Case Number: BC517291    Hearing Date: July 21, 2014    Dept: 32

CASE NAME: The Linde Law Firm v. Phillip Andrew Duff, et al.
CASE NO.: BC517291
HEARING DATE: 07/21/14
DEPARTMENT: 32
CALENDAR NO.: 4
SUBJECT: Motion for Sanctions
MOVING PARTY: Defendant Ariat International, Inc. (“Ariat”)
RESP. PARTY: Plaintiff The Linde Law Firm (“Linde Law”)

COURT’S TENTATIVE RULING

Motion for Sanctions DENIED.

Plaintiff’s Request for Sanctions DENIED.

ANALYSIS

Plaintiff’s Evidentiary Objections

Declaration of Gregory Gilchrist

(1) Sustained.
(2) Sustained.
(3) Overruled.
(4) Overruled.

Declaration of Christopher G. Caldwell

(1) Sustained as to last sentence “SMD did not authorize the filing of the lawsuit ….” Overruled as to remainder.
(2) Sustained.
(3) Sustained.
(4) Sustained.
(5) Sustained.
(6) Sustained.

Defendant’s Evidentiary Objections

Declaration of Douglas Linde

(1) Sustained.
(2) Overruled.
(3) Sustained.
(4) Overruled.
(5) Overruled.
(6) Overruled.
(7) Overruled.
(8) Overruled.
(9) Overruled.
(10) Overruled.
(11) Overruled.

Declaration of Jeffrey Zinder

(12) Overruled.
(13) Sustained.

Motion for Sanctions

This motion for sanctions follows an underlying action in United States District Court in which Linde Law represented Phillip Andrew Duff (“Duff”) and The SMD Group Limited (“SMD”) in trademark litigation. Douglas Linde (“Linde”) is the principal manager of Linde Law. Ariat owns SMD, which although named in the complaint has apparently not yet been served. At one time, Duff was the sole shareholder of SMD. The parties have discussed in their papers the filing and ultimate settlement of the federal court action and where appropriate the court will refer to matters relating to that case in the discussion below. In this case, Linde Law has sued Duff for unpaid legal fees on a quantum meruit basis and Ariat and SMD for tortiously interfering with its recovery of fees from Duff. Because SMD has not yet appeared in the action, the sanctions motion is brought only by Ariat.

21-Day Safe Harbor

A party’s motion for sanctions may not be filed until 21 days after it is served. (CCP § 128.7(c)(1).) This is the so- called safe harbor provision and is designed to give the opposing party an opportunity to withdraw the pleading in the face of the anticipated motion. Such a motion must be made separately from any other motion or request to the court. (Id.; see Martorana v. Marlin & Saltzman (2009) 175 Cal. App. 4th 685, 699.) If an offending pleading is not withdrawn during the CCP § 128.7 “safe harbor” period, the motion for sanctions may then be filed. (Malovec v. Hamrell (1999) 70 Cal. App. 4th 434, 440.)

Here, the proof of service indicates that Defendant served the motion for sanctions on Plaintiff by mail on May 27, 2014. However, Defendant’s counsel also indicates in a declaration that he sent the motion to Plaintiff’s counsel by email and overnight delivery on April 25, 2014. (See Suppl. Esbenshade Decl. ¶¶ 2-3.) The motion was filed on May 27, 2014, more than 21 days after the April 25, 2014 service. Accordingly, Defendant complied with the safe harbor provisions of § 128.7.

Merits

This motion is based on Code of Civil Procedure (“CCP”) § 128.7(c) which provides as follows: “If, after notice and a reasonable opportunity to respond, the court determines that subdivision (b) has been violated, the court may, subject to the conditions stated below, impose an appropriate sanction upon the attorneys, law firms, or parties that have violated subdivision (b) or are responsible for the violation. In determining what sanctions, if any, should be ordered, the court shall consider whether a party seeking sanctions has exercised due diligence.”

Subdivision (b) states that “by signing, filing, and submitting a pleading, a party is certifying that all of the following conditions are met: (1) It is not being presented primarily for an improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation; (2) The claims, defenses, and other legal contentions therein are warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law; (3) The allegations and other factual contentions have evidentiary support …; (4) The denials of factual contentions are warranted on the evidence ….”

Because section 128.7 is based on its federal analog, Rule 11, of the Federal Rules of Civil Procedure, our courts look to Rule 11 cases in these motions. In that regard, a leading California treatise has observed that “[f]ederal cases have adopted a policy of restraint in imposing sanctions under Rule 11, resolving doubts in favor of the party against whom sanctions are sought. It is treated as an ‘extreme’ remedy and reserved for the ‘rare and exceptional case where the action is clearly frivolous.’” (Rutter Guide, Civ. Pro. Before Trial ¶ 9:1139 and §9::1212, citing Operating Engineers Pension Trust v. A–C Co. (9th Cir. 1988) 859 F2d 1336, 1344.)

“The attorney’s certification re evidentiary support presumes the attorney has personal knowledge of facts sufficient to support the certification. An attorney may rely on hearsay information only to the extent it is reasonable to do so.” (Rutter Guide, Civ. Pro. Before Trial ¶ 9:116, citing Unioil, Inc. v. E.F. Hutton & Co., Inc. (9th Cir. 1986) 809 F2d 548, 558.). At the outset of a case, and before discovery has been obtained from the opposing party, hearsay may be an important component of an attorney’s evidentiary analysis because the attorney has no direct access to the other side’s witnesses.

In the motion for sanctions, Defendant contends that Plaintiff’s cause of action for intentional interference with prospective economic relations lacks evidentiary support for two basic reasons. First, Defendant contends that Plaintiff made repeated assurances that he or his firm would not seek any recovery from Defendant related to the underlying trademark infringement lawsuit. Second, Defendant contends that Plaintiff has no evidence that Defendant threatened Duff to prevent him from honoring his fee agreement with Plaintiff, i.e., there is no evidentiary support for the alleged tort.

Assurances Plaintiff Would Not Seek Recovery From Defendant

Defendant contends that Plaintiff filed the underlying trademark infringement lawsuit on behalf of SMD without authorization. Defendant Arial states that it is the parent company for SMD. Defendant contends that when it learned of the federal court suit it took steps to disengage from the case. As part of that process, Defendant sought assurances from Linde Law that the firm would not claim that it was owed fees by Ariat for what it contended was the firm’s allegedly unauthorized representation of SMD.

In support of the motion, Defendant submits declarations of Gregory Gilchrist (“Gilchrist”), the attorney whose firm substituted into the underlying case for Duff (replacing Linde Law) and Christopher Caldwell (“Caldwell”), whose firm did the same for SMD. Both attorneys state generally that they received assurances from Plaintiff that he would not “seek any recovery” from SMD or Ariat related to the underlying lawsuit. (See, e.g., Caldwell Decl. ¶¶ 7-8.)

The claim that Linde Law agreed not to pursue a monetary claim against Ariat and SMD is largely based on a series of emails. As summarized in the reply at pages 3-4, Defendant authenticates email communications between Plaintiff and Caldwell to demonstrate Plaintiff’s alleged waiver of recovery against Defendant. In an email to Caldwell dated March 29, 2011, Linde stated the following:

I agree that if you are successful in getting SMD/Ariat (only) dismissed without any recovery, SMD/Ariat will not owe any money to me, my firm, or any other attorneys who worked with us on this lawsuit. I have conferred with my co-counsel and all agree. As you noted of your own efforts, our efforts to reach agreement with you is not a waiver of any rights or remedies. (Mot. Exh. B.)

In an email to Caldwell dated March 30, 2011, Linde further stated that “without agreeing to your statements as to our authorization to prosecute the case, I agree with the course of action described below, and agree that neither I, my firm, nor any other attorneys who worked with us on this lawsuit, will seek any fees, costs, or other recovery or remedy from or against SMD/Ariat. I have conferred with my co-counsel and all agree.” (Mot. Exh. C [emphasis added].)

In the opposition papers, Plaintiff highlights an email Linde sent to attorney Gilchrist on June 1, 2011. In responding to Gilchrist’s request for information about Plaintiff “making claims for fees against SMD,” Linde stated the following:

My agreement with SMD is in writing. I can send you a copy of it with their permission, or you can request a copy from them.

Your e-mail stated something the effect that I could never make a claim against them. That is the main portion that I was pointing out is incorrect. If for example, if they act tortuously towards me or otherwise infringe my rights, I of course could make a claim against them for damages.

In any event, my understanding is SMD is not recovering anything in the settlement. If that is the case, then I have no basis to seek fees from them. (Mot. Exh. A.)

As noted above, the first argument that the claim is barred by the prior agreement turns on a series of brief email communications and related oral communications. There was no long form agreement on these issues, or any written agreement other than as stated in the emails and an agreement to settle the underlying lawsuit which did not deal with claims between these parties. There was no mention of waiver of rights under Civil Code § 1542, as is typically found in release agreements.

The parties dispute the reach of the agreement made over fees; Linde Law claims it is limited to seeking legal fees and costs for the underlying case from Defendant and SMD, i.e., the firm would solely look to Duff for such payments, and Defendant reads it broader to mean Plaintiff would seek no recovery from Defendant on any basis whatsoever. It is not necessary for the court to determine on a motion for sanctions the proper interpretation of any release agreed to by Plaintiff and Defendant in the email exchanges and related oral discussions discussed in the papers. At this point, it is sufficient that Plaintiff has asserted a plausible theory that it did not waive the tort claim for intentional interference related to its efforts to be paid by Duff.

The language from the March 30, 2011 email that Plaintiff waived “fees, costs, or other recovery or remedy” is broad. However, the March 29, 2011 email arguably suggests that the agreement was intended to release only claims for fees or costs against SMD, and was not “a waiver of any rights or remedies.” As discussed in opposition at pages 10-11, “Civil Code section 1542 was intended by its drafters to preclude the application of a release to unknown claims in the absence of a showing, apart from the words of the release of an intent to include such claims.” (Casey v. Proctor (1963) 59 Cal.2d 97, 109.) Here, Plaintiff contends in Linde’s declaration that Duff requested new counsel in April 2011. He states that he learned Defendant intimidated Duff to not use any settlement proceeds to pay Plaintiff on May 26, 2011. (Linde Decl. ¶¶ 13-15.) Therefore, Plaintiff asserts a plausible theory that the interference claim may not have been known at the time the March 2011 emails were exchanged and was not intended to become part of that agreement. Linde’s email to Gilchrist dated June 1, 2011 is consistent with a narrower interpretation of any release or agreement not to sue. It appears that there was a formal settlement agreement of the federal case, but the parties have not submitted a copy of this agreement. Moreover, Linde states that the formal settlement included “no new releases between Linde Law and Ariat/SMD.” (Linde Decl. ¶ 17.). Thus, that agreement has no bearing on this motion.

Based on the foregoing, Plaintiff has at least some evidentiary support to establish that it did not waive the intentional interference claim against Defendant or agree not to pursue a claim based on that theory.

Elements of Intentional Interference Claim

The complaint alleges that Linde was told by Gilchrist that Defendant threatened Duff to prevent him from honoring any agreement with Plaintiff. (Compl. ¶ 21.) The complaint also alleges that unspecified “Defendants” threatened that unless Plaintiff transferred to them its right to monies earned in providing legal services in the underlying trademark infringement lawsuit, “Defendants” would file a disciplinary complaint with the California State Bar against Plaintiff. (Compl. ¶ 23.)

Defendant contends that these allegations lack factual support. In his declaration, Gilchrist denies making the statements alleged in paragraph 21 of the complaint. (Gilchrist Decl. ¶ 3.) Defendant’s counsel also denies that any threat or intimidation was made against Duff, and that Defendant always maintained that whatever is owed to Plaintiff is an issue for Duff to resolve. (Caldwell Decl. ¶ 15.) Caldwell states that he never threatened to file a disciplinary action on behalf of Defendant, and that Defendant has not filed a disciplinary complaint against Plaintiff. (Id. ¶ 16.) Both of these declarations are detailed. However, as Plaintiff notes, Defendant does not offer a declaration from Duff or any representative of Ariat.

As indicated above, it is not appropriate for the court to weigh the strengths or weaknesses of the parties’ evidence for a motion for sanctions. It is sufficient that Plaintiff has asserted at least some evidentiary support for his claims that Defendant interfered with Plaintiff’s agreement with Duff. In his own declaration, Linde has declared under penalty of perjury that Gilchrist told him on May 26, 2011 that Defendant had threatened to terminate Plaintiff’s employment and rescind his pension if Duff used any of the settlement proceeds to pay Plaintiff. (Linde Decl. ¶ 15.) Although portions of this testimony would be inadmissible hearsay if offered for the underlying truth or proof of the ultimate facts, as observed above, at least in the preliminary process of a case, an attorney may only have “hearsay” information to assess a claim. The court cannot find at this stage that Plaintiff or his counsel were unreasonable in relying on Gilchrist’s alleged statements in filing suit. For instance, further investigation of Gilchrist’s alleged statement might lead to admissible evidence.

Plaintiff also submits email exchanges, as summarized in the opposition brief at page 8, in which Gilchrist stated that Duff was “offering some money against advice” and that paying “anything more [than a gesture] … will … leave him in the soup with Ariat.” (See Linde Decl. Exh. D.) Plaintiff also submits statements of Caldwell that Defendant “was extremely angry, that my conduct unethical, and that Ariat was prepared to seek disciplinary action against me and my firm with the State Bar.” (Linde Decl. ¶ 9.) These statements suggest at least inferentially that Defendant might have pressured Duff in the settlement to exclude Plaintiff or limit any payment to Plaintiff. And, once Duff and Ariat representatives are deposed, Plaintiff may obtain admissible evidence to support the claim. Defendant’s reply arguments on this evidence focus on inferences that can be made from the evidence, but do not show that no evidence exists. (Reply 7-9.). To the extent that discovery does not yield admissible evidence to support the claim, Defendant may, of course, bring a summary judgment motion.

Based on the foregoing, Defendant’s motion for sanctions is DENIED.

Plaintiff’s Request for Monetary Sanctions

“If warranted, the court may award to the party prevailing on the motion the reasonable expenses and attorney’s fees incurred in presenting or opposing the motion.” (CCP § 128.7(c)(1).) To award sanctions to the opposing party on a motion for sanctions, the court must find that the motion for sanctions was itself “frivolous, unfounded, filed for an improper purpose, or otherwise unreasonable.” (See Musaelian v. Adams (2011) 197 Cal.App.4th 1251, 1257-1258.)

In opposition, Plaintiff highlights purported misstatements of the evidence made by Defendant. (See Oppo. 11-14.). Although the court denies the motion for sanctions, Defendant raised reasonable arguments and the court cannot find that the motion itself was frivolous.

Plaintiff’s request for sanctions is DENIED.