The opinion of the court was delivered by: James C. Francis IV, United States Magistrate.
The parties to this action have consented to proceed before a United
States Magistrate pursuant to 28 U.S.C. § 636(c). Two motions are
currently pending: the plaintiff's motion for a preliminary injunction
and the defendant's motion to disqualify plaintiff's counsel.*fn1 For
the reasons that follow, the plaintiff's motion is granted and the
defendant's motion is denied.
Vestron, Inc. ("Vestron"), the plaintiff in this action, produces and
distributes video programs. In 1985, the National Geographic Society
("the Society") granted Vestron an exclusive license for domestic home
video rights for the Society's well known television documentaries. (Pl.
exh. 4). Pursuant to this agreement, the Society provided master tapes
from which Vestron produced and duplicated videocassettes for
distribution in the United States and English-speaking Canada. In
addition, Vestron sold cassettes back to the Society at $13.75 per unit,
and the Society then resold these to its members through a video club
In 1987, the Society began exploring the possibility of distributing
videocassettes of its programs in certain foreign territories. A number
of potential distributors, including Vestron, submitted proposals.
Vestron's bid included not only plans for foreign distribution, but also
the offer of a concession on its domestic contract with the Society,
lowering the price from $13.75
to $10.00 for each cassette sold back to the Society.
Vestron's proposal dated December 8, 1987, stated that "Vestron
distributes and sells directly to the video trade in every major
international video market with its own sales force. Local offices are in
full operation in: London, England; Stockholm, Sweden; Brussels,
Belgium; Munich, West Germany; Utrecht, Netherlands; Tokyo, Japan;
Sydney, Australia; Paris, France." (Pl. exh. 14, Proposal at 3).
In recommending acceptance of Vestron's bid, Tim Kelly, the Society's
associate director for television, stated:
Vestron has submitted a revised bid for home video
distribution in certain foreign territories (primarily
Western Europe and Australia). The bid is a good one,
combining price concessions which lower the Society's
cost for obtaining videos for the National Geographic
Video Club, with a strong proposal for distribution in
the foreign territories.
(Pl. exh. 1). The analysis upon which Mr. Kelly relied found that
Vestron's bid was economically preferable to the next best offer because
of the price concession on the domestic agreement. (Id.). Mr. Kelly also
argued that "Vestron has a full service international distribution
operation based in London, with 7 other offices, and staffed by
approximately 170 people worldwide." (Id.).
The Society ultimately accepted Vestron's bid, and by a Memorandum of
Agreement dated July 22, 1988, Vestron received the rights to sixty
titles, to be released over a period of six years. (Pl. exh. 2). The
territories covered were France and certain French-speaking territories,
non-Italian speaking Switzerland, Austria, East and West Germany,
Liechtenstein, the Benelux countries, Australia and New Zealand,
Scandinavia, Spain, Portugal, and Greece. (Id.). The Society was
guaranteed $1,000,000, to be paid in annual installments of $200,000, and
it was entitled to royalties of seventeen percent of gross receipts.
(Id.). On the domestic side, Vestron agreed to lower the price that it
charged for videotapes purchased by the Society itself to $10.00, and the
term of the domestic agreement was extended for a year. (Id.).
Following execution of the Memorandum of Agreement, the parties
performed under the modified terms of the domestic arrangement, with
Vestron providing finished cassettes to the Society at the lower price.
(Tr. 64-65, 234).*fn2 However, the Memorandum of Agreement specifically
contemplated the drafting of a more formal document reflecting the agreed
upon terms. (Pl. exh. 2).
Prior to execution of the long-form contract, the parties had
additional communications about the plans for foreign distribution.
First, in a meeting in Vestron's offices in Stamford, Connecticut in
September, 1988, Vestron described how the European operation would be
coordinated by Locus Video Group, B.V. ("Locus"), its affiliate in
Utrecht. (Tr. 107-08). Next, a meeting was set for May 3, 1989, both to
prepare for signing of the long-form contract and to allay the Society's
concerns about Vestron's financial health. (Tr. 110). In preparation for
this meeting, Vestron developed a document entitled "Home Video Launch
Plan" that described its plans for initiating distribution. This document
included details of a "hub" arrangement, with each of seven market
territories coordinated from a different hub office. (Pl. exh. 15 at 2,
4-5). In the first draft of this document presented to the Society, the
Scandinavian hub was located in Stockholm (Def. exh. D. at 4), while in
the revised version, this territory was to be coordinated from a London
office. (Pl. exh. 15 at 4). In both drafts, the territories of Spain,
Portugal, and Greece were to be subject to oversight from Vestron's Los
Angeles office. (Id. at 5; Def. exh. D at 6). At the May 3 meeting, it
was projected that the Society's first foreign distribution would be
undertaken simultaneously in each
territory in September, 1989 and would be coordinated from Locus in
Utrecht. (Tr. 118-22). In addition, Jon Peisinger, Vestron's President,
acknowledged that Vestron was seeking additional financing, but assured
the Society that it would be forthcoming. (Tr. 122-23).
On May 10, 1989, the deal anticipated by the Memorandum of Agreement
was finally formalized. The domestic agreement was officially modified to
incorporate the extended term and price changes. (Pl. exh. 4). At the
same time, a full contract for foreign distribution rights was executed
by the Society and by Vestron Video International, a division of Locus.
(Pl. exh. 3).
In addition to the terms set forth in the Memorandum of Agreement, this
longform contract also included several clauses of significance to this
litigation. First, Vestron warranted that it would use:
best efforts to promote the manufacture, sale,
distribution, and exploitation of the Programs to
create and satisfy demand in the Territory and that it
will use best efforts to make and maintain adequate
arrangements for the sale, distribution, and
exploitation of the Programs in all available markets
permitted hereunder throughout the Territory.
(Id. at Principal Terms, ¶ 16), Next, the long-form contract provides
that "[n]othing herein contained shall be deemed to limit [Vestron] from
entering into any agreement with any subdistributor, wholesaler, retailer
or otherwise with respect to copies on whatever term and conditions
[Vestron] and such other party may agree." (Id. at General Terms, ¶
5(j)). Finally, the Society is barred from rescission or equitable relief
and is relegated to an action for damages except where Vestron fails to
make a guarantee or royalty payment or fails to render a royalty
statement. (Id. at General Terms, ¶ 9).
Following execution of the long-form contract, Mr. Berman of the
Society met with representatives of the Vestron hubs at Locus' offices in
Utrecht. (Tr. 123). Although Mr. Berman was apparently unaware of it at
the time, the representative of the French hub was in fact an employee of
Warner Home Video, to whom Vestron had sublicensed its French rights.
(Tr. 123-29, d238, 377-78; Pl. exh. 34).
Throughout the period of the negotiations and implementation of the
foreign licensing agreement, Vestron was experiencing financial
uncertainty. On August 10, 1988, Vestron had received from Security
Pacific National Bank a commitment for a $100 million credit facility.
However, this commitment was withdrawn in October, 1988. (Tr. 191-92).
Thereafter, Vestron obtained $40 million in short term financing and made
efforts to find a longer term credit facility. In April, 1989, it
succeeded in obtaining a commitment for a $50 million facility from
Chemical Bank, contingent on Chemical's ability to syndicate $30 million
of the loan. (Tr. 194-96).
By mid-June, 1988, it was evident that Chemical would not be
successful, and its commitment would be withdrawn. Consequently, Vestron
decided to close Vestron Pictures, its movie production unit. Since
Vestron Pictures had supplied Vestron's foreign distributors with a large
share of their inventory, Vestron decided in July, 1989 to close its
remaining direct sales offices in Benelux, Germany, and Australia, and
rely exclusively on subdistributors. (Tr. 198-99). In late July, 1989,
Jon Peisinger of Vestron communicated these changes to Tim Kelly of the
Society in a telephone conversation. (Tr. 273). Thereafter, he discussed
them again with Todd Berman during a convention that they both attended
on August 8-10, 1989. (Tr. 275-77). Finally, in a memorandum dated August
11, 1989, Eric Eggleton of Vestron advised Todd Berman of the details of
the restructured foreign operations and indicated that the launch date
would likely be pushed back from September to October. (Pl. exh. 21).
Nevertheless, a schedule was developed that called for an initial release
of six titles, followed by releases of three titles each in December,
1989 and March, June, September, and December of 1990 (Id.; Tr. 132-34;
Perhaps most significant to the Society, Vestron's reliance on
subdistributors threatened to reduce the royalties that the Society would
ultimately receive. As long as Vestron distributed directly, the Society
would receive seventeen percent of the gross receipts received by
Vestron. However, by sublicensing the rights, Vestron reduced its own
gross receipts by about eighty percent, thus proportionally reducing the
amounts to be passed through to the Society. (Tr. 391-94).
On December 6, 1989, the Society's counsel sent a letter to Vestron
objecting to the restructuring of the foreign operations and complaining
of a number of problems encountered under the domestic ...