After two appeals, $11.7 million judgment reduced to $3

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Snatching defeat from the jaws of certain victory may be a cliché, but sometimes it is too apt not to use, as a recent opinion from the 7th Circuit demonstrates.

By engaging in abuse of the discovery process when all that was required was to prove damages after affirmance of a default judgment, the plaintiff wound up with a nominal damage award of only $3.

The Spamhaus Project is a nonprofit company that identifies and blocks spam, or unwanted email. e360 Insight Inc. is a now-defunct internet marketing company that was added to Spamhaus’ list of spammers.

e360 brought suit, alleging state law claims of tortious interference with contract, tortious interference with prospective economic advantage, and defamation. The case was removed to federal court by Spamhaus, but Spamhaus then, for unclear reasons, stopped defending the suit.

After default judgment was granted against it for more than $11.7 million, Spamhaus unsuccessfully moved to set aside the judgment. The 7th Circuit affirmed the default judgment, but remanded for an evidentiary hearing on damages. e360 Insight Inc. v. The Spamhaus Project, 500 F.3d 594 (7th Cir. 2007).

On remand, e360 repeatedly failed to cooperate with discovery. The district court imposed sanctions, ordered e360 to cooperate and also ordered, “No new discovery may be propounded by either party.”

In contravention of the order, e360 added 16 new witnesses, and increased its damage claim more than tenfold to $135 million. The district court struck all the new witnesses and any damage claims in excess of the original $11.7 million that e360 had sought.

After a bench trial, the court awarded a total of $27,002. Both parties appealed and Sept. 2, the 7th Circuit reduced the award to $3 – one dollar for each of the three claims.

On appeal, e360 argued that the district court’s sanctions were inappropriate, because its failure to comply with the order was the result of inadvertence, rather than bad faith.

But the court found this argument misplaced, because a showing of bad faith is only required when dismissal or default is imposed as a sanction. For lesser sanctions, such as the district court imposed here, only failure to comply is required.

Nevertheless, the court found that the failure to comply with discovery orders in this case was bad faith.

The court explained, “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.”

The court then went further, and vacated the finding that e360 incurred any damages at all.

The district court had awarded $27,000 for tortious interference with contract — the amount of revenue e360 grossed monthly.

But the 7th Circuit held this was an erroneous method to determine damages, because it was based on lost revenue, rather than lost profits.

“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,” the court stated.

The court concluded, “Having squandered its opportunity to present its case, e360 must content itself with nominal damages on each of its claims, and nothing more.”

The court therefore vacated the judgment and remanded with instructions to enter judgment for $3.

CASE: e360 Insight Inc. v. The Spamhaus Project, Nos. 10-3538 & 10-3539