TAS DISTRIBUTING COMPANY, INCORPORATED, Plaintiff-Appellant, v. CUMMINS ENGINE COMPANY, INCORPORATED, Defendant-Appellee.
No. 05-1371
United States Court of Appeals For the Seventh Circuit
ARGUED SEPTEMBER 19, 2006—DECIDED JUNE 14, 2007
Before RIPPLE, MANION and WOOD, Circuit Judges.
Appeal from the United States District Court for the Central District of Illinois. No. 03 C 1026—Joe Billy McDade, Judge.
I
BACKGROUND
A. Facts
TAS is an Illinois corporation with its principal place of business and corporate headquarters in Peoria, Illinois. It invents, develops, engineers, markets and licenses patented, proprietary technology. This technology automatically turns an engine on under certain circumstances (“Temp-A-Start”) and off during other circumstances (“Temp-A-Stop”). Cummins is an Indiana corporation with its principal place of business in Columbus, Indiana. Cummins manufactures engines for use in trucks and has approximately thirty percent of the market share of the United States truck engine market.
1.
In order to permit a clear understanding of the litigation before us, we must provide some background pertaining to
a.
TAS has four technologies relevant to this dispute. Two of these technologies are used to manufacture “Temp-A-Start” Products; they perform functions that automatically turn on an engine. The other two involve “Temp-A-Stop” Products; they function to power down automatically an engine when it is not in use. Each of these products comes in two different varieties—an “ECM” or “One-Box” Product which is installed into the engine itself and a “Retrofit” or “Two-Box” Product which can be added to an existing engine or vehicle.
Before Cummins approached TAS about a licensing agreement, TAS had an exclusive license agreement with Detroit Diesel Company (“DDC”). In TAS’ view, DDC had failed to comply with certain aspects of the agreements that were necessary to preserve the exclusive nature of the relationship. TAS therefore brought an action to rescind the TAS/DDC License Agreement; it sought a declaration that the TAS/DDC License Agreement no longer provided exclusive rights to DDC. Shortly thereafter, Cummins approached TAS and told TAS that it desired to obtain the right to use its proprietary technology. Cummins urged TAS to pursue aggressively litigation against DDC in order either to terminate or to eliminate the exclusivity of the TAS/DDC Agreement. In March 1998, the United States District Court for the Central District of Illinois granted summary judgment in TAS’ favor, declaring that DDC’s exclusive rights under the agreement were validly terminated. TAS and DDC then
b.
In February 1997, TAS and Cummins entered into a Master Agreement regarding the TAS technology, conditioned upon a judicial determination that the TAS/DDC license was no longer exclusive. The Master Agreement generally governed the relationship between the parties, defined various terms, established non-competitive requirements and protected the TAS technology. The Master Agreement included an integration clause. The two companies also entered into a License Agreement. The License Agreement granted Cummins a license to utilize the TAS technology and set forth royalty and payment terms. The License Agreement also included the following clause:
Licensee shall make all reasonable efforts to market and sell ECM Products and Retrofit Products so as to maximize the payment of royalties to Licensor under this License Agreement.
R.1, Ex.B at 5.
A “product” is defined as “any product, including any component or subassembly of the product, manufactured with or incorporating all or a substantial part of the Sub-
c.
Cummins integrated both the Temp-A-Start and the Temp-A-Stop technology into its “ICON Product.”1 It developed a brochure for this product and featured it at trade shows and in product presentations. Despite these efforts, Cummins averaged sales of fewer than 200 ICON Products on an annual basis. Cummins developed and
The sales performance of Cummins’ products was substantially below the expectations of the parties. Prior to entering into any contracts with TAS and during negotiations, Cummins made certain projections regarding its likely sales of engines incorporating the TAS technology. These projections ranged from likely sales of 4,000 products during the first year, and 10,000 each subsequent year, to the projection that Cummins would eventually attain 12,000 a year. Indeed, Cummins’ competitor, DDC, allegedly sold significantly more TAS Products than did Cummins.3 Nevertheless, Cummins consistently made the minimum royalty payments as required by the License Agreement. It has fulfilled its contractual obligation to pay at least $1,000,000 in royalties.
TAS submitted an affidavit of its president, Harvey Slepian, in support of its motion for partial summary
B. District Court Proceedings
The district court granted Cummins’ motion for summary judgment. The district court determined that there were disputed material issues of fact with respect to whether Cummins made “all reasonable efforts” to market and sell the TAS technology. However, it took the view that this determination did not preclude a grant of summary judgment because proof of damages is an element of a breach of contract claim, and TAS had failed to present any proof that it was damaged by Cummins’ alleged failure to make “all reasonable efforts” to market TAS’ products. TAS had cross-moved for partial summary judgment based upon Cummins’ alleged failure to market a stand-alone Temp-A-Stop Product. The district court did not reference expressly the Temp-A-Stop Product when ruling on Cummins’ summary judgment motion. TAS submits that, because the district court did not
II
DISCUSSION
We review the district court’s grant of summary judgment de novo. See Magin v. Monsanto Co., 420 F.3d 679, 686 (7th Cir. 2005). In doing so, we must construe all facts
A.
As we have noted in our earlier description of the district court’s ruling, that court determined that there were genuine issues of triable fact with respect to whether Cummins had employed its best efforts in selling engines with TAS’ technology. However, the court nevertheless held that summary judgment for Cummins was proper because TAS had failed to produce any evidence that would support an award of damages.
TAS submits, for the first time in its reply brief, that, in a breach of contract case, damages are presumed. We cannot consider this argument; it is well-settled that arguments first made in the reply brief are waived. Beraha v. Baxter Health Care Corp., 956 F.2d 1436, 1441 (7th Cir. 1992).6
Because the district court granted summary judgment to Cummins on the ground that TAS had failed to demonstrate that it could prove damages, we pause at this point to set forth the basic principles that govern that issue. TAS essentially is seeking the profits it allegedly had lost because Cummins had breached the “all reasonable efforts” requirement of the parties’ agreement. We therefore must focus on the requirements to prove and receive lost profit damages.
As a general principle, when seeking the recovery of lost profits, a claimant must establish these lost profits with “reasonable certainty.” See, Note, The Requirement of Certainty in the Proof of Lost Profits, 64 Harv. L. Rev. 317, 317 (1950). This “reasonable certainty” rule was formerly a rule of “absolute certainty,”8 but this requirement has fallen into disuse. The absolute certainty requirement
In Illinois, in order to recover for breach of contract, a plaintiff must establish both “that he sustained damages . . . [and] he must also establish a reasonable basis for computation of those damages.” Ellens v. Chicago Area Office Fed. Credit Union, 576 N.E.2d 263, 267 (Ill. App. Ct. 1991). Dating back to the start of the 20th Century, Illinois courts have stated that, for lost profits to be an element of damages, they must be established with certainty, see Trout Auto Livery Co. v. People’s Gas Light & Coke Co., 1912 WL 1990, at *2 (Ill. App. Ct. 1912), capable of definite proof, see Mugge v. Erkman, 1911 WL 2315, at *2 (Ill. App. Ct. 1911), or capable of tangible proof, see Favar v. Riverview Park, 1908 WL 2065, at *2 (Ill. App. Ct. 1908).
The party claiming damage bears the burden of proving those damages to a reasonable degree of certainty. See In re Estate of Halas, 568 N.E.2d 170, 181 (Ill. App. Ct. 1991) (citing Rosos Litho Supply Corp. v. Hansen, 462 N.E.2d 566 (Ill. App. Ct. 1984) (abrogated on other grounds)). However, when a party establishes that it is entitled to damages but fails to prove the amount of those damages to a reasonable degree of certainty, only nominal damages are recoverable at the discretion of the trial judge. Id.
More recently, in the specific context of lost profits damages, Illinois courts have stated that “[l]ost profits will be allowed only if: their loss is proved with a reasonable degree of certainty; the court is satisfied that the wrongful act of the defendant caused the lost profits; and the profits were reasonably within the contemplation of the defaulting party at the time the contract was entered into.” Milex Prods., Inc. v. Alra Labs., Inc., 603 N.E.2d 1226, 1235 (Ill. App. Ct. 1992); see also Royal’s Reconditioning Corp. v. Royal, 689 N.E.2d 237, 240 (Ill. App. Ct. 1997). When the profits arise out of a breached contract, those profits are considered an element of the contract and thus, within the contemplation of the parties at the time the contract was established; these damages are recoverable if proved to a reasonable degree of certainty. Id.
Certainly, because damages for lost profits are prospective, these damages will be inherently uncertain and incapable of calculation with mathematical precision. Royal’s Reconditioning, 689 N.E.2d at 240. Nevertheless, the evidence presented must afford a reasonable basis for the computation of damages. Id. Indeed, the Supreme Court of Illinois has stated expressly that “the law does
Illinois courts consistently have rejected “the use of speculative, inaccurate or false projections of income in the valuation of a business” and reviewing courts will reverse damage awards “based on speculation or conjecture.” SK Hand Tool Corp. v. Dresser Indus., 672 N.E.2d 341, 347, 348 (Ill. App. Ct. 1996). Moreover, the party requesting damages must show causation, that is that the alleged breach is the cause of those damages, with reasonable certainty. Id. at 348; see also Midland Hotel Corp., 515 N.E.2d at 61, 66.
Finally, as a general rule, expected profits of a new commercial business are considered too uncertain, specific and remote to permit recovery. SK Hand Tool, 672 N.E.2d at 348. This maxim is commonly referred to as the “new business rule” and, as we shall note later, the same approach applies likewise to new product lines in established businesses when profits are difficult to measure. There are, of course, some exceptions. Milex Products v. Alra Laboratories, Inc., 603 N.E.2d 1226, 1236-37 (Ill. App. Ct. 1992), notes that there are circumstances in which the general rule that the lost profits of a new business are too speculative to be recoverable does not apply. The court in Milex Products relied upon cases in which experts have provided convincing and non-speculative evidence sufficient to prove lost profits, and where, as
Although many cases addressing damages for lost profits have included expert testimony, see, e.g., Milex Products, 603 N.E.2d at 1236, Illinois law does not require expressly expert testimony to prove lost profits damages. Illinois courts likewise have highlighted that “mathematical certainty is not required” in the proof of lost profits. Drs. Sellke & Conlon, Ltd. v. Twin Oaks Realty, Inc., 491 N.E.2d 912, 917 (Ill. App. Ct. 1986).
With these principles in mind, we now turn to the question of whether TAS has shown that it has suffered damages through Cummins’ alleged failure to market engines with TAS’ technology. TAS attempts to demonstrate that it was damaged and to provide a reasonable basis for the calculation of these damages through two submissions. First, it presents evidence of the sales of TAS Products by Cummins’ chief competitor, DDC. Second, it contends that Cummins should have achieved the sales estimates projected during negotiations. We shall examine each of these approaches in turn.
TAS submits first that it was damaged beyond the minimum royalty payments because Cummins’ competitor, DDC, sold many more products than did Cummins. Relevant to this analysis is Illinois’ “new business rule” which states that the reasonable certainty requirement for recovery of lost profits damages may be satisfied by comparable “past profits in an established business, but that the lost profits of a new business would be too speculative” on which to base recovery. Malatesta v. Leichter, 542 N.E.2d 768, 782 (Ill. App. Ct. 1989). The general rule under Illinois law is that a new business has no right to recover lost profits. See, e.g., Stuart Park Assoc. Ltd. P’ship v. Ameritech Pension Trust, 51 F.3d 1319, 1328 (7th Cir. 1995) (interpreting Illinois law). Illinois courts have upheld damage awards based on comparable businesses where the “profits [are] of a person other than plaintiff, who operated the same established business at the identical location for the period of time which plaintiff seeks damages.” Id. In situations where the plaintiff operated an established business at an identical location during the
We have recognized that Illinois’ new business rule can apply when an entity, while established in the field, markets a new product. In Stuart Park Associates Ltd. Partnership v. Ameritech Pension Trust, 51 F.3d 1319, 1328 (7th Cir. 1995), one party argued that its successes with other apartment complexes should dictate its likely profits regarding the disputed complex. However, we stated in that case that, because the complexes were different pieces of real estate from different markets, they did not provide a self-evident mode from which to generalize any lost profits incurred. Stuart Park, 51 F.3d at 1328.
Illinois courts likewise have held that the new business rule applies with equal force to new products which create potential new business for the entity. In Milex Products, an Illinois appellate court concluded that, in the context of the specific new product at issue, the plaintiffs had demonstrated the existence of an established market sufficient to prove damages. 603 N.E.2d at 1236. The court nonetheless acknowledged that, absent such special evidence, the new business rule would preclude recovery. Id. However, under the particular facts of the case, the court concluded that the proof of lost profits was based upon a reasonable degree of certainty. Id.
Other courts also have stated that past successes with similar products or businesses do not provide sufficient information from which to calculate lost profits on a new product or new business. See Kinesoft, 139 F. Supp. 2d at 909. In Kinesoft Development Corp. v. Softbank Holdings Inc., 139 F. Supp. 2d 869, 909 (N.D. Ill. 2001), the plaintiff Kinesoft relied on several exceptions to the new business rule in urging that this rule should not serve as a bar to recovery. First, Kinesoft urged that it had some profit record prior to the breach, which has been recognized as an exception to the new business rule under Illinois law. Id. Kinesoft also relied upon an exception recognized in Milex Products where an identical product had been sold by another company and thus, there was an established market from which to calculate lost profits. Id. at 910. However, the court found that Kinesoft had failed to present evidence regarding any comparable company selling comparable products. Id.
In this case, the Illinois “new business rule” provides significant guidance for our decision. It appears that Cummins manufactured two different products incorporating the TAS technology, a One-Box ECM ICON Product and a Two-Box Retrofit ICON Product. Each of these products incorporated both the Temp-A-Start and Temp-A-Stop technologies. Although DDC did manufacture and market TAS technology, it is undisputed, on this record, that only Cummins manufactured the ICON Product that incorporated both the Temp-A-Start and Temp-A-Stop technologies. Because a product containing both technologies is inherently different from one that contains only one type of TAS’ proprietary technologies, the Illinois “new business rule” renders a comparison to DDC’s sales of engines somewhat speculative, and, con-
Moreover, Illinois law, even without reference to the new business rule, clearly requires that damages be proved to a reasonable certainty. E.J. McKernan Co., 623 N.E.2d at 1000. TAS submits first that it was damaged beyond the minimum royalty payments because Cummins’ competitor, DDC, sold many more products than did Cummins. TAS has failed, however, to produce any evidence that proves its lost profits to a reasonable certainty, and therefore TAS’ claim must fail. We note that “Illinois courts have not hesitated to reverse damage awards based on false assumptions or data as speculative.” SK Hand Tool, 672 N.E.2d at 348 (citing Midland, 515 N.E.2d at 67; Reynolds v. Coleman, 527 N.E.2d 897, 904-05 (Ill. App. Ct. 1988); F.L. Walz, Inc. v. Hobart Corp., 510 N.E.2d 1248, 1252-53 (Ill. App. Ct. 1987)). Illinois courts also have stated that “[i]t is perhaps true that absolute certainty as to the amount of loss or damage in such cases involving lost profits is unattainable, but that is not required to justify a recovery. All the law requires is that it be approximated by competent proof.” Curt Bullock Builders, Inc. v. H.S.S. Dev., Inc., 634 N.E.2d 751, 753 (Ill. App. Ct. 1994) (internal citations and quotation marks omitted). The evidence before us on summary judgment simply does not establish a basis upon which damages can be calculated to a reasonable degree of certainty.
TAS submits that Cummins should have sold as many products incorporating the subject technology as did DDC. There is scant evidence in the record pertaining to the DDC’s sales of engines with the TAS technology. Slepian, TAS’ president, asserted in an affidavit that DDC
There is no evidence in the record, aside from TAS’ assertions, suggesting that DDC’s product sales provide a reasonable basis upon which to calculate damages. TAS submits that DDC is a chief competitor of Cummins, and, therefore, that DDC’s sales numbers likewise should have been attained by Cummins. Merely stating that Cummins should have sold as many engines incorporating the TAS technology as did DDC, without more, does not warrant reversal of the district court’s judgment. There is nothing in the record tending to suggest that Cummins could have sold as many products as DDC; the record is devoid of information relating to DDC’s precise role in the engine market. The record also does not contain facts, beyond unsupported contentions, tending to establish that DDC and Cummins are sufficiently compara-
TAS also urges that Cummins should be bound by the sales projections it forwarded during negotiations. We believe that the district court properly noted that the Master Agreement’s integration clause, Section 7,13 precludes such an argument. The Supreme Court of Illinois has held expressly that, “where parties formally include an integration clause in their contract, they are explicitly manifesting their intention to protect themselves against misinterpretations which might arise from extrinsic evidence.” Air Safety, Inc. v. Teachers Realty Corp., 706 N.E.2d 882, 885 (Ill. 1999). The court went on to hold that, in a situation where the contract is facially unambiguous and contains an integration clause, the “four corners rule” applies, barring the consideration of extrinsic evidence. Id. at 886.
Therefore, Cummins’ pre-contractual sales projections during negotiations cannot be considered proof of damages. TAS had that information when it established the minimum royalty payments, and has not shown that it was damaged in excess of those payments. The law is clear in Illinois that only the four corners of an integrated contract are properly considered when interpreting a contract. See id. Illinois courts have interpreted the parole evidence rule to bar the introduction of evidence relating to understandings not reflected in the terms of the contract,
TAS has failed to present, on this record, a reasonable basis for the calculation of any damages and likewise TAS has failed to show it was damaged beyond the minimum royalty payments paid by Cummins.
B.
Finally, TAS seeks specific performance of Cummins’ obligations under the contract. Specific performance is an exceptional remedy and is normally available only when damages constitute an inadequate remedy. See, e.g., Miller v. LeSea Broad., 87 F.3d 224, 230 (7th Cir. 1996). Furthermore, an order for specific performance is appropriate only when the terms of the contract are sufficiently specific to allow the precise drafting of such an order. See Crane v. Mulliken, 408 N.E.2d 778, 780 (Ill. App. Ct. 1980); see also Restatement (Second) of Contracts § 362 (“Specific performance or an injunction will not be granted unless the terms of the contract are sufficiently certain to pro-
TAS seeks an order mandating that Cummins shall perform specifically its obligation to make “all reasonable efforts” to manufacture and market the subject technology. Since TAS and Cummins have an ongoing relationship, and, in fact, TAS’ prayer for specific performance expressly acknowledges the indefinite nature of the License Agreement, an order for specific performance would require the kind of ongoing supervision that strains judicial resources. See, e.g., New Park Forest Assoc. II v. Rogers Enters., Inc., 552 N.E.2d 1215, 1218 (Ill. App. Ct. 1990).
We cannot perceive any abuse of discretion in the district court’s determination that specific performance was not an appropriate remedy. Again, specific performance is an extraordinary remedy and ought not be granted where the terms of the contract do not allow for the drafting of a precise order. Furthermore, specific performance is rarely an appropriate remedy where such a grant would mandate ongoing supervision by the court. We therefore cannot say that the district court abused its discretion in denying TAS’ request for specific performance of the “all reasonable efforts” term of the License Agreement.
Conclusion
For the foregoing reasons, the judgment of the district court is affirmed.
AFFIRMED
Clerk of the United States Court of Appeals for the Seventh Circuit
USCA-02-C-0072—6-14-07