author: BARRINGTON D. PARKER, District Judge:

text:
    In re NATIONAL STUDENT MARKETING LITIGATION.
    MDL No. 105.
    United States District Court, District of Columbia.
    Nov. 9, 1984.

      See also, D.C., 517 F.Supp. 1345.
    Charles Duncan, Nathalie P. Gilfoyle, Robert C. Hacker, Jay D. Pedelty, Peabody, Lambert & Meyers, Washington, D.C., for Special Master.
    Richard J. Braemer, Steven T. Stern, Braemer & Kessler, Philadelphia, Pa., for claimant Herbert M. Frank and Raymond Gold (Renselaar).
    William M. Bradner, Jr., David R. Baker, Chadbourne, Parke, Whiteside & Wolff, New York City, for claimant George W. Schiele (Mailbag/M.I.I.).
   MEMORANDUM OPINION

(Renselaar Corporation and Mailbag/M.I.I.)

BARRINGTON D. PARKER, District Judge:

INTRODUCTION

On August 22 and 23, 1984, hearings were held to determine what valuations should be placed on Renselaar Corp. (“Renselaar”) and Mailbag International, Inc. (“Mailbag”) and its affiliate M.I.I. Services, Inc. (“M.I.I.”) collectively referred to as Mailbag/M.I.I. At the hearings, the Court received and considered testimony, exhibits and other evidence submitted and proffered by Duff & Phelps, Inc. (“Duff & Phelps”), the expert witness engaged by the Special Master. Also reviewed and considered were the testimony, exhibits and evidence proffered by the claimants Renselaar and Mailbag/M.I.I., represented by their former owners Raymond Gold and George Schiele and their expert witnesses Gabriel Nagy arid Thomas Dewey.

At this time, the Court is called upon to make a de novo determination of the reasonable fair market value for the two companies acquired by National Student Marketing (“NSM”). The fair market value of a company under the circumstances presented is the price a willing buyer would pay a willing seller in an arm’s-length transaction in which both parties are reasonably informed and knowledgeable about all relevant facts, and are not acting under compulsion.

A.

In the spring and summer of 1969, the former owners of Renselaar and Mailbag/M.I.I. exchanged their stock in those corporations for NSM shares. At the time, Renselaar and Mailbag/M.I.I. shares were not publicly traded and there was no active market for the stock. The only known “sales” of their stock occurred in connection with the 1969 NSM mergers. Under the circumstances it was thus appropriate to consider a variety of factors in determining the fair market values of the companies at the time of merger. Among the relevant factors considered were: the nature of the companies’ products; the life and history of the companies; their size and growth potential; and, the financial operations of the companies.

After a review of the testimony, exhibits, documents and all evidence presented at the valuation hearings; after weighing the credibility, experience and expertise of the several witnesses appearing both for the Special Master and the claimants; and, after considering the post-hearing memoranda of the parties, the Court determines that: the fair market value of Renselaar as of the date of acquisition — April 10, 1969, was $4.1 million; the fair market value of Mailbag/M.I.I. as of the date of acquisition — October 14, 1969, was $2,987,057.

Pursuant to Rule 52, Fed.R.Civ.P. the Court makes the following findings of fact and conclusions of law.

FINDINGS OF FACT

In March 1983, Charles Duncan, Esquire, and the law firm of Peabody, Lambert & Meyers were appointed as Special Master in this proceeding. Their responsibility, inter alia, was to process and to determine the validity of proofs of claims submitted by claimants who had previously exchanged stock in corporations owned by them for NSM shares.

With Court approval the Special Master engaged Duff & Phelps, a Chicago-based firm, to undertake an independent financial analysis and to assist in establishing the validity of the submitted claims and determining the reasonable fair market values for the several companies acquired by NSM in a stock for stock transfer. For more than 20 years Duff & Phelps has been involved in investment research, provided financial analyses to corporations and institutions, and also provided professional consulting and special valuation studies for companies involved in mergers and acquisitions. They are not brokers/dealers or investment bankers. Duff & Phelps was no stranger to this litigation. Earlier in the proceeding it served as an independent financial analyst to counsel for NSM and counsel for the class plaintiffs.

A.

The Special Master and Duff & Phelps gathered all available information relevant to the value of the companies at the time of acquisition. Based on that data, Duff & Phelps then determined what they considered to be a range of reasonable and fair values for each company.

With few exceptions a range of values was based on a discounted cash flow analysis, using projections of operations of a particular company as if it had not been acquired by NSM. In determining the reasonableness of its results, Duff & Phelps compared the price/earnings ratio resulting from the discounted cash flow analysis with price/earnings ratio relating to other acquisitions by NSM during this period as well as relevant financial data from other comparable companies.

Over and beyond this approach and the valuations determined by Duff & Phelps, the Special Master made an independent determination of what it considered to be the fair market value of NSM shares received by former owners of an acquired company. However, values ascribed to those shares by the claimants, and in some cases the number of shares, were higher than what the Special Master determined was appropriate.

An important aspect of the valuation process utilized in connection with NSM shares transferred outright was that of discounting by one-third the quoted market price on the date of the acquisition to reflect the fact that the acquired NSM shares were “lettered” or “restricted,” not registered with the Securities and Exchange Commission, and thus could not be sold readily on the open market. This was an acceptable and recognized procedure in the valuation process. Indeed it was first utilized and sanctioned in connection with an evaluation and study of the private placements of restricted NSM stock during the period September 1, 1967 to December 31, 1970. Touche Ross, an accounting firm, reviewed NSM accounting through that period, including all private placements of restricted stock, and concluded that, on the average, such stock sold for two-thirds of the market price of unrestricted stock. Accordingly, on that basis, the Special Master consistently and appropriately applied a one-third discount in valuing restricted NSM stock.

The Court has no problem with such an approach. The practice and reasoning is sound. It recognized the realities of the securities market. It is a well-established and generally recognized principle employed in determining stock values. It was appropriately applied as to both Renselaar and Mailbag/M.I.I.

The merger agreements generally provided for the transfer of a specified number of NSM shares at the closing. Many of the agreements provided for “loss” escrow stock accounts. The provision for such accounts was intended to protect NSM against undisclosed liabilities of an acquired business. In some instances “earn-out” provisions provided for additional NSM shares to the former owner if the acquired business reached certain levels of financial success. A few of the agreements established “market-protection” escrow accounts providing for release of NSM shares if their market value fell below specified levels.

A discussion of the problems associated with the determination of the fair market value of Renselaar and Mailbag/M.I.I. follows.

RENSELAAR CORPORATION

Renselaar was acquired by an agreement with NSM dated April 10, 1969. At that time its sole shareholders were Raymond Gold and Herbert Frank.

The company was concerned principally with the production and distribution of wall decors and a wide variety of poster products. Its products were targeted to consumers under the age of 25.

The wall decor poster industry was highly fragmented and a large number of companies competed for the market. Renselaar was engaged in a high risk and trendy business. While it was recognized as the industry leader, it only had an eight percent share of the entire market. In some instances it had exclusive licensing agreements but at the same time, design copying by many competitors was a continuing problem.

Posters generally had a short period of popularity and were subject to rapidly changing youth fads. While it was necessary for a company to continually update its lines so as to capitalize on current trends and fads, the nature of the market made it almost impossible for a company to be certain that its products would be continually accepted.

A.

Renselaar was formed in 1965 and operated at a loss through October 1965. Fiscal year ending October 1966 was its first full year of operation. The corporation was operated at a profitable level until its acquisition by NSM.

Under the merger agreement, the Renselaar owners received 145,396 shares of NSM lettered or restricted stock. A total of 72,968 were issued on April 10, 1969. An additional 72,968 shares were issued pursuant to the earn-out provisions of the agreement.

Claire Hansen of Duff & Phelps testified that a reasonable value for Renselaar in April 1969 ranged from $3.1 to $4.1 million. He relied upon a discounted cash flow analysis in arriving at that valuation. Renselaar’s counsel agreed that such an analysis was appropriate and a generally accepted method of approach.

In making its analysis Duff & Phelps reviewed Renselaar’s past sales and earnings performance. Based on that review, projections were made of the company’s revenues and cash flow. Future cash flow was then discounted to present value using an appropriate discount rate which Duff & Phelps determined was from 22 to 24 percent. In Hansen’s opinion, an interested buyer would have expected such a return on an investment in the company. The discount rates led to the valuation ranges of $3.1 to $4.1 million.

The underlying assumptions upon which Duff & Phelps relied in making its projections for the greater part were taken from a document, Poster Prints — Progress Report and Annual Plans (Special Master Ex. 6), written and prepared by Renselaar management for the benefit of NSM in June 1969. The document projected increased revenues and pre-tax earnings for 1970 through 1972. Duff & Phelps assumed the same levels of increase projected in the claimants’ document. The Court finds that document credible evidence of the prospects for growth assumed by Gold and Frank within two months after the merger was consummated. Under the circumstances it was thus reasonable and proper for Duff & Phelps to make use of such recent projections.

Using management’s revenue projections for 1970-72, and the actual revenue for 1968, Duff & Phelps calculated revenues through fiscal 1969 (October 31). Based on the data generated by the claimants, sales were projected to increase 30 percent annually from 1969 to 1972. The actual percentage increase was less than 30 percent but was rounded off to that amount by Duff & Phelps.

On October 15, 1984, the claimants were granted leave to present additional and recently discovered evidence after the close of the hearings in support of Mr. Gold’s testimony that a 60 percent growth in revenues for 1969 was more reasonable than the Duff & Phelps projections. That additional evidence related to December 1968, however, and the actual results for the first part of 1969 may have suggested the need for lower revenue projections. Mr. Gold’s explanations of June 1969 projections are not reliable and persuasive over and against the Duff & Phelps’ response and analysis. The claimants’ most recent submissions of November 8, 1984, have also been considered in arriving at this determination.

In justifying the discount rates, Duff & Phelps relied on several relevant factors including: the trendy nature of the business, the fact that the business was a high risk undertaking, the yields then available from other investments in the securities market; and, a comparison of Renselaar with other companies acquired by NSM.

The Special Master, relying upon an alternative method, arrived at a comparable valuation of $4.0 million based on what it considered to be the fair market value of the NSM shares received by Renselaar’s former owners. Because the NSM stock was lettered, a one-third discount was applied to reflect the stock’s lower value. No challenge was voiced either to such an approach or as to the rate applied.

The initial 72,698 shares of restricted NSM stock were issued on April 10, 1969 and on that date the mean average of the bid and ask market price was $41.50. That stock, however, was worth less than the unrestricted stock. The value calculated for the 72,698 shares was $2,011,311 [72,-698 X $41.50 X % = $2,011,311]. The Special Master assumed that the earn-out shares would in fact be issued and the value of those shares on April 10,1969 was an additional $2.0 million. The value of a sizeable portion of those earn-out shares, when issued, was significantly less, and if their value was actually calculated on the date of issuance, the total value of the shares received would have been considerably less than their value on April 10, 1969.

In view of all the evidence presented, the Special Master recommended that a valúation of $4.1 million for Renselaar was fair and reasonable. The Court finds that the testimony and analyses and the valuation range of $3.1 to $4.1 million presented by the Duff & Phelps expert witnesses were adequately supported by substantial evidence in the record and was more persuasive than the testimony proffered by claimant Gold and his expert witness. While the Special Master arrived at a slightly less valuation, the difference is minimal and the Court finds that the $4.1 million valuation is justified.

MAILBAG INTERNATIONAL, INC.

AND M.I.I. SERVICES, INC.

Mailbag International, Inc. was formed in 1955. In 1969 it was owned by George Schiele and William Torgis, who were the sole owners at the time of the National Student Marketing acquisition.

M.I.I. Services, Inc. was formed in 1967 and was wholly owned by Schiele. It was affiliated informally with Mailbag at a later date.

When acquired by NSM, the two companies were recognized as a single business enterprise, however, M.I.I. maintained a separate corporate identity. The companies were engaged essentially in the same business, namely, direct mail advertising of samples and other promotional materials on behalf of subscribers. Participating advertisers paid to be included in various annual editions of Mailbag/M.I.I. direct mailings. The target market of the mailings was focused almost exclusively on high school, college and young adult groups.

A.

Under the merger agreement, the owners of the two companies received a total of 90,434 shares of restricted NSM stock. Of that total, 9,044 shares were placed in a “loss” escrow account and then subsequently released to the former owners. Immediately following the merger, Schiele registered and sold 13,500 shares for a total of $627,750.

Employing a discounted cash flow analysis, the same procedure as relied upon in similar transactions, Duff & Phelps concluded that a reasonable value for the acquisition ranged from $1.2 to $1.6 million.

The Special Master arrived at an independent and higher valuation. At the same time, however, the valuations proposed by Duff & Phelps were considered. Initially, a tentative valuation of $1.9 million was determined which was conveyed to Schiele. Thereafter, as in all instances, a conference was held with Schiele and his representatives. On this occasion, May or June, 1984, Schiele represented for the first time that the net income figures reported on Mailbag’s federal corporate income tax returns for 1978, 1977 and 1976 and which had been previously relied upon, were understated and should be adjusted. The adjustment was required because the Internal Revenue Service rejected certain claimed deductions and expenses relating to wages and other compensation reported on Mailbag’s tax returns for those years. This was unknown to Duff & Phelps since they had submitted their analyses and valuations at an earlier date. Indeed, this was the first time that Schiele disclosed such information to anyone in the course of this proceeding.

The Special Master then reconsidered his earlier findings and concluded that a reasonable valuation of the companies should be based on the total number of NSM shares received by the claimants, namely, $2.83 million. In arriving at that figure, he considered the 13,500 shares sold for $627,-750, plus the value of the remaining restricted shares (discounted by one third to reflect the restriction). The stock sale price relied upon was as of August 8, 1969, the date that the merger agreement was signed. The mean average between the bid and ask prices of unrestricted NSM stock on that date was $43. The Special Master relied upon the following computation to arrive at the $2.83 million valuation: [ (90,-434-13,500) X $43 X % + $627,750 = $2,833,191].

B.

Schiele’s expert, Thomas Dewey, headed his own New York-based firm. He had considerable prior experience in providing advice, opinions, and services on such matters as corporate valuations, mergers and reorganizations. He was retained by Mailbag/M.I.I. in May 1984.

In Dewey’s opinion the value of the two companies was $4,159,964 arrived at by multiplying the 90,434 NSM shares received by his clients by the mean average of the bid and ask price of $46 per share on October 14, 1969. The Court questions his analysis. It was limited, unduly restricted and contrary to the preponderance of credible testimony and evidence. As an expert, Dewey dismissed and rejected summarily the discounted cash flow analysis without offering any justification or reasons. Likewise, he summarily dismissed and rejected the view that the value of the shares received by Schiele were affected in any way by the fact that a substantial number was lettered or restricted. Schiele’s counsel argued, and his client testified that since he intended to hold the shares for investment, it should make no difference what restrictions were imposed.

But this Court finds that Schiele’s intentions did not in any way alter or change the principle involved. The value of those shares should be discounted in terms of their real value as to what an informed, reasonable and prudent person would be willing to accept under the circumstances and at the particular time. Schiele acquired restricted NSM shares, limited in their marketability. Under such circumstances it was appropriate to apply a discount factor.

When asked about this procedure, the Duff & Phelps expert, Claire Hansen, replied “it is absolutely common practice that [such shares] be sold at a discount.” Tr. August 23, 1984, pp. 92, 93. The one-third discount was not based on chance or speculation but rather on an empirical study of cash transactions of NSM shares undertaken by the Touche Ross accounting firm in 1973, at an earlier stage in this proceeding. The Touche Ross report, relied upon at the time, showed that during that period NSM stock was issued at discounts ranging from 20 to 40 percent, and the one-third ratio used by the Special Master was a weighted average of the range of discounts.

Schiele’s counsel also contended that even if the two companies were not valued on basis of the actual worth of the merger transaction, the discounted cash flow analysis utilized by Duff & Phelps and the Special Master in their appraisals was unrealistic since it did not adequately reflect prices actually paid for comparable companies at the time. The relevant data on those companies have been considered and reviewed and Schiele’s contentions are not supported.

In an attempt to justify the reasonableness of his $4.1 million valuation, Schiele’s expert relied upon an alternative approach based on a representation of 1969 earnings and an application of a price/earnings multiplier of 30. In doing so, he annualized 9-months earnings of May 31, 1969 and arrived at a projected 12-months earnings result of $200,000. However, this approach and methodology was seriously flawed for several reasons. The asserted 1969 earnings improperly included earnings of two companies in addition to Mailbag/M.I.I. These companies, Dufftor and Youth Marketing, were related and acquired by NSM at the same time. But NSM paid for those companies by cash and notes; they were not a part of the merger and the transfer of stock for stock.

The claimants’ expert offered unsatisfactory testimony — vague and generalized, in explaining that appropriate adjustments were made to exclude the earnings of those companies from the projected 1969 earnings. After claimants made known that Mailbag’s corporate tax returns were questioned by the Internal Revenue Service, no reliable earnings data were ever supplied. In addition, there was no reliable or credible testimony from the claimants to show and test the reasonableness of the multiplier of 30 upon which the expert relied, even assuming that necessary adjustments were made. Finally, an evaluation based on only a 1-year earnings record, fell far short of serving as a realistic basis for determining valuation.

1.

A hotly contested area of concern arose from the insistence of Schiele and his counsel that October 14, 1969, rather than the date of August 8, 1969, should be used for ultimate determination of the valuation of NSM shares. The Court agrees with the claimants. While the agreement was signed and dated by the parties on August 8, it was not operative at that time but still required approval of the shareholders of both NSM and the claimants. Under the circumstances, it was reasonable and proper to accept October 14, 1969, when they had shareholder approval and the stock transfer occurred for all parties to the merger. While transfer of the shares may be considered a mere formality, obtaining shareholder approval was entirely different. The agreement between the parties was contingent upon necessary shareholder approval and that was not secured on August 8, 1969.

The Court finds that October 14, 1969, when the NSM and the claimants’ shareholders voted for the merger, was the effective date of merger and the appropriate valuation date. The mean average bid and ask price of NSM stock on that date was $46 per share. The fair market value of Mailbag/M.I.I. on that date was $2,987,056 [(90,434-13,500) X $46 X % + 627,750 = $2,987,056]

CONCLUSIONS OF LAW

Federal law governs the various aspects of this securities law litigation based on Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated pursuant to section 10(b) of the Securities & Exchange Act of 1934, 15 U.S.C. § 78j(b). Huddleston v. Herman & MacLean, 640 F.2d 534, 557 (5th Cir.1981), aff'd in relevant part, 459 U.S. 375, 103 S.Ct. 683, 74 L.Ed.2d 548 (1983). Although the valuation questions before the Court arise out of settlement agreements, the damage formula contained in the Plan of Distribution is based on securities law principles. Thus, securities law damage and valuation guidelines are especially instructive in this matter.

Fair market value has been defined as that which a willing buyer would pay a willing seller when neither is under any compulsion and both are reasonably informed as to all relevant facts. Klapmeier v. Telecheck International, Inc., 482 F.2d 247, 252 (8th Cir.1973); Bar L Ranch, Inc. v. Phinney, 426 F.2d 995, 999 (5th Cir. 1970).

Federal courts have recognized the special difficulty in valuing small, closely' held corporations. Glick v. Campagna, 613 F.2d 31, 37 (3d Cir.1979). In the absence of an active market for a corporation’s stock, the value of the corporation should be based on an assessment of all available evidence of value. Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 155, 92 S.Ct. 1456, 1473, 31 L.Ed.2d 741 (1972); Glick v. Campagna, 613 F.2d at 37; O’Malley v. Ames, 197 F.2d 256, 258 (8th Cir.1952); Francis I. duPont & Co. v. Universal City Studios, Inc., 312 A.2d 344, 347-48 (Del. Ch.1973), aff'd, 334 A.2d 216 (Del.1975); Treas.Reg. § 20.2031-2(e). If necessary, the finder of fact may consider relevant evidence gathered a reasonable time after the stock sale. VI L. Loss, Securities Regulation 3922-23 (1969); Dupuy v. Dupuy, 551 F.2d 1005, 1025 (5th Cir.), cert. denied, 434 U.S. 911, 98 S.Ct. 312, 54 L.Ed.2d 197 (1977). A variety of factors may be considered relevant, depending on the particular circumstances. In Gottlieb v. Sandia American Corp., 304 F.Supp. 980, 992 (E.D.Pa.1969), aff'd in relevant part, 452 F.2d 510 (3d Cir.), cert. denied, 404 U.S. 938, 92 S.Ct. 274, 30 L.Ed.2d 250 (1971), the court referred valuation questions to a special master and directed him to consider a variety of factors, such as the value of similar concerns, the value of intangible assets such as management quality, capitalized future earnings, and the bid and ask prices for the stock.

It is reasonable and appropriate for the Special Master to apply a one-third discount to the value of restricted NSM shares to reflect their lack of marketability. Fox v. Kane-Miller Corp., 398 F.Supp. 609, 647-49 (D.Md.1975), aff'd, 542 F.2d 915 (4th Cir.1976).

In situations such as presented here, where there is disagreement among the expert witnesses and the Court is called upon to evaluate and pass on the merits of the different views expressed by them, the Court must determine whether a particular expert opinion is supported by the record, is reasonable and also whether the opinion has general acceptance. This has been done in arriving at the above valuations.

Based on all available evidence, the Special Master correctly determined that the value of Renselaar, which was the consideration exchanged by claimants Raymond Gold and Herbert Frank for NSM stock, was $4.1 million; that amount shall be the basis on which the Special Master shall calculate the claimants’ actual losses.

Based on all available evidence, the Special Master correctly determined that the value of Mailbag/M.I.I. which was the consideration exchanged by claimant George Schiele for NSM stock was $2,987.057; that amount shall be the basis on which the Special Master shall calculate the claimant’s actual losses.


source: Caselaw Access Project

author: DAVID L. RUSSELL, District Judge.

license: Public Domain

text:
    BOSCO’S CLUB, INC., a corporation, Plaintiff, v. CITY OF OKLAHOMA CITY, a municipal corporation, Defendant.
    No. CIV 83-2439-R.
    United States District Court, W.D. Oklahoma.
    Nov. 11, 1984.

      Rick Romano, Joel L. Carson, Oklahoma City, Okl., for plaintiff.
    Diane L. Davis, Asst. Mun. Counsel, Walter M. Powell, Mun. Counsel, Oklahoma City, Okl., for defendant.
   MEMORANDUM OPINION

DAVID L. RUSSELL, District Judge.

The Plaintiff brought this action against the City of Oklahoma City seeking declaratory and injunctive relief from a newly enacted city ordinance on October 4, 1983. The Plaintiff’s motion for a preliminary injunction was denied on October 14, 1983, the Court concluding that the Plaintiff had failed to demonstrate a likelihood of prevailing on the merits. The case then proceeded to a bench trial on February 1,1984, and was taken under advisement at that time. The Court is now prepared to render judgment and issues this Memorandum Opinion to record its findings of fact and conclusions of law. See Fed.R.Civ.P. 52(a).

I.

The ordinance challenged in this action was promulgated by the City on July 19, 1983 and amended on September 13, 1983. As amended, the ordinance supplemented the Oklahoma City Code with, inter alia, the following provisions:

No licensee, owner, manager, employee, proprietor, or any agent, associate or representative of a licensed establishment shall:
(a) Employ or permit any employee to beg, solicit, induce, procure or request a patron to purchase any alcoholic or nonalcoholic beverage for himself or herself or for any other employee or person not a patron; or
(b) Knowingly serve to any employee any alcoholic or non-alcoholic beverage which was purchased by any patron; or
(c) Permit upon any licensed establishment any employee to loiter on or remain on said premises who begs, solicits, induces, procures or requests a patron to purchase an alcoholic or non-alcoholic beverage for any employee; or
(d) Solicit, induce or request a patron to purchase any alcoholic or non-alcoholic beverage for himself or herself or for any person not a patron; or
(e) Permit any employee to mingle or fraternize with patrons of such licensed establishments. Provided, however, this provision is not applicable to communications between the patrons and the employee when the employee is performing the duties in the furtherance of service of food and/or drinks.

The term “licensed establishment” is defined as “any place of business which is licensed as a private club or has been issued a retail dealer’s license.” The ordinance also prescribes a fine of up to three hundred dollars for violation of any of these provisions.

As the evidence presented at trial indicates, this ordinance was enacted solely to curtail activity known as the “B girl operation,” whereby employees of the licensed establishments solicit patrons to purchase drinks at inflated prices upon the implied promise of sexual favors. A task force was commissioned by the City to study the problem in the Oklahoma City area, and the result was recommendation of the ordinance in question. The ordinance was modeled upon similar statutes adopted in other jurisdictions in response to the proliferation of “B girl” bars.

The Plaintiff, an Oklahoma corporation' doing business at 2829 West California Street in Oklahoma City, is licensed by the City as a private club pursuant to the Oklahoma City Code, and by the State of Oklahoma as a retail dealer of non-intoxicating beer pursuant to the Manufacture and Sale of Non-Intoxicating Beverages Act, 37 O.S. 1981 § 163.1 — § 163.23. Thus, the ordinance in question presumably applies to the Plaintiff in each of these capacities and prohibits the conduct mentioned above on the premises of the club.

The Plaintiff challenges the solicitation ordinance on Oklahoma statutory grounds as well as federal constitutional grounds. The Court will consider each of the Plaintiff’s claims seriatim.

II.

The Plaintiff’s challenge to the ordinance on Oklahoma statutory grounds is based upon the assertion that the Oklahoma legislature has preempted the licensing and regulation of the sale of nonintoxicating beer in Oklahoma. Thus, the Plaintiff argues that the City exceeded its authority by enacting an ordinance regulating the sale of nonintoxicating beer in Oklahoma City.

As a preliminary matter, the Court must determine whether the Plaintiff is entitled to challenge the ordinance both as a private club and as a retail dealer. The City argues that, as the Plaintiff is a private club licensed by the City of Oklahoma City, it is entitled to challenge the ordinance only as a private club. Under this interpretation, the Plaintiff would lack standing to challenge the ordinance as unlawful regulation of the sale of nonintoxicating beer. In support of this proposition the City cites the unpublished opinion of the Oklahoma Court of Criminal Appeals in Scott v. State, No. M-82-518 (Okla.Ct. Crim.App. Aug. 9, 1983).

The Court finds this proposition without merit. First, Scott is distinguishable from the case at bar in that the appellant therein attempted to use his dual status as a private club and a restaurant to avoid statutory regulation in the form of mandatory closing hours. Scott, slip op. at 4. In this case, the Plaintiff seeks to do just the opposite; the Plaintiff attempts to use its dual status to avail itself of statutory regulation that presumably preempts any regulation by the City. Thus, the reasoning in Scott is inapposite to the case at bar. Second, the ordinance in question purports to regulate conduct in both private clubs and retail dealer establishments, and the Plaintiff is clearly in both categories. The Court sees no logic in denying the Plaintiff an opportunity to challenge the ordinance on a statutory basis that is available to other retail dealers, simply because the Plaintiff has also secured licensing as a private club by the City. Third, adoption of the City’s proposition would bring about an anomalous result: the Plaintiff, which owes its legal existence in part to statutory authority, would be prevented from challenging the City’s ordinance as violative of the very authority by which the Plaintiff exists. Thus, the Court concludes that the Plaintiff is entitled to challenge the solicitation ordinance both as a private club and as a retail dealer.

The remaining issue is thus whether the solicitation ordinance impermissibly regulates the sale of nonintoxicating beer. It is clear that the Oklahoma legislature has preempted the authority of a municipality to regulate the sale of nonintoxicating beer. E.g., 7-Eleven, Inc. v. McClain, 422 P.2d 455, 459-60 (Okla.1967); Allison v. Howell, 204 Okl. 404, 230 P.2d 706, 709 (1951); Ex parte Higgs, 97 Okl.Cr. 338, 263 P.2d 752, 756-7 (1953); Ex parte Gammel, 89 Okl.Cr. 400, 208 P.2d 961, 966-7 (1949); Ex parte Pappe, 88 Okl.Cr. 166, 201 P.2d 260, 263 (1948); Cunningham v. Oklahoma City, 556 P.2d 1078, 1079-80 (Okla. Ct.App.1976). Thus, if the ordinance can be characterized as one which regulates the sale of nonintoxicating beer, it must be held invalid as promulgated in excess of the City’s authority.

It is the opinion of the Court that the solicitation ordinance cannot be so characterized. The evidence presented at trial indicates that the ordinance was enacted solely for the purpose of curtailing the infamous “B girl operation.” The City did not intend that the ordinance regulate the sale of nonintoxicating beer; its intent was simply to proscribe and punish morally culpable conduct peculiar to drinking establishments. Further, the ordinance itself is neutral on its face with respect to the sale of nonintoxicating beer. No beer sales are prohibited; only solicitation and its attendant consequences are proscribed by the ordinance. Thus, the ordinance cannot be characterized as regulating the sale of nonintoxicating beer in the sense that such regulation is the purpose of the ordinance.

The Plaintiff seems to argue that an unintended impact on the sale of nonintoxicating beer is sufficient to make the ordinance a regulation of such sales. Assuming arguendo that this is so, the Court is persuaded that any unintended impact on the sale of beer by this ordinance is at best negligible. Arguably, beer purchases will decline if patrons cannot be solicited to purchase beer for establishment employees. However, the amount of beer purchased for employees is necessarily small in comparison to the amount of beer purchased by patrons for themselves. And the Plaintiff has failed to persuade the Court that his beer sales have in fact been affected at all by the ordinance. While the Plaintiff’s evidences does indicate a general decline in sales over the months preceding trial, such decline may be attributable as much to the City’s nude dancing ordinance as to the solicitation ordinance. Thus, the Court concludes that the unintended impact, if any has taken place in this case, is sufficiently de minimis as to be negligible. This being so, the Court cannot conclude that an ordinance not intended to regulate beer sales has become a de facto regulation because of its impact.

In summary, it is the opinion of the Court that the solicitation ordinance does not regulate the sale of nonintoxicating beer. The City therefore has not usurped authority reserved for the Oklahoma legislature, and the Court concludes that the ordinance withstands the Plaintiff’s statutory challenge.

III.

The Plaintiff’s federal constitutional challenges to the solicitation ordinance focus on the equal protection and due process clauses of the fourteenth amendment and the first amendment guarantee of free speech. A preliminary matter to be determined is whether the Plaintiff has the standing to assert the constitutional rights of its employees and patrons. As the City notes, the general rule is that “one to whom application of a statute is unconstitutional will not be heard to attack the statute on the ground that impliedly it might also be taken as applying to other persons or situations in which its application might be unconstitutional.” United States v. Raines, 362 U.S. 17, 21, 80 S.Ct. 519, 522, 4 L.Ed.2d 524 (1960). However, this general rule is not without exceptions, some of which the Court finds applicable to the case at bar. The Court will discuss the standing issue as it applies to the analysis of each of the Plaintiff’s individual constitutional claims.

A.

The Plaintiff’s equal protection argument focuses on the fact that under the ordinance employees in licensed establishments and employees in establishments not defined as licensed receive disparate treatment. The Plaintiff notes that employees in the former category are prohibited from certain kinds of conduct, such as mingling or soliciting, while employees of establishments not covered by the ordinance may engage in such conduct. The Plaintiff asserts that such disparate treatment denies its employees equal protection of the laws in violation of the fourteenth amendment.

Squarely at issue here is the City’s assertion that the Plaintiff lacks the standing to assert the constitutional rights of its employees. However, the Court finds the City’s position untenable for two reasons. First, the Plaintiff, a corporation, can act only by and through its employees. Thus, if the ordinance infringes the constitutional rights of the employees as they work, it is obvious that the Plaintiff has suffered the harm as well. Further, it is clear in the context of an equal protection challenge that the Plaintiff can assert the rights of its patrons because of the relationship between them. Craig v. Boren, 429 U.S. 190, 194, 97 S.Ct. 451, 455, 50 L.Ed.2d 397 (1976). A fortiori, the Plaintiff may assert the rights of its employees, as it stands in an even closer relationship to them than it does to its patrons. Thus, the Plaintiff has standing to assert its equal protection argument.

The most important component of any equal protection analysis is the determination of the appropriate level of scrutiny to be applied to the challenged enactment. Where the challenged enactment creates suspect classifications or denies a fundamental right, strict scrutiny, or close judicial scrutiny, is to be applied to the enactment. San Antonio School District v. Rodriguez, 411 U.S. 1, 17, 93 S.Ct. 1278, 1288, 36 L.Ed.2d 16 (1973); McDonald v. Board of Election Commissioners, 394 U.S. 802, 807, 89 S.Ct. 1404, 1407, 22 L.Ed.2d 739 (1969). See also Craig v. Boren, 429 U.S. 190, 204, 97 S.Ct. 451, 460, 50 L.Ed.2d 397 (1976); Frontiero v. Richardson, 411 U.S. 677, 682, 93 S.Ct. 1764, 1768, 36 L.Ed.2d 583 (1973); Shapiro v. Thompson, 394 U.S. 618, 634, 89 S.Ct. 1322, 1331, 22 L.Ed.2d 600 (1969). However, where neither of these justifications for strict scrutiny is present, only minimal scrutiny is applied to a challenged ordinance. See McGinnis v. Royster, 410 U.S. 263, 276-7, 93 S.Ct. 1055, 1062-3, 35 L.Ed.2d 282 (1973). As the solicitation ordinance in this case neither denies a fundamental right nor creates a suspect classification, the minimal scrutiny or “rational basis” approach is applicable to this case. Cf Richardson v. Belcher, 404 U.S. 78, 81, 92 S.Ct. 254, 257, 30 L.Ed.2d 231 (1971); Dandridge v. Williams, 397 U.S. 471, 487, 90 S.Ct. 1153, 1162, 25 L.Ed.2d 491 (1970); McDonald, 394 U.S. at 807-9, 89 S.Ct. at 1407-9. Thus, the appropriate inquiry in this case is “whether the challenged distinction furthers some legitimate, articulated [City] purpose.” McGinnis, 410 U.S. at 270, 93 S.Ct. at 1059. But see United States Railroad Retirement Board v. Fritz, 449 U.S. 166, 179, 101 S.Ct. 453, 461, 66 L.Ed.2d 368 (1980) (Purpose need not be articulated); McGowan v. Maryland, 366 U.S. 420, 426, 81 S.Ct. 1101, 1105, 6 L.Ed.2d 393 (1961) (“A statutory discrimination will not be set aside if any state of facts reasonably may be conceived to justify it.” [emphasis added]). The ordinance must be sustained if there exists an articulated rational basis for the distinction, as “[t]he constitutional safeguard [of equal protection] is offended only if the classification rests on grounds wholly irrelevant to the achievement of the [City’s] objective.” McGowan, 366 U.S. at 425, 81 S.Ct. at 1104.

It is clear that the City has a legitimate interest in curtailing “B girl” operations in establishments in Oklahoma City. The evidence presented at trial indicates that the operation promotes prostitution, extortion and fraud, and serves no useful purpose whatever. Thus, it is a legitimate goal of the City to eradicate such conduct. The issue in this case is therefore whether the distinction impliedly made by the ordinance furthers this interest of the City. There must be some rational basis for the distinction drawn by the ordinance.

The Court concludes that there is a rational basis for the distinction made by the ordinance, between employees of a licensed establishment and employees of establishments not covered by the ordinance. In promulgating the ordinance, the City attempted to identify the types of establishments in which “B girl” operations were likely to occur. The ordinance therefore implicitly distinguishes between licensed establishments and non-licensed establishments. Licensed establishments are those which either sell nonintoxicating beer or serve alcoholic drinks. Non-licensed establishments are those which do neither. The distinction is meaningful in curtailing “B girl” operations. The common denominator among establishments in which “B girl” operations flourish is that the establishments obtain their principal revenue from serving intoxicating drinks or selling nonintoxicating, but nonetheless alcoholic, beer. And the evidence presented at trial indicates that the operation does exist in many of the establishments that have been defined as licensed establishments under the ordinance. Further, the evidence presented at trial indicates that a typical “B girl” operation would have little likelihood of success in establishments not covered by the ordinance, as the usual “B girl” procedure is to solicit alcoholic drinks from a patron who is already indulging himself with such a drink. Thus, 'the City had ample reason to conclude that solicitation and mingling should be prohibited only in licensed establishments, as defined by the ordinance, because proscription of such conduct in other establishments would not further the purposes of the ordinance.

The City has thus articulated a substantial rational basis for distinguishing between the two classes of employees created by the ordinance. This distinction furthers the City’s legitimate interest in curbing the “B girl” operations. Accordingly, the Court concludes that the Plaintiff’s equal protection challenge to the solicitation ordinance must fail. Accord, Shevin v. Bocaccio, 379 So.2d 105, 107 (Fla.1979).

B..

The Plaintiff’s due process argument is that the ordinance is unconstitutionally vague. The Plaintiff contends that the ordinance proscribes certain classes of conduct but provides no clear guide for determining what conduct is legal and what conduct is illegal. In support of this argument the Plaintiff presents testimony that several employees have left employment for fear of being arrested for conduct that they are unaware is illegal.

It must first be noted that the City’s standing argument has no force in the context of this vagueness challenge. While it is true that the Plaintiff cannot assert the rights of its patrons, it is not for a lack of standing; rather, it is because the ordinance does not proscribe any conduct on the part of the patrons. Further, it seems clear that if the ordinance is vague, it is indeed vague as to both the Plaintiff and its employees, as the ordinance purports to proscribe the conduct of both. And as the Plaintiff can be held liable only through the acts of its employees, the Plaintiff is entitled to assert the vagueness of the ordinance on behalf of its employees. Thus, the Court concludes that a lack of standing is no bar to the Plaintiff’s due process claim.

Although the Plaintiff generally asserts that the entire ordinance is vague, the argument is essentially confined to the contention that subparagraph (e) of the ordinance is unconstitutionally vague. However, for purposes of the record, the Court concludes that subparagraphs (a) through (d) are not vague. Indeed, those provisions seem crystal clear to the Court. The ordinance carefully delineates who is subject to its provisions, and defines any terms likely to be misconstrued. Further, the ordinance clearly enumerates the acts which are prohibited thereunder. The first four provisions leave nothing to chance, and an employee can hardly be misled because- the ordinance lacks specificity. These initial provisions give “fair notice to those to whom [the ordinance] is directed,” and the first four provisions (a) through (d) are therefore not unconstitutionally vague. Grayned v. City of Rockford, 408 U.S. 104, 112, 92 S.Ct. 2294, 2301, 33 L.Ed.2d 222 (1972), quoting American Communications Association v. Douds, 339 U.S. 382, 412, 70 S.Ct. 674, 691, 94 L.Ed. 925 (1950).

The analysis becomes more complicated in light of the vagueness challenge to sub-paragraph (e), which prohibits licensees, owners, managers, employees, proprietors or agents, associates or representatives of a licensed establishment from permitting “any employee to mingle or fraternize with patrons of such licensed establishments.” [emphasis added]. The provision does, however, except from this proscription “communication between the patrons and the employee when the employee is performing the duties in furtherance of service of food and/or drinks.” The Plaintiff argues that the terms “mingle” and “fraternize” lack sufficient specificity to save the ordinance from unconstitutional vagueness.

It is clear that due process commands invalidation of a statute the provisions of which are not clearly defined. Grayned, 408 U.S. at 108, 92 S.Ct. at 2298. The constitutional vagueness rationale protects three particular interests: (1) a statute or ordinance must provide fair warning that gives a person of ordinary intelligence a reasonable opportunity to know what is prohibited; (2) a statute or ordinance must provide explicit standards for those who enforce the laws to prevent arbitrary and discriminatory enforcement; and, (3) a statute or ordinance must be particularly well defined where it impacts on first amendment rights. Grayned, 408 U.S. at 108-9, 92 S.Ct. at 2298-9.

The Plaintiff argues that subparagraph (e) infringes each of the Grayned interests in this case. The Plaintiff first contends that its employees cannot determine exactly what conduct is prohibited by the ordinance, and indeed one witness testified that she was unable to discern right from wrong under the ordinance. The Plaintiff also asserts that the ordinance, as currently written, will permit Oklahoma City policemen to enforce an ordinance in a discriminatory manner. The Plaintiff apparently feels that it will be victimized while other licensed establishments, such as country clubs, will not have to suffer enforcement. Finally, the Plaintiff argues that the prohibition against mingling and fraternizing regulates free speech and, as the first amendment is implicated, the ordinance must be particularly clear and narrowly drawn.

In determining whether a facially imprecise ordinance or statute is nevertheless sufficiently particular to avoid unconstitutional vagueness, the Court must look to three factors: (1) the meaning of the words used in the enactment itself; (2) the interpretation of the enactment given by the appropriate state courts; and, (3) the interpretation of the enactment given by those who must enforce it. Grayned, 408 U.S. at 110, 92 S.Ct. at 2300. See also Cole v. Richardson, 405 U.S. 676, 685-6, 92 S.Ct. 1332, 1337-8, 31 L.Ed.2d 593 (1972); Gooding v. Wilson, 405 U.S. 518, 520, 92 S.Ct. 1103, 1105, 31 L.Ed.2d 408 (1972); Coates v. Cincinnati, 402 U.S. 611, 614, 91 S.Ct. 1686, 1688, 29 L.Ed.2d 214 (1971). As the courts of Oklahoma have yet to construe the ordinance in question, the Court must look exclusively to the meaning of the words and the interpretation given by those who enforce the ordinance.

With respect to the latter factor, the evidence presented at trial indicates that in general Oklahoma City policemen are aware of the purpose of the ordinance and find the mingling provision limited by a requirement of solicitation in general and a “B girl” operation in particular. Because the potential for discriminatory enforcement exists despite this clear understanding, the Court declines to extend great deference to such an interpretation; nevertheless, it does indicate to some extent that the ordinance may be capable of being understood by ordinary persons.

Whatever the interpretation given by others, the root of the vagueness analysis must be in the words of the ordinance itself. Because the Court is satisfied that the words of the ordinance provide a clear exposition of what conduct is proscribed, the Plaintiffs vagueness argument must fail. See Grayned, 408 U.S. at 110, 92 S.Ct. at 2300 (“[W]e think it is clear what the ordinance as a whole prohibits.”).

It must first be noted that the terms “mingle” and “fraternize” must be read in context with subparagraphs (a) through (d), which clearly and unambiguously proscribe solicitation of drinks and other acts attendant to such solicitation. Such construction of facially imprecise terms in light of other closely related provisions is a proper exercise of interpretation. See Cole, 405 U.S. at 683-4, 92 S.Ct. at 1336-7. It seems obvious under this interpretation that mingling and fraternizing are prohibited only to the extent that such activity facilitates or actually involves the outlawed solicitation of drinks.

Further, contrary to the argument of the Plaintiff, the terms “mingle” and “fraternize” do have a precise meaning. To mingle is “to associate or unite, as things by interspersion or persons by ties of relationship; to join company.” City of New Orleans v. Kiefer, 246 La. 305, 164 So.2d 336, 339 (1964). See also People v. King, 115 Cal.App.2d Supp. 875, 252 P.2d 78, 80 (1952). To fraternize is “to associate or mingle as brothers or on fraternal terms.” See Webster’s New International Dictionary 903-4 (3d ed. 1966). Thus, the prohibition against mingling or fraternizing simply means that employees in licensed establishments are not permitted to join company with patrons. Accord Kiefer, 164 So.2d at 339; King, 252 P.2d at 80-1. This is sufficiently clear to apprise employees of what conduct is unlawful, and it is explicit enough to prevent discriminatory enforcement by City policemen. The Court therefore finds that subparagraph (e) is not unconstitutionally vague.

A reading of the entire solicitation ordinance makes quite clear what type of conduct the City is attempting to regulate. Accordingly, the Court concludes that the ordinance does not threaten to deny the Plaintiff or its employees due process of law by reason of vagueness.

C.

The Plaintiffs first amendment challenge to the solicitation ordinance is founded upon the assertion that the ordinance prohibits forms of speech protected by the first amendment. While it is perhaps arguable that the provisions prohibiting solicitation curtail only conduct, the Court is satisfied that the act of solicitation contemplates a sufficient speech component to subject the ordinance to first amendment scrutiny. Thus, the Court concludes that the ordinance must not unduly burden the Plaintiffs first amendment rights if it is to withstand constitutional challenge.

The Court is again faced with the City’s contention that the Plaintiff lacks standing to assert the constitutional right of its employees and patrons. The Plaintiff argues that the first amendment doctrine of facial overbreadth permits the Plaintiff to assert such rights. With this general proposition the Court agrees. E.g., Young v. American Mini Theaters, 427 U.S. 50, 59-60, 96 S.Ct. 2440, 2446-47, 49 L.Ed.2d 310 (1976), reh. denied 429 U.S. 873, 97 S.Ct. 191, 50 L.Ed.2d 155 (1976); Broadrick v. Oklahoma, 413 U.S. 601, 611-4, 93 S.Ct. 2908, 2915-7, 37 L.Ed.2d 830 (1973). However, as the City notes, facial overbreadth has no application in the context of commercial speech. Ohralik v. Ohio State Bar Association, 436 U.S. 447, 462 n. 20, 98 S.Ct. 1912, 1922 n. 20, 56 L.Ed.2d 444 (1978); Bates v. State Bar of Arizona, 433 U.S. 350, 380, 97 S.Ct. 2691, 2707, 53 L.Ed.2d 810 (1977); Olitsky v. O’Malley, 597 F.2d 295, 303 (1st Cir.1979). See also Friedman v. Rogers, 440 U.S. 1, 10 n. 9, 99 S.Ct. 887, 894 n. 9, 59 L.Ed.2d 100 (1979). This is so because “[t]he Constitution ... accords a lesser protection to commercial speech than to other constitutionally guaranteed expression.” Central Hudson Gas v. Public Service Commission, 447 U.S. 557, 562-3, 100 S.Ct. 2343, 2349-50, 65 L.Ed.2d 341 (1980), citing Ohralik, 436 U.S. at 456-7, 98 S.Ct. at 1918-9. Thus, while the Plaintiff is entitled to assert the first amendment rights of its employees because it can speak only through its employees, the Plaintiffs ability to assert the first amendment rights of its patrons depends upon whether the ordinance proscribes commercial speech, or “other constitutionally guaranteed expression.”

Commercial speech is defined as that which does “no more than propose a commercial transaction.” Pittsburgh Press Co. v. Human Relations Commission, 413 U.S. 376, 385, 93 S.Ct. 2553, 2558, 37 L.Ed.2d 669 (1973). See also Friedman v. Rogers, 440 U.S. at 10 n. 9, 99 S.Ct. at 894 n. 9. While the Court is satisfied that the provisions proscribing solicitation thus regulate commercial speech, it is clear that subparagraph (e) may well limit noncommercial, protected speech. The Court will therefore give subparagraph (e) separate analysis after considering the first amendment challenge to the solicitation provisions.

In Central Hudson Gas, the Supreme Court prescribed the four part test by which to measure attempted regulation of commercial speech: (1) the commercial speech must be protected by the first amendment in the sense that it is neither false nor misleading, and that it concerns lawful activity; (2) the governmental interest protected by the ordinance must be substantial; (3) the regulation must directly advance the governmental interest asserted; and, (4) the regulation must not be more extensive than is necessary to serve that interest. 447 U.S. at 566, 100 S.Ct. at 2351. Thus, the solicitation provisions of the City ordinance must be measured against these requirements.

The Court concludes that the solicitation ordinance passes this test. First, while there is evidence to suggest that the solicitation contemplated by the ordinance is misleading and concerns unlawful activity, the Court is satisfied that some acts of solicitation of drinks neither mislead the patron nor concern unlawful conduct. Second, as the Court has noted above, the City has a substantial interest in curtailing “B girl” operations, which is the express purpose of the ordinance. Third, as has also been noted above, prohibiting solicitation of drinks by employees directly furthers the City’s interest in curtailing “B girl” operations. Finally, the Court finds that the ordinance does not exceed the limits necessary to curtail “B girl” operations. Indeed, the Court is at a loss to explain how the City could prevent the operation without criminalizing the solicitation of drinks. Thus, the Court is satisfied that the solicitation provisions of the ordinance, subparagraphs (a) through (d), do not impermissibly burden first amendment rights.

With respect to the solicitation provisions of the ordinance, the Plaintiff offers one last challenge focusing on subparagraph (b), which prohibits the serving “to any employee any alcoholic or non-alcoholic beverage which was purchased by any patron.” The Plaintiff asserts that this provision is overbroad in that it prohibits a patron from voluntarily purchasing a drink for an employee if he chooses on his own to do so. The Plaintiff here makes not the first amendment facial overbreadth challenge, which the Court has already found inapplicable to subparagraphs (a) through (d), but instead the overbreadth challenge that the ordinance proscribes conduct in a way that does not further the City’s interest in curtailing “B girl” operations. See Ohralik, 436 U.S. at 462 n. 20, 98 S.Ct. at 1922 n. 20. Thus, the Plaintiff essentially argues that subparagraph (b) fails to meet the third and fourth elements of the Central Hudson Gas test. Assuming arguendo that the Plaintiff has standing to make such an assertion, cf. Gooding v. Wilson, 405 U.S. 518, 521, 92 S.Ct. 1103, 1105, 31 L.Ed.2d 408 (1972), the Court finds it without merit because subparagraph (b) does not prohibit the patrons of the Plaintiff from voluntarily purchasing a drink for an employee at the patron’s election. As has been noted above, the provisions of the ordinance must be read as an organic whole rather than as individual subparagraphs. Cf. Cole v. Richardson, 397 U.S. 238, 240, 90 S.Ct. 1099, 1100, 25 L.Ed.2d 275 (1970) (Harlan, J. concurring) (“[A]lmost any word or phrase may be rendered vague or ambiguous by dissection with a semantic scalpel.”) Viewed in this context, subparagraph (b) prevents serving a drink purchased by a patron to an employee only if the drink has been solicited by an employee. This interpretation is borne out by the testimony of a City police officer, who testified that he would not consider it a violation of the ordinance for a patron to purchase a beer, for example, for the bartender. While the officer’s understanding of the ordinance is not controlling, it does suggest that any possible over-breadth is cured by construction of the ordinance given by those who will enforce it. Thus, the Court concludes that the ordinance does not prohibit voluntary purchases of drinks by patrons for employees, in the absence of a solicitation by an employee. Accord, City of Miami v. Kayfetz, 92 So.2d 798, 803 (Fla.1957).

The last provision of the solicitation ordinance, subparagraph (e), must meet a more stringent first amendment test than do the first four subparagraphs. Nevertheless, the Plaintiff is not entitled to the full blown facial overbreadth challenge to the ordinance, as such a challenge is reserved for regulations of pure protected speech. Rather, the Plaintiff is entitled to challenge the ordinance’s last provision only as a regulation of a combination of conduct and protected speech. See Broadrick, 413 U.S. at 615, 93 S.Ct. at 2917 (Distinguishing between pure speech and the combination of speech and conduct). Thus, subparagraph (e) must be evaluated in light of the test prescribed by United States v. O’Brien, 391 U.S. 367, 88 S.Ct. 1673, 20 L.Ed.2d 672 (1968), which has the following requirements: (1) that the regulation be within the governmental agency’s power to promulgate; (2) that the regulation furthers an important or substantial governmental interest; (3) that the governmental interest is unrelated to the suppression of free expression; and, (4) that the restriction on first amendment rights is no greater than is necessary to further that interest. 391 U.S. at 377, 88 S.Ct. at 1679.

The Court is satisfied that subparagraph (e) meets the O’Brien standard. First, as has been noted, it is well within the City’s power to promulgate this ordinance. Second, as the Court has noted twice before, the ordinance in general and subparagraph (e) in particular advance the substantial governmental interest in curtailing “B girl” operations. Third, it is quite clear that regulation of “B girl” activity is wholly unrelated to the suppression of free expression. The ordinance does not purport to prohibit speech in general, but only such speech as is incident to solicitation or mingling, speech forms which promote “B girl” operations. Fourth, the Court finds that the incidental restrictions on first amendment rights are no greater than are necessary to advance the City’s interest. The evidence presented at trial indicate that the ordinance would be virtually useless if it did not include the prohibition against mingling and fraternizing. This is so because “B girl” operations flourish only where the employees are permitted to join company or “mingle” with the patrons. And, contrary to the assertions of the Plaintiff, subparagraph (e) does not prohibit the exchange of pleasantries or even light conversation with patrons, as the employees are prohibited from doing so only in the context of mingling or fraternizing. This interpretation of subparagraph (e) is borne out by the testimony of a City police officer, who testified that he did not consider it a violation of the ordinance for an employee to engage in conversation with a patron. As has been noted before, the interpretation given by the City police officer is not controlling, but it does indicate that a reasonable reading of the ordinance by persons of ordinary intelligence does not reveal that it is over-broad. And subparagraph (e) itself provides that no speech is prohibited by the ordinance so long as the employee is “performing the duties in the furtherance of service of food and/or drinks.” It is thus quite clear that the ordinance is narrowly enough drawn to proscribe only such speech as is necessary to curtail “B girl” operations. As in the case of subparagraphs (a) through (d), the Court concludes that subparagraph (e) complies with the requirements of the first amendment.

IV.

In summary, it is the opinion of the Court that the City’s solicitation ordinance contravenes neither Oklahoma statutory law nor the United States Constitution. The City is therefore entitled to prevail on the Plaintiff’s claim for declaratory and injunctive relief. Accordingly, judgment will be entered in favor of the City of Oklahoma City in this action.

      . The Plaintiff originally challenged Ordinance No. 17,293 as well. This ordinance prohibits nude dancing in private clubs such as the Plaintiff. However, as the Pretrial Order indicates, the Plaintiff has abandoned its challenge to the nude dancing ordinance. Only the solicitation ordinance mentioned in this Memorandum Opinion was at issue in the bench trial.

      . It should be noted that the Oklahoma authorities provide little guidance as to whether the instant fact situation establishes an impermissible regulation of the sale of, or licensing to sell, nonintoxicating beers. The cases on record deal with restrictions as to business locations, 7-Eleven, 422 P.2d at 456; Allison, 230 P.2d at 707-8; Gammel, 208 P.2d at 966; Cunningham, 556 P.2d at 1079, or with restrictions as to the permissible hours of operation. Higgs, 263 P.2d at 761; Pappe, 201 P.2d at 262. No case deals with the question whether regulation of specific conduct within the establishment is also a regulation of the sale of nonintoxicating beer.

      . It is interesting to note that the ordinances stricken down by various Oklahoma courts generally have stigmatized a tavern or the sale of beer in general as injurious to public welfare or morals. Thus, ordinances designed to prevent taverns from locating near a school, presumably to protect young impressionable persons from the damaging influences of such establishments, have been invalidated as conflicting with State law. See 7-Eleven, 422 P.2d at 456; Allison, 230 P.2d at 707-8; Cunningham, 556 P.2d at 1079. Likewise, ordinances reflecting a perceived antipathy between religious observance and the sale of beer have been stricken. See 7-Eleven, 422 P.2d at 456; Higgs, 263 P.2d at 761; Pappe, 201 P.2d at 262. In contrast, the ordinance in this case is truly neutral with respect to the moral worth of the establishments themselves. The ordinance does not attempt to stigmatize the sale of beer or to keep establishments selling beer out of the view of persons of tender sensibilities. The ordinance simply criminalizes certain conduct which appears to be unique to such establishments. Even Gammel is inapposite to this case, as the ordinance in Gammel seems to assume the fact that illegal conduct will occur inside an establishment which sells beer. 208 P.2d at 966-7. This ordinance purports to regulate the proscribed conduct where it exists, but does not assume that it will exist in taverns.

      . To the extent that the ordinance proscribes only conduct, the right to mingle and solicit drinks can hardly be described as a fundamental right. To the extent that the ordinance discriminatorily burdens the first amendment right to free speech, see Police Department v. Mosley, 408 U.S. 92, 101-2, 92 S.Ct. 2286, 2293-4, 33 L.Ed.2d 212 (1972), it proscribes only commercial speech, which is entitled to substantially less protection than other forms of speech. See infra at 893. Thus, while the right of free speech is a fundamental right, the subordinate right to speak commercially is not. Cf. McDonald v. Board of Election Commissioners, 394 U.S. 802, 807-09, 89 S.Ct. 1404, 1407-09, 22 L.Ed.2d 739 (1969) (First Amendment right to vote is fundamental, but subordinate right to absentee ballot is not).

      . When asked to enlighten the Court as to the magic of alcohol in the typical "B girl” operation, one City police officer simply asserted that a solicitation, founded upon an implied promise of sexual favors, would have little likelihood of success in the context of items other than alcoholic drinks. To paraphrase the officer’s testimony, the solicitation loses much of its effect when an employee asks a patron to buy for the employee a five hundred dollar hot dog.

      . The terms "mingle” and "fraternize” also provide the basis for the Plaintiffs first amendment facial overbreadth challenge to the ordinance. See infra at 594.

      . As the Court intends to address the first amendment issues below, the Court will at this point consider only whether the ordinance as written has a sufficiently particular meaning to avoid unconstitutional vagueness. However, the Court bears in mind that the existence of first amendment issues colors this analysis with the expectation of a somewhat higher standard of specificity than is normally required.

      . There is perhaps little reason to belabor the standing issue in the first amendment analysis of the first four subparagraphs of the ordinance. It is highly unlikely that these provisions prevent any speech by a patron, as they merely prevent solicitation and related activities by employees. Thus, the Plaintiff's inability to assert the rights of its patrons stems from the fact that no rights are infringed rather than a lack of standing. See supra at 590. However, the distinction between commercial speech and fully protected speech is relevant to the test to be applied to the regulation. See infra at 593, 594.

      . The evidence presented at trial indicates that the solicitations are often made upon the implied promise of sexual favors. Such promises may well prove to be misleading but assuming arguendo that they do not, they promote the illegal activity of prostitution. Further, the evidence indicates that the patron is often misled in that he anticipates that the drinks he purchases for an employee will be sold at regular price, when in fact, as the patron later discovers, he is charged an exorbitant price for the drinks.

      . Further, the regulation is not excessive in that it unduly burdens the free speech rights of the Plaintiffs patrons. See infra at 594-595. This conclusion disposes of the Plaintiffs first amendment challenge to the first four subparagraphs on behalf of its patrons, assuming arguendo that the first four subparagraphs curtail any speech by the Plaintiffs patrons. See supra at 593 n. 8.


author: GESELL, District Judge.

text:
    GENERAL RAILWAY SIGNAL CO., Plaintiff, v. WASHINGTON METROPOLITAN AREA TRANSIT AUTHORITY, Defendant.
    Civ. A. No. 84-1717.
    United States District Court, District of Columbia.
    Nov. 14, 1984.

      Paul L. Waldron, Washington, D.C., for plaintiff.
    Robert J. Sciaroni, William B. Bireher, Robert L. Polk, WMATA, Washington, D.C., for defendant.
   MEMORANDUM

GESELL, District Judge.

General Railway Signal Co. (“GRS”) and Washington Metropolitan Area Transit Authority (“WMATA”) entered into a lump-sum contract covering three phases of the Metro subway project. This is a dispute over the proper amount to be deducted as an equitable adjustment for a change of work eliminating a specific portion of the work covered by the contract. By cross-motions for summary judgment, which have been fully argued, the Court is asked to review the final decision of WMATA’s general manager adopting the majority opinion and rejecting the minority decision of the Army Corps of Engineers Board of Contract Appeals dated December 30,1983, which fixed the credit due WMATA at $1,403,325.

The standard for review in this situation is not in dispute. It is derived from the Wunderlich Act, 41 U.S.C. § 321 et seq. The Board’s decision is final and conclusive unless (1) it is erroneous as a matter of law or (2) it is based on findings of fact which are fraudulent, capricious, arbitrary, so grossly erroneous as necessarily to imply bad faith or not supported by substantial evidence on the record as a whole. GRS contends that the Board’s decision is not supported by substantial evidence and is based on a misapplication of the appropriate legal standard.

A detailed review of the facts established in the extensive administrative record on file with the Court is unnecessary to resolve this dispute. The basic background facts are not essentially contested and are fully covered in the Board’s comprehensive findings of fact. It is necessary only to focus here on the nature of the work change and the facts relied on by the Board in reaching the disputed equitable adjustment.

GRS’s contract required, among other things, the installation of certain wayside equipment for the WMATA automatic train control system and the cables connecting this equipment to the train control room. As originally envisioned under the lump sum contract awarded to GRS, the cables were to be installed by the direct burial method along the right-of-way where the WMATA tracks were at-grade. Direct burial of cable involved excavation of the trench, placement of a stand cushion before running the electrical cable, backfilling and compacting, followed by removal of any excess backfill displaced by the sand and cables. Before any of this work was performed WMATA decided it would provide duct banks for the cable and eliminate the trench work entirely. A price for the new method was negotiated and fixed by agreement. The amount is not in controversy. The work has been performed by the same subcontractor to which GRS had subcontracted the trench work as well as many other electrical aspects of the contract.

This dispute therefore concerns only the amount the original contract price should be reduced by reason of the deleted trench work. This work was part of a large subcontract awarded by GRS which covered almost one-half of GRS’s entire contract undertaken for a fixed price lump sum of $42,074,675.30. The subcontractor bid and had also been given a lump sum for its work. When GRS was preparing a unit price schedule as required by WMATA’s bid invitation, it asked the subcontractor for a line-item breakdown of its costs. The subcontractor provided such a breakdown, but it was not incorporated into the subcontract. The trenching items for the three phases of the WMATA project totaled $1,336,500. GRS used the same trenching line-item figures in its unit price schedule.

The Board of Contract Appeals, by a 2-1 decision, adopted this $1,336,500 figure as conclusive proof of the reasonable cost to GRS of performing the deleted work. It added $66,825 to cover GRS’s reasonable profit on the deleted work, resulting in the $1,403,325 credit to WMATA.

GRS sharply challenges the majority Board’s use of these line items as a measure of the true cost of the deleted work. It contends that the actual cost of performing the work had it been performed should be used rather than arbitrary unit price figures. WMATA’s own estimates of the actual cost were $652,742, $646,985 and $566,000. GRS had lower estimates.

It is clear that the subcontractor was not bound to perform the work or GRS to pay for the work at the line-item figures. These figures were simply an allocation required by WMATA for administrative purposes from successful bidders under lump-sum contracts. In this instance, the unit price schedule was not used even to schedule progress payments. The figures provided were based on $5 per linear foot, an amount that could not be supported at the hearing and that was obviously merely a loose estimate. The use of any line-item figure of this kind has little value in establishing cost for purposes of equitable adjustment for a reduction-of-work situation. The undisputed wide gap between the estimated actual cost for performing the work and the dubious inference the majority drew from the line items as to actual or reasonable cost of performance fully demonstrates the unreliability of the unit price schedule on which the Board rested its conclusions as to cost. The majority departed from any conclusion that could have been made on the record by a reasonable person and gave a windfall to WMATA.

There were no fixed agreed prices for portions of the work covered by the lump-sum contract. Absent such fixed agreed prices, the proper measure of an equitable adjustment in a reduction-of-work case like this is the reasonable cost of performing the work. See, e.g., Gregory and Reilly Associates, Inc., 65-2 B.C.A. 11 4918 at 23,253 (1965); Bruce Construction Corp. v. United States, 324 F.2d 516, 518, 163 Ct.Cl. 97 (1963). The presumption is that reasonable cost is determined by a contractor’s actual costs, see Nager Electric Co. v. United States, 442 F.2d 936, 951,194 Ct.Cl. 835 (1971), and therefore bid pricing calculations, while useful in some instances in showing a contractor’s own pre-dispute estimate of actual cost, cannot be relied on when they vary widely, as they do here, from the only estimates of actual cost in evidence. That actual cost is the presumptive basis for measurement is not in dispute. The Board erred in concluding that the subcontract established a fixed price to GRS for the deleted line items. On the contrary, it is clear that the subcontract, just as GRS’s contract with WMATA, was a lump-sum contract. The line-item allocation submitted by the subcontractor to GRS was presented after the subcontract was made and the subcontract was not amended to reflect it. Accordingly, there was no contract binding GRS to pay a set amount for the deleted work.

Therefore, the Court concludes that the Board majority’s finding of cost is not supported by substantial evidence. Moreover, the majority erred as a matter of law in placing the burden on plaintiff to prove the unreasonableness of the line items as a measure of cost — something they were never intended to be in the first place. See Victory Construction Co. v. United States, 510 F.2d 1379, 1385, 206 Ct.Cl. 274 (1975).

The decision of the Board is reversed and the case is remanded with direction to determine a reasonable cost estimate within 90 days, plus interest as provided by law.

      . By the time this dispute came before the Board many years after the contract and subcontract were entered into in 1971, the subcontractor’s work papers used in arriving at the breakdown figures had been destroyed in regular course, and the amount that would have been incurred for performing the deleted work was not readily ascertainable.

      . The courts accordingly have rejected reliance on bid prices when they do not reflect actual costs. E.g., S.N. Nielsen Co. v. United States, 141 Ct.Cl. 793 (1958).