e360 Insight, et al v. Spamhaus Project
Filing
Filed opinion of the court by Judge Hamilton. The judgement of the district court is VACATED and this matter is REMANDED with instructions to enter judgment for the plaintiffs in the amount of three dollars. Richard A. Posner, Circuit Judge; Michael S. Kanne, Circuit Judge and David F. Hamilton, Circuit Judge. [6334734-3] [6334734] [10-3538, 10-3539]
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In the
United States Court of Appeals
For the Seventh Circuit
Nos. 10-3538 & 10-3539
E360 INSIGHT, INC ., et
al.,
Plaintiffs-Appellees/
Cross-Appellants,
v.
T HE S PAMHAUS P ROJECT,
Defendant-Appellant/
Cross-Appellee.
Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 06-cv-03958—Charles P. Kocoras, Judge.
A RGUED JUNE 8, 2011—D ECIDED S EPTEMBER 2, 2011
Before P OSNER, K ANNE, and H AMILTON, Circuit Judges.
H AMILTON, 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.
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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. 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, Inc. 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 coplaintiff 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
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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
1
Spamhaus argued that its ability to assert a lack of personal
jurisdiction in a Rule 60(b) motion had nothing to do
with whether its attorney appeared or not. See e360 Insight,
500 F.3d at 597. As we recently explained, the exact opposite
is true — this is a “pivotal question” when a defendant asserts
a lack of personal jurisdiction in a Rule 60(b) motion. Philos
Technologies, Inc. v. Philos & D, Inc., 645 F.3d 851, 857 (7th
Cir. 2011).
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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 crossappealed.
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 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.
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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 at-
2
The district court’s July 30, 2008, order plays a central role in
our resolution of the issues in this appeal and is hereafter
referred to as the “July order.” The court later ordered that
the limited remaining discovery allowed by its July order
be completed by December 2, 2008.
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torneys 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 costs, revenues, profits, lost profits, and valua-
3
The district court had previously instructed e360 that it could
no longer provide such answers under Fed. R. Civ. P. 33(d),
which e360 had “overused” in an apparent attempt to
avoid providing meaningful responses to Spamhaus’s interrogatories.
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tion. 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.
Federal Rule of Civil Procedure 37(b)(2)(A) grants
the district courts the power to impose appropriate sanctions for violations of discovery orders. We review
those sanctions for an abuse of discretion, recognizing
that the district courts have “wide latitude in fashioning
appropriate sanctions.” Johnson v. Kakvand, 192 F.3d 656,
661 (7th Cir. 1999). Under this standard, we will affirm
any sanctions that were reasonable under the circumstances, even if we might have resolved the matter differently in the first instance. Id., citing Williams v. Chicago
Board of Education, 155 F.3d 853, 857 (7th Cir. 1998).
On appeal, e360 argues that the sanctions were inappropriate because its failure to comply with the district
court’s July order was the result of inadvertence rather
than willfulness, bad faith, or fault. This argument is
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wholly misplaced. For starters, a showing of willfulness,
bad faith, or fault is necessary only when dismissal or
default is imposed as a discovery sanction. Maynard v.
Nygren, 332 F.3d 462, 467 (7th Cir. 2003) (noting that bad
faith, willfulness, or fault is required only “when dismissals are used specifically as a discovery sanction”);
see Societe Internationale Pour Participations Industrielles
et Commerciales, S.A. v. Rogers, 357 U.S. 197, 212 (1958)
(noting that “serious constitutional questions” compel
conclusion that dismissal may not be imposed as a discovery sanction absent a showing of willfulness, bad
faith, or fault); National Hockey League v. Metropolitan
Hockey Club, Inc., 427 U.S. 639, 640 (1976) (per curiam);
see also Newman v. Metropolitan Pier & Exposition
Authority, 962 F.2d 589, 591 (7th Cir. 1992) (“If the failure
is inadvertent, isolated, no worse than careless, and not
a cause of serious inconvenience either to the adverse
party or to the judge or to any third parties, dismissal
(if the failure is by the plaintiff) or default (if by the
defendant) would be an excessively severe sanction.”).
e360’s failure to comply with the district court’s July
order was a sufficient basis to impose sanctions under
Rule 37(b)(2)(A); see also Societe Internationale, 357 U.S. at
208 (“Whatever its reasons, petitioner did not comply
with the production order. Such reasons . . . can hardly
affect the fact of noncompliance and are relevant only
to the path which the District Court might follow in
dealing with petitioner’s failure to comply.”). e360’s
culpability for that failure “determines only which sanctions the court should impose and not whether any sanctions are appropriate at all.” Tamari v. Bache & Co. (Lebanon)
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S.A.L., 729 F.2d 469, 473 (7th Cir. 1984), citing Societe
Internationale, 357 U.S. at 208. e360’s failure to comply
with the district court’s order was the result of at least
negligence, which is a degree of fault sufficient for imposing sanctions. Tamari, 729 F.2d at 474.
e360 compounds this error by keeping a narrow focus
on only its failure to comply with the district court’s July
order. To justify its failure, e360 repeats the arguments
it presented to the district court: blaming its former
attorneys and Spamhaus. While there is no substance
to those arguments on their own merits, the more fundamental problem is that we review a sanction not in isolation but in light of “the entire procedural history of
the case.” Long v. Steepro, 213 F.3d 983, 986 (7th Cir.
2000); see Salgado v. General Motors Corp., 150 F.3d 735, 740
(7th Cir. 1998) (explaining that a sanction “must be one
that a reasonable jurist, apprised of all the circumstances,
would have chosen as proportionate to the infraction”).
In other words, we weigh not only the straw that
finally broke the camel’s back, but all the straws that
the recalcitrant party piled on over the course of
the lawsuit. See Patterson v. Coca-Cola Bottling Co.,
852 F.2d 280, 284 (7th Cir. 1988) (affirming sanction
of dismissal, noting that the record was “replete with
delays, non-responses to court orders, and missed deadlines”). Thus, it is of little consequence whether, as e360
argues is the case here, the conduct that finally drew the
district court’s ire can be explained away as a simple
negligent mistake. A district court may conclude that
one more supposed miscommunication is just another
example of a party’s demonstrated inability to take his
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discovery obligations seriously. See Newman, 962 F.2d at
591 (“as soon as a pattern of noncompliance with the
court’s discovery orders emerges, the judge is entitled
to act with swift decision”).
In this case, the district court acted reasonably — and
with more restraint than necessary — by imposing severe
sanctions short of dismissal. By the time Spamhaus filed
its motion to dismiss, Linhardt had repeatedly failed to
appear for his scheduled deposition, the district court
had twice found it necessary to order e360 to comply
with its discovery obligations, and e360 had failed
to comply with the court’s clear order compelling discovery.
Even more troubling are e360’s supplemental interrogatory responses. When e360 submitted those responses, it implied that its amendments were meant
only to rectify defects in its previous responses. In actuality, however, e360 had drastically amended its previous
responses. It added sixteen new witnesses, and it increased its damages estimate by a full order of magnitude.
Even setting aside e360’s previous discovery delays,
these changes provided powerful evidence that e360
was not engaging in the discovery process in good faith.
There is no way that e360 could have believed in good
faith that its last-minute disclosure of so many new
witnesses and a radically inflated damages estimate
was even remotely appropriate, especially as part of its
belated effort to comply with a court order compelling
discovery. We cannot believe that e360 first learned of
all this information in the two weeks between its initial,
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late, and inadequate responses to Spamhaus’s interrogatories on August 29, 2008, and its amended responses
on September 12, 2008. All indications are that this
late disclosure was meant to prolong discovery and
inflict additional costs on Spamhaus by forcing it to
request additional time to depose those witnesses and
learn the details of the inflated new damage estimate.
e360 only reinforces this suspicion by arguing to us
that its failure to comply with the district court’s
July order “could have been remedied by allowing
Spamhaus to conduct any [additional] discovery it felt
necessary.”
With this track record, no reasonable person could
conclude that the district court’s sanctions were too
severe. See Johnson, 192 F.3d at 661; see also Johnson v. J.B.
Hunt Transport, Inc., 280 F.3d 1125, 1132 (7th Cir. 2002)
(affirming imposition of harsh sanctions in similar circumstances). The stricken witnesses and new damage
calculation were disclosed to Spamhaus inexcusably
late, and they were provided under circumstances
that seriously call e360’s good faith into doubt. The
district court could have simply dismissed the case as a
sanction for the failure to comply with orders and its
bad faith misuse of the discovery process. See Maynard,
332 F.3d at 467. Instead, the court generously allowed
e360 a chance to prove its damages using the information it had disclosed in a timely manner. In so doing, the
district court imposed a punishment that was not excessive, see Crown Life Ins. Co. v. Craig, 995 F.2d 1376, 1382
(7th Cir. 1993) (requiring that sanctions “be proportionate to the circumstances surrounding the failure[s] to
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comply with discovery”), and at the same time avoided
the serious prejudice that Spamhaus would have
suffered if it had been forced to conduct additional discovery to address e360’s late disclosure of so much new
information. The district court exercised its discretion
with considerable restraint. We affirm the sanction in
its entirety.
B. e360’s Motion to Compel
Having said that, it is more than a little ironic that e360’s
next argument concerns the district court’s refusal to
compel Spamhaus to respond to some of e360’s own
discovery requests. In October 2008, after sanctions were
imposed on e360, e360 moved to compel Spamhaus to
answer a number of pending interrogatories. e360 had
requested that Spamhaus: (1) identify the individuals
involved in the Spamhaus decision to list e360’s IP addresses on its list of known spammers; (2) identify all
Spamhaus employees and volunteers and provide their
job functions, salary, and other compensation; and
(3) identify where “data and other assets are stored.” The
district court denied this motion because its July order
had informed the parties that “the only discovery
left would be the depositions of [Linhardt] and [e360’s]
30(b)(6) representative.”
We review the district court’s denial of e360’s motion
to compel for an abuse of discretion. Packman v. Chicago
Tribune Co., 267 F.3d 628, 646 (7th Cir. 2001). Generally
speaking, a district court’s decision will be considered
unreasonable if it was lacking a basis in law or fact,
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such that it “clearly appears arbitrary.” Walker v.
Sheahan, 526 F.3d 973, 978 (7th Cir. 2008), citing Reynolds
v. Jamison, 488 F.3d 756, 761 (7th Cir. 2007). Even if
the district court’s decision was unreasonable, however, we will not grant any relief “absent a clear
showing that the denial of discovery resulted in actual
and substantial prejudice.” Searls v. Glasser, 64 F.3d
1061, 1068 (7th Cir. 1995). Here, e360 argues that these
standards were met because the July order said only
that, aside from the depositions of Linhardt and
e360’s corporate representative, “No new discovery may
be propounded by either party.” The denied motion
to compel was not “new” discovery, e360 says, but
merely a “request to compel previously propounded
[discovery] requests.”
Even if we treated the July order as ambiguous, e360
was playing with fire by waiting three months to file its
motion to compel. And even if we were to assume that
the district court misinterpreted its own order and erred
by treating e360’s motion to compel as “new discovery”
forbidden by its July order, which we doubt, we see
no basis for finding that e360 suffered “actual and substantial prejudice” from the denial of that motion.
See Searls, 64 F.3d at 1068.
First, Spamhaus employees’ salaries and compensation
were clearly irrelevant to the amount of e360’s damages.
The mere location of Spamhaus’s “data and other assets”
would say nothing about any losses e360 suffered. The
district court’s July order certainly would have prevented e360 from conducting any follow-up discovery
based on the answers.
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The remaining information e360 sought — the identities
of Spamhaus employees and the individuals who were
involved in placing e360’s IP addresses on the list of
spammers — primarily concerned Spamhaus’s liability,
which had already been established by the default judgment. e360 claims that it was prejudiced because these
employees might have known who used Spamhaus’s list
of known spammers or how many of e360’s emails were
blocked as a result. We see little reason to think that
Spamhaus employees would have such knowledge,
however. Spamhaus itself did not actually block any
email. It merely provided a list of IP addresses that ISPs
in turn used to block emails originating from those addresses. As Spamhaus explained in its interrogatory
responses, it provided its list of known spammers for
free on the Internet, without collecting names or other
information about the individuals who viewed that list.
It seems most unlikely, then, that any Spamhaus employees would have any meaningful knowledge about
who actually used its list or exactly how many of plaintiff’s emails were blocked by users of that list. The speculative possibility that some Spamhaus employees might
have possessed such information does not rise to the
level of “actual and substantial prejudice” required
under our case law. Searls, 64 F.3d at 1068.4
4
e360 also argues that it was prejudiced not just by the denial
of its motion to compel responses to these interrogatories, but
also by the denial of any opportunity to follow up on that
information, such as by deposing any employees named in
(continued...)
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C. Plaintiffs’ Exhibit 5(a)
e360 next challenges the district court’s exclusion of
Plaintiffs’ Exhibit 5(a) from evidence. Well before trial,
e360 submitted its Exhibit 5, a spreadsheet prepared by
Linhardt detailing the losses e360 claimed to have suffered because Spamhaus placed e360 on its list of known
spammers. In Exhibit 5, Linhardt had estimated that
e360 had decreased in value by $135,173,577 as a result
of the outgoing emails he believed had been blocked
because e360 was placed on that list. The week before
trial, however, e360 submitted Exhibit 5(a) with a new
“supplemental damage analysis” in which Linhardt
revised that estimate to $122,271,346.
Spamhaus moved to strike Exhibit 5(a) on the ground
that it contained a “wholly new, previously undisclosed
damages calculation.” e360 claimed that it had discovered a mathematical error in one of the calculations
in Exhibit 5. The district court heard arguments shortly
before trial, but declined to make a definitive ruling on
the motion to strike. Instead, the court allowed e360
to offer the exhibit at trial and deferred its ruling on
admissibility until afterward, believing it would “be a
little more attuned to the essence of the claimed mistake”
after hearing the parties’ testimony.
After trial, the district court granted Spamhaus’s
motion and struck Exhibit 5(a) for both procedural and
substantive reasons. e360 Insight, 2010 WL 2403054 at *2.
4
(...continued)
Spamhaus’s responses. This option was foreclosed by the
district court’s July order forbidding such “new discovery.”
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Procedurally, the district court explained, e360 had submitted Exhibit 5(a) “well after the discovery cutoff
date” set in the court’s July order and had offered that
exhibit as support for a damages estimate “exceeding
the limit of damages set . . . as a sanction for [e360’s]
multiple breaches of [its] discovery obligations.” Id.
Substantively, the court concluded that Exhibit 5(a)
was inadmissible under Federal Rule of Evidence 702
because Linhardt, who prepared the exhibit, lacked
“expertise necessary to establish the foundational
basis for admissibility, and no scientific or other reliable
principles or methods were used in the exhibit’s preparation.” Id.
We review the district court’s decision to exclude
Exhibit 5(a) for an abuse of discretion. Maher v. City of
Chicago, 547 F.3d 817, 823 (7th Cir. 2008), citing Griffin v.
Foley, 542 F.3d 209, 217 (7th Cir. 2008). Here, e360
argues that the district court abused its discretion
because Exhibit 5(a) did not contain “new evidence”
forbidden by the July order. Rather, e360 says, the new
exhibit merely contained “a correction to a mathematical calculation and did not disclose any new evidence, methodology[,] or calculation.” True or not, the
district court did not abuse its discretion by rejecting
the new exhibit. It was disclosed long after the time
for disclosure of exhibits, and it was clearly an attempt
to evade the district court’s proper discovery sanction
limiting the damages e360 could seek.5
5
Because the district court did not abuse its discretion by
(continued...)
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D. Linhardt’s Trial Testimony
e360 next complains of the district court’s treatment
of Linhardt’s damages testimony. At trial, Linhardt
testified that he had estimated e360’s damages by calculating the average amount of revenue it would have
received for each email sent and multiplying that by
the number of emails he believed were blocked by ISPs
using the Spamhaus list of known spammers. Linhardt
was e360’s primary witness and the only witness to
testify to damages.
After trial, the district court excluded the vast majority
of Linhardt’s testimony on the grounds that he had attempted to provide expert testimony on matters “beyond
the scope of his . . . business knowledge.” e360 Insight,
2010 WL 2403054 at *3. (We discuss the one significant
exception below in Part E.) The district court noted
that Linhardt was not qualified by knowledge, skill,
experience, training, or education to testify as an expert
regarding the valuation of his business or his business’s
lost profits.
Even if Linhardt had been qualified to offer testimony
on these matters, the district court explained, his testimony was inherently unreliable. This fact, the court said,
“is unmistakably demonstrated by the profound differences in claimed damages proffered at various points
5
(...continued)
excluding Exhibit 5(a) based on the timing of its disclosure
and the effort to avoid the sanctions order, we do not
address the application of Rule 702 to the exhibit.
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during these proceedings.” Id. “At the time of the
default judgment, the damages claimed were $11,715,000.
During discovery, Exhibit 5 was proffered reflecting
damages of $135,173,577. At trial, proffered Exhibit 5(a)
showed damages of $122,271,346. During final argument, the claimed amount was $30,000,000.” Id. at *4.
Even if those wild swings were set aside, the district
court said, “it strains credulity that a company that
made only a fraction of the profits Linhardt asks for
over the course of its five-year lifespan would have garnered profits in the amounts Linhardt set out in his
testimony or documentary evidence.” Id. at *3. Because
of these “systemic problems,” the district court concluded that Linhardt’s damages testimony was not
reliable. Id. at *4.6
On appeal, e360 contends that the district court erred
because it required Linhardt’s testimony to meet the
expert witness standards of Federal Rule of Evidence
702, which allows only qualified experts to testify regarding “scientific, technical, or other specialized knowledge.” e360’s argument misses the point. The district
court gave Linhardt’s testimony no weight because he
was not credible.
We see no basis for doubting the district court’s credibility finding. See, e.g., Anderson v. City of Bessemer City,
6
The district court also noted a number of “individual deficiencies” in Linhardt’s testimony, e360 Insight, 2010 WL 2403054
at *4-*7, but we need not address the parties’ arguments
regarding those deficiencies. We find an ample independent
basis to uphold the court’s assessment of Linhardt’s credibility.
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470 U.S. 564, 575 (1985) (noting that “only the trial judge
can be aware of the variations in demeanor and
tone of voice that bear so heavily on the listener’s understanding of and belief in what is said”). We need not
determine whether Linhardt should have been treated
as an expert or a lay opinion witness.
E. The $27,000 Damage Award — Profits v. Revenue
As we have explained, the vast majority of e360’s evidence was (1) stricken in its entirety as a discovery sanction; (2) excluded because it was disclosed long after
the close of discovery; or (3) rejected on credibility
grounds. The district court’s treatment of this evidence was entirely proper. All that remains is the lone
category of evidence on which the district court rested
its damage award of $27,000.
The district court concluded that Linhardt had
“provide[d] some reliable information” regarding e360’s
contracts with three customers. e360 Insight, 2010 WL
2403054 at *7. During the time that those companies dealt
with e360, they collectively paid e360 approximately
$27,000 per month for the services it performed. Id. As
a result of Spamhaus’s actions, the district court found,
e360 lost its contracts with these customers.
The district court did not believe, however, Linhardt’s
claim that these contracts would have remained in effect
for an additional four years if not for Spamhaus’s conduct. Linhardt had admitted that “long-term agreements
with customers were not the norm in the industry,” the
court explained, and had given no reason to believe
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that these contracts were an exception to that general
rule. Id. at *8. Despite its refusal to award four years of
damages on these three contracts, the court believed
that e360’s relationships with these customers “were not
in danger of ending prior to Spamhaus’s actions,”
making it “more likely than not that they would have
continued to do business with e360 for one additional
month beyond the end of the relationships precipitated
by Spamhaus.” Id. For this reason, the district court
awarded $27,000 on the claim that Spamhaus interfered with e360’s existing contracts, “the amount
of the payments [it] would have received for one
additional month’s worth of work for each of these customers.” Id.
On appeal, Spamhaus argues that the district court’s
damage award was excessive because it was in the
amount of e360’s gross revenue rather than its profit. As
Spamhaus correctly observes, gross revenue is generally
not an appropriate measure of damages because
revenue is calculated without regard to the costs the
plaintiff incurred in the course of making that revenue.
See Taylor v. Meirick, 712 F.2d 1112, 1121 (7th Cir. 1983) (“a
loss of revenue is not the same thing as a loss of profits.
If you sell less of your product you will have lower
costs, and the cost savings is a gain that must be offset
against the loss of revenues in computing lost profit.”).7
7
This rule does not apply to costs that would have been
incurred regardless of whether or not the plaintiff engaged
(continued...)
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Our jurisdiction in this matter is based on diversity
of citizenship between e360 and Spamhaus, and
Illinois law controls the proper measure of damages. See
Europlast, Ltd. v. Oak Switch Systems, Inc., 10 F.3d 1266,
1276 (7th Cir. 1993); Muller v. Groban, 346 F.2d 263, 265 (7th
Cir. 1965); Weakley v. Fischbach & Moore, Inc., 515 F.2d
1260, 1267 (5th Cir. 1975). On this question of state law,
our review of those legal standards is de novo, though
we review the district court’s application of the legal
standard to the facts only for clear error. Shirley v.
Russell, 69 F.3d 839, 841-42 (7th Cir. 1995).
e360 defends the use of gross revenue on the theory
that its revenue was all profit “because the e-mail
messages had already been sent to the intended recipients.” Although the “infrastructure costs” of transmitting
an email were already incurred by the time of its transmission, regardless of whether the email was ever
received, Lindhardt admitted that e360 still had to
pay additional royalty fees whenever its emails generated revenue. These fees and e360’s failure to account
for them in its damages calculation doom the damages
award. See Taylor, 712 F.2d at 1121 (“When a plaintiff
contends that lost sales revenue would have been
all profit, the contention is sufficiently improbable to
7
(...continued)
in the profit-making activity at issue. See Taylor, 712 F.2d at 1121
(“Costs that would be incurred anyway should not
be subtracted, because by definition they cannot be avoided
by curtailing the profit-making activity.”).
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require him to come forward with substantiating evidence. . . .”). Because e360 failed to offer any evidence
that would have allowed the district court to determine
what portion of its $27,000 lost gross revenue would
have been profit, the district court’s award in that
amount was based on an error of law. Without evidence
that might answer the critical question, “we cannot
uphold the award of damages in this amount or even
impose a remittitur.” Id. We must instead vacate the
modest damages award.8
III. Conclusion
By failing to comply with its basic discovery obligations, a party can snatch defeat from the jaws of certain
victory. After our earlier remand, all e360 needed to do
was provide a reasonable estimate of the harm it
suffered from Spamhaus’s conduct. Rather than do
so, however, e360 engaged in a pattern of delay that ultimately cost it the testimony of all but one witness with
any personal knowledge of its damages. That lone
witness lost all credibility when he painted a wildly
unrealistic picture of e360’s losses. Having squandered
8
e360 also argues that the uncertainty inherent in any prediction of a plaintiff’s future lost profits should excuse its
own and the district court’s failure to identify what portion of
e360’s revenue was actually profit. While the law does not
require precision in damages estimates, it requires a reasonable basis for estimating lost profits rather than lost revenue.
See Taylor, 712 F.2d at 1121.
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its opportunity to present its case, e360 must content
itself with nominal damages on each of its claims, and
nothing more. We VACATE the judgment of the district
court and REMAND this matter with instructions to enter
judgment for the plaintiffs in the amount of three dollars.
9-2-11
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