author: MULLIGAN, Circuit Judge:

text:
    Americo MICHEL, Appellant, v. UNITED STATES of America, Appellee.
    No. 433, Docket 74-2198.
    United States Court of Appeals, Second Circuit.
    Argued Nov. 4, 1974.
    Decided Dec. 2, 1974.

      Anna Durbin, Yale Law School, Michael J. Churgin, New Haven, Conn., for appellant.
    David A. De Petris, Asst. U. S. Atty. (David G. Trager, U. S. Atty. E.D.N.Y., Paul B. Bergman, Asst. U. S. Atty., of counsel), for appellee.
    Before KAUFMAN, Chief Judge, and ANDERSON and MULLIGAN, Circuit Judges.
   MULLIGAN, Circuit Judge:

This is an appeal by Americo Michel from an order of the United States District Court for the Eastern District of New York, Hon. Jacob Mishler, Ch. J., entered on July 29, 1974, denying his motion to vacate his sentence pursuant to 28 U.S.C. § 2255. We affirm.

On February 20, 1973, Michel pleaded guilty to count two of a three-count drug indictment. Count two charged Michel with knowingly and intentionally distributing approximately 121.4 grams of cocaine in violation of 21 U.S.C. § 841(a)(1), and aiding and abetting the same in violation of 18 U.S.C. § 2. The two other counts were dismissed on June 1, 1973 when he was sentenced to 5 years imprisonment and 5 years special parole, pursuant to 21 U.S.C. § 841(b)(1)(A). On April , 23, 1974, Michel filed his present motion to vacate his sentence and withdraw his plea of guilty. He maintained below and here that his plea was not voluntary under Rule 11 of the Federal Rules of Criminal Procedure because he did not understand the meaning of the special parole term which was imposed, and further he did not understand that, as a resident alien, he was subject to deportation under 8 U.S.C. § 1251(a) (11) if convicted of a violation of the narcotics laws.

I

The court below held that the imposition of special parole is a direct consequence of a guilty plea and is therefore within the mandate of Rule 11. In Bye v. United States, 435 F.2d 177, 181 (2d Cir. 1970), this court held that, where a defendant’s violation of the drug laws renders him ineligible for parole, the Government must bear the burden of proving that his guilty plea was entered voluntarily and with an understanding of the consequences of the plea. Since special parole adds time to a regular sentence, it is within the Bye rationale. In Bye we said:

[T]he unavailability of parole directly affects the length of time an accused will have to serve in prison. . It would seem that such a major effect on the length of possible incarceration would have great importance to an accused in considering whether to plead guilty.

435 F.2d at 180. We believe that the special parole here imposed is comparable and that the defendant not only should be advised that it will be imposed, but also should be asked by the court if he understands that fact. That is precisely what happened here. On February 20, 1973, Chief Judge Mishler meticulously observed the letter and spirit of Rule 11. The colloquy between the court and the defendant was not an empty ritual and Michel was not a monosyllabic participant. For example, when he indicated that he did not know the maximum prison term, he was advised by the court to consult with his counsel. After he had, the court again asked him if he then understood and Michel answered affirmatively. The court also stated:

In addition, the Court must impose a minimum special parole term not less than three years.
Do you understand that ?
The Defendant Michel: Yes. (emphasis added.)

In light of this exchange, we cannot expect the court to have gone further to ask any more questions. Michel was voluble both at the time of his plea and at the time of his sentencing. He was represented by counsel who was present with him on both occasions. See Eagle Thunder v. United States, 477 F.2d 1326, 1328 (8th Cir.), cert. denied, 414 U.S. 873, 94 S.Ct. 142, 38 L.Ed.2d 92 (1973). When he was sentenced on June 1, 1973, counsel had in the interim been given the opportunity to examine the defendant’s probation report, since the court had noted the possibility that Michel was not as involved as the Government indicated. Referring to the probation report defendant’s counsel stated:

I have a copy of it. I’ve gone over point by point with him and I’ve had a long conversation with him and have gone through the complete details, both of the report and of the consequences of his actions.
(emphasis added.)

After an extended colloquy in which Michel was given the opportunity to withdraw his plea by the court, Michel pleaded guilty and was sentenced for a term of five years. The court stated: “In addition thereto, I impose a special parole term of five years.”

In light of these circumstances, we conclude that there was compliance with Rule 11 When a defendant, represented by and in the presence of counsel, states that he does understand the meaning of a consequence of a plea of guilty, we see no need for further inquiry. We therefore find no merit in the claim that Michel should be granted an evidentiary hearing to determine his alleged ignorance of the meaning of the special parole term. In the absence of detailed evidentiary facts, no hearing is required. O’Neil v. United States, 486 F.2d 1034, 1036 (2d Cir. 1973); United States v. Miranda, 437 F.2d 1255, 1258 (2d Cir. 1971). Here, aside from Michel’s claim that he did not understand, there is only a brief affidavit of his counsel which states that, to the best of his knowledge, he did not discuss either the question of deportation or the meaning of special parole with his client. In view of the record before us — in which counsel told the court of his long conversation with Michel and that he had informed him of the consequences of his crime more than 3 months after the court had specifically advised Michel, in counsel’s presence, that the special parole term must be imposed in addition to the jail term — it is difficult to understand how an evidentiary hearing is j ustified.

II

This court in United States v. Parrino, 212 F.2d 919 (2d Cir.), cert. denied, 348 U.S. 840, 75 S.Ct. 46, 99 L.Ed. 663 (1954) long ago held that even where a defendant has been erroneously advised by counsel that his plea would not result in deportation, no “manifest injustice” within Fed.R.Crim.P. 32(d) would occur in the denial of a motion to withdraw a plea of guilty. The court held that deportation was not a direct but rather a collateral consequence of the plea. In United States v. Santelises, 476 F.2d 787 (2d Cir. 1973), this court affirmed the district court’s determination, made without a hearing, that due process standards did not justify the vacatur of a plea where the defendant had not been advised that he was subject to deportation as a consequence. While recognizing that deportation was a serious sanction, this court followed Parrino, supra, noting in addition that there was before it no allegation of misleading by counsel, which had been an element in the earlier case. Since Santelises was convicted and sentenced in January 1966, prior to the amendment to Rule 11 which became effective on July 1st, 1966, and which added the requirement that the judge in accepting a plea is required to determine that the defendant understands “the consequences of the plea,” Chief Judge Kaufman’s opinion in San-telises intimated no view what its decision would be if Rule 11 were applicable.

We hold that Rule 11 does not affect the long-standing rule in this as well as other circuits that the trial judge when accepting a plea of guilty is not bound to inquire whether a defendant is aware of the collateral effects of his plea. It is clear that the Rule 11 amendment of 1966 was enacted to insure that the trial court inject itself into the proceeding personally to guarantee that there is a factual basis for the plea and that the defendant understands the nature and consequences of his crime. However, there is no indication that the intent of the Rule was to broaden or extend the court’s obligation to cover the ancillary or collateral consequences of his admission of guilt. On the contrary, the position of the Advisory Committee on the Criminal Rules indicates otherwise. The Note of the Committee on the 1966 amendment states: “The third change in the second sentence adds the words ‘and the consequences of his plea’ to state what clearly is the law.” 18 U. S.C. Rule 11, at 4489 (1970) (emphasis added), citing cases. The district judge, in'our view, has the obligation to ascertain that the consequences of the sentence he imposes are understood. Deportation here, as before, was not the sentence of the court which accepted the plea but of another agency over which the trial judge has no control and for which he has no responsibility. We have insisted that even the indigent be represented by counsel, and we cannot seriously expect that the amendment to Rule 11 was intended to relieve counsel of his responsibility to his client. Where his client is an alien, counsel and not the court has the obligation of advising him of his particular position as a consequence of his plea.

Our reading of Rule 11 cases confirms the view we have taken. In Bye v. United States, supra, this court, as we have noted, while holding that ineligibility for parole “affects the length of time an accused will have to serve in prison,” 435 F.2d at 180, reaffirmed the principle that the accused “need not be informed prior to the acceptance of his guilty plea about every conceivable collateral effect the conviction entered on the plea might have.” 435 F.2d at 179, citing, inter alia, United States v. Parrino, supra.

In United States v. Sambro, 147 U.S. App.D.C. 75, 454 F.2d 918 (1971) (per curiam), motion for rehearing en banc denied per curiam, 454 F.2d 924 (1971), the defendant had pleaded guilty to a narcotics charge without knowing or having been advised that his plea would result in his deportation; in fact, his counsel believed that deportation could be suspended by the court. He learned that deportation would result, however, before he was sentenced and claimed that he had not been properly advised of this consequence of his plea. Even though he learned of the consequence at this early juncture, the circuit court affirmed the denial of his motion, relying inter alia, upon United States v. Parrino, supra, 454 F.2d at 922-923.

Appellant claims that, since deportation under the statute is automatic for the convicted drug offender, the consequence is direct and not collateral. The Government urges that this is not so, since a separate administrative civil proceeding must be commenced, and that application for “non-priority status” because of humanitarian factors might result in indefinite suspension of deportation. See 8 U.S.C. § 1254(a)(2). We do not think that the distinction between a direct and a collateral consequence depends upon the degree of certainty with which the sanction will be visited upon the defendant. We do not agree that it is realistic that the trial judge should be under the obligation not only to draw up a complete list of possible consequences, but then in addition to determine the degree of probability of their happening. As we have indicated, he must assure himself only that the punishment that he is meting out is understood. The defendant has pleaded guilty to a crime for which the statute provides sanctions. This punishment properly circumscribes the judge’s responsibility under Rule 11. To require that he anticipate the multifarious peripheral contingencies which may affect the defendant’s civil liabilities, his eligibility for a variety of societal benefits, his civil rights or his right to remain in this country, all of which might give rise to later claims that the plea was not voluntary in the absence of an informed consent, has not been required in our jurisprudence, constitutionally or otherwise. Defense counsel is in a much better position to ascertain the personal circumstances of his client so as to determine what indirect consequences the guilty plea may trigger. Rule 11, in our view, was not intended to relieve counsel of his responsibilities to his client.

Affirmed.

      . 21 U.S.C. § 841(c) provides as follows :
      A special parole term imposed under this section or section 845 of this title may be revoked if its terms and conditions are violated. In such circumstances the original term of imprisonment shall be increased by the period of the special parole term and the resulting new term of imprisonment shall not be diminished by the time which was spent on special parole. A person whose special parole term has been revoked may be required to serve all or part of the remainder of the new term of imprisonment. A special parole term provided for in this section or section 845 of this title shall be in addition to, and not in lieu of, any other parole provided for by law.

      . Appellant relies upon United States v. Richardson, 483 F.2d 516 (8th Cir. 1973), in which the court reversed a judgment of conviction because it was not clear that the defendant had understood that a special parole term would be imposed upon him as a consequence of his plea of guilty. However, there the court based its decision upon the fact that the record did not show that the defendant “had been adequately advised of the consequences of his plea by a reliable source and that he understood these consequences . . . . ” 483 F.2d at 519. The relevant portions of the record, included as an appendix to the opinion, reveal that the court never informed Richardson that he .would serve a special parole term or inquired as to his understanding of the meaning of special parole. The only reference to special parole came from the Assistant United States Attorney in response to a question from the judge as to maximum punishment on each count in the indictment. The Assistant stated the maximum prison term and added that, if imprisonment were imposed, “that imprisonment is followed by a minimum of a three-year special parole.” 483 F.2d at 520. In short, no inquiry was made of the defendant by the court, in contrast with the present case, as to whether or not he understood that the court had to impose a minimum special parole term of three years.

      . The present Rule 11 provides, in part, that a judge shall not accept a plea of guilty “without first addressing the defendant personally and determining that the plea is made voluntarily with understanding of the nature of the charge and the consequences of the plea." The italicized words were added by the 1966 amendment.

      . Failure to inform the defendant of the following results of his guilty plea has been held not to render that plea invalid: Cuthrell v. Director, Patuxent Institution, 475 F.2d 1364, 1366 (4th Cir.), cert. denied, 414 U.S. 1005, 94 S.Ct. 362, 38 L.Ed.2d 241 (1973) (institution of separate civil proceedings against defendant for commitment to a mental health facility) ; Hutchison v. United States, 450 F.2d 930, 931 (10th Cir. 1971) (per curiam) (loss of good time credit) ; United States v. Vermeulen, 436 F.2d 72, 75 (2d Cir. 1970), cert. denied, 402 U.S. 911, 91 S.Ct. 1390, 28 L.Ed.2d 653 (1971) (possibility of imposition of consecutive sentences) ; Meaton v. United States, 328 F.2d 379 (5th Cir. 1964) (per curiam), cert. denied, 380 U.S. 916, 85 S.Ct. 902, 13 L.Ed.2d 801 (1965) (deprivation of rights to vote and to travel abroad) ; United States v. Cariola, 323 F.2d 180 (3d Cir. 1963) (deprivation of the right to vote in some jurisdictions) ; Redwine v. Zuchert, 115 U.S.App.D.C. 130, 317 F.2d 336 (1963) (per curiam) (possibility of undesirable discharge from armed forces).

      . See ABA Minimum Standards for Criminal Justice, Pleas of Guilty § 2.1 (1968).

      . While four judges dissented from the denial of the motion to en lane in Sambro, Judge Bazelon’s dissenting opinion was largely directed to the point that the standard for withdrawing guilty pleas prior to sentence was “far more liberal” than at a later point. He also argued that a Bule 32 motion need not allege a failure to comply with Bule 11 “if the interests of justice so require.” United States v. Sambro, supra, 147 U.S. App.D.C. 75, 454 F.2d at 925, 925-926 (footnote omitted). While Judge Bazelon did cite witli approval Judge Frank’s dissent in our court in Parrino, it should be noted that Judge Frank in his dissent emphasized that the plea resulted from the grossly erroneous advice of defendant’s counsel that he would not be deported. There is, as we have indicated, no claim of misleading advice by counsel here, but only the rather dubious claim that the subject was never discussed between counsel and his alien client.


source: Caselaw Access Project

author: ALDRICH, Senior Circuit Judge. LEVIN H. CAMPBELL,

license: Public Domain

text:
    MERRILL TRUST COMPANY, Executor of the Estates of Dean W. Footman and Priscilla L. Footman, Plaintiff-Appellant, v. Merrill BRADFORD, Executor of the Estates of Charles D. Meyer and Sandra W. Meyer, Defendant-Appellee.
    No. 74-1296.
    United States Court of Appeals, First Circuit.
    Argued Nov. 5, 1974.
    Decided Dec. 5, 1974.

      U. Charles Remmel, II, Portland, Me., with whom David P. Cluchey and Thompson, Willard & McNaboe, Portland, Me., were on brief, for plaintiff-appellant.
    William W. Willard, Portland, Me., with whom Herbert H. Sawyer, Bernstein, Shur, Sawyer & Nelson, Portland, Me., John L. Quinlan, James S. McMahon, Jr., and Bigham, Englar, Jones & Houston, New York City, were on brief, for defendant-appellee.
    Before COFFIN, Chief Judge, ALD-RICH, and CAMPBELL, Circuit Judges.
   ALDRICH, Senior Circuit Judge.

Little purpose would be served in detailing the facts preceding the unfortunate stranding, in the middle of a rainy, foggy night in May, 1970, of the 30-foot ketch, Thalassa, on the westerly side of Lobster Point, near the southwesterly end of Monhegan Island, Maine. The yacht was bound in a general northeasterly direction on an outside run from Plymouth, Massachusetts into Penobscot Bay, a course which led directly by Mon-hegan, and hence to its home port of Camden. The wind was southwest, 15-25 knots; the seas were about four feet, and there were no survivors. At the point of impact, and generally, Monhe-gan has a bold shore, and by morning, when the wreck was discovered stern to the shore, the fiberglass hull was separated from the keel and broken, except to leave erect and out of water the mast which was still carrying the mainsail. The bodies of all who had been aboard were found nearby.

This action was brought by the representative of the estates of Mr. and Mrs. Footman, guests aboard, against the estates of Mr. and Mrs. Meyer, the true and registered owners, respectively. The vessel was well found, and there is no claim of unseaworthiness. The district court dismissed the complaint, after a full opinion, because of a failure to find negligence on the part of either Meyer.

Plaintiff argues that since the case was tried mainly on depositions, the “clearly erroneous” provision of F.R. Civ.P. 52(a) does not apply. That is not so, at least in this circuit. Custom Paper Products Co. v. Atlantic Paper Box Co., 1 Cir., 1972, 469 F.2d 178; cf. C. A. Wright, Law of Federal Courts, 2d ed. 1970, pp. 430-31. However, plaintiff has a better claim. We construe the court’s statement that “[u]pon the entire record [it] is compelled to conclude that plaintiff has failed to establish its burden of proof that the sinking of the Thalassa and the Footmans’ deaths resulted from any negligence of the Meyers” as in part, after making certain findings we will refer to, a ruling of evidentiary insufficiency, not a choice between permissible conflicting conclusions. We consider the appeal on that basis. However, we affirm.

While the evidence warrants, and indeed perhaps compels a finding that Mr. Meyer, hereinafter Meyer, as owner and master aboard, had ultimate authority, it correspondingly requires a finding that Mr. Footman, hereinafter Footman, was a fellow yacht-owner and close friend whose judgment Meyer fully respected. Much of the brief is devoted to the decision to make the outside run, and whether it was by common consent. Although a Camden native spoke of Meyer and Footman only as “about average weekend sailors,” they had taken such trips before and we have no reason to fault the district court’s failure to find negligence, whoever made the decision. But we add that plaintiff’s contention that Meyer, as owner-master, had the ultimate power of decision, and could even put the Footmans ashore, proves too much. The Footmans, unlike seamen who were under contract and earning their living, were equally free to go ashore if they did not concur. Absent some special circumstances, the concept that a yachting party can embark on a trip and then sue the owner because it was a risky undertaking does not appeal to us. This is not to say that in the case of an uninformed guest there might not be a duty to disclose the possible risks, so that there could be a free choice. No such question could arise here as to either Footman. The court found that “[sjince their marriage in 1958, Dean and Priscilla Footman had spent a great deal of time sailing . Both had taken and passed the Power Squadron courses in piloting, seamanship and advanced piloting, had participated in several overnight ocean races .... Both were competent to navigate, and both had at least some experience with night sailing and with stormy and foggy conditions.” On this record it cannot be thought that either Footman was not fully aware of the normal hazards of the voyage, hazards which might lead to an accident regardless of fault. Our interest, accordingly, must be in whether these risks were increased by subsequent negligence, and if so, by whom. The difficulty here is, there is no answer.

First, the possible errors. The basic one, of course, was a mis judgment of their position. The vessel was equipped with a Kenyon log. No one testified to it, but for what it was worth it may be suggested that the long continued southwest wind produced a forward set that, of course, the log failed to register and that the navigator, or navigators, failed to take into account. But, equally, we would take judicial notice that dead reckoning, with winds, tidal currents, and the difficulty of steering a small boat on a precise course, is not in any case an exact science. The more chargeable neglect may be sought in the failure to discover that the vessel was not where they believed themselves to be.

Manana Island, immediately westward of Monhegan, has a foghorn, which the evidence shows was operating. However, it was downwind. The Coast Pilot and other authorities recite that freakish things may happen to sound, and that there may not only be misleading direction, but areas of occlusion. It cannot be said with any confidence that there was actionable error here.

Secondly, the vessel possessed a radio direction finder (RDF), which was recovered in a turned-on condition. Plaintiff’s expert testified that by cross bearings on Manana and other radio beacon stations a fix could have been obtained. Some members of the panel are tempted to question the dependability of this fix, partly because of the nature of RDF’s, but more because of the unfavorable conditions: a small boat, a following wind and a considerable sea. However, we will accept plaintiff’s contention that the operator of the finder may have been in some manner negligent.

It may also be suggested that whoever was in charge of the fathometer was negligent, although in possible extenuation of that individual we note depths of over 200 feet to within a few hundred yards of the shore, and very considerable depths almost to the last moment.

Continuing, there was, presumably, a watch. Plaintiff’s expert suggested the vessel hit the shore head on. The night must have been dark — by two stopped watches it was one o’clock — and with inattention by the lookout, the other parties being properly occupied elsewhere, this may have been possible.

Without further speculation, this leaves several duties possibly ill performed. But not only do we not know which, we do not know who was performing them.

The court warrantably found that it was understood before the commencement of the voyage that “the responsibility for navigation and management of the vessel would be shared.” The parties dispute the meaning the court attributed to the word “responsibility,” but at a minimum, having in mind that on a voyage of this length there must be watches, there must be periods where the owner, whatever may be his ultimate legal responsibility, was not the individual in actual charge. Plaintiff’s contention that the Footmans were restricted to the “handling of sails and lines” and were never “in a position to issue orders,” (viz., in temporary command) is unsupported by the record, and is against common sense.

In addition to this physical fact, it appeared that Meyer had particular confidence in Footman’s navigational ability. Even if all hands were alerted because of what may have been thought to be a crucial problem of avoiding Monhegan, Footman may well have been the one operating the radio direction finder and, it being dark and rainy, doing piloting calculations, below. The evidence shows that while the owner of the vessel is normally the one to make ultimate decisions, the navigator is the one responsible for giving the ship’s position. By the same token, we do not know who was performing other functions, some of which could have been handled by the women. It is not possible that Meyer was doing everything, wheel, compass, RDF, piloting calculations, fathometer and bow watch.

In this circumstance we start with elementary principles. Even a seaman “could not recover if his negligence was the sole cause of the accident,” Sotell v. Maritime Overseas, Inc., 2 Cir., 1973, 474 F.2d 794, 796. While, strictly, the burden of proving contributory negligence is on the defendant, this burden does not arise until plaintiff has met his initial burden of showing defendant’s negligence. We quite accept the district court’s statement that the evidence warrants the inference that “as the result of navigational or operational error [the yacht] ran aground on . Mon-hegan Island.” But this does not tell us who made the error, or, for that matter, errors.

Plaintiff contends that the answer is supplied by the presumption of fault which arises when a vessel strikes an obvious, or well charted, stationary object. Cf. The Clarita and the Clara, 1874, 90 U.S. (23 Wall.) 1, 14, 23 L.Ed. 146; Cranberry Creek Coal Co. v. Red Star Towing & Transp. Co., 2 Cir., 1929, 33 F.2d 272, 274, cert. denied, 280 U.S. 596, 50 S.Ct. 67, 74 L.Ed. 643; Burr v. Knickerbocker Steam Towage Co., 1 Cir., 1904, 132 F. 248. We do not accept defendant’s claim that the presumption is not applicable. However, the presumption is of no assistance. Rationally based upon the premise that such a striking would not occur in the ordinary course, it warrants the inference that someone on board the ship was negligent. This conclusion the district court had already reached. The presumption, however, does not point to any particular individual. Rather, it has been said that the presumption “operates against all parties participating in the management of the vessel at the time of the contact.” International Terminal Operating Co. v. Naviera Aznar, S.D.N.Y., 1961, 198 F.Supp. 214, 217. See Patterson Terminals, Inc. v. S. S. Johannes Fraus, E.D.Pa., 1962, 209 F.Supp. 705, 708. Plaintiff is confusing legal responsibility as between the vessel and third parties with factual responsibility as between the vessel’s members.

The owner, asleep on his watch below, or at least the ship, is legally responsible if a careless helmsman strikes a pier. This does not mean that the helmsman can recover for the injury the collision may have occasioned him; nor is there a presumption that the owner, as distinguished from others on the roster as helmsmen, was the one that was at the wheel. When there is no basis for excluding the plaintiff as the party at fault, plaintiff has not carried the burden of proof. This is not to say that a party must make a strong showing to justify an inference against the defendant, but he must be able to point to something beyond mere speculation. Cf. Pennsylvania R. R. Co. v. Chamberlain, 1933, 288 U.S. 333, 339-340, 53 S.Ct. 391, 77 L.Ed. 819; The Jumna, 2 Cir., 1906, 149 F. 171, 173 (“inscrutable” as distinguished from “inevitable” accident) .

Plaintiff’s final position is that even if it cannot be found that it was Meyer rather than Footman who was in charge of the RDF, it may properly be inferred that it was one or the other, and that Meyer is liable to Mrs. Footman’s estate in any event, either for his own or for Footman’s negligence. We would accept the factual assumption for present purposes, but we do not accept the conclusion. Meyer could not be liable for Footman’s negligence on the ground that Footman was an incompetent person to entrust with the finder, cf. Nuccio v. Royal Indem. Co., E.D.La., 1968, 280 F. Supp. 468 aff’d 5 Cir., 1969, 415 F.2d 228; Traveler’s Indem. Co. v. Gulf Weighing Corp., E.D.La., 1972, 352 F. Supp. 335, 341, because clearly he was competent. Consequently Meyer can be held responsible for Footman’s negligence only on the ground that he actively participated in it — which has not been shown — or on some theory of respondeat superior.

As to this last, we start with the proposition that members of a yachting party are not seamen. Cf. Nuccio v. Royal Indemn. Co., ante, 280 F.Supp. at 469. Yachting is not a commercial venture. Moreover, mutual participation in the operation is expected, and in that sense the members of the party are working for each other. If one member makes a mistake because of an improper direction by the owner, the owner may well be liable to the others, but if injury occurs solely by reason of the member’s own negligence, to that extent the owner and the others are in the venture together. We are aware of no authority that would impose liability on a non-negligent owner. Nor, so far as we know it, is there any such custom. It should be enough that the owner assigns the work to parties he has reason to believe competent to handle it. A finding that Footman erred in operating the RDF would not help the plaintiff.

The cause of this unfortunate accident has not been resolved factually. It cannot be resolved legally.

Affirmed.

LEVIN H. CAMPBELL,

Circuit Judge (concurring).

I concur in everything said by the court.

The nub of appellant’s case is the asserted right to prevail, without direct evidence, on the strength of two presumptions, first that the accident was negligently caused and second that the negligence must have been that of the captain-owner. The second, as Judge Aldrich demonstrates, is too generous if applied in favor of knowledgeable yachting companions sharing in an amateur voyage. There is no good reason why the absence of evidence should entitle them to prevail. If there had been survivors, the Footmans, even assuming they could prove that Meyer was negligent, are likely to have faced affirmative defenses based on their own close participation in any negligent acts and decisions. While there is a strong policy that those in charge of boats should not evade a proper responsibility for their vessel’s harm to innocent third parties, passengers and those in their employ, there is no reason when experienced friends go sailing together that the owner should be presumptively accountable to the others for all negligence in the operation of the vessel.

      . The writer would suggest a somewhat different procedure. The shore, except for the dark, well marked by breakers, may have been seen at the last moment, but with the mainsail out, surely no one on the sheet, no jib, and a sea behind them, the vessel may liave lost way when they turned and been backed into the breakers before it was possible to do anything. Even if this suggestion is correct, it does not necessarily absolve the lookout.

      . The strand occurred some 36 hours, if one may judge from the stopped wristwatches, after the departure from Plymouth.

      . Plaintiff suggests that Meyer, having ultimate command, must at some point have deliberately gone too close to Monhegan. This, however, assumes the point. It would seem obvious that no one meant them to be where —or, for that matter, near where — they were. Quite apart from a desirable margin of safety, the vessel was \/^ mile west of the easterly end of the island. The question is who was responsible for the mistake.

      . We do not take the testimony that the wives were to work the galley as excluding them from the lighter deck jobs. Mrs. Footman had been heard to say before the voyage that she was going to participate in the navigation.

      . Defendant’s contention that the presumption does not apjily because only the island was the stationary object, but not “the rock under the water which surrounds the island,” conjures superlatives we do not care to express.

      . There may, of course, be persons aboard who are seamen. Sometimes the line may be difficult to draw, of. In re Read’s Petition, S.D.Fla., 1963, 224 F.Supp. 241, 244-246, but it could not be said that the Foot-mans were on the employee side thereof.


author: CHOY, Circuit Judge:

text:
    Peter J. BRENNAN, Secretary of Labor, United States Department of Labor, Appellant and Cross-Appellee, v. Thomas E. KEYSER, Individually, and d/b/a Keyser Towing Company, Appellee and Cross-Appellant, and Oscar Shepard, Individually, and Hollenbeck Tow Service, A Corporation, Appellees and Cross-Appellants.
    Nos. 72-2887, 72-2960, 72-2888 and 72-2961.
    United States Court of Appeals, Ninth Circuit.
    Nov. 25, 1974.
    Certiorari Denied March 31, 1975.
    See 95 S.Ct. 1446.

      Donald S. Shire (argued), Counsel for App. Litigation, U. S. Dept, of Labor, Washington, D. C., for appellant.
    G. G. Baumen (argued), Los Angeles, Cal., for appellee and cross-appellant.
    Before CHAMBERS and CHOY, Circuit Judges, and McNICHOLS , District Judge.

       Honorable Iiay McNichols, United States District Judge for tlie District of Idaho, sitting by designation.

   OPINION

CHOY, Circuit Judge:

The Secretary of Labor brought these actions to enforce the overtime pay provisions of Section 7, Fair Labor Standards Act, 29 U.S.C. § 207. The defendant companies (Keyser and Shepard) operate automobile towing services in the Los Angeles area. The district court dismissed both actions, concluding that although Keyser and Shepard were engaged in interstate commerce and therefore were within the court’s jurisdiction under the Act, they were exempt from its overtime regulations. During the years in question, the court found, the companies had met the requirements of the retail sales and services exemption, 29 U.S.C. § 213(a)(2). The Secretary appeals from the dismissal, and Keyser and Shepard appeal from the district court’s finding that they are engaged in interstate commerce.

Factual Background

The Los Angeles Police Department has designated both towing companies as “Official Police Garages” (OPG) and official impound stations for prescribed geographic areas of the city. No contractual relationship has ever existed between the Police Department and an OPG. The Department prescribes rules which an OPG must adhere to, however, if it is to retain its OPG designation. The OPG must observe a schedule of maximum rates for towing and storage services performed as a result of police activity, for example. Tow trucks must be of a certain color and bear OPG insignia, and must carry prescribed equipment. Tow truck drivers must wear standard uniforms. Regulations set minimum standards for storage lots, protection and handling of vehicles, and the safeguarding of property inside the vehicles. Each OPG is limited to a prescribed geographic area of operations, within which it has a monopoly on police referrals. An OPG not only benefits from handling police impoundments; when a citizen asks the police for a tow or roadside assistance without specifying a preferred towing company, the police will call the OPG assigned to that area.

A training bulletin of the Los Angeles Police states that an OPG is an agent of the Police Department. Tow truck drivers are commissioned Special Officers and are required to report observed criminal activity without delay. Although an OPG is not restricted to police calls and does accept calls directly from individuals needing assistance, the parties stipulated that “almost all” of Keyser’s calls were police requests. Substantially more than half of Shepard’s calls appear to have been from the police.

The towing companies received no compensation from the police for vehicles impounded and stored. The owner of the vehicles paid the towing and storage charges directly to the towing company, the vehicle then being released from impoundment. Unclaimed vehicles were sold to satisfy the serviceman’s lien which attached to them.

Portions of two Interstate Highways (1-5 and 1-10) pass through Shepard’s area of operation. No Interstate Highway passes through Keyser’s area, but seven percent of his calls are on a portion of the Harbor Freeway which connects the Long Beach area and 1-405 to the south with 1-5 and 1-10 to the north.

Fair Labor Standards Act

Congress in enacting the Fair Labor Standards Act, established certain standards for payment of overtime compensation by employers of workers engaged in interstate commerce. 29 U.S. C. § 207. It exempted, however, retail or service establishments meeting certain requirements. 29 U.S.C. § 213(a) (2). A “retail or service establishment” is defined as. an establishment at least 75 percent of whose “annual dollar volume of sales” is not for resale and is recognized as retail “in the particular industry”. Such a retail or service establishment is exempt from the Act’s standards if its “annual dollar volume of sales” is less than $250,000, and at least 50 percent of which are in the state where the establishment is located.

Interstate Character of the Services

In their cross-appeal, the towing companies contend that their services are local in character, with no substantial impact on interstate commerce. In Gray v. Swanney-McDonald, Inc., 436 F. 2d 652 (9th Cir.) cert. denied, 402 U.S. 995, 91 S.Ct. 2173, 29 L.Ed.2d 161 (1971), we held that tow truck drivers doing a portion of their work on Interstate or U.S. Highways were engaged in interstate commerce, and therefore were within the coverage of the Act. We remain convinced of the soundness of that decision. We observed in SwanneyMcDonald that although the contact of any one company with interstate traffic might be small, the cumulative impact of the entire towing industry was substantial. To exempt Keyser from the Act’s regulation because the Harbor Freeway is a state highway, but require Shepard’s compliance because the Santa Ana Freeway has been designated an Interstate Highway, would be to miss the point of Swanney-McDonald. We were less concerned in that case with the formal designation of a highway than with the reality of its utility to interstate commerce. The towing companies’ concern that this test leaves no room for purely local commerce would be better argued in another case; here, we rely on the trial judge’s knowledge of local conditions in finding that the Harbor Freeway is so interconnected with the area’s interstate highways as to be an instrumentality of interstate commerce.

Retail Nature of the Services

In arguing that Keyser and Shepard do not fall within the retail sales or service exemption, 29 U.S.C. § 213(a) (2), the Secretary contends that they have not met their burden of showing that 75 percent of their services were recognized as retail “in the particular industry”. One witness, the president of the Official Police Garage Association, testified that towing was recognized as retail by the auto tow service industry.

The district court found that all of the companies’ sales and services were recognized as retail in the industry. The Secretary argues that recognition by the industry is not synonymous with recognition in the industry. We agree, but we observe that evidence proving the first also tends to prove the second. The companies were required to show recognition in the industry in order to claim the exemption. Arnold v. Ben Kanowsky, Inc., 361 U.S. 388, 393, 80 S.Ct. 453, 4 L.Ed.2d 393 (1960). We cannot say, however, that the testimony offered that towing services are recognized as retail by the industry was not substantial evidence that they are so recognized in the industry, nor that the trial judge’s finding was clearly erroneous.

Mitchell v. City Ice Co., 273 F.2d 560 (5th Cir. 1960), cited as authority by the Secretary, actually supports the companies’ position. In City Ice, the Fifth Circuit held that uncontested testimony showing recognition by the industry did not entitle the defendants to a directed verdict on the issue of recognition in the industry; instead it remanded the case for a jury trial on the issue: “The weight to be given [the industry witnesses’] opinions was, of course, to be weighed in light of their self-interest as well as the reasoning with which they supported them. It was not proper for the trial court to take the case from the jury.” Id. at 562. Similarly, we rely on the findings of the trier of fact in this instance.

Although we accept the findings of the district court that the companies met the statutory requirements of the retail sales or service exemption, we find another barrier to their inclusion within that exemption. The rather broad statutory definition of a “retail or service establishment” has been narrowed by judicial decision. Not only must the particular sales or services in question be recognized as retail in the industry, but the industry itself must be one which Congress contemplated as falling within the “retail concept”. Wirtz v. Idaho Sheet Metal Works, Inc., 335 F.2d 952, 956 (9th Cir. 1964), aff’d, 383 U.S. 190, 86 S.Ct. 737, 15 L.Ed.2d 694 (1966). Unlike the district court’s finding that the services were recognized as retail in the industry, the question whether the industry itself falls within the retrail concept of the Act is one of law — of statutory interpretation.

Congress granted the Secretary a large measure of discretion in administering the Act. Idaho Metal Works, 383 U.S. at 205, 86 S.Ct. 737. The Secretary has utilized his expertise in compiling lists of industries whose sales possess or lack a retail character. 29 C.F.R. §§ 779.-317 and 779.320. The automobile towing industry is on neither list. Opposing counsel expend considerable ingenuity drawing analogies between the towing industry and businesses found on one list or the other. The Secretary urges that towing companies perform the same function as ambulance companies and thus are part of the transportation industry which possess no retail character; the companies counter that they more closely resemble auto repair shops and service stations, whose services are recognized as retail.

The district court found the companies’ position more persuasive. We prefer, however, to go behind these analogies and root our decision in the congressional purpose in enacting the retail exemption. The legislative history contains repeated expressions of concern for “the grocery store, the hardware store, the coal dealer, the automobile dealer selling passenger cars or trucks, the clothing store, the dry goods store, the department store, the paint store .” Idaho Metal Works, 383 U. S. at 203, 86 S.Ct. at 746, quoting House Conf.Rep. at 25. See A. H. Phillips, Inc., v. Walling, 324 U.S. 490, 497 n. 7, 65 S.Ct. 807, 89 L.Ed. 1095 (1945). Most of these retailers deal in consumer goods, although sales of farm implements and small trucks also fall within the retail concept. Idaho Metal Works, 383 U.S. at 203, 86 S.Ct. 737. The nature of the merchandise seems less important than the nature of the merchant. Adoption of the retail exemption was an effort to balance the needs of the small town or neighborhood merchant against the welfare of employees. The frequent allusions in the legislative history to the “corner grocer” suggests a desire by many Congressmen to shield from rigid regulation the informal business methods and record keeping of Main Street businessmen who, in dealing directly with the consumer, need a greater flexibility in hours, wages, and conditions of employment than do those businesses dealing principally with other commercial establishments.

We venture no opinion regarding the retail nature of independent towing services. For the purposes of the retail exemption, however, towing services which derive a large proportion of their business from police calls are a distinct activity from those whose assistance is requested directly by the automobile owner. The close relationship between proprietor and customer which characterizes the “Main Street” businessman is absent. Keyser and Shepard emphasize that they have no formal contract with the police. This argument overlooks the symbiosis between police and towing company. In exchange for a monopoly of police calls in a specified area, the companies consent to a large measure of police regulation, even of such details as color of the trucks, uniforms of the drivers, prices charged, and equipment used.

The parties stipulated that almost all of Keyser’s business and most of Shepard’s was derived from police calls. An OPG manager signed a statement that “I understand that my designation as an Official Police Garage may be revoked upon proper finding of the Board that I or any of my employees have violated the rules herein agreed”. The police training bulletin thus seems fully justified in asserting that: “Official Police Garages are a group of towing operations providing service to both the citizens and the Department and, as such, act as agents of the Department”. The companies’ actual customer is the government. The vehicle owner’s sole relationship 'to the towing company in the typical case is to pay the fee established by the Board of Police Commissioners in order to free his vehicle from impoundment. He is apt to view the towing company as quasi-govemmental in nature. In both appearance and reality, these companies work hand in hand with the municipality in performing a service to the general public, often to the annoyance of the “customer” whose car has been impounded. Despite the absence of a formal contract, the companies have sold a major portion of their services to the city in exchange for a limited monopoly of the city’s business.

Exceptions to humanitarian and remedial legislation must be narrowly construed. Only those businesses clearly within both the terms and spirit of the exemption should be allowed to benefit from it. A. H. Phillips, Inc. v. Walling, 324 U.S. 490, 493, 65 S.Ct. 807, 89 L. Ed. 1095 (1945). The towing companies have failed to convince us that Congress intended a business of this nature to be exempted from the Act’s regulations as a retail establishment.

The finding of the district court that the towing companies engaged in interstate commerce and thus fell within the jurisdiction of the Act is affirmed. Its holding that the retail sales and service exemption applies to Keyser and Shepard, and its dismissal of the Secretary’s complaint, are reversed. The case is remanded to the district court for a determination whether the overtime pay provisions of the Act were in fact violated.

Affirmed in part; reversed in part and remanded.

      . Fair Labor Standards Act § 13(a)(2), 29 Ü.S.C. § 213(a) (2) :
      (a) The provisions of [Section 7] shall not apply with respect to—
      :]• * :1:
      (2) any employee employed by any retail or service establishment ... if more than 50 per centum of such establishment’s annual dollar volume of sales of goods or services is made within the State in which the establishment is located . . . [if] such establishment has an annual dollar volume of sales which is less than $250,000 (exclusive of excise taxes at the retail level which are separately stated). A “retail or service establishment” shall mean an establishment 75 per cen-tum of whose annual dollar volume of sales of goods or services (or of both) is not for resale and is recognized as retail sales or services in the particular industry;


author: PER CURIAM.

text:
    James W. SANDERSON, Petitioner, v. The Honorable Fred M. WINNER, United States District Judge for the District of Colorado, Respondent.
    No. 74-1477.
    United States Court of Appeals, Tenth Circuit.
    Argued Nov. 14, 1974.
    Decided Nov. 26, 1974.
    Certiorari Denied April 14, 1975.
    See 95 S.Ct. 1573.
    Granvil I. Specks, Specks & Goldberg, Ltd., Chicago, Ill. (Richard M. Kranzler, Brenman, Sobol & Baum, Denver, Colo., on the brief), for petitioner.
    Patrick M. Westfeldt, Holland & Hart, Denver, Colo., H. L. Arkin, Arkin & Hanlon, R. Brooke Jackson, of Holland & Hart, Denver, Colo., and David Brice Toy and Pamela Ann Rymer, Lillick, McHose, Wheat, Adams & Charles, Los Angeles, Cal., on the brief), for respondent.
    Before SETH, HOLLOWAY and DOYLE, Circuit Judges.
   PER CURIAM.

Plaintiffs seek the issuance of writs of mandamus and prohibition which would direct the district court to vacate certain discovery orders entered June 25, 1974 and prohibit the court from issuing future discovery orders which would invade the attorney-client privilege relating to financial arrangements with attorneys.

The complaint describes a class action pursuant to Rule 23(b)(3). The allegation is that the various Nissan Corporations named in the complaint in the district court have engaged in an unlawful conspiracy with the named dealerships to violate § 1 of the Sherman Act.

The present conflict results from a notice to take depositions in which plaintiffs were served with a demand for the production of the following documents:

2. Current financial statements, income tax returns for the years 1972 and 1973, and any other writings or documents reflecting plaintiffs’ ability to finance the expenses that may be involved in this purported class action litigation.
3. Any agreements plaintiffs have made, collectively or individually, among themselves, with their attorneys of record herein and with any other persons, pertaining to (a) the financing of the costs of this litigation, and (b) the payment of attorneys’ fees that might be incurred. Such documents should include, in addition to express written agreements, correspondence and any and all other writings or records reflecting any oral agreements that may have been made or understandings that may have been reached.

Plaintiffs object to both requests on the ground of relevance and, secondly, on the assertion of attorney-client privilege.

Nissan U.S.A. has moved to compel production asserting that the information is relevant for the purpose of determining whether plaintiffs are adequate class representatives and on the ground that plaintiffs have demanded attorneys’ fees, and hence information as to the fee arrangements that plaintiffs have made is necessary.

On June 25, 1974 an extensive hearing was held which included considerable discourse between the court and counsel. The upshot of this was that the district court granted the defendants’ requests as set forth above. The court also denied the request of plaintiffs to appeal the ruling pursuant to 28 U.S.C. § 1292(b). The refusal of the court to issue this certificate for interlocutory appeal necessitated the petitions which are before us.

In essence, the court’s ruling was that the requested documents were relevant to the issue as to whether a class action was appropriate; that the material was germane to whether the plaintiffs were worthy representatives.

The court also noted that the defendants were entitled to inquire as to whether it was the kind of a class action in which a lawyer seeks to “capture the pot of gold at the end of the rainbow,” and that discovery as to all of the details of the arrangement between the lawyers and clients was pertinent in order to make this evaluation and adjudication. The court distinguished between a trial and the inquiry leading to the determination of appropriateness of the class action. It indicated that the latter inquiry allows it to in effect police the lawyers’ ethics in connection with the solicitation of business from class members.

I.

ARE THE EXTRAORDINARY REMEDIES APPROPRIATE?

Our primary concern is with the propriety of the extraordinary writ. Mandamus is, of course, not to be used as a substitute for an appeal. See Schlagenhauf v. Holder, 379 U.S. 104, 85 S.Ct. 234, 13 L.Ed.2d 152 (1964). Nevertheless, we have recognized that it may be used in some circumstances to review an interlocutory order. See Erie Bank v. United States District Court, Colorado, 362 F.2d 539 (10th Cir. 1966). See also Paramount Film Distributing Corp. v. Civic Center Theater, Inc., 333 F.2d 358, 361 (10th Cir. 1964). The Supreme Court in Will v. United States, 389 U.S. 90, 88 S.Ct. 269, 19 L.Ed.2d 305 (1967) recognized that mandamus can be used in exceptional circumstances “amounting to a judicial ‘usurpation of power’ . . .”

We are of the opinion that the writ of mandamus is appropriate in the present circumstances because, as will appear hereinafter, the court’s action was within the standards which have been recognized by the cases. We view the trial court’s decision as an unwarranted extension of the Supreme Court’s decision in Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 94 S.Ct. 2140, 40 L.Ed.2d 732 (1974), which extension would limit and curtail Rule 23 in a manner never contemplated.

II.

CONTENTIONS

Plaintiffs maintain that the production of the documents should not be allowed, first, because it invades the attorney-client privilege; secondly, because the substance of the fee arrangements is irrelevant and not calculated to lead to the discovery of admissible evidence; and, third, tax returns and other similar financial data are generally irrelevant and compulsory disclosure is not favored. A further reason advanced is that the plaintiffs have agreed to pay the costs of notices to the members of the class.

III.

WHETHER THE MATERIAL SOUGHT WAS RELEVANT

The defendants as well as the district court relied strongly on Eisen v. Carlisle & Jacquelin, supra. We read the district court’s decision as expanding and projecting the Eisen case. First of all, its facts were wholly different from ours. There, the class was extremely large. 2,250,000 members were identifiable. These were the odd-lot traders on the New York Exchange. The district court held a preliminary hearing on the merits and found that petitioner was more than likely to prevail at trial. It then assessed 90% of the notice costs to the defendants. The Supreme Court condemned the holding of a preliminary hearing on the merits and held also that this did not mitigate the error of assessing 90% of the costs to the defendants. The plaintiffs were held bound to advance the notice costs. There is nothing in the opinion of Mr. Justice Powell in Eisen which calls for unlimited inquiry into the financial capacity of plaintiff or which authorizes exposure of the plaintiff’s income tax returns together with financial statements, plus documents showing specific financial capacity. Nor are fee arrangements with lawyers a prescribed discovery subject.

Defendants considered it important to ascertain whether plaintiffs were able to pay all of the costs in the litigation including extensive depositions. We fail to see relevancy in these inquiries particularly with respect to in limine inquiry as to whether a class action is to be allowed. Ordinarily courts do not inquire into the financial responsibility of litigants. We generally eschew the question whether litigants are rich or poor. Instead, we address ourselves to the merits of the litigation. We recognize that the class action is unique and we see the necessity for the court to be satisfied that the plaintiff or plaintiffs can pay the notice costs, and we also agree fully with the Court’s ruling in Eisen that due process requires decent notice. But we do not read Eisen as creating a presumption against finding a class action. Nor does it approve oppressive discovery as a means of discouraging a private antitrust action which, if meritorious, advances an important interest of the government.

We are aware that some lower court decisions have considered the plaintiff’s ability to pay as relevant and proper in the present context. See P.D.Q. Inc. of Miami v. Nissan Motor Corp. in U.S.A., 61 F.R.D. 372 (S.D.Fla.1973); Ralston v. Volkswagenwerk, A.G., 61 F.R.D. 427 (W.D.Mo.1973). However, in both of these cases in which antitrust violations were alleged, the plaintiffs sought to represent a class of all new car purchasers in the United States. Thus, there was legitimate concern about the ability of the plaintiffs to successfully lead a class of this magnitude. Also, the court in Ralston was concerned about its ability to manage the class. The mentioned considerations are not present here.

Nor do we see that the defendants have any legitimate concern as to whether plaintiffs will be able to pay their lawyers and will be able to pay a judgment for costs in the event that such a judgment is entered. In this respect we see no difference between the case at bar and any other lawsuit. Defendant will have ample opportunity for discovery under Rule 69 F.R.Civ.P. if it obtains judgment. See Federal Savings & Loan Insur. Corp. v. Krueger, 55 F.R.D. 512 (N.D.Ill.1972); Gangemi v. Moor, 268 F.Supp. 19 (D.Del. 1967) (Both cases suggest that there is no right to discovery of assets until judgment is obtained).

Finally, defendants know the plaintiff’s resources. His salary is a matter of record in the case.

IV.

In view of our ruling that the matters sought at this juncture and in relationship to the inquiry which was then being conducted are irrelevant, we deem it unnecessary to determine whether the documents sought are privileged.

The fee arrangement between plaintiffs and attorney may not be privileged. We have found cases which rule that such information is privileged and there are other cases to the contrary. It depends on the circumstances. We need not pursue this in view of our conclusion that it is irrelevant. Neither the court nor the defendant has legitimate concern as to the propriety of the arrangement under the code of responsibility. As indicated, whether the plaintiff will be able to pay costs is not now relevant. Tax returns are not generally discoverable. It is only when the plaintiff’s income is directly in issue. Otherwise there is a public policy against an exposure.

At oral argument plaintiffs’ lawyers expressed a willingness to reveal the fee arrangement to the court in camera. We do not know whether this would be helpful, but if it is deemed desirable by the court and counsel we see no objection to it.

We are not unaware of the fact that class actions are a heavy burden to all of the courts, and especially to the trial courts. We are sympathetic to the problems incident to managing these complex cases. Nevertheless, the rule is viable and must be recognized.

Accordingly, we are of the opinion that a writ of mandamus is proper, and so it is ordered that such a writ issue. It is further directed that the rule to show cause be made absolute.

      . This on its face is thin.

      . Legal ethics would ordinarily be inquired into in separate proceedings but, in any event, they do not call for an independent inquiry where, as here, no evidence suggesting unethical conduct has surfaced.

      . Federal judges take an oath to “administer justice without respect to persons, and do equal right to the poor and to the rich.”

      . But see to the contrary Sayre v. Abraham Lincoln Fed. Savings & Loan Ass’n., 65 F.R.D. 379 (E.D.Pa.1974), holding that such probing is irrelevant. The court considered both the ethics and inadequate representation problems in ruling on discovery similar to that sought here.


author: CELEBREZZE, Circuit Judge.

text:
    A. Kenneth HAWKES, Plaintiff-Appellee, v. INTERNAL REVENUE SERVICE, Defendant-Appellant.
    No. 74-1190.
    United States Court of Appeals, Sixth Circuit.
    Dec. 23, 1974.

      Thomas F. Turley, Jr., U. S. Atty., Memphis, Tenn., Scott P. Crampton, Meyer Rothwacks, Bennet N. Hollander, Jane Edmisten, App. Section, Tax Div., Dept, of Justice, Washington, D. C., for defendant-appellant.
    B. C. Clifton, Memphis, Tenn., for plaintiff-appellee.
    Before WEICK, CELEBREZZE and MILLER, Circuit Judges.
   CELEBREZZE, Circuit Judge.

This appeal involves the validity of an order requiring the Internal Revenue Service to disclose various documents, including portions of the 1970 Internal Revenue Manual and Supplement and the Return Classifier’s Handbook.

This is the second time the case has been before this Court. On September 25, 1972, we reversed the District Court’s dismissal of Appellee’s complaint, which had been brought under the Freedom of Information Act, 5 U.S.C. § 552 (1967). After a full discussion of the legislative purpose behind the Act, we remanded for an in camera examination of the requested documents in light of our opinion. Hawkes v. Internal Revenue Service, 467 F.2d 787 (6th Cir. 1972).

After remand but before further proceedings in the District Court, Appellant I.R.S. furnished Appellee with a substantial part of the requested materials. Following an in camera inspection of the disputed documents, the District Court held that “the disclosure of none of these materials would have the sole effect of enabling law violators to escape detection.” Hawkes v. Internal Revenue Service, Civil No. C — 70-409 (W.D.Tenn., filed Nov. 5, 1973). The District Court expressed “some doubt” whether materials “having to do with the selection of returns for audit” should be disclosed, but concluded that “even here in view of the complication of the directions and the checks and balances contained therein, we do not believe that knowledge of this would be of any substantial aid to a fraudulent taxpayer in avoiding detection.” Accordingly, the District Court ordered all the requested materials made available to Appellee, but it sealed the documents pending the outcome of this appeal.

After briefs were filed on appeal, the I.R.S. disclosed further substantial portions of the requested materials. The Service maintains at this time that approximately 70 paragraphs “are considered critical” and should not be disclosed. In general, these paragraphs concern the selection of returns for audit, based on specific amounts claimed under various categories. Their disclosure, the I.R.S. maintains, would substantially impede its enforcement program. The question before us is whether the District Court erred in ordering disclosure of the 70 disputed paragraphs. The remaining passages have already been provided to Appellee, and their disclosure is not before us for review.

In deciding whether the District Court properly followed our directions on remand, we consider whether it properly interpreted our mandate, whether it fully carried out required procedures, and whether its factual findings were clearly erroneous.

Appellant argues that the District Court erroneously interpreted our mandate by adopting a much narrower view of what materials may be withheld than warranted by our opinion on remand. It argues that the District Court’s standard, “that all materials be supplied . unless the sole effect of disclosure would be to enable law violators to escape detection,” ignores the broader sweep in favor of secrecy which Appellant says we gave to the Act. Specifically, the I.R.S. points to our statement that there is a bar to the “disclosure of information which, if known to the public, would significantly impede the [law] enforcement process.” (Emphasis in original)' 467 F.2d at 795. The I.R.S. urges that the “sole effect” criterion is stricter than the “significantly impede” criterion and that the latter view should prevail.

We find no conflict between the District Court’s interpretation of the Act and ours. Indeed, the “sole effect” language was taken directly from our opinion:

The exception for law enforcement materials contained in (a)(2)(C) is, as suggested above, a very narrow one and is to be applied only where the sole effect of disclosure would be to enable law violators to escape detection.
[D]oubts as to the meaning of this subsection should be resolved in favor of disclosure. 467 F.2d at 795 — 796.

Furthermore, the District Court applied the “significantly impede” criterion in considering whether to order disclosure of the materials involving the selection of returns for audit. It stated that it did not believe that disclosure “would be of any substantial aid to a fraudulent taxpayer in avoiding detection.” If disclosure would be of no substantial aid to law violators, necessarily it would not “significantly impede” the enforcement process. We conclude that the District Court properly interpreted our mandate.

Although the I.R.S. faults the District Court’s frank expression of doubt as to whether the materials involving selection of returns for audit should be disclosed and its “confession” that the bureaucratic jargon in the materials made them “very difficult to understand,” there is no indication that the District Court failed to scrutinize the materials with care. We find that the District Court fully complied with the procedures we mandated.

The basic issue, thus, is whether the District Court’s conclusion was clearly erroneous that disclosure of the disputed 70 paragraphs would not have the “sole effect of enabling law violators to escape detection” and would not substantially aid a fraudulent taxpayer. The “clearly erroneous” standard applies even though the only evidence is documentary, i. e., the materials sought and affidavits of two I.R.S. officials. Schna-dig Corp. v. Gaines Mfg. Co., Inc., 494 F.2d 383, 388 (6th Cir. 1974); H. K. Porter Co. v. Goodyear Tire & Rubber Co., 437 F.2d 244, 246 (6th Cir. 1971). In order for us to reverse the District Court, we must be “left with the definite and firm conviction that a mistake has been committed.” United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746 (1948), quoted in Parmer v. National Cash Register Co., 503 F.2d 275 (6th Cir. 1974).

We have reviewed each of the remaining disputed paragraphs, in order to decide whether it is clear that their disclosure would significantly impede enforcement of the revenue laws or would have the sole effect of enabling violators to escape detection. We have concluded that the District Court’s conclusion was not clearly erroneous as to any of the paragraphs.

Generally, the disputed materials, constitute guidelines which I.R.S. agents are to follow in determining which tax returns should be audited and which items on a return deserve special scrutiny. For example, one paragraph which has been made public, § 6.051 of the Return Classifier’s Handbook, states, “Exhibit E lists the average ratio of officers’ salaries to gross income in various types of businesses.” The I.R.S. seeks continued secrecy of Exhibit E, presumably on the ground that knowledge of the table’s specific ratios would encourage corporations not to report salaries in excess of the averages, with the hope of avoiding an audit concerning the reasonableness of their deductions for officers’ salaries. The already disclosed portion of § 6.051 states, however, “The Table is not to be used as an inflexible measure of the reasonableness of compensation, but rather as a guide for testing the reasonableness of the deduction. What constitutes reasonable compensation depends upon the facts in each case.”

We agree with the District Court that disclosure of the ratios specified in Exhibit E would not significantly hamper enforcement activities. In fact, this information falls within a category discussed in our remand opinion:

Information which merely enables an individual to conform his actions to an agency’s understanding of the law applied by that agency does not impede law enforcement and is not excluded from compulsory disclosure under (а) (2)(c).
Far from impeding the goals of law enforcement, in fact, the disclosure of information clarifying an agency’s substantive or procedural law serves the very goals of enforcement by encouraging knowledgeable and voluntary compliance with the law. 467 F.2d at 795.

Disclosure of Exhibit E would give the public a rough notion of what salaries may be unreasonable for corporate deduction purposes, in the view of the enforcing agency — the I.R.S. The sole effect of disclosure of this information would not be easier evasion of the tax laws. Rather, companies taking unreasonable deductions would be encouraged to reduce their officers' salaries to within .the ranges specified in Exhibit E, and ( ipanies wishing substantially to exceed the average range would be on notice that proof of the reasonableness of the higher salary deductions would probably be required by an I.R.S. auditor.

We observe, furthermore, that many of the paragraphs which the I.R.S. seeks to withhold are effectively indistinguishable from items which have been disclosed. Ap pellant’s decision to make most of the requested material public before the hearing on appeal does not, of course, waive any rights to which the I.R.S. was entitled after the District Court’s decision. Our observation is simply that many of the paragraphs remaining in dispute are not very different from information which is already available to the public.

Upon a careful review of the remaining disputed paragraphs, we are not convinced that the District Court was mistaken in concluding that their disclosure would be of no substantial aid to a fraudulent taxpayer wishing to avoid detection. None of the disputed paragraphs state that an audit will be completely avoided if a return has certain characteristics. As is generally known, a certain percentage of every type of return is audited. A fraudulent return always runs the risk of being discovered, and disclosure of the disputed passages will not change that fact.

We recognize Appellant’s sincere belief that its enforcement activities will be inconvenienced by the District Court’s disclosure order. It was Congress which painted the Information Act with a broad brush, however, and it is Congress to which Appellant’s appeal must ultimately be addressed. It is a legislative function to strike the balance between the government’s right to withhold information and the public’s right to know. Efforts to reduce the broad sweep of disclosure which Congress intended by enacting 5 U.S.C. § 552 must be taken to the legislature, not to the courts.

The judgment of the District Court is affirmed. In order to protect Appellant’s right to seek Supreme Court review of our holding, it is ordered that the disputed materials be kept under seal. If Appellant does not file a timely petition for a writ of certiorari in the Supreme Court, the Clerk will return the sealed material to the District Court, with direction that it be delivered to counsel for Appellee.

      . Except for the intervention of new statutory or Supreme Court decisional law, our mandate to the District Court and the accompanying opinion constitute “the law of this case,” and we will not review the correctness of our prior decision. Hildreth v. Union News Co., 315 F.2d 548, 550 (6th Cir. 1963).
      After oral argument, amendments to the Freedom of Information Act were passed, over a presidential veto. These amendments extended the scope of disclosure and do not affect the validity of our prior holding. Neither § (a)(2)(C) nor § (b)(2) of 5 U.S.C. § 552 was changed. See n. 5, infra.

      Although Appellant invites us to reassess our views on subsection (b)(2)’s exemption in light of Environmental Protection Agency v. Mink, 410 U.S. 73, 93 S.Ct. 827, 35 L.Ed.2d 119 (1973), we find no indication in that opinion that our analysis was faulty. Furthermore, the 1974 amendments to the Act “clari-fie[d] Congressional intent to override the Supreme Court’s holding in Mink . with respect to in camera review of classified documents.” Joint Explanatory Statement of Conference Committee, 120 Cong.Rec. H9528 (Sept. 25, 1974).
      Appellant also asks that we defer decision’, until the Supreme Court has decided the case of National Labor Relations Board v. Sears, Roebuck & Co., 156 U.S.App.D.C. 303, 480 F.2d 1195 (1973), cert. granted, 417 U.S. 907, 94 S.Ct. 2602, 41 L.Ed.2d 211 (1974). The Sears case involves very different materials from those sought here. The probability of delay pending the Supreme Court’s decision and the distinguishing features of Sears warrant a refusal to delay decision of this appeal. Indeed, since our decision on remand, the Fifth Circuit has adopted our analysis of both § (a)(2)(C) and § (b)(2) of the Act, in ordering disclosure of materials used'by inspectors ,of .the Occupational Safety and Health Administration. Stokes v. Brennan, 476 F.2d 699 (5th Cir. 1973).

      . See Grumman Aircraft Engineering Corp. v. Renegotiation Board, 157 U.S.App.D.C. 121, 482 F.2d 710, 712 (1973), applying the “clearly erroneous” standard to the review of a district court’s order after remand.

      . Because Appellant may wish to appeal our decision, we will not quote disputed sections in this opinion but will discuss them in general terms.

      . Without discussing specific examples, we note that some of the disclosed material instructs agents to be suspicious of particular claims under specific Code sections. Some of the remaining undisputed paragraphs use nearly identical language to urge attention to other deductions and amounts reported on returns.

      . We note that Congress recently passed amendments to the Act which have further broadened the scope of disclosure. H.R. 12471, 93d Cong., 2d Sess. (1974), motion to override veto passed (House of Representatives) Nov. 20, 1974, (Senate) Nov. 21, 1974. The Act is found at 120 Cong.Rec. H9525-27 (Sept. 25, 1974).


author: KOELSCH, Circuit Judge:

text:
    William H. MARX and Florence Marx, his wife, Plaintiffs-Appellants, v. COMPUTER SCIENCES CORPORATION, Defendant-Appellee.
    No. 73-1548.
    United States Court of Appeals, Ninth Circuit.
    Nov. 22, 1974.

      George M. Hartung, Jr. (argued), of LeSourd, Patten, Fleming & Hartung, Seattle, Wash., for plaintiffs-appellants.
    Don Paul Badgley (argued), of Bogle, Gates, Dobrin, Wakefield & Long, Seattle, Wash., for defendant-appellee.

      Before MERRILL and KOELSCH, Circuit Judges, and JAMESON, District Judge.

       The Honorable William J. Jameson, United States District Judge for the District of Montana, sitting by designation.

   OPINION

KOELSCH, Circuit Judge:

The plaintiffs (hereinafter Marx) appeal from a summary judgment for defendant Computer Sciences Corporation (CSC) on plaintiffs’ claim for damages allegedly resulting from the violation of Section 10(b) of the Securities and Exchange Act of 1934 (15 U.S.C. § 78j(b)) and Rule 10b-5 of the Securities and Exchange Commission and from the denial of plaintiffs’ cross-motion for partial summary judgment on the issue of liability.

Marx predicates his claim upon an earnings forecast made by CSC. His contention in substance is that the forecast was not in accordance with the requirements of § 10(b) of the Act and Rule 10b-5, in that it was both “untrue” and omitted material facts required to make it “not misleading.”

“Summary judgment of course is proper only where there is no genuine issue of any material fact or where viewing the evidence and the inferences which may be drawn therefrom in the light most favorable to the adverse party, the movant is clearly entitled to prevail as a matter of law.” Stansifer v. Chrysler Motors Corporation, 487 F.2d 59, 63 (9th Cir. 1973). We thus turn to the record to ascertain from the “pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits” whether the ruling of the district court was correct.

In brief, the following “facts” appear:

Marx is a knowledgeable and experienced private investor. For some time prior to January 23, 1970, he had been closely studying various financial reports concerning CSC, a company whose business consisted principally of the development and merchandising of computer-related services, known as proprietary systems, one of which, “Computicket” (CT), was currently being developed. CSC’s general accounting practice was to initially capitalize development expenses, rather than to treat them as charges against current income. And when a system became fully operational— defined as generating revenue in excess of expenses — CSC would then change its accounting treatment and begin to charge off the accumulated development expenses against income. CSC’s current registration statement, filed with the Securities and Exchange Commission in April, 1969, and which Marx had studied, contained the statement that CSC expected to begin expensing CT on October 1 of that year; the statement in the ensuing prospectus was to the same effect:

“It is CSC’s policy to capitalize all costs applicable to developing proprietary programs and systems and to amortize such costs over estimated total revenues from the sale of such programs and systems over a specified time period. At July 25, 1969, $17,-580,000 relating to the costs incurred in developing proprietary systems were capitalized. This figure includes $6,800,000 of expenditures incurred in connection with the developing and marketing of COMPUTICKET. The company plans to treat all such additional costs incurred for development of COMPUTICKET after October 1, 1969 as expenses and to charge them against revenues.”

On January 23, 1970, William R. Hoover, then a vice president and director of CSC, delivered a carefully prepared' speech at a meeting in New York of the New York Society of Security Analysts. In it he stated:

“In concluding my remarks, I would like to briefly discuss a few aspects of CSC’s financial performance. Approximately three years ago, Fletcher Jones, Chairman of CSC, forecast revenues for the current CSC fiscal year of $100 million with a net income of 10% of revenue. While it will not be the policy of the company to forecast yearly earnings in the future, since it is so near the closing of our fiscal year (March 27) it is appropriate to compare our performance with Mr. Jones’ forecast. I am pleased to say that CSC expects to exceed the revenue and profit forecast with a total revenue of approximately $105 million and a net income of approximately $1.00 per share on 12.8 million shares outstanding.”

Following delivery of the speech, printed copies were distributed and Hoover responded to questions from the audience. With respect to Computicket and Infonet, another CSC system, he did state that “neither . . . have yet reached full operational stage, neither one will begin to write down appreciable costs in this year”; however, no such intelligence was contained in the prepared speech, and the “broad tape” which disseminated the news of the forecast throughout financial circles simply carried the earnings forecast and made no mention of Computicket. Marx either saw or was advised of this news report the day it appeared. Having neither knowledge that CSC had not begun expensing CT on October 1, as indicated in the prospectus, nor any other information concerning CT’s status and condition, he purchased 2,000 shares of CSC stock at a price of about $30.

The forecast did not prove correct. At the close of the fiscal year, earnings were only 41 cents (and CSC stock had dropped to about $10). The difference between that amount and the “approximately $1.00” forecasted was largely, if not wholly, the result of the “write-off” of the entire accumulated development cost (in excess of $10,000,000) of CT, which CSC abandoned shortly after the Hoover speech. Just when CSC arrived at this decision is not clear. But it does appear that CT troubles had been of long standing. From its inception, CT had not met internal projections or market capture expected of it. It was financed by loans from CSC, which in turn was dependent on the availability of short-term capital. It had experienced problems getting equipment installed, it had been running deficits of one-half a million dollars or more per month for several months before the time of the speech, and it had lost one of its contracts with the First National City Bank of New York for an outlet. Moreover, CSC had attempted, without success, to sell the CT proprietary package to various prospects for differing amounts and during October and November, 1969, had gone so far as to discuss CT’s abandonment, although it then made no decision in that regard. In short, the inference is plain that the likelihood of CT’s commercial success became progressively more doubtful with the passage of time.

After duly considering these facts, we conclude that the district court should not have granted summary judgment in favor of CSC.

I. Potential Liability for Making an “Untrue Statement of a Material Fact.”

That a forecast, essentially a prediction, may be regarded as a “fact” within the meaning of the Rule is settled by G & M, Inc. v. Newbern, 488 F.2d 742 (9th Cir. 1973). In that case this court rejected a defendant’s argument that his representations as to future earnings of a corporation were not actionable under Rule 10b — 5 because mere opinion. We said:

“Under the securities law a reasoned and justified statement of opinion, one with a sound factual or historical basis, is not actionable. Here, however, considering the gross disparity between prediction and fact, and also considering Newbern’s other misrepresentations and failures to disclose, which were relevant to the accuracy of his prediction, we have no difficulty in finding this ‘prediction’ to be actionable. See, e. g., 1 Bromberg, supra, § 5.3 at 97; § 7.2(1) at 147-^8; and cases cited therein.” 488 F.2d at 745— 46.

Nor can there be doubt that the forecast of earnings was a “material” fact. The applicable test of materiality is essentially objective (see 2 Bromberg, Securities Law: Fraud § 8.3, at 201 (1973)): “. . . whether ‘a reasonable man would attach importance [to the fact misrepresented] in determining his choice of action in the transaction in question.’ ” List v. Fashion Park, Inc., 340 F.2d 457, 462 (2d Cir. 1965). And generally earnings projections of a company constitute a prime factor in estimating the worth of its stock, especially when made close to the end of the fiscal year:

“While investors probably attach more significance to future earnings than to any other single factor, they tend to take predictions with a grain of salt because of their inherent uncertainties. But the uncertainty of a projection for a given period declines as the end of the period approaches.” 2 Bromberg, supra, § 7.2(1) at 149.

Kripke, The SEC, The Accountants, Some Myths and Some Realities, 45 N.Y.U.L.Rev. 1151, 1197 (1970).

The next question is, was the forecast an “untrue” statement. Of course in hindsight it turned out to be wrong. But at least in the case of a prediction as to the future, that in itself does not make the statement untrue when made. However, the forecast may be regarded as a representation that on January 23, 1970, CSC’s informed and reasonable belief was that at the end of the coming period, earnings would be approximately $1.00. That is what a reasonable investor would take the statement to mean, and we believe it would be “untrue” when made if CSC did not then believe earnings would be in that amount or knew that there was reason to believe they would not be. In addition, because such a statement implies a reasonable method of preparation and a valid basis, we believe also that it would be “untrue” absent such preparation or basis.

In short, we are clear that the determination of untruthfulness vel non of a statement is inextricably linked with the so-called “scienter” requirement of a private 10b — 5 action and involves an inquiry into the circumstances underlying the statement to ascertain whether or not the maker was guilty of some fault or otherwise culpable. The necessity for such an inquiry is implicit in our observation in G & M, Inc. v. Newbern, supra, at 745-46 of 488 F.2d, that “a reasoned and justified statement of opinion, one with a sound factual or historical basis, is not actionable.”

That some fault is necessary to bring a statement within the proscription of § 10(b) and the Rule, and the nature and degree of the fault, was the subject of considerable discussion in White v. Abrams, 495 F.2d 724 (9th Cir. 1974), a case recently decided by this court. In that decision we rejected a “compartmentalized approach” (495 F.2d at 734) in favor of thé broader “flexible duty standard” and thus held that although fault or culpability of some sort underlies all § 10(b) liability, it need not consist solely of elements essential to a claim for common law fraud or one for negligence but may be consisted of some of the elements peculiar to either. This approach, we declared, “is desirable in an area as complex as securities fraud litigation and will come more closely to improving the sanctity of information in the market place, as Congress intended, without severely hampering the trading in securities and the flow of information.” (495 F.2d at 736).

Applying the flexible duty standard, we conclude that a jury, in light of the great importance attached to an earnings forecast, CSC’s knowledge that investors would heavily rely thereon, and the disparity between the parties in access to the information necessary to judge the accuracy of the forecast, could reasonably find that CSC, by ignoring facts seriously undermining the accuracy of the forecast, failed to meet the duty imposed by § 10(b). We agree with CSC that there is nothing in the record conclusively proving that on January 23 CSC knew to a certainty that CT would soon be written off, and hence that the forecast was intentionally false; but we cannot agree that CSC, in light of the unsatisfactory performance of CT, was justifiably optimistic in its prediction and hence that the same may not be found actionably “untrue,” or lacking in a reasonable basis.

II. Potential Liability for “Omit[ting] to State a Material Fact Necessary in Order to Make the Statements Made . . . Not Misleading.”

Marx also relies on the “material omissions” portion of Rule 10b — 5. The “non-disclosures” he asserts consists of CSC’s failure to reveal, in connection with the forecast, that CT was not being ex-pensed and its failure to likewise reveal numerous particular development problems concerning CT.

With respect to the first matter, we are clear that the reasonable investor could well be misled into assuming that the expected expensing of CT, voiced in the prospectus, had commenced and that the forecast figure included CT’s probable profit or loss from October through March. And we cannot conclude, as a matter of law, that CSC’s nondisclosure of the fact that CT was not operational and that its continued development expenses, which were running in excess of $500,000 a month, were still being debited to the asset account rather than credited against current income, would not influence the decision of a reasonable investor. Both were matters directly bearing upon the economic health and growth potential of CSC in substantial measure.

Whether CSC should have publicized all or some of the particular problems it was experiencing with CT presents a nice problem. A company, of course, need not detail every corporate event, current or prospective, which has or might have some effect upon the accuracy of an earnings forecast. It must disclose only those facts which are material. While we consider it doubtful that the failure N to disclose any one of the distinct problems besetting CT, taken by itself, would constitute an actionable material omission under the rule, we nevertheless cannot say as a matter of law that the failure to disclose some or all of them would not influence the decision of a reasonable investor. An earnings forecast is a shorthand description of the general financial well-being of a company; it creates an influential impression of the condition of the company in the eyes of the investing public. Under the statute and rule, when an earnings forecast is made, such facts should be disclosed as are necessary to allay any misleading impression thereby created. In this case, whether the failure to disclose the existence and nature of each of CT’s problems, or any partial combination of them, was an omission “to state a material fact necessary in order to make the statements made . . . not misleading” is a factual determination properly left to the jury.

In sum, we hold that a jury could reasonably find: (1) that the $1.00 per share earnings forecast was an “untrue statement of a material fact” actionable under Rule 10b — 5, and (2) that the failure to disclose, at the time of the forecast, that CSC had not commenced expensing CT as represented in the prospectus, or other facts indicating that CT was in serious financial trouble, was an omission “to state a material fact necessary in order to make the statements made not misleading.” As liability may permissibly be predicated on either or both of these theories, the district court should not have granted summary judgment for CSC.

The judgment is vacated, and the cause is remanded to the district court for further proceedings.

      . The complaint names three plaintiffs: William H. Marx, his wife and son. In this opinion we refer to Marx alone, for he is the party most actively prosecuting the action. We note, too, that this purports to be a class action; however, the district court made no Rule 23 ruling, and that aspect of the suit is not now an issue.

      . These are the pertinent portions of the statute and rule:
      § 10(b):
      “It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange— “(a) * * *
      “(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.”
      Rule 10b-5:
      “It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of- the mails, or of any facility of any national securities exchange, * * *
      “(2) 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 circum-. stances under which they were made, not misleading, * * * ”

      . The prospectus did contain this caveat:
      “No assurance can be given that COM-PUTICKET will be the first such system to become fully operational in a particular area or that the system can obtain a sufficient volume of business to recover development expenses or to achieve profitable operations.”
      But whether or not it is sufficient to, or did, put Marx on notice, we think is a factual question.

      . CSC’s fiscal years ended March 27.

      . As one leading commentator points out, many of the “facts” which cases treat as material, such as the value of accounts receivable or even the value of fixed assets, are essentially probabilities as to future capacities or expectations. Kripke, Rule 10b — 5 Liability and “Material” “Facts,” 46 N.Y.U.L.Rev. 1061, 1070 (1971). Accord: Sprayregen v. Livingston Oil Co., 295 F.Supp. 1376 (S.D.N. Y.1968).

      . The List test is the one suggested in the Restatement of the Law, Torts, § 538 (1938): “(2) A fact is material if (a) its existence or nonexistence is a matter to which a reasonable man would attach importance * * We are aware that in Mills v. Electric Auto-Lite Co., 396 U.S. 375, 90 S.Ct. 616, 24 L.Ed.2d 593 (1970), the Court in discussing materiality under § 14(a), dealing with proxy violations, employed a “might have been considered” requirement (p. 384) and that in Affiliated Ute Citizens v. United States, 406 U.S. 128, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972), a case dealing with § 10(b), the Court spoke of materiality in terms of facts that “could have been expected to influence” (p. 153, 92 S.Ct. p. 1472), relying upon Chasins v. Smith, Barney & Co., 438 F.2d 1167 (2d Cir. 1970): “whether a reasonable man . . . might well have acted otherwise . . ..” 438 F.2d at 1171. And we note that at least one commentator suggests that the trend is toward relaxing the test to replace “would” with “may” type language. Note, SEC Rule 10b-5: A Recent Profile, 13 Wm. & Mary L.Rev. 860, 883-85 (1972). See also 46 N.Y. U.L.Rev. 187, 192-93 (1971). However, unless clearly directed otherwise by higher authority, we adhere in 10b-5 cases to the traditional and less speculative common law language of the objective test.

      . “The foregoing is not intended to suggest that projections could be subjected to statutory liabilities, either express or under rule lob-5, in the same fashion as a statement of fact about last year’s sales or the ownership of a building. Rather the sole factual elements of a projection should be that it represents management’s view, that it was reached in a rational fashion and that it is a sincere view. Only these elements can be subject to a statutory liability, not the eventuation of the prophecy.” Kripke, supra, 45 N.Y.U.L.Rev., at 1199.

      . Two days before Hoover delivered the forecast speech, CSC’s independent auditors gave final approval for continued deferral of the change-over in accounting for CT expenses. CSC had then prepared the requisite SEC “8 K” form to publicly announce this fact. But the 8 K was not filed with the SEC until eight days following preparation; this by itself would support an inference that CSC knew the prospectus was misleading and a conclusion that the forecast was carelessly or recklessly made.

        As we have noted, Hoover, after delivering his prepared remarks, stated in substance during the question and answer period, that CT was not operational. We agree that this would tend to negative, if not wholly overcome, any inferences that CSC was deliberately attempting to mislead. However, that CSC was not fraudulent does not necessarily exonerate CSC — it may have been derelict in not taking adequate precautions to see the news release was qualified with this information. In that regard, we think that a company is obliged to release material facts in a manner reasonably calculated to reach the investing public, at least in substance. A contrary or lesser requirement would permit a company to manipulate the statements by simply giving favorable information wide dissemination and releasing qualifications without publicity. In this case the evidence is sufficient to raise the issue.

      . Neither the statutes nor the rules explicitly require proof of reliance. However, reliance is a predicate to a private claim. 2 Brom-berg, supra, § 8.6 at 209.
      CSC argues, insofar as alleged omission of material facts are involved, that Marx did not rely on the omission as a matter of law. Because Marx purchased immediately upon seeing the forecast figure on the broad tape, and because the tape carried only the $1.00 forecast and not the speech, CSC argues that any omissions from the speech are irrelevant, as disclosures would not have appeared on the tape and Marx would have purchased the stock in either event. The trouble with CSC’s argument is that it contains the unwarranted assumption that a material disclosure would not have accompanied the forecast on the broad tape and affected Marx’s decision to purchase. Moreover, Marx may reasonably rely on the supposition either that the company has not omitted material facts conditioning the forecast, or has chosen a means of dissemination which will contain necessary qualifications — failure to do either may be actionable. See n.8 supra. With respect to the omissions upon which Marx relies, the statement of the Court in Affiliated Ute Citizens v. United States, 406 U.S. 128, 153-154, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972), is particularly relevant:
      “Under the circumstances of this case, involving primarily a failure to disclose, positive proof of reliance is not a prerequisite to recovery. All that is necessary is that the facts withheld be material in the sense that a reasonable investor might have considered them important in the making of this decision. (Citations omitted.) This obligation to disclose and this withholding of a material fact establish the requisite element of causation in fact.”

      . Bromberg points out that “The bigger and more diversified the company, the less material a given bit of information is.” 2 Brom-berg, supra, § 8.3, at 201.

      . The contract, recently terminated by the First National City Bank, simply concerned one outlet for CT, and such outlets were interchangeable.

        We question whether CSC was attempting to sell portions of CT at declining prices, as Marx asserts. The record indicates that the offers were not comparable, in that they differed from each other in terms. But even if the terms, save for the price, were the same, the attempts to sell were not unusual, in that such was the publicly avowed purpose of CSC — to merchandise its systems.
      The undisclosed facts held to be material in Globus v. Law Research Service, Inc., 418 F.2d 1276 (2d Cir. 1969), and in Chris Craft Industries v. Piper Aircraft Corp., 480 F.2d 341 (2d Cir. 1973), are in marked contrast to those here. In Globus the nondisclosure went to a matter upon which the continued existence of the company directly depended; in Chris Craft the nondisclosure related to the pendency of negotiations looking to the disposal of an important capital asset of the company at less than one-third of its listed book value.

      . We are clear that an omission found to be “material” might be actionable even if the earnings forecast turned out to be substantially correct. For example, had CSC delayed their “write-off” of CT to a subsequent year, thus rendering the forecast “correct,” the failure to disclose CT’s problems existing at the time of the forecast might still be actionable due to the erroneous impression of the health of the company thereby conveyed and the pitfalls concealed.