author: PANNER, Chief Judge.

text:
    Larry D. RILEY, Gary S. Barta, Rodney L. Nielsen and Darlene A. Nielsen, husband and wife, Barclay M. Armitage, James H. George and Inez O. George, husband and wife, Kenneth B. Southall and Sandra D. Southall, husband and wife, William E. Workman and Barbara L. Workman, husband and wife, Dr. Warner B. Swarner and Christine L. Swarner, husband and wife, Robert A. Pfeifer and Jane A. Pfeifer, husband and wife, Leslie J. Hubbard and Martha J. Hubbard, husband and wife, Harley E. Dykema and Adeline D. Dykema, husband and wife, Robert S. Wallace, Jr. and Jodene G. Wallace, husband and wife, Harold Widman and Elise Widman, husband and wife, William R. Mueller and Kay Mueller, husband and wife, and Ronald K. Melott, Plaintiffs, v. Phillip H. BRAZEAU, Larry D. Moomaw, Glen T. McCurdy, and John Does I Through XX, Defendants.
    Civ. No. 84-901-PA.
    United States District Court, D. Oregon.
    June 18, 1985.

      Richard M. Layne, Weaver & Layne, Michael D. Kennedy, Kennedy, Bowles & Towsley, Portland, Or., for plaintiffs.
    Philip H. Brazeau, Aloha, Or., for defendants.
    Frank H. Lagesen, Lawrence P. Blunck, Cosgrove, Kester, Crowe, Gidley & Lagesen, Portland, Or., for Moomaw.
   PANNER, Chief Judge.

Plaintiffs bring this action for violations of federal securities laws, state securities laws, and federal and state racketeering laws. Defendant Larry D. Moomaw (Moo-maw) moves to dismiss. I grant the motion in part, and deny it in part.

BACKGROUND

The recitation of facts is from plaintiffs’ complaint. Plaintiffs invested in a program conceived and administered by Alpha Properties Realty, Inc. (Alpha) and its wholly owned-subsidiary, Macal Development Corporation (Macal). Around August of 1981, Alpha salespeople offered an investment program in which investors made down payments on houses that were to be built by Macal. Macal would take care of all details of financing and construction, and would complete the houses within six months.

After the house was completed, the investor could choose to apply the down payment on the purchase, or receive a refund. If the investor decided to purchase, Macal would manage the house as a rental property for at least a year, and then arrange for sale of the house. The purpose of the one year period was to allow certain tax benefits.

Plaintiffs invested from $8,500 to $20,000 per house. The down payments were not, however, used to finance construction of the houses. Instead, the down payments were used to finance Alpha’s and Macal’s operations costs, including salaries and numerous luxury items.

Alpha employed several salespeople, who presumably made the alleged misrepresentations to plaintiffs. The salespeople were controlled by Alpha brokers, who were controlled by Martin O’Malley, an Alpha officer. O’Malley, the brokers, and the salespeople have all settled with plaintiffs, and are not named as defendants in this action. Glen McCurdy, Macal’s president and a control person at Alpha, was named in the complaint but has since settled with plaintiffs. Alpha and Macal have filed bankruptcy petitions, and are not named as defendants.

Defendant Moomaw was corporate counsel for Alpha and its subsidiaries. He advised control persons at Alpha about the investment program. He and his firm received payments from Alpha which came from the down payments on the houses.

Plaintiffs allege violations of section 17(a) of the Securities Act of 1933 (1933 Act), 15 U.S.C. § 77q(a), section 10(b) of the Securities Exchange Act of 1934 (1934 Act), 15 U.S.C. § 78j(b), Rule 10b-5 promulgated by the Securities Exchange Commission, 17 C.F.R. 240.10b-5 (1983), Oregon’s Blue Sky Laws, O.R.S. §§ 59.055, 59.115, the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1961-68, and Oregon’s Racketeer and Corrupt Organizations Act, O.R.S. §§ 166.715-735. Moomaw is named as a defendant in all but the RICO and Oregon RICO counts.

Moomaw moves to dismiss for failure to plead with particularity and for failure to state a claim, pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure. I grant the motion insofar as it is based on Rule 9(b). The dismissal is without prejudice and plaintiffs have leave to file an amended complaint. I grant the motion in part and deny it in part insofar as it is based on Rule 12(b)(6). The motion is granted with respect to all John Doe defendants and with respect to plaintiffs’ section 17(a) claim, but is denied with respect to plaintiffs’ other claims.

I. RULE 9(b).

STANDARDS

Rule 9(b) provides:

Fraud, Mistake, Condition of the Mind. In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally.

In Walling v. Beverly Enterprises, 476 F.2d 393 (9th Cir.1973), the Ninth Circuit described the rule’s requirements.

Rule 9(b) requires that the circumstances constituting fraud must be stated with particularity. But “[r]ule 9(b) does not require nor make legitimate the pleading of detailed evidentiary matter.” [citing J. MOORE]. Nor does Rule 9(b) require any particularity in connection with an averment of intent, knowledge or condition of the mind. It only requires the identification of the circumstances constituting fraud so that the defendant can prepare an adequate answer from the allegations.
[M]ere conclusory allegations to the effect that defendant’s conduct was fraudulent ... are insufficient...

476 F.2d at 397 (citations omitted).

The Walling court also stated that because the complaint stated the "time, place, and nature of the alleged fraudulent activities,” Rule 9(b) was satisfied. Id. In Bosse v. Crowell, Collier, & MacMillan, 565 F.2d 602 (9th Cir.1977), the Ninth Circuit adopted the time, place, and nature language of Walling, holding:

Rule 9(b) ... only requires the identification of the circumstances constituting fraud so that the defendant can prepare an adequate answer from the allegations. Walling v. Beverly Enterprises, supra. While mere conclusory allegations of fraud will not suffice, statements of the time, place, and nature of the alleged fraudulent activities will.

565 F.2d at 611.

The complaint should state the specific content of the misrepresentation as well as the identities of the parties to it. Miscellaneous Service Workers v. PhilcoFord Corp., 611 F.2d 776, 782 (9th Cir.1981).

In cases involving multiple defendants, plaintiffs must specify the role of each defendant in the fraud. E.g., Hokama v. E.F. Hutton & Co., Inc., 566 F.Supp. 636, 645 (C.D.Cal.1983). The complaint should state whether the particular defendant is being sued as a principal or as an aider and abetter. Bruns II v. Ledbetter, 583 F.Supp. 1050, 1052 (S.D.Cal.1984).

DISCUSSION

Plaintiffs’ complaint fails to describe Moomaw’s role in the fraudulent scheme with the particularity required by Rule 9(b). The allegations that Moomaw knowingly or recklessly participated in or assisted the fraudulent scheme are based on information and belief. To satisfy rule 9(b), plaintiffs should have alleged the source of their information and the reasons upon which their belief is founded. Bruns, 583 F.Supp. at 1050. The allegation that Moomaw attended Alpha’s weekly meeting is not sufficient to satisfy this requirement.

Moomaw also argues that the complaint should be dismissed because plaintiffs fail to adequately allege the elements of aider and abetter liability. These elements are:

(1) a primary actor has committed a securities violation;
(2) the defendant knew of the violation; and
(3) the defendant substantially assisted the primary actor.

Harmsen v. Smith, 693 F.2d 932, 943 (9th Cir.1982).

Moomaw cites Harmsen and argues that plaintiffs must plead each of these elements with the particularity required by Rule 9(b). Some courts have also reached this conclusion. E.g., Zatkin v. Primuth; 551 F.Supp. 39, 42 (S.D.Cal.1982).

1 agree that plaintiff should be required to plead the first element, the primary violation, with particularity. Rule 9(b) itself requires that the fraud be plead with particularity. Plaintiffs may not evade this requirement by arguing that there is no allegation that Moomaw made any of the misrepresentations, or by arguing that the complaint establishes a “chain of command” between those making the misrepresentations and Alpha control persons.

I do not agree, however, that plaintiffs must plead the second Harmsen element, knowledge, with particularity. Harmsen does not require this. Harmsen involved an appeal of a jury verdict. Rule 9(b) was not at issue. Walling and Bosse do not require that knowledge be plead with particularity.

Moomaw cites decisions by two district courts in the Ninth Circuit, Bruns II v. Ledbetter, supra, and McFarland v. Memorex Corp., 493 F.Supp. 631, 637 (N.D.Cal.1980). These courts have held that Walling and Bosse do not set standards for applying Rule 9(b), and have instead adopted the Second Circuit’s stricter approach to Rule 9(b), under which a complaint must not only allege scienter, but must also allege the “facts constituting scienter and an explanation of the defendant’s duty toward the plaintiff.” Goldberg v. Meridor, 81 F.R.D. 105, 111 (S.D.N.Y.1979).

I find that Walling controls on the knowledge issue, and reject Bruns and McFarland. Walling holds that Rule 9(b) does not “require any particularity in connection with an averment of intent, knowledge, or condition of mind.” 476 F.2d at 397. This squares with the language of the rule. While the first sentence of Rule 9(b) provides that the “circumstances constituting fraud” must be pled with particularity, this is modified by the second sentence, which provides that “[mjalice, intent, knowledge, and other condition of mind ... may be averred generally.” (emphasis added). See Cramer v. General Tel. & Electronics Corp., 582 F.2d 259, 273 (3d Cir.1978), cert. denied, 439 U.S. 1129, 99 S.Ct. 1048, 59 L.Ed.2d 90 (1979); Hokama, 566 F.Supp. at 645. The Walling position also harmonizes Rule 9 with Rule 8, which requires that averments in pleadings be concise and direct and that pleadings be construed in a way that does substantial justice. See McGinty v. Beranger Volkswagen, 633 F.2d 226, 228-29 (1st Cir.1980).

Regarding the third element, I agree that plaintiffs must particularly plead facts showing that Moomaw assisted in the alleged fraud. I do not agree, however, with Moomaw’s argument that plaintiffs must particularly plead facts showing that this assistance was “substantial.” “Rule 9(b) requires that fraud be pleaded particularly; it does not require that every element of an offense also-be pleaded particularly.” Seville Industrial Corp. v. Southmost Machinery Corp., 742 F.2d 786, 792 n. 7 (3d Cir.1984).

I also reject Moomaw’s argument that the complaint fails to satisfy Rule 9(b) because it does not state when each plaintiff discovered the alleged fraud. The complaint shows that some plaintiffs brought their claims more than two years after they invested in the Alpha program. Moomaw contends that because the applicable statute of limitations is two years, the complaint should also specify when these plaintiffs discovered the fraud. Rule 9(b) must, however, be read together with Rule 8, which requires that pleadings be “simple, concise, and direct.” A complaint could not satisfy this requirement if it were required to anticipate affirmative defenses like the statute of limitations. Rule 9(b) was intended to provide the defendant with sufficient information to prepare an answer. The complaint provides Moomaw with enough information to know that he may raise the statute of limitations defense. Rule 9(b) does not require more.

I grant the motion to dismiss insofar as it is based on Rule 9(b). The dismissal is without prejudice. Plaintiffs have twenty days leave to file an amended complaint, which should describe the primary violations and Moomaw’s role in them with the particularity required by Rule 9(b). If allegations regarding Moomaw’s role are based on information and belief, the complaint should state the source of the information and the reasons upon which the belief is founded.

II. RULE 12(b)(6).

STANDARDS

When a federal court rules on a motion to dismiss for failure to state a claim, the court must review the sufficiency of the complaint.

In appraising the sufficiency of the complaint we follow, of course, the accepted rule that a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.

Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957) (footnote omitted).

DISCUSSION

I grant the motion with respect to all John Doe defendants. The Ninth Circuit does not permit the inclusion of John Doe defendants. Sigurdson v. DelGuercio, 241 F.2d 480, 482 (9th Cir.1956).

I also grant the motion to dismiss plaintiffs’ first claim, for violation of section 17(a) of the Securities Act of 1933. While the Ninth Circuit stated in Stephenson v. Calpine Conifers II, Ltd., 652 F.2d 808, 815 (9th Cir.1981), that section 17(a) provides a private right of action, the statement is dictum unsupported by analysis. After Stephenson was announced, several district courts in the Ninth Circuit analyzed the issue in depth and found that section 17(a) does not provide a private right of action. E.g., Brabham v. Patenta, N.V., (CV 83-1248-RE) (D.Or. Nov. 5, 1984); Bruns, 583 F.Supp. at 1053. I adopt the analysis used by Judge Redden in Brabham, and find that section 17(a) does not provide a private right of action. The motion to dismiss is granted as to plaintiffs’ first claim.

The motion to dismiss is denied as to plaintiffs’ second claim for violation of section 10(b) of the 1934 Act and Rule 10b-5. Moomaw contends that the refundable deposit contracts do not constitute securities under the 1934 Act. While I am inclined to agree, plaintiffs might be able to prove facts that would create a jury issue. See S.E. C. v. Goldfield Deep Mines Company of Nevada, 758 F.2d 459, 463-465 (9th Cir.1985). This decision cannot be made until after discovery.

The motion to dismiss is also denied as to plaintiffs’ third and fourth claims. The third claim is for violation of O.R.S. § 59.055, which prohibits the sale of unregistered securities. The fourth claim is for violation of O.R.S. § 59.115, which prohibits the sale of a security by means of a material misrepresentation.

Moomaw argues that the refundable deposit contracts are not securities under Oregon law, which is similar to federal securities law on this issue. I reject this argument at present for the same reasons I expressed with regard to the federal securities claim.

With respect to the third claim, Moomaw argues that O.R.S. § 59.055 does not provide a private right of action. I disagree. While O.R.S. § 59.055 does not specifically provide that buyers of unregistered securities may bring a private action, O.R.S. § 59.115 does. O.R.S. § 59.115 provides for the liability of those who sell a security in violation of the Oregon Securities Law. O.R.S. § 59.115(l)(a). Whether plaintiffs bring their unregistered securities claim under O.R.S. § 59.055 or § 59.-115(l)(a) is immaterial. Compare Day v. Saunders, 270 Or. 432, 528 P.2d 513 (1974), with Gardner v. Donovan, 47 Or.App. 97, 613 P.2d 1097 (1980).

With respect to the fourth claim, plaintiffs allege that Moomaw “participated” or “materially aided” in the alleged misrepresentation, pursuant to O.R.S. § 59.115(3). In his motion to dismiss, Moo-maw contends that even if plaintiffs can plead participant liability with particularity, the claim should be dismissed under Rule 12(b)(6) because plaintiffs’ theory of the case cannot involve a violation of O.R.S. § 59.115(3). I disagree.

Moomaw cites Adams v. American Western Securities, Inc., 265 Or. 514, 510 P.2d 838 (1973). In that case, plaintiff brought a securities fraud action against several defendants, including an attorney who had worked for several of the defendants. After the jury returned a verdict against all defendants, the attorney moved for an involuntary nonsuit. The trial court granted the motion, but the Oregon Supreme Court reversed.

The court reasoned that an attorney should not be liable as a participant for merely preparing securities documents or performing services normally performed by a lawyer for a client. The attorney’s conduct went beyond this, however, in that he had prepared, attended to the execution of, and personally filed the registration documents even though he knew that the solicitation and sales of the security had already occurred. 265 Or. at 525-29.

Moomaw argues that the complaint alleges only that he performed services normally performed by a lawyer for a client. He stresses that the complaint alleges only that he advised and assisted Alpha and its subsidiaries in devising the investment program, but does not allege that he prepared, attended to the execution of, or filed any securities documents.

I disagree. Broadly construed, the complaint alleges that Moomaw participated in the development and implementation of the Alpha plan even though he knew or recklessly disregarded that Alpha was not investing plaintiffs’ funds properly. Plaintiffs might be able to prove facts showing that Moomaw participated in the fraud. Whether he prepared any securities documents is not determinative.

CONCLUSION

Defendant Moomaw’s motion to dismiss is GRANTED insofar as it is based on Rule 9(b). The dismissal is without prejudice. Plaintiffs have leave to file an amended complaint complying with the Rule.

The motion to dismiss is GRANTED IN PART and DENIED IN PART insofar as it is based on Rule 12(b)(6). The motion is GRANTED as to John Doe defendants I thru XX and as to plaintiffs’ first claim. The motion is DENIED as to plaintiffs’ second, third, and fourth claims.


source: Caselaw Access Project

license: Public Domain

text:
    PLAID PANTRY STORES, INC., dba Plaid Pantry Store No. 65, Plaintiff, v. UNITED STATES of America, Defendant.
    Civ. No. 84-1409-PA.
    United States District Court, D. Oregon.
    June 18, 1985.

      Wayne D. Palmer, Ted E. Runstein, Kell, Alterman & Runstein, Portland, Or., for plaintiff.
    Charles H. Turner, U.S. Atty., Arno Reifenberg, Sp. Asst. U.S. Atty., Portland, Or., for the U.S.
   OPINION

PANNER, Chief Judge.

• This is an action to obtain judicial review of a three year disqualification of Plaid Pantry Store No. 65 from the food stamp program operated by the United States Food and Nutrition Service (FNS). Review is pursuant to 7 U.S.C. § 2023. Section 2023 provides for a de novo court trial in which the validity of the administrative action is determined. If the action is determined to be invalid, the court may enter a judgment or order which it determines is in accordance with the law and the evidence. Id. Review of FNS sanction is under the arbitrary and capricious standard. Bertrand v. United States, 726 F.2d 518 (9th Cir.1984). In the present case the parties agreed to a trial on stipulated facts.

FACTS

Plaid Pantry operates 118 convenience, retail grocery stores in Oregon and Washington, including Plaid Pantry Store No. 65 (hereinafter “plaintiff”). In January, 1983, defendant received a complaint that plaintiff was accepting food stamps for the purchase of beer and cigarettes (ineligible food stamp items). On January 10, 1983 Marvin Kolstad of the FNS met with Bruce Amick, plaintiffs acting manager to discuss the complaint. Mr. Amick told Mr. Kolstad that he tried to carefully train all employees to insure that they strictly complied with the food stamp rules and regulations. He further informed Mr. Kolstad that he had a new employee with whom he would discuss the allegations and that he would make every effort to insure that there were not food stamp violations. Mr. Amick then discussed the allegation with plaintiffs employees and reiterated plaintiffs policy to insist upon strict compliance of the food stamp rules and regulations.

The store’s food stamp redemptions were not statistically excessive. Because the redemption rate had increased each month for the previous quarter, Mr. Kolstad decided to monitor plaintiff for February, March, and April, 1983. On January 24, 1983, Barbara Russell, officer in charge of the Portland FNS office, wrote Mr. Amick confirming his conversation with Mr. Kolstad, advising him of the possibility of violations and the possible consequences. She also notified Mr. Roger Penn, plaintiffs district supervisor and John Piacentini, plaintiff’s president.

Mr. Kolstad submitted the case for investigation in July, 1983 but plaintiff was not notified of this investigation. Due to illness, the investigation did not occur until 1984. Plaintiff’s store was investigated from February 23, 1984 to March 19, 1984. Reid Peterson, FNS investigator, was successful in purchasing ineligible items with food stamps on five occasions with three different clerks. One clerk was responsible for three of the transactions. His assistant, Susan Bush, was unsuccessful in her attempt to purchase ineligible items with food stamps. Her attempt was the only one occurring during the day. Mr. Reid’s purchases all occurred between 7:40 p.m. and 12:30 a.m. Plaintiff’s management is generally present during the day and not the evening hours. Plaintiff’s management was not involved in any of the transactions and was not present during any of them.

On May 2,1984, defendant charged plaintiff with violations of the food stamp regulations. See 7 C.F.R. § 2021. Plaintiff was invited to submit information relating to the charge but did not.

On May 24, 1984, Ms. Russell, on behalf of the FNS, presented a case summary of these alleged violations to the regional director for the FNS Western Region, for an administrative determination. On July 11, 1984, the director determined that plaintiff had violated the food stamp regulations and disqualified plaintiff from participation in the program for five years. He determined that it was plaintiff’s practice to accept food stamp coupons in exchange for major and minor nonfood ineligible items.

On July 16, 1984, plaintiff requested administrative review of-the determination of the regional director. On October 25, 1984, James A. Ramsey, an administrative review officer for the FNS, upheld the regional director’s order with the modification that plaintiff’s disqualification be for three years instead of five years because he determined the evidence was insufficient to establish that sales of major nonfood items (such as beer and cigarettes) was plaintiffs normal practice. Mr. Ramsay found that the participation of three clerks in five violative transactions established that sales of common nonfood items was plaintiff’s normal practice. He also found that the warning given plaintiff was appropriate and that a civil money penalty was inappropriate.

Plaintiff exhausted its administrative remedies and timely filed for this judicial review. I previously stayed plaintiff’s disqualification pending my review.

Plaid Pantry employs a large number of part-time employees and experiences a high rate of employee turnover. At the time of the investigation, plaintiff employed eight employees at Store No. 65. Between January, 1983 and March, 1984, plaintiff employed twenty-nine different employees at Store No. 65.

Shortly before defendant’s investigation began, a memorandum indicating that disregard of food stamp regulations would result in immediate termination was provided to the three employees allegedly involved in the noneligible transactions. These employees were required to sign the memorandum to insure compliance. The employees involved indicate they received extensive training concerning the food stamp program and that it was not their practice to violate the program’s regulations.

STATUTORY AND REGULATORY SCHEME

Food stamp coupons are only to be used to purchase food from retail food stores which have been approved for participation in the food stamp program. 7 U.S.C. § 2013. The Food Stamp Act was amended on September 8, 1982 to provide for definite periods of disqualification for retail stores violating section 2013. Title 7 of U.S.C. § 2021(b) provides that, upon the first occasion of disqualification, the disqualification shall be for a reasonable period of time, no less than six months, no more than five years. Title 7 of C.F.R. § 278.6(e) provides the penalties for retail stores which violate the food stamp regulations. Subsection 3 provides that the FNS can disqualify the firm for three years if it is to be the firm’s first sanction and the evidence shows:

(i) It is the firm’s practice to commit violations such as the sale of common nonfood items in amounts normally found in a shopping basket and the firm was previously advised of the possibility that violations were occurring and of the possible consequences of violating the regulations____

Subsection 4 of 7 C.F.R. § 278.6(e) provides that the FNS can disqualify the firm for one year if:

It is to be the first sanction for the firm and the ownership or management personnel of the firm have committed violations such as the sale of common nonfood items in amounts normally found in a shopping basket, and FNS had not previously advised the firm of the possibility that violations were occurring and of the possible consequences of violating regulations.

Subsection 5 of 7 C.F.R. § 278.6(e) provides that the FNS can disqualify the firm for six months if:

It is to be the first sanction for the firm and the evidence shows that personnel of the firm have committed violations such as but not limited to the sale of common nonfood items due to carelessness or poor supervision by the firm’s ownership or management.

Subsection 7 of 7 C.F.R. § 278.6(e) provides that the FNS may send the firm a warning letter if violations are too limited to warrant disqualification.

The FNS may impose a civil money penalty as a sanction in lieu of disqualification only when the firm subject to a disqualification is selling a substantial variety of staple food items, and the firm’s disqualification would cause hardship to food stamp households because there is no other authorized retail food store in the area selling as large a variety of staple food items at comparable prices. 7 C.F.R. § 278.6(f).

Title 7 C.F.R. § 278.6(d) provides:

The FNS regional office making a disqualification ... determination shall consider: (1) the nature and scope of the violations committed by the personnel of the firm; (2) any prior action taken by FNS to warn the firm about the possibility that violations are occurring and (3) any other evidence that shows the firm’s intent to violate the regulation.

Title 7 C.F.R. § 271.2 defines “firm’s practice” as the usual manner in which personnel of a firm or store accept food coupons as shown by the actions of the personnel at the time of the investigation.

In Bertrand v. United States, CV 81-838-RE and CV 82-369-RE, slip op. at 6 (D.Or. Feb. 12, 1985), the court found FNS Instruction 744-9 to be invalid because it had not been published in the Federal Register and it had significant impact on the substantive rights of retail store owners. This Instruction interpreted the 1982 regulations then in effect which contained no definition of “store policy.” The regulations have since been amended. In the present case the FNS asserts that it did not need to rely on Instruction 744-9 in determining that plaintiff had violated the regulations or in determining which sanction to apply. I will rely upon this FNS representation and examine the agency determination that a violative transaction occurred without reference to Instruction 744-9. See Thatcher’s Rexall Drug Center, Inc. v. United States, CV 84-1879, slip op. at 6 (E.D.Pa. Oct. 24, 1984) (imposition of sanction by FNS without reliance on FNS Instruction 744-9 upheld because the instruction was not published in the Federal Register or promulgated with procedural rule-making requirements).

DISCUSSION

A review of an administrative decision such as the suspension of food stamp redemption privileges involves two questions: (1) Did the violation occur? and (2) Is the penalty valid? Bruno’s Inc. v. United States, 624 F.2d 592, 594 (5th Cir.1980). In the present case there is no dispute that violative sales of ineligible items occurred. Therefore, my task is to determine whether the agency action in determining the sanction was arbitrary and capricious. Bertrand, 726 F.2d at 520. This standard requires the court to examine the sanction imposed in light of the administrative record to judge whether the agency properly applied the regulations; to determine whether the sanction is “unwarranted in law ... or without justification in fact____” Woodard v. United States, 725 F.2d 1072, (6th Cir.1984). Congress did not intend de novo judicial review of the sanction imposed by the Agency. H.Rep. No. 464, 95th Cong., 1st Sess. 397-98, reprinted in 1977 U.S.CODE CONG. & AD.NEWS 1978, 2326-27. However, the courts have the power to review sanctions. Hough v. United States Department of Agriculture, 707 F.2d 866, 868 n. 1 (5th Cir.1983).

In reviewing the sanctions imposed, I note that the disqualification must be for a reasonable period of time [7 U.S.C. §§ 2021(b)(1) and (2)] and that Congress believed that civil money penalties should be the normal penalty instead of disqualification. H.Rep. No. 464, 95th Cong., 1st Sess. 397, reprinted in 1977 U.S.CODE CONG. & AD.NEWS 1978, 2326.

In order to disqualify a firm for three years, it must be the firm’s “practice” to commit violations such as the sale of common nonfood items in amounts normally found in a shopping basket. The firm must have been previously warned that violations might be occurring and of the possible consequences of such violation. 7 C.F.R. § 278.6(e)(3). The plaintiff argues that there was not sufficient evidence for the FNS to prove it was the firm’s practice to commit violations and that there was no adequate warning provided. Plaintiff has the burden of establishing by a preponderanee of the evidence that the disqualification was factually wrong. Han v. FNS, 580 F.Supp. 1564, 1567 (D.N.J.1984).

1. Sufficiency Of The Evidence.

Plaintiff argues that the FNS failed to follow its own regulations in determining that it was plaintiffs practice to violate the regulations. It asserts that the FNS did not examine the firm’s intent to violate the regulation, that the only attempt at an ineligible transaction during the time when management or supervisory personnel would be present resulted in a refusal or other factors. Plaintiff argues that the FNS chose to arbitrarily emphasize certain factors, without consideration of all of the facts in determining what plaintiff’s “normal practice” was.

In Bertrand, 726 F.2d at 521, the court found that a one year disqualification for sale of cartons of cigarettes or alcoholic beverages in exchange for food coupons by the owner’s son when the store had also received adequate warning was valid. A one year disqualification was upheld in Woodard v. United States, 725 F.2d at 1072. The employees involved in the transactions in Woodard included the owner’s son and daughter, ineligible sales were made on a “number of occasions,” the ineligible items sold included beer and the firm had a practice of buying food coupons at a discount. The Woodard employees who participated in the violative sales were officially discharged after the sales but one of them, the owner’s son, continued to do odd jobs around the store. Id. at 1075.

In Bruno’s, Inc. v. United States, 624 F.2d at 592, the court affirmed the district court’s decision that Bruno’s had violated the Food Stamps Act but that a sixty day suspension imposed by the FNS was arbitrary and capricious. The court affirmed the district court’s order that the sixty day sanction be reduced to a written warning. Undercover shoppers at Bruno’s were successful in five out of six attempts to purchase ineligible items. The Bruno’s court relied partly on FNS Instruction 744-9. However, the facts in that case indicated that, even without reliance on this Instruction, the Bruno’s suspension was arbitrary. The court found that the record in that case established that the violations were against store policy. Id. at 595. The district court determined that Bruno’s had done all it could to prevent violations. Id. In transactions occurring over a period of eight days, only three clerks were implicated. The court found that this was not a substantial percentage of all the clerks. None of the items purchased were major ineligible items such as cigarettes or alcoholic beverages.

In the present case, the investigators were successful in five out of six attempts to purchase ineligible items with food stamps with three different clerks. One clerk was responsible for three of the transactions. The one unsuccessful attempt was the only attempt during the hours when management was present. The three year disqualification was not imposed for the sale of any major ineligible items. At the time of the investigation, plaintiff employed eight employees and employed twenty-nine employees between January, 1983 and March, 1984. Plaintiff’s employees are extensively trained in food stamp regulations and procedures. The three employees involved in the transactions received substantial training concerning the food stamp program. The employees involved were immediately terminated by plaintiff as a result of defendant’s allegations.

The facts in the present case are similar to those in Bruno’s. As in Bruno’s, the plaintiff in the present case “did everything he could do to insure compliance. The court in Bruno’s, interpreting FNS Instruction 744-9, found that these facts did not establish that it was the store’s policy to violate the food stamp regulations.

Title 7 of C.F.R. § 278.6 was amended in 1982 to provide for a three year disqualification if it is the firm’s “practice” to commit violations. 7 C.F.R. § 271.2 defines “practice” as “the usual manner in which personnel ... accept food coupons as shown by the actions of the personnel at the time of the investigation.” Webster’s defines a “practice” as “something habitually engaged in.” Webster’s Third New International Dictionary 1780 (unabridged Ed.1976). The facts of the present case support the conclusion that it was not the plaintiff’s “practice” to violate the food stamp regulations. In addition the FNS made no findings concerning whether the amount of ineligible items sold by plaintiff were of an amount “normally found in a shopping basket” as required by 7 C.F.R. § 278.6(e)(3). The FNS review officer did hot consider plaintiff’s intent as required by 7 C.F.R. § 278.6(d). I find that the FNS’s sanction of plaintiff for three years was violative of 7 C.F.R. § 278.6(e)(3). There was not sufficient evidence to find it was plaintiff’s practice to violate the regulations. Defendant did not properly apply its regulations. The sanction of three years disqualification is “unwarranted in law” and therefore arbitrary and capricious.

2. Sufficiency Of The Warning.

Pursuant to 7 C.F.R. § 278.6(e)(3)(i) the store must have been previously advised of the possibility of violations and of the possible consequences in order to be disqualified for three years. The only warning plaintiff received was a January 24, 1983 letter from Barbara Russell, officer in charge of the FNS Portland Field Office. This letter confirmed the conversation between Mr. Kolstad of the FNS and Mr. Amick on January 19, 1983. The letter stated that Mr. Kolstad and Mr. Amick discussed a complaint that plaintiff was accepting food stamps from Asian families for the purchase of beer and cigarettes and that Mr. Amick stated he was not aware of any violations but that he would review the program rules with his employees, especially one new employee. The letter also stated:

You should take special care to prevent violations because they may lead to your disqualification from the Food Stamp Program. You are responsible for violations committed by your employees. Therefore, it is vital that you make sure that all the store’s employees, including new and part-time employees, know the regulations and adhere to them.
The penalties provided in Section 278.6 of the Food Stamp Program Regulations will be imposed on those authorized firms that do not adhere to the regulations.

Copies of this letter were also sent to Mr. Piacentini, president and Mr. Penn, supervisor.

In Bertrand, 726 F.2d at 521, the court found that a warning letter sent sixteen months before the violations occurred was sufficient warning of possible food stamp violations. The court relied on FNS Instruction 744-9 which stated that warning must be given no more than three years before a violation in order to impose the one year disqualification then in effect. The court stated that was a reasonable period of time in view of the fact that the entities involved are businesses which should be capable of complying with the regulations without repeated monitoring. Id. at 522. In Bertrand, the FNS discussed the warning with the owner’s son, who had made some of the violative transactions, and with the owner herself before sending the warning letter.

Bertrand involved a “Mom and Pop” store with warnings given directly to the owner and her son, both of whom worked in the store when the warning was given and when the subsequent violations occurred. Mr. Amick left plaintiff’s employment shortly after the warning letter was received. In addition to Mr. Amick, there have been two other managers at Store No. 65 between the warning letter and the alleged violations. Mr. Penn, the district supervisor who received a copy of the warning letter, left plaintiff’s employment in July, 1983. A different district manager was employed at the time of the alleged violations. The FNS Instruction relied on by the Bertrand court was interpreting regulations where the maximum penalty involved was a one year disqualification. That penalty in the present case is a three year disqualification. Plaintiffs redemption rate after the warning declined so plaintiff had no reason to suspect that violations were occurring.

The warning letter plaintiff received dealt with the alleged violative sale of beer and cigarettes. The FNS review officer modified the regional director’s initial decision in the present case because he found that evidence insufficient to establish that sales of major nonfood items such as beer and cigarettes was plaintiff’s normal practice. Therefore, the warning plaintiff received did not concern the violations which it was later disqualified for. In Lamboy v. United States, 604 F.Supp. 490, 494 (E.D.Pa.1985), the court found the warning plaintiff received was inadequate when the plaintiff was not warned of the specific violation for which it were penalized.

In the present case, the warning was not specific. It was also inadequate because the FNS dealt with plaintiff as a Mom and Pop organization and did not take plaintiff’s high turnover in personnel into consideration. The warning was untimely for a severe penalty of three years disqualification. I find the warning given plaintiff was inadequate. The three year disqualification of plaintiff violated the requirements of 7 C.F.R. § 278.6(e) and therefore, was arbitrary and capricious.

3. Alternative Sanctions.

Where a court finds that the Agency determination was erroneous, the court may “enter such judgment or order as it determines is in accordance with the law and the evidence.” 7 U.S.C. § 2023. The court may itself choose a new sanction based on all the evidence, or remand for the agency to select a new penalty. Broad Street Food Market, Inc. v. United States, 720 F.2d 217, 220 (1st Cir.1983).

Plaintiff could be disqualified for one year if it is its first sanction, the ownership or management have committed violations, and the firm has been previously warned of the possibility that violations were occurring and of the possible consequences of those violations. 7 C.F.R. § 278.6(4). This is the plaintiff’s first sanction and the warning given to plaintiff by the FNS was inadequate. There is also no evidence that the management or ownership committed any violations of the food stamp regulations. The evidence in the present case is that management committed no violations and did everything it could to prevent any violations. Therefore disqualification of one year pursuant to 7 C.F.R. § 278.6(4) is not an appropriate sanction.

In order to be disqualified for six months, it must be the firm’s first sanction and the evidence must show that personnel have committed violations due to carelessness or poor supervision by the firm’s ownership or management. 7 C.F.R. § 278.-6(5). An employer can be held responsible for his employees violative food stamp transactions. Kulkin v. Bergland, 626 F.2d 181, 183 (1st Cir.1980).

In the present case, plaintiff extensively trained its employees, had a policy of terminating its employees who violated the food stamp regulations and did terminate those employees involved in the violative transactions at issue in this case. Plaintiff did everything it could possibly do to comply with the food stamp regulations. An employer can be penalized for violations of its employees, but not when it has done everything possible to insure compliance by them. Because plaintiff did all it could to secure compliance with the food stamp regulations, I find that there was no carelessness or poor supervision by plaintiff in the present case. Therefore, the six month disqualification provided in 7 C.F.R. § 278.-6(5) is an inappropriate sanction.

The FNS determined that a money penalty was not appropriate in the present case pursuant to 7 C.F.R. § 278.6(f) because it determined that a disqualification would not cause hardship to food stamp households since there is another authorized retail food store in the area selling as large a variety of staple food items at comparable prices. This is a decision within the expertise of the agency and I will not disturb its finding on this sanction.

Plaintiff shall be sent a warning letter because the violations are too limited to warrant a disqualification. 7 C.F.R. § 278.-6(e)(7). Because I have determined that the FNS improperly applied regulation 7 C.F.R. § 278.6 to plaintiff, I do not need to determine if that regulation is void for vagueness as plaintiff asserts. Plaintiffs disqualification for three years was an arbitrary and capricious action. That disqualification is vacated and defendant is ordered to send plaintiff a warning letter pursuant to 7 C.F.R. § 278.6(e)(7).

      . In Bertrand v. United States, 726 F.2d 518, 521 (9th Cir.1984), the court found that Instruction 744-9 was a reasonable interpretation of the regulation.

      . The regulation then in effect was amended by the 1982 amendments which now provide for a three year disqualification.


author: HOLDEN, Senior District Judge.

text:
    Carl H. KACZANOWSKI, D.P.M. and Michael J. Guerra, D.P.M., individually and on Behalf of their patients v. MEDICAL CENTER HOSPITAL OF VERMONT, Fanny Allen Hospital, Hotel Dieu.
    Civ. A. No. 81-336.
    United States District Court, D. Vermont.
    June 19, 1985.

      Robert A. Mello, South Burlington, Vt., for plaintiffs.
    Spencer R. Knapp, Dinse, Erdmann & Clapp, Burlington, Vt., for Medical Center Hosp. of Vermont.
    Richard Wadhams, Pierson, Affolter & Wadhams, Burlington, Vt., for Fanny Allen Hosp., Hotel Dieu.
   MEMORANDUM OF DECISION

HOLDEN, Senior District Judge.

The plaintiffs Carl H. Kaczanowski, D.P.M., and Michael J. Guerra, D.P.M., seek injunctive and compensatory relief arising from denial of staff privileges by the defendants Medical Center Hospital of Vermont (“MCHV”) and the Fanny Allen Hospital, Hotel Dieu (“FAH.”) The action was jointly instituted by the plaintiffs individually and on behalf of their patients. The United States Magistrate was designated by the court to hear and submit his recommendation for disposition of pretrial motions pursuant to 28 U.S.C. § 636(b)(1). The designation included the defendants' motions for summary judgment.

The facts which compose this action are thoroughly explored and reported by the magistrate. Briefly stated, the magistrate concluded that except for Counts IV and V, charging violations of 42 U.S.C. §§ 1985 and 1986, the record in its entirety presents affirmative issues for proof that preclude granting the defendants’ motions for summary judgment. The defendants’ objections to this recommendation bring the case on for this court’s review.

FACTUAL BACKGROUND

Plaintiffs Carl H. Kaczanowski, D.P.M., and Michael J. Guerra, D.P.M., are podiatrists licensed by the State of Vermont to practice their profession pursuant to 26 V.S.A. §§ 321 et seq. They practice together as the “Vermont Foot Clinic” in Burlington and the “Central Vermont Foot Clinic” in Berlin. Both plaintiffs have been admitted as members of the Central Vermont Medical Center (“CVMC”) medical staff, with privileges to perform limited foot surgery at that facility. CVMC is in Washington County and adjoins Chittenden.

MCHV and FAH are both located in Chittenden County. They are the only hospitals in that area. FAH is a private hospital. MCHV is a non-profit hospital medical treatment facility and serves as the primary teaching hospital for the University of Vermont College of Medicine.

Doctors Kaczanowski and Guerra applied to MCHV and FAH to obtain admitting and podiatric surgical privileges as members of the medical staffs of both defendants. Their applications were denied. Plaintiffs claim MCHV and FAH unlawfully forbid them medical staff privileges.

Dr. Kaczanowski sought staff and admitting authority at MCHV in early September 1977. The chairman of the MCHV department of surgery, John Davis, M.D., recommended only limited approval of the application. Specifically, Dr. Davis recommended “Scientific Consultant” status without surgical or admitting privileges. The MCHV medical staff executive committee approved Dr. Davis’ recommendation on November 2, 1978. The full medical staff adopted the recommendation on December 6, 1978. The MCHV Board of Trustees accepted the medical staff’s decision on January 18, 1979. MCHV gave its decision to Dr. Kaczanowski on January 22, 1979.

Dr. Guerra initiated his application to MCHV in mid-June 1979. Dr. Davis noted his recommendation on Dr. Guerra’s application on June 27, 1979. Dr. Davis recommended the same status granted to Dr. Kaczanowski, Scientific Consultant, without privileges to admit or perform surgery. Dr. Guerra never completed his application by submitting three letters of recommendation as required. MCHV did not take further or final action on his application.

Drs. Kaczanowski and Guerra applied to FAH in June 1979. FAH’s chief of surgery, Clarence Bunker, M.D., discussed the applications informally with other members of the medical staff who objected to granting plaintiffs any privileges which would overlap the area of the orthopedic surgeons. Dr. Bunker and the surgeons he consulted agreed that plaintiffs should only be allowed to perform soft tissue foot surgery; surgery requiring the cutting of bone was reserved to the orthopedic surgeons.

After consultations with the FAH administrator and the plaintiffs, Dr. Bunker made a formal recommendation to the Fanny Allen Medical Executive Committee. The recommendation would allow plaintiffs to perform soft tissue foot surgery on an outpatient basis. It would restrict the plaintiffs to consulting with attending physicians on inpatient admissions. The committee adopted Dr. Bunker’s recommendation.

The plaintiffs, Dr. Kaczanowski and Dr. Guerra, objected to the restrictions on their privileges at FAH. They met with Dr. Bunker and the Medical Executive Committee on June 20, 1980. Dr. Bunker and the committee agreed to reconsider their initial decision in light of the plaintiffs’ privileges at CVMC. The FAH Medical Executive Committee later met with the new chief of surgery, Donald Majercik, M.D., on November 21, 1980. Rather than enlarging the privileges, the committee, on Dr. Majercik’s recommendation, restricted the privileges previously granted to plaintiffs at FAH. The privileges, as thus curtailed, were limited in the same fashion as those granted at MCHV. The Fanny Allen Medical Staff and Board of Trustees ratified the committee’s decision. FAH notified Drs. Kaczanowski and Guerra on January 6, 1981. Plaintiffs commenced this action on October 29, 1981. Extensive discovery ensued, followed by hearings by the magistrate and the district court on defendants’ motions for summary judgment.

THE CLAIMS

The Doctors Kaczanowski and Guerra allege the actions of MCHV and FAH violated the federal antitrust law and their civil rights as protected by the United States Constitution. It is further alleged that the conduct of the defendants offends the Constitution of Vermont and the Vermont statutory and common law.

In summary, Drs. Kaczanowski and Guerra allege both MCHV and FAH based their decisions to deny the applications to practice podiatry to the extent permitted by state law on agreements and acts designed, as a practical matter, to exclude podiatrists from hospital practice. Count I of the complaint alleges unreasonable and substantial trade restraints which violate Section 1 of the Sherman Act. 15 U.S.C. § 1. Count II charges conspiracy and attempt to monopolize in violation of Section 2 of the Sherman Act. 15 U.S.C. § 2.

Count III relies on 42 U.S.C. § 1983 to charge that MCHV and FAH violated constitutional rights protected by the Due Process Clause by depriving the plaintiffs of the privileges sought in their applications. Count IV alleges MCHV and FAH conspired with others to deprive plaintiffs of equal protection and equal privileges and immunities under the laws of the United States, in violation of 42 U.S.C. § 1985(3) and § 1986. In Counts VI—XIV Drs. Kaczanowski and Guerra assert multiple pendent state claims.

DISCUSSION

At the outset, the court is mindful that summary adjudication of antitrust claims is generally disfavored. The Supreme Court has cautioned that motive and intent usually are involved in antitrust litigation, hence summary procedures should be sparingly applied. Poller v. Columbia Broadcasting System, Inc., 368 U.S. 464, 473, 82 S.Ct. 486, 491, 7 L.Ed.2d 458 (1962). With these standards in mind, the court turns to the central issues that are presented in the extensive record accumulated since the commencement of the action.

Exhaustion of Remedies

Both FAH and MCHV challenge the Magistrate’s recommendation that the court adjudicate the merits of the complaint rather than defer to the internal procedures in the hospital administrative structures. The defendants join in urging that judicial relief be withheld until both plaintiffs have exhausted the remedies afforded by the hospital staffs. The court finds no merit in these contentions. There is no statutory mandate that the plaintiffs exhaust the hospitals’ internal appeals. Nor was there any undertaking expressed or implied between plaintiffs and the hospitals which would impose such a requirement.

Indeed the plaintiffs come to this court seeking both equitable and compensatory relief. There is no suggestion that the relief sought is available from the hospitals. Absent some statutory or other directive, the court declines to stay its review to await further administrative action that may prove to be burdensome and unproductive. The court approves that aspect of the Magistrate’s report that recommends against imposing an exhaustion requirement in the present state of this controversy. That takes us to the jurisdictional base for Sherman Act violations.

Sherman Act Claims

Plaintiffs plead that the defendants violated Sections 1 and 2 of the Sherman Act. Section 1 makes “[ejvery contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States ...” illegal. 15 U.S.C. §1. Section 2 provides that “[ejvery person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States ...” acts illegally. 15 U.S.C. § 2.

Since the defendants’ alleged wrongful activities are local in nature, the court’s attention of necessity turns to the question of whether the record establishes that the defendants’ antitrust activity exerted an adverse effect on interstate commerce. The report of the Magistrate concluded in the affirmative.

In the present pretrial posture of the case and in the context of the pending motion for summary judgment the court is inclined to agree. That is not to say that the link between the defendants’ denial of staff privileges to the plaintiff and the adverse effect on commerce is clear and strong. Rather the linkage is frail and fragile in the light of Furlong v. Long Island College Hospital, 710 F.2d 922, 926 (2d Cir.1983).

The court is called upon to afford the plaintiffs a conspectus of the record that lends the greatest strength to their opposition to summary judgment. From this vantage point the facts are not conclusive on the effect of the defendants’ conduct on interstate commerce. Since the jurisdictional issues of fact remain in dispute, the court is inclined to accept and confirm that aspect of the Magistrate’s recommendation that summary judgment on the ground of lack of jurisdiction be denied. Konick v. Champlain Valley Physicians Hospital Medical Center, 561 F.Supp. 700, 711-12 (N.D.N.Y.1983), aff'd on other grounds, 733 F.2d 1007 (2d Cir.), cert. denied, — U.S. -, 105 S.Ct. 253, 83 L.Ed.2d 190 (1984).

Fulfillment of the essentials of the jurisdictional requirement of the Sherman Act does not settle the question of the antitrust violations claimed by the plaintiffs. The plaintiffs contend that the rejections of their applications for staff and admitting privileges by the defendants constitute per se restraint of trade violations. The plaintiffs label the defendants’ conduct as “group boycott,” “tying arrangement,” and “bottleneck.”

The conclusive presumption that attends the application of the Act is restricted, in the words of Justice Black in Northern Pacific Railway Co. v. United States, 356 U.S. 1, 5, 78 S.Ct. 514, 518, 2 L.Ed.2d 545 (1958), to those

certain agreements or practices which because of their pernicious effect on competition and lack of any redeeming virtue are conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use.

The first line of inquiry is whether the bylaws of the defendant hospitals, as applied by their respective governing agencies, are “naked restraints of trade with no purpose except stifling of competition.” White Motor Co. v. United States, 372 U.S. 253, 263, 83 S.Ct. 696, 702, 9 L.Ed.2d 738 (1963).

Per se illegality under the Sherman Act has been “carefully limited.” Walker Process Equipment, Inc. v. Ford Machinery and Chemical Corp., 382 U.S. 172, 178, 86 S.Ct. 347, 351, 15 L.Ed.2d 247 (1965) (citing White Motor Co. v. United States, 372 U.S. 253, 83 S.Ct. 696, 9 L.Ed.2d 738 (1963)). The fact that violations are alleged against the hospitals which implicate their medical staffs is insufficient by itself to escape per se condemnation where the particular kind of restraint is conclusively presumed to be unreasonable. Arizona v. Maricopa County Medical Society, 457 U.S. 332, 344-48, 102 S.Ct. 2466, 2473-75, 73 L.Ed.2d 48 (1982). Yet most restraints have been analyzed under the “rule of reason.” Id. at 343, 102 S.Ct. at 2472.

Of course there is no claim of price fixing here. Nonetheless, the plaintiffs have submitted a standard list of claimed per se violations in different varieties, generally in the customary non-professional marketplace.

Recently the Court has considered the claim of a “tying arrangement” between a hospital and a firm of anesthesiologist which was charged as a per se violation of the Sherman Act. Jefferson Parish Hospital v. Hyde, 466 U.S. 2, -, 104 S.Ct. 1551, 1553, 80 L.Ed.2d 2 (1984). The Court concluded the record provided no evidence that the hospital “forced any such (anesthesiologieal) services on unwilling patients” and afforded “[no] basis for applying the per se rule” to the violation claimed. Id. at ---, 104 S.Ct. at 1567. The Court’s opinion by Justice Stevens goes further to hold that there was insufficient evidence in the record to provide a basis for finding the accused contract had unreasonably restrained competition:

In sum, all the record establishes is that the choice of anesthesiologists at East Jefferson has been limited to one of the four doctors who are associated with Roux and therefore have staff privileges. Even if Roux did not have an exclusive contract, the range of alternatives open to the patient would be severely limited by the nature of the transaction and the hospital’s unquestioned right to exercise some control over the identity and number of doctors to whom it accords staff privileges.

Id. at---, 104 S.Ct. at 1568.

By separate opinion concurring in the Court’s decision, Justice O’Connor explained the exclusive dealing contract is “properly analyzed ... and survives scrutiny under the Rule of Reason.” Concurring Op. at -, 104 S.Ct. at 1569 and at -, 104 S.Ct. at 1576.

In the dental profession the court of appeals affirmed the summary adjudication by the trial court that an association of periodontists imposing a “limited practice requirement” on its members escaped per se condemnation under the rubric of group boycott in the presence of public service considerations. Kreuzer v. American Academy of Peridontology, 735 F.2d 1479, 1492 (D.C.Cir.1984). Here, we have not been referred to any controlling authority governing “bottleneck” violations within the medical profession. Without further search it is sufficient to say that the record at hand fails to provide adequate legal justification for application of the per se rules urged by plaintiffs.

The main thrust of the defendants’ motion for summary judgment is advanced on the premise of public service or ethical norms referred to in Maricopa, supra, 457 U.S. at 348-349, 102 S.Ct. at 2475; National Society of Professional Engineers v. United States, 435 U.S. 679, 696, 98 S.Ct. 1355, 1367, 55 L.Ed.2d 637 (1978); Goldfarb v. Virginia State Bar, 421 U.S. 773, 788, n. 17, 95 S.Ct. 2004, 2013, n. 17, 44 L.Ed.2d 572 (1975). This analysis is strengthened by reference to the bylaws of MCHV and FAH. It is these prescripts that provide the underpinning for the plaintiffs’ antitrust claims.

A medical facility such as those targeted in this controversy is not required to indiscriminately admit all licensed practitioners in the field of health care who wish to attend patients and practice surgery there. Konik v. Champlain Valley Physicians Hospital, 733 F.2d 1007, 1015 (2d Cir.1984) (Kearse, J.) Indeed the state itself exercises sensitive discernment in the granting and withholding of licensing privileges among the various levels of medical service. The public health law expressed in the various chapters of Title 26 of the Vermont Statutes Annotated, has firmly implanted discrete limitations among the various disciplines providing health care to patients treated in Vermont.

The main question presented in the record at hand is whether the defendants' exclusion of the plaintiffs from practicing podiatry at the hospitals constituted an unreasonable restraint on interstate commerce in the antitrust sense of suppressing competition as proscribed by the Sherman Act. See National Society of Professional Engineers v. United States, 435 U.S. 679, 695, 98 S.Ct. 1355, 1367, 55 L.Ed.2d 637 (1978).

Our search of this question begins with the applicable provisions of the MCHV bylaws in effect at the time of Dr. Kaczanowski’s initial application in September of 1977.

Article IV—MEMBERSHIP

SECTION 1. Qualifications. (a) Each applicant for membership in the Emeritus, Attending, Visiting, Clinical Associate and Adjunct Groups shall be a graduate of a medical school approved by the appropriate accrediting body, or of a dental school approved by the American Dental Association, or shall be a qualified osteopathic physician who has completed satisfactorily not less than one year of training in a medical program approved by the Council on Medical Education of the American Medical Association; provided, however, that in the event of graduation from a medical, osteopathic or dental school outside of the United States and Canada, this requirement may be waived in exceptional cases after review by the Medical Board and by vote of the Medical Staff. He shall be legally licensed to practice medicine, dentistry or osteopathy in the State of Vermont.
(b) Each nominee for appointment as Scientific Consultant shall be a member of the faculty of the University- of Vermont College of Medicine, preeminent in his field of scientific endeavor.
(c) No applicant shall be denied Medical Staff membership on the basis of sex, race, creed, color, or national origin.

By-Laws, Rules and Regulations applicable to the Medical Staff, Medical Center Hospital of Vermont, Inc., September 25, 1975.

The Kaczanowski application to MCHV was accompanied by two letters of reference; one from a podiatrist and one from a physician. The privileges requested in the application were “podiatry as described by state law.” The chairman of the Department of Surgery recommended the applicant be appointed and recognized as a scientific consultant without admitting privileges. The recommendation was approved by the executive committee of the medical staff, the full medical staff, and the hospital board of trustees. No appeal was taken from this action.

Dr. Guerra applied for appointment to the medical staff on June 14, 1979 requesting privileges in “Podiatry.” Although the application instruction required three letters of reference from physicians, Dr. Guerra did not include the prescribed letters. Regarding the application as incomplete, no further action was taken by MCHV.

The bylaws of the medical staff of FAH recognize podiatrists in the category of scientific consultant to the attending physician, without affording admitting privileges. The regulations do not permit a podiatrist to prescribe medication or treatment. The rules at FAH provide: “The scope and extent of the surgical procedure the podiatrist may perform must be specifically defined by the Chief of Surgery and recommended to the Executive Committee and Medical Staff in the same manner as all other surgical privileges.” Fanny Allen Hospital, Medical Staff By-Laws, Rules and Regulations, p. 24.

The magistrate concluded that the defendants were not entitled to summary adjudication in the presence of issues of fact concerning a conspiratorial arrangement. The conclusion derived from these factual ingredients: (1) Both hospitals are located in the Burlington area; (2) the two hospitals share in common some staff members; (3) the plaintiffs produced evidence that someone from the FAH “spoke” with someone from MCHV before the privileges initially recommended for plaintiffs at FAH were sharply reduced; (4) FAH granted plaintiffs “the same privileges as MCHV for substantially the same reasons.” Magistrate’s Report, p. 37.

To be sure, the surgical staffs of both hospitals were entrusted with the responsibility of granting staff privileges for their respective hospitals. Although the staff members had certain economic interests in competition with other members of the medical profession, they were not engaged in competition with the hospitals where they held staff privileges. And it has been held that no conspiracy can prevail between a hospital and its medical staff. Weiss v. York Hospital, 745 F.2d 786, 817 (3rd Cir.), cert. denied, - U.S. -, 105 S.Ct. 1777, 84 L.Ed.2d 836 (1985.) A conspiracy is not established by proof of the mere opportunity to conspire. North Eastern Telephone Company v. American Telephone and Telegraph, 651 F.2d 76, 85 (2d Cir.), cert. denied, 455 U.S. 943, 102 S.Ct. 1438, 71 L.Ed.2d 654 (1982). And a conspiracy to violate the antitrust law is not to be inferred from frequent contact between medical professional bodies on general matters of mutual concern. Kreuzer v. American Academy of Peridontology, 735 F.2d at 1488; Weit v. Continental Illinois National Bank and Trust Co., 641 F.2d 457, 462 (7th Cir.1981), cert. denied, 455 U.S. 988, 102 S.Ct. 1610, 71 L.Ed.2d 847 (1982); Feldman v. Jackson Memorial Hospital, 571 F.Supp. 1000,1008 (S.D.Fla.1983), aff'd, 752 F.2d 647 (11th Cir.1985).

The record fails to make it clear that the members of the medical staffs were acting in furtherance of their own professional practice against the interests of the profession and the hospitals they served. Common sense dictates that the use of sensitive medical instruments, which may engage highly technical diagnostic equipment and management of skilled members of the nursing and technological staffs should not be entrusted to applicants who fail to meet a high level of advanced medical training. In this sense the denial of admitting and full staff privileges does not constitute an unreasonable restraint of trade in violation of the Sherman Act.

There are other considerations which reside in the bylaws and their application challenged in this controversy. This was well explained by Judge Fuld writing for the New York Court of Appeals.

The conception that the hospital does not undertake to treat the patient, does not undertake to act through its doctors and nurses, but undertakes instead simply to procure them to act upon their own responsibility, no longer reflects the fact. Present-day hospitals, as their manner of operation plainly demonstrates, do far more than furnish facilities for treatment. They regularly employ on a salary basis a large staff of physicians, nurses and internes, as well as administrative and manual workers, and they charge patients for medical care and treatment, collecting for such services, if necessary, by legal action. Certainly, the person who avails himself of “hospital facilities” expects that the hospital will attempt to cure him, not that its nurses or other employes will act on their own responsibility.

Bing v. Thunig, 2 N.Y.2d 656, 163 N.Y. S.2d 3, 8, 143 N.E.2d 3, 8 (1957).

Since the removal of the cloak of charitable immunity, hospitals across the land have had a serious and well-founded concern that they be subjected to liability for acts and omissions of the hospital staff in ministering to patients admitted to the facility.

The standards for Hospital Accreditation, the state licensing regulations and the defendant’s bylaws demonstrate that the medical profession and other responsible authorities regard it as both desirable and feasible that a hospital assume certain responsibilities for the care of the patient.

Darling v. Charleston Community Memorial Hospital, 33 Ill.2d 326, 211 N.E.2d 253, 14 A.L.R.3d 860, 867 (Schaefer, J.), cert. denied, 383 U.S. 946, 86 S.Ct. 1204, 16 L.Ed.2d 209 (1966). See also Woodard v. Porter Hospital, 125 Vt. 419, 217 A.2d 37 (1966); Minogue v. Rutland Hospital, 119 Vt. 336, 125 A.2d 796 (1956).

It may be said, as the magistrate did, that podiatrists may be disadvantaged for want of full medical staff privileges, equivalent to those enjoyed by physicians and surgeons. By the same token, orthopedic surgeons may experience some corresponding advantage, That disparity does not of itself generate an economic impact affecting interstate commerce within the proscription of the Sherman Act. And as noted earlier, MCHV, as a regional referral medical center and teaching hospital, carries a special responsibility, not only to the patients entrusted to its care, but to the public generally.

Beyond that, the complaint and the record which has developed, fail to demonstrate what anti-competitive effect, if any, the exclusion of the plaintiffs from the hospital staffs has in the relevant medical marketplace. In terms of the Rule of Reason, to demonstrate a right to relief the plaintiff must bring forth “an injury of the type the antitrust laws were intended to prevent and that flows from that which makes the defendants’ acts unlawful.” Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 489, 97 S.Ct. 690, 697, 50 L.Ed.2d 701 (1977) (Marshall, J.).

The record fails to supply the essential ingredients of economic impact. The plaintiffs concede that there are at least two hospitals in the general area that afford limited staff privileges to podiatrists. The fact that plaintiffs have been affected by the exclusion from the defendant hospitals is not enough to justify relief under the Act. E.g. Brown Shoe Co. v. United States, 370 U.S. 294, 320, 82 S.Ct. 1502, 1521, 8 L.Ed.2d 510 (1962) (Warren, C.J.) (Congressional concern with protection of competition, not competitors.)

Under the law as applied to the undisputed facts disclosed by the record, the plaintiffs are not entitled to relief under Section 1 of the Sherman Act. “The offense of monopoly under § 2 of the Sherman Act has two elements: 1) the possession of monopoly power in the relevant market and 2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.” United States v. Grinnell Corp., 384 U.S. 563, 570-71, 86 S.Ct. 1698, 1704, 16 L.Ed.2d 778 (1966).

The facts do not support a finding that the maintenance of the alleged monopoly was willful. Plaintiffs contend that the physicians who made the decisions not to grant privileges have a strong economic interest in excluding podiatrists from the hospitals, urging that if podiatrists have surgical privileges they will be able to compete with present staff members on an equal basis. ■ This contention, if true, may support a finding that the individual physicians have an anticompetitive purpose to exclude podiatrists; it does not explain an economic motive on the part of the hospital to discriminate against podiatrists. Indeed, the plaintiffs argue that the hospital and medical staff had different motives.

The full medical staff and Board of Trustees of both facilities reviewed the recommendations of the chiefs of surgery. The respective medical staffs and governing boards appropriately may be inclined to economic considerations. It is similarly proper to promote worthy professional standards by close examination of the qualifications of medical professionals who apply. There is no evidence to support a finding that the hospitals, through their medical staffs and boards of review, acted contrary to these interests. Patently, the plaintiffs’ credentials do not meet the, minimum standards set by the hospitals to promote the highest quality of patient care. The facts, viewed in the light most favorable to the plaintiffs, do not provide evidence that the defendants willfully pursued the alleged monopoly.

To be sure, the medical specialty of podiatry may advance to the point where other segments of the medical profession will be called upon to afford podiatrists broadened surgical and admitting hospital privileges. Such recognition may derive from the medical profession at large or by legislative action. From the record at hand, there is nothing by way of the Sherman Act to call upon the courts to intrude upon a responsibility reserved to medical decision makers.

The court finds no meaningful evidentiary support in the record at hand for the conclusion that the medical staff bylaws as applied by the defendant hospitals excluded the plaintiffs from the practice of podiatry in the appropriate medical market in upstate New York and northern Vermont. E.g. Feldman v. Jackson Memorial Hospital, supra, 571 F.Supp. 1000 (exclusion of podiatrist from hospital staff presented no triable antitrust issue). Summary judgment will be entered for the defendants for want of triable issues on the plaintiffs’ antitrust claims.

Civil Rights Claims

To present triable issues on the plaintiffs’ civil rights claims under 42 U.S.C. §§ 1983, 1985, 1986, and the United States Constitution, the alleged violation must be linked to “state action.” A defendant’s conduct satisfies this requirement when it meets at least one of the four factors recently articulated by the Court in Lugar v. Edmonson Oil Co., 457 U.S. 922, 939, 102 S.Ct. 2744, 2754, 73 L.Ed.2d 482 (1982): 1) the “public function”; 2) the “state compulsion”; 3) the “nexus”; and 4) the “joint action” tests. Id.

In dealing with the civil rights aspect of this controversy, the teaching of Lugar, supra, marks the direction of travel.

[T]he first question is whether the claimed deprivation has resulted from the exercise of a right or privilege having its source in state authority. The second question is whether, under the facts of this case, respondents, who are private parties, may be appropriately characterized as “state actors.”

457 U.S. at 939, 102 S.Ct. at 2755. Cf. Flagg Brothers, Inc. v. Brooks, 436 U.S. 149, 98 S.Ct. 1729, 56 L.Ed.2d 185 (1978).

Careful adherence to the “state action” requirement preserves an area of individual freedom by limiting the reach of federal law and federal judicial power. It also avoids imposing on the State, its agencies or officials, responsibility for conduct for which they cannot fairly be blamed. A major consequence is to require the courts to respect the limits of their own power as directed against state governments and private interests. Whether this is good or bad policy, it is a fundamental fact of our political order____ Without a limit such as this, private parties could face constitutional litigation whenever they seek to rely on some state rule governing their interactions with the community surrounding them.

457 U.S. at 936-37, 102 S.Ct. at 2753.

The court's attention has not been directed to a particular aspect of Vermont's public health law which delegates authority to the defendants, as private hospitals, to exclude podiatrists from staff privileges at their respective facilities. The plaintiffs do not target the State of Vermont as the source of the deprivation caused here. If the plaintiffs’ exclusion can be said to spring from the state, the next inquiry is whether the hospitals charged here can be appropriately characterized as “active participants in state action.”

The magistrate reported that both defendants have received Hill-Burton funds from the federal fisc, and enjoy tax exemptions and have licensing privileges from the State of Vermont. In a similar setting these points have been held insufficient to avoid dismissal of the civil rights actions for lack of state action in the denial of staff privileges by a private hospital.

While these facts show some state involvement in the activities of the Hospital, the existence of “state action” depends on “whether there is a sufficiently close nexus between the State and the challenged action of the regulated entity so that the action of the latter may be fairly treated as that of the State itself.” Jackson v. Metropolitan Edison Co., 419 U.S. 345, 351, 95 S.Ct. 449, 453, 42 L.Ed.2d 477 (1974). As we said in Powe v. Miles, 407 F.2d 73, 81 (2d Cir.1968), “the state must be involved not simply with some activity of the institution alleged to have inflicted injury upon a plaintiff but with the activity that caused the injury.”

Schlein v. Milford Hospital, 561 F.2d 427, 428 (2d Cir.1977). Of the same substance and effect are Barrett v. United Hospital, 376 F.Supp. 791, 803 (S.D.N.Y.), aff'd mem., 506 F.2d 1395 (2d Cir.1974) and Beverley v. Douglas, 591 F.Supp. 1321, 1329 (S.D.N.Y.1984) (Weinfeld, J.).

Plaintiffs urge that state action is satisfied with respect to MCHV on the basis of its “nexus” with the State of Vermont. The connection factor requires the court to determine whether private conduct is so intertwined with the state that the conduct is no longer private. Burton v. Wilmington Parking Authority, 365 U.S. 715, 81 S.Ct. 856, 6 L.Ed.2d 45 (1961). This circuit has developed a further analysis to determine whether state action is satisfied: 1) the state’s involvement with the private institution must be significant; 2) the state must be involved with the activity that caused the injury; and 3) the state’s involvement must somehow aid the complained of activity. Schlein, supra at 428; Barrett, supra at 797.

MCHV is the teaching hospital for the University of Vermont. Its bylaws provide: “In general the Chief of a department or Service shall be the chairman of the corresponding department or division at the College of Medicine.” Medical Staff By-Laws, Article III, Section 3. The court is not persuaded that this interweave of the functions of teaching medicine at the College and providing medical care at the private' hospital constitutes state action in the deprivation of which the plaintiffs complain. The record discloses no concert of action or agreement between the College of Medicine and MCHV concerning the disposition of the applications for staff privileges at the Medical Center Hospital. Further, under the bylaws staff privileges decisions are made by MCHV’s Board of Trustees, rather than the chiefs of the hospital’s clinical services.

Although Dr. Davis held contemporaneous positions as chief of staff for the Department of Surgery and chairman of a department at the College of Medicine, the record does not demonstrate in answer to the defendants’ motions for summary adjudication, that the source of his staff privilege recommendations derived from the state or that his conduct, can be deemed participation by a state official. Accordingly, it cannot be held that the state aided or was involved in the complained of activity. The record at hand fails to achieve the essential link between the MCHV staff privileges decision and the State of Vermont to meet the demands of state action within the sense and purpose of the Civil Rights Act. This aspect of the plaintiffs’ complaints against MCHV and FAH must be dismissed for lack of state action within the meaning of 42 U.S.C. § 1983 and its jurisdictional counterpart, 28 U.S.C. § 1343.

The remaining claims asserted on the provisions of 42 U.S.C. § 1985(3) and § 1986 are appropriate for disposition by summary adjudication. Although section 1985(3) does not require state action, under this facet of the Civil Rights Act, as Magistrate Niedermeier correctly observed, it is essential to relief that the element of invidiously discriminatory class-based motivation be present. Griffin v. Breckenridge, 403 U.S. 88, 102, 91 S.Ct. 1790, 1798, 29 L.Ed.2d 338 (1971). The plaintiffs have raised no objection to the dismissal of the counts based on these provisions of the civil rights statute.

This litigation is not of recent origin. The discovery pursued by the parties has developed a voluminous record, which has been well canvassed.

Summary judgment under Rule 56 is not a total stranger to the plaintiffs’ claims. “When a motion for summary judgment is made and supported ... an adverse party ... must set forth specific facts showing there is a genuine issue for trial.” Fed.R. Civ.P. 56(e). This means

that sufficient evidence supporting the claimed factual dispute be shown to require a jury or judge to resolve the parties’ differing versions of the truth at trial.

First National Bank of Arizona v. Cities Service Co., 391 U.S. 253, 289, 88 S.Ct. 1575, 1592, 20 L.Ed.2d 569 (1968).

The record at hand fails to make that showing. The court is persuaded by its survey of the expansive record already composed in light of all the favorable intendments in support of the plaintiffs’ side of this controversy, that the defendants are entitled to summary judgment as a matter of law. The root and stock of both party plaintiffs’ claims are the hospital bylaws as written and applied by the governing councils of the defendants charged in this action. They survive the present challenge.

Pendent Claims

Dismissal of the predominant federal claims leaves the remaining state causes of action unattended in terms of judicial power.

[The] power need not be exercised in every case in which it is found to exist. It has consistently been recognized that pendent jurisdiction is a doctrine of discretion, not of plaintiff’s right____Certainly, if the federal claims are dismissed before trial, even though not insubstantial in a jurisdictional sense, the state claims should be dismissed as well.

United Mine Workers of America v. Gibbs, 383 U.S. 715, 726, 86 S.Ct. 1130, 1139, 16 L.Ed.2d 218 (1966).

In keeping with the instruction provided in Gibbs, the pendent state claims will be dismissed without prejudice and “left for resolution to state tribunals.” Id.

CONCLUSION

The exclusion of the plaintiffs from full staff privileges at the defendant hospitals does not constitute a violation of the Sherman Act. Neither does the record, construed in the aspect lending the greatest strength to the plaintiffs’ contentions under the Civil Rights Act, present triable claims for relief. These legal conclusions make it unnecessary to consider the remaining points that have been carefully and comprehensively included in the magistrate’s report.

For the reasons stated in this opinion,

1. The clerk will enter summary judgment for the defendants on Counts I and II of the plaintiffs’ complaint alleging violation of the Sherman Act.
2. Counts III through V of the plaintiffs’ complaint alleging violations of the Civil Rights Act are dismissed.
3. The remaining Counts of the complaint are dismissed without prejudice.
4. Judgment will be entered without costs to either side.

It is SO ORDERED.

      . The following facts are derived primarily from the Magistrate’s Report and Recommendation.

      . The Furlong court upheld the district court's finding that the plaintiff had failed to plead facts that would support subject matter jurisdiction. The plaintiff did not outline facts from which it was inferable that the defendants' activities, infected with the illegality alleged, were likely to have a substantial effect on commerce. The court held that plaintiffs loss of $120,000 income, a substantial portion of which came from out of state insurers, was also insufficient, although a “closer call," to sustain antitrust jurisdiction on a motion to dismiss.

      . The preamble to the BY-LAWS, RULES AND REGULATIONS applicable to the medical staff of MCHV provides:
      Recognizing that the Medical Staff is responsible for the quality of medical care in the hospital and must accept and assume this responsibility subject to the ultimate authority of the hospital governing body and that the best interests of the patients are protected by concerted effort, the physicians and dentists practicing in the Medical Center Hospital of Vermont, Inc., hereby organize themselves in conformity with the By-Laws, Rules and Regulations hereinafter stated.
      The "PURPOSE” of the MCHV "organization” is defined in Article II of the BY-LAWS, RULES AND REGULATIONS as:
      1. To insure that all patients admitted to the hospital or treated in the outpatient department receive the best possible care____
      The "PURPOSE" of the Fanny Allen Hospital, as defined in Article II of its Medical Staff BYLAWS, RULES AND REGULATIONS is,
      1. To insure that all patients admitted to this Hospital or treated in the Outpatient Department receive the best possible medical care available____