ROGER T. BENITEZ, District Judge.
On July 27, 2018, the Court issued an order to show cause why the Court should not impose monetary sanctions against Plaintiff Certified Nutraceuticals, Inc. ("Plaintiff" or "Certified"), Plaintiff's CEO Ahmad Alkayali, and Plaintiff's counsel for misrepresenting the status of Plaintiff and/or Mr. Alkayali as an assignee of U.S. Patent No. 6,323,319 ("the '319 Patent). (Docket No. 48.) Pursuant to the Court's Order, Plaintiff, Mr. Alkayali, and Plaintiff's counsel filed a joint response. (Docket No. 49.) Defendant Avicenna Nutraceutical, LLC ("Avicenna") also filed its optional response. (Docket No. 54.) On August 24, 2018, the Court held a hearing where it heard arguments regarding its July 27, 2018 Order to Show Cause. (Docket No. 55.) Present at the hearing were counsel for Avicenna and Robert Tauler, Plaintiff's counsel of record, who appeared on behalf of Plaintiff, Mr. Alkayali, and himself and his law firm.
As will be explained in further detail below, the Court finds Plaintiff, Mr. Alkayali, and Plaintiff's counsel each violated Federal Rule of Civil Procedure 11(b). Sanctions in this case are therefore warranted.
On November 15, 2016, Plaintiff filed a complaint against Avicenna for false advertising and unlawful business practices under the Lanham Act and California state-law. (Docket No. 1, "Compl.") Mr. Tauler of the law firm Tauler Smith, LLP signed the Complaint. The gravamen of the complaint is that Avicenna falsely advertised its collagen products as "patented" or processed using "patented formulas and production methods" because Avicenna never held any relevant patents. The Complaint further alleged the following:
(Compl. ¶¶ 19, 28.) But at the time the Complaint was filed, Mr. Alkayali was not an assignee of the '319 Patent.
On January 2, 2017, Avicenna filed its answer, wherein it asserted the following as grounds for its affirmative defense of unclean hands:
(Docket No. 5, Answer at p. 9) (emphasis in original.)
The case proceeded and on February 8, 2018, Avicenna moved for summary judgment, relying in part on the aforementioned affirmative defense of unclean hands. (Docket No. 28.) Specifically, Avicenna argued that Plaintiff was barred from recovery under the unclean hands doctrine because it had engaged in the same conduct for which it sought relief. To support its affirmative defense, Avicenna presented evidence that in 2011 Plaintiff advertised one of its products, KollaGen II-xs ("KollaGen"), as patented before the patent covering KollaGen was issued in 2013.
On March 12, 2018, Plaintiff filed its opposition, which relied in part on a supporting declaration from Mr. Alkayali ("MSJ declaration"). Mr. Tauler signed the opposition and Mr. Alkayali signed his MSJ declaration. The opposition argued against application of the unclean hands doctrine on the following purportedly factual grounds:
The factual basis for these representations was provided by Mr. Alkayali's MSJ declaration, wherein Mr. Alkayali stated he is "the assignee of Patent No. 6,323,319" and that "[t]he '319 Patent applied to KollaGen II-xs in 2011." (Docket No. 31-21.) As with the Complaint, at the time the opposition and Mr. Alkayali's MSJ declaration were filed, Mr. Alkayali was not an assignee of the '319 Patent.
Avicenna filed its reply on March 19, 2018, and attached a copy of a May 3, 2002 Order from the Orange County Superior Court
(Docket No. 33-4, Supp. Decl. of Brian Berggren ("Berggren Decl.") ¶ 4, Ex. O.)
On July 27, 2018, the Court granted Avicenna's motion for summary judgment. (Docket No. 47.) Specifically, the Court found Plaintiff barred from recovery for its Lanham Act claim because it had unclean hands.
On the same day, the Court issued the instant order to show cause why monetary sanctions should not be imposed against Plaintiff, Mr. Alkayali, and Plaintiff's counsel for their misrepresentations of Plaintiff and/or Mr. Alkayali as an assignee of the '319 Patent. (Docket No. 48.)
Plaintiff, Mr. Alkayali, and Plaintiff's counsel's joint response (Docket No. 49, "Joint Response") to the Court's July 27, 2018 Order to Show Cause only discusses why the Court should not impose sanctions under Federal Rule of Civil Procedure 11. However, the Ninth Circuit recognizes three "primary sources of authority" that "enable courts to sanction parties or their lawyers for improper conduct: (1) Federal Rule of Civil Procedure 11, which applies to signed writings filed with the court, (2) 28 U.S.C. § 1927, which is aimed at penalizing conduct that unreasonably and vexatiously multiplies the proceedings, and (3) the court's inherent power." Fink v. Gomez, 239 F.3d 989, 991 (9th Cir. 2001).
The Court has considered the relevant portions of the record, the parties' respective briefings and exhibits in response to its July 27, 2018 Order to Show Cause, as well as the oral arguments raised at the August 24, 2018 Hearing. Although the Court finds each source of authority provides a basis for sanctions, Rule 11 appears to be the most appropriate under these circumstances. See Matter of Yagman, 796 F.2d 1165, 1169 (9th Cir. 1986).
"District courts have broad discretion to sanction a party or attorney under Rule 11." DeMarco v. Depotech Corp., 131 F.Supp.2d 1185, 1186 (S.D. Cal. 2001) (citing Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 385 (1990); Barber v. Miller, 146 F.3d 707, 709 (9th Cir. 1998)). "Federal Rule of Civil Procedure 11 provides for the imposition of sanctions when a filing is frivolous, legally unreasonable, or without factual foundation, or is brought for an improper purpose." Estate of Blue v. Cnty. of Los Angeles, 120 F.3d 982, 985 (9th Cir. 1997) (citing Simpson v. Lear Astronics Corp., 77 F.3d 1170 (9th Cir. 1996)). "Frivolous filings are `those that are both baseless and made without a reasonable and competent inquiry.'" Id. (quoting Buster v. Greisen, 104 F.3d 1186, 1190 (9th Cir. 1997)). "The signer's subjective good or bad faith is irrelevant to the Rule 11 analysis, rather an objective reasonableness standard applies." DeMarco, 131 F. Supp. 2d at 1186 (citing Bus. Guides, Inc. v. Chromatic Commc'ns Enter., Inc., 498 U.S. 498, 548 (1991); In re Keegan Mgmt. Co., Sec. Litig., 78 F.3d 431, 434 (9th Cir. 1996)).
Rule 11 sanctions may be imposed even when only a portion, not the entirety, of a pleading is frivolous. Altmann v. Homestead Mortg. Income Fund, 887 F.Supp.2d 939, 955 (E.D. Cal. 2012) (citing Townsend v. Holman Consulting Corp., 929 F.2d 1358, 1364-65 (9th Cir. 1990) (en banc)). If, after notice and a reasonable opportunity to respond, a court determines that Rule 11(b) has been violated, a district court may impose Rule 11 sanctions sua sponte. Fed. R. Civ. P. 11(c); see also Foster v. Wilson, 504 F.3d 1046, 1053 (9th Cir. 2007). When a district court imposes sua sponte Rule 11 sanctions, it is limited to fines payable to the court or "directives of a nonmonetary nature." Fed. R. Civ. P. 11(c)(4).
In a single paragraph, the Joint Response explains:
(Joint Response at p. 3.)
The Joint Response relies entirely on Mr. Alkayali's supporting declaration ("Response declaration"), which adds that "[t]o the best of [his] recollection FCEI was assigned the ['319] Patent on in [sic] early 2002" and that he "d[oes] not have records in [his] possession regarding the assignment." (Docket No. 49-2.) The Joint Response attached "a true and correct copy of the USPTO printout" for the '319 Patent (Docket No. 49-3), to support this explanation. The same document was also attached to Plaintiff's Complaint as an exhibit to Plaintiff's opposition to Avicenna's motion for summary judgment. (See Docket Nos. 1-2, 31-14.)
The Court acknowledges that the attached document indicates "Five Continent Enterprise, Inc." as the "Assignee." (Id. at p. 1.) However, the Court discredits Plaintiff and Mr. Alkayali's explanation in its entirety for several reasons. First, Mr. Alkayali himself assigned the '319 Patent to non-party BioCell Technology, LLC ("BioCell") on December 2, 1997. See Note 1, supra. On May 15, 2000, BioCell assigned the '319 Patent to FCEI, the company in which Mr. Alkayali asserts he is the "sole owner." Id. FCEI then assigned the '319 Patent back to BioCell on
Second, even if Mr. Alkayali somehow "forgot" his and FCEI's roles in the '319 Patent's assignment history, he admits in his Response declaration that he knew he could not "market" the '319 Patent because it was a continuation of the `327 Patent. Importantly, the Orange County Superior Court's May 3, 2002 permanent injunction specifically enjoined Mr. Alkayali and his "officers, agents, employees, representative, and all persons acting in concert or participating with [him]" (i.e., Plaintiff), from "engaging in, committing, or performing, directly or indirectly, by any means whatsoever" the manufacture, distribution, offering for sale, or selling any of the product or goods covered by the `327 Patent, or any continuations thereof. (Berggren Decl. ¶ 4, Ex. O.) In other words, Mr. Alkayali knew that the permanent injunction was in effect at the time Plaintiff's Complaint and his MSJ and Response declarations were signed. These facts further demonstrate Mr. Alkayali's (and therefore Plaintiff's) failure to conduct a reasonable and competent inquiry.
Third, as discussed during the August 24, 2018 Hearing, Plaintiff filed a similar case in this District while the instant action was pending.
For all of these reasons, the Court finds Plaintiff and Mr. Alkayali's representations in the Complaint, opposition to Avicenna's motion for summary judgment, and Mr. Alkayali's MSJ and Response declarations that Mr. Alkayali was as assignee of the '319 Patent were frivolous in violation of Rules 11(b)(3) and 11(b)(4). Accordingly, the Court sanctions Plaintiff and Mr. Alkayali, jointly and severally, in the amount of $5,000
Throughout this litigation, Plaintiff has been represented by Robert Tauler of the law firm Tauler Smith, LLP. As to why sanctions should not be imposed against Plaintiff's counsel, the Joint Response again offers a single paragraph to explain:
(Joint Response at pp. 3-4.)
The Joint Response is vague. It does not explain what steps, if any, Mr. Tauler took to investigate the Complaint's factual allegation that Mr. Alkayali was the assignee of the '319 Patent. Nor does it explain what steps, if any, Mr. Tauler took to investigate the Mr. Alkayali's representations that he was an assignee of the '319 Patent and that the '319 Patent applied to Plaintiff's products, which (as detailed above) formed the basis of one of Plaintiff's arguments in the opposition to Avicenna's motion for summary judgment. Mr. Tauler's oral arguments at the Court's August 24, 2018 hearing did little to provide clarification.
During the hearing, Mr. Tauler conceded that he had a duty to investigate to ensure he pursued Plaintiff's action in good faith both at the time it was filed and throughout the course of its litigation. To demonstrate his compliance with Rule 11, Mr. Tauler indicated he had initially searched the USPTO patent database for the '319 Patent prior to filing the Complaint, and attached the results of said search to the Complaint. However, Mr. Tauler admitted that at the time the Complaint was filed, he was aware that FCEI (i.e., not Mr. Alkayali) was listed as the assignee of the '319 Patent. Remarkably, he further admitted that he did not conduct any further search because Mr. Alkayali "told [him] that [Mr. Alkayali] was the assignee" and because Mr. Tauler "knew that [Mr. Alkayali] was the owner of [FCEI] at the time" he "had no reason to suspect anything different."
Inasmuch as Mr. Tauler argued during the hearing that Mr. Alkayali's status as an assignee "was not central to the complaint" and therefore "[he] didn't have a duty to investigate any further in [his] belief at the time," this argument is not persuasive. Even if the Court found this inquiry sufficient (which it does not), this argument does not excuse his apparent failure to conduct a reasonable and competent inquiry in his responses to Avicenna's motion for summary judgment or the Court's July 27, 2018 Order to Show Cause.
Mr. Tauler was constructively on notice of the potential falsity of Mr. Alkayali's status as the assignee of the '319 Patent when Avicenna filed its answer and raised the unclean hands affirmative defense detailed above. At the hearing, Mr. Tauler effectively conceded he did not conduct any such inquiry at that time. Rather, he only undertook an investigation after Avicenna raised the unclean hands affirmative defense in its motion for summary judgment. Mr. Tauler stated: "I'm not a patent lawyer. We did our best once they raised that defense to investigate those facts, and based on my communications with my client, I was satisfied that he could put in his declaration that he was the assignee of the '319 Patent." Based on this statement, and Mr. Tauler's failure to identify any other type of investigation, the Court concludes that the only meaningful inquiry Mr. Tauler conducted regarding Mr. Alkayali's status as an assignee of the '319 Patent, and whether the '319 Patent covered Plaintiff's product, was to consult with his client. Such an investigation was not objectively reasonable or competent under these circumstances.
More importantly, as a result of Mr. Tauler's failure to conduct a reasonable and competent inquiry, he advanced demonstrably false representations and arguments. Avicenna's reply aptly exposed the falsity of the representations by attaching the assignment history of the '319 Patent from the USPTO's "Patent Assignment Search website" and the Orange County Superior Court's May 3, 2002 Order granting the permanent injunction against Mr. Alkayali. Yet at no point did Mr. Tauler withdraw the misrepresentations from the opposition or Mr. Alkayali's MSJ declaration, or otherwise file an explanation for presenting baseless claims.
More remarkably still, it appears evident that Mr. Tauler did not conduct any further investigation of the misrepresentations in preparing the Joint Response. The Court's Order granting Avicenna's motion for summary judgment stated the following:
(Docket No. 47 at p. 6 n.4.) Had Mr. Tauler conducted a minimal inquiry of searching the USPTO's publicly accessible database, which the Court cited (and recites in Note 1, supra), he would have learned that FCEI's assignment interest in the '319 Patent ended on October 3, 2001. Mr. Tauler cannot evade Rule 11 sanctions by willfully ignoring unfavorable facts. Had Mr. Tauler conducted this minimal inquiry, he could have advised Plaintiff and Mr. Alkayali against making the same misrepresentations in the Joint Response and Mr. Alkayali's Response declaration.
It is no wonder that during the hearing, the following exchange occurred between the Court and Mr. Tauler:
Mr. Tauler's lack of knowledge is a direct result of his failure to conduct a reasonable and competent inquiry. During the hearing, Mr. Tauler stated: "I'm not aware that assignments have to be registered with the USPTO. I don't have familiarity with that subject matter." But this is also not a valid excuse. According to California's Rules of Professional Conduct, "[a] member shall not intentionally, recklessly, or repeatedly fail to perform legal services with competence." Cal. Rules Prof. Conduct 3-110. For purposes of Rule 3-110, "competence" in any legal service applies to an attorney's "1) diligence, 2) learning and skill, and 3) mental, emotional, and physical ability reasonably necessary for the performance of such service." Id. Importantly, "[i]f a member does not have sufficient learning and skill when the legal service is undertaken, the member may nonetheless perform such services" provided he or she: 1) acquires sufficient learning and skill before performance is required, or 2) associates with, or "where appropriate, professionally consult[s] another lawyer reasonably believed to be competent." Id. At the hearing, Mr. Tauler denied acquiring the former but did not discuss the latter. Nor did Mr. Tauler indicate that he had associated with or consulted with another competent lawyer.
Finally, during the hearing Mr. Tauler lamented that: "If I've learned anything from this, it would be to not have included that in the complaint because it was not germane to the cause of action. It was a false advertising complaint." This argument misses the point. Even if the Complaint did not include the representation that Mr. Alkayali was an assignee of the '319 Patent, this would not have prevented Avicenna from raising the unclean hands affirmative defense it raised in its answer and motion for summary judgment. In short, regardless of what type of claim is filed, an attorney has a duty to conduct a reasonable and competent inquiry of all claims and defenses that arise in the provision of his or her legal services.
For all of these reasons, the Court finds Mr. Tauler failed to conduct a reasonable and competent inquiry into Mr. Alkayali's status as an assignee of the '319 Patent, which resulted in the frivolous representations in Plaintiff's Complaint, Plaintiff's opposition to the motion for summary judgment, and Mr. Alkayali's MSJ and Response declarations, in violation of Rules 11(b)(2), 11(b)(3), and 11(b)(4). Accordingly, the Court jointly sanctions Mr. Tauler and his law firm, Tauler Smith, LLP in the amount of $2,500
For the foregoing reasons, Plaintiff and Mr. Alkayali are jointly and severally sanctioned in the amount of $5,000 to be paid to the Court's Library Fund. Mr. Tauler and Tauler Smith, LLP are jointly sanctioned in the amount of $2,500 to be paid to the Court's Library Fund. The sanctions are to be paid by
