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Smart Marketing Group Inc. v. Publications International Ltd.

October 28, 2010

THE SMART MARKETING GROUP INC., PLAINTIFF-APPELLEE/CROSS-APPELLANT,
v.
PUBLICATIONS INTERNATIONAL LTD., DEFENDANT-APPELLANT/CROSS-APPELLEE.



Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. No. 04 C 146-Joan B. Gottschall, Judge.

The opinion of the court was delivered by: Wood, Circuit Judge

ARGUED APRIL 7, 2010

Before WOOD, EVANS, and SYKES, Circuit Judges.

Online commerce has ballooned in importance over recent years, and it is no surprise that automobile dealers are among those who are interested in exploiting its possibilities. This case, brought under the diversity jurisdiction, involves an effort by two companies to develop programs that would deliver location-specific, brand specific, internet sales leads to auto dealers. Publications International Ltd. ("Publications") ran a website that collected the raw sales leads, and Smart Marketing Group ("Smart") promised to develop programs that would market that information to auto dealers. Unfortunately, things did not go as planned. Publications terminated the agreement, and Smart sued for breach of contract. A jury saw things Smart's way and awarded it $5.6 million in damages. Given the deference we owe to the jury, we refrain from disturbing its verdict on liability. Its damages award, however, finds such slim support in the evidence that we conclude that there must be a new trial limited to damages.

I.

In an effort to get a good buy on a new car, millions of Americans now turn to the web in search of free price quotes from local dealers. Publications for some time has run a popular website, called ConsumerGuide.com, that furnishes these quotes. Its website is based on a well-established automotive guide. Provision of these quotes has been profitable for Publications, because the quotes generate sales leads that can be sold to wholesalers, who in turn sell them to auto dealers. In 2003, Publications decided that it could earn more from its leads if it cut out the middlemen and sold directly to the dealers. In order to carry out this plan, it hired Smart to market its leads. Smart's two principals, Michael Welch and William Magarity, had extensive experience selling conventional leads and other promotions to car dealers, but neither had much familiarity with internet leads.

Initially, Publications and Smart developed two separate programs that Publications planned to sell to auto dealers nationwide. The first was called the Approved program; it involved selling dealers the right to be designated as a Consumer Guide Approved Dealership. This designation was supposed to entitle the dealer to use the Consumer Guide logo, to advertise in Consumer Guide's print publications and on its website, to display a plaque in the showroom, and to obtain 40 vehicle-history reports per month. The other program was called Leads & Listings; in principle, it was supposed to exploit the internet more effectively. The parties planned that each member dealership would receive an average of 16 location-specific, brand-specific internet leads per month from ConsumerGuide.com. A standard Leads & Listings contract was supposed to last for 12 months, although in practice it turned out that some dealers preferred shorter terms, and it appears that their wishes were respected.

The parties executed two temporary agreements in March and July 2003, under which Smart began actively selling both programs to dealers. To hear Publications tell the story, the Approved program was a dud. Smart began selling the program to dealers on a commission basis after the March agreement was executed, but the dealers did not like it. Publications says that it took too long for a dealership ad to appear in the bi-monthly Consumer Guide magazine, the dealers received paper certificates rather than wooden plaques, and worst, the dealers were not getting any leads. Many dealers demanded refunds, which they received, and Smart's sales of Approved contracts fell off sharply, down to five in July, eight in August, two in September, and none in October and November.

Still according to Publications, this put pressure on the parties to launch the Leads & Listings program quickly. In the July 2003 agreement, the parties decided to begin marketing the Leads & Listings program, which was set to become operational sometime in the fall. Smart was also to be paid on a commission basis under this program. Between late July and November 2003, Smart sold 428 Leads & Listings contracts; the contracts had varying terms and durations ranging from monthly to annual.

Smart's account of this early stage of the business reflects a different tone. The March 2003 agreement engaged Smart to sell the Approved program plus two others that were never launched. Publications was entitled to cancel the agreement for cause if Smart failed to enroll 240 dealers by March 31, 2004. Smart asserts that it had great success selling the Approved program. It had nearly 50 dealers enrolled by the end of April, and it added another 30 in May. By the end of June it had signed up 113 dealers and was on track to meet the contractual goal. Smart concedes that the dealers were grumbling about the program; in Smart's view, however, this was because Publications was not delivering what it had promised: dealers enrolled between March and May did not receive their "welcome" kit from Publications until early June; instead of plaques they got paper certificates; and their ads did not appear in the Consumer Guide magazine until October.

Smart recounts that the parties had delayed the Leads & Listings program while Publications worked on software designed to distribute the leads. By July, however, they decided to put the Approved program on hold and to focus their efforts on launching Leads & Listings. Smart was to contact Approved dealers first and offer them a discount if they agreed to participate in the Leads & Listings program. As of July 25, 2003, Smart was authorized to begin selling Leads & Listings contracts to dealers. A performance clause in the agreement required it to enroll an average of 30 dealers per month, for minimum monthly fees of $295 to $495 depending on the dealer's size. Smart enrolled over 100 dealers in the program by August 30. It continued to enroll dealers, while at the same time the parties attempted to negotiate a more permanent contract.

By the end of September, Publications had still not finalized the necessary software that was to deliver the promised leads. It asked Smart to limit new contracts to 125 per month; Smart complied with that request. It signed 114 new dealers in October and another 51 by mid-November. All was not well, however. Smart was having trouble getting paid for its efforts, and the parties could not agree on the compensation due for contracts that were converted from the Approved program to Leads & Listings. On October 21, Publications admitted that it owed Smart roughly $120,000. On October 24 the parties signed a two-year contract in which Publications agreed to have Smart sell both programs to dealers. That contract declared all prior agreements "null and void and superseded and replaced in full" by the October agreement. The October agreement included a commission schedule and provisions on termination. It allowed Publications to terminate the arrangement for cause if Smart misrepresented the Consumer Guide or its programs, if Smart engaged in business practices "that Consumer Guide in its sole judgment may negatively impact the Consumer Guide brand [sic]," or the attrition rate in any program exceeded 10% per month prior to the third month's bill.

Very soon after that agreement was signed, Publications decided to pull the plug on the entire relationship with Smart. Publications had not figured out how to deliver the promised leads, and the gap between its promises and its ability to fulfill them had become too wide. Its president, Richard Maddrell, had his lawyer write a letter to Smart on November 18 telling Smart that Publications was terminating the October agreement. The letter relied on each of the three reasons noted in the October agreement: it said that Smart had misrepresented Consumer Guide's programs; that Smart had engaged in practices that had a negative effect on the Guide; and that the attrition rate was in excess of 10% per month. The letter offered no explanation for these conclusions. Publications finally succeeded in bringing its software up to snuff in mid-December 2003. It contracted in ...


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