Appeal from a judgment of the Southern District of New York entered by Thomas P. Griesa, Judge, dismissing a diversity trade libel suit because of the plaintiff's refusal to produce certain of its financial records pursuant to the court's order. Plaintiff's counsel before the district court seeks intervention under Rule 24, F.R.Civ.P., based on an alleged conflict of interest arising out of injury to his reputation. Defendant cross-appeals from an order dismissing four of its counterclaims. Intervention by plaintiff's counsel is granted. The judgment and order of the district court are affirmed. The case is remanded to determine whether reasonable costs and expenses should be awarded to the defendants.
Before Moore, Mansfield and Newman, Circuit Judges.
Plaintiff, Penthouse International, Ltd. ("Penthouse"), appeals from a judgment of the Southern District of New York entered by Judge Thomas P. Griesa dismissing its diversity trade libel suit against Playboy Enterprises and Playboy Publications, Inc. (collectively referred to as "Playboy") because of Penthouse's refusal to produce certain of its financial records pursuant to the court's order made on March 22, 1978. Norman Roy Grutman, counsel for Penthouse in the district court proceedings, appeals an order entered by Judge Griesa denying his motion pursuant to Rule 24, F.R.Civ.P., to intervene as a party, made after the district court's decision to dismiss the action, which was sought on the ground that Judge Griesa's opinion condemning his conduct as trial counsel adversely affected his professional reputation, giving rise to an interest conflicting with that of his client Penthouse. Playboy cross-appeals from the district court's failure to award it reasonable costs and expenses upon its motion for dismissal and from its order granting summary judgment dismissing four of five counterclaims asserted by it. Intervention by Grutman as a party on this appeal is granted. However, we affirm the judgment dismissing Penthouse's action and the four counterclaims, and remand to the district court for further consideration the question of whether reasonable costs and expenses should be awarded to Playboy.
In view of the serious misconduct found by Judge Griesa to have been committed by Penthouse, which included findings of deliberate false testimony on the part of its officials and willful misrepresentation to the court of material facts by Grutman, and the harsh sanction imposed for non-production of relevant documents, a thorough review of the record is essential to determine whether there was any error or abuse of discretion on the part of the district court. Penthouse publishes sex-oriented magazines which compete against similar magazines published by Playboy. The present litigation originated in May, 1974, following a letter by a Playboy official which allegedly libeled Penthouse. In early 1974 Penthouse was required by the Audit Bureau of Circulations, a membership corporation of publishers and advertisers which audits the circulation claims of its members, to issue a revised publisher's statement for the last six months of 1973 and to reduce substantially its claimed advertising sales for November and December. John G. Kabler, defendant's advertising salesman for its competing magazine Oui misinterpreted this action to mean that Penthouse had failed to meet its guaranteed minimum circulation figure by the amount of the reduced copies and on May 16, 1974, sent a letter to various advertising executives to that effect. In fact Penthouse had, notwithstanding the reduction, met its minimum guarantee and when Kabler learned this he on May 21, 1974, sent out a letter correcting the inaccuracy, which Judge Kevin Duffy, in a later ruling on Penthouse's application for a preliminary injunction, found to be unintentional. 392 F. Supp. 257.
On May 24, 1974, three days after Kabler's retraction, Penthouse brought the present suit against Playboy for $10 million compensatory damages, $30 million punitive damages, and injunctive relief. The complaint alleged that Playboy knowingly distributed false information about Penthouse's circulation with the purpose and intent of interfering with its existing beneficial relationships with advertisers, destroying Penthouse's reputation and goodwill, and inducing existing and potential advertisers not to patronize it; that the Kabler letter amounted to a malicious trade libel compelling Penthouse to expend substantial sums to rebut the false statements, including purchase of self-advertising space for correction of the false statements; and that the libel was committed pursuant to a conspiracy on the part of the defendants. Defendant's answers amounted to a general denial except for their admission that the Kabler letter was sent. In addition they interposed five counterclaims. Two (the First and Third) claimed that Penthouse had violated Playboy's rights under the Lanham Trade-Mark Act, 15 U.S.C. §§ 1051, et seq., by using Playboy's registered marks in competitive advertising that created a likelihood of confusion by giving greater prominence to Playboy's marks than to Penthouse's marks, by parodying Playboy's marks for the purpose of trading on and injuring its goodwill, and by using the marks in connection with misleading statistics that falsely implied that Penthouse's circulation was greater than it actually was. The Second and Fourth counterclaims alleged that the same conduct constituted unfair competition. The Fifth counterclaim charged that Penthouse engaged in a false advertising and promotional campaign, misrepresenting circulation figures with respect to the magazines Penthouse and Playboy, in order to injure Playboy. Damages and injunctive relief were sought.
Penthouse's complaint was not limited to the theory that it was damaged per se by a slur on its reputation, which would be questionable, see Harwood Pharm. Co. v. National Broad. Co., 9 N.Y.2d 460, 463, 214 N.Y.S.2d 725, 727, 174 N.E.2d 602 (1961); Payrolls & Tabulating Inc. v. Sperry Rand Corp., 22 A.D.2d 595, 257 N.Y.S.2d 884 (1st Dep't 1965). It sought special damages for interference with and injury to its anticipated business with existing and potential advertisers and with its publication of magazines, and recovery of expenses which had and would be incurred by it to notify the advertising community that its sales had not declined below minimum guarantees, including money expended for the purchase of corrective advertising space and preparation of self-promotional advertisements. This claim of specific pecuniary loss, including loss of customers, see Drug Research Corp. v. Curtis Publ. Co., 7 N.Y.2d 435, 440, 199 N.Y.S.2d 33, 37, 166 N.E.2d 319 (1960); Continental Air Ticketing Agency, Inc. v. Empire Int. Travel, Inc., 51 A.D.2d 104, 380 N.Y.S.2d 369 (4th Dep't 1976), would, if pursued (as it later was at trial), require it to introduce evidence of actual loss of business. This, of course, entitled Playboy to discovery of Penthouse records bearing on any such alleged loss. The scope of discovery permitted Playboy under the Federal Rules of Civil Procedure was broad. It was entitled to any Penthouse records relating to the "subject matter" of the action which might lead to admissible evidence. Rule 26(b), F.R.Civ.P.
Playboy asserted that any decline in Penthouse's advertising revenues was attributable to causes unconnected with the Kabler letter, including (1) an increase in Penthouse's page rates which it had put into effect in September, 1973, six months before the letter, (2) the levelling off of Penthouse's circulation which had begun with its saturation of the market, (3) an ongoing economic recession affecting print media, (4) readers' distaste for the magazine Penthouse's editorial content, and (5) the effect of the revelation that Penthouse had in fact substantially overestimated the size of the circulation of its November and December issues.
From the outset the relevancy to the issues in the case of Penthouse projections made before the Kabler letter of anticipated advertising revenues and of any budget estimates of such anticipated revenues was patent. As Penthouse later acknowledged in its appeal brief to us, it contended that it would "establish a reasonable anticipated growth in advertising sales which was frustrated and hampered by the libel" (Penthouse Br. p.7). If pre-Kabler letter projections and budgets existed, they would indicate what advertising revenue Penthouse expected to gain from its operations. If advertising revenues actually received after the letter proved to be greater than or equal to these projections or budget estimates, this evidence would support Playboy's defenses that the Kabler letter caused Penthouse no injury; if smaller, this would support Penthouse's claim. For the same reason, advertising revenues actually received after the Kabler letter were relevant for comparison against pre-Kabler letter anticipated revenues.
As pre-trial discovery developed, Penthouse asserted in answer to interrogatories that it would prove that the Kabler letter forced it to expend large sums for corrective advertising and self-promotion-some $748,144 for expenses of advertising to counter the alleged libel and $625,000 for expenditures of time of Penthouse officials to rebut the libel (App. 349). Penthouse's financial statements for the post-Kabler letter years, including gross income, net income, and circulation revenues, were therefore relevant. The amount spent by Penthouse on self-promotional advertising might increase or decrease according to actual changes in its gross revenues and net profits. If Penthouse earned more money in 1974 and 1975 than in 1973 it could afford to spend more money proportionately on self-advertising and promotion, regardless of the alleged Kabler libel.
Thus an increase in Penthouse's advertising expenses might actually be attributable to increased revenues from its operations rather than to the letter. At least Playboy was entitled under Rule 26(b) to obtain this data and develop this defense even if Penthouse might disagree with the probative value of the evidence. Some businesses operate on the principle that the amount of money expended on self-advertising depends on the amount of their gross sales and income.*fn1 Moreover, if, as appears to have been the fact, Penthouse's circulation in 1973, while not below its guarantee, was nevertheless substantially below its public claims and estimates (by 256,000 copies in November 1973 and 613,000 copies in December 1973), Playboy was entitled to show that Penthouse spent more money on promotion and self-advertising thereafter in order to improve its circulation (and thus permit it to increase its rate base to advertisers in Penthouse) rather than to rebut the Kabler letter. Playboy properly sought to establish such correlations by obtaining Penthouse's gross revenues, net revenues, and circulation income.
Immediately following the May 24, 1974, commencement of the action, pre-trial discovery was begun by Playboy. On June 17, 1974, the Penthouse Vice-President responsible for administration and record maintenance in its advertising department, Sherwood Z. Katsoff, testified at a deposition attended by Grutman that Penthouse had made projections of its anticipated advertising revenues, with which he was familiar. His testimony clearly indicates to the reader or listener that these projections were written. He stated that several projections had been made, including one by Katherine Keeton, Associate Publisher of Penthouse. (App. 461-63).*fn2 This was confirmed by his testimony at a later 1978 hearing before Judge Griesa on Playboy's motion for sanctions sought because of Penthouse's defiance of a court order to produce certain documents and by the projections themselves, which were eventually produced in 1978 after Penthouse, in a change of strategy, had repeatedly denied the existence of such projections and budgets, leading Judge Griesa to recess trial to permit further discovery by Playboy. Eight such projections were finally produced by Penthouse, more than four years after Katsoff's deposition and after repeated unsuccessful efforts by Playboy to obtain them pursuant to the Federal Rules of Civil Procedure, which were thwarted by non-production and false statements that they never existed. Two of them appear to have been authored by Katsoff and two others have his name on them as a distributee. (App. 2645, 2647, 2648, 2651) At the later sanctions hearing he conceded that they were "the Advertising Department's anticipation of annual advertising revenues." (App. 1441).
On June 24, 1974, Robert Guccione, Publisher of Penthouse, testified at his deposition (attended by Grutman) that he had received forecasts of advertising revenues to the end of Penthouse's fiscal year, which closed in January, and that he had recently received a forecast, which he described as "a piece of paper which is constantly updated each week" showing "(new) prospects, actual placements, actual contracts, (and) drop-outs" (App. 466).
Armed with the foregoing information, Playboy on March 4, 1975, served upon Penthouse a request pursuant to Rule 34, F.R.Civ.P. for documents, which sought inter alia :
22. Financial statements of plaintiff for all periods beginning after December 31, 1969, including but not limited to balance sheets, profit and loss statements and schedules of revenues from the sale of advertising space in Penthouse Magazine.
23. Projections or estimates made by or on behalf of plaintiff of anticipated advertising space sales in Penthouse Magazine for all issues beginning with the January, 1972 issue and including issues yet to be printed or distributed. (App. 232).
By letter dated April 1, 1975, from Alan M. Gelb, Grutman's partner, addressed to David Krupp, Playboy's counsel, Penthouse objected to production of the requested financial statements as "privileged," "confidential," and "not relevant." However, Gelb's letter did not object to production of Penthouse's advertising revenue projections, the existence of which had been testified to by Katsoff and was to be confirmed by their production years later after intervening denials under oath. Undoubtedly these important and at that time recently made documents, which were not moved to a warehouse until February 1977 (App. 1698), were then still in Penthouse's offices and available to its counsel.
Penthouse's tendency to obstruct discovery soon became more apparent when, later in 1975 and early 1976, despite an order by then U.S. Magistrate (now Judge) Gerard Goettel, it failed to respond to interrogatories and was fined $250 by Judge Wyatt. In 1977, after it gave incomplete and evasive answers to interrogatories regarding advertising revenues allegedly lost and failed to appear at a hearing with respect to the matter, U.S. Magistrate Bernikow recommended imposition of $150 costs and expenses on Penthouse, which were imposed by Judge Griesa.
The next relevant episode was Playboy's taking on June 22, 1977, of the deposition (attended by Grutman) of Gerald Kreditor, an English accountant with a London office who was the "second in command" at Penthouse under Guccione. He testified that projections of Penthouse's advertising revenues had been prepared by the advertising staff, which we now know to have been the fact (App. 479-80). In addition he disclosed that comprehensive budgets had been prepared for "the last four years or so," which were circulated by "the controller to Mr. Billman, myself, and Mr. Guccione," and of which he was "sure that (he) would have copies" with "(t)he likelihood (that) there would have been copies ... in the United States as well, because they would have emanated from the United States." (App. 478-81). The record reveals that during the deposition Grutman paid close attention to this discussion of projections and budget estimates, interrupting it several times.*fn3 (Id.) What Kreditor said was later confirmed by the testimony in 1978 of Robert Aronson, Assistant Controller of Penthouse from June 1973 to April 1974 and Controller thereafter until September, 1975. (App. 1519-20). These budgets, which were eventually produced under pressure after trial was recessed for further discovery, could have been helpful to Playboy; one, which was undated, but appears to have been prepared shortly before the Kabler letter, projected advertising revenues for 1974 at $9,183,762 (App. 2657) which a comparison with other projections would show to be the equivalent of 605 advertising pages. A Penthouse advertising department projection reached almost an identical amount (App. 2654). This projection of 605 pages for 1974-75 represented an increase of only 15% over 1973-74, less than the 20% increase Penthouse claimed it had anticipated.
On July 8, 1977, two weeks later, Playboy served on Penthouse another request for documents pursuant to Rule 34, F.R.Civ.P., which repeated and amplified its March 4, 1975, request and asked for the following, which included budgets:
2. All projections or estimates made by or on behalf of plaintiff with respect to advertising sales for the United States edition of Penthouse magazine in pages or dollars, for any period since 1969 to the date of the response to this request.
5. All schedules, charts, lists or financial statements reflecting the sales of advertising space in either pages or dollars in the United States edition of Penthouse magazine for any month or period commencing after December 31, 1969.
17. Financial Statements of plaintiff for all periods beginning after December 31, 1969, including but not limited to balance sheets, profit and loss statements and schedules of revenues from the sale of advertising space in Penthouse magazine. (App. 419-22).
Penthouse objected on August 8, 1977, that the request sought "highly sensitive, confidential, commercial information and trade secrets" (App. 434, 435, 442). At pre-trial conferences before Judge Griesa in September, 1977, Grutman charged that Playboy was prolonging and abusing the discovery process, leading Judge Griesa to impose a moratorium on further discovery. This move, as it turned out, avoided disclosure of highly relevant and important projections and budgets which had been prepared at the request of Penthouse officials and were known to them as early as 1974, when the depositions of Katsoff and Guccione were taken, and which had been referred to by Kreditor in his 1977 deposition.
Playboy's counsel continued after Penthouse's August 8, 1977, response to seek the requested documents, but on August 16, 1977, U.S. Magistrate Jacobs stayed the request, including that for "documents relating to advertising sales and expenses" (App. 446), until Judge Griesa's return from vacation. Finally, at a pre-trial conference held by Judge Griesa on November 17, 1977, Grutman represented to the court that the requested budgets and advertising projections did not exist.*fn4 This, of course, temporarily stymied any further efforts to obtain these important documents.
Proceeding on the basis that no budgets or advertising projections existed, Penthouse pushed its case to trial, which began on January 31, 1978. Katherine Keeton, Associate Publisher of Penthouse, who was later described by Guccione as the higher echelon Penthouse official with responsibility for advertising (App. 811), testified that prior to the Kabler letter Penthouse advertising revenue projections had been made at the beginning of each year (App. 774-75), that she was not aware of any written projections (App. 778), and that based on her recollection Penthouse had anticipated at least a 20% increase in advertising revenues in 1974 over 1973 (App. 775). When Playboy counsel objected to her testifying as to the contents of projections without producing them, Judge Griesa inquired of Grutman, "Was an effort made to find any written projections?," to which Grutman replied, "Yes, your Honor-We do not have any written projections. We have the testimony of this witness and the performance of the company" (App. 777). This was a false statement. Written projections, some rather unfavorable to Penthouse's cause, did exist and were in its possession. Furthermore the trend of the projections for the year 1974-75 was generally downward, up to the time when the Kabler letter was sent (App. 2647, 2648-49, 2651-52, 2654). This trend would permit a trier of fact to infer that Penthouse's advertising sales were falling short of its expectations long before the Kabler letter was sent, and that the decreases that did occur after the letter were attributable to causes other than the letter. Nevertheless, Grutman's strategy was to introduce oral testimony of Keeton and Kreditor as to the advertising revenues Penthouse had anticipated prior to the Kabler letter, which were more favorable to it than most of the unproduced written projections, and then compare them with the revenues actually realized by Penthouse.
The same strategy was pursued by Grutman in his examination of his next witness, Robert Guccione, Publisher of Penthouse. Immediately prior to Guccione's taking the stand Playboy's counsel pointed out that in August, 1977, Penthouse had objected to the request for production of advertising projections on the ground that they were "highly sensitive" and "confidential." Grutman responded, "There are no written projections.... I represent that it was not part of the business of Penthouse and it did not keep or maintain forecasts or written projections" (App. 804, 808). When Judge Griesa pointed out that "if no such forecasts existed your answer would have been, "No such forecasts exist.' It wouldn't be that Request No. 2 calls for disclosure of highly sensitive, confidential information and trade secrets," Grutman responded:
No forecasts do exist. As Mr. Guccione is to be the next witness, I think I can say in advance of his testimony that the only thing kept at Penthouse in written form is a schedule called "Penthouse Advertising Sales Report" in each calendar year, which is updated on an ongoing basis reflecting the revenues achieved. There are no projections, there are not (sic) estimates in writing.
THE COURT: You are using the present tense. Do you mean that projections once existed but have been destroyed?
MR. GRUTMAN: No, your Honor. They never prepared written projections or written estimates. (App. 809-10).
This statement was doubly false. Penthouse had prepared written forecasts and they were in existence.
Thus alerted by his counsel, Guccione, instead of merely denying the present existence of any advertising revenue forecasts, projections, or estimates, went further and testified that he had never seen any such documents other than a "pagination sheet" (App. 811-13, 831-32, 842-43), which he described as "a simple piece of paper that may float around the editorial department prior to the pagination of any given issue of the magazine to show that who (sic) are paginating the magazine, are selecting the editorial, the space requirements for design and layout purposes, and just what ads to expect for that particular issue" (App. 813). Guccione further testified that none of the "pieces of paper" or "pagination sheets," which he described as "scrap paper," were kept (App. 844).
When Playboy's counsel then asked for production of whatever documents did exist Grutman replied, "The witness has said for the last 40 minutes no such documents exist." (App. 845). Judge Griesa commented, "I am assuming definitively there are no such papers and I don't think anything more needs to be said. That is the testimony" (App. 847). Mr. Grutman then recalled Ms. Keeton to the stand and when he sought by indirection, with the aid of a Penthouse document which it had refused to produce in response to Playboy's July 8, 1977 document request on grounds of confidentiality, to have her testify to the substance of the document, Judge Griesa sustained Playboy's objection (App. 895-900).
In line with Grutman's representations to the court, Kreditor, who had testified at his June, 1977, deposition that projections of advertising revenues had been made by Penthouse, now testified at trial in 1978 that there had never been any written projections or forecasts of Penthouse advertising sales (App. 911-12, 967). When he then attempted to testify about Penthouse's advertising sales in 1970-73 and to 1974 sales to certain customers allegedly lost as a result of the Kabler letter, Playboy objected on the ground that its request for documentary evidence of these sales had been refused. The objection was sustained to the extent that Penthouse should supply the underlying figures (App. 913-39). Kreditor, using schedules prepared from Penthouse's records, testified that in 1973 he, with Guccione and Keeton, had estimated that 1974 advertising page sales would increase by more than 30% over the figures for 1973 (App. 943). Kreditor further testified that, comparing these projected increases against advertising sold to recipients of the Kabler letter, the revenue lost to Penthouse was $6,670,550 (App. 969).
Kreditor's trial testimony that there had never been any written projections or forecasts of Penthouse's advertising sales was later disproved by proof that such projections had been prepared and distributed to various top Penthouse officials, as Kreditor had indicated in his June, 1977, deposition. Kreditor clearly knew of these documents. A memo enclosing a Penthouse advertising projection dated December 7, 1973, for the period February 1974 to January 1975 lists Kreditor as a distributee (App. 2135), as does a Fall 1974 forecast for Penthouse's New York advertising staff (App. 2140). Katsoff, moreover, testified that Kreditor would have known about advertising projections (App. 1442).
Similarly Kreditor's trial testimony that no written Penthouse budgets had been prepared which would show estimated advertising revenues and expenditures was disproved. That such budgets had been prepared and circulated by Schneider (Penthouse's controller in 1973) and Aronson (his successor) to Billman (Penthouse's chief operating officer) and to Kreditor, had been admitted by Kreditor in his June, 1977, deposition and was confirmed by Aronson's later testimony (App. ...