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RORER INTL. COSMETICS, LTD. v. HALPERN

October 1, 1980

RORER INTERNATIONAL COSMETICS, LTD. and Rorer Group, Inc.
v.
Robert HALPERN



The opinion of the court was delivered by: HUYETT

MEMORANDUM

This is an action arising under section 10(b) (s 10(b)) of the Securities Exchange Act of 1934 (the 1934 Act), regulations thereunder, and pendent claims under state blue sky laws. The complaint also states a breach of contract claim. Defendant has moved for summary judgment on all claims. The motion was extensively briefed by both sides, and oral argument was held. Because I can find no genuine issues of material fact on the record before me, and because defendant is entitled to summary judgment as a matter of law, defendant's motion must be granted.

 Plaintiff Rorer Group, Inc. (Rorer) is a public corporation headquartered in Ft. Washington, Pennsylvania. Plaintiff Rorer International Cosmetics, Ltd. (RICL) is or was a wholly-owned subsidiary of Rorer, engaged in the cosmetics business.

 From his father's death in 1971 until September 3, 1976, defendant was the president and principal shareholder of Balenciaga Parfums, Inc. (Parfums), a New York Corporation. Balenciaga, S.A., a French concern founded by the late designer, Cristobal Balenciaga, owned the worldwide rights to products bearing the Balenciaga name, including fragrance products. Under certain agreements, collectively the North American Rights Agreement (NARA), entered into in 1958 and 1960 with defendant's father, Parfums acquired the United States trademarks for Balenciaga fragrance products and was given the franchise to distribute Balenciaga fragrance products in North America.

 After making the first seven payments to defendant, plaintiffs refused to pay anything further. This action followed. As elaborated by plaintiffs' answers to interrogatories, plaintiffs' claims were as follows:

 1. Defendant fraudulently concealed from plaintiffs that Parfums, while under his control, created or marketed formulations of perfumes and other products not authorized by the NARA (the counterfeiting claim).

 2. Defendant fraudulently concealed from plaintiffs that Parfums, while under his control, had failed to exert its best efforts to distribute Balenciaga products and to maximize their markets (the best efforts claim).

 3. Defendant fraudulently misrepresented to plaintiffs that they were purchasing 100% of Parfum's outstanding shares, when in fact the transfer did not include 20 shares originally issued in the name of Sol A. Rosenblatt (the Rosenblatt shares claim).

 4. Defendant fraudulently concealed from Balenciaga, S.A. the true facts respecting the terms of plaintiffs' acquisition of Parfums, despite the fact that under the NARA, Balenciaga, S.A. had right of first refusal on the disposition of its North American licensee (the first refusal claim).

 5. Defendant, by engaging in the above misconduct, breached the consulting agreement (the contract claim).

 At oral argument, counsel for plaintiffs withdrew the right of first refusal claim. He also abandoned the best efforts claim as a separate substantive claim, noting however that it was in reality a part of the counterfeiting claim. Thus I shall discuss the best efforts claim, the counterfeiting claim, the Rosenblatt shares claim, and the contract claim.

 Turning first to what plaintiffs now consider the best efforts claim subsection of the counterfeiting claim, I note that it is undisputed on the record that plaintiffs had actual knowledge that Parfums, while under defendant's control, had failed to exert its best efforts to distribute Balenciaga products and to maximize their markets. Exhibit 26 to defendant's motion, an internal memorandum to plaintiff Rorer's board of directors, states in part, "Balenciaga has not produced exceptional sales in the U. S. because the products have not been fully promoted...." Further, the affidavit of Mr. Peters, Rorer's president during the period under consideration, states at paragraph 8 that Juan Ellacuria, president of Balenciaga S.A., told affiant "that Parfums had been undermining the Balenciaga trademark for years, and that the Halperns and Parfums had consistently refused to make a genuine effort to expand the sales of Balenciaga fragrances in the franchised territories." Thus the record clearly shows that Balenciaga, S.A. considered Parfums in violation of the NARA due to failure to exert best efforts, and that plaintiffs knew that best efforts had indeed not been exerted. Plaintiffs have presented no record support whatsoever to the contrary. Thus there exists no genuine issue as to this matter. Defendants are entitled to summary judgment as a matter of law on the best efforts claim because, plaintiffs having had actual knowledge of this situation, defendants cannot be held liable for having concealed that information where the "total mix" of information available to the purchasers put them on actual notice of the problem. Smallwood v. Pearl Brewing Co., 489 F.2d 579, 606 (5th Cir.), cert. denied, 419 U.S. 873, 95 S. Ct. 134, 42 L. Ed. 2d 113 (1974); Spielman v. General Host Corp., 402 F. Supp. 190 (S.D.N.Y.1975); Phillips v. Reynolds & Co., 294 F. Supp. 1249 (E.D.Pa.1969).

 Defendant argues in regard to the counterfeiting claim that (1) plaintiffs were properly advised of the facts which Balenciaga S.A. considered to constitute counterfeiting, and that (2) even if no such facts were communicated to plaintiffs, the omitted facts were not material to plaintiffs' investment decision in that absence of counterfeiting was not relied upon by plaintiffs in making that decision. Plaintiffs have created a genuine issue as to whether they were actually advised of all of the facts underlying the counterfeiting claim through the exhibits to their memorandum in opposition to the motion. However, defendant is entitled to summary judgment as to this claim because the allegedly omitted information was not material to their investment decision, and the 1934 Act and the applicable SEC regulation require concealment of material information in order for such concealment to be actionable. See 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5. In this regard, defendant has presented considerable record support through deposition testimony of plaintiff Rorer's president during the acquisition negotiations, Mr. Peters, deposition testimony and affidavits of plaintiff Rorer's attorney for the acquisition, Mr. Duff, defendant's affidavits and deposition, and exhibits of written documents, that (1) defendant refused to make any representations concerning his or Parfum's compliance with the NARA or Balenciaga S.A.'s view of such compliance, (2) defendant conditioned consummation of the transaction at issue here on plaintiffs' withdrawing their demand for such representations, and inclusion in the documents of a written disclaimer of any representation or warranty as to Parfum's dealings with Balenciaga, S.A. and the NARA, (3) defendant specifically stated to plaintiffs' representatives that the NARA was in jeopardy, and (4) plaintiffs consciously decided to accept jeopardy to the NARA as a business risk, and proceeded with the transaction at issue here despite their actual knowledge that the NARA might not be renewed. Plaintiffs have provided no record support to contradict these facts, and have even conceded that defendant specifically warned them that the NARA was in jeopardy. Thus there is no genuine issue as to the above-mentioned facts. Nevertheless, plaintiffs now claim that defendant withheld material information from them when he failed to disclose that he had created and marketed perfumes in a manner which placed the NARA in jeopardy. The omission which plaintiffs claim was material was defendant's failure to disclose that he had purchased ingredients ...


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