REVISED AUGUST 1, 2001

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

________________________________

No. 99-11242

________________________________

BURKHART GROB LUFT UND RAUMFAHRT GMBH & CO. KG,

Plaintiff-Appellant-Cross-Appellee,

v.

E-SYSTEMS, INC.,

Defendant-Appellee-Cross-Appellant.

_____________________________________________

Appeals from the United States District Court

For the Northern District of Texas

_____________________________________________

July 20, 2001

Before DAVIS, WIENER and STEWART, Circuit Judges.

W. EUGENE DAVIS, Circuit Judge:

Burkhart Grob Luft und Raumfahrt GmbH & Co. KG (“Grob”) sued

E-Systems, Inc. (“E-Systems”) for breach of contract, breach of a

duty of good faith and fair dealing, tortious interference with a

prospective business opportunity, and fraud arising out of the

efforts of the two companies to win a government contract. A jury

found for Grob on the fraud claim alone and awarded Grob $1 in

actual damages and $45 million in punitive damages. The district

court vacated the award of punitive damages and entered a judgment

for Grob in the amount of $1. Grob now appeals, raising several

issues with respect to its damages on the fraud claim. E-Systems
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cross-appeals, contesting the jury’s fraud finding. Finding no

error, we affirm the district court’s judgment in all respects.

I.

This case grows out of a program of the Advanced Research

Projects Agency and the Defense Airborne Reconnaissance Office

(together, “ARPA”), both agencies of the United States Department

of Defense, to build a high-altitude, long-endurance, unmanned

surveillance aircraft. The program, known as Tier II+, required

production of both an aircraft and a ground station, which would be

used to control the aircraft in flight and to receive the data from

its various sensors.

The Tier II+ program had four phases. After soliciting

interest from contractors, ARPA would choose five proposals for

funding in Phase 1. The various contractors selected for Phase 1

would receive funding to produce a detailed design for a prototype

aircraft and ground station. The amount to be awarded in Phase 1

was insufficient to allow the contractors to earn a profit. In

Phase 2, ARPA would select two of the five contractors chosen in

Phase 1. The two contractors selected for Phase 2 would produce

and test a prototype aircraft and ground station. In Phase 3, ARPA

would select one of the two contractors participating in Phase 2.

The winning contractor selected in Phase 3 would further refine and

test their design and produce a number of demonstration aircraft

and ground stations. In Phase 4, the winning contractor would

produce a larger number of operational aircraft and ground
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stations, the ultimate number to be determined by congressional

appropriations.

ARPA set out various performance goals for the aircraft and

ground station. However, none of the performance goals were fixed

requirements. ARPA advised potential bidders that they could trade

off various goals against others. The only fixed requirement ARPA

set out was that the final production aircraft have a price not

greater than $10 million.

Grob is a German company that specializes in manufacturing

aircraft from composite materials. It has manufactured a number of

glider and propeller-driven aircraft, some of which have set world

records for high altitude flight. However, it has never

manufactured a jet aircraft. E-Systems is an American defense

contractor specializing in aerial surveillance technology, military

communications, and systems integration. E-Systems is organized

into several discrete divisions, two of which, the Greenville

division and the Melpar division, are involved in this case.

During the 1980s Grob and E-Systems together developed and

built an aircraft called the Egrett for the West German government.

The Egrett was a manned, propeller-driven aircraft designed to fly

at 50,000 feet with an ability to stay at that altitude for 6 to 10

hours. Though a technical success, the Egrett never went into

production after the collapse of East Germany, the surveillance of

which was the main mission of the Egrett. However, the two

companies signed an agreement to work together to develop and sell
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the Egrett to other customers who might be interested in such an

aircraft.

In early 1994 Grob learned, through its consultant A.C.

Williams, about the Tier II+ program. Grob approached E-Systems

about working together to submit a bid to ARPA. E-Systems

initially rebuffed Grob’s advances. Though the Egrett had been a

technical success, animosity apparently developed between the two

companies towards the end of the Egrett project. Furthermore, ESystems did not think that Grob could build the sort of aircraft

that ARPA would want, namely one that had jet propulsion. Retired

Brigadier General Lawrence Mitchell, an E-Systems employee, had

discussed the Tier II+ program with Major General Ken Israel, the

head of the Defense Airborne Reconnaissance Office. Based on those

discussions, Mitchell told his superiors at E-Systems that ARPA

would likely want a jet aircraft, which Grob had never before

produced.

E-Systems changed its mind about working with Grob on the Tier

II+ project in April of 1994. Klaus Fischer of Grob arranged a

demonstration of the Egrett in Germany for Harry Berman, a senior

ARPA official. Ernest Pennington of E-Systems attended the

demonstration and reported that Berman was “wowed” by the Egrett

and was considering offering Grob a contract right then and there.

Pennington reported these events and recommended that E-Systems

seek to, “keep Grob in our camp as long as possible.” Shortly

thereafter Brian Cullen, the general manager of E-Systems’
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Greenville division, proposed to Grob that the two companies work

together on the Tier II+ program.

The two companies agreed that E-Systems, because of its

experience with U.S. defense contracts, would have responsibility

for drafting the bid to be submitted to ARPA. Executives from the

two companies met in Greenville, Texas in early May, 1994 to plan

their bid for the Tier II+ project. At that meeting, Alan Doshier,

an E-Systems executive, mentioned that the Melpar division of ESystems would be working with Teledyne-Ryan, an American defense

contractor, on another Tier II+ bid. It is not clear just what

Doshier said about Melpar’s involvement to the Grob executives, who

were insisting that E-Systems work with Grob exclusively. Grob

executives, principally Klaus Fischer, continued to insist that

Grob and E-Systems work with each other exclusively. Dutch Meyer

of E-Systems evidently assured the Grob executives that E-Systems

would work with Grob exclusively. Burkhart Grob, the owner of

Grob, finally settled the issue of exclusivity in a letter to Brian

Cullen on June 23, 1994. Grob insisted that the relationship

between his company and E-Systems be exclusive. Cullen agreed to

exclusivity in his reply to Grob’s letter.

While the two companies were settling the issue of

exclusivity, they were also continuing to work on the design of the

aircraft to be included in their proposal to ARPA. At a meeting in

Germany, Peer Frank, Grob’s chief engineer, presented proposals for

both a modified Egrett aircraft and an entirely new jet. The Grob
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executives left the meeting in Germany with the understanding that

the proposal would include both the modified Egrett and the new jet

design. However, E-Systems made only cursory mention of the new

jet design in the final proposal to ARPA. Furthermore, E-Systems

never informed Grob of Mitchell’s conclusion regarding ARPA’s

likely preference for a jet aircraft.

Fourteen groups submitted proposals for Phase 1 of the Tier

II+ program. The Grob/E-Systems bid was not among the five bids

picked for Phase 1. The winning bids came from such companies as

Loral, Northrup Grumman, Westinghouse, Raytheon, and Lockheed. One

of the winning bids was submitted by Teledyne-Ryan and the Melpar

division of E-Systems. The Teledyne-Ryan/Melpar bid was later

chosen as one of the two participants in Phase 2, and later won the

final competition by being picked as the sole participant in Phase

3 of the program.

II.

Aggrieved that it had lost, and that another division of ESystems had won when E-Systems had promised it exclusivity, Grob

sued E-Systems in August of 1995. Grob asserted that E-Systems’

failure to honor its agreement to work with Grob exclusively, its

failure to share information about ARPA’s desire for a jet, and its

failure to include Grob’s plans for a new jet aircraft in the final

proposal to ARPA constituted breach of contract, breach of a duty

of good faith and fair dealing, tortious interference with a

prospective business opportunity, and fraud.
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The district court tried the case to a jury. After the close

of all the evidence, the district court decided that it would not

submit the issue of Grob’s lost profits to the jury because they

were too speculative and uncertain. Thus, the jury form instructed

the jury to consider only Grob’s bid preparation costs as actual

damages for the various claims it asserted. The jury found for Grob

on its fraud claim and for E-Systems on the remainder of Grob’s

claims. The jury awarded Grob $1 in actual damages and $45 million

in punitive damages.

Following the jury’s verdict, Grob moved to have the district

court impose a constructive trust on E-Systems’ profits from the

Tier II+ program. The district court denied Grob a constructive

trust on the grounds that E-Systems had not been unjustly enriched

at Grob’s expense. The district court found that Grob’s failure to

advance in the Tier II+ program was not attributable to E-Systems’

actions, and therefore Grob had no interest in E-Systems’ profits

in the Tier II+ program. E-Systems moved for judgment as a matter

of law on the fraud claim and for vacatur of the award of punitive

damages. The district court vacated the punitive damages award on

the grounds that Texas law did not allow for an award of punitive

damages when actual damages were merely nominal. The district

court denied E-Systems’ motion for judgment as a matter of law and

entered judgment for Grob in the amount of $1.

Grob now appeals, raising four issues. Grob argues that: 1)

the district court erred in not submitting the issue of its lost
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profits to the jury, 2) the district court erred in not imposing a

constructive trust on E-Systems’ profits from the Tier II+ program,

3) the district court erred in not awarding Grob all of its bid

preparation expenses as actual damages, and 4) the district court

erred in vacating the award of punitive damages in light of the

fact that Grob should have been awarded substantial actual damages.

E-Systems cross-appeals, arguing that the evidence was insufficient

to support the jury’s fraud finding.

III.

We begin with the district court’s decision not to submit the

issue of Grob’s lost profits to the jury. Whether Grob produced

sufficient evidence to present the question of its lost profits to

the jury is a question we review de novo. Casarez v. Burlington

Northern/Santa Fe Co., 193 F.3d 334, 336 (5th Cir. 1999). In

determining whether Grob was entitled to have the jury consider its

claim for lost profits, we review the entire record in the light

most favorable to Grob, drawing reasonable inferences in its favor

and not making determinations about credibility or the weight of

the evidence. Id. Grob is entitled to have the question of its

lost profits put to the jury only if there is a conflict in

substantial evidence. Id.

Texas law requires that lost profits be established with

reasonable certainty. Texas Instruments, Inc. v. Teletron Energy

Mgmt., Inc., 877 S.W.2d 276, 279-80 (Tex. 1994). Both the fact of

lost profits, and their amount, must be established with reasonable
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certainty. Id.; Lovelace v. Sabine Consol., Inc., 733 S.W.2d 648,

655 (Tex. App. - Houston [14th Dist.] 1987, writ denied). A

plaintiff’s failure to show either the existence or the amount of

lost profits will necessarily prevent their recovery.

The requirement of reasonable certainty is a flexible one,

demanding a sensitivity to the facts of a particular case. Texas

Instruments, 877 S.W.2d at 279. Where lost profits, in an amount

shown with reasonable certainty, are the natural and probable

consequence of the wrong complained of, then they may be recovered.

Id. Texas law does provide some guidance on what constitutes

reasonable certainty. The Texas Supreme Court has said that,

Profits which are largely speculative, as from an

activity dependent on uncertain or changing market

conditions, or on chancy business opportunities, or on

promotion of untested products or entry into unknown or

unviable markets, or on the success of a new and unproven

enterprise, cannot be recovered. Factors like these and

others which make a business venture risky in prospect

preclude recovery of lost profits in retrospect.

Id. Following this guidance, the Texas courts, and our court in

its application of Texas law, have consistently required persuasive

evidence that a new or speculative business venture had a good

chance of succeeding to allow a plaintiff to recover lost profits

in a case arising out of that new or speculative venture. See, for

example, Aboud v. Schlichtemeier, 6 S.W.3d 742, 747 (Tex. App. -

Corpus Christi 1999, no writ); Ishin Speed Sport, Inc. v.

Rutherford, 933 S.W.2d 343, 351-52 (Tex. App. - Ft. Worth 1996, no

writ); Dyll v. Adams, 167 F.3d 945, 947-48 (5th Cir. 1999); DSC
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Communications Corp. v. Next Level Communications, 107 F.3d 322,

329 (5th Cir. 1997). Furthermore, the Texas courts have denied

recovery to a disappointed bidder who could not show that they

would have received the contract in dispute absent the wrongful

conduct of the defendant. Lovelace, 733 S.W.2d at 656.

Grob has produced no evidence that would allow an award of

lost profits in this case. If E-Systems had not committed fraud in

the Tier II+ competition, then presumably Grob would have been able

to work with E-Systems exclusively, would have submitted a bid on

its own, or would have teamed with another contractor to submit a

bid. However, the fact remains that ARPA wanted a jet aircraft for

this project, which Grob had never built. ARPA’s only firm

requirement for the project was that it cost no more than $10

million per copy at the final production stage. Grob would have

faced an uphill battle in persuading ARPA that its newly designed

jet aircraft that had never been built or tested could meet ARPA’s

firm cost requirements. Finally, to have any chance of making a

profit in this project, Grob was required to show that it would

have been a successful bidder in both Phase 1 and Phase 2. To be

successful in Phase 2, the first phase when the project was

profitable, Grob was required to show that it would likely prevail

over 12 of the other bidders on the Tier II+ project. These

included such experienced contractors as Lockheed, Loral, Raytheon,

and Northrup Grumman.

In the face of these substantial obstacles, Grob submitted no
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evidence to support its contention that it would have been the

winner in the Tier II+ program absent E-Systems’ fraud. Grob did

produce the materials it provided to E-Systems at the meetings the

two companies held to discuss their joint bid. These materials

include a preliminary design for a new jet aircraft. However, Grob

produced no evidence that this design would have likely found favor

with ARPA, that it could have been produced within ARPA’s cost

requirements, or that it would have proved superior to the designs

submitted by the other bidders. Grob also produced no evidence

that any other design it could have conceived would have had any

success. In sum, no matter how badly E-Systems might have behaved,

Grob produced no evidence that it was likely to find success in the

Tier II+ program.

These facts serve to distinguish the cases Grob cites in

support of an award of lost profits in this case. In Aboud, the

Texas Court of Appeals sustained an award of lost profits in a case

arising out of a proposal to build a cancer treatment center in El

Paso. The evidence in Aboud showed that the partners were

experienced physicians, that they had developed such enterprises in

the past, that El Paso needed such a treatment center, and that

such a center was likely to be quite profitable. Aboud, 6 S.W.3d

at 747. Grob had no similar experience in building jet aircraft,

and the market in which Grob was to compete - the Tier II+

competition - was not nearly as favorable to Grob. Grob simply did

not have the same prospects for success as had the partners in
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Aboud.

In DSC Communications, our court sustained an award of lost

profits to a company that had sued a competitor for

misappropriation of trade secrets. The company was awarded lost

profits based on its lost sales of a new telecommunications

product. The evidence tended to show that the plaintiff was an

experienced developer of telecommunications products and that the

product in question was based on a product that had previously been

a success. DSC Communications, 107 F.3d at 329. Grob has no

similar history of success in producing jet aircraft, and

presumably it would have submitted an entirely new, untested

design. Furthermore, Grob was not competing in an open market, but

rather for a single government contract. Grob is simply in a

different position than was the plaintiff in DSC Communications.

Indeed, we have previously distinguished DSC Communications on

grounds very similar to those presented in this case. Dyll, 167

F.3d at 948.

Because Grob did not produce evidence that would have allowed

the jury to award it lost profits with reasonable certainty, the

district court correctly declined to submit this question to the

jury.

IV.

We turn next to Grob’s contention that the district court

should have imposed a constructive trust over E-Systems’ profits

from the Tier II+ project. Under Texas law, a constructive trust
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is an equitable remedy available to a party that has been

defrauded. Meadows v. Bierschwale, 516 S.W.2d 125, 128 (Tex.

1974). Because a constructive trust is an equitable remedy, the

decision whether to impose it is entrusted to the discretion of the

district court, and we review the district court’s decision only

for an abuse of discretion. Affiliated Prof’l Home Health Care

Agency v. Shalala, 164 F.3d 282, 284 (5th Cir. 1999); Marine Indem.

Ins. Co. of America v. Kraft Gen. Foods, Inc., 115 F.3d 282, 287

(5th Cir. 1997).

The required elements for imposition of a constructive trust

under Texas law are: 1) actual or constructive fraud, 2) unjust

enrichment of the wrongdoer, and 3) tracing of the property over

which the trust is placed to some identifiable res in which the

plaintiff has an interest. Haber Oil Co. v. Swinehart (In re Haber

Oil Co.), 12 F.3d 426, 437 (5th Cir. 1994); Monnig’s Dep’t. Stores,

Inc. v. Azad Oriental Rugs, Inc. (In re Monnig’s Dep’t. Stores,

Inc.), 929 F.2d 197, 201 (5th Cir. 1991).

Based on the record evidence produced at trial, the district

court found Grob failed to establish that its aircraft, “would have

met ARPA’s Phase 1 requirement regardless of what E-Systems

disclosed or failed to disclose.” The district court further found

that Grob had shown no, “legitimate interest in [E-Systems’]

profits because there is no evidence that it had a realistic

expectancy of winning the...bid.” As explained above, these

findings are consistent with the jury verdict and fully supported
1Grob relies on Eden Hannon & Co. v. Sumitomo Trust & Banking

Co., 914 F.2d 556 (4th Cir. 1990), where the Fourth Circuit held

that a constructive trust should have been imposed over the profits

the winning bidder made on certain assets it purchased at auction

in favor of the third place bidder. However, that conclusion was

premised on the fact that the winning bidder only won because it

violated a confidentiality agreement it had with the third place

bidder and misappropriated its trade secrets. That is not the

situation in the case before us.

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by the record. Based on these findings, the district court

concluded that E-Systems was not unjustly enriched at the expense

of Grob and that Grob had no interest in E-Systems’ profits from

the Tier II+ project.

The district court did not abuse its discretion in reaching

these conclusions and in declining to impose a constructive trust.

Concerning the unjust enrichment element, as we explained above,

Grob presented no evidence that it would have had any success in

the Tier II+ competition even absent E-Systems’ fraud. Though ESystems’ fraud may have prevented Grob from teaming with another

contractor, or submitting a bid on its own, or being the only

company to have teamed with E-Systems, there is no evidence to

suggest that Grob would have been successful even in Phase 1 of the

Tier II+ competition. There are no profits Grob would have earned

but for E-Systems’ fraud.1 The district court thus correctly

concluded that Grob has no interest in the property, namely ESystems’ profits, over which it seeks a constructive trust.

This conclusion is consistent with the manner in which the

Texas courts have imposed constructive trusts. Texas courts have
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imposed constructive trusts where one party has obtained some

discrete piece of property in which the plaintiff has an interest -

such as a piece of real estate, the assets of a failed bank, or an

oil and gas lease - in a wrongful manner. See Ginther v. Taub, 675

S.W.2d 724, 725 (Tex. 1984) (oil and gas lease); Meadows, 516

S.W.2d at 127 (apartment property); Lone Star Partners v.

Nationsbank Corp., 893 S.W.2d 593, 595 (Tex. App. - Texarkana 1994,

writ denied) (assets of a failed bank). No cases from the Texas

courts concern a situation such as the one presented by this case,

where one party seeks the profits of another party, and where such

profits arise from expertise the aggrieved party does not possess.

Thus, the district court was well within its discretion in refusing

to order a constructive trust in this case.

V.

Grob argues finally that the district court should have

awarded it all of its bid preparation costs on the Tier II+

project. However, Grob’s witness Klaus Fischer admitted that the

figure he gave for bid preparation expenses included amounts

expended before Grob ever began working with E-Systems and that he

had no way of separately calculating what Grob spent after it began

working with E-Systems. R., Vol. 11 at 490-91. Thus, the jury was

well within its rights to award Grob only $1 in actual damages in

light of this uncertainty in the evidence.

As the district court correctly refused to submit the issue of

Grob’s lost profits damages to the jury and also did not abuse its
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discretion in not ordering a constructive trust over E-Systems’

profits on the Tier II+ project, the district court correctly

vacated the punitive damages award. See Peter Scalamandre & Sons,

Inc. v. Kaufman, 113 F.3d 556, 564 (5th Cir. 1997).

We turn finally to E-Systems’ cross-appeal. Our review of the

record and the applicable law convinces us that there was

sufficient evidence to support the jury’s finding that E-Systems

committed fraud.

VI.

The district court properly refused to submit Grob’s lost

profits damages to the jury, and did not abuse its discretion in

refusing to order a constructive trust over E-Systems’ profits on

the Tier II+ project. Because the record evidence supports the

jury’s award of only nominal actual damages, the district court

also properly vacated the jury’s punitive damages award. Our

review of the record persuades us, however, that the evidence was

sufficient to sustain the jury’s verdict that E-Systems committed

fraud. The judgment of the district court is therefore AFFIRMED.

AFFIRMED.