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May 25, 1990


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 solicitation.

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; Tr.* 95-96).

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 ...

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