Penthouse Intern., Ltd. v. Playboy Enterprises, Inc.

• Decision Date: 28 October 1981
• Docket Number: Nos. 449-451,D,s. 449-451
• Citation: 663 F.2d 371
• Parties: PENTHOUSE INTERNATIONAL, LTD., Plaintiff-Appellant, Cross-Appellee, and Norman Roy Grutman, Intervenor-Appellant, v. PLAYBOY ENTERPRISES, INC. and Playboy Publications, Inc., Defendants-Appellees, Cross-Appellants. ockets 80-7515, 80-7517 and 80-7535.
• Court: U.S. Court of Appeals — Second Circuit

Page 371

663 F.2d 371

PENTHOUSE INTERNATIONAL, LTD., Plaintiff-Appellant, Cross-Appellee and Norman Roy Grutman, Intervenor-Appellant, v. PLAYBOY ENTERPRISES, INC. and Playboy Publications, Inc. Defendants-Appellees, Cross-Appellants.

Nos. 449-451, Dockets 80-7515, 80-7517 and 80-7535.

United States Court of Appeals Second Circuit.

Argued Dec. 17, 1980.

Decided Oct. 28, 1981.

Samuel N. Greenspoon, New York City (John Van Voorhees, Eaton, Van Winkle & Greenspoon, New York City, of counsel), for plaintiff-appellant.

David J. Krupp, Chicago, Ill. (Stephen J. Bisgeier, Ronald Barliant, Krupp & Miller, Chicago, Ill., Bernard Mindich, Marc H. Rosenbaum, Wachtell, Lipton, Rosen & Katz, New York City, of counsel), for defendants-appellees.

Harold R. Tyler, Jr., New York City (Michael B. Mukasey, Patterson, Belknap, Webb & Tyler, New York City, of counsel), for intervenor-appellant.

Before MOORE, MANSFIELD and NEWMAN, Circuit Judges.

MANSFIELD, Circuit Judge:

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 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.

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.

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 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.

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.

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...