CHURCH OF SCIENTOLOGY INTERNATIONAL, a California not for profit religious
corporation, Plaintiff,
v.
ELI LILLY & COMPANY, an Indiana corporation; Hill & Knowlton Inc., a Delaware
Corporation; Hill & Knowlton Public Affairs Worldwide Company, a Division of
Hill & Knowlton, Inc.; WPP Group, PLC, a United Kingdom Corporation; Martin
S. Sorrell; J. Walter Thompson Co., Inc., Defendants,
Hill & Knowlton Public Affairs Worldwide Company, Counter-Claimant,
Hill & Knowlton Inc., Counter-Claimant,
Church of Scientology International, Counter-Defendant,
Hill & Knowlton Inc.; Hill & Knowlton Public Affairs Worldwide Company; WPP
Group, PLC; Martin S. Sorrell; J. Walter Thompson Co., Inc., Counter-
Claimants,
Church of Scientology International, Counter-Defendant.
Civ. A. No. 92-1892(SS).
United States District Court,
District of Columbia.
March 21, 1994.
Church brought action against public relations firm which had represented it,
firm's parent corporation and its chief executive, advertising agency owned by
parent, and drug manufacturer represented by agency, alleging breach of
contract and of fiduciary duties against firm, inducement of breach of contract
against parent, agency, executive, and manufacturer, and intentional
interference with business relations against parent, agency, executive,
manufacturer and firm. On defendants' motions for summary judgment, the
District Court, Sporkin, J., held that: (1) genuine issues of material fact
precluded summary judgment for firm on church's claims for breach of contract
and fiduciary duty; (2) firm could not be found to have intentionally
interfered with its own business relations with church; (3) genuine issues of
material fact, including whether conduct of manufacturer went beyond mere
refusal to deal with parent if parent continued to represent church, precluded
summary judgment for manufacturer as to church's claims of inducement of breach
of contract and intentional interference with business relations; and (4)
genuine issues of material fact, including whether agency, parent and executive
conspired with manufacturer to plot termination of relationship between church
and firm, precluded summary judgment as to church's claim of inducement of
breach of contract.
Motions denied in part and granted in part.
[1] FEDERAL COURTS
Parent of both public relations firm and advertising agency, and parent's chief
executive, were not subject to personal jurisdiction in California in church's
action for, inter alia, tortious interference with its relations with firm and,
thus, California, from where suit was transferred, was never proper venue and
District of Columbia choice of law rules therefor applied; parent did not do
business in California, church's claims against executive were based solely on
his acts as parent's chief executive, and all events which give rise to
church's claims against parent and executive occurred outside of California.
[1] FEDERAL COURTS
Parent of both public relations firm and advertising agency, and parent's chief
executive, were not subject to personal jurisdiction in California in church's
action for, inter alia, tortious interference with its relations with firm and,
thus, California, from where suit was transferred, was never proper venue and
District of Columbia choice of law rules therefor applied; parent did not do
business in California, church's claims against executive were based solely on
his acts as parent's chief executive, and all events which give rise to
church's claims against parent and executive occurred outside of California.
[1] FEDERAL COURTS
Parent of both public relations firm and advertising agency, and parent's chief
executive, were not subject to personal jurisdiction in California in church's
action for, inter alia, tortious interference with its relations with firm and,
thus, California, from where suit was transferred, was never proper venue and
District of Columbia choice of law rules therefor applied; parent did not do
business in California, church's claims against executive were based solely on
his acts as parent's chief executive, and all events which give rise to
church's claims against parent and executive occurred outside of California.
[2] ACTION
Under District of Columbia's choice of law rules, law governing claim is to be
law of state with most significant relationship to matters at issue.
[3] CONTRACTS
District of Columbia was jurisdiction with most significant relationship to
matters at issue in church's action for tortious interference with its
relations with public relations firm and breach by firm of contract and
fiduciary duties and, thus, under District's choice of law rules, law
of District applied; document which was basis for relationship between church
and firm was contract which stated specifically that it would be interpreted in
accordance with laws of District, and contract was negotiated, drafted, and for
most part executed in District.
[3] FRAUD
District of Columbia was jurisdiction with most significant relationship to
matters at issue in church's action for tortious interference with its
relations with public relations firm and breach by firm of contract and
fiduciary duties and, thus, under District's choice of law rules, law
of District applied; document which was basis for relationship between church
and firm was contract which stated specifically that it would be interpreted in
accordance with laws of District, and contract was negotiated, drafted, and for
most part executed in District.
[3] TORTS
District of Columbia was jurisdiction with most significant relationship to
matters at issue in church's action for tortious interference with its
relations with public relations firm and breach by firm of contract and
fiduciary duties and, thus, under District's choice of law rules, law
of District applied; document which was basis for relationship between church
and firm was contract which stated specifically that it would be interpreted in
accordance with laws of District, and contract was negotiated, drafted, and for
most part executed in District.
[4] FEDERAL CIVIL PROCEDURE
Genuine issues of material fact precluded summary judgment for public relations
firm as to client/church's claim for breach of contract; fact finder could
have found that church was excellent client that did everything firm demanded
of it, that based upon prior contractual relationship with firm, church's
legitimate expectations were that contract would continue so long as it
remained good client, and that church had legitimate expectation that its
relationship with firm would not be summarily terminated.
[5] FEDERAL CIVIL PROCEDURE
Genuine issues of material fact precluded summary judgment for public relations
firm under District of Columbia law on client/church's claim for breach of
fiduciary duty, despite claim that there could be no such duty; there was
evidence that church's relationship with firm was one of great sensitivity,
based on trust and confidence, and that firm betrayed that trust by
compromising its representation of church for benefit of second client/drug
manufacturer's bottom line, and by giving advice to others to be specifically
used against church's interests. Restatement (Second) of Torts s 874 comment.
[6] FRAUD
Under District of Columbia law, whether there exists "fiduciary
relationship" is fact-intensive question, involving searching inquiry into
nature of relationship, promises made, type of services or advice given and
legitimate expectations of parties. Restatement (Second) of Torts s 874
comment.
See publication Words and Phrases for other judicial constructions and
definitions.
[7] TORTS
Public relations firm could not be found to have intentionally interfered with
its own business relations with client/church under District of Columbia law.
[8] FEDERAL CIVIL PROCEDURE
Genuine issues of material fact, including whether conduct of drug
manufacturer, whose advertising agency's parent corporation also owned church's
public relations firm, went beyond mere refusal to deal with parent if parent
continued to represent church, and whether church's mental health treatment
program was in actual competition with manufacturer's anti-depressant,
precluded summary judgment for manufacturer under District of Columbia law as
to church's claims of inducement of breach of contract between church and firm,
and intentional interference with business relations. Restatement (Second) of
Torts s 766 comment.
[9] FEDERAL CIVIL PROCEDURE
Genuine issues of material fact, including whether advertising agency
representing manufacturer of antidepressant drug, agency's parent corporation,
and parent's chief executive conspired with manufacturer, an outside actor, to
plot termination of relationship between church and public relations firm owned
entirely by parent precluded summary judgment for parent and executive under
District of Columbia law as to church's claims of inducement of breach of
contract and intentional interference with business relations, despite claim by
parent and executive that their actions were privileged. Restatement (Second)
of Torts s 769 comment.
[10] CORPORATIONS
As separate corporate entities, advertising agency and public relations firm,
who shared single parent corporation, had to be held fully and strictly
accountable for their own actions under District of Columbia law; in view of
their fierce independent nature and fact they were organized and operated as
separate corporate entities, to treat them as one would have undermined concept
of corporate structure acting as "fire wall."
[11] FEDERAL CIVIL PROCEDURE
Genuine issue of material fact as to whether advertising agency colluded with
client/drug manufacturer to achieve termination of contract between church and
public relations firm owned by agency's parent corporation precluded
summary judgment for agency under District of Columbia law as to church's
claims of inducement of breach of contract between church and firm, and
intentional interference with business relations; there was evidence that
agency did more than simply convey truthful information to parent as to
potential loss of manufacturer's business. Restatement (Second) of Torts s
772.
*1020 Eric M. Lieberman, Hillary Richard, Laurie Edelstein, Thomas Viles,
Rabinowitz, Boudin, Standard, Krinsky & Lieberman, P.C., New York City, Earle
C. Cooley, Cooley, Manion, Moore & Jones, P.C., Boston, MA, Ronald Kenneth
Mundy, Mundy, Holt & Mance, Anthony Patrick Bisceglie, Bisceglie & Walsh,
Washington, DC, Kendrick Lichty Moxon, Bowles & Moxon, Hollywood, CA, for
plaintiff.
Mark Butler Bierbower, Hunton & Williams, Washington, DC, Thomas G. Slater,
Jr., Hunton & Williams, Richmond, VA, Theodore B. Olson, Theodore J. Boutrous,
Jr., Gibson, Dunn & Crutcher, Washington, DC, Eric Mark Nelson, Howard J.
Rubin, Douglas E. Thea, Lisa Paddock, Paul F. Corcoran, Davis & Gilbert, New
York City, for defendants.
MEMORANDUM OPINION AND ORDER
SPORKIN, District Judge.
This matter comes before the Court on Defendants' motions for summary
judgment.
I. Background
The plaintiff in this action is the Church of Scientology, Incorporated
("CSI"). CSI is the "mother church" of the Scientology religion. [FN1] This
lawsuit stems from the termination of a contract between CSI and defendant and
counterclaim plaintiff Hill & Knowlton, Inc. and its unit, Hill & Knowlton
Public Affairs World Wide Company (together "H & K").
FN1. According to a publication of the Church of Scientology, entitled
What is Scientology, "Scientology is a twentieth century religion", founded
by L. Ron Hubbard in the 1950s. Scientology espouses a philosophy of self-
improvement. Among Scientology's fundamental truths is that "Man is a
spiritual being endowed with abilities well beyond those which he normally
envisages. He is not only able to solve his own problems, accomplish his
goals and gain lasting happiness, but also achieve new states of awareness
he may never have dreamed possible." What is Scientology at 141, Lilly
Reply Ex. C.
H & K is a public relations firm. H & K is also a wholly-owned subsidiary of
Defendant WPP Group, plc., a British public limited company ("WPP"). Defendant
J. Walter Thompson Company, Incorporated ("JWT") is an advertising agency that
is also a wholly-owned subsidiary of WPP. Thus, H & K and JWT are subsidiary
corporations, 100 percent-owned by parent WPP. Defendant Martin S. Sorrell is
a British citizen, occupying the positions of director and Group chief
executive at WPP. Defendant Eli Lilly and Company ("Lilly") is an
international pharmaceutical company and the maker of the antidepressant drug
Prozac. Lilly has been a client of JWT for more than twenty-three years. From
1983 to 1990, Lilly was also a client of H & K in the United Kingdom.
Beginning in 1987, H & K entered into a contract to provide CSI with public
relations services.
The instability of the CSI-H & K and JWT-Lilly alliances became apparent in
late 1989 when CSI launched a highly effective nationwide media crusade against
the drug Prozac and its manufacturer Lilly. Lilly learned of H & K's
representation of CSI and over a period of time conveyed to JWT and WPP its
intention to sever its ties to WPP. Fearing the loss of valued clients, WPP
director Sorrell insisted that H & K terminate its representation of CSI.
Notification of termination occurred only days after the publication of a TIME
magazine cover story, highly critical of CSI. See Richard Behar, Scientology,
The Thriving Cult of Greed and Power, TIME, May 6, 1991 at 32-39.
CSI alleges that its contract for public relations services was unlawfully
terminated by H & K due to tortious interference by Lilly, JWT, WPP, and
Sorrell. CSI claims that as a result of this unlawful termination, it was
deprived of valuable public relations *1021 services "at a time when it had
just sustained a malicious and derogatory assault at the hands of TIME magazine
and was in immediate need of the services of Hill & Knowlton whose expertise in
Church matters had been purchased at great expense over the previous 2 and 1/2
years." Second Amended Complaint P 49 at 16.
CSI has sued on a number of grounds requesting more than $4.7 million in
compensatory damages and $10 million in punitive damages. Count One of the
Second Amended Complaint alleges breach of contract against H & K. Count Two
alleges breach of fiduciary duties against H & K. Count Three alleges
inducement of breach of contract against WPP, JWT, Sorrell, and Lilly. Count
Four alleges intentional interference with business relations against
Defendants WPP, JWT, Sorrell, Lilly, and H & K. H & K has filed a counterclaim
for public relations services rendered to CSI for which H & K has not received
payment. H & K claims it is due $333,216.30. This Court has jurisdiction
under 28 U.S.C. s 1332.
II. Summary Judgment Standards
All defendants have moved for summary judgment and counterclaim
plaintiff H & K has moved for summary judgment on the counterclaim. Under
Federal Rule of Civil Procedure 56, summary judgment shall be rendered if
the pleadings, depositions, answers to interrogatories, and admissions on file,
together with affidavits show that there is no genuine issue of material fact
and that the moving party is entitled to a judgment as a matter of law.
Fed.R.Civ.Proc. 56(c). Mere allegations or denials of the adverse party's
pleading are not enough to prevent the issuance of summary judgment. The
adverse party's opposition must be supported by affidavits or other competent
evidence setting forth specific facts showing that there is a genuine issue for
trial. Fed.R.Civ.Pro. 56(e).
The governing standards for the issuance of summary judgment were set by the
Supreme Court in Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91
L.Ed.2d 265 (1986). In Celotex, the Court explicitly recognized that a
full-blown trial is a drain on resources to be avoided if and when the non-
moving party's position cannot be substantiated through affidavit or other
competent means
Rule 56 must be construed with due regard not only for the rights of
persons asserting claims and defenses that are adequately based in fact to have
those claims and defenses tried to a jury, but also for the rights of persons
opposing such claims and defenses to demonstrate in the manner provided by the
Rule, prior to trial, that the claims and defenses have no factual basis.
Id. at 327, 106 S.Ct. at 2555. (citation omitted). This said, all
reasonable inferences from the evidence are to be drawn in the non-moving
party's favor and therefore, plaintiff's "version of any disputed issue of fact
thus is presumed correct." Eastman Kodak Co v. Image Technical Services,
Inc., 504 U.S. 451, ----, 112 S.Ct. 2072, 2077, 119 L.Ed.2d 265 (1992).
III. The Evidence:
The following gives an overview of the thousands of pages of evidence
submitted by the parties in the form of documents, affidavits, and
depositions. This evidence must be viewed in the light most favorable to CSI.
a. The Contracts
In the fall of 1987, senior officials at CSI and the affiliated Religious
Technology Center ("RTC") became concerned with how Scientology was perceived
by the public and portrayed in the media. On the advice of counsel, CSI
decided to investigate the possibility of retaining a public relations firm. A
series of meetings took place in Washington D.C. between CSI officials and H &
K and its worldwide chairman, Robert Gray. According to the declaration of
David Miscavige, who is Chairman of the Board of Directors of the RTC and the
most senior official of Scientology, Gray requested and the CSI provided
extensive briefing and background materials to H & K to permit H & K to
determine whether or not H & K could be of service to CSI. CSI Ex. 1. After a
review of these documents, H & K agreed to represent CSI.
*1022 A letter of agreement dated December 1, 1987 ("Contract I") was sent
by Robert Gray to CSI President, Heber Jentzsch. Jentzsch signed this
agreement on December 7, 1987. The relevant provisions of Contract I are as
follows. H & K agreed to provide CSI with a communications program which would
have "both short and long-term objectives" including:
. Neutralize negative media coverage; seek a change in the direction
of media coverage by building a new and positive public platform for the
Church; and promote the many positive aspects of scientology (programs,
individual success stories, societal benefits);
. Expand new membership and increase solidarity among existing membership.
CSI Ex. 37 at 1. H & K agreed to work toward these goals by performing
sophisticated public attitude research, conducting an inventory of CSI's
internal resources, providing media training for all those who represent CSI in
public, and doing a materials audit of the books, pamphlets, and press kit
literature that CSI was providing to the media. H & K also agreed to establish
a comprehensive communications program and "to be available as counsel on all
communications matters related to the Church, whether the nature of concerns be
routine or crisis." Id. at 1-3.
H & K noted in the agreement that its policy was to assist controversial
clients even though such representation would necessarily result in loss of
business for H & K. As the letter of agreement stated:
Because it is the oldest and largest communications firm in the world, Hill
and Knowlton is accustomed to being dealt the toughest of communications
challenges. Often is the case that principled clients conducting honest
operations toward laudable and legitimate ends come to us when they are much
misunderstood and maligned in the marketplace. We believe these clients
deserve the best, most reputable counsel and are willing to commit our
reputations and credibility toward that effort. Nevertheless, in doing so we
know we risk both the loss of clients and potential clients as we commit the
full resources of our firm worldwide. The policy of this firm is to balance
the impact of our association with the Church of Scientology, and to compensate
the firm for business or professional loss which unfairly but predictably
attends our relationship. We will undertake to represent the Church with the
same terms applicable to other highly controversial clients.
An advance entry retainer in the amount of $50,000 will be required at the
onset of our relationship. In addition, a monthly retainer of $5,000 will be
required, to which will be added charges for staff services provided to the
Church. These charges will be levied at standard hourly rates for
participating officers and staff assistants as required to carry out programs
and activities approved by you.
CSI Ex. 37 at 4 (emphasis added). There is evidence that the $50,000 fee and
$5,000 monthly retainer (payments against which no actual H & K services were
performed) were non-refundable premiums paid by CSI because of its perceived
controversial reputation. See CSI Ex. 7 at 78-79. There is also evidence that
CSI, on the basis of oral statements made by H & K officials, understood these
premiums were to be in consideration for H & K's guarantee that CSI would not
be abandoned because of pressure by other H & K clients. See CSI Ex. 1 at 4.
While CSI provides evidence via declarations and deposition testimony of
its understanding as to H & K's "guarantee" of non-abandonment in the face of
pressure from other H & K clients, Contract I on its face makes no explicit
mention of any "guarantee". Instead, Contract I includes an integration clause
as well as a provision covering the agreement's termination:
H & K's appointment under this arrangement is to extend from November 30,
1987 to February 15, 1987 [sic] at which point either party may cancel the
agreement. If both parties agree to renew the agreement, it will continue
indefinitely unless either party gives sixty (60) days' written notice of its
desire to terminate or modify the agreement.
This agreement represents the entire agreement of the parties and may be
*1023 amended only by a writing signed by all parties. It shall be governed
and construed in accordance with the laws of the District of Columbia.
CSI Ex. 37 at 5-6.
Pursuant to Contract I, H & K conducted a study of CSI with the assistance of
a public opinion research firm. H & K analyzed CSI documents provided to H & K
by CSI. H & K staff members met with CSI officials on multiple occasions. The
study period established under Contract I endured for nine months during which
time CSI paid, in addition to hourly staff charges, a total of $90,000 pursuant
to the "controversy premium" provision in Contract I. No H & K work was billed
against the $90,000.
H & K entered into a second agreement with CSI via a letter sent by Gray to
Jentzsch on August 12, 1988 ("Contract II"). CSI Ex. 39. This second letter
of agreement noted that having conducted a "thorough study" of CSI over nine
months, H & K was prepared to move forward with the ideas and concepts H & K
had developed to assist CSI. "As we begin this phase, there is a need to
revise our current working relationship," wrote Gray. CSI Ex. 39 at 1.
The new agreement was specifically intended to supersede Contract I: "The
letter of agreement signed in December, 1987 covered activity through the
delivery of our proposal on Tuesday. This letter of agreement will supersede
that contract." Id. Under the new contract, H & K agreed to develop a
number of specific projects as well as to provide CSI with ongoing services:
Ongoing Counsel--Hill and Knowlton will continue to provide Church of
Scientology with ongoing public relations and public affairs counsel for all
those activities on which we now are working. In addition to the development
and implementation of the specific projects outlined above, Hill and Knowlton
staff will be available to provide Church of Scientology with regular and
continuing communications counsel.
CSI Ex. 39 at 2. Although there is no mention in Contract II of any
"controversy premium" payments, the "Billings" section of Contract II makes
clear that CSI was expected to expend a minimum of $25,000 monthly on H & K
services:
Charges for the services of H & K will be made at standard hourly rates for
participating officers and staff assistants as they are required to carry out
the programs and activities approved. On a monthly basis, Church of
Scientology will pay H & K a minimum of $25,000 in advance, for services
rendered under this agreement. Staff time charges incurred in any month for
the Church of Scientology account will be applied against this minimum, and any
staff time charges incurred above the minimum will be billed at regular rates.
Id. at 3.
CSI provides evidence through depositions and declarations that the minimum
monthly billing of $25,000 was intended to be the equivalent of the
"controversy premium" payments found in Contract I. CSI Ex. 1 at 5. CSI
argues that it had secured, through premium payments over the course of
Contract I, and by agreeing to the $25,000 minimum monthly payments in Contract
II, H & K's promise not to terminate the CSI relationship due to pressure from
other clients.
Contract II, like Contract I before it, makes no mention of any specific
agreement by H & K not to terminate CSI due to pressure from other clients.
Contract II does states that the Contract will continue indefinitely unless
either party gives 60 days written notice of its desire to terminate the
agreement:
Length of Contract--Hill and Knowlton's appointment under this agreement will
extend for one year from August 1, 1988 through July 31, 1989, at which point
either party may cancel the agreement. If both parties agree to renew the
agreement, it will continue indefinitely unless either party gives sixty days
(60) advance written notice of its desire to terminate the agreement.
CSI Ex. 39 at 3 (emphasis added). Contract II also contains the same
integration provision found in Contract I, assuring that the written letter of
agreement would represent "the entire agreement of the parties" to be
*1024 amended only by a writing signed by both of the parties. Id. at 4.
Over the course of the next two and one half years, H & K provided substantial
public relations services to CSI, for which CSI eventually paid H & K $4.7
million. Both parties appeared to be perfectly satisfied with the way the
contract was being performed.
b. Eli Lilly and Prozac:
In February 1988, Lilly began to produce and distribute the drug Prozac, an
FDA-approved prescription medication, used for the treatment of depression.
Lilly had been for 23 years exclusively represented by advertising firm JWT.
Lilly Ex. 2. On a small scale, Lilly had also been a client of H & K's
operation in the United Kingdom since 1983. Lilly Ex. 4. Both H & K and JWT
were 100% owned by their common parent, WPP, under the leadership of Martin
Sorrell. Lilly Ex. 6, 7.
CSI has long held antipathy for psychiatric treatment in general and the use
of medication to treat certain psychological disorders in particular. [FN2]
Beginning in late 1989, CSI and a CSI sub-organization called the Citizens
Commission on Human Rights ("CCHR") [FN3], began a nationwide publicity
campaign attacking Lilly and the drug Prozac. The anti-Prozac campaign was
conducted through CSI-related publications, CCHR press releases, appeals by CSI
and CCHR officials to members of Congress, and via CCHR spokespersons'
appearances on radio and television shows, including such television programs
as Geraldo, The Phil Donahue Show, and Larry King Live. The substance of the
message conveyed in the CSI and CCHR attacks was that Prozac is a deadly drug
that may lead Prozac patients to commit mass murder and suicide.
FN2. A document entitled "Public Warning on Psychiatry", written by the
founder of Scientology, L. Ron Hubbard, has been adopted by CSI as part of
the religion's ecclesiastical policy. Lilly Ex. 32 & 33.
FN3. CCHR is an international organization established by CSI in 1969 to
"investigate and expose psychiatric violations of human rights." Lilly Ex.
1 at 2.
Prozac is a valuable source of revenue for Lilly. It is undisputed that
CSI's campaign against Prozac and Lilly has had a deleterious effect both on
sales of Prozac and on Lilly's stock price. See Second Amended Complaint P
34; Lilly Ex. 1. There is evidence that some H & K resources were used to
support CSI in its publicity campaign against Prozac. CSI Ex. 35.
Lilly argues that to the extent H & K provided assistance to CSI in improving
CSI's image with the public, H & K was indirectly assisting in CSI's campaign
against Prozac. The interests of CSI and Lilly were at odds with one another.
The evidence supports a conclusion that WPP assets, namely the resources of
public relations firm H & K and the advertising firm JWT, were acting at cross-
purposes, the former on behalf of CSI and the latter on behalf of Lilly. The
evidence supports a conclusion that H & K was attempting to bolster CSI's
reputation and was providing indirect support for CSI's anti-Lilly, anti-Prozac
campaign, while JWT was working to increase sales of Lilly's products.
Lilly's contract with JWT contained the following provision:
Exclusive Representation: The Agency shall not, without consultation and
prior approval of Lilly's Vice President of Marketing, act as advertising agent
or provide a service similar to the service provided under this Agreement with
respect to similar or competitive products of other manufacturers, suppliers,
distributors, or advertisers other than Lilly divisions, subsidiaries or
affiliates.
Lilly Reply Ex. A. Despite this provision, Lilly tolerated H & K's
representation of competing pharmaceutical products. For example, H & K in the
United Kingdom represented SmithKline Beecham's Seroxat, an anti-depressant
which competes directly with Prozac. CSI Ex. 61.
In the summer of 1990, Lilly made known to WPP and JWT that it was displeased
with the connection between CSI and H & K. Aware of this pressure, Robert
Gray, H & K's top executive working directly with CSI, *1025 prepared drafts
of a letter for H & K CEO Dilenschneider to send to Martin Sorrell. The letter
drafts outlined H & K's opposition to dropping CSI and explained the nature of
the relationship:
In the two years (two and one-half including the study period) we have worked
for CSI, its principals patiently have taught us the intricacies of their
religion and their worldwide efforts to promote it, have been quick to seek and
heed our counsel, have shared confidences, have been honest in their dealings,
reasonable in their expectations and grateful for the progress we have made
toward better public appreciation of their mission substantiated by independent
tracking polls.
In the combined experience of your professionals on our board, Martin, no
client ever has invested more to justify representation by Hill & Knowlton.
This we believe is the compelling reason it would professionally be
unconscionable to desert them now over a non-germane issue involving a non-
client of this firm.
CSI Ex. 49. A later draft added the following paragraph:
No client ever has invested more to justify H & K representation. If we walk
away from Scientology now, I fear the client, with some justification, may
demand return of that six-month study money (get amount) plus other they
attribute to the costs of bringing us up to speed on their mission and their
problems.
CSI Ex. 50.
In late August of 1990, WPP's chairman, Martin Sorrell met with Lilly official
Eugene Step to address Lilly's concerns. Lilly informed JWT and WPP that due
to the perceived conflict between H & K's representation of CSI and JWT's
representation of Lilly, Lilly would pull its business with WPP companies if
the H & K work for Scientology continued. Lilly Mo. for S.J. at 13. At this
meeting, Sorrell explained to Step the structure of the WPP family of
companies, trying to make it clear that WPP was merely a holding company and
that the subsidiaries were entirely independent. Sorrell also noted that H & K
was doing no direct work on the Prozac campaign. Apparently, Step was
unconvinced, and Sorrell departed the meeting with the words "Leave this in my
hands, I'll take care of it." CSI Ex. 52. CSI characterizes this as an
agreement by Sorrell to wind down and terminate the H & K relationship. CSI
Brief at 16. Over a period of time, Sorrell conveyed to H & K CEO Robert
Dilenschneider that he (Sorrell) "felt the church was not right for the Hill
and Knowlton client roster." CSI ex. 18 at 68.
In November 1990, Lilly severed all of its links with H & K in the United
Kingdom, terminating a $160,000 account explicitly due to H & K's
representation of CSI. See H & K Ex. 80, 82. CSI characterizes this move as
an additional step by Lilly to increase the pressure on WPP to drop the CSI
account. In December 1990, Lilly told JWT that it might pull its advertising
account at any time due to lack of action by WPP to address the Scientology
representation. Lilly Ex. 61. In late January 1991, Lilly again told JWT it
was watching and waiting for action on the Scientology matter. Lilly Ex. 62.
In March 1991, after a "lengthy and negative anti-Prozac segment" on the Phil
Donahue television show, Lilly again expressed its concern to JWT about H & K's
Scientology representation. One of the participants on the show was CSI's
chief spokesman on Prozac. See Lilly Ex. 63. In April 1991, Lilly again
expressed its concern to JWT about the CSI issue. These views were transmitted
by JWT officials to Martin Sorrell. One JWT official characterized Lilly's
feelings about CSI as: "it will be all out war and anyone associating with the
enemy [CSI] will be dealt with accordingly." Lilly Ex. 69.
Over this period of time, Sorrell increased his pressure on H & K to terminate
the H & K-CSI relationship. H & K CEO Dilenschneider described this as
"enormous pressure" resulting from "telephone calls and personal meetings of
increasing velocity about whether or not the church should be on [H & K's]
roster." CSI Ex. 18 at 72-73. Dilenschneider believed the "increasing
velocity" of Sorrell's demands to be due to Lilly requests.
c. Other Pressures to Drop CSI as Client
While Lilly expressed its concerns about H & K's representation of CSI
to JWT and *1026 WPP, other members of the WPP corporate family were
actively opposing H & K's representation of CSI. In November 1990, H & K's
Europe CEO, David Wynne-Morgan wrote a number of memoranda to H & K in the
United States warning that the H & K-CSI link was threatening all of H & K's
european pharmaceutical business. In addition, Wynne-Morgan noted that many
H & K european employees were unwilling to work on CSI projects. See Lilly Ex.
48.
Other pharmaceutical companies were refusing to do business with H & K because
of the CSI link. H & K was "blackballed" from pitching all business for the
pharmaceutical firm Ciba-Geigy, including a million-dollar european arthritis
drug account. Lilly Ex. 49.
In April 1991, SmithKline Beecham hired H & K to handle a multi-million dollar
account in the United States for the promotion of a new anti-depressant,
Aropax. Lilly Ex. 71. [FN4] On April 28, 1991, TIME magazine published the
cover story entitled "Scientology--the Thriving Cult of Greed and Power."
Lilly Ex. 70. The article was highly critical of CSI. [FN5] It described
CSI's campaign against Prozac and also noted that CSI had retained H & K for
assistance in improving its image. Within days of publication of the TIME
article, SmithKline fired H & K from the newly-awarded Aropax account on the
basis of the H & K's representation of CSI. Lilly Ex. 72.
FN4. Aropax is the name in the United States for the anti-depressant
called Seroxat in the United Kingdom.
FN5. This article has itself been the basis for a CSI libel suit against
Time. See Church of Scientology, International v. Time Warner, Inc.
806 F.Supp. 1157 (S.D.N.Y.1992).
IV. Termination
On April 30, 1991, H & K CEO Dilenschneider wrote WPP Chairman Sorrell that
H & K would be resigning the CSI account within the terms of the contract.
Lilly Ex. 74. Dilenschneider did this even though he believed strongly that
H & K should not have walked away from CSI. CSI Ex. 18 at 156. On May 1, 1991
H & K Worldwide Chief Robert Gray called CSI lawyer Gerald Feffer to explain
that H & K would be resigning the CSI account. Lilly Ex. 75. There is
evidence that Gray did not want to terminate the H & K relationship with CSI,
and Gray did so only at the insistence of Sorrell. CSI Ex. 18 at 76-78. On
May 3, 1991, Lilly, told JWT that it would be dropping its advertising
account. Lilly Ex. 77. The same day, WPP CEO Sorrell responded to Lilly that
the Scientology account had already been terminated. Lilly Ex. 78.
V. Choice of Law:
[1] As an initial matter, it should be noted that District of Columbia law
applies to this dispute. This lawsuit was originally filed in California and
was transferred to the District of Columbia. Two of the defendants, WPP and
Martin Sorrell, are not subject to personal jurisdiction in California. WPP
does not do business in California and CSI's claims against Sorrell are based
solely on his acts as WPP's chief executive. All the events which give rise to
CSI's claims against WPP and Sorrell occurred outside of California. The
California court lacked personal jurisdiction over Sorrell and WPP. See
Congoleum Corp. v. DLW Aktiengesellschaft, 729 F.2d 1240 (9th Cir.1984) (no
personal jurisdiction where cause of action asserted lacks any relation to the
contact of the defendant with the putative forum state). Thus, California was
never a proper venue to begin with. See 28 U.S.C. s 1391(a). So, while
this Court is a transferee court, District of Columbia choice of law rules must
apply. See Davis v. Costa-Gravas, 580 F.Supp. 1082, 1086-87
(S.D.N.Y.1984) (where venue is improper in transferor court, choice of law
rules of transferee court must apply).
[2][3] Under the District of Columbia's choice of law rules, the law
governing the claim is to be the law of the state with the most significant
relationship to the matters at issue. Hitchcock v. United States, 665 F.2d
354, 360-61 (D.C.Cir.1981). The District of Columbia is the jurisdiction with
the most significant relationship to the matters at issue. The document which
was the basis for the relationship between CSI and H & K *1027 is a contract
which states specifically that it shall be interpreted in accordance with the
laws of the District of Columbia. See CSI Ex. 37 at 6. The contract was
negotiated, drafted, and for the most part executed in the District of
Columbia.
VI. The Counts
a. Breach of Contract
[4] The breach of contract cause of action poses a number of difficult
issues. The contract states: "it will continue indefinitely unless either
party gives sixty days (60) advance written notice of its desire to terminate
the contract."
H & K claims it terminated the contract pursuant to its terms. The fact is
H & K did not give "advance written notice." Conceding this point, H & K
argues that the case law recognizes that oral notice is acceptable where it can
be proven by clear and convincing evidence. CSI counters that H & K
unilaterally curtailed its contractual activities prior to the termination date
at a point in time when CSI claims H & K's services were urgently needed. CSI
also claims that the underlying intent of the parties was that the contract
would continue indefinitely so long as both parties were living up to their end
of the long standing relationship.
There are facts in the record from which a fact finder could make the
following findings:
1. CSI was an excellent client that did everything that H & K demanded of it.
2. Based upon its prior contractual relationship with H & K, CSI's legitimate
expectations were that the contract would continue so long as it remained a
good client.
3. CSI had the legitimate expectation that its relationship with H & K would
not be summarily terminated particularly at a time when it was having
difficulty and was in particular need of H & K's services.
4. H & K knew that CSI was relying on its services and would be placed in a
difficult position by a peremptory termination of the contract.
5. Because CSI believed its contract with H & K would continue indefinitely
and was given no cause to believe there would be a peremptory strike by H & K,
CSI had made no contingency plans to obtain substitute public relations
counsel.
Against this background, the Court finds it must deny H & K's summary judgment
claim on this issue.
b. Breach of Fiduciary Duty against H & K
[5] H & K argues that this count must be dismissed because, as a matter of
law, there can be no fiduciary relationship between a public relations firm and
its client. H & K characterizes the relationship between itself and CSI as an
arms length contractual agreement. In addition, H & K asserts that it cannot
be held accountable for a breach of fiduciary duty when it has simply
terminated a contractual relationship within the terms of the contract. H & K
argues that even if it were a fiduciary, there is no evidence that it breached
its duty to the Church.
There is evidence that during H & K's representation of CSI, H & K's
advice to CSI was distorted because of its strong ties to the pharmaceutical
industry. For example, a letter from H & K Europe's CEO to H & K in the United
States suggests that H & K had other interests besides CSI's interests in mind
when it was giving CSI advice:
"I know that Bob Gray believes that if Hill & Knowlton were not working for
the Church of Scientology, then the stance of the Church against the drug
industry would be infinitely stronger.
....
If we believe that we are reducing the position of the Church against the
pharmaceutical industry by our actions, then it is absolutely essential that we
succeed in persuading the pharmaceutical industry that it is in the interest of
the industry that we should continue working for them."
Lilly Ex. 48 (Letter from David Wynne-Morgan (H & K Europe) to Tom Edison (H &
K New York) November 26, 1990.). There is other evidence that CSI's trust in
H & K was not well-placed. An H & K employee in Washington drafted an internal
memorandum, dated January 16, 1991, for the benefit *1028 of SmithKline
Beecham. This memorandum explained CSI's opposition to psychiatric drugs and
recommended a "preparedness" strategy in the event that CSI began a campaign
against SmithKline's anti-depressant Seroxat. CSI Ex. 91. [FN6]
FN6. While this memorandum was never sent to SmithKline, some of the
tactics suggested therein were conveyed to SmithKline. See CSI Ex. 36.
The author of this memorandum testified that all the information about the
Church came from his own personal experience and did not come from H & K's
account with CSI.
The Restatement (Second) of Torts notes that a fiduciary relation exists when
one party "is under a duty to act for or give advice for the benefit of another
upon matters within the scope of the relation." Restatement (Second) Torts s
874, comment a. To the extent that H & K held itself out to CSI as
knowledgeable in the area of public relations and promised to provide CSI with
"ongoing public relations and public affairs counsel", CSI Ex. 39 at 2, H & K
appears to fit within the Restatement's broad definition of a fiduciary.
[6] It well may be that no Court has ever found there to be a fiduciary
relationship between a public relations firm and one of its clients. But
whether there exists a fiduciary relationship is a fact-intensive question,
involving a searching inquiry into the nature of the relationship, the promises
made, the type of services or advice given and the legitimate expectations of
the parties. A case from the Southern District of New York describes the outer
limits of the fiduciary concept:
"Broadly stated, a fiduciary relationship is one founded upon trust or
confidence reposed by one person in the integrity and fidelity of another. It
is said that the relationship exists in all cases in which influence has been
acquired and betrayed. The rule embraces both technical fiduciary relations
and those informal relations which exist whenever one man trusts in, and relies
upon, another...."
Schmidt v. Bishop, 779 F.Supp. 321, 325 (S.D.N.Y.1991) (quoting Penato
v. George, 52 A.D.2d 939, 383 N.Y.S.2d 900, 902 (2d Dep't N.Y.1976), appeal
dismissed, 42 N.Y.2d 908, 397 N.Y.S.2d 1004, 366 N.E.2d 1358 (1977)) (citing
Restatement (2d) Torts s 874, comment a).
In another case from the Southern District, the Court noted that while
normally a fiduciary duty would not arise from a straightforward contractual
arrangement, a fiduciary relationship could exist under certain circumstances.
For example, such a relationship might exist between a boxing promoter and his
boxer, if the boxer could demonstrate that the promoter had violated "the very
limited tissue of trust a fighter reasonably reposes in a promoter". Don
King Productions, Inc. v. Douglas, 742 F.Supp. 741, 769 (S.D.N.Y.1990). The
existence of a fiduciary relationship would depend on whether the parties,
through the past history of the relationship and their conduct, had extended
the relationship beyond the limits of the contractual obligations. Id. at
770.
Given the record as it currently stands, the Court is unwilling to grant
summary judgment on this count at this time. Viewing the evidence in the light
most favorable to CSI, there is adequate evidence in the record to support
CSI's claim that its relationship with H & K was one of great sensitivity,
based on trust and confidence and that H & K breached the relationship that had
been established. Particularly, there is evidence that H & K betrayed this
trust by compromising its representation of CSI for the benefit of WPP's bottom
line, and by giving advice to others to be specifically used against CSI's
interests.
c. Inducement of Breach (Count 3) and Intentional Interference with Business
Relations (Count 4)
1. Hill and Knowlton
[7] Count Four must be dismissed with regard to H & K. See Press v.
Howard University, 540 A.2d 733, 736 (D.C.App.1988) (suggesting that it borders
on frivolous to argue that a party through its own actions could tortiously
interfere with its own contract); See also Newman v. Legal Services Corp.,
628 F.Supp. 535, 541 (D.D.C.1986) (interference must be with contract between
plaintiff and a third party); Donohoe v. Watt, *1029 546 F.Supp. 753,
757 (D.D.C.1982), aff'd, 713 F.2d 864 (D.C.Cir.1983) ("A defendant's conduct
under his own contract with the plaintiff ... cannot support an action for
interference with it.").
2. Lilly
[8] Lilly moves to dismiss these Counts on the ground that it was privileged
to demand performance of the exclusivity clause of its contract with JWT. In
addition, Lilly asserts it was privileged to act as it did under the
"competitor's privilege" because CSI, through its "Dianetics" mental health
treatment system was in actual competition with Lilly. Lilly also argues that
its actions, at worst, could be described as a refusal to deal, and there is no
evidence that Lilly attempted to improperly influence JWT and WPP.
As to Lilly, the Court believes that there exist genuine issues of fact as to
whether the actions taken by Lilly were proper. For purposes of its motion for
summary judgment, Lilly characterizes its position to JWT and WPP as "it's us
or them". Lilly reply at 7. Lilly asserts that it made no effort to pressure
JWT or H & K; it merely announced its intentions. Lilly calls this action
"reasonable" given the perceived conflict of interest. There is evidence
supporting this characterization of Lilly's conduct, including internal JWT
memoranda that indicated the decision to terminate was up to JWT and WPP, and
that Lilly would not presume to tell WPP how to run its business. See e.g.,
Lilly Ex. 55, 56.
Yet, there is also evidence in the record contradicting Lilly's
characterization. The evidence could support the conclusion that Lilly, rather
than simply presenting JWT and WPP with a choice, exerted increasing economic
pressure on H & K, through JWT and WPP, to drop CSI as a client. For example,
a Lilly spokesman was quoted as saying, "We told [Sorrell] we found it
intolerable to do business with people who do business with the ilk of
Scientology." Lilly Ex. 59. A draft letter from H & K CEO Robert
Dilenschneider to Martin Sorrell (written by Robert Gray), referred to Lilly's
pressure on JWT and WPP as "client blackmail". CSI Ex. 49.
There is a fine line between a simple refusal to deal and unlawful economic
pressure intended to inflict harm on an adversary. The Restatement (Second) of
Torts illustrates the difficulty of distinguishing between a simple refusal to
deal and improper coercion:
1. Upon hearing of B's contract with C, A ceases to buy from B. When asked
by B to explain his conduct, A replies that his reason is B's contract with C.
Thereupon B breaks his contract with C in order to regain A's business. A has
not induced the breach and is not subject to liability to C under the rule
stated in this section.
2. Upon hearing of B's contract with C, A writes to B as follows: "I cannot
tolerate your contract with C. You must call it off. I am sure that our
continued relations will more than compensate you for any payment you may have
to make to C. If you do not advise me within ten days that your contract with
C is at an end, you may never expect further business from me." Thereupon B
breaks his contract with C. A has induced the breach and is subject to
liability under the rule stated in this section.
Restatement (Second) of Torts s 766 comment l. The difference between these
two examples is explained as the difference between a simple refusal to deal
and the actionable use of the refusal to deal as "a means of affirmative
inducement, compulsion or pressure" to terminate an ongoing relationship.
Id. The question as to whether Lilly's conduct went beyond a mere refusal
to deal is first for the trier of fact to determine.
As to the question of whether CSI with its Dianetics program was in actual
competition with Lilly's anti-depressant Prozac, here too are genuine issues of
fact for the jury. It is not clear from the submitted papers exactly how the
Dianetics treatment is used and to what extent Scientology actively markets its
faith and ideology as a drug-free remedy to clinical depression. The Court
will follow the recommendation of the Restatement:
[W]hen there is room for different views, the determination of whether the
interference *1030 was improper or not is ordinarily left to the jury to
obtain its common feel for the state of community mores and for the manner in
which they would operate upon the facts in question.
Restatement (Second) Torts, s 767 comment l. The Court believes that there
are enough genuine issues of material fact as to whether Lilly's interference
was justified to allow this claim to go to the jury.
3. Sorrell and WPP
[9] Sorrell, and WPP also move to dismiss on the ground that their
actions in influencing H & K to terminate the contract were privileged. These
defendants cite the Restatement (Second) of Torts s 769 which suggests that a
party with a financial interest in a contract would be privileged to influence
or interfere with the continuation of that contract. Comment c of
Restatement s 769 seems to suggest that the owner of a concern would be
entitled to interfere with his company's contracts:
The financial interest in another's business requisite for the rule stated in
this section is an interest in the nature of an investment. A part owner of a
business, as for example, a partner or stockholder, has at least an interest of
this nature. A bondholder or other creditor may also have it.
Restatement (Second) of Torts s 769 comment c. In a case which seems to adopt
this reasoning, the Second Circuit found that a corporate parent could
influence a subsidiary to terminate a contract without subjecting the corporate
parent to liability for interference. See American Protein Corp. v. AB
Volvo, 844 F.2d 56, 63 (2nd Cir.1988). Similarly, the 3rd Circuit has found
that a parent corporation could influence a wholly-owned subsidiary not to sign
a lease without being subject to liability from the prospective lessor.
Green v. Interstate United Management Service Corp., 748 F.2d 827 (3rd
Cir.1984). There are also cases from the District of Columbia which recognize
the privilege to interfere of one who has a financial interest in a prospective
contract. See Brown v. Carr, 503 A.2d 1241, 1247 (D.C.App.1986); Zoby
v. American Fidelity Co., 242 F.2d 76, 79-80 (4th Cir.1957).
WPP and Sorrell place substantial reliance on Copperweld Corp. v.
Independence Tube Corp., 467 U.S. 752, 104 S.Ct. 2731, 81 L.Ed.2d 628 (1984).
In Copperweld, the Supreme Court concluded that it would be impossible for a
corporate parent and its wholly-owned subsidiary to conspire for antitrust
purposes. This is because, the Court found,
"[a] parent and its wholly-owned subsidiary have a complete unity of
interest. Their objectives are common, not disparate; their general corporate
actions are guided or determined not by two separate corporate conciousnesses,
but one. They are not unlike a multiple team of horses drawing a vehicle under
the control of a single driver."
Copperweld, 467 U.S. 752, 771, 104 S.Ct. 2731, 2741-42, 81 L.Ed.2d 628
(1984). WPP and Sorrell argue that this passage, supported by other cases,
means that under the circumstances of this case, owner corporations, parent
company officers, and corporate subsidiaries should be able to influence the
decisions of other corporate entities within the same family of corporations
without incurring liability for interference.
At this stage of the litigation, the Court is unconvinced. While recognizing
the cited authority, the Court believes that it would be premature to dismiss
Sorrell and WPP from this lawsuit at this time. This case presents the
circumstance of H & K being ordered by its corporate parent to drop a client.
This was done against H & K's will and cost H & K a multi-million dollar
client. What is significant here is the allegation that the corporate parent
was encouraged to issue this order at the insistence of an outside actor--
Lilly. In other words, the evidence is that the decision to influence H & K to
terminate the CSI relationship was not generated internally within the WPP
family. There is evidence that Sorrell, WPP and JWT conspired with Lilly, an
outside actor, to plot the termination of an arrangement that was otherwise
mutually satisfactory to H & K and CSI. This distinction, the Court believes,
differentiates this case from those cited by defense counsel.
[10] What is more, in the instant case the two corporations in
conflict, while related and *1031 wholly owned by WPP, are very substantial
corporations with dominant positions in their respective industries. From the
record, it appears they act independently of one another and serve clients with
conflicting interests. In view of their fierce independent nature and the fact
they are organized and operated as separate corporate entities, to treat them
as one would undermine the concept of the corporate structure acting as a "fire
wall." It is rare, indeed, in this Court's experience for a corporate complex
to want to pierce its own corporate veil. As separate corporate entities, they
must be held fully and strictly accountable for their own actions.
4. JWT
[11] JWT, in addition to adopting the arguments posited by Sorrell and WPP,
defends on the basis that it was only communicating truthful information to its
corporate parent about the potential loss of business. It is true that this
Court has twice before cited the Restatement of Torts and denied claims of
tortious interference where the allegedly tortious acts involved conveying
truthful information. See Weiss v. Lehman, 713 F.Supp. 489, 503
(D.D.C.1989) (citing Restatement (Second) Torts s 772); International City
Management Ass'n Retirement corp. v. Watkins, 726 F.Supp. 1, 6
(D.D.C.1989) (same). Yet, in this case there is evidence that JWT did more
than simply convey truthful information. The evidence supports the conclusion
that JWT may have colluded with Lilly and WPP to achieve the termination of the
H & K-CSI contract.
VII. H & K's Counterclaim
The Court will defer ruling on the counterclaim. This cause of action in
large measure depends upon disposition of CSI's various claims. Accordingly,
summary judgment will be denied on to H & K. It may later renew its motion at
a more propitious stage of the proceeding.
VIII. Conclusion
Defendants' motions for summary judgment will be denied with the exception
that summary judgment will be granted in favor of H & K with respect to Count
Four alleging its intentional interference with its own business relations with
CSI. H & K's motion on the counterclaim will be denied without prejudice.
This case will proceed to trial. An appropriate order accompanies this
opinion.
ORDER
Having considered Defendants' motions for Summary Judgment, Plaintiff's
opposition thereto, and heard argument by the parties, it is hereby
ORDERED that the motion for summary judgment of Defendants Hill and Knowlton,
Inc., WPP Group, PLC, Martin S. Sorrell, and J. Walter Thompson Co., Inc. be
denied except to the extent that summary judgment be granted in favor of
Defendant Hill and Knowlton, Inc. on Count Four of the Second Amended
Complaint; and it is further
ORDERED that the motion for Summary Judgment of Defendant Eli Lilly & Co. be
denied; and it is further
ORDERED that summary judgment on H & K's counterclaim be denied at this point
in the proceeding.