author: LOUIS H. POLLAK, District Judge.

text:
    MAX DAETWYLER CORP. and MDC Max Daetwyler, A.G. v. INPUT GRAPHICS, INC., Benton Graphics, Inc., Joseph Halbherr and Rufus Benton.
    Civ. A. No. 81-1140.
    United States District Court, E.D. Pennsylvania.
    May 20, 1985.

      Manny D. Pokotilow, Caesar, Rivise, Bernstein & Cohen, Philadelphia, Pa., for plaintiffs.
    Peter T. Cobrin, Stempler & Cobrin, P.C., New York City, Robert C. Podwil, Wolf, Block, Schorr & Solis-Cohen, Philadelphia, Pa., for Benton Graphics and Rufus Benton.
    Karl Spivak, Steele, Gould & Fried, Philadelphia, Pa., for Input Graphics and Joseph Halbherr.
   OPINION

LOUIS H. POLLAK, District Judge.

Plaintiffs brought this patent infringement and unfair competition suit in March, 1981. They allege that defendants have manufactured and sold a doctor blade (“Benton blade”) which infringes a patent held by plaintiff (“Daetwyler blade”) and that defendants have falsely represented the quality and nature of their doctor blade in violation of the Lanham Act. 15 U.S.C. § 1125(a). A doctor blade, the product at the center of this dispute, is a blade-shaped device for wiping excess ink from the printing surface used in the photogravure printing process. That product and the procedural development of this litigation are discussed at greater length in the earlier opinions in this case at 541 F.Supp. 115 (1982), 545 F.Supp. 165 (1982), and 583 F.Supp. 446 (1984).

Currently pending are (1) defendants’ renewed motion for summary judgment on plaintiffs’ Lanham Act claim; (2) defendants’ motion to sever the Lanham Act claim from the patent infringement claim and patent invalidity counterclaim for purposes of trial; and (3) defendants’ motion in limine to preclude plaintiffs from claiming the benefit of the filing dates of earlier applications for the patent at issue in this suit. I will consider these motions in sequence.

1. Motion for summary judgment

In 1982, I denied defendants’ motion for summary judgment on the Lanham Act claim. 545 F.Supp. 165. The opinion discussed the five elements which must be shown to establish a Lanham Act violation. They are: “(1) that the defendant has made false or misleading statements as to his own product; (2) that there is actual deception or at least a tendency to deceive a substantial portion of the intended audience; (3) that the deception is material in that it is likely to influence purchasing decisions; (4) that the advertised goods travelled in interstate commerce; and (5) that there is a likelihood of injury to the plaintiff in terms of declining sales, loss of good will, etc. See Ragold, Inc. v. Ferrero, U.S.A., Inc., 506 F.Supp. 117, 124 (N.D.Ill.1980); see also American Home Prods. Corp. v. Johnson & Johnson, 577 F.2d 160, 165-66 (2d Cir.1978).” 545 F.Supp. at 171. The current motion contends that summary judgment is now appropriate on the Lanham Act claim since the record establishes that plaintiffs lack evidence to establish two of the necessary elements of that claim — that consumers were or could have been deceived by defendants’ representations and that the representations allegedly made by defendants were false.

a) consumer deception

Defendants’ first argument in support of the motion for summary judgment is that plaintiffs do not have the evidence necessary to establish that the alleged misrepresentations actually deceived or had a tendency to deceive a substantial portion of the intended audience. The primary basis for this argument is defendants’ assertion that plaintiffs have not performed a consumer survey on the question of consumer deception. Defendants assert that such a survey is essential to make out a Lanham Act violation. Plaintiffs do not dispute that they have no consumer survey evidence. They contend, however, that such evidence is unnecessary since plaintiffs need only show a tendency to deceive in order to obtain injunctive relief.

Most of the courts which have considered what must be proven to make out this element of a Lanham Act claim have held that injunctive relief may be obtained by showing only that the defendant’s representations about its product have a tendency to deceive consumers while recovery of damages requires proof of actual consumer deception. E.g., Schutt Mfg. Co. v. Riddell Inc., 673 F.2d 202 (7th Cir.1982); Black Hills Jewelry Mfg. Co. v. Gold Rush Inc., 633 F.2d 746, 753-54 (8th Cir.1980); James Burrough Ltd. v. Sign of the Beefeater, Inc., 572 F.2d 574, 578 (7th Cir.1978); Hesmer Foods Inc. v. Campbell Soup Co., 346 F.2d 356 (7th Cir.1965), cert. denied, 382 U.S. 839, 86 S.Ct. 89, 15 L.Ed.2d 81 (1965); Parkway Baking Co. v. Freihofer Baking Co., 255 F.2d 641, 648-49 (3d Cir.1958); Mennen Co. v. Gillette Co., 565 F.Supp. 648 (S.D.N.Y.1983) aff'd, 742 F.2d 1437 (2d Cir.1984); Walker-Davis Publications, Inc. v. Penton/IPC, Inc., 509 F.Supp. 430 (E.D.Pa.1981); Toro Co. v. Textron, Inc., 499 F.Supp. 241 (D.Del.1980); Pennwalt Corp. v. Plough, Inc., 85 F.R.D. 257 (D.Del.1979); John Wright, Inc. v. Casper Corp., 419 F.Supp. 292 (1976) aff'd in part, rev’d in part, 587 F.2d 602 (3d Cir.1978); Skil Corp. v. Rockwell International Corp., 375 F.Supp. 777 (S.D.N.Y.1974); Ames Publishing Co. v. Walker-Davis Publications, Inc., 372 F.Supp. 1 (E.D.Pa.1974). Therefore, there may be a basis upon which a plaintiff may obtain injunctive relief without presenting any evidence regarding the reactions of consumers to the representations made by the defendant.

Plaintiffs also assert that they may recover damages without establishing actual consumer deception. In support of that position, plaintiffs cite American Home Products Corp. v. Johnson & Johnson, 577 F.2d 160, 165 (2d Cir.1978), which quoted Judge Lasker's statement in American Brands, Inc. v. R.J. Reynolds Co., 413 F.Supp. at 1356 (S.D.N.Y.1976), that “[i]f a statement is actually false, relief can be granted on the court’s own findings without reference to the reaction of the buyer or consumer of the product.” Plaintiffs argue that they will present evidence that the representations made by defendants with regard to their product are actually false. Therefore, plaintiffs contend, it is not necessary for them to show more than a tendency to deceive to obtain damages.

Despite the apparent breadth of the language cited by plaintiffs on this point, I have not discovered any decisions which have applied this principle to grant damages to a plaintiff who had failed to show actual consumer deception. Furthermore, although this issue has not been discussed recently by the Court of Appeals for the Third Circuit, in Parkway Baking Co. v. Freihofer Baking Co., 255 F.2d 641, 648 (3d Cir.1958), that court concluded that:

____ a plaintiff in order to make out a cause of action for damages under Section 43(a) [of the Lanham Act] must show not only that the defendant’s advertisement is false but also that this falsification actually deceives a portion of the buying public____ This does not place upon the plaintiff a burden of poving detailed individualization of loss of sales. Such proof goes to the quantum of damages arid not to the very right to recover. However, there must be a showing of some customer reliance on the false advertisement.

I conclude, however, that it is not necessary to determine at this time whether plaintiffs could recover damages without proof of actual deception in this case. This issue is presented in the form of a motion for summary judgment. In support of that motion defendants have presented no evidence that customers were not actually deceived by defendants’ representations. Without such evidence presented in support of the motion, plaintiffs are under no obligation to present countervailing evidence that actual consumer deception has occurred and can rely solely upon their pleadings. Thus, since plaintiffs have alleged a claim to damages under the Lanham Act due to alleged misrepresentations by defendants, they have sufficiently pleaded their claim of deception for the Lanham Act claim to survive the current motion.

Defendants argue, however, that to establish actual deception, it is essential for plaintiffs to present a consumer survey. If defendants are correct on this evidentiary requirement, and if actual deception is a necessary element of a Lanham Act damages claim, then summary judgment would be appropriate despite defendants’ failure to present evidence of a lack of actual deception. In other words, if plaintiffs are required to present a consumer survey, defendants may be entitled to summary judgment if defendants can establish that no survey has been prepared although discovery has closed.

In support of their position that a consumer survey is a necessary item of evidence in a Lanham Act suit, defendants point to American Brands, Inc. v. R.J. Reynolds Tobacco Co., 413 F.Supp. 1352, 1356-57 (S.D.N.Y.1976). In that case, the court said:

We are dealing not with statements which are literally or grammatically untrue; and the tendency to deceive alleged here does not arise out of possible confusion of one product with another. Rather, we are asked to determine whether a statement acknowledged to be literally true and grammatically correct nevertheless has a tendency to mislead, confuse or deceive. As to such a proposition “the public’s reaction to [the] advertisement will be the starting point in any discussion of the likelihood of deception____ If an advertisement is designed to impress ... customers, ... the reaction of [that] group[s] will be determinative.” 1 Call-man: Unfair Competition, Trademarks & Monopolies at § 19.2(a)(1) (3rd ed. 1967). A court may, of course, construe and parse the language of the advertisement. It may have personal reactions as to the defensibility or indefensibility of the deliberately manipulated words. It may conclude that the language is far from candid and would never pass muster under tests otherwise applied — for example, the Securities Acts’ injunction that “thou shalt disclose”; but the court’s reaction is at best not determinative and at worst irrelevant. The question in such cases is — what does the person to whom the advertisement is addressed find to be the message?: ____The fatal defect of both the American and Reynolds cases is that in neither instance has any evidence of substance been submitted which establishes the “determinative” reaction of the consumer to the respective advertisements. The sole evidence submitted by American as to customer reaction to the NOW advertisements was that of David Doer, its Section Sales Manager in the Pennsylvania, New Jersey and Delaware territories, who testified to three or four conversations with NOW buyers who appear to have been confused by NOW advertisements. Putting aside the fact that such statements were reported on a hearsay basis, one can hardly regard the report of three or four casual conversations with smokers as representative of the views of the millions of smokers by whom NOW’s advertisements are read.

This opinion does not state that a consumer survey is necessary, it merely states that in certain types of Lanham Act cases it is necessary to present evidence which establishes the reaction of a significant segment of the customer base to the alleged misrepresentations. In addition, under the facts of that case, it may be that a consumer survey would have been the only effective method by which to gain this evidence. However, in that suit, unlike the present suit, the product in question — cigarettes — was used by millions of consumers. Under such circumstances, a consumer survey may be the only method for obtaining a significant enough sample to be representative of the full population of the product’s consumers. But the class of consumers of doctor blades is considerably smaller. Therefore, it may be possible to satisfy a factfinder that consumers have been deceived or are likely to be deceived by means other than a survey.

Although there are numerous decisions in which courts have considered the persuasiveness or admissibility of consumer surveys, I have discovered none which has mandated the use of such evidence. In fact, in Schutt Manufacturing Co. v. Riddell, Inc., 673 F.2d 202, 207 (7th Cir.1982), the court concluded that:

[a] party seeking such relief [money damages] is required to show not only the likelihood of such confusion, but must demonstrate that it has been damaged by actual consumer reliance on the misleading statements____ Such reliance may be shown not only by evidence of actual diversion of sales, but also by such proof of actual customer deception as surveys, see, e.g., Burrough II at 578, or testimony of a dealer, distributor, or customer on the actual deception issue, ...

This suggests that evidence other than a consumer survey may be relevant and sufficient to show consumer confusion. Accordingly, I conclude that consumer surveys, although useful to the finder of fact in many Lanham Act cases, are not required as a matter of law to establish consumer deception. Therefore, I cannot grant summary judgment on the Lanham Act count of plaintiffs’ twice amended complaint on the ground that plaintiffs cannot establish actual deception or a tendency to deceive a substantial portion of the intended audience.

b) whether the representation is false or misleading

Defendants’ motion also reasserts an argument raised in their earlier motion for summary judgment on the Lanham Act claim — that the representations which they made about their doctor blade are not false. To understand this contention, it is first necessary to understand the particular representations made by defendants which plaintiffs allege were false or misleading.

The Lanham Act claim is found in Count II of plaintiffs’ “twice amended complaint” (hereinafter “second amended complaint"). The relevant allegations are in paragraphs 11 and 12.

11. On information and belief the Defendants have falsely represented that the doctor blade distributed by them under the name “The Benton Blade” is “even more durable than other doctor blades made of the same high-quality imported steel.”
12. On information and belief the Defendants have falsely advertised the quality and nature of the Defendants’ doctor blades in order to sell their own doctor blades which are an infringement of the Plaintiffs’ patent.

Defendants have focused their motion on the alleged misrepresentation discussed in paragraph 11 — that the Benton blade is more durable than other doctor blades made of the same high-quality imported steel. At the time of the last motion directed to this issue, defendants produced the affidavit of Rufus Benton which stated that the Benton blade’s design allowed it to be used for 2 million printing cylinder revolutions before replacement as compared to the .5 million revolution life-span of the Daetwyler blade. The Benton affidavit was opposed by the affidavit of Peter Daetwyler which stated that the term “durable,” as used with regard to doctor blades, means not only the length of time that a blade can be used but also the length of time over which the blade produces hijgh quality printing. The affiant then stated that he had seen Benton blades in use and had been told about use of those blades by others. Daetwyler went on to say that he had seen Benton blades which had stopped producing high quality copies more rapidly than Daetwyler blades would have in similar circumstances. After considering these submissions, I concluded that the Daetwyler affidavit raised a genuine issue of material fact as to the accuracy of the representation that the Benton blade was more durable.

Defendants now contend that the assertions made in the Daetwyler affidavit are no longer valid in light of the statements made by Peter Daetwyler at his deposition. During that deposition, Peter Daetwyler was asked about the circumstances under which he had seen Benton blades which had not produced high quality printing for as long as Daetwyler blades. That testimony shows that the only time at which Mr. Daetwyler could remember having seen a Benton blade in operation, he had seen it producing acceptable quality. All of the other situations which Mr. Daetwyler could recall in which he was aware that the Benton blade was not producing high quality copies for as long as a Daetwyler blade were circumstances in which Mr. Daetwyler’s knowledge was gained second-hand from a customer.

Since the same knowledge which underlay the affidavit was the basis for the discussion of these issues during the deposition, it is apparent that the recitations in Mr. Daetwyler’s affidavit regarding the relative abilities of Daetwyler and Benton blades to produce high quality printing were based upon hearsay. However, affidavits which support or oppose a motion for summary judgment are only cognizable to the extent they relate the personal knowledge of the affiant. Fed.R.Civ.Pro. 56(e). Although it was possible to infer from the affidavit at the time it was submitted that the statements made therein regarding the relative durabilities of Benton and Daetwyler blades were made on personal knowledge, the deposition testimony of Peter Daetwyler has removed that possible inference. Thus, the only statement in the Daetwyler affidavit based upon personal knowledge which opposes the representation of the Benton affidavit regarding the relative durabilities of the two blades is the statement that durability is not merely a matter of the number of revolutions over which a blade can be used but the number of revolutions over which the blade produces high quality printing.

This statement does not refute the factual representation made in the Benton affidavit that Benton blades need only be replaced after 1.5 to 2 million revolutions of the cylinder while the Daetwyler patent states that plaintiffs’ blade will last for .5 million revolutions. The statement in the Daetwyler affidavit suggests that it may be possible to produce evidence to the effect that the Benton blade can only product high quality printing during a small portion of the 1.5 to 2 million revolutions over which it is possible to use that blade. However, that evidence or other evidence that, in practice, the Benton blade has not produced high quality copies for as long as the Daetwyler blade is not present in the record on this motion or the earlier motions filed in this action.

Plaintiffs’ response to the present motion states that plaintiffs intend to produce at least one printer to testify who will say that in his experience the Benton blade has been incapable of producing high quality printing for as long as a Daetwyler blade. However, when the party seeking summary judgment presents cognizable evidence such as the Benton affidavit which refutes a particular element of the plaintiff’s claim, the plaintiff must shoulder the burden of producing countervailing evidence and cannot rely upon the pleadings or upon representations as to what evidence will be produced at trial.

Because plaintiff has not provided cognizable evidence to refute defendants’ affidavit regarding the relative durabilities of the Benton and Daetwyler blades, on the basis of the present record I must conclude as a matter of law that there is no genuine issue of material fact on one of the essential elements of plaintiffs’ Lanham Act claim — that defendants’ representation regarding their product was false — and grant defendants’ motion for summary judgment on the Lanham Act claim. But in light of plaintiffs’ submission that they have witnesses who will state, on the basis of personal experience, that defendants’ blade is not more durable than plaintiffs’ blade, I will allow plaintiffs fourteen days in which to present evidence in opposition to defendants’ affidavit on the question of durability. If no such countervailing evidence is produced in that time period, I will enter an order granting defendants’ motion for summary judgment with regard to Count II. If plaintiffs make such a submission, defendants will be allowed an opportunity to file a responsive memorandum before I determine whether plaintiff’s submission is sufficient to warrant denial of the summary judgment motion.

In opposition to the motion for summary judgment, plaintiffs also argue that the alleged misrepresentation discussed in paragraph 11 of the second amended complaint is not the only misrepresentation which supports the Lanham Act claim. Plaintiffs state that, in addition to the claim that the Benton blade is more durable than other doctor blades made of similar quality steel, defendants have misrepresented the configuration of their blade to make it appear that the defendants’ blade is of a design similar to that of plaintiffs’ blade.

No such claim is clearly set forth in the second amended complaint. Paragraph 12 states that defendants have falsely advertised the “quality and nature” of their doctor blade but provides no specifics. The only allegedly false representation particularized in the second amended complaint is that regarding the durability of the Benton blade in paragraph 11.

Although Federal Rule of Civil Procedure 8 requires a party to plead only a “short and plain statement of the claim,” Rule 9 requires that fraud and mistake be pleaded with greater specificity. The Lanham Act claim in the present case is not a pure “fraud” claim and, thus, need not satisfy all of the pleading requirements which have been imposed under Rule 9. But the policies which underlie Rule 9’s requirement that the nature of an alleged misrepresentation be pleaded with specificity are equally applicable to the type of misrepresentation claims presented in plaintiffs’ Lanham Act claim. In litigation in which one party is charged with making false statements, it is important that the party charged be provided with sufficiently detailed allegations regarding the nature of the alleged falsehoods to allow him to make a proper defense.

I conclude that Count II’s assertion that defendants have misrepresented the “quality and nature” of the Benton blade cannot be read as an allegation that defendants misrepresented the configuration of their blade to make it appear that the blade was shaped similarly to plaintiffs’ blade. In light of that conclusion, I have no reason to consider whether defendants’ motion for summary judgment on the Lanham Act claim would be successful were such a claim presented in Count II.

2. Motion to sever Count II from Count I and from the patent invalidity counterclaim

Defendants have also moved for severance of the Lanham Act claim in Count II from the patent infringement claim in Count I and the patent invalidity counterclaim. It may be that this motion will be mooted if plaintiffs either choose to make no further submissions in opposition to the summary judgment motion or provide evidence which is insufficient to establish the existence of a genuine issue of material fact. However, assuming arguendo that a Lanham Act claim will be part of this litigation at the time of trial, I will consider defendants’ motion to sever.

Federal Rule of Civil Procedure 42(b) allows a court to sever claims or issues for purposes of trial if such a severance would be in furtherance of convenience or would avoid prejudice. Severance is also appropriate when it would be conducive to expedition and economy.

Defendants’ motion asserts that severance would avoid prejudice to defendants that likely would result from requiring a single jury to evaluate the complicated patent claims at the same time they must consider the Lanham Act allegations. Defendant does not suggest that such a severance would further the other interests considered under Rule 42(b) such as expedition, economy, and convenience.

Professor Moore, in his federal practice treatise, has noted that:

Only one of Rule 42(b)’s conditions has to be met for the court to order a separate trial____ Nevertheless, a single trial generally tends to lessen the delay, expense and inconvenience to all concerned, and the courts have emphasized that separate trials should not be ordered unless such a disposition is clearly necessary. While normally the party moving for a separate trial must show that he will be prejudiced if a separate trial is not granted, the matter rests in the discretion of the trial judge.

5 Moore’s Federal Practice ¶ 42.03[1] at 42-36 to -41 (1985) (footnotes omitted).

In the present case, I have no basis for concluding that the interests of economy, convenience or expedition would be served by severing the trial of the patent and Lanham Act claims. In addition, although the union of patent and Lanham Act claims in the complaint will necessarily require the jury to consider two very distinct areas of law, I see no reason to conclude that the jury would not be able properly to evaluate the evidence presented on each legal claim in light of the instructions provided to them. Because defendants have not established a likelihood of prejudice to them from joint trial of these claims, I will deny the motion to sever.

3. Motion in limine to preclude plaintiffs from claiming the benefit of the filing date of any of the patent applications filed prior to the application which was approved

Count I of the second amended complaint alleges patent infringement; defendants have asserted a counterclaim of patent invalidity. These claims relate to the patent held by plaintiffs for the Daetwyler doctor blade. That patent was issued on January 22, 1980. The last application filed prior to the issuance of the patent was Application Number 653,429 filed on January 29, 1976. That application was a continuation-in-part application of Application Number 514,485 filed on October 15, 1974 which was a continuation-in-part of Application Number 329,070 filed on February 2, 1973.

Defendants assert in their motion in limine that the patent should not be deemed to carry the filing dates of the 1974 or 1973 applications but rather that it may carry only the 1976 filing date. Plaintiffs respond that defendants are using this motion to establish the groundwork for a later motion for summary judgment. Plaintiffs contend that if they are not entitled to the filing dates of the earlier applications, the public use of the invention disclosed in the patent between 1974 and 1976 will invalidate the patent. Therefore, plaintiffs argue, if defendants succeed in precluding plaintiffs from claiming the earlier filing dates, defendants will undoubtedly succeed in a future motion for summary judgment directed to the public use issue.

Whether a patent gains the benefit of the filing date of an application filed prior to the application which directly preceded the issuance of the patent depends upon whether the requirements of section 120 of Title 35 are met. That section states:

An application for patent for an invention disclosed in the manner provided by the first paragraph of section 112 of this title in an application previously filed in the United States, ..., which is filed by an inventor or inventors named in the previously filed application shall have the same effect, as to such invention, as though filed on the date of the prior application, if filed before the patenting or abandonment of or termination of proceedings on the first application or on an application similarly entitled to the benefit of the filing date of the first application and if it contains or is amended to contain a specific reference to the earlier filed application.

In the present motion, defendants do not deny (1) that in 1973 and 1974 applications were filed by the inventor named in the 1976 applications, (2) that the continuation-in-part applications were filed prior to the patenting, abandonment, or termination of proceedings on the earlier applications, and (3) that the later applications contained specific references to the earlier applications. The sole issue raised by the present motion is whether the earlier applications disclosed the invention in the manner provided by section 112. The pertinent portion of section 112 states:

The specification shall contain a written description of the invention, and of the manner and process of making and using it, in such full, clear, concise, and exact terms as to enable any person skilled in the art to which it pertains, or with which it is most nearly connected, to make and use the same, and shall set forth the best mode contemplated by the inventor of carrying out his invention.

In other words, the question raised by the present motion is whether the description of the invention presented in the earlier applications was sufficient to allow a person skilled in the art to make and use the invention which was finally patented.

Defendants assert that the later application contained information not found in the earlier applications and, thus, the earlier applications could not be said to have contained a sufficient description of the invention which was eventually patented. In particular, defendants point to the language in the 1976 application which states that the patented doctor blade is selected to be essentially identical to the conventional doctor blade bevel at optimum tonal quality size. Defendants assert that this language was not in the prior applications. Consequently, defendants contend, the earlier patent applications cannot be claimed to have contained a description of the invention sufficient to describe the ultimately patented invention under the terms of section 112.

Plaintiffs respond by citing to language in the earlier applications which they believe describes the same concepts as the language defendants cite in the later application. Plaintiffs argue that it is not necessary that each consecutive application contain exactly the same language for the later application to gain the benefit of the earlier application date.

Upon consideration of the language in the 1976 application as well as the language of the 1974 and 1973 applications, I conclude that I cannot, at this time, state as a matter of law that plaintiffs are not entitled to the benefit of the filing dates of the earlier applications. The question whether the later application contained new matter not found in the earlier applications, is a question of fact. Hogg v. Emerson, 52 U.S. (11 How.) 587, 13 L.Ed. 824 (1850); Stearn v. Superior Distributing Co., 674 F.2d 539, 543, (6th Cir.1982) (a district court finding of new matter is reviewed under the “clearly erroneous” standard). Therefore, to determine at this stage of the litigation that plaintiffs are precluded from claiming the benefit of the earlier filing date, I must conclude that there are no genuine issues of fact as to the contents of each application and as to what those contents would mean to one skilled in the art. Although the language of each application is before me at this time, it is impossible for me to conclude as a matter of law that the later application necessarily contains new matter.

The fact that the later application does not describe the invention in precisely the same language as it was described in the earlier application does not mandate the conclusion that the later application contains new matter. E.g., Application of Edwards, 568 F.2d 1349, 1352 (C.C.P.A. 1978); In re Lukach, 442 F.2d 967 (C.C.P.A.1971). The question to be answered when deciding whether a later application contains new matter not disclosed in the earlier applications is “whether a person skilled in the relevant art, reading a parent application [the earlier application] would have found the [continuation-in-part] disclosures in question to be inherent in the disclosures of the parent and would not have to undertake any independent experimentation in order to do so.” Stearn v. Superior Distributing Co., 674 F.2d at 544. See Application of Herschler, 591 F.2d 693 (C.C.P.A.1979); Application of Driscoll, 562 F.2d 1245 (C.C.P.A.1977); Application of Hoffman, 556 F.2d 539 (C.C.P.A.1977); Illinois Tool Works, Inc. v. Foster Grant Co., Inc., 547 F.2d 1300, 1305 (7th Cir.1976), cert. denied, 431 U.S. 929, 97 S.Ct. 2631, 53 L.Ed.2d 243 (1977); Railroad Dynamics, Inc. v. A. Stucki Co., 579 F.Supp. 353 (E.D.Pa.1983), aff'd, 727 F.2d 1506 (Fed.Cir.), cert. denied, — U.S. -, 105 S.Ct. 220, 83 L.Ed.2d 150 (1984).

I have reviewed the language of the earlier applications to determine whether anything contained therein could relay sufficient information to one skilled in the art for that person to conclude that the statements in the later application regarding the selection of a blade with a bevel which produces optimal tonal quality printing were inherent in the earlier applications. There is some language in those earlier applications, including the language cited by plaintiffs in opposition to the current motion, which suggests that the invention should produce optimum tonal quality printing and which discusses the blade bevel widths which are described in the later application as producing optimal tonal quality. Without evidence as to what these discussions would mean to one skilled in the art, I cannot determine as a matter of law that these earlier applications would not allow one skilled in the art to make a doctor blade which conforms to the specifications of the later patent application.

Defendants contend, however, that it is not necessary for me to make such a factual determination to resolve the motion in limine in their favor. They assert that the fact that the 1974 and 1976 applications were labelled “continuation-in-part” applications, creates an irrebutable presumption that such applications contained new matter not disclosed in the earlier applications. In support of this assertion, defendants cite to the decision of Judge Dowd of the Northern District of Ohio in Foseco International Ltd. v. Fireline, Inc., 607 F.Supp. 1537 (1984). In that case, the court concluded that the decision of the Court of Appeals for the Federal Circuit in Litton Systems, Inc. v. Whirlpool Corp., 728 F.2d 1423 (1984), had held that the filing of a continuation-in-part application created an irrebuttable presumption that the later application contained new subject matter not inherent in the earlier application. Therefore, Judge Dowd found that the patent holder was estopped from claiming the benefit of the earlier application dates by his actions in labelling the later application a continuation-in-part application rather than labelling the application a continuation application. However, that conclusion has since been revised by Judge Dowd who, in ruling on a motion for a new trial in the same case, held that the decision of the Court of Appeals for the Federal Circuit in Pennwalt Corp. v. Akzona, Inc., 740 F.2d 1573 (1984), substantially restricted the irrebuttable presumption discussed in Litton.

In Litton, the Court of Appeals for the Federal Circuit, speaking through Senior Circuit Judge Nichols, stated that the patent holder had, by “recasting its Rule 60 continuation application as a [continuation-in-part], implied that it did add new matter.” Litton, supra, 728 F.2d at 1438. However, that conclusion arose out of the relatively unique history of the prosecution of the application before the Patent and Trademark Office (“PTO”). In that case, the PTO rejected an application and then rejected an attempt to amend that application. The amendment was rejected on the ground that it was “drawn on new matter.” 728 F.2d at 1435. The applicant then filed an application containing the proposed amendments but labelled it a continuation-in-part application. Under those circumstances, the court determined, the applicant’s choice of the label “continuation-in-part” after rejection of the same application as an amendment constituted an acquiescence in the PTO conclusion that the amendment contained new matter.

This narrow interpretation of the holding in Litton is supported by the decision of the Court of Appeals for the Federal Circuit six months after the Litton decision in Pennwalt Corp. v. Akzona, Inc., 740 F.2d 1573 (1984). The Pennwalt court concluded that Litton had held:

the issuance of a patent from a [continuation-in-part] application, filed in response to a PTO “new matter rejection,” estops the patentee from arguing that the PTO’s rejection was erroneous.

740 F.2d at 1578 (footnote omitted). Later in that opinion, the court definitively rejected the interpretation of Litton proposed by the first opinion in Foseco.

The filing of a [continuation-in-part] application to overcome a PTO rejection does not, however, give rise to an irrebuttable presumption of acquiescence in the rejection.

Id.

Consequently, it appears that the Court of Appeals for the Federal Circuit has not imposed an irrebuttable presumption that the filing of a continuation-in-part application precludes the patent holder from claiming the benefit of the earlier applications. A similar conclusion has been reached by the Court of Appeals for the Sixth Circuit. Stearn v. Superior Distributing Co., 674 F.2d 539, 544 (6th Cir.1982) (“The filing of a CIP is not an admission that new matter is contained therein.”) In light of the fact that no other court has applied such a presumption, I conclude that it is inappropriate to establish the rule proposed by defendants in this case.

Because I have been directed to no aspects of the procedural history of the prosecution of the application for the plaintiffs’ patent that are contended to estop plaintiffs from claiming the benefit of the earlier application date under Litton, I conclude that the current record affords no basis for determining as a matter of law that plaintiffs have forfeitted their claim to those filing dates. In light of that conclusion and the determination made earlier that I cannot, as a matter of law at this time, conclude that the language cited by defendants is new matter, I must deny defendants’ motion in limine.

When the motions which are the subject of this Opinion were filed, it was stipulated by the parties that the time for filing pretrial memorandas and for preparing the joint pretrial memorandum would be delayed until after the motions were resolved. It was therefore ordered that plaintiffs’ pretrial memorandum would be filed fourteen (14) days after the date of an order resolving these motions with defendants’ pretrial memoranda to be filed fourteen (14) days after the filing of plaintiffs’ memorandum. Because this Opinion does not completely resolve the motion for summary judgment filed by defendants, the time for filing of plaintiffs’ pretrial memorandum shall not begin to run until an order is issued which grants or denies that motion.

      . J. Thomas McCarthy, in his treatise Trademarks and Unfair Competition (1973), states that consumer deception must be established to recover damages intended to compensate for lost profits. However, he suggests that if damages are calculated as compensation for other types of injury, such as lost goodwill, it may be possible to recover without establishing consumer deception. J.T. McCarthy, Trademarks and Unfair Competition § 27.5(B) (1973).

      . Therefore, I need not consider defendants' alternative assertion that summary judgment is at least appropriate with respect to plaintiffs’ claim for damages if not with respect to the claim for injunctive relief.

      . In each of the earlier versions of the complaint, including the amended complaint which was before this court at the time of the last motion for summary judgment on the Lanham Act claim, the second count was the Lanham Act claim.

      . It appears that plaintiffs discussed the alleged misrepresentation of blade configuration in opposition to the prior motion for summary judgment on Count II as well as in opposition to the present motion. Therefore, it may be that defendants became aware of the likelihood of such a claim at some point during the pretrial development of this case. However, when faced with a motion for summary judgment, I must consider the viability of plaintiffs’ claims solely by reference to the contents of the pleadings and cannot look beyond the complaint or amendments of the complaint to other claims which may have been informally introduced into the litigation by the parties.

      . An applicant may amend his application or file a continuation application to embellish or provide technical improvements of a feature disclosed in the original application. Stearn v. Superior Distributing Co., 674 F.2d 539, 544 (6th Cir.1982). He may also use a continuation-in-part application for that purpose. However, an applicant may not use an amendment or a continuation application to add new matter to an earlier application; a continuation-in-part application is an appropriate instrument for that purpose. See generally Litton Systems, Inc. v. Whirlpool Corp., 728 F.2d 1423 (Fed.Cir.1984).

      . A patent may not be issued if the invention "was ... in public use or on sale in this country, more than one year prior to the date of the application for patent in the United States.” 35 U.S.C. § 102(b). Thus, if plaintiffs are only protected by the later application date, any public use prior to January 29, 1975 of the invention disclosed in the patent would mean that the patent was improperly issued and thus, invalid. However, if plaintiffs are protected by the 1974 or 1973 application dates, public use of their doctor blade between 1974 and 1976 would not affect the validity of the patent.

      . To the extent that a later application for a patent adds new matter which was not inherent in the original application, that new matter is not entitled to the benefit of the earlier filing date. However, the earlier filing date does apply to the material in the later application which was disclosed in the earlier application. E. g., Litton Systems, Inc. v. Whirlpool Corp., 728 F.2d 1423, 1439 (Fed.Cir.1984); Stearn v. Superior Distributing Co., 674 F.2d 539 (6th Cir.1982); Application of Klesper, 397 F.2d 882 (C.C.P.A.1968); Chisolm-Ryder Co. v. Lewis Manufacturing Co., 398 F.Supp. 1287 (W.D.Pa.1975), aff'd 547 F.2d 1159 (3d Cir.), cert. denied, 434 U.S. 825, 98 S.Ct. 72, 54 L.Ed.2d 83 (1977).

      . For a further discussion of the meaning of the language in plaintiffs' patent which states that the patented blade is chosen to be of a bevel width which produces optimal tonal quality printing, see Max Daetwyler Inc. v. Input Graphics, Inc., 583 F.Supp. 446 (E.D.Pa.1984).


source: Caselaw Access Project

author: WILLIAM C. CONNER, District Judge.

license: Public Domain

text:
    MORGAN, OLMSTEAD, KENNEDY & GARDNER INCORPORATED, Plaintiff, v. UNITED STATES TRUST COMPANY OF NEW YORK, Bruce Hintze, Moseley, Hallgarten, Estabrook & Weeden, Inc. and Securities Settlement Corporation, Defendants.
    No. 83 Civ. 8196 (WCC).
    United States District Court, S.D. New York.
    May 20, 1985.
    Jacobs Persinger & Parker, New York City, for plaintiff; Irving Parker, Maxwell E. Cox, Alan Schutzman, New York City, of counsel.
    Shearman & Sterling, New York City, for defendant Moseley, Hallgarten, Estabrook & Weeden, Inc.; Robert J. Hausen, W. Foster Wollen, New York City, of counsel.
    Gaston Snow Beekman & Bogue, New York City, for defendant Securities Settlement Corp.; Martin P. Unger, Alice F. Chen, New York City, of counsel.
   OPINION AND ORDER

WILLIAM C. CONNER, District Judge.

This action is one of several related cases arising out of a complicated series of securities transactions by which an individual named Victor Schipa (“Schipa”) allegedly utilized the services of various individuals and financial institutions to defraud plaintiff Morgan, Olmstead, Kennedy and Gardner, Inc. (“Morgan Olmstead”) of certain securities by means of deceptive devices and misrepresentations. It is not necessary to detail here the mechanics of the fraudulent scheme; however, brief mention of the various parties and certain background facts is necessary to an understanding of the issues now before the Court.

Background

Morgan Olmstead is a securities broker-dealer. In addition to buying and selling securities, Morgan Olmstead also lends them to other broker-dealers and financial institutions. The essence of Morgan Olmstead’s claim in this action is that it made stock loans to Schipa, in his capacity as an officer of Girard Wilde & Co., Inc. (“Girard Wilde”) and Carlisle Institutional Services, Inc. (“Carlisle”), with the understanding that Girard Wilde and Carlisle would act as stock loan “finders” by locating borrowers and arranging loan transactions. According to Morgan Olmstead, Schipa did not arrange stock loans through his two companies, but instead opened an account in the name of Girard Wilde with defendant Moseley, Hallgarten, Estabrook & Weeden, Inc. (“Moseley”), and then arranged for Moseley to make short sales on that account. He allegedly used the stock loaned by Morgan Olmstead to cover those short sales, thereby converting the stocks to his own use and causing Morgan Olmstead considerable losses.

Morgan Olmstead alleges that Moseley placed sales orders for Schipa with knowledge that neither Girard Wilde nor Carlisle had stock with which to make delivery to purchasers. Moreover, according to plaintiff, defendants Bruce Hintze (“Hintze”), United States Trust Company of New York (“U.S. Trust”) and Securities Settlement Corporation (“SSC”) assisted in arranging, transferring and clearing the transactions with knowledge or in reckless disregard of facts which should have led them to realize that the stocks were loaned by Morgan Olmstead, but were subsequently delivered and sold to purchasers for the benefit of Schipa.

Formal proceedings among the parties began in late 1982 or early 1983, when Morgan Olmstead filed with the New York Stock Exchange (“NYSE”) a Demand for Arbitration and Statement of Claim against Moseley and SSC for their parts in the Schipa venture. The arbitration was commenced pursuant to the constitution and rules of the NYSE, which provide that controversies between member firms are to be arbitrated. On April 15, 1983, all three parties agreed to suspend the arbitration proceedings pending thirty days’ notice from Morgan Olmstead that it intended to go forward. The following November, Morgan Olmstead filed suit in this district against defendants Hintze and U.S. Trust, neither of which was or is a NYSE member.

In its complaint against Hintze and U.S. Trust, Morgan Olmstead alleged that Schipa’s activities violated § 10(b) of the Securities and Exchange Act of 1934 (“the 1934 Act”) and Rule 10b-5 promulgated thereunder, and that the defendants aided and abetted Schipa’s fraud. U.S. Trust then filed a third-party complaint, bringing Moseley and SSC into the federal action.

On June 17, 1984, Morgan Olmstead amended its complaint to add Moseley and SSC as primary defendants along with U.S. Trust and Hintze. Upon receiving the amended complaint, U.S. Trust promptly filed an amended answer asserting twenty-one cross-claims against Moseley and SSC for indemnity and/or contribution. For their parts, Moseley and SSC responded by advising Morgan Olmstead that under the NYSE constitution and rules, the three member firms were required to arbitrate their controversies. When Morgan Olmstead refused to go forward with the arbitration it had instituted earlier, Moseley and SSC moved pursuant to § 3 of the Federal Arbitration Act (“the Arbitration Act”), 9 U.S.C. § 1 et seq., to stay Morgan Olmstead’s district court proceedings against them pending arbitration. Morgan Olmstead then cross-moved to stay arbitration, and the parties’ cross-motions, together with voluminous supporting papers, are now before the Court.

Moseley and SSC argue, in essence, that they have a right to arbitrate their dispute with Morgan Olmstead pursuant to the constitution and rules governing NYSE members, and that the presence of non-members in this controversy does not defeat that right. Morgan Olmstead, on the other hand, insists that the controversy among the exchange members must be viewed as part of the larger dispute, and argues that the peculiar procedural posture of the case renders resort to arbitration of the claims against Moseley and SSC inappropriate. Plaintiff asserts, in the alternative, that Moseley and SSC waived their right to arbitrate when they agreed that the suspended arbitration proceedings would resume only on thirty days’ notice from Morgan Olmstead. For the reasons below, the Court will grant Moseley and SSC the stay they seek, and will order Morgan Olmstead to go forward with its claims against them in arbitration.

Discussion

I. The Agreement to Arbitrate

Moseley and SSC have moved to stay this action pursuant to § 3 of the Arbitration Act, and thus the Court’s analysis begins with that section. Title 9 U.S.C. § 3 provides:

If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.

Without question, Morgan Olmstead, Moseley and SSC entered into an agreement to arbitrate disputes arising among them. As members of the NYSE, they are governed by Article VIII, § 1 of the NYSE Constitution, which provides in pertinent part:

Any controversy between parties who are members, allied members, member firms or member corporations shall, at the instance of any such party, ..., be submitted for arbitration, in accordance with the provisions of the Constitution and the rules of the Board of Governors.

As discussed by Judge Cooper of this Court in Brown v. Gilligan, Will & Co., 287 F.Supp. 766, 769 (S.D.N.Y.1968), the constitution and rules of a stock exchange “constitute a contract between all members of the exchange with each other and with the exchange itself.”

Morgan Olmstead, Moseley and SSC each having entered into an agreement to arbitrate disputes with other exchange members, and having done so as a condition precedent to membership in the NYSE, see NYSE Constitution Article IX, § 6, the Court must stay any trial of the controversy among them, pursuant to § 3 of the Arbitration Act, absent some justification sufficiently compelling to overcome the strong federal policy favoring arbitration. Morgan Olmstead asserts that this case presents just such compelling features, premising its argument on authorities establishing a strong interest in preserving the federal courts as exclusive forums for the resolution of federal securities fraud claims.

II. Arbitration of Federal Securities Fraud Claims Between Exchange Members

The Securities Act of 1933 and the Securities Exchange Act of 1934 have customarily been construed as reflecting congressional intent to keep federal securities disputes out of arbitration and in the courts. See generally Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953) (1933 Act); Greater Continental Corp. v. Schechter, 422 F.2d 1100, 1103 (2d Cir.1970) (“This type of question concerning fraud within the meaning of Rule 10b-5 is properly litigated in the courts where a complete record is kept of the proceedings and findings and conclusions are made____ Congress provided that questions arising under [the Securities Acts] were not to be determined in arbitration proceedings (but rather in the courts) even if the contract between the parties contained an arbitration provision.”).

In recognition of this policy, the United States Supreme Court and the lower federal courts have interpreted certain “non-waiver” provisions in these statutes as prohibiting the enforcement of pre-existing agreements to submit federal securities disputes to arbitration. In Wilko v. Swan, for example, the Supreme Court held that § 14 of the 1933 Act, 15 U.S.C. § 77n, which provides that “[a]ny condition, stipulation, or provision binding any person acquiring any security to waive compliance with any provision of this subchapter ... shall be void,” bars enforcement against an investor of an agreement to arbitrate future disputes. The Court found that such an agreement is a “stipulation” within the meaning of § 14, and that the right to be heard in a judicial forum is the kind of “provision” that cannot be waived. 346 U.S. at 434-35, 74 S.Ct. at 186-87. Underlying this conclusion was an acknowledgment that the 1933 Act was enacted for the purpose of protecting investors; the Court noted that when a purchaser waives his right to sue in court, he surrenders “one of the advantages the Act gives him ... at a time when he is less able to judge the weight of the handicap the Securities Act places upon his adversary.” Id. at 435, 74 S.Ct. at 187. Section 29(a) of the 1934 Act, 15 U.S.C. § 78cc(a), which is substantially similar to the non-waiver provision discussed in Wilko, has been similarly construed. See, e.g., Allegaert v. Perot, 548 F.2d 432, 437 (2d Cir.), cert. denied, 432 U.S. 910, 97 S.Ct. 2959, 53 L.Ed.2d 1084 (1977).

If Wilko had created an absolute bar to the arbitration of all federal securities fraud claims, the instant controversy would be easy to resolve. The federal courts have recognized an important exception to the non-waiver rule, however, which is relevant here. In a line of cases following Brown v. Gilligan, Will & Co., 287 F.Supp. 766 (S.D.N.Y.1968), the courts in this circuit and elsewhere have relied on § 28(b) of the 1934 Act, 15 U.S.C. § 78bb(b), to exempt from the non-waiver provision controversies between members of the stock exchanges. That section states, in relevant part:

Nothing in this chapter shall be construed to modify existing law with regard to the binding effect on any member ... of any [exchange] of any action taken by the authorities of such [exchange] to settle disputes between its members____

In Brown, the court drew a distinction between the purposes underlying the 1933 and 1934 Acts, noting that the earlier statute was designed primarily to protect the investing public, and was not intended to protect dealers from the improprieties of fellow dealers. 287 F.Supp. at 772. According to the court, Congress “assumed that dealers could fend for themselves.” Id. The court highlighted legislative history establishing a clear congressional intent to create in the 1934 Act a comprehensive scheme of exchange self-regulation, and concluded on that basis that where stock exchange members have agreed to arbitrate their “intramural disputes” before the stock exchange, a court giving effect to that agreement does no violence to the 1934 Act, but instead, furthers the goals of its framers.

The action taken by [the Exchange] in prescribing rules ... binding on its members and making arbitration imperative, constitutes “action taken by the authorities of such exchange to settle disputes between its members.” Therefore, the instant agreement to arbitrate, which owes its very existence to such rules of the Exchange, must be exempted from the scope of § 29(a) if § 28(b) is to be given effect. ... This construction is based not only on the clear language of § 28(b), but also on that provision’s place in the overall scheme of self-regulation set up by the 1934 Act.

Brown, 287 F.Supp. at 774-75 (footnotes omitted).

The stock exchange member exception established in Brown has since been adopted by the Second Circuit as well as other Circuit Courts of Appeals. See Coenen v. R.W. Pressprich & Co., 453 F.2d 1209, 1214 (2d Cir.), cert. denied, 406 U.S. 949, 92 S.Ct. 2045, 32 L.Ed.2d 337 (1972) (“We fully agree with the reasoning in Brown ... that the arbitration clause contained in the New York Stock Exchange Constitution is precisely the kind of self-regulatory provision called for by the 1934 Act. Instead of violating the policy behind the Act, as appellant contends, arbitration in this case furthers that policy.”); In re the Revenue Properties Litigation Cases, 451 F.2d 310 (1st Cir.1971); Tullis v. Kohlmeyer & Co., 551 F.2d 632, 636 (5th Cir.1977) (“The crucial issue ... is whether the party seeking to avoid arbitration is a member of the Exchange and thus has agreed to arbitration of disputes. If this is the case, as here, then according to Brown ... § 28(b) is applicable and overrides the non-waiver provisions which were the basis of Wilko.”)) DeLancie v. Birr, Wilson & Co., 648 F.2d 1255 (9th Cir.1981). See also Axelrod & Co. v. Kordich, Victor & Neufeld, 451 F.2d 838 (2d Cir.1971) (extending Brown rationale to member/non-member disputes in which non-member seeks to compel arbitration).

Although the federal courts have broadly construed this “exchange member exemption” since Brown, the exception, no less than the non-waiver rule, defies unconditional application. The courts have recognized that under certain circumstances, disputes involving exchange members may implicate factors rendering the claims “inappropriate for enforcement by arbitration.” In Allegaert v. Perot, 548 F.2d 432 (2d Cir.1977), for example, the Second Circuit was presented with claims brought under the Bankruptcy Act, the Securities Exchange Act of 1934, various state laws and common law. The trustee of the bankrupt corporation, which was a member of the NYSE, sued four individuals, several corporate members of the NYSE, and the stock exchange itself. The exchange members moved in the district court to stay the action pending arbitration of their controversies with the trustee for the bankrupt corporation, and the district court granted that motion. The Court of Appeals reversed.

The appellate court stated that Brown and its progeny created a “limited exception to the policy behind Wilko v. Swan,” and that “the exceptions to the general rule for disputes between brokerage houses over industry matters make sense only when limited to their facts.” 548 F.2d at 437. The court pointed out that the case presented not “a mere internal brokerage industry squabble,” but rather “a claim of wholesale fraud of institutional dimension.” Id. Noting in addition that the claim was brought by a bankruptcy trustee on behalf of hundreds of creditors, the court determined, after a careful analysis of competing public policy interests, that the claim was of a character inappropriate for enforcement by arbitration. Id. at 436-38.

Recognizing that the instant action involves neither a simple “internal brokerage industry squabble” nor a “claim of wholesale fraud of institutional dimension,” I turn to an analysis of whether Morgan Olmstead should be compelled to arbitrate its disputes with Moseley and SSC while proceeding in this forum against the defendants not subject to arbitration agreements, or whether, as Morgan Olmstead persuasively argues, the peculiar posture of this case renders arbitration a “meaningless” and “inappropriate” option for resolving these disputes. Pl.Mem. in Opposition to Stay Pending Arbitration at 15-16.

Morgan Olmstead does not deny that it is subject to an agreement to arbitrate disputes with Moseley and SSC, nor does it contend that it is relieved of its obligation under that agreement simply because its claims against Moseley and SSC arise under federal securities laws. In fact, Morgan Olmstead concedes that if this lawsuit could be viewed as a simple intramural dispute among members of the exchange, Moseley and SSC might be entitled to the relief they seek. Pl.Mem. in Opposition to Stay Pending Arbitration at 2. The instant question centers around Morgan Olmstead’s vigorous assertion that the lawsuit cannot fairly be characterized as an “intramural dispute” that should be arbitrated before the NYSE in accordance with the policies underlying Brown, but must instead be viewed as a “massive securities fraud” which was perpetrated in the first instance by a stock exchange non-member, and which extends “beyond the walls of the Exchange.” Id. at 2-3. In support of its cross-motion to stay arbitration pending trial of all claims in this forum, Morgan Olmstead focuses primarily on the inefficiencies, the delays and the administrative difficulties inevitably attendant to the splitting of claims in a complex action. Plaintiff forcefully argues that the presence of nonmember defendants with cross-claims against member defendants virtually ensures that the entire controversy will eventually have to be litigated in this Court, regardless of whether arbitration between members occurs first. Thus, in Morgan Olmstead’s view, neither the specific federal policy favoring exchange self-regulation, nor the general policy of encouraging expedient and economical resolution of disputes through arbitration, would be furthered by enforcement of the arbitration agreement in this case.

Were it not for recent Supreme Court authorities upholding the contractual right to arbitrate in the face of arguments such as those presented by Morgan Olmstead, I might well have been persuaded to deny Moseley and SSC the arbitration order they seek. Having reviewed all the authorities and arguments submitted by the parties, I am satisfied that arbitration of Morgan Olmstead’s claims against Moseley and SSC will create substantial administrative problems, and that the swiftest, simplest and most economical method of resolving the claims in this action would be for this Court to invoke jurisdiction over stock exchange members and non-members alike, and to try all claims in one action. However, I do not believe this is an option available to me.

Two recent Supreme Court cases, Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983) and Dean Witter Reynolds, Inc. v. Byrd, — U.S. -, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985), have considerable bearing on the issues at hand, and therefore warrant close attention. Each of these cases supports the proposition that where arbitrable and non-arbitrable claims are joined, any interest in avoiding piecemeal litigation must give way to the interest in enforcing the contractual agreement to arbitrate.

The Court was presented in Dean Witter v. Byrd with a challenge to the “intertwining doctrine,” under which district courts in three circuits were permitted, in the exercise of their discretion, to deny arbitration of otherwise arbitrable claims that were factually and legally intertwined with nonarbitrable claims. The dispute arose when Dean Witter, which had been sued by an investor alleging that it violated both federal securities laws and state-law provisions, sought an order severing the pendent state claims and compelling their arbitration. The district court denied Dean Witter’s motion and the Court of Appeals for the Ninth Circuit affirmed, applying the intertwining doctrine.

The Supreme Court reversed, rejecting the argument that collateral estoppel problems might arise if arbitration of an “intertwined” state claim were to precede the federal court trial, and rejecting also the suggestion that the inefficiency and redundancy of bifurcated proceedings would thwart the purposes of the Arbitration Act. The Court ruled that the Arbitration Act “leaves no place for the exercise of discretion by a district court, but instead mandates that [the court] shall direct parties to proceed to arbitration on issues as to which an arbitration agreement has been signed,” even where “the result would be the possibly inefficient maintenance of separate proceedings in different forums.” 105 S.Ct. at 1241. The Court found support for this conclusion in the legislative history of the Arbitration Act, which establishes that “the purpose behind its passage was to ensure judicial enforcement of privately made agreements to arbitrate.” Id. at 1242. Byrd’s suggestion that the overriding goal of the Arbitration Act was to promote the expeditious resolution of claims was flatly and firmly rejected by the Court:

[P]assage of the Act was motivated, first and foremost, by a congressional desire to enforce agreements into which parties had entered, and we must not overlook this principal objective when construing the statute, or allow the fortuitous impact of the Act on efficient dispute resolution to overshadow the underlying motivation.

Id. (footnote omitted).

The instant dispute involves federal securities fraud claims rather than pendent state claims, and thus Dean Witter v. Byrd might be viewed as distinguishable from the present case on one level; I find this distinction insignificant, however. Having concluded above that the stock exchange member exception to the general policy against arbitrating federal securities fraud claims removes any bar to enforcement of the contractual obligation incurred by member firms when they agree to comply with the stock exchange constitution and rules, I see no reasoned basis upon which to exempt otherwise arbitrable federal securities claims from the scope of the Dean Witter v. Byrd ruling.

In addition, although Morgan Olmstead has actively pursued only its federal claims against Moseley and SSC, there remain in its amended complaint a variety of state law causes of action against these same parties, including, inter alia, claims of common law fraud and conversion. Morgan Olmstead has down-played the significance of the state law claims. At a conference held May 3, 1985, counsel for plaintiff explained that these claims are based on the same facts that underlie the federal claims; he appeared to suggest that they lacked independent vitality, and he expressed no interest in pursuing them. Under Dean Witter v. Byrd, however, defendants are entitled to demand immediate arbitration of these claims no matter how intertwined they may be with the federal claim. Thus, even if I were not convinced that Dean Witter v. Byrd mandates arbitration of the federal claims, I would be unpersuaded by plaintiffs argument that splitting the action would result in redundant and inefficient proceedings because, in all likelihood, there will be an arbitration in any event.

Of course, the instant case may be complicated somewhat by the presence of stock exchange non-members who cannot be compelled to arbitrate their disputes with Morgan Olmstead, Moseley or SSC. As Morgan Olmstead has forcefully argued, the existence of cross-claims by non-member defendants against member defendants creates a real possibility that even if arbitration is ordered, this Court will ultimately be forced to determine the extent of Moseley’s and SSC’s involvement in the Schipa scheme, and the extent of their liability. In the scenario suggested by plaintiff, the Court would dispatch the exchange members to arbitration, thus upholding Moseley’s and SSC’s expectations, but then proceed to nullify the effect of any arbitrator’s ruling by entertaining the same issues in the context of subsequent third-party litigation here.

To the extent that this position merely reflects efficiency concerns, Dean Witter v. Byrd adequately addresses the argument. However, to the extent that plaintiff’s position reflects a threat to the policy underlying Dean Witter v. Byrd —that of upholding the legitimate expectations of contracting parties — it merits a few comments.

First of all, federal courts have been faced before with multi-defendant cases in which some but not all of the parties are subject to arbitration agreements. As a rule, the Arbitration Act mandates that arbitration agreements “be enforced notwithstanding the presence of other persons who are parties to the underlying dispute but not to the arbitration agreement.” Moses H. Cohen Hospital v. Mercury Construction Corp., 460 U.S. 1, 20, 103 S.Ct. 927, 939, 74 L.Ed.2d 765 (1983). In Moses H. Cohen Hospital, respondent construction company had direct claims against petitioner hospital, which in turn had claims for indemnity against an architect. The hospital was subject to an arbitration agreement with the construction company, but not with the architect. The Supreme Court recognized that bifurcated proceedings might result if the agreement were enforced, but considered the potential unavoidable:

It is true ... that if Mercury obtains an arbitration order for its dispute, the Hospital will be forced to resolve these related disputes in different forums. That misfortune ... occurs because the relevant federal law requires piecemeal resolution when necessary to give effect to an arbitration agreement.

460 U.S. at 20, 103 S.Ct. at 939 (footnote omitted, emphasis in original). See also Hamilton Life Ins. Co. of New York v. Republic Nat’l Life Ins. Co., 408 F.2d 606, 609 (2d Cir.1969) (“The District Court also correctly noted that there is no impediment to enforcing an agreement to arbitrate as between two parties in a dispute involving a multi-party agreement.”).

This general rule makes sense, especially when applied to cases involving complex securities transactions which can often be effected only through the services of many individuals and financial institutions, some of which are exchange members and some of which are not. If the presence of a cross-claim or a third-party claim for contribution or indemnity involving a non-member of the exchange were sufficient to defeat an obligation to arbitrate, it seems to me that parties seriously interested in avoiding arbitration could readily structure their pleadings with that objective in mind. Such a result would certainly undermine congressional intent that member disputes be arbitrated.

Second, while there may indeed be some possibility that the same issues presented and resolved in arbitration would surface again in subsequent litigation, that threat is not necessarily peculiar to situations involving more than two parties. Although the question remains unsettled, the Supreme Court has suggested that an unappealed arbitration decision may not have any collateral estoppel effect in subsequent federal proceedings. See Dean Witter v. Byrd, 105 S.Ct. at -. If no preclusive effect were given, a plaintiff and defendant with federal and state claims might proceed to arbitration of their state claims pursuant to Dean Witter v. Byrd, and later litigate the same issues, albeit couched in slightly different legal terms, in a federal court. No less than in the instant case, the judge might then be called upon to “nullify” the decision of the arbitrator.

Finally, I note that plaintiffs concerns might never materialize; after arbitrating its claims against Moseley and SSC, Morgan Olmstead might well decide to forego prosecution of its claims against U.S. Trust and Hintze. If soundly defeated in arbitration, it might attempt to cut its losses by settling or discontinuing the federal action. By the same token, if wholly or even partially successful in that forum, Morgan Olmstead might also be inclined to spare itself further litigation. In either case, there is no assurance that resort to arbitration would prove a hollow gain for any of the parties.

For all the foregoing reasons, I conclude that the controversy among Morgan Olmstead, Moseley and SSC is appropriate for resolution by arbitration, despite the presence of other parties in the larger dispute who are not subject to any arbitration agreement. I turn briefly, then, to Morgan Olmstead’s argument that Moseley and SSC waived their right to arbitrate.

III. Waiver of Arbitration

On April 15, 1983, several months after Morgan Olmstead commenced arbitration proceedings against Moseley and SSC, counsel for Moseley wrote a letter to the arbitration counsel of the New York Stock Exchange. The text of the letter is set forth fully below:

This will confirm our telephone conversation of earlier today in which you granted the joint request of the three parties to the captioned proceeding that the time for Respondents Securities Settlement Corp. and Moseley, Hallgarten, Estabrook & Weeden Inc. to respond to the Demand for Arbitration by Morgan Olmstead, Kennedy & Gardner Inc. be extended from April 18, 1983 to 30 days after Morgan Olmstead gives notice to the Exchange and Respondents of the commencement of the 30-day period.

Klug letter of April 15, 1983, Ex. B to Chen Aff. Primarily on the basis of this correspondence, Morgan Olmstead asserts that its adversaries have waived their right to arbitrate. Moseley and SSC characterize the waiver argument as “nonsense.”

Morgan Olmstead argues that the April 15, 1983 letter reflects Moseley’s and SSC’s unconditional agreement “to postpone arbitration indefinitely, subject to resumption only when, if ever, Morgan Olmstead requested it.” Parker letter of March 7, 1985. See also Parker letter of March 18, 1985 (“In unambiguous language, SSC and Moseley ... knowingly yielded to Morgan Olmstead any right to resume the arbitration.”). According to plaintiff, defendants’ waiver is further established by their aggressive participation in extensive discovery proceedings connected with this lawsuit, and their motion to compel arbitration is a breach of the agreement memorialized in the April 15, 1983 letter.

As indicated above, counsel for Moseley and SSC vigorously refute Morgan Olmstead’s contention that the April 15 letter reflects a waiver of their right to compel arbitration:

By letter dated April 15, 1983, the parties agreed to suspend the arbitration for an unspecified time. At the time, it was rational to assume that if Morgan Olmstead wanted to proceed with claims against SSC and Moseley, it would do so in the arbitration it had commenced and that Morgan Olmstead, as the petitioner, would be the party that would want eventually to revive the arbitration. Thus, the letter stated that Morgan Olmstead could continue with its arbitration by giving 30-days notice. In so providing, the parties did not intend to bar SSC or Moseley from themselves reviving the arbitration by filing their answers nor did the parties intend that any party was waiving the right to arbitrate. The intent of the letter was simply to provide a period during which the parties might resolve their dispute short of a hearing.

Hausen letter of March 15, 1985 (footnote omitted). Counsel for Moseley indicates that it wrote the letter in question, and that it certainly did not intend to accord plaintiff complete control over the timing of the arbitration. Both defendants assert, moreover, that they were perfectly entitled to participate in discovery within the context of this action, as they are parties to non-arbitrable claims brought by defendant U.S. Trust.

I cannot agree with Morgan Olmstead’s interpretation of the April 15, 1983 letter. The parties have not explained why they decided to suspend the arbitration. However, I see no “unconditional agreement” to resume only on plaintiff’s request, nor do I find “unambiguous language” by which Moseley and SSC yielded their valuable right to compel arbitration. Moseley’s interpretation of the letter, on the other hand, makes perfect sense. As of April 15, 1983, this arbitration was the only pending action arising out of the Schipa venture; Moseley and SSC were respondents in that action, and given Morgan Olmstead’s apparent willingness to suspend the arbitration, there was simply no reason for them to anticipate or look forward to reviving it. They did not seek to reinstitute the arbitration proceedings until Morgan Olmstead asserted direct claims against them, but only at that point was it apparent that Morgan Olmstead sought to pursue its claims in an improper forum.

The suggestion that defendants’ participation in discovery proceedings should also constitute a waiver is similarly without merit. As Morgan Olmstead itself has forcefully argued, the presence of U.S. Trust’s cross-claims ensures that Moseley and SSC will be parties to the federal action regardless of whether arbitration of Morgan’s direct claims is ordered. Defendants’ aggressive defense to those cross-claims effects no waiver.

Conclusion

For all the foregoing reasons, the Court concludes that Morgan Olmstead must assert its direct claims against Moseley and SSC before an arbitrator of the NYSE. Accordingly, the temporary stay of arbitration issued on January 25, 1985 is hereby lifted.

Plaintiff’s claims against U.S. Trust and Hintze, together with all non-arbitrable claims brought by these parties against Moseley and SSC, will proceed before this Court. However, in accordance with my oral ruling of November 16, 1984, these claims will not be tried until such time as the litigation between Morgan Olmstead and its insurance carrier, Federal Insurance Company, has concluded.

SO ORDERED.

      . Morgan Olmstead filed a separate action against Victor Schipa, which is also pending before me, and another action against its insurance carrier, Federal Insurance Company. That action is pending before the Honorable Mary Johnson Lowe of this Court, and I have advised the parties that the issues before me will not be tried until the matter of insurance coverage has been resolved. I so ruled in order to delay trial until it has been determined whether Morgan Olmstead or its insurer should litigate the claims before me.

      . In addition to the counts of aiding and abetting Schipa’s Rule 10b-5 violation, Morgan Olmstead has alleged that Moseley and SSC committed common law fraud, conversion, breach of contract, breach of duty, and violations of stock exchange rules.

      . At a pretrial conference held January 25, 1985, after the cross-motions were fully submitted, the Court entered a temporary stay of arbitration. That Order was followed by a flurry of correspondence from both counsel, a portion of which was solicited by the Court in view of the Supreme Court’s recent decision in Dean Witter v. Byrd, — U.S. -, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985).

        . In Coenen, the Court of Appeals offered two reasons why the dispute in that case could be distinguished from the situation in Wilko. It cited the differences in purpose between the 1933 and 1934 Acts, and it cited the fact that Wilko involved a pre-dispute agreement to arbitrate while Coenen involved a post-dispute agreement to arbitrate. Although the case before me involves a pre-dispute agreement, I do not believe this pre-dispute/post-dispute factor should have any bearing in this context. If the agreement to arbitrate arises when a firm joins the stock exchange, and the courts enforce only those agreements entered into after disputes arise, then the stock exchange member exemption is rendered all but meaningless.

      . If Morgan Olmstead proceeds immediately to arbitration against Moseley and SSC, an award will probably be issued prior to litigation of the claims remaining before me. I can foresee at least three possible scenarios, none of which furthers the policies of expedience and judicial economy.
      If Morgan Olmstead fails to prove its case in arbitration, it will likely pursue U.S. Trust in this forum. U.S. Trust has non-arbitrable derivative claims against Moseley and SSC that cannot be severed; thus, the stock exchange members will all remain in this action. The arbitrator's decision will have no res judicata effect on U.S. Trust because U.S. Trust is not a party to that action. Therefore, in the context of U.S. Trust’s claims, a jury will be called upon to make a de novo review of the liability issues previously determined and, if necessary, to apportion relative fault among exchange members. Nothing will have been gained by arbitration.
      If Morgan Olmstead prevails in arbitration but fails to collect the full measure of damages it seeks, it may pursue U.S. Trust for the remainder. Once again, U.S. Trust will not have been a party to the arbitration, and therefore cannot be foreclosed from relitigating Moseley’s and SSC’s liability. As in the situation posed above, neither time nor effort will have been saved by arbitration.

        Finally, even if Morgan Olmstead collects the full measure of its alleged damages in arbitration, that proceeding may not terminate the controversy. Moseley and SSC might then wish to pursue U.S. Trust for contribution toward Morgan Olmstead’s recovery.
      Thus, it appears that regardless of whether Moseley and SSC go to arbitration against Morgan Olmstead, this entire controversy may well be tried here. Such a result would certainly not further congressional intent to "keep disputes between members out of the courts.” Coenen v. R.W. Pressprich & Co., 453 F.2d 1209, 1212 (2d Cir.1972). Instead of one expeditious proceeding, there may be a complete duplication of effort and an extended delay in the final resolution of this controversy. The concomitant potential for inconsistency between the determinations of arbitrator and jury creates additional concern.

      . In Dean Witter v. Byrd, there was no motion to compel arbitration of the federal securities fraud claims.