MindGames, Inc. v. Western Publishing
218 F.3d 652 (2000)
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Rule of Law:
Under Arkansas law, the 'new business rule' is rejected in favor of a general standard requiring that damages for lost profits, even for a new enterprise, must be proven with reasonable certainty and cannot be based on undue speculation.
Facts:
- In March 1988, Larry Blackwell formed MindGames, Inc. to manufacture and sell a board game he invented called 'Clever Endeavor.'
- In the fall of 1989, MindGames began selling the game and sold 30,000 units within its first 75 days.
- In March 1990, MindGames entered into a licensing agreement with Western Publishing Co., a major game marketer, granting Western the right to market the game.
- The contract required Western to pay MindGames a 15% royalty on all games sold and had an initial term until January 1993, with an option for Western to extend.
- In the first year of the contract, Western sold 165,000 copies of 'Clever Endeavor' and paid MindGames $600,000 in royalties.
- After the first year, sales of the game fell precipitously.
- The parties continued their business relationship until February 1994, although Western did not formally exercise its contractual option to renew the license.
Procedural Posture:
- MindGames, Inc. filed a diversity suit for breach of contract against Western Publishing Co. in the U.S. District Court for the Eastern District of Wisconsin.
- MindGames sought damages for an unpaid renewal fee and approximately $40 million in lost profits (royalties).
- The district court granted summary judgment for Western.
- The district court held that the contract did not entitle MindGames to a renewal fee and that Arkansas's 'new business rule' barred any recovery for lost profits.
- MindGames (appellant) appealed the district court's grant of summary judgment to the U.S. Court of Appeals for the Seventh Circuit.
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Issue:
Under Arkansas law, does the 'new business rule' categorically bar a new enterprise from recovering damages for lost profits resulting from a breach of contract?
Opinions:
Majority - Posner, C.J.
No. The 'new business rule' is an outdated and arbitrary rule that the Arkansas Supreme Court would likely reject in favor of the general standard that lost profits must be proven with reasonable certainty. Although the rigid rule does not bar MindGames' claim, its claim for lost profits fails because it is excessively speculative. The court reasoned that the old Arkansas case establishing the rule, Marvell Light & Ice Co., is antiquated, inconsistent with modern Arkansas damages cases, and has been abandoned by most other states. The better approach is to treat a venture's newness not as a complete bar, but as a factor in determining whether damages can be proven with reasonable certainty. In this case, the success of a new board game is inherently unpredictable, the inventor had no prior track record, and MindGames offered no concrete evidence to provide a rational basis for its $40 million damages claim. Therefore, the claim was based on 'pie-in-the-sky' speculation and could not succeed.
Dissenting - Fairchild, J.
No, the claim is not too speculative as a matter of law to support an award of damages. While agreeing with the majority that the rigid 'new business rule' from Marvell should not apply, the dissent argues that the majority erred in granting summary judgment. Western's summary judgment motion relied almost entirely on the 'new business rule,' which did not require MindGames to produce all of its evidence regarding breach and causation of damages. Given that the court is now applying a different legal standard—reasonable certainty—MindGames should be given the opportunity in further proceedings to prove that Western's alleged breaches caused a loss of sales. The case should therefore be remanded to the district court rather than being affirmed.
Analysis:
This decision is a prominent example of a federal court exercising diversity jurisdiction to predict a change in state common law, moving away from a rigid, per se rule to a more flexible, fact-based standard. It effectively signals the demise of the 'new business rule' in jurisdictions where it still existed, replacing it with the universal requirement that all damages be proven with 'reasonable certainty.' The case clarifies that while new ventures are no longer automatically barred from recovering lost profits, they face a very high evidentiary burden, especially in speculative industries like entertainment, to prove that their claimed damages are not merely aspirational.
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