## Facts

- Baxter sold all stock of Medcom, Inc. to Medcom Holding Company (MHC) in September 1986 under a stock purchase agreement (SPA) with representations and warranties about Medcom’s finances, liabilities, and business prospects.
- The SPA warranted, among other things, that no material facts were withheld, supplied information was true in all material respects, and financial statements complied with GAAP and fairly presented Medcom’s condition.
- MHC alleged Baxter made material misrepresentations and omissions that inflated Medcom’s apparent value, including overstated financial statements, overstated sales programs and prospects, nondisclosure that a purported joint venture had been terminated before closing, and concealment of prior litigation/settlement exposure.
- MHC also alleged Baxter breached the SPA by retaining stock of a wholly owned Medcom subsidiary that should have been transferred with the transaction and by keeping benefits derived from that ownership.
- MHC sued in federal court asserting Rule 10b-5 securities fraud, Illinois common-law fraud, and breach of contract.
- After trial, a jury found Baxter liable and awarded $5,725,000 compensatory damages (itemized as $3,500,000 for sales-program/prospects misrepresentations and $2,225,000 for balance-sheet/financial misrepresentations) and $10,000,000 punitive damages, and it ordered transfer of the withheld subsidiary stock.
- The district court substantially reduced compensatory damages, vacated punitive damages, but ordered specific performance requiring transfer of the subsidiary stock and awarded approximately $1.1 million for benefits Baxter obtained while wrongfully retaining it.
- MHC appealed the reduction of compensatory damages and elimination of punitive damages; Baxter cross-appealed on liability and remedies.

## Issues

1. Whether the evidence sufficiently supported the jury’s compensatory damages for misrepresentations about Medcom’s sales programs/prospects and its balance sheet/financial statements.
2. What damages measure properly applied in a securities-fraud-plus-state-law fraud/contract case involving valuation of a purchased business.
3. Whether punitive damages were available and supported under applicable Illinois standards in this mixed-theory case.
4. Whether specific performance and an award of benefits were proper remedies for Baxter’s failure to transfer the subsidiary stock required by the SPA.

## Decision

- The Seventh Circuit largely reinstated the jury’s compensatory damages, holding the district court cut the award back too aggressively given the evidentiary support and the jury’s reasoned allocation between theories.
- The court affirmed specific performance requiring Baxter to transfer the subsidiary stock to MHC.
- The court affirmed an award to MHC reflecting benefits Baxter received from wrongfully retaining the subsidiary stock.
- The court declined to reinstate the jury’s $10 million punitive damages award, agreeing punitive damages were not justified under the governing standards and in light of limits applicable in this context.

## Legal Principles

- In business-acquisition fraud and warranty disputes governed by state law, compensatory damages may be measured by diminution in enterprise value (akin to benefit-of-the-bargain) when supported by evidence permitting a reasonable estimate of represented versus actual value.
- Appellate review respects a jury’s valuation-based damages determination when the award falls within a range supported by evidence, even if damages cannot be computed with mathematical precision.
- Contractual warranties that financial statements are GAAP-compliant and free of material omissions are central pricing terms in a stock sale; proving they were false can support substantial damages tied to the company’s true value.
- Specific performance may be ordered to compel transfer of subsidiary stock wrongfully withheld when the asset is part of the bargained-for corporate package, and courts may also award restitutionary benefits gained during wrongful retention.
- Punitive damages in Illinois require aggravated misconduct beyond ordinary fraud and must bear a reasonable relation to compensatory recovery; punitive awards are not readily sustained in securities-related transaction disputes where remedies are primarily compensatory.

## Conclusion

The Seventh Circuit held that the jury had an adequate evidentiary basis to award substantial compensatory damages for transaction-related misrepresentations affecting a company’s valuation, affirmed equitable relief compelling transfer of subsidiary stock and recovery of benefits from its wrongful retention, and refused to revive punitive damages under the applicable limits.


Medcom Holding Co. v. Baxter Travenol Labs., Inc., 106 F.3d 1388 (7th Cir. 1997)