Business Guides, Inc. v. Chromatic Communications Enterprises, Inc.
| Decision Date | 21 December 1989 |
| Docket Number | No. 88-15240,88-15240 |
| Citation | 892 F.2d 802 |
| Parties | , 15 Fed.R.Serv.3d 672, 13 U.S.P.Q.2d 1354 BUSINESS GUIDES, INC., Plaintiff-Appellant, v. CHROMATIC COMMUNICATIONS ENTERPRISES, INC.; Michael Shipp, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Stephen V. Bomse, San Francisco, Cal. for plaintiff-appellant.
Neil L. Shapiro, Cooper, White & Cooper, San Francisco, Cal., for defendants-appellees.
Appeal from the United States District Court for the Northern District of California.
Before WALLACE, POOLE and HALL, Circuit Judges.
Business Guides, Inc. (Business Guides) appeals from an order imposing Rule 11 sanctions in its copyright action against Chromatic Communications Enterprises, Inc. (Chromatic) and Shipp, Chromatic's president. Business Guides argues that the district court (1) erred in applying to Business Guides, a represented party, an objective standard of "reasonable inquiry" into the factual basis of papers submitted to court, Fed.R.Civ.P. 11; (2) erred in determining that Business Guides failed to conduct such a reasonable inquiry; and (3) abused its discretion in dismissing Business Guides's action as part of the sanction imposed. In addition, Chromatic urges us to invoke Rule 11 to require Business Guides to reimburse Chromatic for its costs of defending this appeal. The district court had jurisdiction pursuant to 28 U.S.C. § 1338(a). We have jurisdiction over this timely appeal pursuant to 28 U.S.C. § 1291. We affirm in part, reverse in part, vacate in part, and remand.
Business Guides is a subsidiary of Lebhar-Friedman, Inc., a leading publisher of trade journals and magazines in the United States. Business Guides publishes 18 different directories for specialized areas of retail trade. Since 1983, Business Guides has published a directory for computer products and services. This action was based on allegations that Chromatic copied the 1984 edition of Business Guides's computer products and services directory (Directory).
To protect itself against copyright infringement by competitors, Business Guides intentionally plants incorrect information, known in the industry as "seeds," throughout its directories. Business Guides uses two types of seeds. "Type A" seeds are wholly fictitious entries, i.e. businesses which do not exist. "Type B" seeds are partially altered listings, containing minor errors such as transposed numbers in an address or misspelled names. The appearance of one or more seeds in a competitor's publication is strong evidence that copyrighted material has been appropriated.
Business Guides maintains a "master seed list" for each directory it publishes. Normally this master list, which identifies Type A and B seeds separately, is prepared before publication and its seeds are inserted just before the final printing. In preparing its 1984 master list, however, Business Guides did not follow its usual practice. First, the 1984 master list was prepared almost seven months after the publication of the Directory. More importantly for our purposes, Business Guides employed a flawed method of compiling the 1984 master list. This flawed method spurred this lawsuit and, ultimately, produced the Rule 11 sanctions now before us.
Because of a concern that the Directory contained insufficient Type A seeds to substantiate copying, Business Guides directed Burdick, one of its employees, to locate examples of a new form of Type B seed. The new kind of Type B seed would consist of unintentional typographical errors which had shown up in the final version of the Directory. To locate such errors, Burdick compared the final Directory against initial questionnaires used by Business Guides to gather information from the listed companies. The questionnaires are prepared by Lambe, the Director of Research for Business Guides. When Burdick found a disparity between the information listed in the questionnaires and the final Directory, she recorded this on the master list as a Type B seed. This method, however, erroneously assumed that the information on the questionnaires was correct. In fact, information on the questionnaires was frequently revised by Business Guides employees in the proofreading stage. Thus, the 1984 master list of purported errors contained numerous Type B seeds which were factually accurate. The presence of similar listings in competitors' directories would therefore indicate accurate research rather than any copyright infringement of Business Guides's directory.
On October 31, 1986, Business Guides filed a complaint against Chromatic and Shipp, alleging copyright infringement, conversion, and unfair competition. Chromatic publishes a competing directory of computer software dealers. Business Guides sought, among other prayers, a temporary restraining order (TRO) to prevent Chromatic from displaying its directory at an upcoming important trade show. Business Guides's counsel was the law firm of Finley, Kumble, Wagner, Heine, Unterberg, Manley, Myerson & Casey (Finley Kumble).
Business Guides's complaint identified ten seeds in Chromatic's directory which allegedly had been copied. In support of its application for a TRO, Business Guides submitted various affidavits prepared by Finley Kumble. Among these was the affidavit of Burdick, which identified the ten seeds but did not specify what was incorrect about them. The district court allowed the affidavits to be filed under seal, accepting Business Guides's contention that if the information contained in the affidavits were revealed to the public, Business Guides's ability to catch copyright violators would be impaired.
A hearing on the TRO was scheduled for November 7, 1986. Three days before the hearing, the district judge's law clerk telephoned Finley Kumble and requested more specific information regarding the ten seeds. The law clerk asked Finley Kumble to specify what was incorrect about each entry. Finley Kumble then contacted Lambe and requested this additional information. This was apparently the first time Finley Kumble asked for details about the ten "seeds."
Lambe reviewed the 1984 master list and provided Finley Kumble with the requested details. Lambe did not attempt to verify the information by calling the companies listed. Nor did he attempt to obtain the original questionnaires, since they were located in a warehouse in New York and the hearing was only three days away. Lambe did, however, check the accuracy of the seeds' information against subsequent editions of Business Guides's directory. He also checked the zip codes of the listings by consulting a zip code directory. As a result of his investigation, Lambe determined that either three or four of the ten seeds (the record is not clear) in fact contained correct information. After Lambe relayed this information to Finley Kumble, the latter informed the court that Business Guides was retracting its claim of copying as to three of the ten seeds. In addition to retracting the three seeds, Finley Kumble provided the court with the requested specific information regarding the remaining seven seeds.
Concerned about the accuracy of the remaining seeds in light of (1) the retractions and (2) Chromatic's perceived apparent inability to respond to the allegations in the sealed affidavits, the district court law clerk took steps to verify the remaining seeds. By spending approximately one hour telephoning the companies reflected in the remaining seeds, the clerk determined that all but one of the seeds actually contained correct information.
Finley Kumble submitted supplemental materials to the court on November 7, including a supplemental affidavit of Lambe, prepared by the firm, reflecting the additional information uncovered in Lambe's investigation. Finley Kumble presented Lambe's declaration to him on the morning of the November 7 hearing. Lambe had several hours to review his affidavit. He made one correction, crossing out mention of a fourth seed which he had determined did reflect accurate information but which Finley Kumble had not retracted. Lambe then executed the affidavit.
On November 7, the court, in light of the inaccuracies in Business Guides's papers, denied Business Guides's application for a TRO, stayed further proceedings (including discovery), and referred the matter to a magistrate for a determination of whether Rule 11 sanctions should be imposed on Finley Kumble or Business Guides.
The district court summarized the subsequent sanction proceedings before the magistrate as follows:
The Chief Magistrate conducted two evidentiary hearings, one in December 1986 and one in January 1987. The first hearing was ordered to determine whether plaintiff's counsel Finley Kumble should be sanctioned pursuant to Fed.R.Civ.P. 11. The second hearing was ordered to determine whether Business Guides itself should be subject to sanctions pursuant to Fed.R.Civ.P. 11. At both hearings the parties were represented by Mr. Ephraim Margolin ("Margolin"), a local San Francisco defense attorney.
On April 3, 1987, Chief Magistrate Woelfen recommended that sanctions be imposed against both Business Guides and Finley Kumble. The Chief Magistrate recommended that Business Guides, but not Finley Kumble, be held responsible for filing the inaccurate TRO papers. The Chief Magistrate further recommended that both Business Guides and Finley Kumble be sanctioned for their conduct in defending the sanctions proceedings. The Chief Magistrate doubted the good faith of the parties' representations that the factual errors in the affidavit were attributable to coincidences....
The parties, represented by new and separate counsel, filed objections to the April 3 report. Business Guides based its objection on its allegation that new evidence, not previously presented to the Chief Magistrate, was fundamental to a correct understanding of the circumstances of this case....
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