author: ORRICK, District Judge.

text:
    George L. BARRY, Plaintiff, v. Margaret M. HECKLER, Secretary of Health and Human Services, Defendant.
    No. C-83-6178-WHO.
    United States District Court, N.D. California.
    April 18, 1985.

      Harvey P. Sackett, San Jose, Cal., for plaintiff.
    Joseph P. Russoniello, U.S. Atty., Judith Whetstine, Asst. U.S. Atty., San Francisco, Cal., for defendant.
   ORDER

ORRICK, District Judge.

The issue framed by the cross-motions for summary judgment in this supplementary security income (“SSI”) case brought by plaintiff, an unemployed carpenter, against defendant Margaret Heckler, Secretary of Health and Human Services (“Secretary”), is whether plaintiff was assured due process in the manner in which his application for SSI benefits was reviewed. The Court holds that he was not, and that review program following the so-called Bellmon Amendment (hereafter the “Bellmon Review Program”) impermissibly infringed his due process rights. For the reasons hereafter set forth, the Court grants the plaintiff’s motion for summary judgment and denies the defendant’s cross-motion.

I.

A.

The Bellmon Review Program was installed by the Secretary to implement Congress’ mandate to “[review], on his own motion, decisions rendered by administrative law judges.” Pub.L. No. 96-265, § 304(g), 94 Stat. 441, 456 (1980) (The Bell-mon Amendment). Congress intended, in passing the Amendment, to improve the quality of decision-making, to redress the high rate at which ALJ’s were reversing decision made at state levels, and to redress perceived imbalances between the reversal rates of the various ALJs. Association of Administrative Law Judges, Inc. v. Heckler, 594 F.Supp. 1132, 1134 (D.D.C.1984), citing, H.R.Rep. No. 944, 96th Cong., 2d Sess. 57 (1980), reprinted in [1980] U.S. Code Cong. & Ad.News, 1277, 1392, 1405 and S.Rep. No. 408, 96th Cong., 2d Sess. 53 (1980), reprinted in, [1980] U.S.Code Cong. & Ad.News, 1277, 1331.

In implementing the program, the Secretary authorized the Office of Hearings and Appeals to target specific AUs who had high rates of allowing disability benefits (Memorandum from the Associate Director of the Social Security Administration, Louis B. Hayes, Sept. 24, 1982; Exhibit “B” to Plaintiffs Memorandum In Support). Initially, an AU would be targeted for review if he or she had a 66%% or higher allowance rate. By April, 1983, the program was supplemented to allow targeting based on the rate at which the Appeals Council reversed the AU. Under both criteria, only AUs with a' high allowance rate formed the pool from which targeted AUs were selected for review.

When an AU was selected for review, all of the judge’s decisions were subject to Council scrutiny. The judges were also eligible for a mandatory “counseling” program, which included feedback sessions. The sessions were designed to “educate” the AUs and work on “decisional weaknesses.” Although never implemented, the counseling program was described in the memorandum circulated to the AUs. Finally, the AUs were advised that if, after further review, their performance did not improve, “other steps” would be considered. (See, Memorandum of the Associate Director, supra ).

B.

Plaintiff was employed as a carpenter from 1958 until January, 1981, when he suffered a heart attack. He returned to work after July, 1981 but suffered chest pains and back pains that prevented him from performing sustained activity throughout the work day. He stopped working on December 28,1981, and has not been gainfully employed since January, 1982.

Plaintiff brought a claim for disability payments under 42 U.S.C. § 423(a)(1)(D). The administrative law judge (“AU”) granted the plaintiff disability benefits, and determined that the plaintiff had the residual capacity to perform “sedentary work” as defined by 20 C.F.R. § 404.1567. The Appeals Council, on its own motion, chose to review the AU’s decision. On December 6, 1983, the Appeals Council reversed the AU and concluded that the plaintiff was not entitled to disability benefits. Specifically, the Council found that the plaintiff had the “maximum sustained capacity for a full range of medium work activities.” (Tr., pp. 12-13).

The Secretary argues that the Court may not hear plaintiffs constitutional claim because its jurisdiction is limited on review to an inquiry of whether the Appeals Council had substantial evidence to support its decision. The Court finds the Secretary’s position wholly untenable as it not only contravenes the jurisdictional statute found at 28 U.S.C. § 1331, but also offends a strong line of authority which holds that a district court may hear constitutional claims on review, even absent an exhaustion of administrative remedies. Mathews v. Eldridge, 424 U.S. 319, 96 S.Ct. 893, 47 L.Ed.2d 18 (1976); Weinberger v. Salfi, 422 U.S. 749, 95 S.Ct. 2457, 45 L.Ed.2d 522 (1975); Singer v. Schweiker, 694 F.2d 616 (9th Cir.1982). Therefore, the Court may determine the due process issue raised.

The Secretary also argues that even if the program violated due process principles in general, the plaintiff here was not in any way injured by the program and therefore lacks standing. Specifically, the Secretary asserts that: (1) the AU was the only adjudicator affected by the program and here he held in favor of the plaintiff, and (2) due process analysis is irrelevant given that the Council’s decision was supported by substantial evidence.

Addressing the first argument, although it is true that the AU reached a decision in plaintiffs favor, plaintiff was certainly harmed by the targeting program. Had the program not been in effect, the Council would not have automatically reviewed the favorable decision of the AU, thereby decreasing the likelihood that benefits would ultimately be denied.

As to the second argument, due process rights can be violated even if the Appeals Council had sufficient evidence for its decision. In Hummel v. Heckler, 736 F.2d 91 (3d Cir.1984), a social security applicant wished to discover material relevant to whether an AU was subject to the Bellmon review program, and, therefore, biased against awarding benefits. The Secretary objected to the request on relevancy grounds, arguing that the findings of the AU were supported by substantial evidence. The court allowed the plaintiffs discovery request, stating.

[wjhile it may be that substantial evidence in the records as a whole supports the conclusion that [plaintiff] is not disabled, she was entitled to have the evidence evaluated by an unbiased adjudicator.

736 F.2d at 95. Therefore, the plaintiff in this case has standing to assert a violation of his due process rights. As noted above, the AU rendered a decision in plaintiffs favor, the Appeals Council reviewed the plaintiffs decision and reversed.

The plaintiff claims that the Bellmon review program deprived him of his Fifth Amendment rights by creating incentives for high-allowance AUs to reduce their rate of allowances. By keeping their rates down, it is argued, the AUs can avoid scrutiny of all their decisions, avoid feedback sessions, and avoid the threat of “other steps” taken if “no improvement” is made. Additionally, the plaintiff argues that the Appeals Council, by targeting only high-allowance judges, had a hidden agenda to “blue-pencil” or second-guess” the AUs.

The Due Process Clause of the Fifth Amendment requires that the plaintiff receive a “trial before an unbiased judge.” Johnson v. Mississippi, 403 U.S. 212, 216, 91 S.Ct. 1778, 1780, 29 L.Ed.2d 423 (1971) (per curiam), quoting, Bloom v. Illinois, 391 U.S. 194, 205, 88 S.Ct. 1477, 1484, 20 L.Ed.2d 522 (1968) and Mayberry v. Pennsylvania, 400 U.S. 455, 465, 91 S.Ct. 499, 505, 27 L.Ed.2d 532 (1971). This due process rule is applicable to administrative as well as judicial proceedings. Gibson v. Berryhill, 411 U.S. 564, 93 S.Ct. 1689, 36 L.Ed.2d 488 (1973); Hummel v. Heckler, supra, 736 F.2d at 93. In fact, the requirement of impartiality is applied even more strictly to administrative adjudicators because of the absence of procedural safeguards normally available in a judicial proceeding. Hummel v. Heckler, supra, 736 F.2d at 93; National Labor Relations Board v. Phelps, 136 F.2d 562, 563-64 (5th Cir.1943).

The Secretary’s application of the Bellmon Amendment put pressure on selected AUs to reduce their percentage of benefit allowances, thereby denying claimants of their right to an impartial AU. This pressure was applied primarily by way of memoranda from the Office of Hearings and Appeals informing AUs that: (1) all of their decisions would be scrutinized by the Appeals Council, (2) they would be eligible for special peer counseling, and (3) they would be subject to “other steps” if necessary. Such pressure was recognized in Association of Administrative Law Judges v. Heckler, supra, as having adverse consequences on AU decision-making:

... the evidence as a whole, persuasively demonstrated that [the Secretary] retained an unjustifiable preoccupation with allowance rates, to the extent that AUs could reasonably feel pressure, in close cases, and in particular, ... that pressure may have intruded upon the factfinding process and may have influenced some outcomes.

594 F.Supp. at 1142.

In addition to depriving a claimant of the right to an impartial AU, application of the Bellmon review program impermissibly affected the Appeals Council. Common sense indicates that targeting certain AUs with the objective of limiting allowance rates is a method by which the Appeals Council reviewed “liberal” AUs with an eye toward reversal. Application of the Bellmon Amendment is the way to deprived claimants of their due process rights to an impartial tribunal.

Therefore, IT IS HEREBY ORDERED, that the plaintiffs motion for summary judgment is granted and the defendant Secretary’s motion for summary judgment is denied. The determination of the Secretary is reversed and remanded.

      . The individual ALJ portion of the Bellmon review program was eliminated by the Office of Hearings and Appeals of the Social Security Administration on June 22, 1984. However, plaintiffs case was heard prior to the program’s demise by an ALJ who was subject to the program.


source: Caselaw Access Project

author: CARL B. RUBIN, Chief Judge.

license: Public Domain

text:
    Mark Kate LEAMAN, Plaintiff, v. OHIO DEPARTMENT OF MENTAL RETARDATION AND DEVELOPMENTAL DISABILITIES, et al., Defendants.
    Civ. No. C-1-84-999.
    United States District Court, S.D. Ohio, W.D.
    May 14, 1985.
    Marc D. Mezibov, Cincinnati, Ohio, for plaintiff.
    Deborah A. Piperni, Columbus, Ohio, for defendants.
   ORDER

CARL B. RUBIN, Chief Judge.

This matter is before the Court on Defendants’ Fed.R.Civ.P. 12(b)(6) and (b)(1) Motions to Dismiss. (Doc. Nos. 5, 10) For the reasons that follow, the motions are GRANTED as outlined below.

A. FACTS

The following facts are taken from the complaint and accepted as true for the purpose of this motion. Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974).

1. Plaintiff was employed by the Ohio Department of Mental Retardation and Developmental Disabilities (DMR) from December 12, 1983, until April 7, 1984. During that time, Plaintiff was a case management specialist assigned to the Cincinnati office. On April 7, 1984, DMR dismissed Plaintiff stating that she failed to fulfill the requirements of her position. (Doc. No. 1, Exhibit B) Plaintiff appealed her dismissal to the Ohio Personnel Board of Review. The Board of Review found that DMR had complied with the applicable statute and dismissed the appeal for lack of jurisdiction pursuant to the Ohio Administrative Code § 124-1-06. (Doc. No. 1, Exhibit A)

2. Plaintiffs difficulties with DMR began when she was assigned to the case of a juvenile named D.M. DMR had been directed by the Hamilton County Juvenile Court to provide for the care, custody, and well-being of D.M. consistent with the provisions of Ohio Revised Code § 5123.67. (Doc. No. 1 at 5) When Plaintiff took over D.M.’s Case, the juvenile resided in a facility for the profoundly retarded. After visiting D.M. and reviewing her records, Plaintiff formed the opinion that D.M. was only mildly retarded and that placement was inappropriate. A running battle ensued among Plaintiff, her supervisors, and the Juvenile Court over the proper placement of D.M.

3. As a result of her advocacy of D.M.’s interests in this battle, Plaintiff was fired. She now seeks injunctive relief and damages under 42 U.S.C. § 1983; § 504 of the Rehabilitation Act, 29 U.S.C. § 794 (1982); and the due process clause of the Fourteenth Amendment. Named as Defendants in the action are DMR; Minnie Fells Johnson, Director of DMR; Sandra A. Crockett, Commissioner of Residential Services at DMR; Joyce Scott, Chief of Client Services at DMR; and Shirley Wilson-Young, Assistant Chief of Client Services at DMR.

4.Five months after commencing this action, Plaintiff filed a complaint against the State of Ohio in the Ohio Court of Claims based on the same set of facts above. (Doc. 10, Exhibit B) This complaint is virtually identical to the original complaint filed in this Court.

Defendants have filed motions to dismiss both the complaint and an amended complaint. These motions raise numerous issues, only two of which need be addressed for disposition of the case. The first issue is whether the doctrine of sovereign immunity bars suit against DMR. The second issue is whether Plaintiff’s suit in the Court of Claims suit bars this action against individual Defendants.

B. SOVEREIGN IMMUNITY

The Eleventh Amendment provides that “[t]he Judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State, or by Citizens or Subjects of any Foreign State.” U.S. Const. amend. XI. The amendment bars suits brought in federal court by private parties seeking to impose a liability that must be paid from public funds in the state treasury. Quern v. Jordan, 440 U.S. 332, 337, 99 S.Ct. 1139, 1143, 59 L.Ed.2d 358 (1979). Its prohibition includes suits by citizens against their own state or state agencies. Edelman v. Jordan, 415 U.S. 651, 662-63, 94 S.Ct. 1347, 1355-56, 39 L.Ed.2d 662 (1974); See, e.g., Alabama v. Pugh, 438 U.S. 781, 98 S.Ct. 3057, 57 L.Ed.2d 1114 (1978); Hans v. Louisiana, 134 U.S. 1, 10 S.Ct. 504, 33 L.Ed. 842 (1890). The amendment applies to actions brought under 42 U.S.C. § 1983. Edelman, 451 U.S. at 675-77, 94 S.Ct. at 1361-62.

Plaintiff does not dispute DMR’s claim to sovereign immunity nor can she. As a state created, operated, and financed institution, DMR is clearly an arm of the state entitled to Eleventh Amendment protection. See Ohio Rev. Code Ann. ch. 5123 (Page 1981). See, e.g., Lee v. Western Reserve Psychiatric Habilitation Center, 747 F.2d 1062 (6th Cir.1984); Hall v. Medical College, 742 F.2d 299 (6th Cir.1984). DMR must, therefore, be dismissed from the suit for Plaintiffs failure to state a claim against it upon which relief can be granted.

C. OHIO REVISED CODE § 2743.-02(A)(1)

The second issue in this case involves an application of § 2743.02(A)(1) of the Ohio Revised Code (O.R.C.). That section waives Ohio’s Eleventh Amendment protection from actions brought in a specially created Court of Claims. To obtain such waiver, the Plaintiff must waive her right to bring claims against state officers or employees that arise from the same act or omission that formed the basis of the suit against the state. Ohio Rev.Code Ann. § 2743.02(A)(1) (Page 1981). Plaintiffs waiver is void if the Court of Claims determines that the state officer or employee was acting outside the scope of his employment or acted with malicious purpose, bad faith, or in a wanton or reckless manner. Id.

On December 14, 1984, Plaintiff filed a complaint against the state in the Ohio Court of Claims. Application of § 2743.02(A)(1) requires dismissal of Plaintiffs claims against the individual Defendants in this case. Plaintiff argues against such a result claiming that the Ohio law is inconsistent with the laws of the United States. She cites in support of her contention Rosa v. Cantrell, 705 F.2d 1208 (10th Cir.1982), cert. denied, 464 U.S. 821, 104 S.Ct. 85, 78 L.Ed.2d 94 (1983).

Rosa involved a § 1983 suit for the wrongful death of Plaintiffs husband at the hands of a city public safety director. The Defendant city interposed the defense that Plaintiff, by accepting state workers’ compensation benefits was barred under Wyoming law from bringing any claims against the employer city. The court analyzed this defense under 42 U.S.C. § 1988, which allows state law to govern civil rights suits where no federal law applies. State law may only apply, however, when “not inconsistent with the Constitution and the laws of the United States....” Id. The Court found the exclusive remedial provision of the state workers’ compensation statute to be inconsistent with the available federal remedy. 705 F.2d at 1221. In arriving at its conclusion, the court noted that by limiting Plaintiff’s remedy, the Wyoming statute thwarted § 1983’s policy of preventing abuses of power by those acting under color of state law. Id. See also Robertson v. Wegmann, 436 U.S. 584, 591, 98 S.Ct. 1991, 56 L.Ed.2d 554 (1978).

Such is not the case here. Rather than cut off Plaintiff’s § 1983 cause of action and remedy as did the Wyoming statute, application of the Ohio statute would leave Plaintiff’s claim intact. Ohio merely requires adjudication of the claim in a special state court. Plaintiff’s action and the policies behind § 1983 are preserved as state courts have jurisdiction to hear § 1983 cases. Martinez v. California, 444 U.S. 277, 100 S.Ct. 553, 62 L.Ed.2d 481 (1980). Further, the Ohio statute is in line with United States Supreme Court holdings permitting states to limit waiver of their immunity to suits brought against them in their own courts. See Great Northern Life Insurance Co. v. Read, 322 U.S. 47, 64 S.Ct. 873, 88 L.Ed. 1121 (1944); Smith v. Reeves, 178 U.S. 436, 20 S.Ct. 919, 44 L.Ed. 1140 (1900).

By filing in the Ohio Court of Claims, Plaintiff has made a knowing, intelligent, and voluntary waiver of her right to bring claims against officers and employees of the state. In exchange for that waiver, Plaintiff received a solvent Defendant. There being no statutory or constitutional impediment to such an arrangement, this Court will hold Plaintiff to her quid pro quo and dismiss the individual Defendants for failure to state a claim against them. D. CONCLUSION

Defendants’ Motions to Dismiss are GRANTED as to Defendant DMR. Defendants’ Motions to Dismiss are GRANTED as to the remaining Defendants with the condition that Plaintiff may refile in this Court against the individual Defendants should the Court of Claims find that they acted outside the scope of employment, with maliciousness, bad faith, or wantoness or recklessness.

IT IS SO ORDERED.

      . To provide for the anonymity of this particular juvenile, Plaintiff has used the juvenile’s initials for purposes of its pleadings

        . The jurisdiction in civil and criminal matters conferred on the district courts by the provisions of this Title, ... shall be exercised and enforced in conformity with the laws of the United States, so far as such laws are suitable to carry out the same into effect; but in all cases where they are not adapted to the object, or are deficient in the provisions necessary to furnish suitable remedies and punish offenses against law, the common law, as modified and changed by the constitution and statutes of the State wherein the court having jurisdiction of such civil or criminal cause is held, so far as the same is not inconsistent with the Constitution and laws of the United States, shall be extended to and govern the said courts in the trial and disposition of the cause....
      42 U.S.C. § 1988 (1982)


text:
    KDI PRECISION PRODUCTS, INC., Plaintiff, v. RADIAL STAMPINGS, INC., et al., Defendants.
    No. C-1-84-904.
    United States District Court, S.D. Ohio, W.D.
    May 22, 1985.

      Kenneth L. Byrne, Cincinnati, Ohio, for plaintiff.
    Scott Loftus, Wayzata, Minn., Joseph Martineau, St. Louis, Mo., and William R. Ellis, Cincinnati, Ohio, for defendants.
   ORDER DENYING DEFENDANT’S MOTION TO DISMISS AND MOTION TO QUASH

CARL B. RUBIN, Chief Judge.

This matter is before the Court on a Fed.R.Civ.P. 12(b)(2), (3) & (4) Motion to Dismiss the Complaint and Cross Claim for lack of in personam jurisdiction, insufficiency of process, and/or insufficiency of service of process filed by defendant Ocello Tool & Die Co., Inc., (“Ocello”), a Missouri corporation (doc. no. 13). In the alternative, defendant Ocello moves for an Order Quashing the Summons and Service of Summons (doc. no. 13). Co-defendant Radial Stampings, Inc., (“Radial”), a Minnesota corporation, has filed a memorandum contra defendant Ocello’s entire motion (doc. no. 14) and plaintiff KDI Precision Products, Inc., (“KDI”), an Ohio corporation, has filed a similar memorandum contra (doc. no. 16). Defendant Ocello has replied to each memorandum (doc. no. 18). For the reasons stated below, the Motion to Dismiss the Complaint and Cross Claim is DENIED. Similarly, the request for an Order quashing the summons and service of summons also is DENIED.

Plaintiff KDI’s Amended Complaint alleges that it entered into a contract with defendant Radial for “tooling” on February 18, 1983. (Amended Complaint at II 3). KDI also alleges that it entered into a contract with Radial for a “machine” on April 6, 1983. (¶ 4). According to KDI, Radial understood that the two contracts were interdependent and that they collectively constituted the contract. (¶ 6). Plaintiff claims to have paid $21,546.30 to Radial for the “tooling” and “machine” (¶ 7), however, according to KDI, the delivered “tooling” and “machine” do not meet the agreed specifications (Mi 12, 15). Accordingly, KDI claims that Radial has breached its contract (¶¶ 13, 16), breached its warranty (MI 20, 24, 28), and has been unjustly enriched (¶ 32). KDI also claims that Radial fraudulently induced KDI into contracting. (II30).

KDI claims that defendant Ocello manufactured the “tooling” (II34) and that Ocel-lo was aware of KDI’s needs regarding the “tooling” (¶ 35). KDI further claims that Ocello impliedly warranted the “tooling” (1137) and that Ocello breached that warranty (1138).

Radial has cross-claimed against Ocello alleging that if any wrongful acts occurred, Ocello was responsible (doc. no. 8 at 4). Accordingly, Radial claims that Ocello is responsible for any liability to plaintiff KDI (doc. no. 8 at 4).

The Court first will address KDI’s assertion that the entry of a default judgment against Ocello constitutes a waiver by Ocello of its right to assert any defenses under Rule 12(b) (doc. no. 16 at 3-6). However, in support of its argument, KDI cites no Sixth Circuit or Ohio District Court decisions (see doc. no. 16 at 4). Because KDI’s assertion clearly is not the rule in this Circuit, the Court will consider Ocello’s defenses on their merits.

The second inquiry prompted by this Motion focuses on Ocello’s claim that it is an out-of-state corporation and that it has done no business in Ohio (doc. no. 13 at 2). Therefore, according to Ocello, long-arm jurisdiction is inappropriate under the Ohio Revised Code (doe. no. 13 at 2).

When considering the reach of personal jurisdiction in diversity cases, such as the instant action, federal courts must apply state law. Erie Railroad v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). Further, in the United States Court of Appeals for the Sixth Circuit, the law is settled that a federal court sitting in a diversity matter must look to the law of the forum to bind a non-resident defendant, such as Ocello, by judgment in personam. In-Flight Devices Corp. v. Van Dusen Air, Inc., 466 F.2d 220, 224 (6th Cir.1972); Southern Machine Co. v. Mohasco Industries, Inc., 401 F.2d 374, 376 n. 2 (6th Cir.1968); Smartt v. Coca-Cola Bottling Corp., 318 F.2d 447, 448 (6th Cir.1963).

The Ohio long-arm statute is found in Chapter 23 of the Ohio Revised Code. Section 2307.382 provides in pertinent part:

(A) A court may exercise personal jurisdiction over a person who acts directly or by an agent, as to a cause of action arising from the person’s:
(1) Transacting any business in this state;
(2) Contracting to supply services or goods in this state; ...
(5) Causing injury in this state to any person by breach of warranty expressly or impliedly made in the sale of goods outside this state when he might reasonably have expected such person to use, consume, or be affected by the goods in this state, provided that he also regularly does or solicits business, or engages in any other persistent course of conduct, or derives substantial revenue from goods used or consumed or services rendered in this state....

Ohio Rev.Code Ann. § 2307.382 (Page 1981). Ocello claims that if the statute applies, its applicability falls under subsection (A)(2) or under subsection (A)(5) (doc. no. 13 at 4). Radial claims that subsections (A)(1) and (A)(2) apply (doc. no. 14 at 2), as does KDI (doc. no. 16 at 6). Both Radial and KDI concede that subsection (A)(5) does not apply (doc. no. 14 at 1; doc. no. 16 at 6). Therefore, the Court need not address Ocello’s discussion regarding the inapplicability of subsection (A)(5).

The Sixth Circuit outlined the procedure a court must follow when deciding a motion to dismiss for lack of jurisdiction in Welsh v. Gibbs, 631 F.2d 436, 438 (6th Cir.1980), citing O’Hare International Bank v. Hampton, 437 F.2d 1173, 1176 (7th Cir.1971). The plaintiff bears the burden of establishing jurisdiction. 631 F.2d at 438; Weller v. Cromwell Oil Co., 504 F.2d 927 (6th Cir.1974). However, if the Court determines to decide the issue on the basis of written materials only, the plaintiff need only make a prima facie case of jurisdiction. 631 F.2d at 438. The burden on the plaintiff is relatively slight and the Court “must consider the pleadings and affidavits in the light most favorable to the plaintiff.” 631 F.2d at 438, quoting Poston v. American President Lines, Ltd., 452 F.Supp. 568, 571 (S.D.Fla.1978). The plaintiff need only “demonstrate facts which support a finding of jurisdiction in order to avoid a motion to dismiss.” 631 F.2d at 438, quoting Data Disc, Inc. v. Systems Technology Associates, Inc., 557 F.2d 1280, 1285 (9th Cir.1977).

An inquiry into whether or not personal jurisdiction exists requires a two-step analysis. Elliot Co., Inc. v. Caribbean Utilities Co., 513 F.2d 1176, 1179 (6th Cir.1975). Initially, a court must determine if the legislature of the state has extended the jurisdictional reach of its courts to nonresident defendants. Secondly, if the jurisdictional reach extends to non-residents, the court must determine under the circumstances at hand, if jurisdiction can be extended consistent with due process. However, if the state legislature has authorized its courts to reach the full constitutional limits in pursuit of non-resident defendants, the two questions merge into one. Id.

At least with respect to the “transaction of any business” provision, i.e. subsection (A)(1), the Sixth Circuit has determined that the Ohio long-arm statute is intended to extend the jurisdiction of its courts to the constitutional limits. Welsh, 631 F.2d at 439; see also Weller, 504 F.2d at 933 (Phillips, C.J., dissenting); In-Flight, 466 F.2d at 224. The United States Supreme Court first defined the constitutional limit of jurisdiction over non-residents in International Shoe Co. v. Washington, 326 U.S. 310, 66 S.Ct. 154, 90 L.Ed. 95 (1945). In International Shoe, the Court held that there must be “minimum contacts” with the forum state such that maintenance of the suit does not offend “traditional notions of fair play.” Id. at 316, 66 S.Ct. at 158. International Shoe spawned numerous expansions of the “minimum contacts” requirement. See, e.g., World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 100 S.Ct. 559, 62 L.Ed.2d 490 (1980); Hanson v. Denckla, 357 U.S. 235, 78 S.Ct. 1228, 2 L.Ed.2d 1283 (1958); McGee v. International Life Insurance Co., 355 U.S. 220, 78 S.Ct. 199, 2 L.Ed.2d 223 (1957).

The Sixth Circuit, based on International Shoe and its progeny, has employed a three-fold mode of analysis to assist it in determining whether or not a certain act or acts provides sufficient contact between a non-resident defendant and the forum state so as not to violate due process when asserting personal jurisdiction. Welsh, 631

F.2d at 440; In-Flight, 466 F.2d at 226. The test is as follows:

First, the defendant must purposefully avail himself of the privilege of acting in the forum state or causing a consequence in the forum state. Second, the cause of action must arise from the defendant’s activities there. Finally, the acts of the defendant or consequences caused by the defendant must have a substantial enough connection with the forum state to make the exercise of jurisdiction over the defendant reasonable.

Southern Machine Co., 401 F.2d at 381.

The Southern Machine test provides a framework for analyzing the dispute in the instant situation. The Court first will apply the test to subsection (A)(1) of the Ohio long-arm statute.

The first and second parts of the test involve a search for specific types of “contacts.” The first aspect of the Southern Machine approach considers the purposeful doing of an act or causing of consequence in the forum state. In the Sixth Circuit, a party “has ‘acted’ so as to transact business in a state ‘when obligations created by the defendant or business operations set in motion by the defendant have a realistic impact on the commerce of that state.’ Such ‘acts’ become purposeful if the defendant ‘should have reasonably foreseen that the transaction would have consequences in that state.’ ” In-Flight, 466 F.2d at 226, quoting Southern Machine, 401 F.2d at 382-83. Meeting this requirement poses a difficult challenge to KDI. However, the Court determines that the plaintiff successfully has met the challenge.

Ocello’s president, Dennis M. Ocello, admits that he attended a meeting in Cincinnati, Ohio on January 5, 1984 with KDI and Radial (doc. no. 18 at 5). Mr. Ocello claims that he attended the meeting only as an advisor to Radial. However, Ocello does not dispute that it entered into a contract with Radial to manufacture and supply the “tooling” required for the operation of the “machine.” The “tooling” and the “machine” were the substance of the contract executed between Radial and KDI. Further, defendant Ocello tested parts provided by KDI to determine whether the “tooling” and “machine” could generate the result required by KDI {see Exhibit C). If the “tooling” is not sufficient, the “machine” is not effective and the contract is worthless. The Court must assume that Ocello recognized the importance of its part of the three-way transaction among KDI, Radial, and itself. Therefore, Ocello cannot be an “unsuspecting” defendant. See In-Flight, 466 F.2d at 226; Hanson, 357 U.S. at 253, 78 S.Ct. at 1239. Where the contract “required joint performance of [buyer], contractor, and subcontractor” the due process clause of the Fourteenth Amendment permits an Ohio District Court to exercise personal jurisdiction over an out of state subcontractor. Biltmoor Moving & Storage Co. v. Shell Oil Co., 606 F.2d 202 (7th Cir.1979). Therefore, the Court concludes that Ocello created an “obligation” that it “should have reasonably foreseen” “would have a realistic impact on the commerce of Ohio.” See In-Flight, 466 F.2d at 226.

The second part of the Southern Machine test requires a determination as to whether the cause of action arose from the business transacted in Ohio. The Court can dispose of this question shortly. KDI claims that defendant Ocello impliedly warranted the “tooling” (Amended Complaint at 1137) and that Ocello breached that warranty (1138). The cause of action arose from the contract negotiated in -Ohio between KDI and Radial. Therefore, the second aspect of the Southern Machine test is met.

The Court must now consider the third part of the Southern Machine test: Did Ocello have sufficient contact with Ohio to make the exercise of jurisdiction over it reasonable? When resolving this aspect, the Court must consider the extent of Ohio’s interest in the controversy. See Southern Machine, 401 F.2d at 384. Ohio clearly has an interest in resolving a suit brought by one of its residents. See id. at 385. Ohio has expressed a policy of securing to its businessmen the benefit of their bargains. In-Flight, 466 F.2d at 232. To hold a defendant responsible for his failure to perform the obligations imposed upon him by such a contract is consistent with this policy.

Although the strength of Ohio’s interest in resolving the present dispute is significant in resolving part three of the Southern Machine test, other factors also are relevant. Courts have identified the sense of surprise suffered by a non-resident defendant as a factor making long-arm jurisdiction unfair. In-Flight, 466 F.2d at 233. However, based on the contacts of the parties discussed above, Ocello reasonably could have expected KDI’s assertion of jurisdiction. Courts also have considered the nature and quantity of the defendant’s physical contacts with the forum state as an indicator of fairness. Id. at 234. However, physical presence in the state is not a prerequisite to the assertion of jurisdiction over the defendant, see Southern Machine, 401 F.2d at 382, nor does its existence alone establish a sufficient basis for such jurisdiction. Id. at n. 18. “A letter or a telephone call may, in a given situation, be as indicative of substantial involvement with the forum state as a personal visit by the defendant or its agents.” In-Flight, 466 F.2d at 235. “The soliciting of insurance by mail, the transmission of radio broadcasts into a state, and the sending of magazines and newspapers into a state to be sold there by independent contractors” have been held to constitute the transaction of business in a state. Southern Machine, 401 F.2d at 382 (citations omitted). The Court considers Ocello’s trip to Cincinnati, Ocello’s importance to the contract between Radial and KDI, and Ocello’s testing of the “tooling” as indicative of Ocello’s interest in KDI’s Ohio activities. See In-Flight, 466 F.2d at 235. Therefore, the third and final part of the Southern Machine test is met.

Based on the above discussion, the Court concludes that KDI has established a prima facie case of personal jurisdiction over defendant Ocello. Ocello had “minimum contacts” with Ohio, and KDI’s out-of-state service did not offend traditional notions of fair play. International Shoe, 326 U.S. at 310, 66 S.Ct. at 154. Based on this conclusion, the Court need not analyze subsection (A)(2) of the Ohio long-arm statute.

The Court next must evaluate defendant Ocello’s claim of insufficient process and/or insufficient service of process. Ocello asserts that KDI attempted service on it pursuant to Rule 4(c)(2)(C)(ii) (doc. no. 13 at 8). According to Ocello, such service-by-mail mechanism is not available in cases like the instant action where the federal court predicates its jurisdiction on the forum state’s long-arm statute (doc. no. 13 at 8). Rather, Ocello contends that the federal court must look to the service provisions of the forum state’s long-arm statute as dictated in Federal Rule 4(e) (doc. no. 13 at 8-9). KDI asserts that Ocello’s contentions are permissive, not mandatory (doc. no. 16 at 13). Alternatively, KDI claims that its service of process on Ocello, though not strictly in accord with the provisions under the Ohio long-arm statute, substantially complies with the statute’s requirements (doc. no. 16 at 14-15). Thus, according to KDI, its noncompliance is negligible and represents a mere technicality (doc. no. 16 at 14-15).

The Court agrees with KDI’s alternative theory. Rule 4.3 of the Ohio Rules of Civil Procedure specifically sets forth the Ohio requirements of service of process on out-of-state defendants. The pertinent provision of the Rule provides for service by certified mail and return receipt requested. See Ohio R.Civ.P. 4.3(B)(1). Plaintiff KDI served the Summons and Complaint by first class ordinary mail with an enclosed acknowledgment form. Ocello completed the acknowledgment of receipt of Summons and Complaint and returned it to Kenneth L. Byrne, counsel for plaintiff KDI (doc. no. 11 at 1). In essence, the acknowledgment form performed the same function as the return receipt in a certified mailing. This asserted non-compliance with Ohio Rule 4.3(B)(1) represents a “time-consuming and justice-defeating technical-it[y].” Smith v. Peters, 482 F.2d 799, 803 (6th Cir.1973), quoting Goldlawr, Inc. v. Heiman, 369 U.S. 463, 467, 82 S.Ct. 913, 916, 8 L.Ed.2d 39 (1962). The Court at this time advances no position regarding the mandatory/permissive language of Federal Rule 4(e).

In summary, defendant Ocello’s Motion to Dismiss the Complaint and Cross Claim for Want of Personal Jurisdiction and Insufficient Process and/or Service of Process (doc. no. 13) is DENIED. Similarly, Ocello’s alternative request for an Order to Quash the Summons and Service of Summons (doc. no. 13) is DENIED.

IT IS SO ORDERED.


author: JOYCE HENS GREEN, District Judge.

text:
    Barry M. BLACKMAN, Plaintiff, v. HUSTLER MAGAZINE, INC., Defendant.
    Civ. A. No. 76-2103.
    United States District Court, District of Columbia.
    May 30, 1985.

      Aidan D. Jones, Paul Martin Wolff, Washington, D.C., for plaintiff.
    Angelo V. Arcadipane, Washington, D.C., Norman Zafman, Beverly Hills, Cal., Mark W. Foster, Zuckerman, Spaeder, Moore, Taylor & Kolker, Washington, D.C., for defendant.
   MEMORANDUM OPINION

JOYCE HENS GREEN, District Judge.

In a previously-entered Memorandum Opinion and Judgment, defendant Hustler Magazine, Inc. (“Hustler”) was adjudged liable to plaintiff Barry M. Blackman for copyright infringement and unfair competition in connection with Hustler’s unauthorized publication of certain photographs taken and copyrighted by Blackman. Currently before the Court is the issue of damages, which was bifurcated from the liability issue and subsequently tried to the Court. Many of the facts relevant to damages have been stipulated; others were the subject of in-court expert- and fact-witness testimony, documentation, and the parties’ numerous pretrial and post-trial submissions filed as recently as April 2, 1985. In addition, the facts underlying the Court’s liability determination are fully set forth in the July 11, 1984 Memorandum Opinion, which is incorporated by reference into this Opinion.

Barry M. Blackman is a professional photographer who took nude photographs of Elizabeth Ray in September, 1972 when Ms. Ray was relatively unknown. Ms. Ray signed a release giving Blackman all rights to use, publish and copyright the photographs. Approximately four years later, in early June, 1976, the disclosure of Ms. Ray’s relationship with a United States Congressman catapulted Blackman’s former model into the public eye, and thereby substantially increased the potential value of Blackman’s photographs. Recognizing that the publicity surrounding Ms. Ray could work to his advantage, Blackman published (for the first time) the 54 Ray photographs on June 14, 1976, with notice of his claims of copyright affixed to each. Mem. Op. 1-2; Joint Stipulation (“JS”) 2.

On September 2, 1976, Blackman filed two copies of 53 of these photographs with the United States Register of Copyrights, who thereupon issued Blackman Certificates of Registration of a Claim to Copyright covering all 53 of the photographs. On April 8, 1977, Blackman filed the remaining Ray photograph with the United States Register of Copyrights, and was issued a Certificate of Registration of a Claim to Copyright for it as well. During the period from the creation of the photographs to the present time, Blackman has been the sole proprietor of the copyrights in the photographs, and has been the sole owner of all right, title and interest in the photographs, except as to such interest as he has expressly licensed to other persons. JS 3-5.

On June 14 and 15, 1976, Blackman announced, through the news media, that he was the photographer and owner of nude pictures of Elizabeth Ray, and that rights to publish those photographs were available for purchase. Daniel R. Montgomery, a business acquaintance of Larry Flynt, the publisher of Hustler, notified Flynt of Blackman’s announcement and obtained Flynt’s permission to negotiate with Black-man on behalf of Hustler for the rights to publish the Ray photographs. Blackman, through his agent William Tucker, sought $25,000 for the North American rights to commercial use of the photographs; Hustler, through Montgomery, offered $16,000. On June 16, 1976, Tucker flew to Las Vegas, Nevada to negotiate directly with Flynt. The discussions between Tucker and Flynt, recounted in detail in the July 11, 1984 Memorandum Opinion, were inconclusive inasmuch as all involved knew that Blackman had retained authority to approve or reject any agreement negotiated by Tucker. At the close of the June 16, 1976 discussions, Flynt obtained from Tucker copies of the photographs which Tucker had shown to him, and contemporaneously signed a receipt dated June 16, 1976, which noted below the list of photographs received “All copyrighted by photographer Barry M. Blackman.” After signing the receipt Flynt saw in Tucker’s briefcase four original transparencies of additional Ray photographs and asked Tucker to leave those four behind as well. Tucker did so, after adding the four to the receipt. JS 6-11; Mem. Op.

The following day, Blackman sent a telegram to Hustler, which was received by Hustler, stating:

THIS IS TO CONFIRM THE ADVICE OF MY AGENT WILLIAM TUCKER TO YOU YESTERDAY THAT I HAVE RESERVED TO MYSELF PERSONALLY THE SOLE RIGHT TO APPROVE ANY SALE OF MY PHOTOGRAPHS OF ELIZABETH RAY. I AM CONSIDERING YOUR JUNE 16TH, 1976 OFFER AND WILL ADVISE YOU IN WRITING WHETHER I ACCEPT IT. HOWEVER I AM REQUIRING FULL PAYMENT AT THE TIME OF ANY SUCH ACCEPTANCE THAT I MIGHT SUBSEQUENTLY GIVE. [JS 12.]

On June 24, 1976 Blackman and Tucker entered into an agreement with Cheri Magazine for the purchase and sale of rights to the same photographs of Elizabeth Ray which Hustler attempted to purchase. Under the terms of that agreement, Blackman was tendered $20,000, with an additional $10,000 to be forthcoming if the photographs (or any individual photograph) were not published in Hustler or any magazine under the control of Larry Flynt prior to Cheri’s publication. Mem.Op. at 81. Also on June 24, 1976, Blackman sent a telegram to Hustler Magazine, Inc., which was received by Hustler, stating:

THIS IS TO ADVISE THAT I REJECT YOUR OFFER OF JUNE 16 1976 TO PURCHASE MY PHOTOGRAPHS OF ELIZABETH RAY. YOUR $1,000 CHECK IS BEING RETURNED TO YOU BY MAIL.
I HEREBY DEMAND THAT YOU RETURN ALL OF MY PHOTOGRAPHS TRANSPARENCIES PRINTS AND COLOR SEPARATIONS OF ELIZABETH RAY. FAILURE TO COMPLY WITH MY REQUEST WILL BE AT YOUR PERIL.

By mail posted the following day, Black-man, through his attorney, returned Flynt’s uncashed check with an accompanying letter from the attorney stating:

As you know, I represent Barry M. Blackman. Mr. Blackman has asked me to return to you the enclosed $1,000 check.
Mr. Blackman has also requested that I .advise you to return to him all of his photographs, transparencies, prints and color separations of Elizabeth Ray. Any further misappropriation or unauthorized use by you of these properties of Mr. Blackman will result in substantial damages to him for which Mr. Blackman intends to hold you responsible. [JS 14-15.]

As of June 16, 1976, and at all pertinent times subsequent thereto, Flynt and Hustler Magazine, Inc., knew that Blackman was the creator of and owner of all rights to the photographs. Nonetheless, Flynt refused to return to Blackman the photographs left with Flynt on June 16 by Tucker. Instead, Hustler published 11 photographs of Elizabeth Ray in its September, 1976 issue and subsequently republished nine of those photographs in “The Best of Hustler # 2”, and republished one Ray photograph in its July, 1979 anniversary issue. All of the photographs of Elizabeth Ray published in the September 1976 and July 1979 issues of Hustler Magazine and in “The Best of Hustler # 2” were made and copied from transparencies, negatives and prints created by Blackman and obtained by Hustler from Tucker on June 16, 1976. Hustler did not identify Blackman as the copyright owner of any of the Elizabeth Ray photographs which it published in any of the three above-mentioned issues. JS 16-22.

In light of all these facts and others, this Court on July 11, 1984, 620 F.Supp. 792, concluded that

with reason to believe its acts constituted infringement of copyrights, and in the absence of a license to do so, fully cognizant of plaintiff’s rejection of its offer, Hustler willfully published Blackman’s copyrighted photographs on three occasions. The first occasion occurred months after Blackman disavowed any contract. In an brash adventure with destiny, the second and third republications occurred after litigation had commenced. ...
When Hustler elected to publish Black-man’s photographs, it infringed Black-man’s copyrights and acted in unfair competition.... Hustler’s publications of these photographs were not inadvertent or accidental; they did not result from a misunderstanding. As Hustler acted in conscious disregard of Black-man’s rights, its actions were deliberate, intentional, malicious and wanton. Mem.Op. at 30-83.

In sum, this Court found that Hustler made a “willful economic decision for which it must be held accountable.” Mem.Op. at 32. That accounting is the task now at hand.

Because each of Hustler’s three successive publications of the Elizabeth Ray photographs was issued at a different time and involved a distinct set-up and arrangement of copy, they shall be treated as three separate infringements for the purpose of assessing damages. See L.A. Westermann Co. v. Dispatch Printing Co., 249 U.S. 100, 39 S.Ct. 194, 63 L.Ed. 499 (1919); see also 3 Nimmer, The Law of Copyright (hereinafter “Nimmer”), Section 14.04[E] at 37-42.1 (surveying cases invoking “time” test and “heterogeneity” test). Publication of the photographs in the September, 1976 issue and republication in Best of Hustler # 2 (published in late 1976) is governed by the Copyright Act of 1909, 17 U.S.C. § 1 et seq. (1970), which was in effect through 1977. The Copyright Act of 1976, 17 U.S.C. § 101 et seq. (1977), applies to causes of action arising on or after January 1, 1978, and thus governs the republication in the July, 1979 Hustler issue. The damages provisions of the two statutes differ somewhat and will be discussed separately. Plaintiff’s claim of unfair competition does not call for relief above and beyond that provided under the copyright statutes.

A. Damages Under the 1909 Act

Under the 1909 Act, a prevailing plaintiff may recover damages equal to his actual damages suffered due to the infringement plus all the profits made by the defendant from the infringement. 17 U.S.C. § 101(b). In proving profits, the plaintiff is required to prove [revenues] only, and the defendant must prove every element of cost which he seeks to deduct from revenues. Id. Alternatively, the plaintiff may recover an award of statutory damages in lieu of actual damages and profits, in an amount appearing to the Court to be just, within certain limitations where applicable. Id. Under the 1909 Act, the election between these alternatives is to a degree discretionary with the Court, and depends in large measure on the availability of proof as to damages and profits. See 3 Nimmer § 14.04[A] at 23.

1. Damage-Plus-Profit Recovery

As actual damages, plaintiff seeks $10,000 representing the unpaid balance of his agreement with Cheri Magazine, which was lost when Hustler published the Ray photographs in its September, 1976 issue. In addition, he requests actual damages in the amount of $25,000 allegedly due to the reduction in the license value of the photographs caused by Hustler’s wrongful publication of them and consequent saturation of the market and to Hustler’s failure to identify Blackman as the creator and copyright owner of the photographs. In theory, each of these elements is recoverable under the 1909 Act. See 3 Nimmer § 14.02 at 10 and cases cited therein. However, the 1976 Act makes clear that a plaintiff’s lost profits resulting from an infringement are not recoverable as actual damages to the extent that they have been taken into account in computing the defendant’s profits, and vice versa. See 3 Nimmer § 14.01[B] at 5; Taylor v. Meirick, 712 F.2d 1112, 1120 (7th Cir.1983) (1976 Act). That rule is not made explicit in the 1909 Act, but the goal of preventing double recoveries applies equally to actions arising prior to 1977; therefore, the 1976 Act merely clarified but did not change the 1909 Act in this respect.

Defendant concedes that plaintiff has proven $10,000 in actual damages under the Cheri agreement, but argues that the “lost profits” sought by plaintiff as actual damages appear as defendant’s profits under a damage-plus-profit recovery and should not be counted twice. Defendant further contends that the amount of lost profits claimed is highly speculative, given the absence of evidence documenting unsuccessful efforts by plaintiff to sell the Ray photographs to other buyers after the Hustler publication. Defendant also questions the significance of Hustler’s failure to identify plaintiff as the photographer, in that plaintiff was himself an aggressive self-promoter: by his own assertion, when plaintiff first announced the existence of the pictures in mid-June, 1976, his telephone was “literally ringing off the hook” with calls from would-be purchasers. Tr. 186. At any rate, the dollar amount of actual damages in controversy is a relatively modest $15,000, since $10,000 has been conceded.

The profit element of the damage-plus-profit recovery formula raises a far more substantial issue. The statute contemplates that profits will be calculated by deducting costs proven by defendant from revenues proven by plaintiff. 17 U.S.C. § 101 (1970). Accordingly, as a first step each party has submitted its own calculation of revenues produced by the two infringing issues of Hustler governed by the 1909 Act.

In making their calculations, the parties did not have the benefit of accurate financial data specific to the magazine issues in question. Through carelessness only partially explained but not excused by the rigors of a transcontinental relocation of defendant’s corporate headquarters while this litigation was in progress, defendant has misplaced or destroyed documents critical to the revenue inquiry, including advertising receipts and rate sheets, print run tabulations, and the like. Consequently, plaintiff had no choice but to rely on the testimony of an expert economist, whose revenue estimates were based on the scanty information gleaned from Hustler through discovery. Plaintiffs expert had little familiarity with the magazine industry. Tr. 38-44. Barred from calling on its own chosen expert except as a fact witness, see Order of February 22, 1985, defendant relied chiefly on audited aggregate financial data compiled for LFP, Inc., Hustler’s parent corporation.

Drawing upon information in the LFP audited financial statement for 1976 (DX-AA), defendant argues that a reasonable estimate of advertising revenues for the September, 1976 issue is Vi2 of the annual advertising revenues of $317,647, or $26,-471. Plaintiff’s expert ascertained more recent per-page advertising revenues for Hustler, adjusted that figure to account for post-1976 inflation as well as decreased circulation of the magazine, and arrived at a per-page revenue estimate for the September, 1976 issue. Multiplying that per-page estimate by 26.17 pages of advertising space in that issue (including some 16 pages of advertising placed by other LFP businesses), plaintiff’s expert calculated that advertising revenues from the September, 1976 issue totalled $377,921, a figure higher than the annual advertising revenues shown on LFP’s audited financial report. Tr. 55; Plaintiff’ Post-Trial Mem. at 17. Some of the disparity is explained by the fact that plaintiff includes in his calculation the “value” of house ads run at no charge by other Flynt enterprises to fill unsold ad space in the magazine. However, even if the value-based house ad “revenues” are deducted from plaintiff’s advertising revenue total, the remaining $146,-864 exceeds defendant’s figure by over $120,000. To a less dramatic degree, similar disputes drive apart the parties’ advertising revenue estimates for Best of Hustler # 2.

The above example is indicative of the problems engendered by defendant’s loss of crucial documents: lacking specific contemporaneous data, the Court is hard pressed to determine whether plaintiff, defendant, or neither of them strikes close to the truth. An even more troublesome disparity in the parties’ revenue figures concerns direct sales of the September, 1976 issue. The parties agree on the sale price of the issue; their dispute goes to the number of copies sold. Plaintiff relies on a June 17, 1976 article printed in the Las Vegas Sun Times newspaper (PX-28) as evidence that defendant printed and sold as many as a million copies of the September, 1976 issue above and beyond those accounted for. The Sun Times article reported that “Hustler ... [would] publish an additional million copies of the August issue” and quoted Flynt as stating, “We expect to sell out.” PX-28. As the alleged million copies do not appear in defendant’s archives, plaintiff reasons that they must have been sold. Defendant responds that no evidence produced at trial corroborates that prediction, which defendant regards as sheer puffery on Flynt’s part. In the average case, the print run of a magazine can be easily determined by reference to the publisher’s records, for instance, by examination of bills or statements issued from the printer it retains. In this case, it is virtually impossible to state with confidence that direct sale revenues from the September, 1976 issue amounted to the $1,252,917 asserted by plaintiff, the $29,250 claimed by defendant, or any figure between those two.

Even when the parties refer to the same source of information, their conclusions differ at times. For instance, a notation in the LFP audited financial statement for 1976 indicates a non-recurring loss of $4,017,503 in the event of a particular outcome of then-pending litigation between LFP and the distributor of Hustler at that time, Capital Distributing Company (“Capital”). That notation touched off a debate at trial as to the effect, if any, of the $4,017,503 “reserve” (see DX-AA, note D-l) on the tally of distributor sales reflected in Capital’s final settlement for that issue. The dispute turns on whether the reserve represents potential liability of Hustler to Capital or potential liability of Capital to Hustler arising from the lawsuit. The language of the notation is unclear and plaintiff’s expert witness offered flatly contradictory testimony on this point at trial. See Tr. 159, 167-71. For reasons that follow, this matter need not be resolved; it is raised only to demonstrate that even financial records referenced by both parties contain puzzling ambiguities.

On the question of publication costs deductible from expenses, the source of the parties’ dispute is again defendant’s failure to preserve pertinent documents. Because costs, unlike revenues, must be proven by defendant, the consequences of Hustler’s cavalier disposal of records reflecting the expense of printing the magazine at issue fall squarely on defendant’s shoulders. At trial, defendant could do no better than to produce evidence of Hustler Magazine’s yearly profit margin for the year 1976, drawing from the annual financial data prepared for LFP, of which Hustler is one component. Conceding its inability to calculate profits on the basis of revenues minus costs, defendant submits that a fair estimate of the profits generated by the September, 1976 issue and Best of Hustler # 2 may be calculated by multiplying that issue’s revenues by LFP’s profit margin (a percentage figure) for that year. Based on a 19% overall profit margin for 1976 and defendant’s calculation of revenues derived from the September, 1976 issue of Hustler ($2,485,314), defendant concedes earning a $472,210 profit from that issue. Applying the same 1976 profit margin (19%) to defendant’s calculation of revenues derived from Best of Hustler #2 ($1,574,021), defendant concedes profits from Best of Hustler # 2 in the amount of $299,064.

Plaintiff contends that defendant’s profit margin method of calculating profits from the 1976 issues is unacceptable and does not satisfy defendant’s burden of proving the costs of publishing the particular issues in question. Plaintiff cites support for equating profits and revenues where a defendant has not shouldered its burden of proving costs in a copyright infringement action, see F.W. Woolworth Co. v. Contemporary Arts, Inc., 344 U.S. 228, 230, 73 S.Ct. 222, 224, 97 L.Ed. 276 (1952); Russell v. Price, 612 F.2d 1123, 1130-31 (9th Cir.), cert. denied sub nom. Drebin v. Russell, 446 U.S. 952, 100 S.Ct. 2919, 64 L.Ed.2d 809 (1980), and on that authority argues that recoverable profits should equal that portion of gross revenues attributable to inclusion of the Ray photographs. Plaintiff’s calculations of total profits and apportioned recoverable profits (those attributable to the Ray photographs) for the September, 1976 issue and Best of Hustler # 2, are shown and contrasted against defendant’s figures below:

The disparity in the parties’ calculations suggests — and the evidence produced at trial confirms — that an award based on plaintiff’s actual damages plus profits (one basis of recovery under the 1909 Act) would be inappropriate in this case. Defendant is admittedly unable to establish the costs of publishing the isolated Hustler issues involved in this case. Nonetheless, it is clear that substantial costs were incurred and should be somehow accounted for — even those revenues conceded by defendant, not to mention those claimed by plaintiff, necessarily far exceed the profits generated by the two issues. Where costs have not been proven a court may equate profits with revenues; however, this case involves very high sums of money, and a revenue-based award would impose on defendant far too severe a penalty for its inability to document costs.

Defendant’s profit margin method is an equally unacceptable method for determining profits recoverable under a damage-plus-profit award. The 19% 1976 profit margin figure derives from financial data covering all LFP enterprises (not just Hustler Magazine) over the entire year. Thus it does not account for the possibility that Hustler may have been more or less profitable than the other LFP components or that the issues in question may have generated more or less profit than other issues published in 1976. Given these flaws, the profit margin method, like plaintiff’s method of calculating profits, is neither equitable nor based on fact. Accordingly, and in light of the absence of solid cost data, an award of statutory damages under the 1909 Act is more appropriate than a damage-plus-profit award.

2. Statutory Damages

Under the rubric of statutory damages (those awarded “in lieu of actual damages and profits”, 17 U.S.C. § 101(b) (1970)), the Court may award “such damages as ... shall appear to be just.” Id. The statute also generally provides for a $5,000 maximum recovery per infringement; however, that limitation does not apply to infringements occurring after actual notice to a defendant. Id. In this case, Larry Flynt and Hustler Magazine received and ignored prior notice from Blackman and his counsel that publication of the Ray photographs would constitute copyright infringement. Accordingly, statutory damages in any appropriate amount can be assessed.

In determining an appropriate amount, the Court may follow the $l-per-infringing-copy guideline provided in the statute but retains discretion to award a lesser amount in the interests of justice. See Fedtro, Inc. v. Kravex Mfg. Corp., 313 F.Supp. 990 (E.D.N.Y.1970) (yardstick measure of two cents per page applied); 4 Nimmer, Appendix 17 at 2 (yardstick measure “purely discretionary” and “often departed from by courts”). Using either party’s tally of copies printed, the $l-per-copy guideline would yield a multimillion-dollar recovery for plaintiff for the 1976 issues alone. Such an award, like the revenue-based award rejected above, is excessive. Moreover, resort to a plainly arbitrary method of setting damages is unnecessary and illadvised here, as the evidence presented at trial may be drawn upon in an effort to ascertain a more realistic amount of damages.

As discussed above, the available evidence bearing on damages is imperfect and incomplete. Nonetheless, the Court finds useful, for present purposes, defendant’s calculations that its revenues from the September, 1976 issue and Best of Hustler # 2 amount to $2,485,314 and $1,574,021, respectively. Defendant concedes that 19% of those revenues (or $472,210 and $299,-064, for the respective issues) constitutes profits. Therefore, at least a sizeable (unapportioned) profit figure is not in dispute, and, as shown below, the undisputed profits, when properly apportioned and added to proven damages, yield a just and reasonable statutory damage award.

Defendant advocates apportioning profits from both 1976 issues on a 15% basis, and offers both statistics and arguments to support its position. To the extent that defendant simply contrasts the number of pages and photographs per issue against the number of pages devoted to the Ray photographs and the number of plaintiffs photographs included in the magazine, its approach unconvincingly assigns equal revenue-generating value to every page and photograph, regardless of content. Defendant’s contention that the issues containing Ray photographs did not appreciably outsell other 1976 issues is equally insubstantial: that argument addresses revenue apportionment between issues published in 1976 and only tangentially bears on apportionment between features within a single issue.

Based on Hustler’s own treatment of the infringing material — i.e., the use of the Ray photographs as a lure to attract readers, the fostering of publicity focusing on their publication, and the placement of the Ray photographs in the magazine — it is clear that plaintiffs photographs were the highlight of the September, 1976 issue and a prominent part of Best of Hustler # 2. A realistic estimate is that their unauthorized publication generated 60% of the September, 1976 issue’s profits and 35% of the profits of Best of Hustler # 2. Those ap-portionments, while well above defendant’s 15%-per-issue conservative estimates, fall far short of the overly generous 80% and 50% apportionments proposed by plaintiff.

When applied to conceded gross, profits, the 60% and 35% apportionment estimates yield recoverable profit figures in the amount of $283,326 for the September, 1976 issue and $104,672 for Best of Hustler # 2. Recognizing that neither party has proven the underpinnings of these calculations, the Court nonetheless determines that, with respect to the 1976 issues, a total of $397,998 represents a fair recovery which will amply compensate plaintiff for his losses (including the loss of $10,000 under the Cheri contract), strip defendant of its ill-gotten gains and discourage similar actions by defendant in the future. See generally, F.W. Woolworth Co. v. Contemporary Arts, Inc., 344 U.S. 228, 73 S.Ct. 222, 97 L.Ed. 276 (1952) (“lack of adequate proof [as to damages or profits] warrants] resort to the statute in the discretion of the court”, and statutory rule “not merely compels restitution of profit and reparation for injury but is designed to discourage wrongful conduct:); United Feature Syndicate, Inc. v. Sunrise Mold Co., 569 F.Supp. 1475 (D.Fla.1988) (addressing restitution, reparation and deterrence functions of statutory damage award under 1976 Act). Whether a damage-plus-profit recovery would have been higher (as plaintiff claims) or lower (as defendant contends) need not be determined. Under the statute, it will suffice that, upon consideration of the entire record, the amount awarded in the discretion of the Court is just and reasonably designed to accomplish the purposes of the statute.

B. Damages Under the 1976 Act

Defendant’s infringing republication of the Ray photographs in its July, 1979 fifth anniversary issue is governed by the current copyright act, 17 U.S.C. § 101 et seq. (1977), (“the 1976 Act”). The 1976 Act, like the 1909 Act, provides that a plaintiff may recover either actual damages plus profits or statutory damages, 17 U.S.C. § 504. Under the 1976 Act, the election between alternatives is clearly left to the plaintiff, who in this case has deferred to the Court’s discretion on this matter. See Harris v. Emus Records Corp., 734 F.2d 1329 (9th Cir.1984) (under the 1976 Act, election is prerogative of plaintiff, whether or not there is adequate evidence of actual damage or profits).

The parties have stipulated as to all elements of revenues generated by the July, 1979 issue except advertising revenues. As before, plaintiff contends that whether or not payments for house advertising space were actually passed between the various Flynt enterprises, the value of house ad space should be accounted for in this action at the same rate as space actually sold to outside advertisers. Defendant responds that house ads produce no revenue for Hustler, and that the magazine’s inability to sell (and outside advertisers’ unwillingness to pay for) house ad space indicates that it is valueless as a revenue source. Defendant’s argument is the more persuasive; therefore, defendant has properly included in its accounting of advertising revenues only those monies actually paid into Hustler’s coffers by purchasers of ad space in ’the magazine. Accordingly, defendant’s gross revenues calculation of $2,809,351 is accepted as accurate.

The parties have stipulated that the deductible cost to defendant of publishing the July, 1979 issue totalled $1,680,000. JS 47. Subtracting costs from revenue yields an unapportioned profit total of $1,129,351, only part of which may be fairly attributed to the infringing materials. Plaintiff acknowledges that the Ray photographs comprise only a small portion of the 1979 issue and proposes a 5% apportionment. Defendant argues that half of that (2.5%) is appropriate. In consideration of both parties’ arguments and the fact that the newsworthiness of the Ray photographs had diminished considerably by 1979, the Court finds a 3% apportionment to be reasonable. Three percent of the demonstrated profits of $1,129,351 equals $33,881 in profits attributable to the infringement. Plaintiff does not claim that the 1979 republieation caused him to suffer additional actual damages, and the actual damages resulting from the original publication have been accounted for in the statutory damage award with respect to the 1976 issues. Therefore, as to the July, 1979 infringement only, a damage-plus-profit recovery of $33,881 is appropriate and shall be awarded.

C. Other Elements of Recovery

Plaintiff requests that his recovery be increased to adjust for inflation during the period between the filing of the suit and judgment; in addition, he seeks prejudgment interest and punitive damages. None of these elements is traditionally included in a copyright infringement award, and none will be granted in this case. See 3 Nimmer § 14.02 at 10-11 (prejudgment interest “occasionally” awarded in copyright infringement actions); see also Aitken v. Empire Constr. Co., 542 F.Supp. 252 (D.Nebr.1982); Baldwin Cooke Co. v. Keith Clark, Inc., 420 F.Supp. 404 (N.D.Ill.1976) (denying prejudgment interest on damage-plus-profit award); Davis v. E.I. du Pont de Nemours & Co., 257 F.Supp. 729 (S.D.N.Y.1966) (denying prejudgment interest on statutory damage award). See also 3 Nimmer § 14.02 at 12 and cases at nn. 40-41 therein (“it is, in any event, clear that exemplary or punitive damages should not be awarded in a statutory copyright infringement action” as opposed to common-law action, because policy rationale of punishing and preventing malicious conduct can be accounted for in provisions for increasing or disregarding maximum limits on statutory damage award).

The availability of costs and attorney’s fees (both of which are sought by plaintiff) under the 1909 Act and the 1976 Act has been addressed by this Court in Quinto v. Legal Times of Washington, 511 F.Supp. 579, 580 (D.D.C.1981):

Section 505 [of the 1976 Act] provides as follows:
In any civil action under this title, the court in its discretion may allow the recovery of full costs by or against any party other than the United States or an officer thereof. Except as otherwise provided by this title, the court may also award a reasonable attorney’s fee to the prevailing party as part of the costs.
This represents a substantial departure from the 1909 Copyright Act. Under the old law, 17 U.S.C. § 116, it was mandatory that full costs be awarded to the prevailing party in a copyright infringement action while attorney’s fees were discretionary. The new Act leaves both matters to the court’s discretion.

See also 3 Nimmer § 14.09 at 62; Encyclopedia Britannica Educational Corp. v. Crooks, 558 F.Supp. 1247 (W.D.N.Y.1983). The Quinto court summarized the rationale for an award of attorney’s fees as follows:

An award of attorney’s fees helps to ensure that all litigants have equal access to the courts to vindicate their statutory rights. It also prevents copyright infringements from going unchallenged where the commercial value of the infringed work is small and there is no economic incentive to challenge an infringement through expensive litiga-tion_ In addition, an award of attorney’s fees serves to penalize the losing party as well as to compensate the prevailing party.

511 F.Supp. at 581; see also Oboler v. Goldin, 714 F.2d 211, 213 (2d Cir.1983); 3 Nimmer § 14.10 at 64.

With these objectives in mind, and in light of Larry Flynt’s “deliberate, intentional, malicious and wanton” disregard of plaintiff’s rights, Mem.Op. at 33, and defendant’s conduct throughout this litigation, an award of attorney’s fees and costs is appropriate in this case. See Lauratex Textile Corp. v. Allton Knitting Mills, 517 F.Supp. 900 (S.D.N.Y.1981) (willfulness of infringement justifies attorney’s fees). It has been stipulated that the expenses and hours reflected in defendant’s submissions (see Exh. 35 and supplements thereto) are accurate and were incurred solely in this litigation. Defendant has not stipulated to the reasonableness of the hours expended, and under both Copyright Acts only reasonable attorney’s fees are authorized. 17 U.S.C. § 116 (1970); 17 U.S.C. § 505 (1977). The requisite reasonableness is gauged by the amount of work necessary, the amount of work done, the skill employed, monetary amount involved, and result achieved. See 3 Nimmer § 14.-10[D] at 71; see generally Quinto v. Legal Times of Washington, Inc., supra; Cloth v. Hyman, 146 F.Supp. 185 (S.D.N.Y.1956).

Plaintiff has painstakingly accounted for every element of cost and each attorney-hour spent on this case by an associate or junior partner in plaintiff’s counsel’s law firm since January, 1981. However, there is no itemization of charges billed to plaintiff’s account up to December 31, 1980, such charges in the amount of $43,332.50 being reflected as “unbilled balance” on the billing summary submitted to the Court. Likewise, there is absolutely no explanation for the hours spent by plaintiff’s lead counsel, although attorney fees attributable to his legal services amount to $28,250. It is unclear whether the statement of expenses incurred by Robert R. Nathan Associates submitted with plaintiff’s original Exhibit 35 are now contained in the updated Exhibit 35. Accordingly attorney’s fees will not be awarded at this time, but counsel for plaintiff is invited to submit a post-judgment attorney’s fees application, within 20 days of this date, with supporting documentation responsive to the Court’s concerns above.

A separate Judgment accompanies this Memorandum Opinion.

JUDGMENT

Judgment is hereby entered in favor of plaintiff Barry M. Blackman and against defendant Hustler Magazine, Inc., in the amount of $431,879, itemized as follows:

Damages under 17 U.S.C. § 1 et seq. (1970) (Copyright Act of 1909) and common law of unfair competition $397,998
Damages under 17 U.S.C. § 101 et seq. (1977) (Copyright Act of 1976) and common law of unfair competition 33,881
Total $431,879

      . Plaintiff makes reference to the unusual rule in the United States Court of Appeals for the Second Circuit that a plaintiff may be entitled to recover both the defendant's profits and statutory damages. See Peter Pan Fabrics, Inc. v. Jobela Fabrics, Inc., 329 F.2d 194 (2d Cir.1964); see also Lottie Joplin Thomas Trust v. Crown Publishers, Inc., 592 F.2d 651 (2d Cir.1978). That rule, which curiously equates statutory damages with actual damages under the 1909 Act, is not the law in this Circuit and cannot be squared with the language of the statute. See 17 U.S.C. § 101(b) (statutory damages awardable "in lieu of actual damages and profits”) (emphasis added); see abo 4 Nimmer, Appendix 16 at 8.

      . During discovery on the damages issue, defendant provided to plaintiff financial information prepared by Paul Miserendino (then an employee of Hustler) and produced Miserendi-no for deposition by plaintiffs counsel on December 20, 1984. Plaintiff prepared for trial on the understanding that Hustler would base its defense on Miserendino’s calculations and would call him to testify to their accuracy at trial. On February 13, 1985, twelve days before the February 25, 1985 trial date, plaintiff's counsel learned through deposition testimony of Larry Flynt that Miserendino had been fired by Hustler shortly after his deposition. Defendant informed plaintiffs counsel on February 15, 1985 that it planned to call Arnold Levitt instead of Miserendino as a witness for the purpose of estimating Hustler's profits for the September, 1976 issue. Three days later, defendant advised plaintiffs counsel that Levitt would not base his testimony on the documents and methods of calculations employed by Miserendino. Upon plaintiffs motion for a preclusionary order, and in light of defendant’s untimely disclosure, the Court ordered that Levitt be precluded from testifying as an expert witness, but did not limit his testimony as a fact witness. Order of Feb. 22, 1985.


author: INGRAM, District Judge.

text:
    Jesse Albert DURAN, Petitioner, v. A.A. STAGNER, Superintendent, Respondent.
    No. C-85-20005-WAI.
    United States District Court, N.D. California.
    July 9, 1985.

      Kevin Morrison, Sheldon Portman, Public Defender, County of Santa Clara, San Jose, Cal., for petitioner.
    John Van de Kamp, Atty. Gen., San Francisco, Cal., for respondent.
   MEMORANDUM OF DECISION

INGRAM, District Judge.

The application for writ of habeas corpus pursuant to 28 U.S.C. § 2254 is GRANTED in the manner herein specified.

The following facts are without dispute:

Petitioner was arrested for murder.

Petitioner’s exculpatory statement was taken by police officers in circumstances which violated the requirements set forth in Miranda v. Arizona, 384 U.S. 436, 86 S.Ct. 1602, 16 L.Ed.2d 694 (1966).

A motion to suppress the statement so taken was denied by the trial court.

At trial the statement was not introduced by the People as part of the ease in chief. It was first alluded to by defense counsel during the direct examination of petitioner, by eliciting the facts that the statement had been taken, that it was false and the reason given by petitioner for the giving of the statement.

On cross-examination of petitioner, the prosecutor referred to the statement and elicited from petitioner an admission that the statement was false.

After defense rested the prosecutor offered in evidence selected portions of the statement as part of his rebuttal case.

No admonition was given by the trial judge at the time the prosecutor questioned petitioner with respect to the statement or at the time that parts of it were received in evidence.

The trial judge instructed the jury in accordance with CAUIC 2.03 (consciousness of guilt may be inferred from prior false and misleading statements), and 2.20 (prior inconsistent statements for impeachment). Petitioner made timely objection to 2.03.

Petitioner contends that the giving of CAUIC 2.03 impermissibly allowed the jury to consider the statement in question for a purpose other than an evaluation of the credibility of petitioner, which is a use of the statement not constitutionally permissible under Harris v. New York, 401 U.S. 222, 91 S.Ct. 643, 28 L.Ed.2d 1 (1971), and Hinman v. McCarthy, 676 F.2d 343 (9th Cir.1982).

Respondent contends that Hinman is distinguishable from this case, because in the instant case, unlike Hinman it is clear from the procedural posture of the case that the statement was offered for purposes of impeachment, and not as evidence of guilt. Respondent points out that a statement which is wholly exculpatory as is the one in issue, is only of value to the prosecution for purposes of impeachment, in that it does not tend to prove petitioner’s guilt, but just the opposite.

If Hinman is distinguishable in the manner contended for, respondent urges that this case is controlled solely by Harris.

The instant case is not distinguishable from Hinman because these facts, like those of Hinman, involve the impermissible affirmative use of a statement taken without the protections of Miranda. Respondent’s argument is otherwise appealing, but it does not in the court’s opinion sufficiently deal with the problem injected by the giving of CAUIC 2.03. The most liberal reading of Harris makes it clear that the court excepted from the operation of the exclusionary rule “the traditional truth-testing devices of the adversary process.” To expressly allow the jury to consider such a statement as the one in issue here for any purpose other than credibility of the declarant goes beyond the permissible borders of the Harris holding. Even if the suspect instruction is “icing on the cake” as suggested by respondent, it is apparent that it blazes a new trail.

Moreover, in the view of this court, Hinman v. McCarthy, 676 F.2d 343 (9th Cir.1982), enjoins the trial courts of this circuit to properly instruct that statements which are not taken in accordance with the rule of Miranda, and which are used properly in accordance with Harris and with Oregon v. Hass, 420 U.S. 714, 95 S.Ct. 1215, 43 L.Ed.2d 570 (1975), may be considered only for the purpose of evaluating the credibility of the declarant/witness.

The broadening of the exceptions to Miranda exclusion articulated in Harris and Hass by the giving of the instruction in issue amounts to constitutional error. Cf. United States v. Valle Valdez, 554 F.2d 911 (9th Cir.1977).

Such error requires reversal unless it appears beyond a reasonable doubt that the error was harmless, that is, that there is no reasonable possibility that the error materially affected the verdict. Chapman v. California, 386 U.S. 18, 87 S.Ct. 824, 17 L.Ed.2d 705 (1967); Hinman, supra.

Respondent contends that the error is harmless for the same reasons that the California Court of Appeal found that the error was harmless under the somewhat different standards of state law, People v. Duran, 140 Cal.App.3d 485, 189 Cal.Rptr. 595 (1983), and because, unlike the statement in Hinman, the statement in this case is strongly exculpatory, and if believed, would absolve petitioner of guilt.

Petitioner argues primarily the observation in Duran that the extended jury deliberations and the expressed belief of the foreman and 11 members of the jury that they were deadlocked, “point to the closeness of the case.” Petitioner further contends that the exculpatory nature of the statement is not material, because instruction 2.03 permits the drawing of the consciousness of guilt inference on the basis of any deliberating false or misleading statement.

This court has carefully examined the entirety of the trial transcript and is unable to find beyond a reasonable doubt that there was no reasonable possibility that the error materially affected the verdict. Petitioner’s possession of a knife prior to the stabbing is established by the testimony of a single witness, RT 1011, and is squarely contradicted by petitioner’s testimony. An inference of consciousness of guilt may within reasonable possibilities have been a material factor in the finding of the verdict.

Accordingly, an alternative writ of habe-as corpus should issue, commanding the vacation of the judgment and sentence and release of petitioner at the expiration of 120 days, unless he be sooner retried on the issues raised by the information and the responsive plea thereto.

Counsel for petitioner shall prepare a form of writ to be submitted to counsel for respondent for approval as to form and then to the court for signature. Petitioner’s second contention of jury coercion need not be reached.


author: LEVAL, District Judge.

text:
    Josefina GONZALEZ, Chuen Chu Wong, Mo Long Wong, Oscar Weiss, Jose Torres, Poa Kong Chong, Edna Singleton, Crispula Zaragoza, Randall Smith, Frances Friedkiss, Manuela Concepcion, Rita Mena, Nora Robertson, Josephine Lisi, Gim Oy Lee, Leon Lee, Roselyn Lee, Su-Uo Chen Yen, Guey Check Chung, Charlotte Ehrlich, Harry N. Beckerman, Ann Piaggessi, and Katherine Caracciola, Plaintiffs, v. ST. MARGARET’S HOUSE HOUSING DEVELOPMENT FUND CORPORATION, a New York Corporation, the United States Department of Housing and Urban Development, and Samuel R. Pierce, Jr., as Secretary of the U.S. Department of Housing and Urban Development, Defendants.
    No. 84 Civ. 1697 (PNL).
    United States District Court, S.D. New York.
    July 12, 1985.
    As Amended Sept. 11, 1985.

      Kalman Finkel, Civ. Div., The Legal Aid Society, John E. Kirlin, Director of Litigation, Civ. Appeals & Law Reform Unit (Helen Hershkoff, Scott A. Rosenberg, of counsel), Norman Siegel, MFY Legal Services, Inc., Daniel L. Greenberg, Managing Atty. (Margarita Lopez Torres, of counsel), Estroff, Waldman & Poretsky (Jonathan D. Siegfried, Mark Olinsky, of counsel), New York City, for plaintiffs.
    Rudolph W. Giuliani, U.S. Atty., S.D.N.Y. (Richard W. Mark, Asst. U.S. Atty., of counsel), John W. Herold, Trial Atty., U.S. Dept, of Housing and Urban Development, Washington, D.C., for defendants. The U.S. Dept, of Housing and Urban Development and Samuel R. Pierce, Jr., as Secretary of the U.S. Dept, of Housing and Urban Development.
    Carter, Ledyard & Milburn, Louis L. Stanton, Vincent Monte-Sano, Donald F. Simone, New York City, for defendant St. Margaret’s House Housing Development Fund Corp.
   MEMORANDUM AND ORDER

LEVAL, District Judge.

Plaintiffs are elderly tenants at St. Margaret’s House, a low income housing project in New York City operated by defendant St. Margaret’s House Housing Development Fund Corporation. Plaintiffs challenge the imposition by St. Margaret’s of a mandatory meal service charge as a condition of occupancy there. Defendants, St. Margaret’s and the U.S. Department of Housing and Urban Development (HUD), move to dismiss the complaint pursuant to Rule 12(b)(6), F.R.Civ.P., for failure to state a cause of action.

Background

St. Margaret’s is a facility whose construction was financed by a direct loan from HUD, pursuant to § 202 of the Housing Act of 1959, 12 U.S.C. § 1701g. As provided under Section 8 of the United States' Housing Act of 1937, tenants at St. Margaret’s pay a fixed 30% of their income for rent, 42 U.S.C. § 1437a, and HUD pays the remainder of the fair market rent in the form of Housing Assistance Payments (HAP), 42 U.S.C. § 1437f. As a precondition for occupancy, tenants are required by St. Margaret’s to sign a lease agreeing to participate in a mandatory meal service charge of $110.00 per month, not scaled to their income, which provides for one meal per day. There are no express exemptions from the plan for health or religious dietary restrictions, and there are no refunds for meals not eaten.

Plaintiffs are tenants who do not want to participate in the meal program. Their first claim for relief is that the imposition of a mandatory meal service charge as a condition of occupancy requires tenants to pay more than 30% of their adjusted income for rent and therefore violates the Brooke Amendment of Section 8 of the United States Housing Act of 1937, 42 U.S.C. § 1437a(a)(l), which imposed the percentage limitation on the rent for assisted units. Plaintiffs further claim the mandatory meal charge violates the purpose of Section 202 of the Housing Act of 1959, 12 U.S.C. § 1701q, to provide low-income elderly or handicapped persons with affordable housing of modest design supportive of independent living.

Plaintiffs’ second and third claims allege that the mandatory meal plan violates the Regulatory Agreement and Housing Assistance Payments contract between HUD and St. Margaret’s, of which plaintiffs claim to be third-party beneficiaries.

The fourth and fifth claims allege that HUD’s approval of the mandatory meal charge violated the Administrative Procedure Act, 5 U.S.C. § 706(2)(A), because it is a substantive rule that was not legally promulgated through notice and comment; it constitutes arbitrary agency action; and it failed to provide procedures to establish reasonable exemptions from the mandatory meal charge.

The sixth claim charges that HUD violated plaintiffs’ due process rights under the Fifth Amendment by approving the mandatory meal charge and thereby depriving them of their property without providing minimal procedures for determining whether the meal charge is an essential service, necessary in light of each tenant’s needs, or otherwise permissible under the Brooke Amendment.

Plaintiffs seek an order declaring the mandatory meal charge illegal and unconstitutional, and an injunction preventing the defendants from imposing the mandatory meal charge in its current form. Plaintiffs maintain that the meal charge is an essential housing service that should count as part of the total rent that is subsidized by HUD, thereby leaving.the tenants’ rent at 30% of their income including the meal charge; alternatively plaintiffs contend the meal charge should be optional for each tenant.

Discussion

Defendants move to dismiss the complaint. As to the first, second, third and sixth claims, defendants argue that food is not rent so that the mandatory meal charge does not violate the Brooke Amendment. Further, defendants assert that no private right of action exists for plaintiffs to bring suit under the United States Housing Act of 1937 or the Housing Act of 1959. Defendants argue that plaintiffs are not intended third-party beneficiaries of the HAP and Regulatory Agreements between HUD and St. Margaret’s and therefore cannot bring suit based on those agreements. Finally, HUD claims the approval of the mandatory meal charge did not violate the Administrative Procedure Act or the due process clause of the Constitution.

1. Food as an element of Rent

Defendants argue that the mandatory meal charge is not “rent” in the normal meaning of the word. Therefore, they argue the fact that the meal charge increases tenants’ payments above 30% of their income does not violate the Brooke Amendment, which applies only to rent charges.

It is true that, in normal usage, food is not rent. Nonetheless, from the perspective of the tenant, any charge required as a condition of occupancy can be seen as rent, particularly if the charge is attributed to a service, the tenant does not desire and does not use. In my view meal charges may very well be rent under Section 8 if they are mandatory.

If St. Margaret’s House imposed a mandatory supplemental charge for floral arrangements in the lounges, required as a condition of occupancy, this would surely be considered “rent” by an occupant who would not be spending those funds on flowers, given the choice. Given the purpose of the Brooke Amendment to provide publicly assisted housing for persons of very low income by assuring that the rental charges imposed on them not exceed 30% of their income, a mandatory charge beyond the 30% can defeat the Act’s purpose, especially where the tenant realizes no commensurate saving by utilization of the supplemental service.

I recognize contrary authorities, e.g., Aujero v. Todco, Inc., 756 F.2d 1374 (9th Cir.1985); Mayoral v. Jeffco American Baptist Residences, 726 F.2d 1361 (10th Cir.), cert. denied, - U.S. , 105 S.Ct. 255, 83 L.Ed.2d 192 (1984), but I respectfully decline to follow them. The congressional intent behind the Brooke Amendment was to provide rental assistance in behalf of "very tow-income tenants" of publlc housing projects, in response to the concern that “the neediest families have been excluded from the public housing program.” S.Rep. No. 91-392, 91st Cong. 1st Sess. (1969), reprinted in [1969] U.S.Code Cong. & Ad.News 1524, 1542. It sought to secure tenancy at a price not exceeding a fixed percentage of income to permit low income families access to publicly assisted housing. Those who could afford to pay 30% of their income cannot necessarily afford 30% plus $110 mandatory meal charge, particularly if it is for food they do not desire or should not eat.

I reject defendants’ argument that a mandatory food charge cannot be rent under the statute. Whether this food charge is rent raises a triable issue. To the extent defendants’ motion depends on that contention, it is denied.

2. Private Right of Action

Defendants argue that plaintiffs have no private right of action under § 8 of the United States Housing Act of 1937 or § 202 of the Housing Act of 1959. No explicit provision grants tenants a right of action to sue for its alleged violations. Defendants argue that none should be implied.

The factors used in determining whether Congress intended to create a private remedy are: 1) whether plaintiffs are in the class of persons Congress intended to benefit by enactment of the statute; 2) whether there is legislative intent either to deny or to provide a private remedy in light of the statute’s legislative history; 3) whether the existence of a private remedy would be consistent with the underlying purpose of the legislative scheme; and 4) whether the action is one more appropriately a concern of state rather than federal law. Daily Income Fund, Inc. v. Fox, 464 U.S. 523, 104 S.Ct. 831, 839, 78 L.Ed.2d 645 (1984); Fort v. Ash, 422 U.S. 66, 78, 95 S.Ct. 2080, 2088, 45 L.Ed.2d 26 (1975).

Among the stated purposes of the United States Housing Act of 1937 is:

to assist the several States ... to remedy the unsafe and unsanitary housing conditions and the acute shortage of decent, safe, and sanitary dwellings for families of lower income....

42 U.S.C. § 1437. The Brooke Amendment imposes a percentage of income limit on rent chargeable to tenants of low income housing. 42 U.S.C. § 1437a(a). The authorization of housing assistance payments to make up the difference is stated to be “[f]or the purpose of aiding lower-income families in obtaining a decent place to live and of promoting economically mixed housing.” 42 U.S.C. § 1437f(a).

It appears that the persons Congress intended as beneficiaries are the low income tenants and would-be-tenants of public housing. Plaintiffs are unquestionably members of this group.

Although the Act and the legislative history are silent on the existence of private rights of action, I can see no reason to conclude that Congress intended to deny a private right, at least for injunctive relief requiring compliance with the Act. It would seem consistent with the purposes of the Act and useful to its enforcement to allow such an action to insure the intended beneficiaries the benefits the Act intended to confer on them. See Cannon v. University of Chicago, 441 U.S. 677, 703, 99 S.Ct. 1946, 1961, 60 L.Ed.2d 560 (1979); Howard v. Pierce, 738 F.2d 722, 728-29 (6th Cir.1984). The matter is more appropriately a concern of federal, than of state, law.

I find that an implied right of action at least for injunctive relief should be extended to plaintiffs to require compliance with the rent limitations of the Brooke Amendment. Beckham v. New York City Housing Authority, 755 F.2d 1074 (2d Cir.1985).

Accordingly the motion to dismiss the first claim is denied. It is unnecessary to reach the more difficult question of an implied right of action under § 202 of the Housing Act of 1959.

3. Third Party Beneficiary Standing

HUD argues that plaintiffs have no standing to seek relief as third party beneficiaries of either the Regulatory Agreement or Housing Assistance Payments contract between HUD and St. Margaret’s. Whether parties are third party beneficiaries of a given contract depends on the specific facts of who the third parties are and what the contract contains. The contracts at issue embody in part the provisions of the Brooke Amendment and provide procedures for providing services in addition to those in the approved rental schedule. It is the sections of the contracts that reflect limitations from the Brooke Amendment that plaintiffs challenge were breached to their detriment by imposition of the mandatory meal charge.

I am persuaded by the reasoning of the Court of Appeals for the Seventh Circuit in Holbrook v. Pitt, 643 F.2d 1261 (7th Cir. 1981) that “[i]f the tenants are not the primary beneficiaries of a program designed to provide housing assistance payments to low income families, the legitimacy of the multi-billion dollar Section 8 program is placed in grave doubt.” 643 F.2d at 1271.

To the extent plaintiffs challenge the portions of the contracts between HUD and St. Margaret’s which deal with rent limitations and additional charges for services, plaintiffs have standing as third party beneficiaries to those contracts. The issue whether those contracts were in fact breached to the detriment of plaintiffs is not currently before the court. Although the issue is not altogether free from doubt, see Reiner v. West Village Associates, 768 F.2d 31 (2d Cir.1985), in my opinion, plaintiffs have sufficiently alleged a cause of action as third party beneficiaries under these contracts to withstand a motion to dismiss. In any event, the issue is not crucial in view of my ruling as to a private right of action for “rent” under Section 8.

4. APA

HUD moves to dismiss the fourth claim of the complaint which alleges HUD’s approval of the mandatory meal charge was a promulgation of a rule without the notice and comment procedures required by the Administrative Procedures Act. HUD argues that its action fell under the exception to the APA governing rule making for matters relating to “public property, loans, grants, benefits, or contracts.” 5 U.S.C. § 553(a)(2). Because the meal program was implemented through loans and contracts with St. Margaret’s, HUD argues it is exempt from the rule making process. The mandatory meal program is “appurtenant” to the subsidy program, the subsidy program was accomplished through loans and contracts, and therefore the approval of the mandatory meal charge is exempt from the APA.

HUD further argues that it is neutral to mandatory meal programs, and it is within the developer’s authority to set a meal program even in the absence of HUD’s current guidelines which state a developer “may” have mandatory meal programs. HUD argues that imposing a mandatory meal charge is part of the “tenant selection criterion” that is solely in the discretion of the project owner. Daubner v. Harris, 514 F.Supp. 856, 866 (S.D.N.Y.1981).

Plaintiffs respond that since HUD approval is required before project developers can establish a mandatory meal program, the standard for approving meal programs should have gone through the notice and comment procedure.

It is not evident from HUD’s submissions that, at one stage or another, the standard for approval of mandatory meal charges in assisted projects should not have been subject to a notice and comment procedure under the APA. The exemption HUD claims from the APA is only arguably but not conclusively applicable to plaintiffs’ claim for relief. Further, while project owners are free to impose tenant selection criteria, an arguably impermissible increase in the tenants’ rent is not a “tenant selection criteria” under the Daub-ner analysis. Plaintiffs have alleged a cause of action under the APA, and HUD has not supported a grounds for dismissal based on the complaint.

5. Due Process

Plaintiffs assert in their sixth claim that imposition of the mandatory meal charge without requiring minimal procedures for ascertaining whether the charge is an essential service necessary and appropriate for each tenant’s needs, deprives plaintiffs of property without due process of law. This claim is frivolous on its face and is dismissed.

SO ORDERED.

      . The stated purpose for that Act is "to assist private nonprofit corporations, limited profit sponsors, consumer cooperatives, or public bodies or agencies to provide housing and related facilities for elderly or handicapped families.” 12 U.S.C. § 1701g(a)(l). The legislative history has no indication that a private right of action was intended, and unlike the Brooke Amendment, plaintiffs are only indirectly the class upon which Congress intended to confer the benefits of § 202.