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Monday, October 10, 2005

Lesson: Don’t "Pretend" to Contract (or You Might Get Socked With Punitive Damages and Lost Profits)

Microsoft authorizes Wetmore to sell Microsoft software kits to approved Microsoft distributors and licensees. Under the arrangement, Wetmore sells the software kits to a distributor, then it notifies Microsoft.  Microsoft charges the distributor a separate licensing fee.

HGI is a reseller of computer software and hardware; HGI "purchases software in the secondary market because the costs of obtaining software through authorized distribution channels are prohibitive." HGI contacted Wetmore about purchasing Microsoft software. Wetmore notified Microsoft of HGI’s interest. Wetmore agreed to help Microsoft investigate HGI’s activities – to determine whether HGI was illegally selling unlicensed software. Wetmore and Microsoft both knew that HGI was not an authorized Microsoft dealer. With this knowledge, Wetmore pretended to do business with HGI in order to assist Microsoft’s investigation.

Even though Wetmore was "just pretending," HGI completed purchase orders and paid Wetmore for the software. Wetmore confirmed these orders, accepted payment and shipped some of the products. At some point, however, Wetmore told HGI that it could no longer supply HGI with Microsoft software. Wetmore told HGI that there had been "a mistake" and stated that, if HGI returned the prior shipments, Wetmore would give HGI a full refund. HGI sued Wetmore for breach of contract.

Despite Wetmore’s public policy argument, the 11th Circuit agreed with the District Court that Wetmore and HGI had entered into valid, enforceable contracts. The court affirmed the punitive damages award for Wetmore’s fraudulent inducement.

Additionally, reversing the District Court, the 11th Circuit held that HGI could recover lost profits from the resale of the software.  The court held that "the uncertainty and speculative nature of lost profits that generally defeats their recovery in contract cases refers to the cause of the damage and not the amount of the damage."  Here, the cause of the damage was certain enough to allow HGI to recover lost profits.  The 11th Circuit remanded to the District Court to decide whether HGI had met its burden to establish a right to lost profits:

The evidence must show the amount of lost profits from HGI’s breached contracts with Wetmore to a reasonable certainty. To do so, the parties should focus on record evidence of other similar software resellers, if any, including their ability to sell a similar amount of Microsoft software, the price at which such software can be resold, and expenses they would incur from selling such software.

Wetmore, on the other hand, was directed to "focus on evidence of HGI’s ability to cover and mitigate damages, if any."

HGI Assocs., Inc. v. Westmore Printing Co., No. 04-11931 (11th Cir. Oct. 4, 2005).

[Meredith R. Miller]

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