Actonet v. Allou Health &

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________

No. 99-1855
___________

ACTONet, Ltd., *
*
Appellee, *
*
v. * Appeal from the United States
* District Court for the
Allou Health & Beauty Care, doing * District of Nebraska
business as The Fragrance Counter, *
Inc., *
*
Appellant. *
___________

Submitted: December 13, 1999

Filed: August 1, 2000
___________

Before WOLLMAN, Chief Judge, McMILLIAN, Circuit Judge, and BATTEY,1
District Judge.
___________

McMILLIAN, Circuit Judge.

Allou Health & Beauty Care, Inc. d/b/a The Fragrance Counter (Allou Health)
appeals from a final judgment entered in the United States District Court for the District
of Nebraska upon a jury verdict awarding ACTONet Ltd. (ACTONet) $193,831.01

1
The Honorable Richard H. Battey, United States District Judge for the District
of South Dakota, sitting by designation.
for contract damages. See ACTONet, Ltd. v. Allou Health & Beauty Care, Inc., d/b/a
The Fragrance Counter, No. 4-98CV3008 (D. Neb. Mar. 3, 1999) For reversal, Allou
Health argues that: (1) the district court erred in holding that parol evidence was
admissible to explain the contract at issue, (2) evidence admitted was hearsay and
should have been excluded, (3) the award of damages was excessive, not foreseeable
and constituted a penalty, and (4) an exhibit not listed in the pre-trial order was
improperly admitted into evidence. For the reasons discussed below, we reverse the
judgment of the district court and remand for further proceedings consistent with this
opinion.

Jurisdiction was proper in the district court based on 28 U.S.C. § 1332 (diversity
jurisdiction). Jurisdiction is proper in this court based upon 28 U.S.C. § 1291. The
notices of appeal were timely filed pursuant to Fed. R. App. P. 4(a).

BACKGROUND

ACTONet, headquartered in Lincoln, Nebraska, is a developer of websites
where customers can purchase products over the Internet. In September 1996, Eli
Katz, vice president of Allou Health, commenced discussions with Ronald Brown,
president of ACTONet, regarding the development of a website for the sale of men's
and women's fragrances, which site was named The Fragrance Counter. At the time
discussions commenced between ACTONet and Allou Health, Allou Health had a
website on America On-Line for which it was paying twelve percent of revenue.

ACTONet's Brown sent a letter, dated October 16, 1996, to Allou Health's Katz,
setting forth proposed elements of an agreement under which ACTONet would
develop a website and provide Internet services for The Fragrance Counter. See Trial
Exhibit 1. In this letter Brown stated that ACTONet's proposal "will be based on a
partnership. [ACTONet] will provide the server space, T-1 access, and the Web site
for The Fragrance Counter. [Allou Health] will have no initial site development

-2-
expenses but will be charged twelve percent of [its] gross sales." Brown also stated
in this letter that he "would like to enter into a three year contract if possible," and that
"[Allou Health] must be happy with the site and its functionality for the contract to be
valid." Following the receipt of this letter, Katz e-mailed Brown requesting a written
contract. Brown responded by sending ACTONet's preprinted Internet sales
agreement to Allou Health. The agreement, which was in triplicate with white, yellow
and pink copies, was unsigned by ACTONet.2 Under the heading "description," the
proposed agreement incorporated the above quoted language of the October 16, 1996,
letter, except for did the language stating that Allou Health "must be happy with the site
and its functionality for the contract to be valid." Trial Exhibits 2A and 2B. The
"description" stated in relevant part that:

To sum it up, your [Allou Health] staff will keep the site current by
uploading changes in text and images, and we [ACTONet ] will supply
the engine, templates, the shopping cart, the secure server, Internet
access, and advice on using the system. This arrangement will cost your
company 12% of gross sales generated by Compuserve and Prodigy
which will cost The Fragrance Counter 4% of gross sales. ACTONet
would prefer to enter into a three year contract if possible. Trial Exhibits
2A and 2B.

Below the "description," the form agreement stated that, "[t]he following terms
and conditions supersede and take precedence over the above description." Paragraph
16 of these terms provided:

2
Prior to commencement of the trial, the yellow copy was designated at
Exhibit 2, but during the course of the trial the district court admitted the white copy,
and designated the yellow copy as Exhibit 2A and the white copy as Exhibit 2B. See
discussion below regarding the admission of Exhibit 2B.

-3-
 The client shall pay ACTONet for its direct costs of production, art,
artwork, mailing, packaging, shipping, taxes and duties, Federal Express
charges, facsimile charges, and telephone calls incurred by ACTONet in
connection with the performance of this agreement. The client shall pay
all of ACTONet's costs for any necessary traveling done on behalf of the
client. Trial Exhibits 2A and 2B.

Paragraph 19 of the contract provided:

In the event that the client, after having approved any planned Internet
services cancels all or any part thereof, the client shall pay for all costs
incurred therefrom to the date of cancellation and any unavoidable costs
incurred thereafter, including any noncancellable commitments, and
ACTONet shall receive its gross profits, net profit, or loss of profits, as
the case may be, on all such costs incurred. Trial Exhibits 2A and 2B.

Paragraph 25 of the contract provided that, "[t]he agreement may be terminated
by either party on at least sixty (60) days prior written notice to the other party."
Paragraph 26 stated, "[t]his agreement contains the entire understanding between the
parties, cannot be changed or terminated orally and shall be construed in accordance
with the laws of the State of Nebraska ... ." Trial Exhibits 2A and 2B.

Allou Health's Senior Vice President and Chief Financial Officer, David
Shamilzedeh, reviewed the agreement, deleted paragraph 16 in its entirety by drawing
a line through it, and wrote "see front" next to this deletion. He also inserted by
asterisk the words "gross sales less returns and allowances" so that the second sentence
of the "description" stated that," The Fragrance Counter will have no initial site
development expenses but will be charged twelve percent of their gross sales less
returns and allowances." Shamilzedeh signed the agreement on November 27, 1996,
and returned it to ACTONet's Brown, who signed it as modified by Shamilzedeh, on
December 2, 1996.

-4-
 ACTONet's construction of The Fragrance Counter website began in the early
summer of 1997, and the website became operational on August 7, 1997. Allou Health
maintains that it was dissatisfied with the services provided by ACTONet because the
site evidenced a lack of creativity, the design work took longer than expected, and the
website did not function at times. Allou Health further maintains that, in September
1997, ACTONet switched servers during business hours without notifying Allou Health
and that as a result of this switch, which took place during a public relations media
blitz for the website, the site went down with no back-up. To the contrary, ACTONet
contends that, after the website went online, it generated sales and received a good
review in Web Magazine, an Internet public information source that reviews websites.
See Trial Exhibit 15.

Sometime after the website became operational, but prior to September 19, 1997,
Allou Health retained Organic Online, also known as Organic.com (Organic), to
promote the website for The Fragrance Counter. In view of previously unanticipated
advertising expenses incurred as a result of Organic's promotion of the website, Allou
Health sought to renegotiate its agreement with ACTONet. As a result of retaining
Organic, Allou Health's Katz called ACTONet's Brown and attempted to renegotiate
their agreement. In a letter written by ACTONet's general counsel to Allou Health,
dated September 19, 1997, ACTONet stated that, in response to Allou Health's
informing ACTONet that it wished to renegotiate the parties' contract, ACTONet was
"willing to consider amending the terms if [it would be] able to recoup the costs
incurred by [ACTONet] and [its] potential lost profits." Trial Exhibit 5. The letter
stated that ACTONet incurred $22,093 in expenses to develop the website and that its
lost profits over a sixty day promotion period were $7,200. The ACTONet letter
further stated that lost profits were computed by estimating twelve per cent of sixty
day's revenue if the site were promoted. Allou Health's Shamilzadeh subsequently sent
ACTONet a termination letter dated September 29, 1997, stating that Allou Health was
giving the sixty day notice required by the parties' agreement. See Trial Exhibit 7.

-5-
 In the written agreement between Allou Health and Organic, which agreement
was not executed until December 5, 1997, Allou Health committed to paying Organic
for production and planning, in addition to commission and $2,000,000 for advertising.3
Organic implemented a website for The Fragrance Counter subsequent to ACTONet's
voluntarily transferring the domain of the website on December 26, 1997. ACTONet
asserts that, in September 1997, Organic began visiting its website for The Fragrance
Counter and copied its "HTLM" computer code.4 ACTONet further asserts that
Organic visited ACTONet's website for The Fragrance Counter "hundreds of times,
compiling forty-four pages of reports of their visits," and that it would have not been
possible for Organic to design and implement a website as quickly as it did without
using ACTONet's HTLM computer code. Brief for Appellee at 8-9.

ACTONet sought recovery in the District of Nebraska from Allou Health for an
alleged breach of the agreement for development of a website for The Fragrance

3
According to ACTONet, the agreement between Allou Health and Organic
provided that Organic would develop a website for a flat fee of $25,000. See Brief for
Appellee at 9. However, the written agreement between Allou Health and Organic
states that Allou Health was obligated to pay Organic $7,500 for strategic planning,
$25,000 for web site enhancements, $60,000 for public relations, $60,000 for offline
production, and $60,000 for online production, for a total cost of $212,500. See Trial
Exhibit 14 at 15. Additionally, this agreement provides that, for net sales from zero to
three million dollars, Organic would receive five percent of net sales; for net sales from
three million to four million dollars, Organic would receive three percent, and for net
sales over four million dollars, Organic would receive two percent. See Trial Exhibit
14, Attachment (Media Buying Service Agreement at 1). While ACTONet contends
that the percentage of net sales which Allou Health was to pay Organic was less than
twelve percent, Allou Health suggests that the total amount it was obligated to pay
pursuant to its contract with Organic was more than it was obligated to pay pursuant
to its agreement with ACTONet. See Brief for Appellee at 9; Brief for Appellant at 10.
4
See discussion below explaining the nature of an HTML code.

-6-
Counter.5 In its Answer, Allou Health affirmatively alleged that the written contract
provided for termination by either party on sixty days notice and that it had effectively
terminated the contract in accordance with the agreement's provisions. Allou Health
further affirmatively alleged that ACTONet failed to completely create the website
within a satisfactory time frame and that ACTONet failed to mitigate its damages.
Allou Health's motion for summary judgment was denied. Over the objections of Allou
Health, the district court concluded that paragraph 19 of the contract was ambiguous,
allowed testimony regarding the parties' intentions as to its meaning, and submitted the
issue of contract interpretation to the jury. See Appendix for Appellant at 32-42 (Jury
Instruction 6).

The district court's Instruction No. 6 stated to the jury the meaning attributed by
each party to paragraph 19 and further directed the jury as follows:

I instruct you that the defendant had the right under the contract to cancel
the contract without incurring any liability to the plaintiff unless paragraph
19 provides differently. Therefore, it must be decided what paragraph 19
means. The parties dispute the meaning of paragraph 19 of the contract.
... In order to ascertain the meaning of paragraph 19 there are at least one
and possibly three steps you must follow. I will list those steps for you
now.

Instruction No. 6 further directed the jury that at the first step:

You must decide whether the plaintiff and the defendant attached the
same meaning to paragraph 19 when they entered into the contract. If
they did, then you are to apply that meaning to this dispute and you need
not go on to step two or three. If they did not, then you must go on to the
second, and possibly, the third steps.

5
ACTONet also alleged in its complaint that it was entitled to recovery based on
promissory estoppel and unjust enrichment. The court dismissed these allegations at
the conclusion of ACTONet's case in chief.

-7-
 The second step of Instruction No. 6 stated that:

If you find that the plaintiff and the defendant attached different
meanings to paragraph 19 when they entered into the contract, then you
must make a second decision. Where the parties have attached different
meanings to paragraph 19 when they entered into the contract, you must
decide whether to apply paragraph 19 according to the meaning attached
by one party. You make this decision by determining whether at the time
the agreement was made: (a) a party intended one meaning and did not
know of any different meaning attached by the other party, and (b) the
other party knew, or had reason to know, the meaning attached by the
first party.

If you find a party intended one meaning and did not know of any
different meaning attached by the other party, and that the other party
knew, or had reason to know, of the meaning attached by the first party,
then you are to apply that meaning to this dispute and you should not go
on to the third step. If that was not the case, you must go on to the third
step.

The court further instructed the jury that at the third step, "[i]f the meaning of
paragraph 19 was not established by application of the first two steps ..., " then it was
to apply the following meaning to paragraph 19:

Paragraph 19 means that if the defendant canceled the "planned Internet
services" provided by the plaintiff, after the defendant approved and
began to use that [i]nternet service, then the plaintiff is entitled to recover,
upon cancellation of the contract, all of its costs, including development
costs, that the plaintiff incurred in designing and operating the internet
service. In addition, the plaintiff is entitled to recover the profits that the
plaintiff would have earned on those costs from the date the defendant
approved and began to use that internet service to a period not to exceed
sixty (60) days following defendant's notice of termination.

-8-
 The court did not submit a special verdict form to the jury. After a four day trial,
the jury found Allou Health liable for breach of contract and awarded ACTONet
$193,831.01. Consistent with the jury's verdict, judgment was entered on February 19,
1999. Allou Health's moved for judgment notwithstanding the verdict or, in the
alternative, motion for a new trial. The district court denied the motion. Allou Health
now appeals from the final judgment.

DISCUSSION

A. Contract Ambiguity

Allou Health asserts that the district court erred in concluding that paragraph 19
of the agreement is ambiguous and by submitting to the jury the issue of its meaning.
Allou Health claims that not only is its agreement with ACTONet unambiguous, but
under Nebraska law, "when the contract is stated in unambiguous terms, 'the intentions
of the parties must be determined from its contents alone.'" Brief for Appellant at 19,
citing T.V. Transmission, Inc. v. City of Lincoln, 374 N.W.2d 49, 52 (Neb. 1985).
Allou Health further asserts that, "Nebraska law does not permit construction of an
unambiguous written contract; the intent of the parties must be determined from the
plain and ordinary meaning of the contract language." Brief for Appellant at 21. Allou
Health maintains that by its plain meaning its agreement with ACTONet was
terminable at will with sixty days notice, that under no circumstances is it liable to
ACTONet for any costs, and that it can be liable to ACTONet only for twelve percent
of the web sales for the sixty days subsequent to its termination of the agreement.6 It

6
Allou Health computes this amount to be $3,574.80, which represents twelve
percent of its web sales for the sixty day period subsequent to its notice of termination
in September 1997. Its sales for October 1997 were $11,191 and its sales for
November were $29,790. See Brief for Appellant at 16 and Trial Exhibit 18 (document
prepared by Allou Health pursuant to an order of the district court listing monthly gross
sales for The Fragrance Counter).

-9-
further argues that the testimony of Brown concerning paragraph 19 effectively
substituted the word "terminate" for cancel and changed the clear meaning expressed
by the language of this paragraph. As it never "cancelled" a planned Internet service,
but rather terminated the agreement pursuant to the provision for sixty days notice,
Allou Health contends that it is not liable pursuant to paragraph 19 for development
or other costs incurred by ACTONet.

ACTONet maintains that the agreement is ambiguous and that this ambiguity
resulted from Allou Health's deletion of paragraph 16 and the application of the
"description" to the ACTONet form sales agreement without paragraph 16. Because
of the ambiguities in the agreement, ACTONet further contends that the intent of the
parties and the meaning of the agreement must be determined by parol evidence. The
intent of the parties, according to ACTONet, is that the agreement was binding for
three years and that, if during that period Allou Health terminated the agreement or
planned Internet services, ACTONet could recover all costs incurred and profits it
would have earned on those costs over three years. ACTONet further claims that the
language in the "description" is controlling as it reflects the parties' intentions that the
contract was for three years.

We review the district court's determination of Nebraska law de novo. See
LaSociete Generale Immobiliere v. Minneapolis Community Development Agency, 44
F.3d 629, 635 (8th Cir. 1994), cert. denied, 516 U.S. 810 (1995); International Union
of Operating Engineers Local 571 v. Hawkins Construction Co., 929 F.2d 1346, 1348
(8th Cir.1991). The initial question of whether a contract is ambiguous is a question of
law to be determined by the trial court. See Lamb Engineering & Construction
Company v. Nebraska Public Power District, 103 F.3d 1422, 1431 (8th Cir. 1997),
citing Smith v. Wrehe, 261 N.W.2d 620, 625 (Neb. 1978); McCormack v. CitiBank,
N.A., 100 F.3d 532, 538 (8th Cir. 1996); Twin Towers Development, Inc., v.
Butternut Apartments, L.P., 599 N.W.2d 839, 843 (Neb. 1999). Under Nebraska law,
once the trial court determines that a contract is unambiguous, its construction is a

-10-
matter of law to be decided by the trial court. See LaSociete Generale, 44 F.3d at 635-
636.

Here the district court found that the agreement was ambiguous and submitted
the matter to the jury to determine the meaning of paragraph 19. Because it concluded
that the agreement was ambiguous, the district court permitted the jury to consider
parol evidence, including the testimony of ACTONet's Brown, to reach its
determination regarding the meaning of the agreement between ACTONet and Allou
Health. In our review of the district court's decision to submit the interpretation of the
agreement to the jury, we must first determine whether the district court was correct in
concluding that the agreement was ambiguous.

Under Nebraska law, the intent of the parties must be determined by the plain
and ordinary meaning of the contract language as the ordinary or reasonable person
would understand it. See Daehnke v. Nebraska Department of Social Services, 557
N.W.2d 17, 21 (Neb. 1996). "A contract is ambiguous when a word, phrase or
provision in the contract has, or is susceptible of, at least two reasonable but conflicting
interpretations or meanings." Winfield v. CIGNA Companies, 532 N.W.2d 284, 286
(Neb. 1995); see also Union Insurance Co. v. Land and Sky, Inc., 529 N.W.2d 773,
776 (Neb. 1995). This determination is to be made on an objective basis, "not by the
subjective contentions of the parties; thus, the fact that the parties have suggested
opposing meanings of the disputed instrument does not necessarily compel the
conclusion that the instrument is ambiguous." Twin Towers, 599 N.W.2d at 843; see
also Estate of Stine v. Chambanco, Inc., 560 N.W.2d 424, 428 (Neb. 1997). In order
to determine whether the agreement between ACTONet and Allou Health is ambiguous
we must construe the agreement as a whole. See Daehnke, 557 N.W.2d at 21.

First, we will consider ACTONet's assertion that the agreement is for three
years. Although the contract states in the "description" ACTONet's preference for a
three year agreement, the language directly below the description plainly states that

-11-
"the following terms and conditions supercede and take precedence over the above
description." ACTONet relies on the language of the "description" in support of its
position that the parties intended that their agreement was for three years and maintains
that it would not have agreed that Allou Health was not obligated to pay development
costs if the agreement was not for three years.7 Initially, we find that the plain meaning
of the agreement clearly provides that the language of paragraphs 1 through 34 takes
precedence and control over any language in the "description" if these paragraphs
include language which contradicts the "description." Paragraph 25, which establishes
the duration of the contract, states, "[t]he agreement may be terminated by either party
on at least sixty (60) days prior written notice to the other party." Trial Exhibits 2A and
2B Additionally, paragraph 26 includes an integration provision which provides that
the "agreement contains the entire understanding between the parties ... ." Trial
Exhibits 2A and 2B We further find that the "description," which is superseded by the
language of paragraph 25, merely expresses the desire of ACTONet for a three year
term, but the agreement fails to incorporate this wishful thinking into a contractual
provision. Therefore, we conclude that the unequivocal language of paragraph 25
establishes that the agreement was open ended and could be terminated with sixty days
notice. Additionally, paragraph 26 provides that the agreement stands on its own and
does not incorporate terms not included within its express language.

The parties are in disagreement over the meaning of paragraph 19 as well as the
effect, if any, of the elimination of paragraph 16 on Allou Health's liability for
development costs and profits. As stated above, ACTONet asserts that paragraph 19
is ambiguous, while Allou Health maintains that it is not ambiguous. ACTONet
contends that ambiguities were created in paragraph 19 when the parties applied their

7
ACTONet states that ninety percent of its costs were incurred during the design
and implementation phase of the agreement while ten per cent of costs and services
would be provided during the remaining term of the agreement during the servicing and
hosting phase. See Brief for Appellee at 7.

-12-
agreement to ACTONet's preprinted form. ACTONet maintains that paragraph 16 of
its form agreement contemplates that ACTONet would be paid costs and profits as the
work is performed. See Brief for Appellee at 16. While ACTONet suggests that the
elimination of paragraph 16, without altering paragraph 19, created ambiguity, Allou
Health maintains that the intent of the parties was reinforced by the deletion of
paragraph 16. This intent, according to Allou Health was that it would have no initial
site development costs. See Brief of Appellant at 25. As ACTONet signed the
agreement after Allou Health distinctly drew a line through paragraph 16, we find that
ambiguity does not exist regarding the deletion of this provision. We can only assume
that, when Allou Health drew a line through paragraph 16, it meant to eliminate it, and
that ACTONet accepted Allou Health's alteration of the form contract by signing the
agreement with this deletion. Additionally, the interliniation of the words "gross sales
less returns" fails to create ambiguity in reference to the removal of paragraph 16, as
these words explicitly refer to the definition of gross sales rather than to production
costs.

Paragraph 19 refers exclusively to costs incurred as a result of the cancellation
of planned Internet services and makes no reference to development costs nor to
termination of the entire agreement. However, Allou Health urges that the court
distinguish between the words "cancellation" and "termination" and suggests that
cancellation as used in paragraph 19 refers only to a partial termination, and that as it
terminated the entire agreement, paragraph 19 is not applicable to any computation of
ACTONet's damages. See Brief of Appellant at 29. In defining "cancellation," Black's
Law Dictionary states that it is "[a]n annulment or termination of a promise or
obligation." See BLACK'S LAW DICTIONARY 197 (7th ed. 1999). We hold that
it is not necessary to consider the distinction urged by Allou Health because its
termination of the entire agreement necessarily includes the cancellation of any
"planned Internet services." We further hold that the plain meaning of paragraph 19
entitles ACTONet to recover any costs it incurred as a result of the cancellation of
planned Internet services and profits on those costs, if Allou Health agreed to any such

-13-
services prior to the date of cancellation. Paragraph 19 explicitly imposes on
ACTONet an obligation to mitigate its costs but permits its recovery of unavoidable
costs incurred after the date that Allou Health informs it no longer desires Internet
services. Although paragraph 19 does not define what is meant by planned Internet
service, we conclude, considering the "description's" reference to Compuserve and
Prodigy, that the plain meaning of the agreement's language establishes that the planned
Internet services to which paragraph 19 refers include Internet services provided by
ACTONet as well as by third parties. We further hold that, as paragraph 19, by its
plain meaning, makes no reference to costs incurred for the development of the
website, Allou Health's liability pursuant to this paragraph is limited to costs incurred
due to cancellation of planned Internet services, which cancellations were necessitated
by its termination of the agreement.8

ACTONet's letter of September 19, 1997, documented its costs incurred prior
to that date, which costs did not include any planned Internet service. The costs listed
covered of the hours spent by four employees and $100 for a digital I.D. Because
ACTONet does not claim that it incurred costs for planned Internet service prior to
September 19, 1997, the only costs which ACTONet can recover pursuant to paragraph
19 are those incurred as a result of Internet services, if any, to which Allou Health
agreed after September 19, 1997, and prior to September 29, 1997, as well as
unavoidable costs after this latter date.

Upon examination and consideration of the contract as a whole and giving its
terms their plain and ordinary meaning, we conclude that it is not capable of being
understood in more senses that one, and we are compelled to conclude that, as a matter
of law, the agreement is terminable upon sixty days notice and that it is not ambiguous.

8
The "description" states that where sales are generated through Compuserve and
Prodigy, Allou Health is liable to ACTONet for four percent of gross sales, rather than
the twelve percent for which it is otherwise liable.

-14-
Pursuant to the precise wording of the agreement, Allou Health is only liable to
ACTONet for twelve per cent of gross sales less returns and allowances, as well as
costs incurred by the cancellation of any planned Internet services and lost profits on
such costs, through the end of November 1997.9

ACTONet asserts that to accept Allou Health's interpretation of the agreement
"would be to work a great injustice and allow Allou to receive the benefit of the design
and implementation of the website without requiring it to compensate ACTONet."
Brief for Appellee at 16-17. ACTONet further contends that Allou Health would be
unjustly enriched and that manifest injustice would result if this court were to find in
favor of Allou Health, as this would permit Allou Health to take advantage of
ACTONet's design and implementation of the website without being required to pay
for it. See Brief for Appellee at 17. We disagree. ACTONet can not use judicial
interpretation to seek relief from what in hindsight may have been poor business
judgment. Where "two sophisticated parties [negotiate] a commercial contract which
was executed in the absence of fraud, duress, or any other form of unconscionability,
we will not rewrite the contract in order to save a contracting party from its own poor
decisions." LaSociete Generale, 44 F.3d at 637.

B. Evidentiary Matters

Allou Health contends that the trial court abused its discretion by admitting both
the website review from Web Magazine and the HTML codes from the ACTONet and
the Organic websites. See Trial Exhibits 15, 10 and 11, respectively. Allou Health
further maintains that these exhibits should have been excluded as hearsay.

9
As the parties agree that the date of written termination was September 29,
1997, Allou Health is liable for lost profit on gross sales through November 1997.

-15-
 "The hearsay rule excludes out-of-court assertions used to prove the truth of the
facts asserted in them." Mueller v. Abdnor, 972 F.2d. 931, 937 (8th Cir. 1992). Fed.
R. Evid. 801(c) defines hearsay as "a statement, other than one made by the declarant
while testifying at the trial or hearing, offered in evidence to prove the truth of the
matter asserted." However, "evidence not admissible as substantive evidence may
come in for purposes of impeachment." Brown v. LaCreek Electric Association, Inc.,
939 F.2d 623, 625 (8th Cir. 1991). A trial judge has broad discretion in the matter of
admitting or excluding evidence and will not be overturned absent a clear abuse of
discretion. Id. at 625.

The Web Magazine review critiqued the website which ACTONet developed
for The Fragrance Counter. See Trial Exhibit 15. Allou Health asserts that this review
does not fall within one of the specific exceptions to the hearsay rule and that, because
it is prejudicial, it should have been excluded. ACTONet argues that the article is not
hearsay because it not was introduced to prove the truth of the statements contained
therein, but rather to impeach the claims of Allou Health's witnesses that the website
was unsatisfactory. In support of its position regarding the Web Magazine review,
ACTONet suggests that the review's admission was proper because over its objection
the district court permitted Allou Health to read to the jury the deposition testimony of
Eli Katz, David Shamilzedeh, and Michael Golden of Organic regarding the quality of
ACTONet's website for The Fragrance Counter. ACTONet asserts that it did not
expect these depositions to be used at trial and that it was precluded from issuing
subpoenas to these individuals for testimony at trial because they live in New York
State. In particular, ACTONet directs the court's attention to the deposition testimony
of Golden regarding alleged deficiencies in the ACTONet website and describing
Organic's research of its clients' existing websites. ACTONet asserts that admission
of the website review was proper because Golden testified as an expert, and the
website review was introduced as direct impeachment and rebuttal to his testimony.
ACTONet also asserts that the website review was information in the public domain.
In response to ACTONet's position regarding the review, Allou Health contends that

-16-
ACTONet did have the benefit of cross examining Golden and Katz, but that Allou
Health was not afforded the opportunity to cross examine the author of the website
review.

In support of its position that the website review was improperly admitted, Allou
Health directs the court's attention to ADP-Financial Computer Services, Inc. v. First
National Bank of Cobb County, 703 F.2d 1261, 1266 (11th Cir. 1983). In ADP the
trial court did not allow the introduction of customer surveys to impeach testimony
regarding the quality of the services provided by the appellee after the appellee was
purchased by another company.10 Id. In affirming the trial court's rejection of this
evidence, however, the Eleventh Circuit found that the surveys did not compare the
quality of services provided by the appellee to those provided since its purchase. We
conclude that ADT is distinguishable from the matter under consideration because the
website review directly addresses the quality of the ACTONet website, and because
ACTONet offered the article for purposes of impeachment. Under such circumstances,
we further hold that the district court did not abuse its discretion in admitting the
review.

Over Allou Health's objection based on relevancy and hearsay, the district court
permitted ACTONet to introduce the HTML code which it prepared for The Fragrance
Counter website and HTML code which Organic subsequently provided for the website.
See Trial Exhibits 10 and 11 (HTML codes for the ACTONet and for the Organic
websites). Undisputed testimony establishes that an HTML code is a programing
language which generates the visual appearance of a website. All websites use the

10
The court also rejected the admission of the customer surveys holding that they
did not qualify as exceptions to the hearsay rule under the business record exception
of Fed. R. Evid. 803(6) as records of regularly conducted activity or as an admission
against interest by a party-opponent pursuant to Fed. R. Evid. 802(d)(2). ADP, 703
F.2d at 1266.

-17-
same language to produce their appearance, but it is the manner in which the code is
used that produces the appearance of a website. Trial Transcript ("Tr.") at 183. This
code, which is created by a designer, is unseen but is ultimately read by a word
processor. See Tr. at 244. However, any person using a computer can view a website's
HTML code because a function is built into a web browser which permits access by a
choice on the menu bar, which choice is usually titled "view source" or "page source."
Tr. at 213, 253.11

ACTONet introduced the HTML codes to support its assertion that Organic
copied the code which it designed for The Fragrance Counter when visiting the
ACTONet website. To the contrary, Allou Health contends that there are certain
HTML tags which by their nature are necessarily included on both websites. Because
it was not afforded the opportunity to cross examine the author of the Organic HTML
code "as to the assertion that the [Organic] code was in fact what it was presented to
be" and because "the similarity between the ACTONet HTML Code and the [Organic]
Code was a linchpin to [ACTONet's] case," Allou Health contends that the admission
of the HTML codes was hearsay and prejudicial. Reply Brief for Appellant at 20.
ACTONet maintains that it was not seeking to admit the codes for the truth of the
matter but rather to show what Organic displayed on the Internet. See Brief of Appellee
at 27-28. ACTONet further maintains that an HTML code is similar to a photograph
or a tape recording, and, therefore, is admissible.

An employee of ACTONet, who was instrumental in designing the HTML code
for The Fragrance Counter website, testified as to how he developed the code with
input from Allou Health.12 He described how Allou Health supplied the database as the

11
ACTONet does not claim that its HTML code is proprietary, nor does it claim
that Organic obtained access to any of its proprietary information. See Tr. at 214.
12
This designer, Bernie McGinn, testified that he began working on The
Fragrance Counter website in the spring of 1997, when an employee who had already

-18-
source to display the products for The Fragrance Counter, and how he developed the
HTML code to comply with the page layout desired by the client. The designer testified
that he spoke directly to Allou Health's president Katz during the process of developing
the HTML code and that during this process Katz made suggestions regarding the
layout and content of the site and expressed a desire that the user be able to navigate
through the site. The designer further testified how the ACTONet and the Organic
codes were similar and how he prepared printed copies of the both the ACTONet and
the Organic HTML codes for The Fragrance Counter. See Tr. at 255-256. Although
the ACTONet and the Organic websites may or may not have had similar appearances,
the evidence presented to the jury did not dispute that their ultimate functionality was
the same.

Because web servers keep a log of all requests for a web page, ACTONet, with
the use of a log file analyzation program called "Web Trends," determined that from
September 15, 1997, through October 9, 1997, Organic accessed the ACTONet website
for The Fragrance Counter approximately one hundred times. It was during this period
that ACTONet alleges Organic was developing the website for The Fragrance Counter.
Likewise, ACTONet admitted that it visited other websites when it was developing The
Fragrance Counter website. See Tr. at 215.

The parties do not dispute that HTML codes are a programming language which
give websites their appearance. Moreover, HTML codes may present visual depictions
of evidence. We conclude, therefore, that HTML codes are similar enough to
photographs to apply the criteria for admission of photographs to the admission of
HTML codes. "The admission of photographs is a matter within the sound discretion
of the trial court and its decision will not be overturned absent a clear showing of abuse
of discretion." McCrary-El v. Shaw, 992 F.2d 809, 811 (8th Cir. 1993). "The test to

developed the general look of the website, including the color and the buttons that
appear on the page, left ACTONet.

-19-
be applied is whether the prejudicial effect outweighs the probative value of the
evidence." Hale v. Firestone Tire & Rubber Company, 756 F.2d 1322, 1333 (8th Cir.
1985). We conclude that the probative value of the HTML codes of both the ACTONet
and the Organic websites outweighs any possible prejudicial value the codes might have
had. We, therefore, hold that the district court did not abuse its discretion by admitting
these codes. Additionally, we hold that an adequate foundation for the admission of the
HTML codes was laid by the extensive testimony of the ACTONet designer.

Even if error were committed by admitting the website review or the HTML
codes, reversal is not necessarily mandated. "An error, in order to be reversible, must
affect a substantial right of the objecting party, and the burden of showing prejudice
rests on that party." Crane v. Crest Tankers, Inc., 47 F.3d. 292, 296 (8th Cir. 1995)
(citations omitted). See Fed. R. Civ. P. 61.13 We conclude that Allou Health failed to
meet its burden of establishing that it was prejudiced by the admission of either the
website review or the HTML codes and that, at the very most, admission of this
disputed evidence was harmless error.

Allou Health also takes exception to the trial court's admission of the top or white
copy of the agreement between the parties. As stated above, the words "see front,"
written by Allou Health next to the extricated paragraph 16, appeared only on the top
or white copy of the agreement because the pages were pressure sensitive. In the pre-
trial conference, ACTONet designated the yellow copy as its exhibit, and this document
was included in the pre-trial order as Exhibit 2. However, during the course of the trial,
after the jury was selected and after opening statements, ACTONet sought to introduce
the white copy, representing to the district court that the white copy had been found that
morning. Over the objection of Allou Health, the district court admitted the white copy

13
Fed. R. Civ. P. 61 states that no error in the admission of evidence is grounds
for disturbing a judgment or granting a new trial unless the error is "inconsistent with
substantial justice" or affects " the substantial rights of the parties."

-20-
as Exhibit 2B and designated the yellow copy as Exhibit 2A. Allou Health maintains
that it was prejudiced by the admission of the white copy as its opening statement was
predicated on the yellow copy. ACTONet asserts that Allou Health cannot claim
prejudice or surprise because it endorsed the white copy for use as an exhibit. In
support of this position ACTONet states that, not only was this copy produced from
Allou Health's files, but that it was used during the deposition of David Shamilzadeh
and as an exhibit in Allou Health's motion for summary judgment.

Fed. R. Civ. P. 16(e) permits modification of a pre-trial order.14 However, "[a]
pre-trial order will be modified only if there is no substantial injury or prejudice to the
opponent." Glismann v. AT & T Technologies, Inc., 827 F.2d 262, 267 (8th Cir. 1987).
Because it was well aware of the existence of the white copy and because its own
representative wrote the words "see front" on the white copy, we find that Allou Health
cannot claim surprise nor was it prejudiced by the admission of the white copy. We
hold that the district court did not abuse its discretion in admitting the white copy of
the agreement between the parties.

CONCLUSION

We conclude that a new trial is required in this matter because the district court
improperly allowed the jury to interpret an unambiguous contract. See Lamb
Engineering, 103 F.3d at 1433. Additionally, a new trial on the issue of damages is
warranted because the instructions submitted to the jury did not reflect the plain
meaning of paragraph 19 as determined by this court. For these reasons we reverse the
judgment and remand this matter to the district court for further proceedings consistent
with this opinion.

14
Fed. R. Civ. P. 16(e) states that, "[a]fter any conference held pursuant to [Rule
16], an order shall be entered reciting the action taken. This order shall control the
subsequent course of the action unless modified by a subsequent order."

-21-
A true copy.

Attest:

CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.

-22-