author: BARRINGTON D. PARKER, District Judge:

text:
    RANDOLPH-SHEPPARD VENDORS OF AMERICA, et al., Plaintiffs, v. Caspar W. WEINBERGER, et al., Defendants. NATIONAL COUNCIL OF STATE AGENCIES FOR THE BLIND, et al., Plaintiffs, v. Caspar W. WEINBERGER, et al., Defendants.
    Civ. A. Nos. 84-3211, 84-3489.
    United States District Court, District of Columbia.
    Jan. 7, 1985.

      Robert R. Humphreys, Humphreys & Mitchell, Washington, D.C., for plaintiffs.
    Rebecca L. Ross, Asst. U.S. Atty., Washington, D.C., for defendants.
    Stephen N. Shulman, Cadwalader, Wickersham & Taft, Washington, D.C., for intervenor.
   MEMORANDUM OPINION

BARRINGTON D. PARKER, District Judge:

In this consolidated litigation, representatives of several blind vendor groups and interested individuals challenge two procurements awarded by the Secretary of Defense on the grounds that they violate the provisions of the Randolph-Sheppard Act (“Act”), 20 U.S.C. § 107 et seq. The Act authorizes licensed blind persons to operate vending facilities on any Federal property and was enacted for the “purposes of providing blind persons with remunerative employment, enlarging the economic opportunities of the blind, and stimulating the blind to greater efforts in striving to make themselves self-supporting.” Id., § 107(a).

The procurement awards authorized the construction and operation of fast-food facilities on military bases by McDonald’s Corporation (“McDonald’s”) and Burger King Corporation (“Burger King”). In Randolph Sheppard Vendors of America v. Weinberger, C.A. No. 84-3211, the plaintiffs challenge the award of a Navy contract to McDonald’s. National Council of State Agencies v. Weinberger, C.A. No. 84-3489, presents a challenge to a contract award by the Army and Air Force to Burger King. The two proceedings were consolidated as related cases involving the same statute and presenting similar factual and legal issues. In each proceeding, the plaintiffs request declaratory and injunctive relief, which if granted, would result in the termination of the two contracts. McDonald’s was granted leave to participate as a defendant-intervenor in C.A. No. 84-3211 on December 17, 1984.

The plaintiffs in both actions are the National Council of State Agencies for the Blind (“National Council”), the Randolph-Sheppard Vendors of America (“Randolph-Sheppard Vendors”) and its president, Paul Verner, the Blinded Veterans Association, Inc. (“Blinded Veterans”), the Association for the Education and Rehabilitation of the Blind and Visually Impaired (“Association”), the American Council of the Blind (“American Council”), the Affiliated Leadership League of and for the Blind of America (“Affiliated Leadership League”), and Senator Jennings Randolph, the chief sponsor of the Act and its amendments.

On December 19, 1984, the Court heard argument in the Randolph-Sheppard Vendors of America proceeding on the motions to dismiss filed by the government and McDonald’s, and the plaintiffs’ motion for a preliminary injunction. It was agreed among the parties that the arguments advanced would apply equally to the National Council of State Agencies proceeding in which similar motions were pending. At the conclusion of the hearing, the parties stipulated that on basis of the argument, memoranda of points and authorities, affidavits and exhibits, it was appropriate for the Court to consider and resolve the merits of the two proceedings. The government also agreed to halt ongoing construction on the majority of the fast-food facilities authorized under the contract awards until January 4, 1985, by which time a final ruling on the merits would be rendered by the Court.

The issues in this case require resolution of threshold jurisdictional questions of standing and the availability of administrative remedies, as well as the ultimate issue of whether the procurement decisions of Secretary Weinberger violated the Randolph-Sheppard Act.

With respect to the question of jurisdiction, the Court finds that all but four of the plaintiffs have standing to litigate these issues. The Court also determines that the plaintiffs were not required to exhaust their administrative remedies under the particular circumstances of this case. While the Defense Department’s apparent insensitivity to the plight of the blind vendors is deplored and there remain troublesome and vexing questions as to whether or not the Department has complied with the spirit of the law, the Court finds that the procurements complied with the minimum requirements of the letter of the Randolph-Sheppard Act.

THE BLIND VENDORS PROGRAM

Before addressing the central issues presented by the parties, a brief description of the operation of the blind vendors program and a summary of the undisputed material facts is warranted. In a Stipulation of Facts, filed January 2, 1985, the parties agreed to many of the relevant facts.

The Randolph-Sheppard Act was first enacted in 1936, and amended in 1954 and 1974. The Act was designed to provide employment opportunities to licensed blind persons and to give preference to blind operators of vending stands on federal property. S.Rep. No. 937, 93d Cong., 2d Sess. 4 (1974) (“Senate Report”). Congress believed that

the property of the Federal government should be more fully and freely utilized in expanding the vending stand program for the blind, and that no department or agency should be permitted to refuse suitable stand locations to this blind program except where such stand would clearly conflict with the proper functioning of the department or agency.

Id. at 7.

This program is run under the auspices of state agencies for the blind, which are designated by the Secretary of Education. The state agencies bear a substantial responsibility for administering the blind vendor program. They seek permits for the establishment of vending facilities on federal property, 34 C.F.R. § 395.16, 395.35, and issue operating licenses to blind vendors. 20 U.S.C. § 107a(a)5; 34 C.F.R. § 395.7(b). These vending facilities include “automatic vending machines, cafeterias, snack bars, cart services, shelters, counters, and such other appropriate auxiliary equipment” for the sale of a wide variety of items, 20 U.S.C. § 107e(7), including “newspapers, periodicals, confections, tobacco products, foods, beverages, and other articles or services dispensed automatically or manually.” Id., § 107a(a)(5).

In addition, state licensing agencies may request arbitration of any dispute with the federal government concerning compliance with the Act. Specifically,

[wjhenever any State licensing agency determines that any department, agency, or instrumentality of the United States that has control of the maintenance, operation, and protection of Federal property is failing to comply with the provisions of this Act [20 U.S.C. §§ 107 et seq.] or any regulations issued thereunder (including a limitation of the placement or operation of a vending facility as described in section 1(b) of this Act [20 U.S.C. § 107(b) ] and the Secretary’s determination thereon) such licensing agency may file a complaint with the Secretary who shall convene a panel to arbitrate the dispute pursuant to section 6 of this Act [20 U.S.C. § 107d-2] and the decision of such panel shall be final and binding on the parties except as otherwise provided in this Act [20 U.S.C. § 107(b)].

20 U.S.C. § 107d-l(b).

FACTUAL BACKGROUND

On April 2,1984, the Army and Air Force Exchange Service (“AAFES”) issued a solicitation for proposals to establish an exclusive franchise agreement for AAFES to operate fast-food hamburger facilities at selected Army and Air Force installations nationwide. The contract was awarded to Burger King on May 15, 1984. Under the contract, AAFES will manage the franchise operation directly, using its own supplies, equipment and personnel. The contract is designed to phase in as many as 185 franchise facilities during the next five years, and provides for the construction of a maximum of 24 franchise sites during 1985.

On June 5, 1984, the Navy Resale and Services Support Office (“NAVRESSO”) requested proposals for procurement of fast-food hamburger operations to be located at Naval installations throughout the United States and overseas. Proposals were solicited from offerors who were “nationally recognized fast-food hamburger organizations.” McDonald’s was awarded a contract on August 7, 1984 for the construction and operation of a minimum of forty and a maximum of 300 hundred restaurants. Sixty-four restaurants are currently targeted for construction in sixteen states, Puerto Rico, Guam and in several foreign countries. Construction has already begun on at least four of these facilities.

The Department of Defense became aware of the plaintiffs’ concerns about the two procurements as early as June of 1984. At that time, Senator Randolph wrote Secretary of Defense Weinberger, expressing his concern that the fast food operations of the military exchange services violated the Act. Ex. A. In a response dated July 30, 1984, Secretary Weinberger indicated that the Department of Defense “claimed no exemption from the Randolph-Sheppard Act in conjunction with providing nationally known fast-food service. To the contrary, we would be pleased to have the participation of the state blind licensing agencies.” Ex. B. Secretary Weinberger did not explicitly address Senator Randolph’s concern that the procurement request violated the Act by failing to provide adequate opportunities for blind vendors.

Shortly thereafter, the Department of Education also relayed its concerns about the procurements to the Department of Defense. Theodore Bell, the Secretary of Education, wrote Secretary Weinberger to request his analysis of the legality of the fast-food procurements under the Act. Ex. L. He noted that

[s] ince blind vendors licensed under the Randolph-Sheppard program cannot now meet this multi-state requirement [of providing fast food facilities in at least several states], they were precluded from responding to the Request for Proposals (RFP). I am concerned that, as a result, the RFPs may have failed to afford blind vendors an opportunity to be considered for the priority envisioned for them in the Act. I am also concerned that the multi-state requirements [] may constitute a limitation on the placement or operation of a Randolph-Sheppard facility that, under 20 U.S.C. § 107(b), must be cleared in advance by the Secretary of Education. It is my understanding that those requirements were not submitted for clearance.

The record does not indicate that Secretary Weinberger responded to this request.

In a recent September 13, 1984, response to a Freedom of Information Act request initiated by one of the plaintiffs, the American Council of the Blind, George Conn, the Commissioner of the Rehabilitation Services Administration, expressed views similar to Secretary Bell’s:

[t] he Department has taken the position that the issuance of a request for proposal by a Federal entity which restricts applications only to fast-food concerns capable of operating in numerous States appears to impose a limitation on the placement of Randolph-Sheppard vending facilities. Under Section 107(b) of the Randolph-Sheppard Act such limitation may be imposed by a Federal entity only if justification has been provided to the Secretary of the Department of Education and the Secretary has determined that it would be adverse to the interests of the United States to deny the limitation.

Ex. I. It is undisputed that the Department of Defense has not submitted the two procurements to the Secretary of Education for approval. See 20 U.S.C. § 107(b).

During this same time period, the House Appropriations Committee also discussed the applicability of the Randolph-Sheppard Act to the McDonald’s contract. In a September 26, 1984 report dealing with the 1985 Department of Defense Appropriations bill, the Committee stated:

Information provided to the Committee indicates that the methods used by the Department in contracting for [the McDonald’s] food service operation circumvented, if not the letter of the law, at least the spirit of the law.
The Committee directs that the Department of Defense review its policies concerning contracting out for food service operations to determine if those policies comply with the Randolph-Sheppard Act. In addition, the Department should determine if every opportunity was given to the state licensing agents who represent blind vendors to bid for these contracts. A report addressing these issues should be provided to the Committee by March 1, 1985.

H.Rep. No. 1086, 98th Cong., 2d Sess. 24 (1984) (“House Report”).

Several of the plaintiffs filed a protest against the McDonald’s contract with the General Accounting Office (“GAO”). The protest was dismissed on September 6, 1984 because the GAO lacked jurisdiction over a bid protest concerning a nonappropriated fund activity. Ex. H. The consolidated complaints now under consideration were then filed: Randolph-Sheppard Vendors of America-on October 18, 1984 and National Council of State Agencies for the Blind-on November 16, 1984. The plaintiffs have not pursued the arbitration procedures outlined in sections 107d-l and 107 d-2 of the Act and the accompanying regulations at 34 C.F.R. § 395.37.

LEGAL ANALYSIS A. STANDING

A challenge to the award of a federal contract is subject to judicial review under the Administrative Procedure Act (“APA”), 5 U.S.C. § 706(2)(A). Gull Airborne Instruments, Inc. v. Weinberger, 694 F.2d 838, 841 n. 2 (D.C.Cir.1982). Under the APA, any “person suffering legal wrong ... or adversely affected or aggrieved by agency action within the meaning of a relevant statute” has standing to obtain review of the administrative action. 5 U.S.C. § 702. Under this standard, a plaintiff must at a minimum “demonstrate that the challenged acts have harmed him or that he personally would benefit in some tangible manner from the court’s intervention in the controversy.” Public Citizen v. Lockheed Aircraft Corp., 565 F.2d 708, 714 (D.C.Cir.1977). A plaintiff must proffer facts in support of his allegations of harm if these allegations are controverted by the defendants. Id. at n. 22. Here, the plaintiffs’ allegations of harm are set forth in their Motions for Preliminary and Permanent Injunction (“Plaintiffs’ Motion”), filed Nov. 19, 1984 (84-3211) and Nov. 30, 1984 (84-3489), their Response to the Government’s Motion to Dismiss and DefendantIntervenor’s Motion to Dismiss (“Plaintiffs’ Response”), filed Dec. 18, 1984, and several affidavits.

The plaintiffs in this action fall into two categories for purposes of determining the question of standing: individual plaintiffs and associational plaintiffs. The individual plaintiffs are Senator Jennings Randolph, the sponsor of the Act, and Paul Verner, in his capacity as a licensed blind vendor. Mr. Verner also brings suit in his capacity as President of the Randolph-Sheppard Vendors. The associational plaintiffs are the National Council, the Randolph-Sheppard Vendors, the Blinded Veterans, the Association, the American Council, and the Affiliated Leadership League. Although the Court finds that the individual plaintiffs, the Association, and the Affiliated Leadership League do not have standing to challenge these contracts, the remaining plaintiffs are properly before the Court. The findings with respect to the individual plaintiffs and the associational plaintiffs are discussed in turn.

Individual Plaintiffs

Senator Randolph asserts that his special status as the sponsor of the Act and his lifelong advocacy of programs and services for the blind and the visually impaired entitles him to challenge these actions. In short, he claims standing on the basis of his membership in the Senate.

A legislator, however, lacks standing in the absence of an allegation of a specific injury to his statutory or constitutional rights. See, e.g., Moore v. United States House of Representatives, 733 F.2d 946, 951 (D.C.Cir.1984) (alleged violation of constitutional requirement that all revenue bills originate in the House); American Federation of Government Employees, AFL-CIO v. Pierce, 697 F.2d 303, 305 (D.C. Cir.1982) (per curiam) (alleged deprivation of specific statutory right as member of appropriations committee to approve reorganization of the Department of Housing and Urban Development). As this Circuit cautioned in Harrington v. Bush, 553 F.2d 190, 214 (D.C.Cir.1977):

To accept [generalized concerns of Congressional interest as] grounds for standing would in effect allow any Congressional suit to challenge executive action, and an individual legislator would have a roving commission to obtain judicial relief under most circumstances. This would lead inevitably to the intrusion of the courts into the proper affairs of the coequal branches of government (emphasis added).

Although Senator Randolph’s authorship of the Act and his intervention in the subject matter of this litigation are noteworthy and deserving of praise, they merely establish an interest in the proper execution of the law. This interest amounts to a generalized grievance which is too intangible to confer standing. American Federation of Government Employees, 697 F.2d at 305.

Paul Verner has alleged that he is a licensed blind vendor who operates a cafeteria in Tampa, Florida (Plaintiffs’ Motion at 14); however, he has not advanced any facts in support of his claim that he faces potential injury from “the overall negative effect upon the Randolph-Sheppard program as well as the loss of specific employment opportunities.” Plaintiff’s Response at 4. He does not allege that he desires to run a fast-food operation in Tampa, nor does he describe how his cafeteria business would be harmed by the construction of a McDonald’s or a Burger King. In the absence of such allegations, Mr. Verner cannot show harm stemming from the procurements.

Associational Plaintiffs

The question of the standing of the associational plaintiffs — the National Council, the Randolph-Sheppard Vendors, the Blinded Veterans, the Association, the American Council, and the Affiliated Leadership League — to challenge the two procurements is more difficult to resolve. An association may seek relief for injuries suffered in its institutional capacity, as well as injuries suffered in its capacity as a representative of its members. Public Citizen v. Lockheed Aircraft Corporation, 565 F.2d at 714. For purposes of institutional standing, an associational plaintiff must show some palpable injury to its own interests or activities, as distinct from injuries to its members. Community Nutrition Institute v. Block, 698 F.2d 1239, 1253-54 (D.C.Cir.1983), rev’d on other grounds, _ U.S. _, 104 S.Ct. 2450, 81 L.Ed.2d 270 (1984). In contrast, an associational plaintiff has standing to bring suit in a representative capacity even in the absence of injury to the association itself. Hunt v. Washington State Apple Advertising Commission, 432 U.S. 333, 342, 97 S.Ct. 2434, 2440, 53 L.Ed.2d 383 (1977). If the association brings suit as a representative of its members, it must show that:

(a) its members would otherwise have standing to sue in their own right; (b) the interests it seeks to protect are germane to the organization’s purpose; and (c) neither the claim asserted nor the relief requested requires the participation of individual members in the lawsuit.

Id. at 343, 97 S.Ct. at 2441.

Although the associational plaintiffs have not clearly articulated their basis for standing, it appears that they seek standing both in their institutional and their representational capacities. See Plaintiffs’ Motion at 14-16. All of the associational plaintiffs are membership organizations concerned with the interests of blind individuals. Specifically, the National Council is a membership organization of state licensing agencies. The Blinded Veterans, American Council of the Blind, and the Randolph-Sheppard Vendors are organizations whose members include blind vendors. Id. at 15-16. The Affiliated Leadership League and the Association are advocacy organizations for the blind; they do not aver that their membership includes blind vendors. Id.

The gist of the plaintiffs’ complaint is that the procurement of the two fast-food contracts on a national scale violated the rights of blind vendors under the Act. When the issue is framed in this fashion, it appears that the Blinded Veterans, the American Council, and the Randolph-Sheppard Vendors, the three organizations whose members include blind vendors, have standing in their representational capacities to challenge the contract proposals. Individual blind vendors are “within the class of persons whose interests are necessarily, or with substantial probability, affected by the challenged agency action.” Public Citizen, 565 F.2d at 716. Several state licensing agencies have indicated that blind vendors could provide fast-food services to the Department of Defense if those services were contracted for on a smaller scale. See Affidavit of Joseph Snyder (Chairman of the Randolph-Sheppard Committee of the National Council) at II4 and attached exhibits filed December 19, 1984; Affidavit of Donald Wedewer (Director of Florida state licensing agency) at 118, filed Dec. 28, 1984. As representatives of blind vendors who could not meet the large scale requirements of the contracts, these plaintiffs have adequately alleged tangible injury.

Although the associational plaintiffs need not “state with certainty which of the[ir] members [ ] will be harmed,” American Maritime Association v. Blumenthal, 458 F.Supp. 849, 855 (D.D.C.1977), aff'd 590 F.2d 1156 (1978), cert. denied, 441 U.S. 943, 99 S.Ct. 2161, 60 L.Ed.2d 1045 (1979), at least one organization represents a member who has alleged concrete injury from the McDonald’s procurement. A blind vendor in Illinois has alleged that he would request the opportunity to operate a fast-food facility at the Great Lakes Naval Station if the Illinois State licensing agency had been able to bid for operations at that location. Affidavit of Tyrone McDonald at 1110, filed Dec. 28, 1984. Mr. McDonald is also a member of the Board of Directors of the Randolph-Sheppard Vendors. Id. at ¶ 3. The submission of this affidavit strengthens the claim that this plaintiff has standing to challenge the McDonald’s procurement.

As a membership organization of state licensing agencies, the National Council has an equally strong claim to standing in this action. The state licensing agencies are responsible under the Act for obtaining employment for blind individuals on federal property. See 20 U.S.C. § 107a. This responsibility necessarily includes seeking contracts with the federal government for vending facilities. Since the defendants have acknowledged that the state agencies, as representatives of blind vendors, do not have the capacity to provide fast food services on a nationwide scale, the inclusion of this requirement constitutes a perceptible and specific injury to the state agencies and the blind vendors they supervise. See Public Citizen, 565 F.2d at 715. Thus, the same affidavits which establish injury to the blind vendors also establish injury to the state licensing agencies and their representative. See supra at 1013.

The position of the two blind advocacy membership organizations, the Association for the Education and Rehabilitation of the Blind and Visually Impaired and the Affiliated Leadership League of and for the Blind of America is quite different. The members of the Association are professionals who train blind persons for employment and are generally interested in improving services for the blind. Plaintiffs’ Motion at 15. The Affiliated Leadership League is a nonprofit coalition of organizations that seek improved services for the blind. Plaintiffs’ Motion at 16. These plaintiffs have not alleged that their membership includes blind vendors. Id. at 15-16. The interests of these organizations and those of their members are thus too attenuated to establish standing. See Community Nutrition Institute, 698 F.2d at 1253-54. Accordingly, the Association and the Affiliated Leadership League are precluded from litigating the issues in this case on the merits.

B.

EXHAUSTION

Next, the Court turns to the government’s claim that the complaint should be dismissed because the plaintiffs have failed to exhaust their administrative remedies under the Randolph-Sheppard Act. It is unquestionable that at least one affected group — the state licensing agencies — could have sought administrative review of the procurement decisions by seeking arbitration from the Department of Education. The scope of arbitrable issues is broadly defined in 20 U.S.C. § 107d-l(b) to include challenges to a government entity’s

fail[ure] to comply with the provisions of this Act [20 U.S.C. § 107 et seq.] or any regulations issued thereunder (including a limitation of the placement or operation of a vending facility as described in section 1(b) of this Act [20 U.S.C. § 107(b) ] and the Secretary’s determination thereon)...

Although this language is straightforward on its face, it presents several difficult questions of interpretation. First, the opportunity to pursue arbitration may not be limited solely to the entities listed in the statute. In interpreting similar language in 20 U.S.C. § 107d-l(a) concerning blind vendors’ grievances, one federal court has held that the Committee of Blind Vendors for the State of Massachusetts should pursue arbitration. See Massachusetts Elected Committee of Blind Vendors v. Matara, 482 F.Supp. 1186, 1189 (D.Mass.1980). By analogy, the opportunity to pursue arbitration may. also extend to other membership organizations of blind vendors and state licensing agencies.

Second, the courts have differed in their analysis of whether arbitration is mandatory or permissive. In the context of blind vendors’ challenges to the actions of state licensing agencies, two federal courts have held that blind vendors must exhaust their arbitration remedies before seeking relief in federal court. Fillinger v. Cleveland Society for the Blind, 587 F.2d 336, 338 (6th Cir.1978); Massachusetts Elected Committee of Blind Vendors, 482 F.Supp. at 1189. On the other hand, dicta in a recent Court of Claims decision suggests that federal jurisdiction does not require prior resort to arbitration. See Texas State Commission for the Blind v. United States, 6 Cl.Ct. 730 at 735-36 n. 12 (1984).

Moreover, in Randolph-Sheppard Vendors of America, Inc. v. Harris, 628 F.2d 1364 (D.C.Cir.1980), this circuit ruled on the merits of a challenge to regulations promulgated under the Act. There, the court was well aware of the internal arbitration procedures, id. at 1368, but did not find that these procedures presented any bar to federal jurisdiction. Thus, it is at least arguable that certain broad challenges to the implementation of the Act are not proper subjects for arbitration.

The Court, however, need not consider the precise scope of the arbitration requirement. As this circuit has noted, “the exhaustion requirement contemplates an efficacious administrative remedy, and does not obtain when it is plain that any effort to meet it would come to no more than an exercise in futility.” Lodge 1858, American Federation of Government Employees v. Paine, 436 F.2d 882, 896 (D.C.Cir.1970).

In this instance, the plaintiffs were not required to pursue any available arbitration remedies because any resort to arbitration would have been futile. The plaintiffs seek immediate declaratory and injunctive relief with respect to two government procurements which are already under way. It is estimated that an arbitration procedure under the Act would require considerable time to complete. The rights which the plaintiffs seek to vindicate would be lost in the absence of a speedy ruling, even if the Court were to rule in their favor on the merits. Thus, the pragmatic considerations of this case preclude the application of any arbitration requirement.

C.

THE REQUIREMENTS OF THE RANDOLPH-SHEPPARD ACT

Lastly, the Court turns to the merits of the plaintiffs’ claim that the two fast-food procurements violated the Randolph-Sheppard Act, 20 U.S.C. § 107(b). Section 107(b) provides in relevant part that:

[i]n authorizing the operation of vending facilities on Federal property, priority shall be given to blind persons licensed by a state agency
(2) whenever feasible, one or more vending facilities are established on all Federal property to the extent that any such facility or facilities would not adversely affect the interests of the United States.
Any limitation on the placement or operation of a vending facility based on a finding that such placement or operation would adversely affect the interests of the United States shall be fully justified in writing to the Secretary [of Education], who shall determine whether such limitation is justified.

The plaintiffs give a very broad reading to the language which grants a priority to blind vendors and requires a justification for limitations on the placement or operation of vending facilities. They conclude that these two provisions, taken together, forbid the government from including criteria in contracts for vending services which blind vendors are unable to satisfy. Since blind vendors could not satisfy the requirement of national fast-food services, the plaintiffs argue that this requirement violated the Act.

This interpretation of section 107(b) is not without merit. Although Congress has failed to explain the scope of a “priority” or the nature of a “limitation,” the language of that section is very expansive. Moreover, the language does not contain any terms which would restrict its apparent broad reach. A close examination of the legislative history of this section, the interplay between its statutory terms, and an analysis of other statutory provisions of the Act, however, leads to the conclusion that the language of section 107(b) is not as generous as the plaintiffs would wish. In the absence of a clear congressional indication of the scope of section 107(b), the Court cannot adopt the sweeping interpretation which the plaintiffs advocate. Accordingly, the Court determines that the McDonald’s and Burger King contracts do not violate the Act.

The starting point for the interpretation of section 107(b) is the language of its two relevant provisions: the priority established for blind vendors and the prohibition on any limitation on the placement or operation of vending facilities unless such a limitation is approved by the Secretary of Education. Although the plaintiffs focus on the limitation language, they apparently read the two provisions of the statute together to provide a broad set of rights for blind vendors.

A common sense reading of the statutory language, however, indicates that the failure to give priority to blind vendors is something different from imposing a limitation on the operation of their facilities. For instance, the government could afford a priority to a blind vendor over a nonblind competitor in operating a vending facility, but nevertheless, impose other limitations on the placement or operation of blind vending facilities. While the first action would meet the requirements of the Act, the second would not unless the prior approval of the Secretary of Education were obtained. Thus, it is reasonable to conclude that the failure to afford a priority to a blind vendor is not tantamount to imposing a limitation on vending operations.

Moreover, the statutory avenues of relief in the two situations differ. On the one hand, priority in “the operation of vending facilities on Federal property [] shall be given to blind persons licensed by a State agency — ” 20 U.S.C. § 107(b) (emphasis added). The requirements of this section are unequivocal — blind persons have priority over nonblind persons in operating vending facilities on federal property. Of course, the meaning of the term “priority” must still be examined.

On the other hand, the government is not absolutely prohibited from imposing limitations on the operation of vending facilities on federal property. If the government wishes to impose a limitation, it must show that the absence of such a limitation would “adversely affect the interests of the United States,” and submit this justification to the Secretary of Education for approval. 20 U.S.C. § 107(b)(2). Thus, in considering the lawfulness of the government’s actions in this case, the Court must consider whether the two procurements violated either of these statutory provisions. This requires an analysis of the two relevant terms: “priority” and “limitation.”

Priority

The common sense meaning of a priority in the award of a government contract suggests that the two procurements in this case did not violate the Act. Ordinarily, the term “priority” means that an individual or organization seeking the award of a government contract should be given a preference if its proposal meets the requirements of the contract, and falls within a competitive range of the other bids. The term “priority” does not suggest an absolute right to receive a government contract, without regard to the contract criteria or the merits of the other bidders.

The sparse legislative history of section 107(b) suggests that this interpretation is correct. The language of the Senate report from the Committee on Labor and Public Welfare which accompanied the 1974 amendments to the Act, including section 107(b), stated that:

[t]he insertion of the term “priority” underscores the Committee’s expectation that where a vending facility is established on Federal property ... one or more blind vendors have a prior right to do business on such property, (emphasis in original.)

Senate Report at 15. The report goes on to say that

to the extent that a minority business enterprise or non-blind, operated vending machine competes with or otherwise economically injures a blind vendor, every effort must be made to eliminate such competition or injury, (emphasis added.)

Id. These statements, taken together, indicate that with the exception of vending machines operated by nonblind persons and minority business enterprises, blind vendors are not insulated from competition. Nonblind vendors may compete with blind vendors for the opportunity to operate vending facilities on federal property. By analogy, the federal government may establish competitive criteria in soliciting contracts for fast-food procurements, and need not ensure that blind vendors are able to satisfy these criteria.

This interpretation is also supported by the section of the Act which specifically discusses the priority afforded blind vendors for the operation of cafeterias on federal property. See 20 U.S.C. § 107d-3(e). Cafeterias are one of several vending facilities enumerated in the Act. 20 U.S.C. § 107e(7). Although the parties apparently agree that a fast-food operation is not a cafeteria, the following language in section 107d-3(e) is instructive:

The Secretary, through the Commissioner, shall prescribe regulations to establish a priority for the operation of cafeterias on Federal property by blind licensees when he determines, on an individual basis and after consultation with the head of the appropriate installation, that such operation can be provided at a reasonable cost with food of a high quality comparable to that currently provided to employees, whether by contract or otherwise.

The regulation implementing this provision directs the government to promulgate certain requirements “[i]n order to establish the ability of blind vendors to [provide comparable cafeteria services] as that available from other providers of cafeteria services.” 34 C.F.R. § 395.33(b). The government’s

solicitations for offers shall establish criteria under which all responses will be judged. Such criteria may include sanitation practices, personnel, staffing, menu pricing and portion sizes, menu variety, budget and accounting practices. If the proposal received from the State licensing agency is judged to be within a competitive range and has been ranked among those proposals which have a reasonable chance of being selected for final award, the property managing department, agency, or instrumentality shall consult with the Secretary.

Id. Thus, the government, in soliciting offers for contracts for vending facilities, may establish criteria by which those offers may be judged, and need only consider proposals from state licensing agencies which are within a competitive range.

By analogy, blind vendors who operate other types of vending facilities are not protected from all commercial competition, nor are they given the right to insist that the government’s contract solicitations contain only terms and conditions which blind vendors can meet. There is no requirement that a bid proposal be tailored so that blind vendors could satisfy all of its criteria. This is particularly true in a situation such as this where the criteria complained of — the ability to operate a national fast-food operation — is unrelated to the condition of blindness. Instead, this requirement is apparently designed to incorporate certain efficiencies which can be achieved through economies of scale. Absent some clear indication from Congress that national procurements such as these are prohibited, the Court declines to enjoin these contracts.

Limitation

The plaintiffs also argue that the government may not insert a requirement in a proposal for a vending contract which blind vendors or state licensing agencies are not able to satisfy, unless that requirement has been cleared in advance by the Secretary of Education. Taken to an extreme, this argument amounts to an assertion that whenever a blind vendor is unable to meet the requirements of a solicitation for offers, that solicitation must be modified to permit the vendor to apply, or cleared in advance by the Secretary of Education. While Congress could certainly impose these stringent requirements on the ability of the government to determine how it conducts its business, a common sense interpretation of the language of 20 U.S.C. § 107(b)(2) and its legislative history suggests that Congress has not done so.

Section 107(b) requires the government to provide a justification for “any limitation on the placement or operation of a vending facility.” Taken literally, this language would prohibit any nonblind person from operating a vending facility on federal property, since competition from other businesses would affect blind vendors. It is clear, however, that this language does not forbid all conceivable limitations on the operation of blind vending facilities. • Such an interpretation would make nonsense out of Congress’ obvious intent to permit both blind and nonblind vendors to conduct business on federal property. See discussion supra at 23; Senate Report at 19.

Given that certain limitations are not prohibited, the question is whether the procurements at issue fall between permissible boundaries. While neither the Senate report nor the hearings on the 1974 amendments purport to provide an exhaustive list of forbidden limitations, they serve as some indication of the types of restrictions which Congress sought to preclude. This legislative history indicates that impermissible limitations include restrictions

with respect to the kinds of merchandise a blind vendor was permitted to sell, with respect to the location of blind stand [sic], or with respect to the amount of income permitted to accrue to a vendor.

Senate Report at 16. This list of applicable limitations is repeated in several anecdotes contained in the report, id. at 10, 16, and in the Senate hearings. See Hearings Before the Subcommittee on the Handicapped, Committee on Labor and Public Welfare, (“Hearings”), 93d Cong., 1st Sess. at 97, 113, 126, 135, 138, 152, 154 (1973). The concern about the distribution of accrued income arose from the practice of some state agencies of limiting the income earned by any single blind vendor.

The proposals for the McDonald’s and Burger King contracts do not appear to constitute this type of limitation on the operation of a vending facility. In contrast to the direct limitations catalogued in the Senate report, the requirements in the contract proposals have an indirect, albeit a significant, effect on the fortunes of blind vendors. As such, they are not proscribed by the Act.

The Court is sympathetic to the plaintiffs’ real concerns with the government procurement practices at issue in this litigation. If the government continues to seek contracts with parties who have the ability to function on a national scale, the opportunity of blind vendors to compete for such contracts will be severely limited. The House Appropriations Committee recognized this fact, and directed the Department of Defense to “review its policies concerning contracting out for food service operations to determine if those policies comply with the Randolph-Sheppard Act,” House Report at 24. The Committee also questioned the legality of the methods used by the Department in contracting for food service operations. But Congress has not taken any action to prohibit these practices, not has it issued a definitive statement on the scope of the Act, as it is empowered to do. At most, it has expressed concern about the coneededly highhanded procedures utilized by the Department in contracting for food services. Under the present state of the law, the Court declines to hold the contracts invalid.

CONCLUSION

This Court has jurisdiction to consider the claim that these government procurements violate the Randolph-Sheppard Act. On the merits, the Court concludes that although the McDonald’s and Burger King contracts deprive blind vendors of increased employment opportunities, the contracts do not fail to provide a priority for blind vendors or constitute a limitation on the placement or operation of blind vending facilities within the meaning of the Act. The complaints in these consolidated proceedings should be dismissed.

An appropriate Order in support of this Memorandum Opinion was filed on January 4, 1985.

      . The Rehabilitation Services Administration, a component of the Department of Education, is the principal governmental entity bearing responsibility for carrying out the Act. 20 U.S.C. § 107a(a)(l).

      . Unless otherwise noted, the exhibits cited in this Memorandum Opinion are attached to the affidavit of plaintiffs' attorney Robert Humphreys in Support of Motion for Preliminary and Permanent Injunction (C.A. No. 84-3211), filed Nov. 19, 1984. An identical affidavit and accompanying exhibits were filed in C.A. No. 84-3489.

      . Since the two motions are nearly identical, the citation to "Plaintiffs’ Motion” refers to the earlier-filed motion.

      . The suggestion that the Association’s membership includes blind vendors was first articulated by the plaintiffs in their Response to the Motions to Dismiss at 3, and is insufficient to confer standing.

      . Robert Humphreys, counsel for the plaintiffs, has estimated that the arbitration proceeding would take approximately one and one-half years to complete. Mr. Humphreys has had considerable experience in drafting the Randolph-Sheppard Act, and has served as Special Counsel to the Senate Committee on Labor and Public Welfare and as the Commissioner of the Rehabilitation Services Administration. The defendants have accepted his time estimates.

      . According to the regulations
      'Cafeteria' means a food dispensing facility capable of providing a broad variety of prepared foods and beverages (including hot meals) primarily through the use of a line where the customer serves himself from displayed selections. A cafeteria may be fully automatic or some limited waiter or waitress service may be available and provided within a cafeteria and table or booth seating facilities are always provided.
      34 C.F.R. § 395.1(d). This description does not apply to fast-food restaurants.


source: Caselaw Access Project

author: PLATT, District Judge.

license: Public Domain

text:
    G. Thomas CATHERINES, Allan J. Hammer and Haskew Brantley, Plaintiffs, v. COPYTELE, INC., Bradford Trust Company, Denis Krusos and Frank DiSanto, Defendants.
    No. 84 CV 4746.
    United States District Court, E.D. New York.
    Jan. 9, 1985.
    As Amended Feb. 14, 1985.

      Reavis & McGrath by John A. Lowe, Glen Banks, New York City, for plaintiffs.
    Satterlee & Stevens by James F. Rittinger, New York City, for defendants CopyTele, Krusos and DiSanto.
    Bradford Trust Co. by Louis J. Maione, Christopher J. Collins, Associate Counsel, Litigation, New York City, for defendants.
   MEMORANDUM AND ORDER

PLATT, District Judge.

By order to show cause with affidavits annexed three separate individual plaintiffs, each presenting somewhat different circumstances, seek mandatory preliminary injunctions against the defendants enjoining them from taking any actions that would in any way interfere with

(i) plaintiffs’ selling the shares of CopyTele, Inc. (“CopyTele”) stock that they own; and
(ii) the transfer of the registered ownership of any of the shares of CopyTele stock owned by plaintiffs to a third party or, alternatively,
(iii) setting the closing price of CopyTele common stock on the NASDAQ National Market on December 5, 1984, as the price at which plaintiffs would have sold their stock had defendants not prevented them from doing so in order that plaintiffs’ damages may be calculated with certainty.

FACTS

CopyTele is a Delaware corporation with its principal place of business in Huntington Station, New York.

Denis A. Krusos (“Krusos”) is a director and the Chairman of the Board and Chief Executive Officer of CopyTele.

Frank DiSanto (“DiSanto”) is a director and the President of CopyTele.

Krusos and DiSanto each own 535,000 shares and members of their families each own respectively an additional 200,000 shares of CopyTele common stock and together Krusos and DiSanto own 38.22 percent of the outstanding shares of that stock and, as the Court understands it, together with their family members they own the majority of the outstanding shares of the stock. As of November 30,1984, the market value of the stock held bf' Messrs. Krusos and DiSanto was in excess of thirty-three million dollars ($33,000,000).

Bradford Trust Company (“Bradford Trust”) is the transfer agent for CopyTele stock.

From November 9 to November 30, 1982, CopyTele sold an aggregate of 390,000 shares of its common stock to individuals who were officers, employees and others at a price of ten cents a share, or $39,000 in the aggregate.

Plaintiff G. Thomas Catherines purchased 10,000 of these 390,000 shares.

Plaintiff Allan J. Hammer purchased 5,000 of these 390,000 shares.

Plaintiff Haskew Brantley, a State Senator from Georgia, purchased 10,000 of these 390,000 shares.

The stock certificates issued to Messrs. Catherines and Hammer and Senator Brantley did not contain any restrictive legend, and in fact, the words “fully paid and non-assessable” appear on the face of the stock.

The stock sold to plaintiffs was also unregistered. Absent any other restrictions it could be sold over a period of time after two years from the issuance thereof upon compliance with the provisions of Rule 144 under the Securities Act of 1933, as amended.

In October 1984, plaintiffs took action that would allow them to sell their CopyTele stock pursuant to Rule 144 when the holding period expired on November 30, 1984.

On November 30th, Senator Brantley submitted his stock to Bradford Trust for transfer. On December 5th Messrs. Catherines and Hammer submitted their stock to Bradford Trust to transfer. Bradford Trust refused to transfer any of the stock.

Theretofore, by letter dated November 12,1984, addressed to Bradford Trust Company, Mr. Krusos had advised Bradford Trust that CopyTele takes:

The position that [Messrs. Catherines and Hammer] are not entitled to such shares inasmuch as they did not honor their employment commitments with the Company either by never becoming employed by the Company or by not remaining employed by the Company for any significant period of time. This commitment was a condition of their being issued the shares. We further take the position that all of the employees (including the above persons), and the officers and Directors of CopyTele, Inc., had agreed not to sell shares at this time.
Therefore, the Company’s counsel will not issue any opinion under 144, and Bradford Trust Company should not permit transfer of these shares without either our consent or a final order of a Court of competent jurisdiction directing such transfers.

In a similar letter dated December 4, 1984, CopyTele advised Bradford that the shares of Senator Brantley “are restricted and should not be transferred” and “[a]s [heretofore indicated] all such transfers of restricted shares required the prior consent of CopyTele, Inc.” (Ex. CC).

In his affidavit sworn to December 17, 1984, submitted in opposition to plaintiffs’ motion and at the evidentiary hearing thereon, Mr. Krusos testified that all of the shares in question were sold to the three plaintiffs on November 30, 1982 at ten cents a share on the oral condition and understanding that the same might not be sold or otherwise transferred until CopyTele’s “product” was “successfully developed and marketed” or when Mr. DiSanto or Mr. Krusos gave prior written consent to any such transfer.

At the hearing Mr. Krusos testified (and claimed that the plaintiffs knew) that “successfully marketed” meant that a binding order from Xerox for 5,000 units of its product at an “acceptable price” had been received by CopyTele.

CopyTele maintains that these were conditions to which all of its employees and non-employees who purchased shares at ten cents per share agreed in November 1982.

CopyTele employees John Shonnard, Anne Rotondo, Christopher Laspina, Joseph A. Isoldi, Edward G. Lewit, Robert A. Seigler, Henry P. Herms and Jerry Georges, and CopyTele consultants Hershel Smith, Jeff Lebowitz, George Georges and Nettie Lebowitz, the wife of Alvin Lebowitz, a CopyTele consultant, all filed virtually identical affidavits in opposition to plaintiffs’ motion stating in pertinent part:

At the time the shares were offered to me, I agreed that in consideration of the offer of stock at ten cents a share, that until such time as CopyTele developed and successfully marketed its product, I would become and remain a CopyTele employee and would not sell such shares.

All three plaintiffs testified that they made no such agreement with, and were not told of any such condition or restriction by, Mr. Krusos or any other officer or employee of CopyTele before or at the time of their purchase of their shares and were not made aware of the same until, in each case, months after such purchase. None of their shares (and indeed apparently none of the ten-cent shares) were marked subject to any agreement or condition of any kind, no such agreement or condition was set forth in any contemporaneous writing signed by any of the plaintiffs or by any other ten-cent purchaser, and no such agreement or condition is set forth in any minutes of any meeting of the Board of Directors of CopyTele.

Moreover, and most significantly, CopyTele in October 1983 made a public offering of 600,000 of its shares and, in its prospectus dated October 6, 1983, filed and used in connection therewith, it is stated in describing the “potential effect on market value of shares” [being offered] as follows:

The large number of shares of Common Stock of the Company held by its officers, directors and employees of the Company and private investors could be sold by the holders thereof over a period of time after two years from issuance thereof upon compliance with the provisions of Rule 144 and the Securities Act of 1933, as amended.
Such action, if it takes place, could have a depressing effect on the market value of the Company’s Common Stock. Sale with respect to 1,470,000 shares could commence November 8, 1984, with respect to 390,000 shares could commence November 30, 1984 and with respect to 250,000 shares could commence on February 28, 1988, subject to the sales volume limitation of Rule 144.

(Emphasis supplied.)

Mr. Krusos testified at the hearing that he and the President of CopyTele, Frank J. DiSanto, were “controlling shareholders” who owned directly and indirectly 735,000 shares apiece which they purchased at one cent per share and were subject to the same agreement and conditions as the plaintiffs but the prospectus made it clear that they were free to commence selling their shares on November 8, 1984 “subject [only] to the sales volume limitation of Rule 144.”

In addition, CopyTele theretofore had advised Bradford Trust in writing on June 23, 1983, that Messrs. Krusos’ and DiSanto’s one-cent shares and the ten-eent shares (including the plaintiffs’) “represent 2,110,000 of restricted stock which has to be held for two years from the date of issue before they can be traded.”

Plaintiff Hammer testified at the hearing that he was employed by Visual Sciences, Incorporated (“Visual”), another company of which Krusos was Chairman, in the accounting department from 1977 until July 1983, when he was terminated at the direction of Mr. Krusos because Visual, which had been in liquidation since the summer of 1983, no longer needed him and there was no position for him at CopyTele.

At the hearing, Mr. Krusos testified that he personally offered Mr. Hammer a job at CopyTele in November 1982 and that Mr. Hammer performed this job for CopyTele from November 1982 to the Spring of 1983 and that he never terminated Mr. Hammer but merely told him to go back and do his job.

In his affidavit in opposition to plaintiffs’ motion, however, Mr. Krusos swore that Mr. Hammer never joined CopyTele as an employee, but in the Spring of 1983 he was still employed by Visual, and that he left in “a mutual parting of the ways between himself and Visual.”

Plaintiff Catherines testified that he had been employed by Panafax Corporation (“Panafax”), a corporation of which Mr. Krusos was President, from October 1977 until April 1982, as Vice President of Advertising and Communications. Panafax was sold in the Spring of 1982 to a Japanese company and Mr. Catherines was terminated and thereafter was offered a temporary position as a consultant with Visual at $2,500 a month.

Mr. Krusos, according to Mr. Catherines, promised him a job in the Pall with his new company (CopyTele) and an opportunity to buy shares in this new company in return for the inadequate compensation which he had received from Panafax.

Mr. Catherines testified that in the Fall Mr. Krusos told him there was no place in the new company for him but that Mr. Krusos was still going to sell him the shares.

Mr. Krusos testified that in the Fall he offered, and Mr. Catherines accepted, a job with CopyTele similar to that which he had had with Panafax and that Mr. Catherines performed work for and was paid by CopyTele and that he left, “to be on his own.”

Again, however, in his affidavit Mr. Krusos swore that Mr. Catherines had never joined CopyTele as an employee.

Senator Brantley testified that he too had been a Vice President at Panafax from 1977 to 1982 when he also was terminated. Concededly thereafter he was not offered a position by, and held none with, CopyTele or any other companies with which Mr. Krusos was associated.

Ten cents a share stock was also offered to and accepted by alleged financial consultants Hershel Smith and Jeff Lebowitz, and business consultant George Georges. Alvin Lebowitz, another financial consultant, was also offered stock on the same terms; the stock was purchased by his wife, Nettie Lebowitz.

On January 20, 1983, Mr. Catherines and Mr. Krusos parted company and on February 1, 1983, Mr. Krusos wrote to him enclosing a check for one thousand dollars and advising him that he was removing his name as a shareholder of CopyTele.

On February 13, 1983, Mr. Catherines returned the check protesting the action taken.

On March 23, 1983, Mr. Krusos for the first time wrote advising Mr. Catherines that his purchase of shares had been “in consideration of your continued association with the new company, CopyTele” and as part of an agreement to get “CopyTele off the ground and on its way to success.”

On May 10, 1983, CopyTele’s attorneys wrote a letter to Mr. Catherines’ attorneys confirming Mr. Krusos’ position.

Concededly, no demand was made by CopyTele on Mr. Hammer for the return of his shares when he left Visual in July of 1983 and no such demand was made or notice as to any agreement or condition was given to Mr. Hammer until after he attempted to sell his shares in October of 1984.

On November 29, 1984, Mr. Krusos wrote Mr. Hammer such a demand letter advising him that the consideration for his purchase of shares at ten cents per share was that he would have been employed by CopyTele and that he would have worked together as an employee of CopyTele “to build it into a successful and lucrative company.”

At the same time, Mr. Catherines, in his attempt to sell his shares, received virtually an identical letter pointing out to him he was “never even employed by CopyTele in any capacity.”

DISCUSSION

To summarize at this point, defendants have presented this Court with essentially three arguments to substantiate their position that they may rightfully prevent plaintiffs from selling their stock. First, they argued that plaintiffs orally agreed to become CopyTele employees as a condition of their purchasing the stock. Second, they argued that plaintiffs orally agreed not to sell their CopyTele stock until the product had been developed and successfully maketed. The facts as presented thus far have fleshed out these arguments. But, a third argument which defendants presented at the eleventh hour, that is on the day the hearing was commenced on the merits of these “sale constructions,” was that plaintiffs were privy to “inside information” and thus, a fortiori ineligible to sell their stock. Turning to address the validity of defendants’ arguments, we will deal with this latter argument first as the first two are somewhat related and require more discussion.

1. Knowledge of Inside Information

Accepting as a very real possibility defendants’ contention that inside information might be revealed, this Court duly closed the courtroom and sealed the record whenever requested throughout the hearing. Having heard the evidence, this Court can now freely say that there is no basis for this claim.

Defendants attempted to argue that although plaintiffs had no official employment relationship with CopyTele during its first two years, they were in frequent contact with present employees of CopyTele on an informal basis and thus, had access to non-public information. This allegation was not borne out. For example, Mr. Michael Abatemarco (“Abatemarco”), who was then and is now a CopyTele employee, denied revealing any such information to Mr. Catherines in his telephone conversations with him. (We might add here that Mr. Abatemarco also denied having any knowledge of any agreement or condition attached to his ten-cent employee shares.)

To discredit defendants’ argument concerning knowledge of inside information, plaintiffs showed that the product and “raison d’etre” for CopyTele was in fact no big secret at all, having already been the subject of several articles in commonly circulated publications such as Fortune magazine. Petre, “The Mystifying Business Behind a Magical Stock,” Fortune, June 11, 1984, at 55 (Exhibit 18); see also Kindel, et al., “Flat-Panel Display Remembers Images When It’s Turned Off,” Popular Science, August 1984, at 58; Andrew, “Heard on the Street: CopyTele’s Stock Performs Like a Champion, Considering Firm Hasn’t Closed a Single Sale,” Wall St. J, November 1, 1984, at 63.

Defendants themselves were also busy publicizing their product by hunting for companies which might be interested in marketing and manufacturing their product when the prototype was ready; in doing so, defendants had made product presentations to such companies as Xerox Corp. Finally, if CopyTele was written about in such common publications and publicized by defendants themselves, this Court also has no doubt that CopyTele’s progress in developing its product was probably discussed within more technologically specialized publications and within various privately circulated trade publications that are available for “sophisticated investors.”

In sum, there is no credible evidence in the record to date showing that any nonpublic, material information has been transmitted to these plaintiffs, and hence we find that this is not a valid basis for CopyTele’s refusal to permit plaintiffs from selling their stock.

2. Conditions Relating to Future Employment and Successful Product Development

As indicated, defendants claim that plaintiffs should not be permitted to sell their stock because (a) they (at least in the case of Messrs. Hammer and Catherines) breached their employment agreements with CopyTele and hence were not entitled to the same, and (b) they took possession of the same subject to an agreement not to sell until they received permission to do so from Mr. Krusos or Mr. DiSanto or until CopyTele’s product was successfully developed and marketed.

Mr. Krusos may well believe at this point in time that he had in mind in November 1982 (and indeed may even have told some of the ten-cent purchasers), that he was dispensing such shares in order to attempt to hold the loyalty of as many of the purchasers as possible to him in one capacity or another in the financing, development and eventual marketing of his new product, but there is nothing apart from his belated claim to substantiate the existence of an agreement between all of the purchasers or between any of the plaintiffs and him or their acceptance of his claimed conditions. Indeed, all of the documentary evidence is to the contrary. The prospectus and CopyTele’s letter to Bradford dated June 23, 1983 negate his claim. Mr. Krusos’ own letters evince a developing — not a fixed— claim from the inception of the alleged agreement or condition.

The restrictive agreement or condition begins as one that will last until the ten-cent shareholders “get CopyTele off the ground and on its way to success” (Exhibit 14). It progresses from there to a point where CopyTele has been built “into a successful and lucrative company” (Exhibit 17), from there until “its product was successfully developed and marketed,” or until “granted permission by Mr. DiSanto or myself” (Krusos’ affidavit), and from there to such time as CopyTele had received a binding order at an acceptable price for five thousand units from Xerox (Krusos’ testimony at the hearing). Apart from the portion of each such condition that pertained to “permission” to sell, the first three versions of the conditions were and are unenforceable and void by reason of being too vague and indefinite. Only the last of such versions, first advanced at the hearing, might survive such a challenge.

Moreover, Mr. Krusos’ versions of the conditions for entitlement to purchase such shares, have been in a state of flux. Prior to the commencement of this lawsuit, in identical letters dated November 29, 1984, addressed to Messrs. Catherines and Hammer, Mr. Krusos took the position that he had given purchasing privileges to fifteen former employees of Visual and its affiliated companies on the condition that they work together as employees of CopyTele and that in his view, neither of them “were [njever even employed by CopyTele in any capacity and that there has been a total failure to consideration on [their] part with respect to the bases upon which [they] were granted the rights to purchase these shares.” Mr. Krusos’ respective letters to each of them further demanded that they return their shares of CopyTele in exchange for a check from CopyTele for the amount of their original purchase price.

In Mr. Krusos’ affidavit in support of defendants’ memorandum in opposition to plaintiffs’ motion, dated December 17, 1984, he stated that he and Mr. DiSanto had decided in November of 1982 to offer shares of CopyTele to only twelve employees of Visual (at 7). Interestingly, although Messrs. Catherines and Hammer were listed among these persons, Senator Haskew Brantley was not. Subsequently, when Senator Brantley joined this action as a plaintiff, Mr. Krusos did not deny that Mr. Brantley had served as a consultant for his various affiliated companies. As for plaintiffs Catherines and Hammer, Mr. Krusos stated in his affidavit that “there is no dispute that neither Catherines nor Hammer joined CopyTele as employees” (at 13).

At the hearing before this Court, on the other hand, Mr. Krusos again shifted his position by attempting to claim that these two plaintiffs had been employees of CopyTele and had left of their own accord. Senator Brantley, of course, was never claimed to have been, or offered an opportunity to have become, an employee of CopyTele.

Sections 152 and 153 of the Delaware General Corporation Law apparently have been construed to mean that services to be performed in the future are not valid, legal consideration for the issuance of stock by the corporation. In re Seminole Oil and Gas Corporation, 150 A.2d 20 (Del.Ch.1954); Maclary v. Pleasant Hills, Inc., 109 A.2d 830 (Del.Ch.1954). CopyTele appears to be taking the position that the shares issued to Messrs. Krusos and DiSanto and their families and the ten-cent shareholders were validly issued even though a substantial part of the consideration therefor was for prospective future services.

Under Delaware law, this apparently may not be and, if the shares are to be deemed validly issued, they must be in return for “cash, services rendered, personal property, real property, leases of real property or a combination thereof,” or otherwise as Section 152 requires.

3. Subject Matter Jurisdiction

Insofar as subject matter jurisdiction is concerned, there is no question but that this Court has jurisdiction over Senator Brantley’s claim on the basis of diversity, if not otherwise. In the case of Messrs. Catherines and Hammer, the question is more complicated, particularly insofar as damages are concerned, but their claims for injunctive relief, and nominal damages in any event, would appear to lie under Rule 10(b)(5) by reason of the apparent conflict in the various representations which may have been made to the purchasers of the ten-cent shares as to (other than Rule 144) restrictions, conditions or lack thereof, on the sale of the stock.

In view of what we have said with respect to the vagueness and indefiniteness of some of the representations and the evidence pertaining to the lack of any such restrictions or conditions on the one hand and the defendants’ claim as to the force and effect of the same on the other, there is no question as to materiality because the value of the stock as of November 30,1984, would be substantially different if the additional restrictions were in force and effect from the value if the same were non-existent or unenforceable.

Accordingly, we think we have subject matter jurisdiction in this case.

4. Grounds for Injunctive Relief

To prevail, the plaintiffs must show possible irreparable injury and either (i) probable success on the merits or (ii) sufficiently serious questions going to the merits to make them a firm ground for litigation and a balance of hardships tipping decidedly towards the party requesting preliminary relief. Sadowsky v. City of New York, 732 F.2d 312, 316 (2d Cir.1984); Mattel, Inc. v. Azrak-Hamway International, Inc., 724 F.2d 357, 359 (2d Cir.1983); Sperry International Trade, Inc. v. Government of Israel, 670 F.2d 8, 11 (2d Cir.1982); Keeler v. Joy, 489 F.Supp. 568, 574 (E.D.N.Y.1980) (Platt, J.).

As indicated above, plaintiffs have shown a likelihood of success on the merits. Apart from Mr. Krusos’ changing claims, the Court is unable to find anything to support any restrictive agreement or condition (other than Rule 144) imposed upon or accepted by the plaintiffs. Mr. Krusos is a lawyer admitted to practice in this State, and certainly must understand that regardless of what may have been said in oral discussions with employees of former companies about their continuing loyalty or his award of additional compensation to them in the form of opportunity to buy shares in his new company for the same, such statements did not constitute an agreement or condition not to sell their stock for indefinite periods of time — at least not in the face of the subsequent documentary evidence to the contrary. The fact of the matter is that there does not appear to have been anything more than informal discussions between some of the ten-cent purchasers and Mr. Krusos and there were no agreements or conditions binding upon the plaintiffs before or at the time of their purchases.

As to the possibility of irreparable injury, subsequent to November 30, 1984, the first day of plaintiffs’ eligibility to sell their shares under Rule 144, CopyTele’s stock on the NASDAQ market has dropped from 32.625 dollars per share to 19 dollars on January 4, 1985, ie., by almost 40 percent.

In February the available supply of CopyTele shares on the market will be increased from 600,000 shares to 850,000 shares, ie., an increase in excess of 40 percent. An additional 60,000 shares may become available through the exercise of warrants.

As Mr. Krusos himself admitted, these additional shares may affect the market in this stock.

CopyTele has yet to produce its product. It has had no sales and no income apart from interest on its capital. It had, as of July 31, 1984, an accumulated deficit in excess of 2 million dollars and net losses for the nine months period ended July 31, 1984 in excess of 1.1 million dollars. During the same period its selling and administrative expenses were almost 1.3 million dollars. With current annual expenses of almost 2 million dollars, CopyTele may run out of money within the next two years.

CopyTele has yet to announce the development of a prototype of its highly sophisticated electronics system which no one heretofore has ever been able to produce successfully.

Under the circumstances, this Court feels that the plaintiffs have shown possible irreparable injury and that they should be granted the preliminary injunction requested in paragraphs a and b of their order to show cause and the Court so orders such an injunction.

The plaintiffs should submit an appropriate order as promptly as possible.

SO ORDERED.

      . Shares owned by Messrs. Krusos and DiSanto and members of their families purchased at one cent per share on November 8, 1982.

      . Shares owned by former employees and others (including the plaintiffs) purchased at ten cents per share on November 30, 1982.

      . Nettie Lebowitz, in her affidavit, asserts that when she purchased the shares in November of 1982, her husband had agreed to provide financial consulting services to CopyTele. At the time of the purchase, she asserts that she orally agreed at the advice of her husband that she would not sell these shares until CopyTele developed a marketable product.


author: SHADUR, District Judge.

text:
    UNITED STATES of America, Plaintiff, v. Ronald IGNOFFO, et al., Defendants.
    No. 84 CR 507.
    United States District Court, N.D. Illinois, E.D.
    Jan. 11, 1985.

      Judith Dobkin, John Scully, Sp. Attys., U.S. Dept, of Justice, Chicago, Ill., for plaintiff.
    Elliot Samuels, George P. Lynch, Chicago, Ill., Joseph M. Laraia, Wheaton, 111., for defendants.
   DETENTION ORDER

SHADUR, District Judge.

On January 9,1985 following a jury trial, Ronald Ignoffo (“Ignoffo”) was convicted on all counts in the indictment in which he was named in this case. On January 10 the government moved for Ignoffo’s detention pursuant to the Bail Reform Act of 1984 (the “Act”), 18 U.S.C. § 3143(a), claiming Ignoffo was likely to pose a danger to the safety of other persons or the community if released pursuant to Act §§ 3142(b) or (c). This Court immediately conducted a detention hearing (the “Hearing”) on January 10 and 11. Based on the evidence presented at the Hearing this Court makes the following findings of fact (“Findings”):

1. FBI Agent Scott Jennings (“Jennings”) testified as to information he had obtained from Timothy Joyce a/k/a Timothy O’Malley (“Joyce”) during the course of a 1981 interview, in which Joyce had told Jennings Victor Arrigo (“Arrigo”) had borrowed Joyce’s automobile some six months earlier and then failed to return it. On the day after he borrowed the car, Arrigo had assertedly told Joyce he had committed the gangland-type shooting assassination of John DeJohn (“DeJohn”) in Joyce’s automobile and had been accompanied by Ignoffo during the killing. According to Arrigo the assassination had been ordered by “Caesar.” This Court finds the evidence described in this Finding 1 credible.

2. During the trial, immunized witness Eileen Colgan (“Colgan”) provided testimony that, from implications reasonably drawn from the jury’s questions to this Court while they were conducting their deliberations before verdict, appears to have been highly significant to that verdict. Among more than 60 trial witnesses, only Colgan was able to provide direct evidence that linked as many as four persons (Ignoffo and three others) to a single overall gambling business and a conspiracy to conduct such a business. For conviction under Count Two of the indictment, a minimum of five persons must have been found by the jury to have engaged in such a business (and the conspiracy conviction under Count One correspondingly had the same five-person requirement). In fact the jury found guilty of the charges under both those Counts four of the defendants: the three defendants identified by Colgan (Ignoffo, Marshall Portnoy and Warren Winkler) and DiVarco. Before her testimony Colgan had expressed real fear of Ignoffo, about whom she said (outside the presence of the jury):

Ms. Colgan: I grew up with Ron Ignoffo and watched him break people’s faces, and I know the man.
* * # si* * *
Mr. Werksman: Break their faces?
Ms. Colgan: Yes, literally.

3. At the Hearing Ignoffo said he was not involved in the DeJohn shooting and offered the testimony of a number of character witnesses (his sister, her daughter and five persons acquainted with him for varying periods of time). All those witnesses characterized Ignoffo as non-violent. However not one of the acquaintances was aware of the several arrests shown on Ignoffo’s “rap sheet” (several of which involved charges of battery), nor did any of them know any of a series of individuals about whom the prosecutor asked— individuals with whom Ignoffo was associated in his gambling activities or the individuals referred to in Finding 1.

Based on’ the facts presented to this Court at the Hearing and reflected in the Findings, this Court finds and concludes:

1. Ignoffo has been found guilty of a number of offenses and is now awaiting sentence. Accordingly Act § 3143(a) is applicable to him.

2. On the weight of the evidence produced against Ignoffo as described in Finding 1 (evidence that has been credited by this Court), coupled with the sincere and legitimate fears expressed by Colgan as described in Finding 2, all of which are contrasted with the makeweight nature of the evidence produced by Ignoffo as described in Finding 3, this Court cannot find there is clear and convincing evidence Ignoffo is not likely to pose a danger to the safety of any other person or the community if released pursuant to Act § 3142(b) or (c).

It is therefore ordered that Ignoffo is committed to the custody of the Attorney General for confinement at the Chicago Metropolitan Correctional Center pending imposition of sentence. This Court reserves judgment on the motion by Ignoffo’s counsel challenging the constitutionality of Act § 3143(a), both on its face and as applied to Ignoffo, pending submission by both sides’ counsel of legal authorities on that subject.

      . All later citations to the Act in this order will also refer to the section numbering in Title 18 rather than to the internal section numbering of the Comprehensive Crime Control Act of 1984, of which the Act is a part.

      . Under the circumstances and given the substantive nature of the evidence to the effect stated in the text, the testimony was necessarily hearsay. Although Act § 3143(a) contains no specification of procedures, its language (“unless the judicial officer finds by clear and convincing evidence...") necessarily implies a hearing, and this Court concludes the procedural provisions of the last five sentences (except the penultimate sentence) of Act § 3142(f) apply to such a hearing, including the provision that:
      The rules concerning admissibility of evidence in criminal trials do not apply to the presentation and consideration of information at the hearing.

      . Other evidence during the trial and during the Hearing indicates “Caesar" is codefendant Joseph DiVarco (“DiVarco”), with whom Ignoffo was associated by extensive trial testimony. Testimony by Jennings also associated Arrigo and DiVarco (based on Arrigo’s asserted statements and on Joyce’s own stated observations). This Court finds the "Caesar" referred to in the statement to which Jennings testified was in fact DiVarco.

      . Joseph Zucchero, the fourth person identified by Colgan (at the time to which she testified at trial Colgan was living with Zucchero), died in an automobile accident before the indictment in this case was returned. Clearly if the jury credited Colgan’s testimony, Zucchero could have been considered by the jury to have been the fifth person engaged in the gambling business and the conspiracy.

      . This Court does not of course treat such arrests as evidence of the substantive offenses charged against Ignoffo (who has no record of criminal convictions for any crimes of violence). Rather the questions were permitted on cross-examination under Fed.R.Evid. 405(a) to test the witness’ knowledge — or as it demonstrated, their lack of knowledge — on which their opinions as to Ignoffo were based.

      . None of the witnesses called by Ignoffo (apart from his sister and niece, whose interest and bias were obvious and understandable) was really in a position to address the currently relevant issues in an informed way. This Court does not discredit their testimony, but simply finds it wholly nonpersuasive.