In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 05-3567
GREGORY M. SHEPARD and
AMERICAN UNION INSURANCE COMPANY,
Plaintiffs-Appellants,
v.
STATE AUTOMOBILE MUTUAL INSURANCE
COMPANY and STATE AUTO FINANCIAL CORPORATION,
Defendants-Appellees.
____________
Appeal from the United States District Court
for the Southern District of Indiana, Indianapolis Division.
No. 01-C-1103—David F. Hamilton, Judge.
____________
ARGUED APRIL 11, 2006—DECIDED SEPTEMBER 14, 2006
____________
Before FLAUM, Chief Judge, and WILLIAMS and SYKES,
Circuit Judges.
WILLIAMS, Circuit Judge. The plaintiffs-appellants sued
the defendants, claiming that the defendants breached
a confidentiality agreement by relying upon the plain-
tiffs’ confidential disclosures to acquire Meridian Insurance
Group, Inc. Because the plaintiffs cannot establish either
causation or damages, we affirm the district court’s grant of
summary judgment to the defendants.
2 No. 05-3567
I. BACKGROUND
This case centers around the efforts of plaintiff-appellant
Gregory Shepard and the defendants to acquire Meridian
Insurance Group, Inc. and its affiliated companies (collec-
tively, “Meridian”). Shepard is chairman and president
of co-plaintiff-appellant American Union Insurance Com-
pany, a company which has been in his family for three
generations and which Shepard now essentially owns. He
was the largest shareholder (20.26% shareholder) in rival
Meridian, and, after several failed courtship attempts
directly with Meridian, Shepard approached another
rival, the defendants-appellees, State Automobile Mutual
Insurance Company and State Auto Financial Corporation
(collectively, “State Auto”), to discuss a joint effort to
acquire Meridian, perhaps by hostile takeover. Like
Shepard, State Auto had been attempting to purchase
Meridian for several years and, unbeknownst to Shepard,
was in the midst of a new round of negotiations with
Meridian when Shepard approached State Auto with his
business proposal.
On September 27, 2000, Shepard spoke with State Auto’s
Chairman and CEO, Bob Bailey, and proposed a meeting to
discuss a potential joint effort to acquire Meridian. That
same day (or shortly thereafter), Bailey signed a confidenti-
ality agreement that prevented State Auto (and its officers)
from disclosing any non-public information discussed during
the meeting or trading any securities in Meridian as a
result of any information disclosed to State Auto during the
meeting.
On October 2, 2000, Shepard and Bailey, and various
other officers and attorneys from both companies, met at
State Auto for approximately two hours. During this
meeting, Shepard presented three exhibits that illus-
trated his proposed valuation of Meridian and included
some strategic issues to consider in the purchase of Merid-
No. 05-3567 3
ian, including, among other things, certain con-
cerns regarding the correct pricing of Meridian’s stock
options (issues that State Auto’s Chief Financial Officer
(CFO) apparently had failed to consider). Several of
Shepard’s analyses contained significant mathematic
and analytic errors, including a $114 million double-
counting error. At the end of the meeting, Bailey in-
formed Shepard that he would not go along with Shepard’s
proposal and the two parted ways.
According to Shepard, although State Auto refused his
business offer, it nonetheless impermissibly relied upon his
analyses and suggestions in a subsequent meeting
with Meridian, where the State Auto-Meridian merger
was consummated. On October 5, 2000, just three days after
the confidential meeting with Shepard, State Auto’s CFO
revised his financial analysis pertaining to the potential
Meridian acquisition. State Auto’s analyses
now included—for the first time—certain financial informa-
tion that had been presented by Shepard at the confidential
meeting, including the proper consideration and valuation
of outstanding Meridian stock options. The next day, on
October 6, 2000, Bailey met with Meridian’s CEO and CFO
to discuss State Auto’s proposed purchase of Meridian.
Meridian’s CEO, Norma Oman, testified that Bailey
informed her at the very outset of the meeting that he had
just had confidential discussions with Shepard, although
both Bailey and Oman contend that the substance of those
discussions was not revealed by Bailey. Oman also testified
that Bailey had told her that Shepard was “aware of every
element of the September 7th letter” that Bailey had
written to Oman. This letter outlined an initial offer and
stated that Shepard “expected to be paid more than other
shareholders.” In addition, Oman’s notes from the meeting
with Bailey included several references to Shepard, includ-
ing such entries as “Shepard mtg on 10/2 with Bailey” and
“will have litigation from Shepard.”
4 No. 05-3567
By the end of this meeting, Bailey and Oman agreed to
the key terms of State Auto’s acquisition of Meridian. The
deal was announced publicly approximately two-and-a-half
weeks later, on October 25, 2000. State Auto’s acquisition of
Meridian required Shepard (along with all other public
shareholders) to tender his shares to the new corporation in
exchange for a $30 per share price. At the time of the
transaction, Shepard owned approximately 1.5 million
shares. The Meridian acquisition closed on May 31, 2001.
Shepard sued State Auto, alleging that it had breached
their confidentiality agreement both by revealing pro-
tected confidential information to Meridian personnel and
trading in Meridian stock as a result of such confidential
information. The district court granted the defendants’
motion for summary judgment, holding that Shepard
could not establish any of the elements of his breach of
contract action. Shepard now appeals.
II. ANALYSIS
Shepard’s claims fail because the undisputed facts show
that he cannot establish either causation or damages as a
matter of law. Under Indiana law (which controls in this
diversity action), causation is an essential element of
liability in a breach of contract claim. Parke State Bank v.
Akers, 659 N.E.2d 1031, 1035 (Ind. 1995). “As in tort law, so
in contract law, causation is an essential element of liabil-
ity.” Wisc. Knife Works v. Nat’l Metal Crafters, 781 F.2d
1280, 1289 (7th Cir. 1986). Thus, a plaintiff must prove that
the alleged breach of contract was a cause in fact of his loss,
which requires a showing that the breach was a “substan-
tial factor” in bringing about the plaintiff’s damages. See
generally Lincoln Nat’l Life Ins. Co. v. NCR Corp., 772 F.2d
315, 320 (7th Cir. 1985). Although causation is normally a
question of fact for the jury, see INS Investigations Bureau
v. Lee, 784 N.E.2d 566, 575 (Ind. Ct. App. 2003), summary
No. 05-3567 5
judgment is appropriate when the undisputed facts estab-
lish that a plaintiff cannot show the requisite causation as
a matter of law. See Buckner v. Sam’s Club, Inc., 75 F.3d
290, 293 (7th Cir. 1996) (affirming summary judgment
because the plaintiff could not establish the “critical
element of causation”); Harris v. Owens-Corning Fiberglas
Corp., 102 F.3d 1429, 1433 (7th Cir. 1996) (same).
Under Indiana law, a plaintiff carries the burden to plead
and prove damages. Lincoln Nat’l Life Ins. Co., 772 F.2d at
320. Importantly, “[a] mere showing of a breach of contract
does not necessarily entitle a plaintiff to damages.” Id.
Instead, a plaintiff is limited to recovering only the losses
actually suffered from the breach, and an injured party may
not be placed in a better position than he would have
enjoyed if the breach had not occurred. Fowler v. Campbell,
612 N.E.2d 596, 603 (Ind. Ct. App. 1993). Moreover,
damages cannot be based on mere speculation and conjec-
ture. Rather, a plaintiff must have adequate evidence to
allow a jury to determine with sufficient certainty that
damages in fact occurred, and, if so, to quantify such
damages with some degree of precision. See id.; Turbines v.
Thompson, 684 N.E.2d 254, 258 (Ind. Ct. App. 1997);
Fowler, 612 N.E.2d at 603. Thus, “[a] damage award must
be referenced to some fairly defined standard, such as cost
of repair, market value, established experience, rental
value, loss of use, loss of profits or direct inference from
known circumstances.” Fowler, 612 N.E.2d at 603.
Although the parties separate the issues of causation and
damages, these two issues are inextricably linked in this
case. See Wisc. Knife Works, 781 F.2d at 1289 (noting that
the arguments that a party “sustained no damage from the
alleged breach of contract” or that “the alleged breach was
not causally related to that damage” amount to “the same
thing”). That is, they both boil down to the predicate issue
of whether Shepard can present sufficient evidence to
establish that State Auto’s purported misuse of his pro-
6 No. 05-3567
tected disclosures1 was a substantial factor in Shepard
receiving what he contends to be the inade-
quate consideration of $30 per share cash-out. In the
district court, Shepard advanced two theories of causation
and damages. First, he advanced a “lost business opportu-
nity” theory, in which he claimed State Auto’s breach
precluded him from purchasing Meridian directly. He
wisely abandoned that theory on appeal in light of the
undisputed evidence that Meridian’s Board of Directors had
an unmitigated dislike of Shepard and, as a result, was
extremely unlikely to have approved any tender offer by
him. In fact, the board had rejected his two prior offers: an
August 30, 2000 initial offer of $20 per share (rejected on
September 8, 2000), and then an amended offer on Septem-
ber 18, 2000 of $27 per share (rejected on September 21,
2000), both of which directly preceded State Auto’s $30 per
share offer. Shepard’s second theory rests on the contention
that Meridian shares were worth as much as $45 per share
and therefore Shepard’s forced cash-out at $30 per share
was a substantial loss. Shepard owned approximately 1.5
million shares, which would translate to a loss approximat-
ing $22 million—and we use the term “loss” loosely here, as
there is no dispute that Shepard profited handsomely from
the $30 per share price; the sole issue is whether he was
entitled to even great profit.
Under Shepard’s theory, State Auto relied upon his
confidential disclosures pertaining to both the “true” value
of Meridian and his purported bidding strategy to alter
materially its subsequent offer to acquire Meridian. Specifi-
1
The district court determined that Shepard’s disclosures
were not protected because they were either misrepresenta-
tions, inaccuracies, or information in the public domain. We will
assume, for the sake of argument, that Shepard’s disclosures were
protected and that he could establish that State Auto breached
the contract.
No. 05-3567 7
cally, Shepard contends that after his presentation, State
Auto colluded with Meridian to create a $25 million break-
up fee that effectively detracted any would-be suitors from
coming forward with higher competing offers. Shepard also
claims that State Auto boosted its offer price from $27 to
$30 per share (knowing that Shepard had informed Merid-
ian that he would not bid higher than $27 per share).
Shepard argues:
It is undisputed that Defendants’ acquisition of Merid-
ian resulted in the forced sale of Shepard’s MIGI
[Meridian] shares to Defendants, over Shepard’s
objection. Given that, if a reasonable jury could con-
clude that Defendants breached the Agreement by
“trad(ing) in” MIGI stock, and could conclude that
Shepard’s shares were worth more than $30 per share,
then the jury not only could conclude that Defendants
caused the resulting loss to Shepard, but would con-
clude that. In other words, Defendants’ “trad[ing] in”
MIGI stock was undeniably the cause of Shepard’s loss
of his MIGI shares.
Pls. Br. at 54. But this argument misses the mark: it is not
enough for Shepard to show merely that State Auto
breached its confidentiality agreement with Shepard and
that Shepard’s shares were arguably worth more than $30
per share. Even if both of those allegations were true,
Shepard must still show that there is the requisite nexus
between State Auto’s breach and Shepard’s subsequent
damages. See, e.g., Parke State Bank, 659 N.E.2d at 1034.
That is, State Auto’s breach must be a cause-in-fact (i.e., a
“substantial factor”) of Shepard receiving the allegedly
inadequate consideration for his shares. See id.
When the causation issue is properly framed, Shepard’s
argument converts to what appears to be a concession
that he does not have much—if any—evidence to estab-
lish causation: “Whether Defendants’ disclosures to Merid-
8 No. 05-3567
ian of the substance or existence of the [confidentiality]
Agreement, or of Plaintiffs’ other confidential information,
was a cause of Plaintiffs’ damages is less clear, but it is still
a matter that a reasonable jury could easily resolve in
Plaintiffs’ favor.” Pls. Br. at 54. Aside from this conclusory
statement, Shepard does not explain how “a reasonable jury
could easily resolve” this matter in his favor. Indeed, he
faces a steep uphill climb here because the undisputed facts
show that during the entire courtship history for Meridian
(which spanned many months), no one—including
Shepard—offered to pay more than $30 per share to acquire
Meridian. Thus, the undisputed facts tend to show that
Shepard received a premium over the open-market price for
Meridian. In other words, how can Shepard establish that
State Auto’s breach was a substantial factor in his receiving
“only” $30 per share remuneration when no one else in the
marketplace was willing to pay more?
To circumvent this thorny issue, Shepard provides two
circuitous arguments. First, he contends that State Auto
created a $25 million dollar break-up fee that sup-
pressed other entities from coming forth with higher bids.
According to Shepard’s expert, this unusually high break-up
fee could have prevented other would-be suitors from
entering into the bidding for Meridian. Essentially, Shepard
contends that State Auto requested this restrictive provi-
sion to prevent other would-be-bidders from coming out of
the woodwork with higher bids, and, importantly, did so
based upon Shepard’s confidential disclosure that he
personally valued Meridian to be worth more than $30 per
share. But both Shepard and his expert conceded that they
could not identify any other company that was willing to
pay more than $30 per share for Meridian. Indeed, no
company came forward with an offer higher than $20 or $27
per share in the two-month period between Shepard’s initial
public offer of $20 per share, his subsequent amended offer
of $27 per share, and State Auto’s final bid. Moreover,
No. 05-3567 9
despite his proclamations that Meridian was worth as high
as $45 per share, Shepard himself never made an offer
greater than $27 per share. Thus, Shepard is pointing to
nothing more than a discrepancy between a company’s
hypothetical value on paper and its value in the open
marketplace. As any disappointed seller can document,
market forces do not always map one-to-one with theoreti-
cal valuations.
Shepard also contends that State Auto wrongfully
increased its bid from $27 to $30 per share, relying on his
confidential (but admittedly inaccurate) information that he
would not bid higher than $27 for Meridian. But this is a
curious argument because State Auto’s bid was an increase
in price above what Shepard was willing to offer, and, in
any event, was the highest bid received by Meridian.
Shepard seems to be suggesting—although he does
not develop this precise argument—that State Auto inter-
nally valued Meridian at more than $30 per share, and may
have calibrated its bid to just exceed Shepard’s bid, and yet
still remain below what its “true” bid would have been but-
for the misuse of Shepard’s confidential information. Under
this view, the Meridian deal closed at a lower price than
what would have been the “real” price without Shepard’s
revelations. The record does contain State Auto documents
suggesting that State Auto initially valued Meridian at
approximately $35 per share (with some variations). As a
result, perhaps a jury could infer that State Auto lowered
its offer price to $30 per share, purportedly because it knew
that Shepard would not raise his $27 per share offer. Yet
there is nothing in the record to establish that Meridian
intended to begin its offer at $35 per share, much less
intended to continue bidding against itself. To the contrary,
if State Auto hoped to end the bidding at $35 per share, it
certainly would not start its offer at that number—and,
indeed, as shown below, it started its bidding at the
lower amount of $27 per share. As a result, the fact that the
10 No. 05-3567
deal closed at a favorable price to State Auto (but nonethe-
less not a fire-sale price under anyone’s terms—recall that
Shepard was pitching $20 and $27 per share as very
favorable valuation for the shareholders) may speak more
to Meridian’s eagerness to avoid a hostile takeover by
Shepard.
This argument may be the closest that Shepard comes
to a triable issue of fact, but, again, we are carrying much
of the weight here, since Shepard does not develop it.
Nonetheless, it still is not enough for at least two reasons.
First, it is undisputed that on September 7, 2000, approxi-
mately one month before its confidential meeting with
Shepard (and thus before it could have possibly betrayed
Shepard’s confidences), State Auto tendered a $27 per share
private offer to Meridian. Thus, $27 was State Auto’s
starting point and there is nothing in the record to
indicate that State Auto was likely to ratchet any sub-
sequent offer above the $30 per share price (despite its
private valuation estimates pertaining to the final potential
bid price), particularly when there was no other
suitor offering anything higher than $27 per share. And
Shepard withdrew his claim of a lost business opportunity.
Therefore, he cannot claim that State Auto’s increased price
deprived him of the Meridian acquisition. As a result,
Shepard’s argument still requires the jury to engage in
rampant speculation and conjecture as to what State Auto
would have bid in the absence of the breach, which, for the
reasons noted above, is simply too tenuous a thread to
support the number and nature of inferences that Shepard
seeks to invoke. Without more, Shepard cannot estab-
lish that State Auto artificially altered its bidding in
reliance on his disclosures.
Finally, although Shepard does not articulate this theory
in these precise terms, his argument could be read as
suggesting that State Auto’s increase to $30 per share
increased the likelihood of the deal being consummated.
No. 05-3567 11
Therefore, but-for Shepard’s disclosures the deal would
not have gone through at all, and Shepard’s shares presum-
ably could have been redeemed at a higher price somewhere
down the road. But there is nothing in the record pertaining
to the likelihood of another potential suitor, nor any
evidence tending to show that Shepard could have consum-
mated the deal himself, much less that market conditions
made it inevitable that Meridian’s share price would
subsequently rise. As a result, we once again return to the
fundamentally speculative nature of Shepard’s causation
argument. And although Shepard is correct in maintaining
that, in the normal course, the issue of causation is one for
the jury, that is only the case where there is sufficient
evidence to allow a jury to reach a factual conclusion
without engaging in undue speculation. See Luigino’s, Inc.
v. Peterson, 317 F.3d 909, 911-12 (8th Cir. 2003) (affirming
summary judgment because plaintiff could not establish a
causal link between defendant’s misuse of confidential
information and damages); Buckner, 75 F.3d at 293-94
(affirming summary judgment because the plaintiff could
not establish the “critical element of causation”).
The same fundamental problems noted above apply to the
issue of damages. Indiana law requires a sufficient degree
of certainty to support damage awards. The typical recovery
for breach of contract is a party’s expectation interest (i.e.,
the benefit of the bargain). Fowler, 612 N.E.2d at 603. But
here, Shepard’s contract was a confidentiality agreement
(without a liquidated damages provision)—not a contract
for the sale of Meridian. The absence of any other would-be
suitor willing to pay more than $30 per share renders any
damages above that amount inherently speculative, and,
importantly, would result in a windfall to Shepard. Again,
when a plaintiff cannot establish damages with sufficient
certainty to avoid speculation or conjecture by the jury, the
defendant is entitled to judgment as a matter of law. See,
e.g., A.V. Consultants, Inc. v. Barnes, 978 F.2d 996, 1001
12 No. 05-3567
(7th Cir. 1992) (affirming summary judgment because
“[a]ppellant presented nothing outside the pleadings that
allowed any inference of damage”); see also Mid-America
Tablewares, Inc. v. Mogi Trading Co., Ltd., 100 F.3d 1353,
1363 (7th Cir. 1996) (noting that where a party could not
prove its lost profits with reasonable certainty, summary
judgment or judgment as a matter of law may be appro-
priate).
Indeed, in light of the comments above, it does not appear
that Shepard has suffered any actual or consequential
damages here—aside from the indignity of having his
confidences betrayed. A minor complication (which neither
party mentions) arises from the fact that Indiana recognizes
nominal damages in breach of contract actions. See Am.
Fletcher Nat’l Bank & Trust Co. v. Flick, 252 N.E.2d 839,
846 (Ind. Ct. App. 1969) (“The law presumes that at least
nominal damages result from a harm.”); Smith v. Bruning
Enterprises, Inc., 424 N.E.2d 1035, 1037 (Ind. Ct. App.
1981) (holding that nominal damages award was appropri-
ate where “the evidence supporting the damages was
speculative”). Thus, notwithstanding the policy consider-
ations that would mitigate against the costs and resources
expended on a trial where only nominal damages were
available from the outset, Shepard may nonetheless be
entitled to try this case in some form under those terms
(provided he had sufficient evidence to establish a breach of
the contract—an issue that we do not reach). But we need
not decide whether Indiana law supports such an odd result
because Shepard cannot establish the requisite causation in
this case.
III. CONCLUSION
For the foregoing reasons, we AFFIRM the district court’s
grant of summary judgment in favor of the defendants.
No. 05-3567 13
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—9-14-06