In Action Alleging Misrepresentation Concerning Product, Problems and Complaints of Third Parties Prior to Contract of Sale Are Admissible to Show State of Mind of Defendant — High Standard for Success on Motion in Limine to Exclude

From Silicon Knights, Inc. v. Epic Games, Inc., 2011 U.S. Dist. LEXIS 128897 (E.D.N.C. Nov. 8, 2011):

SK and Epic are both engaged in the business of developing video games. On May 10, 2005, SK entered into a license agreement to use Epic's video game engine, the Unreal Engine 3 ("UE3"), in SK's development of Too Human, a game SK produced under a publishing agreement with Microsoft. SK contends that problems with UE3 eventually forced SK to develop their own game engine ("SKE"), which delayed the release of Too Human by nearly two years. In 2007, SK filed suit against Epic. SK alleges that, during the parties' negotiations, Epic made false representations concerning the license agreement and the functionality of UE3. SK asserts multiple claims against Epic, including breach of contract, fraud, and other torts. In response, Epic filed counterclaims asserting breach of contract, copyright infringement, and misappropriation of trade secrets, and seeking imposition of a constructive trust. Epic alleges that SK misappropriated Epic's trade secrets and infringed its copyright when SK used UE3 programming code to develop the SKE game engine. ***

A motion in limine to exclude evidence should be granted only when the evidence is clearly inadmissible on all potential grounds. E.g., Wilkins v. Kmart Corp.. 487 F. Supp. 2d 1216, 1218-19 (D. Kan, 2007); Hawthorne Partners v. AT&T Techs., Inc., 831 F. Supp. 1398, 1400-01 (NX). 01. 1993); see generally 21 Charles Alan Wright & Kenneth W. Graham, Jr., Federal Practice & Procedure § 5037.10 (2d ed. 1982). This principle applies because "a court is almost always better situated during the actual trial to assess the value and utility of evidence." Wilkins, 487 F. Supp. 2d at 1218; see Hawthorne, 831 F. Supp. at 1400-01; Luce v. United States. 469 U.S. 38,41 (1984) (noting that courts are "handicapped in any effort to rule on subtle evidentiary questions outside a factual context"). ***

Epic seeks to exclude evidence and argument concerning the alleged harm that other UE3 licensees suffered. ... Epic argues that such evidence is inadmissible hearsay, is prejudicial, and is not relevant because SK cannot recover damages for harm Epic allegedly caused to other UE3 licensees.... SK responds that the evidence is relevant to SK's claims for fraud, negligent misrepresentation, and unfair and deceptive trade practices, as well as to SK's affirmative defenses, because it is probative of Epic's notice and state of mind regarding problems with UE3. ***

A plaintiff may offer evidence of prior acts or events to prove a defendant's notice or state of mind. See, e.g., Benedi v. McNeil-P.P.C. Inc., 66 F.3d 1378, 1385-86 (4th Cir. 1995); FTC v. Amy Travel Serv., Inc., 875 F.2d 564, 576 n.11 (7th Cir. 1989). When evidence is offered for the limited purpose of proving notice, it is not hearsay. See Fed. R. Evid. 801(c); Benedi, 66 F.3d at 1385-86. Of course, the evidence is still subject to Federal Rule of Evidence 403, which permits a court to exclude evidence if the "probative value is substantially outweighed by the danger of unfair prejudice, confusion of the issues, or misleading the jury, or by considerations of undue delay, waste of time, or needless presentation of cumulative evidence." Fed. R. Evid. 403; see also Benedi, 66 F.3d at 1386.

Evidence of alleged harm to other UE3 licensees is probative of Epic's notice and state of mind at the time Epic and SK entered into the license agreement. Thus, evidence that Epic was aware of harm to other UE3 licensees when the parties entered the license agreement is relevant to SK's claims for negligent misrepresentation, fraud, unfair and deceptive trade practices, and common-law unfair competition. See, e.g., Phelps-Dickson Builders. L.L.C. v. Amerimann Partners, 172 N.C. App. 427, 437, 617 S.E.2d 664, 670-71 (2005). The court therefore denies Epic's motion to exclude evidence of alleged harm that other UE3 licensees suffered before May 10, 2005. The court will instruct the jury that it may consider the alleged harm to other UE3 licensees only as proof of notice and state of mind.

As for alleged harm that other UE3 licensees suffered after May 10, 2005, the evidence is confusing, potentially misleading, and a waste of time. See Fed. R. Evid. 403. These considerations substantially outweigh any probative value of the evidence. Therefore, Epic's motion to exclude evidence and argument concerning alleged harm to other UE3 licensees is granted in part and denied in part. ***

[In addition,] Epic seeks to exclude evidence and argument concerning hearsay complaints that other UE3 licensees made and specifically identifies an undated memorandum ... and a letter from Buena Vista Games.... Epic also notes that complaints from other UE3 licensees are prejudicial and would result in mini-trials over collateral issues. Id. at 9. SK responds that the complaints that other UE3 licensees made are not hearsay because they are not offered for the truth of the matter.... Instead, SK offers the complaints to show Epic's notice and state of mind.... Alternatively, SK argues that the licensee complaints meet several hearsay exceptions....

As noted a plaintiff may offer evidence of prior acts or events to prove a defendant's notice or state of mind. See, e.g., Benedi, 66 F.3d at 1385-86; Amy Travel, 875 F.2d at 576 n.11. When evidence is offered for the limited purpose of proving notice or state of mind, it is not hearsay. See Fed. R. Evid. 801(c); Benedi, 66 F.3d at 1385-86. Thus, SK may offer evidence of complaints that other UE3 licensees made before May 10, 2005, for the limited purpose of showing Epic's notice and state of mind. The court will instruct the jury that it may consider the complaints only as proof of notice and state of mind and not as evidence that the information contained in the complaints is true. As for any UE3 licensee complaints made after May 10, 2005, the court excludes the complaints under Federal Rule of Evidence 403 as confusing, potentially misleading, and a waste of time.***

Footnote 1. As for SK's alternative argument to admit licensee complaints for the truth of the matter asserted, the two documents [D.E. 559-12, 562-10] do not fit within any exceptions cited by SK. First, habit evidence under Federal Rule of Evidence 406 is not an exception to the hearsay rule. See Brooks v. Haggett, No. C 07-2615 MEJ, 2010 WL 4226693, at *2-3 (N.D. Cal. Oct. 21, 2010). In any event, SK does not explain why such habit evidence would be admissible. Second, the documents are not contemporaneous observations. See Fed. R. Evid. 803(1). Third, the documents are not excited utterances, but are a product of reflection. See Fed. R. Evid. 803(2); United States v. Jennings, 496 F.3d 344, 349-50 (4th Cir. 2007). Fourth, the documents do not qualify as records of Epic's regularly conducted business. See Fed. R. Evid. 803(6); Rowland v. Am. Gen. Fin., Inc., 340 F.3d 187, 194-95 (4th Cir. 2003). Fifth, SK may not rely on the residual hearsay exception because SK has not provided notice or shown that it was unable to obtain admissible evidence. See Fed. R. Evid. 807. Finally, SK cannot bootstrap the licensee complaints into evidence pursuant to the rule of completeness. See Fed. R. Evid. 106. As the party planning to offer Epic's responses into evidence, SK does not qualify as an "adverse party" under the rule. Id. Moreover, Rule 106 is not an exception to the hearsay rule. See United States v. Woolbright, 831 F.2d 1390, 1395 (8th Cir. 1987).

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