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Discovery Violations Produce $3 Judgment

Posted: September 6, 2011 Filed under: Case Law, Law-Related News

Ouch. Or, as the court said in its conclusion, “[b]y failing to comply with its basic discovery obligations, a party can snatch defeat from the jaws of certain victory.” e360 Insight, Inc. v. The Spamhaus Project, Nos. 10-3538 & 10-3539 (7th Cir. Sept. 2, 2011) might also be said to illustrate application of the Pig Rule: Hogs get fat; pigs get slaughtered. Whatever one calls it, the decision by the Seventh Circuit Court of Appeals in e360 stands as a clarion call for reasonableness – reasonable diligence, reasonable lawyering, and reasonable expectations.

The case involved claims for alleged tortious interference with contractual relations, tortious interference with prospective economic advantage, and defamation. The defendant removed the case to federal court, then withdrew its answer and allowed a default judgment to be rendered. When the district court entered judgment for $11,715,000 – that’s right, almost $12 million – the defendant changed its mind and decided to litigate the issue of damages. An earlier appeal of the original default judgement resulted in an opinion reversing the original damage award.

During the course of the proceedings on remand, e360 failed to cooperate with discovery. The district court ordered the plaintiff to supplement its interrogatory responses two times. After the plaintiff failed to comply a third time, Spamhaus moved for dismissal. The district court declined to dismiss and afforded the plaintiff another opportunity to supplement its interrogatory responses, which it did by adding 16 witnesses and inflating its damage claim to more than $135 million. The district court declined to dismiss the action but sanctioned e360 by striking its 16 new witnesses and ordering that the plaintiff could not claim more than the $11.7 million it initially sought. At trial, the court also rejected a damages exhibit calculated as an end run around the order limiting the amount of damages claimed. It eventually awarded judgment for $27,002 – $27,000 for interference with contractual relations because the plaintiff did have three contracts with customers who, combined, paid $27,000 per month. The district court believed it was likely the customers would have continued their accounts with e360 for at least one more month, had Spamhaus not identified e360 as a spam marketer.

Both parties appealed. And while the title to this post tells the rest of the story, the opinion is worth reading. Suffice it to say the court of appeals affirmed all of the district court’s discovery orders and damage limitation rulings. It reversed, however, the district court’s award of $27,000 because that amount represented the plaintiff’s gross revenues rather than actual lost profits. “[G]ross 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.” Said the court, “Having squandered its opportunity to present its case, e360 must content itself with nominal damages on each of its claims, and nothing more.”

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