AES Corp v. Dow Chem Co

Opinions of the United
2003 Decisions States Court of Appeals
for the Third Circuit

4-14-2003

AES Corp v. Dow Chem Co
Precedential or Non-Precedential: Precedential

Docket 01-3373

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 PRECEDENTIAL

Filed April 14, 2003

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 01-3373

AES CORP.,
Appellant
v.
THE DOW CHEMICAL COMPANY;
DYNEGY POWER CORPORATION
f/k/a Destec Energy Inc.

On Appeal From the United States District Court
For the District of Delaware
(D.C. Civil Action No. 99-cv-00673)
District Judge: Honorable Joseph J. Farnan, Jr.

Argued May 23, 2002
Before: MCKEE, STAPLETON and WALLACE,*
Circuit Judges

(Filed: April 14, 2003)

* Honorable J. Clifford Wallace, United States Circuit Judge for the
Ninth Circuit, sitting by designation.
 2

Dennis E. Glazer
James W.B. Benkard (Argued)
Frances E. Bivens
Davis, Polk & Wardwell
450 Lexington Avenue
New York, NY 10017
and
Michael D. Goldman
Stephen C. Norman
Potter, Anderson & Corroon
1313 North Market Street
6th Floor - P.O. Box 951
Wilmington, DE 19899
Attorneys for Appellant
Herbert L. Zarov
Michele L. Odorizzi (Argued)
Daniel J. Delaney
Mayer, Brown, Rowe & Maw
190 South LaSalle Street
Chicago, IL 60603
and
David C. McBride
John W. Shaw
Young, Conaway, Stargatt & Taylor
P.O. Box 391
1000 West Street
Brandywine Building - 17th Floor
Wilmington, DE 19899
Attorneys for Appellee

OPINION OF THE COURT

STAPLETON, Circuit Judge:

I. Introduction
The AES Corporation (“AES”) operates power facilities.
AES alleges that Dow Chemical Company (“Dow”) and its
subsidiary, Destec Energy, Inc. (“Destec”),1 violated Sections

1. Destec has since changed its name to Dynegy Power Corporation.
 3

10(b) and 20(a) of the Securities Exchange Act of 1934 (the
“Exchange Act”) in connection with a transaction in which
AES purchased the stock of one of Destec’s subsidiaries,
Destec Engineering, Inc. (“DEI”). DEI’s sole asset was a
contract to design and construct a power plant in The
Netherlands (the “Elsta Plant”). According to AES, Dow and
Destec conspired to sell DEI at an artificially inflated price
by making misrepresentations material to an evaluation of
DEI.
During the pendency of this case in the District Court,
AES and Destec entered into a settlement agreement. Thus,
only the claims against Dow remain. There has been no
discovery. Dow moved for summary judgment, relying solely
on documents relating to the transactions in which AES
acquired DEI’s stock. In response, AES filed a Rule 56(f)
affidavit requesting discovery in identified areas. The
District Court nevertheless granted Dow’s summary
judgment motion. The District Court held that certain
clauses in the transaction documents rendered AES’s
reliance on the alleged misrepresentations unreasonable as
a matter of law.

II. Background
Dow formed Destec to build and run power plants that
would supply power to Dow Chemical facilities and third-
party users. In 1996, after determining that it could not
profitably run Destec as its subsidiary, Dow retained
Morgan Stanley to perform a valuation of Destec in order to
initiate a public sale.
Morgan Stanley issued a Confidential Offering
Memorandum on behalf of Destec. As a precondition to
receiving the Offering Memorandum, AES signed a
Confidentiality Agreement that provided in part:
We [AES] acknowledge that neither you [Destec], nor
Morgan Stanley [Destec’s Investment Banker] or its
affiliates, nor your other Representatives, nor any of
your or their respective officers, directors, employees,
agents or controlling persons within the meaning of
section 20 of the Securities Exchange Act of 1934, as
amended, make any express or implied representation
 4

or warranty as to the accuracy or completeness of the
Information, and we agree that no such person will
have any liability relating to the Information or for any
errors therein or omissions therefrom. We further agree
that we are not entitled to rely on the accuracy or
completeness of the Information and that we will be
entitled to rely solely on any representations and
warranties as may be made to us in any definitive
agreement with respect to the Transaction, subject to
such limitations and restrictions as may be contained
therein.
App. at 197, ¶ 5. Dow was not a party to the Confidentiality
Agreement but is alleged to have been a “controlling
person” of Destec within the meaning of § 20(a) of the
Exchange Act.
The Offering Memorandum included projections and
estimates about the future performance of Destec’s
businesses, including DEI and the Elsta Plant. Like the
Confidentiality Agreement, the Offering Memorandum
warned readers that they were not to rely on the accuracy
or completeness of information contained therein. It further
stated:
[o]nly those particular representations and warranties
which may be made to a purchaser in a definitive
agreement, when, as, and if executed, and subject to
such limitations and restrictions as may be specified in
such definitive agreement, shall have any legal effect.
App. at 7 (alteration in original).
Dow and Destec provided information about Destec to
potential bidders in several other ways. First, Destec
officers gave a presentation to potential bidders, which AES
representatives attended. Dow and Destec also sent certain
documents to potential bidders and made others available
in a room at a Destec facility in Houston, Texas. Further,
Dow and Destec gave potential bidders a computer model to
value the Destec assets. This model included assumptions
about the expenses and revenues of the Elsta Plant. Lastly,
Dow and Destec allowed AES, as part of its due diligence,
to visit the Elsta Plant.
 5

AES contacted Dow about the possibility of purchasing
the international assets of Destec. Dow responded that it
would prefer to sell all of Destec, rather than dispose of it
piecemeal. As a result, AES approached NGC Corporation
(“NGC”) to propose submitting a joint bid for all of Destec,
and a joint bid was subsequently made.
The AES/NGC joint bid was accepted by Dow. The
transaction took place in two steps. First, NGC acquired all
of the stock of Destec pursuant to an Agreement and Plan
of Merger (the “Merger Agreement”) entered into by Dow,
Destec, and NGC. Second, AES purchased all of the
international assets of Destec, including all of DEI’s
outstanding stock, pursuant to an Asset Purchase
Agreement between AES and NGC.
Section 4.6 of the Merger Agreement, to which AES was
not a party, provided as follows:
Except for the representations and warranties
contained in this Article IV, neither Dow nor any other
person makes any other express or implied
representation or warranty on behalf of Dow.
App. at 235. Article IV of the Merger Agreement contained
two pages of representations and warranties of Dow. It
warranted that it was duly organized as a corporation; that
it was authorized to enter the agreement; that the execution
and consummation of the agreement would not violate the
terms of any court order or Dow contract; that no
government approval was necessary; and that no broker
was entitled to a fee in connection with the transaction.
Article IV contained no representation or warranty with
respect to the Elsta Plant.
Similarly, Section 3.4 of the Asset Purchase Agreement,
signed by NGC and AES, states that “except for the
representations and warranties contained in this Article III,
neither NGC nor any other person (as defined in the Merger
Agreement) makes any other express or implied
representation or warranty on behalf of NGC.” App. at 280-
81, Section 3.4. The Merger Agreement defines “Person” to
“mean an individual, partnership, joint venture, trust,
corporation, limited liability company or other legal entity
or Governmental Entity.” App. at 216. Article III of the
 6

Asset Purchase Agreement contains limited representations
and warranties by NGC very similar to those made by Dow
in the Merger Agreement.
The Merger Agreement provided that “[t]his Agreement
and the Confidentiality Agreement, and certain other
agreements executed by the parties hereto as of the date of
this Agreement, constitute the entire agreement, and
supersedes (sic) all prior agreements and understandings
(written and oral), among the parties with respect to the
subject matter hereof.” App. at 265, Section 9.9.
According to AES, shortly after purchasing DEI and
Destec’s other international assets, it realized that the Elsta
Plant would cost far more to complete than its due diligence
investigation had indicated and would open for operation
much later than Dow and Destec had represented it would.
Instead of providing the predicted $31 million in profit, the
project ultimately occasioned a $70 million loss. AES
contends that Dow knew specific facts about the Elsta
Plant that contradicted the representations it had made
prior to and during due diligence. Its complaint alleges
fourteen affirmative misrepresentations and eight material
omissions upon which it relied. Some involved profit and
cost projections, but others involved currently existing
facts. Further, AES contends that, as part of the scheme to
defraud, Dow concealed the true state of the Elsta Plant
and frustrated its due diligence efforts by causing Destec
and its employees to provide false and misleading
information to AES.
The District Court’s opinion refers to all of the above
quoted provisions of the transaction documentation and
“concludes that the ‘no representation/non-reliance’
clauses in the agreements between Dow and AES are
enforceable.” App. at 15. The reference to “agreements
between Dow and AES” is not clear to us, but we assume
for present purposes that AES’s commitment in the
Confidentiality Agreement was made for the benefit of Dow
and, if enforceable, is enforceable by it. In that document,
AES “acknowledge[d]” that no “express or implied
representations or warranty as to the accuracy or
completeness of the Information” had been made and
agreed (1) that Destec and Dow would not have “any
 7

liability relating to the Information” and (2) that AES would
be entitled to rely solely on the representations and
warranties it would be able to secure in “any definitive
agreement.” App. at 197, ¶ 5. In order to avoid further
repetition of this acknowledgment and agreement, we will
refer to them hereafter as the “non-reliance” clause.

III. Analysis

A. The Federal Law
Section 10(b) of the Exchange Act prohibits the “use or
employ, in connection with the purchase or sale of any
security[,] . . . [of] any manipulative or deceptive device or
contrivance in contravention of such rules and regulations
as the Commission may prescribe.” 15 U.S.C. § 78j(b). Rule
10b-5, which was promulgated to implement Section 10(b),
makes it unlawful for anyone engaged in the purchase or
sale of a security to:
(a) To employ any device, scheme, or artifice to
defraud,
(b) To make any untrue statement of a material fact or
to omit to state a material fact necessary in order to
make the statements made, in the light of the
circumstances under which the were made, not
misleading, or
(c) To engage in any act, practice, or course of business
which operates or would operate as a fraud or deceit
upon any person[.]
17 C.F.R. § 240.10b-5. “To state a valid claim under Rule
10b-5, a plaintiff must show that the defendant ‘made a
misstatement or an omission of a material fact (2) with
scienter (3) in connection with the purchase or the sale of
a security (4) upon which the plaintiff reasonably relied and
(5) that the plaintiff’s reliance was the proximate cause of
his or her injury.’ ” Semerenko v. Cendant Corp., 223 F.3d
165, 174 (3d Cir. 2000).
The “reasonable reliance” element of a Rule 10b-5 claim
requires a showing of a causal nexus between the
 8

misrepresentation and the plaintiff’s injury, as well as a
demonstration that the plaintiff exercised the diligence that
a reasonable person under all of the circumstances would
have exercised to protect his own interests. Straub v.
Vaisman and Co., Inc., 540 F.2d 591, 597-98 (3d Cir.
1976). In Straub, we identified a non-exclusive set of factors
to aid in determining whether a party’s reliance was
reasonable under all of the circumstances. We noted that
courts may consider (1) whether a fiduciary relationship
existed between the parties; (2) whether the plaintiff had
the opportunity to detect the fraud; (3) the sophistication of
the plaintiff; (4) the existence of long standing business or
personal relationships; and (5) the plaintiff’s access to the
relevant information. See id. at 598.
The District Court held that as a result of AES’s
contractual commitment not to rely on any representations
other than those incorporated in the final agreements, its
alleged reliance was unreasonable as a matter of law. AES
insists that this holding is incorrect in light of Section 29(a)
of the Exchange Act, 15 U.S.C. § 78cc(a). Section 29(a)
provides: “Any condition, stipulation, or provision binding
any person to waive compliance with any provision of this
title or of any rule or regulation thereunder, or of any rule
of an exchange required thereby shall be void.” 15 U.S.C.
§ 78cc(a). That is, by its terms, Section 29(a) “prohibits
waiver of the substantive obligations imposed by the
Exchange Act.” Shearson/American Express, Inc. v.
McMahon, 482 U.S. 220, 228 (1987). The underlying
concern of this section is “whether the [challenged]
agreement weakens [the] ability to recover under the
Exchange Act.” Id. at 230 (quotation omitted).

B. The Applicable Law
AES emphasizes that the Merger and Asset Purchase
agreements stipulated that Delaware law would govern their
interpretation and insists that we must look to that law to
determine the effect to be given the non-reliance clause.
While we will not rule out the possibility that state law may
play a role in some situations involving a Rule 10b-5 claim,
we conclude that it has no role here. Reasonable reliance is
an element of a federal law claim and what constitutes
 9

such reliance is a matter of federal law. Federal law calls
for the determination of reasonableness to be made on a
case-by-case basis based on all of the surrounding
circumstances. The terms of any agreement between the
parties may be among these relevant circumstances and, if
there is a material dispute about what the parties agreed
to, reliance on state contract law may be appropriate to
resolve that dispute.
The Delaware cases relied upon by AES, however, do not
involve rules of contract interpretation. Primary reliance, for
example, is placed upon Norton v. Poplos, 443 A.2d 1 (Del.
1982), which involved a contract to sell commercial real
estate in which the parties had represented that they “do
not rely on any written or oral representations not expressly
written in the contract.” Id. at 6. The Delaware Supreme
Court held that Delaware law will not enforce such a clause
to bar a common law rescission claim based on fraudulent,
or “innocent but material[,] misrepresentation by a seller.”
Id. AES and Dow dispute whether this is an across-the-
board rule of Delaware law or whether its application
is limited to non-negotiated contracts between
unsophisticated parties.2 We need not resolve that issue;
the issues of what constitutes an anticipatory waiver of a
federal securities claim and whether a purported
anticipatory waiver of such a claim is enforceable are
matters of federal law. See Newton v. Rumery, 480 U.S. 386
(1987) (“the agreement purported to waive a right to sue
conferred by a federal statute. The question whether the
policies underlying that statute may in same circumstance
render that waiver unenforceable is a question of federal
law.”).

C. The Role of the Non-Reliance Clause
This brings us back to Section 29(a) of the Exchange Act
which forecloses anticipatory waivers of compliance with

2. Compare, e.g., Progressive International Corp. v. E.I. duPont deNemours
& Co., ___ A.2d ___, 2002 Del. Ch. LEXIS 91 (Del. Ch., July 9, 2002),
and Great Lakes Chem. Corp. v. Pharmacia Corp., 788 A.2d 544 (Del. Ch.
2001), with S.C. Johnson & Son, Inc. v. Dowbrands, Inc., 167 F. Supp. 2d
657, 674 (D. Del. 2001).
 10

the duties imposed by Rule 10b-5. We believe the
conclusion inescapable that enforcement of the non-
reliance clauses to bar AES’s fraud claims as a matter of
law would be inconsistent with Section 29(a).
As we have noted, reliance is an essential element of a
Rule 10b-5 claim. It necessarily follows that, if a party
commits itself never to claim that it relied on
representations of the other party to its contract, it
purports anticipatorily to waive any future claim based on
the fraudulent misrepresentations of that party. The same
is true if the commitment is more limited, e.g., a promise
not to claim reliance on any representation not set forth in
the agreement. The scope of the anticipatory waiver is more
limited, but it is nevertheless an anticipatory waiver of
potential future claims under Rule 10b-5.
We, thus, find ourselves in agreement with the
conclusion of the Court of Appeals for the First Circuit in
Rogen v. Ilikon, 361 F.2d 260 (1st Cir. 1966). There, a
stockholder and former officer and director of the defendant
company brought suit alleging that during negotiations for
the sale of his stock after his separation from the company,
officers and directors of the defendant corporation failed to
disclose material information about the possibility of new
prospects for the company. In the agreement to sell his
stock, plaintiff represented that he was familiar with the
business of the company and that he was not relying on
any representations of the purchaser or its agents. In
addressing the propriety of this type of contractual
provision under the Exchange Act, the Court concluded:
This [type of contract clause] is not, in its terms, a
“condition, stipulation, or provision binding . . .
[plaintiff] to waive compliance” with the Securities Act
of 1934 as set forth in Section 29(a) of the Act, (15
U.S.C. § 78cc(a)). But, on analysis, we see no
fundamental difference between saying, for example, “I
waive any rights I might have because of your
representations or obligations to make full disclosure”
and “I am not relying on your representations or
obligations to make full disclosure.” Were we to hold
that the existence of this provision constituted the
basis (or a substantial part of the basis) for finding
 11

non-reliance as a matter of law, we would have gone
far toward eviscerating Section 29(a).
361 F.2d at 268 (alterations in original).
As the Rogen court noted, this is not to say that a
plaintiff’s declaration in a contract of an intent not to rely
may not be evidence that he or she did not rely on
representations of the defendants. That declaration, alone
or in conjunction with other evidence of non-reliance, may
establish an absence of reliance and, when unrebutted,
may even provide a basis for summary judgment in the
defendant’s favor. Thus, in this case, the non-reliance
clauses are some evidence of an absence of reliance.
However, the District Court did not find that the evidence
of non-reliance was unrebutted. Indeed, Dow does not
contend that the information provided by it and its
associates played no material role in AES’s decision to enter
the agreement.
Dow does contend, and we understand the District Court
to have held, that the non-reliance clauses establish as a
matter of law that any reliance of AES was unreasonable
reliance. We find the same tension between Section 29(a)
and this argument, however, as we have found between
Section 29(a) and the argument that the non-reliance
clauses foreclose an assertion by AES that it relied. If all of
the evidence bearing on the reasonableness of AES’s
reliance does not entitle Dow to summary judgment under
traditional summary judgment principles, it would offend
Section 29(a) to bar its claim based solely on a contractual
commitment not to claim reliance.

IV. The Issue for Decision on Remand
This leaves for resolution the issue of whether, viewing all
of the relevant circumstances and applying the reasonable
reliance standard set forth in Straub, a reasonable trier of
fact could only conclude that AES failed to exercise
ordinary care in protecting its own interest. We decline to
address that issue, however, because we conclude that it is
premature to do so.
Dow did not argue to the District Court that it was
entitled to summary judgment because an application of
 12

the principles of Straub to all of the relevant circumstances
of this case could lead only to one conclusion. It candidly
acknowledged that the record was undeveloped with respect
to AES’s investigation and its failure to discover the facts it
learned after settlement. It insisted, however, that the
record had established the only fact necessary to require
summary judgment in its favor — the existence of the non-
reliance clause. Stated otherwise, Dow’s argument is that it
is impossible for a buyer to show reasonable reliance in any
case where there is a non-reliance clause. Faced with this
argument, AES understandably did not file affidavits or
verify its complaint, although it did file a Rule 56(a)
affidavit pointing out the need for discovery.
The non-reliance clauses are, of course, among the
circumstances to be considered in determining the
reasonableness of any reliance here. Importantly, they
reflect the fact that the seller was unwilling to vouch for the
accuracy of the information it was providing and the fact
that the buyer was willing to undertake to verify the
accuracy of that data for itself. Clearly, in such
circumstances, a buyer who relies on seller-provided
information without seeking to verify it has not acted
reasonably. Clearly, a buyer in a non-reliance clause case
will have to show more to justify its reliance than would a
buyer in the absence of such a contractual provision. For
this reason, cases involving a non-reliance clause in a
negotiated contract between sophisticated parties will often
be appropriate candidates for resolution at the summary
judgment stage. We are unwilling, however, to hold that the
extraction of a non-reliance clause, even from a
sophisticated buyer, will always provide immunity from
Rule 10b-5 fraud liability.
AES’s complaint alleges that Dow and its subsidiaries
were in exclusive control of the information necessary to
accurately evaluate the Elsta Plant. It further alleges that,
as a part of its fraudulent scheme to sell DEI to someone
at a price far above its worth, Dow controlled release of the
relevant information to AES both initially as well as during
the period that it was conducting its investigation to
determine the accuracy of the information initially
disclosed. Much of that information involved projections
 13

and other “soft” data that a seller dealing in good faith
would understandably be unwilling to guarantee. According
to AES, it conducted a diligent investigation that was
reasonably calculated to determine the reliability of Dow’s
representations but revealed no reason to suspect that Dow
was intentionally misleading it. Dow allegedly saw to it that
all information received by AES would reassure it of the
reliability of the earlier supplied data; Dow allegedly also
prevented AES from securing the data in Dow’s and
Destec’s files that would have disclosed the fraud.
In its Rule 56(e) affidavit, AES seeks discovery of
information in the exclusive possession of Dow to support
AES’s claim that Dow and Destec intentionally concealed
their fraudulent conduct, restricted its access to truthful
information, and accelerated the transaction to prevent AES
from discovering the true status of the construction at the
Elsta Plant.
With this as background, AES points to our observation
in Straub:
[A] sophisticated investor is not barred [from] reliance
upon the honesty of those with whom he deals in the
absence of knowledge that the trust is misplaced.
Integrity is still the mainstay of commerce and makes
it possible for an almost limitless number of
transactions to take place without resort to the courts.
Straub, 540 F.2d at 598 (citations omitted). AES argues
that a reasonable investor, in its position, trusting in the
integrity of the seller, would have understood the seller’s
unwillingness to guarantee the truth of the supplied data
as something other than a warning that it was unreliable3

3. In Semerenko, 223 F.3d at 181, we upheld the dismissal of some of
the plaintiffs’ Rule 10b-5 claims against the accounting firm of Ernst &
Young on the ground that the plaintiffs could not reasonably have relied
upon its audit opinions after the company publicly announced the
discovery of accounting irregularities and warned investors not to rely on
its prior financial statements and audit reports. Dow cites Semerenko for
the proposition that there is no need here to consider all of the
circumstances in determining the reasonableness of plaintiff’s reliance.
The cases are not analogous, however. Dow was not saying to potential
 14

and would have been willing to rely upon an unimpeded
investigation of its own.
While AES may have an uphill battle here and summary
judgment for the defendants may be appropriate at some
point, we decline to give controlling significance to the
existence of a non-reliance clause in a vacuum. We fully
appreciate that the avoidance of costly discovery is one of
the objectives of negotiating such clauses. Nevertheless, to
hold that a buyer is barred from relief under Rule 10b-5
solely by virtue of his contractual commitment not to rely
would be fundamentally inconsistent with Section 29(a).
Given this legislative directive, parties in Dow’s position will
have to rely upon discovery management and the summary
judgment process to ameliorate the discovery burden.
In reaching this conclusion, we have not been unmindful
of the decision of the Court of Appeals for the Second
Circuit in Harsco Corp. v. Sequi, 91 F.3d 337 (2d Cir. 1996).
The court there affirmed the dismissal of a Rule 10b-5
security fraud claim based on a stipulation in the stock
purchase agreement that the sellers were “not [to] be
deemed to have made . . . any representation or warranty
other than as expressly made by” the sellers in the
agreement. Id. at 342. The Harsco court rejected the
purchaser’s argument that the District Court’s dismissal
had violated Section 29(a). Although acknowledging that
“the underlying concern of § 29(a) is ‘whether the agreement
weakens the ability to recover under the Exchange Act’ ”
and that the agreement before it could accurately be
described as doing precisely that, the Court nevertheless
found the “no other representation” clause enforceable:
Thus, the Agreement can be described as weakening
Harsco’s ability to recover under § 10(b) of the
Exchange Act. We think, however, that in the
circumstances of this case such a “weakening” does not

investors that it was supplying unreliable data that should not be relied
upon. Rather, it was communicating only that it was not willing to
absorb the risk of guaranteeing the data it was tendering to potential
investors for use in evaluating DEI without having been paid for doing so
as part of the contract price.
 15

constitute a forbidden waiver of compliance. Here there
is a detailed writing developed via negotiations among
sophisticated business entities and their advisors. That
writing, we conclude, defines the boundaries of the
transaction. Harsco brings this suit principally alleging
conduct that falls outside those boundaries.
* * *
Harsco bought Section 2.04’s fourteen pages of
representations. Unlike a contractual provision which
prohibits a party from suing at all, the contract here
reflects in detail the reasons why Harsco bought Multi-
Serv—in essence, Harsco bought the representations
and, according to Sections 2.05 and 7.02, nothing else.
This means that there are fourteen pages of
representations, any of which, if fraudulent, can be the
basis of a fraud action against the sellers. But Harsco
specifically agreed that representations not made in
those fourteen pages were not made. Thus, it is not fair
to characterize Sections 2.05 and 7.02 as having
prevented Harsco from protecting its substantive rights.
Harsco rigorously defined those rights in Section 2.04.
This analysis becomes a question of degree and
context. Harsco has not waived its rights to bring any
suit resulting from this deal. Each representation in
Section 2.04 is a tooth which adds to the bite of
Sections 2.05 and 7.02. In different circumstances (e.g.,
if there were but one vague seller’s representation) a
“no other representations” clause might be toothless
and run afoul of § 29(a). But not here.
Id. at 343, 344.
We find Harsco’s reasoning unpersuasive. Section 29(a) is
not intended to protect substantive rights created by
contract. It is designed to protect rights created by the
Exchange Act, and it expressly forecloses contracting
parties from “defin[ing] the boundaries of the[ir]
transaction” in a way that relieves a party of the duties
imposed by that Act. We do not dispute that there may be
economic efficiency in allowing private parties the freedom
to fashion their own bargains. But Congress has made a
decision to limit that freedom when it comes to anticipatory
 16

waivers of Exchange Act claims. Accordingly, we conclude
that we must side with the First Circuit Court of Appeals in
Rogen rather than with the Harsco court.4
In addition to Harsco, Dow relies on One-O-One Enters.,
Inc. v. Caruso, 848 F.2d 1283 (D.C. Cir. 1988), Jackvony v.
RIHT Finan. Corp., 873 F.2d 411 (lst Cir. 1989), and
Rissman v. Rissman, 213 F.3d 381 (7th Cir. 2000). None of
these cases address § 29(a). Moreover, as we read them,
each provides some support for the approach we hold that
the District Court should have taken here — treat the
existence of the non-reliance clause as one of the
circumstances to be taken into account in determining
whether the plaintiff’s reliance was reasonable. See the
analysis of these decisions in Rissman, 213 F.3d at 387-
389 (Rovner, J., concurring). As the District of Columbia
Court of Appeals has observed in commenting on One-O-
One, a contrary reading “would leave swindlers free to
extinguish their victims’ remedies simply by sticking in a
bit of boilerplate.” Id. at 388.

V. Conclusion
The judgment of the District Court will be reversed and
this matter will be remanded for further proceedings
consistent with this opinion.

4. The Harsco court distinguishes Rogen on the grounds that it did not
involve sophisticated parties or as detailed an agreement as that before
it. We do not understand Rogen to turn on these factors. Nor do we
believe § 29(a) to be susceptible of reading that would make an exception
for sophisticated parties and detailed agreements.
 17

WALLACE, J. Clifford, Senior Circuit Judge, concurring and
dissenting:
I agree the case should be reversed, but disagree on the
evidentiary use of the stipulations and waivers on remand.
Section 29(a), 15 U.S.C. § 78cc(a), states, “Any . . .
stipulation . . . binding any person to waive compliance
with [the Securities Exchange Act] . . . shall be void.” AES
and Dow’s stipulations are waivers of compliance, and
under the express terms of section 29, they are “void.” The
majority holds that the void stipulation can nonetheless be
evidence of the reasonableness of AES’s reliance. I write
separately because I cannot join in the majority’s
interpretation of the word “void.”
A void clause is “of no effect whatsoever.” BLACK’S LAW
DICTIONARY 1568 (7th ed. 1999). It is “an absolute nullity.”
ID. It is “ineffective,” “useless,” “having no legal force or
validity.” THE AMERICAN HERITAGE DICTIONARY 911 (4th ed.
2001). If we permit the void stipulation to have evidentiary
value, it is no longer a nullity, ineffective, or useless.
Instead, it becomes a very potent weapon in the 10b-5
defendant’s arsenal. This is precisely what section 29(a)
prohibits.
At its core, section 29 seeks to prevent parties from
contractually avoiding the requirements of Rule 10b-5. If
the void stipulation may be evidence in a later Rule 10b-5
claim, how likely is it that the seller of securities will lose
the 10b-5 claim? Imagine the mountains of evidence the
10b-5 plaintiff will need to compete with the evidence of the
stipulation. Realistically, how will a plaintiff convince a
reasonable juror that he reasonably relied on a
representation when he signed a provision that stated
otherwise? To permit the void stipulation to serve as
evidence of a lack of reasonable reliance would be to take
the teeth out of section 29. It would make a 10b-5 claim
logically possible, but essentially hopeless. Congress meant
more when it enacted section 29(a).
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