2003 Decisions

Opinions of the United

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Precedential or Non-Precedential: Precedential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

Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2003

This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova

University School of Law Digital Repository. It has been accepted for inclusion in 2003 Decisions by an authorized administrator of Villanova

University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu.

Recommended Citation

"AES Corp v. Dow Chem Co" (2003). 2003 Decisions. Paper 591.

http://digitalcommons.law.villanova.edu/thirdcircuit_2003/591
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. 
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. 

2
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 thirdparty 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

3
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. 

4
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

5
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

6
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

7
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

8
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-theboard 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). 

9
the duties imposed by Rule 10b-5. We believe the

conclusion inescapable that enforcement of the nonreliance 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

10
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

11
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 nonreliance 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

12
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

13
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. 

14
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 MultiServ—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

15
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-OOne, 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. 

16
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).

17
A True Copy:

Teste:

Clerk of the United States Court of Appeals

for the Third Circuit

18