561 F.3d 1298 (11th Cir. 2009), 08-11026, Eagle Hosp. Physicians, LLC v. SRG Consulting, Inc.

Docket Nº:08-11026.
Citation:561 F.3d 1298, 90 U.S.P.Q.2d 1065
Party Name:EAGLE HOSPITAL PHYSICIANS, LLC., Plaintiff-Counter Defendant-Appellee, v. SRG CONSULTING, INC., Hospitalist Physicians, Inc., Steven R. Gerst, Defendant-Counter Claimants-Appellants.
Case Date:March 12, 2009
Court:United States Courts of Appeals, Court of Appeals for the Eleventh Circuit

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561 F.3d 1298 (11th Cir. 2009)

90 U.S.P.Q.2d 1065

EAGLE HOSPITAL PHYSICIANS, LLC., Plaintiff-Counter Defendant-Appellee,


SRG CONSULTING, INC., Hospitalist Physicians, Inc., Steven R. Gerst, Defendant-Counter Claimants-Appellants.

No. 08-11026.

United States Court of Appeals, Eleventh Circuit.

March 12, 2009

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[Copyrighted Material Omitted]

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John G. Crabtree, John G. Crabtree, P.A., Key Biscayne, FL, Cary Ichter, Adorno & Yoss LLC, Atlanta, GA, for Defendant-Counter Claimants-Appellants.

Stephen E. Hudson, Judith A. Powell, Kilpatrick Stockton, LLP, Atlanta, GA, for Plaintiff-Counter Defendant-Appellee.

Appeal from the United States District Court for the Northern District of Georgia.

Before MARCUS, KRAVITCH and ANDERSON, Circuit Judges.

KRAVITCH, Circuit Judge:

Appellant-Defendants, SRG Consulting, Inc., Hospitalist Physicians, Inc., and Dr. Steven Gerst, (" Appellants" ) appeal the imposition of sanctions and entry of a default judgment in favor of Plaintiff-Appellee, Eagle Hospital Physicians (" Eagle" ). The district court struck Appellants' answer and counterclaims after discovering that Gerst had been secretly monitoring Eagle's confidential email communications and entered a default judgment against Appellants. We hold that the district court neither violated Gerst's Fifth Amendment rights nor abused its discretion and therefore affirm the imposition of sanctions and the entry of a default judgment.


Eagle operates a business contracting hospitalists-doctors who specialize in the care and treatment of hospitalized patients-out to hospitals with whom it establishes contractual relationships. Gerst, principal owner of SRG and Hospitalist Physicians, Inc., owns approximately 10% of Eagle, personally or through his other companies. In July 1999, SRG and Eagle entered into a marketing and sales agreement (the " Agreement" ) pursuant to which SRG would provide marketing and sales services to Eagle to develop business contacts with hospitals for Eagle. Under the Agreement, " SRG [was] responsible for locating potential contractors, educating them about Eagle's hospitalist programs, and performing any other services necessary to secure a hospitalist contract for Eagle." The Agreement provided that SRG would be paid a commission " [f]or each contract for hospitalist services executed between Eagle and another party which either SRG, or its agent, has secured on behalf of Eagle."

According to Eagle, the relationship between SRG and Eagle began to sour in 2002. Among other problems, the parties disagreed regarding the proper content for the website SRG maintained on Eagle's behalf, eaglehospitalphysicians.com. Eagle's CEO wrote to Gerst and requested that the website be transferred from SRG to Eagle. When Gerst refused to give Eagle access to the website, Eagle

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registered and began developing its own website, ehphospitalists.com. SRG then registered 150 domain names containing versions of Eagle's name and trademarks, including ehphospitalist.com-the singular form of Eagle's new site. Gerst informed Eagle that he would transfer the websites to Eagle only if Eagle paid him a large salary or gave him additional equity in Eagle. In his deposition, Gerst testified that, as a condition to transferring the domain names, he also requested hundreds of thousands of dollars from Eagle as compensation for the costs to create and maintain the websites, but later testified that the actual development costs were just over $67,000.

On October 21, 2003, Eagle sent written notice terminating the Agreement. Gerst responded that Eagle did not have the authority to unilaterally terminate the Agreement and that it therefore remained in effect.

In April 2004, Eagle filed the present suit, asserting claims under the Anti-cybersquatting Consumer Protection Act, the Federal Trademark Act of 1946, 15 U.S.C. § 1051, et seq. , and various state laws. Eagle also sought declaratory relief as to whether it owed any outstanding commissions to SRG under the marketing contract. Appellants filed counterclaims, seeking payment of those commissions.

On September 26, 2005, Gerst submitted an affidavit to the court. Attached to the affidavit were email documents sent between Eagle personnel and Eagle's attorneys. The documents were protected by attorney-client privilege. Eagle deposed Gerst in an attempt to find out how and when he had obtained the privileged and internal emails. Gerst invoked the Fifth Amendment throughout the deposition and refused to explain how and when he had intercepted these emails, whether he had help doing so, and whether he continued to have the ability to intercept privileged internal and attorney-client email communications. Eagle filed a motion for sanctions against Appellants, asserting three grounds for sanctions: (1) Appellants' refusal to answer questions concerning their ongoing ability to monitor communications between Eagle and its counsel; (2) Appellants' failure to pay attorney's fees as ordered by the court; and (3) Appellants' failure to produce all responsive documents in discovery. The district court determined that reasons (2) and (3) did not justify sanctions, and that only reason (1) supported sanctions.1 The court held a hearing to discuss Gerst's refusal to answer questions about how he obtained privileged information from Eagle. At the hearing, Eagle established that Gerst had accessed numerous privileged emails during a time period covering December 13, 2003 through September 13, 2005.

In its sanctions ruling, the court recognized, quoting In re Sunshine Jr. Stores, Inc., 456 F.3d 1291, 1305 (11th Cir.2006), that the " severe sanction of a dismissal or a default judgment is appropriate only as a last resort, when less drastic sanctions would not suffice." The court found that " by acquiring information protected by the attorney-client privilege, attaching these documents to court filings, and not revealing whether any additional information has been obtained, Dr. Gerst has engaged in behavior that disrupts the litigation and is therefore in bad faith." The court noted that the " parties will never know the extent to which Dr. Gerst was able to ‘ eavesdrop’ on" Eagle and its officers. The court inferred from Gerst's silence that he continued to maintain the ability to intercept

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communications and concluded that this ability created " a disruption to [Eagle] and the litigation in general." The court considered whether lesser sanctions would suffice to punish and deter Appellants from future misconduct. Because, however, Gerst had already been privy to privileged information which he could not unlearn and because neither Eagle nor the court could know the extent of Gerst's activities, the court determined that no lesser sanctions than striking Appellants' answer and counterclaims would suffice.

After briefing from both parties, the court ruled on the appropriate damages and remedies resulting from the sanctions. Because the answer and counterclaims were struck, Appellants had defaulted. Due to their default, the court found that Appellants admitted all well-pleaded claims contained in the complaint and held that Eagle had established Appellants' liability on the cybersquatting claim. The court awarded statutory damages of $1,000 for each of the twenty-four domain names the parties called " minor" and $10,000 for each of the three " main" domain names. The court also awarded attorney's fees to Eagle in light of Appellants' misconduct. Appellants timely appealed.


This court reviews assertions of constitutional error de novo. United States v. Anton, 546 F.3d 1355, 1357 (11th Cir.2008).

We review a court's imposition of sanctions under its inherent powers for abuse of discretion. Chambers v. NASCO, Inc., 501 U.S. 32, 51, 111 S.Ct. 2123, 115 L.Ed.2d 27 (1991). " In determining whether the court abused its discretion we ask whether it ‘ applie[d] the wrong legal standard or ma[de] findings of fact that are clearly erroneous.’ " Byrne v. Nezhat, 261 F.3d 1075, 1103 (11th Cir.2001) (quoting United States v. Sigma Int'l, Inc., 244 F.3d 841, 852 (11th Cir.2001)).

Finally, we review the sufficiency of a complaint de novo. See Financial Security Assur., Inc. v. Stephens, Inc., 450 F.3d 1257, 1262 (11th Cir.2006) (reviewing the dismissal of a complaint for failure to state a claim de novo ).


Gerst's Fifth Amendment Rights 2

Appellants contend that the district court erred twice in its decision to strike their answer and counterclaims. First, Appellants argue that the court violated Gerst's Fifth Amendment rights by drawing adverse inferences from his refusal to testify. Second, Appellants argue that the court violated Gerst's Fifth Amendment rights by sanctioning him and dismissing his suit in response to his assertion of his Fifth Amendment rights. We disagree on both counts.

Appellants' first argument was not preserved for appeal. Appellants failed to argue to the district court that adverse inferences could not be drawn from Gerst's Fifth-Amendment-protected silence. In fact, during the October 22, 2007 hearing, Appellants' attorney stated that he did not intend to challenge the district court's order with respect to the drawing of inferences, and that " the law is clear" that " the court is entitled to draw adverse inferences" from Gerst's silence. By failing to raise the issue to the district court, Appellants have waived their right to argue on appeal that the inferences were impermissible. See

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BUC Int'l Corp. v. Int'l Yacht Council Ltd., 489 F.3d 1129, 1140 (11th Cir.2007) (noting that " [a]s a general rule in civil cases this court does not consider issues raised for the first time on appeal" ).

We note, however, that in a civil suit such as this one, the court may draw...

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