Opinion
94 Civ. 0905 (RPP)
March 5, 2002
Gerald Walpin, Rosenman Colin, LLP, New York, New York, for Plaintiff
Gregory P. Joseph, Gregory P. Joseph Law Offices LLC, New York, New York; David Spears, Richard Spears Kibbe Orbe, New York, New York, for Defendant
OPINION AND ORDER
The Court of Appeals vacated a judgment for damages against Defendants, SCS Communications, Inc. and Stephen C. Swid (collectively "SCS/Swid"), because Plaintiffs, The Herrick Company, Inc. and Norton Herrick (collectively "Herrick"), failed to prove that Defendant Skadden, Arps, Slate, Meagher Flom ("Skadden") was a diverse party within the meaning of 28 U.S.C. § 1332(a). The Court of Appeals has remanded the case with directions to this Court to "decide whether . . . Skadden is in fact diverse," and if found not to be, "determine whether SCS/Swid was unduly prejudiced by Skadden's participation in the lawsuit and consequently whether jurisdiction over the main case may be salvaged, under Newman-Green, by eliminating the court's previously asserted jurisdiction over the settlement involving Skadden." Herrick Co., Inc. v. SCS Communications, Inc., 251 F.3d 315, 334 (2d Cir. 2001).
Background
In the first half of 1993, TOG Acquisition Co. ("TOG"), owned by Defendants Sheinberg and Chan, attempted to acquire the Orleander Group ("Orleander"), a manufacturer of bicycle accessories, but failed for lack of financing. On August 2, 1993, the owners of Orleander granted Herrick an exclusive right to acquire the business of Orleander. On August 16, 1993, Herrick entered into a joint venture agreement with TOG, by Sheinberg, and SCS Communications, Inc. ("SCS"), by Defendant Weinroth, to acquire Orleander.
The terms of the agreement called for Herrick to receive a one-half share of Orleander, with the other one-half share to be divided between TOG and SCS. Defendant Swid owns 90% of SCS. Defendant Weinroth was a director of SCS in 1993.
In October, 1993, Herrick assented to the use of TOG as the acquiring entity of Orleander. In mid-October, agreements for TOG's acquisition of, and financing for, the business of Orleander were executed, and a closing was scheduled for November 22, 1993. On November 21, 1993, a dispute arose between Herrick and Sheinberg and Weinroth over proposed terms of a shareholders' agreement and of TOG's bylaws, and Sheinberg and Weinroth informed Herrick that he was no longer their partner. Eight days later, with the legal assistance of Defendants Skadden and Skadden partner Mark Smith, TOG acquired Orleander without Herrick's participation. The shareholders to the transaction were Defendants Sheinberg, Chan, Weinroth and Swid.
Members of Swid's family became minor shareholders in TOG when it acquired Orleander.
Herrick filed this lawsuit in February, 1994, claiming that Sheinberg, Weinroth, Chan, SCS/Swid, and Smith/Skadden had conspired to improperly deprive Herrick of its one-half share in Orleander. Herrick's amended complaint included claims for breach of contract, breach of fiduciary duty, fraudulent inducement, and knowing participation in breach of fiduciary duty. Herrick alleged that subject matter jurisdiction existed because Plaintiffs were completely diverse from all Defendants. Defendants, including Skadden, did not contest subject matter jurisdiction in any of their pleadings.
Shortly before the start of trial on January 12, 1999, Herrick and all Defendants entered into a joint pre-trial order. The pre-trial order stated, in relevant part:
3. a. Plaintiff states that subject matter jurisdiction is based on 28 U.S.C. § 1332. The action is between citizens of different states, and the matter in controversy exceeds the sum of $50,000.
i. Plaintiff The Herrick Company, Inc. is [a] corporation organized and existing under the laws of the State of Florida, with its principal place of business located in Boca Raton, Florida.
ii. Plaintiff Norton Herrick is a citizen of the State of Florida.
. . .
vii. Defendant Skadden, Arps, Slate, Meagher Flom is a law firm engaged in the practice of law with one of its offices located in the City, County, and State of New York. None of its partners is a citizen of the State of Florida.
. . .
b. None of the defendants challenges subject matter jurisdiction.
A jury trial commenced with openings on Tuesday, January 12 and Wednesday, January 13, 1999. Prior to counsels' opening statements, the Court instructed the jury that opening statements were not to be considered as evidence. (Tr. at 20, 24.) The Court stated:
You must pay close attention to all of the evidence presented. Evidence consists only of the testimony of witnesses, documents, and other things admitted as evidence or stipulations agreed to by the attorneys. Certain things are not evidence and must not be considered by you. First, statements, arguments, and questions by lawyers are not evidence.
. . . .
Finally, let me say a few words about trial procedure. First, the lawyers have an opportunity to make opening statements to you. And they will do that shortly. These statements are not evidence. They serve no purpose other than to give you an idea in advance of the evidence that the lawyers expect you to hear from the witnesses. These statements allow the lawyers to give you a preview of what this case is all about, but the only evidence comes from the witnesses and the exhibits.
(Id.) On the morning of Wednesday, January 13, 1999, Plaintiffs' first witness, Norton Herrick, began to testify on direct examination. (Tr. at 231.) On Thursday, January 14, 1999, the Court excused the jurors after lunch, stating:
Well, ladies and gentlemen, a legal issue has come up, but, also, we have been watching the weather, and from what we gather, the weather is going to intensify this afternoon and going to be better tomorrow. And I think it would be best if we adjourn at this time and we come back at 10 o'clock tomorrow. Some of you come from up in Westchester and various places, and I think it would be better if we adjourned until tomorrow.
(Tr. at 447.) The next morning, Friday, January 15, 1999, the Court addressed the jury in the jury room, stating:
I think we may be able to eliminate some witnesses here that would take a week or so or two weeks off the length of the case. So I don't know but we are trying. I think the thing is to break for lunch. . . .
(Tr. at 452.) After the luncheon recess, counsel for Herrick and for Sheinberg, Weinroth, Chan, Smith, and Skadden announced, out of the presence of the jury, that they had reached private oral settlement agreements. (Tr. at 452-54.) One of the terms of the settlement agreements was that the Court should keep jurisdiction for the purposes of enforcement of the settlements and in case any dispute should arise as to the phraseology of the agreement. (Tr. at 453.) The exact terms of the agreement were to be reduced to writing the following week. Pursuant to settlement, Sheinberg, Weinroth, Chan, Smith, and Skadden were then excused for the duration of the trial. (Id.) When the jury returned to the courtroom that afternoon, the Court stated:
The private oral settlement agreements were transcribed by the parties outside the Court's presence and are not part of the Court record.
As you can see, ladies and gentlemen, we have — a number of the attorneys and parties are not here. The plaintiffs' case against the other defendants is no longer before you. That fact has no significance whatsoever for your consideration of the plaintiffs' case against SCS Communications and Stephen Swid. You should draw no inferences for or against any of the remaining parties by reason of this development.
(Tr. at 455.) The Court then dismissed the jury for the day with instructions to return the following Tuesday. After the jury had been excused, the deputy clerk handed the Court a note he had received from a juror asking which parties and claims remained in the case. (Tr. at 457.) The Court informed counsel of the note and counsel agreed upon a prepared statement to the jury. (Id.)
The Court was closed on Monday, January 18, 1999 in honor of Martin Luther King, Jr.'s birthday.
On Tuesday, January 19, 1999, the Court addressed the jury, stating:
Ladies and gentlemen, I have got a note from Mr. Monteagudo saying that the jurors weren't quite clear as to what happened on Friday. Let me put it this way, the defendants who are no longer in the case before you are Henry Chan, Richard Sheinberg, Stephen Weinroth, the law firm of Skadden, Arps, Slate, Meagher Flom, and Skadden partner Mark Smith. You will still have to consider and decide the plaintiffs' claims of breach of contract and breach of fiduciary duties against the remaining defendants, Stephen C. Swid and SCS Communications Inc.
Now the developments on Friday are not to be considered by you as having any relevance for or against the remaining parties to this lawsuit. All right?
(Tr. at 472.) The direct and cross-examination of Mr. Herrick then continued through January 22, 1999.
On February 10, 1999, the Court charged the jury. (Tr. at 3808-52.) The Court reviewed with the jury a special verdict form requiring yes or no answers to six questions on liability. (Tr. at 3849-50.) The Court stated:
The first question is, one, is SCS liable to plaintiffs for breach of the August 16, 1993 agreement? Yes, no. If you answered yes, proceed to question 2. If you answered no, proceed to question 3.
Two, do you find Mr. Swid is liable to plaintiffs for breach of the August 16, 1993 agreement because he was the alter ego of SCS? Answer, yes, no. Go to question 3.
Three, is SCS liable to plaintiffs because an affiliate of SCS acquired an interest in Orleander in violation of the August 16, 1993 agreement? Answer, yes, no.
Go to question four, is SCS liable to plaintiffs for failure to perform its fiduciary duties? Answer, yes, no. If you answered yes, proceed to question 5. If you answered no, proceed to question six.
Five, do you find that Mr. Swid is liable to plaintiffs for SCS's failure to perform its fiduciary under the August 16, 1993 agreement because he was the alter ego of SCS? Answer, yes, no.
Six, is Mr. Swid liable to plaintiffs for knowingly participating in the breach of fiduciary duty by a party to the August 16, 1993 agreement? Answer, yes, no. . . .
(Id.) On February 11, 1999, the jury returned a verdict, answering yes to all six of the above questions and awarding Herrick $10,549,000 in damages. (Tr. at 3908-09.)
On March 11, 1999, SCS/Swid filed motions pursuant to Federal Rules of Civil Procedure 50 and 59, seeking judgment notwithstanding the verdict, a new trial, and alteration of the judgment. In these motions, SCS/Swid contended for the first time that no federal subject matter existed because Skadden had partners who were U.S. citizens domiciled abroad and therefore was not a diverse party within the meaning of 28 U.S.C. § 1332(a). See Cresswell v. Sullivan Cromwell, 922 F.2d 60, 68 (2d Cir. 1990) (United States citizens "domiciled abroad are neither citizens of any state of the United States nor citizens or subjects of a foreign state," so that "§ 1332(a) does not provide that the courts have jurisdiction over a suit to which such persons are parties.")
On July 23, 1999, counsel for Herrick, Sheinberg, Chan, Weinroth, Skadden, and Smith submitted written stipulations of dismissal of all claims against those defendants and providing for the Court's retention of jurisdiction for purposes of enforcement of the private settlement agreements. The Court so ordered each of these stipulations on July 26, 1999.
In its Opinion and Order dated August 4, 1999, the Court denied SCS/Swid's motions to dismiss for lack of subject matter jurisdiction because they had not challenged Skadden's status as a diverse party until after the trial was completed, approximately five years after the lawsuit had been filed, and because the Court and the parties considered the case terminated as to Skadden following its settlement on January 15, 1999 (though the written settlement agreement had not been submitted and filed prior to the verdict). On August 19, 1999, Herrick filed a notice of appeal challenging the Court's determination that the sums received from the settlements would be setoff against the judgment against SCS/Swid. On August 24, 1999, SCS/Swid filed a notice of cross-appeal.
On appeal, the Court of Appeals vacated the judgment on the grounds that (1) subject matter jurisdiction was not waivable; (2) the Court had retained jurisdiction over Skadden by maintaining jurisdiction over the settlement; and (3) Herrick had failed to carry its burden of persuasion that Skadden was a diverse party from the outset of the lawsuit. Herrick Co., 251 F.3d at 333.
On remand, the Court of Appeals has directed the Court first to consider whether Skadden is a diverse party, and if not, whether Skadden may be dismissed (pursuant to Herrick's request) as a dispensable party without undue prejudice to SCS/Swid, thereby salvaging jurisdiction in the main case. Id. at 334. The Court of Appeals has further directed the Court, should it conclude that Skadden may be dismissed without undue prejudice to SCS/Swid, to determine "whether it should appropriately reinstate part or all of its prior judgment." Id.
Is Skadden a Diverse Party?
After engaging in discovery on the issue, Herrick has conceded that it can not demonstrate that Skadden was a diverse party at the outset of this lawsuit. Due to Herrick's inability to show that Skadden was a diverse party, the Court must determine, as directed by the Court of Appeals, whether Skadden may be dismissed as a dispensable party without undue prejudice to SCS/Swid.
Can Skadden Be Dismissed as a Dispensable Party Without Undue Prejudice to SCS/Swid?
"[I]t is well settled that Rule 21 [of the Federal Rules of Civil Procedure] invests district courts with authority to allow a dispensable nondiverse party to be dropped at any time, even after judgment has been rendered." Newman-Green v. Alfonzo-Larrain, 490 U.S. 826, 832, 109 S.Ct. 2218, 2223, 104 L.Ed.2d 893 (1989). Rule 21 requires, however, that if a party is to be dropped, it must be "on such terms as are just." Fed.R.Civ.P. 21.
Herrick argues that Skadden was a dispensable party because co-defendant Smith's liability is co-extensive with Skadden, and complete relief could be accorded in Skadden's absence because Skadden was liable for any judgment against Smith. SCS/Swid has not contested Herrick's position. (Tr. of Conf. of January 3, 2002 at 3.) Accordingly, the Court finds that Skadden was a dispensable party.
To the extent it may be relevant, Smith and Skadden were jointly represented at trial by Curtis, Mallet-Provost, Colt Mosle by Mr. Peter Fleming, Jr., which suggests that these parties did not consider their interests divergent.
SCS/Swid contends, however, that dismissal of Skadden as a dispensable party at this point in the litigation would not be just because SCS/Swid was prejudiced by Skadden's participation in the case. In analyzing this claim, the Court will utilize the framework suggested by the Court of Appeals. First, the Court will determine whether Skadden's presence "produced a tactical advantage for one party or another." Herrick Co., 251 F.3d at 331 (quoting Newman-Green, 490 U.S. at 838). Next, the Court will "weigh the advantage — if any — that exists, the prejudice — if any — that advantage causes, and also the existence of countervailing factors, before deciding — in the first instance — on the propriety of curing, ex post, the jurisdictional defect."Id. at 332.
Herrick and SCS/Swid each contend that the other party has the burden of proof on the issues of tactical advantage and undue prejudice. Because Herrick is the party seeking to dismiss Skadden as a dispensable party under Rule 21 and salvage jurisdiction over the main case, Herrick has the burden of proof by a preponderance of the evidence on both issues. Tactical Advantage
SCS/Swid contend that it is insufficient for Herrick to show the absence of tactical advantage or prejudice by a preponderance of the evidence. Rather, SCS/Swid contend that Herrick must show that Skadden's participation as a defendant could not possibly have caused a tactical advantage or prejudice. (SCS/Swid's Mem. of Law on the Issue of Tactical Advantage at 6, Reply Mem. at 1.) In support of their position, SCS/Swid cite Kanzelberger v. Kanzelberger, 782 F.2d 774, 778-79 (7th Cir. 1986), where the Seventh Circuit noted that the plaintiff corporation's presence "may have colored the outcome" of the litigation. SCS/Swid argue that, under Kanzelberger, Herrick must demonstrate that Skadden's participation as a defendant could not have colored the outcome. The Court does not find this argument persuasive. The balancing test suggested by the Court of Appeals does not seem to support SCS/Swid's position that it should prevail if Herrick can not prove that Skadden's presence could not have colored the outcome. Herrick Co., 251 F.3d at 332. In addition, the Court has reservations about whether the Seventh Circuit intended to adopt a "may have colored the outcome" standard in Kanzelberger. Lastly, the Court notes that in Sweeney v. Westvaco Co., 926 F.2d 29, 42 (1st Cir. 1991), the First Circuit did not require the party seeking to dismiss a non-diverse party after judgment to prove the impossibility of prejudice; in fact, the First Circuit rejected the defendants' claim of prejudice on the grounds that it was too speculative.
The Court has found little case law describing what constitutes a "tactical advantage." Courts have indicated that tactical advantages can occur where the presence of a non-diverse party allows one side to introduce evidence that would otherwise be inadmissible or access materials that would otherwise have been unobtainable, see Sweeney v. Westvaco Co., 926 F.2d 29, 41-42 (1st Cir. 1991) (finding no tactical advantage because "[e]ven without [the non-diverse defendant's] presence as a party, Mrs. Sweeney could have conducted the same discovery, called [the non-diverse defendant] as a witness, and introduced all the evidence that, in fact, she presented to the jury"); Casas Office Machines, Inc. v. Mita Copystar America, Inc., 42 F.3d 668, 677 (1st Cir. 1994) (finding no significant tactical advantage where the presence of the non-diverse defendants did not give plaintiffs access to materials that were otherwise unobtainable), or where the nature of the non-diverse party bolsters the credibility of one side see Kanzelberger v. Kanzelberger, 782 F.2d 774, 778-79 (7th Cir. 1986) (finding a tactical advantage where plaintiff, an ousted corporate shareholder in a closely held corporation, joined the corporation as a plaintiff in a suit against the controlling shareholders of the corporation because "[t]he [non-diverse] corporation's presence side by side with [plaintiff] lent some additional credence to his claim that the defendants had usurped control of the corporation — made the dispute seem less a squabble among the shareholders and more an effort by the defendants to despoil the corporation").
SCS/Swid's case is distinct from these cases. SCS/Swid has made no claim that it would have presented its case differently if Skadden had not been a party. Nor has SCS/Swid claimed that Herrick was able to discover any materials that were otherwise unobtainable or introduce evidence which would otherwise have been inadmissible as result of Skadden being a defendant in this case. Nor has SCS/Swid shown that Herrick's claims were bolstered by the fact that Skadden, a large law firm, was a defendant. Herrick's claims were (1) against its partners to the August 16, 1993 joint venture agreement for breach of that agreement and (2) against Skadden and Mark Smith, as its attorney in the negotiations with Orleander, for acting against its interests. Had Skadden not been a defendant, Herrick still would have claimed that Smith, the Skadden partner in charge of the Orleander transaction, had betrayed Herrick by acting against its interests. Accordingly, there is no showing that Skadden's status as a defendant affected the way the jury would view the case, a la Kanzelberger, where the corporation's status as a plaintiff made "the dispute seem less a squabble among the shareholders and more an effort by the defendants to despoil the corporation." 782 F.2d at 779.
In their brief, SCS/Swid argue that Herrick received a tactical advantage because Skadden's presence created "a classic David vs. Goliath scenario, with the added edge of Goliath being a huge law firm in an era of extreme lawyer unpopularity." (SCS/Swid's Mem. of Law on the Issue of Tactical Advantage at 2.) The Court finds no basis in the record to support this argument. It is true that Herrick's counsel described Skadden in his opening as "one of the largest, most powerful and sophisticated law firms in this country" but he did not reiterate that description or seek to use that description to taint the other defendants in some way. And far from painting Plaintiff as an underdog fighting an uphill battle to achieve justice against a large law firm, Herrick's counsel portrayed Norton Herrick as an extremely successful and wealthy real estate magnate. (Tr. at 237-251.) Accordingly, the Court rejects SCS/Swid's "David and Goliath scenario," particularly SCS/Swid's contention that Skadden's presence as a defendant created a "David and Goliath scenario."
Nor was a David and Goliath effect created by the number of counsel present, because Smith and Skadden were represented by the same counsel, or created by the number of defendants at counsel table, which rose nominally only from six to seven. The Court uses the term nominally because no representative of Skadden sat at the defense table other than Smith.
To the extent that SCS/Swid are now suggesting that members of the jury might have harbored feelings about lawyers or large law firms, there was no such suggestion during the trial. The jury was selected by extremely able counsel after a thorough voir dire. Accordingly, the Court rejects SCS/Swid's intimations of prejudice by jury members against lawyers or large law firms.
At oral argument, SCS/Swid contended that Herrick received a tactical advantage by being able to point to Skadden during opening statements. (Tr. of Conference of January 3, 2002 at 46-48.) It is the Court's view that identifying a defendant during opening does not constitute the type of tactical advantage envisioned by the Supreme Court in Newman-Green or by the Second Circuit in its prior opinion in this ease.
Undue Prejudice
SCS/Swid argues that it was unduly prejudiced by Skadden's settlement on the fourth day of trial; an occurrence which SCS/Swid characterizes as an "obvious defeat" which gave credence to Herrick's claims against SCS/Swid because "Skadden was acting as SCS/Swid's agent at the time it committed the alleged misconduct." (SCS/Swid's Mem. of Law on the Issue of Tactical Advantage at 3, 10.) In considering this claim, it is important to bear in mind that in many multi-defendant cases, one defendant settles and the jury returns a verdict for the remaining defendants.
In support of its contention that SCS/Swid was unduly prejudiced by Skadden's settlement on the fourth day of trial, SCS/Swid has submitted affidavits from three experts — Prof. Norbert Schwarz, Donald E. Vinson, and Sonya Hamlin. In essence, the declarations of Prof. Schwarz, Vinson, and Hamlin proceed as follows:
Norbert Schwarz is Professor of Psychology at the University of Michigan and Senior Research Scientist in the Survey Research Center and the Research Center for Group Dynamics of the University of Michigan's Institute of Social Research. (Scwharz Decl. at ¶ 1.) Prof. Schwarz declares that he has reviewed the opening statements, testimony taken preceding the settlement, the Court's instructions to the jury following the departure of settling defendants, and the final arguments. (Schwarz Decl. at ¶ 2.)
Donald E. Vinson is chairman of Vinson Dimitrius, a firm that specializes in trial consulting and jury research. (Vinson Decl., ¶ 1.) He declares that he has reviewed the opening statements and first few days of trial. (Vinson Decl. at ¶ 2.)
Sonya Hamlin is president of Sonya Hamlin Communications, a private jury consulting and courtroom communications firm. (Hamlin Decl., ¶ 1.) She declares that she has reviewed the trial transcript and other (unspecified) materials in this case. (Hamlin Decl. at ¶ 2.)
In reply, Herrick has submitted affidavits from two experts — Steven D. Penrod and David Island — opining that no credible evidence exists that Skadden's presence in the case adversely affected SCS/Swid and pointing out shortcomings in the opinions offered by Schwarz, Vinson, and Hamlin.
(1) Herrick presented `a story' in its opening that "Herrick's partners plotted with the law firm Skadden Arps, Slate, Meagher Flom, and its partner, Mark Smith, attorneys representing both them and Herrick, to take the Orleander opporturuty away from Herrick and ultimately deprive Herrick of his interest in this very valuable company" (Schwarz Decl. at ¶ 3(a) (quoting Tr. at 28));
(2) In his opening, Herrick's counsel portrayed Skadden as "one of the largest, most powerful and sophisticated law firms in this country"; (Schwarz Decl. at ¶ 3(b) (quoting Tr. at 30));
(3) Skadden's sudden disappearance from the trial "is likely to suggest to at least some members of the jury that the firm settled" (Schwarz Decl. at ¶ 3(b));
(4) "A settlement, however, entails that "one of the largest, most powerful and sophisticated law firms in this country' (T-30) — which was acting on behalf of Mr. Swid and SCS when it committed the acts in question — concluded that it is unlikely to win this case" (Id.);
(5) "Hence, Skadden's disappearance from the trial is bound to lend high credibility to the plaintiffs' `story,' apparently confirming the hypothesis that Skadden and its clients, the, other defendants (including Mr. Swid and SCS) collaborated in a deliberate `scheme' to steal an investment opportunity from Mr. Herrick." (Id.)
There is no evidence that the jury viewed the disappearance of defendants Skadden, Smith, Weinroth, Sheinberg, and Chan as indicative of a settlement. On January 14, 1999, the Court dismissed the jury early, telling the jury that it was doing so because (1) "a legal issue had come up" and (2) the weather was bad. (Tr. at 447.) The next morning, the Court instructed the jury that they were dismissed until after lunch because the Court and parties were working eliminating some witnesses in order to condense the trial. (Tr. at 452.) When the jury returned to the courtroom after lunch, Sheinberg, Weinroth, Chan, Skadden, and Smith were no longer in the case. (Tr. at 455.) Had the jurors speculated about the reasons for the departures of the parties, they may have linked these disappearances to the legal issue the Court said had come up.
The declarations of these experts are flawed in several important aspects. As Plaintiffs point out, none of the experts attended the jury selection, the openings, or the trial. They did not read the entire trial transcript, and have not questioned the jurors about the effect of Skadden's presence in the case or about the basis for their verdict against SCS/Swid. They have not conducted a mock jury analysis to determine whether prejudice existed. They cite no authority for the notion that a jury would view a settlement as tantamount to an admission of wrongdoing which could have prejudiced SCS/Swid's defense. They also ignore the Court's instructions to the jury, prior to openings, (a) on what constitutes evidence, (b) that openings are not evidence, and (c) that the jury is to base its verdict only on the evidence presented at trial. (Tr. at 18-24.)
More importantly, the declarations pay little, if any, attention to the "stories" presented by the defendants in their openings. Sheinberg, Weinroth, and Chan presented "a story" in which:
(1) Sheinberg and Chan formed TOG and entered into a retainer agreement with Skadden to be TOG's attorney prior to any dealings with Herrick;
(2) After entering into the August 16, 1993 letter agreement with Herrick, Sheinberg and Weinroth carried out the agreement in good faith;
(3) Norton Herrick acted in bad faith, engaging in bullying and manipulative tactics, by virtue of which Herrick forfeited the right to participate in the Orleander transaction.
(Tr. at 87-151.) Skadden and Smith presented "a story" in which:
(1) Skadden represented TOG and its two stockholders, Sheinberg and Chan;
(2) Skadden did not represent Weinroth, SCS, Swid, or Herrick;
(3) Herrick acted in bad faith and forfeited the opportunity to participate in the Orleander transaction;
(4) Herrick did not name Skadden or Smith or charge them with any wrongdoing when the plaintiffs filed their original suit in state court;
(Tr. at 204-231.) SCS and Swid presented "a story" in which:
(1) Swid, who controls SCS through ownership of 90 percent of SCS stock, was unaware that Weinroth had signed the August 16, 1993 agreement on behalf of SCS;
(2) Swid, upon discovering Weinroth's actions, immediately advised Weinroth that SCS, a media company, would not participate in the purchase of an unrelated business;
(3) Swid, individually, was interested in participating in the Orleander acquisition, but removed himself from the deal in September, 1993 following Herrick's suggestion that Herrick and Swid cut out the other parties to the purchase;
(4) Swid had nothing further to do with the deal or its negotiation until he was approached at the last minute after being assured Herrick was out of the deal;
(5) Swid met with Smith and Skadden for the first time after coming back into the deal in late November;
(6) Smith and Skadden were not Swid's attorneys, but he relied on them in the press of the closing for advice that Herrick had no rights in the deal.
(Tr. at 151-175.)
As this review of Defendants' openings shows, SCS/Swid and Skadden/Smith both claimed that Skadden did not represent SCS/Swid. Thus, SCS/Swid, supported by Skadden, took the position, at variance with the other defendants, that Skadden/Smith hadn't been their attorneys. Nonetheless, SCS/Swid's experts take the position that the jury would have concluded, at the time of Skadden's departure from the case, that Skadden "was acting on behalf of Mr. Swid and SCS when it committed the acts in question." (Schwarz Decl. at ¶ 12.)
At that point in the record, Mr. Herrick's testimony had not covered the grounds on which he would claim that Skadden/Smith was his attorney.
The declarations of SCS/Swid's experts also ignore the contemporaneous settlements of Sheinberg and Weinroth. These settlements would have borne directly on SCS/Swid's case as they were SCS's partners in the August 16, 1993 joint venture agreement. By comparison, Skadden's connections to SCS/Swid were unclear. Counsel for Skadden/Smith and SCS/Swid had both stated that Skadden represented Sheinberg, Chan, and TOG, and did not represent SCS/Swid. Accordingly, in the event of a juror's supposition that financial settlements had been reached, the effects of Weinroth's and Sheinberg's settlements would far outweigh any effects on SCS/Swid from a supposition of settlement by Skadden/Smith.
All six questions the jury was asked to answer in its verdict dealt with whether SCS had breached the August 16, 1993 joint venture agreement, whether Swid was liable as the alter ego of SCS, and whether Swid had knowingly participated in a breach of fiduciary duty. (Tr. at 3849-50.) The Court, based on its previous rulings, charged the jury that the August 16, 1993 joint venture agreement was binding and did not require that the co-venturers enter into a shareholders agreement. (Tr. at 3822-23.)
More importantly, the supposed settlement by Smith would have had the same effect on a juror's supposed resolution of the cases as a settlement by Skadden. As the declarations of Prof. Schwarz and Hamlin acknowledge, Herrick's opening "story" could have been exactly the same had Skadden not been a defendant. Skadden partner Smith was a diverse party and all statements about Skadden could have made via Smith. As Prof. Schwarz states, "[t]he logic developed above would apply if only Mr. Smith, a Skadden partner, but not the firm itself, had been a defendant at the trial." (Schwarz Decl. at ¶ 14.) Both Schwarz and Hamlin attempt to distinguish the effects of the Smith and Skadden settlements on the grounds of Skadden's size. Prof. Schwarz declares:
Vinson's declaration does not even mention the fact that all of the statements about Skadden could have been introduced via Smith.
Skadden was introduced during the trial as the equivalent of a "heavy weight champion" in the legal arena — "one of the largest, most powerful and sophisticated law firms in this country" (T-30). The observation that this champion considered the weight of the evidence as heavy enough to prefer a settlement, most likely invited more extreme inferences than the observation that a single individual (Mr. Smith) settles. It is therefore highly likely that the adverse influence for Mr. Swid and SCS Communication would have been less pronounced if only Mr. Smith, rather than the firm itself, had been a defendant at the trial.
(Id. at ¶ 16.) Similarly, Hamlin declares:
Mark Smith's presence as a defendant alone could not possibly have had the same impact on the jury. He is merely a lawyer — not one of the "most powerful and sophisticated law firms in this country." There is a difference injurors' eyes between a lawyer and a law firm.
(Hamlin Decl. at ¶ 19.)
These distinctions are not persuasive. Defendant Smith was a not a solo practitioner. He was a partner at Skadden with access to all of its resources.
In view of(1) the correctness of the Court's instruction to the jury that it was not to draw any inferences for or against any of the remaining parties by reason of the departures of some of the parties, (2) the speculative nature of SCS/Swid's claim of undue prejudice, (3) the fact that all statements about Skadden could have been introduced via Smith, and (4) the fact that any supposed settlements by Weinroth and Sheinberg, undisputed signatories to the August 16, 1993 agreement, would have been far more damaging to SCS/Swid as an alleged partner than any supposed settlements by Smith and Skadden (who were claimed to have breached their fiduciary duty as attorneys to Herrick, a disputed fact, by siding with Sheinberg and Weinroth), the Court finds that Skadden's limited presence in the case did not prejudice SCS/Swid. Other Countervailing Factors
SCS/Swid also claim that they were unduly prejudiced by Skadden's presence as a defendant because Herrick's allegations of wrongdoing by Skadden during openings likely spilled over onto SCS/Swid in the minds of the jurors and tainted the jury's opinion of SCS/Swid. (Vinson Decl. at ¶¶ 13-18, 22; Hamlin Decl. at ¶¶ 13-18). They claim that:
extensive psychological research shows that jurors do not evaluate multiple defendants individually, as separate entities, when they are portrayed as confederates. Rather, defendants are evaluated as members of a group sharing the traits and goals ascribed to each individual. . ., jurors cannot cognitively separate the information they heard about one defendant from the assumptions they made about him based upon his associations with the other defendant.
(Vinson Decl. at ¶ 17.) Vinson and Hamlin cite no authority in support of this proposition. Dr. Penrod, one of Herrick's experts, states that he is "aware of only one study involving more versus fewer defendants" and that study "found no effects that might suggest a failure to evaluate each defendant separately." (Penrod Decl. at ¶ 83.) Vinson and Hamlin's assertion that jurors do not evaluate multiple defendants individually when they are portrayed as confederates also is contrary to the experience of the Court. Accordingly, the Court is not persuaded, in general, that "jurors do not evaluate multiple defendants individually, as separate entities, when they are portrayed as confederates," and believes it unlikely here where Plaintiffs painted Skadden/Smith's role somewhat differently from the roles of the other defendants. (Vinson Decl. at ¶ 17.)
Though SCS/Swid now contend that Skadden's presence, as one of the largest, most successful, and most prestigious law firms in the United States, unduly prejudiced them, a review of the transcript reveals that counsel for SCS/Swid relied on Skadden's prominence and legal abilities in his opening to argue that Herrick was appropriately excluded from the Orleander transaction in his opening statement. He stated:
And Skadden Arps, as Mr. Walpin said, one of the largest, most successful, and most prestigious law firms in the United States, they brought their very keen analytical skills to bear and concluded that Mr. Herrick was appropriately not in this deal.
(Tr. at 174.)
Counsel for SCS/Swid also relied on Skadden's status as a premier law firm in his summation, whereas counsel for Herrick had not mentioned Skadden in his closing. SCS/Swid's counsel stated:
Now, Mr. Swid asked Mark Smith from Skadden Arps two different times, Do I have a problem? Here this guy is suing me. Do I have any exposure if I go forward? Mr. Smith tells him two times. You don't. You don't. It is an agreement to agree. It is not a binding agreement. In any event, Mr. Herrick has breached the agreement by acting in bad faith.
Mr. Swid is a businessman, and a good one, but he is not a lawyer. Mr. Smith is a lawyer at Skadden Arps, one of the premier law firms in the United States, if not the world. Mr. Swid is entitled to form a state of mind based upon and in reliance on what Mr. Smith tells him, and that's what he does.
(Tr. at 3735.)
Only months after the jury returned a verdict in favor of Herrick did SCS/Swid complain that Skadden's presence in the case unduly prejudiced them.
Conclusion
SCS/Swid has made no showing that the jury verdict would have been different if Skadden had not been in the case for the first few days of testimony. Having reviewed the briefs, the affidavits of Schwarz, Vinson, Hamlin, Penrod, and Island, and the trial transcript, the Court finds that Herrick did not obtain any tactical advantage as a result of Skadden's presence as a defendant in this case, that there are no grounds for a finding that SCS/Swid was prejudiced, and that countervailing factors weigh against any finding of prejudice. The Court finds that SCS/Swid was not unduly prejudiced by Skadden being a party at trial and concludes that dismissal of Skadden as a dispensable party is just. The Court therefore (1) orders that this Court's prior orders asserting supplemental jurisdiction over the settlement involving Skadden be vacated, (2) orders that Skadden be dismissed as a party to this action nunc pro tunc as of the date this action was commenced, and (3) orders its prior judgment in this case reinstated.
IT IS SO ORDERED.