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Lehman v. Dow Jones & Co.

January 30, 1986


Appeal from an order of the District Court for the Southern District of New York, William C. Conner, Judge. The order granted defendant's motion for summary judgment in an action wherein plaintiff, a California attorney, sought to recover a finder's fee or on quantum meruit, despite the lack of a signed agreement with defendant complying with New York General Obligations Law § 5-701(a)(10), and also sought damages because of defendant's alleged fraud in promising to pay him for his services without intending at the time to do so and because of defendant's using, without plaintiff's consent and to his detriment, allegedly confidential information obtained from him. Reversed on the contract and quantum meruit claims, affirmed on the fraud and breach of confidence claims.

Author: Friendly

Before: FRIENDLY, MANSFIELD and WINTER, Circuit Judges.

FRIENDLY, Circuit Judge:

Plaintiff Norton J. Lehman is a California attorney who devotes most of his professional time to working as a "finder" of corporate acquisition deals, primarily concerning cable television companies. During the period in which the events described herein took place, Lehman maintained his office in Beverly Hills, California. Defendant Dow Jones & Company, Inc. ("Dow Jones") is a publicly held Delaware corporation with its principal executive and editorial offices in New York City, where it engages in a variety of activities including publication of The Wall Street Journal. The present action relates to services allegedly rendered by Lehman in connection with Dow Jones' acquisition of a substantial equity interest in Continental Cablevision, Inc. ("Continental"). Lehman has pleaded six theories of liability. The first four--breach of express contract, breach of implied contract, unjust enrichment, and quantum meruit --relate to Dow Jones' alleged breach of an oral contract to pay Lehman a finder's fee if he was a procuring cause of Dow Jones' acquiring an interest in Continental. The parties and the district court have treated these together under the style of "contract-like" claims.*fn1 In a fifth claim, Lehman asserts that Dow Jones promised to pay him for his services without any present intention of doing so, thus fraudulently inducing him to perform such services. In a sixth claim, Lehman asserts that Dow Jones breached an agreement not to use or disclose certain allegedly confidential information.

The action was originally brought in the District Court for the Central District of California, with federal jurisdiction predicated on diverse citizenship, 28 U.S.C. § 1332, but was transferred, on Dow Jones' motion, to the Southern District of New York. There Dow Jones moved for summary judgment. It argued that the "contract-like" claims were barred by the "finder's provision" of the New York statute of frauds,*fn2 that the fraud claim was simply a contract claim in disguise, and that the breach of confidence claim failed as a matter of law and in any event could not be substantiated. The court granted the motion.

The salient facts are as follows:*fn3 Lehman's first contact with Dow Jones took place in the fall of 1979 when he endeavored to interest it in the acquisition of a cable company that he was representing. Warren R. Phillips, chairman and chief executive officer of Dow Jones, referred him to George W. Flynn, its senior vice president in charge of acquisitions, who was based in New Jersey. Flynn said that Dow Jones was interested in acquiring cable companies and would welcome information about Lehman's client, which Lehman promptly sent. Several months later, Flynn wrote from New Jersey indicating lack of interest. However, in a subsequent telephone conversation Flynn informed Lehman that Dow Jones was very much interested in acquiring cable systems, authorized him to find one, and offered to pay him a finder's fee if he procured such an acquisition for Dow Jones. Lehman claims that on the basis of these representations he began to search for promising acquisition prospects.

In May 1980, Lehman sent Phillips and Flynn information about another cable company; in this letter he stated he was "going forward on this matter as a finder for Dow Jones on the Goldman, Sachs & Co. formula of 5-4-3-2-1% of total consideration . . . to be paid me by Dow Jones."*fn4 Flynn telephoned from New Jersey indicating lack of interest because the company was too small, but he thanked Lehman and encouraged him to investigate further acquisition candidates for Dow Jones.

Lehman's next potential acquisition candidate was a California company in the specialty publishing field. In a letter to Flynn, he stated that he was proceeding on the basis that he would be paid a 4% fee. Flynn telephoned that the proposed fee arrangement was a fair one, but that Dow Jones was not interested in acquiring that company. However, Flynn confirmed Dow Jones' interest in acquiring a cable company and encouraged Lehman's continued efforts.

This was followed by a more extensive effort with respect to Dow Jones' possible acquisition of Falcon Communications ("Falcon"), a California-based cable company. On this occasion Lehman telephoned Phillips in New York and was referred to Ray Shaw, Dow Jones' president. Shaw indicated that Dow Jones might be interested in Falcon and agreed that it would pay Lehman a finder's fee should the acquisition close. On January 9, 1981, Lehman wrote Shaw a long letter in regard to Falcon; the letter repeated that Lehman was "going forward on the 'standard' Lehman or Goldman, Sachs formula," which the letter subsequently spelled out. See supra note 4. As a result of a further telephone call with Shaw, a meeting was held in New York between the president of Falcon, his lawyer, and Lehman and Phillips, Shaw, and other Dow Jones officials on January 14, 1981. During the meeting Shaw confirmed to Falcon's president that Lehman was representing Dow Jones in the proposed transaction. Ultimately no transaction occurred.

In June 1981 Lehman proposed another acquisition to Frederick Harris, Dow Jones' vice president of finance. This time Lehman proposed that his fee should be based on the "Daniels" formula, to wit, 5% of the first ten million dollars and 1% of each successive million of the total acquisition price. Harris agreed to the formula. Again nothing occurred.

This was the background for Lehman's proposal of Continental as a candidate for acquisition. Lehman had been following the company for some time. In the fall of 1981 he learned that it intended to make a public offering. Lehman did not consider the proposed offering price range to be realistic, advised Continental officials to that effect, and suggested that an alternative to a public offering would be a sale to one of the companies he represented. Timothy Neher, Continental's vice president and treasurer, agreed to send Lehman Continental's preliminary prospectus dated August 20, 1981, which had been filed with the SEC in anticipation of the proposed public offering but was not yet available to the public. The understanding was that Lehman could use it for the purpose of making an analysis, which he could communicate to the companies he represented. On September 11, 1981, Lehman had a telephone conversation with Harris in New Jersey. Harris, who knew of Continental's proposed public offering, said there was no point in attempting to deal with the company under such circumstances; but Lehman, on the basis of his prior talks with Continental officers, insisted to the contrary. Harris agreed that Lehman could go forward on a 1% compensation formula and that Dow Jones would keep his information confidential. On September 14, 1981, Lehman sent Dow Jones a five page submission letter dated September 10, 1981, containing an analysis of Continental based on his study of the preliminary prospectus. The letter confirmed the agreement on a 1% compensation formula and emphasized the confidentiality of the information regarding Continental, requesting that it not be disclosed to anyone outside of Dow Jones without first conferring with Lehman. On September 15, 1981, Harris telephoned Lehman that Dow Jones was not interested in going forward with the proposed Continental acquisition.

On September 24, 1981, George Wiegers, a partner of Lehman Brothers Kuhn Loeb, Inc., met with Shaw and Harris and suggested the availability of Continental. Lehman thinks he may have inadvertently brought this about. After Harris had disclaimed any interest by Dow Jones in Continental, Lehman suggested to Continental that LIN Broadcasting might be a prospective suitor and recommended that it "check out" LIN with F. Warren Hellman, a former Lehman Brothers partner known to both Continental and LIN. Lehman asserts, based on deposition testimony from Harris, that Wiegers told Shaw and Harris at the September 24 meeting that, although he had not yet spoken with anyone at Continental, he knew the company would be receptive to an equity investment because of his recent contacts with Hellman. Harris had Lehman's September 10 submission letter with him at the meeting and showed it to Wiegers, who remarked, "Well, if something goes through, we might have a problem later on." As a result of the meeting, negotiations took place between Dow Jones and Continental, and in November 1981 Dow Jones acquired a $78 million minority interest in the company. Although there was no written agreement, Dow Jones paid Lehman Brothers a finder's fee of $780,000, representing 1% of the value of the transaction.

As stated, Judge Conner granted Dow Jones' motion for summary judgment. The bulk of his opinion concerned the "contract-like" claims. The initial problem here was that New York's statute of frauds contains the special finder's provision quoted in note 2 supra, while California's statute of frauds does not. Judge Conner began by deciding, with obvious correctness, that, despite Klaxon Co. v. Stentor Electric Manufacturing Co., 313 U.S. 487, 85 L. Ed. 1477, 61 S. Ct. 1020 (1941), he, as a transferee judge, must apply the choice of law rules of the state--to wit, California-- where the transferor court sat. See Van Dusen v. Barrack, 376 U.S. 612, 639, 11 L. Ed. 2d 945, 84 S. Ct. 805 (1964). He characterized these rules as "a hybrid of 'governmental interest' analysis and 'comparative impairment' analysis," citing Offshore Rental Co. v. Continental Oil Co., 22 Cal. 3d 157, 161-65, 583 P.2d 721, 723-26, 148 Cal. Rptr. 867, 869-72 (1978) (en banc), and Bernhard v. Harrah's Club, 16 Cal. 3d 313, 320-23, 546 P.2d 719, 723-26, 128 Cal. Rptr. 215, 219-22 (en banc), cert. denied, 429 U.S. 859, 97 S. Ct. 159, 50 L. Ed. 2d 136 (1976). He identified the policy of the pertinent section of New York's statute of frauds as being "designed to protect against sham claims for commissions, thereby enhancing the state's position as a national business center, especially for negotiation of the kind of corporate transactions involved in this case," citing Hutner v. Greene, 734 F.2d 896, 899 (2nd Cir. 1984), and Intercontinental Planning, Ltd. v. Daystrom, Inc., 24 N.Y.2d 372, 382-83, 300 N.Y.S.2d 817, 826-29, 248 N.E.2d 576 (1969). On the other hand, California's interest lies in "'upholding the reasonable expectations of its residents who are parties to agreements that would be valid and enforceable absent any [Statute of] Frauds restriction,'" the quoted language being from Denny v. American Tobacco Co., 308 F. Supp. 219, 223 (N.D. Cal. 1970), a diversity case applying California choice of law rules. Following the approach signalled by Justice Traynor's seminal article, Is This Conflict Really Necessary, 37 Texas L. Rev. 657 (1959), judge Conner found that there was no true conflict here because California's interest lay only in protecting the reasonable expectations of its residents: Lehman, as a professional finder, "should have known that the New York Statute of Frauds would govern his dealings with Dow Jones, and accordingly, he could not have held a reasonable expectation that his alleged oral contract for a finder's fee would be enforceable." Since California thus would find that its interests were not implicated, it would apply the New York statute of frauds. The judge then went on to hold that the exception for an attorney at law in the New York's finder's provision did not apply to Lehman because he was not admitted to practice in New York.

Turning to the fraud claim, Judge Conner ruled, citing Solin Lee Chu v. Ling Sun Chu, 9 A.D.2d 888, 889, 193 N.Y.S.2d 859, 860 (1st Dep't 1959), that Lehman could not avail himself of such a claim because this would circumvent the statute of frauds. He also sustained Dow Jones' position with respect to the breach of confidence claim, finding that the information given to Dow Jones was derived wholly from public sources and that, even if this were not true, Lehman had forfeited any claim to confidentiality by disseminating the same information to at least four other companies, in one instance without even requesting that it be held in confidence. Accordingly, he granted Dow Jones' motion for summary judgment in toto. This appeal by Lehman followed.


1. The "Contract-Like" Claims

We do not agree that California would find its policy of protecting the reasonable expectations of its residents inapplicable to Lehman. Putting aside that even if Lehman had read the New York statute of frauds he would have discovered that on its face the finder's provision was inapplicable to him as an attorney, see infra, the argument assumes not only that Lehman knew or ought to have known that the finder's provision existed in the first place, but also that he should have concluded that California would choose to apply the New York statute of frauds rather than its own--the very point here at issue. Beyond this we do not think California would consider that one of its residents lacks a reasonable expectation of compensation because he knows that a statute of frauds can be successfully invoked against him. Many oral contracts within the statutes of frauds are performed, as was Dow Jones' contract with Lehman Brothers in this very case. When a finder has repeatedly put a responsible company like Dow Jones on notice that he expects a fee, and when the company has orally agreed to pay one, as Lehman alleges, the finder has a reasonable expectation of obtaining a fee even if he is also aware that the corporation may take shelter under a statute of frauds. Denny V. American Tobacco Co., 308 F. Supp. 219 (N.D. Ca. 1970), is not to the contrary. Denny had no contract, oral or written, for the payment of a fee by ...

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