Certified Nutraceuticals, Inc. v. Avicenna Nutraceutical, LLC

• Decision Date: 14 September 2018
• Docket Number: Case No.: 3:16-cv-02810-BEN-BGS
• Court: U.S. District Court — Southern District of California
• Parties: CERTIFIED NUTRACEUTICALS, INC., a California Corporation, Plaintiff, v. AVICENNA NUTRACEUTICAL, LLC, a Georgia Limited Liability Company, Defendant.

CERTIFIED NUTRACEUTICALS, INC., a California Corporation, Plaintiff, v. AVICENNA NUTRACEUTICAL, LLC, a Georgia Limited Liability Company, Defendant.

Case No.: 3:16-cv-02810-BEN-BGS

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF CALIFORNIA

September 14, 2018

ORDER IMPOSING SANCTIONS

On July 27, 2018, the Court issued an order to show cause why the Court should not impose monetary sanctions against Plaintiff Certified Nutraceuticals, Inc. ("Plaintiff" or "Certified"), Plaintiff's CEO Ahmad Alkayali, and Plaintiff's counsel for misrepresenting the status of Plaintiff and/or Mr. Alkayali as an assignee of U.S. Patent No. 6,323,319 ("the '319 Patent). (Docket No. 48.) Pursuant to the Court's Order, Plaintiff, Mr. Alkayali, and Plaintiff's counsel filed a joint response. (Docket No. 49.) Defendant Avicenna Nutraceutical, LLC ("Avicenna") also filed its optional response. (Docket No. 54.) On August 24, 2018, the Court held a hearing where it heard arguments regarding its July 27, 2018 Order to Show Cause. (Docket No. 55.) Present at the hearing were counsel for Avicenna and Robert Tauler, Plaintiff's counsel of record, who appeared on behalf of Plaintiff, Mr. Alkayali, and himself and his law firm.

As will be explained in further detail below, the Court finds Plaintiff, Mr. Alkayali, and Plaintiff's counsel each violated Federal Rule of Civil Procedure 11(b). Sanctions in this case are therefore warranted.

RELEVANT FACTUAL BACKGROUND & PROCEDURAL HISTORY

On November 15, 2016, Plaintiff filed a complaint against Avicenna for false advertising and unlawful business practices under the Lanham Act and California state-law. (Docket No. 1, "Compl.") Mr. Tauler of the law firm Tauler Smith, LLP signed the Complaint. The gravamen of the complaint is that Avicenna falsely advertised its collagen products as "patented" or processed using "patented formulas and production methods" because Avicenna never held any relevant patents. The Complaint further alleged the following:

19. In fact, Ahmad Alkayali, CEO of Certified, is listed as the assignee and inventor in connection with U.S. Patent No. 6,323,319[.]

28. For example, Ahmad Alkayali is listed as the assignee and inventor in connection with U.S. Patent No. 6,323,319[.]

(Compl. ¶¶ 19, 28.) But at the time the Complaint was filed, Mr. Alkayali was not an assignee of the '319 Patent.¹ In other words, this allegation was not true.

On January 2, 2017, Avicenna filed its answer, wherein it asserted the following as grounds for its affirmative defense of unclean hands:

Plaintiff's claims, and each of them, are barred, entirely or in part, by the Doctrine of Unclean Hands, in that inter alia,contrary to Plaintiff's representations, it is not actually the "assignee" of any U.S. patents. Instead, it is the assignor of several patents that it no longer owns, including U.S. patents with Serial Nos. 6,323,319, 6,323,327 and 8,344,106.

(Docket No. 5, Answer at p. 9) (emphasis in original.)

The case proceeded and on February 8, 2018, Avicenna moved for summary judgment, relying in part on the aforementioned affirmative defense of unclean hands. (Docket No. 28.) Specifically, Avicenna argued that Plaintiff was barred from recovery under the unclean hands doctrine because it had engaged in the same conduct for which it sought relief. To support its affirmative defense, Avicenna presented evidence that in 2011 Plaintiff advertised one of its products, KollaGen II-xs ("KollaGen"), as patented before the patent covering KollaGen was issued in 2013.

On March 12, 2018, Plaintiff filed its opposition, which relied in part on a supporting declaration from Mr. Alkayali ("MSJ declaration"). Mr. Tauler signed the opposition and Mr. Alkayali signed his MSJ declaration. The opposition argued against application of the unclean hands doctrine on the following purportedly factual grounds:

- "Defendant argues that the doctrine of unclean hands precludes Plaintiff from any recovery because Plaintiff lied in 2011 when it described in passing its avian collagen product, KollaGen II-xs as patented in two press releases. However, in 2011, the KollaGen II-xs product was covered by the Patent No. 6,323,319." (Docket No. 31 at p. 3.)

- "Plaintiff's CEO Ahmad Alkayali, is an and [sic] assignee of U.S. Patent No. 6,323,319[.] . . . The '319 Patent applied to Plaintiff's avian collagen product, KollaGen II-xs in 2001 [sic]." (Id. at p. 4.)

- "[I]n 2011, the KollaGen product was covered by the '319 Patent, issued on or about November 11, 2001." (Id. at p. 10.)

- "[I]n 2011, the '319 Patent applied to KollaGen II-xs. . . . Indeed, Plaintiff identified its CEO as the assignee of the '319 Patent in its Complaint[.]" (Id. at p. 11.)

The factual basis for these representations was provided by Mr. Alkayali's MSJ declaration, wherein Mr. Alkayali stated he is "the assignee of Patent No. 6,323,319" and that "[t]he '319 Patent applied to KollaGen II-xs in 2011." (Docket No. 31-21.) As with the Complaint, at the time the opposition and Mr. Alkayali's MSJ declaration were filed, Mr. Alkayali was not an assignee of the '319 Patent.² As a result, the representations in the opposition and Mr. Alkayali's MSJ declaration were untrue.

Avicenna filed its reply on March 19, 2018, and attached a copy of a May 3, 2002 Order from the Orange County Superior Court³ granting a permanent injunction against Mr. Alkayali. In relevant part, the injunction permanently enjoined Mr. Alkayali, his "officers, agents, employees, representative, and all persons acting in concert or participating with [him] . . . from engaging in, committing, or performing, directly or indirectly, by any means whatsoever, any of the following acts":

A. Transferring, assigning, licensing, hypothecating, enforcing, selling, granting, encumbering, or in any way changing the legal or equitable title to the patent issued by the United States Patent Office as US Patent # 6,025,327, or any continuation thereof (collectively referred to as "327 Patent").

B. Manufacturing, distributing, offering for sale, or selling any of the product or goods covered under the 327 Patent." . . .

D. From interfering, directly or indirectly, with BioCell's manufacture, distribution, offer for sale, selling or licensing the 327 Patent or any product or good covered under the 327 Patent.

(Docket No. 33-4, Supp. Decl. of Brian Berggren ("Berggren Decl.") ¶ 4, Ex. O.)

On July 27, 2018, the Court granted Avicenna's motion for summary judgment. (Docket No. 47.) Specifically, the Court found Plaintiff barred from recovery for itsLanham Act claim because it had unclean hands.⁴ To support this finding, the Court took judicial notice that the '319 Patent is a continuation of the '327 Patent (which meant the permanent injunction for the '327 Patent extended equally to the '319 Patent), and that "[s]ince the initial assignment in 1997, neither Plaintiff nor Mr. Alkayali appears to have held any interest or license for the '319 Patent." (Id. at pp. 6 n.4, 7 n.6.)

On the same day, the Court issued the instant order to show cause why monetary sanctions should not be imposed against Plaintiff, Mr. Alkayali, and Plaintiff's counsel for their misrepresentations of Plaintiff and/or Mr. Alkayali as an assignee of the '319 Patent. (Docket No. 48.)

DISCUSSION

Plaintiff, Mr. Alkayali, and Plaintiff's counsel's joint response (Docket No. 49, "Joint Response") to the Court's July 27, 2018 Order to Show Cause only discusses why the Court should not impose sanctions under Federal Rule of Civil Procedure 11. However, the Ninth Circuit recognizes three "primary sources of authority" that "enable courts to sanction parties or their lawyers for improper conduct: (1) Federal Rule of Civil Procedure 11, which applies to signed writings filed with the court, (2) 28 U.S.C. § 1927, which is aimed at penalizing conduct that unreasonably and vexatiously multiplies the proceedings, and (3) the court's inherent power." Fink v. Gomez, 239 F.3d 989, 991 (9th Cir. 2001).

The Court has considered the relevant portions of the record, the parties' respective briefings and exhibits in response to its July 27, 2018 Order to Show Cause, as well as the oral arguments raised at the August 24, 2018 Hearing. Although the Court finds each source of authority provides a basis for sanctions, Rule 11 appears to be the most appropriate under these circumstances. See Matter of Yagman, 796 F.2d 1165, 1169 (9th Cir. 1986).

I. Sanctions Under Federal Rule of Civil Procedure 11

"District courts have broad discretion to sanction a party or attorney under Rule 11." DeMarco v. Depotech Corp., 131 F. Supp. 2d 1185, 1186 (S.D. Cal. 2001) (citing Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 385 (1990); Barber v. Miller, 146 F.3d 707, 709 (9th Cir. 1998)). "Federal Rule of Civil Procedure 11 provides for the imposition of sanctions when a filing is frivolous, legally unreasonable, or without factual foundation, or is brought for an improper purpose." Estate of Blue v. Cnty. of Los Angeles, 120 F.3d 982, 985 (9th Cir. 1997) (citing Simpson v. Lear Astronics Corp., 77 F.3d 1170 (9th Cir. 1996)). "Frivolous filings are 'those that are both baseless and made without a reasonable and competent inquiry.'" Id. (quoting Buster v. Greisen, 104 F.3d 1186, 1190 (9th Cir. 1997)). "The signer's subjective good or bad faith is irrelevant to the Rule 11 analysis, rather an objective reasonableness standard applies." DeMarco, 131 F. Supp. 2d at 1186 (citing Bus. Guides, Inc. v. Chromatic Commc'ns Enter., Inc., 498 U.S. 498, 548 (1991); In re Keegan Mgmt. Co., Sec. Litig., 78 F.3d 431, 434 (9th Cir. 1996)).

Rule 11 sanctions may be imposed even when only a portion, not the entirety, of a pleading is frivolous. Altmann v. Homestead Mortg. Income Fund, 887 F. Supp. 2d 939, 955 (E.D. Cal. 2012) (citing Townsend v. Holman Consulting Corp., 929 F.2d 1358, 1364-65 (9th Cir. 1990) (en banc)). If, after notice and a reasonable opportunity to respond, a court determines that Rule 11(b) has been...