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Skycom Corp. v. Telstar Corp.

decided: March 3, 1987.

SKYCOM CORPORATION AND GERALD M. WALTERS, PLAINTIFFS-APPELLANTS,
v.
TELSTAR CORPORATION, DEFENDANT-APPELLEE



Appeal from the United States District Court for the Eastern District of Wisconsin, No. 83-C-0625, Robert W. Warren, Chief Judge.

Flaum and Easterbrook, Circuit Judges, and Will, Senior District Judge.*fn* Will, Senior District Judge, concurring in part and dissenting in part.

Author: Easterbrook

EASTERBROOK, Circuit Judge.

Skycom Corp. and Telstar Corp. provide pay-TV services such as Home Box Office to customers by microwave transmissions, bypassing the cables often used to convey the signals. The assets of their line of business include the radio dishes needed to receive signals from satellites or local microwave repeaters, licenses from the FCC and local governments to set up transmission and reception equipment, and contracts with customers. Skycom operated principally in and near Milwaukee but was trying to enter the Chicago market; Telstar operates nationwide. In 1982 Skycom and its president (and sole stockholder) Gerald Walters opened negotiations with Telstar to sell Skycom's assets to Telstar.

I

Telstar, like Skycom, was interested in the Chicago market. Satellite Television, Inc. (Sat-Tel), a third firm, had a license to transmit pay-TV signals within Chicago. Walters tried to acquire Sat-Tel and its license. WGGO, Inc., a shell corporation formed by attorney Stephen Schlegel at Walters's request, acquired on July 29, 1982, the right to negotiate further concerning Sat-Tel's stock. Schlegel nominally owned all of the stock of WGGO, but Walters was entitled to buy the stock from Schlegel. The contract between Sat-Tel and WGGO called for WGGO to put up $10,000 in earnest money, which would give WGGO negotiating rights through August 31, 1982. Shortly after signing the July 29 contract on behalf of WGGO, Walters called the president of Telstar to offer Skycom's assets.

The negotiations between Skycom and Telstar progressed quickly. On August 21 Telstar sent Walters a letter outlining the details of an acquisition. Walters proposed amendments in a letter dated August 25. Telstar replied with a letter dated September 1, accepting most of Walters's proposals. This letter sets out "the terms and conditions of our [Telstar's] agreement in principle to acquire the assets of Skycom . . . . Your [Walters's] signature on this letter will indicate your and Skycom's acquiescence and agreement to the terms and conditions outlined herein." The letter enumerates both terms (such as a promise to give Walters 200,000 shares of Telstar stock and employ him for three years) and conditions (such as limitations on the liabilities of Skycom that may exist at the time of the acquisition). Paragraph 5 of the letter states:

You are warranting that you hold the sole ownership of WGGO, Inc., an Illinois corporation, which is in the final stages of a negotiation to purchase shares of stock in Satellite Television, Inc. from Lawrence A. Myers and Earl J. Niemoth (the "SAT-TEL Agreement"). Telstar shall have the right to continue the negotiations on the SAT-TEL Agreement in place of WGGO, Inc. The negotiations shall continue on the basis of the draft agreement attached hereto and Telstar shall also meet the requirement of the earnest money deposit of $10,000 while further negotiations continue.

The penultimate paragraph of the letter contains a promise by Walters not to disclose the terms, conditions, or "even the existence of these negotiations" and a pledge by Walters that "there will be no other negotiations by you with any other entity concerning these business transactions during the course of these negotiations with Telstar." Several paragraphs of the letter refer to a "formal agreement" to be signed later, and in the final paragraph Telstar promises to "work diligently to conclude this transaction expeditiously." One "contingent condition" contained in the letter states: "the purchase of the [Skycom] assets envisioned hereunder shall be completed on or before September 15, 1982."

Walters signed this letter on September 5, 1982, under the word "Accepted" that Telstar had typed at the close. He returned it to Telstar. He also put Telstar in touch with the shareholders of Sat-Tel, ceased negotiating with Sat-Tel himself, and advised Telstar how it might deal with a rival bidder for Sat-Tel. Walters told Schlegel to continue the negotiations on Telstar's behalf and bill Telstar for all work after August 24; Schlegel did so, and Telstar agreed to pay the bills. Telstar remitted $10,000 to Schlegel to hold as earnest money. Telstar acquired Sat-Tel on November 15.

But all had not gone well. WGGO's option had expired on August 31, 1982, five days before Walters signed the letter; WGGO never did put up the $10,000. Walters's "warranty" in paragraph 5 that he was the only owner of WGGO was false, although perhaps harmlessly so. Some other points covered in the letter proved troublesome. Walters was unable to reduce Skycom's debt to the level specified. The deal did not close on September 15. Walters was unable to reduce the debt even by November 15, an extended date the parties began using. In a letter dated November 10, 1982, Walters's lawyer informed Telstar that the liabilities remained outstanding and also declined to complete the deal on the ground that the 200,000 shares of stock would not be liquid. The September 1 letter referred to the securities as "200,000 shares of Telstar investment stock, appropriately legended pursuant to SEC regulations."*fn1 Walters chafed at the restrictions on reselling this stock and suggested substituting either registered stock or $70,000 in cash. Telstar did not accept either alternative.

The deal came apart. Telstar asserted that Skycom was not sufficiently profitable. ("Contingent condition" 5 in the September 1 letter is that "the intended business operations are deemed practicable by Telstar.") Telstar walked away with the Sat-Tel license (obtained directly from Sat-Tel); Walters was left with Skycom. Walters believes that the negotiations were a ruse to acquire the Sat-Tel license and that Telstar never intended to close. Telstar replies that it wanted to complete the transaction but could not because Skycom carried excess liabilities and Walters balked at the terms contained in the letter. Telstar also asserts that the warranty in paragraph 5 was false -- both because Walters did not own WGGO and because by September 1 WGGO had no ongoing negotiations with Sat-Tel that it could transfer to Telstar.

In April 1983 Skycom and Walters filed suit in a Wisconsin court. The complaint alleged that the letter of September 1 is a contract and demanded specific performance: 200,000 shares of Telstar stock; $146,000 for lost salary and bonus; 20% of Telstar's profits from its Chicago and Milwaukee operations; and the assumption of Skycom's debts. Telstar removed this suit to federal court on the basis of diversity of citizenship, see 28 U.S.C. §§ 1332(a)(1) and (c), 1441(a). Skycom and Walters amended their complaint in February 1984 to add damages claims sounding in breach of contract, fraud, misrepresentation, and racketeering under civil RICO, 18 U.S.C. §§ 1962(b), 1964. The district court granted Telstar's motion for summary judgment, holding that the text of the September 1 letter reveals that the parties contemplated a subsequent definitive agreement. As a result, the judge concluded, the September 1 letter is not a contract. The judge did not discuss the claims sounding in fraud or RICO. The parties agree on the facts, although they vigorously dispute the inferences that may be drawn.

II

The letter of September 1 describes itself as an "agreement in principle", the sort of depiction that regularly is taken as an expression of a desire not to be bound. E. Allan Farnsworth, Contracts 117 n.3 (1982) (collecting cases). The letter speaks of a "formal agreement" that is to be signed by September 15. The letter contains representations that must be checked and undertakings to be completed, such as Skycom's promise to reduce its debt to a specified level. On top of that, the letter contains two clauses that give Telstar a right to back out. Paragraph 2 states that the deal will proceed only if the lenders on the two notes Telstar agrees to purchase "will agree to refinance the notes on terms acceptable to Telstar." "Contingent condition" 5 is that "the intended business operations are deemed practicable by Telstar." A natural reading of this document is that the parties have agreed on some terms (such as the number of shares of stock Walters will receive) but left open others (such as the rate of interest Telstar will pay on the debts it assumes) and have recognized the need to tie down these open terms before closing the deal.

The letter could be treated as an "agreement to agree" on the open terms. There may be a commitment to close the deal, although perhaps with an adjustment of the price if Skycom cannot reduce its debt or the operations are not "practicable" with a given rate of interest. As an "agreement to agree", however, it is not enforceable. The parties agree that this case is governed by the law of Wisconsin. Under Wisconsin law, agreements to agree do not create binding obligations. See Witt ...


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