ESN, LLC v. Cisco, 5:08cv20 (E.D. Tex. Dec. 30, 2009)
Chief Judge David Folsom
Holding: Defendant's Motion to Dismiss GRANTED; Plaintiff's Motion to Disqualify and for Sanctions GRANTED IN PART.
Ever wondered how serious the Eastern District of Texas judges are about the parties' obligations to produce relevant documents in a timely fashion? Read on.
This opinion deals with two motions - a motion to dismiss the plaintiff's patent infringement case for lack of standing, and the plaintiff's responsive motion to disqualify or sanction the defendant's counsel for their alleged conduct in prosecuting the motion to dismiss.
Defendant Cisco sought a dismissal of the action for lack of standing, and thus lack of subject matter jurisdiction, because it claimed that the inventor Mr. Gregory D. Girard, assigned his rights in the patent in suit to a non-party Iperia, Inc., by way of an employment agreement while Mr. Girard was at Iperia. Cisco has since purchased Iperia's interest in the patent in suit, the order notes, which becomes important later.
The same day that the motion to dismiss was filed the plaintiff filed a motion to disqualify Defendant's counsel and to impose sanctions, asserting that Defendants and their counsel had agreed to pay Iperia $500,000 in exchange for its cooperation and favorable testimony in connection with Defendant's motion to dismiss, thus making Iperia the Defendant's "evidentiary puppet" due to the $200,000 "kicker" contingent on Defendant's successful assertion of patent ownership.
Judge Folsom concluded that the invention which became the patent in suit was in fact within the scope of the employment agreement, and thus the Defendant's motion to dismiss for lack of standing should be granted. In doing so, he was careful to point out that he did not rely on any statements or testimony by Iperia, the credibility of which was in dispute.
So Cisco won the battle - now did it win the war? Judge Folsom noted that due to the lack of standing, he did not have subject matter jurisdiction, so the Plaintiff's motion to disqualify counsel was now moot. But as for the motion for sanctions - that was a different issue, as federal courts maintain the ability to police the ethical conduct of attorneys practicing before them.
Chief Judge Folsom first detailed the provision in the Patent License Agreement that formed the basis for the Plaintiff's allegations of improper payment in exchange for favorable testimony, and concluded, applying the Federal Circuit's opinion in Ethicon, that the provision was not illegal, unethical, or otherwise forbidden. Under the facts of this case, the payments reflected the uncertainty over whether Iperia owned the patent, and were not forbidden payments in exchange for testimony. Next, the Court looked at the Plaintiff's claim that the Defendants should be sanctioned because they obtained the Employment Agreement on which the standing issue in this case turned three days before Girard's deposition, and did not produce it until almost two months later. The Defendants actually questioned Mr. Girard about the agreement during his deposition, and its counsel later admitted to the Court that he had a copy of the agreement at the deposition, and "Plaintiff suffered prejudice in that Mr. Girard could not refresh his recollection with the Employment Agreement and Plaintiff could not question Mr. Girard regarding the actual agreement at deposition." To use the Court's terminology, Defendants asked Iperia for the "silver bullet" document (the employment agreement), received it, and did not timely disclose it, to the Plaintiff's detriment. The order goes on to explain just precisely why the document was relevant, and which provisions of the relevant rules and requests required its production.
Judge Folsom concluded that "Defendants' conduct suggests that winning their motion to dismiss has been more important to Defendants than conducting themselves in a fair and forthright manner in compliance with the Federal Rules of Civil Procedure, as well as the professional standards expected of all attorneys practicing in this Court's district" and wrote that "[t]he Court finds that Defendants withheld timely production of the Employment Agreement through a deliberate, willful failure to disclose, thereby consciously disregarding Plaintiff's rights,"
The Court concluded that after the lack of subject matter jurisdiction was shown it could not retain jurisdiction as a sanction, so it denied Plaintiff's motion to dismiss the motion to dismiss, as well as to provide the sealed documents relating to the motion to dismiss to state bar disciplinary authorities. But some substantial sanction was needed, the Court determined, for the Defendant's failure to comply with its duty to supplement its disclosures. Judge Folsom ordered the Defendants to reimburse the plaintiff for its expenses (including attorney's fees) associated with the failure to produce the agreement, and assessed a fine of $100,000 (one hundred thousand dollars) payable to the fines and restitution account of the court. "Such a fine is necessary and appropriate" Chief Judge Folsom wrote, "to protect the sound administration of justice and to punish and deter violation of the Federal Rules of Civil Procedure, the Court's Local Rules, and the professional standards of this Court's district."
