51 F.3d 1319, 1328 (7th Cir. 1995) (Illinois 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 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 established 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 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 conclusive 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. K N 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 sec. 4507, pp. 126-50 (2d ed. 1996). Law, Holmes said, in a controversial definition that is, however, a pretty good summary of how courts apply the law of other jurisdictions, is just a prediction...

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