Appeal from the United States District Court for the Northern District of Illinois, Eastern Division.
No. 87 C 9853 Suzanne B. Conlon, Judge.
Before ESCHBACH, COFFEY, and MANION, Circuit Judges.
ARGUED SEPTEMBER 26, 1996
DECIDED FEBRUARY 14, 1997 *fn1
Plaintiff-Appellant, Cross-Appellee Medcom Holding Company ("MHC") filed a five-count complaint against Defendants-Appellees, Cross-Ap-pellants Baxter Travenol Laboratories, Inc. and Medtrain, Inc. ("Baxter" collectively) in November 1987. MHC alleged that Baxter engaged in a scheme to defraud MHC in the September 1986, sale of the stock of Medcom, Inc. ("Medcom"). This complaint has already resulted in three jury trials in the district court over the course of eight years and only one issue has come before this Court previously, on interlocutory appeal. See Medcom Holding Co. v. Baxter Travenol, 984 F.2d 223 (7th Cir. 1993). We assume familiarity with that decision. These cross-appeals, however, raise a number of new issues.
I. The Stock Purchase Agreement and Sale of Medcom
Baxter acquired Medcom in a stock purchase for more than $50 million in May of 1982. Medcom's primary business was the production and distribution of audiovisual and written training material for health-care providers and consumers, both in the United States and abroad. Medcom's subsidiary, Entertainment Partners, Inc. ("EPI"), also produced general entertainment films for television. Baxter owned Medcom for four years. During that time, Medcom suffered significant operating losses.
In 1986, Baxter sold to MHC all of the outstanding capital stock of Medcom for $3.77 million pursuant to a Stock Purchase Agreement (the "SPA"). In the SPA, Baxter made several representations and warranties as of the date of the SPA and as of the date of closing. The representations and warranties include the following: that no material fact was undisclosed that was necessary to prevent previous statements from being misleading; that all representations, statements, and information provided to MHC (including the schedules and financial statements contained in the SPA) were true in all material respects; and that Baxter would pay the amount of any overstatement in the September 30, 1986, balance sheet, which it represented had been prepared in accordance with generally accepted accounting principles ("GAAP").
Subsequent to MHC's purchase of Medcom, MHC discovered various facts that it claims were part of a scheme by Baxter to defraud MHC. In particular, MHC alleged that Baxter falsely represented and warranted that Medcom had a balance sheet with $10 million in assets at book value when Baxter knew that Medcom had a pertinent asset value of only $1 million. Among other evidence of this alleged scheme to defraud, MHC pointed to evidence that Baxter had written down Medcom's assets to a total of $1 million in precisely the same manner as the two earlier write downs, but this time the write-down was reflected only on the Medcom accounting records held at Baxter's corporate offices. It was not reflected on Medcom's September 30, 1986, balance sheet given to MHC. MHC also pointed to evidence that Medcom's Chairman and CEO, Robert Funari, had prepared an analysis of the realizable value of Medcom's assets that was several million dollars less than the value represented to MHC and that A.D. Little, a valuation firm, had conducted a preliminary appraisal that indicated that Medcom's assets were worth only $2.5 million.
Baxter presented testimony that Medcom's balance sheet was accurate, fairly presented, and in accordance with GAAP. Baxter also presented evidence that A.D. Little's valuation was a preliminary, unissued draft and did not include substantial fixed assets that were included in the sale to MHC. Baxter also produced testimony that Funari's personal valuation was based on market value, whereas the balance sheet concerned book value.
MHC alleged that Baxter had falsely represented the status of Medcom's marketable domestic training programs. The June 1986 offering memorandum for the stock, the "Blue Book," stated that Medcom had a "current library" of over 1600 audiovisual training programs that it marketed in the United States for nurse, physician and consumer health education. The Blue Book also stated that the Famous Teachings in Modern Medicine ("FTMM") and the Video Journal of Medicine Series for Physician Education "currently contain over 500 active programs . . . ." MHC alleged that two-thirds of the programs were neither "current" nor "active" and could not be sold for current medical instruction. Baxter argued that the Blue Book simply contained an accounting of the number of programs, not a representation as to the contents or marketability of the programs. Baxter also countered MHC's claim with evidence that the vast bulk of programs in Medcom's library were "ethically saleable" in 1986.
MHC alleged that Baxter falsely represented in the Blue Book the existence of a pending $3 million sale of programs to the Daharan Medical Center in Saudi Arabia. Baxter did not disclose that it had information that this sale would not take place and that the sale of any additional programs in Saudi Arabia was unlikely. MHC further alleged that Baxter failed to disclose that millions of dollars worth of previous sales were the results of bribes, not the quality of the product. Baxter introduced evidence that prospective buyers were told "that they should put no value on the Saudi Arabian business when looking at Medcom." (R. 658-4 at 384.)
MHC also alleged that Baxter did not disclose that the Saudi programs had been the subject of a law suit brought by Medcom's founder, Richard Fuisz, (the "Fuisz litigation") against Baxter and Medcom, alleging improper payments to Saudi officials and their family members. Nor did Baxter disclose that the settlement of the suit subjected the purchaser of Medcom to potential liability. Baxter produced evidence that the Fuisz litigation was settled before Baxter sold Medcom to MHC, Baxter was responsible for payment of the settlement, and Baxter was bound by the confidentiality provisions of the settlement agreement. Therefore, Baxter was not obligated to disclose the litigation.
MHC alleged that Baxter misrepresented in the June 1986 Blue Book the existence of a newsletter joint venture with the UCLA teaching hospital despite the fact that Baxter already had cancelled this venture by letter in April 1986. Baxter claimed that Medcom had simply given notice to UCLA that Medcom would terminate its contract with UCLA effective October 31, 1986. Baxter claimed that notice was given once Baxter decided to sell Medcom so that any future buyer would not be contractually obligated to keep publishing the unprofitable newsletter.
MHC also alleged that Baxter had breached the SPA as it related to Medcom's stock in EPI. Under the SPA, Baxter was obligated to transfer certain stock in EPI to MHC. Baxter did not transfer this stock until the district court ordered it to do so. This Court affirmed that order of specific performance in Medcom Holding Co., 948 F.2d 223. The parties now dispute what amount of equitable compensation MHC should receive based on Baxter's possession beyond the date the stock should have been transferred pursuant to the SPA.
Based on these and other similar claims, MHC alleged that Baxter had schemed to defraud MHC and was liable for damages on a number of theories. Baxter disputed all the claims and argued both that it was not liable and that it had caused MHC no damages.
The first trial, Medcom I, took place over the course of six weeks in 1990. Of the five counts in MHC's original complaint, only three of the counts were tried: Count I alleged violations of Section 10-b of the Securities Exchange Act of 1934, 15 U.S.C. sec. 78j(b) and Rule 10b-5, 17 C.F.R. sec. 240.10b-5 (collectively "Rule 10b-5"); Count IV alleged fraud under Illinois common law; and Count V alleged breach of contract. The Medcom I jury found Baxter liable on all three counts and awarded to MHC compensatory damages in the amount of $5,725,000 and punitive damages in the amount of $10,000,000. The jury also specifically found that Baxter breached the SPA as it related to EPI. *fn2
On the special verdict form, the jury made specific findings on actual damages. The jury awarded $3,500,000 on MHC's claims relating to Medcom's domestic programs and $2,225,000 on MHC's claims relating to Medcom's September 30, 1986 balance sheet. The jury awarded zero damages on MHC's claims regarding the UCLA Newsletter, the FTMM physician programs, and Medcom's Saudi Arabian operations. The Medcom I jury further broke down these awards to $1 million on Count I, $3 million on Count IV and $1,725,000 on Count V.
Baxter brought a post-trial motion for judgment notwithstanding the verdict or for a new trial. The district court granted the motion in part and denied it in part. The district court sustained the liability verdict on all three counts, noting that there was sufficient evidence to support the jury's verdict of common law fraud, Rule 10b-5 fraud and breach of contract with respect to both the domestic programs and the balance sheet. The district court, however, vacated the compensatory damages award, granting Baxter a new trial on damages (but not on liability) and reserved ruling on the award of punitive damages. The court later issued a specific performance decree requiring Baxter to transfer EPI to MHC.
The second trial, Medcom II, took place over the course of two weeks in 1991 and was limited to the two specific damages claims for which the Medcom I jury had awarded compensatory damages. MHC sought $9,000,000 for the balance sheet overstatement and $4,300,000 for the domestic programs' lost profits. The jury returned an award of $9,000,000 for the 10b-5 fraud, an award of $4,300,000 for the breach of contract, and $0 for the common law fraud. The verdict form did not ask the jury to divvy the damages between the balance sheet overstatement and the domestic programs' lost profits.
The district court denied MHC's motion to enter judgment of $13.3 million on the verdict by cumulating the awards. The court determined that the $4.3 million award was reasonable based on the evidence, but found that the jury's $9 million damage award on the Rule 10b-5 claim was insupportable. The court held that there was no rational basis upon which the Medcom II jury could have found that the company's value at the time of Medcom's purchase was $9 million less than the $3.77 million purchase price. Ultimately, the court found the verdict irreconcilable, stating:
[MHC] offered the same evidence and the court instructed the jury that the same measure of damages applied to both the fraudulent misrepresentation and breach of contract claims. Yet the jury returned a verdict of "zero" on the fraudulent misrepresentation claim, and a verdict of $4.3 million on the breach of contract claim. Thus, it appears that the verdicts on Counts IV and V are irreconcilable on any rational basis. The court finds that, under all the circumstances, the jury's verdicts on all three damages claims are tainted with error and result in a miscarriage of justice. Accordingly, a new trial is warranted. (MEMORANDUM OPINION AND ORDER, 3/24/92, 1992 WL 67873 at *4.)
The district court subsequently reconsidered the presentation of evidence regarding liability. On March 3, 1993, the court vacated the Medcom I liability verdict because it determined that a damages-only trial was inappropriate. The district court ordered a retrial of both liability and damages, but limited the retrial to the two specific claims for which MHC had initially received compensatory damages from the Medcom I jury: MHC's claims relating to Medcom's domestic programs and Medcom's September 30, 1986 balance sheet. The court also granted Baxter judgment as to punitive damages, vacating the Medcom I jury's award of $10 million.
MHC then filed a motion seeking to present evidence beyond the two specific claims (i.e., evidence of the Fuisz litigation, the Saudi Arabian operations, etc.) as evidence of Baxter's alleged scheme to defraud both for purposes of liability and damages. The district court denied MHC's motion in its entirety, but indicated that MHC could attempt to introduce this evidence under Rule 404(b) of the Federal Rules of Evidence. In response, MHC filed an offer of proof, which the court denied in its entirety.
The third trial, Medcom III, took place between September 15, 1994, and October 4, 1994. The district court excluded all evidence except the evidence related to Medcom's domestic programs and Medcom's September 30, 1986 balance sheet. The Medcom III jury returned a verdict in favor of Baxter on all counts. The district court denied MHC's post-trial motions seeking reconsideration of the district court's prior orders and reinstatement of the prior verdicts or a new trial.
Between Medcom I and Medcom III, one issue reached this Court on interlocutory appeal. On January 26, 1993, this Court affirmed the district court's specific performance decree regarding EPI. See Medcom Holding Co., 984 F.2d 223. Baxter transferred the EPI stock to MHC on March 3, 1993. The district court then referred the matter to a magistrate judge for recommendation regarding an accounting of the benefits received by Baxter from its wrongful possession of EPI from September 30, 1986, to March 3, 1993. The magistrate judge held a hearing and issued a report. Both parties raised objections to the magistrate judge's recommendations. The district court sustained both parties' objections in part, and entered judgment for MHC in the amount of $1,117,645.
III. The Parties' Positions on Appeal
MHC raises a host of issues, seriatim. First, MHC requests that we reinstate judgment on the Medcom I verdict in its entirety. MHC argues that the district court improperly invaded the jury's province when it vacated the Medcom I jury's $5.725 million compensatory damage award because the court concluded that the jury could not have made a rational downward adjustment of MHC's damages computations. MHC also argues that the court improperly substituted its judgment for the jury's when it vacated the award of punitive damages.
Second, and alternatively, MHC urges this Court to enter judgment on the Medcom II verdict. MHC contends that the district court erred in vacating the Medcom II jury's award of $13.3 million and in vacating the Medcom I jury's liability verdict, which the court had originally determined was fully supported by the evidence. Third, MHC seeks a new trial. MHC asserts that the district court improperly limited MHC's proof of liability and damages in Medcom III. In addition, MHC believes that it was entitled to try its punitive damages claim at Medcom III. Fourth, MHC seeks prejudgment interest if this Court chooses to ...