Sumotext Corp. -v- Zoove, Inc.

Opinion

1 2 3 UNITED STATES DISTRICT COURT 4 NORTHERN DISTRICT OF CALIFORNIA 5 SAN JOSE DIVISION 6 7 SUMOTEXT CORP., Case No. 16-cv-01370-BLF

8 Plaintiff, ORDER DENYING DEFENDANTS’ 9 v. MOTIONS FOR ATTORNEYS’ FEES AND COSTS 10 ZOOVE, INC., et al., [Re: ECF 483, 486] 11 Defendants.

12 13 This order addresses two motions for attorneys’ fees and costs, the first brought by 14 Defendants Zoove, Inc., Virtual Hold Technology, and VHT StarStar (collectively, “Zoove”), and 15 the second brought by Defendant StarSteve, LLC (“StarSteve”). See Zoove Mot., ECF 483; 16 StarSteve Mot., ECF 486. The motions have been taken under submission without oral argument. 17 See Order Submitting Motions, ECF 506. 18 The motions are DENIED for the reasons discussed below. 19 I. BACKGROUND 20 Plaintiff Sumotext Corporation (“Sumotext”) filed this action in March 2016, asserting 21 breach of contract and related state law claims arising out of Zoove’s termination of Sumotext’s 22 leases of StarStar numbers. See Compl., ECF 1. Several rounds of motion practice resulted in a 23 third amended complaint (“TAC”) containing several of the original state law claims as well as 24 later-added federal antitrust claims. See TAC, ECF 218. In April 2018, the Court dismissed 25 Defendant Mblox, Inc. from the action and denied the remaining Defendants’ motions to dismiss 26 the TAC, thus settling the pleadings. See Order, ECF 251. Zoove and StarSteve answered the 27 TAC in May 2018, see Answers, ECF 252, 255, and the parties spent the next year on discovery. 1 leaving only two federal antitrust claims in the TAC: a claim for restraint of trade in violation of 2 Section 1 of the Sherman Act, and a claim for conspiracy to monopolize and monopolization in 3 violation of Section 2 of the Sherman Act. See Order Approving Joint Stipulation, ECF 335. 4 Defendants’ motion for summary judgment on the antitrust claims was denied on 5 December 20, 2019. See Order Denying Defendants’ Motion for Summary Judgment, ECF 376 6 (sealed), 382 (public). On January 23, 2020, Defendants sent Sumotext an Offer of Judgment 7 pursuant to Federal Rule of Civil Procedure 68, offering to allow Sumotext to take judgment 8 against all Defendants in the amount of $1.7 million. See Bloch Decl. ¶ 3 & Exh. A, ECF 483-1, 9 483-2. Sumotext did not respond to the Rule 68 offer, which expired two weeks later on February 10 5, 2020. See Bloch Decl. ¶ 4, ECF 483-1. A jury trial on Sumotext’s antitrust claims commenced 11 on February 24, 2020. See Minute Entry, ECF 454. On March 6, 2020, the jury rendered a verdict 12 for Defendants and against Sumotext. See Jury Verdict, ECF 470. Judgment for Defendants was 13 entered on the same date. Judgment, ECF 471. 14 Defendants thereafter filed the present motions, asking the Court to award them attorneys’ 15 fees and costs as sanctions for Sumotext’s litigation conduct. Zoove requests an award in the 16 amount of fees and costs incurred after expiration the Rule 68 offer – $648,688.26 in attorney and 17 paralegal fees, and $117,171.41 in expert fees and costs. StarSteve requests an award in the 18 amount of all fees and costs it incurred in the litigation, totaling $391,110.85. 19 II. LEGAL STANDARD 20 “Three primary sources of authority enable courts to sanction parties or their lawyers for 21 improper conduct: (1) Federal Rule of Civil Procedure 11, which applies to signed writings filed 22 with the court, (2) 28 U.S.C. § 1927, which is aimed at penalizing conduct that unreasonably and 23 vexatiously multiplies the proceedings, and (3) the court’s inherent power.” Fink v. Gomez, 239 24 F.3d 989, 991 (9th Cir. 2001). “Each of these sanctions alternatives has its own particular 25 requirements, and it is important that the grounds be separately articulated to assure that the 26 conduct at issue falls within the scope of the sanctions remedy.” Christian v. Mattel, Inc., 286 27 F.3d 1118, 1131 (9th Cir. 2002). Defendants request sanctions under the second and third sources 1 Under § 1927, an attorney “who so multiplies the proceedings in any case unreasonably 2 and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and 3 attorneys’ fees reasonably incurred because of such conduct.” 28 U.S.C. § 1927. “[S]ection 1927 4 does not authorize recovery from a party or an employee, but only from an attorney or otherwise 5 admitted representative of a party.” Kaass Law v. Wells Fargo Bank, N.A., 799 F.3d 1290, 1293 6 (9th Cir. 2015) (quotation marks and citation omitted). “The imposition of any sanction under 28 7 U.S.C. § 1927 must be accompanied by a finding that the sanctioned attorney acted recklessly or 8 in bad faith or committed intentional misconduct.” Edwards v. Alameda-Contra Costa Transit 9 Dist., 796 F. App’x 461, 462 (9th Cir. 2020) (quotation marks and citation omitted). 10 Under its inherent authority, a district court may impose sanctions on a party or its counsel 11 for bad faith conduct. See Goodyear Tire & Rubber Co. v. Haeger, 137 S. Ct. 1178, 1183-84 12 (2017); Roadway Express, Inc. v. Piper, 447 US 752, 766 (1980). “Recklessness suffices for § 13 1927 sanctions, but sanctions imposed under the district court’s inherent authority require a bad 14 faith finding.” Lahiri v. Universal Music & Video Distribution Corp., 606 F.3d 1216, 1219 (9th 15 Cir. 2010). 16 III. DISCUSSION 17 Defendants ask the Court to award them attorneys’ fees and costs under Federal Rules of 18 Civil Procedure 54(d) and 68, 28 U.S.C. § 1927, and the Court’s inherent power. The Court first 19 addresses Rules 54(d) and 68, which do not confer authority on the Court to impose the sanctions 20 requested here. The Court next addresses § 1927 and, finally, its inherent power. 21 A. Federal Rule of Civil Procedure 54(d) 22 Defendants argue that Federal Rule of Civil Procedure 54(d) and Civil Local Rule 54-5 23 grant the Court discretion to award attorneys’ fees and costs in appropriate circumstances. Rule 24 54(d) requires that “[a] claim for attorney’s fees and related nontaxable expenses must be made by 25 motion unless the substantive law requires those fees to be proved at trial as an element of 26 damages,” and it provides guidance as the timing and contents of such a motion. Fed. R. Civ. P. 27 54(d)(1), (2). Civil Local Rule 54-5 sets forth additional requirements for a Rule 54(d) motion. 1 While Rule 54(d) creates a mechanism for seeking attorneys’ fees and costs, it does not 2 create a right to recovery. See MRO Commc’ns, Inc. v. Am. Tel. & Tel. Co., 197 F.3d 1276, 1280 3 (9th Cir. 1999). “[T]here must be another source of authority for such an award.” Id. at 1281. 4 “The requirement under Rule 54(d)(2) of an independent source of authority for an award of 5 attorneys’ fees gives effect to the ‘American Rule’ that each party must bear its own attorneys’ 6 fees in the absence of a rule, statute or contract authorizing such an award.” Id. 7 Zoove’s motion was timely filed within fourteen days after entry of judgment. See Fed. R. 8 Civ. P. 54(d)(2) (requiring that motion “be filed no later than 14 days after the entry of 9 judgment”). StarSteve’s motion was filed after the fourteen-day period, but the Court granted 10 StarSteve’s motion for an extension of time in light of the COVID-19 pandemic. See Order 11 Granting StarSteve’s Mot. for Extension, ECF 490. However, while Defendants’ motions are 12 properly before the Court, they cannot be granted absent an independent source of sanctioning 13 authority. 14 B. Federal Rule of Civil Procedure 68 15 Defendants suggest that Federal Rule of Civil Procedure 68 provides a basis for awarding 16 attorneys’ fees and costs. That rule provides that “[a]t least 14 days before the date set for trial, a 17 party defending against a claim may serve on an opposing party an offer to allow judgment on 18 specified terms, with the costs then accrued.” Fed. R. Civ. P. 68(a). “If the judgment that the 19 offeree finally obtains is not more favorable than the unaccepted offer, the offeree must pay the 20 costs incurred after the offer was made.” Fed. R. Civ. P. 68(d). Zoove cites Rule 68 in requesting 21 an award of fees and costs incurred after expiration of Defendants’ Rule 68 offer. See Zoove’s 22 Mot. at 1, ECF 483. While StarSteve requests all fees and costs incurred in the litigation, 23 StarSteve makes alternative request for fees and costs incurred after expiration of Defendants’ 24 Rule 68 offer. See StarSteve’s Mot. at 2, ECF 486. 25 Sumotext correctly points out that Rule 68 does not apply in this case because Defendants 26 prevailed at trial. “Federal Rule 68 is inapplicable in a case in which the defendant obtains 27 judgment.” MRO Commc’ns, 197 F.3d at 1280. In their reply briefs, Defendants concede that 1 that the Court should take Sumotext’s rejection of a seven-figure offer of judgment into account 2 when considering whether to impose sanctions under § 1927 or the Court’s inherent authority. See 3 Zoove’s Reply at 3-4, ECF 497; StarSteve’s Reply at 18, ECF 501. 4 None of the cases cited by Defendants suggests that a plaintiff’s rejection of a Rule 68 5 offer has any bearing on imposition of sanctions against the plaintiff for asserted litigation 6 misconduct. Zoom’s reliance on Marek v. Chesny, 473 U.S. 1 (1985), is misplaced. Marek 7 addressed “whether attorney’s fees incurred by a plaintiff subsequent to an offer of settlement 8 under Federal Rule of Civil Procedure 68 must be paid by the defendant under 42 U.S.C. § 1988, 9 when the plaintiff recovers a judgment less than the offer.” Marek, 473 U.S. at 3. The Supreme 10 Court answered that question in the negative, holding that “[c]ivil rights plaintiffs – along with 11 other plaintiffs – who reject an offer more favorable than what is thereafter recovered at trial will 12 not recover attorney’s fees for services performed after the offer is rejected.” Id. at 10. Marek has 13 no application to the present case, which is not a civil rights suit and in which Defendants 14 prevailed at trial. The other cases cited by Defendants likewise offer no support for their position. 15 See, e.g., Farr v. Healtheast, Inc., No. CIV. A. 91-6960, 1993 WL 220680, at *1 (E.D. Pa. June 9, 16 1993) (no mention of Rule 68 in order granting summary judgment for defendants and directing 17 defendants to brief their request for attorneys’ fees and costs under statute and the court’s inherent 18 power); Wei v. Bodner, No. CIV. 89-1137 (AET), 1992 WL 165860, at *8 (D.N.J. Apr. 8, 1992), 19 aff’d, 983 F.2d 1054 (3d Cir. 1992) (no mention of Rule 68 in order awarding prevailing 20 defendants attorneys’ fees and costs under statute and Rule 11). 21 Moreover, in the Court’s view, consideration of the Rule 68 offer would favor Sumotext, 22 not Defendants. As discussed below, Defendants assert that the claims in this case were so 23 baseless that Sumotext’s insistence on litigating them warrants imposition of sanctions. That 24 assertion is undercut by the fact that, on the eve of trial, Defendants apparently thought they had 25 enough exposure on the claims to warrant a $1.7 million offer of judgment. 26 Accordingly, the Court concludes that Rule 68 neither authorizes nor supports Defendants’ 27 motions for sanctions. 1 C. 28 U.S.C. § 1927 2 Section 1927 permits a court to sanction an attorney who “unreasonably and vexatiously” 3 multiplies the proceedings in a case. 28 U.S.C. § 1927. “The key term in the statute is 4 ‘vexatiously’; carelessly, negligently, or unreasonably multiplying the proceedings is not enough.” 5 In re Girardi, 611 F.3d 1027, 1061 (9th Cir. 2010). “The imposition of any sanction under 28 6 U.S.C. § 1927 must be accompanied by a finding that the sanctioned attorney acted recklessly or 7 in bad faith or committed intentional misconduct.” Edwards, 796 F. App’x at 462 (quotation 8 marks and citation omitted). Any sanction under § 1927 must be imposed against the individual 9 attorney who engaged in the improper conduct, not against the law firm. See Kaass Law, 799 F.3d 10 at 1293. 11 It is unclear whether Defendants actually seek sanctions against Sumotext’s attorneys, 12 despite Defendants’ citations to § 1927. Neither motion acknowledges that sanctions under 13 § 1927 may be imposed against an attorney but not against a party. Zoove does not identify any of 14 Sumotext’s attorneys by name. StarSteve’s motion contains a single reference Sumotext’s counsel 15 Julie Greathouse, asserting that she “demonized” StarSteve’s president, Steve Doumar, during 16 Sumotext’s opening statement. See StarSteve’s Mot. at 5. In support of this assertion, StarSteve 17 quotes a single sentence of the opening statement, in which Ms. Greathouse told the jury that the 18 evidence would show Mr. Doumar met with Sumotext’s customers without Sumotext’s 19 knowledge. See id. To the extent StarSteve seeks imposition of sanctions against Ms. Greathouse 20 – which, again, is unclear from the briefing – it has failed to show how Ms. Greathouse’s 21 statement unreasonably and vexatiously multiplied the proceedings. The statement was consistent 22 with Sumotext’s theory of the case and indicated what Sumotext expected to prove at trial. 23 StarSteve offers no other evidence that would support an award of sanctions against Ms. 24 Greathouse under § 1927. 25 Defendants’ motions for attorneys’ fees and costs pursuant to § 1927 is DENIED. 26 D. Inherent Authority 27 A district court has “inherent authority to sanction a litigant for bad-faith conduct by 1 authority is limited to “the fees the innocent party incurred solely because of the misconduct – or 2 put another way, to the fees that party would not have incurred but for the bad faith.” Id. at 1184. 3 The district court must make a specific finding of “bad faith or conduct tantamount to bad faith.” 4 Fink, 239 F.3d at 994. Bad faith “includes a broad range of willful improper conduct.” Id. at 992. 5 For example, “[a] finding of bad faith is warranted where an attorney knowingly or recklessly 6 raises a frivolous argument, or argues a meritorious claim for the purpose of harassing an 7 opponent.” Primus Auto. Fin. Servs., Inc. v. Batarse, 115 F.3d 644, 649 (9th Cir. 1997) (quotation 8 marks and citation omitted). “A party also demonstrates bad faith by delaying or disrupting the 9 litigation or hampering enforcement of a court order.” Id. (quotation marks and citation omitted). 10 Zoove does not acknowledge that bad faith is the relevant standard for imposition of 11 sanctions under a court’s inherent power or even mention the term “bad faith.” Under the 12 subheading “Why the Court Should Award Fees and Costs,” Zoove argues that Sumotext ignored 13 Defendants’ Rule 68 offer and therefore should be required to pay the attorneys’ fees Zoove 14 incurred between expiration of the Rule 68 offer and the jury’s verdict because “[w]hat’s sauce for 15 the goose is sauce for the gander.” Zoove’s Mot. at 1, ECF 483. As discussed above, Rule 68 16 does not apply when judgment is entered for the defendant, and Zoove has cited no authority 17 suggesting that rejection of a Rule 68 offer can constitute bad faith. Zoove also asserts that 18 “defendants have been forced to sift through an ever-changing collection of claims,” noting that 19 Sumotext dismissed its state law claims in August 2019 and certain antitrust claims shortly before 20 trial. Zoove’s Mot. at 1, ECF 483. The state law claims survived vigorous motion practice, and 21 the antitrust claims survived summary judgment. That Sumotext ultimately decided not to go to 22 trial on certain claims is not evidence of bad faith. 23 StarSteve recites the relevant standard, bad faith, and it argues that Sumotext should be 24 sanctioned for pursuing claims that had no legal basis. StarSteve notes that it obtained dismissal 25 of certain claims prior to trial and ultimately prevailed on the remaining claims. That Sumotext’s 26 claims were narrowed through motion practice and ultimately defeated does not establish bad 27 faith. StarSteve offers no evidence of the type that has supported other courts’ exercise of inherent 1 copyright lawyer spent years litigating a suit that was obviously and objectively baseless. See 2 || Lahiri, 606 F.3d at 1221. Here, Sumotext’s antitrust claims survived summary judgment and 3 || therefore cannot be characterized as objectively baseless. In Lahiri, the copyright lawyer 4 || misrepresented applicable Indian law to the district court and attempted to cause the district 5 || judge’s recusal by retaining the judge’s former law firm to defend him against a sanctions motion. 6 See Lahiri, 606 F.3d at 1221. Here, no such conduct has been alleged or proved. 7 “The bad faith requirement sets a high threshold.” Primus, 115 F.3d at 649. “Because of 8 their very potency, inherent powers must be exercised with restraint and discretion.” Chambers v. 9 || NASCO, Inc., 501 U.S. 32, 44 (1991). Defendants have not come close to meeting the high 10 || threshold to show that Sumotext’s conduct in the present case constituted or was tantamount to 11 bad faith. 12 Defendants’ motions for attorneys’ fees and costs pursuant to the Court’s inherent power is 13 || DENIED. || IV. ORDER 3 15 Defendants’ motions for attorneys’ fees and costs are DENIED. a 16 This order terminates ECF 483 and 486.

|| Datea: July 27, 2020 han en hom Lh ham BETH LABSON FREEMAN 20 United States District Judge 21 22 23 24 25 26 27 28