JAY SYVERSON, PLAINTIFFAPPELLANT v. FIREPOND, INC., a DELAWARE CORPORATION ROBERTSON STEPHENS, INC., a MASSACHUSETTS CORPORATION, GEORGE FLORA, v. FIREPOND, INC., a DELAWARE CORPORATION ROBERTSON STEPHENS, INC., a MASSACHUSETTS CORPORATION,
Docket: 03-2410
Court: Court of Appeals for the Eighth Circuit; October 21, 2004; Federal Appellate Court
George Flora and Jay Syverson filed lawsuits against FirePond, Inc. and Robertson Stephens, Inc., alleging fraud, negligent misrepresentation, and breach of contract. Both plaintiffs appealed a district court's dismissal of their claims under Federal Rule of Civil Procedure 12(c), which the Eighth Circuit affirmed.
Flora's claims centered on an oral agreement in 1997 to provide personnel-placement services to FirePond in exchange for stock options on 150,000 shares. Although Flora initially agreed to terms allowing options to vest immediately, he later signed a lock-up agreement in November 1999, which restricted his ability to exercise these options for 180 days following FirePond's initial public offering (IPO). During this period, the stock price soared to $100 but plummeted to $17.75 by the end of the lock-up, eventually dropping below $1. Flora did not exercise his options until over a year after the lock-up expired, after discovering that not all shareholders were bound by the lock-up agreement and that some had sold shares or exercised options at more favorable prices.
Syverson was employed by FirePond and its predecessor, Clear With Computers (CWC), receiving stock from both companies in exchange for his services before FirePond's IPO. He, like another employee, Flora, was required to sign a lock-up agreement as part of the IPO process. When Syverson expressed concerns about the agreement, FirePond attorney Christian Misvaer insisted it was mandatory and warned that without signatures from all shareholders, the IPO could not proceed. Misvaer also suggested that failing to sign could complicate Syverson's ability to exchange his CWC shares for FirePond shares.
Additionally, FirePond's general counsel, Thomas Carretta, informed Syverson about the IPO and included the lock-up agreement for signature, stressing that all shareholders must comply for the IPO to advance. Syverson claims he only signed the agreement based on Misvaer's assurance that he would be notified if the lock-up requirements changed, which he alleges Misvaer agreed to.
During the 180-day lock-up, Syverson's shares experienced a significant decline in value, dropping to $17.75 by the lock-up's end and continuing to fall to less than $2.00. He later discovered that not all shareholders were bound by the lock-up agreement, contrary to earlier assurances. Syverson contends that some investors were permitted to sell their shares immediately after the IPO at a higher price, while he and others were subjected to longer lock-up periods. He filed claims against FirePond and Robertson similar to Flora's allegations.
Flora's lawsuit included claims of negligent misrepresentation, fraud, breach of contract, and violations of the Minnesota Securities Act and the Securities Exchange Act. FirePond sought judgment on the pleadings, and while some claims were dismissed, others were allowed to proceed. Ultimately, the court ruled against both Flora and Syverson on various claims, leading to an appeal.
A motion for judgment on the pleadings is reviewed de novo, accepting all factual allegations by the non-moving party as true and drawing all reasonable inferences in their favor. Judgment is warranted when no material factual issues exist and the movant is entitled to judgment as a matter of law. The court reviews the district court's application of state law de novo.
In their negligent misrepresentation claims, Syverson and Flora contend the district court erred in its dismissal, which was based on the failure to establish the necessary elements for such claims. To succeed, a plaintiff must demonstrate: 1) a duty of reasonable care by the defendant; 2) a breach of that duty through the negligent provision of false information; 3) reasonable reliance on the misrepresentations, leading to injury; and 4) damages. The district court found no duty of care was alleged or existed and that reasonable reliance could not be proven, which would affirm the dismissal if correct.
For a claim of negligent misrepresentation, the plaintiff must prove a legal duty that was breached, which arises only when information is supplied for the guidance of others in transactions where the provider has a pecuniary interest. Furthermore, the plaintiff must show reasonable reliance on the misinformation.
Syverson claims that FirePond and Robertson had a duty to inform him about shareholder signatures for the lock-up agreement. However, even if a legal duty was alleged, the claims fail due to the inability to demonstrate reasonable reliance on the alleged misinformation. Flora's stock-option contract was governed by a negotiated written agreement, and claims of duress do not reflect that communication deprived him of free will. Syverson's decision to sign the lock-up agreement was not coerced or a result of an adhesion contract. The court concludes that reliance on the alleged misrepresentation was unreasonable, as neither FirePond nor Robertson provided investment advice, and the decisions were made after standard negotiations.
Flora and Syverson signed a lock-up agreement allowing the underwriter to waive any provision without third-party notice. Consequently, any claims against Robertson for negligent misrepresentation fail, as Flora and Syverson could not reasonably rely on Robertson's statements that contradicted the signed agreement. Similarly, their fraud claims also fail due to the lack of reasonable reliance.
Flora claims FirePond breached an oral contract from February 1998 for unrestricted stock options in exchange for placement services, arguing that subsequent written Stock Option Agreements, which he signed in May and November 1998 and which included selling restrictions, breached this oral contract. The district court found that the written agreements, which Flora willingly signed despite initially objecting to the restrictions, superseded the oral contract due to conflicting terms.
Flora's appeal also introduced a new theory that the breach occurred through his acquiescence to the lock-up agreement, claiming FirePond had a duty to provide unrestricted stock options at the initial public offering. However, this argument was not presented in the district court and thus was not considered on appeal.
The district court's dismissal of both Flora and Syverson's claims is affirmed.
Circuit Judge Colloton expresses partial agreement and dissent regarding a legal case involving Flora and Syverson. He concurs with the dismissal of Flora's breach of contract claim and the fraud claims against both defendants, as well as the negligent misrepresentation claim against FirePond. However, he believes that Flora and Syverson sufficiently pleaded a negligent misrepresentation claim against Robertson Stephens under Minnesota law and advocates for reversing the district court's dismissal of that claim.
The court ruled that Flora and Syverson did not adequately plead fraud or negligent misrepresentation claims due to an unreasonable reliance on alleged misrepresentations, pointing to the explicit terms of the lock-up agreement. Colloton disagrees with this reasoning, arguing that the representation by FirePond that all shareholders must sign the lock-up agreement does not contradict the underwriter's ability to waive any provision after signing. He asserts that knowledge of the waiver provision does not negate the assertion that not all shareholders are required to sign the agreement.
Colloton explains that once a shareholder signs the agreement, they lack bargaining power, and this power dynamic affects their reliance on FirePond's representations. He contends that Flora and Syverson lost the opportunity to act strategically based on the misrepresentations made to them, which undermines the court's conclusion on their reliance being unreasonable.
Despite this, he agrees with the dismissal of the fraud claims against FirePond and Robertson Stephens, noting that Flora and Syverson failed to plead fraud with the requisite specificity as per Federal Rule of Civil Procedure 9(b). There are no direct allegations of false representation by Robertson Stephens to Flora and Syverson, and their claims of misrepresentation through agents lack sufficient basis to establish an agency relationship that would hold Robertson Stephens liable for FirePond's actions.
The complaints against FirePond lack sufficient allegations of fraud, particularly failing to specify how FirePond knew its representation that all shareholders needed to sign the lock-up agreement was false. Allegations that FirePond's experienced counsel should have known this do not meet the particularity requirement of Rule 9(b). Consequently, the district court's dismissal of the negligent misrepresentation claim against FirePond is affirmed, as under Minnesota law, a duty of care in making representations exists only when a party is engaged in supplying guidance. The ordinary commercial relationship between FirePond and Flora and Syverson does not establish such a duty.
In contrast, the claims against Robertson Stephens are deemed sufficient under Minnesota law. Although Robertson Stephens does not directly provide advice to individual investors, it is involved in underwriting public offerings, which entails supplying information to guide clients. The complaints allege that Robertson Stephens made representations to FirePond, knowing they would be communicated to shareholders. Flora and Syverson's argument for liability through a chain of reliance is supported by Minnesota law, referencing a precedent where an insurance agent could recover from a negligent accountant based on similar reliance. Consequently, the judgment dismissing negligent misrepresentation claims against Robertson Stephens should be reversed.
The Minnesota Supreme Court in Bonhiver did not specify the boundaries for recovery in cases of negligent misrepresentation. However, it acknowledged the adoption of the Restatement (Second) of Torts definition of negligent misrepresentation, which provides guidance on determining who can recover. The Restatement clarifies that a negligent defendant may be liable to individuals for whom the information was supplied, even if the defendant did not intend a specific person to receive it. It suffices that the defendant knows the recipient intends to relay the information to a defined group or class of persons.
This approach has been upheld in similar cases, such as Reisman v. KPMG Peat Marwick LLP, where investors sued an accountant for negligent misrepresentation despite lacking a direct relationship, as the court inferred the accountant knew the investors would rely on their information. In Hosford v. McKissack, the Mississippi Supreme Court ruled homebuyers could claim against a pest control company for a negligent report, as it was foreseeable the buyers would rely on it.
In the case at hand, Flora and Syverson claimed Robertson Stephens made a negligent misrepresentation to FirePond, aware that FirePond would convey this to shareholders and option-holders for a lock-up agreement. Under Minnesota law, which follows the Restatement's framework, these allegations are deemed sufficient to withstand a motion for judgment on the pleadings. Consequently, the claims against Robertson Stephens for negligent misrepresentation should be reinstated, while the judgment on all other claims is affirmed. Additionally, Flora and Syverson did not assert a claim of fraud through indirect representations, focusing instead on an agency theory regarding Robertson Stephens' alleged misrepresentations made by its agents.
