author: CANNELLA, District Judge:

text:
    PRITCHARD SERVICES GROUP OF AMERICA, INC. and Nation-Wide Building Services, Ltd., Plaintiffs, v. INTERNATIONAL TELEPHONE AND TELEGRAPH CORPORATION and ITT Canada Limited, Defendants.
    No. 79 Civ. 3951 (JMC).
    United States District Court, S.D. New York.
    March 29, 1985.

      Donovan, Leisure, Newton & Irvine, New York City (Kenneth E. Newman, Richard W. Mark, John D. Worland, Jr., New York City, of counsel), for plaintiffs.
    Cahill Gordon & Reindel, New York City (Thomas F. Curnin, Thorn Rosenthal, New York City, of counsel), for defendants.
   OPINION

CANNELLA, District Judge:

After a nonjury trial on the merits, the Court finds for defendants.

BACKGROUND

Plaintiffs instituted this action charging defendants with violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder by the Securities and Exchange Commission. Plaintiffs also allege defendants’ violation of Section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), New York’s anti-fraud statute, N.Y.Gen.Bus. Law § 352-c, and common law fraud. Because the language of the state statute and the common law prohibitions against fraud are substantially similar to the scope of Rule 10b-5, plaintiffs main thrust throughout the trial was directed at the violation of federal laws.

This action arises out of defendants’ sale of the entire stock of ITT Service Industries Corporation [“ITTSI” ] and Allied Building Services of Ontario, Limited [“ABSO” ] to plaintiffs on November 1, 1978. On that date, plaintiffs paid a total price of $8,000,000, representing net tangible assets plus $500,000. Pursuant to the Purchase Agreement [“Agreement”], the value of the net tangible assets was ultimately to be decided after the closing by the parties’ accountants. They reached agreement on a figure of $7,678,678—a final purchase price of $8,178,678.

Plaintiffs claim a fraud based upon misleading representations and omissions by defendants that induced their purchase of ITTSI stock. Plaintiffs seek damages in the sum of $2,875,000, which allegedly represents the difference between the price paid plus transaction-related costs and the fair market value of ITTSI stock on November 1, 1978. Defendants seek judgment of $178,678 plus interest from August 2, 1979 on their counterclaim for the balance of the purchase price.

After a thirteen-day trial on issues of liability and damages, and the numerous documents, briefs and arguments ably and cogently submitted by counsel, the Court makes the following findings of fact and conclusions of law:

The Parties

Plaintiff Pritchard Services Group of America [“PSGA” ], a Nevada corporation and plaintiff Nation-Wide Building Services, Ltd., a wholly-owned subsidiary of Pritchard Services Group of Canada, Ltd., a Canadian corporation, are both controlled by a publicly-held Great Britain corporation, Pritchard Services Group, PLC [“PSG” ]. PSG’s principal business is building maintenance. Plaintiffs are referred to collectively as “Pritchard”.

Defendant International Telephone and Telegraph Corporation [“ITT” ], a Delaware corporation with its principal place of business in New York and defendant ITT Canada Limited [“ITT Canada” ], a Canadian corporation wholly-owned indirectly by ITT, are referred to collectively as “ITT”. ITTSI and ABSO [collectively “ITTSI” ] were wholly-owned subsidiaries

of ITT and ITT Canada before their sale to Pritchard. ITTSI’s name was changed to Pritchard Services, Inc.

Principal Actors

Peter Pritchard is chairman of the board of PSG and PSGA. He was Pritchard’s chief negotiator in the acquisition of ITTSI. Curtis Roberts is an executive at PSG and has been responsible for operating PSG companies in foreign countries.

Stanley Luke, the principal negotiator for ITT, was an ITT executive vice-president and headed its acquisition and divestitute program. David Davidson was ITTSI’s president at the time of its sale. James Kelley, a certified public accountant with ITT, was responsible for providing financial information about ITTSI to Pritchard. Walter Domeracki was manager of financial controls of ITT’s building services division and was responsible for the accounting systems and controls utilized by ITTSI. Gabor Mezei was the comptroller for ITT-SI’s Building Services Division. William Bramwell was an ITT staff attorney who handled legal aspects of the ITTSI transaction.

The Transaction

In 1976, PSG instructed Roberts to investigate building service companies in North America for potential acquisition. PSG wanted to build a cleaning services business by purchasing several companies in various geographical areas. Roberts and Peter Pritchard were sophisticated in the operation and acquisition of building services businesses. They had reviewed the financial records of hundreds of potential targets, had operated subsidiaries around the world, and had recently purchased businesses in Australia and the Far East. In November 1977, PSG acquired a building maintenance company in Puerto Rico.

Roberts initially contacted ITT in April 1978 about the possible purchase of ITTSI. Pritchard and ITT conducted several negotiations during the summer of 1978. The principal meetings were in London, England on July 17, 1978 and in New York City on August 29, 1978. The parties also conducted negotiations by mail, telex and telephone. Pritchard made extensive investigations into ITTSI and received detailed financial and other information from ITT.

ITTSI, comprised of approximately thirteen separate companies acquired by ITT, was primarily involved in the building services business. Its other unrelated operations were transferred to ITT before the sale to Pritchard. The Agreement for the ITTSI stock became effective on November 1. 1978. ITT’s representations and warranties in the Agreement concerning financial statements, PX 9, ¶ B.6; the absence of any adverse change in the condition of ITT-SI’s business, PX 9, ¶ B.16; and the accuracy and completeness of all representations, warranties and information provided by ITT, PX 9, II B.17, explicitly did not survive the closing. PX 9, ¶ J.l.

The Parameters of the Lawsuit

Plaintiffs assert that they were wrongfully induced to purchase ITTSI because they were defrauded by defendants’ false and misleading representations and omissions of material fact. These allegations can be categorized generally under one main claim concerning the break-even operating rate and three tangential claims regarding financial information, goodwill, and internal accounting and assessments. The Court will analyze separately the factual basis of the allegations in each category with regard to whether the misrepresentations and omissions were material, plaintiffs detrimentally relied on material (dis)information, and if necessary, the proof of scienter.

The Court notes that the issues of reliance and materiality are intertwined for each separate allegation, see Herzfeld v. Laventhol, Krekstein, Horwath & Horwath, 540 F.2d 27, 33-35 (2d Cir.1976) and also recognizes that its conclusions of law on materiality are properly decided after compiling all the evidence to determine whether a reasonable investor would view the omissions/misstatements “as having significantly altered the ‘total mix’ of information made available.” TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 2132, 48 L.Ed.2d 757 (1976). The Court finds, however, that plaintiffs have failed to prove a violation of securities laws under the separate categories or in the case as a whole.

“Although a judicial review of alleged material misstatements or omissions should not become an exercise in ‘nitpicking’,” Pantry Pride v. Rooney, 598 F.Supp. 891, 901 (S.D.N.Y.1984) (quoting Kennecott Copper Corp. v. Curtiss-Wright Corp., 584 F.2d 1195, 1200 (2d Cir.1978)), the Court will examine in some detail plaintiffs’ relevant specific allegations. The Court’s findings of fact and conclusions of law track those proposed by defendants for the simple reason that the Court found their witnesses credible. Plaintiffs’ principal witnesses, Roberts and Pritchard, were not straightforward on several occasions. The Court specifically noted at trial that Pritchard had “a pathological block to answering]” [Tr. 620] certain questions and that at various times he “sound[ed] to me like Alice in Wonderland.” [Tr. 1170]. The Court finds both Roberts and Pritchard to be incredible on many issues, and, like a bad egg in an omelet, it spoils their entire testimony, even when taken with a grain of salt.

BREAK-EVEN OPERATING RATE

Misrepresentations/Omissions

ITT represented to Pritchard on several occasions prior to the closing, orally and in writing, that ITTSI was operating at or near a break-even rate and that it was in the process of “turning around” from its financial difficulties of previous years. These representations were made at the initial meeting in April 1978, [Kelley] Tr. at 412-13, PX 1, 9; the June 27, 1978 meeting between Pritchard’s agent, A. Theodore Barron and ITT, [Kelley] Tr. at 436-37, [Luke] Tr. at 1197-98, JX 3 (Luke Deposition at 115); the July 17, 1978 meeting in London, [Roberts] Tr. at 40, [Pritchard] Tr. at 536-37, 572; the meetings in New York during the first week of August 1978, [Davidson] Tr. at 1687-88; the August 29, 1978 meeting in New York, [Davidson] Tr. at 1689-90, [Luke] Tr. at 1216-18; and PSG’s press release to its shareholders and others on November 1, 1978, the language of which was approved by ITT and states in relevant part that “management information made available to [PSG] shows that ITTSI is currently near to a break-even operating rate.” PX 11.

The crucial document affecting the break-even operating rate—Pritchard’s principal allegation of fraud—is ITT’s set of pro forma financial statements, dated August 31, 1978, which show an eight-month loss for ITTSI of $318,000. PX 8. Plaintiffs assert that the break-even representations, supported in large measure by the minimal $318,000 loss [$39,750/month], were false because of hidden losses. They point to four factors supporting their contentions. Initially, ITT filed losses for ITT-SI as of October 31, 1978 in the amount of $1,302,372 on its 1978 federal income tax return. PX 36; [Domeracki] Tr. at 685-86; [Mezei] Tr. at 1660-61. Second, ITTSI’s certified audit report confirms a pre-tax loss of $1,822,366 for 1978, including the $1,302,372 loss for the first ten months. DX CD. Third, Pritchard maintains that $884,000 of the $1,302,372 loss for the first ten months is directly attributable to losses from ITTSI’s continuing operations. Finally, Pritchard calculates that ITTSI would have lost $160,000 in November and December 1978 had it continued to operate in the same manner as the preceding ten months.

Reduced to simple terms, Pritchard maintains that ITTSI lost $884,000 on a continuing basis for the first ten months of 1978 [$88,400 monthly loss], which is allegedly a misrepresentation from the August pro formas showing a $318,000 loss for the first eight months, or a ten-month loss projection of $397,500. The Court notes that measuring from the first closing of ITTSI’s books in mid-November 1978, when Pritchard was in actual control of the company, the loss for the first ten months was recorded as $378,000. DX CY, [Andrew J. Capelli] Tr. at 1732-33; [Domeracki] Tr. at 1325. This loss averages to $37,800—an improvement of the $39,750 monthly loss projected by the August pro formas. The Court finds that these initial figures, consistent with ITT’s breakeven representations, are accurate and reflect the actual financial condition of ITTSI. Pritchard’s attempt to stretch the $378,000 figure to $884,000 grows almost entirely out of year-end accounting procedures, which are disproportionately bloated by Pritchard’s extraordinary closing procedures.

The Court initially notes that $208,000 of internal ITT charges, recognized by plaintiffs as falling outside the ambit of the $884,000 continuing loss figure, PX 48, may have been restated inadvertently in its $607,000 figure representing ITTSI’s initial loss from continuing operations before adjustments. DX CY, col. 2. The $607,000 figure forms the base figure from which plaintiffs adjust upwards to $884,000. PX 48.

The August pro formas, covered by the accuracy and no adverse change clauses of the Agreement, are also affected by two disclaimers. The first disclaimer is that the “interim pro-forma financial statements were prepared from the books of account and records of ITTSI, its Subsidiaries and ABSO, but have not been subjected to the same review and analysis afforded the year-end financial statements.” PX 9, ¶ B.6(b). Thus, plaintiffs are on notice that this information was taken from ITTSI’s books without further analysis or adjustment procedures. [Roberts] Tr. at 662-63, 1302-10; [Capelli] Tr. at 1724-25. The second disclaimer is that the pro formas “may require modification to comply more accurately with the closing methods employed in the preparation of the annual statements. [ITT] does not believe that such modification, if any, of the interim statements would have a material effect on the financial condition ... of ITTSI ... for the interim period.” PX 9, ¶ B.6(b).

ITTSI’s practice was to keep its books open for approximately one month at a year-end closing. [Domeracki] Tr. at 1337. Pritchard, however, kept ITTSI’s books open until approximately February 10, 1979, more than three times the usual length (102 days). This allowed Pritchard to record certain adjustments that would not have been picked up if the books were closed normally for review on November 1, 1978. Moreover, the purpose of the November 1, 1978 closing and subsequent negotiation of adjustments was to calculate net tangible assets in order to fix a purchase price, but was not meant to be used for determination of ITTSI’s profits or losses for the first ten months. • [Lang] Tr. at 873-74, 998. As a result of the $695,-000/$506,000 of adjustments booked retroactively by Pritchard for November 1, 1978, in excess of those initially established on November 15, 1978, Pritchard was able to reduce the purchase price by $570,000. DX AM, CZ. The Court will address briefly the list of adjustments.

The initial adjustments for estimated accruals of vacation pay, payroll, state and local taxes, federal and state unemployment taxes, travel and entertainment, and health and welfare benefits resulted in a positive adjustment of $46,000 in ITT’s favor, thereby resulting in an overstatement of losses on the August pro formas. As defendants correctly observe, this adjustment reflects a controlled and conservative accounting approach because ITTSI actually overaccrued for these adjustments.

Pritchard adjusted the books to reflect a $45,000 entry for sick and severance pay. Forty-three thousand dollars of this figure is directly attributable to the TWA terminal contract, which according to generally accepted accounting principles is not booked until the time it is actually paid out. [Lang] Tr. at 908-10, [Domeracki] Tr. at 1345-49, [Mezei] Tr. at 1629-32, [Capelli] Tr. at 1742. The Court finds that because the termination of the TWA contract was not known until December 1978, $43,000 is properly reduced from Pritchard’s adjustments. Additionally, because the entire amounts of the Diversified claim ($18,000), the Columbus lease repairs ($10,000) and the reserve for the Department of Labor in Corpus Christi ($28,000) were not known until December 1978 or January 1979, a total of $99,000 is reduced from Pritchard’s adjustments. [James W. Needham] Tr. at 1923-25. The Court notes that Pritchard received a $92,000 reduction of the purchase price in respect to these adjustments ($45,000, $18,000, $10,000 and $15,000 [proportionately] ). DX CZ.

Pritchard made a $206,000 adjustment for physical inventory of supplies and small tools. Approximately $113,231.33 of this adjustment is directly attributable to Pritchard’s new closing procedure and valuation methods, which do not reflect expenses or losses incurred in 1978. DX DB; [Capelli] Tr. 1751-60. The Court finds that at least $47,768.67 of the remaining adjustment figure is attributable to the adoption of new procedures and methods of valuation used by Pritchard, and accordingly, only $45,000 can be attributed to unrecorded shrinkage in 1978. [Needham] Tr. at 1927-29. Pritchard received a $206,000 reduction of the purchase price with respect to the inventory adjustment for supplies and small tools. DX CZ.

Pritchard made a $38,000 adjustment for physical inventory of fixed assets for which it received a $38,000 purchase price reduction. DX CZ. For purposes of the breakeven operating rate, the Court finds that this deterioration should be spread over a five-year period with a resulting $6,333 loss adjustment for the first ten months of 1978. [Needham] Tr. at 1929-30. The Court notes that Pritchard was informed before the sale of the fact that ITTSI had never inventoried its fixed assets. [Domeracki] Tr. at 1343.

Pritchard made an $88,000 adjustment for accounts payable for which it received an $88,000 purchase price reduction. DX CZ. The Court finds that $54,000 of this figure resulted from Pritchard keeping the books open for over 100 days and that only $34,000 should be properly adjusted on a basis comparable to that used in previous years by ITTSI. [Capelli] Tr. at 1763-66; [Mezei] Tr. at 1629.

The $15,000 adjustment for the New York City Port Authority contract for which Pritchard received a $15,000 reduction in purchase price, DX CZ, is reduced because the contract was not terminated until March 1979 and did not affect ITTSI’s operating rate. [Capelli] Tr. at 1737. The Court will allow a $10,000 adjustment to reflect a ten-month loss of the fifteen months’ losses reflected by the contract. [Mezei] Tr. at 1636-37.

The $6,000 accrued bonus adjustment used by Pritchard is a proper adjustment. [Needham] Tr. at 1933.

The $98,000 New York City Credit Reversal claim is disregarded because it is an extraordinary item not subject to any closing or net tangible asset negotiation and because it was disclosed by Domeracki to Roberts and thence to Pritchard. PX 6, item 1.

The final tally shows a positive adjustment of $46,000 and negative adjustments of $2,000; $45,000; $6,333; $34,000; $10,-000; and $6,000 for a total amount of $57,-333 that arguably should have been reflected on the pro formas. The actual allegation of misrepresentation is that this new figure showing a $435,333 [$43,533/month] ten-month loss for ITTSI is a misrepresentation of a breakeven operating rate based on the August pro formas showing a $39,-750 monthly loss. The Court finds, however, that the increase of monthly losses of $3,783 for 1978 was not a misrepresentation or omission.

The Court finds that ITTSI’s losses of $33,783 per month in September and October 1978 are consistent with the breakeven representation of $39,750 (or $43,533) monthly losses reflected on the August pro formas. ITTSI was nearing a break-even operating rate on November 1,1978, a finding supported by ITTSI’s approximate $7,000-$10,000 profit results for November and December 1978. [Capelli] Tr. at 1786, 1878-79, [Needham] Tr. at 1917, [Roberts] Tr. at 2051-61; DX CB, CC, CD, DJ, DK; JX 318-23, 457-73 (Deposition of Kuthethur Rajogopal Rao). Accordingly, the Court finds that the break-even operating rate representations and the documents provided by ITT accurately reflected ITT-SI’s financial condition and that the undisclosed adjustments were not “omissions” actionable under the securities laws.

Materiality/Reliance/Scienter

Assuming arguendo that the $5,733 monthly increase in loss reflects a misrepresentation/omission of the breakeven operating rate, there would be no materiality. Pritchard conceded at trial that a $25,000 adjustment would not be material. [Pritchard] Tr. at 1146-53. Moreover, at his deposition, Pritchard evaluated a projected $105,000 annualized profit projection reflected in the Barron report. Although the parties agreed before the closing that the Barron report was not credible, Pritchard maintained that “to be pedantic, making $105,000, if you are talking about a few nickels or dimes, then it is near to or break even.” [Pritchard] Tr. at 1146.

Pritchard knew that ITTSI had lost $1.3 million in 1976 and $3.2 million in 1977. Its principal concern was to gain a foothold in the building maintenance business in North America. The evidence adduced at trial establishes that it was essentially immaterial to Pritchard whether ITTSI’s losses on the interim financial statements were understated by significant amounts because Pritchard was relying upon its own expertise to swing ITTSI into profitability, a task at which it succeeded. Having successfully turned around other overseas loss situations in acquired companies, Pritchard trumpeted the benefits of the ITTSI purchase to its shareholders, directors, financiers and to the public on the basis of its ability to reverse ITTSI’s then current loss position. PX 2, 11; DX A, AC, BQ; [Roberts] Tr. at 132-34, 218, 227-28, 257; [Pritchard] Tr. at 1140-41; [Needham] Tr. at 1908-11, 1918-19, 1984-85. Accordingly, for the foregoing reasons, the Court finds that Pritchard did not rely upon any representations or omissions made by ITT with respect to ITTSI’s profits and losses as the basis for purchasing ITTSI. See Titan Group, Inc. v. Faggen, 513 F.2d 234, 236-39 (2d Cir.), cert. denied, 423 U.S. 840, 96 S.Ct. 70, 46 L.Ed.2d 59 (1975); REA Express, Inc. v. Interway Corp., 410 F.Supp. 192, 197-201 (S.D.N.Y.), rev’d on other grounds, 538 F.2d 953 (2d Cir.1976).

FINANCIAL INFORMATION

Plaintiffs assert that representations relating to financial information about ITTSI, which were provided to Pritchard, were fraudulent. ITT represented that its interim balance sheet of July 1975, PX 5, ITT-SI’s income statements for 1973, 1974, 1975, 1976, and 1977, PX 9, ¶ B.6(a), the August 1978 pro formas, PX 9, fl B.6(b), the Agreement, PX 9, ¶ B.6(b), and other financial information provided to Pritchard, [Roberts] Tr. at 51, were “prepared in accordance with generally accepted accounting principles [“GAAP”] consistently applied and present fairly the financial position of ITTSI and its subsidiaries.” Id. The GAAP representation was coupled with the no material misrepresentation/omission clause and the no adverse change clause. PX 9, ¶ B.17.

Plaintiffs’ main objection is that the financial information provided to them did not comply with GAAP or opinion 28 of the Accounting Principles Board [“APB-28”]. PX 47-1. APB-28 applies to interim financial reporting and requires that interim statements “be viewed primarily as an integral part of an annual period.” PX 47-1, ¶ 9. With respect to anticipated year-end adjustments, APB-28, PX 47-1, ¶ 17 provides:

The amounts of certain costs and expenses are frequently subjected to year-end adjustments even though they can be reasonably approximated at interim dates. To the extent possible such adjustments should be estimated and the estimated costs and expenses assigned to interim periods so that the interim periods bear a reasonable portion of the anticipated annual amount. Examples of such items include inventory shrinkage, allowance for uncollectible accounts, allowance for quantity discounts, and discretionary year-end bonuses.

The Court notes that no reference is made to APB-28 in any of the financial documents. Moreover, the Agreement provides that “interim pro-forma financial statements have been prepared using the same GAAP as those employed in the preparation of the annual financial statements [but that] [t]hese interim pro-forma financial statements have not been subjected to the same review and analysis afforded the year-end financial statements.” PX 9, H B.6(b). The Agreement also represents that the financial statements present fairly the operations of ITTSI, a requirement not found in APB-28. [Lang] Tr. at 951.

Plaintiffs’ accounting expert conceded that APB-28 contemplates the use of estimates and acknowledges that there will also be year-end adjustments for companies. [Lang] Tr. at 948-49. The Court notes that four members of the accounting principles board dissented from the APB-28’s principle that adjustments should be estimated and prorated during interim periods because they believe financial statements for any period should reflect only the events occurring during the reported period and should not be adjusted to predict expected results. PX 47-1 at 535. Additionally, there is a question whether APB-28 even applies to internal financial statements of nonpublic subsidiaries of public companies. [Capelli] Tr. at 1728, 1846-51.

After reviewing APB-28 and the other GAAP allegations, the Court finds that defendants’ financial records accurately reflect ITTSI’s finances and conform with accounting principles. This determination is supported by the Court’s finding that the pro formas did not contain misrepresentations or omissions. There is no evidence that defendants’ accounting procedures fell outside the ambit of GAAP, and more importantly, in view of the disclaimer and other relevant communications, plaintiffs can not establish any detrimental reliance. Accordingly, for the foregoing reasons, the Court finds that there was no fraud involved in the passing of financial information from ITT to Pritchard.

GOODWILL

Plaintiffs maintain that ITT defrauded them through misrepresentations and omissions on the issue of goodwill. This areas was the most troubling to the Court during trial and a chronology of negotiating events is set forth: In the April 1978 meeting, Roberts was told that ITTSI had net tangible assets of approximately 7 million dollars not including 3 million dollars of goodwill. PX 1, f 6. The ITTSI balance sheet given to Pritchard in May 1978 shows a $3,173,000 goodwill entry. PX 3. Similarly, the ITTSI balance sheet attached to the July 1978 letter of intent also shows the same entry for goodwill. PX 5. During the July 1978 meetings, Pritchard’s negotiators were told that the goodwill represented the book figures for ITTSI. [Roberts] Tr. at 43; DX BR. Finally, the $3,173,000 goodwill figure was also entered on ITTSI’s balance sheet given to Pritchard at the August 29, 1978 meeting. PX 22; [Needham] Tr. at 2017-18.

Goodwill had been written off ITTSI’s books in 1977 based on a deferred recommendation of its accountants, PX 39; DX DG; [Kelley] Tr. at 454-57, and was not carried on the books during 1978. At first blush, this clear misrepresentation would appear to be a crucial factor in the case. That Pritchard was made aware prior to the closing that goodwill had actually been written off is evidenced by the following: (1) an October 11, 1978 letter from ITT to Pritchard’s counsel enclosing the accountant’s statement that “All goodwill ... was charged to 1977 operations due to a diminution in value,” DX BV; (2) an October 13, 1978 letter from Pritchard’s counsel to Pritchard’s accountants, forwarding the October 11 statement, DX BW; (3) Pritchard’s November 1, 1978 letter to its shareholders wherein a charge of $3,193,000 against ITTSI’s 1977 results is described as “goodwill amortisation and write-off”, PX 11; (4) Pritchard’s testimony that he was aware that goodwill had been written off prior to the closing, [Pritchard] Tr. at 1160-63; (5) William M. Bramwell’s testimony that he informed plaintiff’s counsel about the write-off in September 1978, DX BS, [Bramwell] Tr. at 1267-68; (6) Kelley’s testimony that he also informed plaintiffs’ counsel about the write-off in September 1978, [Kelley] Tr. at 456; (7) the revised August 31 pro formas, which deletd goodwill from ITTSI’s balance sheet, PX 10; (8) the August 1978 balance sheet furnished to Pritchard, which did not include any entry for goodwill, DX BX; [Domeracki] Tr. at 1292-93.

During the negotiations for ITTSI, the purchase price was reduced by a $2,700,000 figure that ostensibly represented a reduced goodwill figure. This reduction was made in negotiations during the August 29, 1978 meeting and is reflected in the Agreement’s final purchasse price of net tangible assets plus a $500,000 [goodwill] premium. The Court was troubled by these events because Pritchard did not know before the August 29, 1978 meeting that goodwill was off the books.

The principal negotiators for the parties, however, did not find that there were any problems. Luke maintained that the goodwill represented a premium, which although not on ITTSI’s books, was includable in the company’s net worth for sales purposes. [Luke] Tr. at 1190. In responding to the Court’s inquiries, Luke testified that the $3,193,000 goodwill figure was a negotiating device. [Luke] Tr. at 1191. The quid pro quo for discounting $2,693,-000 from the $11,000,000 London negotiated price was:

[T]he net result was that I said to Mr. Pritchard, “If in fact I go along with your proposal of no more than $8 million, and I give you this [goodwill] discount of $2.7 million, I want you to know that I don’t want to hear any more about forecasts, or earnings, or any other financials. And I am giving you this discount in order to take care of all those things.” And we agreed, and I said to him, “I am only going to give you three representations which will survive the closing. One is that we own the company. Another, that I will guarantee the receivables.” The receivables by themselves on that balance sheet was worth $7 million. “I will guarantee the taxes and I will guarantee any insurance claims. But so far as we are concerned, Mr. Pritchard, this is the end. I am giving you these things to take care of the problems that you have raised here.” and Mr. Pritchard understood it and he said, “That’s fine.”

[Luke] Tr. at 1192-93.

Pritchard testified that at the time of the closing he knew the goodwill had been written off. [Pritchard] Tr. at 1162. He also testified that the goodwill “was not an issue” [Pritchard] Tr. at 1163, that the $500,000 goodwill premium resulted from “long and arduous” negotiations with Luke, [Pritchard] Tr. at 1163-64, and was “part and parcel of the [$8,000,000] negotiated figure.” [Pritchard] Tr. at 1165. The Court finds that the $500,000 goodwill premium actually represented the $50,000,000 of contracts on ITTSI’s books, in addition to the $7,500,000 net tangible assets, later determined to be $7,678,678.

Accordingly, for the foregoing reasons, the Court finds that any misrepresentations or omissions on the goodwill figures were not material and did not induce plaintiff to rely on them for purposes of the acquisition of ITTSI.

INTERNAL ACCOUNTING/ASSESSMENTS

Plaintiffs allege that they were defrauded by a number of omissions regarding ITTSI’s internal accounting practices and personnel assessments. Pritchard argues that evidence of ITTSI’s weak internal accounting and control systems were withheld by ITT. Specifically, plaintiffs allege that (1) ITT failed to disclose that ITTSI’s accounting system did not produce reliable information; (2) ITT failed to disclose that ITTSI had suffered a string of negative year-end adjustments (“Disastrous Decembers”); and (3) ITT failed to disclose that it had been unsuccessful in trying to restructure ITTSI’s financial recordings.

Plaintiffs’ allegations concerning the personnel assessments center on (1) ITT's failure to disclose a July 28, 1978 “personal and confidential” letter from Davidson to Luke wherein, inter alia, Davidson noted that ITTSI’s “customer base is very fragile and existing relationships cannot be disturbed without serious risk of losing the accounts,” PX 15, II (a), and (2) ITT’s failure to disclose the potential loss of ITTSI managers, PX 15, ¶ (c) (“we are not dealing with a stable, loyal, confident organization”) (emphasis in original).

Pritchard’s arguments on the accounting control systems, as defendants correctly observe, are irrelevant in light of the Court’s finding that ITTSI was operating near a break-even rate as represented. The issue of accounting controls would only bear on scienter if the interim pro formas were materially misleading. In any event, although the yearend adjustments in previous years were not insignificant, they were not material facts affecting Pritchard’s decision to acquire ITTSI.

The 1976 year-end adjustments of $844,-000 involved a net of only $77,000 relevant to Pritchard. Although the relevant 1977 adjustments, after excluding workmen’s compensation and Parr Meadows adjustments amounts to $248,000, DX AN; [Domeracki] Tr. at 742, the Court notes that the evidence adduced showed that ITT-SI had tried to take a relatively conservative approach to the write-off of questionable assets. [Domeracki] Tr. at 736-37, [Mezei] Tr. at 1595-98; DX AO.

The Court is also satisfied that ITTSI made concerted efforts to clean up its financial recordkeeping through the hiring of new financial people, the implementation of new accounting policies and inventory procedures, monthly operations reviews and by an attempt to integrate the recommendations proposed by ITTSI’s outside accounts.

Pritchard’s allegations about the personnel assessments is meritless. The Davidson letter is a confidential memorandum concerning the necessity of maintaining effective operations during the divestiture discussions. Davidson intended to limit the circulation to Luke, L. Hamilton and J. Lester. JX 1 at 252-55. Pritchard, however, was aware of the fragile loyalty of ITTSI managers and the low employee morale. PX 6, DX BN, BO, BP; [Roberts] Tr. at 304-05.

Miscellaneous Misrepresentations/Omissions

The Court has reviewed other issues in this case that are only partially subsumed within the previous four categories. These issues include, inter alia, the Barron Report, [Kelley] Tr. at 433, [Luke] Tr. at 1197; field inventory, [Roberts] Tr. at 100-04; the accountants’ compromise on various adjustments relating to ITTSI’s continuing operations, DX BX; the effect of ITT’s 1978 tax returns, PX 36, [Capelli] Tr. at 1726-27; the October 1978 western region audit report, DX CX; and ITTSI’s budget projections, PX 11, DX AU, AV, AW, AX, AY, DT, DU, DV, DW, DX, DY, DZ, EA, ED.

Using the test set forth in TSC Indus., Inc. v. Northway Inc., supra, 426 U.S. at 449, 96 S.Ct. at 2132, the Court finds that these additional allegations, combined with those discussed in the four main categories, do not result in a significant alteration of the “total mix” of (dis)information presented to Pritchard. Additionally, the Court does not find that the elements of detrimental reliance or scienter have been proved.

Other Issues

In light of the Court’s findings of fact and conclusions of law, the Court does not address the issues surrounding damages or defendants’ additional defenses to liability theories. The Court also does not make any finding with respect to defendants’ assertions (1) about the relevance of the non-survival of representations/omissions concerning the financial statements and condition of ITTSI; (2) that the $2.7 million dollar reduction of the purchase price foreclosed this lawsuit; or (3) that the post-closing reduction of $570,000 in the net tangible assets, and therefore the purchase price, was Pritchard’s exclusive remedy with respect to the allegations raised in its complaint.

Counterclaim

The Court awards ITT judgment on its counterclaim for the unpaid balance of the purchase price—$178,678.00 plus interest from August 2, 1979, thirty days after the final determination of net tangible assets. DX X; PX 9, H A.5(b)(i).

Costs and Attorneys’ Fees

ITT’s motion for costs and attorneys’ fees is denied. The Court notes the increasing and reflexive frequency with which Rule 11 motions are being filed in this District. Plaintiffs’ claim had merit on its face and was not brought for malicious purposes. Although the original impetus behind the lawsuit appears to have arisen because ITTSI did not turn around as quickly as projected, plaintiffs’ counsel carefully compiled its case and skillfully presented its version of the facts and law without any evidence of harassment or bad faith.

CONCLUSION

Accordingly, for the foregoing reasons after a nonjury trial on the merits, the Court finds for defendants.

The foregoing constitute the Court’s findings of fact and conclusions of law. Fed.R.Civ.P. 52(a).

Defendants are given Judgment on their counterclaim of $178,678 with interest from August 2, 1979.

The Clerk of the Court is directed to prepare and enter Judgment dismissing the complaint.

SO ORDERED.

      . 17 C.F.R. § 240.10b-5 provides:
      It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
      (a) To employ any device, scheme, or artifice to defraud.
      (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
      (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.

      . The following abbreviations are used: Plaintiffs Exhibit ["PX”]; Defendants’ Exhibit [“DX”]' Joint Exhibits ["JX”]; and citations to the trial transcript are in the form "[witness name] Tr. at page."

      . Pritchard's trial testimony on whether Luke represented that ITTSI was operating at a breakeven rate at the August 29, 1978 meeting conflicts with Luke's testimony and Pritchard's pretrial deposition. Compare [Pritchard] Tr. at 541-50, 631-32, 1173-76 with [Luke] Tr. at 1212-13 and [Pritchard] Tr. at 652, 1175-79 (Pritchard deposition). Pritchard’s testimony that he would not have gone through with the deal if ITTSI was not operating at a break-even rate, see [Pritchard] Tr. at id., is belied by a written contemporaneous report made by Pritchard's Chief Financial Officer after discussions with Pritchard on August 31, 1978:
      Following [Pritchard’s] visit to the States on Monday 28th August verbal agreement has now been made with Luke of I.T.T. re acquisition of I.T.T.S.I. as follows:

        Profits/Losses

      Luke said that the present President Davidson had said that the company would break through to break even in August and that he felt there would be a small profit [for] September/December although it is our opinion that there will be a loss for that period.

      DX BM (emphasis added).
      Roberts' testimony on the significance of the goodwill write-off, [Roberts] Tr, at 99, is contradicted by overwhelming evidence that Pritchard was aware of this disclosure prior to closing. See DX BV, BX, BW; [Bramwell] Tr. at 1267-68; [Kelley] Tr. at 456; [Pritchard] Tr. at 1160-63. Roberts also gave conflicting testimony and reports concerning the attempt to retain Richard Starke at PSI. Compare [Roberts] Tr. at 87-88 (wanted Starke to stay on) with DX Q at 48 (Roberts Deposition) (no attempt to retain Starke) and DX R at 3 (Roberts 1979 report) (attempted to retain Starke) and [Davidson] Tr. at 1692-93 (Roberts did not want to retain Starke). Additionally, Roberts partially disavowed the accuracy of documents reflecting the two-month operation of ITTSI for November and December 1978 even though they were prepared for Pritchard, and one document was based in part on discussions with Roberts in Dallas. [Roberts] Tr. at 2051-66; DX DJ, DIC

      . The Court finds that an $888,000 loss for continuing operations is the result when using Pritchard’s calculations. The $414,000 discrepancy reflects ITT internal charges of: $105,000 for contract service charges; $103,000 for imputed interest; $21,000 for the exclusion of ABSO profit; and $185,000 for the Bulkley building leasehold improvements.

      . Pritchard calculates that of the $519,994 loss recorded for November and December 1978 in the certified audit report, only $360,000 reflected costs and savings occurring solely because of the sale, thereby leaving a projected • $160,000 loss.

      . The Court adheres to a $88,800 projected monthly loss, see note 4 supra, which is more favorable to plaintiffs.

      . Pritchard discovered $695,000 in adjustments, largely through unorthodox methods of valuation, which pumped the $607,000 ten-month loss figure for ITTSI—based on the $378,000 booking of November 15, 1978—to the final $1,302,-372 figure claimed by Pritchard. DX CY. The Court is concerned with the $506,000 list of adjustments that increased the $378,000 booking to $884,000, the crucial continuing loss figure.

      . This figure represents the proportionate elimination from the $206,000 adjustment when compared to the $123,672 elimination from the $225,000 overall adjustment.

      . The Court notes that this profit figure of a minimum of $3,500 a month should be reduced by $3,783 to show a maximum average $283 monthly loss, certainly a break-even operating rate for a business with revenues approximating 50 million dollars.

      . The Court finds that $676,000 attributable to workmen's compensation was necessary to reconcile ITTSI’s accruals with its insurance carrier’s liability estimates. [Domeracki] Tr. at 738-41. The $39,000 adjustment for pensions and the $52,000 adjustment for general liability insurance both related to internal ITT requirements.

      . Workmen’s compensation is excluded for the same reasons as the 1976 adjustment. Parr Meadows is a non-building services operation of ITTSI sold back to ITT before the Pritchard acquisition.


source: Caselaw Access Project

author: EDWARD WEINFELD, District Judge.

license: Public Domain

text:
    WALES INDUSTRIAL INC., Plaintiff, v. HASBRO BRADLEY, INC., Defendant.
    No. 85 Civ. 2049 (EW).
    United States District Court, S.D. New York.
    March 30, 1985.

      Lilling & Greenspan, White Plains, N.Y., for plaintiff; Burton L. Lilling, Bruce E. Lilling, A. Kate Huffman, White Plains, N.Y., of counsel.
    Parker Auspitz Neesemann & Delehanty P.C., New York City, for defendant; Anthony M. Radjce, Kim J. Landsman, Martin S. Himeles, Jr., New. York City, of counsel.
   MEMORANDUM

EDWARD WEINFELD, District Judge.

Plaintiff moves pursuant to Fed.R.Civ.P. 65 for a preliminary injunction. As our Court of Appeals stated recently, “ ‘[p]erhaps the single most important prerequisite for the issuance of a preliminary injunction is a demonstration that if it is not granted the applicant is likely to suffer irreparable harm before a decision on the merits can be rendered.’ ” Citibank, N.A. v. Citytrust & Citytrust Bancorp, Inc., 756 F.2d 273, 276 (2d Cir.1985) (quoting Bell & Howell: Mamiya Co. v. Masel Supply Co., 719 F.2d 42, 45 (2d Cir.1983)). Even assuming that plaintiff’s allegations of potential injury are true, they do not amount to a demonstration of irreparable harm. Essentially, plaintiff claims that unless the Court makes an early determination of the validity of defendant’s claimed copyrights and whether plaintiff’s toy products infringe those rights, if any, then shipments of plaintiff’s toys may be detained or recalled by the United States Customs Service, with which defendant has already registered its claimed copyrights; that plaintiff’s customers may, as one already has, require it to indemnify them against possible legal action by defendant; that because of defendant’s published threats of litigation plaintiff is likely to lose prospective sales to as yet unidentified customers; and that plaintiff, a new company, would be severely damaged in its business and reputation if it were compelled to cancel its customers’ purchase orders that are now pending, since those customers would then be reluctant to deal with plaintiff in the future. As these claims indicate, plaintiff’s greatest risk of loss is that it may not be able to fill its customers’ pending purchase orders promptly and without complication. Yet any order cancellations or expenses it may incur in filling these orders that are attributable to defendant’s allegedly wrongful efforts to enforce its claimed copyrights would only reduce plaintiff’s anticipated profits on these orders. Such loss could easily be calculated and offset by money damages. As to the claim that plaintiff may lose prospective sales and future business opportunities, the value of which cannot now be ascertained, plaintiff offers lit-tie more to support this claim than its assumption that such would be the case.

More importantly, it is clear that plaintiff embarked upon its present course of business with full knowledge that its sales efforts might be met with claims of copyright infringement. Plaintiff concedes that its toys are based on copies of Japanese goods for which defendant owns the United States copyrights and that plaintiff directed its foreign supplier to modify the copies in order to avoid infringing defendant’s rights. Indeed, plaintiff expressly reserved the right to cancel its contract with the foreign supplier if the preliminary injunctive relief plaintiff now seeks could not be obtained before April 1, 1985. Plaintiff was well aware of the legal risk involved in selling its toys but chose to undertake that risk and proceeded to accept purchase orders from the customers whose good will it now fears losing. Its claim now that this very risk threatens to cause it injury of an irreparable nature is considerably less persuasive as a result. Furthermore, while plaintiff learned that its venture would meet with resistance from defendant as early as January 1985, when defendant gave notice to plaintiff’s supplier and sales representative that defendant would institute an infringement lawsuit against them unless they discontinued sales of plaintiff’s toys and plaintiff executed the contract with its supplier wherein it reserved the right to cancel if it could not obtain preliminary injunctive relief by April 1, 1985, plaintiff waited until the very eve of April 1 before commencing this declaratory judgment action, in effect “jumping the gun” on defendant. “In short, [plaintiff's] failure to act sooner ‘undercuts the sense of urgency that ordinarily accompanies a motion for preliminary relief and suggests that there is, in fact, no irreparable injury.’ ” Citytrust & Citytrust Bancorp, at 277 (quoting in part Le Sportsac, Inc. v. Dockside Research, Inc., 478 F.Supp. 602, 609 (S.D.N.Y.1979)).

In addition, and entirely apart from the foregoing, it is questionable upon the voluminous and complicated record presented on this application that at this stage of the action plaintiff has established a likelihood of success upon a trial of the merits. Plaintiff’s main contention that lack of a copyright notice on the items offered for sale by defendant’s supplier in Japan vitiates any copyright by defendant in the United States is drawn into serious question. See Midway Mfg. Co. v. Artie International, Inc., 547 F.Supp. 999, 1008 (N.D.Ill.1982), aff'd, 704 F.2d 1009, 1013 (7th Cir.), cert. denied, — U.S.-, 104 S.Ct. 90, 78 L.Ed.2d 98 (1983); 17 U.S.C. §§ 401(a), 405(a)(2). Moreover, assuming defendant is entitled to prevail on the issue of the validity of its claimed copyrights, plaintiff’s further claim that its toys do not infringe those rights is at once challenged upon a mere inspection of the parties’ products. The fact that plaintiff’s supplier continually modifies its molds so as to make its items here in issue more distinguishable from defendant’s corresponding items gives further support to defendant’s claim of infringement and that plaintiff embarked upon a deliberate policy of copying defendant’s copyrighted items. Indeed, “Plaintiff does not deny that Glacier had access to the Takara Items or that Glacier originally copied.” Plaintiff’s Brief at 12.

Plaintiff has not shown a likelihood of success on the, merits. Nor, assuming there are sufficiently serious questions going to the merits to make them a fair ground for litigation, has it shown that the balance of hardships tips decidedly in its favor, given its apparent willingness to undertake the risk of an infringement action by defendant and then to wait some two months before seeking preliminary relief. Accordingly, plaintiff has failed to carry its burden on all branches of the standard for granting a preliminary injunction, see Jackson Dairy, Inc. v. H.P. Hood & Sons, Inc., 596 F.2d 70, 72 (2d Cir.1979) (per curiam), and its motion is denied.

So ordered.


text:
    WALES INDUSTRIAL INC., Plaintiff, v. HASBRO BRADLEY, INC., Defendant, and Benny P. Lueng, Sheila Lieberman, Lieberman & Rosen Associates, Inc. d/b/a Lieberman & Associates, James Knilans d/b/a Knilans & Associates, and Glacier Enterprises Co. Ltd., Additional Defendants on the Counterclaims.
    No. 85 Civ. 2049 (EW).
    United States District Court, S.D. New York.
    July 3, 1985.

      Lilling & Greenspan, White Plains, N.Y., Ballon, Stoll & Itzler, New York City, for plaintiff and third party defendants Benny P. Lueng, Sheila Lieberman, Lieberman & Rosen Associates, Inc., and James Knilans; Burton L. Lilling, Bruce E. Lilling, A. Kate Huffman, White Plains, N.Y., Richard Weinberger, New York City, of counsel.
    Parker Auspitz Neesemann & Delehanty, P.C., New York City, for defendants and counterclaim plaintiff Hasbro Bradley, Inc.; Anthony M. Radice, Carroll E. Neesemann, Kim J. Landsman, New York City, of counsel.
   OPINION

EDWARD WEINFELD, District Judge.

This action centers about the validity and alleged infringement of copyrights in a popular new series of convertible robot toys known as “The Transformers,” fantasy action figures that can be transformed by manipulation from robots into dinosaurs and other forms. The series, which includes some seventy different figures, is manufactured in Japan by Takara Co., Ltd. (“Takara”), not a party to the action, and is distributed in the United States by defendant Hasbro Bradley, Inc. (“Hasbro”) under an exclusive sales license granted by Takara and its American sales subsidiary on November 1, 1983. Thereafter, on November 12, 1984, Takara assigned to Hasbro its rights in the Transformer copyrights for the United States for a period of three years, subject to renewal upon mutual consent. Plaintiff Wales Industrial Inc. (“Wales”) plans to import and distribute into the United States its own version of several convertible robot toys, which are manufactured in Taiwan by third party defendant Glacier Enterprises Co., Ltd. (“Glacier”), a Taiwanese company which, though served with process, has not appeared and is in default.

In March 1985, Wales commenced this action against Hasbro seeking a declaratory judgment that Hasbro’s claims to copyrights in the Transformers are invalid and that Wales’s planned sales of its then yet to be imported products will not infringe any such copyrights. Wales also moved for. a preliminary injunction enjoining Hasbro from taking legal action against or from otherwise interfering with Wales’s sales effort. In an opinion dated March 30, 1985, familiarity with which is assumed, the Court denied Wales’s motion. 612 F.Supp. 507.

Thereafter, Hasbro asserted counterclaims against Wales and third party claims against Wales’s principal, Benny Leung, and its supplier, Glacier, charging them with violations of federal copyright and trademark law as well as New York law. Specifically, it charges they have advertised, promoted, and solicited sales of convertible robot toys in the United States that are copied from and are substantially similar to the sculptural expressions in five Transformers known as “Slag,” “Sludge,” “Grimlock,” “Topspin,” and “Perceptor.” Hasbro further charges that James Knilans and Lieberman & Rosen Associates, Inc. (“LRA”), as Wales’s sales representatives, and Sheila Lieberman, as LRA's president, have participated in and furthered the illegal sales effort by Wales, and they are also named as third party defendants.

Wales and all third party defendants now move pursuant to Fed.R.Civ.P. 12(b)(1) and 12(b)(7) to dismiss Hasbro’s counterclaims and third party claims for lack of subject matter jurisdiction and failure to join Takara as an indispensable party. In addition, Knilans, LRA, and Lieberman move for dismissal upon the ground that they are not responsible for any infringing activity in which they may have engaged on Wales’s behalf. Hasbro opposes the motions and cross-moves for a preliminary injunction enjoining Wales and those acting in concert with it from importing or distributing three convertible robot toys that Glacier allegedly copied from three Transformers—Slag, Sludge, and Grimlock—and has already shipped to Wales for sale in the United States.

LACK OF SUBJECT MATTER JURISDICTION

Wales and the other movants first contend that Hasbro may not sue for infringement of any Transformer copyrights because the putative assignment of these copyrights to Hasbro is limited to a term of three years and thus is not an assignment but at most merely an exclusive license to distribute and sell the toys for a limited period and in a specified territory. By the document executed November 12, 1984,

Takara does hereby sell, assign, transfer and set over to Hasbro the entire right, title and interest to any copyrights on the [Transformer] designs for the United States of America, including the right to apply for ... and own copyrights thereon in those countries for a term of three (3) years subject to the terms of the Agreement of November 1, 1983, at the conclusion of which, unless renewed for additional terms by mutual consent, Hasbro agrees to assign back to Takara, free of any charge, all of the rights assigned herein, including any copyrights covering said rights that may be issued.

On its face, the document purports to transfer to Hasbro rights in the Transformer copyrights that are exclusive but limited in time and place of effect. Under the doctrine of divisibility, embodied in the Copyright Act of 1976 (the “Act”), whereby a copyright owner may transfer less than all of his copyrights, such a grant would constitute a “transfer of copyright ownership” and would entitle Hasbro, to the extent of any particular exclusive right it acquired, “to all of the protection and remedies accorded to the copyright owner” by the Act. For purposes of invoking the protection of the Act, it is the exclusiveness of the rights transferred, not an absence of temporal or geographic limitations upon them, that is essential. Thus, whether the document executed by Takara on November 12, 1984 is denominated an assignment or an exclusive license is of no consequence for purposes of subject matter jurisdiction. The Act expressly authorizes the “legal or beneficial owner of an exclusive right under a copyright,” subject to the recordation and registration requirements, discussed hereafter, “to institute an action for any infringement of that particular right committed while he or she is the owner of it.”

The copyright grant executed by Takara on November 12, 1984 was recorded by Hasbro in the United States Copyright Office on April 22, 1985. Thus, the recordation prerequisite to an infringement action by a transferee of an exclusive right under a copyright was satisfied. That recordation occurred some five weeks after this action was commenced is irrelevant; it is sufficient that it occurred before the hearing on the instant motion. Thus, the jurisdictional requirement of recordation was satisfied.

Wales and the other movants contend that a further jurisdictional requirement, registration of the Transformer copyrights, has not been satisfied. Section 411(a) of Title 17 provides that “no action for infringement of the copyright in any work shall be instituted until registration of the copyright claim has been made in accordance with this title.” Registration of a copyright claim is a jurisdictional prerequisite to a suit for infringement. Under section 409, a registration application must identify the “copyright claimant” and indicate how the claimant, if it is not the author, obtained ownership of the copyright. The term “copyright claimant” is not defined in the statute and one must look to the regulations of the United States Copyright Office. In this case, Hasbro filed registration applications for the Transformers identifying itself as the copyright claimant “[b]y assignment from Takara.” The movants contend these registrations are invalid because Hasbro is not a “copyright claimant” as that term is defined in the regulations. The latter define a “copyright claimant” as either the “author of a work” or a “person or organization that has obtained ownership of all rights under the copyright initially belonging to the author.” According to the movants, since Takara is identified in the registrations as the author of the Transformers, and since, under the document of November 12, 1984, Hasbro did not obtain “ownership of all rights under the copyright initially belonging to the author [Takara],” but only limited rights in the Transformer copyrights, Hasbro does not qualify as a copyright claimant under either prong of the definition.

If, as is claimed, Hasbro erroneously identified itself on the registrations as the “copyright claimant,” in contravention of the statute and regulations, this alleged error would not invalidate the registrations. Even if Hasbro were not a “copyright claimant,” it is, under the movants’ own reading of the November 12 document, the owner of an exclusive right, limited in time and place of effect, in the Transformers, and as such it would be entitled under the Act and the regulations to submit applications for and obtain registration of the copyright claims in those works. Thus, Hasbro’s error, if any, would not be jurisdictional but a technical misdescription: it should have identified Takara rather than itself as the “copyright claimant” on the registration applications it submitted. Such error could be readily corrected by Hasbro’s filing supplementary registrations with the Copyright Office. Since there is no indication that the claimed error was committed knowingly, and since identification of the copyright claimant as Takara rather than Hasbro would not have occasioned rejection of the applications by the Copyright Office, the alleged error would not require dismissal of Hasbro’s infringement claims.

Wales and the other movants contend the registrations of four of the five Transformers are invalid for still another but different reason. As to three of the toys, Slag, Sludge, and Grimlock, Hasbro registered copyright claims in July 1984, some four months before Takara executed the copyright grant on November 12, 1984. Thus, the Movants argue, Hasbro registered the claims to these three toys before it was entitled to do so and its counterclaim for infringement must be dismissed. Hasbro responds, however, that Takara actually transferred the rights in the Transformer copyrights by prior oral assignments, in April and May 1984, several months before the July registrations, and that the document executed by Takara on November 12, 1984 confirmed the prior oral assignments.

A transfer of copyright ownership, either by means of an assignment or an exclusive license, “is not valid unless an instrument of conveyance, or a note or memorandum of the transfer, is in writing and signed by the owner of the rights conveyed.” This requirement is satisfied, however, by the owner’s later execution of a writing that confirms a prior oral agreement, at least where, as here, there is no evidence of any dispute between the owner and licensee as to the validity of the alleged oral grant. The movants dispute Hasbro’s claim that the document executed by Takara on November 12, 1984 was a written confirmation of the alleged oral assignments in April and May 1984. They emphasize that the decretal paragraph of the document speaks in the present tense and makes no reference to any prior oral assignment. However, the effective date of the document is not indicated and, although the document contains no reference to the alleged oral assignments, it is expressly made subject to the sales license agreement entered into by Takara, its American subsidiary, and Hasbro on November 1, 1983. Thus, Hasbro’s proffered reading of the document as confirming pri- or oral assignments is “ ‘fairly reasonable.’ ” There are material issues of fact as to whether Takara made such oral assignments and whether Takara and Hasbro intended the November 12, 1984 document to confirm them. These issues foreclose dismissal of Hasbro’s copyright claims before it has had an opportunity to present extrinsic evidence of Takara’s and its intentions concerning the document. Hasbro’s registration of the Slag, Sludge, and Grim-lock copyright claims must be presumed valid for purposes of this motion. As to Perceptor, however, Hasbro concedes it is not mentioned in the November 12 document and withdraws its copyright claims.

Accordingly, the motion to dismiss the copyright counterclaim and third party claims for lack of subject matter jurisdiction is denied as to all toys in issue except Perceptor.

FAILURE TO JOIN AN INDISPENSABLE PARTY

Wales and the other movants next contend that Takara, as author of the Transformers, is an indispensable party to the action in whose absence the copyright claims must be dismissed pursuant to Fed. R.Civ.P. 12(b)(7) and 19. They argue that because the validity of the Transformer copyrights is in issue, and because Takara granted Hasbro rights therein for a period of only three years, thereby retaining ownership of such rights for the balance of the seventy-five year statutory life of each copyright in the United States, a determination by this Court that the copyrights are invalid or unenforceable in this country would adversely affect the rights and interests of Takara, not a party to the action. In its complaint and opposition to Hasbro’s motion for a preliminary injunction, discussed hereafter, Wales asserts that Takara, prior to granting the rights in issue to Hasbro, offered for sale in Japan two convertible robot toys without copyright notice affixed thereto and that these toys, along with the Transformers subsequently modeled on them, are in the public domain. Thus, the validity of the underlying copyrights in at least two Transformers is in issue and ultimately must be determined by the Court. As a nonparty, of course, Takara would not be bound by a judgment of this Court declaring such copyrights invalid; nevertheless, such a judgment may, as a practical matter, impair or impede Takara’s ability to protect its interest in the subject matter of the action.

Of greater significance, alluded to by the movants but without elaboration, is that Hasbro’s failure to join Takara will subject the movants to a risk of multiple lawsuits and inconsistent judgments concerning the validity of the Transformer copyrights. In the event Wales prevails upon its claim that some of the Transformers are in the public domain, and thereafter proceeds to distribute its own version of these toys, it could be sued for infringement again, this time by Takara, which, as already noted, would not be bound by the Court’s prior judgment. Thus, joining Takara as a party to this action would enable Wales “to respond in one action to all claims of infringement for [its] act, and thus either to defeat all claims in the one action, or by satisfying one adverse decree to bar all subsequent actions.” In addition, and not to be disregarded, there is the interest of the courts and the public in complete, consistent, and efficient settlement of controversies.

For the foregoing reasons, joinder of Takara as a party to the action is desirable. The recently enacted Copyright Act vests discretion in the Court to “require the joinder ... of any person having or claiming an interest in the copyright.” Absent special circumstances joinder should be required in cases challenging the validity of the copyright upon which rest the rights of the person to be joined and should not be required if the only issue is whether the defendant engaged in unlawful copying. Here, there is both a challenge to the validity of some of the Transformer copyrights and a charge of infringement. In addition, under prior copyright law, an author who transferred something less than full ownership of his copyright, such as an exclusive right to sell copies of his work in a limited territory for a limited time, was an indispensable party to an action in which the validity of the copyright was to be determined, and in his absence the action could not be maintained. To mitigate the harshness of this rule, the Supreme Court, in Independent Wireless Telegraph Co. v. Radio Corp., held that an exclusive licensee could join the licensor as an involuntary plaintiff who would be bound by any judgment rendered if the licensor first were invited to join, refused to do so, and could not be served with process in any jurisdiction where the licensee could obtain effective relief.

As noted, the new Act vests discretion in the Court concerning joinder. In light of the facts developed on these motions with respect to the validity of the copyrights, Takara should be joined as a party. Therefore, Hasbro is directed to request Takara to join with it as a party to this litigation. If, within ten days from date, Takara fails to do so, then Hasbro is directed to amend its counterclaims and third party claims to include Takara as a co-party and, pursuant to 17 U.S.C. § 501(b), to serve written notice of the action with copies of the amended pleadings upon Takara. Thereupon, pursuant to Rules 19(b) and 21, and the Supreme Court’s decision in Independent Wireless, Takara shall be an involuntary counterclaim plaintiff and third party plaintiff and thus bound by the judgment of the Court.

Accordingly, upon Hasbro’s compliance with the foregoing direction, the motion to dismiss the counterclaim and third party claim for failure to join an indispensable party is denied; otherwise it is granted.

THE CLAIMS AGAINST THE SALES REPRESENTATIVES

The third party defendants Knilans, LRA, and Lieberman move to dismiss Hasbro’s claims against them upon general allegations that their conduct in furthering the sale and distribution of the alleged infringing products was performed as independent sales representatives, in which capacity they served not only Wales but others; that their services in advertising and promoting sales of the products were performed on a commission basis; and that they had no interest in or control over Wales or Glacier, were not their employees, and had no involvement in the conception or development of the products. However, it is well settled that one who knowingly induces, causes, or materially contributes to the infringing conduct of another may be held liable as a “contributory” infring-

er. If the conduct of Wales and Glacier is found to have infringed the Transformer copyrights, then Knilans, LRA, and Lieberman may be held jointly and severally liable with Glacier and Wales upon proof that each knew or should have known of the latter’s infringing activity and participated in or furthered it. Whether these defendants had actual or constructive knowledge of the alleged infringement and whether they played a sufficient role in furthering it are fact issues that may not be resolved upon this motion. So, too, Lieberman’s claim that she engaged in the solicitation effort solely in her capacity as an employee and officer of LRA cannot be resolved now. An individual who causes a corporate defendant to infringe copyrights and personally participates in the infringing activity is jointly and severally liable with the corporation for the infringement. Resolution of this fact issue must also await trial.

Accordingly, the motion by third party defendants Knilans, LRA, and Lieberman to dismiss Hasbro’s third party claims against them is denied.

PUBLICATION WITHOUT NOTICE OF COPYRIGHT

As already noted, Wales charges that some of the Transformers here in issue are in the public domain. This charge is made in opposition to Hasbro’s motion for a preliminary injunction but will be addressed separately for convenience.

First, as to two Transformers, Slag and Grimlock, Wales asserts that copyright notices are visible only when the toys are in their robot, and not their dinosaur, configurations. Since Hasbro has registered separate copyright claims for each configuration, Wales asserts, it should have affixed separate copyright notices to each and having failed to do so forfeited any copyrights in the dinosaur configurations of these two toys. This charge is directly contrary to the tradition of construing the notice requirement liberally. A notice consisting of the copyright symbol, Takara's name, and the date of first publication is stamped on an integral, nondetachable part of each toy and is easily visible when the toy is manipulated into its robot configuration, as it is intended to be, and fully satisfies the statutory requirement that reasonable notice of a copyright claim be given.

Second, as to the Slag and Sludge toys, Wales contends that Takara displayed the original versions of these toys at the 1984 Tokyo Toy Show without copyright notices affixed to them, thereby placing these versions and the two Transformers modeled upon them into the public domain. Wales contends that Takara’s omission is incurable under 17 U.S.C. § 405(a)(2) because it was intentional. Hasbro responds that only Takara’s version of the Slag toy was published without notice; that the omission was inadvertent since this version was intended for sale only in Japan where there is no copyright protection for toy sculptures and as soon as Takara decided to manufacture the Slag toy for sale to Hasbro in the United States it began printing copyright notices on this item; and that Hasbro cured the omission by promptly registering the Transformer copyrights and selling in the United States only Transformers bearing notices.

While the authorities are divided as to whether an intentional omission of copyright notice from an authorized copy is curable under section 405(a)(2), those cases involved publications in the United States. When a foreign author publishes copies of his work without notice in his own country, and thereafter assigns his copyrights or grants an exclusive license therein for purposes of publication in the United States, the assignee or exclusive licensee can cure the omission with respect to copyright protection in this country by placing notices on all copies distributed under its own authority in this country and elsewhere and by registering the works with the Copyright Office within five years after their initial publication by the foreign author. In this instance, as already discussed, Hasbro made valid registrations of the Transformer copyrights in 1984, well within five years after Takara first published a version of the Slag toy (or any other Transformer) without notice. In addition, the evidence indicates that Hasbro has distributed all of its Transformers with proper notices.

Wales does not dispute this last point. Rather, it relies solely upon an affidavit by a sales representative who states that he purchased “five Takara Dinosaur/Robot toys” in a Los Angeles toy store on June 19, 1985 and that all but one lacked notice. These toys are not identified as Transformers and have nothing to do with the toys in issue. Essentially, Wales’s contention is that Takara’s initial omission of copyright notice on the products sold in Japan cannot be cured unless all convertible robot toys distributed by Takara, not just the Transformers sold to Hasbro, have notices printed on them. However, the notice requirements of section 401 and the cure provisions of section 405(a) apply to copies distributed “by authority of the copyright owner”—in this ease, Hasbro. There is no evidence that Hasbro authorized the sale of any of Takara’s convertible robot toys other than Transformers, either in the United States or elsewhere. Absent such evidence, sales of Takara’s convertible robot toys other than Transformers, even those allegedly sold in this country, are not distributed “by authority of the copyright owner” and are of no consequence in this action.

Finally, Wales contends that, at worst, it is an “innocent infringer” who acted upon a good faith belief that the Transformers were in the public domain and therefore Hasbro’s relief, if any, should be an involuntary license granted to Wales pursuant to 17 U.S.C. § 405(b). However, Wales did not enter into its initial contract with Glacier until after its National Sales Manager had received formal notification of Hasbro’s copyright claim from its attorneys. Moreover, even an innocent infringer may be enjoined from engaging in infringing activity. Thus, whether Wales is an “innocent infringer” entitled to an involuntary license is a fact issue to be resolved at trial.

Accordingly, at this stage of the litigation, the various attacks levelled against the validity of the Transformer copyrights claimed by Hasbro must fail, and the motions to dismiss Hasbro’s counterclaims and third party claims are denied.

HASBRO’S MOTION FOR A PRELIMINARY INJUNCTION

Hasbro moves for a preliminary injunction to enjoin Wales, the third party defendants, and others acting in concert with Wales from importing, distributing, or selling any toys with sculptural expressions substantially similar to those of three Transformers, Slag, Sludge, and Grimlock. Despite Wales’s various attacks upon the validity of Hasbro’s claim to copyright relief, the above discussion and disposition of the dismissal motions indicate that Hasbro is likely to prevail upon a trial and establish the validity of the Transformer copyrights and its claimed rights thereunder. As to the infringement of those rights, an inspection of the toys in issue, as well as Wales’s admission that Glacier initially copied Takara’s toys and then modified the copies at Wales’s urging to avoid a lawsuit for infringement, amply supports the charge of unlawful copying, as the Court observed in its prior opinion.

By itself, however, a probability of success upon the merits does not entitle Hasbro to preliminary injunctive relief. It is a sina qua non of such relief that Hasbro must also establish irreparable injury. Under a well established rule in this Circuit, a prima facie case of copyright infringement gives rise to a presumption of irreparable injury—at least, the allegations of irreparable harm need not be very detailed. Hasbro’s allegation that it is the largest toy company in the United States and enjoys a reputation for high quality toy distribution attributable in large part to the safety of its products and conformance to United States governmental and industry safety standards for toys is unchallenged. Hasbro’s principal contention of irreparable harm is that its well established reputation as a leader in the toy industry in the United States will be tarnished because the plaintiff’s alleged infringing products are of inferior quality and may not meet federal or industry child safety requirements. Hasbro also contends that the distribution of such products, in imitation of its own, will have a serious impact upon its relationship with existing licensees and will deter potential licensees from making purchases.

Wales, while not conceding that Hasbro will suffer irreparable injury, contends that by its delay in applying for preliminary injunctive relief Hasbro has waived any right thereto. Wales instituted this action on March 15, 1985 and simultaneously applied for injunctive relief, which, as already noted, was denied. Hasbro asserted its counterclaims against plaintiff and third party claims against others on April 9 and thereafter amended them on June 7, 1985. Hasbro’s instant motion was not filed until June 20, 1985, after Wales and the others made their respective motions to dismiss Hasbro’s claims and counterclaims. As to alleged delay, Hasbro responds (1) that it and its attorneys were led to believe that Wales would abandon its contracts with Glacier after the Court had denied Wales's application for injunctive relief as, indeed, Wales itself had represented would follow if the relief it requested were denied; (2) that counsel for Wales and Hasbro engaged in ongoing settlement discussions following the denial of Wales’s preliminary injunction motion; and (3) that Hasbro did not learn that Wales was beginning to import Glacier’s toys until plaintiff’s document production on May 29, 1985 and depositions that were taken on May 31 and June 5, 1985. These disclosed that to date, in April and May, Wales imported and shipped to customers only some 8000 pieces but that it has placed further orders with Glacier, as yet undelivered.

Hasbro’s allegation that it first learned on May 29, 1985 that Glacier had actually shipped the alleged infringing products to Wales is unchallenged. So, too, that serious settlement discussions in fact were in progress during the pendency of the foregoing matters was voluntarily adverted to by plaintiff’s attorney during the argument of this motion. While Hasbro might have been more alert by cross-moving for injunctive relief when plaintiff made its initial application, the reasons noted above adequately explain the relatively slight delay in presenting the instant application.

I am of the view that Hasbro is entitled to the requested preliminary injunction. It has sufficiently established the threat of irreparable harm in the absence of an injunction and has further established not one but both prongs of the prevailing rule in this Circuit: (1) a likelihood of success on the merits and (2) sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly in its favor. Hasbro’s claim, if established, that Wales and others are engaged in the distribution of inferior products in imitation of Hasbro’s—products that may not comply with federal or industry child safety standards—and that such distribution may adversely affect Hasbro’s reputation as a distributor of high quality children’s toys and reduce the demand for its products from existing customers and interfere with prospective business from others, meets the test of irreparable injury.

Finally, the equities of the situation warrant the requested relief. As demonstrated by its contract with Glacier, Wales embarked upon a deliberate and calculated policy that it knew would be challenged by the owner of the Transformer copyrights. Wales did not contract with Glacier for the manufacture of what Hasbro terms the “knockoff” toys until March 10, 1985 (and backdated its contract to January 15, 1985), two months after it not only had specific notice of the copyright registration by Hasbro but after Hasbro had marketed millions of pieces of Transformers and spent millions of dollars in advertising. In contrast, to date, Wales has imported and sold only some 8000 pieces, a minute quantity compared to the estimated total sales by Hasbro in 1985 of some forty-eight million pieces. Any injury to Wales is de minimis and can readily be compensated by monetary damages in the event it should be the prevailing party after a trial. On the other hand, the injury to Hasbro in loss of prestige with the public and its existing and potential customers is incalculable. Fur' thermore, Wales, in the event it .does not prevail at trial upon its major claims, may be entitled to a license from Hasbro pursuant to 17 U.S.C. § 405(b), relief it has requested upon the ground that its alleged infringement was innocent and in good faith. As this Court previously noted in denying Wales’s initial application, “it is clear that plaintiff embarked upon its present course of business with full knowledge that its sales efforts might be met with claims of copyright infringement____ Plaintiff was well aware of the legal risk involved in selling its toys, but chose to undertake that risk____” In short, Wales undertook its alleged infringing conduct with its eyes wide open and cannot now be heard to complain if its activity is stayed until a final determination upon the merits of the action.

Submit order.

      . Wales Indus. Inc. v. Hasbro Bradley, Inc., 612 F.Supp. 507 (1985).

      . Answer and amended counterclaims, exhibit D.

      . 17 U.S.C. §§ 101-914.

      . 17 U.S.C. §§ 101, 201(d)(2).

      . See Library Publications, Inc. v. Medical Economics Co., 548 F.Supp. 1231 (E.D.Pa.1982), aff'd, 714 F.2d 123 (3d Cir.1983) (mem.); 3 M. Nimmer, Nimmer on Copyright § 10.02[A], at 10-20 to 10-21 (1985) (quoting H.Rep. No. 94-1476, 94th Cong., 2d Sess. 123 (1976), reprinted in 1976 U.S.Code Cong. & Ad.News 5659, 5739).

      . 17 U.S.C. § 501(b); see Eden Toys, Inc. v. Florelee Undergarment Co., 697 F.2d 27, 36 (2d Cir.1982).

      . 17 U.S.C. § 205(d).

      . See Meta-Film Assocs., Inc. v. MCA, Inc., 586 F.Supp. 1346, 1350-52 (C.D.Cal.1984); Dan-Dee Imports, Inc. v. Well-Made Toy Mfg. Corp., 524 F.Supp. 615, 619 (E.D.N.Y.1981); Co-Opportunities, Inc. v. National Broadcasting Co., 510 F.Supp. 43, 48-49 (N.D.Cal.1981).

      . Techniques, Inc. v. Rohn, 592 F.Supp. 1195, 1197 (S.D.N.Y.1984); International Trade Management, Inc. v. United States, 553 F.Supp. 402, 1 Cl.Ct. 39 (1982); Charron v. Meaux, 60 F.R.D. 619, 624 (S.D.N.Y.1973).

      . 37 C.F.R. § 202.3(a)(3) (emphasis added).

      . 17 U.S.C. § 408(a); 37 C.F.R. § 202.3(c)(1).

      . See U.S.C. § 408(d); 37 C.F.R. § 201.5.

      . See Eckes v. Card Prices Update, 736 F.2d 859, 861-62 (2d Cir.1984); Original Appalachian Artworks, Inc. v. Toy Loft, Inc., 684 F.2d 821, 827-28 (11th Cir.1982); Thomas Wilson & Co. v. Irving Dorfman Co., 433 F.2d 409, 412 (2d Cir.1970), cert. denied, 401 U.S. 977, 91 S.Ct. 1200, 28 L.Ed.2d 326 (1971); Russ Berrie & Co. v. Jerry Eisner Co., 482 F.Supp. 980, 988 (S.D.N.Y.1980).

      . 17 U.S.C. § 204(a).

      . See Eden Toys, 697 F.2d at 36.

      . See Wards Co. v. Stamford Ridgeway Assocs., 761 F.2d 117, 120-121 (2d Cir.1985) (quoting Sobering Corp. v. Home Ins. Co., 712 F.2d 4, 9 (2d Cir.1983)).

      . See Wards, at 120; Sobering Corp., 712 F.2d at 9; see also Dan-Dee Imports, 524 F.Supp. at 617-19 (written assignment stating present transfer but referring to prior oral agreement allegedly including an assignment presents fact issue whether parties intended writing to confirm alleged prior oral assignment).

      . Jenkins v. McKeithen, 395 U.S. 411, 421-22, 89 S.Ct. 1843, 1848-49, 23 L.Ed.2d 404 (1969); Grand Union Co. v. Cord Meyer Dev. Corp., 735 F.2d 714, 717 n. 1 (2d Cir.1984).

      . See Provident Tradesmens Bank & Trust Co. v. Patterson, 390 U.S. 102, 110, 88 S.Ct. 733, 738, 19 L.Ed.2d 936 (1968); Fed.R.Civ.P. 19(a)(2)(i).

      . Independent Wireless Tel Co. v. Radio Corp., 269 U.S. 459, 468, 46 S.Ct. 166, 169, 70 L.Ed. 357 (1926).

      . See Provident Tradesmens Bank, 390 U.S. at 111, 88 S.Ct. at 738.

      . 17 U.S.C. § 501(b); see H.Rep. No. 91-1476, 94 Cong., 2d Sess., at 159, reprinted in 1976 U.S.Code Cong. & Ad.News 5659, 5775.

      . See Swarovski America Ltd. v. Silver Deer Ltd., 537 F.Supp. 1201, 1206-07 (D.Colo.1982); 3 M. Nimmer, Nimmer on Copyright § 12.03, at 12-31 (1985).

      . 269 U.S. 459, 46 S.Ct. 166, 70 L.Ed. 357 (1926).

      . See id. at 473, 46 S.Ct. at 171; Followay Prods., Inc. v. Maurer, 603 F.2d 72, 74-76 (9th Cir.1979); First Financial Marketing Servs. Group, Inc. v. Field Promotions, Inc., 286 F.Supp. 295 (S.D.N.Y.1968); Manning v. Miller Music Corp., 174 F.Supp. 192, 196-97 (S.D.N.Y.1959).

      . See First Financial Marketing Servs., 286 F.Supp. at 299.

      . Columbia Pictures Indus., Inc. v. Redd Horne, Inc., 749 F.2d 154, 160 (3d Cir.1984); Gershwin Publishing Corp. v. Columbia Artists Management, Inc., 443 F.2d 1159, 1162 (2d Cir.1971).

      . Screen Gems-Columbia Music, Inc. v. Mark-Fi Records, Inc., 256 F.Supp. 399, 403 (S.D.N.Y.1966); cf. Stix Prods., Inc. v. United Merchants & Mfgs., Inc., 295 F.Supp. 479, 499-500 (S.D.N.Y.1968) (trademark infringement).

      . Columbia Pictures, 749 F.2d at 160; Lauratex Textile Corp. v. Allton Knitting Mills Inc., 519 F.Supp. 730, 733 (S.D.N.Y.1981); Lottie Joplin Thomas Trust v. Crown Publishers, Inc., 456 F.Supp. 531, 537 (S.D.N.Y.1977), aff’d, 592 F.2d 651 (2d Cir.1978); Samet & Wells, Inc. v. Shalom Toy Co., 429 F.Supp. 895, 903-04 (E.D.N.Y.1977), aff’d, 578 F.2d 1369 (2d Cir.1978) (mem.).

      . See Uneeda Doll Co. v. Goldfarb Novelty Co., 373 F.2d 851, 853-54 (2d Cir.), cert. denied, 389 U.S. 801, 88 S.Ct. 9, 19 L.Ed.2d 56 (1967).

      . 17 U.S.C. § 401(b), (c); 37 C.F.R. § 201.20(c), (i)(2); see Uneeda Doll Co., 373 F.2d at 853-54; Boucher v. DuBoyes, Inc., 253 F.2d 948 (2d Cir.), cert. denied, 357 U.S. 936, 78 S.Ct. 1384, 2 L.Ed.2d 1550 (1958); Scarves by Vera, Inc. v. United Merchants & Mfgs., Inc., 173 F.Supp. 625 (S.D.N.Y.1959).

      . See Shapiro & Son Bedspread Corp. v. Royal Mills Assocs., 764 F.2d 69, 72-73 (2d Cir.1985).

      . Compare Beacon Looms, Inc. v. S. Lichtenberg & Co., 552 F.Supp. 1305, 1310-12 (S.D.N.Y.1982), with O'Neill Devs., Inc. v. Galen Kilburn, Inc., 524 F.Supp. 710 (N.D.Ga.1981).

      . See Midway Mfg. Co. v. Artie Int'l, Inc., 547 F.Supp. 999, 1008 (N.D.Ill.1982), aff'd, 704 F.2d 1009, 1013 (7th Cir.), cert. denied, -U.S.-, 104 S.Ct. 90, 78 L.Ed.2d 98 (1983).

      . Hasbro’s Product Manager/Boys Toys asserts there have been no sales of Transformers, and specifically none of the Slag and Sludge toys, in the United States or other countries as to which Hasbro obtained rights from Takara without a copyright notice printed on each toy, package, and related advertising. Affidavit of David A. Kelman at ¶ 18. In addition, Takara’s Japanese counsel asserts that all toys exported by Takara to the United States for sale by Hasbro have contained copyright notices. Affidavit of Saiji Tanaka at ¶ 6.

      . Affidavit of Don Melcher at ¶¶ 2-3.

      . Indeed, representatives of Hasbro, Takara, and Takara's American subsidiary all assert that such sales in this country by anyone other than Hasbro are prohibited under the sales license agreement of November 1, 1983. Affidavit of Leo Hoffman at ¶¶[ 2-4; Kelman aff. at ¶ 19; Tanaka aff. at f 2.

      . See Nintendo of America, Inc. v. Elcon Indus., Inc., 564 F.Supp. 937, 943-44 (E.D.Mich.1982); see also Twentieth Century-Fox Film Corp. v. Dunnahoo, 637 F.2d 1338, 1343 (9th Cir.1981); H.M. Kolbe Co. v. Armgus Textile Co., 315 F.2d 70, 74 (2d Cir.1963); Goldman-Morgen, Inc. v. Dan Brechner & Co., 411 F.Supp. 382, 390 (S.D.N.Y.1976).

      . See 17 U.S.C. § 405(b).

      . See Citibank, N.A. v. Citytrust & Citytrust Bancorp., Inc., 756 F.2d 273, 275 (2d Cir.1985) (quoting Bell & Howell: Mamiya Co., 719 F.2d 42, 45 (2d Cir.1983) ).

      . Wainwright Securities, Inc. v. Wall Street Transcript Corp., 558 F.2d 91, 94 (2d Cir.1977), cert. denied, 434 U.S. 1014, 98 S.Ct. 730, 54 L.Ed.2d 759 (1978).

      . Compare Citytrust & Citytrust Bancorp, 756 F.2d at 276-77.

      . Buckingham Corp. v. Karp, 762 F.2d 257, 261 (2d Cir.1985); Sperry Int’l Trade, Inc. v. Government of Israel, 670 F.2d 8, 11 (2d Cir.1982); Jackson Dairy, Inc. v. H.P. Hood & Sons, Inc., 596 F.2d 70, 72 (2d Cir.1979) (per curiam).

      . Wales, at 508-509.

      . After this opinion was in final form and about to be filed, both sides submitted additional material without authorization from the Court. The Court has not considered this material in disposing of the instant motions.


author: NEALON, Chief Judge.

text:
    John FAUST, Plaintiff v. RCA CORPORATION, Defendant.
    Civ. No. 84-1403.
    United States District Court, M.D. Pennsylvania, Third Circuit Division.
    April 10, 1985.

      Elliot B. Edley, Edley and Reishtein Wilkes-Barre, Pa., for plaintiff.
    Frank C. Sabatino, John H. Leddy, Schnader, Harrison, Segal & Lewis, Philadelphia, Pa., for defendant.
   MEMORANDUM AND ORDER

NEALON, Chief Judge.

The plaintiff filed this action on October 19, 1984, alleging the defendant breached an implied employment contract, wrongfully discharged and defamed him. Jurisdiction was based on diversity of citizenship as the plaintiff is a Pennsylvania citizen and the defendant a Delaware corporation. On December 10, 1984, the defendant filed a Motion to Dismiss for Failure to state a claim upon which relief can be granted or, in the alternative, for summary judgment, asserting the plaintiff’s claims are preempted by the Labor Management Relations Act. A brief in support of the motion was filed by the defendant dated December 21, 1984 and a brief in opposition to the motion was filed by the plaintiff dated January 28, 1985. On February 11, 1985, the plaintiff filed an amended complaint incorporating his previously alleged counts and adding' a new count based upon Section 301 of the Labor Management Relations Act, 29 U.S.C. § 185. Also, on February 11, 1985, the defendant filed a Reply Brief contending the plaintiff’s request to file a new count under § 301 would be untimely. The plaintiff then filed a supplemental brief dated April 9, 1985, addressing the untimeliness issue. The motion is now ripe for disposition. For the reasons set forth below, the court will grant the defendant’s motion to dismiss plaintiff’s common law claims and deny the defendant’s motion regarding the plaintiff’s § 301 claim.

The plaintiff, a former employee of the Keystone Jobs Corps Center (Center) operated by a division of RCA, was discharged from his employment on May 22, 1984. The plaintiff contends he was arbitrarily and capriciously discharged without just cause. The defendant asserts that he was discharged for possession of intoxicants on Center property. During his employment, the plaintiff was a member of the Service Employees International Union, Local 406, which was a party to a collective bargaining agreement between itself and Operation and Management Services, Inc., a wholly owned subsidiary of RCA International Service Corporation. The agreement provides: “No employee covered by this agreement shall be disciplined or discharged without just cause.” The agreement also establishes a four-step grievance procedure. The Local processed plaintiff’s grievance through the first two levels of the procedure and then withdrew the grievance. It is the plaintiff’s assertion that the Union did not fairly represent him through the grievance process.

The defendant, in its Motion to Dismiss, alleges that even if all of the plaintiff’s averments are accepted as true, the Labor Management Relations Act provides that the collective bargaining agreement is exclusive and supersedes all common law causes of action which might otherwise be available for an alleged wrongful termination. Count I of the complaint asserts that plaintiff had an implied employment contract arising from a company policy that employees would only be terminated for just cause “after all practical steps toward rehabilitation or salvage of the employee [had] been taken and had failed.” It is clear, however, that a collective bargaining agreement extinguishes an individual employee’s power to alter the terms of an agreement by a separate contract between himself and the employer. See Olguin v. Inspiration Consolidated Copper Co., 740 F.2d 1468, 1474 (9th Cir.1984). Such a separate agreement would be preempted by the collective bargaining agreement. In the ease sub judice, the plaintiff argues that his right not to be dismissed without just cause has been altered to include a requirement that the employer make an attempt at rehabilitation prior to dismissal. Such a provision clearly changes the meaning of the collective bargaining agreement and is, therefore, preempted by that agreement.

In Count II, plaintiff alleges his termination was caused by the defendant’s malicious and intentional actions taken without just cause. This common law claim for wrongful termination has also been preempted by the collective bargaining agreement. Id. See also Costello v. United Parcel Service, Inc., Civil No. 84-4869 (E.D.Pa., November 7, 1984); National Labor Relations Act § 301, 29 U.S.C. § 185. An employee protected by a collective bargaining agreement must pursue his grievance remedies under the contract pri- or to litigating his claim in court. There are a number of exceptions to this rule, however, none of them appear to apply in this case. See Costello, supra at 2-3. Accordingly, Count II will also be dismissed.

In the plaintiff’s final common law claim, Count III, he alleges that various of the defendant’s employees intentionally mishandled the investigation against him and also defamed and harassed him openly. It is the defendant’s contention that this claim is also preempted by the collective bargaining agreement as the allegations concerning these events are “intimately connected” with the plaintiff’s discharge. It is clear that the plaintiff’s characterization of his claim is not binding on this court. See Olguin, supra at 1472. If the state law claim “arises under” the collective bargaining agreement it may be re-characterized as such. Id. Therefore, it appears that the real issue here is whether the plaintiff was improperly discharged. The Labor Management Relations Act plainly indicates that resolution of this type of dispute should be made pursuant to the collective bargaining agreement. For the above reasons, the court will also dismiss Count III of the plaintiff’s complaint.

The plaintiff additionally requests leave to amend his complaint to allege a new cause of action pursuant to Section 301 of the Labor Management Relations Act. The defendant contends that such an amendment is untimely since any claim based upon Section 301 would be barred by the statute of limitations. Pursuant to Rule 15(a) of the Federal Rules of Civil Procedure, the plaintiff was entitled to file his amended complaint as a matter of right any time prior to a responsive pleading being served. The defendant has filed a Motion to Dismiss, but such a motion is not a responsive pleading under the Rules. See Fed.R.Civ.P. Rule 7(a); 6 C. Wright & A. Miller, Federal Practice and Procedure § 1483 (1971). Therefore, plaintiff was permitted to file his amended complaint. Any claims added by the amended complaint, however, would have to satisfy the Statute of Limitations unless the amended complaint “relates back” to the filing of the original complaint pursuant to Rule 15(c) of the Federal Rules of Civil Procedure. The six month statute of limitations, here, has clearly expired. See DelCostello v. International Brotherhood of Teamsters, 462 U.S. 151, 103 S.Ct. 2281, 76 L.Ed.2d 476 (1983). Therefore, the court will consider whether the Section 301 claim relates back to the filing of the original complaint. Rule 15(c) provides that a new claim will not relate back unless it “arose out of the conduct, transaction, or occurrence set forth or attempted to be set forth in the original pleading.” When a plaintiff attempts to allege an entirely different transaction by the amended complaint, the new claim will be subject to the defense of the Statute of Limitations. See Pendrell v. Chatham College, 386 F.Supp. 341, 344-45 (W.D.Pa.1974); C. Wright & A. Miller, supra, at § 1497.

Because the rationale of the relation-back rule is to ameliorate the effect of the statute of limitations, rather than to promote the joinder of claims and parties, the standard for determining whether amendments qualify under Rule 15(c) is not simply an identity of transactions test; although not expressly mentioned in the Rule, the Courts also inquire into whether the opposing party has been put on notice regarding the claim or defense raised by the amended pleading. Only if the original pleading has performed that function, which typically will be the case if the letter of the test set forth in Rule 15(c) is satisfied, will the amendment be allowed to relate back to prevent the running of the limitations period in the interim from barring the claim or defense.
... An approach that better reflects the liberal policy of Rule 15(c) is to determine whether the adverse party, viewed as a reasonably prudent man, ought to have been able to anticipate or should have expected that the character of the originally pleaded claim might be altered or that other aspects of the conduct, transaction or occurrence set forth in the original pleading might be called into question.

Id. at 495-96, 499. Simply because an amended pleading changes the legal theory on which an action was initially brought is "of no consequence if the factual situation upon which the action depends remains the same and has been brought to the defendant’s attention by the original pleading.” Id. at 500. Therefore, the addition of a statutory cause of action or a change from a common law claim to a statutory claim would not preclude a relation back as long as the amended pleading alleges matter that arises out of the “same conduct, transaction, or occurrence” as set forth in the original pleading. See also DeMalherbe v. International Union of Elevator Constructors, 449 F.Supp. 1335, 1353-54 (N.D.Cal.1978). It is not unreasonable for the court to assume the defendant will anticipate the plaintiff’s alleging all possible theories of recovery. Id. at 1354.

In the ease sub judice, the plaintiff’s § 301 claim in his amended complaint alleges a breach of the collective bargaining agreement by the defendant employer and a failure of the Union to afford the plaintiff fair representation. In his original complaint, the plaintiff contends he was arbitrarily and capriciously discharged without just cause. The defendant has been fully aware of the plaintiffs membership in the Union, Local 406, and of plaintiff’s attempt to pursue his grievance through the procedure established by the collective bargaining agreement. The general fact situation out of which the § 301 claim arises is the plaintiff’s allegedly improper discharge. Therefore, the new claim does arise out of substantially the same conduct or occurrence set forth in the original complaint. The defendant, accordingly, should have been able to anticipate that a claim similar to the § 301 claim advanced here would likely be added. In light of the liberal policy of Rule 15(c), the defendant’s motion to dismiss the plaintiff’s § 301 claim as barred by the Statute of Limitations will be denied and plaintiffs claim will be deemed to relate back to the filing of the original complaint.

An appropriate Order will enter.

ORDER

In accordance with the reasoning set forth in the accompanying Memorandum, IT IS HEREBY ORDERED THAT:

(1) The defendant’s Motion to Dismiss Counts I, II and III of the plaintiffs original complaint is granted.
(2) The defendant’s Motion to Dismiss Count IV of the plaintiffs amended complaint is denied.

      . The plaintiff’s Opposition Brief, Document No. 9 of the Record, indicates his request to name the Union as a defendant and also to proceed with the action against the defendant employer. The plaintiff has, however, filed an amended complaint, Document No. 11 of the Record, in which he adds a Section 301 claim as Count IV but does not add the Union as a named defendant.