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Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 

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. FILED 

UNITED STATES COURT OF APPEALS UmU!Ci S~t.es Co~rt(?f Appcab ienth C1rcu1t 

FOR THE TENTH CIRCUIT 

M. DUANE HORTON, individually and as ) 

Trustee for the employees of SII Mega- ) 

diamond, Inc.; NATHAN HORTON; WENDY ) 

HORTON McBRIDE; DAVID R. HALL, as custo-) 

dian for Barbara Hall; EMILY HALL; MARK) 

DAVID HALL; MICHAEL ALLEN HALL; STEPHEN) 

RANDALL HALL; DAVID R. HALL, Trustee ) 

for DHD, Inc.; RICHARD c. STRATFORD; ) 

MARILYN STRATFORD; STRATFORD ) 

INVESTMENTS; STRATFORD ENTERPRISES; ) 

VERA C. STRATFORD; RICHARD C. STRATFORD) 

TRUST; BARRY DEWAYNE WOOD; CATHERINE H. ) 

THOMPSON; CHARLOTTE HALL WEIGHT, ) 

individually and as custodian for ) 

Hannah Weight; HYRUM ROBERT WEIGHT; ) 

SARA WEIGHT; DANIEL RAY BARTHOLOMEW; ) 

ALBERT JOLIS; BERNARD JOLIS; DOUGLAS ) 

ALLEN MECHAM; SHERLENE HALL BARTHOLOMEW,) 

individually and as custodian for ) 

Daniel Hall Bartholomew and Laura ) 

Bartholomew; R. L. COATS; J. EARL ) 

GARRETT; H. TRACY HALL, individually ) 

and as custodian for Anthony Rondot ) 

Hall, Elizabeth Hall, Huntington Tracy ) 

Hall, Mary Hall, Richard Alexander Hall,) 

Robert Langford Hall, Spencer William ) 

Roy Hall, Suzanna Hall and Zina Hall; ) 

IDA ROSE HALL; KAREN VANDYKE HALL; ) 

NANCY HALL MECHAM, individually and ) 

as custodian for Carli Anne Mecham ) 

and Chelsey Kae Mecham; ELIZABETH HALL ) 

NEIL, individually and as custodian for) 

Emily Hall, Ernie Tracie Neil, Gregory ) 

Scott Neil and John Patrick Neil; ) 

JOHN MARTIN NEIL; DOUGLAS N. THOMPSON; ) 

BRYAN YOUNG WEIGHT; VIRGINIA HALL WOOD, ) 

individually and as custodian for ) 

Johnathan Wesley Wood; NATHAN SPENCER ) 

WOOD; SARA ELIZABETH WOOD; WARREN TRACY) 

WOOD; ELIZABETH HUNTINGTON HALL, ) 

) 

Plaintiffs-Appellees, ) 

) 

v. ) 

) 

SMITH INTERNATIONAL, INC., ) 

) 

Defendant-Appellant. ) 

SEP 10 1991 

ROBERT L. HOECKER 

Clerk . 

No. 90-4168 

(D.C. No. 89-CV-811) 

(D. Utah) 

Appellate Case: 90-4168 Document: 010110090104 Date Filed: 09/10/1991 Page: 1 
ORDER AND JUDGMENT* 

Before SEYMOUR, EBEL, Circuit Judges, and BABCOCK,** District 

Judge. 

**Honorable Lewis T. Babcock, District Judge, 

District Court for the District of Colorado, 

designation. 

United States 

sitting by 

After examining the briefs and appellate record, this panel 

has determined unanimously that oral argument would not materially 

assist the determination of this appeal. See Fed. R. App. P. 

34(a); 10th Cir. R. 34.1.9. 

submitted without oral argument. 

The case is therefore ordered 

Defendant appeals from an adverse judgment entered by the 

United States District Court for the District of Utah following a 

bench trial. Plaintiffs brought this action in diversity for 

compensatory damages and declaratory relief relating to 

defendant's performance of its obligations under a corporate 

merger agreement. 

The parties' dispute has narrowed on appeal to a single 

issue--whether the district court correctly determined that 

* This order and judgment has no precedential value and shall 

not be cited, or used by any court within the Tenth Circuit, 

except for purposes of establishing the doctrines of the law of 

the case, res judicata, or collateral estoppal. 10th Cir. R. 

36.3. 

2 

Appellate Case: 90-4168 Document: 010110090104 Date Filed: 09/10/1991 Page: 2 
royalty payments due plaintiffs under section 3.2(ii)(f) of the 

agreement, 1 referred to as the sixth of six contingent "milestone" 

provisions included in section 3.2(ii), were not subject to a 

direct offset by payments received by plaintiffs pursuant to the 

fifth milestone, . .i.e.,.. .section 3.2(ii)(e) . .. Specifically, 

defendant argues that the district court's construction of the 

latter section is erroneous because (1) all of the first five 

milestones set out in sections 3.2(ii)(a)-(e) are related to the 

sixth in this regard by the same language, 2 (2) plaintiffs 

submitted insufficient evidence to distinguish section 3.2(ii)(e) 

from its four counterparts on the matter of setoff, and (3) prior 

to trial, plaintiffs stipulated that "[t]he maximum amount payable 

to Plaintiffs under the Progress Payment Milestone [i.e., section 

3.2(ii)(f)] is limited by amounts paid or payable under Sections 

3.2(ii)(a)-(d)." Final pretrial order filed May 29, 1990, at 10, 

para. F• I see also id. at 5, para. B6. Thus, defendant contends 

that in light of plaintiffs' failure to distinguish section 

3.2(ii)(e) from sections 3.2(ii)(a)-(d) on the critical issue of 

setoff, their pretrial stipulation on the issue with regard to the 

1 We shall follow the manner of the district court and the 

parties in letting references to the pertinent sections of the 

corporate merger agreement stand in as well for the corresponding, 

functionally derivative provisions of the ancillary employee trust 

agreement executed between defendant and the employees affected by 

the merger, represented by plaintiff Duane Horton. 

2 The language in question, found in section 3.2(ii)(f), reads 

as follows: "any amounts payable under this Section 3.2(ii)(f) 

for any calendar year shall not exceed an amount equal to the 

aggregate of amounts paid or payable under this Section 3.2(ii)(f) 

less the aggregate of amounts paid or payable under Sections 

3.2(ii) (a)-(e)." (Emphasis added.) 

3 

Appellate Case: 90-4168 Document: 010110090104 Date Filed: 09/10/1991 Page: 3 
latter sections was equally binding with regard to the former, and 

the district court therefore erred in approaching the case as if 

with a fresh slate, hearing and relying on evidence of the 

parties' intent contrary to the stipulation. 

Virtually -all of the trial -witnesses- conceded, the district 

court concluded, and the parties do not dispute on appeal that 

section 3.2(ii)(f) is ambiguous. We agree. Consequently, the 

district court properly heard extrinsic evidence to determine the 

parties' intent regarding the relationship between sections 

3.2(ii)(e) and (f). The matter is, therefore, one of fact, May v. 

Interstate Moving & Storage Co., 739 F.2d 521, 523 (10th Cir. 

1984), and our review is limited to the clearly erroneous 

standard, Nunn v. Chemical Waste Management, Inc., 856 F.2d 1464, 

1467 (10th Cir. 1988). Accordingly, the district court's 

interpretation of the evidence must stand absent a definite and 

firm conviction that a mistake has been committed. Anderson v . 

.:C=i:..:t:;..,y.__o=f--=B:..:e:..:s::..::s::.;e=m=e=r'----==C=-=i::.;t::.i.Y f 4 7 0 

determination is plausible 

U.S. 564, 573 (1985). If its 

in light of the record viewed as a 

whole, we may not reverse even though we might have weighed the 

evidence differently. Id. at 574. 

Plaintiffs presented the only testimony by a participant in 

the contract negotiations from inception to conclusion of the 

agreement. Duane Horton testified that the parties' original 

intent on the matter of setoff was to structure a direct mutual 

limitation operative only 

"external sales" milestones 

between the "technological" and 

(which ultimately became sections 

3.2(ii)(a)-(d)) on the one hand, and the royalty or "progress 

4 

Appellate Case: 90-4168 Document: 010110090104 Date Filed: 09/10/1991 Page: 4 
payment" milestone (ultimately section 3.2(ii)(f)) on the other. 

R. Vol. II at 80-100. The additional, "upside performance" or 

"major success" provision (ultimately section 3 • 2 (ii) ( e) ) 

suggested by Horton and agreed to by defendant was conceived 

independently of --· these- considerations as -- a . means to offer 

plaintiffs a further share in subsequent revenue should the 

venture's success exceed expectations. Id. at 100-05, 125-26. 

The structure and language of the resulting letter of intent 

drafted by the negotiating parties corroborates Horton's 

testimony, as does the fact, also noted by Horton, that the upper 

limit specified in section 3.2(ii)(f) equals the sum of the 

figures in sections 3.2(ii)(a)-(d). 

Horton indicated that he never deviated from this original 

intent or engaged in discussions to renegotiate the basic 

structure of the setoff. See id. at 106-07, 123-28, 145; R. Vol. 

III at 49-50. When the upside performance provision became the 

"fifth milestone" in a preliminary draft of the final agreement, 

he considered it a mere convenience of expression. (Since the 

setoff provision later included in section 3.2(ii)(f) had not yet 

been written, the change had no significance in that regard at the 

time.) R. Vol. III at 10-14, 50. When section 3.2(ii)(f) was 

finally prepared, Horton viewed it as relating solely to the 

timing, not the total amount, of milestone payments, 3 serving to 

assuage a cash flow concern that had recently been raised in 

3 The district court's memorandum opinion contains a 

discussion of this issue, which was resolved in 

plaintiffs and has not been challenged on appeal. 

5 

thorough 

favor of 

Appellate Case: 90-4168 Document: 010110090104 Date Filed: 09/10/1991 Page: 5 
discussions by defendant, id. at 120-24; see also R. Vol. II at 

37-39, 50, so 

3.2(ii)(a)-(e) 

the indiscriminatory reference 

therein did not signal to him 

to 

any 

position on the issue of setoff, R. Vol. III at 124-25. 

sections 

change in 

Horton's- testimony -is -significant in several respects. It is 

substantiated to some extent by external evidence and, insofar as 

it provides a continuous trace of contractual intent from 

inception to completion of the agreement, it stands unopposed by 

like evidence from any other participant in the transaction. 

Indeed, two of defendant's employees testified that defendant's 

current interpretation of section 3.2(ii)(f) in regard to setoff 

actually originated with counsel in connection with this lawsuit. 

See R. Vol. IV at 213-15, 237. Finally, Horton's testimony does 

not contradict the pretrial stipulation, since he conceded that 

the parties had always intended a mutual setoff between sections 

3.2(ii)(a)-(d) and section 3.2(ii)(f). 

Plaintiffs also presented the testimony of Larry Holman, the 

attorney who assisted Horton during the negotiations and drafting 

that followed execution of the letter of intent. Holman 

corroborated Horton's view that the reference in section 

3.2(ii)(f) to sections 3.2(ii)(a)-(e) was only a timing limitation 

intended to alleviate cash flow problems for defendant and, 

accordingly, he also agreed that any upside performance payment 

received by plaintiffs pursuant to section 3.2(ii)(e) was not to 

be set off against the remaining royalty payments still available 

under section 3.2(ii)(f). See R. Vol. III at 127-33, 157-63. 

However, lacking Horton's firsthand experience regarding the 

6 

Appellate Case: 90-4168 Document: 010110090104 Date Filed: 09/10/1991 Page: 6 
parties' original, if linguistically obscured, intentions, Holman 

further found no basis for deducting from section 3.2(ii)(f) 

royalties even those payments made under sections 3.2(ii)(a)-(d). 

Defendant maintains that, to this extent, Holman's 

testimony, unlike . Horton's, contradicts the parties' pretrial 

stipulation and should not have been considered. We note, though, 

that while defendant did at one point refer to the stipulation in 

its cross-examination of Holman, see R. Vol. IV at 276-77, 

defendant never once expressly objected to the solicitation or 

reception of Holman's testimony contrary thereto. Accordingly, we 

do not think the district court abused its discretion in 

considering such testimony for whatever light it might throw on 

the limited issue of the parties' contractual intent regarding the 

relationship of sections 3. 2 (ii) ( e) and ( f) . 

4 Cf. Monod v. 

Futurai Inc., 415 F.2d 1170, 1173-74 (10th Cir. 1969)(pretrial 

4 Because defendant has not challenged the district court's 

determination that payments under sections 3.2(ii)(a)-(d) are, 

like the payment under section 3.2(ii)(e), not set off against 

section 3.2(ii)(f), we express no opinion on the much broader 

issue of whether that substantive determination could itself stand 

in light of the pretrial order and defendant's references to the 

stipulation regarding section 3.2(ii)(f) during trial. We 

recognize, as evidently do the parties, that given (1) the total 

limitation of $7.4 million placed on sections 3.2(ii)(a)-(f) by 

section 3.2(ii)(i), (2) the expiration of the time allotted for 

accrual of all milestone benefits, and (3) the fact that $3.7 

million was earned under sections 3.2(ii)(a) ($1.85 million) and 

(e) ($1.85 million), the district court's ruling for plaintiffs on 

the setoff effect of section 3.2(ii)(e) essentially mooted the 

issue as to sections 3.2(ii)(a)-(d). That is, so long as the 

district court correctly held that section 3.2(ii)(e) does not 

reduce the amount available under section 3.2(ii)(f), its failure 

to deduct the $1.85 earned under section 3.2(ii)(a) therefrom, 

even if error, is of no consequence, since $7.4 million minus $3.7 

million equals $5.55 million less that $1.85 million in any event. 

7 

Appellate Case: 90-4168 Document: 010110090104 Date Filed: 09/10/1991 Page: 7 
' . ~ 

order may be amended within trial court's discretion to conform to 

evidence if issue tried without objection). See generally R.L. 

Clark Drilling Contractors, Inc. v. Schramm, Inc., 835 F.2d 1306, 

1308 (10th Cir. 1987)(abuse of discretion standard applicable to 

district _ court!s decisions regarding modification of pretrial 

order). 

On the basis of the evidence and legal principles discussed 

above, we conclude that the district court did not err in 

determining that the parties' intent, ambiguously expressed in 

their final agreement, was to permit plaintiffs to earn the upside 

performance benefit of section 3.2(ii)(e) and the royalty payments 

of section 3.2(ii)(f) independently, without any direct reciprocal 

restriction beyond that regarding the timing of payment. 

The judgment of the United States District Court for the 

District of Utah is AFFIRMED. 

Entered for the Court 

David M. Ebel 

Circuit Judge 

8 

Appellate Case: 90-4168 Document: 010110090104 Date Filed: 09/10/1991 Page: 8