A Tale of Two Internet Lead Generators
A recent U.S. Court of Appeals decision from the Seventh Circuit makes an observation that is no surprise to most auto dealers—“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.” The judge was writing about the rise in internet use by prospective buyers looking for cars, and the case involving the effort of two companies to develop programs that would deliver internet sales leads to auto dealers.
Things did not turn out as planned for Publications International Ltd. and The Smart Marketing Group however. Publications ran the popular website ConsumerGuide.com, which provides shoppers with price quotes. Back in 2003, Publications generated sales leads and sold them to wholesalers who would then sell them to the dealers. It decided to cut out the middleman and entered into an agreement with Smart to market the leads it generated directly to dealers. Publications developed two separate programs, the first called the Approved Program which would give the participating dealer the right to be designated as a “Consumer Guide Approved Dealer,” with a right to use the Consumer Guide logo, to advertise in Consumer Guide’s print publications and on its website, to display a plaque in its showroom, and to obtain 40 vehicle-history reports per month. The other program, “Leads & Listings” was supposed to produce 16 location-specific, brand-specific leads per month from ConsumerGuide.com.
The programs did not deliver all they promised, and the relationship between the two parties began to sour. The delay in publishing the ads, paper certificates in lieu of wooden plaques, and that no leads were generated were primarily to blame for dealer dissatisfaction and demand for refunds on the first program. The Leads & Listings program did produce leads but there was a discrepancy between the numbers represented by Publications and those Smart was seeing. Publications was having difficulty with its software program, while Smart kept enrolling dealers. Smart wasn’t getting paid its commissions either. After several months of difficulties, Publications terminated the contract it had entered into with Smart. Publications continued with its software program, and with a different sales force began to sell a leads-distribution program to auto dealers until late in 2005, when it sold the Consumer Guide automotive business.
After Smart’s contract was canceled, it filed a lawsuit seeking damages of $8.8 million. Both sides put on expert testimony at trial and the jury ultimately awarded $5.6 million for breach of contract. Publications appealed, because it thought the award was unsupported by the facts and Smart appealed because it wanted prejudgment interest on the award.
What troubled the Appeals Court was that the business the jury was deciding upon was not an established business, but a “start up.” Neither Publications, who had been providing internet leads to wholesalers to resell, nor Smart who had experience with conventional promotions for car dealers, had ever engaged in a business that put the two elements together. The testimony by the various witnesses at trial about how many leads could be generated by the program were speculative, so much so that the award by the jury was deemed excessive. On these grounds, the Appeals Court decided that the award fell “outside the range of fair and reasonable compensation, or resulted from the passion or prejudice of the jury,” such that it “shocked the judicial conscience,” and justified the Court’s vacating the award and remanding the case for another trial on the damages to be based on what the Court hopes will be more accurate information.
The lessons to be learned here are that promises should not be made that cannot be kept, and although “start ups” may have enthusiasm, businesses with a proven track record are the ones to deal with.
The Smart Marketing Group, Inc. v. Publications International, Ltd., 2010 U.S. App. LEXIS 22412 (Oct. 28, 2010).