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D.S. MAGAZINES, INC. v. WARNER PUBLR. SERVS.

August 7, 1986

D.S. MAGAZINES, INC., Plaintiff,
v.
WARNER PUBLISHER SERVICES INC., Defendant



The opinion of the court was delivered by: WEINFELD

EDWARD WEINFELD, D.J.

Plaintiff D.S. Magazines, Inc. ("D.S."), a New Jersey corporation, commenced this diversity action against Warner Publisher Services Inc. ("Warner"), a New York corporation and wholly-owned subsidiary of Warner Communications, Inc. D.S., a publisher of magazines catering to the "teen fan," "black teen fan," and "entertainment/personality" audiences, alleges that Warner, a magazine distributor, breached the contracts between the parties and committed fraud. Warner denies D.S.'s allegations and counterclaims for breach of contract, return of monies advanced to D.S., and fraud.

 The case was tried to the Court, in a trial that took 20 days, during which 23 witnesses testified, accumulating a trial transcript of 2,898 pages, and thousands of exhibits were received into evidence. Since the trial was to the Court, some testimony and a number of exhibits which include obvious hearsay were nonetheless received in an effort to expedite the trial. The Court repeatedly observed that its determination would be based only upon relevant and material evidence. *fn1"

 Based upon a reading of the Court's contemporaneous trial notes, a close re-reading of pertinent portions of the trial record, the exhibits, the demeanor of the witnesses and an evaluation of their credibility, the Court makes the following findings of fact and conclusions of law.

 BACKGROUND

 To put matters in perspective, a brief description of the magazine publishing industry is necessary. The chain of distribution for magazines sold on newsstands--as opposed to those mailed directly to subscribers--consists of a publisher, a national distributor, wholesalers and retailers. The publisher produces the magazine and is responsible for its editorial content. The publisher either distributes the magazine itself or it contracts with one of the thirteen national distributors who arranges for distribution of the magazines from the printer to the wholesalers, who in turn distribute the magazines to the retailers. The publisher, in consultation with its national distributor, determines the total number of copies of each title to be printed each month, referred to as the "print order." *fn2"

 In addition to arranging for distribution to wholesalers, the national distributor performs other functions, characterized by Warner as a marketing function and a financial function. The marketing function consists of advising the publisher on the most effective methods for maximizing sales of the magazines and assisting the publisher in achieving maximum distribution of its magazines by monitoring the wholesalers and retailers and by attempting to persuade the wholesalers to increase the number of copies of magazines they will distribute to their retailers. The national distributor employs a force of field representatives who are responsible for maintaining contact with the wholesalers and visiting the retailers. The field force reviews the sales history of the magazines and of the competitors' magazines, attempts to increase the number of retailers receiving the magazines, insures that the magazines are being received by the wholesalers and retailers on time and suggests to the publisher how many copies of the magazines the wholesalers should receive ("allotments"). In addition to this ongoing work, the field representatives perform special tasks coordinated by the national distributor's home office and report to the national distributor's home office on both the ongoing and special work performed for the publisher.

 The financial function consists of advancing to the publisher contractually agreed upon amounts upon shipment of the magazines from the printer to the wholesalers. The advances, calculated as a percentage of projected gross billings to wholesalers, allow the publisher to defray its publishing costs. In effect, the distributor serves, to a limited extent, as a factor or a banker to the publisher. At the end of each month, Warner bills the wholesalers for the magazines that went on sale that month. *fn3" Then, approximately three months after the issue of the magazine goes "off sale," *fn4" the national distributor calculates net sales by adding up the total number of copies of the magazine distributed to the wholesalers and deducting from the total the number of unsold magazines returned by the wholesalers. *fn5" The national distributor then deducts the advances paid to the distributor then deducts the advances paid to the publisher, the distributor's commission -- in this case 5% of net sales -- and any contractually agreed upon expenses. If there is any balance due to the publisher, it is remitted to it. If the amount remaining after deduction of commissions and expenses is insufficient to enable the distributor to recoup the advances paid to the publisher, an "overdraft" is created. Under the contracts at issue here, overdrafts could be deducted from the advances due on subsequent issues or from the proceeds of the sales of subsequent issues, or payment could be demanded from the publisher.

 The third link in the chain is the wholesaler. There are approximately 450 wholesalers in the country, each of whom serves a particular in the country, each of whom serves a particular geographic region, by delivering the magazines to the retailers. Most wholesalers handle between 2500 and 3000 magazine titles. *fn6" With a few exceptions, there is only one wholesaler for most magazines in a particular geographic area.

 The wholesaler receives the magazines in bulk directly from the printer. The wholesaler determines the number of each magazine title to be shipped to its retailers, makes up the individual delivery bundles, transports these bundles to each retailer, and picks up the unsold magazines from each retailer. Some wholesalers are required to return all unsold copies to the distributor for destruction, while others are authorized to destroy the magazines on their own premises and submit an affidavit attesting to the number of copies destroyed. The wholesaler keeps records, usually on a computer, of the sales of each magazine by each retailer. Based on these sales records, the computer is programmed to determine how many copies of each magazine to deliver to each retailer. If a retailer fails to sell any copies of a particular magazine for a few consecutive months, the computer automatically removes that retailer from the distribution lists for that magazine. *fn7"

 Wholesalers, like all other members of the distribution chain, attempt to maximize their profits. Because they incur costs in retrieving unsold copies and destroying them and in delivering more copies than are sold, if the wholesaler is allotted more copies of a magazine than the wholesaler believes is appropriate to achieve his desired sales efficiency, the wholesaler may refuse to deliver the excess copies to the retailers (referred to as "withholding") or may return the magazine before its off-sale date (referred to as "prematuring").

 The final link in the distribution chain for magazines sold on newsstands is the retailers. There are approximately 200,000 retailers in the United States and Canada, of which approximately 150,000 have "mainline" racks which can display several magazines at one time. *fn8" Other retailers have small displays at the checkout counter, while others offer only TV Guide. Many retail chain stores have "restricted lists" containing the names of the magazines that the retailers in that chain are "authorized" to sell by the parent company. There are approximately 607 chains in the United States and Canada representing 76,000 retailers. *fn9"

 Retailers decide how many magazines they want to sell, the number of copies they want to receive, and how the magazines will be displayed. Publishers pay a fee to some retailers for making space available in their stores to display the publisher's magazines, referred to as a "Retail Display Allowance" ("RDA"). Publishers contract with the national distributor or with independent agencies to audit and pay the Retail Display Allowances. In this case, D.S. retained a third-party, Progressive Magazines, Inc., to monitor RDA payments.

 The Contracts Between D.S. and Warner

 A central issue in this case is meaning of paragraph 7(f) of the parties' contracts. It is desirable, therefore, to review the history of the contracts, particularly as it relates to the disputed provision.

 In 1978, Warner's predecessor, Independent News Company, Inc. ("Independent"), entered into a contract with D.S.'s predecessor, The Laufer Company ("Laufer"). An annex to the typewritten contract provided: "Every title to receive a complete distribution by Independent personnel at least three times a year in the A Towns and at least two times a year in the B Towns. ('Distribution' to be defined as dealer by dealer review with appropriate allotment adjustments effected)." *fn10" The 1981 contract between Warner and Laufer, a printed form contract, eliminated this provision and replaced it with paragraph 7(f), in which Warner agreed "[t]o have Warner's field personnel monitor the sales performance of the Publication(s) through periodic check-ups of wholesale distributors, such check-ups to take place at least three times a year in the A Towns and at least two times a year in the B Towns." *fn11" The contract did not define "periodic check-ups of wholesale distributors."

 In August 1982, D.S. purchased four magazine titles from Laufer -- Tiger Beat, Tiger Beat Star, Right On, and Daytimers, -- and assumed the two-year contract with Warner for the distribution of all the titles except Right On, which was distributed by another company. The contract was due to expire on June 30, 1983.

 On May 16, 1983, D.S. and Warner entered into two contracts for the distribution of plaintiff's magazines. One contract for the distribution of plaintiff's magazines. One contract was for the exclusive distribution of D.S.'s Tiger Beat, Tiger Beat Star and Daytimers publications and was to expire on June 30, 1985. *fn12" The second contract, effective August 5, 1983, was for the exclusive distribution of D.S.'s Right On and Class publications and was to expire on August 4, 1985. *fn13" Both contracts contained paragraph 7(f), the "periodic check-ups of wholesale distributors" provision contained in the 1981 contract assumed by D.S. On March 7, 1985, D.S. terminated both contracts *fn14" and announced the next day that it had replaced Warner with another national distributor, Select Magazines, Inc. ("Select").

 DISCUSSION

 Against the foregoing description of the industry and the parties' relationship, we turn to the parties' claims. D.S. contends that Warner breached the contracts in two ways. First D.S. alleges that Warner breached paragraph 7(f) of the contracts which required Warner to have its field personnel "monitor the sales performance of the Publication(s) through periodic check-ups of wholesale distributors, such check-ups to take place at least three times a year in the A towns and at least two times a year in the B towns." Second, D.S. contends that Warner breached its implied duty to use its best efforts in performing distribution work; that the precipitous decline in the sales of D.S.'s magazines during the contracts' period was due to Warner's failure adequately to perform field work.

 Warner vigorously denies these contentions. As to the first claim, Warner contends that the contractual requirement to perform "periodic check-ups of wholesale distributors" was fulfilled, as that term is defined by Warner. Warner also contends it substantially performed its obligations and that to the extent D.S. lost sales, it was the result of D.S.'s policies, practices and unilateral decisions, not of actions taken by Warner. Warner contends that D.S.'s termination of the contracts was not justified and, therefore, it is entitled to prevail on its counterclaim for breach of contract. In its second counterclaim, Warner seeks to recover monies advanced to D.S. in excess of the amount it received from the wholesalers, referred to as "overdrafts."

 Both parties also claimed that the other committed fraud. D.S. offered no proof at trial to sustain its fraud claim, apparently abandoning it as evidenced by the absence of any mention of the claim in its post-trial papers. For its part, Warner alleges that D.S. fraudulently induced Warner to pay advances in February 1985 that Warner was not obligated to pay. Warner alleges that D.S. misled it into believing the contracts would be renewed, but that D.S. never had any misrepresentation and argues that Warner was contractually obligated to pay the advances.

 I. Breach of the Contracts

 The parties do not dispute the existence of valid and binding contracts. The only issues raised are which party breached the contracts and what ...


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