Bamberg v. Goldman, Sachs & Co. , 771 F.3d 37 ( 2014 )

United States Court of Appeals
For the First Circuit
Nos. 13-2173
13-2208
JAMES AND JANET BAKER; PAUL G. BAMBERG AND ROBERT ROTH,
Plaintiffs, Appellants,
v.
GOLDMAN, SACHS & CO., ET AL,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Patti B. Saris, U.S. District Judge]
Before
Lynch, Chief Judge,
Torruella and Ripple,* Circuit Judges.
Alan K. Cotler, with whom Joan A. Yue, Debra A. Djupman, Roy
D. Prather III, Reed Smith LLP, Peter C. Horstmann, and Partridge,
Ankner & Horstmann, LLP were on brief, for appellants James and
Janet Baker.
Christian M. Hoffman, with whom Jack R. Pirozzolo, Catherine
C. Deneke, and Foley Hoag LLP were on brief, for appellants Paul G.
Bamberg and Robert Roth.
John D. Donovan, Jr., with whom Daniel V. McCaughey, Matthew
L. McGinnis, Timothy R. Cahill, Ropes & Gray LLP, Paul Vizcarrondo,
John F. Lynch, Carrie M. Reilly, Lindsey M. Weiss, Molly K. Grovak,
and Wachtell, Lipton, Rosen & Katz were on brief, for appellees
Goldman, Sachs & Co., et al.
*
Of the Seventh Circuit, sitting by designation.
November 12, 2014
LYNCH, Chief Judge. Dragon Systems, Inc. ("Dragon"), a
leading voice recognition software company in the late 1990s,
needed infusions of capital to continue operations and so sought an
acquisition partner. It hired an investment banker, Goldman Sachs
("Goldman"), to assist it. Dragon was acquired in June 2000 by
Lernout & Hauspie Speech Products N.V. But Lernout & Hauspie had
fraudulently overstated its earnings. When that was learned,
bankruptcy ensued for the merged company, and the name Dragon and
its technology were sold from the estate.
Naturally, considerable litigation followed out of this
debacle, including these suits against Goldman by two groups of
Dragon shareholders. Goldman has been found not liable both by a
jury on claims of negligent performance of services, gross
negligence, intentional and negligent misrepresentation, and breach
of fiduciary duty, and also by a court on claims of violations of
Mass. Gen. Laws ch. 93A. After a jury found in favor of Goldman on
all of plaintiffs' common-law claims on January 23, 2013, the
district court found that Goldman had not engaged in unfair or
deceptive conduct in violation of ch. 93A. The two groups of
shareholder plaintiffs appeal from the district court's ruling on
their 93A claims, essentially arguing that there is an incongruity
between the court's findings of fact and its non-liability finding,
such as to justify reversal. As to the jury verdict, plaintiffs
argue that they are entitled to a new trial on their common law
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claims because of evidentiary errors and erroneous jury
instructions. Finding no error, we affirm.
I.
A. Factual Background
We tell the facts as found by the jury and the court.
Plaintiffs and now appellants James and Janet Baker,
Robert Roth, and Paul Bamberg in 1982 founded Dragon, a speech
recognition technology company. Dragon, a closely-held corporation
headquartered in Newton, Massachusetts, manufactured and sold
software which recognized spoken commands and transcribed ordinary
conversational speech. The Bakers, Bamberg, and Roth were
principal shareholders in the company and served at various times
as members of Dragon's board of directors and senior management.
At the time of the events giving rise to this lawsuit, the Bakers
and Seagate Technology (a principal investor in Dragon) owned 90%
of the company, while Bamberg and Roth owned 8%. At oral argument,
counsel for Bamberg and Roth referred to Bamberg, Roth, and James
Baker as the "brains behind [Dragon's] technology." Janet Baker
was Dragon's CEO from 1998 until 1999, when she was asked to
resign. The district court found that Janet Baker was "considered
difficult to work with" while she was CEO.
By the end of the 1990s, "Dragon had an extensive
research and development pipeline for future products and
opportunities . . . which included speech recognition for mobile
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telephones and handheld devices." These were called Dragon's
"golden eggs." The company was considered "a leader in speech
technology products" and was valued at roughly $600 million.
Despite Dragon's apparent eminence in the field, the company's
financial condition was in fact perilous. Dragon lost money in
every year of its existence, save one. By the end of the 1990s,
Dragon employees and executives were concerned about the company's
ability to make payroll. Dragon began to consider merging with
another company in order to obtain a capital infusion so that it
could develop the "golden eggs" and make them profitable.
In the fall of 1999, competing bidders Lernout & Hauspie
Speech Products N.V. ("L&H") and Visteon Automotive Systems
("Visteon"), a subsidiary of Ford, each offered to acquire Dragon
for approximately $580 million. Dragon then sought out Goldman to
be its investment banker. On December 8, 1999, Ellen Chamberlain,
as Dragon's Chief Financial Officer, signed an agreement (the
"Engagement Letter") with Goldman. Goldman agreed to "provide
[Dragon] with financial advice and assistance in connection with
this potential transaction, which may include performing valuation
analyses, searching for a purchaser acceptable to [Dragon],
coordinating visits of potential purchasers and assisting [Dragon]
in negotiating the financial aspects of the transaction."1 The
1
The testimony at trial generally confirmed this
description of Goldman's responsibilities in connection with the
transaction. For example, Janet Baker testified that Goldman was
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Engagement Letter stated that Goldman would receive a $150,000
quarterly fee, as well as a payment of at least $2 million if the
sale were consummated.
Significantly, the Engagement Letter also contained an
exculpation clause ("Annex A") providing that Dragon, Seagate, and
Janet Baker would not hold Goldman liable for any derivative claims
arising out of Goldman's services to Dragon "except to the extent
that any . . . claims . . . result from the gross negligence,
willful misconduct or bad faith of Goldman Sachs . . . ." Janet
Baker and Seagate signed the Engagement Letter agreeing to the
above-quoted sentence from Annex A (the only provision of the
agreement that involved them in their personal capacities).
A prior draft of the Engagement Letter, which had been
rejected, had, by contrast, provided that Goldman was engaged by
Dragon and by Janet Baker and Seagate in their capacity as
stockholders. The earlier rejected draft had also made those
stockholders guarantors of Dragon's obligation to pay Goldman for
its services. The final Engagement Letter omitted the reference to
"basically hired to facilitate a transaction." She explained, "we
were looking at doing a transaction where they would help us do
whatever due diligence needed to be done, would have facilitated us
-- which could be raising issues that needed to be addressed . . .
and negotiating the terms, looking at comparables of various kinds,
and giving us their advice." Christopher Fine of Goldman similarly
explained, "[a]s I understood it, we were retained to give input
and advice and help facilitate a . . . process . . . that was said
to be in its later stages, but [sic] to advise the company on any
and all aspects where we could provide expertise in the context of
completing this process."
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"stockholders" because Janet Baker did not wish to be personally
liable for Goldman's fee. Thus, the Engagement Letter was between
Dragon (the company) and Goldman (with the exception of the
exculpation clause, to which, as noted above, Janet Baker and
Seagate also agreed).
Goldman assembled a four-person team to work on the
Dragon merger: T. Otey Smith, Alexander Berzofsky, Richard Wayner,
and Christopher Fine. Wayner was the leader of the team. The
record shows that Wayner was an experienced banker, having been
involved in numerous transactions during his career at Goldman.
Even before the Engagement Letter was signed, the Goldman team
began to involve itself in the process of conducting financial due
diligence on L&H. A jury could easily have concluded that Ellen
Chamberlain, the CFO of Dragon, was ultimately in charge of the due
diligence, and Goldman's role was to assist her in multiple ways.
On December 16 and 17, 1999, the Goldman team met with
both sets of plaintiffs and other senior Dragon management to
discuss the buyout proposals. Some of the Dragon management,
particularly Bamberg, had serious reservations about merging with
L&H. Bamberg expressed concern over L&H's employment practices and
"questionable financials." At trial, he testified that "everyone
around the table had got the message that I was skeptical about
L&H." The Goldman team identified several potential "issues" with
the L&H proposal -- for example, the volatility of L&H's stock,
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"[p]ast accounting practices re: R&D," and concerns about the
percentage of L&H's growth that was due to organic growth versus
growth by acquisition. Dragon's then-President John Shagoury
testified that Goldman "dicuss[ed] these issues with the Board" and
that, for the most part, the Board's "concerns were allayed with
explanation of what those [issues] were all about."
On December 20, 1999, Dragon entered into a period of
exclusive negotiation with Visteon. The negotiations did not prove
fruitful, and in February 2000 Dragon and Visteon allowed the
exclusivity period to lapse.
Dragon then turned its full attention to a possible
merger with L&H. At this point, the Board was "focused on speed
and certainty" because of Dragon's deteriorating financial
situation. Dragon needed the capital from a merger.
On February 9, 2000, L&H, for its part and independently
of the merger discussions, had an earnings conference call with
analysts and released its Q4 1999 earnings. L&H stated during that
call that its earnings in Asia had increased over 1000 percent,
while growth in the United States and Europe was much slower.
On February 14, the Bakers received a news article by e-
mail that both reported the L&H earnings call and raised questions
regarding the reported disparity between ample growth in Asia and
growth elsewhere. The record does not indicate whether the Bakers
raised this news article with other Dragon executives or with
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Goldman. The district court found that "[p]laintiffs were aware of
L&H's growing Asian revenues, and considered the matter to be an
important issue." Goldman did not have an analyst covering L&H at
the time, and no one at Goldman participated in the earnings call
or communicated information about the call to anyone at Dragon.
On February 17, 2000, Chamberlain e-mailed the Goldman
team to complain about the lack of progress on doing due diligence
on L&H. She "specifically requested that Goldman 'drive and
analyze' the due diligence" and identified several outstanding
issues with respect to the process. The Goldman team continued to
send due diligence requests to L&H, but it did not receive
satisfactory answers. Consequently, when Goldman prepared draft
evaluation books, it "simply included the future revenue
projections [it] received from L&H."
A key event occurred on February 29, 2000, when Goldman
faxed Dragon a memo addressed to Dragon and copied to Hale & Dorr,
Dragon's legal counsel. The facsimile transmission sheet
instructed the recipient to "forward to Paul Cohen [Dragon's in-
house counsel], Don Waite [Dragon's CEO], and Janet Baker
immediately." It was not copied to Roth or Bamberg. The memo was
entitled "Lernout & Hauspie -- Due Diligence & Accounting Issues,"
and read in part:
[T]here are several areas where we feel
greater insight and clarity needs to be gained
with respect to both due diligence and
accounting. . . . [W]e would like to re-
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iterate our point of view that additional due
diligence, led by accounting professionals on
both sides, is important to gain greater
comfort with respect to some of the issues
indicated below.
Our experience shows that companies
like . . . L&H[], which grow via acquisition,
necessitate an extra level of care at this
stage of the process. This only becomes more
important as Dragon shareholders and employees
are ready to receive, and in some instances,
hold L&H common shares and/or options, as part
of the merger consideration. Our
recommendation is that Dragon's certified
public accountants perform comprehensive due
diligence on L&H, side by side with
management, Hale & Dorr and Goldman Sachs.
The memo then listed several specific areas of concern.
Bamberg and Roth did not receive a copy of this memo, and
they maintain that neither the Bakers nor any other members of
Dragon's senior management ever informed them of its contents.
Chamberlain, for her part, was dissatisfied with
Goldman's work. She testified that she found it "ironic that [the]
memo was written after I wrote a memo to Goldman Sachs telling them
what my expectations were from a banker and pretty much they cut
and pasted it back . . . ." It appears that this was an internal
gripe; Chamberlain did not testify that she told anyone at Goldman
of her frustration at receiving the February 29 memo. Indeed, we
have not been pointed to any evidence that anyone at Dragon ever
told Goldman that its performance was unsatisfactory, or that it
was expected to play a larger role with regard to the due diligence
process.
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There is conflicting evidence in the record as to whether
Dragon actually followed the advice contained in the February 29
memorandum from Goldman. Janet Baker testified that Dragon took
Goldman's concerns seriously and that the Dragon team, led by
Chamberlain, went "through each and every one of these points and
discuss[ed] them at length." She explained further that Goldman
"had made some recommendations about things that [Dragon's
accountant] Arthur Andersen should look at, and we had Arthur
Andersen look at those things." But Catherine Moy of Arthur
Andersen testified that Arthur Andersen was not aware of the
February 29 memo and was never asked to implement Goldman's
recommendations. Goldman's Wayner testified that Chamberlain was
"resistant to move forward on these items" because "she and Dragon
did not want to do this level of additional detail."
The district court found that the Goldman team remained
unsatisfied with L&H's due diligence responses, but did not repeat
their concerns to anyone at Dragon after sending the February 29
memo.
Also on February 29, all plaintiffs participated in a
conference call with Goldman's Wayner and Charles Elliott, a
European software research analyst whom Goldman had recruited to
help the Bakers assess the value of L&H's stock. Goldman, as said,
did not have an analyst covering L&H at the time, and Elliott was
unaware of L&H's February 9 earnings report. Apparently, the L&H
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earnings report was not mentioned on the call. Elliott commented
generally on the state of the European software market and
speculated (correctly, as it turned out) that the stock market
would react positively to Dragon's merger with L&H. Elliott later
testified that, had he known of L&H's skyrocketing Asian revenues,
he would have been skeptical of them because he "kn[ew] something
about Asian languages, and . . . the phonetic structure makes it
incredibly difficult to take a European dictation software system
and apply it . . . to Asian languages."
On March 7, 2000, L&H announced that it had agreed to
acquire a company called Dictaphone Corporation and to assume $425
million of Dictaphone's debt. The Goldman team did not update its
evaluation of the L&H-Dragon merger to include analysis of the
effects of that transaction. Neither the district court's findings
nor the submissions of the parties indicate whether Goldman
communicated this information to anyone at Dragon or whether Dragon
knew of this acquisition from other sources.
Discussions between Dragon and L&H on a proposed merger
had continued. On March 8, 2000, CEO Waite and the Bakers met with
a team from L&H to discuss the terms of the proposed merger. Roth,
Bamberg, and the members of the Goldman team were not at this
meeting. L&H offered to buy Dragon for $500 million, half cash and
half stock, but the Bakers declined the offer and made a
counteroffer.
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Janet Baker, on behalf of Dragon, then signed a
handwritten agreement drafted by CEO Waite under which L&H would
buy Dragon for $580 million, all stock. The Bakers and Waite did
not consult Goldman, Chamberlain, or the other Dragon board members
before Janet Baker executed the handwritten agreement.
After the execution of the agreement, on March 22, 2000,
CFO Chamberlain held a conference call with accountants from Dragon
and L&H to discuss the due diligence issues identified by Goldman
in the February 29 memo. The parties dispute whether any Goldman
employees were on this call, but the district court found that
Goldman's Berzofsky participated in this call.2 Chamberlain
testified that there were still "open issues" with respect to due
diligence after this call.
Importantly, the next day, March 23, the Goldman team and
the Dragon board of directors had a conference call to discuss the
status of due diligence. There is conflicting evidence regarding
what precisely was said at the meeting. The district court found
that the participants all agreed due diligence was completed. That
finding is supported by the record.3 The court also found that
2
In contesting this finding, Goldman points out that
Berzofsky was not a recipient of the March 21 e-mail providing the
call information.
3
James Baker testified that he had a "visual image" of
"collectively everybody in the room turning to Ellen [Chamberlain]
to report on whether -- ask the questions, have the accounting
questions been asked to [L&H's accountant] KPMG, and we turned to
her and she said yes."
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"the Goldman team did not state they were still dissatisfied with
due diligence, even though they were." That is also supported by
the record.
On March 27, 2000, Dragon board members and executives
held a meeting to consider the transaction as to which Janet Baker
had executed the March 8 handwritten agreement. All of the
plaintiffs attended the meeting, as did Waite, Chamberlain,
Shagoury, Fine, and Smith. Goldman's Wayner called into the
meeting. The evidence shows that Goldman offered tempered but
positive comments about the proposed merger. For example, Fine
testified that Goldman's assessment was "positive in the overall,"
but he also stated that Goldman "did not give an opinion pro or con
on the transaction" and that Waite "was displeased that [Goldman]
had not . . . been more positive or given more support or [a] more
definitive opinion." Still, Wayner testified that he did not
disclose any of the Goldman team's concerns about the status of due
diligence on L&H because "the client did not ask." Wayner also
noted that he had already raised those issues with Chamberlain and
Janet Baker. Similarly, Fine testified that the Goldman team did
not bring up its due diligence concerns "because th[ey] had all
been raised with substantially the same group that was in there."
Significantly, plaintiffs testified, and the district court found,
that plaintiffs would not have gone forward with the deal had
Wayner voiced his concerns about the due diligence issues at the
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March 27 meeting. Ultimately, the Dragon board voted to approve
the merger, and the transaction closed on June 7, 2000. Dragon
merged into L&H and ceased to be an independent entity.
From there, the situation deteriorated quickly. In
August 2000, the Wall Street Journal reported that L&H had vastly
overstated its Asian revenues, and indeed had identified as
customers some South Korean companies who had never done business
with L&H. The SEC began investigating L&H's financial statements,
and eventually L&H admitted that it had improperly recorded $373
million in revenue. L&H restated its financials for two and a half
years and filed for bankruptcy in November 2000. Following the
bankruptcy, plaintiffs' shares of L&H stock became worthless. The
Dragon name and technology were sold from the estate.
B. Other Proceedings
Before initiating this lawsuit, plaintiffs sued numerous
other parties to recover the losses they suffered as a result of
L&H's fraud. The defendants were L&H and several of its officers
and directors, entities related to L&H, entities and individuals
affiliated with L&H's auditor, L&H's investment bank, and certain
banks that provided financing to L&H. Plaintiffs collectively
received over $75 million in settlements from those parties.
James and Janet Baker ("the Baker plaintiffs") and Roth
and Bamberg ("the Roth plaintiffs") then sued Goldman in separate
actions in state and federal court, respectively. Goldman removed
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the Bakers' suit to federal court, and the two actions were then
consolidated for purposes of discovery and trial. They have been
consolidated for purposes of appeal.
Each set of plaintiffs brought claims for negligent and
intentional misrepresentation, negligence, gross negligence, breach
of fiduciary duty, and violations of Mass. Gen. Laws ch. 93A.4
After a 20-day trial, the jury found in favor of Goldman
on all of plaintiffs' common law claims. The verdict form
instructed the jury to reach Goldman's third-party claims against
the Bakers only if they determined that Goldman was liable to the
Roth plaintiffs. Nonetheless, the jury also found that Janet Baker
made negligent misrepresentations and had committed a breach of her
fiduciary duty to the Roth plaintiffs, and that James Baker had
committed a breach of his fiduciary duty to Bamberg.
The district court found for Goldman on plaintiffs'
ch. 93A claims.5 In a thorough opinion, the court ruled that,
although Goldman may have committed negligence by failing to (1)
disclose to plaintiffs that no one at Goldman was covering L&H at
the time of the transaction; (2) repeat the Goldman team's due
4
Goldman asserted third-party contribution claims against
the Baker plaintiffs for negligent misrepresentation and breach of
fiduciary duty with respect to any liability that the Roth
plaintiffs might establish against Goldman. These are not at issue
in the appeal.
5
There is no right to a trial by jury for claims brought
under ch. 93A. Walsh v. Chestnut Hill Bank & Trust Co., 607 N.E.2d
737, 740–41 (Mass. 1993).
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diligence concerns after expressing those concerns once in the
February 29 memo; and (3) adequately analyze L&H's Asian revenues
and its revenue projections, Goldman's conduct "was not so
egregious as to warrant ch. 93A relief." In reaching its
conclusion, the court gave weight to the jury's verdict exonerating
Goldman of any liability, as it was entitled to do.
The court also rejected the Roth plaintiffs' theory,
presented for the first time in a post-trial brief, that Goldman
had violated ch. 93A because it violated 940 Mass. Code Regs.
3.16(2). That section provides that "an act or practice is a
violation of [ch. 93A] if . . . [a]ny person or other legal entity
. . . fails to disclose to a buyer or prospective buyer any fact,
the disclosure of which may have influenced the buyer or
prospective buyer not to enter into the transaction." The court
ruled that the Roth plaintiffs had waived any claim under § 3.16(2)
by failing to present it before trial, and held that the theory was
meritless in any event because the regulation does not apply to
business-to-business transactions. The court later denied both
sets of plaintiffs' motions for reconsideration of the ch. 93A
ruling, as well as their motions for a new trial. This appeal
followed.
II.
Both the Baker plaintiffs and the Roth plaintiffs argue
that the district court erred as a matter of law in holding that
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Goldman's conduct was not "unfair or deceptive" within the meaning
of ch. 93A. Plaintiffs' briefs contend that ch. 93A does not
require a showing of "egregious" conduct and that, even if
"egregiousness" is the correct standard, Goldman's conduct rose to
that level. After de novo review, we hold that the district court
correctly articulated the legal standard applicable to plaintiffs'
ch. 93A claims, and correctly applied that standard to its factual
findings. We affirm the dismissal of those claims.
A. Standard of Review
"Following a bench trial on a chapter 93A claim, we
review the district court's legal conclusions de novo and its
underlying factual findings for clear error." Fed. Ins. Co. v.
HPSC, Inc., 480 F.3d 26, 34 (1st Cir. 2007). "[W]hether a
particular set of acts, in their factual setting, is unfair or
deceptive is a question of fact," Arthur D. Little, Inc. v.
Dooyang Corp., 147 F.3d 47, 54 (1st Cir. 1998) (quoting Ahern v.
Scholz, 85 F.3d 774, 797 (1st Cir. 1996)), "but whether that
conduct rises to the level of a chapter 93A violation is a question
of law." Fed. Ins. Co., 480 F.3d at 34; see also Casavant v.
Norwegian Cruise Line Ltd., 952 N.E.2d 908, 911–12 (Mass. 2011)
(whether an act is unfair or deceptive is a factual question, but
"[a] ruling that conduct violates [ch. 93A] is a legal, not a
factual, determination" (quoting R.W. Granger & Sons v. J & S
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Insulation, Inc., 754 N.E.2d 668, 675 (Mass. 2001))).6 Under the
clear error standard of review, we accept the district court's
findings of fact unless, after careful consideration of the entire
record, "we are 'left with the definite and firm conviction that a
mistake has been committed.'" Vinick v. United States, 205 F.3d 1,
6 (1st Cir. 2000) (quoting Anderson v. City of Bessemer City, 470
U.S. 564, 573 (1985)). If the district court's factual conclusions
are based on an erroneous view of the controlling law, however,
"the case for deference vanishes," and we review those conclusions
de novo. Id. at 6–7.
In ruling on a ch. 93A claim, a trial court is not bound
by a jury's verdict on parallel common law claims. E.g., Klairmont
v. Gainsboro Rest., Inc., 987 N.E.2d 1247, 1263–64 (Mass. 2013);
6
We note that there is arguably some inconsistency in the
caselaw concerning the proper standard of review on a ch. 93A
claim. The Supreme Judicial Court of Massachusetts has repeatedly
stated that "[a] ruling that conduct violates [ch. 93A] is a legal,
not a factual determination" that is reviewed de novo. Casavant,
952 N.E.2d at 911–12; accord R.W. Granger, 754 N.E.2d at 675. But
cases from both Massachusetts and this Circuit have consistently
held that "[t]he determination of whether certain conduct is unfair
or deceptive is a question of fact" that is reviewed for clear
error. Fed. Ins. Co., 480 F.3d at 34; accord In re Pharm. Indus.
Average Wholesale Price Litig., 582 F.3d 156, 184 (1st Cir. 2009);
Casavant, 952 N.E.2d at 912; R.W. Granger, 754 N.E.2d at 676;
Spence v. Bos. Edison Co., 459 N.E.2d 80, 88 (Mass. 1983) (whether
conduct is unfair is a matter of fact). The distinction between a
"finding of fact" that conduct is unfair or deceptive and a "legal
conclusion" that the conduct violates ch. 93A is not readily
apparent. We have no need to explore the issue further in this
case, however, because the district court's ultimate conclusion
that Goldman did not violate ch. 93A is correct under any standard
of review.
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Specialized Tech. Res., Inc. v. JPS Elastomerics Corp., 957 N.E.2d
1116, 1119–20 (Mass. App. Ct. 2011). But the court may, if it
chooses, consider the verdict in reaching its conclusions, or adopt
the verdict entirely. See Serv. Publ'ns, Inc. v. Goverman, 487
N.E.2d 520, 527 (Mass. 1986).
B. Ch. 93A Legal Standard
Chapter 93A proscribes "unfair or deceptive acts or
practices in the conduct of any trade or commerce." Mass. Gen.
Laws ch. 93A, § 2 (emphasis added). The statute provides a cause
of action to "[a]ny person who engages in the conduct of any trade
or commerce and who suffers any loss of money or property . . . as
a result of the use or employment by another person . . . [of] an
unfair or deceptive act or practice." Id. § 11. If successful, a
plaintiff is entitled to actual damages, or double or treble
damages if the defendant's violation of § 2 was willful or knowing.
Id. Here, the district court found that Goldman's "conduct was not
unfair or deceptive under ch. 93A."7
7
The Roth plaintiffs argue that they are in a different
position than the Baker plaintiffs. They argue that this is
because "the trial court failed to make an express finding as to
whether or not Goldman's acts were unfair or deceptive as to the
Roth plaintiffs." We not persuaded for two reasons. First, the
district court's statement in its order on plaintiffs' motion for
reconsideration that Goldman's conduct "was not unfair or deceptive
under ch. 93A" is most naturally read as applicable to all
plaintiffs, since it is not by its terms limited to the Bakers.
Second, because the district court dismissed the Roth plaintiffs'
ch. 93A claims, it logically must have found that Goldman's conduct
was not unfair or deceptive "as to the Roth plaintiffs."
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Here, plaintiffs essentially do not dispute the district
court's factual determinations -- indeed, both sets of plaintiffs
base the statement of facts in their briefs almost entirely on the
district court's findings of fact. Instead, plaintiffs argue that
there is a disconnect between the district court's factual findings
and its ultimate conclusion that Goldman was not liable under
ch. 93A. The latter conclusion, plaintiffs contend, was both wrong
as a matter of law and clearly erroneous as a matter of fact.
Specifically, plaintiffs' briefs argue that the district
court applied the wrong legal standard to its findings of fact when
it held that, in order for a defendant's conduct to violate
ch. 93A, it "must be not only wrong, but also egregiously wrong."8
Plaintiffs offer an extensive catalogue of Massachusetts cases in
which the court found liability under ch. 93A without mentioning an
"egregiousness" standard. Goldman responds that cases from both
the Massachusetts state courts and this Circuit have been
consistent in requiring a heightened showing of "egregiousness" or
"rascality" in adjudicating ch. 93A claims.
8
Contrary to Goldman's assertion, neither the Baker
plaintiffs nor the Roth plaintiffs have waived the argument that
ch. 93A does not require a showing of egregiousness. Although the
plaintiffs occasionally used the term "egregious" in their
submissions and arguments to the district court, they have
maintained throughout this litigation that ch. 93A goes well beyond
the common law and encompasses a wide range of conduct, from
egregious negligence to simple "half-truth[s]" or "unscrupulous and
unethical conduct."
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Chapter 93A "was 'designed to encourage more equitable
behavior in the marketplace.'" Commercial Union Ins. Co. v. Seven
Provinces Ins. Co., 217 F.3d 33, 40 (1st Cir. 2000) (quoting Arthur
D. Little, 147 F.3d at 55). However, "it 'does not contemplate an
overly precise standard of ethical or moral behavior. It is the
standard of the commercial marketplace.'" Id. (quoting Ahern, 85
F.3d at 798).
The language that courts have used to describe the
ch. 93A standard has varied considerably over the years. See id.(collecting cases). Early Massachusetts decisions suggested that,
in order to violate ch. 93A § 11, conduct must "attain a level of
rascality that would raise an eyebrow of someone inured to the
rough and tumble of the world of commerce," Levings v. Forbes &
Wallace, Inc., 396 N.E.2d 149, 153 (Mass. App. Ct. 1979); see also
Spence v. Bos. Edison Co., 459 N.E.2d 80, 88 (Mass. 1983), or have
a "rancid flavor of unfairness," Atkinson v. Rosenthal, 598 N.E.2d
666, 670 (Mass. App. Ct. 1992). The First Circuit followed the
Massachusetts courts' lead in articulating the ch. 93A standard, as
it is required to under Erie. See, e.g., Quaker State Oil Ref.
Corp. v. Garrity Oil Co., 884 F.2d 1510, 1513 (1st Cir. 1989).
In 1995, the Supreme Judicial Court of Massachusetts
stated that it found "uninstructive phrases such as 'level of
rascality'" and instead would "focus on the nature of challenged
conduct and on the purpose and effect of that conduct as the
-22-
crucial factors in making a [ch.] 93A fairness determination."
Mass. Emp'rs Ins. Exch. v. Propac-Mass, Inc., 648 N.E.2d 435, 438
(Mass. 1995) (citation omitted). But even after Propac-Mass,
Massachusetts courts, when addressing claims that a defendant's
negligent act constituted a violation of ch. 93A, continued using
labels akin to the "level of rascality" phrase to describe the
level of negligence necessary for a finding of liability. See,
e.g., Ross v. Cont'l Res., Inc., 899 N.E.2d 847, 861 (Mass. App.
Ct. 2009). Moreover, the SJC has repeatedly held that "mere
negligence," standing alone, is not sufficient for a violation of
ch. 93A -- something more is required. E.g., Klairmont, 987 N.E.2d
at 1257; Darviris v. Petros, 812 N.E.2d 1188, 1192 (Mass. 2004);
Swanson v. Bankers Life Co., 450 N.E.2d 577, 580 (Mass. 1983). In
Marram v. Kobrick Offshore Fund, Ltd., 809 N.E.2d 1017 (Mass.
2004), which the district court relied on for the legal standard
that it applied in this case, the SJC described that "something
more" as "extreme or egregious" negligence.9 See id. at 1032;
accord Lily Transp. Co. v. Royal Institutional Servs., Inc., 832
N.E.2d 666, 687 n.15 (Mass. App. Ct. 2005); cf. Stonehill Coll. v.
Mass. Comm'n Against Discrimination, 808 N.E.2d 205, 229–30 (Mass.
2004) (in order for breach of contract to constitute a ch. 93A
9
This reading of the statute does not render § 11's
provision for double and treble damages superfluous. Double or
treble damages are authorized if a violation is "willful" or
"knowing." Mass. Gen. Laws ch. 93A, § 11. Conduct can be
egregiously negligent without being willful or knowing.
-23-
violation, there must be "some egregious circumstance surrounding
that breach"). And our Circuit has again followed the
Massachusetts courts' lead in using the term "egregious" to state
the standard of ch. 93A liability. See, e.g., In re Pharm. Indus.,
582 F.3d at 185 (quoting Mass. Sch. of Law at Andover, Inc. v. Am.
Bar Ass'n, 142 F.3d 26, 41 (1st Cir. 1999)); In re TJX Cos. Retail
Sec. Breach Litig., 564 F.3d 489, 497 (1st Cir. 2009).10
Thus, while we share the SJC's sentiment in Propac-Mass
that phrases such as "level of rascality" are uninstructive, we
find no legal error in the district court's analysis. It drew the
"egregious" standard directly from caselaw from the SJC and this
Circuit. If the standard for ch. 93A liability requires
clarification, the SJC can provide it in an appropriate case. See
Gill v. Gulfstream Park Racing Ass'n, Inc., 399 F.3d 391, 402 (1st
Cir. 2005) ("A federal court sitting in diversity cannot be
expected to create new doctrines expanding state law.").
10
Plaintiffs are correct that the first mention of the term
"egregious" in the ch. 93A caselaw is found, not in a Massachusetts
case, but rather in a First Circuit opinion, Massachusetts School
of Law. 142 F.3d at 41 (stating that the "general meter" of
ch. 93A claims "is that the defendant's conduct must be not only
wrong, but also egregiously wrong -- and this standard calls for
determinations of egregiousness well beyond what is required for
most common law claims"). But the SJC's adoption of that term in
its own ch. 93A jurisprudence shows that it concurs with the
Massachusetts School of Law formulation.
-24-
C. The District Court's Factual Findings
The district court identified three instances of
questionable conduct on the part of Goldman: (1) its failure to
disclose that Elliott was not covering L&H at the time of
plaintiffs' February 29 conference call with him; (2) its failure
to reiterate at a later date (and in particular, at the final
meeting on March 27) the due diligence-related concerns expressed
in the February 29 memo; and (3) its work on the valuation analysis
of L&H. There was ample evidence in the record upon which the
judge could have concluded that this conduct was neither unfair nor
deceptive. We consider each of the three instances identified
above in turn.
First, with regard to the Elliott call, the trial
testimony and Janet Baker's contemporaneous notes of the call
suggest that Wayner introduced Elliott as a European equities
analyst -- not, as plaintiffs now contend, as an expert on L&H
specifically. The district court did not clearly err in rejecting
plaintiffs' argument that Goldman misrepresented Elliott's
knowledge of L&H or otherwise acted unfairly or deceptively during
the call. Indeed, it is unclear what additional information
plaintiffs think they would have gained had Elliott been covering
L&H, or had Wayner mentioned the Asian earnings report to Elliott.
Janet Baker was aware of L&H's surging Asian revenues, and it is
doubtful that the Bakers would have changed their views on the
-25-
merger based on Elliott's telling them something that they already
knew.11 In fact, Chamberlain testified that it would not have been
important to her whether or not Elliott was covering L&H.
Second, turning to Goldman's due diligence concerns, the
district court found that "the Goldman team should have disclosed
their continuing due diligence concerns at the March 27 meeting or
on the March 23 conference call." Nonetheless, the court held that
their failure to do so was not "egregious" because Goldman had
already informed Chamberlain, who was in charge of due diligence at
Dragon, and the rest of the Dragon team about the due diligence
concerns. That finding was not error. Members of the Goldman team
testified at trial that they saw no need to raise those issues yet
again at the March 27 meeting because Goldman had made clear to
Dragon personnel that it was not satisfied with L&H's due diligence
responses. Plaintiffs have pointed to no evidence that anyone from
Dragon ever complained to Goldman that its work on the transaction
had been unsatisfactory or that it was expected to play a larger
11
Plaintiffs point to Elliott's testimony that, had he
known of the reported Asian revenues, he would have been
"s[k]eptical" because he "kn[e]w something about Asian languages,
and [he] would have really challenged this on the basis that the
phonetic structure makes it incredibly difficult to take a European
dictation software and apply it to -- to Asian languages." This
argument rings hollow. Elliott's hypothetical skepticism would
have been based not on his expertise as a financial analyst, but
rather on his (entirely coincidental) familiarity with Asian
languages. This is reason to doubt that Elliott would have been in
a better position to judge the technical plausibility of L&H's
success in Asia than the Bakers, who are experts in computer
dictation software.
-26-
role in the due diligence process. Further, despite the concerns
raised in the February 29 memo, Janet Baker had already signed a
handwritten deal with L&H on March 8. Goldman could have
reasonably believed, based on this development, that the deal had
essentially been agreed to and hence that raising further concerns
after this point would simply serve to irritate its client.
The Roth plaintiffs, noting that they were never informed
of Goldman's due diligence concerns because they never received a
copy of the February 29 memo, argue that Goldman's conduct was
unfair or deceptive as to them, even if was not unfair or deceptive
as to the Bakers. According to the Roth plaintiffs, Goldman
deceived them because it painted a rosy picture of the
transaction's prospects in the February 29 call with Elliott and in
the March 27 meeting and never told Bamberg and Roth of the
outstanding due diligence issues.
The district court rejected this contention "because the
Goldman bankers reasonably believed that Janet Baker and
Chamberlain, their main contacts at Dragon, would inform the rest
of Dragon's board and senior management about important events and
documents leading up to the merger." This conclusion is amply
supported in the record.12 Roth testified that Janet Baker and
Chamberlain were his "interface" with regard to the status of due
12
Insofar as the Roth plaintiffs mean to argue that this
finding was clear error, we disagree for the reasons stated in the
text.
-27-
diligence and that he "relied on Janet Baker to obtain information
on [L&H] including its financial condition in order to determine
whether to vote to approve the merger with L&H." Bamberg similarly
testified that he relied on Janet Baker to "keep[] both Bob and
myself up to date on major issues while not troubling us with
details."
The Roth plaintiffs' contention that "[t]hree Goldman
witnesses admitted knowing that the Roth [p]laintiffs . . . were
unaware of its due diligence concerns" is not supported by the
record. The Roth plaintiffs cite the following pieces of testimony
for their argument:
C From Wayner's deposition: "Q: You did not tell the people
assembled [at the March 27 meeting] that Goldman Sachs
had not obtained information it had requested? A:
Depends on how you phrase that question. There's a
subset of persons that knew that was our point of view.
So are you asking me whether no one in that room knew
that or did I mention it at this meeting?"
C From Fine's deposition: "We gave our advice . . . to all
the principals who were in the room at the board meeting.
We had talked to -- the Baker's [sic] had seen our books
where some of the issues had been raised. The memo had
gone to Mr. Waite. The majority or [sic] the people who
were capable of approving and not approving had seen our
reservations."
C From Smith's deposition: "Q: If Rich Wayner was not
satisfied with the due diligence that was obtained
regarding Asian revenues, customer agreements, licensing
agreements, related party transactions, would you have
expected Wayner to have expressed those views at the
March 27, 2000 board meeting? A: No. . . . I would not
have -- that to have been done in that form, no. It
would have been an embarrassment to Ms. Baker and the
deal leaders."
-28-
The Roth plaintiffs read this testimony to suggest that
Goldman knew that Roth and Bamberg were, as counsel put it at oral
argument, "in the blind," and intentionally withheld information
from them in order to make sure the transaction would go forward.13
To the contrary, it is reasonable to read Wayner's and Fine's
statements to mean that they saw no need to raise their due
diligence concerns yet again because they had already communicated
those concerns to most, if not all, of the individuals who had a
stake in the transaction. And it is reasonable to read Smith's
testimony as simply stating that he did not want to impede the
progress of the transaction because Janet Baker had already made it
known that she wanted to consummate the deal as quickly as possible
-- indeed, she had already agreed to the transaction in writing
three weeks before. The district court did not err in its
conclusion that Goldman did not act unfairly or deceptively in
failing to raise its due diligence concerns specifically with Roth
and Bamberg.
13
At oral argument, counsel were in disagreement as to
whether Roth and Bamberg, who held a minority of Dragon's stock,
could have blocked the merger with L&H had they wished to. The
parties submissions provide no guidance on this point. We need not
resolve the question to decide this case. The district court
apparently assumed that Roth and Bamberg could have vetoed the
transaction, because it found that the deal would not have gone
forward had Goldman disclosed its concerns to the Roth plaintiffs.
Yet the court also found that Goldman's conduct was not unfair or
deceptive. As explained above, that finding was not error.
-29-
The Roth plaintiffs have suggested that, because Judge
Saris found that the L&H transaction would likely not have gone
forward if Goldman had raised its ongoing concerns about due
diligence at the March 27 meeting, she was required to find a
violation of ch. 93A as a matter of law. We disagree. It is true
that cases from Massachusetts and this Circuit have defined a
"deceptive" act as one that "could reasonably be found to have
caused a person to act differently from the way he or she otherwise
would have acted." Incase Inc. v. Timex Corp., 488 F.3d 46, 57
(1st Cir. 2007) (quoting Aspinall v. Philip Morris Cos., 813 N.E.2d
476, 486 (Mass. 2004)); see also Grossman v. Waltham Chem. Co., 436
N.E.2d 1243, 1245 (Mass. App. Ct. 1982). But it cannot be that any
conduct gives rise to liability under ch. 93A by virtue of the mere
fact that the conduct affects a person's actions in a way that
eventually causes that person harm. Were that so, one could be
liable under ch. 93A simply for giving bad advice, no matter how
well-intentioned and well-founded the advice. That is not the law.
Indeed, as said, the SJC has instructed that even negligent
misrepresentations (which, by definition, "could reasonably be
found to have caused a person to act differently from the way he or
she otherwise would have acted") give rise to ch. 93A liability
only if they are "extreme" or "egregious." Marram, 809 N.E.2d at
1032.
-30-
Finally, with regard to Goldman's "professionally
negligent" financial analysis of the Dragon-L&H transaction, the
district court did not err in finding that this conduct was neither
unfair nor deceptive. In reaching its conclusion, the district
court properly took into account the jury's finding, based on
sufficient evidence, that Goldman was not negligent in rendering
professional services. Goldman raised a bevy of due diligence
issues in the February 29 memo. Plaintiffs have presented no
evidence that Dragon ever responded by asking Goldman to do further
due diligence work. Moreover, there is testimony that Goldman was
engaged primarily to raise questions and facilitate the merger, not
to lead the due diligence on Dragon's eventual merger partner.
Chamberlain -- not Goldman -- was the "quarterback" of due
diligence. The jury called it one way whether there was any
negligence at all; the district court called it another, but was
certainly entitled to consider the jury finding in weighing whether
Goldman had been unfair or deceptive.
In short, the district court properly determined that
Goldman's conduct, even if sloppy and unforthcoming, was not unfair
or deceptive. The court's factual findings are supported by the
record, and it correctly applied the ch. 93A legal standard to
those findings. We find no error in the district court's analysis
of plaintiffs' ch. 93A claims.
-31-
III.
The Roth plaintiffs contend that the district court erred
in rejecting their belated theory of Goldman's liability under 940
Mass. Code Regs. 3.16(2). Not so. The Roth plaintiffs waived any
claim under § 3.16(2) by failing to raise it before trial and
waiting until the jury had ruled against them on their common law
theories.
Under Mass. Gen. Laws ch. 93A § 2(c), the attorney
general is empowered to make rules and regulations defining the
"[u]nfair methods of competition and unfair or deceptive acts or
practices" that violate § 2(a). One such regulation provides that
an "act or practice is a violation of [ch. 93A] if . . . [a]ny
person or other legal entity subject to this act fails to disclose
to a buyer or prospective buyer any fact, the disclosure of which
may have influenced the buyer or prospective buyer not to enter
into the transaction." 940 Mass. Code Regs. § 3.16. In their
post-trial brief to the district court, the Roth plaintiffs argued
that Goldman's conduct in this case violated § 3.16 because Goldman
failed to disclose facts that would have influenced whether the
Roth plaintiffs agreed to vote for the Dragon-L&H merger (and thus
"buy" L&H stock). Plaintiffs did not raise this argument either
before or at trial. We agree with the district court that the Roth
plaintiffs waived any claim under § 3.16. See DCPB, Inc. v. City
of Lebanon, 957 F.2d 913, 917 (1st Cir. 1992) (plaintiff cannot,
-32-
after trial, "superimpose a new (untried) theory on evidence
introduced for other purposes"), superseded on other grounds, as
recognized in Lamboy-Ortiz v. Ortiz-Vélez, 630 F.3d 228, 243 n.25
(1st Cir. 2010).
The Roth plaintiffs contend that their general argument
that Goldman's failure to disclose relevant facts about the L&H
transaction violated ch. 93A was sufficient to put Goldman on
notice of the § 3.16 claim, but we are not persuaded. Goldman knew
only that it was defending against claims of "unfair or deceptive"
acts under ch. 93A, § 2. It had no warning of any claim that it
had per se violated § 2 via § 3.16 until after trial. See
Rodriguez v. Doral Mortg. Corp., 57 F.3d 1168, 1172 (1st Cir. 1995)
(plaintiff may not "leave defendants to forage in forests of facts,
searching at their peril for every legal theory that a court may
some day find lurking in the penumbra of the record"). To allow
the Roth plaintiffs to raise this claim so late would have
undoubtedly prejudiced Goldman. See Grand Light & Supply Co., Inc.
v. Honeywell, Inc., 771 F.2d 672, 680 (2d Cir. 1985) ("Where a
party seeks to apply evidence presented on a separate issue already
in the case to a new claim added after the conclusion of the trial,
the opponent may be unfairly prejudiced."); see also Lebanon, 957
F.2d at 917 (citing Honeywell for this proposition).
Even if the Roth plaintiffs had properly raised an
argument under § 3.16, we see no basis in present Massachusetts law
-33-
to credit the claim. The SJC's decision in Knapp Shoes Inc. v.
Sylvania Shoe Manufacturing Corp., 640 N.E.2d 1101 (Mass. 1994),
strongly suggests that § 3.16 applies only to transactions
involving consumers and not to transactions involving sophisticated
business entities.
In Knapp, the SJC held that 940 Mass. Code Regs.
§ 3.08(2), providing in relevant part that "[i]t shall be an unfair
and deceptive act or practice to fail to perform or fulfill any
promises or obligations arising under a warranty," applies only to
consumer claims under ch. 93A. Knapp, 640 N.E.2d at 1104. The
court reasoned that the other subsections in § 3.08 "use the term
'consumer' to denote the persons protected by their provisions, and
concern matters generally involved in consumer transactions." Id.
at 1105. Even though subsection (2), by its terms, did not limit
its application to consumers, the court found that the context of
the statute indicated that it did not apply to business-to-business
transactions. Id. ("Where the bulk of the regulation applies only
to consumers and their interests, and subsection (2) contains no
language suggesting that it was meant to apply to a broader class
of persons or interests, we conclude that the portion of subsection
(2) at issue was not intended to encompass a contract dispute
between businessmen based on a breach of . . . warranty . . . .").
The same reasoning is applicable here. Two of the four
subsections of § 3.16 mention "consumers" and concern consumer
-34-
protection issues. Subsection (3) makes an act or practice a
violation of ch. 93A if "[i]t fails to comply with existing
statutes, rules, regulations or laws, meant for the protection of
the public's health, safety, or welfare promulgated by the
Commonwealth or any political subdivision thereof intended to
provide the consumers of this Commonwealth protection." Subsection
(4), in similar fashion, makes an act or practice a violation of
ch. 93A if "[i]t violates the Federal Trade Commission Act, the
Federal Consumer Credit Protection Act or other Federal consumer
protection statutes within the purview of [ch.] 93A, § 2." Thus,
just as in Knapp, "[i]t is reasonably clear that, in drafting the
regulation, the Attorney General had in mind protection for
consumers against unfair or deceptive acts or practices." 640
N.E.2d at 1105; see also In re First New Eng. Dental Ctrs., 291
B.R. 229, 241 (D. Mass. 2003) (applying Knapp's reasoning to
conclude that § 3.16 does not apply to "business to business
transactions"); Callahan, Note, Massachusetts General Laws Chapter
93A, Section 11: The Evolution of the "Raised Eyebrow" Standard,
36 Suffolk U. L. Rev. 139, 157–58 (2002) (after Knapp, "courts may
apply similar reasoning to invalidate applicability of other
regulations to business-to-business transactions"); cf. Indus. Gen.
Corp. v. Sequoia Pac. Sys. Corp., 44 F.3d 40, 44 (1st Cir. 1995)
("A commentator has noted that section 11 'probably does not
contain a general duty of disclosure' . . . ." (quoting Gilleran,
-35-
The Law of Chapter 93A § 4:10 (1989 & Supp. 1994))). But see
Lechoslaw v. Bank of Am., 618 F.3d 49, 58 (1st Cir. 2010)
(suggesting that § 3.16 applies to businesses); Lily Transp. Corp.
v. Royal Inst'l Servs., Inc., 832 N.E.2d 666, 673–74 (Mass. App.
Ct. 2005) (same).
The Roth plaintiffs argue that § 3.16 is "general" and so
should not be read to exclude businesses from its scope. They note
that the preamble to the section provides that it does not "limit[]
the scope of any other rule, regulation or statute." But § 3.16 is
no more general than § 3.08, which likewise covered multiple
subjects and provided that it "in no way limits, modifies, or
supersedes any other statutory or regulatory provisions dealing
with warranties." See Knapp, 640 N.E.2d at 1104. In short, we
simply see no meaningful distinction between § 3.16 and § 3.08 that
would counsel against applying Knapp's reasoning to the former.
This is ultimately an issue for the SJC to resolve.14
IV.
Finally, plaintiffs argue that they are entitled to a new
trial because the district court erred in (1) admitting the
drafting history and Annex A of the Engagement Letter between
Goldman and Dragon and (2) instructing the jury regarding the
14
The Roth plaintiffs have not asked for certification of
this issue to the SJC.
-36-
relevance of the Engagement Letter and its drafting history. Both
of these contentions are without merit.
A. Admission of the Drafting History and Annex A
We review the district court's evidentiary rulings for
abuse of discretion. Enos v. Union Stone, Inc., 732 F.3d 45, 49
(1st Cir. 2013). If we find error, we reverse unless "it is highly
probable that the error did not affect the outcome of the case."
McDonough v. City of Quincy, 452 F.3d 8, 19–20 (1st Cir. 2006).
The district court properly applied state law in
admitting the Engagement Letter and its drafting history. In Nycal
Corp. v. KPMG Peat Marwick LLP, 688 N.E.2d 1368 (Mass. 1998), the
SJC set forth the requirements for a plaintiff asserting a claim of
negligent misrepresentation against a defendant who supplies
information for the guidance of others in business transactions.
Under Nycal, if the plaintiff and defendant are not in contractual
privity (as is the case here, because Goldman was engaged by
Dragon, not by plaintiffs), in order to succeed on a negligent
misrepresentation claim, the plaintiff must show that the defendant
had "actual knowledge . . . of the limited -- though unnamed --
group of potential [parties] that will rely on the [defendant's
advice], as well as actual knowledge of the particular financial
transaction that such information is designed to influence." 688
N.E.2d at 1371–72 (quoting First Nat'l Bank of Commerce v. Monco
-37-
Agency Inc., 911 F.2d 1053, 1062 (5th Cir. 1990)); see also
Restatement (Second) of Torts § 552 (1977).
Provisions of the draft Engagement Letter indicating that
Goldman was to be employed by individual stockholders were
explicitly removed from the final agreement. That is clearly
relevant to Goldman's knowledge as to whether individual
shareholders would rely on Goldman's financial advice, when the
plaintiffs expressly chose not to sign the agreement in order to
avoid the indemnification obligations which the signatory, Dragon,
undertook. Accordingly, the Engagement Letter and its drafting
history were relevant to both sets of plaintiffs' negligent
misrepresentation claim, see Fed. R. Evid. 401, and the plaintiffs
have not shown that their relevance was substantially outweighed by
a risk of unfair prejudice, see Fed. R. Evid. 403. The evidence
was admissible.15
Annex A was relevant to the case for the same reason as
was the drafting history. The final version of Annex A, like the
rest of the agreement, excluded any relevant reference to
"Stockholders," which further strengthens the inference that
Goldman did not intend for individual stockholders to rely on its
15
The drafting history of the Engagement Letter was not
barred by the parol evidence rule. That rule prohibits the
introduction of evidence of the circumstances leading to an
agreement's execution for the purpose of contradicting or changing
its terms. See ITT Corp. v. LTX Corp., 926 F.2d 1258, 1264 (1st
Cir. 1991).
-38-
financial advice. Thus, even though Annex A concerned Goldman's
liability for derivative, rather than direct, claims, the district
court did not abuse its discretion in admitting it. This is all
the more so given the district court's explicit instruction to the
jury that the exculpatory clause in Annex A "is inapplicable . . .
because the plaintiffs' claims are . . . direct claims for
themselves as individual shareholders." We assume that the jury
followed this instruction. United States v. George, 761 F.3d 42,
57 (1st Cir. 2014).16
Even if admission of Annex A was arguably an abuse of
discretion, any error was harmless, given the court's cautionary
instruction and the substantial amount of other evidence tending to
suggest that Goldman did not intend individual shareholders to rely
on its advice. See SEC v. Happ, 392 F.3d 12, 28–29 (1st Cir. 2004)
(admission of cumulative evidence was harmless error).
16
The Baker plaintiffs argue that Goldman's counsel made
improper arguments based on the Engagement Letter and its drafting
history in closing argument. We disagree. Counsel's comments are
fairly read as simply outlining the theory of relevance articulated
above -- the fact that the word "Stockholders" was removed from the
agreement makes it less likely that Goldman knew individual
stockholders would rely on its advice. In any event, plaintiffs
did not lodge a contemporaneous objection to Goldman's closing, and
the allowance of the statements certainly did not rise to the level
of plain error. See Portuges-Santana v. Rekomdiv Int'l Inc., 725
F.3d 17, 26 (1st Cir. 2013) (where party fails to object to
statements made in closing, claim of improper argument reviewed for
plain error).
-39-
B. Jury Instructions
We review de novo a claim that a jury instruction was
based upon an erroneous statement of the law. Hatch v. Trail King
Indus., Inc., 656 F.3d 59, 64 (1st Cir. 2011). "We review for
abuse of discretion 'whether the instructions adequately explained
the law or whether they tended to confuse or mislead the jury on
the controlling issues.'" Id. (quoting United States v. Silva, 554
F.3d 13, 21 (1st Cir. 2009)); see also Johnson v. Spencer Press of
Me., Inc., 364 F.3d 368, 378 (1st Cir. 2004) ("So long as th[e]
language properly explains the controlling legal standards and is
not unduly confusing or misleading, it will not be second-guessed
on appeal."). "We look at the instructions as a whole, not in
isolated fragments." Hatch, 656 F.3d at 64.
The plaintiffs objected to the last paragraph of the jury
instructions concerning the Engagement Letter on the ground that it
was "somewhat confusing." The instructions on the Engagement
Letter read as follows:
[L]et me just mention briefly this engagement
letter you've heard so much about, the
engagement letter.
The engagement letter is a contract
between Goldman Sachs and the company, Dragon
Systems. The shareholders were not parties to
the contract with one exception -- the so-
called exculpation clause. This clause only
applies to something in the law called
derivative actions by shareholders on behalf
of the corporation for damages suffered by the
corporation. That provision is inapplicable
here because the corporation no longer existed
after the merger and because the plaintiffs'
-40-
claims are what are known as direct claims for
themselves as individual shareholders. That's
why I keep saying, it's always the plaintiffs
as individual shareholders.
Because the shareholders were not
parties to the engagement letter, they cannot
sue for breach of contract. That's why you
don't see "breach of contract" in here
anywhere. However, Goldman Sachs may still be
held responsible for certain common law causes
of action. You may have heard the term
"torts." That's what we've just been talking
about for the last hour. These torts include
negligence, gross negligence, negligent
misrepresentation[,] fraud or intentional
misrepresentation, and breach of fiduciary
duty. Those claims require that the
plaintiffs establish that Goldman Sachs owed
them a duty as I have just instructed you.
However, in determining whether Goldman
Sachs is liable, you can consider all of the
evidence, including the engagement agreement,
the course of dealing between the parties
before and after the agreement, and the
history of negotiating the agreement.
There was no error in this jury instruction, nor was it
confusing.17 The jury was entitled to consider the agreement and
its drafting history in considering both sets of plaintiffs' tort
claims. As said, the evidence was relevant to plaintiffs'
17
We reject the Roth plaintiffs' argument that the
instruction was confusing because it encouraged the jury to lump
both sets of plaintiffs together in considering Goldman's
liability. First, the Engagement Letter and drafting history were
relevant to both sets of plaintiffs' claims because, as explained
above, they were probative of Goldman's intent. Second, the
district court explicitly instructed the jury that it should
consider the claims of each plaintiff individually. The jury
obviously followed that directive, as its answers to the questions
regarding Goldman's contribution claim do differentiate between the
various plaintiffs. For example, the jury found that Janet Baker
breached her fiduciary duty to Roth and Bamberg but that James
Baker breached his fiduciary duty to Bamberg, but not to Roth.
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negligence claims because it suggested that Goldman did not foresee
that individual shareholders would rely on its advice. It was
relevant to the intentional misrepresentation claims because, to
prove such a claim, a plaintiff must show that the defendant
intended to induce the plaintiff to act upon a false statement.
Masingill v. EMC Corp., 870 N.E.2d 81, 88 (Mass. 2007). And it was
relevant to the breach of fiduciary duty claims because a fiduciary
relationship exists only if the plaintiff justifiably reposed trust
in the defendant and the defendant knew of and accepted that trust.
Broomfield v. Kosow, 212 N.E.2d 556, 560 (Mass. 1965); see also
Maffei v. Roman Catholic Archbishop of Bos., 867 N.E.2d 300, 313
(Mass. 2007); Patsos v. First Albany Corp., 741 N.E.2d 841, 851
(Mass. 2001).18 The last paragraph of the quoted instruction was
both clear and substantively correct.
V.
We affirm the decision of the district court. Costs are
awarded to Goldman.
18
As Goldman notes, the district court instructed the jury
on these elements of the intentional misrepresentation and breach
of fiduciary duty claims, and plaintiffs did not object to those
instructions.
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