Free Reply to Response to Motion - District Court of Colorado - Colorado

Case 1:02-cv-01004-JLK-BNB

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO Civil Action No. 02-cv-01004-JLK-BNB VIRTUAL CLOUD SERVICES, INC., a Colorado corporation, Plaintiff, v. CH2M HILL, INC., a Florida corporation, and TIMOTHY INGRAM, Defendants. REPLY IN SUPPORT OF VIRTUAL CLOUD'S MOTION IN LIMINE: FIXATION OF DATE FOR MEASUREMENT OF DAMAGES AND EXCLUSION OF EVIDENCE OF SUBSEQUENT EVENTS The rule that damages should be measured and fixed as of the date of Defendants' wrongful conduct applies to each of Virtual Cloud's claims. That rule also applies to each of the damages theories that Virtual Cloud will present at trial, including lost profits. While lost profits damages are not appropriate if the fact that plaintiff would have earned lost profits is too speculative or remote, the resolution of that question should focus on the status of events when the wrongful conduct occurred, rather than through the lens of 20-20 hindsight. This is fully consistent with the rule in Colorado that "once the fact of damages has been established with the requisite degree of certainty, uncertainty as to the amount of damages will not bar recovery." Tull v. Gundersons, Inc., 709 P.2d 940, 943 (Colo. 1985); accord Cope v. Vermeer Sales & Serv. Of Colo., 650 P.2d 1307, 1309 (Colo. App. 1982) ("The rule which precludes recovery of uncertain and speculative damages applies only where the fact of damages is uncertain, not where the amount is uncertain.").

Case 1:02-cv-01004-JLK-BNB

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A. The Date of Wrongful Conduct Rule Applies To Each Of Virtual Cloud's Claims. The date of wrongful conduct rule is not limited to the misappropriation/reasonable royalty arenas. Damages for breach of contract are similarly "fixed at the time of breach." McCoy v. Riley, 771 P.2d 25, 26 (Colo. App. 1989); accord Southern Colo. MRI v. MedAlliance, Inc., 166 F.3d 1094, 1100 (10th Cir. 1999). Under this rule "later events such as fluctuations in value after the breach do not affect the measure of damages." 22 Am. Jur. 2d Damages § 78 (2006). The date of wrongful conduct rule also applies to tort actions, including those in which damages are sought for lost profits. The date of wrongful conduct rule was applied by this Court and by the Tenth Circuit Court of Appeals in the Wharf case, which involved breach of contract as well as multiple torts including fraud, breach of fiduciary duty and negligent misrepresentation. United Int'l Holdings v. Wharf (Holdings) Ltd., 210 F.3d 1207, 1230 (10th Cir. 2000). In that case, plaintiff's claim of $67,000,000 in compensatory damages was based on a net present value analysis of the relevant company's "projected revenue stream." Id. At 1229. The Wharf action was commenced in 1994 after Wharf denied UIH an opportunity to invest in the Wharf cable project. By the spring of 1997, when the Wharf case was tried, the profit projections used to calculate UIH's damages were several years old. Wharf "sought to demonstrate that the cable project's actual performance was worse than forecasted" and (with the benefit of hindsight) sought to prove that UIH's expert "improperly assessed the risks associated with the project." Id. at 1230. This Court excluded all evidence concerning the project's actual performance "as irrelevant because damages became fixed on the date Wharf finally denied UIH's option claim ­ March 18, 1994." Id. The Tenth Circuit affirmed. Id.

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The LinkCo case, which has one of the most extensive and persuasive discussions of this issue of any case cited by any party, also demonstrates that the date of wrongful conduct rule is not limited to intellectual property claims using the reasonable royalty measure of damages. LinkCo, Inc. v. Fujitsu Ltd., 232 F. Supp. 2d 182 (S.D.N.Y. 2002). The trial in LinkCo involved claims of misappropriation of trade secrets, tortious interference with contract and unfair competition. Id. at 184. The court nonetheless excluded evidence of post-wrongful conduct profit projections and the wrongdoer's failure to make a profit from infringing sales. Id. at 19091 (rejecting defendant's argument that its lack of profits is relevant to both the measure of damages and to the value of the trade secret); see also Cross Media Mktg. Corp. v. Nixon, No. 06 Civ. 4228 (MBM), 2006 WL 2337177 at *6 (S.D.N.Y. Aug. 11, 2006) (lack of actual profits does not insulate defendants from being obligated to pay for what they have wrongfully obtained). There is no indication that the court in LinkCo excluded this evidence only with respect to the misappropriation claim and admitted it with respect to the other tort claims. This is particularly significant since the only claim that went to the jury, and the claim that resulted in an award of $3.5 million in damages, was plaintiff's claim for unfair competition. Id. at 185 n.3.1

Contrary to Defendants' assertion (Response at 6) that "actual sales" are always used in reasonable royalty calculations and only the royalty rate is the subject of the hypothetical negotiation analysis, the decision in LinkCo also expressly states that sales projections made at the time of the hypothetical negotiation should always be used when they are available and evidence of defendant's actual sales were only introduced because no contemporaneous projections existed, in addition to the fact that defendant there had made millions of dollars of actual sales. LinkCo, 232 F. Supp. 2d at 189-91.

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B. The Date Of Wrongful Conduct Rule Excludes Evidence Of Post-Wrongful Conduct Activity In The Relevant Market. Defendants seek to offer evidence concerning a lack of sales of Virtual Cloud's service and the "fact" that "the market for technology similar to Virtual Cloud's service never materialized." Response at 2.2 It may be true that the market for managed services like those offered by Virtual Cloud suffered a downturn when the dot.com bubble burst, but that downturn was temporary and it is precisely the type of "what if" evidence that is and should be excluded by the rule fixing the measurement of damages at the date of wrongful conduct. In Prospero Assocs. v. Redactron Corp., 682 P.2d 1193 (Colo. App. 1983), defendant argued that it "should have been allowed to introduce at trial evidence showing a subsequent decline in the market for leased equipment." Id. at 1198. The Colorado Court of Appeals rejected that argument and held that "market fluctuations after the contract is breached are not relevant in measuring contract damages which are measured at the time of the breach." Id.; accord Rhue v. Dawson, 841 P.2d 215, 226 (Ariz. App. 1992). Significantly, the damage claimed and awarded in Prospero were consequential damages, including lost profits. In those instances in which courts have allowed evidence of post-tort sales, projections or market conditions to be admitted on the question of damages it is often the plaintiff which first offers such evidence and thereby opens the door to the admission of other post-tort evidence. For example, where a defendant has had actual sales based upon an infringing or

This supposed "fact" is belied by CH2M Hill's acquisition of Microsource, one of Virtual Cloud's competitors. See Virtual Cloud's February 9, 2007 Notice Re Status Of Yardstick Measure Of Damages.

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misappropriated product, the plaintiff will offer evidence of "actual sales" as part of its proof of damages. E.g., Avocent Hunsville Corp. v. Clearcube Tech., Inc., No. CIVA CV-03-S-2875-NE, 2006 WL 2109503 at *8 (N.D. Ala. July 28, 2006); see also LinkCo, 232 F. Supp. 2d at 191 (actual sales evidence admitted where reasonable royalty based on running royalty rather than lump sum figure). In those cases, it would not be fair to allow only the plaintiff to offer damages evidence concerning the period after the date of wrongful conduct. Those cases do not support the conclusion that defendants can offer post-wrongful conduct evidence where, as here, the plaintiff will only offer evidence concerning the state of affairs existing at the time of the wrongful conduct. C. The Question Whether Lost Profits Are Too Speculative Or Remote Should Be Measured At The Date Of Wrongful Conduct. Defendants argue their point most strenuously with respect to lost profits damages because they claim that evidence concerning sales post-breach (and indeed post-complaint) are relevant to the question whether Virtual Cloud should be awarded lost profits and, if so, in what amount. However, even lost profits damages should be fixed at measured pre-complaint. See Prospero, 682 P.2d at 1198. Defendants rely extensively on Roberts v. Holland & Hart, 857 P.2d 492 (Colo. App. 1993) including citing it for the proposition that "[e]vidence showing whether there was a market for Virtual Cloud's service or financing for its business is highly probative" with respect to Virtual Cloud's consequential loss damages. Response at 10. The Roberts case, however, is inapposite and it does not support the proposition for which Defendants cite it.

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Roberts was a legal malpractice action. Holland & Hart committed malpractice with respect to a legal description in a real estate document. It was the plaintiff in Roberts who sought to introduce evidence of post-wrongful conduct events. The negligent acts in Roberts were discovered during foreclosure proceedings and near the end of the 75-day redemption period. A quiet title action ensued and in the subsequent malpractice action, Roberts: Basically allege[d] that the change in the real estate markets and the collapse of the savings and loan industry which occurred during the time that the quiet title action was pending prevented him from obtaining the necessary financing. Roberts, 857 P.2d at 495. The court in Roberts held that "the entire project was too speculative in nature to warrant lost profits damages because the whole project was contingent upon finding a financier for an amount well above $17.5 million, and there is no evidence to suggest that such financing was available." Id. at 498. There are several other significant differences between the Roberts case and this case. First, in this case, it was defendant CH2M Hill that provided the financing needed at the end of 2001 to keep Virtual Cloud running in order to solicit the all-important FEMA opportunity. CH2M Hill dropped its support for Virtual Cloud only after CH2M Hill reneged on the parties' December 18, 2001 joint venture agreement and sought to appropriate the FEMA opportunity for itself. In Roberts, plaintiff sought, and failed to obtain, financing from third parties. Second, CH2M Hill wrongfully usurped the FEMA opportunity with full knowledge that Virtual Cloud needed more paying customers to obtain additional financing. There was no allegation or evidence in Roberts that Holland & Hart's negligent conduct caused plaintiff's inability to obtain financing.

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Case 1:02-cv-01004-JLK-BNB

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Third, in Roberts the plaintiff's own testimony showed that Roberts would not have made a profit even if he had raised the $17.5 million he sought to redeem the property because he did not "take into account the $16 million second mortgage" on that property. Id. at 497. Under those facts, the court's conclusion that lost profits were too speculative and remote to go to a jury is unremarkable. Defendants also rely on Astarte, Inc. v. Pacific Indus. Sys., Inc., 865 F. Supp. 693 (D. Colo. 1994). Response at 10. In Astarte, however, the allegations were of a continuing tort involving conflicts of interest and usurpation of corporate opportunities, so the evidence of plaintiff's slide into insolvency was contemporaneous with the alleged wrongful conducts. Id. at 697-99. The analogous evidence here would be evidence of Virtual Cloud's financial condition in the spring of 2002 and Virtual Cloud has not moved to exclude that evidence. In addition, evidence of plaintiff's insolvency in Astarte was directly relevant to and dispositive of liability (as opposed to damages) because key contract rights were terminable upon plaintiff's insolvency. CONCLUSION For the foregoing reasons, Virtual Cloud respectfully requests that the Court enter an order fixing the date for measurement of damages at April 22, 2002 (the date that Defendants submitted a proposal to FEMA based upon their attempted cloning of the Virtual Cloud solution) and excluding any evidence concerning actual or projected sales or profits dated after April 22, 2002.

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Case 1:02-cv-01004-JLK-BNB

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DATED this 14th day of February, 2007. Respectfully submitted,

s/ Scott R. Bauer ______________________________________ Scott R. Bauer Dart M. Winkler Moye White LLP 16 Market Square, 6th Floor 1400 Sixteenth Street Denver, CO 80202-5529 Telephone: 303 292 2900 Sarah Block Wallace, Esq. Featherstone Petrie DeSisto, LLP 600 - 17th Street, Suite 2400 South Denver, CO 80202 Telephone (303) 626-7100 ATTORNEYS FOR PLAINTIFF VIRTUAL CLOUD, INC.

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Case 1:02-cv-01004-JLK-BNB

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CERTIFICATE OF SERVICE I hereby certify that on this 14th day of February, 2007, I electronically filed the foregoing REPLY IN SUPPORT OF VIRTUAL CLOUD'S MOTION IN LIMINE: FIXATION OF DATE FOR MEASUREMENT OF DAMAGES AND EXCLUSION OF EVIDENCE OF SUBSEQUENT EVENTS with the Clerk of Court using the CM/ECF system which will send notification of such filing to the following email addresses: David W. Stark, Esq. Heather Carson Perkins, Esq. Jennifer K. Harrison, Esq. Faegre & Benson, LLP 3200 Wells Fargo Center 1700 Lincoln Street Denver, CO 80203-4532 [email protected] [email protected] [email protected]

/s Ronda Morehead __________________________________________

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