Shepard v. State Auto. Mut. Ins. Co.

• Decision Date: 14 September 2006
• Docket Number: No. 05-3567.,05-3567.
• Parties: Gregory M. SHEPARD and American Union Insurance Company, Plaintiffs-Appellants, v. STATE AUTOMOBILE MUTUAL INSURANCE COMPANY and State Auto Financial Corporation, Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 742

463 F.3d 742

Gregory M. SHEPARD and American Union Insurance Company, Plaintiffs-Appellants, v. STATE AUTOMOBILE MUTUAL INSURANCE COMPANY and State Auto Financial Corporation, Defendants-Appellees.

No. 05-3567.

United States Court of Appeals, Seventh Circuit.

Argued April 11, 2006.

Decided September 14, 2006.

Bryce H. Bennett, Jr., Raymond T. Seach (argued), Riley, Bennett & Egloff, Indianapolis, IN, for Plaintiffs-Appellants.

John W. Zeiger, Stuart G. Parsell (argued), Zeiger, Tigges, Little & Lindsmith, Columbus, OH, John D. Nell, Wooden & McLaughlin, Indianapolis, IN, for Defendants-Appellees.

Before FLAUM, Chief Judge, and WILLIAMS and SYKES, Circuit Judges.

WILLIAMS, Circuit Judge.

The plaintiffs-appellants sued the defendants, claiming that the defendants breached a confidentiality agreement by relying upon the plaintiffs' confidential disclosures to acquire Meridian Insurance Group, Inc. Because the plaintiffs cannot establish either causation or damages, we affirm the district court's grant of summary judgment to the defendants.

I. BACKGROUND

This case centers around the efforts of plaintiff-appellant Gregory Shepard and the defendants to acquire Meridian Insurance Group, Inc. and its affiliated companies (collectively, "Meridian"). Shepard is chairman and president of co-plaintiff-appellant American Union Insurance Company, a company which has been in his family for three generations and which Shepard now essentially owns. He was the largest shareholder (20.26% shareholder) in rival Meridian, and, after several failed courtship attempts directly with Meridian, Shepard approached another rival, the defendants-appellees, State Automobile Mutual Insurance Company and State Auto Financial Corporation (collectively, "State Auto"), to discuss a joint effort to acquire Meridian, perhaps by hostile takeover. Like Shepard, State Auto had been attempting to purchase Meridian for several years and, unbeknownst to Shepard, was in the midst of a new round of negotiations with Meridian when Shepard approached State Auto with his business proposal.

On September 27, 2000, Shepard spoke with State Auto's Chairman and CEO, Bob Bailey, and proposed a meeting to discuss a potential joint effort to acquire Meridian. That same day (or shortly thereafter), Bailey signed a confidentiality agreement that prevented State Auto (and its officers) from disclosing any non-public information discussed during the meeting or trading any securities in Meridian as a result of any information disclosed to State Auto during the meeting.

On October 2, 2000, Shepard and Bailey, and various other officers and attorneys from both companies, met at State Auto for approximately two hours. During this meeting, Shepard presented three exhibits that illustrated his proposed valuation of Meridian and included some strategic issues to consider in the purchase of Meridian including, among other things, certain concerns regarding the correct pricing of Meridian's stock options (issues that State Auto's Chief Financial Officer (CFO) apparently had failed to consider). Several of Shepard's analyses contained significant mathematic and analytic errors, including a $114 million double-counting error. At the end of the meeting, Bailey informed Shepard that he would not go along with Shepard's proposal and the two parted ways.

According to Shepard, although State Auto refused his business offer, it nonetheless impermissibly relied upon his analyses and suggestions in a subsequent meeting with Meridian, where the State Auto-Meridian merger was consummated. On October 5, 2000, just three days after the confidential meeting with Shepard, State Auto's CFO revised his financial analysis pertaining to the potential Meridian acquisition. State Auto's analyses now included — for the first time — certain financial information that had been presented by Shepard at the confidential meeting, including the proper consideration and valuation of outstanding Meridian stock options. The next day, on October 6, 2000, Bailey met with Meridian's CEO and CFO to discuss State Auto's proposed purchase of Meridian. Meridian's CEO, Norma Oman, testified that Bailey informed her at the very outset of the meeting that he had just had confidential discussions with Shepard, although both Bailey and Oman contend that the substance of those discussions was not revealed by Bailey. Oman also testified that Bailey had told her that Shepard was "aware of every element of the September 7th letter" that Bailey had written to Oman. This letter outlined an initial offer and stated that Shepard "expected to be paid more than other shareholders." In addition, Oman's notes from the meeting with Bailey included several references to Shepard, including such entries as "Shepard mtg on 10/2 with Bailey" and "will have litigation from Shepard."

By the end of this meeting, Bailey and Oman agreed to the key terms of State Auto's acquisition of Meridian. The deal was announced publicly approximately two-and-a-half weeks later, on October 25, 2000. State Auto's acquisition of Meridian required Shepard (along with all other public shareholders) to tender his shares to the new corporation in exchange for a $30 per share price. At the time of the transaction, Shepard owned approximately 1.5 million shares. The Meridian acquisition closed on May 31, 2001.

Shepard sued State Auto, alleging that it had breached their confidentiality agreement both by revealing protected confidential information to Meridian personnel and trading in Meridian stock as a result of such confidential information. The district court granted the defendants' motion for summary judgment, holding that Shepard could not establish any of the elements of his breach of contract action. Shepard now appeals.

II. ANALYSIS

Shepard's claims fail because the undisputed facts show that he cannot establish either causation or damages as a matter of law. Under Indiana law (which controls in this diversity action), causation is an essential element of liability in a breach of contract claim. Parke State Bank v. Akers, 659 N.E.2d 1031, 1035 (Ind. 1995). "As in tort law, so in contract law, causation is an essential element of liability." Wisc. Knife Works v. Nat'l Metal Crafters, 781 F.2d 1280, 1289 (7th Cir.1986). Thus, a plaintiff must prove that the alleged breach of contract was a cause in fact of his loss, which requires a showing that the breach was a "substantial factor" in bringing about the plaintiff's damages. See generally Lincoln Nat'l Life Ins. Co. v. NCR Corp., 772 F.2d 315, 320 (7th Cir.1985). Although causation is normally a question of fact for the jury, see INS Investigations Bureau v. Lee, 784 N.E.2d 566, 575 (Ind.Ct.App.2003), summary judgment is appropriate when the undisputed facts establish that a plaintiff cannot show the requisite causation as a matter of law. See Buckner v. Sam's Club, Inc., 75 F.3d 290, 293 (7th Cir.1996) (affirming summary judgment because the plaintiff could not establish the "critical element of causation"); Harris v. Owens-Corning Fiberglas Corp., 102 F.3d 1429, 1433 (7th Cir.1996) (same).

Under Indiana law, a plaintiff carries the burden to plead and prove damages. Lincoln Nat'l Life Ins. Co., 772 F.2d at 320. Importantly, "[a] mere showing of a breach of contract does not necessarily entitle a plaintiff to damages." Id. Instead, a plaintiff is limited to recovering only the losses actually suffered from the breach, and an injured party may not be placed in a better position than he would have enjoyed if the breach had not occurred. Fowler v. Campbell, 612 N.E.2d 596, 603 (Ind.Ct.App.1993). Moreover, damages cannot be based on mere speculation and conjecture. Rather, a plaintiff must have adequate evidence to allow a jury to determine with sufficient certainty that damages in fact occurred, and, if so, to quantify such damages with some degree of precision. See id.; Turbines v. Thompson, 684 N.E.2d 254, 258 (Ind.Ct. App.1997); Fowler, 612 N.E.2d at 603. Thus, "[a] damage award must be referenced to some fairly defined standard, such as cost of repair, market value, established experience, rental value, loss of use, loss of profits or direct inference from known circumstances." Fowler, 612 N.E.2d at 603.

Although the parties separate the issues of causation and damages, these two issues are inextricably linked in this case. See Wisc. Knife Works, 781 F.2d at 1289 (noting that the arguments that a party "sustained no damage from the alleged breach of contract" or that "the alleged breach was not causally related to that damage" amount to "the same thing"). That is, they both boil down to the predicate issue of whether Shepard can present sufficient evidence to establish that State Auto's purported misuse of his protected disclosures¹ was a substantial factor in Shepard receiving what he contends to be the inadequate consideration of $30 per share cash-out. In the district court, Shepard advanced two theories of causation and damages. First, he advanced a "lost business opportunity" theory, in which he claimed State Auto's breach precluded him from purchasing Meridian directly. He wisely abandoned that theory on appeal in light of the undisputed evidence that Meridian's Board of Directors had an unmitigated dislike of Shepard and, as a result, was extremely unlikely to have approved any tender offer by him. In fact, the board had rejected his two prior offers: an August 30, 2000 initial offer of $20 per share (rejected on September 8, 2000), and then an amended offer on September 18, 2000 of $27 per share (rejected on September 21, 2000), both of which directly preceded State Auto's $30 per share offer. Shepard's second theory rests on the contention that Meridian shares were worth as much as $45 per share and therefore Shepard's forced cash-out at $30 per share was a substantial loss. Shepard owned approximately 1.5 million shares, which would translate to a loss...