author: JUNE L. GREEN, District Judge.

text:
    SAFEWAY STORES, INC., Plaintiff, v. UNITED FOOD AND COMMERCIAL WORKERS UNION, LOCAL 400, Defendant.
    Civ. A. No. 84-0185.
    United States District Court, District of Columbia.
    March 28, 1985.

      Richard C. Hotvedt, Eric A. Sisco, Washington, D.C., for plaintiff.
    William W. Thompson, II, Arlington, Va., for defendant.
   MEMORANDUM OPINION

JUNE L. GREEN, District Judge.

This matter is before the Court on plaintiff’s motion for summary judgment, the opposition thereto and cross-motion for summary judgment of defendant, plaintiff’s opposition to defendant’s cross-motion, defendant’s reply, oral argument on the motions, and the entire record herein.

Plaintiff filed the instant action, requesting that the Court vacate an arbitration award. Plaintiff alleged that the arbitrator exceeded his authority in refusing to affirm the company’s decision to discharge a union member for insubordination and threatening remarks. Complaint ¶¶ 23-25.

Defendant responded with a counterclaim, seeking enforcement of the award and past wages due to the discharged employee from the date of the arbitrator’s decision. Answer and Counterclaim at 9.

Plaintiff thereafter moved for summary judgment. The company alleged that the arbitrator dispensed “his own brand of industrial justice” and that the basis of his award had no support in the record. Defendant filed a cross-motion for summary judgment, contending that the arbitrator properly interpreted the collective bargaining agreement and that the award drew its essence from the contract.

For the reasons stated below, the Court denies plaintiff’s motion for summary judgment and grants the cross-motion of defendant Union.

I.

On October 23, 1982, plaintiff Safeway suspended employee Odell Johnson from his position as a journeyman meat cutter for disobeying an order and threatening a supervisor with physical harm. Several days later, Johnson was terminated effective on the date of his suspension. Complaint ¶ 12; Plaintiff’s Statement of Material Facts as to Which There is No Genuine Issue (“Plaintiff’s Statement of Material Facts”) ¶ 7; Defendant’s Statement of Material Facts as to Which There is No Genuine Issue (“Defendant’s Statement of Material Facts”) ¶ 5.

The Union submitted a formal written grievance on October 25, 1982, to protest “the suspension and/or termination” of Johnson. Defendant’s Statement of Material Facts ¶ 6; Complaint ¶ 13. As required under the parties’ collective bargaining agreement then in effect, Safeway and the Union met on October 27, 1982, to discuss the grievance and attempt to reach an amicable settlement. Plaintiff’s Statement of Material Facts ¶ 9; Exhibit B ¶ 21.2 to Complaint. Several days later, the parties met a second time to discuss the disciplinary action taken against Johnson. Plaintiffs Statement of Material Facts II10; see Answer and Counterclaim at 6, ¶ 11.

Unable to resolve the grievance informally, the Union submitted the dispute to binding arbitration pursuant to the terms of the collective bargaining agreement. Defendant’s Statement of Material Facts II7; Exhibit B 11 21.3 to Complaint. The arbitrator heard the matter on July 12, 1983 and August 10, 1983, and rendered his decision on November 3, 1983.

The arbitrator found that Johnson “was guilty of direct disobedience of an appropriate order, and that he compounded his offense by a threat to do bodily harm to a supervisor if he were disciplined for his insubordination conduct.” Exhibit B at 7 to Complaint. The arbitrator refused to uphold the discharge, however, because of the company’s failure to fully disclose all reasons for the decision “until after the judgment [to discharge Johnson] was reached.” Id. at 6.

Specifically, the arbitrator found that at both grievance meetings, company officials told Johnson and Union representatives that the discharge was based on Johnson’s insubordination and failure to follow instructions on October 23, 1982. After the second meeting, the company’s personnel supervisor asked one Union representative to review Johnson’s personnel file. Thereafter, during the arbitration hearing, the personnel supervisor, who was the company’s final decision maker, stated that he relied on the acts of insubordination plus Johnson’s past disciplinary record and a newspaper clipping of Johnson’s conviction of battery in an incident involving a former girlfriend. Id. at 5.

Because reliance on the past record and newspaper clipping was not disclosed timely, the arbitrator overturned the discharge and ordered Johnson’s reinstatement without back pay, id. at 6-8, which amounted to a one-year suspension.

Safeway refused to follow the arbitration award and, instead, instituted this action.

II.

The parties do not dispute the scope of judicial review of an arbitration award. The law is well settled that the courts’ role is limited to determining whether the award “draws its essence from the collective bargaining agreement.” United Steelworkers of America v. Enterprise Wheel & Car Corporation, 363 U.S. 593, 597, 80 S.Ct. 1358, 1361, 4 L.Ed.2d 1424 (1960).

This standard prohibits courts from reviewing the merits of an arbitration award. “The refusal of courts to review the merits of an arbitration award is the proper approach to arbitration under collective bargaining agreements. The federal policy of settling labor disputes by arbitration would be undermined if courts had the final say on the merits of the awards.” Id. at 596, 80 S.Ct. at 1360. Courts traditionally have refused to become another layer of review and cause of delay, Office and Professional Employees International Union, Local 2 v. Washington Metropolitan Area Transit Authority, 724 F.2d 133, 137 (D.C.Cir.1983), recognizing the utility of the arbitral process. “[Arbitration of such disputes is faster, cheaper, less formal, more responsive to industrial needs, and more conducive to the preservation of ongoing employment relations than is litigation; ____” Devine v. White, 697 F.2d 421, 435 (D.C.Cir.1983).

Rather, courts are limited strictly to determining whether the arbitrator “grossly deviate[d]” from the authority conferred on him by the collective bargaining agreement or from the issues submitted for arbitration. Office and Professional Employees International Union, Local 2 v. Washington Metropolitan Area Transit Authority, 724 F.2d at 140; Unit ed Steelworkers of America v. Warrior & Gulf Navigation Company, 363 U.S. 574, 582, 80 S.Ct. 1347, 1352, 4 L.Ed.2d 1409 (1960). An arbitrator’s disregard of his conferred authority would produce an award that did not “draw its essence” from the labor agreement, and thus could not be upheld by a reviewing court. But under the law of the District of Columbia Circuit, “[t]he case must present egregious deviations from the norm before [the courts] will abandon the firmly-established principle of deference.” Office and Professional Employees International Union, Local 2 v. Washington Metropolitan Area Transit Authority, 724 F.2d at 137.

The courts’ deference to arbitration awards, however, does not grant to arbitrators unrestrained authority. As stated previously, arbitration is a matter of contract and the arbitrator’s authority is limited by the arbitral agreement. Davis v. Chevy Chase Financial Limited, 667 F.2d 160, 165 (D.C.Cir.1981). “When an [arbitrator] ventures outside the scope of authority conferred on [him] by the collective bargaining agreement, [he] lacks power to bind the parties.” Northwest Airlines, Inc. v. Air Line Pilots Association International, 530 F.2d 1048, 1050 (D.C. Cir.), cert. denied, 426 U.S. 942, 96 S.Ct. 2663, 49 L.Ed.2d 394 (1976). A court is precluded from giving effect to such an award. Davis v. Chevy Chase Financial Limited, 667 F.2d at 165.

An arbitrator’s authority is confined to interpreting and applying the collective bargaining agreement. He may not substitute his view of what the parties to an agreement should have agreed to for what the parties actually did agree to. Morgan Services, Inc. v. Local 323, Chicago and Central States Joint Board, Amalgamated Clothing and Textile Workers Union, 724 F.2d 1217, 1224 (6th Cir.1984); see Washington Hospital Center v. Service Employees International Union, Local 722, 112 LRRM 3008 (D.D.C.1983). By exceeding his authority and in effect rewriting the collective bargaining agreement, the arbitrator improperly would be “dispensing] his own brand of industrial justice.” United Steelworkers of America v. Enterprise Wheel & Car Corporation, 363 U.S. at 597, 80 S.Ct. at 1361.

Plaintiff in the instant action argues (1) that the arbitrator exceeded his scope of authority by modifying the collective bargaining agreement and (2) that even if the award was not an improper modification, the basis of the arbitrator’s decision was supported by no evidence in the record. The Court finds both arguments to be without merit.

A. Scope of Authority

In overturning the company’s discharge of employee Johnson, the arbitrator stated in part that he found

merit in the Union’s objection that the Company in relying on the grievant’s past record in reaching its final judgment to discharge him did not disclose that reliance to the Union until after the judgment was reached. Similarly the reliance on the newspaper clipping, which reliance was not disclosed to the Union or to grievant, was improper.

Exhibit A at 6 to Complaint.

Plaintiff interprets the arbitrator’s decision as modifying the provisions of the collective bargaining agreement that dictate the proper procedures for plant management and protection of employee rights. Plaintiff contends that the decision requires “union-participation in pre-decision consideration of discipline,” which ignores the contractually established right of management to discipline and the right of the Union thereafter to protest. Plaintiff’s Memorandum of Points and Authorities in Support of Motion for Summary Judgment (“Plaintiff’s Motion”) at 13.

Under the agreement, management has the exclusive responsibility for directing and controlling the work force, Exhibit B ¶ 1.1 to Complaint, and “the right to discharge or discipline any employee for good cause.” Id. at ¶ 9.2. Once the disciplinary action is taken, the Union has the right to protest the action under the agreement’s grievance procedures. Id. at art. 21.

Plaintiff argues that the collective bargaining agreement contains no provision “that requires the Company to notify the Union of the basis for disciplinary action prior to effecting the discipline.” Plaintiff’s Motion at 12. Rather, the grievance procedures are triggered only after a dispute or disagreement arises as to the interpretation of the agreement. The Union has no authority “to file a grievance concerning an anticipated disagreement or dispute” as to disciplinary action which has not yet been taken. Id. By demanding such a requirement, plaintiff argues, the arbitrator directly violated the collective bargaining agreement, which explicitly precludes the arbitrator from changing, modifying, or amending the agreement. Id. (citing Exhibit B ¶ 21.3(2) to Complaint).

An arbitrator, of course, may not ignore the plain and unambiguous language of a collective bargaining agreement. To do so would exceed the arbitrator’s scope of authority and violate the “essence” requirement of the arbitration award. Teamsters, Chauffeurs, Warehousemen, Helpers and Food Processors, Local Union 657 v. Stanley Structures, Inc., 735 F.2d 903, 905 (5th Cir.1984); Detroit Coil Company v. International Association of Machinists & Aerospace Workers, Lodge #82, 594 F.2d 575, 579 (6th Cir.), cert. denied, 444 U.S. 840, 100 S.Ct. 79, 62 L.Ed.2d 52 (1979); Washington Hospital Center v. Service Employees International Union, Local 722, 112 LRRM at 3010.

But the right to interpret ambiguous language in the collective bargaining agreement is reserved exclusively for the arbitrator. A court may not overturn an arbitration award because its interpretation of the agreement differs from that of the arbitrator. “It is the arbitrator’s construction which was bargained for; and so far as the arbitrator’s decision concerns construction of the contract, the courts have no business overruling him because their interpretation of the contract is different from his.” United Steelworkers of America v. Enterprise Wheel & Car Corporation, 363 U.S. at 599, 80 S.Ct. at 1362; see also W.R. Grace & Company v. Local Union 759, International Union of the United Rubber, Cork, Linoleum & Plastic Workers of America, 461 U.S. 757, 764, 103 S.Ct. 2177, 2182, 76 L.Ed.2d 298 (1983) (An arbitration clause means that the parties choose to have disputes concerning construction of the agreement resolved by an arbitrator, not the courts.).

If an arbitration award interpreting ambiguous language represents a “plausible” interpretation of the contract, the award must be upheld. Davis v. Chevy Chase Financial Limited, 667 F.2d at 166 (citing Federated Employers of Nevada, Inc. v. Teamsters Local No. 631, 600 F.2d 1263, 1264 (9th Cir.1979)). “‘[Courts] must resist the temptation to reason out a la judges the arbiter’s award to see if it passes muster.’ ” Alhambra Foundry Company v. General Warehousemen’s Union, Local 598, 687 F.2d 287, 289 (9th Cir.1982) (citation omitted). The arbitrator need only give a “permissible” construction, not necessarily the “best” one. Morgan Services, Inc. v. Local 323, Chicago and Central States Joint Board, Amalgamated Clothing and Textile Workers Union, 724 F.2d at 1222 n. 8; see also Local Union 59, International Brotherhood of Electrical Workers v. Green Corporation, 725 F.2d 264, 268 (5th Cir.), cert. denied, — U.S. -, 105 S.Ct. 124, 83 L.Ed.2d 66 (1984) (interpretation derived from wording or purpose of contract in some logical way).

While plaintiff argues that the arbitrator’s wording represents a violation of express contract language, defendant asserts that the decision is a proper interpretation of the agreement’s ambiguous “good cause” provision.

Article 9 of the collective bargaining agreement provides, in pertinent part, that the “Employer shall have the right to discharge or discipline any employee for good cause, including ... direct refusal to obey orders by the Employer which are not in violation of this Agreement____” Exhibit B ¶ 9.2 to Complaint.

Defendant contends that the arbitrator “was charged ... to decide whether ‘good cause’ for the termination existed.” Memorandum of Points and Authorities in Reply to Plaintiff’s Opposition to Defendant’s Cross-Motion for Summary Judgment at 5-6. The Union further argues that since the arbitrator’s decision represents a plausible interpretation of the clause, the Court may not overrule the award. Id. at 6

According to defendant, the arbitrator’s decision requires the company to provide procedural fairness to a disciplined employee by notifying the employee and Union of all reasons for the disciplinary action during the grievance process. Untimely notification would preclude the grievant and Union from responding to the company’s charges, thereby circumventing the purpose of the contractually established grievance procedure. Memorandum of Points and Authorities in Support of Defendant’s Cross-Motion for Summary Judgment and in Opposition to Plaintiff’s Motion for Summary Judgment at 21-22.

The parties’ differing interpretations evidence the ambiguous nature of the arbitrator’s opinion in the instant case. The decision may be viewed as requiring Union participation in management’s disciplinary decision-making process, which would violate the arbitrator’s scope of authority. Or the opinion may be read as embodying an interpretation of the agreement’s “good cause” provision. Both interpretations of the arbitrator’s opinion are reasonable.

“A mere ambiguity in the opinion accompanying an award, which permits the inference that the arbitrator may have exceeded his authority, is not a reason for refusing to enforce the award.” United Steelworkers of America v. Enterprise Wheel & Car Corporation, 363 U.S. at 598, 80 S.Ct. at 1361; Office and Professional Employees International Union, Local 2 v. Washington Metropolitan Area Transit Authority, 724 F.2d at 141 (“[A]mbiguity in itself is not a basis to set aside the award.”).

When an opinion is subject to several interpretations, the Supreme Court requires courts to favor the arbitrator’s decision in order to encourage the writing of supporting opinions. See United Steelworkers of America v. Enterprise Wheel & Car Corporation, 363 U.S. at 598, 80 S.Ct. at 1361; International Association of Machinists & Aerospace Workers, Local Lodge No. 389 v. San Diego Marine Construction Corporation, 620 F.2d 736, 739 (9th Cir.1980). An arbitrator is not required to state to the court his reasons for an award. A well-reasoned opinion, however, “engender[s] confidence in the integrity of the [arbitration] process and aids in clarifying the underlying agreement.” United Steelworkers of America v. Enterprise Wheel & Car Corporation, 363 U.S. at 598, 80 S.Ct. at 1361.

Furthermore, as in Enterprise, this Court sees no reason to believe that the arbitrator in the instant action abused the authority placed in him by the parties and ignored the plain language of the agreement. Id. The Court, therefore, rejects the interpretation of plaintiff that the arbitrator exceeded his authority by improperly modifying the collective bargaining agreement. Rather, the Court finds that the arbitrator’s decision reflects an interpretation of the agreement’s ambiguous “good cause” standard.

This raises the issue of whether the arbitrator’s interpretation is “plausible” or “permissible.” The arbitrator has interpreted the “good cause” standard as requiring the company to meet not only the substantive requirements listed in the agreement, but also certain procedural requirements in disciplining or discharging an employee.

In his opinion, the arbitrator acknowledged that employee Johnson was guilty of insubordination and that he aggravated the offense by threatening a supervisor. Exhibit A at 7 to Complaint. The collective bargaining agreement provided that the company may “discharge or discipline any employee for good cause, including ... direct refusal to obey orders____” Exhibit B ¶ 9.2 to Complaint. The arbitrator found that although the offenses may have supported a discharge “in a proper case,” he could not uphold the company’s decision under the circumstances of the present case. Exhibit A at 7-8 to Complaint.

The circumstances included the failure of the company to notify timely the grievant and the Union of all the reasons for its decision to discharge the employee. The arbitrator found that at both grievance meetings, the company announced that the discharge was based on the employee’s insubordination on October 23, 1982. The final decision maker, the company’s personnel supervisor, however, apparently reviewed the employee’s entire personnel file before the second meeting and based his approval of the discharge on that information. But he failed to notify the grievant and the Union of this reliance at the grievance meeting. Id. at 4-5; see Safeway Stores, Inc. and UFCW Local 400, FMCS 83K/10535 at 61, 80 (1983) (Strongin, Arb.) (“Arbitration Hearing”). Rather, the personnel supervisor reviewed employee Johnson’s personnel file with one Union representative in the absence of the grievant at the conclusion of the second meeting. Exhibit A at 5 to Complaint.

Even though the personnel supervisor may have communicated his reliance to the Union representative at that time, Arbitration Hearing at 29, the arbitrator apparently thought the notification was untimely as it occurred after the conclusion of the second meeting, which terminated the informal grievance process. The grievant had-no opportunity to respond to the additional reasons for his discharge and, in fact, he wrongly was told of a different basis for the action.

Under these circumstances, the arbitrator concluded that “good cause” did not exist for the discharge despite the seriousness of the employee’s misconduct.

Several courts have addressed the question of whether procedural fairness properly may be interpreted from a similar “just cause” provision. The Eighth Circuit held that procedural ambiguity was inherent in a “just cause” clause which required resolution by the arbitrator. “[T]he arbitrator ... was required to decide what ‘just cause’ means. His holding that the term has significant procedural implications is not beyond the scope of his authority.” Chauffeurs, Teamsters and Helpers Local Union No. 878 v. Coca-Cola Bottling Company, 613 F.2d 716, 721 (8th Cir.), cert. denied, 446 U.S. 988, 100 S.Ct. 2975, 64 L.Ed.2d 847 (1980); Local 636, Upholsterers’ International Union of North America v. American Carpet Mills, Inc., 86 LRRM 2611, 2612 (N.D.Ga.1973) (“A finding of just cause is certainly discretionary____”). The court therefore upheld the arbitrator’s reinstatement of the employee based on his conclusion that the lack of procedural fairness precluded the finding of “just cause” for the discharge.

The court noted that arbitrators traditionally have applied notions of “industrial due process” to “just cause” standards. Id. at 719-20 (citing Summers, Individual Protection Against Unjust Dismissal: Time for a Statute, 62 Va.L.Rev. 481, 500 (1976); Getman, Labor Arbitration and Dispute Resolution, 88 Yale L.J. 916, 921 (1979)). The court further stated that a collective bargaining agreement’s express definition of the substantive aspects of the standard did not preclude the interpretation of procedural aspects. Id.

Similarly, the Sixth Circuit in Anaconda Company v. District Lodge No. 27 of the International Association of Machinists and Aerospace Workers held that a provision requiring the company to treat employees “fairly and justly” granted broad discretion to the arbitrator to interpret procedural requirements. 693 F.2d 35, 37 (6th Cir.1982).

This Court sees no reason to distinguish between the phrases “just cause” and “good cause.” Both require a “legally sufficient ground or reason” for an action. Black’s Law Dictionary 623, 775 (5th ed. 1979).

The collective bargaining agreement in the instant action is silent on procedural requirements for “good cause.” The agreement, however, establishes a process by which the Union may protest any company action which it believes violates the agreement. That process includes the opportunity for the parties to meet and attempt to resolve their differences informally before submitting the issue to arbitration. Exhibit B ¶¶ 21.2, 21.3 to Complaint. If the company fails to notify the grievant and Union fully of all its reasons for an action until after the conclusion of the informal grievance process, the company circumvents the process and denies the Union its contractually established right to resolve the dispute informally.

The parties bargained for the arbitrator’s interpretation of the “good cause” clause, which by its silence granted him discretion tó determine procedural requirements. The arbitrator’s interpretation that “good cause” did not exist to discharge employee Johnson because of a lack of procedural fairness is plausible. Even if the Court disagrees with this interpretation, the award must be upheld unless other grounds are shown for its reversal.

B. Record Evidence

Plaintiff further argues that even if the arbitrator did not exceed his authority, the basis of his decision is unsupported by the record evidence. Specifically, plaintiff contends that the arbitrator refused to uphold the discharge solely because the company failed to notify the grievant and Union of its reliance on the employee’s personnel file before the company’s final decision to discharge was made. Plaintiff’s Motion at 17.

Plaintiff claims that the uncontradicted evidence is to the contrary. The company’s personnel supervisor testified that during his discussion with a Union representative of employee Johnson’s file, he “advised her that based on [the October 23, 1982] incident plus the record of the employee, that [he] considered the disciplinary action to be appropriate.” Arbitration Hearing at 29. Plaintiff claims that this discussion occurred during the second grievance meeting and before the personnel supervisor ordered the discharge. Plaintiff’s Motion at 18.

An arbitration award that is based on facts contrary to record evidence must fail. Office and Professional Employees International Union, Local 2 v. Washington Metropolitan Area Transit Authority, 724 F.2d at 140; Devine v. White, 697 F.2d at 436 n. 80. If an arbitrator not only erred in view of the facts, but also the sole articulated basis for the award was in error, the award must be overturned as the result of a “ ‘gross mistake ... made out by evidence,’ but for which, according to the arbitrator’s rationale, a different result would have been reached.” Electronics Corporation of America v. International Union of Electrical, Radio and Machine Workers, Local 272, 492 F.2d 1255, 1257 (1st Cir.1974) (quoting Burchell v. Marsh, 58 U.S. (17 How.) 344, 350, 15 L.Ed. 96 (1854)).

But, again, the Court’s review is limited. An arbitration award must stand if some support for its basis exists in the record. Devine v. White, 697 F.2d at 436 n. 80 (emphasis added). Courts have no authority to review the merits of an award. Thus, errors in the determination of factual issues alone do not warrant the overturning of an award. Only if no support whatsoever exists may a court vacate the award. Storer Broadcasting Company v. American Federation of Television and Radio Artists, Cleveland Local, 600 F.2d 45, 47-48 (6th Cir.1979); Detroit Coil Company v. International Association of Machinists & Aerospace Workers, Lodge # 82, 594 F.2d at 580-81.

The arbitrator in the instant action found that a review of employee Johnson’s personnel file did not occur until.after the second grievance meeting and that at that meeting the reason.for discharge was stated as insubordination. Exhibit A at 5 to Complaint. These findings were supported by testimony of James N. Green, a Union representative present at both grievance meetings. Arbitration Hearing at 422-23.

The arbitrator’s statement that the company did not notify the Union of its reliance on the employee’s past disciplinary record “until after the judgment [to discharge] was reached” creates an ambiguity. An uncertainty exists as to what the arbitrator meant by the quoted phrase. The parties argued extensively the precise timing of the company’s final decision.

Defendant contends that the uncontradicted evidence shows that the final decision was reached only after the review of the employee’s personnel file with a Union representative. Plaintiff’s Motion at 18-21. Some evidence exists in the record, however, that the personnel supervisor approved the termination after receiving a call concerning the matter and reviewing the employee’s personnel file before the second grievance meeting. Arbitration Hearing at 61, 80. At the meeting, however, the stated reason for the discharge was insubordination. Id. at 422. The arbitrator may have found that the personnel supervisor decided to terminate Johnson based on the file before the second meeting, yet stated different reasons for the termination at the meeting.

Alternatively, the arbitrator may have found that the final decision to discharge occurred at the close of the second grievance meeting when the grievant’s and the Union’s opportunity to respond to the charges ended. A subsequent review of the file with one Union representative after the close of the contractually established grievance process may not have constituted timely notice in the arbitrator’s view, particularly when different reasons were given during the meeting.

Both of these interpretations are supported by at least some record evidence.

Where an arbitrator’s language is ambiguous, and one interpretation is supported by record evidence while another is void of any supporting evidence, the Court may subscribe to the interpretation carrying support in the record. Electronics Corporation of America v. International Union of Electrical, Radio and Machine Workers, Local 272, 492 F.2d at 1257; see United Steelworkers of America v. Enterprise Wheel & Car Corporation, 363 U.S. at 597-98, 80 S.Ct. at 1361. This Court sees no reason to assume that the arbitrator in the instant action ignored the testimony of the personnel supervisor. The arbitrator, in fact, recognized that some review of the employee’s past record occurred with a Union representative, Exhibit A at 5 to Complaint, although that review was untimely considering the statements made at the grievance meetings. Id. at 7.

Moreover, a court may not overturn an arbitration award unless the “sole articulated basis for the award was in error.” Electronics. Corporation of America v. International Union of Electrical, Radio and Machine Workers, Local 272, 492 F.2d at 1257. The- award in the instant action is not clearly based solely on the lack of “industrial due process.” The arbitrator stated that employee Johnson’s insubordination and threat were “grave offenses which might in a proper case have led to an affirmance of the discharge penalty, and in any event call for a severe penalty.” Id. at 7-8 (emphasis added). He did not state that had the company properly notified the grievant and Union of its reasons for discharge, he would have affirmed the penalty.

The collective bargaining agreement authorizes the company to “discharge or discipline” employees for good cause. Exhibit B ¶ 9.2 to Complaint. This language has been held ambiguous and subject to the arbitrator’s interpretation. The arbitrator, therefore, would have the right to interpret the language as granting to the arbitrator the discretion to determine the appropriate discipline. International Association of Machinists & Aerospace Workers, Local Lodge No. 389 v. San Diego Marine Construction Corporation, 620 F.2d at 738 — 39; see Morgan Services, Inc. v. Local 323, Chicago and Central States Joint Board, Amalgamated Clothing and Textile Workers Union, 724 F.2d at 1222.

By vacating the arbitration award in the instant action, the Court would be intruding upon the authority of the arbitrator to interpret the collective bargaining agreement and to determine the appropriate penalty under the facts of this case even if the company had followed appropriate procedural requirements.

For the foregoing reasons, the Court denies the motion for summary judgment of plaintiff and grants the cross-motion of defendant.

      . A court also may overturn an arbitration award if it evidences partiality by the arbitrator, is contrary to the record evidence, or is contrary to law or explicit public policy. Office and Professional Employees International Union, Local 2 v. Washington Metropolitan Area Transit Authority, 724 F.2d 133, 140 (D.C.Cir.1983).


source: Caselaw Access Project

author: BLUMENFELD, Senior District Judge.

license: Public Domain

text:
    Robert PRICE, et al. v. INTERNATIONAL UNION, UNITED AUTOMOBILE AEROSPACE AND AGRICULTURAL IMPLEMENT WORKERS OF AMERICA, Marine Draftsmen Association, Local 571, UAW, AFL-CIO and Electric Boat Division, General Dynamics Corporation.
    Civ. No. H-84-1221(MJB).
    United States District Court, D. Connecticut.
    April 11, 1985.

      Edward T. Lynch, Jr., Dennis G. Ciccarillo, Michalik & Lynch, New Britain, Conn., Edward F. Hughes, North Springfield, Va., for plaintiffs.
    Michael B. Nicholson, Daniel W. Sherrick, Detroit, Mich., Robert A. Goldstein, Kliegman, Goldstein, Israel & Cooper, New York City, Glenn E. Coe, Perakos & Coe, New Britain, Conn., Arthur G. Telegen, Foley, Hoag & Eliot, Boston, Mass., and Barbara J. Collins, Hartford, Conn., for defendants.
   RULING ON PENDING MOTIONS

BLUMENFELD, Senior District Judge.

I. Facts

This action is brought by employees of the General Dynamics Corporation, Electric Boat Division, against their employer, their local union (defendant Marine Draftsmen Association-UAW, Local 571), and their international union. Plaintiffs are members of a clerical and technical workers bargaining unit represented by the union. The collective bargaining agreement between General Dynamics and the union includes a “union security” clause which requires all employees in the bargaining unit to join the union within 31 days of their employment. Pursuant to this clause, the union can demand the discharge of any member of the bargaining unit who fails to pay dues and initiation fees to the union, and General Dynamics would be subject to suit for breach of the contract if it failed to discharge such an employee.

Plaintiffs here have complied with the union security clause, but have also informed the union that they protest the payment of any amounts which the union will expend for purposes other than collective bargaining or contract administration related to this bargaining unit (e.g., expenditures in support of candidates for public office). The union, however, insists that plaintiffs pay their dues and initiation fees in full, and has informed the plaintiffs that it will seek discharge of any member of the bargaining unit who refuses to pay. The union has also informed plaintiffs of a procedure provided by the constitution of the International, pursuant to which plaintiffs may seek a rebate of that portion of their dues which the union spends on political causes which plaintiffs find objectionable.

Plaintiffs contend that the union’s insistence on full payment of dues and fees violates their first amendment speech and associational rights, fifth amendment due process rights, and statutory right to fair representation. They sought a preliminary injunction, which was denied by this court on December 21, 1984 on the grounds that plaintiffs had shown neither irreparable injury nor a likelihood of success on the merits. Several motions are currently pending.

II. Plaintiffs’ Motion to Amend Complaint

Plaintiffs’ original complaint was brought by Robert Price and Timothy Sullivan, “on behalf of themselves and all others similarly situated,” and included class-action allegations. A “motion to maintain class action” was also filed. On December 13, 1984, the court granted a motion to amend the complaint, adding 250 additional plaintiffs. Plaintiffs have now moved to amend the complaint a second time.

The proposed amended complaint drops the class allegations, and clarifies certain other aspects of plaintiffs’ claims. The union objects to the amendment, contending that it interferes with the briefing schedule established by the court at the hearing on December 21, 1984. That schedule required the union to file a motion to dismiss the complaint, or in the alternative for summary judgment, on January 14, 1985, the very day that plaintiffs filed their motion for leave to amend. It is impossible, the union claims, to respond to a complaint by moving for its dismissal when on the day the dismissal motion is due to be filed defendants receive an amended complaint.

The court’s examination of the proposed amended complaint has discovered no prejudice to be suffered by defendants if the amendment is allowed. Under Fed. R.Civ.P. 15(a), leave to amend shall be “freely given when justice so requires.” Amplification of previously alleged claims is one of the clearest cases for leave to amend. 3 Moore’s Federal Practice 1115.08[3] (1984). Accordingly, plaintiffs’ motion to amend the complaint is granted.

III. Motion to Strike

In connection with their motion for summary judgment, discussed below, plaintiffs filed a “statement of material facts as to which there is no genuine issue to be tried,” as required by Local Rule of Civ.P. 9(c). The union has moved to strike this statement on two grounds. First, plaintiffs’ statement includes exhibits which are not referred to in any affidavit filed by plaintiffs, and are not authenticated, sworn or certified copies as required by Fed.R. Civ.P. 56(e). Second, plaintiffs’ statement consists in substantial part of conclusory factual allegations and legal contentions, also in contravention of Rule 56.

Plaintiffs’ statement and exhibits are vulnerable to this attack. On a motion for summary judgment, a court may not consider materials that would not be admissible in evidence at trial, and the exhibits of course would not be admissible without some form of authentication. See 6 Moore’s Federal Practice ÍÍ 56.11[1.-8] (1983) and cases there cited; Fed.R.Evidence 901. Moreover, the conclusory allegations and legal contentions contained .in plaintiffs’ statement are not what is contemplated by Local Rule 9(c).

However, the court does not find it necessary to strike plaintiffs’ statement and exhibits. Among the latter, some are duplicative of other exhibits already in the record, and others are irrelevant to the issues raised by the motions for summary judgment. The court is able to accord the various documents submitted the weight they deserve, and can adequately separate factual from non-factual allegations. Defendants’ motion to strike is therefore denied.

IV. Motions for Summary Judgment

The plaintiffs and the union defendants have each moved for summary judgment. Both parties have filed statements of material facts not in issue, as required by Local Rule of Civ.P. 9(c). Although these statements do not agree in every particular, the material facts necessary for disposition of the case, discussed above in Part I of this Ruling, are not in dispute. I therefore find that summary judgment is appropriate. See Fed.R.Civ.P. 56.

A. The Issue of Government Action

The parties agree that, in order to prevail on their constitutional claims, plaintiffs must establish governmental involvement in the denial of their constitutional rights. The first and fifth amendments provide protection only against governmental action. Hudgens v. NLRB, 424 U.S. 507, 513, 96 S.Ct. 1029, 1033, 47 L.Ed.2d 196 (1976) (first amendment); Public Utilities Commission v. Poliak, 343 U.S. 451, 461, 72 S.Ct. 813, 820, 96 L.Ed. 1068 (1952). As plaintiffs characterize the issue, “the scope of the legislative grant of power to the MDA/UAW to compel payment [of 100% of dues and fees] under threat of federally-enforced termination ... makes this action fairly attributable to the government____” Plaintiffs’ Memorandum in Support of Summary Judgment at 3. The defendants contend that “state action is not present in the conduct of the Defendants in negotiating and applying a union security clause valid under the National Labor Relations Act and under applicable state law, and in UAW’s expenditure of dues or fees collected under such a clause.” UAW’s Memorandum in Opposition to Motion for Preliminary Injunction at 3 (incorporated by reference in union defendants’ Memorandum in Support of Motion to Dismiss or, in the Alternative, for Summary Judgment). Whether the conduct at issue is the insistence on full payment, the negotiation and enforcement of the union security clause, or the expenditure of dues and fees, if the conduct is not “fairly attributable to the state,” Lugar v. Edmondson Oil Co., 457 U.S. 922, 937, 102 S.Ct. 2744, 2753, 73 L.Ed.2d 482 (1982), defendants are entitled to judgment as a matter of law.

In Lugar, the Supreme Court established a two-part approach to the question of “fair attribution.”

First, the deprivation must be caused by the exercise of some right or privilege created by the State or by a rule of conduct imposed by the State or by a person for whom the State is responsible____ Second, the party charged with the deprivation must be a person who may fairly be said to be a state actor. This may be because he is a state official, because he has acted together with or has obtained significant aid from state officials, or because his conduct is otherwise chargeable to the State. 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.

Id.

1. Was there a government-created right or privilege?

The Court of Appeals for the District of Columbia Circuit has recently applied the Lugar analysis to a union’s use of fees collected under an “agency shop clause” which is analogous, although not identical, to the union security clause at issue here. Kolinske v. Lubbers, 712 F.2d 471, 477-80 (D.C.Cir.1983). The court held that the first part of the Lugar test was not satisfied, stating:

In employing the two-part test outlined in Lugar, we must first determine whether the agency shop clause and the attendant restrictions in strike benefits funded in part by those agency fees constitute an exercise of “some right or privilege created by the state or by a rule of conduct imposed by the state, or by one for whom the state is responsible.” Lugar, 457 U.S. at 937 [102 S.Ct. at 2753]. In no sense is the agency shop clause compelled by federal law. Appellee cites no law, and our review of the NLRA fails to disclose any federal law, that forces the union and the company to adopt that provision as part of their labor contract. We are left with the question whether the authorization provided the agency shop clause by section 8(a)(3) of the NLRA [] makes the clause an exercise of a right or privilege created by the state or one for whom the state is responsible. We conclude that it does not.
The district court held the agency shop clause to be state action because such clauses are “expressly authorized” by Congress, and consequently, the use of such fees was subject to constitutional scrutiny. But it is well settled that a state’s mere authorization of private conduct does not justify a finding of state action. Blum v. Yaretsky, 457 U.S. 991, 1004 [102 S.Ct. 2777, 2785, 73 L.Ed.2d 534] (1982); Jackson v. Metropolitan Edison Co., 419 U.S. 345, 354 [95 S.Ct. 449, 455, 42 L.Ed.2d 477] (1974). While the NLRA provides a framework to assist employees to organize and bargain collectively with their employers, the NLRA is neutral with respect to the content of particular agreements. See NLRA § 8(d), 29 U.S.C. § 158(d); Local 24, International Brotherhood of Teamsters v. Oliver, 358 U.S. 283, 294-95 [79 S.Ct. 297, 303-04, 3 L.Ed.2d 312] (1959). The NLRA does not mandate the existence or content of, for example, seniority clauses, work rules, staffing requirements, or union security provisions like agency shop clauses or mandatory payroll deductions for union dues. Even though federal law provides an encompassing umbrella of regulation, the parties, like any two parties to a private contract, were still free to adopt or reject an agency shop clause with or without government approval. Thus, the authorization for agency shop clauses provided by NLRA section 8(a)(3) does not transform agency shop clauses into a right or privilege created by the state or one for whom the state is responsible.

Kolinske, 712 F.2d at 477-78 (original footnote and citations omitted, new footnote added). See Hovan v. United Brotherhood of Carpenters and Joiners, 704 F.2d 641 (1st Cir.1983) (no governmental action involved where union refuses membership to one who will not take oath).

Plaintiffs believe Kolinske was wrongly decided. They argue that section 8(a)(3)’s explicit authorization of union security provisions such as the one at issue here embodies a strong federal policy designed to promote labor peace by eliminating the “free rider” problem, and that it is part of a statutory scheme which encourages unions and employers to enter into such agreements. Moreover, should the employer breach such a union security agreement, the union may avail itself of the assistance of the federal courts and the National Labor Relations Board in enforcing the contract. Plaintiffs contend that if viewed in this context, the union’s demand, pursuant to the union security clause of the contract, that plaintiffs pay full dues and fees, carries enough of a federal imprimatur to be considered the exercise of a “right or privilege created by the government.”

Section 8(a)(3)’s authorization of union shop clauses, however, creates no right or privilege. In fact, as amended by the Taft-Hartley Act in 1947, the statute prohibits closed shop clauses, which previously had been permitted. Neither the original language of section 8(a)(3), which permitted closed shop clauses, nor the 1947 amendment, which prohibits closed shops but permits union shops, seeks to impose any particular form of union security clause on labor or industry. See Algoma Plywood Co. v. Wisconsin Employment Relations Board, 336 U.S. 301, 314, 69 S.Ct. 584, 591, 93 L.Ed. 691 (1949). Moreover, section 14(b) of the National Labor Relations Act, 29 U.S.C. § 164(b), allows any state to prohibit union shop agreements. Thus section 8(a)(3), properly viewed, does no more than disclaim any federal policy toward union security clauses. Such clauses will be enforced if state law permits it, and will not be enforced if state law prohibits their enforcement. No federal right or privilege is created by such a statute.

The foregoing discussion makes it clear that plaintiffs’ reliance on cases decided under section 2, Eleventh of the Railway Labor Act, 45 U.S.C. § 152, Eleventh, is misplaced. In the leading case, Railway Employees’ Dept. v. Hanson, 351 U.S. 225, 76 S.Ct. 714, 100 L.Ed. 1112 (1956), the Court held that a union shop agreement made pursuant to section 2, Eleventh did not infringe the first or fifth amendment rights of workers who sought to avoid joining the union. In order to reach the merits, the Court necessarily found the presence of government action, but that finding rested explicitly on the statutory language superseding contrary state law. Id. at 232, 76 S.Ct. at 718. “In other words, the federal statute is the source of the power and authority by which any private rights are lost or sacrificed.” Id. (footnote omitted). In contrast, union security agreements permitted by section 8(a)(3) of the National Labor Relations Act must give way in the face of contrary state law. Thus, the federal statute is not “the source of power and authority” for such agreements.

Hanson’s progeny includes International Association of Machinists v. Street, 367 U.S. 740, 81 S.Ct. 1784, 6 L.Ed.2d 1141 (1961), Railway Clerks v. Allen, 373 U.S. 113, 83 S.Ct. 1158, 10 L.Ed.2d 235 (1963), and Ellis v. Railway Clerks, 466 U.S. 435, 104 S.Ct. 1883, 80 L.Ed.2d 428 (1984). In each of these cases, the Court confronted a challenge by union members to particular use's of their union dues. In each case, the Court held that unions are prohibited from using funds collected from a member for political purposes to which the member expressly objects. But the Court explicitly rested these decisions on section 2, Eleventh of the Railway Labor Act, and not on the Constitution. Thus there was no need to consider whether the collection of fees and dues, pursuant to a statutorily-authorized union security clause, for proscribed purposes, constituted state action, and the Court expressed no opinion on this question. Likewise inapposite is Abood v. Detroit Board of Education, 431 U.S. 209, 97 S.Ct. 1782, 52 L.Ed.2d 261 (1977), also relied upon by plaintiffs. In Abood, plaintiffs’ employer was a governmental entity. Since the government was a party to the union security agreement at issue in the case, the Court never faced the state action question. The Court relied extensively on Hanson and Street in reaching the conclusion that the agency shop clause at issue in Abood, which was authorized by a Michigan statute covering public sector collective bargaining, was not constitutionally offensive. But nothing the Court said in Abood indicated that it would extend the state action ruling of Hanson to non-Railway Labor Act cases.

I conclude, therefore, that Hanson and the cases following it do not require a finding that governmental action is present in the circumstances presented by this case. The union security clause contained in the contract among the defendants here is part of a privately bargained contract among private parties. That clause would be permissible if both state and federal law were silent about such clauses, and the existence of a permissive, but not compulsory, federal statute which may be preempted by contrary state law does not establish that the federal government is the source of authority for the clause. Kolinske, 712 F.2d at 476-77. Accord Reid v. McDonnell Douglas Corp., 443 F.2d 408 (10th Cir.1971).

2. Was there a “government actor”?

Even if the conduct at issue here did rest on a government-created right or privilege, plaintiffs would have to show that the second part of the Lugar test — the requirement that defendant be a state actor — is satisfied. The court in Kolinske addressed this issue in some detail, 712 F.2d at 478-80, and found that the traditional indicia used to attribute private conduct to the state were not present. A similar analysis in the instant case leads to the same result.

There is no allegation here that the defendants perform a traditionally public function. Cf. e.g., Marsh v. Alabama, 326 U.S. 501, 66 S.Ct. 276, 90 L.Ed. 265 (1946). Nor do plaintiffs claim that the defendants conspired with state officials, or were coerced or encouraged by such officials. Cf. Adickes v. S.H. Kress & Co., 398 U.S. 144, 90 S.Ct. 1598, 26 L.Ed.2d 142 (1970). Finally, the fact that the collective bargaining process and the behavior of unions are extensively regulated by the federal government does not make defendants “state actors” where the government has not compelled or significantly encouraged the challenged conduct. Rendell-Baker v. Kohn, 457 U.S. 830, 102 S.Ct. 2764, 73 L.Ed.2d 418 (1982). The Supreme Court has held at least twice that union conduct is not state action. United Steelworkers v. Sadlowski, 457 U.S. 102, 121 n. 16, 102 S.Ct. 2339, 2350 n. 16, 72 L.Ed.2d 707 (1982) (union rule prohibiting candidates for union office from accepting contributions from nonmembers does not contravene the first amendment because there is no state action); United Steelworkers v. Weber, 443 U.S. 193, 200, 99 S.Ct. 2721, 2725, 61 L.Ed.2d 480 (1979) (collectively bargained affirmative action plan does not involve state action, and therefore does not present an alleged violation of the fourteenth amendment).

Plaintiffs also seek to bring this case within the doctrine of Shelley v. Kraemer, 334 U.S. 1, 68 S.Ct. 836, 92 L.Ed. 1161 (1948), by referring to the threat of “federally-enforced” termination of employees who refuse to pay dues and fees in full. But Shelley is plainly distinguishable from the instant case. In Shelley, the state court intervened in a private transaction between a willing seller and a willing buyer to enforce a racially restrictive covenant at the behest of a third party neighboring landowner. Here, by contrast, there has as yet been no court intervention. Thus far, the parties to the agreement have abided by it. A court’s intervention to enforce the agreement will be called for only if the agreement is breached. Such intervention could occur in any suit on a contract. This possibility does not satisfy the state action criteria of Shelley or Lu-gar.

For the foregoing reasons, I conclude that the conduct challenged in this case is not conduct which is “fairly attributable” to the government, and defendants’ motion for summary judgment must be granted as to plaintiffs’ constitutional claims.

B. The Claim for Breach of the Union ’s Duty of Fair Representation

[8] Plaintiffs state as an alternative ground for relief the claim that

by negotiating the union security clause, demanding and obtaining 100% of dues and fees from plaintiffs under threat of discharge, and spending portions of those sums for costs other than for collective bargaining, the MDA/UAW is violating the statutory duty of fair representation owed to plaintiffs.

Plaintiffs’ Memorandum at 30 (emphasis in original). The union’s duty of fair representation, which arises from sections 8(b) and 9(a) of the National Labor Relations Act, 29 U.S.C. §§ 158(b), 159(a), is breached “only when a union’s conduct toward a member of the collective bargaining unit is arbitrary, discriminatory, or in bad faith.” Vaca v. Sipes, 386 U.S. 171, 190, 87 S.Ct. 903, 916, 17 L.Ed.2d 842 (1967). The duty is “derived from a union’s statutory right to be the exclusive representative of the members of a designated unit.” Abrams v. Carrier Corp., 434 F.2d 1234, 1251 (2d Cir.1970). The ordinary ease under the doctrine is one in which a plaintiff contends that his union has failed to represent him adequately in processing a grievance against the employer or contesting a discharge. E.g., Vaca, supra.

As authority for the proposition that the union’s conduct in the instant case violated its duty of fair representation, plaintiffs rely on the decision of the Ninth Circuit Court of Appeals in Seay v. McDonnell Douglas Corp., 427 F.2d 996 (1970), appeal after remand, 533 F.2d 1126 (1976). The court in Seay held that plaintiffs who contested the expenditure for political purposes of fees collected pursuant to an agency shop clause had stated a claim for breach of the union’s duty of fair representation. The court read into the collective bargaining agreement a requirement that agency fees be spent only on costs attributable to the bargaining unit. The court found this requirement implied in the “statute under the terms of which the collective bargaining agreement, with its agency fee provision, was entered into in [the] ease.” 427 F.2d at 1000. But although the agreement in Seay was governed by the National Labor Relations Act, the court based its holding on the Railway Labor Act cases discussed supra at pp. 1248-1249.

Defendants contend that Seay was wrongly decided, since the court in Seay ignored the differences between section 2, Eleventh of the Railway Labor Act and section 8(a)(3) of the NLRA. The court in Seay assumed that the two statutes were “for all purposes here, the same,” 427 F.2d at 1003, and that if the Railway Labor Act forbids the expenditure of agency fees for political purposes, the National Labor Relations Act must also forbid such expenditures. The court also assumed, without elaboration of its rationale, that expenditures in violation of this rule would breach the duty of fair representation.

In my judgment, the court in Kolinske took a more persuasive approach to the claim that the conduct in issue here constitutes a breach of the union’s duty of fair representation. The court stated:

A union’s duty of fair representation arises out of the exclusive representational status granted a union by section 9(a) of the NLRA, 29 U.S.C. § 159(a) (1976). See Baker v. Newspaper & Graphic Communications Union Local 6, 628 F.2d 156, 165 (D.C.Cir.1980). This section has been interpreted to mean that the union must “serve the interests of all [employees] without hostility or discrimination toward any, to exercise its discretion with complete good faith and honesty, and to avoid arbitrary conduct.” Vaca v. Sipes, 386 U.S. 171, 177, 87 S.Ct. 903, 909, 17 L.Ed.2d 842 (1967) (citing Humphrey v. Moore, 375 U.S. 335, 342, 84 S.Ct. 363, 367, 11 L.Ed.2d 370 (1964))....
... Arising as it does out of a union’s privilege under section 9(a) of the NLRA to serve as the employee’s exclusive representative, the duty of fair representation is co-extensive only with the power of exclusive representation. As we have earlier noted, “a union ... can be held to represent employees unfairly only in regard to those matters as to which it represents them at all — namely, 'rates of pay, wages, hours ..., or other conditions of employment.’ ” International Brotherhood of Teamsters, Local No. 310 v. NLRB, 587 F.2d 1176, 1183 (D.C.Cir.1978) (quoting 29 U.S.C. § 159(a) (1970) (emphasis in original) (footnote omitted); see also Miranda Fuel Co., Inc., 140 N.L.R.B. 181, 185 (1962) (duty of fair representation extends to matters affecting employment). In other words, the duty of fair representation extends only to matters involving an employee’s dealings with his employer and ordinarily does not affect an employee’s relationship with the union structure. Bass v. International Brotherhood of Boilermakers, 630 F.2d 1058 (5th Cir.1980).

712 F.2d at 481 (emphasis added).

In the instant case, the controversy over the union’s use of dues and fees is purely an internal union matter. There is no claim that the union has represented these plaintiffs inadequately or unfairly in any dealings with the employer. Indeed, the Supreme Court has recently indicated that in order to prevail on a claim alleging breach of the union’s duty of fair representation, the aggrieved employee must show both that the employer breached the collective bargaining agreement and that the union breached its duty to assist the plaintiff in seeking a remedy for the employer’s breach. DelCostello v. International Brotherhood of Teamsters, 462 U.S. 151, 164, 103 S.Ct. 2281, 2290, 76 L.Ed.2d 476 (1983). Although plaintiffs have made the employer a defendant in this case, they have alleged no breach of contract by the employer. I conclude that the plaintiffs have failed to show a breach by the union of its duty of fair representation.

C. The Adequacy of the Union’s Rebate Scheme

Plaintiffs have devoted a large portion of their memorandum to a contention that the union’s rebate procedure for members who object to the expenditure of dues and fees for political purposes is inadequate. Were the adequacy of the rebate scheme a material issue in this case, summary judgment for either party would have to be denied, since the operation of the procedure would raise contested questions of fact. Having decided, however, that plaintiffs’ constitutional claims must fail for lack of government action, and that the claim for breach of the duty of fair representation must fail because the expenditure of dues and fees is a purely internal union matter, I need not pass on the adequacy of the rebate scheme.

V. General Dynamics Corporation’s Motion to Dismiss

In view of the disposition of the cross-motions for summary judgment discussed above, the employer’s motion to dismiss for failure to establish governmental action in the negotiation or execution by General Dynamics of the collective bargaining agreement is granted.

VI. Conclusion

I am not unmindful that the central allegation of this case — that plaintiffs are forced, on pain of discharge, to support political speech and activities with which they disagree — is a serious one. Forced political speech is repugnant to the ideas of individualism and freedom of expression which underlie the first amendment to the Constitution. I am satisfied, however, that the legal theories on which plaintiffs rely are not supported by the applicable statutes and caselaw. Plaintiffs must seek relief in other fora, such as the Congress, the NLRB, and within the union itself.

For the foregoing reasons, the action is dismissed against defendant General Dynamics Corporation, and the joint motion of the union defendants for summary judgment is granted.

SO ORDERED.

      . For convenience, the union defendants will be referred to hereinafter as "the union.”

      . Such a clause is commonly referred to, and will be referred to hereinafter, as a “union shop" clause.

      . Under an "agency shop” clause, all members of the bargaining unit must pay dues and fees to the union, but are not required to become members.

      . Section 8(a)(3) of the National Labor Relations Act, 29 U.S.C. § 158(a)(3) (1982), provides in pertinent part:
      (a) It shall be an unfair labor practice for an employer—
      (3) by discrimination in regard to hire or tenure of employment or any term or condition of employment to encourage or discourage membership in any labor organization: Provided, That nothing in this subchapter, or in any other statute of the United States, shall preclude an employer from making an agreement with a labor organization ... to require as a condition of employment membership therein on or after the thirtieth day following the beginning of such employment or the effective date of such agreement, whichever is the later____

      . A “closed shop” clause makes union membership a precondition of employment in the bargaining unit.

      . For an argument that the courts should not find union conduct subject to constitutional review, which relies in part on the distinction between statutes which "command” and those which "permit,” see Wellington, The Constitution, The Labor Union, and "Governmental Action,” 70 Yale L.J. 345 (1961). Professor (later Dean) Wellington contends that the task of regulating union conduct is best left to Congress, which can regulate by statute after full consideration of policy options.

      . Section 2, Eleventh of the Railway Labor Act, 45 U.S.C. § 152 Eleventh (1982), provides in pertinent part:
      Notwithstanding any other provisions of this chapter, or of any other statute or law of the United States, or Territory thereof, or of any State, any carrier or carriers as defined in this chapter and a labor organization or labor organizations duly designated and authorized to represent employees in accordance with the requirements of this chapter shall be permitted—
      (a) to make agreements, requiring, as a condition of continued employment, that within sixty days following the beginning of such employment, or the effective date of such agreements, whichever is the later, all employees shall become members of the labor organization representing their craft or class:

      . Before the decisions in Kolinske and Reid, two appellate courts had reached the opposite result in similar cases. Seay v. McDonnell Douglas Corp., 533 F.2d 1126 (9th Cir. 1976); Linscott v. Millers Falls Co., 440 F.2d 14 (1st Cir.1971). Thus there is a conflict among the circuits on the governmental action issue in this case. The Court of Appeals for the Second Circuit has never reached the issue. See Buckley v. American Federation of Television and Radio Artists, 496 F.2d 305 (2d Cir.), cert. denied, 419 U.S. 1093, 95 S.Ct. 688, 42 L.Ed.2d 687 (1974). In the absence of binding authority in this circuit, I consider the reasoning of the decision in Kolinske to be persuasive.

      . The Supreme Court has warned that "[e]ven rough analogies [between the Railway Labor Act and the National Labor Relations Act] must be drawn circumspectly, with due regard for the many differences between the statutory schemes.” Railroad Trainmen v. Terminal Co., 394 U.S. 369, 383, 89 S.Ct. 1109, 1118, 22 L.Ed.2d 344 (1969) (footnote omitted).

      . Were the conduct at issue in this case considered to come within the duty of fair representation doctrine, it is difficult to see what expenditure decisions by the union would not be subject to judicial review under the doctrine. In my view, it would be a mistake to give the duty of fair representation, which is a doctrine implied by, the NLRB and the courts from the statute, such a broad reading. When Congress sought to regulate the internal affairs of unions, it had no difficulty in enacting a statute designed specifically to do so. See the Labor-Management Reporting and Disclosure Act, 29 U.S.C. § 401 et seq. (1982).


author: LOWE, District Judge.

text:
    MINSTAR ACQUIRING CORP., and Minstar, Inc., Plaintiffs, v. AMF INCORPORATED, W. Thomas York, William H. Bricker, Barbara Knowles Debs, Raymond A. Hay, John L. Huck, Roy M. Huffington, John F. McGillicuddy, Francis C. Rooney, Jr., Ralph S. Saul, and William P. Sovey, Defendants.
    No. 85 Civ. 3800 (MJL).
    United States District Court, S.D. New York.
    June 6, 1985.
    As Amended June 18, 1985.

      Weil, Gotshal & Manges, New York City, for plaintiffs.
    Davis Polk & Wardwell, New York City, for defendants.
   MEMORANDUM OPINION AND ORDER

LOWE, District Judge.

This is an action to enjoin various defensive measures taken by defendants to thwart plaintiff’s tender offer and to force curative disclosure on AMF’s 14-d(9) statement. Presently before the Court is plaintiff’s motion for a preliminary injunction. For the reasons stated below we grant the injunction.

BACKGROUND

The recent years have seen a massive proliferation of corporate takeover battles. The manner in which these contests are waged has undergone dramatic changes. The case at bar asks the Court to determine the propriety of various actions taken by the target corporation to thwart a hostile tender offer.

This case has a tortured procedural history. The plaintiffs in the instant action are Minstar Inc. and Minstar Acquiring Corporation (hereinafter collectively referred to as “Minstar” or “plaintiff”). Minstar Inc. is a Minnesota Corporation which is engaged in various lines of business, including boat manufacture and the moving industry. Minstar Acquiring Corporation is a New Jersey Corporation which is wholly owned and controlled by Minstar J.nc. Apparently, the only purpose for the existence of Minstar Acquiring is to purchase other companies. Both companies are controlled by a group headed by Minstar Chairman Irwin Jacobs (“Jacobs” or “Jacobs group”).

The defendants are AMF incorporated (“AMF”), its Chairman W. Thomas York (“York”) and various other officers and directors of AMF. AMF is also a New Jersey corporation, therefore it is undisputed that the New Jersey Corporation Law provides the rule of decision in this case. AMF is also engaged in several lines of business, most of which center around the production of sporting goods, including yachts.

On April 26, 1985 Minstar commenced a tender offer by making the appropriate filings with the Securities Exchange Commission (“SEC”). The tender offer was preceded by a so-called “running start” whereby Minstar beneficially acquired about 7.5% of the outstanding AMF stock. The tender offer was for 12 million shares of AMF at $23 per share. AMF is currently trading on the market at about $19 per share. If the offer succeeds Minstar will beneficially control about 50.5% of AMF stock.

At the same time Minstar began its tender offer it filed Minstar v. Abrams, Civil Action 85-3173 (MJL), in an attempt to have a New York anti-takeover statute declared constitutionally invalid. The Attorney General and AMF stipulated to effective non-enforcement of the statute, thus mooting the question, however AMF counterclaimed alleging that Minstar’s SEC disclosure was defective. After Minstar agreed to some curative disclosure, we denied expedited discovery since the exigency had been removed.

Minstar then filed the instant action which we accepted as a related case. This complaint contains three major groups of claims. First Minstar claims that AMF’s 14d(9) statement contains false and misleading statements or omissions and thus violates Section 14 of the Williams Act, 15 U.S.C. § 78n(d) (“Williams Act”). Minstar’s second claim is that various AMF defensive tactics were illegal as a matter of state law or were ultra vires under the corporate charter. Finally, Minstar contends that the defense tactics constitute a breach of AMF’s directors’ fiduciary duty as a matter of State law.

As an initial observation we note that this entire action resembles somewhat “the tail wagging the dog.” The basis of federal jurisdiction is predicated on the violation of the Williams Act, yet most of plaintiff’s claims and the relief which it seeks sound in state law. While we believe that determination of the state law causes of action is a proper exercise of our pendent jurisdiction, in the future, we may, in an appropriate case refrain from hearing such claims. See Federman v. Empire Fire and Marine Insurance Co., 597 F.2d 798, 809 (2d Cir.1979). In this case the extent of the plaintiff’s state law causes of action was not clear until the eve of the hearing and the closing of the tender offer. Under these circumstances, the interest of justice required that we retain jurisdiction. However, we believe that matters of state law are best left to the sound judgment of the state courts.

None of this should be read to say that the plaintiff’s Williams Act claims are improper. We note that the SEC has in the past recommended legislation to bring control of defensive tactics within the ambit of federal regulation. That the Congress has chosen not to adopt such legislation is of course wholly within its discretion. It must be remembered, however, that the Williams Act in no way creates any substantive right to challenge the actions of boards of directors; rather it is simply a disclosure statute. Buffalo Forge v. Ogden, 717 F.2d 757 (2d Cir.1983), cert. denied, 464 U.S. 1018, 104 S.Ct. 550, 78 L.Ed.2d 724.

Although the case is marshalled around the Williams Act, plaintiff’s battle cry is “breach of fiduciary duty,”. while defendants march to the sound of the business judgment rule. The Williams Act claims, in large part, turn on the validity of the defensive tactics taken by the Board, an issue of corporate governance regulated by state, not federal law. Thus we begin with the state law claims.

The vernacular of tender offers is filled with colorful terms such as “poison pills,” “white knights” and “scorched earth.” Mr. Jacobs is labeled a “raider.” A “raider” is known for his “hostile” takeover attempts. As such AMF generally characterizes him as a bad person. AMF believes that the structure of the present tender offer is especially hostile. It refers to the take-over as a “front-end loaded, two-tier” tender offer. Under an offer such as this, the offeror acquires a bare majority of the stock in the first step. Once in control, the offeror often makes significant changes in the target such as selling the “crown jewel” or stopping dividend payments. The offeror then undertakes a second stage offer in which it buys the remaining shares. It is alleged that the second stage offer price is often below the first stage price. Moreover the second stage is often purchased with so-called “junk bonds.”

AMF argues that such two-tiered offers are by their nature always unfair and “irresistibly coercive.” It argues that the “freeze-out” of the non-tendering shareholders through suspension of dividends, dries up any market for the non-tendering stock thus depressing the price of such stock far below its “real” value. AMF argues, that the shareholders are placed in what it calls a “prisoner’s dilemma.”

Under the “prisoner’s dilemma,” individual dispersed shareholders are forced to tender their shares into a partial offer regardless of whether they think the offer being proposed gives them full and fair value. They act out of fear that other shareholders, with whom they cannot communicate or collaborate, will tender and thus enable the bidder to relegate the non-tendering shareholder to the distinctly less attractive position of minority shareholder in a company controlled by a majority interest.

Minstar counters that a two-tiered offer is not in any way illegal under federal law or the applicable New Jersey state law. Moreover, Congress and the SEC have consistently held the view that tender offers benefit shareholders by “offering them an opportunity to sell their shares at a premium, and act as a guard against the entrenchment of management and thus, it is in the shareholders’ interest to allow them the opportunity to consider and act on tender offers.” SEC’s Brief as Amicus Curiae in the case of Moran v. Household International Inc., attached as Appendix “B” to plaintiff’s memorandum. See also, Economic Report of the President, attached as Appendix “A” to the plaintiff’s memorandum; Edgar v. MITE Corp., 457 U.S. 624, 632-33, 102 S.Ct. 2629, 2635-36, 73 L.Ed.2d 269 (1982).

The Williams Act was intended to provide shareholders with full and fair disclosure of material information upon which to make an informed decision. “Congress felt that it was for fully-informed investors to decide whether takeover offers were fair and equitable and that the investors should be free to make their own decisions.” Buffalo Forge Co. v. Ogden Corp., 717 F.2d 757, 760 (2d Cir.1983), citing Edgar v. Mite, 457 U.S. 624, 640, 102 S.Ct. 2629, 2639, 73 L.Ed.2d 269 (1982).

The AMF board met to consider the Minstar offer and unanimously rejected it. The alleged rationale for the rejection was that, taken as a whole, the offer was inadequate and not in the best interest of the corporation or its shareholders. The Board stated that it was concerned with the detrimental effect a two-tiered takeover would have on the non-tendering shareholders. Specifically, it believed that the remaining shareholders would be unable to realize the fair value for their shares. Minstar asserts that the Board of AMF was concerned with entrenching itself in office, or else leaving AMF in ruins if forced out.

At the AMF board meetings between May 2, 1985 and May 9, 1985 the Board considered and discussed the implementation of various defensive tactics designed to thwart the Minstar takeover bid. In its 14d-9 Schedule AMF unveiled a series of defensive tactics designed to prevent the takeover.

These defensive tactics fall into two general categories. One is the so-called “poison pill” or Rights Plan. The other is the so-called “scorched earth” policy.

AMF’S RESPONSE

A. AMF’s Scorched Earth Plan

With the Minstar tender offer looming on the horizon, the AMF board on April 23, 1985 decided to amend the company’s stock option and Long Term Incentive Plan. The original plan authorized a Committee composed of three or more directors to grant to key employees favorable options to purchase stock based upon stated performance objectives, over a particular period. The amendments adopted on May 9th, dropped the performance requirements and provided that the price at which stock appreciation rights would be exercisable would be either, the highest price paid per share in any tender offer in effect at any time during the sixty day period immediately prior to the exercise of such rights or the highest sale price per share during such sixty day period. The effect of this amendment is to create favorable option prices derived from market events, rather than from employment based achievements. Moreover, the plan expanded the definition of events for triggering the option to include the consummation of a tender offer. AMF’s board asserts that the purpose for these amendments was to calm employee fears created by hostile takeover attempts and to safeguard rights and benefits already allegedly promised to AMF employees. Minstar claims that the plan lacks a rational basis in that it provides the optionees with a significant cash benefit without corresponding performance objectives at the expense of AMF and its shareholders. Minstar concludes that the amendments constitute corporate waste.

Also on May 9, 1985, the AMF board approved other measures. One provided a 20% increase in benefits accrued under a previously terminated Retirement Annuity Plan. This change, like all the other amendments, became operative only if a change of control occurs on or before December 1, 1985.

Another measure created the “Severance Allowance Plan” providing for an increase in the severance allowance for certain salaried employees on the corporate staff. The Plan doubled AMF’s prior formula of lVá weeks base pay for each year of completed service. This Plan would become effective only in the event of any involuntary termination during the two year period following a “change in control.”

The Board established two trusts to implement the newly-developed plans. The first trust provided the resources for funding the increased retirement benefits. The second trust provided the resources to fund deferred payments under the Rights Plan. The provisions of the trusts provided for revocability by the incumbent Board but, in the event a new Board took control, the new Board would be irrevocably bound by the trusts.

B. The AMF Rights Plan. (“Poison Pill”)

At the board of directors meeting on May 9, 1985 the AMF board declared a dividend of one “Right” per share of its outstanding common stock, as of the close of business on May 20, 1985. Each Right entitled the holder to exchange one share of AMF common stock for a “unit” comprised of one-tenth of a share of a new series of AMF stock designated “Series B Preference Stock” and $5.75 principal share of 14.5% Subordinated debentures, due in 1995. The Indenture covering these Debentures contained certain restrictions including: (1) a moratorium on incurring further debt, except for working capital used in the ordinary course of business and to fund the Rights Plan; (2) a restriction on the sale or transfer of assets of AMF exceeding 1% of Consolidated Adjusted Net Assets, except as conducted in the ordinary course of business; and (3) a prohibition on the making of investments with affiliates of AMF.

In the event of default, the holders of at least 25% of all debentures then outstanding may declare the principal of all the debentures and the interest accrued thereon due and payable. AMF claims that the combined liquidation preference of Series B Preference Stock and the principal amount of the Debenture (per unit) amounts to $23.00.

The Rights assigned are not transferable and may be exercised only during a forty day period beginning on the date that a person acquires 30% or more of the shares of AMF common stock without having proposed a plan to acquire all the remaining shares on terms which are deemed fair by the board of directors. The Rights expire on November 15, 1985 if not triggered prior to that date.

In the event the Rights are exercised, the holders of Series B Preference Stock are entitled to receive dividends at an annual rate of 15.5% calculated on the liquidation price of $172.50 per share. The Series B Stock is not redeemable until 1990, and then is redeemable only at a specified premium. The Series B stockholders are not entitled to vote for directors, except if accrued dividends are not paid. In this event the B stock, as a class, may elect two members of the Board. The Rights are redeemable for $.10 per Right by action of the AMF board at any time prior to a change in control, however, upon a change in control they become irredeemable.

The cumulative effect of these defensive tactics is to seriously deter any unfriendly tender offers. Minstar argues that the offeror would acquire a debt-ridden corporation and a new board would be bound to pay dividends, employee benefits and severance pay far in excess of its fiscal capacity. Thus the term “scorched earth” is used to describe what is left of the target company after the “successful” tender offer.

AMF on the other hand argues that the defensive tactics are nothing more than an attempt to assure that any non-tendering shareholders would receive fair value for their stock. In other words, it argues that the Board is, in effect setting the second stage price. Minstar counters that by any reasoned analysis no tender offer would be made in the face of massive forced payments and debt restrictions. The offeror would be left with nothing but smoldering ash. Thus, Minstar claims the defensive tactics do not set a fair price for the second stage, but rather, sound the death knell to the tender offer, thereby denying the shareholders the basic right of tendering for a premium according to market forces. See SEC brief of Amicus Curiae, supra; Cf. Edgar v. MITE Corp., 457 U.S. at 639, 102 S.Ct. at 2639.

DISCUSSION

Standard for A Preliminary Injunction

The standard in the Second Circuit for preliminary injunctive relief requires a showing of: “(a) irreparable harm and (b) either (1) likelihood of success on the merits or (2) sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly toward the party requesting the preliminary relief.” Wali v. Coughlin, 754 F.2d 1015, 1026 (2d Cir. 1985) Jackson Dairy Inc. v. H.P. Hood & Sons, Inc., 596 F.2d 70, 72 (2d Cir.1979); Accord Arrow United Industries, Inc., v. Hugh Richards, Inc., 678 F.2d 410, 413-14 (2d Cir.1982); Warner Bros., Inc. v. Gay Toys, Inc., 658 F.2d 76, 78-79 (2d Cir. 1981).

We have no trouble concluding that if the tender offer is defeated due to defensive tactics which are in fact illegal, the plaintiff will suffer irreparable harm. However, we believe that plaintiff must meet the “likelihood of success” test because the balance of hardships weighs evenly.

A. Illegality or Ultra Vires Acts

We begin by considering whether the AMF board exceeded its authority as a matter of New Jersey law or its corporate charter when it adopted the defensive tactics. If the Board had no power to do what it did then we must strike the acts regardless of the Board’s motive or justification in acting.

Minstar’s primary argument in this regard is that the adoption of the Rights Plan was illegal. It puts forth five grounds, however, the arguments in fact overlap.

Minstar argues that the Rights Plan discriminates against post May 20th stockholders. The Rights are not transferable. Thus, only the shareholders as of May 20, have any right to convert their stock. AMF contends that it did not' discriminate against Minstar because, to the extent that Minstar owned any stock on May 20th, it too may convert. We find AMF’s argument unpersuasive.

The May 20th date was not simply the record closing date as in the case of the usual dividends declaration. Normally, the record date closes the class of shareholders eligible to receive the dividend. Thereafter, the shareholder may transfer his dividend if he so chooses. The non-transferability of the Rights in the instant case is the fatal flaw.

We believe that as a matter of New Jersey law this type of discrimination between holders of a class of securities is illegal. In Mesa Petroleum Co. v. Unocal Corp., (Del.Ch.1985), 493 A.2d 946 (Del.Sup.1985) the Chancery Court held that this type of discrimination is illegal. Slip Op. at 19. While the Delaware Supreme Court reversed the Chancery Court’s opinion, we believe that the courts of New Jersey would not follow the Appellate Court of Delaware. Asarco Inc. v. MRH Holmes A Court, 611 F.Supp. 468 (N.J.1985), is particularly instructive. In that case Judge Debevoise of the United States District Court for the District of New Jersey stated at p. 1260-1261:

I am not persuaded by the logic of the opinion of the Delaware Supreme Court reversing the Chancery Court and do not believe it would be followed in New Jersey.

Id, referring to, Baker v. Providence and Worcester Co., 364 A.2d 838 (Del.Ch.1976).

A second ground for invalidating this Plan is that the non-transferability of the Rights constitutes an unreasonable restraint on the alienability of the underlying common stock. Under normal circumstances Rights have real value when exercised in conjunction with common stock. However, the transfer of the common stock herein cannot be accomplished with the Rights, thus the value of stock in the hands of a post-May 20th purchaser is significantly reduced. Moreover, the seller would destroy much of the value of the Right by transferring the stock. Under these circumstances we find that the non-transferability of the Right is an unreasonable restraint on alienation. See Hill v. Warner, Berman & Spitz, 197 N.J.Super. 152, 484 A.2d 344 (1984).

We must infer that the effect of the Rights, as now constituted, is to restrict the transferability of the underlying stock. Therefore AMF’s arguments that the restraint only limits the Rights is unpersuasive. Moreover, despite the rationalizations of the AMF board, this effect seems to have been clearly intended.

We note that AMF claims the Rights are intended to protect the non-tenderors, however, anyone who purchased AMF common on the market would not be protected. In fact such a shareholder is distinctly more disadvantaged due to the Rights Plan. He would be unable to seek the “protection” of Class B stock, nor would he be part of the Minstar majority. Because many of the non-tendering shareholders would convert to Class B, the open market purchaser would be left out in the cold, without any large block of similarly situated non-tendering shareholders.

Finally we note the Rights Plan has the impermissible effect of vesting a veto power over any merger in the hands of the non-tendering May 20th stockholders. As discussed above only May 20th stockholders can become Class B shareholders. The Rights Plan requires approval of a merger by the Class B stock as a class, thus the May 20th shareholders may have effective control over any merger. The only way Minstar could ever merge would be to conduct a second tender offer after the Rights have been exercised to gain control of now non-existent Class B stock. We believe that such major changes in structure and voting rights may only be approved by the shareholders. The Board’s unilateral action, in this Court’s opinion, was improper under New Jersey law. We need not reach Minstar’s other grounds for holding the poison pill illegal nor need we reach the question of whether its adoption was pursuant to a valid corporate purpose.

Accordingly we will preliminarily enjoin the use of the Rights in any way. Because the debentures are an integral part of the Rights Plan we also enjoin their issuance. While we have grave doubt that the restrictions on incurring new debt and the restraint on the transfer of more than 1% of AMF’s assets may be validly accomplished by the unilateral action of the Board, we also do not reach the question of whether the restraints adopted were for a valid corporate purpose. We simply hold that the debentures, with their restraints, were issued as part of the Rights Plan and thus are illegal. We will leave the question of whether similar debentures with similar restraints are in themselves invalid for another day.

B. Breach of Fiduciary Duty and the Business Judgment Rule

A far more difficult issue is whether the “scorched earth” devices constitute a breach of the Directors’ fiduciary duty. As noted above we do not reach the question of whether the poison pill breached their fiduciary duty.

Stated simply Minstar claims that the clear-cut purpose of the poison pill and scorched earth is to stop Minstar’s tender offer from succeeding and thereby entrench the current Board and Management. Just as simply stated, AMF claims that the Board acted to protect the shareholders as a whole and is therefore protected by the business judgment rule. N.J.Stat.Ann. § 14A:6-1.

While the parties’ claims may be stated simply the issues raised by those claims are extremely complex. The business judgment rule is a rule of judicial restraint which holds that courts will not inquire into the business judgment of directors who are acting without self-interest and in good faith. As an initial matter we question whether it is appropriate to apply the rule in the context of defensive tactics. The rule was developed to protect directors’ judgments on questions of corporate governance. Questions like “should we buy a new truck today?” or “should we give Joe a raise?” are simplistically, types of business judgments which the rule was developed to protect. Courts have no place substituting their judgments for that of the directors.

Defensive tactics, however, raise a wholly different set of considerations. The problem is that defensive tactics often, by their very nature, act as a restraint on business purposes. Therefore, the application of the business judgment rule in this context seems, to us, questionable, however, the weight of authority dictates that the rule be applied. See Asarco (holding that the business judgment rule applies to tender offer defensive tactics.); See also, N.J.Stat.Ann. § 14A:6-1, Treadway Co. v. Care Corp., 638 F.2d 357 (2d Cir.1980). However many of the cases which have heretofore dealt with the issue, have applied a variant of the business judgment rule. See e.g., Moran v. Household Internad, 490 A.2d 1059 (Del.Ch.1985) (appeal pending); Norlin Corp. v. Rooney Pace Inc., 744 F.2d 255 (2d Cir.1984) (raising the inference of self-dealing); see generally, Block, Barton and Radin, Business Judgment Rule Changes, N.Y. Law Journal, May 28, 1985, p. 25 col. 6.

The term “scorched earth” is a military term — in fact the analogy to war seems to run through much of the take over vernacular. When a battle is lost and a force must retreat from its position, it burns the town and fields, so that the conquerors get nothing for their troubles but scorched earth. In tender offer terms, the scorched earth occurs when the defending directors purposefully injure the corporation. This is most often accomplished by riddling the corporation with debt and .exhausting its credit. Thus the newly acquired corporation must service a long term debt which has no current value to the company, while it is unable to borrow the money it needs to function.

In the instant case the scorched earth tactic alleged included the creation of trust funds which were to remain revocable and unfunded until there is a shift in control of the corporation. On this occurence the trust becomes irrevocable. Minstar argues that the cost of these tactics is so high that AMF will operate at a loss for years.

Minstar argues that the purpose of the scorched earth was simply to entrench current management and the Board. It argues that this is clearly improper and that the business judgment rule should not protect the Board from this alleged misconduct. See Treadway Cos. v. Care Corp., 638 F.2d 357 (2d Cir.1980); Michelson v. Duncan, 407 A.2d 211 (Del.1979); Singer v. Magnavox, 380 A.2d 969 (Del.1977), overruled on other grounds, Weinberger v. HOP, Inc., 457 A.2d 701 (Del.1983); Condec Corp. v. Lunkenheimer Co., 230 A.2d 769 (Del.Ch.1967); Royal Industries, Inc. v. Monogram Industries, Inc., [1976-1977 Transfer Binder] Fed.Sec.L.Rep. (CCH) ¶ 95, 863 (C.D.Cal.1976). When directors use corporate powers to preserve their control, they become interested directors and have the burden of proving the fairness and propriety of the challenged transaction, Norlin Corp. v. Rooney, Pace, Inc., 744 F.2d 255, 264-65 (2d Cir.1984); Asarco, Inc. v. MRH Holmes A Court, 611 F.Supp. 468 (D.N.J.1985); Bennett v. Propp, 41 Del.Ch. 14, 187 A.2d 405, 409 (1962). The Second Circuit, interpreting New Jersey law, stated in Treadway:

In nearly all the cases treating stock transactions

intended to affect control, the directors who approved the transaction have had a real and obvious interest in it: Their interest in retaining or strengthening their control of the corporation. It is this interest which causes the burden of proof to be shifted to the directors, to demonstrate the propriety of the transactions.

638 F.2d at 382 (emphasis added).

In countering Minstar’s argument AMF relies heavily on Johnson v. Trueblood, 629 F.2d 287 (3d Cir.1980). That case held that a showing of “a” motive to retain control, without more is not actionable. However Johnson cannot be read to require that the only motive be self preservation, rather it requires that there must be a “showing from which a fact finder might infer that impermissible motives predominated in the making of the decision ...” 629 F.2d at 292.

In this regard we find the case of Norlin Corp. v. Rooney Pace Inc., 744 F.2d 255 (2d Cir.1984) to be very instructive. In Norlin the Second Circuit raised a “strong inference that the purpose of [the challenged acts] was not to benefit the employees but rather to solidify management’s control ...” 744 F.2d at 265, thus the burden was shifted to the directors to show that the transaction was fair and reasonable. Id., citing Johnson v. Trueblood (Rosenn J. concurring and dissenting).

Under the facts of this case we believe that at least as strong an inference is raised. This inference is based upon the fact that the severance benefits, like the other defensive tactics, are triggered only by the change in control. Minstar points out that AMF has already announced a long term plan which calls for substantial staff reductions in some areas. Thus, an employee who is to be terminated pursuant to the Plan, will receive twice as many severance benefits, if Minstar takes over, even though the decision to terminate him was already made by the present AMF board. AMF claims the changes are “prudent steps designed for the most part to safeguard rights and benefits already earned by and owed to AMF employees” (defendants’ memorandum at 42). It goes on to argue that the increases were made to bring AMF in line with “severance plans in effect at other companies.” Id. at 44. If this was in fact the true justification then conditioning the program on a change in control would be unnecessary.

AMF attempts to distinguish Norlin on the ground that it involved “egregious facts.”

The only viable distinction between Norlin and the case at bar is that in Norlin the board’s control was assured forever, whereas in the instant case the Rights are dissolved, if not triggered in six months. We find this to be an insufficient distinction, because AMF’s board could simply extend the Rights time and time again. The time limit also tends to support the inference that the scorched earth tactics were intended only to thwart tender offers. If AMF’s board’s justification was to protect employees and the like, there would be no reason for the durational limitation.

Moreover, it is important to note that the Norlin Court held that neither the “unsavory [business] reputation” of the tender offeror nor the need to gain time for the target to find a white knight justified “a wholesale wresting of corporate power from the hands of the shareholders.” 744 F.2d at 276.

Accordingly, we hold on the record before us that the conditioning of the various scorched earth tactics on a change in control of AMF properly raises a strong inference that AMF’s board acted only to entrench itself. This inference is sufficiently strong to shift the burden to the directors under the business judgment rule. Nothing in this holding should be read to say that the same type of severance benefits and employee rights would not be proper exercises of business judgment if granted, unconditioned on a change in control of the corporation.

C. The Williams Act Claim

As noted earlier this is a case of the tail wagging the dog. Minstar makes many specific claims that AMF’s 14d-(9) is false and misleading, however, since we are preliminarily enjoining AMF’s defenses, mounted in response to the tender offer, AMF’s 14d-(9) disclosure concerning the effects of its actions is necessarily no longer correct. Accordingly there is no- need for us to determine if the statements were correct when made. This is not to say that the Williams Act claims were not valid viable federal claims in their own right, but simply that the claims are mooted. Therefore AMF is ordered to file a new 14d-(9) statement.

CONCLUSION

Plaintiff has demonstrated irreparable harm and a likelihood of success on the merits. A preliminary injunction shall therefore issue in accordance with this opinion. The parties are to submit proposed orders of preliminary injunction by 10:00 a.m. tomorrow.

It Is So Ordered.

      . Change of control under the Plan is defined as either any person accumulating beneficial ownership of 30% of the AMF outstanding common stock or displacement of the incumbent board of directors.

        . At oral argument the parties disagreed as to the corporation’s ability to pay the dividend. However, since we preliminarily enjoin the Rights Plan on legal grounds, we need not reach the factual issue of whether it was adopted in violation of the Board’s fiduciary duties.

      . Defendants argue that plaintiff must meet the “substantial likelihood" standard. We need not decide which standard applies since we find that Minstar has meet the more stringent standard of Wali.

      . We recognize that the Board was empowered to issue as a dividend these rights to all common shareholders pursuant to the corporate charter. However, the non-transferability of the rights constituted a division of the common stock into two classes (pre-May 20/post-May 20). The bundle of rights possessed by pre-May 20 shareholders is significantly greater than those that would be possessed by purchasers of the common stock on the open market, post-May 20. We consider this discriminatory reclassification of the common stock as improper. We believe that the Board may not do this without shareholder approval under New Jersey Law. N.J.Stat.Ann. § 14A:9-l(2)(f); 14A:9-2(4). See Asarco.

        . At the hearing on the motion, AMF’s counsel argued that the restrictions on transfer were specifically authorized by New Jersey Statute. They first cited NJ.Stat.Ann. 14A:7-7(1). We hold that § 7-7(1) is inapplicable. It appears that § 7-7(1) merely requires that any restraint on transferability appear on a certificate legend. That section does not substantively authorize restrictions.
      Counsel next asserted that § 14A:7-12(2) authorizes the restriction. While we agree that § 7-12(2) does authorize some restraints on alienation, it does not authorize the type of restriction at issue here. To the contrary, that section specifically indicates that a restraint must be "reasonable.” We can find no authority in New Jersey law or the common law which authorizes a complete, absolute restraint on alienation. We therefore hold that the restriction is unreasonable. See Allen v. Biltmore Tissue, 2 N.Y.2d 534, 542, 161 N.Y.S.2d 418, 423, 141 N.E.2d 812, 817 (1957) ("As the cases thus make clear, what the law condemns is ... an effective prohibition against transferability” [Emphasis in original]).

      . Corporate governance is predicated upon a division of powers between the shareholders and the board of directors. The two basic attributes of common stock ownership are: (1) the right to vote; and (2) the right to make independent decisions concerning the purchase or sale of stock. The duty owed to the shareholders by the board of directors is: (1) the duty of care; and (2) the duty of loyalty. See Norlin Corp. v. Rooney Pace Inc., 744 F.2d 255 (2d Cir.1984).
      The duty of care implicates the exercise of business judgment in the lawful and legitimate furtherance of corporate purposes. The duty of loyalty is a prohibition against violation of the fiduciary relationship, i.e., self-dealing. The Right of a shareholder to sell his stock is a private transaction between a willing seller and a willing purchaser and in no way implicates the business judgment rule. Therefore, a board of director’s assertion of a unilateral right, under the business judgment rule, to act as a surrogate for the shareholder’s independent right of alienation of his stock is troublesome. However, because of our holding we need not reach this issue.