COMMUNICATIONS TEST DESIGN, INC. v. CONTEC, LLC

RESPONSE in Support re MOTION for Sanctions

E.D. Pa.March 22, 2019

IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA COMMUNICATIONS TEST DESIGN, INC., Plaintiff, v. CONTEC, LLC, Defendant. ) ) ) ) ) ) ) ) ) ) Civil Action No. 2:18-cv-04077-GJP DEFENDANT CONTEC LLC’S REPLY IN SUPPORT OF ITS MOTION FOR SANCTIONS Case 2:18-cv-04077-GJP Document 22 Filed 03/22/19 Page 1 of 13 1 INTRODUCTION In its opposition, CTDI tells the Court to simply ignore the bad faith conduct of its CEO and counsel that led to this anticipatory and unnecessary lawsuit. CTDI also sticks to its untenable claim that it filed this action not to beat Contec to the courthouse, but to obtain a judicial resolution and remove the “cloud” over CTDI’s business. For these and the other reasons discussed below, CTDI’s opposition confirms that sanctions are warranted. ARGUMENT I. CTDI’s Opposition Confirms that Sanctions are Warranted. Contec moved for sanctions under three independent grounds: 35 U.S.C. § 285, 28 U.S.C. § 1927, and the Court’s inherent authority. In opposing each ground, CTDI makes essentially the same arguments. Contec thus addresses CTDI’s arguments together below, and demonstrates that CTDI fails to refute Contec’s showing that sanctions are warranted. Indeed, by incredulously maintaining that it “did not file this action to harass Contec or for some other improper purpose, but to obtain a judicial declaration that CTDI’s Test Systems do not infringe any claim of the patents-in-suit” (Doc. 20 at 11), CTDI confirms that it and its counsel should be sanctioned. A. Sanctions are Warranted for CTDI’s Initial Conduct in Misleading Contec to Believe that Litigation Might be Avoided. One of the recurring points in CTDI’s opposition is that the anticipatory nature of a first- filed suit is only one factor in determining whether to exercise declaratory judgment jurisdiction (see Doc. 20 at 5, 6, 9, 11). In other words, CTDI believes that it is acceptable to preemptively file first for forum-shopping purposes and then argue that other factors, such as the convenience of the parties and witnesses, justify maintaining the anticipatory suit. But that is not what happened. To be clear, CTDI did not simply file this action in anticipation of Contec’s suit. CTDI and its counsel actively induced Contec to defer its filing by leading Contec to reasonably believe that CTDI was Case 2:18-cv-04077-GJP Document 22 Filed 03/22/19 Page 2 of 13 2 willing to engage in good faith licensing negotiations and that litigation might be avoidable. On the day Contec was to file suit, CTDI arranged a call with Contec’s CEO, heard Contec’s initial proposed terms, and agreed to provide a counterproposal (Doc. 5-1 at 7). That same day, CTDI’s counsel assured Contec that CTDI “will consider potential terms as [Contec] requested,” represented that CTDI wanted “to avoid an impasse,” and “encourage[d] a continued conversation between the executives” (id. at 7-8). As the Court correctly found, this was all pretense (Doc. 15 at 10). CTDI was not really interested in having good faith negotiations. CTDI just wanted to buy enough time to file this action first, in its home forum. In its opposition to sanctions, CTDI attempts to sweep this bad faith conduct under the rug, telling the Court that it “should be ignored” (Doc. 20 at 8). It should not be ignored. CTDI tries to cast the Court’s finding of CTDI’s improper motive as a “credibility determination” with respect to a “dispute of material fact” (id. at 7-8). But the facts – i.e., the timing and substance of CTDI’s words and deeds – were undisputed; they also speak for themselves. CTDI’s claim that the Court should have conducted a “plenary trial” to determine CTDI’s motive (id. at 8) is likewise misplaced. Even if such a hearing is ever required for a discretionary ruling as to declaratory judgment jurisdiction, “[a] court can evaluate its jurisdiction without an evidentiary hearing so long as the court has afforded the parties notice and a fair opportunity to be heard.” McCann v. George W. Newman Irrevocable Tr., 458 F.3d 281, 290 (3d Cir. 2006) (discussing procedures for Rule 12(b)(1) motion for lack of subject matter jurisdiction). In addition, a “key consideration in determining whether a hearing is required is whether either party requested one.” Id. Here, CTDI had ample notice and opportunity to be heard, and to request a plenary trial if it thought necessary. Accordingly, CTDI’s bad faith conduct in inducing Contec to defer filing based on the pretense of good faith negotiations is highly relevant to Contec’s motion for sanctions. Indeed, Case 2:18-cv-04077-GJP Document 22 Filed 03/22/19 Page 3 of 13 3 such actions alone are sufficient to subject CTDI to sanctions under Section 285 and/or the Court’s inherent authority.1 Moreover, as shown below, CTDI’s initial conduct exposes the frivolousness of the positions CTDI later took in opposing Contec’s motion to dismiss. B. Sanctions are Also Warranted Because CTDI Made Frivolous Arguments in Opposition to Contec’s Motion to Dismiss. CTDI primary claim in opposing sanctions is that it was objectively reasonable for CTDI to argue (i) “that this action was filed to obtain judicial resolution of a dispute and not for purposes of forum shopping or in bad faith” and (ii) that “even if [the Court] were to consider this action anticipatory, this Court should still deny Contec’s motion because such consideration is merely one factor in the analysis.” See Doc. 20 at 4-5, 11, 13. As demonstrated below, this claim fails. 1. CTDI Had No Good Faith Basis to Claim that it Filed this Action to Obtain a Prompt Judicial Resolution. CTDI’s first argument – that it filed this action to remove the “cloud” Contec’s allegations created over CTDI’s business (Doc. 9 at 5, 12) – had no basis in fact. If CTDI truly needed speedy resolution by a court, it could have just let Contec file its complaint as it said it would. Or, CTDI could have promptly dismissed its complaint after Contec filed suit in New York in order to avoid initial motion practice and proceed on the merits. Further, if CTDI genuinely wanted a quick resolution, it would not have withheld service of its complaint until weeks after being served with Contec’s New York complaint. In sum, this argument was objectively and subjectively baseless. 1 See Citi Trends, Inc. v. Coach Inc., Civil Action No. 17-cv-1763, 2018 U.S. Dist. LEXIS 84130, at *11-12 (D. Md. May 17, 2018) (finding case exceptional due to plaintiff’s “forum shopping and procedural fencing” in filing suit one day before the trademark owner’s anticipated suit); China Healthways Inst., Inc. v. Hsin Ten Enter. USA, Inc., Nos. 02-cv-5493, 02-cv-7520, 2003 U.S. Dist. LEXIS 16286, at *40-41 (C.D. Cal. Mar. 12, 2003) (finding defendant subject to sanctions under court’s inherent powers where “it is clear from the correspondence between the parties that Defendant misled Plaintiff into believing that Defendant had an interest in settlement, when in fact, Defendant planned only to file an anticipatory declaratory relief action”). Case 2:18-cv-04077-GJP Document 22 Filed 03/22/19 Page 4 of 13 4 CTDI asserts that this argument was objectively reasonable because CTDI relied on a verified statement from CTDI’s CEO, and “Contec offers no evidence to the contrary” (Doc. 20 at 4-5). Yet Contec offered ample evidence to the contrary; indeed, nearly all the objective evidence (e.g., the parties’ letters, emails, and actions) was to the contrary. In this regard, the Court specifically found that CTDI’s position was contradicted by “Parsons’ agreement to continue negotiations the following week, his intention to offer a counterproposal and CTDI’s counsel’s letter promising a desire for a non-judicial resolution and continued negotiations” (Doc. 15 at 11). Contrary to CTDI’s conclusory comments in a footnote (Doc. 20 at 12 n.3), CTDI’s frivolous arguments as to its motive for filing suit are very similar to the frivolous arguments deemed sanctionable in China Healthways. There, in arguing against the plaintiff’s (a trademark owner) motion to dismiss the defendant’s (an accused infringer) anticipatory action, the defendant claimed that the plaintiff’s letters and emails did not constitute “overt threats of litigation,” were only “attempts to initiate settlement negotiations,” and did not “instill upon [defendant] a feeling that [plaintiff] was about to file suit.” China Healthways, 2003 U.S. Dist. LEXIS 16286, at *36- 37. The court found that this argument “was not seriously tenable.” Id. at 37. Upon reviewing the documents, the court found it was “clear” that “Defendant did not honestly believe that Plaintiff did not plan to initiate litigation.” Id. The court explained that instead, “Defendant filed the New York Action on a belief that Plaintiff would file suit in California and for the sole reason to preclude Plaintiff from being the first to file suit.” Id. The court concluded that defendant’s position “was a frivolous argument made in bad faith” and that defendant was subject to sanctions under Section 1927. Id. Here, CTDI’s argument as to its motive for filing suit is similarly frivolous and made in bad faith. CTDI and its counsel knew that CTDI did not honestly file this action to eradicate a Case 2:18-cv-04077-GJP Document 22 Filed 03/22/19 Page 5 of 13 5 “cloud” over CTDI’s business. CTDI filed this action to preclude Contec from being the first to file. CTDI claims that its conduct “does not compare to the type of misconduct” that has resulted in sanctions in other cases, like misrepresenting evidence or using litigation to extort a larger settlement (Doc. 20 at 8). Contec disagrees. CTDI’s conduct is substantially identical to the conduct found sanctionable in China Healthways, Citi Trends, and U.S.A. Dawgs, is analogous to conduct found sanctionable in other cases, and should be deterred. CTDI and its counsel should be sanctioned for making this argument in opposition to Contec’s motion to dismiss, and for maintaining it in opposition to Contec’s motion for sanctions (Doc. 20 at 11). 2. CTDI Had No Good Faith Basis to Oppose Contec’s Motion to Dismiss. CTDI’s second argument – that Contec’s motion to dismiss should be denied because even if the action is considered anticipatory, that is only one factor in the analysis – was also frivolous. As discussed above, this ignores that CTDI did more than just file an anticipatory suit, it also misled Contec into believing CTDI was interested in resolving the dispute without litigation. In its motion to dismiss, Contec explained that this additional consideration, among others, provided “sound reason” to decline declaratory judgment jurisdiction (Doc. 5-1 at 15). The Court agreed, finding that “[i]nterference with ongoing negotiations constitutes another ‘sound reason that would make it unjust’ to exercise jurisdiction over the declaratory judgment action” (Doc. 15 at 12). The Court also rejected CTDI’s claim that this was the more convenient forum, finding that this factor also supported dismissing CTDI’s action in favor of Contec’s suit in New York (id. at 14). C. CTDI’s Failure to Withdraw its Motion to Dismiss in New York Removes Any Doubt that Sanctions are Warranted. Finally, CTDI has still yet to withdraw its motion to dismiss the New York Action. Contec raised this point in its motion for sanctions (see Doc. 18-1 at 7-8), but CTDI did not address it. While CTDI’s response may be that it has chosen to appeal this Court’s dismissal order (Doc. 19), Case 2:18-cv-04077-GJP Document 22 Filed 03/22/19 Page 6 of 13 6 that will only continue to unreasonably multiply the proceedings and increase Contec’s costs. It also serves as more objective evidence that CTDI is not truly interested in a prompt judicial resolution. Contec reserves the right to seek additional sanctions relating to any such appeal. See, e.g., Rohm & Haas Co. v. Crystal Chem. Co., 736 F.2d 688, 692 (Fed. Cir. 1984) (“We construe the language of § 285 as applicable to cases in which the appeal itself is exceptional”). II. Contec is a “Prevailing Party” Under 35 U.S.C. § 285. CTDI contends that Contec is not a “prevailing party” under Section 285 because this Court’s dismissal does not preclude CTDI from pursuing its declaratory judgment claims in the New York action as counterclaims (Doc. 20 at 2). This argument relies on the false premise that to have prevailing party status, a defendant must obtain a preclusive judgment. That is not the law. A. The “Prevailing Party” Standard Considers Whether a Defendant Effected, or Rebuffed a Plaintiff’s Attempt to Effect, a Material Alteration of the Legal Relationship. In CRST Van Expedited, Inc. v. EEOC, the Supreme Court clarified the standard for determining whether a defendant has prevailed. 136 S. Ct. 1642, 1646 (2016). The Court reiterated that the “touchstone of the prevailing party inquiry must be the material alteration of the legal relationship of the parties,” and that this change must be marked by “judicial imprimatur.” Id. (quotations and citations omitted). The Court explained that a defendant may achieve a material alteration of the legal relationship, and be a prevailing party, even if the relevant disposition is not on the merits. Id. at 1651 (noting that defendant has “fulfilled its primary objective whenever the plaintiff’s challenge is rebuffed, irrespective of the precise reason for the court’s decision”). The Court further explained that declaring a defendant ineligible to recover attorneys’ fees unless it received a judgment on the merits would frustrate the purpose of the fee-shifting provision at issue because “Congress must have intended that a defendant could recover fees expended in frivolous, unreasonable, or groundless litigation when the case is resolved in the defendant’s favor, whether Case 2:18-cv-04077-GJP Document 22 Filed 03/22/19 Page 7 of 13 7 on the merits or not.” Id. at 1652. In Raniere v. Microsoft Corporation, the Federal Circuit held that CRST “applies to our analysis of prevailing-party status under [35 U.S.C. § 285], and that defendants need not prevail on the merits to be classified as a ‘prevailing party.’” 887 F.3d 1298, 1306 (Fed. Cir. 2018). The Court joined other circuits in interpreting CRST “to mean that, if a defendant succeeds on a jurisdictional issue, it may be a prevailing party.” Id. at 1305. The Court also found that the same policy rationales emphasized by the CRST Court “underscore § 285 actions: the statute deters filing of ‘exceptional cases.’” Id. at 1306. The Court affirmed that the defendant was a prevailing party where the plaintiff’s case was dismissed for lack of standing with prejudice. Id. CTDI distinguishes Raniere because the dismissal of CTDI’s anticipatory action was “essentially without prejudice” (Doc. 20 at 2). But the Federal Circuit did not suggest that prevailing party status rises or falls based on whether a dismissal is with or without prejudice. Rather, the Court explained that the “relevant inquiry” is not so categorical. Raniere, 887 F.3d at 1306. In determining prevailing party status under Section 285, courts are to consider “whether the district court’s decision . . . effects or rebuffs a plaintiff’s attempt to effect a ‘material alteration in the legal relationship between the parties.’” Id. (quoting CRST, 136 S. Ct. at 1651). B. The “Prevailing Party” Standard Does Not Require a Defendant to Obtain a Preclusive Judgment. The CRST Court declined to decide the specific question of whether a defendant must obtain a preclusive judgment in order to prevail. Id. at 1653. On remand, however, the Northern District of Iowa carefully analyzed the CRST standard and, in a well-reasoned opinion, held that “a preclusive judgment is not necessary to confer prevailing party status.” EEOC v. CRST Van Expedited, Inc., 277 F. Supp. 3d 1000, 1013 (N.D. Iowa 2017). Instead, the court explained, “a preclusive judgment [is] a sufficient, but unnecessary prerequisite to satisfying the standard Case 2:18-cv-04077-GJP Document 22 Filed 03/22/19 Page 8 of 13 8 reiterated by the Supreme Court in [CRST].” Id. The court reasoned that “[a] party can still enjoy a material alteration in the legal relationship between itself and its opponent even without obtaining a preclusive judgment.” Id. at 1014. The court specifically noted that “the mere fact that relief does not prevent the opposing party from refiling its case . . . does not mean that no alteration of the legal relationship of the parties has occurred.” Id. at 1015.2 Other courts have used similar reasoning to find that a dismissal for lack of personal jurisdiction, though not preclusive, effects a material alteration in the legal relationship and confers prevailing party status because it bars the plaintiff from pursuing its claims in its preferred venue.3 C. Here, the “Prevailing Party” Standard is Satisfied by the Court’s Dismissal of CTDI’s Anticipatory Action. In support of its motion, Contec cited the District of Maryland’s decision in Citi Trends, 2018 U.S. Dist. LEXIS 84130. See Doc. 18-1 at 4. There, as in this case, the court granted the defendant’s motion to dismiss the accused infringers’ declaratory judgment action, finding good reason to decline to exercise jurisdiction under the Declaratory Judgment Act. Id. at *5. Specifically, the court found that plaintiffs “had waited until [the intellectual property owner’s] suit was so certain and imminent, that filing suit in [the accused infringers’ preferred court] was an improper act of forum shopping.” Id. (internal quotations and citation omitted). After a thorough 2 See also Beach Blitz Co. v. City of Miami Beach, No. 1:17-cv-23958, 2018 U.S. Dist. LEXIS 165462, at *26-27 (S.D. Fla. Sep. 24, 2018) (analyzing post-CRST cases and finding that defendant was prevailing party where dismissal “closed this Court to the plaintiff (at least for the time being and unless and until Plaintiff exhausted its pre-suit remedies).”). 3 See Direct Fitness Sols., LLC v. Direct Fitness Sols., LLC, 281 F. Supp. 3d 697, 701-02 (N.D. Ill. 2017) (applying CRST to hold that by obtaining dismissal for lack of personal jurisdiction, the defendant “achieved the enduring victory of barring plaintiff from proceeding further on its claims in this venue” and was prevailing party even though “plaintiff could refile its claims against defendant in Florida”) (internal quotations and citation omitted); Megna v. Biocomp Labs., 225 F. Supp. 3d 222, 224-25 (S.D.N.Y. 2016) (applying CRST and concluding that “[a] dismissal for lack of personal jurisdiction, like a dismissal on mootness or state sovereign immunity grounds, is a procedural determination that closes the court to the nonmoving party”). Case 2:18-cv-04077-GJP Document 22 Filed 03/22/19 Page 9 of 13 9 discussion of the CRST and Raniere decisions, the Maryland court held that the defendant was a prevailing party and was entitled to its attorneys’ fees. Id. at *6-9. The court reasoned that the defendant “‘fulfilled its primary objective’ by rebuffing [the accused infringer’s declaratory judgment claims], ‘irrespective of the precise reason for [the court’s] decision’”). Id. at *9 (quoting CRST, 136 S. Ct. at 1651, and citing Direct Fitness Sols., 281 F. Supp. 3d at 701-02). CTDI has no answer to Citi Trends. Indeed, CTDI did not even attempt to address the Citi Trends decision in arguing that Contec is not a prevailing party (see Doc. 20 at 1-3). Instead, CTDI cites Fashion Television LLC v. APT Satellite Co., where the Southern District of New York determined that a dismissal for lack of personal jurisdiction was insufficient to confer prevailing party status because it was not a preclusive judgment. No. 17-cv-5413, 2018 U.S. Dist. LEXIS 153890, at *12-14 (S.D.N.Y. Sep. 10, 2018). As explained above, imposing a preclusive-judgment requirement has been carefully considered and rejected by other courts, including by another judge in the Southern District of New York. See Megna, 225 F. Supp. 3d at 224-25. The Fashion Television court also appears to have given too much weight to a pre-CRST Second Circuit decision and a magistrate’s recommendation that was later rejected by the Southern District of Florida.4 Moreover, the Court’s dismissal here effects more of a material alteration in the legal relationship than a dismissal for lack of personal jurisdiction. After a dismissal for lack of personal jurisdiction, the plaintiff is generally free to refile the same complaint and affirmative claims at any time (subject to, e.g., a statute of limitations) and in any court having jurisdiction and venue over the defendant. Here, by contrast, CTDI cannot refile its claims against Contec in another 4 See Fashion Television LLC, 2018 U.S. Dist. LEXIS 153890, at *13-14 (relying on Dattner v. Conagra Foods, Inc., 458 F.3d 98 (2d Cir. 2006) and Beach Blitz Co. v. City of Miami Beach, No. 17-cv-23958, 2018 U.S. Dist. LEXIS 136419 (S.D. Fla. Aug. 10, 2018) (report and recommendation), which was later rejected by 2018 U.S. Dist. LEXIS 165462 (S.D. Fla. Sept. 25, 2018) (holding that defendants were prevailing parties)). Case 2:18-cv-04077-GJP Document 22 Filed 03/22/19 Page 10 of 13 10 complaint; it must adjudicate its claims as counterclaims in the New York action. Further, CTDI cannot wait; it must file its compulsory counterclaims in Contec’s New York case. Further still, CTDI can only have its claims heard by the Northern District of New York. Thus, not only is the Fashion Television decision unpersuasive, its facts are also distinguishable. Finally, denying Contec its attorneys’ fees for lack of a preclusive judgment would frustrate the purpose of Section 285, which serves to deter parties from filing “exceptional” cases like this one. Raniere, 887 F.3d at 1306. For all these reasons, this Court’s dismissal is a judicially- sanctioned material alteration in the parties’ relationship that makes Contec a prevailing party. III. Contec’s Fees Relating to CTDI’s Motion to Dismiss the New York Action Should be Included in the Sanctions Award. CTDI contends that Contec’s fees in the New York action are unavailable in a sanctions award because the resulting work product was not actually utilized in this action. Doc. 20 at 14. But the New York work product was utilized in this case. For example, CTDI filed its motion to dismiss the New York action on October 26, 2018, and Contec filed its opposition on December 4, 2018. Much of Contec’s work on its opposition in responding to CTDI’s arguments in New York were used to prepare Contec’s reply brief in this action, which was filed on December 10, 2018.5 Contec’s work in New York was also the direct result of CTDI’s misconduct set forth above. Thus, Contec is entitled to its fees relating to CTDI’s motion to dismiss in New York. CONCLUSION For the forgoing reasons, this Court should grant Contec’s Motion for Sanctions in its entirety, and award any other sanctions the Court may deem appropriate. 5 See, e.g., Doc. 14 at 3, 6, 8 (including case law discussions from prior brief in New York), 4 (including rebuttal from New York brief to CTDI’s CEO’s statements), 5 (including argument from New York brief that CTDI never communicated its beliefs about potential for settlement), 10 (including additional declaration with testimony originally used to support New York brief). Case 2:18-cv-04077-GJP Document 22 Filed 03/22/19 Page 11 of 13 11 Dated: March 22, 2019. Respectfully submitted, /s/ Mark W. Halderman James J. Rodgers, Esquire PA Attorney Id No. 21635 jrodgers@dilworthlaw.com Mark W. Halderman, Esquire PA Attorney Id No. 307229 mhalderman@dilworthlaw.com DILWORTH PAXSON LLP 1500 Market Street, Suite 3500E Philadelphia, PA 19102-2101 (215) 575-7000 (Tel) (215) 575-7200 (Fax) Coby S. Nixon Pro hac vice cnixon@taylorenglish.com Seth K. Trimble Pro hac vice strimble@taylorenglish.com TAYLOR ENGLISH DUMA LLP 1600 Parkwood Circle, Suite 400 Atlanta, Georgia 30339 Phone: (770) 434-6868 Facsimile: (770) 434-7376 Attorneys for Defendant Contec, LLC Case 2:18-cv-04077-GJP Document 22 Filed 03/22/19 Page 12 of 13 CERTIFICATE OF SERVICE I hereby certify that on the date below, I caused to be served a true and correct copy of the foregoing Reply in Support of Motion for Sanctions electronically via the CM/ECF System, and/or electronic mail upon the following: Salvatore Anastasi, Esquire BARLEY SNYDER 2 Great Valley Parkway, Suite 101 Malvern, PA 19355 (610) 722-3899 sanastasi@barley.com George C. Werner, Esquire BARLEY SNYDER 126 East King Street Lancaster, PA 17602-2893 (717) 299-5201 gwerner@barley.com Attorneys for Plaintiff, Communications Test Design, Inc. /s/ Mark W. Halderman Mark W. Halderman Dated: March 22, 2019 Case 2:18-cv-04077-GJP Document 22 Filed 03/22/19 Page 13 of 13