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Baker v. Goldman, Sachs & Co.

United States Court of Appeals, First Circuit

November 12, 2014

GOLDMAN, SACHS & CO., ET AL, Defendants, Appellees

As Amended November 17, 2014.

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[Copyrighted Material Omitted]

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[Copyrighted Material Omitted]

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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.

Before Lynch, Chief Judge, Torruella and Ripple,* Circuit Judges.


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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

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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 claims because of evidentiary errors and erroneous jury instructions. Finding no error, we affirm.


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 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 Engagement Letter stated

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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 " 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, " [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" ...

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