Information Communication Corp. v. Unisys Corp.

UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT

__________________

No. 97-20826
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INFORMATION COMMUNICATION CORPORATION,

Plaintiff - Appellant - Cross-Appellee,

OUTLAND TECHNOLOGIES INCORPORATED,

Plaintiff - Appellee,

v.

UNISYS CORPORATION,

Defendant - Appellee - Cross-Appellant.

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No. 97-20827
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INFORMATION COMMUNICATION CORPORATION; ET AL,

Plaintiffs,

INFORMATION COMMUNICATION CORPORATION,

Plaintiff - Appellee,

v.

UNISYS CORPORATION,

Defendant,

v.

ABBOTT, SIMSES, ALBUM & KNISTER,

Movant - Appellant.
 ______________________________________________

Appeals from the United States District Court for the
Southern District of Texas
______________________________________________
July 15, 1999

Before KING, Chief Judge, and POLITZ and BENAVIDES, Circuit Judges.

BENAVIDES, Circuit Judge:

These two appeals arise from a cross-filed suit between

Information Communication Corporation (“ICC”) and Unisys

Corporation (“Unisys”) over a bilateral contract between the two

companies. At trial, the jury found through a special verdict

that both companies had materially breached the contract, that

Unisys had breached first, and that Unisys’s and ICC’s respective

damages from the breaches were $192,000 and $2.7 million. After

the trial, but before the district court rendered judgment,

Abbott, Simses, Album & Knister (“Abbott Simses”), which

represented ICC during part of the case, sought to intervene to

protect its right to recover its attorneys’ fees from any award

to ICC. As to the suit between the companies, the district court

ruled that neither ICC nor Unisys was entitled to an award and

entered a take-nothing judgment. The district court also denied

Abbott Simses motion to intervene. All three parties appealed

the district court’s rulings which we now affirm as to the take-

nothing judgment.

I. BACKGROUND

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 At the heart of this case is a contract that ICC and Unisys

entered into in April 1988. Titled the Software Development

Subcontract (the “Master Contract”), it governed the relationship

of ICC and Unisys as joint creators of public-safety computer

systems that could be used by police departments in small-to-

medium-size cities to facilitate 911 dispatch, to manage records,

and to write reports. ICC created and supplied the software

applications, and Unisys supplied the computer hardware. Both

parties agree that the Master Contract, with addenda, should be

construed as one agreement and that performance by each party was

intended to be measured by performance to each of the eight

cities that purchased on of the Unisys/ICC systems. Both parties

also agree that ICC’s and Unisys’s covenants under the Master

Contract were mutually dependent, such that if either party

materially breached the contract, the other was excused from

performing its contractual obligations.

Each city that installed a Unisys/ICC system encountered

various and significant start-up problems. Although ICC’s

software had run on computers used to demonstrate the systems, it

did not function on the hardware ultimately supplied by Unisys

for installation. The problems cost each of the companies

greatly. The substantial amount of time and money that ICC spent

rewriting the software for use on the Unisys machines exacerbated

the company’s cash flow problems and forced ICC to close its

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doors in January 1991. Although Unisys was ultimately able to

supply the cities with working systems after ICC closed, it paid

more than $2 million to settle claims made by the cities under

the terms of their contracts.

After ceasing its operations, ICC filed suit against Unisys,

and Unisys counterclaimed. Each asserted that the start-up

problems had been caused by the other having breached the Master

Contract. During a nine-day trial in August 1996, the parties

introduced twenty-two witnesses and volumes of exhibits to show

whether ICC and Unisys had fulfilled their contractual

obligations. ICC contended that Unisys had supplied inadequate

hardware with inadequate central processing units as well as

insufficient memory and disk space. ICC argued that its software

had run adequately on earlier Unisys hardware and hardware from

other manufacturers. While admitting that its delivery of some

software was late under the terms of the Master Contract, ICC

attributed the delays to its need to rewrite its software to work

on Unisys’s inadequate machines. Unisys, on the other hand,

claimed that its hardware had functioned properly and that the

problems had arisen due to ICC’s software. Unisys contended that

ICC’s software did not function as promised and that it was

delivered late at numerous sites. Unisys also contended that the

inadequacies in its hardware, if any, were due to ICC having

underestimated the technical requirements of its own software.

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 At the end of the trial, the jury was instructed to answer

six questions. In the answers to those questions, the jury found

that both Unisys and ICC had failed, without excuse, to perform

material obligations under the Master Contract; that Unisys had

been the first to breach materially; that $2.7 million dollars

would fairly compensate ICC for Unisys’s breach; and that

$192,000 would fairly compensate Unisys for ICC’s breach. After

trial, ICC moved for judgment on the verdict and Unisys moved for

a Rule 50 judgment n.o.v. or, in the alternative, a remittitur of

ICC’s damage award.

In April 1997, the district court produced a forty-five page

memorandum and order granting Unisys’s motion, and entered a

take-nothing judgment for both parties. The district court held

that neither ICC nor Unisys could recover damages under the

Master Contract because each had materially breached it. The

court ruled in the alternative that, as a matter of law, the

evidence presented to the jury concerning ICC’s damages was too

speculative to support any recovery. Finally, the court stated

that even if ICC was permitted some recovery as a matter of law,

the damages awarded by the jury exceeded the bounds of reasonably

recovery, and that they should be reduced from $2.7 million to

$132,280.

In the same memorandum and order, the district court ruled

on several motions pending before it, including the Abbott Simses

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motion to intervene. Abbott Simses represented ICC in its

litigation against Unisys from March 1991 to October 1994. In

October 1994, the attorney at Abbott Simses that had led the team

representing ICC moved to a different firm, taking the ICC

account with him. Having not received any payments for the legal

services provided to ICC, Abbott Simses argued that it was

entitled to intervene in order to recover by preference and

priority out of the first monies received by ICC from the

judgment. The district court denied Abbot Simses motion, ruling:

“Given the Court’s primary decision herein that ICC may not

recover as a matter of law, these motions are moot. In any

event, the Motion for Leave is denied. The matters in issue are

not sufficiently related to the operative facts in this six year

old case to justify joinder of the proposed new claims.”

II. DISCUSSION

A. Take-Nothing Judgment

ICC argues on appeal that the district court erred both in

interpreting Texas law as requiring a take-nothing judgment, and

in concluding that ICC offered insufficient evidence at trial to

support the jury’s finding that it had $2.7 million in lost

profits damages. Unisys does not contest the district court’s

take-nothing judgment. It does argue, however, that if ICC’s

award is reinstated, Unisys’s award should also be reinstated to

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setoff any recovery by ICC. We review de novo the district

court’s judgment as a matter of law, whether based upon an

interpretation of Texas law or based upon the sufficiency of the

evidence. See, e.g., Cobb v. Natural Gas Pipeline Co., 897 F.2d

1307, 1309 (5th Cir. 1990) (reviewing conclusions of state law de

novo); Conkling v. Turner, 18 F.3d 1285, 1300-01 (5th Cir. 1994)

(reviewing a judgment regarding the sufficiency of the evidence

de novo).

The district court predicated its take-nothing judgment upon

its understanding of the Texas canon of contract law stated in

Dobbins v. Redden, 785 S.W.2d 377 (Tex. 1990), that “‘a party to

a contract who is himself in default cannot maintain a suit for

its breach.’” Id. at 378. This rule, the district court found,

applies without limitation to all mutually dependent contracts.

Therefore, because the jury found that both ICC and Unisys had

breached the Master Contract, and both parties agreed that the

Master Contract was mutually dependent, the district court held

that the Dobbins rule precluded any recovery by either party.

Upon reviewing the relevant Texas caselaw, we agree with the

district court that the Dobbins rule prevents Unisys from

recovering under the Master Contract. We are unconvinced,

however, that it precludes recovery by ICC. Specifically, we are

troubled by the decision of the Texas Supreme Court in Mead v.

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Johnson Group, Inc., 615 S.W.2d 685 (Tex. 1981). There, the

court permitted Evadine Mead, a party to a business sales

contract, to recover under that contract despite the fact that

she was in breach at the time she sued under it. Noting that the

other party’s breach had occurred first, the court permitted Mead

to recover because “[a] party in default on a contract is not

relieved by a subsequent breach by the other party.” Id. at 689.

Applied here, that principal would permit ICC to recover under

the Master Contract because Unisys had breached it first.

Because we do not find Mead distinguishable from this case on the

grounds stated by the district court,1 we are unable to agree

that the rule in Dobbins instead of the rule in Mead should

necessarily control here.

1
The district court distinguished Mead from this case on the
basis of the contract in Mead involving independent covenants, as
opposed to dependent covenants. Even if this argument is
persuasive analytically, it is not a reasonable interpretation of
the Mead decision. First, if the Texas Supreme Court believed that
it was considering a contract with independent covenants, its
statement in Mead that a “[d]efault by one party excuses
performance by the other party,” Mead, 615 S.W.2d at 689, would be
patently incorrect. See Hanks v. GAB Business Services, Inc., 644
S.W.2d 707, 708 (Tex. 1983) (“A prerequisite to the remedy of
excuse of performance is that covenants in a contract must be
mutually dependent promises.”). Second, the case cited in Mead as
supporting the principle that a party in default is not relieved by
the other party’s subsequent breach, Whittenburg v. Groves, 208
S.W. 901 (Tex. Comm’n App. 1919, judgm’t adopted), states the
principle in regards to a contract for the sale of real estate,
which clearly would have involved mutually dependent covenants.
Third, the court in Mead makes no mention of independent versus
dependent covenants nor otherwise indicates that the difference was
relevant. Mead is thus not so easily dismissed in relation to this
case.

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 We nonetheless do agree with the district court that ICC

should be denied recovery on the court’s alternative ground, that

ICC presented insufficient evidence to support the jury’s finding

lost profits. In ruling on a Rule 50 motion based upon

sufficiency of the evidence, we “consider all of the evidence-not

just that evidence which supports the non-mover’s case-–but in

the light and with all reasonable inferences most favorable to

the party opposed to the motion.” Boeing v. Shipman, 411 F.2d

365, 374 (5th Cir. 1969). The motion was properly granted “[i]f

the facts and inferences point so strongly and overwhelmingly in

favor of one party that the Court believes that reasonable men

could not arrive at a contrary verdict.” Id.

The standard under Texas law for proving lost profits is

onerous. The amount of profits lost “must be shown by competent

evidence with reasonable certainty.” Texas Instruments, Inc. v.

Teletron Energy Management, Inc., 877 S.W.2d 276, 279 (Tex.

1994). Lost profits may not be recovered where they are “too

uncertain or speculative, or where the enterprise is new or

unestablished.” Id. In determining whether the claimed lost

profits are speculative, courts are to consider whether they are

“dependent on uncertain or changing market conditions, or on

chancy business opportunities, or on promotion of untested

products or entry into unknown or unviable markets, or on the

success of a new and unproven enterprise.” Id. Texas courts

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have not hesitated to direct verdicts where plaintiffs have

failed to present evidence of lost profits meeting these

standards. In Texas Instruments, for example, the Supreme Court

of Texas affirmed a trial court’s decision to overturn a jury’s

award of $500,000 in lost profits damages because the damages

were based on the plaintiffs plans to market an untested new

product, a voice-prompted, programmable thermostat. There, the

court remarked that “[t]he mere hope for success of an untried

enterprise, even when that hope is realistic, is not enough for

recovery of lost profits.” Id. at 280. See also Szczepanik v.

First Southern Trust Co., 883 S.W.2d 648, 650 (Tex. 1994)

(denying recovery of lost profits where the plaintiffs evidence

of lost profits was deemed too speculative); Holt v. Atherton,

835 S.W.2d 80, 85-86 (Tex. 1992) (same).

We agree with the district court that ICC did not meet its

burden of proffering competent evidence to show the existence of

lost profit damages with reasonable certainty. ICC was a

paradigmatic new and unproven business. Recently opened, it had

no track record of successfully creating and marketing new

products. It had been late with many of its software deliveries

and the majority of its customers experienced significant start-

up “bugs.” Furthermore, ICC had essentially no history of

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profitability.2 Because the computer software market is ever-

changing and ICC did not have many, if any, future contracts in

place when it shut down, ICC was not assured a profitable future.

These factors were reflected in the Small Business

Administration’s refusal to guarantee a $300,000 loan to ICC in

August 1990. They also compel our conclusion that although ICC

may have had a realistic hope that it would find much success in

its future, that hope was not sufficiently concrete to permit

recovery for lost profits.

B. Denial of Motion to Intervene

Abbott Simses’s only interest in this case was to recover

its fees from any monies awarded to ICC. Our conclusion, in

2
ICC admits that its only arguably profitable year was fiscal
year 1990 when it claims to have made a net profit of $107,048.
Even that claim is suspect, however. The only evidence of
profitability proffered by ICC was a report compiled by Ernest
Bugh, a CPA. That report blindly relied upon income statements
provided by ICC and did not include an audit or review of the
underlying financial information. That underlying financial
information contained sufficient disparities to make all of Bugh’s
conclusions unreliable. Most notably, the income statement
provided by ICC indicated that ICC had a “Cost of Sales” of
$161,314 for FY1990. Yet, the “Cost of Project” amount on ICC’s
schedule of contracts for FY1990, which should have been included
in the “Cost of Sales” figure, was over $360,000. If the entire
“Cost of Project” amount had been included in the “Cost of Sales,”
ICC would have shown a net loss, instead of a profit, in FY1990.
Although Bugh hypothesized that this discrepancy was the result of
an accounting irregularity instead of a computational error, that
speculation was unsupported by evidence. Furthermore, because
Thomas Mayor, ICC’s damages expert, relied upon Bugh’s profit
calculation in estimating damages, this irregularity makes ICC’s
damages evidence suspect, as well.

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agreement with the district court, that ICC should receive no

damage award nullifies this interest. Abbott Simses's appeal is

therefore moot and consideration of its arguments on appeal

unnecessary.

III. CONCLUSION

For the foregoing reasons, we affirm the district court’s

decision denying recovery to both Unisys and ICC for damages

resulting from their respective breaches to the Master Contract.

We do not consider Abbott Simses's appeal of the district court’s

denial of their motion for leave to intervene as the take-nothing

judgment moots their interest in this case.

AFFIRMED.

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