Clerisy Corp. v. Airware Holdings, Inc.

• Decision Date: 03 December 2013
• Docket Number: CV 12-2110-PHX-PGR
• Parties: Clerisy Corporation, et al., Plaintiffs, v. Airware Holdings, Inc., et al., Defendants.
• Court: U.S. District Court — District of Arizona

Clerisy Corporation, et al., Plaintiffs, v. Airware Holdings, Inc., et al., Defendants.

CV 12-2110-PHX-PGR

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA

DATED: December 3, 2013

ORDER

Before the Court is Plaintiffs' motion to dismiss all claims and counterclaims without prejudice. (Doc. 109.) Defendants have filed a cross-motion for attorneys' fees and costs. (Doc. 110.) For the reasons set forth herein, the Court will grant Plaintiffs' motion to dismiss and deny Defendants' cross-motion.

BACKGROUND

Plaintiff Reed Transition Technologies, LLC, owns a patent for an "Apparatus for and Methods of Administering Volatile Substances into an Inhalation Flow Path." Plaintiff Clerisy Corp. manufactures, markets, and distributes Aromahaler® Nasal SoftStrips™ using the patented apparatus. Defendants market, sell, and distribute "AIR" branded nasal products, which, like the Nasal SoftStrips, are infused with essential oils.

Plaintiffs filed a complaint in the Western District of New York alleging that Defendants are infringing the Patent. The case was transferred to the District of Arizona on Defendant's motion. Plaintiffs filed an amended complaint, and Defendants filed an answer and counterclaims.

The Court held a claim construction hearing and, on July 23, 2013, issued an order largely adopting the constructions proposed by Plaintiffs. (Doc. 102.)

On September 27, 2013, Plaintiffs filed the pending motion to dismiss under Rule 41(a)(2). (Doc. 109.) Plaintiffs state that they do not have the financial resources to continue litigating the case. (Id.)

DISCUSSION

"Federal Rule of Civil Procedure 41(a)(2) allows a plaintiff, pursuant to an order of the court, and subject to any terms and conditions the court deems proper, to dismiss an action without prejudice at any time." Westlands Water District v. U.S., 100 F.3d 94, 96 (9th Cir. 1996) (internal citation omitted). A court "should grant a motion for voluntary dismissal . . . unless a defendant can show that it will suffer some plain legal prejudice as a result." Smith v. Lenches, 263 F.3d 972, 975 (9th Cir. 2001).

Plaintiffs have executed a covenant not to sue Defendants. (Doc. 109, Ex. A.) They argue that the covenant extinguishes any case or controversy between the parties, so that the Court now lacks subject matter jurisdiction over any of the claims or counterclaims in this action, which therefore must be dismissed. The Court agrees. Under the broad covenant here, the adequacy of which Defendants do not dispute, Plaintiffs have met their burden of showing that they cannot reasonably be expected to sue, thereby mooting the case. See Already, LLC v. Nike, 133 S. Ct. 721, 726 (2013); Dow Jones & Co. v. Ablaise Ltd., 606 F.3d 1338, 1346 (Fed.Cir. 2010).

Defendants do not oppose dismissal or contend that they will be prejudiced. However, they ask the Court to condition dismissal on Plaintiffs' reimbursement of Defendants' attorney's fees and costs pursuant to Rule 41(a)(2) or under 28 U.S.C. § 1927, which provides for the imposition of fees and costs against any attorney who "multiplies the proceedings in any case unreasonably and vexatiously." The Court concludes that Defendants are not entitled to attorneys' fees under either Rule 41(a)(2) or § 1927.

1. Rule 41(a)(2)

Rule 41(a)(2) provides that unless a plaintiff files a notice of dismissal before the opposing party serves either an answer or a motion for summary judgment, or the parties stipulate to the dismissal of the action, "[a]n action may be dismissed at the plaintiff's request only by court order, on terms that the court considers proper." Fed. R .Civ. P. 41(a)(2). A motion for voluntary dismissal pursuant to Rule 41(a)(2) should be granted unless a defendant can show that it will suffer some plain legal prejudice as a result of the dismissal. Smith v. Lenches, 263 F.3d 972, 975 (9th Cir. 2001). As noted, Defendants do not make such a showing.

A court has the discretion to condition a dismissal without prejudice upon the payment of "appropriate costs and attorney fees." Westlands Water Dist. v. United States, 100 F.3d 94, 96 (9th Cir. 1996). The payment of fees is not, however, a prerequisite to a Rule 41(a) dismissal. Stevedoring Servs. of Am. v. Armilla Intern. B. V., 889 F.2d 919, 921 (9th Cir. 1989) (explaining that "no circuit court has held that payment of the defendant's costs and attorney fees is a prerequisite to an order granting voluntary dismissal"); see Westlands, 100 F.3d at 97 ("Imposition of costs and fees as a condition for dismissing without prejudice is not mandatory.").

In arguing for an award of fees under Rule 41(a)(2), Defendants assert that "in cases where the litigation has proceeded to the point that the defendant has incurred significant fees and costs, the courts ordinarily condition a dismissal without prejudice on the plaintiff's reimbursement of the defendant's fees and costs incurred during the litigation." (Doc. 110 at 8.) In support of this position Defendants rely on McCants v. Ford Motor Co., 781 F.2d 855 (11th Cir. 1986). There, the Eleventh Circuit stated that "[a] plaintiff ordinarily will not be permitted to dismiss an action without prejudice under Rule 41(a)(2) after the defendant has been put to considerable expense in preparing for trial, except on condition that the plaintiff reimburse the defendant for at least a portion of his expenses of litigation." McCants, 781 F.2d at 860.

Defendants' argument is not persuasive in the light of Ninth Circuit law. In Heckethorn v. Sunan Corp., 992 F.2d 240, 242 (9th Cir. 1993), the court held that "Fed.R.Civ.P. 41(a)(2) in itself is not 'specific statutory authority' for the imposition of sanctions against an attorney." Thus, this Court must have an "independent basis" to impose fees and costs as a condition of voluntary dismissal. Chavez v. Northland Group, No. CV-09-2521-PHX-LOA, 2011 WL 317482, at *3 (D.Ariz. February 1, 2011) (citing Heckethorn, 992 F.2d at 242); see Chang v. Pomeroy, No. CIV-S-08-657-FCDS-DAD-PS, 2011 WL 618192, at *1 (E.D.Cal. Feb. 10, 2011) (explaining that "a court cannot impose fees and costs as a condition of voluntary dismissal absent some basis other than the mere fact of the plaintiff's request for Rule 41(a)(2).").

While the Court agrees with Defendants that it retains the discretion to condition dismissal on an award of attorneys' fees, it finds no basis to do so here. A fee award is particularly inappropriate in this case, given that Plaintiffs' have executed a covenant not to sue. Defendants face no threat of future, duplicative litigation. "The covenant not to sue precludes the possibility of relitigation of this matter, and therefore an award of fees and costs, which is designed to protect defendants from the expense of defending an action again, is not required." Furminator, Inc. v. Ontel Products Corp., 246 F.R.D. 579, 596 (E.D.Mo. 2007); see Gap, Inc. v. Stone Intern. Trading, Inc.,169 F.R.D. 584, 589 (S.D.N.Y. 1997) ("The Gap's offer of a covenant not to sue obviates the need to reimburse the defendants on this ground, however, since there is no possibility of relitigation."); see also Colombrito v. Kelly, 764 F.2d 122, 134 (2d Cir. 1985) ("The purpose of such awards is generally to reimburse the defendant for the litigation costs incurred, in view of the risk (often the certainty) faced by the defendant that the same suit will be refiled and will impose duplicative expenses upon him.").

The Court will next consider the argument that 28 U.S.C. § 1927 provides a basis for the recovery of Defendants' attorneys' fees.

2. 28 U.S.C. § 1927

A court may impose sanctions against an attorney under 28 U.S.C. § 1927, which provides that, "Any attorney or other person admitted to conduct cases in any court of the United States or any Territory thereof who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys' fees reasonably incurred because of such conduct."

Sanctions may be imposed under § 1927 where there is a finding of bad faith or recklessness. See Lahiri v. Universal Music & Video Distribution Corp., 606 F.3d 1216, 1219 (9th Cir. 2010); Pacific Harbor Capital, Inc. v. Carnival Air Lines, Inc., 210 F.3d 1112, 1118 (9th Cir. 2000). Bad faith is assessed "under a subjective standard. Knowing or reckless conduct meets this standard." MGIC Indem. Corp. v. Moore, 952 F.2d 1120, 1121-22 (9th Cir. 1991). "[T]he term 'vexatious' has been defined as 'lacking justification and intended to harass.'" Terrebonne, Ltd. of California v. Murray, 1 F.Supp.2d 1050, 1055 (E.D.Cal.,1998) (quoting Overnite Transp. Co. v. Chicago Ind. Tire Co., 697 F.2d 789, 795 (7th Cir.1983)). Courts have characterized § 1927 as imposing an "extreme standard, White v. American Airlines, Inc., 915 F.2d 1414, 1427 (10th Cir. 1990), which should be "sparingly applied," F.D.I.C. v. Calhoun, 34 F.3d 1291, 1297 (5th Cir. 1994).

Defendants asserts that Plaintiffs' pursuit of their patent infringement claims was vexatious and unreasonable because "[t]he evidence has established at every stage of this case that AirWare's accused products do not incorporate any 'barrier' that prevents the essential oil molecules on the device from coming into contact with the user's skin."¹ (Doc. 110 at 9.) According to Defendants, therefore, Plaintiffs pursued the claims despite knowing that Defendants' product did not infringe the patent. Defendants recount the following eventsin support of their argument that Plaintiffs were aware that Defendants' products did not contain a barrier.

- Before filing suit, Plaintiffs and their attorneys obtained samples of Defendant AirWare's products "and should have known then that the products did not have a barrier." (Doc. 110 at 5.)

- On August 10, 2012, two weeks after Plaintiffs filed their complaint, and again on August 24, AirWare's counsel sent Rule 11 notice letters to Plaintiffs' counsel stating...