author: VINING, District Judge.

text:
    TURNER BROADCASTING SYSTEM, INC., Plaintiff, v. CBS, INC., et al., Defendants.
    No. C85-2617A.
    United States District Court, N.D. Georgia, Atlanta Division.
    Aug. 16, 1985.

      Joseph F. McLaughlin, Shearman & Sterling, New York City, John J. Dalton, Trout-man, Sanders, Lockerman & Ashmore, Steven W. Korn, Corporate Counsel, Atlanta, Ga., for plaintiff.
    David Boies and Richard Hoffman, Cra-vath, Swaine & Moore, New York City, David R. Aufdenspring, Powell, Goldstein, Frazer & Murphy, Atlanta, Ga., for defendants.
   MEMORANDUM OPINION

VINING, District Judge.

In this action for violation of the federal securities laws and for breach of fiduciary duties, the plaintiff moved for a preliminary injunction. The court announced its decision denying the plaintiffs motion for preliminary injunction in open court on July 30, 1985. This memorandum opinion will complement and supplement the oral ruling made at that time.

On April 18, 1985, Turner Broadcasting System, Inc. (“TBS”) filed a registration statement with the Securities and Exchange Commission announcing its intention to make an exchange offer for all the outstanding shares of the common stock of CBS. The offer, if successful, would give TBS and its chairman, president, and controlling shareholder, Ted Turner, control of CBS.

On the same date this action was filed by TBS seeking to enjoin “the concerted and unlawful efforts of CBS ... and the director defendants to retain control of CBS in the hands of current management, regardless of the best interest of CBS shareholders.” In the original complaint TBS outlined several actions which it alleged CBS had taken and was contemplated taking to entrench current management. However, the focus of this litigation changed when, on July 3, 1985, CBS announced its offer to repurchase approximately 21% of its outstanding stock for $150 per share (with $40 being paid in cash and the remainder in a senior note with a face value of $110, bearing interest at 10% per annum, due 1995). In its second amended complaint, filed after the CBS repurchase offer, TBS alleges that certain features of that offer fit into the overall pattern of improper retention of control, notably: (1) the private placement of certain shares of a new series of CBS preference stock convertible into CBS common stock, which has allegedly been placed with five friendly institutional investors, (2) the grant to William S. Paley of the right to put a portion of his shares to CBS at a price of $150 per share, payable in cash, a payment term in sharp contrast to that offered to other shareholders, and (3) “poison pill” provisions in the note indenture, preferred stock, and credit agreements.

Against this rather general factual background, TBS has set out five claims for relief: Claim 1 is for misleading statements and omissions of material fact allegedly made by CBS in connection with TBS’s tender offer, in violation of section 14(e) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(e); Claim 2 for making public statements constituting recommendations to CBS shareholders which had the effect of misleading CBS shareholders and the investing public concerning the terms, value, viability, and desirability of the TBS exchange offer and making such recommendations prior to filing its formal response to the TBS exchange offer on its Schedule 14D-9, in violation of section 14(d) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(d), and Rule 14d-9 promulgated thereunder; Claim 3 for misleading statements and omissions of material fact in the notice of annual meeting and proxy statement by which the defendants solicited proxies for the April 17, 1985, annual meeting of CBS shareholders in violation of section 14(a) of the Exchange Act, 15 U.S.C. § 78n(a), and Rule 14a-9 promulgated thereunder; Claim 4 for breach by the CBS directors of their fiduciary duty to the CBS shareholders; and Claim 5 interference with contractual and business relationships between TBS and certain investment banking firms.

Although the complaint alleges violations of the federal securities laws, primarily through misstatements and misleading statements, the court finds that such statements were, for the most part, mere puf-fery or were verbal jousts between protagonists in a hostile situation. To the extent that any such statement may have been misleading under the federal securities laws, such statements were not of such a magnitude that would warrant granting a preliminary injunction. Also, the allegations under claim 5 are not sufficient to warrant an injunction.

The central issue in this case, and the one to which most of the evidence was presented during the hearing conducted on July 24-26, is whether the defendant directors breached their fiduciary duty to the CBS stockholders. Setting out the primary components of the TBS offer and the CBS offer provides a useful framework for considering the arguments in this case.

TBS’s offer to CBS shareholders did not contain any offer of cash but instead offered to exchange the following for each share of CBS stock:

$46 principal amount 15% seven year senior note
$46 principal amount 15V2% fifteen year senior debenture
$10.31 principal amount five year series A zero coupon note
$11.91 principal amount six year series B zero coupon note
$15.90 principal amount eight year series C zero coupon note
$18.38 principal amount nine year series D zero coupon note
$30 principal amount 16V4% twenty year senior subordinated debenture One share of $2.80 preferred stock (stated value $16.50 per share)
.75 share of class B common stock

The offer was conditioned upon (1) a minimum of 21 million CBS shares being tendered, (2) FCC approval of the acquisition, and (3) recission of CBS board of directors’ action on April 4, 1985, which action deleted a by-law provision allowing the holders of 10% of the outstanding CBS stock to call a special meeting of shareholders, and (4) the expiration of the waiting period applicable to the exchange offer under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

In its amended registration statement, filed with the SEC, TBS noted that the purpose of its exchange offer was to gain control of CBS and that after consummation of the exchange offer it would effect a merger of the companies. Following the merger TBS would then seek to dispose of all businesses and assets of CBS that are not related to CBS’s national television broadcast and network businesses; revenue from such sales would be used to service the debt incurred in purchasing the outstanding stock of CBS. Under the TBS exchange offer, each share of the TBS class B common stock would have Vs of a vote per share; holders of TBS class A common stock would have approximately 83% of the voting power of TBS, compared with approximately 17% of such voting power for the holders of the TBS class B common stock. Since Ted Turner currently owns approximately 81% of the outstanding TBS stock, he would have approximately 67% of the voting power of the new entity.

In its offer CBS proposed to purchase up to 6,365,000 shares of its common stock, representing approximately 21% of its outstanding shares “by exchanging for each of those shares $40 in cash and a $110 principal amount 107/8% senior note due 1995.” The notes contained several covenants about which TBS complains in this suit.

(1) Limitation on liens and sales and leasebacks. The notes prohibit CBS from mortgaging or otherwise encumbering corporate assets without concurrently providing that the notes be secured equally and ratably with such new secured debt unless the aggregate principal amount of such secure debt does not exceed 5% of the consolidated adjusted book capitalization. The notes further prohibit CBS from entering into any sale and leaseback for a period in excess of three years of any property which CBS has owned for more than six months.

(2) Limitation on additional debt. The notes prohibit CBS from incurring any additional debt that would cause the ratio of its consolidated total debt to its total capitalization to exceed .7 to 1.0 unless such debt was authorized by a majority of the board’s independent directors (which are defined as a director who is not and has never been an employee of the company and who was either a member of the board on July 31, 1985, or who subsequently becomes a director of the company and whose election was approved by a majority of the independent directors then on the board).

(3)Limitation on sales of assets. This provision prohibits CBS from transferring or selling any assets, with certain exceptions, unless authorized by a majority of the independent directors.

CBS’s offer also contains a provision, known as the “Paley put” which gives William S. Paley, who is the founder of CBS and is currently a director of the company, the option to sell to CBS a maximum of 434,489 shares of his stock for $150 per share, payable in cash. This option must be exercised by Mr. Paley between August 1, 1988, and August 1, 1995. Mr. Paley currently owns 1,548,091 share of CBS stock, and certain members of his family, a related a partnership, and certain affiliated trusts (all of which, for federal tax purposes, are treated as if Mr. Paley had control over) own an additional 360,155 shares. CBS states that the Paley put was incorporated into its offer because with his low tax basis in his stock and the fact that he is deemed a “controlling person” for federal tax purposes, any profit he made on the sale of the stock would be treated as a dividend and thus would be taxed as ordinary income rather than as capital gain.

To help finance its purchase of its shares, CBS entered into preference stock purchase agreements with five institutions whereby those institutions agreed to purchase 1,250,000 of convertible series B preference stock at a price of $100 per share. The terms of this stock provide that CBS may not take any action which would result in the ratio of debt to adjusted book capitalization for the company exceeding .75 to 1.0. The terms of the stock also provide, according to CBS’s SEC filing, “that any holder thereof will be entitled to obtain injunctive relief to compel specific performance, or to restrain any act or proposed act by the Company which would result in the breach, of any of the provisions of the Company’s Restated Certificate of Incorporation applicable to the Series B Preference Stock.”

To obtain additional financing for his purchase offer, CBS entered into two revolving credit agreements dated as of March 29, 1985, providing for revolving credit loans in an aggregate principal amount of $1,500,000,000. These agreements prohibit the company from having consolidated indebtedness and guarantees in excess of $2.4 billion and further require the company to maintain a positive consolidated net worth at all times. Under the agreements, CBS agrees not to merge or consolidate with any other corporation unless after giving effect to such merger or consolidation there would be no event of default under the agreement. The agreement also requires 80% of the proceeds of certain dispositions of property to be approved to reduce the loans outstanding under the agreements. One of the events of default under the agreement is the resignation, removal, or replacement during any one month of 50% or more of the full board of directors of TBS.

CBS had considered a possible recapitalization in early 1984, primarily because several financial analysts were concerned with the low debt to equity ratio of CBS at that time. Although at one time a low debt to equity ratio was seen as the mark of a healthy company, in recent years such low ratio was seen as detrimental in financial and corporate circles because it made such a company an attractive takeover target. Consequently, financial analysts had encouraged CBS to incur some “good” debt that would increase its debt to equity ratio, thus, while keeping the company healthy, making it less attractive as a takeover prospect.

In February 1984, CBS hired Morgan Stanley & Co. to analyze various corporate actions to protect the company from corporate raiders. In June, Morgan Stanley provided CBS with a report that served as the basis for further consideration of the options available to CBS, including in the by-laws a stock repurchase.

In July 1984 CBS’s board chairman and chief executive officer, Thomas H. Wyman, with the approval of the board, began an examination of the CBS by-laws and of options which might provide appropriate defensive mechanisms in the event of a hostile takeover attempt. In November 1984, the board of directors conditionally approved and authorized a stock repurchase of 3 million shares; however, that repurchase was not undertaken because CBS was presented with the opportunity to acquire Ziff-Davis Publishing Company. Instead of repurchasing its stock, CBS purchased Ziff-Davis. .

In February 1985, private investors offered $826,000,000 for Multimedia, Inc., a company which owned five television stations, twelve radio stations, and several newspapers; this purchase price provided a significant premium over the market price of the Multimedia stock just one month previously. In mid-March, the American Broadcasting Company and Capital Cities Communications, Inc., announced the CCCI would acquire ABC and its other businesses for approximately $3.5 billion, a substantial premium over the market price of ABC stock. These two purchases reflected the financial analysts’ observations made previously to CBS that CBS, like several other media corporations, was underleveraged (ie., had a low debt to equity ratio). These actions provided additional evidence to CBS that there was a gap existing between its intrinsic value and the market value of its stock. From these facts the court finds that although it is highly probable that the TBS tender offer had the effect of forcing CBS to act more quickly on its recapitalization plan, the TBS tender offer was not the catalyst that made CBS decide to consider a recapitalization program.

As noted above, TBS’s tender offer, submitted on April 18, 1985, proposed to exchange for each outstanding share of CBS stock certain TBS securities. These securities were described at times during the preliminary injunction hearing as “junk bonds” or “high yield bonds.” The term “junk bonds” is a term applied to bonds below investment grade and which, by their speculative nature, usually carry high interest rates. The court notes that whether securities are referred to as “junk bonds” or “high yield bonds” depends to a large extent upon whether the person referring to those securities is trying to sell the securities or is attempting to influence people not to purchase the securities.

Prior to the board meeting on April 22, 1985, all of the CBS directors and CBS management were well aware of the terms of the TBS offer. Each of the directors had been furnished information in packages of information concerning the offer, and each testified he had studied this information. Some of the directors discussed the offer among themselves, and some had discussed the offer with CBS management. Morgan Stanley had prepared a report regarding the TBS offer, and all of the directors were aware of this report. At the meeting on April 22, the directors determined that the TBS offer was not in the best interest of the CBS shareholders. In reaching this conclusion, the directors considered the Morgan Stanley report and the presentation made by Morgan Stanley at the meeting; they considered the media reports that they had seen subsequent to the announcement of the TBS plan, and such media reports were almost universal in concluding that the Turner plan would not work; the directors understood that a combination of TBS and CBS would result in an entity that would lose substantial sums of money for several years and that an extremely high cash flow would be necessary to service the debt that would result from the combined TBS/CBS entities; the directors also understood that the TBS securities had not been rated by either Moody’s or Standard and Poor’s, and they were aware that the TBS securities would probably sell in the market for substantially below their face value; the directors also had reports on the reaction of the CBS television affiliates across the country who had responded negatively to the TBS offer, and the board was concerned that a TBS takeover of CBS would result in the loss of several affiliates.

The discussion at the board meeting centered on the economic merits of the TBS offer to the CBS shareholders, and after weighing the various considerations, the CBS board determined that the offer was not in the best interests of the shareholders and so reported to the shareholders and to the media.

As noted earlier, discussions of a recapitalization at CBS had been going on for some months prior to the TBS offer, and on July 3, 1985, CBS announced its offer to purchase approximately 21% of the outstanding shares of CBS for $150 per share, with $40 being in cash and the remainder payable by a note in the principal amount of $110 bearing interest at the rate of 10 7/8 %, at a time when CBS stock was selling for approximately $117 a share. It was CBS’s expectation and Morgan Stanley’s expectation that the notes given by CBS would be traded on the market at near their face value. In fact, evidence has been presented in this case showing that the notes have been trading on a when-issued basis as slightly below their face value, which is not uncommon with when-issued trading.

It is uncontested that CBS’s stock purchase plan will add significant debt to CBS’s capital structure. However, it is easy to see that the debt added by the purchase of these shares is nowhere near the debt that would be created in the event the TBS offer is successful. For example, under the CBS plan, the corporate debt would be approximately $1.3 billion; whereas, the corporate debt under the TBS offer would be approximately $5 billion.

The CBS notes, the revolving credit agreements, and the preference stock contains certain limitations or restrictions on such matters as liens, sales and leasebacks, additional debt, and sales of assets. The court finds that these provisions were to protect the noteholders by insuring that the corporation would have sufficient assets to turn to in the event of a default. While the notes contained a provision that would allow the independent directors on the CBS board to waive certain of the restrictions, the court finds that, although unusual, such a provision is not unique. The court finds that such a provision is reasonable in view of the testimony that investors had high regard for the CBS board and such a provision would make the notes more, not less, attractive in the marketplace.

In its amended complaint, TBS alleges that the CBS board looked for friendly investors with which to place its preference stock. A representative from Prudential Bache, one of the investors, testified that his primary concern was to look after his company’s investment in CBS. Regardless of whether the attitude taken by the investors in the preference stock was friendly or unfriendly, the court finds nothing improper or illegal in this offering.

Although TBS stressed the provision found in the preference stock issue regarding injunctive relief, the court concludes that this is really a non-issue. A provision allowing a person to seek injunctive relief for violation of an agreement confers no greater rights than an individual would have without such provision. Furthermore, the fact that a person may seek injunctive relief does not mean that he will ipso facto receive such relief; rather, obtaining injunctive relief is dependent upon his convincing a court that he is legally entitled to such relief on the merits of his claim. The court finds that the injunctive relief provision was superfluous and of no legal significance.

At a special called meeting of the CBS board of directors conducted by telephone on April 4, 1985, the board removed from the CBS by-laws a provision which allowed the owners 10% of the outstanding stock to call a special meeting of the shareholders without board approval. The court finds that this action was taken in response to an effort by Ivan Boesky, an arbitrager, to have the company purchase his shares at a premium. Mr. Boesky had obtained 8.7% of the outstanding shares of CBS and, immediately after obtaining those shares and giving proper notice, had approached CBS about purchasing his shares at a premium. This court finds that this was just an ordinary case of greenmail and the response of CBS was reasonable in that it did not want this individual to have an opportunity to call a special meeting of the shareholders, with the attendant expense, for the purpose of pursuing his greenmail attempt. The court finds that the action of the CBS board in removing that by-law provision was reasonable, and the court will not issue a mandatory injunction requiring the CBS board to reinstate that bylaw.

The numerous questions presented in this preliminary injunction hearing can be distilled to the central question of whether the decisions and actions of the CBS board of directors were fair and reasonable in their best business judgment, as the defendants argue, or whether the actions were made solely for the purpose of entrenching current management without regard to the CBS shareholders, as argued by TBS.

The four prerequisites for the granting of a preliminary injunction, as set forth in Canal Authority of the State of Florida v. Callaway, 489 F.2d 567, 572 (5th Cir.1974), are as follows:

(1) A substantial likelihood that plaintiff will prevail on the merits,
(2) A substantial threat that plaintiff will suffer irreparable injury if the injunction is not granted,
(3) That the threatened injury to plaintiff outweighs the threatened harm the injunction may do to the defendant, and
(4) Granting the preliminary injunction will not disserve the public interest.

Since the court concludes that the plaintiff has failed to meet its burden of showing a substantial likelihood that it will prevail on the merits, there is no reason for the court to consider the remaining three prerequisites.

Since CBS is a New York corporation, the duties and powers of its officers and directors are governed by New York law. Such powers and responsibilities are succinctly set out in Northwest Industries, Inc. v. B.F. Goodrich Co., 301 F.Supp. 706 (N.D.Ill.1969), wherein the court stated that in performing their duties, directors are held to a standard of exercising honest business judgment, which is defined as the exercise of that care which businessmen of ordinary prudence use in managing their own affairs. Because of the wide measure of discretion allowed officers and directors, mere differences of judgment are not sufficient to warrant judicial intervention; rather, there must be proof of fraud or manifestly oppressive conduct on the part of the directors in order to set aside their actions.

In considering tender offers management has the responsibility to oppose offers which in its best business judgment are detrimental to the company or its stockholders. In judging an offer, management should be scrupulously fair, and its informed opinion should result from that strict impartiality which is required by its fiduciary duties. If, after applying these standards, the company concludes that the offer is not in the best interests of the company or its stockholders, the company may then take any step not forbidden by law to counter the attempted takeover.

Two of the cases relied upon by TBS need comment by this court. The first is an unpublished decision by the United States District Court for the Southern District of New York, Minstar Acquiring Corp. v. AMF, Incorporated, 621 F.Supp. 1252 (1985). To defeat a tender offer from Minstar, the AMF board approved certain measures including a plan by which the directors conditionally declared a dividend to existing shareholders as of a particular date of a “right” to exchange one share of AMF stock for a newly issued, non-trans-ferrable, high dividend preferred stock. However, the right was triggered only by a change of control. The court found this plan, which discriminated between holders of a class of securities on different dates to be illegal under New Jersey law. In the instant case, the CBS board of directors has taken no action which would, in and of itself, be illegal under New York law.

With respect to Norlin Corp. v. Rooney, Pace Inc., 744 F.2d 255 (2d Cir.1984), the Court of Appeals affirmed the granting of an injunction that prohibited Norlin Corp. from taking certain actions in an effort to defeat a takeover bid. However, in Nor-lin, the directors from Norlin were attempting to do something that was illegal, viz., they were attempting to vote shares in Norlin stock held by a wholly owned subsidiary. The subsidiary was incorporated under Panama law, and both New York and Panama law expressly prohibited a subsidiary that is controlled by a parent corporation from voting shares of the parent’s stock.

In its discussion of a board member’s fiduciary obligation to a corporation and its shareholders, the court noted that the board member has both a duty of care and a duty of loyalty. In evaluating a director’s compliance with the duty of care, New York courts adhere to the business judgment rule, as defined earlier. The second duty, the duty of loyalty, derives from the prohibition against self dealing that inheres in the fiduciary relationship. “Once a prima facie showing is made that directors have a self-interest in a particular corporate transaction, the burden shifts to them to demonstrate that the transaction is fair and serves the best interests of the corporation and its shareholders.” 744 F.2d at 255.

In considering whether the Norlin directors had violated their duty of loyalty, the court found that the directors had created an employee stock option plan, appointed three Norlin directors as trustees, and immediately transferred a large number of shares of Norlin to the plan and trust. In finding that this action violated fiduciary principles of state common law, the court stated:

The precipitous timing of the share is-suances, and the fact that the ESOP was created the very same day that stock was issued to it, give rise to a strong inference that the purpose of the transaction was not to benefit the employees but rather to solidify management’s control of the company. This is buttressed by the fact that the board offered its shareholders no rationale for the transfer other than its determination to oppose, at all costs, the threat to the company that Piezo’s acquisition ostensibly represented. Where, as here, directors amass voting control of close to a majority of a corporation’s shares in their own hands by complex, convoluted and deliberate maneuvers, it strains credulity to suggest that the retention of control over corporate affairs played no part in their plans.

744 F.2d at 265 (footnote omitted).

In the case sub judice this court finds that the directors of CBS exercised their best business judgment in formulating the recapitalization plan with its various factors and in formally opposing the TBS tender offer. The stock repurchase was not designed, in and of itself, to defeat the TBS tender offer to the detriment of the CBS shareholders. The court further finds that the CBS directors could reasonably conclude that the TBS offer, with its high risk securities and questionable financial viability, was not in the best interests of the CBS shareholders. It is only in regard to the Paley put that the court finds that TBS has made a prima facie showing that the directors may have been motivated by the self-interest of one director and thus breached their duty of loyalty.

The Paley put provision guarantees that Mr. Paley will receive- $150 in cash if he decides to exercise his option of putting a portion of the shares owned or beneficially controlled by him to the company. (If CBS stock is selling for more than $150 per share at the time the option is exercised, Mr. Paley would be required to pay over to CBS such excess amount.) CBS directors testified that such provision was incorporated in the stock purchase offer since Mr. Paley, as a controlling shareholder under IRS regulations, would have his income taxed as a dividend and thus as ordinary income instead as of capital gain.

The court has serious problems with this provision and believes that it may be contrary to the best interests of the other CBS shareholders. Although Mr. Paley may have tax problems, such problems are his and are not the problems of CBS or the other CBS shareholders. In fact, other CBS stockholders might have some problem in deciding whether to tender their shares depending upon their own financial situation; for example, if some of them have held their shares for under six months, their income would also be treated as ordinary income rather than as a capital gain. While Mr. Paley’s problem may be unique because of his being a controlling person, others will have problems which are peculiar to their situations.

However, the court does not believe that the Paley put provision is of such a magnitude that the court should enjoin the CBS repurchase offer in its entirety. Additionally, since the Paley put is not immediately exercisable, there is no need for the court to enter a preliminary injunction against its exercise at this time; rather, the court will consider this provision at the trial, on the merits of this case. By delaying a ruling until that time, neither CBS nor any shareholders, other than Mr. Paley, will be harmed. At the trial on the merits the court will consider whether treating Mr. Paley differently from all other CBS shareholders was, in actuality, in the best interests of all CBS shareholders.

Although TBS alleges that the actions taken by the directors in this case were in bad faith and for the primary purpose of entrenching themselves at CBS, the court finds that their primary purpose of the actions of the board of directors was not to entrench themselves at CBS to the detriment of the shareholders. The fact that the directors may be sustained in their efforts to remain on the board is not enough to show that their actions were bad business judgment decisions. The mere fact that they remain on the board is not sufficient for this court to enjoin the actions they have taken in their efforts to recapitalize CBS.

Whenever the plaintiff demonstrates that the directors have an interest in the board transaction, the burden shifts to the directors to prove that the transaction was fair and reasonable to the corporation. Of course, “[i]n nearly all of the cases treating stock transactions intended to affect control, the directors who approved the transaction have had a real 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.” Treadway Companies, Inc. v. Care Corp., 638 F.2d 357, 382 (2d Cir.1980). Once the burden has shifted, the directors must show that the transaction was fair, “in the sense that it was entered into for a proper corporate purpose, and not merely for the directors’ selfish purposes.” 638 F.2d at 382. If the directors show that the transaction was for a proper corporate purpose, “they need not also prove that the actual terms of the transaction was fair.” 638 F.2d at 382, note 47.

Even if the court should conclude that the CBS stock repurchase plan was “intended to affect control” of the corporation, the court would not enjoin the repurchase since the court finds that TBS has not carried its burden of showing that the transactions were unfair or unreasonable because the court also finds that the directors have made a sufficient showing of fairness by demonstrating through the evidence presented that the transactions entered into were for a proper corporate purpose.

In reviewing the actions of management in the face of a tender offer, many courts have been influenced by Cheff v. Mathes, 41 D.Ch. 494, 199 A.2d 548 (1964). In Cheff the Supreme Court of Delaware held that because of the inherent danger in the purchase of shares with corporate funds to remove a threat to corporate policy when a threat to control is involved, the burden is on the directors to justify such a purchase as one primarily in the corporate interest. However, this burden is not as heavy as in those situations where the directors have a personal and pecuniary interest in the transaction (apart from being mere shareholders or directors of the company) as would be the case when a director sells property to the corporation for pecuniary gain. Cheff specifically noted, however, “It is important to remember that the directors satisfy their burden by showing good faith and reasonable investigation; the directors will not be penalized for an honest mistake of judgment, if the judgment appeared reasonable at the time the decision was made.” 41 D.Ch. at 506, 199 A.2d at 555. In this case the CBS directors had no pecuniary interests, and the court finds that they have met their burden of showing that in good faith and after reasonable investigation they found reasonable grounds to believe that the TBS purchase and merger plan could be a danger to corporate policy and effectiveness.

In applying the business judgment rules to situations wherein directors are in the position of opposing defensive actions against the threat of a takeover, the court must realize that the directors may be confronted with a very difficult dilemma. Directors are bound to take such actions as they deem necessary if they believe that the tender offer is not in the best interests of the shareholders. If they determine in good faith that the threatened action is adverse to the shareholders’ and corporation’s interests, they have a duty to resist the takeover through all legal means at their disposal. However, successful resis-tence to the takeover attempt will most likely have the collateral effect of perpetuating the incumbent directors’ control so that the directors’ self-interest in maintaining control may appear to have been one of the purposes of resistence. It is for this reason that courts have generally held, and this court so holds, that the business judgment rule continues to apply to insulate directors’ actions in challenge-to-control contexts despite the directors’ apparent self-interest, unless the tender offer can show that such self-interest was the primary purpose for the directors’ resistence!

In the case sub judice the court finds that the self-interest of the directors was not their sole or primary purpose. The court finds that CBS had a very independent and knowledgeable board of directors, none of whose livelihood depended upon CBS in any event. Each of the directors made his or her own independent decision in this matter with no hint of self-interest or pecuniary gain. (The only possible exception being the Paley put which the court will consider more fully at a future date).

For the foregoing reasons, since the court concludes that the plaintiff has failed to meet the first prerequisite for obtaining a preliminary injunction, i.e., showing a substantial likelihood of success on the merits, TBS’s motion for a preliminary injunction is DENIED.

SO ORDERED, this 16th day of August, 1985.

      . The court notes that the complaint fails to state a claim for relief under 15 U.S.C. § 78n(e), also known as the Williams Act, since that code section in no way creates any substantive right in a tender offeror to challenge the action of the board of directors; that legislation was intended to protect the shareholders, and "tender offerors were not the intended beneficiaries of the bill.” Piper v. Chris-Craft Industries, Inc., 430 U.S. 1, 28, 97 S.Ct. 926, 942, 51 L.Ed.2d 124 (1977).

      . The TBS securities have not been traded on a when-issued basis, so it is impossible to compare the actual market value of the CBS and TBS securities.


source: Caselaw Access Project

author: SIFTON, District Judge.

license: Public Domain

text:
    OLYMPUS CORPORATION, Plaintiff, v. UNITED STATES of America; Ronald T. Regan, and William VonRaab, Defendants.
    No. CV-84-0920.
    United States District Court, E.D. New York.
    Aug. 22, 1985.

      Whitman & Ransom, New York City by Max Schutzman, John Hadlock, for plaintiff.
    Department of Justice, Washington, D.C. by Velta A. Melnbrencis, and Raymond J. Dearie, U.S. Atty., E.D.N.Y., Brooklyn, N.Y. by Charles Kleinberg, for defendants.
    James C. Tuttle, Troy, Mich., and Gillen & Calideno, New York City by Michael J. Gillen, and Steele Simmons & Fornaciari, Washington, D.C. by Robert W. Steele, for K-Mart.
    Miller Cassidy Larroca & Lewin, Washington, D.C. by Nathan Lewin, for 47th Street Photo Corp.
   SIFTON, District Judge.

This is an action brought by Olympus Corporation, a New York Corporation, doing business in Nassau County, for declaratory and injunctive relief against the enforcement of 19 C.F.R. § 133.21(c), which provides that certain restrictions upon the importation of trademarked goods do not apply when “the foreign and domestic trademark ... owners are parent and subsidiary companies or are otherwise subject to common ownership and control.”

As set forth in this Court’s Memorandum and Order of November 15, 1984, it is essentially undisputed that plaintiff is the exclusive United States distributor of Olympus-brand optical products, including photographic products and accessories such as cameras, lenses, flash units, and filters, all of which are manufactured in Japan, and that it owns the rights in this country to the Olympus trademark for those products. Olympus is a subsidiary corporation of Olympus Optical Company Ltd. (“Olympus Optical”), a Japanese corporation which is the manufacturer of Olympus-brand products, and the owner of the rights to the Olympus mark in Japan.

Defendants are the United States of America; Donald T. Regan, in his capacity as Secretary of the Treasury; and William Von Raab, Commissioner of the United States Customs Service (the “federal defendants”). In addition, 47th Street Photo and K-Mart Corporation have sought leave to intervene as defendants. It is not disputed that 47th Street Photo is a New York City retailer of electronic equipment, including Olympus-brand products or that K-Mart is a national retailer operating more than 2,000 stores. Both proposed defendant-intervenors sell or propose to sell so-called “gray market” goods, as hereinafter defined, to consumers at discount prices.

In April 1978, the United States Customs Service accepted the Olympus trademark for import protection, pursuant to 15 U.S.C. § 1124 (“Section 42”) and 19 U.S.C. § 1526 (“Section 526”). However, Customs specifically declined to prohibit importation into the United States by unrelated third parties (such as K-Mart and 47 th Street Photo) of merchandise bearing the Olympus trademark and manufactured by Olympus Optical. Olympus alleges in its complaint that 19 C.F.R. § 133.21(c), which permits the importation of what are colloquially referred to as “diverted” or “gray market” goods — goods produced by a foreign manufacturer and bearing that manufacturer’s trademark which are purchased abroad and imported by persons other than the manufacturer’s authorized distributor — is ultra vires. Plaintiff argues that the regulation is inconsistent with two statutes, 15 U.S.C. § 1124 and 19 U.S.C. § 1526, which together prohibit the importation into the United States of goods bearing a trademark identical or confusingly similar to a mark owned by a United States citizen or corporation which is registered with the United States Patent and Trademark Office and recorded with the United States Custom Service, without the authorization or consent of the American trademark proprietor. Olympus accordingly requests that this Court enjoin the Customs Service from enforcing the provisions of 19 C.F.R. § 133.21(c)(2) as to it.

Because of the controversy surrounding the current Customs’ regulations, the Customs Service on May 21, 1984, published a notice soliciting economic data from the public concerning the effects of the importation of gray market goods. In addition, two actions seeking relief similar to that sought by Olympus were brought in other forums. First, in Vivitar Corp. v. United States, 585 F.Supp. 1419, and 593 F.Supp. 420 (C.I.T.1984), aff'd, 761 F.2d 1552 (1985), rehearing denied, No. 84-1638 (D.C.Cir. June 12, 1985), Vivitar sought a writ of mandamus in the Court of International Trade to compel Customs to revise 19 C.F.R. § 133.21. In addition, in Coalition to Preserve the Integrity of American Trademarks v. United States, 598 F.Supp. 844 (1984), (the so-called “COPIAT” case), an association of foreign manufacturers sought declaratory and injunctive relief halting the administration of 19 C.F.R. § 133.21. Recently, defendants in both cases have been granted summary judgment, and the Vivitar decision has been affirmed on appeal by the Court of Appeals for the Federal Circuit.

By Memorandum and Order dated November 15, 1984, the undersigned denied a motion by the federal defendants seeking dismissal of the complaint for lack of subject matter jurisdiction. That decision did not address a number of other motions filed by the parties and proposed inter-venors. The matter, therefore, is now before the Court for consideration of the balance of motions: the motions of K-Mart and 47th Street Photo for leave to intervene, the motions of the federal defendants and proposed intervenors for dismissal or a stay due to plaintiff’s alleged failure to exhaust administrative remedies and under the doctrine of primary jurisdiction, the motions of the federal defendants and proposed intervenors for a stay pending resolution of Vivitar and COPIAT and transfer of venue to the district of the District of Columbia, the motion of proposed inter-venor 47th Street Photo for dismissal for failure to state a claim upon which relief can be granted, plaintiff’s motion for summary judgment, and the cross-motions of the federal defendants and proposed inter-venors for summary judgment.

Motions for Intervention As of Right

Under Rule 24(a)(2), a proposed intervenor must show that (1) the application is timely, (2) the applicant claims an interest relating to the property or transaction which is the subject matter of the action, (3) the protection of the interest may, as a practical matter, be impaired by the disposition of the action, and (4) the interest is not adequately protected by an existing party. United States Postal Service v. Brennan, 579 F.2d 188, 191 (2d Cir.1978). The parties do not dispute that proposed intervenors’ applications are timely.

With respect to the second requirement, the Court of Appeals for this Circuit has recently noted:

“The term ‘interest’ in this context defies a simple definition. Before the 1966 amendment, Rule 24(a) allowed intervention as of right only where the applicant ‘is or may be bound by a judgment in the action’ or where the ‘applicant is so situated as to be adversely affected by a distribution or other disposition of property in the custody of the court or of an officer thereof.’ Clearly, the 1966 amendment was intended to expand the right to intervene beyond those situations. However, as another court has aptly observed, ‘the amendments made the question of what constitutes an “interest” more visible without contributing an answer.’
“In discussing ‘interest in the context of intervention as of right,’ the Supreme Court has stated that the interest must be ‘significantly protectable.’ Moreover, it is said that such an interest must be direct as opposed to remote or contingent.
“These definitions are, of course, imprecise, but it is difficult to be more than general in stating criteria designed to cover the multitude of possible intervention situations.”

Restor-A-Dent Dental Lab v. Certified Alloy Products, 725 F.2d 871 (2d Cir.1984) (citations omitted).

Applying these principles to the applications before me, I conclude that the interests of 47th Street Photo, but not those of K-Mart, rise to a level sufficient to require intervention as of right.

47th Street Photo has submitted affidavits which are essentially undisputed indicating that it purchases a substantial quantity of Olympus products from authorized distributors of Olympus merchandise abroad. According to these documents, if 47th Street Photo were forced to purchase the Olympus products that it sells solely from United States distributors, which would happen only if plaintiff prevailed in this action, it would be unable to continue selling Olympus products at discount prices. In addition, 47th Street Photo’s access to other foreign-manufactured gray market products, which apparently are not available through the manufacturer’s United States distributors, would be curtailed. Overall, 47th Street Photo’s ability to do business would be substantially threatened. See NYPIRG v. Regents, 516 F.2d 350 (2d Cir.1975); see also Planned Parenthood v. Citizens for Community Action, 558 F.2d 861 (8th Cir.1977); Atlantic Refining Co. v. Standard Oil Co., 304 F.2d 387 (D.C.Cir.1962).

K-Mart, while a substantial purchaser of gray market goods, stands in a somewhat different position with respect to this case because it merely claims to be a “potential customer for imported Olympus gray market products.” Its interest, therefore, is more remote and contingent. In one sense, K-Mart’s position is analagous to that of the pharmacists in NYPIRG, supra, because K-Mart seeks to intervene in a suit challenging a regulation quite possibly inimical to its livelihood. Compare Atlantic Refining, supra, and Natural Resources v. U.S. Nuclear Reg. Comm., 578 F.2d 1341 (10th Cir.1978) with Wade v. Goldschmidt, 673 F.2d 182 (7th Cir.1982) and Rosebud Coal Sales Co. v. Andrus, 644 F.2d 849 (10th Cir.1981). However, I am persuaded by practical considerations recently discussed in Restor-A-Dent, supra, to deny K-Mart’s motion to intervene as of right. Most importantly, to open the door to K-Mart’s intervention as of right would do so to a class of persons or entities only remotely affected by the outcome of a challenge to a federal regulation and would preclude exercise of discretion in weighing the adverse effect of intervention on the prosecution of the plaintiff’s cause of action. Restor-A-Dent, supra at 876; see also United States ex rel. Carmona v. Ward, 416 F.Supp. 276, 279 (S.D.N.Y.1976). Accordingly, K-Mart’s motion for intervention as of right is denied because the applicant claims too remote and contingent an interest in the property or transaction that is the subject matter of this action.

As to the third requirement, quite clear: ly, 47th Street Photo’s ability to protect its interests will, as a practical matter, be impaired if 47th Street Photo is not permitted to intervene. Although apprehension concerning the force of stare decisis will not support intervention in all cases, Oneida Indian Nation v. State of New York, 732 F.2d 261 (2d Cir.1984), its effect under the circumstances presented here, presenting a significant case of apparent first impression, suffices to establish the third element of Brennan. Natural Resources Defense Council, supra, 578 F.2d at 1345, see generally Federal Rule of Civil Procedure 24(a); NYPIRG, supra, 516 F.2d at 350; Spirit v. Teachers Ins. and Annuity Ass’n, 93 F.R.D. 627, 643 (S.D.N.Y.1982).

Finally, as to the fourth element of the Brennan analysis, I conclude that 47th Street Photo has met its burden of establishing that the Government’s representation may be inadequate because 47th Street Photo’s interests, as well as its perspective and expertise, may differ significantly from those of the Government’s. This burden is minimal, Trbovich v. U.M.W., 404 U.S. 528, 538 n. 10, 92 S.Ct. 630, 643 n. 10 (1972); yet, the applicant must at least overcome the presumption of adequate representation that arises when it has the same ultimate objective as a party to an existing suit, Brennan, supra, 579 F.2d at 191, especially if that party is the Government. Environmental Defense Fund, Inc. v. Higginson, 631 F.2d 738, 760 (D.C. Cir.1979). 47th Street Photo has stressed, and the United States does not contest, that it possesses experience and knowledge in a complex area of international trade and business which the Government does not have. Natural Resources Defense Council, supra, 578 F.2d 1341. In addition, 47th Street Photo may be expected to make a more vigorous presentation in favor of the regulation in question, given its significant economic interest in the regulation. NYPIRG, supra. Further, its private interest may differ somewhat from the more public interest oriented motives of the Government. See Vivitar v. United States, supra. 47th Street Photo has also pointed out thát its legal arguments may differ from those of the Government. See generally National Farm Lines v. ICC, 564 F.2d 381 (10th Cir.1977).

Accordingly, 47th Street Photo’s motion for intervention as of right is granted.

K-Mart’s Motion for Permissive Intervention

Under Rule 24(b), a district court may, in its discretion, permit intervention when “an applicant’s claim or defense and the main action have a question of law or fact in common.” In exercising its discretion the district court must principally consider “whether the intervention will unduly delay or prejudice the adjudication of the rights of the original parties.” Additional considerations include the nature and extent of the intervenor’s interests, whether its interests are adequately represented by the other parties, whether the applicant will benefit by intervention, and whether the applicant will significantly contribute to full development of the underlying factual issues in the suit and to the just and equitable adjudication of the legal question presented. Brennan, supra, 579 F.2d at 192-93.

Having considered these factors in the context of the present ease, I conclude that K-Mart’s motion for permissive intervention should be granted. K-Mart’s defenses and the instant action plainly concern a common question of law or fact, the validity of 19 C.F.R. § 133.21(c). In addition, since K-Mart has raised different legal arguments to support the regulation, its interest may not be adequately represented by 47th Street Photo and the Government and may contribute to more complete development of the record. Most importantly, the enormity of K-Mart’s economic stake in the validity of the regulation in question, though too contingent to justify intervention as of right, weighs heavily in favor of permissive intervention.

The foregoing determinations differ from those reached by the Court of International Trade in Vivitar, 585 F.Supp. 1415 (C.I.T. 1984), which, under virtually identical circumstances, denied K-Mart’s application for permissive intervention. Citing “the potential for a vast number of applications for intervention by persons in the position of K-Mart,” id. at 1419, Judge Restani concluded that intervention would unduly delay or prejudice the adjudication of the rights of the original parties. My reasons for concluding to the contrary are twofold. First, to date, only two such parties have come forward in this action. In addition, the fact that two highly interested private parties, as. well as the Government, are prepared to invest their time and resources to affirm the validity of 19 C.F.R. § 133.-21(c) may actually discourage others similarly situated from concluding that it is necessary to make such a commitment to the litigation themselves. Regardless, any future applications by other parties will be evaluated in the light of the current posture of the case, and further intervention may well be inappropriate. Accordingly, K-Mart’s motion for permissive intervention is granted.

Motions for Dismissal or Stay

Primary Jurisdiction. In United States v. Philadelphia National Bank, 374 U.S. 321, 353, 83 S.Ct. 1715, 1736, 10 L.Ed.2d 915 (1963), the United States Supreme Court stated that the doctrine of primary jurisdiction

“requires judicial abstention in cases where protection of the integrity of a regulatory scheme dictates preliminary resort to the agency which administers the scheme.... Court jurisdiction is not thereby ousted, but only postponed.”

In this Circuit primary jurisdiction is said to be based upon “a desire for uniformity of regulation and the need for an initial consideration by a body possessing special expertise in the issue presented.” Board of Education of City School District v. Harris, 622 F.2d 599, 606 (2d Cir.1979). In determining whether to apply the doctrine, the courts have considered (1) whether the question at issue is within the conventional experience of judges or whether it involves technical or policy considerations within the agency’s particular field of expertise, (2) whether the question at issue is peculiarly within the agency’s discretion, (3) whether there exists substantial danger of inconsistent rulings, and (4) whether a prior application to the agency has been made. RCA Global Communications, Inc. v. Western Union Telegraph Co., 521 F.Supp. 998, 1006 (S.D.N.Y.1981), quoting Orange & Rockland Utilities, Inc. v. Howard Oil Co., 416 F.Supp. 460, 466 (S.D.N.Y.1976).

Applying these considerations to the instant case, I find it unnecessary and inappropriate to defer to the Treasury Department’s factfinding expertise because the issue presented is strictly legal and within the expertise of the judiciary. Board of Education of City School District, supra, 622 F.2d at 607. Few, if any, technical or policy concerns of the agency are involved in this case; rather, the dispute is one of statutory construction and consideration of whether § 133.21(c) properly implements Section 526 of the Tariff Act and Section 42 of the Lanham Act as intended by Congress. RCA Global Communications, Inc., supra at 1006. Those few issues of fact that do emerge when considering the issue of gray market imports generally are tangential to the narrow focus of the dispute — the construction of § 526 of the Tariff Act by the Customs Service as set forth in § 133.21(c). Further, the record shows that resort to the agency is also unnecessary because of the Customs Service’s and Treasury Department’s long-standing and oft-expressed general policy. See Olympus Exhibit F.

In sum, then, the issue is not peculiarly within the agency’s discretion and has been before the agency for consideration formally and informally for several years. There is no compelling reason for this Court to defer its jurisdiction and postpone indefinitely consideration of the regulation at issue. I, therefore, decline to dismiss this case pursuant to the doctrine of primary jurisdiction.

Exhaustion of Administrative Remedies. Federal defendants and intervenor-defendants correctly note that exhaustion of prescribed administrative remedies must generally precede resort to the federal judiciary. Myers v. Bethlehem Ship Building Co., 303 U.S. 41, 50-51, 58 S.Ct. 459, 463-64, 82 L.Ed. 638 (1938). The exhaustion doctrine is concerned with the timing of judicial review and provides that a court should resist premature intervention in a dispute. Judicial relief is premature when an agency has not had the opportunity to fully develop factual findings, apply its expertise to new issues, and to exercise its discretionary powers. See McKart v. United States, 395 U.S. 185, 193-94, 89 S.Ct. 1657, 1662-63, 23 L.Ed.2d 194 (1969); Touche Ross, infra, 609 F.2d at 574. This broad rule, however, has been subject to substantial judicial clarification, and its application to any given case “requires an understanding of its purposes” and analysis of the unique circumstances of a particular dispute. Touche Ross, infra at 576 quoting McKart v. United States, supra, 395 U.S. at 193, 89 S.Ct. at 1662. Upon review of the case law in this area, I conclude that exhaustion is not required here.

It is well recognized that several exceptions to the exhaustion doctrine exist, including, inter alia, the rule that the doctrine is inapplicable “when the issues presented to the court revolve around statutory interpretation.” Touche Ross & Co. v. SEC, 609 F.2d 570, 576-77 (2d Cir.1979); TIME D.C. Inc. v. Truck Employees of North Jersey Welfare Fund, 560 F.Supp. 294, 302 (E.D.N.Y.1983). Here, the issue involved is strictly legal, involving neither the agency’s particular expertise nor its factfinding powers. Particularly on point is this Circuit’s ruling in Touche Ross v. SEC, supra. Plaintiff therein sought a declaratory judgment that SEC Rule 2(e) had been promulgated “without any statutory authority” and that plaintiff was being burdened by the agency acting “without authority of law.” 609 F.2d at 573. Defendant, the SEC, moved to dismiss on the ground that plaintiff had failed to exhaust administrative remedies. The court set forth a list of situations in which exhaustion issues may arise, the third being pertinent to this case:

“... and (3) when, as in the particular circumstances of this case, Touche Ross requested this Court to adjudicate the question whether the Commission has the authority to promulgate Rule 2(3) and to proceed thereunder.”

Id. at 574 (emphasis in original). Upon examination of the facts before it, the Touche Ross court concluded that agency expertise and discretion were unnecessary because “the issue is one of purely statutory interpretation.” Id. at 577.

The Touche Ross court held, in relevant part, that “because there is no need for further agency action to enable us to reach the merits ... appellants need not exhaust the administrative remedies.” Id. at 574. The Court of Appeals has held exhaustion to be unnecessary in other cases where the underlying purposes of the doctrine as outlined by the Supreme Court in McKart, supra, 395 U.S. at 193-94, 89 S.Ct. at 1662-63, are satisfied. E.g., Finnerty v. Cowen, 508 F.2d 979 (2d Cir.1974); Daipulse Corp. v. Food & Drug Administration, 500 F.2d 75 (2d Cir.1974); see also TIME D.C. Inc., supra.

The instant case presents a situation virtually identical to that existing in Touche Ross. Plaintiff herein challenges the validity of an agency regulation, § 133.21(c), and the agency’s statutory authority to issue it. Determination of that question is properly vested in the federal judiciary because there is no difficulty in obtaining and identifying the relevant facts through analysis of the legislative and administrative history.

Further, exhaustion of administrative remedies is unnecessary for other reasons. Exhaustion is unnecessary where administrative remedies would be futile. Here, the Treasury Department has already decided not to modify the regulation. See Olympus Exhibit F; see Diapulse Corp., supra. The fact that plaintiff may petition the agency for amendment or rescission of the regulation is not determinative. See Consumers Union v. Miller, 84 F.R.D. 240, 244 (D.D.C.1979). While the May 21, 1984 notice soliciting data regarding the economic effects of gray market imports remains outstanding, plaintiff should not be barred from judicial review of the legality of the regulation at issue since the legality of the regulation does not depend upon its economic impact.

Finally, defendant’s reliance on Seafarers International Union of North America, AFL-CIO v. United States Coast Guard, 736 F.2d 19 (2d Cir.1984), is misplaced. The challenge in Seafarers was to agency inaction and failure to announce a rule, whereas plaintiff herein challenges as ultra vires a specific regulation being enforced. The issues in Seafarers were largely factual while the dispute in the present case is purely legal. Finally, in Seafarers, the defendant Coast Guard was concurrently involved in a reexamination of the regulations concerned and had instituted a comprehensive rulemaking. The Court, therefore, declined to “intervene in this ongoing administrative process on the basis of abstract and broad allega-tions_” Id. at 29. In contrast, the present case involves no such substantial ongoing agency proceedings and no comparable set of factual issues appropriate for initial consideration by the agency possessing particular expertise in such matters.

For all the foregoing reasons, federal defendants’ and defendant-intervenors’ motions to dismiss or stay this action on grounds of primary jurisdiction or failure to exhaust administrative remedies are denied.

Motions for Stay or Transfer of Venue

Because COPIAT and Vivitar have been decided during the pendency of these motions, the issues raised by defendants’ motions for a stay or transfer of venue are moot.

Motion to Dismiss for Failure to State a Claim

Defendant-intervenor 47th Street Photo contends that plaintiff’s complaint fails to state a claim under Section 42 of the Lan-ham Act, 15 U.S.C. § 1124, which provides in pertinent part that “no article of imported merchandise ... which shall copy of simulate a trademark registered in accordance with the provisions of this chapter ... shall be admitted to entry at any customhouse of the United States.... ” Plaintiff contends that this statute affords it protection against the importation by third parties of goods bearing authentic Olympus trademarks.

Section 42 of the Lanham Act is, with slight modifications, a re-enactment of Section 27 of the Trademark Act of 1905. 33 Stat. 724. It is agreed that up until A. Bourjois & Co. v. Katzel, 260 U.S. 689, 43 S.Ct. 244, 67 L.Ed. 464 (1923), goods possessing a genuine foreign trademark could not infringe a domestic trademark. E.g., Fred B. Gretsch Mfg. Co. v. Schoening, 238 F. 780 (2d Cir.1916); Hunyadi Janos Corp. v. Stoeger, 285 F. 861 (2d Cir.1922). In Katzel, the Second Circuit held that an American purchaser, by arms-length transaction, of exclusive domestic trademark rights could not prevent the foreign seller of the trademark rights from continuing to sell to others the foreign made goods bearing a lawful French trademark which then came into the United States after the transfer of trademark contract, because the goods coming in were not counterfeit marks or spurious goods and, therefore, did not “copy or simulate.”

While the Katzel decision was pending before the United States Supreme Court, Congress, after limited debate, enacted Section 526 of the Tariff Act, 19 U.S.C. § 1526. In 1923, the Supreme Court reversed the Second Circuit opinion in Katzel and held that the defendant could be enjoined from selling imported merchandise which was the authentic product of the French manufacturer and bore its trademark. This decision has been interpreted in two ways. One reading, urged herein by plaintiff, is that importation was prohibited under trademark law because such goods imported by anyone other than the American trademark registrant violated the holder’s property right in that trademark. The other reading, asserted herein by defendants, concludes that the Katzel holding was premised largely on the equities of the facts in the case — specifically, the unfairness of permitting the foreign manufacturer, which had sold its trademark rights to another, to subsequently have its goods imported into the United States in direct competition with the independent American purchaser of the trademark.

A. Bourjois & Co. v. Aldridge, 263 U.S. 675, 44 S.Ct. 4, 68 L.Ed. 501 (1923), presented the Supreme Court with a factual situation similar to that in Katzel. The Second Circuit certified two questions to the Supreme Court: “(1) Is the sale in the United States of Westheimer’s Manon Lescaut powder an infringement of plaintiffs registered trademark? [and] (2) is the collector, by section 27 of the Trademark law, required to exclude from entry genuine Ma-non Lescaut powder so as aforesaid made in France?” A. Bourjois & Co. v. Aldridge, 293 F. 1013, 1014 (2nd Cir.1922). In its per curiam decision the Supreme Court responded: “The two questions certified by the Circuit Court of Appeals for the Second Circuit are answered in the affirmative, upon the authority of Bourjois & Co. v. Katzel, 260 U.S. 689, [43 S.Ct. 244, 67 L.Ed. 464] the defendant not objecting.” Id. at 626, 44 S.Ct. at 4. Aldridge, while directly applying Section 27, the predecessor to Section 42 of the Lanham Act, is, therefore, also subject to two interpretations based upon the aforementioned alternative readings of Katzel.

The District Court for the District of Columbia, by Judge Johnson, concluded in COPIAT that Katzel and Aldridge were narrow holdings tied to the particular facts of those cases. Having made that finding, Judge Johnson held that, absent the Katzel facts, Section 42 of the Lanham Act must be read to apply only to merchandise bearing counterfeit or spurious trademarks that truly “copy or simulate” genuine trademarks. The Court of International Trade, by Judge Restani, did not address Section 42 of the Lanham Act in Vivitar, having decided in an earlier opinion that it lacked subject matter jurisdiction to do so. Vivi-tar, supra. However, in concluding that Section 526(a) of the Tariff Act could reasonably be read to authorize Customs Service regulation 133.21(c), Judge Restani also apparently read Katzel and Aldridge in the narrow manner urged herein by defendants. In Osawa & Co. v. B & H Photo, 589 F.Supp. 1163 (S.D.N.Y.1984), Judge Leval construed Katzel and Aldridge broadly and concluded that Section 42 of the Lanham Act does govern genuine foreign merchandise imported into the United States. See also Bell & Howell: Mamiya Co. v. Mosel Supply Co., 548 F.Supp. 1063 (E.D.N.Y.1982) (Neaher, J.), rev’d and remanded on other grounds, 719 F.2d 42 (2d Cir.1983). Finally, the United States International Trade Commission (“ITC”) in In re Certain Alkaline Batteries (Duracell), No. 337-TA-165 (I.T.C. Nov. 1984), also construed Section 42 to exclude genuine goods that bear a foreign trademark from entry into the United States if that trademark copies or simulates the American trademark holder’s mark. The 3-2 decision of the ITC was disapproved by President Reagan on January 4, 1985.

As is clear, judicial interpretation of the scope of Katzel, Aldridge and Section 42 is split. It appears to this Court that Katzel held that the independent owner of the registered trademark had the right to enjoin anyone else from selling the same product under that mark in the United States. In Katzel, the Supreme Court emphasized the equities, citing no statute or precedent. Justice Holmes wrote that it would be “most unfair” to permit the French trademark seller to arrange to have its goods marketed in the United States by someone other than the American owner “for the purpose of evading the effect of the transfer.” 260 U.S. at 691, 43 S.Ct. at 245. Such a “contrivance,” he said, “must fail.” Id. For the same equitable reasons, Justice Holmes said that buyers from the French producer, even if not engaged in any conspiracy, were prohibited from violating the trademark rights that had been purchased by an American concern that had invested substantial sums in developing its own independent public image.

This language makes clear, when read in conjunction with Section 42 of the Lanham Act, that a determination as to whether genuine foreign merchandise infringes a domestic trademark holder’s mark cannot be made at the customhouse at the time of importation. If Section 42 regarding goods that “copy or simulate” a domestic trademark were interpreted to apply to genuine foreign merchandise such as that at issue in this case, Customs’ officials would be placed in the position of having to determine at the time of border crossing whether the domestic trademark holder had developed an independent public image in this country. Customs’ officials, in effect, would be given the power to determine infringement at the border, before the issue of domestic good will was clarified. That determination of copying and confusion is appropriately resolved through litigation in the courts where a full factual record can be developed. Accordingly, I conclude that plaintiff’s Section 42 cause of action fails to state a claim for relief and must be dismissed.

Cross-Motions for Summary Judgment

As a preliminary matter, it is necessary to address defendant-intervenors’ assertion that material factual issues exist requiring trial which preclude plaintiff from obtaining summary judgment. Such claimed factual disputes include plaintiff’s alleged injuries, plaintiff’s allegations that gray market imports are “free-riding” on its good will established through an expensive commitment to the Olympus-brand by national advertising, warranty and service programs, and the extent to which Olympus-brand goods are imported, without authorization and sold at a significantly lower wholesale price. These arguments, however, are unpersuasive in the context of the instant action for declaratory and injunc-tive relief. The allegedly disputed facts simply are not material issues relevant to this action under § 526 to invalidate Customs Service regulation § 133.21(c).

Of course, even the legal issue as to the proper construction of § 526 and the reasonableness of regulation § 133.21(c) requires identification and organization of the facts concerning the legislative and judicial history of § 526 and the administrative history regarding the promulgation and application of § 133.21(e). Such inquiry is, however, part of the determination of the law, not a matter of factual dispute. Accordingly, the parties to this action, including intervenors, have briefed in exhaustive detail the history of the statute and regulation in controversy. Although the parties have drawn different conclusions as to the significance or meaning of various legislative, judicial, and agency actions, none of the parties has challenged the basic historical chronology and the factual background of the statute and regulation at issue. Because this is so, the dispute is ripe for judicial interpretation and summary disposition.

The issue for determination, then, is whether § 113.21(c) is inconsistent with § 526 of the Tariff Act and, therefore, ultra vires. Plaintiff asserts that § 526 on its face permits Olympus to exclude all merchandise bearing the Olympus trademark but distributed by anyone other than the domestic mark holder. Plaintiff contends that § 133.21(c) effectively nullifies the protection that it claims Congress intended § 526 to provide United States trademark owners, as supported by the legislative and administrative history of the statute. Defendants contend that the broad language of § 526 cannot be applied without consideration of the intended purpose of the statute. Resorting to the same legislative history cited by plaintiff, defendants conclude the Congress enacted § 526 as a special, limited remedy aimed at protecting American businesses from perceived unfair competition occurring in Katzel-type factual circumstances. Further, defendants argue that the administrative practice and congressional action or inaction subsequent to enactment of § 526 support their narrower construction of the statute.

Section 526 read literally would indeed give plaintiff the right to exclude all goods bearing the Olympus trademark. However, as Judge Patricia Wald of the District of Columbia Court of Appeals has observed while discussing the Supreme Court’s canons of statutory construction:

“[Although the Court still refers to the ‘plain meaning’ rule, the rule has effectively been laid to rest. No occasion for statutory construction now exists when the Court will not look at the legislative history....”

Wald, Some Observations on the Use of Legislative History in the 1981 Supreme Court Term, 68 Iowa L.Rev. 195 (1983). It is clear, then, that the Court may examine “the circumstances surrounding enactment” of § 526 including “the evil which it was designed to remedy ... contemporaneous events, [and] the situation ... as it was pressed upon the attention of the legislative body.” Church of the Holy Trinity v. U.S., 143 U.S. 457, 459, 463, 12 S.Ct. 511, 512-513, 36 L.Ed. 226. No theory of judicial review requires the Court to ignore available facts that may aid it in establishing legislative intent. Zenith Radio Corporation v. United States, 437 U.S. 443, 98 S.Ct. 2441, 57 L.Ed.2d 337 (1978). Furthermore, in construing § 526, the administrative interpretation of the Customs Service charged with administering the statute is entitled to substantial deference. Id. at 450, 98 S.Ct. at 2445.

Having undertaken such review of the legislative history of and administrative practice with respect to § 526, I conclude that the statute was enacted in response to the Second Circuit’s Katzel decision and had a limited purpose. The broad interpretation that plaintiff urges upon the Court is contrary to the reading that is supported by the legislative history, longstanding administrative practice by the Customs Service, relevant judicial decisions, and legislative inaction or acquiescence of all of the above during the decades following enactment of § 526. Because the legislative history has been thoroughly set forth in Judge Restani’s opinion in Vivitar, there is no need to reiterate it herein. Further, Judge Restani and Judge Johnson in Vivi-tar and COPIAT, respectively, have exhaustively discussed the administrative practice of the Customs Service and congressional ratification thereof, again obviating the need for a similar recitation of that history by this Court. The Federal Circuit, however, in affirming Vivitar has stated its majority opinion in lengthy dicta, that § 526 is of broader scope than the regulation. The majority concluded that § 526 should not be given the limited construction urged by defendants herein. In reaching that conclusion, the majority rejected the same arguments presented by defendants herein in favor of a limited construction based upon the legislative history, administrative interpretation, and implied congressional ratification of § 526. Although the Federal Circuit’s opinion is thorough and thoughtful, its conclusion as to the scope of the statute is less persuasive to this Court than that reached in Vivitar and COPIAT.

Accordingly, the motions of K-Mart and 47th Street Photo for leave to intervene are granted; the motions of the federal defendants and defendant-intervenors for dismissal based on the doctrines of primary jurisdiction or exhaustion and for stay or transfer of venue are denied; the motions of 47th Street Photo for dismissal of the Section 42 claim is granted; plaintiff’s motion for summary judgment is denied; and the cross-motions of all defendants for summary judgment on the § 526 claim are granted.

The clerk is directed to enter judgment dismissing the complaint and to mail a copy of the within to all parties.

SO ORDERED.

      . K-Mart alleges and the parties don't dispute that it purchases $250-300 million annually of gray market goods.

      . The court in Vivitar granted 47th Street Photo’s motion for intervention as of right and denied K-Mart’s application for similar relief.

      . During a status conference on June 11, 1984, counsel for the United States, in response to a question from the Court, stated that "we don't contemplate for [sic] remand to the agency because the agency at this stage believes that its regulation is valid_’’ Tr. at p. 15.

      . I do not reach a conclusion as to whether plaintiff has formally exhausted all potential avenues of agency review. However, as noted earlier, it appears that plaintiffs position has long been before the agency for consideration, and the agency has chosen, for its own policy, administrative or political reasons, not to issue a conclusive determination.

      . As Judge Davis stated in his concurring opinion criticizing the majority’s "wholly inappropriate ... dicta” in Vivitar:

      “All that we hold in this case is that the Customs regulation is now valid as a Customs enforcement regulation.”
      761 F.2d at 1572.