In the
United States Court of Appeals
For the Seventh Circuit

No. 99-2719

Arnold R. Rissman,

Plaintiff-Appellant,

v.

Owen Randall Rissman and Robert Dunn Glick,

Defendants-Appellees.

Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 98 C 3656--Blanche M. Manning, Judge.

Argued April 7, 2000--Decided May 23, 2000



     Before Bauer, Easterbrook, and Rovner, Circuit Judges.

     Easterbrook, Circuit Judge. Gerald Rissman formed Tiger
Electronics to make toys and games. In 1979 Gerald gave his sons
Arnold, Randall, and Samuel large blocks of stock in the firm:
Gerald kept 400 shares and gave Randall 400, Arnold 100, and Samuel
100. In 1986 both Gerald and Samuel withdrew from the venture.
Tiger bought Gerald’s stock, and Arnold bought Samuel’s, leaving
Randall with 2/3 of the shares and Arnold with the rest. Randall
managed the business while Arnold served as a salesman. Arnold did
not elect himself to the board of directors, though Tiger employed
cumulative voting, which would have enabled him to do so. When the
brothers had a falling out, Arnold sold his shares to Randall for
$17 million. Thirteen months later, Tiger sold its assets
(including its name and trademarks) for $335 million to Hasbro,
another toy maker, and was renamed Lion Holdings. Arnold contends
in this suit under the federal securities laws (with state-law
claims under the supplemental jurisdiction) that he would not have
sold for as little as $17 million, and perhaps would not have sold
at all, had Randall not deceived him into thinking that Randall
would never take Tiger public or sell it to a third party. Arnold
says that these statements convinced him that his stock would
remain illiquid and not pay dividends, so he sold for whatever
Randall was willing to pay. Arnold now wants the extra $95 million
he would have received had he retained his stock until the sale to
Hasbro.

     Because the district judge granted summary judgment to the
defendants, see 1999 U.S. Dist. Lexis 10611 (N.D. Ill.), we must
assume that Randall told Arnold that he was determined to keep
Tiger a family firm. Likewise we must assume that Randall secretly
planned to sell after acquiring Arnold’s shares. But we need not
assume that Arnold relied on Randall’s statements (equivalently,
that the statements were material to and caused Arnold’s decision),
and without reliance Arnold has no claim under sec. 10(b) or Rule
10b-5. See 15 U.S.C. sec. 78j(b); 17 C.F.R. sec. 240.10b-5; Basic,
Inc. v. Levinson, 485 U.S. 224, 243 (1988). Arnold asked Randall to
put in writing, as part of the agreement, a representation that
Randall would never sell Tiger. Randall refused to make such a
representation. Instead he warranted (accurately) that he was not
aware of any offers to purchase Tiger and was not engaged in
negotiations for its sale. Contrast Jordan v. Duff & Phelps, Inc.,
815 F.2d 429 (7th Cir. 1987). The parties also agreed that if Tiger
were sold before Arnold had received all installments of the
purchase price, then payment of the principal and interest would be
accelerated. Having sought broader assurances, and having been
refused, Arnold could not persuade a reasonable trier of fact that
he relied on Randall’s oral statements. See Karazanos v. Madison
Two Associates, 147 F.3d 624, 628-31 (7th Cir. 1998). Having signed
an agreement providing for acceleration as a consequence of sale,
Arnold is in no position to contend that he relied on the
impossibility of sale.

     Indeed, Arnold represented as part of the transaction that he
had not relied on any prior oral statement:

The parties further declare that they have not relied upon any
representation of any party hereby released [Randall] or of their
attorneys [Glick], agents, or other representatives concerning the
nature or extent of their respective injuries or damages.

That is pretty clear, but to foreclose quibbling Arnold made these
warranties to Randall:

(a) no promise or inducement for this Agreement has been made to
him except as set forth herein; (b) this Agreement is executed by
[Arnold] freely and voluntarily, and without reliance upon any
statement or representation by Purchaser, the Company, any of the
Affiliates or O.R. Rissman or any of their attorneys or agents
except as set forth herein; (c) he has read and fully understands
this Agreement and the meaning of its provisions; (d) he is legally
competent to enter into this Agreement and to accept full
responsibility therefor; and (e) he has been advised to consult
with counsel before entering into this Agreement and has had the
opportunity to do so.

Arnold does not contend that any representation in the stock
purchase agreement is untrue or misleading; his entire case rests
on Randall’s oral statements. Yet Arnold assured Randall that he
had not relied on these statements. Securities law does not permit
a party to a stock transaction to disavow such representations--to
say, in effect, "I lied when I told you I wasn’t relying on your
prior statements" and then to seek damages for their contents.
Stock transactions would be impossibly uncertain if federal law
precluded parties from agreeing to rely on the written word alone.
"Without such a principle, sellers would have no protection against
plausible liars and gullible jurors." Carr v. CIGNA Securities,
Inc., 95 F.3d 544, 547 (7th Cir. 1996).

     Two courts of appeals have held that non-reliance clauses in
written stock-purchase agreements preclude any possibility of
damages under the federal securities laws for prior oral
statements. Jackvony v. RIHT Financial Corp., 873 F.2d 411 (1st
Cir. 1989) (Breyer, J.); One-O-One Enterprises, Inc. v. Caruso, 848
F.2d 1283 (D.C. Cir. 1988) (R.B. Ginsburg, J.). Several of this
circuit’s opinions intimate agreement with these decisions, though
we have yet to encounter a situation squarely covered by them. See
SEC v. Jakubowski, 150 F.3d 676, 681 (7th Cir. 1998); Pommer v.
Medtest Corp., 961 F.2d 620, 625 (7th Cir. 1992); Astor Chauffeured
Limousine Co. v. Runnfeldt Investment Corp., 910 F.2d 1540, 1545-46
(7th Cir. 1990). Jackvony and One-O-One fit Arnold’s claim like a
glove, and we now follow those cases by holding that a written
anti-reliance clause precludes any claim of deceit by prior
representations. The principle is functionally the same as a
doctrine long accepted in this circuit: that a person who has
received written disclosure of the truth may not claim to rely on
contrary oral falsehoods. See Carr and, e.g., Associates In
Adolescent Psychiatry, S.C. v. Home Life Insurance Co., 941 F.2d
561, 571 (7th Cir. 1991); Dexter Corp. v. Whittaker Corp., 926 F.2d
617, 620 (7th Cir. 1991); Teamsters Local 282 Pension Trust Fund v.
Angelos, 762 F.2d 522, 530 (7th Cir. 1985). A non-reliance clause
is not identical to a truthful disclosure, but it has a similar
function: it ensures that both the transaction and any subsequent
litigation proceed on the basis of the parties’ writings, which are
less subject to the vagaries of memory and the risks of
fabrication.

     Memory plays tricks. Acting in the best of faith, people may
"remember" things that never occurred but now serve their
interests. Or they may remember events with a change of emphasis or
nuance that makes a substantial difference to meaning. Express or
implied qualifications may be lost in the folds of time. A
statement such as "I won’t sell at current prices" may be recalled
years later as "I won’t sell." Prudent people protect themselves
against the limitations of memory (and the temptation to shade the
truth) by limiting their dealings to those memorialized in writing,
and promoting the primacy of the written word is a principal
function of the federal securities laws.

     Failure to enforce agreements such as the one between Arnold
and Randall could not make sellers of securities better off in the
long run. Faced with an unavoidable risk of claims based on oral
statements, persons transacting in securities would reduce the
price they pay, setting aside the difference as a reserve for risk.
If, as Arnold says, Randall was willing to pay $17 million and not
a penny more, then a legal rule entitling Arnold to an extra $95
million if Tiger should be sold in the future would have scotched
the deal (the option value of the deferred payment exceeds 1),
leaving Arnold with no cash and the full risk of the venture.
Arnold can’t have both $17 million with certainty and a continuing
right to 1/3 of any premium Randall negotiates for the firm, while
bearing no risk of loss from the fickle toy business; that would
make him better off than if he had held his shares throughout.

     Negotiation could have avoided this litigation. Instead of
taking the maximum Randall was willing to pay unconditionally,
Arnold could have sought a lower guaranteed payment (say, $10
million) plus a kicker if Tiger were sold or taken public. Because
random events (or Randall’s efforts) would dominate Tiger’s
prosperity over the long run, the kicker would fall with time.
Perhaps Arnold could have asked for 25% of any proceeds on a sale
within a year, diminishing 1% every other month after that (so that
Randall would keep all proceeds of a sale more than 62 months after
the transaction with Arnold). Many variations on this formula were
possible; all would have put Randall to the test, for if he really
planned not to sell, the approach would have been attractive to him
because it reduced his total payment. Likewise it would have been
attractive to Arnold if he believed that Randall wanted to sell as
soon as he could receive more than 2/3 of the gains. Yet Arnold
never proposed a payment formula that would share the risk (and
rewards) between the brothers, and the one he proposes after the
fact in this litigation--$17 million with certainty and a perpetual
right to 1/3 of any later premium--is just about the only formula
that could not conceivably have been the outcome of bargaining.

     Arnold calls the no-reliance clauses "boilerplate," and they
were; transactions lawyers have language of this sort stored up for
reuse. But the fact that language has been used before does not
make it less binding when used again. Phrases become boilerplate
when many parties find that the language serves their ends. That’s
a reason to enforce the promises, not to disregard them. People
negotiate about the presence of boilerplate clauses. The sort of
no-reliance clauses that appeared in the Rissmans’ agreement were
missing from other transactions, such as the ones in Astor
Chauffeured Limousine and Acme Propane, Inc. v. Tenexco, Inc., 844
F.2d 1317 (7th Cir. 1988). Still other transactions, such as the
one discussed in LHLC Corp. v. Cluett, Peabody & Co., 842 F.2d 928
(7th Cir. 1988), include "strict reliance" clauses, entitling one
party to rely on every representation ever made by the other.
Arnold could have negotiated for the elimination of the no-reliance
clauses, or the inclusion of a strict-reliance clause, but in
exchange he would have had to accept a price lower than $17
million. Judges need not speculate about the reason a clause
appears or is omitted, however; what matters when litigation breaks
out is what the parties actually signed.

     Contractual language serves its functions only if enforced
consistently. This is one of the advantages of boilerplate, which
usually has a record of predictable interpretation and application.
If as Arnold says the extent of his reliance is a jury question
even after he warranted his non-reliance, then the clause has been
nullified, and people in Arnold’s position will be worse off
tomorrow for reasons we have explained. Rowe v. Maremont Corp., 850
F.2d 1226 (7th Cir. 1988), on which Arnold principally relies, does
not assist him. Maremont contended that as a matter of law no oral
representations survive a written contract; we rejected that
conclusion in Rowe, 850 F.2d at 1234, and again in Astor
Chauffeured Limousine, but in neither Rowe nor Astor Chauffeured
Limousine had the parties included a no-reliance warranty in their
written agreement. Arnold, by giving Randall such a warranty, put
himself in a different position.

     Only one case offers Arnold even a glimmer of support:
Contractor Utility Sales Co. v. Certain-Teed Products Corp., 638
F.3d 1061, 1083 (7th Cir. 1981), concluded that an integration
clause did not preclude reliance on prior fraudulent statements
under the common law of Pennsylvania. To the extent that Contractor
Utility Sales rests on a belief that state law allocates issues
between judge and jury in diversity litigation (for the opinion
cites only state cases in the critical passages), it has been
overtaken by subsequent decisions. See Mayer v. Gary Partners &
Co., 29 F.3d 330 (7th Cir. 1994) (overruling a line of cases that
applied state law to determine which issues must be presented to
juries). To the extent that Contractor Utility Sales states a
proposition of federal practice, it does not extend beyond simple
integration clauses--and must be deemed of doubtful validity even
with respect to them, given the wealth of later decisions such as
Jackvony, One-O-One, Angelos, and Carr. But we need not decide
whether this aspect of Contractor Utility Sales is sound, for the
agreement between Arnold and Randall contained the clauses set out
above, in addition to an integration clause. Perhaps the parties
added the language to make sure that Contractor Utility Sales could
not be used to upset their deal. No matter their motives, however,
their language forecloses any damages based on oral
representations.

     In order to get anywhere, Arnold must rid himself of the
no-reliance clauses, and to this end he argues that the entire
stock-sale agreement is voidable because signed under duress. The
parties agree that Illinois law supplies the definition of duress.
Arnold contends that he signed under duress because:

Randall threatened to fire him from his job at Tiger.

His stock was illiquid and worthless unless Randall could
be persuaded to buy it (or to sell Tiger), and Randall threatened
never to buy the stock if Arnold caused trouble.

He feared that Randall would cause Tiger to stop
reimbursing the shareholders for taxes that had to be paid on
Tiger’s profits. (Tiger became a Subchapter S corporation in 1991,
so its profits were taxable to the shareholders. Part of the 1991
agreement required Tiger to distribute dividends equal to the
shareholders’ tax obligations, and Arnold professes fear that
Randall would not honor this commitment.)
Late in 1996 Randall caused Tiger to eliminate cumulative
voting, depriving Arnold of the entitlement to elect himself to the
board.

Glick told Arnold that he would be subject to penalties
if he revealed confidential information to third parties in order
to stir up acquisition bids.

Tiger filed suit against Arnold in an Illinois court to
resolve a dispute about Arnold’s right to review Tiger’s corporate
records.

Randall (according to Arnold) threatened to "drag him
through the courts forever" unless Arnold sold his stock.

The district court concluded that none of these assertions calls
into question the validity of the agreement under Illinois law, and
we agree.

     Illinois defines duress as "a condition where one is induced
by a wrongful act or threat of another to make a contract under
circumstances which deprive him of the exercise of his free will".
Curran v. Kwon, 153 F.3d 481, 489 (7th Cir. 1998), quoting from
Kaplan v. Kaplan, 25 Ill. 2d 181, 185, 182 N.E.2d 706, 709 (1962).
The essential question is whether a "threat has left the individual
bereft of the quality of mind essential to the making of a
contract." Kaplan, 25 Ill. 2d at 186, 182 N.E.2d at 709. Arnold was
of sound mind and readily could understand his options. He had
legal and financial advice--and, despite what Arnold now says, he
had many alternatives to the sale. He could, for example, have
dissented from the decision to eliminate cumulative voting and
demanded that Tiger repurchase his stock at a price to be set by a
neutral appraiser. 805 ILCS 5/11.65(a)(3)(iii), 5/11.70. This was
his absolute right; it did not depend on demonstrating that
elimination of cumulative voting was "oppressive" or the like. If
he thought $17 million too low, he had only to present that
position to the state judiciary. Likewise with his fear that Tiger
would stop distributing the money necessary to cover taxes on its
profits. Tiger’s failure to keep its promises would have led to a
remedy in state court, and Arnold’s lawyers surely could have
informed him that although litigation (including the records-access
suit then under way) may seem to last "forever," it ends much
faster. At oral argument Arnold’s lawyer said that Arnold wanted to
avoid risk; after all, the appraisal might have concluded that his
stock was worth less than $17 million. True enough; many sensible
people want to curtail risk (and all litigation is risky); but that
objective could not be achieved if courts refused to enforce
agreements like the one between Arnold and Randall, for then
litigation would be the only way to resolve disputes. No legal
system can accept an assertion that "this contract was signed under
duress because my only alternative was a lawsuit." That would
eliminate settlement--and to a substantial degree the institution
of contract itself.

     This is not to say that a remote possibility of litigation as
an alternative to settlement always scotches a claim of duress.
Illinois uses formulaic words such as "free will," but when forced
to choose it applies a functional approach under which
opportunistic exploitation of options that contracts were designed
to foreclose equals duress. The party that performs first incurs
sunk costs, which the other may hold hostage by demanding greater
compensation in exchange for its own performance. The movie star
who sulks (in the hope of being offered more money) when production
is 90% complete, and reshooting the picture without him would be
exceedingly expensive, is behaving opportunistically. The classic
case, though not from Illinois, is Alaska Packers’ Ass’n v.
Domenico, 117 F. 99 (9th Cir. 1902) (admiralty). After a fishing
vessel reached a remote location, the crew refused to work (and
threatened to sail home) unless paid double the wage to which they
had agreed immediately before leaving port. The court held that the
vessel owner’s promise to double the wage was unenforceable because
obtained under duress: the remote location and lack of an alternate
crew had enabled the sailors to behave opportunistically. See also
Varouj A. Aivazian, Michael J. Trebilcock & Michael Penny, The Law
of Contract Modifications: The Uncertain Quest for a Benchmark of
Enforceability, 22 Osgoode Hall L.J. 173 (1984); Timothy J. Muris,
Opportunistic Behavior and the Law of Contracts, 65 Minn. L. Rev.
521 (1981). No one would have thought that the owner’s ability to
file a lawsuit could have helped; the fishing season would be over
before the case could be adjudicated, and the seamen might have
been judgment-proof anyway. Illinois cases holding that particular
agreements were made under duress because litigation was not a
feasible alternative are in the same vein. See People ex rel.
Carpentier v. Daniel Hamm Drayage Co., 17 Ill. 2d 214, 161 N.E.2d
318 (1959); Kaplan v. Keith, 60 Ill. App. 3d 804, 377 N.E.2d 279
(1st Dist. 1978). But for Arnold litigation (especially an
appraisal action under which a state court would have compelled
Tiger to buy his shares for their full value) would have been a
sensible option.
     People under indictment for murder, and facing the death
penalty, may settle their dispute and avoid the risk with a guilty
plea and a term of imprisonment. North Carolina v. Alford, 400 U.S.
25 (1970). People facing discharge at an advanced age may agree to
early retirement and resolve their dispute with a severance
package. See Henn v. National Geographic Society, 819 F.2d 824 (7th
Cir. 1987). Neither the criminal defendant nor the older worker may
accept the benefits of the bargain and later seek to avoid the
detriments on the theory that unpleasant options mean duress. In
each situation litigation offers a civilized, and proper,
alternative: the innocent person may stand trial, and the worker
may pursue a claim under the ADEA. Arnold could have litigated but
chose to settle instead. If people in Arnold’s position can’t
assure their antagonists that a settlement will bring peace, then
there will be many fewer settlements, and those that still occur
will be concluded on altered terms. Randall would not have paid $17
million had he thought that Arnold remained free to carry on their
disputes--to drag Randall through the courts forever.
     The agreement between Randall and Arnold contains a global
settlement and release. Our conclusion that the agreement is valid
means that the agreement extinguishes all of Arnold’s claims, under
both state and federal law.
Affirmed


     ROVNER, Circuit Judge, concurring. I join in the majority
opinion, and agree that under the facts of this case, the
non-reliance clause precludes damages for the prior oral
statements. I write separately only to explain further the basis
for, and scope of, that holding. As the majority opinion notes, our
holding follows that of the courts of appeals in Jackvony v. RIHT
Financial Corp., 873 F.2d 411 (1st Cir. 1989) (Breyer, J.) and
One-O-One Enterprises, Inc. v. Caruso, 848 F.2d 1283 (D.C. Cir.
1988) (R.B. Ginsburg, J.). The reasoning in those cases, as well as
other cases in this court, reveals that all circumstances
surrounding the transaction are relevant in determining whether
reliance on prior oral statements can be deemed reasonable. Thus,
although it may be determinative in many--and perhaps most--cases,
the existence of a non-reliance clause will not automatically
preclude damages for prior oral statements.

     In Jackvony, the First Circuit set forth eight factors that
are relevant in determining whether an investor’s reliance on prior
statements was reasonable: (1) the sophistication and expertise of
the plaintiff in financial and securities matters; (2) the
existence of long standing business or personal relationships; (3)
access to the relevant information; (4) the existence of a
fiduciary relationship; (5) concealment of the fraud; (6) the
opportunity to detect the fraud; (7) whether the plaintiff
initiated the stock transaction or sought to expedite the
transaction; and (8) the generality or specificity of the
misrepresentations. 873 F.2d at 416. The court then held that the
reliance on the prior statements in Jackvony was unreasonable
because the prior statements were vague, Jackvony was a
sophisticated investor, the written proxy statement instructed
Jackvony not to rely on any other statements, Jackvony seemed
anxious to expedite the transaction, and Jackvony helped draft the
written acquisition documents. Thus, the Jackvony court did not
hold that a non-reliance statement precludes a fraud claim in all
cases, but notes that it is a factor that may defeat a claim of
reliance.

     Similarly, the D.C. Circuit in One-O-One, in holding that an
integration clause rendered reliance on prior representations
unreasonable, set forth the context in which that written agreement
was reached. Specifically, the court noted that the parties reached
the written agreement after eight months of vigorous negotiations
involving many offers, promises and representations, and that the
integration clause was included to avoid misunderstandings as to
what was agreed upon in the course of those extensive negotiations.
848 F.2d at 1286. The court also rejected the plaintiffs’ claim of
fraud in the inducement based on the circumstances present in that
particular case, holding that "[w]e have here the case of ’a party
with the capacity and opportunity to read a written contract, who
[has] execute[d] it, not under any emergency, and whose signature
was not obtained by trick or artifice;’ such a party, if the parol
evidence rule is to retain vitality, ’cannot later claim fraud in
the inducement.’" Id. at 1287, quoting Management Assistance, Inc.
v. Computer Dimensions, Inc., 546 F. Supp. 666, 671-72 (N.D. Ga.
1982 ___, aff’d mem. sub nom. Computer Dimensions, Inc. v. Basic
Four, 747 F.2d 708 (11th Cir. 1984). In fact, in Whelan v. Abell,
48 F.3d 1247, 1258 (D.C. Cir. 1995), the court explicitly
recognized that the conclusion in One-O-One "was plainly not
intended to say that an integration clause bars
fraud-in-the-inducement claims generally or confines them to claims
of fraud in execution. . . . Such a reading would leave swindlers
free to extinguish their victims’ remedies simply by sticking in a
bit of boilerplate." Id.

     Thus, both Jackvony and One-O-One recognize that courts must
consider all of the surrounding circumstances in determining
whether reliance on a prior oral settlement is reasonable, and that
the existence of a non-reliance clause is but one factor, albeit a
fairly convincing one in many cases. This is also consistent with
our decision in Carr v. CIGNA Securities, Inc., 95 F.3d 544, 547
(7th Cir. 1996), which held that "[i]f a literate, competent adult
is given a document that in readable and comprehensible prose says
X . . . and the person who hands it to him tells him, orally, not
X . . . our literate competent adult cannot maintain an action for
fraud against the issuer of the document." In discussing
disclaimers in the context of a fiduciary relationship, Carr noted
that a written disclaimer may not provide a safe harbor in every
case, because "[n]ot all principals of fiduciaries are competent
adults; not all disclaimers are clear; and the relationship
involved may involve such a degree of trust invited by and
reasonably reposed in the fiduciary as to dispel any duty of
self-protection by the principal." Id. at 548. The reasonableness
of the reliance thus depends on an analysis of the surrounding
circumstances. Just as it would be unreasonable to expect a person
to pore through a 427 page document looking for "nuggets of
intelligible warnings," a person may not claim reasonable reliance
when a written disclaimer is apparent in an eight page document.
Id.

     This is nothing new. The issue of reasonable reliance has
always depended upon an analysis of all relevant circumstances. I
write separately merely to avoid the inevitable quotes in future
briefs characterizing our holding as an automatic rule precluding
any damages for fraud based on prior oral statements when a
non-reliance clause is included in a written agreement. The world
is not that simple, and our holding today cannot be interpreted so
simplistically. On the facts in this case, involving extensive
negotiations aided by counsel and with numerous rejections of
efforts to include the oral representations in the written
agreement, the non-reliance clause rendered any reliance on the
prior statements unreasonable.
