R. Bruce Wayne, A.P.C. (063143)

POST KIRBY NOONAN & SWEAT LLP

600 West Broadway, Suite 1100

San Diego, California 92101-3302

Telephone: (619) 231-8666

Facsimile: (619) 231-9593

Attorneys for Defendants/Counterclaimants,

TERRI WELLES, INC. and TERRI WELLES, an individual

Defendants TERRI WELLES and TERRI WELLES, INC. (collectively referred to hereinafter as "WELLES") for themselves alone, jointly and severally, answer the First Amended Complaint (for convenience hereinafter referred to as "Complaint") filed herein by Plaintiff as follows:

2. WELLES admits the allegations in paragraph 2 of the Complaint.

3. WELLES admits that the Complaint purports to state claims for relief under the laws described in paragraph 3, but denies the remaining allegations of that paragraph.

4. WELLES admits the allegations of Paragraph 4.

5. WELLES admits the allegations of Paragraph 5.

6. WELLES admits that the Court has subject matter jurisdiction and that venue is proper.

7. WELLES admits that PEI publishes Playboy magazine and that the magazine has been published since 1953; lacks knowledge or information sufficient to form a belief as to the truth of the remainder of the allegations in paragraph 7 of the Complaint and, on that basis, denies those allegations.

8. WELLES admits that PEI has published numerous specialty magazines; lacks knowledge or information sufficient to form a belief as to the truth of the remaining allegations in paragraph 8 of the Complaint and, on that basis, denies those allegations.

9. WELLES admits that Playboy magazine is published and distributed in interstate commerce and throughout the world by PEI; lacks knowledge or information sufficient to form a belief as to the truth of the remaining allegations in paragraph 9 of the Complaint and, on that basis, denies those allegations.

10. WELLES admits that PEI sells videocassettes and other goods and services; lacks knowledge or information sufficient to form a belief as to the truth of the remaining allegations in paragraph 10 of the Complaint and, on that basis, denies those allegations.

11. WELLES admits that Plaintiff purports to own various trademarks; lacks knowledge or information sufficient to form a belief as to the truth of the remaining allegations in paragraph 11 of the Complaint and, on that basis, denies those allegations.

12. WELLES admits that Plaintiff has federally registered various trademarks; lacks knowledge or information sufficient to form a belief as to the truth of the remaining allegations in paragraph 12 of the Complaint and, on that basis, denies those allegations.

13. WELLES admits that Plaintiff has federally registered various trademarks; lacks knowledge or information sufficient to form a belief as to the truth of the remaining allegations in paragraph 13 of the Complaint and, on that basis, denies those allegations.

14. WELLES admits that PEI utilizes the terms Playmate and Playboy in various magazines, videocassettes, a website, and other goods; lacks knowledge or information sufficient to form a belief as to the truth of the remaining allegations in paragraph 14 of the Complaint and, on that basis, denies those allegations.

15. WELLES admits that PEI maintains a website on the Internet at http://www.playboy.com and also operates Playboy Cyber Club at http://cyber.playboy.com; lacks knowledge or information sufficient to form a belief as to the truth of the remaining allegations in paragraph 15 of the Complaint and, on that basis, denies those allegations.

16. WELLES lacks knowledge or information sufficient to form a belief as to the truth of the allegations in paragraph 16 of the Complaint and, on that basis, denies those allegations.

17. WELLES admits that the various models who have posed for the Playmate-of-the-Month feature have come to be known, inter alia, as Playmates and/or Playmates of the Month; lacks knowledge or information sufficient to form a belief as to the truth of the remaining allegations in paragraph 17 of the Complaint and, on that basis, denies those allegations.

18. WELLES admits that, each year, there is a single model who is given the title "Playmate of the Year;" WELLES denies the remaining allegations in paragraph 18 of the Complaint.

19. WELLES denies the allegations in paragraph 17 of the Complaint.

20. WELLES admits the allegations in paragraph 20 of the Complaint.

21. WELLES admits the allegations in paragraph 21 of the Complaint.

22. WELLES admits that her website includes nude photographs of herself and contains her biographical and personal appearance information; WELLES denies the remaining allegations in paragraph 22 of the Complaint.

23. WELLES denies the allegations in paragraph 23 of the Complaint.

24. WELLES admits that she identifies herself as the 1981 Playmate of the Year on her website, but denies the remaining allegations in paragraph 24 of the Complaint.

25. WELLES admits that her website offers various goods and promotes WELLES as a spokesperson; denies the remaining allegations in paragraph 25 of the Complaint.

26. WELLES admits that she identifies herself as Terri Welles - Playmate of the Year 1981 on her website and that she discusses her background including that she was and is a Playboy Playmate of the Month, and Playboy Playmate of the Year for 1981; WELLES denies that she uses any of Plaintiff's alleged trademarks in a prominent fashion or otherwise; WELLES denies the remaining allegations in paragraph 26 of the Complaint.

27. WELLES admits that her website's meta tags index the content of her website and therefore contain the words "playboy" and "playmate" along with many other words; WELLES denies the remaining allegations in paragraph 27 of the Complaint.

28. WELLES admits that Stephen Huntington assisted her in setting up her website, but has insufficient information or belief to enable her to answer and, on that ground, denies the remaining allegations of paragraph 28 of the Complaint.

29. As to the first two sentences of paragraph 29 of the Complaint, WELLES lacks knowledge or information sufficient to form a belief as to the truth of the allegations in this sentence and, on that basis, denies those allegations. As to the final sentence of paragraph 29, WELLES denies all of the allegations in that sentence.

30. WELLES admits that there is a section of her website which displays the addresses of various other websites from which a visitor (if he or she so desires) can jump to and which are linked to WELLES' website; WELLES denies the remaining allegations in paragraph 30 of the Complaint.

31. WELLES admits that she has various banners on her website which allow a visitor (if he or she so desires) to jump to the website associated with the owner of the banner; WELLES has insufficient information or belief to enable her to answer and, on that ground, denies the remaining allegations in paragraph 31 of the Complaint.

32. WELLES admits that compensation is received from banner advertisers; denies the remaining allegations of paragraph 32 of the Complaint.

33. WELLES denies the allegations of paragraph 33 of the Complaint.

34. WELLES admits that PEI provides a Cyber Club website at http:\\www.cyber.playboy.com; lacks knowledge or information sufficient to form a belief as to the truth of the remaining allegations of paragraph 34 and, on that basis, denies those allegations.

35. WELLES denies the allegations contained within paragraph 35 of the Complaint.

36. WELLES denies the allegations contained within paragraph 36 of the Complaint.

37. WELLES denies the allegations contained within paragraph 37 of the Complaint.

38. WELLES incorporates by reference her responses to paragraphs 1 through 37 of the Complaint.

39. WELLES denies the allegations contained within paragraph 39 of the Complaint.

40. WELLES denies the allegations contained within paragraph 40 of the Complaint.

41. WELLES denies the allegations contained within paragraph 41 of the Complaint.

42. WELLES denies the allegations contained within paragraph 42 of the Complaint.

43. WELLES incorporates by reference her responses to paragraphs 1 through 42 of the Complaint.

44. WELLES denies the allegations contained within paragraph 44 of the Complaint.

45. WELLES denies the allegations contained within paragraph 45 of the Complaint.

46. WELLES denies the allegations contained within paragraph 46 of the Complaint.

47. WELLES denies the allegations contained within paragraph 47 of the Complaint.

48. WELLES denies the allegations contained within paragraph 48 of the Complaint.

49. WELLES incorporates by reference her responses to paragraphs 1 through 48 of the Complaint.

50. WELLES denies the allegations contained within paragraph 50 of the Complaint.

51. WELLES denies the allegations contained within paragraph 51 of the Complaint.

52. WELLES denies the allegations contained within paragraph 52 of the Complaint.

53. WELLES incorporates by reference her responses to paragraphs 1 through 52 of the Complaint.

54. WELLES denies the allegations contained within paragraph 54 of the Complaint.

55. WELLES denies the allegations contained within paragraph 55 of the Complaint.

56. WELLES denies the allegations contained within paragraph 56 of the Complaint.

57. WELLES denies the allegations contained within paragraph 57 of the Complaint.

58. WELLES incorporates by reference her responses to paragraphs 1 through 58 of the Complaint.

59. WELLES denies the allegations contained within paragraph 59 of the Complaint.

60. WELLES denies the allegations contained within paragraph 60 of the Complaint.

61. WELLES denies the allegations contained within paragraph 61 of the Complaint.

62. WELLES denies the allegations contained within paragraph 62 of the Complaint.

63. WELLES incorporates by reference her responses to paragraphs 1 through 62 of the Complaint.

64. WELLES denies the allegations of paragraph 64 of the Complaint.

65. WELLES denies the allegations of paragraph 65 of the Complaint.

66. WELLES is informed and believes and thereon alleges the following as separate and affirmative defenses:

67. As a separate affirmative defense, WELLES alleges that the Complaint and each of Plaintiff's Counts I through VI therein fail to state a claim upon which relief can be granted.

68. As a separate affirmative defense, WELLES alleges that Plaintiff's claims for damages and all other relief are barred by the doctrine of laches.

69. As a separate affirmative defense, WELLES alleges that Plaintiff's claims for damages and all other relief are barred by the doctrine of estoppel.

70. As a separate affirmative defense, WELLES alleges that Plaintiff's claims for damages and all other relief are barred by the doctrine of acquiescence.

71. As a separate affirmative defense, WELLES alleges that Plaintiff's claims for damages and all other relief are barred by the doctrine of unclean hands.

72. As a separate affirmative defense, WELLES alleges that Plaintiff has waived its claims against WELLES.

73. As a separate affirmative defense, WELLES alleges that, as to each cause of action, although WELLES denies she committed or is responsible for any act or omission that could support the recovery of punitive damages in this action, if and to the extent any such act or omission is found, recovery of such punitive damages against WELLES is unconstitutional under the United States Constitution and the California Constitution, including: the Excessive Fines Clause of the Eighth Amendment, the Due Process Clause of the Fifth Amendment and Section One of the Fourteenth Amendment and other provisions of the United States Constitution; and, the Excessive Fines Clause of Section 17 of Article 1, the Due Process Clause of Section 7 of Article 1, and other provisions of the California Constitution.

74. As a separate affirmative defense, WELLES alleges that Plaintiff's claims are barred by the doctrine of consent.

75. As a separate affirmative defense, WELLES alleges that the damage allegedly suffered by Plaintiff, if any, was the direct and proximate result of the negligence of parties, persons, corporations and/or entities other than WELLES and therefore any recovery against WELLES should be barred or, to the extent such recovery is permitted, the liability of WELLES, if any, is limited in direct proportion to the percentage of fault actually attributable to WELLES.

76. As a separate affirmative defense, WELLES alleges that there is no likelihood of confusion between Plaintiff's purported trademarks and marks alleged by Plaintiff to be used by WELLES.

77. As a separate affirmative defense, WELLES alleges that any alleged use of the terms in which Plaintiff claims trademark rights are a fair use under 15 U.S.C. §1125(c)(4) and 15 U.S.C. §1115(b)(4).

78. As a separate affirmative defense, WELLES alleges that Plaintiff has expressly and implied license and authorized WELLES to utilize the titles Playmate, Playboy Playmate, Playmate of the Month, Playmate of the Year, Playboy Playmate of the Year, Playmate of the Year 1981, and all variations thereof.

79. As a separate affirmative defense, WELLES alleges that Plaintiff failed and refused, and continues to fail and refuse, to take reasonable or adequate steps to mitigate, alter, reduce or otherwise diminish the alleged damages, if any, suffered. By reason of the foregoing, Plaintiff is barred from any recovery for such damage, if any.

80. As a separate affirmative defense, WELLES alleges that Plaintiff's claims, and each of them, are barred by all applicable statutes of limitation.

81. WELLES presently has insufficient knowledge or information upon which to form a belief as to whether she may have additional affirmative defenses available. WELLES reserves the right to assert additional affirmative defenses in the event discovery or further analysis indicates that additional or unknown or unstated affirmative defenses would be available.

PRAYER

WHEREFORE, Defendants WELLES pray for a judgment as follows:

        1. For entry of judgment in favor of Defendants and against Plaintiff on all counts;

2. For an award to WELLES of all costs of this suit and reasonable attorneys' fees, the amount to be fixed by the Court, as provided for by applicable statutes;

3. For a declaration that this case is exceptional within the meaning of 15 U.S.C. §1117; and,

4. Granting WELLES such other and further relief as the Court may deem just and proper under all of the circumstances.

COUNTERCLAIM

For their Counterclaims, TERRI WELLES and TERRI WELLES, INC. (sometimes collectively referred to herein as "WELLES") allege the following:

        1. Counterclaimant TERRI WELLES is an individual and citizen of the State of California, currently residing in Del Mar, California, within the Southern District of California.

2. Counterclaimant TERRI WELLES INC. ("WELLES INC.") is a corporation duly organized and existing under the laws of the State of California, with its principal place of business in the County of San Diego, State of California, within the Southern District of California.

3. Counterclaimants are informed and believe, and thereon allege, that Counterdefendant PLAYBOY ENTERPRISES, INC. ("PEI") is a corporation organized and existing under the laws of the State of Delaware, with its principal place of business in Chicago, Illinois.

4. This Court has subject matter jurisdiction pursuant to 28 U.S.C. §1332, in that it is an action between citizens of different states and the matter in controversy exceeds the sum or value of $75,000, exclusive of interests and costs; furthermore, this Court has subject matter jurisdiction under the principles of supplemental jurisdiction pursuant to 28 U.S.C. §1367 and also pursuant to 28 U.S.C. §2201.

5. Venue is proper pursuant to 28 U.S.C. §1391 in that, inter alia, a substantial part of the events or omissions giving rise to these claims occurred within this judicial district.

6. Counterclaimant TERRI WELLES is a self-employed model and spokesperson. She first appeared on the cover of Playboy magazine in May 1980, was subsequently featured as the Playmate of the Month in the December 1980 issue and was awarded the title Playmate of the Year 1981 in June 1981. PEI is the publisher of Playboy magazine, and the magazine has been continuously published since 1953.

7. Since 1980, PEI has utilized photographs taken of TERRI WELLES in subsequent publications of Playboy magazine and other of its publications, such that TERRI WELLES has appeared in no less than thirteen (13) issues of Playboy magazine and eighteen (18) newsstand specials published by PEI. No additional compensation has been paid to TERRI WELLES by PEI, for the subsequent and continuing use of these photographs, and PEI has benefitted substantially from its use of said photographs. TERRI WELLES has always identified herself since that time as a Playboy Playmate or Playmate of the Year 1981; likewise, PEI has always identified TERRI WELLES as a Playmate, Playboy Playmate, Playmate of the Year, Playmate of the Year 1981, Playboy Playmate of the Year 1981, and has not only expressly and impliedly permitted and authorized her to utilize such terms in describing herself but has encouraged TERRI WELLES, as well as other women who have been featured as Playboy Playmate of the Month or awarded the title of Playboy Playmate of the Year to utilize these terms to describe themselves in their own career endeavors, including in publicity and promotional material for and involving commercial activity. The terms Playboy Playmate and Playboy Playmate of the Year, and variations thereof, have become part and parcel of the identity of TERRI WELLES, as well as other women who have achieved these titles. The term Playboy Playmate of the Year 1981 has become synonymous with TERRI WELLES -- she is, in fact, Playboy Playmate of the Year 1981. While PEI may own certain copyrighted photographs of TERRI WELLES, PEI does not own TERRI WELLES; while PEI continues to profit from the continuing use of her photographs, PEI has no right to control the manner or method by which she earns a living.

8. Taking advantage of new technology to market herself, her services and her products, WELLES created a website on which TERRI WELLES provides biographical information that identifies and describes her by the Playmate and Playboy Playmate of the Year 1981 titles bestowed upon her by PEI and used by her for more than eighteen years. The website -- www.terriwelles.com -- opened on or about June 29, 1997, and includes, among other things, certain free pages, free photographs of WELLES (owned by WELLES), a fan club posting board, an autobiography, and a listing of current events and personal appearances. The site, at that time, originally also included a promotional picture of TERRI WELLES (a black-and-white 8"x10" glossy headshot) copies of which had, in the past, been given to her as well as other Playmate of the Month and Playmate of the Year titleholders by PEI for promotional purposes, which typically were thereafter given out or sold by her in promotional activities. A true and correct copy of said photograph is appended hereto as Exhibit A, and incorporated herein by this reference. Eleven of the fifteen free web pages on her website include a disclaimer which unequivocally indicates that the website is not endorsed by PEI. Other PEI titleholders were and continue to be given these 8"x10" headshots by PEI for self-promotional distribution.

9. The website also includes additional pages containing photographs of TERRI WELLES which are available for a monthly subscription fee. None of the products sold on the website bear any trademarks owned by PEI and are not Playboy memorabilia. None of the photographs displayed on the website are owned by PEI or are copyrighted PEI material.

10. TERRI WELLES invested more than $25,000 in creating her website and, prior to the opening of the website, contacted PEI and was expressly advised by PEI that, consistent with the above policy and practice, she could continue to identify herself as Playboy Playmate of the Year 1981 and Playmate because those are her titles.

11. PEI has for several years maintained a free website -- www.playboy.com. Commencing in or about August 1997, PEI opened a new pay subscription component of its website known as the Playboy Cyber Club ("the Cyber Club"), upon which it located home pages for its Playmates and Playmates of the Year. Counterclaimants are informed and believe and thereon allege that, given Playboy's continually declining magazine subscription base, PEI's corporate strategic plan places great emphasis upon and indeed requires substantial success in its Internet publishing ventures, including revenues to be obtained from its Cyber Club website. In turn, success of PEI's Cyber Club website requires and hinges upon the agreement by its Playmate titleholders to participate in the Cyber Club on the terms and conditions dictated by PEI. Their failure or refusal to so agree would substantially lessen and diminish the value and their earning of profits on PEI's website and would decrease the popularity and thus the profitability of Playboy's website. While PEI may claim and contend that its subscribers "read the articles," in truth and in fact, PEI's claim to fame are the women who have adorned its pages as Playmates and Playmates of the Year.

12. In 1997, PEI formulated a plan to persuade and induce Playmates to agree to participate on the home pages of the Cyber Club on terms and conditions which in fact provided little, if any, financial benefit or remuneration to the titleholders who participated, while providing substantial financial benefit to PEI. For instance, no fee was paid or to be paid to the titleholder for participating, nor would the titleholder receive any portion of the monthly subscription fees ($6.95/month) to be paid, and actually paid, by the thousands of subscribers; all such revenues were to be paid to PEI and not shared with any of the participating women.

13. In or about Spring and Summer 1997, several Playmates, including TERRI WELLES, had launched their own websites or were otherwise publicizing themselves on other websites on the Internet and fairly and accurately describing themselves as either a Playboy Playmate or a Playboy Playmate of the Year, among other titles or accomplishments.

14. Counterclaimants are informed and believe and thereon allege that part of PEI's plan and strategy to induce participation in the Cyber Club was to falsely assert and contend that these titleholders had no right to so describe themselves on any Internet website which PEI considered to be competitive to its Cyber Club website so as to coerce said person into believing that she could not effectively maintain her own website and that her only option to promote herself or her career was through the PEI Cyber Club, the revenues of which inured almost entirely to the benefit of PEI, and whose content was also entirely controlled and restricted by PEI. In so doing, PEI unlawfully misused and abused its lawful trademarks.

15. Counterclaimants are informed and believe and thereon allege that PEI determined that, to the extent that its false and baseless assertions and contentions were not acquiesced in, then PEI would engage in a campaign of harassment and wrongful conduct designed to coerce and intimidate said persons into acquiescence and to further to deflect management, time, effort and finances from website building to website defense, and to destroy any activity perceived by PEI to be competitive by Counterclaimants and others.

16. That strategy included embarking upon publicity campaigns in the press and otherwise to defame and disparage the products, goods, services and personal reputations of those who refused to acquiesce, the making of entirely frivolous and baseless claims of unlawful and unethical business behavior, and undertaking activities designed to interfere with and drain the financial resources of those who, in PEI's view, would compete with PEI as alleged above so as to make an example of those who refused to acquiesce and compel them and others to participate in PEI's Cyber Club.

17. Commencing in or about late-July 1997, PEI, through its founder Hugh Hefner ("Hefner"), suddenly and without any prior warning, and contrary to its well-established historical policy and practice, for the first time advised TERRI WELLES that she could no longer utilize the terms Playboy Playmate or Playboy Playmate of the Year 1981 or variations thereof to describe herself on her website (or in any "commercial activity") and, simultaneously, consistent with the foregoing, attempted to induce Counterclaimant TERRI WELLES to abandon her website and to become an active participant in PEI's Cyber Club on the terms and conditions dictated by PEI.

18. After launching and paying for her website, PEI contacted WELLES with several concerns, one of which was that WELLES should not use the PEI copyrighted, but lawfully acquired, PEI promotional picture of WELLES (Exhibit A) -- even though WELLES had distributed this same, lawfully-acquired picture (Exhibit A) for seventeen years without objection from PEI.

19. In order to avoid costly and protracted litigation with someone with PEI's economic clout, but believing that she was acting lawfully, WELLES nevertheless capitulated to PEI's demands and removed the lawfully-acquired photograph of her (Exhibit A) and made other modifications to her website.

20. At no point did PEI complain, either orally or in writing, about WELLES' implementation of the meta tags on her website. WELLES' use of meta tags has at all times complied with the recommendations of the Worldwide Web Consortium.

21. When TERRI WELLES, for good and obvious financial and other reasons nonetheless refused (1) PEI's demand to no longer describe or identify herself by her titles Playmate or Playmate of the Year 1981, and (2) refused to participate in PEI's Cyber Club website, PEI commenced a pattern of corporate intimidation, harassment and coercion designed to compel WELLES to abandon her otherwise lawful activity and join the PEI Cyber Club and, failing that, to disparage her, destroy her business, and make an example of her, such that others would be deterred from engaging in such lawful activity. This activity has been successful as to other PEI titleholders. PEI's acts and conduct in furtherance of this goal include, but are not limited to,the following.

22. PEI has engaged in a campaign of disseminating false and unprivileged publications and representations about Counterclaimant TERRI WELLES, designed to injure her in her profession, trade and business by asserting that she is dishonest and unethical in the conduct of her business, including, but not limited to, making the following representations to third parties and the public:

(a) In or about April 1998, PEI, through its general counsel Howard Shapiro, stated to Carl S. Kaplan of the Cyber Law Journal (New York Times) that TERRI WELLES "was hijacking Playboy's customers;" said statement was subsequently published in the Cyber Law Journal on April 24, 1998, and disseminated throughout the United States and the world. At the time PEI made the foregoing statement, it knew that said statement was false and that it had no facts at all to substantiate that any Playboy customer had been in any way stolen by WELLES or diverted from Playboy to WELLES, and it was made maliciously with the intent to disparage and defame WELLES so as to damage WELLES and diminish or defeat her ability to conduct her business.

(b) In or about March 19, 1998, PEI issued a written press release which stated, inter alia, that WELLES was using her website illegally, including advertising "the availability of Playmate memorabilia for purchase on her site," thereby suggesting and asserting that WELLES was unlawfully offering for sale on her website trademarked PEI products, including memorabilia; said statement was disseminated throughout the United States and the world, and published in several media publications including, but not limited to, CNet News.com's article of March 23, 1998, in which said statement was attributed to Rebecca Theim, a PEI spokeswoman. At the time said statement was made, PEI knew it was false, and knew that WELLES was not advertising or offering for sale any PEI products, memorabilia or otherwise, on her website, and said statement was made, knowing it to be false, and for the sole purpose of disparaging and defaming WELLES in her business reputation, so as to injure and damage WELLES and reduce her ability to compete with PEI.

(c) In the same press release, PEI stated that "Terri Welles is operating an Internet website using several of Playboy's registered trademarks without permission . . . ." At the time said press release was disseminated, PEI knew that said statement was false and that TERRI WELLES had been permitted to utilize and had utilized her titles to describe herself with PEI permission for approximately seventeen years and, in fact, had obtained express permission of PEI to utilize said titles on her website before June 29, 1997. Said statement was made to disparage and defame TERRI WELLES' reputation, and to suggest that she acted unethically and unlawfully in the conduct of her business.

(d) PEI, including its founder Hefner, has repeatedly interfered in TERRI WELLES' relationship with her website "hosts," Janey and Stephen Huntington, by a variety of acts, including the making of false, disparaging and defamatory statements about TERRI WELLES to them including, but not limited to, that TERRI WELLES is engaged in "unlawful action" on her website, and that TERRI WELLES was publishing "confidential and proprietary information about Playboy" on her website. PEI has also repeatedly made threats of baseless litigation against the Huntingtons. WELLES is informed and believes and thereon alleges that these false statements and threats were made for an improper purpose, including casting TERRI WELLES in a false and negative light, in an attempt to induce the Huntingtons to sever their business relationship with WELLES, and to further inhibit WELLES' ability to continue in business and to conduct her business.

(e) WELLES is informed and believes and thereon alleges that PEI has undertaken additional wrongful and illegal activity to disrupt WELLES' business relationships and to make it even more difficult for WELLES to conduct her business, including interfering with WELLES' existing business relationships. Since WELLES refused to accede to PEI's unreasonable demands regarding restricting the content of her website and agreeing to participate in the Cyber Club website, PEI has retaliated against WELLES by attempting to have her dis-invited from future Glamourcon events, and refusing to provide to TERRI WELLES promotional photographs for utilization by her at Glamourcon events; the provision of promotional photographs to Playmates is and always has been a "perk" of the title, to which all other Playmates are entitled; WELLES has been singled out and denied access to promotional photographs for this purpose as retaliation for refusing to agree to PEI's unreasonable and unlawful demands.

(f) On or about September 26, 1997, PEI accused WELLES of unlawfully utilizing Playboy's copyrighted materials on her website, including "reproduction of informal photographs -- taken at the Playboy Mansion and elsewhere." Said accusations have been made in correspondence to WELLES and published to third parties, including the Huntingtons. At the time said accusations were made, PEI knew that the photographs to which they referred were, in fact, not copyrighted PEI material, that PEI had no copyright protection for such material, and that WELLES was lawfully in possession of said photographs with full right to publish said photographs. Again, said threats and accusations were made in an attempt to oppress WELLES, to falsely portray her and her business ethics in a negative light, for the purpose of disrupting her business relationships.

(g) >From and after August 1997, when TERRI WELLES advised PEI, through Hefner, that she would not capitulate to PEI's unreasonable and unlawful demands, she has been the target of a campaign to crush her financially as to make an example of her such that other women similarly situated will fall in line, agree to participate in PEI's Cyber Club, and sign restrictive agreements relinquishing their rights to utilize their lawful titles in future promotional activities. In addition to the foregoing, WELLES has been a recipient of telephone calls from PEI personnel advising her that she cannot consort with or have business relationships with people deemed undesirable by PEI in an attempt to control her and then harassed by PEI personnel at Glamourcon events over her refusal to accede to PEI's demands. WELLES is informed and believes and thereon alleges that all of the foregoing has been done in an attempt to inflict financial and emotional distress upon WELLES so as to inhibit her ability to conduct her lawful business and to coerce her into acceding to PEI's unreasonable demands.

23. Counterclaimants reallege and replead each and every allegation and every part thereof of paragraphs 1 through 22 and incorporates said allegations by this reference as though fully set forth herein.

24. Each and all of the statements attributed to PEI, whether oral or written, as alleged in paragraph 22, were unprivileged and were defamatory per se because they exposed TERRI WELLES to contempt, ridicule and obloquy, and tended to directly injure her in her profession, trade and business; each of the statements was false and known by PEI to be false at the time said statements were made.

25. As a direct and proximate result of the above-described words, Counterclaimant TERRI WELLES has suffered general damages to her reputation in a sum in excess of

the jurisdictional minimum of this Court and according to proof at time of trial.

26. As a direct and proximate result of the foregoing, Counterclaimants, and each of them, has been injured in their profession, trade or business, and suffered loss of income in an amount presently unascertainable, and according to proof at the time of trial herein.

27. As a direct and proximate result of the foregoing, Counterclaimant TERRI WELLES has suffered embarrassment, humiliation, severe mental and emotional distress, shock and injury to her nervous system, and damage to her physical and emotional well-being, all to her damage in an amount presently unascertainable and according to proof at the time of trial herein.

28. As a direct and proximate result of PEI's conduct, Counterclaimant WELLES has been and will in the future be required to incur medical expenses and costs in an amount presently unknown and according to proof at the time of trial.

29. The conduct of PEI as alleged above was willful, malicious, oppressive and fraudulent and undertaken in conscious disregard of WELLES' rights, and WELLES is therefore entitled to recover punitive damages in an amount according to proof at the time of trial.

30. Counterclaimants reallege and replead each and every allegation and every part thereof of paragraphs 1 through 29 and incorporates said allegations by this reference as though fully set forth herein.

31. At all times, from and after June 29, 1997, PEI had full knowledge and was aware that Counterclaimants had an active, ongoing business, and a substantial base of existing and future clientele from whom WELLES would obtain economic benefit both presently and in the future due to TERRI WELLES' popularity, her business acumen, ability and diligence. As a result thereof, PEI was aware that Counterclaimants would continue to earn income and profits through said relationships indefinitely into the future as a result of the business advantages obtained through her popularity, labors and efforts. In or about August 1, 1997, PEI, through its agents and employees, including its founder Hefner, commenced the conduct and activities described in paragraph 22 with the specific intent and purpose of disrupting the aforementioned advantageous business relationships, and destroying those relationships so as to prevent Counterclaimants from obtaining income, engaging in their occupation, and competing with PEI. As a direct and proximate result of the aforementioned acts and conduct of PEI, Counterclaimants' business relationships have been disrupted and diminished, all to their personal and financial detriment as alleged below.

32. Had PEI not engaged in the aforementioned conduct, said advantageous business relationships would have continued indefinitely into the future, and Counterclaimants would have continued to receive substantial income through those relationships.

33. As a direct and proximate result of the foregoing, Counterclaimants have been damaged by loss of income and profits, in an amount presently unascertainable and according to proof at the time of trial herein.

34. As a further direct and proximate result of the foregoing, TERRI WELLES has suffered embarrassment, humiliation, severe mental and emotional distress, shock and injury to her nervous system, damage to her physical and emotional well-being, all to her damage in an amount presently unascertainable and according to proof at the time of trial herein.

35. As a direct and proximate result of PEI's conduct, Counterclaimant TERRI WELLES has been and will in the future be required to incur medical expenses and costs in an amount presently unknown and according to proof at the time of trial.

36. The conduct of PEI as alleged above, was willful, malicious, oppressive and fraudulent and undertaken in conscious disregard of Counterclaimants' rights and Counterclaimants are therefore entitled to recover punitive damages in an amount according to proof at the time of trial.

37. Counterclaimant TERRI WELLES realleges and repleads each and every allegation, and every part thereof of paragraphs 1 through 36, and incorporates said allegations by this reference as though fully set forth set forth herein.

38. The conduct of PEI was and continues to be intentional and malicious and done for the purpose of causing Counterclaimant TERRI WELLES to suffer humiliation, mental anguish, and severe emotional and physical distress.

39. Throughout the foregoing, PEI was aware that revenues derived by TERRI WELLES from her website were her primary source of income and PEI attempted to use the threats against her business to coerce her into acceding to PEI's unlawful demands.

40. As a direct and proximate result of PEI's conduct, TERRI WELLES has suffered embarrassment, humiliation, severe mental and emotional distress, shock and injury to her nervous system and damage to her physical and emotional well-being all to her damage in an amount presently unascertainable and according to proof at the time of trial herein.

41. As a direct and proximate result of PEI's conduct, TERRI WELLES has been and will in the future be required to incur medical expenses and costs in an amount presently unknown and according to proof at the time of trial.

42. The conduct of PEI as alleged above was willful, malicious, oppressive and fraudulent and undertaken in conscious disregard of TERRI WELLES' rights, and TERRI WELLES is therefore entitled to recover punitive damages according to proof at the time of trial.

43. Counterclaimants reallege and replead each and every allegation, and every part thereof of paragraphs 1 through 42, and incorporate said allegations by this reference as though fully set forth herein.

44. Counterclaimants are informed and believe and thereon allege that, in addition to the wrongful acts and conduct alleged to have been committed by PEI against Counterclaimants as set forth above, PEI has engaged in similar acts and conduct with respect to other women who are entitled to refer to themselves as Playboy Playmate of the Year or Playboy Playmate of the Month, so as to intimidate those titleholders from so utilizing said titles in any venture which PEI arbitrarily perceives as competitive to PEI and to further compel and coerce them into participating in PEI's Cyber Club, so as to economically benefit PEI and force them contractually to relinquish their right to fairly use these titles in their careers and future ventures. Said activities and conduct have included, but are not limited to, repeated baseless and bad faith threats of litigation should said persons not accede to PEI's unlawful and unreasonable demands.

45. Each and all of the acts and conduct of Counterdefendant PEI, as alleged above in this Counterclaim, constitute unlawful, unfair or fraudulent business practices within the meaning of California Business & Professions Code §17200.

46. The unlawful, unfair and fraudulent business practices of PEI described above present a continuing threat to Counterclaimants and others as alleged and, unless restrained, will be repeated.

47. As a direct and proximate result of the foregoing acts and conduct, PEI receives and continues to hold substantial income and revenue derived by it from its Cyber

Club and other activities which it has achieved only through the foregoing illegal activity, and Counterclaimants and others are entitled to restitution thereof.

48. Counterclaimants reallege and replead each and every allegation, and every part thereof of paragraphs 1 through 47, and incorporates said allegations by this reference as though fully set forth herein.

49. An actual controversy exists as between Counterclaimants and Counterdefendant as follows: (a) Counterclaimants claim and contend that TERRI WELLES and all other women who have earned the title and designation of Playboy Playmate of the Month or Playboy Playmate of the Year are entitled to so describe themselves in future activity promoting themselves and their careers, including promotional activities on the Internet; Counterdefendant PEI contends to the contrary, and claims and contends that Counterclaimant TERRI WELLES and other titleholders are not so entitled, and that only PEI has the right to utilize the terms Playboy Playmate of the Month or Playboy Playmate of the Year, in any and all commercial activities, including activities on the Internet.

(b) WELLES contends that she and other titleholders have the right to sell or otherwise dispose of, and to fairly use and display (on the Internet and otherwise) promotional photographs of themselves (in the form similar to Exhibit A hereto) lawfully acquired and owned by them without interference or restriction by PEI, while PEI contends to the contrary.

(c) WELLES contends that she and other titleholders can lawfully index their websites, through use of meta tags or otherwise, by reference to their lawfully-earned titles Playboy Playmate and/or Playboy Playmate of the Year in compliance with the recommendations of the Worldwide Web Consortium, while PEI contends to the contrary.

50. A declaration by this Court as to the respective parties' rights and responsibilities is necessary in order to resolve said controversy and avoid the necessity of future litigation.

WHEREFORE, Counterclaimants pray for relief on their Counterclaim herein as follows:

1. For general and special damages in an amount according to proof at the time of trial herein;

2. For punitive damages in an amount according to proof at the time of trial herein;

3. Pursuant to California Business & Professions Code §§17203 and 17535 and pursuant to the equitable powers of this Court, Counterclaimants pray that Counterdefendant be preliminarily and permanently enjoined from the acts of unfair competition described herein;

4. Pursuant to California Business & Professions Code §§17203 and 17535 and pursuant to the equitable powers of this Court, Counterclaimants pray that Counterdefendant PEI be ordered to restore to the public all funds acquired by means of any act or practice declared by this Court to be unlawful or fraudulent or to constitute unfair competition under California Business & Professions Code §17200, et. seq.;

5. That the Court render a declaratory judgment in favor of and as requested by WELLES in paragraphs 42(a), (b) and (c) and against PEI;

6. For cost of suit herein incurred; and,

///

///

///

///

///

///

7. For such other and further relief as the Court may deem just and proper.

DATED: January 4, 1999 POST KIRBY NOONAN & SWEAT LLP

By:

David J. Noonan

Defendants and Counterclaimants TERRI WELLES and TERRI WELLES, INC. hereby demand a trial by jury.

DATED: January 4, 1999 POST KIRBY NOONAN & SWEAT LLP

By:

David J. Noonan

Attorneys for Defendants/Counterclaimants,