CogniTest Corp. v. Riverside Publishing

Citation: CogniTest Corp. v. Riverside Publishing Co., 107 F.3d 493 (7th Cir. 1997).

Factual Background
Appellant, CogniTest Corporation (“CogniTest”), a developer of a psychological software program, sought the assistance of a distributor to aid in the marketing and disbursement of its newly designed program known as INvironment. In August 1992, CogniTest began discussing the possibility of distribution with Riverside Publishing Company (“Riverside”). Over the next few months, the discussions between CogniTest and Riverside produced an oral agreement in which Riverside agreed to serve as the exclusive distributor of CogniTest’s software in the United States and Canada.

Over the next 10 months the two companies entered into negotiations. In October 1993, a written agreement was executed. Both parties agreed that the written agreement “fairly and accurately represented the terms and conditions of the oral agreement”. The written contract provided that CogniTest would develop the INvironment software program, while Riverside would use “reasonable commercial efforts to achieve maximum sales”. In addition, Riverside would refrain from using any of CogniTest’s proprietary information and would not market any competing software program during the contract’s initial eight-year term. However, if Riverside were to provide twelve months notice of its intent forgo renewal, the company could commence development on a competing software program. Finally, the agreement included both an option that allowed either party to terminate the agreement prior to publication and a provision that limited remedies in the event of a pre-publication breach.

On July 14, 1994, four weeks prior to the initial publication, Riverside exercised the option to terminate the contract. Riverside stated that the results produced after evaluating market research indicated that the market conditions were unfavorable for the introduction of the INvironment system in its current form. By that time, CogniTest had obligated itself to expend over $870,000.00 ($160,000.00 of which was advanced by Riverside) to fulfill contractual obligations.

Subsequently, CogniTest brought suit against Riverside, claiming that Riverside’s termination was a wrongful breach of the agreement. Additionally, CogniTest claimed that Riverside’s reason for terminating the agreement was “false” and “unreasonable” and that the real reason the contract was terminated was due to Riverside’s involvement in developing a competing software program utilizing CogniTest’s proprietary information. As a result, CogniTest sought $30 million in damages that represented the profits lost as a proximate result of Riverside’s breach.

Trial Court Proceedings
At trial, the district court dismissed CogniTest’s claim for failing to allege any damages that were not waived in the limitations clause. In reaching this decision, the court looked at two provisions of the contract. First, the court looked at what Riverside called the “liquidated damages clause", which stated: “In the event that this Agreement is terminated by Riverside due to CogniTest’s breach….Cognitest shall repay any outstanding advances. In the event that this Agreement is terminated by Riverside prior to Initial Publication for any other reason, CogniTest shall retain all such outstanding advances.” Next, the court looked at the “Limitation on Remedies” clause, which provided: “In no event shall either party be liable for any lost profits…or consequential damages even if the other party knows or should have known the possibility of such damages. When taking the two clauses together, the court determined that CogniTest’s sole remedy was to retain the $160,000.00 advance given by Riverside prior to termination. Since CogniTest was entitled to and did retain the advance, no further cause of action could be persued. CogniTest appealed the trial courts decision.

Appellate Court
On appeal, the 7th Circuit Court of Appeals upheld the lower court ruling. This determination was based on the preclusion affect the limitation of remedies provision in the contract had. Since the clause specifically limited “profits lost”, CogniTest’s claim that it was entitled to over $30 million in lost profits could not stand. In addition, the court of appeals determined that the remedies provided in the “Limitation of Remedies” clause were exclusive, and as a result, CogniTest could not recover out-of-pocket expenses incurred prior to termination. Therefore, the $870,000.00 spent Riverside terminated the contract was viewed as a “shared” expense, since Riverside provided $160,000.00 of the money.