Diapulse Corporation of America v. Birtcher Corporation

• Decision Date: 20 June 1966
• Docket Number: No. 350,Docket 29520.,350
• Citation: 362 F.2d 736
• Parties: DIAPULSE CORPORATION OF AMERICA, Bessie Ginsberg, as Executrix under the Last Will and Testament of Abraham J. Ginsberg, deceased, Jesse Ross, William F. Kelly, Jr., Bernard O. Siler, Irving Grad and Joseph Ross, Plaintiffs-Appellees, v. The BIRTCHER CORPORATION, Defendant-Appellant, and Cecil J. Birtcher, Defendant.
• Court: U.S. Court of Appeals — Second Circuit

362 F.2d 736 (1966)

DIAPULSE CORPORATION OF AMERICA, Bessie Ginsberg, as Executrix under the Last Will and Testament of Abraham J. Ginsberg, deceased, Jesse Ross, William F. Kelly, Jr., Bernard O. Siler, Irving Grad and Joseph Ross, Plaintiffs-Appellees, v. The BIRTCHER CORPORATION, Defendant-Appellant, and Cecil J. Birtcher, Defendant.

No. 350, Docket 29520.

United States Court of Appeals Second Circuit.

Argued April 26, 1966.

Decided June 20, 1966.

Certiorari Dismissed September 1, 1966.

COPYRIGHT MATERIAL OMITTED

Richard D. Furlong, Freeport, N. Y. (Freedman, Weisbein & Furlong, Freeport, N. Y., on the brief), for plaintiffs-appellees.

Thomas H. McManus, New York City (Lynch & McManus, New York City, on the brief), for defendant-appellant.

Before SMITH, KAUFMAN and FEINBERG, Circuit Judges.

Certiorari Dismissed September 1, 1966. See 87 S.Ct. 9.

KAUFMAN, Circuit Judge:

An inevitable concomitant of our highly competitive private enterprise system is that businessmen engage in "puffing" their products, while they attempt to downgrade those of their competitors. Ordinarily, the law tries to maintain a position of neutrality toward the techniques of exaggerated salesmanship which have become commonplace today. But when these tactics begin to exceed reasonable bounds and a party is truly aggrieved, the judicial process will redress the wrong. It is in this context that the present case arises. The Birtcher Corporation appeals from a jury verdict awarding $50,000 in compensatory damages and $75,000 in punitive damages to the Diapulse Corporation of America, and nominal damages to six other plaintiffs, officers, and employees of Diapulse for allegedly libelous statements made about them. For the reasons set forth below, we affirm.

Both the Birtcher and Diapulse corporations are manufacturers of electrical modalities used in the medical treatment of various human illnesses. Birtcher, chartered under the laws of California, is the older and more firmly established enterprise. It was organized in 1936 and at the time of the alleged libels was the second largest producer of diathermy machines in the United States with annual gross sales of over $2,000,000. Diapulse, a relative newcomer, was formed in 1957 under the laws of Delaware to manufacture and sell the Diapulse machine, an invention of Dr. Abraham Ginsberg. Its net sales at the time of the alleged libels totaled approximately $362,000.

Birtcher manufactured a conventional diathermy machine — a device which creates an electromagnetic field producing electrical currents in that portion of the patient's body at which the treatment head is aimed. The principle upon which the machine functions is that the resistance of the body tissue to the current results in heat. The machine cost Birtcher approximately $300 to manufacture, wholesaled for about $600, and retailed for approximately $900. Unlike the conventional diathermy machine, the Diapulse device interrupts the current from 80 to 600 times a second in order to allow the heat produced to dissipate between pulsations. The postulate, much debated by medical experts, is that beneficial therapeutic effects can be achieved by radio waves alone, without the attendant thermal reaction that normally occurs in the absence of pulsed current. The Diapulse machine cost $750 to produce, and was sold to dealers for $1600, who in turn sold it to doctors for approximately $2300.

In 1954, Cecil J. Birtcher, president and moving force behind the defendant corporation, came to Dr. Ginsberg's New York office to discuss a proposal that Birtcher's company manufacture the Diapulse machine; but nothing developed from these talks. The libels alleged by the Diapulse Corporation and the other plaintiffs occurred some six years later and were three in number. The first was a letter written on November 11, 1960 by Cecil Birtcher to an old friend, and leading authority in the field of physical medicine, Dr. Frank H. Krusen of the Mayo Clinic, in which Birtcher stated that the Diapulse machine "is being sold under rather high pressure methods throughout the country to unsuspecting and perhaps ignorant physicians with rather fantastic claims," and that clinical support was based on claims by "a number of men called doctors who, upon investigation, turn out to be Chiropractors and by various `institutes' that no one ever heard of." Birtcher also said in his letter that the machine "is being pushed onto unsuspecting medical men at the fantastic price of $2300 each," and he described Dr. Ginsberg's office as being "suggestive of a mill and the whole thing seemed to me to be strictly a medical racket." The letter to Dr. Krusen inquired whether the Mayo Clinic had tested the Diapulse device and requested the results of such tests. Within a few days Dr. Krusen replied that tests had been made and that an unfavorable report had been published indicating that the Clinic was unable to find any of the unusual effects that were claimed.

The second alleged libel was grounded on a memorandum dispatched by Mr. Birtcher on December 2, 1960 to "All Birtcher Employees, Wholesale Field Engineers and Retail." One hundred copies were prepared and distributed in the following manner: 25 to retail salesmen, 9 to wholesale salesmen, 25 to salesmen in the home office, 8 to office managers in the home office, and the remaining 33 copies to Mr. Birtcher's secretary. In the memorandum, Birtcher stated that he had decided that the Diapulse "was simply rank misrepresentation and quackery." He quoted from Dr. Krusen's letter reporting the results from the Mayo Clinic test, and concluded by saying:

In my opinion, any surgical supply dealer or his salesmen, selling such a device to a doctor is guilty of unethical practices as he is merely seizing the opportunity to make a dollar and his customer, the doctor, accepts the device based on the misrepresentations of the dealer or the salesman.

As a matter of fact, I do not want merchandise which bears my name sold under the same auspices as those who will sell such quack devices.

Appellees introduced evidence to prove that this memorandum also was shown to three independent dealers of diathermy equipment.

The third alleged libel was published in a pamphlet of the Birtcher Corporation entitled "Quotable Quotes." Over 6000 copies of this publication were distributed in January 1961 to dealers, salesmen, physician's supply dealers, hospital supply dealers, and the corporate defendant's employees throughout the country. The pamphlet purported to quote from the report of the Mayo Clinic, but actually it presented the views expressed by Dr. Krusen in his letter to Mr. Birtcher. "Quotable Quotes" ended by stating:

The question is — Why should a physician pay $2400.00 for a Diapulse Machine when he can get the same and better results with a shortwave diathermy and spend only one-third of this amount? Shortwave is clinically proven therapy. Diapulse is not.

These three publications — (1) the November 11 letter to Dr. Krusen, (2) the December 2 memorandum, and (3) Quotable Quotes — gave rise to the instant suit. Appellant's principal contentions on this appeal are that there was not sufficient evidence to establish that the statements were untrue, and that the damages awarded were excessive. Before these are considered, however, there are two threshold questions which this court must resolve.

I. Jurisdiction

The present action was commenced in the State Supreme Court, Nassau County, by service of process upon Louis Kogan, doing business in New York as an alleged managing agent of appellant under the name Birtcher Medical Distributors of New York. When the case was removed to the Federal Court, Eastern District, the Birtcher Corporation moved pursuant to Rule 12(b) of the Federal Rules of Civil Procedure to dismiss the action, contending that the court lacked jurisdiction because Birtcher was a foreign corporation not licensed to do business in New York and in fact was not doing business there. We conclude that this contention is without merit.¹

Since this case is in the federal court by reason of diversity of citizenship, the question of amenability to suit must be determined by state law. See Arrowsmith v. United Press Int'l, 320 F.2d 219 (2d Cir. 1963). In New York prior to the passage of the Civil Practice Law and Rules (CPLR), a foreign corporation not authorized to do business in the state was amenable to local suit only if it had in fact been "doing business" in the state.² For nearly a half century the New York courts have adhered to Judge Cardozo's statement in Tauza v. Susquehanna Coal Co., 220 N.Y. 259, 268, 115 N. E. 915, 918 (1917) that "there is no precise test of the nature or extent of the business that must be done," and the New York Court of Appeals declared only a few years ago that the facts in each case will determine whether or not a foreign corporation is "doing business."³ Cf., Blount v. Peerless Chem. (P.R.) Inc., 316 F.2d 695, cert. denied, Colbert v. Peerless Chemicals (P.R.) Inc., 375 U.S. 831, 84 S.Ct. 76, 11 L.Ed.2d 62 (1963); MacInnes v. Fontainebleau Hotel Corp., 257 F.2d 832 (2d Cir. 1958). Recently, in Simonson v. International Bank, 14 N.Y. 2d 281, 251 N.Y.S.2d 433, 200 N.E.2d 427 (1964) the New York Court of Appeals declared that in actions commenced prior to the enactment of section 302 of the CPLR, jurisdiction will obtain over a foreign corporation if "it was engaged in such a continuous and systematic course of `doing business' here as to warrant a finding of its `presence' in this jurisdiction."

The facts in the case before us justify the conclusion that the Birtcher Corporation was "present" in New York at the time this suit was instituted. Since 1956 Kogan had been continuously engaged in business as the Birtcher Medical Distributors of New York; and, for a number of years the telephone listings in the New York City phone directories for the Birtcher Corporation and for the...