United States District Court, D. Idaho
HOYT A. FLEMING, Plaintiff,
ESCORT, INC., et al., Defendants.
MEMORANDUM DECISION AND ORDER
B. LYNN WINMILL, Chief District Judge.
The Court has before it numerous motions. The Court heard oral argument on the motion for preliminary injunction, and all the motions are fully briefed and at issue. The Court will resolve each motion below.
Motion for Sanctions and to Terminate & Motion for Order to Show Cause
In an earlier-filed action ( Fleming I), plaintiff Fleming claimed that defendant Escort manufactured and sold radar detectors that infringed Fleming's 038 and 653 patents. A jury found that Escort had infringed a number of claims of both patents, and awarded Fleming $750, 000. See Special Verdict Form (Dkt. No. 304) in Fleming v. Escort CV-09-105-BLW. Specifically the jury found that the following Escort products were infringing: GX65, Passport 9500i, Passport 9500ix, and Passport IQ. The Court found that Escort's financial position was precarious and so directed Escort to place the $750, 000 sum in escrow. Escort complied with that Order. Just recently, the Court filed an Amended Judgment in that case, increasing the award to $1, 454, 404.56, based on post-verdict findings that Fleming was entitled to pre- and post-judgment interest, and including an award of attorney fees based in part on the vexatious conduct of Escort's counsel. The motion at issue charges the same counsel with new instances of vexatious litigation.
Fleming filed this action ( Fleming II ) against Escort and twenty of its distributors - referred to as the Customer Defendants - claiming that the radar detectors they sold infringed Fleming's 038 and 653 patents, along with a third patent that was not litigated in the earlier case, the 905 patent. This suit is referred to as a "customer suit" because it is an action against the manufacturer's customers (as well as the manufacturer) who are distributing the allegedly infringing devices. The Customer Defendants include companies such as Amazon, Best Buy, and Sears. The earlier-filed action is known as a manufacturer's suit - that is, it is an action solely against the manufacturer (Escort) of the infringing devices.
Escort moved to dismiss Counts One and Two (the Counts alleging infringement of the 038 and 653 patents) on the ground that the jury verdict in Fleming I had essentially given Escort a paid-up license covering both past and future use of the patented technology. The Court agreed with Escort as to the four devices actually litigated in that case, specifically the GX65, Passport 9500i, Passport 9500ix, and Passport iQ devices. But the Court refused to extend its ruling to devices not litigated in Fleming I.
Escort responded to that ruling by filing another motion to dismiss, alleging that one of its allegedly infringing devices - the Pro 500, named in both Count One and Count Two - was identical to the GX65 and is entitled to be dismissed from these two Counts just as the GX65 was dismissed. Fleming countered by pointing to differences between the two devices. The Court found issues of fact that precluded dismissal.
The litigation over that motion is the source of much of the dispute that now occupies the Court. To demonstrate that the Pro 500 was not the same as the GX65, Fleming compared the source code of the GX65 with the source code that ran the Pro 500 and found thousands of differences.
Fleming had identified the source code that ran the Pro 500 from, among other material, (1) Escort's First Amended Answer and Counterclaim and (2) Escort's Non-Infringement Contentions. Escort's First Amended Answer and Counterclaim, filed on March 27, 2013, cites specific lines of source code that incorporate a technique known as "grid matching" that allegedly differentiated Escort's products from Fleming's patented inventions. See First Amended Answer and Counterclaim (Dkt. No. 35) at pp. 15-18. About a month later - on May 6, 2013 - Escort filed its Non-Infringement Contentions, citing the source code contained in its discovery production at ESC17363 as providing a defense for all its accused devices. On that same day, Escort physically produced ESC17363 to Fleming. The source code lines cited by Escort in its Non-Infringement Contentions were identical to the source code lines cited by Escort as a defense to infringement in its First Amended Answer and Counterclaim.
The Court's Local Rules required Escort to produce the source code that operated the accused devices. Escort produced ESC17363 as part of its obligation under this Local Rule. The source code contained in ESC17363 was the only new source code produced by Escort, and the Pro 500 was the only product not previously litigated. Escort's counsel told Fleming's counsel that all the source code had been produced. The entire manner in which Escort produced ESC17363, and the allegations it made concerning ESC17363, constituted a representation that ESC17363 was the source code operating the Pro 500.
Yet the source code in ESC17363 was much different from the source code that ran the GX65. Indeed, the differences were so profound and obvious that Escort's argument to the contrary appeared frivolous at best and fraudulent at worst. Accordingly, Fleming filed a motion a motion for an order to show cause compelling Escort and its declarant - John Kuhn - to appear and explain why they should not be sanctioned for, in Fleming's words, a fraud upon the Court. That motion was filed on September 5, 2013.
Just over two weeks later - on September 23, 2013 - Escort filed its reply brief to its motion to dismiss and attached another declaration from Kuhn. He represented - for the first time - that the source code at ESC17363 was not used to run the Pro 500. See Kuhn Declaration (Dkt. No. 80-1) at ¶¶ 11-12. Escort argued that Fleming's rush to charge Escort with fraud, and his failure to do discovery, led him to mistakenly assume that ESC17363 operated the Pro 500. Escort argued further that because the Pro 500 was not operated by ESC17363, the differences in source codes were irrelevant.
Escort's argument raised more questions than it answered. If ESC17363 did not operate the Pro 500, why did Escort disclose it under the Court's Local Rules requiring the production of all source code used to operate the accused devices? Why had Escort represented in its non-infringement contentions that the source code contained in ESC17363 provided a defense for all its accused devices? What source code did operate the Pro 500? Why had that source code not been disclosed? If some undisclosed source code operated the Pro 500, why had Escort's counsel earlier represented that he had produced all the source code to Fleming?
Fleming sought answers to these questions from Escort. Escort responded on September 30, 2013, by providing the source code that actually ran the Pro 500. See Letter (Dkt. No. 143-28). A few months later, Escort produced Product Compatibility Logs showing the source code used by each of the accused devices. That Log demonstrated that ESC17363 was never used in any commercial version of Escort's products.
This absence of ESC17363 in the Log directly contradict Escort's earlier representation - discussed above - that the source code in ESC17363 provided a complete defense to Fleming's infringement allegations as to all of Escort's accused devices. Fleming argues that because Escort never used ESC17363 in any of its commercially sold devices - as Escort's Product Compatibility Log represents - then Escort must have fabricated ESC17363, and Escort's earlier representations about it being a complete defense were false.
What motive would Escort have to produce false source code? Fleming points out that the source code in ESC17363 uses a "grid matching technique" that Fleming had expressly disclaimed during the reexamination process before the Patent Office. This is why Escort claimed earlier that ESC17363 provided a complete defense - the source code contained in ESC17363 used a "grid matching technique" that Fleming had represented was not used in his patented inventions.
Fleming finds suspicious the timing of the development and production of ESC17363. The source code was developed on March 21, 2013, and just six days later was cited as a defense to infringement in Escort's First Amended Answer and Counterclaim. About a month later - on May 6, 2013 - Escort filed its Non-Infringement Contentions, citing ESC17363 as providing a defense for all its accused devices, and physically produced the source code to Fleming. Fleming finds this timing suspicious because it comes just before a long-scheduled Ninth Circuit settlement conference set on June 11, 2013. Fleming charges that
defendants and their counsel orchestrated the preparation and advancement of their false evidence not only to manufacture defenses they did not legitimately have, but to intimidate and otherwise convince Mr. Fleming (before and after the settlement conference) that his case lacked merit.
See Fleming Brief (Dkt. No. 144) at p. 13. Escort denies the charge that it fabricated ESC17363, and explains that while ESC17363 was never used in any commercially sold products, it was used in a test version of the 9500ix product. Steven Orr, who develops products for Escort, stated that
I personally loaded [ESC17363] into Escort's 9500ix product and evaluated the functionality of the 9500ix product with [ESC17363], as part of the process by which lines of source code are vetted for implementation into Escort's commercially sold products."
See Orr Declaration (Dkt. No. 150-3) at ¶ 16. Escort argues that this actual use of ESC17363 rebuts Fleming's charge that the source code was fabricated to cook up a defense. But if ESC17363's use was confined to testing - as Orr's statement above indicates - then why did Escort earlier cite ESC17363 as a defense to infringement on all their accused devices?
To that question, Orr responds that in March 2013 - when Escort originally made its representations that ESC17363 provided a defense - he felt "these lines of source code were complete" and "would be further implemented into Escort's commercially sold products." See Orr Declaration (Dkt. No. 150-3) at ¶ 16. In other words, Escort produced ESC17363 on the expectation that it would later be used in the accused devices. This explanation came more than a year after Escort had produced ESC17363 and alleged that it provided a defense for all of Escort's accused devices. Orr explains further that ESC17363 went through a number of modifications as Escort continued to test it into November of 2013. Although Escort says that it intended to use the modified source code to actually operate products sold commercially in January of 2014, they admit they failed to do so until about a month ago, in late August of 2014. See Peckman Declaration. Orr alleges that although ESC17363 was modified during its subsequent development, many of its lines of source code remain unchanged and continue to be used in the source code - ESC20466 - that is now used in its commercially sold products. See Exhibit C1 (Dkt. No. 150-3).
Taking Escort at its word, the following is undisputed: (1) In March of 2013, Escort cited specific lines of source code from ESC17363 in its First Amended Answer and Counterclaim as a defense to infringement; (2) In May of 2013, Escort filed Non-Infringement Contentions - pursuant to Local Rule 3.4 that requires production of the source code operating the accused devices - citing ESC17363 as a defense to infringement and produced a physical copy of the source code to Fleming; (3) Escort's counsel represented to Fleming's counsel that all the source code had been produced; (4) Escort failed to explain in its production of ESC17363 that the source code was not being currently used in any Escort accused device being sold commercially, and that Escort only hoped to use it commercially - or some portion of it - in the future; (5) ESC17363 in its entirety has never been used in any commercially produced Escort product and was only used during tests of the 9500ix product; (6) Some lines of source code contained in ESC17363 eventually were used in commercial products by January of 2014 (and perhaps as early as November of 2013).
The Court will assume the truth of Escort's representations that it did not fabricate ESC17363, and that it intended to eventually use it to operate Escort's accused devices. To find otherwise would require an evidentiary hearing following discovery. While discovery may reveal fabrication - and support a renewed motion by Fleming at that time - the Court cannot now find, on the basis of this record, that Escort has fabricated the source code contained in ESC17363.
However, assuming ESC17363 was not fabricated does not resolve this motion in Escort's favor. Even with this assumption, Escort's production of ESC17363 was misleading and caused Fleming to waste considerable resources holding Escort to account.
Escort's production was misleading because it represented that ESC17363 was the current operating source code for the Pro 500 even though Escort was not using ESC17363 in the Pro 500. At the same time, Escort's counsel represented to Fleming's counsel that all the source code had been produced, when in fact that was not true. This constitutes misleading conduct by Escort's counsel.
This misleading conduct had expensive consequences. To rebut Escort's claim that the Pro 500 was the same as the GX65, Fleming was required to scour thousands of lines of source code (22, 110 lines contained in 961 pages) contained in ESC17363. Escort's misleading conduct also required Fleming to file a number of motions to hold Escort to account. Moreover, the Court has been forced to spend countless hours to understand the scope of Escort's misleading conduct and its consequences. All of this could have been avoided if Escort had provided the source code that actually operated the Pro 500 as required by Local Rule 3.4(a), instead of producing ESC17363 that Escort knew was not being used to operate any accused device.
An attorney who "multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses and attorneys' fees reasonably incurred because of such conduct." See 28 U.S.C. § 1927. The Court also has the inherent power to sanction a lawyer for a "full range of litigation abuses" including for acting "vexatiously." See Evon v. Law Offices of Sidney Mickell, 688 F.3d 1015, 1035 (9th Cir. 2012). "Recklessness suffices for § 1927 sanctions but sanctions imposed under the district court's inherent authority require a bad faith finding." Braunstein v. Arizona Dept. of Transp., 683 F.3d 1177, 1189 (9th Cir. 2012).
In this case, Escort's counsel represented that ESC17363 operated Escort's accused devices knowing that ESC17363 did not operate any accused device. This false representation was beyond reckless and was made in bad faith because Escort's counsel knew it was not true. The Court will therefore award attorney fees as sanctions under both § 1927 and the Court's inherent power. Thus, the Court will grant Fleming's motion for sanctions. Fleming asks the Court to go further and enter judgment against Escort, but the Court finds that more limited sanctions are the appropriate remedy. Fleming also seeks an order compelling Escort to show cause why they should not be sanctioned. The Court's award of attorney fees is a sufficient sanction ...