Metavante Corp. v. Emigrant Savings Bank

In the

United States Court of Appeals

For the Seventh Circuit

Nos. 09-3007, 09-3996

M ETAVANTE C ORPORATION, a Wisconsin

Corporation,

Plaintiff-Appellee,

v.

E MIGRANT SAVINGS B ANK, a New York

Corporation,

Defendant-Appellant.

Appeals from the United States District Court

for the Eastern District of Wisconsin.

No. 2:05-cv-01221-JPS—J.P. Stadtmueller, Judge.

A RGUED A PRIL 8, 2010—D ECIDED A UGUST 30, 2010

Before R IPPLE, M ANION and T INDER, Circuit Judges.

R IPPLE, Circuit Judge. Metavante Corporation

(“Metavante”) originally brought an action in Wisconsin

state court against Emigrant Savings Bank (“Emigrant”)

for breach of contract. The case was removed to the

district court, and Emigrant counterclaimed for breach

of contract and fraud. Following a bench trial, the dis-

2 Nos. 09-3007, 09-3996

trict court entered judgment for Metavante on all

claims.1 Emigrant appealed.

While the appeal on the merits was pending, Metavante

filed, in the district court, a petition for fees and costs

pursuant to a fee-shifting provision of the contract. The

district court granted the petition in full. We con-

solidated the appeal of the fee award with the appeal of

the merits. For the reasons set forth in this opinion,

we affirm the judgment of the district court.2

I

BACKGROUND

A.

Emigrant, founded in 1850, chose to expand its business

by launching an on-line, direct bank, to be known

as EmigrantDirect. Rather than develop the on-line

system in-house, Emigrant decided to outsource this

operation. Consequently, in 2004, it searched for a vendor

to provide the on-line technology. Ted Morehouse, Emi-

grant’s Senior Vice President of Marketing, testified that

the bank’s IT director, Dennis Healy, recommended

Metavante, a vendor that provides electronic banking

1

The jurisdiction of the district court was based on diversity

of citizenship. See 28 U.S.C. § 1332.

2

Our jurisdiction is based on 28 U.S.C. § 1291.

Nos. 09-3007, 09-3996 3

services and products to financial institutions. 3 Mr. Healy

offered to have someone from Metavante call Mr.

Morehouse; consequently, Barry Holst made contact

with Emigrant in February 2004.

In March 2004, Mr. Holst, along with others from

Metavante, visited Emigrant. The Metavante team gave

a PowerPoint presentation which referred to Metavante

as “[t]he most complete offering of scalable, integrated

solutions for financial services providers,” and noted

its ninety million accounts processed and nine billion

financial transactions. Ex. 1063 at EMI-0014995.4 As a

result of this presentation, Mr. Morehouse was con-

fident that he would not have to worry about volume-

related system problems. The same PowerPoint, how-

ever, listed “Application processing/account opening

(workflow)” as a “Related Project[]/Initiative[]” of

Metavante. Id. at EMI-0015002. Mr. Morehouse testified

that he did not recall asking what was meant by that

term, although he did acknowledge that he knew that

“certain applications” were still being developed and

that he “was willing to live with it because [he] thought

they would be completed and in place well before we

launched.” R.569 at 226. Mr. Morehouse admitted that

3

Emigrant also considered another company called Sanchez

Corporation. Sanchez ultimately was not selected, in part

because it outsourced a number of its functions.

4

The record contains two sets of exhibits. One set, Metavante’s

exhibits, is denominated “PX.” The other, Emigrant’s exhibits,

is simply denominated “Ex.”

4 Nos. 09-3007, 09-3996

he knew by June that on-line account creation did not

“have some of the automation that we wanted.” Id. at 204.

He admitted, however, that Emigrant “entered into the

technology outsourcing agreement knowing that the on-

line account creation was in a state of progress and

would require further development for what Emigrant

wanted.” Id. at 209.

Metavante subsequently circulated a proposal. The

proposal stated, in part, that “Metavante offers a truly

integrated banking system, fully scalable to large

volumes, yet modular in nature. This scalable platform

processes nearly 90 million accounts each and every

night.” R.522 ¶ 22. According to Mr. Morehouse, the

proposal’s reference to existing clients that fit the direct

bank profile and its general use of the present tense

together indicated that Metavante’s product already

existed. The proposal also stated that “[o]n occasion

Metavante has made the determination that purchasing

niche products with advanced capabilities made more

sense than developing these systems. However, even

in these situations Metavante has made it a top

priority to build integration into these products so

that customers on the Metavante core applications can

continue to enjoy the integration they expect.” Ex. 1067

at EMI-0003078-79. Metavante offered as a reference

another of its clients, Capital One, and Emigrant spoke

to Capital One.

Over the next several months, Metavante and Emigrant

negotiated a Technology Outsourcing Agreement (“the

Agreement”). It was signed in August 2004. At some

Nos. 09-3007, 09-3996 5

point in negotiations, Emigrant requested from Metavante

a flow chart describing how the system worked so that

the information could be shared easily within Emigrant.

Metavante provided this flow chart in July; it did not

specify that its subcontractor, Teknowledge, would

control one segment of the system. Mr. Holst never said

anything to Mr. Morehouse “to disabuse [him] of [the]

impression” that Metavante would not outsource. R.569

at 191. According to Emigrant’s First Vice President

John McNally, Emigrant learned in early October

that Metavante outsourced part of its application to

Teknowledge. R.570 at 122. According to a document

from Emigrant’s files, however, Emigrant knew about

Teknowledge on September 14; the document in ques-

tion stated that: “The customer validation pages and

processing will be done through the Metavante 3rd party

partner application, Teknowledge.” Ex. 1134 at EMI-

0025523; see also R.569 at 251-52.

B.

The Agreement required Metavante to perform

certain services. These included “Electronic Banking

Services,” which enabled users “to access, receive, collect,

concentrate, and/or report data and/or initiate transac-

tions.” PX 1, Agreement § 4.5.5 Another service was “ACH

Services,” by which funds would be transferred. Agree-

ment § 4.6. Section 3.1 of the Agreement, entitled “Perfor-

5

Hereinafter, we shall simply refer to the Agreement without

referring to PX 1.

6 Nos. 09-3007, 09-3996

mance by Subcontractors,” provided in part that

“[c]ustomer understands and agrees that the actual

performance of the Services may be made by Metavante,

one or more Affiliates of Metavante, or subcontractors

of any of the foregoing Entities.”

The Agreement contained a performance warranty

that required Metavante to provide “all Services in a

commercially reasonable manner.” Agreement § 6.1.

The Agreement also provided that the availability of

several of Metavante’s services was to be evaluated

according to service levels; for example, a service level

of 98% availability meant that a given service had to

be available 98% of the time. Anything covered by a

service level was exempt from the performance war-

ranty. Emigrant does not dispute the service levels;

rather, its argument is that service levels measured only

system availability. Emigrant contends that defects not

resulting in outages of the system were not reflected in

the service levels and were subject to the performance

warranty.

The Agreement also contained a Termination Clause.

Agreement § 8.2. This clause provided that a party

may terminate the Agreement for cause, but also specified

that the parties enjoyed broad rights to cure. Even if

a default was not capable of cure within thirty days,

the defaulting party could avoid termination by imple-

menting a plan for cure. Moreover, the Agreement pro-

vided that failure to perform services as required could

be cured by re-performance.

If Emigrant terminated for convenience, rather than

for cause, the Agreement required that Emigrant pay a

Nos. 09-3007, 09-3996 7

termination fee. The Agreement provided for a re-

duced termination fee if Emigrant “migrate[d] its data

processing for direct banking to an in-house solution.”

Agreement, Termination Fee Schedule, § 1(b). The Agree-

ment also contained a fee-shifting provision. Agreement

§ 17.8.6

C.

EmigrantDirect launched in January 2005. The Online

Account Creation service allowed consumers to open

accounts, and was developed by Teknowledge,

Metavante’s subcontractor. The Consumer Electronic

Banking service allowed consumers to manage accounts.

The EmigrantDirect system launched in January 2005

did not contain a “Good Funds Model.” This Model

checks the account balance against the desired trans-

action amount to ensure that the account contains suffi-

cient funds to carry out the transaction. Without such a

model, a customer can transfer more money than is

6

This provision provides:

If any legal action is commenced in connection with the

enforcement of this Agreement or any instrument or

agreement required under this Agreement, the prevail-

ing party shall be entitled to costs, attorneys’ fees

actually incurred, and necessary disbursement incurred

in connection with such action, as determined by the

court.

Agreement § 17.8.

8 Nos. 09-3007, 09-3996

available in his account. Eileen Lyon, Emigrant’s First

Vice President of Marketing, testified that the subject of

a Good Funds Model never had been discussed during

the negotiations. Mr. Morehouse testified that he was

comfortable launching without a Good Funds Model

because he had been assured that Emigrant could work

around the problem manually. R.569 at 272-73. A year

before the contract was terminated, Metavante put in

place a Good Funds Model at Emigrant’s request.

EmigrantDirect had other flaws. According to Kimberly

Romano, EmigrantDirect’s Director of Operations, cus-

tomers frequently received error messages and were

unable to complete on-line applications, resulting in

many calls to Emigrant’s call center. Emigrant under-

took mitigation measures, including sending paper ap-

plications to customers. The number of customer service

representatives was increased from “[s]ix or eight” to “in

the 50s.” R.571 at 94. Emigrant also noticed that some

transactions failed to process. Id. at 86-87. Emigrant’s

expert in computer science and software assurance,

Roger Nebel, testified that Metavante failed to deliver

its services in a commercially reasonable manner

because its system was poorly integrated, poorly tested,

poorly planned, not scalable and experienced degraded

service. Ms. Romano testified that she “had never seen

anything like this. The fact that things were identified,

supposedly cured and they were recurring, just added

insult to injury.” Id. at 172. She also testified, however, that

she believed Metavante employees were trying to be

helpful and were themselves frustrated about the prob-

lems. Id. at 105.

Nos. 09-3007, 09-3996 9

Despite these problems, however, EmigrantDirect

acquired over 250,000 new accounts and over $6 billion

in deposits in under nineteen months. Mr. Morehouse

testified that before launch, Emigrant did not know

whether the system would be a great success or a

complete failure that would result in his firing.

Mr. Morehouse admitted, however, that Emigrant blew

its projections “out of the water.” R.569 at 257. He also

admitted that Emigrant advertised its direct bank as

the most successful direct bank in the country—a procla-

mation he believed to be true when made.7 The

district court likewise found that EmigrantDirect was

“nothing short of a home run.” R.545 at 19. Metavante’s

expert in the performance of financial technology

services agreements, David Moffat, testified that

Metavante’s performance was commercially reasonable,

and the “most compelling fact” supporting this asser-

tion was “the level of deposits that were achieved on

this system, the number of accounts that were opened,

transactions that were involved here.” R.575 at 237.

Emigrant contends, however, that this success is at-

tributable to its mitigation efforts. Not only did it hire

additional customer service staff, it also employed paper

7

During trial, Emigrant’s damages expert, Paul Pocalyko,

suggested that, despite a competitive advantage in interest

rates throughout most of 2005, R.575 at 6, Emigrant’s competi-

tors earned a bigger market share than did Emigrant. Id. at 9.

However, Pocalyko testified that Emigrant lost only one per-

cent of the market due to Metavante’s failures. Id. at 10.

10 Nos. 09-3007, 09-3996

applications, performed identity validation and checked

available balances before approving external transfers.

D.

In September 2005, Metavante sued Emigrant in Wis-

consin state court for nonpayment of fees. When

Emigrant was served in November, it removed the case

to the district court. Around this time, Metavante sent

a letter to Emigrant, providing notice of impending

termination of the Agreement for nonpayment. Emigrant

responded by paying the requested amount in two in-

stallments. In letters accompanying the payments, Emi-

grant requested Metavante’s assistance in effecting “the

orderly transition of Metavante’s services to Emigrant.” Ex.

1338. Emigrant also objected to the payments and

reserved its right “to pursue all claims against Metavante.”

Id. This action prompted Metavante to amend its com-

plaint to seek a declaratory judgment affirming its right

to the payments and, in the event of termination, the

termination fee.

In March 2006, Metavante again provided notice of

impending termination due to nonpayment. The Agree-

ment was not terminated. On May 3, 2006, however,

Emigrant informed Metavante that it was terminating

the Agreement for cause, effective the weekend of June 17,

2006. In this letter, Emigrant stated that Metavante’s

services had been “flawed and inadequate from incep-

tion.” PX 184 at MVNT001305. Specifically, the letter

referenced “Metavante’s inability to prevent deposit

customers from overdrafting on their accounts,” the

Nos. 09-3007, 09-3996 11

“inability to process satisfactorily new account applica-

tions,” Metavante’s “continued and frequent service

outages,” and its inability to “determine if or when a

customer’s deposit transfer request to an EmigrantDirect

account has in fact been completed.” Id. The letter also

referenced “the obvious failure of Metavante personnel

to understand their own system,” id. at MVNT001306,

and Metavante’s refusal “to provide Emigrant with timely

and accurate information with respect to outages and

problems with its system,” id. at MVNT001307. The letter

made much of failures the system suffered over the

New Year’s holiday 2006 (affecting about 6,000 customers),

as well as other, more recent defects affecting about

500 customers.

In July 2006, Metavante amended its complaint to

reflect breach-of-contract claims for unpaid fees from

April 2006 and later. Emigrant counterclaimed that

Metavante had fraudulently induced Emigrant to

enter into the contract, that Metavante had intentionally

misrepresented its capabilities throughout the parties’

relationship and that Metavante had breached its own

contractual obligations. Later, Metavante contended that

Emigrant had not developed an “in-house” system, which

would have entitled Emigrant to a lower termination fee.

Emigrant refers to this as the “in-house claim,” even

though it is not, strictly speaking, a distinct “claim.”

The case was tried to the bench in May 2009. Following

trial, the district court ruled for Metavante on all claims

in an oral decision. In relation to Emigrant’s allegations

of fraud, the court emphasized that Emigrant did not

12 Nos. 09-3007, 09-3996

raise its concerns with Metavante or otherwise “appro-

priately vet[]” them. R.545 at 13. The court also stated

that, although there had been “hiccups” in the relation-

ship between Metavante and Emigrant, id. at 18, none

amounted to a material breach of the contract. It empha-

sized the importance of EmigrantDirect’s commercial

success, the testimony suggesting that a good working

relationship between the parties had existed and the

remarks that Emigrant CEO Howard Milstein had made

to his board of directors. See infra at II.C.1.a. The court

also noted Metavante’s pursuit of unpaid fees in late

2005, which led to discussions from which the court

inferred that “the parties were headed toward a relation-

ship that would result in the agreement being terminated

not for cause but for the convenience of the parties.” Id. at

21. On the issue of whether Emigrant migrated to an “in-

house” solution, the court found for Emigrant and

awarded the lower termination fee.

II

MERITS

We now turn to the merits of this case. We shall consider

Emigrant’s arguments about the applicable standard of

review. Then, we shall discuss Emigrant’s evidentiary

arguments pertaining to expert testimony offered by

Metavante. We next shall turn to the contract issues,

considering first, whether the district court relied on the

proper factors in determining whether Metavante

breached the contract, and second, whether the court’s

conclusion on the matter was clearly erroneous. We

Nos. 09-3007, 09-3996 13

shall also discuss whether Metavante breached the cove-

nant of good faith and fair dealing. We then shall turn

to Emigrant’s fraud claims and consider Emigrant’s

claim of fraudulent inducement before turning to its

claim that Metavante intentionally misrepresented its

failures during the contractual relationship.

A.

After a bench trial, we review conclusions of law de novo

and findings of fact for clear error. Johnson v. West, 218

F.3d 725, 729 (7th Cir. 2000). Provided that the trial court

correctly states the law, we review for clear error the

court’s findings as to whether the facts meet the legal

standard. Here, however, Emigrant contends that the

district court’s factual findings should be given no defer-

ence because they were adopted verbatim from

Metavante’s proposed findings and because they are

internally contradictory.

We have expressed in the past our disapproval of the

practice of a district court’s adopting findings drafted by

one party. See W. States Ins. Co. v. Wis. Wholesale Tire, Inc.,

148 F.3d 756, 759 n.3 (7th Cir. 1998). This view is not

idiosyncratic to this court, but is a matter of federal

ju d ic ia l p o l i c y p o i n t e d l y a r t i c u l a t e d b y th e

Supreme Court of the United States. See Anderson v. City

of Bessemer, 470 U.S. 564, 572 (1985). Although we

examine the district court’s findings “especially criti-

cally” under these circumstances, they are still the

findings of the court and are reviewed for clear error. Doe

v. First Nat’l Bank of Chicago, 865 F.2d 864, 875 (7th Cir.

14 Nos. 09-3007, 09-3996

1989) (internal quotation marks omitted); see also

Anderson, 470 U.S. at 572-73; Silver v. Executive Car Leasing

Long-Term Disability Plan, 466 F.3d 727, 733 (9th Cir. 2006)

(“[I]t is entirely consistent to review a district court’s

conclusions for clear error, while applying that standard

of review with a careful inspection of the record.”).

Upon examination of the record in this case, it is clear

that the district court rejected some of Metavante’s pro-

posed findings and adjusted a few others, but never-

theless adopted, on a wholesale basis, a great quantity

of the proposed findings, including complete sets of

findings and conclusions pertaining to certain claims.

Nevertheless, our reading of the district court’s oral

remarks does not suggest to us that the court blindly

adopted the proposed findings. Cf. Machlett Labs., Inc. v.

Techny Indus., Inc., 665 F.2d 795, 797 & n.4 (7th Cir. 1981)

(applying close scrutiny where district court adopted

proposed findings of prevailing party without reading

them). Rather, we believe that the court read the

findings that it adopted and carefully considered them.

Emigrant points out two alleged contradictions

between the district court’s adopted findings and its oral

ruling. These pertain to whether the court made a

finding on damages and whether the court made a

finding on Emigrant’s use of Metavante’s confidential

information. However, neither of these two points are

at issue in this appeal. Therefore, we need not decide

whether the district court actually contradicted itself.

This case therefore is not analogous to Mor-Cor Packaging

Products, Inc. v. Innovative Packaging Corp., 328 F.3d 331,

Nos. 09-3007, 09-3996 15

334-35 (7th Cir. 2003), where we were unable to deter-

mine the trial court’s finding on the key point in the

case—whether the contract at issue had been breached.

While we believe that the district court’s treatment of

this case is adequate, we pause to note that appellate

courts and trial courts must go about their work with a

concern for the overall accuracy and efficiency of the

judicial process. The practice followed here, while

having the superficial appeal of expediting the articula-

tion of the district court’s conclusions, creates a sig-

nificant potential for inaccuracy at the trial level and

great difficulty for a reviewing court that depends so

much on the thoughtfulness and precision of the trial

court’s work product. This case involved a ten-day trial

and over 500 docket entries. Oral remarks and wide-

scale adoption of proposed findings hardly sharpens

the issues in a way that conveys accurately the trial

court’s estimation to the appellate court.

B.

Emigrant challenges part of the testimony of one of

Metavante’s experts, David Moffat. It contends that the

testimony was unreliable, irrelevant and beyond the

scope of the disclosed expert report.

Moffat, a consultant employed with Huron Consulting

Group, is experienced in financial services technology

and was tendered as an expert in “service levels perfor-

mance and measurements in the financial services

industry as well as the performance of financial tech-

16 Nos. 09-3007, 09-3996

nology services agreements.” R.575 at 217. He testified

that Metavante had performed its services in a commer-

cially reasonable manner. In reaching that conclusion,

he placed particular importance on “the level of deposits

that were achieved on this system, the number of ac-

counts that were opened, transactions that were in-

volved,” as well as Metavante’s responsiveness to Emi-

grant’s concerns and issues. Id. at 237.

Emigrant submits that Moffat’s testimony about com-

mercial reasonableness should have been excluded under

Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579

(1993). Under the rule established in that case, the

district court was required to “ensure that the expert

testimony at issue both rests on a reliable foundation

and is relevant to the task at hand.” Trs. of Chicago Painters

& Decorators Pension, Health & Welfare, & Deferred Sav.

Plan Trust Funds v. Royal Int’l Drywall & Decorating, Inc.,

493 F.3d 782, 787 (7th Cir. 2007) (internal quotation

marks omitted).

Ordinarily, we review a district court’s decision to

admit or exclude expert testimony for abuse of discretion.

Gayton v. McCoy, 593 F.3d 610, 616 (7th Cir. 2010). Emigrant

submits, however, that the district court’s failure to

perform any Daubert analysis should deprive its ruling

of the usual deference.

We agree that the district court failed to perform a

Daubert analysis. The court, in its oral ruling, stated only

that “I find nothing in Mr. Moffat’s opinions to run afoul

of either Rule 702 or notice requirements to opposing

counsel.” R.545 at 2. Although we have held that the

Nos. 09-3007, 09-3996 17

court in a bench trial need not make reliability deter-

minations before evidence is presented, In re Salem, 465

F.3d 767, 776-77 (7th Cir. 2006), the determinations must

still be made at some point. Two of our sister circuits

have held that Daubert’s requirements of reliability and

relevancy continue to apply in a bench trial. Attorney Gen.

of Okla. v. Tyson Foods, Inc., 565 F.3d 769, 779 (10th Cir.

2009); Seaboard Lumber Co. v. United States, 308 F.3d 1283,

1302 (Fed. Cir. 2002). We have assumed the same. Trs. of

Chicago Painters, 493 F.3d at 787. However, the usual

concerns of the rule—keeping unreliable expert testimony

from the jury—are not present in such a setting, and our

review must take this factor into consideration. See

Attorney Gen. of Okla., 565 F.3d at 779. Nevertheless, the

“court must provide more than just conclusory state-

ments of admissibility or inadmissibility to show that it

adequately performed its gatekeeping function.” Gayton,

593 F.3d at 616.

Here, we must characterize the district court’s state-

ment as conclusory. We therefore must review the ad-

missibility of the expert testimony de novo. After our

review of the record, we conclude that Moffat’s testi-

mony was both relevant and reliable.

Moffat’s testimony was relevant. Neither side disputes

that whether Metavante’s performance was com-

mercially reasonable was at issue. However, there was

significant disagreement as to whether Emigrant’s com-

mercial success is a legitimate factor in determining

whether Metavante’s performance was commercially

reasonable, and Moffat’s testimony spoke to that ques-

18 Nos. 09-3007, 09-3996

tion. Moffat’s testimony was designed to assist the court

in assessing the reasonableness of Emigrant’s assessment

of Metavante’s performance in a particular industry,

financial services, during a transition to a new technology

that would transform its way of doing business.

Moffat’s testimony was sufficiently reliable to justify

its admission. An expert’s testimony is not unreliable

simply because it is founded on his experience rather

than on data; indeed, Rule 702 allows a witness to be

“qualified as an expert by knowledge, skill, experience,

training, or education.” Fed. R. Evid. 702 (emphasis

added); see also Smith v. Ford Motor Co., 215 F.3d 713, 718

(7th Cir. 2000).8 Rule 702 does require, however, that the

expert explain the “methodologies and principles” that

8

Criminal cases, for instance, are replete with examples of

experts, such as police officers and informants, qualified by

experience. See, e.g., United States v. Goodwin, 496 F.3d 636, 641

n.2 (7th Cir. 2007) (reiterating that “federal agents who have

training and experience in drug-related transactions, crimes

and prosecution are qualified to give expert testimony con-

cerning the practices of those engaged in this type of activity”

(internal quotation marks omitted)); United States v. Gray,

410 F.3d 338, 347 (7th Cir. 2005) (DEA agent with 7 years

experience, 5 as a narcotics canine officer, qualified as an

expert); see also United States v. Vesey, 338 F.3d 913, 916-17 (8th

Cir. 2003) (holding that testimony of “a convicted drug traf-

ficker and a confidential informant for law enforcement” should

have been admitted as an expert “to present evidence of

how illegal drug operations are normally conducted and to

counter the testimony of the government’s expert witness”).

Nos. 09-3007, 09-3996 19

support his opinion; he cannot simply assert a “bottom

line.” Minix v. Canarecci, 597 F.3d 824, 835 (7th Cir.

2010); see also United States v. Noel, 581 F.3d 490, 497 (7th

Cir. 2009) (rejecting expert testimony where expert “in

essence, told the jury nothing more than, ‘I am familiar

with the definition of child pornography, and this

meets that definition because I said so’ ”). Nor may the

testimony be based on subjective belief or speculation.

Trs. of Chicago Painters, 493 F.3d at 787-88.

Moffat’s testimony cannot be characterized as mere

ipse dixit. He did not simply testify that Metavante’s

performance was commercially reasonable because he

said so. Rather, he explained that in the financial sector,

as he has seen and experienced it, businesses consider

technological innovation satisfactory if it enables them

to meet their business financial objective.9 These explana-

tions were based on Moffat’s experience in the industry,

9

Moffat has acquired technologies on behalf of banks and

negotiated servicing on behalf of technology firms. R.575 at 219.

He testified that based on that experience, “the objective is

essential,” because technology is “built and deployed for the

purposes of meeting a business objective.” Id. at 238. “I’m not a

coder, I’m not a developer,” Moffat testified, “but I’m [a]

business man, in terms of my experience in this area, and the

job got done.” Id. at 250.

He also testified that when he worked for the Bank of New

York, “as we saw our assets grow significantly, not unlike

[Emigrant’s], during the period I was there, we concluded

that that was scalable, as I would conclude that this is

scalable for the same reason.” Id. at 245.

20 Nos. 09-3007, 09-3996

which included managing a fifty-person development

team. R.575 at 275-76. In essence, Moffat testified that

he was familiar with the manner in which financial

services firms have evaluated technological innovations

in the past and suggested that the same perspective

was appropriate in the present situation. In his view,

because Emigrant had met its business objectives, it

should have considered Metavante’s performance to

have been satisfactory despite various operational prob-

lems that had arisen along the way. These “hiccups,” R.545

at 18, as the district court referred to them, were to be

expected along the way and should be tolerated in that

industry as long as the bank’s financial objectives were

being realized. Therefore, Moffat’s testimony based on

the usual business practice is reliable.

Emigrant is, of course, critical of the quality of Moffat’s

testimony and does not believe that it ought to have

been credited by the district court. These criticisms do

not go to admissibility but to the appropriate weight

that should be accorded to the evidence. As we noted

in Gayton, “[d]etermination on admissibility should not

supplant the adversarial process; shaky expert testimony

may be admissible, assailable by its opponents through

cross-examination.” 593 F.3d at 616 (internal quotation

marks omitted). The record demonstrates clearly that

the district court was very much aware of this distinction

and, although it admitted the evidence, it also made it

very clear that, in the final analysis, it found it of limited

utility in making a final determination in the case.

Emigrant also submits that Moffat’s testimony about

commercial reasonableness went beyond the scope of

Nos. 09-3007, 09-3996 21

the disclosed expert report. Rule 26(a)(2)(B)(i) of the

Federal Rules of Civil Procedure requires disclosure of a

written expert report that contains “a complete state-

ment of all opinions the witness will express and the

basis and reasons for them.” “The purpose of these

[expert] reports is not to replicate every word that the

expert might say on the stand. It is instead to convey

the substance of the expert’s opinion . . . so that the op-

ponent will be ready to rebut, to cross-examine, and

to offer a competing expert if necessary.” Walsh v. Chez, 583

F.3d 990, 994 (7th Cir. 2009). They allow attorneys, not

experts in the fields at issue, to prepare intelligently for

trial and to solicit the views of other experts. S.E.C. v.

Koenig, 557 F.3d 736, 744 (7th Cir. 2009). We review

the district court’s ruling on a motion to exclude non-

disclosed expert evidence for abuse of discretion. Ciomber

v. Coop. Plus, Inc., 527 F.3d 635, 640 (7th Cir. 2008).

We are not confronted with a situation such as the one

before us in Ciomber v. Cooperative Plus, Inc. where the

expert clearly deviated from the established scope of his

expected opinion. 527 F.3d 635, 641-42 (7th Cir. 2008).

We believe that Moffat’s supplemental expert report,

combined with his original expert report, gave Emigrant

sufficient information to allow it to prepare adequately

for his testimony. The reports, when fairly read together,

make it clear that Moffat believed that Metavante’s level

of performance should have satisfied Emigrant, given

the level of financial success achieved by the venture.

Indeed, there is no better proof that the reports gave

Emigrant adequate notice than the very able cross-examina-

22 Nos. 09-3007, 09-3996

tion of Moffat by Emigrant’s counsel. Counsel stressed

that Moffat was not a programmer, that Moffat did not

consider “what percentage of consumers who tried to

become Emigrant Direct customers were able to succeed,”

R.575 at 264, and that this information is a factor to con-

sider in whether Metavante provided services in a com-

mercially reasonable manner. Id. at 271. Counsel also

explored Moffat’s opinion on Metavante’s internal com-

munications and communications with Teknowledge,

highlighting that Moffat’s opinion was based on observa-

tions of others. Id. at 274-78. Moffat was asked to ex-

plain several of Metavante’s communications, pre-

sumably to highlight what Emigrant saw as the incorrect-

ness of Moffat’s position. These lines of questioning

make it clear that the district court did not abuse its

discretion in determining that Emigrant had been ade-

quately prepared for Moffat’s testimony.

C.

We turn to Emigrant’s contract arguments. Emigrant

submits that Metavante breached the Agreement’s per-

formance warranty and its duty of good faith and fair

dealing. We shall examine each of these contentions

in turn.

1.

Metavante warranted that it would “provide all Services

in a commercially reasonable manner.” Agreement § 6.1.

Although some aspects of Metavante’s service were

Nos. 09-3007, 09-3996 23

excepted from this warranty,1 0 it applied to its provision

of software and hardware and the design of the system.

a.

Emigrant contends that, in considering whether

Metavante provided services in a commercially rea-

sonable manner, the district court improperly relied on

the performance of EmigrantDirect in the marketplace.1 1

Our review of contract meaning is de novo. What is

commercially reasonable is a question of fact. See, e.g.,

Ford Motor Co. v. Lyons, 405 N.W.2d 354, 376 n.16 (Wis. Ct.

App. 1987) (under the UCC).

The district court did not commit any legal error in

interpreting the contract language. As Ford Motor Co. v.

Lyons illustrates, the term “commercially reasonable

manner” is a commonly employed term in commercial

transactions. 405 N.W.2d 354, 376 n.16 (Wis. Ct. App. 1987).

The district court adopted the definition from Black’s

Law Dictionary of “a transaction conducted in good faith

and in accordance with commonly accepted commercial

10

Availability of the system was evaluated according to

service levels, discussed supra at II.C.1.b.

11

Emigrant also contends that the district court “misinterpreted

the Agreement’s termination clause to impose on Emigrant a

duty of reminding Metavante that it had a right to cure de-

fects.” Appellant’s Br. in 09-3007 at 43. In light of our holding

that Emigrant had no basis to terminate the contract, we

need not address this argument.

24 Nos. 09-3007, 09-3996

practice.” R.545 at 17. In giving meaning to this term,

the district court certainly did not err in concluding

that the success of the overall venture was relevant and

probative evidence. True, the performance warranty

addressed Metavante’s provision of technology services,

not overall business performance. Nevertheless, results

in the area of technology services, while not conclusive

proof of reasonable performance, are an indicator that

the court is entitled to take into account in making its

determination. A strong overall program performance,

including commercial success, suggests that the program

is performing in a reasonable manner. Although it is

possible that mitigation efforts would produce an ex-

tremely strong overall performance despite poor compo-

nent performance, a reasonable fact-finder is entitled to

conclude that such mitigation efforts were not deter-

minative and that the overall success of the venture is

due to the quality of a major component’s contribution.

Therefore, although EmigrantDirect’s commercial suc-

cess cannot establish conclusively the commercial reason-

ableness of Metavante’s performance, the court certainly

was entitled to consider it and to give this factor

great weight.12

A fair reading of the district court’s findings and oral

ruling establishes, moreover, that the court considered

12

We therefore cannot accept Emigrant’s argument that,

because, during contract negotiations, Metavante had refused

to warrant EmigrantDirect’s overall success, that overall

performance is totally irrelevant to the court’s determination

of commercial reasonableness of Metavante’s performance.

Nos. 09-3007, 09-3996 25

EmigrantDirect’s commercial success as just one

factor, albeit a significant one, in its determination that

Metavante’s performance had been commercially rea-

sonable. The court, although emphasizing EmigrantDirect’s

success, also discussed the cooperative nature of the

Emigrant-Metavante relationship. It noted testimony

that the sides “work[ed] together continuously to

address issues.” R.545 at 9. The court also recognized

“what [Emigrant CEO] Mr. Milstein was telling his

board of directors during this enterprise with

Metavante.” Id. at 18. The court noted that Mr. Milstein

was asked about “ ‘some technological issues’ ” with

EmigrantDirect and that “ ‘he responded that most of

these issues had been worked out with Metavante.’ ” R.538

at 20. The court also noted that, in October 2005, Emigrant

inquired about doing more business with Metavante.

Id. at 21. These facts suggest that Emigrant itself believed

Metavante’s performance to be reasonable. The district

court also noted that the contract referred to a 25% “aban-

donment rate” in calculating a reasonable price. R.545

at 13-14. The district court simply did not regard

EmigrantDirect’s success as conclusive proof that

Metavante performed reasonably.

We must conclude that the district court was under

no legal misapprehension and committed no methodo-

logical misstep in its consideration of this issue.

b.

Emigrant next contends that the district court’s con-

clusion, that Metavante performed in a commercially

26 Nos. 09-3007, 09-3996

reasonable manner and therefore did not breach the

performance warranty, was clearly erroneous. See Int’l

Prod. Specialists, Inc. v. Schwing America, Inc., 580 F.3d 587,

594-95 (7th Cir. 2009) (determination of material breach

reviewed for clear error). In evaluating this contention,

“[w]e do not reweigh the evidence or determine the

credibility of witnesses.” Murdock & Sons Constr., Inc. v.

Goheen Gen. Constr., Inc., 461 F.3d 837, 840 (7th Cir. 2006).

The district court emphasized, in addition to Emigrant’s

commercial success, the testimony of William Scialabba

and John McNally about the working relationship

between the parties, as well as Mr. Milstein’s statements

to the Emigrant Board of Directors. The district court

concluded that this evidence evinced no material breach

on the part of Metavante. The court’s findings em-

phasized Metavante’s good-faith diligence “to address

any issues that arose.” R.538 at 19. The findings also

noted that Emigrant even had inquired about doing

additional business with Metavante. Id. at 21. Further, the

district court found that Emigrant had planned to termi-

nate the Agreement for convenience well before the

termination letter was sent. R.545 at 21. On the district

court’s view of the evidence, therefore, Emigrant had a

product that was an outstanding commercial success,

gave every indication that Metavante’s performance

was satisfactory, and enjoyed a good working relation-

ship with Metavante—but nevertheless had planned to

terminate the relationship, well before it actually at-

tempted to do so. To the district court, these facts

showed that Metavante’s performance was commercially

reasonable.

Nos. 09-3007, 09-3996 27

These findings are not clearly erroneous. They are

supported by testimony from David Moffat, who sug-

gested that, in the business world, technology is

built with the business goal in mind. Emigrant used

Metavante’s technology to achieve its goal, as evidenced

by the product’s success. The findings were also sup-

ported by testimony that Metavante worked to fix prob-

lems as they arose. Mr. Milstein’s remarks to the Board

and Mr. McNally’s interest in further business are evi-

dence that Emigrant itself believed that Metavante

was complying with its obligations. The record also

provides evidence that Emigrant had long intended to

terminate the Agreement. On September 27, 2005, the

same day Milstein told the Board of Directors that

most technological issues have been worked out with

Metavante, he also told the Board that preparations

were underway “to arrange for EmigrantDirect accounts

to be managed within the Bank next year.” See PX 104

at EMI-0076814. In November 2005, well before the

May 2006 termination letter, Emigrant inquired about

developing “a plan to enable the orderly transition of

Metavante’s services to Emigrant” and noted that “time

is of the essence.” Ex. 1338.

The Agreement reveals that the parties understood

that they were dealing with the application of a rela-

tively new technology. Problems along the way were a

possibility, but the parties were committed to quickly

fixing these problems. The parties did not expect “reason-

able” to mean “perfect” or “flawless.” Section 8.2 of the

Agreement specifies that, before a party may terminate,

either party shall have 30 days to either cure a default or

28 Nos. 09-3007, 09-3996

implement and “diligently carry-out” a plan to cure the

default. That section also provides that

any error in processing data, preparation or filing

of a report, form, or file, or the failure to perform

Services as required hereunder shall be satisfactorily

cured upon the completion of accurate re-process-

ing, the preparation or filing of the accurate

report, form, or file, or the re-performance of the

Services in accordance with applicable require-

ments, respectively.

Agreement § 8.2 (emphasis added). This contractual

provision supports the district court’s view that the

parties expected that performance issues may arise, but

that they were committed to fixing them. Under its

terms, diligent efforts to correct problems is a key factor

to commercially reasonable performance. Evidence of

the parties’ working relationship, Emigrant’s ultimate

success, and Emigrant’s inquiry about additional busi-

ness serve to support the district court’s conclusion in

this case.

Emigrant invites our attention to the testimony of its

expert, Roger Nebel, and on Metavante’s internal docu-

ments. However, this evidence does not compel a con-

trary inference.

2.

Emigrant’s second contractual claim is that the district

court erroneously held that the implied covenant of good

faith and fair dealing was not breached in this case.

Nos. 09-3007, 09-3996 29

Emigrant emphasizes Metavante’s internal documents

and communications with Teknowledge, which are

harshly critical of Teknowledge’s performance. Emigrant

contends that Metavante’s failure to share these views

with Emigrant breached the implied covenant.

Emigrant is correct that the implied duty of good faith

and fair dealing is a part of the Agreement, just as it is a

part of every other contract governed by Wisconsin

law. See Kreckel v. Walbridge Aldinger Co., 721 N.W.2d 508,

514 (Wis. Ct. App. 2006). Although “good faith” is a

difficult term to define, Wisconsin courts have at-

tempted to define “bad faith”:

“A complete catalogue of types of bad faith is impossi-

ble, but the following types are among those which

have been recognized in judicial decisions: evasion of

the spirit of the bargain, lack of diligence and slacking

off, willful rendering of imperfect performance, abuse

of a power to specify terms, and interference with or

failure to cooperate in the other party’s performance.”

Foseid v. State Bank of Cross Plains, 541 N.W.2d 203, 213

(Wis. Ct. App. 1995) (quoting Restatement (Second) of

Contracts § 205 cmt. d). It is, of course, possible to breach

the implied duty of good faith even while fulfilling all

of the terms of the written contract. Id. at 212.

The district court held that “Metavante did not have

an ‘implied’ duty to notify Emigrant when a computer

application used to provide Services under the Agree-

ment experienced a problem or issue.” R.538 at 54. The

court also held explicitly that “Metavante did not breach

any implied covenant of good faith.” Id. Emigrant offers

30 Nos. 09-3007, 09-3996

no reason to doubt these conclusions. The obligations of

the parties to perform the terms of a contract must be

evaluated in the context of the totality of the business

arrangement contemplated by the contract. As we have

noted earlier, the district court viewed the business

arrangement here as a cooperative effort to develop

a technological innovation in the financial services in-

dustry. The arrangement contemplated the possibility of

glitches along the way that would require a cooperative

effort to address and to rectify. Overall availability was

measured by service level benchmarks. The district court

determined that Metavante diligently moved to address

the imperfections that arose. That determination is sup-

ported by the record.

D.

We now shall turn to Emigrant’s fraud claims. In Wis-

consin, the elements of a cause of action for fraud in

the inducement and for intentional misrepresentation

are: (1) the defendant made a factual representation;

(2) the factual representation was false; (3) the defendant

made the factual representation knowing that it was

untrue or without caring whether it was true or false;

(4) the defendant made the representation with intent

to defraud or to induce another to act upon it; and (5) the

plaintiff believed the statement to be true and relied

upon that statement to its detriment. See Kaloti Enters.,

Inc. v. Kellogg Sales Co., 699 N.W.2d 205, 211 (Wis. 2005).

Nos. 09-3007, 09-3996 31

1.

a.

We first address Emigrant’s claim of fraudulent induce-

ment. Wisconsin has adopted the rule found in Restate-

ment (Second) of Contracts § 166, which provides:

If a party’s manifestation of assent is induced by

the other party’s fraudulent misrepresentation as

to the contents or effect of a writing evidencing or

embodying in whole or in part an agreement, the

court at the request of the recipient may reform

the writing to express the terms of the agreement

as asserted,

(a) if the recipient was justified in relying on

the misrepresentation . . . .

See Hennig v. Ahearn, 601 N.W.2d 14, 26 (Wis. Ct. App.

1999). Section 172 of the same Restatement is also perti-

nent:

A recipient’s fault in not knowing or discovering

the facts before making the contract does not make

his reliance unjustified unless it amounts to a

failure to act in good faith and in accordance

with reasonable standards of fair dealing.

See Hennig, 601 N.W.2d at 27.

Emigrant contended at trial that Metavante had made

certain misrepresentations prior to the formation of the

Agreement—namely, that Metavante’s system was a

“proven model” that was “truly integrated” and “fully

scalable to large volumes.” According to Emigrant, the

32 Nos. 09-3007, 09-3996

“proven model” claim was false because, at the time

Metavante first had contact with Emigrant, Metavante

had not yet made the decision to offer a direct bank and

therefore had no product—certainly not a “proven

model.” R.578 at 139; Ex. 1081. Metavante, Emigrant

claimed, did not have customers; it had one customer. The

“truly integrated” representation was false, urges Emi-

grant, because Metavante employed a subcontractor,

Teknowledge. R.578 at 143. The “fully scalable” representa-

tion was false because Metavante could not handle, as

it claimed, 90 million accounts per day. R.578 at 158-59.

Emigrant now contends that the district court erred by

holding that Emigrant could not rely justifiably on

Metavante’s alleged misrepresentations because it

did not investigate them. The district court stated that “in

the final analysis this is very much [a] two-way street;

and as a consequence of the contract language such as

it is, and such as that language was reviewed by individu-

als within Emigrant, they had as much an obligation

to inquire as to whether de facto there would or were

going to be used any subcontractors in fulfilling

Metavante’s contract obligations.” R.545 at 10-11. Although

the court here focused specifically only on the issue of

subcontractors, it later made the more general point that

Emigrant “has only itself to look to in terms of these

asserted deficiencies that have been catapulted, if you

will, into a suggestion that there was fraud.” R.545 at 13.

When these statements are assessed in the context of

the findings of fact and conclusions of law, we believe

that it is very clear that the district court’s point was

Nos. 09-3007, 09-3996 33

that, in light of the extensive pre-contract negotiations

that took place in this matter, it was not reasonable for

Emigrant to rely on any early sales pitch of Metavante;

instead, Emigrant only could rely on the carefully negoti-

ated terms of the final contract. Wisconsin law requires

that a fraud plaintiff prove that his reliance is reason-

able. Kailin v. Armstrong, 643 N.W.2d 132, 145-46 (Wis. Ct.

App. 2002). All the facts and circumstances, “including

the intelligence and experience of the misled individual

and the relationship between the parties,” must be con-

sidered in determining whether this condition was met.

Bank of Sun Prairie v. Esser, 456 N.W.2d 585, 589 (Wis. 1990).

When determining whether reliance is reasonable, the

court essentially determines whether the plaintiff had

the right to rely on the representations. See Hennig, 601

N.W.2d at 25 n.3. Whether reliance was reasonable is

ordinarily a question of fact.1 3 Sciano v. Hengle, 83 N.W.2d

689, 692 (Wis. 1957); see also Cozzi Iron & Metal, Inc. v.

U.S. Office Equip., Inc., 250 F.3d 570, 574 (7th Cir. 2001)

(applying Illinois law); McWaters v. Parker, 995 F.2d 1366,

1374 (7th Cir. 1993) (applying Indiana law). Here, two

sophisticated businesses negotiated an arms-length

transaction over a period of several months. R.522 ¶ 6, 25.

13

In this case, the district court made conclusions of law

suggesting that it was considering the issue as a matter of

law. R.538 at 57. We believe it evident that if the court be-

lieved that Emigrant’s reliance was unreasonable as a matter

of law, it also believed that Emigrant’s reliance was unrea-

sonable as a matter of fact. We will evaluate the issue under

the latter standard.

34 Nos. 09-3007, 09-3996

Both sides carefully reviewed the Agreement. Id. ¶ 7.

Emigrant was represented by both in-house and outside

counsel, id. ¶ 27, and engaged the services of a firm called

Core-Teck to conduct a “Risk Review and Analysis of

Metavante Contract,” id. ¶ 38. Emigrant submitted several

comments and suggested changes to the Agreement. Id.

¶ 32. The Agreement provided that subcontractors may

be used. Agreement § 3.1. Moreover, the Agreement

contained specific availability guarantees—namely, service

levels of 98%—and a broad performance warranty.

R.522 ¶ 12, 14.

There is no provision in the contract that recites

explicitly that “Metavante’s services are unproven, not

scalable and not integrated.” However, the Agreement,

combined with the circumstances of its negotiation,

permitted the district court to conclude that any reliance

on oral representations in this case was unreasonable.

Wisconsin case law makes clear that

“[c]ourts will refuse to act for the relief of one claiming

to have been misled by another’s statements who

blindly acts in disregard of knowledge of their falsity

or with such opportunity that by the exercise of ordi-

nary observation, not necessarily by search, he would

have known. He may not close his eyes to what is

obviously discoverable by him.”

Ritchie v. Clappier, 326 N.W.2d 131, 134 (Wis. Ct. App. 1982)

(quoting Jacobsen v. Whitely, 120 N.W. 285, 286 (Wis. 1909)).

Here, the negotiation process made clear to Emigrant

the capabilities of Metavante and the expectations of the

parties were memorialized in a written instrument with

Nos. 09-3007, 09-3996 35

an integration clause. Indeed, as a result of the negotia-

tions, the parties drew up performance standards to

serve as more precise benchmarks for Metavante’s per-

formance. Metavante’s services were required to be

available 98% of the time, and with respect to aspects of

Metavante’s performance other than availability, the

parties agreed that Metavante was required to perform

in a “commercially reasonable manner.” Agreement § 6.1.

These performance benchmarks addressed the same

concerns as the alleged misrepresentations. Emigrant

thus ensured that it would receive a desired level of

service by negotiating for certain performance guarantees.

Moreover, Emigrant was in a strong bargaining position.

It did not agree to a mere form warranty that it had no

power to change. It was able to request any additional

assurances that it felt were needed.

Accordingly, we must conclude that the district court

did not err in concluding that any reliance by Emigrant

on the alleged misrepresentations of Metavante was not

reasonable. The contract contained ample provisions

that addressed the same concerns as Metavante’s earlier

alleged statements. We already have held that these

provisions were not breached.1 4

14

The cases relied upon by Emigrant do not support its posi-

tion. In Hennig v. Ahearn, 601 N.W.2d 14 (Wis. Ct. App. 1999),

there was an unacknowledged change in the final draft of the

contract; most changes were highlighted and discussed by the

parties as they passed drafts back and forth. The alleged

misrepresentation was the failure to disclose this change; the

(continued...)

36 Nos. 09-3007, 09-3996

14

(...continued)

court held that it was a question for the fact-finder whether

reliance was reasonable. Id. at 24. The court only held that a

jury could conclude that reliance was reasonable, not that a jury

must so conclude. Id. at 24-25. Emigrant also relies on First

National Bank & Trust Co. v. Notte, 293 N.W.2d 530, 539 (Wis.

1980). That case supports our holding; it states that “[t]he

recipient’s fault in failing to discover the facts before

entering the contract does not make his reliance unjustified

unless his fault amounts to a failure to . . . conform his conduct to

reasonable standards of fair dealing.” Id. at 539 (emphasis sup-

plied). We have held that, in view of all the facts and circum-

stances, the district court was permitted to find that Emigrant’s

reliance was not reasonable. Emigrant also relies upon Lewis

v. Paul Revere Life Insurance Co., 80 F. Supp. 2d 978, 999 (E.D.

Wis. 2000). In that case, an insurance applicant allegedly

failed to disclose certain matters on his application. The ap-

plicant contended that the insurer’s reliance on the applica-

tion was not justified because he had authorized the insurer

to obtain his medical records, which would have disclosed the

matters at issue. The court disagreed, noting that “[n]othing on

the face of Lewis’s application made obvious that there was

any falsity to its claims that Lewis never had known indica-

tions of or been treated for mental or emotional disorder and

that he had not received medical treatment or advice during

the past five years.” Id. at 999. By contrast, in the present case,

the district court determined that Emigrant’s participation

in contractual negotiations addressed the issues of the alleged

early false representation and that Emigrant bargained for,

and received, provisions in the arms-length contract that took

any earlier representations into account. Finally, Emigrant

(continued...)

Nos. 09-3007, 09-3996 37

b.

We also note that, irrespective of the reliance issue, this

fraud claim fails on other grounds. The district court

determined that Metavante’s claims that its product was

“integrated” and “scalable” were not false. Indeed, the

court adopted a finding stating that “Emigrant has

failed to meet its burden of proving that the statements

allegedly made by Metavante were both false and mate-

rial.” R.538 at 56. In its view, this case did not rise “to

the level of even meriting serious consideration as a

fraud claim” and that the fraud claim was “driven by

the hard reality of one trying to avoid its contractual

obligations that otherwise come into play and the Court

has found applicable here.” R.545 at 29. “[T]his is in the

final analysis a breach of contract case . . . .” Id. at 3.

Additionally, as we have discussed earlier, the concepts

of “integration” and “scaleability” were inextricably

bound up with the issue of whether Metavante’s perfor-

mance was commercially reasonable. Emigrant con-

14

(...continued)

derives no assistance from Household Finance Corp. v. Christian,

98 N.W.2d 390 (Wis. 1959). That case holds that a bank was

entitled to rely on the statements made on a loan application.

It is true that the law does not require all recipients to ex-

amine critically, as a matter of course, representations made

to them. Id. at 392-93. But the negotiation of a contract for

services, which included performance benchmarks, by two

sophisticated entities over a period of several months is a

circumstance that is relevant to our analysis, and Household

Finance is not to the contrary.

38 Nos. 09-3007, 09-3996

tended vigorously that Metavante’s performance was

commercially unreasonable because it was not scalable

or well integrated. Therefore, when the district court

made a determination on the question of commercial

reasonableness, it was considering scaleability and in-

tegration.

The district court did not clearly err in this respect.

Emigrant’s own expert witness, Roger Nebel, testified

that “integration” referred to putting together multiple

parts in a way that works. R.571 at 210-11. “Scalable,” 1 5

according to the same witness, is “simply meant to

indicate that the solution can grow in one or more of

these dimensions,” including new products, new volume

or faster speed. R.572 at 5-6. As we have discussed

earlier, there was ample evidence that Emigrant was

satisfied with Metavante’s performance and that

Metavante’s performance enabled Emigrant to achieve

great success. To the extent Emigrant contends that

Metavante represented that it would not use subcon-

tractors, we note that section 3.1 of the Agreement, entitled

“Performance by Subcontractors,” allows for the use of

subcontractors. This provision was obvious to Emigrant.

Metavante’s alleged representations that its product

was “proven,” Appellant’s Br. in 09-3007 at 34, present a

slightly more difficult inquiry, because whether the

product was “proven” is not directly related to the per-

15

The trial transcripts use a different spelling - “scaleable.” The

parties use what we believe to be the more correct spelling.

We shall follow the parties throughout this opinion.

Nos. 09-3007, 09-3996 39

formance of the product. However, at the time Metavante

approached Emigrant, Metavante had a client—Capital

One. Metavante referred Emigrant to Capital One, and

Emigrant spoke to Capital One. This consultation op-

portunity allowed Emigrant to evaluate for itself

whether Metavante was sufficiently “proven.” Emigrant

could speak with Capital One and request additional

references if not satisfied.

“[C]ourts will refuse to act for the relief of one claiming

to have been misled by another’s statements who

blindly acts in disregard of knowledge of their falsity

or with such opportunity that by the exercise of ordi-

nary observation, not necessarily by search, he would

have known. He may not close his eyes to what is

obviously discoverable by him.”

Ritchie, 326 N.W.2d at 134 (quoting Jacobsen, 120 N.W.

at 286).

2.

Emigrant also claims that Metavante intentionally

misrepresented Teknowledge’s adequacy throughout

the Emigrant-Metavante relationship. The district court

rejected this claim; Emigrant correctly points out that

the court did so with little comment.1 6 Emigrant relies

16

The district court found that, “[b]oth before and during the

Agreement, Emigrant had knowledge and was aware of the

(continued...)

40 Nos. 09-3007, 09-3996

on Moffat’s admission that “what Metavante said to

Teknowledge and what Metavante said internally about

Teknowledge’s performance [that it was inadequate]

was indeed different from what they told EmigrantDirect.”

Reply Br. in 09-3007 at 11. Emigrant also points to an

instance in 2005 when “Metavante assured Emigrant

after numerous problems . . . that it had fully tested the

capacity of its account opening system, while simulta-

neously warning that system’s subcontractors that

‘[s]tress and performance testing has been inadequate:

capacity planning appears nonexistent.’ ” Reply Br. in 09-

3007 at 5. Specifically, Metavante told Emigrant that

its system could handle 2,000 account openings per day,

but told Teknowledge that the system was “inadequate

to support solutions of the current scale.” Ex. 1229 at

MVNT-331122. Emigrant also appears to contend, if

implicitly, that Metavante committed fraud when it

failed to disclose Teknowledge’s troubles.

We address only the claim that Metavante affirma-

tively made false statements about Teknowledge’s capaci-

ties and abilities, telling Emigrant that Teknowledge’s

performance was adequate when it was, in reality, inade-

16

(...continued)

facts and circumstances that form the basis of its claims for

fraud in the inducement and intentional misrepresentation,

and thus cannot prove those claims, let alone by clear and

convincing evidence.” R.538 at 56.

Nos. 09-3007, 09-3996 41

quate.17 The district court’s resolution of the contract

claim and its remarks on the case’s failure to “merit[]

serious consideration as a fraud claim,” R.545 at 29,

make it clear that the district court found that Emigrant

failed to prove that Metavante’s representations that

Teknowledge was adequate were false. We see no clear

error in this determination for the reasons we stated

in connection with the contract claim.

The district court committed no reversible error in

determining that Emigrant’s fraud claims were without

merit.

III

FEES

We now turn to the fee petition filed by Metavante.

First, we shall provide an overview of the facts of the

fee proceedings. Next, we shall discuss whether

Emigrant is entitled to fees on the “in-house claim.”

Finally, we shall turn to whether the district court

properly allowed Metavante to submit redacted bills in

support of its fee petition.

17

Metavante had no duty to disclose defects in its system to

Emigrant. This is so because, as we have stated, these defects

did not amount to a breach of warranty, and Metavante at-

tempted to fix these defects in good faith. See supra at II.C.2

(discussing implied covenant of good faith and fair dealing).

42 Nos. 09-3007, 09-3996

A.

Following the verdict, Emigrant moved to amend the

judgment. Mindful that section 17.8 of the Agreement

provided for the award of attorney’s fees to the “prevailing

party,” Emigrant asked for amended findings that

showed Emigrant to be the prevailing party on the “in-

house claim.” Emigrant stated that it was entitled to

attorneys’ fees relating to that aspect of the litigation

and that Metavante was not entitled to its corresponding

fees. R.553 at 3. The district court denied the motion. It

held that there was no independent “in-house claim”; the

“claim” that Emigrant so characterized was merely a

partial defense. The court also stated that, “while [it]

found that Metavante was entitled to an amount less

than the full termination fee under the Agreement, the

record is sufficiently clear on this point.” R.556 at 3.

Subsequently, Metavante filed a petition for nearly $10

million in fees and costs. In support of the petition, it

submitted redacted bills. The bills showed the amounts

of time, rates, and money spent, but descriptions of work

performed were redacted. Emigrant objected, arguing

that redacted bills made reasonableness review impossible.

The court granted the fee petition in full. It held that

under Medcom Holding Co. v. Baxter Travenol Laboratories,

Inc., 200 F.3d 518 (7th Cir. 1999), the aggregate

fee amount requested by Metavante was reasonable. It

considered the factors mentioned in Medcom in

reaching this conclusion, noting, among other things, that

Metavante had paid its fees when the outcome of the

case was uncertain and that the fees were not out of

Nos. 09-3007, 09-3996 43

proportion to the stakes of the case. Because line-by-line

analysis was foreclosed by Medcom, unredacted bills

were not required.

B.

We now turn to Emigrant’s argument for fees related

to the “in-house claim.” 1 8 The Agreement provided that,

if Emigrant terminated for convenience rather than for

cause, it would have to pay a termination fee. If

Emigrant migrated to an “in-house solution,” the contract

provided for a lower termination fee. Agreement, Termina-

tion Fee Schedule § 1(b). Emigrant points out that

Metavante sought a termination fee of approximately

$20.7 million. The district court, however, awarded a

much lower termination fee of approximately $3.8 million.

Therefore, Emigrant contends that it was the “prevailing

party” on what it calls the “in-house claim,” entitling it

to a portion of its legal fees.

Emigrant relies primarily on the fee-shifting provision

of the Agreement. That provision states as follows:

If any legal action is commenced in connection

with the enforcement of this Agreement or any

instrument or agreement required under this

Agreement, the prevailing party shall be entitled

18

Metavante contends that Emigrant waived this argument by

not submitting a fee petition of its own. However, Emigrant

brought the argument to the court’s attention in opposition

to Metavante’s petition.

44 Nos. 09-3007, 09-3996

to costs . . . incurred in connection with such

action, as determined by the court.

Agreement § 17.8. We review the meaning of the contract

term, “prevailing party,” de novo. Tax Track Sys. Corp. v.

New Investor World, Inc., 478 F.3d 783, 788 (7th Cir.

2007). Here, the Agreement is unambiguous. The term

“prevailing party” is a term of common usage in this

context. It does not include, whether viewed in the

abstract or in the context of this agreement, a party

who has partial success on an affirmative defense.

There was no separate and distinct “in-house claim” in

the case; there was an in-house issue. Resolution of that

issue caused Metavante to be awarded less damages

than it had sought. We cannot accept Emigrant’s argu-

ment that it is entitled to fees and costs attributable to

litigation of this issue. The district court determined

correctly that Emigrant’s success on the in-house issue

does not render it a “prevailing party” within the

meaning of the contract. Emigrant left this litigation

with nothing; in no sense is it the “prevailing party.”

Emigrant also appears to contend that Metavante

pursued the in-house issue in bad faith. It is well-settled

that “a prevailing defendant may obtain attorneys’ fees

if the plaintiff litigated in bad faith.” Mach v. Will County

Sheriff, 580 F.3d 495, 501 (7th Cir. 2009). The district

court found nothing to indicate that Metavante pursued

the issue in bad faith, and we see no basis for the

reversal of that determination. Metavante argued at trial

that the Agreement required that Emigrant’s successor

system be developed fully in-house, without any outside

Nos. 09-3007, 09-3996 45

assistance. The district court rejected this argument as

a matter of contract interpretation. However, Emigrant

advances no contention that this argument was frivolous.1 9

Metavante also argued that Emigrant had made use

of Metavante’s confidential information. As the district

court noted, there was evidence showing that Emigrant

was in a position to use confidential information. McNally

testified that his job was to “explain[] away the func-

tionality that we had in the Metavante system and try[]

to make sure that we convert over everything that we

19

Metavante submitted in its closing argument that,

[f]or Emigrant’s successor system to be in-house,

Emigrant and Emigrant alone under Section 1B had to

create its own data processing platform for that system;

not hire someone else to create it, not hire someone

else to assist in creating it or to assist in creating

some portion of it.

R.578 at 33. Section 1(b) of the Termination Fee Schedule

provided:

Notwithstanding the foregoing, if after the initial thirty-

six (36) months of the term, Customer migrates its

data processing for direct banking to an in-house solution

by creating their own data processing platform, Customer

may terminate this Agreement without payment of

any Termination Fee . . . . This special termination

option shall not apply in the event Customer acquires

software from another source to replace the Metavante

services described in this Agreement and enables it

to run in-house.

Agreement, Termination Fee Schedule § 1(b) (emphasis added).

46 Nos. 09-3007, 09-3996

needed to do into the in-house model.” R.570 at 154. He

also testified that he did a lot of reading and asked

many questions in order to understand the “func-

tionalities” of the Metavante system. Id. at 161-62. Notably,

one of Emigrant’s own experts, Dr. Stephen Garland of

MIT, testified about the safeguards that are sometimes

taken to avoid infringing on trade secrets and to avoid

being sued for infringement. McNally testified, however,

that no one was screened off of the in-house project and

no one was directed not to use confidential information.

R.570 at 235-36. This evidence provided a good-faith

basis to pursue the in-house issue; the fact that Metavante

ultimately was unable to prove, to the satisfaction of

the district court, that Emigrant actually had used con-

fidential information does not render it now liable for

Emigrant’s attorney’s fees.

C.

Emigrant submits that Medcom did not permit the use of

redacted bills; rather, unredacted bills were required in

order to allow the district court to review the fee request

for reasonableness.2 0

20

Metavante submits that Emigrant “never argued the Medcom

line of cases supposedly requires the judicial examination of

detailed attorney work entries that were indisputably sub-

mitted to, reviewed, and paid by the client in the ordinary

course of business.” Appellee’s Br. in 09-3996 at 21. However,

we believe that Emigrant’s argument was fairly presented to

(continued...)

Nos. 09-3007, 09-3996 47

In Medcom, we confronted a request for attorneys’ fees

on the basis of an indemnity clause. We made clear that

indemnity clauses contain an implied requirement that

20

(...continued)

the district court. Emigrant contended below that “a court

should not dispense with an inquiry into the reasonableness

of a fee request merely because the litigant paid its legal

bills—the litigant must still justify the reasonableness of its

requested fees and costs. This is so because, in reality, a party

might choose to pay fees that are not commercially reasonable.”

Reply Br. in 09-3996 at FRA-12-13. Emigrant submitted that

except for the fact that Metavante already had paid, “Metavante

offers no other evidence by which Emigrant or the Court can

meaningfully assess the reasonableness of Metavante’s fees.”

Id. at FRA-14. Emigrant also specifically contended that

“any showing of the reasonableness of Metavante’s fees is

impossible without detailed time records.” Id. at FRA-16. These

arguments are exactly the arguments that Emigrant now

makes. Metavante is correct that Emigrant cited some inap-

posite cases and did not cite or address Medcom Holding Co. v.

Baxter Travenol Laboratories, Inc., 200 F.3d 518 (7th Cir. 1999), but

this fact does not work a waiver. A litigant may cite new

authority on appeal. See United States v. Rapone, 131 F.3d 188,

196 (D.C. Cir. 1997) (“In the present case, Rapone is not at-

tempting to raise the issue of a jury trial for the first time on

appeal. Rather, he simply offers new legal authority for the

position that he repeatedly advanced before the district

court—that he was entitled to have his case tried before a

jury.”); Fed. R. App. P. 28(j) (allowing counsel to bring “perti-

nent and significant” new authority to the attention of the

court after brief has been filed). None of Metavante’s cited

cases establish that a failure to cite cases works a waiver.

48 Nos. 09-3007, 09-3996

the fees sought be reasonable. Medcom, 200 F.3d at 520-

21. The purpose of this requirement is “to guard against

moral hazard—the tendency to take additional risks (or

run up extra costs) if someone else pays the tab.” Id. at

521. We stated:

If attorneys submit bills that meet market stan-

dards of detail, their omission of information to

which courts resort in the absence of agreement

is of no moment. If the bills were paid, this

strongly implies that they meet market standards.

The fees in dispute here are not pie-in-the-sky

numbers that one litigant seeks to collect from a

stranger but would never dream of paying itself.

These are bills that MHC actually paid in the ordi-

nary course of its business. The indemnity

requires Baxter to make MHC whole, which means

reimbursement for commercially-reasonable fees

no matter how the bills are stated.

Id. at 520 (internal citations omitted; emphasis in original).

We also said:

Instead of doing a detailed, hour-by-hour review

after the fashion of a fee-shifting statute, therefore,

the district judge should have undertaken an

overview of MHC’s aggregate costs to ensure

that they were reasonable in relation to the stakes

of the case and Baxter’s litigation strategy (plus

the fact that this case was tried three times and

appealed twice before). One indicator of reason-

ableness is that MHC paid all of these bills at a

time when its ultimate recovery was uncertain.

Nos. 09-3007, 09-3996 49

Another is that MHC’s total legal fees and ex-

penses came to about $200,000 less than Baxter’s.

Id. at 521.

We further developed the Medcom principles in Taco

Bell Corp. v. Continental Casualty Co., 388 F.3d 1069 (7th

Cir. 2004). In that case, the appellant had submitted an

affidavit, which we called “excruciatingly detailed,” from

a firm that reviews lawyers’ bills; the affidavit stated

that Taco Bell had overpaid its lawyers. Id. at 1075-76.

We did not discuss the contents of the affidavit; we

simply stated that, “[b]ecause of the resulting uncertainty

about reimbursement, Taco Bell had an incentive to

minimize its legal expenses (for it might not be able to

shift them); and where there are market incentives to

economize, there is no occasion for a painstaking

judicial review.” Id.2 1

21

Medcom involved a contract that was governed by the law

of Illinois. 200 F.3d at 519. However, our decision was not

based on Illinois law. Indeed, even when fees are sought

pursuant to a contract, Illinois courts require more exacting

scrutiny: “[T]he petition for fees must specify the services

performed, by whom they were performed, the time ex-

pended thereon and the hourly rate charged therefor.” Kaiser

v. MEPC Am. Props., Inc., 518 N.E.2d 424, 427-28 (Ill. App.

Ct. 1987). Because of the importance of these factors, it

is incumbent upon the petitioner to present detailed records

maintained during the course of the litigation containing

facts and computations upon which the charges are predi-

cated. Id.

(continued...)

50 Nos. 09-3007, 09-3996

Emigrant submits that the district court misapplied

Medcom when it permitted Metavante to submit redacted

bills. Emigrant focuses on our comments about “market

standards of detail,” Medcom, 200 F.3d at 520, to argue

that, while “contracting parties have no basis to complain”

“if summary bills without detailed time records are

acceptable to and paid by clients,” such bills were not

accepted by Metavante in this case, Appellant’s Br. in 09-

3996 at 18.

Medcom and its progeny hold that, as a matter of the

efficient and fair administration of the federal courts,

individual scrutiny of line-item entries is neither neces-

sary nor appropriate in contractual fee-shifting cases.

Given the fact that the fees were paid by a party who

had no reassurance of indemnity, we believed that market

considerations normally would render unnecessary

resort to the time-consuming examination of individual

expenses. For the federal courts, such exercises drain the

21

(...continued)

In Taco Bell Corp. v. Continental Casualty Co., 388 F.3d 1069

(7th Cir. 2004), we made explicit that Medcom was grounded in

federal law and explained the reason. The issues involved

were requirements of proof, which “concern how a particular

court system, having regard for its resource constraints and

the competing claims on its time, balances the cost of meticulous

procedural exactitude against the benefits in reducing error

costs.” Id. at 1076. We cited cases holding that “[t]he decision

to hold an evidentiary hearing when making an attorney’s

fee award is a matter of procedure.” Id. (internal quotation

marks omitted).

Nos. 09-3007, 09-3996 51

institution of its most valuable resource—time. As an

alternative methodology, we stated:

Instead of doing a detailed, hour-by-hour review

after the fashion of a fee-shifting statute, therefore,

the district judge should have undertaken an

overview of MHC’s aggregate costs to ensure that

they were reasonable in relation to the stakes of

the case and Baxter’s litigation strategy (plus the

fact that this case was tried three times and ap-

pealed twice before).

Medcom, 200 F.3d at 521. In Taco Bell, we reiterated this

operating principle when the non-prevailing party sub-

mitted a detailed affidavit scrutinizing the prevailing

party’s fees. We did not examine this affidavit, stating

that “where there are market incentives to economize,

there is no occasion for a painstaking judicial review.”

Taco Bell, 388 F.3d at 1076.

Emigrant submits that allowing the submission of

redacted bills effectively amounts to a prepayment stan-

dard—if the prevailing party has paid its legal bills, the

opposing party must pay those costs. This result, in Emi-

grant’s view, would vitiate the reasonableness require-

ment. In Medcom, however, we took the view that, in the

normal course of adjudication, “reasonableness must

be assessed using the market’s mechanisms,” 200 F.3d at

520, and that aggregate costs should be reviewed for

reasonableness in relation to certain other factors, id. at

52 Nos. 09-3007, 09-3996

521. 22 Of course, special circumstances may arise in

which a district court will have reason to doubt whether

market considerations alone were sufficient to ensure

reasonable fees. In those instances, the district court, as

a matter of its sound discretion, can require additional

information of the parties. In such instances, of course,

the court must proceed with due regard for the attorney-

client privilege and for the protection of other con-

fidential and proprietary information. Here, we are con-

vinced that none of the concerns articulated by

Emigrant were of such moment as to make it an

abuse of discretion for the district court to decline to

depart from the approach established in Medcom.

Here, the district court made the determination of

reasonableness on the basis of not only the presumptive

validity of market forces, but also the affidavits of

the parties which assured the court that rates had been

negotiated, supporting documentation had been re-

22

In Medcom, we referred to “bills that meet market standards

of detail.” 200 F.3d at 520. Our focus, however, was on the

perspective of the prevailing party who received, reviewed

and paid the bills. See id. (“If the bills were paid, this strongly

implies that they meet market standards.”). Medcom was

referring to bills that met market standards of detail in the

form that the general counsel reviewed. Medcom recognizes that

the prevailing party’s general counsel, or similar corporate

officer, has a duty, imposed by various provisions of federal

and state law, to scrutinize the bills before paying them; this

is why it places great weight on the fact that the prevailing

party paid the bills without assurance of repayment.

Nos. 09-3007, 09-3996 53

viewed and pertinent questions asked. The court also

was faced with a situation in which the party challenging

the fees as excessive had declined to reveal its own fees

as a measure of a reasonable expenditure. Indeed, while

criticizing Metavante for retaining an out-of-town firm

to handle the trial, Emigrant itself proceeded with a

comparable out-of-town firm of its own. Emigrant also

makes much out of the fact that some legal costs were

incurred by Metavante after it was aware of its status

as the prevailing party. Given the district court’s aware-

ness of how Metavante’s general counsel and its outside

counsel had negotiated the fee arrangement, we believe

that the court acted within the bounds of its discretion

in determining that no additional guarantee of reason-

ableness was required.

General counsels, as corporate officers and as members

of the bar, have a great responsibility to ensure that

rates charged their client reflect the exercise of the

highest standards of fiduciary duty; similarly, repre-

sentations made to the court about fee arrangements

must reflect exacting levels of candor. The judges of the

district court have the responsibility—and the author-

ity—to ensure that these standards are met. We only

hold that in most situations, as here, this responsibility

can be discharged without line-by-line scrutiny of sub-

missions.

54 Nos. 09-3007, 09-3996

Conclusion

The judgment of the district court is affirmed.

A FFIRMED

8-30-10