Jabat, Incorporated v. Smith, Gary

In the
United States Court of Appeals
For the Seventh Circuit

No. 99-1466

JABAT, INC.,

Plaintiff/Counterclaim Defendant-Appellant,

v.

GARY SMITH and THE LINKS CO.,

Defendants/Counterclaimants/Third-Party
Plaintiffs-Appellees,

v.

K. JABAT, INC.,

Third-Party Defendant-Appellant.

Appeal from the United States District Court
for the Southern District of Illinois, Benton Division.
No. 97-CV-4192-JPG--J. Phil Gilbert, Chief Judge.

Argued September 28, 1999--Decided January 7, 2000

Before Bauer, Flaum and Diane P. Wood, Circuit
Judges.

Bauer, Circuit Judge. This is a breach of
contract action arising from the breakdown of a
business relationship between Gary Smith
("Smith") and the Links Co. ("Links"), the
defendants/counter-plaintiffs/appellees in this
matter, and Jabat, Inc. and K. Jabat, Inc.
(collectively "Jabat"), the plaintiffs/counter-
defendants/appellants. The jury found for Smith
and Links and against Jabat. The district court
ordered a remittitur and denied Jabat’s motion
for a new trial. Claiming error in the exclusion
of certain evidence at trial and that the
remittitur exceeds the highest possible award
supported by the evidence, Jabat appeals. We
affirm.

I. BACKGROUND

In 1993, Smith approached Jabat with a proposed
business deal. Jabat manufactures plastic parts
that are used in other products. Smith’s
background is in production and sales, primarily
in the grass bag industry. He conducts business
through a sole proprietorship called "The Links
Company."

Through his work in the industry, Smith learned
that American Yard Products ("AYP") was paying
too much for the plastic parts used in its grass
bag production./1 He realized that if he could
find a manufacturer to sell him the parts at a
lower price he could turn around and sell them to
AYP for a mark-up, thereby making a profit for
himself. AYP produces over 1.5 million bags
annually for Sears, and, therefore, the business
from AYP could be substantial.

Smith obtained quotes from several plastic
extruder manufacturers, including Jabat, for the
plastic parts used to hold grass bags on lawn
mowers. Jabat’s price for the plastic clips was
88/100 cents per inch, with an additional one
cent per part if notched off line. Based upon
this price, Smith began negotiating with Jabat.
He offered to bring AYP’s business to Jabat if
Jabat used him as a broker.

Because Smith could not afford to buy the parts
from Jabat and resell them to AYP, it was agreed
that Smith would act more as a sales
representative. He would negotiate the price that
AYP would pay to Jabat and service the account.
In return, Jabat would pay Smith the "spread"
(the difference between the price Jabat quoted to
Smith and the price Smith negotiated with AYP).
The deal was executed on September 3, 1993. It
was subject to cancellation on ninety days
written notice if either party violated the
principle of good faith.

Jabat agreed to protect Smith’s and Links’
exclusive rights to market Jabat products to AYP
as long as Smith was able to get an order from
AYP within one year of the signing of the
contract and as long as sales were maintained at
a minimum of $50,000 per year. Although Jabat
says it was its intent, there was no condition in
the contract that Smith deal exclusively for
Jabat.

The AYP business exceeded everyone’s wildest
expectations. Smith produced an order within one
month, rather than within one year as required by
the contract. Sales for the first six months
totaled $205,000. Over time, Jabat and Smith were
able to increase their business with AYP until
they were the majority supplier of plastic bag
clips to AYP.

But, the relationship between Jabat and Smith
rapidly soured. Jabat began complaining that
Smith was not communicating with it regarding the
pricing on the AYP account. In time they also
began to suspect that Smith was not dealing
exclusively on behalf of Jabat. Notwithstanding
these concerns, Jabat continued working with
Smith. The account was simply too profitable to
jeopardize.

In January, 1995, Smith sought quotes from
Jabat on 12 new parts he intended to market to
AYP. Jabat confirmed that it would produce the
new parts but told Smith it wished to change the
manner of his compensation, from the "spread" to
a ten percent commission. Smith rejected this
proposal. The parties, by letter dated February
7, 1995, finally agreed that Smith would continue
to receive the "spread" on the original parts but
a ten percent commission on the 12 new parts.

The events which precipitated the breaking point
in the relationship began in the Spring of 1995.
Two of the 12 new parts Smith had marketed to AYP
were to be used on a new lift top dustless bag
AYP was making for Craftsman. AYP had tried for
years to develop the bag, without success. The
plastic parts needed to be bent to be sewn on the
curved grass bag. Initially, Lockscreen (a
competitor) and Jabat were both supplying blank
straight parts. AYP would then punch a v-notch in
the part, so the part could be bent. The sewers
would bend the part and sew it on the bag. This
process was time-consuming and slowed down
processing.

Smith worked with AYP’s grass bag manager to
find a more expedient, cost effective process. At
first, AYP tried a routed part from Jabat. The
routed notch is more of a round notch than the v-
notch and eliminated a step in the process
because AYP was not required to punch the v-notch
in the part. But, ultimately, AYP found the Jabat
part was not acceptable because the routing
prevented the part from completely closing.
Smith promised to devise a way to close down
the notches for AYP, so that AYP would not have
to do it. Using a welder, he was able to take
Jabat’s routed parts and Lockscreen’s notched
parts and sonicly weld the parts. With this
configuration, all that AYP had to do was lay the
bent part on the fabric and sew it to the fabric.

Unbeknownst to Jabat, Smith was reworking these
parts in The Links’ office in Georgia. He even
started having Jabat and Lockscreen ship the
parts directly to The Links’ office. When two
Jabat representatives stopped by The Links’
office in February, 1996 to see Smith, they were
surprised to see the electronic welder (which
they interpreted as being a machine capable of
manufacturing the parts they were supplying to
AYP) and their competitor’s products in the
office. Disturbed by these signs of "competitive
activity," the Jabat representatives purchased a
camera and returned to The Links’ office to take
pictures through the office window.

Smith denied competing with Jabat and the
relationship floundered along for a little while
longer. But, highly suspicious of Smith now,
Jabat sought to change Smith’s compensation
arrangement again so that he received only a
commission on all parts sold. The parties
disagree on whether this arrangement, outlined in
a letter dated June 4, 1996, ever became an
agreement. The letter was silent as to whether
cause was needed to terminate the parties’
relationship.
On August 26, 1996, Jabat received a call from
AYP’s grass bag production line manager, upset
about an order. The AYP manager complained that
she had been trying for several days to contact
Smith about the order but had been unable to
reach him. Characterizing this as Smith’s failure
to service the account and placing Jabat’s
account with AYP at risk, Jabat terminated its
contract with Smith.

Jabat sued Smith, alleging that he had breached
the parties’ contract by acting in bad faith.
Jabat sought an injunction to prevent Smith from
using Jabat’s pricing information and money
damages for the profits that Smith allegedly
diverted from Jabat by selling his own product
directly to AYP. Smith counterclaimed against
Jabat, claiming that it breached the contract
when it terminated him. Smith sought money
damages for the compensation he would have earned
from Jabat’s sales to AYP.

The trial was contentious, with each side
bitterly complaining about the other’s conduct.
Jabat sought to introduce evidence that Smith
failed to file his income tax returns for 1996
and 1997. Furthermore, using Smith’s deposition
testimony that the copies of those returns he had
produced during discovery were copies of the
returns he sent to the IRS, Jabat sought to
challenge Smith’s credibility because those
returns had not, at the time the deposition was
taken, been sent to the IRS. The District Court
refused to admit that testimony, ruling it would
be collateral and too prejudicial. The court did,
however, find that the returns themselves and the
information in them was admissible to show
Smith’s income and damages.

Smith presented no expert testimony as to his
lost income, instead relying solely on an exhibit
calculating Jabat’s sales to AYP through April,
1998. Despite this paucity of evidence, the jury
returned a verdict in favor of Smith and against
Jabat in the amount of $804,302.04. Jabat moved
for a new trial, claiming that the jury’s verdict
was excessive and not supported by the evidence.
The District Judge agreed and said that unless
Smith and Links accepted a remittitur that
reduced the judgment to $590,000 he would order
a new trial on the issue of damages. Upon Smith’s
and Links’ acceptance of the remittitur, the
District Court entered judgment in that amount.

II. DISCUSSION

A.Smith’s Failure To File 1996 and 1997 Tax
Returns

Jabat first raises as error the District
Court’s exclusion of facts demonstrating "Smith’s
willingness to conceal and avoid the truth: his
failure to file income tax returns and his false
testimony that he had done so." The District
Court heard arguments on this issue in limine
before trial, ruling that the timeliness of the
tax returns’ filing was a collateral issue which
would confuse the issues before the jury and be
unduly prejudicial. We review the District
Court’s evidentiary decisions for an abuse of
discretion, United States v. Johnson, 127 F.3d
625, 630 (7th Cir. 1997) (citation omitted),
keeping in mind that judges have wide latitude
when deciding whether to admit or exclude
evidence. Rarely will we disturb those decisions.
United States v. Saunders, 166 F.3d 907, 920 (7th
Cir. 1999).

In this instance we cannot say that the trial
court abused its discretion. The ruling was
carefully crafted to permit the introduction of
the tax returns themselves and allow cross-
examination of Smith as to the information
contained therein. This was important so that the
issue of Smith’s mitigation of damages could be
addressed as could Jabat’s contention that Smith
received income from its competitor. The issue of
whether Smith was late in filing the returns had
no bearing on these issues.

Jabat urges us to rule that the jury must be
allowed to consider evidence of a party’s failure
to file tax returns to assess that party’s
credibility. Jabat cites no cases from this
circuit to support its argument. Indeed, it
offers as authority only one case from this
jurisdiction in which evidence of prior
convictions for failure to file tax returns was
admissible for impeachment. United States v.
Wilson, 985 F.2d 348, 350 (7th Cir. 1993). But
that case is so factually dissimilar as to be
unpersuasive. There, the defendant was being
tried for conspiring to deceive the IRS, thus
making his failure to file tax returns relevant.
That is not the case here. The issue before the
jury was whether Smith breached the contract with
Jabat.

In sum, we hold that the District Court did not
abuse its discretion in barring Jabat from making
reference to Smith’s untimely filing of his 1996
and 1997 tax returns. Jabat’s motion for a new
trial on that ground was properly denied.

B. Smith’s Entitlement to Future Lost Income

Jabat next raises the issue of whether Smith is
entitled to damages beyond the trial date. Jabat
contends that Smith is not entitled to future
lost income because he presented no evidence of
how much the income might be. Indeed, Jabat
claims that the issue should never have gone to
the jury. However, Jabat made no objection to
Smith Instruction No. 8 which states:
The elements of damages claimed by Smith in this
case are the amount of money he would receive
from Jabat from Jabat’s past sales to American
Yard Products and for Jabat’s future sales to
American Yard Products if Jabat had not
wrongfully terminated the contract.
By failing to object to this instruction when it
was tendered, we find that Jabat has waived its
objection to the award of future lost income.

A party waives an argument on appeal if that
argument relates to a jury instruction it failed
to object to. Heritage Commons Partners v.
Village of Summit, 935 F.2d 1489, 1492 (7th Cir.
1991). See also Wilson v. Kelkhoff, 86 F.3d 1438,
1442-43 (7th Cir. 1996). Here, the argument
advanced by Jabat (that Smith could not recover
future damages because they were too remote and
speculative), is an indirect challenge to
Instruction No. 8. Such an argument, once waived,
cannot be brought on appeal. Bogan v. Stroud, 958
F.2d 180, 181-84 (7th Cir. 1992) reh’g den.; Sims
v. Mulcahy, 902 F.2d 524, 533-36 (7th Cir. 1990),
cert. denied, 498 U.S. 897 (1990).

"When parties do not object to jury
instructions, these instructions generally become
the law of the case." Geldermann, Inc. v.
Financial Management Consultants, Inc., 27 F.3d
307, 312 (7th Cir. 1994). See also Rakovich v.
Wade, 850 F.2d 1180, 1192 (7th Cir. 1987) (en
banc), cert. denied, 488 U.S. 968 (1988). Once
the law of the case is settled, the parties can
only argue that the jury did not properly apply
the instructions to the facts. Will v.
Comprehensive Accounting Corp., 776 F.2d 665, 675
(7th Cir. 1985), cert. denied, 475 U.S. 1129
(1986). By permitting an instruction to be given
which clearly authorized the jury to award
damages beyond the trial date, Jabat waived its
right to claim that such damages could not be
awarded.

C. Evidence Supporting the Damages Award

Jabat’s final challenge is to the amount of the
damages awarded. Jabat claims that it is
excessive and not supported by the evidence.
Jabat seeks either a new trial on the issue of
damages or a further remittitur in the amount of
$402,728.70. We find that although this argument
might indirectly relate to Instruction No. 8 it
is more properly characterized as a challenge to
the jury’s application of the instructions to the
facts, an argument not waived by Jabat’s failure
to object to Instruction No. 8. We review the
District Court’s remittitur under an abuse of
discretion standard. DeBasio v. Illinois Central
Railroad, 52 F.3d 678, 687 (7th Cir. 1995), cert.
denied, 516 U.S. 1157 (1996) (citation omitted).

The substantive law of the state determines
whether the damage award was adequately supported
by the evidence. Gasperini v. Center for
Humanities, Inc., 518 U.S. 515, 538 (1996). In
Illinois, "the evidence need only to tend to show
a basis for the computation of damages with a
fair degree of probability." Medcom Holding
Company v. Baxter Travenol Laboratories, Inc.,
106 F.3d 1388, 1398 (7th Cir. 1997) (quoting In
Re: Busse, 464 N.E.2d 651, 655 (1st Dist. 1984)).
Moreover, lost profits need not be proven with
absolute certainty. Medcom, 106 F.3d at 1399.
Such damages are not capable of proof with
absolute certainty and thus we merely require the
evidence to "tend to establish a basis for the
assessment of damages." H. Vincent Allen &
Associates v. Weis, 379 N.E.2d 765, 770 (1st
Dist. 1978).

Like the District Court, we wish that more
evidence of Smith’s future lost income had been
presented. But we cannot say that the evidence
that was submitted does not support the jury’s
verdict. Smith Exhibit 33a shows AYP sales to
Jabat through April, 1998, and, correspondingly,
the monies that Smith and Links would have earned
during that time had the contract not been
terminated by Jabat. Gleaning from these and past
sales figures we know that Jabat’s business with
AYP was growing at a steady rate of ten percent
per year. Thus, extrapolating from this, the jury
did have a basis upon which to assess damages.

The District Court was able to make this type
of extrapolation in determining the amount of the
remittitur. By seeking a further remittitur in
the specific amount of $402,728.70 Jabat has also
demonstrated that the measure of damages are
readily calculable. Thus we reject the argument
that the award of future damages cannot stand
because they are speculative or that they are not
supported by the evidence.

In setting the amount of its remittitur, the
District Court used the "maximum recovery rule,"
which directs that the court set an amount based
on the "highest amount of damages that the jury
could properly have awarded based on the relevant
evidence." Unisplay v. American Electronic Sign
Co. Inc., 69 F.3d 512, 519 (Fed Cir. 1995). Jabat
argues that the court made a "mathematical error"
by adding the projected 1998 amount ($190,447.85)
into the calculation twice, and thus contends the
remitted amount is excessive. We do not address
this issue as it was not presented to the trial
court and was raised for the first time on
appeal. We state merely that we believe that the
judgment entered after the remittitur is within
the range of the maximum recovery a jury could
have awarded Smith. The award accurately reflects
the proven commission amounts from August, 1996
through May, 1998, the length of time Smith had
already worked for Jabat, and the evidence that
the commissions Jabat paid on that account
increased annually at a rate of about ten
percent. This was the evidence at trial and the
District Court properly relied upon it in setting
the remittitur. There was no abuse of discretion.

III. CONCLUSION

There was no error in the exclusion of the
evidence regarding the untimely filing of Smith’s
tax returns. Our review of the evidence also
convinces us that the District Court’s remittitur
was appropriate. Finding no abuse of discretion
on either issue we hereby AFFIRM the judgment in
favor of Gary Smith and The Links Co. and against
Jabat, Inc. and K. Jabat, Inc.

AFFIRMED.

/1 AYP makes grass bags and mowers for Sears.