January 7, 2014
LES Insights
Authored by D. Brian Kacedon, John C. Paul, and Daniel F. Roland
Courts may impose a wide range of sanctions against litigants that abuse the discovery process or otherwise fail to follow the rules of procedure or court orders. A recent decision from the United States District Court for the Eastern District of Pennsylvania illustrates the extent to which a court can and will sanction parties who abuse the discovery process. In Bortex Industry Co. v. Fiber Optic Designs, Inc.,1 the court became increasingly involved in discovery to address various disputes between the parties. Despite the repeated threat of sanctions, Bortex violated several court orders and failed to meet discovery obligations. Because the court concluded that no other sanction fully addressed Bortex's conduct, the court entered judgment in favor of the opposing party.
Bortex Industry Company Limited, a Chinese company, brought a declaratory-judgment action against Fiber Optic Designs, Inc. ("FOD"), asserting that two of FOD's patents, U.S. Patent Nos. 7,220,022 and 7,934,852, were invalid, unenforceable, and not infringed. FOD filed a counterclaim for patent infringement and a motion for a preliminary injunction.
Bortex alleged that in 1999, its Chairman, Sean Shao, developed and sold ornamental LED Christmas lights. According to Bortex, the President of FOD, David Allen, saw these lights on display during the 1999 Canton Light Show in China. Bortex alleged that over the next three years, David Allen purchased a number of strings from Shao and corresponded with Shao to learn about the LED technology. Bortex claimed that when FOD filed for its patents, which relate to LED designs, David Allen and Mark Allen were incorrectly listed as inventors while Shao should have been listed, but was not. Bortex pointed out that after obtaining the '022 and '852 patents, FOD filed patent-infringement actions against numerous Bortex customers, including one brought in 2007 against New England Pottery, LLC (the "NEP Action"). In response to that action, NEP filed a request for inter partes reexamination of the '022 patent.
To support its motion for injunctive relief, FOD argued that it had a significant likelihood of success on the merits of its infringement counterclaim because the '022 patent had already survived both ex parte and inter partes reexamination proceedings before the U.S. Patent and Trademark Office. Although NEP was listed as the real party-in-interest in the petition for inter partes reexamination, FOD asserted that Bortex participated in the reexamination and indemnified NEP for its costs. FOD pressed this point because, if true, Bortex would be estopped from attacking, in a later civil litigation, the validity of any claim held not invalid on any ground NEP raised or could have raised during the reexamination.
During discovery on FOD's motion for a preliminary injunction, the parties regularly required court intervention to resolve disputes centering on Bortex's failure to produce discoverable materials. On January 14, 2013, the court ordered an expedited discovery schedule and directed the parties to supplement responses to any outstanding written discovery. Following the order, Bortex not only failed to supplement its discovery responses but also withheld numerous documents responsive to FOD's requests for production, such as sales information to help establish the need for a preliminary injunction. During a later status hearing, Bortex's counsel assured the court that Bortex would not hold any discoverable material back. In addition to warning the parties that sanctions would be considered if they did not comply with the discovery schedule, the court ordered Bortex to produce the sales information and also ordered that all discovery pertinent to the preliminary-injunction motion be completed by May 6, 2013.
On the eve of a status hearing on April 4, Bortex provided additional discovery responses, which FOD later alleged were still deficient, particularly as to communications between Bortex and NEP related to the requested reexaminations. The court again warned the parties that continued failure to comply with discovery orders could result in sanctions. On May 23, the court issued another order instructing Bortex to produce the requested documents related to its communications with NEP. Bortex responded that because it was not involved in the reexamination request, it did not have any discoverable communications about the reexamination. After discovering information contradicting Bortex's response—including reimbursement requests sent from NEP to Bortex, as well as related emails and deposition testimony from the NEP Action—FOD filed a motion for sanctions. FOD stressed that Shao also lied in his deposition for the present case, where he stated that: (1) he never heard of NEP; (2) Bortex never conducted business with NEP; (3) Bortex never reimbursed NEP for legal expenses; and (4) he was unaware of the NEP Action.
After a hearing on FOD's motion for sanctions, the court found that Bortex had financed the reexamination of the '022 patent and also engaged in sanctionable conduct by withholding documents and information in violation of court orders. Less than one week later, FOD notified the court of additional documents that it argued Bortex should have produced and that reflected Bortex's significant involvement in the reexamination, with Shao's full knowledge. The court then considered case-dispositive sanctions.
To defend its position, Bortex argued that certain documents had not been turned over because of language-related misunderstandings. Bortex then supplemented its discovery responses and produced documents unearthed after counsel travelled to China, including some revealing that Shao knew of Bortex's reimbursements for legal fees in the NEP Action and the related reexamination. Making matters worse for Bortex, FOD submitted a declaration from a former Bortex employee, who stated that Shao retained only in hardcopy––and not on the company's network––customer indemnification agreements and other documents relating to the NEP Action and the reexamination of the '022 patent.
Because FOD sought case-dispositive sanctions, the court weighed certain factors: (1) the extent of responsibility by Bortex representatives; (2) any prejudice to FOD caused by Bortex's failure to meet scheduling orders and respond to discovery; (3) any history of intentional delays by Bortex; (4) whether the conduct of Bortex or counsel was willful or in bad faith; (5) the effectiveness of sanctions other than dismissal; and (6) the merit of Bortex's claims or defenses.
As to the first factor, citing a review of Shao's deposition testimony and other evidence, the court found that he had committed perjury. Certain emails directly contradicted Shao's earlier statements, such as his testimony that he had never heard of NEP, that Bortex never conducted business with NEP, and that he was unaware of the NEP Action. The court also found the former Bortex employee's declaration to be compelling evidence of Shao's personal responsibility because Bortex responded to repeated requests for documents by alleging that no responsive documents existed, even though Shao had them in hardcopy. Notwithstanding Bortex's attempt to paint Shao's conduct as the result of ignorance or miscommunication, the court found that Bortex purposefully thwarted discovery orders and held that this factor weighed heavily in favor of dismissal.
When addressing the prejudice to FOD, the court found that Bortex's conduct led to numerous additional hearings, delays, and costs. Further, because of Bortex's conduct, the court was unable to timely consider the remedy that FOD originally sought––immediate injunctive relief. While noting that some of Bortex's abuses could be alleviated with additional discovery and further postponement, the court questioned whether the truth would ever be known given Bortex's willingness to make false representations to the court. Finding that Bortex's refusal to comply with discovery orders significantly prejudiced FOD, the court held that the second factor also weighed in favor of case-dispositive sanctions.
To evaluate Bortex's intentional delay, the court scrutinized the history of the case as a whole. Bortex's continued assurances that it would comply with its discovery obligations and repeated failures to do so required the court to intervene in discovery. Bortex violated three discovery orders and compounded its problems, the court reasoned, by ignoring all of the warnings about sanctions. Bortex's actions resulted in a delay of more than six months, leading the court to hold that this factor weighed in favor of dismissal.
On the factor of willfulness or bad faith, the court analyzed the importance of the evidence withheld. The court found that much of the wrongfully withheld discovery pertained to a critical issue because participating with NEP in the reexamination would have estopped Bortex from raising certain defenses in this action. Given the abundance of evidence of bad-faith conduct, the court found that Bortex was aware of the implications of its participation in the reexamination and intentionally failed to meet its discovery obligations. Bortex's language-barrier argument proved fruitless, as a number of emails were written in Chinese. The court therefore held that this factor weighed in favor of case-dispositive sanctions.
Because dismissal is a sanction of last resort, the court considered the effectiveness of other sanctions. Pointing out that Bortex is a Chinese company without any known assets in the U.S., the court found unlikely the possibility of enforcing monetary sanctions. The court also did not want to sanction Bortex's counsel because it would remove the focus from the bad faith exhibited by Bortex and Shao. Lastly, because FOD sought immediate injunctive relief, further delay would benefit only Bortex. Having considered all possible sanctions, the court concluded that the only appropriate remedy was dismissal.
The lone factor in Bortex's favor was the merit of its claim. Because its allegations could support recovery or constitute a complete defense if presented at trial, the court found that Bortex stated a claim that, when looking at the alleged facts in a light most favorable to Bortex, could be meritorious. In other words, Bortex's allegations could have survived a motion to dismiss at the pleading stage, making this factor weigh against dismissal.
After balancing the six factors, with no single factor being dispositive, the court concluded that the factors weighed heavily in favor of striking Bortex's pleadings. Because the discovery violations at issue were so flagrant and done in bad faith, the court granted the motion for sanctions, struck Bortex's pleadings, including its affirmative defenses to infringement, and entered judgment in favor of FOD.
This case illustrates the process by which courts assess conduct of the parties and determine the type of sanctions to impose against parties who disobey court orders, make false representations, or otherwise abuse the discovery process.
Endnotes
1 The Bortex decision can be found at http://docs.justia.com/cases/federal/district-courts/pennsylvania/paedce/2:2012cv04228/465738/98/0.pdf?1386081559.
Copyright © Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm's clients.
Copyright © Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm’s clients.
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