John E. Trytko, Jr. v. Hubbell, Inc., Cross-Appellee
Docket: 93-1740, 93-1857
Court: Court of Appeals for the Seventh Circuit; October 6, 1994; Federal Appellate Court
John E. Trytko, Jr. filed a three-count amended complaint against Hubbell, Inc. in a diversity case involving allegations of negligent misrepresentation, constructive fraud, and a violation of Indiana Blue Sky laws. The claims were related to the expiration dates of stock options granted to Trytko, who served as president of Raco, Inc., acquired by Hubbell in 1981. The district court granted judgment as a matter of law for Hubbell on the constructive fraud and Blue Sky law counts, allowing only the negligent misrepresentation claim to proceed to jury trial, which resulted in a $629,300 verdict for Trytko. Hubbell's post-trial motions for judgment notwithstanding the verdict and a new trial were denied, leading to its appeal concerning Count I, while Trytko cross-appealed the dismissal of Count II. The court affirmed the jury verdict for Trytko on Count I but reduced the damage award by $95,000, reflecting the option price.
Trytko's retirement discussions with Hubbell officials before his June 1, 1985 retirement included a meeting where he was misinformed by Hubbell's general counsel, Richard Davies, about the duration he had to exercise his stock options. Trytko contended that he was incorrectly advised he could exercise the options until their expiration date, while Hubbell presented a conflicting account of the conversation.
Trytko noted the years 1991, 1992, and 1993 on his stock option record during a conversation with Davies, who changed the subject rather than addressing Trytko's comments. Trytko later recorded these dates on the stock option document. Davies asserts he informed Trytko multiple times about the three-year limit for exercising stock options for retired employees, claiming Trytko understood this rule without asking questions. Although Trytko exercised his qualified stock options shortly after retiring, he waited over three years to address his non-qualified options. On December 5, 1988, Trytko contacted Davies to exercise remaining options, only to learn they had expired on June 1, 1988. Trytko referenced notes from a 1985 meeting that suggested a ten-year term for the options, prompting Davies to request a copy of those notes. Attempts to resolve the dispute through correspondence were unsuccessful, leading Trytko to file a lawsuit on May 31, 1990. The trial commenced on January 6, 1993, but the court dismissed two claims related to constructive fraud and Indiana's Blue Sky laws, allowing only the negligent misrepresentation claim to proceed. During the trial, evidence revealed that Hubbell began sending expiration reminder notices in January 1988 but did not notify Trytko. Additionally, evidence presented showed the significant increase in stock value had Trytko been able to exercise his options timely, ultimately leading to a jury verdict in favor of Trytko for $629,300 in damages. Hubbell's post-trial motions were denied, and Hubbell appealed the verdict, while Trytko cross-appealed the dismissal of his constructive fraud claim. The court must apply Indiana law as it would be interpreted by its courts.
The absence of a definitive ruling from the state supreme court and contradictory opinions from state appellate courts complicates the determination of applicable state law. In such cases, federal courts must carefully analyze evidence to predict how the highest state court would rule. Indiana appellate courts historically did not recognize the tort of negligent misrepresentation, as seen in several earlier cases. However, in Eby v. York Division, the court acknowledged this tort in the specific context of employer-employee relationships, reversing a summary judgment against an employer who made negligent misrepresentations regarding future employment. The court emphasized the employer's duty to protect employees from their own negligence, applicable even to economic injuries. Subsequent decisions, however, have largely confined the recognition of negligent misrepresentation to employment contexts and denied its application in professional opinion scenarios. The Eby ruling is limited in scope, and Indiana courts have consistently refused to expand the tort beyond employment-related cases. Federal district courts in Indiana have echoed this narrow interpretation. Overall, while negligent misrepresentation is recognized in limited circumstances within employment relationships, it is not broadly accepted in Indiana law.
Courts in Indiana are divided on the recognition of the tort of negligent misrepresentation and the applicable circumstances. The case of Eby is highlighted as the most comprehensive examination of this tort, yet Indiana courts have limited its application to employment situations without extending its rationale. Despite this, Eby has not been overruled by higher courts, suggesting that Indiana recognizes the tort in situations closely resembling Eby. In the current case, Trytko's claims are deemed sufficiently analogous to Eby, focusing on whether an employer, through an agent, failed in its duty by making false representations that the employee relied upon to their detriment. The district court correctly allowed the jury to decide on the claim.
Hubbell argues that Trytko has not shown entitlement to damages, prompting a review of how Indiana courts would address the matter, though no clear precedent exists on damages for negligent misrepresentation. The analysis draws on opinions from other jurisdictions and legal treatises, particularly referencing Section 552 of the Restatement, which outlines the elements of the tort. Section 552B specifies the damages recoverable, including the difference in value between what the plaintiff received and the amount paid, and excludes benefits from the contract with the defendant. The out-of-pocket rule is established as the measure of damages, focusing on the plaintiff's loss rather than potential gains from the transaction. This rule is explained by comparing the values involved and clarifying that it does not account for the benefit of the bargain.
Out-of-pocket damages are defined as pecuniary losses incurred due to reliance on a misrepresentation, applicable when a buyer uses a product believing it to be suitable for a purpose for which it is not, or incurs preparation expenses based on a false representation. In contrast, the benefit-of-the-bargain rule allows a plaintiff to recover the difference between the actual value received and the value promised. The Restatement adopts out-of-pocket damages for innocent misrepresentations and benefit-of-the-bargain for fraudulent ones. Courts have generally supported that plaintiffs in negligent misrepresentation cases may recover only out-of-pocket damages. Notable cases, such as Rosales and First Interstate Bank, reflect this standard. In Gediman, liability was found under the Restatement, awarding damages based on the value difference between the chosen and optimal benefit options. The Ninth Circuit clarified that this award was not benefit-of-the-bargain but rather the difference between what was given up and what was received. This distinction between out-of-pocket and benefit-of-the-bargain damages is further supported by the Cunha case and is also recognized in Lewis, although some jurisdictions view Lewis as a narrow exception where out-of-pocket recovery does not suffice to restore the injured party.
In Lewis, the defendant agent misrepresented to the plaintiff that her deceased husband had purchased a life insurance policy, when in fact he had bought an annuity. Upon his death, the plaintiff discovered the truth when attempting to redeem what she thought was the insurance policy. The court awarded her damages equivalent to the death benefit of the nonexistent policy, rather than just the return of premium payments, because she relied on the defendant's misrepresentations and did not seek alternative insurance. This decision highlighted the distinction between reliance and expectancy damages. Section 552B(2) prohibits recovery of expectancy damages arising from negligent misrepresentations but allows recovery for reliance damages, which are based on what the plaintiff forewent due to the misrepresentation. The Lewis ruling recognized that the plaintiff's recovery was for the pecuniary loss resulting from reliance on the misrepresentation, not a benefit from a hypothetical bargain. In a related case involving Trytko, the argument against recovery was that he would receive the benefit of a prior bargain due to a misrepresentation affecting stock options he already possessed. However, it was determined that Trytko forfeited exercising his existing rights due to the misrepresentation and was therefore entitled to recover the pecuniary loss from that reliance. The jury awarded reliance damages, reflecting the loss incurred from the misrepresentation, consistent with the Restatement's guidance on damages.
Trytko’s ownership in Hubbell increased to 11,547 shares, valued at approximately $629,300, due to stock dividends by the time of trial. However, this valuation overcompensates Trytko, as it does not account for an option price of $95,000 that he would need to pay, warranting a reduction in the judgment. Hubbell challenged the district court's evidentiary rulings, claiming that notices sent to stock option holders were inadmissible as "subsequent remedial measures" under Fed. R. Evid. 407. The district court admitted these notices to impeach witness Richard Davies, emphasizing that the notices were relevant despite Hubbell's objections. Trytko argued that Rule 407 did not apply since the notice practice began before his claim arose and was not strictly "subsequent and remedial." The court determined that admitting the evidence for impeachment was appropriate and found no abuse of discretion, noting Hubbell waived any objections regarding limiting instructions by not requesting them. Additionally, Hubbell contested several jury instructions but the appellate review of these instructions is limited to whether they misled the jury. Indiana law requires that jury instructions be based on evidence, and a party cannot contest the refusal of an instruction that misstates the law.
Instructions 17, 18, and 19 pertained to the theory of negligent misrepresentation, with Hubbell challenging these instructions by asserting that Indiana does not recognize this tort. The court affirmed the district court's decision to instruct the jury on this theory, confirming that Indiana does recognize negligent misrepresentation. Instructions 238 and proposed Instruction 15A focused on damage measures, highlighting the challenges faced in formulating appropriate jury instructions due to the lack of relevant Indiana case law. The parties referenced cases from other jurisdictions and the Restatement to construct an instruction that estimated how an Indiana court might rule. The dispute centered on the definition of "benefit of the contract," with Hubbell arguing that the final paragraph of Instruction 23 inadequately defined this term under Restatement Sec. 552B(2) limitations. The court rejected this argument, stating that the instruction sufficiently explained the relationship between benefit-of-the-bargain damages and a plaintiff's expectancy interest.
Hubbell also sought to overturn the jury's finding that Trytko was not partially at fault, arguing that Trytko's background should have made him aware of his stock options' terms. The court noted that it is not responsible for resolving factual disputes or reweighing evidence, as these tasks belong to the jury. The jury had sufficient evidence to conclude that Trytko bore no fault, and his reference to a "mistake" in a 1989 letter did not constitute an admission of fault but reflected his interpretation of Hubbell's stance. Finally, Hubbell claimed the district court improperly limited its closing argument regarding mitigation of damages, specifically objecting to an argument that Trytko could have purchased shares on the open market after learning of the restrictions on exercising stock options. The court maintained that the jury was adequately instructed on the duty to mitigate damages.
Hubbell argues that there is sufficient evidence to suggest Trytko had the financial ability to purchase the desired shares, and his failure to do so warrants a reduction in damages. The district court has broad discretion in managing counsel's arguments, and a verdict will only be reversed if there is an abuse of that discretion. Counsel's arguments must be based on evidence presented in court. Trytko's counsel objected to comments about his potential stock purchase following the denial of his options, which the trial judge upheld due to Hubbell's failure to provide evidence of Trytko's ability to mitigate damages as of December 5, 1988. Hubbell's attempt to gather financial information shortly before the trial was thwarted by a magistrate’s ruling. The district court correctly prevented discussions of Trytko's financial condition as this information was not part of the trial evidence. Additionally, Hubbell's claim that the damage award was excessive was reviewed under federal standards, concluding that there was no evidence of jury bias or an excessively high award. However, the damage award should be reduced by $95,000, the option price, to avoid an unjust enrichment for Trytko. Lastly, the court reviewed the decision to grant judgment as a matter of law against Trytko for constructive fraud. Under Indiana law, the evidence must favor the non-moving party, and judgment can only be granted if no substantial evidence supports the claim's essential elements. Constructive fraud requires proof of a duty between parties, a violation of that duty through deceptive representations or silence, reliance by the injured party, resulting injury, and an advantage gained by the other party at the injured party's expense.
In Knauf Fiber Glass, GmbH v. Stein, the court examines the elements of constructive fraud in Indiana law, noting that it differs from negligent misrepresentation by requiring the existence of a confidential relationship and the gaining of an advantage by one party at the expense of another. There is a dispute between the parties regarding the nature of the advantage required, with Hubbell arguing for an "unconscionable" advantage standard, while Trytko claims that Indiana courts have moved away from this requirement. The court concludes that Trytko must demonstrate that Hubbell gained an "unconscionable" advantage concerning the stock options, a requirement supported by recent case law.
Hubbell contends it gained no advantage from the expiration of Trytko's stock options, while Trytko argues that Hubbell avoided a $450,000 loss by retaining the stock and that the options incentivized his continued employment, benefiting Hubbell financially. However, the court finds that the evidence does not support a claim of the unconscionable advantage necessary for constructive fraud, indicating that the situation does not meet the threshold for legal action despite any perceived injustice.
The district court's judgment favoring Hubbell on Count II of Trytko's Amended Complaint is affirmed. The court determined Indiana recognizes the tort of negligent misrepresentation, which allows recovery of out-of-pocket or reliance damages due to a defendant's deception. The jury's verdict in favor of Trytko on Count I is upheld, but the damages are reduced by $95,000, from $629,300 to $534,300, reflecting the price Trytko would have paid had he exercised his stock options. In the cross-appeal, the court affirms the entry of judgment against Trytko, concluding Hubbell did not gain the unconscionable advantage necessary for constructive fraud under Indiana law. The judgment is affirmed with modifications. The elements of negligent misrepresentation, per the RESTATEMENT (SECOND) OF TORTS Sec. 552, include liability for false information supplied in a professional context, limited to those who justifiably rely on it. The commentary clarifies that damages for negligent misrepresentation do not include loss of bargain damages, contrasting with fraudulent misrepresentation. Hubbell's argument that Trytko suffered no out-of-pocket loss is rejected; the stock options were part of Trytko's compensation, for which he provided valuable consideration.
Indiana's stance on whether to adopt the traditional Restatement view or a broader approach for benefit-of-the-bargain damages in cases of negligent misrepresentation is not necessary to resolve, as the jury's award was justified, albeit with a modification, under the more restrictive view. Rule 407 prohibits the admission of subsequent remedial measures as evidence of negligence but allows such evidence for other purposes, like proving ownership or feasibility.
Instruction 23 clarifies that damages for negligent misrepresentation aim to compensate for the plaintiff's pecuniary loss caused by the misrepresentation, quantified as the difference between the received value and the purchase price, along with any losses from reliance on the misrepresentation. Plaintiffs must take reasonable steps to mitigate damages, which the jury must consider when determining compensation.
The concept of a contract is defined as a set of promises enforceable by law, with damages aimed at putting the injured party in the position they would have been in had the contract been fulfilled. Proposed Instruction 15A specifies that any recovery must be based solely on damages proven to have been incurred from reliance on defendant's misrepresentations, excluding losses related to the plaintiff’s contracts with the defendant, such as stock options and associated financial benefits.
A letter from the plaintiff reflects concerns about the denial of rights related to stock options, indicating a misunderstanding on the plaintiff's part rather than misleading information from the defendant. During discussions on mitigation, the court sustained an objection regarding the lack of evidence for the plaintiff's actions post-denial of stock option exercise. The jury had enough context regarding the plaintiff's financial status, including a substantial income in his final year and previous ability to raise funds for stock options, making the mitigation instruction relevant.
