During discovery, the plaintiff moved to compel production of documents regarding the defendant’s understanding of stacking restrictions under the license agreement. In ruling on the motion to compel, the U.S. District Court for the Eastern District of Missouri concluded that, by asserting reformation claims based on mutual mistake and unilateral mistake, the defendant had placed its subjective belief concerning the stacking rights at issue. The district court gave the defendant the option to either voluntarily dismiss the reformation claims or produce all documents relating to the issue.
The defendant opted to continue litigating its reformation counterclaims and produced internal emails of its in-house attorneys and high-level executives who were directly involved in negotiating the license agreement. Some of the emails produced indicated that the defendant’s negotiators and in-house attorneys were aware that there could be a stacking restriction.
The plaintiff moved for sanctions, asserting the defendant had misrepresented its subjective belief concerning stacking rights and had perpetrated a fraud on the district court. The court granted the plaintiff’s motion and invoked sanctions striking the defendant’s reformation defense and counterclaims and awarding the plaintiff attorney fees.
Distinction Between Factual and Legal Arguments Is Important
The Federal Circuit upheld the district court’s decision, finding that the district court imposed targeted sanctions by carefully fitting its sanctions to the conduct it found to be improper. In affirming the decision, the Federal Circuit noted that “the district court made clear [the defendant] was sanctioned for knowingly making factual misrepresentations concerning its subjective belief in order to maintain its reformation claims” rather than being sanctioned for making legal arguments.
The Federal Circuit’s decision reminds attorneys that careful pleading is important. “Not arguing factual conclusions, as opposed to underlying facts, can help an attorney avoid sanctions,” says Jeffrey G. Close, Chicago, IL, cochair of the ABA Section of Litigation’s Discovery and Motion Practice Subcommittee of the Pretrial Practice & Discovery Committee. “For example, in this case, the defendant pled conclusions, e.g., that it never intended the license agreement to limit its right to stack traits. If it had instead pled that on such-and-such a day, a negotiator said something along the lines of, ‘we intend to stack traits, this won’t prevent us, will it?’ we would have a different result,” Close adds.
Section leaders also caution attorneys that, in addition to pleading the underlying facts, making specific statements can help them avoid sanctions. “Be careful about making sweeping statements,” says David J. Wolfsohn, Philadelphia, PA, cochair of the Section of Litigation’s Intellectual Property Litigation Committee. “In this case, what appeared to motivate the court were the broad allegations, for example, ‘at all times believed,’” he says.
Subjective Belief Can Be Difficult to Support
The Federal Circuit also found no error in the district court’s reliance on the statements of the defendant’s individual employees, because they were high-level executives and in-house attorneys who directly participated in the contract negotiation with the plaintiff as the defendant’s corporate representatives. “It strikes me as problematic that this opinion could be read to mean that as litigators we cannot make broad allegations and statements of the understanding of the company if the understanding of some individuals of the company is contrary,” says Wolfsohn. “If you have two people at the corporation with different subjective understandings, does that mean you can’t argue the position of those whose views are going to advance you in the case?” he adds.
When there is little evidence to support a claim, lawyers need to remember that they must carefully consider whether to make that claim. “You have to have the gumption to stand up to the client and say, ‘What do we have to support your claim when the documents show otherwise?’” emphasizes Close.
Catherine McLeod, Litigation News Contributing Editor