System Operations, Inc. v. Scientific Games Development Corp.

Decision Date24 May 1977
Docket NumberNos. 76-1691,76-1692,s. 76-1691
Citation555 F.2d 1131
PartiesSYSTEM OPERATIONS, INC., a Delaware Corporation, and Mathematica, Inc., a New Jersey Corporation v. SCIENTIFIC GAMES DEVELOPMENT CORPORATION, a Michigan Corporation, and Dittler Brothers, Inc., a Georgia Corporation, Appellants.
CourtU.S. Court of Appeals — Third Circuit

Edward J. McCardell, Jr., Jamieson, McCardell, Moore, Peskin & Spicker, Trenton, N. J., Michael C. Murphy, Robert L. Mote, Ralph H. Greil, Troutman, Sanders, Lockerman & Ashmore, Atlanta, Ga., for Scientific Games Development Corp.

James J. McLaughlin, McLaughlin, Abbots & Cooper, Trenton, N. J., Eugene G. Partain, Harvey D. Harkness, Powell, Goldstein, Frazer & Murphy, Atlanta, Ga., for Dittler Brothers, Inc.

William Miller, Allen D. Porter, Miller & Porter, Princeton, N. J., for appellees.

Before ROSENN and HUNTER, Circuit Judges, and SNYDER, District Judge. *


ROSENN, Circuit Judge.

The genesis of this litigation is the calculating appeal of state governments to the gambling instincts of their respective constituents as an important tool to raise operating revenues. This growing phenomenon in state government 1 has fanned a blazing competition between the parties in this proceeding for state and municipal contracts in the lucrative and fast-growing "instant lottery" ticket market. This action is an outgrowth of that heated rivalry.


System Operations, Inc., a 76 percent owned subsidiary of plaintiff Mathematica, Inc., a New Jersey corporation, is engaged in the designing, marketing, and implementing of public lotteries. Both plaintiff corporations ("System") maintain their principal places of business in New Jersey. Defendant Scientific Games Development Corp. ("Scientific"), a Michigan corporation, competes with System in public lottery consulting, designing, and marketing and often works jointly with defendant Dittler Brothers, Inc., ("Dittler"), a specialty printer, in designing lottery tickets. Both defendant corporations maintain their principal places of business in Georgia.

In an instant lottery, unlike the more traditional weekly or monthly lottery, each ticket is a pre-determined winner or loser. The determinative numbers, letters, or symbols on each ticket are concealed from view by a coating of gold leaf or other opaque material which can be rubbed off by the purchaser of the ticket, thereby instantaneously providing such person with the good, or more often, sad results.

The key to a successful instant lottery is in the coating process. The ticket coating must resist all attempts to see through it or around it with special equipment: if the hidden numbers can be read without leaving visible evidence that the ticket has been disturbed, the lottery is doomed to failure; unscrupulous dealers will cull out the winning tickets and sell only the losers to unsuspecting members of the public. As the number of winners among the public declines, confidence in the game diminishes; ticket sales fall off. The end result is a degenerating lottery with less revenue for the sponsoring state or city.

In the instant lottery business, a ticket is said to be "broken" if a feasible means of reading the hidden numbers has been discovered; a ticket is "non-breakable" or "secure" if such reading is impossible. Ticket security is the paramount concern of instant lottery directors. Allegations that a ticket has been broken or is insecure can threaten the success of a lottery and must be taken seriously.

System instituted an action in the United States District Court for the District of New Jersey charging Scientific and Dittler with antitrust violations, seeking a declaratory judgment that certain patents held by the defendants are invalid, and alleging that the defendants have engaged in a widespread campaign to falsely disparage the security of System's lottery ticket and to interfere with its contractual relations with various lottery commissions around the country. On this common law cause of action, System requested both damages and permanent injunctive relief, and applied to the district court for an immediate preliminary injunction against further disparagement of its instant lottery ticket and further interference with its contractual relations. The district court entered an order granting the preliminary injunction and it is that order which we are called upon to review. 1A Although the district court's subject matter jurisdiction is based on federal questions of antitrust and patent law under 28 U.S.C. §§ 1337, 1338, 2201, and 2202 (1970), it had pendent jurisdiction over the plaintiffs' state law claims of product disparagement and interference with contract. This court has jurisdiction under 28 U.S.C. § 1292(a)(1) (1970) to review the order granting the preliminary injunction.

In its complaint, System alleges that Scientific and Dittler falsely and maliciously disparaged the security of System's instant lottery ticket to lottery officials in the states of Delaware, Illinois, Michigan, New Jersey, and in the city of Omaha, Nebraska. Although further proceedings in this case may well deal with instances of alleged disparagement in all these states, in the hearing on the motion for the preliminary injunction the district court, with the consent of the parties, focused exclusively on the defendants' activities in Delaware and Omaha. The court found that in both these areas, Dr. Koza, the chairman of the board of directors of Scientific, made numerous statements to lottery officials that the System ticket was easily broken, that it had been deemed insecure by police of several states, and that dealers were breaking the tickets and "ripping off" the public. But the court found no evidence that Dittler engaged in such activities. In spite of Scientific's alleged campaign of disparagement, System managed to retain the Delaware contract previously awarded to it while competition for the Omaha contract became moot upon the cancellation for other reasons of the Omaha game.

Finding that the parties "were almost constantly negotiating or bidding on contracts" in many states, the district court entered the following order:

ORDERED that defendant Scientific Games Development Corporation, its officers, agents, employees and any other persons acting in concert with the above, be and are hereby enjoined from making, uttering or publishing false and disparaging statements, whether direct or indirect regarding plaintiffs' instant lottery tickets, this to include statements that plaintiffs' instant lottery tickets are not secure or can be "broken"; statements relating to rumors of ticket selling agents taking advantage of the alleged insecurity of plaintiffs' instant lottery tickets; and other similar statements or innuendo regarding the security of plaintiffs' instant lottery tickets; and

It is further ORDERED that there being no sufficient showing of impropriety on the part of defendant Dittler Brothers, Inc., said defendant not be specifically enjoined from any activity except insofar as its officers, agents and employees may be said to be acting as an agent for or in concert with defendant Scientific Games Development Corporation, as set forth above. 2

Scientific and Dittler appeal from this order. Because we conclude that the preliminary injunction cannot be sustained under the applicable New Jersey law and also because the district court failed to require plaintiffs to post a security bond, we reverse the order of the district court and remand the case for further proceedings.


The threshold issue which confronts us is the choice of law. The issue is knotty, for the allegedly disparaging statements of which System complains were published in New Jersey, Delaware, Nebraska, Michigan, and Illinois by a company headquartered in Georgia concerning products of companies with principal places of business in New Jersey. The problem is made more complex by the broad scope of the preliminary relief granted: the injunction restricts the conduct of the defendants not only in the foregoing states but also in every state in the Union in which they might compete for future lottery contracts. In addition, System seeks both damages for disparaging communications which were allegedly published in these states and a permanent injunction against all future disparagement regardless of the state in which it occurs.

In skirting the choice-of-law problem and basing its decision in part on case law from jurisdictions some of which have no apparent relationship to this case, 3 the district court violated the command of Klaxon v. Stentor Elec. Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941), that a federal district court adjudicating a state law issue must apply the law of the forum state, including that state's choice-of-law rules. See Suchomajcz v. Hummel Chemical Co., 524 F.2d 19 (3d Cir. 1975). Although Klaxon was a diversity jurisdiction case, the same principle holds true with respect to pendent jurisdiction claims. See UMW v. Gibbs, 383 U.S. 715, 726, 86 S.Ct. 1130, 16 L.Ed.2d 218 (1966); Mintz v. Allen, 254 F.Supp. 1012 (S.D.N.Y.1966). Since the present cause of action for product disparagement is indeed based on state, not federal, law, the district court's selection of applicable rules of product disparagement law should have been governed by the choice-of-law principles of the forum state, New Jersey. See Henry v. Richardson-Merrell, Inc., 508 F.2d 28 (3d Cir. 1975). The district court having failed to follow this course, it becomes our obligation to distill from those New Jersey choice-of-law principles a rule by which we can select the applicable body of product disparagement law. 4

As we recognized in Henry, supra, New Jersey courts have abandoned the traditional lex loci delicti approach to choice of law problems in tort cases in favor of the more flexible governmental interest...

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